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How the Insurance Business Works

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Irvin Sha

Insurance was created to protect individuals and entities from risk. It involves paying a premium to another party, which agrees to cover that individual or entity from any financial damages if a covered event occurs.

An example would be a homeowner pays a premium to an insurance company to cover his home in the event of a hurricane causing damage.

The insurance company makes money two ways: by charging enough premium to cover the damages they have to cover over the life of the policy; and by investing the premiums collected until they have to pay claims (called the "float").

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