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Since the life insurance contract is a contract of certainty, because the contingency, the death, or the expiry of the term will certainly occur, the payment is certain. If the contingency occurs, payment is made. The payment is made at a certain contingency insured. So, the probability of loss is calculated at the time of insurance. If there is an expectation of more loss, a higher premium may be charged. There are several methods of evaluation of risks. The risk is evaluated before insuring to charge the share of an insured, herein called, consideration or premium. Like all co­operative devices, there is no compulsion here on anybody to purchase the insurance policy. So, by insuring or underwriting a large number of persons, he can pay the amount of loss. Such a group of persons may be brought together voluntarily or through publicity or solicitation of the agents.Īn insurer would be unable to compensate for all the losses from his own capital. The most important feature of every insurance plan is the cooperation of a large number of persons who, in effect, agree to share the financial loss arising due to a particular risk that is insured. The loss arising from these events, if insured, are shared by all the insured in the form of a premium. The event may be the death of a breadwinner to the family in the case of life insurance, marine-perils in marine insurance, fire in fire insurance, and other certain events in general insurance, e.g., theft in burglary insurance, accident in motor insurance, etc. Insurance is a device to share the financial losses which might befall an individual or his family on the happening of a specified event. In contrast, the legal definition provides for the legally enforceable contract that spells out the legal rights, duties, and obligations of all the parties to the contract.įrom the above explanation, we can find the following characteristics, which are generally observed in life, marine, fire, and general insurances. The financial definition provides for the funding of the losses. The legal definition focuses on a contractual arrangement whereby one party agrees to compensate another party for losses. The Significance of this fact will be clear by the following example. Thus the risk is not averted, but the members share the loss on its occurrence. The persons exposed to a particular risk cooperate to share the less caused by that risk whenever it takes place. The function of insurance is to spread this loss over many persons through the mechanism of cooperation. So it is clear that every risk involves the loss of one or the other kind. The more specific definition can be given as following “Insurance may be defined as a consisting one party (the insurer) agrees to pay to the other party (the insurer) or his beneficiary, a certain sum upon a given contingency (the risk) against which insurance is sought.”

The insurance, thus, is a contract whereby Insurance is defined as a form of risk management primary insurance has been defined to be that in which a sum of money as a premium is paid in consideration of the insurance incurring the risk of paying a large sum upon a given contingency. Insurance is a cooperative device of distributing losses falling on an individual or his family over many persons, each bearing a nominal expenditure and feeling secure against heavy loss. Similarly, another definition can be given.