In law and economics, insurance is a form of risk management primarily
used to hedge against the risk of a contingent, uncertain loss.
Insurance is defined as the equitable transfer of the risk of a loss,
from one entity to another, in exchange for payment. An insurer is a
company selling the insurance; an insured, or policyholder, is the
person or entity buying the insurance policy. The insurance rate is a
factor used to determine the amount to be charged for a certain amount
of insurance coverage, called the premium. Risk management, the
practice of appraising and controlling risk, has evolved as a discrete
field of study and practice.
The transaction involves the insured assuming a guaranteed and known
relatively small loss in the form of payment to the insurer in
exchange for the insurer's promise to compensate (indemnify) the
insured in the case of a financial (personal) loss. The insured
receives a contract, called the insurance policy, which details the
conditions and circumstances under which the insured will be