What is Insurance?

The first preamble to the first English Marine Insurance Statute of 1601 observed that by means of insurance “it shall come to pass that loss lighteth lightly upon many rather than heavily upon fees.”

(ii) Insurance is a device by means of which the risks of two or more persons or firms ar combined through actual or promised contributions to a fund out of which claimants are paid.

(iii) Insurance is a contractual relationship which exists when one party, for a consideration, agrees to reimburse another for loss caused by designated conti­gencies.

The first party is called the insurer or underwriter, the second, the insured or policyholder ; the contract is the insurance policy ; the legal consideration is the premium ; the contract is the insurance policy ; the legal consideration is the premium ; the loss of the life or property in question is the  exposure ; and the contingency is the happening of the insured event.

All general in­surance contracts are governed by the following basic principles :

(i) insurable interest

(ii) utmost good faith

(iii) indemnity

(iv) suborgation

(v) contribution

(vi) proximate cause.

Insurance contract, defined :

Insurance is a contract by which one party is consideration of a price paid to him adequate to the risk becomes security to the other that he shall not suffer loss, damage or prejudice by the happening of the perils, specified to certain things to which he may be exposed.”

All insurance contracts must have the following five essential elements in order that they may be enforceable at law :

(i) offer and acceptance

(ii) consideration

(iii) consensus ad idem i.e., agreement between the parties

(iv) capacity of the parties and

(v) legality of the contract.

Insurance Concept in brief

• Business of insurance is related to the protection of the economic value of the assets.
• An asset is valuable to the owner because he get some benefit from it.
• No asset is expected to last forever.
• An accident or some unfortunate external event may destroy the asset or make it incapable of giving the desired benefits.
• Insurance is a mechanism that helps to reduce the effects of such adverse situations.
• The event that may cause a loss is called a peril
• The concept of insurance gives an assurance that the benefit will be protected.
• Insurance covers only uncertain risks. If the occurrence can be known with certainty insurance will not be possible
• The concept of insurance pools several people who face the same situation and risk.
• Insurance brings together a community of people exposed to similar kind of risk and promises to pay the loss suffered by any of the individual members in the community from that are specified risk.
• In life insurance to ascertain question is person himself because he earns for himself and his family
• A human life is an income generating asset. This asset can be destroyed by a death or illness.
• In case of a human being the earning stops on his retirement.
• Living too long can be as much a problem as dying too young
• Insurance does not protect the asset
• Insurance cannot prevent the loss due to the peril
• Insurance can only try to reduce the impact of the risk on the owner of the asset and those who depend on that asset
• Only economic or financial losses can be compensated
• Insurance covers both tangible and intangible assets
• Intangible risks are insurable

Classes of insurance

• Insurance very broadly classified into life and non-life insurance
• Nonlife insurance is also termed as property and casualty insurance in some countries
• Life insurance policies are for longer durations
• Nonlife policies are usually of shorter duration of one year.
• There are some policies with longtail which means the liability of the insurers does not win the duration of the policy period. It may extend to several years or even after the expiry of the policy period.
• In non- life insurance there are three major classes – fire, marine and miscellaneous insurance