, UNIT-1 INTRODUCTION TO INSURANCE
INTRODUCTION:
Insurance is the most effective risk management tool which can protect
individuals and businesses from financial risks arising out of various
contingencies. The emotional and psychological loss can never be compensated,
but at least the financial loss can be compensated with insurance. Though there
are uncertainties in life which you cannot mitigate, but insurance will surely
help you transfer the financial risk associated with the same.
DEFINITION:
Insurance is a legal contract between two parties- the insurance company
(insurer) and the individual (insured), where in the insurance company promises
to compensate for financial losses due to insured contingencies in return for the
premiums paid by the insured individual. In simple words, insurance is a risk
transfer mechanism, where you transfer your risk to the insurance company and
get the cover for financial loss that you may face due to unforeseen events. And
the amount that you pay for this arrangement is called premium.
NATURE /FEATURES/CHARACTERISTICS OF INSURANCE:
1. Contract:
Insurance is contract between two parties in which one party agrees to
provide protection to other party from losses in exchange for premium. The
parties are insurer and insured. Insurer guarantees compensation in occurrence
of any contingency to insured and insured pays premium to insurer for
protection. Insurance companies accept the offer made by the insurance policy
holder and enter into contract. Contract for insurance is always in written.
2. Lawful Consideration:
Existence of lawful consideration is must for insurance contract like any
other lawful contract. The insurance policy holder is required to pay premium
regularly to the insurance company. This premium is paid in exchange for
protection against losses and damages guaranteed by insurance companies.
3. Payment on Contingency:
Insurer is required to compensate the insured only on happening of
contingency for the damages and losses done. Insured cannot make profit from
,insurance policy but can only claim compensation from insurer in case of
contingency. If no contingency occurs, insurer is not required to pay any
compensation to insured.
4. Risk Evaluation:
Insurer evaluates the risk associated with subject matter of insurance
contract. Proper risk evaluation enables the insurer to calculate the right amount
of premium to be paid by insured. Insurer uses different techniques for risk
evaluation. If insurance object is subject to heavy losses, heavy premium will be
charged. On the other hand, if there is less expectation of losses then low
premium will be charged.
5. Large Number of Insured Persons:
There are large numbers of insured person’s takes insurance policy from
insurer. Larger the number of insurance policy holders with insurance
companies, smaller will be the degree of risk on any individual. Risk arising
from any contingency is shared among these large numbers of insured persons.
6. Co-Operative Device:
Insurance is a cooperative device to pool risk among large number of
persons. Insurance is a platform where different persons come together to share
risk by taking insurance policy from insurer. All persons pay premium regularly
to insurance companies. If any of person incurs losses or damages due to
occurrence of any contingency, insurance company will compensate him out of
premiums paid by different persons.
7. Not a Charity or Gambling:
Insurance is a legal contract. It cannot be termed as a charity or gambling.
Compensation paid to insured by insurer is not in charity but is paid in exchange
of premium deposited by him. Insured pays premium to insurer for guarantee of
compensation in happening of contingency. Also, insured cannot make profit
out of insurance policy and is meant for recovering him from losses only. He is
paid compensation only when he incurs losses due to contingency. That is why
it is not a gambling.
ROLE/IMPORTANCE/SIGNIFICANCE/ADVANTAGES/BENEFITS OF
INSURANCE:
, 1. Provide safety and security:
Insurance provide financial support and reduce uncertainties in business and
human life. It provides safety and security against particular event. There is
always a fear of sudden loss. Insurance provides a cover against any sudden
loss. For example, in case of life insurance financial assistance is provided to
the family of the insured on his death. In case of other insurance security is
provided against the loss due to fire, marine, accidents etc.
2. Generates financial resources:
Insurance generate funds by collecting premium. These funds are
invested in government securities and stock. These funds are gainfully
employed in industrial development of a country for generating more funds and
utilised for the economic development of the country. Employment
opportunities are increased by big investments leading to capital formation.
3. Life insurance encourages savings:
Insurance does not only protect against risks and uncertainties, but also
provides an investment channel too. Life insurance enables systematic savings
due to payment of regular premium. Life insurance provides a mode of
investment. It develops a habit of saving money by paying premium. The
insured get the lump sum amount at the maturity of the contract. Thus life
insurance encourages savings.
4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing
domestic savings. Insurance turn accumulated capital into productive
investments. Insurance enables to mitigate loss, financial stability and promotes
trade and commerce activities those results into economic growth and
development. Thus, insurance plays a crucial role in sustainable growth of an
economy.
5. Medical support:
A medical insurance considered essential in managing risk in health.
Anyone can be a victim of critical illness unexpectedly. And rising medical
expense is of great concern. Medical Insurance is one of the insurance policies
that cater for different type of health risks. The insured gets a medical support in
case of medical insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The
basic principle of insurance is to spread risk among a large number of people. A
large number of persons get insurance policies and pay premium to the insurer.
Whenever a loss occurs, it is compensated out of funds of the insurer.
