SONA COLLEGE OF ARTS AND SCIENCE, SALEM - 5

SUBJECT: FUNDAMENTALS OF INSURANCE CLASS: III B.COM “B”

UNIT – I

INTRODUCTION TO INSURANCE
Insurance is a legal agreement between an
insurer (insurance company) and an insured
(individual), in which an insured receives financial
protection from an insurer for the losses he may
suffer under specific circumstances.

Under an insurance policy, the insured needs

to pay regular amount of premiums to the insurer.
The insurer pays a predetermined sum assured to
the insured if an unfortunate event occurs, such as
death of the life insured, or damage to the insured or
his property

MEANING

Insurance meaning is a legal contract between two parties- the insurance company (insurer) and the
individual (insured), wherein the insurance company promises to compensate for financial losses due to
insured contingencies in return for the premiums paid by the insured individual. In simple words, insurance
is a risk transfer mechanism, where you transfer your risk to the insurance company and get the cover for
financial loss that you may face due to unforeseen events. And the amount that you pay for this arrangement
is called premium. There is insurance available for various risks, starting from your life to mobile phones
that you use. In the end, it’s essential to protect what is ‘important’ to you.

DEFINITION
Insurance is a contract in which a sum of money is paid by the insured in consideration of the
insurer’s incurring the risk of paying a large sum upon a given contingency.
By – Justice Tindal
Insurance is a social device where by uncertain risks of individuals may be combined in a group and
thus made more certain; small periodic contribution by the individual providing a fund out of which those
who suffer losses may be reimbursed.
By – Riegel. R and Miller J.S
Insurance is a plan by which large number of people associates themselves and transfer, to the
shoulders of all, risks attached to individuals.
By – D.H. Magee
Insurance is a co-operative form of distributing a certain risk over a group of persons who are exposed to it.
By - Ghosh and Agarwal
Insurance is a social device providing financial compensation for the effects of misfortune, the payments
being made from the accumulated contribution of all parties participating in the scheme. By- Ghosh and Agarwal

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 How does an Insurance Policy Work?
1. Premium
Is the money you pay to the insurance company to
avail of insurance policy benefits.
2. Sum Insured
Sum insured is applicable for a non-life insurance
policy like home and health insurance. It refers to
the maximum cap on the costs you are covered for in
a year against any unfortunate event.
3. Sum Assured
Sum assured is the amount the life insurance
company pays to the nominee if the insured event
happens (death of insured).

Nature of Insurance
On the basis of the definitions of insurance discussed above, one can observe the following characteristics:

(i) Contract: Insurance is a contract between the insurance company and the policyholder wherein the
policyholder (insured) makes an offer and the insurance company (insurer) accepts his offer. The contract of
insurance is always made in writing.
(ii) Consideration: Like other contracts, there must be lawful consideration in insurance also. The consideration is
in the form of premium which the insured agrees to pay to the insurer.
(iii) Co-operative Device: "All for one and one for all" is the basis for co-operation. The insurance is a system
wherein large numbers of persons, exposed to a similar risk, are covered and the risk is spread over among the
larger insurable public. Therefore, insurance is a social or co-operative method wherein losses of one are borne by
the society.
(iv) Protection of Financial Risks: Insurance offers protection to those risks which can be measured in terms of
money i.e., financial risks. As such insurance compensates only financial or monetary loss or risks.
(v) Risk sharing and Risk Transfer: Insurance is a social device for division of financial losses which may fall
on an individual or his family on the happening of some unforeseen events. The events may be the death of a bread
winner of a family in the case of life insurance, marine perils in marine insurance, fire in fire insurance and other
events in general insurance e.g. theft in burglary insurance, accident in motor insurance, etc. The loss arising from
these events if insured are shared by all the insured in the form of premium. Hence, risk is transferred from one
individual to a group.
(vi) Based upon Certain Principles: The insurance is based upon certain principles like insurable interest, utmost
good faith, indemnity, subrogation, causa-Proxima, contribution, etc.
(vii) Regulated by Law: In almost all the countries in the world, statutory laws are being enacted to regulate the
functioning of insurance companies. In India too, life insurance and general insurance are regulated by Life
Insurance Corporation of India Act 1956, and General Insurance Business (Nationalization) Act 1972, and IRDA
Regulations etc.
(viii) Value of Risk: Before insuring the subject matter of the insurance contract, the risk is evaluated in order to
determine the amount of premium to be charged on the insured. Several methods are being adopted to evaluate the
risks involved in the subject matter. If there is an expectation of heavy loss, higher premiums will be charged.
Hence, the probability of occurrence of loss is calculated at the time insurance.
(ix) Payment at Contingency: An insurer is liable to pay compensation to the insureds only when certain
contingencies arise. In life insurance, the contingency - the death or the expiry of the term will certainly occur. In
such cases, the life insurer has to pay the assured sum. In other insurance contracts, the contingency - a fire
accident or the marine perils, may or may not occur. So, if the contingency occurs, payment is made, otherwise no
payment needs to be made to the policyholders.

