Insurance is a mechanism of risk transfer and sharing by pooling of risks and funds among a group of individuals

who are exposed to similar kinds of risks for the benefit of those who suffer loss on account of the risk.
Insurance is, thus, a financial tool specially created to reduce the financial impact of unforeseen events and to create
financial security. Indeed, everyone who wants to protect himself against financial hardship should consider
insurance.

Terminology used in definition of Insurance:

• Insurer or insurance company – The agency involved in Insurance business is known as insurer
• Insured/ Assured – The person who gets his property/life insured is known as insured
• Policy - The agreement or contract which is put in writing is known as a Policy.
• Policyholder: Also known as the policy owner, this is the person who owns the policy. The policyholder is the one
who buys the insurance and pays regular premiums.
• Nominee: The nominee or the beneficiary is the person who inherits the sum assured in case the life assured passes
away during the term of the policy. This is normally chosen by the policyholder and is usually a family member or a
close relative.
• Premium – The consideration in return of which the insurer undertakes to make goods the loss or give a certain
amount in case of life insurance is known as premium. An insurance company has mainly two source of income. (a)
The first is premium amount collected from policyholders and (b) through the returns on investments made by the
company. The funds for investment come from the premium collected. Hence the main source of income for the
insurance company is the premium.
• Sum assured: the insurance company signs a contract with the insured, where it promises to pay a certain amount
to the beneficiaries of the policyholders in case the policyholder (insured) dies during the term of the policy or to
the policyholder himself, if he survives the term of the policy. The amount is paid to the beneficiaries is also known
as death benefit. This sum assured is the amount predetermined by the individual, based on his future liabilities and
current income.
• Contract: An agreement binding at law between two or more parties is called contract.
• Peril: A peril is an event that causes a personal or property loss by fire, windstorm, explosion, collision premature
death, sickness, floods, dishonesty etc.
• Hazard: Hazard is a condition that may create, increase or decrease the chances of loss from a given peril.
• Exposure: An exposure is a measure of physical extent of the risk.
• Deferment period: it is the duration between the commencement of policy and the commencement of risk. It is
the duration for which one must wait before the benefits of the insurance plan actually begin. There is no insurance
cover during the deferment period.
• Deferred date: the date on which risk commences
• Rider: A rider is an additional clause or condition added to the base policy that gives additional (add-on) benefit
to the buyer. Riders can be compared to choice of different toppings in a pizza. A base policy is like a pizza base and
choice of riders is like choice of different pizza toppings available to customize the pizza as per an individual’s
requirement. Riders help to customize different requirements of a person into a single policy. riders enable a person

