How Insurance Works

Insurers use a pool of many premiums to pay for the home, auto and business losses of Canadians unfortunate enough to experience a loss. You are covered for losses outlined in your contract only, not for predictable events.

4 Steps in the Insurance Process

  1. Your insurance company estimates an annual cost or premium to accept the risk of covering your home, business or car. Premiums are based on how much money insurance companies think they will need to pay for the coming year's claims.
  2. On a monthly or annual basis, you pay a premium to your insurer for assuming this risk on your behalf.
  3. Your insurance company puts all premiums into one large pool. Your insurance is an annual contract, so the pool operates for only one year at a time.
  4. Your insurance company uses the pool of many premiums to pay for the losses of the few who make claims in that year.

What Happens After a Major Loss?

Insurance companies manage the pool of premiums to ensure there is sufficient funding available in the event of a large claims situation.

An example of this could be multiple claims after a natural disaster such as the massive 2013 flooding in Alberta for which claims are still being estimated and paid. The 1998 ice storm that hit parts of Ontario, Quebec and New Brunswick which resulted in approximately 700,000 claims for damage totalling $1.4 billion.

What Will Be Covered?

Insurance pays for only the insured losses described in your contract. It is very important that you read your policy and/or talk with your insurance representative about what you are covered for and what you're not. Insurance will not pay for every problem that you may encounter, nor is it meant to cover regular home maintenance. Insurance is generally intended – and priced accordingly – to help you cope with the financial consequences of unpredictable events that are sudden and accidental. If, for example, you live on a floodplain by a river, flooding of your property in the spring is not sudden or accidental; it is inevitable and, therefore, potentially uninsurable.Learn more about insurance options for your home, vehicle or business.