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The concept of insurance originates from a simple yet complex idea: managing uncertainty about the future by protecting against risks, perhaps remote but nonetheless predictable, and by sharing the costs among individuals with the same needs. Insurance is an arrangement where an entity (insurer) promises to provide compensation to the insured upon the happening of a specified event or loss. This promise can be obtained by paying a small charge upfront (premium). The terms are decided between the insurers and insured via an insurance contract. Example - the insurer [A] promises to pay the insured [B] a compensation of Rs. 10 lacs (promise) if B is diagnosed with cancer (event) after 6 months from start of policy (terms) and upfront payment of Rs. 2000 (premium). An insurance company works on building products aimed at providing financial protection from risks. These risks include death of bread earner (life insurance), hospitalization expenses (health insurance), damage to assets (car insurance) etc. The insurance company's role includes;

  1. Pricing of the premium
  2. Determining the coverage i.e. compensation
  3. Inking the insurance contract
  4. Collection of premium
  5. Administering the claim/promise 

The insurance company earns a profit by managing the risk. On a unit economics basis ... Profit = Premium collected + Investment income on premium collected - Selling expenses - Claims paid & provisioned - Operating expenses

  • Premium collected = Rs. 10 lacs (say, 100 users on avg paid Rs. 10,000 each as premium)
  • Investment income = Rs. 80,000 (8% interest p.a. on Rs. 10 lacs)
  • Selling expenses = Rs. 1,50,000 (15% commission paid on Rs. 10 lacs)
  • Claims paid & provisioned = Rs. 6,50,000 (say, 13% of users made claims averaging Rs. 50,000 each)
  • Operating expenses = Rs. 2,00,000 (20% of Rs. 10 lacs)
  • Hence, the profit earned by the insurance company is Rs. 1.8 lacs  (Rs. 10 lacs + Rs. 0.8 lacs - Rs. 1.5 lacs - Rs. 6.5 lacs - Rs. 2.0 lacs).

Please note, while in the above scenario the insurer made a profit - it would have been very different had 23% of the users made a claim instead of only 13%. In this scenario, the insurer would have made a loss of Rs. 4.7 lacs. Thus, the insurer too has to carry risk on its books and has to manage the delicate balance between risk forecasting and pricing the policy. Insurance is covering yourself or a valuable against any contingency or an unforeseen event resulting in a partial or full damage (disability, medical emergency or death in case of an individual). Insurance is sought to make good the loss when viewed in respect to valuables. You pay specific amount to the company known as premium against which they provide you coverage i.e. Sum Assured. In case of any damage or miss happening the company will pay you the Sum assured also known as Insured Amount. There are many other factors which are involved but for simple understanding this might be good enough. Insurance companies assess the probability of an event occurring and then create appropriate prices called premiums, to charge individuals against a particular type of risk. The premiums need to be both competitive in the market and high enough to cover any payouts or 'claims'. Insurance firms then invest the premium money to enhance profits.

To deliver these service insurers require a workforce with a diverse mix of skills like agents, brokers, underwriters to perform different insurance back-end & front-end task.

History and Modern Method

The earliest forms of insurance were a primitive form of commercial insurance, especially in regards to shipping goods, since cargo was often lost or damaged or stolen by thieves and pirates. Please earliest methods of reducing risk involved either the pooling of risk or transferring the risk to moneylenders or investors of expeditions.

Customers who buy plans on private health insurance exchange health are taking advantage of their newfound ability to purchase an extended short-term insurance policy without triggering the individual mandate penalty, newly released data from the company shows. Many more health customers opted for short-term plans over unsubsidized Affordable Care Act-compliant plans during the first half of the ACA open enrollment period for 2019 coverage than during the previous open enrollment, health said. Among health customers buying short-term plans and ACA plans without subsidies, seven in 10 enrolled in a short-term insurance plan between Nov. 1 and Nov. 25, while 30% opted to buy an ACA plan at full cost. During the first half of open enrollment for 2018 coverage, 56% of chose a short-term insurance plan, while 44% enrolled in an unsubsidized ACA plan.

Principles of Insurance

Utmost Good Faith

Both parties involved in an insurance contract the insured (policy holder) and the insurer (the company) should act in good faith towards each other. The insurer and the insured must provide clear and concise information regarding the terms and conditions of the contract. A contract of insurance must be made based on utmost good faith (a contract of uberrimate fade). It is important that the insured disclose all relevant facts to the insurance company. Any facts that would increase his premium amount, or would cause any prudent insurer to reconsider the policy must be disclosed. This is a very basic and primary principle of insurance contracts because the nature of the service is for the insurance company to provide a certain level of security and solidarity to the insured person’s life. However, the insurance company must also watch out for anyone looking for a way to scam them into free money. So each party is expected to act in good faith towards each other.

