Insurance is a type of financial services offered by the insurance companies. The basic principle of insurance is distribution of costs to cover a negative event, such as an accident, disaster, theft, loss, etc., for a longer period of time in regular installments. Insurance is thus a form of risk management, which is trying to dampen the impact of certain negative events and spread the financial demands of the negative events over a longer period of time. Insurance allows organizations to protect themselves against unexpected loss or expense and to preclude significant financial difficulties for a reasonably affordable insurance rate.
Enterprises and organizations usually use following types of insurance:
- Property insurance
- Natural disaster insurance - covers damages to property caused by natural hazard (e.g. fire, flood, windstorm, lightening, explosion)
- Technical insurance - the insurance of construction and assembly risks
- Business interruption insurance - covers consequential damages arising from interruption (called consequential insurance)
- Insurance against theft - covers property in case of theft or damage to the offender
- Transportation insurance - covers the risk of damage, destruction, theft or loss of belongings during transport
- Liability insurance for damage
- Legal expenses insurance
- Insurance of financial losses
- Insurance claims
Insurance company assumes for the fee the obligation, and for payment provides insurance coverage - pays to insured person indemnity if the insured event occurs.
The contractual relationship between the insurer (insurance company) and the insured is established in the insurance contract.
A specific type of insurance is collateral (reinsurance). It is a de facto insurance of insurers. The existence of security is particularly important in cases of large claims such as floods, tsunamis, etc., when payment of damages would exceed the options of insurance companies.
Use of the insurance in practice: Organizations and companies use insurance to cover potential losses from negative events. Insured organization or enterprise must always consider the size and the degree of the risk of unexpected event and regular payments of insurance that must pay off for specified period of time. The organization must always balance these two things. When the risk of negative event is small and the amount of insurance is large, then the insurance is not worth it.