RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Rajasthan Board RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

  • At present time, every person, industry and company is prone to risk. Nobody wants to bear risk.
  • Everyone, from lower class to higher class, politician, labourer, farmer, industrialist, actor fears future uncertainties.
  • Every person fears death, every business fears natural calamities and every every employee fears for delays in salaries.
  • A partner of firm fears the other partner in context to financial security.
  • Traders who trade through sea routes want security from marine accidents and calamities.
  • In ancient time, when people faced adverse situations like financial loss/death, they helped each other with mutual consent.
  • There is a word Yogchhem Rigveda for insurance.
  • There is a discussion about sale and purchase price of particular product, its transportation charge and business risk in Manusmriti.
  • Initially, the need of insurance was required to provide security for goods and life of traders.
  • Today, insurance is needed in every sector.
  • Insurance helps by providing financial cover for future uncertainties, risks and losses.
  • In today’s time, it is not possible to live a carefree life without insurance.
  • Insurance is that tool by which uncertainties become certain.
  • With the help of insurance, security is assured.
  • Principle of Insurance is, “bear the risk of one another mutually.”

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Important Words Related to Insurance

  1. Insurance agent : An individual or organisation who promises to pay the compensation to the insurer.
  2. insured : Second party in an insurance contract who is the owner of insurance subject matter or who is the beneficiary of insurance subject matter. Insured can be in the form of individual, a firm or an organisation. He pays premium to the insurance agent.
  3. Premium : It is the amount paid by the insured to the insurance agent in consideration to the insurance contract.
  4. Content of insurance : The life or property which is insured is known as content of insurance.
  5. Short insurance : When property is insured for less than its price, it is known as short insurance.
  6. Half insurance : When property is insured for more than its price it is known as half insurance.
  7. Re insurance: When any insurance company insures the risk from other insurance company to minimise the risk, it is known as Re insurance.
  8. Dual insurance : When an insured gets insured for the same content of insurance from more than one insurance company, it is known as dual insurance.
  9. Insurance form: Insurance form is a written document by which an insurance contract is done between two parties-insurer and insurance agent.
  10. Time bound insurance: It is a type of insurance in which, if the insurer fails to pay the premium in time he/she loses all rights of insurance.
  11. Assurance : This word is used in those contracts in which the liability of the insurance company is fixed. Mostly assurance is used for life insurances.
  12. Insurance : This word is used in those contracts in which there is risk of loss but it is not certain that the loss will occur. It is mostly used in general (fire, marine) insurance.
  13. Risk : Any type of loss, uncertainty, destruction or accident is known as risk.
  14. Insurance hazards : Those factors which create losses in special situations for the content of insurance are known as insurance hazards.

Meaning and Definitions of Insurance

Generally, the meaning of insurance is in context to providing financial cover from future uncertainites and losses. Insurance has been defined by different experts from different perspectives. Experts with legal perspectives have defined insurance as a contract. For the convenience of study, insurance can be classified into the following three categories :

  1. General definition
  2. Functional definition
  3. Contractual definition

1. General definition : According to Sir William Beveridge, “The collective bearing of risk is insurance.” According to this definition, an individual cannot bear the risk alone. Bearing the risk mutually is the function of insurance.

According to John Magee, “Insurance is a plan by which large number of people associate themselves and transfer to their shoulders all risk that is attached to individuals.”

According to Thomas, “Insurance is a provision which a prudent man makes for the loss or inevitable contingencies of loss or misfortune.”

Therefore, insurance is a social system in which losses and risks together are transferred from the individual to the groups. It is a collective bearing of risk.

2. Functional definition : These definitions are economic or business-related, since they make clear how insurance acts as a device for providing financial compensation against risk or misfortune.

According to Reigal & Miller, “Insurance is a social device whereby the uncertain risks of individuals may be combined in groups and thus made more certain. Small periodic contributions are made by the individuals providing a fund, out of which, those who suffer losses may be reimbursed.”

On the basis of these definitions, we can say that insurance is a social solution in which huge number of people are organised for getting security from future losses or uncertainties by paying premiums, which forms the fund from which payments can be made for losses.

3. Contractual definition : These definitions consider insurance as a contract to indemnify the losses on occurrence of certain contingency in future.

According to Justice Tindall, “Insurance is a contract in which a sum of money is paid as premium as consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.”

According to Reigel & Miller, “In its legal aspects, it is a contract in which the insurer agrees to make good any financial loss, the insured may suffer within the scope of contract.”

According to E. W. Patterson, “Insurance is a contract by which one party, for a compensation called the premium, assumes particular risks of the other party and promises to pay him or his nominee a certain sum of money on a specified contingency.”

On the basis of all the above definitions, it can be said that insurance is a contract between two parties. One is the insurance agent and other is the insured. They agreed upon the content of insurance, insurer pays a premium to insurance agent and the agent is liable for

paying the agreed amount on future losses. Therefore, insurance is a social system of bearing risk together and compensating the victim from the funds created from the accumulated premiums.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Characteristics or Nature of Insurance

Following are the characteristics of Insurance :

