After reading this article you will learn about:- 1. Meaning of Insurance 2. Definition of Insurance 3. Nature 4. Basic Types 5. Need 6. Characteristics 7. Working 8. Functions.
Meaning of Insurance:
If one goes by the word meaning insurance is a contract between two parties whereby the insurer agrees to indemnify the insured upon the happening of a stipulated contingency, in consideration of the payment of an agreed sum, whether periodical or fixed (the premium). Insurance falls into the main groups of life, property, marine, aviation, health, transport, motor vehicle – third party liability, and personal accident and sickness.
The term “assurance” is generally limited to the first of these, because the event in respect of which the policy is taken out – namely the death of the person – is assured, or certain. Only the time of the death is uncertain.
The meaning of insurance in context of insurance business is not easy to define. There are hundreds of definitions of insurance by hundred of persons. In fact the insurance is the subject matter relating from man to man and a person to person.
One needs insurance of life, another insurance of property and someone else for risk of business. A very rich may like insurance of his property and his wealth. A common man would like to keep secure his small earnings as secured.
The ultimate meaning comes to ensue security of what a person thinks very important for him. Every one want to be secure, or be content on certain conditions, to secure against any sort of peril may it be of life, against fire, accident, falling ill or otherwise. It is therefore that everyone wants to secure him in one or the other way But no one knows when the eventuality shall arise and remains in doldrums waiting for the eventuality.
In the present day affairs insurance means financial protection against losses arising out of happenings of an uncertain event. In order to protect against such losses one has to bear some financial burden also. This can be ensured by paying certain amount, depending on the risk covered and the amount of expected loss in the form of paying premium to any of the insurance companies.
In, simple words the meaning of insurance is to keep a person fearless and unworried about the future happenings which always remain uncertain. It absolve the risk of uncertainty and provides a piece of mind because the insurance facilitates reimbursement during crises situations and compensate for any potential future losses.
In view of the above discussion it is apparent that seeking an insurance cover is to transfer the risk from oneself to the insurance company. It is therefore can also be said as risk management tool for unfortunate events like death, accident, disability, sickness and retirement.
All these unfortunate events can either be met by paying from one’s own pocket or one may choose to transfer the risk on some consideration i.e., paying of premium to the insurance company which will pay on one’s behalf Insurance company: the company that underwrites the policy and this is where you transfer the risk to by paying a fee which is called the insurance premium.
Definition of Insurance:
Insurance is contract between two parties (one the insurer and second the insured) whereby the insurer agrees to undertake the risk of the insured in consideration of some amount known as premium and in return promises to compensate a fixed sum of money to the insured party on happening of an uncertain event like DEATH.
In case of survival the insurer has to pay after the expiry of a certain period in case of life insurance or to indemnify the insured party on happening of an uncertain event in case of general insurance.
In simple words insurance is sharing collective responsibility by a large number of people to compensate few people in case of crises Managing the collective responsibility (pooling persons) the insurance companies work as trustee to take care of such collective responsibility and the insurance regulations provide specific guidelines to ensure the insurance functions due serve the society as per the expectations of pooling members.
Nature of Insurance:
1. By nature insurance is a devise of sharing risk by large number of people among the few who are exposed to risk by one or the other reason.
2. If a large number of subscribers to insurance serve the purpose of compensation to few among them exposed to uncertain risks appears as a co-operative look.
3. Valuation of risk is determined as per predefined terms and conditions of the insurance policies.
4. Insurance provides facility of financial help in case of contingency.
5. However it depends on the value of insurance for which payment is made in case of contingency. This provides basis of the amount to be paid.
6. Insurance is a policy regulated under laws and therefore the amount of insurance can neither be paid as gambling nor as charity.
Basic Types of Insurance:
1. Credit Insurance:
Credit insurance means of insuring the payment of commercial debts against the risk of non-payment by the borrower because of his insolvency or for some other reason.
