What is insurance and what does it do?

Consumers enter into contracts of insurance to manage the risk that their house, car, household goods or even their health could be damaged or destroyed. Indeed, insurance allows consumers to protect themselves against many of the risks inherent in their daily lives. Consumers expect that when events occur that require them to claim on their insurance policies they will be able to do so expeditiously. In recent times, however, this has not always been the case. As with investment schemes, insurance companies have failed, leaving people not only unable to claim on their policies, but unable to obtain insurance at all. Even without market failure, it is possible that in some circumstances claims will be denied as consumers have not understood the extent of cover they have contracted for or their obligations under the contract. This chapter provides an overview of the Australian insurance industry and its regulation, looking at insurance-specific legislation and codes of practice. The recent insurance crisis is also analysed to the extent that it illustrates overall regulatory issues.

Insurance is concerned with shifting and spreading the risk of loss. Indeed, it could be said that ‘[t]he aim of insurance is to shift the risk from one person (the insured) to another (the insurers)’. Insurers are commonly insurance companies or firms of underwriters.