What You Need to Know About Your Surging Premium

 

Insurance Diagram

What You Need to Know About Your Surging Premium

         Insurance can be fairly complicated. A lot of work goes into an insurance policy, on the part of both the insurer and the policyholder, in order to determine the proper amount of coverage and the appropriate premium. Also, insurance premiums often change, and your premium could change even if you didn’t make any changes to your lifestyle or possessions since your last term. But it’s easier to understand once you gain a basic understanding of insurance. Once you understand the basics, you can be smarter about your policy, and you’ll have a better idea of how this whole processes works for both your insurance company and yourself.

         To understand the concept of insurance, let’s go all the way back to ancient Greece. The Greeks were one of the first civilizations to use insurance and they used it to cover goods carried by merchants. For example, perhaps a merchant wants to send his goods across the sea. Without insurance, he would simply pay a carrier to transport the goods and the merchant would have to accept the risk of the goods getting lost or stolen. If the merchant’s goods were indeed lost, then he would be left with nothing. But the Greeks used insurance to solve this problem. In ancient Greece, a merchant could pay an additional fee, now known as a premium, to insure his goods. In exchange for receiving this extra money, the carrier would guarantee a safe delivery. Thus, if the goods were lost or stolen, the carrier would completely compensate the merchant. People were then able to transport their wares safely at a minimal fee.

Why does all of this work? How can these carriers afford to pay their customers whenever their wares are stolen? The answers lie in the numbers. We must understand that there were many sellers attempting to send their goods across the sea. When many sellers pay a premium to a small group of carriers (let’s call this an insurance company), then this insurance company is going to make a great deal of money. However, occasionally someone does lose their goods due to a bad storm or to thieves. In this case, the insurance company must compensate the merchant. This will come at a high cost for the insurance company, but these catastrophes are so infrequent that the insurance company will make enough money to stay in business. Neither the insurance company nor the merchant (the policyholder) wants anything bad to happen. Yet, the policyholder benefits from this comfort and safety, and the insurance company benefits from the premium. Insurance companies use the money they get from these premiums to invest and earn even more money. This whole process enables insurance companies to award massive amounts of money to people on a regular basis.

So what does this mean for you? When shopping for an insurance policy, you’ll want to consider two main things: your premium and the amount of coverage that you will receive. More coverage means a higher premium, but more importantly, less risk means a lower premium. If your insurance company thinks that your insured entity is likely to fail, then it’s going to be reluctant to cover you, and it’s going to charge you a lot for your coverage. The best way to keep your premium low is to reduce your risk. This means making sure that your article (your car, house, or your health) is in top condition. But some things that determine your premium aren’t under your control. For instance, an insurance company wouldn’t want to cover a large amount of articles in a small area; this is because all of these articles could be wiped out by one catastrophe. If you have an article in an area where all the other articles are insured by the same company, you will pay a higher premium because you are creating a higher risk level. So if your premium changes mysteriously, just remember this whole process. Insurance is all about risk, and good risk assessment is what keeps everyone insured at a reasonable price.

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