Insurance, in law and economics,
is a form of risk management primarily used to hedge
against the risk of catastrophic financial loss. Insurance
is defined as the equitable transfer of the risk of
a potential loss, from one entity to another, in exchange
for a premium and duty of care. Insurer, in economics,
is the company that sells the insurance. Insurance
rate is a factor used to determine the amount, called
the premium, to be charged for a certain amount of
insurance coverage.
From the point of view of the insurance company there
are four general criteria for deciding whether to
insure events or not.
1. There must be a larger number
of similar objects so the financial outcome of insuring
the pool of exposures is predictable. Therefore they
can calculate a "fair" premium.
2. The losses have to be accidental and unintentional
(i.e., on the insured's part).
3. The losses must be measurable, identifiable in
location and time, and definite. An insurer also requires
that losses cause economic hardship. This so that
the insured has an incentive to protect and preserve
the property to minimize the probability that the
losses occur.
4. The loss potential to the insurer must be non-catastrophic,
i.e., it cannot put the insurance company in financial
jeopardy.
Losses must be uncertain of occurrence.
