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Insurance Basics

Insurance is a financial safety net for unexpected losses and accidents. It protects against costly medical bills, death, car damage, and even home loss.


Insurance companies rely on the law of large numbers to calculate risks and produce rates for their policies. The rate-setting process is known as underwriting. Visit https://www.nicholsoninsurance.com for more information.

Insurance policies are a legal contract between the insurance company and the insured. It should clearly define the coverage offered, exclusions that take away coverage, and conditions that must be met for coverage to apply. A well-written policy is easy to read and understand and contains all the information necessary to determine if the policy meets the insured’s needs.

Most policies are written with a Definitions section, which defines terms used throughout the policy. Most policies also contain Endorsements and Riders, which are written provisions that add to or modify the terms of the original policy.

Premiums are collected from many insured parties in return for a promise to pay claims when they occur. This reduces the risk for an insurer, and allows them to earn a profit.


Generally, an insurance policy provides compensation for losses sustained due to certain specified perils. The amount paid by the insured for coverage is called a premium. The remaining margin, after paying anticipated losses (called reserves), is the insurer’s profit. A captive is a subsidiary insurance company owned by an employer group for the purpose of insuring its exposures.

Builders’ Risk Policies – typically written on reporting or completed value form, these policies insure buildings under construction as well as materials and equipment incidental to the construction. This type of policy is also commonly referred to as a Contractors’ Specified Interest or Builders’ Risk Policy.

Disability Income – Short-Term – coverage purchased by merchants, manufacturers, educational institutions and others who extend credit, to indemnify them against loss of income due to disability or involuntary unemployment. This type of coverage is often referred to as Credit Default Insurance or Boiler and Machinery.

Excess and Umbrella Liability – liability coverage for an insured above a stated limit in a basic policy, or over an attachment point or self insured retention. This type of coverage is also known as excess of loss reinsurance or umbrella reinsurance.

Preferred Provider Organization – arrangement in which Health Plan Companies, and in some cases, self-insured employers, establish contracts with specific medical providers and offer incentives, such as lower deductibles or copayments, to encourage covered individuals to use these contracted medical services.


Underwriting is the process by which insurance companies evaluate a potential policy applicant. They review all relevant information, including medical and financial history, to decide whether or not a person or company should be insured, and at what price. This process helps standardize insurance prices, so that two similarly qualified individuals would pay roughly the same amount for coverage. It also helps insurers avoid unacceptably risky investments by vetting applicants on a case-by-case basis and rejecting those who present too much of a risk.

As insurance underwriting evolves, it may become less of a manual process and more of an analytical one, with predictive models playing an increasing role in the decision-making process. While this will not completely eliminate the need for underwriters, it may allow them to partner with sales teams more often and help explain the rationale behind underwriting decisions to customers and agents and brokers. It may also alleviate some regulatory concerns by giving underwriters the opportunity to communicate with regulators early in the process to discuss how predictive models are developed and what data they use to make their decisions.

In addition to the day-to-day tasks of reviewing submissions and calculating premiums, underwriters are also expected to help the insurance company meet sales and profit goals. This can be challenging, especially since many underwriters must juggle dozens of submissions per day, each of which needs to be evaluated for its suitability to the insurance company’s portfolio.

Insurance underwriters must also ensure they are writing clear, concise letters. They must weed out unnecessary modifiers and keep the letter to under a page in length. This way, the underwriter can quickly read through it and understand exactly what is being presented.

Ultimately, underwriting is an essential function of insurance and it should not be taken lightly. Despite the influx of new technology and alternative data sources, it is vital to have highly-trained underwriters who are familiar with the nuances of these systems and are able to apply them appropriately to their day-to-day duties. Without these skills, it is unlikely that an insurer will be able to take advantage of the exponential opportunities that lie ahead.


A claim is a formal request to an insurance company to reimburse for losses covered under a policy. Insurance companies handle claims by assigning them to adjusters, who investigate each claim and recommend settlement options based on the damage amount and policies held. In some cases, the insurance company may need to consult outside experts to evaluate a particular loss. The claims process can be lengthy, depending on the complexity of the claim.

The insurer will also collect and analyze historical loss data to determine rates and premiums for future periods. The analysis involves calculating loss ratios and expense loads to determine whether the current premium is adequate given the expected claims experience. If the expected claim payout is not adequate, changes in policy terms or pricing may be needed.

An insurance policy is a legal contract between the insured and the insurer, so when a claim is made the parties must comply with the terms of the contract. The insured must notify the insurer of the loss or incident triggering the claim, and provide all necessary documentation. This documentation can include medical records, police reports, and repair estimates. In some cases, the insurer may require that the policyholder pay for the cost of the claim up front and submit reimbursement requests later.

Liability-insurance claims are particularly challenging for insurers, as they involve a third party, the plaintiff, who may not be inclined to cooperate with the insurance company and may view it as “deep pocket.” Claims departments employ a large number of claims adjusters and a support staff of records management and data-entry clerks. Incoming claims are assigned to adjusters based on severity, and the adjuster investigates each claim in close cooperation with the insured, determines if coverage is available under the policy, and assesses the reasonable monetary value of the claim. If there is a disagreement about the reasonable monetary value of the claim, the case may be settled by arbitration or litigation. The adjuster may be a representative of the insurance company or, in some instances, an independent contractor.