Understanding How Insurance Works

When it comes to insurance, many people still feel confused about how it actually works. This is because insurance is a profit-oriented institution rather than a social one, so how can it cover the risks we face? In life, the risks that befall us can have an impact on our financial condition and stability.

Without the benefits of insurance, we can suffer losses and our financial continuity may be disrupted. Unfortunately, many people are unaware of the benefits of insurance, let alone how it works, such as how life insurance, health insurance and vehicle insurance operate.

The Basic Ideas Behind How Insurance Works

In general, insurance exists to provide protection. Whether it is health insurance, property insurance or life insurance, all types of insurance share the same goal: to protect against the possibility of risk. The large number of insurance types can often leave people who are new to the subject confused about understanding insurance products in depth.

Therefore, by understanding the basic ideas behind how insurance works, you can avoid misunderstandings and know whether you will receive insurance benefits that meet your expectations or the opposite. Here are the basic ideas behind how insurance works:

1. Basic Principles

The basic principle of insurance is to transfer the risks that may occur to another party. These risks cannot be avoided, but their impact can be minimized by avoiding risk, controlling risk, accepting risk and transferring risk. Insurance manages risk by moving the loss from one individual into a group and spreading the loss experienced by that individual across all members of the group.

2. Business Stages

First, pooling: bringing together people with the same interests and similar types of insurance, with the aim of sharing the same risk. Second, collecting funds or premiums from the group that has been brought together. Third, paying compensation or claims to those who actually suffer losses.

3. Factors That Determine the Premium Amount

In insurance, the risks faced by each individual are transferred to the insurer or life insurance company that agrees to compensate losses up to a certain amount, as stated in the previously agreed policy contract. To be able to pay these losses, the insurer will set a premium that must be paid by the individual who is insured.

In how conventional insurance sets premiums, several factors must always be considered, namely:

• The probability of loss.
• The value of each loss.
• The administrative costs needed to run the business, such as collecting premiums from each member, paying claims, assessing losses, etc.
• The margin of error that can occur when predicting losses.
• Other factors such as financial, health and social factors. Mistakes in measuring these factors can cause losses for the insurance company, such as setting a premium lower than it should be.

Types of Insurance You Should Know

Insurance companies offer a variety of products and types of insurance. There are many types of insurance, and each provides benefits covering the costs of damage or loss. The insurance mechanism requires that there be a large number of risks.

So, based on the theory, anything with the potential for loss or damage can be insured, such as vehicle insurance that covers damage to cars and motorcycles. Therefore, it can be said that there are many types of insurance for every situation. To help you better understand how insurance works, here are the types of insurance in Indonesia that you should know about:

1. Life Insurance

Life insurance is a type of insurance designed to protect the family if the insured person who is the main source of income passes away. Life insurance provides financial protection against the loss of income of a family member who is the breadwinner.
Life insurance will provide benefits to family members if the insured person dies due to illness, accident or other risks that are unintentional. If you are currently the head of a family supporting a child and spouse, it is very important to choose life insurance.

2. Vehicle Insurance

Motor vehicle insurance is a type of insurance that covers losses from damage to motor vehicles caused by accidents or natural disasters. Motor vehicle insurance is generally divided into two types:

• All risk vehicle insurance, which covers all types of damage from accidents, natural disasters, riots, including the risk of theft.
• Total loss only (TLO) vehicle insurance, which provides protection against the risk of theft and repairs if the repair cost is equal to or more than 75% of the vehicle's value immediately before the loss.

3. Health Insurance

Health insurance is a type of insurance that covers the costs of medical treatment and hospital care. This type of insurance can be considered the most basic and is advisable for everyone to have, especially if you have just entered the workforce.

When you enter the workforce and earn your own income, it is very important to start building a financial foundation. That foundation can be built, among other things, by having health insurance.

With health insurance, you can avoid being burdened by medical costs when you fall ill, so your personal finances stay on track. You also do not have to burden your parents with medical expenses, because how health insurance works ensures that you can receive the best healthcare without having to pay anything out of pocket.

4. Property Insurance

The working mechanism of property insurance is essentially no different: it covers the financial risk of damage. Property insurance is a type of insurance that provides financial protection for property assets such as a house if an unwanted risk affects that property.

Besides houses, property insurance also covers apartments, commercial buildings, etc. Home insurance or property insurance generally provides compensation if losses arise from natural disasters, fire or theft.

5. Credit Insurance

Credit insurance is a type of insurance that protects banks and financial institutions if a borrower defaults due to death, layoff, or bankruptcy. Credit insurance is required for those applying for a Mortgage (KPR), Motor Vehicle Loan (KKB), or even a credit card.