Business and Investment sidenote

The fundamental attribute of insurance is the transfer of risks from an individual to a group. The risk only means there is a possibility of occurrence of loss or damage. It may or may not happen. There has to be an uncertainty about the risk. Insurance is done against the contingency that it may happen. Insurance is relevant only if there are uncertainties. There are other meanings of the term risk. To the ordinary man in the street risk means exposure to danger. In insurance practice, risk is also used to refer to the peril or loss producing event. For example, it is said that general insurance covers the risks of fire, explosion, cyclone, flood etc.

Conceptually, the mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of the members suffers a loss. The others will share the loss and make good to the person who lost. The manner in which the loss is to be shared can be determined before hand. It may be proportional to the likely loss that each person is likely to suffer, which is indicative of the benefit he would receive if the peril befell him. The share could be collected from the members after the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid.

It is a known fact that, a human life is also an income generating asset. This asset also can be lost through unexpectedly early death or made non-functional through sickness and disabilities caused by accidents. If it happens around the time of one’s retirement, when it could be expected that the income will normally cease, the person concerned could have made some other arrangements to meet the continuing needs. But if it happens much earlier when the alternate arrangements are not in place, insurance is necessary to help those dependent on the income. (more…)