Magazine 2014
International Peer-Reviewed Journal  
Prerna Ramteke  
In today’s times human life is very busy, stressful and full of health problems with lots of insecurities. To  
overcome these problems we attend yoga classes, do meditation, go for walks, jog and work hard to  
make more money to live a happy and lavish life but life is also full of risks, uncertainties and since the  
element of risk is incidental to life and cannot be avoided or transferred, many natural risks or losses  
can be avoided through insurance. Insurance is a contract by which the insurer (insurance company) in  
consideration of the payment of a sum (premium) agrees to pay a specified sum to the Insured in the  
event of happening of a certain event. Financial literacy among the middle class and the lower class is  
very low or negligible due to the absolute struggle for survival in today’s time. Insurance of any kind or  
type is almost nonexistent and hence literating them about the importance of Insurance is very crucial to  
save for the rainy day as saying goes “Prevention is better than cure”  
Keywords : Insurance, Insurer, Insured, Premium, Policy, Risks.  
Man on Earth always had an eye on the avoidance of ill luck and has tried in all ages somehow to  
ensure himself and to take out a policy of some sort on which he paid a regular premium in some form  
of social denial and sacrifice.” Sumner and Keller.  
Insurance has a past with merchants who had power and money. The common man was not even  
aware of this as there were hardly any risks involved in his life, he had no property to be stolen or  
unforeseen weather to damage it and if it were to happen he would blame the almighty for it. Therefore  
the knowledge about insurance among the middle and lower middle class, especially the lower income  
group is very poor for the fact that they earn to survive and have a hand to mouth existence. These  
socio economically weaker groups of people have a very difficult life due to lack of education and  
awareness. These groups have now realized the importance of education due to their backwardness  
in most things in life and the rising cost of living in urban areas has made their life very difficult and  
unmanageable and therefore they want their children to be educated and do not suffer as they have.  
The people from these groups hardly have any savings and most of them do not have any bank  
accounts. The college helped the students to open bank accounts and through class interactions we  
found they had no knowledge about insurance thus we arranged for a lecture on insurance to make  
them literate about finance and security in life.  
Hisotry of Insurance  
From the early times human societies have tried to find ways to minimize the shock of existence and  
become aware of doing things together by pooling the resources and helping out the needy ones. The  
concept of mutual cooperation can be traced to ancient times where enterprising merchants sent  
caravans and ships to trade with India, Egypt, Phoenicia and China. Traders in older times devised a  
system of contracts in which the supplier of the capital of business would agree to cancel the loan if the  
trader was robbed of his goods. The trader who borrowed the capital paid an extra sum (premium) for  
this kind of protection over and above the usual interest. As for the lender collecting these premiums  
from many traders made it possible for him to absorb the losses of the less fortunate or unfortunate  
few, who suffered the loss. This arrangement proved to be sensible and appealing than the earlier one  
where the trader’s ship and other tangible property as well as his life and that of his family were  
pledged as slaves.  
Over the period of time, this practice was sensibly legalized in the code of Hummurabi in 2100 BC. The  
Phoenicians and the Greeks applied a similar kind of system for their sea business. The Romans used  
burial clubs as a form of life Insurance, providing funeral expenses for members and payments to the  
survivors for future subsistence. Growth of Towns and trade in Europe gave birth to medieval guilds  
and they undertook to protect their guild members from losses by fire and shipwrecks, provide ransom  
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to pirates, support in sickness, poverty and to provide decent burial. By the middle of 14 century as  
evidenced by the earliest known Insurance contract (Genoa, 1347), Marine insurance was practically  
universal among maritime native of Europe. Therefore the first kind of formal Insurance business was  
marine Insurance. Traders who met in the Lloyds coffee house in London agreed to share the losses of  
their goods carried by ship due to pirate attacks, bad weather or sinking of the ships. The first Insurance  
policy was issued in England in 1583.  
Meaning of Insurance  
The word ‘Bima’ was derived from the Persian word “Bim” meaning “fear” and “Bima” means expenses  
incurred to get rid of fear.”  
