Insurance Domain

What is insurance?
Cut through the financial jargon to learn all the essentials about insurance.

Put basically, insurance enables those who suffer a loss or accident to be compensated for the effects of
their misfortune. The payments come from a fund of money contributed by all the holders of individual
insurance policies. In other words, individual risks are pooled and shared, with each policyholder
making a contribution to the common fund.
The contribution is known as the premium. Premiums are paid to insurers - these are institutions
which accumulate the money into the fund from which claims are paid. The loss is in fact paid for by
the policyholder making the claim and by all the other policyholders who have not suffered in the same
way.
Insurers are professional risk takers. They know the probability of different types of risk happening.
They can calculate the premiums needed to create a fund large enough to cover likely loss payments.
Clearly, only a proportion of policyholders will require compensation from the fund at any one time.
So two important factors arise when calculating the premium. Firstly, the general likelihood that a loss
will occur. Secondly, whether the particular policyholder is above or below average in risk.
Take three examples. In motor insurance a young person with a high powered car, or a driver with a
long history of accidents will pay a higher premium than a mature and experienced driver with a
modest saloon who has been accident free.
Similarly, the owner of a fish and chip shop will pay a higher premium for his fire insurance than, say,
the owner of an office. The risk is greater, so the premium is higher.
Someone who is young, fit and in a risk-free job will find it easier to buy life insurance, and will pay
lower premiums than someone who has a heart condition or is in a risky occupation.

Two kinds of Insurance

There are two different kinds of insurance - life insurance and general insurance. With life insurance
you don't renew your policy each year. Instead, you agree to pay a fixed premium for a set number of
years. In other words you enter a long-term commitment when you buy a life insurance policy.

What is the Difference?

General insurance pays out;

• if a car has an accident or is stolen

• if a house catches fire or is burgled
• if a holiday has to be cancelled
• if someone is careless and damages other people's property.

Most life policies, on the other hand, pay out when an event happens;

• when someone dies

• when someone survives beyond a specific date.

Anyone can buy life insurance but, of course, the premium will depend on your age, your health, and
your occupation.
Husbands and wives can insure each other's lives. However, you cannot insure the lives of other people
unless you have a financial involvement in their life. This principle of insurance is called "insurable
interest".

Insurable Interest
Insurable interest is a fundamental principle of insurance. It means that the person wishing to take out
insurance must be legally entitled to insure the article, or the event, or the life. In other words, the
happening of the event insured against, or the death of the life insured must cause the policyholder
financial loss. Mr Smith would not be able to insure Mr Brown's house because its destruction would
not cause Mr Smith financial loss. Similarly, you cannot insure the lives of other people unless you
have a financial interest in the life being insured. The principle of insurable interest demonstrates the
difference between insurance and a wager or bet.

General Principles
Other principles apply to all kinds of insurance.

• Insurance can provide compensation only for the actual value of property. It cannot cover the
loss of sentimental value, for example.
• There must be a large number of similar risks so that the likelihood of a claim can be spread
among other policyholders. It must be possible for insurers to calculate the chance of loss so
that a premium can be set which matches the risk.
• Losses must not be deliberate and not inevitable. Clearly, you could not buy fire insurance for a
house which was already burning nor life insurance for someone on his or her deathbed.
• Lastly, there are some risks which have financial implications so vast that they can be dealt
with only by the state. These risks (mainly those arising from war or the major escape of
nuclear or radioactive material) are normally not insurable.
• Insurance takes the risk away from people's lives and businesses. It brings peace of mind to the
policyholder. In return for paying premiums the policyholder knows that, if the unexpected
happens, financial compensation will be available from the fund of premiums.

Insurance overview

What is it?
In simple terms, insurance allows someone who suffers a loss or accident to be compensated for the
effects of their misfortune. It lets you protect yourself against everyday risks to your health, home and
financial situation.

