All insurance, from homeowners insurance for your home to health insurance for your body, is about chance. What is most likely to occur, and how often it can occur. The types of general insurance out there cover what they cover because those are the most likely risks that can occur. The frequency and cost to compensate for the risk explains how much you pay on your insurance premiums. By understanding the relation between risk and insurance, you get a better appreciation of insurance and how to reduce its costs.
Understanding and Compensating for Risk
To better understand what risk is in the insurance world, let’s look at an example of the risk of driving your car:
- The Risk: An accident that results in bodily injury, having to repair/replace a vehicle or other property damage.
- The Cost: Medical bills, lost time from work, car rentals, car repair or replacement. These costs can range from a few hundred to thousands of dollars.
When dealing with the risk (and cost) of getting into an accident, you have options. You can negate the risk by not driving. You can avoid part of the risk by becoming a safer driver or using a car with crash and safety features. But the most common (and mandatory) feature is the idea of transferring the cost of the risk to another party through insurance.
How Insurance Works with Risk
Insurance works by pooling the risk and the funds to pay for it. If 1 in a 100 people are statistically likely to get into an accident, if those 100 people all pay enough to cover the cost of the one person, all 100 people are covered for the risk and can pay for it. This is an oversimplification of the process, which has many factors and types of insurance, a few of which we’ll go over below.
Risk Mitigation
Looking back on the car example, all 100 of those hypothetical people don’t share the same amount of risk. Some will be in age groups that are more likely to get in an accident or have previous tickets such as speeding or accidents that show they have riskier driving habits. Others will have less risk, with fewer tickets, driving safer vehicles, etc. Those who have high risks must pay more to the pool, while those who have less risk have to pay less.
Risk Management
Risk management is the process of getting insurance, where an insurance agent talks to you about what you want to insure and gets information from you to help assess the amount of risk you’re bringing to the pool. They may offer ways to mitigate risk, as well as the various things that are not covered (but may be covered under riders or additional insurance).
We hope this covered the basics of what risk means in the insurance world. If you’ve got more questions about insurance risk, specific policies, or insurance in general, please contact us. TJ Woods Insurance provides residential and commercial insurance in the Worcester area and beyond, and we would be glad to answer any questions you have.
