Meaning of Insurance

Insurance means a promise of compensation for any potential future losses. It facilitates financial
protection against by reimbursing losses during crisis. There are different insurance companies that offer
wide range of insurance options and an insurance purchaser can select as per own convenience and
preference. Several insurances provide comprehensive coverage with affordable premiums. Premiums
are periodical payment and different insurers offer diverse premium options. The periodical insurance
premiums are calculated according to the total insurance amount.

In other words, a promise of compensation for specific potential future losses in exchange for a
periodic payment. Insurance is designed to protect the financial well-being of an individual, company or
other entity in the case of unexpected loss. Some forms of insurance are required by law, while others
are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and
the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the
policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder
pays part of the loss (called the deductible), and the insurer pays the rest.

Definition of Insurance

“Insurance is cooperative form of distributing a certain risk over a group of persons who are exposed to
it.”

Ghosh and Agarwal

“ Insurance is an instrument of distributing the loss of few among many”.

Disnadle

“Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer’s
incurring the risk of paying a large sum upon a given contingency.”

Justice Tindall

Nature of Insurance

Sharing of Risk: Insurance is a device to share the financial losses which might befall on an individual or
his family on the happening of a specified event. The event may be death of a bread-winner to the family
in the case of life insurance, marine-perils in marine insurance, fire in fire insurance and other certain
events in general insurance, e.g., theft in burglary insurance, accident in motor insurance, etc. The loss
arising nom these events if insured are shared by all the insured in the form of premium.

Co-operative Device: The most important feature of every insurance plan is the cooperation of large
number of persons who, in effect, agree to share the financial loss arising due to a particular risk which is
insured. Such a group of persons may be brought together voluntarily or through publicity or through
solicitation of the agents.

Value of Risk: The risk is evaluated before insuring to charge the amount of share of an insured, herein
called, consideration or premium. There are several methods of evaluation of risks. If there is
expectation of more loss, higher premium may be charged. So, the probability of loss is calculated at the
time of insurance.

Payment at Contingency: The payment is made at a certain contingency insured. If the contingency
occurs, payment is made. Since the life insurance contract is a contract of certainty, because the
contingency, the death or the expiry of term, will certainly occur, the payment is certain. In other
insurance contracts, the contingency is the fire or the marine perils etc., may or may not occur. So, if the
contingency occurs, payment is made, otherwise no amount is given to the policy-holder.

Amount of Payment: The amount of payment depends upon the value of loss occurred due to the
particular insured risk provided insurance is there up to that amount. In life insurance, the purpose is not
to make good the financial loss suffered. The insurer promises to pay a fixed sum on the happening of an
event.

Large Number of Insured Persons: To spread the loss immediately, smoothly and cheaply, large number
of persons should be insured. The co-operation of a small number of persons may also be insurance but
it will be limited to smaller area. The cost of insurance to each member may be higher. So, it may be
unmarketable.

Insurance is not a gambling: The insurance serves indirectly to increase the productivity of the
community by eliminating worry and increasing initiative. The uncertainty is changed into certainty by
insuring property and life because the insurer promises to pay a definite sum at damage or death.

Insurance is not Charity: Charity is given without consideration but insurance is not possible without
premium. It provides security and safety to an individual and to the society although it is a kind of
business because in consideration of premium it guarantees the payment of loss. It is a profession
because it provides adequate sources at the time of disasters only by charging a nominal premium for
the service.

Features of insurance

Provide safety and security: Insurance provide financial support and reduce uncertainties in business and
human life. It provides safety and security against particular event. There is always a fear of sudden loss.
Insurance provides a cover against any sudden loss. For example, in case of life insurance financial
assistance is provided to the family of the insured on his death. In case of other insurance security is
provided against the loss due to fire, marine, accidents etc.
 Generates financial resources: Insurance generate funds by collecting premium. These funds are
invested in government securities and stock. These funds are gainfully employed in industrial
development of a country for generating more funds and utilized for the economic development of the
country. Employment opportunities are increased by big investments leading to capital formation.

Life insurance encourages savings: Insurance does not only protect against risks and uncertainties, but
also provides an investment channel too. Life insurance enables systematic savings due to payment of
regular premium. Life insurance provides a mode of investment. It develops a habit of saving money by
paying premium. The insured get the lump sum amount at the maturity of the contract. Thus life
insurance encourages savings.

