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Insurance:
(i) An undertaking
of one person; (ii) to indemnify another person; (iii) to pay a sum of
money or other thing of value; (iv) from loss or liability in respect
of an event; (v) the happening of which is uncertain.
Insurance
is one means of dealing with risk. The fundamental principle of insurance
is a pooling of risks.
In
the absence of insurance, three possible individuals bear the burden of
an economic loss:
- the individual suffering
the loss;
- the individual causing the
loss via negligence or unlawful conduct; or lastly,
- a particular party who has
been allocated the burden by the legislature, such as employers under
Workmen's Compensation statutes.
While types of insurance vary
widely, their primary goal is to allocate the risks of a loss from the
individual to a great number of people. Each individual pays a "premium" into a pool, from which losses are paid out. Regardless of whether the
particular individual suffers the loss or not the premium is not returnable.
Therefore, for example, when a building burns down, the loss is spread
to the people contributing to the pool.
Insurance companies are the
safe keepers of the premiums. Because of its importance in maintaining
economic stability, the government and the courts are very strict in ensuring
these companies are regulated and fair to the consumer.
References
Insurance
Canada
The
Financial Services Commission of Ontario
Canadian
Insurance & Finance Research Station
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