Insurance – Concept notes

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 Contents
1 Understanding the need of Insurance .................................................................................................. 4
1.1 Risk and Perils ............................................................................................................................... 4
1.2 Savings and investment ................................................................................................................ 5
1.3 Introduction to insurance. ............................................................................................................ 5
1.4 Features and Characteristics of Insurance .................................................................................... 6
1.5 History of insurance ...................................................................................................................... 7
2 Fundamental Principles Governing Insurance Contract ....................................................................... 9
3 Types and Classification of Insurance ................................................................................................. 13
3.1 Life Insurance .............................................................................................................................. 13
3.2 Different type of life insurance ................................................................................................... 13
3.2.1 Term Life Insurance............................................................................................................. 14
3.2.2 Whole life Insurance ........................................................................................................... 14
3.2.3 Difference between Term and Whole life insurance .......................................................... 15
3.2.4 Endowment policy .............................................................................................................. 15
3.2.5 Money Back Plans or Cash Back Plans ................................................................................ 16
3.2.6 Pension (Annuity) Plans ...................................................................................................... 16
3.2.7 Unit Linked Insurance policies (ULIPs) ................................................................................ 17
3.3 Non-life insurance (General Insurance) ...................................................................................... 18
3.4 Different types of General insurance .......................................................................................... 18
3.4.1 Health Insurance ................................................................................................................. 18
3.4.2 Motor Insurance ................................................................................................................. 19
3.4.3 Home insurance .................................................................................................................. 20
3.4.4 Fire Insurance ...................................................................................................................... 20
3.4.5 Travel Insurance .................................................................................................................. 20
3.4.6 Cargo Insurance .................................................................................................................. 21
4 Difference between life and general insurance .................................................................................. 22
5 Insurance sector in India ..................................................................................................................... 23
5.1 Regulation of Insurance sector in India ...................................................................................... 23
5.2 Social Security Schemes related to Insurance ............................................................................ 25
5.3 Difference between Social security insurance schemes and private insurance ......................... 26
6 Customer Protection ........................................................................................................................... 27

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 6.1 Insurance ombudsman ............................................................................................................... 28
7 Emerging concepts and products in insurance sector ........................................................................ 28
7.1 Bancassurance ............................................................................................................................ 28
7.1.1 Bancassurance Models........................................................................................................ 29
7.2 Micro-insurance .......................................................................................................................... 30
7.3 Reinsurance................................................................................................................................. 30
7.4 Group Insurance.......................................................................................................................... 31
7.5 Assurance .................................................................................................................................... 31
7.6 Double Insurance ........................................................................................................................ 32

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 1 Understanding the need of Insurance
Before moving to the core definition of Insurance, first let’s understand why we need
insurance, we need insurance mainly because of two reasons, (a) Risk and Perils and (b)
Saving and Investment.

1.1 Risk and Perils

Every day, we hear stories about accidents and other misfortunes that someone has
suffered. Some of these include:

1. All of a sudden, people fall seriously ill

2. Motor vehicles are stolen, and people die or get injured in accidents involving motor
vehicles
3. House and belongings are destroyed by fire
4. Large scale loss of lives and destruction of property in cyclones and tsunamis

Life is full of uncertainties and surprises. Protecting oneself, one's families and society from
these uncertain events has been one of the biggest concerns of man for centuries

Definition of risk

'Risk is a term that we use to refer to the chance of suffering a loss as a result of uncertain
events like the above. The events that give rise to such risks are known as perils. Some
examples of perils are -

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 1.2 Savings and investment
It is possible for us to take measures to reduce the financial consequences that arises due
to the above-mentioned risks and protect ourselves financially. One of the ways by which
this is normally done is with the help of savings and investment.

Example -

• We would have seen or learnt from our parents or elders about the need to save for the
future. By saving or investing money, the money so accumulated can be used to cope
with the loss. However, such savings can only give back our own money plus some good
returns.
• What would happen if a human life is lost or a person is disabled permanently or
temporarily?
• A person dies suddenly. Where would the person's family get the money from to
support Itself? How would the person's family meet the various living expenses after his
death?
• A person suffers a paralytic stroke that leaves him permanently bed- ridden Such an
event would result in loss of income to the household and put the family in a lot of
hardship
• The loss suffered is so large in all such situations that one's say to take care of the
financial burden

1.3 Introduction to insurance.

For all the above-mentioned reasons, we need some specialized financial instrument, via-
which we can mitigate the financial losses. For the same, we have a popular financial
contract, which we call as insurance.

Insurance can be defined as a contract between two parties, where one promises the other
to indemnify or make good any financial loss suffered by the latter (the insured) in
consideration for an amount received by way of premium. The contract of insurance is
referred to as the 'policy'.

Insurance is, thus, a financial tool specially created to reduce the financial impact of
unforeseen events and to create financial security. Indeed, everyone who wants to protect
himself against financial hardship should consider insurance.

Now let’s understand the basic features and characteristics of Insurance.

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 1.4 Features and Characteristics of Insurance
1. Insurance is contract between two parties - Insurance is contract between two parties
in which one party agrees to provide protection to other party from losses in exchange
for premium. These parties are insurer and insured. Wherein insurer is the party which
is providing the services and insured is the party which is availing the services.

For example, if XYZ company is providing Insurance cover to Ram, then here XYZ
company is the insurer party to the contract and Ram is insured party to the contract.
Also, the insurance contract is non-transferable without the consent of the insurance
policyholder.

