FACULTY OF LAW, JAMIA MILLIA ISLAMIA

MAIN ASSIGNMENT ON:

NATURE AND PRINCIPLES OF INSURANCE

BA–LLB (Hons)

NAME- DYUTI RAINA

Semester – X, Section –A
Roll No:09

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 INDEX
S.NO. LIST OF CONTENTS PAGE
NO.

1. Acknowledgement 3.

2. Introduction 4.

3. Meaning and Concept of Insurance 4.

4. Principles of Insurance 6.

5. Statutory Governance 7.

6. Functions of Insurance 7.

7. Bibliography 10.

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 ACKNOWLEDGEMENT

In performing this assignment, I had to take the help and guideline of some respected persons,
who deserve my greatest gratitude. The completion of this assignment gives me much pleasure. I
would like to expand my deepest gratitude to all those who have directly and indirectly guided
me in writing this assignment.

In addition, a thank you to Mr. Sukesh Mishra who introduced me to the methodology of
work, and whose passion for the subject had a lasting effect..

Many people, especially my classmates, have made valuable comment suggestions on this
proposal which gave me an inspiration to improve my assignment. I thank all the people for
their help directly and indirectly who have helped in completing this assignment.

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 INTRODUCTION
There are no certainties or guarantees in life. There is no guarantee that the business will not
suffer an unexpected loss or damage. So while we cannot protect our interests against all risks,
we can opt for some insurance.

Life insurance in its modern form came to India from England in 1818 with the formation of
Oriental Life Insurance Company (OLIC) in Kolkata mainly by Europeans to help widows of
their kin. Later, due to persuasion by one of its directors (Shri Babu Muttyal Seal), Indians were
also covered by the company. However, it was after 1840 that life insurance really took off in a
big way. By1868, 285 companies were doing business of insurance in India. Earlier these
companies were governed by Indian company Act 1866.

By 1870, 174 companies ceased to exist, when British Parliament enacted Insurance Act 1870.
These companies however, insured European lives. Those Indians who were offered insurance
cover were treated as sub-standard lives and were accepted with an extra premium of 15% to
20%. By the end of the 18th century, Lloyd's had brewed enough business to become one of the
first modern insurance company.

Meaning and concept of Insurance

Life is a roller coaster ride and is full of twists and turns. Insurance policies are a safeguard
against the uncertainties of life. As in all insurance, the insured transfers a risk to the insurer,
receiving a policy and paying a premium in exchange. The risk assumed by the insurer is the risk
of death of the insured in case of life insurance.

Insurance policies cover the risk of life as well as other assets and valuables such as home,
automobiles, jewelry etc. On the basis of the risk they cover, insurance policies can be classified
into two categories:

(a) Life Insurance (b) General Insurance

Life insurance products cover risk for the insurer against eventualities like death or disability.
Non-life insurance products cover risks against natural calamities, burglary, etc.

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Insurance is system by which the losses suffered by a few are spread over many, exposed to
similar risks. With the help of Insurance, large numbers of people exposed to a similar risk make
contributions to a common fund out of which the losses suffered by the unfortunate few, due to
accidental events, are made good. Insurance is a protection against financial loss arising on the
happening of an unexpected event. Insurance policy helps in not only mitigating risks but also
provides a financial cushion against adverse financial burdens suffered.

Insurance is defined as a co-operative device to spread the loss caused by a particular risk over a
number of persons who are exposed to it and who agree to ensure themselves against that risk.
Risk is uncertainty of a financial loss. Insurance is also defined as a social device to accumulate
funds to meet the uncertain losses arising through a certain risk to a person injured against the
risk. Insurance provides financial protection against a loss arising out of happening of an
uncertain event. A person can avail this protection by paying premium to an insurance company.
A pool is created through contributions made by persons seeking to protect themselves from
common risk. Any loss to the insured in case of happening of an uncertain event is paid out of
this pool. Life insurance has come a long way from the earlier days when it was originally
conceived as a risk-covering medium for short periods of time, covering temporary risk
situations, such as sea voyages. As life insurance became more established, it was realized what
a useful tool it was for a number of situations that includes temporary needs, threats, savings,
investment, retirement etc. Insurance is a contract between two parties whereby one party agrees
to undertake the risk of another in exchange for consideration known as premium and promises
to pay a fixed sum of money to the other party on happening of an uncertain event (death) or
after the expiry of a certain period in case of life insurance or to indemnify the other party on
happening of an uncertain event in case of general insurance. The party bearing the risk is known
as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or
'assured'.

According to the U.S. Life Office Management Inc., “Life Insurance provides a sum of money if
the person who is insured dies whilst the policy is in effect.”

The definition of insurance can be seen from two view points:

(a) Functional Definition (b) Contractual Definition

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 (a) Functional Definition

Insurance is a co-operative device of distributing losses, falling on an individual or his family

(b) Contractual Definition

Insurance may be defined as a contract consisting of one party (the insurer) who agrees to
pay to other party (the insured) or his beneficiary, a certain sum upon a given contingency
against which insurance is sought.

