So you’re ready to start thinking about insurance—great!
Buying insurance is easier when you understand how it works, but it can often be presented using dry, complex language, making it difficult to wrap your mind around. When considering purchasing insurance for the first time, it helps to think of it in simple terms. Below we explain the basic concepts of insurance so that you know what you’re getting into before you take steps toward protecting what matters most to you.
Risk pooling makes it possible.
Following the idea that loss is less catastrophic when shared, the concept of insurance involves a transfer of risk from an individual or business to a larger entity (ie, an insurance company). An insurance company agrees to compensate an insured individual for accidental loss in exchange for a fee called a premium. The insurance company collects premiums from a large group of insureds and pools it all together to cover the expenses of individual losses as they occur. This is called risk pooling, and it makes large financial losses easier to bear because the risk of an individual loss is spread across many policyholders.
How insurance works.
When you purchase an insurance policy, you become an insured policyholder. You enter into a contractual agreement with the insurer for a defined period of time, often for one year. You make monthly or annual premium payments to the insurer in exchange for financial compensation in the event of a potential future loss. When you put money into a premium pool with many others, some of that money helps people who suffer an unexpected loss. If you suffer a loss that is protected under your policy and you make a valid claim for that loss, the insurer will pay for the loss. If you do not make a claim, you will not receive any compensation and your premium payments remain invested in the pool of money the insurer uses to pay for policyholder claims.
Why it works: the law of large numbers.
In order for insurance to function, insurers need to calculate the actual probability of loss to set the cost of premiums appropriately. In probability and statistics, the law of large numbers states that the actual losses of a group of insured people approach their expected average value more closely as the number of insured people increases. That means the probability of actual loss amongst a group is more accurate the larger the group is. When you purchase an insurance policy and put money into a premium pool with many others, that money is used to cover claims. Not every policyholder will claim a loss during the insured period, but the law of large numbers ensures that those who do will be covered.
There when you need us.
In the most simple terms, insurance is an agreement that guarantees financial compensation for a future uncertain event. Each policy will be different and will come with specific terms and conditions. If you’re new to the realm of insurance and ready to start exploring your coverage options, the teams at Kessler Insurance in Osler and Warman are ready to answer your questions! Get in touch over the phone at 306-239-2166 and follow us on social media to keep informed about our latest news.