2. Group Insurance:
Group Insurance is insurance or life insurance obtained by a person as a member of a group, such as a professional organization, rather than as an individual, because in this way better terms can often be obtained. This is because there is an administrative saving for the company, and sometimes also because a particular group has a better life expectancy than people in general.
3. Life Insurance:
Life Insurance/Assurance is a contract by which the insurer/assuror undertakes to pay the person for whose benefit the cover is effected, or to his personal representative, a certain sum of money on the happening of a given event, or on the death of the person whose life is assured.
4. Marine Insurance:
It is contract by which underwriters engage to indemnify the owner of a ship, cargo or fright against losses from certain perils or sea risks to which their ship or cargo may be exposed. In case of marine insurance another type of insurance is prevalent known as Mutual Insurance.
This type of insurance is provided by ship-owners throughout the world who have clubbed together in various mutual protection and indemnity associations to cover hazards which are not covered by marine policies, which have standard clauses leaving a number of contingencies un-provided for, or only partially provided for. The liabilities of mutual insurance company are periodically divided amongst the subscribers in proportion to the tonnage they have entered with the company.
5. Fire Insurance:
Is a contract of indemnity by which an insurance company undertakes to make good any damage or loss by fire to buildings or property during a specific time.
Need of Insurance:
Life of everyone is full uncertainties. Nobody knows what is going to happen in next moment. This element of unknown situation always hounds around the mind of a person and keeps him worried to think as to what will happen in future in case of any mishappening. This worry is to think about the future of the person and his family. Among a number of worries the main and very important is economic uncertainty of himself or his family.
If anyone is satisfied with his present earnings, he also thinks whether or not his present day capacity of earning will last for long. Perhaps there remains an iota of fear that it may not last for the long. On this very point everyone thinks about to secure his future.
Under the impression of securing future one thinks about the adoption of saving and investment plans. . He not only thinks about himself but also about his family. In case of any miss happening everyone is worried as to what shall happen to his family.
Everyone knows that there is no substitute in case of death of an earning member of the family and no compensation is able to fulfil the gap in case of death of the earning member. But for supporting economically upto some extant the method adopted is known as insurance.
The life insurance is such a cover that provides security to the family of insured in case of his death. Life Insurance in such cases provides some solutions to the worries of family members.
Once upon a time it was very difficult to convince people for getting an insurance cover but today it has become a need of the day. Today the life insurance does not cover the risk of life only but also provides many added benefits also in the field of saving and investments.
People need insurance because the unexpected does happen. Whether it is a fire, a car wreck, illness or a death, the financial consequences can be devastating if you are uninsured. Insurance helps people have peace of mind when life’s unexpected events happen.
In Case Of Non-Life Insurance Also The Life Is Full Of Uncertainties:
Other than life there are many fields which create a lot of worries in every one’s life. After insuring life or purchasing a life insurance policies no one is absolved of the entire worries of life.
There remains many fields to worry about. Every field need some security cover and to ensure such security cover one is not able to apprehend the future unfortunate happenings. It therefore becomes prudential to get insured for visual or un-visual events one is able to foresee.
Such event may be conceived:
1. You never know what is going to happen:
This is the main reason for having insurance. If you are covered and someone breaks in to your home and steals something you get it replaced, if you break your hip you get it replaced etc. This is how insurance should work.
2. You can’t trust nature:
Recently in 2010 a cloud burst in Himachal Pradesh took life of hundreds of people and thousands of persons were left as homeless people. In a situation of terrorists regime any one is exposed to the risk of life and business. These are just for example of the destructive forces of nature. Add storms, hurricanes, tornadoes, earthquakes, tsunamis, floods etc. into the mix and it becomes very clear that insurance is still very necessary!
3. You can’t trust other people:
Accidents happen to everyone, but there are people who cause accidents through negligence, a drunk driver for example. Not being insured doesn’t mean you can’t sue them, but at least you are covered from the start!
4. It’s not as expensive as you might think:
Insurance plans can seem expensive, but there are always ways to save money, like bundling different types of insurance together for example.
