Insurance is your soldier

Yes, Insurance is your soldier to protect you from unseen consequences. Let us see the reasons.

There are certain principles, which make it possible for insurance to remain a preferred fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to.It will become bearrable when the community shares the burden.The second is that the peril should occur in an accidental manner.Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assests and ask others to share the loss. This would be taking unfair advantage of an arrangement put into place to protect people from the accidental risks they are exposed to. The occurence has to be random, and not the deliberate creation of the insured person.

The manner in which the loss is to be shared can be determined before hand. It can be equal among all. It can also be proportional to the risk that each person is exposed to. The trader who has sent Rs.100 lakhs worth of goods on a ship will bear double the loss to be borne by another trader who has got Rs.50 lakhs worth of goods on the same ship. Current practice is to make the sharing proportional to the exposure to risk. The share could be collected from the members after the loss has occured or the likely shares may be collected in advance, at that time of admission to the group.Insurance companies collect in advance and create a fund from which he losses are paid.

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How Insurance Works?

Let us have a close look at the working principle of Insurance:

The mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ships are exposed to the same risks, which are related to water damage, sinking of the vessel, piracy,etc. Those owning factories are not exposed to these risks, but they are exposed to these risks like fire,hailstorms,earthquakes,lightning,burglary, etc.Like this, different kinds of risks can be identified and seperate groups made,including those exposed to such risks. By this method, the heavy loss that any one of them in the group may suffer( all of them may not suffer losses at the same time) is divided into bereable small losses by all the others in the group. In other words, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.Insurance helps to spread the costs or risks.

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