Understanding insurance principles

Large Group of the Insured

There are factors and underlying principles that are considered by the insurer while taking upon it the liability to cover the risks for the insured. The individual insured usually belongs to a large group of similar people with similar risk profile and exposure. The insurer aims at increasing the units of this large homogenous group to benefit from the lesser probability of actual incidence of the risk thus getting enough premiums to leave the insurer with profit after settlement of insurance claims. There is however instances of exception to this general principle as in case of insurance cover for units belonging to remote or unusual groups like large commercial estates or film and sports personalities.

Verifiable Events

Any loss covered under insurance must be clearly verifiable. The elements of the events should have specific time, place of occurrence and cause of occurrence. All these criteria must be satisfactorily verifiable for the insurer to consider the claim of compensation by the insured. The simplest example would be payment of benefits under a life insurance policy on the death of the policy holder or the insured. Losses resulting from car accidents, injury at workplace and loss of property by fire come close to be identified as definite and verifiable losses. Any loss apparently thought to be definite like a worker getting afflicted with ailments due to certain adverse conditions prevailing at the workplace may not really be so if the elements of the occurrence as mentioned above are not distinctly identifiable. The insurer must have adequate information before taking a decision to settle the insurance benefits.

Other Conditions

The cause for the loss or damage should occur by chance or accident and not by design or by some voluntary action (say self-inflicted injury) to make the insured eligible for insurance settlement. It can be verified by the insurer that the occurrence of the event leading to the loss was beyond the control of the insured person. This is the reason why normal business risks are usually not covered under insurance which is meant only for covering accidental or unforeseen losses. From the viewpoint of the insured, the anticipated financial loss must be substantial enough to warrant the premium paid for the insurance cover. The viewpoint of the insurer is to get enough premiums to cover the expected losses that the insurer will have to settle in the event of a claim plus costs incurred by it to issue and administer the insurance policy. Another larger concern for the insurance company is to see that the premiums earned are enough to sustain for it a continuous capital with which to pay the insurance benefits to its policy holders. That makes it more important for a person to go for insurance only after making sure that the value to be got back is good enough or the stake is high enough to justify paying the premiums. The probability and the cost of loss are thus two important considerations for the insured. While the former is incalculable, the latter can be measured by evaluating the amount recoverable from an insurance policy when a claim is made.