IC 01 – Principles of Insurancec

CHAPTER 1: Risk Management

 Peril: Event that may cause loss (e.g., fire, flood, earthquake).
 Insurance: Cannot prevent peril but reduces financial impact on the owner/beneficiary.
 Risk: Uncertainty of outcome.
o Types: Catastrophic, Important, Financial, Non-financial, Dynamic, Static, Pure, Speculative,
Fundamental, Particular.
 Hazard: Increases chances of loss.
o Types:
 Physical Hazard: Related to the subject matter (e.g., poor wiring).
 Moral Hazard: Related to the character or intention of the proposer.
 Loss Includes:
o (a) Repair, replacement, or reinstatement.
o (b) Consequential losses during downtime.
 Risk Management Techniques:
o Prevention, Reduction, Retention, Transfer.
o Techniques: Separation, Duplication, Diversification, Indemnity Agreements, Hedging.
 Life Insurance: Risk to life can be transferred to a life insurance company.

CHAPTER 2: Concept of Insurance and Its Evolution

 Purpose of Insurance: Protection from risks to continue deriving benefits from assets.
 Insurance Concept: Risk is transferred from the asset owner to insurer for a premium.
 History:
o Oldest evidence: Babylonian obelisk (Hammurabi’s code).
o India’s first life insurer: Oriental Life Insurance Co., Kolkata (1818).
 Reforms:
o Sector opened to private players in 2000.
 Principle of Pooling: People exposed to similar risk share losses.
 Types: Life Insurance & General Insurance.
 Importance: Promotes trade and commerce by providing risk cover.

CHAPTER 3: The Business of Insurance

 Risk Management Options:

o Avoidance, Reduction, Retention, Transfer.
 Insurance Mechanism: Spreads individual losses across a group.
 Reinsurance: Risk transferred from one insurer to another.
o GIC is India’s national reinsurer.
 Financial Management:
o Revenue minus expenses ≠ Profit → Maintained as reserves for claims.
o Surplus → Distributed as profit or bonus.
 Premium Calculation:
o Based on expected loss using law of large numbers.
 Business Continuity: General insurance helps businesses recover and continue operations.
 Underwriting:
o Evaluates risk
o Determines entry, exposure, and premium

CHAPTER 4: The Insurance Market

  Market Segments:
1. Insurance Companies (Life, Non-life, Reinsurance)
2. Intermediaries (Agents, Brokers)
3. Specialists (Surveyors, Medical Examiners, TPAs)
4. Regulators (IRDAI, Ombudsman)
5. Educational Institutions (Insurance Institute of India, etc.)
 IRDAI: Regulatory authority under the Insurance Act.
 Insurance Ombudsman:

o Resolves policyholder complaints.

o Operates in 12 cities across India.

 Grievance Redressal:

o Toll-free: 155255
o Email: complaints@[Link]

 Educational Institutions: Offer professional certifications like Associateship, Fellowship.

CHAPTER 5: Insurance Customers

 Customer: Person who buys goods/services offered by a business.

 Internal Customer: Work output of one department used as input by another within the same organization.
 Customer Mindset: Varies over the policy lifecycle (buying, claim, renewal).
 Code of Ethics (IRDA):
o Promotes ethical behaviour.
o Unethical behaviour: Prioritizing self-interest over the policyholder’s.
 Business Ethics:
o About honesty, transparency, and fair dealing.
o Not lying, cheating, or stealing.

CHAPTER 6: The Insurance Contract

 Insurance Contract: Agreement between policyholder and insurer.

o Specifies subject matter, liability, premium, conditions, and consequences of default.
 Principles of Insurance:

1. Insurable Interest: Must exist (at proposal/claim/both – varies by product).

 Arises by law, contract, or statute.
2. Indemnity: Insured restored to financial position before the loss.
 Modes: Cash, Repair, Replacement, Reinstatement.
 Not applicable to life insurance.
3. Subrogation: Insurer can recover claim from the third party responsible.
4. Contribution: When multiple policies exist, insurers share the claim proportionally.
 Not applicable to life insurance.
5. Utmost Good Faith:
 Duty of full disclosure on both sides about all material facts.

CHAPTER 7: Insurance Terminology

 Proposal Form: Starting point of insurance (except marine cargo).

 Policy Document Includes:
o Subject matter, sum assured, endorsements, term, exclusions, and conditions.
 Life Insurance Premium Options:
o Limited Payment: Pay for a limited period.
 o Single Payment: Lump sum at start.
 General Insurance Renewal:
o Each renewal = new contract.
o Terms may change at each renewal.
 Premium Reserve:
o Portion of premium set aside for claims liability.