2. Lawful Consideration – Existence of lawful consideration is must for insurance contract

like any other lawful contract. The insurance policy holder is required to pay premium
regularly to the insurance company. This premium is paid in exchange for protection
against losses and damages guaranteed by insurance companies. An insurance premium
is the amount you pay for an insurance policy. Simply put, premiums are what you pay
insurance companies in exchange for coverage.

3. Payment On Contingency - Insurer is required to compensate the insured only on

happening of contingency for the damages and losses done. Insured cannot make
profit from insurance policy but can only claim compensation from insurer in case of
contingency. If no contingency occurs, insurer is not required to pay any compensation
to insured.

4. Risk Evaluation - Insurer evaluates the risk associated with subject matter of insurance
contract. Proper risk evaluation enables the insurer to calculate the right amount of

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 premium to be paid by insured. Insurer uses different techniques for risk evaluation. If
insurance object is subject to heavy losses, heavy premium will be charged. On the
other hand, if there is less expectation of losses then low premium will be charged.

5. Not A Charity or Gambling - Insurance is a legal contract. It cannot be termed as a

charity or gambling. Compensation paid to insured by insurer is not in charity but is paid
in exchange of premium deposited by him. Insured pays premium to insurer for
guarantee of compensation in happening of contingency.

6. Sharing of Risk - Insurance is a device to share the financial losses which might befall an
individual or his family on the happening of a specified event.

7. Insurance is a Co-operative Device - The most important feature of every insurance

plan is the cooperation of a large number of persons who, in effect, agree to share the
financial loss arising due to a particular risk that is insured. Such a group of persons
may be brought together voluntarily or through publicity or solicitation of the agents.

8. Sum assured of policy - It is the amount for which insurance policy is taken.

9. Surrender value of policy - Surrender value is the amount which the insurance company
would pay to the policy-holder, if he wants to discontinue the policy before the date of
its maturity.

1.5 History of insurance

The Indian Insurance Industry is as old as it is in any other part of the world. The first
insurance company in India was started in 1818 in Kolkata. We had a few foreign and
Indian insurers operating in the Indian market till the nationalization of the industry took
place. The reasons for the nationalization of the industry are concerned mostly with the
unethical practices adopted by some of the players against the interests of the insurance
consumers.

An ordinance was issued on 19 January 1956 nationalizing

the life insurance sector and Life Insurance Corporation
(LIC) of India came into existence in the same year. The LIC
absorbed 154 Indian, 16 Non-Indian insurers and also 75
provident societies.

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 The committee on reforms in the insurance sector (headed by former Finance Secretary
and RBI Governor R.N. Malhotra) went into the question of reforms in the insurance sector
recommended in 1994, opening the sector to private participation to induce a spirit of
competition amongst the various insurers and to provide a choice to the consumers. It was
also the recommendation of the Committee that such a broad basing of the industry will
ensure a better penetration of the insurance market of the country in terms of the Gross
Domestic Product (GDP), which remains at very low levels in comparison to some of the
developing countries in the Asian region. The Indian insurance industry has evolved into a
truly competitive market from a monopoly in 2001, due to the entry of private and foreign
players.

The new entrants have contributed to the sector's development significantly by enhancing
product awareness, promoting consumer education and creating more organized
distribution channels (agency, bancassurance, broking, direct and corporate agency
amongst others). However, the Indian insurance industry is underperforming - both in
terms of insurance penetration and insurance density compared to the developed
countries like US, UK. France and South Africa.

Key Terms to discuss

A – Insurance Penetration - Insurance penetration measures the contribution of insurance

premium to the Gross Domestic Product (GDP) of a country in percentage terms.

For example, if a country generates a total insurance premium of say, INR 100 Crore and
that country’s GDP for the same period is INR 1000 Crore, insurance penetration translates
to 10% (i.e. 100/1000 * 100).

B – Insurance Density - Insurance density, on the other hand, is the ratio of insurance
premium to the total population. It gives an indication of how much each of the citizen in a
country spends on insurance in terms of premium.

In other words, it is the per capital premium for the country, calculated by dividing the total
insurance premium by the population. For example, if the population of the country in the
above example is 10 Lakh people, the insurance density (per capital premium) would be
INR 1,000.

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 Now, we have a clear understanding of general terms, features and characteristics of
insurance, therefore now we will understand Fundamental Principles Governing Insurance
Contract

2 Fundamental Principles Governing Insurance Contract

The business of insurance aims to protect the economic value of assets or life of a person.
Through a contract of insurance, the insurer agrees to make good any loss on the insured
property or loss of lite (as the case may be) that may occur in course of time in
consideration for a small premium to be paid by

Apart from the above essentials of a valid contract, insurance contracts are subject to
additional principles. These are:

Principles of
insurance

Principle of Principle of
Utmost Good Insurable
Faith Interest

Principle of Principle of
Indemnity Subrogation

Principle of Principle of
Contribution Proximate Cause

Now let’s understand these principles in bit detail

A. The Principle of Utmost Good Faith (Principle of Uberrimae fidei)

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 This principle states that both the parties (insured and insurer) in an insurance contract
should act in good faith towards each other, i.e. they must provide clear and concise
information related to the terms and conditions of the contract. The Insured should
provide all the information related to the subject matter, and the insurer must give precise
details regarding the contract.

Example – Rajat took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the
Insurance company will not be liable to bear the financial burden as Rajat concealed
important facts.

B. Principle of Insurable Interest

This principle says that the individual (insured) must have an insurable interest in the
subject matter. Insurable interest means that the subject matter for which the individual
enters the insurance contract must provide some financial gain to the insured and also lead
to a financial loss if there is any damage, destruction or loss.

Example – The owner of a factory has an insurable interest in the factory because he is
earning money from it. However, if he sells the factory, he will no longer have an insurable
interest in it.