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In some life policies, payment is not certain due to uncertainty of a particular contingency within a particular
period. For example, in term insurance, the payment is made only when death of the assured occurs within the
specified term, may be one or two years. Similarly, in pure endowment, payment is made only at the survival of
the assured at the expiry of the period.
(x) Amount of Payment: The amount to be paid to the policyholders depends upon the value of loss occurred due
to the particular risk, provided insurance cover is there upto that amount. In life insurance, the assurer has to pay
the agreed amount on the happening of an event. In life insurance, the assurer has to pay the agreed amount on the
happening of an event. If an event or contingency takes place, the payment does fall due if the policy is valid and
in force at the time of the event. The amount of loss at the time of contingency is immaterial in the case of life
insurance. But in the case of property and general insurance, the amounts of loss as well as the occurrence of loss
are required to be proved.
(xi) Huge Number of Insured Persons: In order to make insurance cheaper and affordable, it is necessary to
insure larger number of persons or property because the lesser would be cost of insurance and so, the lower would
be premium. In past years, tariff associations or mutual fire insurance associations were found to share the loss at a
cheaper rate. In order to function successfully, the insurance should be joined by a larger number of persons.
(xii) Insurance is not Gambling: The contract of insurance cannot be considered as gambling as the insured is
assured to get his loss indemnified only on the happening of such uncertain event as stipulated in the contract of
insurance, whereas the game of gambling may either result into profit or loss.
(xiii) Insurance is not a Charity: Premium collected from the policyholders under insurance is the cost of risk so
covered. Hence, it cannot be taken as charity. Charity lacks the element of contract of indemnity and compensation
of loss to the person whosoever makes it.
(xiv) Investment Portfolio: Since insurers' liability to pay compensation to the insured arises on the happening of
certain uncertain event, the insurers do not have to keep the collected premium with them. They invest the
premium received in selected securities and earn interest and dividend on them. Thus, the insurers have two
sources of income: the insurance premium and the investment income (i.e. interest / dividend) which occurs over
time.

Functions of Insurance
Insurance provides a variety functions which are beneficial to the common man, directly or indirectly. As such,
functions of insurance can be divided into three categories:
(i) Primary functions
(ii) Secondary functions
(iii) Other functions

(i) Primary Functions: The following are the main functions performed by the insurance:
(a) Provides Protection: Providing protection to the insured against the probable chances of loss is one of the
main functions of insurance. The insurance guarantees the payment of loss and thus protects the insured from
suffering. The insurance cannot check the happening of the event but can compensate for losses arising at the
happening of the risk event.
(b) Provides Certainty: Insurance offers certainty of payment for the risk of loss. There are different types of
uncertainty in a risk. Whether the risk will occur or not, when will it occurs, how much loss will be there. In other
words, there is uncertainty of happening of time and amount of loss. Insurance removes all these uncertainty and
the insured is given certainty of payment of loss. The insurer charges premium for providing the said certainty.

c) Distributes Risk: All business concerns face the problem of risk and if the concern is big enough, handling of
risks becomes a specialized function. Risk and insurance are inter women with each other. Insurance, as a device,
is the outcome of the existence of various risks in our day-to-day life. It does not eliminate risks but it reduces the
financial loss caused by risks. Insurance spreads the whole loss over the larger number of persons who are exposed
by a particular risk.

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(ii) Secondary functions: Some functions of insurance are categorized as secondary functions. Such functions are
as follows:
(a) Prevention of Loss: The insurers assist financially to the health organisations, fire brigade, educational
institutions and other organisations which are involved in prevention of losses of the general public from death or
damage. The insurance joins hands with these institutions in preventing the losses of the society because the
reduction in loss causes lesser payment to the insured and so more saving is possible which will assist in reducing
the premium. Lesser premium invites more business and more business cause lesser share to the insured. The
reduced premium will stimulate more business and more protection to the general public.

(b) Provides Capital: Insurance provides capital to the industries in various forms. First, it reduces financial risks
and losses by providing facilities of core capital investments in various big organisations. Secondly, the amount of
premiums collected by the insurers is made available for the industrial development of the country in various
financing forms such as by providing of share capital, providing long term loans to companies and term loans and
loans to the state to invest in the country's public sector industries. Thirdly, insurance makes the company or
organisation to avail loans on each term by hypothecating the insurance policies. Now-a-days, banks and other
financial institutions insist that the assets must be insured if one wants to get loan against those assets.

(c) Increases Efficiency: Insurance increases the efficiency of the business by reducing the risks or fear of losses.
It provides a sense of security in the business world, which in turn becomes a source for the growth and
diversification of the industry. Management is relieved of the various risk involved in uncertainties, becomes able
to give due attention to other factors which affect the total efficiency of the organisation such as labour force,
material management, marketing, etc.

(d) Adequate Financial cover: The necessity of insurance is largely felt to give a cover to the rural areas and
economically backward classes with a view to reach all insurable persons in the country and provide them
adequate financial cover against death at a reasonable cost.

(e) Helps in judging the viability of major projects: Generally, the insurer conducts an investigation of the
assets or project as a whole before insuring the same with a view to judge the profitability of the project.
Unprofitable projects are denied the benefit of insurance. Hence, management may drop such projects or units in
advance in order to prevent losses.

(iii) Other Functions: Apart from primary and secondary functions, the insurers perform various others functions
which are beneficial to the common man, business community and the nation as a whole. A few of them are as
follows:
(a) Encourages savings: Life insurance is considered as one of the important forms of savings. The premium paid
is accumulated and is returned to the assured if he survives till the date of maturity. Certain tax exemptions are
given under Sec.80C of the Income Tax Act to inculcate the habit of thrift and savings among the masses.
Payment of a life policy premium becomes a habit and promotes savings.

