Q.What is insurance?
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Start your 14-day free trial to unlock the full solution →Insurance is a contract in which the insurer agrees to compensate the insured for a specified loss in return for a premium. It is a risk-sharing device based on pooling the contributions of many to meet the losses of a few.
Meaning of Insurance:
Insurance is a legal contract (called a policy) between two parties — the insurer (the insurance company that gives the protection) and the insured (the person who takes the protection). Under this contract, the insured pays a fixed sum called the premium at regular intervals, and in return the insurer promises to pay a fixed amount of money (compensation) if a specified uncertain event, such as fire, accident, theft, illness or death, causes a loss to the insured.
Nature and working of insurance:
- Co-operative device / pooling of risk: A large number of people exposed to a similar risk contribute premiums into a common fund. The losses suffered by the unfortunate few are met out of this common fund. Thus, risk is shared among many.
- Protection against uncertainty: Insurance does not prevent the happening of an event, but it provides financial protection and reduces the burden of loss on the insured.
- Contract of good faith: Both parties must disclose all material facts honestly while entering into the contract.
- Payment on a defined event: Compensation is paid only when the specified event occurs and a loss is actually suffered (in life insurance, on death or maturity). …
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