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How insurance works

Most people are familiar with the concept of insurance. We insure our homes, property and even our lives to safeguard ourselves against the financial consequences of the unexpected. But insurance is also central to the functioning of the modern world.

No one would be prepared to go into business without insurance protection indemnifying against possible litigation or losses, No airline would take to the air without insuring itself against the risk of accident and compensation claims. In fact, in many places, there is a legal requirement for businesses to have insurance protection against injuries to third parties.

Yet despite the fact that insurance is so common in our daily lives, very few people truly understand how insurance works. And even fewer realise that, without insurance, our world would be a very different place.

Insurance, in simple terms, is the transfer of risk. The insured pays a fee or premium to the insurer who then becomes responsible for the financial implications of an unforeseen event. This means that the insured is protected financially. For example, if you have a house and it burns down you have to pay the full cost of the rebuild – unless you have the right insurance. In this case, you pay a fraction of the cost of the house as a regular premium to the insurer and the insurer foots the bill for replacing the house. Businesses insure themselves in the same way against losses or litigation by clients. Without insurance, businesses would not be able to function.

Insurers meet these costs by spreading them across their clients. It works in this way. Insurers receive premiums from all their clients, the amount being fixed according to the assessed risk. This is then invested so that insurer has additional income. Insurers rely on the probability that the vast majority of clients will never have to make a claim and their investment income, so what they pay out is less than their total income. The insurance industry is highly regulated to ensure that insurance companies are able to meet their obligations when claims are made.

All insurance works basically in this way. Simple as it sounds, it still requires a number of separate specialist roles to function effectively, many of which are seldom seen by an insurance company’s clients. These include:

  • Insurance underwriter – responsible assessing risks and setting premiums.
  • Loss or claims adjuster – responsible for investigating claims and assessing the insurer’s liability.
  • Compliance manager - responsible for ensuring that the company complies with regulatory requirements and its own policies.
  • Account executive – responsible for promoting the company’s products and looking after individual clients.

The simple, basic concept of the insurance industry belies the varied and complex roles within it. With the number of jobs in insurance currently available the sector clearly offers an exciting career opportunity for anyone with good financial and analytical skills.

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