The definition of insurance can be made from two points:
(i) Functional Definition and, (ii) Contractual Definition.
Functional definition :
Insurance is a co-operative device to spread the loss caused by a particular risk over a number of persons, who are exposed to it and who agree to insure themselves against the risk.
Thus, the insurance is (a) a co-operative device to spread the risk; (b) the system to spread the risk over a number of persons who are insured against the risk; (c) the principle to share the loss of each member of the society on the basis of probability of loss to their risk; and (d) the method to provide security against losses to the insured.
Similarly another definition can be given. Insurance is a co-operative device of distributing losses, falling on an individual or his family over a large number of persons, each bearing a nominal expenditure and feeling secure against heavy loss.
Contractual Definition :
Insurance has been defined to be that in which a sum of money as a premium is paid in consideration of the insurer’s incurring the risk of paying a large sum upon a given contingency.
The insurance, thus, is a contract whereby (a) certain sum, called premium, is charged in consideration, (b) against the said consideration, a large sum is guaranteed to be paid by the insurer who received the premium, (c) the payment will be made in a certain definite sum, i.e., the loss or the policy amount whichever may be, and (d) the payment is made only upon a contingency.
More specific definition can be given as follows Insurance may be defined as a consisting one party (the insurer) agrees to pay to the other party (the insurer) or his beneficiary, a certain sum upon a given contingency (the risk) against which insurance is sought.