Primary function of insurance is the transfer of risk by means of a two-party contract called an insurance policy. An insurance policy is a contract that shifts financial risk from the insured to insurer. The insurer agrees with the insured to assume a specified risk in exchange for a premium. Insurance relationship is a contractual one.
Insurance involves large numbers, statistics, and derived probabilities.
If insured person suffers a loss, the insurer makes payment to either the insured or a beneficiary, depending on the type of policy. Indemnity is based on the grounds that insurance is a system for distributing losses and not one that enables the insured to make profits. An injured person is only limited to payment for loss actually suffered. Indemnification addresses moral hazards attendant on insurance. Insured can mean two things, one for property and liability insurance and one for life insurance.