unit iii boirm

7/24/2019 Unit III Boirm

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UNIT IIIINTRODUCTION

TOINSURANCE


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We live in a world of uncertainty and facerisks in our everyday life. These risks areunpredictable. If we can anticipate and

predict them, we can prepare for them.

Insurance is the best risk-transfer mechanismand is a process by which the losses of a few,

who are unfortunate to suer such losses, areshared amongst those exposed to similaruncertain events situations.

INSURANCE


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Thus, Insurance is a contract betweenthe insurance company (insurer) and the

policyholder (insured). In return for aconsideration (the premium), the

insurance company promises to pay aspecied amount to the insured on thehappening of a specic event.

It is nothing but a risk transfer mechanismwherein the person taking out insurancetransfers their risk to the insurance companyin return for a payment !known as the

premium".

INSURANCE


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Insurance has been known to exist in someform or other since #$$$ %.&.

'riental life Insurance &o. (td. in )*)* + in&alcutta !nglish &o."

Tritan Insurance company in )*$ + in&alcutta

The Insurance business was regulatedthrough the Insurance ct, )/#*.

HISTORY OF INSURANCE


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In the year )/0, (ife Insurance %usiness wasnationali1ed and (ife Insurance &orporation ofIndia !(I&" was formed on )st 2eptember)/0.

In )/34 with the passing of the 5eneralInsurance %usiness !6ationali1ation" ct,general insurance business was nationali1ed

with eect from )st 7anuary, )/3#. xisting)$3 companies were amalgamated andgrouped into 8ve companies vi1., 6ationalInsurance &ompany, 6ew India ssurance

&ompany, 'riental Insurance &ompany,

HISTORY OF INSURANCE


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The break-up of the :oint family system andemergence of the nuclear family in themodern era, coupled with the stress of daily

life has made it necessary to evolvealternative systems for security.

ssets are likely to be destroyed or made non+ functional before the expected life time.

There is a possibility of loss or damage.;ossibility implies uncertainty.

It provides safety and security.

NEED AND IMORTANCE OFINSURANCE


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Insurance encourages savings

;romotes economic growth


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Elements of contract: greement - 'er and cceptance

&onsideration

Insured + premium payment and ful8llment of

policy conditions

Insurer + promise to do certain things asspeci8ed in the contract !insurance policy"

(egally competent parties (egal ;urpose

(egal =orm- &ontract may be oral or writtenbut accepted by regulator before being

marketed.

INSURANCE AS A CONTRACT


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2. Principle of Insurable interest:9nder this principle of insurance, the insuredmust have interest in the sub:ect matter ofthe insurance. bsence of this makes the

contract null and void.

Insurable interest is where you have a validreason to insure and stand to suer a direct8nancial loss if the event insured againstoccurs. Insurable interest exists when aninsured derives a 8nancial or other bene8tfrom the continuous existence of an insuredob:ect. =or example, a person has an

insurable interest in their own car but not in

PRINCIPLES OF INSURANCE


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3. Principle of indemnity:

Indemnity means security or compensationagainst loss or damage. The principle ofindemnity is such principle of insurancestating that an insured may not be

compensated by the insurance company in anamount exceeding the insured>s economicloss.



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3. Principle of indemnity:

In any type of insurance the insured would becompensated with the amount e?uivalent to

the actual loss and not the amount exceedingthe loss. This is a regulatory principle. Thisprinciple is observed more strictly in propertyinsurance than in life insurance.

The purpose of this principle is to set back theinsured to the same 8nancial position thatexisted before the loss or damage occurred.



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4. Principle of Contribution:n insured party may have policies with twoor more insurers covering the same risk,although not necessarily with e?ual degrees

of liability. Therefore, in the event of a claim,all of the insurers should pay an e?uitableproportion of the claim payment.

&ontribution is the right of an insurer to call

upon the other insurers to share the costs ofsuch a claim payment. The fundamental pointis that, if an insurer has paid a claim in full, itcan recoup a proportion of the costs from the

other insurers of the risk.



