Many life assurance schemes in the past lacked transparency, and had high up front charges and commissions. Responding to consumer pressure, insurance companies have introduced new products that spread out commissions and charges previously frontloaded in the form of Personal Investment Plans and Personal Equity Plans, both of which are described in some detail later in this series. Insurance is concerned with potential risks. Typically a group of people who face a common risk pool that risk so that everyone in the pool pays for, or shares the loss incurred by a few members of the pool. Some forms of insurance are mandatory under law such as car insurance.
Some insurance is required under contract.
When purchasing property there is a requirement to obtain life assurance, property insurance, and in some cases an indemnity bond. Assume, for example, that 100,000 people insure their homes with the same insurance company and each house is worth 200,000. By using this information insurance companies can predict the level of risk. If 50 of these houses burned down without insurance, each of these individual house owners would be left with a site worth a mere fraction of the total value and the lending institution would lose out on a valuable investment. If statistically 50 out of 100,000 could be destroyed in a year, by pooling a sum of 100 each into the insurance companies' common pool, each of the 100,000 contributing homeowners are protected against an important financial risk.