Insurance Concepts - Part 3 - Insurance and Its Classifications

What is an Insurance ?

Till now, we have discussed the Risk, its classification and Risk Management. We have also seen how the concept of Insurance is derived from Risk Transfer, which is one of the important techniques of Risk management.

Insurance is one of the most important risk management tools. An Insured will transfer his or her risk to an Insurer via an insurance contract. Insured is the party effecting insurance, who may be an individual, a Company, Firm, Corporate body etc., with legal status. Insurer is the party granting the protection under an insurance policy.

 The Insured will pay a consideration called premium to the insurer. The premium is  dependent upon the frequency and severity of the event occurring. The Insurer uses premiums collected from every Insured in a group to pay for the losses of the few members of the group. This is with the assumption that not everyone incurs a loss at the same time. This process is referred to as pooling. Pooling effectively allows each individual Insured to share the cost of a loss, so that no one Insured must cover the entire loss himself or herself.

 Insurance is as good as any other legal contract. It needs to have an offer, acceptance, consideration, legality of the transaction and should follow the public policy. It also needs to have common understanding between the parties. It is witnessed by an evidence of the contract called Policy of Insurance.

 Insurance contracts are designed in accordance with basic principles that define which risks are insurable. For a risk, which is a potential loss, to be considered insurable, it must have certain characteristics. These basic characteristics define an insurable risk and form the foundation of the business of insurance. A potential loss that does not have these characteristics generally is not considered insurable.

Classifications Of Insurance

The insurance domain is broadly classified into 4 parts. They are outlines in the below sections.

Health & Disability Insurance

 Pays for medical expenses for sickness or accidental bodily injury.

It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs.

Provided through a government-sponsored social insurance program, or from private insurance companies.

Purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual consumers.

Life Insurance

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses.

Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or as an annuity.

Annuities

It is recurring periodic series of payments. Annuities are also called Pensions.

 Property and Casualty (P&C) Insurance

 Property and Casualty insurance consists those forms of Insurance designed to protect against losses resulting from damage to or loss of property and losses arising from legal liabilities.

Property Insurance is designed to indemnify the insured for loss of or damage to building, furniture, fixtures or other personal properties.

Casualty insurance is designed to protect the insured  from losses arising out of Legal Liabilities