Insure Its Fundamentals and more

To Insure is to transfer the risk of financial losses from an individual or entity to an insurer. This risk transfer occurs when a stipulated condition in a contract occurs to a person or organization specified within that agreement. As a result, a monetary benefit is paid or given to the insured per the agreement.

This protection from monetary loss comes at a cost to the protected person. This cost or fee paid to the organization covering the risk of financial loss is called a premium

If a specified condition occurs, the protected individual or entity is referred to as the insured and gets compensated for the loss experienced by the insurer

To be Insured therefore means reducing or eliminating uncertain financial loss by buying a contract that gives a small predictable premium expense which removes a more substantial unpredictable loss. 

In return for buying a policy for a smaller, known premium, the possibility of a more substantial loss is eliminated by pooling premiums and insured events by the insurer. As a result of this pooling, the financial impact of a cost that could be disastrous for one policyholder is diversified or spread among a broader group. 

So this pooling of risk is essential as it spreads the cost of losses between multiple insured. Take for instance a car which is protected by insurance during an accident. Insurers group this risk of a crash with other insureds. Meaning the more substantial the cost of loss shared between all the members of the protected group reducing the average price of the premium to the members as only a small percent may experience a claim at any one time. 

When we Insure an item, the price should be such that the individual customer should have to pay the smaller know premium instead of a potentially sizeable lost experience. To ensure each policyholder pay a fair premium according to their risk of loss, they bring to the group. 

A fair premium to Insure is calculated by the insurer when there is sufficient lost experience or knowledge of past events, that the insurer can then use the resulting data to calculate likely outcome through the use of sophisticated calculations. This process is what is known as underwriting and involves calculating the probability of occurrence for each insured or categories of insureds. 

Generally the larger the group of insured or policyholders the more accurate the lost experience calculated, and the appropriate premiums are charged to include a margin to enable the insurer to build its reserves for years with severe losses. When Unique and rare risks are to be insured for example the fingers of a pianist the premiums are significantly higher. 

When we Insure it protects the insured wheater, it is a business on an individual against unforeseeable loses as it transfers the risk of losses of the few insured which is paid for by a group of insureds, with the premiums based on the risk of each insured or entity. A little more details an extremely sophisticated risk transfer system that comes in many variations. 

Historically when one insured the insurance system then did not fully transfer risk as it was never known by whom and how much they might have to pay and there was not a guarantee of payment. Today however insurance has developed such that insured policyholders know their required share of the premium. This certainty of what the premium expense is will be offers tremendous value. So much so that it is their fore fair to say that modern society could not function without insurance. 

Today many activities taken for granted involve a high enough degree of risk, and it is highly likely would not be performed were it not be for insurance. When we insure, a large number of similar risks are required for it to be economical meaning that when we Insure unique risks or possibility of loss, it can be prohibitively expensive. Also, certain key elements have to present for something to be insurable, and insurance regulation has a crucial role to play here. 

How do insurers assess a risk they insure? 

Insurers assess the risk they insure for the policyholder through a process called underwriting. The cost or premium charged to the insured depends on the insurer's assessment of the level of the insured risk as each entity or individual generally has a different inherent level of risk. Individuals who seek life insurance policies may have different health conditions, and each diagnosis may affect each insured differently. Hence the insurer ensures that each insured pays for a level of risk proportionate to rating factors assigned to each risk assessed. The more likely the chance of risk occurring, the higher the charge or premium

How does the insuring underwriting process differ amongst insurers? 

The insurers underwriting process differ in that the level of risk they are prepared to accept varies, the terms and conditions applied to the companies policies further homogenize risk by removing the type, events or circumstance under which the insurer can pay claims to the insured. The provisions or the terms and conditions of an insurance plan is also essential as it helps to reduce the impact of adverse selection and moral hazard. 

The assessment of risk offers economic efficiency as it allows the price of insurance to reflect the cost to be insured. Underwriters underwriting risks must abide by the law of the land and hindrance to the underwriting process tend to lead to higher insurance prices, limiting its availability and choices available to consumers. 

Does the risk-based pricing model practice when Insuring have other advantages? 

Risk-based pricing encourages innovation it allows insurers to compete more effectively both on price and the products offered. Developing new, rating factors can enable consumers to Insure products with more competitive rates, and insurance products for risks that were previously uninsurable. As an example when insurers learn more about the diagnosis and treatment of certain illnesses, coverage can be provided for diseases that were deemed previously uninsurable. So too, better modeling of flood risk can make previously uninsurable homes insurable. Risk-based pricing can also influence the behavior of individuals positively with the promotion of safe practices. 

So what is a moral hazard mean when we insure? 

