BASICS OF INSURANCE Chapter: 4

BASICS OF INSURANCE

Insurance is a financial product that provides protection against potential financial

losses. It works by transferring the risk of financial loss from the policyholder to the
insurance company in exchange for a premium. The purpose of insurance is to
provide financial protection for unexpected events that could cause financial harm to
individuals or businesses.
There are several types of insurance, including life insurance, health insurance,
property insurance, liability insurance, disability insurance, and long-term care
insurance. Each type of insurance provides financial protection for specific risks.
Insurance is based on the principle of risk pooling, where many individuals or
businesses pay premiums into a fund, which is then used to pay out claims to those
who experience a covered loss.
The amount of the premium paid by the policyholder is based on the likelihood of
the insured event occurring and the potential financial impact of the loss.
Insurance policies typically have a deductible, which is the amount that the
policyholder is responsible for paying before the insurance company will pay out a
claim.
Insurance companies use actuarial science to calculate the probability of a loss
occurring and the potential financial impact of the loss in order to set premiums and
determine the terms of the insurance policy.
Insurance policies can be customized to meet the specific needs of the policyholder,
including the amount of coverage, the term of the policy, and the types of risks
covered.
Insurance is regulated by government agencies, such as state insurance departments,
to ensure that insurance companies operate fairly and in the best interests of their
policyholders.
Insurance plays a critical role in society by providing financial protection for
individuals and businesses, which can help to mitigate the economic impact of
unexpected events and promote financial stability.
In Nepal, the insurance industry is regulated by the Insurance Board, which is
responsible for licensing and supervising insurance companies operating in the
country. The insurance industry in Nepal is relatively small compared to other
countries, with only a few insurance companies operating in the market.
The types of insurance available in Nepal include life insurance, health insurance,
property insurance, and liability insurance. Life insurance is the most common type
of insurance in Nepal, with many people purchasing policies to provide financial
protection for their families in case of an unexpected death. Health insurance is also
becoming more popular as people seek to protect themselves against rising
healthcare costs.
One of the challenges facing the insurance industry in Nepal is the lack of awareness
and understanding of insurance products among the general public. Many people are
not familiar with the different types of insurance available and may not understand the
benefits of purchasing insurance.
Another challenge facing the insurance industry in Nepal is the lack of trust in
insurance companies. Some people may be hesitant to purchase insurance because
they do not trust insurance companies to pay out claims in a timely and fair manner.
Despite these challenges, there is potential for the insurance industry to grow in Nepal
as the economy continues to develop and people become more aware of the need for
financial protection. Insurance companies can play a role in educating the public
about the benefits of insurance and building trust through transparent and fair
business practices.
PRINCIPLES OF INSURANCE
I. Insurable Interest: Insurable interest refers to the requirement that the policyholder
must have a financial interest in the subject of the insurance policy. For example, a
person can insure their own car because they have a financial interest in it, but they
cannot insure their neighbor's car because they do not have a financial interest in it.
II. Utmost Good Faith: Utmost good faith requires both the policyholder and the
insurance company to act honestly and transparently in their dealings with each other.
For example, when applying for life insurance, a person must disclose any pre-existing
medical conditions they have, even if they think they may not be relevant to the policy.
III. Indemnity: Indemnity means that the purpose of insurance is to provide compensation
for a covered loss. For example, if a person's house is insured for $200,000 and is
destroyed by a fire, the insurance company will pay out up to $200,000 to cover the
cost of rebuilding the house, but not more than that amount.
IV. Contribution: Contribution refers to the principle that if the policyholder has
multiple insurance policies covering the same loss, each insurance company is
responsible for contributing a proportional share of the loss. For example, if a
person has two insurance policies covering their car and they are involved in an
accident, each insurance company will contribute a share of the cost of the
damage.
V. Subrogation: Subrogation means that if the insurance company pays out a claim
for a covered loss, they may have the right to seek reimbursement from a third
party who was responsible for the loss. For example, if a person's car is damaged
in an accident caused by another driver, their insurance company may pay for the
repairs and then seek reimbursement from the other driver's insurance company.
VI. Proximate Cause: Proximate cause refers to the requirement that the insurance policy will only cover
losses that are caused by a covered event. For example, if a person's car is damaged in a flood, their car
insurance policy will only cover the damage if flood damage is specifically listed as a covered event in
the policy.
VII. Materiality of facts: is a legal principle in insurance that states that any facts that are material to the risk
being insured must be disclosed to the insurance company by the policyholder. Material facts are facts
that would influence the decision of an insurer in accepting or rejecting an application for insurance or in
setting the terms and conditions of a policy.If a policyholder fails to disclose a material fact, their
insurance coverage may be invalidated, and the insurer may refuse to pay out on a claim. For example, if
a person applies for life insurance and fails to disclose a pre-existing medical condition that they have,
and later passes away from that condition, the insurance company may refuse to pay out the death benefit
to the beneficiaries of the policy.It is important for policyholders to fully and truthfully disclose all
material facts to the insurance company when applying for insurance or when making a claim.
Conversely, it is also important for insurers to ask the right questions and gather all relevant information
when assessing the risk of an applicant to ensure that they have all material facts necessary to make a
decision.
UBERIMMAE FIDAE &
IMPLICATIONS DUTY OF
DISCLOSURE
"Uberrimae Fidei" is a Latin term that means "utmost good faith". It is a legal
principle that requires both parties involved in an insurance contract to act with
utmost good faith, honesty, and full disclosure. This principle places a duty of
disclosure on the policyholder to disclose all material facts to the insurance
company.
In insurance, material facts are those that would influence the insurer's decision to
accept or reject an application or set the terms and conditions of a policy. Failure to
disclose material facts may result in the invalidation of an insurance policy, and the
insurer may refuse to pay out on a claim.
The duty of disclosure under the principle of utmost good faith applies to both the
policyholder and the insurer. The insurer must also disclose any material facts that
could affect the policy or the claim. The principle of utmost good faith places a high
level of trust and confidence between the insurer and the insured, and it is essential
for a successful insurance contract.
The duty of disclosure is not just limited to the initial application process but also
applies throughout the life of the policy. For example, if the policyholder's
circumstances change during the term of the policy, such as a change in occupation
or health status, they have a duty to inform the insurer of these changes.
In summary, the principle of utmost good faith and the duty of disclosure impose a
legal obligation on both parties to an insurance contract to act with honesty and full
disclosure. Failure to disclose material facts may result in the invalidation of the
policy and the insurer may refuse to pay out on a claim.
TYPES OF INSURANCE

