Insurance
P.K. College, Contai
Department of Commerce (UG & PG)
Unit - IV
What Is Insurance?
Insurance is a contract, represented by a policy, in which a policyholder receives financial protection
or reimbursement against losses from an insurance company. The company pools clients’ risks to make
payments more affordable for the insured. Most people have some insurance: for their car, their house,
their healthcare, or their life. Insurance policies hedge against financial losses resulting from accidents,
injury, or property damage. Insurance also helps cover costs associated with liability (legal responsibility)
for damage or injury caused to a third party.
How Insurance Works
Many insurance policy types are available, and virtually any individual or business can find an insurance
company willing to insure them—for a price. Common personal insurance policy types are auto, health,
homeowners, and life insurance. Most individuals in the United States have at least one of these types
of insurance, and car insurance is required by state law. Businesses obtain insurance policies for field-
specific risks. For example, a fast-food restaurant’s policy may cover an employee’s injuries from cooking
with a deep fryer. Medical malpractice insurance covers injury- or death-related liability claims resulting
from the health care provider’s negligence or malpractice. A company may use an insurance broker for
advice to help them manage the policies of its employees. Businesses may be required by state law to
buy specific insurance coverages.
Insurance Policy Components
Understanding how insurance works can help you choose a policy. For instance, comprehensive coverage
may or may not be the right type of auto insurance for you. Three components of any insurance type
are the premium, policy limit, and deductible.
Premium
A policy’s premium is its price, typically a monthly cost. Often, an insurer takes multiple factors into
account to set a premium. Here are a few examples:
• Auto insurance premiums: Your history of property and auto claims, age and location, credit-
worthiness, and amount of coverage that may vary by state.
• Home insurance premiums: The value of your home, personal belongings, location, likelihood
of natural disasters, and coverage amounts.
• Health insurance premiums: Age, sex, location, health status, and coverage levels.
• Life insurance premiums: Age, sex, use of tobacco, medical history, and amount of coverage.
Much depends on the insurer’s perception of your risk for filing claims. For example, suppose you
own several expensive automobiles and have a history of reckless driving. In that case, you will likely
pay more for an auto policy than someone with a single midrange sedan and a perfect driving record.
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Insurance Basics
driving. However different insurers may charge different premiums for similar policies. So finding the price that is
right for you requires some legwork.
Policy Limit
The policy limit is the maximum amount an insurer will pay for a covered loss under a policy. Maximums may
be set per period (e.g., annual or policy term), per loss or injury, or over the life of the policy, also known as the
lifetime maximum.
Typically, higher limits carry higher premiums. For a general life insurance policy, the maximum amount that the
insurer will pay is referred to as the face value. This is the amount paid to your beneficiary upon your death.
The federal Affordable Care Act (ACA) prevents ACA-compliant plans from instituting a lifetime limit for essential
healthcare benefits such as family planning, maternity services, and pediatric care.
Deductible
The deductible is a specific amount you pay out of pocket before the insurer pays a claim. Deductibles serve as
deterrents to large volumes of small and insignificant claims.
For example, a $1,000 deductible means you pay the first $1,000 toward any claims. Suppose your car’s damage
totals $2,000. You pay the first $1,000, and your insurer pays the remaining $1,000.
Deductibles can apply per policy or claim, depending on the insurer and the type of policy. Health plans may have
an individual deductible and a family deductible. Policies with high deductibles are typically less expensive because
the high out-of-pocket expense generally results in fewer small claims.
Types of Insurance
The National Association of Insurance Commissioners (NAIC) compiles an index of complaints about insurance
companies. This information comes from state insurance regulators. The NAIC then compares the number of
complaints to the insurance company’s market share.
There are many different types of insurance. Let’s look at the most important.
Health Insurance
Health insurance helps cover routine and emergency medical care costs, often with the option to add vision and
dental services separately. In addition to an annual deductible, you may also pay copays and coinsurance, which
are fixed payments or a percentage of a covered medical benefit after meeting the deductible. However, many
preventive services may be covered for free before these are met.
Health insurance may be purchased from an insurance company, an insurance agent, the federal Health Insurance
Marketplace, provided by an employer, or through federal Medicare and Medicaid coverage.
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P.K. College, Contai
Department of Commerce (UG & PG)
The federal government no longer requires Americans to have health insurance, but in some states, such as California,
you may pay a tax penalty if you do not have insurance.
