LESSON 1

INTRODUCTION TO INSURANCE
- Meenu
Asstt. Professor, SRCC,
University of Delhi.

Every risk involves the loss of one or other kind. In older time, the contribution by the
person was made at the time of loss. Today, only one business, which offers all walks of life, is
insurance business. Owing to growing complexity of life, trade and commerce, individual and
business firms and turning to insurance to manage various risks. Every individual in this world is
subject to unforeseen uncertainties which may make him and his family vulnerable. At this place,
only insurance helps him not only to survive but also recover his loss and continue his life in a
normal manner.

Insurance is an important aid to commerce and industry. Every business enterprise

involves large number of risks and uncertainties. It may involve risk to premises, plant and
machinery, raw material and other things. Goods may be damaged or may be destroyed due to
fire or flood. Some risk can be avoided by timely precautions and some are unavoidable and are
beyond the control of a business. These unavoidable risks can be protected by insurance.
What is Insurance
In D.S. Hamsell words, insurance is defined as a social device providing financial
compensation for the effects of misfortune, the payment being made from the accumulated
contributions of all parties participating in the scheme
In simple terms Insurance is a co-operative device to spread the loss caused by a
particular risk over a number of persons, who are exposed to it and who agree to insure
themselves against the risk
Thus, the insurance is
(a) A cooperative device to spread the risk;
(b) the system to spread the risk over a number of persons who are insured against the risk;
(c) the principle to share the loss of the each member of the society on the basis of
probability of loss to their risk; and
(d) the method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties (namely insurer and
insured or assured) whereby one party (insurer) undertakes in exchange for a fixed amount of
money (premium) to pay the other party (Insured), a fixed amount of money on the happening of
certain event (death or attaining a certain age in case of life) or to pay the amount of actual loss
when it takes place through the risk insured (in case of property)
Terminology used in definition of Insurance
- Insurer or insurance company The agency involved in Insurance business is known
as insurer
- Insured/ Assured The person who gets his property/life insured is known as insured
- Policy - The agreement or contract which is put in writing is known as a Policy
- Premium The consideration in return of which the insurer undertakes to make goods
the loss or give a certain amount in case of life insurance is known as premium

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Assurance and Insurance
The two words were used synonymously at one time, but there is fine distinction between
the two. Assurance is used in those contracts which guarantee the payment of a certain sum on
the happening of a specified event which is bound to happen sooner or later, for example
attaining a certain age or death. Thus life policies comes under assurance.
Insurance, on the other hand, contemplates the granting of agreed compensation of the happening
of certain events stipulated in the contract which are not expected but which may happen, for
example risk relating to fire, accident or marine.
Nature of Insurance
Following are the main characteristics of insurance which are applicable to all types of
insurance (life, fire, marine and general insurance).
1. Sharing of Risks - Insurance is a device to share the financial losses which may occur to
individual or his family on the happening of certain events
2. Co operative Device Insurance is a co-operative device to spread the loss caused by a
particular risk over a large caused by a particular risk over a large number of persons who
are exposed to it and who agree to insure themselves against the risk.
3. Value of Risk Risk is evaluated at the time of insurance. There are several methods of
valuing the risk. Higher the risks, higher will be premium
4. Payment on Contingency -If the contingency occurs, payment is made; payment is
made only for insured contingency. If there is no contingency, no payment is made. In
life insurance contract, payment is certain because the death or the expiry of term will
certainly occur. In other insurance contract like fire, marine, the contingency may or may
not occur
5. Amount of Payment of Claim - The amount of payment depends upon the value of loss
occurred due to the particular insured risk. The insurance is there upto that amount. In life
insurance insurer pay a fixed sum on the happening of an event or within a specified time
period.
Example In fire insurance, if fire occurs and half the property is destroyed, but the
whole property is insured, then payment of claim will be made only for that half building
that is destroyed not the whole amount of insured.
6. Insurance is different from Charity - In charity, there is no consideration but insurance
is not given without premium
7. Large number of Insured Person - Insurance is spreading of loss over a large number
of persons. Larger the number of persons, lower the cost of insurance and amount of
premium and incase lower the number of persons, higher the cost of insurance and
amount of premium.
8. Insurance is different from Gambling - In gambling, there is no guarantee of gain, by
bidding the person expose himself to risk of losing. Whereas in insurance, by getting
insured his life and property, he protect himself against the risk of loss.
Functions of Insurance
Functions of insurance can be divided into parts;
I Primary functions.
II Secondary functions.

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I Primary Functions
1. Certainty of compensation of loss: Insurance provides certainty of payment at the
uncertainty of loss. The elements of uncertainty are reduced by better planning and
administration. The insurer charges premium for providing certainty.
2. Insurance provides protection : The main function of insurance is to provide protection
against risk of loss. The insurance policy covers the risk of loss. The insured person is
indemnified for the actual loss suffered by him. Insurance thus provide financial
protection to the insured. Life insurance policies may also be used as collateral security
for raising loans.
3. Risk sharing : All business concerns face the problem of risk. Risk and insurance are
interlinked with each other. Insurance, as a device is the outcome of the existence of
various risks in our day to day life. It does not eliminate risks but it reduces the financial
loss caused by risks. Insurance spreads the whole loss over the large number of persons
who are exposed by a particular risk.
II Secondary Functions
1. Prevention of losses : The insurance companies help in prevention of losses as they join
hands with those institutions which are engaged in loss prevention measures. The
reduction in losses means that the insurance companies would be required to pay lesser
compensations to the assured and manage to accumulate more savings, which in turn,
will assist in reducing the premiums
2. Providing funds for investment : Insurance provide capital for society. Accumulated
funds through savings in the form of insurance premium are invested in economic
development plans or productivity projects.
3. Insurance increases efficiency : The insurance eliminates the worries and miseries of
losses. A person can devote his time to other important matters for better achievement of
goals. Businessman feel more motivated and encouraged to take risks to enhance their
profit earning. This also helps in improving their efficiencies.
4. Solution to social problems : Insurance take care of many social problems. We have
insurance against industrial injuries, road accident, old age, disability or death etc.
5. Encouragement of savings : Insurance not only provides protection against risks but
also a number of other incentives which encourages people to insure. Since regularity and
punctuality pf payment of premium is a perquisite for keeping the policy in force, the
insured feels compelled to save.
Principles of Insurance
The basic principles which govern the insurance are -
(1) Utmost good faith
(2) Insurable interest
(3) Indemnity
(4) Contribution
(5) Subrogation
(6) Causa proxima
(7) Mitigation of loss
1. Principle of utmost good faith : A contract of insurance is a contract of Uberrimae
Fidei i.e., of utmost good faith. Both insurer and insured should display the utmost good
faith towards each other in relation to the contract. In other words, each party must reveal

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 all material information to the other party whether such information is asked or not.
There should not be any fraud, non disclosure or misrepresentation of material facts.
Example in case of life insurance, the insured must revel the true age and details of the
existing illness/diseases. If he does not disclose the true fact while getting his life insured,
the insurance company can avoid the contract.
Similarly, incase of the insurance of a building against fire, the insured must disclose the
details of the goods stored, if such goods are of hazardous nature
A material fact means important facts which would influence the judgment of the insurer
in fixing the premium or deciding whether he should accept the risk, on what terms. All
material facts should be disclosed in true and full form
2. Principle of Insurable Interest: This principle requires that the insured must have a
insurable interest in the subject matter of insurance. Insurance interest means some
pecuniary interest in the subject matter of contract of insurance. Insurance interest is that
interest, when the policy holders get benefited by the existence of the subject matter and
loss if there is death or damage to the subject matter.
For example In life insurance, a man cannot insured the life of a stranger as he has no
insurable interest in him but he can get insured the life of himself and of persons in
whose life he has a pecuniary interest. So in the life insurance interest exists in the
following cases:-
- Husband in the life of his wife and wife in the life of her husband
- Parents in the life of a child if there is pecuniary benefit derived from the life of a
Child
- Creditor in the life of debtor
- Employer in the life of an employee
- Surety in the life of a principle debtor
In life insurance, insurable interest must be present at the time when the policy is taken.
In fire insurance, it must be present at the time of insurance and at the time if loss if subject
matter. In marine insurance, it must be present at the time of loss of the subject matter.
3. Principle of Indemnity : This principle is applicable in case of fire and marine
insurance only. It is not applicable in case of life, personal accident and sickness
insurance. A contract of indemnity means that the insured in case of loss against which
the policy has been insured, shall be paid the actual cost of loss not exceeding the amount
of the insurance policy. The purpose of contract of insurance is to place the insured in the
same financial position, as he was before the loss.
Example A house is insured against fire for Rs. 50000. It is burnt down and found that the
expenditure of Rs. 30000 will restore it to its original condition. The insurer is liable to
pay only Rs. 30000.
In life insurance, principle of indemnity does not apply as there is no question of actual
loss. The insurer is required to pay a fixed amount upon in advance in the event of
accident, death or at the expiry of the fixed term of the policy. Thus, a contract of a life
insurance is a contingent contract and not a contract of indemnity.
4. Principle of Contribution: The principle of contribution is a corollary to the doctrine of
indemnity. It applies to any insurance which is a contract of indemnity. So it does not apply
to life insurance. A particular property may be insured with two or more insurers against
the same risks. In such cases, the insurers must share the burden of payment in proportion
to the amount insured by each. If one of the insurer pays the whole loss, he is entitled to
contribution from other insurers

