I.

INTRODUCTION TO INSURANCE

UNIT IV

Insurance is a contract between the insurance company (insurer) and the policyholder
(insured). In return for a consideration (the premium), the insurance company promises to
pay a specified amount to the insured on the happening of a specific event.
Insurance in terms of the relationship between the insured & the insurer
transfer device:
Insurance may be defined as the transfer of pure risk from the insured to the
insurer. The insured is the person or firm or company confronted by risk and the insurer
is a person or firm or company, which specializes in the assumption of risk. The primary
business of the insurer is risk assumption for a fee.
According to Prof Mehr & Cammack, Insurance is a device for reducing risk by
combining a sufficient number of exposure units to make their individual losses
collectively predictable. The predictable loss is then shared proportionately by all units in
the combination. Therefore, it implies both that uncertainty is reduced & losses are
shared. Further, it is said that a device will be deemed Insurance if
(i) it implies the law of large numbers so that the requirement of future funds to
cover losses are predictable with reasonable accuracy.
(ii) it provides some definite method for raising these funds by levies against the units
covered by the scheme.
Insurance is a social device which combines the risks of individuals into a group, using
funds contributed by members of the group to pay for losses.
The essence of the Insurance scheme is that it is a
1)
Social science
2)
Accumulation of funds
3)
It involves a group of risks
4)
Transfer of risk to the whole group
Background of Insurance:
Insurance as security is need of all human beings. No animal, no plant nor
mountains and oceans want any security, like man does. Man is afraid of uncertainty,
fears and death. Although a reality, one day each one will die; early or later, timely or
untimely is the question, which has no answer. He is afraid of risk & losses in future. He is
ever in search of security & certainty. In early history man lived in-groups and
communities to be secure.
At the earlier stage, whenever an earning member would die due to disease or death,
the other members of the social group (or family or clan) would contribute to bail the
survivors in the family out of financial difficulties. This contribution was in the shape of
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food- clothing and shelter. Even today we donate money, food, clothing and other materials
of life to rehabilitate the family whose breadwinner has left for his heavenly abode,
unfortunately, suddenly, sadly. (Also people, friends, relatives even today contribute
towards marriage, education, healthcare expenses or mishap).
Later, as commercial considerations grew stronger and stronger; nucleus family
growth became a common practice these contributions and sharing started becoming
individualistic and took the shape of premium. The assurances which were earlier by will
and practice became a commodity (though intangible). Thus the concept of Insurance
grew. Any person who would not contribute, or would contribute less according to his
paying capacity was denied reciprocal help or promise of help, or was given help in
proportion to his contribution which he had been contributing as a faithful obedient
member of the society.
In earlier days, in India, on an unexpected death of breadwinner in any family, the
villagers or neighbourhood would collect funds to help the survive in the family and such
practice continues even now. Today also, when after death Bhog or Kiryas takes place,
relatives give money to the survivors though this may not be adequate collection to meet
expenses of remaining part of life when there is no breadwinner. Insurance is on similar
pattern.
Purpose of Insurance:
Every human being has fear in his mind. The fear whether he will be able to meet
the basic needs of the life i.e. Food, Clothing and Housing (Roti, Kapda and Makkan). He
has fear not only for himself but also for his dependents. The source of income to meet his
basic needs may be through service or business. If he is able to meet his basic needs then
he acquires the assets i.e. vehicles, property or jewellery etc. Then he gets additional fear of
saving the assets from destruction. (The assets may be destroyed through accident, fire or
earthquake etc. and the income may be cut off due to certainty i.e. old age and death or
uncertainty i.e. accident, illness or disability.)
As you know, the old age and death is certain for every human being while the accident,
illness, disability and destruction of assets may be by random. The number of accidents
will take place but with whom is uncertain. Therefore, to overcome this problem, the
Insurance plays a very important role.
The principal source of income of an individual comes from the compensation for work
performed by him. If this source of income gets cut off then: Family will make social and economic adjustments like:
Wife may take employment at the cost of home making responsibilities
Children may have to go for work at the cost of education.
Family members might have to accept charity from relatives, friends etc. at the cost of
their independence and self-respect.
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Family standard of living might have to be reduced to a level below the essentials for
health and happiness.
The basic threats which all of us may encounter to varied extent and which result in cut
off of income or sudden increase in - uncalled for expenses (beyond our means or higher
than our earnings) i.e. dislocates the human life, are: ILLNESS (malnutrition, environment, chronic) uncertain ACCIDENT (uncertain)
Disability Permanent or Temporary (uncertain) OLD AGE (certain)
DEATH ( certain)
Need of Insurance:
To provide Security and Safety
The Life Insurance provides security against premature death and payment in old age to
lead the comfortable life. Similarly in general Insurance, the property can be insured
against any contingency i.e. fire, earthquake etc.
To provide Peace of Mind
The uncertainty due to fire, accident, death, illness, disability in the human life, it is
beyond the control of the human beings. By way of Insurance, he may be compensated
financially but not emotionally. The financial compensation provides not only peace of
mind but also motivates to work more and more.
To Eliminate Dependency
On the death of the breadwinner, the consequences need not be explained. Similar to the
destruction of property and goods the family would suffer a lot. It could lead to reduction
in the standard of living or begging from relatives, friends or neighbours. The economic
independence of the family is reduced. The Insurance is the only way to assist and
provider them adequate at the time of sufferings.
To Encourage Savings
Life Insurance provides protection and investment while general Insurance provides only
protection to the human life and property respectively. Life Insurance provides systematic
saving because once the policy is taken then the premium is to be regularly paid otherwise
the amount will be forfeited.
To fulfill the needs of a person
a)
mily needs
b)
age needs
c)
adjustment needs
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Fa
Old
Re-

d)

cial needs: Education, Marriage, health

Spe

e)

The
clean up needs: After death, ritual ceremonies, payment of wealth tax and income
taxes are certain requirements, which decreases the amount of funds of the
family members.
To Reduce the Business Losses:
In business the huge amount is invested in the properties i.e. Building and Plant and
Machinery. These properties may be destroyed due to any negligence, if it is not insured no
body would like to invest a huge amount in the business and industry. The Insurance
reduced the uncertainty of business losses due to fire or accidents etc.
To Identify the Key man:
Key man is a particular man whose capital, expertise, energy and dutifulness make him
the most valuable asset in the business and whose absence well reduce the income of the
employer tremendously and upto that time when such employee is not substituted. The
death or disability of such valuable lives will prove a more serious loss than that fire or any
hazard. The potential loss to be suffered and the compensation to the dependents of such
employee require an adequate provision, which is met by purchasing an adequate life
policies.
To Enhance the Limit:
The business can obtain loan but pledging the policy as collateral for the loan. The insured
persons are getting more loan due to certainty of payment at their death.
Welfare of Employees:
The welfare of the employees is the responsibility of the employer. The employer is
supposed to look after the welfare of the employees. The provisions are being made for
death, disability and old age. Though these can be insured through individual life
Insurance but an individual may not be insurable due to illness and age. But the group
policy will cover his Insurance and the premium is very low in group Insurance. The
expenditure paid on account of premium will be allowable expenditure.
II. INSURANCE AS RISK MANGEMENT TOOL
What is Risk:
Risk is the potential of loss (an undesirable outcome, however not necessarily so)
resulting from a given action, activity and/or inaction. The notion implies that a choice
having an influence on the outcome sometimes exists (or existed). Potential losses
themselves may also be called "risks". Any human endeavor carries some risk, but some
are much riskier than others.
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Risk can be defined in seven different ways

