Life insurance has no competition from any other business. Many people think that life insurance is an investment or a means of saving. This is not a correct view. When a person saves, the amount of funds available at any time is equal to the amount of money set aside in the past, plus interest. This is so in a fixed deposit in the bank, in national savings certificates, in mutual funds and all other savings instruments. If the money is invested in buying shares and stocks, there is the risk of the money being lost in the fluctuations of the stock market. Even if there is no loss, the available money at any time is the amount invested in not the total of the savings already made, but the amount one wished to have at the end of the savings period. The final fund is secured from the very beginning. One is paying for it over the years, out of the savings. One has to pay for it only as long as one life or for a lesser period, if so chosen. The assured fund is not affected. There is no other scheme which provides this kind of benefit. Therefore life insurance has no business.
This is not similar to a hire purchase scheme. In a hire purchase scheme, the instead purchase is effected immediately, but the price is paid in installments later. However, in the event of death, the balance installments are not excused. They have to be paid by the surviving family. In the case of life insurance, the premiums cease on death. There are no outstanding installments. There is no financial arrangement that can equal the benefits of life insurance.
A comparison with other forms of savings will show that life insurance has the following advantages.
In the event of death, the settlement is easy. The heirs can collect the moneys quicker, because of the facility of nomination and assignment. The facility of nomination is now available for some bank accounts, provident fund etc.
There is a certain amount of compulsion to go through the plan of savings. In other forms, if one changes the original plan of savings, there is no loss. In insurance, there is a loss.
Creditors cannot claim the life insurance moneys. They can be protected against attachments by courts.
There are tax benefits, both in income tax and in capital gains.
Marketability and liquidity are better. A life insurance policy is property and can be transferred or mortgaged. Loans can be raised against the policy.
It is possible to protect a life insurance policy from being attached by debtors. The beneficiary’s interests will remain secure.
The following tenets help agents to believe in the benefits of life insurance. Such faith will enhance their determination to sell and their perseverance.
Life insurance is not only the best possible way for family protection. There is no other way.
Insurance is the only way to safeguard against the unpredictable risks of the future. It is unavoidable.
The terms of life are hard. The terms of insurance are easy.
The value of human life is far greater than the value of property. Only insurance can preserve it.
Life insurance is not surpassed by any other savings or investment instrument, in terms of security, marketability, stability of value or liquidity.
Insurance, including life insurance, is essential for the conservation of many businesses, just as it is in the preservation of homes.
Life insurance enhances the existing standards of living.
Life insurance helps people life financially solvent lives
Life insurance perpetuates life, liberty and the pursuit of happiness.
Life insurance is a way of life
Sunday, June 12, 2011
ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT
For economic development, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth. The Insurance Act has strict provisions to ensure that insurance funds are invested in safe avenues, like Government bonds, companies with record of profits and so on.
As on 31.3.2006, the total investment of the LIC exceeded Rs.520, 000 crores, of which nearly Rs.300, 000 crores were directly in Government related securities, nearly Rs.16, 000 crores in the State Electricity Boards, nearly Rs.22, 000 crores in housing loans, Rs.19, 000 crores in the power generation sector and Rs.10, 000 crores in water supply and sewerage systems. Other investments included road transport, settling up of industrial estates and directly financing industry. Investments in the corporate sector exceeded Rs.30, 000 crores. These directly affect the lives of the people and their economic well-being.
The LIC is not an exception. All good life insurance companies have huge funds, accumulated through the payments of small amounts of premia of individuals. These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. The private insures in India are new and have accumulated funds equal to about one-eight of the LIC’s. But even their investments in the various sectors and contributing directly and indirectly to the country’s economic development, would be of similar proportions.
A life insurance company’s funds are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trust for the benefit of the policyholders. The management of life insurance companies is required to keep this aspect in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the LIC, benefit the society at large.
Apart from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, floods, etc. Financiers, like banks, would collapse if the factory, financed by it, is reduced to ashes by a terrible fire. Insurers cover also the loss to financiers, if their debtors default.
