The Value of Insurance is a contract between an individual and the insurance company where an individual gets compensation against the losses from an insurance company.The insurance companies work by collecting small amounts of money from its clients and funds that money together to pay for damages.
Insurance provides peace of mind up to a point. Unless you own, for example, a small retail business, you probably retain the majority of your insurable losses through deductibles and self-insured retention. In this situation, insurance provides no peace of mind.
The majority of risks are not insurable. We call these “business risks.” They’re usually not transferable to someone else’s ‘’balance sheet’’. This leaves us with catastrophic risk, for which insurance and reinsurance are perfectly suited.
Without ‘’insurance’’ and ‘’risk’’ management, the world’s economies would grind to a halt. The business has great value, but only in the macro sense. It’s a different story where the rubber meets the road. In the vast majority of insurance transactions, ‘’agents’’ compete against one another to see how lo w they can drive the ‘’premiums’’.
The Problem of Comparisons
The problem is that people don’t think of insurance and risk mitigation services as they do about other goods or services. They think that, regardless of cost, they’re supposed to get the same amount (and quality) of insurance limits and coverage. After all, competing programs must be compared on an “apples-to-apples” basis.
To make an apples-to-apples comparison, the competing products must be identical. But premiums never are. The value of the good or service generally often bears little relation to its cost, and everyone thinks this is just fine. In the non-insurance world, there are usually small variations in price among identical items.If an item is “on sale” or if demand is greater than the supply, pricing differences exist. But nothing comes close to insurance in this regard.
Value versus Cost
One could argue that the insurance product has very little intrinsic value. The disconnection between value and cost in the insurance business is directly related to the perception of what is being sold. Anyone doesn’t expect individual insurance buyers to consider the macro benefits that insurance provides to society; to them, it’s just a necessary evil. Most, if not all, insurance buyers think this way—in part because their agents and brokers also think insurance is a necessary evil.
Instead of defending the efficacy and true value of the product, some agents and brokers simply reflect their clients’ attitudes and misconceptions. You don’t make many sales if you disagree with your clients’ belief systems. Many people also consider insurance to be a necessary evil because of its uniqueness—it represents the status quo. Their premiums do not buy anything new or offer the possibility of gain.
If a better model for transferring and managing risk is viable and potentially profitable (for intermediaries, buyers, and sellers), anyone think it would present an opportunity to change the nature of the insurance transaction for the better.