Insurance Domain What is insurance? Cut through the financial jargon to learn all the essentials about insurance.
Put basically, insurance enables those who suffer a loss or accident to be compensated for the effects of their misfortune. The payments come from a fund of money contributed by all the holders of individual insurance policies. In other words, individual risks are pooled and shared, with each policyholder making a contribution to the common fund. The contribution is known as the premium. Premiums are paid to insurers - these are institutions which accumulate the money into the fund from which claims are paid. The loss is in fact paid for by the policyholder making the claim and by all the other policyholders who have not suffered in the same way. Insurers Insurers are professional professional risk takers. They know the probability probability of different different types of risk happening. happening. They can calculate calculate the premiums premiums needed to create create a fund large enough to cover likely loss payments. payments. Clearly, only a proportion of policyholders will require compensation from the fund at any one time. So two important factors arise when calculating the premium. Firstly, the general likelihood that a loss will occur. Secondly, whether the particular policyholder is above or below average in risk. Take three examples. In motor insurance a young person with a high powered car, or a driver with a long history of accidents will pay a higher premium than a mature and experienced driver with a modest saloon who has been accident free. Similarly, the owner of a fish and chip shop will pay a higher premium for his fire insurance than, say, the owner of an office. The risk is greater, so the premium is higher. Someone who is young, fit and in a risk-free job will find it easier to buy life insurance, and will pay lower premiums than someone who has a heart condition or is in a risky occupation. Two kinds of Insurance There are two different kinds of insurance - life insurance and general and general insurance. insurance. With life insurance you don't renew your policy each year. Instead, you agree to pay a fixed premium for a set number of years. In other words you enter a long-term commitment when you buy a life insurance policy. What is the Difference? General insurance pays out; •
if a car has an accident or is stolen
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if a house catches fire or is burgled
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if a holiday has to be cancelled
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if someone is careless and damages other people's property.
Most life policies, on the other hand, pay out when an event happens; •
when someone dies
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when someone survives beyond a specific date. d ate.
Anyone can buy life insurance but, of course, the premium will depend on your age, your health, and your occupation.
Husbands and wives can insure each other's lives. However, you cannot insure the lives of other people unless you have a financial involvement in their life. This principle of insurance is called "insurable interest". Insurable Interest Insurable interest is a fundamental principle of insurance. It means that the person wishing to take out insurance must be legally entitled to insure the article, or the event, or the life. In other words, the happening of the event insured against, or the death of the life insured must cause the policyholder financial loss. Mr Smith would not be able to insure Mr Brown's house because its destruction would not cause Mr Smith financial loss. Similarly, you cannot insure the lives of other people unless you have a financial interest in the life being insured. The principle of insurable interest demonstrates the difference between insurance and a wager or bet. General Principles Other principles apply to all kinds of insurance. •
Insurance can provide compensation only for the actual value of property. It cannot cover the loss of sentimental value, for example.
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There must be a large number of similar risks so that the likelihood of a claim can be spread among other policyholders. It must be possible for insurers to calculate the chance of loss so that a premium can be set which matches the risk.
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Losses must not be deliberate and not inevitable. Clearly, you could not buy fire insurance for a house which was already burning nor life insurance for someone on his or her deathbed. dea thbed.
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Lastly, there are some risks which have financial implications so vast that they can be dealt with only by the state. These risks (mainly those arising from war or the major escape of nuclear or radioactive material) are normally not insurable. Insurance takes the risk away from people's lives and businesses. It brings peace of mind to the policyholder. In return for paying premiums the policyholder knows that, if the unexpected happens, financial compensation will be available from the fund of premiums.
Insurance overview What is it? In simple terms, insurance allows someone who suffers a loss or accident to be compensated for the effects of their misfortune. It lets you protect yourself against everyday risks to your health, home and financial situation. There are many different types of insurance: You are unlikely to need every single one of these, so read around, choose carefully and remember to read the small print.
