Insurance: An overview chapter three

CHAPTER THREE
INSURANCE: AN OVERVIEW
3.1 Definition of Insurance:
There is not single definition of insurance. Insurance can be defined
from the viewpoint of several disciplines, Insurance may be defined in
economic, legal business, social, and mathematical point of view as follows:
 In economic sense:
sense: insurance is an important tool that provides certainty or predictability
aiming at reducing uncertainty in regard to pure risks. It accomplishes this result by
pooling or sharing of risk.
 Legal point of view: insurance is a contract by which one party, in consideration of the
price paid to him adequate to the risk, becomes security to the other that he/she shall not
suffer loss, damage or prejudices by the happening of the perils specified in the policy.

Article 654(1) of the commercial code of Ethiopia states insurance as follows:

"A contract whereby a person called the insurer undertakes against payment of one or more
premiums to pay a person, called the beneficiary, sum of money where a specified risk
materializes.
From this definition of law we can learn that insurance is contractual agreement between
two parties: the person (Insured) and Insurance companies. When a person buys private
insurance, she/he is entering into a contract with the insurer that entitles the person
(Insured) to certain advantages but also imposes certain responsibilities such as payment
of a premium and satisfying certain conditions specified in the policy.

 Business Point of views: as a business institution, insurance has been defined as a plan by
which large number of people associate themselves and transfer risks of individuals to the
shoulders of all members of the policy.

 Social View Point: insurance is defined as a social device for making payment for the
accumulation of fund to meet uncertain losses of capital which is carried out through the
transfer of risk of many individuals to one person or a group of persons. It is advice
through which few unfortunates are paid by many who are member of the policy.

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 Mathematical viewpoint: insurance is the application of actuarial (Insurance mathematics)

principles. Laws of probability and statistical techniques are used for achieve predictable
results.
The commission of Insurance Terminology of the American Risk and
Insurance Association has defined insurance as follows.
“Insurance is the pooling of accidental losses by transfer of such
risks to insurers, who agree to indemnify insureds for such losses,
to provide other financial benefits on their occurrence, or to
render services connected with the risk”.
Based on the preceding definition, an insurance plan or arrangement
typically includes the following characteristics.
3.2 BASIC CHARACTERISTICS OF INSURANCE:
There are four basic characteristic of insurance
 Pooling of Losses
 Payment of Accidental Losses
 Risk Transfer
 Indemnification
 Pooling of Losses:
Pooling or the sharing of losses is the heart of insurance. Pooling is
the spreading of losses incurred by the few over the entire group,
so that in the process, average loss is substituted for actuarial. In
addition, pooling involves the grouping of a large number of exposure
units so that the law of large numbers can operate to prove a
substantially accurate prediction of future losses. Ideally, there should
be large exposure units that are subject to the same perils. Thus,
pooling implies (1) the sharing of losses by the entire group, and
(2) prediction of future losses with some accuracy based on the
law of large numbers.
With respect to the first concept – loss sharing – consider this simple
example. Assume that 1000 farmer in southern Ethiopia agree that if
any farmer’s home is damaged or destroyed by a fire, the other
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members of the group will indemnify, or cover, the actual costs of the
unlucky farmer who has a loss. Assume also that each home is worth
$100,000 and on average, one home burns each year. In the absence of
insurance, the maximum loss to each farmer is $100,000 if the home
should burn. However, by pooling the loss, it can be spread over the
entire group, and if one farmer has a total loss, the maximum amount
that each farmer must pay is only $100 ($100,000/1000). In effect, the
pooling technique results in the substitution of an average loss of $100
for the actual loss of $100,000.
In addition, by pooling or combining the loss experience of a large
number of exposure units, an insurer may be able to predict
future losses with greater accuracy. From the viewpoint of the
insurer, if future losses can be predicted, objective risk is reduced.
Thus, another characteristic often found in many lines of insurance is
risk reduction based on the law of large numbers.
 Payment of Accidental Losses:
A second characteristic of private insurance is the payment of
accidental losses. An accidental loss is one that the unforeseen
and unexpected and occurs as a result of chance. In other words,
the loss must be accidental. The law of large numbers is based on the
assumption that losses are accidental and occur randomly. For
example, a person may commit suicide. The loss would be
accidental insurance policies do not cover intentional losses.
 Risk Transfer:
Risk transfer is another essential element of insurance. With the
exception of self-insurance, a true insurance plan always involves risk
transfer. Risk transfer means that a pure risk is transferred
from the insured to the insurer, who typically is in a stronger
financial position to pay the loss than the insured. From the
viewpoint of the individual, pure risks that are typically transferred to

