Every business faces a variety of risks. For example, there may be injury to employees in job related accidents, goods may be lost in transit; there may be fire in the godown, and so on. In all these situations the entire loss is to be borne by the businessman or the owner.
But, now-a-days, the risk of loss or damage is not entirely borne by the owner. The insurance provides protection against losses form such risk of the business for a nominal charge called premium. In other words, it helps the business in recovering losses which may arise due to various happening in the course of business, partly or fully from the insurance company.
Risk is the possibility of loss or damage due to factors over which we have little or no control. Similarly business risk refers to the possibility of loss or damage on the happening of certain events which are beyond one’s control. All types of business risks are not covered by insurance. The risk of loss due to fire, theft, earthquake, flood, etc. can be insured on payment of a nominal amount. These are called insurable risks. But, risk of loss on account of decline in demand of a product due to change in fashions, introduction of new products in the market or change of policy of the government cannot be insured. These are called non-insurable risks. The non-insurable risks are to be fully borne by the businessman.
Meaning of Insurance
The term ‘Insurance’ refers to a contract between two parties, one known as insured and the other insurer, whereby the insurer in exchange of a fixed amount of money agrees to compensate the insured against risks of loss or damage caused by happening of certain events. The document containing the contract is known as ‘Insurance Policy’.
The person whose risk is insured is called ‘Insured’ or ‘Assured’ and the person or the company which insures is known as ‘Insurer’,or ‘Assurer’. The consideration in return for which the insurer agrees to compensate the insured is known as ‘Premium’.
Thus, insurance can be defined as ‘a contract between the insurer and insured whereby the insurer undertakes to pay the insured a fixed amount, in exchange for a fixed sum of money (premium), on the happening of a certain event (like attaining a certain age or on death), or pay the amount of actual loss when it takes place due to the risk insured.
Importance of Insurance
Protection Against Risk: Insurance provides protection against various risks involved in business. The protection is in the form of a provision to compensate for the loss suffered by the insured.
Pooling of Risk: Insurance helps in sharing of risk. In practice, a large number of people seek insurance by paying the premium which results in the formation of insurance fund. This fund is used for compensating a few among them who may suffer a loss. Thus, in effect the loss is spread over a large number of people.
Helps in Securing Loans: Banks and financial institutions usually insist on the insurance of goods and properties before loans can be sanctioned on their security. So insurance makes it convenient to secure loans and advances from the financial institutions.
Protection Against Liabilities under various Labour Laws: Insurance gives protection to businessmen in the event of compensation payable to employees for accidents leading to fatal injury, partial injury, disablement, as well as sickness and maternity.
Contribute to Economic Development: Funds with the insurance companies are invested in various types of securities and projects, which contribute to economic development of the country.
Generation of Employment: Insurance companies provide employment to a large number of people on regular basis. A number of people earn their livelihood working as insurance agents.
Social Security: Life insurance provides security against risks of old age and premature death of people. Besides, social security is provided to workers through the Employees State Insurance scheme whereby accidental risks are covered.
Types of Insurance
Based on the subject matter of insurance or the nature of risk covered, insurance can be broadly classified as:
- Life Insurance
- Fire Insurance
- Marine Insurance
- Other types of Insurance
1. Life Insurance
As a human being we are exposed to different types of risk. A person may face an untimely death on account of an accident or some illness. In such a situation, the family of the deceased faces financial hardship. Similarly, on attaining old age one may not have enough money to manage a comfortable living. There is still another situation when one may need a large sum of money such as marriage of a son or daughter, higher professional education, etc.
Life insurance is a contract that protects you against such types of situation. It is a contract whereby the insurer undertakes to pay a certain sum of money either on the death of the insured or on the expiry of a specified period of time in consideration of a certain amount (premium) paid by the insured either in lump sum or in instalments. Since the risk insured is certain to happen and the sum assured is bound to be paid sooner or later, the contract of life insurance is also referred to as life assurance.
2. Fire Insurance
Fire insurance is a contract whereby the insurer, in consideration of premium, undertakes to compensate the insured for the loss or damage suffered due to fire. The premium is payable in single instalment. The fire insurance contracts are generally taken up for one year. It automatically comes to an end after the expiry of one year. However, one can renew the policy every year by paying the premium on time.
3. Marine Insurance
Marine insurance is an agreement by which the insurance company agrees to indemnify the owner of a ship or cargo against risks which are incidental to marine adventures. During an ocean journey, a ship is exposed to a variety of risks such as collision with other ship, collision of ship with hidden rocks, fire, storm, and so on.
In all these situations, the entire loss is grouped into three categories:
- loss to the ship
- loss to the cargo
- loss of freight
Marine insurance that covers the risk of loss of cargo is known as Cargo Insurance. When the owner of a ship is insured against loss on account of perils of the sea, it is known as Ship or Hull insurance. Further, the freight is usually payable by the owner of cargo on its safe delivery at the port of destination. So, the shipping company may also seek insurance of the risk of loss of freight. Such a marine insurance is known as freight insurance.
Other Types of Insurance
Apart from life, fire and marine insurance, general insurance companies insure a variety of other risks through various policies.
Motor Vehicles Insurance: Insurance of passenger cars, vans, commercial vehicles, motor cycles, scooters, etc., covers the risks of damage of the vehicle by accident, loss by theft, and so also the liability arising out of injury to, or death of a third party involved in the accident. In fact, vehicle insurance in respect of third party is compulsory.
Health Insurance: It provides protection against the medical expenses incurred on treatment of illness or injury suffered by the policyholder. It is also termed as medi-claim insurance, and is one of the most popular type of insurance now-a-days.
Crop Insurance: It protects the farmers from the loss suffered due to crop failure in the event of drought or flood.
Cash Insurance: It protects the banks and other business establishment against loss of money in transit.
Cattle Insurance: It covers the risk of loss due to the death of a cow, buffalo, heifer, bull, etc. caused by accident, diseases etc.