Final answer:
The insurer is the one who accepts the risk of loss in exchange for a premium. Policyholders pay premiums to share the financial risk, and insurers compensate those who incur covered losses. However, having insurance might lead to moral hazard, where insured individuals may not take adequate steps to prevent losses.
Step-by-step explanation:
The insurer accepts the risk of loss in return for a premium. Insurance is essentially a method of protecting a person or entity from financial loss. In this arrangement, policyholders make regular payments, known as premiums, to an insurance company. Then, the insurance firm compensates those policyholders who suffer significant financial damage from an event that is covered by their insurance policy.
An essential aspect of this system is that insurance is a way of sharing risk among a group of policyholders, where each contributes to a pool through premiums in order to be protected from potentially devastating financial losses. However, this can give rise to a situation known as moral hazard, where people may be less inclined to prevent an insured event from occurring, knowing that the financial risks are covered.