Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.
The party bearing the risk is known as the ‘insurer’ or ‘assurer’ and the party whose risk is covered is known as the ‘insured’ or ‘assured’.
Concept of Insurance / How Insurance works:
The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds.
In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds
Contribution to the pool is made by a group of people sharing common risks and collected by the Insurance companies in the form of premiums.
Role of Insurance:
Insurance plays a crucial role in every risk management programme. Insurance is basically a risk control device. The purchase of insurance reduces the expected cost of losses. Risk reduction contributes for increased expected cash flows to the firm. The main advantage of purchasing insurance is that the firm must pay the loading on the insurance premium, which decreased expected cash flows.
The fundamental characteristics of insurance are:
It involves transfer of risk from the individual to the group
There is a sharing (pooling) of losses on some equitable basis such that fortuitous (unexpected) losses will be indemnified (paid)
Benefits of Insurance:
Reimbursement for losses
Reduction in tension and fear
Avenue for investment
Prevention of losses
Credit multiplication
Costs of insurance to society
Cost of business operations
Fraudulent and exaggerated claims
The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds.
In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds
Contribution to the pool is made by a group of people sharing common risks and collected by the Insurance companies in the form of premiums.
Role of Insurance:
Insurance plays a crucial role in every risk management programme. Insurance is basically a risk control device. The purchase of insurance reduces the expected cost of losses. Risk reduction contributes for increased expected cash flows to the firm. The main advantage of purchasing insurance is that the firm must pay the loading on the insurance premium, which decreased expected cash flows.
The fundamental characteristics of insurance are:
It involves transfer of risk from the individual to the group
There is a sharing (pooling) of losses on some equitable basis such that fortuitous (unexpected) losses will be indemnified (paid)
Benefits of Insurance:
Reimbursement for losses
Reduction in tension and fear
Avenue for investment
Prevention of losses
Credit multiplication
Costs of insurance to society
Cost of business operations
Fraudulent and exaggerated claims
