What is Insurance?

In a report dated September 26, 2010 by GMA News.TV, they said that despite the devastation wrought by typhoons Ondoy and Pepeng on 2009, Filipinos are still not that insurance conscious.

Philippine Insurers and Reinsurers Association (PIRA) chairman Mitch Rellosa observed that the increase in application for insurance coverage after the said typhoons was not due to the people's response to potential threat of death and destruction but as a response to bank requirements.  Rellosa stated his concern over the need for educating the Filipinos about the importance of insurance.

In response to that, I am writing this blog to help Filipinos understand what is insurance and the need to have a proper insurance protection.

Definitions
Section 2(1) of the Insurance Code of the Philippines defines a "contract of insurance" as "an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event."

Investopedia.com gives their definition of insurance as "a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium."

In the above definitions, we can see that insurance is a contract or agreement between two parties - the insurance company or insurer and the policyholder or the insured.

The agreement allows the insured - individuals, business and other entities - to protect themselves against significant potential losses and financial hardships in exchange for a reasonably affordable rate, that is the premium, thus transferring the cost of said potential losses from the insured to the insurer.

The loss of income that a family would experience as a result of the premature death of the breadwinner is considered a significant loss and hardship.  It would be very difficult for a family to replace the income lost caused by such unforeseen event but the premiums paid to the insurer will ensure that the income will be replaced by the insured amount.  The same is true with other forms of insurance.  The potential loss will have a detrimental effect on the individual or entity by having an insurance protection.