# What insurance is

The entire purpose of insurance is to transfer [risk](safety.md).

- Insurance is paying rent to transfer the risk of unlikely events (perils or liability) you can't afford.
  - It's technically a "hold-harmless agreement" for a fee.
  - The only sensible insurance is for risks that can't be [avoided, reduced, self-insured, or shared](safety-riskmgmt.md).
- Large-scale monetary losses can bankrupt you, and an insurance policy protects from those risks.
- Unless you carry insurance from others (which is a guaranteed exercise in severe [statistical analysis](math-stat.md)), insurance is a *terrible* way to gain [investment](money-investing.md) income.

Before insurance, it's often worth distributing a proportion of the risks with others to *share* it.

*Always* insure a risk when you don't think you'd be able to recover from it.

- Insurance can, with some exceptions, cover every financial loss you could conceive.
- If you can't afford insurance, your lifestyle has taken on too many risks to be legitimately safe.

Insurance *only* manages pure risk.

- A risk is the chance of a loss, but isn't the *actual* loss (e.g., the chance of slipping).
- Risk exposures can be speculative or pure:
  - Speculative risk - there are chances of losses *and* gain (e.g., gambling, [investing](money-investing.md)).
  - Pure risk - there is only the chance of loss (e.g., hurricane).

In short:

1. Insurance covers losses.
2. Losses are caused by events/occurrences which are pure risks.
3. Events/occurrences are caused by perils or liability, which are enhanced by hazards.

To be insurable, a risk must meet a few criteria:

1. [Predictable](imagination.md), typically with [statistics](math-stat.md).
2. Outside the insured's control ([unexpected](imagination.md), [accidental](humanity.md), or [uncertain](understanding-certainty.md)).
3. *Not* a catastrophic thing affecting many people (e.g., [war](people-conflicts-war-why.md), nuclear hazards, flood), though excess and surplus lines can often cover those events.
4. Be measurable, with a clear monetary value.
5. Causes a legitimate financial/economic [hardship](hardship.md) (i.e., that party has an insurable interest).

Sections:

- [The insurance policy](money-insurance-policy.md)
- [Losses and claims](money-insurance-losses.md)
- [Premiums, valuations, and limits](money-insurance-value.md)
- [The business of insurance](money-insurance-business.md)
- [How to wisely work with insurance products](money-insurance-how.md)