Insurance Principles

1. 1Definition & Nature Insurance
Slide prepared by: Abdullah Al Yousuf Khan
Assistant Professor - IUBAT

2. The Text Book
M. N. Mishra
and
Dr. S. B.
Mishra
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3. PART ONE
CHAPTERS
1. Definition and
Nature of
Insurance
2. Evolution of
Insurance
3. Role and
Importance of
Insurance
4. Insurance Contract
 INTRODUCTION
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4. Introduction
 Introduction
 Life Insurance
 Marine Insurance
 Fire Insurance
 Miscellaneous Insurance
 Prospects of Insurance Business
 Insurance Legislation

5. Definition of Insurance
 Insurance is defined as a co-operative
device to spread the loss caused by a
particular risk over a number of persons
who are exposed to it and who agree to
ensure themselves against that risk.

6. Terminologies
 Risk
 Chance of Loss
 Peril
 Hazard
 Physical
 Moral
 Morale
 Legal
 Loss
 Premium
 Insurer
 Insured
 Agent
 Underwriter
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7. Risk
 Risk is uncertainty of a financial loss. –
[Mishra]
 Risk is defined as uncertainty concerning a
possible loss. Another words, risk is the
variation in possible outcomes of an event
based on chance. [Dorfman]
• Risk is defined as uncertainty
concerning the occurrence of a loss.
[Rejda]
 E.g. the risk of being killed in a car accident because
of uncertainty.
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8. Chance of Loss
 Chance of loss should not be confused
with the risk.
Chance of loss is the possible
number of losses out of a
given number of exposures.
– It is simply the probability of loss.
– Is defined as the probability that an
event will occur.
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9. Peril
A PERIL is defined as the cause
of loss.
 E.g. fire, tornados, heart attack,
road accident,
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10. Hazard
Hazard is a condition that may
increase the chance of loss.
HAZARDS are conditions that
increase the frequency or the
severity of the losses.
Hazard is any condition that
creates or increase the chance of
loss.
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11. Types of Hazard
 Physical – physical condition that increases
the chance of loss.
 Moral – dishonesty or character defects in an
individual somebody who deliberately causes
the loss ………
• Morale – carelessness or attitude to a loss
because of the existence of the insurance The
attitude, is an “Why should I care? I’m insured,”
example of the morale hazard.
 Legal – characteristics of the legal system
that increases frequency ……….
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12. Loss
 Loss is the unintentional decline in or
disappearance of value arising from a
contingency.
 Loss is the undesired reduction of
economic value.
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13. Insurer, Insured
 Insurer;
 is the party who agrees to pay for the
losses
 Insured;
 Is the party who claim for the damage from
the insurer.
 Premium
 Is paid by the insured and received by the
insurer for the insurance
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14. Functions of Insurance
Primary Function
It Provides
Certainty
It Provides
Protection
Risk-Sharing
Secondary Function
Prevention of
Loss
Provides Capital
Improves
Efficiency
Helps Economic
Growth
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15. Definition of Insurance
1. Functional Definition;
a) A co-operative device to spread the risk.
b) The system to spread the risk over a number
of persons who are insured against the risk.
c) The principle to share the loss of each
member of the society on the basis of
probability of loss to their risk.
d) The method to provide security against
losses to the insured.
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16. Definition of Insurance
 Contractual Definition;
Insurance is defined as to which a sum of money as
a premium is paid in consideration of the insurer’s
incurring the risk of paying a large sum upon a given
contingency.
a) certain sum, called premium, is charged in
consideration,
b) against the said consideration, a large sum is
guaranteed to be paid by the insurer who
received the premium,
c) the payment will be made in a certain definite
sum,
d) the payment is made only upon a contingency
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17. Finally
Insurance may be defined as an
agreement consisting of one party
(the insurer) who agrees to pay the
other party (the insured) or his/her
beneficiary, a certain sum of money
upon a given contingency (the risk)
against which insurance is sought.
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18. Nature of Insurance
 Sharing of Risk
 Co-operative Device
 Value of Risk
 Payment at Contingency
 Amount of Payment
 Large Number of Insured Persons
 Insurance is not Gambling
 Insurance is not Charity
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19. Principles of Insurance
 Principles of Co-operation
 Principles and Theory of Probability
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20. Questions
 What are the various functions of insurance?
 State briefly the suitable definition of
Insurance.
 Insurance is not to prevent risk, but to
indemnify the losses arising from a certain
risk – comment.
 What are the various principles of Insurance?
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