There are many different types of insurance:

You are unlikely to need every single one of these, so read around, choose carefully and remember to
read the small print.
 • Travel: Holidays can be dangerous occasions - especially abroad. If someone falls ill it is much
more difficult than it would be at home to cope with the situation. Medical treatment is
expensive. More here.
• Household contents and building insurance: Contents insurance covers the contents of a
home such as furniture, carpets, clothes, television, refrigerators, jewellery and so on. In other
words, what you would take with you if you moved. Buildings insurance protects against
damage to the actual structure of the home and to its fixtures and fittings. Contents and
buildings policies can be bought separately or together in one package. More here.
• Car insurance: Most people know something about motor insurance. This is because any
vehicle driven on public roads must have a certain level of insurance. The Road Traffic Act
ensures that drivers must meet liabilities they incur should they injure other people or cause
damage in an accident. More here.
• Life insurance: A means of providing for your dependents should you die early, but also a way
to save cash through endowment policies or similar.
• Private medical insurance: This covers the costs of private medical treatment for curable
short-term illness or injury. It means that should you become ill you could be treated
immediately privately rather than being put on an NHS waiting list. More here.
• Critical illness insurance: This allows you to insure your income/ health were you to become
too ill to work later on in life, and protects any dependents/ loved ones from the financial
consequences of such unexpected events. More here.
• Accident, sickness and unemployment cover: According to Moneyextra: "In 1999, 30,000
properties were re-possessed by mortgage lenders... Many lost their homes because they could
no longer afford to pay their mortgage payments through an accident, sickness or
unemployment." If you are planning on buying a house it may be sensible to think about getting
some mortgage payment protection insurance.
• Pet insurance: This basically helps you foot the vet's bills if your pet gets poorly. By paying
regularly into an insurance policy it means you have paid for the bill gradually rather than
having to find the money for a steep bill when you can least afford it. More here.

Excess charges
Insurance policies often have hidden costs and hard-to-understand small print. Look out for excess
charges, as they won't always pay the first £50 or more of an insurance claim.

What do all the words mean?

Don't know your underwriter from your write-off? Visit BBC Watchdog for a quick glossary.

How do I make an insurance claim?

• Keep any evidence: Depending on the situation either get the names and addresses of any
witnesses, keep any relevant receipts, or take photographs.
 • Contact the broker/ insurer: Give them a ring then follow up with a letter, keeping a copy for
yourself. They should send you a claim form, which you should fill out and send back ASAP.
Send 2-3 professional estimates for the repairs with the form.
• Help with your claim.

Who can I complain to?

If you aren't happy with the way your insurance company is acting you can contact the financial
ombudsman service who offer a free, independent service for resolving disputes with insurance firms.

Household insurance
There are two basic types of household insurance; contents insurance and building insurance...

Contents insurance covers the contents of a home such as furniture, carpets, clothes, television,
refrigerators, jewellery and so on. In other words, what you would take with you if you moved.
Buildings insurance protects against damage to the actual structure of the home and to its fixtures and
fittings. Contents and buildings policies can be bought separately or together in one package.

Contents Insurance
Everyone needs contents insurance, even if living in rented accommodation or sharing with friends.
Tenants are responsible for their own property and they should make sure they have insurance against
the risk of damage by fire, storm, or flood. There are of course other dangers which affect rented as
well as owner-occupied homes, think of burglary for example. Unfortunately many people, particularly
those living in rented property, ignore these dangers. About one in four households in Britain has no
contents insurance at all.
Policies vary between insures. They give cover to the contents while they are inside the home and, in
some cases, while they are outside in the immediate surroundings of the home. Most policies extend to
give limited cover for contents which are temporarily away from the home. For example in the UK
they may be at your place of work or at a holiday hotel.
Contents insurance covers damage from a very wide range of risks. These include fire; theft; escape of
water from tanks or pipes; oil leaking from fixed heating systems; storm; flood; riot or malicious
damage; explosion; lightning may impact by aircraft, vehicles or animals; falling trees; subsidence and
earthquake. A contents policy also covers the loss of rent or the additional cost of alternative
accommodation if the home is made uninhabitable. Contents cover includes accidental breakage of
mirrors and glass in furniture and there is some cover for damage to rented property where the tenant is
liable for this.
An important extension of contents insurance covers the legal liability of the occupier. Liability could
arise if other people are injured or their property damaged as a result of the occupier's negligence. This
is a little known but very important fringe benefit of household insurance. If, for example, a
householder carelessly let a dog run free and caused a serious road accident, then the householder ...
and not the car drivers ... could be legally liable and face an expensive bill for damages and legal fees.
Many household policies also offer cover for any legal expenses to sue someone or if you are sued.

