Basics of Insurance - I

• Insurance considered as a process by which the losses of a few, who are unfortunate to
suffer losses, are shared amongst those exposed to similar uncertain events / situations.
• The chance of suffering a certain economic loss and its consequence could be transferred
from one individual to many through the mechanism of insurance.
• Insurance is the method by which individuals may seek to manage their risks. Here they
transfer the risks they face to an insurance company.
• Insurance is a contractual arrangement whereby one party agrees to compensate another
for losses which may be suffered as a result of the occurrence of certain unforeseen events,
in return for the payment of a consideration.
• An Insurance Policy is a contract between 2 parties Insurer (Insurance Company) and
Insured (Policy Holder) as per Indian Contract act 1872.
• The party agreeing to pay for the losses is known as the Insurer while the party who is
compensated for the loss suffered is called the Insured.
• The consideration that insurer receives in return is known as the Premium.
• Insurance arises because the insured has a possibility of loss also known as his or her loss
exposure.
The Asset
An asset may be defined as any kind of property that yields value or returns to the owner.
Assets can be classified in to
Property (Physical)
Goodwill (Non- Physical)
Human Capital (Personal)
Human Life Value
• Dr. Hubener developed Human Life Value (HLV) concept.
• He is known widely as the Father of Insurance Education. He originated the concept of
HLV, which became a standard method of calculating insurance value and need.
• These assets may lose value due to uncertain event.
• This chance of loss/damage is known as risk.
• The cause of risk is known as peril.
• Persons having similar risks pool (contribute) money (premium) together.
Primary burden of Risk – losses actually suffered.
E.g. Damage to asset
Secondary burden of Risk – losses that might happen. Eg. Physical/Mental strain.
The Risk
Classification of Risk
Pure Risk & Speculative Risk
Pure Risk is defined as a situation in which there are only the possibilities of loss or no loss.
The only possible outcomes are adverse (loss) and neutral (no loss).
E.g. Premature death, job related accidents, damage to property, flood, earthquake etc.
Speculative Risk is defined as a situation in which either profit or loss is possible.
E.g. Investment in Stocks & Real Estate, Betting activities etc.
Diversifiable Risk & Non-Diversifiable Risk
Diversifiable Risk is a risk that affects only individuals or small groups and not the entire
economy. It is a risk that can be reduced or eliminated by diversification.
It is also known as Non systemic Risk, Particular Risk or Specific Risk
E.g. Car theft, Fire Accident, Robbery
Non-Diversifiable Risk that affects the entire economy or large number of persons or groups
with in the economy. It is also called as Fundamental Risk.
E.g. War, Typhoon, Flood, Earthquake
The distinction between a Diversifiable Risk & Non- Diversifiable Risk is important because
government assistance may be necessary to insure Non-Diversifiable Risk.
Personal Risks
• Personal Risks are risks that directly affect an individual or family.
• Major personal risks that can cause great economic insecurity includes
Premature Death
Inadequate retirement income
Poor health conditions
Property Risk
• Persons owing properties are exposed to Property Risk, the risk of having property
damaged or destroyed from numerous causes.
Liability Risk
• Liability Risks are another important type of Pure Risk that most persons face.
• That arises when one is held liable to pay damages for omission or commission of an act
that result in injury to person or damage to property of another. The loss has no maximum
upper limit but is typically decided in court of law.
Techniques for Managing Risk
Risk Avoidance
Risk Retention
Risk Reduction
Risk Control
Risk Transfer
Risk Avoidance
• Controlling risk by avoiding a loss situation is known as Risk Avoidance.
Risk Retention
• One tries to manage the impact of risk and decides to bear the risk and its effects by
oneself. This is known as Self-Insurance/ Self – Funding.
• Self - Insurance of oneself or one's interests by maintaining a fund to cover possible losses
rather than by purchasing an insurance policy.
• Insurance is designed to protect against financial losses you can’t afford to bear, but for
losses that you can afford, self-insurance can save money since you aren’t paying insurance
premiums.
Risk Reduction & Risk Control
• This is a more practical and relevant approach than Risk Avoidance. It means taking steps
to lower the chance of occurrence of a loss and/or to reduce severity of its impact if such
loss should occur.
• The measures to reduce chance of occurrence are known as Loss Prevention.
• The measures to reduce degree of loss are called Loss Reduction.
Risk Transfer
• Risk Transfer involves transferring the responsibility for losses to another party. Here the
losses that may arise as a result of a fortuitous event (or peril) are transferred to another
entity.
• Insurance is one of the major forms of risk transfer
Insured
• An Insured is a person who is the buyer of the insurance policy.
• An insured is the proposer of the policy who pays premium as the consideration to the
insurance company.
• Insured purchases the insurance policies to safeguard the assets from the financial
consequences of losses or damage that occur from peril.
Insurer
• An Insurer is a company who sells the insurance policies.
• Insurer is the one who bears the risk in return for consideration which is known as
premium.
• Insurer agrees to pay to the insured a certain sum of money if the insured peril occurs.
Premium
• Insurance is nothing but a risk transfer mechanism wherein the person purchasing
insurance transfers his/ her risk to the insurance company in return for a payment known as
the Premium.

Basics of Insurance - II
History of Insurance in India
The Oriental Life Insurance Co. Ltd: The first life insurance company set up in India. It was
created by Europeans in Calcutta.
