Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Ideally, insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a reasonable fee. In practice, however, the business of providing insurance protection often ends up in litigation between the parties involved, while the responsibilities of regulating insurance markets routinely winds up as a political football for government agencies. In general, it is contract in which one party agrees to pay for another party's financial loss resulting from a specified event.

Principles of Insurance

The loss must occur by chance: For life insurance, death is certain but timing is not.

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The rate of loss must be predictable: In order to set prices (or rates) insurers must be able to estimate them or they would be bankrupt.

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The loss must be definite: Insurers need to know how much it would be required to pay when the insured event occurs.

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The loss must be significant: No one rationally buys insurance when the administrative costs overwhelms the transaction.

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The loss must not be catastrophic: If the insurer is insolvent, it does not do the insured any good.

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