Protecting against risk through insurance

What is insurance?

Insurance is a means of protection against financial risks associated with events that may cause harm. This means, for instance, that insurance helps cover all or part of the costs incurred if you have a car accident, get sick or are unable to work.

Insurance is based on the following principle: A lot of people are exposed to similar risks. Only a few, however, actually suffer harm as a consequence of those risks. So, if many people pay money into a common “pool” to protect themselves against certain risks, there will be enough money available, which can then be paid out to those people who have actually suffered harm. The basic idea behind this is that the financial consequences of damage will not have to be borne by just one person.

Under insurance schemes, policyholders, i.e. persons who have concluded a contract with an insurance company, pay into a collective pool. In most cases, the policyholder is the insured party, i.e. the person whose interests are protected by an insurance policy. In some cases, however, the policyholder can also insure other persons. This is the case, for instance, if a parent (as the policyholder) takes out private supplementary health insurance for a child under 18 (the insured person). Through insurance, the financial burden remains relatively low for policyholders. And very few of them will actually experience damage. Those who do, however, will get financial support from the collective pool – thanks to the insurance policy they have taken out with their insurance company. Those policyholders who do not experience damage also pay into the same pool, which allows for the burden of risk to be shared. Insurance companies thus play an important role in society, helping people achieve greater financial stability.

Of course, companies and organizations also need insurance to protect themselves against a range of risks and financial challenges. These include, for example, liability insurance or business interruption insurance. However, the Finanznavi website will focus on the importance of insurance for individuals to protect themselves against risk. There are different types of insurance that are relevant for individuals, such as life insurance, health insurance, home insurance or motor vehicle liability insurance. These different types and their benefits will be discussed below.

Concluding an insurance contract and receiving payout in the event of a claim

The very first step that you should take when buying insurance is to think about the risks you want to be insured against and to get advice from several different insurance companies. Subsequently, you should compare the policies offered by the different companies and choose one based on the policy conditions, i.e. the scope of cover and the cost of the premium. The insurance premium is the sum a policyholder pays for insurance cover. You can get a first overview of what is offered by different insurance companies by consulting price comparison websites.

After choosing a company and policy, you need to submit an application for insurance cover to that company. Note that such an application is binding for a period of six weeks. When filing an application, it is important to decide which risks and dangers you would like to cover and how high the amount insured should be. On their application, applicants must provide truthful information. If information is incorrect or not filled in, the insurance company may refuse to pay in the event of a claim. Applicants must also provide all material information if circumstances change during the term of the insurance contract.

Once the insurance company has received the application, it establishes the applicant’s individual risk profile. Depending on the type of insurance, different aspects will be taken into account, including above all the applicant’s age and health or the type of object insured. According to the EU Charter of Fundamental Rights, insurance companies must offer women and men (who otherwise have the same risk characteristics) the same premiums, as discrimination based on gender is prohibited. In addition, insurance companies cannot decline or terminate coverage or charge higher premiums because of a person’s physical impairment. Higher premiums due to such an impairment may only be applied if the individual’s state of health significantly increases potential risks and thus strongly impacts the risk assessment. Having assessed the individual’s risk profile, the insurance company determines the premium that has to be paid regularly by the prospective policyholder in order to be covered. If the company accepts the individual’s application for insurance cover, it then typically provides the applicant with the insurance contract, which includes the terms and conditions and the insurance policy.

One of the core components of an insurance contract is the premium. In some cases, the contract also provides for a deductible. The deductible is the amount of money policyholders have to pay out of their own pocket toward a covered claim. The general rule is that lower premiums come with higher deductibles, while higher premiums tend to have lower deductibles. If a policyholder pays a lower monthly premium to the insurance company, for instance, they will usually a have higher deductible, requiring them to pay more out-of-pocket before insurance coverage starts. If damage is considered unlikely to occur, a deductible can reduce the cost of the premium.

