Ever imagined bearing the brunt of the heavy loss of one’s life or property? It not only increases the pain but adds fuel to the fire. Given one person must deal with the grief as well as bear the brunt of the financial loss, it brings sanity to a standstill.
Why need for Insurance Arises
To mitigate such a scenario, insurance helps to transfer the financial losses from the person concerned to a third party willing to bear that risk of loss. The insuring firm also agrees to bear the financial losses following it. Insurance companies do the exact same thing and therefore are extremely important in business and personal life.
Not only are insurance products catering to assets – both tangible and intangible assets and life as well, they cater to business stages and processes and therefore are an extremely vital business service. In exchange, the Insurance company charges small annuity payments known as premiums for paying a certain sum to the insured (the client) should that kind of risk actuate and transfer the financial risk over to the company.
Principles of Insurance
The Insurance companies work on the most important principle – ‘law of large numbers’. This suggests that pooling insurance policies and their premiums is the best option to service the ‘claims’. The probability of all clients asking for claims at the same time is calculated which is extremely less. Also, the clients are screened and accepted individually on the basis of such calculation of probability. Therefore it reduces all sorts of costs which would have been borne had only a few people were clients.
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Thus, insurance is a profitable venture and it is a bet against a future loss which might or might not happen.[i]
Value Chain of Insurance
The value chain that insurance follows is as follows –
Applications phase – The client approaches the insurance company and then proceeds onto the number of claims and sum insured they want.
Underwriting phase – Here the company underwriters evaluate how much of sum insured is required to ensure that the company does not suffer a loss by onboarding this client. A risk profiling of the client is therefore important.
Up-selling– this is where additional insurances are sold. This step is extremely important for the survival of the insurance companies.
Claims – Claims are made when the loss is proven and the risk has actualized. The insurance company must remunerate the insured for the loss that has been claimed.
Types of Insurance and Changing Face
Insurance which used to originally only cater to life and real estate has now expanded to avenues such as vehicles, animals, airline, health and many other avenues which have significantly increased the business that comes from Insurance.
The Insurance industry is integrating technology as well which is increasing its coverage across countries and are very vital therein. It is assimilating the use of drones to do ariel surveys for determining real estates and could save $6.8 billion[ii] each year. It is also imbibing the use of other methods like artificial intelligence to find and confirm unknown patterns in claims which could only be seen earlier by experienced underwriters. Data analytics is another area contributing to insurance assessments.
The pace at which the insurance market is soaring ahead is something which brings into perspective the importance it shall have in the near future as well.