Triton Insurance Co. Ltd.: The first non-life insurer to be established in India
Bombay Mutual Assurance Society Ltd.: The first Indian insurance company. It was formed
in 1870 in Mumbai
Postal Life Insurance was established in 1884 & it is the oldest life insurer in this country.
Owned by Ministry of Communication & IT
National Insurance Company Ltd.: The oldest non-insurance company in India. It was
founded in 1906 and it is still in business.
• In 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to
regulate the insurance business.
• The Insurance Act 1938 was the first legislation enacted to regulate the conduct of
insurance companies in India.
• The Controller of Insurance was appointed by the Government under the provisions of the
Insurance Act.
Life Insurance Corporation
• Life insurance business was nationalised on 1st September 1956 and the Life Insurance
Corporation of India (LIC) was formed.
• There were 170 companies and 75 provident fund societies doing life insurance business
in India at that time.
Established – 1st September 1956
Corporate Office – Mumbai
Zonal Offices – 8
Divisional Offices – 113
Branches – 2000+
Policy Holders – 29 crore +
Individual Agents – 15 lakh +
Chairman – Mr. M R Kumar
Slogan – Yogakshemam Vahamyaham
Subsidiaries of LIC
• LIC Housing Finance
• IDBI Bank
• LIC Pension Fund Ltd.
• LIC Credit Cards – Partnership between LIC Cards Services Ltd. & Corporation Bank
• LIC Mutual Fund - It is a joint venture between LIC, LIC Housing Finance, GIC Housing
Finance, & Corporation Bank.
General Insurance Corporation
• With the enactment of General Insurance Business Nationalisation Act in 1972, the non-life
insurance business was nationalised 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.
• The New India Assurance Co. Ltd (1919) – Mumbai
• National Insurance Company Ltd. (1906) – Kolkata
• The Oriental Insurance Company Ltd. (1947) – New Delhi
• United India Insurance Company (1938) – Chennai
R.N. Malhotra Committee
• In 1993, the Malhotra Committee was setup to explore and recommend changes for
development of the Insurance Industry.
• In 1997 the Insurance Regulatory Authority (IRA) was established.
• The passing of the Insurance Regulatory & Development Act, 1999 led to the formation of
Insurance Regulatory and Development Authority (IRDA) in April 2000 as a statutory
regulatory body for life, non-life, health insurance and reinsurance industry.
• IRDA has been subsequently renamed as IRDAI in 2014.
• Up to 49% Foreign Direct Investment (FDI) allowed in Indian Insurance Sector
• The insurance industry of India consists of 58 insurance companies of which 24 are in life
insurance business and 34 are non-life insurers. Among the life insurers, Life Insurance
Corporation is the sole public sector company.
• Out of 34 non-life insurance companies, there are six public sector insurers, which include
two specialised insurers namely Agriculture Insurance Company Ltd for Crop Insurance and
Export Credit Guarantee Corporation of India for Credit Insurance.
• Insurance Laws (Amendment) Act, 2015 provides for enhancement of the Foreign
Investment Cap in an Indian Insurance Company from 26% to 49% with the safeguard of
Indian ownership and control.
• Insurance penetration of India i.e. Premium collected by Indian insurers is 3.69% of GDP in
FY 2017-18.
• Per capita premium underwritten i.e. insurance density in India during FY 2017-18 is $ 73.
• Insurance Penetration is calculated as first year new business premium to GDP
• Insurance Density (measured in $) refers to per capita premium or premium per person.
• Underwrite means sign and accept liability under (an insurance policy), thus guaranteeing
payment in case loss or damage occurs.
Insurance Regulatory & Development Authority of India
Established: 19th April 2000
IRDA Act was passed in 1999
Headquarter: Hyderabad
Recommended by: R.N. Malhotra Committee
1st Chairman of IRDAI: Shri. N. Rangachary
Present Chairman of IRDAI: Shri. Subhash Chandra Kunthia
• In 1993, Committee on Reforms in the Insurance Sector, headed by Mr. R. N. Malhotra set
up to recommend reforms.
Some recommended reforms
Private sector companies should be allowed to promote insurance companies
Foreign promoters should also be allowed
Government to vest its regulatory powers on an independent regulatory body answerable to
Parliament
• IRDAI was created to protect the interests of policyholders, to regulate, promote and
ensure orderly growth of the insurance industry.
• It frames regulations for insurance industry in terms of Section 114A of the Insurance Act
1938.
• 19th April observed as “Insurance Awareness Day” in India.
Functions of IRDAI
Section 14 of the IRDA Act, 1999 lays down the duties, powers and functions of IRDA.
Registering and regulating insurance companies
Protecting policyholders’ interests
Licensing and establishing norms for insurance intermediaries
Promoting professional organisations in insurance
Regulating and overseeing premium rates and terms of non-life insurance covers
Specifying financial reporting norms of insurance companies
Regulating investment of policyholders’ funds by insurance companies
Ensuring the maintenance of solvency margin by insurance companies
Ensuring insurance coverage in rural areas and of vulnerable sections of society
Bima Bemisaal
• Bima Bemisaal is the brand name for IRDAI's insurance awareness campaign.
• It is a consumer education initiative and has the tagline "Promoting Insurance. Protecting
Insured"
• Bima Bemisaal educates policyholders about their rights and obligations and informs them
about the complaints resolution methods available to them.