Difference Between Forwards & Futures (image credit : google)
Difference between Forwards and Futures
Futures are similar to forwards. However, there are certain differences between two. The following are the important points of differences between forwards and futures
Futures
Standardised contracts.
Valuation (or settlement) is done on a daily basis (marked to market basis).
Margins are required (requires guarantee deposits from the parties).
Transaction is done through a clearing house.
Traded in organized stock exchanges (futures exchanges).
Default risk is considerably reduced (there is a margin as guarantee deposit).
More liquid.
Rarely closed. Buyer and sellers normally revise their positions to close the deals (only about 1% of the contracts are settled through delivery).
Settled daily.
Forwards
Customised or tailor – made contracts.
Settlement is made on the pre – specified date of maturity.
Margins are not required.
There is no clearing house. It is only a bilateral (between buyer and seller) agreement.
Not traded in organized stock exchanges (traded on phone or telex).
Default risk is higher.
Less liquid.
Contracts are generally closed (closed on actual delivery and payment) (over 90% contracts are settled by delivery).
We have seen that in forward contracts there are some problems such as counter party nsk, illiquidity, lack of centralisation of trading etc. The futures contract has been developed to remove the disadvantages of a forward contract. A futures contract is very similar to a forward contract in all respects except the fact that it is completely a standardised one. Hence, It is rightly said that a futures contract is nothing but a standardised forward contract.
Meaning of Futures
Futures contract is standardised and exchange-traded Futures contract is an agreement between buyer and seller to buy or sell a an asset at a certain time in future at a certain price. These are traded on recognised exchanges like NCDEX (National Commodity and Derivative Exchanges Limited), MCX (Multi Commodity Exchange of India Limited, Mumbai), NSE, BSE etc. Asset is delivered at a future date at the price fixed today. The future date is called the delivery date or final settlement date. The agreed price is called the ‘futures price’.
Thus, futures contract provides both a right and an obligation to buy or sell a standard asset or security or currency on a specified future date at a price agreed when the contract is entered into. Futures contracts are commonly known as futures.
Futures are standardised with regard to the contract size and also the maturity period of the contract. Futures contracts require deposits of margins. Hence, default risk is avoided. Although the price of the futures is negotiable between the parties, it isregulated by the futures exchange.
There are separate futures exchanges. Each exchange has a clearing house. The clearing house arranges for delivery of asset and payment of money. Clearing house becomes the counter-party to the original parties. The original parties are the buyer and the seller. Clearing house becomes a counter-party to the buyer in delivering the asset. It becomes a counter party to the seller in making payment. Thus, clearing house is called a central counter-party.
A wide variety of commodities and financial assets from the underlying assets in futures contracts. Wheat, sugar, wool, gold, aluminium, copper, etc. are some of the commodities underlying futures contracts. Stocks, stock indices, foreign currencies, bond, etc. are the financial assets underlying futures contracts.
Example of a Futures Contract
Today, September 1, the jeweler is setting the price of jewelry to be sold in December through the catalog he is printing. His major input expense is the cost of gold, which changes from day to day in the market. Today, the jeweler sees the following prices:
Spot gold, 3,500 per gram
Gold futures for December delivery, 3,600 per gram.
For simplicity, let’s take two cases-the futures price in December is 3,800 per gram, i.e., higher than it was in September ( 3,600), or the futures price in December is * 3,250, lower than it was in September. In either case, the jeweler’s effective cost of gold is 3,600 per gram, i.e., the futures price he “locked in” during September.
To see how this works, assume on December 1 the price of gold is 3,800 a gram. In such a case, the jeweler has gained 200 per gram on the futures contract that he can use to decrease the effective cost of the spot gold he is purchasing-from 3,800 to 3,600. On the other hand, if the futures price of gold on December 1 were 3,250, the jeweler could buy spot gold for * 3,250, but he would have had a loss of 350 per gram in the futures market, resulting again in an effective cost of 3,600 for a gram of spot gold in December.
Opening Savings & Current Account (image credit : google)
Steps for opening a Savings or Current Accounts in the name of Customers
There are some steps to open an account in the bank. To open an account, we must follow that steps. The relationship between the customer and the banker begins with the opening of an account in the name of the Customer. The steps to open an account in the name of the Customer are,
Application on the prescribed form
Introduction of the applicant
Obtaining specimen signature
Receiving initial deposit
Opening the Account
Kyc
1. Application on the prescribed form
To open an account in a bank the customer has to fill the application form given by the Banker and submit it to the bank for the opening of the account. Filling out the application form is very easy. We just fill in our details like name, address, phone number, occupation, etc.
