Definition and History of Insurance

Understanding Insurance
Life is full of risks that might be expected or unexpected, that's why we need to understand about insurance. Some natural events that occurred in recent years and takes a lot of casualties, both fatalities and property, such as reminding us of the need for insurance. For every member of society including the business world, the risk for experiencing disadvantage (misfortune) are always there (Kamaluddin: 2003). In order to overcome the losses incurred, humans developed the mechanism which we now know as insurance.
The primary function of insurance is as a mechanism to transfer risk (risk transfer mechanism), the transfer risk from one party (the insured) to another party (the insurer). The transfer of risk is by no means eliminates the possibility of misfortune, but the insurer to provide financial security (financial security) as well as the tranquility (peace of mind) to the insured. In return, the insured pays the premium in a very small number when compared with the potential losses that may be suffered (Morton: 1999).
Basically, the insurance policy is a contract that is a legal agreement between the insurer (in this case the insurance company) with the insured, where the insurer was willing to bear some losses that may arise in the future in return for payment (premium) of a particular insured.


According to Law No. 2 of 1992, which referred to the insurance or coverage is an agreement between two or more parties, with which the insurer committed themselves to the insured, by accepting the insurance premiums to provide reimbursement to the insured for loss, damage or loss of expected benefits, or legal liability to third parties that may be suffered by the insured, arising out of an uncertain event, or to provide a payment based on life or death of an insured person.
In order for a loss of potential (which may occur) can be covered by insurance (insurable) then it should have the following characteristics: 1) the occurrence of loss contains uncertainty, 2) the loss must be restricted, 3) the loss must be significant, 4) the ratio of losses can be predictable and 5) the loss is not catastrophic (disaster) for the insurer.
The question arises, death is definitely something, why be insured? Even though it is something that contains a certainty, but the exact time of death when someone is outside the control of the TSB. So when the event of death that really contain the uncertainty is what causes it insurable.
There are two forms of agreement in determining the payment amount at maturity of insurance, namely: the contract value (valued contract) and the indemnity contract (contract of indemnity). The contract value is an agreement where the amount of payment has been determined in advance. For example, the sum assured (UP) on life insurance. Indemnity contract is an agreement that the number of santunannya based on the number of actual financial loss. For example, the cost of hospital care.
In the case of insurance companies sought to curb possible losses from a fatal / major, then it can shift risk to another insurance company. This is called reinsurance; companies accepting reinsurance called reinsurers.
In addition to the above five characteristics, before it can be insured, the insurance company should consider the insurable interest and anti-selection. Insurable interest relating to the relationship between the insured and the recipient of compensation / benefits - in terms of potential loss. Example, insurance companies will not sell fire insurance policy to a person other than the owner of the building is insured. Insurable interest within this example is the ownership of an eye something that is insured. Similarly, family relationships, financial linkages are reasonable, also a form of insurable interest. The definition of anti-selection (counter selection) refers to the existence of a greater tendency to take insurance because it has a level of risk above average. Example, people who have bad health records or the risk of dangerous jobs tend to buy insurance. To reduce anti-selection effect, insurance companies must be able to identify and classify potential risks or losses. The process of identification and classification of the level of risk is called underwriting or risk selection. But that does not mean anti-selection led to the filing of insurance is rejected, because the risk of loss to the insured by above average premium may be subject to sub-standard (special premium) because the risk is sub-standard (special risks) unless the possibility of loss is much higher, perhaps the insurance application was rejected.
History of Insurance
Insurance Babylonian society originated from 4000-3000 BC, known as Hammurabi agreement. Then in 1668 AD at the Coffee House Lloyd's of London London stands as a forerunner to conventional insurance. Sources of insurance law is positive law, natural law and pre-existing examples as culture.
Insurance brings social as well economic mission with the premiums paid to insurance companies to guarantee the transfer of risk, namely the transfer (transfer) the risk of the insured to the insurer. Insurance as a risk transfer mechanism where the individual or business move some uncertainty in exchange for premium payments. The definition of risk here is uncertain whether or not a loss (the uncertainty of loss).
Insurance in Indonesia started in the Dutch colonial period, associated with the success of companies of the country in the plantation sector and trade in Indonesia. To meet the security needs of business sustainability, certainly needed the insurance. The development of the insurance industry in Indonesia had a vacuum during the Japanese colonial period.
Security needs to filled by the Life Insurance
1) Personal Needs, including: the provision of the final living expenses such as costs associated with death, the cost of bill payment in the form of debt or loan must be repaid; family benefits; cost of education, and pensions. In addition, the life insurance policy that has cash value can be used as a savings and investment.
2) Business Needs, such as: insurance on key persons (insurance for key people within the company); insurance quotes on business owners (insurance for business owners); employee benefits (employee benefits) for example, a collection of life and health insurance.
source: Morton, G. (1999). Principles of Life and Health Insurance. LOMA.