Introduction to insurance ।। need of insurance ।। Types of insurance

The Concept of Insurance

The concept of insurance

The concept of insurance is old man kind. Its origin appears simultaneously with the appearance of human society. From the beginning of society protection has remained an important need of human beings.

The man has always thought of

protection of his life, his family, his assets and his earning capacity. The owner of the

assets have to suffer heavy loss.

Insurance is an arrangement to indemnify the loss or risk caused by the perils to the property. Fire, flood, earthquake, theft are the probable events and are called 'perils. Risk means the possibility of loss due to the perils which are unforeseen and loss may occur or not. Uncertainty is an important aspect of risk.

Thus, insurance is a contract in which persons exposed to similar risks come together and decide among themselves, that the loss of any person due to such risk shall be shared by all persons on some equitable basis.

The concept of insurance can be understood better with the help of the following examples.

Assume that there are 10,000 houses in a city and every year 10 houses are destroyed by fire. The amount of loss due to fire is Rs. 1,00,000 per house.

It means the total estimated loss will be 1,00,000 x 10 = Rs.10,00,000. If this loss is divided into 10,000 house owners, the share of each house owner will be Rs.100. Thus, by contributing a small amount of Rs.100 every year all the 10,000 house owners get protection against the risk of fire.

Insurance - introduction ।। What is Insurance

Introduction

An individual and his family or business may be exposed to different risks in his life. Risk arises due to uncertainty which can not be avoided. Human beings do not have any command on uncertainties. Human beings can suffer heavy loss themselves or to property due to unforeseen events e.g. death, illness, accident, fire, earthquake etc. These risks may result in financial loss. He wants to compensate for the financial loss caused to the property or to the life. Insurance is the mechanism to reduce the loss to property or to the life which occurs due to such risk or perils. It is a co- operative device to spread the loss caused by a particular risk over a number of persons. Thus, insurance can not avert the risk or loss but it can be distributed amongst the insured persons.

The first insurance company was formed in the United States in Charles Town (Charleston), South Carolina, in 1732 which underwrites fire insurance.

The modern form of insurance has originated in the last three centuries. The first life insurance

policy was insured in England in 1583. Lloyds Association, a leading marine insurance company in the world was founded in 1688 in a Coffee House in London run by Edward Lloyds.

However the attention of public were attracted towards the necessity of fire insurance and starting of fire insurance business on commercial

basis after the great fire in London in 1966 which lasted 4 days and destroyed 13000 buildings. In India the concept of insurance was found in Arya Chanakya’s Arthashastra.

There after the British started insurance business in the modern form by establishing Life and General Insurance companies in India

Definition of insurance

Definition :

There various definitions of insurance are given by experts. They can be divided into two groups i.e. functional definition and contractual definition. They are as follows;

Functional Definitions

1. Ghosh and Agrawal : Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it.

2. Rock Fell :Insurance is the source of distribution of loss of few persons into many persons.

3. A.Z.Mayerson : Insurance is a device for the transfer to an insurer of certain risks of economic loss that would otherwise come by the insured.

4. Encyclopedia Britannica : Insurance may be described as a social device whereby a large group of individuals, through a system of equitable contributions, may reduce or eliminate certain measurable risks of economic loss common to all members of the group.

5. W. Beverideges : The collective bearing of risk is Insurance.

6. D.S.Hancsell : Insurance may be defined as a social device providing financial compensation for the effects of misfortune, the payments being made from the accumulated contribution of all parties participating in the scheme.

7. Wherry and Newman : Insurance by lessening uncertainty, frees the individual from the same element of risk .

Contractual Definition

1. E. W. Patterson : Insurance is a contract by which one party , for a consideration called premium, assumes particular risk of the other party and promises to pay him or his nominee a certain or ascertainable sum of money on specified contingency.

2. Justice Tindall : Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency.

According to functional definition insurance is a system of transferring the risk from one person to a group of persons and distributing the loss arising out of the risk among all the l members of the group.

However, the contractual definition explains the nature of contract between the insurer and insured.

According to this definition insurance is a contract to pay certain some of money to the insured or his heirs on happening of certain contingent even in the future.

Characteristics of Insurance

The analysis of the above definitions explains the nature of insurance as follows.

1. Insurance is a Contract

Insurance is a contract between two parties i.e. insurer and insured by which the insurer, in consideration of insurance premium, agrees to compensate the insured against certain probable risks. Since insurance is a contract the provisions of Indian Contract Act viz. proposal, acceptance, consideration, competency of parties lawful object etc. are applicable to insurance contracts as well. It is a contract to pay compensation on the happening of a certain event in the case of fire, marine and general insurance. If there is no loss , no compensation is paid and even no premium is returned to the policyholder. But in case of life insurance , insurance company pay certain sum of money on the death of the insured person or if insured is alive, paid to them the amount of premium with interest and bonus.

