• Sagar Acharjee


Insurance is defined as a cooperative mechanism for spreading the loss caused by a specific risk among a group of people who are exposed to it and agree to insure themselves against it. Risk refers to the possibility of a financial loss. It is not to be confused with the probability of loss, which is the number of losses that are likely to occur given a given number of exposures. It is also not to be confused with peril, which is defined as the cause of loss, or with hazard, which is a condition that may increase the probability of loss. Finally, risk should not be confused with loss, which is the unintentional loss or disappearance of value as a result of a contingency. There is risk wherever there is uncertainty about the likelihood of a loss. Every risk entails a loss of some sort or another. The purpose of insurance is to spread the risk among a large number of people who have agreed to help one another in the event of a loss. The risk cannot be avoided, but the loss incurred as a result of that risk can be shared among the agreed-upon parties. Because the chances of loss, i.e., the time and amount, to a person, are unknown, they have agreed to share the loss. Because any of them could lose money as a result of a risk, the rest of the people who have agreed to share the loss will. The process of loss distribution becomes easier as the number of such people increases. In fact, the loss is shared by them through the payment of a premium based on the likelihood of loss. In the past, people's contributions were made at the time of Joss. Insurance is also defined as a social device for accumulating funds to cover the uncertain losses incurred by a person who is insured against the risk.


Insurance functions can be divided into two categories.

There are two types of functions: primary and secondary.

Primary Purposes

(1) Insurance gives you peace of mind.

Insurance provides payment certainty in the event of a loss. Better planning and administration can help to reduce the risk of loss. However, insurance relieves the individual of such a difficult task. Furthermore, if the subject matter is inadequate, self-provision may be more expensive. In a risk, there are various types of uncertainty. Will the risk occur, when will it occur, and how much loss will there be? In other words, the occurrence of time and the amount of loss are both uncertain. All of these uncertainties are removed by insurance, and the assured receives assurance of payment in the event of a loss. For providing the aforementioned certainty, the insurer charges a premium.

(2) Insurance offers security.

The primary purpose of insurance is to provide protection against the possibility of loss. The time and amount of loss are unpredictable, and if a risk occurs, the person will lose money if they do not have insurance. Insurance ensures that a loss will be paid and thus protects the insured from suffering. Insurance cannot prevent a risk from occurring, but it can compensate for losses that occur as a result of the risk.

(3) Risk-sharing is a term used to describe a situation in which two or more people share

Because the risk is unknown, the loss that results from it is also unknown. When a risk occurs, the loss is shared among all those who are exposed to it. Risk-sharing was done only in ancient times when there was damage or death; however, today, on the basis of risk probability, a share is obtained from each and every insured in the form of premium, without which the insurer cannot guarantee protection.


Aside from the primary functions listed above, insurance also performs the following tasks:

(1) Loss Prevention

Because a reduction in loss means a lower payment to the assured, more savings can be made, which helps to lower the premium. A lower premium attracts more business, and more business means a lower share of the guaranteed. As a result, the premium has been reduced to, which will encourage more business and provide more protection to the general public. As a result, insurance companies provide financial support to health organisations, fire departments, educational institutions, and other organisations that work to prevent mass deaths and property damage.

(2) It Provides Funding

The insurance industry provides the society with capital. The funds accumulated are put into a productive channel. With the help of insurance investment, the society's lack of capital is reduced to a greater extent. The insurance industry, businesses, and individuals benefit from the insurers' investments and loans.

(3) It boosts productivity.

The insurance takes care of the worries and misery that come with death and property destruction. The carefree person can devote both his body and soul to better results. It not only improves his efficiency, but it also improves the efficiency of the masses.

(4) It aids in the advancement of the economy.

Insurance provides an incentive to work hard for the betterment of the masses by protecting society from massive losses of damage, destruction, and death. The masses also provide a large amount of capital, the next factor in economic progress. Property, valuable assets, people, machines, and society are all unlikely to suffer significant losses as a result of the disaster.


The terms "functional definition" and "contractual definition" can both be used to define insurance.