1. The probability of something happening multiplied by the resulting cost or benefit if
it does.
2. The probability or threat of quantifiable damage, injury, liability, loss, or any other
negative occurrence that is caused by external or internal vulnerabilities, and that
may be avoided through preemptive action.
PERIL AND HAZARD
The terms "peril" and "hazard" should not be confused with the concept of risk discussed
earlier. Let us first consider the meaning of peril.
Peril
Peril is defined as the cause of loss. Thus, if a house burns because of a fire, the peril, or
cause of, loss, is the fire. If a car is totally destroyed in an accident with another motorist,
accident (collision) is the peril, or cause of loss. Some common perils that result in the loss
or destruction of property include fire, cyclone, storm, landslide, lightning, earthquakes,
theft, and burglary.
Hazard
Factors, which may influence the outcome, are referred to as hazards. These hazards are
not themselves the cause of the loss, but they can increase or decrease the effect should a
peril operate. The consideration of hazard is important when an insurance company is
deciding whether or not it should insure some risk and what premium to charge. So a
hazard is a condition that creates or increases the chance of loss. There are three major
types of hazards: Hazard can be physical or moral or Morale.
Physical hazard
Physical hazard relates to the physical characteristics of the risk, such as the nature of
construction of a building, security protection at a shop or factory, or the proximity of
houses to a riverbank. Therefore a physical hazard is a physical condition that increases
the chances of loss. Thus, if a person owns an older building with defective wiring, the
defective wiring is a physical hazard that increases the chance of a fire. Another example of
physical hazard is a slippery road after the rains. If a motorist loses control of his car on a
slippery road and collides with another motorist, the slippery road is a physical hazard
while collision is the peril, or cause of loss.
Moral hazard
Moral hazard concerns the human aspects which may influence the outcome. Moral
hazard is dishonesty or character defects in an individual that increase the chance of loss.
For example, a business firm may be overstocked with inventories because of a severe
business recession. If the inventory is insured, the owner of the firm may deliberately burn
the warehouse to collect money from the insurer. In effect, the unsold inventory has been
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sold to the insurer by the deliberate loss. A large number of fires are due to arson, which is
a clear example of moral hazard.
Moral hazard is present in all forms of insurance, and it is difficult to control. Dishonest
insured persons often rationalise their actions on the grounds that "the insurer has plenty
of money". This is incorrect since the company can pay claims only by collecting premiums
from other policy owners.
Morale hazard
This usually refers to the attitude of the insured person. Morale hazard is defined as
carelessness or indifference to a loss because of the existence of insurance. The very
presence of insurance causes some insurers to be careless about protecting their property,
and the chance of loss is thereby increased. For example, many motorists know their cars
are insured and, consequently, they are not too concerned about the possibility of loss
through theft. Their lack of concern will often lead them to leave their cars unlocked. The
chance of a loss by theft is thereby increased because of the existence of insurance.
BASIC CATEGORIES OF RISK
Speculative (dynamic) risk is a situation in which either profit OR loss is possible.
Speculative risk is uninsurable.
Pure or Static Risk
The second category of risk is known as pure or static risk. Pure (static) risk is a situation
in which there are only the possibilities of loss or no loss, as oppose to loss or profit with
speculative risk. The only outcome of pure risks are adverse (in a loss) or neutral (with no
loss), never beneficial. Examples of pure risks include premature death, occupational
disability, catastrophic medical expenses, and damage to property due to fire, lightning, or
flood.
Besides insurability, there are other classifications of Risks. Few of them are discussed
below:
Fundamental Risks and Particular Risks
Fundamental risks affect the entire economy or large numbers of people or groups within
the economy. Examples of fundamental risks are high inflation, unemployment, war, and
natural disasters such as earthquakes, hurricanes, tornadoes, and floods.
Particular risks are risks that affect only individuals and not the entire community.
Examples of particular risks are burglary, theft, auto accident, dwelling fires. With
particular risks, only individuals experience losses, and the rest of the community are left
unaffected.
Subjective Risk
Subjective risk is defined as uncertainty based on a person's mental condition or state of
mind. For example, assume that an individual is drinking heavily in a bar and attempts to
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drive home after the bar closes. The driver may be uncertain whether he or she will arrive
home safely without being arrested by the police for drunken driving. This mental
uncertainty is called subjective risk.
Objective Risk
Objective risk is defined as the relative variation of actual loss from expected loss. For
example, assume that a fire insurer has 5000 houses insured over a long period and, on
an average, 1 percent, or 50 houses are destroyed by fire each year. However, it would be
rare for exactly 50 houses to burn each year and in some years, as few as 45 houses may
burn. Thus, there is a variation of 5 houses from the expected number of 50, or a variation
of 10 percent. This relative variation of actual loss from expected loss is known as objective
risk.
Static Risks
Static risks are risks connected with losses caused by the irregular action of nature or by
the mistakes and misdeeds of human beings. Static risks are the same as pure risks and
would, by definition, be present in an unchanging economy.
Dynamic Risk
Dynamic risks are risks associated with a changing economy. Important examples of
dynamic risks include the changing tastes of consumers, technological change, new
methods of production, and investments in capital goods that are used to produce new and
untried products.
Financial and Non-financial Risks
A financial risk is one where the outcome can be measured in monetary terms.
This is easy to see in the case of material damage to property, theft of property or lost
business profit following a fire. In cases of personal injury, it can also be possible to
measure financial loss in terms of a court award of damages, or as a result of negotiations
between lawyers and insurers. In any of these cases, the outcome of the risky situation
can be measured financially.
There are other situations where this kind of measurement is not possible. Take the case of
the choice of a new car, or the selection of an item from a restaurant menu. These could be
construed as risky situations, not because the outcome will cause financial loss, but
because the outcome could be uncomfortable or disliked in some other way. We could even
go as far as to say that the great social decisions of life are examples of non-financial risks:
the selection of a career, the choice of a marriage partner, having children. There may or
may not be financial implications, but in the main the outcome is not measurable
financially but by other, more human, criteria.
Insurance is primarily concerned with risks that have a financially measurable outcome.
But not all risks are capable of measurement in financial terms. One example of a risk
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that is difficult to measure financially is the effect of bad publicity on a company consequently this risk is very difficult to insure.
RISK MANAGEMENT
Risk, in insurance terms, is the possibility of a loss or other adverse event that has the
potential to interfere with an organizations ability to fulfill its mandate, and for which an
insurance claim may be submitted.
What is risk management?
Risk management ensures that an organization identifies and understands the risks to
which it is exposed. Risk management also guarantees that the organization creates and
implements an effective plan to prevent losses or reduce the impact if a loss occurs.
A risk management plan includes strategies and techniques for recognizing and
confronting these threats. Good risk management doesnt have to be expensive or time
consuming; it may be as uncomplicated as answering these three questions:
1. What can go wrong?
2. What will we do, both to prevent the harm from occurring and in response to the
harm or loss?
3. If something happens, how will we pay for it?
An effective risk management practice does not eliminate risks. However, having an
effective and operational risk management practice shows an insurer that your
organization is committed to loss reduction or prevention. It makes your organization a
better risk to insure.
Role of insurance in Risk Management:
Insurance is an important risk management tool in India. Public and classified
organisations are the basic organisations for improving risks. Regulatory controls reduce
individual risks. For instance, in India, the IRDA combines insurance mechanisms with
regulatory controls to control risk failures. In open markets, risk is improved through
insurance markets by diversifying the expenditures.
Risk management is major part of finance. But now insurance companies are selling
the financial risk management products and the substitutes are directly put in capital
markets. Insurance policies protect a large number of insurable risks and cover financial
risks.
Risk Financing
Risk financing refers to the manner in which the risk control measures that have been
implemented shall be financed. It is necessary to transfer or reduce risks when risk
exposure of a company goes beyond the maximum limit. But both these methods involve
costs. Risk financing is defined as the funding of losses either by using the internal
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reserves or by purchasing insurance. The main objective of risk financing is to spread the
losses over time in order to reduce the financial strain. Three ways through which risk is
financed are:
Losses are charged according to the present operating costs.
Ex-ante provision is made for losses by procuring insurance or by constructing an
unforeseen event for which losses are charged.
Losses are financed with loans that are paid after few months.
Risk financing provides the techniques for funding of losses after their occurrence.
In general, risk management deals with risks by designing the procedures and
implementing the methods that lessens the loss occurrence or the financial impacts.
Insurance is a prime risk management tool which defines risk as a preloss exercise
reflecting an organisations post loss goals. The main purpose of risk management is to
minimise losses and protect people. Insurance is an easily affordable loss prevention
technique.
Insurance acts as contractual transfer for risks. Insurance is an appropriate
management tool when the amount of loss is low and amount of potential loss is high. For
smaller and medium sized organisations, insurance acts as risk management tool. In
certain cases, larger-sized organisations may also need the services of insurance
companies for loss settlements. Even after insuring a loss procedure, risk manager faces
some problems. Hence risk managers need to choose an appropriate insurance company,
policy and agent. Increasingly, insurance is a prime management tool which resolves the
liability limitations. For example, if a production process requires chemical components,
then special toxic risk insurance is needed.
Risk avoidance
Risk avoidance is where a certain loss exposure is never acquired or the existing one is
totally removed. This is one of the strongest methods to deal with risks. The major
advantage of this method is that it reduces the chance
of loss to zero. The two ways by which risk can be avoided are proactive avoidance and
abandonment avoidance. In the first case, the person does not assume any risk and
therefore any project which brings in risk is not taken up. For example a company which
has chances of nuclear radiation will not set up the company, due to the perils which it
can bring up.
In the case of abandonment avoidance, the existing loss exposure is abandoned. All
activities with a certain degree of risk are abandoned. The case of abandonment avoidance
is very few. If a firm abandons risky activities, then it faces difficulties in remaining in the
market. The firm in the process of abandoning might take up new activities which exposes
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to another type of risk.

Risk reduction
This strategy aims to decrease the number of losses by reducing the occurrence of loss,
which can be done in two ways namely loss prevention and loss control.
Loss prevention is a desirable way of dealing with risks. It eliminates the possibility of loss
and hence risk is also removed. The examples of this are safety programs like medical care,
security guards, and burglar alarms.
Loss control refers to measures that reduce the severity of a loss after it occurs. For
example segregation of exposure units by having warehouses with inventories at different
locations. Insurance companies provide guidance and incentives to the company which
has taken the policy to avoid the occurrence of loss.
Risk retention
Retention simply means that the firm retains part or all the losses incurred from a given
loss. Risks may be knowingly or unknowingly retained by the organisation. They are hence
classified as active and passive based on this. Active risk retention is when the firm knows
of the loss exposure and plans to retain it without making any attempt to transfer it or
reduce it. Passive retention is the failure to identify the loss exposure and retaining it
unknowingly.
Retention can be used only under the following circumstances:

When insurers are unwilling to write coverage or if the coverage is too expensive.If
the exposure cannot be insured or transferred.
If the worst possible loss is not serious.
When losses are highly predictable.

Based on past experience if most losses fall within the probable range of frequency, they
can be budgeted out of the companys income.
Risk combination
In this strategy, risks are retained in a proportion that reduces the overall risk
combination to a minimum level. In order to minimise the overall risk, one risk is added to
another existing risk instead of transferring a risk. This strategy is mostly used in
management of financial risk. The risk is distributed over a number of issuers instead of
putting it on a single issuer. This reduces the chances of default. For example it is better to
have multiple suppliers instead of relying on a single supplier.
Risk transfer
If the risk is being borne by another party other than the one who is primarily exposed to
risk then it is termed as risk transfer. In this case, transfer of asset does not take place but
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only the risk involved is transferred. The two parties involved in this strategy are the
transferor (party transferring the risk) and the transferee (party to whom the risk is
transferred). The contracts made in this strategy are grouped as exculpatory contracts.
In this contract the transferor is not liable if the event of risk takes place. But if the
transferor is supposed to pay for the risk incurred then it cannot be termed as risk
transfer.
Risk sharing
This is an arrangement made by which the loss incurred is shared. For example in a
corporation, a large number of people makes investments and hence each bears only a
portion of risk that the enterprise faces. Insurance involves the mechanism of risk
sharing.

