Shared Risk
There are many different types of insurance meant to protect consumers from financial ruin. There is insurance to cover cars, houses and other tangible, valuable personal assets. Insurance is available to cover life and health, teeth, disability and consumers at risk of being sued. Insurance funding is developed by pooling the resources of a wide range of people so that those who need benefits have a source of funding. Insurance companies that put together these pools assume the risks. Insurance companies mitigate their losses and earn profits because the majority of people in their specific pools do not file claims or use the coverage.
Process
An insurance policy is a legal contract purchased by consumers, report analysts at the Insurance Institute of Michigan. The contract spells out the conditions under which the insurance company will pay a claim. The consumer agrees to pay the premiums on a monthly, quarterly or annual basis to keep the contract in force. Insurance policies are sold by agents who either work directly for an insurer or as an independent agent representing a variety of different companies. Insurance agents earn commissions on the policies that they sell.
Purpose
The purpose of insurance is to protect consumers from paying insurmountable bills should an accident or unforeseeable event take place. Insurance can protect consumers from losses incurred by any sort of unexpected financial burden. Medical insurance pays for doctors and hospitals in case of illness or injury. Life insurance typically is used to cover funeral expenses and to provide survivors with funds. Property insurance is used to cover loss from theft, fire and other losses. Car insurance covers damages to an automobile as well as injuries to passengers involved in an accident. Businesses utilize insurance to cover workers hurt on the job as well as liability for accidents incurred by customers.
Operations
Insurance companies collect premiums and then pool the funds. They use part of the income to cover their expenses, including personnel to sell and manage the policies and capital expenses for buildings and office supplies. Insurance companies invest the balance of the pool in stocks, bonds, real estate and other investment vehicles to grow the available pool of funds and protect the policyholders. Profits are realized through these investments as well. Nonprofit insurance company investments are meant to keep the premiums lower for consumers. Claims are submitted to insurance companies for payment either directly to providers or to the policyholders. The insurance company pays the claims when they meet all the requirements of the original contract.
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