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Basics of Insurance

S . No Table of Contents

1. His tory of I nsurance

(a) Insurance and its Evolution
(b) Milestones in Insurance
(c) Liberalisation of Insurance Industry
(d) Importance
2. Ty pes of I nsurance
(a) Life Insurance
(b) General Insurance
i. Health Insurance
ii. Travel Insurance
iii. Motor Insurance
iv. Property Insurance
v. Fire Insurance
vi. Marine Insurance
vii. Flood Insurance
viii. Crop Insurance
3. P rinciples of Insurance
(a) Principle of Indemnity
(b) Principle of Utmost Good Faith
(c) Principle of Insurable Interest
(d) Principle of Subrogation
(e) Principle of Mitigation of Loss
(f) Principle of Contribution
(g) Principle of Causa Maxima
4. Ty pes of Risks in Insurance
(a) Pure Risk
(b) Speculative Risk
(c) Financial Risk
(d) Non-Financial Risk
(e) Particular Risk
(f) Static Risk
(g) Dynamic Risk
(h) Fundamental Risk

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Basics of Insurance

History of Insurance

Insurance is a policy that provides financial protection for your property, life, or health, paying you in
case of death, loss, or damage. A party promises to compensate another party in exchange for a fee in
the case of a certain loss, damage, or injury as a way of financial loss protection is Insurance. It is a
method of risk management that is primarily employed to protect against the risk of a potential loss.

History of Insurance in India:

Since insurance was known to exist in some form as early as 3000 BC, the history of insurance in India
dates back to this time. The fundamental idea of insurance- pooling and sharing resources was
practised by numerous cultures in a disorganised fashion.

Modern Insurance in India began around 1800 AD with agencies of foreign insurance starting a marine
Insurance business.

Year Event

1818 first life insurance company – Oriental Life Insurance

Company was established in Kolkata

1829 Madras Equitable was established in Madras (Chennai)

Presidency

1850 First non-life insurance company - Triton Insurance

Company

Limited

1870 Bombay Mutual was started in Mumbai

1874 Oriental was started in Mumbai

1896 Bharat Insurance Company Limited was started in Delhi

1897 Empire of India was started in Mumbai

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The growth of insurance business in India required the enactment of the Insurance Act, 1938

Evolution of Insurance:

• 1818: Oriental Life Insurance Company, the first life insurance company on Indian soil started
functioning.
• 1870: Bombay Mutual Life Assurance Society, the first Indian life insurance company started its
business.
• 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life
insurance business.
• 1928: The government can now gather statistical data about both life and non-life insurance
companies according to the Indian Insurance Companies Act.
• 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of
protecting the interests of the insuring public.
• 1956: Nationalization of life insurance: Life insurance business was nationalized on 1st September
1956 and the Life Insurance Corporation of India (LIC) was formed through the LIC Act, 1956. A capital
contribution of Rs. 5 crores from the Government of India was also made. There were 170 companies
and 75 provident fund societies doing life insurance business in India at that time. From 1956 to 1999,
the LIC held exclusive rights to do the life insurance business in India.
• 1972: Nationalization of non-life insurance: With the enactment of General Insurance Business
Nationalization Act (GIBNA) in 1972, the non-life insurance business was also nationalized and the
General Insurance Corporation of India (GIC) and its four subsidiaries were set up. At that point of time,
106 insurers in India doing non-life insurance business were amalgamated with the formation of four
subsidiaries of the GIC of India.
• In 1973, general insurance business was nationalised in India and the General Insurance
Corporation of India (GIC) and the four subsidiaries; National Insurance Company Limited, The New
India Assurance Company Limited, The Oriental Insurance Company Limited and United India
Insurance Company Limited were formed. As part of the nationalisation process, the funds of all existing
companies were merged with the four subsidiaries of the GIC.
• Till 1999, LIC had the exclusive right over life insurance business in India. In 1999, the relevant
laws were amended and the life insurance sector was opened for business to private players.