Insurable Interest

Insurable interest just means that the subject matter of the contract must provide some financial gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged, destroyed, stolen, or lost. This means that the insurer must have some pecuniary interest in the subject matter of the insurance. This means that the insurer need not necessarily be the owner of the insured property but he must have some vested interest in it. If the property is damaged the insurer must suffer from some financial losses.

In auto insurance, this will most times be a no brainer, but it does lead to issues when the person driving a vehicle doesn’t own it. For instance, if you are hit by a person who isn’t on the insurance policy of the vehicle, do you file a claim with the owner’s insurance company or the driver’s insurance company? This is a simple but crucial element for an insurance contract to exist.


Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes the responsibility of compensating the insured against any possible damage or loss that he may or may not suffer. Life insurance is not a contract of indemnity. Indemnity is a guarantee to restore the insured to the position he or she was in before the uncertain incident that caused a loss for the insured. The insurer (provider) compensates the insured (policyholder). The amount of compensation is in direct proportion with the incurred loss. The insurance company will pay up to the amount of the incurred loss or the insured amount agreed on in the contract, whichever is less. For instance, if your car is inured for $10,000 but damages are only $3,000. You get $3,000 not the full amount. Compensation is not paid when the incident that caused the loss doesn’t happen during the time allotted in the contract or from the specific agreed upon causes of loss (as you will see in The Principle of Proximate Cause). Insurance contracts are created solely as a means to provide protection from unexpected events, not as a means to make a profit from a loss. Therefore, the insured is protected from losses by the principle of indemnity, but through stipulations that keep him or her from being able to scam and make a profit.


Contribution establishes a corollary among all the insurance contracts involved in an incident or with the same subject. Contribution allows for the insured to claim indemnity to the extent of actual loss from all the insurance contracts involved in his or her claim. This principle applies if there are more than one insurer. In such a case, the insurer can ask the other insurers to contribute their share of the compensation. For instance, imagine that you have taken out two insurance contracts on your used Lamborghini so that you are covered fully in any situation. Let’s say you have a policy with Allstate that covers $30,000 in property damage and a policy with State Farm that cover $50,000 in property damage. Then about $19,000 will be covered by Allstate and $31,000 by State Farm.

This is the principle of contribution. Each policy you have on the same subject matter pays their proportion of the loss incurred by the policyholder. It’s an extension of the principle of indemnity that allows proportional responsibility for all insurance coverage on the same subject matter.


This principle can be a little confusing, but the example should help make it clear. Subrogation is substituting one creditor (the insurance company) for another (another insurance company representing the person responsible for the loss). After the insured (policyholder) has been compensated for the incurred loss on a piece of property that was insured, the rights of ownership of this property go to the insurer. This principle says that once the compensation has been paid, the right of ownership of the property will shift from the insured to the insurer. So the insured will not be able to make a profit from the damaged property or sell it. So let’s say you are in a car wreck caused by a third party and your file a claim with your insurance company to pay for the damages on your car and your medical expenses. Your insurance company will assume ownership of your car and medical expenses in order to step in and file a claim or lawsuit with the person who is actually responsible for the accident (i.e. the person who should have paid for your losses).

The insurance company can only benefit from subrogation by winning back the money it paid to its policyholder and the costs of acquiring this money. Anything paid extra from the third party, is given to the policyholder. So let’s say your insurance company filed a lawsuit with the negligent third party after the insurance company had already compensated you for the full amount of your damages. If their lawsuit ends up winning more money from the negligent third party than they paid you, they’ll use that to cover court costs and the remaining balance will go to you.

Proximate Cause

The loss of insured property can be caused by more than one incident even in succession to each other. This principle states that the property is insured only against the incidents that are mentioned in the policy. In case the loss is due to more than one such peril, the one that is most effective in causing the damage is the cause to be considered. Property may be insured against some but not all causes of loss. When a property is not insured against all causes, the nearest cause is to be found out. If the proximate cause is one in which the property is insured against, then the insurer must pay compensation. If it is not a cause the property is insured against, then the insurer doesn’t have to pay. When buying your insurance policies, you will most likely go through a process where you select which instances you and your property will be covered for and which ones they will not. This is where you are selecting which proximate causes are covered. If you end up in an incident, then the proximate cause will have to be investigated so that the insurance company validates that you are covered for the incident.