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Travel: Holidays can be dangerous occasions - especially abroad. If someone falls ill it is much
more difficult than it would be at home to cope with the situation. Medical treatment is expensive. More here. •
Household contents and building insurance: Contents insurance covers the contents of a
home such as furniture, carpets, clothes, television, refrigerators, jewellery and so on. In other words, what you would take with you if you moved. Buildings insurance protects against damage to the actual structure of the home and to its fixtures and fittings. Contents and •
buildings policies can be bought separately or together in one package. More here. Car insurance: Most people know something about motor insurance. This is because any vehicle driven on public roads must have a certain level of insurance. The Road Traffic Act ensures that drivers must meet liabilities they incur should they injure other people or cause
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damage in an accident. More here. Life insurance: A means of providing for your dependents should you die early, but also a way
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to save cash through endowment policies or similar. Private medical insurance: This covers the costs of private medical treatment for curable shor shortt-te term rm illn illnes esss or inju injury ry.. It means means that that shou should ld you you beco become me ill ill you you coul could d be trea treate ted d
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immediately privately rather than being put on an NHS waiting list. More here here.. Critical illness insurance: This allows you to insure your income/ health were you to become too ill to work later on in life, and protects any dependents/ loved ones from the financial
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consequences of such unexpected events. More here here.. Accident, sickness and unemployment cover: According to Moneyextra: "In 1999, 30,000 properties were re-possessed by mortgage lenders... Many lost their homes because they could no long longer er affo afford rd to pay pay thei theirr mort mortga gage ge paym paymen ents ts thro throug ugh h an acci accide dent nt,, sick sickne ness ss or unemployment." If you are planning on buying a house it may be sensible to think about getting some mortgage payment protection insurance.
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Pet insurance: This basically helps you foot the vet's bills if your pet gets poorly. By paying
regularly into an insurance policy it means you have paid for the bill gradually rather than having to find the money for a steep bill when you can least afford it. More here here.. Excess charges Insurance policies often have hidden costs and hard-to-understand small print. Look out for excess charges, as they won't always pay the first £50 or more of an insurance claim. What do all the words mean? Don't know your underwriter from your write-off? Visit BBC Watchdog for a quick glossary. How do I make an insurance claim? •
Keep any evidence: Depending on the situation either get the names and addresses of any witnesses, keep any relevant receipts, or take ph otographs.
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Contact the broker/ insurer: Give them a ring then follow up with a letter, keeping a copy for yourself. yourself. They should send you a claim claim form, form, which you should should fill out and send back ASAP. ASAP. Send 2-3 professional estimates for the repairs with the form.
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Help with your claim.
Who can I complain to? If you aren't happy with the way your insurance company is acting you can contact the financial ombudsman service who offer a free, independent service for resolving disputes with insurance firms. Household insurance There are two basic types of household insurance; contents insurance and building insurance...
Content Contentss insura insurance nce covers covers the conten contents ts of a home home such such as furnit furniture ure,, carpet carpets, s, clothe clothes, s, televi televisio sion, n, refrigerators, jewellery and so on. In other words, what you would take with you if you moved. Buildings insurance protects against damage to the actual structure of the home and to its fixtures and fittings. Contents and buildings policies can be bought separately or together in one package. pa ckage. Contents Insurance Everyone needs contents insurance, even if living in rented accommodation or sharing with friends. Tenants are responsible for their own property and they should make sure they have insurance against the risk of damage by fire, storm, or flood. There are of course other dangers which affect rented as well as owner-occupied homes, think of burglary for example. Unfortunately many people, particularly those living in rented property, ignore these dangers. About one in four households in Britain has no contents insurance at all. Policies Policies vary between insures. insures. They give cover to the contents contents while they are inside the home and, in some cases, while they are outside in the immediate surroundings of the home. Most policies extend to give limited cover for contents which are temporarily away from the home. For example in the UK they may be at your place of o f work or at a holiday hotel. Contents insurance covers damage from a very wide range of risks. These include fire; theft; escape of water from tanks or pipes; oil leaking from fixed heating systems; storm; flood; riot or malicious damage; explosion; lightning may impact by aircraft, vehicles or animals; falling trees; subsidence and earthq earthquak uake. e. A content contentss policy policy also covers covers the loss loss of rent rent or the additio additional nal cost cost of altern alternati ative ve