To claim the amount of insurance, the insured must be the owner of the subject matter
both at the time of entering the contract and at the time of the accident.

C. Principle of Indemnity

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 This principle says that insurance is done only for the coverage of the loss; hence insured
should not make any profit from the insurance contract. In other words, the insured
should be compensated the amount equal to the actual loss and not the amount exceeding
the loss. The purpose of the indemnity principle is to set back the insured at the same
financial position as he was before the loss occurred.

Example

Mr. Pankaj owns a restaurant, which he had bought five years ago for 20 lakhs. He had
bought fire insurance worth 10 lakhs.

His restaurant caught fire and he suffered a loss of 6,00,000.

The amount of compensation to be paid by the insurance company

= (sum insured/value of insured asset) * actual loss

= (10 lakhs/20 lakhs) * 6,00,000

Amount to be paid by the insurer to Mr. Pankaj = 3,00,000

D. Principle of Subrogation

Subrogation means the restitution of the rights of an assured in favors of the insurer. In
accordance with the principle of subrogation the insurance company acquires the right of
the insured to sue the third party to compensate for his negligence and loss inflicted upon
when it indemnifies the insured for the losses suffered by him.

Example

Mr. Kishore was on his way to office in his car when it was hit from behind by a truck driver
and the truck driver was drunk. Here Mr. Kishore can claim compensation from the
insurance company. The insurer in turn can sue the Truck owner Mr. X for the damages.
Here Mr. Kishore has no right of action against Mr. X since he has already been paid
compensation for the loss.

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 E. Principle of Contribution

Contribution principle applies when the insured takes more than one insurance policy for
the same subject matter. It states the same thing as in the principle of indemnity, i.e. the
insured cannot make a profit by claiming the loss of one subject matter from different
policies or companies.

Example – Mr. Nikhil insured his property worth Rs. 15 Lakhs with Company ABC for Rs. 10
lakhs and he also insured the same property with company XYZ for Rs.8 lakhs. The owner
(Mr. Nikhil) in case of damage to the property for 5 lakhs can claim the full amount from
Company ABC but then he cannot claim any amount from Company XYZ. Now, Company
ABC can claim the proportional amount reimbursed value from Company XYZ.

F. Principle of Proximate Cause

This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will find
the nearest cause of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not a cause the
property is insured against, then no payment will be made by the insurer.

For example - If the person is insured to be protected against fire occurring due to electric
short circuit and the fire occurs due to leakage of LPG cylinder then the insurance company
is not liable to pay for the losses. In this case only if the fire were caused by short circuit
would the loss be covered.

G. Principle of Loss Minimization

This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimize the loss to the insured property. The principle does not allow
the owner to be irresponsible or negligent just because the subject matter is insured.

Example – If a fire breaks out in your factory, you should take

reasonable steps to put out the fire. You cannot just stand back
and allow the fire to burn down the factory because you know
that the insurance company will compensate for it.

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 3 Types and Classification of Insurance
Keeping customers needs at the centre of insurance product innovation, there have been
introduction of multiple insurance products. To start with, first let’s discuss regarding the
basic classification of the insurance policies.

Insurance is classified into life insurance and non-life insurance. First, we will cover life
insurance in detail

3.1 Life Insurance

Life insurance aims at providing financial security to the individuals and their dependents.
Life insurance deals with the insurance of individuals, groups, and pension plans. The risk
covered here is death in case of life insurance, sickness, and disability in case of health
insurance. So, the risk covered here is survival.

It is the insurance policy whereby the policyholder

(insured) can ensure financial freedom for their
family members after death. It offers financial
compensation in case of death or disability.

While purchasing the life insurance policy, the insured

either pay the lump-sum amount or makes periodic
payments known as premiums to the insurer. In
exchange, of which the insurer promises to pay an
assured sum to the family, if insured in the event of
death or disability or at maturity.

3.2 Different type of life insurance

Depending on the coverage, life insurance can be classified into the below-mentioned types

Types of life
insurance

Pension Unit linked

Term Life Whole life Endowment Money back
(Annuinty) Insurance
Insurance insurance insurance Policy
Plans plans (ULIPs)

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 3.2.1 Term Life Insurance
This type of life insurance policy furnishes protection for a limited number of years. It
terminates with no maturity value. The face amount (assured amount) of the policy is
payable only if the insured's death occurs during the stipulated term. Nothing is paid in
case of survival.

For example, Mr. Pankaj (current age – 25 Years) has purchased a term life insurance policy
that covers him financially in the event of death up-to the age of 40.

Now is Mr. Pankaj somehow die before the age of 40, the terms of the policy will cover him,
and the insurer will pay the assured amount. However, If Mr. Pankaj lives post the age of
40, then his policy will not yield any financial benefit to him. He must renew the policy for
another term under new conditions.

Term Life Insurance are Issued for a short period but customarily provides protection for
at least a set number of years, such as 10 or 20 years, or to a stipulated age, such as 65 or
70 years. Initial premium rates are low compared to other life products because the period
of protection is limited.

3.2.2 Whole life Insurance

Whole life insurance is intended to provide insurance protection over one's entire lifetime.
It provides for the payment of the face amount upon the insured's death regardless of
when death occurs.

Universal life policies can function as whole life insurance if they have sufficient cash
value; The face amount payable under Whole life policies typically remain at the same
level throughout the policy duration, although dividends are often used to increase the
total amount paid on death. In most policies, the gross premium also remains at the same
level throughout the premium payment period with some exceptions

For example, ABC Insurance company issues a whole life Insurance policy of INR 25,000 to
Mr. Saif, who is the policy owner and insured party of the contract. Now regardless of the
age, the moment Mr. Saif dies, the insurer (ABC company) will pay INR 25,000 to the
nominee of the Mr. Saif.

