The basis of insurance is really quite simple and easy to understand, we complicate it by making assumptions and raising our expectations beyond reason.
Following the process of insurance, the way it has always been intended to work is not difficult. Your insurance company collects payments from many policyholders to cover those few who suffer a loss. The premiums that you pay for your auto, property, farm or commercial insurance policies are collected into a large pot and anyone who contributes can expect that these funds will be available when they have a loss. Since only a few of the many may require a payout for their loss each year there will always be adequate funds when needed.
Unfortunately, an increasing trend is evident in weather-related incidents and has resulted in flooding, wind damage and fire costing insurers millions of dollars. Many insurance companies may experience an excessive number of claims by policyholders and the money collected may be paid out be substantially more than anticipated or budgeted by the insurer, that is why it is always important to keep the premium collection pot replenished year after year. You may be surprised to learn that many insurance companies struggle to make any profit from your insurance premiums after paying claims they encounter throughout the year and the meeting the operating costs necessary to service their members. Most opportunities for profits use to come from investments, but a decline in the investment market has had a major impact on anticipated returns of any significance.
As previously stated, insurance is actually pretty simple. The complication comes not from what the intention of insurance is, but rather the assumption and expectations of the customer.
Your annual insurance policy is a promise by your insurance company to protect against certain perils during the policy term (causes of loss). Your policy is renewed each year at a new premium to be paid, but your premiums paid year over year do not accumulate for you individually to draw upon as needed for only your own losses. You have probably heard someone complain that they have paid their premiums consistently for many years, but whey they submitted a small claim it was not covered. If the claim falls outside of the insured perils of your policy it would be denied for payment by the insurance company; however, most often these small claims are not denied but rather are less than the policy deductible (the amount you pay first in the event of any claim against the policy). The truth of the matter is that your insurance policy is not intended to pay smaller insignificant losses. If it did, the pot of money held by your insurance company would be depleted in no time leaving the collection empty when a policyholder suffered a major loss. Payment of all small claims would result in increased premiums by insurers that would exceed affordability by most people, and defeat the true purpose of the process.
There is most definitely a misconception by many policyholders that comes from a lack of understanding how insurance works and what it is intended to cover. Only a few realize this and have no intention of ever submitting a small claim which is minuscule in nature. Your insurance does not protect against maintenance issues of aging homes or daily automobile expenses caused by wear and tear, nor is it a provision for payout due to minor financial losses of only a couple hundred dollars of damage. The value of your insurance policy, and why you really need to carry insurance (adequate insurance at proper and full value) is when you experience a major loss in your life from a sudden and unforeseen incident such as the loss of your family home caused by fire, the destruction of your newly purchased vehicle in an auto accident (may include serious injury to driver and passengers as well), or a summer wind so strong it ripped the roof from your dwelling or garage.
The insurance industry has historically failed in educating the public and policyholders. This, combined with increasing consumer demands to know more about the products they purchase and get more value for their dollar, has created the current dilemma in the world of insurance. These days most answers to your insurance questions or inquiries can be found online, but when all else fails the old fashioned system of insurance still holds true, just ask.
Article Written by Darcy Johnson
Erie Mutual Insurance Manager – Sales, Marketing & Business Development
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