What is Insurance? Definitions, Core Concepts, How It Works

Insurance intermediaries often highlight the benefits of various insurance plans during promotions; insurance companies’ advertisements frequently mention terms like “coverage,” “peace of mind,” and “planning for the future.” Would you therefore assume that after purchasing insurance, you can:

• Receive full compensation for surgery fees and hospitalization costs if hospitalized due to illness?
• Claim the full amount of losses after returning home if you lose belongings during travel?
• Even get compensation for a new car if your car is stolen?

Why might you not receive full compensation when these unexpected events happen? As the saying goes, the devil is in the details, and the answer lies there too.

In reality, different types of insurance, including medical, travel, and auto insurance, offer various product options. Depending on the product you purchase, the compensation details, amount limits, and required documents for claims will vary!

1. Coverage Scope

Taking the examples above, we must understand the circumstances leading to hospitalization: Was it an accident or a long-standing illness? During travel, was the loss due to negligence or theft? For the car, was it stolen from a parking lot or lent to a friend and then disappeared? If the cause of hospitalization, loss of belongings, or car theft is covered under the insurance policy you purchased, you can file a claim with the insurance company.

2. Claim Amount

However, the claim amount may not always equal your full loss; it depends on the terms of your insurance policy.

First, it’s important to recognize that insurance isn’t all-powerful or free; you must understand the following 3 points:

• Why paying a premium of just a few hundred dollars could lead to compensation exceeding that amount?
• Why do you have to pay premiums annually without guaranteed stable returns?
• Where does the money come from, and what is the true meaning of insurance?

When buying a handbag, we first check its brand, material, and size; purchasing insurance is similar. Once you pay and receive the policy contract full of terms, it’s like the handbag’s design. As a consumer, you must clearly understand what you’re buying!

In fact, insurance is one of the oldest industries in the modern economy, having evolved over centuries to become mature and diverse. However, its core principles remain unchanged. By understanding these core ideas and principles, you’ll grasp what insurance truly is.

Insurance is part of risk management involving risk transfer. Policyholders pay premiums to transfer their potential financial losses to the insurance company. The insurance company collects these premiums to form an insurance pool, providing monetary compensation to policyholders when accidents occur.

Insurance operates on the principle of pooling resources, much like the idiom “many a little makes a mickle.” In simple terms, it gathers a large fund from many contributors, which can be drawn upon when needed. The insurance company collects premiums to create a fund, and when a policyholder suffers a loss due to an accident, compensation comes from this fund. The more people participate, the more economically efficient it becomes. This way, the losses of a few are covered by the collective fund, effectively sharing risks as policyholders transfer them to the insurance company through premiums.

Of course, when you purchase insurance, you don’t know if an accident will happen. It’s a precautionary measure to handle unforeseen events and unpredictable risks, forming part of risk management.

This article’s content is adapted from the book jointly published by the Hong Kong Federation of Insurers and Joint Publishing, Insurance Series: Introduction to Insurance

• Author: Linda Lam
• Planning: Hong Kong Federation of Insurers
• Publisher: Joint Publishing (HK) Company Limited
• ISBN: 9789620444562

The Hong Kong Federation of Insurers (HKFI) was established on August 8, 1988, with the aim of promoting and advancing the development of the insurance industry in Hong Kong. It currently has over 130 member companies and serves as the recognized representative organization for the insurance sector, approved by the government.

HKFI maintains close communication and dialogue with authorities, regulatory bodies, and stakeholders to negotiate matters affecting the insurance industry. It actively works to elevate professional standards in the sector, drive industry growth, and educate the public on insurance knowledge, thereby enhancing public confidence in the insurance industry.