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Understanding Insurance Basics

Insurance is defined as a cooperative mechanism to distribute risk among individuals, involving the payment of a premium for potential future losses. Its primary functions include providing certainty of payment and protection against losses, while secondary functions encompass loss prevention and economic support. The nature of insurance emphasizes risk sharing and cooperation, distinguishing it from gambling and charity.

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5 views6 pages

Understanding Insurance Basics

Insurance is defined as a cooperative mechanism to distribute risk among individuals, involving the payment of a premium for potential future losses. Its primary functions include providing certainty of payment and protection against losses, while secondary functions encompass loss prevention and economic support. The nature of insurance emphasizes risk sharing and cooperation, distinguishing it from gambling and charity.

Uploaded by

mdahanafabidudoy2003
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd

Chapter 1

Definition and Nature of Insurance


Definition of Insurance

 Functional Definition: Insurance is a cooperative device to spread


the loss caused by a particular risk over a number of persons, who are
exposed to it and who agree to insure themselves against the risk.

 Contractual Definition: Insurance has been defined to be that in


which a sum of money as a premium is paid in consideration of the
insurer’s incurring the risk of paying a large sum upon a given
contingency.
Functions of Insurance

Primary Functions

i. Provides certainty of payment at the uncertainty of loss.


ii. Provide protection against the probable chances of loss.
iii. Risk-Sharing

Secondary Functions

i. Prevention of loss
ii. Provides Capital
iii. Improves efficiency
iv. Helps in economic progress
Nature of Insurance

 Sharing of Risk
 Co-operative device
 Value of Risk
 Payment at contingency
 Amount of Payment
 Large Number of Insured Persons
 Insurance is not a Gambling
 Insurance is not Charity
Principles of Insurance

1. Principles of Co-operation: If one person is providing for his own


losses, it cannot be strictly an insurance because in insurance, the
loss is shared by a group of persons who are willing to co-operate.

2. Principles of Probability: The chances of loss are estimated in


advance to affix the amount of premium. Since the degree of loss
depends upon various factors, the affecting factors are analyzed
before determining the amount of loss.
Philosophy of Insurance

Risk Loss Peril Hazard


 Risk implies future uncertainty about deviation from expected
earnings or expected outcome. Risk measures the uncertainty that an
investor is willing to take to realize a gain from an investment.
 Loss is the financial damage one suffers due to an insurable event.
 A peril is a potential event or factor that can cause a loss, such as the
possibility of a fire that could engulf a house.
 A hazard is a factor or activity that may cause or exacerbate a loss,
such as a can of gasoline left outside the house door or a failure to
regularly have the brakes of a car checked
 Example: Suppose a fire begins in your chimney and destroys your
home because you have not cleaned the chimney in a few years. In
that case, the fire is the peril, and the dirty or defective chimney is the
hazard

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