Insurance: A Brief Overview

Introduction:

Insurance in simple term can be defined as transferring or lifting of risk of an individual to a group. Individuals come together to pool in their resource in order to ensure the financial security, the fund thus raised is used to reduce the loss incurred by a party in case of an event arise. Few research articles can be found about insurance, it is risky to write about the complex insurance business and this might be the reason why few authors have tried to give a general survey.[1]

History and Evolution

The idea of insurance, which took birth thousands of year ago, was based on the idea of ‘pooling of risks’. During ancient time humans used to hunt in groups to avoid the risk of being a lone hunter, and in turn reducing the vulnerability. Another account of the same is that while people went hunting, commodities from their cave were lost, stolen or destroyed either by other humans or wild animals. As a solution to this problem, a wise man suggested an alternative, which was to pool in their resources, that is to keep a small fraction of everyone’s resource in each cave so that everyone suffers or bears a partial loss and thus mitigating the loss rather than one individual losing all his belongings.

The idea of insurance can be traced back to China were shipowners used to pay a premium to insure them from the risk of piracy. However, the earliest account of insurance policy (18th Century B.C.) that was written down was seen in the Babylonian monument with the code of King Hammurabi Craved into it.

During the Middle Age master craftsmen paid a certain amount to the guilds and trained their apprentices. And if a master suffered any misfortune the guilt would provide support and assistance. Thus, through this, the concept of group coverage emerged.  The evolution of life insurance can be traced back to various sources such as Ancient Rome, England, France and Holland.

In India the roots of insurance can be traced to Manusmrithi, Yagnavalkyasmrithi and Arthasastra were writings explain about the pooling of resources which could be redistributed in events of calamities. In the early days, a common fund was created mostly at the panchayat level where people would contribute small amounts and the fund collected would be given as compensation for the loss suffered by the people who had contributed. In 1818 Oriental Life Insurance Company was set up in Kolkata, followed by which many insurance companies were found. Later in India the insurance market began to be regularized, using various statutory measures such as The Indian Life Assurance Companies Act, 1912, The Indian Insurance Companies Act etc.  On 19 January 1956, The Government of India nationalized the life insurance sector and in the same year, the Life Insurance Corporation came into existence. Later in 1972, the General Insurance Business (Nationalization) Act was passed by the Indian Parliament and General Insurance Business in India was nationalized from 1^st January 1973. The Life Insurance Company remained monopoly till the late 90s and was finally reopened to the private sector. And presently there are a large number of insurance companies in India.

Concept of Insurance

The concept of insurance includes protecting individuals, families and organizations from financial losses that might arise out of an unexpected event or an accident. [2] The concept of insurance evolved from the idea of ‘pooling of risk’, where the loss suffered by a person is mitigated using resources that were raised from people, who agreed to pool in their resources to be protected or insured from future risk. By the concept of insurance, it is ensured that no one person lost everything rather the risk is divided among many.

While looking deeply into the concept of insurance there are three important concepts, these are loss, loss exposure and claim. Loss is an unexpected economic loss that a person suffers. Whereas loss exposure includes someone or something that can experience damage, destruction, death, illness or disability etc. Claim means the demand made by a person to recover the damages or losses that he/she suffers. Claims can be raised against an individual, an organization, a firm or an insurance company.

Types of Insurance

There exist numerous classifications on the types of insurance. In general, there are eleven types of insurance, they are:

