Insurance

Insurance
Site: School of Open Learning

Course: Banking & Insurance
Book: Insurance
Printed by: Guest user
Date: Tuesday, 18 July 2017, 10:23 AM
Table of contents
1 LESSON 1 INTRODUCTION TO INSURANCE
2 LESSON 2 INSURANCE PRODUCTS AND STATE OF INSURANCE INDUSTRY IN INDIA
3 LESSON 3 LEGAL FRAMEWORK LIFE & GENERAL INSURANCE BUSINESS
4 LESSON 4 THE INSURANCE ACT, 1938 AND IRDA ACT,1999
5 LESSON 5 AGENCY LAW
6 LESSON 6 CONSUMER PROTECTION ACT, 1986
7 Unit 6 LESSON 7 LIFE INSURANCE
8 LESSON 8 UNDERSTANDING OF THE ANNUAL REPORT OF LIFE INSURANCE COMPANIES
9 LESSON 9 GENERAL INSURANCE 9NON LIFE INSURANCE FIRE/MARINE
10 LESSON 10 GENERAL INSURANCEMOTORHEALTH & MISCELLANEOUS
11 LESSON 11 UNDERSTANDING ANNUAL REPORT OF A NON-LIFE INSURANCE COMPANY

1 LESSON 1 INTRODUCTION TO INSURANCE
LESSON 1
INTRODUCTION TO INSURANCE
- Meenu
Asstt. Professor, SRCC,
University of Delhi.
Every risk involves the loss of one or other kind. In older time, the contribution by the person
was made at the time of loss. Today, only one business, which offers all walks of life, is insurance
business. Owing to growing complexity of life, trade and commerce, individual and business firms and
turning to insurance to manage various risks. Every individual in this world is subject to unforeseen
uncertainties which may make him and his family vulnerable. At this place, only insurance helps him
not only to survive but also recover his loss and continue his life in a normal manner.
Insurance is an important aid to commerce and industry. Every business enterprise involves
large number of risks and uncertainties. It may involve risk to premises, plant and machinery, raw
material and other things. Goods may be damaged or may be destroyed due to fire or flood. Some risk
can be avoided by timely precautions and some are unavoidable and are beyond the control of a
business. These unavoidable risks can be protected by insurance.
What is Insurance
In D.S. Hamsell words, insurance is defined as a social device providing financial compensation
for the effects of misfortune, the payment being made from the accumulated contributions of all
parties participating in the scheme
In simple terms Insurance is a co-operative device to spread the loss caused by a particular risk
over a number of persons, who are exposed to it and who agree to insure themselves against the risk
Thus, the insurance is
(a) A cooperative device to spread the risk;
(b) the system to spread the risk over a number of persons who are insured against the risk;
(c) the principle to share the loss of the each member of the society on the basis of probability of
loss to their risk; and
(d) the method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties (namely insurer and insured or
assured) whereby one party (insurer) undertakes in exchange for a fixed amount of money (premium)
to pay the other party (Insured), a fixed amount of money on the happening of certain event (death or
attaining a certain age in case of life) or to pay the amount of actual loss when it takes place through
the risk insured (in case of property)
Terminology used in definition of Insurance
- Insurer or insurance company The agency involved in Insurance business is known
as insurer
- Insured/ Assured The person who gets his property/life insured is known as insured
- Policy - The agreement or contract which is put in writing is known as a Policy
- Premium The consideration in return of which the insurer undertakes to make goods
the loss or give a certain amount in case of life insurance is known as premium
Assurance and Insurance

The two words were used synonymously at one time, but there is fine distinction between the
two. Assurance is used in those contracts which guarantee the payment of a certain sum on the
happening of a specified event which is bound to happen sooner or later, for example attaining a
certain age or death. Thus life policies comes under assurance.
Insurance, on the other hand, contemplates the granting of agreed compensation of the happening of
certain events stipulated in the contract which are not expected but which may happen, for example
risk relating to fire, accident or marine.
Nature of Insurance
Following are the main characteristics of insurance which are applicable to all types of insurance
(life, fire, marine and general insurance).
1. Sharing of Risks - Insurance is a device to share the financial losses which may occur to
individual or his family on the happening of certain events
2. Co operative Device Insurance is a co-operative device to spread the loss caused by a
particular risk over a large caused by a particular risk over a large number of persons who are
exposed to it and who agree to insure themselves against the risk.
3. Value of Risk Risk is evaluated at the time of insurance. There are several methods of valuing
the risk. Higher the risks, higher will be premium
4. Payment on Contingency -If the contingency occurs, payment is made; payment is made
only for insured contingency. If there is no contingency, no payment is made. In life insurance
contract, payment is certain because the death or the expiry of term will certainly occur. In other
insurance contract like fire, marine, the contingency may or may not occur
5. Amount of Payment of Claim - The amount of payment depends upon the value of loss
occurred due to the particular insured risk. The insurance is there upto that amount. In life
insurance insurer pay a fixed sum on the happening of an event or within a specified time period.
Example In fire insurance, if fire occurs and half the property is destroyed, but the whole
property is insured, then payment of claim will be made only for that half building that is
destroyed not the whole amount of insured.
6. Insurance is different from Charity - In charity, there is no consideration but insurance is

not given without premium
7. Large number of Insured Person - Insurance is spreading of loss over a large number of
persons. Larger the number of persons, lower the cost of insurance and amount of premium and
incase lower the number of persons, higher the cost of insurance and amount of premium.
8. Insurance is different from Gambling - In gambling, there is no guarantee of gain, by
bidding the person expose himself to risk of losing. Whereas in insurance, by getting insured his life
and property, he protect himself against the risk of loss.
Functions of Insurance
Functions of insurance can be divided into parts;
I Primary functions.
II Secondary functions.

I Primary Functions
1. Certainty of compensation of loss: Insurance provides certainty of payment at the
uncertainty of loss. The elements of uncertainty are reduced by better planning and
administration. The insurer charges premium for providing certainty.
2. Insurance provides protection : The main function of insurance is to provide
protection against risk of loss. The insurance policy covers the risk of loss. The insured person is
indemnified for the actual loss suffered by him. Insurance thus provide financial protection to
the insured. Life insurance policies may also be used as collateral security for raising loans.
3. Risk sharing : All business concerns face the problem of risk. Risk and insurance are
interlinked with each other. Insurance, as a device is the outcome of the existence of various
risks in our day to day life. It does not eliminate risks but it reduces the financial loss caused by
risks. Insurance spreads the whole loss over the large number of persons who are exposed by a
particular risk.
II Secondary Functions
1. Prevention of losses : The insurance companies help in prevention of losses as they join
hands with those institutions which are engaged in loss prevention measures. The reduction in
losses means that the insurance companies would be required to pay lesser compensations to
the assured and manage to accumulate more savings, which in turn, will assist in reducing the
premiums
2. Providing funds for investment : Insurance provide capital for society. Accumulated
funds through savings in the form of insurance premium are invested in economic development
plans or productivity projects.
3. Insurance increases efficiency : The insurance eliminates the worries and miseries of
losses. A person can devote his time to other important matters for better achievement of
goals. Businessman feel more motivated and encouraged to take risks to enhance their profit
earning. This also helps in improving their efficiencies.
4. Solution to social problems : Insurance take care of many social problems. We have
insurance against industrial injuries, road accident, old age, disability or death etc.
5. Encouragement of savings : Insurance not only provides protection against risks but
also a number of other incentives which encourages people to insure. Since regularity and
punctuality pf payment of premium is a perquisite for keeping the policy in force, the insured
feels compelled to save.
Principles of Insurance
The basic principles which govern the insurance are -
(1) Utmost good faith
(2) Insurable interest
(3) Indemnity
(4) Contribution
(5) Subrogation
(6) Causa proxima
(7) Mitigation of loss
1. Principle of utmost good faith : A contract of insurance is a contract of Uberrimae
Fidei i.e., of utmost good faith. Both insurer and insured should display the utmost good faith
towards each other in relation to the contract. In other words, each party must reveal all
material information to the other party whether such information is asked or not. There should
not be any fraud, non disclosure or misrepresentation of material facts.
Example in case of life insurance, the insured must revel the true age and details of the
existing illness/diseases. If he does not disclose the true fact while getting his life insured, the
insurance company can avoid the contract.
Similarly, incase of the insurance of a building against fire, the insured must disclose the details
of the goods stored, if such goods are of hazardous nature
A material fact means important facts which would influence the judgment of the insurer in
fixing the premium or deciding whether he should accept the risk, on what terms. All material
facts should be disclosed in true and full form
2. Principle of Insurable Interest: This principle requires that the insured must have a
insurable interest in the subject matter of insurance. Insurance interest means some pecuniary
interest in the subject matter of contract of insurance. Insurance interest is that interest, when
the policy holders get benefited by the existence of the subject matter and loss if there is
death or damage to the subject matter.
For example In life insurance, a man cannot insured the life of a stranger as he has no
insurable interest in him but he can get insured the life of himself and of persons in whose life
he has a pecuniary interest. So in the life insurance interest exists in the following cases:-
- Husband in the life of his wife and wife in the life of her husband
- Parents in the life of a child if there is pecuniary benefit derived from the life of a Child
- Creditor in the life of debtor
- Employer in the life of an employee
- Surety in the life of a principle debtor
In life insurance, insurable interest must be present at the time when the policy is taken. In
fire insurance, it must be present at the time of insurance and at the time if loss if subject matter. In
marine insurance, it must be present at the time of loss of the subject matter.
3. Principle of Indemnity : This principle is applicable in case of fire and marine insurance
only. It is not applicable in case of life, personal accident and sickness insurance. A contract of
indemnity means that the insured in case of loss against which the policy has been insured,
shall be paid the actual cost of loss not exceeding the amount of the insurance policy. The
purpose of contract of insurance is to place the insured in the same financial position, as he
was before the loss.
Example A house is insured against fire for Rs. 50000. It is burnt down and found that the
expenditure of Rs. 30000 will restore it to its original condition. The insurer is liable to pay only
Rs. 30000.
In life insurance, principle of indemnity does not apply as there is no question of actual loss.
The insurer is required to pay a fixed amount upon in advance in the event of accident, death
or at the expiry of the fixed term of the policy. Thus, a contract of a life insurance is a
contingent contract and not a contract of indemnity.
4. Principle of Contribution: The principle of contribution is a corollary to the doctrine of
indemnity. It applies to any insurance which is a contract of indemnity. So it does not apply to
life insurance. A particular property may be insured with two or more insurers against the same
risks. In such cases, the insurers must share the burden of payment in proportion to the amount
insured by each. If one of the insurer pays the whole loss, he is entitled to contribution from
other insurers
Example B gets his house insured against fire for Rs. 10000 with insurer P and for Rs. 20000 with
insurer Q. a loss of Rs. 15000 occurs, P is liable to pay for Rs. 5000 and Q is labile to pay Rs
10000. If the whole amount pf loss is paid by Q, then Q can recover Rs. 5000 from P. The
liability of P &Q will be determined as under:
Sum insured with Individual insurer (i.e. P or Q ) x Actual Loss = Total sum insured

Liability of P =10000 x 15000 = Rs.5000
30000
Liability of Q =20000 x 15000 = Rs.10000

30000
The right of contribution arises when:
(a) There are different policies which related to the same subject matters;
(b) The policies cover the same period which caused the loss;
(c) All the policies are in force at the time of loss; and
(d) One of the insurer has paid to the insured more than his share of loss.
5. Principle of Subrogation : The doctrine of subrogation is a collorary to the principle
of indemnity and applies only to fire and marine insurance. According to doctrine of
subrogation, after the insured is compensated for the loss caused by the damage to the
property insured by him, the right of ownership to such property passes to the insurer after
settling the claims of the insured in respect of the covered loss.
Example Furniture is insured for Rs. 1 lacs against fire, it is burnt down and the insurer pays
the full value of Rs. 1 Lacs to the insured, later on the damage Furniture is sold for Rs. 10000.
The insurer is entitled to receive the sum of Rs. 10000.
A loss may occur accidentally or by the action or negligence of third party. If the insured suffer
a loss because of action of third party and he is in a position to recover the loss from the insurer
then insured can not take action against third party, his right is subrogated (substituted) to the
insurer on settlement of the claim. The insurer, therefore, can recover the claim from the third
party.
If the insured recovers any compensation for the loss (due to third party), from the third party,
after he has already been indemnified by the insurer, he holds the amount of such
compensation as the trustee if the insurer.
The insurer is entitled to the benefits out of such rights only to the extent of the amount he has
paid to the insured as compensation
6. Principle of Causa Proxima : Causa proxima, means proximate cause or cause which, in
a natural and unbroken series of events, is responsible for a loss or damage. The insurer is liable
for loss only when such a loss is proximately caused by the peril insured against. The cause
should be the proximate cause and can not the remote cause. If the risk insured is the remote
cause of the loss, then the insurer is not bound to pay compensation. The nearest cause should
be considered while determining the liability of the insured. The insurer is liable to pay if the
proximate cause is insured.
Example In a marine insurance policy, the goods were insured against damage by sea water,
some rats on the board made a hole in a bottom of the ship causing sea water to pour into the
ship and damage the goods. Here, the proximate cause of loss is sea water which is covered by
the policy and the hole made by the rats is a remote cause. Therefore, the insured can recover
damage from the insurer
Example A ship was insured against loss arising from collision. A collision took palce resulting
in a few days delay. Because of the delay, a cargo of oranges becomes unsuitable for human
consumption. It was held that the insurer was not liable for the the loss because the proximate
cause of loss was delay and not the collision of the ship.
7. Principle of Mitigation of Loss: An insured must take all reasonable care to reduce the
loss. We must act as if the property was not insured.
Example If a house is insured against fire, and there is accidental fire, the owner must take
all reasonable steps to keep the loss minimum. He is supposed to take all steps which a man of
ordinary prudence will take under the circumstances to save the insured property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1. Benefits to Individual
2 Benefits to Business or Industry
3. Benefits to the Society
It can be explained as under -
1. Benefits to Individual
(a) Insurance provides security & safety : Insurance gives a sense of security to the
policy holder. Insurance provide security and safety against the loss of earning at death or in
old age, against the loss at fire, against the loss at damage, destruction of property, goods,
furniture etc.
Life insurance provides protection to the dependents in case of death of policyholders and to
the policyholder in old age. Fire insurance insured the property against loss on a fire. Similarly
other insurance provide security against the loss by indemnifying to the extent of actual loss.
(b) Encourage Savings : Life insurance is best form of saving. The insured person must
regularly save out of his current income an amount equal to the premium to be paid otherwise
his policy get lapsed if premium is not paid on time.
(c) Providing Investment Opportunity : Life insurance provide different policies in which
individual can invest smoothly and with security; like endowment policies, deferred annuities
etc. There is special exemption in the Income Tax, Wealth Tax etc. regarding this type of
investment
2 Benefits to Business or Industry
(a) Shifting of Risk : Insurance is a social device whereby businessmen shift specific risks to
the insurance company. This helps the businessmen to concentrate more on important business
issues.
(b) Assuring Expected Profits : An insured businessman or policyholder can enjoy normal
expected profits as he would not be required to make provisions or allocate funds for meeting
future contingencies.
(c) Improve Credit Standing : Insured assets are easily accepted as security for loans by
the banks and financial institutions so insurance improve credit standing of the business firm
(d) Business Continuation With the help of property insurance, the property of business is
protected against disasters and chance of closure of business is reduced
3. Benefits to the Society
(a) Capital Formation : As institutional investors, insurance companies provide funds for
financing economic development. They mobilize the saving of the people and invest these
saving into more productive channels
(b) Generating Employment Opportunities : With the growth of the insurance business,
the insurance companies are creating more and more employment opportunities.
(c) Promoting Social Welfare : Policies like old age pension scheme, policies for education,
marriage provide sense of security to the policyholders and thus ensure social welfare.
(d) Helps Controlling Inflation : The insurance reduces the inflationary pressure in two
ways, first, by extracting money in supply to the amount of premium collected and secondly, by
providing funds for production narrow down the inflationary gap.
Type of Insurance
Insurance cover various types of risks and include various insurance policies which provide
protection against various losses.
There are two different views regarding classification if insurance:-
I. From the business point of view; and
II From the risk points of view
I. Business point of view
The insurance can be classified into three categories from business point of view
1. Life insurance;
2. General Insurance; and
3. Social Insurance.
1. Life Insurance: The life insurance contract provide elements of protection and investment
after getting insurance, the policyholder feels a sense of protection because he shall be paid a
definite sum at the death or maturity. Since a definite sum must be paid, the element of
investment is also present. In other words, life insurance provides against pre-mature death
and a fixed sum at the maturity of policy. At present, life insurance enjoys maximum scope
because each and every person requires the insurance.
Life insurance is a contract under which one person, in consideration of a premium paid either
in lump sum or by monthly, quarterly, half yearly or yearly installments, undertakes to pay to
the person (for whose benefits the insurance is made), a certain sum of money either on the
death of the insured person or on the expiry of a specified period of time.
Life insurance offers various polices according to the requirement of the
persons -
- Term Assurance
- Whole Life
- Endowment Assurance
- Family Income Policy
- Life Annuity Joint Life Assurance
- Pension Plans
- Unit Linked Plans
- Policy for maintenance of handicapped dependent
- Endowment Policies with Health Insurance benefits
2. General Insurance:The general insurance includes property insurance, liability insurance
and other form of insurance. Property insurance includes fire and marine insurance. Property of
the individual and business involves various risks like fire, theft etc. This need insurance
Liability insurance includes motor, theft, fidelity and machine insurance
Type of General Insurance policies available are -

- Health Insurance
- Medi- Claim Policy
- Personal Accident Policy

- Group Insurance Policy
- Automobile Insurance
- Workers Compensation Insurance
- Liability Insurance
- Aviation Insurance
- Business Insurance
- Fire Insurance Policy
- Travel Insurance Policy
3. Social Insurance: Social insurance provide protection to the weaker sections of the
society who are unable to pay the premium. It includes pension plans, disability benefits,
unemployment benefits, sickness insurance and industrial insurance.
II Risk Points of View
The insurance can be classified into three categories from Risk point of view
1. Property Insurance
2. Liability Insurance
3. Other forms of Insurance
1. Property Insurance: Property of the individual and business is exposed to risk of fire,
theft marine peril etc. This needs insurance. This is insured with the help of:-
(i) Fire Insurance
(ii) Marine Insurance
(iii) Miscellaneous Insurance
(i) Fire Insurance: Fire insurance covers risks of fire. It is contract of indemnity. Fire
insurance is a contract under which the insurer agrees to indemnify the insured, in return
for payment of the premium in lump sum or by instalments, losses suffered by the him due
to destruction of or damage to the insured property, caused by fire during an agreed period
of time. It includes losses directly caused through fire or ignition. There are various types of
fire insurance policies.
- Consequential loss policy
- Comprehensive policy
- Valued policy
- Valuable policy
- Floating policy
- Average policy
(ii) Marine Insurance: Marine insurance is an arrangement by which the insurer
undertakes to compensate the owner of the ship or cargo for complete or partial loss at sea.
So it provides protection against loss because of marine perils. The marine perils are
collisions with rock, ship attack by enemies, fire etc. Marine insurance insures ship, cargo
and freight.
The following kinds of marine policies are -
- Voyage policy
- Time policy
- Valued policy
- Hull Policy
- Cargo Policy
- Freight Policy
(iii) Miscellaneous Insurance: It includes various forms of insurance including property
insurance, liability insurance, personal injuries are also insured. The property, goods,
machine, furniture, automobile, valuable goods etc. can be insured against the damage or
destruction due to accident or disappearance due to theft.
Miscellaneous insurance covers
- Motor
- Disability
- Engineering and aviation risks
- Credit insurance
- Construction risks
- Money Insurance
- Burglary and theft insurance
- All risks insurance
2. Liability Insurance: The insurer is liable top pay the damage of the property or to
compensate the loss of personal injury or death. It includes fidelity insurance, automobile
insurance and machine insurance.
The following are types of liability Insurance:-
- Third party insurance
- Employees insurance
- Reinsurance
3. Other forms of Insurance: It include export credit insurance, state employee insurance
etc. whereby the insurer guarantees to pay certain amount at the happening of certain events.
The following are other form of Insurance-
- Fidelity Insurance
- Credit Insurance
- Privilege Insurance
2 LESSON 2 INSURANCE PRODUCTS AND
STATE OF INSURANCE INDUSTRY IN INDIA
LESSON 2
INSURANCE PRODUCTS AND STATE OF INSURANCE INDUSTRY IN INDIA
- Meenu
Terminologies under insurance

1. Insurer Explained earlier
2. Insured Explained earlier

3. Premium Explained earlier
4. Indemnity Explained earlier

5. Utmost good faith Explained earlier
6. Insurable interest Explained earlier

7. Proximate Cause Explained earlier
8. Subrogation Explained earlier

9. Contribution Explained earlier
10. Reinsurance - Reinsurance is the transfer of insurance business from once insurance to
another. Reinsurance is an arrangement whereby an original insurer who has insured a risk
insures part of that risk again with another insurer, that is to say, reinsurance a part of risk in
order to diminish his own liability. The insurer transferring the business is called the principle
or ceding or original of fire and the office to which the business is transferred is called for
reinsurer or guaranteeing office. It is also a contract of indemnity. Reinsurance is a contract
between the reinsured (the insurer) and the reinsurer.
11. Peril of the Sea - Perils of the Sea is also known as Nautical/ marine perils/maritime. It
means all those perils that are consequential or incidental to sea journey. It include collisions,
war perils, captures, jettison, barratry. It does not include the typical action of winds and
waves.
12. Perils - A peril is defined as the cause if the loss. Examples of peril include fire, tornadoes,
heart attacks and criminal acts. Insurance policies provide financial protection against losses
caused by perils.
13. Jettison - Jettison means voluntary throwing away of the cargo or part of a vessels
equipment for the lightening or relieving the ship for common safety. The aim of the intentional
throwing away of the goods or property is to relive the vessel from the some imminent peril.
Accidental falling of the things does not constitute jettison
14. Actual Loss - Actual Loss is a material and physical loss of the subject matter insured.
Subject matter is completely destroyed or so damaged that it ceases to be a thing of the kind
insured. It is no longer the same as originally insured. For example, A ship is entirely destroyed
by the fire constitute total loss.
15. Constructive Total Loss - In constructive total loss, the ship or cargo insured is not
completely destroyed but is so badly damaged that the cost of repair of recovery would be
greater than the value of the property saved. In such a case, it is preferable to abandon the
destroyed property.
16. Partial Loss - A partial loss occurs when the subject matter of insurance is partially
destroyed or damaged. In marine insurance, a partial loss of vessel or cargo is called an
average.
17. General Average -General average refers to the sacrifice made during extreme conditions
for the purpose of rescuing the ship and the cargo from being damaged. It is incurred for the
benefits of all interests. It is always voluntary and intentional. This loss has to be borne by all
parties who have an interest in the marine adventure. For example, damage to ship engine or
machinery in attempting to raise a stranded ship, throwing part of the cargo, equipment of the
vessel overboard to lighten the load and save the vessel.
18. Particular Average Loss - Particular average loss is defined as a partial loss of the
subject matter insured causes by a peril insured. It is accidental in nature. Such a loss is borne
by the underwriter who insured the object damaged.
19. Enemies - The ships belonging to the enemy may cause loss to the insured and is re
underwritten by the marine policy. This policy extends to all the persons of the enemy country
and to their hostile acts provided such acts form part if the enemy actions
20. Agent - A licensed person or organization authorizes to sell insurance by or on behalf of an

insurance company.
21. Broker -A licensed person or organization paid by you to look for insurance on your
behalf.
22. Claim - Notice to an insurer that under the terms of a policy, a loss may be covered.
23. Burglary There are two type of burglary

(a) Theft of the property from the premises following upon entry if the said premises by
violent and forcible means
(b) Theft by a person in the premises who subsequently breaks our by the violent and forcible
means
24. Hazard - Hazard refers top those conditions or features or characteristics which create or
increase the chance of loss arising from a given peril.
There are two type of hazard
(a) Physical Hazard
(b) Moral Hazard
(a) Physical Hazard Physical hazard refers to the risk arising from material features
of the subject matter of insurance, for example, Fire - wooden floor are more prone to
fire, greater the number of the storey in a building, the greater the hazard.
(b) Moral Hazard - Moral hazard arises from human weaknesses, for example,
dishonesty, carelessness etc. or from general economic conditions like condition of
unemployment would result in a increased of burglaries.
25. Disability Insurance -This insurance provides compensation to the insured when income
is interrupted or terminated because of illness, sickness or due to injury because of accident. It
provides insurance against loss of income.
26. Warranties - Warrantee means a guarantee or a condition which is basic to the contract
of insurancy. Any breach of insurance warranties goes to the root of the contract and gives the
aggrieved party the right to avoid the contract. Section 35 of marine insurance Act define
warranties as A warranty means a promissory warranty. It means an undertaking by the
assured that same particulars thing shall or shall not be done, or that some condition shall be
fulfilled or he affirms or negatives the existence of a particular state of facts.
In simple words, it means that the insured undertakes that some particular thing shall or shall
not be done, or that some stipulation shall be fulfilled, or that particular state of the facts does
not exist. If a warranty is not complied with by the insured, the contract comes to an end / and
the insured is going to suffer.
27 Total Loss - Total loss means that the subject matter insured is fully destroyed and it
totally lost to its owner.
28. Underwriting - Underwriting is the most important aspect for any insurance, underwriting
is a process of selecting applicants for insurance and classifying them according to their degrees
of insurability so that the appropriate premium rates may be changed.
So underwriting include principle and practices concerning the acceptances or rejection of risk,
the total amount of acceptance, the total amount of retention for insurers own amount and
treatment of the balance through reinsurance
29. Workers Compensation Insurance -It provide four type of benefits (Medical care,
death, disability and rehabilitation) for employee job related injuries or disease as a matter of
right (without regard of fault)
30. Grace Period - A period (Usually 31 days) after the premium due date, during which an
overdue premium may be paid without penalty. The policy remains in force throughout this
period.
31. Material Misrepresentation - The policy holder/ applicant makes a false statement
regarding any material facts on his/her applications. For example, in case of life insurance, the
applicant may not reveal the true age and details of the existing illness/ diseases.
32. Risk - Risk means uncertainty concerning loss, and not the loss itself, or the cause of loss; or
the chance of loss. If, for example, the chance of loss by fire to a particular type of residential
house is 1 in 1000, a person who owns a single house cannot predicts his loss. Either his flat will
burn or will not burn. He has no basis for predicting the outcome. He is faced with complete
uncertainty even though the chance of loss is low.
New Insurance Products

1. Policies under LIC mutual Fund
LIC launched its mutual fund with promise to the investors to provide high returns along with
safety and security of investments. LIC mutual fund came up with 5 schemes which provide
distinct benefits to various cross sections of investors. The names of scheme are:-
- Dhanashree 1989
- Dhan 80 cc (1)
- Dhanvarsha
- Dhanvarsha 1989
- Dhanvridhi 1989
2.Jeevan AkshayV
This can be purchased immediately through lump sum payment as single premium. The plan
provides for annuity payments, which are available throughout the lifetime of and annuitant.
Annuity may be paid either at monthly, quarterly, half yearly or yearly intervals. Premium is
paid as lump sum. Minimum purchase price of the policy is Rs. 50,000 or such amount which
may secure a minimum annuity of Rs. 3000 per annum and maximum no limit. Medical
examination is not required. The minimum age of the proposer should be 40 year & maximum
should not exceed 79 years.
3. Jeevan Dhara
The payment of annuities in respect of policies under Jeevan Dhara has to start one month after
the completion of the deferment period.
4.Jeevan Kishore
This is an endowment assurance plan available for children of less than 12 years of age. The
policy may be purchased by any of the parents/ grand parents. Premiums are payable yearly, half
yearly, quarterly or monthly throughout the term of the policy or till earlier death of child. This
is a with profit plan i.e; get share of the profit in the form of bonus.
5. Jeevan Chhaya
This is an endowment assurance plan that provides financial protection against death throughout
the term of the plan.
6. New Jeevan Suraksha I
These are deferred annuity plans that allow the policyholder to make provisions for regular
income after the selected terms. Premiums are payable yearly, half yearly, quarterly, monthly or
through deduction opted by the policyholder, throughout the term of the policy or till earlier
death. Premium can be paid in lump sum also.
Insurance in India Historical Background
In India, the concept of insurance was prevalent even during ancient times. The reference of
insurance is found in Rigveda with the name yogakshema more or less related to the well being and
security of the people. Hammurabi in 2100BC, formalized the concept of the civic responsibilities,
bottomry and respondentia. Bottomry and respondentia loans refer to marine contracts covering
vessels and cargo. However, there is no evidence that insurance in its present form was practiced
prior to the twelfth century.
1. Marine Insurance Insurance in the oldest form existed in the form if marine insurance.
there was a contract of Bottomry bond, under this, the system of credit and the law of interest
were well developed and were based on a appreciation of the hazards involved and the means
of safeguarding against it. If the ship was lost, the loan and interest were forfeited. The
contract of insurance was made a part of the contract of carriage. Freight was fixed according
to seasons and was very reasonable. Various risks were involved with marine transport like
heavy winds, highway robbery, capturing by kings enemies. So to safeguard that, the marine
traders developed a method of spreading that financial loss.
2. Fire Insurance -Marine insurance was followed by fire insurance. it had been originated in
Germany in the beginning if the sixteen century. In England in 1666 there was great fire in
which about 85 percent of the houses were burnt and property worth of sterling ten crores were
completely burnt off. Fire insurance office was established in 1681 in England. After this, fire
insurance spread all over the world.
In India, the general insurance started working with the establishment of the Triton Insurance
Calcutta in 1850. However general insurance could not progress much in India.
3. Life Insurance - Life insurance first started in England in the sixteen century. The first life
insurance policy was of Willam Gybbons on June 18,1653. The first registered life office in
England was the Hand in Hand Society established in 1696. The life insurance did not
progress much in the United States during the eighteenth century.
In India, some European started the first life insurance company in Bengal Presidency, viz, the
Oriental Life Assurance Company in 1818. Then in 1871, Bombay Mutual Life Assurance Society
was established. In 1874 another important life insurance office was started Oriental
Government Security Life Assurance Co. Ltd sooner than several offices developed in India.
4. Miscellaneous Insurance - Miscellaneous Insurance take place at the later part of the
nineteenth century with the industrial revolution in England. Various insurance were developed
like accident insurance, fidelity insurance, liability insurance. The main institution was Lloyds
association. Now, various insurance are taking place like cattle insurance, crop insurance,
project insurance etc.
Reforms in the Indian Insurance Sector

After the nationalization of the life insurance industry in 1956 and general insurance industry in
1972, the insurance industry confined only to the operations of Life Insurance Corporation of India and
General Insurance Corporation of India and its four subsidiaries viz; The National Insurance Company
Limited, New India Assurance Company Limited, Oriental Fire & General Insurance Company Limited
and United India Fire & General Insurance Company Limited. There was state monopoly, inefficient
customer services, outdated technologies. So in 1993, Malhotra Committee, led by former secretary
and RBI Governor, R.N. Malhotra, was formed to evaluate the Indian Insurance Industry and for
recommending its future directions.
Objectives of Malhotra Committe
1. To suggest the structure of the insurance industry, to assess strength and weaknesses, to offer
wide variety of insurance products with a high quality of service to the public.
2. To make recommendations for modifying structure of insurance industry for changing general
policy framework, etc.
3. To make specific suggestions for improving the functioning of Life Insurance Corporation of
India and General Insurance Corporation of India.
4. To make suggestions on regulation and supervision of the insurance sector in India
5. To give advice on role and working if surveyors, intermediaries like agents,etc. in the insurance
sector
6. To make recommendations on any other matter which is relevant for development of the
insurance industry in India.
Recommendations of Malhotra Committee
Malhotra committee submitted its report in 1994 and gave the following major recommendations
in respect of :-
(I) Structure
- Government stake in the Insurance companies to be brought down to 50%

- Government should take over the holding of General Insurance Corporation of India & its
subsidiaries so that these subsidiaries can act as independent corporations
- All the Insurance companies should be given freedom to operate
(II) Competition
- Private companies with minimum paid up capital of Rs. 1 billion should be allowed to
enter in industry.
- No company should deal in both life and general insurance through a single entity
- Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies
- Postal life insurance should be allowed to operate in the rural market

- Only one state level life insurance company should be allowed to operate in each state.
- The insurance act should be changed

- The insurance regulatory body should be set up.
- Controller of insurance should be made independent

(III) Investment
- Mandatory investment of LIC life fund in Government Securities to be reduced from 75

percent to 50 percent
- GIC and its subsidiaries are not to hold more than 5% in any company
(IV) Customer Service

- LIC should pay interest on delays in payment beyond 30 days
- Insurance companies must be encouraged to set up unit linked pension plans

- Computerisation of operations and updating of technology to be carried out in the
insurance industry.
So the main emphasis was to improve the customer service and to opened up insurance sector for
the competition. But at the same time, the committee felt that new players could ruin the public
confidence in the industry. The recommendations of the committee were discussed at different forum.
In 1999, keeping in view of the recommendations of Malhotra Committee, Insurance Regulatory and
Development Authority (IRDA) Bill was drafted. The Government has ruled out privatization of public
sector insurance companies, LIC and GIC. There will be dilution of 100 percent Government equity in
LIC and GIC.
IRDA bill was formed by amending the Insurance Act, 1938, the Life Insurance Corporation Act,1956
and General Insurance Business (Nationalisation Act,1972). This bill was enacted to open up the
insurance sector.
IRDA provides for a nine member regulatory body with statutory powers. It fixed minimum capital
requirement for Life and General Insurance at Rs. 100 Crores and for reinsurance firms at Rs. 200
Crores.
There was some oppositions so Government reintroduced the bill with some changes. In 1999, the
bill was finally passed and IRDA was formed to regulate and promote insurance business in India.
Liberalisation of Insurance markets in India

Liberalisation are of two types :-
- Domestic Liberalisation
- External sector Liberalisation

Domestic Liberalisation consists of general curbs and guides on production, investment, price,
the role of market and resources allocation etc.
External sector Liberalisationconsists of liberalization in term of international flow of goods,
services, technology and Capital
Liberalisation of insurance involves transformation of the industry from a government monopoly to a
competitive environment. Indian companies too should have chance to carry out its business in a
foreign country without much limitation.
Liberalisation of the insurance sector has contributed towards the economic development of the
country in the following ways :-
(i) Employment Generations as more demand for marketing experts, finance specialists, human
resources professionals, statisticians etc.
(ii) Allowing of foreign players in Indian Insurance Sector bring more funds in the economy.
(iii) Liberalisation helps in promoting industry ancillary to insurance industry, like, advertising etc.
New policy cover have been developed. Customer friendly pricing structure was developed that
would foster healthy competition throughout the insurance industry. Various distribution
channels were developed.
(iv) Modern techniques were developed like bancassurance to sell insurance products to customers.
Banks too have involved in the task of distributing insurance products. Insurance companies are
entering into tie ups with manufactures of consumers goods in order to speed up the process of
reaching the customer at their door steps.
(v) IT sector boost up. The need for quicker delivery of insurance products has provoked the
competing insurance players to follow more sophisticated, automated systems
Major Insurance Players in India
There are two types of insurance players
I Life Insurance
II Non Life Insurance
I Following major players in life Insurance sector

1. Bajaj Allianz Life Insurance Company Limited:
It was incorporated on 12thMarch 2001 and get certificate of registration on 3rd April 2001. It is a
joint venture between Bajaj Auto Limited and Allianz AG of Germany. It conduct life insurance
business in India.
Products offered by the company are :-
- Risk Care Plan
- Cash Care Plan
- Life Care Plan
- Save Care Plan
- Invest Gain Plan
- Group Risk Care Plan Employer - Employee
- Group Credit Care Plan - Employer - Employee
- Group Risk Care Plan Non Employer - Employee
2. Birla Sun Life Insurance Company Limited:
It is a joint venture between Aditya Birla Group Sun life Corporation of U.S. Company offer a
unique products having features of
- Good Returns
- Security
- Liquidity
- Tax Benefits
- Transparency and
- Expediency
Products offered by the company are:-
- Flexi Save Plus endowment Plan
- Flexi life line whole life Plan
- Flexi Cash flow money back Plan
- Single Premium Plan
- Flexi secure life retirement plan (Pension)
- Birla sun life term plan
3. HDFC Standard Life Insurance Company Limited:

It is a joint venture between HDFC and Standard life. The company was incorporated on
14thAugust 2000.
- With profit endowment Assurance
- With profit money back
- Single Premium Whole Life
- Loan Cover term Assurance
- Personal Pension Plan
- Childrens Plan
- Group Term Insurance
- Development Insurance Plan
4. ICICI Prudential Life Insurance Company Limited:
It is a joint venture between ICICI Bank Limited and Prudential of UK. The company has paid up
capital of Rs. 230 Crores. The was incorporated on 26thNovember 2000 and it started its operation on
19thDecember 2000. Company offers wide range of products for Individual, Investors and Corporates .
Products offered by the company are :

Individuals Plans Cash and Back, Life Guard, Forever Life, Life Link Pension & Life Time Pension
Investment Plans Assure Invest, Life Link Plan etc.