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to enhance the scope of protection offered by a policy, qualitatively and quantitatively. E.g. Accidental death benefit
rider, Critical illness rider, Income benefit rider etc.
• Annuitant: an individual investing in annuity is known as an annuitant
• Actuaries: Actuaries are trained professionals who deal with the financial aspect of risk to life. They are people
qualified from the Institute of Actuaries London or Actuarial Society of India. They analyse the occurrence of risk
and their impact, by using various mathematical, statistical and financial models. Actuaries study probability and
analyse the whole operation of insurance business.
• Indemnify:To restore the victim of a loss to the same position as before the loss occurred.
• Reinsurance: A type of insurance that involves acceptance by an insurer, called the reinsurer, of all or a part of the
risk of loss covered by another insurer, called the ceding company. It is a way for an insurer to avoid having to pay
for large or catastrophic losses. Reinsurance is a type of insurance that is purchased by insurance companies to
reduce risk. Essentially, reinsurance may restrict the cost of damages that the insurer can theoretically experience.
• Co-payment (Co-pay): A fixed amount the insured pays for covered healthcare services, with the remaining
balance covered by the insurance company. (Common in health insurance).
• No claim bonus: The bonus is getting under the policy, if the claim is not reported during the policy period and
after that the time renewal (in time) then as per the policy term no claim bonus is avail for the vehicle insurance
policy and
• Intermediaries: people or organisations who sell insurance for insurers - bringing together those who offer
insurance protection and those who want to buy it
• Free Look Period: Imagine you buy a term life insurance today, but change your mind about it later. An insurance
policy usually comes with a free look period which is the duration within which you can terminate the policy without
paying penalties. This period can differ from policy to policy.
• Claimant. A claimant is any person or entity requesting payment from an insurer, or insurance company.
• Deductible. A deductible refers to the amount of money that you, the insured, are required to pay before the
insurance company takes over. For example, if you have a Rs. 500 deductible on your auto insurance policy, and
you're involved in an accident that results in Rs. 5000 in damages, you would pay Rs. 500 and the policy would pay
the Rs. 4500 (or up to the limit of the policy).
• Endorsement under an insurance policy refers to an amendment or change made to the existing policy, which
changes the terms of original policy. Endorsement can be additions to the insurance such as riders, changes or
deletions etc. Endorsement can be made at the time of purchasing the insurance policy or at the time of renewal.
• Liability. This refers to a legal obligation or responsibility one party has for causing damage, injury, or loss to
another party
• Underwriter - person who identifies, examines and classifies the degree of risk represented by a proposed insured
in order to determine whether or not coverage should be provided and, if so, at what rate.
• Underwriting - the process by which an insurance company examines risk and determines whether the insurer
will accept the risk or not, classifies those accepted and determines the appropriate rate for coverage provided.
• CoverageThe scope of protection provided under the insurance contract; the amount and types of risks covered.
• Grace Period: If you couldn’t pay the renewal premium for your policy on time, life insurance company gives you
an extension in the number of days after the premium payment due date. A ‘Grace Period’ can be period of 15 days
in case of monthly premium payment mode, and 30 days in case of annual premium payment mode. If the
policyholder does not pay the premiums even before the end of grace period, the policy gets lapsed.
• Lapsed policy: a default in the payment of premium can result in the cancellation of the policy. This is known as a
lapsed policy. A certain grace period is provided by insurance companies to make the payment, if the policyholder
fails to make the payment during this period the policy is lapsed.

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• Surrender Value: If the policyholder decides to discontinue the plan before the maturity age, the life insurance
company pays an amount to the policyholder as per policy document, this is called Surrender Value. • Adverse
Selection: The tendency of people with a higher-than-average risk of loss to seek out or continue insurance more
often than those with a lower risk.
• Loss Ratio: The losses divided by the premiums paid. The numerator (losses) can be losses incurred or losses paid,
and the denominator (premium) can be earned premiums or written premiums, depending on what use is going to
be made of the loss ratio.
• Keyman Insurance Policy: A life insurance policy taken by a person on the life of another person who is or was
his employee/connected to his business in any manner whatsoever.
• Maturity claim: The Payment to the policy holder at the end of the stipulated term of the policy is called maturity
claim.
• Reinstatement: The restoration of a lapsed policy to in-force status. Reinstatement can only occur after the
expiration of the grace period. The company may require evidence of insurability (and, if health status has changed,
deny reinstatement), and will always require payment of the total amount of past due premium.
• Banc-assurance- Selling of insurance products through banks.
• Actuary- A person with expertise in field of economics, statistics and mathematics, who helps in risk assessment
and estimation of premium etc. for an insurance business.
• Lapse Ratio- It is the ratio of the number of life insurance policy that lapsed within a given period to the number
of policy in Force at beginning of that period.
• Agent- An individual who sells and services insurance policies
• Claim- A demand made by the insured, or the insured s beneficiary, for payment of the benefits as provided by the
policy.
• Commission-it is the Fee paid to an agent or insurance salesperson as a percentage of the policy premium.
• Waiting period- This is the period of time that must pass before your cover comes into effect. During this time you
are unable to claim. For example, if you have a waiting period applied for spinal injuries, you would be unable to
claim for this condition until the waiting period had passed. This is to prevent people applying for cover when they
know that they are likely to claim soon.
• Indemnity insurance- is an insurance policy designed to protect professionals and business owners when they
are found to be at fault for a specific event such as misjudgment.
• Claimant- A person who makes an insurance claim.
• Penetration Rate- indicates the level of development of insurance sector in a country. It is around 4% in India. •
Vesting date- it is the date from which the annuity holder starts receiving the policy benefits of a regular stream of
income.
• Appointee- Appointee is a person who acts as a caretaker of the policy benefits for the nominee until he attains
the age of 18 years.
• Lock-in period- Certain insurance policies also come with investment benefits. These dual benefit insurance
policies have a condition of lock-in period. According to this, during the lock-in period, investor/insurer is not
allowed to withdraw the invested amount.
• Nominee- Nominee refers to the person who is entitled to receive the policy benefits in this situation when policy
owner meets an unforeseen event and dies.
• Regular premium- Regular premium is the amount that the insurer pays to the insurance company on a regular
basis as specified in the insurance terms & conditions.
• Single premium- Single premium is the one-time payment to be paid to insurance provider as specified in the
policy terms before the plan commencement date.

