INTRODUCTION TO

INSURANCE
Contents
Meaning and Defination
How Insurance operates
History Of insurance
Classification of insurance
Function of insurance
1.1. Meaning and Defination
Meaning
there are countless risks in every sphere of life; For
human life there are risk of death, for property, there
are fire risks and so on.
The chance of occurrence( probality) of events causing
loss are quite uncertain because they may or may not
take place.
there fore, insurance is a mechanism to help peoples
facing common risk and make their small contribution
to the common fund.
Example
In a village, there are 250 houses, each valued at br.
2,000,000. Every year one house gets burnt, resulting
in to a total loss of 2,000,000. If all the 250 owners
come together and controibute br 8000 each, the
common fund would be br 2,000,000. This is enough
to pay br 200000 to the owners whose has got burnt.
There fore the risk of one owner is spread over 250
house owners of the village.
Defination Of insurance

1. Functional Definition
2. Contractual Defination

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 contract may be defined as a contract by
which one party (the insurer/insurance company)
agrees to pay to the other party (the insured) or his
beneficiary, a certain sum upon a given contingency
(the risk) against which insurance is sought.
How insurance Operates?
Illustration presented on British insurers association
meeting
Basic Analysis
Losses are spread over peoples who are exposed to
same risk and agree to share it
The frequency and severity of loss should be
measurable in terms of time and money
The rate is depends on the frequency and severity of
loss plus administrative cost
History Of Insurance
Historians believe insurance first developed in Sumer and
Babylonia (both in what is now Iraq) beginning in about 3000 BC.
The merchants and traders of these societies transferred and
pooled their money to protect themselves from losses of cargo to
thieves and pirates.
In the 18th century BC, Babylonian king Hammurabi developed a
code of law, known as the Code of Hammurabi, which codified
many specific rules governing the practices of early risk-sharing
activities. For instance, the code dictated that traders had to repay
merchants who financed trading voyages unless thieves stole goods
in transit, in which case debts would be cancelled.
Note that still the new code is developed in insurance market e.g-
911 attack
In the last several centuries BC the societies of Greece and
Rome developed some of the earliest systems of life
insurance.
Greek and Roman citizens formed benevolent societies,
organizations in which members paid dues that went toward
paying for the burial of members who died. Sometimes
these societies also paid for the living expenses of deceased
members’ families.
 During the Middle Ages (5th to 15th centuries AD), workers
joined together in craft. Many guilds, particularly in England
and Italy, provided benefits to workers and their families in
the event of illness or death
1.2. Classification of Insurance
Insurance can be classified on the following ways;
 Classification based on nature of insurance
 Classification based on business point of view
 Classification based on risk point of view
 Classification based on nature of insurance

Life insurance
Fire insurance
Marine insurance
Social insurance
General and other accident insurance
  Classification based on business point of view
Life insurance
Non life insurance
Classification based on risk point of view
 Personal insurance
 Property insurance
 Liability insurance
 Fidelity guarantee insurance
3.3. Function of insurance
1. Certainty- it provides certainty of payment for the
risk of loss.
there are different type of uncertainty in a risk
Such as; the risk will occur or not, when will it occur?
how much loss will be there?
 Insurance removes all these uncertainty and the
assured is given certainty of payment.
2. Protection- the insurance guarantee the payment of
loss and thus protects the assured from suffering. The
insurance can not check the happening of the event
but can compensate for loss arising at the happening
of the risk event.
3. Risk sharing-when risk takes place, the loss is shared
by all the persons who are exposed by it.
4. Assist in capital formation- The insurance provides
capital to the society. The accumulated funds are
invested in productive channel.
5. Prevention of loss- the insurance companies assist
financially to the health organization, fire
bregade,educational institution,and others which are
engaged in preventing the loss of the mass from death
or damage.