Now a lot of foreign words are increasingly included in our vocabulary. One of them is a franchise. Only a few years ago, only “advanced” businessmen worked with this term, but now any entrepreneur who wants to improve their well-being is faced with it.
To the question "What is a franchise?" we can answer that this is a term of economic science, which can mean:
- part of the losses of the person insuring property;
- the right to franchising;
- Creation of an enterprise based on franchising.
In the first definition, a deductible means a portion of a person’s loss in property insurance that is not refundable by the insurance company under the terms of the contract.
In the second definition, the term explains the right to create an enterprise that sells products of a partner.
The third value is the creation of an enterprise based on franchising. For example, the shops of well-known brands of cosmetics and clothes work like this.
So what is a franchise? In simple words, this is a kind of leasing a trademark or product, as well as using the existing business system in its activities. The founder of franchising is McDonald's. Indeed, thanks to the wide sale of their franchises around the world, the McDonald brothers with fast food items have become quite popular.
A franchise - what it is, almost everyone understands when contacting an insurance company. The insurer explains the franchise as the release of his company from the obligation to indemnify for losses not exceeding the established amount. In this case, the conditional and unconditional value is different.
What is a franchise in insurance, you can very clearly show an example. So, a person takes out insurance for a new car. The established amount is 5 thousand dollars. Then, when choosing insurance under the “hijack + damage” system, the insurer will need to pay 400 dollars. The insurance company offers to do this with a franchise of $ 100, and a person will pay for insurance not $ 400, but 380. At the time of insurance, this option is certainly profitable. But when an insured event occurs, there are some nuances.
For example, small scratches appeared on the car or a headlight was broken. Since the amount of damage does not exceed the cost of the franchise ($ 100), the repair is carried out by the owner at his own expense. With minor breakdowns, it may be easier to have a certain deductible. So, a person calls in to a car service center, where in a short period of time they eliminate all minor malfunctions. Otherwise, he would have had to exchange the relevant securities with the insurance company for a long time, until they compensate the damage in the amount of the agreed amount.
If the loss amounted to $ 120, then the insurance company will reimburse only 20 of them. But, taking into account the amount of necessary securities to receive $ 100, many car owners do not contact the insurer because of such a small amount and take all the costs on themselves.
If more serious damage occurs, the situation looks a little different. For a repaired car, a car service bills an insurance company, and that, in turn, pays an invoice for $ 100 less. This missing money must be paid by the car owner. In this situation, only the insurance company remains the winner.
The franchise described above is characterized as unconditional. This type is the most common and it is it that insurers offer.
What is a franchise, shows a conditional method of accrual. So, if losses on an insured event did not exceed its value, then the car owner incurs expenses. If the amount of damage is more than the deductible (even if insignificantly), then the insurance company indemnifies the damage in full. This type is more beneficial for the insured, but insurers offer it extremely rarely.
Thus, in this article we have given the definition of “what is a franchise”, listed its varieties and methods of application.