Loss Minimization

This is our final principle that creates an insurance contract and the most simple one probably. In an uncertain event, it is the insured’s responsibility to take all precautions to minimize the loss on the insured property. Insurance contracts shouldn’t be about getting free stuff every time something bad happens. Therefore, a little responsibility is bestowed upon the insured to take all measures possible to minimize the loss on the property. This principle can be debatable, so call a lawyer if you think you are being unfairly judged under this principle.

Social Impact of Insurance

Insurance provides people from all walks of life and businesses a form of safety net and security. Because it offers protection it makes people feel safe and secure from loss and illness as well. It benefits apply to so many aspects of life that can range from paying huge medical bills should you become seriously ill and save you from loss of income or having to file bankruptcy. Should a natural disaster happen that wipes out your home or business people who carry the adequate amount of insurance coverage is not faced with the stress and worries of how they can recover from the catastrophe event. Through active risk prevention, insurance companies can not only improve lives and potentially make whole nations more resilient, but they actually increase their company’s competitive advantage. In other words, they apply the concept of shared value. Shared value recognizes that the health of any business is inextricably linked to the long-term prosperity of its clients and communities. Through applying a shared value lens, companies can discover entirely new avenues for growth at the intersection of social needs, their business priorities, and their unique assets and expertise. One of the most important social factors in the insurance business is insurance agents' ability to establish a rapport with customers. Insurance buyers aren't going to choose agents who lack industry knowledge, come across as uncaring salespeople or can't provide legal contracts to back their products and services. Agents must provide excellent customer service, which often requires follow-up phone calls, thank you cards, face-to-face discussions and detailed question and answer sessions with current and potential customers.

The social effects of insurance affects almost every part of our live today. It virtually controls the simple everyday life of what people want to do as it is required with most major purchases. A good example is married couples who have found their dream home and are excited because it fits their budget only to find out when they call to get a home owner insurance quote they cannot afford it so insurance has crushed their dream. Insurance can also cause hardship on so many people and can keep them from driving a car because they cannot afford a policy. Insurance can be costly and insurance companies gamble on the fact that the mass population will never use it. Thanks to the Internet, consumers can research, compare, analyze and create specialized insurance policies with the click of a button. Insurance companies and their agents must have a dynamic, competitive and visible online presence. Insurance buyers want websites that are easy to maneuver, links that provide all the necessary details and message centers that make correspondence quick and simple. Strong marketing practices, for example, TV commercials, radio announcements and user-friendly websites, can give one insurance company a significant competitive advantage over another.

Types of Insurance

Credit Insurance

Commercial coverage against losses resulting from the failure of business debtors to pay their obligation to the insured, usually due to insolvency. The coverage is geared to manufacturers, wholesalers, and service providers who may be dependent on a few accounts and therefore could lose significant income in the event of insolvency. Sometime called bad-debt insurance.

Property Insurance

The property insurance is the insurance that protects the physical goods and the equipment of the business or home against any loss from theft, fire, and any other perils. It can be an all-risk coverage policy that gives protection against all the risks, or it can be named-risk coverage policy that gives protection against only those perils that are specified in the policy document. Direct damage coverage is what most people think of when they hear the words "property insurance." This type of insurance covers loss or damage to physical property by a covered cause of loss. 
The property insurance is considered as an umbrella or package cover that offers a combination of covers through single policy. It may include the homeowner’s policy, renter’s policy, flood insurance, shopkeeper’s policy, office package policy, and earthquake insurance policy. Such policies instead of just covering the risk of the property might also include some of the personal liabilities also.

Income Protection

Income protection usually pays out until retirement, death or your return to work, although short-term income protection policies are now available at a lower cost. Income protection doesn't pay out if you're made redundant, but will often provide 'back to work' help if you're off sick. Income protection insurance (sometimes known as permanent health insurance) is a long-term insurance policy designed to help you if you can’t work because you’re ill or injured. It ensures you continue to receive a regular income until you retire or are able to return to work. The maximum you can insure is usually around 50-60% of your earnings, as the provider needs to ensure there is an incentive for you to return to work. The good news is that claims are currently tax-free. A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured's death.

Life Insurance

Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It's important to note that death benefits from all types of life insurance are generally income tax-free. Life insurance, also known as life cover or life assurance is a way to help protect your loved ones financially if you were to die during the length of your policy. Please remember that life insurance is not a savings or investment product and has no cash value unless a valid claim is made.

Auto Insurance

Auto insurance is a contract between you and the insurance company that protects you against financial loss in the event of an accident or theft. In exchange for your paying a premium, the insurance company agrees to pay your losses as outlined in your policy. Auto insurance provides coverage for:

  1. Property – such as damage to or theft of your car
  2. Liability – your legal responsibility to others for bodily injury or property damage
  3. Medical – the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses

Basic personal auto insurance is mandated by most U.S. states, and laws vary. Auto insurance coverage’s are priced individually (a la carte) to let you customize coverage amounts to suit your exact needs and budget.

