insurance

Module 2: Principles of Insurance

2.0 Introduction to Insurance

  • Explains risk nature and significance in handling uncertainty.

  • Insurance as the primary method to manage risks for families and businesses.

2.1 Objectives of the Lesson

  • Understand the concept of insurance.

  • Learn how insurance works.

  • Comprehend the need for insurance.

  • Explore how insurance aids in economic development.

2.2 Nature of Insurance

Three Schools of Thought:

  1. Relationship Perspective:

    • Insurance as a transfer device of risk from insured to insurer.

  2. Technical Definition:

    • Prof. Mehr & Cammack define insurance as a method to reduce risk by pooling exposure units, making losses predictable and shared.

    • Features include:

      • Law of large numbers for predictability.

      • Method for raising funds through levies on covered units.

  3. Combination Concept:

    • Prof. Willet sees insurance as a social device for pooling risks to address uncertain losses.

    • Key elements include:

      • Group risk combination.

      • Estimation of future losses.

Summarized Definition of Insurance

  • "Insurance is a social device which combines the risks of individuals into a group, using funds contributed by members to pay for losses."

  • Essential Characteristics:

    1. Social science.

    2. Accumulation of funds.

    3. Group of risks and transfer of risk within that group.

2.3 Background of Insurance

  • Insurance fulfills the human need for security against uncertainty, which drives individuals to seek assurances against loss.

  • Early social groups contributed to support survivors in case of loss.

  • Shift from communal support to individualistic insurance through premiums.

2.4 Purpose of Insurance

  • Addresses fears about meeting basic life needs (food, clothing, housing).

  • Protects income against uncertainties of life.

  • Ensures continued income for families to maintain living standards when breadwinners face risks.

2.5 Need for Insurance

  • Security and Safety: Protection against premature death and loss of property.

  • Peace of Mind: Financial compensation amidst uncertainty provides emotional solace.

  • Eliminating Dependency: Protects families from financial hardship after a breadwinner’s death.

  • Encouraging Savings: Insurance policies promote systematic savings due to ongoing premium payments.

  • Fulfilling Personal Needs: Addresses family, old age, and special needs.

  • Reducing Business Losses: Insures businesses against property loss and promotes capital investment.

  • Identifying Key Persons: Protects against potential income loss caused by the absence of critical employees.

  • Enhancing Limits: Policies can be pledged for loans, aiding financial borrowing capacity.

  • Welfare of Employees: Employers can provide policies covering their employees' risks with reduced premiums.

2.6 How Insurance Works

  • Based on the theory of probability, insurance spreads the risk among many, allowing predicted payouts for losses while sharing costs among a larger pool of individuals.

2.7 Insurance as a Social Security Tool

  • United Nations Declaration of Human Rights supports the notion of insurance as a right to a standard of living.

  • Government of India responsibilities as per Article 41 to provide support for unemployment, sickness, and disability related to social security.

  • Provides alternate income arrangements for families after the breadwinner's death, preventing economic deterioration.

2.8 Role of Insurance in Economic Development

  • Investments from insurance companies in infrastructure enhance economic growth, allowing for:

    • Mobilization of public savings.

    • Increased quality of life through better resources and protection.

    • Indirect benefits include better living standards and enhanced productivity across society.

2.9 History of Life Insurance

  • Life insurance has historical roots with the first policy issued in London in 1583.

  • India practiced insurance during Vedic times and has evolved since the late 19th century with Indian Companies beginning operations.

  • The Indian government nationalized insurance in the mid-20th century to better regulate the sector.

  • Liberalization efforts in 1999 led to the establishment of the Insurance Regulatory and Development Authority (IRDA).

2.10 Life Insurance Investment

  • Regulations dictate investment strategies for life insurance funds aimed at supporting developmental sectors such as infrastructure and the rural economy.

2.12 Summary

  • Insurance is a crucial tool providing personal security, encouraging savings, and contributing to the economic development of society and the country.