How Insurance Works

Working of Insurance

Small contributions from many such owners having similar kind of assets are accumulated as a 'common fund'.And in case of any unfortunate happening with the few unlucky one,the loss is compensated from the same 'common' fund.

Process

• An asset which has an economic value must be identified.
• An asset can be classified as:- Physical (Car,House), Non-Physical( Goodwill,Name), Personal(Body parts such as,eyes,limbs etc.).
• An asset is always interconnected with a Risk Factor because of Peril(the cause behind the risk).
• Then,comes a Principle known as Pooling,where contributions (premiums) from various investors is collected.
• This pool of funds is used to compensate the losses suffered by the unfortunate ones.

Thus, as a whole Insurance reduces Burden, Stress and a feeling of Insecurity.

Types of Burden

1. Primary

2. Secondary

Primary Burden:- It refers to the losses suffered by the household or the business unit.These kind of losses are measurable and can be easily compensated by the insurance.

Secondary Burden:- It refers to the stress and anxiety that one suffers when there is an uncertainty of  losses .