Insurance, in law
and economics, is a form of risk management primarily used to hedge
against the risk of
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a contingent loss.
Insurance is defined as the equitable transfer of the risk of a potential
loss, from one entity to another, in exchange for a premium. Insurer, in
economics, is the company that sells the insurance. Insurance rate is a
factor used to determine the amount, called the premium, to be charged for
a certain amount of insurance coverage. Risk management, the practice of
appraising and controlling risk, has evolved as a discrete field of study
and practice.
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Indemnification
An entity seeking to transfer risk (an individual, corporation, or
association of any type, etc.) becomes the 'insured' party once risk is
assumed by an 'insurer', the insuring party, by means of a contract,
called an insurance 'policy'. Generally, an insurance contract includes,
at a minimum, the following elements: the parties (the insurer, the
insured, the beneficiaries), the premium, the period of coverage, the
particular loss event covered, the amount of coverage (i.e., the amount to
be paid to the insured or beneficiary in the event of a loss), and
exclusions (events not covered). An insured is thus said to be
"indemnified" against the loss events covered in the policy.
When insured parties experience a loss for a specified peril, the coverage
entitles the policyholder to make a 'claim' against the insurer for the
covered amount of loss as specified by the policy. The fee paid by the
insured to the insurer for assuming the risk is called the 'premium'.
Insurance premiums from many insureds are used to fund accounts reserved
for later payment of claims—in theory for a relatively few claimants—and
for overhead costs. So long as an insurer maintains adequate funds set
aside for anticipated losses (i.e., reserves), the remaining margin is an
insurer's profit. |
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