Insurance policies work by taking premiums from customers in
exchange for baring the risk of certain costly events occurring.
For example, if there is one fire in your town each month,
everyone could just sit tight and hope their house doesn't burn
down next, or everyone could pitch in and pay an insurance
premium each month and this is then used to rebuild the house
that burns down. Very simply this is how insurance works. It is
a method of spreading a risk over a far wider area, so that it
will not be as devastating as if it was concentrated solely on
the person who experiences the loss.
Exclusion Clauses
There are a few problems with this however and they attract much
criticism. One criticism is that by taking on the risk for
people, insurance makes people take greater risks than they
otherwise would. For example, if you know your home contents are
insured against burglary, then you may not be as careful about
locking the doors and windows every time you leave the house. Or
if your bike is insured, you may not bother to lock it as much
as if it wasn't insured. In the insurance industry, this problem
is known as the moral hazard.
Insurance companies protect themselves against this by inserting
exclusion clauses into their contracts, which remove their
obligation to pay out if the insured performs or fails to
perform certain stated actions. They might for instance require
that you fit smoke detectors, or use good locks on your doors,
or other things that will reduce the risk of the insured against
event occurring.
Too Complex
There are also certain risks that you are not allowed to insure
against in most countries. This is first of all because it would
be too difficult for the insurance companies to quantify, but
mostly it's because they are risks that governments want the
person at risk to bare himself or herself. They generally apply
to multinational companies.
There is also the criticism that insurance policies are far too
complex for the vast majority of consumers to understand. It is
simply unreasonable to expect the customer to understand lengthy
documents that have been drafted by not one, but usually teams
of specialised lawyers. This can lead to consumers being misled
or buying insurance policies on unfavourable terms. To get
around this, most countries regulate the content of insurance
contracts to ensure that they remain fair to consumers.
There is also the option of using the services of an
insurance broker to shop the market for you.
About the author:
Joseph Kenny is the webmaster of the insurance site
http://www.insure121.com/
where you will find information, news and links to the leading
providers of
home
insurance in the UK.
