Insurance is an effective means of protecting individuals from the consequences of risks. It is based on transferring them to an insurer that is responsible for repairing or compensating all or part of the damage caused by the occurrence of certain accidental situations.
It is a very useful and widely used coverage formula in modern society. It involves paying an amount ( insurance premium ) and receiving financial compensation or service in return whenever a situation covered by the policy occurs.
Insurance, what is it and how does it work?
Proper risk management involves a combination of various actions aimed at protecting people and their assets. Some of the actions that can be carried out are:
- Prevent the occurrence of situations that cause damage.
- Maintain goods in proper condition.
- Save to cover possible future damages.
- Have healthy lifestyle habits.
Insurance is one of the actions that can be taken to manage risks, and in fact, it is the most economical and effective option. But we must not forget that none of them, on their own, offer complete security.
Furthermore, business activity could not function without insurance, which transforms unpredictable and variable costs arising from risks into affordable fixed costs, such as premiums.
Insurance is based on the distribution of damages among a large number of people with the same or similar protection needs. Thus, when an event occurs that causes specific damages to one of these people, all the others also contribute to repairing the damages through the premiums they pay for their insurance policies.
For the proper functioning of this mechanism, insurance entities must properly carry out the following tasks:
- Bringing together a large number of people to secure the system.
- Correctly calculate the expected accident rate to ensure stability.
- Manage the process, attending to the insured at all times.
What risks can be insured?
There are many different types of insurance in the insurance market depending on the needs of consumers, however, not all risks can be insured. Before taking out insurance, it is necessary to know that only those risks that are insurable are:
It is not possible to know with certainty whether or not they will occur, or when.
- Certain risks in the home can be insured because it is not known if or when they will occur; but, generally, damages due to lack of maintenance or the effects of time cannot be claimed (for example, leaks caused by the natural oxidation of an iron pipe).
- In the case of car insurance, the driver does not know if he will have an accident.
- In life insurance, it is known that people die, but what is unknown is the exact moment in which that will occur.
Be possible
- A water pipe in a home may burst. Therefore, you can take out home insurance to guarantee the response to any damage that may occur.
- A vehicle may suffer or cause some type of damage. Therefore, it can be insured. In many countries, it is mandatory to take out civil liability insurance for vehicles, to which other voluntary coverages can be added.
- You cannot take out insurance “against an attack by a household appliance” because it is impossible for this event to occur.
They are concrete, that is, they can be described accurately.
- The risks to which a home is exposed can be described accurately and are therefore insurable. However, a home insurance policy cannot define something as vague as “all damages to the home are insured” without specifying the type of home and its characteristics.
- You cannot take out travel cancellation insurance by simply stating that you are going on a trip. You must describe the specifics of the trip.
Its purpose must be legal and it must not be detrimental to third parties.
- The risk of driving under the influence of alcohol is not insurable since this is an illegal activity.
- You cannot take out freight insurance if the goods to be transported are drugs; drug trafficking is not a legal activity, therefore, the risk of its transport is not insurable.
They are fortuitous, that is, beyond the human will to produce them.
- You cannot claim damages to a car through insurance if its owner intentionally crashes it.
- You cannot deliberately leave the taps open in a home and claim for damages caused.
