Insurance Risk

What does “RISK” have to do with “INSURANCE”?  You have to first understand what insurance is and what it is not. Insurance is a legal contract that you sign in which you agree to pay your premium into a fund that is shared with other people who have also agreed to the same thing. So now you have a “pool” of money available in case anyone in the group of “insureds” suffers a  loss. The larger the number of people in the pool, the more money will be available to cover the losses of the group.

These are the two bricks that hold each end of the contract in place- 1.  You (the insured) promises to pay the specified premium, and 2. The insurance company, (the entity who manages the “pool” of money for a fee), promises to pay you for a financial loss from a chance event. Your  ” INSURANCE” ( THE THE PROMISE TO PAY) is defined in the contract and will state exactly what those losses are that you will be reimbursed for- your policy does NOT PROMISE TO REIMBURSE YOU FOR ANY BAD THING THAT HAPPENS TO YOU. 

That is where the word “RISK” enters into the contract. A “RISK” is a chance event that can cause a loss. Since your policy promises to pay for your financial losses, it must further clarify what losses will be paid out of the fund. Why can’t they pay for everything? What if your garage roof leaks because you never replaced the shingles since you built the house 50 years ago? If that were a covered loss, then no one would do regular maintenance on his or her property and the money in the fund would soon be gone. It is the responsibility of the insurance company, as the manager of the pool of money, to make sure that there is enough money to cover the losses of all the people who have paid into the fund.

Since insurance companies are regulated by the states, each state monitors the companies and requires that they have a certain percentage of the premiums they manage, available on hand at all times to pay claims. This “loss reserve” must be maintained or the state will close the company because if they pay out more than is coming in, the fund will be bankrupt.

Some examples of “RISK”(a chance event that causes a loss) in a homeowner’s policy are windstorm, hail, vandalism and theft. These are just a few that are listed in a “named perils” policy.  There are policies that state that the policy will pay for all causes of loss except those that the policy specifically excludes. Those things that are excluded will be listed and explained in the contact. Some examples of risk (a chance event that causes a loss) in an auto policy are accidental collusion with other vehicles, buildings, or a telephone pole. Other risks are encounters with animals, and stones breaking your windshield.

It is very important that you read your policy, ask your agent to explain anything that you do not understand before you sign the contract and before you have a claim. Remember, the time to ask if something is covered is BEFORE you sign the contract and BEFORE you have a claim.