By its simplest definition, insurance is the transfer of risk.
With common insurance types like auto insurance and homeowners insurance, we are transferring our risk of loss to a group. This group is our fellow insured, our neighbors, and the other customers of the insurance company, and we each pay a premium to maintain our insurance coverage.
In the event of a loss, our individual financial exposure is limited to our deductible and whatever amount we’ve paid in premiums. This assumes that we have enough coverage to cover the loss. If it’s a big loss, and assuming that we do have enough coverage, our individual exposure is much less than the cost of the actual loss, the impact of which could be financially devastating to an individual, family, or business.