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Unit 8: Insurance Planning

family. The insurer promises to pay a fixed sum on the happening of an event i.e. death or Notes
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, are
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. 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 loosing, but the insured safeguards himself through insurance, and may suffer loss
only if he is not insured.

8.2 Risk and Insurance

Insurable risks have certain common features. They are enumerated below:
1. Financial value: The risk must involve a loss that is capable of financial quantification.
Insurance is concerned only with situations where monetary compensation is given
following a loss. Loss or damage of property may lead to a loss, which is quantifiable. In
life assurance for example, the financial loss suffered by a wife on the death of her husband
is difficult to quantify; still a specific sum of money is decided prior to taking out the
policy.
2. Homogeneous exposures: If there are thousands of people/properties having similar
exposures then the contributions could be comparatively small as the percentage of losses
on the whole will decrease.
3. Insurance is concerned only with pure risks: Speculative risks, where there is the possibility
of some gain, cannot be insured. This is generally the case, although certain modern
developments may lead us to alter this statement in due course. Speculative risks are
normally taken in the hope of a gain. All pure risks are insurable but speculative risks, on
the whole, are not.
4. Fortuitous (by fortune): The loss must be entirely fortuitous as far as the person seeking
insurance is concerned. It is not possible to insure against an event that will occur with
certainty, as in such a case, there would be no risk, no uncertainty of loss. The frequency
and severity of any risk must be completely beyond the control of the person taking the

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