"History of Insurance"
The Great Fire of London, which burned down 13,200 homes in 1666, could be linked to insurance as we know it today. After this happened, Nicholas Barbon opened a building insurance office. In 1680, he set up "The Fire Office," the first fire insurance company in England, to cover brick and frame homes. In 1732, the first fire insurance company in the United States was opened in Charles Town, South Carolina, which is now called Charleston.
In 1752, Benjamin Franklin started the Philadelphia Partnership for the Insurance of Houses from Loss by Fire. They wouldn't insure homes that were too likely to catch on fire, like all-wooden homes.
Insurance Principles:
The time or place where damage will happen must be unknown. Damages need to have a very clear value. Insurers should be able to estimate prices so they can set premiums, or calculate prices. The insurance company wants to know how much they will have to pay if the insured event happens. Almost all types of insurance have maximum payouts, but health insurance is one of the few exceptions.
The loss should be important: De minimis, which comes from Latin and means "about small things," is a legal principle that says small things are not covered. The "premium" is the fee that the insured person pays to the insurer for taking on the risk.
"Perils" are possible sources of risk that could give rise to claims. Perils include things like fire, theft, earthquakes, hurricanes, and a lot of other possible dangers. A policy of insurance may say in detail which risks are covered and which aren't. The loss can't be too bad, because if the insurance company goes bankrupt, they won't be able to pay the insured. In the U.S., there are "Guaranty Funds" that pay back people whose insurance companies went out of business. The National Association of Insurance Commissioners is in charge of running this program (NAIC).
Indemnification
Any person, business, or organization that wants to transfer risk becomes the "insured" party when the risk is taken on by an "insurer," also called the "insuring party," through a contract called an "insurance policy." This legal contract spells out the total amount of coverage (compensation) that will be given to the insured by the insurer when the risk is taken on, in the event of a loss, as well as the specific risks that will be covered (indemnified) for the length of the contract.
When an insured party suffers a loss because of a certain peril, the coverage lets the policyholder file an "insurance claim" against the insurer for the amount of damage that was agreed upon in the policy contract.
The stability of insurance companies
One of the most important things to look at is how strong and stable the insurance company is financial. Whenever you buy an insurance policy. If you pay an insurance premium now, it will cover damage that could happen many years from now. Because of this, it is very important that the insurance company can stay in business. Several insurance companies have recently gone bankrupt, leaving their customers without coverage (or coverage simply given by a government-backed insurance pool with less insurance History and principles-attractive payouts for damages). There are a number of independent rating agencies, like Best's, that give insurance companies references and grades on how financially stable they are.
"How the Premium is Figured Out"
Actuarial science is used by the insurance company to figure out how much risk they are willing to take. Information is gathered to make estimates about future insurance claims, which are usually pretty accurate. Actuarial science uses statistics and probability to figure out the risks associated with the different types of perils that are covered. These scientific principles, along with other factors, are used by insurers to set rates.
Gambling Analogy
Some people mistakenly think that insurance is a type of bet that takes place over the policy time period. This is especially true when a moral hazard is involved. The insurance company puts money on the chance that you or your property won't lose anything, while you bet on the opposite. Floods are not covered by almost any home insurance. By getting insurance, you protect yourself from risks that you might not be able to avoid otherwise, and that doesn't give you the chance to benefit (net risk). That is, gambling is not a risk that can be covered by insurance.
Who Doesn't Really Need Insurance?
Some religious groups, like the Amish and Muslims, don't have insurance. Instead, they rely on help from their fellowship. When disasters strike. This could be thought of as "social insurance," since the risk of each person is taken on by the society as a whole, which might pay for the whole cost of rebuilding. This could work in small, close-knit communities where people help each other out and someone else could help rebuild a house that was destroyed. Most societies couldn't handle this kind of system well, and it might not work for big risks anyway.
