Table of Contents
Introduction
We all face different kinds of risks in our daily lives. Some of these risks are predictable, while others are not. Some of these risks can cause minor losses, while others can cause major losses. How can we prepare ourselves for these uncertain events and reduce their impact? The answer is insurance. Insurance is a way of transferring the risk of loss from one person to another in exchange for a payment. Insurance allows us to share the burden of loss with others who are in the same situation. Insurance also gives us peace of mind and security in case something bad happens. Insurance is a contract between two parties: the insured and the insurer. The insured is the person who pays a certain amount of money, called the premium, to the insurer. The insurer is the person who agrees to pay the insured a certain amount of money, called the claim, if a specified event, called the risk, occurs. The document that contains the terms and conditions of the insurance contract is called the policy. Insurance can cover various types of risks, such as life, property, health, and so on. Insurance is a useful and beneficial tool that helps us cope with the uncertainties of life.
Meaning of Insurance
Insurance is a way of protecting yourself from the possibility of losing something valuable or facing a problem that you cannot afford to solve. For example, if your car is stolen, you may not have enough money to buy a new one. But if you have insurance, you can pay a small amount of money every year to an insurance company, and they will give you a large amount of money if your car is stolen. This way, you share the risk of losing your car with many other people who also have insurance. The insurance company uses the money they collect from everyone to pay for the losses of those who need it. Insurance can also cover other things, such as your health, your life, your business, or your property. Insurance is important for the economy and the society, because it helps people and businesses to deal with unexpected problems and to invest in the future.
Definition of Insurance
Depending on the category, there are two different definitions of Insurance :
- Functional Definitions
- Contractual Definitions
Functional Definitions
According to Encyclopaedia Britannica, “Insurance may be defined as a social device whereby a large group of individuals, through a system of equitable contributions, may reduce or eliminate measurable risk of economy loss common to all members of the group.”
According to Magee D.H., “Insurance has been defined as a plan by which large number of people associate themselves, to shoulders of all, risks attached to individuals.”
According to Allen C. Mayerson, “Insurance is a device for the transfer of certain risks of economic loss to an insured, that would otherwise be borne by the insured.”
According to Ghosh and Agarwal, “Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it.”
From the above stated definitions, we can highlight some common features as follows:
- Insurance is a device to transfer risk.
- Insurance is a cooperative device.
- Insurance is based on the value of risk.
- Insurance is contingent on an event.
- Insurance covers fortuitous losses.
- Insurance pays a fixed amount.
- Insurance requires a large number of insured persons.
Contractual Definitions
According to Maclean, “Insurance is a method of spreading over a large number of persons a possible financial loss too serious to be conveniently borne by an individual.”
According to 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.”
In the case of Lucena v. Crawford (1806), Lawrence J. provided a comprehensive definition of interest in the context of insurance contracts. Here’s a simplified version of his definition:
Insurance is a contract where one party, in return for a price adequate to the risk, becomes security to the other that they shall not suffer loss, damage, or prejudice from the occurrence of specified perils to certain things exposed to them.
Insurance, as defined by various experts, is a contract where one party, for a consideration known as a premium, assumes the risk of another party and promises to pay them or their nominee a certain or ascertainable sum of money on a specified contingency. This method spreads a potential financial loss, too serious to be conveniently borne by an individual, over a large number of persons. The insurer, in return for a price adequate to the risk, becomes security to the other party that they shall not suffer loss, damage, or prejudice from the occurrence of specified perils to certain things exposed to them.
Key features of contractual insurance:
- Risk Spreading
- Contractual Agreement
- Security Against Loss
- Financial Consideration
Historical Development of Insurance
Insurance has a long history that dates back to ancient times. The earliest examples of insurance contracts are found in the form of bottomry agreements (Bottomry is a term that refers to a type of maritime contract, where the owner of a ship borrows money and uses the ship as collateral. If the ship is lost or damaged during the voyage, the owner does not have to repay the loan. But if the ship returns safely, the owner has to pay back the loan with interest. Bottomry was a common practice in ancient times, but it is no longer used today.), which were used by the Babylonian traders as far back as 4000-3000 BC. Bottomry was also a common practice among the Hindus in India around 600 BC. Under a bottomry agreement, the traders borrowed money with the condition that they did not have to pay it back if their cargo was stolen by pirates or sank in the sea. The interest on the loan compensated for the risk. However, there is no proof that insurance in its modern form existed before the 12th Century. As society advanced, so did the scope of insurance.
