Nature of Insurance
The insurance has the following
characteristics which are generally, observed in case of life, marine, fire and
general insurances.
1
Sharing of Risk :
Insurance is a device to share the financial losses which might be fall on an individual
or his family on the happening of a specified event The event may be death of a bread-winner to
the family in the case of life insurance , marine-perils in marine insurance,
fire in the fire insurance and other certain events in general insurance ,
e.g., theft in burglary insurance , accident I motor insurance, etc. the loss
arising from these events if insured are shared by all the insured in the form
of premium.
2
Co-operative
Device: The most important feature of
every insurance plan is the co-operation of large number of persons who, in
effect, agree to share the financial loss arising due to a particular risk
which is insured. Such a group of persons may be brought together voluntarily
or through publicity or through solicitation of the agents. An insurer would be
unable to compensate all the losses from his own capital. So by insuring or
underwriting a large number of persons, he is able to pay the amount of loss .
Like all co-operative devices, there is no compulsion here on anybody to purchase
the insurance policy.
3
Value of Risk:
The risk is evaluated before insuring to charge the amount of share of an
insured, herein called, consideration of premium. There are several methods of
evaluation of risks If there is expectation of more loss , higher premium may
be charged. So, the probability of loss is calculated at the time of insurance.
4
Payment of
Contingency: The payment is made at a certain contingency insured If the
contingency occur, payment is made. Since the life insurance contract is a contract
of certainty, because the contingency, the death or the expiry of term, will
certainly occur the payment is certain. In other insurance contracts, the
contingency is the fire or the marine perils etc, may or not occur. So, if the
contingency occurs payment is made, otherwise no amount is given to the
policy-holder. Similarly, in certain types of life policies, payment is not
certain due to uncertainty of a particular contingency within a particular
period. For example, in term-insurance, the payment is made only when death
of the assured occurs within the specified term, may be one or two
years. Similarly, in pure endowment payment is made only at the survival of the
insured at the expiry of the period.
5
Amount of
payment: The amount payment depends upon the value of loss occurred due to
particular insured risk provided insurance is there up to that amount. In life
insurance, the purpose is not to make good the financial loss suffered. The
insurer promises to pay a fixed sum on the happening of an event. If the event
or the contingency takes place, the payment does fall due if the policy is
valied and in force at the time of the event, like property insurance , the
dependents will not be required to prove the occurring of loss and and the
amount of loss. It is immaterial in life insurance what was the amount of loss
at the time of contingency. But In the property and general insurances, the
amount of loss, as well as the happening of loss is required to be proved.
6
Large Number of
Insured persons: to spread the loss immediately, smoothly and cheaply, large
number of persons should be insured. The co-operation of a small number of
persons may also be insurance but it will be limited to smaller area. The cost
of insurance to each member may be higher. So it may be unmarketable.
Therefore, to make the insurance cheaper, it is essential to insure large
number of persons of property because the lesser would be cost of insurance and
so, the lower would be premium in past years, tariff associations or mutual fire
insurance associations were found to share the loss at cheaper rate. In order
to function successfully, the insurance should be joined by a large number of
persons.
7
Insurance is not
gambling: The insurance serves indirectly to increase the productivity
of the community by eliminating worry and increasing initiative. The
uncertainty is changed into certainty by insuring property and life because the
insurer promises to pay a definite sum at damage or death. From a family and
business point of view all lives possess an economic value which may at any
time be snuffed out by death, and it is as reasonable to ensure against the
loss of this value as it is to protect oneself against the loss of property. In
the absence of insurance, the property owners could at best practice only some
form of self –insurance, which may not give him absolute certainty. Similarly,
in absence of life insurance, saving requires time; but death may occur at any
time and the property, and family may remain unprotected. Thus the family is
protected against losses on death and damage with the help of insurance,
from the company point of view, the life
insurance is essentially non-speculative, in fact no other business operates
with greater certainties From the
insured point of view, too, insurance is also the antithesis of gambling.
Nothing is more uncertain than life and life insurance offers the only sure
method of changing that uncertainty into certainty. Failure of insurance amounts gambling because the uncertainty of
loss is always looming. In fact, the insurance is just the opposite of
gambling. In gambling , by bidding the person exposes himself to risk of losing
, in the insurance, the insured is always opposed to risk, and will suffer loss
if he is not insured, by getting insured his life and property, he protects
himself against the risk of loss In fact, if he does not get his property or
life insured he is gambling with his life on property.
8
Insurance is not
charity: Charity is given without
consideration but insurance is not possible without premium. It provides
security and safety to an individual and to the society although it is kind of
business because in consideration of
premium it guarantees the payment of loss. It is profession because it provides
adequate sources at the time of disasters only by charging a nominal premium
for the service.
Principles of insurance
The insurance is based upon (i) principles of co-operation and, (ii)
principle of probability
i)
Principle of
co-operation: Insurance is co-operation device. If one person is providing for
his own losses, it cannot be strictly an insurance because in insurance, the
loss is shared by a group of persons who are willing to co-operate. In ancient
period, the persons of a group were willingly sharing the loss to a member of
the group. They used to share the loss to a member of the group. They used to
share the loss at the time of time damage. They collected enough funds from the
society and paid to the dependents of the deceased or the persons suffering
property losses. The mutual co-operation was prevailing from the very beginning
up to the era of Christ in most of the countries. Lately, the co-operation too
another from where it was agreed between the individual or the society to pay a
certain sum in advance to be member of the society. The society by accumulating
the funds, guarantees payment of certain amount at the time of loss to any
member of the society. The accumulation of funds and charging of the share from
the member in advance became the job of one institution called insurer. Now it
became the duty and responsibility of the insurer to obtain adequate funds from
the members of the society to pay them at the happening of the insured risk.
Thus, the shares of loss took the form of premium. Today, all the insured give
a premium to join the scheme of insurance. Thus, the insured are co-operating
to share the loss of an individual by payment of a premium in advance.
ii)
Principles of
probability: The loss in the shape of premium can be distributed only on the
basis of theory of probability. The chances of loss are estimated in advance to
affix the amount of premium. Since the degree of loss depends upon various
factors, the affecting factors are analysed before determining the amount of
loss. With the help of this principle, the uncertainty of loss is converted
into certainty. The insurer will have not to suffer loss as well have to gain
windfall. Therefore, the insurer has to charge only so much of amount which is
adequate to meet the losses. The probability tells what are the chances of
losses and what will be the amount of
losses.
The
inertia of large number is applied while calculating the probability. The
larger the number of exposed persons, the better and more practical would be
the findings of the probability. Therefore, the law of large number is applied
in the principle of probability. In each and every field of insurance the law
of large number is essential. These principles keep in account that the past
events will incur in the same inertia. The insurance, on the basis of past
experience, present conditions and future prospects, fixes the amount of
premium. Without premium, no co-operation is possible and the premium cannot be
calculated without the help of theory of probability, and consequently no
insurance is possible. So these two principles are the two main legs of
insurance.
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