Basic of Insurance - Part 1
All of us have heard of insurance. Life insurance, car insurance, business insurance, etc... Many of us know it is an important element in our life, yet only few really understand what insurance is all about and have applied the concept of insurance to their own advantage.
So what is insurance? Basically, insurance is an arrangement where individual share his/her loses with a group of people facing the similar risk exposures. How does it work? Let say a group of people facing a particular risk contribute to a “fund” in the form of premium. Of course it is impossible for them being struck by the unfortunate event all at the same time right? This “fund” is created to compensate the unfortunate few as a result of the operation of the specific risks. It is what we call as Pooling of Risk.
Insurance is essentially an economic institution based on the principal of mutuality and co-operation. Nonetheless, the fund created is just sufficient to pay for a maximum of certain claims only. Besides, only certain risks can be insured. The primary function of insurance is to equitably spread the financial losses of the unfortunate few among the many. It is used to reduce the total amount of losses and removes fear and worries. At the same time, it can also be utilized as a mean of saving and sources of capital for investment.
So what is insurance? Basically, insurance is an arrangement where individual share his/her loses with a group of people facing the similar risk exposures. How does it work? Let say a group of people facing a particular risk contribute to a “fund” in the form of premium. Of course it is impossible for them being struck by the unfortunate event all at the same time right? This “fund” is created to compensate the unfortunate few as a result of the operation of the specific risks. It is what we call as Pooling of Risk.
Insurance is essentially an economic institution based on the principal of mutuality and co-operation. Nonetheless, the fund created is just sufficient to pay for a maximum of certain claims only. Besides, only certain risks can be insured. The primary function of insurance is to equitably spread the financial losses of the unfortunate few among the many. It is used to reduce the total amount of losses and removes fear and worries. At the same time, it can also be utilized as a mean of saving and sources of capital for investment.
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