Insurance as we know it today could date back to the Great Fire of London, which in 1666 devoured 13,200 houses. After this disaster, Nicholas Barbon opened an office to insure buildings. In 1680 he established England’s first fire insurance company, “The Fire Office”, to insure brick and frame houses. The first insurance company in the United States to provide fire insurance was formed in Charles Town (now Charleston), South Carolina, in 1732.
In 1752, Benjamin Franklin founded Philadelphia Aid for the Insurance of Houses from Loss by Fire. He refused to insure some buildings where the risk of fire was too great, such as 100% wooden buildings.
The principles of insurance:
The exact time or occurrence of the loss must be uncertain. The value of the losses should not be surprising. To determine premiums, or in other words to calculate price levels, insurers must be able to estimate them. Insurers need to know the price they would be called upon to pay once the insured event has occurred. Most types of insurance have maximum payment levels, with several exceptions, such as health insurance.
The loss must be significant: The legal principle of De minimis (Latin: about least things) dictates that insignificant things are not covered.
Possible random causes that can give rise to insurance claims are called “perils.” Examples of hazards may be fire, theft, earthquakes, hurricanes, and a host of other potential hazards. An insurance policy will set out in detail which perils are covered by the policy and which are not. The damage must not be on a catastrophic scale. If the insurer is insolvent, it will not be able to pay the insured. In the United States, Guarantee Funds exist to reimburse insured victims whose insurance companies are bankrupt. This program is administered by the National Association of Insurance Commissioners (NAIC).
Indemnity (compensation)
Anyone who wishes to carry risk (individual, corporation or organization of any kind) becomes an ‘insured’ party once the risk is assumed by an ‘insurer’, the insuring party, by means of a contract, defined as a ‘policy’. ‘ for sure . This legal agreement establishes terms that specify the total coverage (reimbursement) that the insurer must provide to the insured when assuming the risk, in case of loss, and 100% of the specific risks covered (compensated), for the duration of the contract. .
When the insured parties experience a loss, for a specified peril, the coverage allows the policyholder to make a ‘claim’ against the insurer for the amount of the damage when specified in the policy contract.
Financial viability of insurance companies.
Financial stability and the position of the insurance company should be an important factor when purchasing an insurance contract. An insurance premium paid today provides coverage for damage that may arise a few years from now. Because of that, the financial strength of the insurance company is more significant. In recent years, some of the insurance companies have become unable to pay, neglecting their policyholders without coverage (or coverage simply from a government-backed insurance group with less favorable payouts for losses). Various independent rating agencies, such as Best, provide data and rate the financial strength of insurance companies.
Risks evaluation
The insurer uses actuarial science to quantify the risk it is willing to consider. The information is collected to approximate future insurance claims, usually with reasonable accuracy. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and insurers use these scientific principles, in combination with other factors, to decide the composition of rates.
The game analogy
Certain people mistakenly assume that insurance is a type of bet (particularly in relation to moral hazard) that is executed during the period of time of the policy. The insurance company is betting that you or your property will not be damaged while you are betting on the opposite outcome. Virtually all homeowners insurance does not cover flooding. By using insurance, you are managing risk that you could not otherwise prevent, and that does not provide the possibility of profit (pure risk). In other words, gambling is not an insurable risk.
The “insurance” of Social Solidarity
Some religious groups, including the Amish and Muslims, refrain from purchasing insurance and instead rely on the support of their society when disaster strikes. This could be considered as “social insurance”, since the risk for any given person is collectively borne by the community, which will fully bear the cost of reconstruction. In gated mutual aid communities where others might step in to rebuild the entire lost property, this arrangement might work. Most societies would not be able to effectively support these types of models and they will not work for catastrophic risks.
(Source: http://en.wikipedia.org/wiki/Insurance).