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Fundamentals of Insurance Unit 1 Introduction to Insurance
Fundamentals of Insurance Unit 1 Introduction to Insurance Notes cover all the exercise questions in UGC Syllabus. Fundamentals of Insurance Unit 1 Introduction to Insurance provided here ensures a smooth and easy understanding of all the concepts. Understand the concepts behind every Unit and score well in the board exams.
Introduction to Insurance
FUNDAMENTALS OF INSURANCE
| VERY SHORT TYPES QUESTION & ANSWERS |
(A) Multiple choice question and answers:
1. Insurance works on the principle of –
(a) Sharing of losses.
(b) Probabilities.
(c) Large numbers.
(d) All of the above.
Ans: (d) All of the above.
2. Insurance helps to –
(a) Prevent adverse situations from occurring.
(b) Reduce the financial consequences of adverse situations.
(c) Negate all consequences of adverse situations.
(d) Make assets continuously productive.
Ans: (b) Reduce the financial consequences of adverse situations.
3. The term ‘Risk’ includes –
(a) Damage to machinery and property.
(b) Impact on the health or life of a person.
(c) Leakage of toxic products into the atmosphere.
(d) All of the above.
Ans: (d) All of the above.
4. The main purpose of having life insurance is –
(a) As an avenue for long-term investment.
(b) As a medium for getting income tax benefits from savings.
(c) As a governmental programme for reducing poverty.
(d) None of the above.
Ans: (d) None of the above.
5. Which of the following intermediaries do not require IRDA’s licence/approval to operate in India?
(a) Insurance Brokers.
(b) Insurance Agents.
(c) Third party Administrators.
(d) All the above intermediaries require IRDA’s licence/approval.
Ans: (d) All the above intermediaries require IRDA’s licence/approval.
6. An actuary is expected to:
(a) Make an exact forecast of the future liabilities of policies.
(b) Make a reasonable forecast of the future liabilities of policies.
(c) Calculate the premium required to cover a risk on a long-term basis.
(d) Find the probability of an insured event to happen in non-life policies.
Ans: (b) make a reasonable forecast of the future liabilities of policies.
7. The Indian insurance industry is governed by
(a) Insurance Act-1978
(b) General Insurance Business (nationalisation) Act.1972
(c) Life Insurance Corporation Act,1956
(d) Insurance Regulatory and Development Authority Act,1999
(e) All of these.
Ans: (e) All of these.
8. The ___________ is the party who gets his life or property insured against risks.
(a) Insured.
(b) Insurer.
(c) Assurer.
(d) None.
Ans: (a) Insured.
9. The insurer agrees to compensate the insured in consideration of a sum of money is called
(a) Premium.
(b) Policy.
(c) Subject matter.
(d) None.
Ans: (a) Premium.
10. Which of the following insurance contract is not based on the principle of indemnity.
(a) Fire insurance.
(b) Marine insurance.
(c) Life Insurance.
(d) All.
Ans: (c) life insurance.
(B) Fill in the blanks:
1.The principle of ___________ ensures that an insured does not profit by insuring with multiple insurers.
Ans: Contribution
2. The minimum paid up capital required for a General Insurance Company is Rs. ___________.
Ans: 100 crores.
3. The IRDA was set up in ___________.
Ans: 2000
4. The IRDA stands for ___________.
Ans: Insurance Regulatory and Development Authority.
5. ___________ is a social device for eliminating
or reducing the loss of society from certain risk.
Ans: Insurance.
6. Insurance provides security against ___________ and ___________.
Ans: Risk and loses.
7. A contract of insurance is a ___________ agreement.
Ans: contingent.
8. ___________ was the first Indian insurance company.
Ans: Bombay Mutual Assurance Society Ltd.
9. Risk is evaluated on the basis of ___________ theory.
Ans: Probability.
10. The ___________ is the party who agrees to compensate the other person against possible losses.
Ans: Insurer.
(C) Answer the following Question:
1. Name of the Acts under which life insurance is given?
Ans: The Insurance Act 1738 and the life Insurance Corporation Act 1956.
2. What are the factors that affect life insurance premium?
Ans: Several factors determine the premium of an life insurance policy, such as your age, gender, health condition, income, Lifestyle, and profession. Also, claim-free years can help in reducing insurance premium for certain types of insurance policies.
3. What is the waiting period under insurance policies?
Ans: Waiting period refers to the period for which an insurance policyholder must wait before the insurance coverage comes into effect. He/she may not receive insurance benefits for claims filed before the waiting period is over or untill the insurance coverage begins. Also, this period various from one type of insurance policy to another.
4. Why do I need to insurance policy renewal?
Ans: The insurance policies needs timely renewal to offer continued benefits to the policyholder. They are renewable within the grace period post the expiry date and may get lapse if the premium is not paid timely. Also, the insurance company is entitled not to offer coverage for the period for which no premium is received.
5. How many claims can I file under my insurance policy?
Ans: You are allowed to make a certain number of claims only basis the type of insurance you have bought. Also under policies like health and motor you can get a bonus/ discount in the next year for not filing claims under the policy in a year.
6. What is a cashless facility related to an insurance policy?
Ans: Cashless facility is available with certain types of insurance policies like health and motor insurance. Under this facility, the insurance companies pay the expenses incurred by a policyholder directly to the hospitals or network garages.
7. What is assurance?
Ans: ‘Assurance’ is a team used where an event is bound to happen, i.e., death in the case of life insurance, and the only uncertainty is the date of its occurrence.
8. What is pure risk?
Ans: Pura risks can produce only one outcome i.e., loss. There is no question of earning profit.
9. What is speculative risk?
Ans: Speculative risks may produce two outcomes either profit or loss.
10. What is degree of risk?
Ans: The degree refers to severity of loss (small or big). The degree of risk changes. These changes depend upon the uncertainty of loss or gain.
11. What is warranty?
Ans: A warranty is that by which the assured undertakes that some particular thing shall or shall not be done. That certain conditions shall be fulfilled.
12. What is express warranty?
Ans: An express warranty is one which is expressed or written on the face of the policy itself and imposes some obligation upon the insured.
13. What is implied warranty?
Ans: An implied warranty is one, which is not expressly written on the face of the policy but is implied by nature, to the contract of insurance.
14. Mention two primary function of Insurance.
Ans: Two primary functions of Insurance are:
(a) Insurance provides certainty
(b) Insurance provides protection and risk sharing.
15. Write any two secondary function of Insurance.
Ans: The secondary functions of insurance includes:
(a) Prevention of loss and provide capital.
(b) Providing efficiency and helping in economic progress.
16. What is causa proxima?
Ans: Causa proxima is a principle which indicates that the insurer always takes the proximate cause while paying the claim.
17. In which Insurance the principle of indemnity is not applied?
Ans: In Life Insurance.
18. In which year the marine Insurance Act was passed?
Ans: In the year 1963
19. What are the three classes of marine Insurance?
Ans: (a) Hull Insurance.
(b) Cargo Insurance.
(c) freight Insurance.
20. What is double insurance?
Ans: Where two or more policies are effected by or on behalf of the assured on the same adventure and interest or only part thereof, and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over insured by double insurance.
21. What is marine insurance contract?
Ans: A marine insurance is a contract whereby the insurer undertakes to indemnity the insured in a manner and to the extent thereby agreed against the marine losses. The risks insured against are those commonly known as perils of the sea such as collision of one ship against another ship, rocks, storm etc. and fire as well as action of the master or crew of the ship.
22. What is fire insurance contract?
Ans: Contact of fire insurance is a contract of indemnity according to which the insurer promises to indemnify the insured for the losses arising out of fire. In consideration of this contract, the insurer charge some premium. Fire insurance policy is taken for a definite period generally for one year.
23. What is reinsurance?
Ans: The contact of reinsurance is entirely different from double insurance. Reinsurance is an arrangement where by an insurer who has accepted insurance lays off part of his own risk with another insurer to reduce his own liability.
24. Define life Insurance contact.
Ans: Life Insurance is a contract between insurer and the insured. In this contract the insurer in consideration of premium undertakes to pay a certain sum of money either on the death of the insured or on the expiry of certain period, whichever is earlier.
| SHORT TYPE QUESTIONS & ANSWERS |
1. Define Insurance. Mention five essential elements for Insurance.
Ans: “Insurance is a process in which uncertainties are made certain.” According to John megi, Insurance is a plan wherein persons collectively share the losses of risks.”
According to E.W. patterson, “Insurance is a contract by which one party, for a compensation called the premium, assumes particular risks of the other party and promises to pay to him or his nominee a certain or ascertainable sum of money on a specified contingency.”
The five essential elements for Insurance are:
(i) The occurrence of the loss must be accidental.
(ii) There must be large numbers of similar risks.
(iii) The loss caused by the risk must be definite.
(iv) The peril insured must be capable of producing a loss.
(v) The cost of insurance must be within the reach.
2. What is Risk? Write five types of business risk?
Ans: Risk has several meanings. The meanings differ according to their field of use. In general, risk refers to the possibility or chance of meeting danger, suffering loss or injury or exposure to adversity or danger. In a broader sense risk is uncertainty.
The five types of business risk are:
(i) Price Change.
(ii) Credit Risks.
(iii) Supply Risks.
(iv) Change in Quality.
(v) Exchange Risks.
3. Mention five characteristics of the principles of Indemnity.
Ans: The five characteristics of the principles of Indemnity are:
(i) The principle applies to all the contents of insurance except life and personal accident insurance.
(ii) The amount of compensation or Indemnity will be restricted to the amount of loss and the insured is not allowed to make any profit.
(iii) If there is more than one insurer for the same subject matter the insured can recover the amount of loss from any one and not from all. The other insurers will contribute the loss according to their ratio.
(iv) If the insured gets any claim against third party after bring fully indemnified by the insurer, the insurer has the right to receive the entire amount paid by the third party.
(v) The insurer takes all the rights of the insured after paying the compensation. It includes the value received of the destroyed property after sale.
4. Mention five essentials of the doctrine of subrogation.
Ans: The five essentials of the doctrine of subrogation are:
(i) Subrogation is a supplement to the principle of indemnity.
(ii) Subrogation only up to the amount of claim.
(iii) Subrogation cannot be applied before payment.
(iv) Subrogation does not apply to life and accident policies.
(v) Subrogation is the substitution.
5. Write five conditions for the application of the principle of contribution.
Ans: The five conditions for the application of the principle of contribution are:
(i) The policy or policies must cover the same peril.
(ii) They must protect the same interest.
(iii) The interest or the subject matter of the insurance must be the same.
(iv) The policy or policies must have been in force at the time of loss.
(v) The insured must be the same person.
6. What is Insurance? How does insurance work?
Ans: Insurance is a legal agreement between two parties i.e., the insurance company (insurer) and the individual (insured). In this, the insurance company promises to make good the losses of the insured on happening of the insured contingency. The contingency is the event which causes a loss. It can be the death of the policyholder or damage/destruction of the property. It’s called a contingency because there’s an uncertainty regarding happening of the event. The insured pays a premium in return for the promise made by the insurer.