2. Means of Mutual help/ Cooperative device

All for one and one for all is the basis for cooperation. Insurance is a strong cooperative device to spread the loss caused by a specific event. Insurance is based on the principle of mutual help. Under this arrangement persons exposed to same risks come together and create a common fund and compensate the person who has actually suffered the loss. People individually can not afford to bear the entire loss. But jointly they can get protection by contributing a small amount each to the common fund. In other words, insurance is a cooperative mechanism wherein large number of persons come together.

They have similar risk and share the loss by contributing a small amount in the form of a premium.

3. Large number of Insured Person

The insurance mechanism works on the principle of large number of insured

persons. Insurance is spreading loss over a large number of persons. Larger the number of persons, lower the cost of insurance and amount of premium. On the other hand, lower the number of persons, higher the cost of insurance and amount of premium.

4. Uncertainty of events:

The event to be insured must be uncertain and unforeseen. It may occur or may not occur, e.g. every property insured for fire risk may be not catches fire Insurance can be taken in case of uncertain events.. In life insurance even though death of insured person is certain, its timing is uncertain. Hence life insurance is also a lawful agreement.

5. Protection of Financial Risk :

Insurance is a contract to indemnify the financial loss caused to the insured property due to the specific risk during the period of the insurance contract. If the insured suffers no loss during this period he is not entitled to receive any amount from the insurer. In other words, insurance is a contract of indemnity and not a contract of profit. The maximum amount of compensation is limited to the actual loss of the property. Thus, the insured can not make any profit out of the loss incurred. In other words an insurer is protected from financial risks which are measured in terms of monetary values. Life insurance contracts are an exception to the principle of indemnity. He can also take life policies of any amount as the loss of death can not be measured in monetary terms.

6. Based on certain principles and regulated by law

Insurance business is regulated by certain act passed by central or state governments in every country. Life insurance is regulated by Life Insurance Corporation of India Act 1956 whereas General Insurance is regulated by General Insurance Business (Nationalization)Act 1972 In India Insurance Regulatory and Development Authority (IRDA) is set up in 1999 to regulate the Insurance business in the country. The insurance business stands upon certain principles such as insurable interest, utmost good faith, indemnity, subrogation, causa-proxima, contribution etc.

7. Sharing and transfer of risk :

Insurance is a social and economic device. It share the financial loss occurred due to unforeseen events between the public who are exposed to risk. Insurance is a plan to bear the risks and financial losses occurs due to unexpected events. The death of the insured, fire losses, marine perils, burglary, fidelity etc. may cause a tremendous loss to the policy holder. The insurance shared this risk amongst all the insured in the form of premium. That means the risk is transferred from one individual (person) to a group of people.

8. Valuation of Risk :

First of all insurance company should evaluate the risk and finalize the amount of premium. Thereafter the insurance company enters into the contract. It is the basis of charging a premium which depends upon the risk. If risk is high the rate of premium becomes high. The risks involved in the subject matter can be evaluated by several methods. The procedure of valuation of risk is different in case of life, fire, marine and accident insurance.

9. Payment of claim at contingency:

The insurance company is liable to pay compensation i.e. claim amount only if certain unforeseen event takes place in case of fire, marine and accident insurance. In other words if the unforeseen event occurs, payment is made to policy holder.If contingency not take place, there is no need to pay any amount of compensation to the insured. In case of life insurance, the contingency i.e. death or the maturity of the policy will certainly happen. In such case insurer is liable to pay the policy amount on the death of the insured or on the expiry of the term whichever is earlier.

10. Insurance is not Gambling or Wagering :

Insurance is a lawful contract. It transfers the risk of one person to a group of people. Under insurance contract policy holders paid consideration in the form of premium. Insurance serves indirectly to increase productivity and convert uncertainty into certainty. Therefore an insurance contract is not a gambling or wagering contract. Persons involved in gambling or wagering bid and expose themselves to risks of losing. There is no chance to convert risks or losses to gains. In the game of gambling there may either result in profit or loss.

11. Insurance is not a charity but business :

The insurance is a business which provides protection to life or property from unforeseen events. However, insurance companies collect the amount of premium as a consideration form policy holders for the cost of risk so covered. Charity is a payment without claiming anything in return.

Need of Insurance

Life insurance is an intangible property and its need may not be realized properly by the people / firms. It is, therefore, rightly said that

"Insurance is a subject matter of solicitation." The need and purpose of Insurance is explained below.

1. Provide Economic Protection :

Insurance provides economic protection to the people and their property. Events like fire, flood, lightening, earthquake, theft, breakdown in machinery may damage the property and cause financial loss. The primary objective of insurance is to provide protection against the financial loss of property due to specific risks. It should however, be remembered that insurance does not protect the property from any risk nor it can avoid the risk. It can also not reduce the loss. It only indemnifies such financial loss. A fire insurance policy can not prevent the occurrence of fire. It pays the amount of loss caused to the property by fire.