Functional Defination  
Insurance is a process in which uncertainties are made certain” - Mac Gill  
The function of insurance is primarily to decrease the uncertainty of events”. Thomson has defined it  
as “Insurance is a provision which a prudent man makes against fortuitous or inevitable contingencies,  
loss of misfortunes. It is a form of spreading risks”.  
Legal Definition  
According to Chief Justice Tindal – “Insurance is a contract in which sum of money is paid by the  
assured in consideration of the insurer’s incurring the risk of paying a large sum upon a given  
contingency” In legal terms, Insurance is a contractual agreement whereby one party agrees for a  
consideration called premium, to compensate another party for losses. Thus, an insurance transaction  
involves the following terms  
Insurer – The party agreeing to pay for the losses of the insured  
Insured – The party who insured his risk with the insurer  
Premium – The payment to the insurer received from the insured for indemnifying the  
Policy – It is a contract between the insurer and the insured that sets the contractual obligation  
Exposure to loss – The insured’s possibility  
Risk is an uncertainty of loss and is central to the study of Insurance and it is good to know this concept  
before we know what Insurance is. Risks can be categorized as fundamental and Particular risks.  
Fundamental risks are impersonal in origin and consequences and their effects generally falls on  
masses. They arise out of the nature of the society we live in or from some physical calamities like war,  
Inflation, changing customs, typhoons, tidal waves, tsunamis etc. These risks are largely uninsurable  
and some of them are insurable depending on the circumstances. Particular risks has its origin in  
individual events and its impact can be felt locally like Theft of property, damages due to accidents  
explosion of a boiler due to negligence of employees have personal effects.  
How Insurance Works  
The mechanism of Insurance is very simple. People who are exposed to some kind of risk come  
together and agree that if any one of them suffers a loss, the others will share the loss and make good  
to the person who lost. Therefore different kinds of risks are identified and separate groups are made.  
By Insurance, the heavy loss that anyone or few of them suffer is divided into bearable small losses by  
all. In other words, the risk is spread among the community and the likely big impact on one or few is  
reduced to smaller manageable impacts on all. The manner in which the loss is to be shared is  
determined beforehand and is proportional to the risk that each person is exposed to and is indicative  
of the benefit he would receive if the peril befell him. These insurance companies collect the share of  
people to pool in advance and create a fund from which the losses can be paid.  
Right and Responsibilities of the Insurer  
To collect premium from the insured  
To specify rules and conditions that govern the promise made under the policy  
To pay for the losses occurred and claimed by the insured  
Rights and Responsibilities of the Insured  
Obligation to pay premium to the insurer  
To collect payment from the insurer if a covered loss occurs  
Obligation to comply with the terms and condition prescribed by insurer  
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About Insurance Acts  
Insurance Act, 1938 had provided for setting up of the Controller of Insurance to act as a strong and  
powerful supervisory and regulatory authority for insurance. Post nationalization, the role of controller  
of Insurance diminished considerably in significance since the Government owned the insurance  
companies. The Insurance Regulatory and Development Authority Act 1999 is an act to provide for the  
establishment of an Authority to protect the interests of holders of insurance policies, to regulate promote  
and ensure orderly growth of the insurance industry and for matters connected therewith or incidental  
thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the  
General insurance Business (Nationalization) Act, 1972 to end the monopoly of the Life Insurance  
Corporation of India (for life insurance business) and General Insurance Corporation and its subsidiaries  
for general insurance business). Insurance companies accept risks, which may even be beyond their  
resources. They transfer their extra risk to reinsurance companies. Reinsurance act as the wholesale  
market for insurance business. The chain of risk transfer then becomes like this  
Amendment of the Life Insurance Corporation Act, 1956  
The Life Insurance Act, 1956 shall be amended in the manner specified in the Second Schedule to this  
Act. This amendment ends the monopoly of the Life Insurance Corporation of India to do life insurance  
business in India and opens the entry of private sector Indian companies into the life insurance business.  
Amendment of General Insurance Business (Nationalization) Act, 1972  
The General Insurance Business (Nationalization) Act 1972 shall be amended in the manner specified  
in the Third Schedule to this Act. These amendments ends the monopoly of the General Insurance  
Corporation of India and its subsidies to do general insurance business in India and opens the entry of  
private sector Indian companies into the general insurance business.  
