Page 251 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes

Task Study the evolution of insurance in the world and in India.

Did u know? The contract of insurance (in order to be a valid contract) can be entered into
only by person(s) competent to contract.

Self Assessment

Fill in the blanks:

1 Insurance companies are called ............................
2. A .............................. of insurance other than life insurance contract is a contract of indemnity.
3. Insurance is defined as a ................................ device to spread the loss caused by a particular
risk over a number of persons who are exposed to it
4. The first kind of ....................................... insurance business was marine insurance.
5. Insurance primarily creates counter part of the risk, which is ....................................

12.9 Role of Insurance in Financial System

Insurance is a part of financial system. Financial system may be defined as set of institutions,
instruments and markets, which gather savings and channel them to their most efficient use.
The system consists of individuals (savers), intermediaries, markets and users of savings. Economic
activity and growth are greatly facilitated by the existence of the market in mobilizing the
saving and allocating them among competing users.
An economy needs institutions that impartially enforce property rights and contracts. Economic
growth of a country depends on the existence of a well functioning financial infrastructure. It is
essential that the financial infrastructure be developed sufficiently so that the market operates
in an efficient manner.
Insurance as a part of the financial system provides valuable services to those affected by various
risks or contingencies.

It takes care of the financial consequences of certain specific contingencies but in insurance
terminology, such contingencies are called risks and they cause losses when they occur.
The effect of these losses on financial system is not only negative but may be disastrous and
catastrophic also. It results in substantial burden on the financial well-being of those affected.
The insurance sector supports the financial system in several ways. A few have been enumerated
below:
1. It accepts the risk from people and corporate bodies who are exposed to them.
2. It collects small amounts of premium, which are pooled together to be called an insurance
fund. This fund is used for investment purpose.

3. It organizes compulsory insurance in certain areas as per the provisions of the law.
4. It sells voluntary insurance covers through its sales force.
5. It settles claims arising out of insured losses. Neither the insurance company nor the
insured are allowed to make profits out of insurance. If insurance company gets a surplus

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