Insurance Definition

Insurance Definition

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What is Insurance?

Insurance is a means of protection against financial loss. It is a form of risk management, which is used mainly to protect against the risk of accidental or uncertain loss.

The insuring entity is known as an insurer, insurance company, insurance company or underwriter. A natural or legal person buying insurance is known as an insured or insured person. In the insurance transaction, in the event of a cover loss, the insurer has to bear the relatively known and guaranteed loss in the form of payment in return for the insurer's promise to compensate the insured. The loss may or may not be financial, but it should be redundant for financial terms and usually, something happens in which there is insurable interest established by the insured's ownership, occupation or an existing relationship.

The insured receives a contract, called an insurance policy, which specifies the terms and conditions in which the insurer will indemnify the insured. The amount of money collected by the insurer for coverage provided by the insurer for an insurance policy is called premium. If the insured has a loss which is likely covered by the insurance policy, then the insured claims to have a complaint with the insurer for processing by the regulator. The insurer can cover his risk by taking reinsurance, where another insurer agrees to take some risks, especially if the principal insurer believes that the risk is very good for transport.

Early Methods

Methods for the transfer or distribution of risks were practiced by traders of Chinese and Babylonian respectively in the third and second millennium BC respectively. [1] Chinese merchants who travel on the banks of the Chinese river, redistribute their goods through many ships to limit the losses due to the overthrow of each person's vessel. The Babylonian developed a system that was recorded in the famous Code of Hammurabi, C. 1750 BC, and was practiced by the first sailing merchants of the Mediterranean Sea. If a trader gets a loan to fund his shipment, then he will pay the additional amount in return for the lender's cancellation guarantee if the shipment was stolen or was lost in the sea.

About 800 BCE, residents of Rhodes made "normal mean". This allowed merchant groups to pay to ensure that their belongings were sent together. The prizes collected will be used to reimburse any trader, whose goods have been thrown during transportation due to hurricanes or ships [2].

In the 14th Century, separate insurance contracts (ie no insurance policies combined with loans or other types of contracts) were invented in Genoa, because insurance policies were supported by pledges of land ownership. The first known insurance contract was returned to Genoa in 1347, and in the next century, marine insurance developed widely and premiums were comfortable with risks intensively [3]. These new insurance contracts have made it possible to separate insurance from investments, a separation of roles that has proven useful for the first time in marine insurance.

Modern insurance

Insurance for enlightenment and developed varieties in Europe became much more sophisticated.

The Lloyds Coffee House was the first organized market for marine insurance.
Property Insurance As we know it can be detected today in the Great Fire of London, which swallowed more than 13,000 homes in 1666. The devastating effects of the fire have changed the development of insurance to "a question of convenience" in urgency, a change of consideration involving Sir Christopher Warren of a site for "insurance office" in his new plan. For London in 1667. "[4] Fire insurance did not achieve anything from many endeavors, but in 1681, economist Nicholas Barbone and eleven partners made the first fire insurance company" Insurance Office for Home "to secure brick and frame houses behind the Royal Exchange Initially, 5,000 homes were insured by its insurance office. [5]

At the same time, the first insurance plans for underwriting entrepreneurial initiatives have become available. At the end of the seventeenth century, increasing importance of London as a center for trade increased the demand for marine insurance. At the end of 1680, Edward Lloyd opened a cafe, which became a meeting point for the parties in the shipbuilding industry, who wanted to secure the cargo and vessels, and who were ready to take such initiatives. These informal initiatives inspired Lloyd's insurance market in London and inspired many related shipping and insurance companies [6].

Brochures promoting the National Insurance Act 1911
The first life insurance policy was determined at the beginning of the 18th century. The first company to offer life insurance was the Amicable Society for a permanent assurance office, founded in 1706 by William Talbot and Sir Thomas Allen. [[] []] Edward Rowe Morse founded the Society for Equitable Assurance on Lives and Survivorships in 1 M62.

He was the first mortgage insurer in the world and was the pioneer of age-based mortality-based awards, which define the basis of "the structure for the practice and development of scientific insurance" and the basis of modern life insurance, on which they later all live Insurance systems were based [9].