2. Investment:

Another important purpose of life insurance is investment for meeting a person's future needs such as education, marriage of children, provision of income for old age etc. The small amount paid regularly as premium for a certain number of years grows into a large investment in the long run besides providing insurance protection. Thus, insurance helps to generate investment through collection of a small amount of premium which fulfills the future economic needs of the people.

3. Tax Benefit :

Besides providing insurance protection to policyholders it is also helpful to get income tax relief in proportion to premium payment made during the financial year.

So through insurance savings in income tax can be made. Thus, It gives a tax rebate to the insured and his tax liability is reduced.

4. Social Security:

In recent years the importance of insurance as a social security device has increased significantly. The state is devising various insurance schemes to provide protection to the economically and socially weaker sections, rural people, farmers, workers and artisans at lower or subsidized premiums. The use of insurance as advice of social security has helped the state to maintain social stability and peace reduce the economic burden on the society and discharge its responsibility towards the society.

5. Business Needs:

Business also needs insurance protection. Insurance safeguards the investment in business against various risks, ensures continuity of operations, and thus gives boost to business growth. It indemnifies the loss of factory buildings, machinery, equipment, inventories and other assets caused by fire, flood, earthquake, theft etc.

It also provides protection against the fraudulent acts, dishonesty or misappropriation of money by the employees. Insurance can also be taken for risks in foreign trade, fluctuations in foreign exchange rates, political instability etc. Thus the economic tensions and fear of loss, discontinuity of the business can be reduced.

6. Cover against uncertainty :

By providing financial support insurance system minimizes uncertainties in business and human life. However, it should be noted that, insurance does not protect the property from any peril or risk nor avoid it. But, insurance only indemnifies the financial loss occur due to unforeseen events. Thus, insurance provides coverage against uncertainties.

7. Provision against unexpected death :

The life of a person is full of uncertainties and risks. Due to unforeseen incidents like early death, the life of a person comes to an end. Sometimes due to accidents, the life of a person becomes non-functional through partial or total disabilities. Insurance system makes a provision to help dependents in the form of financial compensation.

8. To generate financial resources :

Insurance generate huge funds by collecting small amount from number of persons i.e. policy holders in the form of regular premium. These funds are invested in government securities, bond and stock. It is also gainfully employed in industrial development and utilized for the economic development of the nation. The employment opportunities can be increased through collective investments.

9. To enhance labor welfare :

Insurance provides financial compensation to the employees or workers getting injured if any unforeseen event takes place at the workplace, when they are at work. Insurance plays an important role as a tool to increase labor welfare by making provision for payment of financial assistance as compensation.

10. Medical Support :

Today's lifestyle has changed rapidly. Due to modernization and industrialization the level of environment pollution has increased tremendously. It increases the health risk. Anyone can be a victim of critical illness. However, medical care has become unaffordable. Medical insurance is one of the ways to fulfill different types of health risks. Insurance provides medical support to policy holders through medical insurance policy.

11. Helpful to business organization:

There are chances of loss of business,factory building, vehicles, computers, machinery, equipment’s, raw material, finished goods etc. caused by fire, flood, earthquake, theft etc. In such a case , a business organization needs insurance protection. Insurance provides assurance to the business organizations to safeguard the investment against such risk by indemnifying the loss. It is helpful to business organizations to focus only on business activities and to enhance the business.

12. Useful to partnership firm :

In a partnership firm , if any partner dies, it is the responsibility of other partners to pay the share of the expired partner to his legal heirs. It may likely close down the business. In such cases insurance provides the amount of compensation to the legal heirs of a deceased partner.

13. Encourages Savings:

Insurance develops a habit of saving among citizens. It encourages people to to.make systematic savings through payment of regular premiums. The insured gets the lump sum amount at the maturity of the policy.

Economic Significance of Insurance

The significance of insurance in the life of a person has increased over the years with increase in the risks and uncertainties. The significance of insurance can be discussed through various views like economic, commercial or social.

Economic Significance of Insurance

The economic significance of insurance may be explained with the help of the following points.

1. Encouragement to saving:

Insurance encourages people to make systematic savings through payment of regular premiums. The regular payment of premiums develops a habit of saving among citizens in the country.The small savings of millions of insured persons results in a huge amount of national savings.

2. Generation of Employment :

Insurance business has a tremendous capacity of generating employment both directly and indirectly in the country. It provides employment to millions of people in the administrative and development department. Insurance business generates direct employment in the form of agents, advisors, surveyors, development officers, administrative staff etc. Besides these direct employment opportunities, the real estate, information technology and other services are also increased due to protection of insurance which enhanced their employment capacity.

3. Infrastructure development:

The development of the economy is mostly dependent upon the development of basic infrastructure such as electricity, water supply, transportation facilities and communication. Insurance companies provide funds to develop these basic needs in the form of share capital, loans and advances. Thus, the rapid development of infrastructural facilities in the country is the output of insurance.