(b) Promotes Foreign Trade: Foreign trade fully depends on insurance. The banker will not come forward to
discount the marine trade bills unless the cargo is fully insured. In India, insurance has been made mandatory for
foreign trade. It relieves entrepreneurs from the uncertainties of foreign trade.

(c) Checks Inflation: Insurance plays a key role in checking inflation. It curbs the circulation of money and saves
it from its ill effects. Compulsory savings in the form of premium reduces the disposable income of the individual
and this scarce source of production is utilised in a better way by investing for the national development.

(d) Social Security: Insurance offers an instrumental force to fight against social evils like poverty,
unemployment, disease, old age, fateful accidents of person and property and similar other calamities of nature. It
helps in creating awareness among the general public regarding adoption of techniques for minimising the
happening of controllable uncertain events. It has also helped in a greater way by designing various types of
insurance in our country like Employees State Insurance Act, Provident Fund Act, Workmen's Compensation Act,
etc.
(e) Credit Facilities: Businessmen are able to raise loans from banks and other financial institutions by pledging
their insurance policies with them. In case, the businessmen are unable to return the loan amount, the financial
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institutions can recover their amount out of the policy's surrender value.

Principles of Insurance
Every subject or discipline has certain generally accepted and by symatically laid down standards or principles to
achieve the underlying objectives. Insurance is no exception to this general rule.
I General Principles
II Specific Principles

I. General Principles or Essentials of insurance contract

(i) Offer and Acceptance: The person who wants to take up cover against particular perils offers his risk through
a proposal form to the insurance company. When the premium is received by the company and cover note or
policy is issued by the company, it signifies the acceptance of the proposal.

(ii) Consideration: The premium paid is the consideration and on receipt of the premium by the insurance
company, the contract comes into force. The consideration need not be money only but it must be valuable. It may
be sums, rights, interest, profit or benefit.

(iii) Mutual consensus ad idem: There should be a complete and unbiased agreement between the insurer and
insured regarding the terms of the contract. The intention of the insured should have been clearly understood by
the insurance company and vice versa.

(iv) Competency: A proposer should have capacity to enter into a contract. If the proposer is of sound mind and
has attained age of majority, he is said to be competent to enter into a insurance contract. Also, he must not be
debarred by any law to which he is subject to enter into agreement. Any insurance policy taken by a legal guardian
on a minor's life will constitute a valid contract.

(v) Lawful object: The object for which an agreement entered should be lawful. Such object should not be illegal,
immoral or against the interest of the public. In proposal form, the object of insurance is asked which should be
legal and the object should not be concealed. If the object of insurance, like the consideration is found to be
unlawful, the policy is void. Moreover, the object of the contract should not be of gambling nature.

II. Specific principles

A contract of insurance, in addition to fulfilling the general principles as discussed above, will also have to
observe some of specific principles of insurance such as (i) principle of cooperation; (ii) principle of probability;
(iii) principle of insurable interest; (iv) principle of utmost good faith; (v) Principle of indemnity; (vi) Principle of
subrogation; (vii) principle of contribution; (viii) principle of causa proxima; (ix) principle of warranty; (x)
principle of mitigation of loss; and (xi) principle of assignment. Let us discuss these principles one by one.

(i) Principle of Co-operation: The sharing of risks among large number of persons through the technique of co-
operation is the basis of insurance. In this, the losses of an individual person are divided among a group of
persons. The theory of co-operation operates practically in this manner. All those who are themselves or their
insurable interests or object matter are exposed to certain risks, pool their resources in the form of small periodical
or single payment i.e., premium out of which the insured has to pay only an actual but definite sum of amount in
place of an unexpected or probable financial loss.

(ii) Principle of Probability: The occurrence of risk in each type of insurance is estimated through the theory of
probability for which the insurer follows the theory of large numbers. The insurers collect the data of previous
happenings taking a large number of years into consideration and form an idea about the incidence in future. Life
insurance companies prepare the mortality tables and calculate the premium accordingly.
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(iii) Principle of Insurable Interest: The term 'Insurable interest' refers to the legal right to insure arising out of a
financial relationship, recognized at law, between the insured and the subject matter. The person taking an
insurance policy must have an insurable interest in the property or life insured. A person is said to have an
insurable interest in the property, if he is financially benefitted by its existence and is prejudiced by its loss,
destruction or non-existence. Similarly, a person taking a life policy must have an insurable interest in the life of
the insured person.
 Existence of Insurable Interest
The rules in regard to the presence of insurable interest in respect of life, fire and marine insurance differs
widely.
Life Insurance: The insurable interest must be present in the person insured at the time when the policy is
taken. It may or may not be in existence at the time of death of the insured.
Fire Insurance: In fire and miscellaneous insurance, insurable interest must be present both at the time of
taking the policy and at the time of loss. For example, if the property insured under a fire policy is sold and there is
a loss after the sale, the insured cannot recover the loss as he has no insurable interest at the time of occurrence of
loss.
Marine Insurance: In marine cargo insurance, insurable interest is required at the time of loss. It may not
be present at the time of effecting insurance. An importer of goods may insure the goods under a marine policy,
although at the time, he may not be the owner of the goods. Ownership of the goods passes from the exporter to
the importer only when the payment is made.