  1. Protection against risk: Insurance provides protection against the risk involved in life, material and property. It is a device to mitigate the loss from the risks and not to eliminate the risks.
  2. Spreading of risk : Insurance is a plan which spreads the risks and losses of few people among a large number of people.
  3. Cooperative device: Insurance is based on the principle of cooperation : one for all and all for one. Groups of people create funds by paying premiums and help the members to compensate for losses from those funds.
  4. Wider scope : Field of insurance is wider in nature. It covers cattle insurance, crop insurance, farming insurance, medical insurance, vehicle insurance, along with traditional insurance like life, fire, marine and theft insurance.
  5. Insurance of pure risks only : There are 2 types of risks – pure risk & speculated risk. In pure risk-loss is definite, like loss by theft, fire, etc. Speculated risk is where loss is ^ uncertain; like gambling. Insurance helps in safeguarding the loss due to pure risk.
  6. Regulated under the law: The government of every country enacts the laws governing insurance businesses so as to regulate and control its activities for the interest of the people. In India, it is regulated by IRDA.
  7. Evaluation of risk : For the purpose of ascertaining the insurance premium, the volume of risk is evaluated, which forms the basis of an insurance contract. Higher the risk, higher will be the premium charged by the insurance companies.
  8. Insurance is not a charity: Charity is paid without consideration, but in the case of insurance, premium is paid to the insurer in consideration of future payment. Insurance is an economic activity done with an objective of some economic gain.
  9. Not against social welfare: Insurance cannot be done for activities which are against society, for example theft, smuggling, kidnapping and grabbing property.
  10. Not a gambling act: Insurance is not a gambling act. Gambling is illegal which provides gain to one party and loss to the other. Insurance is a valid contract to indemnify against financial losses.
  11. Other features: Insurance is based upon certain principles and under constitutional set up. It is based on mutual faith.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Scope and Kind of Insurance

It is believed that, insurance originated in the thirteenth century in India. If we talk about origin and development of insurance, we find reference of marine insurance.

Therefore, marine insurance is the oldest form of insurance, followed by life insurance, fire insurance and other types of insurance. Today, different types of insurance are available according to the needs and types of risk. For the convenience of study, we can classify insurance on the following basis :

  1. Classification on the basis of nature of insurance.
  2. Classification on the basis of business.
  3. Classification on the basis of risk of insurance.

On the basis of nature of insurance, there are five types of insurance :

  1. Life insurance
  2. Fire insurance
  3. Marine insurance
  4. Social insurance
  5. Miscellaneous insurance.

1. Life insurance : Life insurance may be defined as a contract in which the insurer, against consideration of certain premium, which is either in lumpsum or by other periodical payments, agrees to pay the assured or to the person for whose benefit the policy is taken, the assured sum of money on the happening of a specified event, contingent on human life. In the contract of life insurance, unlike other insurances, insurable interest has only to be proved at the date of contract and not necessarly at the time when the policy is due.

If the insured dies before the policy matures, then his nominee is not required to pay further premium and gets the right to obtain claim of insured amount on behalf of the insured. In life insurance, the elements of indemnity as well as investment both are present. In India, alongwith LIC, some private companies like Kotak Mahindra, Bajaj Allianz and ICICI Prudential are also issuing life insurance policies to the assured.

2. Fire insurance: A fire insurance is a contract to indemnify the insured for destruction of or damage to property caused by fire. The insurer undertakes to pay the amount of the insured loss, subject to the maximum amount stated in the policy. Fire insurance is essentially a contract of indemnity not against the accident, but against the loss caused by the accident.

The insurable interest in the subject matter must be present both at the time of tenure of the policy and at the time of loss, subject to the maximum limit of sum assured. In modern days, fire insurance covers areas such as loss by fire, lightening, explosion, implosion, aircraft damage, riot, strike, malicious terrorism, storm, cyclone, tempest, tornado, flood, etc.

3. Marine insurance : It is an insurance contract to indemnify against loss arising from certain perils and marine risks, to which shipment, merchandise and other interest in maritime adventure may be exposed during a certain voyage or a certain period of time.

Marine insurance involves different types of insurance related to ship, cargo and freight namely, single vessel policy, fleet policy, floating policy, freight policy, currency policy, ship construction policy, valued policy, etc.

4. Social insurance: Social insurance has been developed to provide economic security to weaker sections of the society who are unable to pay the premium for adequate insurance. Insurance which comes under this category include unemployment, sickness, accidental death, old age, pregnancy and death.

National Labour Commission defines social insurance as a plan which provides the amount as profit out of the accumulated fund contributed by insured, service provider and government, rightfully to low income groups.

In this way, social insurance is a scheme of providing economic and social security to the insured against unemployment, sickness and sudden accident, with an objective that they can maintain their living standard out of a common fund made for this purpose.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Some important types of social insurance are given below:

Sickness insurance: In this type of insurance, medical benefits and reimbursement of pay during the sickness period are given to the insured person who falls sick. General Insurance Commission has issued mediclaim policies for this purpose.

Death insurance: Economic assistance is given to dependents of the assured in case of death during employment. The employer can transfer his such liability by getting insurance policy for the employees.

Disability insurance : There is a provision for compensation in case of total or partial disability suffered by factory employees due to accident while working in factories. According to Employees Compensation Act, the responsibility to pay compensation vests with the employer. But the employer transfers his liability to the insurer by taking group insurance policy.

Unemployment insurance: In case, an insured person becomes unemployed due to certain specific reasons, he is provided economic support till he gets employment.

Old age insurance: In this type of insurance, the insured or his dependents are paid economic assistance after certain age. This is a plan toprovide assistance to the insured in his old age.

Government is operating different insurance schemes for the poor, daily wage earners, rikshaw pullers, landless labourers, sweepers, craftsmen, etc. with nominal amount of premium.

5. Miscellaneous insurance: The increasing urbanisation, industrialisation, automation, technical development, etc. has given rise to a number of risks or hazards. To provide security against extended and diversified risk, many other types of insurance have also been developed. The important ones among them are :

Motor vehicle insurance : Insurance of buses, trucks, cars, scooters, motor bikes, etc. has been made compulsory so that losses due to accidents can be claimed from the insurance company.

The duration of motor vehicle insurance does not exceed one year. The Insurance company bears the liability of loss to all the three parties, i.e. loss due to damage or destruction of vehicle, any loss to the owner and the loss to third party due to a vehicle.

