The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expect to get some benefits from it. It is a benefit because it meets some of his needs. The benefit may be an income or in some other form. In the case of a factory or a cow, the product generated by it is sold and income is generated. In the case of a motor car, it provides comfort ans convenience in transportation. There is no direct income. Both are assets and provide benefits.

Every asset is expected to last for a certain period of time during which it will provide the benefits. After that, the benefits may not be available. There is as life time for a machine in a factory or a cow or a motor car. None of them will last for ever. The owner is aware of this and he can so manage his affairs that by the end of period of life time, a substitute is made available. Thus, he makes sure that the benefits is not lost. However, the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it incapable or giving the benefits. Insurance is a mechanism that helps to reduce the effects of such adverse situations. It promises to pay to the owner or beneficiary of the asset, a certain sum if the loss occurs.

Life History of Insurance – insurance has been known exist in some form or other since 3000BC. The Chinese traders, traveling treacherous river rapids would distribute their goods among several vessels, so that the loss from any one vessels being lost, would be partial and shared, and not total. The Babylonian traders would agree to pay additional sums to lenders, as the price for writing off the loans, in case of the shipment being stolen. The inhabitants of Rhodes adopted the principle of ‘general average’, whereby, if goods are shipped together, the owners would bear the losses in proportion, if loss occurs, due to jettisoning during distress. (captains of ships caught in storms, would throw away some of the cargo to reduce the weight and restore balance. Such throwing away is called jettisoning) The Greeks had strated benevolent societies in the late 7^th century AD, to take care of the funeral and families of member who died. The friendly societies of England were similarly constituted. The Great Fire of London in 1666, in which more than 13000 houses were lost, gave a boost to insurance and the first fire insurance company, called the Fire Office, was strated in 1680.

The first insurance company was the Bombay Mutual Assurance Society Ltd, formed in 1870 in Mumbai. This was followed by the Bharat Insurance Co. in 1896 in Delhi, the Empire of Indian in 1897 in Mumbai, the United India in Chennai, the National Indian and the Hindustan Cooperative in Kolkata.

Purpose and need of Insurance –

Assets are insured, because they are likely to be destroyed or made non-functional before the expected life time, through accidental occurrences. Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are perils. If such perils can cause damage to the asset, we say that the asset is exposed to that risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the cost of the building, the contents in it and the extent of damage.

Another classification is between Pure risks and Speculative risks. The latter are in the nature of betting of gambling where the risk is, to some extent, under the control of the person concerned, while a pure risk is not so. It is more in the nature of an Act of God. Insurance deals with only pure risks and not speculative risks. This point will be elaborated later, in the chapter on the principles of the Life insurance.