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Example B gets his house insured against fire for Rs. 10000 with insurer P and for Rs. 20000
with insurer Q. a loss of Rs. 15000 occurs, P is liable to pay for Rs. 5000 and Q is labile
to pay Rs 10000. If the whole amount pf loss is paid by Q, then Q can recover Rs. 5000
from P. The liability of P &Q will be determined as under:

Sum insured with Individual insurer (i.e. P or Q ) x Actual Loss = Total sum insured

Liability of P = 10000 x 15000 = Rs.5000

30000

Liability of Q = 20000 x 15000 = Rs.10000

30000
The right of contribution arises when:
(a) There are different policies which related to the same subject matters;
(b) The policies cover the same period which caused the loss;
(c) All the policies are in force at the time of loss; and
(d) One of the insurer has paid to the insured more than his share of loss.
5. Principle of Subrogation : The doctrine of subrogation is a collorary to the principle
of indemnity and applies only to fire and marine insurance. According to doctrine of
subrogation, after the insured is compensated for the loss caused by the damage to the
property insured by him, the right of ownership to such property passes to the insurer
after settling the claims of the insured in respect of the covered loss.
Example Furniture is insured for Rs. 1 lacs against fire, it is burnt down and the insurer
pays the full value of Rs. 1 Lacs to the insured, later on the damage Furniture is sold for
Rs. 10000. The insurer is entitled to receive the sum of Rs. 10000.
A loss may occur accidentally or by the action or negligence of third party. If the insured
suffer a loss because of action of third party and he is in a position to recover the loss
from the insurer then insured can not take action against third party, his right is
subrogated (substituted) to the insurer on settlement of the claim. The insurer, therefore,
can recover the claim from the third party.
If the insured recovers any compensation for the loss (due to third party), from the third
party, after he has already been indemnified by the insurer, he holds the amount of such
compensation as the trustee if the insurer.
The insurer is entitled to the benefits out of such rights only to the extent of the amount
he has paid to the insured as compensation
6. Principle of Causa Proxima : Causa proxima, means proximate cause or cause which,
in a natural and unbroken series of events, is responsible for a loss or damage. The
insurer is liable for loss only when such a loss is proximately caused by the peril insured
against. The cause should be the proximate cause and can not the remote cause. If the risk
insured is the remote cause of the loss, then the insurer is not bound to pay compensation.
The nearest cause should be considered while determining the liability of the insured. The
insurer is liable to pay if the proximate cause is insured.

Example In a marine insurance policy, the goods were insured against damage by sea
water, some rats on the board made a hole in a bottom of the ship causing sea water to
pour into the ship and damage the goods. Here, the proximate cause of loss is sea water
which is covered by the policy and the hole made by the rats is a remote cause.
Therefore, the insured can recover damage from the insurer

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 Example A ship was insured against loss arising from collision. A collision took palce
resulting in a few days delay. Because of the delay, a cargo of oranges becomes
unsuitable for human consumption. It was held that the insurer was not liable for the the
loss because the proximate cause of loss was delay and not the collision of the ship.
7. Principle of Mitigation of Loss: An insured must take all reasonable care to reduce the
loss. We must act as if the property was not insured.
Example If a house is insured against fire, and there is accidental fire, the owner must
take all reasonable steps to keep the loss minimum. He is supposed to take all steps which
a man of ordinary prudence will take under the circumstances to save the insured
property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1. Benefits to Individual
2 Benefits to Business or Industry
3. Benefits to the Society
It can be explained as under -
1. Benefits to Individual
(a) Insurance provides security & safety : Insurance gives a sense of security to the policy
holder. Insurance provide security and safety against the loss of earning at death or in old
age, against the loss at fire, against the loss at damage, destruction of property, goods,
furniture etc.
Life insurance provides protection to the dependents in case of death of policyholders and
to the policyholder in old age. Fire insurance insured the property against loss on a fire.
Similarly other insurance provide security against the loss by indemnifying to the extent
of actual loss.
(b) Encourage Savings : Life insurance is best form of saving. The insured person must
regularly save out of his current income an amount equal to the premium to be paid
otherwise his policy get lapsed if premium is not paid on time.
(c) Providing Investment Opportunity : Life insurance provide different policies in which
individual can invest smoothly and with security; like endowment policies, deferred
annuities etc. There is special exemption in the Income Tax, Wealth Tax etc. regarding
this type of investment
2 Benefits to Business or Industry
(a) Shifting of Risk : Insurance is a social device whereby businessmen shift specific risks
to the insurance company. This helps the businessmen to concentrate more on important
business issues.
(b) Assuring Expected Profits : An insured businessman or policyholder can enjoy normal
expected profits as he would not be required to make provisions or allocate funds for
meeting future contingencies.
(c) Improve Credit Standing : Insured assets are easily accepted as security for loans by the
banks and financial institutions so insurance improve credit standing of the business firm
(d) Business Continuation With the help of property insurance, the property of business is
protected against disasters and chance of closure of business is reduced
3. Benefits to the Society
(a) Capital Formation : As institutional investors, insurance companies provide funds for
financing economic development. They mobilize the saving of the people and invest
these saving into more productive channels
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 (b) Generating Employment Opportunities : With the growth of the insurance business,
the insurance companies are creating more and more employment opportunities.
(c) Promoting Social Welfare : Policies like old age pension scheme, policies for education,
marriage provide sense of security to the policyholders and thus ensure social welfare.
(d) Helps Controlling Inflation : The insurance reduces the inflationary pressure in two
ways, first, by extracting money in supply to the amount of premium collected and
secondly, by providing funds for production narrow down the inflationary gap.
Type of Insurance
Insurance cover various types of risks and include various insurance policies which
provide protection against various losses.
There are two different views regarding classification if insurance:-
I. From the business point of view; and
II From the risk points of view
I. Business point of view
The insurance can be classified into three categories from business point of view
1. Life insurance;
2. General Insurance; and
3. Social Insurance.
1. Life Insurance: The life insurance contract provide elements of protection and
investment after getting insurance, the policyholder feels a sense of protection because he
shall be paid a definite sum at the death or maturity. Since a definite sum must be paid,
the element of investment is also present. In other words, life insurance provides against
pre-mature death and a fixed sum at the maturity of policy. At present, life insurance
enjoys maximum scope because each and every person requires the insurance.
Life insurance is a contract under which one person, in consideration of a premium paid
either in lump sum or by monthly, quarterly, half yearly or yearly installments,
undertakes to pay to the person (for whose benefits the insurance is made), a certain sum
of money either on the death of the insured person or on the expiry of a specified period
of time.
Life insurance offers various polices according to the requirement of the persons -
- Term Assurance
- Whole Life
- Endowment Assurance
- Family Income Policy
- Life Annuity Joint Life Assurance
- Pension Plans
- Unit Linked Plans
- Policy for maintenance of handicapped dependent
- Endowment Policies with Health Insurance benefits
2. General Insurance: The general insurance includes property insurance, liability
insurance and other form of insurance. Property insurance includes fire and marine
insurance. Property of the individual and business involves various risks like fire, theft
etc. This need insurance Liability insurance includes motor, theft, fidelity and machine
insurance

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 Type of General Insurance policies available are -
- Health Insurance
- Medi- Claim Policy
- Personal Accident Policy
- Group Insurance Policy
- Automobile Insurance
- Workers Compensation Insurance
- Liability Insurance
- Aviation Insurance
- Business Insurance
- Fire Insurance Policy
- Travel Insurance Policy
3. Social Insurance: Social insurance provide protection to the weaker sections of the
society who are unable to pay the premium. It includes pension plans, disability benefits,
unemployment benefits, sickness insurance and industrial insurance.
II Risk Points of View
The insurance can be classified into three categories from Risk point of view
1. Property Insurance
2. Liability Insurance
3. Other forms of Insurance
1. Property Insurance: Property of the individual and business is exposed to risk of fire,
theft marine peril etc. This needs insurance. This is insured with the help of:-
(i) Fire Insurance
(ii) Marine Insurance
(iii) Miscellaneous Insurance
(i) Fire Insurance: Fire insurance covers risks of fire. It is contract of indemnity. Fire
insurance is a contract under which the insurer agrees to indemnify the insured, in
return for payment of the premium in lump sum or by instalments, losses suffered by
the him due to destruction of or damage to the insured property, caused by fire during
an agreed period of time. It includes losses directly caused through fire or ignition.
There are various types of fire insurance policies.
- Consequential loss policy
- Comprehensive policy
- Valued policy
- Valuable policy
- Floating policy
- Average policy
(ii) Marine Insurance: Marine insurance is an arrangement by which the insurer
undertakes to compensate the owner of the ship or cargo for complete or partial loss
at sea. So it provides protection against loss because of marine perils. The marine
perils are collisions with rock, ship attack by enemies, fire etc. Marine insurance
insures ship, cargo and freight.
The following kinds of marine policies are -
- Voyage policy
- Time policy
- Valued policy
- Hull Policy
- Cargo Policy
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 - Freight Policy
(iii) Miscellaneous Insurance: It includes various forms of insurance including property
insurance, liability insurance, personal injuries are also insured. The property, goods,
machine, furniture, automobile, valuable goods etc. can be insured against the
damage or destruction due to accident or disappearance due to theft.
Miscellaneous insurance covers
- Motor
- Disability
- Engineering and aviation risks
- Credit insurance
- Construction risks
- Money Insurance
- Burglary and theft insurance
- All risks insurance
2. Liability Insurance: The insurer is liable top pay the damage of the property or to
compensate the loss of personal injury or death. It includes fidelity insurance, automobile
insurance and machine insurance.
The following are types of liability Insurance:-
- Third party insurance
- Employees insurance
- Reinsurance
3. Other forms of Insurance: It include export credit insurance, state employee insurance
etc. whereby the insurer guarantees to pay certain amount at the happening of certain
events.
The following are other form of Insurance-
- Fidelity Insurance
- Credit Insurance
- Privilege Insurance

