Insurance:

1.An arrangement by which a company or the state undertakes to provide a guarantee of

compensation for specified loss, damage, illness, or death in return for payment of a specified
premium.
2.Insurance is a contract, represented by a policy, in which an individual or entity receives
financial protection or reimbursement against losses from an insurance company
3. Insurance refers to a contractual arrangement in which one party, i.e. insurance company
or the insurer, agrees to compensate the loss or damage sustained to another party, i.e. the
insured, by paying a definite amount, in exchange for an adequate consideration called as
premium.

Nature of Insurance:
1. By nature insurance is a devise of sharing risk by large number of people among the few
who are exposed to risk by one or the other reason.

2. If a large number of subscribers to insurance serve the purpose of compensation to few

among them exposed to uncertain risks appears as a co-operative look.

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3. Valuation of risk is determined as per predefined terms and conditions of the insurance
policies.

4. Insurance provides facility of financial help in case of contingency.

5. However it depends on the value of insurance for which payment is made in case of
contingency. This provides basis of the amount to be paid.

6. Insurance is a policy regulated under laws and therefore the amount of insurance can
neither be paid as gambling nor as charity.

Difference between, an insurer and insured?

An Insured is a person who is the buyer of the insurance policy. An insured is the proposer of
the policy who pays premium as the consideration to the insurance company. Insured
purchases the insurance policies to safeguard the assets from the financial consequences of
losses or damage that occur from insured peril

An Insurer is a company who sells the insurance policies. Insurer is the one who bears the risk
in return for consideration which is known as premium. Insurer agrees to pay to the insured
a certain sum of money if the insured peril occurs so that it is possible to continue the benefits
What Is an Insurance Premium?
An insurance premium is the amount of money an individual or business pays for an insurance
policy. Insurance premiums are paid for policies that cover healthcare, auto, home, life, and
others.

Once earned, the premium is income for the insurance company. It also represents a liability,
as the insurer must provide coverage for claims being made against the policy. Failure to pay
the premium may result in the cancellation of the policy.

KEY TAKEAWAYS:

• An insurance premium is the amount of money an individual or business must pay for
an insurance policy.
• Insurance premiums are paid for policies that cover healthcare, auto, home, life, and
others.
• Insurance premiums may increase after the policy period ends.

Understanding Insurance Premiums:

When you sign up for an insurance policy, your insurer will charge you a premium. This is the
amount you pay for the policy or the total cost of your insurance. Policyholders may choose
from a number of options for paying their insurance premiums. Some insurers allow the
policyholder to pay the insurance premium in installments—monthly or semi-annually—while
others may require an upfront payment in full before coverage starts.

There may be additional charges payable to the insurer on top of the premium including taxes
or services fees.

The price of the premium depends on a variety of factors including:

• The type of coverage

• Your age
• The area in which you live
• Any claims filed in the past
• Moral hazard and adverse selection
The History of Insurance:
The main concept of insurance—that of spreading risk among many—has been around as long
as human existence. Whether it was hunting giant elk in a group to spread the risk of being
the one gored to death or shipping cargo in several different caravans to avoid losing the
whole shipment to a marauding tribe, people have always been wary of risk.

KEY TAKEAWAYS

1. The first written insurance policy was found on an ancient Babylonian monument.
2. In the Dark and Middle Ages, the guild system emerged—members paying into a larger
pool that covered total loss.
3. Later, in the 1600s, voyages to the New World would secure multiple investors in each
voyage to spread the risk around.
4. After the fire of London destroyed a large portion of the city in 1666, fire insurance
became available.
5. While insurance was common in Europe at the time, the first insurance in America
didn't come around until the 1750s.