Home Insurance
Homeowners insurance (also known as home insurance) protects your home, other property structures, and personal
possessions against natural disasters, unexpected damage, theft, and vandalism. Homeowner insurance will not cover
floods or earthquakes, which you must protect against separately. Policy providers usually offer riders to increase
coverage for specific properties or events and provisions that can help reduce deductible amounts. These adders will
come at an additional premium amount.
Renter’s insurance is another type of homeowners insurance.
Your lender or landlord will likely require you to have homeowners insurance coverage. Where homes are concerned, if
you do not have coverage or stop paying your insurance bill, your mortgage lender is allowed to buy homeowners
insurance for you and charge you for it.
Auto Insurance
Auto insurance can help pay claims if you injure or damage someone else’s property in a car accident, help pay for
accident-related repairs on your vehicle, or repair or replace your vehicle if it is stolen, vandalized, or damaged by a
natural disaster.
Instead of paying out of pocket for auto accidents and damage, people pay annual premiums to an auto insurance
company. The company then pays all or most of the covered costs associated with an auto accident or other vehicle
damage.
If you have a leased vehicle or borrowed money to buy a car, your lender or leasing dealership will likely require you
to carry auto insurance. As with homeowners insurance, the lender may purchase insurance for you if necessary.
Life Insurance
A life insurance policy guarantees that the insurer pays a sum of money to your beneficiaries (such as a spouse or
children) if you die. In exchange, you pay premiums during your lifetime.
There are two main types of life insurance. Term life insurance covers you for a specific period, such as 10 to 20 years.
If you die during that period, your beneficiaries receive a payment. Permanent life insurance covers your whole life as
long as you continue paying the premiums.
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P.K. College, Contai
Department of Commerce (UG & PG)
Sum Insured vs Sum Assured: Understanding the Difference
The table below highlights the difference between basic sum insured and sum assured.
Basis Sum Insured Sum Assured
Applicability for Applicable for non-life insurance plans such Applicable for life insurance and guaranteed-
policy as home insurance, motor insurance, health return insurance policies.
insurance, etc.
Nature of policy Based on the indemnity principle; reimburses Fixed amount, pre-determined by the insurer;
only the amount of loss or damage. paid in case of death during the policy tenure
or on maturity of the policy.
Benefit No monetary benefit beyond reimbursement A monetary benefit is paid to the insured or
of the loss/damage amount. nominee.
Agent
An insurance agent is a representative who sells policies on behalf of an insurance company. The agent helps consumers
select the right insurance based on their needs, but represents the insurance company. Insurance agents sell and
negotiate different insurance policies.
Role of TPA
TPA stands for Third Party Administrator. It is an entity that helps insurance companies manage insurance
policies and claims on behalf of policyholders. The primary function of a TPA is to assist insurance companies in
providing health insurance services to individuals and in managing their claims.
A Third Party Administrator deals with operational services such as processing health insurance claims admissible
under mediclaim policies under contract to an insurance company. Insurers usually outsource their claim processing
to such third parties.
A TPA is responsible for:
• Managing and processing a large number of health insurance claims.
• Offering high-quality and speedy services to clients.
What are the roles played by a TPA? A TPA plays a crucial role in the processing of health insurance claims.
A few of the important roles played by a TPA are: (add remaining points as required).
P.K. College, Contai
Department of Commerce (UG & PG)
1. Issuance of health cards to the insured
A validation procedure is carried out for every policy issued to the policyholder. This procedure autho-
rizes a health card to be issued to the insured. A health card is required at the time of hospitalization
as it contains the policyholder, the policy number, and the TPA responsible for processing claims. The
insured can show this card and inform the TPA or insurer of the claim.
2. Smooth and speedy processing of claims
TPA’s essential tasks include smooth and speedy processing of claims. They are responsible for speedy
claim processing as soon as it is intimated by the insured. TPA ensures a smooth claim settlement by
verifying and checking the documents submitted by the insured. They can ask for more information as
and when required. Claims could either be cashless or reimbursement. In cashless claims, TPA collects
all the necessary documents directly from the hospital. The insured is asked to produce bills and other
supporting documents for reimbursement claims.
3. Provides helpline facilities for customer query
The policyholders must access information and assistance to solve their claim-related questions. TPAs
should set up helplines available 24×7 and valid all across the country so that policyholders can reach
out whenever they have a query. To know the status of their claim, policyholders can call the toll-free
number 1800-258-5956.