CHAPTER 8: Life Insurance Products

 Types of Insurance: Life vs Non-life.

 Basic Life Plans:
1. Term Assurance Plan: Pays only if death occurs during term.
2. Pure Endowment Plan: Pays only if insured survives the term.
 Traditional Plans: Combine features of term and endowment plans.
 ULIP (Unit Linked Insurance Plan):

o Combines insurance and market-linked investment.

 Annuity Plans: Provide regular income to policyholder.

 Group Insurance:

o Covers a group (e.g., employees, members) with a common objective.

CHAPTER 9: General Insurance Products

 Three Broad Categories:

1. Fire Insurance
2. Marine Insurance:
 Cargo Insurance
 Hull Insurance
3. Miscellaneous Insurance:
 Motor, Health, Personal Accident, Liability, etc.
 Motor Insurance:

o Covers: Vehicle damage, third-party liability, injury/death, property damage.

 Personal Accident Insurance:

o Covers death/disablement due to accidents (external, violent, visible means).

 Health Insurance:

o Types:

1. Individual Health Policy

2. Group Health Policy
3. Family Floater Policy

📜 History of Insurance (Global)

1. Early Forms of Insurance:

o Originated with human society; based on mutual aid (e.g. rebuilding houses).
o Still exists in some non-money economies (e.g. parts of former Soviet Union).
2. Ancient Practices:
 o China (3000 BC): Traders distributed cargo across vessels to reduce risk.
o Babylonia (1750 BC): Risk-sharing documented in the Code of Hammurabi.
3. Achaemenian Empire (Iran):
o System of helping those who gifted the monarch; considered an early form of insurance.
4. Rhodes (1000 BC):
o Concept of General Average: Shared loss among merchants.
5. Greece & Rome (600 AD):
o Guilds (benevolent societies) helped families and paid funeral expenses.
6. Middle Ages – Europe:
o Friendly societies pooled money for emergencies.
7. Renaissance Europe:
o Separate insurance contracts originated in Genoa (14th century).
o Marine insurance became prominent.
8. Lloyd’s of London (1680s):
o Coffeehouse became a hub for marine insurance underwriting.
9. Post-Great Fire of London (1666):
o First fire insurance company: The Fire Office by Nicholas Barbon.
10. United States:
o First insurer in 1732 in Charleston.
o Benjamin Franklin founded Philadelphia Contributionship in 1752.
11. Modern Regulation:
o Insurance regulated by individual U.S. states.
o Proposals for dual state-federal regulatory system.

🇮🇳 History of Insurance in India

1. Ancient India:
o Mentioned in Manusmriti, Dharmashastra, and Arthashastra.
o Concepts of resource pooling during calamities (fire, flood, famine).
2. Early Marine Insurance:
o Traces of marine trade loans and carriers’ contracts.
3. Life Insurance:
o Oriental Life Insurance Co. – Established in 1818 in Calcutta.
o Followed by Madras Equitable (1829), Bombay Mutual (1871), etc.
4. General Insurance:
o Triton Insurance Co. (1850, Calcutta) by the British – first general insurer.
o Indian Mercantile Insurance Ltd. (1907) – all classes of insurance.
5. Post-Independence Developments:
o Dominance of foreign companies till early 20th century.
o Nationalisation of life insurance (1956) and general insurance (1972).
6. Liberalisation & IRDA:
o Malhotra Committee (1993): Recommended private sector participation.
o IRDA formed in 1999; became statutory in 2000.
o Market opened in August 2000; foreign ownership allowed up to 26%.
7. Current Scenario:
o Insurance industry growing at 15–20% annually.
o Insurance and banking contribute ~7% to India's GDP.
o Supports infrastructure development and risk-taking capacity.
IC 11 – Practice of General Insurance:

CHAPTER 1: Introduction to General Insurance

 Insurance dates back to 4th century B.C. with “bottomry bonds” used by Mediterranean merchants.
 In India, life insurance was nationalized in 1956 and general insurance in 1972.
 2000 reforms liberalized the insurance sector, allowing private and foreign companies.
 GIC became the national reinsurer; its four subsidiaries became independent insurers.
 By June 2011, India had 24 non-life insurance companies.
 Key participants: insured, insurer, intermediary, reinsurer, lawyers, consultants, and surveyors.
 Reinsurance companies may buy retrocession (reinsurance of reinsurance).
 IRDA (Insurance Regulatory and Development Authority) is the insurance regulator in India.
 Insured segments: retail individual, SME, corporate.

CHAPTER 2: Policy Documents and Forms

 Insurance is a legal contract with all essential elements of a valid agreement.

