Insurance

Insurance

Insurance is nothing but a system of spreading the risk of one onto the shoulders of many.

According to M. K. Ghosh & A. N Agarwala said “Insurance is a co-operative form of

distributing a certain risk over a group of persons, who are expected to do it.

Insurance is a method or process which distributes the burden of the loss on a number of persons
within the group formed for this particular purpose.

According to Oxford Dictionary, “Insurance is a legal contract in which an insurer promise to

pay a specified amount to another party, the insured, if a particular event happens and the insured
suffer’s a financial loss as a result.

The definition of insurance can be made from two points:

• Functional definition.
• Contractual definition.

➢ Functional definition

Insurance is a co-operative device to spread the loss caused by a particular risk over a number of
persons who are exposed to it and who agree to insure themselves against the risk.

➢ Contractual Definition:

Insurance has been defined to be that in which a sum of money as a premium is paid in
consideration of the insurer’s incurring the risk of paying a large sum upon a given contingency.

From the above discuss we can write, insurance is a social device which reduces uncertainty by
spreading the economic burden of losses among members of a group who have similar risks.

Assurance

Assurance is a situation whereby people seem to certain of any outcome.

Assurance deals with certainty which means that it is relates to those situations where one can be
estimated with exact amount.

According to Business Dictionary, “Assurance is a terminology which covers the risk of

certainty.”

According to I.M. Tailors, “Assurance refers to someone feel comfortable with a decision and
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clearing his doubt,”

Insurance

Difference between life insurance and other types of insurance.

Life insurance contracts can be distinguished from other insurance contracts on the following
points:

Life Insurance Other forms of insurance

Life assurance contract is not a contract of Other forms of insurance contracts are
indemnity. contracts of indemnity.
Since life assurance contract is not a contract Other types of insurance the doctrine of
of indemnity, it is not governed by the subrogation to all rights, gains and benefits of
doctrines of subrogation. the subject matter lost.
In life insurance contract the event is bound to Other forms of insurance the event insured
occur. may not occur.
Life insurance contracts bring a combination of Other forms of insurance contracts serve as a
protection and investment. protection measures and not an investment
measures.
A life insurance contract is a valued contract In other types of insurance, the insured cannot
and the assured is paid full amount even if few recover full amount of the sum assured when
premiums are paid. his loss is more than the sum assured.
A life insurance contract is a contract for a Other types of insurance contracts are
long period. undertaken for a maximum period of one year.
Premium on life insurance contracts are In other forms of insurance contracts,
calculated on the basis of the age of the premiums are calculated on the basis of the
assured. value of the property insured.
Life insurance contracts can be surrendered Other types of insurance contracts cannot be
before maturity but after a period of 3 years. terminated by surrender of policy.

“Insurance is able to curtail inflation”- do you agree or not? Clarify your position.
or, ‘Insurance is able to curtail inflation, so it should be made compulsory’ – Comment.
Answer:

Insurance is nothing but a system of spreading the risk of one onto the shoulders of many.

The insurance reduces the inflationary pressure in two ways –

• Firstly, by extracting money in supply to the amount of premium collected.

• Secondly, by providing sufficient funds, for production narrow down the inflationary gap.

As we know the two main causes of inflation are increased money in supply and decreased
production in supply. Through collecting of insurance premium of the policy insurance reduces
money in supply and provide loan to their policy holder enhancing production supply in market
so that it can curtail inflation.
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Insurance

Classify insurance from risk point of view.

The insurance can be divided from two angles: from

➢ Business point of view

➢ The risk point of view

Business Point of View:

The insurance from business point of view can be categorized into:

(1) Life Insurance,

(2) General Insurance, and
(3) Social Insurance.

(1) Life Insurance:

Life insurance contract may be defined as the contract where by the insurer in consider of a
premium undertakes to pay a certain amount of money either on the death of the insured or on
the expiry of a fixed period.

Life Insurance is different from other insurance in the sense that the subject matter of insurance
is life of human being. The insurer will pay the fixed amount of insurance at the death or at the
expiry of certain period. At present, life insurance enjoys maximum scope because each and
every person requires the insurance.