“A nominee or beneficiary is a person who is eligible to collect the death benefit from the
insurance firm after the policyholder’s death”

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 3.2.3 Difference between Term and Whole life insurance
1. As explained above, term life insurance pays out a death benefit for a specific pre-
determined period of time, usually from covering your dependents from one to 30
years. Because most term policies expire before the policy holder dies and consequently
never pay a claim, term life insurance coverage tends to be the most affordable.
2. On the other hand, when you pay your whole life insurance premium, you are
guaranteed that your beneficiaries will receive a death benefit if you die when the
policy is active.
3. Here's another way to contrast the two life insurance policies: Term life insurance may
be great for young married couples who are just starting out but need a way to protect
their spouse or children (i.e., the beneficiaries), while whole life insurance is best suited
for individuals who expect evolving financial needs during their lifetime and have low
tolerance for investment risk.

3.2.4 Endowment policy

Unlike term policies endowment policies promise not only to pay the policy face amount on
the death of the insured during a fixed term of years, but also to pay the full-face amount at
the end of the term if the insured survives the term.

An endowment policy has the following features:

• Endowment plans promise protection from risk in the event of death of the insured
during the policy term as well as an assured sum upon the maturity of the policy. In
this type of policy, the maturity of the policy is usually chosen to coincide with the
retirement of the person.
• These policies are issued for specific terms chosen by the proposer who can choose the
duration of the policy which may be 10, 15, 20 or 30 years. Where the duration is short
the premium involved is higher. It is to be noted that whether the assured meets a
premature death or not the full amount of the policy has to be paid by the insurance
company provided the premiums have been paid as stipulated in the policy.

For example – Mr. Rocky wishes to save INR 2,50,000 by the time he turns 65. He decides
to do this through an Endowment Policy. The premium he needs to pay is INR 4,000 per
year. If Mr. Rocky pays this premium every year, the life insurer guarantees that he will
have INR 2,50,000 at age 65, which he will receive as a lump sum payment.

Now assuming that, Mr. Rocky survives till age of 65, then the insurer will pay him INR
2,50,000 and now consider the second case, which is death of Mr. Rocky.

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 Sadly, Mr. Rocky doesn't make it to age 65. He passes away 10 years early. The life
insurance company that issued his endowment policy will pay his beneficiary INR 2,50,000
immediately.

3.2.5 Money Back Plans or Cash Back Plans

A money back plan pays out the sum assured as ‘survival benefits’ evenly distributed
throughout the term of the policy as long as the policyholder is surviving.

The survival benefit becomes payable after a few years of the commencement of the
money back policy and continues till the maturity if the insured is alive. Upon the death of
the policyholder before the maturation of the plan, the nominee(s) receive the maturity
amount, the whole sum assured, along with any bonus if accrued.

For example - Mira buys a money back plan for a Sum Assured of Rs.10 lakhs. She chooses
a term of 25 years and pays regular premiums throughout the policy tenure. The Plan
promises survival benefits @20% of the Sum Assured after every 5 years of the plan. On
maturity, 20% of the Sum Assured is paid along with any accrued bonuses.

Mira, thus receives Rs.2 lakhs (20% of 10 Lakh) every 5 years, i.e. in the 5th policy year, 10th
policy year, 15th policy year and 20th policy year. At the end of the 20th policy year, Mira
has already received Rs.8 lakhs. On maturity, Rs. 2 lakhs along with added bonuses would
be paid to her and the plan would terminate.

Please note that - If Mira dies on the 18th year of the policy, Rs.10 lakhs would be paid to
the nominee along with the added bonus even though she has already received Rs.6 lakhs
as Survival Benefits.

3.2.6 Pension (Annuity) Plans

When an employee retires, he no longer gets his salary while his need for a regular income
continues. Retirement benefits like Provident Fund and gratuity are paid in lump sum which

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 are often spent too quickly or not invested prudently with the result that the employee
finds himself without regular income in his post - retirement days.

Pension is therefore an ideal method of retirement provision because the benefit is in the
form of regular income. It is wise to provide for old age, when we have regular income
during our earning period to take care of rainy days. Financial independence during old age
is a must for everybody.

There are two types of annuities (pension plans).

Immediate Annuity

In case of immediate Annuity, the Annuity payment from the Insurance Company starts
immediately. Purchase price (premium) for immediate Annuity is to be paid in lump sum in
one installment only.

Deferred Annuity

Under deferred Annuity policy, the person pays regular contributions to the Insurance
Company, till the vesting age/vesting date. He has the option to pay as single premium
also. The fund will accumulate with interest and fund will be available on the vesting date.
A deferred annuity is the type of annuity where you start getting payments from your
insurance company at a later date, not immediately.

3.2.7 Unit Linked Insurance policies (ULIPs)

ULIP is short for Unit linked Insurance Plan. ULIP's are a combination of insurance plus
investment. A small portion of the money invested (Premium) goes to securing your life
whereas the rest of the money is invested in the market.

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 ULIP is an insurance plan that offers the dual benefit of investment to fulfil your long-term
goals, and a life cover` to financially protect your family in case of an unfortunate event.
The premium paid towards a ULIP is divided into two parts. A part of it is contributed to
your life cover`, and the remaining is invested in the fund of your choice. You can choose
to invest in equity, debt, or a combination of both funds as per your risk appetite and
goals.

