At the end of this blog, you should have understood, because here is best introduction of insurance. the basic concepts relating to insurance business, the meaning of the words ‘peril’ and ‘risk’ different kinds of risks, importance of insurance in society and economy.
→What Is Insurance:
The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefits from it.
It is a benefit because it meets some of his needs. The benefit may be an income or in some other form. In the case of a factory or a cow, the product generated by it is sold and income is generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income. Both are assets and provide benefits.
Every asset is expected to last for a certain period of time during which it will provide the benefits. After that, the benefit may not be available. There is a life time for a machine in a factory or a cow or a motor car. None of them will last forever.
The owner is aware of this and he can so manage his affairs that by the end of that the period or life time, a substitute is made available. Thus, he makes sure that the benefit in not lost. However, the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it incapable of giving the benefits.
An epidemic may kill the cow suddenly. In that case, the owner and those enjoying the benefits there from would be deprived of the benefits. The planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effects of such adverse situations. It promises to pay to the owner or beneficiary of the asset, a certain sum if the loss occurs.