Insurance is one way that people seek security, which is a basic human need, just like food, clothing and shelter. While insurance provides a level of security to the person being insured, it also provides a level of risk to the provider. This is offset by premiums which are set at a level commensurate with the risk presented by the insurance and the insured.

One way that this is measured is by a standard deviation of possible outcomes. For example, let's pretend there is a house fire in two different houses - one located in prestigious Beverly Hills, California, while the other home is located in a less-savory downtown Los Angeles district. In the event of a fire, the expected value for repairs for both homes is $25,000. However, there will be a standard deviation for each house. The deviation for the Beverly Hills home is $1,000 and the standard deviation for the Los Angeles home is $400. If the cost of repairs for both of these homes is normally distributed, then the probability that the repairs will cost more than $30,000 is only eleven percent for the Los Angeles home; however, it is thirty-one percent for the Beverly Hills home.

How Does Your Insurer View You?

With an insurer, liability is managed across a large pool of participants, most of whom will not see losses, but will, with their regular premium payments, pay to cover the claims and losses of the unfortunate few. There are many highly-technical mathematical formulas that determine how significant a risk any particular party will present to the overall pool. The higher the risk, the more an insurer must consider whether or not to accept the policy - accept the risk - which represents real financial loss for them. When presented with an application that represents a serious liability, the typical response of the company will be to offer a policy with substantially higher premiums in order to help offset the risk. If the insured is paying more money toward managing other claims, they are - hopefully - paying enough to mitigate the increased likelihood that they will end up costing the provider money by way of needing to file a claim of their own.

Another way that some companies regulate risk, is by teaching or training their customers various methods of lowering their chances of having to file a claim. This may include offering classes or simple instructional methods that are mailed to their home to encourage certain types of less-risky behavior or attitudes. This regulation is commonly referred to as "risk management".