Page 248 - DMGT303_BANKING_AND_INSURANCE

Unit 12: Insurance

Notes
Example 1: In a particular colony there are 600 houses each having a worth of Rs.. 30000.
Every year there is a probability of 3 houses getting burnt. The resultant loss per house is Rs
30000 and total loss being Rs 90000. If all the 600 home owners pool Rs 150 each to the pool the
unfortunate people whose houses were burnt can be easily paid.

Example 2: There are 10000 persons in a city who all are aged 40 and are healthy. It is
expected that of these, 10 persons may die during the year. If the economic value of the loss
suffered by the family of each dying person is taken to be Rs. 30000, the total loss would work
out to Rs. 3,00,000/-. If each person in the group contributed Rs. 100/- a year, the common fund
would be Rs.10,00,000/-. This would be enough to pay Rs. 30,000/- to the family of each of the
ten persons who die. Thus, 10000 persons share the risk of 10 persons.

The surplus, if any, after payment of claims remains in the fund which is utilized to meet future
excess losses or returned back to policyholders in one or the other form.

Human being - Are they Assets?

A human being is an income-generating asset. One's manual labour, professional skills are the
assets. Human assets can also be lost like other assets due to causes like - early death, fatal
sickness and death caused by accidents.
Accidents may or may not happen. Death will happen, sooner or later but the timing is uncertain.

Insurance is necessary to help those dependent on the income of a person.

Insurance - Is it a Business?

Insurance companies are called insurers. The business of insurance is to:
1. Bring together the persons with common insurance interests (sharing the same risks)
2. Collect the share or contribution (called premium) from all of them and
3. Pay out compensations (called claims) to those who suffer.

An Insurance policy, like all other contracts, creates rights and corresponding duties for the
parties to the contract. Let us examine the rights and responsibilities of the insurer and the
insured.

12.6 Rights and Responsibilities of the Insurer and Insured

12.6.1 Rights and Responsibilities of the Insurer

Rights and Responsibilities of the Insurer are listed below:
1. Right to collect premium from the insured: Insurer has a right to collect in advance a
specified sum as premium for his taking obligation of reimbursing the loss to the insured
as and when it occurs.
An insurer pays the claims to the insured from the pool of funds so build up through
collection of premiums. In fact, an insurer loads the premium with his administrative
costs (management expenses and agents commission) as well.

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