What is insurance?

 

Generally, it is a risk mitigation relationship between an insured party and an insurer.

The insured party is the individual who is protected. They are mitigating the risk of suffering, some sort of costs, damages, liability, etcetera, based on a specific type of occurrence. An insurer is the individual willing to or accepting responsibility for indemnifying or holding the insured harmless in the event that a certain occurrence occurs.

So insurance comes back in any number of context or situations but there are a couple of key concepts that you need to understand there. To start with, the concept of risk mitigation and the purpose of insurance in that way, and then the protected individual, the insured and then the individual doing the protecting that is the individual mitigating the risk for the insured being the insurer.

Other than that, you need to understand the value that is exchange there. The insurer will pay premiums to the insurer, that is any form of value to the insurer in exchange for that insure promising to indemnify or again, hold harmless or cover any costs, damages, etcetera associated with a specific type of occurrence. And this is memorialized in an insurance contractor an insurance policy.

Now, the key characteristics of that insurance contract or policy are the potential risks that are covered and the limits of coverage. So the policy will identify a specific type of risk. It can be the occurrence of any number of types of events but it will specifically identify a range of coverage of specific contingencies, things that could arise at some point in the future. After that, the extent to which it will cover, indemnify, or pay for any resulting damages suffered by the insured in the event that that occurrence comes about.

Now, just to give you some examples of some occurrences, it could be that you wreck your vehicle. It could be that you suffer some kind of health ailment. So the policy provides coverage for any payments or costs incurred for the treatment of that. It could be a policy in the event you commit a professional malpractice. It could be a policy that prevents damage to property. These are contingent events that might arise in the future. If they did, it would cause a risk of harm so the insurer and the insured enter this relationship.

In the event this comes about, the insurer will again pay or hold the insurer harmless up to a certain amount, the limits of coverage. As long as you have these key concepts then this is the basis for what is insurance and the insurance relationship.