INSURANCE TERMINOLOGIES AND ITS CONCEPT

Risk: The combination of the likelihood of the occurrence of a harm and the severity of that
harm.
Example: Flood damage, Earthquake damage etc.
Hazard: It is any source of potential damage, harm or adverse health effects on something
or someone. (or) Hazard is the one which accelerates the peril.
Example: Proximity of house to river, Bad Condition of Road etc.
Peril: Exposure to the risk of death, destruction, or loss (or) Peril is the one which causes the
loss.
Example: Flood, Earthquake, Fire, Cyclone etc.
Insurance: It is a means of protection from financial loss. Basically, it is a form of risk
management, mainly used to protect against uncertain loss.
Insurance is a contract, which is called a policy, in which individual or organization receives
financial protection by paying certain amount of money.
Insurer: An entity that provides insurance coverage to an individual or organization.
Insured: The person or the organization who buys insurance is known as Insured (or)
Policyholder.
Premium: It is an amount paid periodically by the insured to the insurer for covering his risk.
Sum Insured: It is the maximum value that the insurance company will pay in case of any
loss.
Insurance Policy: A document detailing the terms and conditions of a contract of Insurance.
Inclusions: All the perils that are covered by the insurer will be given in the policy.
Exclusions: All the perils that are excluded by the insurer will be mentioned in the policy.
Concept of Insurance: Insurance works on the concept of pooling of funds. In this all the
policyholders pool their risks together. They all pay premiums and if one of them suffers
financial losses, then the pay-out comes from this fund. So, the risk is shared between all of
them. The main condition in this is that all the policyholders should prone to the same risk.
So, the greater number of policyholders the lesser will be the premium payable.
Agent: An agent is a person who represents an insurance firm and sells insurance policies on
its behalf.
Broker: Insurance broker is a professional who represents consumers in their search for the
best insurance policy for their needs.
Insurance Principles:
There are certain principles that are important to ensure the validity of the contract.
Both the parties must abide by these principles.
 Principle of Utmost Good Faith
 Principle of Insurable Interest
 Principle of Indemnity
 Principle of Subrogation
 Principle of Contribution
 Principle of Proximate Cause
Principle of Utmost Good Faith:
A contract of insurance must be made based on this principle. It is important that the
insured disclose all relevant facts to the insurance company. Any facts that would increase
the premium amount, or would cause insurer to reconsider the policy must be disclosed.
If all the material facts are not disclosed and if the company finds that then the
insurance company have all the right to terminate the policy.
Principle of Insurable Interest:
This principle states that the insurer must have some interest in the subject matter of
the insurance. This means that if the property is damaged then the insured must suffer from
the financial loss.
Principle of Indemnity:
This principle states that insurance company promises to compensate the policy
holder for the amount of loss up to the amount agreed upon in the contract. It is a
guarantee to restore the insured to the position he/she was in before the incident that
caused a loss for the insured.
Principle of Subrogation:
This principle says that once the compensation has been paid, the right of ownership
of the property will shift from the insured to the insurer. So, the insured will not be able to
make a profit from the damaged property or sell it.
Principle of Contribution:
This principle applies if there are more than one insurer. In such case, the insurer can
ask the other insurers to contribute their share of the compensation. If the insured claims
full insurance from one insurer he losses his right to claim any amount from the other
insurers.
Principle of Proximate Cause:
This principle states that the property is included only against the incidents that are
mentioned in the policy. In case the loss is due to more than one such peril, the one that is
most effective in causing the damage is the cause to be considered.

Types of Insurance:
The following are the types of insurance in India. They are:
 Life Insurance
 General Insurance
Life Insurance:
It is a contract that offers financial compensation in case of death or disability. Some
life insurance policies even offer financial compensation after retirement or a certain period
of time. It helps you to secure family’s financial security even in your absence.
The policyholder can either make a lump-sum payment while purchasing a life
insurance policy or make periodic payments to the insurer. These are known as premiums.
In exchange, insurer promises to pay an assured sum to family in the event of death,
disability or at a set time.
The different plans offered by Life Insurance Companies are:
 Term Insurance
 Endowment plan
 Whole Life plan
 Retirement plan
 Child Plan
 Unit Linked Insurance Plan
General Insurance:
It is a contract that offers financial compensation on any loss other than death. It
insures everything apart from Life. It compensates for financial losses due to liabilities
related to your car, house, bike, health, travel etc. The insurance company promises to pay a
sum assured to cover damages to vehicle, medical treatments to cure health problems,
losses due to theft or fire, or even financial problems during travel.
The different types of General Insurance are:
 Health Insurance
 Motor Insurance
 Travel Insurance
 Home Insurance
  Fire Insurance

Health Insurance:
This type of Insurance covers the cost of medical care. It pays for or reimburses the
amount you pay towards the treatment of any injury or illness.
It usually covers:
 Hospitalization
 Treatment of critical illness
 Medical bills prior to or post hospitalisation
 Day care procedures
Motor Insurance:
It is a general insurance cover that offers financial protection to vehicles from loss
due to accidents, damage, theft, fire or natural calamities.
It generally provides two types of coverages. They are:
 Third Party Liability
 Comprehensive Coverage
Third Party Liability is mandatory insurance in India where the car which is insured hit
another car, then the insurance company will pay for the damages of other car.
Comprehensive coverage is the one where the insurance company covers both Third Part
Liability and Personal Protection.
Travel Insurance:
It compensates for any financial liabilities arising out pf medical and non-medical
emergencies during travel abroad or within the country.
The travel insurance usually covers:
 Loss of Damage
 Emergency medical expenses
 Loss of passport
 Hijacking
 Delayed flights
 Accidental deaths
Home Insurance:
It is a cover that compensates for damage to home due to natural calamities, man-
made disasters or other threats.
 It covers liabilities due to theft, fire, burglary, flood, earthquake and sabotage. It not
only offers financial protection to home, but also takes care of the valuables inside the
property.

Home Insurance usually covers:

 Structure of the property
 Any structures attached to the property
 Personal property inside the house
 Liability to others
Workmen Compensation Policy:
This is a commercial insurance policy that covers the legal liability of an employer to
provide compensation to its workmen in case of death or accident. This insurance enables
an employer to demonstrate his ability to meet the obligations imposed by the workmen
compensation Act.
Workmen compensation generally covers:

 Bodily injury caused by accident during the course and scope of employment
 Bodily injury caused by disease or aggravated by the conditions of the
employment
 Death or temporary disablement
 Permanent total or partial disablement
 Legal costs and expenses incurred with the company’s consent

Insurance Claim:
It is a formal request by a policy holder to an insurance company for coverage or
compensation for a covered loss or policy event. The company validates the claim and once
approved, issues payment to the insured or an approved interested party on behalf of the
insured.

IRDA:
The Insurance Regulatory and Development Authority of India is an autonomous
statutory body tasked with regulating and prompting the insurance and re-insurance
industries in India.