Risks, Risks and More Risks

One of the things about insurance that makes it very similar to something like a credit card is that both sides are taking a large amount of risk on the insurance. You are taking risk by purchasing the insurance and the company is taking a risk by selling the insurance. In order to become a smart and savvy consumer that is able to get the most out of their deals it is very important for you to a) understand these risks and b) be able to counter the risks that you are taking in order to minimize them. Additionally, understanding the risks of the insurance company will help you predict any curves they might throw at you later on down the road.

Risks to You

When you purchase insurance you are going to have to start paying a premium on the insurance that you’ve purchased. A premium is simply a payment that you make to the insurance company that allows them to cover you with one of their insurance plans. Companies frequently have multiple levels of insurance and the higher the premium you are willing to pay the higher the likelihood that whatever situation you get yourself into is likely to be covered by the insurance that you have purchased. This right away shows you the primary risk of insurance; namely that you could pay all of the premiums, get yourself into the situation and end up not being covered by the insurance plan. This would mean that you would be out the money you spent on the premium as well as the money that you have to spend to rectify the situation you are in. It is a very bad place to be in but unfortunately one that many consumers have found themselves in over the course of the existence of insurance.

Risks to Them

In many respects insurance really is a game of investing. You invest in the company and if an event like an accident happens then the company has to pay you the policy in full. This is basically the primary risk to the company. There is a very remote, although definitely possible chance that there may be a large amount of claims over the same short period of time and if this happens the reserves of the insurance company might be exhausted and they might not be able to pay. Nowadays the insurance business is very mathematical in nature and experts with doctorates are able to discern the exact amount of premiums needed to make this a very low likelihood so while it is not very likely it still remains a remotely possible risk.

Article correct at its author date: May 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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