UNIT 4

Insurance: The insurer( company) and the insured( individual) enter a legal contract for the
insurance called the insurance policy that provides financial security from the future
uncertainties.

In simple words, insurance is a contract, a legal agreement between two parties, i.e., the
individual named insured and the insurance company called insurer. In this agreement, the
insurer promises to help with the losses of the insured on the happening contingency. The
insured, on the other hand, pays a premium in return for the promise made by the insurer.

The contract of insurance between an insurer and insured is based on certain principles.
Insurance is in a form of policy, Insurance is a contract in which the individual or an entity gets
the financial protection, in other words, reimbursement from the insurance company for the
damage (big or small) caused to their property.
Insurance is a cooperative device to spread the loss caused by a particular risk over the number
of persons who are exposed to that risk.
Insurance allows individuals. Businesses and other entities protect themselves against
significant potential losses and financial hardship at a reasonably affordable rate.

Principles of Insurance:

The concept of insurance is risk distribution among a group of people. Hence, Cooperation
becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer and the insured have to
uphold the 7 principles of Insurances mentioned below:

● Principle of Utmost Good Faith: The fundamental principle is that both the parties in an
insurance contract should act in good faith towards each other, i.e. they must provide
clear and concise information related to the terms and conditions of the contract. The
Insured should provide all the information related to the subject matter, and the insurer
must give precise details regarding the contract.
Example – Joby took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the
Insurance company will not be liable to bear the financial burden as Joby concealed
important facts.

● Principle of Proximate Cause: This is also called the principle of ‘Causa Proxima’ or the
nearest cause. This principle applies when the loss is the result of two or more causes.
The insurance company will find the nearest cause of loss to the property. If the
proximate cause is the one in which the property is insured, then the company must pay
compensation.
If it is not a cause the property is insured against, then no payment will be made by the
insured.
 Example – Due to fire, a wall of a building was damaged, and the municipal authority
ordered it to be demolished. While demolition the adjoining building was damaged. The
owner of the adjoining building claimed the loss under the fire policy. The court held that
fire is the nearest cause of loss to the adjoining building, and the claim is payable as the
falling of the wall is an inevitable result of the fire.
In the same example, the wall of the building was damaged due to fire, fell down due to
a storm before it could be repaired and damaged an adjoining building. The owner of the
adjoining building claimed the loss under the fire policy. In this case, the fire was a
remote cause, and the storm was the proximate cause; hence the claim is not payable
under the fire policy.

● Principle of Insurable interest: This principle says that the individual (insured) must have
an insurable interest in the subject matter. Insurable interest means that the subject
matter for which the individual enters the insurance contract must provide some financial
gain to the insured and also lead to a financial loss if there is any damage, destruction or
loss.
Example – the owner of a vegetable cart has an insurable interest in the cart because he
is earning money from it. However, if he sells the cart, he will no longer have an
insurable interest in it.
To claim the amount of insurance, the insured must be the owner of the subject matter
both at the time of entering the contract and at the time of the accident.

● Principle of Indemnity: This principle says that insurance is done only for the coverage of
the loss; hence insured should not make any profit from the insurance contract. In other
words, the insured should be compensated the amount equal to the actual loss and not
the amount exceeding the loss. The purpose of the indemnity principle is to set back the
insured at the same financial position as he was before the loss occurred. Principle of
indemnity is observed strictly for property insurance and not applicable for the life
insurance contract.
For example: If a person buys vehicle insurance for a value of Rs. 100000. If the vehicle
got damaged worth Rs.60000, then the insurance company will pay Rs.60000. If the
damage is Rs. 120000, the insurance company will pay Rs. 100000.

● Principle of Subrogation: Subrogation means one party stands in for another. As per this
principle, after the insured, i.e. the individual has been compensated for the incurred loss
to him on the subject matter that was insured, the rights of the ownership of that property
goes to the insurer, i.e. the company. Subrogation gives the right to the insurance
company to claim the amount of loss from the third-party responsible for the same.
Example – If Mr. A gets injured in a road accident, due to reckless driving of a third party,
the company with which Mr A took the accidental insurance will compensate the loss
incurred to Mr A and will also sue the third party to recover the money paid as claim.

