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. Insurance can be defined from two different perspectives, which are as follows:
- Functional definition:
Insurance is a co-operative device to spread the loss caused by a particular risk to which a number of people are exposed to and agree to insure them against the risk.
Therefore, insurance is:
- Co-operative device
- To spread the risk amongst the persons who are insured against it
- To share the losses according to the probability of loss to the risk of each member of society
- To provide security against losses to the insured
- Contractual definition:
Insurance has been defined to be that in which a sum of money as a premium is paid in consideration of the insurer’s incurring the risk of paying a large sum upon the contingency. The insurance thus is a contract whereby:
- Certain sum, called premium is charged in consideration,
- Against the said consideration, a large sum is guaranteed to be paid by the insurer who received the premium,
- The payment will be made in certain definite sum, i.e., the loss or the policy amount whichever My be, and
- The payment is made only upon a contingency.
Moreover, insurance can be defined as a consisting one party (the insurer) agrees to pay to the other party (the insurer) or his beneficiary, a certain sum upon a given contingency (the risk) against which the insurance is sought.
Meaning of Insurance:
An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.
The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.