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1) What is insurance ? Explain the principles of insurance.
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used
to hedge against the risk of a contingent or uncertain loss. Insurance is a contract between the
insurer and the insured, whereby the insurer agrees to compensate the insured against loss. The
insured has to pay a certain fixed sum of money on a timely basis to the insurer.
The principles of insurance are as follows:
1. Principle of Utmost good faith: As per this principle, there must be good faith and honesty
between the insurer and the insured. Both of them must also disclose all material facts accurately.
Insured must provide complete, clear and correct information of the subject matter while insurer
must provide all the relevant information regarding terms and conditions. If complete, correct and
clear information is not provided by either sides of the contract, it may result in non-settlement of
claim.
E.g.: Suppose a person takes a life insurance policy of 1 crore and dies a year later due to medical
problem which he had not disclosed at the time of taking policy. In this case, the insurer can refuse
to give compensation to family members as the person had not disclosed all the facts.
2. Principle of Insurable interest: As per this principle, the insured must have insurable or financial
interest in the subject matter of insurance. In simple words, insurable interest exists when the
insured derives financial or any other kind of benefit from the insured object/person. Insurable
interest is applicable to all insurance contracts.
E.g.: i)A person has insurable interest in his own life and property.
ii) A businessman has insurable interest in the goods he deals and business property.
3. Principle of Indemnity: To indemnify means to compensate. In insurance terms, indemnify means
an assuranc (promise) to put the insured in the same financial position as he was before happening
of the uncertain event. Sc this principle, insurer agrees to compensate insured for the actual loss
suffered.
The applicability of principle of indemnity is as follows:
In case of fire, marine and general insurance, amount of compensation is limited to the amount
assured or actua incurred, whichever is less.
E.g.: If goods worth 3 Lac are destroyed and insured value if 4 Lac, then the insurance company shall
pay th only3 Lac. However, if the insured value is 2 Lac, it shall pay 2 Lac only and not 3 Lac.
ii) Principle of indemnity does not apply to life insurance as the value of human life cannot be
assessed in mone terms. In case of death of insured, the actual sum assured is paid to the nominee.
4. Principle of Subrogation: This principle is applicable to all contracts of indemnity. As per this
principle, after insurer pays compensation to the insured, legal right of the insured property gets
transferred to the insurer. This is applicable only when the damaged property has any value after the
unforeseen event causing damage.
5. Principle of Contribution
Contribution principle applies when the insured takes more than one insurance policy for the same
subject matter. It states the same thing as in the principle of indemnity, i.e. the insured cannot make
a profit by claiming the loss of one subject matter from different policies or companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and with company
B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can claim the full amount
from Company A but then he cannot claim any amount from Company B. Now, Company A can claim
the proportional amount reimbursed value from Company B.
6. Principle of Loss Minimisation
This principle says that as an owner, it is obligatory on the part of the insurer to take necessary steps
to minimise the loss to the insured property. The principle does not allow the owner to be
irresponsible or negligent just because the subject matter is insured.
Example – If a fire breaks out in your factory, you should take reasonable steps to put out the fire.
You cannot just stand back and allow the fire to burn down the factory because you know that the
insurance company will compensate for it.
7. Principle of Proximate Cause
This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle applies when
the loss is the result of two or more causes. The insurance company will find the nearest cause of
loss to the property. If the proximate cause is the one in which the property is insured, then the
company must pay compensation. If it is not a cause the property is insured against, then no
payment will be made by the insured.
Example –
Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be
demolished. While demolition the adjoining building was damaged. The owner of the adjoining
building claimed the loss under the fire policy. The court held that fire is the nearest cause of loss to
the adjoining building, and the claim is payable as the falling of the wall is an inevitable result of the
fire.
2) Define a bank? Explain Different types of bank.
1. Central Bank
o This is the apex institution for a country’s banking industry. In India, that’s the
Reserve Bank of India (RBI).
o Key functions:
1. Frames the monetary policy.
2. Issues currency notes.
3. Acts as banker to the government.
4. Acts as a “bankers’ bank” to commercial and other banks.
o So basically: the big boss of banks, making sure the banking system and money
supply run smoothly.
2. Commercial Banks
o These are the banks we deal with the most: deposits, loans, and everyday banking. (
o In India, they can be split into three groups:
Public sector banks (majority government-owned)
Private sector banks (owned by individuals/companies)
Foreign banks (established outside India but operating in India
o Their functions include: accepting deposits, giving out loans, facilitating payments,
agency functions etc.
3. Co-operative Banks
o These are especially important in rural and semi-urban areas.
o Purpose: provide credit to economically weaker sections (farmers, small‐scale units)
at more accessible terms.
o Operates at three levels:
1. Primary Credit Societies (village‐level)
2. District Central Co-operative Banks (district level)
3. State Co-operative Banks (state level)
4. Industrial / Development Banks
o These banks focus on medium and long-term financing of businesses – especially for
expansion/modernisation.
o Examples: Industrial Finance Corporation of India (IFCI), State Finance Corporations
(SFCs), etc.
o Functions include: underwriting shares, purchasing debentures, etc, for business
units.
5. Exchange Banks
o These banks specialise in foreign trade transactions — i.e., banking across borders.
o Functions: financing foreign trade, issuing Letters of Credit (LCs), discounting foreign
bills, remittances of dividends/profits from abroad, etc.
6. Regional Rural Banks (RRBs)
o Set up to enhance banking access in rural/semi-urban areas. In India, sponsorship is
often by a commercial bank.
o Capital structure: central government, state government & sponsor bank.
o Aim: deposit mobilisation + credit to small/marginal farmers, rural artisans.
7. Savings Banks
o Purpose: encourage savings especially among people in rural areas or with fixed
incomes.
o They accept small deposits and help inculcate thrift.
8. Investment Banks
o These banks usually work with business firms/governments rather than the general
public.
o They provide advisory & financial assistance: mergers & acquisitions, underwriting,
etc.
9. Specialised Banks
o Banks with a niche focus. For example:
Export-Import Bank of India (EXIM Bank) – for import/export finance.
Small Industries Development Bank of India (SIDBI) – support for the MSME
sector.
National Bank for Agriculture and Rural Development (NABARD) – apex for
agriculture & rural sector. (