4. Promotes economic development :

The investment policies of insurance companies facilitate the speedy economic development of a country. Insurance accelerates the process of economic development through mobilizing domestic savings. It helps to convert accumulated capital into productive investments. Insurance companies invest in the central and state government’s securities, public and private sector companies, co-operative sector, industries, corporations etc. Thus, insurance plays an important role in the sustainable development of the economy.

5. Facilitates agriculture and rural development:

India is an agricultural country. Indian agriculture mostly depends upon the regularity of monsoon. Therefore, there may be losses caused by heavy rain, drought, flood, wind, pests and diseases. Through crop insurance such losses are compensated by insurance . Besides this they can provide protection to the farmers and their assets such as agriculture, poultry, cattle, horticulture, sericulture, agricultural pump sets, farm equipment etc. Insurance makes available the funds for construction of wells and irrigation schemes. The Insurance Regulatory and Development Authority (IRDA) has made it obligatory for the insurance company to conduct insurance business to a certain extent every year in rural areas. Thus, insurance companies can contribute significantly to the development of rural areas.

6. Increase in foreign exchange reserves:

By doing business in various countries, insurance companies can earn valuable foreign currency to the country. It helps to increase the foreign exchange reserves. It facilitates the import requirements of the country.

7. Facilitates the development of capital market:

The contribution of insurance companies in the development of capital market in the country is significant. They can invest large amount of funds in state and central governments securities. The insurance companies have started issuing unit linked insurance policies. These schemes provide more attractive benefits to the policy holders. Thus, insurance helps in the development of the capital market.

Commercial Significance of Insurance

commercial or social.

Commercial Significance of Insurance:

1. Business continuity :

In a partnership firm, if any partner retires or dies, the continuing partner should repay the dues and share of such partner. Insurance helps to pay the share and other due of such partner and remaining partners may continue their business.

Besides, insurance protects the life of persons and their assets against several risks. Losses occurring due to unforeseen incidence can be compensated by insurance. Thus, insurance safeguards the business and ensures business stability.

2. Development of Trade and Industry:

The huge funds collected by insurance companies in the form of premium are mobilized to the trade and industrial sector. Insurance companies invest these funds in the industrial sector in the form of share capital, loans and advance. It is helpful to traders and industrialists undertake new projects and enter into new business. It accelerates trade and industrial development. Besides, the uncertainties in business are reduced considerably by the insurance arrangement. It helps to the business people to reduce difficulty or tension in expanding their business. Thus the business activities get encouragement to go further.

3. Encourages development of aids to trade/ service sector:

Basically, the development of trade and industry depends upon the development of aids to trade such as transport facilities, banks, warehouses, communication etc.

Today the service sector emerged as a pillar of nation building. The growth of the service sector increased with simultaneous development of trade and industry. Insurance helps to develop such aids to trade by giving assurance the payment of compensation if loss occurs due to unexpected incidents. In addition to that, insurance provides financial help to develop these services in the country.

4. Promote foreign Trade :

Insurance plays an important role in developing international trade by promoting foreign trade. Generally foreign trade i.e. export trade carried out through marine voyage. In marine transport tremendous risk is involved such as vessel crash, sinking of vessel, robbery, fire, jettison war perils, cargo or vessel seized by enemy etc.. Huge loss may occur due to such perils. Insurance assures to compensate if loss occurs and provide protection from these perils. Thus, insurance helps to promote export i.e. foreign trade.

5. Promotes foreign trade:

Insurance encourages foreign trade in a number of ways. It can provide protection against various marine perils, fluctuation in the exchange rate, export risks and loss in air transport etc. In Fact marine insurance has been the oldest form of insurance. Most of the foreign trade is conducted through marine transport and is exposed to marine perils and losses.

6. Insurance of Key men/ Key Personnel:

Key men of the business are the assets of the organization. The key man is the man whose capital, experience, goodwill, ability to control, devotion etc. make him the most valuable asset of the business. The absence of such key men may reduce the profit considerably. The experience and ability of key men helps to carry out business efficiently and effectively. By ensuring the lives of keymen in business the continuity of business operation can be guaranteed If the keyman running the business, especially in case of proprietary business or other key officers on whom the business depends, dies unexpectedly or leaves the firm the future of business is endangered. In such a case, insurance provides the compensation to the dependents and helps to cover the loss by taking out a key man insurance policy.

7. Employee welfare and protection of interest:

According to various labor laws, business firms have to provide provident fund, gratuity, pension and other welfare facilities to employees. In addition to that, the employees are motivated by providing bonuses and awarding rewards by the organization. Hence, the employer has taken out a group insurance policy for all employees by paying a premium on behalf of the employee. Insurance mechanism facilitates the prompt payment of these liabilities and protects the interest of the worker.

8. Helps to increase business efficiency:

Business entities are full of risks and uncertainties. There may be chances of losses occurring to the property due to damages, fire, accident, theft etc. Insurance provides protection to these properties by payment of compensation. It enables us to rearrange the business organization. Due to this, the owners of the business are free from the worries of business losses. They can concentrate on business activities and maximize profit. Thus, insurance helps to increase business efficiency.

