“risk refers to the possibility that unpleasant or dangerous might happen”

- Macmillan English Dictionary

“Risk is the condition in which there is a possibility of an adverse deviation from a desired

outcome that is expected or hoped for.”

- Emmett J. Vaughan.

“at its most general level, risk is used to describe any situation where there is uncertain

about what outcome will occur.”

- S.E. Harrinton & G.R. Michaus.

 PERILS AND HAZARDS

Perils refers to the CAUSE of loss or contingency that may cause a loss.
It refers to the immediate causes of losses
It means serious and immediate danger
Eg. Fire, Collusion etc.,
Hazards are the CONDITIONS that the severity of losses or the conditions affecting the
perils.
These are conditions that create or increase the severity of losses.
Physical Hazards – Consist of those physical properties that increase the chances
of losses from the various perils. Eg. Stocking the crackers in the complex will
increase the peril of fire.
Intangible Hazards:
1. Moral Hazards- These refers to the increase in the possibility or severity of loss
emanating from the intention to deceive or cheat. Eg. Firing the factory running
the loss.
2. Morale Hazards- it is the attitude of indifference , so it is carelessness or
indifference .. Eg. Smoking in the oil refinery , careless driving, etc.,
3. Societal Hazards: It refers to cause a huge societal impacts. Eg. Heavy bore
wells., unauthorized buildings etc.,
 Financial &
Non-
Financial

Quantifiable
Static &
& Non-
Dynamic
quantifiable
TYPES
OF
RISKS

Fundamental
Pure & & Particular
Speculative (Group/
Individual)
Financial Risk:
If any risk is leads to incur any monetary losses are called as financial losses.
Three important elements to affect the financial losses :
1. Some one adversely affected by the happening of an event.
2. The assets or income is likely to exposed to financial losses
3. Peril cause the losses.

Non- Financial Risk:

The risk which are not financial risk is called as non-financial risk.
Eg. Choosing your career, course , institute,
Life choices.
Individual risks:

Individual / Particular risk are confined to the individuals. Thefts, robbery, fire etc

are particular in nature.

Group Risk:

A risk is said to be the group / fundamental risks if it affects the economy as

whole. They most affect the whole social segment or the entire population.

Eg. Earthquake, floods, wars, unemployment etc.

Pure Risk:
Pure risk situation are those where there is a possibility of loss or no loss. There is
no gain for individual or organization.
Speculative Risk:
Speculative risks are possible for the profit or the loss.

1. Pure losses are insurable : Speculative are not

2. Numbers are large in pure than speculative
3. People get benefit out of speculative risks but nothing in pure ris.
Static Risk:
Static risks are more or less predictable and not affect the economic conditions.
Eg. Loss of business, loss due to act of others etc.

Dynamic risk:
Dynamic risk on other hand creates economic or environmental changes .
Eg. Inflation, Prices Level changes,. Technology changes etc.,

1. Dynamic losses are not predictable where as static losses can be predictable
2. Dynamic results in economic/ environmental changes were as it will not
affect
3. For dynamic no cover for insurance but static has cover of insurance
4. Dynamic risk benefit to society but static will not.
RISK MANAGEMNT

Risk Management is an integrated process of delineating specific area or risk , developing a

comprehensive plan, integrating the plan and conducting ongoing evaluation.
 RISK
MANAGEMENT
OBJECTIVES

LOSS INTERNAL
LOSS CONTROL
FINANCING RISK CONTROL

Increased Retention & Self-

Diversification
Precautions Insurance

Reduced level of Insurance Investments in

risk activity Contracts information

Non-Insurance
risk transfers
 Defining the
objective of the
risk
management
exercise

Implementation Identify the risk

& review exposures

PROCESS OF
RISK
MANAGEMENT

Critical analysis
of risk Evaluate the
management & risk exposures
its alternatives
 Risk
Control
Risk Risk
Analysis Financing

RISK
MANAGEMENT
ELEMENTS
 RISK
MANAGEMENT

RISK
RISK ANALYSIS RISK CONTROL
FINANCING

Identification Avoidance Loss Control Risk Retention

Internal
Evaluation Risk transfer
Diversification

External
Diversification
 Checklist
Method

Financial
Statistical
Statement
Tools
Method

RISK
IDENTIFI
CATION
Interactio Flow
n with Chart
others Method

On-site
inspectio
n
 RISK EVALUATION

The
probability
of loss
occurring

Its Severity
 RISK CONTROL

BEFORE OCCURRENCE AFTER OCCURRENCE

OF LOSSES
• Reduction in worry and fear
• Economical ways of handling
risk
• Overcome legal obligations
OF LOSSES
• Survival
• Congruence with mission and
objectives of the business
• Optimizing the social wealth
CLASSIFICATION OF PURE RISK

• Risk of premature
death
• Risk of poor health
PERSONAL
• Risk of insufficient
income after retirement
• Risk of unemployment

