Unit-I: Introduction

UNIT-I: INTRODUCTION

CONCEPT OF INSURANCE
Insurance is form of contract or an arrangement where one party agrees in return for a consideration
to pay an agreed amount of money to another party to make good the loss, damage or injury to
something of value in which the insured has an interest. Being a contract of indemnity, it is based
on the principle of utmost good faith. In today’s world, insurance companies offer retail insurance
policies of varied nature including life, health, fire, marine, etc. Individuals purchase such policies
either in their individual capacity or the employee friendly organizations may extend such cover
as perks of the employment. The business of insurance extends to protection of the economic value
of assets. The owner of an asset attaches a value to the property since it gives them some benefit
in the form of income or the loss of which could cause irreparable loss to the owner. For example,
owning a car for self-use may not give any monetary benefit but it is more for the pleasure of
comfort it provides to the owner. If the vehicle is damaged due to say, water logging due to heavy
rains, the Car will have only scrap value - a need for covering this risk arises in such unforeseen
situations. The basic principle of insurance is that an entity will choose to spend small periodic
amounts of money against a possibility of a huge unexpected loss. Basically, all the policyholder
pool their risks together. Any loss that they suffer will be paid out of their premiums which they
pay. Alternatively, a Company which is in the business of transportation may own a fleet of lorries
which are given on lease for others who want to transport goods. In this scenario, there could be a
reduction on the revenue if there is an accident to the lorry due to which the transportation business
is affected - need for insurance as a risk management tool arises. Similarly, disablement –
permanent or temporary nature or a death of a sole breadwinner in a family may bring down the
standard of living of the family. Therefore, there is a need to give financial protection in the form
of monetary compensation on disablement or death of the breadwinner to the members of the
family – need for life insurance arises. In all the above scenarios, the beneficiary (owner himself
or the nominee in the case of life insurance) would be compensated. Therefore, insurance is a tool
of risk management to cover the uncertainties – the risk of loss of assets or human life.

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

EVOLUTION OF INSURANCE OR HISTORY OF INSURANCE IN INDIA

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in
terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods,
epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian
history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’
contracts. Insurance in India has evolved over time heavily drawing from other countries, England
in particular. Now, we will be discussing in brief about the history of Life Insurance and General
Insurance in India.

 Life Insurance

Year 1818 saw the advent of life insurance business in India with the establishment of the Oriental
Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras
Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the
enactment of the British Insurance Act and in the last three decades of the nineteenth century, the
Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay
Residency. This era, however, was dominated by foreign insurance offices which did good
business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the foreign companies. In
1914, the Government of India started publishing returns of Insurance Companies in India. The
Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life
business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to
collect statistical information about both life and non-life business transacted in India by Indian
and foreign insurers including provident insurance societies. In 1938, with a view to protecting the
interest of the Insurance public, the earlier legislation was consolidated and amended by the
Insurance Act, 1938 with comprehensive provisions for effective control over the activities of
insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there
were a large number of insurance companies and the level of competition was high. There were
also allegations of unfair trade practices. The Government of India, therefore, decided to
nationalize insurance business. An Ordinance was issued on 19th January 1956 nationalising the

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

Life Insurance sector and Life Insurance Corporation came into existence in the same year. The
LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and
foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.

 General Insurance

The history of general insurance dates back to the Industrial Revolution in the west and the
consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a
legacy of British occupation. General Insurance in India has its roots in the establishment of Triton
Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile
Insurance Ltd, was set up. This was the first company to transact all classes of general insurance
business. 1957 saw the formation of the General Insurance Council, a wing of the Insurance
Association of India. The General Insurance Council framed a code of conduct for ensuring fair
conduct and sound business practices.

In 1968, the Insurance Act was amended to regulate investments and set minimum solvency
margins. The Tariff Advisory Committee was also set up then. In 1972 with the passing of the
General Insurance Business (Nationalisation) Act, general insurance business was nationalised
with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four
companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd.,
the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. The General
Insurance Corporation of India was incorporated as a company in 1971 and it commence business
on January 1st 1973. Recently, the Central Government has proposed merger of 3 Public Sector
General Insurance Companies, except New India Assurance Company Limited, paving the way
for consolidation in Government-run general insurance companies

