General Insurance
Unit-4
What is General Insurance
Insurance contracts that do not come under the ambit of life
insurance are called general insurance. The different forms of
general insurance are fire, marine, motor, accident and other
miscellaneous non-life insurance.
General insurance is a contract that offers financial compensation on
any loss other than death. It insures everything apart from life.
A general insurance compensates you for financial loss due to
liabilities related to your house, car, bike, health, travel, etc.
The insurance company promises to pay you a sum assured to cover
damages to your vehicle, medical treatments to cure health
problems, losses due to theft or fire, or even financial problems
during travel.
Types of General Insurance
Health Insurance
Fire Insurance
Marine Insurance
Motor Insurance
Travel Insurance
Home Insurance
Etc…
Fire Insurance
Fire insurance means insurance against any loss caused by
fire. Section 2(61 of the Insurance Act defines fire insurance
as follows: “Fire insurance business means the business of
effecting, otherwise than incidentally to some other class of
business, contracts of insurance against loss by or
incidental to fire or other occurrence customarily included
among the risks insured against in fire insurance policies.”
Types of Fire Policies
Specific Policy
A specific policy is one under which the liability of the insurer is limited to a specified
sum which is less than the value of property.
Valued Policy
A valued policy is one under which the insurer agrees to pay a specific sum
irrespective of the actual loss suffered. A valued policy is not a contract of indemnity.
Average Policy
Where a property is insured for a sum which is less than its value, the policy may
contain a clause that the insurer shall not be liable to pay the full loss but only that
proportion of the loss which the amount insured for, bears to the full value of the
property. Such a clause is called the average clause and policies containing an
average clause are called average policies. The phrase “subject to average” is
equivalent to the insertion of an average clause. “Lloyd’s Fire Policies are usually
expressed to be “subject to average”.
Reinstatement or replacement Policy
In such policies the insurer undertakes to pay not the value of the property
lost, but the cost of replacement of the property destroyed or damaged. The
insurer may retain an option to replace the property instead of paying cash.
Floating Policy
When one policy covers property situated in different places it is called a
floating policy. Floating policies are always subject to an average clause.
Combined Policies
A single policy may cover losses due to a variety of cases, e.g. fire together
with burglary, third party losses, etc. A fire policy may include loss of profits,
i.e. the insurer may undertake to indemnify the policy holder not only for the
loss caused by fire but also for the loss of profits for the period during which
the establishment concerned is kept closed owing to the fire.
Procedure for Fire Insurance:
For insuring any property under the fire insurance policy,
the following is the procedure:
1) Filling of proposal form
2) Inspection of the property
3) Payment of premium
4) Issue of Cover note/ Policy document in lieu of
acceptance of the proposal.
I) Filling of Proposal Form
The fire proposal includes the following information :
(i) Construction of external walls and roof, number of storey.
(ii) Occupation of each portion of the building.
(iii) Presence of hazardous goods.
(iv) Process of manufacture.
(v) The sums proposed for insurance.
(vi) The period of insurance.
(vii) History of previous losses.
(viii)Insurance history - whether previously other insurers had
declined the risk, etc.
II) Inspection of the property:
In case of property of any business organization, whether
manufacturing or other type of organization, a risk inspection
report is submitted by the insurer’s engineers. The engineers
submit in their report the nature of risk involved in the factory/
manufacturing unit.
III) Payment of Premium:
Based on the proposal form and the inspection report of the
engineers, the insurance company will submit the premium rates
to the property owner and if these rates are acceptable to him then
he should pay the amount to the insurance company. It is also a
legal requirement under section 64VB of Insurance Act 1938 that
the premium is paid in advance in full to the insurance company.
IV) Issue of Cover note/ Policy document: On receipt of a completed
proposal form and / or inspection report, the cover note is issued,
pending preparation of the policy document. The cover note is an
unstamped document issued to provide evidence of cover till the time
the policy is issued. The cover note provides insurance against specified
perils on the usual terms and conditions of the company’s policy.
The printed policy form provides for a schedule in which the individual
details of the contract are typed. The items are similar to those in the
Cover Note but with more detailed information.
After issuing the policy document, it is likely that there may be some
changes in the nature of property or sum insured may increase or
decrease. In this case, these changes can be incorporated by way of
endorsements which are issued to record changes such as alteration in
risk, increase or decrease of sum insured, etc.
