Costs of Insurance
The benefits of insurance are not cost-free. Among the costs of insurance are both direct and indirect costs including the following: -
- Premiums paid by insureds
- Operating costs of insurers
- Increased losses
- Increased lawsuits
Premiums paid by Insureds
Insurers must charge premiums in order to have the funds necessary to make loss payments. In fact, an Insurance company must collect a total amount of premiums that exceeds the amount needed to pay for losses in order to cover its costs of doing business. Usually premium rating shall be structured in such a manner that a portion of premium is used for other expenses of the insurers.
Operating Costs of Insurers
Like any business, an insurance company has operating costs that must be paid to run the day-to-day operations of the company. Those costs include salaries, agent commissions, marketing expenses, licensing fees, taxes, reserves for future losses and growth, an element of profit, etc.,
Opportunity Costs
If capital and labor were not being used in the business of insurance, they could be used elsewhere and could be making other productive contributions to society. Therefore, whatever resources the insurance industry uses in its operations represent lost opportunities in other areas – in other words, opportunity costs. These opportunity costs represent one of the costs of insurance.
Increased Losses
Increased Losses can be categorized as follows: -
Exaggerated / inflated claims
Claims on account of careless on the part of the insured
Because of insurance, a person might intentionally cause a loss or exaggerate a loss that has occurred. Many cases of arson or suspected arson involve insurance; some property owners would rather have the insurance money than the property.
Inflated claims of loss are more common than deliberate losses. For example, an insured might claim that four items were lost rather than the actual three or that the items were worth more than their actual value. In liability claims, claimants might exaggerate the severity of their bodily injury or property damage. In some cases, other parties such as physicians, lawyers, garage owners, repairers, etc., encourage exaggerated claims.
Some losses might not be deliberately caused, but they might result from carelessness on the part of the insured.
Increased Lawsuits
Liability insurance is intended to protect people who might be responsible for injury to someone else or damage to someone’s property. The number of liability lawsuits has increased steadily in recent years. One reason for this increase is that liability insurers often pay large sums of money to persons who have been injured. The increase in lawsuits in the
FUNDAMENTALS OF INSURANCE
