Principles of Insurance

Insurance is a cover used for protecting a personopportunity for cost.
from the financial losses. Financial losses can take- Huge Loss - Insurance - The size of the loss
many forms. There are risks to our investments,must be meaningful from the perspective of the
liabilities for our actions, and risks to our ability toinsured. Insurance premiums need to cover both
earn income.the expected cost of losses, plus the cost of
The insurer and the insured are the main twoissuing and administering the policy, adjusting
parties involved in insurance. The insurer is thelosses, and supplying the capital needed to
insurance company which will provide the cover torationally assure that the insurer will be able to
the insured against any financial losses. Thepay claims.
insured may be an individual person or a group of- Affordable Premium - Insurance - If the
people like an employer, members of a society,probability of an insured event is so high, or the
etc.cost of the event is so large, that the resulting
Basic categorization of Insurance There are mainlypremium is large relative to the amount of
two broad categories of insuranceprotection offered, it is not likely that anyone will
- Life insurancebuy insurance, even if on offer.
- Non-life insurance Life insurance products include- A large number of identical coverage units -
Life term policies, which give clean risk coverageInsurance - The vast majority of insurance
of only the death benefit, whereas endowment orpolicies are provided for individual members of
money back policies have a risk as well as savingsvery large classes. The existence of a large
component i.e. death as well as maturity benefit.number of identical coverage units allows insurers
The life insurance also includes Unit - Linkedto benefit from the so-called "law of large
Policies in which there is a risk component and anumbers," which in effect states that as the
savings component, which is invested in equity,number of coverage units increases, the actual
debt or gilt funds, depending on the insuranceresults are increasingly likely to become close to
company.expected results.
Non Life insurance products include property or- Measurable Loss - Insurance - There are two
casualty, health insurance or house, fire, marineelements that must be at least estimatable, if not
insurance etc. This insurance category deals withformally calculable: the probability of loss, and the
all the non-life aspects of an insured like theirattendant cost. Probability of loss is generally an
house, health, land, office, etc which might bringempirical exercise, while cost has more to do with
financial loss. There are few principles of insurance,the ability of a reasonable person in possession of
such as:a copy of the insurance policy and a proof of loss
- Definite Loss - Insurance - The event that givesassociated with a claim presented under that
rise to the loss that is subject to insurance should,policy to make a reasonably definite and objective
at least in principle, take place at a known time, inevaluation of the amount of the loss recoverable
a known place, and from a known cause. Theas a result of the claim.
classic example is death of an insured on a life- Limited risk of terribly large losses - Insurance -
insurance policy.If the same event can cause losses to numerous
- Unintentional or Accidental Loss - Insurance -policyholders of the same insurer, the ability of
The event that comprises the trigger of a claimthat insurer to issue policies becomes constrained,
should be accidental, or at least outside thenot by factors surrounding the individual
control of the beneficiary of the insurance. Thecharacteristics of a given policyholder, but by the
loss should be 'pure,' in the sense that it resultsfactors surrounding the sum of all policyholders so
from an event for which there is only theexposed.