Insurance

Insurance is one of the most interesting and important transactions made by individuals and business firms.

Throughout human history, unexpected economic losses have occurred. Such losses would occur even if the insurance transaction had never been developed. Through the operation of an insurance system, however, combined losses can be predicted.The predictability of losses is basic to an insurance system's operations. Because insurance allows a group's (but not an individuals) losses to be predicted accurately, it allows the cost of losses to be financed and redistributed in advance.

An insurance system redistributes the cost of losses by collecting a premium pay ment from every participant (insured) in the system. In exchange for the premium payment, the insurer promises to pay the insured's claims in the event of a covered loss. Generally, only a small percentage of insureds suffer losses. Thus, an insurance system redistributes the costs of losses from the unfortunate few members experiencing them to all the members of the insurance ' system who pay premiums.

Definition:. Insurance is a financial arrangement that redistributes the costs of unexpected losses. Insurance involves the transfer of potential losses to an insurance pool.’ The pool combines all the potential losses and then transfers the cost of the predicted losses back to those exposed. Thus, insurance involves the transfer of loss exposures to an insurance pool and the redistribution of losses among the members of the pool. Certainty of financial payment from a pool with adequate resources and accurate predictability of losses are the hallmarks of the insurance transaction.

Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses. We call the party agreeing to pay for the losses the insurer. We call the party whose loss causes the insurer to make a claims payment the insured. We call the payment the insurer receives a premium. We call the insurance contract a policy. We call the insured's possibility of loss the insured's exposure to loss. We say the insured transfers the exposure to loss to the insurer by purchasing an insurance policy.