Gap Insurance

Gap insurance covers the “gap” between what your insurance company will pay out and the amount of money you owe on your car loan in the event of a total loss. When you buy a car, the retail price that you pay is greater than the vehicle’s resale value. On top of that, if you financed your car, you likely bundled additional costs into your loan that you cannot recoup, including sales taxes, title fees, emission fees, and registration. Depending on how much of a down payment you put on your car, you may immediately be upside down on your car loan the moment you drive off the lot. That position can then be greatly exacerbated should your car get totaled, in which case you will get less money from your insurance company than you still owe on your car loan.

Health Insurance

Health insurance is a type of insurance coverage that covers the cost of an insured individual's medical and surgical expenses. Insurers use the term "provider" to describe a clinic, hospital, doctor, laboratory, healthcare practitioner, or pharmacy that treats an individual. The "insured" is the owner of the health insurance policy or the person with the health insurance coverage. Depending on the type of health insurance coverage, either the insured pays costs out of pocket and receives reimbursement, or the insurer makes payments directly to the provider.

Burial Insurance

Burial insurance is a type of funeral expense life insurance policy designed to cover the cost of your funeral or cremation expenses when you die. Because many people don't realize that funerals can cost upwards of several thousand dollars, they don't often think about planning ahead. This type of situation can sometimes lead to a financial hardship on families or loved ones who must cover the costs. “Burial insurance” usually refers to a whole life insurance policy with a death benefit of from $5,000 to $25,000. As its nickname implies, people buy this type of policy to provide money for funeral and burial costs for themselves and/or family members. It is possible to buy a policy after answering a few health-related questions on the application and with no medical exam. 
Premiums are payable weekly or monthly. 

The premium is usually collected at the policy owner’s home or workplace, and the premium is usually a small round number, such as $2 or $3 per week; the death benefit is whatever that premium will buy given the insured’s current age. For example, a $3 per week premium might buy a $6,000 death benefit for a 36-year-old man or an $18,000 death benefit for a 9-year-old boy. After you die, burial life insurance pays the death benefit of your policy directly to your beneficiary who can use the money in any manner. For example, if you have a $15,000 burial insurance policy and funeral expenses came in at $10,000; your beneficiary might choose to use the additional funds to pay for other final expenses such as outstanding medical bills, legal costs, or any other outstanding debts you may owe.

Top Insurance Companies Across the World

  • State Farm
  • Berkshire Hathaway
  • Liberty Mutual
  • Allstate
  • Progressive
  • Travelers
  • Chubb
  • USAA
  • Farmers
  • Nationwide
  • AIG
  • Zurich
  • Hartford
  • CNA
  • Am Trust Group
  • American Family
  • Auto Owners Group
  • Erie Insurance
  • Tokio Marine
  • American Financial

Insurance Across the World

The insurance industry comprises companies and people who develop insurance policies, and sell, administrate, and regulate them. Some insurance companies offer investment products and employ people who develop, sell, administrate, or service these products. Insurance is about managing risk, for both the insurance company and its customers. The company must make sure it collects enough money in premiums to offset customers’ claims while still maintaining a profit. Customers use insurance to minimize risk to their finances in the case of lost or damaged property, lawsuits, illness or accident, business interruption, or premature death.

Today, there are few items of value that can’t be insured. The most common insurance policies are business insurance, car/vehicle insurance, health insurance, home/rental insurance, life insurance, and other property/casualty insurance policies. Some celebrities have insured their body parts or musical instruments. For example, Keith Richards, guitarist with the Rolling Stones, insured his fingers. If his fingers were to be injured to the point that he could never play the guitar again, he would file a claim with his insurance company, in this case, Lloyd’s of London, to receive a check equal in value to that placed on his fingers. Insurance basically involves a group of people agreeing to share risks.  It is a very old idea which started back when sailing ships got destroyed or lost their cargoes.  Merchants found that by dividing their cargoes among several boats, they protected themselves from total financial ruin.  That way, if one of the boats was destroyed, no merchant lost everything.  Each stood to lose only a small portion.


By creating a "security blanket" for its insured’s, an insurance company may inadvertently find that its insured’s may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer). This problem is known to the insurance industry as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability. There are a few controversies in insurance, but the main one today is insurance patents. Insurance policies and insurance companies that deny coverage for one reason or another are in most cases more or less illegal and can be sued by the person seeking insurance protection. On the other hand, a huge controversy in insurance are new insurance products are able to have protection by copying a business method patent in America. For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by the insured. Even if a provider were so irrational as to want to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.