Promotes economic growth: Insurance generates significant impact on the economy by mobilizing
domestic savings. Insurance turn accumulated capital into productive investments. Insurance enables to
mitigate loss, financial stability and promotes trade and commerce activities those results into economic
growth and development. Thus, insurance plays a crucial role in sustainable growth of an economy.

Medical support: A medical insurance considered essential in managing risk in health. Anyone can be a
victim of critical illness unexpectedly. And rising medical expense is of great concern. Medical Insurance
is one of the insurance policies that cater for different type of health risks. The insured gets a medical
support in case of medical insurance policy.

Spreading of risk: Insurance facilitates spreading of risk from the insured to the insurer. The basic
principle of insurance is to spread risk among a large number of people. A large number of persons get
insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of
funds of the insurer.

Source of collecting funds: Large funds are collected by the way of premium. These funds are utilized in
the industrial development of a country, which accelerates the economic growth. Employment
opportunities are increased by such big investments. Thus, insurance has become an important source of
capital formation.

BASIC FUNCTIONS OF INSURANCE

1.Primary Functions

2.Secondary Functions
Primary Functions

Providing protection :The elementary purpose of insurance is to allow security against future risk,
accidents and uncertainty. Insurance cannot arrest the risk from taking place, but can for sure allow for
the losses arising with the risk. Insurance is in reality a protective cover against economic loss, by
apportioning the risk with others.

Collective risk bearing : Insurance is an instrument to share the financial loss. It is a medium through
which few losses are divided among larger number of people. All the insured add the premiums towards
a fund and out of which the persons facing a specific risk is paid.

Evaluating risk :Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk.
Risk is the basis for ascertaining the premium rate as well.

Provide Certainty: Insurance is a device, which assists in changing uncertainty to certainty

SECONDARY FUNCTIONS

Preventing losses: Insurance warns individuals and businessmen to embrace appropriate device to
prevent unfortunate aftermaths of risk by observing safety instructions; installation of automatic sparkler
or alarm systems, etc.

Covering larger risks with small capital : Insurance assuages the businessmen from security investments.
This is done by paying small amount of premium against larger risks and dubiety.

Helps in the development of larger industries :Insurance provides an opportunity to develop to those
larger industries which have more risks in their setting up.

Principles of Insurance

The main motive of insurance is cooperation. Insurance is defined as the equitable transfer of
risk of loss from one entity to another, in exchange for a premium.

1. Nature of contract: Nature of contract is a fundamental principle of insurance contract. An insurance

contract comes into existence when one party makes an offer or proposal of a contract and the other
party accepts the proposal. A contract should be simple to be a valid contract. The person entering into a
contract should enter with his free consent
2. Principal of utmost good faith: Under this insurance contract both the parties should have faith over
each other. As a client it is the duty of the insured to disclose all the facts to the insurance company. Any
fraud or misrepresentation of facts can result into cancellation of the contract.

3. Principle of Insurable interest: Under this principle of insurance, the insured must have interest in the
subject matter of the insurance. Absence of insurance makes the contract null and void. If there is no
insurable interest, an insurance company will not issue a policy. An insurable interest must exist at the
time of the purchase of the insurance. For example, a creditor has an insurable interest in the life of a
debtor, A person is considered to have an unlimited interest in the life of their spouse etc.

4. Principle of indemnity: Indemnity means security or compensation against loss or damage. The
principle of indemnity is such principle of insurance stating that an insured may not be compensated by
the insurance company in an amount exceeding the insured’s economic loss. In type of insurance the
insured would be compensation with the amount equivalent to the actual loss and not the amount
exceeding the loss. This is a regulatory principal. This principle is observed more strictly in property
insurance than in life insurance. The purpose of this principle is to set back the insured to the same
financial position that existed before the loss or damage occurred.

5. Principal of subrogation: The principle of subrogation enables the insured to claim the amount from
the third party responsible for the loss. It allows the insurer to pursue legal methods to recover the
amount of loss, For example, if you get injured in a road accident, due to reckless driving of a third party,
the insurance company will compensate your loss and will also sue the third party to recover the money
paid as claim

6. Double insurance: Double insurance denotes insurance of same subject matter with two different
companies or with the same company under two different policies. Insurance is possible in case of
indemnity contract like fire, marine and property insurance. Double insurance policy is adopted where
the financial position of the insurer is doubtful. The insured cannot recover more than the actual loss
and cannot claim the whole amount from both the insurers.

