INSURANCE

The Term ‘insurance’ has not been defined in the

Insurance Act 1938. However, it has classified insurance
business as Life, Non-Life or General and Re-insurance. As
per the Act, life insurance means ‘the business of effecting
contracts of insurance on human life”. It covers any
contract whereby the payment of money is assured on
death (except death by accident only) or the happening of
any contingency dependent on human life which include:
granting of disability and double or triple indemnity
accident benefits;
granting annuities upon human life and
granting of superannuation allowances payable out of
any fund.
 INSURANCE
From the above definitions of insurance, it is clear that insurance provides
financial protection against a loss arising out of happening of an uncertain
event. It is a contract between two parties whereby one party agrees to
undertake the risk of another in exchange for consideration known as
premium and or after the expiry of a certain period in case of life insurance or
to indemnify the other party on the happening of an uncertain event in case
of general insurance. The party bearing the risk is known as the ‘insurer’ or
‘assurer’ and the party whose risk is covered is known as the ‘insured’ or
‘assured’.

Insurance works on the basic principle of risk-sharing. A pool is created

through contributions made by the persons seeking to protect themselves
from a common risk. Premium is collected by insurance companies which also
act as trustee to the pool. Any loss to the insured in case of happening of an
uncertain event is paid out of this pool. A great advantage of insurance is
that it spreads the risk of a few people over a large group of people exposed
to the risk of a similar type.
 KEY CONCEPTS IN INSURANCE
Though insurance has been differentiated into types such as
marine, fire, life, etc, there are certain general principles
applicable to all forms of insurance. These serve as a guide
to the sound interpretation of the purpose of the insurance
contracts in their diversified forms.

Existence of risk: In an abstract sense, risk may be defined

as the change of loss. It can either be an uncertainty as to
the outcome of some event or events, or loss as the result of
at least one possible outcome. In any case, the promise of
the insurer is to save the assured against any such uncertain
consequences. It is indispensable to every contract of
insurance that the subject matter should be exposed to the
contingency of loss or risk.
 KEY CONCEPTS IN INSURANCE
Indemnity: Insurance is essentially a contract of indemnity. All the claims
of the assured will be adjusted only with reference to the actual loss
sustained by him. Thus, it is implicit in every contract of insurance that the
assured, in case of a loss against which the policy has been made, shall be
fully indemnified but shall never be more than fully indemnified. However,
the insurers limit their liability to the amount of the sum assured. This is
to say that in case of loss, the ‘sum assured’ is all that the assured is
entitled to even if the value of the loss suffered that exceed that.

