What is insurance and how does insurance company work?
I want to know what is the exact meaning of insurance. It covers what and where it can be applicable. Nowadays we hear that insurance almost applicable to everything like property, human and health as well as any vehicles. How does a company offering insurance work? How much we get back money after insurance period is over? Where they invest our money?
Author: Manoj Chaurasia 24 Sep 2012 Member Level: Gold Points. 15 ( Rs 12) Voting Score: 0
Insurance in dictionary term means protection against any risk of contingent event or uncertain loss. The risk of loss is transferred from one entity to another entity in exchange of payment.
Now insurance can be broadly classified in two categories :
1. General insurance and
2. Life insurance(assurance).
General insurance deals with insurance of non living things or you can say, all the things except life. Like fire insurance, marine insurance, theft and burglary, motor vehicle insurance, any property or assets, stock, etc.
Life insurance is exactly not insurance but assurance, because life cannot be insured for the simple reason that you cannot measure the worth of life in terms of money. Life of priceless. It is for the same reason it is actually assured and not insured. You decide the cover for your life and accordingly pay the premium.
Now coming to the working of Insurance companies.
Every insurance companies has to bring in capital which counts in crores or for clarity sake it is around Rs.200 crores. A company less than this much of investment cannot form an insurance company. This is just one fact told about the companies that how much is needed to start a company. There are other capital adequacy norms which every insurance company has to fulfill to start working as an insurance company.
Every insurance company has to get registered with Insurance Regulatory Development Authority of India (IRDA) to start its functioning. IRDA controls every insurance company working in India. Guidelines and rules are framed by IRDA and every Insurance company must adhere to it or else its licence to operate will get cancelled.
Every company has to submit its performance reports with IRDA at regular intervals along with its capital adequacy reports for its continuation. These companies are also subject to regular audits and other inspections and verification by IRDA.
Insurance companies accounts are also a little different from the accounts we generally see in day to day life. Income of these companies is from the investments they make out of the premium collected from us. When seen collectively they accumulate a huge sum from premium which gets invested in Government securities, bonds, projects which offer guaranteed returns as well as the equity market which offers growth but also poses risk of loss of investment.
You can understand the same in this way.
Insurance company collects premium from 100 people with assurance of giving a coverage for the value insured.
Premium is collected from all 100 at regular interval and also invested regularly. There will be a maturity period say 10, 15 or 20 years. For this period they will continue to receive premium from 100 people which will earn them income from the investments they will make. Only 5 or 8 people will come to claim the sum assured in case of any loss or damage and not all of the 100 people who took the policy. So the Insurance company is bound to gain from this investment rather than losing more to claims.
Now when you convert this to crores of people who take policy and pay premium then you can imagine that what is the scale of operation they run on. There are at present over a few lakhs of people who took policy and paid premium and later discontinued the policy and even did not bother to claim the money from the company. All the sum is lying with companies which they use for investing and earning. In past whenever an insurance policy was discontinued the premium paid was used to be forfeited and never returned but now days they are kept in a discontinued fund and returned after few years whenever a policy is discontinued.
The example above was related to life insurance company income. Now coming to general insurance where goods and other non-living things are insured. In these kind of insurance there is a guarantee of payment of sum in case of any loss or damage to goods but there is no guarantee of assured return as in case of life insurance policies. Meaning to say that the premium once paid is never returned with any increment. The premium received is the income of the Insurance company and the claims against any damage is the expense.
In case of life insurance the premium paid is returned along with return while in case of general insurance only the value of damage is paid in case of any contingency. The premium paid is not returned. In case there is no damage then there is no return, but only an insurance that in case any damage happens then that can be claimed from the insurance company.
For example, motor vehicle insurance. You pay premium for motor vehicle insurance for 1 year, but during that year your vehicle is completely safe and there is no damage or theft, so you do not get back the premium paid. This premium
becomes income of the insurance company.
You will have to get the policy renewed next year and again pay the premium to keep the policy in force. Now in this year there is an accident and your vehicle is damaged then you can get your vehicle repaired and you can claim that sum from the Insurance company for the damage as policy of insurance was in force.
Hope the explanation gave you an insight to insurance in general.
I would say that there are lots of Insurance companies that are doing very good in India. I can explain the process of how the Insurance company works to earn such a huge amount of fund.
Say if there are some 100 people in a region who have invested in the Insurance company that is doing well and are paying some premium worth 2000 per month and the payment on maturity of 10 years is something like 500000. You may wonder how a company can pay such huge amount for such a small investment(2000*12*10= 240000) but actually the thing is something different.
Investment in Share Market
The insurance company is getting almost 200000 in every month, which it is going to invest in the share market in a diversified manner with the help of professionals and experts. The amount may be doubled or even tripled in a year or two because of the investment in share market and in case of some 10 years it would certainly be somewhere like 400% or even more. Not only this the Insurance company would get lots of investors who are investing in the companies then and there.
In case of Life Insurance payment only for the affected
In the case of Life insurance the insurance company is liable to pay only for certain people who are affected from a lot of say some 100's of people. The percentage of people getting paid from the Insurance company may be very less when compared to the number of investments. Say some 10 out of the 100 as per the example. Hence the company is earning some 2,00,000 per month and the payment is to be made only after a year by the insurance company as per the norms and within this period it would earn almost 20,00,000. Even after the period of one year The insurance company would pay for the affected alone and the money is earned in lakhs each year. If this is the case with only 100 people then you can think about the performance of the insurance companies that are having lakhs and lakhs of customers to them.
I would tell that Insurance companies are the one's that are really performing well and are adding good contributions to the economy of our country.
Some of the best performing Insurance companies as of now that are doing well in Stock market also are Birla Sunlife Insurance, Kotak Mahindra, Life Insurance company, etc.
The meaning of Insurance is," Insurance is one kind of transfer of contingent loss or risk from one entity to another for some consideration or payment." That means everywhere and every place there is uncertainty and risk is involved for example you want to purchase vehicle – there is risk of accident, you want to transfer your business goods from one place to another – there is risk of destroy in accident, you have trading goods in godown then there is risk of fire and theft etc. All these risk are uncertain and unpredictable but if this will happen it will cause huge amount of loss to a normal person. So that to avoid this risk of loss there is fundamental of insurance.
Insurance covers everything and it is applicable to everywhere. That mean, you can take insurance of everything like medical insurance, vehicle insurance, fire insurance, transport insurance, life insurance, insurance of animal etc.
Now a day insurance is applicable everywhere and this is necessary to be applicable everywhere if you know the importance of it. And in some places it is mandatory
Every insurance company works on one simple fundamental. Yes there is uncertainty and risk but practically how many times it happens? Let's take one simple example that there are 1000 vehicle owner in one city and out of them 500 take vehicle insurance of their vehicle. Now insurance company will charge premium from all 500 insurance holder for insurance and give them promise to pay loss of vehicle if any accident will placed. Let's assume they charge Rs.1000 from every insurance holder then what would be total amount collected by company 1000*500=500000.And now you can understand that every vehicle will not going to face accident. Out of 500 hardly 10 or 20 faced accident and they will claim compensation, company will pay out of what it has collected. Company has practice to invest the money if premium in different investment plan according to their policy and also earn return on it.
After insurance period over there is refund in only life insurance policy and other such kind of policy and that will be policy amount. In fire insurance, transport insurance, vehicle insurance there is no kind of refund is available after insurance period is over.
All insurance company has their different policy to invest money of policy but there is restriction on them by law to deposit sum of amount with RBI for security purpose and for public interest.Source: www.indiastudychannel.com