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What are the fundamental principles of insurance?

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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


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.