By taking out insurance, you transfer to the insurer the risks in return for the insurance premium that you would have a hard time facing yourself.
- Why is it good for you to have insurance?
- What does it take for something to be insured?
- Risk management
- Risk management in practice
- How can you cover your own risks?
- What do you have to pay attention to when taking out insurance?
- Taxation of insurance
- How do you build an insurance portfolio that benefits you as well?
- Closing remarks
History of insurance
Insurance is the same age as humanity. Reducing risks, and thus harm, preoccupied people very early on. This was the rudimentary form of insurance, which at the time was the first to mean the apportionment of damages.
Over time, the “childhood disease” of rudimentary forms of insurance became apparent, so these solutions had to be reconsidered due to equal risk bearing in terms of risk-taking. This rethinking, as well as economic-socio-technological developments, have necessitated the satisfaction of more and more insurance needs.
Beyond helping each other, the original classic forms of insurance have already been largely transformed, although there are exceptions. However, the principles they created remained without exception, with the help of which, through mathematical and statistical calculations, insurers became increasingly specialized. For you, this appears there as an advantage in being able to effectively mitigate the risk in a given area and thus bring out an acceptable value for money compared to the initial extremely high amounts.
Form of insurance (legal relationship), supervision
Time has shown which are the most effective forms. In terms of their operation, the most common form of joint stock company occurs. In addition, the association and the domestic branch of a foreign company also occur in Hungary as a form.
Adequate stability is paramount, after all, it would affect the lives of many people if they were unable to meet their commitments. That is why every government anywhere in the world pays a lot of attention to controlling insurers operating in their own country.
Insurers, as money market participants in Hungary, are supervised by the MNB (Hungarian National Bank). You can also turn to the Financial Conciliation Board with your questions and complaints, with the aim of settling a possible dispute out of court.
Why is it good for you to have insurance?
As you can see in the picture above, the basis for achieving any of your financial goals is if you can protect what you already have. Saving is just below the level of protection because if you don’t have as much reserve to make a living from, you won’t be able to maintain insurance premiums in a crisis situation.
So before you go any further, make sure the basics are in order.
You typically enter into a contract with an insurer if the expected final amount of your potential loss would put a significant strain on your budget. So a relatively often small amount (e.g. storm damage in property insurance) or perhaps one time but extremely large (e.g. foreign life-saving treatment in health insurance). By transferring this risk to an insurer, you can sleep more peacefully and be expected to save money even if you pay a premium for it.
You can see this saving most often in the event of a damage event.
To make it easier to understand, let’s take a look, let’s travel back to 1999. The state-owned Budapest Sports Hall at the time was not insured, as according to the practice at the time, the Hungarian State believed that it would only put money from their pocket of the maintainer into their pocket of the insurer. The sports hall burned to dust in 3 hours due to an overturned candle, so the state had to raise money from elsewhere to clean up the ruins and rebuild the property. Had they had insurance (presumably with a state-owned insurer), the reconstruction could have been covered by other money from private contributors.
The same situation is for you but in small. In the event of a realistic loss event, you either replace the asset yourself and commit your reserves, or entrust the insurer with assuming it.
You, as a policyholder in insurance, will do everything you can to reduce your loss ratio. For example, you comply with safety regulations and are likely to act responsibly precisely so that you are not excluded from compensation due to your irresponsibility (eg drunk driving). As a result, you will be even less exposed to having to work to repair damage due to an incident.
With insurance behind you, both as an individual and as an entrepreneur, you can be sure that what you have built up so far will not be destroyed due to an unexpected situation.
Because you don’t have to keep the full amount to cover any damage in an easily accessible place, you can even invest it elsewhere, so your profits can continue to grow.
As an entrepreneur, this way your production can be more continuous. Although you may still be affected by a loss event, the effects of this will be less burdensome for the company’s budget through insurance. You do not have to set aside the full amount for recovery costs, loss of production losses, or other negative effects, so you can turn this part back into your company.
So far, the good news. The bad thing is that not all events that cause great property disadvantage can be insured. For example, you need to solve, if that:
- your company is down due to a strike
- a competitor will acquires of your customers in front of you
- due to a change in the law, you can no longer or you cannot continue your business in the usual form
- customer needs change, you have to adapt to that too
What does it take for something to be insured?
