INSURANCE

Meaning of Insurance

Insurance provides financial protection against a loss arising out of happening of an

uncertain event. A person can avail this protection by paying premium to an insurance
company.
A pool is created through contributions made by persons seeking to protect themselves from
common risk. Premium is collected by insurance companies which also act as trustee to the
pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool.
Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it
spreads the risk of a few people over a large group of people exposed to risk of similar type.

Definition

Insurance is a contract between two parties whereby one party agrees to undertake the risk of
another in exchange for consideration known as premium and promises to pay a fixed sum of
money to the other party on happening of an uncertain event (death) or after the expiry of a
certain period in case of life insurance or to indemnify the other party on happening of an
uncertain event in case of general insurance.

Principles of insurance:
Principles of Indemnity

 Is perhaps the most fundamental principle of insurance. Object of indemnity is to place

the insured after the loss in the same position he occupied immediately before the loss.
He is not to be placed in a better or worse position.
 Indemnity does not imply that the insured will be indemnified to the full value of his loss
e.g. a person whose factory is destroyed by fire cannot recover for loss of profits or
against any liability that may arise from the fire unless he has appropriate policies in
place specifically designed to deal with these losses.

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Principles of Subrogation

 Literally means “to stand in place of”. It is the right of one person to stand at law in the
place of another and to avail him of all rights and remedies of that other person
 Often when a claim occurs there may be 2 avenues of recovery. Suppose A drives
negligently and causes an accident damaging B’s car. If B’s car is insured 2 options are
open to him to recover his loss-he can sue A in delict for damages or he can claim from
his insurer. If B pursues both avenues he will receive double compensation. To prevent B
from profiting from his loss subrogation is used in terms of which once the insurer has
paid B the insurer assumes all B’s rights to sue A. This ensures that the principle of
indemnity is preserved.
Principles of Utmost Good Faith

 Insurance contracts are characterized by information asymmetries between the parties.

Generally the insured knows more about the risk to be insured than the insurer. To
rectify this imbalance the law compels disclosure of information between the parties.
 To act in good faith entails that parties must deal openly and honestly with each other
without suppressing material facts that may influence the judgment of the other party.
The duty to act in good faith applies to all types of insurance contracts
Functions of insurance
Basic functions of Insurance are can be classified as follows:

1. Primary Functions

2. Secondary Functions

3. Other Functions

Primary functions of insurance

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  Providing protection – The elementary purpose of insurance is to allow security against
future risk, accidents and uncertainty. Insurance cannot arrest the risk from taking
place, but can for sure allow for the losses arising with the risk. Insurance is in reality a
protective cover against economic loss, by apportioning the risk with others.
 Collective risk bearing – Insurance is an instrument to share the financial loss. It is a
medium through which few losses are divided among larger number of people. All the
insured add the premiums towards a fund and out of which the persons facing a specific
risk is paid.
 Evaluating risk – Insurance fixes the likely volume of risk by assessing diverse factors
that give rise to risk. Risk is the basis for ascertaining the premium rate as well.
 Provide Certainty – Insurance is a device, which assists in changing uncertainty to
certainty.

Secondary functions of insurance

 Preventing losses – Insurance warns individuals and businessmen to embrace

appropriate device to prevent unfortunate aftermaths of risk by observing safety
instructions; installation of automatic sparkler or alarm systems, etc.
 Covering larger risks with small capital – Insurance assuages the businessmen from
security investments. This is done by paying small amount of premium against larger
risks and dubiety.
 Helps in the development of larger industries – Insurance provides an opportunity to
develop to those larger industries which have more risks in their setting up.

Other functions of insurance

 Is a savings and investment tool – Insurance is the best savings and investment option,
restricting unnecessary expenses by the insured. Also to take the benefit of income tax
exemptions, people take up insurance as a good investment option.

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  Medium of earning foreign exchange – Being an international business, any country can
earn foreign exchange by way of issue of marine insurance policies and a different other
ways.
 Risk Free trade – Insurance boosts exports insurance, making foreign trade risk free with
the help of different types of policies under marine insurance cover.

