What You Should Understand About Insurance

Often people listen about insurance and partly understand the definition and purpose of the insurance. The insurance is supposed understood completely, and people can do with a more objective assessment. And, they can decide what's best for themselves.

Insurance or coverage is an agreement between two or more parties, with which the binding to insured to receive insurance premium, to reimburse the insured for loss, damage or loss of expected profit, or legal liability to third parties which may be suffered insured, arising from an uncertain events, or to provide a payment based on death or life of an insured person.

In a sense, insurance has four basic principles, namely:

1. Indemnity

On this principle, the insurer is willing to pay no more than the actual value that should be borne by the insured. This principle was made on the grounds.

First, the purpose of the insurance contract is to restore the same economic position when the loss has not yet occurred. Second, the insured does not profit from their losses. Third, reduce moral hazard by eliminating the profit incentive.

2. Insurable Interest

This principle says that the insured must be in a position to suffer financially when losses occur. This principle was made to avoid speculation, reduce moral hazard, and not to bear more of the financial needs of the insured (support the principle of indemnity).

3. Utmost Good Faith

Utmost good faith means to value honesty highly regarded in the insurance contract.

4. Subrogation

Subrogation means the insurer is only obliged to pay in accordance with that stated in the policy.

5. Contribution (contribution)

If an object is insured to several insurance parusahaan it will apply the principle of contribution of each insurance company.

6. Proximate Cause (proximal movement)

The main active principle of cause and efficient cause a loss in an event. If the interests of the insured suffered natural disasters or accidents, then first of all we will look for the causes of active and efficient that drives an unbroken chain of events that ultimately there are natural disasters or accidents.

The purpose of this insurance are:

• Provide a guarantee of protection from the risk of losses suffered by one party.
• Improving the efficiency of the subject, because it does not need to specifically conduct surveillance and patrolling to provide protection that takes a lot of energy, time and cost.
• Equitable cost, ie enough to expend a certain amount and do not need to replace / pay for their own losses arising whose number is not certain and uncertain.
• The basis for the bank to extend credit because banks require a guaranteed protection of collateral provided by borrowers.
• As the savings, because the amount paid to the insurance will be returned in larger quantities - Special for life insurance.
• Loss of Earning Power Closes a person or business entity at the time he was not able to function (work).

Potential Problems In Insurance

The purpose of society in terms of buying insurance is to obtain protection when at risk of coverage. The insurance company should be able to avoid those who buy insurance for speculative purposes or pertaruhanan. Therefore, the insurance company must apply the basic principles of insurance.

Another potential problem facing insurers is the behavior of adverse selection and moral hazard of customers and / or prospective customers. Usually most want to purchase health insurance are those who suffer from chronic pain than those who are healthy or sick less.

In other words, those who most want to buy insurance are those who know the risks and risky. They potentially adverse selection, behaving as if healthy with good medical records show.

Therefore, the insurance company should be able to have a way to resolve the issue. Among others, provide requisite physical examination at the hospital who had been appointed (although this does not solve the problem completely because it potentially raises moral hazard problem as a result of the appointment).

In addition, health insurance companies can reduce their adverse selection by selling insurance at a group whose members have the same relative karaksteristik.