3.3 Non-life insurance (General Insurance)

Everything apart from life can be insured under general insurance. It offers financial
compensation on any loss other than death. General insurance covers the loss or damages
caused to all the assets and liabilities. The insurance company promises to pay the assured
sum to cover the loss related to the vehicle, medical treatments, fire, theft, or even
financial problems during travel.

Please note that general insurance is also called as Non-life Insurance.

3.4 Different types of General insurance

Depending on the coverage of asset and liability, general insurance can be classified into
the below-mentioned types

Types of
General
insurance

Health Travel Motor Home Cargo

Fire insurance
Insurance Insurance Insurance insurance insurance

3.4.1 Health Insurance

These days, getting yourself treated is an expensive affair. With each passing day, numerous
new diseases are arising. One visit to a hospital could drain all your savings. This is when
health insurance comes into the picture. It is a type of general insurance product that
offers protection for medical expenses incurred due to hospitalization, due to illness or due
to an accident.

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 Some health insurance companies offer cashless treatment, whereas others reimburse
the medical cost upon submission of bills. The premium is charged on the basis of age,
pre-existing illness, type of coverage, lifestyle, and family health history.

Generally, there are two types of basic health insurance plans:

Mediclaim plan – This covers hospitalization expenses incurred by the policyholder. It is

reimbursed after submitting relevant documents.

Critical illness plan – covers diseases like cancer, heart attack, stroke, organ transplant etc.
In this policy, the insured gets a lump sum after getting diagnosed with a critical illness.

3.4.2 Motor Insurance

Motor insurance is a type of general insurance product that provides insurance for vehicles
of all kinds. It protects the vehicle owner from incurring any financial losses that may arise
from theft, damage, injury, or accident of their vehicle. Please note that In India, it is
mandatory to purchase motor insurance.

There are 2 types of motor insurance:

A. Third-party liability policy – The most common and basic type of motor insurance. This
type of policy only covers losses and damages caused to the other person injured in an
accident, damage to public property or a third-party’s vehicle.

B. Comprehensive motor insurance – this motor insurance policy has broad coverage. It
covers all the aspects of third-party liability as well as the costs incurred due to loss or
damage of your own vehicle. However, the premium of this policy is more than the
third-party liability policy.

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 3.4.3 Home insurance
It takes a lot of effort and hard-earned money to build your dream house. Apart from this,
everything bought to make your house look more beautiful is priceless. To protect such a
priceless possession, you need to get it insured. Home insurance covers the financial loss
that may occur due to damages to house property. Generally, the structural damages
arising as a result of natural calamities are covered in this policy.

The sum assured and the premium payable are calculated on the basis of the size of the
property, rate of construction, and location of the property.

3.4.4 Fire Insurance

It is a well-known fact that fire causes huge losses every year. The individual owner by
taking fire Insurance can prevent fire waste to some extent. A fire insurance is a contract
under which the insurer in return for a consideration (premium) agrees to indemnify the
insured for the financial loss which the latter may suffer due to destruction of or damage to
property or goods, caused by fire, during a specified period.

The contract specifies the maximum amount, agreed to by the parties at the time of the
contract, which the insured can claim in case of loss. This amount is not, however , the
measure of the loss. The loss can be ascertained only after the fire has occurred. The
insurer is liable to make good the actual amount of loss not exceeding the maximum
amount fixed under the policy.

3.4.5 Travel Insurance

Travel insurance is a type of general insurance product for those people who travel a lot, be
it within India or be it a foreign trip. While travelling, a medical or non-medical emergency
may arise. This may result in a financial crisis.

To avoid such a situation, travel insurance is taken. Travel insurance policy protects you
from losses suffered due to:

• Delay in flight
• Loss of Baggage
• Cancellation of flight
• Delay in the trip
• Loss of passport
• Hijacking
• Medical emergency
• Accidental death

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 • Injury due to adventure sports.

Some insurance companies offer cashless hospitalization in case you are hospitalized while
travelling. Travel insurance covers the unanticipated costs while travelling and allows you to
enjoy your trip.

3.4.6 Cargo Insurance

Cargo insurance protects the owner or consignor of goods for possible physical loss or
damage from outside causes during shipping. The insurer will reimburse the policyholder
for the value of the goods if they incur damage or perish while in the hands of the shipper.
It is often available from the shipping company itself, or it may be purchased from a third-
party insurer as well.

Types of Cargo insurance:

While choosing, there are many types of cargo insurance and every one of it has its own
limitations and coverage, but the most common ones based on the modes are the
following:

• Land Cargo Insurance or Haulier Insurance

• Marine Cargo Insurance
• Air Transport Insurance

A. Land Cargo Insurance - Often also known as Haulier Insurance covers the freight when
it is transported or shipped through the land. Usually, the land cargo includes shipment
boarded on a truck but it also includes when it is transported by other vehicles. Since it
is by road, it does include transportation within a country and across countries to
cover collision risk, damages risk, theft risk, and other risk factors

B. Marine Cargo Insurance - The marine cargo includes the shipments transported
through the sea and also includes air freight. Contrary to land cargo insurance, marine
cargo insurance applies to broader boundaries i.e., international transportation. Its
coverage includes damages caused while loading or unloading, bad weather, piracies,
and other relevant risk factors while the cargo is in possession of the Airline or Shipping
line. It depends upon the supplier’s use if he/she is a frequent shipper he/she should go
with the renewable policies as these are relatively less expensive and one can save up a
considerable sum. One special term used for Marine insurance is Hull insurance.

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 Hull insurance (or insurance of the ship) - It covers the insurance of the vessel and its
equipment’s like furniture and fittings, machinery, tools, engine etc.