"Accidental insurance" began to be available at the end of the 19th century. [10] The first company to offer accident insurance was the Railway Passengers Assurance Company, which was established in 1 The4 The to ensure against the growing number of victims of the neonatal railway system in England.

At the end of the nineteenth century, governments began to launch national insurance programs against sickness and old age. Germany was based on a tradition of welfare programs in Prussia and Saxony, which began in the beginning of the 1940s. In 1880 Chancellor Otto von Bismarck introduced old age pension, accident insurance, and medical care, which laid the basis for the German Welfare State [11] [12]. In Britain, the National Insurance Act of 1911 was introduced by the liberal government in a comprehensive law. This gave British working classes the first contributory health insurance and unemployment insurance system [13]. After the Second World War, this system was greatly expanded under the influence of the Beveridge Report, to make us the first modern welfare.


Insurance involves the pooling of money from many insured entities (known as exposures), so that some losses should be incurred. The insured institutions are thus protected from the risk of a commission because this rate depends on the frequency and severity of the event. To be an insurable risk, insured exposure must meet certain features. Insurance as a financial intermediary is an important part of a commercial venture and financial services industry, but individual entities may also self-insure while saving money for potential future losses [15].


A high number of identical exposure units: Since insurance pooling operates through resources, most insurance policies are provided to individual members of large classes, from which insurers benefit from a large number of laws, where expected Damages occur. Similar to actual damage Exceptions include London's Lloyd, who is famous for ensuring the life or health of actors, sports personalities and other celebrities. However, there will be special differences in all exposures which can lead to various premium rates.

Fixed Damage: Damage occurs at a known time, in a known place and for a known cause. The classic example is the death of the life insured in a life insurance policy. Fire, motor vehicle accidents and workers' injuries can easily be found on this criterion. Other types of losses can only be defined in theory. Occupational illness, for example, can be a situation of bias due to long-term contact, in which no specific date, location or reason can be identified. Ideally, the time, location and reason of the loss should be clear so that all three elements can be verified with adequate information to an appropriate person.

Contingent loss: The event that triggering the triggering element of an accident should be less or less than the beneficiary's control. The loss should be pure, in the sense that it is generated from an event for which only the opportunity for the cost is made. In cases where speculative elements are included such as general business risk or even purchase of lottery tickets, it is generally not considered insurable.

Big loss: The size of the loss should be important from the insured's standpoint. The required cost of loss of insurance premium, the cost of issuing and managing the policy, adjustment of losses and the appropriate capital adequacy method should be able to pay both claims. For minimal losses, this latter cost may be many times more than the expected cost of the loss. There is almost no reason to pay these costs unless the proposed security is the actual value for the buyer.

Cost effective premium: If the probability of an insured event is so high, or the cost of the event is such that the resulting premium is more than the amount of security offered, it is unlikely that insurance will be bought, even if Offer. Also, as the accounting profession formally recognizes financial accounting standards, so the premium cannot be so widespread that there is no reasonable possibility of significant losses to the insurer. If there is no possibility of loss, there may be a form of insurance in the transaction, but not the substance (see Financial Accounting Standards Board Announcement 113: "Accounting and reporting period for reinsurance of short-term and long-term contracts").

Calculable Loss: There are two elements that are at least estimable, if not formally calculated: the probability of loss and relative cost. The probability of loss is usually an empirical exercise, whereas the cost is reasonable with the ability of the person to have a copy of the insurance policy and proof of the damage associated with a request made under this policy. Reasonably defined and objective evaluation of the amount of recoverable amount after the loss.

Limited risk of frighteningly high losses: Insurable losses are ideally independent and not frightening, which means that the losses do not occur at one time and the personal losses are not serious to insurers to make bankruptcy; The insurer may prefer to limit their risk of a single event to a small portion of their capital base. Capital Storm limits the ability of insurers to sell earthquake insurance and wind insurance in areas. In the United States, the risk of flood is assured by the federal government.

 In commercial fire insurance, it is possible to find individual assets whose total exposed value is above the capital constraints of each individual insurer. These properties are usually shared among many insurers or insured by an insurer who makes a group of risks in the reinsurance market.


