Insurance is a mechanism for protecting people against losses, damage, injuries, and costs associated with unforeseen events. Insurance is generally defined as a method of spreading risk of loss through a pooling mechanism. Insurance provides protection against a predictable event that arises unexpectedly. Those who are likely to suffer from such loss buy insurance by paying premiums, which are used to pay losses that may arise.
Insured losses may arise through natural events, such earthquakes, floods, hurricanes, windstorms, and other natural causes. They may also arise from manmade events as were experienced on September 11, 2001. Following that tragic event, insurance companies provided billions of dollars in coverage from the losses that arose. Additionally, through the sale of health and life insurance products and services, insurers provide coverage for human loss due to sickness, injury and death.
Both businesses and individuals buy insurance to protect themselves against the uncertainties that cause financial as well as personal loss. The smooth functioning of our families, businesses, corporations—of society itself—cannot be effectively sustained without insurance protection against losses that may arise unexpectedly at some point in our lives.
In the event of losses covered by an insurance policy, the insurance carrier will pay for losses in accordance with the terms of the policy. A policy specifically describes the losses that are covered, certain exclusions for which coverage will not be provided, and the limits of coverage. For example, if the policy limit is $100,000 on a homeowner’s policy and the house is destroyed by fire, the insurance company’s maximum level of coverage will be $100,000. It is very important to purchase the right amount of coverage to protect against potential losses.