Image credit moneychoice.org

Image credit moneychoice.org

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.

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.

To access more topics go to the Commerce Notes page.

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