In order for an insurer to be able to provide you with risk management, mathematical methods are used to estimate the probability of occurrence. If they didn’t, they wouldn’t be able to do an accurate fee calculation and would either go bankrupt very soon or tell you a very high fee. These mistakes have been outgrown by the insurance industry throughout history shortly after the discovery of the New World, so their practice in this is large enough. 🙂
For them, it is important that product of the sum of the expected amount of damage to be paid and the probability of occurrence is as low as possible. So either a very small amount of regular payments or large compensation in the event of disasters, but only very rarely.
Criteria for insurability
Events that meet the following can be insured, the others are not:
- Unforeseen, unintentional damages
- The amount of compensation must be expressed in money: Business reputation cannot be guaranteed in this way
- The damage event should be random: no way is neither planned or intentional, the only thing you know is that sooner or later it will be.
- The risks should be estimated on the basis of past data: UFO abduction insurance can only be taken out if they can already calculate it.
- There must be a sufficiently large risk pool: the amount of compensation is covered by the insurance premiums received by the financial institution, so it requires enough depositors for a realistically low premium, that is, for it to be worthwhile for both the client and the insurer.
- There should be no causal connection with each other: randomness intervenes here as well, chain reactions will not be taken over from you.
Risks that could be insured but the insurer does not wish to assume are treated by the insurer as foreclosure or exemption. These are always known in advance. Exclusion is, for example, war or an act of terrorism. Exemption, in turn, is usually related to the negligence of the insured, such as drunk driving.
Based on these, you can insure a lot of things:
- Property (real estate, car, etc.)
- Legal protection
What is the risk?
By very definition, risk is nothing more than the chance of events with a negative impact occurring.
On the subject of insurance, it is important to emphasize the negative outcome. After all, I saw few people still beeping because he was expecting some mediocre results and got an excellent one instead.
Thus, risk is a concept used in everyday practice as an opportunity for loss or harm to interests. In this case, we typically think of material damage that is actually payable (damage to property or health must be repaired with money) or we are talking about lost profits (eg lost sales and thus declining profits due to machine downtime, for example).
Why should you manage risk?
The average person, whether an individual or an entrepreneur, has only limited resources (money, energy, time, etc.). If this were not the case, there would be no need for insurance because it would easily make up for the loss.
Everybody allocates this limited resource to achieve specific goals to the best of everyone’s knowledge and ability. The downside of limited availability is that during an unexpected event, these resources need to be significantly reallocated, if possible. With insurance behind you, you have the opportunity to raise extra resources, and someone else can solve at least that parts that can be expressed in money.
What risks do you face?
Whether you are an individual or an entrepreneur, you can “choose” from a number of risks. Let’s run through them in groups without claiming completeness:
- Stakeholders: individual, corporate, social
- By direction of danger: I protect my own interests (eg property insurance), I protect someone else’s interests (liability)
- According to the time horizon of the risk: there are risks, that appears in short-, medium- and long-term
- According to the extent of the damage
- Frequency of damage
- In terms of awareness: consciously undertaken, acknowledged inevitable, or unpredictable
Risk management in practice
The task of risk management
Risk management does not appear frequently in everyday vocabulary outside the business world, although it is done by everyone on a daily basis. Some call it care, some call it planning, some call it foresight. In the case of businesses, it is obviously not only part of the daily routine, but even handled by a separate person or group.
The main task in this case is to review all the possible risks and their consequences together with their possible connections. If you have the personal, material and financial condition in place for you, treat it locally. Then it is completely unnecessary to think about insurance. Those that don’t, or aren’t easy to handle locally, pass them on to someone who solves them cheaper than you at your own.
When you think about it, you do the same in every area of life.
- If the battery in your car breaks down, you will replace it on your own. But you don’t start a complete repair yourself (provided you are not already a specialist car service)
- If you get sick a little, an in-house solution e.g. the vitamin C. For more serious illnesses, however, you don’t operate yourself at home, you’d rather go to the doctor.
The same is true for risk management. As for the tiny inconvenience, solve it. Trust someone else to do the rest more effectively.
The basic goal of risk management is to maintain everyday processes. Whether as an individual or as a business, but the goal is to either keep dust out of the machinery or, once you’ve gotten into it, swing over it as easily as possible. Preparing in advance is much easier than in retrospect.
The three activities of risk management
Its purpose is to prevent damage.
There are several ways to accomplish this on your own:
- Risk Avoidance: The cessation of some dangerous activity. This, in turn, often involves changing your goal or giving up on your goal.
- Transfer of risk: you then transfer certain steps to a specialist or take out insurance. The risk remains, but not with you.
