Insurance: Insurance is associated with the protection of all assets, which have economic values.

An asset
could be a source of generating income, for e.g., a factory or a luxury item such as motor cars. Every asset
has a limited span of life after which it has to be replaced by another asset. The normal approach would be
to save money to develop reserve funds until an asset such as factory or shop has outlived its utility. The
reserve funds could be utilised for replacing the out-dated or worn-out-asset with another asset. This would
ensure the flow of income.

It is also possible that the assets may get destroyed due to accidental events such as fire
or natural calamities such as earthquake before they are fully utilised. In this case, the
owner of the assets stands on the threshold of losing his/her source of income. Insurance
provides cover against early loss of assets and thus helps to counter the unpredictable
nature of unforeseen circumstances.

purpose and need for insurance: Assets are exposed to the risk of different perils such as fire, floods,
earthquakes, etc. Perils can cause damage or loss to the assets. Risk refers to a peril or exposure to danger
or a loss-producing event. Risk has the element of uncertainty because it constitutes the possibility of a
damage or loss, which may or may not occur. Risk is associated with:

• Exposure to danger
• Perils such as risk of fire
• Property (Industrial Estate)

Thus, insurance provides protection against the uncertainties associated with different risks.

Note: Insurance is applicable only against uncertainties. Insurance of certainties is prohibited as it would
tantamount to gambling.

The second aspect of the insurance business pertains to insurers performing the role of
trustees.

The insurers act as trustees for the common fund and manage them for the benefit of the
members or policy holders. They ensure that nobody takes unfair advantages of the
insurance mechanism. They monitor strict control over the acceptance of risk and paying
claims on losses that are deliberate and not accidental.

The third aspect of insurance is risk inspection and minimisation of losses.

Insurers ensure pre-acceptance risk inspection through engineers and experts who
recommend risk improvement or loss reduction and provide technical advice on industrial
safety. The insurers also help in loss prevention, industrial and road safety through
sponsored institutions such as earstwhile Loss Prevention Association of India (LPA) and
LPA's Salvage Corps helped to minimise the loss of property in association with the fire
brigades.

The insurers also earn foreign exchange through overseas branches, agencies,
subsidiary/associate companies in nearly 30 countries. Rural insurance such as Cattle and
Agriculture pump sets insurances help the rural economy.
The fourth aspect of insurance deals with the conditions that make it liable for the
insurers to pay for the losses.

Insurance stands for the payment of only fortuitous or accidental losses while prohibiting
payment for intentional or deliberate losses. Insurance cannot prevent a peril from
causing a loss to the assets. It can only compensate for the loss that occurs under the
agreed (insured) peril and help in minimising the peril's impact on life or assets.

Note: Insurance can compensate only economic and financial losses.

How Insurance Works: It is not possible to predict beforehand about who would suffer losses. However,
the theory of probability can be used to determine in advance how many people, on an average, would
suffer losses. This would also help to determine the contribution required towards the common fund

Determining Premium
This example explains how the premium for 500 motor-cycles owners is determined after estimating average
loss of motorcycles.

There are 500 motor-cycles in a town and each is valued at Rs. 50,000. On an average, two motor-cycles
get damaged because of accidents every year and the total loss incurred is Rs. 1,00,000. If each motor-
cycle owner contributes Rs. 200 per annum, it would help to create a common fund of Rs. 1,00,000. This
would be sufficient to compensate the average loss of two motor-cycles every year. Thus, 500 motor-cycle
owners come together to share the risk of two motor-cycle owners.

This example explains how the premium for 1,00,000 people is determined after estimating the average loss
of life.

The population of the town is 1,00,000. Around 10 people die every year in road/rail accidents. Each of the
families of the 10 deceased persons suffers an average loss of income of Rs. 25,000. Thus, the total loss
incurred because of accidental deaths every year is:
Rs. 25,000 x 10 = Rs. 2,50,000.

If everybody in the town makes a small contribution of two rupees and fifty-paisa per annum for the common
fund, it would help to share the loss of 10 families.