Buildings Insurance
Buildings insurance covers the structure of the house including fixtures and fittings, together with
garages and outbuildings. There is limited cover for boundary walls, gates, paths, drives and swimming
pools. In general, anything that would be left behind if the occupier moved is included in buildings
insurance. If you're renting, buildings insurance is paid by the landlord, not you.
The policy should cover damage caused by fire, explosion, lightning, earthquake, the impact of aircraft
vehicles or animals, theft or attempted theft, the breakage of aerials, and oil leaking from a central
heating system. It also covers damage caused by riot and malicious persons, storm, flood, the escape of
water from tanks or pipes, subsidence, landslip or heave, and falling trees. The cover for subsidence
involves an excess and many policies have an excess on other sections such as theft or flood.
Buildings insurance can't cover everything. Exclusions often include storm or flood damage to gates
and fences, and frost damage. If the home is left empty or unoccupied for over 30 days malicious
damage, water leakage and theft won't be covered. Other exclusions are damage caused by war,
rebellion and revolution and damage caused by sonic booms and contamination from radioactive fuel
or waste. Householders can be compensated for damage from this last cause through special
arrangements with the Government.

The Sum Insured

• When householders buy contents or buildings insurance they must decide the right value to put
on the items covered. This amount is known as the "sum insured". The premium to be paid
depends upon this amount. Premium rates may be higher for certain special risks - for example
for a home in an area where burglary happens frequently or for a thatched cottage.
• The sum insured must be sufficient to cover the total value of the goods and buildings
concerned. Many people unfortunately underestimate the cost of replacing or repairing their
homes and their contents. If the sum insured is set too low then, when damage occurs, the
householder will find that the insurance could cover only a part of the cost.
• For buildings, insurance must cover the full cost of rebuilding the property including architect
and surveyors fees and the cost of clearing away the debris and meeting any new building
regulations or by-laws. This is not the same as the market value of the house.
• Rebuilding costs often rise at times when house prices are not moving and vice versa. Take the
case of two identical houses in the same town. One is next door to a noisy factory in a crowded
industrial area while the other house is on the outskirts of town with pleasant country views.
The houses will command very different market prices but the rebuilding cost will be the same.
• For contents, the full value is the cost of replacing the house as new. If a everything in new
policy is replacement as not taken, then an allowance should be deducted for wear and tear. The
sum insured must be reviewed regularly, particularly at times of high inflation. Otherwise the
householder will soon find that the sum insured is too low. Most insurance companies offer
index-linked policies where the sum insured is automatically adjusted in line with general rises
in costs.

Accidental Damage
Policies spell out clearly the risks they cover - like fire, theft and flood. For "accidental damage" cover
you have to pay much more premium. Then, you are covered against such risks as spilling paint on a
carpet, or dropping a camera and breaking it.
Indemnity or Replace-as-new?
Indemnity policies take full account of the wear and tear on goods so that any claim payment would
reflect the age or condition of damaged items. For example the policy would pay less for a ten-year-old
carpet damaged by fire than for a carpet which was only a few months old. Replacement-as-new
policies provide for the full replacement of badly damaged or destroyed goods with new. There are
usually some exceptions such as clothing and household linen.
Clearly, with such a policy, the sum insured (on which the premium is based) must be higher. For a
replacement-as-new policy, the contents of the house must all be valued at their new price. Mixed
policies can also be bought. These provide replacement-as-new cover for some items such as furniture,
carpets and electrical goods which are less than a certain number of years old and indemnity cover for
the rest.

