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Insurance 101
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Indemnification
The basic ideas behind
the first insurance
policies written were to
spread the risk of a
catastrophe beyond a
single party, and
indemnification if a
loss should occur.
Examples of the spread
of risk were the early
“Mutual” insurance
companies. Groups of
farmers, for example,
would form a company in
which each farmer was
part owner. There was a
reciprocal agreement
amongst them, and
payment into a common
fund, to “indemnify” one
another against loss by
fire.
The indemnification
premise was that each
member of the mutual
would be “made whole” in
case of loss. The intent
was to put the claimant
back to where he was had
no loss ever occurred.
Obviously these concepts
have morphed into a much
more sophisticated
mechanism in today’s
insurance marketplace.
But, the basic ideas are
still the same, to
spread risk and make
whole.
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Premium
Considerations
Most insurance premiums
are derived, in one form
or another from
actuarial data. Pascal,
the French scientist,
developed a way to
express probabilities,
and thereby levels of
risk. This led to the
first actuary tables,
which are still used for
many types of insurance.
This development
formalized the practice
of “Underwriting” risk
and made insurance more
affordable.
The most influential
factors on insurance
premiums are the actual
coverage amounts that
will be on the policy.
For instance, for
homeowners insurance,
the primary focus of
coverage is on the
replacement value of the
home. An increase in the
replacement value will
result in an increase in
the premium. However,
there are many ways to
mitigate premium
increases. The use of
higher deductibles is
probably the most common
way. The adding of
security items, such as
alarms, can result in
significant premium
credits.
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Claims
The claims process is an
often misunderstood part
of the insurance puzzle.
The perception is that
if a policyholder files
a legitimate claim,
their policy will be
cancelled or their
premium will go up. In
actuality this seldom
happens. There are
scenarios that raise a
red flag, such as claims
frequency within a short
period of time, or a
suspicious circumstance
leading to loss. But,
for your average, run of
the mill type of claim,
payment is usually made
with a minimum of hassle
and devoid of
repercussions for the
policyholder.
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What exactly is
covered?
This is a question that
insurance agents get
asked quite frequently.
Seldom can an answer be
given that will be
satisfactory. Coverage
is ultimately decided
after a loss has
occurred, and after a
claims adjuster has done
a proper investigation.
A simple answer to the
question might be that
if it’s not specifically
excluded on the policy,
then “it” is covered.
That is mostly accurate,
but not 100% of the
time. There are also
misnomers in insurance
policies that lead to
false beliefs that more
coverage exists than
actually does. The term
“Replacement Cost
Coverage” is a good
example. On most
policies today there is
no such thing a
“Guarantee” Replacement
Cost Coverage on most
policies today means
“the lesser of
the limit shown on the
declarations page of the
policy OR what it
actually takes to
replace the property”.
Bottom line is that it is
always best to read the
exclusions on your
policy first if you want
to know what might
be covered.
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