EVOLUTION OF INSURANCE
1. LIFE INSURANCE
• Presence of some type of protection similar to present life insurance system since ages.
• Concept of insurance evolved from concept of loss sharing – from Aryans to Mediterranean
merchants to Sri Lanka and Egypt.
• Manu and Yajna Valkya – Hindu scriptures credited with insurance thought
• Also seen in writings in Rig Veda, Greek and Syrian scripts.
• Concept of insurance emerged in England in 16th century – Richard Mortin issued the first
policy on William Gybbon’s life in the year 1536.
• Two companies named Hand in Hand Company and The Mercer’s Company came into
existence in 1696 and 1698 respectively.
• Later, the English parliament passed an act which allowed life insurance companies to be set
• In India, modern concept of insurance came into being with the advent of the East India
Company in 18th century.
• First foreign company to have started business of insurance in India was the Oriental
Company in 1818.
• In 1823 – Bombay Life & in 1829 – Madras Equitable Company came into existence.
• WW-1 and WW-2 gave a boost to the business of life insurance.
• Government took steps to regulate the business of life insurance and ultimately nationalized
the business of life insurance in India. It set up the Life Insurance Corporation (LIC) of India
• Government now has allowed many private firms into the field of life insurance.
• E.g.: HDFC Standard Life Insurance Co. Ltd., Max-New York Life Insurance Co. Ltd., ICICI
Prudential Life Insurance Co. Ltd. Etc.
2. MARINE INSURANCE
• Oldest form of insurance.
• Travelers by sea and land were exposed to risk of losing their vessels and merchandise due
to piracy on open seas.
• Other risks existed such as capture by enemy ships, sinking in deep waters, winds and
• The risk to owners of such ships was enormous and therefore to safeguard their interests,
marine insurance evolved.
• Oldest and earliest records of marine policy relates to a Mediterranean voyage in 1347.
• IN the year 1400, a book written by a merchant of Florence indicates premium rates charged
for the shipments by sea from London to Pisa.
• Marine Insurance spread from Italy to trading routes in other countries of Europe.
• IN 1556, Philip II made marine insurance regulations for Spain.
• In 1575, Elizabeth I opened the Chamber of Assurance in the Royal Exchange for the
registration of marine parcels.
• In India, marine insurance was practices for over 3000 years.
• Such insurance also existed from the time of Akbar to Auranzeb.
• However it was the British who introduced the concept of general insurance in India.
• Sun Insurance office Ltd. In Calcutta was set up in 1710. This was followed by many other
• IN 1972, the government nationalized the general insurance business by forming the General
Insurance Corporation (GIC).
3. FIRE INSURANCE
• For the first time, fire insurance was observed in the Anglo- Section Guild form where the
victims of fire hazards were given personal assistance by providing necessaries of life.
• It had originated in Germany in the beginning of the 16th century.
• Fire insurance got a boost in England after the great fire of London in 1666 when the fire
losses were tremendous. (85% houses, Ten crore sterling worth property)
• Fire Insurance office was established in England in 1681.
• With England’s colonial development, fire insurance spread all over the world in the current
• In India too, fire insurance was started during the British regime.
• The oldest of these companies include the Sun Insurance Office in Calcutta (1710), London
Assurance and Royal Exchange Assurance (1720), Phoenix Assurance Company (1782) etc.
• As of now, fire insurance business is in the hands of subsidiaries of the General Insurance
Corporation of India.
• Like any other insurance, fire insurance is a co-operative tool which distributes heavy fire
losses of a small number of individuals over a large number of persons.
4. MISCELLANEOUS FORMS OF INSURANCE
• Due to increasing demand, different forms of insurance have been developed.
• The Industrial Revolution of the 19th century had facilitated the development of accidental
insurance, theft and dacoity insurance etc.
• In the 20th century, many types of social insurance started operating namely unemployment
insurance, crop insurance, cattle insurance etc.
• Thus the business of insurance developed simultaneously with human and social
• Even in the present day world, more and more new forms of insurance are coming into
existence and the scope of general insurance is increasing day by day.
FEATURES OF INSURANCE
• Offer and Acceptance
o Lawful offer by applicant and lawful acceptance by insurer.
o Must confirm with rules laid down in Indian Contract Act.
• Lawful Object
o Object of insurance should not be illegal or against public policy.
o Insurance contract will be invalid.
o Insurance is a contract. Must comply with all essentials of a valid contract.
o Always made in writing.
o Consideration is an essential element in insurance contract.
o Consideration is the premium.
o In consideration of premium, other party agrees to take over risk on the happening of
a certain event.
• Co-operative Device
o A large number of people associate themselves and transfer their individual risks to
the association so formed.
o Many contribute into a common financial pool; insurer is thus able to cover loss easily.
