The primary function of insurance is to spread the financial losses of insured members over the whole of the insuring community, by compensating the unfortunate few from the fund built up from the contribution of all policyholders.

Insurance provides an indemnity against loss or damage i.e. the insured is placed in the same financial position (s)he enjoyed prior to a loss. The insured must be no worse off than (s)he was before a claim is settled. However (s)he must not profit from the insurance, hence:

1. An insured may claim only the amount of the loss from the insurer;
2. If compensation has been received, the insured's rights of recovery from third parties or other source, in respect of the same loss, must be transferred to the insurer (insurance company).
3. The insured cannot benefit beyond his insurable interest in the item insured.