Insurance is a contract of indemnity. You pay a premium, and if a covered loss happens the insurer puts you back in roughly the financial position you were in before. The aim is to make you whole, not to leave you better off than before the loss.
What you are buying
A policy is a promise set out in writing. It names what is covered, what is excluded, the most the insurer will pay, the excess you pay first, and the circumstances in which a claim will and will not be paid. The small print is part of the contract, not an afterthought, so read our guide to how to read an insurance policy before you buy.
Risk, pooled and priced
Insurers pool thousands of similar risks. Your premium helps fund the claims of everyone in the pool, and the price you pay reflects how likely and how costly a claim from you is expected to be. Your price moves with your circumstances, your claims history and wider market claims costs. The companion piece on how insurers calculate risk and price cover explains the mechanics.
The lifecycle of a policy
- Quote and application. You describe the risk. The insurer decides whether to offer cover and at what price.
- Cover starts. You pay the premium and the contract begins.
- During the term. You must tell the truth and meet any policy conditions.
- A loss occurs. You notify the insurer and make a claim.
- Settlement. The insurer assesses the claim and pays, repairs or declines.
The last two steps are covered in our guides to making a claim and how settlements work.
Understanding the bargain helps you buy the right cover, avoid surprises at claim time, and hold insurers to the standards the regulator sets. If a claim is mishandled, the complaints process and the Financial Ombudsman exist to put it right. The editorial standards explain how we source and check what we publish.
This is a foundational explainer. Specific products, home, motor, travel, landlord and business, are covered in their own hubs. Always check your own policy wording, which overrides any general description here.