What is Insurance?

Insurance is necessary for people, industries, and others at different circumstances. Insurance is nothing but a compensation that is given for specific potential future losses in exchange for a periodic payment. In order to design the financial well-being of a company, an entity or even an individual, insurance is necessary. In terms of insurance, the company that provides or sells insurance is called an insurer. A person or an entity that buys the insurance policy is termed an insured or a policyholder.

The insurer pays a sum of money for the policy holder, upon the occurrence of a specific event, in exchange for certain payments called premiums from the insured. The part of the loss which is called deductible is paid by the policy holder and the rest is paid by the insurer.

It can be said that insurance is an instrument that is used as a precautionary measure against future contingent losses. It is used for managing the possible risks of people in future. The loss of life or injuries cannot be measured financially and insurance tries to quantify such losses financially. Certain types of insurance include medical insurance, life insurance, liability insurance, public liability insurance, general insurance and so on.

Insurance runs on a concept that certain group of people, who are thought to be exposed to a similar risk, make contributions for formation of a pool of funds. When an individual among the pool gets loss and suffered from such risk, the compensation is given to him from the pool. The contributions to the pool are made by a group of people sharing common risks and collected by the insurance companies as premiums.