We’ve all seen the ads for insurance saying things like “buy only what you need” or offers to let insureds “name their price”. But for insureds who’ve never read their policy and don’t work in the industry, how do they know what they need? How do insureds know what coverages they do and don’t need, and what constitutes a fair price? Insurance is complicated even for the professionals, and nonprofessionals are often at a loss.

While a good agent will explain coverages to an insured, many insureds’ eyes will glaze over once the explanation begins. They don’t want to sit through a lengthy explanation of the law of large numbers and coverages and exclusions and exceptions to exclusions. So how do we as professionals quickly explain a complicated issue in a way most insureds will understand? We start with the basics and provide a brief overview.

Insurance works by pooling risks - risks with similar characteristics will be “pooled”, or grouped together and charged a premium that reflects the risk of loss. Someone with multiple speeding tickets is more apt to have an accident than someone with no speeding tickets, so those people are put into separate groups. Likewise, those who have filed multiple claims on their property policy are put into a different group than those who have never filed a claim. Location is also a factor - certain areas are more prone to floods, wildfires, tornadoes, and other climate hazards. Insureds with similar characteristics are clumped together. So a neighbor’s premium might be different, even though the houses are similar, due to other factors.