• Direct loss
PROPERTY • Indirect or
consequential loss

LIABILITY
PERSONAL RISK

Risk of premature death: It is defined as the death of household head with unfulfilled
financial obligations. If the surviving family members receives an insufficient amount of
replacement income from other sources or have insufficient financial asset to replace the
income, they may be financial insecure
Risk of insufficient income : it refers to the risk of not having sufficient income at the age
of retirement or the age becoming so the there is a possibility that individual may not be able
to earn the livelihood.
Risk of poor health: it refers to the risk of poor health or disability of a person to earn the
means of survival.
Risk of unemployment: Unemployment is the result of business cycle, unless there is
adequate savings or replacement of income ,then will be at financial insecure.
 PROPERTY RISK

it refers to the risk of having property damaged or lost because of fire earthquake or any other
reason.
Direct Loss: A direct loss is defined as a financial loss that result from the physical damages
destruction , or theft of the property.

Indirect / Consequential loss: it is also an financial loss that results indirectly from the
occurrences of a direct physical damage or theft loss
Eg. Rebuilt the fired factory.
 LIABILITY RISK

These are the risk arising out of the intentional or unintentional injury to the persons or
damage to their properties through negligence or carelessness.
Liability risk generally arise from law. Eg. Liability of the employer under the workmen’s
compensation law or other laws in India.
 TYPES OF LOSSES FROM PURE RISK

Damages to assets
Direct
Losses Injury/Illness to Employees

Liability Claims and defense cost

Loss of normal profit(net cash flow)

Indirect Continuing & Extra operating expenses
Losses Higher cost of funds
Forgone Investment
Bankruptcy Cost(Legal Fees)
 METHODS OF HANDLING PURE RISK

1. Avoidance of risk

2. Loss of control

(a) Loss of prevention

(b)Loss reduction

3. Risk retention

4. Non-insurance Transfers

(a) Transfer of risk by contracts

(b)Hedging price risks

(c) Incorporation of business firm

5. Insurance
AVOIDANCE OF RISK:
Avoiding the risk or circumstance which may lead to losses.
It is not possible to find the formula for avoiding the risk completely but to the extend risk
can be reduced.
LOSS PREVENTION
Loss prrevention aims at reducing the probability of loss so that the frequency minimized
 FINANCIAL RISK MANAGEMENT

Sources of Financial Risk:

➢ Risk arising from organization’s exposer to change in market prices viz. interest
rates, exchange rates, commodity prices.,
➢ Risk arising from actions of and transactions with other organizations such as
vendors, customers, and counter parties in derivative transactions
➢ Risk arising from the internal actions or failures of the organizations, particularly
people, and systems.
 Market Operational

Credit Others
CLASSIFICATIONS
OF
FINANCIAL RISKS
 Defining
Objectives

Implementat
Identifying
ion &
risk exposers
Review FINANCIA
L RISK
MANAGEM
ENT
PROCESS

Analyzing Evaluating
the solutions the risk
RMIS RISK MANAGEMENT INFORMATION SYSTEMS

“It is a computer applications that are customized to meet their(Risk Manager) unique needs,
and they are seeking true Web-based system facilitate the sharing of loss information and
reports with managers in remote locations.”
➢ RMIS are software tools designed to assist risk manager in their functions.
➢ In the current market risk managers are demanding the ability to pluck credible data from
their information system.
➢ RMIS can help managers with a wide array of functions.
➢ RMIS gathers information from all these various systems into one database.
➢ There the data can be analyzed from various angles to get the different perspectives on the
task organization faces.
With this rich database and analysis tool, various custom reports can be produced not just for
the risk manager, but also for managers throughout the organization, giving them a detailed
look at their exposures.
 Reporting

USES
OF
Review of
claims
Adjustment
RMIS Examination
of
Accidents
process
 Data impurity

Lack of
Bugs
services

PROBLEMS
FACED BY
THE RISK
MANAGER

Software
Obsolescence
Incompatibility

Poor
documentation
 DIRECTOR
RISK
MANAGEMENT

MANAGER
SAFTEY
MANAGER MANAGER MANAGER
ANALYST RM HEALTH &
INSURANCE CLAIMS SECURITY
LOSS
PRVENTION

Insurance Supervisor Supervisor Fire Claims Supervisor

Insurance Clerk Supervisor Safety
Administrator Industrial Hygiene protection Administrator Security

Industrial Fire Protection

Safety Engineer
Hygienist Engineer
INSURANCE:
The term insurance is defined in both financial and legal terms.
In financial Sense:
Insurance is a social device in which a group of individuals (insured) transfer risk to
another part (insurer) in order to combine loss experience, which permits statistical
prediction of losses and provides for the payment of losses in order from funds contributed
(premiums) by all the members who transferred risk.
In Legal Sense:
A contract of insurance by which one party in consideration of the price paid to him
proportionate to the risk provides security to the other party that he shall not suffer loss,
damages or prejudice by the happening of certain specific events. Insurance is meant to
protect the insured against uncertain events which may cause disadvantages to him. Life
insurance however is a distinctive type of insurance where there is certainty of the payment
of a specific amount either on death of the insured or on the maturity of the policy
whichever is earlier
B I Reimbursement for losses
E N
N S Reduction in tension and fear
E U
F R Avenue for investment
I A
T N Prevention of Losses
S C
E Credit multiplication
O
F
Cost of insurance to society
 Large number of
exposure units

