CHAPTER ONE:

INTRODUCTION
Prepared By
Md. Sagar Rana
Lecturer
Banking and Insurance
University of Rajshahi
Definition of Insurance

■ Insurance is defined as a co-operative device to spread

the loss caused by a particular risk over a number of
persons who are exposed to it and who agree to insure
themselves against that risk.
■ Risk
• Risk is uncertainty of a financial loss. — [Mishra]
• Risk is defined as uncertainty concerning a possible loss. Another
words, risk is the variation in possible outcomes of an event based on
chance. [Dorfman]
• Risk is defined as uncertainty concerning the occurrence of a loss.
[Rejda] E.g. the risk of being killed in a car accident because of
uncertainty.
• Risk is a condition in which there is a possibility of an adverse
deviation from a desired outcome that is expected or hoped for.
Chance of Loss
■ Chance of loss should not be confused with the risk.
■ Chance of loss is the possible number of losses out of a given number
of exposures. It is simply the probability of loss. Is defined as the
probability that an event will occur.
Peril
■ A PERIL is defined as the of loss. E.g. fire, tornados, heart
attack, road accident, cause
Hazard
■ Hazard is a condition that may increase the chance of loss.
■ HAZARDS are conditions that increase the frequency or the
severity of the losses.
■ Hazard is any condition that creates or increase the chance
of loss.
Types of Hazard
■ Physical - physical condition that increases the chance of loss.
Physical hazards consist of those physical properties that increase
the chance of loss from the various perils. Examples of physical
hazards that increase the possibility of loss from the peril of fire
are the type of construction, the location of the property, and the
occupancy of the building.
■ Moral - dishonesty or character defects in an individual somebody
who deliberately causes the loss. Moral hazard refers to the
increase in the probability of loss that results from dishonest
tendencies in the character of the insured person. More simply, it
is the dishonest tendencies on the part of an insured that may
induce that person to attempt to defraud the insurance company.
Types of Hazard
■ Morale - carelessness or attitude to a loss because of the
existence of the insurance The attitude, is an "Why should I
care? I'm insured," example of the morale hazard. acts to
increase losses where insurance exists, not necessarily because
of dishonesty but because of a different attitude toward losses
that will be paid by insurance. When people have purchased
insurance, they may have a more careless attitude toward
preventing losses or may have a different attitude toward the
cost of restoring damage. Morale hazard is also reflected in the
attitude of persons who are not insureds.
■ Legal - characteristics of the legal system that increases
frequency. Legal hazard refers to the increase in the frequency
and severity of loss that arises from legal doctrines enacted by
legislatures and created by the courts.
Loss
■ Loss is the unintentional decline in or appearance of value
arising from a contingency.
■ Loss is the undesired reduction of economic value.
■ Insurer; is the party who agrees to pay for the losses
■ Insured; Is the party who claim for the damage from the
insurer.
■ Premium Is paid by the insured and received by the insurer
for the insurance
Definition of Insurance
Functional Definition;
■ A co-operative device to spread the risk.
■ The system to spread the risk over a number of persons
who are insured against the risk.
■ The principle to share the loss of each member of the
society on the basis of probability of loss to their risk.
■ The method to provide security against losses to the
insured.
Definition of Insurance
Contractual Definition;
Insurance is defined as to 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 a given contingency.
i. certain sum, called premium, is charged in consideration,
ii. against the said consideration, a large sum is guaranteed
to be paid by the insurer who received the premium,
iii. the payment will be made in a certain definite sum,
iv. the payment is made only upon a contingency
Functions of Insurance
Primary Secondary
Function Function
Insurance
Prevention
provides
of loss
certainty

Insurance
It provides
provides
capital
protection

It improves
Risk sharing
efficiency

It helps
economics
progress
Nature of Insurance

■ Sharing of risks
■ Co-operative devices
■ Value of risk
■ Payment at contingency
■ Amount of payment
■ Large number of insured persons
■ Insurance is not gambling
■ Insurance is not charity
Principles of Insurance

■ Principles of co-operation
■ Theory of probability
*Law of large numbers