1. Life Insurance: This is the most common type of insurance. Life insurance similar to all other insurances is a contract between an insurer and a policyholder. By taking life insurance the insurer pays a sum of money to the beneficiary of the insured when he/she dies. And against this, the policyholder agrees to pay a premium during their lifetime.[3] These insurances are regulated in India through various legislations such as LIC Act 1956, Insurance Rules 1939, Insurance Ombudsman Rules 2017 etc.
2. Health Insurance: These types of insurance are most common as compared to other insurances. Health insurance can be classified into various categories such as insurance that bears the hospital expenses, insurances that cover the entire family in one insurance plan, senior citizen health insurance, pre-existing disease cover plans, critical illness plans, disease-specific plans, maternity health insurance, pro-active plans etc.
3. Motor or Vehicle Insurance: This type of insurance is also common as compared to other types of insurance. In India, one cannot drive a vehicle without motor insurance. In the case of motor insurance, the insurer promises the insured to indemnify the financial liability on the case an event of loss to the insured arises. There are two kinds of insurance that are Third Party liability insurance which is often referred to as liability insurance and first-party insurance.
4. Travel Insurance: These types of insurance are mostly offered by companies that sell travel packages. This type of insurance is also known as traveller’s insurance. Further, if we look closer to this type of insurance the main categories of this insurance include cancellation of the trip, personal or baggage effects coverage, accidental death coverage etc. 
5. Marine Insurance: This is the oldest among all other types of insurance. The marine insurance was legally regulated in 1369 and the first known Marine insurance was executed in Genoa. Marine Insurance may either insure the cargo or the hull of the ship.
6. Property Insurance: This insurance includes a large number of policies such as renters insurance, flood insurance, earthquake insurance, lightning insurance etc. Most of the time when a person keeps his/her property as a mortgage in banks, he/she will be asked to take property insurance to indemnify in case of an event of loss happens. [4]
7. Agriculture Insurance: Through agriculture insurance, the losses suffered by farmers due to natural calamities such as floods, droughts, pests etc., can be mitigated. Various schemes are introduced by the government to safeguard the agricultural sector of India, these are- Unified Package Insurance Scheme (UPIS), Pradhan Mantri Fasal Bima Yojana, Crop Insurance, Weather Based Crop Insurance, Livestock Insurance.
8. Fire Insurance: The concept of fire insurance developed during 1666, when there was a great fire that affected the City of London. Under section 2(6A) Insurance Act 1938, the fire insurance business is defined as follows: “Fire insurance business means the business of effecting, otherwise than independently to some other class of business, contracts of insurance against loss by or incidental to fire or other occurrences customarily included among the risks Insured against in fire insurance policies”.
9. Aviation Insurance: These types of insurance are used to cover the risks that might happen in the aviation industry. However aviation insurance is quite different from other types of insurance, that is the policy specification or options might vary according to different customers. This type of insurance has gained prominence only of late.
10. Rural Insurance: These types of insurance include policies that suitable for rural areas such as poultry insurance, animal-driven cattle insurance, crop insurance, cattle insurance etc.
11. Miscellaneous Insurance: This includes various types of insurances such as shopkeepers insurance, television insurance, cycle insurance, burglary insurance, bankers insurance etc.

Conclusion

The idea of insurance developed and evolved from the simple idea of spreading the risk in order to mitigate the loss suffered by an individual party. This lays as a foundation for the modern-day insurance, which has become interwoven into all aspects of our lives, and due to this most of the people are able to ‘pool the risk’. The evolution of insurance has taken place at a dynamic rate and it has even reached an extent where people can buy insurance online.

References:

• https://westernfinancialgroup.ca/The-history-of-insurance
• The Insurance Act, 1938
• https://www.irdai.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2

[1] Derron, M. (1963). Introduction to Insurance, by Allen L. Mayerson, The Mac Millan Company, New York1962, 438 pages. ASTIN Bulletin, 3(1), 109-110. doi:10.1017/S0515036100007960

[2]Marshall W. Reavis, Insurance: concepts & coverage: property, liability, life, health and risk management (2012).

[3] Yaari, Menahem E. “Uncertain Lifetime, Life Insurance, and the Theory of the Consumer.” The Review of Economic Studies, vol. 32, no. 2, 1965, pp. 137–150. JSTOR, www.jstor.org/stable/2296058. Accessed 4 Jan. 2021.

[4] Roy C. McCullough, Property Insurance, 1963 Ins. L.J. 75 (1963).