accommodation if the home is made uninhabitable. Contents cover includes accidental breakage of mirrors and glass in furniture and there is some cover for damage to rented property where the tenant is liable for this. An important extension of contents insurance covers the legal liability of the occupier. Liability could arise if other people are injured or their property damaged as a result of the occupier's negligence. This is a litt little le known known but very very impo import rtant ant frin fringe ge bene benefi fitt of hous househo ehold ld insu insura rance nce.. If, If, for for examp example le,, a householder carelessly let a dog run free and caused a serious road accident, then the householder ... and not the car drivers ... could be legally liable and face an expensive bill for damages and legal fees. Many household policies also offer cover for any a ny legal expenses to sue someone or if you are sued. Buildings Insurance Buildings insurance covers the structure of the house including fixtures and fittings, together with garages and outbuildings. There is limited cover for boundary walls, gates, paths, drives and swimming
pools. In general, anything that would be left behind if the occupier moved is included in buildings insurance. If you're renting, buildings insurance is paid by the landlord, not you. The policy should cover damage caused by fire, explosion, lightning, earthquake, the impact of aircraft vehicles or animals, theft or attempted theft, the breakage of aerials, and oil leaking from a central heating system. It also covers damage caused by riot and malicious persons, storm, flood, the escape of water from tanks or pipes, subsidence, landslip or heave, and falling trees. The cover for subsidence involves an excess and many policies have an excess on other sections such as theft or flood. Buildings insurance can't cover everything. Exclusions often include storm or flood damage to gates and fences, and frost damage. If the home is left empty or unoccupied for over 30 days malicious damage, water leakage and theft won't be covered. Other exclusions are damage caused by war, rebellion and revolution and damage caused by sonic booms and contamination from radioactive fuel or wast waste. e. House Househo hold lder erss can be comp compen ensa sate ted d for for dama damage ge from from this this last last caus causee thro throug ugh h spec specia iall arrangements with the Government. The Sum Insured •
When householders buy contents or buildings insurance they must decide the right value to put on the items covered. This amount is known as the "sum insured". The premium to be paid depends upon this amount. Premium rates may be higher for certain special risks - for example
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for a home in an area where burglary happens frequently or for a thatched cottage. The The sum sum insu insure red d must must be suff suffic icie ient nt to cover cover the the tota totall value value of the the goods goods and and build buildin ings gs concerned. Many people unfortunately underestimate the cost of replacing or repairing their homes and their contents. If the sum insured is set too low then, when damage occurs, the householder will find that the insurance could cover only a part of the cost.
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For buildings, insurance must cover the full cost of rebuilding the property including architect and surveyors fees and the cost of clearing away the debris and meeting any new building regulations or by-laws. This is not the same as the market value va lue of the house. house.
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Rebuilding costs often rise at times when house prices are not moving and vice versa. Take the case of two identical houses in the same town. One is next door to a noisy factory in a crowded industrial area while the other house is on the outskirts of town with pleasant country views. The houses will command very different market prices but the rebuilding cost will be the same.
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For contents, the full value is the cost of replacing the house as new. If a everything in new policy is replacement as not taken, then an allowance should be deducted for wear and tear. The sum insured must be reviewed regularly, particularly at times of high inflation. Otherwise the householder will soon find that the sum insured is too low. Most insurance companies offer index-linked policies where the sum insured is automatically adjusted in line with general rises in costs.
Accidental Damage Policies spell out clearly the risks they cover - like fire, theft and flood. For "accidental damage" cover you have to pay much more premium. Then, you are covered against such risks as spilling paint on a carpet, or dropping a camera and breaking it.
Indemnity or Replace-as-new? Indemnity policies take full account of the wear and tear on goods so that any claim payment would reflect the age or condition of damaged items. For example the policy would pay less for a ten-year-old carpet damaged by fire than for a carpet which was only a few months old. Replacement-as-new policies provide for the full replacement of badly damaged or destroyed goods with new. There are usually some exceptions such as clothing and household linen. Clearly, with such a policy, the sum insured (on which the premium is based) must be higher. For a replacement-as-new policy, the contents of the house must all be valued at their new price. Mixed policies can also be bought. These provide replacement-as-new cover for some items such as furniture, carpets and electrical goods which are less than a certain number of years old and indemnity cover for the rest. Motor insurance Most people know something about motor insurance. This is because any vehicle driven on public roads must have a certain level of insurance.
