Hopefully, you are used to having an insurance policy for your car, home, and whatever else you need to protect, it's a necessary evil, we know. However, have you ever thought about what it is that an insurance policy actually does? You know it protects you, but how? It all comes down to assessing risk and putting together a policy to protect the client (homeowner, car owner, business owner, etc) from the risk but not by putting the insurance company at undue risk either.
Understanding risk and insurance
How does risk work?
Everything that your insurance company protects you from is a risk. Take your car insurance policy, having collision coverage is a risk. After all, accidents happen, like colliding with a tree or another car. If you have renter’s insurance, a risk could be that someone above you floods their apartment, and the run-off trickles right into your closet, ruining your clothes.
Your insurance company helps protect you from a certain amount of that risk. That’s why they’re in business. They’ll assess what the risk actually is and then work to mitigate it while still protecting you! And you pay the premium regularly to pay for that risk protection.
Determining risk
When it comes to your insurance policy, there are several factors that are going to play into choosing how your risk factors in and how to charge you for that risk protection. The main determiners are the chances of a risk coming to fruition, the potential damage caused by that risk coming to fruition, and the number of risks that you have on your policy.
For example: if your home is burglarized, the insurance would pay to replace those stolen items. Of course, this will depend upon your policy, your deductible and the limits of the policy. But you aren't out 100% and that is protection. You pay the homeowners insurance premium monthly to help spread out the payment should you have to "replace everything" as in this example. Could you imagine having to buy everything in your home again, all at once? That is the risk the insurance company is trying to determine, how likely that will happen. But regardless, as long as you are covered, they will have to.
On the other hand, food insurance is often going to have a high price tag compared to other kinds of protection, especially on the Texas Gulf Coast, where flooding and hurricanes are more likely, than say, California. While it may never be used, you are paying the premium in hopes it never happens, but should it happen, and if you are covered, the insurance company covers it. Again, this premium is based on the risk, the likelihood for it to happen. Imagine if you were to buy flood insurance on the top of a mountain, your premium would be less than someone who lives on the Bayou or on Galveston Island, because the likelihood to flood, is greater.
Lastly, the more that you are covered for, risk-wise, the more that you will pay. Meaning, if you are covering a 5,000 square foot home that you bought for a million dollars, you will pay more to cover your home than someone who lives in the same area but has a 1,000 square foot home that cost one hundred thousand. Similarly, you also have to consider what the policy limits are, additional coverages and etc. If you compare basic auto insurance policies with those that have additional coverage, like collision and comprehensive coverage or rental coverage and etc, it’ll cost more.
How to protect yourself
When you want to make sure that you are covered for the risks that matter most to you, take a moment to focus on just what risks you are covered for and what you want (or don’t want) to be covered for. It may impact your insurance premiums and offer you better protection and/or more reasonable premiums.
To understand risk better, especially in relation to your specific policies, your insurance agent will be able to help you navigate this often-confusing world. Your insurance agent will be the best support to getting the protection that you want while still keeping your policy premiums as affordable as possible. Remember, cheaper is not always better, be sure you are comparing apples to apples. If it is cheaper, what parts of the policy were removed to make it that way?
While insurance and understanding risk can be complicated, it doesn’t mean that you can’t understand the basics of it. Hopefully this has helped to guide you along the way to understanding your policy a bit more!
But if you ever have any questions about your insurance policies, risk or coverage, please contact Harbour Insurance Services at (281) 520-4090 with any insurance needs you may have.