Introduction to Insurance

Insurance is one of the ways that businesses and individuals reduce the financial
impact of a risk occurring – by paying a premium to an insurance company, the risk is
in effect transferred from the client to the insurer, meaning the client can focus on
their business or life. The UK insurance market is the third largest in the world.

Without insurance there would be no risk taking. And without any risk taking, there
would be no businesses and no innovation. Insurance is what enables the modern
world to get on with life.

And it’s everywhere. It’s also big business. In fact, it’s one of the biggest. In terms of
careers, the sector offers a truly remarkable range and diversity of opportunities. You
can enter specialist career streams or join the profession through a host of highly rated
graduate schemes with some of the most prestigious names in finance.

The insurance markets

Insurance can be broken down into two types of markets. Although there are
differences, the theme is the same: both are concerned with offering financial
protection against unforeseen events. You will find similar career opportunities in
each market, although the job title, working environment and salary may differ. The
key distinctions between the markets are often the type of customer and the sum of
money involved.

 The wholesale market focuses mainly on the London Insurance Market, which
comprises the syndicates operating in Lloyd’s of London together with the
London offices of a number of UK and international insurance companies. The
risks that these companies and syndicates share are generally very large and
sometimes unusual and are placed in the market by specialist brokers.
 The retail market is what most people understand by insurance and comprises
the companies that we see advertising on the high street and the internet. It
deals with the types of insurance that the general population need for their
car, house, travel or pets, and also arranges pensions and life cover.
Types of insurance

There are generally three categories of insurance, which can happen across both or
just one of the insurance markets.

 General insurance provides protection for damage that may happen to our
belongings – for example cars, houses, jewellery, or for any harm that may
come to us during particular events such as holidays or sports activities.
Companies also need insurance against any unforeseen events that could
impact upon their business, like a fire in a warehouse or a plane crash, or even
a natural disaster. General insurance is dealt with across both the retail and
wholesale markets.
 Life assurance refers to financial cover for individuals in the event of their
death or illness, therefore providing financial security for their family. Life and
critical illness cover provides security for those who have mortgages. Life
insurance occurs mostly in the retail market.
 Reinsurance is when an insurance company arranges insurance for a risk that
they have already insured themselves. The insurance company becomes the
‘insured’, and the reinsurance company is the ‘insurer’. This is a fairly
specialist type of insurance, and much of this work takes place in the
wholesale market. Reinsurance is normally applied when a company is
insuring against very large perils, so that if paying out against the policy is
necessary, the risk is shared between a number of companies rather than just
falling on one.
 HISTORY
Early methods

Methods for transferring or distributing risk

were practiced by Chinese and Babylonian traders
as long ago as the 3rdand 2nd millennia BC,
respectively.[1] Chinese merchants travelling treacherous river rapids would
redistribute their wares across many vessels to limit the loss due to any single
vessel's capsizing. The Babylonians developed a system which was recorded in the
famous Code of Hammurabi, c. 1750 BC, and practiced by
early Mediterranean sailing merchants. If a merchant received a loan to fund his
shipment, he would pay the lender an additional sum in exchange for the lender's
guarantee to cancel the loan should the shipment be
stolen, or lost at sea.
Modern insurance
Insurance became far more sophisticated
in Enlightenment era Europe, and specialized varieties
developed.
Lloyd's Coffee House was the first organized market for
marine insurance.
the Great Fire of London, which in 1666 devoured
more than 13,000 houses. The devastating effects of the fire converted the
development of insurance "from a matter of convenience into one of urgency, a
change of opinion reflected in Sir Christopher Wren's inclusion of a site for 'the
Insurance Office' in his new plan for London in 1667".[4] A number of attempted
fire insurance schemes came to nothing, but in 1681, economistNicholas
Barbon and eleven associates established the first fire insurance company, the
"Insurance Office for Houses", at the back of the Royal Exchange to insure brick
and frame homes. Initially, 5,000 homes were insured by his Insurance Office
The first life insurance policies were taken out in the early 18th century. The first
company to offer life insurance was the Amicable Society for a Perpetual
Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas
Allen.[7][8] Edward Rowe Mores established the Society for Equitable Assurances
on Lives and Survivorship in 1762.
 It was the world's first mutual insurer and it
pioneered age based premiums based on mortality
rate laying "the framework for scientific insurance
practice and development" and "the basis of modern
life assurance upon which all life assurance schemes
were subsequently based".[9]
In the late 19th century, "accident insurance" began to
become available.[10] The first company to offer
accident insurance was the Railway Passengers
Assurance Company, formed in 1848 in England to
insure against the rising number of fatalities on the
nascent railway system.
By the late 19th century, governments began to initiate national insurance
programs against sickness and old age. Germany built on a tradition of welfare
programs in Prussia and Saxony that began as early as in the 1840s. In the 1880s
Chancellor Otto von Bismarck introduced old age pensions, accident insurance and
medical care that formed the basis for Germany's welfare state.[11][12] In Britain
more extensive legislation was introduced by the Liberal government in the 1911
National Insurance Act. This gave the British working classes the first contributory
system of insurance against illness and unemployment.[13] This system was greatly
expanded after the Second World War under the influence of the Beveridge
Report, to form the first modern welfare state.
Principles of Insurance

