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Definition of Insurance:
Insurance is basically a concept or idea that has been brought by human thought while looking for a solution to face crisis. This concept did not appear suddenly, it has been developing gradually up to now by certain methods and for certain benefits.
It is defined as follows:
" An obligation by a party to another to pay a financial compensation to another party or his assignee upon occurrence of a predictable accident, to be mentioned against the premiums paid by the latter"1
It could be defined also as:
A social device where many share the losses of a few by transferring portion of loss to insurance company in exchange for certain cost
In simple terms, it means that a lot of people who think they may suffer loss all put in a little money to cover financial costs for those among them who actually sustain the loss.
So insurance works on the concept of risk sharing. Risk sharing divides risk among many people.
Mark Dorfman defined insurance financially and legally as follows: " insurance is a financial arrangement that redistributes the costs of unexpected losses. Insurance involves the transfer of potential losses to an insurance pool. The pool combines all potential losses and then transfers the cost of the predicted losses back to those exposed. Thus, insurance involves the transfer of loss exposures to an insurance pool and the redistribution of losses among the members of the pool" (1)
He added more clarification by saying:
"An insurance system redistributes the cost of losses by collecting a premium payment from every participant (insured) in the system. In exchange for the premium payment, the insurer promises to pay the insured's claims in the event of a covered losses.
Generally, only a small percentage of insureds suffer losses. Thus an insurance system redistributes the cost of losses from the unfortunate few members experiencing them to all the members of the insurance system who pay premiums."(2)
Dorfman presented the legal definidtion as follows:
" Insurance is a contractual arrangement whereby one party agrees to compensate another party for losses.
We call the party agreeing to pay for the losses the insurer. We call the party whose loss causes the insurer to make a claims payment the insured.
We call the payment the insurer receives a premium .
We call the insurance contract a policy.
1- Dorfman, Mark S. Introduction to risk management and insurance. 2005,p.2.
2-Ibid,P.2.
We call the insured's possibility of loss the insured,s exposure to loss. We say the insured transfers the exposure to loss to insurer by purchasing an insurance policy"(1)
Insurance may also be defined as " a device for reducing risk by combining a sufficient number of exposure units to make their individual losses collectively predictable. The predictable loss is then shared proportionately by all unites in the combination. This definition implies both that uncertainty is reduced and that losses are shared. These are the important characteristics of insurance".(2)
In a more simple way Robert Mehr says:
"Insurance allows the individual insured to substitute a small, definite cost (the premium) for a large but uncertain loss"(3)
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1- Ibid,p.4
2- Mehre,Robert I. and Cammack, Emerson. Principles of Insurance, (Richard D. Irwin, Inc.,1976),p.31.
3- Ibid, p. 31.
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