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...another party (the insurer), which can be redeemed for money if certain states of nature occur. The ticket is more commonly referred to as an insurance policy, its cost is the insurance premium and the states of nature are the events which are covered by it such as fire causing damage to one's property.
Insurance affects individuals prior to specific events occurring because the insurer must collect premiums. It then pays people in the event of losses suffered from events covered by the policy. Effective preventive measures on the part of insured people sometimes lower the premium, if the insurer can observe them at low cost. For example, if an insured homeowner invests in a mitigation measure that reduces the potential losses from an earthquake, and if that investment could be observed, then a competitive insurer that has the freedom to set rates based on risk has a financial incentive to lower the annual premium for earthquake coverage compared to the premium charged if there had been no mitigation. The benefits in the form of lower expected losses have to be sufficiently large that it is cost-effective for the insurer to incur the transaction costs of varying the premium based on...
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