Insurance is the business of providing
protection against financial aspects of risk, such as those to property, life
and health. The insured makes payments called "premiums" to an insurer,
and in return is able to claim a payment from the insurer if the insured suffers
some kind of loss. For example, a shipowner could insure a ship, and receive
payment if the ship is damaged or destroyed. In the case of a pension the terms
'risk' and 'loss' are somewhat inappropriate, they concern the chances of living
at future times and the need for money because of still being alive.
Learn more about Types
of Life Insurance, Types of Health Insurance, Health Insurance
Insurance reduces risk by pooling together a large number
of risks. For example, many individual people purchase Health Insurance policies.
They each pay a small monthly or yearly premium to the insurance company, and
then when a policy holder gets ill, the insurance company will provide money
to cover medical treatment. For some individuals receiving insurance benefits,
this may total far more money than they have ever paid into the insurance policy
themselves. Others may never make a claim. When averaged out over all of the
people buying policies it evens out. Insurance companies set their premiums based
on their calculated payouts, aiming to take in more money than they pay out in
the long run to cover expenses and, in the case of for-profit insurance companies,
to make a profit.
Insurance companies also earn investment profits, because
they have the use of the premium money from the time they receive it until the
time they need it to pay claims. This money is referred to as "float".
When the investments of float are successful, they may earn large profits, even
if every penny received as premiums is eventually paid out in claims.
An insurance contract or "policy" will set out
in detail the exact circumstances in which a benefit payment will be made and
the amount of the premiums.
History of Insurance
Insurance has been an institution of human society for thousands of years, having
been practiced by Babylonian traders as long ago as the 2nd millennium BCE. Eventually
it was given legal mention in the Code of Hammurabi, and practiced by early Mediterranean
sailing merchants. The Greeks and Romans had "benevolent societies" which
acted to care for the families and funeral expenses of members upon death. Guilds
in the middle ages served a similar purpose, and were also precursor to trade
unions. It is believed that Life Insurance, as we know it today, began in late 17th century England. Originally, as insurance for traders: merchants, ship owners and underwriters met to discuss deals at Lloyd's Coffee House (later to become Lloyd's of London). Insurance became much more sophisticated in post-Renaissance Europe,
and specialized varieties developed. In America Benjamin Franklin helped to popularize
and make standard the practice of insurance, particularly against fire. The 19th
century saw a rise in the government regulation of insurance, and the 20th century
saw further specialization and, in the United States, a bit of deregulation which
allowed other financial institutions, such as banks, to offer insurance. The
ever-increasing ability of science to predict catastrophes of any measure or
variety continues to affect the way insurance is conducted.