How does insurance work in simple terms?
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.
An entity that provides insurance is known as an insurer, an insurance company, an insurance carrier, or an underwriter. A person or entity who buys insurance is known as a policyholder, while a person or entity covered under the policy is called an insured. Policyholder and insured are often used but are not necessarily synonyms, as coverage can sometimes extend to additional insureds who did not buy the insurance. The insurance transaction involves the policyholder assuming a guaranteed, known, and relatively small loss in the form of payment to the insurer (a premium) in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms. Furthermore, it usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.
The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured, or their designated beneficiary or assignee. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss that is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. A mandatory out-of-pocket expense required by an insurance policy before an insurer will pay a claim is called a deductible (or if required by a health insurance policy, a copayment). The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry.
Disclaimer: This article first appeared on Wikipedia.