Page 264 - DMGT303_BANKING_AND_INSURANCE

Unit 12: Insurance

and thereby ensures safety and security for people and organizations. In every economy, there Notes
are a section of people who face many risks, but are unable to ensure themselves. This
phenomenon has led to the emergence of concept of social insurance plans. Social insurance
plans are mostly organized by government to give protection to the weak and the down trodden.
Thus, insurance devise plays a significant role in maintaining the well being of individuals and
the economy as a whole.

Insurance has been-defined as the institution which eliminates risk or which substitutes certainty
for uncertainty. The occurrence of events insured against cannot wholly be prevented but the
uncertainty of financial loss through such occurrences can be eliminated by distributing the loss
over a group. Thus a man cannot be sure whether or not his house will burn even if he use all the
preventive measures known. If the house burns the property is lost and gone forever that much
material value has been actually destroyed. But it is not necessary that the owner should stand
the entire loss. Before the fire occurred it was not known whether his house would burn or some
one's else and he could agree with other owners of houses that they would all contribute to a
common fund from which any unfortunate owner who lost his house by fire should be
recompensed. Thus instead of the loss falling on one it can be divided equally among all. This is
the essence of insurance and it illustrates the meaning of the statement that insurance is the
elimination of uncertainty or the replacement of uncertainty by certainty. The common
contribution to the fund above referred to constitutes the certain loss and is measured by the
premium; the uncertain loss refers to the uncertainty that a particular house will burn. The same
situation exists with respect to life insurance. It is not death itself that can be distributed, i.e.
parcelled out among a number of insurers, but the financial consequences of death. Man has an
earning power during a certain period of his life which is lost to his business or his family by
premature death, but it is not known in advance upon whom death will fall prematurely, hence
all men can contribute to a fund which will be used to satisfy the business and family needs of
those who die early.

12.18 Keywords

Accident: An event definite in time and place and is unintended, unforeseen, unexpected and one
time.

Agent: An insurance company representative licensed to solicit, negotiate or affect contracts of
insurance, and provide service to the policyholder for the insurer.

Avoidance: A risk management technique whereby a situation or activity that may result in a
loss for a firm is avoided or abandoned.

Chance: The unknown and unpredictable element that causes an event to result in a certain way.
Contingency: A happening dependent on something which may occur in future.

Fidelity Risk: Risk of loss due to dishonesty of a person.
Fire Insurance: Coverage for losses caused by fire and lightning, plus resultant damage caused
by smoke and water.
Flood insurance: Coverage against loss resulting from the flood peril.

Fundamental Risk: Risk which arises due to the nature of the society and affect people at large
e.g. inflation, unemployment.

Hazard: A condition that creates or increases the chance of loss.

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