Insurance is the fundamental of insurance by which individuals and firms transfer some of their risk to an outside entity in exchange for a small premium. This enables them to survive financial hardships that would otherwise be overwhelming. Risk-sharing is fundamental to the insurance business and is considered both sound business practice and a form of social behavior rooted in accepted principles of ethics.

In addition to its core purpose of protecting people from financial disasters, the industry is a major contributor to economic growth. Consumers benefit by having access to a wide range of goods and services, business enterprises benefit from the transfer of potentially crippling risk, and governments gain tax revenues that support a wide array of public programs.

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A basic principle of insurance is that the insured must have an insurable interest in the subject matter covered by the policy. This is the primary reason for the requirement of utmost good faith in insurance contracts. It also ensures that the insurer discloses all information that may affect the insured’s loss. This is especially important in life insurance contracts. The principle of proximate cause is another fundamental principle that the insurer must uphold. This entails that the insured will be compensated for the amount of loss caused by the event, but not any amount that exceeds this.

The principle of indemnity is one of the most fundamental principles of insurance and is also the most controversial. This means that the insured should be put back in the same financial position that he was before the loss. This is why many insurers will only cover the cost of replacement or repair and not the full market value of the subject matter.