Insurance is a form of risk management in which a group of individuals ( insureds) transfer risk to another party (insurer) to combine loss experience and provides for payments of losses from funds contributed (premium) by all members who transferred risk. 

It can also be defined as the equitable transfer of risk from one party to another in exchange for monetary compensation known as a premium.

Insurance may also be described as a social device for reducing or eliminating the risk of loss.

Legally, insurance can be defined as a contract in which an individual, entity receives protection against losses from an insurance company.

In insurance, groups of individuals known as policyholders (or insureds) contribute to a particular scheme and the contribution they make to this scheme is called the premium.

The main objective of insurance is to protect the financial well-being of individuals, businesses, government agencies in case they suffer loss.

Functions Of Insurance

The function of insurance can be categorized into primary and secondary function

Primary functions of insurance

1. Provides protection: The primary purpose of insurance is to protect against risks and accidents.

Even though the time and amount of loss are uncertain, insurance guarantees the payment for the loss.

Insurance cannot stop the occurrence of the risk, but it can certainly provide for the losses of the risk.

2. Serve as a common pool: Insurance is a device for sharing the financial loss of the unfortunate few among many others.

It operates on the principle of large numbers in which the insurer collect premiums from individuals, corporations, and government agencies exposed to similar risks and create a common pool/fund from which the insurance pays the few who suffer losses.

For example, an insurance company might create a pool of residential house owners since they are exposed to similar or homogeneous risks such as theft.

3. Spreading of risk: Insurance is a device for spreading the financial losses of policyholders over a large number of people. 

No wonder Professor Thomas defined insurance as "the device for spreading or distributing risk". 

Secondary functions of insurance

1. Provide social security: Insurance offers people social security through a variety of social protection policies. It not only protects in the event of death, but also assists insureds in the event of sickness, old age, maternity, and other events.

2. Reduction of losses: Insurance cautions individuals and businessmen to adopt suitable strategies to reduce unfortunate consequences by observing necessary safety instructions.

3. Contributes towards economic development: Insurance provides opportunities for the growth and development of larger businesses that face more risks in their start-up. 

Financial institutions are more likely to lend money to sick industrial units that have insured their asset.

4. Stimulus to business: if there was no insurance, most businesses would have set aside a contingency fund to meet emergencies, should the need arises 

However, with the advent of insurance, businesses can now transfer risk at a premium to an insurer.

This ensures that business can invest their monies in productive activities, rather than put a large amount of money into emergency funds.

5. Means of savings: Insurance provide means of savings.

Individuals, through life endowment insurance, can save towards a particular social cause.

Limitations Of Insurance

1. Protracted process: Obtaining an insurance claim is a protracted process as it requires lots of legal formalities and investigations

2. Not all losses are insurable: It does not protect against loss. As a rule, only pure risks are insurable. speculative risks are not insurable.

3. May result in crime: It may result in crime in the insured may be tempted to commit to crime in the hope of receiving the g insured amount.

For example, a person, in the hope of collecting from the insurance company, may intentionally cause a loss. 

4. Lack of knowledge: If the underwriter is unable to forecasts the future of certain risks, such risk may not be insured.