Insurance

Academic definition

Insurance is a financial contract wherein a policyholder pays premiums to an insurer in exchange for compensation for specified losses, contingent upon uncertain events (risk pooling). The insurer uses actuarial science to estimate expected losses, typically via the expected value:

$$𝔼[L]=\sum _{i=1}^N{p}_i\cdot L_i,$$

where $p_i$ is the probability of loss $L_i$. Insurers manage risk through diversification, reinsurance, and reserves. Premiums are priced to cover expected losses, administrative costs, and profit margins, while adhering to solvency requirements and regulatory frameworks.

Simplified explanation

Insurance is a way to protect against big, unexpected costs by paying a small, regular fee so that if something bad happens, you get help covering the loss.

How it appears in the game

You play as a CEO of an insurance company, so you can delve deep into the main ideas behind the insurance business: collecting money from premiums, invest it to obtain a profit while keeping an eye on staying solvent.

References

• Insurance (Wikipedia).

Related concepts

• Finance
• Finance Interactive