WHAT IS INSURANCE?

When people facing a common risk pool their resources, they create an accumulation of funds from which individual losses can be paid. Such an arrangement transfers risk from the individual to the group because the group shares the cost of the risk among all of its members.

Insurance can be said to be a device for transferring specified risks of individual persons to an insurer. The insurer agrees, for consideration (usually payment of a premium), to assume, to a specified extent, certain losses that may be suffered by the insured.

Insurance can also be referred to as a system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium. Insurance is a business that guarantees the existence of other businesses in every economy because they cover all their losses.

CHARACTERISTICS OF AN INSURANCE TRANSACTION:

• Pooling of resources;

• Accumulation of funds;

• Distribution of funds to those who have losses;

• Transfer of risk from one person to the group; and

• Spread of risk amongst all members of the group.

BENEFITS OF INSURANCE:

Insurance provides protection by reimbursing people when their

property is damaged or they suffer some other loss. Insurance helps individuals and business owners resume their normal standard of living and operations.

1.    PAYMENT OF LOSSES:

The proceeds of an insurance policy benefit everyone by restoring the insured person or organization to the same financial condition as before the loss and preventing the loss from rippling out and affecting others negatively.

2.    ECONOMIC GROWTH:

The insurance industry plays an important role in the nation's economy. It is second only to the commercial banking industry as a source of investment funds because insurance companies invest the billions of the premium dollars they receive annually in a wide range of investments.

Insurance companies use premiums collected from policyholders to

• pay for claims;

• pay for cost of doing business; and

• build cash reserves for future loss payments.

Cash reserves are invested in federal and municipal bonds that are used to build roads, schools and utilities. Reserves are also invested in commercial developments and the stock market. These investments promote economic growth in communities and support the insurance company’s requirement of maintaining sufficient capital reserves to pay future losses and earn a profit.

3.   LOSS PREVENTION:

Insurance also benefits society by encouraging activities and devices that reduce the amount of losses and their economic impact.

Seat belts and other passive restraints in automobiles significantly reduce the extent of injuries suffered by vehicle occupants involved in

auto accidents. Insurance companies were a major force behind requiring seat belts as standard equipment in all vehicles.

4.   CREDIT SUPPORT:

Banks and credit institutions rely on insurance to make sure they can recover loans if disaster occurs. Insurance allows borrowers to guarantee creditors that their investment is protected against disasters.

Insurance protects:

• The value of property from unforeseen disasters; and

• A client's ability to pay back loans if illness or premature death occurs.

5.   PEACE OF MIND:

It gives the insured rest of mind in case of any losses. (Natural or unnatural).