Motor insurance
Most people know something about motor insurance. This is because any vehicle driven on public
roads must have a certain level of insurance.

The Road Traffic Act ensures that drivers must meet liabilities they incur should they injure other
people or cause damage in an accident.
The person who is injured is known as the third party. The first and second parties are the car driver
and their insurance company respectively. The third party may be a pedestrian, a passenger in the car
driven by the insured person, or the driver or passenger in another vehicle.
The injured third party can claim compensation from the driver of the offending car. The driver then
relies on his or her insurers to pay the other person's claim.

Different Types of Motor Policy

The law says that drivers must have insurance against third party injury or damage claims and that the
insurer must give to the insured a certificate of motor insurance. However, most motor insurance
policies provide far more extensive cover than this. There are four basic types of cover available in
Britain:

• Act only - This brings only the minimum required by law - third party liability risks incurred
on public roads. Policies of this type are very rarely issued. Few motorists would be content to
rely on them unless, because of a poor driving record, they could not obtain any other cover.
• Third party - As well as covering the insured when driving on public roads, this type of policy
applies on private property. It covers third party claims and provides protection against other
legal liabilities. For example passenger indemnity, covering the possibility that a passenger in
the car may cause an accident perhaps by carelessly opening the door and knocking a cyclist
over. It also provides cover against certain legal costs.
• Third party fire and theft - In addition to the protection given by third party insurance, this
type of policy covers loss or damage to the insurer's own car as a result of fire, theft, or
attempted theft.
• Comprehensive - The widest form of cover available, although it cannot protect against every
conceivable risk. In addition to the covers described in 1, 2 and 3, comprehensive cover
protects in other valuable ways. The most important of these is accidental damage cover
 -policyholders can have their own damaged vehicle repaired or replaced. Comprehensive
policies also include personal accident insurance, providing payments for death and specified
serious injuries such as the loss of a limb or sight. Such payments are usually restricted to the
policyholder and his or her wife or husband. Other cover with a comprehensive policy can
include small amounts of medical expenses cover for anyone in the insured car, who is injured
in an accident, and for loss or damage to personal effects in the car.

Different Types of Vehicles

Insurers draw on their statistics and on their experience to issue special policies for various types of
vehicle on the roads. There are, for example, private cars, and motorcycles including motor scooters
and mopeds. Commercial vehicle insurance covers all vehicles used for transporting goods and
passengers for commercial purposes, including hire cars and taxis. The insurance of agricultural and
forestry vehicles and special types of vehicle covers a whole range of machines. Then there are
vehicles constructed for specific purposes such as mobile cranes, earthmoving equipment and
ambulances.

Motor Traders
Motor traders pose a different type of risk and therefore need specialised insurance policies. There are
three basic types of motor trader policy.
"Road risks" covers the trader for any vehicles which they own or which are in their custody or control
while they are away from the premises of the insured business. "Internal risks" covers them only for
liabilities incurred on their own premises. "Combined road and garage" includes both these as well as
other risks.
Insurers will only issue motor-trader policies to traders with their own premises. Traders working from
home will have difficulty getting cover.

Calculation of Premiums
The cost of claims varies widely, depending on the risk involved. From their claims statistics motor
insurers can relate premiums to the degree of risk. This gives fair treatment to all policyholders.
There are four main factors in calculating private car insurance premiums. These are:

• the type of car

• the drivers
• use to which the car will be put
• district in which it is kept

Type of Car
Cars are divided by insurers into 20 groups. The higher the group number, the higher the premium. The
groups take account of factors such as the cost of body parts, the ease with which the car can be
repaired, its value when new, its top speed, Its acceleration, and the degree to which h resist theft.
Sports and high performance cars are more expensive to insure because statistics show that they are
involved in more accidents and also that repairs are more costly than with other types of cars. They are
therefore given a higher group rating than, for example, a small low-powered saloon.
Drivers
Information about drivers affects the premium significantly. Important factors include drivers' ages and
their driving experience. Young drivers - particularly those under 25 - pay a higher premium because
statistics show that they are far more often involved in accidents. Young men have more insurance
claims than young women. This means that some insurers will charge young women lower premiums
than men of the same age.
The premium may also be affected by drivers' occupations. Other factors include the accident record
and history of convictions - drivers convicted of drunk-driving will, when they come back to driving,
have to pay a very high premium for a policy providing only limited cover