C. Air Transport Insurance - Air cargo insurance is a type of policy that protects a buyer or
seller of goods that are being transported through the air. It reimburses the insured for
items that are damaged, destroyed, or lost and, in some cases, may even offer
compensation for shipment delays.

4 Difference between life and general insurance

We know that each type of insurance has a different purpose and covers different aspects
of our lives. While life insurance only concerns your lifespan and the financial security of
your loved ones in your absence, general insurance aims to secure vital assets, including
health, home, and vehicle, among others.

Following are major differences between life and general insurance

• Term of the policy

One of the most significant differences between the two types is the policy term. Typically,
life insurance covers are long term plans. Typically, a life insurance policy has a duration of
15 to 20 years. On the other hand, general insurance policies are short-term plans that get
generally renewed annually depending upon the earlier policy opted.

• Premium Payment

You need to pay a lump sum premium or in regular intervals for life insurance policies.
These recurring intervals can be monthly, quarterly, half-yearly, or annually. In contrast,
you pay a one-time premium for general insurance when you buy the policy or at the time
of renewal. Some exceptions include travel insurance wherein you pay a premium only
purchasing a cover for a particular trip.

• Claim Process

Typically, the nominee receives the sum assured when the policyholder passes away in
life insurance policies. The policyholder can instead receive the proceeds once the policy
matures. For money back and endowment plans, the insurance company also gives
interest generated on the investments. For a critical illness cover, the policyholder can avail
of insurance benefits after the diagnosis of the disorder or health conditions included in the

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 policy terms. While filing a general insurance policy claim, the company considers a
specific event.

For example, the policyholder can only claim health insurance after diagnosis of a disease,
hospitalization, or some other medical emergency, depending upon the policy. Similarly,
travel, home, or vehicle insurance can be claimed only after some form of damage or loss
because of an accident or specific event.

• Value of the Insurance Policy

Policyholders generally determine their life insurance cover value. You can choose the sum
assured depending on your requirements and the ability to pay regular premiums. This
sum assured is then paid back to your nominee in your absence or to you after the policy
matures. On the contrary, the value of a general insurance policy is influenced by an asset’s
value. Thus, the insurance company determines the value by different methods based on
the type of policy Indemnity-based or benefit-based.

5 Insurance sector in India

In this section we will deal with the whole modus operandi of the insurance sector working
and operating in India.

First let’s understand about the regulation of Insurance sector in India.

5.1 Regulation of Insurance sector in India

On 6th January 2000, the President of India gave his assent to the Insurance Regulatory
and Development Authority Bill, which enabled opening up of the insurance sector to
private players. The Insurance Regulatory and Development Authority of India (IRDAI) Act,
1999 facilitates the establishment of Insurance Regulatory and Development Authority as
an autonomous regulatory body for the Indian insurance industry. Accordingly. on 19th
April, 2000, Insurance Regulatory and Development Authority of India (IRDAI), was
created under the IRDAI Act, 1999 to regulate, promote and ensure orderly growth of the
insurance industry and to protect the interests of policyholders.

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 Mission of the Insurance Regulatory and Development Authority of India (IRDAI)

• To protect the interest of and secure fair treatment to policyholders.

• To bring about speedy and orderly growth of the insurance industry (including annuity
and superannuation payments), for the benefit of the common man, and to provide
long term funds for accelerating growth of the economy.
• To set, promote, monitor and enforce high standards of integrity, financial soundness,
fair dealing and competence of those it regulates.
• To ensure speedy settlement of genuine claims, to prevent insurance frauds and other
malpractices and put in place effective grievance redressal machinery.
• To promote fairness, transparency and orderly conduct in financial markets dealing
with insurance and build a reliable management information system to enforce high
standards of financial soundness amongst market players.
• To take action where such standards are inadequate or ineffectively enforced.
• To bring about optimum amount of self-regulation in day-to-day working of the
industry consistent with the requirements of prudential regulation.

Composition of IRDAI board

1. Chairperson
2. Five whole-time members and
3. Four part-lime members

Functions of IRDAI

1. IRDAI has been set up mainly to protect the interests of holders of insurance policies;
2. To regulate, promote and ensure orderly growth of the insurance business and re-
insurance business.
3. IRDAI issues certificate of registration to insurance companies and licenses to all
intermediaries who are engaged in insurance related activities.
4. IRDAl makes regulations for the various Institutions/ entities operating in the
insurance industry and supervises compliance with these regulations through returns
and inspection.
5. IRDAl also facilitates resolution of complaints against insurance companies.
6. As a part of its developmental role, IRDAl emphasizes on empowering public through
policyholders' education, which helps to increase the insurance reach for the benefit of
common man. It has adopted multipronged approach for educating consumers and
organizes Insurance Awareness campaigns directly and through industry promoting
insurance education across the country.

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 IRDAI along with Government of India have insured an orderly development of the Indian
insurance market and now we will understand the role of Insurance in providing social
security.

5.2 Social Security Schemes related to Insurance

Social insurance system consists of a set of government programs that provide economic
security in the short-term or provide services and benefits to improve economic
opportunity in the long-term.

Owing to the above paragraph, there are some major social security programmes, some of
them are discussed below

1. Ayushman Bharat (2018) - Ayushman Bharat Yojana is designed

keeping in mind Universal Health Coverage (UHC). Health services
in India are largely segmented and Ayushman Bharat aims to make
them comprehensive. It is about looking at the health sector as a
whole and ensure continuous care for the people of India. There
are two components related to Ayushman Bharat: Health and
Wellness Centres (HWC) and Pradhan Mantri Jan Arogya Yojana
(PM-JAY).

