Insurance is a financial concept designed to manage risks. Insurers use probability calculations to manage their own loss exposure and earn profits. Insurers provide security to modern civilization, which permits economic growth.
Insurers profit by the efficient deployment of “float.” Float refers to the difference and time frame between collected premiums and paid out claims. Insurers invest float money into stocks and bonds to earn returns over claim expenses. Insurance companies pay claims to replace assets and lost income.
All things of value may be insured. Insurers guarantee payments and coverage for health care, real estate, and financial transactions, alongside the future earnings power for individuals and institutions.
Insurers actually protect society from financial collapse. Natural disasters, bank failures, and government debt default would drain economic resources—without insurance. Further, individuals would refuse to make investments and take calculated risks—for fear of total loss. Insurance enables society to build itself, while the industry recycles premiums back into the economy as investment capital.
Governments oversee insurance companies with strict guidelines because of their economic importance. Insurance company sales and investment policies are regulated.
Poorly managed insurers can incite financial panic. Distressed insurers liquidate large investment portfolios to honor claims, which may cause markets to crash.