The Road Traffic Act ensures that drivers must meet liabilities they incur should they injure other people or cause damage in an accident. The person who is injured is known as the third party. The first and second parties are the car driver and their insurance company respectively. The third party may be a pedestrian, a passenger in the car driven by the insured person, or the driver or passenger in another vehicle. The injured third party can claim compensation from the driver of the offending car. The driver then relies on his or her insurers to pay the other person's claim. Different Types of Motor Policy The law says that drivers must have insurance against third party injury or damage claims and that the insurer must give to the insured a certificate of motor insurance. However, most motor insurance policies provide far more extensive cover than this. There are four basic types of cover available in Britain: •
Act only - This brings only the minimum required by law - third party liability risks incurred on
public roads. Policies of this type are very rarely issued. Few motorists would be content to rely on them unless, because of a poor driving record, they could not obtain any other cover. •
Third party - As well as covering the insured when driving on public roads, this type of policy
applies on private property. It covers third party claims and provides protection against other legal liabilities. For example passenger indemnity, covering the possibility that a passenger in the car may cause an accident perhaps by carelessly opening the door and knocking a cyclist •
over. It also provides cover against certain legal costs. Third party fire and theft - In addition to the protection given by third party insurance, this type of policy covers loss or damage to the insurer's own car as a result of fire, theft, or attempted theft.
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Comprehensive - The widest form of cover available, although it cannot protect against every
conceivable risk. In addition to the covers described in 1, 2 and 3, comprehensive cover prote protects cts in other other valuab valuable le ways. ways. The most most import important ant of these these is accide accidenta ntall damage damage cover cover
-poli -policyh cyhold olders ers can have their their own damaged damaged vehicle vehicle repair repaired ed or replac replaced. ed. Compre Comprehens hensive ive policies policies also include include personal personal accident insurance, insurance, providing payments payments for death and specified serious injuries such as the loss of a limb or sight. Such payments are usually restricted to the policyholder and his or her wife or husband. Other cover with a comprehensive policy can include small amounts of medical expenses cover for anyone in the insured car, who is injured in an accident, and for loss or damage to personal effects in the car. Different Types of Vehicles Insurers draw on their statistics and on their experience to issue special policies for various types of vehicle on the roads. There are, for example, private cars, and motorcycles including motor scooters and mopeds mopeds.. Commer Commercia ciall vehicle vehicle insura insurance nce covers covers all vehicle vehicless used used for transp transport orting ing goods goods and passengers for commercial purposes, including hire cars and taxis. The insurance of agricultural and forestry vehicles and special types of vehicle covers a whole range of machines. Then there are vehicle vehicless constr construct ucted ed for specif specific ic purpos purposes es such such as mobile mobile cranes cranes,, earthm earthmovi oving ng equipme equipment nt and ambulances. Motor Traders Motor traders pose a different type of risk and therefore need specialised insurance policies. There are three basic types of motor trader policy. "Road risks" covers the trader for any vehicles which they own or which are in their custody or control while they are away from the premises of the insured business. "Internal risks" covers them only for liabilities incurred on their own premises. "Combined road and garage" includes both these as well as other risks. Insurers will only issue motor-trader policies to traders with their own premises. Traders working from home will have difficulty getting cover. Calculation of Premiums The cost of claims varies widely, depending on the risk involved. From their claims statistics motor insurers can relate premiums to the degree of risk. This gives fair treatment to all policyholders. There are four main factors in calculating private car insurance premiums. These are: •
the type of car
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the drivers use to which the car will be put
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district in which it is kept
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Type of Car Cars are divided by insurers into 20 groups. The higher the group number, the higher the premium. The groups take account of factors such as the cost of body parts, the ease with which the car can be repaired, its value when new, its top speed, Its acceleration, and the degree to which h resist theft. Sports and high performance cars are more expensive to insure because statistics show that they are involved in more accidents and also that repairs are more costly than with other types of cars. They are therefore given a higher group rating than, for example, a small low-powered saloon.
