Insurance policies work by taking premiums from customers in exchange for baring the risk of certain costly events occurring. For example, if there is one fire in your town each month, everyone could just sit tight and hope their house doesnt burn down next, or could pitch in and pay an insurance premium each month and this is then used to rebuild the house that burns down. Very simply this is how insurance works. It is a method of spreading a risk over a far wider area, so that it will not be as devastating as if it was concentrated solely on the person who experiences the loss.
Exclusion Clauses
There are a few problems with this however and they attract much criticism. One criticism is that by taking on the risk for people, insurance makes people take greater risks than they otherwise would. For example, if you know your home contents are insured against burglary, then you may not be as careful about locking the doors and windows every time you leave the house. Or if your bike is insured, you may not bother to lock it as much as if it wasnt insured. In the insurance industry, this problem is known as the moral hazard.
Insurance companies protect...
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