As on 31.3.2006, the total investment of the LIC exceeded Rs.520, 000 crores, of which nearly Rs.300, 000 crores were directly in Government related securities, nearly Rs.16, 000 crores in the State Electricity Boards, nearly Rs.22, 000 crores in housing loans, Rs.19, 000 crores in the power generation sector and Rs.10, 000 crores in water supply and sewerage systems. Other investments included road transport, settling up of industrial estates and directly financing industry. Investments in the corporate sector exceeded Rs.30, 000 crores. These directly affect the lives of the people and their economic well-being.
The LIC is not an exception. All good life insurance companies have huge funds, accumulated through the payments of small amounts of premia of individuals. These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. The private insures in India are new and have accumulated funds equal to about one-eight of the LIC’s. But even their investments in the various sectors and contributing directly and indirectly to the country’s economic development, would be of similar proportions.
A life insurance company’s funds are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trust for the benefit of the policyholders. The management of life insurance companies is required to keep this aspect in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the LIC, benefit the society at large.
Apart from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, floods, etc. Financiers, like banks, would collapse if the factory, financed by it, is reduced to ashes by a terrible fire. Insurers cover also the loss to financiers, if their debtors default.
THE BUSINESS OF INSURANCE
Insurance companies are called insures. The business of insurance is to (a)bring together persons with common insurance interests (sharing the same risks), (b) collect the share or contribution (called premium) from all of them, and (c) pay out compensations (called claims) to those who suffer from the risks. The premium is determined on the same lines as indicated in the examples above, but with some further refinements.
In India, insurance business is classified primarily as life and non-life or general. Life insurance includes all risks related to the lives of human beings and general insurance covers the rest. General insurance has three classifications viz., Fire (dealing with all fire related risks), Marine (dealing with all transport related risks and ships) and Miscellaneous (dealing all others like liability, fidelity, motor, crop, engineering, construction, aviation, personal accident, etc). Personal accident and sickness insurance, which are related to human beings, is classified as ‘non-life’ in India, but is classified ad ‘life’, in many other countries. What is ‘non-life’ in India is termed ‘Property and Casualty’ in some other countries.
In India, the, IRDA has, in 2005, issued Regulations enabling micro insurance (broadly meaning insurance for small Sums Assured, like 5 to 50 thousands) to be done by both life and general insurers on the basis of mutual tie-ups. A policy may be issued by a life insurer covering both life and non-life risks, but premium on account of the non-life on account of the non-life business will be passed on to a general insurer and the claim amount collected from the latter.
The premium for insurance is based on expectations of the losses. These expectations are based on studies of occurrences in the past and the use of statistical principles. There is, in statistics, a “law of large numbers”. When you toss a coin, the chance, or probability, of a head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer to half a million proportionately than in the case of 10. The variation will be less as a percentage. So also, the larger the numbers (of risks) included in the pool, the better the chances that the assumptions regarding the probability of the risk occurring will be realized in practice. In order to be amenable to statistical predictions, insurers have to insure large numbers of risks. The larger the spread of the business, the better the experience in relation to expectations. The probability of risk being the basis of premium calculation, large numbers are necessary to ensure that the premium charged is viable or adequate.
The business of insurance is one of sharing. It spreads losses of an individual over the group of individuals who are exposed to similar risks. People who suffer loss get relief because at least part of their loss is made good. People who do not suffer loss are relieved because they were spread the loss.
In India, insurance business is classified primarily as life and non-life or general. Life insurance includes all risks related to the lives of human beings and general insurance covers the rest. General insurance has three classifications viz., Fire (dealing with all fire related risks), Marine (dealing with all transport related risks and ships) and Miscellaneous (dealing all others like liability, fidelity, motor, crop, engineering, construction, aviation, personal accident, etc). Personal accident and sickness insurance, which are related to human beings, is classified as ‘non-life’ in India, but is classified ad ‘life’, in many other countries. What is ‘non-life’ in India is termed ‘Property and Casualty’ in some other countries.
