Chapter: I

Introduction

Insurance is a mechanism that ensures an individual to thrive on adverse

consequences by compensating the individual, his/her loss financially. Insurance
may be described as a social device to reduce or eliminate loss to life and property.
Under the plan of insurance, a large number of people associate themselves by
sharing risks attached to individuals. The risks, which can be insured against,
include fire, the perils of sea, death and accidents and burglary. Any risk
contingent upon these may be insured against at a premium commensurate with the
risk involved. Thus collective bearing of risk is insurance.

In the words of John Magee, Insurance is a plan by which large number of

people associate themselves and transfer to the shoulders of all, risks that attach
to individuals.”

Insurance is a financial service for collecting the savings of the public and
providing them with risk coverage. People exposed to same kind of risk are pooled
together. People facing the same risks contribute to a common fund. In case, any
individual who is part of the pool suffers a loss, he is compensated from the
common fund. It also provides capital to the society as the funds accumulated are
invested in productive heads.
 “Insurance is a co-operative device to spread the loss caused by a particular
risk over a number of persons, who are exposed to it and who agree to insure
themselves against risk”

In the words of justice Tindall, “Insurance is a contract in which a sum of

money is paid to the assured as consideration of insurer’s incurring the risk of
paying a large sum a given contingency.”

Life Insurance, assumption by an insuring organization of the risk of death of a

policyholder. Unlike loss in insurance on property, loss in life insurance is certain
to occur and total. The element of uncertainty is when death will occur. Mortality
is subject to the laws of probability, however, and life-insurance premiums can be
calculated from mortality tables, which indicate the average number of people in
each age and gender group that will die each year. A person trained to make such
calculations, known as an actuary, determines the amount of premiums to be
collected yearly from each group in order for the principal and its earned interest to
equal the benefits to be paid to the policyholder’s beneficiaries. The principal
payment required annually constitutes the net premium.

Example: in a town, there are 2000 persons who are aged 60 and are healthy. It is
expected that of these 20 persons may die during the year. If the economic value of
the loss suffered by the family of each dying person were taken to be Rs. 50,000,
the total loss would work out to Rs.10, 00, 000. If each person of the group
contributes Rs. 500 a year, the common fund would be Rs. 10, 00,000. This would
be enough to pay Rs. 50,000 to the family of each of the 20 dying persons. Thus
the risks in case of 20 persons are shared by 2000 persons.
 In the words of D.S.Hansell, “Insurance may be defined as a social device
providing financial compensation for the effects of misfortune, the payment
being made from the acclimated contributions of all parties participating in the
scheme.”

In a layman's words, insurance means, ‘a guard against pecuniary loss arising on

the happening of an unforeseen event’. In developing economies, the insurance
sector still holds a lot of potential which can be tapped. Majority of the people in
the developing countries remains unaware of the functions and benefits of
insurance and it is for this reason that the insurance sector is still to grow.
 Insurance as a service

The function of insurance is to protect you against losses you cannot afford.
Transferring the risks of a person, business, or organization -- (the insured) -- to an
insurance company, or “insurer” does this. The insurer then reimburses the insured
for “covered" losses - i.e., those losses it pays for under the policy's terms.

As the insurance consumer, you pay an amount of money, called a premium, to

the insurer to transfer the risk. The insurer pools all its premiums into a large fund,
and when a policyholder has a loss, the insurer draws funds from the pool to pay
for the loss. Life is full of unexpected events that can create large financial losses.
For example, whenever you drive, it is possible that you will have a costly
accident. Risks affect you by causing worry about potential loss and how to deal
with the consequences. Insurance reduces anxiety over a possible loss and absorbs
the financial brunt of its consequences. However, while insurance coverage is
essential, how much and what type of insurance people need differ for every
individual. You must decide how much risk you are willing to tolerate without
insurance. For example, benefits for disability policies typically begin after a
waiting period of one to six months. Therefore, you should ensure that you have
some form of coverage or a financial resource before the policy period begins.
 Characteristics of Insurance

1. Sharing of Risk:
Insurance is a device to share the financial losses which might befall on an
individual or his family on the happening of a specified event. The event may be
death of a bread-winner to the family in the case of life insurance, marine-perils in
marine insurance, fire in fire insurance and other certain events in general
insurance, e.g., theft in burglary insurance, accident in motor insurance, etc. The
loss arising nom these events if insured are shared by all the insured in the form of
premium.

