UNIT 2

A. INTRODUCTION TO INSURANCE
Purpose and Need for Insurance:

Primary Functions

1. Clarity: Insurance helps individuals and businesses understand potential financial risks and their
potential impact, creating transparency and predictability in financial planning.
2. Security: It offers financial protection against unexpected losses, providing a safety net that
ensures economic stability in times of crisis or damage.
3. Risk Sharing: By pooling resources from many participants, insurance distributes the financial
burden of risks, making it more manageable for individuals and businesses.
4. Assistance to Business Enterprises: Insurance supports businesses by covering potential losses
and liabilities, thus enabling them to operate with greater confidence and stability.

Secondary Functions

1. Prevention of Loss: Insurance can incentivize loss prevention measures through lower premiums
for safer practices, reducing the likelihood and severity of losses.
2. Provides Capital: It can supply necessary capital by offering funds for recovery and investment,
aiding in financial growth and resilience.
3. Improves Efficiency: By mitigating financial risks and uncertainties, insurance helps streamline
operations and decision-making processes, enhancing overall efficiency.

Insurance as a Social Security Tool

Insurance plays a crucial role as a social security tool by providing a financial safety net that helps
individuals and families manage the risks and uncertainties of life. It helps in maintaining economic
stability by covering losses due to unforeseen events such as accidents, illnesses, and natural disasters.
This protection ensures that vulnerable populations are not pushed further into poverty due to
unexpected financial burdens. Various government schemes in India illustrate the role of insurance in
enhancing social security:

1. Shiksha Sahyog Yojna: This educational support scheme under the Janashree Bima Yojana
provides scholarships to children of families insured under the Janashree Bima Yojana. By easing
the financial strain of educational expenses, this initiative encourages the education of
economically disadvantaged children, helping them to break the cycle of poverty and secure
better futures.
2. National Health Insurance (Rashtriya Swasthya Bima Yojana - RSBY): This scheme offers
health insurance to families below the poverty line, covering hospitalization expenses for a wide
range of medical conditions. It significantly improves access to quality healthcare for the poor,
reducing their out-of-pocket expenditures and protecting them from the financial devastation
that can result from serious illnesses. By providing such support, the scheme ensures that health
emergencies do not derail the economic stability of vulnerable families.
3. Janashree Bima Yojana: This life insurance scheme targets individuals below and marginally
above the poverty line, providing financial support in the event of death or disability. It ensures
 that the families of insured individuals receive financial assistance during crises, thus preventing
them from falling into severe economic hardship.
4. Health Insurance for Handloom Weavers: This scheme addresses the specific needs of
handloom weavers, offering health insurance coverage for illnesses and injuries. Given the
occupational hazards faced by weavers, this insurance helps maintain their health and
productivity, supporting the handloom industry and ensuring that weavers can continue their
livelihoods without interruption due to health issues.
5. Raj Rajeshwari Mahila Kalyan Bima Yojana: This scheme is designed specifically for women,
providing life and accident insurance coverage. By ensuring financial support in case of accidents
or death, it empowers women by enhancing their social security and independence, contributing
to gender equality and the economic stability of their families.

Role of Insurance in Economic Development

1. Savings and Insurance: Insurance encourages individuals to save regularly through premium
payments, leading to a disciplined approach to financial planning and creating a pool of funds
that can be invested in economic activities.
2. Capital Formation and Insurance: The premiums collected by insurance companies are invested
in various sectors, contributing to capital formation and financing infrastructure projects,
businesses, and other economic activities, thus fostering economic growth.
3. Insurance as a Financial Intermediary: Insurance companies act as financial intermediaries by
channeling funds from policyholders to investment opportunities, facilitating the flow of capital
and supporting economic development.
4. Effective Management of Risk: By providing a mechanism to manage and transfer risks,
insurance enables individuals and businesses to undertake ventures and investments with greater
confidence, promoting innovation and economic activity.
5. Promoting Trade and Commerce: Insurance mitigates the risks associated with trade and
commerce, such as property damage, liability, and business interruption, thus encouraging
business operations and international trade.
6. Efficient Capital Allocation: Insurance companies assess and price risks, directing capital to the
most productive and secure investments, ensuring that resources are allocated efficiently across
the economy.
7. Promoting Financial Stability and Reducing Anxiety: By offering protection against financial
losses, insurance helps maintain economic stability and reduces the anxiety associated with
uncertainties, enabling individuals and businesses to plan and invest with confidence.