2. Introduction of the applicant
The next step is to open an account in the bank is introduce the customer itself. This is why is that the banker has to satisfy himself with the identity of the customer before the opening of an account in the name of the customer.
3. Obtaining specimen signature
After the completion of the introduction of the applicant, the customer is required to give his specimen signature to the bank.
4. Receiving initial deposit
After the above formalities are over then next the bank receives the initial deposit from the customer to his account.
5. Opening the account
After receiving the initial deposit then the banker can open the account in the name of the customer.
6. Kyc
The last process of opening an account in the bank is KYC. KYC means Know Your Customer. This is a process of obtaining information about the identity and address of the customers. The process helps to ensure that the bank’s services are not misused.
The process for opening an account in the bank is very simple. We just fill our details in the application form and give our signature then the banker will verify the details and signature and give the amount for the opening of the account and last we can open our account in a bank with the help of the banker.
An investor who prefers to have good equity share investments is faced with the problem of choosing from among 6000 and odd listed companies of BSE. The selection depends upon the risk characteristics of individual shares. certain industries give unimaginable returns and at the same time risk factor is too much. set an industry give steady returns but capital appreciation is meagre. Identifying the industry, selecting the company to park hard earned money is a herculean task. After identifying and selecting the company, it is necessary to decide the quantum of funds or proportion of funds to be blocked in a particularcompany or industry. Once this is done,portfoliois created. after creating the Portfolio, the investor has to watch the developments with regard to the companies, industries included in this portfolio. Watch the developments taking place all around, economic, political, social, demographic, legal, technological etc., and revise the portfolio to form a new or ideal one. He has to exit from certain companies /industries and enter into certain companies /industries. This is known as portfolio management and less risky.
An overdraft happens when there isn’t sufficient cash in that frame of mind to cover an exchange or withdrawal, however the bank permits the exchange at any rate. Basically, it’s an expansion of credit from the monetary foundation that is conceded when a record arrives at nothing. The overdraft permits the record holder to keep pulling out cash in any event, when the record has no assets in it or has lacking assets to cover how much the withdrawal.
Fundamentally, an overdraft implies that the bank permits clients to get a limited budget. There is interest on the credit, and there is normally a charge for each overdraft. At many banks, an overdraft charge can run upwards of $35.
Figuring out Overdrafts With an overdraft account, a bank is covering installments a client has made that would somehow be dismissed, or on account of genuine actual checks, would bob and be returned without installment.
Similarly as with any credit, the borrower pays interest on the exceptional equilibrium of an overdraft advance. Frequently, the interest on the advance is lower than the interest on Mastercards, making the overdraft a superior transient choice in a crisis. By and large, there are extra charges for utilizing overdraft security that lessen the sum accessible to cover your checks, for example, deficient assets expenses per check or withdrawal.
Exceptional Considerations Your bank can select to utilize its own assets to cover your overdraft. Another choice is to interface the overdraft to a Mastercard. Assuming the bank utilizes its own assets to cover your overdraft, it regularly won’t influence your FICO assessment. At the point when a Mastercard is utilized for overdraft insurance, it’s conceivable that you can build your obligation to the place where it could influence your FICO rating. Nonetheless, this won’t appear as an issue with overdrafts on your financial records.
On the off chance that you don’t take care of your overdrafts in a foreordained measure of time, your bank can surrender your record to an assortment organization. This assortment activity can influence your FICO assessment and get answered to the three fundamental credit offices: Equifax, Experian, and TransUnion. It relies heavily on how the record is accounted for to the offices regarding whether it appears as an issue with an overdraft on a financial records.
