Understanding what insurance is and the essentials of it can sometimes be tricky. Insurance is a legal contract between the insurer and the insured. The insurer promises to compensate for the losses caused due to any contingencies in return for the premiums paid by the insured persons.
The insurer is the insurance company most of the time, and the insured person is the policyholder.
In other terms, Insurance is the assurance by one party to the other for losses caused to him due to any unforeseen circumstances in return for that assurance that the party pays the premium to the assurer on either a monthly, quarterly or yearly basis.
It is a form of risk management method to indemnify a person or any relative of that person or any property belonging to that person.
The insurance sector in India gets managed by India’s Insurance regulatory and development authority of India (IRDAI).
The insurance regulatory and development authority of India Act 1999 established IRDA.
The act was also brought to amend the insurance act 1938, LIC Act 1956 and the General Insurance business (nationalisation) act 1972.
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Elements of an insurance contract
After getting to know what insurance is, let’s focus on the characteristics of insurance contracts. To establish a valid insurance contract, there are some elements of an insurance contract needed to achieve. These are:-
- An insurance contract must comply with the provisions of the Indian Contract Act 1872
- There must be an insurable interest on the part of the insured person. It means that the insurable interest is the subject matter of the insurance contract, which depicts that it is a pecuniary interest and the occurrence of insured risk must be capable of financial valuation.
- The other element of the insurance contract is that it must consist of utmost good faith between the contract partners, i.e. insurer and insured.
It means that the insurer must disclose all the terms and conditions of the contract to the insured person, and the insured person must disclose all the facts concerning the agreement to the insurer.
- A contract of insurance must be made according to the principle of indemnity. And there must be a promise on the insurer’s part to compensate for the loss caused by the contingency that occurred. That loss should be in terms of monetary loss or should get equated in monetary terms.
- The principle of indemnity does not apply to personal insurance because the amount of loss is not easily calculable in that insurance.
- An insurance contract must also get based on the doctrine of subrogation. The doctrine of subrogation states the insurer’s right to replace the insured person’s place after claiming the settlement.
In other terms, it is the right of the insurer to recover the amount of claim from any third party due to whose negligence the loss gets precipitated after the settlement of the claim to the insured person. Even this doctrine does not apply to personal insurance as it is the supplementary principle of indemnity.
- There must be a proximate cause for the precipitation of the loss, and that proximate cause must be the direct cause for failure rather than being a remote cause.
The cause of the loss doesn’t need to be direct, but this should be a responsible cause for the appeared loss.
- Certain conditions and promises in an insurance contract have to be followed by the insured person, and these certain conditions and promises are called warranties.
Some warranties get mentioned in the contract, and some are not mentioned. If these warranties get breached, the insurer receives free from liability. The continuance of the contract is subject to the fulfilment of these warranties. The warranties mentioned in the policy are called express warranties.
How does Insurance work?
Out of all the functions of insurance, the primary function of insurance is that it works by the concept of risk pooling which is a form of risk management.
When a person buys an insurance policy and becomes the policyholder or an insured person, he pays a premium monthly, quarterly, or yearly
The insurance company accumulates the premium amount collected from all its clients and pools the funds for compensating the pool members or the policyholder for the loss caused due to the contingency occurring
In simple words, the losses get compensated from the pool of funds created by the premiums paid by the insurance company’s clients if a client claims compensation from the insurance company.
What are types of Insurance?
Insurance policies are to secure the life, health or assets of a particular person. One takes Insurance policies to avoid a financial crisis due to loss caused to life, health or assets. There are some types of insurances aiming to safeguard the aspects mentioned above. These are:-
Life insurance aims to secure the dependents of a person after his death
Life insurance supports the policyholder’s dependents like a spouse, children, parents, etc., after his death.
It provides the insurance policy nominee with the amount of the claim in the event of the death of the insured policyholder.
It creates financial stability for the dependents and or to get rid of a debt or fund the education of children, etc
Some of the types of life insurance policies are:-
- Term Plan- The term plan provides monetary payments for a specified period at a fixed rate interest in case of the policyholder’s unfortunate death.
- Endowment Plan- Endowment plans are life insurance policies where the insured person is paid a lump sum amount after maturity or death of the person.
- It provides the person with some additional profit after the maturity period gets over on the full paid amount to the insurer.
