CHAPTER 3

NATURE OF INSURANCE

LEARNING OBJECTIVES
Upon completion of this chapter, you should be able to:
➢ Describe concepts of insurance.
➢ State the functions and the applications of insurance.
➢ Identify the elements of an insurable risk.
➢ Describe the benefits of insurance enjoyed by person involved.
➢ Explain the common features of insurance development.
 Overview

❖ Definition
❖ Operation of Insurance
❖ Concept of Common Pool
❖ Characteristics of Insurable Risks
❖ The Functions of Insurance
❖ The Benefits of Insurance
❖ The Development of Insurance
 Definition
❖Insurance is an agreement where a group of
individuals facing similar risks can share the
fortuitous losses of the unlucky few by the transfer
of such risks to the insurer who agrees to
compensate the losses.

Premium Common fund Loss

…contributions from …pooled together (common ….pay losses suffered by
many insured…. pool)… a few…
 Operation of Insurance
• Insu ranc e works be caus e th e : -
i n sure r c an co le ct prem ui m s f ro m a gr ou p of
individuals in similar circumstances
(not all of whom will suffer losses in any one year..
)

These premiums then pooled together, and used

by the insurer to pay losses

Losses then shared out among all the

policyholders rather than borne solely by the
unlucky few.
 Concept of Common Pool
❖ Insurance uses a common pool concept.

It takes contributions,
An insurance in the form of
company sets itself insurance premiums
up to operate the from many insured
pool. and pay for the losses
of a few.

The law states that

The operation of the the larger the group
common pool is of similar risks, the
based on the closer the actual
successful application losses experienced
of the Law of large by the group will
numbers. approach the
expected losses.
Characteristics of Insurable Risks
fortuitous

Financial
Public policy value

Characteristics of
insurable risks
Particular Insurable
risks interest

Homogeneous
Pure risks exposures
The Functions of Insurance

Primary
function

Indirect Secondary
functions functions
 Primary
function
Indirect
• To act as tisk transfer mechanism functions
Secondary
functions • Investment of funds
• Invisible exports
• Releasing funds otherwise tied up in reserves
• Stimulate business enterprise • Source of employment
• Remove fear and worry
• Reduction of losses
• Savings
• Social benefits
The Benefits of Insurance
Peace of
mind

Invisible Lost
earning control
Benefits
of
insurance

Investment Social
of funds benefits
END