Why Insurance

WHY INSURANCE

Insurance is the equitable transfer of the “risk” of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

The term ‘risk’ can be defined as the possibility of adverse result flowing from any occurrence. Risk arises out of uncertainties. If it is known beforehand that a loss will occur, there is no risk. At least, one of the possible outcomes is undesirable. This may be a loss in the generally accepted sense in, which something an individual possess is lost.

In our day-to-day life, we are exposed to risks at every moment. Even if we lock ourselves in a room, there is a risk of the roof falling on our head by an earthquake! Anything we do in life is exposed to risk. We can have a profitable business, but our office or factory can reduce to ashes due to short circuit!

Hence, it is very important that we identify the potential risks faced by us and our businesses and take appropriate and timely steps to protect the interest of all parties concerned.

Some risk that can be classified as

Personal Risks

Following are the four personal risks any individual has to face

• Premature Death (effect on the dependents)
• Dependent Old Age
• Sickness or Disability
• Unemployment
• Accidents

Property Risks

• Loss of Property
• Loss of Use of Property
• Additional Expense Incurred Due to Loss of Property

Liability Risks

Liability to indemnify against the unintentional damaged caused to someone and or his/ her property due to negligence or misjudgment.

Risk Management

The risk management steps can be broadly seen as two methods

Risk Control

Avoiding, Retaining, Sharing, Reducing - these are the risk control methods.

Risk Financing

Transferring of risk is termed as ‘risk financing’, which can be done by insuring against the particular risk. Hence, it is a risk transfer mechanism by which an organization or an individual can exchange its uncertainty with certainty.

The uncertainty faced would include whether a loss will occur, when it will take place, how severe it will be and how many there might be in a year. Due to uncertainty, it is very difficult to budget the amount of loss so the organization takes steps to control it.

Insurance offers the opportunity to exchange this uncertain loss to certain loss: by payment of premium. It is an instrument of immense value not only to an organization, but also to an individual.

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