Insurance Planning

Insurance Planning

God forbid but if you have ever undergone incidents like fallen seriously ill, got your flight refuted, ever been robbed, or worse suffered a car crash, you will get to know how hectic these incidents can be. But if you get everything insured, the chances are you won’t have to go through much distress. Having insurance means the expenses over repairs, travelling, medical treatments or robbery can be lessened to greater extent.

Insurance is a form of risk management used to primarily transfer risk, usually from oneself to another entity. It is described as:

“The pooling of unexpected losses by transferring the risks to insurers who agree to cover the insured for their losses and to provide other benefits when these unexpected occurrences take place” -- Principles of Risk Management and Insurance by George E. Rejda

In a much simpler stance, Insurance accommodates you with money when things go out of place. But with too many companies offering different types of insurances, it’s essential to read the fine print, enquire, get your questions answered and ultimately find the exact policy for your needs.

Objective of Risk Management

The purpose of risk management is to avoid, minimize or control the impact of losses to an individual due to any accident/ devastation that maybe caused to him.

Managing or Transferring Risk

The only constant is life is change, and risks are a part of it which is a reminder that things can go wrong too. You can supersede risk by following the five paths mentioned below:

Avoidance:

Try to avoid the risk as much as possible, usually through investing in very low risk instruments, for instance, bonds with fixed rate of return.

Reduction:

Measures taken to reduce the chances and value of the losses. The most common method to reduce risk in equity instruments is through options.

Retention:

Keeping or retaining the risk with oneself. This is done when the cost of reducing the risk is more than the possible maximum benefit that can be derived.

Transfer:

Passing over one’s risk to someone else. An important, commercial form of transferring risk is through insurance, where risk is transferred to an insurance company.

Sharing:

Having common pools called ‘risk sharing pools’ allow many parties to share the risk according to his share. This is usually a private arrangement.

Characteristics of Insurance
 

1. Sharing Risk

Insurance allows those financial losses that might befall on an individual or his family when a specified event takes place to be shared. The event may be death of a bread-winner to the family in the case of life insurance, loss of assets through fire in fire insurance and other certain events in general insurance, e.g., accident in motor insurance, etc. The damage/loss occurring from these events are shared by a larger group of people facing the same risk.

2. Large Number of Insured Persons

To spread the loss, large number of persons should be insured. Therefore, to make the insurance low-priced, it is important to insure large sum of persons or property with the same risk.

When probability is tested over a large sample, the actual results are closer to the expected result. This “law of large numbers” is particularly helpful in risk management. When insurance company takes exposures to a large number of people facing the same risk, the chances are much better that the overall group will realize that risk as per expectations.

Thus, the larger group not only helps spread the risk, they also aid in more precise prediction of future events.

3. Transfer of Risk

Any loss occurring due to a specified event is transferred to the insurer. The insured person /entity will bear the loss, but will not come across any financial damage.

4. Cost of Doing Business

The risk is of an event occurring is generally estimated before insurance is given. This is divided among a group of people, and one share of it is charged to any individual requiring insurance coverage. This amount charged is called premium or consideration. There are several ways to evaluate risks. If more loss is expected, higher premium may be indicted.

5. Indemnification

Indemnification refers to the concept of ‘making whole again’. Insurance generally restores the loss of value back to its position before the occurrence of the event.

6. Payment at Contingency

Since insurance coverage is conditional to a specified event occurring, thus an insurer only needs to pay the insurance amount only if that event occurs. Insurance for theft, accident etc will only result in a payment if such an event occurs. For life insurance, usually the amount of the payment is known, however, the timing of the payment remains unknown (since payment is dependent on death).

Functions of Insurance

The primary functions of insurance are stated below:

Protection:

The most important and basic need for insurance is as a mean to provide protection against potential risks, with unknown certainties. Insurance does not necessarily recognize risk in terms of value and time but can still provide protection for these risks.

Diversification of risk:

By having a large number of people with similar risks, any future losses are shared among a greater number of people with insurance. They all contribute in terms of a premium to a collective fund that is used to cover eventual losses.

Risk Assessment:

Depending on the insurance cover sought, insurance companies look at a number of factors to evaluate future risk. This is important in determining who to provide coverage to and the amount of premium to be charged for the insurance coverage.

While Making Claims..

There are some important pointers you should always remember while you are claiming for insurance.

  • Let know your insurer as earlier as you can and include every detail you can think of.
  • Show them the picture of whole situation and be honest.
  • Bring along all documents which can support your claim.

Liaise with the insurer and the people associated with it who can help you assess the claim such as, doctors or investigating officers.