IRM- MODULE- 1

S.P.SEN
 SYLLABUS
• BASIC PRINCIPLES OF INSURANCE
• INDEMNITY, INSURABLE INTEREST,
MATERIALITY OF FACTS, UBERIMMAE FIDAE
AND IMPLICATION, DUTY OF DISCLOSURE.
• TYPES OF INSURANCE: LIFE INSURANCE,
GENERAL INSURANCE, HEALTH & MEDICAL
INSURANCE, PROPERTY RELATED
INSURANCE, LIABILITY INSURANCE,
CRITICAL ILLNESS OR DREAD DISEASE
INSURANCE, REINSURANCE.
• PRINCIPLES GOVERNING MARKETING OF
INSURANCE PRODUCTS.
 International Comparison of Insurance Penetration

Country 2002 2003 2004

Total Life Non- Total Life Non- Total Life Non-

life life life

USA 9.58 4.6 4.98 9.61 4.25 5.15 9.17 4.12 5.05

UK 14.75 10.19 4.56 13.37 8.62 4.75 12.6 8.92 3.68

Germany 6.76 3.06 3.7 6.99 3.17 3.82 6.97 3.11 3.86

Japan 10.86 8.64 2.22 10.81 8.61 2.2 9.52 6.75 2.77

India 3.26 2.59 0.67 2.88 2.26 0.62 3.17 2.53 0.65

China 2.98 2.03 0.96 3.33 2.3 1.03 3.06 2.21 1.05

World 8.14 4.76 3.38 8.06 4.59 3.48 7.99 4.55 3.43
 International Comparison of Insurance Density

Country 2003 2004

Total Life Non-life Total Life Non-life

USA 3637.7 1657.5 1980.2 3755.1 1692.5 2062.6

UK 4058.5 2617.1 1441.4 4508.4 3190.4 1318.0

Germany 2051.2 930.4 1120.8 2286.6 1021.3 1265.3

Japan 3770.9 3002.9 768 3874.8 3044 830.8

India 16.4 12.9 3.5 19.7 15.7 4.0

China 36.3 25.1 12.2 40.2 27.3 12.9

World 469.6 267.1 202.5 511.5 291.5 220

-Insurance is defined as the equitable
transfer of the risk of a loss, from one
entity to another, in exchange for a
premium.
-Insurance, in law and economics, is a
form of risk management primarily
used to hedge against the risk of a
contingent loss.
-Risk management- the practice of
appraising and controlling risk.
 FUNCTIONAL DEFINITION
Insurance is a co-operative device to spread loss
caused by a particular risk over a number of
persons, who are exposed to it and who agree to
insure themselves against the risk. Analysis
shows following points:
1. Co-operative device to spread risk.
2. System to cover a number of persons who are
insured against the risk.
3. The principle to share the loss on the basis of
probability of loss to the risk.
4. Method to provide security against losses to the
insured.
5. Co-operative device of distributing losses.
 Contractual Definition
Insurance is a contract where one party (insurer)
agrees to pay to the other party (insured) or his
beneficiary, a certain sum upon a given
contingency (risk) against which insurance is
sought. Analysis indicates;
1. Certain sum, called premium, is charged in
consideration.
2. A large sum is guaranteed by the insurer who
received the premium.
3. Payment will be made in a certain definite sum
(loss or the policy amount whichever may be)
4. The payment is made only upon a contingency.
 FEATURES OF INSURANCE
• Offer & Acceptance
• Lawful object
• Contract
• Consideration
• Co-operative device
• Protection of financial risk.
• Good faith
• Contract of indemnity
• Certainty and contingency
• Subrogation
• Insurable interest
• Insurance is neither gambling nor charity.
FUNCTIONS
Primary function:
• Provides certainty and security.
• Distributes risks.
Secondary Function:
1. Provides capital.
2. Increases efficiency
3. Helps in loss reduction
4. Helps in judging viability of major project.
Other Function:
1. Economic development.
2. Expansion of foreign trade
3. Provides funds to invest.
4. Encourage savings
5. Checks inflation.
6. Social security.
7. Credit facilities.
 ORIGIN AND GROWTH (INDIA)
• Some of the important milestones in the
life insurance business in India are:
• 1912 - The Indian Life Assurance
Companies Act enacted as the first statute
to regulate the life insurance business.
• 1928- The Indian Insurance Companies
Act enacted to enable the govt. to collect
statistical information about both life and
non-life insurance business.
• 1938- Consolidation of earlier legislation
to protect the interest of the insuring
public.
 ORIGIN AND GROWTH (INDIA)

