Insurance is the more formalized means to mitigate the adverse consequences of
unemployment, loss of health, death, old age law suits and destruction of property. The
insurance industry occupies a very important place among financial services all over the
world. Today insurance affects people from all walks of life. Individuals as well as
business firms turn to insurance for managing various risks.
What is insurance?
Insurance can be defined as a contract between two parties, where one promises the
other to indemnify or make good any financial loss suffered by the latter (the insured) in
consideration for an amount received by way of ‘premium’ The contract of insurance is
referred to as the ‘policy’.
Losses cannot be determined before hand, but certainly can be reimbursed if and when
they occur, by insurance. For this, people facing common risks come together and
contribute a fixed amount towards a pool, out of which they are reimbursed if and when
Insurance is a business based on the previous experience of damage and loss. Actual
loss comes close to estimated loss where the number of assets/individuals exposed to
similar risk is large. The law of large numbers gains importance here since the amount of
premium to be charged depends upon the expected loss, which should enable the
insurer to meet all the expenses and claims that arise and also allow for reasonable
Payment of accidental and unintentional losses
Insurance deals with covering of losses, which are accidental in nature. The insurer
should cover all unexpected and unforeseen losses, which occurs at random.
The contract of insurance is one where the risk of one party is transferred to the other,
who is the insurer who is usually in a stronger position financially and can easily make
good the loss of the insured. Risks of death, illness, theft, etc. are all examples where
the risk of the insured can be transferred to the insurer. Thus the most commonly
adopted form of risk transfer is insurance.
Principle of indemnity
Life insurance is not a contract of indemnity. But property insurance or personnel
accident insurance contracts are contracts of ‘indemnity’. Indemnity merely means to
make good any financial loss suffered by the insured and to put him or her back in the
same financial position as he or she was before the occurrence of the loss. It is the duty
of the insurer to make good the loss suffered so as to enable the insured to again derive
the benefits from the insured assets as he used to earlier. An example is the
Householders Insurance policy where the insurer pays the actual loss to the policyholder
in case of any theft or damage that has been caused to his household appliances or
gadgets covered under the policy. In accordance with this principle, the insured cannot
claim more than the actual loss caused to an insured risk.
Insurance and Gambling
Gambling also known as wager is betting on chance and is highly speculative. An
insured must have an insurable interest in the subject matter of a contract of insurance, which is not required in the case of a wager, where the interest is only restricted to the stake won or lost. An insurance contract is guided by the principle of utmost good faith, which is not required in the case of a wager. The insured event may or may not take place in the case of insurance (except life insurance). But in case of a wagering agreement the event takes place at a fixed future date. Insurance is enforceable by law whereas in gambling none of the parties has any legal remedy.