SIM=Subscriber Identity Module
As the other posts said..this is the chip that performs several critical functions on your phone, to include:
-Provides the wireless carrier (phone company) with a unique serial number that associates billing and authentication to your account.
-Stores some or all phone numbers that are stored in your phone.
-Some SIMs may also store some phone settings and functions, but this varies by phone model and carrier.
The message you are getting is due to the phone not being able to recognize the SIM. SIMs are pretty resilient, and I have seen some even survive salt water immersion (something that usually spells certain death to any electronic device). While the phone could also have a failure where the SIM slot connects to the phone, the most likely culprit is the place where the SIM contacts and the phone contacts meet. Here's the easiest way to fix it.
-Take out the SIM card
-Place a little rubbing alcohol or electronic contact cleaner on a paper towel or other clean cloth. Be careful, as rubbing alcohol is flammable! No smoking, lit candles or other ignition sources should be nearby.
-Lightly clean the contacts on the SIM card with the cloth.
-Depending on the type of SIM slot, try to LIGHTLY clean the metal contacts where the SIM contacts meet the phone with a cloth or cotton swab with alcohol or contact cleaner on it. Be careful not to push on these too hard or bend the contacts while cleaning.
-Once the alcohol dries, place the SIM back into the phone and power the phone on. Be careful not to get oil from your fingertips on the SIM while placing it back into the phone. SIMs are usually pretty resistant to this, but oils can attract dirt and dust. Even in small quantities these can compromise your connection.
I hope this helps! If not, you can usually place the SIM in another phone used by your phone carrier, even if it isn't the same model phone. This will help you figure out whether the SIM or phone is the problem.
Also, a little tidbit...your phone may show "emergency calls only", even with no SIM installed. This is because the FCC mandates American cell phone providers to never block 911 calls, even on an unactivated phone.
Personal knowledge of cellular phones and communications systems.