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INSURANCE AS A GUARD AGAINST RISK OF LOSSES

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The world is a risky place and is a part of every human venture. Certain forces are out of our control.  From the mourning routine until we get back into bed, we are exposed to different degrees of risk. Risk is an undesirable outcome and is the possibility of a loss that has the potential to interfere with an ability to fulfill and for which a claim be submitted. 

Immunity is a practical topic. Insurance claims are rejected by the Insurance Companies on some technical grounds. So, while dealing with Insurance matters, Finance professionals or an Investor should understand the basic concepts and principles of Insurance.

STATE THE CONCEPT OF INSURANCE? 

Life Assurance is an arrangement where one party agrees in return for a consideration to pay an agreed amount to another party. That makes good the loss or damage, which adds something of value in which the insured has an interest. Insurance Policy is based on the principle of utmost good faith.  

Insurance companies offer retail insurance policies of varied nature. Individuals purchase such policies either in their individual capacity or employee-friendly organizations. Therefore, Insurance is a tool of risk management to cover the uncertainties – the risk of loss of assets or human life.

MENTION HISTORY OF INSURANCE IN INDIA?

Indemnity has a deep-rooted history. It is mentioned in the writings of Manu, Yagnavalkya, and Kautilya. The writings talk as per the pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics, and famine. This was a precursor to modern-day Insurance. Ancient Indian history, the earliest traces of Insurance were in the form of marine, trade loans, and carriers’ contracts. Insurance in India has evolved and heavily drawing from other countries, England in particular.  

Insurance services concept. abstract  sphere or globe in hands. Premium Vector

WHAT ARE THE ACTS & REGULATIONS GOVERNING BOTH LIFE & GENERAL INSURANCE BUSINESS IN INDIA?

The following ACTS that regulates Insurance Business in India:

  • Insurance Act, 1938 and Ombudsman Rules,2017
  • Foreign Exchange Management Act
  • Consumer Protection Act, 1986
  • Labor Law legislations and many more.

The following REGULATIONS governing Life Insurance Business in India: 

  • LIC Act, 1956
  • Amendments to the LIC Act

The following REGULATIONS affecting General Insurance Business in India:

  • General Insurance Nationalization Act, 1972 and its amendments
  • Marine Insurance Act, 1963
  • Indian Ports (Major Ports) Act, 1963
  • Indian Railways Act, 1989
  • Employee State Insurance Act,1948, and many more.

DIFFERENCE BETWEEN INSURANCE AND REINSURANCE

INSURANCE – is a protection tool for the individual for the premium paid by them and the company will receive it. 

For Example – when an auto Insurance policyholder has an accident, the Insurer (Insurance Company) reimburses the individual for injuries and damage to his vehicle.

REINSURANCE – is the protection tool taken out by a large insurance firm to ensure that they survive large losses. The premium paid for reinsurance will be divided among all the Insurance companies in the pool that bear the risk of loss. Unlike Insurance which protects individuals from losses, Reinsurance protects the Insurance Company from financial losses.

DID YOU KNOW INSURANCE AND REINSURANCE ARE A RISK TRANSFER TECHNIQUES? 

Insurance and Reinsurance are forms of Financial Protection. Losses are guarded against whereby it transfers the risk to another party through Insurance Premium payment. In addition to that, it is an incentive for bearing the risk.

THE STAKEHOLDERS UNDER THE INSURANCE MARKET

The Insurance Market comprises of the following stakeholders:

  • The Policyholder is the Customer to whom the policy is issued. They can be an Individual Policyholder or Corporate Policyholder. Individual Policyholder is also known as the Retail segment and constitutes the biggest chunk of Customers. Corporate Policyholders comprise of Business entities that purchase insurance cover for various business needs.
  • Insurance Agent, Intermediary or Insurance Intermediary
  • Insurance Company/Insurer provides service to Policyholders. They accept premium and provide Insurance cover by issuing Insurance Policy documents which constitute a contract between Insurance companies and Policyholders. Those should adhere to prescribed guidelines

WHAT IS INSURANCE CONTRACT AND ESSENTIALS OF A VALID CONTRACT & ITS FEATURES?

