Concept of Insurance
The basic objective of insurance is to transfer the risk of a person to the insurance company which has easily spread it over a large number of persons who are insuring similar risks. The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.
It is a promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. When parties agree the terms of an insurance policy, a contract created between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policyholder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest. Examples include car insurance, health insurance, disability, life, and business.
Insurance is a guaranty of partial or complete indemnity against a financial loss that will result if an event of a specified kind occurs.
Parties of insurance
The following are the parties involved in an insurance contract.
- Insured: The person seeking some surety against the possible loss is called ‘insured’.
- Insurer: The person contracting to indemnify against the loss is the insurer:
- Insurance Policy: The written contract of insurance the policy
- Premium: The price paid by the insured in fulfilment of his part of the contract is the premium;
- Indemnity: The amount paid when a loss has been incurred is the indemnity.
- Beneficiary: The person to whom the indemnity is paid is the beneficiary (who may or may not be the insured).
Classes of insurance
In relation with the nature of loss we can classify insurance into two classes.
- Property insurance and
- Personal insurance.
Property insurance is that which indemnifies for loss of one’s possession in specified ways, such as by fire, by the elements at sea (marine), by hail, lightning, or cyclone, by death (of valuable animals), by robbery, and by breakage (as of window-glass). Personal insurance is that which indemnifies the beneficiary for loss of income as the result of various happenings to persons, the chief being death, accident, sickness, invalidity, old age, and unemployment.
Types of Insurance
Insurance provides indemnity, or reimbursement, in the event of an unanticipated loss or disaster. There are different types of insurance policies in the world cover almost anything that one might think of. Likewise there are numerous companies who are providing customized insurance policies. Insurance is mainly of two types: Life insurance and general insurance. General insurance means Fire, Marine and Miscellaneous insurance which includes insurance against burglary or theft, fidelity guarantee, insurance for employer’s liability, and insurance of motor vehicles, livestock and crops.
The Insurance Act, 1972 and the General Insurance Business (Nationalization) Act, 1972 govern Fire and Marine Insurance, while the Indian Marine Insurance At, 1963 governs marine insurance in our country. These laws contain provisions relating to the constitution, management and winding up of insurance companies and the conduct of insurance business of all types.