Four basic principles.

  1. The very first type of insurance as we now know it came into being in the Middle Ages. A village had 20 families, each of which had a pig. Pigs were then very important as the killing and butchery of said pig would keep the family alive over winter. If a pig died, then so could the family.  The village elders – the first insurance brokers – came up with a plan. A decent pig was about 20 pence to buy and that could be beyond the means of a family to find in a hurry so each of the villagers put a penny into the pot (“pot” is still used as a term for the amount of money an insurance company has available) and if a pig died, a replacement would be purchased. And there is the first basic principle: the many put money into a pot for the benefit of those few who suffer whatever it is that they are insured against.
  2. The second basic principle is  insurable interest. You cannot insure something that you do not have a financial interest in. Back in the days of public executions, some unscrupulous people would take out life insurance on the people listed for the chop, even Charles I. Insurance companies soon spotted that was a way of their losing money. You can’t insure your friend’s car or your neighbour’s house or anybody on Death Row.
  3. The third basic principle is indemnity. The idea is that if the insured event happens, you are put back in the position you were in immediately prior to that event. So, if your three-year-old car is written off, your insurance company will provide you with sufficient funds to buy another three-year-old car in the same condition. Deciding the actual amount is the entertaining bit.
  4. The fourth is that you can only insure against the unexpected. For instance, you can’t insure against wear and tear and depreciation. Your insurance company isn’t going to buy you new tyres if yours go bald, any more than they would fill your fuel tank when you’re near empty.

Act of God?

Finally, not a principle but a fact. No such thing as “Act of God” have ever been written into any insurance policy anywhere in the world. An event is either insured or it isn’t.