Define & Measurable

ELEMENTS OF AN
INSURABLE RISK
loss

Determine probability
Distribution

Random Loss

Non- Castastropic
Loss

Premium should be
economically feasible
LARGE NUMBER OF EXPOSURE UNITS:
➢ The theory of insurance is based on large numbers.
➢ There must be sufficiently large number of homogenous exposure in order to
predict the reasonable losses.
➢ The probabilistic estimates used by logic , assume large number of units in a
distribution and insurance products are priced accordingly.

DEFINE & MEASURABLE (CALCULABLE) LOSS:

➢ The losses are fairly predictable.
➢ It can be measured in terms of money
➢ Loss of peace of mind, tension etc., cannot be indemnified.
DETERMINABLE PROBABILITY DISTRIBUTION:
➢ The probability distribution of the happening of adverse events is determinable.
➢ If there is no determinable distribution thee is no question of issuing a cover by an
insurance company.

RANDOM LOSS:
➢ The adverse event may or may not occur in future and once which the insurance
company has not control.
➢ Naturally if the event is non- random , there is no question of insurance.
➢ If any losses occurred in past , there is no question of insurance.
➢ It is important that randomness is ensured by the underwriters who guard against
adverse selection- the tendency of the poorer than average insured to seek or
continue insurance coverage.
NON – CATASTROPHIC LOSSES:
The losses should not be non – catastrophic losses.
Not all the units in the homogenous group will be subject to an adverse event.
Recall that if all the units meet losses, the company will be ruined only few out of
large group will be exposed.

PREMIUM SHOULD BE ECONOMICALLY FEASIBLE:

Since the insurance pool is structured to be sufficiently large, the price charged by
the insurer for buying the risk is generally low. It should be sufficient to cause the
rich for the insurer as well as viable for the insured.
INSURANCE AS A MACRO-ECONOMIC ISSUE
Mobilization of savings:
• The money collected from the scattered and distant policy holders by way of premium is
pooled and invested in projects which would otherwise have not been possible.
• This reduces the transactions cost of financing and eases the pressure on other financial
intermediaries.
Creation of liquidity:
• Instead of policyholders directly landing their money to entrepreneurs and projects, money
lent on behalf of insurance company.
• This creates the liquidity in the and in case of adverse events occurs money is immediately
paid without time lag.
Economies of Scale;
The bulk fund invested in large and infrastructure projects promotes economies pf scale,
promoter economic development and growth and other technological innovation.
INSURANCE AND GDP:
• The relationship between the insurance density and GDP is DIRECT.
• Insurance density varies directly with GDP.
INFLATION, BUSINESS CYCLES & INSURANCES:
• Inflation and business recessions directly reduces the real purchasing power and
network of the people respectively.
• Insurance can give cover to these, yet the negative side is the adverse impact on the
financial performance of the companies.
POPULATION CHANGES & INSURANCE:
• Population changes materially affects the insurance industry because of the economic
consequences of changing rates of birth, death, marriage and family formation.
• The shifting age distribution affects the kinds and amounts of insurance the people
will buy.
 KINDS OF
INSURANCE

LIFE NON-LIFE

Endowment Property

Money back Liability

Pension Health
LIFE INSURANCE:

Definition of Life Insurance

“The term life insurance implies the type of insurance, that covers the

risk of life and provides a guarantee to compensate by paying the

specified sum, either on the death of the insured or after the specified

period.”
In life insurance, the amount is payable on the happening of the uncertain event. Moreover,
there are certain plans, wherein the payment of the policy amount is made at the maturity.
These are long term contracts which require the payment of premium throughout its life till
it matures and the sum assured is paid on maturity. It can be surrendered, after some years,
wherein the policyholder will get a proportion of premiums paid, called as surrender value.
• As the name suggests, life insurance covers your life. In case of policyholder’s
premature demise within the policy term, the insurance company pays the sum assured
to the nominee.
• One of the most essential financial instruments, life insurance helps your family to stay
financially independent, square off liabilities taken in the form of loans, maintain the
lifestyle provided, and keep essential goals on track.
• The insurance plan which covers the life-risk of the insured is called life insurance.
• Life insurance is also known as assurance, whereby the sum assured is paid to the
insured.
There are three types of life insurance, discussed as under
Whole life assurance: In whole life assurance, the amount of the policy is paid
only on the death of the insured, to the nominee or the legal heir of the insured.
As the name suggests, a whole life insurance offers you coverage for your entire
life. The policy term for whole life insurance plans extend up to 100 years and as
long as the premiums are paid, the benefits of the policy are kept intact.

