Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
RISK ANDINSURANCE   NATURE OF   INSURANCE
DEFINITION Insurance is an agreement  whereby a group of  individuals facing similar  risks can share the  fortuitous los...
HOW DOES INSURANCE           WORK? Insurer can collect premiums from a group  of people in similar circumstances not all ...
COMMON POOL An insurance company sets  itself up to operate the pool. It takes contributions, in the  form of insurance ...
LAW OF LARGE NUMBERS      Law of large numbers states that the       larger the group of similar risks, the       closer ...
INSURANCE PREMIUM Contribution =  premium which is the  consideration an  insured pays to the  insure for an  insurance c...
BREAKDOWN OF THE    PREMIUM         PURE PREMIUM          RISK         EXPENSE          LOADING         CONTINGENCY    ...
PREMIUM CALCULATION SUM INSURED x          Expense Loading – to                          cover the expenses  PREMIUM RAT...
CXTS OF INSURABLE RISKS Financial Value Large number of similar  risks Pure risks only No catastrophic loss Fortuitou...
FUNCTION OF INSURANCE            PRIMARY             FUNCTION             – Risk transfer               mechanism
FUNCTION OF INSURANCE SECONDARY FUNCTIONS   – Releasing funds otherwise     tied up in reserves.   – Stimulate business  ...
FUNCTION OF INSURANCE INDIRECT FUNCTION – Investments of funds – Invisible exports
OTHERS Sources of Employment   – Insurance industry has generated numerous     employment opportunities Classes of Insur...
DIFFERENCES BETWEEN LIFE     AND OTHER FORMS OF         INSURANCE Life – Certain event, the only uncertainty  is when the...
Upcoming SlideShare
Loading in …5
×

nature of insurance

17,453 views

Published on

nature of insurance

  1. 1. RISK ANDINSURANCE NATURE OF INSURANCE
  2. 2. DEFINITION Insurance is an agreement whereby a group of individuals facing similar risks can share the fortuitous losses of the unlucky few by the transfer of such risks to the insurer who agrees to compensate the losses
  3. 3. HOW DOES INSURANCE WORK? Insurer can collect premiums from a group of people in similar circumstances not all of whom will suffer losses in any one year. These premiums are then pooled together and used by the insurer to pay losses. Losses are thus shared out among all the policyholders rather than borne solely by the unlucky few.
  4. 4. COMMON POOL An insurance company sets itself up to operate the pool. It takes contributions, in the form of insurance premiums from many insureds and pay for the losses of a few. The operation of the common pool is very much based on the successful application of the Law of Large Numbers.
  5. 5. LAW OF LARGE NUMBERS  Law of large numbers states that the larger the group of similar risks, the closer the actual losses experienced by the group will approach the expected losses  This law implies that the greater the number of similar risk, the more accurate the insurer can be in predicting the future losses.  Allows the insurer to fix premium in advance  Insurer can assess the risk and fix a premium which reflects the hazard and value of the risk which an insured brings to the pool.
  6. 6. INSURANCE PREMIUM Contribution = premium which is the consideration an insured pays to the insure for an insurance coverage of a specified nature for a specified policy period
  7. 7. BREAKDOWN OF THE PREMIUM  PURE PREMIUM RISK  EXPENSE LOADING  CONTINGENCY LOADING  PROFIT LOADING
  8. 8. PREMIUM CALCULATION SUM INSURED x  Expense Loading – to cover the expenses PREMIUM RATE = occurred in maintaining PREMIUM the insureds contribution. PAYABLE.  Contingency Loading – to Premium Rate = cover the possible variability of claims Average Total costs. Claims / Average  Profit Loading – to cover Total Value expected dividend payments to the insurer’s Insured X 100% shareholders.
  9. 9. CXTS OF INSURABLE RISKS Financial Value Large number of similar risks Pure risks only No catastrophic loss Fortuitous Loss Insurable Interest Legal and not against public policy Reasonable premium
  10. 10. FUNCTION OF INSURANCE  PRIMARY FUNCTION – Risk transfer mechanism
  11. 11. FUNCTION OF INSURANCE SECONDARY FUNCTIONS – Releasing funds otherwise tied up in reserves. – Stimulate business enterprise – Insurance also stimulates business – Remove fear and worry – Reduction of losses – Savings – Social benefits
  12. 12. FUNCTION OF INSURANCE INDIRECT FUNCTION – Investments of funds – Invisible exports
  13. 13. OTHERS Sources of Employment – Insurance industry has generated numerous employment opportunities Classes of Insurance – Life Assurance – General Insurance Risks Covered by Life Assurance – Premature Death – Continuous Stream of Income during retirement – Sickness or Disability Risks Covered by General Insurance – Motor Vehicles – Marine and Aviation – Products or goods sold
  14. 14. DIFFERENCES BETWEEN LIFE AND OTHER FORMS OF INSURANCE Life – Certain event, the only uncertainty is when the time it will occur General – term of contract is only one year and it is cancelable by both parties Life longer term and can only be cancel by insured General is subject to principle of indemnity

×