INSURANCE

Devansh Barot
 INDEX

1. Introduction to Insurance

2. Fundamentals of Risk Management

3. Insurance Contract, Terminology, Elements and Princi

ples

4. General Insurance

5. Personal and Liability Insurance

6. Financial Planning and Life Insurance

7. Types of Life Insurance Policies for

 1. Introduction to Insurance

WHAT IS INSURANCE?

• TRANSFERING RISK FROM ONE ENTITY TO ANOTHER ENTITY.

PREMIUM
INSURED INSURER

RISK ASSURRANCE
 HOW DOES INSURANCE WORK?

• FUND POOLING

contribution towards a pool losses suffered by members of the pool

 HOW DOES INSURANCE WORK?

• When the pool is managed by the individuals it is called mutual insurance and
when it is managed by a company it is called life/general insurance.

INSURANCE

MUTUAL INSURANCE LIFE/GENERAL INSURANCE

 CRITERIA FOR INSURANCE

LAW OF LARGE NUMBERS

LOSS MUST BE ACCIDENTAL

LOSS MUST BE DEFINITE AND MEASURABLE

LOSS MUST NOT BE CATASTROPHIC

 LAW OF LARGE NUMBERS

• GREATER THE NUMBER OF EXPOSURES

1. The more accurate the prediction;
2. The less the deviation of the actual losses from
the expected losses .
3. The greater the credibility of the prediction.
 LOSS MUST BE ACCIDENTAL

• Insurance is based on chance.

• We cannot insure an event which is bound to
happen.
• There should be an element of uncertainty.
 LOSS MUST BE DEFINITE AND
MEASURABLE

• In order for a loss to be insured, it must be clear

and definite about what has been lost.
• Insurer needs to have a clear understanding of the
nature of the loss and needs to determine the
financial value of the loss.
 THE LOSS MUST NOT BE
CATASTROPHIC

• Catastrophic losses refers to severe financial losses

that occur out of single event
• Natural disasters can be example of a catastrophic
event
• Insurers limit their exposures to catastrophic losses
and these events cannot be covered as standalone.
 TYPES OF RISKS

• SPECULATIVE RISK
• These risks involve taking chance on an uncertain
outcome, often with the potential for high reward
but also the probability of significant loss.
• Example, investing in stocks , starting a new business,
pursuing an untested strategy in a competitive market.
 TYPES OF RISK

• PURE RISK
• It is an absolute risk that cannot be controlled or
avoided and can only be transferred or insured
against.
• Pure risks are those risks in which there is only a
possibility of loss or no loss, there is no
probability of making profits.
 TYPES OF RISK

RISK

PARTICULAR RISK FUNDAMENTAL RISK

 TYPES OF RISK

• STRATEGIC RISK
• This risk results from goal-oriented behaviour.
• OPERATIONAL RISKS
• The operation of the enterprise, such as the risk
of injury to employee.
 TYPES OF RISK

• FINANCIAL RISK
• It is the risk that an investment will result in losses.
• It refers to financial losses due to unexpected events
or changes in market conditions.
• Some risks can be investment risk, interest rate risk,
liquidity risk.
 PERIL AND HAZARD

• PERIL
• It is an immediate, specific event, causing a loss and giving
rise to risk. An accident or illness is a peril.

• HAZARD
• An event giving rise to a peril is an hazard.
• Having a water tank near electronic devices can be considered
as a hazard.
 TYPES OF HAZARD

• PHYSICAL HAZARDS
• Are characteristics of the individual that increase or reduce the chance
of peril.
• MORAL HAZARDS
• Are habits or activities that increase risk, such as drug or alcohol use.
• MORALE HAZARDS
• Individual activities that arise from a state of mind, such as
underwater diving, sky diving
 UNDERWRITING

• Underwriting involves evaluating risk associated with

issuing a policy.
• The evaluation is performed using predefined criteria,
historical data and past experience.
• Based on the evaluation, the underwriter may decide to
accept, reject, or accept with terms and conditions.
• The terms and conditions may include rate ups to the
policy.
 PURPOSE OF INSURANCE ACT, 1938

• To protect policy holders from unethical practices by insures.

