INSURANCE

Presented by
Prof. Sipra Karmakar
Gandhi Institute for Technology
 Introduction
 Insurance is a legal agreement between
two parties i.e. the insurance company
(insurer) and the individual (insured).
 [Link]
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 Cont…
 Contingencies: The contingency is the
event which causes a loss. It can be the
death of the policyholder or
damage/destruction of the property. It’s
called a contingency because there’s an
uncertainty regarding happening of the
event. The insured pays a premium in
return for the promise made by the
insurer.
 Terms of Insurance
 Producer/Agent: A legal representative of
an insurance company
 Broker: A legal representative of multiple
insurance companies
 Person: Individual human being/
association/ organizations/corporations/
partnerships and trusts
 Insured: ‘person’ covered by an insurance
policy
 Insurer(Principal): Company who issues
an insurance policy
 Cont…
 Applicant(proposed insured): Person
applying for insurance.
 Insurance policy: A written instrument, in

which a contract of insurance is set forth.

 Premium: Payment

 Insurance: Transfer of risk

 Risk: Possibility of loss

Pure Risk: Loss only

Speculative Risk: Loss or
Gain(Gambling)
 Cont…
 Hazard: Condition and actions that
increase the risk or probability of loss.
Physical condition (blind/deaf)
 Peril: Accident / specific event (Tornado,
car crash, flood). Causes of Loss
 Loss: Reduction of quantity, quality or
value. Basis for a claim.
 Insurance: Transfer of Loss, Protection
Basic principles of Business of
Insurance
 Principle of Utmost Good Faith
 Principle of Insurable interest
 Principle of Indemnity(security, protection
and compensation given against damage,
loss or injury)
 Principle of Contribution
 Principle of Subrogation
 Principle of Causa Proxima(nearest cause)
 Principal of Loss Minimization
Principal of Utmost Good Faith
The fundamental principle is that both the parties in an
insurance contract should act in good faith towards each
other, i.e. they must provide clear and concise
information related to the terms and conditions of the
contract.
The Insured should provide all the information related to
the subject matter, and the insurer must give precise
details regarding the contract.
Example – Jacob took a health insurance policy. At the
time of taking insurance, he was a smoker and failed to
disclose this fact. Later, he got cancer. In such a
situation, the Insurance company will not be liable to
bear the financial burden as Jacob concealed important
facts.
 Principal of Insurable Interest

This principle says that the individual (insured) must

have an insurable interest in the subject matter.
Insurable interest means that the subject matter for
which the individual enters the insurance contract
must provide some financial gain to the insured and
also lead to a financial loss if there is any damage,
destruction or loss.
Example – the owner of a vegetable cart has an
insurable interest in the cart because he is earning
money from it. However, if he sells the cart, he will
no longer have an insurable interest in it.
To claim the amount of insurance, the insured must
be the owner of the subject matter both at the time
of entering the contract and at the time of the
accident.
 Principal of Indemnity

This principle says that insurance is done only for the coverage of
the loss; hence insured should not make any profit from the
insurance contract. In other words, the insured should be
compensated the amount equal to the actual loss and not the
amount exceeding the loss. The purpose of the indemnity principle
is to set back the insured at the same financial position as he was
before the loss occurred. Principle of indemnity is observed strictly
for property insurance and not applicable for the life insurance
contract.
Example – The owner of a commercial building enters an
insurance contract to recover the costs for any loss or damage in
future. If the building sustains structural damages from fire, then
the insurer will indemnify the owner for the costs to repair the
building by way of reimbursing the owner for the exact amount
spent on repair or by reconstructing the damaged areas using its
own authorized contractors.
 Principal of Contribution
 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.
 Principal of Subrogation
Subrogation in the insurance sector generally involves three
parties: the insurer (insurance company), the policymaker
(insured party), and the party responsible for the damages.
The process usually starts when the insurer pays out the
losses of the insurance claim filed by the policymaker. When
the policyholder receives the amount of money for the claim,
the insurer may start the process of collecting the amount of
the claim from the party that caused the damages.
 Example John and Sam were involved in a car accident. As
a result, John’s car was severely damaged, and he required
$3,000 for the repair of the vehicle. Luckily, John’s car was
insured, and he recovered the full cost of the repair
($3,000) through an insurance claim.
 Eventually, an investigation determined that Sam was
responsible for the accident as he exceeded the speed
limit. John’s insurance company decides to recover the
amount of the claim from Sam, as he caused the damages.
 Principal 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.
For example an insured suffered injuries in an
accident. He was admitted to the hospital. He
contracted an infectious decease while undergoing
the treatment. He dies due to this infectious decease.
The court held that the proximate cause of his death
was infectious decease and not the injury. The original
accident was the remote cause. So the claim cannot
 Principal of Loss Minimization

