The basic principle of insurance is that
an individual or a business concern
chooses to spend a definitely known
sum in place of a possible huge amount
involved in an indefinite future loss.
Thus insurance is the substitution of
a small periodic payment (premium) for
a risk of large possible loss. The loss of
risk still remains but the loss is spread
over a large number of policyholders
exposed to the same risk. The premium
paid by them are pooled out of which
the loss sustained by any policy holder
is compensated. Thus, risks are shared
with others. From the analysis of past
events the insurer (an insurance
company or an underwriter) knows the
probable losses caused by each type
of risk covered by insurance.
Insurance, therefore, is a form of risk
management primarily used to safe
guard against the risk of potential
financial loss. Ideally, insurance is
defined as the equitable transfer of the risk
of a potential loss, from one entity to
another, in exchange for a reasonable
fee. Insurance company, therefore, is
an association, corporation or an
organisation engaged in the business
of paying all legitimate claims that may
arise, in exchange for a fee (known as
premium).
Insurance is a social device in which
a group of individuals (insured)
transfers risk to another party (insurer)
in order to combine loss experience, which
provides for payment of losses from funds contributed (premium) by all
members. Insurance is meant to protect
the insured, against uncertain events,
which may cause disadvantage to him.