Nature and Functions of Insurance
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Nature and Functions of Insurance

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Questions and Answers

Which of the following best describes the role of insurance intermediaries?

  • They define the terms of insurance contracts.
  • They bear the financial risks directly.
  • They facilitate the process between insurers and policyholders. (correct)
  • They are responsible for underwriting insurance policies.

    • According to J.B. Maclean, insurance is solely for individuals bearing their own financial risks.

    False

    What is the agreed consideration paid by the insured to the insurer called?

    premium

    The concept of insurance allows the ______ of risks among many individuals.

    <p>spreading</p> Signup and view all the answers

    Match the insurance definitions with their corresponding authors:

    <p>W. Beveridges = Collective bearing of risk is insurance J.B. Maclean = Method of spreading financial loss Riegel &amp; Miller = Social device for uncertain risks Hardy Ivamy = Contractual obligations between insurer and insured</p> Signup and view all the answers

    Which statement describes insurance as defined by Riegel & Miller?

    <p>It combines uncertain risks to make them more certain.</p> Signup and view all the answers

    An insurance contract must involve some uncertainty regarding an event occurring.

    <p>True</p> Signup and view all the answers

    What is the main purpose of an insurance contract as stated by Hardy Ivamy?

    <p>To pay a sum of money upon the occurrence of a specified event.</p> Signup and view all the answers

    What is one of the primary functions of insurance?

    <p>Modifies uncertainty to certainty</p> Signup and view all the answers

    Insurance does not encourage the development of larger industries.

    <p>False</p> Signup and view all the answers

    Name one secondary function of insurance.

    <p>Avoidance of losses</p> Signup and view all the answers

    Insurance serves as a _____ way of savings and investment.

    <p>compulsory</p> Signup and view all the answers

    How does insurance benefit businessmen?

    <p>By relieving them from capital investments for larger risks</p> Signup and view all the answers

    Match the functions of insurance with their descriptions:

    <p>Modifying uncertainty = Insurance transforms uncertain risks into known risks. Avoidance of losses = Helps prevent unfortunate consequences through safety measures. Compulsory savings = Encourages saving while availing tax exemptions. Source of foreign exchange = Insurance is a global business that contributes to foreign currency.</p> Signup and view all the answers

    Small capital investment through insurance provides coverage for larger risks.

    <p>True</p> Signup and view all the answers

    Insurance acts as a source of earning _____ exchange.

    <p>foreign</p> Signup and view all the answers

    What is the primary purpose of an insurance company?

    <p>To generate profits</p> Signup and view all the answers

    The term 'aleatory' refers to something certain and predictable.

    <p>False</p> Signup and view all the answers

    What are the primary functions of insurance?

    <p>To provide protection, collective risk, and evaluation of risk.</p> Signup and view all the answers

    Insurance contracts are characterized as __________ because they depend on uncertain events.

    <p>aleatory</p> Signup and view all the answers

    Match the following functions of insurance with their descriptions:

    <p>Provide protection = Shield against economic loss Collective risk = Sharing losses among a larger group Evaluation of risk = Assessing probable risks based on factors</p> Signup and view all the answers

    What is the small contribution made by the insured called?

    <p>Premium</p> Signup and view all the answers

    Insurance serves only the purpose of protecting the insured from losses.

    <p>False</p> Signup and view all the answers

    What does insurance primarily shift?

    <p>The loss suffered by an individual to a professional risk-bearer.</p> Signup and view all the answers

    Study Notes

    Nature of Insurance

    • Insurance operates as a profit-driven business, not a charity.
    • The essence of insurance is risk-sharing among participants.
    • Insured individuals receive financial relief for their losses through pooled resources.

    Contract Characteristics

    • Insurance contracts are termed 'aleatory,' meaning outcomes depend on uncertain events.
    • These contracts involve speculation on potential profits and losses.

    Functions of Insurance

    • Functions are divided into Primary, Secondary, and Other functions.

    Primary Functions

    • Provide Protection: Shields against future risks and economic loss through shared risk.
    • Collective Risk: Distributes financial burdens of few among a larger group, pooling premiums into a fund for payouts.
    • Evaluation of Risk: Assesses and determines premium rates based on potential risks.
    • Provide Assurance: Transforms uncertain risks into more certain outcomes.

    Secondary Functions

    • Avoidance of Losses: Alerts individuals to preventive measures, thereby reducing claims and encouraging savings.
    • Small Capital for Larger Risks: Allows businesses to mitigate high risks by paying minimal premiums.
    • Encouragement for Industrial Development: Supports larger industries by enabling access to financing against risks through insurance.

    Other Functions

    • Savings and Investment: Insurance fosters a compulsive savings structure and limits unnecessary spending while providing tax benefits.
    • Foreign Exchange Earnings: Insurance contributes to the global financial landscape.

    Key Personalities in Insurance

    • Insurers: Insurance companies managing the risk pool.
    • Assured/Public/Policyholder: Individuals or entities purchasing insurance.
    • Intermediaries: Insurance agents, brokers facilitating transactions between insurers and insured.

    Definitions

    • Collective risk-bearing is a foundational concept of insurance (W. Beveridges).
    • Insurance spreads financial risk across many individuals to alleviate burdens on individuals (J.B. Maclean).
    • Social purpose serves to group uncertain risks together for better stability and assurance (Riegel & Miller).
    • An insurance contract involves an agreement where the insurer promises compensation for specified events in exchange for premiums (Hardy Ivamy).
    • There must be uncertainty regarding the occurrence or timing of insured events (Prudential Insurance Company case).

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    Related Documents

    INSURANCE SLIDE 1 -PU.pdf

    Description

    Explore the essential principles of insurance as a profit-driven enterprise and its role in risk-sharing among individuals. This quiz delves into the characteristics of insurance contracts and their various functions in the industry.

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