Need of Insurance
Assets are insured because they are likely to be destroyed or made non-functional, through an accidental occurrence , such possible occurrences are called perils, fire, floods, breakdowns,lightning,earthquakes,and etc. are perils. The damage that these perils may cause the asset, is the risk that the asset is exposed to.
The risk means that there is a possibility of loss or damage. it may or may not happen.There has to be an uncertainty about the risk. if there is no uncertainty about the occurrence of an event, it cannot be insured against.
There are other meanings of the term risk. to the ordinary man in the street risk means exposure to danger. in insurance practice, risk is also used to refer to the peril or loss producing event. for example, it is said that fire insurance covers the risks of fire, explosion,cyclone,flood etc. again it is used to refer to the property covered by insurance for example, a timber construction is considered to be a bad risk for fire insurance purpose.
The mechanism of insurance is very simple. people who are exposed to the same risks come together and agree that, if any one of the members suffers a loss, the other will share the loss and make good to the person who lost. all people who send goods by ship sinking,piracy, etc. Those owning factories are not exposed to these risks,but they are exposed to different kinds of risks like fire, hailstorms, earthquakes,
lightning,burglary,etc like this, different kinds of risks can be identified and separate groups made,including those exposed to such risks, by this method,the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.
The manner in which the loss is to be shared can be determined before hand. it may be proportional to the likely loss that each person is likely to suffer, which is indicative of the benefit he would recevive if the peril befell him. the shares could be collected from the members after the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. insurance companies collect in advance and creat a fund from which the losses are paid.
Assets are insured because they are likely to be destroyed or made non-functional, through an accidental occurrence , such possible occurrences are called perils, fire, floods, breakdowns,lightning,earthquakes,and etc. are perils. The damage that these perils may cause the asset, is the risk that the asset is exposed to.
The risk means that there is a possibility of loss or damage. it may or may not happen.There has to be an uncertainty about the risk. if there is no uncertainty about the occurrence of an event, it cannot be insured against.
The mechanism of insurance is very simple. people who are exposed to the same risks come together and agree that, if any one of the members suffers a loss, the other will share the loss and make good to the person who lost. all people who send goods by ship sinking,piracy, etc. Those owning factories are not exposed to these risks,but they are exposed to different kinds of risks like fire, hailstorms, earthquakes,
lightning,burglary,etc like this, different kinds of risks can be identified and separate groups made,including those exposed to such risks, by this method,the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.
The manner in which the loss is to be shared can be determined before hand. it may be proportional to the likely loss that each person is likely to suffer, which is indicative of the benefit he would recevive if the peril befell him. the shares could be collected from the members after the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. insurance companies collect in advance and creat a fund from which the losses are paid.
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