- Unit Linked Insurance Plans or ULIPs- In ULIP, premium paid is used for insurance and investment benefits. Some parts of the premium go towards death benefit, and some go towards investment in mutual funds, debt mutual funds, etc.
- Whole Life Insurance- This policy provides financial security for an individual’s whole life instead of a specified term
- Child’s Plan- This is also an investment cum insurance policy. It provides financial aid for the insured person’s children throughout their lives on achieving the maturity period. The death benefit is also available under this plan which offers a lump-sum payment after parents’ death.
- Money-Back plan- This plan pays a certain percentage of the plan’s sum assured after regular intervals. It is also known as a survival benefit.
- Retirement Plan- This is also known as a pension plan. This policy plan is also a fusion of investment and insurance. It gets paid to a person after his retirement in the form of pensions or a lump-sum amount.
It is a type of policy that grants protection to a person in the form of compensation in the event of an accident in a motor vehicle
It is a mandatory legal requirement in India, and every motor vehicle should have insurance for its vehicle. All motor vehicle insurance policies get covered under the motor vehicle act, 1988 and the motor vehicle (amendment) act, 2019.
It covers three types of vehicles.
- Four wheelers like cars,
- Two-wheelers like bikes, scooters etc
- Commercial vehicles like trucks, buses. Tempo, etc.
Further, motor vehicle Insurance is also classified into three categories. These are:-
- Third-party liability is a minimum requirement for every motor vehicle in India to avail third-party liability motor insurance. It protects oneself from the claims of any third party arising out of an accident
It only protects against claims of the third party by providing compensation to that party to avoid legal consequences. It does not offer any cover of protection or any compensation to loss against the policy holder’s vehicle.
- Comprehensive cover: Unlike third-party liability insurance, a comprehensive cover policy covers both the third party and policyholder’s vehicle against the loss caused by accident. It also covers the policyholder’s vehicle against any natural calamity, fire, riots, and other such instances. It also covers the policy owner’s vehicle against theft by providing the cost of the vehicle
- Own damage cover: A person owning this has third party liability insurance before can avail of this policy. It provides all the benefits same as comprehensive cover except the one included under third party insurance.
It grants protection to the insured persons against any health ailment or any financial loss incurred due to health ailments, including the cost of treatment, diagnosis, hospital expenses, and other expenses
It protects the patients admitted to the hospital, while some plans also protect against expenses done for the treatment at home.
There are some main types of health insurance policies. They are:
- Individual health insurance- This insurance plan offers medical cover to just one policyholder.
- Family Floater Insurance- This policy plan offers health insurance for the entire family at once
- Critical illness cover- These health plans provide extensive financial assistance to the policyholder diagnosed with specific chronic illnesses
- Senior citizen health insurance- This policy plan specifically caters to senior citizens, i.e. people aged 60 years and beyond.
- Group health insurance- These policy plans are for employees of an organisation or company. These policies get organised so that older beneficiaries can get removed, and fresh beneficiaries can get added depending upon the company’s employee retention capability.
- Maternity health insurance- This plan covers medical expenses during prenatal, post-natal and delivery stages. It covers both the mother as well as a newborn baby.
- Personal Accident Insurance- These medical insurance policies protect financial liabilities, arm injuries, disability or death from accidents.
- Preventive Healthcare Plan- These policies cover the cost of treatment related to severe disease or condition.
Travel insurance policies ensure protection for travellers during a trip. Travel insurance protects against travel expenses, luggage loss, medical emergencies arising on a trip, etc.
There are three types of travel insurance policies. These are:-
- Domestic travel insurance- A domestic travel insurance grants protection against any such loss mentioned above arising on a trip within the country
- International travel insurance- This is also the same as domestic travel insurance. The only difference is that the jurisdiction of cover increases and increases to international travel and trips and protects against any such loss like loss of a passport or luggage.
- Home Holiday Insurance: This type of policy protects the policyholder’s home against any event arising when he is on a trip, and his home remains unguarded and unprotected. This protection can be like protection against burglary, fire, and other events.
This insurance covers buildings, houses or any immovable property. It protects both private and commercial properties.
It protects the property against any unforeseen event that may occur and cause loss to the property or its belongings. These unforeseen events can be theft, fire due to a short circuit or an act of god, etc.