- Preparation, precaution: the damage event is less likely to happen, if trouble does happen, it is possible that you will have smaller problems. A typical case is fire and accident protection.
If trouble does occur, the compensation is primarily intended to restore the condition prior to the damage in financial terms. At this point, the activity can continue, although everyone knows that a similar damage event is likely to occur in the future. (eg storm damage)
One of the most common demands in the field of insurance arises in connection with this, and in the course of history the insurance was created mostly due to such demands.
Compensation already takes place during the damage event. It is also in the interest of the injured party, so the aim is to mitigate the damage. In the event of a fire, you do not wait for the flames to spread, but you do act until the firefighters arrive.
How can you cover your own risks?
The most frequently requested insurance policies for individuals:
- real estate insurance (in some cases only movable property)
- travel insurance
- life insurance
- health insurance
- accident insurance
- legal expenses insurance
When insuring real estate, it is extremely important that the standard and amount of service is properly selected. Given that this is presumably your greatest asset value, any damage could also have a big impact on you.
When you look at what insurance is all about, it’s not enough to just look for a single line. eg look at the concept of water and already check mark. The insurer distinguishes between soaking, pipe rupture, flood, inland water or run-off water. And it was just water.
It is worth paying attention to what exactly the insurance covers. In the case of high-value movable property, it is advisable to report this as well, as without it they will not be paid in case of possible destruction.
When taking out insurance, it is advisable to pay attention to the price-value ratio instead of just the price. There may be only a few thousand forints between the offers of two insurers, but there may be millions of differences in compensation.
In the case of motor vehicles, the Bonus-Malus classification is based on the damage done so far. The more careful you are, the more likely they are to see you.
As it is an easy to take out insurance, it is familiar to many people. It is definitely necessary to pay attention to the deadlines, because after the anniversary of the insurance you no longer have the opportunity to change. If that involves a change in the fee, it is not even possible to change it to such an extent that you take advantage of the direct debit discount instead of a check.
Before you travel, think about where you are going and what programs await you there. Since you can only take out travel insurance before you start your trip, and the insurer adjusts its prices to the required coverage, this is an important issue. It does matter
- the development of public health in the target country: you get less cholera in Western Europe than in other areas,
- public safety: you go to play war with water gun or you face a real weapon
- planned program: sightseeing is preferred (and thus cheaper) by the insurer than white water rafting.
Hungarian healthcare is heavily overloaded, but I could mention any other country too. Although patients are received by professionally competent physicians, they cannot do miracles without funding.
Within the framework of health insurance you will receive faster service and less administration. If necessary, you can even be cured by foreign doctors who specialize in the given disease, so on the one hand you will get back on your feet sooner and on the other hand your chances of survival will increase.
Maybe you’re saying that you have an acquaintance in the hospital. This can be useful many times within the framework of normal social insurance. Your acquaintance’s may not be able to help you in a completely different field than his own. For you, however, it matters how long it takes you to get to the right specialist, and it can also be cardinal how much a particular specialist takes a patient for. Health insurance will give you clear answers to these questions.
Whether you have credit behind you or a member of your family is heavily dependent on your income, they have the opportunity not to be financially ruined if any tragedy happens to you.
The issue of life insurance is made up of several parts, think carefully about your needs before concluding a contract.
In a lucky case, you stay alive even after you had a bad moment. The outcome of a possible accident and your chances of recovery are not just up to you. It is in the deck that your life, your place of residence, must be completely transformed just to exist. Accident insurance is intended to cover the costs of this, as well as the costs of your lost income.
Legal expenses insurance
Navigating the maze of law is not always easy even for a specialist lawyer. When it comes to your rights, you don’t just have the right to listen. Everything else costs a lot of money. Here, the service itself is put behind you, so you don’t have to worry about wether you are able to pay for the professional.
In the case of a company contract, the issues dealt with by individuals live in the same way. Here, too, it is necessary to look at what exactly the contractor is signing, and here, too, the principles already mentioned above are true.
How is a company insurance different from a private one?
Insurance accounting issues
Firms typically fund low-value, standard damages at the expense of sales revenue. This risk is more of an additional cost, a kind of predictable loss, rather than a real insurance issue. In terms of accounting, accounting for as an expense and more complex taxation appear compared to individuals.
Volume of corporate insurance
In the case of a business, it is advisable to look at each of the parts to be provided both in whole and separately. Competing all property insurance (motor, real estate, etc.) at the same time can bring a serious advantage to a given company, even if later you don’t provide everything to the same insurer.
