All insurance is based on the idea of solidarity. Whoever pays in premiums, does so not just for him-/herself, but for all insured persons exposed to the same type of risk. Those premiums serve to cover the benefits stipulated by contract, in case that specific risk materialises.
The need for safety is a fundamental human need; life, however, is fraught with dangers and risk to human health, survival and property. As it is impossible to predict the future with any degree of certainty, humans have always sought protection through insurance. Any modern society is inconceivable without insurance. The Swiss are a very safety-minded nation, spending more money on insurance than any other.
The idea of solidarity is central to all types of insurance. A large number of people or corporations facing the same type of risk pay premiums into a joint pool. If an insured event occurs, the parties concerned will receive benefits out of that pool. This how insurance works – and how it worked 3,700 years ago, when the Babylonians insured their caravans. All Babylonian traders faced the same perils, it therefore made sense for them to join forces. In solidarity, this community then took care of those hit by disaster. Unlike today, this precursor of modern insurance had no commercial aspect. The first institutional insurers that were no part of the risk-bearing community per se established themselves in the Middle Ages.
All members of a risk-bearing community pay a contribution (premium) in order to support members who have to face damages or losses. Premiums consist of three elements:
Risk component: Actuarial bases of insurance statistics and empirical values determine the risk component. This component should be sufficient to cover all damages and losses.
Cost component: The cost component covers the insurer’s remuneration for its services (advice, conclusion of the insurance contract, claims handling, etc.) These costs are borne by all insured persons alike.
Savings component: Endowment insurance also includes a savings goal. A specific component of the premium serves to finance the contractual pay-out at maturity. The interest to be credited by the insurance company plays a major part in this.
If an insured event materialises, the insurer has to deliver the agreed benefits, as there are:
Payments: lump-sum capital, pensions, daily allowances and all kinds of damages.
- Services: defence against unwarranted third-party claims against the insured person (especially in liability insurance), legal protection, advice, assistance.