9. Provision of Statutory liabilities:

The business entities imposed a number of statutory liabilities under various laws e.g. workmen’s compensation liability, product liability, professional liability, consumer protection act, corporate social responsibility etc. Adequate provision of These liabilities can be made by taking respective policies. Thus, the business people are free from the tension of discharging these liabilities

10. Reduction of loss Probability:

Insurance can help the insured by suggesting ways and means of reducing the probability of loss to the assets to be insured. Their technical persons and surveyors inspect the assets before accepting the risk and recommend the precautions to be taken for loss reduction and better functioning. By adopting these measures the Insurance premiums can be reduced.

11. Increase in the value of assets:

The insurance of assets increases their value as collateral security. Banks and other financial institutes are willing to provide more loans against the security of these assets. Thus, the borrowing capacity of business increases. The risk of losing money is less in case of these assets.

12. Loss prevention measures:

The insurance not only grants protection against loss of assets due to specific risks but also suggests measures for loss prevention and minimization. In India Loss Prevention Association is set up for this purpose.

Insurance as a Social Security Tool

Insurance is not only a device of individual and business security but also a device of social security. Social insurance is useful for solving various social problems like unemployment, old age, crimes, disability and health care of the aged.

Burden of the state to provide relief to unemployment, destitute and aged citizens may be reduced through the insurance arrangement. The large fund of insurance companies can be utilized for society's desirable investments, thus, ensuring the utilization of society's funds for social welfare, and wellbeing. The United Nations Organization’s declaration of Human Rights 1948 provides that, “Everyone has a right to a standard of living adequate for the health and well- being of himself and his family”. According to this right everyone has entitled to get food, cloth, shelter, medical care and essential social services. They have also right to security in case of unemployment, illness, disability, widowhood and any other causes beyond his control.

The Government of India has also provided article 41 in the Indian Constitution regarding social security. Thus, insurance is not only a device of individual and business security but also a device of social security. It works as a social security tool as follows.

1. Social Insurance :

The LIC of India has set up a Social Security Fund and provided special insurance plans for the benefit of the poor and the people below the poverty line. It is also helpful to agriculturists and the persons engaged in the unorganized sector. Some of the insurance plans are as,

i. Rural Self Employment Scheme

ii. Rural Group Insurance Scheme

iii. ShikshaSahyogYojana

iv. SarvatrikAarogyaBimaYojana

v. Crop Insurance

vi. Solatium Scheme etc.

2. Protection to wealth :

General Insurance Corporation of India and other private insurance companies provide protection to properties of the society. Insurance is a mechanism of indemnifying the loss that occurs due to fire, flood, earthquake, theft and so many other perils. Due to security provided by insurance against such perils, people are free from worries and they are getting satisfaction and comfort in life. Life insurance provides protection against loss of human wealth. If human material is strong, well-educated and carefree, it will generate maximum income. Society will have financial security against old age, death, damage and disappearance of his physical wealth and life wealth. The society protects against degradation through prevention of economic losses with the help of insurance.

3. Economic growth of the nation:

Insurance plays an important role in the development of a nation through the development of the economy by mobilizing domestic savings. Insurance turns accumulated funds into productive investment which is generated through a small amount of premium. Sufficient capital available from insurance companies accelerates the production cycle. Insurance enables financial stability and encourages trade and commerce activity. Thus, by providing a strong hand and mind, protection against loss of property and adequate capital to produce more wealth, insurance creates economic growth for the nation.

4. Reduction in Inflation :

Too much circulation of money can increase the inflation in the economy. Insurance withdraws money from society as a domestic savings through premium which reduces the circulation of money. On the other hand insurance provides funds for production which narrow down the inflation gap. Thus, insurance helps to control the inflation which in turn increases the satisfaction level of the society.

Types of Insurance

Types of Insurance in brief

The insurance contract is classified in to three main types i.e. Personal Insurance, Property Insurance and Guarantee Insurance.

1. Personal Insurance:

When an individual person takes insurance policy of own life then it is called as personal insurance. In a broad sense, personal insurance is also called Life Insurance. Under this policy the insurer provides insurance cover against unexpected happenings like death, illness and accident. We cannot measure the loss of insured when he dies; hence the principle of indemnity is applicable to this insurance.

The personal insurance classified in-to three types such as Life Insurance,

Personal Accident Insurance and Health Insurance.

Life Insurance : In life insurance individual can take the insurance of own life. Any person are having unlimited insurable interest in own life, hence principle of indemnity is notapplicable to life insurance. Life insurance again classified in to two types i.e. whole life policy and endowment life policy.

Personal Accident Insurance :Under personal accident insurance insurer has to pay compensation to insured if he disable to do work due to accident or his nominee after death of insured. The compensation is depending upon percentage of impairment.

Health Insurance: Under health insurance individual can make arrangement of medical expenses, expenses of operation and other expenses of hospitalization.

Under this policy insurer undertake the responsibility of payment of the entire amount directly to respective hospitals.

