Almost every adult in the UK has some kind of insurance – whether it’s for themselves, their home or even their pet dog.
But what is it?
Insurance provides protection against financial loss for people and companies. Insurance companies are paid to take risks from customers who could not afford to pay the loss if the risk turns into reality.
Insurance companies guarantee payment for things such as car accidents, injuries at work and illness.
There are two different types of insurance:
Life insurance: pays a lump sum or regular payments to your family, if you die during the length of your policy.
Life insurance companies sometimes provide pension schemes – a special kind of savings plan. You save a little of your income regularly whilst you are working, which can then be used as an income in later life when you want to work less or retire.
Life insurers also sell an insurance policy called an annuity. This provides a guaranteed income for the life of the pensioner and stops the worry of using up all of their savings.
General insurance: protects ourselves and the things we care about, such as cars, homes and belongings – anything other than Life insurance.
General Insurers are responsible for insuring against large catastrophes such as natural disasters. They are also at the forefront of responding to emerging risks, such as cyber risks and climate change.
General insurance policies are typically much shorter – many are renewed annually.
For a customer, there are three steps to insurance:
1. You choose an insurance policy
Choose an insurance policy which says what you are and aren't protected against.
2. You pay the premium
This is the amount you pay per month or year or as a one-off for the insurance. The amount you pay depends on the risk and value of what you are insuring.
3. You make a claim
If something happens and your insurance policy covers it, you let your insurers know and they will pay you as agreed.
How does insurance benefit the economy?
The UK insurance industry is the largest in Europe. It provides peace of mind for people and it reduces uncertainty for businesses. Insurance also contributes to our economy in other ways.
Insurance companies in the UK:
- Manage investments of roughly £2 trillion. They use customers’ premiums to invest in companies, stocks and bonds.
- Pay nearly £12 billion in taxes to the UK Government each year. This money can be used to help pay for public services, such as education.
Why do we care about insurance companies?
At the Bank of England we supervise about 500 insurance companies. Approximately 25% are Life insurers and the remainder are General insurers.
Our job is to make sure that insurance companies keep their promises to pay their customers, and do not let them down, often when they need that money the most. That means we have to monitor the insurers’ financial safety and soundness, which also helps to support the wider stability of the UK financial system.
Insurers take on a wide range of risks and should manage them in a financially sound way. Judging the risks in insurance companies and how they are managed is complex. Our regulation should give people added confidence when buying policies in the insurance market. Customers must trust that the insurance company will make good on its promise to pay when required.
The aim of our regulation is to reduce the chances of the insurance company failing and ultimately, customer hardship and financial instability.