Introduction to insurance | Complete information by

 Introduction to insurance | Complete information by


Please read this article carefully. then you will be able to:

  • Define Insurance
  • Explain the concept of insurance
  • explain the purpose and need of insurance
  • Explain the Concept of Risk, Peril and Hazard.


Every asset is to subject to risk. it may destroyed or may become non- functional anytime. insurance is defined as a contract whereby, In return of payment of premium by the insured. The insurers pay the financial losses suffered by the insured as result to the occurrence of unforeseen events.

Thus, Insurance protect a person from losses suffered and indemnifies the loss. thus it can be rightly said that the general insurance is for the person and not the property as any assets or property is inherently expose to any loss. Insurance is based of the concept of risk pooling or risk sharing of losses.

Basically under this concept, all individual suffering a similar risk, place and agreed sum into pool and the nominees collected are used to indemnify any contributing individual against any losses arising out of the risk.

Therefore we can say insurance is mechanism where the losses of an individual are transferred over a group of individual who are exposed to the same risk. In other words, insurance is a method in which a large number of people exposed to a similar risk make contributions to the common fund out of which the losses suffered by the unfortunate few due to accidental events, are made good.

Concept of Insurance


For Example– In a village there are 400 houses each valued at RS 20,000. Each Year On The average 4 Houses get burned resulting into total loss of RS 80,000. If all the 400 owner came together and contribute RS200 Each the Common Fund would be RS 80,000/-

This Fund is enough to pay RS 20,000 to each of the 4 owners whose houses got burnt. Thus the risk of 4 owners is spread over 400 house- owners of the village.

If a human being dies, there is a financial loss to the family. if the non-human living being die there is a financial loss to the owner.

If the Non- Life assets are destroyed there is a financial loss to the owner. so customer pay certain nominal premium and get secured from untimely death or destruction of property to cover financial loss.

Let us Take a Look at the assets covered by insurance companies

Human Being (generally covered under Life Insurance Companies). however, Personal accident insurance, Travel Insurance, Health insurance etc. Related to human beings are dealt with by general insurance companies – Human beings are also treated as assets.

Other non-human living beings like elephant, horses, dog, fish, honey bee etc. (Covered by general insurance companies) these are treated as as human beings property or assets of human beings because they provide monetary benefit to human being.

Non-life assets like industries, building (Houses), Machinery, aero planes, ships, motor vehicles, Electrical fixtures, Factories, shops etc. (Covered by general insurance companies).

In other words, Customers transfer the risk of the loss of the assets to the insurer by the paying the required premium. Insurance does not  protect the assets against death or damage to property but Pays the actual financial loss to the family or owner of the property.

Thus, one can conclude that \”General insurance is for the person  and not the property\”. In other words it means, that property is inherently exposed to loss, while financial loss compensation can be made good for an individual through the medium of insurance.

Insurer– The Insurance companies which pools the premium fund pays in case of loss.

Insured– The person who pays the premium is called insured.

Purpose and need of insurance

Insurance reduces consequences of adverse situations insurance is a mean of protection from financial loss, but it would not protect the asset.

it is a form of risk management primarily used to cover against the risk of contingent, uncertain loss. to Guard against such unexpected losses there is a need of insurance.

Therefore, assets are insured because they are likely to be destroyed or made non functional before the expected life time. By inspiring the assets the insured can feel safe his capital on asset is secured and he is free form any anxieties.

Besides, the insurance can replace the damaged asset with the payment of loss received from insurers- so that the insured can run his business uninterrupted.

Concepts of Risk, peril and hazard

Peril :

Accidents, diseases, fire, floods, breakdown, lighting, earthquake, etc. are called accidental events. these are otherwise called perills.

Qualification of perils:

  • Perills does not reverse assets against loss.
  • A perill  can not be avoided through insurance.

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