Life Insurance: Life insurance provides financial protection to the policyholder's

family or dependents in the event of their untimely death. It pays out a lump sum to
the beneficiary upon the death of the policyholder, which can be used to cover
expenses such as funeral costs, mortgage payments, or education costs. There are
different types of life insurance policies, including term life insurance, whole life
insurance, and universal life insurance.
General Insurance: General insurance provides protection against a range of risks
and hazards, such as fire, theft, accident, or natural disasters. It covers assets such as
homes, vehicles, and businesses. General insurance policies can be divided into two
categories: property insurance and liability insurance.
Health and Medical Insurance: Health insurance provides coverage for medical
expenses, such as hospitalization, surgeries, and doctor visits. It is designed to
protect policyholders from the high costs of medical care. There are different types
of health insurance policies, including individual health insurance, group health
insurance, and critical illness insurance.
Property-related Insurance: Property insurance protects the policyholder's physical
assets, such as homes, buildings, or personal belongings, against damage or loss due
to fire, theft, or natural disasters. It includes different types of insurance policies,
such as homeowners insurance, renters insurance, and flood insurance.
Liability Insurance: Liability insurance protects the policyholder against legal claims
made by third parties for damages or injuries caused by the policyholder's actions or
negligence. It includes different types of liability insurance, such as general liability
insurance, professional liability insurance, and product liability insurance.
Reinsurance: Reinsurance is insurance for insurance companies. It allows insurers to
transfer a portion of their risk to other insurers in exchange for a premium.
Reinsurance can help insurance companies to manage their risk exposure and protect
themselves against catastrophic losses.
In summary, there are several types of insurance, each with its own unique features
and benefits. Life insurance provides financial protection to the policyholder's family
in the event of their death, while general insurance covers a range of risks and
hazards. Health and medical insurance provide coverage for medical expenses,
property insurance protects physical assets, and liability insurance protects against
legal claims. Reinsurance is insurance for insurance companies.
MARKETING OF INSURANCE PRODUCTS

