What is Insurance ?

Insurance

"To understand and implement proper Insurance Planning, you should be able to grasp the following in the upcoming posts - WHAT IS INSURANCE, HISTORY OF INSURANCE and PRINCIPLES OF INSURANCE".

Insurance is based on principles of co-operation. The losses suffered by a few are spread over and shared by many. For example, collecting insurance premium from many people and sharing the loss with one person.

Insurance is protection against possible financial loss arising on the happening of an unexpected circumstance; it gives you peace of mind;

An insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured risk;

Insurance is concerned with protection of economic value of assets. Tangible assets are human beings, house, furniture, car, motor cycle etc. Intangible assets are liabilities

Insurance is a contract between two parties i.e., the insurer and the insured under which the insurer undertakes in exchange for a fee called premium which is paid periodically to compensate the insured for the loss / uncertain event arising from the risk insured against. In return, Insurance companies collect premiums to provide for this protection. A loss is paid out of the premiums collected from the insuring public and the Insurance Companies act as trustees to the amount collected as premiums to pay unforeseen losses.

For Example, in a Life Policy, by paying a premium to the Insurer, the family of the insured person/ bread winner receives a fixed compensation of sum assured on the death of the insured.

Similarly, in Car Insurance, in the event of the car meets with an accident, the insured receives the compensation to the extent of damage.

Insurance is defined in a ‘financial sense’ as, a financial arrangement which redistributes the costs of unexpected losses among the members of the pool from whom premium was collected. The pool is a collection of people exposed to similar risks. All members contribute a fixed amount as fees called premium towards a pool. The person who contributes premium will get an assurance that a certain fixed sum of money will be paid to him if the unforeseen event insured against happens.

Insurance can be defined in a ‘legal sense’ as, a contract between two parties by which one party (Insured) undertakes to make good or indemnify any financial loss suffered by other party (Insurer), in consideration of a sum of money called premium, on the happening of a specified event e.g. fire, accident or death. In this aspect, Insurance contract is referred as a policy.

To conclude, Insurance substitutes the uncertainty in human life by providing financial compensation. Insurance is a transfer of risk from the individual (One Party) to the group of people / pool (Other Parties) and there is a contract of sharing (pooling) of losses on some equitable basis such that unexpected losses can be indemnified (paid).

Categories: Insurance, Insurance Planning, Tutorials