detrimental financial effect. Generally, households or firms with insurance make regular payments, called

premiums. The insurance company prices these premiums based on the probability of certain events

occurring among a pool of people. Members of the group who then suffer a specified bad experience receive

payments from this pool of money.

Many people have several kinds of insurance: health insurance that pays when they receive medical care; car

insurance that pays if their car is in an automobile accident; house or renter’s insurance that pays for stolen

possessions or items damaged by fire; and life insurance, which pays for the family if the insured individual

dies. Table 16.1 lists a set of insurance markets.

Type of Insurance

Who Pays for It?

It Pays Out When . . .

Health insurance

Employers and individuals

Medical expenses are incurred

Life insurance

Employers and individuals

Policyholder dies

Automobile insurance

Individuals
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