Insurance is a financial contract sold by insurance companies in form of policies whereby an entity or an individual gets financial protection or reimbursement against losses that might arise from an insured risk. Risks are adverse events that are insured against in case they occur leading to financial losses to the insured. It allows institutions or individuals to transfer their financial risks to a pooled group of risks through a contract. The insured party is allowed to periodically spend small amounts of money to the insurer against the possibility of significant unexpected loss. The history of insurance in the UK dates back to the 14th or 15th centuries where marine insurance was written being the first insurance in the UK. Other insurances such as life and fire insurance followed. The insurance market has developed in the United Kingdom to become the largest insurance industry in Europe and the fourth biggest in the world. There are different types of insurance with some being a requirement of the law such as motor insurance and some as conditions of a contract such as buildings insurance and some being optional such as life insurance. The insurance companies in the UK have different types of insurance policies and any business or individual can get an insurance company that is willing to insure them for a fee. Most UK citizens have one or more insurances. The Financial Conduct Authority (FCA) is responsible for the authorization of individuals or organizations interested in selling, advising, or arranging insurance in the UK. The Bank of England’s Prudential Regulation Authority is also responsible for the regulation of the insurance business.
There are 340 authorized general insurance companies in the UK and there are other 563 insurance companies that offer insurance services in the UK but their headquarters are in other European countries. With the many insurance companies in the UK, it is important to compare to find the insurance companies with the best premiums (Mukwiri, 2017). There are websites that help people find an insurer that provides the best deal for their situation.
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The principle behind insurance is to allow the transfer of risks from an individual entity to a pooled group of risks through a contract between two parties. The insured gets an opportunity to contribute a small amount of money to cushion them against the possibility of big unexpected losses. What that means is that the policyholders pool their risks together which is a form of shared risk. The premiums that they contribute, which vary, pay the losses they suffer. The reason why businesses and individuals get insured is because of uncertainties and risks which give no guarantee that an entity or an individual will not suffer some form of unexpected damage or loss (Shiu, 2020). Therefore, since institutions and people cannot protect all their interests against the involved risks, it is important to ensure those risks and uncertainties are insured.
The contract between the insurer and the policyholder is called a policy which details the amount of liability or risk covered by the insurer. When the policyholder buys a policy, they are required to make regular payments which are referred to as premiums to the insurer. When the policyholder makes a claim, the insurer only pays the loss that is covered within the policy. When the policyholder does not make a claim, the money is not refunded but rather it is pooled together with other policyholders’ premiums who are covered within the same insurance provider (Forss, Kalimo, and Purola, 2000). If a claim is made, the money used to pay is taken from the pool of premiums paid by their premiums and that of other policyholders.
The insurance companies use the risk data to determine the possibility of an event that a client intends to insure against happening. The information from the calculations is then used to determine the cost of a policy. The higher the possibility of an insured event happening, the higher the risk to the insurer, and therefore the cost of the premium is high. The insurer makes other considerations before charging a premium such as the characteristics of the person or business intending to be insured (Burling, 2017). That is, is the client have a bigger or smaller risk than the average policyholder? For instance, a teenager intending to insure a high-powered car will be charged more in the premium he/she will be offered because statistics show that they have a higher probability of being involved in an accident than more experienced and mature people.
Although there are various conditions and terms depending on a company and/or policies offered, there are principles that standardize the insurance industry in the UK. The Prudential Regulatory Authority (PRA) is a branch of the Bank of England that is mandated to ensure that insurance companies have the capacity to operate. The Financial Conduct Authority is responsible for the regulation of the practice and behavior of insurers. The leading representative body in the insurance industry in the UK is the Association of British Insurers (ABI) which has more than 250 members (Shiu, 2020). According to the principles and standards set by the regulators, the cover an insurer provides is for the actual value of the item or property that may be lost or damaged, that is, the replacement value. It does not include the sentimental value. Another principle is that there should be many similar risks that the probability of a claim is well spread to other policyholders. The insurers should be able to calculate the probability of loss to make sure that a premium is set in a manner that matches the risk. On the side of the policyholder, the losses should not be deliberate but rather unpredictable and accidental.
The Association of British Insurers (ABI) works on behalf of its members who are companies offering insurance services. The association, in collaboration with the regulators, policymakers, and the government, create and maintain an efficient and effective insurance market. ABI provides general information to clients on matters relating to savings and insurance products available in the insurance market. It also promotes and provides services that ensure high standards, transparency, and best practice in the insurance industry.
Types of Insurance
In the UK, there are various types of insurance that are mandatory since they are a requirement of the law and there is extra coverage that is optional but also important. Broadly, these insurance can be categorized into public and private insurance. The public insurance, also known as social insurance is funded through government plans and they include social security, temporary disability insurance, and other healthcare insurance provided by the state. Private insurance plans whose coverage is done by private companies. Under private insurance, there are individual insurance and business insurance.