2. Co-operative Device:

The most important feature of every insurance plan is the co-operation of large
number of persons who, in effect, agree to share the financial loss arising due to a
particular risk which is insured. Such a group of persons may be brought together
voluntarily or through publicity or through solicitation of the agents.

An insurer would be unable to compensate all the losses from his own capital. So,
by insuring or underwriting a large number of persons, he is able to pay the amount
of loss. Like all cooperative devices, there is no compulsion here on anybody to
purchase the insurance policy.

3. Value of Risk:

The risk is evaluated before insuring to charge the amount of share of an insured,
herein called, consideration or premium. There are several methods of evaluation
of risks. If there is expectation of more loss, higher premium may be charged. So,
the probability of loss is calculated at the time of insurance.
4. Payment at Contingency:

The payment is made at a certain contingency insured. If the contingency occurs,

payment is made. Since the life insurance contract is a contract of certainty,
because the contingency, the death or the expiry of term, will certainly occur, the
payment is certain. In other insurance contracts, the contingency is the fire or the
marine perils etc., may or may not occur. So, if the contingency occurs, payment is
made, otherwise no amount is given to the policy-holder.

5. Amount of Payment:

The amount of payment depends upon the value of loss occurred due to the
particular insured risk provided insurance is there up to that amount. In life
insurance, the purpose is not to make good the financial loss suffered. The insurer
promises to pay a fixed sum on the happening of an event.

If the event or the contingency takes place, the payment does fall due if the policy
is valid and in force at the time of the event, like property insurance, the
dependents will not be required to prove the occurring of loss and the amount of
loss. It is immaterial in life insurance what was the amount of loss at the time of
contingency. But in the property and general insurances, the amount of loss as well
as the happening of loss, are required to be proved.

6. Large Number of Insured Persons:

To spread the loss immediately, smoothly and cheaply, large number of persons
should be insured. The co-operation of a small number of persons may also be
insurance but it will be limited to smaller area. The cost of insurance to each
member may be higher. So, it may be unmarketable.

Therefore, to make the insurance cheaper, it is essential to insure large number of

persons or property because the lesser would be cost of insurance and so, the lower
would be premium.

7. Insurance is not Charity:

Charity is given without consideration but insurance is not possible without

premium. It provides security and safety to an individual and to the society
although it is a kind of business because in consideration of premium it guarantees
the payment of loss. It is a profession because it provides adequate sources at the
time of disasters only by charging a nominal premium for the service.
 Functions of Insurance

Insurers provide insurance policies, which are legally binding contracts for
which the policy holder pays insurance premium. Under an insurance contract,
insurance companies promise to pay specified sum contingent on the occurrence of
future events. Based upon this, the functions of insurance may be discussed as
follows:

 Certainty:
Insurance provides certainty of payment for the risk of loss. There are
uncertainty of happening of time and amount of loss. Insurance removes all
these uncertainty of happening of time and amount of loss. Insurance
removes all these uncertainty and the assured is given certainty of payment
of loss. The insurer charges premium for providing the said certainty.

 Protection:
The main function of the insurance is to provide protection against the
probable chances of loss. The insurance guarantees the payment of loss and
thus protects the assured from sufferings.

 Risk Sharing:
When risk takes place, the loss is shared by all the persons who are
exposed to the risk. The share is obtained from each and every insured in the
shape of premium without which the insurer does not guarantee protection.
 Assists in Capital Formulation:
The insurance provides capital to the society. The scarcity of capital
of the society is minimized to greater extent with the help of investment of
insurance.

 Prevention of Loss:
The insurance companies assist financially to the health organization,
fire brigade, educational institutions, and other organization, which are
engaged in preventing the losses of the
masses from death or damages. The insurance joins hands with these
institutions in preventing the losses of the society because the reduction in
loss causes lesser payment to the end so more saving possible which will
assist in reducing the premium. Lesser premium invites more business and
more causes lesser share to the assured. The primary function of insurance is
to act as a risk transfer mechanism. Under this function of insurance, an
individual can exchange his uncertainty for certainty.
 Types of Insurance

Following chart explain types of insurance:

Kinds of Insurance

Life Insurance General Insurance

Marine Insurance Fire Insurance Miscellaneous

Insurance

Automobile Cattle Crop Machinery Theft Film

Insurance Insurance Insurance Insurance Insurance Insurance

At one time, we in India had no option but the nationalized insurance

companies like LIC, GIC, etc. Now several private players, often with foreign tie-
ups, are entering the fray. There are now several companies selling any one type of
insurance, each with its own price structures, coverage, and policy exclusions.
Insurance Marketing

The term Insurance Marketing refers to the marketing of insurance services

with the aim to create customer and generate profit through customer satisfaction.
The insurance marketing focuses on the formulation of an ideal mix for insurance
business so that the insurance organization survives and thrives in the right
perspective.

