What is insurance?

Insurance in broad terms may be described as a method of sharing financial losses of few from a common fund that are equally exposed to the same loss. Insurance, in the simplest terms, means you pay a lump sum to get leverage or protection against an incident of large magnitude. So, when the unexpected misfortune is encountered the insurance company can set in helping you out to sail through the dirt.

Example:
Say 1000 motor cars valued at Rs. 300000/- each are observed over a period of five years. On an average say per year two cars are at total loss by accident. Then the total annual loss would be Rs.600000. If the loss is to be shared by all the 1000 owners then they have to contribute Rs.600/- each.

Insurance is concerned with the protection of the economic value of assets. Human being, house, furniture, motor car are tangible assets while liabilities are intangible assets.

Insurance is associated with the concept of RISK. Risk can be defined as the unforeseen element which may impede your progress in achieving the objective.

 

Essential elements of insurance:

  • Subject Matter: It is defined as the asset (human life, machinery, motor car etc) which creates economic value.
  • Peril: It is defined as the factor (fire, storm, burglary, injury etc) that can create hazard to the asset thereby creating loss of economic value.
  • Financial Loss: It is defined as the degree of hazard the subject matter is exposed to due to the peril.

 

Fundamental Principles of Insurance:

  • Utmost Good Faith: The greatest degree of good faith by law is expected from the proposer. It is the duty of the proposer to disclose all material facts not only already known but also extends to material facts which he ought to know.
  • Insurable Interest: Insurable interest is defined as the right of the insured to insure the asset. Insurable Interest is required to support the contract of Insurance in order to make it legal, otherwise the contract is null and void. In nutshell if property is the subject matter of insurance then the subject matter of insurance contract is the insured's pecuniary interest in that property.
  • Principle of Indemnity: Indemnity can be defined as "compensation for loss or injury sustained" or "to make good the loss or damage". This principle is not applicable to life insurance policies.
  • Subrogation: This may be defined as the transfer of rights and remedies of the insured to the insurer who has indemnified the insured in respect of the loss.

 

Types of Insurance:

Insurance is generally classified into 2 types:

  1. Life Insurance
  2. General Insurance

Life Insurance:

Life Insurance pertains to the loss of income due to death of the person whose life is insured with the insurer. In this case the proceeds of the policy are paid to the nominee of the insured upon death of the life insured.

 

The benefits of life insurance are: 

  1. Covers death or critical illness.
  2. Covers financial interests of the family on the death of the policyholder.
  3. These products also have inbuilt wealth creation propositions. The customer benefits on two counts and life insurance occupies a unique space in the landscape of investment options available to a customer.
  4. Life insurance products offer specific tailor made products for different life stages.
  5. They offer retirement plans.
  6. A few products offer loan facilities against the plan.
  7. Last but not least life insurance premiums offer tax saving benefits.

 

General Insurance:

General Insurance refers all other types of insurance except life insurance. Hence this is also referred to a non life insurance.

 General Insurance can be further classified into three categories:

  • Fire Insurance
  • Marine Insurance
  • Miscellaneous Insurance
  • Motor Insurance
  • Health Insurance
  • Householder Insurance
  • Shopkeeper's Insurance
  • Engineering Insurance
  • Rural Insurance
  • Liability Insurance

One of the main reasons why one should go for insurance is to protect one's belongings and assets against financial loss. When one has earned and accumulated property, protecting it is prudent. The law also requires us to be insured against some liabilities. That is, in case we cause losses to another person, that person is entitled to compensation. To ensure that we can afford to pay that compensation, the law requires us to buy liability insurance, so that the responsibility of paying the compensation is transferred to an insurance company.

 

What does General Insurance do for me?

Accidents... illness... fire... financial securities are the things you'd like to worry about any time. General Insurance provides you the much-needed protection against such unforeseen events. Unlike Life Insurance, General Insurance is not meant to offer returns but is a protection against contingencies. Under certain Acts of Parliament, some types of insurance like Motor Insurance and Public Liability Insurance have been made compulsory.

 

How much Insurance do I need?

It is very important to have adequate amount of coverage for each insurance policy. For any asset or property insurance, the value of the asset based on market value or reinstatement value should be taken into consideration before deciding Sum Insured. If the Sum Insured is not adequate, the percentage representing the uncovered portion of the asset is to be borne by the insured.

 

Regulation of Insurance Industry in India:

The insurance business in India is governed by two legislations:

  • The Insurance Act 1938
  • The Insurance Regulatory and Development Authority Act 1999

All insurance companies, life and non-life, in public as well as private sector fall under the purview of the regulator IRDA (Insurance Regulatory and Development Authority) and are governed by the above mentioned two acts.