Insurance

Life is full of uncertainties — risks of death and disability to human life, fire and burglary to property, perils of the sea to shipments of goods, and so on. If any of these events occurs, the loss to an individual or organisation may be so great that it is beyond their capacity to bear. Insurance exists to minimise the impact of such uncertainties; indeed, investment in factory buildings, heavy equipment or other assets is often not possible unless the risks are covered by insurance.

The idea behind insurance

• People facing common risks come together and make small contributions to a common fund.
• This fund helps to spread the loss caused to one individual by a particular risk over the many persons exposed to that same risk.

Definition

• Insurance is a device by which the loss likely to be caused by an uncertain event is spread over a number of persons who are exposed to it and are prepared to insure themselves against it.
• It is a contract (or agreement) under which one party, in return for a consideration, agrees to pay an agreed amount of money to another party to make good a loss, damage or injury to something of value in which the insured has a pecuniary interest, as a result of some uncertain event.

Key terms

• The written contract is called the policy. …