The Basic Principles of Insurance

Written by yousaf

Getting an insurance policy is considered more of a necessity than a convenience. But what about starting an insurance company?

An insurance company starts with basically minimal investment since its job is to provide a

failsafe in case of risk or danger. Insurance requires the gathering of funds from all the insured

entities (exposures) to pay for some of the losses that might occur. Guaranteed protection

(insurance) involves paying a fee, which is dependent on the frequency and severity of the

event’s occurrence. Insurance from a financial standpoint is crucial, many financial services and

enterprises act as an intermediary for people, but one can also self-insure buy saving money in

anticipation of future losses.

For a risk to be insurable it needs to meet certain characteristics. Private companies have a list

of criteria that it needs to meet in order to be insurable. These are:

  • A Large number of Small exposure units: Individual members of large classes take up

insurance policies, allowing insurers to benefit from the law of large numbers, in which the

predicted average losses are similar to the actual average losses. However, all exposures will

have different premiums due to particular differences.

  • Definite loss: The occurrence happens at a known place, at a known time and from a known

cause. The clearest example of this would be the death of a person having life insurance. Fires,

accidents, injuries from work and so on meet this criterion. The ideality of it should be that a

person of sound mind can verify the place, cause and time of the loss.

  • Accidental loss: When the incident happens the causation of the loss should be such that it

is outside the control of the beneficiary or fortuitous in nature. The incident should be pure,

where it is absolute and should warrant for no speculative element in its occurrence. This is

why business risks and purchasing lottery tickets are not considered insurable.

  • Large loss: The losses incurred on the side of the insured must be meaningful from his

perspective. The insurer needs to pay all additional costs involved in the episode, and

sometimes they cost several times more than its expected worth.

  • Affordable premium: if the odds of the occurrence is considerable, and the cost of it is so

significant that the resulting premium is substantially bigger than the offered protection, then it

is unlikely that the insurance on it would be purchased even if it is on offer.


  • Calculable losses: Two elements that need to be estimable, if not calculable are: the

probability of loss and the attendant cost. A reasonable estimation of both can help insurance


  • Limited risk of catastrophically massive losses: Most insurable incidents are -independent

and non- catastrophic, meaning that it does not happen at once and the ones that do aren’t big

enough to bankrupt the insurer. Calamities such as earthquakes, fire, hurricanes, and floods

and so on, are generally government insured and privately insured ones are syndicated in the

reinsurance market.

Various insurance websites offer help to clarify doubts on insurance, compare insurance policy,

compare insurance plans, and compare premiums on insurance and so on.

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