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5. Principle of ubrogation:

The principle of subrogation enables theinsured to claim the amount from the thirdparty responsible for the loss. It allows theinsurer to pursue legal methods to recoverthe amount of loss, =or example, if you getin:ured in a road accident, due to recklessdriving of a third party, the insurancecompany will compensate your loss and willalso sue the third party to recover the moneypaid as claim.



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!. Principle of mitigation of loss:ccording to this principle, the insured mustalways try his level best to reduce the loss ofhis insured property, in case of happening of

uncertain events.

The insured must not neglect and behave

irresponsible during such events :ust becausethe property is insured.



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". Principle of causa pro#ima:

It literally means the @nearest cause> or @directcause>. This principle is applicable when theloss is the result of two or more causes. Theproximate cause meansA the most dominantand most eective cause of loss isconsidered. This principle is applicable whenthere are series of causes of damage or loss.



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CHARACTERISTICS OFINSURANCE CONTRACTS

1. Personal Contracts Insurance protects insured, not the

property or liability sub:ect to loss.

ssignment provision

In property insurance, if ownership of aproperty changes, insurance contracts!policies" cannot be transferred toanother party !buyer" without the

insurer>s written consent. In life insurance, the bene8ciary or

ownership of policy may be freelyreassigned.


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2. $leatory Contracts contract whose value to either or both of

the parties depends on chance or futureevents, or where the monetary values ofthe partiesB performance are une?ual.The insurerBs obligation to pay a loss

depends on uncertain events ;remium paid by Insured C &laim paid by

Insurer



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3. Contracts of adhesion Insurance contracts are drafted by an

insurer and an insured must accept orre:ect all the terms and conditions.

Insured gets the bene8t of doubt. &ourts tend to interpret an ambiguous

term in an insurance policy in favor of aninsured.

&ontracts may be altered by the addition ofriders or endorsements Dider or endorsement + a document that

amends or changes the original policy.



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4. Conditional contracts

n insurer>s obligation to pay a claimdepends on whether the insured or thebene8ciary has complied with all policyconditions.

The insurer may not pay a claim if one ormore of policy conditions are not complied.



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5. %nilateral contracts

'nly one party makes a legally enforceablepromise.

Insured are not legally forced to paypremium or renew the policy.



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TYPES OF INSURANCE


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&he distinction bet'een life and generalinsurance business is that( in lifeinsurance the claim is )#ed and certain(but in the case of general insurance (

the claim is uncertain.

&he liabilities of life insurancecompanies are long term liabilities andhence they are big in*estors in longgestation infrastructure pro+ects etc.

TYPES OF INSURANCE


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,ife insurance companies co*er ris-sthat relate to human li*es. &hey oerdierent bene)ts under dierent typesof products and co*er the ris- of early

death( as 'ell as the ris- of li*ing intoold age.

,ife Insurance is a contract pro*iding forpayment of a sum of money to theperson assured or( follo'ing him to theperson entitled to recei*e the same( onthe happening of a certain e*ent.

LIFE INSURANCE


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LIFE INSURANCE


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In this plan the ,ife insurance companypromises to pay a speci)ed amount 0suminsured if the insured dies during the

term of the plan. If the life insuredsur*i*es the entire duration of the planthen they 'ill not be entitled toanything( meaning that there is

$&%I&6 7EE8I& 'ith such policies.

TERM INSURANCE PLANS


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9E6 PI&: &erm insurance plans oer only death

co*er.

&hey are the simplest form of insuranceplans oered by insurance companies.

&erm insurance plans are the cheapestinsurance plans a*ailable in the mar-et.

ormally the term starts from 5 yearsand runs to 1( 15( 2( 25( 3 years orany other term chosen by the insuredand agreed by the insurer.



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9E6 PI&:

Protection against liabilities: to co*erlarger liabilities li-e home loans or carloans( term insurance co*er is the bestsolution.