Moral hazard is the changes in the behavior of insureds or policyholders occur which makes risk more likely once they have an insurance contract as the insurance contract passes the cost of loss from the policyholder to the insurance company. When Moral Hazard exist it can have the undesired effect of increasing premiums for all insured as there may be an overall increase on claims than expected. The policy provision of a policy can mitigate moral hazard. 

What does adverse selection mean when you insure? 

Adverse selection is a situation in which higher-risk individuals or entities take out insurance. Adverse selection is avoided by proper underwriting by identifying relevant risk factors and setting premiums to reflect the risks correctly. As an example, if poor drivers and excellent drivers are offered car insurance at the same price based on their driving habits and history for both groups, the premium will be better value for poor drivers which is expected to have more claims than good drivers. As a result, more bad drivers than good drivers are likely to purchase insurance increasing the insurer claims higher than anticipated when the insurer priced the product, this hence affects the insurer reserves or the premiums it ultimately charges consumers. However, when insurers rate the harmful driving habits and driving history of drivers a lower premium cost can be offered to good drivers. 

What does it means to Insure with reinsurance and why we reinsure? 

Reinsurance is insurance for insurers, and it reduces the insurer’s risk of loss by sharing the risk among one or more insurers. Reinsurance is vital as some losses are to mush for a single insurer. Insurers accomplish the reinsurance process through facultative reinsurance or treaty reinsurance. In facultative reinsurance, reinsurance works by transferring a portion of a significant risk that has been taken by the insurer. Treaty reinsurance, however, works by moving a part of all the book or group of risks to another insurer (Reinsurer) for a percent of the original premium paid. If there is a claim, the reinsurer pays the insurer a proportionate share of the loss. 

The underwriting process benefits policyholders in that the more information held about a particular risk, the more the premium can be calculated to reflect that risk. Where the insurer’s freedom to underwrite and the price is restricted, the pricing, availability of the policies and the insurer’s profitability may be affected. 

What insurable means to you when you insure? 

For a risk to be insurable, it must be definable and financially measurable. Insurance provides financial compensation against a risk materializing or offers a benefit or service if that risk occurs. The risk must, therefore, be fully definable, to identify whether a loss has occurred and a claim payment is due. 

A loss experienced must be measurable to determine the reimbursement needed. When a person or entity insure against burglars in as home, as an example determining if the event has occurred and the insurer easily calculates the financial compensation due to the insured

When consumers experience injuries as a result of an auto accident, the court sometimes decides the court sometimes decides the level of payment to the insured. Where the financial losses are less straightforward such as the death of an insured of a life insurance policy, the benefit is determined in advance by the insurer

To Insure risk, it should be random, transferable, and independent. An event that will occur involves no uncertainty. When there is no uncertainty, no transfer of risk takes place. The occurrence of risk to the insured should be unpredictable and happens purely by probability, or be outside the control of the stakeholders of the policy; otherwise, moral hazard could result. 

Life insurance works within this principle as, although death is inevitable, it's timing is not known. Also, the insured must have an insurable interest is a requirement which exists when there is a recognizable relationship between the risk and the insured. Direct ties or ownership generate insurable interest. As an example a person may have 'insurable interest" in their property but not in their neighbor's property. 

To Insure the insurer must be able to calculate a premium that makes economic sense for the insured and the insurer. The risk that is the charged to the insured must be affordable and below the item covered and also allow the insurer the ability to cover future claims while making a profit. A competitive insurance marketplace fosters the balance between these factors. The likelihood of the risk must be measurable to calculate a fair premium

The insurer must be able to compute the possibility of the risk occurring by factoring in the average severity and frequency of similar dangers with some degree of accuracy by analyzing a reasonably large claims history for the particular events, based on the insurer’s own experience, industry data or other sources. There should be a limited risk of substantial catastrophic losses, or the financial impact of the claim should not be so significant that the insurer could not hope to pay for the cost. 

Events that could result in substantial losses the insurers can use techniques such as reinsurance to reduce their exposure which is typically the case for insurance for natural catastrophes or airlines crashes. Coverage generally only offers indemnity and the payment made following the occurrence of a covered event only reimburses the policyholder for the loss incurred; the policyholder cannot profit from the claim as this could change their behavior to influence more likely losses. Risks are not all insurable; to be, it must have some specific characteristics. 

Why do we need to Insure? 

When we insure, we effectively can assess, control and reduce risks turning substantial, unexpected costs into manageable smaller payment for a policyholder allowing the participation in activities we typically would not because the risk otherwise would be too costly. As an example, a person or company running an airline company would be responsible for the cost amalgamated with airline crashing so to a person might also be less likely to buy their car for the same reason.