The Bad Side Of Insurance
Insurance works by having clients give their premiums in exchange for taking on the risk of costs if certain events would occur. For instance, if one house will burn down every month in your area, everyone could just sit and pray that their house won’t be next, or you could all pay a certain amount every month to help rebuild the affected house. Very simply this is how insurance works. It is a method of spreading a risk over a far wider area, so that it will not be as devastating as if it was concentrated solely on the person who experiences the loss.
Exclusion Clause
There are some problems with this that attract a lot of criticism. One of these it that by taking on the risk for people, insurance actually makes people take greater risks than they normally would. For example, if your home contents are insured against burglary, then you might not be as careful about locking up the house. Or if you have insurance for your bike, you may not be so vigilant about locking it up as compared to if you have no insurance. In the insurance industry, this problem is known as the moral hazard.
Insurance companies protect themselves against this by inserting exclusion clauses into their contracts, which remove their obligation to pay out if the insured performs or fails to perform certain stated actions. For example, you might be required to have smoke detectors, or use quality locks on your doors.
Insurance Is So Complex
There are also risks that you aren’t allowed to insure against in most countries. The reason would be that the governments would want the individuals to take on the risk themselves. This applies to multinational companies.
There is also the criticism that insurance policies are far too complex for the vast majority of consumers to understand. Since the documents are drafted by teams of specialized lawyers, then consumers cannot be expected to fully understand them. This can lead to consumers being misled or buying insurance policies on unfavorable terms. This is why most countries regulate the content of insurance contracts to make sure that they are fair to consumers.
There is also the option of using the services of an insurance broker to shop the market for you.
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