The insurance business involves providing financial protection against a range of risks. Insurers pay out claims in the form of premiums to protect the interests of their policyholders. In exchange for the premiums, the insurers pay out the insured’s interest up to the amount of their insurable interest. The insurance contract between the insurer and the insured consists of a set of clauses, such as the duration of the coverage, the type of loss that will be covered, and any exclusions.
Insuring companies make money through the underwriting process, which involves deciding on the premiums that will be paid out to policyholders. These premiums are then used to cover the insurer’s expenses, as well as to cover future claims. One of the most complex aspects of the insurance business involves the use of statistical and probability-based methods to estimate claims. However, the insurance company also uses its discretion to determine which risks to accept and which to reject.
Insurers also take out reinsurance contracts, which involve another insurance company bearing some of the risk. This is particularly useful if the primary insurer considers the risk too high for them to bear.