When taking out insurance, it is important to carefully check the policy terms and conditions, including any policy exclusions, to ensure adequate coverage in the event of damage. Policy exclusions define circumstances or events not covered by an insurance policy. Understanding the exclusions in an insurance policy is crucial to avoid unpleasant surprises when filing a claim. In addition, policyholders should carefully review the insurance contract sent to them by the insurance company. If the contract deviates from the application submitted, policyholders can object in writing within one month of receipt of the contract. If this is not done, the contract is deemed to be approved.

Kommt es in der Folge zu einem Schadensfall, muss die Versicherungsnehmerin oder der Versicherungsnehmer diesen an das Versicherungsunternehmen melden. Das Versicherungsunternehmen prüft den Fall und stellt anhand der im Versicherungsvertrag vereinbarten Bedingungen fest, ob dieser Schaden durch die Versicherung gedeckt ist. Gedeckt bedeutet in diesem Fall, dass das Versicherungsunternehmen für den Schaden eine Zahlung leistet. Wird der Versicherungsschutz bestätigt, so ermittelt das Versicherungsunternehmen im nächsten Schritt die Höhe des Schadens und zahlt folglich die Schadenssumme aus, wobei die Versicherungsnehmerin oder der Versicherungsnehmer einen allfällig vereinbarten Selbstbehalt tragen muss und das Versicherungsunternehmen maximal die Versicherungssumme auszahlt. 

The following illustration provides an overview of how insurance works:

Make sure to avoid underinsurance. It occurs when insurance is in place, but the amount insured is not sufficient to fully cover the value of the item insured. This means that, in the event of damage, not all costs incurred would be covered by the insurance company, which could result in considerable additional costs for policyholders. However, overinsurance should be avoided too. It occurs when the amount insured is higher than the actual value of the item insured. In other words, policyholders pay a higher premium than necessary.

It is therefore crucial to carefully evaluate personal circumstances and determine the amount of insurance coverage against potential risks needed to avoid being underinsured or overinsured. As personal circumstances change, policyholders should make sure to regularly review and, if necessary, adjust the amount of insurance coverage they have. To do so, they should themselves get in touch with the insurance company. 

Insurance services offered in Austria

There is a wide range of insurance services available in Austria to effectively guard against all kinds of risks. The insurance services offered can be assigned to two major segments: statutory social security (also called social insurance) and private insurance. Both segments contribute substantially to financial security and stability in Austria. The following table provides an overview:

Statutory social security

In Austria, all employees, self-employed people, unemployed people, children and pensioners are covered by statutory social security. Social security contributions are paid by self-employed people as well as employers and employees. The contributions to be paid by employees are deducted every month from their wages or salaries. The amount of the contributions corresponds to a certain percentage of their income. This means that people with higher incomes have to pay more into statutory social security than people with lower incomes. There is, however, an earnings cap, beyond which no additional social security contributions have to be paid. Put differently, social security contributions are calculated based on that part of people’s monthly income which falls below the earnings cap. Finally, social security is also subsidized by the Austrian government.

Statutory social security comprises four areas: health insurance, accident insurance, pension insurance and unemployment insurance. Providing services in all of these four areas contributes to the financial and social security of the Austrian population (see also Understanding the basics of the economy and Work and income).

Health insurance

Statutory health insurance covers all kinds of health care services, including visits to the doctor, medications and hospital stays. The majority of the Austrian population has health insurance with the Austrian health insurance fund (Österreichische Gesundheitskasse – ÖGK); public sector employees are insured with the insurance institution of public sector employees, rail and mine workers (Versicherungsanstalt öffentlich Bediensteter, Eisenbahnen und Bergbau – BVAEB); and self-employed people with the insurance fund of the self-employed (Sozialversicherung der Selbstständigen – SVS).

