Insurance Companies
Insurance companies are like a casino operator with a group of punters gathered around a roulette table. They offer odds on something happening in your life. If it comes up they pay out. If it doesn't then they take your chips. However, just like a casino, they will try and make sure that the odds they offer are always in their favor.
What Is An Insurance Policy?
Insurance for us is pretty much anything that guarantees we won't suffer too much from our dumb decisions or accidental fate that befalls us. You could argue that something like a college education is an insurance policy. It, after all, attempts to prevent us from suffering from un-employment and poor income. Do you wear a hard hat when you ride a bicycle? That hat is an insurance policy in case you should fall off the bike and hit your head.
But the policies we buy from insurance companies only give us money. They don't prevent us from physical injury in the first place from our own foolish activities or the foolish activities of others. An insurance policy doesn't protect us. It merely compensates us for a loss.
What Do We Need insurance For?
Consider this tale...
A traveller is walking along and approaches a steep gorge with a rope bridge connecting either side of the gorge. At the base of the gorge are jagged rocks. On the other side of the gorge is Lala Land which is a utopian paradise.
The traveller approaches the rope bridge and prepares to cross the gorge. But beside the start of the rope bridge stands a man in a smart red suit.
"Crossing today sir?" asks the suited man.
"Yes. I want to visit Lala Land which I have heard so much about. Do I have to pay to use the bridge?" says the traveller.
"No sir, use of the bridge is free."
"OK. Thanks." The traveller places one foot onto the rope bridge but is then interrupted by the man in the red suit.
"Uhmm...perhaps you would like to take out a rope bridge crossing insurance policy sir?"
"Why! Is the bridge unsafe?" asks the traveller with concern.
"No, I don't think so sir. It is maintained every day." replies the suited man.
"So why would I need a thingy insurance policy?"
"Well sir. The ropes could have frayed and not been noticed by the inspection team. It could snap as you are halfway across and you would fall to your death on the jagged rocks below."
"Oh...but it's safe isn't it? I mean it is either safe or it isn't right?"
"I think so sir but I cannot guarantee it. Nothing is black and white. The bridge did fail 10 years ago. Unexpected things happen you know. You can never be 100% sure the bridge won't break."
The traveller takes his foot off the rope bridge.
"But how else can I get to the other side?" asks the traveller.
"Well there is a path sir. It's very steep and slippery...but I can offer you a path insurance policy just in case you fall and tumble into the gorge...would you like that?"
"And how often does that happen?"
"Well, not often but if you were to stumble you would suffer a very bad injury. Sometimes rocks fall off the cliff and tumble down too you know."
"I might as well risk the bridge." says the traveller.
"Yes you might make it. Mind you on the other side of the gorge they only allow certain people into Lala Land."
"Oh really! Who do they let in?"
"It depends on the day of the week and what star sign you are. I don't know the details. I could offer you a Lala Land entrance insurance policy if you wish. It pays out if you are declined entrance."
The traveller puts his rucksack down on the ground and pulls out a bottle to drink from.
"Nice rucksack sir." says the suited man as he admires the rucksack.
"Yes it is the best I could buy." replies the traveller.
"Hmm...I'd be careful sir, it could be stolen round here. Would you like to insure it for theft or loss?"
"Now hang on!" shouts the traveller. "Next you'll be offering me insurance for tying my bootlaces together!"
"Oh yes sir. Life is very uncertain and eventful. I can insure you for almost anything. Would you like sunburn insurance?"
"No I wouldn't. Surely there are some risks that just have to be faced."
"Oh yes sir, of course sir. Insurance is only useful if they happen."
"Well none of it will happen!" insists the traveller as he picks up his rucksack. "Watch this!"
The traveller races across the rope bridge to the other side and shouts out "See across safely in one piece!"
"Yes sir very good." responds the suited man. "Would you like a return cover policy sir?"
"Ah shutup!" shouts the traveller and turns his back to head off to Lala Land.
Suddenly a streak of lightening descends from the heavens and strikes the traveller dead in an instance.
"Blast!" exclaims the red suited man. "I could have offered him a wrath of God policy."
Buy Insurance Or Be Prepared?
Insurance companies would just love us to insure virtually every aspect of our lives from the day we are born to the day we die. But which is the better insurance? To be prepared for eventualities or to hold a piece of paper that compensates us for our own mistakes and the fate that may befall us? Of course some insurance is mandatory i.e. we have to have it or we end up in trouble with the law. This is because the government and some companies do not trust us or the elements of nature. They assume something bad will happen. We are required to have motor insurance if we drive a car. And we are required to have building insurance if we own a property.
Finally some terminology. A bad event that can happen to us or our possessions is called a "peril" by the insurance companies. The agreement between us and them is the "policy". Cash pay outs we gain from an insurance are called "benefits". Events that not covered are called "exclusions". The money we pay for an insurance policy is called a "premium". Insurance is for events that may or may not happen. Over the years insurance companies have gathered enough data to be able to assess the chance of events occurring and levy premiums in accordance with their predictions.
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