Protecting the ‘Pool’

You may have seen reported in the press over the summer that insurers are funding a new Garda unit set up to tackle bogus insurance claims.

Why do insurers put effort and expense into claim investigations and projects such as this?

To find the answer I think we need to ask a simple question.

How Does Insurance Work?

In answering this let me take you back in time. London in the seventeenth century, around the time of the Great Fire. Merchants and shipbuilders would meet in coffee shops to discuss trade and their problems and concerns in relation to it.

In effect they had the same risks associated with their businesses as we have when buying a home or a car; significant loss of or damage to the property or the potential liabilities associated with using it could have very serious financial consequences for them. The destruction or sinking of a ship could bankrupt them. They needed to protect themselves against the risk of such a catastrophic financial loss.

So they began pooling their resources together. They would each pay into a central pool. Where any of them suffered a loss they would be compensated from the pool. From those beginnings the modern insurance industry developed.

This is how insurance works. We pay our home insurance premium to the insurer. The insurer pools our premium with those of all the other home owners. From that pool they pay the claims of those who suffer an insured loss.

So back to our original question.

Why do insurers put time and effort into investigations and projects aimed at validating claims?

It is in order to protect both their policyholders and their shareholders. Insurers manage the pool from which our claims are paid. They must ensure that the total cost of claims does not exceed the total of premiums allocated to pay claims.

To look at this a different way we, as policyholders, are directly affected by increases or decreases in both numbers of claims and average cost of claims paid. Increases in claims costs invariably mean increases in insurance premiums.

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