How Insurance Works

The irony surrounding insurance is that it is something you purchase hoping never to use it in your lifetime. The only reason you buy is to protect yourself from unpredicted losses that is difficult to overcome-a lawsuit threatening to wipe out your savings, a fire that may destroy your home, the accident that you wish would never take place.
Hence it's not surprising as to why people are not keen to understand how insurance works. But still there are some who want to have a little bit of information about insurance especially when it comes to buying one or filing a claim. So continue to read to understand how insurance works and how premiums are decided.

A better understanding on Insurance

An insurance policy is a legal contract that is established between your insurance company and you. In the document there are certain conditions that need to be agreed upon by both the parties and duly signed on the paper. You as the insured have to pay a particular amount to the company called the premium and the company promises to cover you for particular losses. Insurance forms will differ from company to company and the form will specifically mention what is covered and what is not.

All about Insurance Premium

The amount that is charged by your insurance company to actively cover you is called the insurance premium. Insurance premiums can vary among many insurance providers for the same service, hence the need to get several quotes before considering any insurance policy. The cost of any insurance premium is based on statistics rather than individual history or habits. Premiums consists of 3 components that you need to be aware of:

1. Mortality charges: This is incurred by the insurance company to cover for risk of death of the insured. These expenses differ from individual to individual and the sum assured-it is high for a high age including sum assured.

2. Administration and sales expenses: Insurance companies incur these expenses for operational purposes and retrieved from the premiums paid by you.

3. Savings component: A portion of your premium is invested by the life insurance company in many investment routes like bonds, equities and government securities forming your savings component.

Insurance Underwriters-Their role

Who do you think writes down all the conditions, terms and price of insurance policies after assessing various factors? You guessed it right, the Underwriters. Insurance is about risk and up to what level the insurance companies are prepared to take while offering cover. Underwriting requires a great amount of cautious analysis and tremendous skill. In some cases, statistical data is collected and rating cards are produced. Put the information into the rating system and premiums and insurance terms are generated automatically. Underwriters generally specialise in one particular area like general insurance (travel, household, pet or motor) commercial insurance, life insurance or a specific sector like aviation or power utilities.