If you, the policyholder, survive the policy term, you get maturity benefits. If you
want to remain insured throughout your life, whole life insurance plans are a good
choice to make.

Term life assurance: In term life assurance, the policy amount is paid to the
nominee, if the insured passes away before the expiry of the specified term, or to
the insured himself, on the maturity of the term.
Annuity: When the term of the policy expires, the payment of the policy amount
is paid to the holder periodically, as long as the insured is alive.
 Term
Life
Insurance

Money Endowments
Back
LIFE
INSURANCE

Pension ULIP’s
Types of life insurance
TERM LIFE INSURANCE:
Term insurance is the simplest form of life insurance available in the market. A pure
protection plan, a term insurance offers a large coverage at an affordable premium. A 30-year-
old non-smoking male can opt for a term plan offering a cover of Rs.1 crore for a policy term
of 30 years by paying a nominal premium of a little over Rs.8,000 per annum. Term plan gives
you the flexibility to choose a sum assured 15-20 times of your annual income.
It pays your nominee the sum assured in case of your demise within the policy term. The
insurance proceeds received help your family to meet daily expenses and pay off debts.
Note: that pure term plans have no maturity benefits. It means, in case you survive the
policy term, you don’t get these benefits.

However, of late insurers have come up with the return of premium term insurance plans
which return all the premiums paid in case you survive the policy term. But these plans are
slightly more expensive than pure term plans.
ENDOWMENT PLANS:
Weaving insurance and investment in a single product, endowment plans offer life cover as
well as build a corpus for essential life goals. A certain portion of the premium goes towards
the sum assured, while the other portion is invested in low-risk avenues. In case of your
demise during the policy term, your nominee gets the sum assured.
In case you survive the policy term, you get the sum assured as maturity amount along
with the accumulated bonuses. Thus, endowment plans fulfill the dual needs of
insurance and investment.
Endowment plans are life insurance policies that not only cover the individuals life
in case of an unfortunate events. But also offers a maturity benefits at the end of the term.
After a specific period of time called “maturity”- they are designed to pay a lump sum
amount. The insurance company will pay this assured sum to the endowment policy
holders nominees in case of death or to the holder himself on a fixed date in the future.
MONEY BACK :
In a money back plan the insured person gets a percentage of sum assured at
regular intervals. Instead of getting the lump sum amount at the end of the term.
It is an endowment plan with the benefit of liquidity.
Money back policies are similar to endowment plans, except that they pay a
certain amount at pre-defined intervals during the policy term. For instance, a
money-back policy for a term of 15 years, may pay a certain amount at the end
of 5th and 10th year of the policy term. On policy maturity, it pays the maturity
benefits along with the accumulated bonuses.
PENSION :
A pension plan is the retirement amount, which an individual gets from their insurance
company on a regular basis or in form of lump sum.

Pension plans or retirement plans offer you the dual benefits of investment and insurance
cover. You just have to invest a certain amount regularly to accumulate over a specific
tenure in a phase-by-phase manner. This will ensure a steady flow of monthly pension once
you retire.

Pension insurance contract is an insurance contract that specifies pension plan

contributions to an insurance undertaking in exchange for which the pension plan benefits
will be paid when the members reach a specified retirement age or on earlier exit of
members from the plan.
Unit linked insurance plans (ULIPs)
Combining insurance and investment in a single product, ULIPs offer life
protection as well as the opportunity for capital appreciation by investing in
various funds of varying degrees of risk. Just like endowment policies, in
ULIPs a certain portion of the premium goes in providing life cover, while
the other portion is invested in markets to earn returns.
NON-LIFE INSURANCE / GENERAL INSURANCE:
Definition of General Insurance
General insurance or otherwise known as non-life insurance or property and casualty
insurance, is a contract that covers any risk apart from the risk of life. The insurance is to
safeguard us and our property, such as home, car, and other valuables from fire, theft,
flood, storm, accident, earthquake and so on.

These are the contract of indemnity, wherein the insurer promises to make good, the loss
occurred to the insured. So, irrespective of the amount of policy, the insurance company
will reimburse the loss suffered by the insured.

General insurance covers non-life assets - such as your home, vehicle, health, travel –
from floods, fire, thefts, accidents and man-made disasters.
 BASIS FOR COMPARISON LIFE INSURANCE
Meaning Life insurance can be understood
as the insurance contract, in which
the life risk of an individual is
covered.
GENERAL INSURANCE
General insurance refers to the
insurance, which are not covered
under life insurance and includes
various types of insurance, i.e. fire,
marine, motor, etc.

What is it? It is a form of investment. It is a contract of indemnity.

Term of contract Long term Short term
Claim payment Insurable amount is paid, either on Loss is reimbursed, or liability
the occurrence of the event, or on incurred will be repaid on the
maturity. occurrence of uncertain event.

