Chapter 1

Purpose and need for insurance

Purpose and need for insurance

The need for insurance arises out of the risks we all run in the course of living in our daily lives. Our lives are constantly in danger through accident or illness. Our property may be subject to loss or damage, while losses incurred by others may affect us in some way or another. We also run the risk of causing injury or damage to other people or their property at a subsequent heavy cost to ourselves. Apart from this there is a possibility of being sued. People have a steady striving for security. Likewise there is a need for eliminating risk. People want to reduce or eliminate the risk. For that purpose they will try to transfer the risk to someone who is ready and able to bear it.

In older times, individuals’ possession is not sufficient. Trade was done on the basis of simple barter system. The life of the people was short lived. The growth of commerce and industry, introduction of money as means of exchange lead the society as a complicated one. Life is becoming riskier. Risk was enhanced in every sphere of life. Losses incurring on property became serve. The early merchants used to protect their property by arming themselves and guarding it against robbers. Ships were faced by sea perils. Due to expansion of business the business men are not able to protect their property themselves. They are not able give protection against all these hurdles. So people thought of some methods and remedy for replacing lost goods.

Many merchant traders and business owners could build up reserve funds for that purpose. But that would tie up capital which could be used more productively in the business itself. The sums required might be enormous in the case of a major catastrophe. Again, several years of successful and trouble-free trading are required to build up sufficient reserves. New entrants to business are not able to do it. In their case it was a disadvantage and the entrepreneurial initiative would be quiet. So to solve these problems faced by new and existing entrepreneurs, the resources are to be pooled to provide central funds out of which losses would be met without catastrophic effects upon on any one contributor. Merchants who are interested in this field dropped their Occupation and started as professional acceptors of risks. Gradually they are able to assess classes of trade and the hazards involved in a particular venture and to determine the amount to be collected as contributions to the central fund on an equitable basis.

From this it will be clearly seen that the introduction of insurance was absolutely essential in the development of trade as a means of transferring risk. Over the years the insurance industry has also played its part in risk reduction and elimination. By increasing premium rates, imposing excesses or asking an insured to carry a part of a risk himself, it has encouraged the improvement of ‘poor’ risks. The use of trained surveyors to inspect properties proposed for insurance has also resulted in many recommendations for increased security provisions and better fire protection give protection against all these hurdles. So people thought of some methods and remedy for replacing lost goods.

Is to solve these problems faced by new and existing entrepreneurs, the resources are lo be pooled to provide central funds out of which losses would be met without catastrophic effects upon on any one contributor. Merchants who are interested in this field dropped their Occupation and started as professional acceptors of risks. Gradually they are able to assess classes of trade and the hazards involved in a particular venture and to determine the amount to be collected as contributions to the central fund on an equitable basis.

The inspection services provided by engineering offices reduce the chances of loss or damage. In a more general sense, leaflets and films produced on a range of topics by the insurance associations help to educate the public to be aware of the existence of hazards, especially in the home. Although the development of insurance was furthered mainly by the desire to cover property lost at sea, in time fire insurance, life assurance and a whole range of other classes were introduced to meet the needs of the day.

This has greatly accelerated the development of the reinsurance market as a back-up to direct insurers as has the increasing nationalism of countries which see insurance funds as a prime national asset and restrict their exportation by foreign insurers. It has also led to a need for highly qualified brokers to deal between clients and insurers, and insurers and re-insurers. The modern worldwide insurance market is thus an immense and complex industry. Without which modern life would hardly be possible.

The reason why we need Insurance today and its value to the community can be summed up as follows.

  1. Spreads the cost of losses: It spreads the cost of losses over all those exposed to risk, rather than those who actually suffer loss, thus providing security for a minimal cost.
  2. Reduces the need for individual insurance funds: Insurance reduces the need for individual reserve funds, thus freeing up capital for productive use elsewhere.
  3. Provides investment capital for governments and Industry: From its own accumulated funds Insurance provides investment capital for governments and industry. Current Government borrowing is substantially underwritten by insurance Companies who have bought the Gilts.
  4. Encourages loss-prevention activities: Insurance encourages loss-prevention activities, thus helping to create a safer society for us all. The UK insurance market, in particular, gains about 70 per cent of its non- life business from abroad so that it is a valuable ‘invisible’ exporter which leads to a better standard of living.
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