Insurance is risk cover

 Insurance is risk cover. Insurance is sharing of losses. It is loss avoidance and loss reduction too. When Cyril’s motor car got damaged in an accident the insurance people refunded the entire cost incurred by him in repairing the car. You wonder whether this is possible. It is and this is how.

                            

We know that insurance offers compensation for loss incurred. The insurance company collects premiums from all the insured people. This will be a big amount. Now, all those insured people will not meet with accidents or losses. Only a few among them will. They will be paid compensation from the premiums collected. In other words the losses faced by some will be shared by all insured people. When the losses faced by a few are spread amongst a large number of insured people, the loss borne by each one is very negligible. But those who faced the losses get full compensation. Thus, insurance is spreading and sharing of losses.

Sometimes small amounts are spent to ward off the occurrence of risks and large losses, and also to keep the loss to a minimum if at all a risk takes place. The best example one can quote here is the Fire Services Department maintained by government. This is, truly speaking, risk-avoidance and risk reduction, which is an aspect of insurance.

Assets have value. They may be destroyed or made non-functional through accidental occurrences known as perils. Consequently the owner of the asset faces a loss which can be quantified in terms of money. These losses can be compensated through the mechanism of insurance. Fire, floods, breakdowns, lightning, earthquake etc are examples of perils to which an asset is exposed to. Let us understand insurance as an arrangement where all people who are exposed to the same risk come together and agree to compensate those amongst them who face loss.

Key words:

Risk cover
Loss reduction
Risk reduction
Risk avoidance