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Important Milestones in Insurance History:

• 1993- Malhotra Committee established

• 1994- Recommendations of the Malhotra Committee published
• 1995- Mukherjee Committee established
• 1996- Setting up of (interim) Insurance Regulatory Authority (IRA)recommendations of the IRA
• 1997- Mukherjee Committee Report submitted but not made public
• 1997- The government gives greater autonomy to Life Insurance Corporation, General Insurance
Corporation, and its subsidiaries with regard to the restructuring of boards and flexibility in investment
norms aimed at channelling funds to the infrastructure sector
• 1998- The cabinet decides to allow 40 percent foreign equity in private insurance companies—26
percent to foreign companies and 14 percent to non-resident Indians and Foreign Institutional Investors
• 1999- The Standing Committee headed by Murali Deora decides that foreign equity in private
insurance should be limited to 26 percent. The IRA bill is renamed the Insurance Regulatory and
Development Authority Bill
• 1999- Cabinet clears Insurance Regulatory and Development Authority Bill
• 2000- President gives assent to the Insurance Regulatory and Development Authority Bill

Liberalisation of Indian Insurance

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Basics of Insurance

Insurance in India is governed by the Insurance Act, 1938 as amended from time to time. It lays down
the rules and regulations for the insurance industry. The Insurance Regulatory and Development
Authority (IRDA) Act was enacted in 1999. IRDA is the regulator for the insurance business in India.

Importance of the Insurance Industry:

• Trade and industry get some steadiness and stability.

• Business owners can concentrate on their businesses without worrying about the vagaries of
nature like floods, earthquakes, cyclones etc.
• Business owners know that in the event of natural calamities insurance companies will come to
their rescue to compensate for the losses faced due to these perils.
• In the absence of insurance companies, the business owners will be exposed to the risk of losses
due to these vagaries and will have to bear heavy losses in the event of any natural calamity.
• Insurance arrangements increase the capacity of those affected, to cope with these losses and
incidental problems.

Types of Insurance

Insurance is broadly classified into life insurance and general insurance.

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Life Insurance:

• The insurance policy that allows the policyholder (insured) to guarantee financial security for their
surviving family members after his/her death is Life Insurance.
• The difference between life insurance and other types of insurance is that in this case, the object
of insurance is a person's life. It offers financial compensation in case of death or disability.
• The insured pays the insurer either a lump sum payment or regular premium payments when
acquiring a life insurance policy. In return, the insurer agrees to pay the family of the insured an agreed
sum in the event of death, disability, or maturity.
• This insurance offers security to the family in the event of an untimely death or provides a
sufficient sum throughout old age when earning capacity is diminished.
• Through pension plans, life insurance can help protect people from longevity risks.

General Insurance:

• Animals, farmland, goods, industries, cars, and other non-human items are covered by non-life
insurance or general insurance.
• Non-life insurance also covers losses brought on by individual actions such as forgery, burglary,
failure to keep a commitment (in the event of mortgage loan repayment), and professional malpractice.

Types of General Insurance:

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• Health Insurance: Health insurance is a type of general insurance offering policyholders financial
support when they are admitted to hospitals for treatment. Additionally, some plans also cover the cost
of therapy received at home, either before or after admission to a hospital.
• Motor Insurance: Motor insurance refers to contracts that provide financial support in the event
that your car or motorcycle is involved in an accident. Motor insurance can be availed for three
categories of motorised vehicles involving Car Insurance, Two-wheeler Insurance, Commercial Vehicle
Insurance.
• Property Insurance: Through property insurance plans, you can insure any building or immovable
structure. This could be your home or a business location. You can ask the insurance company for
financial aid if such a property is damaged in any way. Remember that such a plan also financially
protects the inside of the property's content.
• Travel Insurance: Travel insurance may give financial assistance in a variety of situations,
including lost luggage, trip cancellation, and more, depending on the service you choose. Travel
Insurance is a short-term cover.
• Mobile Insurance: In the event of unintentional damage, mobile insurance enables you to reclaim
the cost of fixing your phone.
• Fire Insurance: Fire insurance deals with all fire-related risks and will include damage due to riots,
malicious acts, typhoons, cyclones, earthquakes and consequential expenditures related to these
events.