In India, the, IRDA has, in 2005, issued Regulations enabling micro insurance (broadly meaning insurance for small Sums Assured, like 5 to 50 thousands) to be done by both life and general insurers on the basis of mutual tie-ups. A policy may be issued by a life insurer covering both life and non-life risks, but premium on account of the non-life on account of the non-life business will be passed on to a general insurer and the claim amount collected from the latter.
The premium for insurance is based on expectations of the losses. These expectations are based on studies of occurrences in the past and the use of statistical principles. There is, in statistics, a “law of large numbers”. When you toss a coin, the chance, or probability, of a head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer to half a million proportionately than in the case of 10. The variation will be less as a percentage. So also, the larger the numbers (of risks) included in the pool, the better the chances that the assumptions regarding the probability of the risk occurring will be realized in practice. In order to be amenable to statistical predictions, insurers have to insure large numbers of risks. The larger the spread of the business, the better the experience in relation to expectations. The probability of risk being the basis of premium calculation, large numbers are necessary to ensure that the premium charged is viable or adequate.
The business of insurance is one of sharing. It spreads losses of an individual over the group of individuals who are exposed to similar risks. People who suffer loss get relief because at least part of their loss is made good. People who do not suffer loss are relieved because they were spread the loss.
HOW INSURANCE WORKS
The mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any of them suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ships are exposed to the same risks, which are related to water damage, sinking of the vessel, piracy, etc. Those owning factories are not exposed to these risks, but they are exposed to different kinds of risks, fire, hailstorms, earthquakes, lightning, burglary, etc. Like this, different kinds of risks can be identified and separate groups made, including those exposed to such risks. By this method, the heavy loss that any one of them in the group may suffer (all of them may not suffer such losses at the same time) is divided into bearable small losses by all the others in the group. In other words, the risk is spread among he community and the likely big impact on one is reduce to smaller manageable impacts on all. Insurance helps to spread the costs or risks.
If a Jumbo Jet with more than 350 passenger’s crashes, the loss would run into several crores of rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jets will crash at the same time. If 100 airline companies flying Jumbo Jets, come together into an insurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne by each airline would come down to a few lakhs of rupees. Thus, insurance is a business of ‘sharing’. It makes an unbearable loss, bearable…
There are certain principles, which make it possible for insurance to remain a preferred and fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that the peril should occur in an accidental manner. Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the loss. This would be taking unfair advantage of an arrangement put into place to protect people from the accidental risks they are exposed to. The consequence has to be random, accidental, and not the deliberate creation of the insured person.
The manner in which the loss is to be shared can be determined beforehand. It can be equal among all. It can also be proportional to the risk that each person is exposed to. The trader who has sent Rs 100 lakhs worth of goods on a ship will bear double the loss to be borne by another trader who has got Rs 50 lakhs worth of goods on the same ship. Current practice is to make the sharing proportional to the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid.
The collection to be made from each person in advance is determined on the basis of assumptions. While it may not be possible to tell beforehand, which person will suffer, it may be possible to tell, on the basis of past experience, how many persons, on an average, may suffer losses.
If a Jumbo Jet with more than 350 passenger’s crashes, the loss would run into several crores of rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jets will crash at the same time. If 100 airline companies flying Jumbo Jets, come together into an insurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne by each airline would come down to a few lakhs of rupees. Thus, insurance is a business of ‘sharing’. It makes an unbearable loss, bearable…
There are certain principles, which make it possible for insurance to remain a preferred and fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that the peril should occur in an accidental manner. Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the loss. This would be taking unfair advantage of an arrangement put into place to protect people from the accidental risks they are exposed to. The consequence has to be random, accidental, and not the deliberate creation of the insured person.
The manner in which the loss is to be shared can be determined beforehand. It can be equal among all. It can also be proportional to the risk that each person is exposed to. The trader who has sent Rs 100 lakhs worth of goods on a ship will bear double the loss to be borne by another trader who has got Rs 50 lakhs worth of goods on the same ship. Current practice is to make the sharing proportional to the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid.
The collection to be made from each person in advance is determined on the basis of assumptions. While it may not be possible to tell beforehand, which person will suffer, it may be possible to tell, on the basis of past experience, how many persons, on an average, may suffer losses.
