Finance

How Insurance Works

06 Mar 2009
2257

Life is full of unexpected happenings. Any unwanted incident may take place at anytime which anyone may be unaware of. So people are always in search of peace of mind to keep themselves away from the tensions of risks in life. It’s the need of this mental relaxation that gave birth to the term insurance.



Insurance: It’s Need

Life is full of risks, which may at home, at work or in our autos. Some risks are minimal and can be overcome, but most are not. This is where insurance comes into effect.
Insurance does not protect us from the risks but covers or compensates the consequences of the happening. Insurance companies have always surveyed the statistical picture and come up with a plan that'll give people peace of mind.

Classification of Risks

12 Feb 2009
1939

Risks are classified in various ways. One classified is based on the extent of the damage likely to be caused. Critical or Catastrophic risks are those which may lead to the bankruptcy of the owner. It would happen if the loss is total, like in a tsunami, wiping out everything. It can also happen if the deceased person was heavily in debt. Important risks may not spell doom, but may upset family or business finances badly, requiring a lot of time to cover. The adverse effects of an economic recession are one such. Less damaging are unimportant risks, like temporary illness or accidents.

Assets are insured, because they are likely to be destroyed or made non-functional before the expected life time, through accidental occurrences. Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquake, etc, are perils. If such peril can cause damage to the asset, we say that the asset is exposed to the risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending upon the cost of the building, the contents in it and the extent of damage.

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