How the Insurance Industry Works
We recently did some research and found that most Asda customers don’t fully understand the insurance industry or trust the companies involved in it. That didn’t exactly come as a surprise to us.
To help you understand how exactly the industry works, who’s involved, and where we fit into the process, we’ve put together this guide. We’ve also included a glossary at the bottom of the page that explains some of the main terms used in insurance that you might not have heard before.
The insurance industry
You probably already know how insurance itself works – you buy a policy and it provides coverage that means you don’t have to pay the full cost of serious damages or injuries caused by certain covered incidents, those specified in the policy.
What’s more confusing is how the industry works. To put it simply: companies called insurers write insurance policies for customers based on individually calculated risk, before selling the policies either direct or through another company. Policies, or insurance coverage, are usually paid for in the form of premiums; monthly or annual payments made by the policy holder. In the event of a valid claim, insurers are liable for compensating the policy holder for their losses.
Insurers are the foundations of the insurance industry. They’re the party who agree to compensate individuals or organisations for financial losses under the agreement set out in a policy. The insurers are the ones who create the terms of the policy, based on the research and statistical evidence they use to determine the level of risk involved in insuring a specific party, and they’re the ones who have liability for paying out in the event of a valid claim.
Insurance brokers are different to insurers in that they arrange policies choosing from different insurers, rather than just offering one option. However, although you buy from a broker under their branding, they’re not actually the party liable for compensating the policyholder in the event of a claim. The insurer whose policy they sell to you is still the one who foots the bill. Brokers are essentially specialist advisors who will do the work to find the policy that best suits you, before selling it to you (under their name).
Insurance comparison sites
Insurance comparison sites go a step further than brokers and offer complete transparency on a range of policies from both insurers and brokers, all presented in one place. Just like brokers, they don’t actually write policies and they’re also not liable for compensating the policy holder in the event of a claim. They simply showcase the relevant policies from all of the brokers and insurers that they work with. The reason they’re so popular is because they can save lots of time – the customer only has to fill out one set of questions to see a selection of policies, rather than having to answer the same questions time after time.
How you buy
The most direct way of buying an insurance policy is by going straight to an insurer, as they’re the ones who write the policies and carry the liability for compensation. However, shopping directly with an insurer can be limiting, as you only get one company’s offering. You could shop around manually to find the best price from multiple insurers, but that’s a time-consuming process that involves filling out a lot of forms.
Alternatively, you can buy through a broker who will do the work for you but is limited in that they can only offer you policies from the insurers they work with. This cuts down on the time you have to spend shopping around for the best priced policy, but brokers won’t work with every insurer and the policy might be more expensive than buying direct because a broker’s fee is involved.
The third option, and one that’s grown massively in popularity in recent years, is to use an insurance comparison site. This takes the benefits of using a broker a step further by offering you the choice of relevant policies from an increased selection of providers, both brokers and insurers, while only having to fill in one set of questions.
You don’t buy a policy directly from a comparison site, they only provide the introduction to the insurance provider. Think of them purely as a way to compare your options without filling out lots of forms. Comparison sites have nothing to do with the insurance policy you end up buying, they’re just a way to find it.
Who pays who?
Because there are multiple types of company you can buy insurance through, there are different combinations of payments that can get made. Knowing who pays who in which situation might help you to better understand the process as a whole.
Firstly, and most simply, you can buy a policy direct with an insurer. This means that just one payment gets made – you pay the insurer for their coverage.
If you buy through a broker instead, things get a little bit more complicated. As we’ve already covered, brokers don’t actually create policies or pay out for claims but instead simply rebrand a policy from an insurer they work with and add on a fee. This means that if you buy through a broker, they will take their cut before then passing on the rest to the insurer, so you’re essentially paying two companies. This doesn’t always mean that it’ll be more expensive than buying direct though, as insurers will often offer their policies at a cheaper rate through brokers to be more competitive.
Using a price comparison site to find an insurance policy means even more parties are involved. If you buy a policy direct from an insurer that you find on a price comparison site, you’ll still pay your premium to the insurer directly, but they’ll then pay a commission fee to the comparison site. If you buy from a broker on a comparison site, the broker and the comparison site will both receive a commission fee from the insurer.
Interestingly, the insurance industry as a whole is not very profitable. This is partly because not all of your premium goes to the insurer - 12% of every policy premium is paid to the government by the insurer as a tax - but mostly because insurers pay out roughly the same amount for claims as what they make through selling policies.
How insurance works
- The customer looking for insurance has to answer the insurer’s questions, whether to the direct insurer, or the broker or comparison site.
- The information provided from their answers is sent to what’s known as a software house where computers use insurers’ information to calculate risk, generate a quote, and send the premium and terms back. If the question set was filled out through a broker or comparison site, multiple software houses will be involved to generate multiple quotes.
- The customer can choose to buy the policy, whether that’s directly through an insurer, or through a broker or comparison site. Payment options are usually a single annual fee or 12 monthly instalments.
- If the customer makes a valid claim (one that’s covered under the terms of their policy) during the duration of their policy term, the liable insurer will review the validity of the claim and potentially make what’s known as a pay-out.
- When the policy term expires, usually after 12 months, the policy will either auto-renew or end. This is when customers have the choice to choose a new policy if they’d like to. Auto-renew has the advantage that cover is continuous but renewal prices are often more expensive than moving to a new insurer (or even buying a new policy from the same insurer!) so it’s always worth shopping around to see if you can find a cheaper deal.
There are a lot of terms thrown around in the insurance industry that you might not have heard before. Here’s what they mean in the context of insurance:
An approved repairer is a repair company or individual that is approved and recommended for use by an insurance provider. Policy holders aren’t required to use the approved repairer when they claim, but they may be liable for an extra charge if they don’t.
A claim is the application for a pay-out that a policyholder can make to recover some of the costs incurred by an incident that’s caused damage or injury and which is covered under the policy.
Concealment is when an applicant for insurance hides or holds back information from the insurer that could affect the policy.
Consequential loss coverage is when an insurer covers certain resultant losses following damage, such as loss of profits.
A fault claim is an incident or loss where either the policy holder is to blame or costs can’t be recovered from the party at blame (say, an uninsured motorist).
FCA stands for the Financial Conduct Authority, the independent regulatory body for financial industries.
Indemnity is when an insurer tries to place the insured party back in the same position they were in before a loss, or as close as possible.
A lapse is when a policy is not renewed, for whatever reason, and expires – the cover ends on the date set out in the policy.
Market value is the price that an insured item or asset would have at the current market rate. Market value is often very different from the replacement or rebuilding value. These are often associated with vehicle or home insurance.
Material facts are the factors that could influence the insurer in accepting or declining a risk.
No claims discount
No claims discount, sometimes known as no claims bonus, is the discount on a premium insured parties are sometimes offered after uninterrupted periods where no claims were made.
A non-fault claim is the opposite of a fault claim. It’s when an insurer can recover all of the costs involved in a claim from the party to blame.
A policy is a document created by insurers that outlines the terms and conditions behind an insurance contract.
The premium is the cost, usually billable monthly or annually, that the insured party pays for their policy.
Renewal is the opposite of expiry. It’s when a policy is renewed at the end of the policy period and cover continues for another period of coverage.
Settlement is the money that the insurer pays out to cover the costs, partial or total, of a claim resulting from an insured incident.