While it sometimes seems that insurance companies work in mysterious ways, the idea behind insurance is simple: it uses the payments of many to cover the losses of a few. The money you pay for your insurance – your premiums – goes into one large pool at the insurance company. Those of us who suffer a loss that is insured can then draw from that pool. Because only a few of us need to draw from the pool in any given year, there is enough money in it to pay major losses like those incurred as a result of fire or a serious automobile accident. This concept is called spreading the risk, or risk sharing.
However, the pool must be replenished, or refilled, each year, so it will hold enough money to cover the coming year's losses. You can imagine how quickly it can be drained by one major disaster. The 1998 Quebec ice storm alone resulted in an estimated 700,000 claims for damage totalling $1.14 billion, according to the Insurance Bureau of Canada. That's enough to suck the pool, if not dry, at least to ankle depth. In fact, many insurance companies do not even make a profit on the premiums they receive as compared with the money they pay out in claims and spend to operate the business. Rather, their profit derives from their investments.
Your insurance policy represents a promise to protect you against certain "perils" – or causes of loss – for a given period of time, usually a year. This promise is renewed on a year-by-year basis; your premiums do not "build up" for you to draw upon when needed (except in the case of certain life insurance products – whole life, for example – that are designed with an investment component). In fact, this is one of the most common misconceptions about insurance. Consumers complain that they faithfully pay their premiums year after year. Yet, when they finally need their insurance to cover a small loss, they can't make a claim, because the cost of the deductible (the portion of the claim that you have to pay) may be as high as, or even higher than, the amount of the claim itself. Then there's always the risk – there's that word again! – of premiums going up as a result of a claim, even a small one. It's a familiar, and understandable, litany.
Another common misconception is that insurance covers every misfortune that might befall you. If that were the case, no one could afford the premiums. Neither is insurance intended to be a maintenance policy, so don't even think of contacting your insurer if your aging roof leaks and damages your broadloom, or your sofa gets ratty from wear and tear. Nor is it intended to cover minor losses that consumers could afford to pay for themselves. Rather, insurance is intended primarily to protect you against serious, and unforeseen, loss or injury that you could not pay for otherwise – for example, a major car accident, a fire that destroys your home, the theft of your precious jewellery, the death of a spouse and the consequent loss of that individual's income. It is not designed to replace your $200 lost sweater, as inconvenient and annoying as that loss may be. If insurers were to pay all of these smaller claims, there would not be enough money left in the pool to pay the large ones. If you ever suffer a major loss, you will soon realize that that's when insurance really pays its way.
Many consumer complaints stem from a lack of understanding of how insurance works and what it is designed to cover. The insurance industry, for the most part, has failed to communicate this information to consumers, although a number of initiatives are now in place to rectify this shortcoming.
It may seem that everywhere you turn these days, someone, somewhere, is hawking some kind of insurance, whether it be through television, over the Internet, on the phone, through the mail, or plastered on billboards. However, there are actually only four main channels through which insurance is sold. While any of the following could meet your needs, you should choose the one that is convenient for you and with which you are most comfortable. Throughout this Web site, we use the general term "insurance provider," so as not to favor any one of these channels over another.
Brokers – An insurance broker sells the products of several different insurance companies, and can therefore offer a variety of choices. However, no one broker represents all the companies, so if you want a wide range of quotations, you should consult more than one broker, and ask which companies each one represents. Some brokers are licensed to sell both property/casualty and life/health insurance products, while others sell only one of these two main types of insurance.
Agents – An agent represents only the products of one insurance company. Companies that use their own "captive" agents to sell their products are called "direct insurers." While an agent may not be able to provide you with access to as many products as a broker could, most direct insurers offer a wide enough range to meet the needs of most consumers, at a competitive price.
Direct sellers – Also called "direct-response insurers," these are the newest kids on the block. Like direct insurers who operate through local agents, direct sellers generally sell only the products of their particular company. However, what distinguishes them from direct insurers is that their products are sold via telephone from a central location known as a "call centre," rather than through local agents.
Group plans – Although any of the above channels may supply group insurance, consumers buy it through their workplace, alumni association, professional association, or other group affiliations. Group insurance is generally less expensive for both the insurer and the consumer, because it is sold in quantity to a relatively homogeneous group.
It helps to know the main players, so here's a brief primer to help you understand who does what in an insurance company and brokerage.
Actuary – an employee of the insurance company who prices future risks by applying mathematical models to problems of insurance and finance; in other words, develops models to evaluate the financial implications of uncertain future events.
Adjuster – a person who investigates and settles claims on behalf of the insurance company. The adjuster may be either an employee of the company or an independent contractor hired by the company. Less common are public adjusters, who represent the interests of the homeowner or business owner following a property loss, and are paid a percentage of the insurance settlement by the consumer.
Claims handler/examiner – an employee of the insurance company who looks after your claim. This person is supervised by a claims manager.
Customer service representative (CSR) – an employee of the insurance brokerage or company who assists in handling requests from clients and other duties that must be performed. This person is not the same as an insurance broker, who must be licensed (although many CSRs are also licensed).
Underwriter – an employee of the insurance company who decides whether or not the company should accept a particular risk; for example, your house or your life insurance application. The term "underwriter" can also refer to the company. For example: "Company XYZ is the underwriter of that insurance policy."