Insurance: Meaning and Basic Nature of Insurance12th May 2020
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.
Meaning of Insurance
If one goes by the word meaning insurance is a contract between two parties whereby the insurer agrees to indemnify the insured upon the happening of a stipulated contingency, in consideration of the payment of an agreed sum, whether periodical or fixed (the premium). Insurance falls into the main groups of life, property, marine, aviation, health, transport, motor vehicle third party liability, and personal accident and sickness.
The term “assurance” is generally limited to the first of these, because the event in respect of which the policy is taken out namely the death of the person is assured, or certain. Only the time of the death is uncertain.
The meaning of insurance in context of insurance business is not easy to define. There are hundreds of definitions of insurance by hundred of persons. In fact the insurance is the subject matter relating from man to man and a person to person.
One needs insurance of life, another insurance of property and someone else for risk of business. A very rich may like insurance of his property and his wealth. A common man would like to keep secure his small earnings as secured.
The ultimate meaning comes to ensue security of what a person thinks very important for him. Every one want to be secure, or be content on certain conditions, to secure against any sort of peril may it be of life, against fire, accident, falling ill or otherwise. It is therefore that everyone wants to secure him in one or the other way But no one knows when the eventuality shall arise and remains in doldrums waiting for the eventuality.
In the present day affairs insurance means financial protection against losses arising out of happenings of an uncertain event. In order to protect against such losses one has to bear some financial burden also. This can be ensured by paying certain amount, depending on the risk covered and the amount of expected loss in the form of paying premium to any of the insurance companies.
In, simple words the meaning of insurance is to keep a person fearless and unworried about the future happenings which always remain uncertain. It absolve the risk of uncertainty and provides a piece of mind because the insurance facilitates reimbursement during crises situations and compensate for any potential future losses.
In view of the above discussion it is apparent that seeking an insurance cover is to transfer the risk from oneself to the insurance company. It is therefore can also be said as risk management tool for unfortunate events like death, accident, disability, sickness and retirement.
All these unfortunate events can either be met by paying from one’s own pocket or one may choose to transfer the risk on some consideration i.e., paying of premium to the insurance company which will pay on one’s behalf Insurance company: the company that underwrites the policy and this is where you transfer the risk to by paying a fee which is called the insurance premium.
Insurance is contract between two parties (one the insurer and second the insured) whereby the insurer agrees to undertake the risk of the insured in consideration of some amount known as premium and in return promises to compensate a fixed sum of money to the insured party on happening of an uncertain event like DEATH.
In case of survival the insurer has to pay after the expiry of a certain period in case of life insurance or to indemnify the insured party on happening of an uncertain event in case of general insurance.
In simple words insurance is sharing collective responsibility by a large number of people to compensate few people in case of crises Managing the collective responsibility (pooling persons) the insurance companies work as trustee to take care of such collective responsibility and the insurance regulations provide specific guidelines to ensure the insurance functions due serve the society as per the expectations of pooling members.
Nature of Insurance
- By nature insurance is a devise of sharing risk by large number of people among the few who are exposed to risk by one or the other reason.
- If a large number of subscribers to insurance serve the purpose of compensation to few among them exposed to uncertain risks appears as a co-operative look.
- Valuation of risk is determined as per predefined terms and conditions of the insurance policies.
- Insurance provides facility of financial help in case of contingency.
- However it depends on the value of insurance for which payment is made in case of contingency. This provides basis of the amount to be paid.
- Insurance is a policy regulated under laws and therefore the amount of insurance can neither be paid as gambling nor as charity.