Why Is Insurance Indispensable for business?
“It is always the intention of the business owner that somehow some kind of reimbursement should be available in case of any adversity or calamity. A businessman tries to shift the risk to those agencies, which are specialized in bearing that risk. Insurance is the best way to shift the risks. ”
Business is always open to risks. There may be losses in future due to unforeseen or unpredictable circumstances. A businessman makes some assumptions for the future and bases all his decisions on those predictions. It is very difficult to assess the future circumstances because a complex interplay of various factors is involved. Whenever there is even a slight deviation in these factors, the element of risk comes into play.There may be changes in demand for a product, prices of raw material may increase, labor rates may grow up, and government may impose certain restriction on the business. Beside these, there may be calamities like earthquake, floods, fire etc. The influence of all the above-mentioned factors is very great on any business and if damage control measures are not adhered to, they can even spell doom for a well-flourishing business. The businessman tries to control and minimize risk but they cannot altogether be avoided.
It is always the intention of the business owner that somehow some kind of reimbursement should be available in case of any adversity or calamity. A businessman tries to shift the risk to those agencies, which are specialized in bearing that risk. Insurance is the best way to shift the risks. Insurance companies thrive on this human tendency and have a lot of policies in the offing to suit the needs of every person and every business.
There are policies relating to fire, industrial accident, consequential losses, etc. A pre-determined premium is paid to the insurance company. Certain reasons and conditions are mentioned in every insurance policy. If some loss occurs due to the reasons mentioned in the policy, the insurance company compensates the loss.
Insurance is a contract between two parties whereby one part agrees to cover the loss suffered by the other party for a consideration of some money called Premium. The party, which promises to indemnify the loss, becomes the insurer, and the person or the property subject to risk becomes the insured.
The agreement providing for insurance is called insurance policy. Poling system is the idea behind every kind of insurance business. Large number of persons are combined together to reduce or to compensate the future loss of any one of them.
In actuality, each person contributes a small amount of money only. It’s the cumulative effect that raises capital for the insurance company. It is also not possible that at a particular moment all the insured persons become eligible for insurance. If this happens, the insurance company will become insolvent.
Pooling system helps in spreading the risks over a large number of units. This system is based on the theory of large numbers or more precisely the science of probability. The probability that all the insured persons will claim compensation at one time is surely zero. Hence, the insurance business never runs out of money.
Author - DeeKay
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