2. Property Insurance :

When individual or any organization can take insurance of his property for compensation of future loss then it is called as Property Insurance. Property insurance is a contract of indemnity. Therefore, principle of indemnity is applicable to this insurance contract. The insured must have insurable interest in such property.

The insurer promise to pay loss occurs by insured due to damage of property within the limit of policy amount. However, insurance does not protect the property from any peril nor avoid the peril. Insurance only indemnifies the financial loss occur due to uncertain risks. It is the main objective of the insurance to provide protection against the financial loss due to the perils.

A person can take insurance for office buildings, houses, furniture, domestic products, raw materials, plants and machinery, motor vehicles, jewelry, precious goods etc.

3. Guarantee Insurance:

It is a new type of insurance. Guarantee insurance evolved early in the 20th century. After industrial revolution the scope and volume of business transaction are tremendously increased. Most of the businessmen are rely upon employees of the organization. The two classes such as owner and employees are generated in the society. At the same time the risk of fraud and dishonesty is increased. Guarantee insurance is an arrangement whereby the insurer agrees to indemnify the insured for fixed amount against loss arising through dishonesty, fraud or a breach of contract.

e.g. If borrower not repaid the loan amount of bank, cashier of bank or any credit society or business has misappropriate the cash in such a case the insurer agrees to pay such a loss. The guarantee insurance is not against theft, but against the dishonesty of the employee. Hence these two types are completely different from each other.

4. Liability Insurance :

Under liability insurance, a person is liable to a third person owing to provisions of any law or to his employees under an act. The liability insurance covers the risks of third parties, compensation to employees under workmen’s compensation insurance, liability of the automobile owners if damage to a third party due to a motor accident. It also covers reinsurances

Principles of Insurance

The principles of insurance are the set of rules which are applicable to the agreement entered in by the insurer and insured.

The contract of insurance is based on certain fundamental principles; some of them are common to life, fire, marine and miscellaneous insurance. Fundamental principles of insurance are divided into two groups i.e. Primary Principles and Secondary Principles.

These are discussed as follows :-

Primary Principles

Primary principles of insurance are the basic principles of insurance. These are the backbone of insurance contract. Generally these principles are existing in all types of insurance contract.

These principles are as follows.

1. Principle of Insurable Interest –

Insurable interest means interest of the insured in the subject matter of insurance. Prof. Hansell has defined insurable interest as “a financial involvement in which is able to be insured”. It is the basic condition of insurance contract that insured must possess insurable interest in the subject matter of insurance. The insured should have monetary relationship with the subject matter. This monetary relationship must be legally acceptable.

Insurable interest is the pecuniary interest whereby the insured is benefited by the existence of the subject matter and is prejudiced by the death or damage of the subject matter. In other words policy holder (insured) is economically benefited by the survival or the existence of the subject matter and suffers economic loss vice versa. This principle is applicable to all types of insurance contract.

When insurable interest is exist?

Generally, in life insurance contract the insurable interest should exist at the time of taking insurance, while in marine insurance it should exist at the time of indemnification. In case of fire and accident insurance it should exist both the time.

Who can hold Insurable Interest?

Husband and wife - Husband and wife both have unlimited insurable interest in each other’s life. They can insure each other. For other relatives the right to insure does not arise e.g. father, mother, independent son or daughter etc. unless some economical interest in each other.

Partners - All partners have a mutual insurable interest in each other. The death of any partner may cause an economical loss to the other partner.

Debtors and Creditors – A creditor has a right to insure the life of debtor to the extent of his debt.

Trustee’s – Trustee’s, attorney, administrator have a right to insure property entrusted to them.

Owner – Legal owner of the property has insurable interest in the said property.

Landlord and tenant – They have insurable interest to the extent of the rent.

Employers and employees – They have insurable interest in each other. Employers have the right to insure the key employees as well as employees can insure the life of an employer.

2. Principle of Indemnity –

It is an important principle of the insurance contract. It is applicable to all types of insurance contract excluding life insurance. Insurance is a contract of Indemnity.

Indemnity means a security against loss or compensation for loss. Such compensation will be equal to the loss to the property. In other words the insured can not earn any profit out of this contract. Indemnity restores the policy holder to the same financial position after a loss as he can enjoy immediately prior to the loss. Once the policy holder is indemnified, he has to surrender all his rights relating to

damaged property to the insurance company.

Methods of Indemnification:

Usually there are three methods of indemnification. They are as follows.

Cash Payment – It is the most suitable and user friendly method of payment of loss of indemnity. Under this method actual loss is evaluated and payment in cash is done to the insured.

Replacement / Reinstatement – Generally this method is used in fire insurance. Both the parties prefer to settle the claim through replacement. The insurance company replaces a new part of the whole property. This concerns particularly in fire insurance the rebuilding of premises to their former conditions.

Repairs – Under this method with the consent of the policy holder insurance the company repairs the damaged part of the property. Generally it is used for repairing motor vehicles.

