Understanding Insurance and Risk
Understanding Insurance and Risk
Insurance, no matter what is being covered, is defined as: the equitable transfer of risk from one party to another for a predetermined fee.
On first glance this may seem like a simple concept, however in practice perceiving how insurance works can prove to be a major challenge.
First we must understand the definition of "risk."
While there have been a myriad of attempts to define risk, to many of us this term probably refers to "uncertainty concerning a potential loss." This is to say that a "risk" will most likely suggest danger or a loss of some type, although we cannot precisely ascertain what type of undesirable event will occur, and are unable to predict the exact extent of any losses associated with that event.
Losses that occur as a consequence of Risk may be Financial, Physical, or Emotional in nature.
Financial
A financial loss is one that can be measured in economic terms. This may relate to, for example, the theft of a computer or a loss in earnings.
Physical
A physical loss is where a person has experienced negative physical consequences. This can include death or dismemberment, or simply falling ill. A physical loss will often have financial consequences for the individual concerned.
Emotional
An emotional loss is one that creates feelings of grief, sorrow, or despair. Examples of an emotional loss may include the loss of childhood photo albums, or breaking up with your significant other. Emotional losses have no quantifiable financial outcomes.
When insurance organizations use the term "risk" it is important to be aware that there may be using the term with alternative definitions. These alternate meanings can include:
The property or person at risk whom the provider is insuring.
The peril, or cause of loss, insured. In this definition some insurance policies may provide coverage on an "all risks" basis where any loss due to any cause will be covered under the terms of the insurance, except where otherwise specified by the policy.
Of the three types of losses listed above, it is only Financial and Physical consequences which are likely to be insurable risks. However, not all Financial and Physical risks can be covered by insurance.
In order to understand if a risk can be covered by an insurance policy we must look at two factors:
The potential financial results of the risk
The cause and effect of the risk
If we are looking at the financial results of a certain risk we may consider the risk to fall into one of two categories; this is to say that we may define a risk to be either Pure or Speculative.
As the name suggests, a Pure Risk is one where there is no potential of any financial gain. In other words, a Pure Risk offers only the possibility of a loss. Examples of a Pure Risk can include things like a Fire, Accident, or Death.
If, on the other hand, a risk is deemed to be Speculative then it will offer the potential for either a loss or a gain. Speculative risks can best be exemplified in such activities as gambling. Black Jack, for example, offers the chance of a player to win or lose sums of money, and as such would be considered a Speculative Risk. Other speculative risks can include ordinary business and entrepreneurial activities.
For our purposes it should be clarified that the majority of insurance products cover only risks which are deemed to be Pure in nature. This is due to the fact that many speculative risks are undertaken on a voluntary basis, with the ultimate objective of the individual undertaking the risk being some type of gain. If a speculative risk were insurable, then the individual being insured would have no motivation to achieve the gain, relying solely on the insurance product.
As mentioned above, when considering a risk we must not look only at the financial nature of the risk, but also the possible causes and effects of the risk. In this regard a risk will typically be defined as being a Particular Risk or a Fundamental Risk.
A Particular Risk is one which has a relatively limited consequence, usually only affecting a single individual or small number of people. Even though the outcomes of the risk may be serious for those involved, such as death or permanent dismemberment following a car accident, the results of a Particular Risk will be localized and will not impact society on a larger scale. Health, Motor Accidents, and Personal Injuries are all examples of a Particular Risk.
In the case of a Fundamental Risk, the risk has causes which are beyond the control of any single individual or group of individuals, and has effects which will impact large numbers of people; possibly even entire societies. Fundamental Risks are best exemplified with acts of War or Terrorism, Famine, and Wide Spread Natural Disasters.
In most cases it is only Particular Risks which are covered by insurance products. Many insurers will not provide coverage for Fundamental Risks as they are deemed to be unviable financially and, as such, insurance companies will not handle these risks commercially. However, in some cases, certain Fundamental Risks are now being considered for coverage by a limited number of insurance providers. War and Terrorism Health Insurance would be an example of an insurance product which covers what many insurers consider to be a Fundamental Risk.
Understanding the definition of Risk as it applies to an insurance product we can then return to our original definition and say that, fundamentally:
Insurance is a mechanism for the transfer of risk; moving the potential for future financial loss from the individual, to the insurance provider, in return for a fee or premium.