Car Insurance
It is compulsory in the UK since it is a requirement of the law. All vehicles used on the road or those kept in public places have to be insured. An exception is for those vehicles which have been declared off the road and are not being used. Since auto insurance is a big industry, it has many insurance companies offering this cover. Companies like Direct Line, Aviva, and Esure are among the largest vehicle insurance providers. Car owners, therefore, have a large pool to choose from when they are looking for an insurance company with the best policies with favorable premiums for their vehicles. In the UK, there are three types of car insurance Third-party, fire and theft, and comprehensive coverage. The third-party insurance cover is the least legal level of vehicle cover. The policy covers compensation for other parties involved in an accident except for the personal costs. Third-party, fire, and theft cover the parties involved in an accident, compensation if the vehicle is stolen or is damaged by fire (Florey and Florey, 2019). Although comprehensive policy differs with insurance companies, the policy generally covers the damages to a vehicle during an accident. Depending on the insurer, this policy covers vehicles and other round-the-clock roadside services such as towing. The premiums are dependent on the policy, the value of the vehicle, and the driver’s profile. The average cost of a fully comprehensive vehicle insurance premium is about £473 (Florey and Florey, 2020). Car insurance policies mostly have an excess fee which means that a policyholder has to make a certain payment on top of the normal premium before making a claim. The car insurance companies have a culture of ‘no claims’ discounts which means that people who stay for years without making claims can get substantial discounts while paying their premiums.
Home Insurance
Although homeowners are not required by law to have home insurance, most mortgage offers require that they have the insurance. When buying a house in the UK, a person needs to have home insurance. To avoid breaking the law, landlords should have building insurance. The policy covers damages that may occur on the structure of the home and any other damage that may occur on permanent fitting and fixtures. The policy does not cover the wear and tear of the home. However, it covers the costs that may be incurred during rebuilding or repairing the house. If the policy does not cover at least 80% of the home’s replacement cost, the coverage provided by the insurer is significantly reduced. Since there are inflationary times, the policyholder has to adjust the policy limits upwards or else buy a rider that adjusts for inflation automatically (Burling, 2017). The homeowner gets savings by lowering the premium when property values are dropping significantly. The average cost of a building insurance policy is about £163 per annum. However, in addition to that, the policy may require the policyholder to pay an excess fee.
Private Health Insurance
Private health insurance is an optional form of insurance that offers people an opportunity to quickly access specialized healthcare services in better facilities without waiting for a long time. Private health insurance varies a lot depending on the policyholder’s circumstances. Most employers include health insurance for their employees. The policy requires that the insurer pays for all or part of the medical costs incurred during hospitalization, consultation with a doctor, and prescription medicines for the policyholder. There are policies that cover 100 percent of the hospitalization costs and 80 percent of the prescribed medicine (Sharma, Jadi, and Ward, 2020). Most policies have a deductible amount which means that the insurance provider will not pay for healthcare until the deductible amount is reached.
Life Insurance
Life insurance is an insurance policy that provides payments to the family or any other named beneficiary of the deceased policyholder. There two types of life insurance, term insurance, and whole-life insurance. For the term insurance, the policy only covers during the period of the policy is active and payments are done only when the policyholder dies (Sharma, Jadi, and Ward, 2020). The whole-life insurance gives both insurance and savings and the policyholder can collect the money before he/she dies. Disability insurance is a policy that provides payments of a certain percentage of the worker's earnings weekly or monthly. The payments are made after the policymaker cannot work anymore because of an illness or an accident. Policies that have long waiting periods have lower premiums than those that require payments after a shorter period.
Workers’ Compensation Insurance
Workers’ compensation insurance is a policy that covers workers in case they are injured while working. The policy covers medical expenses, death, and injury benefits when an employee is injured or dies because of his/her work in the company. Although some jobs have low risks, there may be minor incidences like slip-and-fall injuries that may lead to a costly claim (Mukwiri, 2017). Therefore, businesses for compensation policy to avoid such unpredicted and costly expenses. Another business insurance is business interruption insurance which is associated with risks arising from disaster or catastrophic events. A business loses income due to a worker’s inability to work, manufacture, or sell products. The interruption insurance is therefore more applicable for businesses that require physical working space like a retail store. Business interruption policy compensates the lost income as a result of the events. The policy helps in reducing the possible financial loss that may arise as a result of a catastrophic event or a lawsuit.
Product Liability Insurance
Product liability insurance is most suited for people or businesses that produce, design, and supply products of their own. Even if a business takes all measures to ensure that the products it produces are safe, a lawsuit may occur as a result of damages arising from its product. It also covers the unlikely situation whereby a product causes damage or injury to the third party or their property (Mukwiri, 2017). The product liability policy covers a business the legal fees and compensation costs that are associated with the claim. Most companies provide tailored policies to policyholders to suit a specific product. Professional liability policy, also known as errors and omissions (E&O) insurance, is a type of insurance that covers a business against claims that arise as a result of failure or mistakes during delivery of services or goods. An insurance company customizes the policies to fit the concerns of its clients.