BASIS FOR COMPARISON FIRE INSURANCE MARINE INSURANCE
Meaning Fire insurance is an insuance contract Marine insurance refers to a contract,
wherein the insurer commits to wherein the insurance company
compensate the insured in case of any promises to compensate the insured in
incident happening with the subject case of loss caused to ship or cargo
matter due to fire or any such event. due to perils of sea.
Insurable interest Must exist both while taking the policy Must exist when the loss takes place.
and on the occurrence of loss.
Objective To cover fire risk. To cover sea perils.
Claim Lower of amount insured or actual loss Purchase price of the material plus 10-
sustained. 15% profit.
Moral responsibility of insured Important condition Does not exist
Policy amount It cannot be more than the value of It can be the market value of the cargo
subject matter. or ship.
Marine Insurance
What is Marine Insurance?
Coverage for goods in transit, and for the commercial
vehicles that transport them, on water and over land. The
term may apply to inland marine but more generally applies
to ocean marine insurance. Covers damage or destruction
of a ships hull and cargo and perils include collision,
sinking, capsizing, being stranded, fire, piracy, and
jettisoning cargo to save other property. Wear and tear,
dampness, mould, and war are not usually included.
Types of Marine insurance
Hull Insurance: Hull insurance mainly caters to the torso and hull of
the vessel along with all the articles and pieces of furniture on the
ship. This type of marine insurance is mostly taken out by the owner
of the ship to avoid any loss to the vessel in case of any mishaps
occurring.
Machinery Insurance: All the essential machinery are covered
under this insurance and in case of any operational damages, claims
can be compensated (post survey and approval by the surveyor).
The above two insurances also come as one under Hull & Machinery
(H&M) Insurance. The H&M insurance can also be extended to cover
war risk covers and strike cover (strike in port may lead to delay and
increase in costs)
Protection & Indemnity (P&I) Insurance: This insurance
is provided by the Production and Indemnity Club, which is
ship owners mutual insurance covering the liabilities to the
third party and risks which are not covered elsewhere in
standard H & M and other policies.
Protection: Risks which are connected with ownership of
the vessel. E.g. Crew related claims.
Indemnity: Risks which are related to the hiring of the ship.
E.g. Cargo-related claims.
Liability Insurance: Liability insurance is that type of
marine insurance where compensation is sought to be
provided to any liability occurring on account of a ship
crashing or colliding and on account of any other induced
attacks.
Freight Insurance: Freight insurance offers and provides
protection to merchant vessels’ corporations which stand a
chance of losing money in the form of freight in case the cargo is
lost due to the ship meeting with an accident. This type of
marine insurance solves the problem of companies losing money
because of a few unprecedented events and accidents occurring.
Marine Cargo Insurance: Cargo insurance caters specifically
to the marine cargo carried by ship and also pertains to the
belongings of a ship’s voyages. It protects the cargo owner
against damage or loss of cargo due to ship accident or due to
delay in the voyage or unloading. Marine cargo insurance has
third-party liability covering the damage to the port, ship or
other transport forms (rail or truck) resulted from the dangerous
cargo carried by them
Motor Insurance
Vehicle insurance (also known as car insurance, motor
insurance or auto insurance) is insurance for cars, trucks, motor
cycle, and other road vehicles. Its primary use is to provide
financial protection against physical damage or bodily injury
resulting from traffic collision and against liability that could also
arise from incidents in a vehicle. Vehicle insurance may
additionally offer financial protection against theft of the vehicle,
and against damage to the vehicle sustained from events other
than traffic collisions, such as keying, weather or natural disaster,
and damage sustained by colliding with stationary objects. The
specific terms of vehicle insurance vary with legal regulations in
each region.
Personal Accident Insurance
Personal Accident insurance or PA insurance is an annual policy which provides
compensation in the event of injuries, disability or death caused solely by violent,
accidental, external and visible events.
You can either take a PA policy for yourself or a group policy for your family.
An accident can include events such as the following:
• Injury caused because of any kind of fall or collision
• Any kind of train/ road or plane accident.
• Any kind of injury due to gas cylinder burst.
• Injuries because of burning, drowning, poisoning etc
An accident can result in three events. viz. temporary disability, permanent disability,
and death
1. Temporary disability: In case of a temporary total disability, a weekly compensation is
paid by the Insurance Company for the entire period of the disability. Nevertheless,
generally, the payment is made only for a maximum period of 52 weeks. This payment
can prove invaluable to your family members in case you are the only earning member
of the family. Please note that you don’t receive any compensation for a temporary
partial disability.
