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Ins 231 Principles of Insurance 2023

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15 views4 pages

Ins 231 Principles of Insurance 2023

Uploaded by

afolayaneniola7
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INS 231 PRINCIPLES OF INSURANCE 2023/2024 SESSION

TOPIC 1: The concept of Risk and Insurance

What is Insurance?

Insurance is a contract in which the individual or an entity gets the


financial protection from the insurance company for the damage
caused to their property.

The parties are referred to as “the insured” – the individual/entity


and “the insurer” – the insurance company.

The insurer and the insured enter a legal contract for the insurance
called the insurance policy which provides financial security from the
future uncertainties.

Insurance is thus defined as a co-operative device to spread the loss


caused by a particular risk over several persons who are exposed to it
and who agree to ensure themselves against that risk.

The existing literature agrees that insurance must contain both of the
following elements: (1) risk pooling and (2) risk transfer. The risk
pooling creates a large sample of risk exposures and, as the sample
gets larger, the possibility of missing future loss predictions gets lower.
This is the law of large numbers. The combination of risk pooling and
risk transfer (from the owner of the risk to a third, unrelated party)
physically reduces the risk, both in number and in the anxiety it
causes. As such, we regard insurance as a social device in which a
group of individuals transfer risk to another party in such a way that
the third party combines or pools all the risk exposures together.
Pooling the exposures together permits more accurate statistical
prediction of future losses. Individuals who transfer risk to a third-party
are known as insureds. The third party that accepts the risks
transferred by insureds is known as the insurer.
Pooling of risks is considered the primary principle of insurance and the
law of large numbers is categorically fundamental to the process of
establishing insurance guidelines.

What is risk?

Risk implies future uncertainty about deviation from expected earnings


or unexpected outcome.

Risk in insurance is defined as the uncertainty of the occurrence of an


event that can cause economic losses. It refers to the risk or chance of
occurrence of something harmful or unexpected that might include loss
or damage of the valuable assets of the person or injury or death of
the person where the insurers assess these risks and, based on which,
work out the premium that the policyholder needs to pay.

The term risk in insurance states how insurers evaluate their chances
in issuing insurance policies to the property or injured party.

Types of Risk

Pure risk: - this refers to the situation where it is certain that the
outcome will lead to loss of the person only or maximum it could lead
to the condition of the break-even to the person, but it can never cause
profit to the person. Example of pure risk is damage to a car in an
accident or a fire to a building.

Speculative risk: -this refers to the situation where the direction of the
outcome is not specific. It could lead to either result into a profit or a
loss. This could be an investment in shares which could lead either to a
profit or loss.

Particular risk: - this refers to the risk which arises mainly because the
actions or the interventions of the individual or group of individuals.
They are usually insurable and generally the main subjects of the
insurance.
Fundamental risk: - this refers to the risk which arises due to the
causes which are not under the control of any person. The impact of
fundamental risk affects essentially a group. These risks include events
such as earthquake, recession.

The essence of insurance is to ensure that it’s the following:

1. A social scheme
2. An accumulation of funds
3. It involves a group of risks.
4. Transfer of risk to a whole group

Functions of Insurance

1. To provide security and safety


2. To provide peace of mind
3. To eliminate dependency
4. To encourage savings
5. To fulfil the needs of a person
6. To reduce business losses
7. To identify the key man
8. To enhance the limit
9. Welfare of employees

Advantages of Insurance

1. It offers financial protection against the heavy losses due to


unforeseen situations. It helps to mitigate risk.
2. It provides some peace of mind to the individuals or companies
who may face the risk, allowing them to channelise their time and
funds to some productive work.
3. It allows the business to continue. The entity does not have to
stop its operations due to fund crunch resulting from some
unforeseen situations.
4. Insurance companies provide some additional services to
policyholders in the form of advice or guidance regarding risk
mitigation or risk assessment.
5. Insurance companies provides cover which are customized to
meet the demand and need of the policyholders.

Disadvantages of Insurance

1. The premium costs rise with the rise in risk.


2. The policies may have several deductibles, exclusions and out of
pocket expenses which policyholders should be aware of while
taking the insurance.
3. The process of claim disbursement may be complex and time
consuming involving a lot of documentation and investigation.
4. Sometimes individuals or companies may end up taking up
multiple insurance policies for the same risk, resulting in extra
premiums.

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