Accident insurance

Statutory accident insurance provides comprehensive cover for accidents which occur during work or on the way to and from work. Services covered include first aid measures, therapeutic treatments, rehabilitation costs and cash benefits for injuries or illnesses sustained during work. Most people in Austria are covered with the general accident insurance institution (Allgemeine Unfallversicherungsanstalt – AUVA); public sector employees as well as rail and mine workers have both accident insurance and health insurance with the BVAEB.

Pension insurance

Statutory pension insurance is intended to provide financial security for policyholders after they leave the workforce, i.e. in retirement (see also Planning ahead: saving for retirement).

As a rule, pension insurance is managed by the Austrian pension insurance institution (Pensionsversicherungsanstalt – PVA). If the total income a pensioner receives is below a certain reference level, they are entitled to a compensatory supplement to ensure that everyone has a minimum income in retirement.

The maximum pension amount is calculated based on the contributions paid into pension insurance and the number of contribution months. The highest possible calculation basis is the maximum contribution basis per month. Another key element for determining employees’ statutory pension entitlements is their gross income.

For more information on pension provisions, see here.

Unemployment insurance

Unemployment insurance, the fourth component of statutory social security, is managed by the Austrian Public Employment Service (Arbeitsmarktservice – AMS) and protects insured persons in the event of unemployment. If an employee becomes unemployed in Austria and meets certain conditions, this person will receive unemployment benefits for a limited period of time.

Private insurance

In addition to mandatory social insurance in Austria, there is also the option of taking out private insurance. For this type of insurance, a rough distinction can be made between personal and property insurance.

Personal insurance

Personal insurance refers to any kind of insurance that covers an individual’s life or health, such as life insurance, private health insurance or personal accident insurance.

Life insurance

Life insurance allows individuals to make long-term provisions for old age (term life insurance) and to provide financial security for family members in the event of the policyholder’s premature death (pure life insurance). Life insurance can also serve as credit protection (see also Loans and loan costs), thus minimizing financial risks.

Policies often combine aspects of term and pure life insurance. They are designed to offer financial protection to the policyholder’s family in the event of the policyholder’s death, and otherwise serve to build up wealth in the long term. The amount insured is therefore either paid out to the policyholder at the end of the policy term (in a lump sum or in lifelong periodic installments) or to the named beneficiaries when the policyholder dies while covered by the policy. It is important to bear in mind that life insurance policies provide coverage for a specific period of time. If they are terminated prematurely, i.e. before the end of the policy term, this may result in financial loss.

Private health insurance

Private health insurance offers additional benefits that go beyond statutory health insurance and is taken out on a voluntary basis. It comes with additional medical services exceeding those provided by statutory health insurance and, in most cases, with more flexibility when choosing doctors and hospitals. Private health insurance is based on individually agreed conditions, i.e. the policyholder can adapt the scope of insurance to their individual needs and expectations.

It is important to note that in Austria, private health insurance does not replace statutory health insurance, but can be taken out voluntarily in addition to the latter. In other words, statutory health insurance is the basis of health care in Austria, with private health insurance providing for additional options tailored to individuals’ needs. When considering taking out private supplementary health insurance, you should bear in mind that the premiums set by the insurance companies can vary depending on your circumstances and on the range of services provided. Potential policyholders should therefore carefully weigh up the costs, the range of services and their personal needs in order to decide whether or not this type of insurance is right for them.

Personal accident insurance

In addition to statutory accident insurance, which only covers accidents that happen at work or during the commute to or from work, individuals can also take out personal accident insurance. After all, the most serious accidents often happen during leisure and sporting activities. In these cases, all needed medical treatments are covered by statutory health insurance; however, potential financial consequences are not. Permanent damage to health, accident-related sick leave, hospital stays or similar situations often come with high financial costs for those affected. Personal accident insurance policies can be tailored to individual needs to include e.g. costs related to recovery or hospital benefits, i.e. benefits which are paid out for each day the insured individual is hospitalized due to an accident. It is, however, important to also know about the limits of personal accident insurance policies. For high-risk sports, for instance, there is often no insurance cover.

