Introduction to Insurance

Introduction
An individual and his family or business may be exposed to different risks in his
life. Risk is arises due to uncertainty which can not be avoided. Human being does
not have any command on uncertainties. Human being can suffer heavy loss itself or
to the property due to unforeseen event e.g. death, illness, accident, fire, earthquake
etc. These risks may result into financial loss. He wants to compensate the financial
loss caused to the property or to the life. Insurance is the mechanism to reduce the
loss to property or to the life which occur due to such risk or perils. It is a co-
operative device to spread the loss caused by a particular risk over a number of
persons. Thus, insurance can not avert the risk or loss but it can be distributed
amongst the insured persons.
The first insurance company was formed in the United States in Charles Town
(Charleston), South Carolina, in 1732 which underwrites fire insurance. The modern
form of insurance has originated in the last three centuries. The first life insurance
policy was insured in England in 1583. Lloyds Association, a leading marine
insurance company in the world was founded in 1688 in a Coffee House in London
run by Edward Lloyds. However the attention of public were attracted towards the
necessity of fire insurance and starting of fire insurance business on commercial
basis after great fire in London in 1966 which lasted 4 days and destroyed 13000
buildings. In India the concept of insurance was found in Arya Chanakya’s
Arthshatra. There after the British started insurance business in the modern form by
establishing Life and General Insurance companies in India

The Concept of Insurance

The concept of insurance is as old a man kind. Its origin appears simultaneously
with the appearance of human society. From the beginning of society protection has
remained an important need of human being. The man has always thought of
protection of his life, his family, his assets and his earning capacity. The owner of the
asset has to suffer heavy loss. Insurance is an arrangement of indemnify the loss or
risk caused by the perils to the property. Fire, flood, earthquake, theft are the
probable events and are called as 'perils. Risk means the possibility of loss due to the
perils which is unforeseen and loss may occur or not. Uncertainty is an important
aspect of risk.
Thus, insurance is contract in which persons exposed to similar risks come
together and decide among themselves, that the loss of any person due to such risk
 shall be shared by all persons on some equitable basis.

Insurance is a social device for spreading the chance of financial loss among a large
number of people. By purchasing insurance, a “person” shares risk with a group of
others, thereby reducing the individual potential for disastrous financial consequences.
Transacting insurance includes soliciting insurance, collecting premiums and handling
claims.

By insurance a person can protect himself and his dependents from loss arising from
future uncertain events like fire, accidents, early death and so on. Thus the risk is not
averted but the loss on the occurrence is shared by the members. The function of
insurance is to spread this loss over a large number of person through the mechanism
of co-operation.

Definition :
There various definitions of insurance are given by experts. They can be divided
into two groups i.e. functional definition and contractual definition. They are as
follows;
Functional Definitions
1. Ghosh and Agrawal : Insurance is a cooperative form of distributing a
certain risk over a group of persons who are exposed to it.

2. Rock Fell :Insurance is source of distribution of loss of few persons into many
persons.
3. A.Z.Mayerson : Insurance is a device for the transfer to an insurer of certain
risks of economic loss that would otherwise come by the insured.
4. Encyclopedia Britannica : Insurance may be described as a social device
whereby a large group of individuals, through a system of equitable
contributions, may reduce or eliminate certain measurable risks of economic
loss common to all members of the group.
5. W. Beverideges : The collective bearing of risk is Insurance.

Contractual Definition
1. E. W. Patterson : Insurance is a contract by which one party , for a
consideration called premium assumes particular risk of the other party and
promises to pay him or his nominee a certain or ascertainable sum of money on
specified contingency.
2. Justice Tindall : Insurance is a contract in which a sum of money is paid to the
assured as consideration of insurers incurring the risk of paying a large sum
upon a given contingency.
 According to functional definition insurance is a system of transferring the risk from
one person to a group of persons and distributing the loss arising out of the risk
among all the members of the group.
However, the contractual definition explains the nature of contract between the
insurer and insured. According to this definition insurance is a contract to pay certain
some of money to the insured or his heirs on happening of certain contingent even in the
future.