7. Principle of proximate cause: Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This
principle is applicable when the loss is the result of two or more causes. The proximate cause means; the
most dominant and most effective cause of loss is considered. This principle is applicable when there are
series of causes of damage or loss.

What is Fire Insurance

Fire insurance is property insurance covering damage and losses caused by fire. The purchase of fire
insurance in addition to homeowner’s or property insurance helps to cover the cost of replacement,
repair, or reconstruction of property, above the limit set by the property insurance policy. Fire insurance
policies typically contain general exclusions, such as war, nuclear risks, and similar perils.
Fire insurance policies include payment for loss of use, or additional living expenses due to uninhabitable
conditions as well as damage to personal property and nearby structures. Homeowners should
document the property and its contents to simplify the assessment of items damaged or lost during a
fire.

A fire insurance policy includes additional coverage against smoke or water damage due to a fire and is
usually effective for one year. On expiration, the policyholder may renew the policy according to the
conditions of the policy.

Some standard homeowner’s insurance policies include coverage for fire. If excluded, fire insurance may
need to be purchased separately, especially if the property contains valuable items that cannot be
covered with standard homeowner's coverage. The insurance company’s liability is limited by the policy
value and not by the extent of damage or loss sustained by the property owner.

The following are the main features of fire insurance:

1. Insurable Interest

The insured party should contain insurable interest in the property which he/she wants to insure. It
should exist both at the time of taking the policy and also at the time of claiming loss. The insurable
interest means the insured is benefited by the survival of the things insured and suffers a loss by their
destruction.

2. Utmost Good Faith

A contract of insurance is understood as a contract of utmost good faith. The insured should make clear
all the important points with regards to the subject-matter of the insurance so that the insurer may
correctly estimate the risks involved. The insured should provide information regarding construction of
the house, environment, possibility of catching fire and possible measures that can be taken in the case
of any events. The insurance company may terminate the contract when it comes to know that the facts
are not disclosed.

3. Personal Contact
A fire insurance contract is a personal contract. The insured is involved in this contract with his property.
Therefore, the insurance company should have detailed and full knowledge about the behavior and
character of the insured. As it is a personal contract, the insurance policy cannot be transferred without
the permission of the insurance company. If the possession of the insured goods or property is
transferred to the third person, the company has a right to terminate the contract of insurance.

MARINE INSURANCE

What is Marine Insurance?

Marine insurance covers the losses or damages caused to ships, terminals and any transport or cargo by
which goods are transferred, acquired, or held between different points of origin and final destination.
The term may also apply to inland marine but it is usually used in the context of ocean marine insurance.
Marine insurance is a haven for transporters and shipping corporations because it helps to lower the
aspect of financial loss due to cargo loss.

Marine insurance is a crucial aspect because through this policy, shipowners and other transporters can
be sure of claiming damages in case of a mishap. Sometimes, it happens that despite following all the
safety regulations, losses or damages arise. Along with natural hazards which have the potential to
disrupt the cargo and vessel, there are other incidents and attributes which could also cause a major
financial loss to the transporter. For instance, incidents like piracy and possibilities of cross-border
shootouts are more prevalent when it entails water transportation and therefore, to avoid any such loss
or damage, it is in the interest of the transporter to buy a marine insurance.

Main features of marine insurance:

PROPOSAL AND ACCEPTANCE

It is based on a general proposal and acceptance concept. Coverage of risk will start from the date of
acceptance of the proposal by the insurance company. Any loss or damage to goods in transit occurring
prior to the date of acceptance of proposal will not be covered under the marine insurance policy.

PAYMENT OF PREMIUM

Coverage of risk will also start from the date of payment of premium. If the payments are made in
cheque, the date of realization of money will be considered for providing the risk coverage.