A contract of surety is an agreement whereby one party, called the insurer, undertakes, in return for an agreed consideration, called the premium, to pay the other party, namely the insured, a sum of money, upon the occurrence of a specified event resulting in a loss to him. 

ESSENTIALS OF A VALID INSURANCE CONTRACT 

  • Proposal
  • Acceptance
  • Consideration
  • Competency to contract
  • Consensus ad idem
  • Lawful Object
  • Not to be in restraint of trade
  • Certain one and not a wagering contract

Apart from the above Essentials, Insurance Contract is subjected to additional principles:

  • Principle of Utmost good faith
  • Principle of Insurable interest 
  • Principle of Indemnity 
  • Principle of Subrogation 
  • Principle of Contribution 
  • Principle of Proximate cause 
  • Principle of Loss of Minimization

FEATURES OF AN INSURANCE CONTRACT

  • Aleatory
  • Adhesion
  • Executory
  • Unilateral
  • Conditional
  • Personal Contracts
  • Warranties
  • Concealments
  • Fraud
  • Impersonations
  • Parol Evidence Rule

THE PRINCIPLES OF INSURANCE

PRINCIPLE OF UBERRIMAE FIDEI (Utmost Good Faith) 

• Insured and Insurer should have a good faith towards each other. 

PRINCIPLE OF INSURABLE INTEREST 

• The insured must have an interest. 

PRINCIPLE OF INDEMNITY 

• Under this the insurer agreed to compensate the insured for the actual loss suffered.

PRINCIPLE OF SUBROGATION 

• After the insured is compensated, then the right of ownership of such property passes to the insurer. 

PRINCIPLE OF CONTRIBUTION 

• insured can claim the compensation only for the occurred losses.

PRINCIPLE OF CAUSA PROXIMA (NEAREST CAUSE) 

 • The property may be insured against some conditions and not against all. 

PRINCIPLE OF LOSS MINIMIZATION 

• It is the duty of the insured to take all possible steps to minimize the loss to the insured property on the happening of an uncertain event.

*(NOTE- The above principles are applicable for Life, Marine, Fire & General Insurance)

THE PRODUCTS IN LIFE ASSURANCE & HEALTH INSURANCE & GENERAL INSURANCE

LIFE ASSURANCE – 

  • Term Insurance Product 
  • Whole Life Insurance Products
  • Endowment Products
  • Money-Back Products
  • Annuity Products
  • Linked Life Insurance Products
  • Variable Life Insurance Products 

HEALTH INSURANCE covers the risk of hospitalization and provides financial support upon life assured.

  • Indemnity based health insurance products 
  • Fixed benefit-based health insurance products

GENERAL INSURANCE

  • Fire insurance
  • Marine insurance
  • Motor insurance
  • Personal Accident Insurance
  • Liability Insurance
  • Engineering Insurance
  • Miscellaneous Insurance (Householders’ Insurance, Shopkeepers’ Insurance and many more)
  • Rural Insurance (Animal Driven Cart Insurance, Horticulture Insurance, Poultry Insurance, Weather/Crop Insurance, etc.)

ETHICS AND CORPORATE GOVERNANCE IN INSURANCE

MORAL PHILOSOPHY in business is fundamental to the long-term success of any business. CORPORATE GOVERNANCE is a system by which companies are safeguarded. It is about promoting corporate fairness and accountability. 

The insurance sector has to protect the interests of the policyholder’s demands for this is important to have good governance practices for maintenance of solvency, sound long term investment policy. The growth ensures sound Corporate Governance in the Insurance sector with overall risk management across the structure and to prevent any contagion and ensures financial stability.

Assurance companies have become competitive in nature. They not only provide risk cover to infrastructure projects, but they also contribute long-term funds. In fact, they are an ideal source of long-term debt and equity for infrastructure projects. 

Insurance is a tool that is compensated out of funds. Insurance is a shield against uncertain events that may occur in the future. Company image is the important criteria that consumers consider before taking up life insurance. This is because people expect safety and security for their money which they invest, followed by the factor Premium paid to the insurer and then Bonus and Interest paid by the company, services, etc.

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