INTRODUCTION:
Insurance is the most effective risk management tool which can protect
individuals and businesses from financial risks arising out of various
contingencies. The emotional and psychological loss can never be compensated,
but at least the financial loss can be compensated with insurance. Though there
are uncertainties in life which you cannot mitigate, but insurance will surely
help you transfer the financial risk associated with the same.
DEFINITION:
Insurance is a legal contract between two parties- the insurance company
(insurer) and the individual (insured), where in the insurance company promises
to compensate for financial losses due to insured contingencies in return for the
premiums paid by the insured individual. In simple words, insurance is a risk
transfer mechanism, where you transfer your risk to the insurance company and
get the cover for financial loss that you may face due to unforeseen events. And
the amount that you pay for this arrangement is called premium.
NATURE /FEATURES/CHARACTERISTICS OF INSURANCE:
1. Contract:
Insurance is contract between two parties in which one party agrees to
provide protection to other party from losses in exchange for premium. The
parties are insurer and insured. Insurer guarantees compensation in occurrence
of any contingency to insured and insured pays premium to insurer for
protection. Insurance companies accept the offer made by the insurance policy
holder and enter into contract. Contract for insurance is always in written.
2. Lawful Consideration:
Existence of lawful consideration is must for insurance contract like any
other lawful contract. The insurance policy holder is required to pay premium
regularly to the insurance company. This premium is paid in exchange for
protection against losses and damages guaranteed by insurance companies.
3. Payment on Contingency:
Insurer is required to compensate the insured only on happening of
contingency for the damages and losses done. Insured cannot make profit from
,insurance policy but can only claim compensation from insurer in case of
contingency. If no contingency occurs, insurer is not required to pay any
compensation to insured.
4. Risk Evaluation:
Insurer evaluates the risk associated with subject matter of insurance
contract. Proper risk evaluation enables the insurer to calculate the right amount
of premium to be paid by insured. Insurer uses different techniques for risk
evaluation. If insurance object is subject to heavy losses, heavy premium will be
charged. On the other hand, if there is less expectation of losses then low
premium will be charged.
5. Large Number of Insured Persons:
There are large numbers of insured person’s takes insurance policy from
insurer. Larger the number of insurance policy holders with insurance
companies, smaller will be the degree of risk on any individual. Risk arising
from any contingency is shared among these large numbers of insured persons.
6. Co-Operative Device:
Insurance is a cooperative device to pool risk among large number of
persons. Insurance is a platform where different persons come together to share
risk by taking insurance policy from insurer. All persons pay premium regularly
to insurance companies. If any of person incurs losses or damages due to
occurrence of any contingency, insurance company will compensate him out of
premiums paid by different persons.
7. Not a Charity or Gambling:
Insurance is a legal contract. It cannot be termed as a charity or gambling.
Compensation paid to insured by insurer is not in charity but is paid in exchange
of premium deposited by him. Insured pays premium to insurer for guarantee of
compensation in happening of contingency. Also, insured cannot make profit
out of insurance policy and is meant for recovering him from losses only. He is
paid compensation only when he incurs losses due to contingency. That is why
it is not a gambling.
ROLE/IMPORTANCE/SIGNIFICANCE/ADVANTAGES/BENEFITS OF
INSURANCE:
, 1. Provide safety and security:
Insurance provide financial support and reduce uncertainties in business and
human life. It provides safety and security against particular event. There is
always a fear of sudden loss. Insurance provides a cover against any sudden
loss. For example, in case of life insurance financial assistance is provided to
the family of the insured on his death. In case of other insurance security is
provided against the loss due to fire, marine, accidents etc.
2. Generates financial resources:
Insurance generate funds by collecting premium. These funds are
invested in government securities and stock. These funds are gainfully
employed in industrial development of a country for generating more funds and
utilised for the economic development of the country. Employment
opportunities are increased by big investments leading to capital formation.
3. Life insurance encourages savings:
Insurance does not only protect against risks and uncertainties, but also
provides an investment channel too. Life insurance enables systematic savings
due to payment of regular premium. Life insurance provides a mode of
investment. It develops a habit of saving money by paying premium. The
insured get the lump sum amount at the maturity of the contract. Thus life
insurance encourages savings.
4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing
domestic savings. Insurance turn accumulated capital into productive
investments. Insurance enables to mitigate loss, financial stability and promotes
trade and commerce activities those results into economic growth and
development. Thus, insurance plays a crucial role in sustainable growth of an
economy.
5. Medical support:
A medical insurance considered essential in managing risk in health.
Anyone can be a victim of critical illness unexpectedly. And rising medical
expense is of great concern. Medical Insurance is one of the insurance policies
that cater for different type of health risks. The insured gets a medical support in
case of medical insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The
basic principle of insurance is to spread risk among a large number of people. A
large number of persons get insurance policies and pay premium to the insurer.
Whenever a loss occurs, it is compensated out of funds of the insurer.