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

REGULATIONS OF INSURANCE BUSINESS IN INDIA

This millennium has seen insurance come a full circle in a journey extending to nearly 200 years.
The process of re-opening of the sector had begun in the early 1990s and the last decade and more
has seen it been opened up substantially. In 1993, the Government set up a committee under the
chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms
in the insurance sector. The objective was to complement the reforms initiated in the financial
sector. The committee submitted its report in 1994 wherein, among other things, it recommended
that the private sector be permitted to enter the insurance industry. They stated that foreign
companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian
partners. Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body
to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in
April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance
customer satisfaction through increased consumer choice and lower premiums, while ensuring the
financial security of the insurance market. The IRDA opened up the market in August 2000 with
the invitation for application for registrations. Foreign companies were allowed ownership of up
to 26% in the equity share capital of the Insurer. This limit was later raised to 49% during the year
2016. The limit of foreign investments in intermediaries has increased from 49% to 100% in year
2019. The Authority has the power to frame regulations under Section 114A of the Insurance Act,
1938 and has from the year 2000 onwards various regulations ranging from registration of
companies for carrying on insurance business to protection of policyholders’ interests were
framed. In December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a national re-
insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. Today
there are 34 General Insurance Companies including 7 Health Insurance Companies and 24 Life
Insurance Companies as per IRDA. Beside IRDA Act, 1999 and Insurance Act, 1938, there are
some common Act/Regulation to the General and Life Insurance Business in India and some Acts
have been made for specific requirement of Life Insurance/ General Insurance. Acts/Regulations.

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

CLASSIFICATION OF INSURANCE CONTRACT / TYPES OF INSURANCE

Types of life insurance policy / contract

There are three major types of life insurance contracts based on the period of risk coverage: term
insurance contract, whole life insurance contract, and universal life insurance contract. These three
are the basic types of life insurance contracts, but the market is flooded with several life insurance
policies that combine these three types of life insurance contracts.

1. Term life insurance policy: A term insurance contract is the simplest form of a life
insurance contract. Term insurance contracts are entered into by the insurer and the insured
for a fixed duration of time, and the provision for protection gets exhausted once the policy
period is over. Also, in such contracts, there is no cash value remaining at the end of the
policy period.
2. Whole life insurance policy: Whole life insurance contracts do not have any clause
relating to a specified policy period, and they provide risk coverage for the entire lifetime
of the insured. Such insurance contracts accumulate a cash value that is not more than the
face value of the insurance policy. Such policies have a provision to pay the cash value to
the policyholder on maturity or surrender of the policy.
3. Universal life insurance policy: Such insurance contracts have a provision for allowing
the owner to decide the policy period, amount of premium, and the amount of death benefit
required to be covered by the life insurance policy. Such policies have a provision wherein
the insurer makes a monthly charge for general expenses and mortality costs and credits
the amount of interest earned to the policyholder. Universal life insurance policies are
further divided into type A and type B policies.

Type A: policies have a provision for a specified amount of death benefits.

Type B: universal life insurance policies have a provision for a specified amount of death
benefits along with an accumulated cash value to be paid to the insured.

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

Life insurance contracts can further be classified as follows:

1. Group life insurance policy: This type of insurance coverage is provided by employers
to groups of employees.
2. Industrial life insurance policy: Industrial life insurance policy consists of a large number
of individual contracts with weekly or daily premiums.
3. Credit life insurance: Credit life insurance is created when an individual purchases an
asset on an installment basis. Such life insurance policies have a clause which states that if
the insured dies before the payment of all the installments, the seller will be protected
against any losses arising due to the non-payment of the remaining installments.

Non-Life or General Insurance Contract

General insurance is a contract between the insured and the insurer wherein the insurance company
provides risk coverage to any asset or object other than an individual's life in which the insured
has a financial interest. Motor insurance, property insurance, and travel insurance are a few types
of general insurance products sold by insurance companies. General insurance policies are issued
for a period of one year and are renewable annually.

Types of general insurance products

1. Motor insurance: A motor insurance policy is mandatory for driving legally in the
country. Motor insurance policies can be of two types, namely, a third-party liability
insurance policy or a comprehensive package policy. Third-party liability insurance has
liability coverage for losses arising in a situation where the insured's motor vehicle causes
damage to a third party, such as public property or some other vehicle. A comprehensive
package policy has liability coverage for third-party losses as well as losses arising to the
insured's motor vehicle for no fault of his, such as accident, theft, fire, natural calamities,
or any other causes.
2. Homeowners insurance: Homeowners insurance covers the entire range of risks and
losses arising from burglary, theft, or natural calamities.