Risk hedging
Hedging is buying and selling future contracts to balance the risk of changing prices in the
cash market. A hedger is someone who uses derivatives to reduce risk caused by price
movements. Derivatives are instruments derived from the base securities like equity and
bonds. Forward contracts, futures, swaps and options are examples of derivatives.
III. PRINCIPLES OF INSURANCE
The business of insurance aims to protect the economic value of assets or life of a person.
Through a contract of insurance the insurer agrees to make good any loss on the insured
property or loss of life (as the case may be) that may occur in course of time in
consideration for a small premium to be paid by the insured.
1. Principle of Utmost good faith
2. Principle of Insurable interest
3. Principle of Indemnity
4. Principle of Subrogation
5. Principle of Contribution
6. Principle of Proximate cause
7. Principle of Loss of Minimization
1. PRINCIPLE OF UBERRIMAE FIDEI (UTMOST GOOD FAITH)
Both the parties i.e. the insured and the insurer should have a good faith towards
each other.
The insurer must provide the insured complete, correct and clear information of
subject matter.
The insurer must provide the insured complete, correct and clear information
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regarding terms and conditions of the contract.

This principle is applicable to all contracts of insurance i.e. life, fire and marine
insurance.
Principle of Uberrimae fidei (a Latin phrase), or in simple English words, the Principle of
Utmost Good Faith, is a very basic and first primary principle of insurance. According to
this principle, the insurance contract must be signed by both parties (i.e insurer and
insured) in an absolute good faith or belief or trust.
The person getting insured must willingly disclose and surrender to the insurer his
complete true information regarding the subject matter of insurance. The insurer's liability
gets void (i.e legally revoked or cancelled) if any facts, about the subject matter of
insurance are either omitted, hidden, falsified or presented in a wrong manner by the
insured.
The principle of Uberrimae fidei applies to all types of insurance contracts.
2. PRINCIPLE OF INSURABLE INTEREST

The insured must have insurable interest n the subject matter of insurance.
In life insurance it refers to the life insured.
In marine insurance it is enough if the insurable interest exists only at the time of
occurrence of the loss.
In fire and general insurance it must be present at the time of taking policy and also
at the time of the occurrence of loss.
The owner of the party is said to have insurable interest as long as he is the owner of
it.
It is applicable to all contracts of insurance.
The principle of insurable interest states that the person getting insured must have
insurable interest in the object of insurance. A person has an insurable interest when the
physical existence of the insured object gives him some gain but its non-existence will give
him a loss. In simple words, the insured person must suffer some financial loss by the
damage of the insured object.
For example: The owner of a taxicab has insurable interest in the taxicab because he is
getting income from it. But, if he sells it, he will not have an insurable interest left in that
taxicab.
From above example, we can conclude that, ownership plays a very crucial role in
evaluating insurable interest. Every person has an insurable interest in his own life. A
merchant has insurable interest in his business of trading. Similarly, a creditor has
insurable interest in his debtor.
3. PRINCIPLE OF INDEMNITY
Indemnity means guarantee or assurance to put the insured in the same position in
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which he was immediately prior to the happening of the uncertain event. The insurer
undertakes to make good the loss.

It is applicable to fire, marine and other general insurance.

Under this the insurer agreed to compensate the insured for the actual loss suffered.
Indemnity means security, protection and compensation given against damage, loss or
injury. According to the principle of indemnity, an insurance contract is signed only for
getting protection against unpredicted financial losses arising due to future uncertainties.
Insurance contract is not made for making profit else its sole purpose is to give
compensation in case of any damage or loss.
In an insurance contract, the amount of compensations paid is in proportion to the
incurred losses. The amount of compensations is limited to the amount assured or the
actual losses, whichever is less. The compensation must not be less or more than the
actual damage. Compensation is not paid if the specified loss does not happen due to a
particular reason during a specific time period. Thus, insurance is only for giving
protection against losses and not for making profit.
However, in case of life insurance, the principle of indemnity does not apply because the
value of human life cannot be measured in terms of money.
4. PRINCIPLE OF SUBROGATION
As per this principle after the insured is compensated for the loss due to damage to
property insured, then the right of ownership of such property passes to the insurer.
This principle is corollary of the principle of indemnity and is applicable to all
contracts of indemnity.
Subrogation means substituting one creditor for another. Principle of Subrogation is an
extension and another corollary of the principle of indemnity. It also applies to all
contracts of indemnity.
According to the principle of subrogation, when the insured is compensated for the losses
due to damage to his insured property, then the ownership right of such property shifts to
the insurer.
This principle is applicable only when the damaged property has any value after the event
causing the damage. The insurer can benefit out of subrogation rights only to the extent of
the amount he has paid to the insured as compensation.
For example: Mr. Arvind insures his house for ` 1 million. The house is totally destroyed
by the negligence of his neighbour Mr. Mohan. The insurance company shall settle the
claim of Mr. Arvind for ` 1 million. At the same time, it can file a law suit against Mr.
Mohan for ` 1.2 million, the market value of the house. If insurance company wins the case
and collects ` 1.2 million from Mr. Mohan, then the insurance company will retain ` 1
million (which it has already paid to Mr. Arvind) plus other expenses such as court fees.
The balance amount, if any will be given to Mr. Arvind, the insured.
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5. PRINCIPLE OF CONTRIBUTION
The principle is corollary of the principle of indemnity.
It is applicable to all contracts of indemnity.
Under this principle the insured can claim the compensation only to the extent of
actual loss either from any one insurer or all the insurers.
Principle of Contribution is a corollary of the principle of indemnity. It applies to all
contracts of indemnity, if the insured has taken out more than one policy on the same
subject matter. According to this principle, the insured can claim the compensation only to
the extent of actual loss either from all insurers or from any one insurer. If one insurer
pays full compensation then that insurer can claim proportionate claim from the other
insurers.
For example: Mr. Arvind insures his property worth Rs. 100,000 with two insurers "AIG
Ltd." for `90,000 and "MetLife Ltd." for `60,000. Arvind's actual property destroyed is worth
` 60,000, then Mr. Arvind can claim the full loss of `60,000 either from AIG Ltd. or MetLife
Ltd., or he can claim `36,000 from AIG Ltd. and `24,000 from Metlife Ltd.
So, if the insured claims full amount of compensation from one insurer then he cannot
claim the same compensation from other insurer and make a profit. Secondly, if one
insurance company pays the full compensation then it can recover the proportionate
contribution from the other insurance company.
6. PRINCIPLE OF CAUSA PROXIMA (NEAREST CAUSE)
The loss of insured property can be caused by more than one cause in succession to
another.
The property may be insured against some causes and not against all causes.
In such an instance, the proximate cause or nearest cause of loss is to be found out.
If the proximate cause is the one which is insured against, the insurance company is
bound to pay the compensation and vice versa.
Principle of Causa Proxima (a Latin phrase), or in simple English words, the Principle of
Proximate (i.e Nearest) Cause, means when a loss is caused by more than one causes, the
proximate or the nearest or the closest cause should be taken into consideration to decide
the liability of the insurer.
The principle states that to find out whether the insurer is liable for the loss or not, the
proximate (closest) and not the remote (farest) must be looked into.
For example: A cargo ship's base was punctured due to rats and so sea water entered and
cargo was damaged. Here there are two causes for the damage of the cargo ship - (i) The
cargo ship getting punctured beacuse of rats, and (ii) The sea water entering ship through
puncture. The risk of sea water is insured but the first cause is not. The nearest cause of
damage is sea water which is insured and therefore the insurer must pay the
compensation.
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However, in case of life insurance, the principle of Causa Proxima does not apply.
Whatever may be the reason of death (whether a natural death or an unnatural death) the
insurer is liable to pay the amount of insurance.
7. PRINPLE OF LOSS MINIMIZATION
Under this principle it is the duty of the insured to take all possible steps to
minimize the loss to the insured property on the happening of uncertain event.
According to the Principle of Loss Minimization, insured must always try his level best to
minimize the loss of his insured property, in case of uncertain events like a fire outbreak
or blast, etc. The insured must take all possible measures and necessary steps to control
and reduce the losses in such a scenario. The insured must not neglect and behave
irresponsibly during such events just because the property is insured. Hence it is a
responsibility of the insured to protect his insured property and avoid further losses.
For example: Assume, Mr. Arvind's house is set on fire due to an electric short-circuit. In
this tragic scenario, Mr. Arvind must try his level best to stop fire by all possible means,
like first calling nearest fire department office, asking neighbours for emergency fire
extinguishers, etc. He must not remain inactive and watch his house burning hoping,
"Why should I worry? I've insured my house."
IV. CHARACTERISTICS OF INSURANCE CONTRACT

