Insurance - Introduction

By: Prachi Kulkarni

Introduction to Insurance Insurance Sector in India History of Insurance Sector in India Insurance Sector Reforms Principles of Insurance Insurance Contract

August 10, 2010

Introduction to Insurance

Introduction to Insurance

What is Insurance ?
Importance of Insurance

Basic Terms of Insurance

What is insurance
Introduction to Insurance

It is a business related to the protection of the

Economic Value of the Assets.

Business of insurance is nothing but that of

It is a cooperative device to spread the loss

sharing. It spreads losses of an individual over a group of individuals who face common risks. caused by a particular risk over a number of persons who are exposed to the same risk and who agree to insure themselves against the risk.

Purpose And Need Of Insurance

Introduction to Insurance

Purpose of taking insurance is to help

people protect themselves from losses caused by unforeseen events, to their assets and protect themselves financially in case of untimely death. to get destroyed or made non functional, through an accidental occurrence. Such possible Occurrences are called Perils.

Assets are insured because they are likely

Importance of Insurance
Risk Alleviation Reducing fear of future Boosting confidence to undertake new venture Promotion of savings Social security: group insurance for employees Reducing demand on social services Credit worthiness Tax benefits Others: Guaranteed profit, simulates business,
mediclaim support, helps the dependents
Introduction to Insurance

Role Of Insurance In Economic Development

Introduction to Insurance

Insurance company is a major instrument for the

mobilization of savings of people public

Helps in capital formation with mobilised funds of the

Long term funds for infrastructure development

Helps at an individual level and hence indirectly helps in

economic development.

Spread of financial services in the rural areas and amongst

socially less privileged areas.

Source of employment

Introduction to Insurance

Basic terms of Insurance

Insured, insurer, insure, premium, claim, policy,
subject matter of insurance, reinsurance, actuary, nominee or beneficiary

Basic Terms
Introduction to Insurance

Insured: a person who is protected against losses. He gets

money from the insurer on the happening of an uncertain event. In life insurance policies, insured is called assured. the event of an uncertain event for which the insurance has been taken. where if regular small payments are made, a person or a company will pay compensation for a. loss, b. damage, c. injury, d. death etc. getting the protection of insurance cover.

Insurer: person or company who agrees to pay money in

Insure: means to have contract with a person or company

Premium: money paid to the insurance company for

Basic Terms
Introduction to Insurance

Claim: It is a demand made by the insured on the insurer to

compensate for the loss on happening of an event.

Policy: is a document of insurance contract between

insured and insurer. It contains all the details about the contract period, terms, conditions etc. insured. E.g. Life insurance: life of the assured, Marine insurance: the cargo or the ship.

Subject matter of insurance: The thing or property or life Reinsurance: The original insurer enters into an agreement
with another insurer for sharing a part or all the risks undertaken by him, this is normally used for high risk.

Basic Terms
Introduction to Insurance

Actuary: He is a professional appointed by an insurance

company to give them advice on matters relating to premium rates, insurance policies, investments to be made by the company, maintenance of accounts etc. policy money will be paid if the insured dies.

Nominee or beneficiary: He is a person or persons to whom

Introduction to Insurance

Insurance Sector in India

Major Players
Rules and Regulations

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Major Players in Insurance Industry

Introduction to Insurance

The IRDA, which is the regulatory body

Insurance Advisory Committee set up by

IRDA

The Insurers Public and Private sector

Life Insurance Council

Insurance agents and brokers.

Tariff Advisory Committee (TAC)

Relevant Legislations, Rules

Introduction to Insurance

The Insurance Act 1938

The IRDA Act 1999

Life Insurance Corporation act 1956

Consumer Protection Act 1986

Ombudsman

Obligations of the Life and General Insurer

Introduction to Insurance

History of Insurance

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History of Insurance
Introduction to Insurance

Indian insurance sector reveals a 360 degree

turn witnessed over a period of almost two centuries. Insurance in India started without any regulation in the Nineteenth century. Life Insurance in its modern form was first set up in India through a British Company called the Oriental Life Insurance Company in 1818, Bombay Assurance Company in 1823 and Madras Equitable Life Insurance Society in 1829.

History Of Insurance
Introduction to Insurance

These companies operated in India but did not

insure the lives of Indians.

The first company which offered insurance to

Indians at a Fair Value was Bombay Mutual Life Assurance Society.

The first General Insurance Company was

established in the year 1850, it was called the Triton Insurance Company.

History Of Insurance
Introduction to Insurance

By 1938, the insurance market in India was buzzing

with 176 companies (both life and non-life).

The industry was plagued by fraud.

Need for nationalization of the life insurance

business was felt.

Introduction to Insurance

Insurance Sector Reforms

Nationalisation
Liberalisation Post-Liberalisation

IRDA

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Insurance Sector Reforms

Introduction to Insurance

NATIONALISATION

In 1956 the then Finance Minister announced

nationalization of the life insurance business. Reasons for nationalization were

Private insurance companies did not promote insurance in the rural areas. Government would be in a better position to channel resources for saving and investment. Bankruptcies of the life insurance companies had become a major problem

Nationalisation
Introduction to Insurance

Life insurance Industry was nationalized

under LIC.

The General Insurance Industry was

nationalized in 1972.

The GIC was set up as the holding

company.

It had four subsidiaries, New India,

Oriental, United India and National Insurance Companies.

Liberalization
Introduction to Insurance

Liberalization of the insurance market was

recommended in a report released in 1994 by the Malhotra Committee. Key recommendations included:

a. Govt. should take over the holdings of the GIC. b. Indian companies with a min. paid up capital of 100 cr. to be allowed to enter. c. Foreign companies to be allowed to enter in collaboration with the Indian companies d. No company to carry out life and non-life business through a single entity. e. Controller of Insurance to be made independent. f. An Insurance regulatory body to be set up.

