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Insurance, what are they and how do they work?

Insurance is an  effective means  of protecting individuals against the consequences of risks. It is based on  transferring them to an insurer  that is responsible for repairing or compensating all or part of the damage caused by the appearance of certain accidental situations.

It is a  very useful and widely extended coverage formula in modern society. It involves paying an amount ( insurance premium ) and receiving in exchange financial compensation or a service whenever a situation contemplated in the policy arises.

Proper risk management involves a  combination of various actions  aimed at protecting people and their assets. Some of the actions that can be carried out are:

  • Prevent the occurrence of situations that cause damage.
  • Keep the goods in proper conditions.
  • Save to correct possible future damage.
  • Have healthy lifestyle habits.
  • Etc.

Insurance is part of the actions that can be carried out for risk management , in fact, it is the most 

economical and effective option. But do not forget that none of them, by itself, offers complete security.

In addition, the business activity could not function if insurance did not exist, which transforms the unpredictable and variable costs derived from risks into affordable fixed costs, such as premiums.

The insurance  is based on the distribution of the damage among a very large number of people with the same or similar protection needs . Thus, when an event occurs that causes specific damage to one of these people, all the others also participate in repairing it through the premiums they pay for their insurance policies.

For the proper functioning of this mechanism, insurance entities must properly perform the following tasks:

  • Gather a large number of people to secure the system.
  • Correctly calculate the predicted accident rate, to have stability.
  • Manage the process , assisting the insured at all times.

What risks can be insured?

In the insurance market there are very varied insurances depending on the needs of consumers, however, not all risks can be insured. Before contracting insurance, it is necessary to know that only those risks will be insurable that:

It cannot be known with certainty whether or not they will occur, or when

  • Certain risks in the home can be insured because it is not known if they are going to manifest or when; but, generally, damages due to lack of maintenance or as a result of the effects of time (for example, leaks caused by the natural oxidation of an iron pipe) cannot be claimed.
  • In the case of car insurance, the driver does not know if he is going to have an accident.
  • In life insurance, it is known that people die, but what is unknown is the exact moment in which that will happen.

be possible

  • It is possible for a water pipe in a house to break. Therefore, you can take out home insurance that guarantees the response to the damage that may occur.
  • It is possible that a vehicle suffers or causes some type of damage. Therefore, they can be insured. In Spain it is mandatory to take out civil liability insurance for vehicles, to which other voluntary coverage can be added.
  • You cannot take out insurance “against the attack of a household appliance” because it is impossible for this event to occur.

They are specific, that is, they can be accurately described

  • The risks to which a home is exposed can be accurately described, therefore, they are insurable. However, something as imprecise as “all damage to the home is insured” cannot be defined in a home insurance policy, without specifying the type of home and its characteristics.
  • It is not possible to take out trip cancellation insurance by simply indicating “that a trip is going to be made”. Their particularities have to be described.

Its object is legal, and that they are not detrimental to third parties

  • The risk of driving under the influence of alcohol is not insurable as this is an illegal activity.
  • You cannot take out freight insurance if the merchandise to be transported is drugs; drug trafficking is not a legal activity, therefore, the risk of its transportation is not insurable.

Are fortuitous, that is, alien to the human will to produce it

  • Damage to a car cannot be claimed through insurance if its owner intentionally crashes it.
  • You cannot deliberately leave the taps open in a home and claim for the damage caused.



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