A contract of insurance 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 or its equivalent in kind, upon the occurrence
of a specified event resulting in a loss to him. The policy is a document which is an
evidence of the contract of insurance.
As per Anson, a contract is an agreement enforceable at law made between two or more
persons by which rights are acquired by one more persons to certain acts or forbearance
on the part of other or others.
The Indian Contract Act, 1872, sets forth the basic requirements of a Contract. As per
Section 10 of the Act:
All agreements are contracts if they are made by the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and are not hereby expressly
declared to be void...
An Insurance policy is also a contract entered into between two parties, viz., the Insurance
Company and the Policyholder and fulfills the requirements enshrined in the Indian
Contract Act.
ESSENTIALS FOR A VALID CONTRACT
1. Proposal: When one person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal (Promisor).
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In Insurance paralance, a Proposal form (also called application for insurance) is filled in
by the person who wants to avail insurance cover giving the information required by the
insurance company to assess the risk and arrive at a price to be charged for covering the
risk (called premium). When a proposal form is submitted, the Customer does not make a
proposal, but it is only invitation to offer. The insurance company, based on the
information furnished in the proposal form, assesses the risk (also called underwriting),
and conveys the decision if accepted, at what premium and on what terms and
conditions. This is also called counter offer in insurance terminology by the insurance
company to the Customer. A medical examination is also conducted, where necessary,
before making the counter offer.
2. Acceptance: When a person to whom the proposal is made, signifies his assent thereto,
the proposal is said to be accepted (Promisee). A proposal, when a accepted, becomes a
promise;
When the Customer accepts the terms of the offer and signifies his assent by paying the
First Premium (the amount payable as the consideration), the proposal is accepted by the
Customer. A proposal of the insurance company (terms of offer), when accepted by the
Customer, becomes a promise.
3. Consideration: When, at the desire of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from doing, or promises to do or to
abstain from doing, something, such act or abstinence or promise is called a consideration
for the promise; every promise and every set of promises, forming the consideration for
each other, is an agreement;
4. Competency to contract: Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who is sound mind and is not
disqualified from contracting by any law to which he is subject.
In the case of Insurance the person with whom the Contract is entered into is called
Policyholder or Policy Owner who could be different from the subject matter which is
insured. In Life insurance contracts, for example, the person whose life is insured could be
different. For example, the Policyholder could be the Father and the Life assured could be
the son. In the case of Fire insurance, the Policy owner could be the Owner of a building
and the subject matter of insurance would be the building itself.
The Policyholder must have attained the age of majority at the time of signing the proposal
and should be of sound mind and not disqualified under any law. However, the life assured
could suffer from the above infirmities.
5. Consensus ad idem: Two or more person are said to consent when they agree upon the
same thing in the same sense.
Both the insurance company and the Policyholder must agree on the same thing in the
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same sense. The Policy document issued to the Policyholder (Customer) clearly defines
the obligations of the insurer and the terms and conditions upon which the Insurance
contract is issued.
6. Lawful object: The consideration or object of an agreement must be lawful, The
consideration or object of an agreement is unlawful under the following circumstances:
(a) Where a contract is forbidden by law or
(b) Where the contract is of such nature that, if permitted, it would defeat the
provisions of any law or is fraudulent;
(c) Where the contract involves or implies, injury to the person or property of another;
or
(d) Where the Court regards it as immoral, or opposed to public policy.
(e) The object of an insurance contract, i.e. to cover the risk by taking out an insurance
policy, is a lawful object.
7. Agreement must not be in restraint of trade or legal proceedings: Every agreement
by which anyone is restrained from exercising a lawful profession, trade or business of
any kind, is to that extent void. Every agreement, by which any party thereto is
restricted absolutely from enforcing his rights under or in respect of any contract, by the
usual legal proceedings in the ordinary tribunals, or which limits the time within which
he may thus enforce his rights, is void to the extent
8. Agreement must be certain and not be a wagering contract: Agreements, the
meaning of which is not certain, or capable of being made certain, are void. Agreements
by way of wager are void; and no suit shall be brought for recovering anything alleged to
be won on any wager, or entrusted to any person to abide the result of any game or other
uncertain event on which may wager is made.
FEATURES OF INSURANCE CONTRACT
Though all contracts share fundamental concepts and basic elements, insurance
contracts typically possess a number of characteristics not widely found in other types of
contractual agreements. The most common of these features are listed here:
(a) Aleatory
If one party to a contract might receive considerably more in value than he or she gives up
under the terms of the agreement, the contract is said to be aleatory. Insurance contracts
are of this type because, depending upon chance or any number of uncertain outcomes,
the insured (or his or her beneficiaries) may receive substantially more in claim proceeds
than was paid to the insurance company in premium dollars. On the other hand, the
insurer could ultimately receive significantly more money than the insured party if a claim
is never filed.
(b) Adhesion
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In a contract of adhesion, one party draws up the contract in its entirety and presents it to
the other party on a 'take it or leave it' basis; the receiving party does not have the option
of negotiating, revising, or deleting any part or provision of the document. Insurance
contracts are of this type, because the insurer writes the contract and the insured either
'adheres' to it or is denied coverage. In a court of law, when legal determinations must be
made because of ambiguity in a contract of adhesion, the court will render its
interpretation against the party that wrote the contract. Typically, the court will grant any
reasonable expectation on the part of the insured (or his or her beneficiaries) arising from
an insurer-prepared contract.
(c) Utmost Good Faith
Although all contracts ideally should be executed in good faith, insurance contracts are
held to an even higher standard, requiring the utmost of this quality between the parties.
Due to the nature of an insurance agreement, each party needs - and is legally entitled - to
rely upon the representations and declarations of the other. Each party must have a
reasonable expectation that the other party is not attempting to defraud, mislead, or
conceal information and is indeed conducting themselves in good faith. In a contract of
utmost good faith, each party has a duty to reveal all material information (that is,
information that would likely influence a party's decision to either enter into or decline the
contract), and if any such data is not disclosed, the other party will usually have the right
to void the agreement.
(d) Executory
An executory contract is one in which the covenants of one or more parties to the contract
remain partially or completely unfulfilled. Insurance contracts necessarily fall under this
strict definition; of course, it's stated in the insurance and agreement that the insurer will
only perform its obligation after certain events take place (in other words, losses occur).
(e) Unilateral
A contract may either be bilateral or unilateral. In a bilateral contract, each party
exchanges a promise for a promise. However, in a unilateral contract, the promise of one
party is exchanged for a specific act of the other party. Insurance contracts are unilateral;
the insured performs the act of paying the policy premium, and the insurer promises to
reimburse the insured for any covered losses that may occur. It must be noted that once
the insured has paid the policy premium, nothing else is required on his or her part; no
other promises of performance were made. Only the insurer has covenanted any further
action, and only the insurer can be held liable for breach of contract.
(f) Conditional
A condition is a provision of a contract which limits the rights provided by the contract. In
addition to being executory, aleatory, adhesive, and of the utmost good faith, insurance
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contracts are also conditional. Even when a loss is suffered, certain conditions must be
met before the contract can be legally enforced. For example, the insured individual or
beneficiary must satisfy the condition of submitting to the insurance company sufficient
proof of loss, or prove that he or she has an insurable interest in the person insured.
(g) Personal contract
Insurance contracts are usually personal agreements between the insurance company and
the insured individual, and are not transferable to another person without the insurer's
consent. (Life insurance and some maritime insurance policies are notable exceptions to
this standard.) As an illustration, if the owner of a car sells the vehicle and no provision is
made for the buyer to continue the existing car insurance (which, in actuality, would
simply be the writing of the new policy), then coverage will cease with the transfer of title
to the new owner.
(h) Warranties and Representations
A warranty is a statement that is considered guaranteed to be true and, once declared,
becomes an actual part of the contract. Typically, a breach of warranty provides sufficient
grounds for the contract to be voided. Conversely, a representation is a statement that is
believed to be true to the best of the other party's knowledge. In order to void a contract
based on a misrepresentation, a party must prove that the information misrepresented is
indeed material to the agreement. According to the laws of most states and in most
circumstances, the responses that a person gives on an insurance application are
considered to be a representations, and not warranties.
(i) Misrepresentations and Concealments
A misrepresentation is a statement, whether written or oral, that is false. Generally
speaking, in order for an insurance company to void a contract because of misrepresented
information, the information in question must be material to the decision to extend
coverage.
Concealment, on the other hand, is the failure to disclose information that one clearly
knows about. To void a contract on the grounds of concealment, the insurer typically must
prove that the applicant willfully and intentionally concealed information that was of a
material nature.
(j) Fraud
Fraud is the intentional attempt to persuade, deceive, or trick someone in an effort to gain
something of value. Although misrepresentations or concealments may be used to
perpetrate fraud, by no means are all misrepresentations and concealments acts of fraud.
For instance, if an insurance applicant intentionally lies in order to obtain coverage or
make a false claim, it could very well be grounds for the charge of fraud. However, if an
applicant misrepresents some piece of information with no intent for gain (such as, for
example, failing to disclose a medical treatment that the applicant is personally
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embarrassed to discuss), then no fraud has occurred.

(k) Impersonation (False pretenses)
When one person assumes the identity of another for the purpose of committing a fraud,
that person is guilty of the offense of impersonation (also known as false pretenses). For
instance, an individual that would likely be turned down for insurance coverage due to
questionable health might request a friend to stand in for him (or her) in order to complete
a physical examination.
(l) Parol (or Oral) evidence rule
This principle limits the effects that oral statements made before a contract's execution
can have on the contract. The assumption here is that any oral agreements made before
the contract was written were automatically incorporated into the drafting of the contract.
Once the contract is executed, any prior oral statements will therefore not be allowed in a
court of law to alter or counter the contract.

