8/3/2019 insurancw

1/8

Insurance

Insurance is a form ofrisk managementprimarily used to hedge against the riskof a

contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a

loss, from one entity to another, in exchange for payment. An insurer 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 iscalled the premium. Risk management, the practice ofappraising and controlling risk, has

evolved as a discrete field of study and practice.

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.

Insurance policy

An insurance policy is a legally binding contract between an insurance company and theperson who buys the policy, commonly called the "policyholder", who also is often the

person insured.

In exchange for payment of a specified sum of money, called the "premium," the

insurance company agrees to pay for certain types of loss or damage as specified by thecontract. When a loss occurs which meets all of the requirements described by the terms

of an insurance policy, the loss is said to be "covered" by that policy. The term insurance

policy refers specifically to the written contract. You probably have other documents that

may or may not offer you additional rights, including your application, anycorrespondence from the insurer, summary plan descriptions (for disability and medical

insurance), and your declarations page (often shortened to dec page).

http://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Decision_modelhttp://en.wikipedia.org/wiki/Indemnifyhttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Insurance_policyhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Decision_modelhttp://en.wikipedia.org/wiki/Indemnifyhttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Insurance_policy

8/3/2019 insurancw

2/8

In some sense we can say that insurance appears simultaneously with the appearance of human

society. We know of two types of economies in human societies: natural or non-monetary

economies (using barter and trade with no centralized nor standardized set of financial

instruments) and more modern monetary economies (with markets, currency, financial

instruments and so on). The former is more primitive and the insurance in such economies entails

agreements of mutual aid. If one family's house is destroyed the neighbours are committed to

help rebuild. Granaries housed another primitive form of insurance to indemnify against famines.

Often informal or formally intrinsic to local religious customs, this type of insurance has survived

to the present day in some countries where modern money economy with its financial instruments

is not widespread.[citation needed]

Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which

insurance is part of the financial sphere), early methods of transferring or distributing risk were

practised by Chineseand Babylonian traders as long ago as the3rd and 2ndmillennia BC,

respectively.[13]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 Babylonians

developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, andpractised by early Mediterranean sailingmerchants. 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.

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 in Norouz (beginning of the Iranian New Year); the heads of different ethnic

groups as well as others willing to take part, presented gifts to the monarch. The most important

gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik

(Achaemenian gold coin) the issue was registered in a special office. This was advantageous to

those who presented such special gifts. For others, the presents were fairly assessed by theconfidants of the court. Then the 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. Jahez, a historian and writer,

writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or

wants to construct a building, set up a feast, have his children married, etc. the one in charge of

this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he

or she would receive an amount of twice as much."[14]

A thousand years later, the inhabitants ofRhodes invented the concept of thegeneral 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 deliberatelyjettisoned in order to lighten the ship and save it from total loss.

The ancient Athenian"maritime loan" advanced money for voyages with repayment being

cancelled if the ship was lost. In the 4th century BC, rates for the loans differed according to safe

or dangerous times of year, implying an intuitive pricing of risk with an effect similar to insurance.[15] TheGreeks and Romansintroduced the origins of health and life insurance c. 600 BCE when

they created guilds called "benevolent societies" which cared for the familiesof deceased

members, as well as paying funeral expenses of members.Guilds in the Middle Ages served a