Premium Premium has to be paid over the Premium should be paid in lump
years. sum.
Insurable interest Must be present at the time of Must be present, both at the time
contract. of contract and at the time of loss.

Policy value It can be done for any value based The amount payable under non-life
on the premium the policy holder insurance is confined to the actual
willing to pay. loss suffered or liability uncured,
irrespective of the policy amount.

Savings Life insurance place has a General insurance has no such

component in savings. savings component.
Key Differences Between Life Insurance and General Insurance
1.The insurance contract, in which the life risk of an individual is covered, is known
as life insurance. As opposed, the insurance, which is not covered under life
insurance and includes various types of insurance, i.e. fire, marine, motor, etc. is
general insurance.
2.Life insurance is nothing but an investment avenue. On the contrary, general
insurance is a contract of indemnity.
3.Life insurance is a long-term contract, which runs over a number of years.
Conversely, general insurance is a short term contract, which needs to be renewed
every year.
4.In life insurance, the sum assured is paid, either on the happening of the event or
the on the maturity of the term. As against this, in general insurance, the amount of
actual loss is reimbursed, or liability incurred will be repaid on the happening of an
uncertain event.
5. In life insurance, the premium is paid throughout the life of the term. In
contrast, in general insurance, one shot payment of premium is made.
6. In life insurance, the insurable interest must be present only at the time of
the contract, but in general insurance, the insurable interest must be
present, both at the time of contract and at the time of loss.
7. Life insurance can be done for any value based on the premium the
policyholder willing to pay. Unlike, general insurance the sum payable is
confined to the amount of loss suffered, regardless of the policy amount.
8. The component of saving is normally present in life insurance but not in
general insurance.
 Nature
of
contract
Principle Principal
of of utmost
proximate good
cause faith

Principles
of Principle
Double Insurance of
insurance Insurable
interest

Principle
Principal of
subrogation of
indemnity
Nature of contract

Nature of contract is a fundamental principle of insurance contract. An insurance contract

comes into existence when one party makes an offer or proposal of a contract and the
other party accepts the proposal.
A contract should be simple to be a valid contract. The person entering into a contract
should enter with his free consent.

Principal of utmost good faith:

Under this insurance contract both the parties should have faith over each other. As a
client it is the duty of the insured to disclose all the facts to the insurance company. Any
fraud or misrepresentation of facts can result into cancellation of the contract.
Principle of Insurable interest
Under this principle of insurance, the insured must have interest in the subject matter of the
insurance. Absence of insurance makes the contract null and void. If there is no insurable
interest, an insurance company will not issue a policy.
An insurable interest must exist at the time of the purchase of the insurance. For example, a
creditor has an insurable interest in the life of a debtor, A person is considered to have an
unlimited interest in the life of their spouse etc.
Principle of indemnity:
Indemnity means security or compensation against loss or damage. The principle of
indemnity is such principle of insurance stating that an insured may not be compensated by
the insurance company in an amount exceeding the insured’s economic loss.
In type of insurance the insured would be compensation with the amount equivalent to the
actual loss and not the amount exceeding the loss.
This is a regulatory principal. This principle is observed more strictly in property insurance
than in life insurance.
The purpose of this principle is to set back the insured to the same financial position that
existed before the loss or damage occurred.
Principal of subrogation:
The principle of subrogation enables the insured to claim the amount from the third party
responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of
loss, For example, if you get injured in a road accident, due to reckless driving of a third party,
the insurance company will compensate your loss and will also sue the third party to recover
the money paid as claim.

Double insurance:
Double insurance denotes insurance of same subject matter with two different companies or
with the same company under two different policies. Insurance is possible in case of indemnity
contract like fire, marine and property insurance.
Double insurance policy is adopted where the financial position of the insurer is doubtful. The
insured cannot recover more than the actual loss and cannot claim the whole amount from
both the insurers.
Principle of proximate cause:
Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is
applicable when the loss is the result of two or more causes. The proximate cause
means; the most dominant and most effective cause of loss is considered. This principle
is applicable when there are series of causes of damage or loss.
 REGULATION OF INSURANCE BUSINESS IN INDIA

The insurance business is primarily regulated by two statues:

1. Insurance Act 1938
2. Insurance and Regulatory Development Authority Act 1999.
The insurance business are classified in to four classes:
A. Life Insurance business
B. Fire Insurance business
C. Marine Insurance business
D. Miscellaneous Insurance business
Apart from this the followings are also the regulatory bodies:
GIC and its subsidiaries are regulated by the General Insurance Business
(Nationalization) Act 1972
LIC is regulated by the LIC Act 1956
IRDA Act 1999
LEGAL FRAMEWORK OF INSURANCE BUSINESS
➢ Insurance is made available to the public through the medium of contracts.
➢ The contract may range from implied or oral agreements.
➢ Most of the insurance are expressed and in written
➢ Insurance contract are complicated because of technical in nature of subject matter
➢ Need for the legal clarity may lead to a beyond the comprehensive of typical
insurance consumer.
➢ Technical nature of many contracts often distracts from the mutual understanding of
its terms by parties to the contract.
➢ Insurance can be classified into two categories Life and non-life insurance.
➢ In a life policy the life is covered for certain amount which is payable on the maturity
of the policy or on the death of the policyholder whichever is earlier.
➢ The amount is payable on death to the nominee/legal heir of the deceased.
➢ Non-life insurance can again categorized according to the uncertainties and event
covered by the representatives policies.
 INDIAN CONTRACT ACT 1872

