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Unit 1: Evolution and Meaning of Insurance
Rupesh Roshan Singh, Lovely Professional University

Unit 1: Evolution and Meaning of Insurance Notes

CONTENTS
Objectives
Introduction

1.1 Evolution of Insurance
1.2 Definition of Insurance
1.3 Meaning of Insurance

1.4 How Insurance Works?
1.5 Indian Insurance Industry
1.6 Role of Insurance in Financial System
1.7 Summary
1.8 Keywords

1.9 Review Questions
1.10 Further Readings

Objectives

After studying this unit, you will be able to:

Discuss the evolution of insurance
Define and explain the meaning of insurance
Explain how insurance works
Discuss the Indian insurance industry

Describe the role of insurance in financial system

Introduction

You must be aware that people seek security. A sense of security may be the next basic goal after
food, clothing, and shelter. An individual with economic security is fairly certain that he can
satisfy his needs (food, shelter, medical care, and so on) in the present and in the future. Economic
risk (which we will refer to simply as risk) is the possibility of losing economic security. Most
economic risk derives from variation from the expected outcome. One measure of risk, used in
this study note, is the standard deviation of the possible outcomes. As an example, consider the
cost of a car accident for two different cars, a Porsche and a Toyota. In the event of an accident the
expected value of repairs for both cars is 2500. However, the standard deviation for the Porsche
is 1000 and the standard deviation for the Toyota is 400. If the cost of repairs is normally
distributed, then the probability that the repairs will cost more than 3000 is 31% for the Porsche
but only 11% for the Toyota.
You will find it interesting to note that modern society provides many examples of risk.
A homeowner faces a large potential for variation associated with the possibility of economic
loss caused by a house fire. A driver faces a potential economic loss if his car is damaged.
A larger possible economic risk exists with respect to potential damages a driver might have to

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