Insurance is about sharing risks and costs. Cost planning and disaster recovery are the two main motivations to getting insured but there’s a lot more to it than that. It’s a fascinating topic with quite a history. The principal is the legal term for the person, business, or other entity looking to purchase insurance.
Businesses are especially interested in insurance as cost planning is paramount, often more important than making a profit itself. It’s not always good practice nor indeed possible for business to hold high cash reserves but cash flow is always important. At least in the short term, cash flow is even more important than profitability. A company can always liquidate some cash held up in stock to pay bills, take a loss and keep going. But a significant one-off cost affecting cash flow could mean wages cannot be paid, which is often terminal to a business despite a company being profitable.
The beginnings of international trade was a period of increase in wealth (a respectful word for those that had their freedom stolen in the slave trade should of course be made). There were problems though; it was a very risky business. It was possible to make a fortune and then lose a ship and crew in bad weather. This risk was expensive and meant it scared investors away due to unpredictability. Though profits were there to be made, the risk meant there was often little liquidity in the industry.
In 1688 Edward Lloyd opening a coffee shop in London. Many sailors, merchants and shipowners would meet here and amongst themselves made various agreements to deal with the problems of international trade. These meetings eventually led to the formation of Lloyds of London which is now still one of the biggest insurers in the world.
The insurer is able to provide services to individuals precisely because of its unique position as a central point among those wishing to be insured. The insurer sees its customers like a statistician and can pool insurance premiums (for a cut of course) to be paid out to the predicted unfortunate minority.
Of course, sometimes they can get the statistics wrong but the law requires that the agreement is honoured. Indeed in the 1990s this happened on a massive scale when claims related to asbestos meant Lloyd’s of London had to liquidate some of the collateral it legally had to put up. The collateral was often private individuals that had put their own land on the line in return for a regular payment. Someone somewhere has to pay.
In many ways it’s a form of socialism created by capitalists.
Christian James writes articles for www.letinsure.co.uk on subjects including tenant reference check and building insurance.