INSURANCE

From Business From Risk point

point of view of view

Life Property Liability Other Forms

Insurance Insurance Insurance

General Fire Third Party Fiduciary

Insurance Insurance Insurance Insurance

Social Marine Employee Credit

Insurance Insurance Insurance Insurances

Miscellaneous Motor Privilege

Insurance Insurance

Reinsurance

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 LESSON 2
INSURANCE PRODUCTS AND STATE OF INSURANCE
INDUSTRY IN INDIA
- Meenu
Asstt. Professor, SRCC,
University of Delhi.

Terminologies under insurance

1. Insurer Explained earlier
2. Insured Explained earlier
3. Premium Explained earlier
4. Indemnity Explained earlier
5. Utmost good faith Explained earlier
6. Insurable interest Explained earlier
7. Proximate Cause Explained earlier
8. Subrogation Explained earlier
9. Contribution Explained earlier
10. Reinsurance - Reinsurance is the transfer of insurance business from once insurance to
another. Reinsurance is an arrangement whereby an original insurer who has insured a
risk insures part of that risk again with another insurer, that is to say, reinsurance a part of
risk in order to diminish his own liability. The insurer transferring the business is called
the principle or ceding or original of fire and the office to which the business is
transferred is called for reinsurer or guaranteeing office. It is also a contract of
indemnity. Reinsurance is a contract between the reinsured (the insurer) and the reinsurer.
11. Peril of the Sea - Perils of the Sea is also known as Nautical/ marine perils/maritime. It
means all those perils that are consequential or incidental to sea journey. It include
collisions, war perils, captures, jettison, barratry. It does not include the typical action of
winds and waves.
12. Perils - A peril is defined as the cause if the loss. Examples of peril include fire,
tornadoes, heart attacks and criminal acts. Insurance policies provide financial protection
against losses caused by perils.
13. Jettison - Jettison means voluntary throwing away of the cargo or part of a vessels
equipment for the lightening or relieving the ship for common safety. The aim of the
intentional throwing away of the goods or property is to relive the vessel from the some
imminent peril. Accidental falling of the things does not constitute jettison
14. Actual Loss - Actual Loss is a material and physical loss of the subject matter insured.
Subject matter is completely destroyed or so damaged that it ceases to be a thing of the
kind insured. It is no longer the same as originally insured. For example, A ship is
entirely destroyed by the fire constitute total loss.
15. Constructive Total Loss - In constructive total loss, the ship or cargo insured is not
completely destroyed but is so badly damaged that the cost of repair of recovery would
be greater than the value of the property saved. In such a case, it is preferable to abandon
the destroyed property.
16. Partial Loss - A partial loss occurs when the subject matter of insurance is partially
destroyed or damaged. In marine insurance, a partial loss of vessel or cargo is called an
average.
17. General Average -General average refers to the sacrifice made during extreme
conditions for the purpose of rescuing the ship and the cargo from being damaged. It is
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 incurred for the benefits of all interests. It is always voluntary and intentional. This loss
has to be borne by all parties who have an interest in the marine adventure. For example,
damage to ship engine or machinery in attempting to raise a stranded ship, throwing part
of the cargo, equipment of the vessel overboard to lighten the load and save the vessel.
18. Particular Average Loss - Particular average loss is defined as a partial loss of the
subject matter insured causes by a peril insured. It is accidental in nature. Such a loss is
borne by the underwriter who insured the object damaged.
19. Enemies - The ships belonging to the enemy may cause loss to the insured and is re
underwritten by the marine policy. This policy extends to all the persons of the enemy
country and to their hostile acts provided such acts form part if the enemy actions
20. Agent - A licensed person or organization authorizes to sell insurance by or on behalf of
an insurance company.
21. Broker - A licensed person or organization paid by you to look for insurance on your
behalf.
22. Claim - Notice to an insurer that under the terms of a policy, a loss may be covered.
23. Burglary There are two type of burglary
(a) Theft of the property from the premises following upon entry if the said premises
by violent and forcible means
(b) Theft by a person in the premises who subsequently breaks our by the violent and
forcible means
24. Hazard - Hazard refers top those conditions or features or characteristics which create
or increase the chance of loss arising from a given peril.
There are two type of hazard
(a) Physical Hazard
(b) Moral Hazard
(a) Physical Hazard Physical hazard refers to the risk arising from material
features of the subject matter of insurance, for example, Fire - wooden floor are
more prone to fire, greater the number of the storey in a building, the greater the
hazard.
(b) Moral Hazard - Moral hazard arises from human weaknesses, for example,
dishonesty, carelessness etc. or from general economic conditions like condition
of unemployment would result in a increased of burglaries.
25. Disability Insurance -This insurance provides compensation to the insured when
income is interrupted or terminated because of illness, sickness or due to injury because
of accident. It provides insurance against loss of income.
26. Warranties - Warrantee means a guarantee or a condition which is basic to the
contract of insurancy. Any breach of insurance warranties goes to the root of the contract
and gives the aggrieved party the right to avoid the contract. Section 35 of marine
insurance Act define warranties as A warranty means a promissory warranty. It means
an undertaking by the assured that same particulars thing shall or shall not be done, or
that some condition shall be fulfilled or he affirms or negatives the existence of a
particular state of facts.
In simple words, it means that the insured undertakes that some particular thing shall or
shall not be done, or that some stipulation shall be fulfilled, or that particular state of the
facts does not exist. If a warranty is not complied with by the insured, the contract comes
to an end / and the insured is going to suffer.
27 Total Loss - Total loss means that the subject matter insured is fully destroyed and it
totally lost to its owner.