CONTRACT OF INDEMNITY

Marine insurance is a contract of indemnity. That means, the insurance company is liable to compensate
only till the extent of actual loss suffered. There is no liability lies on the part of the insurance company if
there is no actual loss suffered. For example, let's says an insured has a marine insurance policy for Rs.25
lacs. In the event of loss, actual loss was estimated as Rs.15 lacs. In this case, insured will not receive a
compensation more than Rs.15 lac even if the coverage is Rs.25 lac.

INSURABLE INTEREST

Marine insurance gets applicable only if the insured has an insurable interest in the subject matter
(insurable property) at the time of loss. Requirement of insurable interest to be present only at the time
of loss makes the marine insurance policy as ‘freely assignable'. Policy can be assigned freely prior to or
after the occurrence of damage or loss unless the terms and condition of the policy restricts it.

UTMOST GOOD FAITH

Marine insurance policies work on the principle of utmost good faith. Owner of the goods or property to
be transported must disclose all the required information accurately to the insurance company at the
time of availing the marine insurance. Non-disclosure, mis-description or misrepresenting of facts and
information by insured makes the marine insurance policy voidable at the time of claim.

PRINCIPLE OF SUBROGATION

Marine insurance policy works on the principle of subrogation. But the right of subrogation arises only
after the payment has been made to the insured. After settling the marine insurance claim, insurer holds
all the right to sue the third party who is responsible for the loss. In this case, insurer can recover the
amount of compensation paid to insured from the third party. The aim of the principle of subrogation is
to ensure that the insured receives the compensation only for actual loss suffered.

PRINCIPLE OF CONTRIBUTION

Principle of contribution applies in case of multiple marine insurance policies. Losses will be paid
proportionately if the insured holds multiple policies for his goods or property. For instance, goods worth
Rs.40 lac is insured with two different insurers. And there is loss of goods in the marine event, total
amount of loss will be compensated to the insured proportionately by both the insurance companies.

COMES WITH WARRANTY

Marine insurance policies come with warranty which is a legal undertaking between insurance company
and insured. It's basically a legal obligations by the insured. Marine insurance policy stands cancelled or
terminated as soon as there is breach of warranty. Warranty can be express warranty which are expressly
included in the policy or can be an implied warranty which is not included expressly in the policy but are
assumed and understood by both the parties in the contract.

Cargo insurance

The cargo insurance policy is specially designed insurance cover for goods in transit. It offers coverage to
freight against all types of losses or damages from external causes during transportation whether by
land, sea, or rail.

Usually, cargo insurance policies are freely assignable. However, in the case of insured goods being
personal belongings of a person, policies cannot be assigned.

The principles and experience of Marine Insurance drive cargo insurance policies, and thus, they are also
called marine cargo insurance. Cargo insurance policies for land transportation are slightly different from
their ocean/river counterparts.

The cargo insurance policies for land transport are called inland transit insurance policies. The second
greatest difference between inland transit and marine cargo will be the crossing of international borders
which is more likely in marine policies. First difference being the land and water transport systems
covered.

Features same as marine insurance

What Is A Candlestick?

A candlestick is a type of price chart used that displays the high, low, open and closing prices of a
security for a specific period. It originated from Japanese rice merchants and traders to track market
prices and daily momentum hundreds of years before becoming popularized in the United States. The
wide part of the candlestick is called the "real body" and tells investors whether the closing price was
higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock
closed higher)

Candlestick charts display the high, low, open and closing prices of a security for a specific period.

Candlesticks originated from Japanese rice merchants and traders to track market prices and daily
momentum hundreds of years before becoming popularized in the United States.

Candlesticks can be used by traders looking for chart patterns.

The candlestick's shadows show the day's high and low and how they compare to the open and close. A
candlestick's shape varies based on the relationship between the day's high, low, opening and closing
prices.

Candlesticks reflect the impact of investor sentiment on security prices and are used by technical
analysts to determine when to enter and exit trades. Candlestick charting is based on a technique
developed in Japan in the 1700s for tracking the price of rice. Candlesticks are a suitable technique for
trading any liquid financial asset such as stocks, foreign exchange and futures.

