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Insurance Articles |
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Insurance Articles |
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What is insurance?Insurance is the business of providing protection against financial aspects of risk, such as those to property, life and health. The insured makes payments called "premiums" to an insurer, and in return is able to claim a payment from the insurer if the insured suffers some kind of loss. For example, a ship-owner could insure a ship, and receive payment if the ship is damaged or destroyed. In the case of a pension the terms 'risk' and 'loss' are somewhat inappropriate, they concern the chances of living at future times and the need for money because of still being alive.
Insurance reduces risk by pooling together a large number of risks. For example, many individual people purchase health insurance policies. They each pay a small monthly or yearly premium to the insurance company, and then when a policy holder gets ill, the insurance company will provide money to cover medical treatment. For some individuals receiving insurance benefits, this may total far more money than they have ever paid into the insurance policy themselves. Others may never make a claim. When averaged out over all of the people buying policies it evens out. Insurance companies set their premiums based on their calculated payouts, aiming to take in more money than they pay out in the long run to cover expenses and, in the case of for-profit insurance companies, to make a profit.
Insurance companies also earn investment profits, because they have the use of the premium money from the time they receive it until the time they need it to pay claims. This money is referred to as "float". When the investments of float are successful, they may earn large profits, even if every penny received as premiums is eventually paid out in claims. An insurance contract or "policy" will set out in detail the exact circumstances in which a benefit payment will be made and the amount of the premiums.
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