Personal accident insurance : This insurance is an annual policy which provides compensation in the event of injury, disability or death caused solely by violent, accidental, external and visible events. The policy offers total payment of the fixed sum insured in case of permanent total disability and death, and a specified percentage of sum insured, in case of permanent partial disability.

Burglary insurance : Burglary insurance falls under the category of insurance of property. In case of burglary policy, the loss of damage to household goods and property and personal effects due to thefts, burglary, house breaking and acts of such nature are covered. This policy is usually taken by cinema halls, petrol pumps, hotels, banks and financial institutions.

Cattle insurance : It is an insurance to indemnify against the loss accruing from death of cattle like camels, bulls, sheep, buffaloes, cows, etc. resulting from accident, disease or pregnancy.

Crop insurance : This insurance plan provides financial help to the farmers in the event of crop failure due to drought or flood. This insurance covers all risk of loss or damage relating to production of rice, wheat, millets, oilseeds, pulses, etc.

Other insurance plans: In addition to above, insurance plans are available for safety of jewellery, bullock cart, T.V., laptops, hotel-clients insurance, sports insurance, baggage insurance, beauty insurance, etc.

Crime insurance: This insurance is done to manage the loss resulting from criminal acts such as robbery, burglary, extortion and other forms of theft or other offences with the potential to cause financial ruin. In also covers computer fraud, provides premises’ coverage, transit coverages, depositor’s forgery coverage, etc. to protect a commercial organisation from such losses.

Pradhan Mantri Suraksha Bima Yojna (PMSBY) : It is government-backed insurance accident scheme formally launched by Prime Minister Shri Narendra Modi on 9th May, 2015. It is available for people between 18 to 70 years of age who have bank accounts. It attracts an annual premium of? 12 exclusive of taxes. In case of accidental death or full disability, the payment made to the nominee will be ? 2 Lakh. In case of partial permanent disability, ? 1 lakh is paid through banks.

Pradhan Mantri Jeevan Jyoti Bima Yojna (PMJJBY): It is a scheme for life insurance launched by Prime Minister Shri Narendra Modi in 2015, PMJJBY is available to people between 18 to 50 years of age who have bank accounts. It provides cover of ? 2 lakhs in case of death. Annual premium paid by the memeber is ? 330, which will be debited from the bank account of the individual in a single instalment.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Purpose Function of Insurance

According to Riegal Miller, “Objective of insurance is to minimise the future uncertainties.” Every individual requires insurance for future certainity and for minimising the risk. In today’s world, insurance not only provides security from future uncertainties, but also performs various other jobs which are helpful for the country, the individual and the society.

Objectives of insurance can be divided into three parts :

1. Primary functions:

  • Providing certainty against risk.
  • Providing protection.
  • Risk sharing.
  • Evaluation of risk.
  • Investigation.

2. Secondary functions:

  • Creating awareness and alertness for protection against loss.
  • Providing financial assistance.
  • Contributing towards development of large-scale enterprises.
  • Increase in efficiency.

3. Indirect functions:

  • Promotion of exports.
  • Encouragement to forced savings.
  • Providing social security.
  • Contribution to foreign exchange reserves.
  • Contributes towards rural development programmes.

1. Primary functions: It includes all those functions for which insurance is developed. These are

To provide certainty: Insurance provides certainty of payment for the risk of loss. There are uncertainties of happenings of time and amount of loss. Insurance eliminates these uncertainties and the assured receives payment for loss. The insurer charges premium for providing the certainty.

Provides protection: The second main function of insurance is to provide protection from probable chances of loss. Insurance cannot stop the happening of a risk or event, but it can compensate for losses arising out of it. Through insurance, any person can feel safe from probable chances of loss by getting his property, goods, valuables etc. insured against risks and hazards like natural calamity, theft or robbery. Insurance provides safety and protection to businessmen against risks and other perils.

Risk sharing : Undoustedlv. the risks and hazards related to life, material and property are to be borne by the insureo^but the economic losses arising out of them are spread over a number of persons who are exposed to it and who prepare to insure themselves against such events/risks.

According to John Magee, “Insurance is a plan by which large number of people associate themselves and transfer to their shoulders all the risks attached to individuals.” Therefore, it is said, “insurance is collective bearing of risk.”

Evaluation of risk: Insu^nce evaluates the volume of risk insured to ascertain the insurance premium which forms the basis of insurance contract. Insurer measures the probability of losses by tonsidering several factors to determine the premium to be paid by insured.

Investigation: The purpose of insurance is to investigate in the area of insurance, so that according to the changed needs or requirements, the insured can change his insurance plans. On the basis of investigation of losses, an insured can make efforts to minimise future risks and losses.

2. Secondary function:

To create alertness for protection against losses: The basic purpose of insurance is to make people aware and conversant with the risk and hazards of the probable losses, so that they may become alert. Insurance companies, from time to time, by method of publicity create awareness among people about the need by medical investigation, prevention of diseases, self precautions, so that such losses can be prevented and mitigated.

In India, “Loss Prevention Association of India” has been established for this purpose. Insurance companies also provide incentives to encourage people to be insured by giving rebate in premium amount to those who have not claimed compensation for the last few years.

To provide financial assistance: Insurance extends credit or financial assistance to industrial and commercial institutioris and to the government for the expansion of economic and infrastructural activities by making available the collected premium amount from the insured people for investment in production channels, which increases the rate of economic growth and development.

To contribute towards development of large-scale enterprises: Insurance has contributed much towards development of infrastructural and large-scale industries by investing in shares and debentures, preventing losses to them by insuring their property, material, etc.

Increases efficiency: Insurance reduces worries and fear before and after losses by providing protection against various risks. Thus, it increases the efficiency of a person, business, society, etc.