The insurer and the insured get a legal contract for the insurance, which is called the insurance policy. The insurance policy has details about the conditions and circumstances under which the insurance company will pay out the insurance amount to either the insured person or the nominees. Insurance is a way of protecting yourself and your family from a financial loss. Generally, the premium for a big insurance cover is much lesser in terms of money paid. The insurance company takes this risk of providing a high cover for a small premium because very few insured people actually end up claiming the insurance. This is why you get insurance for a big amount at a low price. Any individual or company can seek insurance from an insurance company, but the decision to provide insurance is at the discretion of the insurance company. The insurance company will evaluate the claim application to make a decision. Generally, insurance companies refuse to provide insurance to high-risk applicants.
7. Insurance as a social security tool in present social set up. Explain.
Ans: Insurance is very important for the society and it serves the society as a social security tool. Insurance provides an instrumental force to fight against evils of poverty, unemployment, diseases, old age, fateful accidents of persons and property and similar other calamities of nature.
When the only earner of family dies, the income of family also dies and the economic conditions are adversely affected, unless other alternate arrangement is made. So life insurance plays an important role as an alternate arrangement, because it contains the elements of investment and protection.
Again, insurances raise the standard of living of the people by providing essential social services including housing, medical care and security in the event of sickness, disability, unemployment etc. This way the people feel both mentally and physically secured.
So, insurance acts as a security tool for our society because it is a co-operative device for spreading over the loss suffered by one or more, caused by a particular risk, over a large number of persons who agree to share the loss collectively.
8. Insurance & Economic development are related to each other. Explain.
Ans: For economic development, investments are very necessary. Investments are made out of savings. Insurance sector plays an important role for the mobilisation of savings of people.
The collection of funds in form of premium from life, fire, marine and others insurance represents the contribution in millions. These funds are invested in the government and non-government enterprises for economic growth for the benefit of the society. So for economic growth of the country, insurance provides strong hand and sound mind, which results to produce more wealth.
Insurance sector also provides protection facility against loss by fire, theft, earthquake, accidents and other natural calamities. By getting the various policies, insured feels secured and expands his business on International level. Thus insurance promotes foreign trade and helps in earning or securing valuable foreign exchange.
So, we can say insurance plays an important role for the economic development of the country.
9. Write down the importance of insurance to an individual and to business.
Ans: The importance of insurance to an individual are stated below:
(i) Insurance provides security and safety.
(ii) It provides peace of mind.
(iii) In eliminates dependency.
The importance of insurance to business sector are:
(i) It provides financial help.
(ii) It reduces uncertainty of business losses.
(iii) It grants credit facility.
10. Mention five essential characteristics of an insurable Interest?
Ans: Following are the essential characteristics of an insurable Interest:
(a) There must be some subject matter to insure, such as property, life, or limb life in the case of life insurance and property in the case of fire insurance.
(b) The insured must have some legally recognised relationship with the subject matter insured.
(c) The insured must be benefited by the safety of the subject matter and he suffers loss if the subject matter is lost, damaged or destroyed.
(d) The subject matter must be definite and can be recognised easily. and
(e) The subject matter should be measured in terms of money.
11. Write a brief note on the importance of insurable Interest. Mention time of application of Insurable Interest in different insurance.
Ans: The principle of Insurable interest basically distinguishes insurance from gambling or wagering transactions. In case the insured has not an insurable Interest in the property insured, the contract of insurance would amount to a gambling or speculative contract. As such, no person can enter into a valid contract unless he has insurable Interest in the subject matter of insurance. The most clear and common case of existence of pecuniary insurable Interest is the ownership of the property being insured and insuring own life. Insurable interest may also exist due to the use, value or profit of the property such as bailment, mortgages, shipment etc.
The application of Insurable Interest differs in all the classes of insurances:
(i) Life Insurance: In Life insurance contract insurable Interest must exist at the time of effecting the insurance.
(ii) Marine Insurance: Here the insurable Interest must exist at the time of loss.
(iii) Fire Insurance: Insurable Interest must exist at the time of effecting the insurance as well as at the time of loss.
12. What do you mean by insurable Interest? Mention five types of persons having insurable Interest.
Ans: The principle of Insurable Interest is a precondition for a valid contact of insurance. The person getting an insurance policy must have an insurable Interest in the subject matter to be insured. A person is said to have an insurable Interest in the property, if he is financially benefitted by existence and is prejudiced by its loss, destruction or non-existence. Similarly, a person taking a life insurance policy must have an insurable Interest in the life of the insured person. the insured must positively stand benefitted financially due to existence or continuance of life, preservation of the object insured or he must suffer a financial loss on the happening of an event against which he seeks insurance.
Persons having insurable Interest:
(i) An individual person has an insurable Interest in his own life to an unlimited extent. However the limit is restricted by his capacity to pay the premium and financial status.
(ii) A wife has an insurable Interest in the life of her husband and vice-versa.
(iii) A creditor has an insurable Interest in the life of his debtor to the extent of his loan advanced to him, but not more than that.
(iv) A partner in business has an insurable Interest, in the life of his copartner to the extent of his capital employed in the business.
(v) An agent has insurable Interest in his principal to the extent of layer’s insurable Interest.
13. Give four difference between Insurance Contract and General Contract?
Ans:
| Basic | Insurance contract | General contract |
| 1. Meaning | Insurance is a contract where by one party agrees to pay a specified sum on the happening of an eventin consideration calledThe premium | A contract is an agreementand is governed by the Indian contract Act, 1872 |
| 2. Object | The object is to provide Protection against the insured event | The object is to perform the contract |
| 3. Insurable interest | For every insurance contract, there must be an insurable Interest | In a general contract there isno necessity of an insurable Interest |
| 4. Principle of caveat emptor | This principle does not apply to an insurancecontract. | This principal applies to general contract |
14. Write about the rules regarding to the existence or presence of Insurable interest in respect of life, marine and fire insurance.
Ans: The rules in regard to the existence or presence of Insurable interest in respect of life, marine and fire insurance differs widely:
(i) In case of life insurance, the person taking out a life policy must have a pecuniary insurable interest in the life of the insured person at the time of taking of the policy. It may or may not be present at the time of death of the person whose life is insured or at the time of making claims on maturity.
(ii) In case of fire insurance, insurable Interest must exist both at the time of taking out the policy and also at the time when the loss occur and a claim is filed with the insurance company.
(iii) In case of marine and other insurances, insurable Interest must be present at the time of occurrence of loss. In other words the insured has to establish his insurable Interest in the insured object at the time when claim of loss is made on the happening of certain or uncertain event insured against. However it may not be present at the time of effecting the contract.
15. State the three essentials of Insurable interest in respect to all types of insurance.
Ans: An analysis of the defination given under section 7(2) of the marine insurance Act, 1963 provides three essentials of Insurable interest in respect to all types of insurances.
(i) Subject matter of insurance must be certain. There must exist some property, rights, interest, life or potential liability, which must be capable of being insured called the subject, matter. It must be ascertainable.
(ii) The insured must bear a legal relationship to the subject matter or he must be the owner thereof. He stands to benefit by the safety or continuous existence of the property, rights, interest, life or liability and stands to lose by any loss, damage, injury, death or creation of liability to the subject matter.
(iii) The insured must be the owner or may possess the legal rights or interest in the subject matter to be insured. As such the ownership or legal rights or relationship of the insured person must exist in the property, rights or life or any potential liability.
In case the above three legal conditions are not present, the subject matter or life cannot become an insurable Interest and hence is not capable of being insured.
16. Mention the insurable Interest in case of life insurance.
Ans: The following persons may have an insurable Interest in the subject matter under the life insurance:
(i) A person has an unlimited insurable interest in his own life.
(ii) A husband in the life of his wife.
(iii) A wife in the of her husband.
(iv) A father in the life of his son, if he is dependent on his son.
(v) A son in the life of his father, if he is dependent on his father.
(vi) A creditor in the life of a debtor to the extent of the amount of debt.
(vii) A partner in the life or lives of his co-partner or co-partners.
(viii) An employer in the lives of his employees or servants.
(ix) An employee, employed for a specified period in the life of his employer.
(x) A brother in the life or lives of his sister/sisters.
(xi) A sister in the life or lives of his brother/brothers.
(xii) A mother in the life of her son (s).
(xiii) A son in the life of his mother.
(xiv) A principal in the life of his agent.
(xv) An agent in the life of his principal.
17. Mention the insurable Interest in the fire insurance.
Ans: The following persons may have insurable Interest in the subject matter under the fire insurance:
(i) The owner of the property has an insurable Interest in his property.
(ii) Every partner has an equitable insurable Interest in the properties of the firm.
(iii) Husband and wife have a joint insurable Interest in their respective properties.
(iv) A creditor has an insurable Interest in the property on which he has a lien for his debt.
(v) An agent has an insurable Interest in the property of his principal.
(vi) A bailee has insurable Interest in the properties or articles bailed.
(vii) A trustee has insurable Interest in the properties covered under trusteeship contracts.
(viii) An insurer has insurable Interest in respect to all those risks covered under the reinsurance.
(ix) A mortgager has insurable Interest in the full value of property so mortgaged.
(x) A lessee has an insurable Interest in the properties get on lease.
18. Mention the insurable Interest in marine Insurance.
Ans: The following persons may have insurable Interest in marine Insurance:
(i) The owner of the ship.
(ii) The cargo owner in his cargo.
(iii) The master and the crew of ship in their remunerations.
(iv) The creditor who has lent money or ship or cargo to the extent of the debt.
(v) A mortgagor in the property so mortgaged.
(vi) A mortgagee to the extent of sum due to him under mortgage and interest thereon.
(vii) The ship owner in the freight to be received.
(viii) A trustee in the properties held under trust.
(ix) An insurer in the subject matter of reinsurance.
19. Mention four benefits of life Insurance.
Ans: four benefits of life Insurance:
(i) it protects the families from the economic hardships after the death of the bread winner member of the family.
(ii) Savings provide the new source of income when permanent earning stops and life assurance provide and immediate some of income for one‘s family on the death of an insured person pre-maturely.
(iii) It provides an insured additional earning by way of bonus and interest credited by the life insurance corporation.
(iv) Life assurance is needed because when one cease to earn money insurer provides certain sum of money to the insured as per various terms of policies.
20. Write down the procedure for the settlement of claims of an insured.
Ans: Claims are settled either on maturity of policy term or on death of the policy holder.
The procedure for settlement of claims both on maturity and death are discussed below:
(i) Claims on maturity: Claims payable at the end of the term of the policy are known as maturity claims. In order to expedite the settlement of maturity claim, the insurer sends to the assured a discharge voucher in advance.
The requirements which are to be completed by the assured are:
(a) Proof of age.
(b) The policy document for cancellation, unless it is with insurer as security for loan.
(c) Assignment deed done on a separate sheet.
(d) Discharge voucher.
(e) Indemnity bond in case the policy document is lost or destroyed.
(ii) Death Claims: Claims arising by death of the life assured are known as death claims. The following requirements are to be completed by the assured:
(a) Proof of death provided by claimant’s statement, municipal death certificate, doctor’s certificate, cremation or burial certificate, police report in accident or murder cases.
(b) The policy document.
(c) Records of assignment and reassignment if any.
(d) Proof of age.
(e) Legal evidence of title, if there is no nomination or assignment.
(f) Form of discharge.
21. Write short notes:
(i) Revival of lapsed policies.
