Chapter- 5

Introduction to Insurance
Contents:
 Meaning
 Nature
 Scope
 Role
 Origin & History of Insurance
 Insurance Contract
 Types & Features
 Kinds of Insurance Organizations
 Re-insurance and Double Insurance

Meaning of Insurance
Insurance is a contract in which the individual or an entity gets the financial protection.
In simple words, insurance is a contract, a legal agreement between two parties, i.e., the
individual named insured and the insurance company called insurer. In this agreement,
the insurer promises to help with the losses of the insured on the happening contingency.
The insured, on the other hand, pays a premium in return for the promise made by the
insurer.
It is a form of risk management where insured transfer potential loss in exchange of
premium

Risk Management
Possibility of loss managed through-

 Risk Avoidance: A risk is eliminated by not taking any action that would mean
the risk could occur.
 Risk Reduction: A risk becomes less severe through actions taken to prevent or
minimize its impact.
 Risk Retention: Retention is the acknowledgment and acceptance of a risk as a
given. Usually, this accepted risk is a cost to help offset larger risks down the road,
such as opting to select a lower premium health insurance plan that carries a
higher deductible rate.
  Risk Transfer: risk is transferred via a contract to an external party who will assume
the risk on an organisation’s behalf

Insurable risk
 Monetary value
 Insurable interest
 Homogenous exposure
 Public policy

Purpose of Insurance
 Peace of mind
 Savings
 Investment of funds
 Preservation of income

Process of work
 Creation of pool
 Past experience


Principle:
 Utmost good faith : The fundamental principle is that both the parties in an
insurance contract should act in good faith towards each other, i.e. they must
provide clear and concise information related to the terms and conditions of the
contract.
 Indemnity : This principle says that insurance is done only for the coverage of the
loss; hence insured should not make any profit from the insurance contract
 Subrogation : Subrogation means one party stands in for another. As per this
principle, after the insured, i.e. the individual has been compensated for the
incurred loss to him on the subject matter that was insured, the rights of the
ownership of that property goes to the insurer, i.e. the company
 Contribution : Contribution principle applies when the insured takes more than
one insurance policy for the same subject matter.
 Insurable interest : This principle says that the individual (insured) must have an
insurable interest in the subject matter. Insurable interest means that the subject
matter for which the individual enters the insurance contract must provide some
financial gain to the insured and also lead to a financial loss if there is any damage,
destruction or loss.
  Proximate cause: This principle applies when the loss is the result of two or more
causes. The insurance company will find the nearest cause of loss to the property

Features:
 Transferring risk at loss of life, asset, properties
 Showing loss among members
 One party undertakes risk from another
 Risk is shared in exchange of consideration

Risk caused by insurance

 Pure risk--- ( storm)
 Speculative risk---(Financial)
 Personal risk---( Health issue)
 Property risk---(Asset)
 Liability---( Accident caused by warranty)
 Income loss---( Losing job because of partial or full disability)

Nature of Insurance
Contract:
Insurance is contract between two parties in which one party agrees to
provide protection to other party from losses in exchange for premium. The parties are
insurer and insured.

Lawful Consideration :
Existence of lawful consideration is must for insurance contract like any
other lawful contract. The insurance policy holder is required to pay premium regularly to
the insurance company. This premium is paid in exchange for protection against losses
and damages guaranteed by insurance companies.

Payment on Contingency:
Insurer is required to compensate the insured only on happening of
contingency for the damages and losses done. Insured cannot make profit from insurance
policy but can only claim compensation from insurer in case of contingency. If no
contingency occurs, insurer is not required to pay any compensation to insured.
Risk Evaluation :
Insurer evaluates the risk associated with subject matter of
insurance contract. Proper risk evaluation enables the insurer to calculate the right
amount of premium to be paid by insured. Insurer uses different techniques for risk
evaluation. If insurance object is subject to heavy losses, heavy premium will be charged.
On the other hand, if there is less expectation of losses then low premium will be charged.

