.

Learning Outcome
After this presentation you will be familiar with:
1. The concept of insurance
2. Types of insurance
3. Principles of insurance contract
4. Purpose of insurance
5. Need of insurance
6. How insurance works
7. Insurance as social security service
8. Govt’s legislation to protect rights & provide benefits to common man
9. Role of insurance in economic development
10. Meaning of life policy
11. Insurance premium
12. Annuity
13. Re-insurance
14. Surrender value
15. Claim
16. Bonus
17. Insurance formats
 Introduction
“Insurance is a social device which combines the risks of
individuals into a group, using funds contributed by
members of the group to pay for losses.”

The essence of the Insurance scheme is that it is a

1) Social science
2) Accumulation of funds
3) It involves a group of risks
4) Transfer of risk to the whole group
 Background
 Insurance as security is need of all human beings.
 No animal/plant/mtns/oceans want any security, like man
does.
 Man is afraid of uncertainty, death and in search of security &
certainty.
 In early history man lived in-groups and communities to be
secure. At the earlier stage, whenever an earning member
would die due to disease or death, the other members of the
social group (or family or clan) would contribute to bail the
survivors in the family out of financial difficulties. This
contribution was in the shape of food- clothing and shelter.
 Even today we do the same.
 Later, commercialization of the same.
 Thus the concept of Insurance grew.
 Types of Insurance

1. Life insurance [life of human beings]

2. General insurance [other than life]
- Fire insurance
- Marine insurance
- Miscellaneous insurance
 Principles of insurance contract
1. Utmost faith in goods - refers to both the insurer and insured must be clear
on the terms and conditions within the contract.
2. Insurable interest – having interest in benefits of the policy.
3. Indemnity - refers to replacing something which has been lost [not
possible with life insurance but with non life].
4. Contribution – more than one insurance policy can be taken up.
5. Subrogation - refers to the insurance co. replacing the part of the
automobile which has been damaged. No benefit from the sale replaced
part to the insured, it will be for the Insurance co.
6. Mitigation - refers to minimizing the risk from your side [wearing helmet
while riding bike].
7. Causa – Proxima - refers to the nearest possible cause. Insurance
companies don’t really look into the complete details of what may have
happened. For a car accident, the policy would cover just the car accident
and would not look into details why the accident happened
[pothole/driver drunk].
 Purpose of insurance
 Every H/being has fear in his mind for himself and dependents.
 The fear whether he will be able to meet the basic needs of the
life i.e. Food, Clothing and Housing.
 The principal source of income of an individual comes from the
compensation for work performed by him.
 If this source of income gets cut off then: - Family will make
social and economic adjustments like:
i. Wife may take employment at the cost of home making
responsibilities
ii. Children may have to go for work at the cost of education.
iii. Family members might have to accept charity from relatives,
friends etc. at the cost of their independence and self-respect.
iv. Family standard of living might have to be reduced to a level
below the essentials for health and happiness.
 Need of insurance
1. To provide Security and Safety: against premature death and payment
in old age for comfortable life. In general Insurance, the property can be
insured against any contingency i.e. fire, earthquake etc.
2. To provide Peace of Mind - The uncertainty due to fire, accident,
death, illness, disability in the human life, is beyond human control.
3. To Eliminate Dependency - The Insurance is the only way to assist
and provide them adequately at the time of sufferings.
4. To Encourage Savings - provides systematic saving because once the
policy is taken, premium is to be regularly paid otherwise be forfeited.
5. To fulfill the needs of a person a) Family needs b) Old age needs c)
Re-adjustment needs d) Special needs: Education, Marriage, health e)
The clean up needs: After death, ritual ceremonies, payment of wealth
tax and income taxes.
6. To reduce business losses.
7. Welfare of employee through group insurance
8. Enhances loan limit
 How insurance works
 Theory of probability: It says an event may happen. Say 10 % in a
year. For example, in a particular city having a population of 1 lakh
on an average-200 people die in accident, 800 people get injured
and disabled, another 2000 die natural death, & 7000 die of
disease. This data as per statistic is certain. Then what is
uncertain? Uncertainty is as to who will die or get disabled during
day to day high risk prone fast life.