At the same time, each insurer has its own specialty, so even vehicle categories should be managed separately for each group.
Wider range of risks in corporate insurance
There are areas in the life of a business that are exactly the same as an individual. Thus, the same insurances apply to them as well.
But there are life situations that cannot be interpreted in individuals. Of course, since these would also impose a significant cost on the company and basically meet all the criteria of insurability, it is advisable to minimize the risks through insurance.
Corporate insurances that different from individuals
All Risk insurance
This type of contract reimburses for all non-excluded claims. Its popularity is growing, which is partly due to the fact that the gap between the premiums of traditional insurance and all-risk insurance has narrowed significantly. On the other hand, it provides greater security, because the traditional insurance only pays compensation for the items listed. Either way we think through the possibilities, life easily rewrites the script.
Group insurance for employees
It is popular with those who want to take care of their employees. If necessary, you can also form groups within the insurance, so it can also be a tool for differentiated rewards.
Corporate travel insurance
In the life of a company, it is often the case that the work regularly calls an employee abroad. Then you can also take out travel insurance similar to private ones, with the difference that it is accounted for as an expense and has a time frame, so you don’t have to predict when and who will leave.
Health insurance for people as defined in the Corporate Tax Act., that can be accounted for as an expense
The most important factor for a senior is time. There is typically not more much can fit in with the day-to-day operations, so it is often the case that a company car sees service more often than a company manager would appear at a screening test. In the case of his illness, however, the company can suffer much more damage too, and in the case of a late-noticed illness, himself too.
A special form of fringe benefits. This point can be used optimally by the owners / managers in the first place, most often in the field of private health insurance. In this case, the company accounts for the service as an expense, but the given insured person is the one who can recover as quickly as possible.
In an increasingly fast-paced and increasingly complex world, responsibility is paramount to maintaining trust. However, this is becoming increasingly difficult.
Within the framework of liability insurance, the insurer undertakes to indemnify the damage caused to the third party by the contractor (as a policyholder) under certain conditions.
This contract protects two parties at the same time:
- the contractor’s customer can be sure that he will receive either a product of the right quality or compensation.
- the insurer only reimburses if the contractor is liable, with insurance behind him the contractor does not have to have the amount to be paid to the buyer.
If we only rely on the delivery of goods in Hungary, the goods can travel hundreds of km until they arrive at the customer. This distance alone carries many risks in itself. An additional risk could be the crime, but even the deterioration of the goods.
Accident insurance in the event of an accident at work
In the event of an accident at work, an injured worker can claim millions in damages. Although you may not be able to avoid an accident, you can “pass” the amount of compensation to the insurer. What decides whether it is appropriate to take out insurance against an accident at work is nothing more than numbers. Can you / do you want to pay the amount that can realistically happen to you.
It provides coverage for the gross profit you would have made on the insured product if there had been no downtime at that production unit. The range of downtime is wide of course, from power outages to storm-induced shutdowns to anything, but not planned outage.
It is used in addition to traditional property insurance, but it can even stand on its own. They are mostly used for high – value machines (production machines, agricultural machines, etc.)
The difference between “traditional” property insurance and machine insurance is that the traditional version typically covers the risk of elemental damage and burglary. Machine insurance can also cover human and technical hazards (awkwardness, negligence, operator error, material error, or even damage).
In some professions, this is an explicit requirement. While advanced software specifically makes many types of bugs impossible, not everything can be trusted to them. Since in each case the person is held liable instead of the machine, it is helpful to have insurance tailored to your profession behind you. Such professions, for example
- independent court enforcement activity
- design, construction and responsible technical management activities
- auditing, bookkeeping, tax consultancy, payroll and social security activities
- pharmacy activity
- personal and property protection, private investigation activities
What do you have to pay attention to when taking out insurance?
Insurance of an individual
In Hungary, underinsurance and overinsurance are also common in property insurance. In the case of underinsurance, although the premiums may seem favorable, in the event of a loss, the insurer pays significantly less than is necessary for the replacement.
And in case of overinsurance, you also pay for items that are completely unnecessary for you (either there is no chance of damage or not a significant amount).
In the case of life-related insurance, we cannot talk about value, because there is no value that can be expressed in HUF. However, this is not why we are not over-insured about health and life. Most people are either underinsured or not at all compared to their actual needs. (This raises an interesting question, which one is more important to you if you are more careful about securing your car than yours.)
