Introduction to Insurance

Insurance is known as a risk transference strategy where a firm/person transfers a risk of significant potential loss to another party by paying a premium in advance. In other words insuring involves insured person transferring risk of potential future loss to a insurer by paying a premium in advance. Just in case if the insured risk materializes the insurer has to pay for the loss incurred by the insured person.  As an example, a vehicle owner insures his vehicle to transfer the potential risk of meeting with accidents. For this, the owner of the vehicle has to pay a premium at the beginning of the period and enter into insurance contract. Just in case if the vehicle meets with an accident during the insured period the insurance company has to pay the loss incurred by the vehicle owner depending on the terms and conditions of the insurance contract.

On the other hand, many people who want to get their risk transferred pay the premium to the insurance company which creates the insurance fund/pool. Out of this fund the insurance company pays for the losses incurred by the insurance policy holders. Paying for losses is not a loss to the insurance company because not all insurance policy holders are going to make losses and rest of the funds in the insurance pool can be invested in a worthy investment and insurance company can make an extra income on it.

There are many risks can be insured such as:

  • Risk of natural disasters such as flood and earthquake
  • Risk of losing a family member
  • Risk of getting ill and incurring medical expenses
  • Risk of vehicles meeting with accidents
  • Risk of bad debt
  • Risk of employee safety

As the first step of insuring you need to identify what are the risks that you are facing and which risks need the risk transference using an insurance policy. This can be judged based on rule of thumb or legal requirement such mandatory insurance on vehicles. Once you have found the types of risk you can ask the insurance agent to provide you with insurance policy which matches your requirement. There are 02 types of agents named captive agents (agents who are bound to sell insurance policies of a single insurance company) and independent agents (agents who sell policies from different insurance companies) and you are free to choose the type of the agent based on your preference. Once you have chosen the insurance agent he will carry out a process called underwriting.


Underwriting is the process which assess value of the risk that is going to be insured and based on the value of risk the insurance premium will be decided. In other words it evaluates the likeliness of the loss occurring and value of the potential losses.  It will evaluate the risk based on predetermined standards such as medical conditions of health insurance policy holder and driving history for a vehicle insurance policy. As an example, if a motor vehicle insurance policy has to be obtained to assess the likeliness of an accident occurrence the underwriter will examine the driving history of the driver and the fitness condition of the vehicle. When evaluating the potential loss underwrite will value the vehicle in the present value terms and potential loss in terms of future. Based on all these factors, final underwritten value will be determined and based on that value the insurance premium that has to be paid will be determined.

Once the insured person pays the premium to the insurance company through the insurance agent, both parties (insurance company and insured person) enter into the insurance contract and the “insurance contract” which explains the terms and conditions of the insurance policy will be handed over to the insured person. Insurance contract document will include the type of coverage, starting date of the coverage, expiry date of the coverage, terms and conditions of the insurance policy.

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One thought on “Introduction to Insurance”

  1. Tech says:

    Terrific work! This is the type of information that should be shared around the web. Shame on the search engines for not positioning this post higher!

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