Group Plans Group Gratuity, Group Term Assurance
5. Life Insurance Corporation of India Limited:

Life Insurance Corporation of India Limited was established in 1956. it has 7 zonal and 100
divisional offices and 204 branches. It is the dominate leader in life insurance business in India. The
Company offers wide variety of products
- Whole Life Plan
- Endowment Plan
- Children Plan
- Joint Life Plan
- Group Term Insurance Plan
6. Tata AIG Life Insurance Company Limited:

It is a joint venture between Tata Group and AIG of America. The company has paid up capital of
Rs. 185 Crores.. Company offers wide range of products
- 15 year life line (With return of premium) Plan
- Money Saver Plan
- Security and Growth Plan
- Mahalife Plan
7. SBI Life Insurance Company Limited:
It is a joint venture between SBI and Cardiff S.A. France. The company has paid up capital of Rs.
250 Crores.. Company offers wide range of products
- Sanjeevan Plan
- Sudarshan Plan
- Young Sanjeevan Plan
- SBI Scholar Plan
8. OM Kotak Mahindra Life Insurance Company Limited:

It is a joint venture between Kotak Mahindra Finance Limited and Old Mutual Public Ltd. The
company has paid up capital of Rs. 150 Crores.
The major products offered are
- Insurance Bond Plan
- Gramin Bima Yojana Plan
- Retirement Plan
- Capital Multiplier Plan
- Annuity Plan
- Child Advantage Plan

9. Max New York Life Insurance Company Limited:

It is a joint venture between Max India Limited and New York life. The company has paid up capital
of Rs. 250 Crores..
The company offers wide range of insurance plans. Products offered are
- Whole Life Endowment Plan
- Term Assurance Plan
10. ING Vyasya Life Insurance Company Limited:

It is a joint venture between ING, Vyasa bank and GMR Group. The company has paid up capital of
Rs. 110 Crores.
- Reassuring Life Endowment Assurance Plan
- Fulfilling Life Anticipated Whole Life Plan
- Maximising Life Money bank Plan
- Conquering Life Plan
11. AVIVA Life Insurance Company Limited:
It is a joint venture between Dabur India and CGU, a Wholly subsidiary AVIVA Public Limited
Company (PLC). The company has paid up capital of Rs. 110 Crores.
- Life Long Plan
- Life Saver Plan
- Life Bond Plan
- Corporate Life Plan
- Credit Plus Plan
- Secure Life Plan
- Easy Life Plan
- Pension Plus Plan
12. AMP Sanmar Assurance Company Limited:
It is a joint venture between AMP and Sanmar Group.
- Dhan Shree Plan
- Subha Shree Plan
- Nitya Shree Plan
- Rakash Shree Plan
- Yuva Shree Plan
- Bhagya Shree Plan
II Following major players in Non life Insurance sector
1. Bajaj Allianz General Insurance Company Limited:
It was incorporated on 19thSeptember 2000 and get certificate of registration on 2ndmay 2001. It
is a joint venture between Bajaj Auto Limited and Allianz AG of Germany. It conduct general insurance
business (Including health insurance business) in India. Its paid up capital is Rs. 110 Crores
Company offer following categories of products
- Fire insurance
- Motor Insurance
- Workmen Compensation
- Consequential loss (fire) insurance
- Engineering (Including electronics equipments, machinery, boiler explosion etc.
- Health insurance
- Personal accident
- Householders
- Overseas travel
2. ICICI Lombard General Insurance Company Limited
It is a joint venture between ICICI Bank Limited and Lombard Canada Limited (Oldest property and
casualty insurance company in Canada). ICICI Lombard offer a wide range of retail and corporate
general insurance customized product as under :
- Home Insurance
- Personal Care
- Fire and Special Peril Policy
- Consequential loss (fire) insurance
- Burglary Insurance
- Liability products like Public liability insurance act policy, Workmen Compensation
3. IFFCO TOKIO General Insurance Company Limited
It is a joint venture between IFFCO and Tokio marine & fire Insurance Company Limited,
Japan. Its paid up capital is Rs. 100 Crores. It is among Indias top three private sector general
insurance companies. The company offer a wide range of unique customized policies , some of major
products as under :
- Industrial All Risks
- Machinery Breakdowns
- Machinery Loss of Project
- Product Liability
- Marine (Cargo)
- Motor (Private/ personal Car/ Commercial Vehicles)
- Overseas Travel Insurance
- Cash Insurance
4. National Insurance Company Limited
National Insurance Company Limited was incorporated in 1906 and nationalised in 1972.
Company carry out general insurance business. 1972, 22 foreign companies and 11 Indian Insurance
Companies were amalgamated with National Insurance Company Limited as a subsidiary of General
Insurance Corporation of India . Then in 2002, the company was de linked from General Insurance
Corporation of India and now working as independent company. Company offers a wide variety of
products and also carrying out reinsurance and foreign operations
5. New India Assurance Company Limited

New India Assurance Company Limited was incorporated in 1919 and was nationalised in
1972. Company carry out general insurance business. In 2002, the company was de linked from
General Insurance Corporation of India and now working as independent company. Company offers a
wide variety of products and also carrying out reinsurance and foreign operations
6. Oriental Insurance Company Limited
Oriental Insurance Company Limited was incorporated in 1947 as a subsidiary of Oriental
Government Security Life Assurance Company Limited. In 1956 Oriental Insurance Company Limited
becomes subsidiary of LIC. On 13thMay 1971, Government of India took over the management of all
general insurance companies in India, then in 1973, General insurance business was nationalized and
General Insurance company came under the General Insurance Corporation of India . Then in 2002, the
company was de linked from General Insurance Corporation of India and now working as independent
company. Company offers a wide variety of products and also carrying out reinsurance and foreign
operations. The Company head office is in New Delhi
7. United India Insurance Company Limited
It was one of the subsidiary General Insurance Corporation of India, In 2002, the company was
de-linked from General Insurance Corporation of India and now working as independent company.
Company offers a wide variety of products such as sports insurance, mediclaim policy, T.V. Policy ,
Floriculture Insurance, Agricultural Insurance etc. The Company head office is in Chennai
8. Tata AIG General Insurance Company Limited
It is a joint venture between Tata Group and AIG (American International Group Inc.). Its paid
up capital is Rs. 125 Crores. It is the first Indian Insurance company which offers a comprehensive
policy to cover various risks in the IT sector. Other products offered are property, casualty, marine,
director and officers liability, accident, health, home owners and automobiles insurance
9. Royal Sundaram General Insurance Company Limited
Royal Sundaram General Insurance Company Limited is a joint venture between Royal and Sun
Alliance Insurance and Sundaram Finance Limited. It started its operations from March 2001. The
products offered by the company are:
- Travel Shield
- Accident Shield
- Health Shield
- Home Shield
10. Cholamandalam General Insurance Company Limited

Cholamandalam General Insurance Company Limited is promoted by Chennai based Murugappa
group. The Company has capital of Rs. 105 crores. The products offeres following products
- Motor Insurance
- Home Insurance
- Electronic Insurance
- Neon Sign Insurance
- Machinery breakdown Insurance
- Marine Insurance
- Pet Insurance
11. Reliance General Insurance Company Limited
It is one of the fastest growing general insurance company in India. Reliance General Insurance
Company Limited is a subsidiary of Reliance Capital. It provide insurance coverage to all categories of
people and offers a wide range of insurance products. The company has a unique features covering
customers centric products, multiple distribution channels and new modern technology.
12. Export Credit Guarantee Corporation of India Limited
Export Credit Guarantee Corporation of India Limited was established in 1957 by the
Government of India. It function under the administrative control of the Ministry of Commerce,
Government of India. The main objective was to strengthen the export promotion campaign by
insuring the risk associated with exporting on credit. It is the fifth largest credit insurer of the world in
term of coverage of national exports. The paid up capital of the company is Rs. 500 Crores.
The insurance products offered by the corporation includes
- Turnover Policy
- Small Exporter Policy
- Standard Policy
- Buyer wise Policy
- Insurance cover for buyers credit and line of credit service policy
- Construction Work Policy
3 LESSON 3 LEGAL FRAMEWORK LIFE &

GENERAL INSURANCE BUSINESS
LESSON 3
LEGAL FRAMEWORK LIFE & GENERAL INSURANCE BUSINESS
- Meenu

ESSENTIALS OF GENERAL CONTRACT (SECTION 10) OF INDIAN CONTRACT ACT

1872
The law of contract in India is contained in the Indian Contract Act 1872, According to section
2(h) of the Indian Contract Act 1872, An agreement enforceable by law is a contract
A contract, therefore, is an agreement the object of which is to create legal obligation i.e. a duty
enforceable by law.
Thus there are two main elements
I An agreement
II Legal obligation i.e a duty enforceable by law
An agreement comes into existence when one party makes a proposal or offer to the other
party and that other party signifies his ascent (i.e. gives his acceptance)
An agreement to become a contract must give rise to a legal obligation i.e. , a duty enforceable by
law.
To be enforceable by law, an agreement must possess the essential elements of a valid contract
as contained in section 10.
Essentials of a valid contract

In order to become a valid contract, an agreement must have the following essentials elements:
1.Offer and Acceptance
There must be a lawful offer and a ;lawful acceptance of the offer. There must be tow parties to
an agreement, one making the offer and the other accepting it. The offer must be definite,
unambiguous and certain. It must be communicated. Acceptance must be absolute and unqualified i.e
it should not be conditional. It must be communicated to the offeror.
2. Intention to create legal relationship
There must be an intention among the parties that the agreement should be attached by legal
consequences and create legal obligations. Agreement of a social or domestic nature does not involve
any legal obligations so they are not a contract.
3. Lawful consideration
Consideration means something in return. An agreement is enforceable only when each of the
parties to it gives something and get something consideration must be something of value. It may
be past, present or future.
4. Capacity of parties
The parties to an agreement must be competent to contract. Parties must be of the age of
majority and of sound mind and must not be disqualified form contracting by any law to which they
are subject (Section 11). If any of the parties to the agreement suffers a from minority, lunacy,
idiocy, drunkenness, etc., the agreement is not enforceable
5. Free consent
One of the essentials of the valid contract is that there should be consensus ad idem, i.e. they
agree upon the same thing in the same sense at the same time and that their consent is free and real.
Coercion is said to be free whom it is not caused by :-
(i) Coercion
(ii) Under influence
(iii) Misrepresentation
(iv) Fraud
(v) Mistake
When there is no consent, there is no contract.
6. Lawful object
The object of the contract must be lawful. It should not be illegal, immoral or opposed to public
policy. If the object of the agreement is performance of unlawful act, the agreement is
unenforceable, for example, An agreement to commit an assault or to beat a man has been held
unlawful and void.
7. Writing and registration
According to the Indian Contract Act, a contract may be oral or in writing. But in certain special
cases, it lays down that the agreement, to be valid, must be in writing or/and registered. For
example, it requires that an agreement to pay a time barred debt must be in writing and an
agreement to make a gift for natural love and affection must be in writing and registered.
8. Certainty
The terms of agreement must be certain and not vague, indefinite or ambiguous. For example, A,
agree to sell B a hundred tons of oil. There is nothing whatever to show what kind of oil was
intended, the agreement is void for uncertainty.
9. Possibility of performance
A contract must be capable of performance. An agreement to do an act impossible is itself is void.
10. Agreement not declared void
The agreement must not be have been expressly declared void by any law in force in the country.
(Section 24-30 and Section 56).
Kind of Contracts
Contract may be classified on the following basis.
Classification according to enforceability:
From the point of view of enforceability, a contract may be
1 Valid Contract
2 Voidable Contract
3 Void Contract
4 Unforceable contract
5 Illegal or unlawful contract
1. Valid contract : An agreement that fulfills all the essentials requisites as per the
requirement of law is a valid contract.
2. Voidable contract : An agreement which is enforceable by law at the option of one or
more of the parties thereto, but not at the option of the option of the other or others, is
voidable contract. When a element of free consent is absent, a contract is said to be voidable
contract. For example, C threatens to shoot B, if he does not let out his house to him. B
agree to let out his house to C. The consent of B is not free, so it is voidable at the option of
B.
3. Void contract: Void contract means which is not enforceable by law. A contract is not void
from its beginning and it is valid and binding on the parties when originally entered but may
later on become void. For example, A agrees to sell B 100 bags of wheat at Rs. 650 per bag.
Before delivery, the government bans private trading in wheat, the contract becomes void.
4. Unenforceable contract : Contracts, which cannot be enforced in a court of law because
of some technical defects such as absence of writing or because the remedy has become time
barred are called unenforceable contracts.
5. Illegal or unlawful contract : An agreement is illegal and void it object or
consideration :-
(i) is forbidden by law; or
(ii) is of such a nature that , if permitted , it would defect the provisions of any law; or
(iii) is fraudulent; or
(iv) involves or implies injury to the person or property of another; or
(v) the court regards it as a immoral, or opposed to public policy.
Classification according to the mode of creation
It can be divided into
1. Express contract
2. Implied contract
3. Constructive or quasi contract
1. Express contract : Where both the offer and acceptance are made in words spoken or
written, it is an express contract.
2. Implied contract : Where both the offer and acceptance are made by acts and conduct of
the parties and not by words, it is an implied contract. For example, P a coolie in uniform
takes up the luggage of Q to be carried out of the railway station without being asked by Q
and Q allows him to do so , then the law implies that Q agree to pay for the services of P
and there is an implied contract.
3. Constructive or quasi contracts : It is based on the principle of justice that a person
shall not be allowed to enrich himself un justify at the expenses of another. For example, if
A a salesman, leaves goods at B house by mistake and B treat the goods as his own, then he
is bound to pay for the goods.
Classification on the basis of extent of execution

From the point of view if the extent of execution a contract may be executed or executory.
1. Executed contract : An executed contract is one in which both the parties have executed
/discharge their respective obligation, i.e., completely performed their share of obligation. For
example, A agrees to sell his house toB for Rs. 15 Lacs and accordingly transfer the house to
B on getting the agreed amount from B. The contract is a duly executed contract.
2. Executory contract : Executory contract is a contract in which both the parties are yet to
execute their respective obligations. Executory contracts are also known as Bilateral contracts.
ESSENTIAL FEATURES OF INSURANCE CONTRACTS
Like any other contract, insurance contract are also governed by the provisions of the law of
contract as laid down in The Indian Contract Act, 1872. Therefore they have to fulfill the essential
features of a valid contract
The essentials of a valid contract have been discussed earlier.
LIFE INSURANCE CORPORATION ACT, 1956
The life insurance corporation Act, 1956 is an act
(I) to provide for the nationalisation of life insurance business in India
(II) to provide for the regulation and control of the business of the Corporation.
As per the act, 245 private insurance companies, provident societies, etc., were amalgamated
and the life insurance corporation of India was formed and has since then grown up to be the largest
insurance company in India.
Some of the important provisions are as follows

Short title and commencement
(1) This Act maybe called the Life Insurance Corporation Act, 1956
(2) It shall come into force on such date as the Central Government may, by Notifications in the
Official Gazette, appoint.
Important Definitions: Sec 2 of the act contains the definitions adopted under the act.
Some of the important definitions in this act, unless the context otherwise requires are:
(1) "Appointed day, means the date on which the Corporation is established
under Section 3;
(2) "Composite insurer "means an insurer carrying on in addition to controlled business

any other kind of insurance business;
(3) "Controlled business" means
(i) In the case of any insurer specified in sub-clause (a) or sub-clause (b) of clause (9) of section 2
of the Insurance Act and carrying on life insurance business
(a) all his business, if he carries on no other class of insurance business;
(b) all the business appertaining to his life insurance business, if he carries on any other
class of insurance business also;
(c) all his business if his certificate of registration under the Insurance Act in respect of
general insurance business stands wholly cancelled for a period of more than six months
on the 19th day of January, 1956.
(ii) in the case of any other insurer specified in clause (9) ofsection2 of the Insurance Act and
carrying on life insurance business
(a) all his business in India, if he carries on no other class of insurance business in India;
(b) all the business appertaining to his life insurance business in India, if he carries on any
other class of insurance business also in India;
(c) all his business in India if he certificate of registration under the Insurance Act in
respect of general insurance business in India stands wholly cancelled for a period of
more than six months on the 19th day of January, 1956.
(4) "Corporation" means the Life Insurance Corporation of India established under section 3;
(5) "Insurance Act means the Insurance Act, 1938(4of1938);

(6) "Insurer" means an insurer as defined in the Insurance Act who carries on life insurance
business in India and includes the Government and a provident society as defined in section65 of
the Insurance Act;
(7) "Member"means a member of the Corporation;
(8) "Prescribed" means prescribed by rules made under this Act;
(9) "Tribunal"means a Tribunal constituted under section17 and having jurisdiction in respect of
any matter under the rules made under this Act;
(10) All other words and expressions used herein but not defined and defined in the Insurance Act
shall have the meanings respectively assigned to them in that Act.
Establishment and incorporation of Life Insurance Corporation of India

Sec 3 of the act provides that
(1) With effect from such date as the Central Government may, by notification in the Official
Gazette, appoint, there shall be established a Corporation called the Life Insurance Corporation
of India.
(2) The Corporation shall be a body corporate having perpetual succession and a common seal
with power subject to the provisions of this Act, to acquire, hold and dispose of property, and
may by its name sue and be sued.
Constitution of the Corporation
According to sec 4 of the Act:
(1) The Corporation shall consist of such number of persons not exceeding 2 as the Central
Government may think fit to appoint thereto and one of them shall be appointed by the Central
Government to be the Chairman there of.
(2) Before appointing a person to be a member, the Central Government shall satisfy itself that
person will have no such financial or other interest as is likely to affect prejudicially the
exercise or performance by him of his functions as a member, and the Central Government shall
also satisfy itself from time to time with respect to every member that he has no such interest;
and any person who is, or whom the Central Government proposes to appoint and who has
consented to be, a member shall, whenever required by the Central Government so to do,
furnish to it such information as the Central Government considers necessary for the
performance of its duties under this sub-section.
(3) A member who is in anyway directly or indirectly interested in a contract made or proposed to
be made by the Corporation shall as soon as possible after the relevant circumstances have
come to his knowledge, disclose the nature of his interest to the Corporation and the member
shall not take part in any deliberation or discussion of the Corporation with respect to that
contact.
Capital of the Corporation
(1) The original capital of the Corporation shall be five crores of rupees provided by the Central
Government after due appropriation made by Parliament bylaw for the purpose, and the terms
and conditions relating to the provision of such capital shall be such as maybe determined by
the Central Government.
(2) The Central Government may, on the recommendation of the Corporation, reduce the capital
of the Corporation to such extent and in such manner as the Central Government may
determine
Functions of the Corporation

These are as follows:
1) Subject, to the rules, if any, made by the Central Government in this behalf, it shall be the
general duty of the Corporation to carry on life insurance business, whether in or outside India,
and the Corporation shall so exercise its powers under this Act as to secure that life insurance
business is developed to the best advantage of the community.
2) Without prejudice to the generality of the provisions contained in sub-section (1) but subject
to the other provisions contained in this Act, the Corporation shall have power
(a) To carryon capital redemption business, annuity certain business or reinsurance

business in so far as such re insurance business appertains to life insurance business;
(b) Subject to the rules, if any, made by the Central Government in this behalf, to invest
the funds of the Corporation in such manner as the Corporation may think fit and to take
all such steps as may be necessary or expedient for the protection or realization of any
investment; including the taking over of and administering any property offered as
security for the investment until a suitable opportunity arises for its disposal;
(c) To acquire, hold and dispose of any property for the purpose of its business;
(d) To transfer the whole or any part of the life insurance business carries on outside India
to any other person or persons, if in the interest of the Corporation it is expedient so to
do;
(e) To advance or lend money upon the security of any movable property or otherwise;
(f) To borrow or raise any money in such manner and upon such security as the Corporation
may think fit;
(g) To carry on either by itself or through any subsidiary any other business in any case
where such other business was being carried on by a subsidiary of an insurer whose
controlled business has been transferred to and invested in the Corporation under this
Act;
(h) to carry on any other business which may seen to the Corporation to be capable of
being conveniently carried on in connection with its business and calculated directly or
indirectly to render profitable the business of the corporation;
(i) to do all such things as maybe incidental or conducive to the proper exercise of any of
the powers of the Corporation. In the discharge of any of its functions the Corporation
shall act so far as maybe on business principles.
Power of Corporation to impose conditions, etc
(1) In entering into any arrangement, under section 6, with any concern, the Corporation may
impose such conditions as it may think necessary or expedient for protecting the interest of the
Corporation and for securing that the accommodation granted by it is put to the best use by the
concern.
(2) Where any arrangement entered into by the Corporation under section 6 with any concern
provides for the appointment by the Corporation of one or more directors of such concern, such
provision and any appointment of directors made in pursuance there of shall be valid and
effective notwithstanding anything to the contrary contained in the Companies Act, 1956 (1
of1956),or in any other law for the time being in force or in the memorandum, articles of
association or any other instrument relating to the concern, and any provision regarding share,
qualification, age limit, number of directorships, removal from office of Directors and such like
conditions contained in any such law or instrument aforesaid, shall not apply to any director
appointed by the Corporation in pursuance of the arrangement as aforesaid.
(3) Any director appointed as aforesaid shall-
(a) Hold office during the pleasure o f the Corporation any maybe removed or substituted by any
person by order in writing by the Corporation;
(b) Not incur any obligation or liability by reason only of his being a director or for anything done or
omitted to be done in good faith in the discharge of his duties as a director or anything in
relation thereto;
(c) Not be liable to retirement by rotation and shall not be taken into account for computing the
number of directors liable to such retirement.
Management of the Corporation
The central office of the Corporation shall be at such place as the Central Government may, by
notification in he Official Gazette, specify.The Corporation shall establish a zonal office at each of the
following places, namely, Bombay, Calcutta, Delhi, Kanpur and Madras, and, subject to the previous
approval of the Central Government, may establish such other zonal offices as it thinks fit. The
territorial limits of each zone shall be such as may be specified by the Corporation.There may be
established as many divisional offices and branches in each zone as the Zonal Manager thinks fit.
Other Committees
(1) The Corporation may entrust the general superintendence and direction of its affairs and
business to an Executive Committee consisting of not more than five of its members and the
Executive Committee may exercise all powers and do all such acts and things as may be
delegated to it by the Corporation.
(2) The Corporation may also constitute an Investment Committee for the purpose of advising it in
matters relating to the investment of its funds, and the Investment Committee shall consist of
not more than eight members of whom not less than four shall be members of the Corporation
and the remaining members shall be persons (whether members of the Corporation or not) who
have special knowledge and experience in financial matters, particularly, matters relating to
investment of funds.
It may appoint one or more persons to be the managing director or directors of the
Corporation, and every managing director shall be a whole time officer of the Corporations, and shall
exercise such powers and perform such duties as may be entrusted or delegated to him by the
executive committee of the corporation.
Funds of the Corporation-

Corporation shall have its own fund and all receipts of the Corporation shall be credited thereto and
all payments of the Corporation shall be made there from.
Audit
(1) The accounts of the Corporation shall be audited by auditors duly qualified to act as auditors
of companies under the law for the time being in force relating to companies, and the auditors
shall be appointed by the Corporation with the previous approval of the Central Government
and shall receive such remuneration from the Corporation as the Central Government may fix.
(2) Every auditor in the performance of his duties shall have at all reasonable times access to the
books, accounts and other documents of the Corporation.
(3) The auditors shall submit their report to the Corporation and shall also forward a copy of their
report to the Central Government.
Annual report of activities of Corporation

The Corporation shall, as soon as may be, after the end of each financial year, prepare and
submit to the Central Government in such form as maybe prescribed a report giving an account of its
activities during the previous financial year, and the report shall also give an account of the activities,
if any, which are likely to be undertaken by the Corporation in the next financial year.
Liquidation of the Corporation

No provision of the law, as provided in the Companies Act, relating to the winding up of
companies or corporations shall apply to the corporation established under this act, and the
corporation shall not be placed in liquidation save by order of the central government and in such
manner as the central Government may direct.
THE GENERAL INSURANCE BUSINESS (NATIONALISATION) ACT,1972

The Life Insurance business was nationalised in 1956. at this stage, the General insurance
business was allowed to be continued in private hands. In 1971, General Insurance (emergency
provisions) ordinance was enacted.
The Government of India took over the management of all General Insurance Companies
operating in India whether they belonged to Indian or non-Indian shareholders. Subsequently, the
General Insurance (Emergency Provisions) Amendment Act, 1971 was passed withdrawing certain rights
of the Directors and Members of the Companies, which they were enjoying under the Companies Act.
General Insurance (Nationalization) Act, 1972 shortly followed and with effect from 2ndJanuary,1973
the provisions of the Act became effective.
The most significant provisions of the Act are
Definitions:
In this act, unless the context otherwise requires, acquiring companies: means any Indian
insurance company and, where a scheme has been framed involving the merger of one Indian
insurance company in another or the amalgamation of two or more such companies,means the Indian
insurance company in which any other company has been merged or the company which has been
formed as a result of amalgamation;
Appointed day means such day, not being a day later than the 2ndday of January, 1973, as the
central government may , by notification, appoint;
Companies actmeans the companies act, 1956;
Corporationmeans the general insurance corporation of India formed under section 9;

Existing insurer means every insurer the management of whose undertaking has vested in the
central government under section 3 of he general insurance (emergency provisions) act, 1971 an d
includes the undertaking of the life insurance corporation in so far as it relates to the general
insurance business carried on by it;
Foreign insurermeans an existing insurer incorporated under the law of any country outside India;
General insurance business means fire, marine or miscellaneous insurance business, whether
carried on singly or in combination with one or more of them, but does not include capital redemption
business and annuity certain business;
Government companymeans a government company as defined in section 617 of the companies
act;
Indian insurance company means an existing insurer having a share capital who is a company
within the meaning of the companies act;
Insurance actmeans the insurance act, 1938;
life insurance corporation means the life insurance corporation of India established under the
life insurance corporation act, 1956;
Notificationmeans a notification published in the official gazette;
Prescribedmeans prescribed by rules made under this act;
Schedulemeans the schedule to the act;

Schememeans the scheme framed under section 16;
Words and expressions used in this act but not defined herein or in the insurance act and
defined in the companies act, shall have the meanings respectively assigned to them in the companies
act.
Functions of Corporation
The functions of the Corporation are enumerated in Section18 of the Act, some of are as
follows:
The functions of the Corporation shall include:-
(a) The carrying on of any part of the general insurance business, if it thinks it desirable to do so;
(b) Aiding, assisting and advising the acquiring companies in the matter of setting up of standards
of conduct and sound practice in general insurance business and in the matter of rendering
efficient services to holders of policies of general insurance;
(c) Advising the acquiring companies in the matter of the controlling their expenses including the
payment of commission and other expenses.
(d) Advising the acquiring companies in the matter of the investment of their funds;
(e) Issuing directions to acquiring companies in relation to the conduct of general insurance
business.
Functions of acquiring companies

(1) Subject to the rules, if any, made by the Central Government in this behalf and to its
memorandum and articles of association, it shall be the duty of every acquiring company to
carry on general insurance business.
(2) Each acquiring company shall so function under this Act as to secure that general insurance
business is developed to the best of the community.
(3) In the discharge of any of its functions, each acquiring company shall act so far as may be on
business principles and where any directions have been issued by the Corporation shall be
guided by such directions.
(4) For the removal of doubts it is hereby declared that the Corporations and any acquiring
company may, subject to the rules, if any, made by the Central Government in this behalf,
enter into such contracts of reinsurance treaties as it may think fit for the protection of its
interests.
Power to make rules

According to section 39,
The Central Government is also empowered to make rules to carry out the provisions of the Act
and such rules may provide for:
(a) Manner in which the profits and other moneys received by the Corporation may be dealt with
(b) The conditions subject to which the Corporation and the acquiring companies shall carry on
general insurance business;
(c) The terms and conditions subject to which any re-insurance contract or treaties may be
entered into;
(d) Form and manner in which any notice or application may be made to the Central Government;
(e) The reports which may be called for by the Central Government from the Corporation and
acquiring companies; and
(f) Any other matter which is required to be or may be prescribed.
Powers of the central government under the act
Power to transfer employees: under the provisions of sec 22 of the act, the corporation may at
any time transfer any officer or employee from an acquiring company or the corporation to any other
acquiring company or the corporation, as the case may be, and the officer or employee so transferred,
shall continue to have the same terms and conditions of service as were applicable to him
immediately before such transfer.
Power to issue directions: according to sec 23, the corporation and every acquiring company
shall, in the discharge of its functions, be guided by such directions in regard to matters of policy
involving public interest as the central government may give.
Power to frame/ amend a scheme
According to section 17,
If the central government is of opinion that for the more efficient carrying on of general
insurance business it is necessary so to do, it may, by notification, frame one or more schemes. The
central government may, by notification, add to, amend or vary any scheme framed under this section
. a copy of every scheme , and every amendment thereto, framed under this section shall be laid, as
soon as may be after it is made, before each House of Parliament
Power to regulate the terms and conditions of service of officers and other
employees
According to section 17A, the central government may, by notification in the official gazette,
frame one or more schemes for regulating the pay scales and other terms and conditions of service of
officers and other employees of the corporation or of any acquiring company.
4 LESSON 4 THE INSURANCE ACT, 1938 AND
IRDA ACT,1999
LESSON 4
THE INSURANCE ACT, 1938 AND IRDA ACT,1999
- Meenu
THE INSURANCE ACT, 1938

