Theoritical Insurance




The caption of this article needs some explanation – to keep the readers – especially those engaged in selling – and the author on the same plane of understanding with ad idem.


Most of us know the practical insurance – that is the practical application of insurance for selling purposes. We search for the financial or economic needs of individuals and seek their understanding and co-operation to provide them their ‘need satisfaction’ through packages of life insurance. 


This article tries to explore whether the theory of risk can be used to suggest insurance to individuals irrespective for the search of their needs. In other words, we try to explore the theory-based selling in the place of need- based selling – as a supportive method if not as an alternative method.  


This article hopes that if the theoretical insurance understanding as examined here would at least help the practical insurance approach as a marketing tool: “theory support to practice.”


Practical insurance assumes that life insurance is a cover against the risk of death.


Let us deal with this proposition theoretically – logically – through an inquiry of questions and answers.


There are two important words in the proposition made above: the risk and the death. Does the life insurance cover deal with ‘death’? No, because death is a certainty and insurance does not cover certainties. It deals with uncertainties only. It deals with misfortune only.


Does it deal with the ‘risk’? No, because risk is an abstract idea and insurance does not deal with abstract objects.


What insurance exactly does ? does it deals with the effect and aftermath of death.


Death is the termination of living and it occurs as a natural course of life (old age) or as an end-effect of an accident or sickness. But we also see that not all old persons die and neither all accidents (however serious they are) lead people to death nor all sickness (however severe the sickness might be) make people to die. In other words, death is an event contributed by certain visible causes like old age, accident or sickness – which causes may or may not induce death.  It is notable that while the occurrences of the causes are certain the occurrence of the event is not certain and it is an uncertainty.


So, the concept and meaning of death does not help us in our enquiry into our understanding of the theoretical insurance.


Let us now consider the word: risk.


Risk has never been defined in concrete terms in the sense that all scientists and mathematicians have conceded that risk is an abstract idea – and as any abstractness cannot be defined in exact terms it (the risk) can only be assumed to be present in certain circumstances where it (the risk) may or may not manifest itself in to concrete occurrences of ‘events’. 


It is now clear and certain that uncertainty is the essence of risk, also like death. 


Therefore, the main feature of the concept of risk is its uncertainty. Apart from this feature, there are two more features of risk – Frequency and Severity.  Severity has again two dimensions: Level of Severity and Quantum of Severity.




FrequencySingular Multiple

SeverityLevel of Severity Quantum of Severity

Level of SeverityLow, Medium, High

Quantum of SeverityLow, Medium, High


Knowing the features and nature of risk we may now define risk – for the purpose of this article – as:


“A risk may be said to be present in a state or a situation, and occurrence or occurrences of which may or may not result into an undesirable event or events which may  or may not cause a loss, damage or suffering.”


The above definition of risk brings out all the features of a risk. The words “may be said to be present” suggests the uncertainty feature of risk. “Occurrence or occurrences” suggest the frequency feature of risk which also suggests that the occurrence can be a singular occurrence of the risk or several occurrences of the same risk. 


Similarly the undesirable event or events may be a singular event from one occurrence or from several occurrences or multiple events from one occurrence or several occurrences. 


This possibility is more in case of non-life insurance realm. In life and disability insurance one example can be an accident followed by a death of a person from a single risk.


“May cause a loss or suffering” again denotes the uncertainty element of the risk and also the severity feature – Level of Severity and Quantum of Severity. An undesirable event or events may happen but with no loss or suffering. 


For example, a car accident may happen with no loss or suffering to any one – that is with neither disability nor death. Some times the level and quantum of severity may be low or medium or high. 


Some times the level may be low but the quantum high or vice versa. Level means degree of the loss or suffering and quantum means the amount or quantity of the loss or suffering. Such a loss, damage or suffering could be emotional, psychological and many times monetary or pecuniary. 


In practical insurance only monetary or pecuniary losses are considered as ‘insurable’ because emotional or psychological losses are invaluable and immeasurable in any terms.


We can observe that every event in a human life – however small or big it is – and at any age and stage of the life span- has a definite socio-economic and psycho-relational changes and they have an effect on the concerned individual and his surroundings, people, personal life and organization. On a larger canvas this is also true for every other organization.


Every change brings in a new set of states and situations. Every state or situation brings in new set of risks, because “risk may be said to be present in a state or a situation”. 


Thus, risk becomes a continuum in life. It is omnipresent. Risk is certain and only its manifestation is uncertain. We can not avoid it. We can either take it and face it or manage it prudently before it manifests.  When it manifests into a loss, damage or suffering one can not know nor estimate its level or quantum of severity – till the manifestation is complete. 


Unless one is prepared with some fore thought and ‘back up’ of compensation at least in monetary terms – against such an uncertainty looming large with a possibility of becoming a sudden certainty – the aftermath may be irreparable and unbearable. It might prove brutal, colossal and fatal to the person or his surrounding circumstances and people. One’s entire organization might be totally jeopardized beyond control or retrieval. 


Secondly, even if any such a back up created once may not be ‘risk proof’ , for ever, because with every change in life a new set of states and situations are brought in with no one’s influence and consequent new sets of risks open up. Therefore search for new ‘back ups’ – suitable for such newer changes and risks becomes a ‘need’ and a ‘must’. 


It is a vicious chase – in life – of ever ensuing changes, ever changing situations and ever increasing risks. And, these risks are there to be ‘covered’ with suitable ‘back ups’ for a peaceful and meaningful ‘living’ – juxtapose with the certainty of the uncertainty of one’s future.


This is the essence of the theoretical insurance. 


If one – especially the salesperson – internalizes these concepts one can very easily and aptly adopt and adapt them for practical insurance purposes.


Author-G. N. Bhaskar Rau


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