With the increase of business activities and the expansion of globalization concept, the risks that are involved in businesses, as well as individuals, have increased dramatically. Insurance can be considered as a method that has been introduced to minimize the impact that the risks can make on a business or an individual.
Insurance is a contract between two parties, represented by a policy with all the terms and conditions related to the insurance agreement. The agreement usually happens between an individual or an entity who wishes to receive financial protection or reimbursement against the losses and the insurance company who wish to provide a cover for loss or damage of a particular asset. The insurance company pools the risks of its clients to make the payments more affordable for the insured party.
Insured and Insurer are the two main parties involved in the insurance agreement.
Insured- Insured is a person or organization that gets the cover from the insurance company
Insurer – Insurer is the insurance company that provides the insurance cover for the insured party
Insurance policies are used as a secure method to reduce the risk against the potential financial losses that may occur as a result of damage to the insured asset or property. The loss can be big or small, yet it should be coved if it is agreed according to the insurance agreement.
History of Insurance
The starting point of the concept of insurance dates back to at least the 18th century B.C. The earliest written insurance policy that has been identified was to belong to ancient times on a Babylonian monument with the code of King Hammurabi carved into it. Hammurabi’s code is considered one of the first examples in the history of written laws.
Apart from that, bottomry contracts were popular in ancient India as well as in Greece. Under the bottomry contract, loans were granted to merchants with the terms that the loan does not have to be repaid if the shipment was lost at the sea. The interest paid for the loan covered the risk of insurance.
In ancient Rome, there were burial societies that paid funeral costs for the contributors and the contributors had to pay monthly dues to the society. In the 15th century, marine insurance became popular due to the high-risk type involved in shipping goods.
From the ancient days, almost all the countries used the insurance concept as a way of reducing the risks they are facing when doing business. Apart from that, insurance became popular among individuals as a method of covering their lives against sicknesses. Apart from that, the death cover also was added to insurance as a way of providing financial protection to loved ones in the cause of one’s death.
Importance of Insurance
Buying insurance helps organizations as well as individuals as a method of reducing the risks they are facing in day-to-day activities. It helps to ensure that the person or the organization is financially secure to face the problems.
Insurance is considered as a way of transferring the risk to another party and make payments for the insurer for taking the risk responsibility. The insured usually has to make the payments as a premium to the insurer throughout the time period of the insurance validity. In return, the insured gets the benefit of receiving compensation from the insurer if the loss or damage mentioned in the insurance contract occurred.
Due to the secured nature of having insurance, some types of insurance are compulsory to have by the law. Motor insurance is one such insurance that is mandatory for motor vehicle owners to have with a minimum cover of the third party.
However, when getting into an insurance agreement, there are several principles of insurance that are relevant to make sure that the insurance does not help any party to make a profit from the loss or damage to the asset.