Introduction,basic concepts and importance of insurance

• Insurance is the pooling of risks.
• an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.

Importance of insurance

• It covers against a financial loss which may or may not happen resulting from an insurable risk such as theft, fire or an accident.

Basic concepts in insurance

Pooling of risks

• Many people join an insurance company and
• pay premiums into a a common pool or fund.
• At regular intervals.
• When a loss occurs to one of these people:
• the insurer takes money from the pool of premiums and
• uses this money to compensate the unfortunate member leaving the profit for the insurer.
• The remainder of the pool is invested.
• The burden of the loss is thus shared amongst the members.

Insurable risks.

• Have past consistent records e.g. fire, theft or accidents.
• Can be assessed.
• And the probabilities of these events occurring is calculated.
• A fair premium is fixed.
• To cover claims that may arise.
• And earn profit for the insurer.

Non insurable risks

• These have inconsistent records e.g. bad management and losses occurring due to the outbreak of war.
• Cannot be assessed accurately.
• Their probabilities cannot be calculated.
• A fair premium for these cannot be calculated.
• They cannot thus be insured.

Premium

• Payment is made by the insured to the insurer.
• In return for an insurance cover.
• Determined by the type of risk e.g.
• the greater the risk the higher the premiums.
• Based on past records.
• Determined by the number of people insuring against a certain risk i.e. the lower the number of people insuring against that risk the less the premium.
• Determined by the value of the property.
• Determined by the probability of the loss occurring or size of the risk involved.
• Determined by the profits made by the insurer.

Actuaries

• Collect statistics of risks.
• Analyse these statistics .
• Assesses risks.
• Calculate probabilities of risks.
• Fix fair premium to be paid.

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