As such, we can say that the primary benefit of an insurance policy is the financial compensation made available to the policyholder in the event that a specified risk occurs.
From a commercial perspective this financial compensation may allow a business to continue running after, for instance, a fire or law suit. With regards to the individual, the financial compensation is of great help in situations where the beneficiary is in need; such as a death, in the case of life insurance, or a serious illness in the case of health insurance.
To further expand on the above, we can look at the topic of health insurance.
With a health insurance policy, the primary aim of the product is to indemnify you, that is to say financially compensate you in some way, should you suffer from an illness or accident which negatively impacts your health.
To simplify this, we can say that a health insurance policy transfers the potential financial loss associated with medical treatment or illness to the insurance company for a premium.
From this definition we can see that it is only the risk of illness which is covered under a health insurance plan. As such, it makes sense that pre-existing medical conditions (that is to say, medical conditions which are present prior to enrollment in a health insurance policy) would not typically be covered by a plan, due to the fact that there is no "risk" associated with a pre-existing condition.
If the condition exists prior to the purchase of a plan, then there is no "risk" involved in the coverage; the condition is a fact, and consequently any negative financial outcomes, such as the medical bills associated with the condition, are facts as opposed to "risks."
Keeping with the health insurance example, this can clearly be seen in the way that many international health insurance companies choose to work with pre-existing conditions, which are: Exclusion, Moratorium, and Coverage with Loading.
Exclusion
If an individual applying for a health insurance plan has a pre-existing medical condition, the most common way for this condition to be dealt with under the plan is to exclude it from coverage. As stated above, insurance is the equitable transfer of risk. If a condition exists, then there is no risk to transfer, and as such will not typically be covered under the policy. Examples of pre-existing conditions can include illnesses and medical conditions such as Diabetes, Asthma, or even Pregnancy.
Moratorium
In some cases the insurance company may offer a moratorium on the coverage of a pre-existing condition. A moratorium is a waiting period of, usually, 24 months from the start of the plan. If, during this waiting period, the insured individual displays no symptoms of the condition, requires no treatment, and receives no medication, then the condition may be reconsidered for coverage at the renewal of the policy. The reason for this is due to the fact that while a medical condition may be pre-existing, and represent no "risk" in the way we have outlined above, it is entirely possible for a person to recover from their illness. In the event that the policyholder has recovered from the illness, to such an extent that no further care is required, then the "risk" of their falling ill from the condition can be covered under the policy.
Coverage with Loading
In very rare cases the insurer may decide to offer coverage for a pre-existing condition, but will require an inflated premium be paid on the policy; this is known as a premium loading. Coverage with Loading is not offered by every insurance company, or even for every condition, but does make sense when considered with the larger idea of "risk." As insurance is the equitable transfer of risk in return for a predetermined fee, the insurance company together with the policyholder may decide to allow coverage of a certain risk in return for a higher fee than would usually be associated with the policy in question. This can only happen if both parties agree to the terms of the policy and the premium being proposed. Coverage with Loading will typically only be offered with regards to a very small number of pre-existing conditions, as it makes sense that a pre-existing condition such as Cancer will require much larger levels of indemnification, and consequently a much larger premium loading, than an illness like Hypertension.
When looking at any insurance policy it is fundamental to understand that the concept of "risk" within the coverage will affect whether or not the insurance provider will offer coverage. This can be seen in the car insurance company raising the premium on a driver who has a history of accidents (consequently presenting a higher risk to the insurer), or the health insurance provider excluding a pre-existing condition from the medical insurance policy. In both cases the risk has been accounted for by the provider, and in both cases the coverage has been adjusted accordingly. Buy Online Cosmetic Gifts & Gift Hampers For Women Purchasing The Top Key Stage Specific Books Online ETycoon Review | Massive eTycoon Bonus: Warning The Best Christmas Gift For My Husband How is a boot camp helpful in reducing weight? Make Him Commit - What Can Make a Man Succumb There is no comparison: Box-Store Brackets V.S. Federal Brace Diamond ring and wedding ring collection at –jewelry deport Houston Short Term Disability Insurance Tips And Facts Top Dating Tips That Can Help You To Understand Women Better Spoil Your Newborn The Right Way Aarkstore Enterprise-pharmaniaga Berhad (pharma) - Financial And Strategic Analysis Review The Pivotal Role Of Lights In A Wedding