Insurance contracts are agreements between insurance companies and insured for the
purpose of transferring from insured to the insurer a part of the risk of loss arising out of
contingent event.
Therefore all the provisions of Indian contract act 1872, in general are applicable to
insurance contracts.
Under section 10 of the Indian contract act, the following conditions are necessary to form
a valid contract.
▪ Agreement between two parties
▪ Lawful object
▪ Capacity to contract
▪ Consideration
▪ Possibility of performance.
OFFER AND ACCEPTANCE:
The offer for entering into insurance contract generally come from the insured (Proposer). The
insurance company may also propose to make the contracts.
In order to constitute a valid acceptance, offer and acceptance must fulfill the requirements as
prescribed by the Indian contract act 1872. moot point is acceptance.
On acceptance of the proposal by the insurer , a valid and binding contract comes to existence.
In case of life insurance a valid and binding contract comes to the existence upon the payment
of first premium.
LEGAL OBJECT:
For a valid contract, the object of the agreement should be lawful and must not be prohibited
by any law.
Any subject matter of the contract that is (i) not forbidden by law, (ii) is not immoral or, (iii)
opposed to the public policy, (iv) which dose not defeat the provision of any law.
The subject matter of insurance in the proposal form and also the consideration should be
legal.
CAPICITY TO CONTRACT:
The rules laid down under the contract act 1872, defining the contratual capacity of the
parties apply generally to insurance contract in same manner as they apply to other types of
contracts.
Every person is competent to contract
(i) Who is the age of majority according to the law
(ii) Who is sound mind
(iii) Who is not disqualified from contracting by any law to which he is subject.

A minor is therefore incompetent to contract, and a contract with a minor is a nullity.

But under certain circumstances an insurer, may issue a policy on the life of the minor. Under
the system of deferred assurance policies, the insurance contract is with a parent or legal
guardian who is competent to the contract.
FREE CONSENT:
The consent shall be free with it is not caused by
(i) Coercion
(ii) Undue Influence
(iii) Fraud
(iv) Misrepresentation
(v) Mistake
CONSIDERATION:
For the insurance contracts, consideration is in the form of premium to be paid by the
insured and a promise to pay, compensate or indemnify in accordance with the terms and
conditions incorporated in the policy, on the part of insurer.
The premium is the price for the risk undertaken by the insurers.
It is the consideration receivable by the insurers from the insured in exchange for their
undertaking to pay the sum insured in case the event insured against takes place.
Amount of premium is not the criteria, but a contract without payment of premium is void.
 LAWS CONCERNING INSURANCE
Insurance Act,1938
The Merchant Shipping Act,1958
Insurance Regulatory and Development
The bill of lading Act, 1855
Authority Act,1999
The indian ports (Major Ports) Act, 1963
Life Insurance Corporation Act,1956
The indian railways Act,1890
General Insurance business (Nationalization)
The carriers Act,1865
Act,1972
The indian Post office Act,1898
Motor Vehicles Act,1988
The carriages by air act, 1972
The inland Steam Vessels Act,1917 and the
Multi modal Transportation Act,1933
amended Act, 1977
Workmen’s Compensation Act,1923
Marine Insurance Act,1963
Employee State insurance Act,1948
The carriage of goods by sea Act,1925
The Indian Stamp Act,1899
INSURANCE ACT,1938:
Insurance Act 1938, primary law that governs the insurance business in india. It
provides for the registration and licensing of insurers, payment of premiums, alteration
and other policy matters, powers of governments accounts, audit and reports
requirements ,mode of deposits and investments, constitutions of certain claims
settlement authorities.
INSURANCE REGULATORY and DEVELOPMENT AUTHORITY ACT1999
It provides for the establishment of an authority to protect the interest of holders of
insurance policies, to regulate, promote and ensure orderly growth of the insurance
industry and for matters connected therewith to identical thereto and further to amend
the insurance Act 1938, the LIC Act 1956 and General Insurance Business
(Nationalization) Act 1972.
LIFE INSURANCECORPORATION ACT 1956
LIC Act1956, and the regulations made thereunder deals with the formation of life insurance
corporation- its functions, powers . Capital , transfer of business, conduct of business and
other related matters.
GENERAL INSURANCE BUSINESS (NATIONALIZATION) ACT1972
It deals with the formation of GIC and amalgamation of insurers existing prior to the
promulation of the act. it describe the powers and functions of GIC, powers of central
government and other related issues.
MOTOR VEHICLES ACT, 1988
Motor vehicles act 1988 provides for compulsory insurance of motor vehicles. The act
provides that no motor vehicle can be used in a public place unless there is in force in
relation to vehicle a policy issued by an authorized insurer.
 HISTORY OF INSURANCE – INDIAN PERSPECTIVE:
• In India the first insurance company was established on 1818- ORIENTAL LIFE
INSURANCE COMPANY at Calcutta.
• Succession with this establishment BOMBAY LIFE ASSURANCE COMPANY 1823
and MADRAS EQUITABLE LIFE ASSURANCE SOCIETY 1829 was established.
• In general insurance business TRITON INSURANCE COMPANY-1850 was
established. It is the first general insurance company established at Calcutta by British.
• Prior to 1871, Indians were charged about 15% more premium as compared to
Europeans.
• Bombay Mutual Life Assurance Society 1871 was the first company not differentiate
between Indians and Europeans in the matter of fixation of premiums.
• The first attempt at regulation of insurance business in India was through the life
Assurance companies Act 1912.
• Later broad- based Insurance Act comes into existence from the year 1928 onwards.
• The insurance act was subsequently reviewed and a comprehensive legislation was
enacted called the Insurance Act 1938.
 EARLY HISTORY OF 18TH CENTURY

