Insurance is a method by which a person who is exposed to potential risk as a result of occurrences beyond his control, passes the financial loss to a third party, in part or in full. The ‘Insured’ is the one who transfers his potential loss, and the ‘Insurer’ is the party who indemnifies or agrees to reimburse the insured for such potential loss.

This is usually done in exchange for a charge or a payment known as the ‘Premium,’ the insurer offers the insured, the coverage for a potential financial loss.

Insurance is a crucial part of risk management, but it is not the only one. Before you decide to get insurance, consider your personal risks and determine how you can lessen the likelihood of them occurring, as well as how you can minimize the impact on your life if they do have.

You may then get insurance to protect yourself from financial ruin in an unusual event . Say, for example, your home is damaged or destroyed by a wildfire.

Financial  loss

There would be a financial loss in the case of damage owing to the occurrence of an unfavorable event, in addition to other damages. Below are some cases for you to understand as to what is financial loss-

If the incident results in the death of a person, his family may lose a source of income, especially if he was the earning member.

In the event of a person’s accident, which results in a temporary or permanent disability, the financial loss might be attributable to both medical expenses and lost earnings as a result of his impairment.

If property, whether mobile or immovable, is lost or damaged, the financial loss will be the cost of replacing or repairing the property, as the case may be.

Why there is a need to manage financial risk?

  1. It gives a person peace of mind and ensures security.
  2. Increased earnings stability reduces average tax obligations.
  3. Risk management helps safeguard a person’s financial flow.
  4. it helps in safeguarding the interest of the family members.
  5. A person’s credit rating also improves.

What constitutes an Insurable risk?

Individuals consider purchasing insurance to be cost-effective. If the risks can be shared, the insurer will consent to the arrangement, but some protections will be required from his side. What constitutes a risk insurable in light of these principles? What types of risks might an insurer consider insuring?

Here are the answers to these questions. The loss and its monetary worth must be well-defined and uncontrollable by the policyholder. The prospective loss must be considerable and significant enough that it is preferable to substitute a known insurance premium for an unpredictable economic result in the absence of insurance.

The owner of the policy should not be permitted to create or promote a loss that would result in the gaining of a benefit or claim. After a loss occurs, the policyholder should not manipulate the loss’s value for example, by lying to raise the amount of the benefit or claim payment. Losses that are covered should be relatively self-contained.

The fact that one policyholder suffers a loss should not have a significant impact on whether or not additional policyholders suffer losses. For example, an insurer would not cover all of the businesses in a certain neighborhood against fire since a fire in one may spread to the others, requiring the insurer to make several big claim payments. If all of these requirements are met, it means that the insurer will provide the insurance.

It’s worth noting that the insurance contract would specify the situations under which the insurance company would be responsible for compensating the financial loss. If the condition or incident that produced the financial loss is not covered by the insurance contract and a loss occurs, the Insurance Company will not be obliged to compensate the victim.

For example, if the insurance contract between the car owner and the insurance company states that coverage would be provided in the event of an accident but not if the automobile is destroyed due to a fire, the insurance company will not be obliged to compensate the car owner for the loss.


Thus, insurance is a unique form of contract between the Insurer (the Insurance Company) and the Insured (the client), in which the customer agrees to pay the Insurance Company a premium. This premium can be paid in one lump sum or over time. This will be determined by the type of insurance and its terms. In place of payment of such premium, the Insurance Company undertakes to make a payment to the client or to absorb the costs incurred by the client as a result of financial loss suffered as a result of specified occurrences.



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