3. Principle of Utmost Good Faith –

Insurance contracts are based upon the mutual trust and confidence between the policyholder and insurance company. Utmost good faith means faith on each other; this means each party to proposed contract is legally responsible to reveal to the other party all material information relating to subject matter. Material information means the information on which the decision of the other party to enter into a contract depends. In other words material fact means a fact that would influence the mind of a prudent underwriter in assessing the risk. The policy holder should disclose and provide all the facts to the insurance company otherwise the contract will become invalid.

The responsibility of disclosing all the material information relating to the subject matter lies with the insured. Material fact includes the following.

The fact or information which increases the risk of the insurance company.

In case of life insurance, facts about life and health, family history, habits,

hereditary disease, risk increases due to profession etc.

In case of marine insurance, possibility of risk due to improper maintenance of ship.

In case of burglary insurance, past history of burglary if any. However certain facts are not included in the material fact which is as follows.

The fact or information which reduces the risk of the insurance company.

The information which includes in the insurance contract.

The information is easily obtained by insurance companies etc.

4. Principle of Probability –

The theory of probability is the basis of insurance contracts. The principle of

Probability means the chances of happenings of an event and expected amount of loss.

Though the chances of incurring loss to any property are depend upon so many factors and rates of premium are fixed in advance by considering these factors. This theory is helpful for understanding the chances of losses and expected amount of losses. In view point of insurance company the law of large numbers is an important law. Probability of happening of certain events happening is applicable for a large number. But very few insured suffer loss and they get compensation.

5. Principle of Co-operation –

Professor Hansell define insurance is a social device providing financial compensation for the effects of misfortune and the payment being made from the accumulated contributions of all parties participating in the scheme. In other words insurance is a co-operative measure for providing security against losses.

The loss occurs due to an unfortunate event that is divided into groups of people. This concept of Insurance has also come into existence from ancient period. The loss is compensated through social fund created by collecting money in the form of premium by way of co-operative efforts. It is systematic mechanism of cooperating each other by a group of persons who are expected to loss and actual loss suffered by anyone of them is shared by all in the form of a premium.

Secondary Principles of Insurance –

Basically an insurance contract is the contract of indemnity. Secondary principles are the outcome of the principle of indemnity. It includes the following.

1. Principles of Subrogation –

Subrogation means to exercise for own benefit, all rights and remedies which insured possession against the third party. In other words for own benefit, the insurance company comes to possess all the rights of the insured against the third person as regards the subject matter can be claimed by the insurer after paying the claim.

According to Elelyn Thomas, “It is the right to which one person has to stand in the place of another and avail himself of all the rights and remedies of that other.”

This principle is the outcome of the principle of indemnity. It is applicable only when loss to the property is fully compensated. The payment of compensation twice to the owner of the property is avoided. e.g. If motor car of the insured is damaged by accident, insurance company may pay full amount of compensation to Mr. A. In such a case the insurer will become entitled to all the rights of insured subject matter against a third party who is responsible for damage. Insured cannot claim the amount for damage from a third party and insurance company at a time.

If he gets an excess amount, it should be returned to the insurance company.

The right of subrogation may take place in any one of the following ways.

Right arising out of tort

Right arising out of contract

Right arising out of salvage

Right arising out of contract

Principle of Contribution –

The principle of contribution is applicable when the policyholder takes the insurance from two or more insurance companies on the same risk or subject matter. In such case payment towards compensation to insured by insurance company is to be made proportionately. In other words the insurance company can call other insurance company similarly liable to the same insured to share the cost of payment of compensation. This principle ensures equitable distribution of losses between different insurance companies. Under this principle insured cannot be prohibited from taking more policies of the same property or risk with different insurance companies but he is not allowed to make profit by way of double

insurance.

For example, Mr. A has taken insurance of his house valued Rs.6 lakh with two companies amounting to Rs. 600000 and Rs. 300000 respectively. House is fully destroyed by fire in such case both the companies compensate the loss by contributing proportionately as Rs. 400000 and Rs. 200000 (i.e. 2:1) respectively and not in fully.

3. Principle of Mitigation of Loss –

The term mitigation means to minimize or take efforts to minimize. This principle place a duty on the policy holder to make every effort and to take all such steps to minimize the loss to the subject matter when unfortunate event take place. In other words under this principle it is the duty of insured to take necessary steps to minimize the loss, as the owner of uninsured property used to take. That means under this principle he is expected to take prudent action to minimize the loss and to save whatever is left. He must to take efforts to save the property from damages in case of accident. If he fails to do so and it is found that he was silent or negligent at the time of the unfortunate event, the insurance company can avoid the amount of claim.

4. Principle of CausaProxima –

CausaProxima is the Latin word. It Means Proximate Cause i.e. nearest cause.

