Insurance is a financial arrangement where an insurer guarantees compensation for specific risks in exchange for regular payments from the insured, spreading the risk among many people to ensure profitability. Insurance companies use complex models to calculate premiums and may also purchase reinsurance to protect themselves from large-scale losses, while investigating claims to prevent fraud.

This chapter explains the concept of insurance, highlighting how it allows individuals to transfer risk to a company in exchange for a monthly premium. It discusses the various types of insurance, the financial models companies use to ensure profitability, and the peace of mind insurance provides by covering potential large expenses from unforeseen events.

Reinsurance is a crucial mechanism for insurance companies to manage their risk exposure by purchasing insurance on their own policies, ensuring they remain solvent during high-loss events. Additionally, insurance companies rigorously investigate claims to prevent fraud, employing top investigators to avoid faulty payouts, making insurance a profitable and secure business for both companies and consumers.