Financial Services, Insurance, Insurance Brokers

How Does Insurance Work?

How does Insurance WorkInsurance got its start during the days when cargo ships were heavily used and when they got destroyed, their cargo was lost. Merchants began dividing their cargo among a number of boats so they were not as likely to lose all their merchandise and reach complete financial ruin. This way, even if one boat was lost, merchants didn’t lose everything but were more likely to only lose a small portion of their goods. They “shared the risk” between the boats which is the foundation of the insurance industry today. Insurance is basically parties agreeing to sharing risks.

Insurance Basics

There are many different types of insurance available today including life, home, auto and health. By purchasing insurance, you are joining with many people who pay insurance fees to a company. The company will use the money it collects for paying claims which are submitted by those they are paid to insure. The money that comes in is all pooled into and then all the losses and expenses are shared from this one source. The important aspect of insurance is that the risks are shared among the members.

Insurance Policies

When a person buys insurance, they are given a policy which acts as a legal contract. It will list all the specific benefits that the individual is buying; and it lists the all the things that are covered and what types of things are not. An insurance policy also states the amount of the premium which is to be paid as well as when it is to be paid. An insurance agent can explain all the details included in the policy and individuals should always make sure they understand all the details included.

Types of Insurance

Insurance exists to protect almost anything that might happen accidentally or unexpectedly. When insurance is purchased, a person is buying protection against losses that might be a burden financially. There is life insurance which protects dependents in the event of a provider, or parent’s death. Car insurance protects individuals from financial loss if a vehicle is damaged or if a person is injured in a wreck. Renters may purchase insurance to protect their personal belongings. Health insurance helps pay costly medical bills or for standard health care. Employers purchase worker’s compensation to pay expenses in the event an employee is injured on the job.

Insurance Premiums

There are three basic uses for the premiums collected by insurance companies. First of all, they collect and pool the money in order to use it to pay the claims that come in. Secondly, the company uses the money that comes in to pay for all the expenses which are involved in selling and providing protections. Thirdly, the money is invested. When returns on investments come in, it helps keep down the cost of insurance paid by policyholders.

How Insurance Premiums are Determined

Setting insurance rates is a very complex process. It is not as simple as setting a price for a product because the money paid has to help cover costs associated with events that are not know like fires or automobile accidents. Premiums have to be paid in advance which means the price has to be set before the costs are known. There are several factors involved in setting insurance rates but they basically depend on two trends: how many claims are being processed and how severe each claim is.

Who regulates the insurance companies?

Every legal business in the US is subject to oversight by the government and governing bodies. State government basically regulate insurance companies. Each state has its own agency which is headed by a chief insurance commissioner or regulator. This office is responsible for administering the laws which have been approved by the state legislature. Each state has various laws regarding insurance.

Social Implications of Insurance

Even though there are many personal benefits from having insurance, society also gains from it. One benefit is that both businesses and individuals are compensated for losses that are covered by insurance. Accident prevention becomes a primary focus, and insurance provides funds for investment opportunities. Having insurance can also reduce worry and stress that are related to accidents or other unfortunate or unexpected events that commonly occur.


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