INSURANCE Insurance is nothing but a system of spreading the risk of one onto the shoulder s of many.

Whilst it becomes somewhat impossible for a man to bear by himself 10 0% loss to his own property or interest arising out of an unforeseen contingency , insurance is a method or process which distributes the burden of the loss on a number of persons within the group formed for this particular purpose. The definition of insurance can be made from two points: Functional definition. Contractual definition. Functional definition Insurance is a co-operative device to spread the loss caused by a particular ris k over a number of persons who are exposed to it and who agree to insure themsel ves against the risk. Contractual definition Insurance has been defined to be that in which a sum of money as a premium is pa id in consideration of the insurer's incurring the risk of paying a large sum upon a given contingency. Insurance is a social device which combines the risks of individuals into a grou p, using funds contributed by members of the group to pay for losses. --- James L. Athearn Insurance is a legal contract in which an insurer promise to pay a specified amou nt to another party, the insured, if a particular event happens and the insured suffers a financial loss as a result. --- Oxford Dictionary Insurance is a promise by an insurer to an insured of protection and/or service. --- Mowbray and Blacnchard Insurance is a co-operative form of distribution a certain risk over a group of persons who are exposed to it. --- M.K. Gehosh and A.N. Agorwala From the above discuss we can write, insurance is a social device which reduces uncertainty by spreading the economic burden of losses among members of a group who have similar risks.

PURPOSE OF INSURANCE 1. Insurance spreads the economic burden of losses by using funds contributed by members of the group to pay for them. Thus, it is a loss spreading device. 2. The fundamental purpose of insurance however is neither the spreading nor the prevention of losses. Rather, it is reduction of the uncertainty which is cause d by awareness of the possibility of loss. 3. An insurance scheme provides certainty for the individual members of the grou p by averaging loss costs. The contribution made by the individual to the group

is assumed, on the basis of predictions, to be his share of losses suffered by t he group. In exchange for this contribution, he is assured that the group will assume any losses that involve him. He transfers his risk to the group and averages his los s costs, thus substituting certainty for uncertainty. He pays a certain premium instead of facing the uncertainty of the possibility of large loss. FUNCTION OF INSURANCE The functions of Insurance can be bifurcated into three parts: 1. Primary Functions 2. Secondary Functions 3. Other Functions The primary functions of insurance include the following: Provide Protection The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Collective bearing of risk Insurance is a mean by which few losses are shared among larger number of people . All the insured contribute the premiums towards a fund and out of which the pe rsons exposed to a particular risk is paid. Assessment of risk Insurance determines the probable volume of risk by evaluating various factors t hat give rise to risk. Risk is the basis for determining the premium rate also Provide Certainty Insurance is a device, which helps to change from uncertainty to certainty. Insu rance is device whereby the uncertain risks may be made more certain. Research and publicity Insurers also spend money in research and publicity in creating risk consciousne ss amongst which has a far reaching effect on reduction in national waste. The secondary functions of insurance include the following: Prevention of Losses Prevention of losses causes lesser payment to the assured by the insurer and thi s will encourage for more savings by way of premium. Reduced rate of premiums st imulate for more business and better protection to the insured. Small capital to cover larger risks Insurance relieves the businessmen from security investments, by paying small am ount of premium against larger risks and uncertainty. Contributes towards the development of larger industries Insurance provides development opportunity to those larger industries having mor e risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including p lant and machinery. If improves efficiency The insurance eliminates worries and miseries of loans at death and destruction of property. The carefree person an devote his body and soul together for better achievement. It improves not only his efficiency, but the efficiencies of the m asses are also advanced. It helps economic progress