CLASSIFICATION OF RISKS
Risks are classified in various ways. One classification is based on the extent of the damage likely to be caused. Critical or Catastrophic risks are those which may lead to the bankruptcy of the owner. It would happen if the loss is total, like in a tsunami, wiping out everything. It can also happen if the deceased person was heavily in debt. Important risks may not spell doom, but may upset family or business finances badly, requiring a lot of time to recover. The adverse effect of an economic recession is one such. Less damaging are unimportant risks, like temporary illness or accidents.
Another classification is between financial and non-financial risks. Referred to in an earlier paragraph is concerned with only financial risks.
A third classification is between Dynamic and Static risks. Dynamic risks are caused by perils which have national consequence, like inflation, calamities, technology, political upheavals, etc. Static risks are caused by theft or misappropriation. Dynamic risks are less likely to occur than static risks, but are also less predictable... Static risks are more suited to management through insurance.
Fundamental risks are those that affect large populations while Particular risks affect only specific persons. A train crash is a fundamental risk while a theft is a particular risk. Life Insurance business deals with experience, as many persons will be affected at the same time, when there is an. Earthquake, flood or riot.
Another classification is between pure risks and speculative risks. The latter are in the nature of betting or gambling where the risk is, to some extent, under the control of the person concerned, while a pure risk is not so. It is more in the nature of an Act of God. Insurance deals with only pure risks and not speculative risks.
Another classification is between financial and non-financial risks. Referred to in an earlier paragraph is concerned with only financial risks.
A third classification is between Dynamic and Static risks. Dynamic risks are caused by perils which have national consequence, like inflation, calamities, technology, political upheavals, etc. Static risks are caused by theft or misappropriation. Dynamic risks are less likely to occur than static risks, but are also less predictable... Static risks are more suited to management through insurance.
Fundamental risks are those that affect large populations while Particular risks affect only specific persons. A train crash is a fundamental risk while a theft is a particular risk. Life Insurance business deals with experience, as many persons will be affected at the same time, when there is an. Earthquake, flood or riot.
Another classification is between pure risks and speculative risks. The latter are in the nature of betting or gambling where the risk is, to some extent, under the control of the person concerned, while a pure risk is not so. It is more in the nature of an Act of God. Insurance deals with only pure risks and not speculative risks.
PURPOSE & NEED OF INSURANCE
Assets are insured, because they are likely to be destroyed or made non-functional before the expected life time, through accidental occurrences. Such possible occurrences are called perils. Fire, floods, breakdown, lightning, earthquakes, etc, are perils. If such perils can cause damage to the asset, we say that asset is exposed to the risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the cost of the building, the contents in it and the extent to damage.
The risk only means that there is a possibility of loss or damage. The damage may or may not happen. The earthquake may occur, but the building may not have been affected at all. Insurance is done against the possibility that the damage may happen. There has to be an uncertainty about the risk. The word ‘possibility’ implies uncertainty. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against. In the case of a human being, death is certain, but the time of death is uncertain. The person is insured, because of the uncertainty about the time of his death.. In the case of a person who is terminally ill, the time of death is not uncertain, though not exactly known. It would be ‘soon’. He cannot be insured.
Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The risk can sometimes be avoided, through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. They are the ones who benefit from the asset and therefore, would lose, when the asset is damaged. Insurance only compensates for the losses – and that too, not fully.
Only economic consequences can be insured. If the loss is not financial, insurance may not be possible. Examples of non-economic losses are love and affection of parents, leadership of managers, sentimental attachments to family heirlooms, innovative and creative abilities, etc.
The risk only means that there is a possibility of loss or damage. The damage may or may not happen. The earthquake may occur, but the building may not have been affected at all. Insurance is done against the possibility that the damage may happen. There has to be an uncertainty about the risk. The word ‘possibility’ implies uncertainty. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against. In the case of a human being, death is certain, but the time of death is uncertain. The person is insured, because of the uncertainty about the time of his death.. In the case of a person who is terminally ill, the time of death is not uncertain, though not exactly known. It would be ‘soon’. He cannot be insured.
Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The risk can sometimes be avoided, through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. They are the ones who benefit from the asset and therefore, would lose, when the asset is damaged. Insurance only compensates for the losses – and that too, not fully.
Only economic consequences can be insured. If the loss is not financial, insurance may not be possible. Examples of non-economic losses are love and affection of parents, leadership of managers, sentimental attachments to family heirlooms, innovative and creative abilities, etc.
BREIF HISTORY OF INSURANCE
Insurance has been known to exist in some form or other since 3000 BC. The Chinese traders, traveling treacherous river rapids would distribute their goods among several vessels, so that the loss from any one vessel being lost would be partial and shared, and not total. The Babylonian traders would agree to pay additional sums to lenders, as the price for within off the loans, in case of the shipment being stolen. The inhabitants of Rhodes adopted the principle of 'general average', whereby, if goods are shipped together, the owners would bear the losses in proportion, if loss occurs, due to jettisoning during distress.(Captains of ships caught in storms, would throw away some of the cargo to reduce the weight and restore balance. Such throwing away is called jettisoning) The Greeks had started benevolent societies in the late 7th century AD, to take care of the funeral and families of members who died. The friendly societies of England were similarly constituted. The Great Fire of London in 1666, in which more than 13000 houses were lost, gave a boost to insurance and the first fire insurance company, called the Fire Office, was started in 1680.
The origins of insurance business as in vogue at present, is traced to the Lloyd’s Coffee House in London. Traders, who used to gather in the Lloyd’s coffee house in London, agreed to share the losses to their goods while being carried by ships. The losses used to occur because of pirates who robbed on the high seas or because of bad weather spoiling the goods or sinking the ship. In India, insurance began in 1818 with life insurance being transacted by an English company was the Bombay Mutual Assurance Society Ltd, formed in 1870 in Mumbai. This was followed by the Bharat Insurance Co. in 1896 in Delhi, the Empire of India in 1897 in Mumbai, the United India in Chennai, the National, the National Indian and the Hindustan Cooperative in Kolkata.
Later, were established the Cooperative Assurance in Lahore, the Bombay Life(originally called the Swadeshi Life),the Indian Mercantile, the New India and the Jupiter in Mumbai and the Lakshmi in New Delhi. These were all Indian companies started as a result of the swadeshi movement in the early 1900s.By the year 1956, when the life insurance business was nationalised and the Life Insurance Corporation of India (LIC) was formed on 1st September 1956, there were 170 companies and 75 provident fund societies transacting life insurance business in India. After the amendments to the relevant laws in 1999, the L.I.C. did not have the exclusive privilege of doing life insurance business in India. By 31.8.2007, sixteen life insurers had been registered and were transacting life insurance business in India.
The origins of insurance business as in vogue at present, is traced to the Lloyd’s Coffee House in London. Traders, who used to gather in the Lloyd’s coffee house in London, agreed to share the losses to their goods while being carried by ships. The losses used to occur because of pirates who robbed on the high seas or because of bad weather spoiling the goods or sinking the ship. In India, insurance began in 1818 with life insurance being transacted by an English company was the Bombay Mutual Assurance Society Ltd, formed in 1870 in Mumbai. This was followed by the Bharat Insurance Co. in 1896 in Delhi, the Empire of India in 1897 in Mumbai, the United India in Chennai, the National, the National Indian and the Hindustan Cooperative in Kolkata.
Later, were established the Cooperative Assurance in Lahore, the Bombay Life(originally called the Swadeshi Life),the Indian Mercantile, the New India and the Jupiter in Mumbai and the Lakshmi in New Delhi. These were all Indian companies started as a result of the swadeshi movement in the early 1900s.By the year 1956, when the life insurance business was nationalised and the Life Insurance Corporation of India (LIC) was formed on 1st September 1956, there were 170 companies and 75 provident fund societies transacting life insurance business in India. After the amendments to the relevant laws in 1999, the L.I.C. did not have the exclusive privilege of doing life insurance business in India. By 31.8.2007, sixteen life insurers had been registered and were transacting life insurance business in India.
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