Insurance is synonymous to a lot of people sharing risks of losses expected from a supposed accident. Here, the costs of the losses will be borne by all the insurers.
For example, if Mr. Adam buys a new car and wishes to insure the vehicle against any expected accidents. He will buy an insurance policy from an insurance company through an insurance agent or insurance broker by paying a specific amount of money, called premium, to the insurance company.
The moment Mr. Adam pay the premium, the insurer (i.e. the insurance company) issue an insurance policy, or contract paper, to him. In this policy, the insurer analyses how it will pay for all or part of the damages/losses that may occur on Mr. Adam’s car. Mark Hauser
However, just as Mr. Adam is able to buy an insurance policy and is paying to his insurer, a lot of other people in thousands are also doing the same thing. Any one of these people who are insured by the insurer is referred to as insured. Normally, most of these people will never have any form of accidents and hence there will be no need for the insurer to pay them any form of compensation.
If Mr. Adam and a very few other people has any form of accidents/losses, the insurer will pay them based on their policy.
It should be noted that the entire premiums paid by these thousands of insured is so much more than the compensations to the damages/losses incurred by some few insured. Hence, the huge left-over money (from the premiums collected after paying the compensations) is utilized by the insurer as follows:
1. Some are kept as a cash reservoir.
2. Some are used as investments for more profit.
3. Some are used as operating expenses in form of rent, supplies, salaries, staff welfare etc.
4. Some are lent out to banks as fixed deposits for more profit etc. etc.
Apart from the vehicle insurance taken by Mr. Adam on his new vehicle, he can also decide to insure himself. This one is extremely different because it involves a human life and is thus termed Life Insurance or Assurance.