Insurance companies( under some termplans( allo' the life insured to increase ordecrease the death co*er during the term

of the plan. 8or most term plans the insurancecompany speci)es the minimum andma#imum sums insured.

ost insurance companies specify the



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eturn of premium 0P plan: 2ome insurance companies also oer variants

of term insurance plans in the form of returnof premium plans. If the life insured dies

during the term of the plan, the insurancecompany pays the speci8ed amount !suminsured" to the nomineebene8ciary.

If the life insured survives the entire policy

tenure then on maturity the insurancecompany returns part of the premium, or theentire premium, to the life insured accordingto the terms of the policy.



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eturn of premium 0P plan:

In another variant of term insurance plans,some companies also pay some interest along

with the premium on the maturity of the planif the life insured survives until maturity.



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$ pure endo'ment plan is the oppositeof a term insurance plan. In this plan thelife insurance company promises to paythe life insured a speci)ed amount 0suminsured only if they sur*i*e the term ofthe plan. If the life insured dies duringthe tenure of the plan then they 'ill notbe entitled to anything.

o in short( this plan oers onlymaturity bene)t in the e*ent of the life

insured sur*i*ing the entire tenure of

P%E E;


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$n endo'ment insurance plan isbasically a combination of a terminsurance plan and a pure endo'mentplan. It oers death co*er if the lifeinsured dies during the term of thepolicy or sur*i*al bene)t if the life

insured sur*i*es until the maturity ofthe policy.

E;


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9E6 PI&:

Endo'ment insurance plans pay aspeci)ed amount on maturity of the plan

if the life insured sur*i*es the entireterm of the plan.

;eath co*er: &hese plans also ha*e adeath co*er element. If the life insured

dies before the maturity of the plan thenthe death co*er bene)t is paid to thenominee=bene)ciary.

a*ings element: these plans( apart

from the death co*er( also ha*e a

E;


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9E6 PI&:

>oal?based in*estment: these plans canalso be bought for accumulating money

for speci)c plans li-e a child@s highereducation or marriage etc.

ome insurance companies also allo'partial 'ithdra'al or loans against these

policies. &his plan also comes in dierent

*ariants. ome plans ha*e a higherdeath co*er than the maturity bene)t

and *ice *ersa.

E;


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$ term insurance plan 'ith anunspeci)ed period is called a 'hole lifeplan. $s the name of the plan speci)es(this plan co*ers the indi*idual

throughout their life.

n the death of the life insured( thenominee=bene)ciary is paid the sum

insured along 'ith the bonusesaccumulated up until that point in time.;uring the indi*idual@s lifetime they canma-e partial 'ithdra'als to meet

emergency reAuirements. $n indi*idual


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$n annuity is a series of regularpayments from an annuity pro*ider0insurance company to an indi*idual0called the annuitant in return for a

lump sum 0purchase price orinstallment premiums for a speci)ednumber of years.

$n annuity is the re*erse of a lifeinsurance policy. In life insurance theinsurance company ta-es on the ris-(but 'ith an annuity the annuitant ta-es

on the ris- that they 'on@t die in a *ery

PEI $%I&6 P,$


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Child plans:

&hild insurance plans help parents to save for theirchildren>s future 8nancial needs such as education,marriage etc.

oney?bac- policies:

In money-back policies @partial survival bene8ts>are paid to the policyholder during the term of thepolicy at speci8c intervals.

alary sa*ing schemes 0:

In these schemes the insurance company has anarrangement with the employer, whereby theemployer deducts the premium from the

employee>s salary and passes it on to theinsurance com an ever month.

$I> P,$


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%nit?lin-ed Insurance plans carry ahigher ris- than 'ith?pro)t policies andcontain fe'er guarantees. Bo'e*er( theyare much more De#ible. %nit?lin-ed

policies are suited to people prepared tounderta-e some in*estment ris- toobtain the bene)ts of De#ibility. eturnsare sub+ect to mo*ements in the capital

mar-ets 'here in*estments such aseAuities 0shares are traded.

