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Fundamental Principle of Insurance

The fundamental idea of insurance is that an individual or a business concern selects to spend a definite amount of money in place of a possible large amount involved in an indefinite future loss. Hence insurance is the replacement of a small periodic payment (premium) for a risk of huge possible loss. The loss of risk is still there but the loss is spread over many number of policy holders having the same risk. The premium paid by them are pooled out of which the damage experienced by any policy holder is remunerated. Thus, risks are been shared with many other people. With the study of past events the insurer (an insurance company or an underwriter) knows the notable damages caused due to each type of risk covered by insurance. Insurance, hence, is a kind of risk management mainly used to safe guard against any risk of potential financial loss. Normally, insurance is defined as the reasonable transfer of the risk of a potential loss, from one individual to another, in exchange for an equitable fee. Insurance company, hence, is a firm, corporation or an organization performing the business of paying all rightfull claims that may arise, in exchange for a fee (known as premium). Insurance is a social device where a group of individuals (insured) passes risk to another party (insurer) in order to combine damage experience, which provides for payment of damages from funds given (premium) by all members. Insurance is meant to safeguard the insured, against accidental events, which maybe disadvantageous to him.

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