(iv) Principle of utmost good faith: It means that it is the duty of the buyer to satisfy himself about the quality,
quantity and soundness of the goods or property to be purchased before she/he enters into contract with the seller.
Utmost good faith requires each party to tell the other truth, the whole truth and nothing but the truth. It means that
the parties to contract must make full disclosure of all the material facts and information relating to the contract.

(v) Principle of Indemnity: This principle is applicable to all contracts of insurance except the contract life
insurance where (a) the loss suffered by the insured can be measured in terms of money; and (b) a mode of putting
the insured after the mitigation of loss in the same position in which he was placed just before the occurrence of
loss.

(vi)Principle of Subrogation: This means stepping into the shoes of other. By this principle, the insurer steps into
the shoes of the insured and becomes entitled to all rights of action against third party to cover the loss from the
person responsible regarding the subject matter of insurance after the claim of the insured has been fully settled
and paid.

(vii) Principle of Contribution: This principle is yet another outcome of the principle of indemnity. It is applied
to all contracts of indemnity i.e., all contracts of insurance except the life insurance and personal accident
insurance. In the contract of insurance, a person is allowed to take more than one policy on the same property. But
in case there is loss, the insured cannot recover more that the full amount of his actual loss. If she/he recovers the
full amount of her/his actual loss from one insurer, then the principle of contribution will be applied by the court,
according to which the insurer who has paid the insured the full amount of compensation will recover
proportionate contribution from the other insurers.

(viii) Principle of Causa Proxima: Proximate cause means the active, efficient cause that sets in motion a chain
of events which brings about a result, without the intervention of any force started and working actively from a
new and independent source. The proximate cause is not necessarily the first cause, nor the last cause; it is the
dominant, efficient or operative cause. While determining the liability of the insurer, the proximate (nearest) cause
alone and not the remote cause is to be considered. The insurer is not liable for remote cause even if it is one of the

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insured perils. Therefore if the immediate cause is an insured risk for the occurrence of which the insured is to be
paid, the insurer is liable to make the payment of loss under the policy, otherwise not.

(ix) Principle of Warranty: A warranty is a term in the insurance contract upon the breach of which the insurer is
discharged from all the liability as from the date of the breach. Warranties must be strictly complied with. It is
quite irrelevant that the breach is unconnected with the loss that occurs. It makes warranty more like an exception
to the risk than a condition in a usual contractual sense, since the operation of an exception is in no way dependent
upon the decision of the insurer. A warranty may be (A) Express warranty and (B) Implied warranty.

(x)Principle of Mitigation of loss: According to this principle, an insured is supposed to take all necessary steps
to reduce the loss if mishap occurs. The insured according to this principle must act as if the property was not
insured. This principle aims at making sure that the insured person behaves like a prudent person and is not
careless.

(xi) Principle of Assignment: Assignment may be defined as the transfer of rights and liabilities of an insured to a
third party who has acquired insurable interest in the subject matter of insurance, so that the assignee becomes the
new insured with a right to deal with the insurer in his own name and can recover directly from the insurer any
claim payable under the policy.
KEY FEATURES OF INSURANCE

Listed below are the key features of an insurance plan that you should consider
Insurance is a tool for risk transfer.
Insurance is a community solution as several people, who are exposed to the same risk, pool their
funds together to bear the loss.
The contract is based on the ‘utmost good faith’ principle unlike other business contracts.
Insurance cover does not affect the chance of loss or minimise the magnitude of loss.
As a party to the insurance contract, you should always try to avoid, mitigate and minimize the losses.
You can only insure against risks which are unpredictable in occurrence and magnitude.
Speculative, financial (betting) and business risks cannot be insured.

Importance/Advantages of Insurance
The importance of insurance cannot be neglected in the present day when uncertainty is prevailing everywhere.
The importance of insurance is not only limited to an individual or to a family. It has spread over the entire
nervous system of business and over the country as a whole. As such it can be studied under the following
headings:
I. Importance to an Individual
(i) Provides security and safety Insurance offers financial protection against large and uncertain losses to the
lives and properties of an individual in consideration of a small amount of premium. In life insurance, payment is
made, when the bread winner of a family dies or the term of insurance policy expires. Fire insurance protects
against losses due to fire while marine insurance offers protection against loss of ship, cargo and freight. In other
insurances, relevant policies offer necessary protection against loss of a given contingency.

(ii) Provides peace of mind Everybody is exposed to various types of risks such as risk of accident, risk of health
hazards, risk of loss of property due to theft and fire, etc. Thus, everybody is tensed about these risks. By offering
protection to these risks, insurance eliminates all tensions and fear from the minds of insured and provides them a
complete peace of mind.

(iii) Eliminates dependency: In case the bread-winner of a family dies, the family members of the deceased
insured do not have to carry begging bowls for alms. As the life of the bread-winner of the family was already
insured, the insurer will pay the agreed sum to his family members. With the funds provided by the insurer, the

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family members can lead a decent life without seeking helping hand of others.

(iv) Source of savings. Life insurance inculcates the habit of savings among the general public by compelling
them to pay premiums regularly on the policies taken by them. When a man knows that he must pay the premium
failing which his policy will lapse, he has to cut down the unnecessary expenses and save something to pay the
premium. At the time of maturity of policy, the insured gets the accumulated money which can be utilised for
building a house, marriage of daughter, education of children or for any capital expenditure.

