CHAPTER 1

INTRODUCTION TO INSURANCETOPIC OUTLINES:

1. Definition of Insurance

2. Importance of Insurance

3. How Insurance Works

4. Functions of Insurance

5. Classes of Insurance

Definition

An economic institution based on the principles of mutuality, formed for the purpose of

establishing a common fund, the need for which arises from chance occurrences of nature, whose

probability can be fairly estimated.

It involves payment of contracted benefits or compensation to the insured or a third party

against unforeseen losses.

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Essential features of

insuranceAn economic institution

Based on the principles of mutuality or cooperation

Its objective is to accumulate fund to pay for claims

Only certain risks can be insured against

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The importance of insurance

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The need for income

Source of income

Unfortunate events or risks

How insurance operates?

FUND?

RM100

RM100

RM100

RM100RM100

RM100

RM100

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Risk : Premature death

RM100 is contributed every

month to the fund.

If every CIRCLES

represent 10000 people,

HOW much money is

accumulated in the FUND?

TOTAL :

Loss : RM100,000

Concepts involved :

1. Pooling of risk

2. Pooling of losses

Functions of Insurance

Secondary Functions

Cost stabilization

Stimulates business

enterprises

Removes fear and worries

Reduction of losses

Means of savings

Sources of capital for investment

Provides employment

for many

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Primary function :

Equitable

distribution of the

financial losses of

the few who are

insured among the

many insureds.

Classes of insurance

Life Assurance

A contract which pays an agreed sum of money on the happening of a

contingency (event), or of a variety of contingencies, dependent on human

life.

Risks Covered :

Premature death

Continuous stream of income during retirement

Sickness or disability

General Insurance

A contract arranged to provide cover against certain risks to the insured

and/or third parties

Risks covered :

Loss or damage to property

Legal liability caused by products or goods sold or process carried out

Death or injury to a person by an accident

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