3. General functions:

Promotion of exports : Foreign trade involves many risks such as the damage to cargo, loss due to sinking of ships at sea, payment defaults or delay by foreign buyers, etc. But by issuing policies covering the risk of air and marine transport, credit sale of goods and payments, etc. insurance companies help in promoting foreign trade by making it risk free.

Encourage forced savings: One of the purpose of insurance is to create and encourage saving habits. It develops an attitude of savings. In India, taking life insurance is a good method of saving. Tax benefits in premium make it a popular source of investment, thus creating compulsory saving.

To provide social security: Security against premature death and old age sufferings is provided by life insurance. The main objective of insurance is to provide safety and security by compensating for losses due to premature death of the insured. It not only provides security to the dependents, but it compensates to the insured himself in case of disability, sickness, old age, maternity, etc.

Contribution to foreign exchange reserves: In case of foriegn trade, insurance is done at international level. The goods to be exported are insured and the premium on such insured goods is to be paid in foreign currency. Therefore, insurance is an important source of foreign currency and foreign exchange receipts.

Contribution towards rural development/social welfare programmes : Insurance contributes in rural development / social welfare schemes. It does so by insuring old age person, persons suffering from severe illness, crop, cattle, etc.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Need/Importance/Role of Insurance

With increase of risk and uncertainty in human life! industrialisation and technology, the importance of insurance is increasing. In today’s scientific age, we are living under different types of uncertainties, and on the other hand, we are also worried about dangers from uncertainty and for their security. Everyone is surrounded by risks and uncertainties and insurance is the easiest way to overcome these risks. Therefore, the importance of insurance today is not only limited to an individual or family, but its importance is also spread in the country’s every sector, whether small or big.

Today, every person or entrepreneur wants to do business and work without worries. He wants mental peace and health. For this, the only weapon he has for safety from future risks and uncertainties is insurance. Prof. Dinsdale has clarified the importance of insurance by saying, “No one can afford to be without insurance in this world.” The great statesman, Churchill has said in context of insurance, “If things happen according to me I will write on every household door please be insured.”

From all this it is clear that insurance is very important. Insurance not only provides social, economic, physical, mental security, but it also helps in the country’s overall development. For the importance of insurance in commercial sector, Lord Hardwicke has said, “It is not possible to operate business without insurance.”

The significance or utility of insurance can be categorised in the following headings :

  1. Importance from individual point of view.
  2. Importance from social point of view.
  3. Importance from business point of view.
  4. Importance from national point of view.

1. importance from individual point of view:

Insurance provides protection : The major role played by insurance is to provide safety and protection against risks and uncertainties. On the happening of specified event, the insured is protected againsts losses caused. Life insurance provides security against premature death of an individual and also provides security against sickness, old age, etc.

In the even of death of the insured, his dependents can get the claim and get financial security. Fire insurance, marine insurance and miscellanous companies indemnify the insured against the damage or destruction to property, theft, etc. It is clear that insurance provides security and safety against the losses of pure risks in all the fields.

Provides mental peace: Second benefit of insurance is that it reduces worries and fears and provides mental peace to the insured. If the family head has adequate amount of life insurance, he is less likely to worry about the financial security of his dependents in the event of his premature death.

A person insured for long-term disability does not need to worry about the loss of earning, property owner who are insured enjoy greater peace in mind because he knows he is covered if the loss occurs. Reduction of worries and fears give mental peace to the insured. Consequently, his efficiency to work also enhances.

Fosters economic independence: Death or accidents are such instances in which the people become shattered and financially insecure. In the event of death of the earning member, the family members, especially the dependents, face acute problems of subsistence. Insurance is such a means to make oneself self-reliant economically.

Encourages savings: Insurance encourages savings and investment habits. In the words of Regel Miller and Williams, “Insurance creates an environment conductive to savings. In life insurance, the element of protection as well as investment is present.

In it, regular payment of premium is mandatory, so it promotes forcedjsavings.” Nowadays such insurance policies are popular, which encourage the habit of savings with financial security, such as moneyback policy.

Protection to domestic goods from risks: Insurance also provides safety to domestic goods like TV, fridge, car, jewellery, house, etc. against risks and-uncertainties.

Creates awareness among the people : Insurance companies create awareness among the people for the need to protect themselves from the possible risk to property, life and goods. Certain insurance companies charge reduced premium rates for the renewal of policies if the insured has not made any claim for the payment in previous years.

Meeting statutory liabilities: By taking insurance, it becomes easier to meet the statutory liabilites. A third party insurance cover can shift the liability on the third party who caused the loss or injury to any property.

Exemption from tax liability: Insurance is an important way of obtaining tax rebate. The money paid towards insurance premium is deducted from the gross income and this encourages savings and investment. Similary, gift insurance policies enjoy the benefit of tax free premium.

Safety against decree : The money saved towards the payment of premium is totally safe, because the insurance policy cannot be acquired by creditors through any decree obtained from the court in case the insured becomes insolvent. This is possible only against property and not against the policy.

Increases goodwill: Insurance also contributes towards increasing the goodwill of the people. Those having insurance policies are considered to be secure and settled people.

Availability of credit against insurance policy: The insurance companies grant loans to the insured upto certain percentage of the premium money paid, keeping in mind the surrender value of the policy on that date. Such loan facility is given to the insured for his business, domestic purposes, etc.

Investment: Insurance is a contract of indemnity and investment is not the main function of insurance, but it offers benefit of investment. The money paid as premium is an investment and also covers the risk in case of life insurance. Thus, insurance canjpe said to be a source of investment.

2. Importance from social point of view:

Safety and security of family: Insurance brings stability in the life of people in the society. The death of the bread-earner of the family can disturb and ruin the life of his dependents. Life insurance not only provides financial security and safety to a person, but it also protects that family from disintegration.

