UNIT III

INTRODUCTION
TO
INSURANCE

INSURANCE
We live in a world of uncertainty and face
risks in our everyday life. These risks are
unpredictable. If we can anticipate and
predict them, we can prepare for them.
Insurance is the best risk-transfer mechanism
and is a process by which the losses of a few,
who are unfortunate to suffer such losses, are
shared amongst those exposed to similar
uncertain events / situations.

INSURANCE
Thus, Insurance is a contract between
the insurance company (insurer) and the
policyholder (insured). In return for a
consideration (the premium), the
insurance company promises to pay a
specified amount to the insured on the
happening of a specific event.
It is nothing but a risk transfer mechanism
wherein the person taking out insurance
transfers their risk to the insurance company
in return for a payment (known as the
premium).

HISTORY OF INSURANCE
Insurance has been known to exist in some
form or other since 3000 B.C.
Oriental life Insurance Co. Ltd. in 1818 in
Calcutta (English Co.)
Tritan Insurance company in 1850 in
Calcutta
The Insurance business was regulated
through the Insurance Act, 1938.

HISTORY OF INSURANCE
In the year 1956, Life Insurance Business was
nationalized and Life Insurance Corporation of
India (LIC) was formed on 1st September
1956.
In 1972 with the passing of the General
Insurance Business (Nationalization) Act,
general insurance business was nationalized
with effect from 1st January, 1973. Existing
107 companies were amalgamated and
grouped into five companies viz., National
Insurance Company, New India Assurance
Company, Oriental Insurance Company,

NEED AND IMORTANCE OF

INSURANCE
The break-up of the joint family system and
emergence of the nuclear family in the
modern era, coupled with the stress of daily
life has made it necessary to evolve
alternative systems for security.
Assets are likely to be destroyed or made non
functional before the expected life time.
There is a possibility of loss or damage.
Possibility implies uncertainty.
It provides safety and security.

NEED AND IMORTANCE OF

INSURANCE

Insurance encourages savings

Promotes economic growth
Medical support
It is a source of collecting funds.

INSURANCE AS A CONTRACT
Elements of contract:
Agreement - Offer and Acceptance
Consideration
Insured premium payment and fulfillment of
policy conditions
Insurer promise to do certain things as
specified in the contract (insurance policy)
Legally competent parties
Legal Purpose
Legal Form- Contract may be oral or written
but accepted by regulator before being
marketed.

PRINCIPLES OF INSURANCE
1. Principle 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.
The insurer must also provide the insured
complete, correct and clear information
regarding terms and conditions of the
contract.

PRINCIPLES OF INSURANCE
2. Principle of Insurable interest:
Under this principle of insurance, the insured
must have interest in the subject matter of
the insurance. Absence of this makes the
contract null and void.
Insurable interest is where you have a valid
reason to insure and stand to suffer a direct
financial loss if the event insured against
occurs. Insurable interest exists when an
insured derives a financial or other benefit
from the continuous existence of an insured
object. For example, a person has an
insurable interest in their own car but not in

PRINCIPLES OF INSURANCE

3. 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 insureds economic
loss.

PRINCIPLES OF INSURANCE
3. Principle of indemnity:
In any type of insurance the insured would be
compensated with the amount equivalent to
the actual loss and not the amount exceeding
the loss. This is a regulatory principle. 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.

PRINCIPLES OF INSURANCE
4. Principle of Contribution:
An insured party may have policies with two
or more insurers covering the same risk,
although not necessarily with equal degrees
of liability. Therefore, in the event of a claim,
all of the insurers should pay an equitable
proportion of the claim payment.
Contribution is the right of an insurer to call
upon the other insurers to share the costs of
such a claim payment. The fundamental point
is that, if an insurer has paid a claim in full, it
can recoup a proportion of the costs from the
other insurers of the risk.

PRINCIPLES OF INSURANCE
5. Principle 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.

PRINCIPLES OF INSURANCE
6. Principle of mitigation of loss:
According to this principle, the insured must
always try his level best to reduce the loss of
his insured property, in case of happening of
uncertain events.
The insured must not neglect and behave
irresponsible during such events just because
the property is insured.

PRINCIPLES OF INSURANCE
7. Principle of causa proxima:
It 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.

CHARACTERISTICS OF
INSURANCE CONTRACTS
1. Personal Contracts
Insurance protects insured, not the
property or liability subject to loss.
Assignment provision
In property insurance, if ownership of a
property changes, insurance contracts
(policies) cannot be transferred to
another party (buyer) without the
insurers written consent.
In life insurance, the beneficiary or
ownership of policy may be freely
reassigned.

CHARACTERISTICS OF
INSURANCE CONTRACTS
2. Aleatory Contracts
A contract whose value to either or both of
the parties depends on chance or future
events, or where the monetary values of
the parties' performance are unequal.
The insurer's obligation to pay a loss
depends on uncertain events
Premium paid by Insured < Claim paid by
Insurer

CHARACTERISTICS OF
INSURANCE CONTRACTS
3. Contracts of adhesion
Insurance contracts are drafted by an
insurer and an insured must accept or
reject all the terms and conditions.
Insured gets the benefit of doubt.
Courts tend to interpret an ambiguous
term in an insurance policy in favor of an
insured.
Contracts may be altered by the addition of
riders or endorsements
Rider or endorsement a document that
amends or changes the original policy.

