Insurance Is A Pool Of Risk

Insurance is a pool of risk

Insurance is the practice by which an individual secures or obtains financial compensation for a specified loss or damage resulting from risk of any sort by contract with a company to which he pays regular premiums.

Risk is defined as the possibility of danger,injury, loss etc, while premium is the payment made by an insured person to insurance company on regular basis for the insurance cover given to him. A shop keeper for example is likely to have quite valuable stock of goods and he could suffer losses from such things as fire,burglary, theft, flood etc. By paying a sum of money to the insurance company,that is premium, the shop keeper knows that he will be compensated in future for any losses he suffers from these causes.

The risk of both business and private life which insurance takes care of include accidents, fire, theft,illness and death. Few people will choose to bear personally all of these risks. Any business man for example, who refuses to get insurance cover would suffer great anxiety in case fire, theft or accident occurred on his premises. A serious fire which destroyed his premises could mean the end of his business unless he could afford to re-build.

Insurance is based on the "pooling of risks". It is possible for the insurance companies to calculate the chances of something happening, based on past statistics, and from this they can work out how much they should charge for their insurance. The same result would be achieved if a groul of traders got together and agreed that any losses due to accidents would be shared equally among themselves. An insurance company is better suited to do the work as it will be specializing in it,and can undertake the work more efficiently.

Because losses of the few are shared among many, insurance is said to be a pool of risks.