Definition of Insurance
There is no single definition of Insurance. Insurance can be defined from the viewpoint of several disciplines including law, economics, History, actuarial Science, risk theory and sociology.
There are different definition of Insurance-
- Insurance means to reduce the risk of uncertainty.
- Insurance means to distribute the risk of loss.
- Insurance means to take an engine so that life will move smoothly because without an engine, car will not a move and without an insurance, life will not move appropriately.
- According to Justice Tindall, insurance is a contract where the insured pays a sum of money to the insurer in exchange for the insurer’s agreement to pay a larger sum in the event of a specific contingency.
- Emeric Fischer defines an insurance contract as an agreement between two or more parties where the insured pays the insurer a specific sum in exchange for the insurer indemnifying the insured for losses caused by certain risks, contingencies, or occurrences. For the agreement to be legally enforceable, the insured must have an insurable interest in the property being insured.
- According to Baker (2008), insurance is a voluntary undertaking whose obligations are determined by the rules of contract law. However, by the mid-19th century, courts in the United States and Europe recognized that insurance policies are more like contracts of adhesion, where insurance companies and policyholders rarely have equal bargaining power.
- Hence in Simple Terms Insurance is a legal agreement that is prepared between insured and insurer.
- After careful study the commission of insurance terminology of American risk and Insurance Association has defined Insurance-
Insurance is a polling of fortuitous losses by transfer of such risk to insurers who agree to indemnity insured for such losses to provide other pecuniary benefit on their occurrence or to render services connected with risk.
Basic Characteristic of Insurance
A). Pooling of Losses
B). Payment of Fortuitous Loss
C). Risk Transfer
D). Indemnification
Polling of Losses
- Polling is a spreading of entire loss suffer by the few over the entire group so that in the process average loss is substituted for actual loss.
Polling of loss implies two things-
- The Sharing of losses by entire group
- The Prediction of entire loss of future with some accuracy based on Law of large number.
Note:
Law of large number states that larger the number of exposures greater the probability that actual loss experience will equal to expected loss experience.
For e.g.- if you flip a coin into the air the probability of getting “heads” is 0.5. if you flip the coin 10 times you may get heads 8 times. If you flip the coin 1 million times the actual number of heads would be approx. 500,000.
Thus a number of random toss increase, the actual result approach the unexpected result.
Payment of Fortuitous Loss
- A fortuitous loss simply means which is cause as a result of Chance. It is unforeseen and unexpected kind if loss.
- In other words the loss is like an accident.
- These risk cannot be controlled.
- For e.g. In Dehradun a big rock fall on the head of an individual.
Risk Transfer
- It is an essential element of insurance.
- With the expectation of self-insurance, a true insurance plan always involve risk transfer.
- Risk transfer simply means that a pure risk is transferred from insured to the insurer who typically is in a stronger financial position to pay the loss than the insured.
- Pure risk are typically transferred to insurer include-
- Risk of premature death
- Excessive longevity
- Poor health
- Disability
- Destruction
- Theft of property
- Personal liability
Indemnification
- Indemnification means loss is restored to his or her financial position.
- g. If your office burn in fire a homeowner policy will indemnify you or restored you to your previous position.
- Only the loss is restored but it also depend on the market value.
Characteristic of Ideally Insurable Risk
There are 6 Insurable risk –
- There must be a large number of exposure unit.
- The loss must be accidental & unintentional.
- The loss must be determinable & measurable.
- The loss should not be catastrophic.
- The chance of loss must be calculable.
- The premium must be economically feasible.
Large number of exposure unit
The first requirement of an insurable risk is a large number of exposure unit. E.g. – a large number of wooden frame dwelling in a city grouped together for the purpose of providing property insurance on dwelling.
The main purpose is to enable insurer to predict losses based on law of large number. The loss cost can then be spread over all insurer in underwriting class.
Accidental & Unintentional loss
The loss should be unforeseen and unexpected by the insured and outside of insured control. If an individual deliberately
Cause a loss he or she should not be indemnified for loss.
Reason for Requirement-
Accidental – law of large number based on random occurrence of events
Moral hazard – it increase if insured deliberately intend to cause of loss.
Determinable and Measurable Loss
This means the loss should be defined as to cause, time, place and amount.
Some losses however are difficult to determine and measure. E.g. under a disability income policy the insurer promise to pay a monthly benefit to disability.