• Albiruin and Marcopolo mentioned in their tour memories that the practices of

insurances was common in India.

• There was a protection to war risk also.

• The names and the positions of the insurers are not stated. We guess the

ordinary merchants undertook the risks.

• The position remained unchanged till the arrival of British insurers in India.

• There was lack of insurance customs, stable conditions and permanent

economic policies and all of above there was lack of knowhow.

• There was no great need for insurances.

19TH CENTURY

• British traders set up agencies houses in many port town and marine insurance was
followed.
• Most of the Indian insurance companies were established after 1797, out of which 7
were there in Kolkata, 5 were at Chennai and Mumbai.

• 1850- TRITIAN insurance company formed at Kolkata.

• 1857- first war of Indian Independence and society was disrupted, In spite of that the
insurance companies came up.
• 1861- company named British Mercantile practiced general insurance.
• 1872- Hindu Family Annuity Fund was in practice.
• 1896- Bharath Insurance Company was started.

There was no rules to govern the general insurance, the joint stock companies act 1860
regulates the operations.
 PERIOD
1901-1918

• The general insurance business got encouragement from Swadeshi Movement.

• The few known insurers who started business were the cooperative insurance
(AMRISTER)
• The Indian Mercantile came up in 1901.
• The National Insurance and general insurance society started at (Calcutta) in 1906.
• Zenith started in 1906.
• The Indian Insurance Act 1912 excluded general insurance from its scope.
 PERIOD
1919-1939

• This is a period of growth.

• Many Indian and Non- Indian companies were born.
• In 1964 it was found 23 companies doing good business were started during
1919-1939.
• Indian Insurers were weak financially and always fell behind the foreigners.
• Indian Insurance Companies (Amendment) Act 1928 were passed.
• The Indian Insurance Act,1938 were passed.
• The Indian Insurance Companies Association was formed.
• The Insurance Business regulated strictly by government.
 PERIOD
1940-1949

• 37 insurance starting in this period.

• 4 Marine insurance companies were started.
• Motor insurance was practiced on mutual basis.
• War risk was managed compulsory by government.
• The non-indian insurers lost hold gradually.
 PERIOD
1950-1972

• Many new features were introduced in Indian Insurance Act,1961.

• Every insurer is required to insure a certain proportion (not
exceeding 30%) with the approved Indian Insurers like Indian
Reinsurance Corporation and Indian Guarantee Reinsurance
which was carried by LIC.
• The general insurance company expressed the inability.
1912 The indian Life assurance companies act enacted as the first statue to regulate the
life insurance business
1928 The indian Insurance Companies Act enacted to enable the government to collect
statistical information about both life and non-life insurance business.
1938 Earlier legislation consolidated and amended to by the insurance act with objective of
protecting the interest of the insuring public.
1956 254 Indian and foreign insurers and provident society taken over by the central
government and nationalized. LIC formed by an Act of Parliament viz., LIC Act 1956
with a capital contribution of Rs. 5 Crore from government of India.
1907 The indian Mercantile insurance Ltd., set up, the first company to transact all classes of
general insurance business.
1957 General Insurance Council, a wing of the Insurance Association of India, frames a code
of conduct for ensuring fair conduct and sound business practices.
1968 The insurance Act amended to regulate investments and set minimum solvency
margins and the Tariff Advisory Committee set up.
1972 The General Insurance Business(Nationalization) Act 1972, nationalized the general
insurance business in India with effect from 1st January 1973. 107 insurers
amalgamated and grouped into four companies viz., the national insurance company
ltd., the new india assurance company ltd., oriential insurance company ltd., and
united india insurance company ltd., GIC incorporated as a company
The nationalization of life insurance business took place in 1956 when 245 Indian and
foreign insurance and provident societies were first amalgamated and then nationalized.
The LIC of India came into existence and has enjoyed a monopoly over the life insurance
business in India.
NATIONALIZATION
1972

• While nationalization of life insurance there was demand for nationalization of general

insurance also.

