What is insurance?

Insurance is the main way for individuals and businesses to help with the financial part if something bad happens. It could be a fire, a car accident, or the accidental breakage of your cellphone screen – the cost of fixing these damages can all be covered by insurance.

The concept of risk

We all face risks everyday. Choosing to start a new business, buying a house, going sailing on a winter’s day – everything we do has an element of risk to it.

And if we do buy the house then there are risks to the house too. There could be a fire in the wiring, the neighbouring river may burst its banks, or a tree might fall through the roof in a storm. Any one of these events could have a huge financial impact. And most of us simply couldn’t afford to pay for damage like this if it did happen.

That’s where insurance steps in. Insurance gives you the ability to transfer this risk to someone else to make sure that even when the worst happens you won’t be too out of pocket as a result.
How does insurance work?
When things go wrong it can be expensive and for many of these eventualities, insurance is there to pay the bills.

An insurance company agrees to take on risks on behalf of a customer in exchange for a fee, this is the premium. It’s the small amount of money you pay in advance to be protected in the future.

In return for the premium you’re provided with an insurance contract, the ‘policy’. We like to think of this as our promise to protect you should something unexpected happen.

Not everything can be covered by an insurance company though. Things like wear and tear and intentional damage are not covered under any policy. So it pays to read through the policy wording before taking out cover to be sure you know what you’re buying.

How are premiums calculated?

The premium, and the terms and conditions of the policy, are based on the likelihood and severity of the risk happening.

How often do 25 year olds crash their cars? Does this change for males or females? What about if they are in a city versus the country? What level of damage is typical in these events? Are other vehicles usually involved?

These are just some of the questions an insurer will ask when setting the premiums for risks presented to them. It’s our aim to get the premium just right for your personal risk exposure – this is what we call a fair premium.

The premium is collected across many customers and placed into ‘pools’. Should a customer make a claim on a policy, the insurer will pay out on that claim from the pool of funds. So it’s important the total premium collected from all customers is adequate to cover all the expected claims to be paid.

Insurers are very closely supervised to make sure that they always have enough money to pay all their claims, and the total premium collected from customers can increase or decrease over time to ensure it is well matched to the expected claims.

Not only does your premium cover the claims, it also has to cover all government levies such as the Fire Service Levy and Earthquake Commission Levy, and taxes such as GST. A portion of the premium will cover the company’s costs, and there will be an allowance for profit.

What is an excess?

When something does happen and you need to make a claim, you need to contribute towards the cost of the claim. This is called the excess.

If we didn’t have excesses in place, the total number and cost of claims covered by the insurance company would increase. To cover this your premiums would also increase.

Excesses help keep insurance premiums more affordable for everyone. Here at Cove, you can select an excess that suits you. If you’d prefer to pay a slightly higher premium now so that you don’t have to pay so much should a claim happen, you can do that by selecting our lowest level excess. If you’d rather save money now, and worry about a claim later, a higher excess might be more suitable for you.