The Role and Importance of Insurance:

Insurance contributes a lot to the general economic growth of the society by provides stability
to the functioning of process. The insurance industries develop financial institutions and
reduce uncertainties by improving financial resources.
1. Provide safety and security:
Insurance provide financial support and reduce uncertainties in business and human life. It
provides safety and security against particular event. There is always a fear of sudden loss.
Insurance provides a cover against any sudden loss. For example, in case of life insurance
financial assistance is provided to the family of the insured on his death. In case of other
insurance security is provided against the loss due to fire, marine, accidents etc.
2. Generates financial resources:
Insurance generate funds by collecting premium. These funds are invested in government
securities and stock. These funds are gainfully employed in industrial development of a
country for generating more funds and utilized for the economic development of the country.
Employment opportunities are increased by big investments leading to capital formation.
3. Life insurance encourages savings:
Insurance does not only protect against risks and uncertainties, but also provides an
investment channel too. Life insurance enables systematic savings due to payment of regular
premium. Life insurance provides a mode of investment. It develops a habit of saving money
by paying premium. The insured get the lump sum amount at the maturity of the contract.
Thus life insurance encourages savings.
4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing domestic savings.
Insurance turn accumulated capital into productive investments. Insurance enables to
mitigate loss, financial stability and promotes trade and commerce activities those results into
economic growth and development. Thus, insurance plays a crucial role in sustainable growth
of an economy.
5. Medical support:
A medical insurance considered essential in managing risk in health. Anyone can be a victim
of critical illness unexpectedly. And rising medical expense is of great concern. Medical
Insurance is one of the insurance policies that cater for different type of health risks. The
insured gets a medical support in case of medical insurance policy.

6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of
insurance is to spread risk among a large number of people. A large number of persons get
insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated
out of funds of the insurer.
7. Source of collecting funds:
Large funds are collected by the way of premium. These funds are utilized in the industrial
development of a country, which accelerates the economic growth. Employment
opportunities are increased by such big investments. Thus, insurance has become an
important source of capital formation.

The social value of insurance:

Though insurance products are provided in a commercial context, both for individuals and for
corporate customers, they clearly serve a wider purpose. Insurance helps oil the engine of the
economy, for example in underwriting trade through trade credit. It also provides peace of
mind to the public through collective insurance for a host of perils including flood, fire, and
health. In short, the economy and society as a whole benefits from the certainty insurance
brings through (to quote our first paper in this series):

1. Efficiently protecting the public through innovative risk management techniques.

2. Freeing up businesses and professionals from everyday risks and encouraging
innovation and competition.
3. Relieving the burden from the state and providing comfort to individuals by providing
safe, effective and affordable pension savings, protection and de-cumulation products
that convert pension savings into retirement income.
These are just some of the areas where insurance contributes to society. As the professional
body for the insurance sector dedicated to protecting the public, the Chartered Insurance
Institute is looking at various aspects of the social role that insurance plays. We thought this
might be helpfully brought to life with a series of short papers considering this concept in
greater detail, setting out the purpose, which is often intangible, of insurance and the benefits
it brings and risks it mitigates. Insurance is vital. Just imagine a world without it.

8 Types of Insurance Organizations:

1. Self-Insurance

The plan by which an individual or concern sets up a private fund out of which to pay losses
is termed “self-insurance”. The person lays aside periodically certain sum to meet the losses
of any contemplated risk.

2. Individual Insurer

An individual like other business can perform the business of insurer provided he has
sufficient resources and talent of the insurance business. The individual organization has been
rare in the field of insurance.

3. Partnership

A partnership firm can also carry on the insurance business for the sake of profit. Since it is
not an entity distinct from the persons composing it, the personal liability of partners in
respect of the partnership debts is unlimited.

4. Joint Stock Companies

The joint stock companies are those which are organized by the shareholders who subscribe
the necessary capital to start the business, are formed for earning profits for the stockholders
who are the real owners of the companies. The management of a company is entrusted to a
board of directors who are elected by the shareholders from among themselves.

5. Mutual Companies

The mutual companies were co-operative associations formed for the purpose of effecting
insurance on the property of its members. The policy-holders were themselves the
shareholders of the companies, each member was insurer as well as insured.

6. Co-Operative Insurance Organization

Co-operative insurance organizations are those concerns which are incorporated and
registered under co-operative societies act. The concerns are also called ‘co-operative
insurance societies’.

7. Lloyd’s Association

Lloyd’s association is one of the greatest insurance institutions in the world. Taking its name
from the coffee house of Edward Lloyd; where underwriters assembled to transact business
and pick-up news, the organization traces its origin to the latter part of the seventeenth
century. So, it is the oldest insurance organization in existing form in the world.