Large Number of Insured Person:

There are large numbers of insured person’s takes insurance
policy from insurer. Larger the number of insurance policy holders with insurance
companies, smaller will be the degree of risk on any individual. Risk arising from any
contingency is shared among these large numbers of insured persons.

Co-operative Device:
Insurance is a cooperative device to pool risk among large number
of persons. Insurance is a platform where different persons come together to share risk
by taking insurance policy from insurer. All persons pay premium regularly to insurance
companies.

Not a Charity or Gambling:

Insurance is a legal contract. It cannot be termed as a charity or
gambling. Compensation paid to insured by insurer is not in charity but is paid in
exchange of premium deposited by him. Insured pays premium to insurer for guarantee
of compensation in happening of contingency.

Role of Insurance
The process of insurance has been evolved to safeguard the
interests of people from uncertainty by providing certainty of payment at a given
contingency. Insurance not only serve the ends of individuals, or of special groups of
individuals, it tends to pervade and transform our modern social order, too. The role and
importance of insurance, here, has been discussed from an individual, business and
society’s view.

Importance of Insurance to Individuals:

Insurance provides security and safety
Insurance provides safety and security against the loss on a
particular event. In case of life insurance, payment is made when death occurs or the term
of insurance expires. In other insurance, too, this security is provided against the loss at a
given contingency. for eg. property of insured is secured against loss due to fire in fire
insurance.
Insurance affords peace of mind:
Insurance provide security which is the prime motivating factor. It
tends to stimulate an individual do more work.

Insurance protects mortgaged property:

At the death of the owner of the mortgaged property, the
property is taken over by the lender of money and the family is deprived of the use of the
property. On the other hand, the mortgagee wishes to get the property insured because
at the damage or destruction of the property he may lose his right.

Insurance eliminates dependency:

At the death of the husband or father or earning mother, the loss
to the family needs no elaboration. Similarly, at destruction of property and goods, the
family would suffer a lot. The economic independence of the family is reduced or,
sometimes, lost totally. Insurance tries to eliminate dependency.

Life Insurance provides profitable investment:

The elements of investment i.e. regular saving, capital formation,
and return of capital along with certain additional return are perfectly observed in life
insurance. Life insurance fulfills all these requirements at a low cost.

Importance of Insurance to Business

Security and Safety:

It gives a sense of security and safety to the businessman. It
enables him to receive compensation against actual loss. He can concentrate on his
business with a secure feeling that in case of losses arising from insurable risk, his losses
will be compensated.

Distribution of risk:
Risk in insurance is spread over a number of people rather
being concentrated on a single individual

Normal expected profit:

An insured trader can enjoy normal margin of profit all the time.
He is protected from unexpected losses because of insurance.

Easy to get loans: A trader can get bank loans easily if his stock or property is
insured, as insurance provides a sense of security to the lenders.
Advantages of Specialization:
Businessmen can concentrate on their business activities without
spending more time on safeguarding their property. The insurance companies, on the
other hand, can provide specialized insurance services.

Importance of Insurance to Society

Protects society’s wealth:

Through various types of insurance schemes, the insurer protects the
wealth of the society. Life insurance offers protection against loss of human wealth.
General insurance policies protect the property against losses due to fire, theft, accident,
earthquake, etc.

Removes social evils:

All forms of insurance tend to reduce the extent of social evils that
are meant to alleviate. The most effective argument for reduction of fire losses is that
smaller losses will make smaller premiums possible.

Maintains standard of living:

Insurance rescues many people in the society who are rendered
destitute through misfortune. They are able to maintain the standard of living due to high
returns. They reduce the destitution and miser.

Social security benefits:

Insurance plays a pivotal role in fulfilling certain needs for which state might have to
provide. The provision for old age, sickness and disability of persons in general. Those
who have their insurance do not become a burden on state insurance plan.

