In a recent report published by Zurich Insurance company, they have endeavoured to be as transparent as possible about the mechanics of commercial insurance polices, breaking down the costings, profits, losses and some of the issues that surround the model. It also attempts to dispel the myth that insurance is a “rip-off” and nothing but a sophisticated cash making machine. As its managing director infers, Insurance is actually a very simple process and product – think of the street where you live – you all get together and agree to put some money each in a pot each month just in case something terrible happens like a fire and destroys one of the groups possessions. Taking it right back to basics makes very interesting reading. As the writer said ” Risk and uncertainty are part of everyday life. There are some risks we are all prepared to take and some risks that may severely impact our lives and livelihoods”

The insurance principal is, in itself, fairly straightforward:

• An insurance policy transfers all or most of the expense of a potential loss from customer to insurer, for which the insurer charges a fee or premium.
• The insurer pools all premiums from customers facing similar risks.
• It then pays for losses, its own expenses to understand risks and administer the business, and usually an insurance broker for providing a customer with professional advice and choice.
• The insurance company also attempts to retain a profit to deliver the desired returns to shareholders who provide the capital to make all of this possible. That said, the internal workings of an insurance company and its jargon are, admittedly, complex. That’s not for any ‘bad reason’ or sinister motive, it’s just complex to understand the variety of risks that face a wide range of businesses, set appropriate premiums, attach and assess reserving to claims… and set reserves for claims that may happen in 40 years’ time that haven’t even been considered at that point – and have actually already happened.

Whilst each class of insurance may be treated in a slightly different fashion – cheap empty property insurance, for example, would be treated differently to a cheap shop insurance policy as there are features and benefits that a business would require that an unoccupied property insurance wouldn’t. Typical examples would be the need for business interruption (the consequential loss to a business should an insured peril be called upon) or money cover.