Distribution of risk : Insurance distributes the risks of a person among a large number of people. That is why it is considered to be a cooperative device of bearing the risks collectively. In words of Reigel & William, “Insurance represents the highest degree of cooperation for mutual benefits.”

Prevention of social evils: Lack of education and economic evils like unemployment induce people to get into evils like theft, dacoity, prostitution and other social evils j Insurance helps a person and his family to become self-sufficient economically, by providing coverage against risk of life, property, etc.

Signifies developed culture: Insurance signifies a progressive and developed social culture. The countries without insurance are said to be the backward ones.

Improves the standard of living of people : Insurance is a means of earning through, and saving, the investment, by transferring the risk. Insurance helps a person to become economically self-sufficient, strong, relieved from economic worries, by insuring against risks and by providing direct employment to a large number of people.

Awareness towards health : By the method of publicity, insurance creates awareness among the people about the need of medicajfihvestigation, prevention of diseases, self precautions and maintaining good health. While taking health insurance policy, medical checkup is compulsory and it proves to be of importance for the insured.

Promotes education: Insurance facilitates and encourages educational opportunities in the society. Insurance policies support education to children. Insurance encourage higher education by providing facility of educational loan.

Development of employment opportunities : Insurance companies provide employment to a large number of people direptly and indirectly. Thousands of people are working in insurance companies as development officers, branch managers, agents, clerks, etc. More than 85,000 people are employed in GIC and 1,50,000 in LIC. The number of agents working in private and government insurance companies are in lakhs.

Fullfilment of social responsibility: Each person in a society has responsibility towards other person in different ways, for example, father has responsibility towards his family, employer towards his workers, producers towards customers, etc. Insurance help the people in the society to successfully meet their economic liabilities and social responsibilities.

Helps in implementation of social security plans: Through insurance, the plans of social security for poor and backward sections of society can be implemented and enforced. In our country, government has started many plans beneficial for poor people. These schemes and plans ensure social security to the weaker and backward sections of society. For example, Pradhan Mantri Jeevan Jyoti Beema Yojna (PMJJBY), Atal Pension Yojna, Pradhan Mantri Suraksha Beema Yojna (PMSBY), etc.

Economic independence : Insurance helps in making the society economically independent. By pooling small savings of the insured and distributing the losses of huge risks among many, insurance makes all the people in society economically self-reliant.

A means of social change : Insurance is an important means of social change. Supporting this statement, “Mehr and Cammack” have aptly said, “Insurance can be an important means of social change. It is a measure of bringing important changes in the mindsets, standard of living, lifestyle, etc. of the people in society.”

3. Importance from business point of view:

Protection from risk : A business is exposed to several risks. There can be risk of theft, damage, etc. to property, goods and profits from natural calamities, by sea perils, by fire, by negligence of human beings, etc. Insurance provides protection from various such risks through indemnifying the insured businessmen against the losses due to the specified event.

Protection to business due to sudden death of the key person: The successful operation and development of a business largely depends on its directors, managers and administrative personnel. Sudden death of such persons badly affect the functioning of the business. Insurance plays an important role by insuring the life of key persons in the business, so that the future of business can be kept protected from uncertainties.

Increases business and industrial efficiency : Insurance provides protection from various kinds of risks and financial security against losses. This reduces the fear and worries of businessmen and promotes mental peace. Therefore, the efficient management of business activities becomes possible. Similarly, by taking group insurance policy for the employees, by taking policy of assets of business, businessmen can remain free from botheration. All this helps in enhancing the efficiency of business.

Increases credit worthiness: Insurance extends credit to industrial and commercial institutions. An entrepreneur can get insurance for his business unit, plant and machinery or permanent assets purchased by him and can get credit easily.

Protects the interest of employees: Insurance provides protection to employees, in case of business losses. They can their jobs, or can be deprived of various benefits like gratuity, bonus, pension, etc. The employer can take different types of insurance policies to protect the interest of the workers and employees.

Easy management of employees welfare scheme and social security schemes: Modern business undertakes a number of employees’ welfare schemes, like industrial housing, extension of credit facility, etc. for which the insurance companies extend financial support for 184 Insurance – Introduction and Important

the purpose of provision of social security. These schemes include payment of pension, super annuation, gratuity, medical benefits, maternity benefits, workers’ compensation plan, etc.

Promotes foreign trade : Import and export trade is usually affected by marine perils, failure to receive payment from foreign buyers and other losses. Insurance helps in the development of foriegn trade by making insurance claims against losses of ships, cargo, vessel, freight and other related risks and uncertainties.

Reduces cost: Insurance enables the manufacturer to sell a product at a lower price because through insurance, he is able to cover many risks of produ ction in exchange for a small premium. In the absence of insurance plans, the business has to bear losses of different nature like fire, riots, strikes, decoity, explosion, theft, accidents, natural calamities, marine losses, etc. All these types of risks are covered by insurance.

Safety against civil liabilities : Industrial houses can get protected against social and civil liabilities by getting insured against losses arising from risks and hazards of poisonous gases, bad contaminated water, etc. which are a result of production process and have bad impact on health of workers and people living in surrounding areas, on the land and crops, etc. As a result of protection against civil liabilities, the local community also cooperates in the smooth running of business operations and trade.

Protection from loss of profits: Alongwith the development of business activities in modern time, Insurance also has extended its role in protecting various industrial and commercial activities. It provides protection against losses arising from temporary shut down of shops or factories, shut down of production for some time. In this way, insurance provides protection from loss of productivity and provides profit to the business.

Financial assistance to industries : All the insurance organisations provide long-term and short-term capital to commercial and industrial organizations. Insurance companies also extend credit facilities to financial institutions that provide long-term credit to business organizations. Therefore, we can say that insurance directly assists in the establishment and development of industries.

