The Real Function(s) of Insurance

Restore Loss

1. An insurance company's main function is to restore you back to the
condition you were in before a loss. Some people think if they have
multiple insurance policies, they will get more money for an item. They
are wrong. Over-insuring an item is a waste of your money. Insurance
companies will not pay you for more than an item is worth. In the event
there are more than one insurance carriers, the insurance will be paid
based on the percentage of insurance. For example, if you break a vase
worth $100 and own two policies each written to cover the full amount of
$100, you will not get $200 for the vase. Instead, the first insurance
company will cover 50 percent, and the next will cover the other 50
percent. Insurance will not let you profit from a loss.

Spread Risk

2. Another function of insurance companies is to spread risk. Reinsurance is
when one insurance company will turn to another to spread risks over a set
amount. Insurance companies wouldn't function after a natural disaster
without reinsurance. Imagine if one insurance company or even a handful
had to pay all the losses from Hurricane Katrina. The company would go
bankrupt, and the insured would be left with nothing.

Protection

3. Insurance is paying for a certain set amount to protect yourself from
having to possibly pay a higher amount. Some insurance companies started
as a group of individuals who pooled their money to cover any disasters
that might occur to the individual. It is a community mindset similar to
barn raisings in which a whole community would gather to help build a barn
for one family. You pay a set premium amount for coverage you may not
need, but if you do need it, the money is there.

Safety

4. Safety is a big concern for insurance companies. Insurance lobbyist
campaign for changes to laws to ensure drivers are following safer driving
techniques. The Insurance Institute for Highway Safety is a scientific and
educational organization funded by insurance companies. Their goal is to
reduce losses from auto accidents on the road.

Profit

5. Insurance companies care about your safety, but not from an altruistic
point of view. An insurance company's main function is to make a profit.
They are a business. This is one thing many consumers tend to forget.
Drivers get upset if their insurance rates go up after too many not-at-
fault accidents and say it is unfair for the insurance company to punish
them when it is not their fault. What they fail to realize is, from a
business prospective, a loss is a loss, regardless of who is at fault. If
your driving behavior causes losses, your rates will go up to cover those
potential losses. If your car is a magnet for hit and runs, your insurance
company will raise your rates to protect against your pattern of losses.
Is it fair? No, but it is good business.