Sub: Finance Topic: Insurance
play an important role in an economy in that they are risk bearers or theunderwriters of risk for a wide range of insurable events. Moreover, beyond their risk bearer role,insurance companies are major participants in the financial market as investors. To understand why,we will explain the basic economics of the insurance industry. As compensation for insurancecompanies selling protection against the occurrence of future events, they receive one or morepayments over the life of the policy. The payment that they receive is called a premium. Between thetime that the premium is made by the policy holder to the insurance company and a claim on theinsurance company is paid out, the insurance company can invest those proceeds in the financialmarket. The insurance products sold by insurance companies include:
. Policies insure against death with the insurance company paying thebeneficiary of the policy in the event of the death of the insured. Life policies can be for purelife insurance coverage (e.g., term life insurance) or can have an investment component (e.g.,cash value life insurance).
. The risk insured is the cost of medical treatment for the insured.
Property and casualty insurance
. The risk insured against financial loss resulting from thedamage, destruction, or loss to property of the insured property attributable to an identifiableevent that is sudden, unexpected, or unusual. The major types of such insurance are (1) aresidential property house and its contents and (2) automobiles.
. The risk insured against is litigation, the risk of lawsuits against the insuredresulting from the actions by the insured or others.
. This product insures against the inability of an employed person to earn
an income in either the insured’s own occupation
or any occupation.