How insurance work

How insurance work

Insurance is a financial product sold by insurance companies to protect you and / or property against the risk of loss, damage or theft (such as floods, burglary or accident).

Some types of assurance that you must withdraw by law such as car insurance if you drive a vehicle; Some of whom you may need as a condition of a contract such as buildings insurance as a requirement of your mortgage; And others are judicious to go out, such as life insurance or savings for a pension.

Although it is a good idea to make sure that you do not pay insurance that you do not need, you should always think about what would happen if a disaster hit and you did not have a blanket for protect yourself.

You can buy insurance policies for many aspects of your life, for example for your health, home, car, business or retirement.

An insurance policy is the contract that you retre with an insurer to protect you from specific risks under the agreed conditions.


How it works

When you buy a strategy, you make regular payments, called premiums, the insurer. If you make a complaint, your insurer will pay for the loss covered by the policy.

If you do not complain, you will not recover your money; Instead, it is brought together with the premiums of other insurance holders who have undergone insurance with the same insurance company. If you make a claim, the money comes from the police bonus pool.

How premiums are calculated

Insurers use risk data to calculate the likelihood of the event you make sure to increase. This information is used to determine the cost of your premium. The more likely the event is to occur, the higher the insurer's risk and, as a result, the higher the cost of your premium.

An insurer will take into account two important factors when exercising the premium they charge.


What is the probability of general terms that someone will have to make a claim?

Is the person who wishes to subscribe a policy a higher or smaller risk than the "medium" insurance policyholder (for example, a high-power young person can be charged a higher premium because they are statistically more likely to be involved in an accident than a mature and experienced driver)?

Only a proportion of subscribers will make a claim over a year.

Standard policy conditions

Although policies have different terms and conditions, there are generally three main principles common in all insurance policies. These included:

The cover is provided for the actual value of the property or the lost or damaged element (its replacement value), but does not include any sentimental value

There must be a lot of similar risks so that the likelihood of a claim can be spread among other policies. It must be possible for insurers to calculate the risk of loss so that a premium can be defined which corresponds to the risk

Losses should not be deliberate

For more information

Read our insurance page for information on shopping around

Read the UK Insurance ABI Guide - The Advantages of Pricing Risk (PDF 1.57MB) To learn more about how insurance work