Professional Documents
Culture Documents
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 own
property or interest arising out of an unforeseen contingency, 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.
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.
Insurance is a social device which combines the risks of individuals into a group, using funds
contributed by members of the group to pay for losses.
--- James L. Athearn
“Insurance is a co-operative form of distribution a certain risk over a group of persons who
are exposed to it.”
--- M.K. Gehosh and A.N. Agorwala
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.
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PURPOSE OF INSURANCE
2. The fundamental purpose of insurance however is neither the spreading nor the
prevention of losses. Rather, it is reduction of the uncertainty which is caused by
awareness of the possibility of loss.
3. An insurance scheme provides certainty for the individual members of the group by
averaging loss costs. The contribution made by the individual to the group is
assumed, on the basis of predictions, to be his share of losses suffered by the
group.
In exchange for this contribution, he is assured that the group will assume any losses that
involve him. He transfers his risk to the group and averages his loss costs, thus substituting
certainty for uncertainty. He pays a certain premium instead of facing the uncertainty of
the possibility of large loss.
FUNCTION OF INSURANCE
The functions of Insurance can be bifurcated into three parts:
1. Primary Functions
2. Secondary Functions
3. Other Functions
Assessment of risk
Insurance determines the probable volume of risk by evaluating various factors that give
rise 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 is
device whereby the uncertain risks may be made more certain.
If improves efficiency
The insurance eliminates worries and miseries of loans at death and destruction of
property. The carefree person an devote his body and soul together for better
achievement. It improves not only his efficiency, but the efficiencies of the masses are also
advanced.
NATURE OF INSURANCE
Sharing of risk
Insurance is a device to share the financial losses which might be fall on an individual or his
family 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 general
insurance.
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Co-operative Device
The most important feature of every insurance plan is the co-operation of large number of
persons who, agree to share the financial loss arising due to a particular risk which is
insured. All co-operative devices, there is no compulsion here on anybody to purchase the
insurance policy.
Value of risk
The risk is evaluated before inuring to charge the amount of share of an insured, here is
called, consideration or premium. If there is expectation of more loss, higher premium may
be charged. So, the probability of loss is calculated at the time of insurance.
Payment at Contingency
The payment is made at a certain contingency insured. If the contingency occurs, payment is
made. Since the life insurance is a contract of certainty, because the contingency, the
death or the expiry of term, will certainly occur, the payment is certain.
Amount of payment
The amount of payment depends upon the value of loss occurred due to the particular
insured risk provided insurance is there up to that amount. In case of life insurance, the
insurer promises to pay a fixed sum on the happening of an even.(Either death or the expiry
of the term).
PRINCIPLE OF INSURANCE
Principles of Co-operation.
Insurance is co-operative device. If one person is providing for his own losses, it can not be
strictly an insurance because in insurance, the loss is shared by a group of persons who are
willing to co-operate. It is the duty and responsibility of the insurer to obtain adequate
funds from the members of the society to pay them at the happening of the insured risk.
Thus, the shares of loss took the form of premium. Today, all the insured give a premium to
join the scheme of insurance. Thus, the insured are co-operating to share the loss of an
individual be payment of a premium in advance.
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Principles of Probability
The loss in the shape of premium can be distributed only on the basis of theory of
probability. The chances of loss are estimated in advance to affix the amount of premium.
Since the degree of loss depends upon various factors, the affecting factors are analyzed
before determining the amount of loss. With the help of this principle, the uncertainty of
loss is converted into certainty. The insurer will have not to suffer loss as well have to gain
windfall. Therefore, the insurer has to charge only so much of amount which is adequate to
meet the loss. The probability tells what the chances of loss are and what will be the
amount of losses.
The insurance, on the basis of past experience, present conditions and future prospects,
fixes the amount of premium. Without premium, no-operation is possible and the premium
can not be calculated without the help of theory of probability, and consequently no
insurance is possible. So, these two principles are the two main legs of insurance.
Nature of Risk
In insurance, risks are existing, they may occur at any time. For example, death, old age,
fire, marine perils, accident etc; may occur at any time.
In case of gambling, the risk does not exist, it is being created for game or amusement
while one will suffer and another will gain. In absence of such game nobody will suffer. In
absence of insurance, the property owner will suffer while due to insurance, no party will
suffer.
Insurable interest
In insurance contract, insurable interest is essential. Without insurable interest, it would be
wagering contract. Thus, this principle clearly distinguishes the insurance contract from the
gambling.
USES TO INDIVIDUAL
USES TO BUSINESS
Enhancement of credit
The business can obtain loan by pledging the policies as collateral for the loan. The insured
persons are getting more loans due to certainty of payment of their deaths. The
redeemable debenture can be issued on the collateral of capital redemption. The insurance
properties are the best collateral and adequate loans are granted by the lenders.
Business continuation
In any business, particularly in partnership may discontinue at the death of any partner
although the surviving partners can restart the business but in both cases the business and
the partner will suffer economically. The insurance policies provide adequate fund at the
time of death.
Welfare of employees
The welfare of employees is the responsibility of the employer. Therefore, the latter has to
look after the welfare or the former which can be provision for early death, provision for
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disability and provision for old age. These requirements are easily met by the life insurance,
accident and sickness benefit, and pensions which are generally paid by insurance.
The employees will devote their maximum capacities for any assigned task. The struggle and
strife between employees and employer can be minimized with such schemes.
USES TO SOCIETY
Reduction in inflation:
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.