• To regulate the insurance industry and ensure it operates fairly and
transparently.
• To ensure that insures have sufficient financial resources to meet their
obligations to policyholders.
• To provide framework for the formation and operation of insurance
companies.
• To establish requirements for the solvency and financial stability of
insurers.
 INSURANCE REGULATORY AND
DEVELOPMENT AUTHORITY (IRDA)

• IRDA was established in 1999 by an act of parliament,

• Its primary role is to regulate and develop the insurance industry in India.
• This includes overseeing the operations of insurers, intermediaries, and
ither industry participants.
• IRDA also plays a role in promoting insurance awareness and literacy
among the general public.
• The authority is headquartered in Hyderabad and is composed of a
chairman and a number of whole-time and part-time members.
 THIRD PARTY ADMINISTRATORS (TPA)
- HEALTH INSURANCE

• TPAs handle claims processing and other administrative

tasks for health insurers.
• They may also provide services such as network
management, policy underwriting, and customer support.
• TPAs allow health insurers to outsource certain non-core
functions, allowing them to focus on their core
competencies.
 2. Fundamentals of Risk Management

RISK

• Risk is an inherent part of insurance and refers to the probability of an

event occurring, which could lead to a loss.
• There are two main components in definition of risk.
• Uncertainty, It Refers to the lack certainty about whether an insured
event will occur. For example, It is uncertain that a particular
individual will get into a car accident.
• Undesired consequences are the negative outcomes that can result
from a an event occurring. For example, the consequences of a car
accident could include damage to the vehicle, injury to the driver and
passengers, and financial loss due to medical bills and lost wages.
 CLASSIFICATION OF RISKS

• Pure Risks
• Risk that is not accompanied by the possibility of gain that is, Loss or no
Loss.
• There is no chance of gaining any profit from it.
• Speculative Risks
• It is also known as “Risk of gain”, is a type of risk that is accompanied by
the possibility of both loss and gain.
• Speculative risks are typically not covered by insurance policies, as the
involve the possibility of gaining financial benefit.
 CLASSIFICATION OF RISKS

• Dynamic Risk
• It is a type of risk that is constantly changing and evolving.
• Refers to the risks that are affected by external factors such as economic
conditions ,technological development, changes in price levels.
• Static Risk
• It is a type of risk that is relatively stable and constant over time.
• Refers to the risks that are relatively predictable and not significantly affected by
external factors.
 CLASSIFICATION OF RISKS

• Fundamental Risks
• Those risks that affect a significant portion of the society or the economy as a whole.
• Examples can be Economic downturns, Pandemics, Wars.
• These types of risks can have a widespread impacts.
• Particular Risks
• Those risks that arise from individual events and affect individual people or businesses.
• Example can be Health risks, Liability risks ,property risks.
• These types of risks are typically covered by insurance companies.
 RISK MANAGEMENT

• Risk management in insurance involves identifying, assessing and mitigating risks.

• Identifying risk
• This involves identifying the source of risks this may include internal as well as external factors.
• Assessing risk
• This involves evaluating the likelihood and potential impact of identified risks in order to understand
the potential consequences of each risk and take steps to mitigate them.
• Mitigating risk
• This involves taking steps to reduce the likelihood or impact of identified risk which can help an
organization to protect itself against potential losses.
• Monitoring
• This involves regularly reviewing and updating risk management strategies in order to ensure that
identified risks are being effectively managed.
 RISK AVOIDANCE

• It is the practice of avoiding activities or situations that

pose a risk.
• This can involve not participating in certain activities or
avoiding exposure to certain types of risks.
• This can be effective in certain situations where the risk is
particularly high or the potential consequences of the risk a
severe.
 RISK TRANSFER

• It is the transfer of the activity that creates the risk or

transferring the risk of potential losses to another party.
• This can be done through Insurance where the risk of
potential losses is transferred to an insurance company in
exchange of a premium.
• Or Transfer of risks through contracts by including
provisions that assign responsibility for certain risk to
another party.
 3. Insurance Contract, Terminology, Elements and
Principles

WHAT IS A CONTRACT?

