Insurance, in general, is a device by means of which risks are distributed in such a way as to lessen the economic burden to those upon whom it would otherwise fall more heavily. In case of fire insurance, for example, any one of a thousand houses may be burned during the coming year. There is danger for all house owners. But if each householder pays to an insurance company a small sum of money which he will scarcely miss, he may receive the assurance that in case his house does really burn he will be reimbursed for the larger part of the value. Or in the case of life insurance, while each person knows that he will some day die, the time of his death is uncertain. He does not know whether or not he will live long enough to make suitable material provision for his dependents. By paying a small sum of money yearly to the insurance company he receives assurance that upon his death, whether soon or late, his dependents will receive a substantial sum of money.

Although all insurance is in a sense social in its nature, a distinction is made between commercial insurance and social insurance. Commercial insurance is insurance which is conducted as a competitive business. The insurance company collects premiums from different individuals who are subject to the hazard in question. These premiums must be sufficient in the long run to pay the losses to the insured and to pay for the management of the insurance business. Considerable sums of money are paid by insurance companies in advertising and attracting customers. Where the amount for which the insurance is issued is large these expenses for securing the business become relatively small. On the other hand, where persons can afford insurance only in small amounts the cost of securing business often becomes so great as to be prohibitive.

Social insurance is working-class insurance. Here the amounts for which insurance is issued are usually small and the costs of administration relatively large. The result is, that while this class is urgently in need of insurance in various forms, the profits of the business are not sufficient to induce commercial companies to go into it. Moreover, some of the hazards which are borne by the working class are placed upon them unfairly and ought to be borne by the businesses which employ them or by society in general. Since the least well provided for of the workers will not or cannot afford commercial insurance and since the state has a direct interest in guarding them from disasters which they are likely to meet from unforseen eventualities, it becomes the duty of the state to assist them to secure insurance. This state-assisted insurance is called social insurance to distinguish it from competitively secured insurance, which is called commercial insurance.