Meaning of Insurance

Insurance is an arrangement under which people facing common risks together and make their small contributions to the common fund. While it may not be possible to say in advance, which person will suffer the losses, it is possible to work out how many persons on average out of the group, may suffer loss. When risks occur, the loss is made good out of the common fund. In this way, each and everyone share the risk. In fact, they share the loss by payment of premium which is calculated on the likelihood of loss. An example will make the concept of insurance more clearer. In a town, there are 1000 bikes, each valuing 100 dollars and they are owned by 1000 individuals. It is expected that every year, one bike is totally damaged in the town due to accident. So, the insurance company collects 1 dollar as premium amount to join in this insurance policy from all the bike owners. Finally, the company pays the 100 dollar for the owner who suffers from the loss due to that accident.