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Insurance and Risk

People think of risk as uncertainty about outcomes. Insurance mainly focuses on negative outcomes, that is, the possibility of suffering a loss (as opposed to the chance of making a gain). Insurance in the law is a contract in which a premium is paid ex ante for the coverage of certain contingencies ex post. The typical insurance contract includes two sides, an insured and an insurer. The insured transfers her risk of suffering the loss to the insurer. The insurance industry supplies a promise to pay for the loss in a contract. One alternative to this bilateral arrangement is mutual risk sharing agreements that may include many partners and do not include prepayments. The benefit and cost of sharing will be settled among the partners ...

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