Drivers Information about drivers affects the premium significantly. Important factors include drivers' ages and their driving experience. Young drivers - particularly those under 25 - pay a higher premium because statistics show that they are far more often involved in accidents. Young men have more insurance claims than young women. This means that some insurers will charge young women lower premiums than men of the same age. The premium may also be affected affected by drivers' drivers' occupations. occupations. Other factors factors include the accident accident record record and history of convictions - drivers convicted of drunk-driving will, when they come back to driving, have to pay a very high premium for a policy providing only limited cover Use The use to which a car is put also affects the risk. Most insurers recognise three common classes; •
use for social domestic and pleasure purposes and use by the policy holder in person in
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connection with his business or that of his employer or partner use for social, domestic and pleasure purposes and for the business of the policyholder or that of his employer or partner
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all this cover, plus commercial travelling.
All of these types of cover exclude the use of the car for racing, competitions, and rallies or for carrying passengers for hire or reward. However, taking money from passengers in return for a lift (known as "car sharing") is allowed, as long as the lift is not part of a business arrangement. District The risk is also influenced by the district in which the car is kept. Areas with a high density of traffic are more risky than a remote country area. Also, some areas have a significantly higher-than-average record of car theft or vandalism. Insurers therefore divide the country up into a number of categories of area according to their experience of the risks involved. Sometimes, theft is not covered where a car is left overnight in the open. No Claim Discount Motorists who go for a year or more without making an insurance claim qualify for a no claim discount off the basic premium. Most insurers offer a reduction of around 25% after one claim-free year. This discount rises, year by year, to 60% or 65% after four or five years. If the motorist has to claim off his own policy he may lose some or all of his discount. The discount is allowed for not making a claim and the question of blame for any accident is not relevant. Therefore if motorists make a claim they will lose part of their discount (even if they are not to blame) unless their insurers can recover their claim payment from another motorist who is at fault. Many insurers issue special policies which allow, say, two claims in three years without the no claim discount being affected. These "protected discount" policies of course cost more to buy. The Excess The excess is an arrangement whereby motorists meet the first part of a claim for accidental damage to the car or its theft. The amount of the excess is set out in the policy.
Excesses Excesses may be agreed by motorists motorists on a voluntary basis to reduce the level of the premium premium or they may be imposed by the insurer. Compulsory excesses are often imposed, for example, on learner drivers or those who are young or inexperienced. A motorist with a poor claims record may also have to face a compulsory excess. These excesses cut down the cost to insurers of small claims and therefore benefit all policyholders. Motoring Abroad All private motor policies issued in the UK extend automatically for use in all EU countries, and certain other European countries. The cover, however, is limited to third party liability. To enjoy the full level of UK cover, such as fire, theft and accidental damage, motorists should tell their insurance insurance company before departure. departure. The company will then arrange arrange to extend cover during the period of the visit. Holiday insurance Holidays can be dangerous occasions - especially abroad. If someone falls ill it is much more difficult than it would be at home to cope with the situation, so make sure you're covered.
Holida Holiday y insura insurance nce can be bought bought as a comple complete te packag packagee or select selective ively. ly. Packag Packagee polici policies es usuall usually y include Cancellation Protects against the loss of deposits, advance payments, and other charges if a holiday has to be cancelled. The cancellation may be due to death, injury or illness of the traveller or a close relative, busine business ss associ associate ate,, or other other member member of the party. party. It may be because because of jury jury servic servicee or witnes witnesss summons. summons. Cancellation Cancellation cover does not, however, extend to previously previously existing existing medical medical conditions conditions or pregnancy. Some policies also pay compensation if departure is delayed by industrial action or if the holiday has to be curtailed. Medical Expenses Even in the EU, where there are special arrangements for British people to have free or cheap medical treatment, it is sensible to take out separate insurance. This not only covers the cost of treatment but also extra travel, accommodation costs, and air ambulances home if necessary. Cover is often for £1 million or more. Personal Accident Pays compensation if the policyholder is accidentally injured. Personal Liability Pays for any damages the policyholder may incur to another person. Baggage and Money Pays for up to £1,000 or more of baggage, with 250 pounds or so for lost money.
