Introduction to Insurance:
Insurance is a medium for transferring risk. to be insured, there must be a risk, else the importance of insurance is void. So, the process of managing risks that are minor or major to the human community is called insurance. An insurance contract is signed between two parties; Insured and insurer. This contract is a term proposal that takes the shape of an agreement between an insurer and insured which binds the insurer to compensate the insured in case of risks.
While transferring the risks towards the insurance company (insurer), the insured must pay the insurance premiums. According to an insurance contract, the insurer is liable to pay the sum assured to the insured. Although human life is precious and nothing in the world can substitute a person’s life, and Insurance contract is the only medium to compensate and this is the commonly accepted risk management method.
The growth of contractual saving institutions is the outcome of the necessity of people to protect themselves from risks of loss of life and properties. At the same time, people need surplus income as a precautionary measure to have comfortable living during old age. As a result of these felt-necessities, insurance companies became powerful emerging contractual savings institutions since people contributed by way of premiums to purchase different kinds of insurance policies to protect against risks of life and properties.
Even in our country, the development of contractual savings institutions having no early history of growth continued to become a realized fact. It is in too late a period of 1968 government initiated the establishment of an insurance company as the leading contractual saving institution to mobilize the funds regularly at a larger scale. In our country, these governments built contractual savings institutions still pre-dominate the whole of other contractual savings especially insurance companies that have developed now. As per instance, National Insurances Company (Rashtriya Beema Sansthan) became a dominant government initiated insurance company for many years. In the last few decades, insurance companies both life and non-life areas grow in scope and coverage.
In early 2020, there were 39 insurance companies out of which 20 constitute non-life insurance companies. The insurance committee made it a deliberate policy to make a line of demarcation between life and non-life insurance companies requiring separate departments to operate independently. At present, the insurance committee has been a powerful authority to monitor taking similar measures to strengthen the capital base, imposing restrictions on insurance and investment activities so that they are properly protected and make insurance companies financially Viable.
The premium collection comprises Rs. 14.16 billion in mid-July 2007. The unforgettable historical event of great fire occurrences in England brought the spread of miseries and suffering to the extent that insurance companies are borne due to such historical incident. Insurance companies emerge as a powerful financial institution in the collection and mobilization of savings available for long-term investment based on the contractual obligation to repay the policyholders when they need such funds for alternative uses. These institutions by their nature and characteristics are protectors rather than profit-seekers.
However, at present, they are major financiers to the support and growth of the national economy as they have developed skills and expertise regarding how they invest in various assets and turnkey projects. Contractual savings institutions in their role as financial intermediaries in the financial market are indirect means of mobilizing and investing funds in the overall growth of the national economy. These include among all the insurance companies that procure steady inflow of funds in the form of premiums from policyholders demanding various insurance policies according to their preferences, priorities, and needs.
As such, liquidity is not a problem to these contractual saving institutions although they have to face for some period especially during the depression of the 1930s as regular premiums could not be collected in such a critical period. These institutions are well built up with adequate skill and professional expertise since they are able to estimate relatively as well as accurately the number of insurance benefits to be paid. Their liabilities are long term nature maturing after many years and they can manage their activities to encourage the purchase of insurance policies from policyholders.
The funds so collected are channelized to make appropriate long term investment programs sufficient to meet their contractual obligations especially when insurance policies mature. In later developments, annuities became popular in providing various kinds of benefits under varying terms and conditions depending on changing patterns of income and changing values of assets in which funds are invested. The success of a contractual saving institution lies in maturing the long term contractual obligation through the adequate generation of returns in a way inflow and outflow of funds are synchronized in a more predictable way.
But, in our country, despite the growth of contractual saving institution both in terms of structure and size have not been able to invest due to excessive government interference on one hand and lack of investment skill on the other hand. It is further important that resources of contractual saving institutions like Rastriya Beema Sansthan (National Insurance Corporation) will be utilized for the purpose of economic development and growth of the private sector in a broader national perspective. This also helps in the development of real estate activities besides providing protection against risk.