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

3. Health insurance: Health insurance provides coverage against the expenses related to
hospitalization, accidental illness, day-care procedures, psychiatric support, annual health
check-up, maternity benefits, and critical illnesses.
4. Accident insurance: Accidental coverage is a type of casualty insurance and protects an
individual against out-of-pocket expenses arising to the insured in the event of an accident
or physical injury.
5. Travel insurance: Travel insurance covers financial liability if any when the insured is
traveling within or beyond the boundaries of the country. The scope of coverage of this
type of policy extends to loss of baggage, loss of passport, losses arising due to hijacking,
medical emergencies during travel, and delayed flights.
6. Disaster insurance: Disaster insurance covers losses arising to the insured due to multiple
perils, such as extreme weather conditions as well as losses arising due to natural disasters,
such as floods and earthquakes.
7. Commercial line insurance: Such insurance policies provide coverage to business entities
against losses arising due to moral hazards as well as any unforeseen events that disrupt
the business operations. Property insurance, marine insurance, liability insurance, and
employee benefits insurance are some examples of such insurance. Out of these, liability
insurance can be further categorized into third-party liability insurance, public liability
insurance, product liability insurance, and professional liability insurance.

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA

(‘IRDAI’)

The IRDAI Act, 1999, established the Insurance Regulatory and Development Authority of India
(“IRDAI” or “Authority”) as a statutory regulator to regulate and promote the insurance industry
in India and to protect the interests of policyholders. The IRDAI Act also carried out a series of
amendments to the Act of 1938 and conferred the powers of the Controller of Insurance on the
IRDAI. The members of the IRDAI are appointed by the Central Government from amongst
persons of ability, integrity and standing who have knowledge or experience in life insurance,
general insurance, actuarial science, finance, economics, law, accountancy, administration etc.
Section 4 of the IRDAI Act,1999 specifies the authority’s composition. It is a ten- member body
consisting of a chairman/chairperson, five full-time and four part-time members. Every

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

Chairperson and every other whole time member of IRDAI appointed shall hold office for a term
of five years and every part time member shall hold office for a term not exceeding five years.
However, Chairperson shall not hold office once he or she attains 65 years while whole time
members shall not hold office once he or she attained the age of 62 years. Central Government
may remove any member from office if he or she is adjudged insolvent or is physically or mentally
incapacitated or has been convicted of an offence involving moral turpitude or has acquired
financial or other interests or has abused his position. Chairperson and the whole time members
shall not for a period of two years from the date of cessation of office in IRDAI, hold office as an
employee with Central Government or any State Government or with any company in the
insurance sector.

POWERS AND FUNCTIONS IRDAI

Under Section 14 of the IRDA Act, IRDA has the following powers:

1. Issue of Certificate of Registration to insurance companies, renew, modify, withdraw,

suspend or cancel the certificate of registration
2. Protection of interests of policyholders in matters concerning assignment of policies,
nomination,
3. insurable interest, claim settlement, surrender value and other terms and conditions of
insurance contract
4. Specification of requisite qualifications, practical training and code of conduct for
insurance agents and intermediaries
5. Specification of code of conduct for surveyors and loss assessors
6. Promoting efficiency in the conduct of insurance business
7. Promoting and regulating professional organizations connected with insurance and
reinsurance business
8. Levying fees and other charges for carrying out the purposes of the Act
9. Calling for information from or undertaking inspection of insurance companies,
intermediaries and other organisations connected with insurance business
10. Control and regulation of rates, advantages, terms and conditions that may be offered by
general insurance companies

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

11. Specifying the form and manner in which books of account shall be maintained by
insurance companies and intermediaries
12. Regulation of investments of funds by insurance companies
13. Regulation of maintenance of margin of solvency
14. Adjudication of disputes between insurers and insurance intermediaries.

INSURANCE COUNCILS
 Life Insurance Council
As per Section 64F (1) of the Insurance Act, 1938, an Executive Committee of the Life
Insurance Council shall be formed comprising of the following persons, namely: –
a) FOUR: Representatives of members of the Life Insurance Council elected in their
individual capacity by the members in such manner as may be laid down in the bye-
laws of the Council. One of the four representatives shall be elected as the
Chairperson of the Executive Committee of Life Insurance Council;
b) ONE: An eminent person not connected with insurance business, nominated by
IRDAI;
c) THREE: Persons to represent Insurance agents, Intermediaries and Policyholders,
respectively, as may be nominated by the Authority; and
d) ONE EACH: Representative from Self-help groups and Insurance Co-operative
Societies.
 General Insurance Council
Similarly, as per Section 64F (2) of the Insurance Act, 1938, an Executive Committee of
the General Insurance Council shall consist of the following persons, namely: –
e) FOUR: Representatives of members of the General Insurance Council elected in their
individual capacity by the members in such manner as may be laid down in the bye-
laws of the Council. One of the four representatives shall be elected as the
Chairperson of the Executive Committee of General Insurance Council;
f) ONE: An eminent person not connected with insurance business, nominated by the
IRDAI; and
g) FOUR persons to represent Insurance agents, third party administrators, Surveyors
and Loss Assessors respectively, as may be nominated by the Authority.