Basic Principles of Insurance

1. Insurable Interest: The insured must have a financial stake in the subject matter of the insurance.
This ensures that insurance is used to protect against genuine risks rather than as a speculative
venture.
2. Utmost Good Faith: Both parties in an insurance contract must act with honesty and disclose all
relevant information. This principle ensures transparency and trust between the insurer and the
insured.
3. Indemnity: Insurance aims to restore the insured to the financial position they were in before the
loss occurred. It prevents the insured from making a profit out of an insurance claim.
4. Proximate Cause: The primary cause of the loss must be covered by the insurance policy. This
principle determines whether a loss is directly attributable to an insured peril.
 5. Subrogation: After compensating the insured for a loss, the insurer has the right to recover the
amount from a third party responsible for the loss. This prevents the insured from being
compensated twice for the same loss.
6. Mitigation of Losses: The insured must take reasonable steps to minimize the loss or damage to
the insured property. This principle ensures that the insured acts responsibly and does not
intentionally increase the risk of loss.
7. Contribution: If multiple insurance policies cover the same risk, each insurer will pay a
proportionate share of the claim. This principle prevents the insured from recovering more than
the actual loss by claiming from multiple policies.

Life Insurance

Life insurance is a contract where the insurer agrees to pay a specified sum of money to the insured or
their nominee upon death or at the end of a specified period, in exchange for regular premium
payments. It offers financial protection against the risk of premature death and serves as an investment
by returning a sum at the policy’s expiry. This form of insurance provides essential support to families in
the event of the insured's death and encourages savings through tax-free investments. Additionally, it
can cover other risks related to human life, such as disability and medical expenses.

Characteristics of Life Insurance

1. Outcome of an Offer: Life insurance is formed through an offer by the insured and acceptance
by the insurer, formalized in writing.
2. Payment of Sum Assured: The insurer pays a specified amount either on the insured’s death or
upon policy maturity, whichever comes first.
3. Payment of Premium: The insured must regularly pay premiums until death or policy expiration.
4. Contract of Contingency: Life insurance is a contingent contract, where the loss (death) cannot
be quantified in monetary terms but is compensated with a fixed sum.
5. Insurable Interest: The insured must have an insurable interest at the time of policy issuance,
though it may not be required at the time of death.

Fire Insurance

Fire insurance is a contract of indemnity where the insurer agrees to compensate the insured for
financial losses caused by fire, up to the amount insured or the value of the damaged property,
whichever is less. It does not prevent or control fires but promises to cover losses incurred. The policy is
based on an agreement where the insured pays a premium, and the insurer covers losses from defined
fire-related perils within a specified period. Claims are settled based on the actual damage or loss
sustained.

Characteristics of Fire Insurance

1. Contract of Indemnity: Compensation is limited to the value of the damaged property or the
sum insured, whichever is lower.
2. Offer and Acceptance: The contract results from the insured’s offer and the insurer’s acceptance.
3. Premium: The policy is issued in exchange for a premium paid by the insured.
4. Insurable Interest: The insured must have a financial interest in the property at the time the
policy is taken and when the loss occurs.
5. Policy Duration: Policies are typically issued for one year but can be for shorter periods.
 6. Principle of Subrogation: After a claim is paid, the insurer has the right to claim any salvageable
remains from the damaged property.

Marine Insurance

Marine insurance, the oldest form of insurance, covers risks associated with sea transport and foreign
trade. It provides protection against various marine perils such as sinking, storms, collisions, and damage
to ships and cargo. This insurance arrangement indemnifies the ship or cargo owner against losses
occurring during marine ventures, including damage, destruction, or disappearance of the ship and
cargo, as well as non-payment of freight. Marine insurance can cover individual journeys or multiple
journeys over a specified period and can also extend to inland transport.

Characteristics of Marine Insurance

1. Contractual Agreement: Marine insurance is based on a contract between the insured and the
insurer.
2. Premium Payment: The insured must pay a premium as consideration for the coverage.
3. Coverage: Marine insurance can cover ships (hull), cargo, and freight against various marine
perils.
4. Policy Duration: Policies can be issued for a single journey or multiple journeys within a
specified period.
5. Indemnity for Loss: The insurer compensates for losses caused by marine perils, not for the
prevention or control of these risks.
6. Inland Extension: Marine insurance can also apply to inland transport, such as rail and road, in
addition to sea transport.

Health Insurance

Health insurance provides financial coverage for medical expenses incurred due to illness or injury. It
involves paying a premium to obtain coverage for various healthcare needs, including hospitalizations,
medical treatments, and long-term care. Health insurance policies can be customized and may cover
costs related to accidents, disabilities, and other health issues. In India, health insurance has grown
significantly due to increased awareness and economic liberalization, providing essential financial
protection against high medical costs.

Characteristics of Health Insurance

1. Coverage for Serious Health Problems: Health insurance addresses the rising incidences of
severe diseases, offering financial protection for conditions like cancer, AIDS, and heart attacks.
2. Adaptation to Changed Lifestyles: With modern lifestyles leading to health risks, health
insurance covers a range of lifestyle-related diseases, ensuring financial support in case of health
complications.
3. Cost of Medical Treatment: It helps mitigate the high costs of medical treatments and
hospitalizations, making healthcare more accessible and affordable.
4. Tax Benefits: Government policies offer tax incentives for health insurance premiums, promoting
its adoption among individuals and businesses.
5. Employee Benefits: Many companies provide health insurance as part of employee benefits,
enhancing workplace satisfaction and encouraging wider enrollment in health insurance plans