Guide to pet insurance
1. What is insurance?
It’s all about risk
When somebody buys insurance, they are taking a precaution to protect themselves from a potential, unwanted event. Buying insurance allows us to manage potential risks.
By purchasing an insurance policy, we transfer the risk of the unwanted event happening to another person (to the insurer). In exchange for this transfer of risk, money is paid to the other person in the form of a premium. Then, if and when the unwanted event occurs, the person who purchased the insurance is ‘covered’ and can put in a claim to the insurer who will then have to pay out to cover the loss because they took on the risk.
Without insurance, people wouldn’t do many of the things that they do on a regular basis because the risks would be too big. We wouldn’t drive cars, run businesses or go on holiday, just in case something bad happened. Having insurance to protect us from the effects of any risk factors allows us to get on with our lives whilst feeling secure and having peace of mind.
What’s in it for the insurer?
Why would an insurer accept a premium of under £100 from someone in return for a risk factor which could result in them having to pay out thousands of pounds?
Well, to make their business profitable, insurance companies bring together a large number of customers who are all worried about the same risk factor. Insurance companies know that the total of all premiums collected in a year, from the group of customers, should be more than enough to pay for those claims received from the smaller number of customers who actually went through the unwanted event.
What happens to the money, which I pay in premiums, if I never experience the unwanted event and therefore never claim?
Once you have paid a premium, and received the set length of cover, the money is the insurers. They have provided you with the service you paid for and have therefore earned the money you gave to them.
- Next page: What is pet insurance?