Insurance is a form of risk management that is primarily used to protect against the risk of a devastating loss. An insurance company collects insurance payments, or premiums, from customers to pool their risks. This makes insurance payments more affordable for those who buy insurance, or insureds.
Purchasing insurance involves assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate in the event of a loss.
The insurer’s promise to put the insured back in the same situation they were in before the unexpected loss is called indemnification, and is the backbone of insurance. This type of contract is called an insurance policy, and it details the conditions and circumstances under which the insured will be financially compensated.
– Information compiled by Anthony Ahlegian