Indian Insurance Sector Needs Better Strategies

Risk is an unavoidable fact of life on earth. When one steps out of his house in the morning, one doesn’t know what awaits him.

- Shinjini Mukherjee

Human beings may be risk lovers, risk averse or risk neutral, depending on the affinity one has towards risk as an element and yet most people find an uncertain misfortune unappealing. In an age where we claim to know it all, human beings don’t like to be defeated. Instead, they want to be ready for anything that comes their way. It is this attitude towards the uncertain that makes way for the need of insurance. D.S.Hansell, author of ‘Introduction to Insurance’, defines insurance as, “A social device providing financial compensation for the effects of misfortune, the payment being made from the accumulated contributions of all parties participating in the scheme.”

A two-sum game

Insurance ensures the outcome of an uncertain future. Whether or not you will be involved in an accident may be uncertain. Yet, once you do meet with an accident, you can rest assured that your insurance will cover your bills. What happens if you don’t ever meet with an accident? You keep paying the premium all your life, lose an enormous amount of money in doing so, and virtually end up with nothing in return, at least in your lifetime. Your family members get paid an amount after your death, if that counts. Insurance basically transfers one loss into another.

When you lose, you don’t bear the burden alone. Other payers of premium bear the brunt of it as well. Like most financial instruments, insurance puts forward a two-sum game. What person A gains in the transition is exactly what person B loses, if there are the only two people involved. In reality, thousands of people are involved in the process. While all of them pay the premium regularly, only a handful actually claims their return. This is why insurance is essentially a risk-sharing contract.

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