Classification of Insurance Groups

Under the insurance mechanism, people who are exposed to similar risks come together and form a group
to share the loss that could occur to any member. For e.g., people who own factories are exposed to similar
risks such as fire, burglary, earthquake, etc. People who face similar risks come together and make a small
contribution towards a common fund, the amount of which is determined on every individual's previous loss
experiences.

People are also categorised as groups insured against specific risks such as war, fire, earthquakes, etc.
This constitutes the identification of different types of risks and organising them into separate groups.

Pooling of Common Risks and Resources

Insurance requires the pooling of common risks and resources. Insurance companies known as insurers,
bring together people with common interest i.e., those who are exposed to similar risks. The insurers collect
the share of contribution (called premium), from the insured. This premium is accumulated in the common
fund and is utilised for paying the compensation, (called claims) to an insured who suffers a loss. Thus, the
insured can pay a small amount i.e., the premium, to buy protection against large and uncertain risks.

Fundamentals of Insurance:

Social Welfare
Insurance encourages social security and welfare of the rural sector. The peasant community can avail the
benefits of insurance to ward off risks such as uneven rainfall, failed crop, etc.

Social Security Insurers play an important role in managing the government-sponsored social security
schemes such as Personal Accident Social Security (PASS) scheme, crop insurance schemes such as
National Agriculture Insurance Scheme (NAIS), etc. The social security schemes promote welfare of the
peasant community and contribute to the employment and growth of rural families.

Different Social Security Schemes

Although schemes such as Janta Personal Accident, Gramin Personal Accident, Jana Aarogya, Jan
Raksha, Bhavishya Aarogya, Raja Rajeshwari Mahila Kalyan Yojana, etc., operate on a commercial basis,
however, their aim is to provide social security to the families in the rural sector.

The Integrated Rural Development Programme (IRDP) beneficiaries are eligible for special insurance
schemes that provide cover on cattle/ livestock, other agricultural activities such as apiculture, sericulture,
fisheries and assets like agricultural pumps and animal driven carts. The insurers charge premium at
subsidised rates. They collect premium from the insured to invest in the economic growth.

Social Security Schemes: 1) Janta Personnel Accident 2) Jana Aarogya 3) Jan Raksha

4) Bhavishya Aarogya 5) Raja Rajeshwari Mahila Kalyan Yojana

Role of Insurance in Economic Development

An insurance company’s strenght lies in the fact that huge amounts are collected and pooled together.
These amounts come by way of premiums. Every premium represents a risk that is covered by that
premium. In effect, therefore, these vast amounts represent pooling of risk. The funds are collected and held
in trust for the benefit of the policyholders. The manegement of insurance companies are required to keep
this aspect in mind and make all its decisions in ways that benefit the community. This applies also to its
investments. That is why successful insurance companies would not be found investing in speculative
ventures. Their investments benefit the society at large.

The system of insurance provides numerous direct and indirect benefits to the individual and his family as
well as to industry and commerce and to the community and the nation as a whole. Those who insure, both
individuals and corporates, are directly benefitted because they are protected from the consequeences of
the loss that may be caused by the accident or for fortutious event. Insuracne, thus, ina sense protects the
capital in industry and releases the capital for further expansion and development of business and industry.

Insurance removes the fear, worry and anxiety associated with this future uncertainity and thus encourages
free investment of capital in business eneterprises and promotes efficient use of existing resources. Thsu
insurance encourages commercial and indutrial development and theryby contributes to a vigorous ecenomy
and increased national productivity.

No bank or financial institution would advance loans on property unless it is insured against loss or damage
by insurable perils.

Insurers are closely associated with several agencies and institutions engaged in fire loss prevention, cargo
loss prevention, industrial safety and road safety.

Before acceptance of a risk, insurers arrange survey and inspection of the property to be insured, by
qualified engineers and other experts. The object of these surveys is not only to assess the risk for rating
purposes but also to suggest and recomens to the insured, various improvements in the risk, which will
attract lower rates of premium. Insurance ranks will export trade, shipping and banking services as earner of
foreign exchange of the country. Indian insurers operate in more than 30 countries. These operations earn
foreign exchnage and represent invisible exports.

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