What You Should Know: Insurance Basics - Part 1

Insurance is one of the most misunderstood products people pay for. Many people think of it as something they must buy, but never “get anything out of.” Others view it as a scam or a product that only benefits the insurance company when in reality, insurance is a centuries-old financial system built on law, mathematics, and shared risk, designed to protect individuals, families, and businesses from substantial financial loss.

At Oakley Insurance Group, we believe in customer education so you understand what you’re paying for, its value, and purpose. In this first post of our “What You Should Know” series, we’ll explore what insurance is, how it works, and why your premium isn’t “wasted money.”

Disclaimer: Educational Purpose

All coverages reviewed in this post are for educational purposes. Determination of coverage is made when a claim is filed and reviewed by the insurance company and its insurance adjustors. These professionals will verify coverage applies and will help you through the claims and indemnification process.

What Is Insurance?

Insurance is a legal contract between you (the insured) and an insurance company (the insurer). You agree to pay a premium, and in exchange, the insurer agrees to compensate you (indemnify) for certain losses according to the terms of your policy when a loss occurs.

At its core, insurance is about risk management. Every day, individuals and businesses face risks that could result in financial loss: a building fire, a car accident, a health emergency, or even a liability lawsuit. Instead of bearing risk and costs alone, insurance allows you to transfer the risk to a company that pools it among thousands — even millions of other policyholders.

The Law of Large Numbers

Insurance works because of something called the Law of Large Numbers — a statistical principle stating that as the number of similar exposure units increases, the accuracy of predicting future losses improves. Simply put, the more people or properties insured under a given type of policy, the more predictable the overall loss patterns become.

This allows insurance companies to set fair rates, maintain financial stability, and ensure claims can be paid when losses occur. Everyone pays a small amount (their premium) so when a loss occurs to them or to others the insurance company can help cover the loss.

The Purpose of Insurance: Indemnification

The goal of insurance is indemnification — to restore you, as closely as possible, to the same financial position you were in before the loss occurred – it’s meant to make you whole again. This is why insurers carefully verify losses, apply deductibles, and assess whether coverage applies. The principle of indemnity ensures that insurance remains a fair, sustainable system for everyone.

Perils and Causes of Loss

In insurance language, a peril is a specific event or cause of loss that a policy either covers or excludes. Examples of perils include:

• Fire

• Windstorm

• Theft

• Explosion

• Hail

• Vandalism

• Liability

A cause of loss refers to the incident that triggers coverage. For instance, a house fire caused by faulty wiring is a cause of loss under the peril of fire. Understanding what perils your policy includes and excludes is one of the most important parts of being an informed policyholder.

Types of Insurance

There are hundreds of different insurance products, but most fall into one of a few broad categories for both personal and commercial/business insurance:

• Property Insurance – Protects physical assets like homes, buildings, vehicles, and personal belongings.

• Liability Insurance – Helps to cover costs if you’re found legally responsible for bodily injury or property damage to others.

• Health Insurance – Helps to cover preventative care and unforeseen medical expenses.

Though each policy type operates differently, they all share the same foundation: the exchange of premium for protection against specific risks.

The Mutual Benefit: Why It Works

Insurance only functions because of collective participation. The premiums you pay don’t vanish — they join the pool used to pay for claims, overhead, reinsurance, and reserve funds. When you buy insurance, you’re buying a contract that transfers your financial risk to someone else.

In that sense, insurance isn’t a scam or a “money sink.” It’s a safety net, and one that depends on everyone doing their part — paying into the system today so protection is available tomorrow.

Summary

Insurance is more than just paperwork and premiums — it’s a financial contract, a shared responsibility, and a cornerstone of modern life. It protects homes, vehicles, health, livelihoods, and the people we love from the unpredictable.

By understanding how insurance works, you empower yourself to make better decisions, recognize the value of your policies, and approach rate changes with informed perspective.

This concludes Part I of “What You Should Know – About Insurance.” Stay tuned for Part II, where we’ll dive deeper into the “back-end” of insurance, reinsurance, where your premium dollars go, how rates are determined, and more.