BANKING AND INSURANCE

PROJECT REPORT

MEANING, NATURE AND

RELEVANCE OF INSURANCE
Submitted To- Submitted by-
Ms. Alka Sharma Jayant Singla
University Institute of Legal Studies B. Com LLB (H.)
PU, Chandigarh Sem-1 (Sec E)
Roll No. 249/20

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ACKNOWLEDGEMENT
The success and final outcome of this project required a lot of guidance and
assistance from many people and I am extremely fortunate to have got this all
along the completion of my project. Whatever I have done is only due to such
guidance and I would never forget to thank them.
I take this opportunity to record deep sense of gratitude to my teacher,
Ms. Alka Sharma Ma’am, University Institute of Legal Studies, Chandigarh for
her incontestably perfect unmatched guidance, encouragement, valuable
suggestions and efforts made during the preparation of this project and
during her lectures which enabled me to complete this project successfully on
the topic,

“Meaning, Nature and Relevance of Insurance”

I owe my regards to the entire faculty of the Department of Legal Studies from
where I have learnt the basics of law and whose informal discussions,
intellectual support helped me in the entire duration of this work.

Jayant Singla
B.Com LLB (Hons.)
Semester- 1 (Sec-E)
Roll No.- 249/20

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 CONTENTS
1. Introduction...…………………………………………Page 04
2. Meaning of Insurance.……………………………..Page 05
3. Terminologies…………………………………………Page 06
4. Nature of Insurance.……………………………......Page 08
5. Relevance of Insurance…………….……………...Page 10
6. Conclusion……………………………………………...Page 13
7. Bibliography…………………………………………...Page 14

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 INTRODUCTION
It is a generally acknowledged phenomenon that there are enormous risks in
every sphere of life. For property, there are fire risks; for shipment of goods,
there are perils of sea; for human life, there are risks of death or disability;
and so on. The chances of occurrences of the events causing losses are quite
uncertain because these may or may not take place. In other words, our life
and property are not safe and there is always a risk of losing it.

A simple way to cover this risk of loss money-wise is to get life and property
insured. In this business, people facing common risks come together and make
their small contributions to the common fund. While it may not be possible to
tell in advance, which person will suffer the losses, it is possible to work out
how many persons on an average out of the group may suffer the losses.

When risk occurs, the loss is made good out of the common fund. In this way,
each and every one share the risk. In fact, insurance companies bear risk in
return for a payment of premium, which is calculated on the likelihood of loss.

It is device for spreading a risk among a number of persons, who are exposed
to that risk. Insurance is a social device of sharing risks. According to Sir
William Beveridge, therefore,

“The collective bearing of risk is insurance”

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 MEANING
Insurance is a mechanism by which the person exposed to the potential risk,
arising out of the events beyond his control, transfers the financial loss; in
part or in full to a third party.

The party which transfers his potential loss is termed as the ‘Insured’ and the
party which indemnifies or undertakes to compensate the insured of such
potential loss is termed as ‘Insurer’. The Insurer provides the coverage for the
potential financial loss in lieu a fee or a consideration which is called the
‘Premium’.

Thus, Insurance is a special type of contract between the Insurer (the

Insurance Company) and the Insured (the client) wherein:

A. The client agrees to pay a premium to the Insurance Company. Such

premium may be a fixed amount payable as a single payment or it may be paid
as periodical payments. This will depend upon the type of Insurance and the
terms thereof.

B. In lieu of the payment of such premium the Insurance Company agrees to

make some payment to the client or bear the costs of the client due to
financial loss incurred on the occurrence of certain events. For example, in
vehicle insurance, the Insurance Company bears the loss on accident.

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 TERMINOLOGIES
Insurance Policy- A contract of insurance explaining its terms and
conditions is called 'Insurance Policy.' It contains information about the
subject insured, the amount of policy, the party to the contract, the
contingencies covered etc. It is properly stamped and is normally issued by
the insurance company.

Insurer- It is insurance company which undertakes the risk. It is the party

which pays money or compensation on the happening of certain event or
contingency to the insured party or its nominees. The LIC, general insurance
companies or other private companies in insurance business are the insurer.

Insured- Insure is the person who has taken up the insurance policy.
Insurer shifts his risk to the insurance company on the payment of a premium.
He is the person who seeks protection.

Premium- It is the amount paid by insured to the insurer as a

consideration for shifting the risk. The person taking up insurance cover will
pay a specified amount as per agreement to the insurance company. It is the
price of insurance cover.

