What is the first thing that comes to mind when you judge 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 common in mainstream society today. I even opinion less of the industry until I ended up getting a job with State Farm. I accepted the position because I needed a real job with a real 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 popular auto insurance but homeowners and life insurances as well. They are also beginning to enter the finance industry by creating their own bank. State farms goal is to be “Like a Good Neighbor”; to be there for you when something goes evil and to abet restore you to your status prior to the dejected incident. State 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 help explain how the insurance industry works and hopefully help lay to rest some of those negative stereotypes.

First and foremost I will explain why people prefer insurance. The purpose of insurance is to protect a person’s financial status 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 great financial burden and the purpose of insurance is to relieve that burden. It is meant to give people peace of mind intelligent that if something were to happen it would not extinguish their finances. Next, I will explain the process of how an insurance company decides to regain 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 alive to 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 conventional male living in a big city, there is data to support that you are more likely to be involved 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 accept 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 full 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, hurt from floods, earthquakes, winds, glass breakage and so on. So one day you are driving down the road and you rear raze another car at a end light because you were not paying attention. What do you do? You have your car taken to a body shop and obtain an estimate of how considerable it will cost to repair the damages. At State Farm they have Select Service shops that you can retract 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 much faster to the customer. If you do not bring your car to a Select Service shop then a Station Farm inspector must go to the shop where you have your auto and view the damages themselves which and bewitch longer. The Select Service shops have the trust of State Farm due to their agreement so no inspection is needed. Once the shop has estimated the damages they send the estimate to State 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 decide if payment can be rendered. In most cases, if coverage exists there is little reason to deny a claim. To settle how much is paid on a claim the principle of indemnity must be used. Indemnity means that it is the insurance company’s responsibility to restore the person insured to their outmoded financial dwelling 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 come by 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 get 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 leer, that leaves only a 5 cent profit off of the original $1.15 from premiums and investments. If insurance companies were really out to screw their customers and make as much money as possible I would think they would be making a bigger profit than 5 cents.

All in all, an insurance company’s main goal is to execute 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 just like everyone else, they want to ensure that their customers are taken care of when something goes disagreeable. 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.