 A policy typically includes seven standard components.
 Proposal forms have general, insurance-specific, and subject-specific questions.
 Claim forms help in processing claims and building analytical databases.

CHAPTER 3: Fire and Marine Insurance

 Standard Fire and Special Perils Policy covers losses from fire and similar perils.
 Can be customized to client needs.
 Marine insurance types:
o Hull Insurance (for ships)
o Cargo Insurance (for goods)
 Marine loss types: total loss, partial loss, sue and labour charges, salvage charges.
 Marine policy types:

1. Specific Policy
2. Open Cover
3. Open Policy
4. Special Declaration Policy
5. Annual Policy
6. Duty and Increased Value Policy

CHAPTER 4: Motor Insurance and Personal Liability Insurance

 Motor vehicles are classified into:

o (a) Private Cars
o (b) Two-Wheelers
o (c) Commercial Vehicles
 Governed by the Motor Vehicles Act, 1988.
 Important documents: Certificate of Insurance, Cover Note, Renewal Notice.
 Policy Forms:
o Form A: Act only policy (covers third-party liability)
o Form B: Comprehensive policy (own damage + third-party)
  Detariffication in 2007 allowed free pricing of Own Damage cover.
 Major liability insurances:
o Public Liability
o Product Liability
o Professional Indemnity
o Employer’s Liability
 Personal Accident Insurance provides compensation for death/disability due to accidents.
 Health Insurance reimburses hospitalization expenses.

CHAPTER 5: Engineering and Other Insurance

 Engineering Insurance includes:

o CAR (Contractors All Risks): Civil projects (buildings, roads, etc.)
o EAR (Erection All Risks): Plant/equipment installation
o ALOP (Advance Loss of Profit): Financial loss due to project delays
o Machinery Breakdown, Boiler & Pressure Plant, Electronic Equipment, CPM policies
 Burglary Insurance: Covers theft and damage due to burglary.
 Money Insurance: For cash in transit (banks, POs, etc.).
 Fidelity Guarantee: Protects employers from employee fraud/dishonesty.
 Householder's and Shopkeeper’s Policies: Bundled insurance for multiple risks.
 Aviation Insurance: Includes hull, war risk, liability, and total loss cover.
 Satellite Insurance: Covers all stages—pre-launch to in-orbit and third-party liability.
 Micro Insurance: Affordable insurance for low-income groups, covering both life and general insurance.

CHAPTER 6: Underwriting

 Two main sources of income for an insurer:

1. Underwriting income
2. Investment income
 Underwriters assess risk and exposure of clients to decide acceptance and pricing.
 Underwriting process includes:

o Receipt of proposal
o Evaluation of risk
o Acceptance/rejection
o Determination of terms, conditions, and premium
o Exposure management

 Risk sharing is essential through:

o Coinsurance (sharing risk among multiple insurers)

o Reinsurance (passing risk to another insurer)

 Types of reinsurance:

o Facultative: Case-by-case basis

o Treaty: For a portfolio or class of risks

 Risk management involves 4 steps:

1. Identify risks
2. Assess risks
3. Evaluate risks
4. Manage risks
CHAPTER 7: Ratings and Premium

 Pricing is crucial to insurer profitability.

 Target: Achieve consistent underwriting profits.
 Pure premium = Claims paid / number of policies
(basic form of premium calculation)
 Technical rate = Pure premium + loading for expenses and contingencies
Book rate = Marketable rate based on technical rate and strategy
 Operational pricing factors include:
o Rating of risk
o Catastrophe loading
o Commercial discounts

CHAPTER 8: Claims

 Claims service is the most visible and crucial part of insurance service.
 Poor claims handling negatively affects customer trust and profitability.
 Claims process involves:
1. Intimation
2. Fact gathering
3. Investigation
4. Decision (approve/reject)
5. Negotiation
6. Settlement
7. Closure
 Classification of claims is essential for data analysis and portfolio management.
 Claims leakage occurs when recoverables are missed, such as:

o Excess recovery
o Subrogation rights against third parties
o Contribution from co-insurers
o Salvage recovery

CHAPTER 9: Insurance Reserves and Accounting

 Accurate reserving is critical to long-term profitability and financial health.

 Stakeholders include: shareholders, underwriters, government, management.
 Types of reserves:
1. Premium Reserves:
 Unearned Premium Reserve (UPR)
 Unexpired Risk Reserve (URR)
2. Claims Reserves:
 Open Claims Reserve
 IBNR (Incurred But Not Reported)
 Investment theories followed:

o Modern Portfolio Theory (MPT)

o Asset Liability Management (ALM)

 Insurance accounting is similar to general accounting but adjusted for sector-specific needs (e.g., treatment
of reserves, deferred acquisition costs, etc.)