• A contract is a legal binding agreement between two or

more parties.
• The terms of the contract specify the obligations of each
party and the consequences of not fulfilling those
obligations.
• In case of breach the parties of the contract can avail of
legal remedy.
 VOID AND VOIDABLE

• Void is when the terms of the contract are illegal or

against public policy.
• Voidable contract is a contract that is valid but can be
cancelled by one of the parties. Typically occurs when one
party has been defrauded or misled.
• A void contract is not legally binding from the outset, while
a voidable contract is legally binding until it is breached.
 ELEMENTS OF A VALID CONTRACT

• Offer and Acceptance

• A contract requires an offer from one party and an acceptance by
another.
• The offer must be clearly communicated and must specify the
terms of the agreement.
• The acceptance must be unconditional and must be communicated
to the party that made the offer.
 ELEMENTS OF A VALID CONTRACT

• Consideration
• It refers to the value that each party receives under the
contract.
• Each part to the contract should confer some benefit on the
other.
• This can be a payment, a service, or something else of value.
• Both parties must provide consideration in order for the contract
to be enforceable.
 ELEMENTS OF A VALID CONTRACT

• Capacity
• The parties to a contract must have the legal capacity to enter
the agreement.
• This means that they must be of legal age and of sound mind,
and must not be under the influence of drugs or alcohol.
• The reason being a person entering into the agreement should
have the ability to honor the commitment made under the
contract.
 ELEMENTS OF A VALID CONTRACT

• Legal purpose
• The purpose of the contract must be legal.
• Contracts for illegal activities or those that violate public
policy are not enforceable.
• It must also be possible to perform the terms of the contract.
• If the terms of the contract of the contract are impossible to
fulfil, the contract will not be considered valid.
 CHARACTERISTICS OF INSURANCE
CONTRACTS

• Principle of indemnity
• The purpose of insurance is to restore the insured party to the
same financial position they were in before a loss occurred.
• The insurer is not meant to profit from an insurance pay out,
but rather to compensate the insured for their actual loss
• The insured should be in the same financial position after the
settlement of the claim he was immediate before the loss.
 CHARACTERISTICS OF INSURANCE
CONTRACTS

• Rules of insurable interest

• In order for an insurance contract to be valid, the insured
party must have an insurable interest in the subject matter
of the insurance.
• This means that the insured party must stand to suffer a
financial loss if the subject matter is damaged or
destroyed.
 CHARACTERISTICS OF INSURANCE
CONTRACTS

• Subrogation
• It the legal principle that allows an insurer to step into the
shoes of the insured and pursue a third party for
damages that the insurer has paid to the insured.
• Subrogation does not exist in life insurance.
• It is a legal substitution of a person in another’s place.
 CHARACTERISTICS OF INSURANCE
CONTRACTS

• Utmost good faith

• Both the parties should reveal all the true information about
themselves with no ambiguity.
• Aleatory contract
• Aleatory contract is a contract wherein the performance of one or
both the parties is based on the occurrence of an event.
• Such insurance contracts may be a boon to one party but create a
major loss for the other, as more in benefits may be paid out than
actual premiums received, or vice versa.
 4. General Insurance

CLASSIFICATION OF GENERAL INSURANCE

INSURANCE

GENERAL/NON-LIFE
LIFE

PERSONAL PROPERTY LIABILITIES

PERSONAL PROFESSIONAL
MEDICLAIM FIRE MARINE ENGINEERING PUBLIC PRODUCT
ACCIDENTS IDEMNITY
 FIRE INSURANCE

• It provides coverage for damage or loss caused by fire.

