CONCEPT OF INSURANCE – DEFINITION, KINDS, PURPOSE, FUNCTIONS AND HISTORY

This article has covered the Concept of Insurance including its definition, kinds of insurance, purpose of it, functions and development of Insurance in India   

1. INTRODUCTION

 

Insurance is a financial arrangement that provides protection against potential losses or risks. It is a contract between an individual or an entity (the policyholder) and an insurance company (the insurer). The policyholder pays a premium to the insurer in exchange for the insurer's promise to compensate for covered losses or damages.

 

2. DEFINITION OF INSURANCE

 

The definition of insurance can be classified under two categories;

 

i) Functional Definitions and

 

ii) Contractual Definitions

 

i) Functional Definition

 

According to Allen C. Mayerson, “Insurance is a device for the transfer of certain risk of economic risk of economic loss to an insured, that would otherwise he borne by the insured”.

 

As per Disnadle, “Insurance is an instrument of distributing the loss of few among many”.

 

According to Thomas, “A provision which a prudent man makes against fortuitous or inevitable contingencies, loss or misfortune”.

 

According to Magee D.H., “Insurance has been defined as a plan by which large number of people associate themselves, to shoulders of all, risks attached to individuals”.

Thus, on the basis of above-mentioned functional definitions of insurance, one can observe its features as follows:

 

• a)   It is a co-operative device.

• b)   It is a mechanism to shift the loss of few to many.

• c)   Insurer bears risk in return for a fee collected called premium.

• d)   It is a method to reduce or eliminate financial loss to group members.

 

ii) Contractual Definitions

 

According to E.W. Patterson, “Insurance is a contract by which one party, for a consideration called premium, assumes a particular risk of the other party and promises to pay to him or his nominee a certain or ascertainable sum of amount on a specified contingency”.

 

According to MacLean, “Insurance is a method of spreading over a large number of persons a possible financial loss too serious to be conveniently borne by an individual”.

According to Justice Tindall, “Insurance is a contract in which a sum of money is paid to the assured in consideration of insurer’s incurring the risk of paying a large sum upon a given contingency”.

 

In Lucena vs. Crawford, (1806), Justice Lawrence observed, “Insurance is a contract by which the one party in consideration of a price (called the premium) paid to him adequate to the risk becomes security to the other that he shall not suffer loss, damages or prejudice by the happening of the perils specified to certain things which may be expressed to them”.

 

Thus, on the basis of above stated contractual definitions of insurance, one can highlight its features as follows:

 

• a)   It is a contract,

• b) Whereby certain sum, called premium, is charged in consideration  from the insured,

• c)   By the insurer and he assumes the risk of insured,

• d)   That on the happening of a specific event,

• e)   He shall pay a specified or ascertained amount.

 

 3. PURPOSE OF INSURANCE

 

The primary purpose of insurance is to mitigate the financial impact of unforeseen events or risks. By transferring the risk to the insurer, individuals and businesses can protect themselves from significant financial losses that may arise from various perils, such as accidents, theft, natural disasters, illness, or death etc.

 

Insurance operates on the principle of risk pooling. Many policyholders pay premiums, which are pooled together to create a fund. When a policyholder experiences a covered loss, they can file a claim with the insurer, and if the claim is valid, the insurer provides financial compensation or other benefits according to the terms of the insurance policy.

 

4. KINDS OF INSURANCE

 

There are various types of insurance available to cater to different needs and circumstances. The different kinds of insurance include:

 

s Life Insurance:

 

Provides a lump sum payment or regular income to the beneficiaries upon the policyholder's death. It helps provide financial security and support to the policyholder's family or dependents.

 

s Health Insurance:

 

Covers medical expenses and provides financial protection against healthcare costs, including hospitalization, surgeries, medications, and preventive care.

 

s Auto Insurance:

 

Protects against losses or damages resulting from automobile accidents. It typically includes coverage for property damage, bodily injury, and may offer additional protection against theft or other perils.