5. For your peace of mind:
Knowing that you (and your family) are covered by an insurance policy if something unfortunate does happen can help put your mind at ease.
The need of insurance is well felt when one has to bear the losses from his own pocket. When pocket does not allow to bear the expenses incurred on losses the insurance come to rescue.
Insurance is purchased to protect you from a catastrophic loss when you KNOW you wouldn’t be able to afford the loss. For example, health event/condition such as serious accident/stroke/cancer/heart attack and everything in between that would cause you to be out of work temporarily or permanently, home fire that burns down half the home, car accident that could be in lacs to a total loss, death and now family is on the street, property stolen, business liability when someone sues you…etc..
Either one bears all such expenses from his pocket or gets these reimbursed from the insurance company is matter of fact that insurance cover has become a need of the day. . One pays a very small amount of money for the promise that a LOT of money is pledged in the event of a covered loss.
Characteristics of Insurance:
One can easily differentiate these characters of insurance as below:
1. Any Insurance is a contract between insurer and insured for compensating the losses.
2. For any insurances contract not only premium is charged but it also obligatory to pay the premium in time.
3. Payment to insured in the event of loss as per the agreement and terms of policy purchased by the insured.
4. Insurance is a simple contract based on good faith.
5. Insurance contract is one that provides benefits to both the insurer as well as insured. In other words it is a contract for mutual benefits.
6. All other contracts are based on present day situation whereas an insurance contract is one for compensating future losses.
7. The insurance concept being based on pooling funds by many and distributing among few for their losses is a social security also.
Working of Insurance:
The insurance is nothing than a group of people feeling similar kind of risk come together and decide to make contribution towards formation of pool of funds to be used in case of crises arisen out of uncertain happenings.
In the eventuality of happening an event of loss on account of any risk (for which the pool was created) the member of the group is compensated out of the same pool of funds. Contribution to the pool is made by a group people sharing common risk and collected by the insurance companies which is popularly known as “premiums”.
The insurance can be briefly known as:
Insurance is a contractual agreement in law and business that provides compensation by an insurer (insurance company) to an insured party (person or any company) if or when a particular situation occurs in particular circumstances. Such state of affairs possibly consist of death or personal grievance, mishap, joblessness or old age, lose control to of or harm to material goods, or such a number of instances that can be money-wise compensated.
Several citizens who are uncovered to the threat of happening of an unpredicted incident make a payment of relatively small amount of money to the insurer, by which the insurer can conducts its operations by amassing those small amounts and create a fund that is used to compensate those insured who in reality undergo from such an occurrence.
The contributions of the insured persons are called premiums. An agreement of cover is added in a policy that specifies the conditions under which the insurer agrees to assure the policyholder for loss in contemplation of the payment of a stated payment or payments.
Functions of Insurance:
When we talk about functions of insurance one thing comes to our mind that after purchasing an insurance policy we need not to worry about our future. This is a wrong concept. Every insurance policy is subject to the terms and conditions contained in the insurance agreement and therefore any insurance serves a limited purpose as agreed to between two parties the Insurer and the Insured.
One cannot expect more than what one has insured himself. It is pertinent to note that the functions of any insurance remained confined to the terms and conditions of different type of insurance policies.
However there are certain functions which apply to every kind of insurance including life insurance as well as general insurance that includes every type of insurance such as home, automobile, jewellery, property and other valuable assets.
The functions of Insurance cannot be explained because of its diversity but in order to understand we can find a classification of functions as follows:
1) Primary Functions:
The Primary function of Insurance is as we think about any insurance. One feels insured and contended about future risks only because one is sure to be compensated for any loss of future. It is therefore Primary function of Insurance to provide protection against future risks, accidents and uncertainty.
No insurance can arrest the risk from taking place, no insurance can prevent future miss happenings, but can certainly provide some cover for the losses of risk. In real terms Insurance is a protective cover against economic loss by sharing the risk with others, (the pooling members).
