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.
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