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Monday, May 27, 2024

Financial Basics of Insurance: Key Concepts and Principles You Need to Know

The article provides an overview of insurance, its objectives, functions, principles, risks, premiums, benefits and reserves, as well as the role of insurance companies and existing legislation.

What is the article about?

  • Introduction
  • Definition of insurance
  • Goals and functions of insurance
  • Principles of insurance
  • Insurance risks
  • Insurance premiums
  • Insurance payments
  • Insurance reserves
  • Insurance companies and their role
  • Insurance legislation
  • Types of insurance
  • Table on the topic of insurance
  • Conclusion

Introduction

Welcome to the lecture on insurance! In this lecture we will look at the basic concepts and principles of insurance, as well as its goals and functions. We will explore the different types of insurance, insurance risks and premiums, and the role of insurance companies in this process. We will also touch upon issues of insurance legislation and consider insurance payments and reserves. Ready to get started? Let’s get started exploring the fascinating world of insurance!

Definition of insurance

Insurance is a process in which an insurance company (insurer) assumes the financial risks associated with possible losses or damages that the policyholder (insured person) may experience in exchange for payment of an insurance premium.

The main purpose of insurance is to provide financial protection to the policyholder against unexpected events that could lead to financial losses. Insurance allows you to transfer risks to an insurance company, which is ready to compensate losses in the event of an insured event.

Insurance has several functions:

  • Protection function – insurance provides protection against financial losses associated with various risks, such as accidents, illnesses, fires, etc.
  • The function of social stability – insurance helps reduce the social and economic consequences of accidents and disasters by providing financial support to victims.
  • Function of Economic Development – ​​Insurance contributes to economic development because it allows entrepreneurs and companies to take more risks knowing that they can be protected from losses.

Insurance is based on several principles:

  • The principle of indemnification – the insurance company undertakes to compensate only the real financial losses of the policyholder, not allowing him to make a profit from the insured event.
  • Assurance Principle – Insurance is based on the principle of probability, where the insurance company evaluates risks and sets the insurance premium according to those risks.
  • Principle of solidarity – insurance is based on the principle of solidarity, where all policyholders contribute their insurance premiums to form a common fund from which losses are reimbursed.

Insurance is an important part of the modern economy and provides protection and security to many people and organizations. It allows you to reduce financial risks and ensure financial stability in the event of an accident or loss.

Goals and functions of insurance

Insurance has several purposes and functions that help provide protection and security to policyholders. Here are some of them:

Financial protection

One of the main purposes of insurance is to provide financial protection to policyholders. The insurance company assumes the risk of possible losses or accidents, paying the insured amount or compensation in the event of an insured event. This allows the policyholder to avoid financial losses and maintain their financial stability.

Risk distribution

Insurance also serves a risk distribution function. When a policyholder buys an insurance policy, they transfer their risk to the insurance company. Thus, the risk is distributed among many policyholders, which reduces the financial burden on an individual or organization in the event of an insured event.

Promotion of economic development

Insurance plays an important role in economic development as it contributes to the stability and security of businesses and individuals. With insurance, entrepreneurs can take risks and grow their business knowing that they are protected from potential losses. It also helps attract investment and create jobs, which contributes to economic growth.

Providing Coverage

Insurance provides different types of coverage for different risks. For example, auto insurance covers losses associated with car accidents, health insurance covers medical expenses, and home insurance covers losses associated with damage or loss to real property. Thus, insurance provides protection and coverage for various aspects of life and business.

Overall, insurance plays an important role in providing security and financial protection to policyholders. It helps reduce financial risk, spread risk among multiple policyholders, promote economic development, and provide coverage for a variety of risks.

Principles of insurance

Insurance principles are the basic rules and principles that underlie the functioning of the insurance system. They define the relationship between the policyholder and the insurer, and also ensure the fair and efficient functioning of the insurance market.

The principle of indemnization

The principle of indemnification means that the insurance company undertakes to compensate the policyholder only for actual losses incurred as a result of the insured event. The insurance payment must be proportionate to the losses and must not exceed them.

Principle of Confidence

The principle of certainty requires that the insurer has sufficient information about the insurance risk before entering into an insurance contract. The insurer must be confident that the insured event is likely to occur and that the policyholder has a real interest in protecting against this risk.