Definition of Function

Insurance is a cooperative mechanism for spreading the loss caused by a specific risk among a group of people who are exposed to the risk and agree to insure themselves against it. Thus, insurance is (a) a cooperative device for spreading risk; (b) a system for spreading risk over a number of people who are insured against the risk; (c) a principle for sharing the loss of each member of society based on the probability of loss to their risk; and (d) a method for providing security against insured losses. Another definition could be given in the same way. Insurance is a cooperative device for spreading losses incurred by an individual or his family among a large number of people, each of whom bears a small cost and feels secure against a large loss.

Definition of a Contract

Insurance is defined as a financial transaction in which a sum of money is paid as a premium in exchange for the insurer's risk of having to pay a large sum in the event of a specified occurrence. Thus, insurance is a contract in which (a) a certain sum, called a premium, is charged in consideration, (b) a large sum is guaranteed to be paid by the insurer who received the premium, (c) the payment will be made in a specific definite sum, i.e., the loss or the policy amount, whichever is greater, and (d) the payment is made only if a contingency occurs. A more specific definition is as follows: Insurance is defined as a contract in which one party (the insurer) agrees to pay a certain sum to another party (the insurer) or his beneficiary in the event of a specific occurrence (the risk) for which insurance is sought.


The following characteristics of insurance can be found in life, marine, fire, and general insurances.

1. Risks are shared

Insurance is a tool for sharing the financial losses that may befall an individual or his family as a result of the occurrence of a specific event. In the case of life insurance, the event could be the death of a family breadwinner, marine-perils in marine insurance, fire in fire insurance, and other specific events in general insurance, such as theft in burglary insurance, accident in motor insurance, and so on. If these events are insured, the loss is shared by all the insured in the form of premium.

2. Collaborative Tool

The most important feature of any insurance plan is the participation of a large number of people who, in effect, agree to share the financial loss incurred as a result of an insured risk. A group of people like this can be gathered voluntarily, through publicity, or through the agents' solicitation. An insurer's own capital would be insufficient to cover all losses. As a result, he is able to pay the loss by insuring or underwriting a large number of people. There is no obligation on anyone to purchase the insurance policy, as there is with all cooperative devices.

3. The Cost of Risk

Before insuring to charge the amount of a share of an insured, referred to as consideration or premium, the risk is assessed. Risk assessment can be done in a variety of ways. If a higher loss is expected, a higher premium may be charged. As a result, at the time of insurance, the probability of loss is calculated.

4. Payment on the Spot

Payment is made if a specific contingency is insured, and payment is made if the contingency occurs. The payment is certain because the life insurance contract is a contract of certainty, because the contingency, death or term expiration, will almost certainly occur. Fire, marine perils, and other contingencies may or may not occur in other insurance contracts. So, if the contingency occurs, payment is made; otherwise, the policyholder receives no money. Similarly, payment is not guaranteed in certain types of life insurance policies due to the uncertainty of a specific contingency occurring within a specific time frame. In term insurance, for example, payment is made only if the assured dies within the specified term, which could be one or two years. Similarly, in Pure Endowment, payment is made only if the insured survives until the period ends.

5. The Payment Amount

The amount of payment is determined by the amount of loss suffered as a result of the specific insured risk, assuming insurance coverage is available up to that amount. The goal of life insurance isn't to compensate Joss for his financial losses. When an event occurs, the insurer promises to pay a set amount. If the event or contingency occurs, the payment is due if the policy is valid and in force at the time of the occurrence, such as property insurance, and the dependents are not required to prove the loss occurred and the amount of loss. It makes no difference in life insurance what the amount of loss was at the time of the occurrence. However, in property and general insurance, both the amount of loss and the occurrence of loss must be proven.

6. There are a lot of people who are insured.

A large number of people should be insured to spread the loss quickly, smoothly, and cheaply. A small group of people working together could be insurance, but it would be limited to a smaller area. Each member's insurance premiums may be higher. As a result, it might be unmarketable. As a result, in order to make insurance more affordable, it is necessary to insure a large number of people or property, because the lower the cost of insurance, the lower the premium. Tariff associations or mutual fire insurance associations have been found in the past to share losses at a lower cost. The insurance must be joined by a large number of people in order to function properly.