Insurance and wager not identical: The fundamental principle of

indemnity on which the greater part of the law of insurance is based,
prima facie, negatives any treatment of insurance at par with the
wagering contracts. A contract of insurance is described as aleatory. It is
speculative to the extent that the parties may not know whether the
event insured against will occur or not, thus involving a case of mutual
risk. The insurer in turn, for a comparatively small sum in the shape of a
premium, undertakes to compensate against a heavy loss.
 KEY CONCEPTS IN INSURANCE
Insurable Interest: The next test for a valid insurance
contract is the existence of insurability interest. The
‘insurable interest’ may be defined as follows: “Where the
assured is so situated that the happening of the event on
which the insurance money is to become payable would, as
a proximate result, involve the insured in the loss or the
diminution of any right recognized by law or in any legal
liability, there is an insurable interest to the extent of the
possible loss or liability”.
Principle of Utmost Good Faith: The observance of utmost
good faith by the parties is vital to a contract of insurance.
Insurance is called as UBERRIMAE FIDEI contract because
the parties here are required to conform to a higher degree
of good faith than in a general law of contract.
 INSURANCE-TYPES & PRODUCTS
Insurance can range from life to medical to general (residential,
commercial property, natural incidents, burglary, etc.)
Life Insurance: It is a protection against financial loss resulting
from death. It is promise by the insurance company to pay the
beneficiary a specific amount of money when the insured dies in
exchange for the timely payment of premiums. Thus, there are
three parties to a life insurance transaction; the insurer, the
insured, and the owner of the policy. The owner and the insured
are often the same person. The beneficiary is not a party to the
policy but is designated by the owner who may changethe
beneficiary unless the policy has an irrevocable beneficiary
designation. Life insurance is also termed as long-term
insurance. It includes Whole Life Assurance, Endowment
Assurance, Assurances for Children, Term Assurances, and
Money Back Policy.
 INSURANCE-TYPES & PRODUCTS
Whole Life Insurance: In whole life assurance,
the insurance company collects premium from
the insured for whole life or till the time of his
retirement and pays claim to the family of the
insured only after his death.
Endowment Assurance: In case of endowment
assurance, the term of policy is defined for a
specified period say 15, 20, 25 or 30 years. The
insurance company pays the claim to the family
of assured on his death within the policy’s term
or in an event of the assured surviving the
policy’s term.
 INSURANCE-TYPES & PRODUCTS
Assurances for Children: Under the Child’s Deferred Assurance Policy, claim
by the insurance company is paid on the option date which is calculated to
coincide with the child’s eighteenth or twenty-first birthday. In case the parent
survives till the option date, the policy may either be continued or payment
may be claimed on the same date. However, if the parent dies before the
option date, the policy remains continued until the option date without any
need for the payment of premiums. If the child dies before the option date, the
parent received back all the premiums paid to the insurance company.
School Fee policy can be availed by affecting an endowment policy on the life
of the parent with the sum assured, payable in installments over the schooling
period.
Term Assurance: Term Assurance policies are only for a limited time, claim for
which is paid to the family of the assured only when he dies. In case the
assured survives the term of policy, no claim is paid to the assured.
Annuities: Annuities are just the opposite of life insurance. A person entering
into an annuity contract agrees to pay a specified sum of capital (lump sum or
by installments) to the insurer. The insurer in return promises to pay the
insured a series of payments until insured’s death.
 INSURANCE-TYPES & PRODUCTS
Money Back Policy: Money Back policy is generally issued for a
particular period and the sum assured is paid through periodical
payments to the insured which is spread over this time period. In
case of death of the insured within the term of the policy, full
sum assured along with bonus accruing on it is payable by the
insurance company to the nominee of the deceased.
Unit Linked Insurance Policy (ULIP): ULIP is an abbreviation for
Unit Linked Insurance Policy. A ULIP is a life insurance policy
which provides a combination of risk cover and investment.

The dynamics of the capital market have a direct bearing on the

performance of the ULIP. The allocated (invested) portion of the
premium, after deducting all the charges and premium for risk
cover under all the policies in a particular fund as chosen by the
policy holders, are pooled together to form a unit fund.
 INSURANCE
How to choose an Insurance Plan?
A wide range of insurance products are available in the
market today. Each insurance product is different from
the other in having some unique attribute which is
devised to meet the specific needs of an individual.
However, with such a wide range of products available,
it becomes very difficult for an individual to choose an
insurance plan that is best suited to meet his
requirements. Based on the financial plan and needs
and one’s affordability to pay premium, an individual
can choose a plan from amongst the alternative plans
available in the market. Table 12.3 gives a description
of different plans based on the needs of an individual.
 INSURANCE
How to choose an Insurance Plan?
A wide range of insurance products are available in the
market today. Each insurance product is different from
the other in having some unique attribute which is
devised to meet the specific needs of an individual.
However, with such a wide range of products available,
it becomes very difficult for an individual to choose an
insurance plan that is best suited to meet his
requirements. Based on the financial plan and needs
and one’s affordability to pay premium, an individual
can choose a plan from amongst the alternative plans
available in the market. Table 12.3 gives a description
of different plans based on the needs of an individual.
 INSURANCE
Need / Purpose Recommended Best suited for
Insurance Plan

• Savings & capital appreciation ULIP • Moderate to high income

• Protection (Risk cover) • Have dependents

• Security to dependents Term Policy • Young individuals

• Risk Cover • Low Income
• Have dependents

• Child’s future studies Children Plan • Couples having small kids

• Child’s Marriage

• Retirement benefits Pension plans • Persons aged above 40

• Risk cover • Persons not having a pension provision from their employer

• Risk cover Money back policy • Persons having recurring financial requirements
• Periodic Payments • low to moderate income

