Insurance

Industry Overview

In the simplest terms, insurance is the transfer of risk, from the insured to the insurer, in exchange for a premium. In other words, insurance equals peace of mind. In exchange for a payment or payments to the insurer, the insured knows that, should some unpredictable ill befall him or his property, the insurer will be responsible for resolving some or all of the problem (depending on the terms of the insurance agreement). For example, the purchaser of health insurance knows that her health insurance plan will be there to pay for her treatment should she get sick; that her property and auto insurance carriers will be there to pay for repairs should her house be damaged by fire or replacement should her car be stolen; and that her life insurance carrier will provide her family with the money it needs to live on should she die unexpectedly.

While what happens to the individual insurance customer or to his property is unpredictable—you never know when someone’s going to get sick, or get into a car accident, after all—the insurer stakes its viability on its ability to predict losses that will be incurred on a macro level. Typically an insurer covers many policyholders for a given kind of loss, and so is able to predict what its costs to cover those policyholders' losses will be over time. Insurance companies make a profit by charging more in premiums than they predict they will have to pay out over time for losses.

Insurance is big, big business. Some 1,800 U.S. insurance companies offer personal and commercial product lines including basic health/life and property/casualty protection as well as a long list of other coverage ranging from automobiles to mortgages to insurance for insurance companies (known as reinsurance). These products protect customers from losses resulting from illegal actions, medical needs, theft, earthquakes and hurricanes, and a variety of other causes.

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