Fundamentals Of Insurance: Protection Against Risk.

Human life is full of many uncertainties, like death, illness, accidents, earthquakes, and fire accidents. You might also occasionally have these types of uncertain problems. 

Insurance is for you if you want protection against risk and loss. But do you know what insurance is and how it works? So let’s talk about insurance. In this blog, we will talk about the fundamentals of insurance. 

Precap: fundamentals of insurance

What is insurance?

Principles of insurance.

Types of insurance.

Benefits of insurance.

What Is Insurance?

Insurance is a protection against impending dangers. Insurance is a contract by which a company and the state undertake to provide a guarantee of compensation for specified loss, illness, damage, and death in return for the payment of a fixed premium.

In simple words, insurance is a contract in which the individual or a company gets financial protection against an unexpected loss.

Insurer:Insurer is a company (an authoritative body)that protects against risk.

Insured:- Insured is the person or company covered against risk.

It is a service that an insurer provides under a particular insurance contract against a premium paid by the insured. Let’s discuss the fundamentals of insurance.

also read: CAGR Meaning In Stock Market : Magic Of Compounding

Principles Of insurance: Fundamentals Of insurance 

The insurance contract between an insured and an insurer is based on some principles. Let’s know these principles of insurance in detail.

S.noPrinciples of insurance 
1Principle of Insurable interest
2Principle of indemnity
3Principle of Proximate cause
4Principle of Utmost good faith
5Principle of contribution
6Principle of Loss minimization 
7Principle of subrogation 

Principle of insurable interest 

The principle of insurable interest says that the insured must have an insurable interest in the subject matter ( property, person’s life, etc.).

Insurable interest means the subject matter for which the person and company taking the insurance contract must provide some financial gain or financial loss to the insured if there is any damage or loss. 


People take property insurance for their own houses but not for their neighbors’ houses. The person does not have an insurable interest in their neighbor’s house.

To claim the amount of insurance, the insured must be the owner of the subject matter both at the time of the loss and at the time of taking the contract.

Principle of indemnity

This principle of indemnity says that insurance is taken only for the loss and damage coverage. Hence the insured should not make any profit from the insurance policy. 

The main objective of the indemnity principle is to get the insured back in the same financial position as they were before the loss and damage occurred. The insured should be paid an amount equal to the actual loss. 

This principle insurance does not apply to life and health insurance.


Johny is a businessman having a cloth shop. He has insured his goods for $5lakh. After some time the goods were damaged due to a fire accident. Jones claimed a full $5 lakh as compensation. It was found that only goods worth $2 lakhs were destroyed, and now only $ 2 lakhs will be provided to him.

Principle of proximate cause (nearest cause)

This is also called the principle of the nearest cause. This principle applies when the loss of subject matter can be caused by more than one incident. The insurance company will find the closest reason for losing to the subject matter. 

The company must pay compensation if the proximate cause is the one in which the subject matter is insured. If it is not a reason the subject matter is insured against, then no payment will be made by the insurer.


A cargo ship’s base was damaged due to rats. That’s why seawater entered the cargo, and the shipment was damaged. There are two causes of the damage to the cargo ship. 

(i) The cargo ship got punctured because of rats.

(ii) The sea water enters the ship through damage.

The risk of seawater is insured, but the first reason is not. The nearest reason for the damage is guaranteed seawater, and the insurer must pay the compensation.

Principle of utmost good faith

The principle of utmost good faith means that the insurer and insured in an insurance contract should act in good faith towards each other. They must provide clear, important, and concise details related to the agreement.

The insured should provide all the information related to the subject matter, and on the other hand, the insurer must give precise details regarding the insurance contract.


Adam took a health insurance policy. At the time of taking his insurance, he was a smoker and had some other health issues that he failed to disclose. Later, he got cancer and some other health problems. In this situation, the insurance company will not be liable to bear the financial burden as Adam concealed important facts.

