| How Insurance Works | back to Insurance Education |
 |
How Insurance WorksInsurance is based on a mechanism called “risk pooling”, or a group sharing of losses. People exposed to a risk agree to share losses on an equitable basis. They transfer the economic risk of loss to an insurance company. Insurance collects and pools the premiums of thousands of people, spreading the risk of losses across the entire pool. By carefully calculating the probability of losses that will be sustained by the members of the pool, insurance companies can equitably spread the cost of the losses to all the members. The risk of loss is transferred from one to many and shared by all people who are insured in the pool. Each person pays a premium that is measured to be fair to them and to all based on the risk they impose on the company and the pool. |