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• Marine Insurance: Marine insurance deals with goods being transported by sea, air, rail or road as
well as all marine-related risks.
• Flood Insurance: Flood insurance is a type of property insurance that covers a dwelling for losses
sustained by water damage specifically due to flooding.
• Crop Insurance: Crop insurance is a means of protecting the agriculturist against financial losses
due to uncertainties that may arise from crop failures/losses arising from named or all unforeseen perils
beyond their control.

Principles of Insurance

There are seven basic principles applicable to insurance contracts relevant to personal injury and car
accident cases.

Principle of Utmost Good Faith:

• This is a very basic and primary principle of insurance contracts because the nature of the service
is for the insurance company to provide a certain level of security and solidarity to the insured person’s
life.
• Here both parties involved in an insurance contract—the insured (policyholder) and the insurer
(the company)—should act in good faith towards each other.

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• The insurer and the insured must provide clear and concise information regarding the terms and
conditions of the contract.
• If the insurance provider gives you information that is false or misleading and this false information
results in a loss for you, the provider may be held accountable.
• An example is when we buy vehicle insurance for the risk of loss and damage over a period of one
year. If both parties hold the principle of utmost good faith, the insured will not make a claim if the
insured risk does not occur. Conversely, if the risk is true, the insurance company will approve the claim
filed.

Principle of Proximate Cause:

• When a loss has two or more causes, this rule is applicable.

• The closest reason for the property's loss will be determined by the insurance company. The
business must make restitution if the insured property's damage was the proximate cause.
• No payment will be provided by the insured if the reason is not one that the property is covered
against.
• For example: A cargo ship’s base was punctured due to rats and so sea water entered and cargo
was damaged. Here there are two causes for the damage of the cargo ship – (i) The cargo ship getting
punctured because of rats, and (ii) The sea water entering ship through puncture. The risk of seawater
is insured but the first cause is not. The nearest cause of damage is sea water which is insured and
therefore the insurer must pay the compensation.

Principle of Insurable Interest:

• According to this principle, the insured person must have an insurable interest in the subject
matter.
• The term "insurable interest" simply denotes that the object of the contract must yield some
financial benefit to the insured (or policyholder) by virtue of its existence and would result in a financial
loss if it were damaged, destroyed, stolen, or lost.
• An example of an insurable interest is a policyholder who purchases home insurance for their own
residence but not for that of a neighbour. The person has no insurable stake in any monetary loss
brought on by harm to their neighbour's home.

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Principle of Indemnity:

• Principle of Indemnity states that the insured shall be compensated appropriately for the losses
caused to the goods by the insurer, only to the extent that the insurer does not make a profit out of the
loss that occurred.

• To put it another way, the insured should only receive compensation that is equal to the real loss
and not more.
• The promise of indemnity is to put the insured person back in the position they were in prior to the
unknown event that resulted in a loss for the insured.
• The provider (insurance company) pays the insured (policyholder). The insurance provider
guarantees to reimburse the policyholder for losses up to the predetermined contract limit.
• For example, if you suffer a loss to your home due to a fire and it is estimated that it would cost
$50,000 to repair the damage, then that is what you would get from the insurance company subject to
limits of insurance selected and other terms and conditions of the insurance policy.

Principle of Subrogation:

• According to the Principle of Subrogation, after providing compensation to the insured for the
subject-matter, the insurer gets every right against the third party.
• This principle is applied to all the insurance contracts that are the ‘Contracts of Indemnity’.
• For example, suppose you have suffered injuries due to an accident caused by a third party. In
that case, subrogation gives your insurance company the legal right to step into your shoes and seek
compensation for the damages caused to your car.

Principle of Contribution:

• When an insured person purchases multiple insurance policies covering the same risk, the
contribution principle is in effect.
• The insured cannot make money by claiming the loss of one subject matter from other policies or
businesses, which is what the concept of indemnification states.

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• For example, Rahul buys an insurance policy of ₹50,000 for a property of ₹90,000 from Insurer X
and ₹20,000 from Insurer Y. He suffered a loss of ₹ 30,000, which he can claim from both insurers.