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 28. Underwriting - Underwriting is the most important aspect for any insurance,
underwriting is a process of selecting applicants for insurance and classifying them
according to their degrees of insurability so that the appropriate premium rates may be
changed.
So underwriting include principle and practices concerning the acceptances or rejection
of risk, the total amount of acceptance, the total amount of retention for insurers own
amount and treatment of the balance through reinsurance
29. Workers Compensation Insurance -It provide four type of benefits (Medical care,
death, disability and rehabilitation) for employee job related injuries or disease as a
matter of right (without regard of fault)
30. Grace Period - A period (Usually 31 days) after the premium due date, during which an
overdue premium may be paid without penalty. The policy remains in force throughout
this period.
31. Material Misrepresentation - The policy holder/ applicant makes a false statement
regarding any material facts on his/her applications. For example, in case of life
insurance, the applicant may not reveal the true age and details of the existing illness/
diseases.
32. Risk - Risk means uncertainty concerning loss, and not the loss itself, or the cause of
loss; or the chance of loss. If, for example, the chance of loss by fire to a particular type
of residential house is 1 in 1000, a person who owns a single house cannot predicts his
loss. Either his flat will burn or will not burn. He has no basis for predicting the outcome.
He is faced with complete uncertainty even though the chance of loss is low.
New Insurance Products
1. Policies under LIC mutual Fund
LIC launched its mutual fund with promise to the investors to provide high returns along
with safety and security of investments. LIC mutual fund came up with 5 schemes which
provide distinct benefits to various cross sections of investors. The names of scheme are:-
- Dhanashree 1989
- Dhan 80 cc (1)
- Dhanvarsha
- Dhanvarsha 1989
- Dhanvridhi 1989
2. Jeevan Akshay V
This can be purchased immediately through lump sum payment as single premium. The
plan provides for annuity payments, which are available throughout the lifetime of and
annuitant. Annuity may be paid either at monthly, quarterly, half yearly or yearly
intervals. Premium is paid as lump sum. Minimum purchase price of the policy is Rs.
50,000 or such amount which may secure a minimum annuity of Rs. 3000 per annum and
maximum no limit. Medical examination is not required. The minimum age of the
proposer should be 40 year & maximum should not exceed 79 years.
3. Jeevan Dhara
The payment of annuities in respect of policies under Jeevan Dhara has to start one month
after the completion of the deferment period.
4. Jeevan Kishore
This is an endowment assurance plan available for children of less than 12 years of age.
The policy may be purchased by any of the parents/ grand parents. Premiums are payable
yearly, half yearly, quarterly or monthly throughout the term of the policy or till earlier
death of child. This is a with profit plan i.e; get share of the profit in the form of bonus.
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 5. Jeevan Chhaya
This is an endowment assurance plan that provides financial protection against death
throughout the term of the plan.
6. New Jeevan Suraksha I
These are deferred annuity plans that allow the policyholder to make provisions for regular
income after the selected terms. Premiums are payable yearly, half yearly, quarterly,
monthly or through deduction opted by the policyholder, throughout the term of the policy
or till earlier death. Premium can be paid in lump sum also.
Insurance in India Historical Background
In India, the concept of insurance was prevalent even during ancient times. The reference of
insurance is found in Rigveda with the name yogakshema more or less related to the well
being and security of the people. Hammurabi in 2100BC, formalized the concept of the civic
responsibilities, bottomry and respondentia. Bottomry and respondentia loans refer to marine
contracts covering vessels and cargo. However, there is no evidence that insurance in its present
form was practiced prior to the twelfth century.
1. Marine Insurance Insurance in the oldest form existed in the form if marine
insurance. there was a contract of Bottomry bond, under this, the system of credit and the
law of interest were well developed and were based on a appreciation of the hazards
involved and the means of safeguarding against it. If the ship was lost, the loan and
interest were forfeited. The contract of insurance was made a part of the contract of
carriage. Freight was fixed according to seasons and was very reasonable. Various risks
were involved with marine transport like heavy winds, highway robbery, capturing by
kings enemies. So to safeguard that, the marine traders developed a method of spreading
that financial loss.
2. Fire Insurance -Marine insurance was followed by fire insurance. it had been originated
in Germany in the beginning if the sixteen century. In England in 1666 there was great
fire in which about 85 percent of the houses were burnt and property worth of sterling ten
crores were completely burnt off. Fire insurance office was established in 1681 in
England. After this, fire insurance spread all over the world.
In India, the general insurance started working with the establishment of the Triton
Insurance Calcutta in 1850. However general insurance could not progress much in India.
3. Life Insurance - Life insurance first started in England in the sixteen century. The first
life insurance policy was of Willam Gybbons on June 18,1653. The first registered life
office in England was the Hand in Hand Society established in 1696. The life
insurance did not progress much in the United States during the eighteenth century.
In India, some European started the first life insurance company in Bengal Presidency,
viz, the Oriental Life Assurance Company in 1818. Then in 1871, Bombay Mutual Life
Assurance Society was established. In 1874 another important life insurance office was
started Oriental Government Security Life Assurance Co. Ltd sooner than several
offices developed in India.
4. Miscellaneous Insurance - Miscellaneous Insurance take place at the later part of the
nineteenth century with the industrial revolution in England. Various insurance were
developed like accident insurance, fidelity insurance, liability insurance. The main
institution was Lloyds association. Now, various insurance are taking place like cattle
insurance, crop insurance, project insurance etc.
Reforms in the Indian Insurance Sector
After the nationalization of the life insurance industry in 1956 and general insurance
industry in 1972, the insurance industry confined only to the operations of Life Insurance
13
Corporation of India and General Insurance Corporation of India and its four subsidiaries viz;
The National Insurance Company Limited, New India Assurance Company Limited, Oriental
Fire & General Insurance Company Limited and United India Fire & General Insurance
Company Limited. There was state monopoly, inefficient customer services, outdated
technologies. So in 1993, Malhotra Committee, led by former secretary and RBI Governor, R.N.
Malhotra, was formed to evaluate the Indian Insurance Industry and for recommending its future
directions.
Objectives of Malhotra Committe
1. To suggest the structure of the insurance industry, to assess strength and weaknesses, to
offer wide variety of insurance products with a high quality of service to the public.
2. To make recommendations for modifying structure of insurance industry for changing
general policy framework, etc.
3. To make specific suggestions for improving the functioning of Life Insurance
Corporation of India and General Insurance Corporation of India.
4. To make suggestions on regulation and supervision of the insurance sector in India
5. To give advice on role and working if surveyors, intermediaries like agents,etc. in the
insurance sector
6. To make recommendations on any other matter which is relevant for development of the
insurance industry in India.
Recommendations of Malhotra Committee
Malhotra committee submitted its report in 1994 and gave the following major
recommendations in respect of :-
(I) Structure
- Government stake in the Insurance companies to be brought down to 50%
- Government should take over the holding of General Insurance Corporation of India & its
subsidiaries so that these subsidiaries can act as independent corporations
- All the Insurance companies should be given freedom to operate
(II) Competition
- Private companies with minimum paid up capital of Rs. 1 billion should be allowed to
enter in industry.
- No company should deal in both life and general insurance through a single entity
- Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies
- Postal life insurance should be allowed to operate in the rural market
- Only one state level life insurance company should be allowed to operate in each state.
- The insurance act should be changed
- The insurance regulatory body should be set up.
- Controller of insurance should be made independent
(III) Investment
- Mandatory investment of LIC life fund in Government Securities to be reduced from 75
percent to 50 percent
- GIC and its subsidiaries are not to hold more than 5% in any company
(IV) Customer Service
- LIC should pay interest on delays in payment beyond 30 days
- Insurance companies must be encouraged to set up unit linked pension plans
- Computerisation of operations and updating of technology to be carried out in the
insurance industry.

14
 So the main emphasis was to improve the customer service and to opened up insurance sector
for the competition. But at the same time, the committee felt that new players could ruin the
public confidence in the industry. The recommendations of the committee were discussed at
different forum.
In 1999, keeping in view of the recommendations of Malhotra Committee, Insurance
Regulatory and Development Authority (IRDA) Bill was drafted. The Government has ruled out
privatization of public sector insurance companies, LIC and GIC. There will be dilution of 100
percent Government equity in LIC and GIC.
IRDA bill was formed by amending the Insurance Act, 1938, the Life Insurance Corporation
Act,1956 and General Insurance Business (Nationalisation Act,1972). This bill was enacted to
open up the insurance sector.
IRDA provides for a nine member regulatory body with statutory powers. It fixed minimum
capital requirement for Life and General Insurance at Rs. 100 Crores and for reinsurance firms at
Rs. 200 Crores.
There was some oppositions so Government reintroduced the bill with some changes. In
1999, the bill was finally passed and IRDA was formed to regulate and promote insurance
business in India.
Liberalisation of Insurance markets in India
Liberalisation are of two types :-
- Domestic Liberalisation
- External sector Liberalisation
Domestic Liberalisation consists of general curbs and guides on production, investment, price,
the role of market and resources allocation etc.
External sector Liberalisation consists of liberalization in term of international flow of goods,
services, technology and Capital
Liberalisation of insurance involves transformation of the industry from a government monopoly
to a competitive environment. Indian companies too should have chance to carry out its business
in a foreign country without much limitation.
Liberalisation of the insurance sector has contributed towards the economic development of the
country in the following ways :-
(i) Employment Generations as more demand for marketing experts, finance specialists,
human resources professionals, statisticians etc.
(ii) Allowing of foreign players in Indian Insurance Sector bring more funds in the economy.
(iii) Liberalisation helps in promoting industry ancillary to insurance industry, like,
advertising etc. New policy cover have been developed. Customer friendly pricing
structure was developed that would foster healthy competition throughout the insurance
industry. Various distribution channels were developed.
(iv) Modern techniques were developed like bancassurance to sell insurance products to
customers. Banks too have involved in the task of distributing insurance products.
Insurance companies are entering into tie ups with manufactures of consumers goods in
order to speed up the process of reaching the customer at their door steps.
(v) IT sector boost up. The need for quicker delivery of insurance products has provoked the
competing insurance players to follow more sophisticated, automated systems
Major Insurance Players in India
There are two types of insurance players
I Life Insurance
II Non Life Insurance
15
I Following major players in life Insurance sector
1. Bajaj Allianz Life Insurance Company Limited:
It was incorporated on 12th March 2001 and get certificate of registration on 3rd April 2001.
It is a joint venture between Bajaj Auto Limited and Allianz AG of Germany. It conduct life
insurance business in India.
Products offered by the company are :-
- Risk Care Plan
- Cash Care Plan
- Life Care Plan
- Save Care Plan
- Invest Gain Plan
- Group Risk Care Plan Employer - Employee
- Group Credit Care Plan - Employer - Employee
- Group Risk Care Plan Non Employer - Employee
2. Birla Sun Life Insurance Company Limited :
It is a joint venture between Aditya Birla Group Sun life Corporation of U.S. Company offer
a unique products having features of
- Good Returns
- Security
- Liquidity
- Tax Benefits
- Transparency and
- Expediency
Products offered by the company are:-
- Flexi Save Plus endowment Plan
- Flexi life line whole life Plan
- Flexi Cash flow money back Plan
- Single Premium Plan
- Flexi secure life retirement plan (Pension)
- Birla sun life term plan
3. HDFC Standard Life Insurance Company Limited :
It is a joint venture between HDFC and Standard life. The company was incorporated on 14th
August 2000.
Products offered by the company are :-
- With profit endowment Assurance
- With profit money back
- Single Premium Whole Life
- Loan Cover term Assurance
- Personal Pension Plan
- Childrens Plan
- Group Term Insurance
- Development Insurance Plan
4. ICICI Prudential Life Insurance Company Limited :
It is a joint venture between ICICI Bank Limited and Prudential of UK. The company has
paid up capital of Rs. 230 Crores. The was incorporated on 26th November 2000 and it started its