● Principle of Contribution: Contribution principle applies when the insured takes more
than one insurance policy for the same subject matter. It states the same thing as in the
 principle of indemnity, i.e. the insured cannot make a profit by claiming the loss of one
subject matter from different policies or companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and
with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs
can claim the full amount from Company A but then he cannot claim any amount from
Company B. Now, Company A can claim the proportional amount reimbursed value from
Company B.

● Principle of Loss Minimisation: This principle says that as an owner, it is obligatory on the
part of the insurer to take necessary steps to minimize the loss to the insured property.
The principle does not allow the owner to be irresponsible or negligent just because the
subject matter is insured.
Example – If a fire breaks out in your factory, you should take reasonable steps to put
out the fire. You cannot just stand back and allow the fire to burn down the factory
because you know that the insurance company will compensate for it.

Types Of Insurance: There are two broad categories of insurance:

● Life Insurance
● General insurance

1. Life Insurance – The insurance policy whereby the policyholder (insured) can ensure
financial freedom for their family members after death. It offers financial compensation in
case of death or disability. While purchasing the life insurance policy, the insured either
pays the lump-sum amount or makes periodic payments known as premiums to the
insurer. In exchange, of which the insurer promises to pay an assured sum to the family
if insured in the event of death or disability or at maturity.

Depending on the coverage, life insurance can be classified into the below-mentioned types:

● Term Insurance: Gives life coverage for a specific time period.

● Whole life insurance: Offer life cover for the whole life of an individual
● Endowment policy: a portion of premiums go toward the death benefit, while the
remaining is invested by the insurer.
● Money back Policy: a certain percentage of the sum assured is paid to the insured in
intervals throughout the term as survival benefit.
● Pension Plans: Also called retirement plans are a fusion of insurance and investment. A
portion from the premiums is directed towards retirement corpus, which is paid as a
lump-sum or monthly payment after the retirement of the insured.
● Child Plans: Provides financial aid for children of the policyholders throughout their lives.
● ULIPS – Unit Linked Insurance Plans: same as endowment plans, a part of premiums go
toward the death benefit while the remaining goes toward mutual fund investments.
 2. General Insurance – Everything apart from life can be insured under general insurance.
It offers financial compensation on any loss other than death. General insurance covers
the loss or damages caused to all the assets and liabilities. The insurance company
promises to pay the assured sum to cover the loss related to the vehicle, medical
treatments, fire, theft, or even financial problems during travel. General Insurance can
cover almost anything, and everything but the five key types of insurances available
under it are –
● Health Insurance: Covers the cost of medical care.
● Fire Insurance: give coverage for the damages caused to goods or property due to fire.
● Travel Insurance: compensates the financial liabilities arising out of non-medical or
medical emergencies during travel within the country or abroad
● Motor Insurance: offers financial protection to motor vehicles from damages due to
accidents, fire, theft, or natural calamities.
● Home Insurance: compensates the damage caused to home due to man-made
disasters, natural calamities, or other threats.

Benefits of Insurance:
Insurance gives benefits to individuals and organizations in many ways. Some of the benefits
are discussed below:

● The obvious benefit of insurance is the payment of losses.

● Manages cash flow uncertainty when paying capacity at the time of losses is reduced
significantly.

● Complies with legal requirements by meeting contractual and statutory requirements,

also provides evidence of financial resources.

● Promotes risk control activity by providing incentives to implement a program of losing

control because of policy requirements.

● The efficient use of the insured’s resources. It provides a source of investment funds.
Insurers collect the premiums and invest those in a variety of investment vehicles.

● Insurance is support for the insured’s credit. It facilitates loans to organizations and
individuals by guaranteeing the lender payment at the time when collateral for the loan is
destroyed by an insured event. Hence, reducing the uncertainty of the lender’s default by
the party borrowing
● funds.