Long white/green candlesticks indicate there is strong buying pressure; this typically indicates price is
bullish. However, they should be looked at in the context of the market structure as opposed to
individually. For example, a long white candle is likely to have more significance if it forms at a major
price support level. Long black/red candlesticks indicate there is significant selling pressure. This suggests
the price is bearish. A common bullish candlestick reversal pattern, referred to as a hammer, forms when
price moves substantially lower after the open, then rallies to close near the high. The equivalent bearish
candlestick is known as a hanging man. These candlesticks have a similar appearance to a square
lollipop, and are often used by traders attempting to pick a top or bottom in a market.

Different types of candle stick patterns

1. Bullish Engulfing Candlestick

A bullish engulfing candle pattern is formed when the price of a stock moves beyond both the high and
low of the previous day range. It engulfs. Usually this sort of pattern will tell a trader the price has moved
down, found some support or buying volume, and then made a bullish move back up by breaking the
previous day’s high. Often this type of candle can be the signal for a sustained upward move or trend
change.

2. Bearish Engulfing Candlestick

The opposite of a bullish engulfing candle, a bearish engulfing candle pattern will move to test a level
above the previous day high, then after finding selling volume will move sharply downwards, breaking
the previous day’s low. Again this can be a precursor to a sharp sustained drop in price or trend change.
The bearish engulfing pattern can happen at tops or within a trend, signaling further moves downward.

3. Hammer Reversal Candlestick

A hammer type pattern can form when support or resistance is sharply rejected by market participants.
In the example below, the price moved lower but found some support or buying volume. At this point
the bulls took control and closed the candle around its opening level.

The next day a strong bullish up candle was formed, showing the momentum was continuing. Traders
and investors found value and the price began to trend. These types of patterns can happen in either
direction, are tend to appear in the shape of a hammer, hence the name “hammer”.
4. Doji Candlestick

A Doji candle is the name given to patterns which signify indecision in the price action of a stock. Usually
these form at areas where the bulls and bears commence battle and are fighting each other for
direction.

In a doji candle, the body is usually very small with a close near the open price, and can have long wicks
formed to the high and low, which were tested but fought back from by each side. The pattern signifies
uncertainty, indecision, and is waiting for either the bulls or bears to take control. Often the next
direction is an upwards or downwards sustained move in price as the stock breaks beyond the Doji
candle. Although the Doji candle is often not a great entry candle for a trade (due to its nature it could
be broken either way by the bulls or bears), it does offer a heads up that sentiment may be changing.

Different types of chart prepared for technical analysis

There are four primary types of charts used by investors and traders depending on the type of
information they’re seeking and their desired goals. These chart types include line charts, bar charts,
candlestick charts, and point and figure charts. In the following sections, we will focus on the S&P 500
over the same period to illustrate the differences between the charts when the underlying data set is the
same.

Line Charts

Line charts are the most basic type of chart because it represents only the closing prices over a set
period. The line is formed by connecting the closing prices for each period over the timeframe. While
this type of chart doesn’t provide much insight into intraday price movements, many investors consider
the closing price to be more important than the open, high, or low price within a given period. These
charts also make it easier to spot trends since there’s less ‘noise’ happening compared to other chart
types.

Bar Charts
Bar charts expand upon the line chart by adding the open, high, low, and close – or the daily price range,
in other words – to the mix. The chart is made up of a series of vertical lines that represent the price
range for a given period with a horizontal dash on each side that represents the open and closing prices.
The opening price is the horizontal dash on the left side of the horizontal line and the closing price is
located on the right side of the line. If the opening price is lower than the closing price, the line is often
shaded black to represent a rising period. The opposite is true for a falling period, which is represented
by a red shade.

Candlestick Charts

Candlestick charts originated in Japan over 300 years ago, but have since become extremely popular
among traders and investors. Like a bar chart, candlestick charts have a thin vertical line showing the
price range for a given period that’s shaded different colors based on whether the stock ended higher or
lower. The difference is a wider bar or rectangle that represents the difference between the opening and
closing prices.

Falling periods will typically have a red or black candlestick body, while rising periods will have a white or
clear candlestick body. Days where the open and closing prices are the same will not have any wide body
or rectangle at all.

Point and Figure Charts

Point and figure charts are not very well known or used by the average investor, but they have a long
history of use dating back to the first technical traders. The chart reflects price movements without time
or volume concerns, which helps remove noise – or insignificant price movements – that can distort a
trader’s view of the overall trend. These charts also try to eliminate the skewing effect that time has on
chart analysis.