How Insurance Works

When things go wrong it can be expensive and so, for many of these eventualities, insurance is there to take the financial risk on our behalf.

A business that provides insurance agrees to take on risks on behalf of a company or individual, in exchange for a fee. It does this by providing the business or individual concerned with an insurance contract, sometimes called a ‘policy’.

This policy will cover a person or business for many of the costs they have to meet as a result of a risk occurring and provides the policyholder with some security should the worst happen.

The Concept of Risk in Insurance

Running a business of any kind involves a certain amount of risk. Whether it’s the risk of fire, the risk of damage to exported goods or the risk of natural disasters, all these incidents will have a financial impact on your business if they occur. This is what is being referred to when we use the term ‘risk’.

Most businesses take small steps to manage the effects of risk. For example, by installing smoke alarms and sprinkler systems to reduce the damage caused by fire or by installing security alarms to deter thieves.

However, business owners also want to protect themselves against the financial consequences of something untoward happening, and this is where insurance comes in. In effect, the business can transfer the risk away from themselves and on to someone else.

This transfer of risk is the basis of all insurance, and is something that Lloyd’s has been doing since the 17th century.