Page 30 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 2: Risk and Insurance

Notes

Task Conduct a survey among 20 people and ask them what they think, why there is a
need of insurance and prepare a small report based on your survey.
If you have insurance but do not incur a loss for which you had coverage, you lose only the
premium you paid, although some insurance policies do have a return-of-premium feature.
And even though a particular loss may not occur, you still receive value from the premium paid
in the form of peace of mind and the knowledge that you are being obedient to commandments
that instruct you to care for your family. However, if you do not have insurance and you are
sued, get sick, or even die, you and your family may suffer serious consequences: your family
may have to rely on only one income or a reduced income to get by, and your children may not
be able to achieve important goals.
If you do not have insurance and you suffer great loss, it is likely that you will not be able to take
care of your family as you should. You may be unable to work, and you may lose your earning
capacity: you may lose everything you have ever saved.

Notes Insurance allows you to transfer the financial responsibility for risks like illness,
disability, and death to an institution capable of handling these risks.
Following points will give you more clarity about the need for insurance:

1. Removal of uncertainties: Insurance company takes the risks of large but uncertain losses
in exchange for small premium. So it gives a sense of security, which is real gift to the
business man. If all uncertainty could be removed from business, income would be sure.
Insurance removed many uncertainties and to that extent is profitable.

2. Stimulant of business enterprise: Insurance facilitates to maintain the large size commercial
and industrial organizations. No large scale industrial undertaking could function in the
modern world without the transfer of many of its risks to insurer. It safeguards capital and
at the same time it avoids the necessity on the part of industrialists. They are therefore free
to use their capital as may seem best.
3. Promotion of saving: Saving is a device of preparing for the bad consequences of the
future. Insurance policy is often very suitable way of providing for the future. This type of
policy is found particularly in life assurance. It promotes savings by making it compulsory
which has a beneficial effect both for the individual and nation.
4. Correct distribution of cost: Insurance helps to maintain correct distribution of cost. Every
business man tries to pass on to the consumer all types of costs including accidental and
losses also. In the various fields of Insurance such losses are correctly estimated keeping in
view a vast number of factors bearing on them. In the absence of insurance these losses
and costs would be assessed and distributed only by guess work.

5. Source of credit: Modem business depends largely on credit; insurance has contributed ‘a
lot in this regard. A life insurance policy increases the credit worthiness of the assured
person because it can provide funds for repayment if he dies. Credit extension is also
obtained by means of various kinds of property insurance. A businessman who stock of
goods has been properly insured can get credit easily. Similarly marine insurance is an
essential requirement for every transaction of import and export.
6. Reduction of the chances of loss: Insurance companies spend large sums of money with a
view to finding out the reasons of fire accidents, theft and robbery and suggest some

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