The role of insurance - Essay Example

Insurance helps in curbing the loss that a person can achieve due to a happening that may happen in the future. This is a form of risk management in which several strategies are used to hedge the risk that is present in the future, the risk related to uncertainty. Broadly defining the term, it is the transfer of risk from one owner to another. This exchange from one entity to another is done by paying a premium to one party who is undertaking the contingent risk. In return the person who is giving up on the loss and paying the premium, gets the benefit of knowing either the extent of risk that is present and or preventing the loss at all. Insurance is one of the basic forms of risk management. In terms of position, an insurer is the person who undertakes the risk of loss; the policy holder is the person who buys the insurance and let's goes of the risk that is associated. There is another term that is present, called the insurance rate; this factor is used to determine the charge that is charged for a certain kind of insurance. This extra charge is called the premium that the policy holder has to pay to let go of the risk that is present. All in all, the field of insurance and related risk management has evolved as a science. Insurance, along with risk management goes hand in hand. In other words, insurance is a product that is used to manage the risk that is associated with an expected event such a death, or an accident in which the prospective risks associated with the death and the accident would be the risk of the family losing a family member and the income that he or she brings. Also, the damage of the car in the accident will have to be paid. In such a case, where one knows the prospective hazards of something, it is better to insure the event so that the weight of paying for that risk at a later stage decreases. The risk premium that the policy holder has to pay depends upon the kinds of risk that the insurance company is covering. In short, the higher the risk, the higher the premium is to be paid to the insurance company and the events with a lower risk have to be adjusted with a lower premium. In evaluating the risk of an event, the insurance company makes sure that they take into account every quantifiable and qualitative factor that is present in the environment to come at a compensation that can be good enough today in order to cover the expenses in the future, if the event happens. Therefore, they insurance company greatly increases its value when the event that is being insured doesn't happen at all. For all this to take effect, the insurance providers undertake massive research regarding the insurance holder and the event that might take place. They insurance company also makes sure that they use statistical tools to evaluate the occurring of the events that may be insured, for example the loss of an earning family member or an illness. Risk profiling is another major aspect of insurance. Companies who provide insurance makes sure that they do adequate risk profiling and consider it an important part. According to research and the Pareto principle, more than 80% of insurance claims arise from less than 20% of the profiles that are present. Thereofre, risk profiling helps the insurance companies understand which areas provide them greater risks of claims and which don't. Insurance providers' major aim is to develop an understanding regarding the subject that is being insured and gathering maximium possible and relevant knowledge so that they are able to better evaluate the potential risks that are present and also the likelihood of the occurrence of such events. Co-relations between different events, different factors, and summaries are presented to help the insurance providers with sound conclusions. Today, even artificial intelligence is being used in order to understand the correlation that is present between events that would help the insurance providers gauge the risk of an event happening. For example, the correlation between people having high amounts of alcohol everyday and the tendency of them having a heart attack would greatly help the insurance company gauge the risk associated with a person who comes for a life insurance and has a tendency to consume more alcohol than usual. The basic kinds of insurance that is present around the world, that practically the whole of United States is the health insurance cover that everybody gets. Health insurance covers all kinds of medical issues that are present and also some of the basic issues that are there. Health insurance are one kind of insurance that are either state provided or provided by private companies. Obviously, the state provided insurance covers lesser aspects and has a cap on insurance while the private insurance companies provide a greater coverage and may charge a higher premium. Health insurance or dental insurance is also usually provided in the work benefits that employees get as a part of compensation. It is under law required by the US government for the employers to provide some sort of coverage to the individual that is working in their organization. Health insurance companies achieve the high potential risk insurance in two ways. The concept of risk pooling and risk sharing are two concepts that are used to hedge the risk that is present to the insurance companies. Risk pooling is another concept that is present in the insurance sector and it provides some protection to the insurance providers against the occurring of certain events and catastrophes such as floods, earthquakes etc. One needs to realize the potential problem an insurance company can come into if casualties occur in the city due to earthquakes. If the people are protected for house damage and loss of life, surely the insurance companies will be bankrupt paying all the claims that may arise is such a situation. Risk pooling helps insurance companies release some of the risk associated with natural calamities and issues that occur on a larger, macroeconomic scale. With the help of this system, the insurance companies come together to get protection against these calamities. However, not all kinds of risks can be pooled away. In a way, this helps the insurance providers to disregard the certain kinds of population from getting insured due to the presence of certain factors that are present in them. The biggest example in this case would be the health risk pools that are present that provide certain class and people with the insurance due to presence of certain ailments or conditions. These pools that are developed have their different programs according to the states and they help the people get insurance which are otherwise turned down by other insurance agencies. They have capped premiums and are heavily subsidized so that the weight of the payment is not transferred on the individual. Therefore, there is an inherent factor that the pool will lose the money slowly and gradually. There is also a waiting list for such pools so that people don't misuse the facility being provided to them. A risk pool primarily is comparable to other insurance and market plans. The basic purpose of risk pooling is to provide people who are poor and would otherwise not have the capability to pay high for the insurances considering the problems that they have. Another example present that an insurance company that is present in a tornado prone area of Florida might form a risk pool with another insurance company in the tornado prone city such as Kansas. Therefore, if there is such a catastrophe occurs in the state of Florida, some of the losses will be shared by the insurance company working in Kansas City. Intergovernmental pools are based on similar lines but they are public entities and public health example that is provided above is an example. In health insurances, the risk pools that are made are designed to help the underprivileged. However, some insurance providers are not good. In such cases, these insurance providers can be a stopping point for the people who are otherwise denied medical coverage. (Mark, 1977) There is risk sharing facilities present as well. In such a case, the person who is undertaking the insurance policy is providing and underlying asset that they provide the insurance provider. It allows the client to sell a certain portion of the risk associated with the assets that are present with him, and the process is known as securitization. In such a case, the assets that are present remain in the person's balance sheet and a guarantee is provided by the insurance company against protection from the risk. In risk sharing, the risk that is associated is managed when the risk is diversified by dividing the risk in a pool of insurers such syndication. This helps the insurance companies be protected against the threats of the unknown. BIBLIOGRAPHY Greene, M. (1977) Risk and Insurance. South Western Publication Company Read More