 All 1 lakh people will fear accident, possibility of injury or death

and its consequences to varying degree as per their age, behaviour,
nature of work, environment hazards and many other factors.

 This method of sharing losses of a few by many is the basis or

core philosophy of insurance. Insurance companies started from
individual effort i.e. an individual or group of individuals pooled
funds in a partnership or company and started offering a definite
payment (called claim) in every case of death or disablement of the
participating individuals, against a small amount received (called
premium)
 ……..
Suppose in a year, Total deaths feared – 200; Total disabilities -800; and Total
Persons Who wanted to insure – 1 lakh.
Entitled for claim and agreed to
Death payment, say = Rs.1 lakh [claim]
Disability payment, say = Rs.50,000/-
Death claims amount for the year = Rs. 2,00,00,000/- (200 X 1 lakh) – (a)
Disability amount for the year = Rs. 4,00,00,000/- (800 X 50,000) – (b)
Total outgo (expected) (a + b) = Rs. 6,00,00,000/- (6 crores)
Therefore, minimum contribution which 1 lakh persons should have made to
meet the claims 6 crores / 1 Lakh = Rs. 600 per year. Thus with a small
amount of Rs. 600/- each 1 lakh people feel assured for payment of Rs. 1 lakh
each in case of death, and Rs. 50,000/- in case of disablement.
And if that individual had to provide for himself, by himself then the entire
Rs.1 lakh or Rs.50,000/- would have to be arranged by the unfortunate
person himself. Thus, losses are spread in the insurance system.
 Insurance as a social security tool
1. United Nations Declaration of Human Rights 1948 provides: Every
one has a right to adequate standard of living for health and well
being of himself and his family.
2. Under a socialistic system the responsibility of full security would
be placed upon the state to find resources for providing social
security.
3. In India, Article 41 of our Constitution requires the State (within
limits of its economic capacity and development) to make effective
provision for securing the right to work, to education and to
provide public assistance in case of unemployment, old age,
sickness and disablement.
4. Part of the obligations under Article 41 are met by the State through
the mechanism of Life Insurance.
5. Where breadwinner of family dies, family’s income stops to that
extent, affecting the economic condition. Life Insurance provides
such alternate arrangement.
6. Life insurance helps in restoration of the adverse economic
condition so caused.
 GOI’s legislations to protect rights and provide benefits to common man as part of SSS

Workman Compensation Act 1923: This perhaps was the earliest act to be
enacted for the benefits of the workers. By passing this act the liability of
employer was fixed and he is now required by law to pay compensation to
victims of accidents while on duty.

Employee State Insurance Act 1948: The purpose behind this legislation was
to provide medical aid to workers and their families working in industries
located in certain notified areas. Under this part of employee’s salary and
some part is contributed by the Employer is deposited with the Employee
State Insurance corp.

With the funds thus collected and with more contributions from the state and
Central Govt., Dispensaries and Hospitals have been set up all over the
country where the worker members and their families are provided health
care free of cost. Under this scheme regular periodic payment are made to
workers if they are unable to attend duty due to illness and there is provision
for payment of pension in the case of permanent partial disability or death.
 ...........

