The Insurance Product:
Touching The Adventures and Perils which the Underwriters are contented to bear and take upon themselves, They are the Seas, Men-of-War, Fire, Lightning, Earthquake, Enemies, Pirates, Rovers, Assailing Thieves, Sins of Man, and Acts of God.
When you buy insurance coverage, The product you are buying is protection. Our product of insurance protection is unlike many other products. You don’t drive it to work, You don’t put it on your head to keep you warm, and you don’t use it to cook your food. Our product is intangible. In other words, it is something that people can’t see or touch, and because it is intangible, it is difficult for people to understand.
Actually our product is a promise, A promise to the person who buys the insurance that if “such and such” occurs, they will receive payment if “such and such” doesn’t, they won’t. The insurance policy is the written explanation of our intangible product and explains what is included in the promise.
Thankfully insurance policies aren’t as confusing today as they use to be, Today’s insurance policies use language that is easier to read. Even with more simplified wording, people still find insurance policies difficult to understand. Your knowledge of the policy , what it represents and what it describes is extremely important because the policy is the only tangible thing our clients receive when they buy insurance. It is a description and a symbol of the product you are buying.
The Concept Of Risk:
The policy is also a symbol of the transfer of risk. Now this concept of Risk is basic to your knowledge of the insurance business, So lets talk about risk. Lets use Mary Jackson as an example, Mary has just bought a new car. It has all the latest features and many other extra gadgets. It is very comfortable and drives like a dream. It looks great and makes Mary feel proud, and needless to say it cost Mary a lot of money! If anything happens to destroy the car, Mary knows she wouldn’t be able to afford another one. She’s not even sure she could pay for the cost of repairs if the car was damaged very badly. Now it is possible that nothing will ever happen to the car. But then again, something might. The outcome is uncertain. This is the insurance concept called risk.
Ways To Handle Risk:
Since Mary knows there is a risk involved in owning the car , She could decide to avoid the risk altogether and not buy the car in the first place.
She could decide to retain the risk herself and start saving money, With the idea in mind that if something happens to the car, She will have enough money saved to repair or replace it.
Neither of these seems like a good option to Mary. So instead she decides to buy the car and buy an insurance policy for the car at the same time. Her decision to buy insurance is also a decision to transfer the risk to the Insurance Company, What a Relief.
Okay, So Mary has decided to buy the car and to buy the insurance. The cost of the car is based on the model of the car and the kind of features it offers. Mary can also choose extra options if she wishes to pay more for them.
When she buys the insurance for her car she will pay a premium , which is the cost of the insurance protection. This cost is based on things like, the value of the car, The amount of insurance Mary wants, and her record as a driver.
Will the insurance actually protect her car? Well, not exactly. The insurance coverage doesn’t protect the car itself, but rather it protects Mary against financial loss associated with the car. The Insurance policy is a promise that if something happens to the car, the insurance company will put Mary back in the same, or similar, financial condition she was in before the loss happened.
Indemnity:
Well, Let’s say Mary drives this car for two years and has a wreck, The promise made by the insurance company is that they will pay to repair the car to its previous state, or replace the car with one like the two-year old car. Mary will not get a new car. It is not the purpose of insurance to put Mary in a better position after a loss than she was before the loss occurred. The purpose is for Mary to break even. This is another Concept of Insurance called Indemnity.
Joe Chapman 04/17/2014