4. Strengthens and builds the hospital networks
TPA needs to have a massive and robust network of hospitals. TPA ensures to build a strong network
of hospitals by enlisting the best hospitals so that policyholders can easily avail cashless treatment with
minimum hassle.
5. Arrange for extra value-added services
TPA’s arrange for value-added services like ambulance services, wellbeing programs, specialized consulta-
tion, 24×7 toll-free helplines, etc. It is also the responsibility of the TPA to ensure seamless and smooth
delivery of services along with sharing their knowledge about health insurance with the insured.
A TPA carries out various roles that benefit both the insurer and the insured. TPA is essential for the
insurance company, hospital, and insured to work simultaneously in sync. Furthermore, different TPAs
have many features that ease the work of the insurers, hospitals, and policyholders. Before enrolling in
a TPA, remember to read the terms and conditions to set your expectations from your TPA.
What is IRDAI? Meaning & Functions of IRDAI
The Insurance Regulatory and Development Authority of India (IRDAI) is vital in regulating and de-
veloping India’s insurance sector. Established in 1999 as an autonomous and statutory body, the IRDAI
serves as the primary regulator for the insurance industry in the country. Its main objective is protecting
policyholders’ interests and ensuring the insurance industry’s growth and stability.
The IRDAI operates under the Ministry of Finance and oversees the functioning of insurance compa-
nies, intermediaries, and other entities involved in the insurance sector. It operates with the mission to
protect the rights of policyholders, promote fair and transparent practices, and foster the development
of a robust and sustainable insurance market in India.
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P.K. College, Contai
Department of Commerce (UG & PG)
What is IRDA?
IRDA stands for the Insurance Regulatory and Development Authority of India. It regulates the insur-
ance business in India and supervises the functioning of Life and General Insurance companies.
IRDAI has set various rules and regulations for the operation of the insurance industry. Its sole
objective is to defend the policyholders’ interest and holistically ensure the insurance industry’s growth
and evolution. IRDAI regularly issues notices to insurance companies if there are any changes in rules
and regulations. It leads the insurance companies to foster efficiency in the conduct of the insurance
business and control the rates or any other insurance-related charges.
How Does IRDA Work?
IRDAI, known as the apex body of the insurance sector, ensures that it frames rules and regulations
without any uncertainty or ambiguity towards any insurance company. To ensure integrity and financial
soundness in the industry, the primary work of the IRDAI revolves around the policyholder’s interest.
Its major roles include:
• Issue the certificate of registration to new insurance companies.
• Establish rules and regulations to take care of the interests of the policyholders.
• Monitor claim settlements fairly and ensure that no claim is denied by the insurance company of
their free will.
• Regulate the code of conduct of the insurance company and those associated with the insurance
industry.
• Address issues and provide solutions in case of disputes arising via the IRDAI ombudsman.
• Regulate and control the insurance rate to impede undesirable and superfluous premium hikes that
might distress the policyholder.
• Hold accountability for setting a minimum percentage limit for insurance companies in both Life
and General Insurance.
• Take responsibility for granting licenses to insurance agents. It issues licenses to individuals to
clear the required exam. It was integrated with the IRDAI regulations and comprised the rules for
applying for and acquiring an insurance agent license.
What is IRDAI and its Function?
The primary function of IRDAI is to protect policyholders’ interests while maintaining the insurance
market’s stability and efficiency. It achieves this by performing various roles and responsibilities. Some
key functions of IRDAI include:
Regulation and Supervision
IRDAI formulates and enforces regulations and guidelines that govern the conduct of insurance compa-
nies, intermediaries, and other entities operating in the insurance sector. It grants licenses to insurance
companies, sets capital requirements, and oversees their functioning to ensure compliance with applicable
laws.
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P.K. College, Contai
Department of Commerce (UG & PG)
Policyholder Protection
One of IRDAI’s key objectives is safeguarding policyholders’ interests. It sets norms for the fair treatment of poli-
cyholders, including grievance redressal mechanisms. IRDAI ensures that insurers uphold their commitments toward
policyholders and operate transparently and ethically.
Product Approval
IRDAI reviews and approves insurance products and policies before introducing them to the market. This ensures
products are fair, transparent, and provide adequate coverage. It also regulates premium rates to prevent unfair
pricing.
Financial Stability
IRDAI monitors insurers’ financial health and solvency to ensure their ability to meet claims. It establishes prudential
norms and conducts inspections and audits to assess financial soundness.