Ans: (i) Revival of lapsed policies: One of the privileges granted by the insurer to the policyholders, on his failure to pay any of the renewal premiums, strictly on the due date, which results into complete forfeiture of the assurance is revival of lapsed policies. When a policy lapses, the policy holder can apply for its revival within 5 years from the due date of the first unpaid premium but before the date of maturity.
Some of the important points to be taken into consideration while applying for the revival are:
(a) The revival must be affected during the lifetime of the life assured.
(b) The overdue premium with interest or revival fee must be paid. The corporation calls for medical and/or evidence of any alteration of the risk. The insurer applies the right to impose its own terms on which revival can take place if there is any adverse change in health or insurability. The corporation assumes liability again and revives policies within 6 months from the due date of the first unpaid premium without asking for evidence of health.
(ii) Surrender value.
Ans: Surrender Value: when the person, who is assured, is unable to pay his premium within allowable time, his life policy lapses.If he is unable to revive his policy within stipulated time, he can surrender his policy and can get ‘cash surrender value’. If he gets this payment, the contract of insurance comes to an end and the assured will get the cash value without any liability to pay further premiums. Life Insurance corporation of India has guaranteed surrender value if the premium have been paid for at least two years on to the extent of one-lenth of total number of premiums stipulated for in the policy, provided such one tenth exceeds one full year premium. Surrender value is the amount which the insurer pays back to the assured in total discharge of the policy.
| LONG TYPE QUESTIONS & ANSWERS |
1. What is Insurance? Define marine insurance, fire insurance and re – insurance.
Ans: Insurance is a legal agreement between two parties – the insurer and the insured, also known as insurance coverage or insurance policy. The insurer provides financial coverage for the losses of the insured that s/he may bear under certain circumstances.Insurance acts as a vital shield against unforeseen circumstances. It protects you from unplanned expenses and offers a financial cushion from accidents, illnesses and more. Insurance safeguards the financial interests of your family in your absence.
(a) Marine insurance: Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the final destination.Marine insurance covers loss or damage during the transfer of property from origin to destination, including ships, goods, terminals and various transportation modes.
(b) Fire – insurance: Fire insurance policies provide payment for the loss of use of the property as a result of a fire. They also often provide additional living expenses if the fire caused uninhabitable conditions.One of the primary objectives of fire insurance is to protect the insured financially if their property suffers from fire-related damages. The insurance provides coverage for damage or physical loss or destruction of your insured property.
(c) Re – insurance: Reinsurance is insurance that an insurance company purchases from another insurance company to insulate itself (at least in part) from the risk of a major claims event. With reinsurance, the company passes on (“cedes”) some part of its own insurance liabilities to the other insurance company.Reinsurance allows companies to limit their losses by distributing specific risks with other companies. This can help in freeing up additional capital for the companies. Reinsurance gives companies the provision to accept new clients with the purchase of additional relief insurance.
2. Explain the origin and development of Insurance.
Ans: The origin of insurance is lost in antiquity.The earliest traces of insurance in the aminet world are found in the form of marine trade loans or carriess contracts which included an elements of insurance. Evidence is on record that arrangement embodying the idea of insurance were made in Babylonia and India at Qmte an early period. In Rigreda, the most sacred book of India. References were made to the concept of “yogakshema” more or less akin to the well being end sceneirty of the people.
The origin and development of Insurance can be discussed as below:
(i) marine Insurance: The marine insurance is the oldest form of insurance. Under bottomry bond, the system of credit and the law of interest were well developed and the means of safeguarding against it. If the ship was lost, the loan and interest were forfeited. The contract of insurance was made a part of the contract of carriage and Manu shows that Indians had even anticipated the doctrine of average and contribution.
The insurance development was not confirmed the lombards and to the Hansa, it spread throughout Spain, Portugal, France, Holland and England. The marine form and leading prominence of Lombards merchants got a prominent section of the London City. They binet homes there and took the name of domlard shreep Later on, this street became famous in insurance history. The lord’s coffee hense gave an impetus to develop the marine insurance.
(ii) Fire insurance: After marine insurance fire insurance developed in present form. It has been observed in Anglo Section Guite or for the first time. Where the victims of fire hazards were given personal assistance by providing necessaries of life. It had been originated in Germany in the beginning of sixteenth century. The fire insurance got momentum the England after the great fire in 1666 when the fire loses were tremendous. About 85%of the houses were burnt to ashes and property worth of sterling ten crores were completely burnt of. Fire insurance office was established in 1681 in England with colonial development of England, the fire insurance spread all over the world in present form.
(iii) Life Insurance: life insurance made its first appearance in England in 16th century. The first recorded evidence in England being the policy on life of William Gybbons on June 18,1653. Even before this date annuities had become quite common in England, and marine insurance had, in fact made its appearance three thousand years ago. The life insurance developed Ehange alley. The first registered life office in England was the hand in hand society established in 1696 the famous Amicable society for a perpetual Assurance office started its operation since 1706 life insurance did not prosper in the United States during the 18th century, because of serious fluctuations in death rate, but soon after 1800 some active interest began to be shown in this enterprise because of the application of level premium plan which had by then been in operation in U.k. for more than a generation. In India some Europeans started the first life insurance company in Bengal presidency viz, the Orient life assurance company in 1818. Thereafter, Bombay mutural life assurance society in 1871, Oriental govt. Security life assurance company Ltd in 1874 etc.
3. Briefly explain about the history of Insurance in India.
Ans: In India, the historical beginning of insurance is not exactly known. but the modern concept of insurance came into being with the advent of East India company in 18th century. So many insurance companies from Britain started coming to India to insure the English residents. They used to change very high rate of premium due to high mortality rate in India. But in 19th century when Indians were recruited to jobs in various offices, then they started seeking protection with insurance companies.
The first foreign company which started the business of insurance in India was “Oriental” In 1823 a company named “Bombay Life”. Started giving insurance policies for two-three years terms. Then “ Madras Equitable company came into existence in 1829. These companies failed due to improper and wrong policies in regarded to valuation, management and depreciation norms etc. After that so many development investments took place. Many European countries tried to establish business in India but failed to survive due to unethical business practices. The British Parliament passed an Insurance Act in 1870 and then a few organised efforts were made in the life insurance sector in India.
One comprehensive legislation was passed on insurance by Govt for the first time in 1928. During the second world war so many new insurance companies came up. But, they resorted to heavy speculation and great financial irregularities were seen in then.
4. Explain the various kinds of Insurance. What are the various types or kinds of Insurance contract?
Ans: The different kinds of Insurance are as follows:
(a) Life Insurance: Life insurance provides two fold advantages, the first in the form of small savings and the other in the form of security in the event premature death. Thus, a life Insurance is a combination of servings as well as security.
(b) General Insurance: Broadly speaking, except life Insurance all types of insurance come under general insurance.
The main branches of the general insurance are as under:
(i) Marine Insurance: This is the oldest form of insurance and covers all the marine perils, not only the ship is damaged or destroyed but there is also the loss of cargo and consequently the loss of freight. Therefore, the marine insurance covers the risk of ship, cargo and freight on high seas.
(ii) Fire Insurance: This is insurance covers the risk of fire. With the industrializations in every country, there is an increasing demand if fire insurance because there is every chance of fire spreading in big factories. Godowns, warehouses and ships. The five insurance not only covers the link of fire but the consequences losses from such fire are also covered.
(iii) Liability Insurance: This includes the risk of liability towards third parties which the misused in required to pay as an employer. For example, damages to property belonging to third person in case of accident. Similarly, an employee is responsible for making payments to his employees when they suffer injury or are involved in accidental death during the comes of duty.
(iv) Social Insurance: the main object of social insurance is to protect and uplift the weaker sections of the society. In a welfare state, like India, it is the duty of the Govt. to provide social insurance to its masses. Social Insurance may be in different forms, like pension plans, disability benefits, unemployment benefits, sickness insurance and industrial insurance etc.
(v) Miscellaneous Insurance: Besides the above, cattle insurance; crop insurance theft and burglary insurance are some of the other forms of insurance. Export credit insurance, state employee insurance and quantee insurance also come under this category.
Following are the insurance contracts which are applicable on the business or life or property:
(i) Contract of Indemnity: The principle of indemnity also applies to all contacts of insurance except the contracts of life insurance where.
(a) The loss suffered by the insured can be measured in money terms.
(b) a made of putting the insured after the mitigation of loss in the same position in which he has placed just before the occurrence of loss.
Hence all the contents of insurance except life insurance, are the contracts of indemnity. Indemnity means to made good the loss and nothing more than the actual loss. In accordance with the principle of indemnity, the insured’s actual loss is indemnified on the occurrence of certain events. The basic adjective of the insurance is, in fact, to transfer the loss of an individual over to the insurer who in turn very easily spread it over a larger number of person (insured). The Compensation can never be more than the actual loss suffered by the insured as such, the insured is never allowed to make profit out of loss.
(ii) Contract of Life Insurance: Life insurance is a contract in which insurer, in consideration of a premium, undertakes or pay a certain sum of money either on the death of the insured to his / her nominees or on the expiry of fixed period to him / her. Suppose A gets the life insurance policy on 10 Jan, 1996 for 10 years for Rs. 1,00,000. If he does before the expiry of policy then his claimant will get the claim and if he survives upto the expiry of policy then he himself will get the maturity value of the policy. So it is an important device to provide family security on voluntary basis through individual initiative.
(iii) Contract of fire Insurance: Contract of fire insurance is a contract of Indemnity according to which the insurer promises to Indemnify to the insured for the losses arising out of fire, In consideration of this contract, the insurer charges some premium. Fire insurance policy is taken for a definite period generally for one year. If there is no loss due to fire during that specific period, the insurance company will not pay anything and if some losses are caused during the insured period by fire the actual losses are compensated to the limit of the amount instead (whichever is less).
(iv) Marine Insurance Contract: A marine insurance is a contract whereby the insurer undertakes to Indemnify the insured in a manner and to the extent thereby agreed against the marine losses. It means the losses incidental to marine losses. It is a contract of Indemnity. The risk insured against are those commonly known as perils of the sea such as collision of one ship against another ship, rocks, storm etc. as fire as well as action of the master or crew of the ship. Thus, it is a device to secure protection from loss or damage to properly while in shipment.
(v) Contract of Insurable interest: A person can enter into a valid contract of insurance only if he has an insurable Interest in the object or in the life of the insured person. In case, the element of Insurable interest is not present, as this principle requires, the insurance contract would be a wagering agreement which is not valid and as such cannot be enforced in the court of law. As such, in the absence of Insurable interest, no contract of insurance can come into existence. In other words, it would amount to be a void contract. Fire insurance and marine insurance cannot be valid without the existence of genuine insurable Interest in the subject matter to be insured.
(vi) Contract of Utmost Good Faith: Basically, the contracts of insurance are contracts of Utmost Good Faith, means the contracts which require absolute and utmost good faith on the part of all the parties concerned with the contract. As such, insurance contracts are contracts of Utmost Good Faith and absence of Good Faith may result in the invalidation of contracts of insurance. Life, fire and marine Insurance are primarily based on the principle of utmost good faith.
(vii) Personal insurance: This includes life, accident, health and sickness insurance. In this contract, the insurer agrees to pay a predetermined sum of money, on the happening of the event, such as reaching a certain age or death, whichever is earlier. This is so because the actual loss cannot be calculated or measured in case of human life.