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

INSURANCE TERMINOLOGIES

What is Insurance contract?

Insurance is a contract wherein an individual or entity gets financial protection from the insurance
company for any damages or losses incurred.

Who is Insured?

The individual or entity is called the insured.

Who is Insurer?

The insurance company is called the insurer.

What is Insurance term?

The insured and the insurer enter a legal contract for a fixed term called the insurance term.

What is Insurance Policy?

The insured and the insurer enter a legal contract is called an insurance policy.

Actual cash value. There are a few ways your policy can be set up that impact the amount you are
paid when filing a claim. Actual cash value is one such method, and it is calculated by subtracting the
amount of depreciation from the initial cost of the property. Depreciation is usually calculated by
subtracting a certain percentage from the property per year. However, not every insurance company
calculates depreciation the same. In most cases, actual cash value coverage is a less-expensive
insurance option. Another (often more expensive) alternative is called "replacement cost coverage,"
which we will cover later on.

Actuary. Actuaries are experts at assessing risks by analyzing statistics and data. They often work with
insurance companies to help set rates for insurance products.
Adjuster. Sometimes referred to as a 'claim examiner,' an adjuster is someone who investigates a
claim. They determine if the loss is covered by the policy, estimate damages, and often write a check
to the insured.

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

Agent. An agent, or insurance agent, is someone who sells insurance policies for an insurance
company or carrier. Their agency may be exclusive or non-exclusive, meaning they sell insurance for
a single carrier, or a number of carriers.

Assured. This is an individual who has an insurance policy, and is another word for "insured" or
"policyholder."
At-fault. In a situation such as an auto accident, "at-fault" refers to the person who is liable for the
damages. In other words, this is the person who caused the accident, or is otherwise legally responsible
for it.
Bodily injury. As the name suggests, this simply refers to an injury a person sustains. In an auto
accident, bodily injury liability coverage is designed to pay for the expenses that result from such an
injury.
Cause of loss. Another way you may see 'perils' referenced in policy language.
Collision. refers to coverage that pays for damages of vehicle after a collision (hence the name), either
with another vehicle or an object, like a traffic sign. This is often an optional coverage unless one have
an auto loan or lease your vehicle, in which case the lender will likely require it.

Claimant. A claimant is any person or entity requesting payment from an insurer, or insurance
company.
Declarations page. This page is basically a snapshot of the important information regarding your
insurance policy. It will have policyholder information, such as name, address, and policy number, as
well as coverages, limits, premiums, deductibles, and dates of coverage.
Dwelling. “Dwelling insurance is one of several coverage types included in a standard homeowner’s
insurance policy”. This coverage type pays to repair or rebuild any part of your home’s physical
structure if it’s damaged by a covered peril up to your policy limits. Anything permanently affixed to
your home is a part of dwelling coverage, which includes the interior and exterior walls, the roof and
permanently attached fixtures like kitchen cabinets.

Named insured A named insured is any person, firm, or organization, or any of its members
specifically designated by name as an insured(s) in an insurance policy, as distinguished from others
that, although unnamed, fall within the policy definition of an "insured."
Named Peril (Named Peril Policy). This refers to a type of insurance policy that provides protection
or coverage for certain perils explicitly outlined in the policy. The opposite of a named peril policy

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri

 Unit-I: Introduction

would be an open peril policy, which provides coverage for all causes of loss except those excluded in
the policy.

Peril. Perils are the causes of damage to insured property that your policy protects against.

Policyholder. This is yet another term you might frequently hear or see that refers to the person or
entity an insurance policy covers, like "insured," and would appear on the declarations page.
Policy Jacket. In reference to an insurance policy, the policy jacket is a document that contains all of
the details about the specific policy. This includes terms, conditions, coverages, perils, exclusions, and
so on. It does not include endorsements or a declarations page.
Premium. This is the amount of money you, the insured, pay to an insurance company in exchange
for coverage.

Rider. As you'll see, in the world of insurance, there are often a number of different words that refer
to the same thing. The word "rider" is one such example. Like an endorsement, a rider is an amendment
that can be added to a basic policy to modify it, typically for an additional premium.
Umbrella Insurance. A type of liability insurance that expands coverage limits above and beyond the
limits of an underlying liability insurance policy.

Gururaj S Barki-Department of Commerce, KLEs G H College, Haveri