Market Development
IRDAI promotes the development and expansion of the insurance sector by encouraging innovation, diversification,
and technological advancements. It also facilitates new entrants and promotes healthy competition.
Consumer Awareness
IRDAI promotes public awareness of insurance products, benefits, and need for insurance. It conducts campaigns,
publishes educational materials, and implements initiatives to enhance financial literacy and empower consumers.
Intermediary Regulation
IRDAI regulates insurance intermediaries such as agents, brokers, and TPAs. It sets qualification requirements, code
of conduct, and operational guidelines to ensure ethical practices and professionalism.
International Cooperation
IRDAI collaborates with international insurance regulators and organizations to exchange knowledge, best practices,
and regulatory experiences. This helps harmonize regulations, address cross-border challenges, and promote global
standards.
What is the IRDA Rule?
The IRDA rule comprises guidelines, regulations, and norms that govern various aspects of the insurance industry.
These rules form a robust framework for insurers, intermediaries, and policyholders.
Licensing And Registration
IRDA regulates the licensing and registration of insurers, intermediaries, and agents. It sets eligibility criteria,
qualifications, and capital requirements for obtaining licenses in the insurance business.
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P.K. College, Contai
Department of Commerce (UG & PG)
Policyholder Protection
The IRDA places significant emphasis on safeguarding policyholders’ interests. It mandates insurance companies
to maintain a high standard of service, transparency in policy terms and conditions, and timely claim settlements.
The rule also establishes guidelines for policy-related disclosures and resolves grievances through an integrated
grievance redressal mechanism.
Solvency Margin
The IRDA rule mandates insurers maintain a solvency margin, which is the excess of assets over liabilities. The
margin ensures insurers’ financial stability and ability to fulfill policyholder claims. It also acts as a buffer to
protect policyholders’ interests.
Product Approval
The IRDA must approve Insurance products before being introduced in the market. This ensures that the products
meet the required standards, are suitable for the target customers, and offer reasonable terms and conditions.
Investment Guidelines
The IRDA specifies guidelines on insurers’ investment activities, ensuring prudent investment practices and risk
diversification. These guidelines help insurers manage their investment portfolios responsibly, reducing the poten-
tial risks associated with investments.
Market Conduct And Anti-Fraud Measures
The IRDA rule promotes fair market conduct and prohibits fraudulent activities, misrepresentation, and unfair
trade practices. It establishes mechanisms to detect and deter fraudulent behavior, safeguarding the industry’s
integrity and building consumer trust.
Structure of the Insurance Regulatory and Development Authority of India (IRDAI)
The Insurance Regulatory and Development Authority of India (IRDAI) is a statutory body that regulates and
promotes the insurance industry. Here’s a breakdown of its structure:
Governing Body:
A 10-member body with a Chairman, five full-time members, and four part-time members appointed by the Gov-
ernment of India.
Departments:
IRDAI is functionally divided into various departments, each handling specific aspects of insurance regulation.
Some key departments include:
• Life Insurance Department
• Non-Life Insurance Department
• Financial Regulation Department
• Registration Department
• Policyholders’ Grievances Department
• Information Technology Department
Committees:
IRDAI functions with the help of various committees that advise it on different aspects of insurance regulation.
These committees include: . . .
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Insurance Advisory Committees
• Insurance Advisory Committee
• Life Insurance Advisory Committee
• General Insurance Advisory Committee
• Reinsurance Advisory Committee
IRDAI also has regional offices across India to facilitate effective regulation and grievance redressal. IRDAI’s structure ensures
a comprehensive approach to regulating the insurance industry, balancing the interests of policyholders, insurance companies,
and the overall growth of the insurance sector in India.
Role and Importance of IRDAI in the Insurance Sector
The Insurance Regulatory and Development Authority of India (IRDAI) is critical in ensuring India’s healthy and trustworthy
insurance sector. Here are some factors explaining its importance:
Protecting Policyholders
IRDAI acts as a watchdog for policyholders. It sets rules for fair policy terms, transparent claim settlements, and provides a
grievance redressal mechanism to address issues with insurance companies.
Market Stability and Growth
IRDAI promotes healthy competition among insurers, fosters innovation, and lowers consumer premiums. It also maintains
financial solvency requirements for insurance companies, ensuring they have enough funds to meet future claims. This fosters
a stable and secure market.
Transparency and Order
IRDAI mandates clear disclosures in insurance policies and requires transparent claim processes. It promotes consumer education
so individuals can make informed decisions about insurance products.