Property insurance

In addition to personal insurance, individuals can also take out other types of private insurance, such as property insurance, to protect against certain risks and increase their financial security. Property insurance includes, for instance, motor vehicle insurance or home insurance

Motor vehicle insurance

Motor vehicle insurance in Austria consists of two main components: compulsory motor vehicle liability insurance and voluntary comprehensive insurance.

Motor vehicle liability insurance is mandatory for vehicle owners. It covers the expenses linked to damages and injuries to others (including passengers in your vehicle) when you are found at fault in an accident. However, it does not cover damage to your own vehicle or injuries you sustain.

In addition to motor vehicle liability insurance, you can also choose to take out comprehensive insurance, which includes coverage of damages to your own vehicle. Partially comprehensive insurance covers damage caused by e.g. theft, fire or storms, while fully comprehensive insurance basically covers all damage regardless of fault. Policyholders can arrange with their insurance provider which risks should be covered. It should be considered that most comprehensive insurance policies come with a deductible, i.e. with a certain amount that must be paid by the policyholders themselves.

Home insurance

Home insurance usually consists of property and personal liability insurance. It covers all the home contents, such as the furnishings in your house or apartment, appliances and other personal belongings inside your insured home. More specifically, this includes all pieces of furniture, pictures, household items, electronic devices, clothing and books. Home insurance not only protects the property of the policyholder, but also that of the policyholder’s partner, children and relatives living in the same household. As a rule, home insurance also includes personal liability insurance. This type of insurance provides protection against claims resulting from injuries or damage to other people or property that you, as a private individual, are exposed to. It covers, for instance, the cost of damages resulting from road accidents involving pedestrians or cyclists, or the cost of injuries sustained by others in the event of accidents in or out of your home.

Other property insurance

In addition to the types of insurance mentioned above, there are many other insurance products available in Austria. By taking out legal expenses insurance, policyholders can protect themselves against the risk of incurring legal expenses. By taking out homeowners insurance, they can insure their house or apartment against different risks, such as fire, water or storm damage. Travel insurance helps individuals cover financial losses associated with unforeseen events when traveling, including illness, injury, accidents or loss of luggage. In the agricultural sector, individuals often take out hail damage insurance to protect against extreme weather events that have become more frequent with climate change. Finally, there is also fire damage insurance, which is often included in home insurance or homeowners insurance.

Determining your insurance needs

In Austria, some types of insurance are required by law, such as statutory social security (described above), which includes health, accident, pension and unemployment insurance. In addition, motor vehicle liability insurance is mandatory for vehicle owners, providing financial protection against damages or injuries caused by the insured vehicle to other people, vehicles or property. Even though home insurance, which usually includes property and personal liability insurance, is not compulsory, it is still recommended in order to protect against claims for damages from other people in both professional and private contexts.

When deciding on which voluntary insurance policies to take out, it can be helpful to think about your personal life situation. Make sure to always guard against risks that could turn into existential threats (see also Dealing with risk). Carefully choose the type of coverage you need yourself, taking into account the Austrian insurance market as well as your individual circumstances. 

When selecting insurance products, the amount insured should correspond to the risks that will be covered under the insurance policy. Policyholders should disclose all potential risks to the insurance company (e.g. health risks), as incorrect or incomplete information will generally result in claims getting denied or compensation being lower.

Moreover, policyholders should make sure to comply with the duties (obligations) specified in the insurance contract (requiring policyholders to e.g. not store flammable materials, to install alarm systems, turn off the water supply before a long absence or report any road traffic accident to the police). If policyholders fail to comply with their duties, they risk getting no support from the insurance company in the event of a claim.

Further exclusions from coverage may also be listed in the policy terms (concerning e.g. gross negligence or the use of untested or unauthorized machinery). This means, for instance, that if machines are used that have not been tested or approved, the insurance company will not pay out on a claim.