(viii) Property insurance: This includes all such contracts where the subject matter of insurance is Property of any kind. In this case, the insurer agrees to pay the actual loss of property insured under a policy.This includes fire, marine motor and miscellaneous insurance.
(ix) Liability Insurance: Where a person is liable to a third person in accordance with the provisions of law or to his employee under the provisions of an act, the liability towards such payment can be covered under liability insurance. Workmen’s compensation insurance and third party insurance are examples in this case.
(x) Guarantee insurance: It is an agreement where by the insurer agrees to Indemnify the insured for a fixed amount against loss arising through dishonesty or fraud or a breach of contract. Fidelity insurance and credit insurance are examples in this case.
5. Explain the various types of business risk.
Ans: Modern business is on a large scale. Production of goods is in anticipation of demand. Besides, there is a time lag between production and distribution. In the course of distribution, the business faces several risks and uncertainties.
These are described below:
(i) Price Change: In a free market economy fluctuations in prices constitute the greatest uncertainty which can wipe off even the normal profits and may involve businessmen into unexpected losses. It is very difficult to secure full cover against adverse price change. Hedging provides limited price insurance.
(ii) Credit Risks: Credit is the life blood of business. Business can be boosted by sales on credit. But it may lead to bad debts. Distance between seller and buyer enhances credit risk. However these can be insured by an insurance. Company or self insurance, i,e, through bad debt reserve.
(iii) Supply Risk: Supply of goods May be irregular, uncertain or most inadequate occasionally. Fluctuations in supply affect adversely production of goods. Essential raw materials are usually scarce.
(iv) Change in Quality: Risks of loss due to deterioration in quality of goods is considerable for perishable goods, e.g, fruits vegetables; milk etc. Sea water is corrosive and it affects adversely the quality of goods. However, air tight packaging and cold storage Facilities can prevent the deterioration in quality.
(v) Exchange Risks: Fluctuation in the rate of exchange constitute a major risk in foreign trade. Unfavorable rate of exchange May lead to a considerable loss either for an importer or an exporter. However, traders can secure cover against exchange risk in the forward exchange market.
(vi) Demand Risks: The nature, character and size of consumer demand are ever changing. Buying motives and habits are dynamic. Fashions and tastes are always changing. In a buyer’s market, consumer demand plays a vital role in marketing. However, with the help of marketing research, ‘business concerns secure reasonable protection against adverse or sudden changes in the demand for commodities.
(vii) Price cutting Risks: In a buyer’s market, we may some across cut throat competition among sellers and risk of loss due to price cutting by rivals may involve losses. Falling prices are prejudicial to sellers.
(viii) Substitute Sale: Risk of loss due to sale of suitable products is constantly there. New inventions May introduce better substitutes, sellers may deliberately force the sale of substitutes. The device of branding and packing May prevent this danger considerably.
(ix) State Interference: Private enterprise is required to face risks and uncertainties due to the wave of social controls and sometimes, also nationalisation of a certain industry or trade in order to protect the public interest. Further nationalisation of cotton textile Mills, in Bombay took place recently due to prolonged strike dragging on over a year.
(x) Market Risks: Business conditions and the state of trade are also ever changing. Adverse change in market conditions, e.g., due to recession or depressing, may lead to falling prices and falling profits. In a rising market, over stocking may be profitable but in a falling market it may be suicidal.
(xi) Contract Defaults: The parties to a contract of sale may make a default, e.g., a buyer may refuse to pay or take delivery of goods or a seller fails to give delivery of goods on the prescribed date or time.
(xii) Physical loss: Your property or goods May be lost or damaged due to fire. earthquake, storm, flood, danger of the sea, pilfering, burglary etc.
(xiii) Fidelity Risk: Employees May commit a breach of trust and the concern, may suffer heavy losses due to their dishonesty.
(xiv) Public Misbehaviors: Strikes, lockouts, riots, etc, May create losses or damages to property.
(xv) Artificial Risks: There are due to gambling or wagering contracts or betting. They are called ‘play’ risks. They are deliberately created by gamblers. Of course, such risks cannot be insured under any circumstances.
6. Write down the importance of insurance to commerce and industry and to society. Discuss the benefits or needs of Insurance to Industry and commerce.
Ans: To commerce and industry:
(i) It increases production.
(ii) Acts as a source to foreign exchange.
(iii) It helps in economic growth.
To Society:
(i) Insurance provide huge funds to the society.
(ii) It raises the standard of living.
(iii) It tends to reduce social evils.
Insurance covers many risks and uncertainties in the world of business and acts as a boon to the industrial or commercial concerns.The following are some of the important services of insurance:
(a) Risk Transfer: Businessmen can easily and conveniently transfer the risk of loss to increase.
(b) Protection: Businessmen do not have to worry about losses as damages when the risk of loss to thus property is duly insured. They will receive compensation against actual loss their positition becomes ‘as you were’, even though the actual loss takes place.
(c) Assured profit: An insured businessmen can enjoy normal expected profits, e.g, 15% or 20% margin of profit.In the absence of insurance, the loss, if it takes place, May wipe off the profit margin and may further involve the business into losses.
(d) Benefits to consumers: As the property of the businessmen is duly insured, and he can get a normal profit margin, he can charge lower prices to consumers. There is no need to keep additional cover for any risk of loss. Without insurance, he will have to keep a much greater margin of profits to cover unexpected losses.
(e) Security for loan: He can get liberal bank loans if his stock of goods or property, i,e,. The security for loan, is duly insured. Banks may even charge a lower rate of interest in such cases.
(f) Division of Labour: We can have division of labour in the world of business and can secure all the benefits of specialisation. Businessmen can fully concentrate on their main business activity-production or distribution of goods. Insurance companies can provide expert and specialised insurance services to all insured parties.
(g) Diffusion of Risk: The larger the number of insured persons, the lower will be the incidence or burden of loss to be borne by an individual. Thus, the total risk of loss is spread, over and widely distributed through sharing of losses or the device of insurance. This is called pooling of risk of loss or mutual cooperation. Diversification of risk of loss is the greatest benefit of insurance.
Deduction from annual gross income is allowed in the prescribed manner to encourage insurance.
(h) Investment: A life insurance contract provides not only protection but also investment, or a pension in old age. Under life policy, one can also get bonuses added to the policy amount when we have with profit life policy.
(i) Development funds: Insurance companies as institutional investors can mobilise small national savings in the form of insurance premium. They usually invest these funds in shares and debentures of business companies and and also in government securities. In fact, one of the import out causes of nationalisation of insurance is to secure control of insurance funds for financing economic development plans.
(j) Social Benefits and Security: At present, we have insurance against ill health, old age, accidents, unemployment, etc. Thus, insurance acts as a good instrument for securing welfare and social security. The Social insurances are usually available in all counters. (The greatest advantage of insurance is that the burden of loss falls lightly upon many, rather than falling heavily upon a few persons.)
7. “Although insurance is of our best devices for dealing with risks, it is not perfect.” —- Comment and explain the limitations of insurance.
Ans: Insurance has become a part of our life. It is not restricted to life., marine or fire only but has spread over to almost every sphere of human activity. Naturally, the question arises. ‘ls the scope of insurance unlimited and is there any possibility to insure each and every risk?’ The answer to then question lies in the scope of insurance, which is limited.
The are certain limitations of the scope of insurance, which are as follows:
(i) Absence of Insurable interest: The basic element of insurance is the presence of Insurable interest. The person having insurable interest in the subject matter can take the advantage of insurance, if there is no existence of Insurable interest, the contract is void ab-initio. Thus, the insurable interest restricts the scope of insurance.
(ii) Limited to financial loss: The principle of indemnity applies to all insurance contracts, except life insurance. The object of this principle is to place the insured in the same financial position where he was before the happening of the insured event.
This is essential to avoid the tendency of over insurance. So far as the life insurance is concerned, this principle does not apply, as we cannot measure the value of assureds own life in terms of money.
(iii) Moral limitation: The presence of moral hazards also restricts the scope of insurance. Concealment of any material fact, while effecting insurance, comes under this category. For example, a person suffering from T B or cancer gets himself insured (Whereas he is uninsurable) in other to obtain claims by his dependents and in the case of fire insurance the value of the case of fire insurance the value of the property is overvalued in order to get fire insurance claim. Therefore, an insurer must consider moral hazards while accepting insurance proposals.
(iv) High premium rates: High premium rates restrict the scope of insurance as it deprives the poor persons, who are unable to pay high premium rates to go in for insurance.
(v) All risks are not insurable: The scope of insurance is fast increasing and almost all risks are covered. But the insurers donot cover the risks from war, nuclear explosion, etc. thus, the scope is limited to a certain extent.
The insurers generally undertake to insure that subject matter, against the risks, which are accidental and fortuitous in nature, and which can be measured in terms of money. Thus we can say that all risks are, not insurable, even though most of them can be insured.
8. Explain the purchase of Insurance. State and explain the features of Insurance.
Ans: The main purposes performed by Insurance are given below:
(i) Provides Certainty: The main purpose of insurance is to reduce the risk or uncertainties of events. Insurance is a means to Indemnify or compensate the losses caused by the uncertain events. The insured converts his uncertainties into certainties by paying premium to the insurer.
(ii) Risk Distribution: The insurance is a means of distributing the losses of any uncertain events among a large number of person covered under the contract of insurance.
(iii) Provides Security: Insurance provides the feeling of security against the evil effects of the uncertain events i.e. risks.
(iv) Provides Capital: Insurance reduces financial risks and losses by providing facilities of core capital investments in various giant organisations.
(v) Insurance Efficiency: Insurance by reducing the risks or fear of losses increases efficiency in business. It provides feeling of security in the business community, which in turn becomes a source for the growth and diversification of the Industry.
(vi) Helpful in loss reduction: Insurance Company not only secures the losses but also advises the adoption of various methods and techniques which help in reducing the risks or losses.
(vii) Expands Foreign trade: Insurance provides security to the international traders, shippers and banking or financial institutions which are the main functionaries to foreign trade. Thus, insurance promotes foreign trade and helps in earning valuable foreign exchange.
(viii) Encourages Savings: Insurance may be considered as a better alternative for savings now a days. Due to this, the people are bound to curb their expenses and pay the premium to the Insurance Company in time so that their scheme is not lapsed.
(ix) Providing facilities of Credit: Businessmen can get credit facilities from various financial institutions by pledging their insurance policies.
(x) Helps in checking inflation: Insurance is an important yardstick to check inflation. It curbs the circulation of money and saves it from its ill effect. Compulsory savings in the form of premium reduces the spending volume of the individuals.
Insurance possesses various characteristics. They are discussed under the following heads:
(i) Contract: Insurance is a contract between the insurer and the insured wherein the insured makes an offer and the insurer accepts his offer. The contract of insurance is always made in writing.
(ii) Consideration: Insurance is a contract by which one party in a consideration called premium, takes over a particular risk of the other party and promises to pay to the insured or his nominee a certain sum or ascertainable sum of money on the happening or occurrence of an uncertain event.
(iii) Protection of financial risks: Insurance covers only such risks which can be measured in money terms i.e. financial risks. As such insurance compensates only financial or monetary loss or risks.
