Definition of insurance

The definition of insurance can be made from two points: (i) Functional definition (ii) Contractual definition.

Functional definition: insurance is a co-operative device to spread the loss caused by a particular risk over a number of people, who are exposed to it & who agree to insurance themselves against the risk. Thus the insurance is (A) a co-operative device to spread the risk. (B) The system to spread the risk over a number of people who are insured against the risk. (C) The principle to share the loss of each member of the society on the basis of probability of loss to their risk.  (D) The method to provide security against losses to the insured.

Similarly another definition can be given. insurance is a co-operative device of distributing losses, falling on an individual or his family over a large number of persons, each bearing a nominal expenditure & feeling secure against heavy loss.

Contractual definition: insurance has been defined to be that in which a sum of money as a premium is paid in consideration of the insurer’s incurring the risk of paying a large sum upon a given contingency. The insurance, thus, is a contract whereby (A) certain sum, called premium, is charged in consideration (B) against the said consideration, a large sum is guaranteed to be paid by the insurer who received the premium, (C) the payment will be made in a certain definite sum. i.e., the loss or the policy amount whichever may be & (D) the payment is made only upon a contingency. More specific definition can be given as follows-

Insurance may be defined as a consisting one party (the insurer) agrees to pay to the other party (the insured) or his beneficiary, a certain sum upon a given contingency (the risk) against which insurance is sought.