Insurance In India

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Contents

  1. Definition of Insurance
  2. Fundamental Principles of Insurance
  3. Business model of an Insurer
  4. Indemnification
  5. History of Insurance
  6. Types of Insurance
  7. Insurance Companies
  8. Insurance industry in the world
  9. Controversies
  10. Useful Links

Definition of Insurance

When a group of people exposed to similar risk come voluntariely and contribute to a general fund and out of which people who suffer losses are compensated from the general fund. This system is called Insurance. The person raises the fund is called Insurer. The person contributes to the fund is called the Insured. The amount of contribution is called Premium.

Insurance is a type of risk management which is primarily used to hedge against the risk of a huge loss. Insurance can be defined asthe fair transfer of the risk of a loss from one entity to another. It is done with an exchange for a premium. Insurance is incurring loss in terms of premium to prevent a huge loss.

An Insurer is a company who sells Insurance. Premium is the amount, determined by the factor Insurance rate, which is charged for an amount of insurance coverage.

It is defined as an agreement whereby one person(called the proposer) agrees to pay a sum of money (premium) periodically for an agreed term to the other person (Insurer) who in turn agrees to pay a definite sum of money on the happening of certain events contingent on human life.

Where there is no economic loss there cannot be any insurance.
Insurance is possible only by distruction.
Insurance is possible only when there is economic loss.
Insurance is possible only when there is uncertainity, chance, risk.
Insurance is possible only when the insured object generates income.

Fundamental Principles of Insurance

Insurable risks share several common points:

  1. Large quantity of exposure units of same type. Majority of insurance policies are sold for individual members of very huge classes. For example, in 2004 number of automobile policies sold in United States is about 175 million. In 2007 two million policies are sold online. Insurers benefit from large number of homogeneous Insurance units. Insurers profit is based on "Law of large numbers". As the number of homogeneous exposure units increases, expected results becomes actual results. There are some exceptions to this "Law of large numbers" in Insurance Industry. Some insurance companies offer insurance policies to actors, actresses and sports persons. Insurance policies on Huge buildings and properties exists but there are no homogeneous units. Some companies offer Satellite Launch insurance which is very rare. Although several exposures fail on this creterion of "law of large numbers" , many exposures are considered to be insurable.

  2. Definite Loss. An incident or an event which causes the loss that is subject to insurance policy should take place from a predetermined or known cause, at a known place and at a known time. Insurence is based on this theory of definite loss.
    Examples: (a)Death of the insured who has taken Life Insurance Policy
    (b) Death, injury, damage to the insured by fire, accidents.
    all these examples meet the creterion. But other types of losses does not meet the creterion of definite losses. In case of health insurance definite loss cannot be predetermined as in most cases, the cause of the disease, specific time, place cannot be estimated.

  3. Loss due to Accidents The incident or event which initiates the claim shoud be incidental and it should not be premeditated. It should have happened by chance. The event should not have occured under the control of the beneficiary of the insurance. For example if a person has bought Fire insurance on his property, and due to fire his property gets damaged. If the person deliberately puts fire to his property keeping in view of getting the insurance amount, he is not eligible to get insurance amount as the event has occured under the control of the insured. Only if the event happens by chance the insured is eligible to get the insured amount. Ordinary business risks are not considered to be eligible for Insurance.

  4. Large Losses:Amount of premium should be adequate to cover the expected cost of loss. It should also cover the cost of administering and issuing the policy and should be sufficient for the insurer to pay the claims. From the view point of the insured, premium paid should be reasonable to cover the size of the loss. There is no meaning in paying heavy premiums when the protection offered has not of much value to the buyer.

  5. Affordable premium. When a group of people exposed to similar risk come voluntarily and contribute to a general fund and out of which people who suffers losses are compensated from the general fund. This system is called Insurance. The person raises the fund is called insurer. The person contributes to the fund is called the insured. The amount of contribution is called premium.

  6. Estimable and calculable Loss: There are two elements which are estimable. They are the Probability of loss and the attendent cost.

  7. Limited risk of sudden losses.

Business model of an Insurer

Insurance companies profit from two methods:

  • Underwriting: It is the process of assesment of risks, selection of risks and how much premium should be charged for the acceptance of those risks.
  • Investment: Collection of premiums from the insured.

We can formulate a business model of Insurers like this

Profit=Earned Premium + Income from Investment - Incurred Loss- Underwriting Expenses

Insurance Underwriting: Underwriting is the evaluation of risk and exposure of pro

Indemnification

Meaning of Indemnity: The amount paid by X to Y as compensation for a loss suffered by Y is called Indemnity.

History of Insurance

It is difficult to trace the origin of Insurance. There are two types of economies in our history. First one is natural or non-money economy and second one is money economy. Natural economy is without money, markets and financial instruments. Money economy consist of money, financial instruments and markets. First one is more ancient than the second one. In the natural economy Insurance assumes the form of help by people to each other.

Types of Insurance
  • Life Insurance

    • Life Insurance or Life assurance provides monetary benefit to the deceased persons family or other beneficiary. It can be termed as a compensation to the insured Person's family.

  • Home Insurance
  • Car Insurance
  • Auto Insurance
  • Health Insurance
  • Casualty Insurance
  • Disability Insurance
  • Property Insurance
  • Liability Insurance
  • Credit Insurance

Insurance Companies

 Insurance Companies can be classified into two main groups:
  • Life Insurance Companies: This type of companies sell life insurance, pension products and annuities
  • General, Non-life or Property/Casualty Insurance Companies: These sell other types of Insurance.

Insurance industry in the world

Controversies

Useful Links
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