You know that you need insurance, and you pay your premiums monthly or yearly. But if you’re like most people, you probably aren’t quite sure how insurance works beyond that. Where is your premium used? What happens when you file a claim? And what steps should you take to ensure you’re using your insurance effectively?
If you’ve ever experienced a car wreck, house fire or other catastrophe, you know firsthand that a good insurance policy can feel like a lifesaver. By taking the time to understand how insurance works, you’ll be better able to gauge how much insurance you need to carry, when to file a claim, and what to expect from the process.
How Was Insurance First Started
The modern property insurance industry traces its beginnings to 17th century London. After the Great Fire of London destroyed 13,000 homes in 1666, people began to realize the importance of insuring their property. In 1681, a group of 12 partners opened the first fire insurance company in London, the Insurance Office for Houses, insuring 5,000 homes. Their success led to a number of additional property insurers opening offices throughout the city.
In America, the first insurance company was started by Founding Father Benjamin Franklin in 1752.The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire refused to insure houses that were fire hazards, thereby setting new standards for homebuilding—and those standards were eventually incorporated into building codes and zoning laws. In 1759, Franklin also helped start America’s first life insurance company, the Presbyterian Ministers’ Fund.
By the 1800s, the insurance industry had really taken off. But not all insurance companies were trustworthy. In December of 1835, when the Great Fire of New York destroyed 17 blocks and hundreds of buildings in New York City, many insurance companies avoided paying claims or went bankrupt.
However, when word of the fire reached The Hartford Insurance Group, its leaders, President Eliphalet Terry and Secretary James Bolles, gathered every Hartford policy that was in effect in New York City, ordered a sleigh and team of horses, and started out across 108 frozen miles to the half-ruined city.
The Hartford set up shop in the city and began to itemize, study, and approve claims. Its willingness to accept responsibility fostered confidence in the community and helped solidify the public’s confidence in fire insurance and the insurance industry as a whole.
How Is Your Premium Determined?
The ability to recover from a loss is, of course, the reason why you have insurance. You buy insurance to protect yourself and to minimize risk, but did you know that insurance companies have to minimize their risk, too? Insurance companies carefully calculate your risk—or the likelihood that loss or damage will happen—to determine the cost of your premium. The more likely it is for a loss to occur, the greater the risk the insurance company is taking on and the higher the cost of your premium.
Loss history is an important part of the formula insurance companies use to determine their risk in taking on a particular policyholder. Those who’ve filed claims in the past are potentially more likely to file claims again in the future. Thus, after you file a claim, your loss history changes, as does your risk assessment. As a result, your premium may increase after filing a claim—or more likely, after filing multiple claims—because your loss history has changed and therefore, your insurance company’s risk in insuring you has changed, too.
How Is Your Premium Used?
Although the insurance industry has changed tremendously since its earliest days, the basic premises remain the same. Insurance buyers—also known as policyholders—pay premiums to their insurer. If a policyholder files a claim for a loss covered by their policy, the insurer will pay for that loss. But if a policyholder doesn’t file any claims, they don’t just get their money back.
The premiums of policyholders are pooled together and those pooled funds are used to pay the claims of those policyholders who do experience losses. In other words, policyholders effectively share the costs of each other’s losses. This is true even if you’ve just joined the pool and haven’t paid much into it—in the event of a loss, you’ll still be covered. And because all policyholders share the losses that occur to a relative few, each policyholder’s premium is relatively small.
It might seem unfair to pay for damages from someone else’s kitchen fire. But remember that that person might end up helping you pay for a new roof after a big storm.
What Happens When You File a Claim?
If you experience a loss or damage to your automobile, home, or something else that you have insured, you can file a claim with your insurance company in order to be compensated. Usually, you begin this process by calling your insurance agent or a representative of the insurance company and providing them with information about the claim you need to file. In most cases, the insurance company will send a claims adjuster to meet with you. They may inspect your vehicle or property for damage. You may have to provide evidence of ownership and value.
After the claims adjuster has gathered all the necessary information, they will prepare an estimate for the damages and request that the company send you a check for the estimated amount. Most insurance policies include a deductible, or an agreed-upon amount that the policyholder is responsible for paying in the event of a claim, so keep in mind that your deductible will be subtracted from the total amount you will be paid.