(v) Sound Investment Some life policies possess all the elements of investment ie, regular saving, capital
formation and return on the capital along with certain additional returns. These elements are found in policies like
endowment policies, money back policies; unit linked insurance plans, etc.

(vi) Protects mortgaged property: Generally, the middle class policyholders purchase assets or construct a
building by borrowing money from insurance companies. In case the insured dies before repaying the loan, the
legal representative of deceased insured can pay off the unpaid loan with the amount provided by the insurer and
keeps the assets of the family intact.

(vii) Other uses Life insurer fulfills the needs of an individual person such as family needs, old age needs, Re-
adjustment needs, income for widow and widower, clean-up funds and clean-up expenses such as for ritual
ceremonies, payment of taxes, etc. The insurer also helps to meet requirement of funds in emergencies and in the
event of unwanted losses in the form of compensation.

II. Importance to Business

The insurance has been useful to the business community also. Some of its uses are discussed below:
(i)Reduces uncertainty of business losses: In the world of business, a huge number of properties are employed.
All the properties are exposed to loss or damage by fire, theft, accidents and other perils. So, the great risks are
involved in day-to-day functioning. The businessman, by taking an insurance policy, reduces uncertainty of
business losses and be sure of his future earnings and smooth running of his business

(ii) Improves efficiency. As an insured businessman is relieved from the worries of risk of losses, he can devote
his entire attention towards development of his business and maximisation of profit. The new as well as old
businessmen are guaranteed payment of certain amount with the insurance policies at the death of the person; at
the damage, destruction or disappearance of the property or goods. The uncertainty of loss may affect the mind of
the businessman adversely. The insurance, removing the uncertainty, encourages the businessmen to work hard.

(iii) Enhancement of Credit: A businessman can get loan by pledging his insurance policies as collateral
securities for the loan. He is allowed to take more loans due to certainty of payment at his death. The amount of
loan that can be obtained with such pledging a policy will not exceed the cash value of the policy. In case of death,
this cash value can be utilised for settling the loan along with the interest. In case, the borrower the lender can
policy and get the amount of loan and interest thereon repaid.

(iv)Continuous Business: In case, a partner dies in a partnership business the operation of the business will have
to be suspended for some time In view of this, both business and remaining partners will suffer In view. The
insurance policies provide adequate funds at the time of death. With the help of that fund, the remaining partners
can restart the operation of the business.

(v)Employee's Security: Employees are the real assets of any business. Insurance provides adequate provisions
for the grant of welfare measures such as employees state insurance, group insurance policies, old age pensions
and accident policies for the benefit of employees Due to these provisions, employees put in a lot of hard work for
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the development of business concern.

III. Importance to Society

Insurance is a part and parcel of society today. It has various uses as given below:

(i)Protects society's wealth: Through various types of insurance schemes, the insurer protects the wealth of the
society. Life insurance offers protection against loss of human wealth. General insurance policies protect the
property against losses due to fire, theft, accident, earthquake, etc. As such, both general and life insurances offer
protection to stabilize business condition and financial position.

(ii) Removes social evils: All forms of insurance tend to reduce the extent of evils that are meant to alleviate. The
most effective argument for reduction of fire losses is that smaller losses will make smaller premiums possible.

(iii) Maintains standard of living: Insurance rescues many people in the society who are rendered destitute
through misfortune. They are able to maintain the standard of living due to high returns. They reduce the
destitution and misery. These could lower the ideals and standards of conduct of entire communities.

(iv)Social security Benefits: Insurance plays a pivotal role in fulfilling certain needs for which state might have to
provide. The provision for old age, sickness and disability of persons in general. Those who have their insurance
do not become a burden on state insurance plan. In case of fire, explosions and other calamities that would tend to
impoverish (render poor) families would have been relieved of the financial loss if adequate insurance had been
maintained.

(v)Equitable distribution of loss: Insurance distributes the cost of accidental events in a equitable manner. In the
absence of insurance, this would have been paid in a haphazard manner. For example, the cost of fire insurance is
reflected in house rent. In the absence of insurance, some tenents would pay higher rents than others.

TYPES OF INSURNACE

Life Insurance General Insurance

The above mentioned types of insurance are discussed in the pages to come:

1. Life Insurance: It is a contract in which the insurance company, in consideration of a premium paid either in
lumpsum or instalments, undertakes to the person for whose benefit the policy is undertaken, a certain sum of
money on the death of the insured or on the expiry of the policy, whichever occurs first. For life insurance, the risk
covered against is death. The life insurance company pays the sum assured in the event of death.
Some of the types of life insurance policies that are prevalent in the market are:
Whole life policy
As the name suggests, in this kind of policy the amount that is insured will only be paid out to the
person who is nominated and it is only payable on the death of the insured.
Some insurance policies have the requirement that premium should be paid for the whole life while
others may be restricted to payment for 20 or 30 years.
Endowment life insurance policy
In this type of policy the insurer undertakes to pay a fixed sum to the insured once the required
number of years are completed or there is death of the insured.
Joint life policy
It is that type of policy where the life insurance is availed by two persons, the premium for such a
policy is paid either jointly or by each individual in the form of installments or a lump sum amount.

