While most of us have some kind of insurance, whether that be for our home, travelling abroad or for our mobile phones, not many of us understand how it actually works.
That’s probably because there are so many different aspects, various forms to fill in, numerous questions to answer, multiple boxes to tick and page upon page of small print for you to read. Some of you may feel this is intentional so that insurance companies can continue to line their pockets, but, unfortunately, this is simply the nature of a business that has been constantly evolving for nearly 400 years!
However, with this article, we’ll attempt to demystify exactly how it works so that the next time you happen to buy it hopefully you’ll have a better understanding of just what it is your paying for.
What is insurance?
Put simply, insurance is a service provided by either a financial institution or the state that protects you against risk — risk of losing something, of getting ill, having something stolen or accidentally damaging something. And this ‘something’ can extend to pretty much anything such as a life, a hotel reservation in Barcelona, a mobile phone or even a losing hand in Blackjack.
How did insurance begin?
There are many different types of insurance, but to keep it simple we’ve selected a core few to delve into the history of to give you a better picture of just exactly it all began (and some of the benefits it produced along the way).
Funnily enough business insurance (insurance coverage that protects businesses from losses due to events that may occur as part of running that business) started just like many of today’s companies start today, in an East London coffee shop owned by, Edward Lloyd, back in the late 1680s.
Lloyd’s Coffee House, as it was then known, happened to be frequented by the entrepreneurs of the time, sailors, merchants and shipowners, who would engage each other in a wager to see who’s ship would return safely from whatever voyage it was on. What a lovely bunch!
With the advent of the American Revolution and the Napoleonic War, the demand for maritime insurance shot up and people quickly started to realise just how necessary insurance was. As such it wasn’t long before the model was extended to other business practices and the members of Lloyd’s Coffee House quickly grew, eventually evolving into the world’s specialist insurance market that it is today.
Mutual insurance (insurance that is owned entirely by its policyholders) started in similar circumstances. In the late 17th century, groups of English farmers, who could not obtain insurance from the large business insurers, decided to protect their farms from fires by pooling their money together. If one of them was unlucky enough to have their farm destroyed, they could access that pool to help get themselves back on their feet.
This plan quickly caught on and was soon adopted by many different towns and villages. While the groups themselves eventually consolidated to become a single entity. This consolidation continued throughout the 20th century and is how most of the modern day insurance giants were formed. Unfortunately, as with most companies, as they got bigger they also became largely faceless, losing the human touch they were originally founded upon.
Another type of insurance that was born out of the fire of necessity was Property Insurance. After the devastating Great Fire of London, people decided to protect their houses in the event such a catastrophic event happened again by insuring their property with specialist fire insurance companies.
Interestingly, this type of insurance led to the foundation of the modern day firefighting, with each insurer creating its’ own dedicated Fire Department whose job it was to minimise the damage inflicted on properties the company insured.
This grand idea was soon transferred across the pond by Benjamin Franklin, who in 1752 introduced as a way for Philadelphia residents to protect their homes in the event of a fire. Interestingly, Franklin’s company was among the first to offer advice to its policyholders on minimising the risk of fire and refuse to insure those homes that posed the largest risk, such wooden houses.
Since then insurance has continued to grow, eventually evolving into the multi-billion pound industry that we know (and distrust) today — probably because with more types of insurance (and more money) things tend to often more complex.
How does insurance actually work?
In order to fully explain how insurance works, it’s good to remember that there a few parties who are all involved in the process.
The first bit of the insurance process begins when you make contact with the broker, they evaluate your claim. Working for you rather than the insurance company, they have your best interests at heart. An insurance broker will use their know-how to secure the best deal for you.
The broker shops around the different underwriters for the right product for you. The underwriter is the one who takes the ‘balance sheet’ risk and promises to pay you if the unforeseen circumstance that you are insuring occurs.
The insurance provider is backed by an underwriter who agrees to take on the ‘balance sheet risk’ (the risk of paying out on the policy) of insuring whatever is being insured (such as a house, car or mobile phone — these various types of insurance are often referred to as products).
The person who takes care of you when you need to make the claim is called the claim handler. The claim handler liaises with the insurance company as well as the underwriter. Their main responsibility is to verify the claim is genuine (as there are many claims that are not) and ensure that the process runs as smoothly as possible for you.
The claim handler can be part of or be a seperate company to the underwriter.
This aspect of the business used to be something that was dealt with in-house. Insurance firms phased this out in a bid to cut costs so the majority of claims handling is now performed by someone who isn’t involved with the firm.
The UK has the most developed insurance chain in the world which means that there are many different processes. For instance, brokers can be tied to one underwriter but can also work with a wide variety of different underwriters.
A relatively new development in the insurance chain is the aggregator. While aggregator may sound like another bit of financial jargon, it actually describes a company who compare and find the best deals for insurance. In simplest terms, aggregators are companies such as Compare the Market or Confused.com.
These companies are relatively new to the insurance chain but their popularity has soared in recent years. However, while they may find the cheapest deal in terms of total cost — they do not compare the small print of each policy.
Insurance may seem like it is inherently complicated but the fact of the matter is that every type of insurance policy follows a clearly defined path — even if that path happens to be hidden in the small print.
How does insurance benefit you?
In short, having an insurance policy is the best way to protect yourself against risk. Given that risk can take on many forms, there are many situations in which having insurance will provide you with the peace-of-mind that should something happen to something or someone you love you’re covered.
However, it’s often the case that we wish we had some kind of insurance policy after an incident happens. And given that insurance may seem like an unnecessary cost that can be counteracted by a healthy dose of common sense (lock up your bike, don’t leave your phone on a table with no one to watch it etc.) sometimes shit does happen. That’s when insurance can help.
Now if only there was a way to buy insurance, get the peace-of-mind it provides when something goes wrong, but also gives you money back when you don’t need it…
Introducing so-sure — a new kind of insurance, Social Insurance, that’s better & cheaper. Starting with mobile phones, get complete cover for a small monthly fee, connect with your trusted friends and if no one claims you get money back at the end of the year.
We’d love to hear what you think.