Regulation and Development
IRDAI regulates all insurance companies and intermediaries in India. It issues licenses, sets codes of conduct, and monitors
compliance with regulations. It also helps develop the insurance sector by introducing new product categories and promoting
insurance awareness.
New Rule of IRDAI (2023)
In 2023, IRDAI implemented a significant new rule to enhance transparency and combat fraud in the insurance sector. According
to the regulation, individuals must submit Know Your Customer (KYC) documents when purchasing new insurance policies.
This requirement applies to various types of insurance, including health, auto, travel, and home insurance.
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What are the Rights and Duties of IRDAI?
Established to safeguard policyholder interests and promote orderly growth, IRDAI fulfils dual
responsibility–wielding both regulatory and developmental powers. Here is the list of rights
and duties of IRDAI:
Regulation
• Fostering operational efficiency within the insurance industry
• Overseeing and supervising professional associations affiliated with insurance and re-
insurance enterprises
• Imposing fees and various assessments to facilitate the objectives of this legislation
• Soliciting information, conducting inspections, inquiries, and audits of insurers, interme-
diaries, insurance intermediaries, and related entities engaged in insurance operations
• Exercising control and regulation over the rates, benefits, terms, and conditions offered
by insurers in relation to general insurance activities not governed by the Tariff Advisory
Committee under Section 64U of the Insurance Act, 1938 (4 of 1938)
• Prescribing the specific format and method for maintaining accounting records and sub-
mitting financial statements by insurers and other insurance intermediaries
• Supervising investment practices of insurance companies
• Ensuring the maintenance of adequate solvency margins
Duties
• Resolving conflicts arising between insurers and intermediaries or insurance intermediaries
• Overseeing the operations of the Tariff Advisory Committee
• Determining the proportion of the insurer’s premium income allocated towards support-
ing initiatives aimed at fostering and overseeing professional organizations mentioned in
clause (f)
• Establishing the percentage of the insurer’s engagement in life insurance and general
insurance activities within rural or social sectors
• Wielding additional authorities as designated by the appropriate regulations
What are the Types of Insurance Policies Regulated by
IRDAI?
As part of the regulatory role, the IRDAI oversees various insurance policies offered by insurance
companies in the country. These policies cater to the diverse needs of individuals, businesses,
and other entities.
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Life Insurance
As the name suggests, life insurance is a financial plan that safeguards your life. It is a contract
between an insurance policyholder and an insurance company wherein the insurer agrees to pay a
sum in exchange for premium payments if the covered person passes away or after the designated
maturity period. There are two types of life insurance: term and whole life insurance.
Non-Life Insurance (Also Commonly Known As General In-
surance)
Everything else that is not covered under life insurance falls under non-life or general insurance.
This includes health insurance, vehicle insurance, two-wheeler insurance, home insurance, business
insurance, travel insurance, etc.
The Objective of IRDAI
The primary objective of the IRDAI is to implement the provisions under the Insurance Act. The
mission statement of IRDAI is:
• To safeguard the interest of the policyholder and ensure his/her fair treatment.
• To govern the insurance industry impartially and to ensure the industry’s financial sanity
remains intact.
• To routinely formulate regulations to ensure the insurance industry functions without any
uncertainty.
Establishment and History of IRDAI
The Government of India was the insurance industry’s regulatory body until 2000. However, to
establish a stand-alone body, the IRDAI was built following the recommendation of the Malhotra
Committee Report in 1999. By August 2000, the IRDAI began accepting applications for registra-
tions and allowed companies, through invites from different countries, to invest as much as 26% in
the Indian market.
It has defined several rules and regulations under the Insurance Act of 1938. These regulations
range from the registration of insurance companies to their operation in the country to protect
the interests of policyholders. As of September 2020, 24 Life Insurance companies and 31 General
Insurance companies are registered with the IRDAI.
Features and Benefits of IRDAI
Below are some of the leading features and benefits of the Insurance Regulatory and Development
Authority of India (IRDAI):
• Acts as a regulatory body for the insurance industry.
• Safeguards the interests of the policyholder.
• Rules and regulations are established by the IRDAI under Section 114A of the Insurance Act
of 1938.
• IRDAI can grant registration certificates to new insurance companies that wish to operate in
India.
• IRDAI oversees the insurance industry’s activities to guarantee the persistent development of
the insurance company and the policyholder.