Nature/characteristics of insurance

  1. Sharing of risk:

Insurance is a device that shares the monetary losses which might fall upon an individual or his family due to an event.

The loss may be because of various reasons like: death of the bread-earner of the family, theft, fire, accident etc.

  1. Co-operative device:

Insurance is co-operation of large number of people who agree to share the financial loss arising due to a particular event. The insurer cannot compensate every loss from his capital so by underwriting a number of people enable him to pay for the amount of loss on an individual. Such a group of people can be brought together through solicitation of agents, publicity or voluntarily. There is no compulsion to buy the insurance policy.

  1. Value of risk:

The risk is evaluated before insuring and accordingly the premium is charged. The higher the probability of loss, higher the premium charged. There are several methods to calculate risk.

  1. Payment of contingency:

The payment is made at the occurrence of the contingency insured. In case of life insurance the payment is certain as the death with certainly occur. While, other contingencies like fire, theft, etc might not occur, in such case no amount is given to the policy holder. However, in certain types of life policies, payment is not certain due to reasons like expiry of the policy. Example: Term-insurance.

  1. Amount of payment:

The amount paid by the insurer depends upon the value of loss occurred to the insured risk. In life insurance it is immaterial, as the value of one’s life cannot be calculated; while in other general and property insurances the amount and the happening of the loss has to be proved.

  1. Large number of insured people:

Large number of people should be insured in one co-operation as it will make the spread of loss smooth, immediate and cheap. In smaller co-operations the cost of insurance on one member may be higher. Therefore, the larger number of persons insured will result into low-cost of insurance as well as its premium.

  1. Insurance is not gambling :

Insurance eliminates the worry and turns uncertainty into certainty by insuring the property or life because the insurer promises to pay definite amount on damage or loss. Nothing is more uncertain than life and life insurance offers the only sure method of changing that uncertainty into certainty. In fact insurance is opposite of gambling because by gambling the person exposes himself to risk of losing whereas by insuring the person safeguards himself or his property.

  1. Insurance is not charity:

Insurance is not possible without premium i.e. consideration, and charity is given without consideration. Insurance provides security and safety in exchange of premium; therefore, it is kind of business

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s