Insurance

Insurance protects persons and belongings from economic losses

Insurance

The idea behind insurance is quite simple. Many share the risk for somthing that may not happen. You pay fees to an insurance company to receive compensation if such things do happen e.g. for lost things, damages to yourself or others or accidents when travelling. However it is important to keep in mind that an insurance company is only obliged to compensate you for benefits which are mentioned in the policy. It is always advisable to have a copy of the insurance policy to be able to refer to the policy condition since they are often quite specific.

What is insurance?

Insurance is a way of achieving peace of mind that if you suffer an unfortunate, unpredictable loss you will receive financial compensation from the insurer that is meant to put you back in the same financial position you enjoyed before the loss. The idea behind insurance is quite simple.

By collecting a sum of money ("the premium") from each policyholder, the insurer creates a fund from which he eventually pays the losses ("claims") of those unfortunate policyholders who suffer a loss. In this way the contributions of the many pay for the losses of the few. The contribution or "premium" you pay into the fund depends on:

• the size of the risk you want to cover since this will affect the size of the "claim" or amount you will be entitled to take from the fund; and

• the likelihood of a claim occurring, which is calculated on the basis of past experience and the expertise of the insurer.

Reference should be made to Fact Sheet 11 for a more detailed discussion on risk.

Remember, when thinking of taking out an insurance policy, that social insurance already covers your basic needs when being sick, unemployed or old. Therefore, you should direct your attention to purchasing an insurance cover where necessary.

In all EU countries, public health systems, usually financed from tax, cover all or most of the cost for your medical treatments. When showing their European Health Insurance Card (EHIC) nationals of a Member State, an EEA country or Switzerland have access to health care in all these countries in accordance with the legislation of the individual’s country. The national health insurance institution has to issue an EHIC card on request.

Most Europeans are entitled to public pensions when reaching a certain age. Employers often contribute to complementary insurances, e.g. supplementary pensions or a work accident insurance. If you find yourself insufficiently covered by social insurance and employers contributions you may take a complementary insurance with an insurance company.

Having stated the above, there are many other risks which can be covered by a suitable insurance policy e.g. home insurance against fire, burglary and other serious damages. You may need a travel insurance to cover costs for lost items and other accidents that may happen on travel. Your motor vehicles, pets and sports and leisure equipment also need to be insured, if they represent a significant value to you. A liability insurance covers the cost of damage that you may cause to other people.

Why do I need insurance

There are countless examples of unexpected events that may cause you or your family to suffer a financial loss:

• An unexpected event could happen, such as a fire in your home. Your most valuable investment and possession could be destroyed.

• You may be on holiday and lose your baggage.

• You may meet with an accident that costs you your life. Your family will need the financial support that you previously gave them. In some cases, you may turn to state benefits for compensation but these are usually low; besides, you must make sure that you qualify for them.

• Moreover, there are situations that impose a legal obligation to be insured, such as when driving a car or other motor vehicle.

Although there is almost no limit to the risks you can insure against, there are particular risks that are uninsurable because:

• they are speculative - such as trading or gambling risks, • the resultant potential loss is too catastrophic - such as war and nuclear risks or • insurance which would be against public policy - such as insurance to cover the costs of fines or criminal damages

Insurance is based on an agreement with an insurance company – called an insurance policy. It is important to take the time and effort needed to understand what the policy covers and what it requires from you before deciding to sign it. The agreement describes in detail what the insurance policy covers and often also what it does not cover. Read ‘the small print’.

It is equally important to contact several insurances companies to compare their offers. Coverage and fees differ substantially between companies. Make sure that it meets your needs and does not include items that are already covered by the State or another policy.

The cost of the insurance policy depends on what the policy covers. Insurances against risks that often happen are more expensive than insurances against risks that seldom happen.

You can reduce the fee by choosing an ‘excess risk’ insurance, that only covers economic consequences of a loss over a certain limit, if you are able and willing to pay the costs below that limit from your own pocket.

Which are the different types of insurances?

Not everything can be insured. The consequences of some accidents are too unforeseeable to be covered by an insurance policy, e.g. extensive natural disasters. There are various types of insurance and different classifications. The following is only an overview:

• General Business: This encompasses a wide variety of insurance covers that can be broken down in two main groups:

(1) Personal lines: These are insurance that protect you as an individual and your interests such as your car, your home, your holidays and your health.

(2) Commercial/Industrial lines: These are insurance to protect larger risks and business interests such as hotels, factories, construction projects, shops, small businesses etc. These insurance policies usually provide cover for a period of one year and may then be renewed. However some are also short-term covers with a period of cover that is less than one year. An example is a travel policy. In the case of commercial/industrial lines the policy may cover a period of time that is longer than a year such as an insurance protecting a construction risk.

• Life Business: This term is used for all forms of insurance cover that is linked to a person’s life. These include:

(1) Term insurance - protects your dependants in the event of your death during a specified short period of time. The sum assured is payable only if death occurs within the defined period.

(2) Whole Life - protection for your loved ones to ensure they receive a sum of money upon your death.

(3) Endowment - protection with an element of savings because it not only pays your dependants upon your death but it also pays you a sum of money if you survive beyond a certain age.

(4) Unit Linked - An investment policy with an element of insurance protection. These policies offer cover for a continuous period of time and are not annually renewable. They are called long-term business.

The above list is by no means an exhaustive one and only includes the more common types of insurance policies.

You may have complaints

• How to complain is discussed in fact sheet 8 “Making a complaint” • Start by asking the insurance company for redress • If still having complaints contact : The Office of the Consumer Complaints at the Malta Financial Services Authority • You can also approach FIN-NET, a financial dispute resolution network of national out-of-court complaint schemes in the EEA countries.

European cross border issues

EHIC and FIN NET are the only relevant cross border functions. Insurance is still very national. There are of course some cross border aspects, but these are probably not relevant at school, e.g. the need to further improve transportability of second pillar pensions rights and the need for common rules for third party liability traffic insurance. The European Commission is working on both these topics. At present, decisions on the right to compensation are taken by domestic insurance companies even if the damage has happened abroad.

Glossary

Accident - All risk policy - Beneficiary - Claim - Compulsory Insurance - Consumer Counsellor – Death Benefit - EEA – Excess insurance – Home Loan - Insurance agreement – Insurance Company – Insurance policy – Life Insurance - Insured - Insurer - Liability - Liability Insurance - Life-changing events - Loan - Premium - Public health systems – Risk - Social Insurance – Social Services - Social Support Services - Stress – Stressor - Supplementary/complementary insurance –

Further reading

• MFSA Insurance Guides

• Insurance Fact Sheet

Web links

• Dolceta Module 2 Financial services on Life Insurance Polices

• Dolceta Module 7 Financial Literacy Fact Sheet 11 Risk:

• FIN-NET – financial dispute resolution network of out-of-court complaint schemes in the EEA countries

• Pensions in EU

• The Community provisions on social security – Your rights when moving within the European Union

• The European Health Insurance Card:

• MFSA Consumer Complaints Manager

• Consumer and Competition Division

• Investor Compensation Scheme in Malta