Insurance

Module 4 & 5
What is Insurance?

• 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.
Principles 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:

1. Utmost Good Faith

2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization
 1. 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 – Jacob 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 Jacob concealed important facts.
2. 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.
2. Principle of Proximate Cause
• In the previous example, the wall of the building damaged due to fire,
fell down due to 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.
3. 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.
4. 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.

• Example – The owner of a commercial building enters an insurance contract to

recover the costs for any loss or damage in future. If the building sustains
structural damages from fire, then the insurer will indemnify the owner for
the costs to repair the building by way of reimbursing the owner for the
exact amount spent on repair or by reconstructing the damaged areas using
its own authorized contractors.
5. 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 occurred to Mr A and will also sue the
third party to recover the money paid as claim.
6. 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.
7. 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 minimise 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.
Life Insurance
Concept & Importance
Life insurance provides financial
security to the policyholder's
family in the event of the
insured's demise. It helps to
mitigate the impact of the
breadwinner's absence.
Additionally, life insurance can
also be used as a tool for long-
term savings and investment.
Products
Life insurance in India offers a
range of products including term
plans, endowment policies,
whole life policies, and unit-
linked insurance plans (ULIPs).
Each product has distinct
features and benefits catering to
different financial needs and
goals.
Importance of Life
Insurance
Life insurance is a crucial
financial instrument for securing
the future of dependents. It
ensures that the family's
financial well-being remains
stable, especially in the absence
of the primary earner. The tax
benefits associated with life
insurance also make it an
attractive investment option.
Life Insurance
• 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 pay 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.
Types of Life Insurance
• 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
investment.
and A portion from the premiums is directed towards
corpus,
retirementwhich is paid as a lump-sum or monthly payment after the
of the insured.
retirement
• Child Plans: Provides financial aid for children of the policyholders
their lives.
throughout
• ULIPS – Unit Linked Insurance Plans: same as endowment plans, a part
premiums
of go toward the death benefit while the remaining goes
mutual fund investments.
toward
General Insurance
• 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.
Types of General Insurance
• Health Insurance: Covers the cost of medical
care.Insurance: give coverage for the damages caused
• Fire
goods or property due to
to
fire.
• Travel Insurance: compensates the financial
arising out of non-medical or medical emergencies
liabilities
travel
duringwithin the country or
abroadInsurance: offers financial protection to
• Motor
vehicles from damages due to accidents, fire, theft,
motor
natural
or calamities.
• Home Insurance: compensates the damage caused
home due to man-made disasters, natural calamities,
to
other
or threats
Health Insurance
Significance
Health insurance plays a vital
role in safeguarding individuals
against exorbitant medical
expenses. It provides access to
quality healthcare, thereby
ensuring financial security during
medical emergencies and
illnesses.
Coverage Options
In India, health insurance offers
various coverage options
including individual plans, family
floater policies, and senior
citizen health plans. These
policies cover hospitalization
expenses, pre and post-
hospitalization costs, and specific
illnesses.
Evolving Trends
The health insurance sector in
India is witnessing trends such as
the incorporation of technology
for claim processing, the
emergence of customized plans,
and the inclusion of wellness
benefits to promote preventive
healthcare.
Motor Insurance
Legal Requirement
Motor insurance is mandatory in
India under the Motor Vehicles
Act, 1988. It provides financial
protection against liabilities
arising from third-party injuries
or property damage during
accidents involving the insured
vehicle.
Coverage
Motor insurance offers two main
types of coverage - third-party
liability and comprehensive
coverage. Third-party liability
covers damages to others, while
comprehensive coverage
includes damages to the insured
vehicle as well as third-party
liabilities.
Key Considerations
When opting for motor
insurance in India, it's essential
to consider factors such as the
insured declared value (IDV),
add-on covers like zero
depreciation, and the insurer's
claim settlement ratio for a
comprehensive coverage
experience.
Property Insurance
Need & Types
Property insurance is crucial for
safeguarding one's assets against
unforeseen events like natural
disasters, theft, and fire. It
includes various types such as
home insurance, fire insurance,
and burglary insurance.
Key Benefits
By opting for property insurance,
individuals can protect their
residential and commercial
properties, the contents within,
and valuable possessions. It also
provides financial stability during
property damage, ensuring quick
recovery and reinstatement.
Claim Process
In the event of a claim,
policyholders need to provide
accurate documentation of the
damages incurred.
Understanding the claim process
and adhering to the insurer's
requirements can expedite the
settlement and recovery
process.
Crop Insurance
Significance
Crop insurance is vital for
protecting farmers against crop
failures due to natural
calamities, pests, or diseases. It
provides financial security and
promotes agricultural
sustainability by mitigating the
risks associated with farming.
Challenges
Challenges in crop insurance
include issues related to
implementation, awareness, and
a lack of historical data for
assessment. Ensuring efficient
and transparent claim
settlements is also a key
challenge in the sector.
Government Initiatives
The Indian government has
launched various schemes and
initiatives to enhance the reach
and effectiveness of crop
insurance, such as the Pradhan
Mantri Fasal Bima Yojana
(PMFBY), aiming to provide
comprehensive risk coverage to
farmers.
Benefits of Insurance

• 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.
Benefits of Insurance

• 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
organisations 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.