Page 243 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes Introduction

Insurance is a form of risk management primarily used to hedge against the risk of a contingent,
uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity
to another, in exchange for payment. An insurer is a company selling the insurance; the insured,
or policyholder, is the person or entity buying the insurance policy. The amount to be charged
for a certain amount of insurance coverage is called the premium. Risk management, the practice
of appraising and controlling risk, has evolved as a discrete field of study and practice.

12.1 History and Meaning of Insurance

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.
– Summer and Keller
It existed in some form of mutual or communal protection in the Aryan tribes some 3000 years
back.
– Stone and Cox
Transactions in the shape of Bottomry Bonds were done in Italy in 12th and 13th Century A.D.
The word "Bima" was derived from the Persian word "Bim" meaning "Fear" and "Bima" means
"expense" incurred to get rid of fear.
– Persian Dictionary
From the beginning human societies have tried to find ways to soften the shocks of existence.
Our ancestors were very much aware that no individual could do it alone, only by pooling the
resources of the many, the unfortunate few could be helped.
This simple idea of mutual cooperation persists like a welcome footpath through the incredible
tangle of human history. For example, in ancient times, enterprising merchants sent caravans
and ships to trade with all parts of the known world: with Egypt, Phoenicia, India and China.
Traders in olden 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 (a 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 unfortunate few, who really suffered the loss.
Above arrangement proved to be more sensible and appealing than the earlier one whereby the
trader's ship and other tangible property as well as his life and those of his family as well was
pledged (as a slave).
Accordingly, the practice was sensibly legalized in the code of Hummurabi in 2100 B.C. The
Phoenicians and the Greeks applied a similar kind of system to their sea-born commerce. The
Romans used burial clubs as a form of life insurance, providing funeral expenses for members
and later on, for payments to the survivors for their future subsistence.
With the growth of towns and trade in Europe, the medieval guilds undertook to protect their
guild members from losses by fire and shipwreck, provide ransom to get free from the captivity
of pirates, and support in sickness and poverty and to provide decent burial. By the middle of the
14th centuries as evidenced by the earliest known insurance contract (Genoa, 1347), marine
insurance was practically universal among the maritime nations of Europe.

238 LOVELY PROFESSIONAL UNIVERSITY