How insurance works – the role of the insurance industry in society
How insurance works, Insurance protects individuals and companies against unforeseen events. The idea of insurance is simple.
It is about spreading risks over a larger group and over time.
A policyholder shares his risk with a larger group instead of bearing the entire risk himself.
Each policyholder pays a premium that reflects the risk they add to the group. The financial effects of various risks may be too great for the individual to manage on their own.
By insuring, individuals and companies can reduce their risks. In this way, insurance contributes to security, financial stability, and growth in society.
What can be insured?
In order to be able to insure against a certain risk or event, certain criteria must be met. An injury must be sudden and unforeseen.
It is not possible to ensure something that you know for sure will happen. It must also be possible to calculate and estimate the extent and cost of an injury.
For events that can cause extensive losses, insurance companies can use reinsurance to reduce their own risk. If a risk is considered too great, insurance companies may refrain from offering insurance.
For the most common types of insurance, such as home insurance and personal insurance, insurance companies are in principle obliged to grant insurance.
How do you price insurance?
In order to be able to offer financial protection at reasonable costs, risks must be able to be assessed and priced correctly.
Insurance companies make their assessments using scientific methods and experience from previous years. Insurance is divided into different groups based on the outcome of their expected claim.
For example, there may be a difference between the price of insuring a villa in a larger city compared to a villa in a smaller town.
Dog insurance can have different pricing depending on the dog’s age and breed. The price of car insurance can differ between car brands and year models.
Women and men, on the other hand, must always be treated equally when pricing insurance.
Different types of insurance
Insurance is usually divided into life insurance and non-life insurance. Life insurance can provide compensation when the insured becomes ill, dies, or retires.
Non-life insurance compensates for damage to property, such as a villa or a car. Some health and accident insurances are also included in non-life insurance.
Sometimes the terms personal insurance and non-life insurance are used instead. Insurance can also be divided into individual and group insurance.
It is usually voluntary to take out insurance.
But there are exceptions such as motor insurance, which is mandatory for all motor vehicles. A special form of insurance is group insurance.
They are available both as group insurance and as collective agreement insurance. Collective insurance covers virtually all employees and is based on agreements between employers and employees’ organizations.
They supplement public insurance, for example in the event of retirement and illness.