http://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Babyloniahttp://en.wikipedia.org/wiki/3rd_millennium_BChttp://en.wikipedia.org/wiki/3rd_millennium_BChttp://en.wikipedia.org/wiki/2nd_millennium_BChttp://en.wikipedia.org/wiki/Millenniumhttp://en.wikipedia.org/wiki/Millenniumhttp://en.wikipedia.org/wiki/Insurance#cite_note-12http://en.wikipedia.org/wiki/Insurance#cite_note-12http://en.wikipedia.org/wiki/Insurance#cite_note-12http://en.wikipedia.org/wiki/Code_of_Hammurabihttp://en.wikipedia.org/wiki/Mediterraneanhttp://en.wikipedia.org/wiki/Merchanthttp://en.wikipedia.org/wiki/Merchanthttp://en.wikipedia.org/wiki/Merchanthttp://en.wikipedia.org/wiki/Achaemenianhttp://en.wikipedia.org/wiki/Ancient_Iranhttp://en.wikipedia.org/wiki/Ancient_Iranhttp://en.wikipedia.org/wiki/Insurance#cite_note-13http://en.wikipedia.org/wiki/Rhodeshttp://en.wikipedia.org/wiki/Rhodeshttp://en.wikipedia.org/wiki/General_averagehttp://en.wikipedia.org/wiki/General_averagehttp://en.wikipedia.org/wiki/Classical_Athenshttp://en.wikipedia.org/wiki/Classical_Athenshttp://en.wikipedia.org/wiki/Insurance#cite_note-14http://en.wikipedia.org/wiki/Ancient_Greecehttp://en.wikipedia.org/wiki/Ancient_Greecehttp://en.wikipedia.org/wiki/Ancient_Romehttp://en.wikipedia.org/wiki/Ancient_Romehttp://en.wikipedia.org/wiki/Familyhttp://en.wikipedia.org/wiki/Familyhttp://en.wikipedia.org/wiki/Funeralhttp://en.wikipedia.org/wiki/Guildhttp://en.wikipedia.org/wiki/Guildhttp://en.wikipedia.org/wiki/Middle_Ageshttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Babyloniahttp://en.wikipedia.org/wiki/3rd_millennium_BChttp://en.wikipedia.org/wiki/2nd_millennium_BChttp://en.wikipedia.org/wiki/Millenniumhttp://en.wikipedia.org/wiki/Insurance#cite_note-12http://en.wikipedia.org/wiki/Code_of_Hammurabihttp://en.wikipedia.org/wiki/Mediterraneanhttp://en.wikipedia.org/wiki/Merchanthttp://en.wikipedia.org/wiki/Achaemenianhttp://en.wikipedia.org/wiki/Ancient_Iranhttp://en.wikipedia.org/wiki/Insurance#cite_note-13http://en.wikipedia.org/wiki/Rhodeshttp://en.wikipedia.org/wiki/General_averagehttp://en.wikipedia.org/wiki/Classical_Athenshttp://en.wikipedia.org/wiki/Insurance#cite_note-14http://en.wikipedia.org/wiki/Ancient_Greecehttp://en.wikipedia.org/wiki/Ancient_Romehttp://en.wikipedia.org/wiki/Familyhttp://en.wikipedia.org/wiki/Funeralhttp://en.wikipedia.org/wiki/Guildhttp://en.wikipedia.org/wiki/Middle_Ages

8/3/2019 insurancw

3/8

similar purpose. TheTalmud deals with several aspects of insuring goods. Before insurance was

established in the late 17th century, "friendly societies" existed in England, in which people

donated amounts of money to a general sum that could be used for emergencies.

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of

contracts) were invented in Genoain 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-RenaissanceEurope, and specialized varieties developed.

The first insurance company in theUnited States underwrote fire insurance and was formed in

Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklinhelped to

popularize and make standard the practice of insurance, particularly against fire in the form

ofperpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of

Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire

prevention. Not only did his company warn against certain fire hazards, it refused to insure certain

buildings where the risk of fire was too great, such as all wooden houses. In the United

States, regulation of the insurance industry is highly Balkanized, with primary responsibilityassumed by individual state insurance departments. Whereas insurance markets have become

centralized nationally and internationally, state insurance commissioners operate individually,

though at times in concert through a national insurance commissioners' organization. In recent

years, some have called for a dual state and federal regulatory system (commonly referred to as

the Optional federal charter(OFC)) for insurance similar to that which oversees state banks and

