Thursday, October 8, 2009


Aneke (1998) using Kulp (1956:10) fourfold classification stated thus:
Insurance, in its development as a business; a technique for averaging loss; an instrument of social and economic planning and a legal institution, has taken on many faces and forms, which continue to confound simple schemes.
As a business, insurance can have the status of a chartered insurance company, a private corporation, a group of associated individuals cooperating in an insurance venture informally or a governmental agency. In this business status is an economic institution that reduce risk by combining under one management a group of objects so situated that the aggregate accidental losses to which the group is subjected become predictable within narrow limits. It is a risk distributing and loss-sharing device. These risk distributing and loss-predicting functions are made possible by the principle of large number.
The principle is that the larger the number of separate risk of a like nature combined into one group the uncertainty there will be as to the amount of loss that will be incurred within a given period. These large numbers reduce the violent fluctuations and eliminate the speculative tendencies in the losses shared from year to year. As a social facility insurance enables individuals to safeguard themselves against such misfortunes by having the losses of the unfortunate few paid by the accumulated funds of the many who are exposed to the same risk. By this quasi-collective devices, insurance takes the form of a subsidy created by the many who are subject to a certain risk, to the few, who are affected by the occurrence of the risk.
The above discussion highlight some of the broader aspects of the insuring mechanism by singling out the arrangement which makes modern insurance workable i.e. the application of large number and other laws of probability, prevention, premium accumulation, compensation or combination of these techniques.
The insurance company groups together a large number of people (homogenous group) who are exposed to the same form of risk (say accident, theft, fire, death etc.) within the same period. It gathers these people together knowing that in any one year only very few in the group will actually suffer any loss. By collecting an amount of money from each person in the group, it then can accumulate a pool of fund out of which the losses suffered by the few who become victims can be paid.

No comments:

Post a Comment