Insurance is a mechanism that transfers risk from an individual or entity to an insurance company. The insurance company assumes the risk of loss or damage in exchange for a fee, known as a premium.

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When an individual purchases insurance, they enter into a contract with the insurance company, known as a policy. The policy outlines the terms and conditions of the insurance coverage, including what is covered, the amount of coverage, and the premium that the individual must pay.

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The insurance company uses statistical analysis and actuarial science to determine the likelihood of a particular event occurring and the potential cost of that event. Based on this analysis, the company sets the premium that the individual must pay to receive the desired level of coverage.

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In the event of a covered loss or damage, the individual files a claim with the insurance company. The insurance company investigates the claim and, if it is determined to be covered under the policy, pays the individual a sum of money to cover the cost of the loss or damage, up to the limit of the coverage.

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In this way, insurance provides individuals and businesses with a way to manage risk by transferring it to an insurance company, which has the resources and expertise to handle the potential costs of a loss or damage event.

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