Spreading the Risk
Because a number of people enter into similar agreements with the same company, the number of people paying into the pool is large. Because there are more people contributing to the pool than there are making claims on the pool, the company should have enough to pay whoever files a claim with them.
This is called “spreading the risk” or “common funding.” Because the company has to be able to calculate the chance of something happening, you are obliged to give them specific information that they can use to work out the risk of them having to pay you during the agreed period. The agreement is a contract of “good faith.” If anyone does not tell the company the whole truth, the company may not properly work out what an individual’s payment should be, and may be able to refuse to pay if an incident occurs.
The agreement with an insurance company is a policy or contract of insurance; the amount you pay is a premium; and the amount the insurance company pays is an indemnity.
Indemnity
An “indemnity” is an amount that restores you to the same financial position that you were in immediately before the incident. This could be the whole amount that you agreed on with the insurance company or a portion of it that matches the cost you incurred, if it is less than the whole amount you agreed at the start. The amount you agreed is called the sum insured and is the amount that you and the insurance company agreed was the maximum amount that you would be able to claim. For example, for a house destroyed by a fire or hurricane this would be the cost of its reconstruction, and the removal of all debris and so on, but is unlikely to include the cost of the land, as you would still own this.
Common Fund
So insurance, in its basic form, is a group of people who pool money into a common fund. When someone in the group suffers a loss, such as damaging their car in an accident, they can use the common fund to fix their car. If someone keeps getting into accidents and taking money from the fund, whoever is running the fund will say that they should pay more because they represent a higher risk to the whole fund. Similarly, for example, if there is a year when bad weather hits the islands, many people would have losses and have to draw from the common fund. It may be that the next year, everyone will have a higher premium to ensure that the fund pool is able to meet the cost of a similar storm should one occur
Due to its small population compared to, say the USA, there will be fewer people putting money into the fund so consumers in the BVI may pay higher premiums (put more money in the common fund) than they might have to elsewhere.
How much Insurance do you pay?
The amount you pay (your premium) for an insurance policy will be based on the information you provide to the insurance company, the type of risks that you want to insure against, and the statistical chance of the risk happening. An insurance policy usually states the length of time that the insurance will cover (the term) which could be for six months or a year for auto insurance or “the rest of your life” for life insurance. You can pay for the term in a lump sum or by regular monthly or weekly installments.
Some countries have a type of insurance called Social Security where you must pay an amount of your wage into a “social fund” and you can claim money from the social fund under certain circumstances. This is usually a mandatory payment.
Some types of insurance such as auto insurance are compulsory – that means you are required by BVI law to have coverage if you drive a motor vehicle. Most insurance is not compulsory; you can choose whether you want to buy it, what type of insurance you would like to have, and which insurance company you will buy your policy from.