Compensations- It is amount paid by the insurance company to the

policy holder or his nominee, in case of death of insured. It is the amount of
actual loss suffered by the insured which is paid as compensation. In case of
life insurance, it is the amount of policy which is paid either to the insured or

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his nominee. In life insurance, the loss of life cannot be compensated but a
specific amount is paid in this regard.

Insured Amount- It is the maximum amount which an insured may get

in case of loss. Insured amount is mentioned in the policy and the premium is
fixed as per the amount. In case of life insurance, insured is paid either on the
death of the policy holder or on the completion of policy period. In case of
general insurance, insured amount is the maximum amount up to which the
claim may be settled.

Contingency- It is the actual happening of an event or not happening of

an event on which the loss depends.

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 NATURE
1. Contract- Insurance is a contract between the insurance company and
the policyholder wherein the policyholder (insured) makes an offer and the
insurance company (insurer) accepts his offer. The contract of insurance is
always made in writing.

2. Co-operative Device- All for one and one for all is the basis for
cooperation. The insurance is a system wherein large number of persons,
exposed to a similar risk, are covered and the risk is spread over among the
larger insurable public. Therefore, insurance is a social or cooperative method
wherein losses of one is borne by the society.

3. Protection of financial risks- An insurer is protected from

financial risks which can be measured in terms of money. As such insurance
compensates only financial or monetary loss or risks.

4. Risk sharing and risk transfer- Insurance is a social device for

division of financial losses which may fall on an individual or his family on the
happening of some unforeseen events. When insured, the loss arising out of
the events are shared by all the insured in the form of premium. Therefore,
the risk is transferred from one individual to a group.

5. Based upon certain principles- The insurance is based upon

certain principles like insurable interest, utmost good faith, indemnity,
contribution, etc.

6. Regulated by Law- Insurance companies are regulated by statutory

laws in almost all the countries. In India, life insurance and general insurance
are regulated by Life Insurance Corporation of India Act 1956, and General
Insurance Business (Nationalization) Act 1972, and IRDA Regulations etc.

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7. Value of Risk- Before insuring the subject matter of the insurance
contract, the risk is evaluated in order to determine the amount of premium to
be charged on the insured. If there is an expectation of heavy loss, higher
premiums will be charged. Hence, the probability of occurrence of loss is
calculated at the time of insurance.

8. Payment at contingency- An insurer is liable to pay compensation

to the insureds only when certain contingencies arise. In life insurance, the
contingency — the death or the expiry of the term will certainly occur. In
other insurance contracts, the contingency, may or may not occur. So, if the
contingency occurs, payment is made, otherwise no payment need to be made
to the policyholders.

9. Insurance is not gambling- An insurance contract cannot be

considered as gambling as the person insured is assured of his loss
indemnified only on the happening of such uncertain event as stipulated in the
contract of insurance, whereas the game of gambling may either result into
profit or loss.

10. Insurance is not a charity- Premium collected from the

policyholders under an insurance is the cost of risk so covered. Hence, it
cannot be taken as charity. The insurer is legally bound to pay.

11. Investment portfolio- Since insurers’ liability to pay

compensation to the insured arises on the happening of certain uncertain
event, the insurers do not have to keep the collected premium with them.
They invest the premium received in selected securities and earn interest and
dividend on them. Thus, the insurers have two sources of income: the
insurance premium and the investment income (i.e., interest / dividend)
which occurs over time.

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 RELEVANCE
Insurance has become an integral part of business or an individual's life. The
uncertainty of future prompts every section of society to take up some types
of insurance policy. Insurance helps in compensating the loss suffered due to
the happening of certain contingency. The role, importance and relevance of
insurance may be discussed of follows:
• Relevance and useful for the individual
• Relevance and useful for business.
• Relevance and useful for society.