• It typically covers the cost of rebuilding or repairing the
property subject to overall limit of the sum insured.
• Premium rating depends on the type of occupancy-whether
industrial or otherwise.
• Discount in premium is given based on past claims history
and - fire protection facilities provided at the premises.
 ENGINEERING INSURANCE POLICY

• It provides coverage for damage or loss to machinery and

equipment.
• Can practically cover all stationary and mobile machinery,
mechanical and electrical equipment's, machineries and apparatus
used in industry.
• In claims for partial loss cost of replacement of parts in full
without depreciation with all the additional expenses is considered.
• In case of total loss the settlement is based on the actual value of
item immediately before the occurrence, taking into account
appropriate depreciation.
 MARINE CARGO INSURANCE

• Marine insurance covers damages to cargo when it is in transit.

• It not only covers when transit over the sea but also when in
transit by air, overland, inland, waterways, costal seas and also
when being sent by post.
• Marine cargo policies are freely assignable and can be assigned
before or after the loss.
• The sum insured indicated in the policy is the value agreed
between the insured and the insurer
 CONTRACTORS ALL RISK INSURANCE

• This policy provides coverage for both property damage

and third-party liability for construction projects.
• CAR insurance may be availed by the Principal,
Contractors and Subcontractors.
• CAR insurance provides an ‘all risk’ cover whereby every
hazard is covered which is not specifically excluded.
• The premium rates for CAR insurance is based on the
nature of the project and period of contract.
 TYPES OF COVERS IN MOTOR
INSURANCE

• Statutory third party liability only

• Extended third party liability only

• Third party, fire and or theft

• Comprehensive
 CLASSIFICATION OF MOTOR
INSURANCE BUSINESS

Motor insurance

Commercial Motor trade Motor trade

Private car’s Motor cycles
vehicle road risk internal risk
 MOTOR INSURANCE

• The motor insurance usually covers three kinds of financial

losses:

• Loss or damage to the vehicle

• Liability to third parties

• Loss of use of vehicle

• There are some extra benefits which can be added to the standard

plan.
 BURGLARY INSURANCE

• It covers theft of property after forcible violent entry or

theft followed by actual violent forcible exit.
• The policy can be extended to cover the risk of riots, strike
and terrorism.
• Each and every item is separately subject to the condition
of average,
Loss x Value of item at time of loss / Insured value
 MONEY INSURANCE

• This policy covers money in transit from or to insurer’s premises

to bank or post office.
• The premium is charged on total estimated amount of money in transit
during the entire policy period which is considered as provisional
premium.
• On expiry of the policy, the insured has to declare the actual value of
money in transit. The premium is then calculated again on this
amount.
• This premium is called the ‘earned premium’.
 5. Personal and Liability Insurance

TYPES OF PERSONAL INSURANCE

Personal Insurance

Mediclaim Personal accidents

Individual Group
Mediclaim Mediclaim
 MEDICLAIM POLICIES

• Individual Mediclaim
• This policy seeks to reimburse the expenses incurred by the
insured for hospitalization/ domiciliary hospitalization arising
out of an illness/accident.
• Group Mediclaim policy
• It is issued to a homogenous group of people such as
employees of the company with extension of maternity benefit.
 MEDICLAIM POLICIES

• Mediclaim policies are issued to those in the age group of 5

to 80 years.
• However, children can be covered from 3 months to 5 years
provided either of the parents have taken a Mediclaim
policy.
 PERSONAL ACCIDENT INSURANCE

• It covers if insured sustains any bodily injury directly and

solely from accident
• It also covers if root cause of the disease is the accident and
disablement is arrived from the shock.
• It covers
• Permanent Total Disablement
• Permanent Partial Disablement
• Temporary Total Disablement
 LIABILITY INSURANCE