Some dishonest claim may deliberately fake sickness or injury to collect from insurer.
Steps to Determine & Measure loss
No Catastrophic Loss
This means that large proportion of exposure unit should not incur losses at the same time. Insurers ideally avoid all catastrophic losses. In reality however it is impossible because catastrophic loss periodically result from flood, hurricanes, tornado, earthquake, forest fires and other natural disaster.
Catastrophic loss can also result from act of terrorism.
Finally financial instrument are now available for dealing with catastrophic loss. The instrument include catastrophic bond, it is design to help fund catastrophic loss.
Calculable Chance of loss
The insurer be able to calculate both average frequency and average severity of future loss with some accuracy. It is important so that proper premium can be charged that is sufficient to pay all claim and yield a profit during policy period.
There are some loss which cannot be calculated – flood, wars, unemployment.
Thus without assistance these losses are difficult for private carriers to ensure.
Economically Feasible Premium
The insured must be able to afford premium. Every time the insured have to take appropriate premium plan so that it will equal to chance of loss.
With this one view if chance of loss 40% the cost of loss policy exceeds the amount that the insurer must pay under contract.
Types of Insurance
Life Insurance
Life insurance simply means to reduce the risk of life in terms of “Financially and mentally”. It give mental peace to individual. It remove the burden of dependency on children, because you are financially secure as well as your retirement is secure.
It pay death benefit to beneficiaries when insured dies, with additional bonus and reversionary bonus.
There are various product of life insurance-
- Term Insurance
- Whole life Insurance
- Annuity
- Pension
- Endowment
- Investment(SIP,ULIP)
There are various companies who provide life insurance- LIC (Life Insurance Corporation), ICICI prudential life Insurance, HDFC Life Insurance, TATA AIA Life Insurance Company.
Some life insurance companies also sell individual & group health insurance plan that cover medical expense because of sickness or injury.
Health Insurance
Health Insurance simply means to reduce the financial security for “emergencies”. Today time the hospital expenses touching the heights. In now days people have to save about 50 thousand annually for emergencies.
Planning always have to be SMART–
- S for Specific
- M for Measurable
- A for Achievable
- R for Relevant
- T for Time bound
There are various reason to save for health insurance, there can be any emergency.
Regarding operation, child admit, OPD, treatment of any health issues.
LIC offers 200+ health issues plan. There are end number of issues.
That why it is called to take mediclaim and health insurance. Mediclaim give security for hospital expenses and health insurance give financial security. Mediclaim and health insurance for child, married and old people are available with different premium.
It is important mostly for old age people because hospital is our second home at that time and normally approx. 10 thousand require every month.
There are companies who provide insurance- LIC, HDFC, Care health.
There are agents and brokers who sell insurance.
General Insurance
General Insurance simply means providing “financially peace” from non-life expenses. There are end number of product in general insurance which are insured- cargo, marine, property, liability, casualty etc.
Casualty insurance is a broad field of insurance that cover whatever is not covered by fire, marine and life insurance , casualty line include auto, liability, compensation and health insurance.
Property & Casualty Insurance Coverage
Personal Line
- Private passenger auto Insurance
- Homeowner Insurance
- Personal Umbrella liability Insurance
- Earthquake Insurance
- Flood Insurance
Commercial Line
- Fire and allied line Insurance
- Commercial multiple peril insurance
- General liability Insurance
- Product Liability Insurance
- Worker Compensation Insurance
- Commercial auto Insurance
- Accidental & health Insurance
- Professional Liability Insurance
- Boiler & Machinery Insurance
- Crime Insurance
Government Insurance
There are various proposals and schemes of government insurance programme at present times.
Government insurance can be divided into Social Insurance and other Insurance.
Social Insurance
These programme are designed by government with certain characteristic.
These programme are financed entirely by mandatory contribution from employers, employees and not by general revenue of government.
Major Programmes in India-
- Mahatma Jyotiba Phule Jan Arogya Yojana
- Pradhan Mantri Suraksha Bima Yojana
- Atal Pension Yojana
- Karunya Health Scheme
Other Government Insurance
There are both state and national level.
State–
- Dr YSR Aarogyasri Health Care Trust
- Arogya Raksha
- Working Journalist Health Scheme
- Employee Health Scheme
National-
- Central Government Health Scheme
- Ayushman Bharat
- Aam Aadmi Bima Yojana
- Pradhan Mantri Jeevan Jyoti Bima Yojana
