Insurance is a Cooperative device for distributing risk.
Insurance may be described as a social device to reduce or eliminate risks of loss to life and property. “Insurance is defined as a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk.” – M.N. MISHRA.
“Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it” – Ghosh and Agarwal
The legal definition focuses on a contractual arrangement whereby one party agrees to compensate another party for losses.
Illustrations: Risk is uncertain of a financial loss. It should not be confused with the chance of loss which is the probable number of losses out of a given number of exposures. It should not be confused with peril which is defined as the cause of loss or with hazard which is a condition that may increase the chance of loss. Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. The insured receives a contract called the insurance policy which details the conditions and circumstances under which the insured will be compensated.
So it is clear that every risk involves the loss alone or the other king. The function of insurance is to spread this loss over a large number of persons through the mechanism of co-operation. The persons who are exposed to a particular risk cooperate to, share the loss caused by that risk whenever it takes place. Thus the risk is not averted but the loss of its occurrence is shared by the members. As in private life, in business also there are dangers and risks of different kinds. The aim of all types of insurance is to make provision against such dangers.