The Life Insurance Corporation (LIC) Act, 1956  
Preamble (Act No. 31 of 1956) [18 June, 1956]  
An Act to provide for the nationalization of life insurance business in India by transferring all such  
business to a Corporation established for the purpose and to provide for the regulation and control of  
the business of the Corporation and for matters connected therewith or incident thereto. Be it enacted  
by Parliament in the Seventh Year of the Republic of India as follows:  
The Insurer and the Insured to have Mutual Goals  
One thing the insured must remember is that by transferring the risk to an insurance company, he has  
not shed his responsibility for managing the risk. If an accident occurs, the company is not going to  
repair or replace the car and if the car is lost, it is not going to search or trace it. It is the duty of the  
insured to avoid loss as far as possible. If avoidance is not possible, the insured must try to prevent or  
minimize the loss from occurring by acting as if he is uninsured. He has to maintain his insured property  
carefully, and has to protect it in an untoward situation and make it available for inspection to the  
insurance company, if he incurs a loss.  
Insurance companies motivate people to cover risks  
It is true that the risk minimized if collected under a group. But how many people realize this risk is  
their own? Only an insurance company understands practice of this idea. The risk owner/bearer may  
have knowledge of the risk. But because, it is intangible and contingent in nature, he usually ignores it.  
A risk bearer needs to be motivated to come together into the group. This is done by the insurance  
company. It uses its marketing people – agents and brokers to do this job. In case of compulsory  
insurance like motor insurance, the problem is less but the insurance is usually voluntary (life and  
health insurance) and the people have to be motivated and attracted for example, through tax incentives  
to come and join the pool.  
Insurance companies accept risks which may even be beyond their resources. Insurance companies  
transfer their extra risk to reinsurance companies. Reinsurance companies act as the wholesale market  
for insurance business. The chain of risk transfer then becomes like this  
Marketing of Insurance  
Marketing of insurance is done by agents and brokers. Other channels like banc assurance, online  
sales, telemarketing, etc. are also used. The main aim is to motivate more and more people to join into  
the group, so that they pay premiums through which the claims and expenses are met and profit is  
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earned by the Insurance Company and is further distributed among policyholders as bonus or is  
offered as reduction in premium in case of without profit policies.  
Insurable Interest  
The risk that is to be insured must result in some form of financial loss to the person taking insurance.  
Otherwise, any person could insure some other person’s house or car so that when the house or car  
was damaged he, in addition to the owner of the property, would receive compensation form the  
insurance company. This is not allowed. One of the basic doctrines of insurance is that the person  
insuring must be the one who stands to suffer some financial loss if the risk materializes.  
Characteristics of Insurance  
It is a cooperative device  
It helps in risk sharing and risk transfer  
Calculates risk in advance  
Payment/claim amount is paid on occurrence of contingency  
Amount of payment  
Number of persons insured is large  
It is neither charity nor gambling  
Types of Insurance  
There are 2 types of Insurances  
Life Insurance  
Non-Life Insurance  
Term Insurance Pre Endowment  
a) Marine Insurance  
b) Fire Insurance  
c) Personal Accident  
a) Fidelity Guarantee Insu  
b) Crop Insurance  
c) Burglary Insurance  
d) Flood Insurance  
d) Vehicle or Motor  
e) Aviation Insurance  
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Functions of Insurance  
It helps in capital formation  
It provides certainty  
It provides protections  
It helps in prevention of losses  
It shared risk  
Meaning of Life Insurance  
Life Insurance contract may be defined whereby “The insurer in consideration of a premium paid  
either in lump sum or in periodical installments, undertakes to pay an annuity of certain sum f money  
either on the death of the insured or in the expiry of a certain number of years”. An untimely and  
premature death of the bread-earner brings economic disaster to the dependent family.  
There are 3 ways to remove problems of economic security.  