8. State Insurance

The government of a nation sometimes owns the insurance and runs the business for the
benefit of the public. The state insurance is defined as that insurance which is under the public
sector put; more specifically it can be stated that when governments have taken over the
insurance business particularly life insurance.

Types of Insurance:

1.Life Insurance or personal Insurance:

Life Insurance is different from other insurance in the sense that, here, the subject matter of
insurance is the life of a human being. The insurer will pay the fixed amount of insurance at
the time of death or at the expiry of a certain period. At present, life insurance enjoys
maximum scope because life is the most important property of an individual.

2.Property Insurance

Under the property insurance property of person/persons are insured against a certain
specified risk. The risk may be fire or marine perils, theft of property or goods damage to
property at the accident.

3.Marine Insurance

Marine insurance provides protection against the loss of marine perils. The marine perils are;
collision with a rock or ship, attacks by enemies, fire, and captured by pirates, etc. these perils
cause damage, destruction or disappearance of the ship and cargo and non-payment of
freight. So, marine insurance insures ship (Hull), cargo and freight.
4.Fire Insurance:

Fire Insurance covers the risk of fire. In the absence of fire insurance, the fire waste will
increase not only to the individual but to the society as well. With the help of fire insurance,
the losses arising due to fire are compensated and the society is not losing much

5.Liability Insurance

The general Insurance also includes liability insurance whereby the insured is liable to pay the
damage of property or to compensate for the loss of persona; injury or death. This insurance
is seen in the form of fidelity insurance, automobile insurance, and machine insurance, etc.

6.Social Insurance

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

7.Guarantee Insurance

The guarantee insurance covers the loss arising due to dishonesty, disappearance, and
disloyalty of the employees or second party. The party must be a party to 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 debt.

Structure or Main Business Model for Insurance

Companies:

Insurance companies base their business models around assuming and diversifying risk. The
essential insurance model involves pooling risk from individual payers and redistributing it
across a larger portfolio. Most insurance companies generate revenue in two ways: Charging
premiums in exchange for insurance coverage, then reinvesting those premiums into other
interest-generating assets. Like all private businesses, insurance companies try to market
effectively and minimize administrative costs.

Pricing and Assuming Risk:

Revenue model specifics vary among health insurance companies, property insurance
companies, and financial guarantors. The first task of any insurer, however, is to price risk and
charge a premium for assuming it. Suppose the insurance company is offering a policy with a
$100,000 conditional payout. It needs to assess how likely a prospective buyer is to trigger
the conditional payment and extend that risk based on the length of the policy. This is where
insurance underwriting is critical. Without good underwriting, the insurance company would
charge some customers too much and others too little for assuming risk. This could price out
the least risky customers, eventually causing rates to increase even further. If a company
prices its risk effectively, it should bring in more revenue in premiums than it spends on
conditional payouts.

Interest Earnings and Revenue:

Suppose the insurance company receives $1 million in premiums for its policies. It could hold
onto the money in cash or place it into a savings account, but that is not very efficient: At the
very least, those savings are going to be exposed to inflation risk. Instead, the company can
find safe, short-term assets to invest its funds. This generates additional interest revenue for
the company while it waits for possible payouts. Common instruments of this type
include Treasury bonds, high-grade corporate bonds, and interest-bearing cash equivalents.1

Reinsurance:
Some companies engage in reinsurance to reduce risk. Reinsurance is insurance that
insurance companies buy to protect themselves from excessive losses due to high exposure.
Reinsurance is an integral component of insurance companies' efforts to keep
themselves solvent and to avoid default due to payouts, and regulators mandate it for
companies of a certain size and type.For example, an insurance company may write too much
hurricane insurance, based on models that show low chances of a hurricane inflicting a
geographic area. If the inconceivable did happen with a hurricane hitting that region,
considerable losses for the insurance company could ensue. Without reinsurance taking some
of the risks off the table, insurance companies could go out of business whenever a natural
disaster hits.