● It reduces social burden by reducing uncompensated accident victims and the

uncertainty of society.
The requirements of insurable risk( requisites) are the elements that an insurance company
considers before crafting and selling a policy. Knowing these elements safeguard the company
from suffering a catastrophic financial loss or being taken advantage of by the insured.
An insurance company will only allow a policyholder to pass a loss on to them only if the
company is well aware of the consequences involved.

It is aware of the following:

● that a loss should happen by chance and not as the result of a premeditated action,
● that the loss is predictable and natural (such as death), that the loss is measurable (how
much amount of money to cover is determined in advance),
● that the loss is not catastrophic (and will not make the company insolvent), and
● that the insurance payment is justifiable if compared to the value of the loss.

7 elements/requirements of an insurable risk are;

● Large numbers of exposure units: The prime necessity for a risk to be insurable is that
there must be a sufficiently large number of homogeneous exposures to combine
reasonably predictable losses. Lost data can be compiled over time, and losses for the
group can be predicted with some accuracy. The loss costs can then be spread over all
insured’s in the underwriting class. Also, the probabilistic estimates used by the
insurance company, by logic, assume a large number of units in a distribution, and
insurance products are priced accordingly.

● Define and measurable loss: A second requirement is that the loss should be both
determinable and measurable. This means the loss should be definite as to cause, time,
place, and amount. Life insurance, in most cases, meets this requirement easily. The
cause and time of death can be readily determined in most cases, and if the person is
insured, the face amount of the life insurance policy is the amount paid. The losses are
fairly predictable and can be measured in money terms—loss of peace of mind, tension,
etc. Or loss of life cannot be indemnified.

● Determinable probability distribution: The probability distribution of the occurrence of an

adverse event is determinable. This condition is necessary to establish a free premium
according to the theory of equivalence. If there is no determinable distribution, there is
no question of issuing a cover by an insurance company.

● Calculable chance of loss: The insurer must calculate both the average frequency and
the average severity of future losses with some accuracy. This requirement is necessary
so that a proper premium can be charged that is sufficient to pay all claims and
expenses and yield a profit during the policy period.Certain losses, however, are difficult
to insure because the chance of loss cannot be accurately estimated, and the potential
for a catastrophic loss is present. For example, floods, wars, and cyclical unemployment
occur on an irregular basis, and the average frequency and the severity of losses are
 difficult. Thus, without government assistance, these losses are difficult for private
companies to insure.

● Fortuitous( by chance) loss: The adverse event may or may not occur in the future and
once the insurance company has no control. So naturally, if the event is non-random or
the loss has occurred in the past, there is no insurance question. Also, it is important to
note that randomness is ensured by underwriters who guard against adverse selection,
the tendency of the poorer than average insured to seek or continue insurance
coverage.

● Non-catastrophic loss: The losses should be non-catastrophic. Not all the units in a
homogeneous group will be subject to an adverse event. This means that a large
proportion of exposure units should not incur losses at the same time. As we stated
earlier, pooling is the essence of insurance. However, if most or all of the exposure units
in a certain class simultaneously incur a loss, then the pooling technique breaks down
and becomes unworkable. Premiums must be increased to prohibitive levels, and the
insurance technique is so long a viable arrangement by which losses of the few are
spread over the entire group. For example, insurers ideally wish to avoid all catastrophic
losses. In reality, however, this is impossible because catastrophic losses periodically
result from floods, hurricanes, tornadoes, earthquakes, forest fires, and other natural
disasters. In addition, catastrophic losses can also result from acts of terrorism.