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insurers include the risk of premature death, poor health, disability,

destruction and theft of property, and liability lawsuits.
 Indemnification:
A final characteristic of insurance is indemnification for losses.
Indemnification means that the insured is restored to his or her
approximate financial position prior to the occurrence of the
loss. Thus, if your home burns in a fire, a homeowner’s policy will
indemnify you or restore you to your previous position. If you are sued
because of the negligent operation of an automobile, your auto liability
insurance policy will pay those sums that you are legally obligated to
pay. Similarly, if you become seriously disabled, a disability income
insurance policy will restore at least part of the lost wages.
3.3 REQUIREMENTS (FUNDAMENTALS) OF AN INSURABLE
RISK
Insurers normally insure only pure risks. However, not all pure risks
are insurable. Certain requirements usually must be fulfilled before a
pure risk can be privately insured. From the viewpoint of the insurer,
there are ideally six requirements of an insurable risk.
Requirements:
 Large Number of Exposure Units
 Accidental and Unintentional Loss
 Determinable and Measurable Loss
 No Catastrophic Loss
 Calculable Chance of Loss
 Economically Feasible Premium
 Large Number of Exposure Units:
The first requirement of an insurable risk is a large number of
exposure units. Ideally, there should be a large group of roughly
similar, but not necessarily identical, exposure units that are subject to
the same peril or group of perils. For example, a large number of

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frame dwellings in a city can be grouped together for purposes of

providing property insurance on the dwellings.
The purpose of this first requirement is to enable the insurer to predict
loss based on the law large numbers. Loss data can be compiled over
time, and losses for the group as a whole can be predicted with some
accuracy. The loss costs can then the spread over all insureds in the
underwriting class.
 Accidental and Unintentional Loss:
A second requirement is that the loss should be accidental and
unintentional; ideally, the loss should be accidental and outside the
insured’s control. Thus, if an individual deliberately causes a loss, he
or she should not be indemnified for the loss.
 Determinable and Measurable Loss:
A third requirement is that the loss should be both determinable and
measurable. This means the loss should be definite as to cause, time,
place and amount. Life assurance in most cases meets this
requirement easily. The cause and time of death can be readily
determined in most cases, and if the person is insured, the face
amount of the life assurance policy is the amount paid.
Some losses, however, are difficult to determine and measure. For
example, under a disability-income policy, the insurer promises to pay
monthly benefit to the disable person if the definition of disability
stated in the policy is satisfied. Some dishonest claimants may
deliberately fake sickness or injury to collect from the insurer. Even if
the claim is legitimate, the insurer must still determine whether the
insured satisfies the definition of disability stated in the policy.
The basic purpose of this requirement is to enable an insurer to
determine if the loss is covered under the policy, and if it is covered,
how much should be paid.
 No Catastrophic Loss:

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The fourth requirement is that ideally the loss should not be

catastrophic. This means that large proportion of exposure units
should not incur losses at the same time. As we stated earlier, pooling
is the essence of insurance. If most or all of the exposure units in a
certain class simultaneously incur a loss, then the pooling technique
breaks down and becomes unworkable. Premiums must be increased
to prohibitive levels, and the insurance technique is no longer a viable
arrangement by which loses of the few are spread over the entire
group.
Insurers ideally which to avoid all catastrophic loses. In reality,
however, this is impossible, because catastrophic losses periodically
result from the foods, hurricanes, tornadoes, earthquakes, forest fires,
and other natural disasters. Catastrophic losses can also result from
acts of terrorism.
Several approaches are available for meeting the problems of
catastrophic loss. First, reinsurance can be used by which insurance
companies are indemnified by reinsures for catastrophic losses.
Reinsurance is the shifting of part or all of the insurance originally
written by one insurer to another. Second, insurers can avoid the
concentration of risk by dispersing their coverage over a large
geographical area. The concentration of loss exposures in a
geographic area exposed to frequent floods, earthquakes, hurricanes,
or the natural disasters can result in periodic catastrophic losses. If
the loss exposures are geographically disperses, the possibility of a
catastrophic loss is reduced.
Finally, new financial instruments are now available for dealing with
catastrophic losses. These instruments include catastrophe bonds,
which are designed to pay for a catastrophic loss.
 Calculable Chance of Loss:
A fifth requirement is that the chance of loss should be calculable.
The insurer must be able to calculate both the average frequency and
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the average severity of future losses with some accuracy. This

