Course Description :-
Purpose & Need of Insurance
Assets may be destroyed or made non-functional through an Accidental Occurrence.
Such possible accidents are called Perils –
Fire, Flood, Breakdowns, lightening, earthquakes etc
The damage that these Perils may cause to the Asset, is the Risk that the Asset is exposed to.
Risk – a possibility of Loss or damage – may or may not happen. Element of Uncertainty, if it is not, it can not be insured.
Other Meaning of the Term – Risk
- For Common Man: Exposure to danger
- In Insurance Practice: It is also used to refer to Peril or Loss Producing Event -
As Fire Insurance cover the Risks of Fire, Flood, Explosion, Cyclone etc.
It is also used to Property covered by Insurance – A Timber construction considered to be a bad Risk for Fire Insurance.
Mechanism of Insurance –
People, who are exposed to same Risks, come together and agree to share the loss and make good to the persons who suffer loss.
So, the Risk is spread among the community and the likely big impact on one / a few is reduced to smaller manageable impacts on all.
Manner of Loss sharing -
- Is determined beforehand. It may be collected after the Loss or may be collected in advance also.
- Insurers collect it in advance and create a fund from which the losses are paid.
- Human Life is also an Asset and is subject to
- Unexpected early death or sickness or disabilities caused by an accident.
- Accident may or may not happen.
- Death will happen but the timing is uncertain.
- Insurance does not protect the Asset.
- It does not prevent its loss due to the Peril. Peril cannot be avoided by Insurance. Peril can be sometimes, avoided by better Safety or Damage Control Management
How Insurance Works –
People facing common Risks come together & make their small contribution to the common fund. How much? It is determined on the past Experience basis.
Example –
In a village there are 400 Houses each valued Rs. 20,000.
On an average, 4 get burnt.
So, total Loss – 4 x 20,000 = Rs. 80,000
Contribution by each - Rs. 80,000 / 400 = Rs. 200
The Business of Insurance –
- Pooling of Risks and Resources
- To Bring together Persons with common Insurance interest (sharing the same Risks),
- Collecting the share or contribution (called Premium) from all of them, and
- Paying out compensation (called Claims) to those who suffer.
So, it is a method or a technique of collection of small amount or premium from many Individuals & Firms, out of which losses of few are paid.
Insurance as a Social Security Tool
Provision of Social Security is -
An Obligation of State-State has passed various Laws to use Insurance as a Tool of Social Security.
The Employee State Insurance Act, 1948- Provides for Employees State Insurance Corporation to pay for Sickness, Disablement, Maternity & Death
For the maintenance of Hospitals, Dispensaries etc (For the Industrial Employees and the Member of their Family who are Insured Persons)
Insurers play a very important role in the Social Security Schemes sponsored by the Govt.
The Crop Insurance Scheme (RKBY)
Is a measure with considerable Social Significance?
Not only has the Insured Farmers get benefited but also Community at large - directly or indirectly.
All Rural Insurance Schemes, operated on Commercial Basis are designed to provide Social Security to the Rural Families.
Besides, the Insurance Industry itself offers on commercial basis, Insurance Covers which have ultimate objectives to provide Social Security - Janata Personal Accident, Jan Arogya.
Role of Insurance in Economic Development-
- Insurance Companies collect premium in advance and thus Funds are collected and held in trust for the Benefit of the Policy Holders.
- Every Premium represents a Risk that is covered by the Premium. In effect, this vast amount represents pooling of Risks.
- The Management of this Fund ever keeps the ultimate objective – the benefit to the Society and country at large. They invest it judiciously to derive further benefits to community.
The system of Insurance provides many direct or indirect benefits to –
- Individuals and their families, as well as to Industry and Commerce, then to Community and Nation as a whole.
- Directly as they are protected from the consequence of the loss that may be caused the accident or the fortuitous event.
Role of Insurance in Economic Development
- Besides, before insurance of Risk, Insurers arrange Surveys and Inspection of the Property to be Insured. The object is not only to assess the risks but also to suggest and recommend – various improvement in the Risk, which will attract lower rates of Premium.
- It also earns Foreign Exchange. Indian Insurers operates in more than 30 Countries. These operations earn Foreign Exchange and represent invisible export.