V. FUNCTIONS OF INSURERS:
Functions of insurers are different for life and general insurance. But some general
functions in the insurance organizations which are ensured by the insurer are discussed
in this section.
Production and sales
Production or sales is usually used in manufacturing and marketing industries. In
insurance industry, the term production and sales refers to the process where an insurer
creates and sells policies to the applicants. A producer is the insurer who produces a
particular insurance policy. If an insurer gets more number of applicants, then the
production is said to be high. The sales section of insurance industry highly depends upon
the insurance agents
Agency arrangement
To create an effective sales team, the insurer should have a good relationship with
agents. Insurance agents are the ones who reach the applicant in person and help them
choose the suitable policy for their risks. They are recruited, trained and supervised by
managers. The insurers maintain a market research division for revision of products and
launching of new products as per the evolving felt needs. The agents need to associate
themselves with the production department in identifying the marketing goals to be
achieved, study new products and marketing techniques. In India, the public sector life
insurance company LIC, has around 1.2 billion working insurance agents.
Professionalism in selling
The insurance industry is growing fast and insurance coverages are given in almost
all risks faced by an individual or an organisation. As the agents are the first ones to reach
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the applicant, they have to be aware of the field to be insured. This is possible only if the
agents are professionals with good technical knowledge in particular areas of insurance.
Professionalism is needed in marketing the products also. The insurance agents must
categorise and choose the applicants, study the risks faced by them and recommend the
best solution.
Underwriting
Underwriting is defined as a process of analysing risks of insurance applicants, and
deciding whether the insurance company should accept or reject the application.
Underwriting is a challenging task where the underwriter has to consider the applicants
side and also the risks that the company will have to face if it accepts the new policy.
Though the task of choosing polices is the responsibility of underwriters, the power to
accept or reject the policy lies with the insurer.
For example, if an applicant asks for a health insurance, the provider has to thoroughly
scrutinise the present and past health of the applicant, within applicable terms.
Sometimes the underwriter may have some reservation due to past medical records, but
decide to insure the applicant, with some conditions not included in the coverage for a
period of time. At some other times, the medical records may indicate a level of risk that
the company cannot accept, and the provider will decide to not underwrite the health
coverage. If the underwriter discards the applications where the applicant is expected to
take long time medial coverages then the insurance company can maintain a steady
monetary base and serve other clients.
Underwriting differs for life and property insurances. For life insurance, either a numerical
method or a judgmental method is used. In judgmental method, an underwriter judges the
application, by studying the applicants medical history records and present health
conditions. In numerical method, the underwriter (insurer) numerically rates every type
physical disability. These rates are added up and used to find the risks involved in the
particular policy. In some cases, the underwriters do not consider policy proposals wherein
the applicant has very bad health conditions. Underwriting is carried out in accordance
with an underwriting policy and principles
Statement of underwriting policy
The underwriting policy is the first step in underwriting. This policy clearly obeys the
companys policies and is written to ensure that the company gains more profit and
business. This policy establishes certain rules and conditions which the underwriters
follow thoroughly. This policy defines the statements of insurance policies that will be
written, prohibited exposures, the coverage to be given for each exposure and similar terms
and limitations
Rate making
Rate making is yet another important operation of insurers. Rate is defined as the price
per each unit of protection or exposure of insurance. The rate is the cost of production and
its value is known only when the policy period is over. The premium paid at first should be
sufficient for the claims and other expenses. If it is inadequate, then the insurer will be in
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loss. Insurance rates are subjected to government regulations. Government allows rates
which are not too high and which are not biased. The rate and premium determination is
the function of insurance actuaries. To determine the rates for life insurance, an actuary
has to study the statistical data of births, deaths, marriages, employment, retirement,
illnesses, and so on. The basic goal of an actuary is to determine the best premium for
policies, such that there is a profit for the company, and the company can effectively
compete with other insurance companies.
Insurance premium
Insurance premium is the product of rate and the number of units of protection
purchased. It involves the cost of the policy, requirements, benefits and the cost of writing
the insurance. The insurance premium depends upon two factors, loss expected (Pure
premium), and cost required for the business (Loading). The insurer calculates the pure
premium by dividing the total expected loss by the total number of exposures. Loading is
calculated as the sum of the agents fee, insurance expenses, tax and other fees. The gross
premium is the sum of pure premium and the loading amount.
Rate making guidelines
- The basic rate making guidelines are:
- The rate should be just enough to cover the losses, but should not be in excess.
- The rate should allocate equal cost burden to the insureds without any biasness.
- The rates should encourage the insureds to do loss control.
- The rates should be revised and updated often.
The guidelines seem to be simple, but have to be maintained strictly. If the rate is high,
then it is easy to cover the losses, but it will be challenging to compete in the insurance
market. If the rates are calculated incorrectly, then it cannot be bargained again. The cost
is assigned differently in different situations. For example in life insurance, the rates are
fixed after considering the occupation, income and expenditure, marital status, and so on.
Managing claims
Claims management is the basic goal of the insurance industry. It means to settle the
losses of the insurer and the differences between the insurer and the insured. Claims
management is more than just settling the losses with money. Insurance companies have
claim settlement representatives to carry out this task. An insurance company should pay
for the claim reasonably. Rejection of undeserved claims also falls under claims settlement.
Claim management is the function of an insurance adjuster. There are various such
adjusters working in the insurance industry.
The basic objective of claims settlement includes:
Confirmation of a covered loss - The insurer should make sure that the claim to be
covered had actually occurred or not. The insurer should check, if the applicant of
a life or property insurance is eligible to claim it.
Reasonable and timely payment of claims - The claims settlement should be fair, and
without any delay. If the applicants reasonable claim is rejected, it may defy the
main objective of insurance. It may also affect the insurers reputation.
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Personal support to the insured - Apart from the legal responsibilities as per the
contract, the insurer should help the insured personally in some cases. For
example, an insurer should help the insured to find a temporary house, if there is
any natural hazard.
Investments
The investment function of an insurer is the most important function to run the company.
The insurance company gets their income from the policyholders, who pay their premium
regularly. The insurer invests this money in financial schemes efficiently to use it for the
payment of loss of the insured. As the premium of the policy is paid in advance, it can be
invested in other financial schemes till the insured claims it for a loss. An insurance
company makes all the investments according to the government regulations. The
investment manager working for a company must follow all these rules before investing.
Investment for life insurance differs from property insurances. These differences are
discussed below:
Life insurance investments - In case of life insurance companies, the insurers decide the
solvency through the minimum assured return on investment. This means that, in life
insurance policy, most of the amount to be claimed during a loss is decided at the time of
selling the policy to the applicant. In life insurances, the safety of the insured is given the
first priority and it is usually a long term insurance policy. This allows the company to
invest more funds received from the regular premiums given by the insured. Another
aspect of a life insurance policy is that it reduces the cost of life insurance. An insurance
company can invest the premium of life insurance policies and earn interest. The
policyholders also get a payment of dividends accordingly and thus the cost of life
insurance policy is reduced. Generally, life insurance companies invest their finances in
real estate or policy loan. Life insurance policies are of two types:
o General account - In general account the obligations towards the insured person is
fixed. It mainly insured the life of the person.
o Separate account - In separate account the obligations towards the insured person
are in regard with the assets of the person. It is used for pension funds and
maturities.
Property and liability insurance investments - In property and liability insurance,
the investment is not fixed. It computes the profits obtained from the investment
and the frequency of underwriting losses. Property and liability insurance mainly
depends on the term of investment. If the investment is for a long term, then the
profits will be more, and if the term is small, then the profit is also less. Property
and liability insurance companies invest their funds in bonds and equity shares.
Apart from functions discussed above, the insurance organisations have some more
functions as listed below. The functions already discussed were mainly related to the
owners of the company or the insurers, but the functions covered in this section are
common to all financial organisations.
Accounting - Accounting department handles the financial accounting processes
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of an insurer. An insurance company recruits and assigns accountants to do this

task.
Legal functions - In an insurance organisation, legal function is a very important
function. Legal functions are mainly to address the general corporate operations of
the company.
Loss control services - An insurance company is obliged to provide loss control
services as an important part of the risk management. Generally, property and liability
insurers provide many loss control services.
Electronic data processing - Like any other commercial company, insurance
companies are also using technology in every process. Electronic data processing (EDP)
is used to computerise every operation performed in an insurance company. The use of
EDP has transformed the insurance industry as it speeds up the processing and
storage of information which lessens many routine tasks.
Other departments - Some other departments of insurance organisations are
engineering, administrative, statistical etc.

VI. TYPES OF INSURERS:

In some of the foreign countries insurance is classified under following categories:
A)Government
Social security
Unemployment
B)Private
Life
Life
Health
Annuity
Non-life
Property
Liability
Miscellaneous
Government insurance programs are the insurance programs, which are carried out by
the government. It can be classified further into social insurance and other Government
Insurance. Social insurance is a specialized government insurance largely financed by the
compulsory contributions from the employees. Since the employees make the
contributions, they are entitled to benefits whether the need arises or not. The examples of
social insurance are old age, survivors and disability insurance, Medicare, workers
compensation insurance, compulsory temporary insurance, retirement etc.
Private insurance is classified into life insurance and non life insurance. Life insurance
aims at providing financial security to the individuals and their dependents. The risk
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covered here is death in case of life insurance, sickness and disability in case of health
insurance. Annuity, on the other hand provides financial assistance to old persons with no
earnings to meet their daily requirements. So, the risk covered here is survival.
Non-life insurance refers to the property, liability and miscellaneous insurance, which are
covered in the Module II.
In the Indian context, insurance can be broadly classified into:
A)Life insurance
B)General insurance
Life insurance
Life insurance deals with the insurance of individuals, groups, and pension plans. Since
1st September, 1956, transacting life insurance business in India was the exclusive
privilege of the nationalised insurance company viz., LIC. However, with the passing of the
IRDA Act, 1999, the life insurance sector has been thrown open to private players.
Types of life insurance plans offered in our country:
Term assurance plans
Whole life plans
Endowment assurance plans
Assurances for children
Family income policy
Joint life assurance
Health insurance benefits (Asha Deep II and Jeevan Asha II)
For handicapped dependents (Jeevan Adhar)
Pension plans
Unit linked plan (Bima Plus of LIC)
A life insurance policy that provides coverage for the whole of the insureds life is
called Whole Life insurance. A policy that covers a set time period, such as five or ten
years, is called Term life insurance. Endowment policies are also term policies but the
difference is it pays benefits when the insured dies during the policy term and pays
benefits if the insured survives the policy term. And Annuity contracts promise to pay the
insured a periodic payment.
General insurance or non-life insurance policies, including automobile and
homeowners policies, provide payments depending on the loss from a particular financial
event. General insurance is typically defined as any insurance that is not determined to
be life insurance.
Health insurance is a contingent claim contract on the insured incurring additional
expenses or losing income because of incapacity or loss of good health. Payment becomes
necessary because physical or mental incapacity prevents the insured from being able to
work is called Disability Income Insurance. If the incapacity prohibits the insureds
activities of daily living, it is called Long term care insurance. If the insured incurs

