How Insurance Companies Work - Frequently Asked Questions About Insurance

How Do Insurance Companies Work?

Modern insurance companies work by providing some financial protection to their clients in the event of a catastrophic loss. When an insurance policyholder incurs expenses related to medical care, or the damage or loss of a valuable insured possession such as a house or car, the insurance company provides financial remuneration and other reimbursement. This is, in general, the basis for almost all types of insurance. In exchange for this guarantee of financial protection, the client pays the insurance company a regular premium. Premiums are usually paid each month, although some companies offer a discount for quarterly or annual premium payments.

How Much Is the Insurance Premium, and How Is It Calculated?

The amount of the premium can vary wildly depending on the factors involved. Certain types of insurance require, because of their nature, a higher premium. Auto insurance, liability insurance for businesses and malpractice insurance for health professionals are examples of high premium insurance types.

The insurance company will also take into account the amount of risk that is involved in insuring the person or institution. The higher the probability of an event happening that may need to be covered, the higher the premium will be.

An example of this is with auto insurance. When a driver is in an accident and the insurance company pays to cover the costs of repairs, frequently the premium will rise for the policy holder. This is because they now have a perceived increased risk for having accidents.

Premiums can range from almost nothing to thousands of dollars.

How Do Insurance Companies Make a Profit?

An insurance company makes a profit, more or less, by gambling. They rely on the fact that the large majority of their clients will not simultaneously face a catastrophic event. In this way, most of the premiums paid to the company are invested or otherwise used to increase the revenue of the company when they are not needed.

What Are the Different Types of Insurance?

There are many different types of insurance. In fact, if a standardized insurance policy does not exist for something, there are institutions like Lloyds of London who will scrutinize the situation and possibly create a custom policy for the client. As an example, Lloyds of London famously insured Betty Grable’s legs against injury for one million dollars.

There are insurance policies for property, automobiles, life, business risks, travel, flying, transporting goods and health just to name a few. The list is nearly endless.

Can I Be Denied Insurance?

Insurance companies have the right to deny insurance to an individual or institution. This can occur when the risk involved in insuring the client is too high. This happens with auto insurance and life insurance regularly. Under new health care laws, health insurance companies will no longer be able to deny coverage to anyone due to pre-existing conditions or health issues.

There is controversy in the insurance industry over a practice called ‘redlining’ where the insurance companies work to deny insurance to an entire area. While they sometimes claim this is due to weather or other geographical factors, there is some evidence that it is actually discriminatory due to economic or racial demographics in the area.

What Decides Whether an Insurance Company Will Pay a Claim?

Insurance policy holders sometimes voice complaints about the legal documentation that they sign when accepting insurance coverage from a company. This is because the insurance companies must state, in no uncertain terms and in excruciating detail, all of the acceptable conditions they will cover and all of the exceptions they will not cover.

The amount of coverage will directly increase the premium because it increases the chance that the company will have to pay for a claim. Almost all types of insurance have these stipulations.

In grey areas of the coverage, insurance companies will usually make a determination on their own whether the claim should be paid or not. The policy holder, if denied, can file an appeal and attempt to reverse this decision. In the end, however, it is the insurance company who ultimately decides.

Who Regulates The Insurance Companies?

While they are truly private businesses, insurance companies are in fact regulated by the federal government and by local state governments. The oversight is not as strict as it is with other financial institutions, but it does exist. The National Association of Insurance Commissioners is the omnibus body that tracks and helps with governmental regulation on behalf of the insurance industry.

In Conclusion

Insurance companies are a necessary part of society. They have come to be relied upon by individuals, businesses and even parts of the government itself. The protections that they provide, the mitigation of potentially devastating damages, and the security in daily life can not be overlooked.