Introduction to Insurance – Essay

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Insurance is a form of protection against a possible risk. It is a method which helps in shifting risks to the insurer in consideration of a nominal cost. The aim of all insurance is to compensate the owner against loss arising form a variety of risks, which he anticipates, to his life, property and business. Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. If the potential loss is small, then it doesn’t make sense to pay a premium to protect against the loss. Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary  compensation known as the premium.

Insurance works by pooling the risk. Pooling risk simply means that a large group of people who want to insure against a particular loss pay their premiums into the insurance bucket, or pool. If the number of insured individuals is so large, then the insurance companies can use statistical analysis to project what their actual losses will be within the given class. They know that all insured individuals will not suffer losses at the same time or at all. This allows the insurance companies to operate profitably and at the same time pay for claims that may arise. For instance, most people have vehicles insurance but only a few actually get into an accident. We pay for the probability of the loss and for the protection that we will be paid for losses in the event they occur. Insurance does not increase the total of risks and of losses, but merely combines, averages, and distributes them equally among all the insured. This eliminates the chance element to the individually by converting into a regular cost to all members of the group. Modern insurance is conducted either by enterprises for profit, or by  mutual companies; but in any case in large measure the losses in insurance are mutually shared, as the premiums (plus interest earned) equal the total losses plus operating expenses and profit, if any is made. Each insured gets a contract of indemnity for the payment of a sum that will help cover the losses of others. Such an exchange is mutually beneficial. The premium comes from marginal income; the loss, if it occurs, would fall upon the parts of income having higher value to the insures. The less urgent needs of the present are sacrificed in order to protect the income that gratifies the more urgent needs of the future. In insurance each party gives a smaller value for a greater; each makes a gain. The greater security in business stimulates effort. This effect is quite the opposite of that of gambling.


On the basis of function we can define insurance in the following ways.

Insurance can be defined as a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who  agree to ensure themselves against the risk.

(Prof. R.S. Sharma)

According to Reigel and Miller, “the function of insurance is primarily to decrease the uncertainty of events.”

In the words of John Megi, “Insurance is a plan where in persons collectively share the losses of risks.”

Thomson defines, “insurance is a provision which a prudent man makes against fortuitous or inevitable contingencies, loss or misfortunes. It is a form of spreading risk.”

Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it. – Ghosh and Agarwal.

In simple terms, “Insurance is a protection against financial loss arising on the happening of an unexpected event,”

On the basis of the functional definitions the following are the main features if insurance.

  1. Insurance is a cooperative device by which risks are distributed among large of number of individuals.
  2.  It provides securities against losses or risks.
  3.  A common fund is raised among members to meet the losses.
  4.  It is a plan under which the losses of uncertain events are secured.

Legally insurance can be defined as follows.

Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after e=the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.

The party bearing the risk is known as the ‘insurer’ or ‘assurer’ and the party whose risk is covered is known as the ‘insured’ or ‘assured’.

According to Chief Justice Tindal, “Insurance is a contract in which sum of money is paid by the assured in consideration of the insures incurring the risk of paying a large sum upon a given contingency”

According to these definitions all contracts of insurance except life insurance contracts, are contract of indemnity.

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