what is meant by insurance? explain the characteristics of insurance.
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Answer:
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance policy.
Explanation:
HomeFinanceInsuranceHistory of Insurance | Example | Definition | Nature or Characteristics
History of Insurance | Example | Definition | Nature or Characteristics
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History to Insurance
Individuals and organizations expose themselves to the chance of loss in all activities due to uncertainties. The more industrialized a society becomes, the more complicated it becomes in its structure which in turn increases the exposure to risks.
Insurance - History, Example, Definition, Nature or Characteristics
Insurance – History, Example, Definition, Nature or Characteristics
These risks are multitudinous and range from the unavoidable to those assumed by choice, annual losses to individuals from untimely death, accidents and sickness or to property from fire, windstorms, sea perils, earthquakes, floods, dishonesty, negligence etc. When estimated in monetary terms would come to high figures and indicate the importance of recognizing and meeting intelligently such risks.
According to the philosophers, all the activities of the universe are obedient to law. Chance has no place in their line of thinking. Events which appear to take place in a purely accidental way are just as much determined as those whose occurrence can be accurately foretold.
The appearance of accident is due entirely to human limitations. It is because we do not know all the previous conditions or all the laws governing them that a particular phenomenon appears to us to occur by chance. In this sense, chance is merely an appearance, resulting from the imperfection of human knowledge and not a part of the course of external nature. However, the imperfect knowledge of laws of nature leaves a great deal of uncertainty about the outcome of human actions and wherever there is uncertainty, there is risk.
As knowledge of natural laws expands and control over the forces that may enter into a given situation increases, risks tend to be eliminated. So far there is uncertainty there is insecurity. The drive for security is one of the basic motivating forces determining the human attitudes. Out of the search for security, insurance was born.
Example for Concept of Insurance
The following example will make the concept of insurance more clearer:
In a college, let us suppose that 500 students come to the college on bikes. By past experience, it is found that every year, say two bikes are lost. Thus it can be said that out of 500 students, any two will lose their bikes, but who those two students would be is not known in advance.
Hence, with this element of uncertainty, each one of the 500 students is exposed to the risk of losing his bike the cost of which maybe Rs. 37,500.
The total cost of two bikes will be Rs. 75,000. To safeguard against this loss, all the 500 students may contribute equally to a fund of Rs. 75,000 by paying Rs. 150 each and whenever the bikes are lost, the sufferers will be paid Rs. 37,500 each out of the common fund.
Every student undertakes to bear a definite monthly loss of Rs. 12.50 in exchange for a probable loss of Rs. 37,500 a year. Thus, insurance makes it possible for a student to bargain an annual loss of Rs. 37,500, which though uncertain, is very probable, in exchange for a definite monthly loss of Rs. 12.50, Rs. 150 to compensate a loss of Rs. 37,500.
What an ingenious device, it is ! Prima facie it seems almost a miracle but to the students of insurance, it will be an unadulterated fact.
Definition of Insurance
Different authors / authorities have defined the term ‘Insurance’ differently
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