Liability

Public Professional
Product
indemnity
 PUBLIC LIABILITY INSURANCE

• When the insurer becomes legally liable to pay for the

third party damages.
• Damages include Death, personal injury, bodily injury or
illness of any person
• As well as loss or damage to property as a result of an
occurrence happening in the territorial limits.
 PROFESSIONAL INDEMNITY
INSURANCE

• This policy is also known as Errors and Omissions

Insurance.
• The liability under this policy primarily arises due to the
negligence of the insured in performance of their
professional duties.
• Insurer is legally liable to pay as compensation to third
parties for bodily injury or for loss or damage to third party
property.
 PRODUCT LIABILITY INSURANCE

• The insurer become legally liable to pay for the damages

result from the use of the product.
• Damages include,
• Personal injury/death sustained as a result of use of the product
• Loss/damage to property sustained as a result of the use of the
product
 6: Financial Planning and Life

FINANCIAL PLANNING

• Financial planning is the process of creating a

comprehensive strategy for managing one’s
financial resources.
• The motive is to achieve long-term financial goals.
• Financial planning often includes budgeting, tax
planning, investment planning, and risk
management.
 FACTORS AFFECTING PREMIUM
RATING

• Mortality

• Interest rate

• Expenditure of the company

 PRINCIPLES OF INSURANCE AND LIFE
INSURANCE

• Utmost good faith

• Insurable Interest

• Indemnity

• Subrogation
 UTMOST GOOD FAITH

• It requires both parties act honestly and

openly with each other, and they disclose all
material facts that are relevant to the
insurance contract.
• Both parties should disclose all relevant
information.
 INSURABLE INTEREST

• Insurable interest exists when the proposer

derives financial benefit from the
continuous existence of the assured or
suffers financial loss by the death of the
assured.
 SUBROGATION

• It is a legal replacement.
• It is transferring the right to insurer to give the claim benefit to the
third party.
• It allows the insurance company to step into the shoes of the insured
party.
 INDEMNITY

• The insured should neither be better off nor worse after the claim is
settled.
• It aims to the insured party in the same financial position they were in
before a loss or damage occurred.
• Life insurance is not a indemnity contract.
 CONTRIBUTION

• This means sharing of losses between multiple

insurers for the same risk.
• This is not possible in Life insurance.
• The insurer initiating the contribution is the leader.
• And the insurers accepting the position in
contribution are the followers.
 TYPES OF LIFE INSURANCE POLICIES

LIFE INSURANCE

INDIVIDUAL GROUP ANNUTIES

TERM
WHOLE LIFE ENDOWMENT IMMEDIATE
INSURANCE
ANNUITY

YEARLY LIMITED
JOINT LIFE
RENEWABLE PAYMENT
ENDOWMENT
TERM WHOLE LIFE DEFFERED
ANNUITY

MODIFIED DOUBLE BENEFIT

LEVEL TERM
PAYMENT ENDOWMENT
WHOLE LIFE GUARENTEED
ANNUITY

INCREASING FIXED TERM

TERM ENDOWMENT

DECREASING
TERM
 7.Types of Life Insurance Policies

TERM INSURANCE

• It is a type of insurance that provides pure death benefit for

a specific period of time.
• If the death of the assured occurs during the term of the
policy, the sum assured is paid.
• If the insured lives beyond the period stated in the policy,
no payment under the policy is envisaged.
 TYPES OF TERM LIFE INSURANCE

• Yearly renewable term insurance (YRTI):

• The term of the insurance is one year, that is renewed on an
annual basis.
• Can be renewed for additional terms , 5 years, 10 years and so
on.
• Every year the premium increases as the age increases.
• It typically offers lower premium than other types of term
insurance, as the premium is based on policyholder’s age.
 TYPES OF TERM LIFE INSURANCE

• Level term life insurance

• Provides a fixed death benefit for a set period of time.
• The Base Premium for level term policy is also fixed.
• Coverage can be taken for a specific period of time,
typically 10,20 or 30 years.
• Longer the term higher the premium.
 TYPES OF TERM LIFE INSURANCE