When a company secures a personal unit, there are basic legal requirements and rules. Many commonly used legal insurance principles are mentioned: [1 insurance]

Compensation - In the case of some losses in the interest of the insurer, the insurer only compensates or compensates the insured.

Compensation insurance - As indicated in the study books of the Chartered Insurance Institute, the insurance company does not have the right to recover from the party that causes the accident and the insured should compensate even if the insured has already filed a lawsuit Reckless party (for example personal accident insurance)

Insurable interest - The policyholder usually has to bear the direct loss. Insurable interest should be present whether it is property insurance or insurance on any person. The concept requires that the insured has "interest" in the loss or damage to the insured or property. In the question, the "share" will be determined by the nature of the relationship between the type of insurance and the property or the relationship between the people. Need an insurable interest which separates insurance from gambling.
Maximum good faith - (Uberrima fides) The insured and the insurer are bound by the good faith bond of honesty and fairness. Physical facts will be disclosed.

Contribution: Insurers who have the same liability as the Insured, they contribute in compensation according to some methods.

Inquiries - The insurance company receives the legal right to pursue recovery from the insured; For example, the insurer can sue who is responsible for the loss of the insured. Insurers can forgive their subordination rights by using special clauses.

Due to proximity, or proximate cause - the cause of loss (risk) policy should be covered by the insurance contract, and the main reason should not be excluded
Mitigation: In the event of damage or accidents, the property owner should try to minimize the loss, as if the property was not insured.


"To indemnify" means to do everything again, or to restore it again in the event that it was possible before a specified event or threat. Consequently, life insurance is generally not considered as liability insurance, but in the form of a "casual" insurance (i.e., a certain event occurs, the complaint arises). There are usually three types of insurance contracts that want to compensate the insured:

A "Return" Policy
"Payment to account" or "[18] on behalf of the policy
A "Compensation" Policy
From the perspective of the insured, the result is usually the same: the insurer pays the loss and compensation costs.

If the insured has a "reimbursement" policy, then the insured person may need to pay the loss and then the insurer can "reimburse" including the loss and pocket expenses, with the permission of the insurer. complaint. [1 [] [19]

According to an "Account to Pay" policy, the insurance carrier will defend and pay a credit from the insured who will not have anything in his pocket. Most modern liability insurance has been written on the basis of the "pay for account" language, which allows the insurance carrier to manage and control the complaint.

Under an "indemnity" policy, the insurance carrier can generally "reimburse" or "pay", which is most beneficial for him and the insured person in the process of dealing with the complaint.

An entity that wants to transfer risk (a person, a company or a union of any kind, etc.) After being insured by the insurer, the risk becomes an 'insured' part. A contract called political insurance. Generally, an insurance contract consists of at least the following elements: Identification of participating parties (insurer, insured, beneficiary), premium, coverage period, event or special loss, amount of coverage (e.g., loss situation) The amount to be paid to the insured or beneficiary in) and exclusions (covered incidents). That is why it is said that an insured person is given "compensation" against the loss covered by the policy.

When the insured party is damaged due to a certain risk, the cover provides for the insurer to file a claim against the insurer for the amount of damage covered according to the policy. The rate to be paid to the insurer taking the risk by the insured is called the premium. Insurance premiums of many policyholders are used to finance reserve accounts for post-credits - for a relatively small number of applicants in theory - and for general costs. As long as an insurer determines sufficient funds for the anticipated losses (which are called stores), then the residual margin is the benefit of the insurer.

Social Impact

Insurance can have a different effect on society, in which there are changes in the cost of loss and damage. On the one hand it can increase fraud; On the other hand, it can help companies and individuals prepare for the devastation and reduce the impact of disasters on families and society.

