Nature of Insurance


Insurance Means

Insurance is a means of protection from any unforeseen losses and contingencies. It is a risk-management technique used for hedging against various uncertain losses. Insurance is a contractual agreement between two parties in which one party promise to protect another party from uncertainties and losses. The first party is insurance company or insurer who agrees to protect and compensate the other party for losses suffered by it. Another one is insured or insurance policyholder who gets protection under insurance policy in return for premium which he is required to pay regularly to insurer. In simple terms, insurance is just the protection against the losses. By taking insurance policy, different insurance policy holders pool their interest together. Loss suffered by any of the insured is paid out of premium amount paid by these policy holders to insurance company. 

Insurance is an effective tool to avoid losses by transferring or sharing it with other individual. It boosts confidence level of peoples and acts as supporting pillar by compensating them at time of emergencies. Insurance helps in economic development of country by mobilising people’s saving by attracting them for investment in insurance policies. Insurance companies reinvest the collected amount in different investment avenues for earning profit. There are generally three steps in insurance process: Firstly, select the insurance policy as per your needs, then you need to pay the premium amount regularly and at last claim your insured amount with the help of supporting documents in case if any unfortunate event occurs. Nature of Insurance is discussed in points as given below:

Nature of Insurance

Nature of Insurance
Nature of Insurance


Insurance is contract between two parties in which one party agrees to provide protection to other party from losses in exchange for premium. The parties are insurer and insured. Insurer guarantees compensation in occurrence of any contingency to insured and insured pays premium to insurer for protection. Insurance companies accept the offer made by the insurance policy holder and enter into contract. Contract for insurance is always in written.

Lawful Consideration

Existence of lawful consideration is must for insurance contract like any other lawful contract. The insurance policy holder is required to pay premium regularly to the insurance company. This premium is paid in exchange for protection against losses and damages guaranteed by insurance companies.

Payment on Contingency

Insurer is required to compensate the insured only on happening of contingency for the damages and losses done. Insured cannot make profit from insurance policy but can only claim compensation from insurer in case of contingency. If no contingency occurs, insurer is not required to pay any compensation to insured. 

Risk Evaluation

Insurer evaluates the risk associated with subject matter of insurance contract. Proper risk evaluation enables the insurer to calculate the right amount of premium to be paid by insured. Insurer uses different techniques for risk evaluation. If insurance object is subject to heavy losses, heavy premium will be charged. On the other hand, if there is less expectation of losses then low premium will be charged.

Large Number of Insured Persons

There are large numbers of insured person’s takes insurance policy from insurer. Larger the number of insurance policy holders with insurance companies, smaller will be the degree of risk on any individual. Risk arising from any contingency is shared among these large numbers of insured persons.

Co-operative Device

Insurance is a cooperative device to pool risk among large number of persons. Insurance is a platform where different persons come together to share risk by taking insurance policy from insurer. All persons pay premium regularly to insurance companies. If any of person incurs losses or damages due to occurrence of any contingency, insurance company will compensate him out of premiums paid by different persons. 

Not a Charity or Gambling

Insurance is a legal contract. It cannot be termed as a charity or gambling. Compensation paid to insured by insurer is not in charity but is paid in exchange of premium deposited by him. Insured pays premium to insurer for guarantee of compensation in happening of contingency. Also, insured cannot make profit out of insurance policy and is meant for recovering him from losses only. He is paid compensation only when he incurs losses due to contingency. That is why it is not a gambling.