Q.Define insurance. Explain its nature as a risk-pooling mechanism.

Insurance does not stop a bad event from happening; it changes who bears the financial cost when it does.

Insurance is a contract, called a policy, under which the insurer agrees, in exchange for a payment called the premium, to compensate the insured for a specified financial loss arising from an uncertain event.

Its underlying nature is best described as risk pooling and risk transfer. A large number of people exposed to a similar risk each contribute a small, affordable premium into a common fund, and whichever few among them actually suffer the loss in a given period are compensated out of that fund. In this way, an uncertain and potentially devastating loss for one individual is converted into a small, certain and manageable cost shared across the whole group. …

State the formal definition first, then explain the pooling mechanism with the 'many contribute small, few claim large' frami …

Do not describe insurance as 'preventing' loss or risk — it manages the financial consequence of a loss, it do …