Principle of Mitigation or Loss Minimisation:

• The insured is required to take reasonable measures to reduce the loss or damage to the insured
subject or property in accordance with the Principle of Mitigation.
• This rule's major objective is to make sure that after purchasing a policy to cover risks, the insured
does not start to behave carelessly toward the subject or property that is insured.
• The insured may forfeit the insurance claim payout if the insured does not maintain the insured
property with appropriate care.
• For example, in the event of a factory fire that was covered by the fire insurance policy, the owner
should make every effort to put out the fire and reduce the damage as much as possible. He does not
have the right to remain silent merely because he purchased insurance coverage for the enterprise.

Types of Risks in Insurance

The term "risks" in insurance refers to how insurers assess their risks while providing insurance
coverage to policyholders for potential losses resulting from theft, loss, damage to property, or even
personal injury.

Following are the Types of Risks in Insurance

1. Pure Risk

2. Personal Risk

3. Property Risk

4. Liability Risk

5. Speculative Risk

6. Financial Risk

7. Non-Financial Risk

8. Particular Risk

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9. Fundamental Risk

10. Static Risk

11. Dynamic Risk

Pure Risk

Pure risk is a circumstance where it is certain that the outcome will only result in the person's loss or, at
most, in the condition of break-even, but it can never result in the person making a profit. Example: pure
risk includes the possibility of damage to the house due to natural calamity.

Personal Risk

Personal Risk is a reference to the person. An individual's health or safety are at risk in this situation.
This kind of risk takes accidents and illness into account. Additionally, personal risk has a direct
correlation to death, illness, retirement, and unemployment. Personal risk, which includes rapi d loss of
financial assets or unexpected mortality, can negatively impact a person's ability to earn a living.

Property Risk

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Property risk is the term for risk situations that have an impact on a company's buildings and other
physical assets. Included in this are all events like theft, fire, and natural catastrophes that could result
in a partial or complete loss of property. In addition to the harm they do, property risk can prevent a
corporation from operating, leading to material and financial losses. This form of risk also takes into
account unfavourable weather conditions and terrorist strikes.

Liability Risk

Liability risk is another sort of risk in insurance that falls under pure risk. This is a personal or
professional risk related to being held accountable to a third party for carelessness or intentional actions
that may result in damage to a third party's person or property. As an illustration, irresponsible driving or
breaching a contract. Legal obligations to third parties are related to this liability risk.

Speculative Risk

Speculative risk refers to the situation where the direction of the outcome is not specific, i.e., it could
lead to a condition of loss, profit, or break-even. In most cases, these risks cannot be insured. An
example of speculative risk includes the purchase of shares of a company by a person.

Financial Risk

Financial risk is defined as a threat where the outcome of the event can be quantified in terms of
money, meaning that any loss that could result from the risk can be valued in money by the person who
is concerned. A loss of the company's inventory due to a fire in the warehouse is an example of a
financial risk.

Non- Financial Risk

Non-financial risk is the kind of risk where the result of the occurrence cannot be quantified in terms of
money, meaning that any loss that can result from the risk cannot be valued in money by the person
who is concerned. One illustration of a non-financial risk is the risk associated with making a poor brand
choice when buying a cell phone.

Particular Risk

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A particular risk is defined as a risk that primarily results from an individual's or a group of persons'
actions or activities. As a result, the specific risk originates at the person level, and its effects are felt
locally. An incident on the bus is an illustration of a specific possibility.

Fundamental Risk

The term "fundamental risk" describes a risk that results from factors outside of anyone's control. In light
of this, it can be claimed that the fundamental risk's causes and effects are impersonal. These dangers
mostly have an effect on the group, or the vast population. The group's exposure to risks from
occurrences like natural disasters, economic slowdown, etc. is included in the fundamental risk.

Static Risk

Static risk is a term used to describe a risk that does not fluctuate over time and is typically unaffected
by the business environment. These dangers result from either human error or natural occurrences.
Employee misappropriation of corporate funds is an illustration of static risk.

Dynamic Risk

Dynamic risk is the term used to describe the risk that results from changes in the economy. These risks
are typically difficult to anticipate. The economy's participants may experience financial losses as a
result of these developments. Changes in the income of individuals within an economy, as well as in
their interests and preferences, are examples of dynamic risk. They are typically difficult to insure.

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