Regulators mandate that an insurance company must only issue a policy with a cap of 10% of
its value unless it is reinsured. Thus, reinsurance allows insurance companies to be more
aggressive in winning market share, as they can transfer risks. Additionally, reinsurance
smooths out the natural fluctuations of insurance companies, which can see significant
deviations in profits and losses.

Evaluating Insurers:

By smoothing out the fluctuations of the business, reinsurance makes the entire insurance
sector more appropriate for investors.

Insurance sector companies, like any other non-financial service, are evaluated based on their
profitability, expected growth, payout, and risk. But there are also issues specific to the sector.
Since insurance companies do not make investments in fixed assets, little depreciation and
very small capital expenditures are recorded. Also, calculating the insurer's working capital is
a challenging exercise since there are no typical working capital accounts. Analysts do not use
metrics involving firm and enterprise values; instead, they focus on equity metrics, such
as price-to-earnings (P/E) and price-to-book (P/B) ratios. Analysts perform ratio analysis by
calculating insurance-specific ratios to evaluate the companies.
7 Most Important Principles of Insurance:
1. Nature of contract:
Nature of contract is a fundamental principle of insurance contract. An insurance contract
comes into existence when one party makes an offer or proposal of a contract and the other
party accepts the proposal. A contract should be simple to be a valid contract. The person
entering into a contract should enter with his free consent.

2. Principal of utmost good faith:

Under this insurance contract both the parties should have faith over each other. As a client
it is the duty of the insured to disclose all the facts to the insurance company. Any fraud or
misrepresentation of facts can result into cancellation of the contract.

3. Principle of Insurable interest:

Under this principle of insurance, the insured must have interest in the subject matter of the
insurance. Absence of insurance makes the contract null and void. If there is no insurable
interest, an insurance company will not issue a policy. An insurable interest must exist at the
time of the purchase of the insurance. For example, a creditor has an insurable interest in the
life of a debtor, A person is considered to have an unlimited interest in the life of their spouse
etc.

4. Principle of indemnity:
Indemnity means security or compensation against loss or damage. The principle of indemnity
is such principle of insurance stating that an insured may not be compensated by the
insurance company in an amount exceeding the insured’s economic loss. In type of insurance
the insured would be compensation with the amount equivalent to the actual loss and not
the amount exceeding the loss. This is a regulatory principal. This principle is observed more
strictly in property insurance than in life insurance. The purpose of this principle is to set back
the insured to the same financial position that existed before the loss or damage occurred.

5. Principal of subrogation:
The principle of subrogation enables the insured to claim the amount from the third party
responsible for the loss. It allows the insurer to pursue legal methods to recover the amount
of loss, For example, if you get injured in a road accident, due to reckless driving of a third
party, the insurance company will compensate your loss and will also sue the third party to
recover the money paid as claim.

6. Double insurance:

Double insurance denotes insurance of same subject matter with two different companies or
with the same company under two different policies. Insurance is possible in case of
indemnity contract like fire, marine and property insurance. Double insurance policy is
adopted where the financial position of the insurer is doubtful. The insured cannot recover
more than the actual loss and cannot claim the whole amount from both the insurers.

7. Principle of proximate cause:

Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is
applicable when the loss is the result of two or more causes. The proximate cause means; the
most dominant and most effective cause of loss is considered. This principle is applicable
when there are series of causes of damage or loss.

Insurance Contracts:
An insurance contract is a document representing the agreement between an insurance
company and the insured. Central to any insurance contract is the insuring agreement,
which specifies the risks that are covered, the limits of the policy, and the term of the
policy. Additionally, all insurance contracts specify:

• conditions, which are requirements of the insured, such as

paying the premium or reporting a loss;
• limitations, which specify the limits of the policy, such as
the maximum amount that the insurance company will
pay;
• exclusions, which specify what is not covered by the
contract.

Obviously, the contents of an insurance contract depends on the type of policy, what the
insurance applicant wants, and how much he is willing to pay. The details of insurance
policies are covered in Standard Insurance Policies. This article covers what is required
of valid insurance contracts, since only valid contracts are legally enforceable.

There are 4 requirements for any valid contract, including insurance contracts:

1. offer and acceptance,

2. consideration,
3. competent parties, and
4. legal purpose.