Meaning of Forwards (or Forward Contracts) forward contract (or simply forward) is the simplest and oldest form of derivatives XA forward is an agreement between two parties to buy or sell an asset at a future date at a price agreed today. So, in forward contracts, the date, the price and the quantity are decided at the time of entering into contract But the contract is implemented in future on the agreed date. Suppose a shopkeeper agrees to sell you a particular model and brand of television set after one month from now at a price of, say, Rs.1,00,000. You agree to the offer. This means that you have entered into a forward contract with the shopkeeper. You are obliged to make payment of Rs. 1,00,000 and take delivery of the television set after one month from today. Similarly the shopkeeper is obliged to deliver the particular model and brand of television set to you and receive Rs. 1,00,000. When you agree to buy an asset in future, you actually buy a forward contract. The shopkeeper sells the forward contract. Suppose after one month the price of the television set increases to Rs. 1,10,000. But you have to pay only the agreed price (ie., Rs. 1,00,000). Suppose the price falls to Rs. 95,000. Then you have to pay the agreed price of Rs. 1,00,000. The agreed price is called forward price. If the actual spot price is higher than the forward price, the buyer is in an advantageous position because he gets the asset at a cheaper price than the prevailing market price. The seller is in a disadvantageous position because he has to deliver the asset at a price which is lower than the prevailing market price. If the spot price is lower than the forward price, the buyer would be at a disadvantage and the seller would benefit. (Both parties to the forward (buyer and seller) have an obligation to perform the contract. That is, the seller must deliver the asset and receive payment and buyer must make payment and take delivery of the asset. In case of default by either party, the other party has a right seek a compensation? Int the forward contracts, one party takes long position (one who agrees to buy the ant ie, the buyer) The other party takes short position (one who agrees to sell the asset, Lethe seller). A forward is a negotiated agreement between two parties. There is no third party or middleman. The transaction occurs between buyer and seller only. Thus, it is a bilateral agreement. It is not traded on organized exchanges. It does not require an initial payment when signing the contract (except for a minor administrative fee, if the other party is a financial institution).
Thus, forward contract is an agreement made today to exchange the commodity or instrument for cash at a predetermined future date at a price agreed upon today. The transler of ownership occurs on the spot. But delivery of the commodity or instrument does not occur until some future date. It means forward is a forward delivery contract and not ready delivery contract. No money changes hands at the time the deal is signed. For example, a wheat farmer may wish to contract to sell his harvest at a future date to eliminate the risk of a change in price by that date.
Example of a Forward Contact
A wheat farmer has planted a crop that is expected to yield 80 quintals. To eliminate the risk of fall in the price of wheat, before the harvest the farmer enters into a forward contract. on 1 July 2019, with a trader to sell the 80 quintals of wheat at 1,300 per quintal after five months. The current price is 1,200 per quintal. No money changes hands now. Suppose the market price of wheat is 1,100 per quintal on 1 December 2019. On this date the farmer delivers the 80 quintals of wheat to the trader in exchange for 1,04,000 (i.e., 1,300 x 80). This price, i.e., 1,300 is fixed and does not depend upon the spot price of wheat at the time of delivery and payment (i.e., 1,100).
At the time of entering into contract, the farmer did not know what exactly the price of wheat would be after five months. Here the farmer gets a gain of 200 per quintal because the market price on 1″ December 2019 is 1,100 per quintal. If he had not entered into forward contract, he would get only 88,000 (ie., 1,100 x 80). The total gain is * 16,000 (1,04,000 88,000 or 200 x 80). Thus, by entering into forward contract the farmer could eliminate the fall in the price of wheat.
Today Banks operate in a highly globalized, liberalized, privatized and a competitive environment. Banks use information technology for surviving in this environment. Banking all over the world is influenced by information technology, fantastic developments in the technology of telecommunications and electronic data processing. So banks are experiencing a fast and far reaching renovation. Liberalisation and globalization process was initiated in India in 1991. Introduction of reforms have had a profound impact on the financial system particularly on the banking industry. Integration of information system with communication technology has fundamentally changed the traditional way of doing banking business. The earlier brick and motor branch is not sufficient today. Banks are trying to bring flexibility in their distribution channels for giving various innovative services to customers.
Technology is now taking banks to their home and offices, 24 hours a day, 365 days a year through Automatic Teller Machines (ATM), telephone and personal computers. The next noteworthy milestone was the introduction of mobile banking primarily through SMS. The launch of smart phones created a revolution in the banking world. The smart phones are now a widely accepted delivery channel in developed countries. In India also the numbers of mobile phone users are increasing day by day. So the banks are exploring the feasibility of using the omnipresent device as an alternative channel for delivery of full-fledged banking services. All this indicate the financial supply chain is undergoing a dramatic change due to technological evolutions.
