CONCEPTS & PRINCIPLES OF INSURANCE

In financial sense It is a social device in which o a group of individuals (insured) o transfer risk to another party (insurer) o in order to combine loss experienced, which permits statistical prediction of losses and provides for payment of losses from funds contributed (premium) by all members who transferred risk
Dr. S N Ghosh

In legal sense It is a contract by which o one party (Insurer) o in consideration of price paid to him o proportionate to risk provides security to the other party (Insured) that he shall not suffer loss, damage or prejudice by the happening of certain specified events. Insurance is meant to protect insured against uncertain events which may cause disadvantage to him
Dr. S N Ghosh

Insurance - combination of three elements 1. Insurance as a Transfer System transferring of risks from Insured to IC which is financially sound and has capacity and willingness to take risks. o A Loss exposure can give rise to three types of losses, namely: a) Property loss (including net income loss), b) Liability loss, and c) Human and personnel loss.
Dr. S N Ghosh 4

2.

o a) b) c) d) e) f) g)

h)

Insurance as a Business - insurance primarily attempts to meet its costs and expenses from premium that it earns and also make a reasonable margin of profit for its own sustainability. Other benefits to society as a whole such as: Payments for the costs of covered losses Reduction of the insureds financial uncertain Efficient use of resources Support for credit Satisfaction of legal requirements Satisfaction of business requirements Source of investment funds for infrastructure development Reduction of social burden
Dr. S N Ghosh

3.

Insurance as a Contract - an insurance policy is a legally enforceable contract. The contract is between IC and the Insured. An insurance contract must meet these four requirements: i. Offer and acceptance ii. Consideration iii. Capacity iv. Legal purpose
Dr. S N Ghosh

Transfer of risk from one person (Insured) to another (Insurer) Sharing (Pooling) of losses on some equitable basis such that o fortuitous (random) losses will be indemnified (paid) Reduction in tension and fear Credit multiplication Avenue for investment

Dr. S N Ghosh

Principle of Uberrimae Fides (Utmost Good Faith) A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not. Non-disclosure of any fact may be unintentional on the part of the insured.
 such a contract is voidable at the insurers option and it can refuse any compensation.

Any concealment of material facts is considered intentional.

Dr. S N Ghosh

Principle of Indemnity On the happening of insured event for which insurance policy is taken up insured should be replenished the amount of loss Insured should not derive any unwarranted benefit from a loss Made in following ways o Cash payment o Repair o Replacement o Reinstatement
Dr. S N Ghosh

i. ii.

iii.

iv.

Principle of Subrogation Restitution of rights of an assured in favour of Insurer against third party for any damages caused by him in place of assured after Insurer has indemnified him for the loss Objectives of the principle: Prevents insured from profiting from damage. Enforces rule of law that guilty is brought to book and made to pay for the loss. Helps Insurer to partially or fully recover amount paid for loss. Helps to lower insurance rates.
Dr. S N Ghosh

10

Principle of Contribution It means indemnity provided for loss occurring on asset, which is insured with several insurers has to be shared pro rata Corollary of doctrine of Indemnity and hence is applicable in case of GI. Requisites o Insured asset/Person (in case of hospitalization insurance) must be common to all policies o Risk insured against must be common to all policies o All policies must be in force during the occurrence of loss
Dr. S N Ghosh

11

Principle of Proximate Cause Literally means nearest cause or direct cause. Immediate cause of mishap, which resulted in the loss. While determining proximate cause sequence of events according to their time of occurrence is irrelevant. Many court judgments act as precedents in arriving at decisions while making settlements. The insurance company is liable to indemnify only against the insured perils.
Dr. S N Ghosh 12

Underwriting - assumption of liability; formal acceptance of a risk by IC for a price (Premium) Objectives o Large volume of premium income sufficient to maintain and enlarge ICs operations and achieve a better spread of risk portfolio; o Earning a reasonable amount of profits; o More spread across the profile and geography
Dr. S N Ghosh

13

 Proposal Form (application for insurance) insurance proposal to be in writing; can not be oral Cover Notes - an evidence of insurance; a temporary and limited agreement, sent prior to completion or preparation of final policy document, or pending some information; or when proposal is under consideration The Slip - document mentioning all the essential information needed for assessing risk proposed Certificate of Insurance - generally printed, dated, signed, numbered; brief details of insured, situation of property, sum insured and period of insurance.
Dr. S N Ghosh 14

LIFE

GENERAL (NON-LIFE)
FIRE MARINE MOTOR

PURE

TERM

LIABILITY

AVIATION

AGRICULTURAL

CONSEQUENTIAL (LOSS) FIRE

ENGINEERING
Dr. S N Ghosh 15

THE INSURANCE ACT, 1938 Important provisions o Registration; ; Accounts and audit; Investments; Limitation on management expenses; Prohibition of Rebates; Powers of Investigation by CG GENERAL INSURANCE BUSINESS NATIONALIZATION ACT, 1972 To provide need-based, low cost insurance covers to rural population, crop insurance scheme, social security benefits; benefits of insurance available to the masses
Dr. S N Ghosh

16

INSURANCE REGULATORY AND DEVELOPEMNT AUTHORITY (IRDA)

After opening up of insurance sector, IRDA is Regulator for monitoring of operations of ICs. HO in Hyderabad Focus on three areas Protection of interest of consumers Ensure financial soundness of insurance industry Pave way to help a healthy growth of insurance market
Dr. S N Ghosh

o i. ii.

iii.

17

The Motor Vehicles Act, 1939 Marine Insurance Act, 1963 The Merchant Shipping Act, 1958 The Bill of Lading Act, 1856 The Indian Ports (Major Ports) Act, 1963 Indian Railways Act, 1989 The Carriers Act, 1865 The Indian Post Office Act, 1898 The Carriage by Air Act, 1972 Multi-modal Transportation Act, 1993 Public Liability Insurance Act, 1991 The Indian Stamp Act, 1899 FEMA 1999 The Consumer Protection Act, 1986
Dr. S N Ghosh

18

Buyers - general public, traders, corporates, clubs, hospitals, schools, etc. INTERMEDIARIES Agents - governed by IRDA (Licensing of Insurance Agents) Regulations, 2000. Qualifications and disqualification prescribed

Testing & Certification -to pass stipulated examination after undergoing training program of 50 (75 hours for composite) at accredited institutions (online / off-line).

Corporate Agents professionals e.g. ICAI,ICSI, ICWA, MBA, Actuarial Society of India, CAIIB Brokers
Dr. S N Ghosh

19

Development Officers (DO) in Public Sector Insurers; an internal arrangement in organizing marketing force of IC. Link between branch manager and Agent Some of the main functions o Disseminating information, Soliciting, negotiating, procuring, or effectuating an insurance contract or renewal o Inspecting risk, Setting a rate, Investigating or assessing claim Direct Sales DSA - sales activity procured by staff of IC itself
Dr. S N Ghosh

20