Fair bonus principle

The principle of fair premium suggests that the insurance premium should be commensurate with the insurance risk. The insurer must set the premium based on actuarial calculations, taking into account the likelihood of the insured event occurring and the expected losses.

Majority principle

The majority principle assumes that the insurance system is based on the principle of distributing risks among a large number of policyholders. The more policyholders participate in the system, the more stable and efficient it is.

Principle of insurable interest

The principle of insurable interest means that the policyholder must have a real interest in preserving the insured property or in ensuring his life and health. The policyholder should not have an interest in the occurrence of an insured event, as this can lead to moral hazard and abuse of insurance payments.

The principle of good faith

The principle of good faith requires that the policyholder and the insurer act with honesty and good faith in entering into and performing the insurance contract. The policyholder must provide true information about the insurance risk, and the insurer must perform its obligations under the contract in good faith.

These principles are the basis of insurance and ensure the fair and efficient functioning of the insurance system. They help protect the interests of policyholders and insurers, as well as ensure the stability and reliability of the insurance market.

Insurance risks

Insurance risks are potential events or circumstances that may lead to the occurrence of an insured event and a claim for insurance payment. They are the basis for concluding an insurance contract and determining the insurance premium.

Types of insurance risks

Insurance risks can be different and depend on the type of insurance. Some of the most common types of insurance risks include:

  • Risks to life and health: include illness, injury, death and disability.
  • Property risks: include fire, theft, property damage and natural disasters.
  • Liability risks: include civil liability for harm to other people or their property.
  • Car insurance risks: include accidents, theft and car damage.
  • Health and health insurance risks: include illnesses, surgeries, treatments and medical services.

Insurance risk assessment

Insurance risk assessment is an important step in the insurance process. The insurer must determine the likelihood of an insured event occurring and the amount of possible losses. For this, various methods and models are used, based on statistical data and analysis of historical events.

Insurance risk assessment allows the insurer to determine the insurance premium – the amount that the policyholder must pay for insurance. The higher the risk, the higher the insurance premium will be.

Insurance Risk Management

Insurance risk management is a process and methods that help policyholders and insurers reduce risks and minimize possible losses. This may include the use of precautions, risk control and management, and the use of insurance to transfer risks to the insurer.

Insurance risk management is an important part of financial planning and provides protection against unexpected events and financial losses. It allows policyholders to feel confident and protected, and insurers to effectively manage risks and ensure the stability of their activities.

Insurance premiums

An insurance premium is the fee a policyholder pays to an insurance company to obtain insurance coverage. It is the main source of income for insurance companies and is calculated based on various factors such as risk, cost of insurance coverage and the likelihood of an insured event occurring.

Factors influencing insurance premiums:

1. Risk: The insurance premium depends on the degree of risk associated with the insured object or event. The higher the risk, the higher the insurance premium will be. For example, insuring the car of a driver with a bad driving record will cost more than insuring a driver with a clean record.

2. Cost of Insurance Coverage: The insurance premium also depends on the cost of the insurance coverage that the policyholder wants to obtain. The higher the cost of coverage, the higher the insurance premium will be.

3. Probability of the occurrence of an insured event: The insurance premium also depends on the probability of the occurrence of an insured event. If the insurance company believes that the likelihood of an insured event occurring is high, it may charge a higher premium.

Types of insurance premiums:

1. Fixed premium: In some types of insurance, such as life or property insurance, the insurance premium may be fixed and not dependent on the individual characteristics of the policyholder. In this case, the insurance premium is determined based on statistical data and general risks.

2. Individual Premium: In other types of insurance, such as automobile insurance or health insurance, the insurance premium may be individual and depend on the characteristics of the policyholder. In this case, the insurance company takes into account factors such as age, gender, driving experience and medical history to determine the insurance premium.

Insurance premiums can be paid once or on a regular basis, depending on the terms of the insurance contract. They can be paid in a lump sum when you purchase insurance or divided into regular payments such as monthly or annual premiums.

It is important to note that the insurance premium is non-refundable and is not returned to the policyholder in the absence of an insured event. It represents a fee for obtaining insurance protection and compensation for possible losses.

