Insurance is a mechanism for spreading risk, for sharing the
losses of the few among the many. It allows the policyholder
to substitute a small, defined expenditure (the premium) for a
large, but uncertain, future loss. Policyholders who escape
losses help to compensate those who are directly and
adversely affected by loss.

Insurance can be thought of as a large pool into which
policyholders place their premiums. This pool has to provide
for payment of the losses suffered by those who have claims
and for the cost of running the insurance business. Because
total premiums are usually insufficient to pay claims and
operating expenses, insurers also use investment earnings to
pay claims and to keep premiums lower than they might
otherwise be.

To establish premiums, insurance actuaries (with
mathematical training in the principle of large numbers and
the theory of probability) estimate the number and cost of
current and future claims, and the amount of investment
income that the insurance company may earn between the
receipt of premiums and payment of claims. Insurers must
predict their claims settlement expenses, overhead,
commission payments or selling costs, provincial and federal
taxes, and reserve funds put aside to cope with catastrophes.