The mechanism of Insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ship are exposed to the same risk, which are related to water damage, ship sinking,piracy,etc

If a jumbo jet with more than 350 passengers crashes, the loss would run into several crores of rupees. No airlines would be able to bear such a loss. It is unlikely that many jumbo jets will crash at the same time. If 100 airlines companies flying jumbo jets, come together into an insurance pool, when ever one of the jumbo jets in the pool crashes, the loss to be borne by each airlines would come down to a few lakh of rupees. Thus, Insurance is a bussiness of "sharing".

(Example- 1) In a village, there are 400 houses, each valued at Rs. 20,000. Every year, on the average, 4 houses get burnt, resulting into a total loss of Rs. 80,000. If all the 400 owner come together and contribute Rs. 200 each, the common fund would be Rs. 80,000. This is enough to pay Rs. 20,000 to each of the 4 owner whose houses got burnt. Thus, the risk of 4 owner is spread over 400 houses - owners of the village.