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• Sum assured- Sum assured is the promised amount of money (as specified in the policy plan) that insurance
providers pay to the insurer upon maturity or unforeseen occurrence.
• Arson- The willful and malicious burning of property, often with criminal intent.
• Assignment- The legal transfer of one person's interest in an insurance policy to another person.
• Co-insurance- A means of spreading the risk on larger insurances between two or more direct insurers.
• Floater Policy- A policy under the terms of which protection follows moveable property, covering it wherever it
may be.
• Group insurance- Any insurance plan under which a few employees and their dependents are insured under a
single policy, issued to their employer, with individual certificates given to each insured employee; the most written
lines are life and accident and health
• Indemnification- Compensation to the victim of a loss, in whole or in part, by payment, repair, or replacement
• Indemnify- Legal principle that specifies an insured should not collect more than the actual cash value of a loss
but should be restored to approximately the same financial position as existed before the loss.
• Replacement Cost (RC)The amount it costs to replace a damaged item with a new one of similar kind and quality,
without deduction for depreciation.
• Package Policy- A combination of two or more individual polices into a single policy. A householder's policy, for
example, is a package policy.
• Under-insurance- The situation where the Sum Insured is less than the total value of property at risk.

Assurance and Insurance:

Feature Assurance Insurance

The event is certain to happen (e.g., death

Nature of The event is uncertain and may or may not
or policy maturity). The only uncertainty
Event (Core) happen (e.g., accident, fire, theft, illness).
is when.

Common Used primarily for Life (Whole Life, Used for General risks (Car, Health, Home,
Application Endowment, Annuities). Fire, Marine).

Based on the Principle of Indemnity, aiming

Underlying Based on the Principle of Certainty,
to restore the insured to the financial position
Principle guaranteeing a payout.
they were in before the loss.

A pre-determined, fixed amount (Sum

The payout is typically equal to the actual
Compensati Assured) is paid regardless of the actual
financial loss incurred (Sum Insured),
on Amount financial loss incurred by the
subject to the policy limit.
beneficiaries.

Duration/Te Generally, covers a long term or the Typically covers a short term (e.g., one year)
rm insured's entire life (whole life). and requires annual renewal.

Element of Often contains an investment or savings Purely a protective cover; lacks an

Investment component (e.g., cash value that builds investment/savings component.

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 up), especially in Whole Life or
Endowment plans.

Multiple claims are possible during the policy

Number of Generally, allows for a single claim (on
period (e.g., multiple car accidents or medical
Claims death or maturity).
bills).

Summary of the Distinction

• Assurance is about a guaranteed financial event (like death) and is often associated with the phrase "life
assurance." It serves both a protective and a savings/investment function.
• Insurance is about protection against a potential, uncertain future event and serves a pure risk mitigation
function.

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