What is Insurance?

insurance types

The business of 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 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 benefits. After that, the benefit may not be available. There is a lifetime for a machine in a factory or a cow or a motor car. None of them will last forever.

The owner is aware of this and he can so manage his affairs so that by the end of that period or lifetime, a substitute is made available. Thus, he makes sure that the benefit is not lost. However, the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it incapable of giving benefits. An epidemic may kill the cow suddenly. In that case, the owner and those enjoying the benefits there would be deprived of the benefits. The planned substitute would not have been ready. There is an adverse or unpleasant situation.

Insurance is a mechanism that helps to reduce the effects of such adverse situations. It promises to pay the owner or beneficiary of the asset, a certain sum if the loss occurs. Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The risk can sometimes be avoided, through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. They are the ones who benefit from the asset and therefore, would lose when the asset is damaged. Insurance only compensates for the losses-and that too, not fully.

Next topic: Purpose and Mechanism of Insurance

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