Risks start with birth and continue till death. Humans all over their lives face a varity of risks including accident, death, fire, theft, disease, conflicts, wars and so on. A single person cannot deal with them all alone, what he can do in shift the risks to a specialized group which can bear the shifted rist at a free. This shifting of the risk is referred to as insurance, the group assuming or bearing the risk is an insurance company, the person shifting the risk is called the insured, and the fee collected is known as a premium.
The basis of insurance lies on law of averages and law of large numbers. According to these laws, thousands or large number of the insured cannot meet disaster or incur damages at a time, only a very few can. As such the amount of premium collected from thousands of the insured is far mush larger than the amount paid to a few for the insured damages or disaster.
Insurance:
Insurance is a risk transfer mechanism. It’s a method of shifting the responsibility for losses to specialists (insurance companies) who handle the risk by spreading it over a large number of people or firms.
A system of protection against loss in which a number of individuals agree to pay certain sums of money, called premiums, to create a pool of money which will use the contribution of these individual to pay the losses of the few caused by events such as fire, accident, illness, or death.
History:
(courtesy: Mr. M. A. Chishti)
History is important for the study of any subject. It is all the more essential in insurance because the essentials of the insurance idea are written in the pages of history. Fortunately, insurance has a rich and interesting history. Its history reflects several periods of human civilization. Its beginning was simple and development gradual. As the trade and industry developed, the need of insurance was also felt and the institution of insurance was invented, as the adage goes: “Necessity is the mother of invention”.
Contracts, known as bottomry, were used by money lenders to shift the burden of risk from owners of ships or cargoes to themselves. The loan was cancelled, if the ship or cargo was lost during a voyage. The change for the bottomry loan, if the voyage was successful, was very high because it included the amount of interes and cost of risk. The contract of bottomry loan in fact sowed the seed of the insurance idea.
According to extant records, loans in the form of bottomry were known to the merchants of Babylon during 4000-3000 B.C. It is also recorded that bottomry was practiced by the Hindus in 6000 B.C. Even in ancient Europe, the Greeks and the Romans also adopted this commercial practice. Therefore, the origin of insurance is very old and man, somehow or the other, has continued his earnest efforts to tide over all hurdles that came in his way to make his life easy and comfortable.
Although marine insurance originated in Italy, its practice gradually spread to other trade centres of Europe. In Bruges there is a record of a court judgement in an insurance dispute in 1377 A.D., while in 1435 A.D. an ordinance regulating marine insurance was issued in Barcelona. Similarly, an ordinance of Florence, dated 1523 A.D. codifies the practice of Italian insurance. By this time, with the waning importance of Mediterranean trade after the discovery of America, Antwerp became a leading insurance market, yielding place to London in later days.
Marine insurance is the first category of insurance business that was developed. In England, the earliest records of marine insurance come to us from the court of Admirality. In due course of time, insurance became international in its character. In 1563 A.D., an Antwerp merchant insured three ships on a voyage from Havre to Central America. This policy, in French, was shared by thirty seven British underwriters. This policy, in French, was shared by thirty seven British underwriters. This participation of the English underwriters confirms the rapid insurance growth in London. In 1570 A.D., London’s own bourse which was erected by Sir Thomas Gresham, was named the Royal Exchange by Queen Elizabeth I, of England.
Until 1720 A.D., marine insurance was entirely in the hands of individual underwriters, whose main business was trade and commerce and insurance was a side-line. These individuals were either available in the Royal Exchange or in one of the nearby coffee houses, of which Edward Lloyd’s, who originally started his business in Tower Street in the City of London, moved later on to Lombard Street. Very soon, Lombard Street became the big centre of marine insurance. Lloyd’s Coffee House was the centre for sales of ships and their cargoes. In this Coffee House, businessmen would come for coffee and sit down to talk about their business and would exchange information about the movements of ships. Lloyds thought why not start a short newsletter so that the people would have the latest information about the movements of vessels. So, he issued the newsletter. When the demand for the newsletter increased, he thought why not open a common fund in which all businessmen would participate and deposit monies according to their resources. This was the beginning of insurance. Edward Lloyds died in 1713 A.D. but the coffee house was carried on by his family. In this coffee-house, the individual insurers, or underwriters concerned with marine insurance, used to congregate to do insurance business. Gradually, a corporate spirit was developed among them. In 1772, the underwriters set up the committee of Lloyd’s to govern their affairs. In 1733, the proprietor of the above coffee-house began the publication of Lloyd’s List, which gave the movements of ships and other matters of trading interest. Lloyd’s List is still published as a daily newspaper from London.
In 1871, Lloyd’s Act was passed to incorporate the Society of Lloyd’s or the Corporation of Lloyd’s as it is now called.
The students of insurance should keep this fact in mind that Lloyd’s does not itself grant insurance as insurance companies do. The policyholder who has a Lloyd’s policy is insured “at Lloyd’s” not with Lloyd’s. “i.e. Lloyd’s is like a vast market-place of insurance where individual underwriters sit to accept risks of insurance. The liability to meet claims under the policy rests solely with those underwriters who are committed by any one policy, each for his own share of the risk.
An insurance broker must be accredited to Lloyd’s before he can place business there and inscribe on his note-paper after his address the world “and at Lloyd’s”. Firms of Lloyd’s brokers may be either one-man business, partnerships, or limited companies, and at least one of the partners or directors is required to be either a member i.e. an underwriting member of, or an annual subscriber to, Lloyd’s. The firm must make a substantial deposit with Lloyd’s and it is held as security for fulfiloment of the firm’s obligations to underwriters. At Lloyd’s the broker is treated in law as the agent of the proposer, but not of the underwriter.
The place where Edward Lloyd’s Coffee house was situated, was taken over by the government as a national asset and today one reads these words on the brass plaque “Lloyd’s Coffee House 1691-1785”.
Lloyd’s is not now an insurance company but an insurance corporation and it is said that it is the biggest insurance organization in the world and participates in the business of every insurance company of every country. In other words, where there is insurance, there is Lloyd’s.
This organization after its establishment in 1688 made such rapid strides that, after about a century, when in 1799 a ship laden with gold and silver bullion sank, the Lloyd’s paid up its insured value of a million pound sterling. The biggest marine loss suffered by this organization was in 1975 when, due to the sinking of 802,502 tonnes of cargo and ship, it paid 122 million pounds sterling within a year.
The Earthquake fire in San Francisco in 1906 resulted in the payment by Lloyd’s of 25 million pounds.
In 1970, one aeroplane was hijacked and destroyed by fire. Lloyd’s paid twelve and a half million pounds.
In 1974, a Turkish Airlines DC-10 crashed near Paris, and Lloyd’s paid its full insured value of one hundred million pounds.
After Lloyd’s, hundreds of insurance companies have come into existence many of whom have worldwide reputation and standing.
After the discovery of marine insurance other classes of insurance such as fire, life, motor, accident etc. appeared in the market. When the Great Fire of London occurred in 1666 A.D., no fire insurance existed. In the same way, life insurance made its debut in 1553, when the life of one William Gibbons was insured by sixteen individual underwriters in London.
How other classes of insurance came into existence would be elaborated in other chapters of this book, when each class of insurance would be dealt with.
Type of Insurance
Insurance business is carried out in three types
1.Life insurance
2.Personal accident insurance
3.Property accident insurance
For more information
insurance
insurance
Life insurance buiness is carried out by life insurance companies while the property and accident insurance by general insurance companies.
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