Insurance Policies - Introduction and History Introduction - What is an Insurance Policy? An insurance policy is a contract between you and another party that works as a protection just in case a particular instance, situation or loss should occur. Insurance policies and the companies that sell them have been in business for decades, trading the risk of having to pay for large losses for the clean profit of premiums when those losses don’t occur. The business side is attractive for the companies that participate; operating costs are low, aside from actual claim payouts, so the revenue brought in can go straight to expansion or profits. The benefit side is obvious for consumers: an insurance policy provides a rainy day umbrella if a particular covered situation goes bad for some reason or circumstance. A Little Bit of History Insurance itself is in the business of risk. Actually, to be more precise, insurance is essentially management of risk. Depending on the category of activity covered, certain general risks are more likely to occur than others. Prior to insurance, people simply accepted that bad things happened, and they hoped that luck and the gods took care of them. If not, then it was just that person’s turn, everybody assumed. Enter the concept of an insurance policy. Wanting to limit losses, a demand was created and identified for a service that could be provided if a business could figure out a way to minimize the effect of losses when they did occur. From a statistical point of view probability argued most of the time things went fine and there were no problems. But a small percentage of given instances would go bad and the given party would suffer a loss. If a business could sell some kind of protection and do so to enough parties, then the given loss that would eventually occur could be outweighed by the ongoing payments of others who suffered no problems. Ergo, the risk management of insurance. Even better, if the business could limit the loss further by parameters, limited coverage, required behavior, etc., then the probability of the claims could be reduced even further. Thus the basics of an insurance policy were created. The contract itself is the policy. It is the agreement between an insurance provider and recipient that if something spelled out in the contract goes wrong, the provider will take care of the loss as specified. That could include money for losses (compensation), or replacement, or some other method of restoring the recipient to a level of status quo. Technically speaking, the provider is called the “insurer” and the party purchasing the contract is referred to as the policyholder or the “insured.” The price paid for the contract to be in place is called the “premium.”