Insurance is a service that helps people and businesses in times of need. It is a global, complex, multi-trillion dollar sector that supports innovation as well as delivers enormous social value. It’s sometimes a legal requirement too – but how does it actually work?
Risk is all around us and comes in many forms. It could be your car getting damaged, or your phone being stolen. For a celebrity, it could be a career-ending injury, or reputational damage. For a business, it could be a cyber attack or exposure to a terrorist incident. When something goes wrong, most people don’t have the money to pay for major repairs themselves, or to settle costly medical bills. That’s where insurance comes in. It removes financial uncertainty by shifting the risk and consequences of a possible loss to the insurance company.
When companies develop new products, there is an element of risk in doing so. By having insurance policies in place, these business can continue to innovate, knowing that product failures in the design phase will not cause serious financial damage.
The insurance you know about
Insurers cover you and your property at a fraction of its value by pooling risk. They group together large numbers of people who all face a similar risk then collect a small amount of money from all of them – the premium. If any of those people need to make a claim, there is a pot of money to help them. There are always more people paying in than claiming so insurance companies can offer relatively low prices to everyone who pays into the pool, while everyone in the pool knows they are covered if they ever need help.
Not everyone will pay the same for their insurance. A driver in their 50s with over 30 years’ safe driving experience is a lower risk than a young person who has just passed their test. This is reflected in the cost of premiums. It’s only fair that those most likely to make a claim pay the most into the pot. In this way insurers can decide a fair price for people based on their individual circumstances. If you’re looking to reduce your car insurance premium, take a look at telematics – a black box which records your (hopefully safe) driving habits.
Commercial insurance lets business owners run their company after unexpected events like natural disasters or cyber attacks. Policies allow businesspeople to protect property, equipment, stock, employees and the general public, who might suffer injury or damage as a result of commercial activities.
There are various types of commercial insurance including:
Public, employers’ and product liability insurance – pays compensation when someone or something has been held liable for an adverse event such as an industrial injury.
Professional indemnity insurance – to protect against claims of negligence in business, for example doctors, lawyers or other professionals.
Business interruption – to enable commercial enterprises to protect their income when they are unable to trade, perhaps due to arson or a major weather event.
Emerging risks mean that policies are regularly changing. Recent developments have included protection for companies against the effects of global climate change, terrorist attacks and pandemics.
The insurance you don’t know about
Special risks – the London Market
Special risks exist in the London insurance market and, more specifically, the Lloyd’s of London marketplace. These are the policies that are a world away from standard personal or commercial ones. For example, a singer can insure their vocal chords or a guitar player can insure their fingers – in other words, the part of their body which helps them earn money. These policies will pay out millions of pounds depending on the lost earning potential.
At the extreme end of special risks are the policies taken out by tens of thousands of people against kidnap or abduction, whether by militants in a dangerous part of the world, or by aliens.
Special risks can emerge from any part of the world but tend to come to London due to the high levels of expertise and experience of the unusual.
Technical roles in insurance
It’s worth remembering that the sector has a huge range of jobs, many of which you can find in every sector – HR, marketing, sales and so on. There are some essential technical roles particular to insurance, more of which below:
Underwriting is the process of assessing a client to determine whether or not their risks are worth covering, and at what cost and terms. Underwriters work in insurance companies and often negotiate terms with a broker.
A broker is an intermediary who searches the insurance market on behalf of a client to find the best policy at the best terms. The broker also offers risk management services for clients to help them mitigate risks.
If face-to-face, the broker will negotiate with the underwriter.
The claims team is the first port of call for a customer when something goes wrong. Due to the contract-focused nature of claims, it is a role that law graduates take to quickly, but it is open to anyone with good client skills and excellent attention to detail.
Loss adjusters visit the scene of an event, be it a flood zone or a burnt-out warehouse. Their role is to work with the authorities and clients to understand the situation, where responsibility lies and to arrange for client compensation where possible. Flexibility is the key for this role, as loss adjusters react to situations that can occur anywhere in the country or beyond.
Reinsurance companies take on part of the risk that insurers assume from their clients. They can do this by sharing the losses among several carriers in the event of a claim. For this service, the reinsurer is paid a share of the insurance premium in accordance with its level of participation in the risks.
Because of the scale involved, reinsurance companies need to be skilled at looking into the future, to identify new types of risks early.