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Contents
Definition of Insurance
It is defined as an agreement whereby one person(called the proposer) agrees to pay a sum of money (premium) periodically for an agreed term to the other person (Insurer) who in turn agrees to pay a definite sum of money on the happening of certain events contingent on human life.
Where there is no economic loss there cannot be any insurance.
Insurance is possible only by distruction.
Insurance is possible only when there is economic loss.
Insurance is possible only when there is uncertainity, chance, risk.
Insurance is possible only when the insured object generates income.
Fundamental Principles of Insurance
Insurable risks share several common points:
Large quantity of exposure units of same type. Majority of insurance policies are sold for individual members of very huge classes. For example, in 2004 number of automobile policies sold in United States is about 175 million. In 2007 two million policies are sold online. Insurers benefit from large number of homogeneous Insurance units. Insurers profit is based on "Law of large numbers".
As the number of homogeneous exposure units increases, expected results becomes actual results. There are some exceptions to this "Law of large numbers" in Insurance Industry. Some insurance companies offer insurance policies to actors, actresses and sports persons. Insurance policies on Huge buildings and properties exists but there are no homogeneous units. Some companies offer Satellite Launch insurance which is very rare. Although several exposures fail on this creterion of "law of large numbers" , many exposures are considered to be insurable.
Definite Loss. An incident or an event which causes the loss that is subject to insurance policy should take place from a predetermined or known cause, at a known place and at a known time. Insurence is based on this theory of definite loss.
Examples: (a)Death of the insured who has taken Life Insurance Policy
(b) Death, injury, damage to the insured by fire, accidents.
all these examples meet the creterion. But other types of losses does not meet the creterion of definite losses. In case of health insurance definite loss cannot be predetermined as in most cases, the cause of the disease, specific time, place cannot be estimated.
Loss due to Accidents
The incident or event which initiates the claim shoud be incidental and it should not be premeditated. It should have happened by chance. The event should not have occured under the control of the beneficiary of the insurance. For example if a person has bought Fire insurance on his property, and due to fire his property gets damaged. If the person deliberately puts fire to his property keeping in view of getting the insurance amount, he is not eligible to get insurance amount as the event has occured under the control of the insured. Only if the event happens by chance the insured is eligible to get the insured amount. Ordinary business risks are not considered to be eligible for Insurance.
Large Losses:Amount of premium should be adequate to cover the expected cost of loss. It should also cover the cost of administering and issuing the policy and should be sufficient for the insurer to pay the claims. From the view point of the insured, premium paid should be reasonable to cover the size of the loss. There is no meaning in paying heavy premiums when the protection offered has not of much value to the buyer. Affordable premium.
When a group of people exposed to similar risk come voluntarily and contribute to a general fund and out of which people who suffers losses are compensated from the general fund. This system is called Insurance. The person raises the fund is called insurer. The person contributes to the fund is called the insured. The amount of contribution is called premium.
Estimable and calculable Loss Limited risk of sudden losses.
Business model of an Insurer
Indemnification
History of Insurance
Types of Insurance
Insurance Companies
Insurance industry in the world
Controversies
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