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Unit 1: Evolution and Meaning of Insurance

policyholder makes to the insurer are premiums. The insurance contract is the policy. The risk Notes
of any unanticipated losses is transferred from the policyholder to the insurer who has the right
to specify the rules and conditions for participating in the insurance pool.
The insurer may restrict the particular kinds of losses covered. For example, a peril is a potential
cause of a loss. Perils may include fires, hurricanes, theft, and heart attack. The insurance policy
may define specific perils that are covered, or it may cover all perils with certain named exclusions,
for example, loss as a result of war or loss of life due to suicide. Hazards are conditions that
increase the probability or expected magnitude of a loss.

Example: Smoking increases the probability of potential healthcare losses, poor wiring
in a house increases the probability of losses due to fire, or a California residence increases the
probability of earthquake damage.
In summary, an insurance contract covers a policyholder for economic loss caused by a peril
named in the policy. The policyholder pays a known premium to have the insurer guarantee
payment for the unknown loss. In this manner, the policyholder transfers the economic risk to
the insurance company. Risk is the variation in potential economic outcomes. It is measured by
the variation between possible outcomes and the expected outcome: the greater the standard
deviation, the greater the risk.
Self Assessment

Fill in the blanks:
9. The …………………………….. considers the losses expected for the insurance pool.
10. …………………………….. are paid out of the premiums collected from the pool of
policyholders.
11. The risk of any unanticipated losses is transferred from the …………………………………
to the insurer.

1.5 Indian Insurance Industry

You must be aware that India insurance is a flourishing industry, with several national and
international players competing and growing at rapid rates.

Figure 1.3: Insurance Industry in India

Insurance Industry in India

Life Insurance Non-Life Insurance/General Insurance

Motor Fire Health Marine
Insurance Insurance Insurance Insurance

Source: http://www.medindia.net/patients/insurance/images/insurance-Industry-India.jpg
Thanks to reforms and the easing of policy regulations, the Indian insurance sector has been
allowed to flourish, and as Indians become more familiar with different insurance products, this

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