There are three main functions of insurance that determine how insurance companies work and how people interact with society.
The first is a risk transfer mechanism, whereby individuals or companies can transfer some of the uncertainty of life on the shoulders of others. In consideration of the premium is known, is typically a very small amount compared to potential losses, the costs of loss that can be transferred to the insurance company. Without insurance, there will be plenty of uncertainty experienced by individuals and businesses, not just how and if the loss occurs, but also the extent and magnitude of potential losses.
The second main function is the formation of a public swimming pool. Insured premiums received by the insurer or pool funds for the type of risk, and those who suffer the loss of claims paid in this pool. Application of the "law of large numbers" of Bernoulli, because a large number of clients that the funds of certain risks or pool would be the insurance company can predict with great accuracy the number of claims or losses that can be maintained over time. There will be some variation in several years of losses and insurance companies include premium items to build up reserves to cover additional losses in bad years or disaster. Therefore, in principle, subject to the limitations on the type of coverage purchased, the customer must pay additional premiums in the general fund after a disaster.
The third main function of the insurance premium is to provide a fair and equitable. Assuming that the mechanism of risk transfer was established by the General Fund or by the pool, the contributions to the fund must be fair to all parties who participated. Any party that wants to make money and pay to bring varying degrees of risk. To avoid adverse selection and just give each of the risk premium is divided into components and evaluation of factors that can price individually on a scale of statistical probability is determined by the expert. They therefore have a greater statistical risk to the general fund would pay more for the same coverage when premiums are calculated, respectively.
Insurance companies use underwriting to reduce the adverse selection problem and protect the funds. The insurer will determine the values of the parameters hazards and risks are acceptable to the funds, with risks that are beyond these parameters. Improve their loyal contribution rate must also take account of contributions made by others in the General Fund and at the right price.
Insurers and insurance companies use many techniques to prevent or cost of a negative selection from a pool of risks. They are usually an exception to cover in the form of words in the policy and added a clause in a secure way, under certain conditions. They use all kinds of mechanisms and tools to instill fear in the population to increase the size of the risk pool and to attract the market sector or niche and target. For example, a major marketing campaign aimed at areas "safe" for example, female drivers are statistically less likely to ask. On the Internet, insurance companies use automated underwriting does not cover everything that is not in accordance with the desired parameters of the risk pool.