Origin
The concept of risk sharing developed in very ancient times. 4th century witnessed the
practice of BOTTOMRY BOBDS and RESPONDENTIA BONDS in maritime trade.
Bottomry, also known as a bottomry bond, is a contract where a shipowner provides his
or her ship as security for a loan to finance a voyage or for a certain period of time. The
shipowner usually uses the loan for maritime (i.e. sea-related) risks (e.g. repairs,
equipment, emergencies) during the voyage.
The term of the agreement was that the loan was required to be repaid only if the ship
reached destination safe and sound. In case of total loss of the ship, nothing was requited
to be repaid. The creditors used to charge a premium, in addition to interest to protect
themselves against the possibility of total losses when they loss the principal amount.
Similar loans could also be raised on the pledge of cargo and this was used to be done
on RESPONDENTIA BONDS. The terms of repayment were exactly the same.
Another practice, GENERAL AVERAGE is still in existence. It has the element of sharing
the loss one by all. It is a Very old custom.
The concept of insurance, that is to say, a system of sharing of spreading risks gradually
developed because of need, which has ultimately replaced by modern insurance
approach.

History & Development

Historical development of the various branches of Indira is given below:

MARIN: Marin is the oldest form of insurance and came first in the list. This type of
insurance probably began in Northern Italy sometimes during the 12th & 13th century and
gradually the concept was rather transferred to or taken over by the United Kingdom.
The present act regulating the marin Insurance business is The Marin Insurance Act, 1906
and this act is followed in our country also.
FIRE: Fire insurance came second in the list of development. The great fire of London in
1666 practically demonstrated the necessity & urgency of fire insurance, about insurance
companies came forward to provide fire insurance protection.
LIFE: The third in the list of development is the life insurance business. During 1583, only
short term policies were used to be issued meaning that only at the death of the life
assured during the term period the money was to be paid. On survival nothing was
payable.
In 1774, the life insurance act was passed in the British Parliament requiring the presence
of insurable interest before one could effect a life policy on the life of another. All these
gradually gave life assurance a sound l, systematic and scientific basis as we see in the
present day.
ACCIDENT: The last in the list of development is the accident insurance business. A
number of various types of policies coming under accident department. Examples are:
personal accident, burglary, fidelity, workmen's compensation, liability policies, cattle,
bond, motor etc. It basically started from personal accident insurance.
Insurance Contract
In insurance, the insurance policy is a contract between the insurer and the policyholder,
which determines the claims which the insurer is legally required to pay. In exchange for
an initial payment, known as the premium, the insurer promises to pay for loss caused by
perils covered under the policy language.

Types & Features of Contract :

Usually There are three types of contracts Viz.,
1. Simple contract
2. Specialty contracts
3. Contracts of record.

Simple Contracts: Most of the Contract, as we usually come across in our day-to-day
transactions or activities, are simple contracts. Unlike specialty contracts, these are not
required to be executed in deeds, that is to say, these are not required to be signed sealed
and delivered. They may be made in writing or simply by words in mouth i.e., orally. Most
of the insurance contracts fall under the category of simple contracts.

Essential Elements:
In order to constitute a simple contract the essential elements required are:

Unrevoked Offer: To start with, there must be an unrevoked offer from the offerer,
which offer is left to be accepted by the offeree . The offerer has a right to withdraw his
offer before it is accepted.

Unqualified Acceptance: There must be an acceptance of the offer made in which

acceptance must be unqualified.

Consideration : Consideration may be defined as Some right, benefit, profit or

advantage accruing to one party or some loss, detriment, responsibility suffered or
undertaken by the other.

Consensus ad idem( of the same mind): The parties to the contract must be of the
same mind as to the proposed contract. They must agree to same thing in the same sense.

Capacity to Contract: The parties must have the legal capacity to enter into a contract.
It should be remembered that minors do not have any capacity to enter into contracts,
unless the contract relates to necessaries for life.