The insurance company can influence the possibility of loss through ethical risk, insurance fraud and preventive measures. To mention the increased risk due to deliberate negligence or apathy [20], insurance scholars have generally used moral hazard to mention the inadvertently ill-conceived and excess loss due to insurance fraud. Insurers endeavor to deal with neglect through inspection, policy provisions, which require certain types of maintenance and possible exemptions for loss prevention efforts. In theory, insurers can encourage investing in reduction in loss, some commentators have claimed that in practice the insurers did not aggressively pursue loss control measures, in particular to prevent the loss of disasters, Such as due to concerns Reduction in rates and legal battle However, since 1996, insurance companies have started playing a more active role in reducing the loss, for example through construction codes [21]

Methods Of Insurance

According to the study books of the Chartered Insurance Institute, different insurance methods are as follows:
Co-insurance: shared risk between insurers
Double Insurance - In case of two or more policies with superimposed coverage of risk (both personal policies will not pay separately - according to a concept called contribution, they will contribute together to compensate the loss of the insured, however, such as insurance In case of emergency insurance, double payment is allowed on life)
Self-insurance - In situations where the risk is not transferred to insurance companies and specifically kept by the entities or individuals
Reinsurance - The circumstances in which the insurer transfers any insurer's share or all risks to another insurer, which is called reinsurer

Underwriting And Investing

The business model is to increase premium and investment income more and more as you pay in losses, and also offer a competitive price that consumers will accept. Benefits can be deducted in a simple equation:

Profit = earned money + investment income - loss - membership fee
Insurers make money in two ways:

Through membership, the process of choosing the risks insured by the insurer and deciding how much premium to pay for the acceptance of such risks.

They invest premiums from the insured parties
The most complex aspect of insurance business is the actuarial science of the process of pricing policies, which uses statistics and probability to estimate the rate of future requests on a fixed risk basis. After generating a fee, the insurer will use discretion to reject or accept risks through the membership process.

At the most basic level, the frequency and severity of the risks insured in the initial ratification process and the expected average payment as a result of these hazards is included. After this, an insurance company will collect historical data on the deficit, bring the loss data to the current value and compare these past losses with the premium collected to assess the adequacy of the rates [22]. Loss reports and expense charges are also used. The ratings for various risk characteristics include the comparison between the loss and "loss" at the most elementary level: Therefore a double-loss policy will be charged twice more. More complex multivariate analyzes are sometimes used when more features are involved and an indivisible analysis can produce misleading results. Other statistical methods can be used to assess the probability of future loss.

At the end of a given policy, the amount of premium paid is paid in the loan, which is the insurer's membership benefit on this policy. Performance Underwriting is measured with something called "joint ratio", which is the ratio between expenditure / loss and premium. [23] The combined ratio of less than 100% indicates membership profit, while any value above 100 indicates a loss of membership. However, the company with a combined ratio of more than 100% can be profitable due to the investment benefits.

Insurance companies make profits from investing on "float" Float, or reserve is available, at a certain time an insurer has deposited in insurance premiums, but has not paid in the credit. Insurers start investing in the insurance collection and continue to earn interest or other income, as soon as they claim. The British Insurance Association (which brings together 400 insurance companies and 94% of UK insurance services) holds about 20% of the investment on the London Stock Exchange [24]. In 2007, the American industry registered a profit of $ 58 billion. In a 2009 letter to investors, Warren Buffett wrote, "We were paid $ 2.8 billion to keep our float in 2008". [25]

In the United States, the loss of membership of insurance companies for property loss and claims was $ 142.3 billion in five years by the end of 2003. But the total profit for the same period as a result of the free float was $ 68.4 billion. Some insiders in the insurance industry, especially Hank Greenberg, do not believe that making profit from the float without a subscription benefit is always possible, but this opinion is not universally acknowledged. Due to the use of boom for profit, some industry experts have asked insurance companies "investment companies who sell insurance and collect money for their investment". [26]

Of course, the float method is difficult to perform in a financially depressed period. The durables market insurers away from the investment and strengthen their underwriting standards, so a bad economy usually means high insurance premiums. This tendency of fluctuation between the profitable and unprofitable period over time is generally known as underwriting or insurance cycle [27].

The claim of loss and the content of management insurance is utility; The real payment is "product". Complaints can be submitted by insurers directly or through intermediaries or agents by the insurers. The insurer may request that the complaints be submitted on forms

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