Most of the main problems were indirectly covered when considering the concept of risk. One cannot be protected from the risks of life. What can be significantly protected is the property of the natural or legal person. The old prayer for all people in the prayer book of the Episcopal Church of England speaks of those who suffer "in spirit, body, and property." Mental and physical strain, as well as illness, can be reduced if the individual has the knowledge and ability to take preventive measures, but in the end, infection and physical decline take their toll. However, a natural or legal person may purchase insurance that protects his property (his income and the capital value of his property) against the human factor (theft or malicious acts), against an accident (fire or impact from a passing vehicle), against a storm and flood, against illness or inability to continue working. In this way, a property can be protected, even if the spirit and / or body of the individual human being is harmed.
The property represents the entire property of the owner. Land, buildings, furniture, bank accounts, clothing, stocks in industrial enterprises, the contents of a refrigerator, copyrights for written materials, a car, patents for discoveries, and thousands of other things can make up a person's or company's property. The value that the holder derives from them can usually be insured. The owner can protect the value of his property from any determinable risk for each part of the property to the extent that he wishes to insure himself. The price of the insurance is the paid premium.
In traditional economics, it is assumed that value is measured by the "exchange value" of things, reduced to the price at which they are sold on the market, but most of the wealth of each country, including things that are protected by insurance , are not traded on the market every year. On the other hand, almost every year after 1932, the prices of things sold on the market increased in almost every country. The main principle for satisfying insurance claims is the indemnity. It can be defined as: "a specific compensation for loss suffered by the owner of the property (including, where appropriate, the physical and mental health or well-being of the owner) as a result of an event covered by the insurance". In most insurance claims, the compensation is in the form of a certain amount of money, which allows the owner of the damaged, lost, destroyed or stolen item to secure from the market repair or replacement, thus he will be placed in the same financial position as before the occurrence of the insured event. Once damaged, a property can only be sold as a secondary raw material (if any) at a price lower than the price of undamaged property of the same type. To provide compensation, the insurer covers the actual price of the property.
The premium determined by the insurer must be reviewed each time the insurance is renewed (which is usually done on an annual basis). This allows the general fund (which is formed by all premiums paid by the insured clients) to be sufficient to meet the expected total amount of substantiated claims arising during the period during which the policy coverage operates; for payment of all administrative expenses, as well as for ensuring profit of the shareholders of the insurance organization.
Alternatives to cash payments
Insurers often reserve the right to replace a lost or damaged item, instead of having to give the insured a cash amount equal to the price of the replacement. An insurer who has to replace several hundred (or even thousands) cars a year could make a better deal than a retail deal if he buys a large number of cars during the year and provides them to the insured (instead of cash). It is common practice for repair shops to negotiate with the insured drivers in order to ask the insurance companies for the highest possible price for their car repairs, and this type of racketeering robs both insurance companies and bona fide policyholders. The insurer has an obligation to all insured to maintain the lowest possible premiums. To do this, he must ensure that each insured with a claim is paid no more than the actual value of the damage. The more efficiently this is done, the lower the price of the policy.
The insurer buys second-hand cars, houses, machines and other things under special conditions, in order to provide the insured with compensation at the lowest cost for the general fund. Buyers of insurance will become increasingly aware of this valuation base, and will decide what part of their property to protect with insurance, to what extent to insure themselves, and what alternative external sources of risk financing may be more beneficial to them than traditional insurance.
Market value and security
Market prices at most sites are determined by complex mechanisms. Once the price at which an object is sold is determined, the owners of all objects of the same category (such as houses on the same street, built to the same standards) tend to assume by analogy that a similar part of their property has the same value. . Banks often lend to the owner of a particular property on the assumption that the value of the property is similar to the market price obtained for a similar house (or painting, or antique, etc.) sold on a particular market. The bank often requires the borrower to insure the property so that (if it dies) the owner can file a claim for the insured value to repay the loan to the bank.
The insurer agrees to indemnify the property owner in the event that an insured event reduces the value of the asset used as collateral for the bank loan. In this way, the insurer indirectly assumes the risk for the bank (the risk of default on the loan), promising to restore the monetary value of the collateral if the object in question is damaged or destroyed.
Bank debts are formulated as monetary amounts maturing on certain dates. Money has traditionally been taken as a measure of value, and in each country the law defines the form of "money" that serves as legal tender to repay debts. Market values, ie prices, are formulated as a number of units in the legal tender of the country where the sale takes place (or in an internationally valid currency recognized in any court in which a party to the contract can legally claim compensation). . The monetary expression of the value of everything changes over time. The prices of different categories of goods vary to different degrees and in different directions. The price of milk not stored in refrigerated rooms drops to zero in about 24 hours. The price of antique watches has risen (at different rates) over the years, with perhaps rare periods of stagnation when the recession reaches its lowest levels.
Bankers do not provide loans secured by highly perishable assets, but the business community needs to finance their stocks of perishable goods and the sale of perishable products. In this way, the business community relies on shareholders and other sources of funding to secure these activities (such as bondholders and investors who will accept drafts and credit notes). Risks accompany the activities and the business environment is constantly looking for more adaptable and affordable means for their financing. Insurance is one of these methods, the most tested and secure, but no longer the only one.
Insurance provides comprehensive protection against the identified "risk" for the term of the policy. Other forms of risk financing may be cheaper and more flexible, but low cost and flexibility pay for themselves with a lower degree of certainty that financing will be possible at the place and time when the risk event necessitates from him.
Source: David E. Bland "Insurance: Principles and Practice"