This document provides an overview of the nature of insurance. It defines insurance as an agreement where individuals facing similar risks can share losses through transferring risks to an insurer. The insurer collects premiums from many policyholders and uses these funds to pay losses of the unlucky few. This allows for losses to be shared across all policyholders rather than borne solely by those who experience losses. It also discusses key concepts like insurable risks, premium calculation, functions of insurance, and differences between life and other forms of insurance.

1. RISK AND
INSURANCE
NATURE OF
INSURANCE

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. 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. 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. 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. 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. BREAKDOWN OF THE
PREMIUM
 PURE PREMIUM
RISK
 EXPENSE
LOADING
 CONTINGENCY
LOADING
 PROFIT LOADING

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. 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. FUNCTION OF INSURANCE
 PRIMARY
FUNCTION
– Risk transfer
mechanism

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. FUNCTION OF INSURANCE
 INDIRECT FUNCTION
– Investments of funds
– Invisible exports

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. 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