Traditional Banking Vs E-Banking
In traditional banking system, the customers are required to visit bank branch for doing every banking transactions. He should go to bank to know account balance, sending money from one branch to other, cash withdrawal etc. Actually the brick and mortar structure of a bank is a unavoidable necessity to perform banking functions. The customer can visit the bank only at working hours. Now the position is changed. After the introduction of E- banking a customer can do a number of transactions by sitting in his office or home or from anywhere at any time. There is no time restriction. The brick and mortar structure of the traditional banking is converted into a click and portal model. So the concept of virtual banking came into existence. Core banking is introduced. Now the banks are offering a number of services through E- banking. ATM, Tele banking, Mobile banking, internet banking, Credit cards etc. The customers can go to shops for purchasing goods without keeping cash in his pocket. He can use credit cards and E cheques for payment.
Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance. There are some kinds of Insurance that are explained below :
On the development point of view Insurance can be classified as
1.Life insurance
2.Marine insurance
3.Pire Insurance
4.Medical insurance
5.General insurance
Life Insurance
Life insurance is essential for any major money earner in a family, regardless of where one works. It helps to protect the lifestyle and home of the insured’s family in the event of his untimely death. Term life insurance is the least expensive, but it has limitations on its duration, which can be specified by the insured. Whole life is more expensive, but it remains in effect for the life of the insured as long as premiums are paid on time. (Life insurance is a contract between the policy holder and the insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person Depending on the contract, other events such as terminal illness or critical illness may also trigger payment in return, the policy holder agrees to pay a stipulated amount (at regular intervals or in lump sums). In some countries, death expenses such as funerals are included, in the premium; however, in the United States the predominant form simply specifies a lump sum to be paid on the insured’s demise. The value for the policy owner is the ‘peace of mind’ in knowing that the death of the insured person will not result in financial hardship.
Marine Insurance
Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination Marine insurance is a type of Insurance that covers boats and ships, as well as their cargo and in some instances the places where the boat or ship is docked. It has a colorful history, beginning informally in England during the 17th century. In 1906, the Marine Insurance Act was passed under British law, creating a standard operating procedure for policies that dictates the world’s policies to this day. The standards set forth by the act are considered reasonable, but due to changes in technology and social standards, the act is generally seen as obsolete and is being replaced by more modern legislature Kinds of Marine Policies The document containing the terms and conditions of the contract is called the Marine Policy. It must contain the names of the assured and the insurer or insurers. The subject-matter insured and the risk covered in the voyage or period of time or both and the sums insured. It must be duly signed by the insurer and stamped under the Stamp Act, 1899. The Marine Insurance Act deals with the following types of policies:
Voyage Policy: When the contract is to insure the subject matter at and from one place to another, the policy is called a “Voyage policy” In this case the risk attaches only when the ship starts on the voyage.
Time Policy: – Where the subject-matter is insured for a definite period of time, it is called a “Time Policy) The ship may pursue any course it likes: the policy would cover all the risks from perils of the sea for the stated period of time. A time policy cannot be for a period exceeding one year, but it may contain a continuation clause.
Mixed Policy:- It is a combination of voyage and time policies and covers the risk during particular voyage for a specified period of time.
Valued Policy:- It is a policy, which specifies the agreed value of the subject-matter insured. If there is no fraud or misrepresentation, the value in a valued policy is conclusive as between the insurer and the insured, whether the loss is partial or total.
Open or Un-valued Policy: In this policy the value of the subject-matter insured is not specified. Subject to the limit of the sum assured, it leaves the value of the loss to be subsequently ascertained.
Floating Policy:- The practice of taking out floating policies has come in vogue because of the difficulty of knowing by which ship or ships the goods are to be shipped. Such a policy therefore only mentions the amount for which the insurance is taken out and leaves the name of the ship(s) and other particulars to be defined by subsequent declarations.
Fire Insurance
Fire insurance is a contract to indemnify the insured for destruction of or damage to property or goods, caused by fire, during a specified period. The contract specifies the maximum amount, agreed to by the parties at the time of the contract, which the insured can claim in case of loss. This amount is not, however, the measure of the loss. The loss can be ascertained only after the fire has occurred. The insurer is liable to make good the actual amount of loss not exceeding the maximum amount fixed under the policy. Fire insurance is a form of property insurance which protects people from the costs incurred by fires. When a.structure is covered by fire insurance, the insurance policy will pay out in the event that the structure is damaged or destroyed by fire. Some standard property insurance policies include fire insurance in their coverage while other cases, fire asurance may need to be purchased separately. Property owners should check with their insuranes companies if they are not sure whether or not fire insurance is part of their policies, and if fire insurance is not included it should be purchased.