requirement is necessary so that a proper premium can be charged
that is sufficient to pay all claims and expenses and yield a profit
during the policy period. Certain losses, however, are difficult to
insure because the chance of loss cannot be accurately estimated, and
the potential for a catastrophic loss is present. For example, floods,
wars and cyclical Unemployment occur on an irregular basis, and
prediction of the average frequency and the severity of losses are
difficult. Thus, without government assistance, these losses are
difficult for private carriers to insure.
 Economically Feasible Premium:
A final requirement is that the premium should be economically
feasible. The insured must be able to pay the premium. In addition,
for the insurance to be an attractive purchase, the premiums paid
must be substantially less than the face value, or amount, of the policy.
To have an economically feasible premium, the chance of loss must be
relatively low. One view is that if the chance of loss exceeds 40%, the
cost of the policy will exceed the amount that the insurer must pay
under the contract. For example, an insurer could issue a $1,000 life
insurance policy on a man age 99, but the pure premium would be
about $980, and an additional amount for expenses would have to be
added. The total premium would exceed the face amount of the
insurance.
Based on these requirements, personal risks, property risks and
liability risks can be privately insured, because the requirements of an
insurable risk generally can be met. By contrast, most market risks,
financial risks, production risks and political risks are usually
uninsurable by private insurers. These risks are uninsurable for
several reasons.
3.4 INSURANCE AND GAMBLING COMPARED (SPECULATION):

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Insurance is often erroneously confused with gambling. There are two

important differences between them. First, gambling creates a new
speculative risk, while insurance is a technique for handling an
already existing pure risk. This, the you bet $300 on a horse race, a
new speculative risk is created, but if you pay $300 to an insurer for
fire insurance, the risk of fire is already present and is transferred to
the insurer by a contract. No new risk is created by the transaction.
The second difference between insurance and gambling is that
gambling is socially unproductive, because the winner’s gain
comes at the expense of the loser. In contrast, insurance is
always socially productive, because neither the insurer nor the
insured is placed in a position where the gain of the winner
comes at the expense of the loser. The insurer and the insured
both have a common interest in the prevention of a loss. Both parties
win if the loss does not incur. Moreover, consistent gambling
transactions generally never restore the loser to the former financial
position. In contrast, insurable contract restore the insured financially
in whole or in part if a loss occurs.
3.5 INSURANCE AND SPECULAION
Speculation on the other hand involves doing some kind of activity with the expectation of
profit in the future. For instance, a business man who purchases and sells goods, stocks
and shares, etc. with the risk of loss and hope of profit through changes in their market
value is a clear case of speculation. Through speculation individuals create a risk
deliberately in the anticipation of profits.
profits. However, an insurance transaction normally
involves the transfer of risks that are insurable, since the requirements of an insurable risk
generally can be met. On the contrary, speculation is a technique for handling risks that
are typically uninsurable, such as protection against a substantial decline in the price of
agricultural products and raw material.

The other difference between the two is that insurance can reduce the objective risk of an
insurer by application of the law of large numbers. In contrast,
contrast, speculation typically

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involves only risk transfer, not risk reduction. The risk of an adverse price fluctuation is
transferred to a speculator who feels he or she can make a profit because of superior
knowledge of forces that affect market price. The risk is transferred, not reduced, and the
speculator’s prediction of loss generally is not based on the law of large numbers.
Charity is given without consideration but insurance is not possible without premium.
Insurance is a profession of providing certainty and predictability and safety to the
individual, business or society. It provides adequate finance at the time of damage only by
charging a normal premium for the service.
3.6 BENEFITS AND COSTS OF INSURANCE
3.6.1 BENEFITS OF INSURANCE
The major social and economic benefits of insurance include the
following:
Indemnification: Indemnification permits individuals, and
families to be restores to their former financial position after a loss
occurs. As a result, they can maintain their financial security.
Because insureds are restored either in part or in whole after a loss
occurs, they are less likely to apply for public assistance or welfare
benefits, or to seek financial assistance form relative and friends.
Less Worry and Fear: A second benefit of insurance is that worry and
fear are reduced. This is true both before and after a loss. For
example, if family heads have adequate amounts of life insurance, they
are less likely to worry about the financial security of their dependents
in the even of premature death; persons insured for long-term
disability to not have to worry about the loss of earnings if a serious
illness or accident occurs; and property owners who are insured enjoy
greater peace of mind because they know they are covered if a loss
occurs.
Promotes loss control system :-In order to minimize their losses,
insurance companies have tried and are continuing to introduce
several kinds of loss reduction and prevention schemes. For example,
health education, inspection, of elevators, and boilers, installation of

