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What is insurance?


The concept of insurance is very straight-forward. In basic terms, you pay an insurance company an amount of money, usually called a premium, in exchange of them agreeing to reimburse any costs you incur resulting from a specified event occurring. For example, the insurance company could agree to pay you back an agreed sum should your house experience flood damage. The insurance company uses statistics to predict in percentage terms the likelihood of this specific event happening, which will then be used to establish a premium that you have to pay.



Because the majority of people with insurance policies never experience such an event, the insurance company tends to make huge profits which off-sets the occasional costly claims. Insurance companies minimise their losses by carefully managing their risks. They do this by varying the cost of premiums based on their perceived risk of your particular case – this is what’s known as underwriting. So if for example, you live in a high risk flood area, your premium is likely to be much higher than someone who lives in an area where the risk of flooding is low.


Another way where insurance companies try to increase their profits is by investing a portion of your premium. Because only a small amount of money from your premium is likely to be paid out to cover claims, it allows the company to invest the remainder of the money. However, they always need to ensure they retain a sufficient amount of funds in the event of a claim being made.



Most insurance policies also include an ‘excess’ payment. This excess payment is a fixed amount that you the policy holder will have to pay in the event of a claim. For example, if you had an excess of £250 and your claim was for a £1,000 then the insurance company will cover £750 and you will have to stump up £250. Excess payments are put in place to discourage policy-holders making excessive and fraudulent claims. Charging an excess also allows insurance companies to lower the costs of their premiums, so making them more affordable to customers.


Did you know you can buy a policy to cover the ‘excess’? –



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