(ii) Collective Risk:
The Insurance policies whether life insurance or general insurance are purchased by lacs of people. But all of them are not subjected to losses every year. It is only a few or negligible who become victim of some miss happenings. In other word lacs of people contribute towards insurance and only a few people need its cover.
It is therefore clear that insurance is a method by means of which a few losses are shared by a large number of people. All the people insured contribute by paying annual premium towards a fund out of which the persons exposed to risks are paid as per the terms and conditions of the insurance policy purchased by them.
(iii) Assessment of Risk:
What is volume of risk is determined by the Insurance companies by assessing diverse factors that give rise to risk. The rate of premium is also decided on the basis of risk involved.
Unless we are insured we remain uncertain about our capability to meet the future risks. But once we are insured it converts our uncertainty into certainty of bearing future risks.
2) Secondary Functions:
(i) Prevention of losses:
In simple words we can say precautions are better than the treatment. It is better instead of seeking the help of insurance if one adopts such measure which prevent the losses. Every Insurance prescribes to take preventive measures against losses. Such as installation of safety devices like automatic sparkler or alarm system, CCTV system etc.
If such type of preventive measure exist there shall be lower rate of premium for getting insurance cover against risks. Prevention of losses is to adopt preventive measures against unexpected losses. For example while driving a two wheeler we use helmets only because we take preventive measures to avoid any accidental loss. It is not certain that an accident is going to happen even than a preventive measure is adopted.
If an insured take such steps he saves a lot in form of the amount of premium required to be paid. If prevention techniques have been adopted and applied the Insurance company may rate the risk at lower level and shall prescribe a lower rate of premium otherwise a higher rate of premium shall be charged.
(ii) Covering Larger Risks with small capital:
Every businessman is always worried about the security of his business. After making large investments in the business it is natural to take care of the business investments. There are two alternatives first one is that the concerned businessman should invest out of his own pocket to create a proper security. The second method is to get his business activities insured.
In such a case the insurance relives a businessman from security investments by paying small amount in the shape of premium against larger risks and uncertainties. This assuages the businessman from security investments for a small amount of premium against larger losses.
(iii) Helps in development of larger Industries:
Larger Industries are prone to more risks in their setting up. The large industries have diversified fields of functioning where one field sometimes has no relation with the other field of the same industry. The activities of large industries are diversified that it goes above any planning to cover every type of risk.
It is only insurance that comes not only to help these large industries against possible risk but also help them to grow. It becomes possible only because insurance provides an opportunity to develop to those larger industries which have more risks in their setting ups.
3) Other Functions:
(i) Insurance is a tool used for saving and investments:
By purchasing any Insurance Policy it becomes completion by the purchaser to make payment of the insurance policy. This completion is blessing in disguise. Most of the policy buyers particularly individuals do not know the purpose of payment of premium. They know only one thing that paying premium is compulsory for them. The fact is otherwise true.
Once an insurance policy is purchased it assume the compulsory way of savings. Not only savings but such funds collected by insurance companies are further invested to the benefit of insured.
Because it is compulsory it restricts the unnecessary expenses by the insured’s on one hand and on the other hand insurance provides them the opportunity to avail Income tax exemption for the amount paid as insurance premium. Some prudent people take up insurance as good investment option also.
Such savings help growth in national economy.
(ii) It is one of sources to earn Foreign Exchange:
The business of insurance has crossed the national borders of any country. While traveling by Air one needs aviation insurance. While on board at sea whether humans or cargo it needs marine insurance which is also spread over across the boarders of any country. In simple words the insurance has become an international business and is necessary also.
It being an international business any country is free to earn foreign exchange as much as per the polices of insurance devised in a way to attract more and more foreign business. It is a good source of earning foreign exchange for any country.
(iii) Risk Free Trade:
Insurance promotes export insurance, which makes the foreign trade risk free with the help of different types of polices under marine insurance cover.
In its most common usage refers to circumstances in which an insurance company tries to recoup expenses for a claim it paid out when another party should have been responsible for paying at least a portion of that claim.
Ongoing through the functions of insurance there appear that the business of insurance has inherited certain character sticks as well.