(iv) Good faith: The contracts of insurance are included in the class of the “uberrima fides contracts”, which require absolute and utmost good faith on the part of the parties to the contract.
(v) Contract of Indemnity: In this the insurance company paid only the cash loss so caused and nothing else because this is based on the principle of indemnity which means compensation up to the limit of actual loss or value of policy whichever is lower.
(vi) Certainty and contingency: Life Insurance contact is a contract of certainty because death will certainly occur but in other insurances, the contingency like fire, theft, earthquake, etc. may or may not occur.
(vii) Insurance is not gambling: The contact of insurance is not gambling because the insurer is assumed to get this loss indemnified only in the event of occurrence.
(viii) Insurance premium is not charity: Premium payable under an insurance is the cost of risk so covered. Hence it can not be treated as charity.
(ix) Insurable Interest: No person can make or enter into a contract of insurance unless he has insurable interest in the subject matter of Insurance.
(x) Co-operative Device: Insurance is a contract in which a large number of people associate themselves and transfer their individual risks to the assumption so formed. As such, insurance is a co-operative device of bearing the risks of individuals.
9. Explain the fundamental principles of life Insurance contracts. Discuss the characteristics/benefits/features of life insurance contracts.
Ans: The various principles applied to life insurance contract are as follows:
(i) Principle of Insurable interest: Life Insurance contract is not a contract of Indemnity like other insurance contract such as fire and marine insurance. Indemnity means that insurance is valid up to the amount of actual loss suffered by the insured and the loss must be due to the risks insured. It applies to all insurances except life insurance. The life insurance contract provides for the payment of a definite sum. The loss on the death of insured cannot be quantified. The insurer is bound to pay according to the terms and conditions mentioned in the policy document. The payment is not related to the financial loss to the family upon the death of the insured. Whether the death of the insured has caused any financial loss to, the beneficiary or not, is immaterial consideration for the insurer at the time of making payment on the death of insured. Insurer cannot deny liability for the sum insured. Life Insurance is a contract to pay a definite sum of money on the happening of an event. If an insured does, the person who is a nominee need not demonstrate or prove that Direct financial loss has resulted from insured’s death. They will get the money according to contact of assignment. Besides protection, this is an investment aspect also in the life insurance. In endowment policy which is for a limited period, there is every chance that insured may not die during insurance period. In this case, the principal sum accumulates for the benefit of insured.
(ii) Principle of utmost good faith: Life Insurance requires that the principle of utmost good faith should be preserved by both the parties to the contract, i,e, insurer and the insured. The insurer and the insured must be of the same mind at the time of contract because the risk cannot be correctly measured in its absence. They must disclose all the material facts to each other, which affects the risk.
The material facts in life insurance are age, income, health, resistance family details, occupation, and plan of insurance etc. the insured should disclose not only these facts which he feels are material but all the facts which are material. It is the duty of both the parties to disclose all the material facts, which are going to influence the decision of the insured. In the absence of utmost good faith, the contract will be voidable at the option of the person who has suffered loss due to non-disclosure of any fact. The intentional non disclosure amounts to fraud and unintentional disclosure amounts to voidable contract.
(iii) Principle of warranty: In life Insurance those representations, which are contained by the policies and expressly or impliedly from the part of the basis of contract are known as warranties. The representation means any information, which a person gives to the insurer during negotiation for effecting insurance contract. The representation may be material or non material. If the representation is material and it is false, it provides a good basis to treat the contract as void or voidable at the option of the insurer. The warranties are the basis of the contract of insurance of all kinds. If any statement given by the insured is false, the contract shall be invalid, and the insurer May forfeit the premium paid by the insured. The informative warranties are very important in life insurance contract as in this the proposer is to disclose all the material facts to the insurer to the best of his knowledge and belief.
(iv) Principle of causa proxima: The efficient or effective cause, which causes the loss, is called proximate cause. It is the real and actual cause of loss. If the cause of loss (peril) is insured, the insurer will pay, otherwise, the insurer will not compensate. In life insurance, the doctrine of cause proxima is not applied because the insurer is bound to pay the amount of insurance whatever may be the reason of death. It may be natural or unnatural. Therefore, this principle is not of much practical importance in connection with life assurance.
(v) Principle of Indemnity: Although this principle does not apply to the life insurance policy, it ensures that the insured gets the compensation that is equivalent to the actual loss. The amount will not exceed the loss so that the insured does not make additional profits from the company. In simple words, the policyholder will be provided with an amount equal to the loss and not more.
(vi) Principle of subrogation: This principle is one of the most important, keeping in mind the unpredictability of life. Subrogation means that the insured is enabled to claim compensation from any third party that is responsible for the loss. The insured is thus allowed to go for legal methods to recover the loss. It also gives the insurance company the right to ownership from the insured to claim an amount from the third party.
(vii) Unilateral Contract: Life Insurance contract is unilateral contract because, here, only the insurer makes an enforceable promise. The insured had already performed his duty of payment of premiums. If the first premium is paid, the insurer is bound to accept subsequent premiums, and to pay the amount of claim as and when it arises.
(viii) Principle of contribution: This principle can be implied if there more than one insurer involved. So, the insured cannot make any profits from different policies.
(ix) Principle of Loss Minimization: Purchasing life insurance means entering into a legal contract between the company and the insured person. Therefore, it is important to keep in mind that there should be minimal loss and risk involved. In such clauses, the owner of the policy is expected to take the necessary steps to limit him/her from any damage. This may include steps to follow a healthy lifestyle, not indulging in life-threatening habits like smoking etc.
(x) Nature of the contract: Lastly, the nature of the contract is a fundamental determiner of co-operation between the client and the company. Thus, the contract should be simple and free of invalid information. The contract must also be signed with the full consent of the client.
Following are the characteristics/benefits/features of life insurance contracts:
(i) Benefits: The primary benefit offered by a life insurance policy is known as the death benefit, or the amount paid to the nominee upon the death of the policyholder. This amount is also known as the sum assured and could also include bonuses. In recent times, policies also offer a benefit upon maturity of the policy, in case the policyholder outlives the term. These benefits are popularly termed as maturity benefits.
(ii) Riders: A rider provides an enhanced amount of coverage to the policyholder and can be availed along with their insurance policy at a nominal cost. Some of the most popular riders are Accidental Death Benefit, Accidental and Permanent Disability Benefit, Waiver of Premium, etc.
(iii) Investment Components: Some life insurance plans come with the dual benefit of an investment component as well. With a single premium, you secure a life cover while also accumulating wealth through investments in a diverse portfolio. Depending on the terms and conditions of the plan, one can invest in equity, debt instruments or various combinations of both. Those opting for policies such as ULIPs can switch and redirect funds, as and when they please.
(iv) Tax Benefits: Various kinds of life insurance plans have different tax benefits as per relevant sections of the Income Tax Act. Generally, the premium paid for a life insurance policy tax-deductible up to Rs. 1.5 lakhs under Section 80C. The payout received from an insurance policy, too, is exempt from tax under Section 10(10D) of the ITA.
(v) Loans component: Your life insurance policy can not just provide you with a life cover, but also help you during a crisis like loan repayment. One benefit of opting for a loan against a life insurance policy is that the rate of interest charged is lower than that of a personal loan.
10. Discuss the various principles of fire insurance? Explain the Need of Fire Insurance for Business Owners.
Ans: The following are the fundamental principles of fire insurance:
(i) Utmost Good Faith: the observance of good faith is necessary, not only during the negotiations of the contract, but through out the term of the policy and also while making claims. The contract of fire insurance is one in which the observance of the utmost good faith by both the parties is of vital significance. The insurer and insured must furnish detailed information regarding the subject matter to be insured. The insured, since he has more information about the subject matter, must disclose all the information asked truly and fully. Any change, after commencement of risk, must be communicated to the insurer. The insured as well as the insurer must take all such steps as may be reasonable for adverting or minimising loss. Since the insured is near to the property, he must act to prevent the fire and if the fire has occurred,he must do his utmost to extinguish it. In such cases he must act as if he was not, insured. Therefore the contract of insurance is entirely based on the principle of ‘uberrimae fidei’ i.e. absolute good faith. It is the duty of the proposer to disclose all the material facts before the contract is completed.
(ii) Principle of Indemnity: This principle aims to compensate the insured for a loss sustained, and the compensation should be such as to place him as nearly possible in the same financial position after the loss as he occupied immediately before the occurrence. The insured cannot claim anything in excess of the amount required to recoup the actual loss sustained. The insurer undertakes to make good the insured’s loss by monetary payment or by reinstatement or replacement, so that the insured, shall be fully indemnified, but this is subject to the sum insured. The law does not sanction any insurance, which would enable the insured to profit by the destruction of the thing insured the object of this principle is to place the insured as far as possible in the some financial position occupied by him before the happening of the event. The insured is not allowed to make any profit as it would be against the principle of indemnity and it would tempt the insured is to get extra money as compensation from the insurer. The principle of indemnity is linked compensation with the principle of Insurable interest so that the insured cannot recover more than the extent of his interest. Suppose, a godown is insured worth Rs.1,00,000/- and there is a fire, which causes the loss to the extent of Rs. 20,000/- only from his insurer and not more than that. The principle of indemnity limits the compensation. It means that if an insurer promises to pay a sum of money in the event of loss it cannot be enforced above the actual loss to the insured. The insured would not tend for over insurance and then intentionally cause a loss achieve financial gain.
(iii) Insurable interest: this is the most important general principle of insurance. The insured must have insurable Interest in the property, which he wants to insure. Insurable interest means some pecuniary interest in the subject matter of insurance contract. Without such interest the contract will be regarded as a gambling policy and therefore void. It must be lawfully clear that insured has an interest in the preservation of the thing so that he will suffer financially on the happening of the event against which he has insured. In case of fire insurance, insurable Interest must be present both at the time of taking the policy and at the time of making the claim.
(iv) Cause Proxima: Proximate cause is very important in fire insurance. The principal of proximate cause indicates that the insurer always takes the proximate cause while paying the claim. If the property insured is burnt and the fire was preceded and brought into operation by an excepted peril, the legal position depends upon whether the peril was the Proximate cause. Before an insured can recover from the insurer for the loss he has sustained it is necessary to determine the cause of loss. If the loss is caused by the insured peril, the insurer is liable, otherwise not. The maxim is that ‘causa proxima non remote’ i,e, see the immediate cause and not the remote cause. If the immediate cause is an insured peril, the insurers are liable to make the payment under the policy, otherwise not. ‘Doctrine of proximate cause’ means that nearest cause and not the remote one is to be taken notice of, at the time of determining the liability of the insurer. This principal is most fundamental for deciding payment of compensation to the insured. Insurance is taken against risk of happening one or more events. The insurer pays compensation to insured only if the insured shows that the cause of loss was insured. lf loss is caused by one event then, it is easy to say whether it is insured or not. Compensation is paid if the cause is insured against. On the other hand, when loss is produced by one cause it is difficult to say which one of them produced the loss. The principle directs the parties to look at the most Proximate and not at the remote cause of loss. That means first pick up the proximate cause and then verify if it is included insurance.lf the two conditions are fulfilled compensation must be paid.
