Overview of Insurance Sector
What is Insurance?
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment (known as insurance premium). It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance Industry manages the risk to people and businesses from the dangers of their current circumstances.
Insurance is a contract between two parties, the insurer or the insurance company and the insured or the person seeking insurance, whereby the insurer agrees to hedge the risk of the insured against some specified future events or losses, in return for a regular payment from the insured as premium. Insurance policy helps in not only mitigating risks but also provides a financial cushion against adverse financial burdens suffered. Insurance policies are a safeguard against the uncertainties of life.
Development of Insurance as Industry:
The concept of insurance is almost as old as human society and over the years, insurance industry matured into the form that we know today. In ancient civilization, if someone's home burned down or met with any disaster, the other members of the community would help together to rebuild it. Everyone felt morally bound to help in case their home was the next to burn. Similarly, humans have been managing risk for many years and in the primitive times the insurance in such economies was agreements of mutual aid. This type of insurance has survived to the present day in some countries where a modern money economy with its financial instruments is not widespread.
Early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing.
The first written account of an insurance policy is found in the Code of Hammurabi, in the 18th century BC, and was designed to forfeit debts owed due to catastrophe. The Babylonians developed a system which was practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea. Sailing merchants and caravans used this insurance to protect themselves from the risks of pirates and treacherous natural terrain. And early health insurance by organized guilds in ancient Greek and Roman civilizations aided surviving members or helped to pay funeral expenses.
Achaemenian monarchs of Ancient Persia were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year where different ethnic groups presented gifts to the monarch. The presents were assessed by the confidants of the court and this assessment was registered in special offices. The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him.
A thousand years later, the inhabitants of Rhodes invented the concept of the general average. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were deliberately jettisoned in order to lighten the ship and save it from total loss.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.
The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance.
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. Insurance in India has evolved over time heavily drawing from other countries, England in particular.
In the last century, the insurance industry adapted to changing lifestyle and growth, introducing products such as automobile and health insurance. And more recently, changing governmental regulations across the world have impacted the regulations by which the insurance sector operates, enabling other industries, including the banking industry, to offer similar insurance products.
How Insurance Works:
An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. The insurance company has to deal with the “Risk Management”, the practice of appraising and controlling risk.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.