Insurance work: The most basic principle behind the concept of insurance is ‘risk pooling.’ Many people are ready to get insurance against any loss or damage, and for this, they are ready to pay the desired premium. This group can be called the insurance pool.
Now, the company knows that the number of interested people is vast, and at the same time, the possibility of all of them needing insurance cover is almost impossible. Thus, it regularly collects companies in the interim and claims when such conditions occur. The most common example of this is auto insurance. We all have car insurance, but how much have we claimed it? So, you pay for the probability of loss and get insured, and you will be paid if the given event happens.
So when you buy an insurance policy, you pay the company a regular amount as a premium for the policy. If you decide to make a claim, the insurer will cover the damages covered by the policy. Using risky data to calculate the probability of companies – you are seeking insurance for the event. The higher the probability, the higher the policy premium. This process is called underwriting, which is the process of assessing the risk of insuring.
The company only seeks the value of the insured entity between the insurers in exchange for the insurance contract. For example, if you have insured your ancestral home for ৫০ 5 million, the company will only consider the home’s actual value. It will not entertain the emotional value that the home can hold for you, as it is impossible to put a price on emotions.
There are different terms for different policies, but the three general principles remain the same for all types: the cover given for a property or item is for the actual value. It does not take into account any perceived value. The benefits of a claim should be spread across the policyholders so that the insurers can calculate the risk to set the premium for the policy. The damage does not have to be intentional. We have covered the first two points above.
The third part is a little more critical to understand. An insurance policy is a particular type of contract between the insured and the insured. This is the agreement of ‘absolute good faith.’ This means a vague but fundamental understanding between the insured and the insured that is not usually present in the regular contract.
This understanding includes the responsibility to fully disclose and not to make any false or intentional claims. If this duty of ‘good faith’ fails to inform you of the information you need, a company may refuse to settle your claim. And this is a two-way street. The company has a ‘good faith’ obligation towards the client, and failing to act on it can cause many problems for the insurer.