Define Insurance. What are its characteristics?

Insurance may be described as a social device to reduce or eliminate risks of loss to life and property. It is a provision which a prudent man makes against inevitable contingencies, loss or misfortune. 

Once Frank H. Knight said “Risk is uncertainty and uncertainty is one of the fundamental facts of life.” Insurance is the modern method by which men make the uncertain, certain and the unequal, equal. It is the means by which success to the support of the weak and weak secure, not by favor sent by right duly purchased and paid for, the support of the strong. 

Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. As in private life, in business also there are dangers and risks of different kinds. The aim of all types of insurance is to make provision against such dangers. The risks which can be insured against include fire, the perils of sea (marine insurance), death (life insurance) and, accidents and burglary. Any risk contingent upon these, may be insured against at a premium a commensurate with the risk involved. Thus, collective bearing of risks is insurance. 

The term ‘insurance’ has been defined by different experts on the subject as follows : 

In the words of John Magee, “Insurance is a plan by which large number of people associate themselves and transfer to the shoulders of all, risks that attach to individuals.” 

In the words of Allen Z. Mayerson, “Insurance is a device for the transfer to an insurer of certain risks of economic loss that would otherwise come by the insured.” 

In the words of Justice Channel, “ Insurance is a contract whereby one person, called the insurer, undertakes in return for the agreed consideration called premium, to pay to another person called the insured, a sum of money or its equivalent on specified event.” 

NATURE OR CHARACTERISTICS OF INSURANCE 

The following are the characteristics of insurance : 

1. Sharing of risks : Insurance is a cooperative device to share the burden of risk which may fall on happening of some unforeseen events, such as the death of head of the family, or on happening or marine perils or loss of by fire. 

2. Cooperative device : Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it. A large number of persons share the losses arising from a particular risk. 

3. Evaluation of risk : For the purpose of ascertaining the insurance premium, the volume of risk is evaluated, which forms the basis of insurance contract. 

4. Payment on happening of specified event : On happening of specified event, the insurance company is bound to make payment to the insured. Happening of the specified event is certain in life insurance; but in the case of fire, marine or accidental insurance, it is not necessary. In such cases, the insurer is not liable for payment of indemnity. 

5. Amount of Payment : The amount of payment in indemnity insurance depends on the nature of losses occurred, subject to a maximum of the sum insured. In life insurance, however, a fixed amount is paid on the happening of some uncertain event or on the maturity of the policy. 

6. Large number of insured person : The success of insurance business depends on the large number of persons insured against similar risk. This will enable the insurer to spread the losses of risk among large number of persons, thus keeping the premium rate at the minimum. 

7. Insurance is not a gambling : Insurance is not a gambling. Gambling is illegal which gives gain to one party and loss to the other. Insurance is a valid contract to indemnity against losses. Moreover, insurable interest is present in insurance contracts and it has the element of investment also. 

8. Insurance is not charity : Charity pays without consideration but in the case of insurance, premium is paid by the insured to the insurer in consideration of future payment. 

9. Protection against risks : Insurance provides protection against risks involved in life, materials and property. It is a device to avoid or reduce risks. 

10. Spreading of risks : Insurance is a plan which spreads the risks and losses of few people among a large number of people. John Magee writes, “Insurance is a plan by which a large number of people associate themselves and transfer to the shoulders of all, risks attached to individuals”. 

11. Transfer of risk : Insurance is a plan in which the insured transfers his risk on the insurer. this may be the reason that Mayerson observes, that insurance is a device ot transfer some economic losses to the insurer, otherwise such losses would have been borne by the insureds themselves. 

12. Ascertaining of losses : By taking a life insurance policy, one can ascertain his future losses in terms of money. This is done by the insurer to determining the rate of premium; which is calculated on the basis of maximum risks. 

13. A contract : Insurance is a legal contract between the insurer and insured under which the insurer promises to compensate the insured financially within the scope of insurance policy, and the insured promises to pay a fixed rate of premium to the insurer. 

14. Based upon certain principle : Insurance is a contract based upon certain fundamental principles of insurance which includes, utmost good faith, insurable interest, contribution, indemnity, causa proxima, subrogation, etc. which are the basis for successful operation of insurance plan. 

15. Institutional set up : After nationalization, the insurance business in the country is operating under statutory organizational set up. In India, the Life Insurance Corporation, the General Insurance Corporation and its subsidiary companies, and private players are operating in the various fields of insurance. : 5 : 

16. Insurance for pure risks only : Pure risks give only losses to the insured, and no profits. Examples of pure risks are – accident, misfortune, death, fire, injury etc. which are all one-sided risks and the ultimate result in loss. Insurance companies issue policies against pure risks only, not against speculative risks. Speculative risks have chances of profits of losses. 

17. Social device : Insurance is a plan of social welfare and protection of interests of the people and Miller observe, “Insurance is of social nature.” 

18. Based on mutual good-faith : Insurance is a contract based on good faith between the parties. Therefore, both the parties are bound to disclose the important facts affecting to the contract before each other. Utmost good faith is one of the important principles of insurance. 

19. Regulation under the law : The government of every country enacts the law governing insurance business so as to regulate and control its activities for the interest of the people. In India the Life Insurance Act 1956 and General Insurance (Nationalisation) Act 1972 and Insurance Regulatory and Development Authority Act 1999 are the major enactments in this direction. 

20. Wider scope : The scope of insurance is much wider and extensive. Various types of policies have been developed in the country against risks on life, fire, marine, accident, theft, burglary etc. 

To conclude, insurance is a device for the transfer of risks from the insureds to insurers, who agree to it for a consideration (known as premium), and promises that the specified extent of loss suffered by the insureds shall be compensated. It is a legal contract of a technical nature.