Marketing of insurance products involves promoting and selling insurance policies to potential
customers. Effective marketing strategies can help insurance companies to increase their
customer base, improve brand recognition, and ultimately, increase their revenue. Here are some
common marketing strategies used in the insurance industry:
Digital Marketing: In today's digital age, digital marketing has become an essential part of
insurance marketing. This includes creating a strong online presence through social media
platforms, search engine optimization, email marketing, and pay-per-click advertising.
Referral Marketing: Referral marketing involves encouraging existing customers to refer their
friends and family to the insurance company. This can be done through referral programs, where
customers are rewarded for each referral they make.
Direct Mail Marketing: Direct mail marketing involves sending physical mail, such as flyers or
brochures, to potential customers. This strategy is effective for targeting specific demographics
and can be personalized for each recipient.
Events and Seminars: Hosting events or seminars is an effective way to educate
potential customers about insurance products and services. This allows insurance
companies to engage with customers face-to-face and build a relationship with them.
Content Marketing: Content marketing involves creating informative and
educational content, such as blog posts, articles, and videos, that provide value to
potential customers. This strategy helps to establish the insurance company as an
industry leader and builds trust with customers.
Telemarketing: Telemarketing involves calling potential customers to promote
insurance products and services. This strategy can be effective for reaching a large
number of people quickly, but it can also be intrusive and result in low conversion
rates.
In summary, marketing of insurance products involves various strategies, including
digital marketing, referral marketing, direct mail marketing, events and seminars,
content marketing, and telemarketing. A successful marketing strategy should be
tailored to the target audience and offer value to potential customers.
REGULATORY PROVISIONS
REGARDING INSURANCE
In Nepal, insurance is regulated by the Insurance Board (IB), a regulatory authority
established under the Insurance Act, 2049 (1992). The IB is responsible for
overseeing the insurance industry and ensuring that insurance companies comply
with relevant laws and regulations. Some of the regulatory provisions regarding
insurance in Nepal are:
Licensing: Insurance companies must obtain a license from the IB to operate in
Nepal. The IB assesses the financial soundness, management expertise, and business
plan of the insurance company before granting a license.
Solvency Requirements: Insurance companies in Nepal are required to maintain a
minimum level of capital and reserves to ensure their financial stability. The IB sets
solvency requirements based on the size and nature of the insurance business.
Policyholder Protection: The IB ensures that insurance companies in Nepal have
adequate systems and procedures in place to protect policyholders' interests. This
includes provisions for timely settlement of claims and dispute resolution
mechanisms.
Investment Restrictions: Insurance companies are required to invest a certain
percentage of their funds in government securities and other approved securities. The
IB regulates the types of investments that insurance companies can make to ensure
the safety of policyholders' funds.
Reporting Requirements: Insurance companies in Nepal must submit periodic reports
to the IB on their financial performance, investments, and other activities. This helps
the IB to monitor the insurance industry and take necessary regulatory action when
required.
Consumer Protection: The IB has established a mechanism for receiving and
resolving consumer complaints against insurance companies. This helps to protect
consumers' interests and ensure that insurance companies operate in a fair and
transparent manner.
In summary, the regulatory provisions regarding insurance in Nepal aim to ensure
the financial stability of insurance companies, protect policyholders' interests, and
promote transparency in the insurance industry. The Insurance Board plays a crucial
role in regulating and overseeing the insurance industry in Nepal.
ROLE OF BEEMA SAMITI
Beema Samiti is the regulatory body for the insurance industry in Nepal. It was
established in 1992 under the Insurance Act, 2049 (1992) with the objective of promoting
the growth and development of the insurance sector in Nepal while safeguarding the
interests of policyholders. The primary roles and functions of Beema Samiti are:

Licensing and Regulation: Beema Samiti is responsible for granting licenses to insurance
companies to operate in Nepal. It also regulates the insurance industry to ensure that the
companies comply with relevant laws and regulations.
Supervision and Monitoring: Beema Samiti monitors the financial performance and
business operations of insurance companies to ensure their stability and sustainability. It
also sets solvency and capital adequacy requirements to ensure that insurance companies
have sufficient financial resources to meet their obligations.
Consumer Protection: Beema Samiti protects the interests of policyholders by
ensuring that insurance companies comply with consumer protection regulations. It
also investigates and resolves complaints made by policyholders against insurance
companies.
Promotion and Development: Beema Samiti promotes the growth and development
of the insurance industry in Nepal by creating a conducive environment for insurers
to operate. It also encourages the use of insurance products by the public through
public awareness campaigns and initiatives.
Research and Policy Development: Beema Samiti conducts research and analysis to
develop policies and regulations that are beneficial for the insurance industry in
Nepal. It also engages in international cooperation to learn from best practices and to
promote the growth of the industry.
In summary, Beema Samiti plays a crucial role in regulating and supervising the
insurance industry in Nepal. Its functions include licensing and regulation,
supervision and monitoring, consumer protection, promotion and development, and
research and policy development. Its role is critical in ensuring the stability and
sustainability of the insurance industry while safeguarding the interests of
policyholders.
CHALLENGES AND
OPPORTUNITIES IN THE
INSURANCE INDUSTRY
Challenges and opportunities in the insurance industry can vary depending on the specific market and
region, but some of the common ones include:
Challenges:
Competition: The insurance industry is highly competitive, and companies have to compete for market share,
leading to pricing pressures and low margins.
Regulatory Environment: The insurance industry is subject to a complex regulatory environment, which can
pose significant challenges for insurers in terms of compliance and adapting to changing regulations.
Technology: Insurance companies need to invest in new technologies to remain competitive, but this can be
costly and require significant resources.
Customer Expectations: Customers are becoming increasingly demanding, expecting personalized and
innovative products and services, and insurers must keep up with these expectations to remain relevant.
Natural Disasters: Natural disasters can lead to significant claims and can impact the insurance industry's
profitability and stability.
Opportunities:

