Originally, we were covered in hair that is course and thick. We still have some of this hair, and it can be found in the armpit and groin area. This hair was used to protect our bodies from the elements (wind, cold, rain, sun). Over time, we developed clothing. When we did this, the course hair that we had everywhere was genetically selected out over time.

Although we still have hair all over our bodies, it is much more fine that it used to be. This hair still does some protecting (including keeping warmth when it gets cold), though we use clothing for many of the original uses.

Good question.
Our ancestors had hair for insulation against the cold and protection from other elements of the environment. We've lost most of our hair, but not all of it, and why we have what we still do is somewhat mystifying. My guess is that it has to do with selecting mates.