When insurance becomes intertwined with economics it is considered a form of risk management to protect in cases of liability due to an unexpected loss. The company or policyholder pays what is called a premium. It is important to have a strong protocol in regards to risk management.

The risk that is insured against has to adhere to a certain criteria in order to be considered an insurable risk. Some of the following risks that can be insured are:

- Considerable amount of comparable exposure components. The law of large numbers where predicted losses are alike to real losses. The basic idea of this is depending on how high the risk is how it will affect the premium rates.
- Clear-cut loss. This is a specific loss, which is defined as known time, place, and cause of loss. (I.e. Auto & fire)
- Calculable loss- the way this loss is figured is formulated based on the probability of loss and attendant cost.
- Amount of loss- this is based on a large loss and the premium must cover both unexpected cost of a loss, adjusting losses, and the cost of insuring to be able to cover filed claims.

The insurance companies have to have the funding available to cover these claims. How does that happen? The insurers are able to cover the losses through investing and underwriting. This is where some confusion and frustration can occur. The underwriter has the sole discretion when figuring premiums based on past statistics and probability to estimate the premium rate of later claims on a basis on a specific risk.

Ultimately, when the companies or individuals file false claims that will affect future premiums for everybody. It is important to ensure you have proper coverage to protect yourself and your business from any unexpected problems that may arise. It is better to be over covered than under.