• Protection of Financial Risks
o Insurance covers only those risks which can be measured in monetary terms.
o It cannot check happening of a certain event; but guarantees payment of loss and
protects assured from economic sufferings.
• Good Faith
o Insurance contracts included in class of “uberrimae fidei” contracts.
o Requires absolute and utmost good faith on parties to the contract.
o Both parties should be of same mind, same understanding at the time of making the
o Duty of both parties to disclose all relevant facts of the contract to each other.
• Contract of Indemnity
o All insurance contracts, except for life insurance, are indemnity contracts.
o Insurance company pays only the cash loss so caused.
o Based on principle of compensation up to the limit of actual loss or value of policy,
whichever is lower.
• Certainty and Contingency
o Life insurance is a contract of certainty because death or expiry of term of policy will
certainly occur; payment is thus certain.
o In other contracts of insurance such as fire, theft etc., the contingency may or may not
o So if the contingency occurs, payment is made; else it is not.
• Insurance is not Gambling
o Insurer is assured of getting his loss indemnified only in event of occurrence of such
uncertain event as stipulated in the contract of insurance.
o In gambling, outcome may either be profit or loss.
o Thus insurance is not gambling; it is based on certainty of uncertain events.
o Contract of general insurance comes under the doctrine of subrogation.
o Once the insured is compensated for the loss caused by the damage to the property
insured by him, the right of ownership of such property passes on to the insurer.
o If damaged property has any value left or if the lost property is recovered, that cannot
be allowed to remain with the insured since in that case he will realize more than the
actual loss which is against the principle of indemnity.
o Thus subrogation means the substitution of the insurer in place of the insured as the
rightful claimant to the possession of the insured property after the insured has been
• Insurable Interest
o No person can make or enter into a contract of insurance unless he has an insurable
interest in the subject matter of insurance.
o One can have insurable interest only when one can be put to a financial loss by the
happening of the event against which a thing or life has been insured.
o In case of life insurance, a person has an insurable interest in his life as well as in the
lives of other persons by whose death he may be prejudiced financially.
o In the case of general insurance, a person has an insurable interest in the property
which is owned by him.
• Insurance cannot be called charity
o Charity is given without consideration whereas insurance is not possible without
consideration i.e. the premium.
o Insurance provides safety and security to the policy holders in consideration of
o Thus insurance contains the element of consideration on both sides of the parties.
INSURANCE AND RISK MANAGEMENT
1.1 CONCEPT OF RISK
Risk is the fundamental premise of insurance
Risk arises out of uncertainty
Risk is the uncertainty of the result of any desired event
It represents the possibility of an outcome being different from what is expected
As far as insurance is concerned, risk can be said to be an outcome which is exactly
contradictory to the purpose for which an insurance is taken up
o There is a risk of burglary when you insure your stock against theft
o There is a risk of an ailment or surgery when you take up a health insurance cover
Risk is always certain, unavoidable and inclusive
Some Common risks
o Loss of Life, Health
o Loss of Income, property and other Financial Assets
o Loss of reputation, peace
o Loss of personal assets like Voice, Smile, Legs etc
1.2 CLASSIFICATION OF RISKS
(a) Financial and Non Financial risks
a. Financial risks are risks that cause a financial detriment to a person in the form of loss
of assets or loss of revenue. It also includes a risk of not earning income that would
have been earned.
Eg. Business Losses, Loss of Profits, defalcation, pilferage of stock etc
b. Non Financial risks are risks that do not affect a person monetarily
E.g. Risk of flunking an exam, risk of not being allowed into Ms. Ramani’s morning
classes, risk of ending up with a digestive problem after eating out
(b) Individual and Group Risks
a. Individual risks are risks are those that affect only the person concerned, or a small,
identifies group of person/s.
E.g. Death of a person affects him and his family
b. Group risks are those, which affect entire segments of the society. They are mostly
impersonal in cause and consequence and cannot be insured because the insurable
interest belongs to everybody.
E.g. Risk of terrorist attacks, earthquakes, recession etc.
(c) Pure and speculative Risks
a. Pure risks are risks involving only two outcomes – loss or no loss. So as to say that a
detriment can either exist or not exist, but there is no possibility of a gain.
E.g. A risk of an accident, risk of falling ill
b. Speculative risks are risks in which there is a possibility of a gain or a loss. The element of
gain is inherent in the given situation.
E.g. Stock market risks, real estate investment risks
(d) Quantifiable and non quantifiable risks
a. Quantifiable risks are those risks, which can be measured and expressed numerically.