Earlier to the Insurance Act, 1938, the insurance business was carried by the insurance
companies in accordance with the principles of the Company Law,1913. When the business started
growing, the need for an independent law to regulate the insurance business was noticed and a
separate Act, the Insurance Act, 1938 was legislated. The Act was used for all purposes relating to
both life and general insurance businesses and their regulations. With regards to general insurance,
this Act is being used to regulate the marine insurance, fire insurance and other insurances. Further
growth of business has made it complex and more legal provisions were required to regulate it. The
Marine Insurance Act, 1963, Public Liability Insurance Act, 1991, Insurance Regulatory and
Development Authority Act, 1999 and regulations made by the IRDA are some of the legislations that
govern the insurance business.
Short title, extent and commencement
1. (1) This Act may be called Insurance Act, 1938.
(2) It extends to the whole of India.
(3) It shall come into force on such date3 as the Central Government may, by Notification in the
Official Gazette, appoint in this behalf.
Definitions
2. In this Act, unless there is anything repugnant in the subject or context, -
(1) Authority means the Insurance Regulatory and Development Authority established under
sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999;
(2) Policy-holder includes a person to whom the whole of the interest of the policy-holder in
the policy is assigned once and for all, but does not include an assignee thereof whose interest
in the policy is infeasible or is for the time being subject to any condition;
(3) Approved securities, means-

(i) Government securities and other securities charged on the revenue of the Central
Government or of the Government of a State or guaranteed fully as regards principal and
interest by the Central Government or the Government of any State;
(ii) debentures or other securities for money issued under the authority of any Central Act or
Act of a State Legislature by or on behalf of a port trust or municipal corporation or city
improvement trust in any Presidency-town;
(iii) shares of a corporation established by law and guaranteed fully by the Central
Government or the Government of a State as to the repayment of the principal and the
payment of the divided;
(iv) securities issued or guaranteed fully as regards principal and interest by the Government
of any Part B State and specified as approved securities for the purposes of this Act by the
Central Government by notification in the Official Gazette; and
(4) "Auditor" means a person qualified under the Chartered Accountants Act, 1949 (38 of 1949),
to act as an auditor of companies;
(5) "Chief agent" means a person who, not being a salaried employee of an insurer, in
consideration of any commission-
(i) Performs any administrative and organizing functions for the insurer, and
(ii) Procures life insurance business for the insurer by employing or causing to be employed
insurance agents on behalf of the insurer;
[(5-A) "Controller of Insurance" means the officer appointed by the Central Government
under section 2B to exercise all the powers, discharge the functions and performs the duties of
the Authority under this Act or the Life
Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance Business (Nationalization)
Act, 1972 (57 of 1972) or the Insurance Regulatory and Development Authority Act, 1999;]
(6) "Court" means the principal Civil Court of original jurisdiction in a district and includes he High
Court in exercise of its ordinary original civil jurisdiction;
(7) "Government security" means a Government security as defined in the Public Debt Act,
1944 (18 of 1944);
[(7A) Indian insurance company means any insurer being a company-
(a) which is formed and registered under the Companies Act, 1956 (1 of 1956);
(b) in which the aggregate holdings of equity shares by a foreign company, either by itself or
through its subsidiary companies or its nominees, do not exceed twenty-six percent paid-
up equity capital of such Indian insurance company;
(c) whose sole purpose is to carry on life insurance business or general insurance business or
re-insurance business.
(8) "Insurance company" means any insurer being a company, association or partnership which
may be wound up under the Indian Companies Act, 1913 (7 of 1913), or to which the Indian
Partnership Act, 1932 (9 of 1932), applies;
(9) "Insurer" means-

(a) any individual or unincorporated body of individuals or body corporate incorporated under the
law of any country other than India, carrying on insurance business not being a person
specified in sub-clause (c) of this clause which-
(i) carries on that business in India, or
(ii) has his or its principal place of business or is domiciled in India, or
(iii) with the object of obtaining insurance business, employs a representative, or maintains a
place of business, in India;
(b) any body corporate [not being a person specified in sub-clause (c) of this clause] carrying on
the business of insurance, which is a body corporate incorporated under any law for the time
being in force in India; or stands to any such body corporate in the relation of a subsidiary
company within the meaning of the Indian Companies Act, 1913 (7 of 1913), as defined by sub-
section (2) of section 2 of that Act, and
(c) any person who in India has a standing contract with underwriters who are members of the
Society of Lloyd's whereby such person is authorized within the terms of such contract to issue
protection notes, cover notes, or other documents granting insurance cover to others on
behalf of the underwriters.But does not include a principal agent' chief agent, special agent'
or an insurance agent or a provident society as defined in Part III;
(10) "Insurance agent" means an insurance agent licensed under Sec. 42 who receives agrees to
receive payment by way of commission or other remunerationin consideration of his soliciting or
procuring insurance business including business relating to the continuance, renewal or revival
of policies of insurance;
(11) "Managing agent" means a person, firm or company entitled to the management of the
whole affairs of a company by virtue of an agreement with thecompany, and under the control
and direction of the directors except to the extent, if any, otherwise provided for in the
agreement, and includes any person, firm or\ company occupying such position by whatever
name called.
(12) "Prescribed" means prescribed by rules made under this Act; and
(13) "Principal agent" means a person who, not being a salaried employee of an insurer, in
consideration of any commission,
(i) Performs any administrative and organizing functions for the insurer; and
(ii) Procures general insurance business whether wholly or in part by employing or causing to be
employed insurance agents on behalf of the
(14) "Special agent" means a person who, not being a salaried employee of an insurer, in
consideration of any commission, procures life insurance business for the insurer whether
wholly or in part by employing or causing to be employed insurance agents on behalf of the
insurer, but does not include a chief agent.
(15)Insurance cooperative societymeans any insurer being a cooperative society, which is
registered on or after the commencement of the insurance (amendment) act, 2002, as a
cooperative society under the cooperative societies act, 1912, or under any other law for the
time being in force in any state relating to cooperative societies or under the multi-state
cooperative societies act, 1984, having a minimum paid up capital (excluding the deposits
required to be made under section 7), of rupees one hundred crores , in which no body
corporate, whether incorporated or not, formed or registered outside India, either by itself or
through its subsidiaries or nominees, any time, holds more than 26 percent of the capital of
such cooperative society, and whose sole purpose is to carry on life insurance business or
general insurance business in India.
Requirements as to capital
No insurer carrying on the business of life insurance, general insurance or re insurance in India
on or after the commencement of the Insurance Regulatory and Development authority Act, 199, shall
be registered unless he has,-
(i) paid-up equity capital of rupees one hundred crores, in case of a person carrying on the
business of life insurance or general insurance; or
(ii) a paid-up equity capital of rupees two hundred crores, in case of a person carrying on the
reinsurance business.
Further, no public company limited by shares having its registered office in India, shall carry on
life insurance business, unless the capital of the company consists only of ordinary shares each of
which have a single face value, and the same paid up amount for all shares, whether existing or new,
except during any period not exceeding one year allowed by the company for payment of calls on
shares.
The act also provides that no prompter shall any time hold more than 26 percent or such other
percentage as may be prescribed. Of the paid up capital in an Indian insurance company, and if he
does, the promoters shall divest in a phased manner the share capital in excess of the 26 percent of
the paid up equity capital or such excess paid up equity capital as may be prescribed, and within such
period as may be prescribed by the central government.

Deposits
Every insurer shall, in respect of the insurance business carried on by him in India, deposit and
keep deposited with the Reserve Bank of India in one of the offices in India of the Bank for and on
behalf of the Central Government the amount hereafter specified, either in cash or in approved
securities estimated at the market value of the securities on the day of deposit, or partly in cash and
partly in approved securities so estimated:-
(a) in the case of life insurance business, a sum equivalent to one per cent of his total gross
premium written direct in India in any financial year commencing after the 31st day of March,
2000, not exceeding rupees ten crores;
(b) in the case of general insurance business, a sum equivalent to three per cent of his total gross
premium written in India, in any financial year commencing after the 31st day of March, 2000,
not exceeding rupees ten crores;
(c) in the case of re-insurance business, a sum of rupees twenty crores
(d) in case the business done or to be done is marine insurance only and relates exclusively
to country craft or its cargo or both, the amount shall be one hundred thousand rupees only.
An insurer shall not be registered for any class of insurance business in addition to the class or
classes for which , he is already registered until the full deposit required has been made.
Audit
The balance-sheet, profit and loss account, revenue account and profit and loss appropriation
account of every insurer, in respect of his insurance business, shall, unless subject to audit under the
Indian Companies Act, 1913 (7 of 1913), be audited annually by an auditor who shall in have the
powers of, exercise the functions vested in, and discharge the duties and be subject to the liabilities
and penalties imposed on, auditors of companies by section 145 of the Indian Companies Act, 1913.
Investment of assets
Every insurer shall invest and at all times keep invested assets equivalent to not less than the
sum of-
(a) the amount of his liabilities to holders of life insurance policies in India on account of matured
claims, and
(b) the amount required to meet the liability on policies of life insurance maturing for payment in
India, less-
(i) the amount of premiums which have fallen due to the insurer on such policies but have
not been paid and the days of grace for payment of which have not expired, and
(ii) any amount due to the insurer for loans granted on and within the surrender values of
policies of life insurance maturing for payment in India issued by him or by an insurer
whose business he has acquired and in respect of which he has assumed liability, in the
manner following, namely,
(a) twenty-five per cent of the said sum in Government securities,
(b) further sum equal to not less than twenty-five per cent of the said sum in
Government securities or other approved securities and
(c) the balance in any of the approved investments specified in any over investment.
Every insurer carrying on the business of life insurance, shall every year, within thirty-one days
from the beginning of the year submit to the authority a return showing as at 31stday of December of
the preceding year the assets held invested in accordance with section 27 and 27A and all other
particulars necessary to establish that the requirements of that section have been complied with, and
such return shall be certified by a principal officer of the insurer. Every such insurer shall also furnish,
within fifteen days from the last day of March , June and September , a return certified as aforesaid
showing as at the end of each of the said months the assets held invested in accordance with section
27.
Power to appoint staff
The Authority may appoint such staff, and at such places as it or he may consider necessary, for
the scrutiny of the returns, statements and information furnished by insurers under this Act and
generally to ensure the efficient performance of the functions of the Authority under this Act.
Registration of principal agents, chief agents and special agents

(1) The Authority or an officer authorized by it in this behalf shall in the prescribed manner and
on payment of the prescribed fee, which shall not be more than twenty-five rupees for a
principal agent or a chief agent and ten rupees for a special agent, register any person who
makes an application to him in the prescribed manner if,
(a) in the case of an individual, he does not suffer from any of the disqualifications
mentioned in sub-section (4) of Section 42, or

(b) in the case of a company or firm, any of its directors or partners does not
suffer from any of the said disqualifications, and a certificate to Act as a principal agent,
chief agent or special agent, as the case may be, for the purpose of procuring insurance
business shall be issued to him.
(2) A certificate issued under this section shall entitle the holder thereof to act as a principal
agent, chief agent, or special agent, as the case may be, for any insurer.
(3) A certificate issued under this section shall remain in force for a period of twelve months only
from the date of issue, but shall, on application made on this behalf, be renewed from year to
year on production of a certificate from the insurer concerned that the provisions of clauses (2)
and (3) of Part A of the Sixth Schedule in the case of a principal agent, the provisions of clauses
(2) and (4) of Part B of the said Schedule in the case of a chief agent, and the provisions of
clauses (2) and (3) of Part C of the said Schedule in the case of a special agent, have been
complied with, and on payment of the prescribed fee, which shall not be more than twenty-five
rupees, in the case of a principal agent or a chief agent, and ten rupees in the case of a special
agent, and an additional fee of the prescribed amount not exceeding five rupees by way of
penalty, in cases where the application for renewal of the certificate does not reach the issuing
authority before the date on which the certificate ceases to remain in force:
Provided that, where the applicant is an individual, he does not suffer from any of the
disqualifications mentioned in clauses (b) to (d) of sub-section (4) of section 42 and where the
applicant is a company or a firm, any of its directors or partners does not suffer from any of the
said disqualifications.
(4) Where it is found that the principal agent, chief agent or special agent being an individual is,
or being a company or firm contains a director or partner who is suffering from any of the
disqualifications mentioned in subsection (4) of section 42, without prejudice to any other
penalty to which he may be liable, the Authority shall, and where a principal agent, chief agent
or special agent has contravened any of the provisions of this Act may cancel the certificate
issued under this section to such principal agent, chief agent or special agent.
(5) The authority which issued any certificate under this section may issue a duplicate certificate
to replace a certificate lost, destroyed or mutilated on payment of the prescribed fee, which
shall not be more than two rupees.
(6) Any person who acts as a principal agent, chief agent or special agent, without holding a
certificate issued under this section to act as such, shall be punishable with fine which may
extend to five hundred rupees, and any insurer or any person acting on behalf of an insurer,
who appoints as a principal agent, chief agent or special agent any person not entitled to act as
such or transacts any insurance business in India through any such person, shall be punishable
with fine which may extend to one thousand rupees.
(7) Where the person contravening sub-section (6) is a company or a firm, then, without prejudice
to any other proceedings which may be taken against the company or firm, every director,
manager, secretary or any other officer of the company, and every partner of the firm who is
knowingly a party to such contravention shall be punishable with fine which may extend to five
hundred rupees.
(8) The provisions of sub-sections (6) and (7) shall not take effect until the expiry of six months
from the commencement of the Insurance (Amendment) Act, 1950.
(9) No insurer shall, on or after the commencement of the Insurance (Amendment) Act, 2002,
appointment or transacts any insurance business in India through any principal agent, chief
agent or special agent.
Regulation of employment of principal agents
(1) No insurer shall, after the expiration of seven years from the commencement of the Insurance
(Amendment) Act, 1950, appoint, or transact any insurance business in India, through a
principal agent.
(2) Every contract between an insurer and a principal agent shall be in writing and the terms
contained in Part A of the Sixth Schedule shall be deemed to be incorporated in, and form part
of, every such contract.
(3) No insurer shall, after the commencement of the Insurance (Amendment) Act, 1950 (47 of
1950), appoint any person as a principal agent except in a presidency-town unless the
appointment is by way of renewal of any contract subsisting at such commencement.
(4) Within sixty days of the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950),
every principal agent shall file with the insurer concerned a full list of insurance agents
employed by him indicating the terms of the contract between the principal agent and each of
such insurance agents, and, if any principal agent fails to file such a list within the period
specified, any commission payable to such principal agent on premiums received from the date
of expiry of the said period of sixty days until the date of the filing of the said list shall,
notwithstanding anything in any contract to the contrary, cease to be so payable.
(5) A certified copy of every contract as is referred to in sub-section (2) shall be furnished by the
insurer to the Authority within thirty days of his entering into such contract, and intimation of
any change in any such contract shall be furnished by the insurer with full particulars thereof to
the Authority within thirty days of the making of any such change.
(6) If the commission due to any insurance agent in respect of any general insurance business
procured by such agent is not paid by the principal agent for any reason, the insurer may pay
the insurance agent the commission so due and recover the amount so paid from the principal
agent concerned.
(7) Every contract as is referred to in sub-section (2), subsisting at the commencement of the
Insurance (Amendment) Act, 1950 (47 of 1950), shall, with respect to terms regarding
remuneration, be deemed to have been so altered as to be in accordance with the provisions of
sub-section (4) of section 40A.
(8) If any dispute arises as to whether a person is or was a principal agent the matter shall be
referred to the Authority, whose decision shall be final.
(9) Every insurer shall maintain a register in which the name and address of every principal agent
appointed by him, the date of such appointment and the date, if any, on which the
appointment ceased shall be entered.
Commission, brokerage or fee payable to intermediary or insurance intermediary

(1) No intermediary or insurance intermediary shall be paid or contract to be paid by way of
commission, fee or as remuneration in any form, an amount exceeding thirty per cent of the
premium payable as may be specified by the regulations made by the Authority, in respect of
any policy or policies effected through him:
Provided that the Authority may specify different amounts payable by way of commission, fee
or as remuneration to an intermediary or insurance intermediary or different classes of business
of insurance.
(2) Without prejudice to the provisions contained in this Act, the Authority may, by the
regulations made in this behalf, specify the requirements of capital, form of business and other
conditions to act as an intermediary or insurance intermediary.
Register of insurance agents
Every insurer and every person who acting on behalf of an insurer employs insurance agents
shall maintain a register showing the name and address of every insurance agent appointed by him and
the date on which his appointment began and the date, if any, on which his appointment ceased.
IRDA ACT 1999
Prior to 1999, insurance companies were owned by the Government. In 1999, the government of
India introduced the insurance regulatory and development authority act, thereby, deregulating the
insurance sector and allowing private companies into the insurance.
The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for the
establishment of an Authority to protect the interests of holders of insurance policies, to regulate,
promote and ensure orderly growth of the insurance industry and for matters connected therewith or
incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act,
1956 and the General insurance Business (Nationalization) Act, 1972
Extent and Commencement
The act extends to the whole of India and will come into force on such date as the Central
Government may, by notification in the Official Gazette.
The Act has defined certain terms, some of the most important ones are as follows: -
A)Appointed daymeans the date on which the Authority is established under the act.
B) Authoritymeans the IRDA established under this Act.
C)Interim insuranceregulatory authority means the insurance regulatory authority set up by
the central government through resolution no. 17(2)/94-InsV , dated the 23rdJanuary 1996.
D) Intermediary or insurance intermediary includes insurance brokers, reinsurance
brokers, insurance consultants , surveyors and loss assessors.
E) Member means whole time or a part time member of the authority and includes the
chairperson .
F)Notification means a notification published in the official gazette.
G) Regulationsmeans the regulations made by the authority.
Establishment and incorporation of authority (section 3)
With effect from such date as the Central Government may, by notification, appoint the
Insurance Regulatory and Develop is to be constituted. The Authority shall be a body corporate, having
perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire,
hold and dispose of property, and to contract and can be sue or be sued in its own name. The head
office of the Authority shall be at such place as the Central Government may decide from time to time
and it may establish offices at other places in India.
Composition of Authority
The Authority shall consist of the following members, namely
(a) a Chairperson;
(b) not more than five whole-time members;
(c) not more than four part-time members, to be appointed by the Central Government
Tenure of office of Chairperson and other members
The Chairperson and every other whole-time member shall hold office for a term of five years
from the date of appointment shall be eligible for reappointment:
However, no person shall hold office as a Chairperson after he has attained the age of sixty-five
years and no person shall hold office as such whole-time
member after he has attained the age of sixty-two years.
A part-time member shall hold office for a term not exceeding five years from the date of his
appointment and shall be eligible for reappointment
A membermay:
resign by giving in writing to the Central Government notice of not less than three months; or
be removed from his office in accordance with the provisions.
Removal from office
The Central Government may remove from office any member who: -
(a) is, or at any time has been, adjudged as insolvent;
(b) has become physically or mentally incapable of acting as a member;
(c) has been convicted of any offence which, in the opinion of the Central Government, involves
moral turpitude;
(d) has acquired such financial or other interest as is likely to affect prejudicially his functions as a
member;
(e) has so abused his position as to render his continuation in office detrimental to the public
interest.
Salary and allowances of Chairperson and members
The act u/s 7 prescribes-The salary and allowances payable to, and other terms and conditions
of service of, the members other than part-time members shall be such as may be prescribed. The
part-time members shall receive such allowances as may be prescribed. The salary, allowances and
other conditions of service of a member shall not be varied to his disadvantage after appointment in
respect of all administrative matters of the Authority.
Meeting of Authority
The Authority shall meet at such times and places, and shall observe such rules and procedures
in regard to transaction of business at its meetings (including quorum at such meetings) as may be
determined by regulations. The Chairperson, or if for any reason he is unable to attend a meeting of
the Authority, any other member chosen by the members present from amongst themselves at the
meeting shall preside at the meeting. All questions which come up before any meeting of the
Authority shall be decided by a majority vote of the members present and voting, and in the event of
equality of votes, the Chairperson, or in his absence, the person presiding shall have a second or
casting vote. The Authority may make regulations for the transaction of business at its meetings.
Duties, powers and functions of Authority

Subject to the provisions of this Act and any other law for the time being in force, the Authority
has the duty to regulate, promote and ensure orderly growth of the insurance business and re-
insurance business. The powers and functions of the Authority include:-
(a) to issue to the applicant a certificate of registration, to renew, modify, withdraw, suspend or
cancel such registration
b) protection of the interests of the policy-holders in matters concerning assigning of policy,
nomination by policy-holders, insurable interest, settlement of insurance claim, surrender value
of policy, and other terms and conditions of contracts of insurance
(c) specifying requisite qualifications code of conduct and practical training for intermediary or
insurance intermediaries and agents
(d) specifying the code of conduct for surveyors and loss assessors
(e) promoting efficiency in the conduct of insurance business
(f) promoting and regulating professional organizations connected with the insurance and
reinsurance business
(g) levying fees and other charges for carrying out the purposes of this Act
(h) calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries and
other organizations connected with the insurance business
(i) control and regulation of the rates, advantages, terms and conditions that may be offered by
insurers in respect of general insurance business not so controlled and regulated by the Tariff
Advisory Committee under section 64U of the Insurance Act, 1938
(j) prescribing the form and manner in which books of account shall be maintained and statement
of accounts will be rendered by insurers and other insurance intermediaries
(k) Regulating investment of funds by insurance companies
(l) regulating maintenance of margin of solvency
(m) adjudication of disputes between insurers and intermediaries or insurance intermediaries
(n) supervising the functioning of the Tariff Advisory Committee
(o) specifying the percentage of premium income of the insurer to finance schemes for promoting
and regulating professional organizations
(p) specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector
(q) exercising such other powers as may be prescribed
Fund
There shall be constituted a fund to be called "The Insurance Regulatory and Development
Authority Fund" is to be established and the following sums will be credited thereto:
(a) All Government grants, fees and charges received by the Authority
(b) All sums received by the Authority from such other source as may be decided upon by the
Central Government
(c) The percentage of prescribed income received from the insurer.
The Fund shall be applied for meeting the following expenses:
(a) the salaries, allowances and other remuneration of the members, officers and other
employees of the Authority
(b) the other expenses of the Authority in connection with the discharge of its functions and for
the purposes of this Act.
Accounts and audit
The Authority shall maintain proper accounts and other relevant records and prepare an annual
statement of accounts in such form as may be prescribed by the Central Government in consultation
with the Comptroller and Auditor General of India. The accounts of the Authority shall be audited by
the Comptroller and Auditor General of India at such intervals as may be specified by him and any
expenditure incurred in connection with such audit shall be payable by the Authority to the
Comptroller and Auditor General of India. The Comptroller and Auditor-General of India and other
person appointed by him in connection with the audit of the accounts of the Authority shall have the
same rights and privileges and authority in connection with such audit as the Comptroller and Auditor
General generally has in connection with the audit of the Government accounts and, in particular,
shall have the right to demand the production of books, accounts, connected vouchers and other
documents and papers and to inspect any of the officers of the Authority. The accounts of the
Authority as certified by the Comptroller and Auditor General of India or any other person appointed
by him in this behalf together with the audit report thereon shall be forwarded annually to the Central
Government and that Government shall cause the same to be laid before each House of Parliament.
Powers of Central Government
Under the act
1) Power to issue directions - The Authority shall, in exercise of its powers or the
performance of its functions under this Act, be bound by such directions on questions of policy,
other than those relating to technical and administrative matters, as the Central Government
may give in writing to it from time to time
2) Power to supersede Authority -If at any time the Central Government is of the
opinion:-
(a) that, on account of circumstances beyond the control of the Authority, it is unable to
discharge the functions or perform the duties imposed on it by or under the provisions of
this Act: or
(b) that the Authority has persistently defaulted in complying with any direction given by
the Central Government under this Act or in the discharge of the functions or
performance of the duties imposed on it by or under the provisions of this Act and as a
result of such default the financial position of the Authority or the administration of the
Authority has suffered; or
(c) that circumstances exist which render in necessary in the public interest so to do, the
Central Government may, by notification and for reasons to be specified therein,
supersede the Authority for such period, not exceeding six months, as may be specified
in the notification and appoint a person to be the Controller of Insurance
The Central Government shall cause a copy of the notification issued and a full report of any
action taken under this section and the circumstances leading to such action to be laid before each
House of Parliament at the earliest.
3) Power to make rules - The Central Government may, by notification, make rules for
carrying out the purposes of this Act. Such rules may provide for all or any of the following
matters, namely:
(a) the salary and allowances payable to and other conditions of service of the members
other than part-time members
(b) the allowances to be paid to the part-time members
(c) such other powers that may be performed by the Authority
(d) the form of annual statement of accounts to be prepared by the Authority
(e) the time at, the form and the manner in which returns and statements and particulars
are to be furnished to the Central Government
(f) the matters on which the Insurance Advisory Committee shall advise the authority
(g) any other matter which is to be, or may be, prescribed, or in respect of which provision
is to be or may be made by rules.
4) Power to remove difficulties - If any difficulty arises in giving effect to the provisions
of this act, the central government may, by order published in the official gazette, make such
provisions not inconsistent with the provisions of this act as may appear to be necessary for
removing the difficulty
5) Grants by central government -The central government may, after due appropriation
made by parliament by the law in this behalf, make to the authority grants of such sums of
money as the government may think fit for being utilised for the purposes of this act.
Furnishing of returns, etc., to the Central Government
The Authority must furnish to the Central Government at such time and in such form and
manner as may be prescribed, or as the Central Government may direct, to furnish such returns and
statements and such particulars in regard to any proposed or existing programme for the promotion
and development of the insurance industry as the Central Government may, from time to time,
require.
The Authority must, within nine months after the close of each financial year, submit to the
Central Government a report giving a true and full account of its activities including the activities for
promotion and development of the insurance business during the previous financial year. Copies of the
reports must be laid, as soon as may be after they are received, before each House of Parliament.
The Chairperson, members, officers and other employees of the Authority shall in this regard be
deemed to be public servants.
Delegation of powers
The Authority may, by general or special order in writing, delegate to the Chairperson or any
other member or officer of the Authority, subject to such conditions, if any, as may be specified in the
order such of its powers and functions under this Act as it may deem necessary. The Authority may, by
a general or special order in writing, also form Committees of the members and delegate to them the
powers and functions of the Authority as may be specified by the regulations.
Establishment of Insurance Advisory Committee
The Authority may, by notification, establish with effect from such date as it may specify in
such notification, a Committee to be known as the Insurance Advisory Committee. The Insurance
Advisory Committee shall consist of not more than twenty-five members excluding ex officio members
to represent the interests of commerce, industry, transport, agriculture, consumer forum, surveyors,
agents, intermediaries, organizations engaged in safety and loss prevention, research bodies and
employees' association in the insurance sector. The Chairperson and the members of the Authority
shall be the ex officio Chairperson and ex officio members of the Insurance Advisory Committee. The
objects of the Insurance Advisory committee shall be to advise the Authority on matters relating to
the making of the regulations. The Insurance Advisory Committee may advise the Authority on such
other matters as may be prescribed.
Penalty for default in complying with, or act in contravention of, this Act
lf any person, who is required under this Act, or rules or regulations made there under,-
(a) to furnish any document, statement, account, return or report to the Authority, fail to furnish
the same; or
(b) to comply with the directions, fails to comply with such directions;
(c) to maintain solvency margin, fails to maintain such solvency margin;
(d) to comply with the directions on the insurance treaties, fails to comply with sue directions on
the insurance treaties, he shall be liable to a penalty not exceeding five lakhs rupees for each
such failure and punishable with fine.
lf a person makes a statement, or furnishes any document, statement, account, return or report
which is false and which he either knows or believes to be false or does not believe to be true,-
(a) he shall be liable to a penalty not exceeding five lakhs rupees for each such failure; and
(b) he shall be punishable with imprisonment which may extend to three years or with fine for
each such failure.
Offences by companies
Where any offence under this Act has been committed by a company, every person who, at the
time the offence was committed, was in charge of, and was responsible to, the Company for the
conduct of the business of the company as well as the company shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and punished accordingly.
Power to make regulations
The authority may, in consultation with the insurance advisory committee, by notification,
make regulations, consistent with this act and providing for all or any of the following matters
The time and places of meetings of the authority and the procedure to be followed at such
meetings including the quorum necessary for the transaction of business.
The transaction of business at its meeting under section 10(4).
The terms and conditions of service of officers and other employees of the authority under
subsection (2) of section 12.
The powers and functions which may be delegated to committees of the members under
subsection (2)of section 23.
Any other matter which is required to be, or may be, specified by regulations or in respect of
which provisions is to be or may be made by regulations.

Rules and regulations to be laid before parliament
Every rule and every regulation under this act shall be laid, as soon as may be after it is made,
before each house of parliament, while it is in session, for a total period of thirty days, which may be
comprised in one session oe in two or more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions aforesaid, both houses agree in making
any modifications in the rule or regulations or both houses agree that the rule or regulations should
not be made, the rule or regulation shall thereafter have effect only in such modified form or be no
effect, as the case may be.
5 LESSON 5 AGENCY LAW

LESSON 5
AGENCY LAW
- Meenu
At times all of us act as principals and agents. If I my friend ask me to deposit his water bill,
then he is acting as principal and I am as agent. Agency Law is contained in Chapter X {Secs182 to 238}
of the Indian Contact Act 1872.
Agent" and "principal:
An "agent" is a person employed to do any act for another, or to represent another in dealings
with third persons. The person for whom such act is done, or represented, is called the "principal".
{sec182}.
Who may employ agent: Any person who is of the age of majority according to the law to which
he is subject, and who is of sound mind, may employ an agent.
Who may be an Agent:
As between the principal and third persons, any person may become an agent, but no person
who is not of the age of majority and sound mind can become an agent, so as to be responsible to the
principal according to the provisions in that behalf herein contained.
Consideration not necessary:
No consideration is necessary to create an agency.
Agent's authority may be express or implied:
The authority of an agent may be express or implied.
Definitions of express and implied authority:
An authority is said to be express when it is given by words spoken or written. An authority is
said to be implied when it is to be inferred from the circumstances of the case; and things spoken or
written, or the ordinary course of dealing, may be accounted circumstances of the case.
Illustration
Aman owns a shop in Serampur, living himself in Calcutta, and visiting the shop occasionally.
Bharat manages the shop, and he is in the habit of ordering goods from Chaman in the name of Aman
for the purposes of the shop, and of paying for them out of Aman's funds with Aman's knowledge.
Bharat has an implied authority from Aman to order goods from Chaman in the name of Aman for the
purpose of the shop.
Extent of agent's authority:
An agent, having an authority to do an act, has authority to do every lawful thing, which is
necessary in order to do such act. An agent having an authority to carry on a business has authority to
do every lawful thing necessary for the purpose, or usually done in the course, of conducting such
business.

