The two main
aspects of insurance, apart from risk transfer, have always been
pooling and risk reduction. Pooling can be referred to as sharing of
risks in a group, which helps in risk reduction. Here risk reduction is
defined as the total amount of uncertainty present in a particular
situation. Insurance achieves risk reduction by bringing all the high
risk activities together so that the aggregate risk can be defined
within narrow limits.
In
the economic world insurance is sometimes compared to gambling, but in
reality they are exactly opposite. Gambling create a new risk where
none existed before while insurance is a method of eliminating or
greatly reducing an already existing risk.
Insurance
is always implemented using all legal formalities and contracts which
are called policies in their jargon, in which the insurer promises to,
reimburse the insured for losses suffered during the term of agreement.
But it happens sometimes that the insurer becomes solvent and they are
unable to pay the losses being incurred. In such unfortunate cases the
insured has to bear all the losses which were assumed to be paid by the
purchase of the policies.
Thus
whenever insurance is being used as a risk reduction technique then it
is always advisable to consider the financial situation of the person
to be insured and take due notice that will the person be able to pay
for all the losses in case of any fault in the process. But sometimes
it is very advisable to buy a group insurance to handle risk
efficiently. If not the only technique, it can act as one of the
potential one to deal such stressful situation.
The main factors that together form the crux of the nature of insurance are: Principle of indemnity, Principle of insurable interest, Principle of subrogation and Principle of utmost good faith.