The Insurance business deals in selling services and therefore due weight
age in the formulation of marketing mix for the insurance business is needed. The
marketing mix includes sub-mixes of marketing such as the people, the process,
and the physical attraction.

The public sector insurance organization have not been formulating and
innovating the marketing mix to cater to the changing needs and requirements and
increasing level of satisfaction of the users.

Majority of the policy-holders are dissatisfied with service-profile and they

often complain regarding the detonating quality of services. Due to this the foreign
insurance companies and private insurance players are snatching away the business
of the public sector insurance organization.
Meaning of Service

A service is an act or performance offered by one party to another. Although

the process may be tied to a physical product, the performance is essentially
intangible and does not normally result in ownership of any of the factors of
production.

Services are those separately identifiable, essentially intangible activities

which provide want-satisfaction, and that are not necessarily tied to the sale of a
product or another service. To produce a service may or may not require the use of
tangible goods. Services include all economic activities whose output is not a
physical product or construction, is generally consumes at the time it is produced,
provides added value in forms {such as convenience, amusement, comfort or
health} that are essentially intangible concerns of its first purchaser.

As it is said that,

“The fruit of SILENCE is Prayer,

The fruit Of PRAYER is Faith,
The fruit of FAITH is Love,
The fruit of LOVE is Service
The fruit of SERVICE is Peace”.
Insurance Marketing Concept

The term insurance marketing refers to the marketing of insurance services

with the motto of customer orientation and profit generation. A fair blending of
profit generation and customer satisfaction gives way to development and
expansion. The insurance marketing focuses on the formulation of an ideal mix for
the insurance business so that the insurance organisations survive and thrive in
right perspective. The organisations can successfully increase the market share,
maximise the profitability and keep on the process of development with the help of
marketing.

In Indian perspective where rural orientation needs a prime attention, the

insurance marketing may prove to be a device for combating regional imbalance
by maintaining the sectoral balance. As an investment institution, the rural
development oriented projects make ways for the transformation of rural society. It
is right to mention that the marketing concept in both bank and insurance business
is a matter of recent origin. The marketing concept in the insurance business is
concerned with the expansion of insurance business in the best interest of the
society vis-à-vis the insurance organisation. The selection of risks (product
planning), policy writing (customer service) rating or actuarial (pricing) and
agency management (distribution) – all marketing activities make up an integrated
marketing strategy. We can’t negate that during the yester decades, there have been
considerable developments in the perception of customer servicing firms like
banking and insurance companies. The marketing concept in the insurance
business focuses on the formulation of marketing mix or a control over the whole
marketing activities that make up an integrated marketing strategy.
 In view of the above, we observe the following facts regarding the concepts of
insurance marketing:

 It is a managerial process.

 It is conceptualisation of marketing principles.

 It is a process of formulating the marketing mix.

 It is an advice to make possible customer orientation.

 It is another name for marketing professionally.

 It is even a social process that paves avenues for social transformation.

 It is to make possible product attractiveness.

 It is to energise the process of quality up gradation.

 Users of insurance Service

The formulation of a creative marketing decision is not possible unless we are

well aware of the different categories of users using the services of insurance
organisations. It is natural that different categories of workers are guided by
different considerations. There are two main users of the insurance services, which
can be seen from the figure given below:

User of Insurance Service

Individual Institutional

An individual or an institution, a person or a group of persons availing the

services are termed to be the actual users of the insurance service. On the other
hand the people from both the categories who are not using the services at present
but are willing to use the service are termed as prospects. The professionals
engaged in servicing the insurance organisations bear the responsibility of
understanding the changing level of expectations of the different categories of
users at first and then activating sincere efforts to develop marketing inputs which
energise the transformation process.