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hospital, physician, or other health care expenses it is called medical expense insurance.
In India, only medical expense insurance is available.
A few differences between life insurance and general Insurance
The risk namely death is certain in life insurance. The only uncertainty is as to
when it will take place, whereas in general insurance, the insured event may or may
not take place.
A life insurance contract is a long-term contract, while general insurance contract is
a one-year renewable contract.
It is difficult to determine the economic or the financial value of life, whereas the
financial value of any asset to be insured under a general insurance policy can be
determined.
The life insurance contract is not a contract of indemnity. The general insurance
contract is a contract of indemnity where the exact value of loss is reimbursed.
The Premium charged under a life insurance policy is based on a mortality table, but
the premium for a general insurance policy is calculated on the basis of past loss
experience, probable risk factors and fixed Tariff plan.
Classification of life and health insurance
Group Insurance Group insurance is a means through which a group of persons, who
usually have a business or professional relationship to the contract owner, are provided
insurance coverage under a single contract. Generally it is provided by employers for the
benefit of their employees. Creditor debtor groups like the loanees of a housing finance
company and miscellaneous groups like professional associations, religious groups,
customers of large retail chains, and savings account depositors, poorer sections of the
society, landless agricultural workers also can avail the benefits of group insurance.
Ordinary individually issued policies The great majority of policies fall within the
ordinary category.
Industrial Insurance it includes life and health insurance policies issued to individuals
in small amounts, with premiums payable on a weekly or monthly basis. These policies are
not popular in India.
Credit insurance This is issued through lending institutions to cover debtors obligations
if they die or become disabled.
VII. REINSURANCE:
Reinsurance simply means Insurance for Insurance Companies. More precisely
Reinsurance transfers insurance underwriting risk to third-party organizations.
Reinsurance is an insurance of insured risk where the insurer retains a part and cedes the
balance of a risk to the reinsurer. This is done to facilitate a greater spread and reduce
liability on the part of the insurer. In other words, reinsurance is insurance of insured risk
taken by insurance companies to protect their liability commitments beyond their net
capacity. This is a widely used risk transfer mechanism and provides the backbone to
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insurance industry. Reinsurance is one of the major risk and capital management tools
available to primary insurance companies.
Need For Reinsurance:
A Direct insurer needs reinsurance for the following reasons:
To limit (as much as possible) annual fluctuations in the losses he must bear on his
own account.
Reinsurance allows direct insurers to free themselves from the part of a risk that
exceeds their underwriting capacity, or risks which, they do not wish to bear alone, for
some reasons.
Direct insurers find relief from particularly large individual risks by ceding them
individually in the form of facultative reinsurance. However, entire portfolios containing
all of the insurers risks; for example, all of the insurers fire, motor or marine
insurance policies are also object of reinsurance. These insurance portfolios are covered
by blanket agreements, so-called obligatory reinsurance treaties.
Who buys reinsurance? Reinsurers deal with professional corporate counterparties such
as primary insurers, reinsurance intermediaries, multinational corporations and their
captive insurers of banks. The main clients of reinsurers are primary insurers, from all
classes of insurance. The amount of business an insurer will reinsure depends on the
insurers business model, its capital strength and risk appetite, and prevailing market
conditions. Among those who buy reinsurance includes: Insurers whose portfolios are
heavily exposed to catastrophic events such as earthquakes, storms etc. Small local
insurance players having low client base need more reinsurance than larger international
insurers who can diversify their insurance covers over a bigger client base. Insurers
writing many different lines of business (Multiline insurers) need relatively less
reinsurance covers than those that focus on a few business lines or sell to a specific
customer group. Commercial lines portfolios with a small number of risks with large
exposures (e.g. aviation industry) need more reinsurance than personal lines portfolios
with a large number of small and homogeneous risks (e.g. motor insurance) 2 Life
insurers with a greater proportion of term cover contracts including mortality or disability
risk element tend to cede more than life insurers with a high level of savings premium (i.e
endowment and unit linked portfolios). Insurers expanding into new products or entering
new geographical regions use reinsurance to benefit from reinsurers expertise and
financing Regulatory and rating agency considerations also significantly influence the
individual demand for reinsurance cover, as reinsurance is a means to provide capital relief
and to improve balance sheet strength.
Reinsurance allows the insurer to retire from an area or class of business and to get the
underwriting advice from the reinsurer. Reinsurance is used for the following reasons:
Increase underwriting capacity - The underwriting capacity is the highest amount of
exposure that an insurance company can underwrite. Reinsurance helps in
increasing the companys underwriting capacity.
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Stabilize profit - The insurance companies often ask for the reduction of the wide
fluctuation in profit and loss margins that is inbuilt in the insurance business.
Reinsurance can be used to stabilize profits.
Reduce the unearned premium reserve - When any insurance company sells a policy
the whole amount of the premium moves in to the unearned premium reserve which is
needed as per the law. Reinsurance reduces the unearned premium reserve that an
insurance company needs according to the law and it increases the surplus position of
the insurer.
Provide protection against a catastrophic loss - Reinsurance also gives protection
against a catastrophic loss in the same way as it helps in stabilising an insurer's
loss experience.
BENEFITS OF REINSURANCE
Main benefits include stabilization of underwriting results, financial flexibility and
expertise.
Stabilization of underwriting results is a dominant driver for non-life insurers to buy
reinsurance.
Reinsurance allows insurers to benefit from economies of scale
Reinsurance expertise supports insurers in controlling their risks
Reinsurance provides long-term security as a benefit for primary life insurers
Benefiting from reinsurers expertise is a major driver to buying life reinsurance
Reinsurance helps to ease insurers capital strains
Reinsurance allows efficient risk and capital management
Reinsurance facilitates economic growth and social welfare
How reinsurance affects the direct insurer
The reinsurer adds value in many ways to the services a direct insurer provides to
his clients.
The reinsurer reduces the probability of the direct insurers ruin by assuming his
catastrophe risks.
He stabilizes the direct insurers balance sheet by taking on a part of the risk of
random fluctuation, risk of change, and risk of error.
He improves the balance of the direct insurers portfolio by covering large sums
insured and highly exposed risks.
He enlarges the direct insurers underwriting capacity by accepting a proportional
share of the risks and by providing part of the necessary reserves.
He increases the amount of capital effectively available to the direct insurer by
freeing equity that was tied up to cover risks.
He enhances the effectiveness of the direct insurers operations by providing
many kinds of services
How reinsurance benefits the direct insurer
Through facultative reinsurance
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Through non-proportional treaty reinsurance