There are certain principles that may apply to the contracts of insurance between insurer and insured,
which are as follows.

i. Utmost goods faith

Insurance contracts are the contract of mutual trust and confidence. Both parties to the
contract i.e., the insurer and the insured must disclose all relevant information to each other.
For example, while entering into a contract of life insurance, the insured must declare to the
insurance company if he is suffering from any disease that may be life threatening.
ii. Insurable interest
It means financial or pecuniary interest in the subject matter of insurance. A person has
insurable interest in the property or life insured if he stands to gain from its existence or loose
financially from its damage or destruction. In case of life insurance, a person taking the policy
must have insurable interest at the time of taking the policy. For example, a man can take life
insurance policy on the name of his wife and if later they get divorced this will not affect the
insurance contract because the man had insurable interest in the life of his wife at the time of
entering into the contract. In case of marine insurance insurable interest must exist at the time
 of loss or damage to the property. In contract of fire insurance, it must exist both at the time of
taking the policy as well as at the time of loss or damage to the property.
iii. Indemnity
The word indemnity means to restore someone to the same position that he/she was in before
the event concerned took place. This principle is applicable to the fire and marine insurance. It
is not applicable to life insurance, because the loss of life cannot be restored. The purpose of
this principle is that the insured is not allowed to make any profit from the insurance contract
on the happening of the event that is insured against. Compensation is paid on the basis of
amount of actual loss or the sum insured, which ever is less.
iv. Contribution
The same subject matter may be insured with more than one insurer. In such a case, the
insurance claim to be paid to the insured must be shared or contributed by all insurers.
v. Subrogation
In the contract of insurance subrogation means that after the insurer has compensated the
insured, the insurer gets all the rights of the insured with regard to the subject matter of the
insurance. For example, suppose goods worth Rs. 20,000/- are partially destroyed by fire and
the insurance company pays the compensation to the insured, then the insurance company can
take even these partially destroyed goods and sell them in the market.
vi. Mitigation
In case of a mishap the insured must take all possible steps to reduce or mitigate the loss or
damage to the subject matter of insurance. This principle ensures that the insured does not
become negligent about the safety of the subject matter after taking an insurance policy. The
insured is expected to act in a manner as if the subject matter has not been insured.
vii. Causa-proxima (nearest cause)
According to this principle the insured can claim compensation for a loss only if it caused by the
risk insured against. The risk insured should be nearest cause (not a remote cause) for the loss.
Then only the insurance company is liable to pay the compensation. For example a ship carrying
orange was insured against losses arising form accident. The ship reached the port safely and
there was a delay in unloading the oranges from the ship. As a result the oranges got spoilt. The
insurer did not pay any compensation for the loss because the proximate cause of loss was
delay in unloading and not any accident during voyage.