(v) Doctrine of subrogation: Another principle, which applies to fire insurance contracts is the principle of subrogation, i.e., the right of the insurance company to recover from the third party the amount paid under the policy. Thus, if the insured possesses any rights against a third party for recovery of his loss, the insurance company becomes, subrogated to these rights. For example, if damage is done to your property, protected by a fire insurance policy, the insurance company may collect from the party who set fire to the property, the amount of damage, which was paid to you by the process of subrogation. The doctrine of subrogation is the natural corollary of the principle of indemnity. The principle of subrogation is a supplement to the principle of indemnity and applies to all the contents of insurance except life and personal accident. The doctrine refers to the right of an insurer to stand in place of insured after the settlement of claim and to secure all the rights and remedies against the third party.
(vi) Warranties: Warranty is that by which the assured undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled or where by the affirms or negatives the existence of a particular state of facts. Warranties, mentioned in the policy, are called express Warranties. under an ordinary contract a warranty is a promise collateral to the main contract and any breach may merely give the right to claim damages. It does not go into the root of the contract. However in an insurance contract, any breach of a warranty entitles the aggrieved party to repudiate the contract either ab-initio or from the date of breach, according to the teams of the contract. A warranty May be
(i) Express warranty.
(ii) Implied warranty.
(vii) Contribution: Contribution is the right of an insurer who has paid a loss under the policy to recover a proportionate amount from the other insurers who are liable for the same loss. Thus, the contribution is the right of an insurer who has paid under a policy to call upon the other insurer to contribute equally or otherwise liable for the same loss. To illustrate we can take an example. Suppose ‘X’ has a fire policy who insures ‘A’, ‘B’ and ‘C’ for Rs. 20,000/-, Rs. 40,000/- and Rs. 60,000/- respectively insuring the same subject matter. If the fire loss is of Rs. 30,000/-.
The contribution of all the three companies will be as under:
(i) Insurance company ‘A’ will contribute = 20,000 × 30,000 / 1,20,000 = 5,000/-
(ii) Insurance company ‘B’ will contribute = 40,000 × 30,000 / 1,20,000 = 10,000/-
(iii) Insurance company ‘C’ will contribute = 60,000 × 30,000 / 1,20,000 = 15,000/-
Contribution is again a corollary to the principle of indemnity and therefore it does not apply to life or accident policies.
Following are the Need of Fire Insurance for Business Owners:
(i) Safeguard your assets: Fire insurance can cover the loss or damage caused by fire to your insured business property and its contents. This includes your office, factory, warehouse, shop, or any other business establishment. It also includes your business assets, such as furniture, fixtures, computers, machines, tools, stock, etc.
(ii) Compensate for the loss: It can also cover the loss of income or profit you may suffer due to fire affecting your business operations. This is also known as business interruption insurance or consequential loss insurance.It can show your customers, suppliers, investors, and other stakeholders that you are responsible and prepared for any fire emergency.
(iii) Enhance your reputation and credibility: Fire insurance can also enhance your reputation and credibility as a business owner. It can show your customers, suppliers, investors, and other stakeholders that you are responsible and prepared for any fire emergency.
11. What are the essential characteristics or principles of marine?
Ans: The essentials of the marine insurance contract are discussed as under:
(a) Features of general contract.
(b) Insurable interest.
(c) Utmost Good Faith.
(d) Indemnity.
(e) Subrogation.
(f) Warranties.
(g) Proximate cause
(h) Assignment.
(i) Return of premium.
(j) Non deviation of voyage.
(a) Features of general contract: It includes the proposal, its acceptance, the consideration and the issue of policy documents.
Proposal: Under a marine insurance contract broker plays an important role. He is well versed in marine insurance laws and practice. He prepares a slip on behalf of the ship owner and marchant. No standard proposal form is used in the marine insurance as used in the other forms of insurances. The slip works as proposal form.
Acceptance: The slip is presented by the broker to the Lloyds writer or any other insurer transacting the marine insurance. When the slip is initiated, the proposal is considered as accepted but the slip has got no legality and cannot be enforced as law until a policy is issued. However, the slip is an evidence of insurance and contacts the teams and conditions of a policy.
Consideration: The premium is the consideration and is determined on the assessment of risk. It is paid by the insured at the time of contract.
Issue of policy: The broker sends to his client the cover note with the terms and conditions of the insurance. Such cover note is only an insurance memorandum and has no value in enforcing the contract with the under writers. The policy is prepared, stamped, signed, and then issued to the assured. The policy is a legal evidence of contract.
(b) Insurable interest: for an insurance contract, one of the essentials is the presence of insurable interest. The insured must have an insurable interest in the subject matter. In other words he must have some recognized relationship with the subject matter. Where by the benefits by its Safety and suffers loss if the subject matter is lost, destroyed or damaged. Insurable interest under marine insurance is not necessarily to exist at the time of effecting the insurance but it must exist at the time of loss. However at the time of effecting the insurance, the insured must exist at the time of loss. However, at the time of effecting the insurance, the insured must have an expectation of acquiring the insurable interest. If he fails to acquire insurable Interest in due course, he is not entitled for indemnification. The subject matter of insurance charges hands from time to time. The insurable Interest should be present only at the time of loss. This makes a marine insurance policy freely assignable.
(c) Utmost Good Faith: The parties to the insurance contract must observe the duty of utmost good faith. They should not conceal any material fact, which may affect the under writer’s decision. The duty to observe utmost good faith lies greater on the part of the insured because he alone knows or ought to know about the risk proposed for insurance and the other party i.e. the insurer has largely to rely upon the information supplied to him. For this reason a proposal for insurance contract is called contract of ‘uberrimae fidei’.
(d) Indemnity: All insurance contracts are, strictly speaking, contracts of indemnity except life and personal accident. The object of this principle is to place the insured as far as possible in the same financial position as occupied by him before the happening of the event. The insured, is not allowed to make any profit as it would be against, the principle of indemnity. The contract of marine insurance is one of Indemnity but perfect indemnity is not possible due to large and varied nature of the marine voyage. The insurers agree to indemnify the assured in the matter and to the extent agreed.’
(e) Subrogation: The principle of subrogation is a supplement to the principle of Indemnity and applies to all the contract of insurance except life and personal accident. The doctrine refers to the right of an insurer to stand in place of insured after the settlement of claim and to secure all the rights and remedies against the third party insured can give up his right to claim from third party but in such a case, insured will be liable to repay the amount he forgoes to the insurer.
(f) Warranties: A warranty has been defined under section 35 of the marine Insurance Act as follows:
(i) A warranty by which the insured undertakes that some particular thing shall or shall not be done or that some conditions shall be fulfilled or where by he affirms or negatives the existence of a particular state of facts.
(ii) A warranty May be express or implied.
(iii) A warranty, therefore, is a condition which must be exactly complied which, whether it be material to the risk or not. If, it is not, so complied with, then, the insurer is discharged from liability as from the date of the breach of warranty.
(g) Proximate cause: Before an insured can recover from the insurer for the loss he has sustained it is necessary to determine the cause of loss. If the loss is caused by the insured peril, the insurer is liable, other wise not. The maxim is that ‘causa proxima non remota spectatur’ i.e. see the immediate cause and not the remote cause. If the immediate cause is an insured peril, the insurer is liable to make the payment under the policy otherwise not. Therefore, it is important to decide the cause of loss. Proximate cause operates to the benefit of both the insurer and the assured. The doctrine defines and limits the scope within which liability may attach to the underwriters.
(h) Assignment: The marine Insurance Act allows the marine policies to assign freely and there are rules in the Act to govern the assignment. Here it is necessary to differentiate between assignment of interest and assignment of the policy. Assignment of interest is the transfer of interest in the subject matter, which must be distinguished with the transfer of the beneficial rights under the policy i.e. assignment of the policy.
(i) Premium and Return of Premium in marine Insurance: It is the duty of the assured or his agent to pay the premium to the under writers. On receiving the premium, it is the duty of insurer to issue policy to the assured or his agent. An acknowledgement on the part of the under writer of having received the premium is exchange for which he grants the protection to the insured. The premium is the formal binding on the under writer who takes the loss/liability on his shoulders. The under water is not bound to issue policy unless he is given the premium, which is a consideration for a valid contract. According to section 54 of the Marine Insurance Act, 1963, ‘unless otherwise agreed, the duty of the assured or his agent to pay the premium and the duty of the insurer to issue the policy to the assured or his agent, are concurrent conditions and the insurer is not bound to issue the policy until payment of the premium.
(j) Non deviation of voyage: Deviation means removal from the normal route or given path. Ship should not deviate from normal route. If it deviates from normal route without any legal reason, the insurer is free from his responsibility. It would be immaterial that the ship returned to its original route before loss. To make insurer free from his liability, there should be actual deviation and not mere intention to deviation.
12. Why is selecting the right insurance plan necessary? Explain the different features or characteristics of the Insurance.
Ans: Selecting the right insurance plan is important to maximise its potential. There are a number of factors that can impact the effectiveness of insurance. Here are some of them:
(i) Personal Aspects: Every individual’s needs are unique. The kind of coverage you need can depend on your age, gender, occupation and lifestyle. For example, if your job requires you to work in accident-prone areas, it may be advised to buy a high sum assured and a longer policy term to ensure your family’s financial security in your absence.
(ii) Adequate Coverage: Make sure to analyse your financial needs and select a plan that offers adequate financial coverage. Insufficient coverage may help you save some money at the time of purchase but can lead to compromised financial security in an emergency.
(iii) Ability to Pay Premium: The plan’s premium is another essential aspect to consider when selecting the right insurance plan. You may have to pay the premium for years, depending on the policy term. Therefore, aim to strike a balance between adequate coverage, premiums and your monthly expenses.
(iv) Policy Duration: Life insurance policies are long-term plans and often last for many years. When choosing a life insurance policy, it is vital to consider various factors such as your age, the ages of your dependents, outstanding debts and future financial obligations.
The following are the features or characteristics of life Insurance:
(a) Insured to pay Premium periodically: The insured is under an obligation to pay periodically The amount of payment till the death of insured or expiry of the period of policy, whichever is earlier.
(b) It is not a contract of indemnity: The contact of life insurance is not a contract of Indemnity because the loss caused by the death cannot be calculated in money terms, nor money is a compensation for loss of one’s life.
(c) Presence of insurable interest: insurable interest must be present in the person insured at the time when the policy is taken in case of life insurance, which may or may not be present at the time of insured’s death.
(d) Family protection: Life insurance policy protects the families from the economic hardship after the death of the bread winner member of the family. Life Insurance is needed because when one ceases to earn money, the insurer provides certain sum of money to the insured as per various terms of policies. Thus the fundamental principle of life insurance is to save a person from uncertain future events such as premature death, old age etc.
(e) Investment of savings: The chief peculiarity of life insurance is that it combines the elements of protection and of investment. There is no other form of economic device, which involves both the elements of protection and investment as well. The life insurance policy holder is usually interested in protecting against risk of premature death as well as in saving and investing his income. Though the protection elements present in other types of insurance as well, the investment feature is totally absent in non life plans such as fire, marine accident, theft, burglary and credit insurance. In the case of life insurance, the insurance company promises to pay a certain sum either on the happening of death of the insured or his attaining a certain age whichever is earlier. In both the cases, the sum assured is bound to be recoverable. Thus life insurance possesses the elements of protection as well as investment. It is also considered to be the best alternative for savings.
