Uncertainty, Information and Insurance

Insurance is a form of economic activity which can only exist in a world of uncertainty. By entering into an insurance contract, an individual gives up some amount of wealth — the premium — for certain in exchange for a payment if and only if some specified set of uncertain events occurs. A rigorous economic analysis of insurance markets could not have been contemplated until the theory of individual choice under uncertainty had been developed, and the results of this analysis are one of the major achievements of the application of expected utility theory.