As we know, one way to prevent risk is to insure the risk for the insurance company. This method is considered the most important method in the fight against risk. Therefore, many people think that risk management is the same as insurance. Although the real situation is not like that.
Insurance means an insurance transaction involving two parties, the insured and the insurer. When the insurer guarantees the insured, he guarantees that he will be compensated for the loss caused by an event that will not necessarily occur or when or when it cannot be determined. A proportion of the sum insured, usually called the “premium”, as the insured is obligated to pay a certain amount of money to the insurer.
From several aspects, insurance has different purposes and methods of division, including:
A. From an economic point of view, then:
To reduce the uncertainty of the results of operations carried out by a person or company to meet needs or achieve goals.
By transferring risk to the other party and combining a significant amount of risk with the other party, the magnitude of the probability of loss can be more accurately estimated.
B. In terms of law:
Transferring the risks faced by a facility or business activity to another party.
The risk is transferred by the insured to the insurer through premium payments in the insurance contract (insurance policy) and then to the insurer.
C. From a commercial point of view, then:
Share the risks faced by all participants of the insurance program.
Risk transferred from individuals/companies to financial institutions (insurance companies) engaged in risk management, which will share the risk with all participants of the insurance they manage.
D. In terms of society, then:
Pay losses together among all participants of the insurance program.
All group members (group members) of the insurance program contribute (in the form of premiums) to sympathize with the losses suffered by some of their members.
E. Mathematically, then:
Predicting the magnitude of risk probability and the result of the forecast is used to divide the risk among all participants (group of participants) of the insurance program.
Calculates the probability performed by the actuary and the underwriter based on the theory of probability (“Theory of Probability”).