It means “as a social promise where an insurance company provides financial compensation for the larger number of risks and uncertainties”. It may involve risk to raw material, premises, plant, and machinery, and illness or death, in return for payment of a specified amount called premium.
Insurance means “protection from financial losses”. It involves two parties i,e. the insurer and insured. Insurer indemnifies full or partial financial compensation for the loss or damage to the insured, occurring from specified eventualities within a specified period. Insurance is vital for risk management.
However, provides protection only against tangible losses and can not ensure continuity of business, market share or customer confidence.
Basic Insurance Terminology :
A policyholder is a person or a group who is the owner of an insurance policy and pays the premium. He has the privilege to exercise the rights stated in the contract and whose name appears on the records of the insurance firm.
It is the duration for which the policy provides life insurance coverage and can be any period ranging from 1 year to 100 years or whole life depending on the type of insurance plan and its terms and conditions.
An insurer is the insurance company which provides insurance policy and coverage and indemnify for losses.
Insured is the person or an organization who has the insurance coverage against insurance perils.
Premium is the amount charged by an insurer to the insured in respect of given insurance policy, where an insurer undertakes all the risks and uncertainties. It involves higher the premium, higher the coverage.
Nature of Insurance:
- Risk Sharing
- Payment on contingency
- Amount of payment of the claim
- Agreement between two parties
- Lawful considerations
- Possibility and certainty of events
- Protection against a specified period
- A large number of insured persons
- Insurance is different from gambling
- Insurance is different from charity
Functions of Insurance:
It provides security against future risks, uncertainty by apportioning with others and also provides strength to insured to bear all the losses at a specified period.
Collective Risk Bearing:
It is an instrument through which an insurance company divides a few losses among the more significant number of people. All the insured party gives a certain amount of premium, out of which some policies are matured.
A certainty of Compensation of loss:
The primary objective of insurance is to reduce the uncertainty by way of better planning and administration.
Initially, the work of an insurance company is to evaluate the risk by ascertaining diverse factors that will give rise to risk.
Prevention of Losses:
Insurance companies help in the prevention of losses to people/organizations by way of joining hands and providing right instructions, installation system which is engaged in loss prevention measures.
Providing funds for Investments:
Insurance company receives a large premium amount by different insured people which they accumulate and invest in economic development plans or productivity projects.
Covering more massive risks with small capital:
By way of paying a small amount of premium, a businessman can cover more significant risks and uncertainty with small capital.
Helps in the development of larger industries:
The insurance company provides an excellent opportunity for the development of those industries which involves more risk.
Insurance increase Efficiency:
As it reduces the uncertainty of business, a businessman feels more motivated and they can devote his time for better achievement of goals and their profit earning. This also helps in improving their efficiency.