What Is Insurance?

When you hear insurance what comes to mind? If it doesn’t make much sense think of the words like assurance, guarantee, protection, and safety from danger. It is a very interesting study and practice. In the successive lines of this resource, we would dig deeper into what insurance entails

What is insurance?

Insurance is the transfer of risks to an insurance company that offers you coverage/protection in the event of that risk. Usually, the protection entails the insurance company taking care of the financial cost of the risk when it happens. Stick with us, it would make sense shortly. Let’s say you drive an Aston Martin and you parked it in a dangerous neighborhood. You’re scared that your new car may get stolen, or vandalized. You then approach an insurance service provider to insure the risks (theft/vandalism). If your car ever gets stolen or vandalized after doing this, the bills are handled by the insurance company.


Insurance companies won’t just compensate or sort the bills of a covered risk. They would only do this if you have an active policy and if you have coverage for that risk. An active policy means you have an up-to-date premium payment. Premium payment is the amount you pay to insurance companies to give you their protection for a specific risk. If you didn’t include risk in your policy, this means the cost for compensating you when the risk happens isn’t in your premium. So, insurance companies would be unable to pay the bills when that uninsured risk happens.

Here’s the catch; An active insurance policy (premium payment) for a specific risk is what you get compensated for when the loss happens.

Types of Insurance

There are varying types of insurance; insurance companies insure whatever has risks attached to them. It’s not rocket science; for example, having a car comes with certain risks like accidents, theft, vandalism, fire accidents, etc. Owning a property or renting it comes with risks, like theft, damage to the structure, water damage, etc.

There are many types of insurance to provide coverage for things (important to human beings) that have a lot of risks attached to them. We have;

  • Auto insurance for your car.
  • Commercial Insurance for your business.
  • Life insurance for covering the cost of living when a person dies.
  • Boat owners insurance.
  • Recreational vehicle insurance.
  • Homeowners insurance for people who own houses.
  • Renters insurance for people renting properties.
  • Worker’s compensation for insuring the life and income of your employees when they are injured on the job.
  • On and on goes the list.

With each type of insurance comes specific coverage. You could own a car and only insure it against theft/vandalism. Protection from theft or vandalism is a specific type of coverage. Another car owner could pick collision coverage to protect his car from the risks that come with accidents.  Each type of insurance has different types of coverage and a person seeking protection from risks can choose.

The nature of risks?

When you have an active policy, you’d get financial compensation for a risk covered in your policy. A covered risk is a risk you paid a premium for as evidence of transferring the risk to the insurance company.

Insurance companies have different coverage for different types of insurance. Depending on the coverage you pick, you’d have a specific risk or a wide range of risks covered. For example, there’s something called comprehensive coverage. This type of coverage usually insures a wide range of risks for any type of insurance you pick.

It all comes down to the past lesson that; each type of insurance has different types of coverage and a person seeking protection from risks can choose the coverage they want. Now, here’s where it gets tricky, you do not get compensation for a risk you didn’t insure. In the case of auto insurance, if you insured the risk of collisions, any other risk outside collision wouldn’t be paid for by the insurance company.

Also, if the risk you insured doesn’t happen all through the year. You have the choice to renew or close your insurance policy. When you renew your insurance policy, it is active. An active policy would always pay out compensation for an insured risk/loss. The insurance company may reduce the cost of your premiums over the years so you can stay committed to insuring a risk whether it happens or not. The truth is; you don’t know what day a risk you fear happens. It’s best you have an active insurance policy when that day comes.

How does an Insurance Company determine Premiums?

Your premium is determined by what you seek Insurance for. Are you seeking insurance for a car, house, boat, life, etc? For example, the worth of your car may include your premium. This is because a more expensive car comes with expensive parts, higher replacement costs, and generally higher risk.

What you seek insurance for, the type of risk you want coverage for, your insurance provider, and how insurance worthy you are amongst others determines your premium. Insurance worthiness is a term that explains the risks attached to giving you coverage for your chosen risk. For example, someone seeking life insurance in a bad state of health is expensive for the insurance provider. Another example is a reckless driver with DIY & tickets seeking insurance from collisions.

Your insurance provider also determines your premium. This is why insurance seekers shop around for the best rates. There are sites that can allow you to compare quotations for many insurance providers for the best rate you can afford.



Insurance is transferring risks to an insurance provider to get protection when a feared risk happens. More professionally, protection means coverage. The transfer on the other hand is validated by the payment of premium for specific coverage. After payment of premium, an insurance policy is issued. This document entails the terms and conditions for insuring your coverage. A risk that doesn’t have a corresponding coverage in your insurance policy wouldn’t receive compensation from the insurance company when it happens.