Date: 2013-08-05

Insurance(1)

A brief survey of insurance literaturereveals differences of opinion concerning how the term should be defined. In whatever way the term is defined, insurance is a social device in which a group of individuals transfer risk and provides for payment of losses from funds contributed by all members who transferred risk. Those who transfer risk are called insureds. Those who assume risk are called insurers.

Risk Transfer

Insurance is a risk transfer mechanism ,whereby the individual or the business enterprise can shift some of the uncertainty of life onto the shoulders of others.In return for a known premium ,usually a very small amount compared with the potential loss, the cost of that loss can be transferred to an insurer. Without insurance, there would be a great deal of uncertainty experienced by an individual or an enterprise,not only as to whether a loss would occur, but also as to what size it would be if it did occur.

For example, a house-owner will realize that each year several hundred houses are damaged by fire . His uncertainty is whether in the coming year his house will be one of those damaged, and he is also uncertain whether,given that he will be one of the unlucky ones, his loss will amount to a hundred dollars or so for the redecoration of his kitchen or whether the house will be gutted and cost him thousands of dollars to repair.Even though the probability of his house becoming one of the loss statistics is extremely low, the average house owner will nevertheless select to spend, say $50 to $60 on house insurance, rather than face the extremely remote possibility of losing a house worth $ 200,000.

In the case of business enterprises, the values cxposed to loss are usually much higher, and the premium charged is likely to be substantially higher than that for a house. Even in these circumstances the majority of firms prefer to pay a known cost or premium for the transfer of risk. rather than face the uncertainty of carrying the risk of loss.

 

( liyy )09 Oct,2010

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