Module 4

Insurance
 Risk
• Uncertainty concerning the occurrence of loss.
• Types:
• Subjective and objective
• Pure and speculative
• Static and dynamic
• Fundamental and particular
• Financial and non financial
 Burden of risk on society
• Larger emergency fund
• Society is deprived of certain goods and
services
• Worry and fear
 Methods of handling risk
• Avoidance of risk
• Loss control
• Retention
• Non insurance transfers
• insurance
 Insurance
• Incase of insurance the risk is transferred to the
insurance company.
• Insurance is the pooling of fortuitous losses by
transfer of such risks to insurers, who agree to
indemnify the insured for such losses, to provide
other pecuniary benefits on their occurrence or
to render services connected with risks.
• The basic objective is to transfer the risk of a
person to the insurance company in consideration
of a nominal cost called insurance premium.
 Features
• Pooling of losses
• Payment of fortuitous losses
• Risk transfer
• indemnification
 Importance
• Importance to individuals
• Importance to business or industry
• Importance to society
 Importance of individual
• Insurance provide security and safety
• Insurance gives a peace of mind
• Insurance protects mortgaged property
• Insurance eliminates dependency
• Life insurance encourages saving
• Life insurance fulfils the need of a person
 Functions of Insurance
Primary and secondary functions
Primary functions include:
• Provide certainty
• Provide protection
• Transfer risk
Secondary functions include;
• Reduce loss
• Improve efficiency
• Helps economic progress
 Principles
• Insurance is defined as a contract between two
parties whereby one party called insurer
undertakes in exchange for a fixed sum called
premiums, to pay the other party called insured a
fixed amount of money on the happening of
certain event.
• The elements of special contract relating to
insurance are called principles of insurance.
• Principle of utmost good faith/ Uberrimae fidei
Both the parties of insurance contract act honestly towards each
other without mislead or withhold critical information from one
another.
• Principle of insurable interest
The insured must posses an insurable interest in the subject matter
of insurance. Subject matter can be any type of property or event
that may result in a loss of legal right or the creation of a legal
liability.
• Principle of indemnity
Indemnity in insurance means that the insurer has to make good the
loss of the insured. The insurer undertakes to put the insured in
the event of loss, to restore the insured to his position
immediately before loss.
• Principle of subrogation
Subrogation means stepping into the shoes of other. The insurer will
step into shoes of the insured and take over the asset or property
for which the insurer has paid claim to the insured.
• Principle of contribution
It refers to sharing of loss between co insurers. The insurer who pays
he claim first can ask all others to contribute. But the right arises
only after paying the loss of the insured. The total loss will be
contributed by the insurers on the basis of one insurer’s promise
bears to aggregate of all insurer’s promise.
• Principle of proximate cause
It means that when a loss is caused by more than one cause the
proximate (closest) cause and not the remote (distant) cause
should be considered to decide the liability of the insurer.
• Principle of loss minimization
Its the duty of the insured to take all possible
steps to minimize the loss to the insured
property on the happening of uncertain
events like fire or blast etc. Hence it is the
responsibility of the insured to protect his
insured property and avid further losses.
 IRDA
• Autonomous statutory agency established by
Government of India in1999.
• Headquarters at Hyderabad.
• For regulating and promoting the insurance and
reinsurance industries in India.
• GOI established IRDA for two significant reasons;
1. To safeguard the interest of the policy holders
2. To upgrade the entire insurance sector and also to
eradicate shortcomings of the insurance industry.
 Scope of IRDA
• Registration of new insurance companies in
India.
• Renewal of insurance registration
• Authority to withdraw and cancel registration
of companies.
• Modify registration procedure for a company.
 Objectives of IRDA
• To protect the interest and rights of insurance policy holders.
• Promote and ensure growth and development of insurance
industry.
• Allow entry of private insurer in the insurance sector.
• Eliminate unhealthy competition.
• Grant licenses to new insurance companies.
• Ensure speedy settlement of claims.
 Functions of IRDA
• Protect the interest of policy holders
• Dealing with registration, modification, renew, cancel of
registration
• Issue registration certificate.
• Specify code of conduct.
• Promoting efficiency in insurance business.
• Regulating funds of insurance companies.
• Adjudication of disputes
• Specifying the percentage of life insurance and general
insurance.
• Supervising the functioning of tariff advisory committee.
 Insurance sector reforms
• In 1993 Malhotra committee headed by former Finance
Secretary and RBI Governor R N Malhotra was formed
to evaluate the Indian Insurance Industry. They
recommended the future direction of insurance sector.
They emphasized to improve customer services and
increase the coverage of insurance policies. Based on the
proposal of the committee IRDA was established.
 Recommendations
• Government stake in the government owned insurance companies
should be bought down to 50%.
• Take over holding of GIC and subsidiaries and act as independent
corporations.
• Allowing private companies with paid up capital of one billion to
enter into insurance.
• No company should deal in both life insurance and general
insurance.
• Foreign company to enter the industry only through collaboration.
• Computerization of operations.
 Bancassuarance
• It means distribution of insurance products
thrugh banks.
• The word is a combination o bank and assurance
which signifies that both bankng and insurace
services are provided by the same corporate
entity.
Eg; SBI life insuarnce comapny Ltd - SBI
 Advantages

 Advantages to banks
• Earn additional income
• Bank become financial supermarket
• Increased return on asset
• Easy selling of insurance to bank customers
• Increased productivity of employee
 Advantages to insurers
• Use of huge customer base.
• Can sell the insurance products in rural areas.
• Can make use of invest habits of customers
• Easy selling of insurance products
 Advantages to customers
• Can get a benefit of insurance with lower premium rates.
• Get both banking and insurance services under one roof.
• Easy settlement of claims through banking channels.
• Convenience in payment of insurance premium.
• Availability if customised insurance products.
 Bancassurance Models
• Pure distributor – bank act as an intermediary offering
products of more than one insurance company.
• Strategic alliance – bank sell the products of only one
insurance company
• Joint venture – bank and an insurer establish a jointly
owned insurance company or distributor, thus
establishing a new entity.
• Financial holding company – a holding company owns
both an insurer and a bank.