INSURANCE
INSURANCE
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 everyone shares the risk. In fact, insurance companies bear risk in return for a payment of premium, which is calculated on the likelihood of loss.
In this lesson, you will learn Insurance, its various kinds, premium calculation, calculation of paid-up/surrender value etc in details.
After studying this lesson, you will be able to:
- defines insurance and its significance;
- define various kinds of insurance-General Insurance
- Life Insurance; explain the scope of insurance;
- define various schemes (Group Insurance scheme, Retirement scheme etc.) and policies of insurances;
- calculate premiums of various types of insurance;
- calculate the age of life to be assured;
- calculate actual premium, and calculate paid up/surrender value keeping policy enforce.
EXPECTED BACKGROUND KNOWLEDGE
- Percentage and its application
WHAT IS INSURANCE?
Insurance is a tool by which fatalities of a small number are compensated out of funds collected from the insured. Insurance companies pay back for financial losses arising out of occurrence of insured events, e.g. in personal accident policy the insured event is death due to the accident, in fire policy, the insured events are fire and other natural calamities. Hence, insurance is a safeguard against uncertainties. It provides financial recompense for losses suffered due to an incident of unanticipated events, insured within the policy of insurance.
Insurance, essentially, is an arrangement where the losses experimented by a few are extended over several who are exposed to similar risks. Insurance is a protection against financial loss arising on the happening of an unexpected event. An individual who wants to cover risk pays a small amount of money to an organization called on Insurance Company and gets insured.
An insurance company insures different people by collecting a small amount of money from each one of them and collectively this money is enough to compensate or cover the loss that some members may suffer
The fixed amount of money paid by the insured to the insurance company regularly is called premium. Insurance company collects premium to provide security for the purpose. Insurance is an agreement or a contract between the insured and the Insurance Company (Insurer).
NATURE OF INSURANCE
On the basis of the definition of insurance discussed above, one can observe its following characteristics:
Risk Sharing and Risk Transfer
Insurance is a mechanism adapted to share the financial losses that might occur to an individual or his family on the happening of a specified event. The event may be the death of earning member of the family in the case of life insurance, marine-perils in marine insurance, fire in fire insurance and other certain events in miscellaneous insurance, e.g., theft in burglary insurance, accident in motor insurance, etc. The loss arising from these events are shared by all the insured in the form of premium. Hence, the risk is transferred from one individual to a group.
Co-operative Device
Insurance is a cooperative device under which a group of persons who agree to share the financial loss may be brought together voluntarily or through publicity or through solicitations of the agents. An insurer would be unable to compensate all the losses from his own capital. So, by ensuring a large number of persons, he is able to pay the amount of loss.
Example of insurance
BRIEF HISTORY OF INSURANCE
Marine insurance is the oldest form of insurance followed by life insurance and fire insurance. The history of insurance can be traced back to early civilization.
As civilization progressed, the incidence of losses started increasing giving rise to the concept of loss sharing. The Aryans through their village co-operatives practised loss of profit insurance.
The code of Manu indicates that there was a practice of marine insurance carried out by the traders in India with those of Sri Lanka, Egypt and Greece.
The earliest transaction of insurance as practised today can be traced back to the 14th century A.D. in Italy when the ship was only being covered. This practice of Marine Insurance gradually spread to London during the 16th century.
The history of Marine Insurance is closely linked with the origin and rise of Lloyd’s shipowners. Marine traders, who used to gather at Lloyd’s coffee house in London, agree to share losses to goods during transportation by ship.
Marine-related losses included:
- Loss of ship by sinking due to bad weather
- Goods in transit by ship robbed by sea pirates
- Loss or damage to the goods in transit by ship due to bad weather in high sea.
The Lloyd’s Act was framed to set up the Lloyd’s by whom they were empowered to transact other classes of Insurance. Today, Lloyd’s is regarded as the largest insurance underwriter in the world. The first insurance policy was issued in England in 1583.
TYPES OF INSURANCE
Insurance occupies an important place in the modern world because the risk, which can be insured, have increased in number and extent owing to the growing complexity of the present-day economic system. It plays a vital role in the life of every citizen and has developed on an enormous scale leading to the evolution of many different types of insurance.
In fact, now a day almost any risk can be made the subject matter of the contract of insurance. The different types of insurance have come about by practice within insurance companies, and by the influence of legislation controlling the transacting of the insurance business. Broadly, insurance may be classified into the following categories:
(1) Classification on the basis of nature of insurance
(a) Life Insurance (b) Fire Insurance (c) Marine Insurance (d) Social Insurance (e) Miscellaneous Insurance
(2) Classification from a business point of view:
(a) Life Insurance (b) General Insurance
(3) Classification from a risk point of view:
(a) Personal Insurance (b) Property Insurance (c) Liability Insurance (d) Fidelity Guarantee Insurance (Car and Motor Insurance)
However, in the present lesson, we will discuss insurance in a business point of view, personal insurance and property insurance.
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