Many people think, take insurance to make a profit. In that sense, when there is a risk, the person can get more replacement funds than he deposited as a premium. This mistaken assumption leaves the person disappointed when things don’t go as expected. Or, there are people who think paying premiums is the same as saving. As a result, when the person cannot get back what he has deposited, he also gives up and does not want to take out insurance anymore.
The concept of “the law of large numbers” Insurance or protection is needed when someone realizes that there is a looming risk. Because, in essence, risk is always present in every human life. But we also need to realize, the level of risk faced by one person with another is different.
Those who have to work in the open, have contact with many people, or travel from one place to another, will have a higher risk of work accidents than those who work in offices all day long.
In more scientific terms, the more often we observe or carry out an event, the higher the inherent risk of that event. Actuarial experts call this kind of trend the concept of the law of large numbers. The law of large numbers in everyday life can be likened to the tossing of a coin. With one toss, the chance the coin will face up is 50%. The same possibilities apply to the opposite.
Well, the more often the coin is tossed, the results of the coin toss face up or down will be closer to the probability percentage. When the level of risk faced by a person increases, then a person will feel the need to get protection. This is what raises the demand for protection products to emerge.
The next question is, what kind of mechanism should be designed to meet protection needs? In simple terms, insurance companies have the following business mechanisms:
• Bringing together people with the same insurance interests, with the aim of sharing the same risks.
• Collecting premium funds from groups of people who have the same interest.
• Pay compensation to those who suffered losses.
Of course, to make this mechanism work ideally, the insurance provider and those who become the insured must be bound by a contract, also known as a policy. The insurance policy contains insurance principles as summarized below:
1. Insurable interest
This principle can be interpreted that a person is only allowed to insure something, which has economic relations and is legally recognized. For example, a businessperson may only take out fire insurance for his shop. Or another example, someone may only buy life insurance or health insurance for their family members.
2. Utmost good faith
The meaning of the principle is that both the policy holder and the insurance company must be of good faith in the engagement. Good faith is defined as disclosing detailed and accurate information. Policyholders must be transparent about the object to be insured. Meanwhile, insurance providers must specify the terms of coverage.
This principle emphasizes the benefits of insurance for policyholders. So, insurance functions to return the customer’s financial position in the event of a risk, to the position before the risk occurred. For example, the function of health insurance is to restore the insured’s financial position before he got sick.
So, if the insured comes out of Rp1 million due to illness, then health insurance functions to return the 1 million. That way, the purpose of obtaining benefits from insurance is a misconception.
This principle means that the insurance company, as the bearer of the risk, takes the position of the insured in demanding compensation in the event of a risk. This principle applies for example to general insurance. Suppose someone named Agus, a vehicle insurance policy holder, is involved in an accident with Budi’s car.
So, when Agus submits a claim for compensation for the accident to the insurance company that took care of it, he no longer has the right to collect compensation from Budi. In this case, it is the insurance company that is responsible for bearing Agus’ losses and then collects the compensation from Budi.
This principle applies to one object that is insured with more than one insurance company. This practice usually occurs in general insurance and the amount of coverage that is insured is very large. It should be noted, even though there are two insurers involved, the principle of indemnity which states that the total compensation cannot be more than the value of the loss, still applies. Then how is the distribution of coverage among insurance companies? Proportional (prorate), which means that each insurer will be responsible prorated according to their respective parts. Non-proportional (excess), which means that each insurer has their respective obligations.
6. Proximate Cause
This principle will be a reference for insurance companies in determining conditions that are the main cause of risk and conditions for disbursement of benefits. This principle aims to reduce the occurrence of disputes due to misinterpretation of risk. On the basis of this principle, insurance policies generally contain risks that are guaranteed and which are excluded in detail. The risk that can befall everyone makes insurance needed by everyone, including you. Hopefully by getting to know the concepts and principles of insurance, you are not mistaken about insurance and can reap the benefits of insurance.