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What is Insurance?
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance.
Insurance is a promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well being of an individual, company or other entity in the case of unexpected loss. Law requires some forms of insurance, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policyholder a sum of money upon the occurrence of a specific event. In most cases, the policyholder pays part of the loss (called the deductible), and the insurer pays the rest.
Types of Insurance
Benefits of Insurance
The existence of a common pool, operated by insurance companies, brings with it many advantages including the following:
- It relieves those insuring from the worry and anxiety they may have about how they would meet the cost of risk. In the case of businesses, this is a positive stimulus to their activities and allows them to get on with their own business in the knowledge that they are financially protected against many forms of risk.
- Business people will be more inclined to risk their money by building factories, making goods, sailing ships, flying planes, with the knowledge that they will not lose everything should they fall victim of some risk. This is an extremely important benefit which insurance brings – not only to the individual insuring but to the whole country – as stimulating businesses makes for a healthy economy.
- Insurance also can help in actually reducing losses. Insurance companies have a great deal of experience in risks of all kinds and, over many years, they have found ways in which certain risks can be reduced. They employ surveyors who go out and look at premises, which people may want to insure. They can, from that experience, often suggest ways in which the likelihood of some risk occurring may be reduced. They might see some hazard, which could injure employees, or a host of other problems. The advice and the recommendations they make on behalf of insurance companies cannot help but reduce the likelihood of many of the risks occurring.
- One further benefit derived from the transaction of insurance is the use to which the insurance company puts the money it holds in the common pool. It does not use immediately all the money it collects as premiums. It holds it until one of the members of the pool suffers a loss. The money it holds is invested in a wide range of investments which all go towards aiding government, industry, and commerce and consequently the whole country. A visible symbol of one of the uses to which insurance funds are directed is the building work being carried out in many of our cities. Look a little closer at the large signs surrounding these building sites and notice how many are being funded by insurance companies.
- Think for a moment of what would happen in the absence of insurance. Certainly the benefits we have already listed would be lost and there might be considerably less industrial and commercial activity. Life would still continue on a personal basis and there would also be a considerable volume of business activity. Presumably, also, risks would still occur and losses would be suffered.
- Who would provide compensation? Who would pay compensation to the injured motor accident victim, who would pay for the repair of damaged property? In short, who would provide the money, which the current insurance market provides? At the moment, insurance companies pay out many millions of pounds every single day of the year and it seems likely that if it were not for insurance, this burden, or at least part of it, would be met by society at large. That would mean each one of us would have to contribute much more than we do now in taxation.
- In relieving the state of this burden, the insurance industry performs a considerable public service.
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Top Providers |
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ICICI Prudential Life |
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SBI Life Insurance |
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Life Insurance Corp. |
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Bajaj Allianz Insurance |
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United India Insurance |
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