Insurance policies work by taking premiums from customers in exchange for baring the risk of certain costly events occurring. For example, if there is one fire in your town each month, everyone could just sit tight and hope their house doesn't burn down next, or could pitch in and pay an insurance premium each month and this is then used to rebuild the house that burns down. This is how insurance works. It is a way to spread a risk over a wider area so that it would be so hard as if it were concentrated on just the person affected.
Exclusion Clause
There are a few problems with this however and they attract much criticism. One criticism is that by taking on the risk for people, insurance makes people take greater risks than they otherwise would. For example, if you have insured your home contents against burglary, you might not be very careful about locking up the house. Or if you had insured your bike, you may not lock it that much as compared to if it wasn't insured. This is referred to as moral hazard in the insurance industry.
Insurance companies protect themselves against this by inserting exclusion clauses into their contracts, which remove their obligation to pay out if the insured performs or fails to perform certain stated actions. For example, you might be required to have smoke detectors, or use quality locks on your doors.
The Text Is Too Complex
Know that there are also some risks that you won't be allowed to insure against. This may be because it would be too difficult for the insurance companies to quantify, but mostly, it's because they are risks that the governments want the individual to take on himself. They generally apply to multinational companies.
Many consumers cannot understand insurance policies well. It is simply unreasonable to expect the customer to understand lengthy documents that have been drafted by not one, but usually teams of specialized lawyers. Consumers may be misled or end up buying insurance policies on unfavorable terms. To get around this, most countries regulate the content of insurance contracts to ensure that they remain fair to consumers.
You can also have an insurance broker to shop the market for you.
Exclusion Clause
There are a few problems with this however and they attract much criticism. One criticism is that by taking on the risk for people, insurance makes people take greater risks than they otherwise would. For example, if you have insured your home contents against burglary, you might not be very careful about locking up the house. Or if you had insured your bike, you may not lock it that much as compared to if it wasn't insured. This is referred to as moral hazard in the insurance industry.
Insurance companies protect themselves against this by inserting exclusion clauses into their contracts, which remove their obligation to pay out if the insured performs or fails to perform certain stated actions. For example, you might be required to have smoke detectors, or use quality locks on your doors.
The Text Is Too Complex
Know that there are also some risks that you won't be allowed to insure against. This may be because it would be too difficult for the insurance companies to quantify, but mostly, it's because they are risks that the governments want the individual to take on himself. They generally apply to multinational companies.
Many consumers cannot understand insurance policies well. It is simply unreasonable to expect the customer to understand lengthy documents that have been drafted by not one, but usually teams of specialized lawyers. Consumers may be misled or end up buying insurance policies on unfavorable terms. To get around this, most countries regulate the content of insurance contracts to ensure that they remain fair to consumers.
You can also have an insurance broker to shop the market for you.
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