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.
 Case Study
 Insurance Company wants accident victi
m to submit irrelevant [Link]
 Types of Insurance
Life Insurance
 Term Policy
 Whole life policy
 Endowment policy
 Money back policy
 Annuity
 Unit Linked Insurance policy(ULIP)
 General Insurance
 Health & Medical Insurance
 Property Insurance
 Liability Insurance
 Marine insurance
 Fire Insurance
 Motor insurance
 Accident insurance
 Credit Insurance
 Fidelity Insurance
 Burglary insurance
 Workmen Compensation insurance
 Unemployment insurance
 Employment Liability insurance
 Life Insurance
 A life insurance contract is a contract in
which the insurer in consideration of
certain premium either in lump sum or
other periodical payments, agrees to pay
to the assured or to the person for whose
benefits the policy is taken, an agreed
sum of money on the death of the
insured or on the expiry of a specified
period of time, whichever is earlier.
 Cont…
 Term Policy: a policy in life insurance may be a
limited numbers of years, the face value of the
policy being payable only if death occurs during
the stipulated term, and nothing being paid in
case of survival.
 Whole life insurance : The sum is payable only
on the death of the insured or assured and the
premium is throughout the life of the policy at a
regular interval.
 Endowment insurance: The sum assured is
payable on the death of the insured or a fixed
period of time which is earlier and premium are
payable only for a fixed period of time as per
contact
 Cont…
 Money Back Policy: It offers periodical payments
of fractional survival benefits during the term of
the insurance policy.
 Annuity: An Annuity is a periodical level of
payments made in exchange of the purchase
money for the remainder of the lifetime of a
person or for specified period.
 ULIP: It offers dual benefits of protection as well
as savings. The protection component is the
insurance cover while the savings component is
that portion of the premium that is invested by
the insurance company on your behalf. The first
one is called Death benefit and the second one
is Maturity benefit.
 General Insurance
 A contract whereby, upon periodic
payment of a sum of money called
premium, the insurer undertakes to
compensate the insured in the event of
any specified loss or damage suffered by
the latter, is known as Non life insurance
or General insurance.
 Reinsurance
 Reinsurance is a contract between two or
more insurance companies by which a
portion of risk or loss is transferred to
another insurance company. This
happens when an insurance company has
undertaken more risk burden on it
shoulders than its bearing capacity.
Reinsurance is an insurance on
insurance.
 Cont…
 Example: P is a factory owner
approached an insurance companies Q
for the insurance for an amount say
Rs.50 crore. Looking to the financial
position , company Q considers to retain
only Rs.25 crore. There are two ways to
deal with the proposal. It may decline to
take risk or accept it for the whole
amount and approach the other insurer
for the excess of his own limit. The other
insurer is called Reinsurance
 Banc-assurance
 Definition: Bancassurance means selling insurance
product through banks. Banks and insurance
company come up in a partnership wherein the bank
sells the tied insurance company's insurance products
to its clients.

