What Is Insurance?

What exactly is insurance?

It sounds like a very basic concept, but it is important to know what insurance is, in order to work out why insurance is so essential to modern-day activities, and why there i such a wide range of different insurance type products out there in the marketplace.

So, typing 'define:insurance' into Google results in this definition coming up: "A practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium".

Interestingly, the word that isn't mentioned here is the key word in the whole process as to why people take out insurance - and that word is RISK. Insurance is a way of risk management, with financial compensation for the possibility of an uncertain loss based on the risk that is taken.

So, when you buy a house, you fill it with contents, which are of course worth money. There is a risk that you are going to get broken into and that the contents of the house, or some of it, will be stolen. This will cost you money. You don't really know exactly what that risk is or how likely it is to happen, but you know that there is a CHANCE that it will happen, or a PROBABILITY: this provides RISK.

In order to mitigate your exposure to that risk, you can take out contents insurance. Depending on the country you live in, this might be mandatory or optional (buildings insurance - that on the bricks and mortar - is usually mandatory).

Then a complicated trade-off comes into effect: you pay a certain amount on a regular basis to be insured - by an INSURER - which, if the worst happens, will pay out a certain sum of money to you, depending on various complicated factors. This is the key idea of insurance.

So it can be seen why insurance is so important, as without it you are completely exposed to whatever risk it is you haven't mitigated against. Of course, insurance is interesting as in you never actually want to have to make a claim, but it is something that most people calculate they can't afford to be without in some cases, whilst in others they decide they are comfortable with the risk.

The articles on this website look at a range of different insurance products, and other pieces of relevant information, with the overall goal of explaining what insurance is and what types of risk can be insured against.

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