How Insurance Works?
This data as per statistic is certain.
Then what is uncertain?
Uncertainty is as to who will die or get disabled during day to day high risk prone fast life. Although, the number is known, name, age, time, place and extent are not known.
If it is known that 200 persons are prone to accidental death in a year, it is not known which 200 individuals?
Due to this certainty, that 10,000 people will die in an accident, or get injured and disabled or die natural death or die of disease; All 1 lakh people will fear an accident, possibility of injury or death and its consequences to varying degree as per their age, behavior, nature of work, environmental hazards and many other factors.
Grown-ups and breadwinners may fear more and dependents may fear less. If in a city of 1 lakh houses & shops, there are about 1000 thefts every year, though some particular 1000 people are affected by the theft, all others (may be more than 90,000) will fear theft and will like some solution to this problem. Human life is a unique income generating asset.
When other assets depreciate with age, it appreciates. Creator of all these assets is a human being, whose efforts have gone a long way in owning them. Before Assurance or Insurance companies came, there were social arrangements in India which almost played a similar role but to a limited extent as we have already given the examples at the beginning of this chapter which explains how “Many would contribute to mitigating losses of a few”.
This method of sharing losses of a few by many is the basis or core philosophy of insurance. Insurance companies started from individual effort i.e. an individual or group of individuals pooled funds in a partnership or company and started offering a definite payment (called claim) in every case of death or disablement of the participating individuals, against a small amount received (called premium).
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