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Unit 3: Nature and Scope of Insurance

sales, distribution, operations, claims, financial experts specializing in investment, banking and Notes
mutual funds, accountants, business analysts, HR professionals, software programmers & analysts,
technical and medical experts, agents, actuaries, valuers, underwriters, risk managers and
surveyors, to name a few. While some of these, such as programmers, marketing and HR
professionals are common to other industries, the rest are exclusive to the insurance sector.
Some key slots are traditional. New ones are those of actuaries, business development officers,
business analysts, insurance agents, valuers, surveyors, underwriters, and even process associates
for insurance underwriting, in the ITES sector such as in GE Capital, among others.
Self Assessment

Fill in the blanks:
7. Insurance is a ………………………… between two parties, the insurer or the insurance
company, and the insured, the person seeking the cover.

8. Insurance also serves as an excellent …………………….. saving mechanism.
9. Most of the population of India is not ……………………………, hence there is a lot of scope
in this sector and a number of companies are planning to enter the sector.

3.4 Insurance, Gambling and Hedging

Following section will give you an insight on the difference between insurance, gambling and
hedging:

3.4.1 Comparing Insurance & Gambling

You will find that insurance is often compared to betting or gambling, with insurers and
bookmakers taking a similar position and applying probability theory in respectively setting
rates and odds.

The underlying principles are the same. A bookmaker will convert prices or odds to percentages.

Example: In simplistic terms, taking a horse race, if the sum total of all the percentages
is less than 100%, it means that a punter could back every horse in the race and make a profit –
the bookmaker would lose. If however, as is customary, the sum total of all percentages is more
than 100%, a bookmaker could lay every horse in the race and make a profit – the punter would
lose. By virtue of the sum total of the percentages always being greater than 100%, overall, the
bookmaker will win. Insurers benefit similarly from this pooling effect, and protect themselves
against catastrophes or abnormal losses by arranging reinsurance.

Gambling transactions offer the possibility of either a loss or a gain. Gambling creates losers
and winners. Insurance transactions do not present the possibility of gain. Insurance offers
financial support sufficient to replace loss, not to create pure gain.

Did u know? The pooling effect means that some punters will win, some will lose.
Gamblers can continue spending, buying more risk than they can afford to pay for. Insurance
buyers can only spend up to the limit of what carriers would accept to insure; their loss is limited
to the amount of the premium.

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