The word insurance came into picture because of the existence of the risks. Risks makes a person timid and dull. So, in those cases insurance will support to safeguard against the risks.
Risks may be of many types. They disturb the normal life of a common person. Some of the risks which are mostly faced by any person are fire, illness, lawsuits, auto accidents etc. They may occur at any place and at any time. These are unexpected twists which change the life of a person.
One cannot say that by using insurance risk will be removed but it will transfer the risk. The insurance will recover you from the financial losses.
Initially, the premium amounts which are paid by the insured for safeguarding against the future consequences will be few and all these premiums will add up into a large pool. When you are in risk these large pool amount will safeguard. Three things will be done with the premium amount by insurance companies. They are : Initially, they use the amount for paying the claims, secondly, they will use it for the expenses of selling and covering insurances and for investing money. All these earnings will reduce the cost of the insurance.
If you are in risk, then the insurance company, will cover you in loss. Suppose if you get involved in the activity which is type of risk. Then in those cases, the insurance company will check for the statistics of the activity and will cover by calculating the amount of risk involved.
The insurance company has also the ability to pay the amount for large single risks like permanent disability of a person etc. Many people will be buying insurance than the people who are getting their claims solved. So, insurance company has the ability to solve any problem.