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fire extinguishers, burglar alarms, on vehicles or houses are risk

control mechanisms developed and applied by insurance companies at
different times. The introduction of this loss control programs can
reduce losses to businesses and individuals and complement good risk
management thereby benefiting society as a whole.
Stimulates international trade and commerce:- Goods traded at
the international market are highly vulnerable to risk of loss due to
large number of perils. As a result it is difficult to think of international
trade without insurance. Insurance coverage may be a condition for
engaging in international trade and commerce. Insurance serves as a
"lubricant of trade", without it trade and commerce may stifle.
Source of Investment Funds: The insurance industry is an
important source of funds for capital investment and accumulation.
Premiums are collected in advance of the loss, and funds not needed to
pay immediate losses and expenses can be loaned to business firms.
These funds typically are invested in shopping centers, hospitals,
factories, housing developments, and new machinery and equipment.
The investments increase society’s stock of capital goods, and promote
economic growth and full employment. Insurers also invest in social
investments, such as housing, nursing homes and economic
development projects. In addition, because the total supply of loanable
funds is increased by the advance payment of insurance premiums, the
cost of capital to business firms that borrow is lower than it would be
in the absence of insurance.
Encourages saving: Insurance is a contractual agreement between
the insurer and the insured, where the insured is expected to pay a
premium for the risk he/she transferred to the insurer. This
compulsory premium payment is a form of encouragement of the
insured to make systematic saving. Particularly, this is possible in

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certain life insurance policies that have dual purpose, i.e., protection in
the event of death and savings in the event of survival.
Loss Prevention: Insurance companies are actively involved in
numerous loss prevention programs and also employ a wide variety of
loss prevention personnel, including safety engineers and specialists in
fire prevention, occupational safety and health, and products liability.
For example, Highway safety and reduction of automobile deaths, Fire
prevention, Reduction of work related disabilities, Prevention of auto
thefts, Prevention and detection of arson losses and ect.,
Enhancement of Credit: insurance enhances a person’s credit.
Insurance makes a borrower a better credit risk because it guarantees
the value of the borrower’s collateral or give greater assurance that
the loan will be repaid. For example when a house is purchased, the
lending institution normally requires property insurance on the house
before the mortgage loan is granted.
Economic growth :- Insurance provides strong hand and mind and
protection against loss of property. In addition to these, insurance
companies accumulate large sum of money available for investment
purpose. Such money accumulated may be invested by the insurance
companies themselves or lent to others to produce more wealth. This
will have its contribution to the economic growth of a country.
3.6.2 COSTS OF INSURANCE TO SOCIETY:
Although the insurance industry provides enormous social and
economic benefits to society, the social costs of insurance must also be
recognized. The major social costs of insurance include the following:
Cost of Doing Business: One important cost is the cost of doing
business. Insurers consume scarce economic resources – land, labor,
capital and business enterprise - in providing insurance to society. In
financial terms, an expense loading must be added to the pure
premium to cover the expense incurred by insurance companies in

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their daily operations. An expense loading is the amount needed to

pay all expense, including commissions, general administrative
expenses, acquisition expense, and an allowance for contingencies and
profit.
Fraudulent (inflated) Claims: A second cost of insurance comes
from the submission of fraudulent claims. Examples of fraudulent
claims include the following: Auto accidents, are faked or staged to
collect benefits, Dishonest claimants fake slip and fall accidents, Phony
burglaries, thefts, or acts of vandalism are reported to insurers, False
health insurance claims are submitted to collect benefits, Dishonest
policy owners take tout life insurance policies on insured who are later
reported as having dies. The payments of such fraudulent claims
results in higher premiums to all insured. The existence of insurance
also prompts some insured to deliberately cause a loss so as to profit
from insurance. These social costs fall directly on society.
Increase Morale hazard:- Increases carelessness in life (morale
hazard problem): it is a condition that causes to be less careful than
they would otherwise be. Some individuals do not consciously seek to
bring about a loss, but the fact that they have insurance causes them
to take more risks than they would if they had no insurance coverage.
This manner may result in excessive losses in the community.
FUNCTIONS AND ORGANIZATION OF INSURERS
In general, insurers operate in much the same manner as other firms;
however, the nature of the insurance transaction requires certain
specialized functions which require a suitable organization structure.
In this section, we will examine some of specialized activities of
insurance companies and the general forms of organization structure.
Functions of Insurers:

