Exploring insurance - the art of spreading risk to avoid loss.
In today’s world there’s a lot going on with everything we own from home, contents, cars and lifestyle toys, investments, business interests, our income and ability to earn and life itself … total up its value and there’s a lot to protect.
So how do we go about protecting that from loss as there’s been a lot of investment to get it where it is and we don’t want to lose it right!
That’s where partnering with an insurer to spread the risk comes in.
We’ll take a look through a series of blogs at the different aspects of insurance, starting here with the foundation of insurance.
Back to the start
From the beginning, mankind has employed the concept and practise of insurance. From hunting in groups to avoid being the one getting chomped by a sabre tooth tiger, safety in numbers - its the art of spreading risk to avoid loss.
Right through the likes of Babylonian times and the Middle Ages, rudimentary forms of insurance were employed, its been around a long time.
Its not however, until the mid to late 1600’s that formalised insurance companies as we know them began to emerge.
In the coffee houses where the first unofficial stock exchange for the British Empire operated, one in particular owned by Edmond Lloyd was a favourite meeting place for merchants and ship owners seeking insurance for voyages to the newly discovered lands, giving rise to the establishment of Lloyds of London in 1688.
The great fire of London in 1666 necessitated the first Fire Office in London in 1680.
It is however, the study of probabilities and risk assessment by mathematicians of the time leading to the practise of underwriting in 1654 making insurance more affordable … and the first study of birth and death records giving rise to mortality tables in 1693, that things really started to formulate.
From these fledgling beginnings some 350 years ago, insurance companies then flourished throughout Europe and beyond and indeed are some of the largest financial institutions in the world today … more on that in a minute.
Notably, even older civilisations had no insurance until quite recently, for example the first insurance companies were established in India in 1818, Japan in 1879 and China in 1885.
Some would say having no insurance would be a good thing … right up to the time something gets destroyed or someone makes a claim against them and they have to pay for it all themselves.
Meanwhile back in 2023, nothing changes but it stays the same … the need to spread risk is the same as it ever was.
So … how then does it work … probably best described as a partnership, rather than take all the risk yourself you pool a small amount of resources with an established insurer who takes a small premium from a large amount of people which creates a super large fund which means in the event you suffer loss, they will replace it for you … all of it … and all its cost you is a small premium in relative terms … brilliant! Beats the heck out of you having to carry it all yourself does it not and ending up with nothing as the amount you would have saved in premiums would be comparatively infinitesimal.
Global investors
Remember we said we’d be back in a minute … well here we go!
Since the establishment of major insurance companies in Europe and later America and other regions, they’ve pooled a lot of money from a lot of people for a long time and have massive amounts of funds at play, not just from premiums but also from investment … these big insurers are the major institutional investors in the global economy through stock markets driving everything from exploration and operations in mining to technology, manufacturing and pretty much everything else that exists on a large scale, all developed from a pool of funds from individuals around the world and putting it to work, how good is that!
Reinsurers
So how then, does a local insurer that’s taken on a whole lot of risk cope when major disaster strikes … well they too, pool their funds with other insurers to ensure their own survival.
Called ‘reinsurance’ … they on sell some of their risk to the world’s major reinsurers, essentially insurance companies for insurance companies, the likes of the big 4 being Swiss RE est 1863 and Munich RE est 1880, Hanover RE est 1966 and SCOR est in Paris in 1970 … American companies such as Berkshire Hathaway and Everest RE Group and the likes of China RE and Korean Reinsurance Co … indeed there are presently 7,608 reinsurers in the world, all looking after your interests.
So your local insurance company may resell something in the order of 65% of its book to the large reinsurers which means it has funds available for the likes of house fires, accident and life insurance claims etc but when the big one hits, the likes of earthquakes, floods and fires … that’s when the cavalry come in and sort it out … and the relatively small local insurer carries on unabated … pretty good system is in not.
So when you take all that into account … it’s not just a local insurance company ripping you off ( myth #1 ) … there’s a whole lot more going on and when it all comes home to roost, you’re the one that’s ultimately getting looked after.
Who’s got your back.
Getting back to that ‘partnership’ notion … it truly is a partnership between yourself and your insurer … they will take on risk that’s not theirs, it’s yours, but they will do that for a small fee relative to the risk they cover and yes, it’s all about probabilities as discovered some 370 years ago so as a consequence, since you’re partners they want you to be honest with them … tell it as it is … the good, the bad and the ugly and they will assess the risk and determine the premium and benefits, what’s covered and what’s excluded. They don’t HAVE to take on your risk and why should they as in essence, you’re sharing it with every other policyholder and you theirs … so it needs to be equitable, to be fair!
That being said … we all know that insurance companies are quick to take your money and look for ways to not pay it out yeah ( misconception #1 ). They don’t actually, remember that word ‘equitable’ … if its all good and above board then all good … but if you’re trying it on then they’ll assess it accordingly as you see they know … insurance fraud is a massive industry and it’s not their first rodeo … they have teams of analysts and eons of data to back up their assessment that a claim may be a bit left of field and of course, the more payouts the higher the premiums as it’s driven by market forces and we all share in it ... and who wants higher premiums right.
So realisation #1 is that your insurer, as your partner, has your back. For a small fee relative to benefits in the event of a claim, you too can be and likely already are a part of what really is a wonderful facility that has benefits not just for yourself but for the world as a whole, that your small contribution is at work driving the global economy forward and you’re being protected at the same time ... brilliant!
Moving forward
Coming back to your household or business and own particular requirements, there are a plethora of things that can be covered by insurance these days but then there has to be a balance between income and outgoings … some can afford the luxury of having major insurance policies yet for others it’s a matter of keeping it to the bare essentials, and everything in between. Determining what’s suitable is the domain of licensed financial advisers that have the skills and facilities to provide appropriate benefits and pricing therefore arranging a consultation to review your insurance requirements are up to date and the best they can be relative to your situation is paramount to a secure future.
At the risk of sounding like an insurance salesman … the consequence of not having enough or the correct insurance in place when an event occurs can be highly detrimental and there are lots of things than can get you both personally and commercially AND … it may surprise you as to how affordable it can be … there are ways to tailor insurance packages to include multiple benefits for a relatively small amount … its worth a look.
