Every asset is expected to last for a certain period of time during which it will perform. After that, the
benefit may not be available. None of the assets will last forever. The owner is aware of this and he can so manage his affairs that by the end of the period of its lifetime, a substitute is made available. Thus he makes sure that the value of income is not lost. However the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it non-functional.
In that case the owner and those deriving benefits there form, would be deprived of the benefit and the planned substitute would not have been ready. This is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situations.
Insurance is a cooperative 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 the risk. (Risk is uncertainty of financial loss.)
Thus the insurance is:
1. A cooperative device to spread the risk.
2. The system to spread the risk over a number of persons who are insured against the risk.
3. The principle to share the loss of each member of the society—on the basis of probability of loss—to their risk.
4. The method to provide security against losses to the insured.
Insurance may also be defined as ‘An agreement where one party (the insurer) agrees to pay to the
other party (the insured) or his beneficiary, a certain sum upon a given contingency (the risk) against
which insurance is sought’.
Insurance is a contract whereby
1. Certain sum, called premium is charged in consideration.
2. Against the said consideration, a large sum is guaranteed to be paid by the insurer who received the
premium.
3. The payment will be made in a certain definite sum, i.e. the loss or the policy amount which ever
may be.
4. The payment is made only upon a contingency.
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