What Is Insurance

Life is full of unexpected risks or unexpected, that's why we need to understand about insurance. The primary function of insurance is as a mechanism to transfer risk (risk transfer mechanism), which transfer risk from one party (the insured) to another party (the insurer). The transfer of risk is by no means eliminates the possibility of misfortune, but the insurer to provide financial security (financial security) and tranquility (peace of mind) for the insured. In return, the insured pays the premium in a very small number when compared with the potential losses that may be suffered (Morton: 1999).Basically, the insurance policy is a contract that is a valid agreement between the insurer (in this case the insurance company) with the insured, where the insurer was willing to bear some losses that may arise in the future in return for payment (premium) certain of the insured.

In order for a loss of potential (which may occur) can be covered by insurance (insurable) it must have characteristics 
1) the loss of uncertainty,
 2) losses should be limited, 
3) the loss must be significant, 
4) the ratio of losses can be predictable 
5) non-catastrophic losses (catastrophe) for the insurer.

There are two forms of agreement in determining the payment amount at maturity of insurance, namely: 
1) The contract value (valued contract) Contract value is an agreement where the amount of payment has been determined in advance. For example, the sum assured (UP) on life insurance. 
2) The contract is an agreement indemnitas santunannya amount based on the amount of actual financial loss. For example, the cost of hospital care.

In the case of insurance companies sought to curb possible losses from a fatal / major, then it can transfer risk to another insurance company. This is called reinsurance, reinsurance companies that accept named reinsurers.

read more for History of insurance