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Insurance is an effective means of protecting individuals against the consequences of risks
Insurance is an effective means of protecting individuals against the consequences of risks. It is based on transferring risks to an insurer who will be responsible for repairing or compensating all or part of the damage caused by the occurrence of certain accidental situations.

It is a very useful coverage formula that is widespread in modern society. It involves paying an amount (insurance premium) and receiving, in exchange, financial compensation or a service whenever a situation covered by the policy arises.

What is insurance and how does it work?

Proper risk management involves a combination of various actions aimed at protecting people and their assets. Some of the actions that can be taken are:

  • Preventing the occurrence of situations that cause damage.
  • Maintaining assets in the appropriate condition.
  • Saving to offset possible future damage.
  • Having a healthy lifestyle.
  • Etc.
Insurance is one of the measures that can be taken to manage risk, and is in fact the cheapest and most effective option. But it should not be forgotten that none of them on their own offers complete security.

Moreover, business could not function without insurance, which transforms the unpredictable and variable costs of risk into fixed and affordable costs such as premiums.

Insurance is based on sharing the damage among a very large number of people with the same or similar protection needs. In this way, when an event occurs that causes specific damage to one of these people, all the others also participate in repairing the damage through the premiums they pay for their insurance policies.

In order for this mechanism to work properly, insurance companies must perform the following tasks well:

  • Bring together a large number of people to support the system.
  • Correctly calculate the expected claims, to ensure stability.
  • Manage the process, assisting the policyholders at all times.

What risks can be insured against?

In the insurance market there are very diverse insurance policies depending on the consumer’s needs, however, not all risks can be insured against. Before taking out an insurance policy, it is necessary to be aware that the only insurable risks are those which:

It cannot be known with certainty whether or not or when they will occur.

  • Certain risks in the home can be insured against because it is not known if and when they will occur; but, generally, damage due to lack of maintenance or as a consequence of the passage of time (for example, leaks caused by the natural rusting of an iron pipe) cannot be covered.
  • In the case of car insurance, the driver does not know if they are going to have an accident.
  • In life insurance, it is known that people will die, but what is unknown is the exact moment at which this will occur.

Possible risks

  • It is possible that a water pipe in a house may burst.  Therefore, a home insurance policy can be taken out to guarantee coverage for any damage that may occur.
  • It is possible that a vehicle may suffer or cause some kind of damage. These can therefore be insured. In Spain it is compulsory to take out civil liability insurance for vehicles, to which other voluntary coverage may be added.
  • It is not possible to take out an insurance policy “against attack from a household appliance” because this event will never happen.

They must be specific, that is, we must be able to describe them accurately

  • The risks to which a home is exposed can be accurately described, so these are insurable. However, a home insurance policy cannot define something as vague as “all damages to the dwelling are insured”, without specifying the type of dwelling and its characteristics.
  • A travel cancellation insurance policy cannot be taken out by merely stating “that a trip is going to be taken”. The specific details must be described.

Its purpose must be legal, and not detrimental to third parties.

  • The risk of driving under the influence of alcohol is not insurable as this is an illegal activity.
  • It is not possible to take out insurance for the transportation of goods if the merchandise to be transported is drugs, for example; drug trafficking is not a legal activity, therefore, the risks of transporting it are not insurable.

They must be fortuitous, in other words, not caused on purpose through human will.

  • Damage to a car cannot be claimed through the insurance if its owner intentionally crashes it.

It is not possible to deliberately leave the faucets running in a house and claim for the damage caused.