Thursday, 12 February 2009 00:00

Classification of Risks

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.

Saturday, 07 February 2009 14:38

Purpose and Mechanism of Insurance

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.

Friday, 06 February 2009 07:58

What is Insurance?

The business of the insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefits from it. It is a benefit because it meets some of his needs. The benefit may be an income or in some other form. In the case of a factory or a cow, the product generated by it is sold and income is generated. In the case of a motor car, it provides comfort and convenience in the transportation. There is no direct income, both are assets and provide benefits.

Every asset is expected to last for a certain period of time during which it will provide the benefits. After that, the benefit may not be available. There is a life time for a machine in a factory or a cow or a motor car. None of them will last forever.