Principles OF INSURANCE

Insurance is based upon:

(a) Principles of Co-operation

(b) Principles of Probability

Principles of Co-operation

Insurance is a co-operative device. If one person is providing for his own losses, it cannot be
strictly insurance because in insurance the loss is shared by a group of persons who are willing to
co-operate.

Principles of Probability

The loss in the form of premium can be distributed only on the basis of theory of probability.
The chances of loss are estimated in advance to affix the amount of premium. Since the degree of
loss depends upon various factors, the affecting factors are analyzed before determining the
amount of loss. With the help of this principle, the uncertainty of loss is converted into certainty.
The insurer will not have to suffer loss as well as gain windfall. Therefore, the insurer has to
charge only so much of amount which is adequate to meet the losses.

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The insurance, on the basis of past experience, present conditions and future prospects, fixes the
amount of premium. Without premium, no co-operation is possible and the premium cannot be
calculated without the help of theory of probability, and consequently no insurance is possible.

STATUTORY GOVERNANCE

Corporate governance in all companies, including insurance companies, includes the rules,
regulations and institutions that regulate the way in which the governance and control of these
companies is performed and implement them in practice. The basic requirement of development
and implementation of corporate governance is the improvement of all of the economic
indicators, primarily the long-term sustainable development in the interests of the owners and all
other stakeholders, including policyholders, creditors, employees, government and the wider
community. The aim of the paper is to analyse the application of corporate governance in the
insurance in the world and in Serbia. Since there is no generally accepted framework for
standardisation of corporate governance, as it differs depending on the specifics of each
individual insurance company, the subject of the research in the paper is a general framework of
corporate governance applicable to all insurance companies with necessary calibration to the
level of individual companies. In the paper we first point out the importance of the application of
corporate governance in the insurance and specifics of the legal framework of corporate
governance in insurance companies in Serbia and then analyse the quality of corporate
governance, reporting on the implementation of corporate governance and international
principles.

FUNCTIONS OF INSURANCE

The functions of Insurance can be bifurcated into three parts:

(a) Primary Functions (b) Secondary Functions

PRIMARY FUNCTIONS

The primary functions of insurance include the following:

Provide Protection The primary function of insurance is to provide protection against future
risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can

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certainly provide for losses of risk. Insurance is actually a protection against economic loss, by
sharing the risk with others.

Assessment of risk Insurance determines the probable volume of risk by evaluating various
factors that give rise to risk. Risk is the basis for determining the premium rate also.

Collective bearing of risk Insurance is a device to share the financial loss of few among many
others. Insurance is a mean by which few losses are shared among larger number of people. All
the insured contribute premiums towards a fund, out of which the persons exposed to a particular
risk are paid.

Savings and investment Insurance serves as a tool for savings and investment, insurance is a
compulsory way of savings and it restricts the unnecessary expenses by the insured. For the
purpose of availing income-tax exemptions, people invest in insurance also.

SECONDARY FUNCTIONS

The secondary functions of insurance include the following:

Prevention of Losses Insurance cautions individuals and businessmen to adopt suitable device
to prevent unfortunate consequences of risk by observing safety instructions; installation of
automatic sparkler or alarm systems, etc. Reduced rate of premiums stimulate more business and
better protection to the insured.

Small capital to cover large risks Insurance relieves the businessmen from security
investments, by paying small amount of premium against larger risks and uncertainty.

Contributes towards the development of large industries Insurance provides development

Source of Earning Foreign Exchange Insurance is an international business. The country can
earn foreign exchange by way of issue of insurance policies.

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Risk Free Trade Insurance promotes exports insurance, which makes the foreign trade risk
free with the help of different types of policies under marine insurance cover.

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 BIBLIOGRAPHY

PRIMARY SOURCE

The Insurance Laws Act, 2015

SECONDARY SOURCES

Books

1. Jain, Rajiv, Insurance Law and Practice (2nd ed.2006)(Vidhi Publishing Ltd., New
Delhi).
2. Madhyastha, P.S., S. Balchandran, et.al, Legal Aspects of Life Insurance,(Reprint August
2006)( Insurance Institute of India. Mumbai)
3. L. C. Goyle: Law of Banking and Bankers, Eastern Law House, New Delhi.
4. M. L. Tannan (revised by C. R. Datta & S. K. Kataria): Banking Law and Practice,
LexisNexis India, Gurgaon.
5. B. Srivastava and K. Elumalai: Seth’s Banking Law, Law Publisher’s India (P) Limited,
Allahabad.
6. R. K. Gupta: Banking: Law and Practice, Modern Law Publications, Allahabad.
7. Prof. Clifford Gomez: Banking and Finance-Theory, Law and Practice, PHI Learning
Private Limited, New Delhi.
8. J. M. Holden: The Law and Practice of Banking, Universal Law Publishing, Allahabad.
9. K. S. N. Murthy and K. V. S. Sarma: Modern Law of Insurance in India, LexisNexis
India, Gurgaon.
10. Sachin Rastogi: Insurance Law and Principles, LexisNexis, India Gurgaon.

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