ZIMSEC O Level Commerce Notes: Insurance: 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.
- 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.
- 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.
- Collect statistics of risks.
- Analyse these statistics .
- Assesses risks.
- Calculate probabilities of risks.
- Fix fair premium to be paid.
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