ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An insurance company pools in collective risks and premiums because it covers a large number of risk-exposed people. The payout to the one who claims insurance coverage is out of this fund. Thereby, all policyholders share the risk of the one who actually suffered the loss.

Detailed explanation-2: -Transfer of risk also is referred to as “spreading the risk:’ because the large losses of a few are distributed through an insurer to a large number of premium payers, each of whom pays a relatively small amount.

Detailed explanation-3: -Yes, Insurance involves sharing of risk. When the insured suffers a loss the insurance company pays him the compensation for the loss. Such loss is not actually paid by the insurer himself. He only distributes the loss suffered by an insured person among other policy holders who are exposed to a similar risk.

Detailed explanation-4: -Issue: Reinsurance, often referred to as “insurance for insurance companies, ” is a contract between a reinsurer and an insurer. In this contract, the insurance company-the cedent-transfers risk to the reinsurance company, and the latter assumes all or part of one or more insurance policies issued by the cedent.

Detailed explanation-5: -Concurrent insurance is when there are two or more insurance policies that provide coverage for the same risks over the same period of time.