What is the definition of insurance?

The correct definition of insurance is a contract in which one party agrees to pay for specified losses in exchange for premiums paid. This concept is fundamental to how insurance operates, as it involves a transfer of risk from the insured (the party seeking protection) to the insurer (the party providing the coverage). By paying premiums, the insured secures a promise from the insurer to compensate for certain losses that may occur, such as damage to property, health care costs, or agricultural losses.

Insurance is essentially about risk management and provides a safety net that enables individuals and businesses to mitigate the financial impact of unforeseen events. The specificity of the types of losses covered, as well as the premium payments, is critical to the functioning of this financial tool. This clear contractual arrangement distinguishes insurance from general agreements or government assistance programs, which do not encapsulate the same structured risk transfer and premium-based payment system.