Insurance provides indemnity, or reimbursement, in the event of an unanticipated loss or

disaster. There are different types of insurance policies under the sun cover almost anything
that one might think of. There are loads of companies who are providing such customized
insurance policies.

Insurance Regulatory and Development Authority (IRDA) act 1999

The Insurance Regulatory and Development Authority (IRDA) is a national agency of the
Government of India. It was formed by an act of Indian Parliament known as IRDA Act 1999,
which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as
stated in the act is "to protect the interests of the policyholders, to regulate, promote and
ensure orderly growth of the insurance industry and for matters connected therewith or
incidental thereto."

Composition of Authority:

As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA,
which was constituted by an act of parliament) specify the composition of Authority 

The Authority is a ten member team consisting of

    (a)    a Chairman;

    (b)    five whole-time members;
    (c)    four part-time members,

(all appointed by the Government of India)

Objectives of IRDA:

1. To protect the interest of and secure fair treatment to policyholders.

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 2. To bring about speedy and orderly growth of the insurance industry (including annuity
and superannuation payments), for the benefit of the common man, and to provide
long term funds for accelerating growth of the economy.
3. To set, promote, monitor and enforce high standards of integrity, financial soundness,
fair dealing and competence of those it regulates.
4. To ensure that insurance customers receive precise, clear and correct information about
products and services and make them aware of their responsibilities and duties in this
regard.
5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other
malpractices and put in place effective grievance redressal machinery.
6. To promote fairness, transparency and orderly conduct in financial markets dealing with
insurance and build a reliable management information system to enforce high
standards of financial soundness amongst market players.
7. To take action where such standards are inadequate or ineffectively enforced.
8. To bring about optimum amount of self-regulation in day to day working of the industry
consistent with the requirements of prudential regulation.
9. Regulating investment of funds by insurance companies
10. Regulating maintenance of margin of solvency;

Roles/ Duties/ Powers/ Functions of IRDA

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.      
   
 Registration: issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration; 
 Protection: protection of the interests of the policy holders in matters concerning
assigning of policy, nomination by policy holders, insurable interest, settlement of
insurance claim, surrender value of policy and other terms and conditions of contracts
of insurance; 
 Qualification: specifying requisite qualifications, code of conduct and practical training
for intermediary or insurance intermediaries and agents
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  Code of conduct: specifying the code of conduct for surveyors and loss assessors;
 Efficiency: promoting efficiency in the conduct of insurance business;
 Professionalism: promoting and regulating professional organizations connected with
the insurance and re-insurance business;
 Fees etc: levying fees and other charges for carrying out the purposes of this Act;
 Information: calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organizations connected with the insurance business;
 Terms of Business: control and regulation of the rates, advantages, terms and conditions
that may be offered by insurers in respect of general insurance business not so
controlled and regulated by the Tariff Advisory Committee under section 64U of the
Insurance Act, 1938 (4 of 1938);
 Books of Accounts: specifying the form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by insurers and other
insurance intermediaries;
 Funds Investment: regulating investment of funds by insurance companies;
 Margin of solvency: regulating maintenance of margin of solvency;
 Rural insurance: specifying the percentage of life insurance business and general
insurance business to be undertaken by the insurer in the rural or social sector; and 
 Others: exercising such other powers as may be prescribed

Challenges facing by Insurance Industry

 Threat of New Entrants: The insurance industry has been budding with new entrants
every other day. Therefore the companies should carve out niche areas such that the
threat of new entrants might not be a hindrance. There is also a chance that the big
players might squeeze the small new entrants.
 Power of Suppliers: Those who are supplying the capital are not that big a threat. For
instance, if someone as a very talented insurance underwriter is presently working for a

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 small insurance company, there exists a chance that any big player willing to enter the
insurance industry might entice that person off.
 Power of Buyers: No individual is a big threat to the insurance industry and big
corporate houses have a lot more negotiating capability with the insurance companies.
Big corporate clients like airlines and pharmaceutical companies pay millions of dollars
every year in premiums.
 Availability of Substitutes: There exist a lot of substitutes in the insurance industry.
Majorly, the large insurance companies provide similar kinds of services – be it auto,
home, commercial, health or life insurance.