Essential Facts About Home Insurance

Understanding the basic facts about home insurance is crucial to protecting your investment whether you are a first-time home buyer or an e...

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20/04/2017

Risk: What it Entails In Insurance

Insurance is a contract between an individual (the policyholder) and an insurance company. This contract provides that the insurance company will cover some portion of a policyholder’s loss as long as the policyholder meets certain conditions stipulated in the insurance contract. The policyholder pays a premium to obtain insurance coverage. 

Premium is the amount of money that an individual or business must pay for an insurance policy. The insurance premium is considered income by the insurance company once it is earned, and also represents a liability in that the insurer must provide coverage for claims being made against the policy. If the policyholder experiences a loss, such as a car accident or a house fire, the policyholder files a claim for reimbursement with the insurance company. The policyholder will pay a deductible to cover part of the loss, and the insurance company will pay the rest.

 When you buy an insurance policy, you’re pooling your loss risk with the loss risk of everyone else who has purchased insurance from the same company. An average homeowner only files a claim once every 9 or 10 years. Insurance companies are therefore able to use the premiums from homeowners who don’t file a claim in a given year to pay for the losses of homeowners who do file a claim, which is called risk pooling.
 We'll be talking about some additional insurance basics: the different types of risk and why it makes sense to eliminate or minimize them even if you have insurance, who can buy insurance and how to get it, and the importance of reviewing your insurance contract, but in this article, we will concentrate on the types of risk and reasons why it makes sense to minimize it even though you are insured.

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RISK

 
Risk in Insurance

Risks can broadly be sorted into four categories.

Preventable risks: are possibilities of something bad happening that you have the power to stop. If you don’t run red lights, you can prevent yourself from causing some types of car accidents.

Minimizable risks: are bad things that you can greatly reduce the chances of. You can greatly reduce the chances of someone stealing your car by not parking it on the street with the keys on the front seat and the doors unlocked. You can greatly reduce your chances of getting lung cancer by not smoking cigarettes.

Avoidable risks: are dangers you can stay away from. Your house can’t fall off a cliff in a mudslide if you don’t buy a house on a cliff.

Unforeseeable risks: are ones you have no power to minimize or prevent. A sinkhole could open up in your backyard and severely damage your house. If you don’t live in an area that is predisposed to sinkholes (such as Florida), you would have no reason to think you were at risk of one.

Taking risks costs you money, and limiting risks can save you money. Here’s an example of how this works.
Type of risk: garage fire
The effect: You have to file a homeowners insurance claim.
The costs: When you file an insurance claim, you have to pay your deductible, and your premiums are likely to go up the next time you renew your policy.
Mitigating risk: Don’t store the gas can you use to fill your lawn mower next to the your water heater, whose pilot light could ignite the gasoline vapors and start a fire or cause an explosion. Buy a gas container with a flame arrestor and a lid that prevents spills.


RISK FINANCING 

Risk financing is concerned with providing funds to cover the financial effect of unexpected losses experienced by a firm. It is the determination of how an organization will pay for loss events in the most effective and least costly way possible. Risk financing involves the identification of risks, determining how to finance the risk, and monitoring the effectiveness of the financing technique that is chosen. Risk financing is designed to help a business align its desire to take on new risks in order to grow, with its ability to pay for those risks. Businesses must weigh the potential costs of its actions against whether the action will help the business reach its objectives. The business will examine its priorities in order to determine whether it is taking on the appropriate amount of risk in order to reach its objectives, whether it is taking the right types of risks, and whether the costs of these risks are being accounted for financially.


RISK TRANSFERENCE

Risk transfer is a risk management and control strategy that involves the contractual shifting of a pure risk from one party to another. Transfer of risk is the underlying tenet behind insurance transactions. The purpose of this action is to take a specific risk, which is detailed in the insurance contract, and pass it from one party who does not wish to have this risk, the insured, to a party who is willing to take on the risk for a fee, or premium, the insurer. For example, whenever a person purchases home insurance, he is essentially paying an insurance company to take the risk involved with owning a home. Risk may be transferred from individuals to insurance companies or from insurers to reinsurers.

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