Marine insurance
Marine insurance is a way of protecting ships, cargo, and other transport modes from damage or loss during sea trade. It is the oldest type of insurance, dating back to ancient times. Babylonian merchants used to borrow money to fund their voyages, and they did not have to repay if their ships or goods were destroyed by pirates, storms, or enemies. This was called a bottomry contract, and it was based on the idea of interest and credit. Indians also used this system around 600 BC. Later, marine insurance became more formal and regulated in Europe. Northern Italian cities were the first to practice it around the end of the 12th century, and it flourished in the 15th century. Spain and England also adopted marine insurance laws and institutions in the 16th century. In the 18th century, marine insurance became a specialized business, with two leading companies in London: London Assurance and Royal Exchange. As trade and commerce grew more complex, marine insurance also evolved to cover different risks and needs. In the 20th century, marine insurance expanded globally and became more standardized. India has a long history of marine insurance, as mentioned in the ancient texts of Manu and Kautilya. They suggested pooling resources to cope with natural disasters such as fire, floods, famine, and disease. However, modern marine insurance in India started with the British, who established seven marine insurance companies in Calcutta between 1797 and 1810.
Fire Insurance
Fire insurance is a way of protecting property and assets from damage or loss caused by fire. It started after the Great Fire of London in 1666, which destroyed thousands of buildings and left many people homeless. The first fire insurance office was set up in England in 1681. Many other insurance companies emerged in England after 1711, but the most successful ones were the London Assurance Corporation and the Royal Exchange Assurance Corporation. They offered fire insurance to people and businesses. Fire insurance came to India with the British rule. The first fire insurance company in India was Triton Insurance Company Ltd., founded in Calcutta in 1850. Other old fire insurance companies were the Sun Insurance Office, Calcutta (1710), London Assurance and Royal Exchange Assurance (1720), Phoenix Assurance Company (1782), and so on. Later, more companies like the Liverpool and London and Globe, North British and Commercial Union opened their branches in Bombay, Calcutta, and other cities. Today, fire insurance is handled by the subsidiaries of General Insurance Corporation of India, which was formed in 1971. Fire insurance has a long history of almost 200 years. However, the general insurance sector in India did not develop much. Many early general insurance companies collapsed due to bad investments, poor management, and weak distribution systems.
Life insurance
Life insurance is a way of securing the financial future of one’s family in case of death. It has a long and rich history that spans across different countries and centuries. Here are some key points about the history of life insurance:
Life insurance began in England in the 16th century, with the first policy issued to William Gybbons. The first official life office was the Hand-in-Hand Society, founded in 1696. In the 18th century, more societies emerged and offered life insurance policies, such as the Amicable Society for a Perpetual Assurance (1705), The Equitable Life Assurance Society (1762), and the West Minister Society (1792). The premium rates depended on the reputation and health of the insured.
Life insurance came to America in 1752, when Benjamin Franklin started the Philadelphia Contribution. By 1820, there were 17 stock life insurance companies in New York. However, many of them failed due to bad investments, poor management, and weak distribution. Between 1873 and 1877, 33 life insurance companies collapsed. Life insurance only grew steadily in the US after 1910. As world trade increased, life insurance also expanded globally in the 20th century. Most of the world’s insurance business is concentrated in Europe and North America.
Life insurance in India has gone through various phases of competition, nationalization, and liberalization. The first life insurance company in India was the Oriental Life Insurance Company, established in Calcutta in 1818. It was followed by the Bombay Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829, and the Oriental Life Assurance Company in 1874. In 1870, the Bombay Life Assurance Company became the first to cover Indian lives at normal rates. Since then, many other companies have been set up in India. Some of the important milestones in the Indian life insurance business are:
- 1912: The Indian Life Assurance Companies Act was passed to regulate the life insurance business.
- 1928: The Indian Insurance Companies Act was passed to enable the government to collect statistical data on life and non-life insurance business.
- 1938: The Insurance Act was passed to consolidate the earlier legislation and protect the interests of the insured.
- 1950: The Insurance Amendment Act of 1950 abolished Principle Agencies.
- 1956: An ordinance was issued on January 19, 1956 to nationalize 245 Indian and foreign insurers and provident societies. Life Insurance Corporation (LIC) was formed by the LIC Act, 1956.
