Question

"Insurance is a method of spreading risks." In the light of this statement, explain how does insurance help in minimising business risks.

Answer 1

1. Insurance is a contract between two parties. One party (the insured) agrees to pay the premium in full or in periodic payments.
2. Insurance is a contract for indemnification. Insurance protects against the risk of an unpredictable event in the future.
3. The foundation of insurance is collaboration, where multiple people share in one person's loss.
4. Insurance spreads risk among a large group of people.
5. They contribute to the shared fund. The common fund compensates insured parties for actual losses.

Insurance is a method of spreading risks. it does not involve pooling risks. Car owners are concerned about the possibility of shop losses due to fire accidents. As a result, they all agree to contribute Rs. 20,000 per year in premiums to cover the risk of loss for the building and goods. An insurance firm charges them Rs. 4,000 crore. Every year, fire incidents damage an average of 20000 shops worth Rs. 10 lakhs. The insurance company will pay Rs. 2,000 crore to the owners of the shops. The insurance firm will use the leftover cash to cover bills and generate profits. This reduces the monthly cost of loss protection for store owners to less than Rs. 1000.