Illustrations
(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any
legal process necessary for the purpose of recovering the debt, and may give a valid discharge
for the same.
(b) A constitutes B his agent to carry on his business of a shipbuilder. B may purchase timber and
other materials, and hire workmen, for the purpose of carrying on the business.
Agent's authority in an emergency:
An agent has authority, in an emergency, to do all such acts for the purpose of protecting his
principal from loss and would be done by a person or ordinary prudence, in his own case, under similar
circumstances.
SUB AGENT
When agent cannot delegate
An agent cannot lawfully employ another to perform acts, which he has expressly, or impliedly
undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or, from
the nature of agency, a sub-agent must, be employed.
"Sub-agent" defined
A "sub-agent" is a person employed by, and acting under the control of, the original agent in the
business of the agency.
Representation of principal by sub-agent properly appointed
Where a sub-agent is properly appointed, the principal is, so far as regards third persons,
represented by the sub-agent, and is bound by and responsible for his acts, as if he were an agent
originally appointed by the principal.
Agent's responsibility for sub-agents: The agent is responsible to the principal for the acts of the
sub-agent.
Sub-agent's responsibility: The sub-agent is responsible for his acts to the agent, but not to the
principal, except in case of fraud or willful wrong.
Agent's responsibility for sub-agent appointed without authority
Where an agent, without having authority to do so, has appointed a person to act as a sub-
agent, the agent stands towards such person in the relation of a principal to an agent, and is
responsible for his acts both to the principal and to third person; the principal is not represented, by
or responsible for the acts of the person so employed, nor is that person responsible to the principal.
Relation between principal and person duly appointed by agent to act in business
of agency
When an agent, holding an express or implied authority to name another person to act for the
principal in the business of the agency, has named another person accordingly, such person is not a
sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to
him.
Agent's duty in naming such person
In selecting such agent for his principal, an agent is bound to exercise the same amount of
discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not
responsible to the principal for the acts of negligence of the agent so selected.
Illustrations
A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of good reputation to
choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be
unseaworthy and is lost. B is not, but the surveyor is, responsible to A.
Right of person as to acts done for him without his authority-effect of Ratification
Where acts are done by one person on behalf of another, but without his knowledge or
authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will
follow as if they had been performed by his authority.
Ratification may be expressed or implied
Ratification may be expressed or may be implied in the conduct of the person on whose behalf
the acts are done.
Illustrations
(a) A, without authority, buys goods, for B. Afterwards B sells them to C on his own account; B's
conduct implies a ratification of the purchase made for him by A.
(b) A, without B's authority, lends B's money to C. Afterwards B accepts interest on the money
from C. B's conduct implies a ratification of the loan.
Knowledge requisite for valid ratification

No valid ratification can be made by a person whose knowledge of the facts of the case is
materially defective.
Effect of ratifying unauthorized act forming part of a transaction
A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction
of which such act formed a part.
Ratification of unauthorized act cannot injure third person
An act done by one person on behalf of another, without such other person's
authority, which, if done with authority would have the effect of subjecting a third person to
damages, or of terminating any right to interest of a third person cannot, by ratification, be made to
have such effect.
REVOCATION OF AUTHORITY
Termination of agency
An agency is terminated by the principal revoking his authority, or by the agent renouncing the
business of the agency; or by the business of the agency being completed; or by either the principal or
agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under
the provisions of any Act for the time being in force for the relief of insolvent debtors.
Termination of agency, where agent has an interest in subject-matter
Where the agent has himself an interest in the property, which forms the subject matter of the
agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of
such interest.
Illustration
A, gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to
him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.
When principal may revoke agent's authority

The principal may, save as is otherwise provided by the last preceding section, revoke the
authority given to his agent at any time before the authority has been exercised, so as to bind the
principal.
Revocation where authority has been partly exercised
The principal cannot revoke the authority given to his agent after the authority has been partly
exercised; so far as regards such acts and obligations as arise from acts already done in the agency.
Compensation for revocation by principal, or renunciation by agent where there is an express or
implied contract that the agency should be continued for any period of time, the principal must make
compensation to the agent, or the agent to the principal, as the case may be, for any previous
revocation or renunciation of the agency without sufficient cause.
Notice of revocation or renunciation
Reasonable notice must be given of such revocation or renunciation, otherwise the damage
thereby resulting to the principal or the agent, as the case may be, must be made good to the one by
the other.
Revocation and renunciation may be expressed or implied
Revocation or renunciation may be expressed or may be implied in the conduct of that principal
or agent respectively.
Illustration
A empowers B to let A's house. Afterwards A lets it himself. This is an implied revocation of B's
authority.
When termination of agent's authority takes effect as to agent, and as to third
persons
The termination of the authority of an agent does not, so far as regards the agent, take effect
before it becomes known to him, or, so far as regards third persons, before it becomes known to
them.
Agent's duty on termination of agency by principal's death or insanity
When an agency is terminated by the principal dying or becoming of unsound mind, the agent is
bound to take on behalf of the representative, of his late principal, all reasonable steps for the
protection and reservation of the interests entrusted to him.
Termination of sub-agent's authority
The termination of the authority of an agent causes the termination (subject to the rules herein
contained regarding the termination of an agent's authority) of the authority of all sub-agents
appointed by him.
AGENT'S DUTY TO PRINCIPAL
Agent's duty in conducting principal's business
An agent is bound to conduct the business of his principal according to the directions given by
the principal, or in the absence of any such directions according to the customs, which prevails in
doing business of the same kind at the place where the agent conducts such business. When the agent
acts otherwise, if any loss be sustained, he must make it good to his principal and if any profit
accrues, he must account for it.
Skill and diligence required from agent
An agent is bound to conduct the business of the agency with as much skill as is generally
possessed by person engaged in similar business unless the principal has notice of his want of skill. The
agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to
make compensation to his principal in respect of the direct consequences of his own neglect, want of
skill, or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by
such neglect, want of skill, or misconduct.
Agent's accounts
An agent is bound to render proper accounts to his principal on demand.
Agent's, duty to communicate with principal

It is the duty of an agent in case of difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions.
Right of principal when agent deals, on his own account, in business of agency without
principal's consent If an agent deals on his own account in the business of the agency, without first
obtaining the consent of his principal and acquainting him with all material circumstances, which have
come to his own knowledge on the subject, the principal may repudiate the transaction, if the case
shows, either that any material fact has been dishonestly concealed from him by the agent, or that
the dealings of the agent have been disadvantageous to him.
Illustrations
(a) A direct B to sell A's estate. B buys the estate for himself in the name of C. A, on discovering
that B has bought the estate for himself, may repudiate the sale, if he can show that B has
dishonestly concealed any material fact, or that the seals has been disadvantageous to him.

(b) A directs B to sell A's estate. B, on looking over the estate before selling it, finds a mine on the
estate which is unknown to A. B informs A that he wished to buy the estate for himself but
conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the
mine. A, on discovering that B knew of the mine at the time he bought the estate, may either
repudiate or adopt the sale at his option.
Principal's right to benefit gained by agent dealing on his own account in business
of agency
If an agent, without the knowledge of his principal, deals in the business of the agency on his
own account instead of on account to his principal, the principal is entitled to claim from the agent
any benefit which may have resulted to him from the transaction.
Agent's right of retainer out of sums received on principal's account
An agent may retain, out of any sums received on account of the principal in the business of the
agency, all moneys due to himself in respect of advances made or expenses properly incurred by him
in conducting such business, and also such remuneration as may be payable to him for acting as agent.

Agent's duty to pay sums received for principal

Subject to such deductions, the agent is bound to pay to his principal all sums received on his
account.
When agent's remuneration becomes due
In the absence of any special contract, payment for the performance of any act is not due to
the agent until the completion of such act; but an agent may detain moneys received by him on
account of goods sold, although the whole of the goods consigned to him for sale may not have been
sold, or although the sale may not be actually complete.
Agent not entitled to remuneration for business misconduct
An agent, who is guilty of misconduct in the business of the agency, is not entitled to any
remuneration in respect of that part of the business, which he has misconduct.
Illustrations
A employs B to recover 1,000 rupees from C. Through B's misconduct the money is not recovered. B
is entitled to no remuneration for his services and must make good the loss.
Agent's lien on principal's property
In the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and
other property, whether movable or immovable of the principal received by him, until the amount due
to himself for commission, disbursements and services in respect of the same has been paid or
accounted for to him.
PRINCIPAL'S DUTY TO AGENT
Agent to be indemnified against consequences of lawful acts
The employer of an agent is bound to indemnify him against the consequences of all lawful acts
done by such agent in exercise of the authority conferred upon him.
Agent to be indemnified against consequences of acts done in good faith
Where one person employs another to do an act, and the agent does the act in good faith, the
employer is liable to indemnify the agent against the consequences of that act, though it may cause
an injury to the rights of third persons.
Non-liability of employer of agent to do a criminal act
Where one person employees another to do an act which is criminal, the employer is not liable
to the agent, either upon an express or an implied promise to indemnify him against the consequences
of that Act.
Illustrations
A employs B to beat C, and agrees to indemnify him against all consequences of the act. B
thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for
those damages.
Compensation to agent for injury caused by principal's neglect
The principal must make compensation to his agent in respect of injury caused to such agent by
the principal's neglect or want of skill.
Illustration
A employs B as a bricklayer in building a house, and put up the scaffolding himself. The scaffolding
is unskillfully put up, and B is in consequence hurt. A must make compensation to B.
EFFECT OF AGENCY ON CONTRACTS WITH THIRD PERSONS

Enforcement and consequences of agent's contract
Contracts entered into through an agent, and obligations arising from acts done by an agent,
may be enforced in the same manner, and will have the same legal consequences as if the contracts
had been entered into the acts done by the principal in person.
Illustrations
(a) A buys goods from B, knowing that he is an agent for their sale, but not knowing who the
principal is. B's principal is the person entitled to claim from A, the price of the goods, and A
cannot, in a suit by the principal, set-off against that claim a debt due to himself from B.
(b) A, being B's agent; with authority to receive money on his behalf, receives from C a sum of
money due to B. C is discharged of his obligation to pay the sum in question to B.
Principal how far bound, when agent exceeds authority
When an agent does more than he is authorized to do, and when the part of what he does,
which is within his authority, can be separated from the part, which is beyond his authority, so much
only of what he does as is within his authority is binding as between him and his principal.
Principal not bound when excess of agent's authority is not separable
Where an agent does more than he is authorized to do, and what he does beyond the scope of
his authority cannot be separated from what is within it, the principal is not bound to recognize the
transaction.
Illustration
A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for a sum of 6,000
rupees. A may repudiate the whole transaction.
Consequences of notice given to agent
Any notice given to or information obtained by the agent, provided it be given or obtained in
the course of the business transacted by him for the principal, shall, as between the principal and
third parties, have the same legal consequences as if it had been given to or obtained by the principal.
Illustrations
A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was so
employed a servant of C, and then learnt that the goods really belonged to D, but B is ignorant of
that fact. In spite of the knowledge of his agent, B may set-off against the price of the goods a
debt owing to him from C.
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
In the absence of any contract to that effect an agent cannot personally enforce contracts
entered into by him on behalf of his principal, nor is he personally bound by them.
Presumption of contract to the contrary: Such a contract shall be presumed to exit in the
following cases-
(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad;
(2) Where agent does not disclose the name of his principal;
(3) Where the principal, though disclosed, cannot be sued.
Right of parties to a contract made by agent not disclosed

If an agent makes a contract with a person who neither, knows nor has reason to suspect, that
he is an agent, his principal may require the performance of the contract; but the other contracting
party has, as against the principal, the same right as he would have had as against if the agent had
been the principal.
If the principal discloses himself before the contract is completed, the other contracting party
may refuse to fulfill the contract, if he can show that, if he had known who was the principal in the
contract, or if he had known that the agent was not a principal, he would not have entered into the
contract.
Performance of contract with agent supposed to be principal
Where one man makes a contract with another, neither knowing nor having reasonable ground
to suspect that the other is an agent, the principal, if he requires the performance of the contract,
can only obtain such performance subject to the right and obligations subsisting between the agent
and the other party of the contract.
Liability of principal inducing belief that agent's unauthorized acts were
authorized
When an agent has, without authority, done acts or incurred obligations to third person on
behalf of his principal, the principal is bound by such acts or obligations, if he has by his word or
conduct induced such third person to believe that such acts and obligations were within the scope of
the agent's authority.
Illustrations
(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C,
being ignorant of B's instruction, enters into a contract with B to buy the goods at a price lower
than the reserved price. A is bound by the contract
(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of
private order from A. The sale is good.
Effect, on agreement, of misrepresentation or fraud by agent
Misrepresentation made or fraud committed, by agent acting in the course of their business for
their principals, have the same effect on agreements made by such agents as if such
misrepresentations of frauds had been made or committed by the principals; but misrepresentations
made, or frauds committed, by agents, in matters which do not affect their authority, do not affect
their principals
Illustrations
(a) A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation, which
he was not authorized by B to make. The contract is voidable, as between B and C, at the
option of C.
(b) A, the captain of B's ship, signs bills of lading without having received on board the goods
mentioned therein. The bills of lading are void as between B and the pretended consignor.

6 LESSON 6 CONSUMER PROTECTION ACT,
1986
LESSON 6
CONSUMER PROTECTION ACT, 1986
- Meenu
The Consumer Protection Act was passed by the Parliament in 1986 and it came into force from 1987. Its
purposes to protect consumers against defective goods, unsatisfactory services, unfair trade practices, etc. The Act
provides for three-tier machinery consisting of District Forum, State Commission and National Commission. It also
provides for the formation protection councils in every state.
The consumers can file their complaints at the appropriate forum for quick redressal. The complaint may relate to
defective refrigerator or TV set, non-functional telephone, lack of due cares in medical treatment and so on. Any service
or product given free of charge is not covered by the Act.
Definitions of Important Terms
Before studying the provisions of the CPA, it is necessary to understand the terms used in the Act. Let us
understand some of the more important definitions.
Complainant means:
1. A consumer; or
2. Any voluntary consumer association registered under the Companies Act, 1956 or under any other law for the
time being in force; or
3. The Central Government or any State Government, who or which makes a complaint; or one or more consumers
where there are numerous consumers having the same interest.
Complaint means any allegation in writing made by a complainant that:
1. An unfair trade practice or a restricted trade practice has been adopted by any trader.
2. The goods bought by him or agreed to be bought by him suffer from one more defects.
3. The services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in any respect.
4. The trader has charged for the goods mentioned in the complaint a price excess. of the price fixed by or under
any law for the time being in force or displayed on the goods or any package containing such goods.
Goods which will be hazardous to life and safety when used, are being offered for sale to the public in
contravention of the provisions of any law for the time being in force, requiring traders to display information in regard to
the contents, manner and effect of use of such goods; with a view to obtaining any relief provided by law under the CPA.
Consumer means any person who:
1. buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under
any system of deferred payment (for example hire purchase or installment sales) and includes any other user of
such goods when such use is made with the approval of the buyer, but does not include a person who obtains
such goods for resale or for any commercial purpose; or
2. hires or avails of any services for a consideration which has been paid or promised, or partly paid and partly
promised, or under any system of deferred payment and includes any beneficiary of such services when such
services are availed of with the approval of the first mentioned person
For the purposes of this definition "commercial purpose" does not include use by a consumer of goods bought and
used by him exclusively for the purpose of earning his livelihood by means of self-employment.
Goods mean goods as defined in the Sale of Goods Act, 1930. Under that act, goods means every kind of movable
property other than actionable claims and money and includes stocks and shares, growing crops, grass and things
attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
Service is defined to mean service of any description which is made available to potential users and includes the
provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other
energy, board or lodging or both, housing construction, entertainment, amusement or the purveying of news or other
information but does not include the rendering of any service free of charge or under a contract of personal service.
Consumer dispute means dispute where the person against whom a complaint has been made, denies or disputes the
allegation contained in the complaint.
Restrictive Trade Practice means any trade practice which requires a consumer to buy, hire, or avail of any good or as
the case may be, services as a condition precedent for buying, hiring or availing of any other goods or services.
Unfair Trade Practice means unfair trade practice as defined under the Monopolies and Restrictive Trade Practices Act.
The MRTP act has defined certain practices to be unfair trade practices.
Defect means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is
required to be maintained by or under any law for the time being in force or under any contract, express or implied, or as
is claimed by the trade in any manner whatsoever in relation to any goods.
Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality, nature and manner of
performance which is required to be maintained by or under any law for the time being in force or has been undertaken to
be performed by a person in pursuance of a contract or otherwise in relation to any service. A consumer is a user of
goods and services. Any person paying for goods and services, which he uses, is entitled to expect that the goods and
services be of a nature and quality promised to him by the seller.
The earlier principle of "Caveat Emptor" or "let the buyer beware" which was prevalent has given way to the
principle of "Consumer is King". The origins of this principle lie in the fact that in today's mass production economy where
there is little contact between the producer and consumer, often sellers make exaggerated claims and advertisements,
which they do not intend to fulfill. This leaves the consumer in a difficult position with very few avenues for redressal. The
onset on intense competition also made producers aware of the benefits of customer satisfaction and hence by and large,
the principle of consumer is king" is now accepted.
Objects of the Consumer Protection Act, 1986
The preamble to the Act states that the Act is legislated to provide for better protection of the interests of
consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for
the settlement of consumer's disputes and for matters connected therewith. The CPA extends to the whole of India except
the State of Jammu and Kashmir and applies to all goods and services unless otherwise notified by the Central
Government.
The basic rights of consumers as per the Consumer Protection Act (CPA) are:
1. Right to safety.
2. Right to be informed.
3. Right to choose.
4. Right to representation (or to be heard).
5. Right to seek redressal.

6. Right to consumer education.
1. Right to Safety :
It is the consumer right to be protected against goods and services which is hazardous to health or life.
2. Right to be Informed:
The consumer has the right to be informed about the quality, quantity, purity, standard and price of goods he
intends to purchase. Therefore, the manufacture must mention complete information about the product, its
ingredients, date of manufacture, price, precaution of use, etc. on the label and package of the product.
3. Right to Choose:
The consumer should be assured of freedom to choose from a variety of products at competitive prices. Every
consumer wants to buy a product on his free will. There should be free competition in the market so that the
consumer may make the right choice in satisfying his needs.
4. Right to Representation (or to be Heard):
The consumer has right to register dissatisfaction with any product and get his complaint heard. Most of the
reputed firms have set up consumer service cells to listen to the consumers complaint and take appropriate steps
to redress their grievances.
5. Right to Seek Redressal:
It is the right to seek redressal against any defect in goods or unfair trader suffered by the consumer. If the
quality and performance of a product falls short of sellers claims, the consumer has a right to certain remedies.
The Consumer Protection Act requires that the product must be repaired, replaced or taken back by the seller as
provided under the contract between the buyer and the seller.
6. Right to Consumer Education:
It means right of acquiring knowledge and being a well-informed consumer throughout his life. He should also be
made aware of his rights and the remedies available through publicity in the mass media.
Consumer Responsibilities
(i) To provide adequate information to the seller: The consumer has the responsibility to provide adequate
information about his needs and expectation to the sellers.
(ii) To exercise caution in purchasing: The consumer must try to get full information on the quality, design,
utility, quantity, price, etc. of the product before purchasing it.
(iii) To insist on cash memo or receipt: The consumer must get a cash memo or receipt as a proof of purchase of
goods from the seller. This would help him in making a complaint to the seller in case of any defect in the goods.
(iv) To file complaint against genuine grievance: The consumer must file a complaint with the seller or
manufacturer about any defects or shortcoming in the products and services.
(v) To be quality conscious: The consumer should never compromise on the quality of goods. While making
purchases, the consumers must look for standard quality certification marks such as ISI, Agmark, Woolmark,
FPO, etc. For example, electric iron must carry ISI mark.
Redressal Machinery under the Act
Consumer Protection Councils
The interests of consumers are enforced through various authorities set up under the CPA. The CPA provides for
the setting up of the Central Consumer Protection Council, the State Consumer Protection Council and the District Forum.
Central Consumer Protection Council

The Central Government has set up the Central Consumer Protection Council, which consists of the following
members:
(a) The Minister in charge of Consumer Affairs in the Central Government who is its Chairman, and
(b) Other official and non-official members representing varied interests. The Central council consists of 150
members and its term is 3 years. The Council meets as and when necessary but at least one meeting is held in a
year.
State Consumer Protection Council
The State Council consists of:
(a) The Minister in charge of Consumer Affairs in the State Government who is its Chairman, and
(b) Other official and non-official members representing varied interests. The State Council meets as and when
necessary but not less than two meetings must be held every year.
Redressal Machinery under the Act
The CPA provides for a 3-tier approach in resolving consumer disputes. The District Forum has jurisdiction to
entertain complaints where the value of goods / services complained against and the compensation claimed is less than
Rs. 20 lakhs, the State Commission for claims exceeding Rs. 20 lakhs but not exceeding Rs. 1crore and the National
Commission for claims exceeding Rs.1 crore.
District Forum
Under the CPA, the State Government has to set up a district Forum in each district of the State. The government
may establish more than one District Forum in a district if it deems fit.
Each District Forum consists of:
(a) A person who is, or who has been, or is qualified to be, a District Judge who shall be its President
(b) Two other members who shall be persons of ability, integrity and standing and have adequate knowledge or
experience of or have shown capacity in dealing with problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one of whom shall be a woman.
Appointments to the State Commission shall be made by the State Government on the recommendation of a
Selection Committee consisting of the President of the State Committee, the Secretary - Law Department of the State and
the secretary in charge of Consumer Affairs
Every member of the District Forum holds office for 5 years or up to the age of 65 years, whichever is earlier and
is not eligible for re-appointment. A member may resign by giving notice in writing to the State Government whereupon
the vacancy will be filled up by the State Government.
The District Forum can entertain complaints where the value of goods or services and the compensation, if any,
claimed is less than rupees twenty lakhs. However, in addition to jurisdiction over consumer goods services valued upto
Rs.20 lakhs, the District Forum also may pass orders against traders indulging in unfair trade practices, sale of defective
goods or render deficient services provided the turnover of goods or value of services does not exceed rupees twenty
lakhs.
A complaint shall be instituted in the District Forum within the local limits of whose jurisdiction-
(a) The opposite party or the defendant actually and voluntarily resides or carries on business or has a branch office
or personally works for gain at the time of institution of the complaint; or
(b) Any one of the opposite parties (where there are more than one) actually and voluntarily resides or carries on
business or has a branch office or personally works for gain, at the time of institution of the complaint provided
that the other opposite party/parties acquiescence in such institution or the permission of the Forum is obtained in
respect of such opposite parties; or
(c) The cause of action arises, wholly or in part.

State Commission
The Act provides for the establishment of the State Consumer Disputes Redressal Commission by the State
Government in the State by notification.
Each State Commission shall consist of:
(a) A person who is or has been a judge of a High Court appointed by State Government (in consultation with the
Chief Justice of the High Court ) who shall be its President;
(b) Two other members who shall be persons of ability, integrity, and standing and have adequate knowledge or
experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one of whom must be a woman.
Every appointment made under this is made by the State Government on the recommendation of a Selection
Committee consisting of the President of the State Commission, Secretary -Law Department of the State and Secretary in
charge of Consumer Affairs in the State.
Every member of the District Forum holds office for 5 years or upto the age of 65 years, whichever is earlier and is
not eligible for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the
vacancy will be filled up by the State Government.
The State Commission can entertain complaints where the value of goods or services and the compensation, if any,
exceeds Rs. 20 lakhs but does not exceed Rs. 1crore.
The State Commission also has the jurisdiction to entertain appeal against the orders of any District Forum within the
State
The State Commission also has the power to call for the records and appropriate orders in any consumer dispute
which is pending before or has been decided by any District Forum within the State if it appears that such District Forum
has exercised any power not vested in it by law or has failed to exercise a power rightfully vested in it by law or has acted
illegally or with material irregularity.
National Commission
The Central Government provides for the establishment of the National Consumer Disputes Redressal
Commission. The National Commission shall consist of:-
(a) A person who is or has been a judge of the Supreme Court, to be appoint by the Central Government (in
consultation with the Chief Justice of India ) who be its President;
(b) Four other members who shall be persons of ability, integrity and standing and have adequate knowledge or
experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce,
accountancy, industry, public affairs or administration, one of whom shall be a woman
Appointments shall be by the Central Government on the recommendation of a Selection Committee consisting of
a Judge of the Supreme Court to be nominated by the Chief Justice of India, the Secretary in the Department of Legal
Affairs and the Secretary in charge of Consumer Affairs in the Government of India.
Every member of the National Commission shall hold office for a term of five years or upto seventy years of age,
whichever is earlier and shall not be eligible for reappointment.
The National Commission shall have jurisdiction:
(a) to entertain complaints where the value of the goods or services and the compensation, if any, claimed exceeds
rupees one crores:
(b) to entertain appeals against the orders of any State Commission; and
(c) to call for the records and pass appropriate orders in any consumer dispute which is pending before, or has been
decided by any State Commission where it appears to the National Commission that such Commission has
exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in
the exercise of its jurisdiction illegally or with material irregularity.
Complaints may be filed with the District Forum by:
1. The consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service
provided or agreed to be provided
2. Any recognized consumer association, whether the consumer to whom goods sold or delivered or agreed to be
sold or delivered or service provided or agreed to be provided, is a member of such association or not
3. One or more consumers, where there are numerous consumers having the same interest with the permission of
the District Forum, on behalf of or for the benefit of, all consumers so interested
4. The Central or the State Government. On receipt of a complaint, a copy of the complaint is to be referred to the
opposite party, directing him to give his version of the case within 30 days. This period may be extended by
another 15 days. If the opposite party admits the allegations contained in the complaint, the complaint will be
decided on the basis of materials on the record. Where the opposite party denies or disputes the allegations or
omits or fails to take any action to represent his case within the time provided,
The dispute will be settled in the following manner:
In case of dispute relating to any goods: Where the complaint alleges a defect in the goods which cannot be
determined without proper analysis or test of the goods, a sample of the goods shall be obtained from the complainant,
sealed and authenticated in the manner prescribed for referring to the appropriate laboratory for the purpose of any
analysis or test whichever may be necessary, so as to find out whether such goods suffer from any other defect. The
appropriate laboratory' would be required to report its finding to the referring authority, i.e. the District Forum or the
State Commission within a period of forty- five days from the receipt of the reference or within such extended period as
may be granted by these agencies.
Limitation period for filing of complaint:
The District Forum, the State Commission, or the National Commission shall not admit a complaint unless it is
filed within two years from the date on which the cause of action has arisen. However, where the complainant satisfies
the District Forum / State Commission, that he had sufficient cause for not filing the complaint within two years; such
complaint may be entertained by it after recording the reasons for condoning the delay.
Powers of the Redressal Agencies:
The District Forum, State Commission and the National Commission are vested with the powers of a civil court
under the Code of Civil Procedure while trying a suit in respect of the following matters:-
1. The summoning and enforcing attendance of any defendant or witness examining the witness on oath;
2. The discovery and production of any document or other material producible as evidence;
3. The reception of evidence on affidavits:
4. The requisitioning of the report of the concerned analysis or test from the appropriate laboratory or from any
other relevant source;
5. Issuing of any commission for the examination of any witness; and
6. Any other matter which may be prescribed.
Under the Consumer Protection Rules, 1987, the District Forum, Commission and the National Commission have the
power to require any person: -
(i) to produce before, and allow to be examined by an officer of any authorities, such books of accounts, documents
or commodities as may be required and to keep such book, documents etc. under its custody for the purposes of
the Act;
(ii) to furnish such information which may be required for the purposes to any officer so specified.
They have the power to:
(i) To pass written orders authorizing any officer to exercise power of entry and search of any premises where these
books, papers, commodities, or documents are kept if there is any ground to believe that these may be
destroyed, altered, falsified or secreted. Such authorized officer may also seize books, papers, documents or
commodities if they are required for the purposes of the Act, provided the seizure is communicated to the District
Forum / State Commission / National commission within 72 hours. On examination of such documents or
commodities, the agency concerned may order the retention thereof or may return it to the party concerned.
(ii) to issue remedial orders to the opposite party.
(iii) to dismiss frivolous and vexatious complaints and to order the complainant to make payment of costs, not
exceeding Rs. 10,000 to the opposite party.
Remedies Granted under the Act :
The District Forum / State Commission / National Commission may pass one or more of the following orders to
grant relief to the aggrieved consumer: -
1. To remove the defects pointed out by the appropriate laboratory from goods in question;
2. To replace the goods with new goods of similar description, which shall be free from any defect;
3. To return to the complainant the price, or, as the case may be, the charges paid by the complainant;
4. To pay such amount as may be awarded by it as compensation to the consumer for any loss or injury suffered by
the consumer due to negligence of the opposite party;
5. To remove the defects or deficiencies in the services in question;
6. To discontinue the unfair trade practice or the restrictive trade practice or not to repeat them;
7. Not to offer the hazardous goods for sale:
8. To withdraw the hazardous goods from being offered for sale:
9. To provide for adequate costs to parties.
Appeals :
Any person aggrieved by an order made by the Forum may prefer an appeal to the State Commission in the
prescribed form and manner. Similarly, any person aggrieved by any original order of the State Commission may prefer
an appeal to the National Commission in the prescribed form and manner. Any person aggrieved by any original order of
the National Commission may prefer an appeal to the Supreme Court.
All such appeals are to be made within thirty days from the date of the order provided that the concerned
Appellate authority may entertain an appeal after the said period of thirty days if it is satisfied that there was sufficient
cause for not filling it within that period. The period of 30 days is to be computed from the date of receipt of the order by
the appellant.
Where no appeal has been preferred against any of the orders of the authorities, such orders would be final. The
District Forum, State Commission or National Commission may enforce respective orders as if it was a decree or order
made by a Court and in the event of their inability to execute the same; they may send the order to the Court for
execution by it as if it were a Court decree or order.
Penalties :
Failure or omission by a trader or other person against whom a complaint is made or the complainant to comply
with any order of the State Commission or the National Commission shall be punishable with imprisonment for a term
which shall not be less than one month but which may extend to 3 years, or with fine of not less than Rs. 2,000 but which
may to Rs. 10000 or with both.
However, if it is satisfied that the circumstances of any case so requires, then the District Forum or the State
Commission or the National Commission may impose a lower fine or a shorter term of imprisonment.
7 Unit 6 LESSON 7 LIFE INSURANCE
Unit 6
LESSON 7
LIFE INSURANCE
Dr Ashish Kumar
LBSIM
Introduction
Life Insurance is universally acknowledged as a tool to eliminate risk, substitute certainty for
uncertainty and ensure timely aid of the family in the unfortunate event of the death of the
breadwinner. In other words, it is the civilized world's partial solution to the problems caused by
death. In other words, Life insurance is protection against financial loss resulting from insured
Individuals death. In realistic terms, life insurance provides you and your family the financial security
and certainty to deal with the aftermath of any unseen unfortunate events.
Life Insurance is a contract for payment of a sum of money to the person assured (or failing
him/her, to the person entitled to receive the same) on the happening of the event insured against.
Usually the insurance contract provides for the payment of an amount on the date of maturity or at
specified dates at periodic intervals or at unfortunate death if it occurs earlier. Obviously, there is a
price to be paid for this benefit. Among other things, the contract also provides for the payment of
premiums by the assured.
In a nutshell, life insurance helps in two ways: premature death, which leaves dependent
families to fend for itself and old age without visible means of support. Any person who has attained
majority and is eligible to enter into a valid contract can take out a life insurance policy for himself /
herself. Policies can also be taken out, subject to certain conditions, on the life of ones children.
The need for life insurance will change as you grow older. When you are young, you may believe
you have no need for life insurance. But as you grow older, possibly get married and take on more
responsibilities, your desire to take out an insurance policy increases.
What is the reach and significance of Life Insurance as an economic activity?
So long as the maintenance of a family depends on the earning power of the bread-winner.
So long as the earning can be destroyed by death, old age or disability.
Just so long life as insurance continues to be the keystone of the individual and those who are
dependent on him.
Thus, life insurance is universal and will play a useful role as long as the family set up survives. Life
Insurance caters to an important social need.
Need For Life Insurance
The need for life insurance comes from the need to safeguard our family. If you care for your
familys needs you will definitely consider insurance. Today insurance has become even more
important due to the disintegration of the prevalent joint family system, a system in which a number
of generations co-existed in harmony, a system in which a sense of financial security was always there
as there were more earning members. Times have changed and the nuclear family has emerged.
Therefore you need to save a part of income for the future too.This is where insurance helps us.
Factors such as fewer numbers of earning members, stress, pollution, increased competition,
higher ambitions etc. are some of the reasons why insurance has gained importance and where
insurance plays a successful role. Insurance provides a sense of security to the income earner as also
to the family. Buying insurance frees the individual from unnecessary financial burden that can
otherwise make him spend sleepless nights. The individual has a sense of consolation that he has
something to fall back on. From the very beginning of your life, to your retirement age insurance can
take care of all your needs. Your child needs good education to mold him into a good citizen. After his
schooling he need to go for higher studies, to gain a professional edge over the others - a necessity in
this age where cut-throat competition is the rule. His career needs have to be fulfilled. Insurance is a
must also because of the uncertain future adversities of life. Accidents, illnesses, disability etc. are
facts of life which can be extremely devastating. Disability can be taken care of by insurance. Your
family will not have to go through the grind due to your present inability.
Moreover, retirement, an age when every individual has almost fulfilled his responsibilities and
looks forward to relaxing can be painful if not planned properly. Have we considered the increasing
inflation and taxes? Will our investment offer us attractive returns under such circumstances? Will it
take care of our family after us? An insurance policy will definitely take care of these and a lot more.
Insurance has become a necessity today. It provides timely financial as also rewards with bonuses. Life
Insurance has come a long way from the earlier days when it was originally conceived as a risk
covering medium for short periods of time, covering temporary risk situations, such as sea voyages.
Therefore after going through the discussion let us summarize our points and understand the
need of life insurance :
a) Temporary needs / threats: The original purpose of life insurance remains an important
element, namely providing for replacement of income on death etc.
b) Regular Savings / Family Protection: Providing for one's family and oneself, as a medium
to long term exercise (through a series of regular payment of premiums). This has become more
relevant in recent times as people seek financial independence for their family.
c) Investment: Put simply, the building up of savings while safeguarding it from the ravages of
inflation. Unlike regular saving products, investment products are traditionally lump sum investments,
where the individual makes a one off payment.
d) Old age provision: Provision for later years becomes increasingly necessary, especially in a
changing cultural and social environment. One can buy a suitable insurance policy, which will provide
periodical payments in one's old age.
e) Children benefit: Provision for the education, marriage and start in life for the children.
f) Special needs provision: Protection against loss arising out of accident, disability, sickness,
loan repayment on death.
g) Tax benefits:Under the Income Tax Act, premium paid is allowed as a deduction from the total
income under section 80C.
Why Is Insurance Superior To Other Form Of Savings?

An immediate estate is created in favor of the policy holder
Protection in case of death
Liquidity in case of need
Tax relief income tax, wealth tax etc.
Policies can be offered as collateral security
Policies can be taken under M.W.P. Act 1874, to protect against creditors
Let us take an example to understand the need for insurance:
Mr. Atul is 45 and self-employed. His wife Nandini, who is a housewife, looks after their two children
aged 3 and 7 years. They stay in a rented accommodation, where the rent is 15,000 rupees per month.
Mr. Atul has taken up a loan of Rs. 2 lakh. His monthly earnings on average are 40,000 rupees. Mr. Atul
passes away in an unfortunate road accident. What are some of the financial implications of his death
on his family.
There may be several financial implications on his family. Some of these are:
a) The monthly income, previously provided by Mr. Atul would stop.
b) His wife and children may have to seek financial assistance from other relatives.
c) His wife may not have enough money to pay back the loan of Rs. 2 lakhs.
d) The family may have to move into a cheaper accommodation.
e) His widow may have to take up work to earn money.
f) The education of his children may suffer.

