Insurance is a service that provides a benefit upon the occurrence of a loss. The benefit, usually financial, can be addressed to an individual, association or company, in exchange for the collection of a fee or premium.
The insurance contract is based on the essential rights and obligations of each party. It establishes the conditions under which the service is rendered. And typically mentions the premium which the assured undertakes to pay, and the provision that the insurer will compensate in the event of a loss.
The insured or beneficiary must not have any interest in the occurrence of losses or the claim could be deemed fraudulent.
This substantial subsidy to hedge against risks through insurance is made possible in the first place by the modern economy’s essential structure of valuable assets and also the development of private values.
Which in turn makes possible a large number of effective protection frameworks in the collective. Thus the development of modern industrial nations is inextricably linked to the development of insurance.
The mechanism of insurance does not alter the probability of occurrence of risk or its consequences. It merely transfers the risk of an economic agent.
The insurance company shall, through the subscription of many similar risks perform the pooling of risks among policyholders. This statistical control of risk allows the insurer to reduce the volatility of its total risk. The law of averages allows the insurer to know the approximate amount of future claims.
In principle, this effect can always be achieved via a jointly organized collective risk adjustment. But these are in practice pertain to the required number of risks generally on a purely communal basis. The insurer provides cover for higher losses on equity, which is constantly under risk.
If the damage is less than the damages and other expenses of the insurer, the rest remains as earnings to pay for the position of this high-risk equity. Often the profits are not distributed but remain with the insurer, the equity base thus increases the security of the insurer. At the same time increases the retention of profits.
Insurance works according to the principle of probability of risks on economic security contributions. They can either be operated in accordance with the principle of association as a mutual insurance or under the principle of speculation as acquisition of insurance. However, the mutual insurance companies today hardly operate a pure collective risk compensation.
It is understandable that if a risk is realized simultaneously for a large number of insured (weather, natural disaster, etc). Money payable by the insurer can greatly reduce their future earnings prospects, or even exceed its financial capabilities. The general technique of insurance is precisely to protect the insurer is in such cases. The insurer may increase the amount of future premiums to replenish the capital devoted to compensation.