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Although there are definite operational differences between life

insurance companies, and property and liability insurers, the major
activities of all insurers may be classified as follows:
 Production (Selling)
 Underwriting (Selection of Risks)
 Rate Making
 Managing Claims
 Investment
These functions are normally the responsibility of definite departments
or divisions within the firms. In addition to these functions there are
various other activities common to most business firms such as
accounting, personnel management, market research and so on.
 Production: One of the most vital functions of an insurance firm is
securing a sufficient number of applicants for insurance to enable the
company to operate. This function, usually called production in an
insurance company, corresponds to the sales function in an industrial
firm.
 Underwriting: Underwriting is the process of selecting risks offered
to the insurer. It is an essential element in the operation of any
insurance program, for unless the company selects from among its
applicants, the inevitable result will be adverse to the company.
Hence, the main responsibility of the underwriter is to guard against
adverse selection. While attempting to avoid adverse selection
through rejection of undesirable risks, the underwriter must secure
an adequate volume of exposures in each class.
The underwriter must obtain as much information about the subject
of the insurance as possible within the limitations imposed by time
and the cost obtaining additional data. The desk underwriter must
rule on the exposure submitted by the agents, accepting some and
rejecting others that do not meet the company’s underwriting

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requirements or policies. When a risk is rejected, it is because the

under writer feels that the hazards connected with it are excessive in
relation to the rate. The four sources from which the underwriter
obtains information are the Application, information form Agent or
Broker, investigations, Physical Examinations or Inspections:
 Rate Making: An insurance rate is the percentage price per unit of
insurance. It is the determination of what rates, or premiums, to charge for insurance.
Like any other price, it is a function of the cost of production.
However, in insurance unlike other industries the cost of production is
not known when the contract is sold, and will not be known until some
time in the future, when the policy has expired. One of the
fundamental differences between insurance pricing and the pricing
function in other industries is that the price for insurance must be
based on the prediction. And unknown until the policy period has lapsed. Most
rates are determined by statistical analysis of past losses based on specific variables of the
insured. Variables that yield the best forecasts are the criteria by which premiums are set.
The process of predicting future losses and future expenses, and
allocating these costs among the various classes of insureds is called
rate making.
The other important difference between the pricing of insurance and
pricing another industry arises from the fact that insurance rates area
subject to government regulation (currently not applicable in
Ethiopia). Because insurance is considered to be vested in the public
interest nations have enacted law imposing statutory restraints on
insurance rates. These laws require that insurance rates must be not
be excessive, must be adequate, and may not be unfairly
discriminatory.
Makeup of the Premiums
A rate is the percentage price charged for each unit of protection or
exposure and should be distinguished from a “Premium”, which is

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determined by multiplying the rate by the amount of risk (sum

insured). The unit of protection to which a rate applies differs for the
various lines of insurance.
The premium is designed to cover two major costs: (I) The expected
loss and (II) The cost of doing business. These are known as the pure
premium and the loading, respectively. The pure premium is
determined by dividing the total expected loss by the number of
exposures. Pure premium consists of that part of the premium
necessary to pay for losses and loss related expenses. Loading is the
part of the premium necessary to cover other expenses, particularly
sales expenses, and to allow for a profit. The gross premium is the
pure premium and the loading per exposure unit. The ratio of the
loading charge over the gross premium is the expense ratio. The
general formula for the gross premium, the amount charged the
consumer, is
Pure Premium
Gross Premium = -----------------------------
1 – Loading Percentage
Example: - X insurance company’s motor pool includes 1000 loss
exposures of automobiles each has a sum insured of (value) 1 million.
The company expects to pay 2 million birr of loss claims in a given
territory. Calculate the pure and gross premium of this motor pool
with the expected expanse ration of 40%?
Given: - Number of exposure= 1000
Sum insured/ car= 1,000 000
Average loss =2 car (2,000,000)
Expense ratio = 0.4
Pure premium= Average loss/exposure unit= 2,000,000/1000=2000
per auto/ year

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Gross premium=Pure premium

1- Expense ratio
=2000/1-0.4=2000/0.6=3333 per auto/ year
Gross Premium= Pure premium+ loading =2000+1333=3333 per
auto/ year
Loading= Gross premium-Pure premium= 3333-2000= 1333 per auto/
year
Loading= expense ratio*GP=3333*0.4=1333per auto/year
Gross Premium= Pure premium+ loading =2000+1333=3333 per
auto/ year
Premium rate= gross premium/ Sum insured =
3333/1,000,000=0.00334
Two basic approaches to rate making, class and individual rating are
discusses below.

