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 actually how insurance works. It is a method of spreading a risk over a far wider area, so that it will not be as devastating as if it was concentrated solely on the person who experiences the loss.
The Exclusion Clauses
There are a few problems with this however and they attract much criticism. One of these is that because insurance takes on risk for people, it makes people take greater risks than they usually would. For example, if your home contents are insured against burglary, then you might not be as careful about locking up the house. Or if your bike is insured, you may not bother to lock it as much as if it wasn't insured. In the insurance world, this is known as moral hazard.
Insurance companies protect themselves by including exclusion clauses in their contracts, which would remove their obligation to pay out if the insured performs or fails to perform certain actions. For example, you might be required to have smoke detectors, or use quality locks on your doors.
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.
There is also the criticism that insurance policies are far too complex for the vast majority of consumers to understand. 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. This can lead to consumers being misled or 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 get an insurance broker to shop the market for you.
The Exclusion Clauses
There are a few problems with this however and they attract much criticism. One of these is that because insurance takes on risk for people, it makes people take greater risks than they usually would. For example, if your home contents are insured against burglary, then you might not be as careful about locking up the house. Or if your bike is insured, you may not bother to lock it as much as if it wasn't insured. In the insurance world, this is known as moral hazard.
Insurance companies protect themselves by including exclusion clauses in their contracts, which would remove their obligation to pay out if the insured performs or fails to perform certain actions. For example, you might be required to have smoke detectors, or use quality locks on your doors.
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.
There is also the criticism that insurance policies are far too complex for the vast majority of consumers to understand. 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. This can lead to consumers being misled or 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 get an insurance broker to shop the market for you.
No comments:
Post a Comment