Chapter 15- Insurance

by • 10/06/2011 • B.COM PART 1 Introduction to BusinessComments (0)860

Q1- Define insurance. Also state the sources of insurance.

INSURANCE:

Insurance is a contract between two parties, one being the insured who will pay a premium to the second party known as the insurer who will pay compensation in a specified loss losses, for instance, fire or theft.

Kinds Of Insurance:

Insurance has two traditional kinds:

  1. Life assurance
  2. General insurance/ Property and accident insurance

 

 

Life Assurance:

Life insurance relies on law of averages according to which, the insurance company works out the premium on the basis of number of insured persons and their respective ages.

Life insurance is of the following types:

  • Life Term Assurance:

Under it, life is insured for a limited or definite period, say, 7 years, 10 years, 20 years, and so on. If the insured dies during the period insured the amount of the policy will be paid on his or her heir or heirs immediately and no premium will have to be paid anymore ever if the insured dries right after paying the first premium. If he survives the whole period the policy will be terminated at the end of the specified period.

  • Whole-Life Assurance:

The insured pays the premium throughout his life. The amount of premium varies with the age and amount of the policy.

  • Term Assurance:

This type calls for insuring for a specified period of time during which the premium is to be paid. Policy will be paid only after the death of the insured, no matter he dies during or after the period of insurance.

  • Endowment Assurance:

This is the commonest of all other insurance policies. Its premium rate is the highest of those of life assurance and limited payment life assurance(term assurance). It is different from the limited payment life assurance on that the policy is paid either after death or after insurance period is complete.

  • Personal Accident Insurance:

Accidents cannot be prevented, but the loss arising out of them can be made up under this insurance scheme. The amount is paid depending on the conditions covered in the policy.

General Insurance:

It has the following kinds:

·        Fire Insurance

Fire insurance policies protect property owners against losses resulting from damage to property used by fire, Now its scope has been widened to cover losses from windstorms, hail, riots earthquake, explosion, flood, chemical or smoke. The amount of premium chargeable by fire insurance companies depend upon the amount of coverage obtained, type of property, and fire fighting arrangements made by the company obtaining protection.

·        Casualty Insurance:

Other risks, in addition to ones discussed above, include theft, health, compensation, travel, motor vehicles, which are covered under casualty insurance.

·        Marine Insurance

Marine insurance protection is available to merchandise in transit. In fact international trade owes to it. Had there been no marine insurance, perhaps foreign trade would not have expanded to the extent which we find today. By offering protection to shippers and foreign traders, marine insurance is playing a vital role in international commerce. It insures cargo, ship and freight.

When a ship sinks in ocean, three things are lost. Firstly, we lose cargo, secondly the ship itself and thirdly the freight that would have been earned by the shipping lines. Cargo is insured by the trader, while ship and freight are insured by the shipping company.

·        Fidelity and Surety Bonds

Fidelity bonds are usually written to cover employees occupying positions of trust in which they have jurisdiction over funds. The employer is guaranteed against loss caused by the dishonesty of such employees and the insurance company will reimburse the policy holder for loss up to the amount specified in the policy.

Surety bonds are written to protect the insured against loss from the non-performance of a contract. A building contractor, for example, who agrees to erect a factory according to specification and within a certain time, might be required to furnish surety bonds guaranteeing performance of the contract. Such fidelity and guarantee are covered by insurance company.

Q2- What are the different methods of reducing risks?

PROTECTION AGAINST RISKS/ METHODS OF REDUCING RISKS

Some methods have been evolved to provide complete or partial protection against some risks.

  • Safety Arrangement:

Safety arrangements are made to protect company assets. Fir fighting devices, internal auditing and control, and electronic safes provide safety against risk. Regular exercise and proper diet keep from fatal disease. Proper market research ensures the success of a new product.

  • Shifting The Risk:

This is the most common method of providing safety against the risk. Shifting the risks refers to the method of getting insured with an insurance  company at a regular premium payment.

  • Self Insurance:

Large business concerns make their own safety arrangement, against various risks, as fire. Since the companies may have many branches, outlets or factories, their own insurance system involves less cost than that of premium paid to the insurance company.

  • Advance Knowledge Of Risk:

One way to avert risks is its recognition or advance knowledge. Medical checkups, saving up money for future, providing fire extinguisher, are devices to minimize risks.

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