This simple example illustrates the impact premature death can have on a family, where the main
earner has no life cover. Had Mr. Atul taken life cover, his family would not have faced such hardships
in the event of his unfortunate death. A simple life insurance policy could have provided Mr. Atul's
family with a lump sum that could have been invested to provide an income equal to all or part of his
income. In simple words, insurance protects against untimely losses. Insurance has been found useful
in the lives of persons both in the short term and long term. Short term needs like sudden medical
costs and long term needs like marriage expenses etc can be met with using life insurance.
Basic Principles Of Life Insurance Contract.
Life insurance is a contract under which the insurer (Insurance Company) in consideration of a
premium paid undertakes to pay a fixed sum of money on the death of the insured or on the expiry of
a specified period of time whichever is earlier. So basic principles of life insurance contract are as
follows:
1. Insurable interest: The insured must have insurable interest in the life assured. In absence of
insurable interest, Contract of insurance is void. Insurable interest must be present at the time of
entering into contract with insurance company for life insurance. It is not necessary that the assured
should have insurable interest at the time of maturity also.Insurable interest exists in the following
cases:
a) A person has an unlimited insurable interest in his/her own life.
b) A person has an insurable interest in the life of his/her spouse.
c) A father has an insurable interest in the life of his son or daughter on whom he is dependent.
Likewise a son may have insurable interest in life of his parents.
d) A creditor has an insurable interest in the life of the debtor, to the extent of the debt.
e) A servant employed for a specified period has insurable interest in the life of his employer.
2. Utmost good faith: The contract of life insurance is a contract of utmost good faith. The insured
should be open and truthful and should not conceal any material fact in giving information to the
insurance company, while entering into a contract with insurance company. Misrepresentation or
concealment of any fact will entitle the insurer to repudiate the contract if he wishes to do so.
3. A contract of indemnity: The life insurance contract is not a contract of indemnity. A Contract of
life insurance is not a contract of indemnity. The loss of life cannot be compensated and only a fixed
sum of money is paid in the event of death of the insured. So, the life insurance contract is not a
contract of indemnity. The loss resulting from the death of life assured cannot be calculated in terms
of money.
Types Of Insurance Policies
Though there are a lot of policies available in the market under different names and by
different companies, the policies can broadly be classified into the following categories:
Term Insurance Policy
Whole Life Policy
Universal Life Insurance Policy
Money Back Policy
Endowment Policy
Pension Plans or Annuities
Joint Life Policy

Group Insurance Policy
Unit Linked Insurance Plan
Term Insurance Policy
Term insurance provides life insurance coverage for a specific period of time. Presently one
year, five year, ten year, and fifteen year, are the periods one can buy term life insurance policy. If
the insured person dies during the period the insurance is in force, the insurance company pays off the
face value of the policy. If the insured lives longer than the term of the policy, the policy is no longer
in effect and nothing is paid. Term insurance is the least expensive form of life insurance. It is
commonly used when the insured needs temporary protection or cant afford the premiums for the
other forms of life insurance. The other reason an insured may want term insurance is to purchase life
insurance and invest the difference between the term policy and cash value policy elsewhere.
Term insurance comes in several forms. There is renewable & non renewable. Non renewable
means that on the expiry of your policy you must go under another physical test and filling out another
questionnaire. On the other hand, with renewable policy you dont need to undergo these formalities
again and you automatically re qualify to continue your policy.Then there is convertible & non
convertible policy. Convertible policy is the one which can be converted into a permanent policy,
whereas non convertible is the one which cannot be converted into a permanent policy or in other
words the policy cannot be converted to any other form of life insurance policy.
Whole Life Policy
The whole life policy provides insurance coverage for the entire life of the insured regardless of
how many years the insurance is paid. Premiums may be paid throughout the insureds entire life or
for a portion of his life. Additionally, the premium can be paid in one lump sum when the policy is
taken out. This is referred to as a single premium whole life policy. When the premium is paid
throughout the life it is known as straight life policy, but when the premium is paid for a specified
period of time it is known as limited life policy.
The premiums are higher for Whole life insurance as opposed to term insurance. The reason
for this is that the policy has investment features as well as death benefits. The cash value portion of
the whole life insurance belongs to the insured. One can take it out in the form of policy loans or can
cash the policy in. Another advantage of whole life insurance is that the premiums are fixed, i.e.
regardless of your age, you pay the same amount for the coverage each year.
Universal Life Insurance Policy
Universal Life is a type of permanentlife insurancebased on a cash value. That is, the policy
is established with the insurer where premium payments above the cost of insurance are credited to
the cash value. The cash value is credited each month withinterest, and the policy is debited each
month by a cost of insurance (COI) charge, and any other policy charges and fees which are drawn
from the cash value if no premium payment is made that month. The interest credited to the account
is determined by the insurer; sometimes it is pegged to a financial index such as a bond or other
interest rate index.
Money Back Policy
Money back policies provide for periodic payments of partial survival benefits during the term
of the policy, as long as the policy holder is alive. An important feature of this type of policies is that
in the event of the death at any time within the policy term, the death claim comprises the full sum
assured, without deduction of any survival benefit amounts, which may have already been paid as
money back components. Similarly the bonus is also calculated on the entire sum assured.
Endowment Policy
An endowment policy covers the risk for a specified period, at the end of which the sum assured
is paid back to the policy holder, along with the bonus accumulated during the term of the policy. This
feature of payment of endowment to the policy holder when the policys term is complete is
responsible for the popularity of endowment policies. The amount received on maturity can either be
utilized either to buy an annuity policy to generate a monthly pension for the rest of the life, or put it
into any other suitable investment of our choice. This is one important benefit which the endowment
policy offers over a whole life insurance policy.
Overall, endowment policies are the most suitable of all insurance plans for covering the risks
to a family breadwinners life. Not only do these policies provide financial risk cover for the family,
were the policy holder to die prematurely but the insurance amount is also repaid once this risk is
over. The endowment amount can then be used for meeting major expenditures such as childrens
education and marriage, etc.
Alternately, the endowment sum is available for a suitable investment geared to providing an
income for the remainder of ones own life. These types of plans are particularly suitable to those who
other than having a risk cover are also interested in a savings component
simultaneously.
Pension Plan or Annuities
An annuity is an investment that we make, either in a single lump sum or through installments
paid over a certain number of years, in return for which we receive a specific sum every year, every
half year or every month, either for whole life or a fixed number of years. After the death of an
annuitant or after the fixed annuity period expires for annuity payments, the invested annuity fund is
refunded, perhaps along with a small addition, calculated at that time. Annuities differ from all the
other form of life insurance in one fundamental way an annuity does not provide any life insurance
cover but, instead offers a guaranteed income either for life or a certain period.
Typically annuities are bought to generate income during ones retired life, which is why they
are also called pension plans. Annuity premiums and payments are fixed with reference to the
duration of human life.
Joint Life Policy
Joint life insurance policies are similar to endowment policies as they too offer maturity
benefits to the policyholders, apart form covering risks like all life insurance policies. But joint life
policies are categorized separately as they cover two lives simultaneously, thus offering a unique
advantage in some cases, notably, for a married couple or for partners in a business firm. Under a
joint life policy the sum assured is payable on the first death and again on the death of the survivor
during the term of the policy. Vested bonuses would also be paid besides the sum assured after the
death of the survivor. If one or both the lives survive to the maturity date, the sum assured as well
as the vested bonuses are payable on the maturity date. The premiums payable cease on the first
death or on the expiry of the selected term, whichever is earlier.
Accident benefits equivalent to the sum assured are available under Joint life insurance
policies on the first death. In case both the lives are covered under Double Accident Benefit (DAB),
the surviving life is covered under DAB until the end of the policy year, in which the first life dies
under the cover of the policy. Both the policy holders can avail these benefits, if
Both the policy holders die simultaneously owing to an accident. To avoid such
an eventuality, nomination is allowed under the policy OR
Both of them die within the specified period as a result of the same accident
OR
The second policy holder also dies in the same policy year as result of another
accident. To avoid such an eventuality, nomination is allowed under the policy.
Joint life insurance policy is ideal for married couples as it provides financial security and risk
protection to both the individuals.
Group Insurance Policy
Group insurance offers life insurance protection under group policies to various groups such as
employers-employees, professionals, co-operatives, weaker sections of society, etc. It also provides
insurance coverage for people in certain approved occupations at the lowest possible premium cost.
Group insurance plans have low premiums. Such plans are particularly beneficial to those for whom
other regular policies are a costlier proposition. Group insurance plans extend cover to large segments
of the population including those who cannot afford individual insurance. A number of group
insurance schemes have been designed for various groups. These include employer-employee groups,
associations of professionals (such as doctors, lawyers, chartered accountants etc.), members of
cooperative banks, welfare funds, credit societies and weaker sections of society.
Many employees see group insurance coverage as a major perk for faithful company service.
The premium payments are usually deducted automatically from the pay itself. Some companies will
absorb the entire cost of the policy as a benefit for employees. The main advantages of the group
insurance schemes are low premium and simple insurability conditions. Premiums are based upon age
combination of members, occupation and working conditions of the group.
A major feature of group insurance is that the premium cost on an individual basis may not be
risk-based. Instead it is the same amount for all the insured persons in the group. Another distinctive
feature is that under group insurance a person will normally remain covered as long as he or she
continues to work for a certain employer and pays their insurance premiums. This is different from the
individual insurance policy where the insurance company often has the right to reject the renewal of a
person's policy, depending on his risk profile.
Unit Linked Insurance Plan
Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk
protection and flexibility in investment. The investment is denoted as units and is represented by the
value that it has attained called as Net Asset Value (NAV). The policy value at any time varies
according to the value of the underlying assets at the time.
In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for
risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to
form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy.
The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP
investors have the option of investing across various schemes, i.e, diversified equity funds, balanced
funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is generally
borne by the investor. In a ULIP, investors have the choice of investing in a lump sum (single premium)
or making premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also
have the flexibility to alter the premium amount during the policy's tenure. For example, if an
individual has surplus funds, he can enhance the contribution in ULIP. Conversely an individual faced
with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). ULIP investors can shift their investments across various plans/asset
classes (diversified equity funds, balanced funds, debt funds) either at a nominal or no cost. Expenses
Charged in a ULIP are as follows:
Premium Allocation Charge: A percentage of the premium is appropriated towards charges initial and
renewal expenses apart from commission expenses before allocating the units under the policy.
Mortality Charges: These are charges for the cost of insurance coverage and depend on number of
factors such as age, amount of coverage, state of health etc.
Fund Management Fees: Fees levied for management of the fund and is deducted before arriving
at the NAV.
Administration Charges: This is the charge for administration of the plan and is levied by
cancellation of units.
Surrender Charges: Deducted for premature partial or full encashment of units.
Fund Switching Charge: Usually a limited number of fund switches are allowed each year without
charge, with subsequent switches, subject to a charge.
Service Tax Deductions: Service tax is deducted from the risk portion of the premium.
Pricing
For life insurance policy you must pay a price in terms of premium. All insurance companies
employ actuaries to fix the premiums of their policies. The actuaries need to consider various factors
(both measurable and non-measurable) and build them into the premiums. There are some factors
that the actuaries already have information on (like mortality rate, claims paid percentages, etc.,)
and the rest of the information comes from the applicant. We will first look at the information
provided by the applicants that play a part in Life Insurance Price, one by one.
Age: Young, fit people who are just about to begin the most productive part of their lives are the
ones who get the cheapest policies. The premium component gradually increases as the age of the
applicant progresses. There is no intentional discrimination here against older people. Mortality trends
state that the chances of mortality increase is directly proportional to age increase and the insurance
companies base their calculations on the age risk factor. So, the older you are the higher you pay!
Type of policy: There are various types of policies; term, partial payment, pension plans, cash
value..etc., As a general rule, you can be sure that premiums increase directly proportional to the
cash value benefits and complexity. Term plans are the cheapest and any other investment based
policy will cost you higher. The coverage amount also plays a part. Higher the coverage, higher the
premium.
Duration of the policy: This plays a more important part in wealth building insurance policies but
even otherwise, longer duration policies are priced cheaper.
Medical history and health: History of previous illness is a risk while underwriting a policy and
therefore carries such people carry higher premium. This is a very important factor and if an applicant
has illness history or have existing ailments, they have to be disclosed to the company, otherwise, the
insurance company will outright reject the claim (when the need arises) citing suppression of vital
information. Height and weight details are also used as factors.
Personal habits and occupation: Habitual smokers and drinkers will be charged higher, as will
people employed in hazardous jobs (Fire fighters, scuba divers). Some hobbies (bungee jumping, car
racing) are also deemed high risk and will attract higher premiums.
Other factors: Apart from the information provided by the applicant, the insurance actuaries need
to input many other factors listed below:
o Mortality Life insurance is based on the sharing of the risk of death by a large group of
people. The amount at risk must be known to predict the cost to each member of the
group. Mortality tables are used to give the company a basic estimate of how much
money it will need to pay for death claims each year. By using a mortality table a life
insurer can determine the average life expectancy for each age group.
o Interest The second factor used in calculating the premium is interest earnings.
Companies invest your premiums in bonds, stocks, mortgages, real estate, etc., and
assume they will earn a certain rate of interest on these invested funds.
o Expense The third consideration is the expenses of operating the
company. The company estimates such expenses as salaries, agents
compensation, rent, legal fees, postage, etc. The amount charged to cover each
policys share of expenses of operation is called the expense loading. This is a
cost area that can vary from company to company based on its operations and
efficiency
Underwriting
The process of assessing the risk profile of the life insurance applicant whether individual or
group and then fixing the rate of premium is called risk classification or underwriting. The methods by
which an insurer manages risks are:
[a] Risk avoidance
[b] Risk transfer
[c] Risk sharing, and
[d] Risk acceptance and management.
Risk acceptance would be through a process of underwriting. The typical underwriting decisions [on a
proposal] of a life insurer are as follows:
Accepted [on ordinary terms/rates], that is, the insurer has decided to undertake the
risk on the proposed life on standard terms of the company.
Accepted [on terms other than those suggested] and offered some other plan /term /
other condition like imposing an extra premium to meet higher health/occupation risk etc.
for undertaking risk on the proposed life.
Postponed, consideration of the proposal is postponed anticipating that the effects of
some of the high risk factors faced by the proposed life may come down in future.
Declined, the proposed life would almost definitely result in a claim by death within the
proposed term.
Underwriters of insurance Companies arrive at the above decisions, or rather conclusions, based on
the analysis of the risks they are likely to face on the life of the proposer or applicant for insurance.
Risks on a life are associated with his family history, personal history, individual and social habits,
occupation, hobbies and the future possibilities of joining the armed forces or Para trooping, diving or
hazardous researches etc. Broadly speaking these factors usually consider for appraising the risk of an
applicant:
Age
Sex (except in several states that require "uni-sex" rates, even though actuarial
data shows women live longer than men)
Height and weight,
Health history (and often family health history -- parents and siblings),
The purpose of the insurance (such as for estate planning, or business or for
family protection)
Marital status and number of children
The amount of insurance the applicant already has, and any additional insurance
s/he proposes to buy (as people with far more life insurance than they need tend
to be poor insurance risks)
Occupation (some are hazardous, and increase the risk of death)
Income (to help determine suitability)
Smoking or tobacco use (this is an important factor, as smokers have shorter
lives)
Alcohol (excessive drinking seriously hurts life expectancy)
Certain hobbies (such as race car driving, hang-gliding, piloting non-commercial
aircraft) and
Foreign travel (certain foreign travel is risky).

The guidelines and regulations for underwriting are different for different insurance
companies. As mentioned above, the life insurance underwriting process takes a series of
factors into consideration to decide the premium amount for an applicant for a particular coverage
policy. After an individual applies for a life insurance quote, the insurance company will circulate a
questionnaire form that the applicant has to fill up with the answers. Underwriting is confidential,
which is maintained under strict regulations. Depending upon the underwriting standards of the
insurance company, the questions may vary. After the applicant fills up the answers to these queries,
the form is sent back to the insurance company.
Once the form is received, the underwriters of thelife insurance company review the risk
profile of the applicant and accordingly, the final premium amount is charged to the policyholder. In
general there are four categories of risks, which are classified according to the standard underwriting
guidelines. The four risk classifications include proffered (charge with low premium), standard
(standard premium amount), rated (relatively high premium amount) and declined (uninsurable). This
way, life insurance underwriting process is a crucial step to calculate the premium amount for
policyholders.
For better understanding about life insurance underwriting, let's take an example of two
individuals applying for the same life insurance quote. Let's consider that first is below 30 years
without any underlying health condition (low death risk), while the second applicant is above 45 years
with hypertension condition (high death risk). With underwriting process, the death risks for the two
applicants are examined, after which the insurance company will charge a low premium for the first
applicant (preferred), while charging a higher premium rate for the second policyholder (rated).
Documentation
The contract for the life insurance starts with the proposal made by the proposer in standard
application form available with insurance company and then various other documents are prepared.
Proposal Forms
The proposal form is a standardized form. The proposal form is a type of an application form, which a
proposer has to fill all the relevant details about the life to be assured. The agent has the proposal
form with him provided by the insurer. There are different types of policies and so the different types
of proposal forms are there. It has the entire details regarding the duration of the policy, type of plan,
mode of payment, etc. A proposal form is to be to be completed by the proposer in his own
handwriting and signed in the presence of the agent. The proposal form contains a declaration at the
end, to ensure the authenticity of the information given.
Usually the proposal form contains the following information to be filled by the prospective
insured:
1. Name of life assured
2. Address
3. Date of Birth
4. Occupation
5. Age
6. Name of the employer (if any)
7. Sum assured of the proposed policy
8. Number and age of the family members
9. Family medical history
10. Proposers Medical history
Besides these there are other related forms regarding health, occupation, the agents confidential
report and many others. In addition there is a consent letter which shows the consent of the life
assured to the imposition of some clause or extra premium, duly signed by the life assured.
First Premium Receipt
The agent provides the proposal form and other related documents and the underwriter
examines the form and other documents and then determines the terms on which to accept the risk or
reject the same. The consent of the person assured is obtained in the form of payment of premium.
After receiving the payment, the insurance company issues the First Premium Receipt, which
acknowledges the proposal of the life-assured. It contains all particulars of the policy. It has the
details of the next premium to be paid. The policy bond is sent within 45-50 days from the date of
first premium receipt to the life assured. The First Premium Receipt is an important and powerful
document on the basis of which the life-assured can ask the insurer to issue the policy bond, which is
treated as Evidence of the Contract of Life assurance.
Policy Bond
After issuing the First Premium Receipt, the next step is that of the insurer of sending the
policy bond to the life-assured and this document is also known as Policy Contract, which is the
ultimate evidence of the life-assured. The Policy Contract contains all the terms and conditions of the
contract between insurance company and the life assured, duly stamped as per the Indian Stamp Act.
The policy is sent to the life assured by the insurer. The policy contract contains the details of the
insurance such as duration of the policy, the type of policy, sum assured, premium amount and the
date of maturity, extra premium, nominee, assignee etc.
Alterations and Endorsements
Endorsement is an authenticated noting on the back of Policy Contract and forms a part of the
contract. In the case of lack of space, the endorsements can be put on a separated sheet of papers
and attached to the policy. Endorsements are required because life assurance is a long-term contract
and the life assured may want certain changes in the terms of contract. There are different type of
alterations or modifications that can be made during the tenure of the policy such as changes
regarding increase or reduction in the sum assured, mode of payment of premium, modification
related on account of mistakes in the preparation of the policy by the insurer, modifications related to
reduction in term, conversion from Non-profit to With Profit and similar other like change of
name, plan-term and so on.
Reminding Notice
It is basically information sent by the insurer to the policyholder, reminding the latter about the
due date of a particular premium and the amount of premium. However it is not the duty of the
insurance company (insurer) to do so. The insurer also informs the policyholder about the lapse of a
policy if the premiums are not paid in time.
Other Documents
Apart from other documents there are some other specialized documents, which are as follows:
i. Proposal on the lives of Non Resident Indians, which consists of some special questionnaire asking
for relevant information.
ii. Partnership Insurance which consist of papers asking for the Profit & Loss account of the firm for
the last three years, the insurance of the partner, the partnership deed and the deed of variation
allowing the purchase of the assurance policy.
Policy Servicing And Settlement Options
Servicing of policy holders include:
(1) Proof of age: The age of the life assured must be proved either during the period of the policy
or after the claim arises, because age is an important factor for calculating at the rate of premium to
be charged for a particular policy.
(2) Nomination: The Policyholder should be advised for nomination, if no nomination was
effected. When nomination or assignment is effected by a policyholder, it should be scrutinized
thoroughly to see whether it was in order or not. If there is any material omission or mistake, it may
be returned to the policyholder or the assignee with a covering letter giving instructions as to the
corrections to be made in the assignment or nomination. When a document is sent for correction,
reminders should be sent every fortnight until the requirements are complied with. The policyholder
should follow the instructions printed on the back of assignment or nomination.
(3) Assignment: Assignment is a means whereby the right and title under a policy gets transferred
from assignor to assignee. Assignor is the policyholder who transfers the title and assignee is the
person who gets the title of the policy from the assignor. Assignment can be made either by
endorsement on the policy or on a separate paper duly stamped. Assignor must be a major.
Assignment must be in writing and assignors signature along with a witness is required. Notice of
assignment should be submitted to the insurer by the assignor.
(4) Alteration / Changes: After issue of a Policy, the Policy holder desires an alteration in the
terms thereof to suit his convenience, e.g., an alteration in the mode of payment of premiums, Plan
of Assurance, reduction in the premium-paying period, etc. An alteration may be allowed provided the
policy is in force and has not become fully paid up. It is stated in the prospectus that no alteration
from one class of Assurance to another subject to a lower scale of premium is permissible. However,
an alteration from the with profits Limited Payment plan to the with profits Endowment Assurance
Plan with premiums payable for a term not exceeding the original premium-paying term will be
allowed even if the premium payable on alteration is lower. Alterations from certain Classes of
Assurance to certain other Classes are not allowed at all.
(5) Paid up value & surrender value: When a policyholder wants to terminate the policy, he
may convert the same into paid-up policy. In this case, the amount of paid-up value is payable to the
insured only after the full term (maturity) of the policy. The option of converting the policy into paid
up policy and stop paying the further premiums can be taken only if the policy has been in force for at
least two years.
If the insured is unwilling or unable to pay the premium of the policy, he may surrender the
policy and ask for its surrender value. Surrender value is the cash value payable by the insurance on
voluntary termination of the policy contract by the life assured before the expiry of the term of the
policy. Surrender value depends on the type of policy and number of premia paid. A policy can be
surrendered only when the premia is paid for the three years.
Settlement:
The easy and timely settlement of a valid claim is an important function of an insurance
company. The yardstick to judge insurance companys efficiency is as to how quick the claim
settlement is. The speed, kindness and fairness with which an insurer handles claims show the
maturity of the company and may lead to great satisfaction of the client. In every insurance company
claim handling is of immense importance. It is the liability of the insurance company to honour valid
and legal claims. At the same the company must identify the fraudulent and invalid claims. A claim
may arise:
On death of Policyholder before the maturity date.
On maturity, i.e. after expiry of the endowment period specified in the policy contract when the
policy money becomes payable.

Certain features are common to all life insurance claims. These are:
1. Policy must be in force at the time of claims.
2. Insured must be covered by the policy.
3. Nothing was outstanding to the insurer at the time of claim.
4. Claim is covered by the policy.
Death Claims
I. Intimation of Death
The death of the life assured has to be intimated in writing to the insurer. It can be done by the
Assignee or nominee under the policy or from a person representing such Assignee or Nominee or when
there is no nomination or assignment by a relative of the life assured, the employer, the agent or the
development officer. Where policy is assigned to a creditor or a bank for valuable consideration,
intimation of death may be received from such assignee. Sometimes, the office need not wait till the
intimation of claim is received. The concerned agent, newspaper reports in case of accidents or air
crashes, obituary columns may give information and claim action can be started. However, the
identity of the deceased should be established carefully. The intimation of the death of the life
assured by the claimant should contain the following particulars: (1) his or her relationship with the
deceased, (2) the name of the policyholder, (3) the number/s of the policy/policies, (4) the date of
death (5) the cause of death and (6) sum assured etc. If any of these particulars are missing the
claimant can be asked to furnish the same to the insurer. The intimation must satisfy two conditions
(1) It must establish properly the identity of the deceased person as the life assured under the policy,
(2) It must be from a concerned person.
II. Proof of Death and Other Documents
In case of claim by death, after the receiving the intimation of death the insurance company
ensures that the insurance policy has been in force for the sum assured on the date of death and the
intimation has been received from assignee, nominee or other claimant.
The following documents are required:
(i) Certificate of death.
(ii) Proof of age of the life assured (if not already given).
(iii) Deeds of assignment / reassignments.
(iv) Policy document.
(v) Form of discharge.
If the claim has accrued within three years from the beginning of the policy, the following additional
requirements may be called for:
a) Statement from the hospital if the deceased had been admitted to hospital.
b) Certificate of medical attendant of the deceased giving details of his/her last illness.
c) Certificate of cremation or burial to be given by a person of known character and responsibility
present at the cremation or burial of the body of the deceased.
d) Certificate by employer if the deceased was an employee.
Proof of death and other documents to be submitted will depend upon the cause of death and
circumstances of each case.
1. In case of an air crash the certificate from the airline authorities would be necessary certifying
that the assured was a passenger on the plane. In case of ship accident a certified extract from the
logbook of the ship is required. In case of sudden cardiac arrest, murder the doctors certificate may
not be available.
2. The insurance may waive strict evidence of title if the sum assured of the policy is small and there
is no dispute among the survivors of the policy moneys.
3. If the life assured had a death due to accident, suicide or unknown cause the police inquest report,
panchanama, post mortem report, etc would be required.
If by any chance policy contract is lost, advertisement of the lost of policy is to be given. Payment can
be made on the basis of an indemnity given by the policyholder. If the deceased has taken out policies
with more than one branch and the claimant has produced proof of death to any one of them and
desires that the other branch or branches, may act on the same proof, his request should be complied
with. The Branch requiring proof of death should directly call for the certified copies from the branch
concerned.
III. Net Payable Amount of Claim
After receiving the required documents the company calculates the amount payable under the
policy. For this purpose, a form is filled in which the particulars of the policy, assignment,
nomination, bonus etc. should be entered by reference to the Policy Ledger Sheet. If a loan exists
under the policy, then the section dealing with loan is contacted to give the details of outstanding
loan and interest amount, which is deducted from the gross policy amount to calculate net payable
claim amount. The net amount of claim payable is calculated and is called payment voucher. In the
case of in force policy unpaid premiums if any due before the Assureds death with late fee where
necessary and the premium falling due in the policy year current at the time of death should be
deducted from the claim amount.
Maturity Claims
If the life insured survives to the full term, then basic sum assured is payable. This payment by
the insurer to the insured on the date of maturity is called maturity payment. The amount payable at
the time of the maturity includes a sum assured and bonus/incentives. The insurer sends in advance
the intimation to the insured with a blank discharge form for filling various details in it. It is to be
returned to the office along with
Original Policy document
Age proof if age is not already submitted
Assignment /reassignment, if any. .
Legally no claim is acceptable in respect for a lapsed policy or death of the Life assured happening
within 3 years from the date of beginning of the policy. However, some concessions are given and
payment of claims is made:
If the Life assured had paid at least 3 years' premiums and thereafter if premiums have not been
paid, the nominees/life assured get proportionate paid up value.
In the event of the death of' the Life assured within 3 years and the policy is under the lapsed
position, nothing is payable.
Procedure of the Maturity Claims

Settlement procedure for maturity claim is simple after receipt of completed and stamped
discharge form from the person entitled to the policy money along with policy documents, claim
amount will be paid by account payee cheque.
If the life assured is reported to have died after the date of maturity but before the receipt is
discharged, the claim is to be treated as the maturity claim and paid to the legal heirs. In this case
death certificate and evidence of title is required.
Where the assured is known to be mentally deranged, a certificate from the court of law under
the Indian Lunacy Act appointing a person to act as guardian to manage the properties of the lunatic
should be called.
Additional Benefits apart from Regular Claims
Double Accident Benefit: For claiming the benefits under the Double Accident Benefit the claimant
has to produce the proof to the satisfaction of the Corporation that the accident is defined as per the
policy conditions. Normally for claiming this benefit documents like FIR, Post-mortem Report are
required.
Disability Benefit Claims include waiver of all premiums to be paid in future till the expiry of the
policy of the life assured if a person is totally and permanently disabled and cannot earn any
wage/compensation/profit as a result of the accident.
Presently, all over the country there are 12 centers where the Insurance Ombudsman has been
appointed. They are part of grievance redressal machinery. They consider the complaints regarding
disputes related to premiums, claims etc.
Distribution Channel
The channel of distribution (place) is an important ingredient of marketing mix as however
useful the product might be and how so ever suitable its price be, unless and until the
products/services are mad available to consumers at centres of convenient buying the consumers
will not be buying the same. Insurance being a service business requires marketing department to play
a key role in delivery of service.
The marketing department conducts research for identification of target customers, help in
maintaining and promoting the distribution system and also plays an active role in development of new
products. It is the most vibrant department in an insurance organization since it has to necessarily
deal with all the other department of the organization. Insurance business is business of law of large
numbers. The law requires the insurer to attract a sufficient number of exposures to allow credible
ratio prediction.
The major task of sales managers in charge of the sales section of insurance company is the
supervision of the sales functions of the branches. This section is also responsible for spreading
awareness among the general public about the benefits of life Insurance. Sales training section is
entrusted with responsibility for training in product, in selling and sales planning in the
personnel such as development officers and agents.
Insurance policies are mainly sold by the agents of insurance company. Beside insurance
agents, Banks and cooperative societies have emerged as strong business partners amongst alternate
channels in terms of first premium mobilization.
Life Insurance Sector In India
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in
terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods,
epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history
has preserved the earliest traces of insurance in the form of marine trade loans and carriers
contracts. Insurance in India has evolved over time heavily drawing from other countries, England in
particular.
1818 saw the advent of life insurance business in India with the establishment of the Oriental
Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras
Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the
enactment of the British Insurance Act and in the last three decades of the nineteenth century, the
Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay
Residency. This era, however, was dominated by foreign insurance offices which did good business in
India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the
Indian offices were up for hard competition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance Companies in India.
The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life
business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to
collect statistical information about both life and non-life business transacted in India by Indian and
foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest
of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act,
1938 with comprehensive provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a
large number of insurance companies and the level of competition was high. There were also
allegations of unfair trade practices. The Government of India, therefore, decided to nationalize
insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154
Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. The
LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.
Following the recommendations of the Malhotra Committee report, in 1999, the Insurance
Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and
develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key
objectives of the IRDA include promotion of competition so as to enhance customer satisfaction
through increased consumer choice and lower premiums, while ensuring the financial security of the
insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to
frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed
various regulations ranging from registration of companies for carrying on insurance business to
protection of policyholders interests. In December, 2000, the subsidiaries of the General Insurance
Corporation of India were restructured as independent companies and at the same time GIC was
converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC
in July, 2002. Today there are 24 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 23 life insurance companies operating in the country. The insurance
sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services,
insurance services add about 7% to the countrys GDP. A well-developed and evolved insurance sector
is a boon for economic development as it provides long- term funds for infrastructure development at
the same time strengthening the risk taking ability of the country.
Check List For Buying The Right Policy

DOS
Look out for no commission policies.
low load life insurance policies have fewer expenses built into them, such as agent
commissions and fees for marketing. This can translate into lower premiums or for variable life
insurance, these lower expenses mean that a higher percentage of your premium goes to work
for you right away so that you can build your cash faster.
Buy as soon as the need exists
An advantage to buy life insurance earlier in life is that your premiums will be low. As you grow
old, the likelihood that you will die increases, which is why older individuals pay more for life
insurance.
DONTS
Dont buy a guaranteed issue policy if you are healthy
Guaranteed issue term life insurance policies normally require no medical exam and are sold
to anyone who comes along. While these policies can be a great way for people who have
medical problems to obtain a life insurance policy, if you are healthy dont buy these policies as
you will get better rates by taking the tests.
Dont buy more or less than you need
Many experts say the best way to pinpoint a smart life insurance benefit amount is through a
needs analysis which can be broken into a simple formula
Short term needs + long term needs resources = how much life insurance you need
Self-Assessment:
1. Explain Fundamental Principles of Life Insurance contract.
2. Discuss various documents prepared by the insurance company while entering a life insurance
contract with the proposer.
3. Explain the procedure of settlement of claims in case of maturity of the policy.
4. Explain the claim settlement procedure in case of death of the assured.
5. Explain the procedure of underwriting of new business.
6. Discuss various life insurance pricing elements.
References:
Mishra M.N., Life Insurance, Administration and Management, Sultan Chand & Co., New Delhi.
Gupta C.B., Business Organization and Management, 2005, Sultan Chand & Co., New Delhi.
Gupta P.K. Insurance and Risk Management, 2005, Himalaya Publishing House, New Delhi.
Ray R.M. Life Insurance in India, 1999, Indian Institute of Public Administration.
Mann T.S., Law and Practice of life Insurance in India, 2000, Deep and Deep Publication, New
Delhi.
www.licindia.com
www.irdaindia.org
8 LESSON 8 UNDERSTANDING OF THE ANNUAL
REPORT OF LIFE INSURANCE COMPANIES
LESSON 8
UNDERSTANDING OF THE ANNUAL REPORT
OF LIFE INSURANCE COMPANIES
Dr Ashish Kumar
LBSIM
Introduction:
The primary legislations including the Insurance Act, 1938 and the IRDA Act, 1999 that deal with
insurance business in India provide the legal framework of insurance accounting in India, over and
above the principles and practices prescribed by Generally Accepted Accounting Principles (GAAP)
and the various Accounting Standards (AS) issued by the Institute of Chartered Accountants of
India(ICAI) and the international organization Financial Accounting Standards Board (FASB). However,
the following statutes, rules and regulations are the major considerations for accounting and financial
management for insurance companies in India:
1. The Insurance Act, 1938 and Insurance Rules, 1939
2. The Insurance Regulatory and Development Authority Act, 1999
3. The Companies Act, 1956
4. The Life Insurance Corporation Act, 1956
5. The General Insurance Business (Nationalization) Act, 1972
Section 11 of the Insurance Act, 1938 provides that every insurer, on or after the commencement of
the IRDA Act, 1999 in respect of insurance business transacted by him and in respect of his
shareholders' fund, shall at the expiration of each financial year, prepare a Balance Sheet, a Profit
and Loss account, a separate Account of Receipts and Payments (Cash Flow Statement), Revenue
Accounts in accordance with the regulations made by the Authority. Every Insurer shall keep separate
accounts relating to funds of shareholders and policyholders.
Accounting Regulations and Financial Statements:

The IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies)
Regulations, 2002 provide that-
An insurer carrying on life insurance business shall comply with the requirements of Schedule' A' to
prepare financial statements.
An insurer carrying on general insurance business shall comply with the requirements of Schedule
'B' to prepare financial statements.
The Report of the Auditors on the Financial Statements of every insurer/ re-insurer shall be in
conformity with the requirements of Schedule 'C'.
The said regulation further provides that financial statements comprising (i) Balance Sheet, (ii)
Receipts and Payments Account (Cash Flow Statement) (iii) Profit & Loss Account (Shareholders'
Account) and (iv) Revenue Account (policyholders' Account) shall be in conformity with the Accounting
Standards (AS) issued by the Institute of Chartered Accountants of India to the extent applicable to
the insurerexcept that:
Accounting Standard 3-Cash-flow Statement shall be only under Direct Method
Accounting Standard 13-Accounting for Investment shall not be applicable
Accounting Standard 17-Segment reporting shall apply to all insurers irrespective of the
requirements for listing and turnover mentioned therein.
Section 2C of the Regulation provides that all words and expressions used herein and not defined
in the Insurance Act, 1938 or in the IRDAAct, 1999 or in the Companies Act, 1956 shall have the
meanings respectively assigned to those Acts. However, regulatory provisions prescribed by the IRDA
and the specific and relevant Accounting Standards promulgated by the Institute of Charted Accoun-
tants of India are being separately discussed in detail in subsequent units.
Financial statements of insurance companies comprise the following as stated earlier:
Balance sheet,
Revenue accounts,
Profit and loss account, and
Receipts and payments account
Besides the financial statements, the annual reports of an insurance company also contain the
following statutory documents for the review and analysis of the various interested groups including
shareholders, policyholders, regulators, reinsurers, employees, co-insurers, etc.
1. Report of the board of directors
2. Management report
3. Auditors report
4. Segment reporting
5. Significant accounting policies
6. Notes and disclosures forming part of accounts
Let us now discuss the above financial statements and reports with reference to legal
requirements, accepted principles and practices with a few examples and exercises. Certain
examples with hypothetical data are also given in Annexure for clarity of understanding of students in
respect of financial statements
Directors Report: legal Requirement as Regards Directors Report (Companies
Act 1956)
As per Section 217 of the Companies Act, 1956 there shall be attached to every balance sheet
laid before a company general meeting a report by its Board of Directors with respect to following
particulars:
The state of affairs of the company.
The amounts, if any, which it proposes to carry to any reserve in balance sheet.
The amount, if any, which it recommends, should be paid by way of dividend.
The material changes and commitments, if any, affecting the financial position of the
company, which have occurred between the end of the financial year of the company to which
the balance relates and the date of the report.
The technology absorption, foreign exchange earnings and outgo and the manners
thereof.
The material changes, if occurred during the financial year in respect of the nature and
class of business of the company or its subsidiary.
The statement showing the name of every employee of the company who, if employed
throughout the financial year, was in receipt of remuneration for that year, which in the
aggregate was not less than Rs. 24,00,000 per annum or if employed for a part of the financial
year was not less than Rs. 2,00,000 per month. Such state shall also indicate that whether any
such employee is a relative of any director or manager of the company.
The Directors' Responsibility Statement must mention that
a) In the preparation of the annual accounts, the applicable accounting standards have
been followed along with proper explanations relating to material departure,
b) The directors had selected such accounting policies and applied them consistently,
c) The results and estimates are reasonable and prudent so as to give.a true and fair
view of the state of affairs of the company at the end of the financial year and of the
profit or loss of the company for that period,
d) That the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of the Companies Act,
1956 for safeguarding the assets of the company and for preventing and detecting frauds
and other irregularities and that the directors had prepared the annual accounts on a
going concern basis.
The reasons for the failure, if any, to complete the buy back within the time specified in
Section 77 A of the Act.
The fullest and explanations on every reservation, qualification or adverse remarks
contained in the auditors' report.
Common Disclosures in Directors Report Contained in the Annual Report of a

General Insurance Company:
Director report of an insurance company generally furnishes the following information specifically as
per the above requirements of the Companies Act, 1956:
1. Comparative Performance Analysis (Class-wise Underwriting Performance) for the financial
year under report with reference to previous year) as appended in Annexure A.2 showing
performance analysis of XYZ General Insurance Co. Ltd. in respect of the following
performance review for FY 2005-06.
Gross direct premium and percentage of growth over previous year
Reinsurance premium ceded
Reinsurance accepted
Net premium and percentage of growth over previous year
Increase in unexpired risks reserve and percentage to net premium
Net premium earned
Net incurred claims and percentage to net premium
Others
2. Review of accounts as an annexure to accounts
3. Profit before tax and after tax
4. Proposed dividend
5. General reserves and current year transfer of profit to that reserve
6. Total assets and the contribution of increase of fair value change account
7. Total investments, its composition/portfolio, its increase over the last year
8. Solvency margin and its change over the previous year
9. Compliance with Section 40C in regard to prescribed % of expenses
Financial Statements:
As mentioned earlier, as per the IRDA (Preparation of Financial Statements and Auditors'
Report of Insurance companies) Regulations, 2000, an insurer shall prepare the Financial Statements
including Balance sheet, Revenue Account (Policyholders Account), Receipts and Payments Account
(Cash Flow Statements) and Profit and Loss Account (Shareholders' account) as Accounting Standard
(AS) issued by the ICAI to the extent applicable to the insurers except that:
1. Accounting Standard 3 (AS 3) and Accounting Standard 17 (AS 17) in case of insurers carrying on
life insurance business
2. Accounting Standard 3 (AS 3), Accounting Standard 13 (AS 13) and Accounting Standard 17
(AS17) in case of insurers carrying on non-life insurance business

Cash flow statements will be prepared only under direct method and segment reporting shall apply
irrespective of whether the securities of the insurer are traded publicly or not in both the cases and
in case of non-life insurance company AS 13-Accounting for investments shall not be applicable.
Financial Statements for life Insurers:

Life Insurers shall prepare Financial Statements as per specified Forms such as Revenue Account
(Form A-RA), Profit and Loss Account (Form A-PL) and Balance Sheet (Form A-BS) as per Part V in
Schedule A of Regulation III. The said financial statements will be prepared in accordance with
General Instructions for preparations as per Part III. The said financial statements shall be supported
by disclosures forming part of financial statements and the comments of management report as per
Part II and Part IV respectively, of the Schedule A. The specified forms of financial statements are
given hereinafter as ready reference.
Form A-BS
Balance Sheet of Life Insurance Company
Schedule Current Previous

Particulars
No. Year Year
SOURCES OF
FUNDS
Shareholders'
Funds:
Share capital
Reserves and surplus
Credit/debit fair value change account
Sub-total
Borrowings
Policyholders'
Funds:
Credit/debit fair value change account
Policy liabilities
Insurance reserves
Provision for linked

liabilities
Sub-total
Funds for Future
Appropriations
Total (Sources of
Funds)
APPLICATION OF
FUNDS
Investments
Shareholders'
Policyholders'
Assets Held to Cover linked liabilities
loans
Fixed Assets
Current Assets
Cash & bank balances
Advances and other

assets
Sub-total (A)
Current liabilities
Provisions
Sub-total (B)
Net Current Assets (C ) =
(A-B)
Miscellaneous Expenditure (not written

off)
Debit Balance in Profit & loss Account
(Shareholders' account)
Total (application

of funds)
Form A-RA
Revenue Account of Life Insurance Company
Policyholders Account

Particulars
No. Year Year
Premiums
Earned-(Net)
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance

accepted
Income from
Investments
(a) Interest, dividends

& rent-(Gross)
(b) Profit on sale/redemption of

investments
(c) Loss on
sale/redemption of
investments
(d) Transfer/Gain on

revaluation/change in fair value*
Other Income (to

be Specified)
TOTAL

(A)
Commission 2
Operating Expenses
Related to Insurance 3
Business
Provision for
DoubUul Debts
Bad debts written off
Provision for Tax

Provisions (other than

taxation)
(a) For diminution in
the value of

Investment
NetN(Net(Net
(b) Others (to be

specified)
TOTAL

(B)
Benefits Paid
4
(Net)
Interim Bonuses
Paid
Change in Valuation of
liability in Respect of life
Policies
(a) Gross
(b) Amount ceded in

reinsurance
(c) Amount accepted

in reinsurance
TOTAL

(C)
Surplus/Deficit
(D) = (A)-(B)-(C)
APPROPRIATIONS
Transfer to
Shareholders'
Account
Transfer to Other
Reserves (to be Specified)
Balance Being Funds for

Future Appropriations
TOTAL

(D)
The above financial statements are to be prepared in accordance with applicable accounting
standard issued by leAL These financial statements will be supported by specified schedules
giving the required details as per regulations.
Disclosures forming part of financial statements (Life Insurer) Part II

A. The following shall be disclosed by way of notes to the balance sheet:
1. Contingent liabilities:
Partly-paid up investments
Underwriting commitments outstanding
Claims, other than those under policies, not acknowledged as debts
Guarantees given by or on behalf of the company
Statutory demands/liabilities in dispute, not provided for
Reinsurance Obligations to the extent not provided for ill accounts

Others (to be specified).
2. Actuarial assumptions for valuation of liabilities for life policies in force.
3. Encumbrances to assets of the company in and outside India.
4. Commitments made and outstanding for Loans, Investments and Fixed Assets.
5. Basis of amortization of debt securities.
6. Claims registered and remaining unpaid for a period of more than six months as on the
balance sheet date.
7. Value of contracts in relation to investments, for:

Purchases where deliveries are pending;
Sales where payments are overdue.

8. Operating expenses relating to insurance business: basis of allocation of expenditure to
various segments of business.
9. Computation of managerial remuneration.
10. Historical costs of those investments valued on fair value basis.
11. Basis of revaluation of investment property.

B.Following accounting policies shall form an integral part of the financial statements:
1. All significant accounting policies in terms of the accounting standards issued by the
ICAI, and significant principles and policies given in Part I of Accounting Principles. Any other
accounting policies, followed by the insurer, shall be stated in the manner required under
Accounting Standard AS 1 issued by the ICAL
2. Any departure from the accounting policies shall be separately disclosed with reasons for
such departure.
C.The following information shall also be disclosed:

1. Investments made in accordance with any statutory requirement together with its
amount, nature, security and any special rights in and outside India;
2. Segregation into performing/non performing investments for income recognition.
Assets to the extent required to be deposited under local laws Percentage of business sector-wise;
A summary of financial statements for the last five years, in the manner as may be prescribed by the
Authority;
Bases of allocation of investments and income thereon between Policyholders' Account and
Shareholders' Account;
Accounting Ratios as may be prescribed by the Authority.
Example:
Financial Statements for non-life Insurance

Non-life Insurers shall prepare Financial Statements as per specified Forms such as Revenue Account
Schedule B of Regulation 3. The said financial statements will be prepared in accordance with General
Instructions for preparations as per Part III. The said financial statements shall be supported by
disclosures forming part of financial statements and the comments of management report as per Part
II and Part IV respectively, of the Schedule B.
The specified forms of financial statements are given hereinafter as ready reference for the
purpose of necessary discussion and analytical study for financial management based on insurance
accounting.
Form B-BS
Balance Sheet: Non-Life Insurer

Particulars
No. Year Year
SOURCES OF

FUNDS
Share capital 5
Reserves and
6
surplus
Fair value

change account
Borrowings 7
TOTAL
APPLICATION

OF FUNDS
Investments 8
Loans 9
Fixed assets 10
Current Assets
Cash and bank
11
balances
Advances and
12
other assets
Sub-
total
(A)
Current
13
Liabilities
Provisions 14
Sub-
total
(B)
Net Current
Assets (C) = (A -
B)
Miscellaneous Expenditure
15
(notwritten off )
Debit Balance in

pal Account
TOTAL
The above financial statements are to be prepared according to the general instruction for
preparation of financial statements as specified in Part III of the IRDA Regulation. Again said financial
statements will be supported by specific disclosure forming part of financial statements as specified
by Part II and comments of management report specified by Part IV of Schedule B of the Regulation. It
should also mention about the contingent liability in respect of the following items:
Party paid-up investments.
Underwriting commitments outstanding.
Claims, other than those under policies, not acknowledged as debts.
Guarantees given by or on behalf of the company.
Statutory demands/liabilities in dispute, not provided for.
Reinsurance obligations to the extent not provided for in accounts.
Form B-RA
Non-life Revenue Account

Particulars
No. Year Year
1. Premium earned
1
(Net)
2. Profit/loss on
sale/redemption of
investments
3. Others (to be

specified)
4. Interest, dividend &

rent (Gross)
TOTAL (A)
1. Claims incurred
2
(Net)
2. Commission 3
3. Operating expenses
related to insurance 4
business
TOTAL (B)
Operating profit/loss
from
Fire/Marine/Misc.
Business C = (A -

B)
APPROPRIATIONS
Transter to
Shareholders' Account
Transfer to
Catastrophe Reserve
Transfer to Other
Reserves (to be
specified)
TOTAL (C)

Form B-PL
Profit and Loss A/c of a General Insurance Company

Particulars
No. Year Year
1. Operating profits/loss
(a) Fire insurance
(b) Marine insurance I
(c) Miscellaneous insurance

2. Income from investments
(a) Interest, dividends & rents (Gross)
(b) Profit on sale of investments

3. Other income (to be specified)
TOTAL (A)
4. Provisions (other than taxation)

(a) For diminution in value of investment
(b) For doubtful debts
(c) Others (to be specified)

5. Other expenses
(a) Expenses other than those related to Ins.
Business
(b) Bad debts written off

(c) Others (to be Specified)
TOTAL (B)
Profit before tax

Provisions for taxation
Appropriations
(a) Interim dividend paid during the year
(b) Proposed final dividend
(c) Dividend distribution tax

(d) Transfer to any reserve or other account
Balance of Profit/loss Brought Forward from Last yr.
Balance Carried Forward to Balance Sheet
Ratio Analysis:
Importantly, the users of financial statements cannot form any opinion on any of the trends for their
economic decisions with the company only on the basis of financial statements unless they use various
ratio analysis and trend analysis with comparative and classified accounting or financial statement. In
using the financial statement including balance sheet, and income statements along with required
disclosure and management report and computing percentage change, trend change, component
percentages, and ratios as exemplified in annexure, the finance manager and analyst constantly
search for some standard of comparison to establish whether the information and relationship they
have found are favourable or adverse for their future economic decisions. Generally two standards of
comparison used by financial analysts are (i) the past performance of the company, and (ii) the
position of the company with respect to industry performance in the country and overseas. The
insurance business is carried on with international process, principle and perspective because of its
very nature of international character. So its trend analysis or trend percentage needs to be compared
with industry data and international standard to judge the company's position in respect of growth,
profitability, liquidity, solvency, etc. In the following table, certain performance analysis has been
done with some hypothetical figures just to show accounting information are used for trend analysis.
Performance Analysis and Trend Percentage (rs. In Lakh) of Ram Insurance Ltd.
Information 2009-
10
2010- Remarks/Observations
11 of Analyst
1 Gross direct
premium 5,676 5,103 Growth in the current year
2 Percentage
growth 11% 4%
Better growth in the current
year
3 Reinsurance
accepted 332 314
More acceptance in the
current year
4 Reinsurance
Ceded 1665 1522
More retention in the current
year
5 Net premium 4342 Net premium increase in the
3895 current year
Increase over 11% Better growth trend in the
previous year 7% current year
% to gross
premium 77% Better trend in current year
76%
These ratios are the most vital tools of financial analysis in management accounting. The corporate
management will take many financial decisions for their strategic issues. With this accounting
information many more analysis like the following few can be done.
Gross Premium to
Shareholders' Funds
Ratio (Rs. in lakh) 2009-10 2010-11
1. Gross Premium 5675.54 5103.16
2. Shareholders' Fund 4161.69 3735.22
3. Ratio (times) 1.36 1.37
Better the ratio, greater is the capacity utilization and better will
be the return. But again this ratio must be within permissible
limits laid down by regulators.

Net Retention Ratio
Gross Net Retention P. Y.

Premium Premium Ratio Retention
Fire 1,103.49 830.76 75.28% 78.12%
Marine 349.33 164.38 47.05% 55.97%
Misc. 4,222.73 3,347.52 79.27% 77.46%
Total 5,675.54 4,342.65 76.52% 76.33%
What does it indicate? What is the necessity of comparative
study?
What does excessively high or abnormally low retention ratio
imply?
Fund and Investment: How to calculate Shareholders' Fund and Policyholders' Fund.
Shareholders' Fund (2010-11) (Rs. in lakh)

Share Capital 200.00
Capital Reserve 0.06
General Reserve 4,622.79
Misc. Reserve (-)14.82 4,808.03
Policyholders' Fund (2010-11) (Rs. in lakh)
Unexpired Reserves 2,253.51
Outstanding Claims 5,505.40 7,758.91
Total Funds 12,566.94
Ratio between the two funds: 38:62
Total Investments 2010-11 2009-10

In India 20344.89 14238.54
Outside India 30.36 336.69

Total Investments 20375.25 14575.23

Long Term 20274.07 14195.57
Short Term 391.18 379.66

Government Investment 4459.81 3989.16

Equity & Debt 16205.44 10586.07

Cash Flow Statement

Cash flow statement is useful in providing users with financial statements with a basis to assess the
ability of the firm to generate cash and cash equivalent and the needs of the firm to utilize those cash
flows. The financial decisions that are taken by users require an evaluation of the ability of the firm to
generate cash and cash equivalent and the timing and certainty of their generation. In insurance
industry, the cash flow statement is of prime importance to the users of the financial statements as
the insurance company carries on risk-taking business dealing with intangible product, i.e., promise to
indemnity loss in future as and when accident will occur in consideration of premium collected
currently. The insurance companies need to have both solvency and liquidity sufficiently to pay off
their liabilities for claims at the time of accident, i.e., occurrence of perils. Thus, an insurer should
always prepare a cash flow statement and should present it for each period for which financial
statements are presented as per regulatory norms and forms. As per the IRDA Regulations, Cash Flow
statement in an insurance company is to be prepared in a Direct Method where AS 3 will not be
applicable. A cash flow statement, if used in conjunction with other financial statements, provides
information that enables the User to evaluate the charges in the net assets of the insurance company
and its financial structure (including its liquidity and solvency). For the purpose of preparation of cash
flow statement of an insurance company, following terms need to be defined for proper interpretation
and use.
1. Cash comprises on hand and demand deposits with banks of the corporate office and its all
operational units including overseas ones.
2. Cash equivalents are short term, highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of a firm (insurer) and other
activities that are not investing or financing activities. In insurance company cash flow from
operating activates (insurance activities) is a key indicator of the extent to which the operations of
the enterprise have generated sufficient cash flows to maintain the operating capability of the
insurers, pay claims, commission, management expenses and dividends, and repay loans and
borrowings.
5. Investing activities are the acquisitions and disposals of long term assets and other investments
not included in cash equivalent.
6. Financing activities are activities that result in changes in the size and composition of the
shareholders' funds and policyholders' funds (in case of insurance company) and borrowings of the
firm.
7. Preparation of cash flow statement Includes classification and segregation of operating, investing
and financing activities.
Direct Method of cash Flow Statement
Cash Flows from Operating Activities Amount Total

Cash receipts from customers .
Cash paid to suppliers and employees
Cash generated from operations

Income taxes paid
Cash flow before extraordinary item
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cash Flows from Investing Activities

Purchase of fixed assets
Proceeds from sale of equipment
Interest received
Dividends received
Net cash from investing activities
Cash Flows from Financing Activities

Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayment of long-term borrowings
Interest paid Dividends paid
Net cash used in financing activities
Net increase in cash and cash

equivalents
Cash and Cash Equivalents at Beginning

of Period
Cash and Cash Equivalents at End of

Period
Indirect Method of Cash Flow Statement

Net profit before taxation, and extraordinary item
Adjustments for
Depreciation
Foreign exchange loss
Interest income
Dividend income
Interest expense
Operating profit before working capital changes
Increase in sundry debtors
Decrease in inventories
Decrease in sundry creditors
Income tax paid

I nterest received
Dividend received
Net cash flows from financing activities

Interest paid
Dividend paid
Net increases in cash and cash

equivalents

of Period
Period
Example of Financial Statement of a Non-life insurance companies:
Example of Financial Statements of Life Insurance Companies
Self-Assessment Questions:
Question 1: Define the legal requirements of Directors Report as per the Companies Act 1956.
Question 2: State IRDA requirements regarding the Financial Statements.
Question 3: Draft Balance sheet and Revenue Account of a life insurance company using imaginary
figures.
Question 4: Prepare the dummy financial statements of a non-life insurance company.
References:
Mishra, K.C. and Guria, R.C.(2009), Practical Approach to General Insurance Underwriting,
Cengage Learning, Delhi.
Gupta C. B., (2005), Business Organization and Management, Sultan Chand & Sons, New Delhi.
Gupta P. K., (2005), Insurance and Risk management, Himalaya Publisher, New Delhi.
9 LESSON 9 GENERAL INSURANCE 9NON LIFE
INSURANCE FIRE/MARINE
LESSON 9
GENERAL INSURANCE 9NON LIFE INSURANCE FIRE/MARINE
Dr Ashish Kumar
LBSIM
Meaning And Importance Of 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. There are also
other covers such as Errors and Omissions insurance for professionals, credit insurance etc. Non-life
insurance companies have products that cover property against Fire and allied perils, flood storm and
inundation, earthquake and so on. There are products that cover property against burglary, theft etc.
The non-life companies also offer policies covering machinery against breakdown, there are policies
that cover the hull of ships and so on. A Marine Cargo policy covers goods in transit including by sea,
air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of
non-life insurance business.
A non-life insurance contract is different from a life insurance contract. A life insurance
contract is a long term contract, while general insurance contract is a one-year renewable contract.
The risk namely death is certain in life insurance. The only uncertainty is as to when it will take
place, whereas in general insurance, the insured event may or may not take place. It is difficult to
determine the economic value of life, whereas the financial value of any asset to be insured under a
general insurance policy can be determined. Because of these peculiar features, a non life insurance
contract is different from a life insurance contract. In this lesson we will learn in detail the treatment
of each type of non-life insurance.
Section 2(6B) of the Insurance Act 1938, defines general insurance business. According to this
general insurance business means fire, marine, or miscellaneous insurance whether carried separately
or in combination. General Insurance Corporation of India (GIC) was set up with exclusive privilege for
transacting General Insurance business. After the passage of IRDA Act 1999, GIC has been delinked
from its subsidiaries and has been assigned the role of Indian reinsurer.
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. Losses created by catastrophes such as the tsunami, earthquakes.
Cyclones etc. have left many homeless and penniless. Such losses can be devastating but insurance
could help mitigate them. Property can be covered, so also the people against Personal Accident. A
Health Insurance policy can provide financial relief to a person undergoing medical treatment whether
due to a disease or an injury. 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. Financiers
insist on insurance. So, most industries or businesses that are financed by banks and other institutions
do obtain covers. But are they obtaining the right covers? And are they insuring adequately are
questions that need to be given some thought. Also organizations or industries that are self-financed
should ensure that they are protected by insurance.

Types of General Insurance
Basically there are four type of general insurance stated below. Beside these a number of different
kinds of policies for hedging against the various kind of risk are available in the market these days.
Fire Insurance
Marine Insurance
Motor Insurance
Health Insurance
Miscellaneous Insurance
Fire Insurance
Fire is hazardous to human life as well as property. Loss of life by fire is covered under Life
insurance and loss of property by fire is covered under fire insurance. Fire causes enormous damage by
physically reducing the materials to ashes. A fire insurance policy provides protection strictly against
fire. There could be enormous reasons for fire. In practice certain other related perils are also
covered by the fire insurance policy. The General Insurance Act (Tariff) recommends the form of the
contract in which a fire insurance is to be written. The policy form contains a preamble and operative
clause, general exclusions and general conditions. Fire Insurance comes under tariff class of business.
All India Fire Tariff is the revised fire insurance tariff, which came into force on May1, 2001. Now a
single policy was introduced to cover all property risks called standard fire and special peril policy in
the place of three standard policies i.e. A, B&C.
A contract of fire insurance can be defined as a contract under which one party ( the insurer)
agrees for consideration (premium) to indemnify the other party (The insured) for the financial loss
which the latter may suffer due to damage to the property insured by fire during a specified period of
time and up to an agreed amount. The document containing the terms and conditions of the contract
is known as Fire Insurance Policy. A fire policy contains the name of the parties, description of the
insured property, the sum for which the property is insured, amount of premium payable and the
period insured against. The premium may be paid either in single installment or by way of
installments. The insurer is liable to make good the loss only when loss is caused by actual fire. The
phrase loss or damage by fire also includes the loss or damage caused by efforts to extinguish fire.
Scope of cover
Standard Fire and special perils policy usually cover loss due to the following perils:
1. Fire: Destruction or damage to the property insured by its own fermentation, natural heating or
spontaneous combustion or drying process can not be treated as damage due to fire.
2. Lightning: It may result in fire damage or other type of damage, such as cracks in a building due
to a lightning strike.
3. Explosion:An explosion is caused inside a vessel when the pressure within the vessel exceeds the
atmospheric pressure acting externally on its surface. This policy, however, does not cover destruction
or damage caused to the boilers or other vessels where heat is generated.
4. Storm, cyclone, typhoon, hurricane, tornado, landslide: These are all various types of
violent natural disturbances accompanied by thunder or strong winds or heavy rain fall. Loss or
damage directly caused by these disturbances are covered excluding those resulting from earthquake,
volcanic eruption etc.
5. Bush fire:This covers damage caused by burning of bush and jungles but excluding destruction or
damage caused by forest fire.
6. Riot, strike, malicious, and terrorism damages: Any loss or physical damage to the
property insured directly caused by such activity or by the action of any lawful authorities in
suppressing such disturbance is covered.
7. Aircraft damage: Loss, destruction or damage caused by Aircraft, other aerial or space devices
and articles dropped there from excluding those caused by pressure waves.
8. Overflowing of water tanks and pipes etc.: Loss or damage to property by water or
otherwise on account of bursting or accidental overflowing of water tanks, apparatus and pipes is
covered.
9. Add-on Covers:The insurer can issue the standard fire policy with added benefits at the option
of the policyholders by charging additional premium. These added benefits are as follows:
1. Architects, Surveyors and Consulting engineers fees ( in excess of 3% claim amount)
2. Debris removal ( in excess of 1% of claim amount)
3. Deterioration of stocks in cold storage due to power failure
4. Forest fire
5. Spontaneous combustion
6. Earthquake as per minimum rates and excess applicable as specified in the tariff.
7. Omission to insure additions, alterations or extensions.

The following types of losses, however, are not covered by a fire policy:
Loss by theft during and after the occurrence of fire.
Loss caused by burning of property by order of any public authority.
Loss caused by underground fire.
Loss or damage to property occasioned by its own fermentation or spontaneous combustion.
Loss happening by fire which is caused by earthquake, invasion, act of foreign enemy, warlike
operations, civil wars, riot etc.
In all the above cases the insurer is not liable, unless specifically provided for in the fire insurance
policy. The insurer can issue the standard fire policy as per the New Fire Tariff along with added
benefits at the option of the policyholders by charging additional premium.

Types of Fire Policies
The important fire insurance policies are discussed below:
(i) Valued Policy. They are the exception in fire insurance. Under valued policy, the value
declared in the policy is the amount the insurer will have to pay to the insured in the event
of a total loss irrespective of the actual value of loss. The policy violates the principle of
indemnity. The insurer has to pay a specified amount quite independent of the market or
actual value of the property at the time of loss. So such a policy is very rarely issued. It may
be issued only on artistic work, antiques and similar rare articles whose value cannot be
determined easily.
(ii) Specific Policy. Under this policy, the insurer undertakes to make good the loss to the
insured upto the amount specified in the policy. Supposing, a building worth Rs.2,00,000 is
insured against fire for Rs. 1,00,000. If the damage to the property is Rs.75,000 the insurer
will get the full compensation. Even if the loss is Rs.1,00,000 the insurer will get the full
amount. But if the loss is more than Rs. 1, 00,000 the insured will get Rs. 1,00,000 only.
Hence, the value of property is not relevant in determining the amount of indemnity in case
of a specific policy.
(iii) Average Policy. Under a fire insurance policy containing the average clause the insured is
liable for such proportion of the loss as the value of the uncovered property bears to the
whole property. e.g. if a person gets his house insured for Rs. 4,00,000 though its actual
value is Rs. 6,00,000 , if a part of the house is damaged in fire and the insured suffers a loss
of Rs. 3,00,000 , the amount of compensation to be paid by the insurer comes out to Rs.
2,00,000 calculated as follows:

Amount of claim= (Insured amount X Actual loss) /Actual value of property
(4,00,000 X 3,00,000)/6,00,000 =2,00,000
(iv) Floating policy. A floating policy is used for covering fluctuating stocks of goods held in
different lots for one premium. With every transaction of sale or purchase, the quantities of
goods kept at different places fluctuate. It is difficult for the owner to take a policy for a
specific amount. The best way is to take out a floating policy for all the stocks of goods.
(v) Reinstatement Policy. In such a policy, the insurer has the right to reinstate or replenish
the property destroyed instead of paying compensation to the insured in cash. It may be
granted on building, machinery, furniture, fixture and fittings only.
(vi) Consequential loss Policy. Sometimes the insured has to suffer a greater financial loss on
account of dislocation of business caused by fire .e.g. close down business after fire for
repair, to meet fixed expenses such as rent, salaries, taxes and other expenses as usual.
Such considerable loss to the insured is not covered by the ordinary fire policy. In order to
cover such loss by fire, the Consequential Loss Policy has been introduced. The loss so
suffered is separately calculated from the loss actually suffered.
(vii) Comprehensive policy. This policy covers the risks of the fire arising out of any cause
that is civil commotion, lightening, riots, thefts, labor disturbances and strikes etc. It is also
known as all insurance policy.
(viii) A Blanket policy. This policy is issued to cover all the fixed and current assets of an
enterprise by one insurance.
(ix) Declaration policy. In this policy, trader takes out a policy for the maximum value of stock
which may be expected to hold during the year. At a fixed date each month, the insured has
to make a declaration regarding the actual value of stock at risk on that date. On the basis
of such declaration, the average amount of stock at risk in the year is calculated and this
amount becomes the sum assured.
(x) Sprinklers leakage policy. It covers the loss arising out of water leakage from sprinklers
which are setup to extinguish fire.
Claim Procedure for Fire Insurance

1. In the event of fire the insured must immediately give the insurer a notice about the loss
caused by fire. A written claim should be delivered with in 15days from the date of loss. The
insured is required to furnish all plans, invoices, documents, proofs and other relevant
informations required by the insurer. If the insured failed to submit these documents within 6
months from the date of loss, the insurer has the right to consider it as no claim.
2. On receipt of the claim the insurer verifies whether the essentials of a valid claim are
satisfied or not. e.g. The cause of fire should be an insured peril.
3. The insured completes the form, signs the declaration given in the form as to the
truthfulness and accuracy of the information and returns the same.
4. An official employed by the insurer investigates small and simple claims. For large claims,
the insurance company employs independent loss surveyor.
5. On the basis of the claim form and the investigation report, the company then settles the
claim.
Marine Insurance
Marine insurance covers 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. Cargo insurance discussed here is a sub-branch of marine insurance, though Marine also
includes Onshore and Offshore exposed property (container terminals, ports, oil platforms, pipelines);
Hull; Marine Casualty; and Marine Liability.
The general principles of marine insurance are the same as with other types of insurance in that
there are two parties: the assured and assurer (or carrier). The assured or insured agrees to pay a
premium and the insurer agrees that, if certain losses or damage occurs to certain interests of the
insured, the insurer will indemnify the insured. The similarities pretty much end here. The complex
circumstances involved in sea voyages require very specific arrangements for the provision of marine
insurance. The fixing of rates and special conditions, for example, requires a vast knowledge of the
nature of vessels and cargos and of the conditions of navigation.
The marine policy may cover the risks of a single voyage, or may insure for a certain period of
time. Cargo is almost always insured by voyage. Vessels are usually insured for certain duration of
time, usually year by the year. Cargo policies may be on a single lot or may be open to cover cargo as
shipped by the insured. Hull insurance, or vessel insurance, may cover a ship or a whole fleet.
Typical of marine insurance is the principle that no contract of marine insurance is valid unless
the insured has an insurable interest in the subject matter at the time of loss. The term insurable
interest has been variously defined. According to the EnglishMarine InsuranceAct of 1906, "every
person has an insurable interest who is interested in a marine adventure.... a person is interested in a
marine adventure where he stands in any legal or equitable relation to the adventure or to any
insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival
of insurable property, or may be prejudiced by its loss, or damage thereto, or by the detention
thereof, or may incur liability in respect thereof".
The nature and scope of marine insurance is determined by reference to s. 6 of the Marine
Insurance Act and by the definitions of marine adventure and maritime perils. A contract of
marine insurance is a contract whereby the insurer undertakes to indemnify the insured, in the
manner and to the extent agreed in the contract, against losses that are incidental to a marine
adventure or an adventure analogous to a marine adventure, including losses arising from a land or air
peril incidental to such an adventure if they are provided for in the contract or by usage of the trade;
or losses that are incidental to the building, repair or launch of a ship.
"Marine adventure" means any situation where insurable property is exposed to maritime perils,
and includes any situation where the earning or acquisition of any freight, commission, profit or other
pecuniary benefit, or the security for any advance, loan or disbursement, is endangered by the
exposure of insurable property to maritime perils, and any liability to a third party may be incurred by
the owner of, or other person interested in or responsible for, insurable property, by reason of
maritime perils. "Maritime perils" means the perils consequent on or incidental to navigation, including
perils of the seas, fire, war perils, acts of pirates or thieves, captures, seizures, restraints,
detainments of princes and peoples, jettisons, barratry and all other perils of a like kind and, in
respect of a marine policy, any peril designated by the policy.
Subject Matter of Marine Insurance

