What is insurance
The best story told about insurance is how it originated may centuries ago. Merchants traveling to a nearby market used to load their goods into boats and travel down-river to a nearby market. Unfortunately, dangerous water conditions often tipped the boats causing the merchants to lose all their possessions. Since this caused significant hardship for the merchants and their families, an alternative solution needed to be created.
The merchants decided if they spread their possessions amongst several boats traveling to the market, chances are most boats would make it and they wouldn't lose all their possessions. This model worked originally but unfortunately several conditions made it unfavourable over time, for example;
1. Some merchants didn't take good care of their boats and therefore were more likely to sink.
2. Newer merchants were unexperienced navigating the waters and tipped their boats more frequently.
3. Some merchants started stealing the goods of other merchants.
Eventually wealthy merchants decided a different alternative was needed. They then agreed to replace all the possessions of any given merchant for a small fee. With this model, every merchant would carry their own goods, in the event their boat tipped traveling through the dangerous waters, the wealthy merchants would pay to replace all their possessions. Of course, the merchants decided the following rules would apply;
1. Any merchant with a boat in poor condition would be charged extra for their journey
2. Newer merchants would be charged extra because they had less experience navigating the dangerous waters.
Of course, this story continues to evolve over many generations but you can get an idea of how insurance allows us to protect ourselves against the financial hardship of a loss.
Today insurance covers 100's possibilities. For example;
Insurance works by "pooling" risk with others. This simply means a group of people want to protect against a loss or exposure that could cause financial hardship. Since the "pool" is so large, you can project what the actual losses will be for a loss or exposure "pool". It is obvious not all people in the pool will have a loss at the same time. This allows third parties (insurance companies) to profitably cover losses or new exposures as they may arise.
What do you think?
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