Chapter One

Introduction To
Insurance
 Objective of this Session

To understand what is insurance

To understand the purpose & need
of insurance
To understand how insurance
works
To understand the business of
insurance
Insurance as a social security tool
& its role in economic development
Advantages of life insurance
 What is Insurance

What is an asset ?

Anything of monetary value that is

owned by a person.

Assets can include bank accounts, stocks, mutual funds,

personal property.
 What is Insurance
Every one has some assets .like
House,
Car etc.

Assets are

Income Generating For Comfort /Convenience

Example: Factory
Example: Car
 What is Insurance
Asset has a specified Lifetime
But, It can

Be Become Non-
destroyed Functional

Which will cause loss to the Owner

 What is Insurance

Insurance is a mechanism that helps

to reduce the effect of such
adverse situations.
 Purpose & Need of
Insurance
Assets may get damaged

Due
to

Accidental Occurrences Called Perils

 Purpose & Need of
Insurance
What are Perils?

Perils are things that cause losses, such

as fire, floods, breakdowns, lightning,
earthquake etc.
 Purpose & Need of
The damageInsurance
due to the perils is the
Risk the asset is exposed to

Peril

Damage/
Financial loss

Asset
Cannot be
prevented
Risk can be insured
against
 Risk & Uncertainties
Risk only means that there is a
possibility of loss or damage.

In our example if there is lightning the

house may get damaged

Insurance is done against the contingency

that it may happen.
Insurance covers Financial Loss

Insurance Compensates only the

financial losses

But does not protect the asset against

the Peril

Insurance Only compensates

cannot protect
the monetary loss
the house
against the fire to some extent
Ris Possibility of
Damage
k
While the event may or may not happen

Purpose of Insurance is

To replace the uncertainty of loss with

certainty of compensation
Non Financial Loss is not covered

If the loss is not financial, insurance

may not be possible.

Example:
1. Non economic losses are love and
affection of parents
2. Leadership of managers
3. Innovative & creative abilities
 How Insurance Works
The manner in which the loss is shared
can be determined before hand.

Contribution Fund Compensation

Basis of contribution is
how many and not who
Fortunate will suffer Unfortunate
Few
Many
 How Insurance Works
Thus people who are exposed to the
same 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.

Example: All people who send goods by ship

are exposed to the same risks, which are related
to water damage, ship sinking, piracy etc.
 Insurance as a Risk sharing Device

People exposed to the same risk come together

and agree that if any one member suffers a loss,
the same will be shared by others, who will make
good to the person who lost

Sharing
Larger Impact

Unfortunate Few
Fortunate Many

Larger Impact reduced to smaller manageable impacts

 Insurance is business of
Sharing
If a Jumbo Jet with more than 350
passengers crashes, the loss would
run into several crores of rupees. No
airline would be able to bear such a
loss.

How can insurance help in mitigating

the financial loss?
 Sharing Risk

100 airline
companies come
together to form
an
insurance pool

Insurance Pool
 Sharing
Shared by Risk
100 airlines

Risk of 1 airline
Basic Principles of Insurance

Occurrence has to be random

Occurrence has to be Accidental

Not the Deliberate creation of

the Insured Person
How you determine the loss
The loss shared is determined before
hand

It is proportional to the risk each

person is exposed to

It is indicative of the benefit he

would receive
 How Insurance Works
Case Study 1:

In a village there are 400 houses, each valued at Rs

20,000.

Every year on an average, 4 houses get burnt, resulting

into a total loss of Rs 80,000.

Find a Solution
 Case Study 1

400 owners come

together
and contributed Rs
200 each
Fund
Fund Size
= 400200
= Rs 80,000
 Case Study: Sharing Risk
Risk of 4 house owners Spread over 400
houses
 Insuring Human Life
Human Life is also an income
generating asset

It can be lost due to early death

It can be Non Functional due to Accident or Sickness

 Insuring Human Life

Accidents and sickness may or may

not happen

But what of death , Is it not Certain

Death will happen, but the

timing is uncertain
 Insuring Life
Risk for Human beings

Living too Long

Dying too Early

Economic Loss
 Insurance of Intangibles
The concept of insurance has been extended beyond the coverage of
tangible assets.

Insurance covers

Tangible Intangibles
Assets

Exporters run the risk of losses

if importers in other country
defaults in payments or in
collecting the goods
 Business of Insurance
The business of
Insurer
insurance is done by
insurance
companies, called
insurers
They bring together
PREMIUMS

persons with
CLAIMS

common interests
(sharing the same
risks)
Collect the share of
contribution (called
Insured
premium)
Pay out
compensation (called
 Insurance Business - India
Insurance Business
(in India)

Life Insurance General Insurance

Marine (dealing Miscellaneous

Fire (dealing with
with transport (dealing with
fire related risks)
related risk & all other like
ships) motor, liability,
personal
accident &
sickness etc)
 Life VsNon Life
Insurance
Life Insurance General
Insurance
Subject matter Human Life Property,
Building, Ship,
Cargo, Motor
Principle of Based on Based on
Coverage Earning estimated value
Capacity
 How Premiums are
calculated
Premium is based on expectations of the
losses.

These expectations are based on studies

of occurrences in the past and use of
statistical principles called Law of Large
Numbers.
Law of Large Numbers : The more times we observe a
particular event, the more likely it is that our observed results will
approximate the true probability that the event will occur.
 Business of Insurance

People who face loss get relief

because their loss is made good.

People who do not suffer are relieved

because they are spared the loss
 Business of Insurance
Insurer is in the position of a trustee
as it manages a common fund and
acts as a fiduciary for the benefit of
the community

It ensures nobody takes unfair

advantage
 Business of Insurance
Thus it prevents entry of people into
a group whose risks are not same as
well as paying charges on claims
which are not accidental

The process of allowing entry into the

group is the process of underwriting
 Insurance as a Social Security Tool
Any progressive state must take care of the
well being of its people

UN
Indian
declaration
Constitution- Food
of Human
Article 41 Clothing
Rights
Housing
Education
Within its Medical Care
Resources Security for
unemployment
and sickness
 Insurance as a Social Security Tool
Bread Winner Dies States Resources

Complimentary

Insurance

to states' efforts
Familys Standard of
Weaker Sections
Living Affected
 Role of Insurance In Development Of
Economy

It relieves the worry of the insured there

by increasing the individuals productivity

It mobilizes money from people's homes

for nation building

Acts as an Anti-inflationary Force-inflation

happens when lot of spending takes place
from income
 Benefits Of Insurance-
Individual
You are paying Rs 1000 every You are paying Rs 1000 every
month as life insurance month in a bank FD
premium. SA 200000

In case of death after 4 years

You will get 200,000 You will get 48,000

+ bonuses + interest
 Benefits Of Insurance-
Individual
It is superior to a traditional saving
vehicle

It encourages saving and forces

thrift

It provides easy settlement and

protection against creditors
 Benefits Of Insurance-
Individual
It helps to achieve the purpose of the
life assured
It can be encashed and facilitates
borrowing

Tax Relief
 Key Learnings
Insurance is a risk sharing device
Insurance is a function of uncertainty
Insurance protects the economic value of
the asset
Living too long is as much a risk as dying
too early
Insurance follows the law of large numbers
Insurance complements the states efforts
in reducing social cost
Thank You