Insurance is a contract, represented by a policy, where a person or entity receives financial protection or reimbursement against losses from an insurance company. It works by spreading risk among many individuals.
Key Characteristics / Core Concepts
- Risk Transfer: Insurance shifts the financial burden of potential losses from the individual to the insurer.
- Pooling of Risks: Insurance companies pool premiums from many individuals to pay for the losses of a few.
- Premium Payments: Policyholders make regular payments (premiums) to maintain coverage.
- Claims Process: When a covered event occurs, the insured files a claim to receive compensation.
- Policy Terms and Conditions: Insurance policies specify the covered events, exclusions, and limitations.
How It Works / Its Function
Insurance works by collecting premiums from many policyholders. These premiums form a pool of funds used to compensate individuals who experience covered losses. Actuaries (risk assessment specialists) use statistical models to predict the likelihood and cost of claims, allowing insurers to set appropriate premium rates.
Examples
- Health insurance covers medical expenses.
- Auto insurance covers damages and injuries related to car accidents.
- Homeowners insurance protects against property damage and liability.
Why is it Important? / Significance
Insurance provides financial security against unpredictable events that could cause significant financial hardship. It protects individuals and businesses from potentially devastating losses, allowing them to recover and rebuild their lives or businesses.
Insurance also plays a crucial role in economic stability by reducing the overall impact of major events on society.
Related Concepts
- Risk Management
- Actuarial Science
- Claims Adjustment