What is Insurance?
In simple terms taking the financial risk of an individual and spreading across a pool of people or community.
Example :
Shankaran Pillai pays a premium of 10 USD to the insurance company for his phone. If he loses the phone or phone gets to damage the insurance company has to buy him a new phone or 75% money of the phone has to be given to Shankaran Pillai.
The insurance company evaluates the risks and determine whether the deal is worth the gamble.
Insurance companies assume that Shankaran Pillai won't lose the phone and 10 USD is profit for them.
Now the insurance company tries to find 100's or 1000's of people similar to the Shankaran Pillai who want to buy insurance from them.
Since the insurance company already has 100's of subscribers they will make a profit of 1000 USD. Now even if Shankaran Pillai loses his phone they will easily pay 100 USD to him and still make a profit of 900USD from 1000 USD.
The modern insurance concept was born in London in the 17th century.
How does Insurance works ?
3 parties will be involved in any modern-day insurances.
- Client
- Broker
- Under writer
Process of insurance :
a) Making of insurance policy/contract
The client reaches an insurance broker for insurance of his products/vehicles/property/medical. Insurance broker evaluates the risks associated with the insurance and evaluates the total price himself or asks a third party to assess the costs involved and make an insurance policy.
The insurance broker passes on the policy to the third person in the chain underwriter. For cheaper premium underwriters may exclude few risks or for higher premiums, he/she might include more risks.
The lead underwriter takes the largest proportion of risks and signs his name in the first document/contract.
The lead underwriter is the person who is responsible for the acceptance of policy or responsible for claims on the policy.
Once the terms on the policy/contract are agreed on by multiple parties, it is made legal.
Now the client is happy and they will pay the premium, the broker keeps 10% of the premium and passes on the 90% to underwriter.
b) Claims /Settlement :
Suppose something bad happens, the client /representative of the client will notify the insurance broker and the insurance broker will notify the lead underwriter. Together they will visit the site for inspection/verification of damage or claims.
Now the insurance broker needs to negotiate the best claims for his/her client. The lead underwriter will pass on the money to an insurance broker in a lump sum and same passed on to the client as per the agreement.
c) The wise Lead underwriter will re-insurance the policy to a bunch of other underwriters so that Lead underwriter is in the position of a client without any loss or risk-free money.
Example :
The lead underwriter will re-sells his USD 10 policy for USD 9 - he gets to keep a USD 1 each for around 100 clients- he makes USD 100 risk-free.
Types of Insurances in the market today are as follows -
- Auto insurance / Car insurance / Bike insurance
- Travel insurance
- Health insurance (Medical insurance)
- Liability insurance
- Term insurance
- Life insurance
- Home insurance
- Pet insurance
- Jewellery Insurance
- Property Insurance
- Marine Insurance
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