Whether you drive a car, rent an apartment, or own a home, chances are good that you’ve had to think about insurance. But if you’ve ever questioned the ins and outs of the business, a basic understanding of the concept of insurance could be just what you need. Let’s breeze through an example, shall we?
Prepare for the worst, hope for the best
Insurance, in a nutshell, is planning for the worst scenario and hoping that it never happens. For example, imagine there’s an annual storm that blows through your Whispering Winds neighbourhood, affecting the 100 houses there. Every year at the same time and in the same place, the storm clouds move in and one house ends up having its roof blown off — a repair that costs $10,000 to fix. Without insurance, every homeowner would have to worry about coming up with $10,000 on short notice if his or her house ends up missing a roof. But at the end of the year, 99 homeowners would have been safe from damage and the hefty bill, while one homeowner would have paid $10,000.
Spread out the risk, reduce costs
With insurance, Whispering Winds homeowners could join together to spread out the risk. If they created an insurance fund, all 100 homeowners could pay $100 at the beginning of the year. The $10,000 total would then go to the homeowner who lost the roof.
By spreading out the risk, each homeowner only has to set aside $100 instead of worrying about $10,000. Sure, if it’s not your house that loses a roof, you never get to use the $10,000, but for most people that’s an acceptable trade. They’d rather risk spending $100 now for the chance to avoid a $10,000 repair bill later on.
Different risks = different rates
You might ask if it’s fair to have every homeowner pay the same $100. After all, Bill at 7 Squall Street had a new roof installed last year, and the manufacturer swears that it’s windproof. As well, Carole at 55 Breeze Boulevard has the best lot in the neighbourhood — a corner that’s protected by a retaining wall and trees. The chances of her roof blowing off are pretty slim compared to other homes around her.
And that’s where insurance underwriters come in. They are experts at assessing risk and assigning a fair price for insurance. If your risk factors are lower than others, your rates will likely reflect it. And if you’re a higher risk, you can expect to pay more to offset those risks.
Protect what you value
At the heart of insurance is the idea of paying a little bit now to protect your valuables so you can avoid a larger expense later on. And it works similarly for just about everything of value in your life. Renters can buy content insurance for their belongings, car owners insure their vehicles, and homeowners protect their investment with policies to fit their specific needs. The next time you need to consider purchasing insurance, remember what you’re really doing — buying peace of mind in the event of a loss. Your broker can help you understand your options.