The basics: how insurance worksFAQs

Insurance is an agreement under which your company transfers a financially measurable risk to an insurer. In exchange for a periodic payment — the premium — the insurer takes on the cost of certain situations, always within what the policy sets out. Insurance doesn't eliminate risk: it transfers it and makes it manageable.

It's what your company pays to keep the insurance policy in force, either as a single annual payment or in instalments. It's calculated from variables that attempt to measure the risk: type of activity, revenue, headcount, sector, prior claims history and the specific coverages you choose, among other factors.

It's the quantified part of the cost of a claim that your company bears before the insurer covers the rest (above the deductible, the insurer pays the amount of the claim). It can be a fixed amount, a percentage or a number of days, depending on the product. A higher deductible usually means a lower premium, and vice versa: it's a way of sharing the risk between your company and the insurer, not a hidden cost. It also filters out very small claims that fall below it, which tend to be poor value given the administrative burden they involve.

The policyholder is the one who signs the policy and pays the premium — usually the company taking out the insurance. The insured is the person or asset covered by the policy, who may or may not be the same as the policyholder. The beneficiary is whoever receives the payout if a claim occurs. In many business insurance policies, the policyholder and the insured are the same entity; in others, such as life, accident or health insurance, they're usually different.

It's the contractual document that sets out, in detail, what your insurance covers, what it excludes, what limits it has and under what conditions the insurer responds. It's usually split into general terms — common to all clients of that product — and special terms, which reflect what's specific to your contract: your activity, your sums insured, your deductibles. Whenever you're unsure what your policy actually covers, the terms and conditions are the reference document, not the sales brochure.

It's a situation the policy expressly leaves out of cover. Every policy has exclusions: this doesn't mean the insurance was poorly arranged, it means that specific risk isn't part of what's being transferred to the insurer. It's worth knowing them before taking out the policy.

The sum insured appears in material damage insurance: commercial or office multi-risk policies, covering the building, contents, stock, machinery. These are policies where you're protecting specific assets that have their own quantifiable value. The indemnity limit appears in liability insurance: General Liability, Professional Indemnity, D&O, Cyber. These are policies where there's no asset of yours to protect, but rather exposure to claims from third parties.

It's the value declared for each item covered by the insurance: what your premises, your stock, your machinery are worth. That value is the basis on which the premium is calculated, and also the maximum the insurer will pay if the item is damaged or lost. That's why it must match the item's real value: if you undervalue it to pay a lower premium, the insurer can apply the proportional rule (average clause) if a claim occurs and pay you only part of the damage, even though the claim is covered.

It's the maximum ceiling agreed in the policy. Up to that figure, the insurer will pay for admitted claims made by third parties (customers, employees, a supplier...).

Within a policy's overall limit, certain specific coverages may have their own, lower ceiling — for example, the cost of notifying affected customers after a data breach, a loss adjuster's fees in a property damage claim, or water damage under a multi-risk policy, where it's common for the policy to set a specific sub-limit well below the sum insured for the building. That sub-limit is part of the overall limit, not added on top of it: if it's used up, there's no additional cover left for that specific guarantee, even if the policy's overall limit hasn't been fully used.

No. Some activities, collective agreements or contracts with third parties require certain types of insurance or minimum sums insured; others are voluntary, even if they may be advisable given the actual risk of your activity. It's worth reviewing case by case, because the obligations vary depending on the activity, the applicable collective agreement and the autonomous region.