An insurance policy, on the other hand, does not remove the risk but provides the holder with security in case the worse happens.

This is how insurance works. An “insurer” defined as a business providing insurance will agree to take on the risk of an individual or a business involved, known as the “insured”. This is done through an insurance contract, otherwise called as a “policy”. In the policy, the insurer states the risks it will agree to insure specifically against and on how much it will be willing to pay in case the risk does happen. The goal of the insurer here is to put back the insured back to the same situation before the risk as if it didn’t happen. The contract can also include the things that the insurer will not insure which is called “exclusions”. For example the only serious risk posed by fixed annuities is if the insurance company backing the contract goes belly-up.

The insurer then collects premiums on every policy and pool all these together then invests them to make it grow. If an insured person makes a claim on the policy, the payment will be taken out from the funds. As a rule, the insurer wants to make profit and hopes that the total premium it gets in a year along with any money acquired from investments will exceed the claims it needs to pay.

Most countries, especially the United Kingdom, are well supervised in order to ensure that they have enough money to cater and pay for all claims.

In order for the policy to include a risk, it must be measurable in monetary terms and should not be likely to happen. An example is that you cannot insure yourself or anybody against the risk of the sun setting. The insured person should also have a direct interest on the loss. By this, you cannot take out life insurance on a complete stranger.

It is important for the insurer to thoroughly consider the circumstances around a risk before deciding to provide insurance to cover against it or not. This process is what they call, “underwriting”. Underwriters are specialists that carry out the responsibility for understanding everything that surrounds the risk such as the probability of the risk to happen, determining what steps have already been taken to reduce it and the financial consequences if it does happens.

Most insurance companies will have varied and different policies to suit the different needs of their clients. It is best to contact an agent to help you decide on which one is best for you and your business.