Motor Vehicle Act 1988:

 The Motor Vehicle Act was amended in 1988 to make
Third Party Liability Insurance compulsory thus no
uninsured vehicle is allowed to ply the roads or in any
public place in India.
 The need of this enactment was felt due to the
growing number of vehicles and the increasing
number of accidents causing injury and death of the
people involved in the accident and not being able to
get relief from the owner/ driver of the vehicle
because of long protracted legal battle involved,
which many victims could not afford.
 Role of insurance in economic development
 Contributing to the economy by preserving human life values and
assets and protecting loss.
 For economic growth, the Govt. needs capital to finance
infrastructure which requires huge investment. As the life Insurance
contracts are long term contracts they can be principal source of capital
for the economy.
 Life insurance plays a major role in mobilization of pubic savings.
 Savings out of life insurance fund are utilized in investments for
growth. (infrastructure bonds, Housing, Railway, equity market etc.)
 Looking to non-life side business, industry and trade would be
seriously handicapped in the absence of insurance cover relating to
losses due to fire, storm, natural calamities, act of God etc.
 Wide-spread of Insurance brings in indirectly the following
advantages – better living standards, higher productivity, improved
law and order, higher GDP.
 Meaning of life insurance
For getting one’s life insured, a predetermined premium
[amount] is given to the Insurance company when a life policy
say for 2o years is taken.
Maturity amount on the policy will be given on any of the
following events whichever is earlier.
1. Death of policy holder [amount will be given to the nominee]
2. Expiry of tenure of the policy [amount will be given to the
policy holder]
Insurance Premium:
Amount paid by the policy holder every year [half
yearly/quarterly etc] to the Insurer [Insurance company] to
keep his policy alive is called insurance premium.
Non payment attracts discontinuance in which case, the
policy holder is entitled to receive surrender value if any.
 …………
Annuity: This is an annual payment guaranteed by
the life Insurance company to a person until his
death in consideration of a lump sum or
instalment received from him before retirement.
The lump sum received is income and the annual
payment called annuity is an expense to the
insurance company. Annuity is like pension
policy.
 Reinsurance
Re-insurance is an arrangement between two insurance
companies by which the large risk of an insurer is partly
transferred to another for which proportionate amount of
premium shall be ceded by the first insurer.

The insurance company [2nd] will however pay a commission

on reinsurance premium received. Such payment of
commission is called commission of reinsurance accepted
and is an expense to the reinsurance accepted company.
For the first insurance, the same will be a gain and is called
commission on reinsurance ceded [dropped]
 Surrender Value
 Say, after paying premium for some time, you run out of money or may be
you have no mood to continue the same
 Surrender value is the value assigned by the Insurance companies to the
life policies on the basis of the premiums received for such policies, when
the policy holder wants to terminate and surrender the policy back to the
insurance company after the payment of the second instalment of
premium specified in the policy.
 When the policy holder defaults in paying the premium after the second
instalment, the insurance companies shall give an option to such policy
holder to surrender the policy or to get them fully paid up.
 Policy is for social protection/insurance cos. are good support system
 If you have given just one premium and stopped, you will get zero
surrender value, SV depends on how much premiums you have paid.
 The more the premiums you have paid [the older the policy], the more the
surrender value you will get.
 Premiums paid if put in a bank will fetch you better return
 1st premium spreads out for insurance agent’s commission, adm cost etc.
so, after 1st premium you get nothing, SV starts only after 2nd premium.
 Claim
 The amount payable by the insurance company to the policy holder on
the happening of the event causing the risk covered under the insurance
policy.
 While preparing the revenue account, the actual claim accepted by the
insurance company during the year should be taken into consideration
and not the claims settled [conservative approach]
 The total claims paid should be added with claims outstanding at the end
and the claims outstanding in the beginning are deducted there from.
Further, necessary adjustments should be made in the account for the
claims intimated and accepted but not paid and claims intimated but not
accepted.
 [expense for the year = expenses paid+closing o/s-opening o/s]
Expense account

Opening O/S 10000 [exp shown but not paid

To bonus 70000 [pay this yr]

To closing O/S for this yr 20,000 -by P&L it will go 80,000

conservative principle takes into account one not settled also.