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 In the case of such a policy the assured sum is provided to both or any one of the survivors upon the
death of any policyholder. These types of policy are taken mostly by husband and wife or between two
partners in a business firm.
Annuity policy
Under this policy, the sum assured or the policy money is paid to the insured on a
monthly/quarterly/half- yearly or annual payments. The payments are made only after the insured
attains a particular age as dictated by the policy document.
Children’s Endowment policy
Children’s endowment policy is taken by any individual who wants to make sure to meet the expenses necessary for
children’s education or for their marriage. Under this policy, the insurer will be paying a certain sum of money to the
children who have attained a certain age as mentioned in the policy agreement

2. General Insurance: General insurance business refers to fire, marine and miscellaneous insurance business
whether carried on singly or in combination with one or more of them. Let us see each of the components of
General insurance in the pages to come:

(i) Fire Insurance: It is a contract of indemnity under which the insurance company undertakes to pay the insured
for the damage or loss caused to the property insured against fire for consideration of premium. Normally, the fire
insurance policy is for a period of one year after which it is to be renewed from time to time. A claim for loss by
fire must satisfy the following two conditions:
(a) There must be actual loss; and
(b) Fire must be accidental and non-intentional

(ii) Marine Insurance: Insurance took its birth in the form of marine insurance. Foreign trade in earlier days was
full of several sea hazards like sinking of the ship, fire to the vessel, storms, seizure or capture by the enemy or sea
pirates, collision, etc. Marine insurance was conceived to safeguard the traders from these evils of the sea.
Marine insurance is a contract whereby the insurer undertakes to indemnify the insured in the manner and to the
extent thereby agreed against marine losses. Marine insurance is an arrangement by which the insurer undertakes
to compensate the owner of a ship or cargo for complete or partial loss at sea and also the loss of freight.
Generally, the following objects are sought to be insured under marine insurance:
(a) Cargo Insurance: When a marine insurance policy is taken by the cargo owner to be compensated for loss
caused to his cargo in the course of its transmission, it is known as cargo insurance.
(b) Freight insurance: Marine insurance is taken to guard against recovery of freight is called freight insurance.
(c) Hull Insurance: When the ship is insured as a whole, it is termed as hull insurance.

(iii) Miscellaneous Insurance: The process of fast development in the society gave rise to a number of risks or
hazards. To provide security against such hazards, many other types of insurance also have been developed under
the head miscellaneous insurance. The miscellaneous insurance includes Motor insurance, public liability
insurance, product liability insurance, professional indemnity insurance, workmen compensation insurance,
personal accident insurance, etc.
Health Insurance- Health insurance is an effective safeguard for protection against rising healthcare costs. Health
insurance is a contract that is made between an insurer and an individual or a group where the insurer agrees to
provide health insurance against certain types of illnesses to the insured individual or individuals.
The premium can be paid in installments or as a lump sum amount and health insurance policy is renewed every
year by paying the premium.
The health insurance claims can be done either directly in cashless or reimbursement availed after treatment is
done. Health insurance is available in the form of Mediclaim policy in India.
Motor vehicle insurance-Motor vehicle insurance is a popular option for the owners of motor vehicles. Here the
owners’ liability to compensate individuals killed by negligence of motorists is borne by the insurance company.
Cattle Insurance- In case of cattle insurance, the owner of the cattle receives an amount in the event of death of
the cattle due to accident, disease or during pregnancy.

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Crop Insurance-Crop insurance is a contract for providing financial support to the farmers in the event of crop
failure due to drought or flood.
Burglary Insurance-Burglary insurance comes under the insurance of property. Here the insured is compensated
in the event of a burglary for the loss of goods, damage occurred to household goods and personal effects due to
burglary, larceny or theft.

DIFFERENCE BETWEEN LIFE AND GENERAL INSURANCE

S.NO BASIS LIFE INSURANCE GENERAL INSURANCE
Life insurance covers an individual’s
General insurance covers non-life assets,
1 life and fixed health benefits like
such as houses, vehicles, health, events,
Cover critical illnesses e.g. Cancer, heart
travel, and more.
ailments etc.
In case the insured dies during the
Compensation is paid only if there is
policy term, the nominees receive the
loss or damage to the house or car,
2 Compensation sum assured. Some plans pay this to
during travel, or in case of
the policyholder if he or she outlives
hospitalisation for medical
the
policy maturity. emergencies.
The premium charged depends on many
You pay a fixed premium depending
factors of the asset insured. For e.g.,
on the coverage amount and this does
3 Premium medical insurance premium will depend
not change during the premium
on medical history, habits, profession,
payment period. and other lifestyle parameters.
This can be paid annually, half-yearly, The premium has to be usually paid as a
4 Payment Term
quarterly, monthly or as a lump sum. lump sum.
These are typically annual policies and
Life insurance policies are long term
can be renewed if required. However,
5 Tenure policies which can continue for up to
they must be renewed within the
99 years of age, depending on the
stipulated time to avoid lapsation.
plan.
The sum assured is paid out to the
In general insurance, the payout is
policyholder’s nominees, provided all
6 Repayment called sum insured. This amount is paid
terms and conditions have been
Amount
complied with. out if the insured asset is lost or
damaged.
The beneficiary can be anyone the
policyholder nominates to receive the
The policyholder is mostly the
benefits in case of their death. For post
7 Beneficiary beneficiary
maturity, the beneficiary can be
anyone
including the policyholder.

