Understanding Insurance: History, Definition, principles, and needs.

Understanding Insurance all about you need to know!

As we all know that Our Life is very uncertain because of Risks, and it can come anytime. Then it will be natural or manmade Risk /Disaster. In that some of the risks are Recoverable but some of them are unrecoverable. So, in that INSURANCE plays very important role to compensate and helps to recover risks. So, let’s try to understand WHAT IS INSURANCE & ITS HISTORY AND IMPORTANCE.

What is Insurance?

Understanding Insurance
Understanding Insurance

Insurance is a contract of “Insurer”(Insurance company) & “Insured”(Person [party] to take insurance) in which, for a consideration (premium) usually agreed upon in advance, promises to reimburse the insured or to render services of the insured in the event that certain accidental occurrences result in losses during a given period. It thus is a method of coping with risk. Its primary function is to substitute certainty for uncertainty as regards the economic cost of loss-producing events.

In Simple words, Insurance is like a financial superhero that helps protect you from unexpected troubles. Imagine you have a buddy who promises to have your back if something bad happens – that’s insurance!

Here’s how it works: You pay a small amount regularly (like a membership fee) to an insurance company. In return, if something unexpected happens – like your car gets damaged, you get sick, or there’s a big problem at home – your insurance buddy steps in to help with the money needed to fix things up.

So, insurance is like having a trusty friend who helps you out when life throws a curveball, making sure you don’t have to face tough times all on your own.

Definition of Insurance:

International Risk Management Institute (IRMI) – “Insurance is a contract that transfers the risk of financial loss from an individual or business to an insurance company.”

William Shirley – “Insurance is a contract in which one party pays a premium, and the other party agrees to compensate for losses or damages that may occur in the future.”

Emmett J. Vaughan & Theresa M. Vaughan “Book – Fundamentals of Risk and Insurance” – Insurance is defined as “a mechanism to transfer the financial consequences of a loss from an individual or entity to a group or pool of individuals or entities in exchange for a premium payment.”

History of Insurance/How Insurance started:

Understanding Insurance

Babylonian Traders: They were the first to introduce Insurance concept.

In ancient Babylon, where bustling trade routes connected civilizations, savvy traders faced numerous risks on their journeys. Recognizing the uncertainties of long-distance commerce, these Babylonian traders devised a primitive form of insurance to safeguard their ventures.

Traders formed a tight-knit community and established a system of mutual assistance. Each trader contributed a portion of their goods to a communal storage facility. In the unfortunate event of a fellow trader’s cargo being lost or damaged during transit due to theft, accidents, or natural disasters, the communal fund compensated the affected party.

This early form of insurance among Babylonian traders not only provided financial protection but also fostered a sense of collective responsibility. The shared risk and support system helped maintain the economic stability of the trading community, ensuring that setbacks for one did not lead to the downfall of many.

This historical precursor to modern insurance highlights humanity’s innate understanding of the need for risk management and mutual cooperation, principles that have evolved over centuries into the sophisticated insurance systems we have today.

The Babylonian traders had agreements where they would pay additional sums to lenders as a price for writing off of their loans, in case a shipment was lost or stolen. These were called bottomry loans. Under these agreements the loan taken against the security of the ship, or its goods had to be repaid only if and when the ship arrived safely after the voyage at its destination.

Greeks: The Greeks had started benevolent societies in the late 7th century AD to take care of the funeral and families – of members who died. The Friendly Societies of England were similarly constituted.

Lloyds: Lloyds started Commercial insurance. The origins of modern commercial insurance business as practiced today can be traced to Lloyd’s Coffee House in London. Traders who used to gather there, would agree to share the losses to their goods being carried by ships due to perils of the sea. Such losses used to occur because of maritime perils such as pirates robbing on the high seas or bad sea weather spoiling the goods or sinking of the ship due to perils of the sea.

History of insurance in India:

India: Modern insurance in India began in early 1800 or thereabouts, with agencies of foreign insurers starting marine insurance business.

The Oriental Life Insurance Co. Ltd.The first life insurance company to be set up in India was an English company.
Triton Insurance Co. Ltd.The first non-life insurer to be established in India.
Bombay Mutual Assurance Society Ltd.The first Indian insurance company. It was formed in 1870 in Mumbai.
National Insurance Company Ltd.The oldest insurance company in India. It was founded in 1906 and it is still in business.

Insurance Act:

बीमा क्या है
बीमा क्या है

In 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it compulsory that premium-rate tables and periodical valuation of companies be certified by an actuary. However, the disparity and discrimination between Indian and foreign companies continued.

The Insurance Act 1938 was the first legislation enacted to regulate the conduct of insurance companies in India. This Act, as amended from time to time continues to be in force. The Controller of Insurance was appointed by the Government under the provisions of the Insurance Act.

Nationalization of life insurance:

Understanding Insurance
Understanding Insurance

i. Life insurance business was nationalized on 1st September 1956 and the Life Insurance Corporation of India (LIC) was formed.

ii. 170 companies and 75 provident fund societies doing life insurance business in India at that time (Total 245 Companies)

iii. Life Insurance Corporation of India (LIC) was formed on September 1, 1956, it was a result of the merger of 245 private life insurance companies. These companies were nationalized, and their assets and liabilities were integrated to create LIC. The consolidation aimed to streamline the life insurance sector in India under a single government-owned entity, facilitating better management and expanding the reach of life insurance services across the country. This move played a crucial role in the growth and development of the insurance industry in India, with LIC becoming a dominant and influential player in the market. The objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

Thus, from 1956 to 1999, the LIC held exclusive rights to do life insurance business in India.

