What is insurance?

Answer 1

It is the pooling of costs between people with similar exposure to particular risks. Originally this was done fairly informally especially between the owners of ships who had both the vessels and the cargoes at risk on the seas (no-one bothered to insure the sailors in those days as they were easily replaced!) but now it is a big international business and there are "reinsurers" who insure the insurance companies.

Experts called actuaries assess the likely occurrence of motor accidents, house fires, crashing satellites and death itself and based on this a company will charge an amount called a premium which is invested, the income being used to reduce the premium and to buffer against unexpected peaks in actual occurrences of the things being insured against.

If the occurrence happens then the insured person makes a claim on the fund and is paid according to the contractual liability - this can give rise to valuation issues.

Finally Moslems have problems with insurance under the Sharia law in that one should not try to guess God's will nor to prevent His Will acting in one's life. There are a number of insurance style funds that are considered legitimate.

Answer 2

The basic concept of insurance is that the risks (i.e. fire, windstorm, flood etc.) are spread out over all of the policyholders. In any given year some policyholders will experience a loss others will not. Insurance is a mechanism that allows us all to "pool" or share the financial risk of loss that we, as individuals, could not.
Insurance companies charge premiums based on the total losses that have been paid over the previous years and what they anticipate future losses will be.

Answer 3

Insurance is a way to transfer risk.

If you own property then you are at risk of incurring a financial loss if that property is damaged or destroyed - or if someone else is injured or has property damaged because of your actions/inaction.

Therefore, you purchase an insurance policy to reduce your risk of financial loss by transferring that risk to the insurance company. The insurance company agrees to take on that risk as outlined in the policy in exchange for the premium you paid.

An insurance policy is a way to transfer your risk of financial loss.

Answer 4

Insurance is risk management. Since we do not know the future, for example with our home. If we knew our home would always be safe from falling trees, floods, fire, why take out insurance? But, since we do not, and should it occur, most of us could not afford the consequences, we take out insurance and thereby share the risk with a company willing to do so, for a price.

Answer 5

Insurance is a bet. You're betting something will happen, the insurance company is betting it won't.

You exchange the small, regular payment, for the possibility that something large and expensive will happen - those are your odds.

Answer 6

The cheapest and most immediate way to displace a risk you cannot afford to take yourself.

Here is a guest post on my friend Ernesto's blog...
http://www.insuranceyak.com/insurance-as-a-financial-tool/