How insurance works


Insurance Guardian is here to help you understand how insurance actually works.

In my experience as an accident and personal injury solicitor I have been dealing with insurance companies for more than twenty five years. I want you to understand how your insurance works, and why it does not always give the insurance cover you thought you were buying.

Insurance is complicated and needs time and effort to get it right. If you are short on time and buy on type of insurance or price don’t be surprised if your cover is lacking. How many people thought they were covered when the volcano in Iceland stopped flights?

We used to buy insurance through insurance brokers. Their job was to use their market knowledge and expertise and find the cover which fitted your needs. They have almost been replaced by comparison websites which rely too heavily on price and speed. If you buy a travel insurance policy for a fiver, do you really think you will be transported home when your plane cannot take off?

Let’s try to understand how an insurance company works. I always think an insurance company is like a bookmaker. A bookie weighs up the chances of each horse winning and losing, looks at the bets he has taken and the cost of paying out across his book. If he is exposed one one horse he will make his own bet with another bookmaker to balance the risks. The same is true of an insurance company, except there is less chance in insurance, as their knowledge of form is based on years of statistics.

Imagine we want to set up an insurance company, and decide to insure moped riders. We would first have to understand the risks. Risk means when we as the insurer have to pay out. Which age group are more likely to have accidents, which type of mopeds are more likely to be stolen, that a moped locked away at night is safer than one on the street, and that riders doing more miles have a greater risk of being knocked off their mopeds? As an insurer we have access to all the statistics we need to help balance our risk. We would need a good spread of age and experience across our riders, we would charge more for those most at risk, and overall we need enough premiums to allow us to pay the claims, and come out with a profit. What keeps us awake at night is that once in a while one of our riders will be at fault and cause an accident, with serious injury to a pedestrian. Awards of £5,000,000 are not unknown for the most severe injuries. That is a lot of premiums to cover one claim. Just like the bookmaker we cover the risk of a big claim by re-insuring with another insurer.

You can see the picture, and when we all start insuring on price alone we apply serious pressure on the insurers to reduce premiums. They will cut the price, but offer less cover, and then try to sell you expensive extras. The cost of legal cover with motor vehicles is a great example, the average cost creeping above £25. That is why a package like Your Key has emerged to provide legal cover free.

If an insurer helps you after an accident and arranges services they will earn a commission. Your Key works by taking these commissions, but making no charge for the legal cover. We recommend you join Your Key.