Qian - Insurance Blog

Insurance – Definition, How it Works, Benefits, History and Types

Oct 28, 2023


Leave a comment


Insurance – Definition, How it Works, Benefits, History and Types

What is Insurance?

Insurance is defined as the process of transferring risk by the owner (of the asset) to the Insurance Company in return for an Insurance Premium.

Insurance is a financial contract between the Insurance Company and the Insured Party where the Insurance Company provides financial protection or reimbursement to the Insured in case of losses suffered by the Insured because of damage to the Insured Assets under certain circumstances. In return for the Financial Protection, the Insured pays a certain amount, known as Insurance Premium, to the Insurance Company for bearing the risk.

 Basically, the Insurer indemnifies the Insured against losses caused by the specific Perils.

How Insurance Works?

Insurance works on the concept of pooling client’s risks. Insurance Companies collect Insurance Premiums from the Insureds (Policyholders) and the companies in turn promise to reimburse the Insureds in case of losses suffered by them on account of certain specified perils. Insurance is thus an arrangement to spread the loss caused by a particular risk over a pool of people who are exposed to that particular risk. The Insurance Companies act as an intermediary to bring a group of people exposed to a common risk together.

Consider an example of a factory owner who is exposed to the risk of fire damage to his factory. A Fire Accident to the factory would mean losses of Crores of Rupees because of damage to plant and machinery, inventory, buildings etc. Thus, a factory owner would take preventive measures to secure his factory from fire accidents. Additionally, the Factory Owner will also secure himself by purchasing a Fire Insurance Policy. The Insurance Policy will reimburse the Policyholder for any damage to the insured assets because of Fire and Allied Perils.

By purchasing an insurance policy, the factory owner secures himself against the risk of damage to the factory because of a fire accident.

What are the Benefits of Insurance?

Insurance provides protection against unexpected financial losses. Insurance protects you and your assets from which you derive benefits.

The Benefits of Insurance are as follows:

Provides Protection

Insurance provides protection to the Insured against unforeseen accidents. The Policy provides reimbursement for damage to Insured assets from which you derive financial benefits. The compensation received allows the Policyholder to reinstate damaged assets.

Manage Uncertainty of Cash Flows

Insurance helps to manage uncertainty of cash flows as it provides compensation whenever losses happen due to insured perils. This reduces the uncertainty for insured party as he does not have to pay out of his own pocket to reinstate damaged assets.

Risk Management

Another important benefit of Insurance is that Insurance Companies incentivise risk control measures to protect the assets by providing discounts in premiums.

Efficient use of Resources

Another benefit of Insurance is that it promotes efficient use of resources as the Insured need not set aside a large amount of resources to pay for damages due to accidents. The Insured can deploy the money elsewhere.

History of Insurance

The History of Insurance is as old as Human Existence. Some of the milestones related to Insurance are listed below:

  1. Over 5000 years ago, Chinese Traders used Insurance as a preventive measure against Piracy by distributing the cargo to be transported among several ships so that if one ship got lost or captured by pirates, the traders suffered only a partial loss.
  2. The First Written Insurance Policy dates to 1750 B.C when Babylonian Traders carved the Code of Hammurabi into a stone monument and clay tablets. The Hammurabi Code was one of the first forms of written laws of Insurance where the ship’s cargo could be pledged for a loan and the repayment of the loan was contingent upon the ship reaching its destination safely. The understanding was that if the goods reached safely, and the goods were sold, the merchant would return the loan to the financier with interest. But if the ship sank or caught fire and the cargo was destroyed, the merchant would not pay back the loan amount. So, in essence, the Interest being charged was actually an Insurance Premium.
  3. In 1666, the Great Fire of London destroyed more than 13000 houses. In response, the First Fire Insurance Company was started in 1680.