Characteristics of Insurance
The analysis of above definitions explains the nature of insurance as follows.
1. Insurance is a Contract
Insurance is a contract between two parties i.e. insurer and insured by which the
insurer, in consideration of insurance premium, agrees to compensate the insured
against certain probable risks. Since insurance is a contract the provisions of Indian
Contract Act viz. proposal, acceptance, consideration, competency of parties lawful
object etc. are applicable to insurance contracts as well. It is a contract to pay
compensation on the happening of a certain event in the case of fire, marine and
general insurance. If there is no loss , no compensation is paid and even no premium
is returned
to policyholder. But in case of life insurance , insurance company pay certain sum of
money on the death of the insured person or if insured is alive, paid to them the
amount of premium with interest and bonus.
2. Means of Mutual help/ Cooperative device

All for one and one for all is the basis for cooperation. The insurance is a strong
cooperative device to spread the loss caused by a specific event. Insurance is based
on the principle of mutual help. Under this arrangement persons exposed to same
risks come together and create a common fund and compensate the person who has
actually suffered the loss. People individually can not afford to bear the entire loss.
But jointly they can get protection by contributing a small amount each to the
common fund.
In other words, insurance is a cooperative mechanism wherein large number of
persons comes together. They have similar risk and share the loss by contributing a
small amount in the form of premium.

3. Large number of Insured Person –

The insurance mechanism works on the principle of large number of insured
persons. Insurance is spreading of loss over a large number of persons. Larger the
number of persons, lower the cost of insurance and amount of premium. On the other
hand, lower the number of persons, higher the cost of insurance and amount of
premium.

4. Uncertainty of events:
The event to be insured must be uncertain and unforeseen. It may occur or may
not occur, e.g. every property insured for fire risk may be not catches fire . Insurance
can be taken in case of uncertain events.. In life insurance even though death of
insured person is certain its timing is uncertain. Hence life insurance is also a lawful
agreement.

5. Protection of Financial Risk :

Insurance is a contract to indemnify the financial loss caused to the insured
property due to the specific risk during the period of insurance contract. If the
insured suffers no loss during this period he is not entitled to receive any amount
from the insurer. In other words, insurance is a contract of indemnity and not a
contract of profit. The maximum amount of compensation is limited to the actual
loss of the property. Thus, the insured can not make any profit out of the loss
incurred. In other words an insurer is protected from financial risks which are
measured in terms of monetary values. Life insurance contracts are an exception to
the principle of indemnity. He can also take life policies of any amount as the loss of
death can not be measured in money terms

6. Based on certain principles and regulated by law –

Insurance business is regulated by certain act passed by central or state
government in every country. The life insurance is regulated by Life Insurance
Corporation of India Act 1956 whereas General Insurance is regulated by General
Insurance Business (Nationalization)Act 1972 In India Insurance Regulatory and
Development Authority (IRDA) is set up in 1999 to regulate the Insurance business
in the country. The insurance business is stands upon certain principles such as
insurable interest, utmost good faith, indemnity, subrogation, causa-proxima,
contribution etc.
7. Sharing and transfer of risk :
Insurance is a social and economic device. It share the financial loss occurred
due to unforeseen events between the public who are exposed to risk. Insurance is a
plan to bear the risks and financial losses occurs due to unexpected event. The death
of the insured, fire losses, marine perils, burglary, fidelity etc. may cause a
tremendous loss to the policy holder. The insurance shared this risk amongst all the
insured in the form of premium. That means the risk is transferred from
 one individual (person) to a group of person.
8. Valuation of Risk :
First of all insurance company should evaluate the risk and finalize the amount
of premium. Thereafter the insurance company enters into the contract. It is the basis
of charging premium which is depends upon the risk. If risk is high the rate of
premium becomes high. The risks involved in the subject matter can be evaluated by
several methods. The procedure of valuation of risk is different in case of life, fire,
marine and accident insurance.

9. Payment of claim at contingency:

The insurance company is liable to pay compensation i.e. claim amount only if
certain unforeseen event takes place in case of fire, marine and accident insurance. In
other words if the unforeseen event occurs, payment is made to policy holder.If
contingency not take place, there is no need to pay any amount of compensation to
the insured. In case of life insurance, the contingency i.e. death or the maturity of the
policy will certainly happen. In such case insurer is liable to pay the policy amount
on the death of the insured or on the expiry of the term whichever is earlier.
10. Insurance is not Gambling or Wagering :
Insurance is a lawful contract. It transfers the risk of one person to group of person.
Under insurance contract policy holder paid consideration in the form of premium. The
insurance serves indirectly to increase the productivity and converted the uncertainty into
certainty. Therefore insurance contract is not a gambling or wagering contract. Persons
involved in gambling or wagering bid and expose themselves to risks of losing. There is
no chance to convert risks or losses into gains. In the game of gambling there may be
either result into profit or loss.

11. Insurance is not a charity but business :

The insurance is a business which provides protection to the life or property
from unforeseen event. However, insurance company collect the amount of premium
as a consideration form policy holders for the cost of risk so covered. Charity is a
payment without claiming anything in return.