Elements of an Insurance Contract

1.) An existing insurable interest

2.) Insured is subject to a risk of loss

3.) Insurer assumes the risk of loss

4.) The assumption of risk is part of a general scheme to distribute actual (economic) losses

5.) Payment of the premiums

If the first 3 elements are the only ones present, the contract is a risk-shifting device.

An insurance contract insures against economic loss by distributing it among all those who are subject to the same risk. This is done through the payment of a premium to a general fund specified for the loss in question. Therefore, each member contributes in a small way to the compensation of losses another member suffers. By entering into a contract of insurance, the member who suffers loss is protected from absorbing his losses alone.