HOW CONVENTIONAL INSURANCE WORKS
Insurance protects against the risk of potential loss. It can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss. An insurer is the company selling the insurance while the insured is the person buying the insurance. Risks that are insurable typically share these six characteristics:
1. The Law of Large Numbers. According to this principle, there must be a large number of homogeneous exposure units so that losses are predictable. The vast majority of insurance policies are thus provided for individual members of very large groups. Automobile insurance, for example, covers about 300 million vehicles in the US.
2. Accidental Loss. The event that triggers a claim should be accidental ...