national banks

http://en.wikipedia.org/wiki/Talmudhttp://en.wikipedia.org/wiki/Talmudhttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Genoahttp://en.wikipedia.org/wiki/Genoahttp://en.wikipedia.org/wiki/Marine_insurancehttp://en.wikipedia.org/wiki/Marine_insurancehttp://en.wikipedia.org/wiki/Renaissancehttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Charleston,_South_Carolinahttp://en.wikipedia.org/wiki/South_Carolinahttp://en.wikipedia.org/wiki/South_Carolinahttp://en.wikipedia.org/wiki/Benjamin_Franklinhttp://en.wikipedia.org/wiki/Benjamin_Franklinhttp://en.wikipedia.org/wiki/Firehttp://en.wikipedia.org/wiki/Perpetual_Insurancehttp://en.wikipedia.org/wiki/Perpetual_Insurancehttp://en.wikipedia.org/wiki/Perpetual_Insurancehttp://en.wikipedia.org/wiki/Philadelphia_Contributionship_for_the_Insurance_of_Houses_from_Loss_by_Firehttp://en.wikipedia.org/wiki/Philadelphia_Contributionship_for_the_Insurance_of_Houses_from_Loss_by_Firehttp://en.wikipedia.org/wiki/Fire_hazardshttp://en.wikipedia.org/wiki/Fire_hazardshttp://en.wikipedia.org/wiki/Regulationhttp://en.wikipedia.org/wiki/Balkanizationhttp://en.wikipedia.org/wiki/US_statehttp://en.wikipedia.org/wiki/National_Association_of_Insurance_Commissionershttp://en.wikipedia.org/wiki/Optional_federal_charterhttp://en.wikipedia.org/wiki/Talmudhttp://en.wikipedia.org/wiki/Good_(economics)http://en.wikipedia.org/wiki/Genoahttp://en.wikipedia.org/wiki/Marine_insurancehttp://en.wikipedia.org/wiki/Renaissancehttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Charleston,_South_Carolinahttp://en.wikipedia.org/wiki/South_Carolinahttp://en.wikipedia.org/wiki/Benjamin_Franklinhttp://en.wikipedia.org/wiki/Firehttp://en.wikipedia.org/wiki/Perpetual_Insurancehttp://en.wikipedia.org/wiki/Philadelphia_Contributionship_for_the_Insurance_of_Houses_from_Loss_by_Firehttp://en.wikipedia.org/wiki/Philadelphia_Contributionship_for_the_Insurance_of_Houses_from_Loss_by_Firehttp://en.wikipedia.org/wiki/Fire_hazardshttp://en.wikipedia.org/wiki/Regulationhttp://en.wikipedia.org/wiki/Balkanizationhttp://en.wikipedia.org/wiki/US_statehttp://en.wikipedia.org/wiki/National_Association_of_Insurance_Commissionershttp://en.wikipedia.org/wiki/Optional_federal_charter

8/3/2019 insurancw

4/8

Principles

Insurance involves pooling funds from many insured entities (known as exposures)

to pay for the losses that some may incur. The insured entities are therefore

protected from risk for a fee, with the fee being dependent upon the frequency

and severity of the event occurring. In order to be insurable, the risk insured

against must meet certain characteristics in order to be an insurable risk.

Insurance is a commercial enterprise and a major part of the financial services

industry, but individual entities can also self-insure through saving money for

possible future losses

Claims

Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for.

Claims may be filed by insureds directly with the insurer or through brokers or agents. The insurer

may require that the claim be filed on its own proprietary forms, or may accept claims on a

standard industry form, such as those produced by ACORD.

Insurance company claims departments employ a large number ofclaims adjusterssupported by

a staff ofrecords management and data entry clerks. Incoming claims are classified based on

severity and are assigned to adjusters whose settlement authority varies with their knowledge

and experience. The adjuster undertakes an investigation of each claim, usually in close

cooperation with the insured, determines if coverage is available under the terms of the insurance

contract, and if so, the reasonable monetary value of the claim, and authorizes payment.

The policyholder may hire their ownpublic adjusterto negotiate the settlement with the insurance

company on their behalf. For policies that are complicated, where claims may be complex, the

insured may take out a separate insurance policy add on, called loss recovery insurance, which

covers the cost of a public adjuster in the case of a claim.

Adjusting liability insurance claims is particularly difficult because there is a third party involved,

the plaintiff, who is under no contractual obligation to cooperate with the insurer and may in fact

regard the insurer as adeep pocket. The adjuster must obtain legal counsel for the insured

(either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years

to complete, and appear in person or over the telephone with settlement authority at a mandatory

settlement conference when requested by the judge.

If a claims adjuster suspects under-insurance, the condition of average may come into play to

limit the insurance company's exposure.

In managing the claims handling function, insurers seek to balance the elements of customer

satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this

http://en.wikipedia.org/wiki/Pooling_(resource_management)http://en.wikipedia.org/wiki/Insurable_riskhttp://en.wikipedia.org/wiki/Self_insurancehttp://en.wikipedia.org/wiki/Insurance_brokerhttp://en.wikipedia.org/wiki/ACORDhttp://en.wikipedia.org/wiki/ACORDhttp://en.wikipedia.org/wiki/Claims_adjusterhttp://en.wikipedia.org/wiki/Claims_adjusterhttp://en.wikipedia.org/wiki/Records_managementhttp://en.wikipedia.org/wiki/Data_entry_clerkhttp://en.wikipedia.org/wiki/Data_entry_clerkhttp://en.wikipedia.org/wiki/Public_adjusterhttp://en.wikipedia.org/wiki/Public_adjusterhttp://en.wikipedia.org/wiki/Plaintiffhttp://en.wikipedia.org/wiki/Plaintiffhttp://en.wikipedia.org/wiki/Deep_pockethttp://en.wikipedia.org/wiki/Deep_pockethttp://en.wikipedia.org/wiki/Condition_of_averagehttp://en.wikipedia.org/wiki/Pooling_(resource_management)http://en.wikipedia.org/wiki/Insurable_riskhttp://en.wikipedia.org/wiki/Self_insurancehttp://en.wikipedia.org/wiki/Insurance_brokerhttp://en.wikipedia.org/wiki/ACORDhttp://en.wikipedia.org/wiki/Claims_adjusterhttp://en.wikipedia.org/wiki/Records_managementhttp://en.wikipedia.org/wiki/Data_entry_clerkhttp://en.wikipedia.org/wiki/Public_adjusterhttp://en.wikipedia.org/wiki/Plaintiffhttp://en.wikipedia.org/wiki/Deep_pockethttp://en.wikipedia.org/wiki/Condition_of_average

8/3/2019 insurancw

5/8

balancing act,fraudulent insurance practices are a major business risk that must be managed

and overcome. Disputes between insurers and insureds over the validity of claims or claims

handling practices occasionally escalate into litigation (see insurance bad faith).

http://en.wikipedia.org/wiki/Insurance_fraudhttp://en.wikipedia.org/wiki/Insurance_fraudhttp://en.wikipedia.org/wiki/Insurance_bad_faithhttp://en.wikipedia.org/wiki/Insurance_fraudhttp://en.wikipedia.org/wiki/Insurance_bad_faith

8/3/2019 insurancw

6/8

8/3/2019 insurancw

7/8

enables many families and business unites to continue intact even after a loss.

8. Productive utilization of funds:-

Insurer accumulates large resources from the various insurance funds. Such resources are

generally invested in the country, either in the public or private sector. This facility

considerably in over all development of the country.

9. Insurance as an investment:-

A life policy is a combination of protection and investment which serves a usefulpurpose. The premium that the insured pays go on accumulating in a fund every year.

The sum of accumulated by the insurance company earn interest. Under life assurance a

person may also invest his capital in a annuity which will pay him an income every year

till death. Therefore, insurance may be regarded as an investment.

10. Promotion of international trade:-

The growth of international trade of the country has been greatly helped by shifting of

risk to insurance company. A ship sailing in the sea faces some miss-fortune. A firebreaks out and burns to ashes all the merchandise of a business man. But the insurance is

one of the devices by these which risks may be reduced or eliminated. So industrialistsand exporter may devote their full attention toward the promotion of business which may

increase the export activities.

11. Removing Fear:-

Insurance helps to remove various types of fear from the mind of the people. The insured

is secured in the knowledge that the protection of the insurance fund is behind him if

some sad event happens. It thus creates confidence and eliminates worries which isdifficult to evaluate, but the benefit is very real.

12. Favorable allocation of factors of production:-

Insurance also helps in achieving favorable allocation of the factors of production.

Capital is usually shy in risky business. People hesitate to invest their capital where

financial losses are great. If protection is provided against these risks by means ofinsurance, several investors will become ready to invest funds in those fields.

13. Growth of business competition:-

Insurance enables the small business units to complete upon more equal term with thebigger organization. Without insurance it would have been impossible to undertake the

risks themselves. On the other side bigger organization could absorb their losses due to

great financial strength. Moreover insurance remove uncertainty of financial lossesarising out of of the certain causes. It thus increases knowledge which is one of the most

important preconditions of perfect competition.

14. Employment opportunity:-

Insurance provides employment opportunity to jobless persons which is helpful for the

improvement and progress of social condition.

8/3/2019 insurancw

8/8

15. Miscellaneous benefits:-

( a ) It establishes the relation between the employed and employer by providing various

facilities i.e. group life insurance, social security scheme, retirement income plan,workman's compensation insurance.

( b ) Insurance creates the confidence and some sense of security among the policy

holder.( c ) Insurance company provides valuable services of skilled and expert persons to

industries and business in order to eliminate various risks.( d ) It promotes economic growth and development. This would be impossible in theabsence of insurance.

( e ) It contributes to the efficiency of business and also industrial and commercial

executives.( f ) Security of dependents is made possible through life assurance. It gives relief tohelpless families after the death of the earning member of the family.

Builds the habit of thrift - Life Insurance is a long-term contract where as policyholder,

you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to

meet financial needs at various life stages.

Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry

and exit under most of the plans.