These property insurance can be of many types or any property or belonging. Some of these are:-
- Home Insurance protects the home and the belongings inside the policyholder against any damage or loss caused by theft, natural calamity, etc.
- Office Insurance protects a commercial space like an office from any form of damage or loss from an unforeseen act or accident that cannot get mitigated.
- Shop Insurance- This insurance protects the shop of a businessman from any loss or damage caused by the previously mentioned acts.
- Building Insurance- This insurance protects a whole building by compensating the loss caused by any of the previously mentioned acts.
There could be many more forms of property insurance as all the types of property cannot be defined here, and insurance coverage may differ from property to property depending on its value and size.
This insurance limits the financial liability of a person for a limited period. It is also known as a small insurance plan or sachet insurance plan.
It focuses on the specific needs of the policyholder. It provides a small cover amount with small premium payments.
This insurance plan protects a person from potential threats or damage.
E.g.:- A person lives in an area where water logging is a common problem. So, that person can take this insurance policy for malaria for a period in which malaria is at an increase for 3-4 months with a small cover amount of 50 thousand
Benefits and Importance of Insurance
There are some advantages of Insurance that benefit the people of a society in many forms. Here are some benefits of insurance depicting its importance.
- Risk management- An insurance gets based on a risk management strategy by using the risk pooling method. It always keeps an insured person secure from future contingencies resulting in a pecuniary loss.
- Economic growth- The insurance sector promotes economic growth by providing employment opportunities, investment in various development projects, etc. It also pays taxes on the profit earned by investing the client’s money in the capital market.
- Risk distribution- Insurance companies use a risk distribution mechanism to avoid the loss of money paid by clients. The risk gets distributed through various organizations and sectors.
- Tax benefit- An insured person is subject to get tax benefits under the income tax act on his premiums. He gets tax exemption on the amount of premium paid by him.
- Ease of loan availability- A policyholder can easily get a loan against him or his property based on the insurance he availed for him or his property. For example, a person taking a loan against his shop can get eased if he has insured his shop.
- Sense of security and peace- An insured person has a sense of security and peace in his mind against any contingency that can risk that person’s financial stability or his family. Insurance gives a sense of security to a person from an event of a financial crisis.
For example, if a person with life insurance dies in an accident, his dependents will not suffer from a financial crisis in their maintenance or fulfilling their needs.
There are some public sector insurance companies in India. These are:-
- Life insurance corporation of India(LIC)
- General insurance corporation of India(GIC).
- United India Insurance company Limited(UIIC)
- The oriental insurance company Limited(OIC)
- National insurance company Limited(NIC)
- Agriculture insurance company of India Limited(AIC)
An insurance policy will always benefit a person if bought with utmost good faith after disclosing all material facts. To meet the inflation and uncertainties in this time, it is better to secure oneself and one’s family or properties to meet the needs of the future and avoid any financial crisis and hardships
Life insurance is also growing in the past few years, ultimately resulting in economic growth in a country. The life insurance industry recorded a premium of 5.73 trillion in the financial year 2020.
Union budget 2021 also increased the FDI limit in the Insurance sector from 49% to 74%.
Insurance penetration in India is the ratio of total insurance premiums in India to its GDP, which increased from 2.82 per cent in FY 19 to 4.2 per cent in FY 21.
The employees of factories and establishments are ensured financial protection under the Employees state insurance act 1948 got enacted to provide the employees with medical benefits, sickness benefits, maternity benefits, and disablement benefits to the employees of factories and establishments
The public liability insurance act 1991 got enacted to provide damages to the persons affected by accidents while handling any hazardous substances.
Which is the regulatory body for the Insurance companies in India?
India's Insurance regulatory and development authority (IRDAI) regulates insurance companies in India.
Which act led to the establishment of the Life Insurance Corporation of India (LIC)?
Life Insurance Act 1956
Which non-life insurance firm gets authorised by the International Financial Services Centre (IFSC) to establish an IFSC Insurance Office in GIFT City in Gandhinagar, Gujarat, in 2021?
ICICI Lombard General Insurance.
"Health AdvantEDGE" scheme was launched by which insurance company provides cover against healthcare and medical needs?
BHARTI AXA General Insurance.