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Module 1 General Insurance Concepts
Insurance is purchased to protect against the risk of economic loss due to dying too soon (life insurance), living too long (annuities), and becoming ill or disabled (health insurance). Insurance is a social device designed to transfer the risk of economic loss to a common pool of funds contributed by many people sharing the same risk. Life and health insurance policies are contractual agreements between the insurance company (the insurer) and the policy owner (the insured) designed to indemnify the insured of financial loss upon occurrence of a specified event (death, disability, accidental injury, illness); provided a consideration
(the premium) has been paid. Insurance contracts are unilateral, in that only one party to the contract makes an enforceable promise (the insurer). Insurance contracts are also aleatory, in that the outcome depends on chance and the consideration exchanged may not be equal. Risk is commonly defined as an exposure to adversity or danger. In the insurance business, risk is the possibility of financial loss. Risk is the basic issue with which insurance deals; it is why insurance exists. There are two types of risk, pure and speculative.
Pure risk involves only the possibility of loss and can be managed through insurance. The purpose of insurance is to indemnify or to restore the insured to his/her original financial position. Insurance is not designed to provide a person with the opportunity of gain or profit. Speculative risk includes the possibility of gain. Gambling and investing in the stock market are good examples. You may lose money, but you may also come out ahead. Speculative risk is not insurable.
Risk management is how one deals with the possibility of financial loss. There are five ways to manage risk: 1. Avoid 2. Reduce 3. Retain 4. Share 5. Transfer The first method is to avoid risk. For example, a person might avoid the risk of wrecking a car by not driving. A business owner taking on a partner is an example of risk sharing.
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