16
operation on 19th December 2000. Company offers wide range of products for Individual,
Investors and Corporates .
Products offered by the company are :
Individuals Plans Cash and Back, Life Guard, Forever Life, Life Link Pension & Life Time
Pension
Investment Plans Assure Invest, Life Link Plan etc.
Group Plans Group Gratuity, Group Term Assurance
5. Life Insurance Corporation of India Limited :
Life Insurance Corporation of India Limited was established in 1956. it has 7 zonal and 100
divisional offices and 204 branches. It is the dominate leader in life insurance business in India.
The Company offers wide variety of products
Products offered by the company are :-
- Whole Life Plan
- Endowment Plan
- Children Plan
- Joint Life Plan
- Group Term Insurance Plan
6. Tata AIG Life Insurance Company Limited :
It is a joint venture between Tata Group and AIG of America. The company has paid up
capital of Rs. 185 Crores.. Company offers wide range of products
Products offered by the company are :-
- 15 year life line (With return of premium) Plan
- Money Saver Plan
- Security and Growth Plan
- Mahalife Plan
7. SBI Life Insurance Company Limited :
It is a joint venture between SBI and Cardiff S.A. France. The company has paid up capital
of Rs. 250 Crores.. Company offers wide range of products
Products offered by the company are :-
- Sanjeevan Plan
- Sudarshan Plan
- Young Sanjeevan Plan
- SBI Scholar Plan
8. OM Kotak Mahindra Life Insurance Company Limited :
It is a joint venture between Kotak Mahindra Finance Limited and Old Mutual Public Ltd.
The company has paid up capital of Rs. 150 Crores.
The major products offered are
- Insurance Bond Plan
- Gramin Bima Yojana Plan
- Retirement Plan
- Capital Multiplier Plan
- Annuity Plan
- Child Advantage Plan

17
9. Max New York Life Insurance Company Limited :
It is a joint venture between Max India Limited and New York life. The company has paid up
capital of Rs. 250 Crores..
The company offers wide range of insurance plans. Products offered are
- Whole Life Endowment Plan
- Term Assurance Plan
10. ING Vyasya Life Insurance Company Limited :
It is a joint venture between ING, Vyasa bank and GMR Group. The company has paid up
capital of Rs. 110 Crores.
The major products offered are
- Reassuring Life Endowment Assurance Plan
- Fulfilling Life Anticipated Whole Life Plan
- Maximising Life Money bank Plan
- Conquering Life Plan
11. AVIVA Life Insurance Company Limited :
It is a joint venture between Dabur India and CGU, a Wholly subsidiary AVIVA Public
Limited Company (PLC). The company has paid up capital of Rs. 110 Crores.
The major products offered are
- Life Long Plan
- Life Saver Plan
- Life Bond Plan
- Corporate Life Plan
- Credit Plus Plan
- Secure Life Plan
- Easy Life Plan
- Pension Plus Plan
12. AMP Sanmar Assurance Company Limited :
It is a joint venture between AMP and Sanmar Group.
The major products offered are
- Dhan Shree Plan
- Subha Shree Plan
- Nitya Shree Plan
- Rakash Shree Plan
- Yuva Shree Plan
- Bhagya Shree Plan
II Following major players in Non life Insurance sector
1. Bajaj Allianz General Insurance Company Limited :
It was incorporated on 19th September 2000 and get certificate of registration on 2nd may
2001. It is a joint venture between Bajaj Auto Limited and Allianz AG of Germany. It conduct
general insurance business (Including health insurance business) in India. Its paid up capital is
Rs. 110 Crores
Company offer following categories of products
- Fire insurance
- Motor Insurance
18
 - Workmen Compensation
- Consequential loss (fire) insurance
- Engineering (Including electronics equipments, machinery, boiler explosion etc.
- Health insurance
- Personal accident
- Householders
- Overseas travel
2. ICICI Lombard General Insurance Company Limited
It is a joint venture between ICICI Bank Limited and Lombard Canada Limited (Oldest
property and casualty insurance company in Canada). ICICI Lombard offer a wide range of retail
and corporate general insurance customized product as under :
- Home Insurance
- Personal Care
- Fire and Special Peril Policy
- Consequential loss (fire) insurance
- Burglary Insurance
- Liability products like Public liability insurance act policy, Workmen
Compensation
3. IFFCO TOKIO General Insurance Company Limited
It is a joint venture between IFFCO and Tokio marine & fire Insurance Company
Limited, Japan. Its paid up capital is Rs. 100 Crores. It is among Indias top three private sector
general insurance companies. The company offer a wide range of unique customized policies ,
some of major products as under :
- Industrial All Risks
- Machinery Breakdowns
- Machinery Loss of Project
- Product Liability
- Marine (Cargo)
- Motor (Private/ personal Car/ Commercial Vehicles)
- Overseas Travel Insurance
- Cash Insurance
4. National Insurance Company Limited
National Insurance Company Limited was incorporated in 1906 and nationalised in 1972.
Company carry out general insurance business. 1972, 22 foreign companies and 11 Indian
Insurance Companies were amalgamated with National Insurance Company Limited as a
subsidiary of General Insurance Corporation of India . Then in 2002, the company was de linked
from General Insurance Corporation of India and now working as independent company.
Company offers a wide variety of products and also carrying out reinsurance and foreign
operations
5. New India Assurance Company Limited
New India Assurance Company Limited was incorporated in 1919 and was nationalised
in 1972. Company carry out general insurance business. In 2002, the company was de linked
from General Insurance Corporation of India and now working as independent company.
Company offers a wide variety of products and also carrying out reinsurance and foreign
operations
19
6. Oriental Insurance Company Limited
Oriental Insurance Company Limited was incorporated in 1947 as a subsidiary of
Oriental Government Security Life Assurance Company Limited. In 1956 Oriental Insurance
Company Limited becomes subsidiary of LIC. On 13th May 1971, Government of India took
over the management of all general insurance companies in India, then in 1973, General
insurance business was nationalized and General Insurance company came under the General
Insurance Corporation of India . Then in 2002, the company was de linked from General
Insurance Corporation of India and now working as independent company. Company offers a
wide variety of products and also carrying out reinsurance and foreign operations. The Company
head office is in New Delhi
7. United India Insurance Company Limited
It was one of the subsidiary General Insurance Corporation of India, In 2002, the
company was de-linked from General Insurance Corporation of India and now working as
independent company. Company offers a wide variety of products such as sports insurance,
mediclaim policy, T.V. Policy , Floriculture Insurance, Agricultural Insurance etc. The
Company head office is in Chennai
8. Tata AIG General Insurance Company Limited
It is a joint venture between Tata Group and AIG (American International Group Inc.). Its
paid up capital is Rs. 125 Crores. It is the first Indian Insurance company which offers a
comprehensive policy to cover various risks in the IT sector. Other products offered are property,
casualty, marine, director and officers liability, accident, health, home owners and automobiles
insurance
9. Royal Sundaram General Insurance Company Limited
Royal Sundaram General Insurance Company Limited is a joint venture between Royal
and Sun Alliance Insurance and Sundaram Finance Limited. It started its operations from March
2001. The products offered by the company are:
- Travel Shield
- Accident Shield
- Health Shield
- Home Shield
10. Cholamandalam General Insurance Company Limited
Cholamandalam General Insurance Company Limited is promoted by Chennai based
Murugappa group. The Company has capital of Rs. 105 crores. The products offeres following
products
- Motor Insurance
- Home Insurance
- Electronic Insurance
- Neon Sign Insurance
- Machinery breakdown Insurance
- Marine Insurance
- Pet Insurance
11. Reliance General Insurance Company Limited
It is one of the fastest growing general insurance company in India. Reliance General
Insurance Company Limited is a subsidiary of Reliance Capital. It provide insurance coverage to
20
all categories of people and offers a wide range of insurance products. The company has a
unique features covering customers centric products, multiple distribution channels and new
modern technology.
12. Export Credit Guarantee Corporation of India Limited
Export Credit Guarantee Corporation of India Limited was established in 1957 by the
Government of India. It function under the administrative control of the Ministry of Commerce,
Government of India. The main objective was to strengthen the export promotion campaign by
insuring the risk associated with exporting on credit. It is the fifth largest credit insurer of the
world in term of coverage of national exports. The paid up capital of the company is Rs. 500
Crores.
The insurance products offered by the corporation includes
- Turnover Policy
- Small Exporter Policy
- Standard Policy
- Buyer wise Policy
- Insurance cover for buyers credit and line of credit service policy
- Construction Work Policy

21
 LESSON 3
LEGAL FRAMEWORK LIFE & GENERAL INSURANCE BUSINESS

- Meenu
Asstt. Professor, SRCC,
University of Delhi.

