Insurance provides individuals and companies protection against large financial losses. Insurance provides individuals and companies protection against large financial losses due to damage or loss of property. In exchange for premium payments made, individuals and companies are guaranteed compensation or reimbursement in the terms of the insurance policy. Insurance has become part of the life of modern society. Life insurance and car insurance are the two most common forms of insurance. Health insurance and compensation for workers are also other types of general insurance. While insurance has become part of the lives of most people, not all understand how it works. How insurance works, there are always risks in life such as fire, theft or earthquakes. Many people expect to avoid financial losses by getting a replacement for lost or damaged private property. Insurance is a way to protect personal finances from undue burdens. Insurance is a form of risk management where risk is transferred to an insurance company in exchange for premium payments.
When purchasing insurance, a person gets an insurance policy that is a legally binding contract. This policy describes in detail all rights, responsibilities and obligations of the insured (the customer) and the insurance company. When a person suffers a loss covered by the policy, he or she can make a claim. Claim is a complete report of what is missing or damaged and its value. The amount of money to be replaced (sum insured) is based on the amounts covered in the policy. When an individual or company purchases an insurance policy, all the money from the premium is then combined into what is called an insurance pool. Insurance companies use statistics to predict how many percent of insured people or businesses will actually suffer losses and make claims. Statistics also help determine the amount of premiums. Other factors such as credit score and prior claims are also considered. Since most of the insured do not suffer a loss or only a small loss, the insurer gets the benefit of allowing them to continue operating and paying big claims occasionally.