Risk cannot be totally avoided. Automobile accidents occur with alarming regularity, normally causing substantial property damage to at least one automobile and frequently to more. The most common form of risk sharing is through insurance. Basically, people who share a common risk contribute to a fund set up to cover the losses that will be felt if the common risk occurs. Any member of the group who suffers a loss due to the occurrence of the common risk can withdraw money from the fund to cover the loss.
Although people can form their own insurance group, most would rather deal with a company established for the express purpose of providing insurance protection. And since the insurance company is an expert in the field, it can establish standards that help minimize the risk faced by members of the covered group.
Under property and liability insurance policies, the purchaser must have an insurable interest at two distinct times: when the policy is purchased and when the loss occurs. The requirements for an insurable interest in life insurance are slightly different from those for property and general liability insurance.
Insurance companies require certain warranties as a condition to providing coverage. Breach of these warranties operates as an avoidance of liability unless the insurer is liable of a waiver of the warranty. Since insurance companies normally can provide coverage over a wider geographic area than a group of individuals could reach, the risk-sharing proportions are usually smaller for the individual insured party.
Additionally, the insurance company's expertise allows for a more scientific and systematic rate-setting mechanism: thus the risk funds contributed by the insured parties are likely to be as low as possible while still providing adequate liability insurance coverage.
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