Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial losses. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium and duty of care.


The type and distribution of losses must be predictable: To set premiums (prices) of insurance must be able to estimate with precision. This is done with the Law of Large Numbers, which states: The greater the number of homogenous exposures considered, the more informed of the loss is equal to the underlying probability of loss. If coverage is unique, the insured pays a higher premium for. Lloyd's of London often accepts single coverage. (E.g. insurance Tina Turner's legs and buttocks Jennifer Lopez)

The loss must be significant: The legal principle of De minimis dictates that trivial matters are not covered. Moreover, the rational insurance use existing insurance when the transaction costs that determines the presentation of a claim is not rational.

The loss should not be catastrophic: If the insurer is insolvent, is unable to pay the insured. In the United States, there is a system of guarantee funds to run at the state level to reimburse insured insurance companies that have become insolvent.
[1] This program is managed by the National Association of Insurance Commissioners (NAIC).
[2] To avoid catastrophic depletion of their own capital, insurers around the world in almost purchase reinsurance to protect against excessive accumulations of risk in one area, and to protect against major disasters. Additionally, "speculative risks" like those incurred through gambling or by purchasing the stocks are not insurable.