INTRODUCTION TO INSURANCE

The life and property of an individual and enterprise are open to various
risks and in varying degrees.

 Premature death of the bread-winner of the family

 Destruction of house by fire
 Accident of vehicle
 Destruction of ship by sea perils
 Sudden hospitalization of self &/ family members

Insurance is a mechanism, which helps to reduce, the financial effects of

adverse situations.

 Insurance is a source of peace of mind.

 Insurance accelerates the process of economic growth.
 Insurance is a credit enhancer.
 Insurance provides protection against risk, but does not eliminate risk.
 Insurance does not avert risk but only the loss is minimised.
 DEFINITION OF INSURANCE

Insurance is a form of contract under which one party agrees in return for a
consideration pay an agreed amount of money to another party to make good a
loss, damage, or injury, to something of value in which the insured has a
pecuniary interest as a result of some uncertain event.

 ‘Insurance is a contract by which one party, for a compensation called the

premium, assumes particular risks of another party and promises to pay to
him or his nominee a certain ascertainable sum of money on a specified
contingency’. – E.W. Patterson
 ‘Insurance is social device for reducing risk by combining a sufficient
number of exposure units to make their individual losses collectively
predictable. The predictable loss is then shared proportionately by all those
in combination’ – Prof. Robert Mehr
 “Insurance is a social device whereby uncertain risk of individuals may be
combined in a group and thus made more certain, small periodic
contributions by individuals providing funds out of which those who suffer
losses may be reimbursed.”- Riegel R. and Miller J.S

Thus, insurance is a contract, represented by a policy, in which an individual

or entity receives financial protection or reimbursement against losses from
an insurance company. The insurance company pools clients’ risk to make
payments more affordable for the insured.
 CHARACTERSTICS OF INSURANCE

 It is a risk transferring mechanism.

 It does not avoid the risk of loss or damage that a company or an individual
may suffer but provides a protection against such loss.
 It is a cooperative device as all policy holders pool their risks together.
 The insurer is in the position of a trustee as it is managing the common
fund, for and on behalf of the community of policyholders.
 Risk of few people is spread over a large number of people.
 Premium is charged on the volume of risk.
 It is a service function.
 Insurance companies guarantees to indemnify the person as per the terms
of contract.
 Sometimes insurance may be a mandatory requirement as in the case of
fire insurance and motor insurance.
 It is different from gambling.
 Gambling creates risk while insurance transfers an existing risk.
 Gambling deals with speculative risk-there might be gains or losses,
while insurance deals with pure risk.
 It is not a charity.
 It is a contract of indemnity.
 It is based on utmost good faith.
 Essentials of a valid contract are there in insurance contract.
 ORIGIN AND EVOLUTION OF INSURANCE

Life Insurance

 The contexts of insurance are available in Manusmriti, Dharmashastra and

Arthashastra.
 The modern concept of insurance in India started with the establishment of
East India Company in 18th century.
 First insurance company was established in Calcutta in 1818 was the
Oriental Life Insurance Company.
 In 1823, Bombay Life Insurance started its business.
 In 1829, Madras Equitable Company came into existence.
 In 1870, British Parliament enacted Insurance Act.
 Bombay Mutual Life Assurance Society was established and became the
first Indian life Insurance company in India.
 In 1912, Government enacted the Indian Life Insurance Companies Act.
 In 1956, the Government of India issued a notification nationalisation of
insurance companies. LIC of India came into existence by merging 245
Indian and foreign insurers.
 In 1990, foreign insurance companies were allowed to carry business in
India on liberalization of Indian economy.
 In 2000, the Insurance Regulatory and Development Authority of India
(IRDAI) was established.

General Insurance

 In 1850, the first company established by Britishers (Triton Insurance) in

Calcutta started General Insurance business.
 In 1907, Indian Mercantile Insurance limited was setup to transact all
type of general insurance business.
 In 1957, the General Insurance Council was setup for ensuring fair
conduct of business and adopting sound business practices.
 In 1968, the Insurance Act was amended to regulate investments and to
set minimum solvency margins.
 In 1972, the general insurance was nationalized and General Insurance
Corporation (GIC) was setup.
 In 1972, all the companies were amalgamated into four companies –
 National Insurance Company Limited
 New India Assurance Company Limited
 Oriental Insurance Company Limited
 United India Insurance Company Limited.
 In 2000, the IRDA was established which opened the market for
private players like Life Insurance, foreign companies were allowed
ownership up to 26%. Now FDI on insurance sector has been
increased to 49%
 The 4 companies which were working as subsidiaries of GIC were re
structured as independent companies.
 HOW INSURANCE WORKS?

 Insurance is a risk transfer mechanism in which the risk of few people is

spread over a large number of people who have joined the similar nature of
plan.

 If the number is large, the company will be able to spread the risk of loss
over the large number of persons and the likely big impact on one is
reduced to smaller manageable impacts on all. Thus, the insurance
company will be able to earn profits.

Example: In a village, there are 400 houses, each valued at Rs.20,000. Every year,
on an average, 4 houses get burnt, resulting into a total loss of Rs.80,000. If all the
400 owners come together and contribute Rs.200 each, the common fund would
be Rs.80,000. This would be enough to pay Rs.20,000 to each of the 4 owners
whose houses got burnt. Thus, the loss of Rs.20,000 each of 4 owners is shared by
400 house-owners of the village, bearing Rs.200 each. This works out to 1% of the
value of the house, which is the same as the probability of risk (4 out of 400
houses)

Thus, insurance means loss of a few, shared by many.

 BASIC CONCEPTS OF INSURANCE

1. Insurance: It is a contract that transfers of risks of financial loss from an

individual or business entity to an insurance company.
2. Insurer: The insurance company who indemnify the person.
3. Insured: The person whose risk is undertaken by the Insurance Company.
4. Premium: It is the fee charged by Insurance Company for undertaking the
risk.
5. Beneficiary: The person who receives the benefits from the policy of the
insurance.
6. Policy: It is the document containing terms and conditions of the contract
of insurance.
7. Sum Assured: It is the amount for which insurance policy is taken.
8. Surrender Value: It is the present cash value of the policy. It is the amount
payable to the holder of a whole life insurance policy if the policy is
cancelled.
9. Double insurance: It is to take more than one insurance policy to cover the
same risk.
10. Re-Insurance: when an insurance company finds that the risk it has
undertaken is too much for it; it may get itself insured with some another
insurance company.
11. Under Insurance: when the sum insured of the insurance policy is not
enough to cover the loss in full.
12. Co-Insurance: It refers to the percentage of treatment costs that the
insured have to bear after paying the deductibles. This amount is generally
offered as a fixed percentage. It is similar to the copayment provision under
health insurance.
 CLASSIFICATION OF INSURANCE BUSINESS

1. Life Insurance (Life assurance , protection and investment)

2. Non- Life insurance/General Insurance (Protection and indemnity)
i. Fire Insurance
ii. Motor Insurance
iii. Marine Insurance
iv. Health Insurance
v. Fidelity Insurance
vi. Livestock Insurance
vii. Crop Insurance
viii. Burglary Insurance
ix. Credit Insurance
x. Travel Insurance
xi. Workmen Compensation Insurance