• Risk cover Endowment Plans • Requirement of fixed sum after the lapse of a certain
• Savings period
 GENERAL INSURANCE
It is an insurance against the risk of loss to assets like car, house, accident,
etc. It includes fire insurance, marine insurance, motor insurance, theft
insurance, health insurance, and personal accident insurance. Also known as
non-life insurance, general insurance is normally meant for a short-term
period of twelve months or less. However, recently longer-term insurance
agreements have made an entry into the business of general insurance but
their term does not exceed five years.
Fire Insurance: It provides protection against the damage to property
caused by accidents due to fire, lightening or explosion, whereby the
explosion is caused by boilers not being used for industrial purposes. It also
includes damage caused due to other perils like storm, tempest or flood,
pipes burst accident, earthquake, aircraft, riot, civil commotion, malicious
damage, explosion or impact.
Marine Insurance: It basically covers three risk areas namely hull, cargo and
freight. The risks which these areas are exposed to are collectively known as
“Perils of the Sea”. These perils include theft, fire, collision etc. Marine cargo
policy provides protection to the goods loaded on a ship against all the
perils that might occur between the departure and arrival warehouse.
 GENERAL INSURANCE
Therefore, marine cargo covers the carriage of goods by
sea as well as the transportation of goods by land.
Marine hull policy provides protection against damage to
a ship caused due to the perils of the sea. Marine hull
policy covers 3/4th of the liability of the hull owner (ship
owner) against any loss due to collisions at sea. The
remaining 1/4th of the liability is looked after by
associations formed by the ship owners for the purpose.
Miscellaneous : As per the insurance Act, all types of
general insurance other than fire and marine insurance
are cover under miscellaneous insurance. Some of the
examples of general insurance are motor insurance, theft
insurance, health insurance, personal accident insurance,
money insurance, engineering insurance etc.
 GENERAL INSURANCE
All assets have some economic value attached to them.
Different assets are exposed to different types of risks.
Insurance is a basic form of risk management which
provides protection against any possible loss to life or
physical assets. Among many benefits associated with
insurance, the important ones are explained below.
Provide Social Security: Insurance acts as an important
tool providing a sense of security to the society on a
whole. It is the right of every human being to have basic
amenities like food, clothing, housing, medical are,
standard of living necessary for his personal and family’s
well being, and the right to security in case of
unemployment, disability, sickness or any other
circumstances out of his control.
 GENERAL INSURANCE
Uncertainty: The basic need of insurance arises as risks
are uncertain and unpredictable in nature. Getting
insurance for an asset does not mean that the asset is
protected against risk or its exposure to a risk is reduced.
Rather it implies that in case the asset suffers any loss in
value due to such a risk, the insurance company bears the
loss and compensates the insured by making payment to
him.
Economic Development: The premium paid to the
insurance companies is a part of their savings. Insurance,
thus, acts as a useful instrument in promoting savings
and investments, particularly within the lower-income
and middle-income families. These savings are ultimately
used as investments that fuel economic growth.
REGULATION OF INSURANCE IN INDIA
Insurance is a federal subject in India. There are two
legislations that govern the insurance sector – The
insurance Act, 1938 and the IRDA Act, 1999. Apart
from these, the provisions of the Companies Act,
1956 are applicable to the companies carrying on
insurance business. Further, insurance being a
contract, the provisions of the Indian Contract Act,
1872 are applicable to such contract.
Insurance Regulatory Development Authority (IRDA)
was set up in 1999 to protect the interests of the
policy holders, to regulate, promote and ensure
orderly growth of the insurance industry. The main
functions of IRDA include:
REGULATION OF INSURANCE IN INDIA
1. To bring about speedy and orderly growth of the insurance industry (including
annuity and superannuation payments), for the benefit of the common man,
and to provide long-term funds for accelerating growth of the economy.
2. To set, promote, monitor and enforce high standards of integrity, financial
soundness , fair dealing and competence of those it regulates.
3. To ensure that insurance customers receive clear and correct information
about products and services.
4. To ensure speedy settlement of genuine claims, to prevent insurance frauds
and other malpractices and put in place effective grievance redressal
machinery.
5. To protect the interest of and secure fair treatment to the policy holders.
6. To take action where such standards are inadequate or ineffectively enforced.
The subordinate regulations that need to be referred to are the Insurance Rules,
1939, the Redressal of Public Grievance Rules, 1998 and around 27 regulations
framed by the IRDA on various subjects ranging from the Actuarial Report and
Abstract Regulations to the Protection of the Policy holders’ Interest Regulations,
2002.