Understanding Insurance

Life is full of unexpected risks or unexpected, that's why we need to understand about insurance. Some natural events that occurred in recent years and takes a lot of casualties, both fatalities and property, such as reminding us of the need for insurance. For every member of society including the business world, the risk for experiencing disadvantage (misfortune) are always there (Kamaluddin: 2003). In order to overcome the losses incurred, humans developed a mechanism that is currently known to us as insurance.

The primary function of insurance is as a mechanism to transfer risk (risk transfer mechanism), the transfer risk from one party (the insured) to another party (the insurer). The transfer of risk is by no means eliminates the possibility of misfortune, but the insurer to provide financial security (financial security) and tranquility (peace of mind) to the insured. In return, the insured pays the premium in a very small number when compared with the potential losses that may be suffered (Morton: 1999).

Basically, the insurance policy is a contract that is a legal agreement between the insurer (in this case the insurance company) with the insured, where the insurer was willing to bear some losses that may arise in the future in return for payment (premium) certain of the insured.

According to Law No. 2 of 1992, is an insurance or coverage is an agreement between two or more parties, with which the insurer committed themselves to the insured, by accepting the insurance premiums to provide reimbursement to the insured for loss, damage or loss of expected benefits, or legal liability to third parties which may be suffered by the insured, arising out of an uncertain event, or to provide a payment based on life or death of an insured person.

In order for a potential loss (which may occur) can be insured (insurable) then it should have the following characteristics: 1) the loss contains uncertainty, 2) the loss must be restricted, 3) the loss must be significant, 4) loss ratio can be predictable and 5) the loss is not catastrophic (disaster) for the insurer.

The question arises, death is definitely something, why be insured? Even though it is something that contains a certainty, but the exact time of death when someone is outside the control of the TSB. So when the death scene that really contain the uncertainty is what causes it insurable.

There are two forms of agreement in determining the amount of the payment at maturity of insurance, namely: the contract value (valued contract) and the indemnity contract (contract of indemnity). The contract value is an agreement where the amount of payment has been determined in advance. For example, the sum assured (UP) in life insurance. Indemnity contract is an agreement that the number santunannya based on the actual amount of financial loss. For example, the cost of hospital care.

In the case of insurance companies sought to curb possible losses from a fatal / major, then it can shift risk to another insurance company. This is called reinsurance; companies accepting reinsurance called reinsurers.

In addition to the above five characteristics, before it can be insured, the insurer must consider the insurable interest and anti-selection. Insurable interest relating to the relationship between the insured and the recipient of compensation / benefits - in terms of loss potential. For example, insurance companies will not sell fire insurance policy to a person other than the owner of the building is insured. Insurable interest within this example is the ownership of an eye something that is insured. Similarly, family relationships, financial linkages are reasonable, also a form of insurable interest. The definition of anti-selection (counter selection) refers to the existence of a greater propensity to take insurance because it has a level of risk above average. For example, people who have a record of poor health or risk dangerous jobs tend to buy insurance. To reduce anti-selection effect, insurance companies must be able to identify and classify potential risks or losses. The process of identification and classification of the level of risk is called underwriting or risk selection. But that does not mean anti-selection led to the filing of insurance is rejected, due to the insured with the risk of loss above the average may be subject to premium sub-standard (special premium) because the risk is sub-standard (special risks) unless the possibility of loss is much higher, perhaps the insurance application was rejected.