Evolution and Growth of Insurance

The exact date of origin of insurance is not known. It is believed that philosophy of insurance was practiced with the evolution of man. Man is always exposed to different kinds of risks.  They thought of eliminating or reducing the impact and financial loss associated with these risks. There are some people who believe that insurance existed in 4500 B.C. in the ancient civilization of Babylonia, Greek, Rome and India. But single opinion about its evolution is yet to be reached at.

It is believed that the marine insurance was the first developed form of insurance. During ancient times, international trade used to be done mainly through sea routes. The journey through sea was subject to risk caused by perils of sea and acts of enemy. The risks were attached to both ship and cargo. At that time traders used to enter into an agreement among themselves under which the loss caused to any person was compensated by dividing the loss among themselves. Later, this system was named as ‘General Average’ under which all traders agreed to distribute any loss among them in ratio of their respective interests. Similarly another system called ‘Bottomry Bond’ prevailed at that time. Under this system traders were given the specialized type of loan called Bottomry Bond, on the condition that they will repay it with interest if the ship reach destination safely. If the ship does not reach destination safely and suffer loss they need not refund the loan. Thus, General Average and Bottomry Bonds contained the basic elements of insurance. These systems were popular in Babylonia, Greek, Rome, India, etc.

Insurance in the modern sense originated during 12th century. The Yahoodies were believed to be the main contributors to the development of modern insurance when they were forced to leave France in 1182. They adopted marine insurance as their line of business. The earliest references to insurance which have so far been traced appear in the accounts of North Italian merchant bankers who dominated the international trade of Europe at that time. Marine insurance is the oldest form of the insurance followed by life insurance and fire insurance.

Basic Terms used in Insurance

·         Insured :

It is the party who seeks protection against a particular risk.

·         Insurer:

It is the party who undertakes to protect the insured.

·         Premium :

It is the amount paid by the insured as the consideration of the insurance contact.

·         Insured Amount :

It is the amount for which he risk is insured.

·         Insurance Policy:

It is a written contract between the insurer and the insured containing the details of the terms and conditions agreed upon.

Insurance - An Introduction

Human beings in their life span have to go through different ups and downs. Some of the uncertain events can be listed as untimely death, loss of valuable property by fire, loss due to accidents, etc. These events are likely to happen but are impossible to eliminate. Such events create a great loss and difficulties in one’s life. So to have compensation from such events, a mechanism of ‘Insurance’ has been introduced. Insurance is a financial mechanism to reduce or eliminate the financial loss due to uncertain risks.

The concept of insurance can be best illustrated with an example. Suppose a village has 10,000 houses of worth Rs. 100,000 each. On an analysis carried out, it is found that four houses of the village are destroyed by fire every year. Thus, it is clear that four houses will catch four houses next year. But it cannot be sure as to which house will catch fire and destroyed to what extent.  But everyone is likely to suffer from a loss of Rs. 100,000 which tends to be a big loss if that is to be borne by a single individual. A method of providing relief against this risk can be establishing a common fund to which each contributes Rs. 40 every year. The four unfortunate householders can be compensated to their losses by the fund contributed by each of the householders. The concept of insurance has originated with the same motive. Insurance make people put collective effort to share losses of risks. Insurance thus can be said as the mechanism of distributing the loss of few people into many people.

In the words of Dr. W.A. Dinsale : “Insurance is a device for transfer of risks of individual entities to an entities to an insurer to a specified extent of losses suffered by the insured.”

Insurance at present times has become a business in which the party doing the business promises to indemnify the losses in return for a consideration against a risk to people who propose to insure themselves. Thus, now-a-days insurance is defined as “A contract by which the insurer undertakes to compensate the insured by paying a fixed sum of money or up to a fixed amount of money on the happening of a predecided but accidental loss in exchange of a premium paid periodically or in lump sum”.

It should be kept in mind that insurance cannot stop an event to happen. But the loss occurred if such incident happens can be somewhat reduced by the insurance. Thus, it is a social device which only reduces the risk and does not completely eliminate it from the society.