20 Characteristics of Insurance in Finance | Explained

Characteristics of Insurance

Insurance is a complex financial product with numerous characteristics that define its nature and operation. Here are some of the main characteristics of insurance:

Sharing of Risks

Insurance is a cooperative device to share the burden of risk which may fall on happening of some unforeseen events, such as the death of the head of the family, or on happening or marine perils, or loss of by fire.

Cooperative Device

Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it. A large number of persons share the losses arising from a particular risk.

Evaluation of Risk

For the purpose of ascertaining the insurance premium, the volume of risk is evaluated, which forms the basis of the insurance contract.

Payment on Happening of Specified Event

On happening of a specified event, the insurance company is bound to make payment to the insured. Happening of the specified event is certain in life insurance; but in the case of fire, marine, or accidental insurance, it is not necessary. In such cases, the insurer is not liable for payment of indemnity.

Amount of Payment

The amount of payment in indemnity insurance depends on the nature of losses that occurred, subject to a maximum of the sum insured. In life insurance, however, a fixed amount is paid on the happening of some uncertain event or on the maturity of the policy.

Large Number of Insured Person

The success of the insurance business depends on the large number of persons insured against similar risks. This will enable the insurer to spread the losses of risk among a large number of persons, thus keeping the premium rate at a minimum.

Insurance is Not a Gambling

Insurance is not gambling. Gambling is illegal which gives gain to one party and loss to the other. Insurance is a valid contract of indemnity against losses. Moreover, insurable interest is present in insurance contracts and it has the element of investment also.

Insurance is Not a Charity

The charity pays without consideration but in the case of insurance, the premium is paid by the insured to the insurer in consideration of future payment.

Protection Against Risks

Insurance provides protection against risks involved in life, materials, and property. It is a device to avoid or reduce risks.

Spreading of Risks

Insurance is a plan which spreads the risks and losses of a few people among a large number of people. John Magee writes, “Insurance is a plan by which a large number of people associate themselves and transfer to the shoulders of all, risks attached to individuals”.

Transfer of Risk

Insurance is a plan in which the insured transfers his risk to the insurer. this may be the reason that Mayerson observes, that insurance is a device to transfer some economic losses to the insurer, otherwise such losses would have been borne by the insureds themselves.

Ascertaining of Losses

By taking a life insurance policy, one can ascertain his future losses in terms of money. This is done by the insurer to determine the rate of premium; which is calculated on the basis of maximum risks.

A Contract

Insurance is a legal contract between the insurer and the insured under which the insurer promises to compensate the insured financially within the scope of the insurance policy, and the insured promises to pay a fixed rate of premium to the insurer.

Based Upon Certain Principles

Insurance is a contract based upon certain fundamental principles of insurance which include, utmost good faith, insurable interest, contribution, indemnity, causa proxima, subrogation, etc. which are the basis for the successful operation of an insurance plan.

Institutional Setup

After nationalization, the insurance business in the country is operating under a statutory organizational setup. In India, the Life Insurance Corporation, the General Insurance Corporation and its subsidiary companies, and private players are operating in the various fields of insurance.

Insurance for Pure Risks Only

Pure risks give only losses to the insured, and no profits. Examples of pure risks are accident, misfortune, death, fire, injury, etc. which are all one-sided risks and the ultimate result in loss.

Social Device

Insurance is a plan of social welfare and protection of the interests of the people and Miller observes, “Insurance is of social nature.”

Based on a Mutual Good-Faith

Insurance is a contract based on good faith between the parties. Therefore, both parties are bound to disclose the important facts affecting the contract before each other. Utmost good faith is one of the important principles of insurance.

A Regulation Under Law

The government of every country enacts the law governing the insurance business so as to regulate and control its activities for the interest of the people. In India, the Life Insurance Act 1956, and General Insurance (Nationalisation) Act 1972, and Insurance Regulatory and Development Authority Act 1999 are the major enactments in this direction.

Wider Scope

The scope of insurance is much wider and more extensive. Various types of policies have been developed in the country against risks to life, fire, marine, accident, theft, burglary, etc.

To conclude, insurance is a device for the transfer of risks from the insureds to insurers, who agree to it for a consideration (known as a premium), and promises that the specified extent of loss suffered by the insureds shall be compensated. It is a legal contract of a technical nature.

FAQs Related to the Characteristics of Insurance

What are the characteristics of insurance?

The following are characteristics of insurance given below: Sharing of Risks 2. Cooperative Device 3. Evaluation of Risk 4. Payment on Happening of Specified Event 5. Amount of Payment 6. A large number of Insured Persons 7. Insurance is Not a Gambling 8. Insurance is Not a Charity 9. Protection Against Risks 10. Spreading of Risks and more.