Description: Bancassurance arrangement benefits

both the firms. On the one hand, the bank earns fee
amount (non interest income) from the insurance
company apart from the interest income whereas on
the other hand, the insurance firm increases its
market reach and customers. The bank acts as an
intermediary, helping insurance firm reach its target
customer in order to increase its market share.
 Micro insurance
 A plan that gives insurance coverage
to economically weaker population
to protect their families and secure
their future.
 Micro insurance products offer coverage
to low-income households or to
individuals who have little savings. It
is tailored specifically for lower valued
assets and compensation for illness,
injury, or death.
 Cont…
A general micro-insurance product is any:

 Health insurance contract

 Any contract covering belongings such as
 Hut
 Livestock
 Tools or instruments or
 Any personal accident contract
 They can be on an individual or group basis
A life micro-insurance product is:

 A term insurance contract with or without return of

premium
 Any endowment insurance contract or
 A health insurance contract
 They can be with or without an accident benefit rider and
 IRDA
Role, Functions
The duties, powers and functions of
IRDA have been specified under
Section 14 of IRDA Act, 1999. The IRDA
Authority has the duty to promote, regulate
and ensure orderly growth of the insurance
and re-insurance businesses across India,
subject to the provisions of this Act and any
other additional law that is being enforced.
 Cont…
 Issuing a certificate of registration to the applicant as
well as modify, renew, withdraw, suspend or cancel
any such registration that is deemed unfit.
 Protecting the interests of the policyholders in
matters concerning assigning of insurance policy,
nomination by policyholders, settlement of insurance
claim, insurable interest, surrender value of policy
and other terms and conditions based on contracts
of insurance.
 Specifying requisite qualifications, practical training
and code of conduct for insurance intermediaries,
insurance brokers and agents.
 Specifying the code of conduct for surveyors and loss
assessors.
 Promotion of efficiency in the conduct of insurance
business.
 Promoting and
Cont…
regulating professional organizations
connected with the insurance and re-insurance business
across India.
 Levying fees, commission and other charges for carrying
out the purposes of this Act.
 Calling for data or information from, undertaking
inspection of, conducting enquiries and investigations,
conducting audit of the insurers, intermediaries,
insurance intermediaries and other organizations
connected with the insurance business.
 Under section 64U of the Insurance Act, 1938 (4 of
1938), controlling and regulation of the rates,
advantages, terms and conditions etc that may be
offered by insurers (or Insurance Companies) in respect
of general insurance business not so controlled and
regulated by the Tariff Advisory Committee.
 Cont…
 Specifying the manner and form in which books of account shall be
maintained and statement of accounts, financial statements etc shall
be rendered by insurers and other insurance intermediaries.
 Keeping a tab, exercising control and regulating investment of funds
by insurance companies.
 Regulating the maintenance of margin of solvency by the Insurers.
 Adjudication of disputes between insurers and intermediaries or
insurance intermediaries, hospitals, healthcare organizations or with
customers.
 To effectively supervise the functioning of the Tariff Advisory
Committee.
 Specifying the percentage of premium income of the insurer to
finance schemes for promoting and regulating professional
organizations referred to in clause (f);
 Specifying the percentage of life insurance business and general (or
non-life) insurance business to be undertaken by the insurance
company in the rural or social sector.
 Exercising any such other powers that may be prescribed with
passage of time.
 Power of IRDA
1. All insurance companies have to register with IRDA
compulsorily.
2. Companies can undertake only insurance business.
3. The capital structure of the companies will be determined
by IRDA.
4. Companies have to deposit with RBI the amount stipulated
by IRDA.
5. Accounts and balance sheets of companies have to be
submitted to IRDA.
6. Insurance companies have to appoint actuaries and they
will value the liabilities of the insurance companies and
report the same to IRDA.
7. Investment of assets will be prescribed by IRDA in the form
of approved securities.
8. The nature of general insurance business will be
prescribed by IRDA.
 Cont…
9. Statements of investment assets to be
submitted to IRDA every financial year.
10. All insurance companies have to devote
certain percentage of their business including
insurance for crops. This should cover unorganized
sector including the economically weaker sections.
11. The appointment of chief executive officer
requires prior permission of the IRDA.
12. All insurance agents must obtain license from
IRDA.
13. IRDA has powers for levying penalty on
companies which fail to comply with the rules and
regulations.