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X insurance Company’s last year average sum insured for fire pool was
Birr 3 million. In this year the sum insured is twofold of the previous
year. The company expects to pay Birr 5 million for loss in this year.
The pure premium that is loaded to each house is Birr 3000.expected
expense is 30%.
Calculate loading, gross premium and rate for the pool and if your
property worth 20 million how much is the expected premium you are
supposed to pay?

X insurance Company’s last year average sum insured for fire pool was
Birr 3 million. In this year the sum insured is twofold of the previous
year. The company expects to pay Birr 5 million for loss in this year.
The pure premium that is loaded to each house is Birr 3000.expected
expense is 30%.
Calculate loading, gross premium and rate for the pool and if your
property worth 20 million how much is the expected premium you are
supposed to pay?

X insurance Company’s last year average sum insured for fire pool was
Birr 3 million. In this year the sum insured is twofold of the previous
year. The company expects to pay Birr 5 million for loss in this year.
The pure premium that is loaded to each house is Birr 3000.expected
expense is 30%.
Calculate loading, gross premium and rate for the pool and if your
property worth 20 million how much is the expected premium you are
supposed to pay?

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X insurance Company’s last year average sum insured for fire pool was
Birr 3 million. In this year the sum insured is twofold of the previous
year. The company expects to pay Birr 5 million for loss in this year.
The pure premium that is loaded to each house is Birr 3000.expected
expense is 30%.
Calculate loading, gross premium and rate for the pool and if your
property worth 20 million how much is the expected premium you are
supposed to pay?

X insurance Company’s last year average sum insured for fire

pool was Birr 3 million. In this year the sum insured is twofold
of the previous year. The company expects to pay Birr 5 million
for loss in this year. The pure premium that is loaded to each
house is Birr 3000.expected expense is 30%.
Calculate loading, gross premium and rate for the pool and if
your property worth 20 million how much is the expected
premium you are supposed to pay?

X insurance Company’s last year average sum insured for fire

pool was Birr 3 million. In this year the sum insured is twofold
of the previous year. The company expects to pay Birr 5 million
for loss in this year. The pure premium that is loaded to each
house is Birr 3000.expected expense is 30%.
Calculate loading, gross premium and rate for the pool and if
your property worth 20 million how much is the expected
premium you are supposed to pay?
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X insurance Company’s last year average sum insured for fire

pool was Birr 3 million. In this year the sum insured is twofold
of the previous year. The company expects to pay Birr 5 million
for loss in this year. The pure premium that is loaded to each
house is Birr 3000.expected expense is 30%.
Calculate loading, gross premium and rate for the pool and if
your property worth 20 million how much is the expected
premium you are supposed to pay?

1. Manual or Class Rating: The manual or class rating method sets

rates that apply uniformly to each exposure unit falling within some
predetermined class or group. Everyone falling within a given class is
charged the same rate.
2. Individual Rating: Under individual rating, each insured is charged a
unique premium based largely upon the judgement of the person
setting the rate. This rating is supplemented by whatever statistical
data are available and by knowledge of the premiums charged similar
insureds. It takes into account all known factors affecting the
exposure, including competition from other insurers.If the

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characteristics of the units to be insured vary so widely it is desirable

to calculate rates for each unit depending on its loss producing
characteristics.
 Managing Claims / Loss Adjustment: The basic purpose of
insurance is to provide indemnity to the members of the group who
suffer losses. This is accomplished on the loss settlement process, but
it is sometimes more complicated than just passing out money.
 Investment Function: -When an insurance policy is written, the
premium is generally paid in advance for periods varying from six
months to five or more years. This advance payment of premiums
gives rise to funds held for policyholders by the insurer, funds that
must be invested in some manner. When these are added to the funds
of the companies themselves, the assets would add up to huge
amounts. Not all the money collected by the insurer is to be invested.
A certain proportion of it should be kept aside to meet future claims.
However, the need for liquidity may vary from one state to another.

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