The insured may be the owner of the ship, owner of the cargo or the person interested in
freight. In case the ship carrying the cargo sinks, the ship will be lost along with the cargo. The
income that the cargo would have generated would also be lost. Based on this we can classify the
marine insurance into four categories:
1. Hull Insurance: Hull refers to the ocean going vessels (ships trawlers etc.) as well as its
machinery. The hull insurance also covers the construction risk when the vessel is under
construction. A vessel is exposed to many dangers or risks at sea during the voyage. An
insurance effected to indemnify the insured for such losses is known as Hull insurance.
2. Cargo Insurance: Cargo refers to the goods and commodities carried in the ship from one
place to another. The cargo transported by sea is also subject to manifold risks at the port and
during the voyage. Cargo insurance covers the shipper of the goods if the goods are damaged or
lost. The cargo policy covers the risks associated with the transshipment of goods. The policy
can be written to cover a single shipment. If regular shipments are made, an open cargo policy
can be used that insures the goods automatically when a shipment is made.
3. Freight Insurance: Freight refers to the fee received for the carriage of goods in the ship.
Usually the ship owner and the freight receiver are the same person. Freight can be received in
two ways- in advance or after the goods reach the destination. In the former case, freight is
secure. In the latter the marine laws say that the freight is payable only when the goods reach
the destination port safely. Hence if the ship is destroyed on the way the ship owner will loose
the freight along with the ship. That is why, the ship owners purchase freight insurance policy
along with the hull policy.
4. Liability Insurance: It is usually written as a separate contract that provides comprehensive
liability insurance for property damage or bodily injury to third parties. It is also known as
protection and indemnity insurance which protects the ship owner for damage caused by the
ship to docks, cargo, illness or injury to the passengers or crew, and fines and penalties.
Types of Marine Policy

There are different types of marine policies known by different names according to the manner of
their execution or the risk they cover. They are:
(i) Voyage Policy: Under the policy, the subject matter is insured against risk in respect of
a particular voyage from a port of departure to the port of destination, e.g. Mumbai to New
York. The risk starts from the departure of ship from the port and it ends on its arrival at the
port of destination. This policy covers the subject matter irrespective of the time factor. This
policy is not suitable for hull insurance as a ship usually does not operate over a particular
route only. The policy is used mostly in case of cargo insurance.
(ii) Time Policy: It is one under which the insurance is affected for a specified period of
time, usually not exceeded twelve months. Time policies are generally used in connection with
the insurance of ship. Thus if the voyage is not completed with in the specified period, the risk
shall be covered until the voyage is completed or till the arrival of the ship at the port of call.
(iii) Mixed Policies: It is one under which insurance contract is entered into for a certain time
period and for a certain voyage or voyages, e.g., Kolkata to New York, for a period of one year.
Mixed Policies are generally issued to ships operating on particular routes. It is a mixture of
voyage and time policies.
(iv) Valued Policies: It is one under which the value of subject matter insured is specified on
the face of the policy itself. This kind of policy specifies the settled value of the subject matter
that is being provided cover for. The value which is agreed upon is called the insured value. It
forms the measure of indemnity in the event of loss. Insured value is not necessarily the actual
value. It includes (a) invoice price of goods (b) freight, insurance and other charges (c) ten to
fifteen percent margin to cover expected profits.
(v) Unvalued policy: It is the policy under which the value of subject matter insured is not
fixed at the time of effecting insurance but has to be ascertained wherever the subject matter
is lost or damaged.
(vi) Open policy: An open policy is issued for a period of 12 months and all consignments
cleared during the period are covered by the insurer. This form of insurance Policy is suitable
for big companies that have regular shipments. It saves them the tedious and expensive process
of acquiring an insurance policy for each shipment. The rates are fixed in advance, without
taking the total value of the cargo being shipped into consideration. The assured has to declare
the nature of each shipment, and the cover is provided to all the shipments. The assured also
deposits a premium for the estimated value of the consignment during the policy period.
(vii) Floating Policy: A merchant who is a regular shipper of goods can take out a floating
policy to avoid botheration and waste of time involved in taking a new policy for every
shipment. This policy stands for the contract of insurance in general terms. It does not include
the name of the ship and other details. The other details are required to be furnished through
subsequent declarations. Thus, the insured takes a policy for a huge amount and he informs the
underwriter as and when he makes shipment of goods. The underwriter goes on recording the
entries in the policy. When the sum assured is exhausted, the policy is said to be fully
declared or run off.
(viii) Block Policy: This policy covers other risks also in addition to marine risks. When goods are
to be transported by ship to the place of destination, a single policy known as block policy may
be taken to cover all risks. E.g. when the goods are dispatched by rail or road transport for
shipment, a single policy may cover all the risks from the point of origin to the point of
destination.
Assignment of Marine Policy
A marine insurance policy may be transferred by assignment unless the terms of the policy
expressly prohibit the same. The policy may be assigned either before or after loss. The assignment
may be made either by endorsement on the policy itself or on a separate document. The insured need
not give a notice or information to the insurer or underwriter about assignment. In case of death of
the insured, a marine policy is automatically assigned to his heirs. At the time of assignment, the
assignor must possess an insurable interest in the subject matter insured. An insured who has parted
with or lost interest in the subject matter insured cannot make a valid assignment. After the
occurrence of the loss, the policy can be assigned freely to any person. The assignor merely transfers
his own right to claim to the assignee.
Clauses in a Marine Policy
A policy of marine insurance may contain several clauses. Some of the clauses are common to
all marine policies while others are included to meet special requirements of the insured. Hull, cargo
and freight policies have different standard clauses. There are standard clauses which are invariably
used in marine insurance. Firstly, policies are constructed in general, ordinary and popular sense, and,
later on, specific clauses are added to them according to terms and conditions of the contract. Some
of the important clauses in a marine policy are described below:
1. Valuation Clause. This clause states the value of the subject matter insured as agreed
upon between both the parties.
2. Sue and Labour clause. This clause authorizes the insured to take all possible steps to
avert or minimize the loss or to protect the subject matter insured in case of danger. The
insurer is liable to pay the expenses, if any, incurred by the insured for this purpose.
3. Waiver Clause. This clause is an extension of the above clause. The clause states that any
act of the insured or the insurer to protect, recover or preserve the subject matter of insurance
shall not be taken to mean that the insured wants to forgo the compensation, nor will it mean
that the insurer accepts the act as abandonment of the policy.
4. Touch and Stay Clause. This clause requires the ship to touch and stay at such ports and
in such order as specified in the policy. Any departure from the route mentioned in the policy
or the ordinary trade route followed will be considered as deviation unless such departure is
essential to save the ship or the lives on board in an emergency.
5. Warehouse to warehouse clause. This clause is inserted to cover the risks to goods from
the time they are dispatched from the consignors warehouse until their delivery at the
consignees warehouse at the port of destination.
6. In charge Clause. This clause covers the loss or damage caused to the ship or machinery
by the negligence of the master of the ship as well as by explosives or latent defect in the
machinery or the hull.
7. F.P.A. and F.A.A. Clause. The F.P.A. (Free of Particular Average) clause relieves the
insurer from particular average liability. The F.A.A. ( free of all average) clause relieves the
insurer from liability arising from both particular average and general average.
8. Lost or Not Lost Clause. Under this clause, the insurer is liable even if the ship insured is
found not to be lost prior to the contact of insurance, provided the insurer had no knowledge of
such loss and does not commit any fraud. This clause covers the risks between the issue of the
policy and the shipment of the goods.
9. Running down Clause. This clause covers the risk arising out of collision between two
ships. The insurer is liable to pay compensation to the owner of the damaged ship. This clause
is used in hull insurance.
10. Free of Capture and Seizure Clause. This clause relieves the insurer from the liability of
making compensation for the capture and seizure of the vessel by enemy countries. The insured
can insure such abnormal risks by taking an extra war risks policy.
11. Continuation Clause. This clause authorizes the vessel to continue and complete her voyage
even if the time of the policy has expired. This clause is used in a time policy. The insured has
to give prior notice for this and deposit a monthly prorate premium.
12. Barratry Clause. This clause covers losses sustained by the ship owner or the cargo owner
due to willful conduct of the master or crew of the ship.
13. Jettison Clause. Jettison means throwing overboard a part of the ships cargo so as to
reduce her weight or to save other goods. This clause covers the loss arising out of such
throwing of goods. The owner of jettisoned goods is compensated by all interested parties.
14. At and From Clause. This clause covers the subject matter while it is lying at the port of
departure and until it reaches the port of destination. It is used in voyage policies. If the policy
consists of the word from only instead of at and from, the risk is covered only from the time
of departure of the ship.
Warranties
Warranty means a promissory warranty by which the insured undertakes that some particular
thing will or will not be done or that some condition will be fulfilled; or affirms or negates the
existence of particular facts. A warranty may be an implied warranty and express warranty.
Express Warranties: An express warranty may be in any form of words from which the intention
to warrant may be inferred. (2) An express warranty must be included in, or written on, the marine
policy or be contained in a document incorporated by reference into the policy. It does not exclude an
implied warranty, unless they are inconsistent.
An express warranty may be in any form of words from which the intention to warrant may be
inferred. Unfortunately, it has proven difficult for insurers to find the exact words that will lead to
the required inference. Words such as warranted that have been held to not necessarily delineate a
warranty. Similarly, the words warranted free from any claim... were held not to delineate a
warranty. Examples of express warranties are as follows:
The number and type of express warranties are limited only by the imagination and ingenuity of
underwriters. Almost anything can be made to be an express warranty provided the proper words are
used. Notwithstanding this total freedom to make almost anything a warranty most policies contain
relatively few. The more common express warranties are:
Navigation and trading warranties that limit the geographical areas in which a vessel may
operate;
Laid up and out of commission warranties that require a vessel to be laid up for a defined
period or generally;
Identity of the master warranties that require a named person to command the vessel;
Towing warranties that prohibit the insured vessel from being towed except where
customary or when the vessel is in need of assistance;
Private pleasure use warranties that prohibit any commercial use of a yacht; and
Warranties regarding surveys and inspections that require inspections to be conducted or
recommendations by surveyors to be complied with.
Implied Warranty: these are the warranties which are not expressly mentioned in the contract
but the law takes it for granted that such warranty exists. An express warranty does not exclude
implied warranty unless it is inconsistent therewith. Implied warranties do not appear in the policy
documents at all, but are understood without being put into words, and as such, are automatically
applicable. These are included in the policy by law, general practice, long established custom or
usage. There are three warranties implied by the Act. They are the warranty of legality, neutrality
and
seaworthiness.
Legality: The warranty of legality is one which is often expressly included in policies as well
as implied. The journey undertaken by the ship must be for legal purposes. Carrying prohibited
or smuggled goods is illegal and therefore, the insurer shall not be liable for the loss.
Neutrality: Where in any marine policy insurable property is expressly warranted to be
neutral, there is an implied condition in the policy (a) that the property will have a neutral
character at the commencement of the risk and that, in so far as the insured has control, that
character will be preserved during the risk; and (b) where the property is a ship, that, in so far
as the insured has control, the papers necessary to establish the neutrality of the ship will be
carried on the ship and will not be falsified or suppressed and no simulated papers will be used.
Seaworthiness: There is an implied warranty in every voyage policy that, at the
commencement of the voyage, the ship will be seaworthy for the purpose of the particular
marine adventure insured.
Types of Marine Losses
A loss arising in a marine adventure due to perils of the sea is a marine loss. Marine loss may be
classified into two categories:
Total loss:A total loss implies that the subject matter insured is fully destroyed and is
totally lost to its owner. It can be Actual total loss or Constructive total loss. In actual total loss
subject matter is completely destroyed or so damaged that it ceases to be a thing of the kind
insured. e.g. sinking of ship, complete destruction of cargo by fire, etc. In case of constructive
total loss the ship or cargo insured is not completely destroyed but is so badly damaged that the
cost of repair or recovery would be greater than the value of the property saved. e.g. a ship
dashed against the rock and is stranded in a badly damaged position. If the expenses of bringing
it back and repairing it would be more than the actual value of the damaged ship, it is
abandoned.
Partial loss: A partial loss occurs when the subject matter is partially destroyed or
damaged. Partial loss can be general average or particular average. General average refers to
the sacrifice made during extreme circumstances for the safety of the ship and the cargo. This
loss has to be borne by all the parties who have an interest in the marine adventure. e.g. A loss
caused by throwing overboard of goods is a general average and must be shared by various
parties. Particular average may be defined as a loss arising from damage accidentally caused by
the perils insured against. Such a loss is borne by the underwriter who insured the object
damaged. e.g. If a ship is damaged due to bad weather the loss incurred is a particular average
loss.
10 LESSON 10 GENERAL INSURANCEMOTOR
HEALTH & MISCELLANEOUS
LESSON 10
GENERAL INSURANCEMOTORHEALTH
& MISCELLANEOUS
Dr Ashish Kumar
LBSIM
Introduction:
Balance sheet,
Revenue accounts,
3. Auditors report
Act 1956)
particulars:
thereof.
The reasons for the failure, if any, to complete the buy back within the time specified in
The fullest and explanations on every reservation, qualification or adverse remarks
contained in the auditors' report.

per the above requirements of the Companies Act, 1956:
1. Comparative Performance Analysis (Class-wise Underwriting Performance) for the financial
performance analysis of XYZ General Insurance Co. Ltd. in respect of the following
performance review for FY 2005-06.
Gross direct premium and percentage of growth over previous year
Reinsurance premium ceded
Increase in unexpired risks reserve and percentage to net premium
Net premium earned
Others
2. Review of accounts as an annexure to accounts
4. Proposed dividend
8. Solvency margin and its change over the previous year
Financial Statements:
As mentioned earlier, as per the IRDA (Preparation of Financial Statements and Auditors'
Report of Insurance companies) Regulations, 2000, an insurer shall prepare the Financial Statements
including Balance sheet, Revenue Account (Policyholders Account), Receipts and Payments Account
(Cash Flow Statements) and Profit and Loss Account (Shareholders' account) as Accounting Standard
(AS) issued by the ICAI to the extent applicable to the insurers except that:
1. Accounting Standard 3 (AS 3) and Accounting Standard 17 (AS 17) in case of insurers carrying on
life insurance business
2. Accounting Standard 3 (AS 3), Accounting Standard 13 (AS 13) and Accounting Standard 17
(AS17) in case of insurers carrying on non-life insurance business

Cash flow statements will be prepared only under direct method and segment reporting shall apply
irrespective of whether the securities of the insurer are traded publicly or not in both the cases and in
case of non-life insurance company AS 13-Accounting for investments shall not be applicable.
Motor Insurance
Motor insurance policy is a contract between the insured and the insurer in which the insurer
promises to indemnify the financial liability in event of loss to the insured. Motor Vehicles Act in 1939
was passed to mainly safeguard the interests of pedestrians. According to the Act, a vehicle cannot be
used in a public place without insuring the third part liability. According to Section 24 of Motor
Vehicles Act, No person shall use or allow any other person to use a motor vehicle in a public place,
unless the vehicle is covered by a policy of insurance. Classification of Motor Vehicles As per the
Motor Vehicles Act for the purpose of insurance the vehicles are classified into three broad categories
such as.
Private cars:
a) Private Cars - vehicles used only for social, domestic and pleasure purposes
b) Private vehicles - Two wheeled
1. Motorcycle / Scooters
2. Auto cycles
3. Mechanically assisted pedal cycles
Commercial vehicles:
1. Goods carrying vehicles
2. Passengers carrying vehicles
3. Miscellaneous & Special types of vehicles
The risks under motor insurance are of two types:

1) Legal liability due to bodily injury, death or damage caused to the property of others.
2) Loss or damage to ones own vehicle\ injury to or death of self and other occupants of the vehicle.
Types of motor policies
When you buy a motor vehicle, you need to buy a motor insurance. There are, however, many types of
motor insurance policies available. The common types are:
Third party cover - This policy insures you against claims for bodily injuries or deaths caused
to other persons (known as the third party), as well as loss or damage to third party property
caused by your vehicle.
Third party, fire and theft cover - This policy provides insurance against claims for third
party bodily injury and death, third party property loss or damage, and loss or damage to your
own vehicle due to accidental fire or theft.
Comprehensive cover - This policy provides the widest coverage, i.e. third party bodily
injury and death, third party property loss or damage and loss or damage to your own vehicle
due to accidental fire, theft or an accident.
Exclusions/Extensions
A standard motor insurance will not cover certain losses, such as your own death or bodily
injury due to a motor accident, your liability against claims from passengers in your vehicle (except
for passengers of hired vehicles such as taxis and buses) and loss or damage arising from an act of
nature, such as flood, storm and landslide. However, you may pay additional premiums to extend your
policy to cover flood, landslide, landslip as well as cover your passengers.It is important to check
your policy for the exclusions.
Important points to consider when buying motor insurance policies
Insured value/sum insured: If you are buying a policy against loss/damage to your vehicle, you
must ensure that your vehicle is adequately insured as it will affect the amount you can claim in the
event of loss/damage. For a new vehicle, the insured value will be the purchase price while for other
vehicles, the insured value is the market value of the vehicle at the point you apply for the insurance
policy.
Under-insurance If you insure your vehicle at a lower sum than its market value, you will be
deemed as self-insured for the difference, i.e. in the event of loss/damage, you will only be
partially compensated (up to the proportion of insurance) by your insurance company.
Over-insurance Should you insure your vehicle at a higher sum than its market value, the
maximum compensation you will receive is the market value of the vehicle as the policy owner
cannot profit from a motor insurance claim.
Duty of disclosure: You should disclose fully all material facts, including previous accidents (if
any), modification to engines, etc. When in doubt as to whether a fact is relevant or not, it is best to
ask your insurance company. If you fail to disclose any material fact, your insurance company may
refuse to pay your claim or any claim made by a third party against you. In such cases, you are
personally liable for such claims.
Price: The price you pay for your motor insurance will depend on the type of policy selected. The
insurance premium charged by your insurance company is the standard minimum rate in accordance
with the Motor Tariff. However, in addition to the standard minimum rate, your insurance company
may impose additional premiums known as loadings to the premium payable in view of higher risk
factors involved such as age of vehicle and claims experience.
No-claim-discount: The premium payable may be reduced if you have no-claim-discount (NCD)
entitlement. NCD is a reward scheme for you if no claim was made against your policy during the
preceding 12 months of policy. Different NCD rates are applicable for different classes of vehicles. For
a private car, the scale of NCD ranges from 25% to 55% as provided in the policy.
Transfer of ownership: In case of any sale of vehicle involving transfer of policy, the insured
should apply to the insurer for consent to such transfer. The transfer is allowed, if within 15 days of
receipt of application, the insurer does not reject the plea. The transferee shall apply within fourteen
days from the date of transfer in writing to the insurer who has insured the vehicle, with the details of
the registration of the vehicle, the date of transfer of the vehicle, the previous owner of the vehicle
and the number and date of the insurance policy so that the insurer may make the necessary changes
in his record and issue fresh Certificate of Insurance.
Excess: Also known as a deductible. This is the amount of loss you have to bear before your
insurance company will pay for the balance of your vehicle damage claim. The types of excess
applicable are as follows:
Compulsory excess of RM400:If your vehicle is driven by a person not named in
your policy or a person named in your policy who is under the age of 21, the holder of a
provisional (L) driving license or the holder of a full driving license of less than two years.
Other excess:applicable at the discretion of your insurance company and in some
cases, no excess is imposed. You can negotiate with your insurance company on this excess.
What you should do in the event of an accident/loss
Take notes of the accident If you are involved in a motor accident, take notes of the
accident, i.e. the names and addresses of all drivers and passengers involved, vehicle registration
numbers, make and model of each vehicle involved, the drivers licence numbers and insurance
identification as well as the names and addresses of as many witnesses as possible
Make a police report You are required by law to lodge a police report within 24 hours of a
road accident.
Notify your insurance company You must notify your insurance company in writing with
full details as soon as possible. Depending on the type of claim you intend to make, you may have
to notify other insurance companies. If you fail to report the accident, you will be liable for your
own loss as well as any third party claim against you.
Select the workshop You must send your damaged vehicle to a workshop approved by your
insurance company. If the accident occurs during office hours, you may call the hotline/
emergency assistance numbers provided by your insurance company. Otherwise, you may call your
insurance company for the nearest approved workshop. Should the accident occur outside office
hours and you are making a claim against your policy, i.e. an own damage claim, you should ensure
that your vehicle is towed to a workshop approved under Repairers Scheme.
Claim Settlement
Claim arises when:
1) The insureds vehicle is damaged or any loss incurred.
2) Any legal liability is incurred for death of or bodily injury
3) Or damage to the third partys property.
The claim settlement in India is done by opting for any of the following by the insurance company.
Replacement or reinstatement of vehicle
Payment of repair charges
In case, the motor vehicle is damaged due to accident it can be repaired and brought back to
working condition. If the repair is beyond repair then the insured can claim for total loss or for a new
vehicle. It is based on the market value of the vehicle at the time of loss. Motor insurance claims are
settled in three stages. In the first stage the insured will inform the insurer about loss. The loss is
registered in claim register. In the second stage, the automobile surveyor will assess the causes of loss
and extent of loss. He will submit the claim report showing the cost of repairs and replacement
charges etc. In the third stage, the claim is examined based on the report submitted by the surveyor
and his recommendations. The insurance company may then authorize the repairs. After the vehicle is
repaired, insurance company pays the charges directly to the repairer or to the insured if he had paid
the repair charges.
Section 110 of Motor Vehicle Act, 1939 empowers the State Government in establishing motor
claim tribunals. These tribunals will help in settling the third party claims for the minimum amount
Theft claims
After submission of the claim form, you must cooperate fully with your insurance company or its
representative during the course of investigation of the theft claim.
In view that the police and your insurance company will require time to investigate your claim,
you will receive the offer of settlement from your insurance company within six months from the
theft notification or upon completion of police investigations, whichever is earlier
Heath Insurance
Health insurance, like other forms ofinsurance, is a form ofcollectivismby means of which
people collectively pool their risk, in this case the risk of incurring medical expenses. The collective is
usually publicly owned or else is organized on a non-profit basis for the members of the pool, though
in some countries health insurance pools may also be managed by for-profit companies. It is
sometimes used more broadly to include insurance covering disability or long-term nursing or
custodial care needs. It may be provided universally through government as a feature of social
solidarity, as is typical in many industrial countries, or as form of government charity such as the
United States Medicaid program. It may be purchased privately on a group basis (e.g., by a firm to
cover its employees) or purchased by an individual for himself or his family. In each case, the covered
groups or individuals pay a fee, premium, or tax, to help protect themselves from health care
expenses.
Health insurance is an insurance, which covers the financial loss arising out of poor health
condition or due to permanent disability, which results in loss of income. A health insurance policy is
a contract between an insurer and an individual or group, in which the insurer agrees to provide
specified health insurance at an agreed upon price (premium). It usually provides either direct
payment or reimbursement for expenses associated with illness and injuries. The cost and range of
protection provided by health insurance depends on the insurance provider and the policy purchased.
Health Insurance Policies and Main Features:

Types of Health Insurance Policies:
Health Insurance policies are broadly classified into types-Individual Health Insurance and Group
Health Insurance. The following Health Insurance policies are available in India:
1. Individual Mediclaim Insurance
2. Group Mediclaim Insurance
3. Overseas Mediclaim Insurance
4. UHI
5. Health Plus Medical Expenses Policy
6. Group Health Plus Medical Expenses Policy
Major Characteristics of Individual Health Insurance Policy
Coverage: Individual coverage are generally classified into the following broad heads:
1. Hospital Surgical Insurance
2. Major Medical Insurance
3. Long-term Care Insurance
4. Disability Income Insurance
Hospital Surgical Insurance: It covers the following expenses:
Hospital expenses: A typical Individual Health Insurance policy covers impatient
hospital expenses subject to a specified limit and subject to certain amount of deductible
or co-insurance
Surgical expenses
Cost of medicines and nursing
Domiciliary expenses up to certain limits
Major characteristics of Medical Insurance :It covers major or broader coverage than basic
coverage with the following characteristics:
1. Broad coverage for hospital charges, drugs, nursing, medical equipments, etc.
2. High maximum limit, say Rs. 5,00,000 or Rs. 10,0000, etc.
3. Benefit period: maximum amount paid under a major benefit policy depending on the
length of the policy
4. Deductible that must be satisfied before the benefit is granted, which may be
yearly deductible, family deductible, etc.
5. Co-insura'lce is provided in most of the policies to avoid moral hazards
6. Taxation benefits subject to compliance of certain requirements
7. Pre-exiting conditions clause to avoid adverse selection
Common exclusions
1. Expenses caused by war or military conflict
2. Cosmetic surgery
3. Dental care except as a result of an accident
4. Eye and examination aids unless there is an accident
5. Pregnancy or childbirth unless specifically provided
6. Expenses covered under W.C. laws or similar laws
7. Services furnished by governmental agencies unless the patient has the obligation to pay
8. Experimental surgery
Standard Individual Mediclaim Insurance- Underwriting Guidelines
Coverage: This policy covers reimbursement of hospital is at ion or domiciliary hospitalization
expenses for illness or diseases or injury sustained. In the event of any claim becoming admissible
under this scheme, the insurer will pay to the insured person the amount of such expenses as would
fall under different heads of medical expenses mentioned below and as are reasonable and necessarily
incurred by or on behalf of such insured persons but not exceeding the sum insured in anyone period
of insurance:
1. Room and boarding expenses provided by hospital or nursing home
2. Nursing expenses
3. Fees of surgeon, anesthetist, consultant etc.
4. Anesthesia, blood oxygen, OT, X-ray, surgical appliances, medicines etc.
The sum insured in this policy varies from ` 15,000 to 5,00,000 per person. This policy provides
for family discount on total premium for the members of the family. In case of no claim, cumulative
discount is also available as per the company's underwriting policy. In case of cost of health check, as
per the policy conditions, generally once in four years is available.
Underwriting Guidelines: Individual Mediclaim Insurance has been showing very high incurred claim
ratio since long. In the tariff market, this product has been sold by almost all underwriters with huge
cross-subsidy from profitable products like fire and engineering. But in the de-tariff market, the
prevalence of cross-subsidy is ruled out. Every product must stand on its own revenue. One product
cannot subsidize other product. In view of our huge claim ratio of around 140 per cent of Individual
Mediclaim Insurance, the underwriters have adopted the following underwriting measures to ensure
prudent underwriting for this product today:
1. Fresh proposal for a single person above 45 years of age is discouraged.
2. Though mediclaim policy is available to persons between 5 years and 80 years of age, fresh
acceptance of cover for a person beyond 60 years is discouraged, unless he is a member of a big
family or group to be covered or otherwise potential.
3. Policy already in force for insured exceeding 75 years of age may be renewed on the basis of
claim experience and risk evaluation with or without restrictive condition as per the risk analysis
findings.
4. Cancellation of policy is done subject to the following underwriting policy:
a. Policy to be renewed by mutual consent.
b. Company is not bound to notify that policy is due for renewal.
c. Policy may be cancelled by company after giving 30-days notice and pro rata premium to be
refunded, provided no claim has been paid under this policy.
d. Company remains liable for any claim arising prior to date of cancellation.
e. The insured may cancel the policy any time; the company would refund premium subject to
'No-claim' during the policy period.
5. Renewal of policy is done on the basis of the following norms:
a. In case renewal is agreed, the illness for which the expenses have been paid in previous policy
are not to be excluded. Renewal is done on earlier terms.
b. If policy is renewed for enhanced sum insured, reimbursement of illness occurred in the
previous policy shall be restricted to old sum insured.
6. Cost of health check up is allowed up to I per cent of average sum insured of four claims-free
underwriting years.
7. Issuance of policies for period less than one year is prohibited.
8. Policies for persons above 75 years to be decided on the claim experience merit.
9. Extension for suspended mediclaim may be allowed only when overseas mediclaim policy has been
taken by an individual or family as whole when one of the person goes abroad by taking overseas
mediclaim policy.
10. Tax-benefit under Section 80D of the IT Act available when premium is paid by cheque.
11. General exclusions: provided under the policy:
a. All diseases or injuries which are pre-existing when the cover incepts for the first time.
b. Any diseases other than those mentioned below contracted by the insured person during the
first thirty days from the commencement of the policy.
c. During the first year of the operation of insurance cover, the expenses on treatment of
diseases such as cataract, benign prostatic hypertrophy, hysterectomy for menorrhagia or
fibromyoma, hernia, hydrocele, congenital internal diseases, fistula in anus, piles, sinusitis
and related disorders.
d. Injury or disease directly or indirectly caused by or arising from or attributable to war,
invasion, act of foreign enemy, war-like operations (whether war be declared or not).
e. Circumcision unless necessary for treatment of a disease not excluded hereunder or as
may be necessitated due to an accident, vaccination or inoculation or change of life or
cosmetic or aesthetic treatment of any description, plastic surgery other than as may be
necessitated due to an accident or as a part of any illness.
f. Cost of spectacles, contact lenses, hearing aids.
g. Any dental treatment or surgery which is a corrective, cosmetic or aesthetic procedure,
including wear and tear, unless arising from disease injury and requires hospitalisation for
treatment.
h. Convalescene, general debility, 'run-down' condition or rest corrective, congenital external
disease defects or anomalies, sterility, venereal disease, intentional self-injury and use of
intoxicating drugs or a1chol.
1. All expenses arising out of any condition directly or indirectly caused to or associated with
human T cell lymph tropic virus type III (HTD-III) or lymphadinopathy-associated virus (LAV) or
the mutants derivative or variations deficiency syndrome or any HTTB-III syndrome or
condition of a similar kind commonly referred to as AIDs.
J. Charges incurred at hospital or nursing home primarily for diagnostic, X-ray or laboratory
examinations not consistent with or incidental to the diagnosis and treatment of the positive
existence or presence of any ailment, sickness or injury for which confinement is required at a
hospital or nursing home.
k. Expenses on vitamins and tonics unless forming part of treatment for injury or disease as
certified by the attending physician.
1. Injury or disease directly or indirectly caused by or contributed to by nuclear weapons or
materials. '
m. Treatment arising from or traceable to pregnancy, childbirth, miscarriage, abortion or
complications of this kind, including caesrian section.
n. Naturopathy treatment.
Guidelines for Group Mediclaim Policy: The underwriters generally follow the underwriting
procedures mentioned below to ensure prudent underwriting and high incurred claim ratio:
1. Group policy will be issued for named persons only.
2. Group shall be of any of seven specified categories, namely, (i) Employer-employee
relationship, (ii) Pre-defined segment where premium is paid by Government, (iii) Members of
a registered club, (iv) Members of a registered co-society, (v) Holders of credit cards of banks,
visa or master cards (vi) Holders of deposit certificates of banks /NBFC, and (vii) Shareholders
of a company.
3. Group discount generally varies from 2.5 per cent to 30 per cent available for various
groups from 101 to 50,000 and above.
4. Monthly endorsement for any addition or deletion of any number of members shall be
without any change in discount.
5. Group below 100 persons may be given group policy without discount.
6. Maternity benefit up to Rs. 50,000 available with 10 per cent loading on basic premium.
7. Cost of health check-up will not be available in group policy.
8. 5 per cent service charges on group policy.
Universal Health Insurance
This Health Insurance is a very important policy for people below the poverty line and is thus of great
importance for social security and National Health Policy. Let us now discuss the important provisions
of such Health Insurance as a matter of case study on underwriting of a Health Insurance product
essential for National Health Policy.
Sum Insured:
1. Section I: Hospitalisation benefit per family-Rs. 30,000
2. Section II: Accidental death benefit for head of family-Rs. 25,000
3. Section III: Disability compensation on hosptalisation for head of family for maximum period of
15 days- Rs. 50 per day
Premium:
1. Individual person: Rs. 365 p.a.
2. Family of five persons (insured + spouse + 3 children): Rs. 548 p.a.
3. Family of seven persons (as above + parents): Rs. 730 p.a.
Benefits
Section I
1. Reimbursement of total medical expenses for anyone accident: Rs. 15,000
2. Reimbursement for a member of family-individually or collectively: Rs. 30,000, subject to
following sub-limits of hospital expenses:
a. Room or boarding expenses: up to Rs. 150 per day
b. ICU reimbursement: up to Rs. 150 per day
c. Fees of surgeon, anaesthesist, consultant, etc.: up to Rs. 4,500 per illness
d. Anesthesia, blood, oxygen, QT, X-ray, surgical appliances, medicines, etc.: up to Rs.
4,500 per illness
The insurer's liability in respect of all claims admitted during period of insurance shall not exceed
the SI ofRs. 30,000 per person or per family.
Section II
Death Compensation for earning head of the family solely and directly due to accident caused by
outward, violent and visible means will be to SI, i.e. Rs. 25,000
Section III
Disable compensation for earning head the family solely and directly due to accident for which a valid
claim under Section I is admitted will be up to Rs. 50 per day with excess of three days for a maximum
period of 15 days.
General Exclusions:
1. All pre-existing diseases are not admissible.
2. Any disease other than those stated in the policy contracted by the insured person
during the first 30 days of commencement of the policy, provided that in the opinion of
panel doctors the insured could not have known the existence of the disease or any symptom
and had not taken any consultation treatment or medication.
3. Some diseases like cataract, benign prostate hypertrophy, hysterectomy, hernia,
menorrhagia or fibromyoma, hydrocele, congenital, internal disease, fistula, piles, sinusitis
and related disorders are not payable.
4. Disease arising from or attributable to war or war-like operations.
5. Circumcision unless necessary for treatment or due to accident.
6. Cost of spectacles, contact lenses and hearing aids.
7. Dental treatment, which is cosmetic, corrective or aesthetic.
8. Convalescence general debility, 'run down' condition or rest cure, congenital external
disease or defects or anomalies, sterility, venereal disease, intentional self-injury and use of
drugs.
9. Any cosmetic treatment or surgery, sterility, venereal disease, HIV, AIDS 10.
10. Diagnostic, X-ray or laboratory examination not consistent with diagnosis
11. Vitamins and tonics not forming part of treatment.
12. Disease or injuries attributable to nuclear weapons.
13. Treatment arising from pregnancy, childbirth, miscarriage, etc.
14. Naturopathy treatment.
Specific Exclusion for Section II
1. Compensation in respect of death directly or indirectly contributed or traceable to any
disability existing on the commencement of the policy.
2. Death arising directly or indirectly from:
a. Internal self-injury or suicide.
b. Pregnancy or any complication thereof.
c. Whilst engaging in aviation, ballooning, mounting or traveling in any aircraft
other than as a passenger.
d. Whilst under the influence of intoxication, liquor or drugs.
e. Directly or indirectly caused by venereal diseases or insanity.
f. Breach of law with criminal intent.
General Conditions:
1. Only one policy will be issued to one family.
2. The pre- and post-hospitalization expenses are excluded.
3. Proposal form and prospectus to be signed by the proposer with all details.
Health Insurance Policies in India: The health insurance policies available in India are:
(a) Mediclaim policy (individuals and groups)
(b) Overseas mediclaim policy
(c) Raj Rajeshwari Mahila Kalyan Yojna
(d) Bhagyashree Child Welfare Policy
(e) Cancer Insurance Policy
(f) Jan Arogya Bima Policy
Mediclaim policy (individuals and groups): Mediclaim policy is offered to individuals and
groups exceeding 50 members. It covers the hospitalization for diseases or sickness and for
injuries. Under group mediclaim policy, group discount is allowed to groups exceeding 101
people. The medical expenses will be reimbursed only if the insured is admitted in the hospital
for a minimum duration of 24 hours. Cost of treatment includes consultation fee of doctors,
cost of medicines and hospitalization charges. Health insurance in India is available at very
economical rates. It is very popular among professionals like Chartered accountants, Advocates,
Engineers etc. It is very suitable for self-employed persons because it covers risks against
several general and serious diseases.
Overseas Mediclaim Policy: In 1984, the Overseas Mediclaim Policy was developed. This
policy will reimburse the medical expenses incurred by Indians upto 70 years of age while
traveling abroad. The premium will be charged based on their age, purpose of travel, duration
and plan selected by the insured under the policy. This policy is provided is provided to
businessmen , people going on holiday tour, traveling for educational professional and official
purposes.
Raj Rajeshwari Mahila Kalyan Yojna: It is a personal accident policy offered by an insurance
company for the welfare of women. It is offered to women residing in rural and urban areas.
Women between 10-75 years of age are eligible for this policy irrespective of their occupation
and income level.
Bhagyashree Child Welfare Policy: It is offered to girls between 0-18 years. The age of the
parents of the girls shouldnt be more than 60 years. It provides coverage to one girl child in a
family who loses her father or mother in an accident.
Cancer insurance policy: It is designed for cancer patients aid association members. The
persons insured under this policy will pay premium to their association along with the
membership fee. This policy will offer coverage to the insured in case he develops cancer. All
the expenses incurred for treatment of cancer not exceeding the sum insured will be paid
directly to the insured person.
Jan Arogya Bima Policy: This policy provides medical insurance to poorer section of the
people. This policy covers illness like heart attack, jaundice, food poisoning, and accidents etc.
that requires immediate hospitalization.
Miscellaneous Insurance:
Personal Accident Insurance:Personal Accident is an insurance cover wherein, in the event of
the person sustaining bodily injuries resulting solely and directly from an accident caused by
EXTERNAL, VIOLENT & VISIBLE means , resulting into death or disablement. An accident may include
events like: Rail / Road / Air Accident, Injury due to any collision/fall, Injury due to Bursting of gas
cylinder, Snake-bite, Frost bite/Dog bite , Burn Injury, Drowning, Poisoning etc.
Personal Accidental policy covers accidental death, loss of limbs, permanent total and partial
disablement as selected and granted by the insurance companies based on the underwriting norms. On
payment of additional premium, medical expenses reimbursement can be covered. These expenses are
payable, in case, if the claim is admitted under the basic policy cover. In addition to the Personal
Accident Insurance cover the policies available are : Nagrik Suraksha Poicy, Janta Personal Accident
Policy, Gramin Personal Accidental Policy , Student Package Policies for students, Bhagashree for Girl-
children, Raj Rajeshwari for Women etc. Further as an ad-on cover Motor Vehicle Package Policy &
Overseas Mediclaim Policy too offer personal accidental injuries cover.
Sum insured is based on various factors namely:
(1) Income from gainful employment,
(2) Type of occupation,
(3) Age as on date of proposal,
(4) Period of insurance
(5) Conditions prevailing at the place from where the proposal is made etc.
(6) As regards the non-earning spouse of the insured the sum insured in respect of such spouse shall
not exceed 50% of the eligibility of the insured, subject to a limit of Rs. One Lakh under benefits
available under Table III of the policy.
(7) Dependent children can be offered a sum insured not exceeding Rs.50000/- to cover death and
disablement only. No temporary disablement cover shall be offered.
Generally Personal Accident policies are maximum for one year only. However, depending upon the
requirement of the proposer it can be offered for a period which could even be lesser than 12 months.
Fidelity Insurance: Fidelity insurance protects organizations from loss of money,

