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    Topic 3 - Nature of Insurance

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    Zainal Azrainshah
    This document discusses the nature of insurance. It defines insurance as an agreement where individuals facing similar risks share the fortuitous losses of a few through risk transfer to an insurer. The insurer collects premiums from many insured individuals and pools these funds to pay losses suffered by a few. Insurance functions by allowing risks to be shared across a common pool rather than borne solely by unlucky individuals. It provides benefits such as peace of mind, investment of funds, and social benefits.

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    Topic 3 - Nature of Insurance

    Uploaded by

    Zainal Azrainshah
    25 views11 pages
    This document discusses the nature of insurance. It defines insurance as an agreement where individuals facing similar risks share the fortuitous losses of a few through risk transfer to an insurer. The insurer collects premiums from many insured individuals and pools these funds to pay losses suffered by a few. Insurance functions by allowing risks to be shared across a common pool rather than borne solely by unlucky individuals. It provides benefits such as peace of mind, investment of funds, and social benefits.

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    Topic 3_nature of Insurance

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    This document discusses the nature of insurance. It defines insurance as an agreement where individuals facing similar risks share the fortuitous losses of a few through risk transfer to an insurer. The insurer collects premiums from many insured individuals and pools these funds to pay losses suffered by a few. Insurance functions by allowing risks to be shared across a common pool rather than borne solely by unlucky individuals. It provides benefits such as peace of mind, investment of funds, and social benefits.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    25 views11 pages

    Topic 3 - Nature of Insurance

    Uploaded by

    Zainal Azrainshah
    This document discusses the nature of insurance. It defines insurance as an agreement where individuals facing similar risks share the fortuitous losses of a few through risk transfer to an insurer. The insurer collects premiums from many insured individuals and pools these funds to pay losses suffered by a few. Insurance functions by allowing risks to be shared across a common pool rather than borne solely by unlucky individuals. It provides benefits such as peace of mind, investment of funds, and social benefits.

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    TOPIC 3:

    NATURE OF
    INSURANCE
    Learning objectives
    Upon completion of this chapter, you should be able to:

    ⮚Describe concepts of insurance.

    ⮚State the functions and the applications of insurance.

    ⮚Identify the elements of an insurable risk.

    ⮚Describe the benefits of insurance enjoyed by person involved.


    Overview

    ❖Definition
    ❖Operation of Insurance
    ❖Concept of Common Pool
    ❖Characteristics of Insurable Risks
    ❖The Functions of Insurance
    ❖The Benefits of Insurance
    Definition

    ❖Insurance is an AGREEMENT where a group of individuals facing SIMILAR risks can SHARE
    the fortuitous losses of the unlucky few by the TRANSFER of such risks to the insurer who
    agrees to COMPENSATE the losses.

    Premium … Common fund Loss


    contributions from many …pooled together (common pool) ….pay losses suffered by a
    insured…. … few…
    Operation of Insurance
    ◦ Insurance works because the :-

    insurer can collect premiums from a


    group of individuals in similar
    circumstances

    These premiums then pooled together,


    and used by the insurer to pay losses

    Losses then shared out among all the


    policyholders rather than borne solely
    by the unlucky few.
    Concept of COMMON POOL
    ❖Insurance uses a common pool concept.

    It takes contributions,
    An insurance company in the form of insurance
    sets itself up to operate premiums from many
    the pool. insured and pay for the
    losses of a few.

    The law states that the


    The operation of the larger the group of
    common pool is based similar risks, the closer
    on the successful the actual losses
    application of the Law experienced by the
    of large numbers. group will approach the
    expected losses.
    Characteristics of Fortuitous
    INSURABLE RISKS
    Public Financial
    policy value

    Characteristics of
    insurable risks
    Particular Insurable
    risks interest

    Homogeneous
    Pure risks
    exposures
    The FUNCTIONS of Insurance

    Primary
    function

    Indirect Secondary
    functions functions
    Primary function

    Indirect
    • To act as risk transfer mechanism functions

    Secondary functions • Investment of funds


    • Invisible exports
    • Source of employment
    • Releasing funds otherwise tied up in reserves
    • Stimulate business enterprise
    • Remove fear and worry
    • Reduction of losses
    • Savings
    • Social benefits
    The BENEFITS of Insurance Peace of
    mind

    Invisible
    Lost control
    earning
    Benefits of
    insurance

    Investment Social
    of funds benefits

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