CHAPTER 1

INTRODUCTION TO INSURANCE
Chapter Introduction
Insurance, through the ages, has been used as a mechanism whereby the insurer organizes the
process by which the unfortunate few, who suffer losses, share the burden with many who are
exposed to risk of similar losses. Such burden would include the primary burden of direct
losses like damage due to fire and indirect losses like loss of production following such
damage. It also includes secondary burden like physical and mental strain caused by anxiety
of probable losses and the cost of maintaining reserves to mitigate such losses, if they occur.
Thus we face risk in our everyday life and learn to manage these risks, so as to mitigate our
losses.
Risks are managed through
a) Avoidance: doing away with the very activity that is risk prone,
b) Retention: keeping the risk on ones own account,
c) reduction and control through loss prevention, financing by creating reserves or
d) Risk transfer: where risk is transferred to some other entity.
Insurance is the best risk transfer methodology.
The cost of risk is based on the factors of probability and impact of the perils occurring and
causing loss.
Insurance activity is advantageous as it facilitates economic growth by investing the premium
funds, by protecting individuals, industry and commerce, community and nation from
economic impact of losses, removing anxiety of losses and promotes investment.
IC 34 Workbook
Insurance Institute of India Page 7

Cases
1. Mr. Singh has insured his house for fire from 09.11.2012 to 08.11.2013. He sent his
renewal cheque dated 8.11.2013 by courier on 10.11.2013. It was received by the
insurance company on 14.11.2013. The insurance company issued a receipt on the
same day with a condition subject to realization of cheque. There was a fire on
9.11.2013 which destroyed Mr. Singhs house. Is the insurance company liable to pay
the claim? Please give reasons for your answer.
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------2. Mr. Ahuja has several pieces of expensive electronic equipment in his office but has
not been insuring them since he feels the premium is very high. In what ways can he
handle the risk of their destruction?
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------3. Mr. Suresh Verma maintains regular habits, does not smoke or drink, exercises
regularly, eats moderately and nutritive food avoiding junk food, etc. He maintains he
does not need health insurance because of his robust health. Do you agree with him?
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---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------4. Mr. Srinivasan is convinced that insurance is irrational because while the insurance
rate for the fire & special perils policy for his house is just about Rs. 50/- per lac, the
rate for his factory building is Rs. 500/- per lac. After all, when both are buildings
constructed of RCC, why should there be such high premium for his factory building?
What would be your answer to Mr. Srinivasan?
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