Simply put, insurance is a way of reducing the financial loss of a future uncertain event.
Let’s go through an example:
When did insurance start?
Similar concepts to insurance date back for thousands of years. It started with businesses and people wanting to reduce the risk of losing their goods such as crops and silver.
An early form of insurance involved merchants coming together and sharing their goods amongst each other’s boats. This way, if one of the boats did not make it to the destination each merchant would only lose a small portion of all their goods. So they didn’t have all their eggs, literally eggs, into the same basket.
How was insurance developed?
It is believed that the modern form of insurance dates back to 17th century London when the shipping industry was thriving.
In those years, shipowners would gather at Edward Lloyd’s coffee house in London to insure their cargoes and ships. Wealthy individuals or groups would insure the ships in return for a payment, called a ‘premium’.
The ‘premium’ would be set by people, known as underwriters. They would set the ‘premium’, or price, by estimating, or guessing, the likelihood of something going wrong and the value of the ship.
What’s Insurance like today?
Insurance today is based on the same old principle. People pay an insurance company each month, or year, to reduce their financial loss if something goes wrong.
You can now buy insurance for almost anything and everything. The most common types of insurance are for your home, car, phone, travelling.
But you can also buy insurance for the strangest of things. Alien abduction, cyber-attacks, and bad weather! Yes, you read that right.
In fact, insurance markets such as Lloyd’s of London can provide tailored insurance for any risk you can think of. Gene Simmons, from the band Kiss, has insured his tongue. Cristiano Ronaldo has insured his legs.
Do I legally need insurance?
The simple answer here is, it depends. Certain types of insurance are legally required. For example, when driving a car you are legally required to have at least third party insurance.
And whilst not a legal requirement, many mortgages require you have a certain level of home insurance. You should have been told about this when getting your mortgage. Perhaps you should double-check.
But most insurances are not a legal requirement. Instead, they’re there to help you.
What are the alternatives to insurance?
If you decide you don’t want insurance, there are alternatives available. You can rely on your own savings to cover any financial losses. Or maybe family and friends can help you. For example, replacing your lost luggage with your own money.
For certain events, there are state benefits that can help. For example, here in the UK, everyone has access to free, at point of use, health care via the NHS. Even though you can buy health insurance to get access to private health care.
So, whilst insurance has come a long way the principles have remained unchanged.