What is Insurance?

Technically Insurance is a invisible Financial protection against unexpected risks in the day to day life. But practically insurance is all about sharing of Risk/Loss.

This concept of Insurance works in the basic of Sharing of Risk and Law of large numbers. Financial Risk exposure of individuals are reduced to a greater extent by way of sharing it among a common group of people.

It is a Contract between a Individual and a company. The customer pays premium in return for a coverage of the individual risks.


What is Sharing of Risk?

Lets discuss in detail what is sharing of Risk!! Before that we should know what risk is!!

Risk is some unexpected event, which gives financial loss.

In insurance context, Risk is something which gives loss of money by some means. Take for example of having a car. The risks associated with owning a car are like accidents, fires, breakdowns, etc.

Think this way, your car happens to meet with a accident, then the cost of repairs is the risk associated with owning a car!!

Now lets learn what is sharing of Risk in Insurance. IF you see the featured image of this post, you can easily associate the sharing or Risk and Insurance. The insurance companies collect a small amount of money from a group of people and pay the claimant with the cost of the risk which happened.

For example, a car insurance premium will cost Rs.10,000. The insurance company collects the premium from some N number of clients and pool it together in a common fund. Then if someone from the pool group faces some accident, the company will take money from this pool and pay the risk affected person.

The persons who had got the claim will not need to spend whole amount from his pocket!!

What is Insurance?


How does Insurance work?

  • We need to identify a common group of people with similar kind of risk exposures.
  • Assess the average risk happening per year
  • Estimate the financial loss to a Individual person due to the risks.
  • Premium is equal to the total Average risk exposure of the group.
  • The premium is collected from the individuals before the start of the scheme.
  • And We should collect a surplus premium amount to handle to unforeseen extra claims coming in a year.
  • Every year the risk exposure will change and by hence there is a change in the premium every year.

Various Types of Insurance

  1. Motor
  2. Life
  3. Health
  4. Fire & Burglary
  5. Travel

The above list of insurances have many subtypes and varieties. Hence it is difficult to explain fully in one article.

We will try to explain in detail each type of insurance in the coming days.


If you want to know about the list of insurance companies in India, follow this post.

You can also know about Housing loans, follow this post.

To know more about Aadharcard in India, Click here.


Post Written By : ARUNKODI K

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