The insurance by protecting the society from huge losses of damage, destruction and death, provides an initiative to work hard for the betterment of the masses. The next factor of economic progress. The capital is also immensely provided by the masses. The property, the valuable assets, the man, the machine and the soc iety cannot lose much at the disaster. The other functions of insurance include the following: Means of savings and investment Insurance serves as savings and investment, insurance is a compulsory way of sav ings and it restricts the unnecessary expenses by the insureds For the purpose of availing income-tax exemptions also, people invest in insurance. Source of earning foreign exchange Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies and various other ways. Risk Free trade Insurance promotes exports insurance, which makes the foreign trade risk free wi th the help of different types of policies under marine insurance cover. NATURE OF INSURANCE Sharing of risk Insurance is a device to share the financial losses which might be fall on an in dividual or his family on the happening of specified event. The event may be dea th, incase of life insurance, marine perils, marine insurance, fire in fire insu rance and other certain events in general insurance. Co-operative Device The most important feature of every insurance plan is the co-operation of large number of persons who, agree to share the financial loss arising due to a partic ular risk which is insured. All co-operative devices, there is no compulsion her e on anybody to purchase the insurance policy. Value of risk The risk is evaluated before inuring to charge the amount of share of an insured , here is called, consideration or premium. If there is expectation of more loss , higher premium may be charged. So, the probability of loss is calculated at th e time of insurance. Payment at Contingency The payment is made at a certain contingency insured. If the contingency occurs, payment is made. Since the life insurance is a contract of certainty, because t he contingency, the death or the expiry of term, will certainly occur, the payme nt is certain. Amount of payment The amount of payment depends upon the value of loss occurred due to the particu lar insured risk provided insurance is there up to that amount. In case of life insurance, the insurer promises to pay a fixed sum on the happening of an even.( Either death or the expiry of the term). Large number of insured persons The co-operation of a small number of persons may also be insurance but in that case, the cost of insurance to each number may be higher. In case of large numbe r of persons opposite condition is applicable. Insurance is not gambling The insurance is just opposite of gambling. In gambling by bidding the persons e xposes himself to risk of losing ,in the insurance the insured is always opposed to risk and will suffer loss if he is not insured.

Insurance is not charity Charity is given without consideration but security and safety provided by insur ance is not possible without consideration or premium. It provides security and safety to an individual and to the society although it is a kind of business bec ause inconsideration of premium it guarantees the payment of loss. PRINCIPLE OF INSURANCE Principles of Co-operation. Insurance is co-operative device. If one person is providing for his own losses, it can not be strictly an insurance because in insurance, the loss is shared by a group of persons who are willing to co-operate. It is the duty and responsibi lity 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 in surance. Thus, the insured are co-operating to share the loss of an individual b e payment of a premium in advance. 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 affectin g factors are analyzed before determining the amount of loss. With the help of t his 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 insur er has to charge only so much of amount which is adequate to meet the loss. The probability tells what the chances of loss are and what will be the amount of lo sses. The insurance, on the basis of past experience, present conditions and future pr ospects, fixes the amount of premium. Without premium, no-operation is possible and the premium can not 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. DIFFERENCE BETWEEN INSURANCE & GAMBLING Insurance and gambling was considered alike because there are uncertainties of e vents and payment is made when the event occurs. Like gambles the insured is una ware of the time and amount of loss. If the event occurs, the insured like the g ambler gains; otherwise they are experiencing the loss. But there are certain di fferences between the insurance contract and gambling. Nature of Risk In insurance, risks are existing, they may occur at any time. For example, death , old age, fire, marine perils, accident etc; may occur at any time. In case of gambling, the risk does not exist, it is being created for game or amusement while one will suffer and another will gain. In absence of such game n obody will suffer. In absence of insurance, the property owner will suffer while due to insurance, no party will suffer. Insurable interest In insurance contract, insurable interest is essential. Without insurable intere st, it would be wagering contract. Thus, this principle clearly distinguishes th e insurance contract from the gambling. Role/ Importance/ Social value of Insurance: The role and importance of insurance has been discussed here in three phases: USES TO INDIVIDUAL

Insurance provides security and safety The insurance provides safety and security against the loss at damage or in olde n age, against the loss at fire, against the loss at damage, destruction or disa ppearance of property, goods, furniture and machines, etc