Principle Of Contribution

This principle applies when the insured takes more than one insurance policy for the same subject matter. At the time of loss, all companies with the insurance contract of the same subject matter contribute to the total loss. In other words, all insurers will share the loss in the proportion of their respective coverage.

It states the same thing as in the principle of indemnity, and the insured cannot make any profit by claiming the loss of one subject matter from different companies. 


A car worth $100000is insured with Company ABC Ltd for $500000 and with company XYZ for $200000. In case of damage to the car for $5 lakhs, the owner can claim the full amount from Company ABC Ltd, but then he cannot claim any amount from Company XYZ. Now, Company ABC Ltd can claim the proportional amount reimbursed value from Company XYZ.

Principle of loss minimization

This principle says that, as an owner, it is mandatory on the part of the insurer to take the necessary steps to minimize the loss to the subject matter. The principle does not allow the owner to be irresponsible and careless just because the subject matter is insured. 

You must take all the necessary steps to minimize the loss when it happens. You must take all the required precautions to prevent the loss, even after taking the insurance.


Johan took an insurance policy for his house. In a fire accident, his house burnt down. He should have called the nearest fire station to minimize the loss. He cannot just stand back and allow the fire to burn down the house just because he knows the insurance company will compensate for it.

Principle of subrogations 

Subrogation is the ability of an insurance company to approach the person or party that has caused the loss.


David gets injured in a road accident due to the reckless driving of a third person. The company with which David took the accidental insurance will compensate for the loss incurred to David and will also sue the third person to recover the money paid as a claim

These are some principles under fundamentals of insurance.

Types Of insurance

Life insurance

Life insurance is a contract between an insurer and an insured where the insurer promises to pay a sum of money in exchange for a premium upon the death of an insured person and after a fixed period.

General insurance

Insurance contracts that do not come under life insurance are called general insurance. The different forms of general insurance are fire, marine, motor, engineering, and other miscellaneous non-life insurance.

Benefits: fundamentals of insurance

Insurance performs lots of functions and gives us multiple benefits. Below are some benefits of insurance that you must know.

Provides protection 

There is always a fear of sudden loss and damage. There may be road accidents, fires in houses and factories, storms in the sea, and loss of life. In these cases, it might be difficult to bear the loss, so insurance protects against risk and losses. It not only protects the insured from financial stress but also helps in checking the mental stress arising out of it.

Spreading risk

Insurance spreads risk to a large number of people. Many people get insurance policies and pay premiums to the insurance company. Whenever a loss and damage happens, it is compensated out of the insurer’s funds. The loss is spread among a large number of people who are taking insurance policies.

Provides certainty 

Insurance provides certainty to the insured. The insured pays a small portion( premium ) of his income for this certainty. So, there is a certainty of financial aid against the premium. It will protect the insured from accidents, hazards, or any type of loss.

Encourage saving 

Insurance does not only protect from risk, but it is an investment too. Life insurance provides a method of investment. The insurance company develops a habit of saving money for an individual by paying a premium from his salary. The policy amount is paid to the insured and his nominees ( child, parents, partner, etc.).

Encourages international trade 

Insurance protects against all types of sea risks, and international trade faces many risks in transporting goods and services from one country to another. Without insurance, businessmen are always worried about the safety of goods and services. There are always uncertainties and risks involved during transit. Insurance provides protection against sea risks.

Fundamentals of insurance is an ideal introduction for individuals who have recently become involved in their business


There are many benefits of having insurance, spreading risk to a large number of people, protection against sudden loss and damage, and providing certainty to the insured. So this is very important for you to know the fundamentals of insurance. Many people consider insurance as an expenditure but it is an investment. You must take a beneficial insurance policy within the right time period.

Que-1. What is premium?

It is an amount paid to the insured  by the insurer for covering his risk. The higher your age, the higher the premium will be.

Que-2. Is insurance a contract?

An insurance is a legal contract between the insurance company (the insurer) and the person (the insured).

Que-3. What is insurance risk?

risk is the chance something harmful or unexpected could happen like loss, theft, or damage of valuable property or someone being injured.

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