risk-sharing

Insurance is a system designed to help individuals and businesses cope with risk. It functions by substituting certainty for uncertainty regarding the financial cost of potential losses. This is achieved through a process where an insurer, in exchange for a premium, agrees to reimburse the insured or provide services if specific accidental events cause losses within a defined period.12

The effectiveness of insurance relies on the law of large numbers. By pooling premiums from a large group of policyholders, insurers can predict the frequency and severity of common losses with reasonable accuracy. This allows them to manage costs and risks through techniques like underwriting (assessing individual risks) and reinsurance (sharing risks among multiple insurers).32

For a risk to be insurable, it must be numerous and homogeneous enough for loss calculation, not subject to simultaneous destruction across all insured objects, accidental in nature, and determinable in terms of loss occurrence and amount.12