Through proportional treaty reinsurance
Through financial reinsurance

VIII. MARKETING CHANNELS

There are many market players in insurance industries i.e.
(a)Agents,
(b)Brokers,
Insurance Agent
Section 2(10) of the Insurance Act, 1938, defines an Insurance Agent as an
insurance agent licensed under Section 42 of the said Act and who received or
agrees to receive payment by way of commission or other remuneration in
consideration of his soliciting or procuring insurance business including business
relating to the continuance, renewal or revival of policies of insurance.
Principal-Agent Relationship- Legal Implications and Status
Sections 182 to 238 of the Indian Contract Act, 1872 govern the relationship
between a Principal and an Agent. An insurance agency contract is also governed by the
principles enshrined therein. An Agent (Insurance Agent) is a person employed to do any
act for another or to represent another in dealings with third persons. The function of an
agent is to bring his principal into contractual relations with third persons. A Principal
(Insurer) is a person for whom the above act is done or who is so represented.
There are two important rules of agency:
1. Whatever a person can do personally, he can do through an agent
2. He who does an act through another does it by himself
In this regard, it is pertinent to note the provisions of Section 237 of the Indian Contract
Act, 1872 on the extent to which the acts of the Agent bind the Principal. Where an Agent
has, without authority, done acts or incurred obligations to third persons on behalf of his
principal, the principal is bound by such acts or obligations, if he has by his words or
conduct induced such third persons to believe that such acts and obligations were within
the scope of the agents authority.
Further Section 238 of the Indian Contract Act, 1872 states that misrepresentation or
frauds committed by the agent acting in the course of business for their principals, have
the same effect on agreements made by such agents as if such misrepresentation or frauds
had been made or committed by the principals. But misrepresentation or frauds
committed by agents in matters which do not fall within their authority do not affect the
principals.
For example, if an insurance agent misrepresents to the customer while selling an
insurance product, the policy contract (agreement between insurer and policyholder) may
become voidable at the option of the Policyholder.
An agent, who acts within the scope of authority conferred by his or her principal, binds
the principal in the obligations he or she creates against third parties. There are
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essentially three kinds of authority recognized in law, viz., actual authority (express or
implied), apparent authority and ratified authority.
Actual authority denotes the authority conferred on an agent by the Principal. It may be
express or implied. Implied authority, as opposed to an express authority which is clearly
given to the agent, is the authority which the agent has by virtue or being reasonably
necessary to carry out his express authority, which might be incidental or ancillary to the
express authority.
Apparent authority or the ostensible authority exists where the Principals word or conduct
would lead a reasonable person in the third partys position to believe that the agent was
authorised to act, even if the principal and the purported agent had never discussed such
a relationship. This is also called as agency by estoppel or the doctrine of holding out.
Acts of the Agent constitute the acts of the Principal (Insurance company) if the said Agent
acts within the scope of authority granted by the Principal. Further the principle of
estoppel is also applicable. Here it is a mentionable fact that relationship between Brokers
to an Insurance company is on a principal to principal basis. Since Broker represents a
customer, acts of a Broker does not bind an insurer.
The following are the pre-requisites for a candidate intending to get a licence issued
(common for all types of agents):
(a) Minimum qualifications: The minimum qualifications prescribed are a pass in 12th
standard or equivalent examination conducted by a recognised Board/Institution. This
condition is relaxed to a pass in 10th standard for applicants residing in a place where
the population is not less than 5,000 (Rural agents)
(b) Practical Training: The applicant shall undergo a minimum of 50 hours practical
training on insurance related matters in life or general insurance business, as the case
may be, spreading to 1 to 2 weeks. Where the application is for a composite licence, the
training shall be 75 hours spread over 3 to 4 weeks covering both life and general
insurance subjects. Where the applicant holds special qualifications such as
membership of Institute of Chartered Accountants of India, Institute of Cost and Works
Accountants of India, Institute of Company Secretaries of India, Insurance Institute of
India or the Institute of Actuaries of India or a Masters degree in Business
Administration of any institution recognised by Central Government or State
Government, it is sufficient if the training is undergone for 25 hours (35 hours if the
licence is composite). The training can be undergone in any of the IRDA accredited
training institutions
(c) Examination: Every applicant shall undergo a pre-recruitment examination in life or
general insurance business or both, as the case may be, conducted by the Insurance
Institute of India or any other body authorised by IRDA.
(d) AML & ULIP training: In addition to the above, the insurer with whom the agent is
attached provides a special training on Anti money laundering (under the IRDAs Anti
money laundering Guidelines dated 31 March 2006) for all Insurance Agents. Training
in Unit Linked Insurance Products (ULIP) is compulsory for life insurance agents before
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they are allowed to sell ULIPs on behalf of a life insurer (under the IRDA (Linked
Insurance Products) Regulations, 2013)
e)Payment of fees of Rs.250 alongwith the application for grant of licence enclosing proof of
age, qualifications, training and examination
Role of an Insurance Agent
An insurance agent represents the insurer with whom he or she is attached. He solicits or
procures insurance business only for such insurer. The responsibilities of an insurance
agent broadly include the following:
(a)Perform Need analysis for the customer The agent is expected to sell the products
of the insurance company, which suit the needs of the customer. For this purpose
he has to analyse the needs of the customer, such as Insurance protection for
family, Asset protection needs, Childrens marriage or education needs, Health
insurance, Pension etc. Depending on the needs and the stage of the life cycle of the
customer, the appropriate product of the insurer which suits the customer is
recommended
(b)Explain the product benefits, premiums, exclusions and other terms and conditions
so that the customer can take an informed decision
(c) Assist the customer in getting the requisite documents for the purpose of seeking an
insurance cover and clarify the doubts of the customer in the proposal form filling
process
(d)Bring to the notice of the insurer any adverse habits of the customer which will have
a bearing on the insurers decision to accept a risk
(e) Inform the customer about the decision of the insurer to issue a policy or otherwise
(f) Provide assistance to customer at various stages of policy servicing and when a
claim is made
INSURANCE BROKER:
Regulation 2(i) of the IRDA (Insurance Brokers) Regulations, 2002, defines Insurance
Broker as a person for the time being licensed by the Authority under Regulation 11, who
for remuneration arranges insurance contracts with insurance companies and/or
reinsurance companies on behalf of his clients.
Licensing of Insurance Brokers
Every Insurance Broker shall possess a valid and subsisting licence to act as an Insurance
Broker issued by IRDA. The framework for licensing of an Insurance Broker is similar to
that of a Corporate Agent. However, as we have seen earlier a Broker differs from an Agent
in the sense that a Broker represents customers interests and is required to select the best
product amongst all insurance companies, while an agent represents an insurer at any
point in time (one in life and one in general insurance) and will present the product of only
such insurer(s) with whom the agent is attached with.
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Categories of Insurance Brokers

