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SAI INTERNATIONAL SCHOOL
CLASS-XI

SUB: Business Studies
Chapter 4: Business Services
Lesson Notes 18 Principles of Insurance

Insurance: Life is full of uncertainties. The chances of occurrence of an event causing losses are
quite uncertain. There are risks of death and disability for human life; fire and burglary risk for
property; perils of the sea for shipment of goods and, so on. If any of these takes place, the
individuals and/or, organisations may suffer a great loss, sometimes beyond their capacities to
bear the same. It is to minimise the impact of such uncertainties that there is a need for insurance.
Investment in factory buildings or heavy equipment or other assets is not possible unless there is
arrangement for covering the risks, with the help of insurance. Keeping this in mind, people
facing common risks come together and make small contributions to a common fund, which
helps to spread the loss caused to an individual by a particular risk over a number of persons who
are exposed to it.

Insurance is thus a device by which the loss likely to be caused by an uncertain event is spread
over a number of persons who are exposed to it and who prepare to insure themselves against
such an event. It is a contract or agreement under which one party agrees in return for a
consideration to pay an agreed amount of money to another party to make a loss, damage or
injury to something of value in which the insured has a pecuniary interest as a result of some
uncertain event. The agreement/contract is put in writing and is known as ‘policy’. The person
whose risk is insured is called ‘insured’ and the firm which insures the risk of loss is known as
insurer/ assurance underwriter.

Functions of Insurance:

The various functions of insurance are as follows:
(i) Providing certainty: Insurance provides certainity of payment for the risk of loss. There are
uncertainties of happenings of time and amount of loss. Insurance removes these uncertainties
and the assured receives payment of loss. The insurer charges premium for providing the
certainity.
(ii) Protection: The second main function of insurance is to provide protection from probable
chances of loss. Insurance cannot stop the happening of a risk or event but can compensate for
losses arising out of it.
(iii) Risk sharing: On the happening of a risk event, the loss is shared by all the persons exposed
to it. The share is obtained from every insured member by way of premiums.
(iv) Assist in capital formation: The accumulated funds of the insurer received by way of
premium payments made by the insured are invested in various income generating schemes.