● Premium should be economically feasible: The insured must be able to pay the
premium.Also, for the insurance to be an attractive purchase, the premiums paid must
be substantially less than the policy’s face value or amount.Since the insurance pool is
structured to be sufficiently large, the price charged by the insurer for buying the risk is
generally low. Thus, it should be sufficient to cause the rich for the insurer and viable for
the insured.
(OR)

1. a large number of homogeneous exposures (in order for the deviation of actual losses
from expected losses to approach zero and the credibility of the prediction to approach
one).
2. loss must be definite in time and amount.
3. loss must be fortuitous. An insured cannot cause the loss to happen; it must be due to
chance.
4. must not be an exposure to catastrophic loss; risks must be spread over a large
geographical area to prevent their concentration. reinsurance often is used to spread
potentially catastrophic risks.
5. premium must be reasonable in relation to the potential loss. In theory, one could even
insure against a pencil point breaking, but the premium would be much greater than any
possible loss.
Characteristics of Insurance contract:
● Risk sharing and risk transfer
● Cooperative device
● Calculated risk in advance
● Payment of claim at the occurrence of contingency
● Amount of payment
● Large number of insured persons
● Insurance must not be confused with charity or gambling

Types of Insurers:
Insurers can be classified by their organizational form:

1. Stock insurers : A stock insurer is a corporation owned by stockholders.

– Objective: earn profit for stockholders by increasing the value of stock and paying
dividends
– Stockholders elect board of directors
– Stockholders bear all losses
– Insurer cannot issue an assessable policy

2. Mutual insurers: A mutual insurer is a corporation owned by the policyowners.

– Policyowners elect board of directors, who have effective management
– Policyholders may receive dividends or rate reductions
– There are three main types of mutual insurers:
• An advance premium mutual is owned by the policyowners; there are no stockholders,
and the insurer does not issue assessable policies
• An assessment mutual has the right to assess policyowners an additional amount if the
insurer’s financial operations are unfavorable
• A fraternal insurer is a mutual insurer that provides life and health insurance to
members of a social or religious organization.
The corporate structure of mutual insurers is changing due to:
– An increase in company
– Demutualization, whereby a mutual company is converted into a stock insurer by a
pure conversion, merger, or bulk reinsurance
– The creation of mutual holding companies
– A holding company is a company that directly or indirectly controls an authorized
insurer

3. Reciprocal exchanges: A reciprocal exchange can be defined as an unincorporated

organization in which insurance is exchanged among the members (called subscribers)
– Insurance is exchanged among the members; each member of the reciprocal insures
the other members
– It is managed by an attorney-in-fact
 – Most reciprocals are relatively small and specialize in a limited number of lines of
insurance

4. Lloyd’s of London: Lloyd’s of London is not an insurer, but a society of members who
underwrite insurance in syndicates
– Membership includes corporations, individual members (called Names), and limited
partnerships
– New individual members now have limited legal liability
– Corporations with limited legal liability and limited liability partnerships can also join
Lloyd’s of London
– Members must meet stringent financial requirements
– Lloyd’s is licensed only in a small number of jurisdictions in the U.S.

5. Blue Cross and Blue Shield Plans: Blue Cross and Blue Shield Plans are generally
organized as nonprofit, community oriented plans
– Blue Cross plans provide coverage for hospital services
– Blue Shield plans provide coverage for physicians’ and surgeons’ fees
– Most plans have merged into one entity
– Many sponsor HMOs and PPOs
– Some plans have converted to a for-profit status to raise capital and become more
competitive

6. Health maintenance organizations (HMOs): A Health Maintenance Organization (HMO)

provides comprehensive health care services to its members
– Broad health care services are provided for a fixed prepaid fee
– Cost control is emphasized
– Choice of health care providers may be restricted
– Less costly forms of treatment are often provided

7. Other types of private insurers:

• A captive insurer is an insurer owned by a parent firm for the purposes of insuring the
parent firm’s loss exposures
– A single parent, or pure, captive is an insurer owned by one parent
– An association captive is owned by several parents

• Savings Bank Life Insurance refers to life insurance that is sold by mutual savings
banks, over the phone or through Web sites

Functions of Insurers:

● Production: ( sale of insurance policies) In the insurance industry, the term selling means
the issuance of policies to the applicant proposer. The product is intangible and does not
exist until a policy is sold. Insurance companies generally depute their direct selling
 representatives to look after the function. They receive the proposal documents, verify
them and issue policies to the proposers.

