INSURANCE

Introduction, History and Principles

Regulator:

IRDA

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 Insurance Companies in India
Life General/ Non-life
• LIC Insurance Corporation Of • New India Assurance Company
India. Limited.

• National Insurance Company Limited.

• ICICI Prudential Life Insurance.
• Oriental Insurance Company Limited.
• SBI Life Insurance.
• Bajaj Allianz General
Insurance Company.
• HDFC Standard Life Insurance.
• Reliance General Insurance Company
• Max Life Insurance. Limited.

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INSURANCE: MEANING NATURE

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 Defining Insurance

A Financial Arrangement Of Risk Transfer.

A contract wherein, one (insured)

transfers the risk to another party
(insurer), who then provides for payment
of losses from funds contributed
(premium).

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 What is a Risk?

An uncertain event or condition, which if occurs,

would have an undefined or unknown adverse
impact on achievement of objective.

Causal Forces:
• Natural Perils: Fire, wind, hail, explosion.
• Human Perils: Theft, riot, vandalism, negligence.
• Economic Perils: Stock market declines, inflation, technological
advances.

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 Risk Types and Insurance
PURE RISK SPECULATIVE RISK
• No Prospect of gain, only • Offers the possibility of gain
Loss. Eg- Fire or loss.

• Property Damage Risk

• Liability Risk
Only Pure risks are
covered by Insurance.
• Personal Risk

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Methods Of Handling Risks

Risk Avoidance Risk Retention

Handling
Risk

Risk Controlling Risk Transfer

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 QUIZ 1.1
1) Which of the following is the regulator of insurance industry in India?
(a) IRDA(b) TRAI (c) RBI (d) SEBI
2) Home insurance is a ____________.
(a) Life insurance product (b) Non-life insurance product
3) Money back policy is a___________.
(a) Life insurance product (b) Non-life insurance product
4) Who pays the premium in case of an insurance contract?
(a) Insurer (b) Insured(c) Nominee
5) Only ________ type of risks can be insured.
(a) Pure risk (b) Speculative risk.
6) Adoption of workplace safety measures is an example of _________.
(a) Risk Transfer (b) Risk Controlling

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PRINCIPLES OF INSURANCE

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 Legal Principles of Insurance
• Insurance is a special type of contract.
Indemnity
Insurable interest
Subrogation
Utmost good faith
Proximate Cause
Contribution
Assignment & Nomination
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 Indemnity
Insurer will make good the loss / damage in such a manner that
financially, the insured is neither better off nor worse off as a
result of the loss.

Applies where the loss suffered is measurable in terms of

money.

Any loss or damage under an insurance contract is settled

based on the sum insured under the policy.

Exa: Whether insured value or market value has to be referred

while admitting claims?

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 Insurable Interest
The insured must bear...
• a legal relationship to the subject matter of insurance.
• He should stand to benefit by the safety of the property, rights,
and interest and lose by any loss, damage, injury or creation of
liability.
• Exa: Can one person insure assets belonging to others?

Insurable Interest- Life Insurance

• The family relationship of husband and wife is universally
accepted to satisfy the requirement of insurable interest.
• Acceptance of other relationships depends.

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 Subrogation

It is corollary to the principle of indemnity.

The transfer of rights and remedies of the insured to the

insurer who has indemnified the insured.

Does not apply to life insurance.

Exa: Who gets the right to asset recovered after theft

claim is settled?

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 Quiz 1.2
1) Which principle says that an insurance claim can be
admitted subject to disclosed value of the asset and
not market value?
(a) Indemnity(b) Insurable Interest
2) Which principle says that a person other than owner
of the asset can not get it insured?
(a) Indemnity (b) Insurable Interest
3) Once claim for an asset is settled, the rights on the
asset passes to the insurer. Which principle
supports this view?
(a) Insurable Interest (b) Subrogation
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 Utmost good faith

The law requires all contracts, to be made in good faith- in absence of fraud
or deceit.

Otherwise contracts will be a nullity.

Onus of Utmost good faith

• Insured is at an advantage of information than Insurer.
• Insurer rather suffers for the loss.
• But the rule also applies to the Insurer.