Social security schemes  
Group effort  
Individual effort  
Some social security schemes are initiated by government of India for the social and economically  
backward sections of the society especially for people below poverty line but they are lacking in  
execution. There is an urgent need to educate people to invest in insurance products to face unforeseen  
incidences and circumstances. When insurance is sold, insurers have to deal with the problem of  
adverse select.  
a) To find out the Financial Literacy among this (selected) group of People  
b) To find out if the selected group think investing in life Insurance is worthwhile  
This is a survey based study. Primary and Secondary data were used. A questionnaire was prepared  
and it was filled by the parents with the help of their daughters who were given an orientation about  
Insurance, its types and importance in present times.  
General Profile of Respondents  
A sample of about 34 people ( ie. parents of our degree college students ) were taken who are in the  
age group of 40 – 50’s and among them 25 were male and 9 female participants.  
Non Matric  
Not mention  
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The data from the survey revealed the following:  
How did you know you about Insurance?  
a) 17 – People were aware about LIC  
b) 03 – People were aware about Max New York Insurance  
c) 02 – People were aware about Reliance Insurance  
d) 04 – People were aware about ICICI Lombard  
e) 01 – Persons was aware about Postal Insurance  
. How did they make the premium payments?  
10 people paid yearly premiums  
3 people paid quarterly  
4 people paid monthly  
From some open ended questions it was found that only 50% of these people had knowledge about  
the Insurance (whether life or vehicle). Most of these people belonged to the lower middle class (also  
lower education level) and hence it was assumed that these people did not have enough money to  
invest in insurance policies. The data also indicates that most of these people did not have knowledge  
about the working or functioning of the insurance. Hence we can say that these people were financially  
not very strong (weak) and did not have financial literacy as how to invest money and where. The data  
collected revealed that half (ie. 17) of the parents were not having policies of any kind and they did not  
have enough knowledge about insurance.  
Therefore there was an urgent need to make these students financially literate. A workshop was organized  
by the department on what is insurance and the different types of Insurance available in the market.  
The girl students were first made aware of the risks which we encounter in our lives and how to overcome  
them by investing money in different insurance policies available in the market and secure your life.  
The workshop also helped them to understand the importance of saving money for the rainy day by  
stretching your budget today to secure your tomorrow and also to educate their parents on the  
importance of investing in insurance policies for their old age, children’s education, marriage, and  
other unforeseen circumstances. It was also found that the parents were happy to know more about  
the policies which would help them in emergencies and were also glad especially to know that at least  
their daughters knew more about insurance than them and would be able to guide them.  
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Thus from the above findings we can conclude that Insurance can be deemed as a luxury among the  
lower middle class where there is hardly any money left to save for a rainy day let alone save for a thing  
called insurance. People live for today and do not think about what tomorrow will bring and struggle to  
meet the ends of daily life. Therefore we found this exercise of educating them about insurance very  
fruitful for students as well as their parents.  
Every Individual has to undergo different phases in life depending on different financial needs and  
patterns of income. Every person should prepare his or her financial plans. Keeping in mind the different  
economic factors that influence his or her pattern of living, the emergence of nuclear families and  
double income has given rise to personal financial planning. Thus life Insurance plays a significant role  
in financial planning by meeting the contingencies, accumulating savings and offering tax advantages.  
Educating girls today especially in finance helps her to plan her family budget and also save for  
emergencies and thus be prepared for emergencies and tackle them without any burden and stress  
and make life more peaceful and happy. Therefore schools should also start educating children about  
finance and budget planning and little bit of accounting to cope with their expenses and budgets and  
spend money wisely.  
Gulati, Neelam. C. 2011, “Banking and Insurance: Principles and Practices”, New Delhi, Excel  
Insurance Act, 1938 (amended up to date)  
Insurance Regulatory and Development Authority Act, 1999  
Jha, R.N. 1999, “Insurance in India”, Mumbai, Bharath Book Bureau (International).  
Mathew, M.J. 2013, “Insurance - Principles and Practices”, Jaipur, RBSA Publishers.  
Mishra, M.N., 2003, “Insurance Principles and Practices”, New Delhi, S. Chand and Co, Ltd.  
Sharma, K.C. 2013, “General Insurance in India - Principles and Practices”, New Delhi, Regal  
Prerna Ramteke :Assistant Professor, Dept. of Sociology, Maniben Nanavati Women’s College, Mumbai.