securities, or inventory resulting from crime. Common Fidelity claims allege employee
dishonesty, embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer
fraud, counterfeiting, and other criminal acts. These schemes involve every possible angle,
taking advantage of any potential weakness in your companys financial controls. From
fictitious employees, dummy accounts payable, non-existent suppliers to outright theft of
money, securities and property. Fraud and embezzlement in the workplace is on the rise,
occurring in even the best work environments. Liabilities covered by crime insurance
usually fall into two categories, although many polices combine both types of coverage:
Money and security coverage pays for money and securities taken by burglary, robbery, theft,
disappearance and destruction.
Employee dishonesty coverage pays for losses caused by most dishonest acts of your employees,
such as embezzlement and theft.
Fidelity insurance includes comprehensive coverage of:
Employee theft
Money and securities while on premises or in transit
Forgery
Funds transfer fraud
Computer fraud
Money order and counterfeit currency fraud
Credit card fraud
Optional client coverage
Coverage for investigative costs for covered losses
Responds to Employee Retirement Income Security Act of 1974 (ERISA) plan bonding requirement.
Broad definition of employee, including directors and officers; employees, including part-time,
leased, temporary, and seasonal employees; and volunteers.
Worldwide coverage.
Burglary Insurance: Such a policy provides protection against loss or damage caused by
housebreaking, robbery or theft. It is also known as robbery, theft or larceny insurance. For this
purpose a comprehensive policy may be taken or each risk may be separately insured. Full details of
the article insured are given in the policy. Insured items include gold and gold ornaments and other
assets including household items such as TV, fridge, air conditioner etc. A burglary policy for business
premises would provide cover against loss to damage by house breaking and burglary of stock-in -
trade, goods in- transit, cash-in-safe, fixture and fittings etc.
Credit Insurance: Credit insurance policy is taken to cover the loss which may arise due to bad
debts or non-payment of dues by the debtors. This insurance is very useful to businessmen who sell
goods on credit. It protects them from loss arising out of insolvency of their debtors. In India, Export
Credit and Guarantee Corporation (ECGC) provide credit insurance to exporters.
Workmens Compensation Insurance: In India, Workmens Compensation Act was passed in

1934 and 1946. According to this act, an employer is required to pay compensation to his workers who
receive injuries or contract occupational diseases during the course of their work. An employer may
obtain an insurance policy to cover such liability. The premiums are payable usually on the basis of
wages. It is also known as Employers Liability Insurance. This policy is essential to every employer
who employs workmen as defined under the Workmens Compensation Act in order to protect
himself against the legal liabilities arising out of death or bodily injury to this workman. It also
extends coverage through reimbursement of medical, surgical and hospitalization expenses including
transportation costs on the payment of additional premium. The National Insurance Company Ltd,
United India Insurance Company Ltd, Oriental Insurance Company Ltd, and the New India Assurance
Company Ltd offer workmens compensation policies.
Travel Insurance: Travel insurance covers travel related accidents also. While traveling outside
India, individuals face risks such as loss of baggage, accidents involving injuries, illnesses and medical
emergencies requiring hospitalization treatment. All this can pose serious consequences to the
overseas travellers. A rational person should therefore secure the required coverage before leaving his
home country. In India travel insurance has become popular among International travellers. The
coverage offered under travel insurance policies in India are as follows:
Medical assistance in case of an emergency
Covers Personal Accident, Medical Expenses & Medical Evacuation & Repatriation
Loss & delay of Checked Baggage
Covers pre-existing medical conditions
Convalescence after hospitalization
Takes care of sudden and unforeseen expenditure Convenient and hassle free trip for
the family
Wedding Insurance: These days, weddings have become quite an expensive and elaborate affair.
People do take care to make this once-in-a-lifetime event a memorable one. In case of any
postponement or cancellation, there is a certain risk of monetary loss. The wedding insurance package
can compensate for the monetary loss. This unique product covers the specific risks related to
weddings. This Policy can protect you against certain types of financial losses you may incur in the
event of unpredictable situations during the period leading up to and including your wedding day. The
period of insurance will be 24 hours prior to the start of the customary functions or rituals or
programmes of events mentioned in the printed invitations till the end of the function or five days
from the beginning whichever occurs earlier. This policy provides cover for expenses actually and
already incurred or advances paid in connection with marriage hall, catering, pandit, guests, music
parties, photos and videography, loss on cancellation of travel tickets etc. Liability is restricted only
when such cancellation arises out of cancellation or postponement of marriage. The policy does not
cover any loss arises when marriage is cancelled or postponed because of dispute between marriage
parties, willful negligence and criminal misconduct of the bride, bridegroom or their parents.

Employee State Insurance Scheme: The Employee State Insurance Scheme (ESIS) is an insurance system
which provides both the cash and medical benefits. It is managed by the Employee State nsurance
Corporation (ESIC), a wholly government-owned enterprise. It was conceived as a compulsory social
security benefit for workers in the formal sector. The original legislation creating the scheme allowed
it to cover only factories which has been using power and employing 10 or more workers. However,
since 1989 the scheme has been expanded, and it now includes all such factories which are not using
power and employing 20 or more persons. Mines and plantations are explicitly excluded from coverage
under the ESIS Act.
Unemployment Insurance: Unemployment insurance is designed to provide short term

protection for regularly employed persons who lose their jobs and who are willing and able to work.
Unemployment insurance has several basic objectives:
1) Provide cash income during involuntary unemployment.
2) Help unemployed workers find jobs.
3) Encourage employees to stabilize employment.
4) Help stabilize economy.
Unemployment insurance is a popular concept in developed countries like U.S. where they have well
defined laws and regulations. However in India it will take a long time to come.
Personal Liability Insurance: Personal liability insurance provides protection against the legal
liability, which arises due to insureds personal acts. The insurance company will pay for legal defense
to third party damages or injuries up to policy limit. Except legal liability, which arises due to
automobile accidents and professional liability, most other personal acts are covered under personal
liability insurance. The personal liability insurance covers damages caused to properties and injuries
to other people due to the negligence of the insured. Under this policy, the insurance company is
bound to defend the insured, should the matter go to court of law. It can also settle the matter out of
court by negotiating with parties for a settlement within the policy limit. Personal liability policy
offers very wide coverage. The following instances of loss, damages or injuries caused by an insured
individual come under the purview of personal liability insurance in which coverage will be available
up to the policy limit.
Accidental fire to neighbors house as a result of insureds negligence
Accidental injury to a third party while playing
Damaging costly antique accidentally belonging to neighbor
Injuring another person while riding a bicycle
Self Assessment Questions

1) Define fire insurance. What are the essential features of a fire insurance contract?
2) What is the claim settlement procedure followed for a fire insurance policy?
3) What is a floating policy?
4) What is marine insurance? How it is different from fire insurance?
5) What is meant by perils of the sea?
6) Briefly describe the different types of losses under marine insurance.
7) Is third party insurance a must under motor vehicle Act?
8) How is subrogation helpful to the insurer?
9) What would be the status of the claim if the vehicle were covered under liability policy?
10) Explain Travel insurance.
11) Explain the scope of Fidelity insurance.
12) Discuss the main clauses of marine policies.
13) Enumerate the various types of marine insurance policies.
14) What do you mean by assignment of policy? Indicate the manner in which a marine policy can be
assigned.
15) Distinguish between express warranties and implied warranties in relation to marine insurance
policy.
16) Write a short note on the following:
i) Unemployment insurance
ii) Wedding insurance
References:
Bhatia R.C., (2005), Business Organization and Management, One Books, New Delhi.
Gupta C. B., (2005), Business Organization and Management, Sultan Chand & Sons, New
Delhi.
Prakash Jagdish, (1995), Business Organization and Management, Kitab Mahal, New Delhi.
Singh B.P. & Chhabra T.N., (2004), Business Organization and Management, Dhanpat Rai &
Co., New Delhi.

11 LESSON 11 UNDERSTANDING ANNUAL
REPORT OF A NON-LIFE INSURANCE COMPANY
LESSON 11
UNDERSTANDING ANNUAL REPORT OF A NON-LIFE INSURANCE COMPANY
Dr Ashish Kumar
LBSIM
Introduction:
Balance sheet,
Revenue accounts,
3. Auditors report
Act 1956)
particulars:
thereof.
The reasons
Particulars for the failure, if any, to complete the buy back within the time specified in
No. Year Year
The fullest and explanations on every reservation, 1qualification

1. Premium earned (Net)
or adverse remarks
contained in theonauditors'
2. Profit/loss report.of investments
sale/redemption
3. Others (to be specified)
4. Interest, dividend & rent (Gross)
TOTAL (A)
per the above requirements ofSchedule
the Companies Act,
Current 1956:
Previous 2
Particulars
1. Comparative Performance No. Analysis
Year (Class-wise Underwriting Performance) for the financial
Year
1. Operatinganalysis of XYZ General Insurance Co. Ltd. in respect of the following
performance
profits/loss review for FY 2005-06.
performance
(a) Fire insurance

Gross direct premium
and
percentage of growth over previous year
Reinsurance
(b)Marine premium ceded
insurance I
(c) Miscellaneous
insurance
2. Income
Increase
from
in unexpired risks reserve and percentage to net premium
investments
Net premium earned
(a)
Interest,
dividends Others
& rents
2. Review
(Gross)of accounts as an annexure to accounts
(b) Profit on sale of
4. Proposed
investments dividend
3. Other income
(to be specified)
8. SolvencyTOTAL margin(A) and its change
over
the previous
year
Financial 4.
Statements
Provisions for life Insurers:
(other than
Life Insurers
taxation)
shall prepare Financial

Statements

as per specified Forms such as Revenue Account
Schedule A(a)ofForRegulation
diminution inIII. The said financial statements will be prepared in accordance with
value of
General Instructions investment
for preparations as per Part III. The said financial statements shall be supported
by disclosures forming
(b) For part of financial statements and the comments of management report as per
doubtful
Part II and debts
Part IV respectively, of the Schedule
A. The specified forms of financial statements are
given hereinafter as ready reference.
(c) Others (to be
specified) Form A-BS

5. Other expenses Balance

Sheet
of Life Insurance
Company
(a) Expenses other
than those related

to Ins. Business
(b) Bad debts

written off Form A-RA
Revenue
(c) Others (to be Account of Life Insurance Company
Specified)
Policyholders Account
TOTAL (B)
Profit before tax
Provisions for Schedule Current Previous

Particulars
taxation No. Year Year
Appropriations
Premiums Earned- 1
(Net)
(a) Interim dividend

paid during the year
(a) Premium
(b) Proposed final
(b) Reinsurance ceded
dividend

(c) Reinsurance accepted
(c) Dividend

distribution
Income tax from

Investments
(d) Transfer
to any reserve or
(a) Interest, dividends &
other account
rent-(Gross)
Balance of
(b) Profit on sale/redemption of
Profit/loss Brought
investments
Forward from Last
(c)
yr. Loss on sale/redemption
2
of investments
Balance Carried
3
Forward
(d) to Balance
Transfer/Gain on
Sheet
revaluation/change in fair value*
1. Claims incurred (Net)

Other Income (to be
Specified)
2. Commission 3
TOTAL
3. Operating expenses related to insurance business 4

(A)
TOTAL (B)
Commission
Operating profit/loss from Fire/Marine/Misc.
Operating
Business Expenses
C = (A - B) Related to
Insurance Business
APPROPRIATIONS 4
Provision
Transter for DoubUul
to Shareholders' Account
Debts
Transfer to Catastrophe Reserve
Bad debts written off
Transfer to Other Reserves (to be specified)
Provision for Tax
TOTAL (C)
Provisions (other than

taxation)
(a) For diminution in the
value of Investment
NetN(Net(Net
(b) Others (to be specified)
TOTAL

(B)
Benefits Paid (Net)

Interim Bonuses Paid
Change in Valuation of liability
in Respect of life
Policies
(a) Gross
(b) Amount ceded in

reinsurance
(c) Amount accepted in

reinsurance
TOTAL

(C)
Surplus/Deficit (D) =
(A)-(B)-(C)
APPROPRIATIONS
Transfer to
Shareholders' Account
Transfer to Other Reserves (to
be Specified)
Balance Being Funds for
Future Appropriations
TOTAL

(D)

The above financial statements are to be prepared in accordance with applicable accounting
standard issued by leAL These financial statements will be supported by specified schedules
giving the required details as per regulations.
Disclosures forming part of financial statements (Life Insurer) Part II

A. The following shall be disclosed by way of notes to the balance sheet:
1. Contingent liabilities:
Partly-paid up investments
Underwriting commitments outstanding
Claims, other than those under policies, not acknowledged as debts
Guarantees given by or on behalf of the company
Statutory demands/liabilities in dispute, not provided for
Reinsurance Obligations to the extent not provided for ill accounts
2. Actuarial assumptions for valuation of liabilities for life policies in force.

3. Encumbrances to assets of the company in and outside India.
4. Commitments made and outstanding for Loans, Investments and Fixed Assets.
5. Basis of amortization of debt securities.
6. Claims registered and remaining unpaid for a period of more than six months as on the
balance sheet date.
7. Value of contracts in relation to investments, for:

Purchases where deliveries are pending;
Sales where payments are overdue.
8. Operating expenses relating to insurance business: basis of allocation of expenditure to
various segments of business.
9. Computation of managerial remuneration.
10. Historical costs of those investments valued on fair value basis.
11. Basis of revaluation of investment property.

B.Following accounting policies shall form an integral part of the financial statements:
1. All significant accounting policies in terms of the accounting standards issued by the
ICAI, and significant principles and policies given in Part I of Accounting Principles. Any other
accounting policies, followed by the insurer, shall be stated in the manner required under
Accounting Standard AS 1 issued by the ICAL

2. Any departure from the accounting policies shall be separately disclosed with reasons for
such departure.
C.The following information shall also be disclosed:

1. Investments made in accordance with any statutory requirement together with its
amount, nature, security and any special rights in and outside India;
2. Segregation into performing/non performing investments for income recognition.
Assets to the extent required to be deposited under local laws Percentage of business sector-wise;
A summary of financial statements for the last five years, in the manner as may be prescribed by the
Authority;
Bases of allocation of investments and income thereon between Policyholders' Account and
Shareholders' Account;
Accounting Ratios as may be prescribed by the Authority.
Example:
Financial Statements for non-life Insurance
Non-life Insurers shall prepare Financial Statements as per specified Forms such as Revenue Account
Schedule B of Regulation 3. The said financial statements will be prepared in accordance with General
Instructions for preparations as per Part III. The said financial statements shall be supported by
disclosures forming part of financial statements and the comments of management report as per Part
II and Part IV respectively, of the Schedule B.
The specified forms of financial statements are given hereinafter as ready reference for the
purpose of necessary discussion and analytical study for financial management based on insurance
accounting.
Form B-BS
Balance Sheet: Non-Life Insurer

Particulars
No. Year Year
SOURCES OF

FUNDS
Share capital 5
Reserves and
6
surplus
Fair value

change account
Borrowings 7
TOTAL
APPLICATION

OF FUNDS
Investments 8
Loans 9
Fixed assets 10
Current Assets
Cash and bank

11
balances
Advances and
12
other assets
Sub-
total
(A)
Current
13
Liabilities
Provisions 14
Sub-
total
(B)
Net Current
Assets (C) = (A -
B)
Miscellaneous Expenditure
15
(notwritten off )
Debit Balance in

pal Account
TOTAL
The above financial statements are to be prepared according to the general instruction for
preparation of financial statements as specified in Part III of the IRDA Regulation. Again said financial
statements will be supported by specific disclosure forming part of financial statements as specified
by Part II and comments of management report specified by Part IV of Schedule B of the Regulation. It
should also mention about the contingent liability in respect of the following items:
Party paid-up investments.
Underwriting commitments outstanding.
Claims, other than those under policies, not acknowledged as debts.

Guarantees given by or on behalf of the company.
Statutory demands/liabilities in dispute, not provided for.
Reinsurance obligations to the extent not provided for in accounts.

Form B-RA
Non-life Revenue Account
Sche Pre
Particulars Current
dule vious
1. Premium earned (Net)
2. Profit/loss on sale/redemption of investments
3. Others (to be specified)
4. Interest, dividend & rent (Gross)
TOTAL (A)
Schedule CurrentPrevious
Particulars
No. Year Year
1. Operating
profits/loss
(a) Fire insurance
(b)Marine
insurance I
(c) Miscellaneous
insurance
2. Income from
investments
(a) Interest,
dividends & rents
(Gross)
(b) Profit on sale of

investments
3. Other income
(to be specified)
TOTAL (A)
4. Provisions
(other than
taxation)
(a) For diminution in

value of investment
(b) For doubtful

debts
(c) Others (to be

specified)
5. Other expenses
(a) Expenses other

than those related
to Ins. Business
(b) Bad debts

written off
(c) Others (to be

Specified)
TOTAL (B)
Profit before tax
Provisions for
taxation
Appropriations
(a) Interim dividend

paid during the year
(b) Proposed final

dividend
(c) Dividend
distribution tax
(d) Transfer
to any reserve or
other account
Balance of
Profit/loss Brought
Forward from Last
yr.
Balance Carried
Forward to Balance
Sheet
1. Claims incurred (Net)
2. Commission
3. Operating expenses related to insurance business

TOTAL (B)
Operating profit/loss from Fire/Marine/Misc.
Business C = (A - B)
APPROPRIATIONS
Transter to Shareholders' Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be specified)
TOTAL (C)
Form B-PL
Profit and Loss A/c of a General Insurance Company
Ratio Analysis:
Importantly, the users of financial statements cannot form any opinion on any of the trends for their
economic decisions with the company only on the basis of financial statements unless they use various
ratio analysis and trend analysis with comparative and classified accounting or financial statement. In
using the financial statement including balance sheet, and income statements along with required
disclosure and management report and computing percentage change, trend change, component
percentages, and ratios as exemplified in annexure, the finance manager and analyst constantly
search for some standard of comparison to establish whether the information and relationship they
have found are favourable or adverse for their future economic decisions. Generally two standards of
comparison used by financial analysts are (i) the past performance of the company, and (ii) the
position of the company with respect to industry performance in the country and overseas. The
insurance business is carried on with international process, principle and perspective because of its
very nature of international character. So its trend analysis or trend percentage needs to be compared
with industry data and international standard to judge the company's position in respect of growth,
profitability, liquidity, solvency, etc. In the following table, certain performance analysis has been
done with some hypothetical figures just to show accounting information are used for trend analysis.
Performance Analysis and Trend Percentage (rs. In Lakh) of Ram Insurance Ltd.
Information 2009- 2010- Remarks/Observations

10 11 of Analyst
1 Gross
premium
direct 5,676 5,103 Growth in the current year
2 Percentage growth 11% Better growth in the current

4% year
3 Reinsurance
accepted 332 314
More acceptance
current year
in the
4 Reinsurance Ceded 1665 More retention in the current

1522 year
5 Net premium 4342 Net premium increase in the
3895 current year
Better growth trend in the

Increase over 11% Better growth trend in the
previous year 7% current year
% to gross premium 77% 76% Better trend in current year
These ratios are the most vital tools of financial analysis in management accounting. The corporate
management will take many financial decisions for their strategic issues. With this accounting
information many more analysis like the following few can be done.
Gross Premium to
Shareholders' Funds Ratio (Rs. 2009-
in lakh) 10 2010-11
1. Gross Premium 5675.54 5103.16
2. Shareholders' Fund 4161.69 3735.22
3. Ratio (times) 1.36 1.37
Better the ratio, greater is the capacity utilization and better will
be the return. But again this ratio must be within permissible limits
laid down by regulators.

Net Retention Ratio
Gross Net Retention P. Y.

Premium Premium Ratio Retention
Fire 1,103.49 830.76 75.28% 78.12%
Marine 349.33 164.38 47.05% 55.97%
Misc. 4,222.73 3,347.52 79.27% 77.46%
Total 5,675.54 4,342.65 76.52% 76.33%
What does it indicate? What is the necessity of comparative
study?
What does excessively high or abnormally low retention
ratio imply?
Fund and Investment: How to calculate Shareholders' Fund and Policyholders' Fund.
Shareholders' Fund (2010-11) (Rs. in lakh)
Share Capital 200.00
Capital Reserve 0.06
General Reserve 4,622.79
Misc. Reserve (-)14.82 4,808.03
Policyholders' Fund (2010-11) (Rs. in lakh)
Unexpired Reserves 2,253.51
Outstanding Claims 5,505.40 7,758.91
Total Funds 12,566.94
Ratio between the two funds: 38:62
Total Investments 2010-11 2009-10

In India 20344.89 14238.54
Outside India 30.36 336.69

Long Term 20274.07 14195.57
Short Term 391.18 379.66

Government Investment 4459.81 3989.16
Equity & Debt 16205.44 10586.07


Cash Flow Statement

Cash flow statement is useful in providing users with financial statements with a basis to assess the
ability of the firm to generate cash and cash equivalent and the needs of the firm to utilize those cash
flows. The financial decisions that are taken by users require an evaluation of the ability of the firm to
generate cash and cash equivalent and the timing and certainty of their generation. In insurance
industry, the cash flow statement is of prime importance to the users of the financial statements as
the insurance company carries on risk-taking business dealing with intangible product, i.e., promise to
indemnity loss in future as and when accident will occur in consideration of premium collected
currently. The insurance companies need to have both solvency and liquidity sufficiently to pay off
their liabilities for claims at the time of accident, i.e., occurrence of perils. Thus, an insurer should
always prepare a cash flow statement and should present it for each period for which financial
statements are presented as per regulatory norms and forms. As per the IRDA Regulations, Cash Flow
statement in an insurance company is to be prepared in a Direct Method where AS 3 will not be
applicable. A cash flow statement, if used in conjunction with other financial statements, provides
information that enables the User to evaluate the charges in the net assets of the insurance company
and its financial structure (including its liquidity and solvency). For the purpose of preparation of cash
flow statement of an insurance company, following terms need to be defined for proper interpretation
and use.
1. Cash comprises on hand and demand deposits with banks of the corporate office and its all
operational units including overseas ones.
2. Cash equivalents are short term, highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of a firm (insurer) and other
activities that are not investing or financing activities. In insurance company cash flow from
operating activates (insurance activities) is a key indicator of the extent to which the operations of
the enterprise have generated sufficient cash flows to maintain the operating capability of the
insurers, pay claims, commission, management expenses and dividends, and repay loans and
borrowings.
5. Investing activities are the acquisitions and disposals of long term assets and other investments
not included in cash equivalent.
6. Financing activities are activities that result in changes in the size and composition of the
shareholders' funds and policyholders' funds (in case of insurance company) and borrowings of the
firm.
7. Preparation of cash flow statement Includes classification and segregation of operating, investing
and financing activities.
Direct Method of cash Flow Statement

Cash receipts from customers .
Cash paid to suppliers and employees
Income taxes paid


Interest received
Dividends received
Net cash from investing activities


Interest paid Dividends paid
Net increase in cash and cash

equivalents

of Period

Period
Indirect Method of Cash Flow Statement

Net profit before taxation, and extraordinary item
Adjustments for
Depreciation
Foreign exchange loss
Interest income
Dividend income
Interest expense
Operating profit before working capital changes
Increase in sundry debtors
Decrease in inventories
Decrease in sundry creditors
Income tax paid


I nterest received
Dividend received
Net cash flows from financing activities

Interest paid
Dividend paid
Net increases in cash and cash

equivalents

of Period

Period

Example of Financial Statement of a Non-life insurance companies:
Example of Financial Statements of Life Insurance Companies
Self-Assessment Questions:
Question 1: Define the legal requirements of Directors Report as per the Companies Act 1956.
Question 2: State IRDA requirements regarding the Financial Statements.
Question 3: Draft Balance sheet and Revenue Account of a life insurance company using imaginary
figures.
Question 4: Prepare the dummy financial statements of a non-life insurance company.
References:
Gupta C. B., (2005), Business Organization and Management, Sultan Chand & Sons, New Delhi.

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2 LESSON 2 INSURANCE PRODUCTS AND STATE OF INSURANCE INDUSTRY IN INDIA

3 LESSON 3 LEGAL FRAMEWORK LIFE & GENERAL INSURANCE BUSINESS

4 LESSON 4 THE INSURANCE ACT, 1938 AND IRDA ACT,1999

5 LESSON 5 AGENCY LAW

6 LESSON 6 CONSUMER PROTECTION ACT, 1986

7 Unit 6 LESSON 7 LIFE INSURANCE

8 LESSON 8 UNDERSTANDING OF THE ANNUAL REPORT OF LIFE INSURANCE COMPANIES

9 LESSON 9 GENERAL INSURANCE 9NON LIFE INSURANCE FIRE/MARINE

10 LESSON 10 GENERAL INSURANCEMOTORHEALTH & MISCELLANEOUS

11 LESSON 11 UNDERSTANDING ANNUAL REPORT OF A NON-LIFE INSURANCE COMPANY

Assurance and Insurance

6. Insurance is different from Charity - In charity, there is no consideration but insurance is

Liability of Q =20000 x 15000 = Rs.10000

Type of General Insurance policies available are -

- Personal Accident Policy

INSURANCE PRODUCTS AND STATE OF INSURANCE INDUSTRY IN INDIA

Terminologies under insurance

2. Insured Explained earlier

4. Indemnity Explained earlier

6. Insurable interest Explained earlier

8. Subrogation Explained earlier

20. Agent - A licensed person or organization authorizes to sell insurance by or on behalf of an

23. Burglary There are two type of burglary

New Insurance Products

Reforms in the Indian Insurance Sector

- Government stake in the Insurance companies to be brought down to 50%

- Postal life insurance should be allowed to operate in the rural market

- The insurance act should be changed

- Controller of insurance should be made independent

- Mandatory investment of LIC life fund in Government Securities to be reduced from 75

(IV) Customer Service

- Insurance companies must be encouraged to set up unit linked pension plans

Liberalisation of Insurance markets in India

- External sector Liberalisation

I Following major players in life Insurance sector

3. HDFC Standard Life Insurance Company Limited:

Products offered by the company are :

Investment Plans Assure Invest, Life Link Plan etc.

5. Life Insurance Corporation of India Limited:

6. Tata AIG Life Insurance Company Limited:

8. OM Kotak Mahindra Life Insurance Company Limited:

9. Max New York Life Insurance Company Limited:

10. ING Vyasya Life Insurance Company Limited:

5. New India Assurance Company Limited

10. Cholamandalam General Insurance Company Limited

3 LESSON 3 LEGAL FRAMEWORK LIFE &

LEGAL FRAMEWORK LIFE & GENERAL INSURANCE BUSINESS

Asstt. Professor, SRCC,

ESSENTIALS OF GENERAL CONTRACT (SECTION 10) OF INDIAN CONTRACT ACT

Essentials of a valid contract

Classification on the basis of extent of execution

Some of the important provisions are as follows

(2) "Composite insurer "means an insurer carrying on in addition to controlled business

(5) "Insurance Act means the Insurance Act, 1938(4of1938);

Establishment and incorporation of Life Insurance Corporation of India

Functions of the Corporation

(a) To carryon capital redemption business, annuity certain business or reinsurance

Funds of the Corporation-

Annual report of activities of Corporation

Liquidation of the Corporation

THE GENERAL INSURANCE BUSINESS (NATIONALISATION) ACT,1972