History of Insurance in India

  1. Insurance began formally in India in the 18th The year 1818 saw the start of life insurance in India when Oriental Life Insurance Company was established in Kolkata.
  2. The year 1850 saw the establishment of first non-life insurance company, Triton Insurance Company Limited in Kolkata by the British.
  3. The Year 1870 saw the enactment of British Insurance Act
  4. Bombay Mutual and Oriental started in Mumbai in the year 1871 and 1874 respectively.
  5. The Life Insurance Companies Act, 1912 was enacted as a first statutory measure to regulate life insurance business.
  6. Insurance Act 1938 was enacted to control the activities of the insurance companies.
  7. Life Insurance Corporation of India came into existence in the year 1956.
  8. General Insurance Council was formed in the year 1957 which formed a code of conduct for ensuring fair conduct and sound business practices.
  9. The Insurance Act was amended in 1968 to regulate and set minimum solvency margins. The Tarriff Advisory Committee was also set up.
  10. The General Insurance Business was nationalised with effect from 1st Jan 1973, where 107 insurance companies were amalgamated and grouped into 4 companies, namely, National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. 
  11. The General Insurance Corporation of India was incorporated as a company in 1971 and started operations on 1st Jan 1973
  12. Insurance Regulatory and Development Authority of India (IRDA) was incorporated as a statutory body in April 2000 to regulate and develop the insurance industry.
  13. The IRDA opened up the Insurance Industry in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938.

Insurance Act, 1938

Insurance Act, 1938 was a law passed in the year 1938 in India to regulate the Insurance Sector. Prior to the Insurance Act, 1938, only Marine Insurance Act of 1906 was applicable to Marine Insurance in India while for other Insurance, the British Common Law applied.

The Insurance Act, 1938 provides power to IRDA to frame regulations for supervision of entities operating in Insurance Sector in India. The Insurance Act 1938 lays down the organisations which are allowed to operate Insurance Business in India.

The Insurance Act, 1938 also lists down the duties of Insurance Companies such as maintaining a register of policies, claims and agents.

What are the Types of Insurance?

Life Insurance and General Insurance are 2 major types of insurance in India.

Life Insurance

Life Insurance insures the life of human beings. Life Insurance insures the human capital or the earning capacity of the Insured Person.

The family members benefit from the earnings of the person and the death of the Insured Person through unexpected events means that the people dependent on the Insured Person lose out on the benefits. A Life Insurance Policy will provide assistance to the dependents of the Insured Person by providing compensation in case of the death of the Insured Person.

General Insurance

General Insurance deals with non-human assets such as factories, cars, cargo etc. General Insurance is also known as Property and Casualty Insurance in some countries.

Various types of General Insurance are as follows:

  1. Fire Insurance provides compensation to the Policyholder for damage to Insured Assets because of Fire and Allied Perils.
  2. Marine Insurance provides compensation to the Insured Party for damage to the Cargo whilst in Transit.
  3. Motor Insurance provides compensation to vehicle owner for damage to the vehicle in case of accidents.
  4. Health Insurance provides compensation to the Policyholder for hospitalisation expenses incurred for treatment of injuries or illnesses.

Final Take

The importance of insurance cannot be understated. It provides assistance and compensation exactly at the time you need it. The compensation allows you to recover from a setback.

IF you have any queries regarding insurance, feel free to reach out to us at 📧 support@qian.co.in or call us on 📞 022-35134695 We would be glad to assist you.




Insurance Act, 1938


List of All Posts In this Insurance Blog


Liability Insurances

Commercial General Liability Insurance Product Liability Insurance Trade Credit Insurance Policy Public Liability Public Liability Insurance (Act) Policy Directors and Officers Liability Cyber Liability Insurance Policy

Commercial Insurances

Standard Fire and Special Perils Insurance Fire Loss of Profit Insurance Keyman Insurance Policy Factory and Warehouse Insurance Policy Contractor's All Risk Insurance Erection All Risk Insurance Industrial All Risk Insurance Policy Machinery Breakdown Insurance Policy Surety Bonds Insurance

Professional Insurances

Architects' Professional Indemnity Doctors' Professional Indemnity Insurance Media Liability Insurance Jeweller's Block Insurance

Marine Insurance

Marine Cargo Insurance Inland Transit Insurance Shipping Container Insurance

Get a Free Quote