What is insurance?
A little from everyone, holding up one.
No one knows when an accident or illness will strike, or whom. Many people put in a little, to carry the large loss of the one it happens to. And the promise works only within what the contract says.
In 30 seconds
- Insurance is a system in which many people pay a little in premiums to support those who suffer a loss.
- Insurance covers only the events written in the contract (the policy). There is often a charge you pay yourself when you claim.
- Across OECD countries, total insurance premiums equal 6.2% of GDP (2024, average).
A loss too large to carry alone.
Many people put in a little, to carry the large loss of the one it happens to.
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Pooling
Accidents, illness, fire. No one knows when, or to whom, they will happen, but gather enough people and it becomes easier to foresee how many will happen overall.
Insurance is a system that passes the small amounts paid by many to the few who suffer a loss.
The promise is written on paper.
Insurance begins with a contract, and you pay a premium.
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Three words
The US National Association of Insurance Commissioners (NAIC) explains that insurance starts with a contract called a policy, under which you pay a premium. When you use it, you will usually pay a deductible.[1]
What is not written is not covered.
Insurance covers only the events written in the contract.
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What is covered
The NAIC says insurance only covers the specific events listed in your policy, and some policies also state what is not covered.[1]
Before you buy, read what is covered and what is not.
A little over 6% of the economy.
Total premiums across OECD countries equal 6.2% of GDP.
Total insurance premiums as a share of GDP across OECD countries (2024, average)
The average across all reporting jurisdictions was 5.4%.
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Insurance in the economy
According to the OECD, total life and non-life premiums equalled 6.2% of GDP on average across OECD countries in 2024, and 5.4% across all reporting jurisdictions. That is lower than ten years ago.[2]
A scale to read before you buy.
A scale for reading insurance.
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Covered events
What is covered, and what is not.[1]
Your own share
How much you pay yourself when you claim.[1]
The premium
The balance between the premiums you keep paying and the amount covered.
This is not advice
This edition explains how insurance works. It does not recommend or compare any policy or insurer.
Next question
NEXT QUESTIONSending today’s work to your future self.NEXT QUESTIONThere is more than one vault.See the Field Notes shelf →What this edition cannot tell you
- How each type of insurance works in detail.
- National insurance systems and rules.