Underwriting of shares and debentures : Insurance companies undertake underwriting of new issue of shares and debentures of newly-formed public companies. By subscribing to the shares and debentures of newly formed companies, they resolve their problems of finance and capital.

Contribution to the development of stock market: Investment in stock market securities by the insurance companies has been helpful in creating and promoting good investment, avenues in the country. They not only invest in shares and debentures, but also accept private placement offers, thus making direct investment in the securities issued by various industries and business organisations.

Contribution in management: The insurance companies hold the right to appoint an efficient and expert person as a director in the board of directors of that business organisation which has taken loan from insurance companies. This not only protects the interest of insurance companies, but also helps in keeping the management of business houses very strong and dynamic.

4. Importance from nation point of view :

Encourages national savings : It increases national savings by way of small contribution of people towards insurance premium. Therefore, insurance helps in promoting thrift and saving habits which result in increased national savings.

Helps in economic development of the country : For economic development of the country, huge amount of capital is required. Insurance companies, through their network of branches spread in different parts of the country, accumulate huge amount from the insured people in the form of premium, and the collected amount is made available to the government or is invested in productive channels, which, in turn, accelerates the pace of economic growth and development in the country.

Contribution in development of money market: Insurance companies contribute towards development of money market. The huge amount collected as premium is made available for the development of money market. Availability of funds facilitates the transactions in long term and short-term securities in money market and capital market. Thus, insurance companies contribute towards the development of money market.

Helps to develop the stock exchange : The insurance companies with vast premium funds, and reserves fund, invest in stock market and actively participate in the functioning of stock exchanges. Not only this, by insuring brokers, they ensure stability in the stock market operations.

Promotes research, investigation and innovation : Insurance promotes research, investigation and innovation in the economy. Speculative and pure risk are involved in research and innovation. The entrepreneurs can undertake these activities without any fear by taking the help of insurance.

There are many activities which are risky but are also integral for the development of nation like, discovering new sources of crude oil, gas beneath land and seas, to discover minerals, to do research for inventing new things and new technologies, testing of defence equipments. By limiting and covering the risk, insurance promotes such activities.

Helpful in development of large-scale industries and business houses :
Insurance has been beneficial towards the establishment, development and growth of large scale industries and business houses. Increased credit facilities, increased production and marketing plans, wide channels of distribution bearing industrial and commercial risk are the major means of contribution towards the business from insurance companies.

Increase employment opportunities : Insurance has increased employment opportunities in the country by increasing capital investment in industries, developing service opportunities by promoting small and cottage industries, commercialisation of agriculture, cattle breeding and dairy farming, etc.

Today, lakhs of people are employed in insurance companies as insurance agents, development officers, clerks, etc. Insurance contributes directly and indirectly in removing unemployment and creating employment and job opportunities in the country.

Contributes to development of entrepreneurship : Insurance plays an important role in encouraging the youth for enterpreneurship and self employment. Insurance provides safety against industrial and commercial risks to small scale and medium scale industries, making them more competitive. Financial institutions and banks provide loans to small-scale and medium industries by mortgaging their insurance policies.

Increase productivity : Insurance reduces the risk and by granting safety and security against risks and hazards makes people fearless. Reducing worries, fears, it makes the insured more focused and adventurous in new areas of business growth, innovations, inventions, etc. Businessmen do not fear and hesitate in making huge investments in business ventures. This leads to better utilisation of resources, potential and capacity, giving favourable results for the development of the country’s economy.

Contribution to foreign exchange reserve: Insurance companies have extended their operation in foreign countries and they earn foreign exchange in the form of premium collected from the foreigners who are insured. Therefore, insurence is making direct and indirect contribution in increasing foreign exchange reserves for our country.

Development of the nation: Insurance paves the way for overall development of a nation by contributing towards capital formation, industrialisation, development of capital market, rural and infrastructural development, prevention of social evils, improving standard of living, promoting education, etc.

Contribution in the social upliftment programmes : For social upliftment it is essential to eliminate poverty and economic disparities. Insurance companies are consistently working in this area, contributing towards the economic and social upliftment of weaker and backward sections of the society.

The unorganised sector consists of farmers, labourers, artisans, blacksmiths, workers of brick kilns, craftsmen, sweepers, etc. It also includes self employed persons like petty retailers, mechanics, plumbers, electricians, economically backward people and the poor, etc.

Insurance companies have provided the insurance coverage against sickness, disability, old age, unemployment, retirement from work by issuing social security insurance policies. IRDA has made it compulsory for insurance companies to do compulsory insurance for socially insecured persons as identified by the government. All this is increasing the contribution of insurance in social upliftment.

Possibilities of continuous development: Today, many such insurance policies are issued which continously provide protection from various kinds of risks and uncertainties, thus, helping in the development of various business organisations. Insurance provides protection from loss of profits. It also the helps indemnify the loss of the profits from business functions, e.g. profit insurance, re-establishment insurance, etc.

Contribution towards national income : Insurance countributes towards increasing the national income of the country. It extends financial assistance to set up new industries, in addition to providing employment to a large number of people. The government receives income from business units by way of taxes and duties, etc. and from employees as income tax. Thus, insurance contributes to national income.

Contribution in public welfare: Insurance contributes towards accomplishment of various public welfare works / programmes. Today, the insurance companies in all the countries invest a part of their reserve and funds in public works like education, medical social welfare, social justice, balanced economic development, etc. This helps the government in successful accomplishment of public welfare projects and programmes.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Social Security : Meaning and Definition

The word “Social Security” has different meanings in different countries. Like other socioeconomic concepts, the connotation of the term social security varies from country to country, with varying political ideologies.

In general sense, Social Security refers to protection provided by the society to its members against providential mishaps over which a person has no control.

