The two main aspects of insurance, apart from risk transfer, have always been pooling and risk reduction. Pooling can be referred to as sharing of risks in a group, which helps in risk reduction. Here risk reduction is defined as the total amount of uncertainty present in a particular situation. Insurance achieves risk reduction by bringing all the high risk activities together so that the aggregate risk can be defined within narrow limits.

In the economic world insurance is sometimes compared to gambling, but in reality they are exactly opposite. Gambling create a new risk where none existed before while insurance is a method of eliminating or greatly reducing an already existing risk.

Insurance is always implemented using all legal formalities and contracts which are called policies in their jargon, in which the insurer promises to, reimburse the insured for losses suffered during the term of agreement. But it happens sometimes that the insurer becomes solvent and they are unable to pay the losses being incurred. In such unfortunate cases the insured has to bear all the losses which were assumed to be paid by the purchase of the policies.

Thus whenever insurance is being used as a risk reduction technique then it is always advisable to consider the financial situation of the person to be insured and take due notice that will the person be able to pay for all the losses in case of any fault in the process. But sometimes it is very advisable to buy a group insurance to handle risk efficiently. If not the only technique, it can act as one of the potential one to deal such stressful situation.

The main factors that together form the crux of the nature of insurance are: Principle of indemnity, Principle of insurable interest, Principle of subrogation and Principle of utmost good faith.