● Underwriting: It is a function of evaluating the subject of insurance. Whether a person,

property, profession, business or other entity and determining whether to insure it.
Underwriting includes all the activities necessary to select risks offered to the insurer. It
is performed by regional office personnel who scrutinize applications for coverage. The
underwriter must apply company standards to each applicant and ascertain whether the
application represents an acceptable risk.
Factors affecting the underwriting decision:
★ Life insurance: Age, gender, health history, occupation, financial condition, personal
habits, size of the policy, current insurance in force.
★ Non- life insurance: type of the property, value, condition, age , location, current
insurance in force, prior losses associated with the property.
★ In case of business: type of business, size, financial condition of business and owners,
business cycle, liability exposures, past losses.

● Rate making : It is technical in nature. It involves the selection of classes of exposure

units on which to collect statistics regarding the probability and severity of loss. It is
supervised by specialists known as Actuaries. They study mortality rate, insurance
company’s financial position, products offered and premium charged, investment pattern
for the insurer, bonus declared on different policies etc. Determination of premium rates
usually based on expected claims, reserve for outstanding claims, acquisition costs,
profit margin etc.

● Managing claims and losses: The settlement of claims promptly is the responsibility of
the insurance company. Settlement of claims is the culmination of a contract of the
insurance. It is essential that the individual and the insurance company look at each
other with trust and confidence. Disclosing all the material facts and paying a premium is
the responsibility of the insured and the company should be bound by the policy
document. Claims can be death claim, maturity claim, survival benefit.

● Investment and financing: The investment operation enables the company to earn
income on funds generated from the key activities like premium . The insurer must
manage the portfolio by assessment of requirement of funds, identification of various
sources of finance, evaluation of the sources in terms of cost, timing etc.

● Accounting and record keeping: As per the guidelines of IRDA, Insurer must maintain
records of the business carried on, all receipts, statement of assets, separate accounts
relating to funds of shareholders and policyholders. Accounts need to be maintained
based on Indian companies act and indian life assurance companies act.

● Other miscellaneous functions:

 ★ Legal advice: the function of a legal adviser is to assist others in the company in their
tasks. Underwriters receive aid in the preparation of policy contracts and endorsements.
In administration claims, disputed claims, legal aid is important.
★ Marketing research: identification of new products, effectiveness of advertising.
★ Engineering services: used as valuable aids in underwriting . ex: an engineer provides
information that will help answer the question “ How long will fire proof glass resist
breaking when subject to the heat of a burning building?”

★ HRM: Selecting employees, maintaining employment records, supervising training and

educational programs etc.

Marketing channels (intermediaries): Agents & brokers – (professionalism, remuneration,

responsibilities, classification, criteria for appointment) and capital adequacy norms for
broker

A marketing and distribution channel consists of a set of people or firms who are intrinsically
involved in the transfer of goods and services from the producer to the end user.

Agent: is a person employed to do an act for another or to represent another in dealings with a
third person. Insurance agent represents an insurance company .

According to IRDA act 1999,under section 2(1)(f) of the act states “Intermediary or insurance
intermediary includes insurance brokers, reinsurance brokers, reinsurance brokers ,insurance
consultants, surveyors and loss assessors”

Insurance intermediaries serve as a bridge between consumers and insurance companies.

An Insurance Intermediary means individual agents, corporate agents including banks and
brokers, insurance marketing firms. Insurance Intermediary also includes Surveyors and
Third Party Administrators.

An agent is a person who is licensed by the Authority to solicit and procure insurance business
including business relating to continuance, renewal or revival of policies of insurance.

An agent could be an Individual Agent or a Corporate Agent. An Individual Agent, as the name
suggests is an individual who is an intermediary representing an insurance company while a
corporate agent is an intermediary other than an individual.

An Insurance Broker means a person licensed by the Insurance Regulatory and Development
Authority who arranges insurance contracts with insurance companies on behalf of his clients.
An Insurance Broker may represent more than one insurance company
While an Agent represents only one insurance company ( one general, one life or both if he is a
composite agent, apart from a health insurance company), a Broker may deal with more than
one life or general or both.

