Page 42 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 3: Nature and Scope of Insurance

Similarly, in pure endowment, payment is made only at the survival of the insured at the Notes
expiry of the period.
5. Amount of Payment: The amount of payment depends upon the value of loss suffered due
to the happening of that particular insured risk, provided insurance is there up to that
amount. In life insurance, the purpose is not to make good the financial loss suffered.
Moreover, one cannot estimate the value of a human being. A person is no doubt precious
to his/her family. The insurer promises to pay a fixed sum on the happening of an event
i.e. death or permanent disability.

The amount of loss at the time of contingency is immaterial in life insurance. But in the
property and general insurances, the amount of loss, as well as the happening of loss, is
required to be proved.
6. Larger Number of Insured Persons: The price of insurance is basically linked to the cost of
claims, which is only known subsequently. In the beginning, it is an unknown factor and
an estimate is made on the basis of past claims experience or empirical data about the
longevity of human beings, accidents and their financial consequences.
Generally, the past claims experience is repeated with minor variations if a large number
of risks are collected. This once again operates by the law of large numbers and is one
reason why insurance companies want to do as much business as possible.

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Caution The ultimate objective is to keep the insurance cost as low as possible.
7. Insurance must not be confused with Charity or Gambling: The uncertainty is changed
into certainty by insuring property and life because the insurer promises to pay a definite
sum at damage or death. In the absence of insurance, the property owner could at the best,
practice only some form of self-insurance, which may not give him absolute certainty.

A family is protected against losses on death and damage with the help of insurance. From
the point of view of an insurance company, the insurance contract is essentially non-
speculative. In fact, no other business operates with greater certainties. From the insured’s
point of view, too, insurance is also not gambling. Failure of taking insurance, however,
amounts to gambling because the uncertainty of loss is always looming on the head.

One could also say that the insurance is just the opposite of gambling. In gambling, by
bidding, the person exposes himself to risk of losing, but the insured safeguards himself
through insurance, and may suffer loss only if he is not insured.

Self Assessment

Fill in the blanks:
1. The risk is evaluated on the basis of …………………………. theory before insuring.
2. In pure ………………………………, payment is made only at the survival of the insured at
the expiry of the period.
3. The amount of loss at the time of contingency is ………………………………… in life
insurance.

3.2 Functions of Insurance

In this section, we will discuss about the functions of insurance. The functions of insurance can be
studied into two parts: (i) Primary Functions (ii) Secondary Functions.

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