What is insurance?
Insurance is a means of protection against financial loss. It is a form of risk management that is primarily used to hedge against the risk of contingent or uncertain loss.
The entity that provides insurance is known as an insurer, insurance company, carrier or underwriter. The person or entity that buys the insurance is called the policyholder, while the person or entity that is covered by the policy is called the insured. Policyholder and insured are often used interchangeably, but they are not necessarily synonymous because coverage can sometimes extend to additional policyholders who did not purchase insurance.
An insurance transaction involves the policyholder assuming a guaranteed, known and relatively small loss in the form of a payment to the insurer (premium) in exchange for the insurer’s promise Furthermore, it is usually something in which the insured has an insurable interest based on ownership, possession or a pre-existing relationship.
The insured receives a contract called an insurance policy that details the terms and circumstances under which the insurer will indemnify the insured or his designated beneficiary or assignee. The amount of money charged by the insurer to the policyholder for the coverage specified in the insurance contract is called the premium.
If the insured suffers damage that is potentially covered by the insurance contract, the insured submits a claim to the insurer for processing by the claims adjuster. Mandatory out-of-pocket payments that are required by the policy before the insurer will pay for the insured event are called deductibles (or deductibles if required by the health insurance policy). An insurer can insure its own risk by taking out collateral, with another insurer agreeing to bear some of the risks, particularly if the primary insurer deems the risk too large to bear.
In insurance, a policy is a contract (generally a standard form contract) between the insurer and the policyholder that determines the claims that the insurer is legally obligated to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for a loss caused by perils covered in the language of the policy.
Insurance policies are designed to meet specific needs and therefore have many features not found in many other types of policies. Because insurance policies are standard forms, they contain standard language that is similar across a number of different types of insurance policies.
The policy is generally an integrated contract, that is, it includes all the forms associated with the agreement between the insured and the insurer.
History of Insurance
Methods for transferring or spreading risk were practiced by Babylonian, Chinese, and Indian traders as early as the 3rd and 2nd millennia BC. Chinese merchants traveling through treacherous river rapids would redistribute their goods among many vessels to limit losses from one vessel capsizing.
Codex Hammurabi Law 238 (c. 1755–1750 BCE) stipulated that a sea captain, shipkeeper, or charterer who saved a ship from total loss was only required to pay the shipowner half of the ship’s value. .
Roman jurist Paulus at the beginning of the crisis of the third century in AD 235 was included on the Lex Rhodia (“Rhodian law”), which expresses the general average principle of marine insurance established on the island of Rhodes from about 1000 to 800 BC as a member of the Doric Hexapolis, probably by the Phoenicians during the proposed Dorian invasion and the emergence of the alleged Sea Peoples during the Greek Dark Ages (c. 1100 – c. 750 ), which led to the spread of the Doric Greek dialect.
The law of general averages is a basic principle that underlies all insurance. In 1816, archaeological excavations at Minya, Egypt (under the Eyalet of the Ottoman Empire) produced a Nerva-Antonine-era tablet from the ruins of the Temple of Antinone in Antinoöpolis, Aegyptus, which prescribed the rules and membership contributions of a funeral.
Bradley (1870–1892 AD), once employed as an actuary at the Mutual Benefit Life Insurance Company, submitted an article to the Journal of the Institute of Actuaries detailing the historical description of a life table of the Severan dynasty compiled by the Roman jurist Ulpian in about 220 AD during the reign of Elagabalus (218–222), which was also included in the Digesta.
Insurance concepts were also found in 3rd century BCE Hindu scriptures such as Dharmasastra, Arthashastra and Manusmriti. The ancient Greeks had maritime loans. Money was advanced against a ship or cargo to be repaid with heavy interest if the voyage prospered.
However, the money would not be repaid at all if the ship was lost, making the interest rate high enough to pay not only for the use of the capital but also for the risk of its loss (fully described by Demosthenes). Loans of this nature have since been common in coastal countries under the name bottomry and respondentia bonds.