As an insurance broker, we often come across this query from new customers: “how does insurance work?” Time permitting, we tell them this story involving two of our favourite characters from childhood – Akbar and Birbal.
A group of villagers once barged into Emperor Akbar’s court and started creating a huge uproar. When asked what the issue was, the village chief revealed that a wild fire had swept through their village and had burned several homes to the ground.
“We have come to ask for a solution, Your Majesty,” said the chief. Our village experienced a flood two years earlier that washed away many homes. A single calamity like this exhausts all our resources and we have nothing left to rebuild our homes!”
After a moment’s thought, Akbar asked Birbal if he would like to suggest a solution. Birbal replied, “Give me a day’s time, Your Majesty.”
“Granted! Tomorrow, we shall all gather here again at noon,” exclaimed the Emperor and left for his chambers.
The next day, the villagers returned. Everyone, including Emperor Akbar, assembled in the court. Birbal proposed his solution.
“Natural calamities like storms, floods, tornadoes, hurricanes, and earthquakes are beyond the control of human beings. It is difficult to prevent them and the losses arising from them can make any home financially crippled. However, there is a simple yet very effective solution! Before any calamity strikes, all homes are exposed to an equal amount of risk. So the solution lies in the distribution of this risk.”
“And how do we distribute the risk?” asked the Emperor, intrigued.
“Each home that is under the purview of danger and wishes to get protected contributes a small amount of money that will get collected into a fund. The fund will then be used to compensate the owners of homes that get destroyed during a calamity. This way, the risk will be divided and the homes that were destroyed during the calamity can be rebuilt with the help of the fund money.”
Akbar appreciated Birbal’s proposal and turned towards the villagers. “What do you think, my people?” he asked, looking at the village chief.
The villagers started exchanging views among themselves. After some deliberation, the chief stepped forward to not only appreciate Birbal’s wisdom but also to agree to his proposed solution.
From that day onwards, the villagers regularly contributed a part of their savings to this fund. And when calamities hit, the fund was utilised to pay those households that suffered the effects of the calamity.
Word spread quickly about this wonderful solution and soon all the villages in the empire were using this idea to protect their villagers!
What Birbal suggested to the villagers in this story is termed as insurance today. In insurance, risk gets divided among all who make their contribution in the form of insurance premiums. And, the coverage amount is paid to those who face financial difficulty resulting from any eventuality that they are covered for.
Also Read: History of Insurance – Introduction
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