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Lightening The Load, Spreading The Risk

Safeguarding against things that might happen in life is an unfortunate necessity most people need to be prepared for, as Peter d’Aguilar explains

Nothing in life is totally risk free, including life itself – so we all need a degree of security and protection from unforeseen setbacks. In one form or another, insurance has always been around. Early humans hunted dangerous prey in groups, to spread the risk. Valuable goods were transported in several different cargo ships, reducing the chances of losing everything at sea through shipwreck or piracy. In more modern times, the insurance risk is passed from the individual to an institution that has the resources to cover a substantial loss.

The dictionary definition of insurance is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium – providing protection against a possible eventuality. In a nutshell, insurance is a mechanism to mitigate risk by spreading it among a group of participants – so that no one is left to carry the burden single handed.

In an ideal world we would never need insurance. Nevertheless, it is reassuring to know we are covered against a variety of potential risks. Insurance comes in many forms to cover the different elements in our lives – from our home and its contents, possessions, cars, health, life, pets and travel to income protection, public liability, professional indemnity and long-term care. Its protection or coverage can be for a limited period or throughout a whole lifetime.

Insurance works on the principle of the policy holder paying a regular, relatively small premium to the insurer in case they should suffer a loss or a claim against them. If this should unfortunately occur, the insurer then pays out a potentially much larger sum by way of compensation. The insurance policy is the contract between the insurer and the insured, setting out everything the policy covers and any conditions and exemptions. In order to keep premiums down and avoid too many small claims many policies include an excess, which is the amount of your claim you agree to cover before the insurer pays the rest. In the event of a claim, the case is assessed by a claims or loss adjuster. 

Insurers sometimes dilute their exposure to larger claims by taking out reinsurance, spreading the risk across other insurance companies. Insurance underwriters are professionals who evaluate and analyse the risks involved in insuring people and assets. Insurance underwriters establish the pricing for accepted insurable risks. The term underwriting means receiving remuneration for the willingness to pay a potential risk.

Perhaps the world’s best-known insurance institution is Lloyds of London, which was founded in the seventeenth century and operates as a marketplace within which multiple financial backers, grouped into syndicates, come together to pool and spread risk.

As with any product purchase, it is advisable to shop around for the best and most cost-effective insurance cover. A good insurer can turn a difficult situation into a more bearable one, providing helpful advice and prompt payment. 

While it’s worth asking for independent recommendations from friends and family, the internet is another place to search. Comparison sites advertise widely and memorably (ranging from meerkats to opera singers) and provide access to a range of insurers. Many people still prefer the customer service, personal touch and face to face experience that comes from using an insurance broker. Ultimately, the aim is the same; to find the best product and negotiate the most favourable rates.

Inevitably, insurance premiums tend to go up after a claim has been made. Conversely, especially in the case of car insurance, a no-claims discount can bring the premium down.

While we hope that our most substantial claims, if any, will be for nothing more drastic than a dented car or a lost handbag, natural disasters can result in massive compensation payments. Earthquakes such as Los Angeles 1994, China 2008 and Japan 2011 resulted in multi-billion-dollar pay-outs; as did several recent hurricanes and tsunamis. However, the biggest hit insurers have ever taken was the 2008 financial crisis, which cost institutions and governments over 20 trillion dollars.