A broker is an individual or a company formed under companies act. A broker can get
associated with many companies .

There are 3 categories of insurance brokers:

● Direct broker
● Reinsurance broker
● Composite broker ( clients can be individuals, companies and reinsurance clients)

Qualifications:
Agent: minimum 12 th pass in urban area and 10th pass in rural area with local language
proficiency.

Agents need to undergo fixed hours of training and pass the online exam to get license as per
IRDA.

To be a broker minimum associate of insurance institute of india or any equivalent professional

qualification the person must undergo Insurance brokers training institute approved by IRDA.

For reinsurance: 10 years experience in insurance business.

An insurance agent's role is primarily that of a communicator, counselor and facilitator. The
prospective customer can buy the best insurance products and services for his/her varied
requirements viz. life, property, health, burglary insurance from the insurance agent.

Insurance agents specialize in providing their clients with insurance policies that protect them
against uncertain events such as illness, damage, theft, or death. The primary objective of an
an insurance agent is to sell insurance policies that will meet the requirements of the client.

Insurance Regulatory & Development Authority (Insurance Brokers) Regulation 2002

The functions of a direct broker shall include any one or more of the following:
● Obtaining detailed information of the client's business and risk management philosophy;
● Familiarizing himself with the client's business and underwriting information so that this
can be explained to an insurer and others;
● Rendering advice on appropriate insurance cover and terms;
● Maintaining detailed knowledge of available insurance markets, as may be applicable;
● Submitting quotation received from insurer/s for consideration of a client;
● Providing requisite underwriting information as required by an insurer in assessing the
risk to decide pricing terms and conditions for cover;
 ● Acting promptly on instructions from a client and providing him written
acknowledgements and progress reports;
● Assisting clients in paying premium
● Providing services related to insurance consultancy and risk management;
● Assisting in the negotiation of the claims

REINSURANCE:

When an insurer transfers a part of his risk on a particular insurance by insuring it with another
insurer or other insurers, it is called “Reinsurance”.

Reinsurance means insuring again by the insurer of a risk already insured. Every insurer has a
limit to the risk that he can bear. If at any time a profitable venture comes his way, he may insure
it even if the risk involved is beyond his capacity which is his retention limit. In such cases, in
order to safeguard his interest, he may reinsure the same risk for an amount in excess of his
retention limit with other insurers, so that the loss due to risk is spread over many insurers

Reinsurance is, therefore, a contract between two insurers and the original contract or the
insured is not at all affected by it. Now there are two contracts on the subject matter. The first
contract is between the original insurer or direct insurer and the owner of the subject matter or
the original insured.

The other contract (reinsurance contract) is between the original insurer and the reinsurer. In the
case of loss on the subject matter, the original insurer collects the insured sum from the
reinsurer and then settles the loss value in full to the original insured.

An example will make the concept of reinsurance more clear:

Mr. X, a factory owner, approached an insurance company ‘A’ for an insurance of an amount of
Rs. 40 crores. Company ‘A’ has two options before it. It can reject the risk or accept the entire
risk and share a part of the risk with another insurer.

In case, the company ‘A’ decides to assume the risk, by retaining Rs. 20 crores worth of
insurance with it and seeking assistance of another insurer for the excess of his own limit. i.e.,
for the balance of Rs. 20 crores. The excess for which the company ‘A’ is approaching the other
insurer is called “Reinsurance”.

1. Direct Insurer: An insurance company which accepts the risk from the proposer and which is
solely responsible to the policyholder for the obligations undertaken.

2. Reinsurer: The insurance company which provides reinsurance cover to the ceding company
is called the Reinsurer. The offer made by the ceding company is accepted by the Reinsurer.
The Re-insurer may be a direct insurer, who in addition to accepting direct business, also
accepts reinsurance business; or a professional reinsurer who accepts only reinsurance
business but does not transact direct business.