2. Pradhan Mantri Jeevan Jyoti Bima Yojana (2015) - This scheme offers life cover of Rs. 2
lakhs to the people of India. People aged 18 to 50 and having a bank account can avail
of the benefits of this scheme for a premium of Rs. 436/- annually.

3. Pradhan Mantri Suraksha Bima Yojana (2015) – This scheme offers accident insurance
to the people of India. People aged 18 to 70 and having a bank account can avail of the
benefits of this scheme. The PMSBY scheme offers an annual cover of Rs. 1 lakh for
partial disability and Rs. 2 lakhs for total disability/death for a premium of Rs. 20
annually.

4. Pradhan Mantri Fasal Bima Yojana (2016) - This scheme provides a comprehensive
insurance cover against failure of the crop thus helping in stabilizing the income of the
farmers. The PMFBY covers all Food & Oilseeds crop and Annual Commercial /
Horticultural crops. The premium to be paid by the farmer depends on the crop sown.
A uniform premium of only 2% to be paid by farmers for all Kharif crops and 1.5% for all
Rabi crops & oilseeds and 5% for horticultural crops.

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 5. Pradhan Mantri Vaya Vandana Yojana (2017) - For benefit of citizens aged 60 & above,
optioning holders to get assured guarantee return of 8% under this scheme.

6. Aam Aadmi Bima Yojana (AABY) - This is one of the latest National Health Insurance
schemes having been established in the year 2007, October. It basically covers
individuals from the age of 18 years-59 years. AABY insurance scheme is tailored for all
those citizens living in the country and in the rural areas.

The above-mentioned schemes are some flagship schemes of social security, now we will
see the difference between social security insurance schemes and private insurance
schemes.

5.3 Difference between Social security insurance schemes and private

insurance
The first way is known as Social Insurance. Here, the State or government takes care of
those who are subjected to losses due to some risk event. Examples are, providing pension
when one grows old or providing tree medical treatment, meeting the cost of
hospitalization etc. The fund for this purpose comes from a pool made up from taxes or
mandatory social security contributions required to be made by all those who work and
earn an income.

The Employees' State insurance (ESI) scheme that provides medical care and other benefits
to employees and Employees' Provident Fund Organization (EPFO) that provides pensions
and survivors' benefits in the event of an employee's death are the popular schemes under
this head

The second way is through voluntary Private Insurance. Here, individuals and groups can
buy insurance from an insurance company by entering into a contract of insurance with
financial protection by agreeing to pay the insuring person (insured) a fixed amount of
money (sum assured) on the happening of a certain even (insured peril).

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 Insurance companies collect premiums to provide for this protection and losses are paid out
of the premiums so collected from the insuring public in other words. an insurance contract
promises to make good to the insured consideration for the premium received from the
insured.

Typical differences between private insurance programs and social insurance programs
include:

1. Equity versus Adequacy: Private insurance programs are generally designed with
greater emphasis on equity between individual purchasers of coverage, while social
insurance programs generally place a greater emphasis on the social adequacy of
benefits for all participants.
2. Contractual versus Statutory Rights: The right to benefits in a private insurance
program is contractual, based on an insurance contract. The insurer generally does not
have a unilateral right to change or terminate coverage before the end of the contract
period (except in such cases as non-payment of premiums). Social insurance programs
are not generally based on a contract, but rather on a statute, and the right to benefits
is thus statutory rather than contractual. The provisions of the program can be changed
if the statute is modified.

3. Funding: Generally, all the social security insurance schemes are funded with the help
of taxpayer money, however the private insurance schemes are funded by the private
pool of money.

6 Customer Protection
For providing protection to Indian consumers against malpractices and gullible brokers who
are out to fleece the customers by raking in quick profits, IRDAI has appointed
Ombudsman in 12 cities across India to specifically deal with Insurance Grievances and
speedy disposal of such cases. In case if a policyholder is dissatisfied by the outcome or the
decision taken by the Insurance Company, such an individual has the liberty to approach
the Insurance Ombudsman as a last resort after exhausting various options. Each
Ombudsman has been empowered to redress customer grievances in respect of insurance
contracts on personal lines where the insured amount is less than Rs. 20 lakhs, in
accordance with the Ombudsman Scheme.

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 6.1 Insurance ombudsman
The institution of Insurance Ombudsman was created by a Government of India on 11th
November 1998 with the purpose of quick disposal of the grievances of the insured
customers (or policyholders) and to mitigate their problems involved in redressal of such
customer grievances. This institution is of great importance and relevance for protecting
the interests of policyholders as well as generating public confidence in the Insurance
system and its associated processes. The institution has helped to generate and sustain the
faith and confidence amongst the consumers and insurers across India.

Insurance Ombudsman mainly performs two types of functions as follows:

(1) Conciliation - The Insurance Ombudsman is empowered to receive and consider

complaints in respect of personal lines of insurance from any individual or policyholder
who has any grievance against an insurer. The complaint may relate to any grievance
against the insurer

(2) Award making - An Ombudsman's powers are restricted to insurance contracts of

financial value not exceeding Rs. 30 lakhs. The insurance companies are required to honour
the awards passed by an Insurance Ombudsman within three months, based on the merit
and validity of an individual claim on case-to-case basis.

7 Emerging concepts and products in insurance sector

In this section we will discuss all about those important innovation, current happening and
major break-though which are taking place in the insurance industry

7.1 Bancassurance
Bancassurance refers to an agreement between a bank and an insurance company. In
bancassurance, the insurance company can use the bank’s distribution channels to sell
products. Banks, in return, receive a certain fee from the insurance company.