E.g. Financial losses, loss of property by fire etc.
b. Non quantifiable risks are those risks which cannot be measured
E.g. Loss of Reputation, Loss of Peace
Pure risks are generally insurable risks and they are further classified as:
1. Personal Risk.
Personal risks are the risks that directly affect an individual’s capacity to earn income.
E.g. Death, Senility, Sickness, Unemployment etc
2. Property Risk
Property risks are risks of damage and loss of property to the owner.
E.g. Loss of Stock, assets etc.
3. Liability Risk
Liability risks are those that arise out of unintentional or intentional injury to the persons or
damages to their properties through negligence or carelessness. These generally arise out of
E.g. Risk of compensation payable under Labour Laws
1.3 UNDERWRITING OF RISKS
Underwriting is a process of scientifically evaluating the nature, timing and effect of risks on the
insured. In other words, it can be called as risk analysis, wherein the underwriter evaluates the
consequences of the risk, how much coverage the insured ought to take and the appropriate
premium that he could pay. In common parlance, we could call the activity of issuing insurance
policies as underwriting. So all insurance agents are functionally underwriters.
Underwriting is important because the insured is often unaware of the necessity of insurance, the
worth of the subject matter and the calculations that go behind determining premium rates, policy
amount etc. Hence, the service of an underwriter becomes necessary. Each insurance company
has its own set of underwriting guidelines to help the underwriter determine whether or not the
company should accept the risk. The information used to evaluate the risk of an applicant for
insurance will depend on the type of coverage involved.
For example, in underwriting automobile coverage, an individual's driving record is critical. As part
of the underwriting process for life or health insurance, medical underwriting may be used to
examine the applicant's health status. The factors that insurers use to classify risks should be
objective, clearly related to the likely cost of providing coverage, practical to administer, consistent
with applicable law, and designed to protect the long-term viability of the insurance program
Significance of underwriting
It is important to underwrite any insurance contract because it helps to:
a. Determine whether the insurance proposal should be accepted by the company or no
b. Determine the rate of premium to be charged
c. Determine what risks can be accepted at normal premium, what can be accepted at extra
premium and what risks cannot be accepted at all.
d. Avoid anti selection or adverse selection
For any further information on this matter, kindly refer to the following books:
1. Principles of Insurance Management – Neelam Gulati
2. Elements of Insurance – Dr. Premavathy
IRDA has a Chairman and some permanent and some part time members but the regulations are
enacted under the guidance of a statutory advisory committee.
The Insurance Regulatory and Development Authority (IRDA) is a national agency of the
Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as
IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission
of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and
ensure orderly growth of the insurance industry and for matters connected therewith or incidental
Insurance business is divided into four classes :
1) Life Insurance 2) Fire Insurance 3) Marine Insurance and 4) Miscellaneous Insurance.
Life Insurers transact life insurance business; General Insurers transact the rest.
No composites are permitted as per law.
Insurance is a federal subject in India. The primary legislation that deals with insurance business in
Insurance Act, 1938, and Insurance Regulatory & Development Authority Act, 1999.
Duties,Powers and Functions of IRDA
Section 14 of IRDA Act, 1999 laysdown the duties,powers and functions of IRDA
(1) Subject to the provisions of this Act and any other law for the time being in force, the Authority
shall have the duty to regulate, promote and ensure orderly growth of the insurance business and
(2) Without prejudice to the generality of the provisions contained in sub-section (1), the powers and
functions of the Authority shall include,
(a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel
(b) protection of the interests of the policy holders in matters concerning assigning of policy,
nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of
policy and other terms and conditions of contracts of insurance;
(c) specifying requisite qualifications, code of conduct and practical training for intermediary or
insurance intermediaries and agents;
(d) specifying the code of conduct for surveyors and loss assessors;
(e) promoting efficiency in the conduct of insurance business;
(f) promoting and regulating professional organisations connected with the insurance and re-
(g) levying fees and other charges for carrying out the purposes of this Act;
(h) calling for information from, undertaking inspection of, conducting enquiries and investigations
including audit of the insurers, intermediaries, insurance intermediaries and other organisations
connected with the insurance business;
(i) control and regulation of the rates, advantages, terms and conditions that may be offered by
insurers in respect of general insurance business not so controlled and regulated by the Tariff
Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);
(j) specifying the form and manner in which books of account shall be maintained and statement of
accounts shall be rendered by insurers and other insurance intermediaries;
(k) regulating investment of funds by insurance companies;
(l) regulating maintenance of margin of solvency;
(m) adjudication of disputes between insurers and intermediaries or insurance intermediaries;
(n) supervising the functioning of the Tariff Advisory Committee;
(o) specifying the percentage of premium income of the insurer to finance schemes for promoting
and regulating professional organisations referred to in clause (f);
(p) specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector; and
(q) exercising such other powers as may be prescribed