Definition of an Insurance Contract

          A legal definition of insurance that  appears in many insurance laws is the following: A contract of insurance is that whereby one party, the insurer, undertakes, for a premium or an assessment, to make a payment to another party, the policyholder or a third party, if an event that is the object of a risk occurs.  It is often defined as a contract of indemnity. The insured is not to make any profit out of the insurance but should only be compensated to the extent of the pecuniary loss. 

          Although various definitions have been offered, one of the most helpful is to define insurance as a mechanism (or a service) for the transfer to someone called the insurer of certain risks of financial loss in exchange of the payment of an agreed fixed amount. The payment is due before the contingent claim is serviced by the insurer.

If from the insured's point of view, insurance is a "transfer," from the insurer's point of view, insurance as a "pooling" mechanism.  It is possible for the insurer to reduce the risk which he faces by offering an "insurance service," by pooling together alarge number of exposure units or risks.