Insurance in India: A Brief History
The insurance sector in India has seen remarkable changes over the last 200 years. There are many private and public insurance companies in India that offer a variety of products and services. Many Indian households have some form of insurance coverage. Here are some key events in the history of insurance in India:
1900-1912: Indian insurance companies grew rapidly due to the Swadeshi movement. However, they also faced problems of mismanagement, fraud, and poor distribution. The Indian Life Assurance Act (Act 6 of 1912) was passed to regulate the life insurance business in India.
1913-1938: Life insurance companies struggled to compete with foreign companies after the Indian Life Assurance Act, 1912. After World War-I, there was a renewed demand to boycott foreign companies and achieve complete independence. This boosted the Indian insurance companies. The Indian Insurance Companies Act was passed in 1928 to enable the government to collect statistical data on life and non-life insurance companies and provident societies. The Insurance Act was passed in 1938 to consolidate the earlier laws and protect the interests of the insured. It also gave the government more control over Indian and foreign companies, leading to the closure of several foreign companies in India.
1938-1950: Indian insurance companies enjoyed steady growth without foreign competition. The Insurance Act was amended in 1950 to make major changes such as requiring equity capital for life insurance companies, limiting shareholdings, controlling investments, appointing a Controller of insurance, submitting periodic returns and information to the Controller, forming a life insurance council and a general council. The Controller could also appoint investigators and administrators for mismanaged companies.
1956-present: The insurance sector in India achieved the goals of socialism. In 1956, 245 Indian and foreign insurers and provident societies were nationalized by the central government. The Life Insurance Corporation (LIC) was formed by the LIC Act, 1956 with a capital of Rs. 5 Crore from the Government of India. In 1957, the General Insurance Council, an arm of the Insurance Association of India, framed a code of conduct for insurance companies to ensure fair and sound business practices. In 1968, the Insurance Act was amended to regulate investments, set minimum solvency levels, give the Controller more powers to inspect and direct, and set up a Tariff Advisory Committee to fix, control, and regulate the premiums and terms and conditions of policies. In 1972, the General Insurance Business (Nationalisation) Act nationalized the general insurance business in India from January 1, 1973. 107 insurers were merged and grouped into four companies: the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd., and the United India Insurance Company Ltd. The General Insurance Company was incorporated as a company.
The insurance sector in India underwent major reforms in the 1990s and 2000s. A committee headed by R.N. Malhotra, the former RBI Governor, suggested in 1994 that private companies should be allowed to offer insurance services. The government accepted this suggestion and passed the IRDA Act in 1999, which created a regulator for the insurance sector and opened the market to private players with some restrictions on foreign ownership. In 2000, the four subsidiaries of the GIC, which were the only public sector insurers, became independent companies. In 2002, a law was passed to separate them from the GIC. Now, there are 24 general insurance companies in India, including the ECGC and the Agriculture Insurance Corporation of India. The insurance sector in India is growing fast, at 15-20 percent per year, and is expected to reach more than 70 Billion Dollars by 2011.
Conclusion
In conclusion, insurance is a crucial financial tool that allows individuals and businesses to mitigate the impact of unforeseen events and potential losses. The fundamental purpose of insurance is to transfer the risk of economic loss from an individual to a larger group through equitable contributions. This cooperative mechanism not only provides financial security but also fosters a sense of community resilience in facing uncertainties.
The definitions of insurance, both functional and contractual, emphasize its role as a risk-transfer device based on the value of risk and contingent on specific events. The contractual nature of insurance involves a mutual agreement between the insured and the insurer, where the insured pays a premium in exchange for the insurer’s promise to compensate for losses in the event of specified risks.
The historical development of insurance traces back to ancient times, with marine insurance being the earliest form, evolving from bottomry agreements. Over the centuries, insurance expanded to cover various risks, including fire and life. In India, the insurance sector has undergone significant transformations, from the growth of Indian insurance companies during the Swadeshi movement to the nationalization of insurers in 1956. Subsequent reforms in the 1990s and 2000s led to the liberalization of the sector, introducing private players and fostering its rapid growth.
As a result, insurance has become an integral part of modern economies, providing individuals and businesses with the means to cope with unexpected challenges and invest in their future. By spreading risks across a large number of participants, insurance contributes to societal stability and economic resilience. In essence, insurance remains a valuable tool for navigating the uncertainties of life, offering individuals and businesses alike a sense of security and peace of mind.