Insurance 101
The insurance industry provides protection for a multitude of financial risks, helping individuals and businesses to avoid potentially devastating financial losses. Different types of insurance policies cover different risks, such as medical expenses, automobile repair expenses and coverage for legal liability. The inner workings of the insurance industry can be broken down into three main categories: the underwriting process, the policy contract and the claims process.
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Underwriting
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When individuals and companies apply for insurance coverage, their application is reviewed by professional underwriters. An underwriter's job is to assess the risk level of applicants and determine how likely they will be to make expensive claims on their policy in the future. Risk factors vary according to the type of insurance policy in question. For example, underwriters assess individual health insurance applicants' risk levels based on their age, their health habits and their medical history. Renters' insurance applicants, on the other hand, are assessed based on things like crime levels in the community, history of claims in the area and the type of property being rented.
Policy and Premiums
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Once an applicant is accepted, he is issued an insurance policy. An insurance policy is essentially a contract between the insurer and the client --- the insured -- stipulating that the client will pay the insurer a monthly premium for an indefinite period of time. In return for the monthly payment, the insurance company agrees to reimburse the insured party for expenses specified in the policy. Different policies insure against different losses. Workers' compensation policies, for example, will reimburse employees for medical expenses and lost pay due to work-related injuries.
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Claims
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When an insured client needs coverage for an insured expense, he submits a claim to the insurance company. Insurance companies investigate claims thoroughly, examining medical records and other expense receipts to ensure that the claim is valid. Insurance companies will go as far as to send a representative out to visit the client, taking photographs of damage and performing their own cost estimate in certain cases, such as with auto insurance or renters' insurance.
Profit Model
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Insurance companies rely on the underwriting process to earn a profit and remain in business. The secret to making money in insurance is to bring in more money in premium payments than you have to pay out in claims. This involves paying close attention to the risk profiles of insurance applicants, trying to avoid taking on clients who are likely to make repeated claims. Insurance companies can also charge different monthly premiums for different clients, charging more money for those who are more likely to make a claim.
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References
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