“How is it possible to pay a small amount for insurance and then receive compensation many times larger?” “Will I get my money back if I didn’t receive any payout on my policy?” – these are common questions people ask.

The answer lies in the very nature of insurance and the principles it is built upon – risk transfer and risk sharing.

When you purchase insurance, you pay a specific amount (called a premium), and if an adverse event occurs that is covered under your policy, the insurer pays out compensation to fully or partially cover your losses. In other words, you are transferring the financial risk of that event to the insurer.

However, for this to work, the risk must also be shared – insurance operates on the principle of solidarity. The insurer collects premiums in advance from many individuals who are exposed to similar types of risk. These pooled funds are then used to pay out claims to those policyholders for whom the insured risk has materialized through the occurrence of an insured event. 

Insurers can afford to charge small premiums while covering potentially large losses because they operate with vast amounts of data and experience. This allows them to assess the likelihood of a given risk occurring and to predict, in general terms, the number and size of claims for a group of people exposed to the same risk.

Insurance activities and products are highly diverse, simply because they are tied to every aspect of human life and activity, as well as the functioning of economies and societies. There are also different approaches to classifying them.

 

General insurance and life insurance

The general insurance covers the risks of destruction or damage to movable or immovable property. This includes auto insurance, such as the popular “Casco” policy, property insurance like “Home Contents,” agricultural insurance, and more. Other types include transport, marine and aviation insurance, engineering insurance, financial risk insurance, accident, travel, and health insurance. Liability insurance also falls under this category, covering material or non-material damages caused by the insured to third parties.

The life insurance, on the other hand, deals with risks related to the life, health, or bodily integrity of the insured or another person (i.e., the policyholder and the insured can be different people). The spectrum of life insurance solutions is broad. Still, two main types of life insurance can be identified – term (risk) insurance and mixed insurance which combines risk coverage with an investment/savings element. Health insurance provides access to a range of medical services and products.

 

Mandatory Insurance and Voluntary Insurance

Depending on whether there is a legal obligation to be insured, insurance policies are classified as mandatory or voluntary. A core principle in insurance is voluntariness, meaning policies are typically taken out at the discretion of consumers – except in certain cases explicitly defined by law, where insurance is compulsory.

For economic and social reasons, legislation in Bulgaria has introduced requirements for mandatory insurance coverage. There are about 70 types of compulsory insurance policies stipulated by law, primarily related to liability and accident. The most well-known is the mandatory motor third party liability insurance, which ensures compensation to third parties – the innocent victims in traffic accidents (both material and non-material damages).

Other mandatory policies include “Passenger Accident Insurance” for public transport users and “Occupational Accident Insurance” for workers and employees performing activities with a risk of occupational injuries.

“Professional Liability Insurance” is mandatory for individuals practicing certain professions or offering specific services, such as lawyers, notaries, doctors and medical staff, certified accountants, tour operators, designers, architects, engineers, independent construction supervisors, insurance brokers, airline ticket agents, and others. This insurance covers damages the insured may cause to third parties as a result of negligent performance of their professional duties.

Property insurance is not legally required but may be contractually mandated – for example, when securing a mortgage loan, insurance on the mortgaged property is typically required. The same goes for life insurance. It is mandatory by law to insure public property – both state and municipal.

 

Individual, Group (Collective), and Corporate Insurance

The individual insurance covers the personal or family needs of the insured persons. In group (collective) insurance, the contract can cover the life, health, or working capacity of a group of insured individuals. The corporate insurance provides protection for company property and other interests of legal entities and sole traders.