 Bonus
There are two types of policies
1. Policies with bonus – premium of such policies is more
than that of others. Such people get bonus out of profits
earned by the insurance companies. Bonus can be given in
the following forms
a] in cash : bonus a/c Dr. To cash account
b] in adjustment/reduction of premium: Bonus a/c Dr. To
Premium [bonus-expenditure; premium-income]
c] on maturity of policy [entry at that time only]
Premium will be more for policy with bonus – because everything
has a cost.
2. Policy without Bonus:
Say, if maturity value of a policy is Rs.10L. At death or maturity,
the value would be 10L+bonus for policy with bonus and only
10L for policy without bonus.
 Formats of Insurance
1. Form B [Revenue account]
2. Form B [P&L account]
3. Form B [Balance Sheet]

When company deals only in one product say may be marine

insurance, it will prepare only revenue account and BS. But if a
company deals in more than one product, it will prepare three
accounts.
 Form B [Revenue Account]
Particular Schedule Rs.
Income earned:

P Premium earned 1 xx
Profit or loss on sale of investment - xx
Interest, dividend and rent - xx
Total A XX

Expenses:
C C=claim incurred[pay claim] 2 xx
C=commission [pay agent] 3 xx
O O=operating expenses 4 xx
Total B XX

Operating profit = A-B =100[say] [where is this gone – below]

Less appropriation:
1. Transfer to reserve – 60
2. Transfer to B/Sheet - 40
 Form B [balance sheet]
Particular Schedule Rs.
S – share capital 5 XX
R – reserve & surplus 6 XX
B – borrowing 7 XX
Total YYYY

I – investment 8 XX
L – loan 9 XX
F – fixed asset 10 XX
C – current asset 11 XX
A – advances 12 XX
Total A XX

C – current liabilities 13 XX
P – provision 14 XX
Total B XX
A-B xx
M- misc. Expenses [+] [add to A-B] xxx
Total YYYY
 Form B [P&L], no schedule is used here
Particular Schedule Rs.
1. Operating Profit
- Fire insurance XX
- Marine insurance XX
- Misc. XX
2. Income from Investment XX
3. Other income XX
Total A XX

4. Provision [other than taxation] XX

5. Other expenses XX
Total B XX

Profit before tax (PBT) A-B XX

Less provision for tax XX
Profit after tax [PAT] XX
Less: appropriation
- transfer to reserve xx
- transfer to B/Sheet xx
............
Contd…..
..............
 Nifty
The same methodology will be used to calculate
Nifty but with two key differences
1. Base year is 1995 and base index value is 1000
2. Calculated based on 50 stocks

Nifty = (sum of all the free flow m cap of 50 bench

mark stocks)*Index factor
Where Index factor = 1000/m cap value in 1995
 Categorization of companies by capitalization
 Traditionally, companies are divided into large-
cap, mid-cap, and small-cap. People have rules of
thumb to determine category from market
capitalization. A common rule of thumb may look
like:
 Large-cap: $10 billion–$200 billion
 Mid-cap: $2 billion–$10 billion
 Small-cap: $200 million–$2 billion
 Micro-cap: $50 million-$300 million
 Animals in stock exchange
Animals as investors or condition of the market
1. Bull/bullish market – if in a mkt, the environment/behaviour of the
investment is for huge investment, favorable for investment is called
bullish. Investor is inherently +ve [aggressive] in terms of investment,
such investor is called a bull. Investor who invests aggressively with all the
market factors intact. Being aggressive is nature of bull.
2. Bear /bearish – opposite of bull, inherently not positive and market
condition not favourable for investment that is bearish. Investor who
invests cautiously. Being passive is nature of bear.
3. Stag – new investor [wants to invest] who has less idea about investment.
Safest is to invest in IPO. Easiest method. Stag invests only in IPO
4. Chickens – people who are fearful of investment and don’t want to invest.
5. Pigs – investors aggressively investing without taking into account the
factors of the market or current conditions of the market.
6. Wolf - investor using illegal or unethical means to invest in the market or
control the market [Movie-wolf of wall street]
7. Cash cow – cow treated as holy in India as it gives milk. Company that
provides profit exponentially or on regular basis is called cash cow.
 Contd…..
7. Camels – rating method
8. Ostrich – investors in spite of the unfavourable condition or sign indicating
them to sell off their shares would continue to stick to their investment
with the hope that conditions will improve [but never] are called ostrich.
In 2008 economic crisis/sub prime crisis; investors/US govt/US regulators
were +ve that market would recover but with passing time, conditions
became miserable.
9. Dead cat bounce – here, investment is low; and for a particular time it is
high and then low again. This small recovery of investment in a stock
market is called a dead cat bounce [small recovery after and before low
investment phases is called dead cat bounce]