Insurance efforts peace of mind: The security wishes the prime motivating factor. This is the wish which tends to stimulate to more work. By means of insurance, however, much of the uncertainty that centre about the wish for security and its attainment may be eliminated. Insurance protect mortgage property At the death of the owner of the mortgage property, the property is taken over b y the lender of the money and the family will be deprived uses of the property. The insurance will provide adequate amount to the dependents at the early death of the property-owner to pay-off the unpaid loans. Similarly, the mortgagee gets adequate amount at the destruction of the property. Insurance eliminates dependency Destruction of any kinds brings reduced standards of living and suffering may go to any extend. The economic independence of the family is reduced or sometimes, lost totally. In absence of protection against such dependency, the social welf are may be negatively affected. The insurance only can provides adequate amount at the time of suffering. Life insurance encourage savings The elements of protection and investment are present only incase of insurance. These policies combine the programs of insurance & savings. In property insuranc e only protection elements exists; The savings of insurance has certain extra advantageSystematic saving is possible because regular premiums are required to be compul sorily paid. In insurance the deposited premium can not be withdrawn easily before expiry of the term the policy which can not be done in case of a saving account in a bank. The insurance will pay the policy money irrespective of the premium deposited wh ile in case of bank deposit; only the deposited amount along with the interest is paid. The compulsion or force to premium in insurance is so high that if the policy ho lder fails to pay premiums within the days of grace, he subjects his policy to l apsation and may get back only a very nominal potion of the total premiums paid on the policy. Life insurance provides profitable investment Individuals are willing or unable to handle their own fund had been pleased to f ind an outlet for their investment in life insurance policies. The elements of i nvestment i.e. regular saving, capital formation and to return of the capital al ong with certain additional return are perfectly observe is life insurance. Life insurance fulfills the needs of a person a. Family needs. b. Old age needs. c. Re-adjustment Needs: At the time of reduction in income whether by loss of unemployment, disability, or death, adjustment in the standard of living of family is required. The life i nsurance helps to accumulate adequate funds. Endowment policy. Anticipated endow ment policy and guaranteed triple benefit policies are deemed to be a good subst itute for old age needs. d. Special Needs:

Need for education. Marriage. Insurance needs for settlement of children. Clean-up funds. USES TO BUSINESS Uncertainty of business loss is reduced In world of business, commerce and industry a huge number of properties are empl oyed. With a slight slackness or negligence, the property may be turned into ash es. In absence of it uncertainty will be to maximum and the huge investment may be at a great risk. By purchasing insurance policy this sort of risk can be mini mized. Business efficiency is increased with insurance Business efficiency is increased with insurance. When the owner of a business is free from the botheration of losses, he will certainly devote much time to the business. The care free owner can work better for the maximization of the profit . The uncertainty of loss may affect the mind of the businessmen adversely. The insurance, removing the uncertainty, stimulate the businessmen to work hard Key man indemnification Key man is that particular man whose capital, expertise, experience, energy, abi lity to control, goodwill and dutifulness make him the most value able asset in the business and whose absence will reduce the income of the employer tremendous ly and up to that time when such employee is not substituted. The amount of loss may be up to the amount of reduced profit, expenses involved in appointing and training, of such persons and payment to the dependents of the key man. The term insurance policy or convertible term insurance policy is more suitable. Enhancement of credit The business can obtain loan by pledging the policies as collateral for the loan . The insured persons are getting more loans due to certainty of payment of thei r deaths. The redeemable debenture can be issued on the collateral of capital re demption. The insurance properties are the best collateral and adequate loans ar e granted by the lenders. Business continuation In any business, particularly in partnership may discontinue at the death of any partner although the surviving partners can restart the business but in both ca ses the business and the partner will suffer economically. The insurance policie s provide adequate fund at the time of death. Welfare of employees The welfare of employees is the responsibility of the employer. Therefore, the l atter has to look after the welfare or the former which can be provision for ear ly death, provision for disability and provision for old age. These requirements are easily met by the life insurance, accident and sickness benefit, and pensio ns which are generally paid by insurance. The employees will devote their maximum capacities for any assigned task. The st ruggle and strife between employees and employer can be minimized with such sche mes. USES TO SOCIETY Wealth of the society is protected The loss of a particular wealth can be protected with the insurance through the prevention of economic losses likes death damage or loss. Life insurance provide s loss of human wealth. The human material, if it is strong, educated and care-f ree, will generate more income. Through stabilization and expansion of business

and industry, the economic security is maximized. Economic growth of the country Welfare of employees creates a conducive atmosphere to work; Adequate capital form insurance accelerates the production cycle. In case of business the property and human material are protected against certai n losses, capital and credit are expanded. Insurance meets all the requirements mentioned here for the economic growth of a country. Reduction in inflation: The insurance reduces the inflationary pressure in two waysFirstly, by extracting money in supply to the amount of premium collected. Secondly, by providing sufficient funds, for production narrow down the inflatio nary gap. Created by, Russel (DIIT) & Composed by, Sojib (DIIT)