Insurance companies play an important role in the economy as they are risk carriers or risk underwriters for a wide range of insurable events. Moreover, beyond that risk-bearing role, insurance companies are major participants in financial markets as investors.

To understand why, let's explain the basic economics of the insurance industry. Insurance companies that sell protection against future events receive one or more payments over the life of the policy as compensation. The payment they receive is called premium. The policyholder pays the premium to the insurance company and the claim is paid to the insurance company. The insurance company can invest that amount in the financial market.

Insurance products sold by insurance companies include:

Life Insurance – The policy insures against the death of the policyholder with the issuing insurance company in the event of the death of the policyholder. Life policies can be pure life insurance coverage (eg term life insurance) or have an investment component (eg cash value life insurance).

Health Insurance - The risk is the cost of medical treatment of the insured.

Property and Casualty Insurance - Risk insured against financial loss resulting from loss, destruction or damage to property insured due to sudden, unexpected or unusual identifiable event. There are two important types of such insurance.

(1) Residential property House and its contents.

(2) Automobiles.

Liability Insurance - The risk insured against is litigation, the risk of lawsuits against the insured due to the actions of the insured or others.

Disability Insurance – This product insures against the incapacity of the employed person to earn income in the insured's own business or any business.

Long Term Care Insurance – This product provides long term coverage for those who can no longer take care of themselves.

Structured Settlement – These policies provide fixed guaranteed periodic payments over a longer period of time, typically as a result of a disability or settlement on another type of policy.

Investment-Oriented Products – Products have a major investment component. They include Guaranteed Investment Contracts (GIC) and Annuities. In case of GIC the life insurance company agrees that when a single premium is paid it will repay that premium and return a predetermined rate of interest earned on that premium throughout the life of the policy. There are many types of annuities, all of which have two basic characteristics.

(1) Periodic payments begin immediately or are deferred until some future date.

(2) Whether the dollar amount is fixed (i.e., a guaranteed dollar amount) or the insurer is variable depending on investment performance.

Financial Guarantee Insurance – The risk insured by this product is the credit risk that the issuer of the insured bond or other financial contract will fail to pay interest and principal on time. Bonds or other financial obligations bearing such guarantees are said to be insurance wraps. A large percentage of the bonds issued by the first municipal governments were insured bonds and asset-backed securities.

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