Basic features of insurance

There are four major characteristics of insurance. Overall definition of insurance can be expressed based on those characteristics. According to the preceding definitions, insurance typically includes the following characteristics:

1.       Pooling of losses

2.       Payment of accidental losses

3.       Risk transfer

4.       Indemnification

1.Pooling of losses: pooling is the spreading of losses incurred by the view over the whole group, so that in the process, average loss is substituted for actual loss. It is the heart of insurance. Pooling implies:

                i.   The sharing of losses by the entire groups: for example, assume that 400 taxi drivers of America agree that if any accident happens and destroys the vehicles, the other member of the group will indemnify the loss of unlucky driver, who has a loss. If the loss is valued of $4000, each driver has to pay only $10

       ii. Prediction of future loss: it is a prediction of future loss with some accuracy based on the law of large numbers. By pooling or combining the loss experience of a large number of exposure units, an insurer may be able to guess future losses can be with great veracity. From the viewpoint of the insurer, if future losses can be guess, objective risk is reduced. Thus, another feature often.

2. Payment of accidental losses: an accidental loss is on that unforeseen and unexpected and occurs as a result of chance. It is the second characteristics of insurance. The law of large numbers is based on the assumption that losses are accidental and occur randomly. For example, a person may be hit by car in the road and break a leg. The loss would be fortuitous. Only such accidental losses are paid by insurance.

3.Risk theory: actually, insurance is a risk transfer business, in which a particular risk of an insured is transferred to the insurer. Risk transfer means that a pure risk is transferred loss than the insured. Particularly, the pure risks of individual and organizations that are disability destruction and accidental loss of property and liability lawsuits. Risk transfer is an essential element of insurance.

4.Indemnification: indemnification is one of the most important characteristics of insurance. Insurance should provide somebody with insurance policy, disability income insurance policy. This will restore at least part of the lost wages. protection, especially financial protection  restored to the approximate financial position prior to the occurrence of the loss, thus, the insurer should reimburse after loss occurred by particular risk for premium received from the insurer against the risks. It should also be noted that insurer indemnify the losses from risk only in specific situation. If the loss occurred because of the negligent operation of the owner, the insurance company will not legally be liable to indemnify the losses. However, the insured may be indemnified under some policies such as auto-liability