Tuesday, October 9, 2012

I think people need to revisit the definition of insurance

I was just glancing at the forums again when I read someone complaining about an insurance company withdrawing coverage from an individual after an accident. I'm not in the insurance line but I think I can guess the reason behind such a move, which is never a good PR move but must have some basis behind it.

First off, I like to revisit the definition of insurance. According to wikipedia, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. In essence, it's a pooling mechanism where the company will analyse an individual an analyse the possibility of the individual requiring a payout. Such companies survive because not everyone wants to be in an accident, but wish to be protected in the event something happens to them.

Now back to the crux of the issue. If insurer A rejects insurance to an individual or increase the premium, it usually means that they are most probably detecting that there is a high possibility that an insurance payout is required due to your risk profile. If the risk doesn't add up, they will usually reject the insurance or demand a premium.

There is a business model behind insurers and I find it a little amazing that individuals can still demand lower premiums when they have already made a claim to the insurer due to an accident.

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