Relevance for Individual:

1. Provides Safety and Security- Insurance provide financial
support and reduce uncertainties in business and human life. It provides
safety and security against particular event. There is always a fear of
sudden loss. Insurance provides a cover against any sudden loss. For
example, in case of life insurance financial assistance is provided to the
family of the insured on his death. In case of other insurance security is
provided against the loss due to fire, marine, accidents etc.
2. Acts as Motivator- A security against adverse situations provides
peace of mind to the individual. A peaceful mind always endeavors to work
more and more. The peace of mind provided by insurance becomes a
motivating factor. The fear of unpleasant situations like death, accident,
storm, fire, damage etc. always weighs heavily on one's mind. These
situations are beyond the control of human agency and occurrence of such
things dampen the spirit of persons. The insurance helps in controlling the
effects of adverse situations which will create security in mind.
3. Encourages savings- Insurance does not only protect against risks
and uncertainties, but also provides an investment channel too. Life

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 insurance enables systematic savings due to payment of regular premium.
Life insurance provides a mode of investment. It develops a habit of saving
money by paying premium. The insured get the lump sum amount at the
maturity of the contract. Thus, life insurance encourages savings.
4. 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.
5. 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.

Relevance for Business:

1. Uncertainty of Business Loss is Contained- Every business faces
many uncertainties. The investments in properties, plant and machinery
and other assets are huge. In case of any mishap like fire etc. everything
may be destroyed. Under such situations the businessman will be required
to purchase the damaged or destroyed assets again. In the event of
business assets being insured, the insurance company will compensate this
loss. The uncertainty of meeting business losses will be assured when
insurance policy is purchased.

2. Enhancement of Credit- Business can obtain loan by pledging the

policy as collateral for the loan. And persons can get more loans due to
certainty of payment at their deaths. The insurance properties are the
best collateral and adequate loans are granted by the lenders.
3. Business continuation- In partnership, business may discontinue
at the death of any partner although the surviving partners can re-start the
businesses, but in both the cases the business and the partners will suffer
economically. Insurance policies provide adequate fund at the time of
death. Each partner may be insured for the amount of his interest in the
partnership and his dependents may get that amount at the death of

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 partner. With the help of property insurance, the property of the business
is protected against disasters and the chance of disclosure of the business
is reduced.
4. Welfare of Employees- The welfare of employees is the
responsibility of the employer. The former work for the latter. Therefore,
the latter has to look after the welfare of the former which can be
provision for early death, provision for disability and provision for old age.
These requirements are easily met by the life insurance, accident and
sickness benefit and pensions which are generally provided by group
insurance. The premium for group insurance is generally paid by the
employer. This plan is the cheapest form of insurance for employers to
fulfill their responsibilities. The employees will devote their maximum
capacities to complete their jobs when they are assured of the above
benefits. The struggle and strife between employees and employer can be
minimized easily with the help of such schemes.

Relevance for Society:

1. Promotes economic growth- Insurance generates significant
impact on the economy by mobilizing domestic savings. Insurance turn
accumulated capital into productive investments. Insurance enables to
mitigate loss, financial stability and promotes trade and commerce
activities those results into economic growth and development. Thus,
insurance plays a crucial role in sustainable growth of an economy.
2. Wealth of the society is protected- The loss of a particular
wealth can be protected with insurance. Life insurance provides for loss of
human wealth. Similarly, the loss of damage of property at fire, accident etc.,
can well indemnified by property insurance, cattle, crop, profit and
machines are also protected against their accidental and economical losses.
With the advancement of the society, the wealth or the property of the
society attracts more hazard and so new types of insurance are also invented
to protect them against possible losses. Through the prevention of economic
losses, insurance protects the society against degradation. Through
stabilization and expansion of business and industry, the economic security
is maximized. The present, future and potential human and the property
resources are well protected.

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 Conclusion
From the meaning, nature and relevance of insurance being written in this
project report shows that insurance is a risk covering tool which an individual
must opt. for the better of his/her own self, his/her business and for the society
as a whole.
Insurance is a risk distributer among various parties, who have opted to secure
themselves against the risks which one cannot foresee and such parties are
exposed to same kind of risk. Insurance lets the insurer pool the insureds’
money which in turn is used to reimburse the loss suffered by some of the
insured parties. Such a mechanism is what we call “Insurance”.
Insurance provides with enormous no. of benefits to various sections of the
society, various economic fields and to individuals of all kind. Such benefits can
only be fully utilized if each and every citizen of the country is covered from the
risks he is exposed to. I can be achieved by proper awareness of the insurance
schemes rolled out the government and the benefits available under such
schemes.
Therefore, considering the benefits of insurance it can play a vital role in the
upliftment of the society and nation as a whole. So, it would be better to realize
the potential which insurance holds and to use the same at the earliest.

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 Bibliography
• KALYANI PUBLISHERS - Banking and Insurance

• www.mbaknol.com

• www.yourarticlelibrary.com

• www.technofunc.com

• www.accountlearning.com

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