ESSENTIALS OF GENERAL CONTRACT (SECTION 10) OF INDIAN CONTRACT

ACT 1872
The law of contract in India is contained in the Indian Contract Act 1872, According to
section 2(h) of the Indian Contract Act 1872, An agreement enforceable by law is a contract
A contract, therefore, is an agreement the object of which is to create legal obligation i.e. a duty
enforceable by law.
Thus there are two main elements
I An agreement
II Legal obligation i.e a duty enforceable by law
An agreement comes into existence when one party makes a proposal or offer to the other
party and that other party signifies his ascent (i.e. gives his acceptance)
An agreement to become a contract must give rise to a legal obligation i.e. , a duty enforceable
by law.
To be enforceable by law, an agreement must possess the essential elements of a valid
contract as contained in section 10.
Essentials of a valid contract
In order to become a valid contract, an agreement must have the following essentials
elements:
1. Offer and Acceptance
There must be a lawful offer and a ;lawful acceptance of the offer. There must be tow
parties to an agreement, one making the offer and the other accepting it. The offer must be
definite, unambiguous and certain. It must be communicated. Acceptance must be absolute and
unqualified i.e it should not be conditional. It must be communicated to the offeror.
2. Intention to create legal relationship
There must be an intention among the parties that the agreement should be attached by legal
consequences and create legal obligations. Agreement of a social or domestic nature does not
involve any legal obligations so they are not a contract.
3. Lawful consideration
Consideration means something in return. An agreement is enforceable only when each of
the parties to it gives something and get something consideration must be something of value.
It may be past, present or future.
4. Capacity of parties
The parties to an agreement must be competent to contract. Parties must be of the age of
majority and of sound mind and must not be disqualified form contracting by any law to which

22
they are subject (Section 11). If any of the parties to the agreement suffers a from minority,
lunacy, idiocy, drunkenness, etc., the agreement is not enforceable
5. Free consent
One of the essentials of the valid contract is that there should be consensus ad idem, i.e. they
agree upon the same thing in the same sense at the same time and that their consent is free and
real.
Coercion is said to be free whom it is not caused by :-
(i) Coercion
(ii) Under influence
(iii) Misrepresentation
(iv) Fraud
(v) Mistake
When there is no consent, there is no contract.
6. Lawful object
The object of the contract must be lawful. It should not be illegal, immoral or opposed to
public policy. If the object of the agreement is performance of unlawful act, the agreement is
unenforceable, for example, An agreement to commit an assault or to beat a man has been held
unlawful and void.
7. Writing and registration
According to the Indian Contract Act, a contract may be oral or in writing. But in certain
special cases, it lays down that the agreement, to be valid, must be in writing or/and registered.
For example, it requires that an agreement to pay a time barred debt must be in writing and an
agreement to make a gift for natural love and affection must be in writing and registered.
8. Certainty
The terms of agreement must be certain and not vague, indefinite or ambiguous. For
example, A, agree to sell B a hundred tons of oil. There is nothing whatever to show what kind
of oil was intended, the agreement is void for uncertainty.
9. Possibility of performance
A contract must be capable of performance. An agreement to do an act impossible is itself is
void.
10. Agreement not declared void
The agreement must not be have been expressly declared void by any law in force in the
country. (Section 24-30 and Section 56).
Kind of Contracts
Contract may be classified on the following basis.
Classification according to enforceability:
From the point of view of enforceability, a contract may be
1 Valid Contract
2 Voidable Contract
3 Void Contract
4 Unforceable contract
5 Illegal or unlawful contract
23
 1. Valid contract : An agreement that fulfills all the essentials requisites as per the
requirement of law is a valid contract.
2. Voidable contract : An agreement which is enforceable by law at the option of one or
more of the parties thereto, but not at the option of the option of the other or others, is
voidable contract. When a element of free consent is absent, a contract is said to be
voidable contract. For example, C threatens to shoot B, if he does not let out his house
to him. B agree to let out his house to C. The consent of B is not free, so it is
voidable at the option of B.
3. Void contract: Void contract means which is not enforceable by law. A contract is not
void from its beginning and it is valid and binding on the parties when originally entered
but may later on become void. For example, A agrees to sell B 100 bags of wheat at Rs.
650 per bag. Before delivery, the government bans private trading in wheat, the contract
becomes void.
4. Unenforceable contract : Contracts, which cannot be enforced in a court of law because
of some technical defects such as absence of writing or because the remedy has become
time barred are called unenforceable contracts.
5. Illegal or unlawful contract : An agreement is illegal and void it object or
consideration :-
(i) is forbidden by law; or
(ii) is of such a nature that , if permitted , it would defect the provisions of any law; or
(iii)is fraudulent; or
(iv) involves or implies injury to the person or property of another; or
(v) the court regards it as a immoral, or opposed to public policy.
Classification according to the mode of creation
It can be divided into
1. Express contract
2. Implied contract
3. Constructive or quasi contract
1. Express contract : Where both the offer and acceptance are made in words spoken or
written, it is an express contract.
2. Implied contract : Where both the offer and acceptance are made by acts and conduct of
the parties and not by words, it is an implied contract. For example, P a coolie in
uniform takes up the luggage of Q to be carried out of the railway station without being
asked by Q and Q allows him to do so , then the law implies that Q agree to pay for
the services of P and there is an implied contract.
3. Constructive or quasi contracts : It is based on the principle of justice that a person
shall not be allowed to enrich himself un justify at the expenses of another. For example,
if A a salesman, leaves goods at B house by mistake and B treat the goods as his
own, then he is bound to pay for the goods.
Classification on the basis of extent of execution
From the point of view if the extent of execution a contract may be executed or executory.
1. Executed contract : An executed contract is one in which both the parties have executed
/discharge their respective obligation, i.e., completely performed their share of obligation.
For example, A agrees to sell his house toB for Rs. 15 Lacs and accordingly transfer
the house to B on getting the agreed amount from B. The contract is a duly executed
contract.

24
 2. Executory contract : Executory contract is a contract in which both the parties are yet to
execute their respective obligations. Executory contracts are also known as Bilateral
contracts.
ESSENTIAL FEATURES OF INSURANCE CONTRACTS
Like any other contract, insurance contract are also governed by the provisions of the law
of contract as laid down in The Indian Contract Act, 1872. Therefore they have to fulfill the
essential features of a valid contract
The essentials of a valid contract have been discussed earlier.
LIFE INSURANCE CORPORATION ACT, 1956
The life insurance corporation Act, 1956 is an act
(I) to provide for the nationalisation of life insurance business in India
(II) to provide for the regulation and control of the business of the Corporation.
As per the act, 245 private insurance companies, provident societies, etc., were
amalgamated and the life insurance corporation of India was formed and has since then grown up
to be the largest insurance company in India.
Some of the important provisions are as follows
Short title and commencement
(1) This Act maybe called the Life Insurance Corporation Act, 1956
(2) It shall come into force on such date as the Central Government may, by Notifications in
the Official Gazette, appoint.
Important Definitions: Sec 2 of the act contains the definitions adopted under the act.
Some of the important definitions in this act, unless the context otherwise requires are:
(1) "Appointed day, means the date on which the Corporation is established
under Section 3;
(2) "Composite insurer "means an insurer carrying on in addition to controlled business
any other kind of insurance business;
(3) "Controlled business" means
(i) In the case of any insurer specified in sub-clause (a) or sub-clause (b) of clause (9) of
section 2 of the Insurance Act and carrying on life insurance business
(a) all his business, if he carries on no other class of insurance business;
(b) all the business appertaining to his life insurance business, if he carries on any
other class of insurance business also;
(c) all his business if his certificate of registration under the Insurance Act in respect
of general insurance business stands wholly cancelled for a period of more than
six months on the 19th day of January, 1956.
(ii) in the case of any other insurer specified in clause (9) ofsection2 of the Insurance Act
and carrying on life insurance business
(a) all his business in India, if he carries on no other class of insurance business in
India;
(b) all the business appertaining to his life insurance business in India, if he carries on
any other class of insurance business also in India;
(c) all his business in India if he certificate of registration under the Insurance Act in
respect of general insurance business in India stands wholly cancelled for a period
of more than six months on the 19th day of January, 1956.
(4) "Corporation" means the Life Insurance Corporation of India established under section 3;
(5) "Insurance Act means the Insurance Act, 1938(4of1938);
25
 (6) "Insurer" means an insurer as defined in the Insurance Act who carries on life insurance
business in India and includes the Government and a provident society as defined in
section65 of the Insurance Act;
(7) "Member" means a member of the Corporation;
(8) "Prescribed" means prescribed by rules made under this Act;
(9) "Tribunal" means a Tribunal constituted under section17 and having jurisdiction in
respect of any matter under the rules made under this Act;
(10) All other words and expressions used herein but not defined and defined in the Insurance
Act shall have the meanings respectively assigned to them in that Act.
Establishment and incorporation of Life Insurance Corporation of India
Sec 3 of the act provides that
(1) With effect from such date as the Central Government may, by notification in the Official
Gazette, appoint, there shall be established a Corporation called the Life Insurance
Corporation of India.
(2) The Corporation shall be a body corporate having perpetual succession and a common
seal with power subject to the provisions of this Act, to acquire, hold and dispose of
property, and may by its name sue and be sued.
Constitution of the Corporation
According to sec 4 of the Act:
(1) The Corporation shall consist of such number of persons not exceeding 2 as the Central
Government may think fit to appoint thereto and one of them shall be appointed by the
Central Government to be the Chairman there of.
(2) Before appointing a person to be a member, the Central Government shall satisfy itself
that person will have no such financial or other interest as is likely to affect prejudicially
the exercise or performance by him of his functions as a member, and the Central
Government shall also satisfy itself from time to time with respect to every member that
he has no such interest; and any person who is, or whom the Central Government
proposes to appoint and who has consented to be, a member shall, whenever required by
the Central Government so to do, furnish to it such information as the Central
Government considers necessary for the performance of its duties under this sub-section.
(3) A member who is in anyway directly or indirectly interested in a contract made or
proposed to be made by the Corporation shall as soon as possible after the relevant
circumstances have come to his knowledge, disclose the nature of his interest to the
Corporation and the member shall not take part in any deliberation or discussion of the
Corporation with respect to that contact.
Capital of the Corporation
(1) The original capital of the Corporation shall be five crores of rupees provided by the
Central Government after due appropriation made by Parliament bylaw for the purpose,
and the terms and conditions relating to the provision of such capital shall be such as
maybe determined by the Central Government.
(2) The Central Government may, on the recommendation of the Corporation, reduce the
capital of the Corporation to such extent and in such manner as the Central Government
may determine