In bancassurance, banks provide the distribution

channel, and insurance companies remain product
developers. It allows two sectors to leverage the
existing network that banks have.

For banks, they can earn extra income by providing

its platform to insurance companies. They can also
get an opportunity to provide more products to
customers. More-rounded services will help banks

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 to enhance customer loyalty. As a result, they can become the center of financial products
for the individual customer.

For insurance companies, they can achieve more sales through the distribution network of
banks. Insurance companies also have access to customers of partnered banks. This helps
in developing their products.

Convergence of Banking and Insurance

The advantages to banks are many, viz., improved customer retention, overall customer
satisfaction, provision of a very good avenue for earning risk free non-interest income by
means of commission over a long period, improvement in bottom lines, higher employee
productivity and also improved return on assets (RoA), as they utilize only the existing
infrastructure and available manpower. There is no requirement of additional capital as
bancassurance is totally risk free.

7.1.1 Bancassurance Models

Internationally, four models of Bancassurance are in vogue. They are:

1. Corporate agency model or distribution alliance model.

2. Joint venture model, where an insurance company and a bank share the equity capital
of their joint venture, subject to local government regulations.
3. Merger between a bank and an insurer.
4. Build or buy own insurance operation.

In India, only the first two models have been adopted. Though a couple of years ago, LIC
India acquire a strategic and significant stake in the equity capital of Corporation Bank and
Oriental Bank of Commerce, they too follow the first model only

Apart from distributing their conventional insurance products, both life and non-life,
through bancassurance, some insurance companies have designed innovative, across the
counter products under group insurance, which can be marketed easily to a large section of
the bank's customers.

Even the Government of India has also utilized the bancassurance model to design and
deliver certain insurance products to the people living below the poverty line as a part of its
social upliftment programme.

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 7.2 Micro-insurance
Microinsurance refers to ensuring low-income people against very specific types of
problems. This is an exchange for premiums that are proportionate to the risk cost and the
likelihood of it happening. This means that microinsurance works exactly the same way as
other types of insurance, but it is targeted specifically towards low income people who
otherwise may not be able to get insurance. This type of insurance targets the section of
the population that mainstream insurance does not usually even address. The concept of
microinsurance lets you pay to insure only what you need.

For example, it can cover small items such as a one-day trip, a one-time event, or even
specific health needs. It's meant to help people with lower incomes, and it can be sold in
any number of ways, such as through licensed insurance agents, community groups,
microfinance lenders, and other non-governmental organizations.

Microinsurance is a way many more people can insure and protect some of their most
valuable assets. It can bring a sense of security to low-income families who could not afford
insurance before.

Other benefits include transparency. There's the ability to handle claims quickly and
accurately. Research shows that when farmers and other small entrepreneurs feel
protected by insurance, they are willing to take more risks and invest more in new business
ventures. That is good for the economy.

7.3 Reinsurance
Reinsurance is a form of insurance purchased by insurance companies in order to mitigate
risk. Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer.
In other words, it protects insurance companies from financial ruin, thereby protecting the
companies' customers from uncovered losses

When an insurance company finds that the

risk it has undertaken is too heavy for it; it
may get itself insured with some other
insurance company. This is called re-
insurance.

In this case, there are two contracts of

insurance:

(i) One between the insured and the

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 insurance company called the contact of insurance.

(ii) The other between the insurance company and the re-insurance company called the
contact of re-insurance.

7.4 Group Insurance

Group insurance is a plan of insurance which provides life cover to a number of persons
under a single policy called the 'Master Policy'. Under the single contract, many persons
are covered. It becomes possible to give a cover to the group at a low cost, on account of
savings in the administrative and medical examination expenses. One important feature is
with regard to selection and underwriting of lives, Individual lives are not assessed. The
selection is of the group. Group selection is aimed at forming a group, which will show an
average rate of mortality.

A Group Insurance is provided to that person, which is created by pooling the people who
are related to the same profession or same association or any other defined criteria. Such
a scheme has been introduced by many insurance companies to provide the requirements
of many specific groups like professionals in an organization, employer-employees, etc.

7.5 Assurance
Assurance refers to an arrangement in which an insurer pays reimbursement for a
specified occurrence, such as death. Assurance policies provide continuous coverage until
the policyholder’s death. For example, a whole life insurance policy provides financial
protection for the rest of the policyholder’s life. Thus, the insured event will undoubtedly
occur sooner or later. Aside from term insurance, the majority of life insurance products
having an investment component are assurance policies.

Difference between insurance and Assurance

Basis of Difference Assurance Insurance

Objective Pays out the assured sum Helps to reinstate financial
when the event takes place stability during an untoward
event

Underlying Principle Principle of Certainty Principle of Indemnity

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 Type Life insurance (except term
insurance) such whole life
assurance, annuity plans,
endowment plans, etc.
General insurance products
such as term insurance,
motor insurance, health
insurance, and liability
insurance, etc.

Duration Long-term Short term

7.6 Double Insurance

Double insurance is the insuring of an individual, dependent, or personal property by two
or more insurance companies. Such dual insurance allows those with coverage to claim the
full amount from the policies, however the total claim cannot exceed the actual loss or
cost associated with the underwritten subject of the policies.

Insurance companies are law bound to honor double insurance policies, but the recipient of
such policies must satisfy certain eligibility requirements. Underwriters of double insurance
policies have the ability to reject or appeal certain claims based on deception or unjust
enrichment. Investing in multiple health insurance plans not only provide comprehensive
coverage to an individual, but also extend backup protection in situation of medical
emergencies, losing a job, or an interim period between switching job from one company to
another.

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