DIFFERENCE BETWEEN LIFE, MARINE, AND FIRE INSURANCE

MARINE
S.NO BASIS LIFE INSURANCE FIRE INSURANCE INSURANCE
The subject matter under The subject matter under The subject matter under
Subject
1 life insurance is human fire insurance is an asset or marine insurance is
Matter
life. a physical property. freight, cargo, or a ship.
Risk is unavoidable when it
comes to life insurance. When it comes to fire
Because the occurrence
The insured amount is paid insurance, there is no
of an event is
2 Risk either when the guarantee of risk. It is
unpredictable, the risk
policyholder reaches possible that the insured
may or may not arise.
maturity or when he or she property will not catch fire.

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 dies (whichever is earlier).
Short-term marine
Life insurance policies are Short-term fire insurance.
3 Time insurance. In most cases,
usually for a longer period In most cases, it is one
frame it is one or a voyage
of time (more than 5 year.
period, or a mix of both.
years).
Insurable installments In the case of marine
Insurable interest must be
Insurable interest must exist both at insurance, insurable
present when purchasing a
4 Interest the time of purchase and at interest must exist at the
life insurance policy. the time of loss. time of loss.
5 Payment of Marine insurance is
Life insurance is paid in Fire insurance is purchased
the based on a lump sum
installments. on a one-time basis.
Premium payment.
If an indemnity, life
Marine Insurance is an
insurance is not a contract.
Fire Insurance is an indemnity contract. The
In life insurance, the
Indemnity Indemnity contract. In fire market value of the ship
6 insured person receives
Agreement insurance, only the actual and the cost of goods
payment on the maturity
loss is covered. destroyed can be claimed
date or after the happening
of a certain event. by the insured.
Loss Loss is measurable in the
One cannot measure the Loss is measurable in the
7 Measurem case of marine
loss of a human being. case of fire insurance.
ent insurance.
The goal of a Life
The goal of Fire Insurance The goal of Marine
8 The Goal insurance policy is to
is to provide security to the Insurance is to protect
provide a safety net and a
wise investment. property. one’s belongings.

GROWTH AND DEVELOPMENT OF INDIAN INSURANCE INDUSTRY

GROWTH
The growth of insurance sector in India is widely noticeable nowadays. Insurance is defined as the
danger protection of a misfortune or equivalent of any kind of misfortune.
An insurance sector is an organization that offers insurance to the insurance policyholder. This can be
a person or an institution from where we buy insurance. Insurance rates are an angle that is utilized to
determine the sum which is being charged for a certain measure of insurance inclusion and called premium.
People are becoming more and more aware of their future health and that is why the health insurance sector
in India is increasing incredibly.
The rate shows that the growth of insurance sector in India will be at the top in a few years. Even in
the present times, the growth of insurance sector in India is most significant. And it expected to be in the
first position.
YEAR EVENT
1818 Life Insurance business introduced in India through Oriental Life Insurance Company
(Calcutta)
1829 Madras Equitable started transacting life insurance in the Madras Presidency
1834 Failure of the Oriental Life Insurance Company
1870 British Insurance Act enactment
1871 Set up of Bombay Mutual
1874 Set up of Oriental
1897 Set up of Empire of India
1914 Government of India published returns of the Insurance Companies in India
1928 Indian Insurance Companies Act enactment to enable the government to collect statistical
data about the life and non-life business transacted in the country by both Indian as well as
foreign insurers
1938 Consolidation of the earlier legislation and amendment of the Insurance Act
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19th January Issuance of an ordinance to nationalize the life insurance sector and the LIC (Life Insurance
1956 Corporation) was set up
1907 Indian Mercantile Insurance Ltd. was set up
1957 Formation of the General Insurance Council
1968 Amendment of the Insurance Act to regulate the investments and set minimum solvency
margins
1972 General Insurance Business (Nationalization) Act passed
1971 General Insurance Corporation of India incorporated as a company
01st January Insurance business nationalized
1973
1993 RN Malhotra committee formed to propose recommendations for reforms in the insurance
sector in India
1999 Insurance Regulatory and Development Authority (IRDA) established
2000 IRDA incorporated as a statutory body
August 2000 IRDA opened the market with the invitation for application for registrations
December Subsidiaries of the General Insurance Corporation of India were restructured as independent
2000 companies

GIC was converted into a national re-insurer

July 2002 Bill to de-link the four subsidiaries from GIC passed in parliament
34 general insurance companies including the Export Credit Guarantee Corporation of
Presently India (ECGC) and Agriculture Insurance Corporation of India and 24 life insurance
companies are operational in India

DEVELOPMENT
The insurance industry has undergone numerous transformations in terms of new developments,
modified regulations, proposals for amendments and growth in 2022. These developments have opened new
avenues of growth for the industry while ensuring that insurers stay relevant with changing times and the
latest digital disruptions. The IRDAI is vigilant and progressive and is determined to achieve its mission of
‘Insurance for all by 2047’, with aggressive plans to address the industry’s challenges.

