Life. Auto. Health. Home. Travel. These are but a few of the various insurance policies available to you. Who, me? Yes, you. Insurance is a contract that offers full or partial financial compensation for loss or damage caused by an uncontrollable event. In exchange, the insured individual pays a sum of money known as a premium. Okay, but how does it all work? How does it all work, you ask? By taking out an insurance policy, you are actually paying the insurer to assume your financial risk in the situation specified in your contract. Take little Jenny here and her darling pet cat. How? Little Jenny pays $20 a month to have her furry friend insured against accidents and illnesses, thus transferring her personal financial risk, should her cat need medical attention. But what's this? Calamity! Little Jenny's cat has broken her leg during hockey practice, racking up $2,000 in vet visits, X-rays and tiny cat crutches! Thankfully, Little Jenny's pet insurance policy covers broken bones, and reimburses her for the medical expenses after she files a claim. How are insurance companies able to pay for all those emergencies? Insurance providers operate by pooling the risk of a large number of policyholders. Little Jenny is just one of many pet owners paying premiums every month. Over the lifetime of the insurance policy some pets will have medical emergencies and most will have no complications at all. The premiums of many are pooled to pay out the emergencies of a few. Huh. Does everyone pay the same premium? No they don't – I mean – you might be asking yourself, does everyone pay the same premium Insurance providers set premiums that allow the system to function and generate a profit. If premiums are set too low, if emergency costs are higher than anticipated or if more individuals make claims than expected, the insurance provider will lose money. Insurance providers therefore apply statistics and mathematics to understand the amount of risk their policyholders represent, and adjust their premiums accordingly. It's why your age and gender can influence your car insurance rates, or why your family medical history and lifestyle can influence your life insurance premiums. Indeed, insurance coverage is a unique system unequaled by any other financial concept on earth. Shh! There might be stuff after the credits! You might be asking yourself if there is additional stuff after the credits. And the answer is no, there is not.