Chapter 1

Introduction to
Insurance.
INTRODUCTION TO INSURANCE

BUSINESS OF INSURANCE:

• The business of Insurance is related to the protection of

economic value of assets.
• The benefits from the asset may be direct or indirect and
Insurance ensures its protection.
• Insurance is a mechanism that helps to reduce the effects
of adverse situations and indemnifies to the extent of loss
to the owner of the asset.
• Assets are insured because they are likely to be
destroyed or become non functional by certain events/
occurrences viz, PERILS.
• Perils are the events and the RISK is the possible loss or
damage.
• Insurance helps in covering the Risk and not the perils.
• Insurance is relevant only when there or uncertainties.
 Risk and Uncertainty.
• Risk is a condition in which there is a possibility of an
adverse deviation from a desired outcome.
• The degree of risk refers to likelihood of occurrence of an
event. It is to a large extent measurable.
• Uncertainty implies that the individual does not have
knowledge of an objective risk situation and can only
make subjective evaluation.
• Pfeiffer says that ‘ risk is the state of real world and
uncertainty is the state of mind. Risk is measurable
uncertainty’.
• Fire, theft and accident are measurable uncertainties and
can be insured. Market speculations are not measurable
and hence can not be insured.
 Brief History of Insurance.
• Insurance has been in vogue for the last 3000
years. COLLEGIA organizations developed by
Romans for sharing of funeral expenses were
the first in the category of Insurance
organizations.
• The English Guilds - they were taking care of
burial expenses and also taking care of policies
after the death of the bread earner or the head
of the family.
• The term Yogakshema is a concept of Rigvedic
period in India.
 ----Continuation
• The Joint Family system is the best insurance mechanism for the entire family
members.
• In 17 Century, the system of Tontines found birth. A certain number persons
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contributed to common fund and the interest is distributed to surviving members at

the end of every year. The tontine system provided data that formed the basis of
mortality tables on which modern insurance is found. That is why ‘ Toronto Tonti’ is
sometimes called the ‘ Father of Modern Life Insurance’
• In 1693 Edmond Halley presented “ Degrees of Mortality of Mankind” based on the
statistics obtained from Breslau in Sileesia, the only city at that time maintaining
records of births and deaths including the ages of its dead people.
• The Actuarial Science developed to a great extent in 19 century.
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• The Equitable Society founded in 1762 in England was the first to be founded on
scientific basis with premiums computing according to age and period of insurance.
• The oldest life offices in India are Bombay Life Society ( 1793) and Oriental Life
Insurance Society ( 1818).
 -- continuation
• The oldest Life policy sold in India was by Royal Insurance
company on the life of Cursetjee Fundoonjee on 6th
January, 1848.
• The birth of Indian Insurance:
1. Mutual Life Assurance Society was started in 1870 by
seven persons in Bombay with just seven rupees for
initial expenses.
2. Hindu Family Annuity Fund was started by Iswar Chandra
Vidya Sagar in 1872.
3. The Swadesi movement gave impetus to insurance and
many companies like Hindusthan Cooperative, Indian
Mercantile etc were formed.
4. By 1956, there were 170 private companies and 75 PF
societies were doing the business of Life insurance and
all of them were amalgamated and Life Insurance
Corporation of India was formed on 1st September, 1956.
 BASIC CONCEPTS OF
• INSURANCE.
Insurance is relevant only when there are uncertainties.
• Insurance does not protect an asset from perils. The perils
can not be avoided by Insurance.
• Only economic consequences can be insured. Non
economic losses can not be insured.
• Peril shall be accidental and not intentional. In simple
parlance, no one can set fire to his house and ask for
insurance.
• Insurance is pooling of risks and sharing of risks. Each for
all and all for each its principle.
• Insurance indemnifies loss but can not prevent loss.
• Insurance is not gambling in the sense that it depends on
standard actuarial principles and underwriting procedures.
• It is selling of a promise which can be redeemed at a future
date. The product is intangible.
• It is based on law of large numbers.
• Insurer acts as a trustee for the funds that are collected.
 Insurance Business
• In India Insurance business is classified primarily as Life and Non
Life or General insurances.
• General Insurance has 3 classifications- Fire Insurance, Marine
Insurance and Miscellaneous ( dealing with fidelity, motor, crop,
engineering, construction and aviation).
• Personal accident and sickness insurance relating to human beings
is classified as General Insurance in India which is not the case in
many other countries.
• IRDA is responsible for regulation and development of insurance
business in India.
• Protecting the interest of the policyholders and securing fair
treatment to them is the prime objective of the IRDA.
• Postal Life Insurance business is administered through the Postal&
Telegraph department through 1.55 lakh post offices across India.
• Micro Insurance Regulations are issued in 2005 by the IRDA and can
be done by both Life and General Insurers. Sum Assured vary from
5000 to 50000 in Micro Insurance.
 Benefits of Insurance – to
• individuals.
By means of Insurance an individual creates an
asset. He has to maintain this asset by paying the
premiums.
• Insurance enforces compulsory savings.
• Creditors can not attach the policies if they are
absolutely assigned or invested under MWP act.
• It is a vehicle for tax saving needs.
• It has features of marketability and liquidity.
• It ensures family protection and safe guard
unpredictable risks and provide financial security.
• Policies can be given as security for commercial
loans and housing loans.
• Policy holder can arrange that in the event of his
death the amount can be paid over a period of
years or selected amounts over a period followed
by a lump sum at the end thereof. This
arrangement fulfils the purpose of Insurance.
 Benefits of Insurance – to
society.
• Insurance is a social security tool because without insurance
this human society would consists of helpless old people,
helpless widows and unprotected orphans.
• The insurance schemes aid in promoting the spirit of Directive
Principles of State policy.
• ‘Public money for public good’ is the guiding principle of
insurance companies and naturally the companies invest in
socially oriented projects like rural electrification, drainage,
infrastructure and other people oriented projects.
• Insurance companies help in developing Capital Markets by
mobilizing the savings of the people.
• Insurance companies support the capital markets by absorbing
market risks through underwriting new bond and equity issues
and provide depth to the markets.
• Business and Trade benefit through Insurance. Without
Insurance trade and commerce would find it difficult to face
major perils like earth quake, floods etc.
THANK YOU
Authored by Nagaraja Rao.