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What is an insurance company?

Insurance may sound like a complicated and daunting subject, but it doesn’t have to be. If you’re thinking about buying your first insurance policy, it is wise to start with the very basics such as ‘What is an insurance company?’Post this, you can move on to understanding slightly more complicated topics such as No Claim Bonus (NCB), claim settlement ratio, cover charge, porting and more. Let’s start with the basics first. This article will illuminate you on the following topics:

  • What is insurance?
  • What is an insurance company?
  • What are the types of insurance companies?

Alright, before you find out what is an insurance company, you need to understand what insurance is. Let’s dive right in.

What is insurance?

Insurance is an agreement between an insurer and an insured. The insurer is generally an insurance company, and the insured is usually an individual. The insurer indemnifies (protects) the insured against unforeseen events. How does an insurer do that? Well, by providing financial assistance.

For instance, Mr. Rajeev bought a health insurance policy from an insurance company. A few months later, Mr. Rajeev falls sick and has to visit the hospital. Since he is insured, he receives a complete refund of the entire amount he spent in the hospital by the insurance company. This is a simple illustration of an insurance agreement.

What is an insurance company?

Now that we know what is insurance, let’s understand what is an insurance company. An insurance company is any company that provides insurance and related services to either the general public or other parties.
An insurance company can either do their business by writing insurance policies to the general public, or they can do their business by writing insurance policies to other businesses.
Further, there are insurance companies that provide insurance services to other insurance companies. These are called reinsurance companies.

What are the types of insurance companies?

Insurance companies are generally classified into 3 subsections:

Life insurance companies

What is a life insurance company? A life insurance company is an insurance company that provides life and term insurance-related policies. Types of policies that are written by life insurance companies are:

Each of these policies aims to insure the life of the policyholder. That means either the policyholder or their nominee will get a lump sum amount either on policy maturity or the death of the policyholder.

General insurance companies

What is a general insurance company? A general insurance company is a company that deals with any insurance product that is non-life in nature. For instance, a general insurance company can deal in motor insurance, health insurance, theft insurance, etc. Types of policies that are written by general insurance companies are:

  • Health insurance policies
  • Motor insurance policies
  • Fire insurance policies
  • Theft insurance policies
  • Crop insurance policies
  • Cyber insurance policies

Reinsurance companies

What is a reinsurance company? A reinsurance company is an insurance company that provides insurance to other insurance companies. Now, why would insurance companies need insurance? The answer is quite straightforward.
A large insurance company issues lakhs of policies every year. What happens if there is a major ecological disaster like an earthquake or a flood and all of the policyholders decide to make claims at the same time? The insurance company could face a massive liquidity crisis in such a time.

To overcome this uncertainty, the insurance company pays a reinsurance company a premium to underwrite some of the policies. Thus, if there is a massive influx of claims, the reinsurance company can come to the rescue of the insurance company by handling some of the claims.

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