More About the Business of Insurance.

by Anna Glendenning | More from this Blogger

06 Feb 2007 01:22 PM

In the first Blog about The Business of Insurance I covered the basic outline of what the Insurance Industry is about. In this Blog I want to talk about what an Insurance Company does to determine premium and what they do with the premiums we pay.

An insurance company accepts the risks associated with the contract policy a customer requests. Based on the information a customer provides, and the underwriting conditions a premium is established for the cost of the contract policy.

When the insurance policy is issued a declaration will be sent to the customer. In the declaration the insurance company or carrier specifically names:

• What specifically is insured.
• Where the specific property insured interest is located.
• The policy period (Execution and Expiration dates.)
• The named insured.
• Conditions of the insurance agreement. (Exactly which losses it will or will not be covered or compensated)
• The specific amounts or limits of coverage.
• The premium that will be charged for the insurance contract.

Insurance companies charge for a policy based on the insurance amount. The insurance amount is the maximum amount that would be awarded in the event of a covered loss. Insurance companies also consider the possibility of a specific loss occurring. Depending on the type and amount of insurance and for what type of risks Insurance companies use data about the person they make a contract with to determine the likelihood the insurance company may actually have to pay for a covered loss.

For example someone wanting an Auto Insurance policy would need to determine the amount of insurance, and what types of insurance coverage they need:

• Is the customer only interested in protecting their personal liability?
• Does the customer want the minimum state liability limits?
• Is their a lien holder on the customers car, making it a requirement to carry comprehensive and collision coverage as well? If so, what deductible limits are required?
• What type of car does the customer drive? Is it newer or older, high performance, a theft target, known to be involved in many accidents?
• What is the customer's driving history? New driver, old driver, lots of speeding tickets, any past accidents, been with or without insurance for the past year?
• What is the customer's Insurance Credit Score?

For a Homeowner Insurance policy the insurance company would look at similar factors. Determine the replacement cost of the house and personal property depending on the specific details about the home, where it is located and what the cost to replace the home might be in that area. Insurance companies would also consider where the nearest fire department is, and that the risk of fire in your area might be. Does the customer have fire alarms, security devices, or demonstrated planning to reduce an exposure to a risk?

Insurance companies rely on the customer to be honest with them about the risks and exposures a customer has when they ask for an insurance contract. One loss can be a higher financial cost then a policy holder would pay for a lifetime of insurance premiums.

Insurance companies have to use the premium dollars wisely, especially in the event of a major disaster in a region they are heavily providing insurance. In order to compensate policyholders for insured losses, an insurance company uses the premiums and invests the money to build portfolio of financial assets. Insurance companies often invest in income-producing real estate which the insurance company can then use to pay off future claims policy holders might have.

Other Blogs In This Series:

• What is the Business of Insurance?

Related Blogs:

• Insurance Careers: Intro From Top to Bottom.
• How To Review Your Insurance Credit Score & Other Public Records
• Insurance As A Lifestyle

Glossary of Insurance Terms:

A | B | C | D | E | F | G | H | I | J-K | L | M | N | O | P | Q-R | S | T | U-V | W-Z

Families.com Blogs are for informational purposes only. Families.com assumes no responsibility for consumer choices. Consumers are reminded that it is their responsibility to research their choices properly and speak to a certified insurance professional prior to making any decision as important as an insurance purchase.

Learn more about Anna Glendenning

Anna Glendenning is a mother of four. Two biological children grown and out of college, and two siblings and adopted together in 2003. Anna's Personal Website http://www.adoptiveparentsnetwork.

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