3. Ceding company: Insurance company that places reinsurance business of the original risk
with a reinsuring company; or the original insurer; the insurer who obtains a guarantee (on fire
policy).

4. Cession: This is the amount reinsured with the reinsurance i.e., ceded to the reinsurer.

5. Reinsurance policy: The contract of reinsurance; in fire insurance, it is called guarantee

policy.

6. Retention: This is the amount retained by the ceding company for its own account i.e.,
maximum it is prepared to lose on anyone's loss. It is also known as ‘net limit‘ or ‘net holding‘ or
‘net line‘.

7. Surplus: This refers to the difference between the sum insured under the policy issued by the
ceding company and its retention.

8. Reinsurance Commission: It refers to the amount paid by the reinsurer to the insurer (ceding
office) as a contribution to the acquisition and administration costs. Usually, it is a fixed
percentage of premium received by the reinsurer.

Advantages of Reinsurance:

● Decreases risk: Insuring large numbers of homes and businesses against damage is a
risky business. Especially if the area is prone to natural phenomena like severe storms.
It can be extremely risky to run a business that could go under after just one weather
event. Reinsurance spreads that risk out over several companies.

● Increases capacity: When the risk of insolvency is decreased through the use of
reinsurance, it allows the insurance company to take on more policyholders. It eliminates
the fear that the company would not be able to pay out all claims in the event of a
disaster.

● Protects against large catastrophes: Insurance companies mostly need reinsurance in a

situation where hundreds or even thousands of claims pour in at once. This almost
always happens after a natural disaster such as a hurricane, tornado, or flood. When
large percentages of policyholders suddenly need to repair damage, reinsurance
companies are key.

● Stabilizes loss: Even if an insurance company can pay for a large number of claims
made in a short period of time, paying out all of those claims may leave it in a dire
 financial situation and extremely unstable. Reinsurance helps keep insurance
companies stable even during tough times.

The main disadvantage for insurance companies is that buying reinsurance is costly.

The Insurance Ombudsman scheme was created by the Government of India for individual
policyholders to have their complaints settled out of the courts system in a cost-effective,
efficient and impartial way.

There are at present 17 Insurance Ombudsman in different locations and any person who has a
grievance against an insurer, may himself or through his legal heirs, nominee or assignee, make
a complaint in writing to the Insurance ombudsman within whose territorial jurisdiction the
branch or office of the insurer complained against or the residential address or place of
residence of the complainant is located.

Can approach the Ombudsman with complaint if:

● You have first approached your insurance company with the complaint and
a) They have rejected it
b) Not resolved it to your satisfaction or
c) Not responded to it at all for 30 days
● Your complaint pertains to any policy you have taken in your capacity as an individual
● The value of the claim including expenses claimed is not above Rs 30 lakhs.

Your complaint to the Ombudsman can be about:

a) Delay in settlement of claims, beyond the time specified in the regulations, framed under
the IRDAI Act, 1999.
b) Any partial or total repudiation of claims by the Life insurer, General insurer or the Health
insurer.
c) Any dispute about premium paid or payable in terms of insurance policy
d) Misrepresentation of policy terms and conditions at any time in the policy document or
policy contract.
e) Legal construction of insurance policies in so far as the dispute relates to claim.
f) Policy servicing related grievances against insurers and their agents and intermediaries.
g) Issuance of life insurance policy, general insurance policy including health insurance
policy which is not in conformity with the proposal form submitted by the proposer.
h) Non issuance of insurance policy after receipt of premium in life insurance and general
insurance including health insurance
i) Any other matter resulting from the violation of provisions of the Insurance Act, 1938 or
the regulations, circulars, guidelines or instructions issued by the IRDAI from time to time or
the terms and conditions of the policy contract, in so far as they relate to issues mentioned at
clauses (a) to (f)
The settlement process

➔ Recommendation:
The Ombudsman will act as mediator and
● Arrive at a fair recommendation based on the facts of the dispute
● If you accept this as a full and final settlement, the Ombudsman will inform the company
which should comply with the terms in 15 days

➔ Award:
● If a settlement by recommendation does not work, the Ombudsman will:
§ Pass an award within 3 months of receiving all the requirements from the complainant
and which will be binding on the insurance company

Once the Award is passed

● The Insurer shall comply with the award within 30 days of the receipt of award and
intimate the compliance of the same to the Ombudsman.