It is a programme of survivors’ insurance against old age, unemployment, health, disability survivor’s insurance maintained by the government through compulsory payments by specific employer and employee groups or from government budget. Thus, social security is protection against disabilities, sickness, maternity, old age, etc.

According to International Labour Organisation (ILO), “Social security is the security that society furnishes through appropriate organisations against certain risks to which its members are exposed. These risks are essentially contingencies of life which the individual of small means can’t effectively provide by their own ability or foresight alone or even in private combination with his fellows.”

According to William Beveridge, “There are five giants that are stalking the land and that should be tackled. They are want, desire, disease, ignorance, squalor and idleness.”

It is clear from the above analysis of the defintion that Social Security is the protection provided by the society to individuals and households to ensure access to healthcare and to guarantee income security, particularly in cases of old age, unemployment, sickness, inability to do, work, injury, maternity or loss of a bread earner.

We will consider all those plans which are operated through contribution made by any of them :

  1. Contribution by insured himself.
  2. By insured and service provider.
  3. By insured or service provider and government’s contribution.
  4. Union of insured and / or service providers and government’s contribution.

Characteristics of Social Security

  1. It is a collective or group effort to provide security to the society, but the persops getting social security can also make contribution.
  2. This group effort is made by any institution or/and organisation or by the government.
  3. Social security is not a charity.
  4. The objective of social security is to make available a minimum standard of living to the respective person in case of contingency.
  5. It is a way of reducing future worries of a person.
  6. Social security philosophy is based on the concept of social justice and human dignity.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Role of Insurance in Social Security

Security to dependents on sudden death : In the event of the death of a covered insured or as a result of unemployment, injury or any other reason, insurance companies provide financial security to the dependents, survivors of the assured, enabling them to discharge the liabilities after death. In some of the insurance plans, the various dependents of the deceased assured are given complete claim or annuity (pension).

Security against unemployment: In some developed countries, there is a facility of unemployment insurance. When any insured employee is terminated, he gets compensation of an agreed amount for a specified period. This insurance facility is not available in our country.

Provision of income or wealth in old age : Old age insurance is one of the most

important part of national security system and it is designed to ensure that a person receives a regular monthly income in his/her old age. The insurance company can pay the entire amount of insurance in a lump sum or annually. The elderly person can invest it further or can be able to maintain a decent standard and quality of life with this amount.

In this way, insurance provides financial security against old age. In India, insurance companies have issued such schemes like – whole life insurance plan, term life insurance plan, guaranteed life insurance plan for senior citizens. Any of such policies can be selected by the people after assessment of various needs, challenges and their convenience.

Security to dependents with disabilities : Insurance companies issue special policies for life of those parents whose one dependent is basically challenged suffering from disability. Such dependents are nominated in the insurance policy, whereas the insurance coverage is provided to the parent. Therefore in case of death of the parent, the dependent with disability gets the insured amount.

Helpful in case of sickness: Insurance provides economic security in case of various diseases of insured under sickness benefit scheme and extended sickness and enhanced sickness benefits to save the insured from hardships during long-term diseases. These days, such policies are popular in which the serious diseases are added on high rate of premium, and on happening ef such disease, the agreed amount is paid to the insured.

Security in case of accident : Life insurance policies usually contain terms of accident insurance. Under it, an assured by paying extra premium, can get accident insurance, for his life. There are groups as well as individual accident insurance schemes run by companies. In both cases, if the insured dies due to accident, the agreed amount of insurance is paid to his nominee, if the insured gets partial or permanent disability, then a specified sum as per the agreement is paid to him.

Security of professionals: Various professionals like doctors, lawyers, engineers can take insurance against the liabilities of losses due to their unintentional mistakes to remain secured and to avoid any kind of trouble or interruptions in their life.

Security from public liabilities : Insurance companies provide numerous loss prevention insurance plans to those industrial and commercial organisations which perform very risky and hazardous production that may be harmful and dangerous and can cause physical, human loss not only to their own organisation, but also to the public. For such risk and losses, business organisations are held responsible.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Social Security in India through Insurance

There are many plans and schemes prevailing in India providing social security. They can be classified as :

  1. Plans driven by insured’s contribution.
  2. Group insurance.
  3. Group social security insurance plans driven by the contribution of central and state government or nodal agency of the insured.

1. Plans driven by insured’s contribution : In such insurance schemes, the insured himself has to pay the premium for taking financial security for himself and his family. All the private sector insurance companies, alongwith LIC, provide facility of whole life policies, endowment assurance policy, or policy having mixed features to provide protection to the insured. Here, premium is paid by the insured himself or by his parents.

2. Group insurance : These are plans driven by insured, employers or labour union contribution. Some of the insurance plans are in the form of group insurance schemes in which contribution is made by insured as well as the employer. Such schemes operated by LIC are :

  • Group gratuity schemes.
  • Group leave encashment schemes.
  • Group cash accumulation plan.
  • Group credit life insurance.
  • Group super annution cash accumulation plan.
  • Group term assurance plan.

3. Group social security insurance plans driven by contribution of central and state governments or nodal agency of the insured : In India, various social security schemes cover the following types of social insurance : pension, health insurance and medical benefit, disability benefit, maturity benefit, gratuity, etc.

There are joint programmes in collaboration with government and the insured contribution to premium to provide economic security to the economically weaker sections of the society. These plans are operated by LIC. Central government granted ? 100 crore to LIC in 1988-89 to form a ‘Social Security Fund’.

Since 2000, from this fund under one plan, several social security schemes are being implemented for the poor under Janshree Beema Yojna. Janshree Beema Yojna is a group social insurance scheme for the people living below the poverty line and marginally above the poverty line.

