Insurance means promise of compensation for any potential future losses. It is used a s effective tools of risk management. It is a hedging instrument used as a precautionary measure. against contingent losses. This instrument is used for managing the possible risks of the future.

Insurance is the process in which losses of few are shared by many persons who are equally exposed to same risks. It is explained with the help of following examples:

In a city there are 1000 persons who are all aged 63 and are quiet healthy. Expected rate of death during the year is of 10 persons. If the economic value of loss suffered by the family of each dying person were taken to be Rs 70,000, the total loss would be Rs. 7,00,000  (70,000* 10). If each person would contribute Rs. 700 a year the common fund would be Rs 7,00,000 (700 * 1000). This will be sufficient to pay Rs 70,000 to the family of each of the 10 dying persons are shared by 1,000 persons. That is why we can say insurance is a cooperative device to share the sufferings of unfortunate person in a group.