Finance illustration Finance theory


Insurance is the business of taking on other people's risks. The UK lies at the heart of the world's insurance market. We were one of the first nations to develop a sophisticated insurance industry, and Lloyd's lies at the heart of this system providing insurance through its underwriters to many of the world's major companies. Most businesses have valuable property and equipment and they all take risks. They can cover themselves against many of these risks by taking out insurance policies.

To take out an insurance policy costs money but if anything should happen to the business or its possessions the insurance company will compensate it. The money we pay to an insurance company is called a premium and we can illustrate how insurance works by using a simple example.

Imagine that there are 20 students in a class each with a bicycle worth £400. Each year, one of the bicycles gets stolen and the unfortunate person has to pay out £400 for a new bicycle. One of the students has the idea of starting an insurance pool. The idea is that each student should put £20 into an insurance pool so that there is £400 in the pool. Whichever student loses his or her bike that year claims the £400 to buy a new bike. Every year therefore they will put £20 each in premium into the central pool of funds.


A business is exposed to a large number of financial risks ranging from fire to non-payment of debts. With all the insurance policies available, business people are able to sleep a lot more easily at night, knowing that by paying out fairly small premiums they are covering themselves against the risk of having to pay out large amounts should anything happen to them or their possessions.

Insurance companies are not in the business to take risks. They very carefully calculate the chances of accidents happening and then set the premiums the public have to pay.

Businesses can take out insurance against damage to or caused by their vehicles, fire and flood insurance, accidents to members of the public or employees on their premises, plate glass window insurance, products liability, freezer insurance and many other risks.

When taking out insurance the insured will first fill in a proposal form. They will then pay an insurance premium, which will provide them with cover, and they will be issued with an insurance policy. Should they suffer a loss they can make a claim.

Supporting Documents

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