 

s Property Insurance:

 

Covers losses or damages to property, such as homes, buildings, or belongings, caused by perils like fire, theft, vandalism, or natural disasters.

 

s Liability Insurance:

 

Protects individuals or businesses from legal liabilities arising from bodily injury or property damage caused to third parties. It helps cover legal costs and potential compensation claims.

 

s Travel Insurance:

 

Provides coverage for risks associated with travel, such as trip cancellations, medical emergencies, lost luggage, or travel-related accidents.

 

s Disability Insurance:

 

These types of insurance policy provide economical support to policy holder who is unable to work because of disabling illness or injury. It provides monthly support to help pay credit cards.

 

s Cyber Insurance:

 

Protects against losses or damages resulting from cyber-attacks, data breaches, or other cyber incidents. It helps cover expenses related to recovery, legal liabilities, and notification requirements.

 

s Home Insurance:

 

This type of insurance is designed to cover various risk and contingencies faced by householders under a single policy. It provides protection to property and interests of the insured and his family members who permanently reside with insured.

 

s Credit Insurance:

 

Credit insurance repays some or all of a loan when certain contingency happens to the borrower such as unemployment, disability or death.

 

Insurance contracts are governed by specific terms and conditions outlined in the insurance policy. These terms include the coverage provided, exclusions, deductibles, limits, and the process for filing claims.

 

Insurance companies assess risks and determine premiums based on factors such as the insured's age, health condition, occupation, location, and the level of coverage sought. Insurers use actuarial analysis and statistical data to calculate the probability of losses occurring and set premiums accordingly.

 

5. FUNCTIONS OF INSURANCE

 

The functions of insurance can be classified into three parts, (1) Primary functions, (2) Secondary functions, (3) Other functions.

 

1) PRIMARY FUNCTIONS

 

a) Provides Protection:

 

As we know that the elementary purpose of insurance is to provide protection against future risks, accidents and uncertainty. The time and amount of loss are uncertain and at the occurrence of any contingency, the person will suffer loss in absence of insurance. Insurance cannot arrest risk from taking place but guarantees the payment of loss and thus protects the insured from sufferings. From above clarification, we can say that insurance in real sense is a protection cover against economic loss by apportioning the risk with others.

 

b) Ensures Certainty:

 

Insurance is a device which helps change uncertainty into certainty. It ensures certainty of payment for the uncertain loss. By better planning and management one can reduce uncertainty of loss. But the insurance relieves a person from such difficult task as the basic function of insurance is to shift the loss suffered by contributor of premium to common funds on the shoulders of willing, capable and consenting professional or professionals. In other words, specific loss faced by a person is positively assumed by another.

 

c) Evaluates Risk:

 

In our day-to-day life we anticipate various kinds of unforeseen risks and, therefore, the loss arising from such risks are also unpredictable. Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. In a layman's words, insurance is a guard against pecuniary loss arising on the happening of unforeseen event and a device to share the loss. The type of risk is the base for ascertaining the premium rate.

 

d) Collective Risk-Sharing:

 

Insurance is a device to share the financial loss. It is a medium to share loss of few among many. The risk of loss cannot be averted but loss occurred can be distributed among the agreed persons who contribute to the common fund. When anybody is exposed to loss, such loss is made good out of the common fund.

 

2) SECONDARY FUNCTIONS:

 

a) Preventing Loss :

 

Insurance warns individuals and businessmen to embrace appropriate device to prevent unfortunate aftermaths of risk by observing safety instructions by asking them to install automatic sparkler or alarm systems etc. The basic purpose behind it is to prevent the losses. Greater the security, lesser the loss and payment needed to be made to the insured. Furthermore, if the payment of loss is lesser, it will lead to reduction in premium. Consequently, it will invite more business which again leads to reduction in premium which in turn stimulates more business and savings to the people. In order to achieve this purpose insurance companies, assist financially those institutions such as fire, health, education and similar groups or organizations who are engaged in preventing unfortunate aftermaths of risk by creating awareness among mass.

