Chp 1 :: Introduction to Insurance

Why Insurance:
Events are unpredictable and could cause economic loss or damage .
Events that could cause Risk is called perils

History of Insurance:
Babylon Traders had agreement to pay extra to the lenders to write of the loans ,
in case a shipment has been lost . These were called BOTTOMRY LOAN.In
India it was practised in Surat & Baruch

Modern Days: In India the principle of life insurance was reflected in the
institution of the joint-family system in India, which was one of the best forms
of life insurance down the ages. Sorrows & losses were shared by various
family members. Emergence of nuclear family has made it necessary to evolve
alternative system for security.
ORIGIN Can be traced to Llyod coffee House ( Marine insurance );
AMICABLE SOCIETY FOR PERPETUAL ASSURANCE in 1706 London.
Considered as First Life Insurance company
Insurance Act 2015:
• For Indian Insurance company: Aggregate holdings of equity shares by
foreign investors should not exceed 49% of the paid up equity capital of
such Indian insurance company.

• For Foreign insurance company:They can engage in reinsurance

through a branch established in India.
Reinsurance means the ''insurance of part of one insurer's risk by another
insurer who accepts the risk for a mutually acceptable premium''

Insurance in India:
• The Oriental Life Insurance CO Ltd ( First Life Insurance company )
• Triton Insurance Co Ltd ( First Non Life Insurance Company )
• Bombay Mutual Assurance Society ( First Indian Life Insurance Co ,
 1870)
• National Insurance Co (Oldest running insurance company in India 1906)
Nationalization of Life Insurance :
1 sept 1956 , LIC was formed . Before this 170 Life insurance company and 75
provident fund societies were present.
Nationalization of Non Life Insurance
General insurance business notification Act 1972 . GIC ( General Insurance
corporation of India ) and 4 subsidiaries were set up . Before this 106 Non life
insurance companies were present.
Malhotra Committee
In 1993, Malhotra Committee was setup to recommend changes for insurance
industry & boost competition.Insurance Regulatory and Development Authority
of India (IRDAI) in April 2000 was formed as a statutory regulatory body both
for life, non-life and health insurance industry. IRDA has been subsequently
renamed as IRDAI in 2014.
Risk Burden:
• PRIMARY burden: losses actually suffered by households ( business
units ) and are measurable and can be settled easily.

• Secondary Burden : costs and strains that one has to bear mainly from
the fact that one is exposed to loss situation . Uncertainty over the event
and loss that could happen makes it easy to transfer the risk to Insurance
companies .

Risk Management Techniques :

Risk Avoidance ( controlling risk by avoiding loss) ,
Risk retention ( one decides to bear the risk and its effect) ,
Risk reduction and control ( measure to reduce chances of occurrence is
called loss prevention , and measure to reduce degree of loss
is loss reduction ) ,
Risk Financing ( provision of funds to meet the loss )
Insurance Vs Assurance:
Insurance refers to protection against an event that MIGHT happen , Assurance
refers to Protection against an event that WILL happen .Insurance provides
covers against Risk , Assurance provides protection against EVENT that is
definite . Assurance policies are associated with Life Insurance
Insurance as a tool of managing risk:
• Don‘t risk a lot for a little: A reasonable relationship must be there
between the cost of transferring the risk and the value derived.
Example: Would it make sense to insure an ordinary ball pen?
• Don‘t risk more than you can afford to lose: If the loss that can arise
due to an event is so large that it leads to a situation that is near
bankruptcy, retention of the risk would not appear to be realistic.
Example: What would happen if a large oil refinery were to be destroyed or
damaged? Could a company afford to bear the loss?
•Consider the likely outcomes of the risk carefully: It is best to insure
those assets for which the probability of occurrence (frequency) of a loss
is low but the possible severity (impact), is high.
Example: Could one afford to not insure a space satellite?

Role of Insurance in Society:

The Employees State Insurance Act 1948, pays for expenses of sickness,
disablement, maternity & death for the benefit of industrial employees and their
families.
Insurers play an important role in social security schemes sponsored by the
Government such as:-
1. RKBY – Rashtriya Krishi Bima Yojana
2. RSBY – Rashtriya Swasthya Bima Yojana
3. PMJBY – Pradhan Mantri Jeevan Jyoti Bima Yojana
4. PMSBY – Pradhan Mantri Suraksha Bima Yojana

This in turn leads to Higher employment generation, more social benefits &
overall economic growth.