Question

Describe various types of insurance and examine the nature of risks protected by each type of insurance.

Answer 1

Insurance can be classified into the following three types:

(i) Life Insurance
(ii) Fire Insurance
(iii) Marine Insurance

Life Insurance:
Life insurance is a contract between the insurer and the insured in which the insurer agrees to pay a certain pre-specified amount to the insured on the occurrence of death of the assured or on maturity of the insurance contract, whichever comes earlier. That is, in case the insured dies before the maturity of the contract, his or her family is given the assured amount. However, if the insured survives till the maturity of the contract, then he or she is given the specified sum of money. In return for this assurance, the insured pays a fixed amount as premium to the insurer. The need for a life insurance policy arises because of the uncertainties of life.

Thus, life insurance policies protect us from the following two types of risks:

(a) Risk of dying too early

(b) Risk of dying too late

Fire Insurance:
Insurance contracts that protect the insured against the loss or damage caused by fire during a given period are called fire insurance contracts. Under a fire insurance contract, the insurer agrees to compensate the insured for the loss or damage to the insured property caused by fire, against a payment of a fixed premium. The maximum compensation which the insurer is liable to pay is pre-specified in the contact, along with the conditions under which the contract is enforceable.

Marine Insurance:
A marine insurance contract protects the owner of a ship or cargo against complete or partial loss or damage caused to the ship or cargo at sea. It provides protection against the perils of the sea such as collision of the ship with a rock, attack on the ship by enemies and pirates, and damage caused by fire. The insured pays a certain amount as premium to the insurer.