This document provides an overview of insurance principles including: - The history of insurance dating back over 5000 years in China and the formation of major insurance companies in India. - Key concepts in insurance including risk, peril, hazards, and methods of managing risk such as prevention, reduction, retention, and transfer. - The main classes of insurance like life, general, and reinsurance. - Components of the insurance market including different types of companies, intermediaries, specialists, and regulatory bodies. - Key elements of an insurance contract between the insurer and policyholder including insurable interest, indemnity, proximate cause, subrogation, contribution, and utmost good faith.

1. Manojkumar B M.sc ., A.I.I.I
PRINCIPLES OF INSURANCE

2. CONTENTS
INTRODUCTION
RISK MANAGEMENT
CLASSES OF INSURANCE
INSURANCE MARKET
INSURANCE CONTRACT

3. History of Insurance
- Over 5000 years back, Chinese traders used insurance as a preventive
against pirates.
- First fire insurance company was started in 1680.
- 1818 first life insurance company – Oriental life insurance.
-Life Insurance Corporation of India (LIC) was formed on 1st Sep 1956.
-General Insurance Corporation of India (GIC) was formed 1973.
INTRODUCTION

4. PERIL – Peril is the cause of loss. Anything that causes the loss is a
peril.
Types of Perils:
Fire, Landside, Flood, Earthquake & Lightning
Classification of Risks
Catastrophic Risk – Single event cause big claim on insurer.
Financial Risk – Those losses can be measured in monetary terms.
Non Financial Risks – Those losses cannot be measured in monetary
terms.
RISK MANAGEMENT

5. Dynamic Risk - Changes in the economy.
Static Risk – Predictable losses
Speculative Risk – Under the control of the person concerned (e.g. lottery,
horse race )
Pure Risk- Not under the control of the person concerned (eg. Fire,
earthquake, theft or death of person)
Hazards – Hazard is condition that increase the chance of loss. It
something that accelerates the peril.
RISK MANAGEMENT

6. Types of Hazards
Physical Hazards – Physical conditions that affect the risk (e.g. Loose
wiring, Cancer)
Moral Hazards –Loss that result from dishonesty.
Ways of Managing Risks
 Prevent
 Reduce
 Retain
 Transfer
RISK MANAGEMENT

7. CLASSES OF INSURANCE

8. INSURANCE MARKET
COMPANIES
• Life Insurance
• Non Life Insurance
• Reinsurance
INTEMEDIARIES
• Individual Agents
• Corporate Agents
• Banks
• Brokers
SPECIALISTS
• TPA
• Surveryors
• Medical Examiners
REGULATORY
BODIES
• IRDA
• Ombudsmen

9. COMPANIES
Life Insurance – Life insurance deals with covering the live of human
beings.
General Insurance – Non life insurance deals with covering non human
objects like animals, agri, goods, factories, vehicles etc. In some countries
non life insurance is also known as Property and Casualty Insurance.
Re-Insurance – Insurance companies can also transfer some of the risk to
other insurance companies.
INSURANCE MARKET

10. INTERMEDIARIES
Individual Agents – Agents have license from IRDA for selling insurance.
The agent should sell insurance policies as per the needs of the prospective
customers and look after their interest till the claims are settled.
Brokers – A insurance broker is an individual, a company, a society or a
firm, wholly engaged in sourcing insurance business for various insurance
companies. Broker is not appointed by insurance companies. License from
IRDA.
Banks – Insurance companies tie-up with bank to sell insurance polices.
INSURANCE MARKET

11. SPECIALISTS
Third Party Administrator (TPA) – A TPA is a specialized health
service provider rendering various services related to health insurance.
These services include networking with hospitals, claim processing and
settlement. Both the insured as well as the insurer benefit from the
services of the TPA. Least one of the directors must be qualified medical
practitioner. License from IRDA.
INSURANCE MARKET

12. Surveyor (Adjuster) - A surveyor is an individual whose job is to assess
the loss. He is also known as “loss assessor”. A surveyor is a part of the
General Insurance. The justification for loss assessment arises because of
the Principle of Indemnity. Surveyors have no role to play in life
insurance as the principle of indemnity does not apply to life insurance.
Individual has to pass an IRDA prescribed examination and undergo
practical training.
INSURANCE MARKET

13. Medical Examiner – In life insurance their help to examine and certify the
health and insurability of the proposer.
REGULATORY BODIES
Regulatory body acts to regulate, promote and ensure orderly growth of
the insurance industry.
Regulatory is issue license to insurers as well as intermediaries like agents,
brokers, TPAs etc.
Regulatory is watchdog of adequacy of premium rates, limit on expenses,
guidelines on investments, protection of policy holders.
INSURANCE MARKET