Legality of Object: The object or the subject matter of the contract must be legal.
Otherwise the contract maybe void or illegal.
Specialty Contracts: The assential feature of a specialty contract is this that it must be
in writing and it must be signed, sealed and delivered. These are also known as contracts
under seal or deed.
Examples are:
Gratuitous promises, where no consideration is involved.
Conveyance or transfer of land etc.

Contracts of Record: These usually refer to record kept in courts arising out of
judgments. They are not agreements in proper and not contracts in the legal sense of the
term. However, this has been indicated here just as a matter of historical interest.

Kinds of Insurance Organizations

Insurance companies in Bangladesh are mainly managed by two organizations. One is

SADHARAN BIMA CORPORATION. And the other is JIBAN BIMA CORPORATION.
SADHARAN BIMA CORPORATION: Sadharan Bima Corporation (popularly known as SBC)
is the one and only state-owned non-life insurer and reinsurer in Bangladesh under the
Ministry of Finance, Government of the People's Republic of Bangladesh. The services
provided by Sadharan Bima Corporation include insuring public and private property
risks, providing liability insurance coverage, reinsurance of the risk underwritten by
private non-life insurers, providing Risk Improvement Services, Industrial Development
through Equity participation and Human Resources Development for Insurance Industry.
JIBAN BIMA corporation : The Jibon bima corporation is the lone state-owned life
insurance company in Bangladesh, which starts its maiden journey on May 14,1973 with
assets and liabilities worth tk 15.70 core of defunct 37 life insurance companies.
Since its inception, JBC is working among the people of Bangladesh with two basic
objectives; firstly, to cover the risk and raising savings habit among the people and
secondly, creates fund for the country's economic development through innovative life
insurance schemes.

Re-insurance:
Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is
the practice whereby insurers transfer portions of their risk portfolios to other parties by
some form of agreement to reduce the likelihood of paying a large obligation resulting
from an insurance claim.
The party that diversifies its insurance portfolio is known as the ceding party. The party
that accepts a portion of the potential obligation in exchange for a share of the insurance
premium is known as the reinsurer.

Double Insurance:
Double insurance is a type of insurance where the same subject matter is insured more
than once. In such cases the same subject is insured, but with different insurers. The
method of double insurance is considered a legal act. In case of loss the insured can claim
from both the insurers and the insurers are liable to pay under their respective policies.

The features of double insurance are:

1. subject matter is insured with two or more insurance companies;
2. the insured can claim the amount from the policies; and
3. the insurer cannot claim more than the actual loss.
Double insurance also follows the basic principles of insurance. Thus a double insurance
does not allow for unjust enrichment of the insured.

Year Question Solution

1. What do you mean by insurance? Point out the subject matter of insurance.
Identify the objectives of Insurance Development Regulatory Authority(IDRA)
(2020+2019)
Ans: insurance definition-
(See in theory part)
Subject matter of Insurance-
The subject matter of insurance may be any property, right, interest, life or liability. Thus,
in fire insurance the subject matter may be a house or a factory. In case of life insurance,
the subject matter is the life of a person and in the accident insurance, the subject matter
is one’s liability for body injuries or damages to the property of a third party. In marine
insurance, it is a ship, or its cargo or the freight. The subject matter is described in the
policy itself.
Subject matter of contract of insurance–
subject matter of contract of insurance is risk. Insurance is a contract in which there is
offer and acceptance, flow of consideration, absence of fraud, legality and the capacity to
contract.
Objective of IDRA-
The main objective to provide technical expertise and capacity building to the IDRA
officials, individually and collectively, in achieving the following fundamental insurance
regulatory and supervisory objectives: 1) protect the policy holders interest, promote
competitive markets and facilitate the fair and equitable treatment of insurance
consumers; 2) promote the reliability, solvency and financial solidity of insurance
institutions; and 3) support and improve the legal framework ( the Insurance Law and
Regulations) and establish effective supervision using the risk based and market conduct
supervision approach.
And to provide technical assistance to IDRA to adopt and use modern Smart Risk Based
Supervision (Smart RBS) including for supervising high standards of corporate
governance and policyholders protection. The smart risk-based approach to supervision
uses in a proportionate manner both off-site monitoring and on-site inspections to
examine the business model of each insurer, evaluate its condition, risk profile and
conduct, the quality and effectiveness of its corporate governance and its compliance
with relevant legislation and supervisory requirements.

