Insurers are responsible for protecting their customers against the many risks they may face. Given the financial nature of this protection, the sector is strictly regulated to ensure insurers remain solvent, in the interests of policyholders.
Insurance works by pooling risk among the people concerned. Their behaviour, in aggregate, is often well understood through the law of large numbers, making it possible to pool risks that will materialize for some customers but not for others. Risk pooling may be public, as with social security, or private, through insurers. It may be compulsory, as with motor vehicle liability insurance, or voluntary, as with supplementary death insurance.
A private insurer's role is to cover a customer's misfortune in return for payment of a premium. The "premium" is payable in advance, in exchange for coverage that may never a priori need to be triggered. This is the reverse production cycle, whereas in conventional commerce a physical product is received at the time of purchase. The risk must be clearly defined, and its occurrence must be random. The terms of compensation, should the risk materialize—an event known as a claim—must also be specified.
Insurance comes in various forms for both individual and corporate customers: life insurance providing survival or death benefits (via savings and retirement benefits or compensation); health and personal-protection insurance (via healthcare benefits or benefits covering life events such as incapacity, disability or a period of unemployment); liability insurance, whether personal or corporate; and property insurance, notably covering vehicles, homes or business premises, theft and accidental damage. Mathematical tools have developed ever since insurance first emerged, a history that can be traced back to the Babylonians, nearly two thousand years BCE, in connection with maritime transport.