(a)Direct Broker (Life)
(b)Direct Broker (General)
(c) Direct Broker (Life & General)
(d)Reinsurance Broker (Reinsurance Life or General)
(e) Composite Broker (Life and/or General + Reinsurance)
A Direct Broker is authorised to recommend the products of any of the life insurance
companies or general insurance companies to their clients, as the case may be.
Role of an Insurance Broker
Regulation 3 of the IRDA (Insurance Brokers) Regulations, 2002 summarises the functions
of a Direct Broker:
(a)Since a Broker represents a client, he is expected to obtain detailed information on
clients business and risk management philosophy and familiarise himself with the
clients business
(b)Render proper advice to the client in selecting the appropriate insurance as well as
terms of insurance
(c) Possessing a detailed knowledge of insurance markets to be in a position to advice
his client
(d)Submitting quotation received from insurance companies for consideration of a
client
(e) Providing the information required about the client or the subject matter to be
insured, to enable insurer to properly assess the risk and give a premium quotation
(f) Updating customer about the progress of the proposal submitted and providing
written acknowledgements
(g) Assisting clients in paying premiums under Section 64VB of the Insurance Act, 1938
(h) Assisting clients in negotiation of claims and maintenance of claim records
Requirements for licensing of an Insurance Broker
Application for broking license, duly filled in and signed by the authorized
signatory, along with supporting documents
Memorandum and Articles of Association shall contain solicitation or procuring
insurance business as an Insurance Broker as the main object
Appointment of a Principal Officer who is the Director or the Chief Executive Officer
appointed exclusively to carry out the functions of an insurance broker. Such a
Principal Officer is subject to minimum qualifications as prescribed under the
Regulations and shall undergo theoretical and practical training from IRDA
accredited training institutes and has passed the examination conducted by
National Insurance Academy, Pune or any other examining body.
Atleast two employees of the applicant entity who have the minimum qualifications
as prescribed by the Regulations and has undergone the practical training and
passed the examination as mentioned above. Only such employees are authorised
to solicit or procure insurance business on behalf of the insurance broker. An
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insurance broker may have as many number of authorized employees fulfilling the
above conditions, as required depending on the business plan.
The entity formed shall be solely engaged in the business of insurance broking and
no other business
o The non-resident equity in insurance broking entity shall not exceed 26%
Minimum capital requirements for the broking entity:
Direct Broker
`50 lakhs
Reinsurance Broker
`200 lakhs
Composite Broker `250 lakhs
A minimum of 20% of the initial capital shall be kept in a Bank deposit which shall
not be released without the prior approval of IRDA
A professional indemnity insurance policy shall be taken by the broker as
prescribed in the Regulations. IRDA may suitable cases allow a newly licensed
broker to product the policy within 15 months from the date of issue of original
licence
Payment of Registration fee as follows:
Category of Insurance Broker
Amount of Registration fee payable
Direct Broker
`20,000
Reinsurance broker
`25,000
Composite Broker
`40,000
Difference between Insurance Agent and Insurance Broker
The basic difference between an Insurance Broker and an Insurance Agent is that while an
Insurance Broker represents the client, while an Insurance Agent represents the insurance
company. As a corollary to the above, an Insurance Broker is licensed to recommend the
products of any insurance company, whereas Insurance Agent at any point in time can sell
the insurance products of only one insurance company with which he is attached.
IX. AN OVERVIEW OF IRDA :
In India also, Government started exercising control on Insurance business by
passing two acts in the year 1912 namely Provident Insurance Societies Act V of 1912 and
Indian Life Insurance Companies Act VI of 1912. These acts were later comprehensively
amended and a new Act namely Insurance Act 1938 came into existence for controlling
Investment of funds, Expenditure and Management of the insurance companies. The Office
of Controller was established to implement this act. Again, this Act was amended in 1950
as per the need of the hour. But in view of growing malpractices in Life Insurance business
and also due to the illiteracy level being high and lack of will for spread of Life Insurance
business, it was nationalized by Government of India. LIC Act was passed in June; 1956,
and this Act came into force from 1 st Sept.1956. Similarly general insurance business was
nationalized Act came into force w.e.f 1 st April 1973 through General Insurance Business
Nationalization Act 1972 (GIBNAct 1972). To implement these acts the Government made
some minor changes in the Insurance Act 1938.
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In early 90s, with the world market forces playing with full strength; growing literacy
level; better regulatory systems and need for fast growth in this sector, the need of the hour
was to go with the world and throw open Life & General Insurance Sector to private
entrepreneurs once again so that there is no monopoly and the customer/ consumer/
buyer gets more choices than one type of Insurance product.
To study the liberalization process in Insurance sector in India, Malhotra Committee
was formed under the Chairmanship of Late Shri R.N. Malhotra. The Malhotra committee
submitted its report in 1994 which recommended that private companies be allowed to
operate in India. The Government accepted the Committees recommendation and
Insurance Regulatory Authority (IRA) was set up in 1996 to show the path for privatization
of insurance Industry. The main aim was the development of Insurance covering all strata
of society (to not only rich but poor, folks from rural, tribal, unorganized sector, social
sector, disabled community, daily wagers, women at large, etc.) gained importance through
concerns put forth by political leaders, trade unionists, social organisations, co-operatives
and policy makers; which amended the name IRA to IRDA (Insurance Regulatory &
Development Authority). Again some amendments were made in the Insurance Act 1938
for smooth functioning of IRDA.
INSURANCE REGULATORY DEVELPMENT AUTHORITY ACT (IRDA) 1999
This Act was passed by Parliament in Dec.1999 & it received presidential assent in
Jan.2000. The aim of the Authority is
to protect the interest of holders of Insurance policies to regulate, promote and
ensure orderly growth of Insurance industry & for matters connected therewith or
incidental thereto.
Under this Act, an authority called IRDA is established which replaces Controller of
Insurance under Insurance Act 1938.
Definitions
Like any other Act, various terms have been defined as follows under section 2: a) Appointed Day means the date on which the Authority is established.
b) Authority means the Insurance Regulatory and Development Authority.
c) Chairperson means the chairperson of the Authority.
d) Fund means the Insurance Regulatory and Development Authority Fund.
e) Interim Insurance Regulatory Authority means the Insurance Regulatory Authority
set up by the Central Government.
f) Intermediary or Insurance intermediary includes Insurance brokers, reinsurance
brokers, insurance consultants, surveyors and loss assessors.
g) Member means a whole time or a part time member of the Authority and includes
the Chairperson.
h) Notification means a notification published in the Official Gazette.
i) Prescribed means prescribed by rules made under this Act.
j) Regulations means the regulations made by the Authority.
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Features of Authority
Corporate body by the aforesaid name which means it will act as group of persons,
called members, who will work jointly not as an individual person like Controller of
Insurance.
Having perpetual succession which means any member may resign or die but the
Authority will work.
A common seal with power to enter into a contract by affixing a stamp on the
documents.
Sue or be sued means the Authority can file a case against any person or organization
and vice versa.
Composition of Authority
The Authority shall consist of nine persons as per details given below:.
Chairperson. Not more than 5 whole time members. Not more than 4 part time members.
These persons shall be appointed by the Central Govt. from amongst persons of ability,
integrity & standing who have knowledge or experience in life Insurance, general
Insurance, actuarial science, finance, economics, law accountancy, administration or other
discipline which would in the opinion of the Central Govt. be useful to the Authority.
(Section 4)
Tenure (Section 5)
The Chairman tenure will be for 5 years and eligible for reappointment till he attains the
age of 65 years. The appointment of members will be for 5 years and eligible for
reappointment but not exceeding the age 62 years.
Removal of Members (Section 6)
The Central Government can remove any member of the Authority if he :a) Is declared bankrupt
b) Has become physically or mentally incapable of acting as a member
c) Has been awarded punishment by any Court.
d) Has acquired such financial or other interest which affect his function as a member.
e) Has so abused his position as to render his continuation in office detrimental to the
public interest.
But no member can be removed form the office unless & until the reasonable opportunity
of being heard is given to such member in the matter.
Salary & Allowances (Section 7)
The Chairperson and full time members shall receive the salary & allowance as prescribed
by the Government.
Bar on future employment (Section 8)
The Chairperson and the whole time members cannot accept any appointment without
Govt. approval within 2 years from the date on which he ceases or retires from the office.
Superintendence & Direction (Section 9)
The Chairperson shall have overall control & provide direction in respect of all
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administrative matters of the Authority. He will chair the meeting as and when he is
present in the meeting. by a majority of votes by the present and voting. In case of equal
voting the decision of Chairperson of that meeting will be final.
Invalidation of proceedings of Authority (Section 11)
The proceedings of Authority will not become invalidate ( not valid in the eyes of law) due to
following reasons: Defects in the formation of the Authority.
Defect in appointment of any Member.
Officers & Employees of Authority (Section 12)
The Authority may appoint officers and employees as it considers necessary for the
efficient discharge of its functions. The terms & conditions of such officers shall be
governed as per the regulations made under this Act.
Transfer of Assets, Liabilities etc (Section 13)
As stated above that initially the Authority was formed under the name Insurance
Regulatory Authority (IRA) and later on the name was changed to Insurance Regulatory
& Development Authority.(IRDA) Therefore the assets and liabilities of IRA will be
transferred to IRDA on the date of establishment of the Authority.
Meeting of Authority (Section 10)
The meeting of the Authority will be held at the time and place as decided by the
Chairperson as per regulation made under this act. If the Chairperson is unable to attend
the meeting then the members will choose the Chairperson from amongst the present
members.
All the issues to be discussed in the meeting shall be decided
Duties, Powers & Functions of Authority (Section 14)
Duties: The Authority shall have the duty to regulate, promote and ensure orderly growth
of the Insurance business and re-insurance business subject to the provisions of any other
provisions of the act.
Powers & Functions to:(a) Issue to the applicant (Insurance company or Insurance Agent or Surveyors or
Insurance Brokers or Third Party Administrators) a certificate of registration, renew,
modify, withdraw, suspend or cancel such registration;
(b) Protection of the interests of the policyholders in matters concerning assigning of
policy, nomination by policyholders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of insurance;
(c) requisite qualifications, code of conduct and practical training for insurance brokers ,
agents, surveyors, Third Party Administrator ;
(d) Specifying the code of conduct for surveyors and loss assessors (Who assess the loss
of policyholder in case of General Insurance);
(e) Promoting efficiency in the conduct of insurance business;
(f) Promoting and regulating professional organisations connected with the insurance
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and re-insurance business;

(g) Levying fees and other charges on insurance companies, Agents, Insurance Brokers,
Surveyors and Third party Administrator;
(h) Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organisations connected with the Insurance business;
(i) 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 (w.e.f., 1/1/2007 TAC has ceased to function).
(j) 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;
(k) Regulating investment of funds by insurance companies;
(l) Regulating maintenance of margin of solvency i.e., having sufficient funds to pay
insurance claim amount;
(m) To settle the disputes between insurers and intermediaries or insurance
intermediaries;
(n) Supervising the functioning of the Tariff Advisory Committee;
(o) Specifying the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organisations referred to in clause(f);
(p) Specifying the percentage of life insurance business and general insurance business
to be undertaken by the insurer in the rural or social sector; and
(q) Exercising such other powers as may be prescribed.
Grants from the Central Government (Section 15)
The Government after approval from the Parliament may grant funds to discharge their
duties as per this Act.
Constitution of Funds (Section 16)
(1) There shall be a fund to be called The Insurance Regulatory and Development
Authority Fund and there shall be credited there to:
a. all Government grants, fees and charges received by the Authority;
b. all sums received by the Authority from such other source as may be decided
upon by the Central Government;
c. the percentage of prescribed premium income received from the insurer/insurance
intermediaries.
(2) The Fund shall be applied for meeting:
a. the salaries, allowances and other remuneration of the members, officers and
other employees of the Authority:
b. the other expenses of the Authority in connection with the discharge of its
functions and for the purposes of this Act.
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Accounts and Audit (Section 17)

(1) The Authority shall maintain proper accounts and other relevant records and prepare
an annual statement of accounts in such form as may be prescribed by the Central
Government in consultation with the Comptroller and Auditor-General of India.
(2) The accounts of the Authority shall be audited by the Comptroller and AuditorGeneral of India at such intervals as may be specified by him and any expenditure
incurred in connection with such audit shall be payable by the Authority to the
Comptroller and Auditor-General.
(3) The Comptroller and Auditor-General of India and any other person appointed by him
in connection with the audit of the of the accounts of the Authority shall have the
same rights, privileges and authority in connection with
such audit as the Comptroller and Auditor-General generally has in connection with
the audit of the Government accounts and, in the particular shall have the right to
demand the production of books of account, connected vouchers and other
documents and papers and to inspect any of the offices of the Authority.
(4) The accounts of the Authority as certified by the Comptroller and Auditor General of
India or any other person appointed by him in this behalf together with the auditreport thereon shall be forwarded annually to the Central Government and that
Government shall cause the same to be laid before each House of Parliament.
Establishment of Insurance Advisory Committee (Section 25)
(1) The Authority may, by notification, establish with effect from such date as it may
specify in such notification, a Committee to be known as the Insurance Advisory
Committee.
(2) The Insurance Advisory Committee shall consist of not more than twenty-five
members excluding ex-officio members to represent the interests of commerce,
industry, transport, agriculture, consumer fora, surveyors, agents, intermediaries,
organisations engaged in safety and loss prevention, research bodies and employees
association in the insurance sector.
(3) The Chairperson and the members of the Authority shall be the ex-officio Chairperson
and ex officio members of the Insurance Advisory Committee.
(4) The objects of the Insurance Advisory Committee shall be to advise the Authority on
matters related to insurance.
(5) The Insurance Advisory Committee may advise the Authority on such other matters as
may be prescribed.
Miscellaneous Provisions
The Central Government can issue the direction to the Authority on policy matters
not on administrative and technical matters and the Authority is bound to follow
such direction.
The Central Government can supersede any act of the Authority.
The Chairperson, Members and employees of Authority shall be deemed to be public
servant while performing the duties as per the provision of this Act.
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The Authority can delegate its powers to Chairperson or members or officers and
employees of the Authority as per regulation made under this act.
The Authority has the power to make rules related to salary & allowances and other
terms & conditions to be applicable to its Chairperson, members, employees or
officers.
The Authority has power to make regulations to be followed at its meetings
The rule & regulation made by the Authority shall be placed before the Parliament.
Any rule or regulations made under this act will bar the applicability of other laws of
the land.
The Authority has the powers to make amendment in Insurance Act 1938, LIC Act
1956 & GIBN Act 1972.

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