Understanding Insurance Principles
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Questions and Answers

Which of the following is NOT a characteristic of an insurable risk?

  • Predictability
  • Unconnectedness
  • Verifiability
  • Substitutability (correct)

What is the primary purpose of pooling risk in insurance?

  • To increase the premiums charged to clients
  • To eliminate all financial risks faced by clients
  • To reduce the financial impact of losses on the insurer (correct)
  • To ensure all clients receive the same compensation

Why are not all types of risks covered by insurance companies?

  • Some risks cannot be quantified or predicted accurately (correct)
  • Insurance companies lack enough capital
  • Insurance is intended only for businesses, not individuals
  • All risks have equal probabilities

In the example provided, how much compensation was paid out compared to the total premiums collected?

<p>Rs. 100,000,000 paid, with Rs. 400,000,000 remaining (D)</p> Signup and view all the answers

What does the term 'casualty' refer to in the context of insurable risks?

<p>The likelihood of the risk occurring (A)</p> Signup and view all the answers

Which factor allows an insurance company to verify the occurrence of damage?

<p>Ability to substantiate claims with evidence (D)</p> Signup and view all the answers

Study Notes

Understanding Insurance

  • Insurance is a contract providing financial protection against damages or losses, benefiting individuals or businesses.
  • Insurance companies pool clients' risks to make overall payments more manageable.
  • Insurance does not cover all types of risks; it has specific insurable criteria.

Pooling of Risk

  • The principle of pooling risk underpins the insurance concept.
  • Insurance companies collect premiums from customers sharing similar risks to create a compensation fund.
  • Compensation is paid to individuals who have faced the insured risk, while most policyholders remain unaffected.
  • Example: Janashakthi Insurance PLC collected Rs. 500,000,000 from 10,000 motor vehicle policies, with Rs. 100,000,000 paid in compensation to the 100 cars involved in accidents.

Insurable Risks

  • Insurable risks are those that insurance companies are willing to cover, quantifiable in financial terms.
  • Key characteristics of insurable risks include:
    • Predictability: Damage must be quantifiable in financial terms.
    • Casualty: There must be a likelihood of occurrence.
    • Unconnectedness: Risks should be identifiable and separable from other risks.
    • Verifiability: Risks must be able to be confirmed with evidence, such as time and date of incidents.

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Description

This quiz explores the fundamental principles of insurance, including the contract nature of insurance, how it provides financial protection, and the pooling of risks among clients. Dive into the key concepts that define how insurance companies operate and manage risk.

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