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Basics of Insurance


 It is common that there are countless of risks in every sphere of life. for property, there are fire risks; for shipment of goods there are perishment of goods; for human life, there are risks of death or disability; and so on. The chances of occurrences of the events causing losses are quite uncertain because these may or may not take place. In otherwords, our life and property are not safe and there is always a risk of losing it. A simple way to cover this risk of loss money-wise is to get life and property insured. In this business, people facing common risks come together and make their small contributions to the common fund.
            While it may not be possible to tell in advance, which person will suffer the losses, it is possible to work out how many persons on an average out of the group may suffer the losses. When risk occurs, the loss is made good out of the common fund. In this way, each and everyone shares the risk. In fact, insurance companies bear risk in return for a payment of premium, which is calculated on the likelihood of loss. 


There are three schools of thought, which have defined the nature of insurance as folows:

1) Insurance in terms of the relationship between the
insured & the insurer – transfer device: The insured is the person or firm or company confronted by risk and the insurer is a person or firm or company, which specializes in the assumption of risk. The primary business of the insurer is risk assumption for a fee.
2) Technical:
This school of thought defines Insurance in terms of techniques or mechanics it involves. According to Prof Mehr & Cammack, Insurance is a device for reducing risk by combining a sufficient number of exposure units to make their individual losses collectively predictable. The predictable loss is then shared proportionately by all units in the combination. Therefore, it implies both that uncertainty is reduced & losses are shared. Further, it is said that a device will be deemed Insurance if
(i) it implies the law of large numbers so that the requirement of future funds to cover losses are predictable with reasonable accuracy.
(ii) it provides some definite method for raising these funds by levies against the units covered by the scheme.
In short, the essential features of Insurance are the manner in which losses are predicted & shared.
3) Combination:
According to the third school of thought, Prof. Willet defines Insurance as a social device for making accumulations to meet uncertain losses of capital, which is carried out through the transfer of risks of many individuals to one person or to a group of persons. Wherever there is accumulation for uncertain losses, or wherever there is transfer of risk, there is one element of Insurance, only when these are joined with the combination of risk in a group is the Insurance complete. Another way to state this is to say that “Insurance is a transfer of risk with the added features of 
(ii) an estimate of future losses”.
Although each of the authors have defined Insurance differently but they are all thinking about virtually the same thing when they use the term Insurance. If we sum up all schools of thought then the Insurance can be well defined as follows:- “Insurance is a social device which combines the risks of individuals into a group, using funds contributed by members of the group to pay for losses.”

According to this school, Insurance may be defined as the transfer of pure risk from the insured to the insurer.

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