Thus Proximate Cause of loss is that cause which is nearest in effectiveness and not remote cause. At the time of payment of compensation, insurance company consider the cause for loss which is an active cause that lead for mishap and loss occur to subject matter. Generally this principle is used when actual cause of mishap is not find out or cannot be fixed. If there are more than two causes operated at the same time as a cause of loss and real cause is not found, in such case insurance company is liable to pay loss or compensation by considering the nearest cause of loss. Generally this principle is used in marine insurance.

Insurance Contract and Wagering Contract

Meaning of Insurance Contract: Insurance is a contract between two parties i.e. insurer and insured. In this contract one party (insurer) agree to compensate for the loss that occurred due to perils to the other party (Insured) by taking consideration in the form of insurance premium.

Definition – “Insurance is a contract in which a sum of money is paid to the insured person on happening of certain event in case of fire, marine and general insurance. And in case of life insurance to pay certain amount either on death of insured person or on expiry of contract period in consideration of premium”.

Nature of Insurance Contract

Insurance is a contract; hence all the provisions of section 10 of Indian Contract Act are applicable to them. Indian Contract Act determines the nature of Insurance is a contract which is as follows.

1. Two Parties - In insurance contracts there are two parties i.e. one is insurer (Insurance Company) and another is insured (Policy holder).

2. Written Agreement – Any contract is legal when it is in written form. Insurance contract is a written agreement between the insurer and insured. The printed proposal form provided by the insurer to the insured.

3. Consideration – Consideration means contract price. In insurance contract, insured person to pay consideration to insurer in the form of premium and insure can accept risk against premium.

4. Eligibility for contract – The contract is legal only when the parties involved in the contract are eligible for contract. The insurance company is legal organization and hence it is eligible for contract. That means the insured must be major and not mad or insolvent.

5. Free Consent – According to the Indian Contract Act consent for any contract should be free. It cannot be given by force, if to do so, the contract may be illegal.

6. Object of Contract – The object of the contract must be legal. If object of any contract is illegal then automatically the contract will be illegal.

7. Recognition by Law – For recognition of law the contract should fulfill all the legal formalities which are given in the law.

Difference between Insurance Contract and Wagering Contract:

The difference between insurance contract and wagering contract can be brought out with the help of following points.

1. Meaning –

Insurance is a contract in which a sum of money is paid to the insured person on the occurrence of certain events in case of fire, marine and general insurance. And in case of life insurance to pay a certain amount either on death of insured person or on expiry of contract period in consideration of premium.

A wagering contract is a contract between two parties in which one party promise to pay money or worth of money on the happening of uncertain event in consideration of the other parties `to pay him if the event does not happen.

2. Insurable Interest –

Insurable interest means interest of the policy holder in the subject matter of the insurance. It is mandatory that policy holder (insured) must possess insurable interest in the subject matter of insurance.

In case of wagering contract insurable interest is not present in the subject matter because the happening of the event is uncertain.

3. Utmost Good Faith –

Insurance contract is depend upon good faith of insurer and insured. That means utmost good faith is existing in insurance contract. In wagering contract principle of Utmost Good Faith is not arise.

4. Consideration –

The insurance contract is made on the basis of consideration. Here, insured person to pay premium to insurance company as a consideration and the company accepts the risk. There is no consideration exists in the wagering contract.

5. Risk –

In insurance contract risk involved and risk is distributed among so many peoples. In wagering contract risk exists because they are based on uncertain events.

6. Enforcement by law –

Insurance contracts are lawful and hence they are enforceable by law. In case of any dispute among insurers and insured, they make sure that it is obeyed.

A wagering contract is illegal and it can not be enforceable by law.

7. Indemnity –

Insurance Company paid compensation after certain event. In a wagering contract there is no risk or loss hence the question of indemnity does not arise.

Summary

An individual and his business is exposed to several risks in their life. e.g. premature death, accident, sickness, fire, flood, earthquake, theft etc.

His income capacity may come to end or reduce for a certain period of time. His business assets and other property may be adversely affected and their working life and income generation capacity is reduced. No amount of precaution can avoid these risks. However, some arrangement can be made to recover the loss arising from their occurrence. Insurance is one of such arrangements and the insurance business has flourished over the years. Insurance business plays a vital role in the economic development of a country. The business significance of insurance also can not be ignored. It also educates businessmen about loss prevention. Thus, insurance is indispensable for the business.

Insurance is a contract between the insurer and insured by which the insurer in consideration of premium received from the insured, agrees to indemnify the insured against the financial loss caused to the subject matter insured by specific risks during the period of the insurance contract. The provisions of Indian Contract Act are applicable to the insurance contracts. Besides these provisions, some special principles, such as utmost good faith, indemnity and insurable interest apply to insurance contracts.

For getting insurance protection, the risk must be uncertain in nature. If the risk is certain it can not be insured.

Insured should not be allowed to make profit from insurance. Insurance is a contract of indemnity and not a contract of wager / gambling. Insurance business is based upon the dual theories i.e. theory of probability and the theory of large numbers which facilitate insurer to estimate the probable loss as accurately as possible. It is a business and not a charitable or philanthropic activity.