Insurance Agent

The evaluation of success of business of an insurer depends on the fact that how popular the insurance company is, and what is its reliability, what all products they offer, and in what volume is the company selling them since when, and other similar questions. As the potential insured and clients are scattered in wide geographical areas, so it becomes inevitable for an insurance company to appoint brokers/middlemen to establish direct contact between the

customers and the insurance company. Therefore, an insurance agent acts as a link between the insurance company and the insured. There is a difference between a general agent and an insurance agent.

Insurance agent is the salesperson of the insurer. An agent is licensed under section 42 of the Insurance Act, 1938, who receives or agrees to receive payment by way of commission or remuneration in consideration of his soliciting or procuring insurance business including business related to the continuance, removal or revival of policies (Sec. 2 (10) of insurance Act, 1938)].

In simple words, we can say that an insurance agent is a licensed representative of the insurer who agrees to work for the insurer in exchange of commission or remuneration. He plays a promotional role.

Who can appoint an agent:

  1. All adults.
  2. All sound-minded people.
  3. Natural guardian or one appointed by the court.
  4. Any corporate body or company.

Who can be an agent: Any person who is authorised to act as such may be an agent. As the agent does make contract on his behalf, it is not necessary that he should have contractual capacity. A minor or a person of unsound mind cannot be an agent. It is, however, in the interest of the principal, that the agent should have the contractual capacity.

Difference between agent and servant

According to the Supreme Court, differences between agent and servant are as follows:

  1. Remuneration of agent is called commission or fees, while servant’s remuneration is called salary.
  2. gent is not a servant while servant can be an agent at any time.
  3. Agent can make conact with third party, while servant cannot.

RBSE Class 12 Business Studies Notes Chapter 13 Insurance-Introduction and Importance

Characteristics of Insurance Agent

Following are the characterstics of an insurance agent:

  1. Insurance company or insurer appoints an agent. He is a person authorised by the insurer to deal in insurance business.
  2. The person who fulfills the requirements as laid down by the Insurance Agents Act, 2000 can become an agent.
  3. An insurance agent can be an individual firm, company, association or cooperative society.
  4. The insurance agent has to obtain license as per rule under Section 42 of Insurance Act, 1938.
  5. It is the duty of the agent to locate the prospective insured and to encourage them for taking insurance.
  6. He gets commission for his work.
  7. His duty involves continuance, renewal or revival of policy of insurance.
  8. The insurance agent has to obtain licence as per rules under Section 42 of Insurance Act, 1938.
  9. Insurance agent cannot appoint any sub-agent on commission.

Qualifications of Insurance Agent

The person applying to obtain the licence to work as insurance agent must have the following qualifications under Insurance Agent Regulation, 2000 :

  1. Must be an Indian citizen.
  2. Must be a major.
  3. Must be of sound mind.
  4. He should not be disqualified by any law court for fraud, misrepresentation, or convicted of some crime, moral turpitude, or any such acts.

Functions of Insurance Agent

The functions of insurance agent as laid down in Regulation 8 of the LIC (Agent) Regulation, 1972 are as follows :

To solicit and procure new business: An agent is bound to obtain certain specificed amount of new business as required under the rules. He should always make efforts in getting new insurance proposals beyond his prescribed limit.

To conserve the present business: In addition to procuring new business, he should ensure the continuity of the policies already issued and prevent them from lapsing on account of default in the payment of premium.

Assist in selection of suitable policy : The agent should give proper guidance and help to the prospects in selection of a suitable policy, keeping in view the needs of the proposer by guiding him.

To enquire into full details of prospects: It is an important duty of the insurance agent to enquire into all requiste information from the prospective insured. This becomes necessary to ascertain the extent of risk.

Inform Agency about the factors which can cause damage to insured: It is the duty of an agent to inform an agency about all the related information which can influance the insurance policy by any means.

Assuring age of an insured : It is a duty of an agent to assure date of birth of an insured at the time of starting the policy. This helps in future settlements.

To motivate the policy holders to pay the premium at time: It is the duty of an agent to inform the insured to pay the premium in time and get benefits of timely payments by avoiding penalties applicable in late payment.

To prevent the policy from lapsing : Agent should inform the disadvantages of policy lapse to the insured.

Inform the insured for making nominees : It is a duty of an agent to make sure nominees column is filled in by the insured. This helps in future settlement of policies without any ambiguity.

To prepare the necessary documents : The proposer has to submit other important documents like birth certificate, medical certificate, etc. The agent can help the proposer by guiding him.

Other important duties of an agent are :

  • Informing about the policy to the insurer.
  • By knowing the requirements of prospects, providing him the best suitable policy.
  • Working hard with honesty.
  • Introducing himself as an insurance agent and if asked show his I.D.
  • If asked by the insured, tell him about the rate of commission.
  • Calculating the amount of premium which is payable by the insured.
  • Explaining the details of insurance application to the prospect.
  • Informing the prospect about the refusal of insurance application by the insurance agency.
  • Following the rules and regulations of Insurance Authority.
  • Providing insurance bond to the insured within 45 days.

Prohibitive functions of an insurance agent :

The important functions from which an insurance agent is prohibited to do certain functions through LIC (Agent) Regulatory Act, 1972 are :

  1. He is prohibited from collecting any fund or accept any risk on behalf of the corporation adversely by his acts.
  2. He is prohibited from depositing any advance instalment of premium on behalf of the proposer or assured from his pocket.
  3. He is prohibited from printing, publishing or circulating any leaflets, booklets, hand bills or advertisements, letter heads, etc. relating to life insurance in any media without prior permission of the divisional manager.
  4. He is prohibited from granting any rebate or commission to any proposer or assured.
  5. He is prohibited from doing the insurance business without holding a valid licence.
  6. He is prohibited from interfering in the matters of other agents.

RBSE Class 12 Business Studies Notes