Economics of insurance

The economics of insurance involves managing risk and distributing costs among many people. Insurance companies collect premiums from policyholders to create a pool of funds. These funds are used to pay for claims when insured events, like accidents or health issues, occur. The goal is to set premium prices that accurately reflect the likelihood and potential cost of claims, ensuring the company stays financially healthy while offering affordable coverage. This system incentivizes risk reduction and allows individuals and businesses to protect themselves against unpredictable losses, fostering economic stability and confidence.