Insurance operates through a contractual agreement between an insurer (the insurance company) and a policyholder (the person buying insurance). Here’s how it works:
- Policy Purchase:
- The policyholder selects the type of insurance they need (e.g., auto, health, life).
- They pay a premium (regular payment) to the insurer.
- Risk Pooling:
- Many policyholders contribute premiums.
- The insurer pools these funds to create a risk pool.
- Risk Assessment:
- The insurer evaluates the policyholder’s risk profile (e.g., age, health, driving history).
- Based on this assessment, they determine the premium.
- Coverage Period:
- The policy specifies the coverage period (e.g., one year).
- During this time, the policyholder is protected against specific risks.
- Claims Process:
- If an insured event occurs (e.g., car accident, illness), the policyholder files a claim.
- The insurer investigates the claim to verify its validity.
- Claim Settlement:
- If the claim is valid, the insurer pays the policyholder or a third party (e.g., medical provider).
- The amount paid depends on the policy’s terms, deductible, and policy limit.
- Risk Transfer:
- Insurance transfers financial risk from the policyholder to the insurer.
- The policyholder pays a small premium to avoid large financial losses.
- Profit and Loss:
- Insurers aim to collect more in premiums than they pay out in claims.
- They invest premiums to generate income.
- Types of Insurance:
- Life Insurance: Pays a benefit to beneficiaries upon the policyholder’s death.
- Health Insurance: Covers medical expenses.
- Property Insurance: Protects against property damage.
- Liability Insurance: Covers legal costs if the policyholder is sued.
- Renewal or Termination:
- Policies can be renewed or terminated.
- If the policyholder doesn’t renew, coverage ends.
Remember, insurance provides financial security and peace of mind, allowing individuals and businesses to manage risks effectively.