This insurance provides protection to the family at the premature death or gives adequate amount
at the old age when earning capacities are reduced. Types of insurance plans offered in our
country:

• Term assurance plans

• Whole life plans
• Endowment assurance plans
• Assurances for children
• Family income policy
• Life annuity Joint life assurance
• Pension plans
• Policy for maintenance of handicapped dependent
• Endowment policies with health insurance benefits

(2) General Insurance:

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Insurance

The general insurance includes property insurance, liability insurance and other forms of
insurance. Fire and marine insurance comes under property insurance.

Liability insurance includes motor, theft, fidelity and machine insurances to a certain extent. The
strictest form of liability insurance is fidelity insurance whereby the insurer compensates the loss
to the insured when he is under the liability of payment to the third party. Types of insurance
policies available are:

• Health insurance
• Personal accident policy
• Group insurance policy
• Automobile insurance
• Worker’s compensation
• Liability insurance
• Aviation insurance
• Business insurance
• Fire insurance policy
• Travel insurance policy

(3) Social Insurance:

The social insurance is to provide protection to the weaker sections of the society who is unable
to pay the premium for adequate insurance. Pension plan, disability benefits, unemployment
benefits, and sickness insurance and industrial insurance are the various forms of social
insurance.

➢ Risk point of view:

1. Personal Insurance:
2. Property Insurance:
3. Liability Insurance:
4. Guarantee Insurance:

1. Personal Insurance:

The personal insurance includes insurance of human life which may suffer loss due to death,
accident and disease. Therefore, the personal insurance is further sub-classified into life
insurance, personal accident insurance and health insurance.

2. Property Insurance:

The property of an individual and of the society is insured against the loss of fire and marine
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perils, the crop is insured against unexpected decline in production, unexpected death of the
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animals engaged in business, break-down of machines and theft of the property and goods.
Insurance

3. Liability Insurance:

The liability insurance covers the risks of third party, compensation to employees, liability of the
automobile owners and reinsurance.

4. Guarantee Insurance:

The guarantee insurance covers the loss arising due to dishonesty, disappearance and disloyalty
of the employers or second. The party must be a party of the contract. His failure causes loss to
the first party. For example, in export insurance, the insurer will compensate the loss at the
failure of the importers to pay the amount of dept.

the functions of insurance

Insurance is a process in which uncertainty are made certain. Here functions of insurance is
depend on insurer.

There are two types of functions like:

a. Primary Function
b. Secondary Function

Primary Function Secondary Function

1. Reducing risk 1. Preventing Losses
2. Ensuring certainty 2. Improve efficiency
3. Distribution of risk 3. Risk research and analysis
4. Providing protection 4. Economic and social development
5. Risk Sharing 5. Creation of savings
6. Financial identity 6. Development of foreign trade

Primary Function:
The following are the primary function of insurance:

1. Reducing risk: Insurance distribute risk to many shoulder

2. Ensuring certainty: The main and first primary function is that insurance provide certainty
3. Distribution of risk: Distribution of risk is another function of insurance. The risk is
distributed by fixed amount on the insured
4. Providing protection: The works is providing protection for these certain risk and try to
remove them.
5. Risk Sharing: Insurance reducing risk which is face insurer and insurer try to reduce that.
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6. Financial identity: Insurance create finical identity

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Insurance

Secondary function:
The following are the secondary function of insurance.

1. Preventing Losses: Insurance try to prevention of loses

2. Improve efficiency: Insurance also improves all efficiency. IT is another formation of
insurance.
3. Risk research and analysis: The function is risk research and analysis them.
4. Economic and social development: Insurance e helps economic development and social
development.
5. Creation of savings: Insurance create savings.
6. Development of foreign trade: Insurance help in development of foreign trade.

Limitations on the scope of insurance.

Insurance is protection against loss. But it is covered by those factors which can be measure and
quantify. The following areas which are not covered by insurance contract.

1. Where potential loss cannot estimate accurately.

2. The insured property is relative to risky: It means those assets are more risky in
comparison with other insured property, in those case the coverage of insurance is
minimum.
3. Insured property is naturally insecure: It refers to those ensure assets which life
expectancy immensely depends on other factor.
4. When the value change dramatically: It refers to it is difficult for the insurance company
to estimate the potential loss because the value of financial assets measure on the basis
market characteristics.

Question: “Insurance is a system of spreading the loss of one into the shoulder of many”-
Interpret the statement using suitable example

Insurance is the spread of loss of one into the solder of many by the re-insurance and double
insurance.

