The distinct function of insurance policies is to provide protection by covering the risk entailed by a property or a thing in case of loss or damage.
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The Downside of Insurance
The distinct function of insurance policies is to provide protection by covering the risk entailed by a property or a thing in case of loss or damage. In exchange for the coverage a certain premium has to be paid by the insured. A classic example would be if a fire unfortunately happens in the vicinity, you can just hope and pray that the firefighters can put out the fire before it reaches your house. If it does, and you have no insurance coverage, then you will have to bear the brunt of producing the entire amount that it will cost to have your house rebuilt. On the other hand, if you own an insurance policy, you can use the money that will be paid by the insurance company to restore your home. Basically, this is the function of insurance. The risk is transferred to a bigger entity so that a huge loss which would probably be very damaging to one person can be prevented through risk distribution.
Items for Exclusion
However, having an insurance policy, according to those critical of this system makes people become more lax and careless since they know that an entity will pay for the consequence of their apathy. For instance, having your house insured against theft, you become lax in your security measures, such as locking your doors and windows before leaving the house. Another example would be whereas before when it was still uninsured you lock your bike for fear of losing it to a thief, now you just leave it unprotected, anyway, it is insured. This problem which is termed as a moral hazard is one of the problems faced by the insurance industry today.
To address this problem, insurance companies have also stipulated certain exclusions or performance of certain obligations on the part of the policyholder so they will also do their share in protecting their properties before they can get indemnified. One such thing is the installation of smoke detectors or excellent locks on doors and windows or other measures to reduce if not totally eliminate the risks of the insured against any eventuality.
Very Complicated
Some risk cannot be insured in most countries. The reason for this is that it will be impossible for the insurance company to calculate the amount and also because it could be something that the government would require the insured to totally declare everything about them. This is usually true for multinational corporations.
The complexity of the insurance policies which makes it almost impossible to understand by a layman has also been met with a lot of criticism. The client is often presented with very long documents which have been crafted not by one lawyer but a team of lawyers expert on the insurance field. So how can you disagree and win against them?
You could also employ the services of an insurance broker to help you find the company that could give you the best coverage at a good premium rate.
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By Oskar Hörnell on January 18, 2010, 5:58 pm
I agree with this. Good article.