Chapter

Definition & Nature

Insurance

Slide prepared
prepared by:
by:Abdullah
AbdullahAl
AlYousuf
Yousuf Khan
Khan
Slide
Assistant Professor
Professor -- IUBAT
IUBAT
Assistant
McGraw-Hill/Irwin

Copyright 2006 by The McGraw-Hill Companies, Inc. All

rights reserved.

The Text Book

M. N.
Mishra and
Dr. S. B.
Mishra
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PART ONE
CHAPTERS
1. Definition and
Nature of
Insurance
2. Evolution of
Insurance
3. Role and
Importance of
Insurance
4. Insurance Contract
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INTRODUCTI
ON

Introduction

Introduction
Life Insurance
Marine Insurance
Fire Insurance
Miscellaneous Insurance
Prospects of Insurance Business
Insurance Legislation

Definition of Insurance
Insurance is defined as a cooperative device to spread the
loss caused by a particular risk
over a number of persons who are
exposed to it and who agree to
ensure themselves against that
risk.

Terminologies

Risk
Chance of Loss
Peril
Hazard

Physical
Moral
Morale
Legal

Loss
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Premium

Risk
Risk is uncertainty of a financial loss.
[Mishra]
Risk is defined as uncertainty concerning
a possible loss. Another words, risk is
the variation in possible outcomes of an
event based on chance. [Dorfman]
Risk is defined as uncertainty concerning
the occurrence of a loss. [Rejda]
E.g. the risk of being killed in a car accident because
of uncertainty.

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Chance of Loss
Chance of loss should not be
confused with the risk.

Chance of loss is the

possible number of losses
out of a given number of
exposures.
It is simply the probability of loss.
Is defined as the probability that
an event will occur.
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Peril
A PERIL is defined as the
cause of loss.
E.g. fire, tornados, heart
attack, road accident,

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Hazard
Hazard is a condition that may
increase the chance of loss.
HAZARDS are conditions that
increase the frequency or the
severity of the losses.
Hazard is any condition that
creates or increase the chance
of loss.
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Types of Hazard
Physical physical condition that
increases the chance of loss.
Moral dishonesty or character
defects in an individual somebody who
deliberately causes the loss
Morale carelessness or attitude to a loss
because of the existence of the insurance
The attitude, is an Why should I care? Im
insured, example of the morale hazard.

Legal characteristics of the legal

system that increases frequency .
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Loss
Loss is the unintentional decline
in or disappearance of value
arising from a contingency.
Loss is the undesired reduction
of economic value.

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Insurer, Insured
Insurer;
is the party who agrees to pay for
the losses

Insured;
Is the party who claim for the
damage from the insurer.
Premium
Is paid by the insured and received by the
insurer for the insurance
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Functions of Insurance
Primary Function

It Provides
Certainty
It Provides
Protection
Risk-Sharing

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Secondary Function

Prevention of
Loss
Provides Capital
Improves
Efficiency
Helps Economic
Growth

Definition of Insurance
1. Functional Definition;

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a) A co-operative device to spread the

risk.
b) The system to spread the risk over a
number of persons who are insured
against the risk.
c) The principle to share the loss of each
member of the society on the basis of
probability of loss to their risk.
d) The method to provide security against
losses to the insured.

Definition of Insurance
Contractual Definition;
Insurance is defined as to which a sum of money as
a premium is paid in consideration of the insurers
incurring the risk of paying a large sum upon a given
contingency.
a) certain sum, called premium, is charged in
consideration,
b) against the said consideration, a large sum is
guaranteed to be paid by the insurer who received
the premium,
c) the payment will be made in a certain definite sum,
d) the payment is made only upon a contingency
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Finally
Insurance may be defined as an
agreement consisting of one
party (the insurer) who agrees to
pay the other party (the insured)
or his/her beneficiary, a certain
sum of money upon a given
contingency (the risk) against
which insurance is sought.
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Nature of Insurance

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Sharing of Risk
Co-operative Device
Value of Risk
Payment at Contingency
Amount of Payment
Large Number of Insured Persons
Insurance is not Gambling
Insurance is not Charity

Principles of Insurance
Principles of Co-operation
Principles and Theory of Probability

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Questions
What are the various functions of
insurance?
State briefly the suitable definition of
Insurance.
Insurance is not to prevent risk, but
to indemnify the losses arising from a
certain risk comment.
What are the various principles of
Insurance?
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