Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments. The insurance company accomplishes this by charging enough in premium payments from the insured participants to exceed the amount the company has to pay out for insured losses. Insurance companies base charges on their actuarial calculation of the frequency of occurrence of the type of risk they insure.
In order for insurance to be profitable, it must be the kind of loss that happens often enough so that there is a pool of insured people willing to pay premiums. In addition, the covered loss must be one that is calculable so that the insurance company can estimate the frequency of losses and how much the loss might be.
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