2. Permanent disability: You are eligible for the entire insured sum in the event of a
permanent total disability. In case of a permanent partial disability, a certain pre-
decided percentage of the sum is provided by the Insurance Company. It is suggested to
read the policy carefully before you buy it, as the percentage varies from company to
company.
3. Accidental death: In the unfortunate event of death, the entire sum insured in paid to
the nominees of the insured person. However, keep in mind that in order to be eligible
for this feature, death should happen within a specific period from the accident. This
period is generally between 90 to 180 days.
Rural Insurance
The Indian law states that insurance companies should be accommodative of
persons in the rural sector or social sector, persons in the economically vulnerable
or backward classes of the society, workers in the unorganized or informal sector
etc. (as specified by the IRDA). In the Insurance Act, 1938, sections 32–B and 32–
C is where this particular law can be found. It defines the percentage of business
that insurance companies are expected to put aside for the persons in the
categories mentioned above. Further, the IRDA has tried to accommodate the two
sections of the Insurance Act by making it compulsory for insurers who offer
general insurance to support business in the rural sector as well. The IRDA has
specified a minimum of 2% of total gross premium during the first financial year, a
minimum of 3% of gross premium in the second financial year and a minimum of
5% of the gross premium in the third and additional financial years. The plan must
include insurance for crops.
Various programmes have been launched by the Government of India for the
benefit of marginal farmers, small farmers, agricultural laborers, etc. Integrated
Rural Development Programme (IRDP) have integrated these programmes since
1980 with the help of funding from the Central and State governments.
Pradhan Mantri Fasal Bima Yojana(crop insurance)
The new Crop Insurance Scheme is in line with One Nation – One Scheme theme. It incorporates
the best features of all previous schemes and at the same time, all previous
shortcomings/weaknesses have been removed.
The highlights of this scheme are as under:
There will be a uniform premium of only 2% to be paid by farmers for all Kharif crops and 1.5%
for all Rabi crops. In case of annual commercial and horticultural crops, the premium to be paid
by farmers will be only 5%. The premium rates to be paid by farmers are very low and balance
premium will be paid by the Government to provide full insured amount to the farmers against
crop loss on account of natural calamities.
There is no upper limit on Government subsidy. Even if balance premium is 90%, it will be borne
by the Government.
Earlier, there was a provision of capping the premium rate which resulted in low claims being
paid to farmers. This capping was done to limit Government outgo on the premium subsidy. This
capping has now been removed and farmers will get claim against full sum insured without any
reduction.
The use of technology will be encouraged to a great extent. Smart phones will be used to
capture and upload data of crop cutting to reduce the delays in claim payment to farmers.
Remote sensing will be used to reduce the number of crop cutting experiments
Reinsurance
Reinsurance, also known as insurance for insurers or stop-loss
insurance, is the practice of insurers transferring portions of
risk portfolios to other parties by some form of agreement to
reduce the likelihood of paying a large obligation resulting
from an insurance claim. The party that diversifies its
insurance portfolio is known as the ceding party. The party that
accepts a portion of the potential obligation in exchange for a
share of the insurance premium is known as the reinsurer.
Two basic methods of reinsurance:
Facultative Reinsurance, which is negotiated separately for each insurance policy that
is reinsured. Facultative reinsurance is normally purchased by ceding companies for
individual risks not covered, or insufficiently covered, by their reinsurance treaties, for
amounts in excess of the monetary limits of their reinsurance treaties and for unusual
risks. Underwriting expenses, and in particular personnel costs, are higher for such
business because each risk is individually underwritten and administered. However, as
they can separately evaluate each risk reinsured, the reinsurer's underwriter can price the
contract more accurately to reflect the risks involved. Ultimately, a facultative certificate
is issued by the reinsurance company to the ceding company reinsuring that one policy.
Treaty Reinsurance means that the ceding company and the reinsurer negotiate and
execute a reinsurance contract under which the reinsurer covers the specified share of
all the insurance policies issued by the ceding company which come within the scope of
that contract. The reinsurance contract may oblige the reinsurer to accept reinsurance of
all contracts within the scope (known as "obligatory" reinsurance), or it may allow the
insurer to choose which risks it wants to cede, with the reinsurer obliged to accept such
risks (known as "facultative-obligatory" or "fac oblig" reinsurance).
