Risk is an inevitable phenomenon in everyday life, be it in the home, along the road, in the office or while accomplishing one activity or the other, one is faced with a named period depending on the nature of the activity.
The question that should agitate the mind of any person, investor or business promoter is how best to reduce if not eliminate the risks inherent in life itself, a business activity or any other common venture. The insurance practice arose out the need for protection against certain perils at each stage of human development. The practitioners and buyers of insurance Co-operate the business out of recognition of the mutual benefits the parties derived from the practice.
Definitions of insurance
Insurance can be defined from various viewpoints individuals, society, legal and economic from the individual standpoint, insurance is an economic device whereby an individual constitutes a small (certain) cost the premium for a large (uncertain) financial loss (the contingency insured against), which would exist if were not for insurance.
Society view insurance as “a plan aimed at providing social welfare.”
Legally, insurance has been defined as an arrangement by which one party (the insurer) promises to pay another party (the insured or policy holder) a sum of money if something should happen which causes the insured to suffer a financial loss.
From the economic point of view, it is a device for the transfer of some risks of economic loss from the insured who otherwise would have borne the risks to an insurer in return for a premium.
Ezirim (1991) defined insurance from its compensation perspective as “ the measure taken by prudent individual or enterprise to provide compensation against the occurrence of unexpected and undersigned future misfortune in consideration of the payment of small amount of money called premium” into a general pool which is to be contributed by many individuals and organizations in proportion to the magnitude of risks bearing transferred to the insurance company.
Functions of insurance
Insurance industry performs two basic functions which includes the:
- Primary Functions: The primary function of insurance is to spread the financial losses of insured members over compensating the unfortunate few from the funds build up from the contributions of all participants.
- Secondary Functions: Besides, the practice of insurance has many secondary functions, which contribute to the welfare of the individual or society. It fosters both private and public interests, individual prudence and acts in an accelerator and as a stabilizer of economic growth. Insurance attempts to cater for the insured from the cradle to the coffin.
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