Insurance is based on the principle of division of risk, where premiums from policyholders help cover costs and generate profits. Companies invest premiums to ensure financial stability during crises. Underwriters set premiums considering risk factors to maintain fairness.
All insurance is based on a principle called division of risk. Insurance functions by spreading the risk among a larger pool of individuals or entities to minimize the financial impact of potential losses. Premiums collected from policyholders help cover the costs of claims, company operations, and profits.
Insurance companies also generate income through investing the premiums received in safe and accessible investments to ensure they can meet their obligations, especially during catastrophic events.
Underwriters assess risks and set premium levels based on factors like historical data, individual risk profiles, and general trends to maintain actuarial fairness.
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