You can avail tax benefits by way of deduction towards the premiums you pay on your life
insurance policy. A maximum of Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961
can be deducted. ... Under Section 80CCC, if you have a pension or annuity plan, you can
receive a deduction up to Rs.Under Section 80CCC, if you have a pension or annuity plan, you
can receive a deduction up to Rs. 1.5 lakh. Upon maturity, two-thirds of the income becomes
taxable while the rest is tax-free.

● Premium paid on health insurance policies: Under this section, premium payment
towards medical insurance is exempted up to ₹25,000/ for self/ family and also up to
₹50,000/- for health/medical insurance in respect of parent/ parents (senior citizens) of
the assessee.
● When the nominee of your policy receives the sum assured, the claim amount is also
tax-free under Section 10(10D), subject to specified conditions.

IRDA- OVERVIEW

Insurance Regulatory and Development Authority of India, commonly known as, IRDA, is the
supreme authority that authorizes the insurance business in India.

It was established by the Insurance Regulatory and Development Authority of India Act, 1999

The Insurance Regulatory and Development Authority of India was established on the
recommendations made by the Malhotra Committee
The main recommendation made by this committee was to allow the entrance of private sector
companies and foreign promoters and independent regulatory authority for the Insurance sector
in India.

Objectives of IRDA:

· To carry forward the interests of the policyholders.

· To uphold the development of the Insurance industry.

· To ensure speedy resolution of claims.

· To prevent frauds and malpractices.

Powers of IRDA / IRDA Functions:

As per Section 14 of the Insurance Regulatory and Development of Authority Act, 1999 the
Authority has to ensure the regulation, development and promotion of the insurance business
and reinsurance business. Following are the other powers, duties and functions of the Authority:

· To avail the applicant a certificate of registration, renewal, modification, withdrawal, suspension

or cancellation of such registration.

· To protect the interests of the policy holders in cases related to assigning and nomination of
policy holders, understanding of insurance claims, insurable interests, surrendering of the value
of the policy and other terms and conditions of the insurance contract.

· To specify the necessary qualifications, code of conduct and practical training for intermediary
or insurance intermediaries and agents.

·Explaining the required code of conduct to the surveyors and loss assessors

· To ensure the proficiency and efficiency of the conduct of the business of insurance.

· To encourage and regulate the relationship between the professional organizations and the
insurance and reinsurance businesses.

· To levy charges to carry out the purpose of the Act.

·To call for the information, undertaking an inspection of, conducting enquiries and
investigations including the audit of insurers, intermediaries, insurance intermediaries and other
organizations connected with the insurance business
· To call for the information, undertaking an inspection of, conducting enquiries and
investigations including the audit of insurers, intermediaries, insurance intermediaries and other
organizations connected with the insurance business.

· To control and regulate the rates, benefits, terms and conditions which are offered to the
insurer in respect of general insurance business that is not controlled and regulated by the Tariff
Advisory Committee under Section 64U of the Insurance Act of 1938 (4 of 1938).

· To specify the manner in which the books are to be maintained and the way in which the
statement of accounts shall be rendered by insurers and other insurance companies.

· To maintain the investment funds by the insurance companies.

· To regulate the maintenance of margin solvency.

· Deciding the disputes between the insurers and the intermediaries of insurance intermediaries.

· Administering the functioning of the Tariff Advisory Committee.

· To set down the percentage premium income of the insurer of finance schemes for promoting
and regulating the professional organizations.

· To protect the interests of the policyholders in cases related to assigning and nomination of
policyholders.

· To set out the percentage of life insurance business and general insurance business to be
taken forward by the insurer in the rural or social sector.

· Exercising other powers as may be prescribed.