• 1956 - 245 Indian and foreign insurers

and provident societies taken over by the
central government and nationalized. LIC
formed by an Act of Parliament, viz. LIC
Act, 1956, with a capital contribution of
Rs. 5 crores from the Government of
India.
 ORIGIN AND GROWTH (INDIA)
• The General insurance business in India,
on the other hand, can trace its roots to
the Triton Insurance Company Ltd., the
first general insurance company
established in the year 1850 in Calcutta by
the British.
• Some of the important milestones in the
general insurance business in India are:
• 1907 - The Indian Mercantile Insurance
Ltd. set up, the first company to transact
all classes of general insurance business.
• 1907- The Indian Mercantile Insurance Ltd
was set up, the first company to transact all
classes of general insurance business.
• 1957- General Insurance Council, a wing of
the Insurance Association of India, frames a
code of conduct for ensuring fair conduct and
sound business practices.
• 1968- The Insurance Act amended to regulate
investments and set minimum solvency
margins and the Tariff Advisory Committee set
up.
• 1972 - The General Insurance Business
(Nationalization) Act, 1972 nationalized the
general insurance business in India with effect
from 1st January 1973.
• 107 insurers amalgamated and grouped into
four companies viz. the National Insurance
Company Ltd., the New India Assurance
Company Ltd., the Oriental Insurance
Company Ltd. and the United India
Insurance Company Ltd. GIC incorporated as
a company.
• The process of re-opening of the sector
had begun in the early 1990s.
- In 1993, the Government set up a
committee under the chairmanship of RN
Malhotra, former Governor of RBI, to
propose recommendations for reforms in the
insurance sector
 ORIGIN AND GROWTH (INDIA)
• -in 1999, the Insurance Regulatory and
Development Authority (IRDA) was
constituted as an autonomous body to
regulate and develop the insurance
industry.
• The IRDA was incorporated as a statutory
body in April, 2000.
• In December, 2000, the subsidiaries of the
General Insurance Corporation of India were
restructured as independent companies and
at the same time GIC was converted into a
national re-insurer.
 ORIGIN AND GROWTH (INDIA)

• The insurance sector is a colossal

one and is growing at a speedy rate
of 15-20%. Together with banking
services, insurance services add
about 7% to the country’s GDP.
 IMPORTANCE (INDIVIDUAL)

• Provides security and safety.

• Provides peace of mind.
• Eliminates dependency.
• Source of savings.
• Source of investment.
• Protects mortgaged property.
• Others- family needs, old age, need for
education, marriage etc.
 IMPORTANCE (business)

• Financial help.
• Reduces uncertainty of business losses.
• Improves efficiency.
• Indemnification.
• Grant of credit facilities.
• Continuous business.
• Employee's security.
 IMPORTANCE (society)

• Protection to society’s wealth.

• Economic growth.
• Maintaining standard of living.
• Social security.
• Distribution of loss.
• Removal of social evils.
• Accelerate production.
• Reduces inflationary pressure.
• Capital formation.
ESSENTIALS OF INSURANCE CONTRACT
• Written agreement.
• Consideration.
• Competency.
• Lawful object.
• Mutual faith.
• Certainty.
• Possibility of performance.
• Contract of subrogation.
• Insurable interest.
 IMPORTANCE (commerce & Industry)

• Economic development
• Earns foreign exchanges.
• Source of capital formation.
• Source of income
 PRINCIPLES OF INSURANCE
• Insurable Interest- insured must be interested in the
subject matter of insurance. The insured must positively
stand benefited financially due to existence. A person is
said to have insurable interest in the property if he is
financially benefited by its existence and is prejudiced by
its loss.
• It must exist both at the time of the proposal and at the
time of claims. In case of marine insurance insurable
interest must exist at the time of claim only as it is
assignable without the consent of the insurer.
• Sec.7(2) of the Marine Insurance Act, 1963 provides
following essentials,
1. Subject matter of insurance must be certain.
2. There must have legal relationship between insured and
subject matter (owner or may possess the legal right or
interest in the subject matter)
 UTMOST GOOD FAITH

