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.
