CHAPT

EROF3INSURANCE
E NATURE
CLO1
Explain the concept of risk
and insurance principles that
govern the insurance industry.
 Nature of Insurance
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LO 1 : The concepts of insurance, common pool
LEARNINGand law of large numbers.
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BJECTIVESAdd
LO 2 :your
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operations Add your
and function oftitle here
insurance
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LO 3 : The characteristics of insurable risks

LO 4 : The benefit of insurance
e concepts of insurance, common pool and law of large numbers.
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 Loss
Common fund
Contributions from Pay loss suffered by
Pool together.
many insured few.
e concepts of insurance, common pool and law of large numbers.

CONCEPT OF COMMON POOL

2) It takes 3) The
4) The law states
contributions, operation of that the larger
1) An in the form of the common the group of
insurance insurance pool is based similar risks, the
company sets premiums on the closer the actual
itself up to from many successful losses
insured and application of experienced by
operate the the group will
pool. pay for the the Law of approach the
losses of a large expected losses.
few. numbers.
: The operations and function of insurance

OPERATION OF INSURANCE
 Insurer can collect premiums from a group of individuals in similar
circumstances.

 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.
: The operations and function of insurance

FUNCTIONS OF INSURANCE

1) PRIMARY FUNCTIONS

2) SECONDARY FUNCTIONS

3) INDIRECT FUNCTIONS
: The operations and function of insurance

FUNCTIONS OF INSURANCE
1) PRIMARY FUNCTIONS

 Insurance provides certainty:

Insurance provides certainty of payment at the uncertainty of loss. The uncertainty of loss can be
reduced by better planning and administration.

 Insurance provides protection:

The main function of the insurance is to provide protection against the probable chances of loss.
The time and amount of loss are uncertain and at the happening of risk, the person will suffer loss
in absence of insurance.

 Risk-Sharing:
The risk is uncertain, and therefore, the loss arising from the risk is also uncertain. When risk
takes place, the loss is shared by all the persons who are exposed to the risk.
: The operations and function of insurance
FUNCTIONS OF INSURANCE
2) SECONDARY FUNCTIONS

 Prevention of Loss:
The insurance joins hands with those institutions which are engaged in preventing the losses of
the society because the reduction in loss causes lesser payment to the assured and so more
saving is possible which will assist in reducing the premium.

 It Provides Capital:
The insurance provides capital to the society. The accumulated funds are invested in productive
channel. The dearth of capital of the society is minimised to a greater extent with the help of
investment of insurance.

 It Improves Efficiency:
The insurance eliminates worries and miseries of losses at death and destruction of property. The
carefree person can devote his body and soul together for better achievement.

 It helps Economic Progress:

The insurance by protecting the society from huge losses of damage, destruction and death,
provides an initiative to work hard for the betterment of the masses.
: The operations and function of insurance
FUNCTIONS OF INSURANCE
3) INDIRECT FUNCTIONS

Saving and Investment

 It is one of the important source of investment.

Risk-Free Trade

 As above mentioned insurance provides certainty and provides protection for future loss or
damage. It provides Indemnity in the event of unexpected loss or damages or disaster. 

Medium of Earning Foreign Exchange

 In international business, Any Country can earn foreign exchange by way of issue of marine
insurance policies. There are some other ways also available.
3 : The characteristics of insurable risks
CHARACTERISTIC OF INSURABLE RISK
NOT AGAINST PUBLIC It is a common principle in law that contracts must not be contrary to what society
POLICY would consider to be the right and moral thing to do.
PURE RISK Insurance is concerned with pure risks only because most pure risks are more
easily predictable.
PARTICULAR RISK Is a risk that affects particular individuals, such as robbery or vandalism
FORTUITOUS The occurrence of the event must be entirely fortuitous as far as the insured is
concerned (the ‘insured’ is the person, company or organisation insured by an
insurance company).
FINANCIAL VALUE The risk to be insured must result in a loss which is capable of being measured in
financial terms.
INSURABLE INTEREST defined as the right to insure arising out of legally recognised financial interest
which a person has in the subject matter of insurance.
HOMOGENOUS In the absence of a large number of homogeneous exposures, the task to
EXPOSURE calculate insurance premium is much more difficult
O 4 : The benefit of insurance
BENEFITS OF INSURANCE

1) Peace of mind

5) Invisible earning 2) Lost control

Benefits of
insurance

4) Investment of
3) Social benefits
funds
 SUMMARY
1) Define and discuss the concepts of insurance, common pool
and law of large numbers.
2) Discuss the operations and function of insurance
3) Identify the characteristics of insurable risks
4) Explain the benefit of insurance
THANKS