This document discusses the purpose of insurance. It begins by defining insurance as a way to spread losses among a large number of people who contribute to a common fund. Insurance transfers risk from the insured to one or more insurers. It provides financial protection and compensation in the event of a claim. The importance of pooling risk is that it allows risks to be spread evenly among a large number of contributors, making it easier for insurance companies to bear losses than individuals. Insurance companies make profits based on the difference between premiums and investment income collected, and losses from claims paid out plus administrative costs.

1. Chapter 38
Purpose of Insurance
1.1 What is Insurance
1.2 Purpose of Insurance
1.3 Importance of Pooling of risk
Commerce Senior 1 : Chapter 38 1

2. 1.1 What is Insurance?
Insurance is a way of
spreading losses among
large number of people
who contribute to a pool or
common fund.
Commerce Senior 1 : Chapter 38 2

3. It is legal agreement
entered into with an insurer
to provide financial
protection and, in the event
of a claim, compensation.
Commerce Senior 1 : Chapter 38 3

4. Insurance is a form of risk management.
It is about calculating and controlling risk.
It transfer risk from the insured to one or
more insurers.
Commerce Senior 1 : Chapter 38 4

5. What is Risk?
Risk is the
possibility of an
occurrence or a
loss.
We do not
know what will
happen in the
future.
The chances of
risks
happening
may be greater
or smaller.
Commerce Senior 1 : Chapter 38 5

6. Commerce Senior 1 : Chapter 38 6

7. Types of Risk
Insurable Risks
Those risks against which
probabilities of occurrence
can be mathematically
calculated on the basis of
available past data for
example theft, accident.
Commerce Senior 1 : Chapter 38 7

8. Non-Insurable
Risks
Those risks against which
probability of occurrence
can not be mathematically
determined for example
failure in exam and change
in fashion.
Commerce Senior 1 : Chapter 38 8

9. Insurer/Underwriter:
One who provides
insurance.
Insured: One who
gets insurance cover.
Insurance Policy:
Contract of
Insurance.
Commerce Senior 1 : Chapter 38 9

10. Commerce Senior 1 : Chapter 38 10
Beneficiary: Is the
person who will get
payment against
insurance claim from
insurance.
Assessor/Actuaries:
Somebody employed
by an insurance
company to assess risks
and fix premiums

11. Commerce Senior 1 : Chapter 38 11
Sum Insured: Is amount
which the insurer promises
to pay at the maximum.
Premium: Amount which is
to be paid on order to buy
an insurance cover. Once
paid it is non-refundable.
Premiums are to be paid on
annual basis.

12. Commerce Senior 1 : Chapter 38 12
Cover Note: A document of
transitional nature which
acts a proof of insurance
before insurance policy is
issued.
Claim form: Is a written
document which has to be
submitted by the beneficiary
to the insurer to the
payment against financial
loss.
Proposal form: Document on
which written data about
the insured is collected. On
basis of this data premium
are calculated.

13. Why do Individual and Business need Insurance?
It gives
confidence to
the
person/busin
ess.
It can be
obtained as a
measure of
saving for a
certain future
plan.
As an
investment
It can give
financial
protection.
Some times it
is a
obligation.
Commerce Senior 1 : Chapter 38 13

14. 1.2 Purpose of Insurance
Financial protection
Compensation
Business Confidence
Institutional Inventors
Commerce Senior 1 : Chapter 38 14

15. 1.3 The Importance of Pooling Risk
Commerce Senior 1 : Chapter 38 15
• The term "risk pooling" refers to the
spreading of financial risks evenly among a
large number of contributors to the
program.
• Insurance is the transference of risks from
individuals or corporations who cannot
bear a possible unplanned financial
catastrophe to the capital markets, which
can bear them easily – at least in theory.

16. Pooling Of Risk
Insurance
Pool
INTEREST
FROM
INVESTMENT
PROFITS
POLICY
HOLDER
ADMINISTARTIVE
COSTS AND
EXPENSES
Commerce Senior 1 : Chapter 38 16

17. How do Insurance Companies make
Profits?
Profits = (premiums +
investment income) –
(losses resulting in claims
+ administrative costs)
Commerce Senior 1 : Chapter 38 17

18. Homework
1. What is Insurance
2. List two type of insurance.
3. Give two reason why people buy insurance
cover.
4. How do insurance companies assist the
economy of a country?
5. What is the definition of term INSURED?
Commerce Senior 1 : Chapter 38 18