How UK Insurance works
Introduction to Insurance in the United Kingdom– insurance is a means by which those unfortunate to suffer a financial loss are provided with compensation. This is called indemnity. If an insurance company were to indemnify you following a loss, it would mean that they have settled your claim. The principle of indemnity is to leave you in similar position after a claim as you were in before it. In simple terms, you pay a sum of money (called the premium) to an insurance company and if you are unlucky enough to suffer a claim, they will compensate you. The premium is calculated on many factors such as location of property sum insured etc and in general terms, the greater the risk, the bigger the premium.
The clever men at insurance companies calculate the rates they charge by working on the laws of large numbers. They seek to “Pool Risks”, that means they collect together large numbers of similar risks or” exposure units” if you want to be clinical and from these “homogonous risks” they are able to calculate their exposure to a loss. The law of large number states that the greater the number of individual units, the more accurate the prediction can be as to loss ratios. This enables the insurer to be able to calculate competitive premiums and make a profit.
Insuring a Risk – Most people, particularly investors in property can see the value in insurance as a Risk Transfer mechanism, not just a necessary evil to ensure you obtain your mortgage funds. Disasters do happen, and claims in excess of £25,000 for Fires & Floods are not uncommon nowadays. So how do we know what is insurable, consider the following:-
- The risk must involve a loss which can be measured in monetary terms
- There must be a large enough number of similar risks for the insurers to make a pool
- The loss must not involve an element of profit
- The loss must be entirely fortuitous
- The insured risk must be ethical and not offend public interest
- The premium charged by the insurers must be reasonable in relation to the potential loss.
Obtaining a Quotation – To obtain your insurance quotation, you will be asked to provide certain amounts of information, this is called underwriting information and based on your answers, a premium will be calculated. For a property risk, the standard set of quote questions will include:-
- The address and post code of the risk
- Details of the year it was built
- Details of it’s construction and the type of property
- How is it used ( Owner Occupied or Tenanted)
- How much it will cost to rebuild
- Details of any previous claims
- Confirmation that the property does not suffer from subsidence
- Confirmation that the property is not in an area that is prone to flooding
Material Facts – When answering questions to obtain an insurance quotation, insurers rely on the principle of utmost good faith, this principle requires each party to declare all of the facts and not wilfully mislead each other. So you as proposer are promising to give the insurer all the relevant information relating to the risk and they are promising to give you a policy document outlining all the terms and conditions of cover with any special warranties. The term insurer’s use for the disclosure of information or additional information not requested by a particular question is called material fact. A material fact is one that is likely to influence an underwriter in to the acceptance or non acceptance of a risk. So if you have suffered previous claims, these would be deemed to be material facts and should be notified to the insurance company as it is likely to affect their acceptance of your proposal. Any insurance quotation you receive is based on the information you provide to the insurers questions, you should declare all material facts to them,. If you are in any doubt as to what constitutes a material fact you should seek clarification from our office. Failure to disclose a material fact may result in you not receive the cover you require or may result in a claim not being paid.