2. Brief discuss the principles of insurance with example. (2020+2019)

Ans- The concept of insurance is risk distribution among a group of people. Hence,
cooperation becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer and the insured
have to uphold the 7 principles of Insurances mentioned below:
1.Utmost Good Faith
2.Proximate Cause
3.Insurable Interest
4.Indemnity
5.Subrogation
6.Contribution
7.Loss Minimization
Let us understand each principle of insurance with an example.
1.Principle of Utmost Good Faith:
The fundamental principle is that both the parties in an insurance contract should act in
good faith towards each other, i.e. they must provide clear and concise information
related to the terms and conditions of the contract.
The Insured should provide all the information related to the subject matter, and the
insurer must give precise details regarding the contract.
Example – Jacob took a health insurance policy. At the time of taking insurance, he was
a smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the
Insurance company will not be liable to bear the financial burden as Jacob concealed
important facts.
2.Principle of proximate cause:
This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will find
the nearest cause of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not a cause the
property is insured against, then no payment will be made by the insured.
Example- the wall of the building damaged due to fire, fell down due to storm before it
could be repaired and damaged an adjoining building. The owner of the adjoining
building claimed the loss under the fire policy. In this case, the fire was a remote cause,
and the storm was the proximate cause; hence the claim is not payable under the fire
policy.
3.Principle of Insurable interest:
This principle says that the individual (insured) must have an insurable interest in the
subject matter. Insurable interest means that the subject matter for which the individual
enters the insurance contract must provide some financial gain to the insured and also
lead to a financial loss if there is any damage, destruction or loss.
Example – the owner of a vegetable cart has an insurable interest in the cart because he
is earning money from it. However, if he sells the cart, he will no longer have an insurable
interest in it.
To claim the amount of insurance, the insured must be the owner of the subject matter
both at the time of entering the contract and at the time of the accident.
4.Principle of Indemnity:
the insured should be compensated the amount equal to the actual loss and not the
amount exceeding the loss. The purpose of the indemnity principle is to set back the
insured at the same financial position as he was before the loss occurred. Principle of
indemnity is observed strictly for property insurance and not applicable for the life
insurance contract.
Example – The owner of a commercial building enters an insurance contract to recover
the costs for any loss or damage in future. If the building sustains structural damages from
fire, then the insurer will indemnify the owner for the costs to repair the building by way
of reimbursing the owner for the exact amount spent on repair or by reconstructing the
damaged areas using its own authorized contractors.
5.Principle of Subrogation:
Subrogation means one party stands in for another. As per this principle, after the insured,
i.e. the individual has been compensated for the incurred loss to him on the subject matter
that was insured, the rights of the ownership of that property goes to the insurer, i.e. the
company.
Subrogation gives the right to the insurance company to claim the amount of loss from
the third-party responsible for the same.
Example – If Mr A gets injured in a road accident, due to reckless driving of a third party,
the company with which Mr A took the accidental insurance will compensate the loss
occurred to Mr A and will also sue the third party to recover the money paid as claim.
6.Principle of Contribution:
Contribution principle applies when the insured takes more than one insurance policy for
the same subject matter. It states the same thing as in the principle of indemnity, i.e. the
insured cannot make a profit by claiming the loss of one subject matter from different
policies or companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and
with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs
can claim the full amount from Company A but then he cannot claim any amount from
Company B. Now, Company A can claim the proportional amount reimbursed value from
Company B.
7.Principle of Loss Minimisation :
This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimise the loss to the insured property. The principle does not allow
the owner to be irresponsible or negligent just because the subject matter is insured.
Example – If a fire breaks out in your factory, you should take reasonable steps to put out
the fire. You cannot just stand back and allow the fire to burn down the factory because
you know that the insurance company will compensate for it.

