Basics of Insurance

Definition
Types & Classification
Concept and how it works
Principles of Insurance

Defnition of Insurance
Insurance is a contract between the insurer and the insured. In return for a consideration
(Premium) the Insurer promises the Insurer to pay the sum assured on happening of the
specific event (Risk Insured).

Insurance is a transfer of risk.

The Insured transfers the risk to the Insurer and in return the pays premium.

Types & Classification of Insurance

Insurance

Life
Insurance

Traditional

Term Plan

Fixed Term

Endowment
Plan

Decreasing
Term

Money Back
Plan

Whole Life
Plan

Pension Plan

Saving's Plan

ULIP's

Fire

Child Plan

Pension Plan

Non Life

Re-Insurance

Marine

Misc

Types & Classification of Insurance

1. Life Insurance
a. Traditional
i. Term Plan
1. Fixed Term
2. Decreasing Term (In General Insurance)
ii. Endowment Plan
iii. Money Back Plan
iv. Whole Life Plan
v. Pension Plan
b. ULIPs/ Variable Life Insurance
i. Savings Plan
ii. Child Plan
iii. Pension Plan
2. Non Life
a. Fire
b. Marine
c. Miscellaneous
i. Motor
ii. Property
iii. Health
iv. Travel
v. Other Liabilities i.e. Theft etc.
3. Re- Insurance
Insurance plans are also classified as Participating and Non-Participating policies
Participating policies/With Profit/Par Policies are ones where the policyholder participates in
the profit generated. Eg. ULIPs
Non-Participating/ Without Profit/Non Par policies are ones where the policyholder does not
get a share of the surplus or bonus. Eg. Term Plans
Concept of Insurance
Insurance is the pooling of resources for the benefit of the individual facing an uncertain event.

The insured benefits since his risk is transferred

The Insurer benefits since they workout the probability of death/occurrence of the event
insured against (called Underwriting)
o This probability of death is called as Mortality in Life Insurance

Probability(Mortality Rate)

Number of Favorable Outcomes (Deaths/Specific Event)

= _________________________________________________
Total number of Outcomes (Total number of Insured)

Larger the denominator lesser will be the probability. Therefore insurance works on the
Law of large numbers.

Principles of Insurance

1. Insurable Interest
2. Utmost Good Faith
3. Indemnity

1. Insurable Interest

Insurable Interest is the financial or pecuniary interest the insurer has on the subject or the object
to be insured.
An individual needs to have an insurable interest in the subject or the object to be insured.
Insurable Interest is deemed to exist in
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.

Own Life A person has unlimited insurable interest in his/her own life
Spouse A husband has insurable interest in his wife and vice versa
Children-Parents can insurance for children when children are dependents and children
can take insurance for their parents when parents are dependent upon them
Assets A person has insurable interest in the assets they own
Creditor Life of debtor to the extent of lent money
Surety- Principal Debtor & Co-Surety to the extent of debt
Employee- Employer and vice versa
Company- Lives of Key people of company ( termed as key man insurance)
Partners- Business partners have insurable interest in lives of each other

In Life Insurance Insurable Interest needs to exist at the inception of policy

In General Insurance - Insurable Interest needs to exist both at the inception of policy and
making a claim
In Marine Insurance- Insurable Interest needs to exist at the time of making a claim

2. Utmost Good Faith

Utmost Good Faith is the positive duty to voluntarily disclose all the material facts related to the
risk being proposed
Material Facts refers to all relevant information essential for underwriting the risk to be
covered

Section 45 ( Indisputability Clause) :

A policy cannot be called into question after two years from commencement.
The onus of proving the material facts to be untrue lies with the insurer after two years.
If the material facts are found to be untrue, the policy is declared null and void ab initio.
3. Indemnity (Applies only to General Insurance)
Indemnity refers to placing the insured in the same financial position after the loss as they
were before the occurrence of the loss
It makes sure that insurance is not used to make profit and the insurer is compensated
only to the extent of loss
It does not apply to Life Insurance wherein the insured is compensated the sum assured.
Since the financial value of an individual cannot be measured.