• Utmost good faith- contract of ubereimae

fidei: implies that contract require absolute
and utmost good faith on the part of all the
parties to the contract.
• It implies absence of fraud or deceit on the
part of the parties to the contract.
• Parties are duty bound to disclose all
material facts relating to the risk covered
and underwrites.
 INDEMNITY
• Indemnity- implies to make good the loss and nothing
more than the actual loss. It lays down that;
1. The insured can be indemnified only up to the extent of
actual loss.
2. The sum of indemnity can never exceed the value of the
policy taken
3. In case of under insurance the loss is indemnified
proportionally.
• As loss can not be measured in terms of money in case
of life insurance, so life insurance contract is not a
contract of indemnity.
• Principle of indemnity is applicable where;
1. Loss can be measured in money terms.
2. A mode of putting the insured after the mitigation of loss
in same position in which he was placed just before the
occurrence of loss.
• All insurance contract except life insurance is the
contract of indemnity.
• There are indirect relationship between principle
of indemnity and principle of insurable interest.
• The amount of compensation shall never exceed
the amount of actual loss or the value of the
policy.
• Doctrine of subrogation applies after the
settlement of claims.
• Valued policies are not covered.
• Different methods of indemnity are cash payment,
repairs, replacements and reinstatement.
 SUBROGATION
• It is also known as ‘ Doctrine of Rights
substitution’ and outcome of indemnity.
• It is the transfer of rights and remedies of the
insured in the subject matter to the insurer after
indemnification.
• The right of ownership of affected property passes
on to the insurer.
• Introduced to safeguard the interest if insurer.
• The doctrine of subrogation is applicable to all
contracts of indemnity even without the existence
of express condition in the contract of insurance.
 Features of Subrogation
• Subrogation is an extension and an outcome of
the principle of indemnity.
• It is not applicable to life insurance contract.
• It is applied to all contract of indemnity- arises
only after the payment of claim to insured.
• It may arise even before indemnification of the
insured except in case of marine Insurance
policies.
• Excess amount realized by insured should
refund to insurer.
• It is only up to the amount of payment.
• Insurer is substituted in the place of other
person who act on the right and claim of the
property insured.
 PRINCIPLE OF CONTRIBUTION
• Outcome of doctrine of indemnity and applied to all
contract of indemnity.
• Contribution is the right of an insurer, who has paid
under a policy, to call upon other insurers or otherwise
liable for the same loss to contribute the payment. The
doctrine ensures equitable distribution of losses between
different insurers.
• Sec 80(1) of Marine Insurance Act 1963 states: where
assured is over insured by double insurance, each
insurer is bound, as between himself and the other
insurers, to contribute to the loss in proportion to the
amount which is liable under this contract.
• The company shall only be liable to contribute pro-rata
with any other guarantee whether by policy or otherwise
held by the insured.
 PRE CONDITION FOR APPLICATION
• The subject matter of insurance must be
common to all policies.
• The peril which causes the loss or damage
must be common to all policies to attract the
principle of contribution.
• The policies must be legally enforceable.
• The policies must be in force at the time of
loss.
• The insurable interest under all policies
must be the same and all policies must be
effected in favour of a common person
(insured).
 CAUSA PROXIMA

• Proximate cause or nearest cause.

• The efficient or effective cause which causes
the loss is called proximate cause.
• It is real and actual cause of loss. It is not of
much practical importance in life insurance.
• In following cases proximate causes are
observed;
1. War risk.
2. Suicide
3. Accident benefit.
 MITIGATION OF LOSS

• MINIMISE OR DECREASE THE

SEVERITY OF LOSS.
• CHECK ON THE BEHAVIOUR AT THE
TIME OF LOSS AS IT IS IMPLIED THAT
INSURED HAS TO TAKE ALL
PREVENTIVE STEPS AS A PRUDENT
OR REASONABLE MAN.
 CLASSIFICATION
ON THE BASIS OF RISK
• PERSONAL INSURANCE
1. Life Insurance – dealing with life if individuals.
2. Personal accident insurance
3. Health Insurance
• PROPERTY INSURANCE
1. Fire Insurance
2. Marine Insurance
3. Rural Insurance
4. Theft or Dacoity Insurance
5. Machinery Insurance
6. Aircraft Insurance
7. Motor Insurance
 ON THE BASIS OF RISK (contd..)

• LIABILITY INSURANCE
1. Re- insurance
2. Workmen’s compensation Insurance
3. Public liability Insurance
4. Motor Insurance (Third Party)
• GUARANTEE INSURANCE
1. Fidelity Insurance
2. Right Insurance
3. Credit Insurance
4. Hire Purchase Guarantee Insurance
 COMMERCIAL POINT OF VIEW
• GENERAL INSURANCE
1. Fire Insurance
2. Marine Insurance
• LIFE INSURANCE
• SOCIAL INSURANCE
1. Accident
2. Sickness
3. Disablement
4. Maternity
5. Old age
6. unemployment
 DEVELOPMENT POINT OF VIEW

• MARINE INSURANCE
• FIRE INSURANCE
• LIFE INSURANCE
• MISCELLANEOUS INSURANCE
• SOCIAL INSURANCE
• These types of insurance are under
common practice.
 MARINE INSURANCE
• It is an arrangement by which the insurance
company or the underwriter agrees to indemnify
the owner of the ship or cargo against the risk
involved to marine cargo and ship.
• It covers the perils of sea as well as inland risks
relating to the cargos, ship, and freight etc. like
the act of nature, sea perils and pirates, fire and
many others.
• It has two main branches such as 1) ocean
Marine Insurance 2) Inland Marine Insurance or
transportation insurance.
• It is classified into 1) cargo insurance 2) Hull
insurance and 3) Freight insurance
Cargo – goods carried by ship. It may be single or
special policy covers single shipment only.
Reporting or open cargo policy covers all
shipment over a period of time. Floating policy is
similar to reporting policy but different in the
method of premium payment.
Hull insurance- insurance of ship. It may be for
particular journey or for a particular period.
Freight Insurance- insurance for freight charges.
 FIRE INSURANCE
• Sec 2 of Indian Insurance Act 1938 states “fire
insurance business means the business of
affecting, otherwise than incidentally the some
other class of insurance business, contracts of
insurance against loss by or incidental to fire or
other, the occurrence customarily included
among the risks insured against fire insurance
policies”
• Fire insurance institution was established only
after the “Great Fire” of London in 1660 A.D.
• Indemnification of loss caused by fire.