7. Insurance isn't a game of chance.

By eliminating worms and increasing initiative, the insurance helps to increase community productivity indirectly. Insuring property and life turns uncertainty into certainty because the insurer promises to pay a specific amount in the event of damage or death. From the perspective of family and business, all lives have an economic value that can be snuffed out at any time by death, and it is just as reasonable to protect oneself against the loss of this value as it is to protect oneself against the loss of property. In the absence of insurance, property owners can only rely on some form of self-insurance, which may not provide him with complete peace of mind. In the absence of life insurance, saving takes time; however, death can strike at any time, leaving your property and family vulnerable. As a result, with the help of insurance, the family is protected against losses due to death and property damage. Life insurance, in the company's opinion, is essentially non-speculative; in fact, no other business operates with greater certainty. Insurance is also the polar opposite of gambling from the perspective of the insured. Life is the most uncertain thing there is, and life insurance is the only sure way to turn that uncertainty into certainty. Insurance failure is akin to gambling because the risk of loss is always present. Insurance is, in fact, the polar opposite of gambling. In gambling, bidding exposes a person to the risk of losing money; however, in insurance, the insured is always opposed to risk and will lose money if he is not insured. He protects himself against the risk of loss by insuring his life and property. In fact, he is gambling with his life on property if he does not get his property or life insured.

Insurance is not a form of charity.

While charity is freely given, insurance is not possible without a premium. Although it is a type of business, it provides security and safety to an individual and society by guaranteeing the payment of loss in exchange for a premium. It is a profession because it only charges a nominal fee for providing adequate resources in the event of a disaster.


The insurance is based on (1) Cooperation Principles and (2) Probability Principles.

(1) Cooperative Principles.

Insurance is a tool for collaboration. It cannot be strictly an insurance if one person is providing for his own losses, because in insurance, the loss is shared by a group of people who are willing to cooperate. During the ancient period, members of a group willingly shared the loss of a group member. They used to share their grief with a group member. They used to split the loss when something went wrong. They gathered sufficient funds from the society and distributed them to the deceased's dependents or those who had suffered property losses. In most countries, mutual cooperation was prevalent from the beginning until the time of Christ. Recently, co-operation has taken on a new form, in which an individual or a society agrees to pay a certain sum in advance to become a member of the society. The society guarantees payment of a certain amount in the event of a loss to any member of the society by accumulating funds. The accumulation of funds and the charging of the member's share in advance became the responsibility of a single institution known as an insurer. It is now the insurer's duty and responsibility to obtain sufficient funds from society members in order to pay them in the event of the insured risk. As a result, the shares of loss became premium. To join the insurance scheme, today's insured must pay a premium. As a result, by paying a premium in advance, the insured are cooperating to share the loss of an individual.

(2) Probability Principles and Theory

Only the theory of probability can be used to distribute the loss in the shape of a premium. The probability of loss is calculated ahead of time to determine the premium amount. Because the degree of loss is determined by a variety of factors, the influencing factors must be examined before the amount of loss can be calculated. The uncertainty of loss is transformed into certainty using this principle. The insurer will not only avoid loss, but will also benefit from a windfall. As a result, the insurer can only charge as much as is necessary to cover the losses. The probability tells you how likely it is that you will lose money and how much money you will lose. When calculating the probability, the large number inertia is used. The greater the number of people who have been exposed, the better and more practical the probability findings will be. As a result, the law of large numbers is used in the probability principle. The law of large numbers is crucial in every field of insurance. These principles take into account the fact that past events will repeat themselves with the same inertia. The amount of premium is determined by the insurance company based on past experience, current conditions, and future prospects. There can be no cooperation without a premium, and the premium cannot be calculated without the use of probability theory, so there can be no insurance. As a result, these are the two main pillars of insurance.