In a variety of situations, insurance is a means of
providing protection against financial loss. It is a contract in which one
party agrees to finance another party's financial loss resulting from a particular
event. Based on the principal of sharing losses, insurance works.
Agree to make regular payments, called premiums to an
insurance company if you wish to be insured against any type of loss. The
company gives you a contract, the insurance policy, in return. For the type of
loss stated in the policy, the company promises to pay a certain sum of money.
Insurance date backs to thousands of years old. The first
form of credit insurance is believed to be the Code of Hammurabi, a collection
of Babylonian laws of 1700BC.
If personal misfortune made it impossible to do
repay, a borrower did not have to repay a loan. Insurance as we know it today
can be traced to the Great Fire of London in 1666, which devoured 13,200
houses. Nicholas Barbon opened an office to insure buildings in the aftermath
of this disaster,.
For indemnifying or guaranteeing an individual against loss,
insurance or assurance is a device. Reimbursement is made from a fund to which
many individuals exposed to the same risk have contributed certain specified
amounts, called premiums.
Payment for an individual loss, divided among many,
does not fall heavily upon the actual loser. Mutuality is the essence of the
contract of insurance, called a policy.
- The
major operations of an insurance company are
- Underwriting
- The
determination of which risks the insurer can take on
- Rate
making
- The
decisions regarding essential prices for such risks.
For guarding against adverse selection, the underwriter is
responsible wherein there is extreme coverage of high risk candidates corresponding
to the coverage of low risk candidates.
The underwriter must think about
physical, psychological, and moral hazards in relation to applicants to prevent
unfavorable selection. Physical hazards include those dangers, which surround
the individual or property, jeopardizing the well-being of the insured.
By
means of the law of averages as calculated by actuaries, the amount of the
premium is determined.
Insurance companies have become major suppliers of
capital by investing premium payments in a wide range of revenue-producing
projects, and they rank among the nation's largest institutional investors.
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