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The Mechanism of Insurance Companies for Insurance of Business - Literature review Example

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This review "The Mechanism of Insurance Companies for Insurance of Business" explains the conceptual framework and theoretical underpinning of Insurance and its basic principles in relation to explaining the mechanism of underwriting and pricing Marine insurance by an insurance company…
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The Mechanism of Insurance Companies for Insurance of Business
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Download file to see previous pages Insurance is a contract between an insurer and insured by which the former agrees to undertake to give compensation to the latter for any financial loss or economic risk and contingencies such as damages, accident, etc. Insurance is the business of pooling of risk between individuals or groups. Vaughan and Vaughan (2007, p. 35) found that the very basic underlying function of insurance is the creation of the counterpart of the risk and thus ensures security to the life,  properties or other valuable possessions of general public or businesses.
An insurance company doesn’t guarantee to decrease of the uncertainty for the individual as to whether the financial risk will occur and it doesn’t alter the probability of risk-occurrence, but it reduces the probability of the financial risk that is connected to the specific event-occurrence (Vaughan and Vaughan, 2007, p. 35). For instance, from the business point of view, when the businessman insures his ship against perils at sea, the uncertainty regarding the financial loss in that event will be eliminated. Insurance plays an imperative role in the development of the economy for the following reasons: Insurance helps to pool of the risks and ensures indemnifying the financial loss against risk of life or property, Insurance gives confidence to entrepreneurs that their loss, which may affect their continuity of the business, will be compensated, Ensures greater flow of money as surplus money in various insurance companies are widely used for economic and government-related investments, Risk, loss, and contingencies, if they are not compensated, will cause many companies or businesses to go out of their operation which in turn adversely affects the development of the economy. Risk Management is a wider term as it encompasses a variety of tools including insurance too. Insurance is one of the techniques for risk management. According to ISO Guide 73, risk management is a coordinated, systematic and structured activity that direct and control a business or other organization with regard to the risk it faced (Reuvid, 2010, p. 58). An organization can take any of different forms of risk management tools. The optimum approach to risk management is to seek to attain a balanced position, by protecting the firm from the impacts of any negative effects of the event. Insurance is a more appropriate and effective way for managing the risk because it directly helps the firm balance the financial position and to ensure success and continued effectiveness of the organization (Berwick, 2006, p. 6).
            Insurance has long been used as a tool of risk management by businesses with a view to mitigating the risks associated with a certain event occurring to properties. But, insurance is available only to certain risks called insurable risks. An insurance company doesn’t provide insurance against risks that cannot be estimated or calculated in advance. From the business point of view, only insurable risks such as fire, burglary, motor accident, marine accident, etc can be uninsured (Doherty, 2000, p. 4) but other risks such as risk due to bad management, war or loss due to seasonal variation, etc cannot be insured since they are non-insurable risks.  ...Download file to see next pagesRead More
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