CHARACTERISTICS OF
INSURANCE CONTRACTS
4. Conditional contracts
An insurers obligation to pay a claim
depends on whether the insured or the
beneficiary has complied with all policy
conditions.
The insurer may not pay a claim if one or
more of policy conditions are not complied.

CHARACTERISTICS OF
INSURANCE CONTRACTS
5. Unilateral contracts
Only one party makes a legally enforceable
promise.
Insured are not legally forced to pay
premium or renew the policy.

TYPES OF INSURANCE

TYPES OF INSURANCE
The distinction between life and general
insurance business is that, in life
insurance the claim is fixed and certain,
but in the case of general insurance ,
the claim is uncertain.
The liabilities of life insurance
companies are long term liabilities and
hence they are big investors in long
gestation infrastructure projects etc.

LIFE INSURANCE
Life insurance companies cover risks
that relate to human lives. They offer
different benefits under different types
of products and cover the risk of early
death, as well as the risk of living into
old age.
Life Insurance is a contract providing for
payment of a sum of money to the
person assured or, following him to the
person entitled to receive the same, on
the happening of a certain event.

LIFE INSURANCE

TERM INSURANCE PLANS

In this plan the Life insurance company

promises to pay a specified amount (sum
insured) if the insured dies during the
term of the plan. If the life insured
survives the entire duration of the plan
then they will not be entitled to
anything, meaning that there is NO
MATURITY BENEFIT with such policies.

TERM INSURANCE PLANS

KEY POINTS:
Term insurance plans offer only death
cover.
They are the simplest form of insurance
plans offered by insurance companies.
Term insurance plans are the cheapest
insurance plans available in the market.
Normally the term starts from 5 years
and runs to 10, 15, 20, 25, 30 years or
any other term chosen by the insured
and agreed by the insurer.

TERM INSURANCE PLANS

KEY POINTS:
Protection against liabilities: to cover
larger liabilities like home loans or car
loans, term insurance cover is the best
solution.
Insurance companies, under some term
plans, allow the life insured to increase or
decrease the death cover during the term
of the plan.
For most term plans the insurance
company specifies the minimum and
maximum sums insured.
Most insurance companies specify the

TERM INSURANCE PLANS

Return of premium (ROP) plan:
Some insurance companies also offer variants
of term insurance plans in the form of return
of premium plans. If the life insured dies
during the term of the plan, the insurance
company pays the specified amount (sum
insured) to the nominee/beneficiary.
If the life insured survives the entire policy
tenure then on maturity the insurance
company returns part of the premium, or the
entire premium, to the life insured according
to the terms of the policy.

TERM INSURANCE PLANS

Return of premium (ROP) plan:

In another variant of term insurance plans,
some companies also pay some interest along
with the premium on the maturity of the plan
if the life insured survives until maturity.

PURE ENDOWMENT PLAN

A pure endowment plan is the opposite
of a term insurance plan. In this plan the
life insurance company promises to pay
the life insured a specified amount (sum
insured) only if they survive the term of
the plan. If the life insured dies during
the tenure of the plan then they will not
be entitled to anything.

So in short, this plan offers only

maturity benefit in the event of the life
insured surviving the entire tenure of

ENDOWMENT INSURANCE PLAN

An endowment insurance plan is

basically a combination of a term
insurance plan and a pure endowment
plan. It offers death cover if the life
insured dies during the term of the
policy or survival benefit if the life
insured survives until the maturity of
the policy.

ENDOWMENT INSURANCE PLAN

KEY POINTS:
Endowment insurance plans pay a
specified amount on maturity of the plan
if the life insured survives the entire
term of the plan.
Death cover: These plans also have a
death cover element. If the life insured
dies before the maturity of the plan then
the death cover benefit is paid to the
nominee/beneficiary.
Savings element: these plans, apart
from the death cover, also have a

ENDOWMENT INSURANCE PLAN

KEY POINTS:
Goal-based investment: these plans can
also be bought for accumulating money
for specific plans like a childs higher
education or marriage etc.
Some insurance companies also allow
partial withdrawal or loans against these
policies.
This plan also comes in different
variants. Some plans have a higher
death cover than the maturity benefit
and vice versa.

WHOLE LIFE INSURANCE PLAN

A term insurance plan with an
unspecified period is called a whole life
plan. As the name of the plan specifies,
this plan covers the individual
throughout their life.
On the death of the life insured, the
nominee/beneficiary is paid the sum
insured along with the bonuses
accumulated up until that point in time.
During the individuals lifetime they can
make partial withdrawals to meet
emergency requirements. An individual

PENSION OR ANNUITY PLANS

An annuity is a series of regular
payments from an annuity provider
(insurance company) to an individual
(called the annuitant) in return for a
lump sum (purchase price) or
installment premiums for a specified
number of years.
An annuity is the reverse of a life
insurance policy. In life insurance the
insurance company takes on the risk,
but with an annuity the annuitant takes
on the risk that they wont die in a very

SAVINGS PLANS
Child plans:
Child insurance plans help parents to save for their
childrens future financial needs such as education,
marriage etc.
Money-back policies:
In money-back policies partial survival benefits
are paid to the policyholder during the term of the
policy at specific intervals.
Salary saving schemes (SSS):
In these schemes the insurance company has an
arrangement with the employer, whereby the
employer deducts the premium from the
employees salary and passes it on to the
insurance company every month.