Insurance payments

Insurance payments are the amounts of money that an insurance company pays to the policyholder or beneficiary in the event of an insured event. They represent compensation for losses suffered by the policyholder.

Insurance payments can be one-time or regular, depending on the terms of the insurance contract. One-time payments are made in the event of an insured event, for example, when a car is damaged or upon the death of the policyholder. Regular payments may be provided, for example, in accident or life insurance, where the insurance company pays a certain amount of money every month or year.

The amount of insurance payments is determined based on the terms of the insurance contract and may be fixed or depend on the amount of losses incurred by the policyholder. For example, in automobile insurance, the insurance company may pay a claim equal to the cost of repairing the car, or pay a sum insured equal to the full value of the car if it is stolen or completely lost.

Insurance payments can be made in a variety of ways, including bank transfer, check or electronic payment. The insurance company is obliged to make payment within the established time limits specified in the insurance contract or in accordance with insurance legislation.

It is important to note that insurance benefits are not guaranteed and may be rejected by the insurance company if the terms of the insurance contract are violated or fraud is detected on the part of the policyholder.

Insurance reserves

Insurance reserves are funds that an insurance company sets aside for future insurance payments. They are financial security for fulfilling obligations to policyholders.

Insurance reserves are formed on the basis of the principle of actuarial mathematics, which allows us to determine expected insurance payments and the necessary financial resources to cover them. They are calculated taking into account various factors, such as the probability of occurrence of insured events, statistical data, insurance rates, etc.

Insurance reserves have several functions:

Payment guarantee

Insurance reserves ensure the financial stability of the insurance company and guarantee its ability to fulfill its obligations to policyholders. They allow the company to make insurance payments in the event of insured events.

Risk Protection

Insurance reserves help an insurance company protect itself from financial risks associated with unexpected insurance events. They allow the company to have sufficient funds to cover losses and minimize financial losses.

Regulation of insurance rates

Insurance reserves also play an important role in regulating insurance rates. They allow the insurance company to adequately assess risks and set appropriate insurance rates to ensure the sustainability and profitability of operations.

Insurance reserves are an important element of insurance activities and ensure the financial stability and reliability of the insurance company. They allow the company to fulfill its obligations to policyholders and provide protection against financial risks.

Insurance companies and their role

Insurance companies play an important role in the modern economy. They provide insurance services that protect people and organizations from financial losses associated with various risks.

Provision of insurance services

The main role of insurance companies is to provide insurance services. They enter into insurance contracts with clients, called policyholders, and undertake to compensate for financial losses resulting from an insured event. In return, policyholders pay premiums, which are payments for insurance protection.

Risk assessment and management

Insurance companies also play an important role in risk assessment and management. They analyze various factors, such as the likelihood of an insured event occurring and the potential financial losses associated with this event. Based on this assessment, they determine the insurance premiums to be paid by policyholders.

Formation of insurance reserves

Insurance companies also form insurance reserves. This is money that the company sets aside for possible insurance payments in the future. The formation of insurance reserves allows the company to be prepared to pay insurance claims and ensures financial stability.

Investment of insurance funds

Insurance companies also invest insurance funds to generate income and provide financial stability. They can invest in various assets such as stocks, bonds, real estate and other financial instruments. Investment income helps companies cover insurance claims and ensure profitability.

Compliance with laws and regulations

Insurance companies are also required to comply with laws and regulations set by regulatory authorities. They must have the appropriate license to carry out insurance activities and comply with requirements for financial reporting, reserves and other aspects of the activity.

Overall, insurance companies play an important role in providing financial protection and stability. They help people and organizations cope with financial risks and provide confidence in the future.

Insurance legislation

Insurance legislation is a set of legal acts that regulate insurance activities in a particular country or region. It sets out the rules and requirements that insurance companies must meet in order to operate.

Objectives of insurance legislation

The main purpose of insurance legislation is to ensure the protection of the interests of policyholders and insurance companies, as well as to ensure the stability and reliability of the insurance market. It also aims to prevent fraud and misconduct in the insurance industry.