• The practice in general insurance was growing unhealthy.

• Government assured the public they would watch its working carefully and consider

nationalization if the condition dose not improve.

 GROUNDS OF NATIONALIZATION

• There were repeated popular demand for nationalization in the

parliament.
• The funds for financing country’s economic development plans
will be available from insurance funds.
• The foreign exchange drain for import business would be stopped.
• The monopolistic control of the business by few industrialist
would end.
• There was a high concentration of economic power .
• The business required immediate cure from various malpractices .
 CURRENT SCENARIO OF INSURANCE INDUSTRY

• The insurance industry of India consist of 53 insurance companies of which 24 are

in life insurance business and 29 are non-life insurers.
• Among the life insurers, LIC is the sole public sector company.
• Six public sector insurers are there in non-life insurance.
• In addition to these, there is sole national re-insurer namely General Insurance
Corporation (GIC Re).
• Out of 29 non-life insurance companies , five private sectors insurers are registered
to underwrite policies exclusively in health, personal accident and travel insurance
segments.
• There are two specialized insurance belonging to public sector namely:
I. Export Credit Guarantee Corporation of India for credit Insurance &
II. Agriculture Insurance Company Ltd for Crop Insurance
 MARKET SIZE

• During April 2015 to Feb 2016 , the LIC insurance industry recorded a new premium income
of 1.072 trillion (US $ 15.75 billion), indicating the growth of 18.3%.
• The general insurance company recorded a 14.1% growth in gross direct premium in the FY
2016 at Rs.864.2 billion (US$ 12.7 billion).
• India’s life insurance sector is the biggest in the world with about 360 million policies ,
which are expected to increase Compound Annual Growth Rate(CAGR) of 12-15 percent
over next five years.
• Insurance industry plans to hike penetration levels to 5% by 2020.
• The country’s insurance market is quadruple in size over next 10 years from its current size
of US$60 billion.
• During the period the life insurance market is worth crossing US$ 160 billion.
• The general insurance business in india is currently at rs.78,000 crore(US$ 11.44 billion)
premium per annum industry and is growing at healthy rate of 17%.
• The Indian insurance market is a huge business opportunity waiting to tie
together.
• The country is the fifteenth largest insurance market in the world in terms of
premium volumes, and it has the potential to grow exponentially in the coming
years.
• India currently accounts for less than 1.5% of the world’s total insurance
premiums and abut 2% of the world’s life insurance premiums despite being the
second most populous nation.
 INVESTMENT
VENUES

• The insurance sector in India is expected to attract over Rs.12,000 crores (US$ 1.76
billion) in 2016 as many foreign companies are expected to raise the stake in private
sectors.
• FDI in the investment in insurance sector stood at US$341 million in March-
September 2015 showing that of 152% compared the same period last year.
• GIC Re and 11 other non-life insurers have jointly formed the indian Nuclear
Insurance pool with capacity of Rs1500 crores (US$ 220.8 Million), and will be
provided risk mechanism.
• Nippon Life Insurance , Japan’s second largest life insurance company, has signed
definitive agreements to invest Rs.2,265 crores (US$332.32 Million)
 GOVERNMENT
INITIATIVES
• Foreign investment will be allowed to 49% subject to the guidelines of Indian Management
and Control.
• Services tax on single premium annuity policies has been reduced from 3.5% to 1.4% pf
premium paid.
• Government insurance companies to be listed on the exchanges.
• IRDA has been formed two committees to regulate and suggest ways to promote e-
commerce in order to increase insurance penetrations.
• The government of india has launched two insurance schemes:
I. Pradhan Mantri Suraksha Bima Yojana (PMSBY)
II. Pradan Mandri Jeevan Jothi Bima Yojana (PMJJBY)
• These are government life insurance schemes offers basic insurance at minimum rates.and
easily availed through the government agencies.
• UP government has launched a first of its kind banking and insurance services helpline for
farmers where individuals can complain on a toll free number.
 FUTURE ANTICIPATION
• As the central government’s plans, it is targeted that life insurance will reach up
to 50% , health insurance to 30% and general insurance around 20% in the
population by 2020.
• The ASSOCHAM( The Associated Chambers of Commerce and Industry in India)
reports mentions that there will be a need of 20lakhs manpower in the industry
by the year 2020.
• This creates a strong need for LIC agency professionals to enter the industry and
help it grow.
• India is fast moving towards becoming an insurance hub for the world.
• A number of global insurance companies outsourcing their core insurance functions to
India.
• Due to low cost the insurance giants are focusing to invest in India, which will help to the
growth of economy as well.