Main objective
The main objective of insurance is to spread the risk of unforeseeable financial loss to policyholders as a result of events specifically specified in the insurance contract. Individuals and undertakings turn to an insurance undertaking to cover their interests against unexpected losses which could lead to material consequences and for which a separate premium is paid. The insurance undertaking calculates the risk of certain claims occurring on the basis of statistical facts, such as accident rates and average claims and determines, inter alia, insurance premiums by reference to the results of these calculations.
Reinsurance
An insurance undertaking reinsures itself with other and larger insurance companies, such as reinsurers, thus spreading the risk of financial loss across multiple parties. Many parties together are better able to deal with larger losses than one party that takes on all the risk.
Insurance utility
Insurance does not prevent accidents. However, it is advantageous in that it limits the financial losses that have occurred. It may, for example, prevent a person from suffering a substantial loss of income as a result of an accident involving him/her, permanent damage to property as a result of fire or theft, and the bankruptcy of an individual as a result of liability incurred by him in the event of damage. Also, insurance may prevent the injured party from receiving compensation because the injured party is unable to pay. Insurance should mean that if a person is involved in an accident or causes an accident entailing liability, the person concerned does not suffer serious disturbance of position or economy.