In the global space, the Insurance sector is embracing cutting-edge technologies such as machine
learning in the automation of claim management, personalized insurance pricing with the Internet of Things,
and Telematics for car insurance. While in the case of India, according to the India Fintech Report
2022, Artificial Intelligence (AI) /Internet of Things (IoT)/ Machine Learning (ML), automated claims, web
aggregations, e-commerce insurance marketplaces, Software/White Label/Application Programming
Interface (APIs) and embedded insurance are being offered by various insurtech players in the market, given
the on-going digital boost in the sector. The IRDAI’s expectations from the sector hint at its aim to push
technological advancements and innovation in the industry.

Here’s a quick recap of the 2022 key trends and developments that can potentially change the face of
the Indian Insurance and Insurtech segment.

KEY DEVELOPMENTS OF THE INSURANCE SECTOR

 LIC IPO
The Rs 21,000-crore initial public offering (IPO) of the government-owned behemoth Life Insurance
Corporation of India (LIC) was the most talked-about market news for the better part of the year. LIC
reserved up to 10 percent of its offer size for its policyholders.

 Life insurers’ focus on guaranteed return policies

Life insurance companies launched traditional endowment policies, promoted as an opportunity for
policyholders to take advantage of higher interest rates raised by RBI.

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 Higher health premiums, newer products
The health insurance premiums for individuals rose by 8-15 percent this year primarily due to a sharp rise
in claims during 2020 and 2021.

 Newer motor insurance riders

The IRDAI allows insurers to offer ‘innovative’ motor insurance riders in the form of pay-as-you-use,
pay- as-you-drive and motor floater policies.

 Use-and-file procedure for quicker product launches

Use-and-file norms allow insurance companies to launch new products without prior approval from the
regulator. The steps taken by IRDAI are in alignment with its goal of infusing more flexibility and higher
governance in the sector. This has helped the insurance industry to mature significantly and continue to
focus on increasing penetration.

REGULATION OF INSURANCE BUSINESS – MEANING

Life is full of unpredictable losses and threats, and hence we are completely dependent on these
Insurance companies. So, it is very important that someone with higher authority or power keeps a check on
these Insurance Companies and sets the rules and regulations to monitor their work and to make sure that
they are not misusing the trust of the people; this is the regulation of Insurance Business. So, Regulation Of
Insurance Business means that someone with higher authority or power like government or parliament keeps
a check on these insurance companies and lays some rules and regulations and ensures that they are not
misusing people’s trust. This ensures that the scope of Insurance will grow because people will know it’s
backed by Parliament.
IMPORTANCE OF REGULATION OF BUSINESS

 Regulation of Insurance Business is very vital as it performs various functions like :

 Protecting the policyholder’s interests.
 Regulation of Insurance business assists in the organised expansion of the insurance business for the
greater good of society.
 An insurance company’s registration certificate can be granted, renewed, revoked, modified, or
suspended.
 Regulation of the Insurance business helps in protecting the policyholder in topics like policy grant,
claim settlement, policyholder nominee selection, surrender policy value, and other policy terms and
conditions.
 Provide long-term financing to help the country’s economy grow.
 Ensure that policymakers are held to high standards of ethics and competence.
 Ensure that legitimate claims are processed quickly.
 By establishing a grievance redress forum for policyholders, you can prevent malpractice and policy
fraud.
 In the financial markets, promote insurance fairness and openness.
 To create a dependable management system that ensures high standards and financial stability is looked
after by policy givers.
 When appropriate standards are not met, take necessary action. Regulation of Insurance business ensures
that the insurance business operates at a high level of self-regulation.

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 EMERGING SCENARIO

The insurance industry comprises companies that provide risk management by underwriting the risks
of individual entities and pooling them to spread the risk. An insurance contract guarantees that, on the
occurrence of a specified uncertain future event, the insurer provides a payment to the insured, and thereby
assumes the risk. In return, the insured (or policyholder) pays a premium, or a regular fee, to the insurer for
providing the coverage. Insurance is critical in providing financial security to people and organisations
performing their daily activities and operations; or undertaking new and risky ventures.

In addition to offering traditional coverages for known risks, supported by comprehensive industry
experience and understanding of their occurrence, insurers must also continually adapt to emerging and
uncertain risks. Today, such risks are manifesting at an unprecedented rate as the world is challenged by
growing complexity and interconnectedness between systems. To fulfill the consequent demand for
insurance coverage against emerging risks, insurers must first evaluate such uncertainty and ensure they can
withstand potential losses and operate sustainably. The insurance industry shares key financial and
operational risk exposures with the wider financial sector, but is also uniquely exposed to insurance risk, so
internal assessments of risk must account for the complexity of interactions between both an insurer’s assets
(premiums invested to cover liabilities) and liabilities.

In the Global Scenario: Globally, the share of life insurance business in total premium was
56.2%.However; the share of life insurance business for India was very high at 79.6% while the share of non
–life insurance business was small at 20.4%. In life insurance business, India is ranked 11 th among the 88
countries, for which data is published by Swiss Re. India’s share in global life insurance market was 2.00%
during 2013.However, during 2013, the life insurance premium in India declined by 0.5 % ( inflation
adjusted
) when global insurance premium increased by 0.7% The Indian non- life insurance sector witnessed a
growth of 4.1 % (inflation adjusted) during 2013.During the same period, the growth in global non-life
premium was
2.3 %. However, the share of Indian non-life premium in global non-life insurance premium was small at
0.66% and India ranks 21st in global non-life insurance markets.

UNIT – I COMPLETED

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