Liberalization
Introduction to Insurance

In 1999 the new govt. passed the IRDA Act.

IRDA separated out the Life, Non-Life and the
Reinsurance business.

Each entity had its own capital requirement.

Post Liberalization
Introduction to Insurance

More number of players have entered the market

leading to a lot of competition.

Better client servicing. Competitive pricing. Greater variety of products.

Better Rural penetration.

Introduction to Insurance

Principles of Insurance

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Principles
Introduction to Insurance

Utmost Good Faith:

The insured must provide to the insurer complete,
correct and clear information about the subject matter of insurance and The insurer must also provide to the insured the complete, correct and clear information about the terms and conditions of contract.

Principles
Introduction to Insurance

Insurable Interest:
The insured must have interest in the subject
matter of insurance. A person is said to have such interest when the physical existence of the object of insurance gives him gain but if the object does not exist then he shall suffer direct financial loss. Thus, in all types of insurance, insurer must suffer some kind of financial loss due to damage or nonexistence of the subject matter of insurance.

Principles
Introduction to Insurance

When insurable interest must be present?

In life insurance:
at the time of taking a life insurance policy In fire and general insurance: at the time of taking policy and also at the time of occurrence of loss. In marine insurance: at the time of loss of subject matter.

Principles
Introduction to Insurance

Indemnity:
Indemnity means a guarantee to pay for the loss
occurred,

This is not applicable to life insurance, as the loss

of life can not be measured in terms of money.

Thus, in all types of insurance, insurer must suffer

some kind of financial loss due to damage or nonexistence of the subject matter of insurance.

Principles
Introduction to Insurance

The actual amount of compensation is limited to

the amount assured or the actual loss suffered whichever is less. The object of the every contract of insurance is to place the insured in the same financial position, as he had if there had been no such loss. Compensation is for actual loss and does not cover loss of profit. If profits are to be indemnified then, the insurer may purposely bring out the event insured.

Principles
Introduction to Insurance

Contribution:
It is applicable when The insured has taken out more than one policy on the same subject matter. The policies cover the same risk which caused the loss All the policies must be in force at the time of the loss One of the insurers has paid to the insured more than his share of loss

Principles
Introduction to Insurance

Under this principle, the insured can claim the compensation from any one or from all insurers. In case any one insurer pays the full amount of loss covered by the policy, after paying it, can claim proportionate contribution of claim from all other insurers. Proportionate contribution means all the insurers have to contribute money in the proportion of the amount of the policy insured with them. This principle is applicable to Life Insurance.

Principles
Introduction to Insurance

Loss minimisation:
When the event occurs, the insured must take all
necessary steps to minimize the loss. If the insured exercises negligence in this regard, insurer can avoid the claim. But insurer is not supposed to minimize the loss at the risk of his life.

Principles
Introduction to Insurance

Subrogation:
This is applicable only in case of:
Fire and Marine policies. Subrogation literally means replacing one person for another. Once, the insurer pays the full compensation to the insured for the damage suffered by him, the insurer get all the rights to take the damaged property from him. Thus insurer steps into the shoes of the insured, only when he has settled the claim.

Principles
Introduction to Insurance

Causa Proxima:
Causa proxima means nearer cause. When the loss has been caused by a series or chain
of causes, the nearest cause must be taken into account to determine whether the insurer has to compensate the loss or not.

E.g. A ship of oranges was insured against loss due to collision.

It collided with another ship. Due to collision the cargo was not properly handled and delayed by one day. The oranges in the ship became unfit for human consumption. Here the clear and near cause of damage is delay and mishandling, hence the insured will not get any compensation.

Introduction to Insurance

Insurance Contract
An insurance contract is an agreement between the insurer and the insured under which the insurer undertakes to compensate the insured for the loss arising from the risk insured against, at a consideration called premium.

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Features
Introduction to Insurance

Personal Contract:
e.g. in property insurance, the legal interest of a person or an entity is insured and not the property itself. If the insured sells the property to a buyer Mr. XYZ then Mr. XYZ will not get the insurance cover unless and until specifically agreed by the insurance company.

Features
Introduction to Insurance

Unilateral Contract:
Unilateral means the court will enforce the contract in one direction only i.e. against on of the parties only. e.g. if the insured has paid all the premiums on time and has lodged a valid claim, then court will force the insurer to accept the claim.

Features
Introduction to Insurance

Conditional Contract:
Insurance contracts are based on terms and conditions. E.g. A condition that appears in most liability contracts is a requirement that the insured should assist the insurer in investigation of event giving rise to the claim. Failure of the insured to provide such assistance may allow the insurer to deny payment of claim.

Features
Introduction to Insurance

Aleatory Contract:
This means there is a chance element and an uneven exchange. The performance of at least one of the parties is dependent on chance, and the insurance contract involves uneven exchange.

Features
Introduction to Insurance

Contract of Adhesion:
The writer of the contract is held responsible for ambiguity of wordings in the contract. Normally insurance company drafts the contract, therefore, in case a provision is found ambiguous, the court will rule in favour of the insured.

Features
Introduction to Insurance

Contract of Utmost Good Faith:

Both parties to the contract are bound to disclose all facts relevant to the transaction. E.g. person who is taking life insurance should disclose all the material health problems while taking the policy.

Features
Introduction to Insurance

Valued / Indemnity Contract:

In case of valued contract, value of the damage is pre-decided, and is paid if the insured event occurs. In case of contract of indemnity, the amount of benefit depends on the size of the loss. Small loss results in small payment. Most property insurance contracts are indemnity contracts.

Introduction to Insurance

Thank You

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Introduction to Insurance

Insurance