14. Insurance Ombudsman – The ombudsman was created to handle
complaints of aggrieved insured person. The function of the ombudsman
is to resolve complaints in respect of disputes between policyholders and
insurers in a cost effective manner.
Ombudsman appointed by insurance council.
INSURANCE MARKET

15. What is insurance contract ?
Insurance is a contract between two parties
a) the insurance company
b) the policy holder
According to the insurance contract:
- The insurance company agree to pay the policyholder a certain sum of
money (Sum Insured)
- If the event (death or peril e.g. fire, earthquake etc.) specified in the
insurance contract happens:
- The policyholder has been paying the premium as specified in the
insurance contract.
INSURANCE CONTRACT

16. E.g. Ramesh has taken a term insurance policy from an insurance
company for 25 yrs. According to the policy terms, Ramesh has agreed to
pay an annual premium of Rs.10,000. The insurance company has agreed
that during these 25 yrs, if ramesh dies, the company will pay ramesh
family Rs. 50 lakhs (Sum assured)
INSURABLE INTEREST – A person is said to have an ‘insurable
interest’ when they stand to gain or benefit from the continued existence
(safety) and well being of the person or property insured and would suffer
a financial loss if there is damage to person or property.
Insurable interest is the legal right of person to insure the subject matter
with which they have a legal relationship recognized by law.
INSURANCE CONTRACT

17. For our Understanding
Employer and Employee - Employer is insurable interest in his employee to
extent of value of services. Employee has insurable interest in the life.
Partners - Partners have insurable interest in the lives of each other. Absence of
any of the partner can affect the firm adversely
Principle of Indemnity – Insurance should place the insured in the same financial
position after loss, as they enjoyed before it not better. The principle of indemnity
ensures tat insurance cannot be used to make profit.
Indemnity does not apply in life insurance.
INSURANCE CONTRACT

18. Way of Indemnifying in General Insurance
INSURANCE CONTRACT
Indemnity
Cash
payment
Repair
Replacement
Reinstatement

19. E.g. A private company has taken insurance cover against fraud by
employees, sum insured is 1,00,000. But employee commit fraud
Rs.1,50,000 company approach insurance company for claim. Insurance
pay only 1,00,000 as the company has taken insurance cover only 1,00,000
INSURANCE CONTRACT

20. PROXIMATE CAUSE – The concept of proximate cause is used to
determine whether the cause of loss is an insured peril or excluded peril.
Insured peril means insurance company settle the claim other reject the
claim.
E.g. : There was a fire in the warehouse. The firemen removed the goods
from the warehouse and kept them in the open. Just then, there was heavy
rainfall and the stock was damaged. In this case fire was identified as the
proximate cause even though the rain actually damaged the stock, and the
insurance company will have to pay the fire was as insured peril.
INSURANCE CONTRACT

21. SUBROGATION - The process of transfer of rights from the insured
person to the insurance company is known as subrogation.
E.g. Kishore, due to negligent driving bang his vehicle into Ravi’s car
causing a damage of Rs. 10,000 with the insurance company. The
insurance company indemnifies Ravi for the damage to his car. After
indemnification, the rights of Ravi to recover the damages from Kishore
(due to his negligent driving) get transferred to the insurance company as
per the process of subrogation.
INSURANCE CONTRACT

22. CONTRIBUTION – The principle of contribution ensures that if there
is more than one insurance policy drawn up on the same subject matter,
the insured cannot recover this loss from all the insurers, in which case
they will recover more than their loss, or even make profit.
E.g. Karan has taken insurance for his home from two different general
insurance companies. One cover Rs.50,000 from ABC company and other
policy cover of Rs.1,00,000 from XYZ company.
There is a fire in the house causing a damage of Rs. 45,000. Karan files a
claim with both the companies.
Karan cannot profit by claiming Rs. 45,000 each from both the
companies. Companies contribute proportion (1:2).
INSURANCE CONTRACT

23. UTMOST GOOD FAITH - It means that both the policyholder and
the insurer need to disclose all material and relevant information to each
other before commencement of the contract.
E.g. alcoholic person had mentioned that he is non-alcoholic and he dies
in a heart attack within 2 years of the policy commencement, then also
the Insurance Company may repudiate or decline the claim on grounds of
“non-disclosure” or “misrepresentation” of “material facts”, i.e. for not
stating the complete truth or misstating information which is relevant for
underwriting and risk assessment. His policy could have been over-rated
or loaded with additional premium if the underwriters were aware of the
fact.
INSURANCE CONTRACT

24. Thank you
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