Final answer:
Insurance companies collect premiums and combine them into a pool of money, used for paying claims and generating investment income. The investments are typically liquid to ensure accessibility in the event of major claims.
Step-by-step explanation:
Insurance companies gather premiums from their policyholders and aggregate them into a large pool of money. This collected money is then utilized to cover any claims that may arise, supporting the fundamental purpose of insurance, which is to protect individuals and businesses from significant financial losses due to unforeseen events. Additionally, these funds, often known as reserves, are invested by insurance companies to generate income. The investments are typically made in safe, liquid assets to ensure that they can be quickly converted into cash if necessary, such as when a major disaster occurs, and claims need to be paid out promptly.