✓ In case of re-insurance:

Re-insurance (contract) is a process of sharing distributing risk to another insurance company

which is too large for the first insurance company.

Example: Mr. Sohel enters into an insurance contract with an insurance company of Y. Since the
policy amount is significant, the insurance company distributed total potential loss amount
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different other company by reinsurance. Such mutual agreement spread on loss to different
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insurance company.
Insurance

✓ In case of double insurance:

Double insurance means purchasing more than one policy for a specific subject matter. In double
insurance the policy holder reduce the level of risk by distributing the policy among different
insurance company.

Example: Here Mr. Sohel individually arrange different insurance policy for a particular asset
and such arrangement distribute the potential loss among different insurance company according
to their proportion of sharing.

So, from the above discussion we can write, insurance is a system of spreading the loss of one
into the shoulder of many.

Nature/Characteristics/Feature/Factor of insurance

Now, in every society insurance is important, principles of insurance are based upon some point.
These points are

1. Principles of insurance interest

2. Principles of fiduciary relationship
3. Principles of financial indemnity
4. Principles of good faith
5. Principles of Cause proximity
6. Principles of proportion contribution
7. Principles of subrogation
8. Principles of profitability
9. Principles of taking optimum risk
10. Principles of quick response

1. Principles of insurance interest:

There must be interest on insurance, and then insurance contract will be done.
2. Principles of fiduciary relationship:
Insurance contract must be done between insurer and insured
3. Principles of financial indemnity
Insurance is principles of financial indemnity. Insurance company barrier the all risk.
4. Principles of good faith
There must have utmost good faith of all insurer and insurer.
5. Principles of Cause proximity:
If there is any loss then the company must barrier all risk.
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6. Principles of proportion contribution:

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Insurance

It is important principles of insurance. if there is any losses, and then all losses are
proportionate contribution all the member.
7. Principles of subrogation:
It is another important principle of insurance
8. Principles of profitability:
In some insurance insured get profit from the insurance e company.
9. Principles of taking optimum risk:
Insurance business another principle is taking optimum risk.
10. Principles of quick response:
Insurance company will response quickly it is another principles of insurance.

Objectives of insurance:

Insurer and insured are two sides and they both have objectives. The objectives are given bellow.

a. Objectives of the policy holder Objectives of the insurer

1. Earning financial security 1. Livelihood
2. Achieving mental peace 2. Increasing profit
3. Gaining saving facility 3. Formation of capital
4. Reducing risk 4. Economic growth
5. Achieving profit 5. Creating employment
6. Capital formation 6. Providing social security
7. Obtaining security in old age 7. Assistance of industry
8. Helps on bringing up children 8. Avoiding the hindrances of risk
9. Showing due respect to govt. rules 9. Plays the roles of saving of the helpless
10. Enhance social status
11. Reducing dependency

A. Objectives of the Policy holders/ Insured

1. Earning financial security
The first and main objectives of the policy holder are earning profit.
2. Achieving mental peace:
Achieving mental peace is another objective of insurance
3. Gaining saving facility:
These objectives are done for life insurance.
4. Reducing risk
Insured or policy holder life and assets risk are reduced by insurance
5. Achieving profit
Sometime insured involved in insurance for achieving profit.
6. Capital formation:
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Capital formation is another objective of policy holder.

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7. Obtaining security in old age:

Insurance helps for security in old age.
8. Helps on bringing up children
Today insurance is used for help in bringing up children
9. Showing due respect to govt. rules
An insurance important objective is showing respect to govt. rules.
10. Enhance social status
Insurance enhance the social dignity
11. Reducing dependency
Policy holder and insured finally get financial security from insurance company or insurer

B. Objectives of the Insurer

1. Livelihood:
Now insurance is one of the important businesses of all society
2. Increasing profit:
Main objectives of the insurer are increasing profit.
3. Formation of capital
Insurer anther objective is formation of personal and national capital
4. Economic growth
Insurance change his or her capital an increasing economic growth by development of trade
and commerce.
5. Creating employment
Insurer another objectives is creating employment by their own successful business
6. Providing social security
Insurance increase social security by insured or policy holder life and their assets of financial
security
7. Assistance of industry
The objective of insurer is assistance to industry and commerce.
8. Avoiding the hindrances of risk
It is important for business to avoid the hindrances of the risk.
9. Plays the roles of saving of the helpless:
Insurer plays the role of saving of the helpless
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