26
Functions of the Corporation
These are as follows:
1) Subject, to the rules, if any, made by the Central Government in this behalf, it shall be the
general duty of the Corporation to carry on life insurance business, whether in or outside
India, and the Corporation shall so exercise its powers under this Act as to secure that life
insurance business is developed to the best advantage of the community.
2) Without prejudice to the generality of the provisions contained in sub-section (1) but
subject to the other provisions contained in this Act, the Corporation shall have power

(a) To carryon capital redemption business, annuity certain business or reinsurance

business in so far as such re insurance business appertains to life insurance
business;
(b) Subject to the rules, if any, made by the Central Government in this behalf, to
invest the funds of the Corporation in such manner as the Corporation may think
fit and to take all such steps as may be necessary or expedient for the protection or
realization of any investment; including the taking over of and administering any
property offered as security for the investment until a suitable opportunity arises
for its disposal;
(c) To acquire, hold and dispose of any property for the purpose of its business;
(d) To transfer the whole or any part of the life insurance business carries on outside
India to any other person or persons, if in the interest of the Corporation it is
expedient so to do;
(e) To advance or lend money upon the security of any movable property or
otherwise;
(f) To borrow or raise any money in such manner and upon such security as the
Corporation may think fit;
(g) To carry on either by itself or through any subsidiary any other business in any
case where such other business was being carried on by a subsidiary of an insurer
whose controlled business has been transferred to and invested in the Corporation
under this Act;
(h) to carry on any other business which may seen to the Corporation to be capable
of being conveniently carried on in connection with its business and calculated
directly or indirectly to render profitable the business of the corporation;
(i) to do all such things as maybe incidental or conducive to the proper exercise of
any of the powers of the Corporation. In the discharge of any of its functions the
Corporation shall act so far as maybe on business principles.
Power of Corporation to impose conditions, etc
(1) In entering into any arrangement, under section 6, with any concern, the Corporation may
impose such conditions as it may think necessary or expedient for protecting the interest
of the Corporation and for securing that the accommodation granted by it is put to the
best use by the concern.
(2) Where any arrangement entered into by the Corporation under section 6 with any concern
provides for the appointment by the Corporation of one or more directors of such
concern, such provision and any appointment of directors made in pursuance there of
shall be valid and effective notwithstanding anything to the contrary contained in the
Companies Act, 1956 (1 of1956),or in any other law for the time being in force or in the
memorandum, articles of association or any other instrument relating to the concern, and

27
 any provision regarding share, qualification, age limit, number of directorships, removal
from office of Directors and such like conditions contained in any such law or instrument
aforesaid, shall not apply to any director appointed by the Corporation in pursuance of
the arrangement as aforesaid.
(3) Any director appointed as aforesaid shall-
(a) Hold office during the pleasure o f the Corporation any maybe removed or substituted by
any person by order in writing by the Corporation;
(b) Not incur any obligation or liability by reason only of his being a director or for anything
done or omitted to be done in good faith in the discharge of his duties as a director or
anything in relation thereto;
(c) Not be liable to retirement by rotation and shall not be taken into account for computing the
number of directors liable to such retirement.
Management of the Corporation
The central office of the Corporation shall be at such place as the Central Government
may, by notification in he Official Gazette, specify.The Corporation shall establish a zonal office
at each of the following places, namely, Bombay, Calcutta, Delhi, Kanpur and Madras, and,
subject to the previous approval of the Central Government, may establish such other zonal
offices as it thinks fit. The territorial limits of each zone shall be such as may be specified by the
Corporation.There may be established as many divisional offices and branches in each zone as
the Zonal Manager thinks fit.
Other Committees
(1) The Corporation may entrust the general superintendence and direction of its affairs and
business to an Executive Committee consisting of not more than five of its members and
the Executive Committee may exercise all powers and do all such acts and things as may
be delegated to it by the Corporation.
(2) The Corporation may also constitute an Investment Committee for the purpose of
advising it in matters relating to the investment of its funds, and the Investment
Committee shall consist of not more than eight members of whom not less than four shall
be members of the Corporation and the remaining members shall be persons (whether
members of the Corporation or not) who have special knowledge and experience in
financial matters, particularly, matters relating to investment of funds.
It may appoint one or more persons to be the managing director or directors of the
Corporation, and every managing director shall be a whole time officer of the Corporations,
and shall exercise such powers and perform such duties as may be entrusted or delegated to him
by the executive committee of the corporation.
Funds of the Corporation-
Corporation shall have its own fund and all receipts of the Corporation shall be credited thereto
and all payments of the Corporation shall be made there from.
Audit
(1) The accounts of the Corporation shall be audited by auditors duly qualified to act as
auditors of companies under the law for the time being in force relating to companies,
and the auditors shall be appointed by the Corporation with the previous approval of the
Central Government and shall receive such remuneration from the Corporation as the
Central Government may fix.

28
 (2) Every auditor in the performance of his duties shall have at all reasonable times access to
the books, accounts and other documents of the Corporation.
(3) The auditors shall submit their report to the Corporation and shall also forward a copy of
their report to the Central Government.
Annual report of activities of Corporation
The Corporation shall, as soon as may be, after the end of each financial year, prepare
and submit to the Central Government in such form as maybe prescribed a report giving an
account of its activities during the previous financial year, and the report shall also give an
account of the activities, if any, which are likely to be undertaken by the Corporation in the next
financial year.
Liquidation of the Corporation
No provision of the law, as provided in the Companies Act, relating to the winding up of
companies or corporations shall apply to the corporation established under this act, and the
corporation shall not be placed in liquidation save by order of the central government and in such
manner as the central Government may direct.
THE GENERAL INSURANCE BUSINESS (NATIONALISATION) ACT,1972
The Life Insurance business was nationalised in 1956. at this stage, the General insurance
business was allowed to be continued in private hands. In 1971, General Insurance (emergency
provisions) ordinance was enacted.
The Government of India took over the management of all General Insurance Companies
operating in India whether they belonged to Indian or non-Indian shareholders. Subsequently, the
General Insurance (Emergency Provisions) Amendment Act, 1971 was passed withdrawing
certain rights of the Directors and Members of the Companies, which they were enjoying under
the Companies Act. General Insurance (Nationalization) Act, 1972 shortly followed and with
effect from 2nd January,1973 the provisions of the Act became effective.
The most significant provisions of the Act are
Definitions:
In this act, unless the context otherwise requires, acquiring companies: means any Indian
insurance company and, where a scheme has been framed involving the merger of one Indian
insurance company in another or the amalgamation of two or more such companies,means the
Indian insurance company in which any other company has been merged or the company which
has been formed as a result of amalgamation;
Appointed day means such day, not being a day later than the 2nd day of January, 1973,
as the central government may , by notification, appoint;
Companies act means the companies act, 1956;
Corporation means the general insurance corporation of India formed under section 9;
Existing insurer means every insurer the management of whose undertaking has vested in the
central government under section 3 of he general insurance (emergency provisions) act, 1971 an
d includes the undertaking of the life insurance corporation in so far as it relates to the general
insurance business carried on by it;
Foreign insurer means an existing insurer incorporated under the law of any country outside
India;
General insurance business means fire, marine or miscellaneous insurance business, whether
carried on singly or in combination with one or more of them, but does not include capital
redemption business and annuity certain business;
29
Government company means a government company as defined in section 617 of the
companies act;
Indian insurance company means an existing insurer having a share capital who is a company
within the meaning of the companies act;
Insurance act means the insurance act, 1938;
life insurance corporation means the life insurance corporation of India established under the
life insurance corporation act, 1956;
Notification means a notification published in the official gazette;
Prescribed means prescribed by rules made under this act;
Schedule means the schedule to the act;
Scheme means the scheme framed under section 16;
Words and expressions used in this act but not defined herein or in the insurance act and
defined in the companies act, shall have the meanings respectively assigned to them in the
companies act.
Functions of Corporation
The functions of the Corporation are enumerated in Section18 of the Act, some of are as
follows:
The functions of the Corporation shall include:-

