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Insurance
What exactly is insurance?

First, insurance is a transfer technique whereby the insured transfers the risk of financial loss to another party, the insurance company or insurer. Second, it is a contract between the policyholder and the insurer that states what financial consequences of loss are transferred and expresses the insurer's promise to pay for those consequences.

Third, insurance is a business and, as such, needs to be conducted in a way that earns a reasonable profit for its owners.

The money a policyholder pays an insurer is small compared to the potential for loss. If a family's house were to burn down, they probably could not afford to replace it without insurance. The insurance system enables someone to transfer the financial consequences of this loss to an insurance company.

The insurance company, in turn, pays for covered losses and distributes the costs among all of its policyholders. In that way, your fellow policyholders share the cost of your loss, as you share in theirs.

Private companies and state and federal governments provide insurance.

There are three major types of private property/casualty insurers: mutual, stock and reciprocal exchanges. The primary difference among these types of insurers is in who owns them.

A stock company is a corporation owned by individuals or stockholders who contribute capital in the hope of earning a profit through the sale of insurance. The stockholders direct the company's operations and share in any profits earned.

A mutual insurance company is a corporation owned by its policyholders, who may receive dividends if the firm is profitable.

A reciprocal insurance exchange is similar to a mutual company in that the policyholders are both the insurers and the insured. The exchange is a collection of individuals, firms and/or corporations that exchange insurance coverage on one another. Each member pays for a portion of the coverage on every other member.

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