%,IP


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Insurance other than ,ife Insurance@falls under the category of >eneralInsurance. >eneral Insurance comprisesof insurance of property against )re(

burglary etc( personal insurance such as$ccident and Bealth Insurance( andliability insurance 'hich co*ers legalliabilities.

ost general insurance co*ers areannual contracts. Bo'e*er( there arefe' products that are long?term.

>EE$, I%$CE


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uitable general Insurance co*ers arenecessary for e*ery family. It isimportant to protect one@s property('hich one might ha*e acAuired from

one@s hard earned income. $ loss ordamage to one@s property can lea*e oneshattered.

Industries also need to protectthemsel*es by obtaining insuranceco*ers to protect their building(machinery( stoc-s etc. &hey need toco*er their liabilities as 'ell.

>EE$, I%$CE


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&he amount you insure for is called thesum assured. ormally a policy should

co*er the *alue of the asset F either themar-et *alue 'hile insuring( or the costof replacing the asset should it be lostor destroyed. &he premium 'ill dependon the sum assured.

Bo' much should I insure forG


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GENERAL INSURANCE


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Insurance that is used to co*er damageto a property caused by )re. 8ireinsurance is a specialiHed form ofinsurance beyond property insurance(

and is designed to co*er the cost ofreplacement( reconstruction or repairbeyond 'hat is co*ered by the propertyinsurance policy.

8IE I%$CE


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SCOPE$ll mo*eable= immo*eable properties of the

proposer on land 0e#cluding those in transitbroadly categorised as follo's :

1. 7uilding 0including plinth and foundations( ifreAuired


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SCOPE3. toc-s:

? a' aterial

? 8inished >oods

? In process

? In trade belonging to


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arine insurance co*ers the loss ordamage of ships( cargo( terminals( andany transport or cargo by 'hich

property is transferred( acAuired( orheld bet'een the points of origin and)nal destination.

$IE I%$CE

SCO


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SCOPE

>oods in &ransit:

? Inland &ransit

? Import? E#port


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$ motor insurance policy is a mandatorypolicy issued by an insurance companyas part of pre*ention of public liability to

protect the general public from anyaccident that might ta-e place on theroad. &he la' mandates that e*eryo'ner of a motor *ehicle must ha*e one

motor insurance policy.

& I%$CE

C


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$ policy that pro*ides )nancialreimbursement to the o'ner or renter ofa structure and its contents( in the e*ent

of damage or theft. Propertyinsurance can includehomeo'ners insurance(renters insurance( Dood insurance and

earthAua-e insurance.

PPE&6 I%$CE

,I$7I,I&6 I%$CE


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,iability insurance is *ery important forthose 'ho may be held legally liable forthe in+uries of others( especially medical

practitioners and business o'ners. $product manufacturer may purchaseproduct liability insurance to co*er themif a product is faulty and causes damage

to the purchasers or any other thirdparty. 7usiness o'ners may purchaseliability insurance that co*ers them if anemployee is in+ured during business

operations.

,I$7I,I&6 I%$CE

BE$,&B I%$CE


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$ type of insurance co*erage that paysfor medical and surgical e#penses thatare incurred by the insured. Bealth

insurance can either reimburse theinsured for e#penses incurred fromillness or in+ury or pay the care pro*iderdirectly. Bealth insurance is often

included in employer bene)t pac-agesas a means of enticing Aualityemployees.

BE$,&B I%$CE

&$E, I%$CE


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$n insurance product designed to co*erthe costs and reduce the ris- associated'ith une#pected e*ents during domestic

or international tra*el. &ra*el insuranceusually co*ers the insured in t'o maincategories: costs associated 'ithmedical e#penses and trip cancellations.

any online companies selling airplanetic-ets or tra*el pac-ages allo'consumers to purchase tra*el insuranceas an added ser*ice.

&$E, I%$CE

ROLEOFAGENTSANDBROKERS


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$gents and bro-ers both sell and manageinsurance for their customers. $gents arethe authoriHed representati*es of an

insurance company or companies( 'hilebro-ers are the authoriHedrepresentati*es of people loo-ing forinsurance.

ROLE OF AGENTS AND BROKERS


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END

unit iii boirm

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