So when choosing insurance, make sure that it is not just looking all right, but tailored to your real needs.
Along with the change in your life situation, it is advisable to review or revise your insurance regularly, preferably every 1-2 years. Many changes can take place during all these years. Whether in your earnings or in the insurance industry, but either the value of your property or your equipment can change significantly.
Unfortunately, we have already seen an example of a completely fine event at start, which is severely underinsured in the event of a loss. The owner provided a farm building for HUF 4 million (this completely covered the whole to the last fence bar), then he started farming, and the property burned down years later. Out of HUF 24 million damage value, the insurer paid the 4 under the policy without a word.
Insurance of businesses
An insurer can finance the restoration of the original condition that existed when the insurance was taken out at the expense of your insurance. Naturally, if you had a little sentry box that was blown away by the wind in the weekend storm, they wouldn’t build a palace for you in its place.
This, in turn, also means that when taking out insurance, you must pay attention to whether the book value or the reconstruction value will be authoritative if the value is determined.
This is important because by applying depreciation, you are given the opportunity under the Accounting Act to remove that asset from your book at the same rate of depreciation. With this description, it is the Accounting Act that gives you the opportunity to replace the old one with a nice new tool.
So for a high-value property or machine, it is important if your accounting is in sync with the actual value. By default, the insurer will only reimburse you up to the book value, even if it cost you much more.
To eliminate this, on the one hand, taking into account inflation on the other hand, you have the opportunity to provide your high-value assets at replacement value instead of book value. However, you need to pay close attention to what your bond contains.
Taxation of insurance
At present, I am only discussing the taxation of insurance in the classical sense, given that I have already mentioned the taxation of investment-linked insurance in the section on the taxation of investments.
On the subject of taxation, it is important to mention that the condition for concluding property insurance is that the policyholder has an interest in the preservation of the given object.
As the insurance indemnity does not qualify as income, they are not obliged to pay PIT either.
The taxation of personal insurance is regulated by the Personal Income Tax Act. In Hungary it is described in Annex 1, paragraph 6.3 up to date
How do you build an insurance portfolio that benefits you as well?
As you can see in the pyramid chart above, proper protection is the foundation of your financial stability.
In the picture below, you can see which are the insurances that support this stability.
Your security has two main directions (life and non-life) that rest on five main pillars:
- Health insurance:perhaps one of the most important things you need to take care of. In the case of a serious illness, on the one hand, you can’t work, and recovery can also take a lot of money.
- Accident insurance:life is the greatest director, so it can make unwanted turns. Standing up from this, or adapting to lasting things, can’t just be psychologically stressful. Your job is much easier if the financial side is solved for you.
- Life insurance:that’s one point that’s not really about you. You will benefit from this insurance if you have family members who depend on you and something disaster happens to you. With this insurance, you can guarantee that your goals that depend on you will be achieved (eg educating a child)
- Property insurance:the loss of property that has already been built has already cost many people their health and family life.
- Securing an asset interest:compensation for lost income, a claim arising from a possible infringement are also significant items.
An insurance portfolio that also benefits you includes the 5 pillars for you, in the optimal balance for your own life situation.
It also means reviewing or revising it regularly every few years, but at least for major life events. During the review, it often happens that for some insurances we choose a different insurer than before precisely because of the optimization.
How to choose insurance?
To set up your own insurance portfolio, it is useful to know what you choose insurance for. As a first step, think about what you want to insure and to what extent. What you fear the most. So you’ve already taken a big step forward, after all, it’s likely that you’re not going to pay for something that’s completely unnecessary for you.
Since an insurance contract is far more complicated than runing down to the public store, it is advisable to seek the help of a professional familiar with it.
As an entrepreneur, you are in the fortunate position that Corporate Tax Act. and other accounting regulations allow you to accounting for certain insurance as an expense or use it as a company benefit. When using a particular service, see if it means a more favorable way for you (cost structure, taxation, etc.) if the business is the contractor.
Before you sign anything, review what the contract is about. Not just the header, but also what the fine print is.
You need to see exactly that:
- what does it pay for
- when they do this (is there any waiting time)
- is there any exclusion
- how and when you can possibly modify the contract (other needs may be important to you in 5 years)
Insurance has already shown throughout history that it is necessary, many, many people have been pulled out of total financial bankruptcy.
Remember: in case of trouble, one still runs to the community where you live. Accordingly, insurance is nothing more than a reduction in the amount you would ask your family members or friends.