Uk Mortgage Insurance

First, quick definitions:

ASSURANCE, describes financial protection against an event which WILL HAPPEN, for example, DEATH.

INSURANCE, describes financial protection against an event which MAY HAPPEN, for example, FIRE.

In practice, the word insurance is used for all forms of cover, most of the time.

Insurance is a means of spreading risk. It's origins lie in groups of people getting together to acheive this aim. For example:

Twelve farmers in a small village each own one pig which they rear, then slaughter for the familys food. If any one farmers pig dies, they, and their family go hungry. So they decide between them to collectively rear a thirteenth pig, sharing the cost of it's food and upkeep. Should any farmer now lose his pig, the insurance pays out i.e. he receives a new pig.

This is insurance in it's simplest form. Obviously there are flaws in system. If all the pigs die, they all go hungry. If a number of pigs die, the "pig payout" is reduced. If no pigs ever die, there will be a surplus (which could be distributed to the group, if agreed).

Increasing the number of participants in the scheme, should reduce costs, but also increases the time needed to administer the scheme. In the pig example, the cost, per year to each member is one twelth of the cost of a replacement. Switch car for pig, and you have a premium of £1,000pa to insure a £12,000 car.

Add in fraud, for example, one farmer decides to kill his own pig, then sell it, making a claim too, and you can see that insurance is a simple idea, which is complicated in practice. What if one farmer owns sheep, another cows, some grow wheat, and yet others root crops?. Now we have a real situation, which has become too difficult to deal with.

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