3.Identify the different types of insurance. (2020)

Ans:
Branch wise classification:
1.Marine: In this branch or department are affected insurance of:
Hullshape, meaning the insurance of shape;
Cargo, meaning the insurance of goods being conveyed;
Freight, meaning the insurance of the consideration received or receivable paid or
payable for the convenience of goods.
2.Fire: In this branch or department are issued insurance against:
a) Loss, damage or destruction by fire and other special perils to material property:
b) Loss of profit or consequential loss arising out of such material damage as in(a) about.
3. Life: In this branch or department are affected insurace of:
a) Ordinary life assurance
b) Industrial life assurance
c) Annuity;
d) Group life assurance
e) Personal accident insurance.
4. Accident: All types of policies other than marine, life and fire are issued in this
department. Main type of policies are;
a) Personal accident:
b) Burglary :
c) Motor:
d) Employes liability:
e) Public liability:
f) Product liability
etc.

4.Clarify the concept of re-insurance and double insurance. (2020)

(Ans in the theory part)
5.Differentiate re-insurance from double insurance. (2019)
Ans:
Double Insurance vs Reinsurance
 Basis of
Double Insurance Reinsurance
Difference

Meaning In double insurance, the same risk is In the reinsurance, the risk or a part
insured with different insurance of the risk is transferred to another
companies or more than one insurance company. The risk remains
insurance company. the same.

Subject This insurance is basically taken for This insurance covers the risk of the
properties having a high value. original insurer.

Claim You can make a claim to all the In this insurance, you will have to
insurance companies for claim from the original insurer and it
compensation. will claim from the reinsurer.

Loss The loss will be shared by all the The reinsurer will only be liable to pay
insurance companies from which you the proportion of the reinsurance.
have taken the insurance.

Goal The main goal of this insurance plan The main goal of this insurance is to
is to assure the benefit of insurance. reduce the risk of the insurer.

Interest of The insured has an insurable interest The insured doesn’t have an
Insured in this kind of plan. insurable interest in this kind of plan.

Insured The insured approval is needed in The consent of the insured is not
Approval double insurance. needed in Reinsurance because it is
done on the insurer’s end.

6.Discuss the special features of insurance contract? (2018)

Ans: Given below are the few features of Insurance contract, these features are unique:-
1. Aleatory
Insurance contracts are Aleatory as promise comes into picture only on occurrence of
event. This occurrence of event is based on probability and occurrence of event is not
controlled by any party.
2. Adhesion
Here contract is prepared by insurer and insured accepts given terms and conditions
without any negotiation.
3. Unilateral
Here Insurer makes any enforceable promise. Insured does not make any promise but
bound by the terms and conditions of policy where contract can be lapsed if renewal
premiums are not paid.
4. Personal Contract
Life insurance is a personal contract or personal agreement between the insurer and the
insured. The owner of the policy has no bearing on the risk the insurer has assumed. For
this reason, people who buy life insurance policies are called policy owners rather than
policyholders.
5. Conditional
An insurance contract is conditional. This means that the insurer’s promise to pay benefits
depends on the occurrence of an event covered by the contract. If the event does not
materialize, no benefits are paid.
6. Valued or Indemnity Contract:
An insurance contract is either a valued contract or an indemnity contract. A valued
contract pays a stated sum regardless of the actual loss incurred. Life insurance contracts
are valued contracts
7. Utmost Good Faith:
Insurance is a contract of utmost good faith. This means both the policy owner and the
insurer must know all material facts and relevant information. There can be no attempt
by either party to conceal, disguise, or deceive.
8. Insurable Interest:
Another element of a valid insurance contract is insurable interest. Insurable interest is a
component of legal purpose. Insurable interest is not defined but can be interpreted by
the loss to the proposer.