Final answer:
Insurance is a method of financial protection where policyholders regularly pay premiums to an insurance company, which commits to pay for certain financial losses during the policy's term. This helps individuals and firms prevent significant financial impacts from specific bad events. It should be mindful of moral hazard which occurs when insured individuals are less cautious to prevent covered events.
Step-by-step explanation:
Insurance is a financial protection method that individuals and firms utilize to protect against economic losses. It operates on a system where policyholders pay regular sums, known as premiums, to an insurance company. In turn, the insurance company is committed to covering the costs of specific financial losses incurred by policyholders due to events specified under the insurance policy, like car accidents or theft.
This contract is an agreement that stipulates the insurance company will support the policyholder by paying for car-related financial losses during the term of the policy. It's important to understand this includes not just the losses themselves, but sometimes also involves a coinsurance aspect where the policyholder and insurance company share the burden of loss according to predetermined percentages
It should be noted, however, that having insurance can sometimes lead to a moral hazard, meaning that individuals might not be as cautious in preventing an insured event from occurring because they know they are protected financially.