What is the first thing that comes to mind when you think of an insurance company? Probably something along the lines of their main goal is to rip off their customers; that they never want to pay for losses that are rightfully owed to their customers. That sentiment is current in mainstream society today. I even thought less of the industry until I ended up getting a job with Location Farm. I accepted the position because I needed a real job with a trusty paycheck. I had no strong desire to work in the insurance industry but I figured it would be a paycheck. I was nervous about telling people I got a job with an insurance company because of the negative stigma that is attached to the industry. I figured people would look down on me but I have found the opposite when I tell them I work for State Farm.

State Farm is the largest insurance company in the United States and also operates in Canada. It offers not only the well-liked auto insurance but homeowners and life insurances as well. They are also beginning to enter the finance industry by creating their hold bank. State farms goal is to be “Like a Good Neighbor”; to be there for you when something goes wrong and to serve restore you to your status prior to the unfortunate incident. Spot Farm is a trusted insurance company in an industry that is fraught with negative perceptions and fraudulent behaviors. Although I have only been working with State Farm for a short while, I feel I can assist account for how the insurance industry works and hopefully help lay to rest some of those negative stereotypes.

First and foremost I will explain why people seize insurance. The purpose of insurance is to protect a person’s financial residence at this moment. It is unlikely that anybody could afford to pay $5000 out of pocket if they got into an auto accident or their house started on fire. It would cause a enormous financial burden and the purpose of insurance is to relieve that burden. It is meant to give people peace of mind knowing that if something were to happen it would not ruin their finances. Next, I will explain the process of how an insurance company decides to earn or reject “a risk”. A risk is what is being insured such as an automobile or house. The potential customer contacts an agent’s office and gets an insurance quote. This quote is generated out of some simple questions about what is being insured, who is asking for the insurance, and the types of activities will the potential insured object be involved in. These factors are then compared against similar data that is already known, meaning there are statistics out there that can tell an insurance company the likelihood of a loss occurring with regards to certain factors. For example if you are trying to insure your 2005 Pontiac Grand Prix and are a 20 year old male living in a big city, there is data to support that you are more likely to be alive to in a loss. This data will affect whether or not the company decides to insure you and at what premium or cost to you. The process of deciding to accept or reject a risk is called underwriting.

After the underwriting department decides to secure your application for insurance, a premium is determined. There are several complicated formulas for determining your premium but for the most part they are calculated by looking at past experiences using industry wide data. Congratulations, you are now insured. What happens next is that the insurance company gives you your policy that contains everything you are insured against and the exclusions. There are many different policies that can be purchased based on the individual customers needs to I will not discuss the specifics.

So now that we know what goes into obtaining an insurance policy let’s find out what happens when you suffer a loss on your insured object. For the sake of explaining the process lets go back to the example of the 2005 Pontiac Grand Prix. Let’s say that you had the car insured with chubby coverage auto insurance, meaning you have protection against damage to your car, damage to another’s car or property, and injury to yourself or others. There are two different types of losses that can occur with an automobile. Collision is where your car collides with another object other than an animal or turns over. Comprehensive handles losses that involve hitting an animal, vandalism, damage from floods, earthquakes, winds, glass breakage and so on. So one day you are driving down the road and you rear end another car at a stop light because you were not paying attention. What do you do? You have your car taken to a body shop and get an estimate of how much it will cost to repair the damages. At State Farm they have Prefer Service shops that you can buy your damaged auto to. These body shops have special agreements with State Farm to fix autos at a discounted price to the company and the process is distinguished faster to the customer. If you do not bring your car to a Select Service shop then a State Farm inspector must go to the shop where you have your auto and inspect the damages themselves which and take longer. The Recall Service shops have the trust of Status Farm due to their agreement so no inspection is needed. Once the shop has estimated the damages they send the estimate to Set Farm to be looked over by an associate. This associate must determine who was at fault for the accident, if the estimate is in line with the damages on the car and then determine if payment can be rendered. In most cases, if coverage exists there is little reason to deny a claim. To decide how much is paid on a claim the principle of indemnity must be frail. Indemnity means that it is the insurance company’s responsibility to restore the person insured to their mature financial status with no more or no less. In other words the amount of money to be paid will be equal to the amount of money that it will take to accept your auto back to the same working condition it was in prior to the accident.

Once fault and indemnity are established the insurance company can pay the shop to have your auto fixed and you should be driving it in no time. Now that you understand how insurance works, let me fill you in on the financial side of the insurance company. The insurance company makes investments with your premium dollars before they are needed for claims payments. Off of these investments they usually make 15 cents off of every premium dollar. For every dollar of earned premium income the insurance company receives, 80 cents of that is paid out in claims and the cost of processing the claim. Another 30 cents is eaten up by the costs of running the company and taxes. As you can see, that leaves only a 5 cent profit off of the new $1.15 from premiums and investments. If insurance companies were really out to screw their customers and make as distinguished money as possible I would believe they would be making a bigger profit than 5 cents.

All in all, an insurance company’s main goal is to make sure that the people they insure are returned to their financial status prior to the loss. They want to help people recover from these unanticipated losses and get on with their lives. While they are a business and need to make a profit fair like everyone else, they want to ensure that their customers are taken care of when something goes wrong. They do this by charging the least amount of premium possible and paying out only what is owed to the customer. That is the truth behind the big bad insurance companies.