The main function of insurance is to spread risk. In its simplest form, insurance allows a group of individuals to put small sums of money into a pot, and use the money only if one member faces a loss. Rather than risk facing one disastrous loss, members take small losses every month and are ensured protection from serious losses.
This system of spreading risk has two main benefits in modern economies: it encourages entrepreneurship and forms the basis of the credit system.
It encourages entrepreneurship because it frees businesses of the financial burden of having to prepare for future losses. Imagine owning a coffee shop without insurance. On top of paying rent for your location, salaries for your employees, and supply costs, you would have to put funds aside in case you encountered a total loss. In this way, it allows entrepreneurs to invest their money into their business without those added costs.
It also allows individuals to access credit by assuring lenders their investments are guaranteed. To use the coffee shop example, imagine you want to open up a new location. You request a bank loan to help pay for a new property. Your bank can only do this if their investment (in your property) can be guaranteed. If your building was destroyed in a fire, your bank would lose the investment. With insurance, they can be sure that their investments are protected. Credit allows business ideas to get off the ground and keeps economies dynamic.
As a foundational aspect of modern economies, insurance plays a vital role in contributing to the well-being and happiness of all members of society. Spreading risk allows individuals to invest in business ventures without the fear of losing everything, and gives investors the assurance they need to put money in the hands of capable entrepreneurs.