Exa: What would happen to a fire claim if the insurance is taken without
disclosing that the insured property is used for fire cracker production?

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 Proximate Cause
Literally means the primary cause is to be regarded during claim
settlement and not remote cause.

In the absence of this rule, every loss could be claimed by the insured
and every loss could be rejected by the insurer.

Exa 1: Can a fire insurance claim for house property be admitted if the
fire breakout happened due to a short circuit in grid station?

Exa 2: Can the loss of stocks be claimed under fire insurance, if these
stocks were recovered by the firemen to save it from fire and stocked in
open yard, subsequently destroyed by heavy rain?
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 Contribution

It means indemnity provided for loss

occurring on asset, which is insured with
several insurers has to be shared pro rata.

Exa: How would the claim of a loss of a cell

phone be settled, if the insured is covered under
both Travel insurance and Household property
insurance?

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 Assignment & Nomination

Assignment
• The instant legal transfer of all the rights and benefits
of the policy.
• E.g. Applying home loans by assigning life insurance
maturity benefits to the financing company.

Nomination
• Appointing a person (Nominee) to receive the policy
benefits upon the death of the insured.

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 Quiz 1.3
1. The principle of ________ says that all material facts related to the asset should
be disclosed at the time entering into insurance contract.
a) Utmost good faith b) Proximate cause
2. Which principle says that primary and not remote cause to be regarded at the
time of claim settlement.
a) Utmost good faith b) Proximate cause
3. A company took a loan from SBI by mortgaging a building (insured with ICICI
Lombard). The company also transferred the rights and benefits of the insurance
(on building) to the lender (SBI). This is a case of:
a) Nomination b) Assignment
4. A property is insured under two insurance policies: A & B. Sum assured under A
& B are $ 100,000 and $ 200,000 respectively. The property got destroyed and
claim made for $ 90,000. How much claim is admissible under policy A?
(a) $ 30000 b) $ 60000 c) $ 90000
5. In question no. 4 above, what would be the total amount of claim admissible
under both the policies, A & B?
(a) $ 90,000 (b) $ 180,000 (c) $ 300,000
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BRIEF HISTORY OF INSURANCE

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 History of Insurance
Insurance in Ancient India: 
• Manusmrithi,  Dharmasastra, Arthasastra 

Insurance in Colonial India:

• 1818 Oriental Life Insurance Company in Calcutta
• 1870s- Bombay Mutual, Oriental, and Empire of India - in the Bombay Residency

Insurance in Independent India:

• January, 1956 nationalisation the Life Insurance sector- Formation of LIC
• 1972 general insurance business was nationalized.
• Malhotra Committee report in 1999- Formation of the Insurance Regulatory and
Development Authority (IRDA)
• In 2002, GIC was converted into a national re-insurer.
 History of Insurance
Insurance Industry in Current Times:
• 31 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and
• 24 life insurance companies operating in the country.
• 2000 onwards FDI and Private players are allowed.

The Insurance Act, 1938

The IRDA Act 1999

Growth rate of the industry = 15-20%.

Insurance sector= 3.5% of India’s GDP

Life insurance companies in India
General insurance companies in India
 Role of Insurance Industry In Economy

Strengthens the risk taking ability.

Aids in Loss reversal mechanism.

Establishes financial stability and discipline.

Provides long- term funds for infrastructure development.

A boon for economic development.

Trends in Insurance Industry in India

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Trends in Insurance Industry in India

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 Quiz 1.4
1) Which of the following is a reinsurance company?
(a) General Insurance Corporation (b) National Insurance
(c) New India insurance (d) Life Insurance Corporation
2) What is the contribution of Insurance sector to the GDP of the country?
(a) 3.5%(b) 15%
3) Which of the following is true about the role of insurance in an economy?
(a) Strengthens the risk taking ability.
(b) Helps to beat the inflation.
4) Which insurance product has the biggest market share among the non-
life insurance products?
(a) Motor vehicle insurance (b) Health insurance
(c) Property damage insurance (d) Marine cargo insurance

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