How The Insurance Industry Works?

How does the insurance industry work?

The The problem is understanding that insurance is a very old industry. It is actually deep rooted into culture.

So if you think about it, if we go back to the days of the tribes, there would always be a tribe and some people in the tribe would be hunters. Some of the tribes people would be blacksmiths some of them would be farmers, some of them would be goldsmiths. And they would all have different roles. But there would always be a head of the tribe. And the purpose of the head of the tribe was to ensure that the entire tribe was safe, secured, protected, satisfied, happy. If any person in the tribe, so let's say one of the hunters ever got killed, The whole tribe would work together to make sure that the family of that hunter would be protected. And that was the reason why everyone went to tribes. That was the concept of community. When tribes became bigger, they moved into cities. They became kingdoms.

The king used to play that role. He would have a treasury that would ensure that his entire population was protected. The soldiers were protected when they went to war. Their families were protected in case the soldiers didn't come back. and that role became more and more important. It came to a point where the society became so big that the government couldn't control all these things and there was a lot of inefficiencies. So they went on to privatize these enterprises. And one of these enterprises was insurance, that if any part of any member of the community passed away, fell sick, the community would work together to make sure that they are protected. And that's the job of insurance. Insurance is a small amount of money that is given to the community and there's what we call a risk pool and the money is collected in that pool of money. That pool is then used to pay out if anyone falls sick, if they pass away, when they retire, when the kids go to college. That pool is used to pay those monies out.

The insurance company's job is to protect that pool. Because there are a lot of people who would try to defraud so they would find a way to make money from that pool rather than understand that that pool is for the whole community. But that's what insurance does. Insurance is a manager of that pool of money which gets used to pay out to people who need it. But there are people out there that try to defraud that pool and that's where investigation comes into play. So insurance companies would investigate claims that they feel are not genuine. And that's why the most important thing when it comes to insurance is understanding the documentation, understanding what is covered, what is not covered, and trying to sit down with a proper financial advisor or intergenerational planner that will be able to guide you on what type of insurances to buy.

So the insurance industry is not a very complicated industry, but it's not a very simple industry because it has evolved over a few thousand years now. But understanding that is where the key is. Insurance is a business that is based only on one thing. Pay your premiums on time to make sure that you're covered for eventualities and there are four primary eventualities that you should be covered for. Number one, in case you pass away, the family needs income protection. Number two, in case you fall ill, the family needs income protection. Number three is when you retire, you want to make sure that you have a steady flow of income. And number four is when your kids go to college, you might as well have some money on the side because you will need to pay for it. These are the four primary things that the pool of money is used for.

There are other variables to it. There are other types of insurances like medical insurance, car insurance, travel insurance. These are what we call non-life insurances. These insurance policies Work on the same principles, but the only difference is the probability changes. So the premium that you pay is the probability of something going wrong. If your premium is higher, means you have a higher probability of something going wrong. Please understand that. So we, I do see some clients who have, for example, diabetes Or they have high blood pressure. And the question they ask you Sanjay, Why is my premium higher? Well, the probability of you falling sick is also higher. And that's why your premium is higher. So it's always based on the probability of something going wrong. And that's the basics of how an insurance policy works.

So if you do have questions, sit down with the intergenerational planner or financial advisor and get yourself more details. But the insurance industry is here to protect you. And that's what they do best.