Insurance

Editor: Matias

Text Words marked with a * will be explained in the glossary

Function

The insurance sector is composed of firms offering risk management* in the form of contracts.

They provide protection against uncertainty and future risks by giving individuals/entities the opportunity to enter into contracts to share the risk of unwanted outcomes.

How does it work?

In any insurance contract, one party (the insurer) guarantees payment, in case an undesired future event happens, to the other party (the policyholder).

In the meantime, the policyholder pays a regular smaller premium* to the insurer in exchange for that potential future protection (if the event materializes).

Business model:

These firms aim to carefully assess premiums to generate income exceeding claim payouts.

The sector is rooted in financial risk management: policies are written and analyzed considering multiple risks and assessing the statistical probabilities of certain outcomes happening.

Insurance premiums/benefits are reevaluated based on variances between statistical data and projections.

Advantage:

Insurance firms are allowed to use customers’ money to fully invest and generate returns for themselves as long as they don’t need to pay.

This is called “float”:

When one party pays money to another without expecting repayment unless a specific event where to happen (accident/catastrophe/damage...).

Visually explained:

Categories:

3 types of insurance firms:

Most common types of personal insurance: auto, health, homeowners, life, etc.

Glossary:

Risk management: Process of identifying, assessing, and controlling financial, strategic and other risks to capital/earnings.

Premium: In insurance, its the amount of money an individual/entity pays for an insurance policy

Source: Investopedia