• Decreasing term life insurance

• The benefits decreases each year the policy is in force.
• And the premium remains constant.
• Usually taken to protect bank loans.
• Also known as “Mortgage Reducing Term
Insurance”.
 TYPES OF TERM LIFE INSURANCE

• Increasing term life insurance

• This insurance provides a death benefit that
increases over time, typically on an annual basis.
• The premium for the policy also increases .
• It can be a good option for those who want a policy
that keeps pace with inflation and other rising costs
over time.
 WHOLE LIFE

• Also know as “Permanent life Insurance”.

• This insurance provides coverage for entire life of the
policyholder, as long as premiums are paid.
• Maximum age to maturity is set to 100 years, the term of
the policy is calculated as (100 - Age at entry).
• Insured does not have an option to choose the term of the
policy.
 TYPES OF WHOLE LIFE INSURANCE

• Limited payment whole life insurance

• The policy holder is only required to make a set
number of premium payments over a specific
period of time, rather than paying on an ongoing
basis.
• You can pay premiums until you reach 60 years of
age.
 TYPES OF WHOLE LIFE INSURANCE

• Modified whole life insurance

• This policy has lower premiums in early years of the
policy
• This can make it more affordable for policy holders who
are younger or have limited financial resources.
• The premiums will increase over time, so its important
for policyholders to be prepared for these increases .
 ENDOWMENT POLICY

• It is a policy that combines life insurance with a

saving or investment component.
• The sum assured is payable on death of the assured
or after a fixed period of years whichever occurs
first.
• Premium under this policy is higher than other
policy.
 TYPES OF ENDOWMENT POLICY

• Joint Life Endowment Policy

• This policy covers two individuals, typically a married
couple.
• The sum assured is payable on death of one of the
assured or after a fixed period of years whichever
occurs first.
• This policy only pays out upon the death of the first
insured person and does not cover the second assured .
 TYPES OF ENDOWMENT POLICY

• Double Endowment Policy

• The amount of sum assured, which is paid by the insurer
on survival of the insured, is double the amount payable in
the event of the insured’s death.
• In this policy maturity benefit is twice from the death
benefit.
• Can be considered as a insurance as well as an investment.
 GROUP INSURANCE

• Policy is always taken for homogenous set of defined group of

people.
• The group owner/leader will have the master policy and all
other people of the group will be considered as the members of
the policy.
• The premium is always based on the experience rating, which is
evaluated on the basis of claim ratio of minimum three years.
• There is no individual policy which is circulated.
 ANNUITIES

• It is a product that provides a stream of payments in

exchange for a lump sum payment or series of
payments.
• It is more of a pension product/pension plan which is
issued by insurance companies used as means of
saving for retirement or other long-term goals.
• There is no Risk coverage in these policies.
 TYPES OF ANNUITY

• Immediate Annuity
• These annuity contracts provides income payments to the
annuitant immediately after the contract is purchased.
• The annuitant makes a single premium payment.
• The annuitant receives annuity either till his death or for
a fixed period of time such as 10 years, 20 years,
depending on the type of contract entered into.
 TYPES OF ANNUITY

• Deferred Annuity
• In this plan you start contributing to create a corpus which can be
later utilised for purchasing the annuity plan.
• There are three stages in this annuity,
1. Contribution period –Where in you contribute on a periodic basis
as an investment depending on the plan.
2. Conversion period – The money accumulated is used to purchase
an annuity plan based on the investment value.
3. Benefits period – Where in annuities start coming up on a periodic
basis.
 TYPES OF ANNUITY

• Guaranteed Annuity
• Insurer needs to provide annuity payments for a certain
number of years, irrespective of whether the annuitant is alive
or dead.
• If the annuitant survives this period, the annuity payments then
continue until the annuitant’s death.
• If the annuitant dies before the expiry of the period certain, the
beneficiary is entitled to collect the remaining payments certain.