Concept of Insurance Company

Insurance is the legal contract between two parties to share potential risk against something. The
risk can be things like loss of life, destruction of property by any means, accident, health,
casualty, disability etc. So, insurance company accept this risk against the premium paid by the
policyholder. For this insurance companies sell insurance policy. The person or firm who buy
insurance policy from insurance companies minimize their potential risk, for this they have to
pay certain amount in regular interval (or only one time in certain case) called premium. The
insurance company also called insurer and the counterparty who share the risk is called insured.
Insurance companies work on the principle of economies of scale. This indicates doing the
insurance at large scale can cover the potential risk of large amount which have probability to
occur very low. For example: an insurance company sells a particular insurance to tens of
thousands people, they collect premium from all insured people but the chances of casualty of all
of them is very low. In the event of casualty, the insured person or their beneficiary will receive
lump sum from the insurance company.
The insurance company collects premium from policyholder at the beginning of the insurance
policy. If the premium is collected on installment basis, then they are collected at the beginning
of each period (month, quarter or year). This premium is the major source of fund for the
insurance company. They have to pay fund later as lump-sum to the policyholder depending
upon the terms and conditions of the policy. This is the major expenses of the insurance
company. These amount vary among the different types of insurance policies and companies.
Also, the payment date of these insurance are unsure, they may occur anytime and the insurance
company have to be prepare for this. The other type of expenses is operating expenses, they are
more or less stable in nature.