INSURANCE

An Introduction to Insurance

Today the insurance sector in full bloom, today, it would not be wrong to say that in the present market scenario,
there is an insurance available for just about anything and everything. With even a bourgeois family man opting
for various insurance schemes, the question today is not whether you have insurance or not. Instead it is, whether
you need a particular insurance or not?

Insurance is no doubt an area of immense importance in regards to the financial and monetary sectors of every
individual. The whole idea behind Insurance as a financial security tool was to design something which could
secure the financial well-being of an individual as well as his/her dependents, in case he/she undergoes an
unforeseen loss. These losses could be related to health, property, assets or life in general.

Insurance helps people manage monetary risks and losses related to investments, liabilities for wrong financial
actions, and risks for inability to earn income at any stage of life. Insurance generally covers all these risks.

A contract (an insurance contract) whereby one person, the insurer, promises and undertakes, in
exchange for consideration of a set or assessed amount of money (called a "premium"), to make a payment to either the
insured or a third-party if a specified event occurs, also known as "occurences".

Usually, but not always, the event specified is a loss which occurs as a result of a certain event, such as the loss of, or damage to,
a house as a result of fire, earthquake or flood.

According to Clarke versus Clarke “ A contract by which one party undertakes, in consideration for a payment (called a premium),
to secure the other against pecuniary loss, by payment of a sum of money in the event of the death or disablement of a person."

According to Insurance Act, “The undertaking by one person to indemnify another person against loss or liability for loss in respect
of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value
upon the happening of a certain event and includes life insurance."

characteristics of insurance

In simple terms, Insurance is a means of transferring insurable risk of a potential loss to an insurance
company against a premium. Hence insurance can be defined as pooling of losses by transfer of risk to
insurer, who promises to indemnify insured for losses, which are unforeseen and accidental in nature.

Thus the characteristics of insurance are:

• Transfer of Risk: The risk is transferred from the insured to the insurer.
• Indemnification: The insurer is restored to his or her approximate financial position prior to the
occurrence of the loss.
• Payment of unforeseen, unexpected and accidental loss. Insurance does not cover intentional loss.
• Pooling of Losses: This means sharing of losses incurred by few over the entire group, so that
process average loss is substituted for actual loss.
Basic functions of Insurance

1.Primary Functions

2.Secondary Functions

3.Other Functions

Primary functions of insurance

•Providing protection – The elementary purpose of insurance is to allow security against future risk,
accidents and uncertainty. Insurance cannot arrest the risk from taking place, but can for sure allow for the
losses arising with the risk. Insurance is in reality a protective cover against economic loss, by
apportioning the risk with others.
• Collective risk bearing – Insurance is an instrument to share the financial loss. It is a medium through
which few losses are divided among larger number of people. All the insured add the premiums towards a
fund and out of which the persons facing a specific risk is paid.
• Evaluating risk – Insurance fixes the likely volume of risk by assessing diverse factors that give rise to
risk. Risk is the basis for ascertaining the premium rate as well.
• Provide Certainty – Insurance is a device, which assists in changing uncertainty to certainty.

Secondary functions of insurance

• Preventing losses – Insurance warns individuals and businessmen to embrace appropriate device to
prevent unfortunate aftermaths of risk by observing safety instructions; installation of automatic sparkler
or alarm systems, etc.
• Covering larger risks with small capital – Insurance assuages the businessmen from security
investments. This is done by paying small amount of premium against larger risks and dubiety.
• Helps in the development of larger industries – Insurance provides an opportunity to develop to those
larger industries which have more risks in their setting up.

Other functions of insurance

•Is a savings and investment tool – Insurance is the best savings and investment option, restricting
unnecessary expenses by the insured. Also to take the benefit of income tax exemptions, people take up
insurance as a good investment option.
• Medium of earning foreign exchange – Being an international business, any country can earn foreign
exchange by way of issue of marine insurance policies and a different other ways.
• Risk Free trade – Insurance boosts exports insurance, making foreign trade risk free with the help of
different types of policies under marine insurance cover.