4 Medical Insurance or Health Insurance
Medical insurance is a contract between the proposer and the Insurance company that mentions the insurance company will pay a portion of medical expenses if the insured is sick or injured and need medical care The insured is required to pay the Insurance company a premium in each month Some contracts also specify that the insurance company will pay a portion of insured’s medical expenses to make sure that the proposer don’t get sick, such as paying for annual physical exams. wellness visits and immunizations. The amount the insurance company will pay, and under what circumstances they’ll pay is known as coverage and can differ significantly from policy to policy.
General Insurance
General insurance is also known as non-life insurance policies including vehicles and homeowners insurance policies and provides payments depending on the loss. caused from a particular financial damage General Insurance typically means any kind of insurance that is not determined to be life insurance. It is also called property and casualty insurance in the US and Non-Life Insurance in Continental Europe. General insurance is a financial mean of protecting items from certain events (General Insurance comprises of insurance of property against fire. burglary etc. personal insurance such as Accident and Health Insurance, and liability insurance which covers legal habilities. It could be applied to car, home, boat or any other valuables, depending on what type of policy the person will buy and what type of insurance the individual is looking for. Insurance other than Life Insurance falls under the category of General Insurance. There are also other covers such as Errors and Omissions insurance for professionals, credit insurance etc.
Auto Insurance
Full coverage is required for new cars or those under financing, although regulations vary by state. Auto insurance is designed to help to pay for repairs or replacement in the event of an accident. It may also cover medical costs for a driver or passengers, or even those for individuals in another vehicle if the insured is deemed to be at fault Auto insurance also covers a vehicle in the event of theft or other forms of damage depending on the chosen policy
Disability Insurance
Disability insurance may protect the insured from financial ruin if he is injured or disabled and can no longer work. This type of insurance is meant to help with monthly living expenses and health care expenses not covered by a health insurance policy. Disability insurance is available in short term and long-term policies. Short-term insurance pays for approximately 6 months. Long-term insurance starts at the end of 6 months and may last until a person reaches age 65. If an employee is covered through the employer, coverage may average between 60% and 70% of the employee’s current income.
Homeowner’s Insurance
Homeowner’s insurance helps to cover losses of a home or property due to fire, natural disaster, faulty electrical work. bad plumbing and more I the insured have a mortgage, he will most likely be required to carry some form of homeowner’s insurance.
Long-Term Care Insurance
Long-term care protection is designed for those diagnosed with chronic illnesses and the elderly may help to provide for nursing home or at-home health care. Long-term care policies may also help to pay for adult day care services and assisted living facilities.
Miscellaneous or Liability Insurance
Miscellaneous Insurance’ refers to contracts of insurance other than these of Life, Fire and Marine insurance. This branch of insurance is of recent origin and it covers a variety of risks.
Personal Accident Insurance – It is the insurance for individuals or groups of person against any personal accident or illness. In India this type of insurance is done by the General Insurance Corporation. The risk insured
in personal accident insurance is the bodily injury resulting solely and directly from accident caused by violent, external and visible means. Under this policy the insurer pays the specified sum, if the insured sustains any bodily injury resulting solely and directly from accident caused by external violent and visible means.
Property Insurance Property risks relate to burglary, house breaking, theft, crop insurance, etc. Any property, movable or immovable, present or future, vested or contingent can be insured from losses by accidents other than fire and marine adventure. The most popular in this branch is burglary insurance.
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home Insurance, or boiler insurance. Property is insured in two ways namely open perils and named perils. Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism, and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage causing events as fire, lightning, explosion, and theft.