ULIPS
Unit-linked Insurance plans carry a
higher risk than with-profit policies and
contain fewer guarantees. However, they
are much more flexible. Unit-linked
policies are suited to people prepared to
undertake some investment risk to
obtain the benefits of flexibility. Returns
are subject to movements in the capital
markets where investments such as
equities (shares) are traded.

GENERAL INSURANCE
Insurance other than Life Insurance
falls under the category of General
Insurance. General Insurance comprises
of insurance of property against fire,
burglary etc, personal insurance such as
Accident and Health Insurance, and
liability insurance which covers legal
liabilities.
Most general insurance covers are
annual contracts. However, there are
few products that are long-term.

GENERAL INSURANCE
Suitable general Insurance covers are
necessary for every family. It is
important to protect ones property,
which one might have acquired from
ones hard earned income. A loss or
damage to ones property can leave one
shattered.
Industries also need to protect
themselves by obtaining insurance
covers to protect their building,
machinery, stocks etc. They need to
cover their liabilities as well.

How much should I insure for?

The amount you insure for is called the

sum assured. Normally a policy should
cover the value of the asset either the
market value while insuring, or the cost
of replacing the asset should it be lost
or destroyed. The premium will depend
on the sum assured.

GENERAL INSURANCE

FIRE INSURANCE
Insurance that is used to cover damage
to a property caused by fire. Fire
insurance is a specialized form of
insurance beyond property insurance,
and is designed to cover the cost of
replacement, reconstruction or repair
beyond what is covered by the property
insurance policy.

SCOPE
All moveable/ immoveable properties of the
proposer on land (excluding those in transit)
broadly categorised as follows :
1. Building (including plinth and foundations, if
required)
Whether completed or in course of
construction (excluding the value of land).
Interiors, Partitions and Electricals.
2. Plant & Machinery, Equipments &
Accessories (including foundations, if
required)
Bought Second hand.
Bought New

SCOPE
3. Stocks:
- Raw Material
- Finished Goods
- In process
- In trade belonging to Wholesaler,
Manufacturer and Retailer.
4. Other Contents such as
- Furniture, Fixtures and Fittings
- Cables and Piping's
- Spares, Tools and Stores
- Household goods, etc.

MARINE INSURANCE

Marine insurancecovers the loss or

damage of ships, cargo, terminals, and
any transport or cargo by which
property is transferred, acquired, or
held between the points of origin and
final destination.

SCOPE
Goods in Transit:
- Inland Transit
- Import
- Export

Who Can Take the Policy?

The contract of sale would determine
who buys the policy. The most common
contracts are :
FOB (Free on Board)
C & F (Cost & Freight)
CIF (Cost, Insurance & Freight)
In FoB and C&F contracts, the buyer is
responsible for insurance.
Whereas in CIF contracts the seller is
responsible for insurance from his own
premises to that of the purchaser.

MOTOR INSURANCE

Amotor insurancepolicy is a mandatory

policy issued by aninsurancecompany
as part of prevention of public liability to
protect the general public from any
accident that might take place on the
road. The law mandates that every
owner of amotor vehiclemust have one
motor insurancepolicy.

PROPERTY INSURANCE

A policy that provides financial

reimbursement to the owner or renter of
a structure and its contents, in the event
of damage or theft. Property
insurancecan include
homeownersinsurance,
rentersinsurance, floodinsuranceand
earthquakeinsurance.

LIABILITY INSURANCE

Liability insurance is very important for

those who may be held legally liable for
the injuries of others, especially medical
practitioners and business owners. A
product manufacturer may purchase
product liability insurance to cover them
if a product is faulty and causes damage
to the purchasers or any other third
party. Business owners may purchase
liability insurance that covers them if an
employee is injured during business
operations.

HEALTH INSURANCE

A type of insurance coverage that pays

for medical and surgical expenses that
are incurred by the insured. Health
insurance can either reimburse the
insured for expenses incurred from
illness or injury or pay the care provider
directly. Health insurance is often
included in employer benefit packages
as a means of enticing quality
employees.

TRAVEL INSURANCE

An insurance product designed to cover

the costs and reduce the risk associated
with unexpected events during domestic
or international travel. Travel insurance
usually covers the insured in two main
categories: costs associated with
medical expenses and trip cancellations.
Many online companies selling airplane
tickets or travel packages allow
consumers to purchase travel insurance
as an added service.

ROLE OF AGENTS AND BROKERS

Agents and brokers both sell and manage

insurance for their customers. Agents are
the authorized representatives of an
insurance company or companies, while
brokers are the authorized
representatives of people looking for
insurance.

END