CHAPTER – 1

Introduction to Insurance

Insurance – in simple language it means to transfer risk to someone who is capable of handling it generally to insurer (Insurance Company).

  1. A) Life insurance history and evolution:-

The origin of insurance business started from London‟s Lloyd coffee house.

1st  Life insurance company in the world was Amicable society for Perpetual

Assurance.

1st  life insurance company to be set up in India was The Oriental Life Insurance company ltd.

1st Non-life insurance company established in India was Triton Insurance company ltd.

1st  Indian insurance company was Bombay Mutual Assurance society ltd found in 1870 in Mumbai.

National Insurance company ltd. is the oldest insurance company founded in 1906.

In 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business.

The Life Insurance Companies Act 1912 made it compulsory that premiumrate tables and periodical valuation of companies be certified by an actuary.

The Insurance Act 1938 was the first legislation enacted to regulate the conduct of insurance companies in India.

Life insurance Business was nationalized on 1st September 1956 by merging 170 insurance companies and 75 Provident Fund societies and Life Insurance corporation of India ( LIC ) was formed..

Non – Life insurance business was nationalized in 1972 by amalgamating 106 insurers, General Insurance Corporation of India (GIC) & its 4 subsidarieswas formed.

Malhotra committee and IRDA:-  Malhotra committee – setup in 1993 to explore and recommend changes for development & it submitted the report in 1994.

IRDAI – Insurance regulatory and Development Authority of India was setup by an act IRDA Act 1999 as a statutory regulatory body for both life and nonlife

Life insurance industry today:

  1. a) Life Insurance Corporation (LIC) of India is a public sector company.
  2. b) There are 23 life insurance companies in the private sector
  3. c) The postal department, under the Government of India, also transacts life insurance business via Postal Life Insurance, but is exempt from the purview of the regulator

How Insurance Works:

There must be an asset which has economic value (Car-physical; Goodwill-nonphysical;

Eye-personal). These assets may lose value due to uncertain event. This chance of

loss/damage is known as risk. The cause of risk is known as peril. Persons having similar risks pool (contribute) money (premium) together.

There are 2 types of Risk Burdens

a)Primary burden of risk – losses actually suffered. E.g. Factory getting fire.

b)Secondary burden of risk – losses that might happen. Eg. physical/mental Stress strain.

Risk management techniques: – The various types of techniques that can be used to manage risk are:

a)Risk avoidance – Controlling risk by avoiding a loss situation

b)Risk retention – One tries to manage the impact to risk and divides to bear the risk and its effects by oneself.

c)Risk reduction and Control – This is a more practical and relevant approach than risk avoidance. It means taking steps to lower the chance of occurrence of a loss and / or to reduce severity of its impact if such loss should occur.

Insurance is a risk transfer mechanism.

Insurance as a tool for managing risk:-

Don‟t risk a lot for a little. E.g. there is no need to insure a ball pen as its cost is not high.

Don‟t risk more than what we can afford to lose. E.g. we cannot afford to not insure our house as its cost is high.

Don‟t insure without considering the likely outcome. E.g. can anyone insure a space satellite?

Insurance refers to protection against an event that might happen whereas Assurance refers to protection against an event that will happen

Role of insurance in Society:

  1. Insurance benefits society economically and socially.
  2. It also provides employment
  3. The money raised from premium is invested in to the development of infrastructure needs.
  4. Removes the fear, worry and anxiety associated with one‟s future.

Govt. Sponsored Insurance Schemes

Employees state insurance corporation, Crop Insurance Schemes (RKBY), Rural insurance schemes.

Run by insurer and not supported by Govt. schemes

Janata Personal Accident, Jan Arogya

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