(f) In covers other risks connected with human life: Life insurance covers certain other risks, which are connected with the human life in addition of the risk of death. For instance, in case of total and permanent disability and medical expenses thereafter, have now come under the purview of life insurance.
(g) It is a co-operative device: Life insurance is a co-operative device of distributing losses falling on an individual or his family over a large number of persons, each bearing a nominal expenditure and feeling secure against heavy losses.
(h) Large numbers must be insured: In order for the life insurance scheme to function successfully, it is essential that it is joined by a large number of persons exposed to the same risk. Although the co-operation of a small number of persons can also be called insurance, yet it will perform its function to a limited extent and the plan might prove to be unworkable. Therefore, from the practical point of view the number of insured should be large.
13. What are the fundamental principles of General insurance?
Or
Mention various elements of a general insurance contract.
Ans: The fundamental principles of a contract of insurance are enumerated below:
(i) Utmost Good Faith: A contract of insurance is a contract of “uberimae fidei” (i.e.On based on good faith). In contracts of insurance, the assured is under a moral duty to disclose accurately all material facts with perfect degree of accuracy and no such fact should be withheld or concealed.
(ii) Contract of Indemnity: A contract of insurance (except life, personal, accident and sickness insurance) is a contract of indemnity. This means that the assured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy.
(iii) Insurable Interest: Insurable interest means that the assured must be in a legally recognised relationship to what is insured so that he will suffer a direct financial loss on the happening of the insured. It is the legal right of a person to insure and is necessary to support every contract of insurance.
(iv) Cause Proxima: The insurer is liable only for those losses which directly or reasonably follow from the event insured against and not for remote consequences and remote causes.
(v) Subrogation: The principle of subrogation means the right of one person to stand in place of another. The doctrine of subrogation is a corollary to the Principle of indemnity and applies only to fire and marine insurances.
(vi) Warranties: A warranty is that by which the assured under-takes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled or whereby he affirms or negatives the existence of a particular state of facts.
(vii) Payment of premium: The policy holder must pay the premium according to the terms of the contract.
(viii) Commencement of Risk: The risk of insurer commences after the contract of insurance is entered into. The insurer receives the premium in a contract of insurance for running the risk.
(ix) Mitigation of loss: It is the duty of the policy holder to take steps for reducing the loss as much as possible in the event of some mishap to the insured property.
(x) Essential Requirements: A contract of insurance must fulfil all the essential requirements of a valid contract.
14. Difference between fire insurance and life insurance?
Ans:
| Basis | Fire insurance | Life insurance |
| Meaning | Fire insurance is a contract of insurance against the loss/damage by accidental fire or other occurrences customarily included under a fire policy. | Life Insurance can be defined as a contract between an insurance policy holder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period. |
| Risk | The policy delivers cover against any kind of damage caused due to a fire-related accident; however, it does not cover for damages or destruction caused to the property insured by own natural heating, fermentation, spontaneous combustion. | For life insurance companies, risk classes are used to determine how likely the insurance company is to have to pay out benefits on your behalf if you pass away. |
| Purpose | The purpose of fire insurance is to protect property owners from losses caused by fire-related incidents. | The purpose of life insurance is to provide financial security to the policyholder’s loved ones. |
| Time | The duration of fire insurance is usually one year. | The duration of life insurance usually ranges between 5-30 years or whole life. |
| Subject matter | The subject matter in fire insurance is physical property or asset. | The subject matter in life insurance is human life. |
| Insurable Interest | It means one has a stake or interest in the property insured against fire. One cannot claim any benefit from the insurance policy if they have no insurable interest. | Insurable interest refers to an investment that protects anything subject to a financial loss. A person or entity may have an insurable interest in an event, item, or, action when the loss or damage of the insured object or person can cause a financial loss. |
15. Why is Insurance Needed?
Ans: Here are some of the reasons why insurance could prove to be essential:
(i) Insurance plans will help you pay for medical emergencies, hospitalisation, contraction of any illnesses and treatment, and medical care required in the future.
(ii) The financial loss to the family due to the unfortunate death of the sole earner can be covered by insurance plans. The family can also repay any debts like home loans or other debts which the person insured may have incurred in his/her lifetime.
(iii) Insurance plans will help your family maintain their standard living in case you are not around in the future. This will help them cover the costs of running the household through the insurance lump sum payout. The insurance money will give your family some much-needed breathing space along with coverage for all expenditure in case of death/accident/medical emergency of the policyholder.
(iv) Insurance plans will help in protecting the future of your child in terms of his/her education. They will make sure that your children are financially secured while pursuing their dreams and ambitions without any compromises, even when you are not around.
(v) Many insurance plans come with savings and investment schemes along with regular coverage. These help in building wealth/savings for the future through regular investments. You pay premiums regularly and a portion of the same goes towards life coverage while the other portion goes towards either a savings plan or investment plan, whichever you choose based on your future goals and needs.
(vi) Insurance helps protect your home in the event of any unforeseen calamity or damage. Your home insurance plan will help you get coverage for damages to your home and pay for the cost of repairs or rebuilding, whichever is needed. If you have coverage for valuables and items inside the house, then you can purchase replacement items with the insurance money.
16. What are the reasons why having insurance is necessary?
Ans: Here are the main reasons why having insurance is necessary:
(a) Financially Security: No matter how much you are earning or how much you have saved; your financial position can be dented by an unexpected event in a moment. So, the best way to become financially secure is to cover yourself, your family, and your assets with insurance. You can buy or renew insurance online and receive a payout for financial support, in case there happens to be an unforeseen event.
(b) Transfer of Risk: The contract of insurance works on the ‘principle of transfer of financial risk from the insured to the insurer’. As an insured, you pay premiums to receive compensation from the insurer, in case of occurrence of an unforeseen event. So, having insurance reduces the financial burden on your shoulders.
(c) Complete Protection for you and Your Family: Family is the most important asset that you have and your family also depends on you for financial support. This is why it is important to make sure that you and your family are completely secure to face any emergency.
(d) No More Stress or Tension During Difficult Times: None of us can see the future or predetermine the future events. Any unforeseen tragedy can leave you physically, ment
ally, and financially strained. So, if you have insurance to take care of the outcomes of such tragedies such as illness, injury or permanent disability, even death-you save yourself and your family from tension and stress. With insurance in place, any financial stress will be taken care of, and you can focus on your recovery.
(e) Some Types of Insurances are Compulsory: Insurance is necessary because sometimes it is mandatory as per the law. An example of this is motor insurance. As per the motor Vehicle Act of 1988, it is compulsory to have at least a third-party motor insurance for every motor vehicle plying on road in India. Motor insurances come in really handy during claims. At IFFCO Tokio, we have improved it even further with our Quick Claim Settlement process which, as the name suggests, expedites the settlement of claims.
(f) Peace of Mind: Having insurance offers you Financial security and also peace of mind. No amount of money can replace your peace of mind so, when you have insurance you know that you are secured against any unforeseen events in life, and this gives you complete peace of mind.
The sum of all these reasons provides enough reason as to why insurance is necessary and with the convenience that you have to buy insurance online from a general insurance company like IFFCO Tokio to secure you, your family, and your assets, both Financial freedom, as well as peace of mind, are pretty achievable.
17. Why Insurance as a security tool?
Ans: Now a day’s social security is considered as a big measure to reduce poverty unemployment and disease. Social insurance is a technique of social security and includes all section of the society. Insurance is considered as a security tool for companies, organisations and individuals. Due to development, the joint family system is reduced to tiny family system where it consists of mother, father and children. If the earner of the family dies the family income also dies. The economic condition of the family is affected and unless some arrangements are available, the family is pushed to lower strata of society. The insurance comes in handy to restore the situation to some extent. In this sense, the insurance business is complementary to the government’s efforts in social management. Insurance which was evolved as an instrumental for social improvement is being now viewed as a social security tool by various stakeholders.
In socialist system, social security is the government’s responsibility. But in capitalistic system of society, provision of security is left to individuals. The society provides instruments and insurance is one of the instruments. In India the provision of social security was a responsibility on the State, as per the Schedule 7 of the Constitution of India. The laws passed by the State to serve the purpose included the use of insurance-compulsory or voluntary as a security tool. The Employees State Insurance was one such scheme, which took care of the expenses incurred due to sickness, disablement, maternity and death, for the benefit of industrial employees and their families. Insurers played an important role in the social security schemes sponsored by the GOI. The Insurance Act, 1938, made it mandatory for insurance companies to offer a percentage of business to the people in the rural sector. They had to offer insurance to workers in the unorganised sectors, economically backward classes of the society and other categories listed by the IRDA. All the insurance schemes operated on commercial basis are designed to provide security to the rural families.
A Tool for Social Security: Life insurance is one of the most effective tools of social security across the globe. In the absence of such a provision to the common people, the society will have no redressal for pitiful elderly masses, helpless widows, unprotected orphans; the factories will have to be scrapped after a fire; the houses will not be rebuilt after being struck by any calamity. With such events and more any economy cannot be stable leave alone the growth.
Our state, unlike the socialist or a developed capitalist society where states are responsible for the deprived and destitute, is ill-equipped to do so. Constitution of India has relevant clauses under the directive principles of the state policy. In article 41, it clearly dictates the state within its monetary and development capacity shall take effective measures to secure the elementary right of work, education, employment, health and any other underserved want of every citizen.
Nevertheless, the failure of states is evident to all, with only a few schemes floated like the one for socially disadvantaged. Providing equal rights and opportunities for all is easier said than done. In the absence of the brand winner of the family there is little that the government or other social agencies can do to look after the welfare of those left behind. The same is true even in the most economically advanced nations.
Thus in order to ensure that the people left behind continue to enjoy the same privileges in society as before and thus stay with the mainstream, life insurance is a probably the best and only social security tool against unforeseen eventualities. It not only creates security but also goes ahead to foster a respect for savings to be able to secure future of the entire family.
18. Explain the Role of Insurance Companies in Economic Development of India.
Ans: Indian insurance companies play the following roles in Economic development of our country.
(i) Saving and Insurance: Saving involves refraining from present consumption. The investment can take place only when there are savings. The relationship between. Saving, investment and growth of GDP can be explained as: G = S/K. Where G_+Rate of GDP growth, S–Saving Ratio and K–Capital output ratio.
Insurance companies lead to economic development by mobilising savings and investing them into productive activities. Indian insurance companies are able to mobilise long-term savings to support economic growth and also facilitate economic development by providing insurance cover to a large segment of our people as well as to business enterprise throughout India.
(ii) Provide safety and security: Insurance provide financial support and reduce uncertainties in business and human life. It provides safety and security against particular event. There is always a fear of sudden loss. Insurance provides a cover against any sudden loss. For example, in case of life insurance financial assistance is provided to the family of the insured on his death. In case of other insurance security is provided against the loss due to fire, marine, accidents etc.
(iii) Promotes Trade and Commerce: The increase in GDP is positively correlated to growth of trade and commerce in economy. Whether it is production of goods and services, domestic or international trade or venture capital projects, insurance dominates everywhere. Even banks demand insurance cover of assets while granting loans for purchase of assets. Thus insurance covers, promotes specialisation and flexibility in the economic system that play contributory role in healthy and smooth growth of trade and commerce.
