Insurance plays a crucial role in modern life and provides covers for risks that allow people to go on with their daily life. Insurance is risk transfer in which the insurer based on specified yet unpredictable events from an individual or an entity charges a premium. In essence, insurance helps to reduce uncertainty and removes the possibility of a larger loss.

Risk pooling serves as the key by spreading the cost of losses between various policyholders. Health insurance is an example. When the risk of a cardio operation is pooled, the large cost a few who suffer from the problem is spread amongst people in the pool. All policyholders should pay and enjoy a relatively low average cost.

In reality, statistical models suggest accidents happen. There is a lower possibility of occurrence amongst the pool when there is a higher insurance leverage. People would argue why they should get themselves insured with a low possibility of occurrence. People should bear in mind the low insurance fee results from the low possibility. That is why people can enjoy a high compensation with a low premium.

              Insurance leverage not only has effects on personal level, but also has a considerable impact on national health burden. In fact, there is a huge pressure on public health service. Insurance leverage helps with the government health finance so that limited resources can be used to solve problems when the private market shares the burden. Hong Kong Government is a typical example that helps to promote the Voluntary Health Insurance Scheme to improve citizens’ health coverage and to alleviate financial pressure on public budget.

It is common that the people are irrational in investment and make unwise decisions when they assume nothing would happen in a bad way. However, as we pointed out, bad things might happen eventually. As such, we have to assess the risks and decide what to do with them. The figure below illustrates how we analyse the nature of risks by their impact and frequency. Insurance indeed serves as a risk transfer.