What is Insurance? What are the Main Types of Insurance?

WHAT IS AN INSURANCE?

Insurance is a tool by which fatalities of a small number are compensated out of funds collected
from the insured. Insurance companies pay back for financial losses arising out of occurrence
of insured events, e.g. in personal accident policy the insured event is death due to accident, in
fire policy the insured events are fire and other natural calamities. Hence, insurance is a
safeguard against uncertainties. It provides financial recompense for losses suffered due to
incident of unanticipated events, insured within the policy of insurance.
Insurance, essentially, is an arrangement where the losses experimented by a few are extended
over several who are exposed to similar risks. Insurance is a protection against financial loss
arising on the happening of an unexpected event.
An individual who wants to cover risk pays a small amount of money to an organization called
on Insurance Company and gets insured. An insurance company insures different people by
collecting a small amount of money from each one of them and collectively this money is enough
to compensate or cover the loss that some members may suffer.
The fixed amount of money paid by the insured to the insurance company regularly is
called premium. Insurance company collects premium to provide security for the
purpose.
Insurance is an agreement or a contract between the insured and the Insurance
Company (Insurer).

NATURE OF INSURANCE

On the basis of the definition of insurance discussed above, one can observe its following
characteristics:

1. Risk Sharing and Risk Transfer
   Insurance is a mechanism adopted to share the financial losses that might occur to an individual
   or his family on the happening of a specified event. The event may be death of earning member
   of the family in the case of life insurance, marine-perils in marine insurance, fire in fire insurance
   and other certain events in miscellaneous insurance, e.g., theft in burglary insurance, accident in
   motor insurance, etc. The loss arising from these events are shared by all the insured in the form
   of premium. Hence, risk is transferred from one individual to a group.
2. Co-operative Device
   Insurance is a cooperative device under which a group of persons who agree to share the
   financial loss may be brought together voluntarily or through publicity or through solicitations of
   the agents. An insurer would be unable to compensate all the losses from his own capital.
   So, by insuring a large number of persons, he is able to pay the amount of loss.

TYPES OF INSURANCE

Insurance occupies an important place in the modern world because the risk, which can be
insured, have increased in number and extent owing to the growing complexity of the present
day economic system. It plays a vital role in the life of every citizen and has developed on an
enormous scale leading to the evolution of many different types of insurance. In fact, now a day
almost any risk can be made the subject matter of contract of insurance. The different types of
insurance have come about by practice within insurance companies, and by the influence of
legislation controlling the transacting of insurance business. Broadly, insurance may be
classified into the following categories:
(1) Classification on the basis of nature of insurance
(a) Life Insurance
(b) Fire Insurance
(c) Marine Insurance
(d) Social Insurance
(e) Miscellaneous Insurance
(2) Classification from business point of view:
(a) Life Insurance
(b) General Insurance
(3) Classification from risk point of view:
(a) Personal Insurance
(b) Property Insurance
(c) Liability Insurance
(d) Fidelity Guarantee Insurance
However, in the present lesson we will discuss insurance in business point of view, personnel
insurance and property insurance.