Arrangements will be made to utilize the funds of these institutions encouraging them to invest in redeemable preferred stock issued by public corporate bodies and public limited companies. But how far their strategies will be accomplished is difficult to implement although not impossible. Even as yet, the growth of major insurance company like Rastriya Beema Sansthan through substantial government ownership could not deliver efficient and innovative insurance products.
This has encouraged the growth of insurance companies under public limited companies like Life insurance corporations of Nepal, National Life and General Insurance, Nepal Insurance, National insurance, Premier Insurance. Himalayan General Insurance, Sagarmatha Insurance, Prudential Insurance. Shikhar Insurance, Everest Insurance, and Nepal Life Insurance Corporation. Many others have been newly emerged such as Lumbini Insurance, Siddhartha Insurance, etc.
To sum up, the legal contract through the consent of insurance and insured where the risk of the insured is transferred to the insurer (insurance company) is known as insurance. To validate this contract, the insured must pay insurance premiums to the insurance company. In insurance, the risks, liabilities, disabilities and even death of the insured are undertaken and considered. Hence, insurance has become indispensable to the general people in the world.
Definitions of Insurance:
Insurance is an arrangement by which a company gives customers financial protection against loss or harm, for example, in case of theft or illness, in return for payment (premium). It is a legal contract that protects citizens from the financial costs that arise from consequences of losses of life, loss of physical properties, material goods damage, failure of business enterprises, etc.
Insurance companies protect individuals against risk. Life insurance companies accept regular payments from individuals in exchange for contracted payments in the event of the policyholder’s death and others. Insurance exists to overcome the outcomes of disadvantageous and unexpected happenings. Every person does try to control or minimize the type of risks but they cannot eliminate the risk. Hence, the financial institution helps protect individuals against certain risks, such as risks to health, disability, and life. So these financial institutions are known as insurance companies. Various scholars have defined the term ‘insurance‘ in different ways.
In the words of D. H. Magoe (1992), “Insurance has been defined as a plan of actions by which a large number of the people associate themselves and transfer the risk to the shoulders of insurance companies to protect against risks that are attached to individuals life and properties.“
According to D. S. Hansel (2001), “Insurance is defined as a social contract providing financial compensation from the effects of misfortunes, and these payments are being made from the accumulated contributions of all parties participating in the scheme“.
According to M. N. Mishra (2003), “Insurance is a cooperative device to spread the loss caused by a particular risk over a number of persons, who are exposed to it and who agree to insure themselves against the risk”.
Mark S. Dorfman (2005) says, “Insurance is a financial arraignment that redistributed the costs of unexpected losses through insurance pools.”
Oxford dictionary (2020) defines insurance as, “an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for the payment of a specified premium.“
According to Investopedia (2020), “Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.“
According to Wikipedia (2020), “Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.“
In the words of GP Chudal (2020), “Insurance is an understanding or an agreement between an insurer and the insured where the former consents to pay the remuneration (compensation) to the latter in the event of deficit or harm to the life and property of the guaranteed.“
According to the above definitions of insurance, it is defined as a co-operative and protective device to spread the loss caused by a particular risk over a number of people who are exposed to it and who agree to ensure them against that risk. Insurance redistributes the costs of loss burden and through mathematically fair price determination by defining proximate cause of loss and its occurrence.
The building blocks of the insurance premium are based on the actual cost of losses plus expenses of maintaining the insurance pool, plus an allowance for unexpected losses fewer earnings on investment. Cash flow underwriting loss ratio expenses ratio and combined ratio are to be considered. It is also important to define insurance events in terms of insurable loss exposure, accidental losses, catastrophic losses, and loss coverage. It is to be, however, understood that gambling losses are not insurance events.
In a broad sense there are two types of insurance:
- Non-Life Insurance (निर्जिवन विमा)
- Life Insurance (जिवन विमा)