Liability Insurance : A person can insure himself against the risk of death and personal injury, or damage, destruction of property. Likewise there can also be an insurance against the risk of incurring liability to third parties. The risk of hability arising out of the use of property comes under the category commonly called “liability insurance. It includes
Public Liability Insurance: That is, an insurance against a liability imposed by law. For example, a house owner may obtain an insurance against his liability to Invitees or licensees, arising from body injury or damage to property.
ii. Professional Negligence Insurance: These policies give professional indemnity cover to accountants, solicitors, lawyers, from any loss or injury due to any negligence in the conduct of their professional duties.
iiiCompulsory Insurance: The ESI Act makes it compulsory for the employers (covered under that Act) to insure their workmen by providing certain benefits to them in the event of their sickness, maternity and employment insurance. The employees insured are entitled to (a) Sickness benefit, (b) Maternity benefit. (c) Disablement Benefit, and (d) Dependent’s benefit.
iv.Employer’s Liability Insurance: The liability of an employer under the modern labour laws, has considerably extended and the employers are tempted to take out Insurances against such liabilities. For examples, when the employees retire, substantial amount become Immediately payable by way of gratuity, commuted pension, leave salary, compensation, etc. and also the uncommuted pension becomes payable in future. Employers often take insurance policies which assure payment of such amounts, as and when these becomes payable.
v. Guarantee Insurance: The main types of policies included in guarantee insurance are a insurance for performance of contract, policies, the guarantor/ underwriter insures the promisee or employer against the loss arising by non-performance by the promisor or the dishonesty of the employee. Fidelity policies are the most common type of guarantee policies, taken under contracts of employment where the employee has an opportunity to be dishonest. Such policies cover the risk of losses arising by theft or embezzlement of money or securities, or by fraud, on the part of employees. 4.Motor Vehicle Insurance : In olden days many of the pedestrians were killed or injured due to motor vehicle accident. They did not get any compensation because the vehicle owner or driver did not have financial resources to pay compensation. The Motor Vehicles Act, 1939 was introduced compulsory insurance to all vehicles. Now the vehicles cannot ply in a public place without such insurance. The insurance of motor vehicles against damage is not made compulsory, but the insurance of third party liability arising out of the use of motor vehicles in public places is made compulsory. Third Party Liability insurance is mandatory for all vehicles plying on public roads in India. So a policy for motor vehicle insurance is, ordinarily, a combined insurance against the damage to the motor vehicle and its accessories, death of or injury to the, occupant of the vehicle and also against the risk of liability for injury to, or the death of, third parties caused by the driver’s negligence.
Insurance occupies an important place in the mulüfaceted modern world since risk, which can be insured, has increased very much in every walk of life. Insurance is a form of protection against a possible risk. It is a method which helps in shifting risks to the insurer in consideration of a nominal cost. The aim of all insurance is to compensate the owner against loss arising from a variety of risks, which he anticipates, to his life, property and business. Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. If the potential loss is small, then it doesn’t make sense to pay a premium to protect against the loss. Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium.
Modern insurance is conducted either by enterprisers for profit, or by mutual companies. Each insured gets a contract of indemnity for the payment of a sum that will help cover the losses of others. Such an exchange is mutually beneficial
Definitions
On the basis of function we can define insurance in the following ways.
Insurance can be defined as a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against the risk. (Prof. R.S.Sharma)
According to Reigel and Miller, “the function of insurance is primarily to decrease the uncertainty of events.
In simple terms, “Insurance is a protection against financial loss arising on the happening of an unexpected event.
Concept of Insurance
Insurance is a form of risk management which is used mainly to hedge against the risk of a contingent, uncertain loss. The basic objective of insurance is to transfer the risk of a person to the insurance company which has easily spread it over a large number of persons who are similar risks. It is a protection against financial loss that may occur due to an unexpected event. insuring
Insurance is defined as the equitable transfer of the risk of loss, from one entity to another, in exchange for payment. Insurance is essentially an arrangement where the losses experienced by a few are extended among many who are exposed to similar risks. It is a protection against financial loss that may occur due to an unexpected event.
The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.
It is a promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. When parties agree the terms of an insurance policy, a contract is created between the insured and the insurer. In exchange for payments from the insured (called premiums). The insurer agrees to pay the policyholder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest. Examples include car insurance, health insurance, disability, life, and business.
Insurance is a guaranty of partial or complete indemnity against a financial loss that will result if an event of a specified kind occurs.
Parties of insurance
The following are the parties involved in an insurance contract.
1.Insured: The person seeking some surety against the possible loss is called ‘insured’.
2 .Insurer: The person contracting to indemnify against the loss is the insurer:
3 .Beneficiary: The person to whom the indemnity is paid is the beneficiary (who may or may not be the insured).
4 .Insurance Policy: The written contract of insurance is the policy.
5 .Premium: The price paid by the insured in fulfillment of his part of the contract is the premium:
6 .Indemnity: The amount paid when a loss has been incurred is the indemnity.
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