What Is Insurance?
Insurance as a concept is a type of a risk management strategy by which an insured individual or an entity indemnifies himself or itself against various risks. It can also be defined as a process of "risk transference" in which the insured entity transfers the risk of sudden loss, mostly financial in nature, by making payments to an insurance provider beforehand. An insurance provider on the other hand evaluates the risk it is undertaking by promising assurance of monetary payoff incase of contingency. The provider derives the payment of the initial charges through this risk evaluation process. Read on to know more about the basic principles of insurability:
Principles of Insurability:
The basic concept of insurance is simple enough to understand. It involves amalgamating funds from various insured entities and assuring the insured of a certain amount of financial support in case of unlikely yet severe circumstances. The common aspects of insurability are:
- Definite financial loss: One of the main aspects of insurance is that the insured entity is exposed to a definite financial loss in certain severe circumstances. For example, in case of motor insurance if the insured vehicle is damaged in an accident there is definite financial loss involved. Or in case of life insurance there would be a definite loss of income or extra liability on the beneficiary in case of demise of the insured person.
- Loss can be calculated: An insurance policy will always have a cap on the amount of pay off that is given in case of exigency. It cannot be a limitless figure. This is usually calculated while underwriting the insurance policy taking in consideration the probable amount of financial loss, which will occur to the insured entity in case of exigency.
- Define Exigency: The insurance policies also need to be underwritten to include the conditions that will be considered as an exigency. Again taking the example of motor insurance, the insurance provider and insured must agree on a legally abiding document that repair costs and medical costs due to an accident will be covered in the insurance policy. Similarly the insurance provider also will include exclusions to an insurance policy. For example, in case of motor insurance accidents occurring while driving under influence of alcohol or illicit drugs are generally not covered under an insurance policy.
- Similar risk exposure to a large number of entities: This is from the point of view of the insurance provider. Usually insurance providers design insurance concepts like motor insurance, life insurance, fire insurance, and medical insurance etc only when there are a large number of entities who face similar exposure in these matters. However, most insurance providers offer customized packages as policies under these large heads depending on the need of the consumer. For example while motor insurance is a general concept, the insured entity can choose to purchase either a 3rd party liability cover or a personal injury cover or both.
Each one of the concepts defined above will have finer issues and sub points. However these concepts largely make up the underwriting process in an insurance policy of any nature.