Digitalization: The digital transformation of the insurance industry has opened up new opportunities for
insurers to offer innovative products and services, improve customer experiences, and increase efficiency.
Emerging Markets: Emerging markets offer significant growth potential for insurers as these regions
have large populations with under-insured or uninsured individuals.
Aging Populations: Aging populations in many countries create opportunities for insurers to offer
insurance products that cater to the needs of seniors.
Big Data: The availability of big data provides insurers with opportunities to better understand customer
needs and preferences and develop more targeted products and services.
Climate Change: Climate change is creating new risks and challenges that the insurance industry can
respond to by offering new products and services to help individuals and businesses mitigate these risks.
In summary, the insurance industry faces significant challenges, such as competition,
regulatory environment, technology, customer expectations, and natural disasters.
However, there are also opportunities to grow and innovate, such as digitalization,
emerging markets, aging populations, big data, and climate change. Successful
insurers will need to be agile, innovative, and adaptive to changing market
conditions and customer needs to stay ahead of the competition.
MCQS
Which of the following is a type of insurance that covers damages to property and liability
claims? a. Life insurance b. Health insurance c. General insurance d. Liability insurance
Answer: c. General insurance
What is the term used to describe the amount an insured person pays out of pocket before
an insurance policy begins to pay? a. Deductible b. Premium c. Policy limit d. Coinsurance
Answer: a. Deductible
Which of the following is a type of insurance that covers the loss of income due to an
illness, injury, or disability? a. Life insurance b. Health insurance c. Disability insurance d.
Liability insurance
Answer: c. Disability insurance
Which of the following is not a type of insurance? a. Health insurance b. Property
insurance c. Car insurance d. Bank account insurance
Answer: d. Bank account insurance
Which type of insurance provides coverage for damage or loss of a vehicle due to an
accident, theft or other perils? a. Life insurance b. Health insurance c. Car insurance
d. Home insurance
Answer: c. Car insurance
Which of the following is a common risk covered by property insurance? a. Illness b.
Disability c. Fire damage d. Car accidents
Answer: c. Fire damage
Which of the following is a regulatory body for insurance companies in India? a. National
Insurance Authority b. Insurance Regulatory and Development Authority of India c.
Reserve Bank of India d. Securities and Exchange Board of India
Answer: b. Insurance Regulatory and Development Authority of India
What is the term used to describe the process of evaluating and determining the risk of
insuring a person or property? a. Premium calculation b. Underwriting c. Claims processing
d. Risk assessment
Answer: b. Underwriting
Which type of insurance provides coverage for losses incurred due to legal liability? a. Life
insurance b. Health insurance c. Property insurance d. Liability insurance
Answer: d. Liability insurance
Which type of insurance provides coverage for losses incurred due to damage or loss of crops or livestock? a. Crop insurance b.
Property insurance c. Health insurance d. Liability insurance
Answer: a. Crop insurance
Which of the following is a common exclusion in a life insurance policy? a. Suicide b. Accidental death c. Natural causes d. Terminal
illness
Answer: a. Suicide
Which type of insurance provides coverage for damage or loss of a home due to perils such as fire, theft, and natural disasters? a.
Life insurance b. Health insurance c. Car insurance d. Home insurance
Answer: d. Home insurance
Which of the following is a benefit of reinsurance for an insurance company? a. Reduced premiums for policyholders b. Increased
risk exposure c. Protection against catastrophic losses d. Higher profits
Answer: c. Protection against catastrophic losses
Which type of insurance provides coverage for losses incurred due to damage or loss of goods during transportation? a. Marine
insurance b. Property insurance c. Health insurance d. Liability insurance
Answer: a. Marine insurance
What is the term used to describe the maximum amount an insurance company will pay
out in the event of a claim? a. Deductible b. Premium c. Coverage limit d. Claim limit
Answer: c. Coverage limit
Which type of insurance provides coverage for medical expenses incurred due to illness or
injury? a. Life insurance b. Health insurance c. Disability insurance d. Liability insurance
Answer: b. Health insurance
Which type of insurance provides coverage for the loss of income due to the death of an
insured person? a. Life insurance b. Health insurance c. Disability insurance d. Liability
insurance
Answer: a. Life insurance
Which of the following is a regulatory body for insurance companies in Nepal? a.
Nepal Insurance Authority b. Insurance Regulatory and Development Authority of
Nepal c. Beema Samiti d. Nepal Rastra Bank
Answer: c. Beema Samiti
What is the term used to describe the transfer of risk from one party to another in
exchange for payment? a. Insurance b. Reinsurance c. Underwriting d. Premium
Answer: a. Insurance
Thank-you