Nationalization of non-life insurance:

i. With the enactment of General Insurance Business Nationalization Act (GIBNA) in 1972, the non-life insurance business was also nationalized and the General Insurance Corporation of India (GIC) and its four subsidiaries were set up.

ii. 106 insurers in India doing non-life insurance business were amalgamated with the formation of four subsidiaries of the GIC of India.

Current Scenarios/situations in India:

Today, global insurance premiums represent 7.1% of the world’s economic activity, and the weight of the industry has increased by one percentage point in the last ten years. This percentage is even better understood when translated into absolute figures: in 2021, premiums rose above USD 6.8 trillion. This is more than the gross domestic product (GDP) of Spain, Italy, and France combined. 

The opportunity for Insurance in India continues to be huge, given the low insurance penetration and density in India. FY22 witnessed a 14% YOY growth in Life Insurance, 11% YOY Growth in overall General Insurance and 25% YOY Growth in Health Insurance. But beyond the numbers, the last two years of the pandemic have fundamentally transformed the sector and accelerated the pace of change. (YOY – Year over year)

Principles of Insurance:

  1. Utmost Good Faith: The principle of utmost good faith underscores the importance of honesty and transparency in insurance contracts. Both the insured and the insurer are bound by an obligation to act honestly and disclose all relevant information. This ensures a fair and transparent contractual relationship.
  2. Insurable Interest: To have a valid insurance contract, the insured must have a genuine financial interest in the subject matter of the insurance. This principle prevents individuals from obtaining insurance for situations in which they have no real stake, reinforcing the idea that insurance is meant to cover actual risks.
  3. Indemnity: The principle of indemnity is central to insurance. It ensures that the purpose of insurance is to provide compensation for the actual financial loss suffered by the insured. Insurance is not meant to be a source of profit but a mechanism to restore the insured to the same financial position as before the loss occurred.
  4. Proximate Cause: In determining coverage, insurers consider the proximate cause of the loss – the primary reason for the claim. This principle helps in clarifying which events are covered under the policy, providing a framework for assessing claims based on the most immediate and direct cause.
  5. Subrogation: After compensating the insured, the insurer may assume the legal rights of the insured to recover the loss from any third party responsible for the damage. This principle prevents the insured from receiving a double recovery and ensures that the party ultimately responsible for the loss bears the financial burden.
Understanding Insurance: History, Definition, principles, and needs.
Understanding Insurance: History, Definition, principles, and needs.

Major types of insurance:

There are mainly 2 types of Insurance – Life Insurance and Non-life Insurance (Fire & Marine insurance), but nowadays insurance sector covers different areas such as:

  1. Life Insurance:
    • Provides financial protection to the policyholder’s family in the event of the policyholder’s death. It can also serve as an investment and savings tool.
  2. Health Insurance:
    • Covers medical expenses, hospitalization costs, and other healthcare-related expenses. Health insurance policies may also include critical illness coverage and other benefits.
  3. Motor Insurance:
    • Mandatory by law, motor insurance includes two main categories –
      • Third-Party Liability Insurance: Covers damages to a third party’s property or injuries caused by the insured vehicle.
      • Comprehensive Insurance: Covers both third-party liability and damages to the insured vehicle.
  4. Property Insurance:
    • Protects against damages or losses to property, including home insurance, fire insurance, and other property-related covers.
  5. Travel Insurance:
    • Provides coverage for unexpected events during travel, such as trip cancellations, medical emergencies, and loss of baggage.
  6. Crop Insurance:
    • Aimed at protecting farmers from financial losses due to crop failure, damage, or other agricultural risks.
  7. Commercial Insurance:
    • Includes various policies designed for businesses, such as liability insurance, business interruption insurance, and professional indemnity insurance.
  8. Personal Accident Insurance:
    • Provides coverage in the event of accidental death or disability, offering financial support to the insured or their family.
  9. Marine Insurance:
    • Covers risks associated with the transportation of goods by sea, air, or land, protecting against damage or loss of cargo.
  10. Cyber Insurance:
    • Protects against losses arising from cyber threats, including data breaches, hacking, and other cybercrimes.

Need/Importance of Insurance:

Insurance is crucial for individuals, businesses, and society at large due to various reasons as follows:

  1. Financial Protection: Insurance provides a safety net against unexpected financial losses, ensuring individuals and businesses can recover from unexpected events.
  2. Risk Management: It helps in managing and mitigating various risks, such as accidents, natural disasters, and health issues, allowing individuals and businesses to focus on their activities without constant fear of financial setbacks.
  3. Legal Requirements: Certain types of insurance, such as auto insurance, are often mandatory by law, ensuring compliance and promoting responsible behavior.
  4. Promotes Economic Stability: Insurance facilitates economic stability by reducing the impact of large financial losses on individuals and businesses, preventing widespread economic disruption.
  5. Encourages Savings: Life insurance, in particular, serves as a form of savings and investment, providing financial benefits to policyholders or their beneficiaries over time.

In essence, insurance is a fundamental tool for managing risks, protecting financial interests, and fostering economic resilience at both individual and societal levels

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