(iv) Facilitates efficient capital allocation: Insurance provides cover to large number of firms, enterprises and businesses and also deploy their funds in number of investment projects. The vast pool of knowledge and expertise so gained enable them to distinguish between productive and high return projects. Therefore, they promote efficient and productive allocation of capital resources, which in turn lead to increased productivity and efficiency in the system.
(v) Encouraging Financial Stability and Reducing Anxiety: Insurer promotes financial stability in economy by insuring the risks and losses of individuals, firm and organisations. Because of uninsured large losses, firm may not be able to compensate for it leading to its insolvency which may cause loss of employment, revenue to supplier & Govt., loss of products to customer, etc. moreover, it relieves the tensions and anxiety of individuals by securing the loss of their lives and assets.
(vi) Reducing Burden on Govt. Exchequer: Insurance companies, particularly life insurers provide a variety of insurance products covering needs of children, women and aged etc under social security network and thereby reduce the burden on Govt. exchequer in providing these services. This Govt., saves expenditure on these items and amount can be utilised for more productive projects. To conclude, we can say that insurance companies play an important role in economic development of country.
(vii) Generates financial resources: Insurance generate funds by collecting premium. These funds are invested in government securities and stock. These funds are gainfully employed in industrial development of a country for generating more funds and utilised for the economic development of the country. Employment opportunities are increased by big investments leading to capital formation.
(viii) Promotes economic growth: Insurance generates significant impact on the economy by mobilising domestic savings. Insurance turn accumulated capital mto productive investments. Insurance enables to mitigate loss, financial stability and promotes trade and commerce activities those results into economic growth and development. Thus, insurance plays a crucial role in sustainable growth of an economy.
19. Discuss the challenges of the insurance industry.
Ans: Following are the challenges of the insurance industry:
(i) Cybersecurity Risks: In the digitized realm of insurance, cybersecurity is no longer an option but a necessity. As companies increasingly rely on digital data and processes, the threat of cyber attacks looms large. Breaches not only compromise sensitive customer data but also erode trust and can lead to substantial financial losses.
(ii) Consumer Expectations and Experience: Today’s consumers demand seamless, personalized experiences, and insurance providers are no exception. The digital age calls for insurers to embrace technology to meet these evolving needs. From mobile apps to AI-driven customer service, insurers must innovate to deliver customer-centric solutions that align with the digital lifestyles of modern consumers.
(iii) Regulatory Compliance: Insurance companies must conform to a complex and ever-changing regulatory landscape which can be challenging to navigate. The regulations are often implemented at national and state levels, making compliance a resource-intensive process.
(iv) Talent Attraction and Retention: As the insurance industry navigates its digital transformation, the need for skilled professionals has never been more critical. Attracting and retaining talent with the right digital skill set is essential for driving innovation and staying competitive.
(v) Evolving Regulatory Environment: The complex regulatory landscape in which insurance companies operate is continuously changing. Staying compliant with diverse and evolving regulations across different jurisdictions is a formidable task, requiring insurers to be agile and informed.
(vi) Disruptive Technologies and Insurtech: The rise of Insurtech startups, armed with AI, big data, and IoT, is reshaping the insurance landscape. These companies bring innovation and efficiency, challenging traditional insurers to evolve or risk obsolescence. Embracing these disruptive technologies is not just a matter of survival; it’s an opportunity to redefine the insurance experience.
(vii) Digital Disruption: The insurance industry is being disrupted by rapid technological advancements reshaping traditional business models and transforming customer expectations. The benefits of this digital revolution to the insurance industry are limitless, but insurance companies are also under pressure to provide their customers with a seamless and convenient digital experience.
20. What are the promotional strategies followed by life Insurance companies? Discuss them briefly.
Ans: The promotional strategy followed by life Insurance companies is basically divided into two stages:
(A) Selling Process I.
(B) Selling Process II.
(A) Selling Process I: This stage includes the following:
(i) Planned prospecting.
(ii) Analysis of human needs.
(iii) Classifications of prospects and methods of approach.
(i) Planned prospecting: Prospecting means finding suitable persons who are likely to assure their lives and who can be approached for this purpose. The success of a salesman or an agent depends upon his ability to find prospects.
Steps in prospecting:
(a) Getting the names of prospects.
(b) Obtaining information about the prospects.
(c) Getting introduction to the prospects.
(d) Selecting the better prospects.
(ii) Analysis of human needs: The life Insurance corporation of India has provided various types of policies to suit the needs of the person.
The needs of a person are divided into:
(a) Family needs.
(b) Old age needs.
(c) Readjustment needs.
(d) Special needs.
(e) Clean up needs.
(f) Business needs.
(g) Miscellaneous needs.
(iii) Classification of prospects and methods of Approach: when the agent has collected information of the prospects, the next step is to classify them and to Approach them accordingly.
Classification of prospects is made according to the requirement of insurance.
The ‘approach’ is a technique on which the success of an insurance agent depends. In approach method the following important points are taken into consideration.
(a) The time is analysed.
(b) Place is analysed.
(c) Method of approach is analysed.
(d) Curiosity Arouser is utilised.
(B) Selling Process II:
Selling Process II involves the following steps:
(i) Interview.
(ii) Canvassing and arguments.
(iii) Objections and their replies.
(i) Interview: The interview with the prospect is the most important part of the selling Process. The objective of the interview should not be the procuration of business only, but it should make the prospect feel that the real intention of the visit is to help the prospect.
The selling interview of insurance involves the following steps:
(a) The Approach.
(b) Uncovering the needs.
(c) Planned presentation.
(d) Motivation.
(e) Close.
(ii) Canvassing and Arguments: Every agent should prepare the argument carefully and think over the several ways of developing and introducing them.
The arguments are numerous, some of them are:
(a) Stock Arguments.
(b) Income Arguments.
(c) Investment Arguments.
(d) Salary Arguments.
(iii) Objection and their replies: The agent should be prepared to meet certain objections whenever they are raised. The agent should know the cause of buyer’s resistance. The Objections should be replied first before proceeding for getting the buyer’s signature and closing the interview. There are various types of Objections.
They are:
(a) Fancied, not real.
(b) Stronger than fancied but not quite real.
(c) The real objections.
21. Explain the procedure of taking a life Insurance policy.
Ans: Life Insurance corporation is having monopoly in the field of life insurance. Thus corporation was sat up on 1st September 1956. The following formalities and procedures are undertaken to get life insurance policy.
(i) Selection of type of life insurance policy: Having different element in different policies the policyholders are free to choose the best polices according to their requirements. It should be noted that no one policy is the best policy for all the policyholders due to variance in cost elements of investment and protection etc.
(ii) Filling up Insurance Form: Generally life insurance policies are taken through an authorised agent of the life Insurance corporation.The proposer is required to fill up the proposal form, which can be had from the agent of L.I.C free of charge. The form should be filled up very carefully so that no wrong information may be given. The proposal form contains the following details.
(a) Proposer’s name, Nationality, permanent address, Occupation, Nature of duties, permanent Residential Address. Name of the employer, length of service, Father’s name, etc.
(b) Terms of assurance, sum to be insured. Payment of premium-monthly or quarterly or half yearly or annually, amount of premium, place and country of birth, date of birt, proof of age of proposes.
(c) Name of Nominee, age, relationship with insured. Full permanent and current address height and weight, history of parents, sisters, brothers, details of previous policy, if any.
(d) Particulars about hereditary disease such a cancer, leprosy, asthma, tuberculosis, diabetes, epilepsy, gout etc.
(e) when the applicant is female adult, the other details are furnished i, e information regarding pregnancy, maternity and disturbances indicative of trouble with female generative organs. Apart from that, female proposer has to fill the following details educational qualification, Average monthly income, source of Income and marital status, husband’s name, his income, occupation and details about his own insurance.
(f) At the end, the proposer has to make a declaration that the statement given in the proposals are correct and no information is concealed. The said proposal is the basis of insurance contract, which is submitted to the corporation.’
(iii) Medical Examination: After completing the proposal form the proposer has to undergo a medical examination through one of the approved medical doctors on points regarding his health, height, weight, chest, tongue, eye and throat, condition of chest, heart, urinary system, nerve system, etc. the medical report is directly submitted to the insurance company for consideration. The insurance company is at Liberty to either accept or reject the proposal based on the doctor’s report.The insurance premium will be higher if condition of health is not good.
(iv) Agent’s confidential report: After the medical report, the agent’s confidential report is submitted to the company.If contains details relating to the personal history of insured. The purpose of the report is to convince the life Insurance corporation regarding the object of insurance, financial position of the insured and again his health conditions.
(v) Acceptance of the proposal form: After getting medical report and confidential report of agent, the insurance company after studying those reports can accept or reject the proposal. The first premium notice is sent along with the letter of motivation regarding the acceptance of the proposal. This makes the insurance contract complete.
(vi) Proof of age: The proposer is required to submit the proof of his age which may be a copy of school certificate or horoscope, certificate of baptism, certificate from municipality or municipal corporation, etc, for verification of the date of birth as mentioned in the application form.
(vii) Payment of premium: The premium is a consideration of insurance contract and is regularly paid to the insurance corporation agreed in different ways. Normally, one month period of grace on annual premium and 15 days in case of monthly premium is allowed for the payment of premium beyond the due date.
(viii) Commencement of risk: After the payment of first premium the risk commences and the proposer becomes insured. The insurance company is liable to pay the full amount of insurance in the event of premature death. The premium must be paid within the due date or within the days of grace otherwise, the corporation is not liable for any payment.
(ix) Issue of policy: Having completed all the required formalities, the insurance company prepares the life insurance policy and sends it to the insured. The back of the policy contains all the details of the policy such as terms and conditions. If has all the details of the proposal i.e. name, address, sum assured, mode of premium, maturity date and amount, etc. The policy bears the seal of the corporation and the signature of the competent authority.
22. Distinguish between Marine insurance and general insurance.
Ans:
| Basis | Marine Insurance | General Insurance |
| Meaning | Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the final destination. | General insurance is an agreement between a policyholder and insurer wherein the insurance company protects your valuable assets from fire, theft, burglary, or any other unfortunate accident. Often, general insurance is confused with life insurance. |
| Purpose | The primary purpose of marine insurance is to provide financial compensation (indemnity) to the insured in the event of a covered loss or damage. | General insurance is an agreement between a policyholder and insurer wherein the insurance company protects your valuable assets from fire, theft, burglary, or any other unfortunate accident. |
| Policy value | A valued marine policy is a type of insurance coverage that places a specific value on marine property prior to a claim being made. | The policy value of general insurance is influenced by the value of the asset. |
| Premium | The premium for Marine Cargo Insurance is determined based on factors such as the value of the goods, the nature of the cargo, the chosen route, the claim history, the fitness of the cargo, and the insurer’s assessment. | The insurance premium amount is influenced by multiple factors and varies from one payee to another. |
| Insurable interest | The Marine Insurance Act, 1963 defines insurable interest as “the assured’s lawful and bona fide interest in the subject matter of a marine insurance policy”. | A person or entity may have an insurable interest in an event, item, or, action when the loss or damage of the insured object or person can cause a financial loss. |