Basic provisions of insurance legislation

Insurance legislation includes the following main provisions:

  • Licensing of insurance companies: legislation establishes the procedure for obtaining and revoking licenses to carry out insurance activities. This allows you to control and regulate the activities of insurance companies.
  • Financial requirements: legislation establishes requirements for the financial stability of insurance companies. They must have sufficient capital and reserves to cover insurance obligations to policyholders.
  • Compulsory insurance: Legislation may provide for compulsory insurance for certain types of risks, for example, car insurance or health insurance. This ensures the protection of citizens and society as a whole.
  • Protection of the rights of policyholders: legislation establishes the rights and obligations of policyholders and insurance companies. It also provides mechanisms for resolving disputes and protecting the rights of insurance consumers.
  • Control and supervision: legislation provides mechanisms for control and supervision of insurance activities. Regulators have the power to inspect the activities of insurance companies and take action in case of violations.

Importance of Insurance Laws

Insurance legislation plays an important role in ensuring the stability and reliability of the insurance market. It protects the interests of policyholders, ensures the financial stability of insurance companies and contributes to the development of the insurance industry as a whole.

In addition, insurance laws help prevent fraud and misconduct in the insurance industry, which helps maintain trust in insurance services.

Types of insurance

Life insurance

Life insurance is designed to provide financial protection in the event of the death of the policyholder. In the event of his death, the insurance company pays the money to the beneficiary named in the policy. Life insurance may also include additional options, such as accident insurance or investment components.

Car insurance

Car insurance is designed to protect car owners from financial losses associated with damage to or theft of a car. It includes types of insurance such as liability insurance, damage insurance, theft insurance and others.

Property insurance

Property insurance is designed to protect property from various risks such as fire, flood, theft and others. It includes real estate insurance, business property insurance, natural disaster insurance and other types of insurance.

Health and medical insurance

Health and medical insurance is designed to provide medical care and financial protection in the event of illness or injury. It may include medical expense insurance, accident insurance, critical illness insurance and other health-related insurance.

Liability to third parties

Third party liability insurance is designed to protect the policyholder from financial losses resulting from injury to other people or their property. It includes civil liability insurance, professional liability insurance, accident insurance and other types of insurance related to third party liability.

Travelers and tourists

Travel and backpacker insurance is designed to provide financial protection while traveling. This may include overseas medical insurance, trip cancellation insurance, baggage insurance and other types of travel-related insurance.

Professional insurance

Professional insurance is designed to protect professionals from financial losses due to errors or misconduct in the course of their work. It includes professional liability insurance, errors and omissions insurance, insolvency insurance, and other types of professional-related insurance.

These are just some of the main types of insurance. There are many other types of insurance that can be tailored to the policyholder’s specific needs and risks.

Table on the topic of insurance

TermDefinitionProperties
InsuranceAn agreement between the policyholder and the insurer, under which the insurer agrees to compensate the policyholder for losses in the event of an insured event, and the policyholder agrees to pay an insurance premium.Protection against financial risksDistribution of risks between policyholdersIncreased confidence and peace of mind for the policyholderStimulating economic development
Insurance risksThe possibility of events occurring that could lead to losses for the policyholder.UncertaintyMeasurabilityAccidentIndependence
Insurance premiumsThe amount of money that the policyholder pays to the insurer for insurance protection.Determined based on insurance risksCan be fixed or variableDepends on the insurance conditions and characteristics of the policyholder
Insurance paymentsThe amount of money that the insurer pays to the policyholder in the event of an insured event.Carried out under the terms of the insurance contractCan be one-time or periodicDepends on the amount of losses and insurance conditions
Insurance companiesOrganizations that provide insurance protection and carry out insurance operations.Licensing and regulation of activitiesCollection of insurance premiums and formation of insurance reservesInsurance risk assessment and managementPayment of insurance compensation

Conclusion

Insurance is a process in which an insurance company provides protection against financial losses associated with various risks. It has its goals and functions based on the principles of justice, reciprocity and solidarity. In insurance, there are various types of risks, premiums and payments, as well as reserves that ensure the financial stability of the insurance company. Insurance legislation regulates this industry and protects the interests of policyholders. Overall, insurance plays an important role in society by providing protection against unexpected financial losses and promoting economic stability.

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