Bulls make money because they invest when the market is favourable, bears
make money because they invest less and cautiously. Pigs get slaughtered
because they invest either in the bull or bearish market.
Contd……..
Contd……
Contd……
2. Improving tax to GDP ratio – in the year 2000-01,
this ratio was 14.1% and has improved to 14.7% in
2010-11 showing that scope of tax has increased.

3. Reduction in rates of direct taxes – the aim of

fiscal reforms is to lower the rate of taxes. Tax
revenue is to be increased by reducing the tax rate
because if the tax rate is reduced, tax payers [all
under tax bracket] will be encouraged to pay and
there will be no evasion of tax. In 2010-11 budget
maximum IT rate is 30%. As a result of this reform,
tax revenue increased considerably .
Contd……
4. Reforms in Indirect taxes – lowering of tax rates,
increasing scope of tax. Import duties gradually
reduced to bring down cost of production so as to
enable domestic industries compete in the
international market. Excise duty rates reduced to
boost aggregate demand. VAT has been introduced
since April 1, 2005. Three tax rates - for gold and
silver, VAT rate is 1%, basic goods -4%, for other
commodities 12.5%.

5. Introduction of service tax – started in 1994-95. In

2007-08, 12%. In 2009-10, reduced to 10%.
Contd……
6. Reduction in non plan govt expenditure – one
major objective of F.Reforms is to put a check on
unnecessary govt expenditure such as superfluous
appointment banned, disinvestment in public
enterprises incurring chronic loses. Comes down
to 10.9% of GDP in 2010-11.

7. Reduction in subsidies – Govt has to make huge

payments by way of subsidies for – fertilizer,
export, food etc. Total amount spent on subsidies
has been rising but has been falling as %age of
GDP [1.9% of GDP in 2010-11]
Contd…..
8. Improvement in tax collection – various schemes
like allotting PAN, strengthening norms of TDS,
making e - filing of tax returns, extension of e
payment facility of taxes etc. Tax authorities given
wide powers to conduct tax raids.

9. Closure of sick public sector companies – to

reduce burden of these loss making units on govt
exchequer.

10. Disinvestment of PSUs- by selling shares of PSUs

to private hands to generate huge funds
Contd…………..

11. Efforts to reduce Govt administrative expenses – by

Govt offering attractive VRS to its employees to
overcome problem of overstaffing. Govt banning
sanctioning of new post in some dept, reducing
grants to various states and privately managed Instns

12. Enactment of fiscal responsibility and budget

management act – in 2003 to reduce fiscal deficit.
Contd…..

13. Reduction in Central Sales Tax – from 3 to

2% from June 1, 2008.

14. Introduction of Goods and Service tax

(GST) – central govt is gradually reducing
CST, excise duty on goods and increasing
service tax rate. Govt is introducing uniform
tax on goods and services named GST.
 Contd…..
15. New Direct Tax Code – with effect from 1st April 2012.
Under this proposed new code, tax rates will be
reduced and tax system will be simplified.

Corporate tax rate will be 30%. No surcharge [tax upon

tax – 10% of tax] and (edn) cess [tax upon tax for
accessing quality edn – edn cess 2% of tax, secondary
cess 1% -all together 3%]will be charged on corporate
sector. Security transaction tax [STT-sale of shares]
proposed to be abolished.
 THANK YOU

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