Insurance is about risk management.
Insurance is a device to manage risk. So, what is risk?
Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.¹
For example, the desired outcome for most families would be that both parents remain healthy and able to provide for the needs of each other, plus the children, and possibly the grandparents. But, sometimes Mom and/or Dad are unable to provide their services because they are sick, or injured, or deceased. Insurance can replace some of the services of the sick, injured, or deceased parent(s) by providing funding, when needed. This example of risk management using insurance is sometimes referred to as the “survivor income” need. There are other needs which can also be satisfied by insurance. We will discuss the survivor income need in more detail, and discuss other applications of the insurance solution in subsequent blog entries.
¹ Fundamentals of Risk and Insurance, Eighth Edition, Emmett J. Vaughan and Therese Vaughan