2. Insurance Providing Protection to all Whether Big or Small

4. In legal terms, insurance is a contractual agreement whereby one party agrees, for a consideration called premium, to compensate another party for losses. Thus an insurance transaction involves the following: Insurer : The party agreeing to pay for the losses of the insured. Insured : The party who insured his risk with the insurer. Premium : the payment to the insurer received from the insured for indemnifying the losses. Policy : is the contract between the insurer and insured that sets the contractual obligation between the two. Exposure to loss : The insured’s possibility of incurrence of loss is called the insured’s exposure to loss.

5. INSURANCE PREMIUM RECEIVED IS POOLED IN A FUND To pay the Expenses of management To Pay Agency Commission To pay the claims Surplus money is invested in Govt. securities as per norms)

6. How Insurance Works The mechanism of insurance is very simple. People who are exposed to the same kind of risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. In other words, the risk is spread among the community and the likely big impact on one or few is reduced to smaller manageable impacts on all. There are certain principles also, which make it possible for insurance to remain a fair arrangement. The first being sharing of risk as it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that the peril should occur in an accidental manner. The occurrence of loss has to be random, accidental, and not the deliberate action of the insured person(s). The manner in which the loss is to be shared can be determined beforehand. average, may suffer losses.

7. The following illustrations make the concept of insurance clear. Example 1 In a particular colony there are 600 houses each having a worth of Rs 30000. Every year there is a probability of 3 houses getting burnt. The resultant loss per house is Rs 30000 and total loss being Rs 90000. If all the 600 home owners pool Rs 150 each to the pool the unfortunate people whose houses were burnt can be easily paid. Example 2 There are 10000 persons in a city who all are aged 40 and are healthy. It is expected that of these , 10 persons may die during the year . If the economic value of the loss suffered by the family of each dying person is taken to be Rs. 30000 , the total loss would work out to Rs. 3,00,000/- . If each person in the group contributed Rs. 100/- a year , the common fund would be Rs.10,00,000/-. This would be enough to pay Rs. 30,000/- to the family of each of the ten persons who die . Thus, 10000 persons share the risk of 10 persons. The surplus if any after payment of claims remains in the fund which is utilized to meet future excess losses or returned back to policyholders in one or the other form.

8. Human being – Is it an asset? A human being is an income-generating asset. One’s manual labour, professional skills are the assets. Human asset can also be lost like other assets due to causes like -early death , fatal sickness and death caused by accidents. Insurance -Is it a Business? Insurance companies are called insurers. The business of insurance is to Bring together the persons with common insurance interests (sharing the same risks) Collect the share or contribution (called premium) from all of them and Pay out compensations (called claims) to those who suffer.

10. In an insurance contract, one should remember that a right created for one party represents a duty for the other party. In the event of default of premium or non-compliance of conditions by insured, an insurer may cancel the insurance or refuse to pay claims/payment of losses.

11. Is insurance a contract? What is its nature ? A contract of insurance is a contingent contract. The general principles of law of contract must be complied with for a contract of insurance to be valid. Contract of insurance comes into existence where there is an offer (from the person facing the risk) and the underwriter or the insurer accepts it by issuing the policy. The contract of insurance (in order to be a valid contract) can be entered into only by person(s) competent to contract. A contract of insurance other than life insurance contract is a contract of indemnity. The insurer undertakes to indemnify the insured for loss or damage arising as a result of risk specified. In case of life insurance, if a person dies the insurance company can only give a specified claim amount as compensation to the survivors, it cannot indemnify the loss of lost life . Since the person who is dead cannot be brought back.

15. Functions of Insurance It provides protection It provides certainty It helps prevention of losses It helps capital formation It shares risk

18. Classes of Risk and their Insurability Financial and Non – financial Risks Static and Dynamic Risks Fundamental and Particular Risks Pure and Speculative Risks

21. Chain of Risk Transfer Risk Insurer Reinsurer Insured