Insurance companies play an important role in an economy in that they are risk bearers or the underwriters of risk for a wide range of insurable events. Moreover, beyond their risk bearer role, insurance companies are major participants in the financial market as investors. To understand why, we will explain the basic economics of the insurance industry. As compensation for insurance companies selling protection against the occurrence of future events, they receive one or more payments over the life of the policy. The payment that they receive is called a premium. Between the time that the premium is made by the policy holder to the insurance company and a claim on the insurance company is paid out, the insurance company can invest those proceeds in the financial market. The insurance products sold by insurance companies include:
Life insurance. Policies insure against death with the insurance company paying the beneficiary of the policy in the event of the death of the insured. Life policies can be for pure life insurance coverage (e.g., term life insurance) or can have an investment component (e.g., cash value life insurance). •
Health insurance. The risk insured is the cost of medical treatment for the insured. •
Property and casualty insurance. The risk insured against financial loss resulting from the damage, destruction, or loss to property of the insured property attributable to an identifiable event that is sudden, unexpected, or unusual. The major types of such insurance are (1) a residential property house and its contents and (2) automobiles. •
Liability insurance. The risk insured against is litigation, the risk of lawsuits against the insured resulting from the actions by the insured or others. •
Disability insurance. This product insures against the inability of an employed person to earn an income in either the insured’s own occupation or any occupation. •
Long-term care insurance. This product provides long-term...
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