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Insurance as a social security tool

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Created on 07 November 2011 Published Date

Individual’s income is dependent upon the investment of his time. Over a period of time, he saves sufficiently to provide for the time, when he is too old to earn. But no body can guarantee him this time.

This uncertainty of time leads him to the invention of insurance. The story goes of a newspaper hawker boy who used to go on cycle to distribute newspapers to earn his livelihood. One day, when he left his cycle outside a house and went in to deliver the newspaper, his cycle got stolen. He had thereafter no means to run around. Walking would be a slow process and his income would dwindle. The boy was a smart one. He called his other brother hawkers and narrated his story. Many others in the same job had similar stories to tell.

They just hit upon an idea. A cycle say would cost Rs. 100/-. There were almost 100 hawkers. Almost every year one cycle was getting stolen. Only if they could have a fund of Rs.100/-such a loss suffered by any of them could be compensated. And the creation of a fund of Rs.100/- merely means a contribution of Rs.1/-  per person per year.

The concept of insurance was born. A co-operative society was created, where each member of the family contributed a small portion  to provide for a possible big loss which was too big for any one to bear.

This crude beginning could later on be applied to varied circumstances. The traders, who sailed on the uncharted high seas, faced the risk of damage or total loss due to storm on the high seas. House--owners found the risk of fire to their house too ruinous to bear. Life being the most precious of the productive assets similarly needed to be protected.

Insurance, let it be noted, does not prevent the loss to occur. It cannot prevent thievery, fire, sinking of a ship due to storm or even death of the bread winner. Far from it, if they could be prevented, there would be no need for insurance. It is only the damages beyond the control of men, purely accidental, or due to fury of nature, which are subjects for insurance.

An intentional damage caused by the insured is an act of sabotage and is therefore a criminal action. In case of human life, even suicide, at least during the short period of one year, is beyond the pale of insurance.

We call life insurance a social security tool because without the provision of insurance, this human society would consist of hapless old people, helpless widows, unprotected orphans. The economy would not survive let alone grow.

The factories would not restart after a fire, houses cannot be rebuilt after an earthquake or a cycle or a motorcycle for that matter cannot be replaced after being stolen. Unlike a socialist society or a highly developed capitalist society where the State takes care of individuals who become destitutes or deprived, in a developing society like ours, the State is too poor to take up such responsibilities.

In the Directive Principles of State Policy, the Constitution of India makes certain mission statements. In article 41, it states that the state, within the limits of its economic capacity and development, shall make effective provision for securing the right to work, to education and to provide public assistance in case of unemployment, old age, sickness and disablement and in other cases of undeserved want.

What it has been able to do, is for anybody to see. There are certain insurance schemes floated for the socially disadvantaged, the details of  which we shall discuss, when we proceed.

The declaration of Human Rights by United Nations similarly declares from the house top that every one has a right to a standard of living adequate for health, well-being of himself and his family including food, clothing, housing, medical care and necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood and other loss of livelihood in circumstances beyond his control.

If wishes were horses, beggars would ride. Even in highly developed countries like Britain and United States where some medium of social security is available, insurance, both life and general is a thriving business.

Insurance is based upon the universal axiom, “God helps him, who helps himself”. There are only three sources of income when calamity has befallen - savings, charity and insurance. Savings needs time to accumulate.

Normally in case of human beings, 90% of the income comes from investment of time and 10% of the income comes from savings. As one grows old, the ratio is reversed and 90% of his income comes from his savings and 10% from investment of his time. That is the ideal situation. But who can guarantee him the time - time to save adequately so as to reverse this ratio.

The second alternative - charity is too demeaning to be even considered as a proper alternative. The only viable alternative therefore is insurance. It is a product of individual’s farsightedness, his present sacrifice for a future gain. It is commensurate with his self respect and dignity.

In case of a house burnt due to an accidental fire, he does not have to go to other members of the society begging help. Insurance thus creates a society of proud people who know how to take care of themselves even during difficult times. Insurance is thus a tool of social security par excellence.

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