It is the
transfer of risk from someone to another:
- The customer want to pay a certain amount of money to transfer the risk (the feel of not being safe) to someone else
- The customer can't afford to handle the risk if it happened
So what do
the insurance companies do?
- They prepare legal agreements to transfer the risk form the customers to them
- They estimate the probability of that risk happening
- They estimate the cost to cover that risk
- The amount of money they need, and then crunch some numbers to figure out how much one customer has to pay them
Notice that;
the risk estimate has a subjective part:
Like if you
are a really bad driver and want to insure your car, they will see your driving
history and you will pay a lot to insure that
Here, both
parts benefit form that: The insurance company gets to keep the money if
nothing happens, and the insured parts get covered
Typically,
the best scenario here is to get maximum amount of premiums possible, and pay
for minimum amount of claims
At last; two
things:
- Don't ever ever go for a bad risk, at least without getting prepared
- You must keep "your promise" to actually deal with the risk if it happened, or else you would be a FRAUD
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