What kind of company is an insurance company and how does the level of risk we present to an insurance company impact the cost of insurance premiums?

Question

What will be an ideal response?

Answer 1

An insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from the insured in exchange for a fee. The purpose of insurance is to help avoid or offset any major financial loss as a result of some unfortunate event. For the monthly or annual premiums that we pay to an insurance company, we shift the risk of financial loss or hardship to the insurance company. In exchange for a relatively small monthly or annual payment, the insurance company will replace our car should it be destroyed in an accident, or pay a large medical bill should we become ill, or replace our income should we become disabled, or take care of our loved ones should we die. That's why we buy insurance. When we buy insurance, we shift the risk of financial loss resulting from something bad happening from us to the insurance company. So it stands to reason that the more risk we present to the insurance company, the more the insurance premium costs. For example, the insurance premium for a Mercedes-Benz is more than that for a Chevrolet Bolt. That's because the more expensive car is more expensive to repair should it be involved in an accident. For another example, an insurance premium is more for a person who smokes than for a non-smoker, whether for health insurance, disability insurance, or life insurance. That's because studies show the likelihood of getting sick, or even of death, is greater for people who smoke than for non-smokers. The trick to buying insurance is to make sure you are adequately protected from financial ruin while presenting as little risk to the insurance company as possible to ensure you are charged the lowest premiums.