A more thorough explanation:

Insurance is a contract between two parties where one party agrees to protect the other party from certain risks in exchange for a payment called a premium. The insurer promises to financially protect the insured from loss, damage, or liability caused by an event covered in the contract. The amount of protection is limited by the terms of the contract.

Without insurance, the burden of an economic loss falls on the individual who suffers the loss, the individual who caused the loss, or a party allocated the burden by the law. Insurance allocates the risks of loss from an individual to a large number of people. Each person pays a premium into a pool, and losses are paid out from the pool. Insurance companies are responsible for managing the premiums.

For example, if a person buys car insurance and gets into an accident, the insurance company will pay for the damages up to the limit of the policy. The premium paid by the insured is used to cover the cost of the damages. If the insured does not get into an accident, the premium is not returned.

The government and courts regulate insurance companies to ensure they are fair to consumers. The McCarran-Ferguson Act gives states the power to regulate the insurance industry, but some federal laws still apply, such as federal tax laws.