Page 83 - Account 10

Insurance

20. Introduction
Human beings are exposed to different
kinds of risks, such as loss of property by fire,
theft, accident, untimely death of persons,
etc. Such types of risks may cause large
financial losses in future and such a loss
blocks the progress of a firm or company.
It is not possible to eliminate the risks or
chances of happening the unfavourable
events but the financial loss resulting from
such uncertainties and risks can be reduced
and recovered. It is insurance, which does so
and protects the persons and firms from such Rastriya Beema Sansthan
a great financial loss.
The concept of insurance can clearly be understood with the help of the following
example. Suppose that, in a village, there are 100 houses having an average price of Rs.
1,00,000. Past experience shows that, average 2 houses catch into fire each year causing a
loss of about Rs. 100,000 around. It is not certain that the particular houses will catch into
fire. So, everybody is exposed to this risk and every family is likely to suffer from a loss
of around Rs. 50,000 each year, which is a big burden for a single family. Therefore, all
the villagers may raise a common fund by collecting Rs. 2000 from each family each year
so that, the two householders who fall under fire can be financially compensated. Thus,
insurance may also be understood as a process of transferring the risks of individual
entities to an association of a large number of people or to a company to compensate or
reduce the financial loss caused by such uncertain and unfavourable happening against
a regular payment of a certain fees called premium. Insurance is a method of transferring
one’s risk to others, who ensure the recovery of a certain financial loss in consideration to
the payment of a certain periodical premium.
Nowadays, insurance has become a business in which the party, doing the business known
as insurance company, promises to indemnify the financial losses caused by certain risk
to a person, who has proposed to insure himself or his property in consideration to certain
premium.
According Encyclopaedia Britannica, “Insurance may be described as a social device whereby
a large number of group of individuals through a system of equitable contributions may reduce or
eliminate certain measurable risks of economic loss common to all members of the group.”
According to Edwin W. Peterson, “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 or ascertainable sum of money on a specified contingency.”
According to Insurance Business Act, 2042, “Insurance can be defined as a contract made by a
person paying certain amount based on estimated life and he or his representative gets the amount
after his death or expiry or policy period.”

82 Aakar’s Office Practice and Accountancy - 10 Financial Institutions 83