Umbrella Insurance Policy
An umbrella insurance policy is extra insurance for the existing insurance. What that means is that, if the policy a policyholder cannot fully cover the expenses of a loss, then the umbrella insurance policy covers the extra expenses (Shiu, 2020). The objective of having umbrella insurance is to add extra protection to an individual with different policies so that in instances where the insurance is not enough the umbrella policy kicks in to avoid out of pocket spending.
Contents Insurance
It is not a legal requirement in the UK. However, it is important since it offers protection to a person’s belongings in case there is an emergency. The belongings are covered against flooding, theft, and fire. An extra fee is charged when a client asks for personal possessions cover or accidental damage cover which covers things outside the property. The premiums of contents policy are based on the value of the items being insured. In the UK, the average cost of contents insurance is about £59 per annum (Shiu, 2020). Unemployment insurance is not very common in the UK. People, however, take an income protection insurance policy. The policy pays some percentage of a person’s earnings in the incidence of inability to work.
Travel Insurance
It has become popular in the UK with several insurers providing different packages for multi, single, and annual trips outside the country. Different insurers offer a variety of policies with the economy option being the cheapest option. However, the option has the highest excess costs which have to be paid before a claim is paid. There are also other expensive premiums that have wider coverage including transport issues like flight delays and loss of baggage.
Commercial Insurance
Commercial insurance in the UK helps individuals and businesses operate within the law and protect their businesses. Public liability insurance is required by law when a business having a public premise or conducting some form of activities in the public. The policy covers injury to humans and damage to property that affects the third party. Employer’s liability insurance is a legal requirement that covers claims that employees make in the event they get injured or sick as a result of the nature of their duties at the workplace. Professional indemnity insurance which is also referred to as professional liability insurance is a legal requirement for some professions such as private consultants, accountants, and solicitors (Burling, 2017). Some businesses are covered by this policy in the incidence that they get claims from their clients in relation to their reputational or financial damage. General liability insurance covers risks that may result in significant liabilities.
Malpractice Insurance
It is usually purchased by several professionals like accountants, lawyers, and doctors to protect them against claims that discontented clients make. The premiums of policies covering doctors have been rising because of the high fines against doctors who are found guilty of negligence while practicing their profession (Sharma, Jadi, and Ward, 2020). Some companies offer medical malpractice insurance for medical professionals that cover both the legal defense and the cost of compensation.
Crime Insurance and Cyber and Data Insurance
Crime insurance has become common for businesses with its policies evolving over time since the nature of crimes has been changing. Under the policy, businesses are allowed to cover unforeseen incidences. The policy covers claims from the damage of property, fraud, and theft. Cyber and data insurance has become increasingly important for businesses using computers and other modern technologies that are used to transmit and store data. The insurance covers businesses against the risks associated with online activities (Shiu, 2020). The policy protects business data compensation is made in time and money lost when fixing data hack and breach.
Conclusion
The United Kingdom has one of the largest insurance industry in the world. The reason why insurance is critical is that there are no guarantees or certainties in life, business, and health. Since it is impossible to protect against all risks, it is crucial to have insurance. Insurance is a contract that provides reimbursement in case the insured risk occurs thus causing financial losses to the insured. The contract itself is the policy and the considerations paid by the policyholder are called premiums. The insurer promises to reimburse the insured who is also called the policyholder. The unforeseen events that are insured against are referred to as perils or risks. The government and other regulatory bodies are responsible for the regulation of the insurance industry. The general concept of insurance is to transfer financial peril from an individual or entity to a pooled group of risks which then makes it a two-party contract. Under the program, an entity is allowed to pay periodically small amounts of money to protect it against the possibility of unexpected loss. Under the principle, an insurer provides protection and reimbursement of losses incurred as a result of damages or injuries to the policyholder. There is much different insurance. There is public and private insurance whereby public insurance is funded through government plans while private insurance plans are offered by private companies and they are funded privately. There are insurances that are legally required by the law and some are optional but equally important. Generally, insurance is important for businesses and individuals because it creates some level of certainty.
References
Burling, J., 2017. The Potential Effect of Brexit on Insurance Regulation in the UK. In Insurance Regulation in the European Union (pp. 79-106). Palgrave Macmillan, Cham.
Florey, M.M., and Florey, D.M., 2019. Your car insurance has been changed. Policy .
Forss, M., Kalimo, E., and Purola, T., 2000. Globalization and the concept of insurance. The Year .
Mukwiri, J., 2017. Directors’ and Officers’ Insurance in the UK. European Business Law Review , 28 (4).
Sharma, A., Jadi, D.M., and Ward, D., 2020. Analyzing the determinants of financial performance for UK insurance companies using financial strength rating information. Economic Change and Restructuring , pp.1-15.
Shiu, Y.M., 2020. How does reinsurance and derivatives usage affect financial performance? Evidence from the UK non-life insurance industry. Economic Modelling , 88 , pp.376-385.
