The core notion of the insurance business is risk sharing, or risk pooling. The beauty of simplicity is matched with the practicality of the concept.
If risks—opportunities for loss—can be distributed across several members of a group, they need only fall lightly on any one of them. As a result, disasters that would otherwise be crushing to one person can be made tolerable for all. Risk-sharing, when viewed as a form of mutual aid, can be seen as not only solid commercial practice, but also as enlightened social behavior based on accepted ethical values.
To Start with :
Risk-sharing was first proposed and practiced in antiquity. Thousands of years have passed since Chinese merchants evolved an ingenious method of guarding against the risk of a financially devastating mishap in the hazardous river rapids that ran alongside their trading routes.
They just split their cargo between many boats.
No merchant lost all of his goods if one of the boats was smashed to bits in the rapids. Only a minor percentage of each would be lost. Although they may not have considered their plan to be insurance, the premise is strikingly similar to that of its modern counterpart, ocean marine insurance, as well as other types of property and casualty insurance. Rather of physically dividing cargoes among a number of ships, modern insurance allows merchants and shipowners to spread the financial expenses of potential losses among a number of merchants and shipowners.
Financial agreements are used to do this. These agreements are typically written in the form of an insurance policy, with insurance underwriters or an insurance company acting as the financial intermediary. The insurer assumes the risks—that is, the obligation to cover the losses—of all policyholders in exchange for a payment called a premium.
The practice of private investors putting their names as guarantors for a fee under posted advertisements of nautical voyages and cargoes in 17th century England gave rise to insurance underwriting. They’d say how much of the financial risk they’d take on.
This group of underwriters met at a London coffee shop run by Edward Lloyd and created the organisation that became known as Lloyd’s of London after the coffee shop.
Lloyd’s had grown into a major presence on the world insurance landscape long before it celebrated its 300th anniversary in 1988. Lloyd’s has been known as a source of coverage for nearly any imaginable sort of risk, owing to its continued tradition of individual underwriting by members.
Modern fire insurance had its origins in 17th century England, however it went a different path than the activities at Lloyd’s. The necessity was demonstrated when a fire raced across London in 1666, destroying 14,000 structures and displacing 200,000 people. The next year, the first fire insurance company was established in London. It was founded in 1680 as a stock firm called as the Fire Office, after being run solely by an entrepreneur named Nicholas Barbon.
The first fire insurance company was established in the New World in 1735, but it only lasted five years. With the effective foundation of the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire in 1752, it was Benjamin Franklin who gave fire insurance its true start. After its firemark, a symbol that first appeared on houses insured by the Contributionship, the company was also known as Hand in Hand. That company is still in operation today.
When the automobile was introduced, insurance was quick to follow, providing financial security and peace of mind to drivers whose accidents, while rare in the early days, could be costly. In 1887, Gilbert Loomis of Westfield, Connecticut, was issued what is thought to be the first vehicle liability policy written—actually, a policy for horse-drawn carriages that was made suitable to an automobile. The cost per $1,000 of liability coverage was $7.50.
Ralph Emery, a Bostonian, sought to insurance his Stanley Steamer against the chance of fire five years later. The first insurance to cover an automobile as property was most likely a maritime policy tailored to his needs.
Property/casualty insurers have broadened their scopes throughout the years to cover a wide range of risks, from hurricane winds and tornadoes to identity theft and the consequences of one person’s negligence causing harm to another. Insurers have frequently discovered a way to deal with the extremely specialized insurance demands of emerging technology—planes, nuclear power plants, offshore oil rigs, and spacecraft.
Homeowners, car owners, businesses, and institutions now have access to a wide choice of insurance products, many of which have become a must for the free-enterprise system to function.
Property/casualty insurance’s functions
Without insurance, our society would be unable to function. There would be so much uncertainty, so much risk of sudden, unexpected, and even catastrophic loss, that it would be difficult for anyone to plan for the future with confidence. Most significantly, obtaining credit or funding would be difficult since few lenders or investors would be ready to risk their money without a guarantee of return.
What is the purpose of insurance?
The transfer of risk is the most basic function of property/casualty insurance. Its goal is to lessen financial risk and make unintentional loss more tolerable. It accomplishes this by paying a professional insurer a small, predictable fee—an insurance premium—in exchange for the assumption of the risk of a significant loss and a guarantee to pay in the case of such a loss.
Diversifying the risk:
“Spreading the risk” is another term for risk transfer: because a few significant losses are divided among a vast number of premium payers, each of whom pays a relatively little sum The more premium payers there are, the more accurately insurers can anticipate likely losses and hence determine the amount of premium to be collected from each. Because the frequency of losses varies, insurers are always gathering loss “experience.”
How does insurance help society?
Insurers, as trustees of policyholder and stockholder funds, become key investors and capital suppliers to the economy as a side benefit to society. In this regard, insurers behave similarly to banks in terms of capital formation. Thus, insurance benefits business operations in two ways: it allows them to operate by transferring potentially crippling risk, and it also allows them to collect capital funds from insurers through the sale of stocks and bonds, for example, in which insurers invest funds. Consumers gain from the wide range of goods and services available, and the economy benefits from the hundreds of thousands of jobs created or supported by the insurance business.