Introduction of Insurance

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INSURANCE

Insurance is nothing but a system of spreading the risk of one onto the shoulders of many.Whilst it becomes somewhat impossible for a man to bear by himself 100% loss to his ownproperty or interest arising out of an unforeseen contingency, insurance is a method orprocess which distributes the burden of the loss on a number of persons within the groupformed for this particular purpose.The definition of insurance can be made from two points:

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Functional definition.

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Contractual definition.

Functional definition

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

Contractual definition

Insurance has been defined to be that in which a sum of money as a premium is paid inconsideration of the insurer’s incurring the risk of paying a large sum upon a givencontingency.Insurance is a social device which combines the risks of individuals into a group, using fundscontributed by members of the group to pay for losses.---

James L. Athearn

“Insurance is a legal contract in which an insurer promise to pay a specified amount toanother party, the insured, if a particular event happens and the insured suffers a financialloss as a result.---

Oxford Dictionary

“Insurance is a promise by an insurer to an insured of protection and/or service.”---

Mowbray and Blacnchard

“Insurance is a co-operative form of distribution a certain risk over a group of persons whoare exposed to it.”---

M.K. Gehosh and A.N. Agorwala

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

PURPOSE OF INSURANCE

1.Insurance spreads the economic burden of losses by using funds contributed bymembers of the group to pay for them. Thus, it is a loss spreading device.

The fundamental purpose of insurance however is neither the spreading nor theprevention of losses. Rather, it is reduction of the uncertainty which is caused byawareness of the possibility of loss.3.An insurance scheme provides certainty for the individual members of the group byaveraging loss costs. The contribution made by the individual to the group isassumed, on the basis of predictions, to be his share of losses suffered by thegroup.In exchange for this contribution, he is assured that the group will assume any losses thatinvolve him. He transfers his risk to the group and averages his loss costs, thus substitutingcertainty for uncertainty. He pays a certain premium instead of facing the uncertainty ofthe possibility of large loss.

FUNCTION OF INSURANCE

The functions of Insurance can be bifurcated into three parts:1. Primary Functions2. Secondary Functions3. Other FunctionsThe primary functions of insurance include the following:

Provide Protection

The primary function of insurance is to provide protection against future risk, accidents anduncertainty. Insurance cannot check the happening of the risk, but can certainly provide forthe losses of risk.

Collective bearing of risk

Insurance is a mean by which few losses are shared among larger number of people. All theinsured contribute the premiums towards a fund and out of which the persons exposed to aparticular risk is paid.

Assessment of risk

Insurance determines the probable volume of risk by evaluating various factors that giverise to risk. Risk is the basis for determining the premium rate also

Provide Certainty

Insurance is a device, which helps to change from uncertainty to certainty. Insurance isdevice whereby the uncertain risks may be made more certain.

Research and publicity

Insurers also spend money in research and publicity in creating risk consciousness amongstwhich has a far reaching effect on reduction in national waste.

The secondary functions of insurance include the following:

Prevention of Losses

Prevention of losses causes lesser payment to the assured by the insurer and this willencourage for more savings by way of premium. Reduced rate of premiums stimulate formore business and better protection to the insured.

Small capital to cover larger risks

Insurance relieves the businessmen from security investments, by paying small amount ofpremium against larger risks and uncertainty.

Contributes towards the development of larger industries

Insurance provides development opportunity to those larger industries having more risks intheir setting up. Even the financial institutions may be prepared to give credit to sickindustrial units which have insured their assets including plant and machinery.

If improves efficiency

The insurance eliminates worries and miseries of loans at death and destruction ofproperty. The carefree person an devote his body and soul together for betterachievement. It improves not only his efficiency, but the efficiencies of the masses are alsoadvanced.

It helps economic progress

The insurance by protecting the society from huge losses of damage, destruction and death,provides an initiative to work hard for the betterment of the masses. The next factor ofeconomic progress. The capital is also immensely provided by the masses. The property, thevaluable assets, the man, the machine and the society cannot lose much at the disaster.The other functions of insurance include the following:

Means of savings and investment

Insurance serves as savings and investment, insurance is a compulsory way of savings and itrestricts the unnecessary expenses by the insured's For the purpose of availing income-taxexemptions also, people invest in insurance.

Source of earning foreign exchange

Insurance is an international business. The country can earn foreign exchange by way ofissue of marine insurance policies and various other ways.

Risk Free trade

Insurance promotes exports insurance, which makes the foreign trade risk free with thehelp of different types of policies under marine insurance cover.

NATURE OF INSURANCE

Sharing of risk

Insurance is a device to share the financial losses which might be fall on an individual or hisfamily on the happening of specified event. The event may be death, incase of life insurance,marine perils, marine insurance, fire in fire insurance and other certain events in generalinsurance.