 

b) Provides Capital:

 

In order to ensure that insurance is providing maximum benefits at the cheapest rate, a large number of persons are insured at similar risk factor. It indirectly helps the nation to accelerate its growth and resources. The premium so collected from the policyholders are utilised by insurer in organised sectors or funded to big industrial houses which in return mobilises capital formation for the insurer.

 

c) Improves Efficiency:

 

Big as well as small industrial houses or other establishments feel relaxed and carefree by ensuring the lives of their workmen, machinery, building, raw material etc., it helps them putting their best efforts and resources in their work. It also provides safety and security to an individual and society at large eliminating their worries and miseries of losses and improves, accelerates and stabilizes their growth.

 

d) Ensures Welfare of Society:

 

As the insurance serves the sociological purpose, it also indirectly helps the nation to accelerate its growth. It provides security to the masses by minimizing their worries and miseries of losses or damage, destruction and death. The insurance helps in commercial prosperity, mobilises the resources, accelerates and stabilizes growth and hence ensures the welfare of society.

 

3) OTHER FUNCTIONS

 

a) Savings and Investment Tool:

 

Insurance restricts unnecessary expenses of a person and, therefore, considered as best option of savings and investment. Also, a person takes insurance as a good investment option to take the benefits of income tax exemptions.

 

b) Medium of Earning Foreign Exchange:

 

Being an international business, any country can earn foreign earn foreign exchange by way of issue of marine insurance policies and a different other way.

 

c) Risk-Free Trade:

 

Insurance provides indemnity or reimbursement in the event of unanticipated loss or disaster. Insurance boosts exports insurance, making foreign trade risk free with the help of different types of policies under marine insurance cover.

 

6. DEVELOPMENT OF INSURANCE IN INDIA

 

The development of insurance in India can be traced back to the 19th century during the British colonial rule. Here's a brief overview of the key milestones in the development of insurance in India:

 

Early Years (1818-1900s): The first insurance company in India, the Oriental Life Insurance Company, was established in 1818 in Kolkata (then Calcutta) by Europeans. Over the next few decades, several foreign insurers set up branches in India to cater primarily to the needs of the British community. These included companies like Bombay Mutual (1871), United India (1906), and National Indian (1906).

 

Indian Ownership (1900s-1950s): In the early 20th century, Indian-owned insurance companies started emerging, aiming to serve the needs of the local population. The first Indian life insurance company, Bombay Life Assurance (1912), was established in Mumbai (then Bombay). The period also saw the establishment of other Indian-owned insurers such as Hindustan Co-operative (1907) and Bharat Insurance (1896). The Indian Insurance Companies Act was passed in 1928, which provided some regulatory oversight to the industry.

 

Nationalization (1950s-2000s): In 1956, the Indian government nationalized the insurance sector, leading to the formation of the Life Insurance Corporation of India (LIC) and the General Insurance Corporation of India (GIC). LIC became the sole provider of life insurance services, and GIC had control over non-life insurance companies. This period witnessed the establishment of several regional and national insurance companies.

 

Liberalization and Privatization: In 2000, the Indian insurance sector underwent a significant transformation with the introduction of the Insurance Regulatory and Development Authority Act (IRDA). The act ended the monopoly of LIC and GIC and allowed private players to enter the insurance market. Foreign direct investment (FDI) was also permitted, enabling international insurance companies to establish joint ventures with Indian partners. This led to the entry of various private insurers, both domestic and international.

Expansion and Innovation: In recent years, the insurance industry in India has experienced rapid growth and diversification. Insurance companies have expanded their product portfolios, offering a wide range of life, health, motor, property, and other insurance products to cater to the evolving needs of the Indian population. There has been a focus on leveraging technology to enhance customer experience, streamline operations, and introduce innovative insurance solutions.

 

7. CONCLUSION

 

Insurance plays a crucial role in managing risk and providing financial protection to individuals, businesses, and society as a whole. It promotes peace of mind, stability, and helps individuals and businesses recover from unexpected events by providing a safety net against potential losses.