Insurance works by pooling contributions from many individuals exposed to the same risks into a central fund. If a risk event occurs like a fire or death, the insured person's loss is paid from this common fund rather than having to bear the entire cost themselves. This spreads the financial risk over a larger group of people.
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Insurance works by pooling contributions from many individuals exposed to the same risks into a central fund. If a risk event occurs like a fire or death, the insured person's loss is paid from this common fund rather than having to bear the entire cost themselves. This spreads the financial risk over a larger group of people.
Insurance works by pooling contributions from many individuals exposed to the same risks into a central fund. If a risk event occurs like a fire or death, the insured person's loss is paid from this common fund rather than having to bear the entire cost themselves. This spreads the financial risk over a larger group of people.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
Insurance works by pooling contributions from many individuals exposed to the same risks into a central fund. If a risk event occurs like a fire or death, the insured person's loss is paid from this common fund rather than having to bear the entire cost themselves. This spreads the financial risk over a larger group of people.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online from Scribd
Download as doc, pdf, or txt
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Basics of Insurance
Meaning of Insurance Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company .
A pool is created through contributions made by persons seeking to protect themselves
from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool.
Insurance works on the basic principle of risk-sharing. A great advantage of insurance is
that it spreads the risk of a few people over a large group of people exposed to risk of similar type.
Definition 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.
Lets take some examples to understand how insurance actually works:
Example 1 Example 2 SUPPOSE SUPPOSE
• Houses in a village = 1000 • Number of Persons = 5000
• Value of 1 House = Rs. 40,000/- • Age and Physical condition = 50 years • Houses burning in a yr = 5 & Healthy • Total annual loss due to fire = Rs. • Number of persons dying in a yr = 50 2,00,000/- • Economic value of loss suffered by family of each dying person = Rs. • Contribution of each house owner = 1,00,000/- Rs. 300/- • Total annual loss due to deaths = Rs. 50,00,000/-
• Contribution per person = Rs. 1,200/-
UNDERLYING ASSUMPTION UNDERLYING ASSUMPTION All 1000 house owners are exposed to a All 5000 persons are exposed to common risk, common risk, i.e. fire i.e. death PROCEDURE PROCEDURE All owners contribute Rs. 300/- each as Everybody contributes Rs. 1200/- each as premium to the pool of funds premium to the pool of funds
Total value of the fund = Rs. 3,00,000 (i.e. Total value of the fund = Rs. 60,00,000 (i.e. 1000 houses * Rs. 300) 5000 persons * Rs. 1,200)
5 houses get burnt during the year 50 persons die in a year on an average
Insurance company pays Rs. 40,000/- out of Insurance company pays Rs. 1,00,000/- out of the pool to all 5 house owners whose house the pool to the family members of all 50 got burnt persons dying in a year EFFECT OF INSURANCE EFFECT OF INSURANCE Risk of 5 house owners is spread over 1000 Risk of 50 persons is spread over 5000 people, house owners in the village, thus reducing the thus reducing the burden on any one person. burden on any one of the owners.