Use
The use to which a car is put also affects the risk. Most insurers recognise three common classes;

• use for social domestic and pleasure purposes and use by the policy holder in person in
connection with his business or that of his employer or partner
• use for social, domestic and pleasure purposes and for the business of the policyholder or that
of his employer or partner
• all this cover, plus commercial travelling.

All of these types of cover exclude the use of the car for racing, competitions, and rallies or for
carrying passengers for hire or reward. However, taking money from passengers in return for a lift
(known as "car sharing") is allowed, as long as the lift is not part of a business arrangement.

District
The risk is also influenced by the district in which the car is kept. Areas with a high density of traffic
are more risky than a remote country area. Also, some areas have a significantly higher-than-average
record of car theft or vandalism. Insurers therefore divide the country up into a number of categories of
area according to their experience of the risks involved. Sometimes, theft is not covered where a car is
left overnight in the open.

No Claim Discount
Motorists who go for a year or more without making an insurance claim qualify for a no claim discount
off the basic premium. Most insurers offer a reduction of around 25% after one claim-free year. This
discount rises, year by year, to 60% or 65% after four or five years. If the motorist has to claim off his
own policy he may lose some or all of his discount. The discount is allowed for not making a claim and
the question of blame for any accident is not relevant. Therefore if motorists make a claim they will
lose part of their discount (even if they are not to blame) unless their insurers can recover their claim
payment from another motorist who is at fault.
Many insurers issue special policies which allow, say, two claims in three years without the no claim
discount being affected. These "protected discount" policies of course cost more to buy.

The Excess
The excess is an arrangement whereby motorists meet the first part of a claim for accidental damage to
the car or its theft. The amount of the excess is set out in the policy.
Excesses may be agreed by motorists on a voluntary basis to reduce the level of the premium or they
may be imposed by the insurer. Compulsory excesses are often imposed, for example, on learner
drivers or those who are young or inexperienced. A motorist with a poor claims record may also have
to face a compulsory excess.
These excesses cut down the cost to insurers of small claims and therefore benefit all policyholders.

Motoring Abroad
All private motor policies issued in the UK extend automatically for use in all EU countries, and
certain other European countries. The cover, however, is limited to third party liability.
To enjoy the full level of UK cover, such as fire, theft and accidental damage, motorists should tell
their insurance company before departure. The company will then arrange to extend cover during the
period of the visit.

Holiday insurance
Holidays can be dangerous occasions - especially abroad. If someone falls ill it is much more difficult
than it would be at home to cope with the situation, so make sure you're covered.

Holiday insurance can be bought as a complete package or selectively. Package policies usually
include

Cancellation
Protects against the loss of deposits, advance payments, and other charges if a holiday has to be
cancelled. The cancellation may be due to death, injury or illness of the traveller or a close relative,
business associate, or other member of the party. It may be because of jury service or witness
summons. Cancellation cover does not, however, extend to previously existing medical conditions or
pregnancy. Some policies also pay compensation if departure is delayed by industrial action or if the
holiday has to be curtailed.

Medical Expenses
Even in the EU, where there are special arrangements for British people to have free or cheap medical
treatment, it is sensible to take out separate insurance. This not only covers the cost of treatment but
also extra travel, accommodation costs, and air ambulances home if necessary. Cover is often for £1
million or more.

Personal Accident
Pays compensation if the policyholder is accidentally injured.

Personal Liability
Pays for any damages the policyholder may incur to another person.

Baggage and Money

Pays for up to £1,000 or more of baggage, with 250 pounds or so for lost money.