(a) The carrying on of any part of the general insurance business, if it thinks it desirable to do
so;
(b) Aiding, assisting and advising the acquiring companies in the matter of setting up of
standards of conduct and sound practice in general insurance business and in the matter
of rendering efficient services to holders of policies of general insurance;
(c) Advising the acquiring companies in the matter of the controlling their expenses
including the payment of commission and other expenses.
(d) Advising the acquiring companies in the matter of the investment of their funds;
(e) Issuing directions to acquiring companies in relation to the conduct of general insurance
business.
Functions of acquiring companies
(1) Subject to the rules, if any, made by the Central Government in this behalf and to its
memorandum and articles of association, it shall be the duty of every acquiring company
to carry on general insurance business.
(2) Each acquiring company shall so function under this Act as to secure that general
insurance business is developed to the best of the community.
(3) In the discharge of any of its functions, each acquiring company shall act so far as may
be on business principles and where any directions have been issued by the Corporation
shall be guided by such directions.
(4) For the removal of doubts it is hereby declared that the Corporations and any acquiring
company may, subject to the rules, if any, made by the Central Government in this
behalf, enter into such contracts of reinsurance treaties as it may think fit for the
protection of its interests.
Power to make rules
According to section 39,
The Central Government is also empowered to make rules to carry out the provisions of
the Act and such rules may provide for:
30
 (a) Manner in which the profits and other moneys received by the Corporation may be dealt
with
(b) The conditions subject to which the Corporation and the acquiring companies shall carry
on general insurance business;
(c) The terms and conditions subject to which any re-insurance contract or treaties may be
entered into;
(d) Form and manner in which any notice or application may be made to the Central
Government;
(e) The reports which may be called for by the Central Government from the Corporation
and acquiring companies; and
(f) Any other matter which is required to be or may be prescribed.
Powers of the central government under the act
Power to transfer employees: under the provisions of sec 22 of the act, the corporation
may at any time transfer any officer or employee from an acquiring company or the corporation
to any other acquiring company or the corporation, as the case may be, and the officer or
employee so transferred, shall continue to have the same terms and conditions of service as were
applicable to him immediately before such transfer.
Power to issue directions: according to sec 23, the corporation and every acquiring
company shall, in the discharge of its functions, be guided by such directions in regard to matters
of policy involving public interest as the central government may give.
Power to frame/ amend a scheme
According to section 17,
If the central government is of opinion that for the more efficient carrying on of general
insurance business it is necessary so to do, it may, by notification, frame one or more schemes.
The central government may, by notification, add to, amend or vary any scheme framed under
this section . a copy of every scheme , and every amendment thereto, framed under this section
shall be laid, as soon as may be after it is made, before each House of Parliament
Power to regulate the terms and conditions of service of officers and other employees
According to section 17A, the central government may, by notification in the official
gazette, frame one or more schemes for regulating the pay scales and other terms and conditions
of service of officers and other employees of the corporation or of any acquiring company.

31
 LESSON 4

THE INSURANCE ACT, 1938 AND IRDA ACT,1999

- Meenu
Asstt. Professor, SRCC,
University of Delhi.

THE INSURANCE ACT, 1938

Earlier to the Insurance Act, 1938, the insurance business was carried by the insurance
companies in accordance with the principles of the Company Law,1913. When the business
started growing, the need for an independent law to regulate the insurance business was noticed
and a separate Act, the Insurance Act, 1938 was legislated. The Act was used for all purposes
relating to both life and general insurance businesses and their regulations. With regards to
general insurance, this Act is being used to regulate the marine insurance, fire insurance and
other insurances. Further growth of business has made it complex and more legal provisions
were required to regulate it. The Marine Insurance Act, 1963, Public Liability Insurance Act,
1991, Insurance Regulatory and Development Authority Act, 1999 and regulations made by the
IRDA are some of the legislations that govern the insurance business.
Short title, extent and commencement
1. (1) This Act may be called Insurance Act, 1938.
(2) It extends to the whole of India.
(3) It shall come into force on such date3 as the Central Government may, by Notification in
the Official Gazette, appoint in this behalf.
Definitions
2. In this Act, unless there is anything repugnant in the subject or context, -
(1) Authority means the Insurance Regulatory and Development Authority established
under sub-section (1) of section 3 of the Insurance Regulatory and Development
Authority Act, 1999;
(2) Policy-holder includes a person to whom the whole of the interest of the policy-holder
in the policy is assigned once and for all, but does not include an assignee thereof whose
interest in the policy is infeasible or is for the time being subject to any condition;
(3) Approved securities, means-
(i) Government securities and other securities charged on the revenue of the Central
Government or of the Government of a State or guaranteed fully as regards
principal and interest by the Central Government or the Government of any State;
(ii) debentures or other securities for money issued under the authority of any Central
Act or Act of a State Legislature by or on behalf of a port trust or municipal
corporation or city improvement trust in any Presidency-town;
(iii) shares of a corporation established by law and guaranteed fully by the Central
Government or the Government of a State as to the repayment of the principal and
the payment of the divided;
(iv) securities issued or guaranteed fully as regards principal and interest by the
Government of any Part B State and specified as approved securities for the
purposes of this Act by the Central Government by notification in the Official
Gazette; and
32
 (4) "Auditor" means a person qualified under the Chartered Accountants Act, 1949 (38 of
1949), to act as an auditor of companies;
(5) "Chief agent" means a person who, not being a salaried employee of an insurer, in
consideration of any commission-
(i) Performs any administrative and organizing functions for the insurer, and
(ii) Procures life insurance business for the insurer by employing or causing to be
employed insurance agents on behalf of the insurer;
[(5-A) "Controller of Insurance" means the officer appointed by the Central
Government under section 2B to exercise all the powers, discharge the functions and
performs the duties of the Authority under this Act or the Life
Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance Business
(Nationalization) Act, 1972 (57 of 1972) or the Insurance Regulatory and Development
Authority Act, 1999;]
(6) "Court" means the principal Civil Court of original jurisdiction in a district and includes
he High Court in exercise of its ordinary original civil jurisdiction;
(7) "Government security" means a Government security as defined in the Public Debt Act,
1944 (18 of 1944);
[(7A) Indian insurance company means any insurer being a company-
(a) which is formed and registered under the Companies Act, 1956 (1 of 1956);
(b) in which the aggregate holdings of equity shares by a foreign company, either by
itself or through its subsidiary companies or its nominees, do not exceed twenty-six
percent paid-up equity capital of such Indian insurance company;
(c) whose sole purpose is to carry on life insurance business or general insurance
business or re-insurance business.
(8) "Insurance company" means any insurer being a company, association or partnership
which may be wound up under the Indian Companies Act, 1913 (7 of 1913), or to which
the Indian Partnership Act, 1932 (9 of 1932), applies;
(9) "Insurer" means-
(a) any individual or unincorporated body of individuals or body corporate incorporated
under the law of any country other than India, carrying on insurance business not being
a person specified in sub-clause (c) of this clause which-
(i) carries on that business in India, or
(ii) has his or its principal place of business or is domiciled in India, or
(iii) with the object of obtaining insurance business, employs a representative, or
maintains a place of business, in India;
(b) any body corporate [not being a person specified in sub-clause (c) of this clause]
carrying on the business of insurance, which is a body corporate incorporated under any
law for the time being in force in India; or stands to any such body corporate in the
relation of a subsidiary company within the meaning of the Indian Companies Act,
1913 (7 of 1913), as defined by sub-section (2) of section 2 of that Act, and
(c) any person who in India has a standing contract with underwriters who are members of
the Society of Lloyd's whereby such person is authorized within the terms of such
contract to issue protection notes, cover notes, or other documents granting insurance
cover to others on behalf of the underwriters.But does not include a principal agent'
chief agent, special agent' or an insurance agent or a provident society as defined in Part
III;
(10) "Insurance agent" means an insurance agent licensed under Sec. 42 who receives agrees
to receive payment by way of commission or other remunerationin consideration of his
33
 soliciting or procuring insurance business including business relating to the continuance,
renewal or revival of policies of insurance;
(11) "Managing agent" means a person, firm or company entitled to the management of the
whole affairs of a company by virtue of an agreement with thecompany, and under the
control and direction of the directors except to the extent, if any, otherwise provided for
in the agreement, and includes any person, firm or\ company occupying such position by
whatever name called.
(12) "Prescribed" means prescribed by rules made under this Act; and
(13) "Principal agent" means a person who, not being a salaried employee of an insurer, in
consideration of any commission,
(i) Performs any administrative and organizing functions for the insurer; and
(ii) Procures general insurance business whether wholly or in part by employing or
causing to be employed insurance agents on behalf of the
(14) "Special agent" means a person who, not being a salaried employee of an insurer, in
consideration of any commission, procures life insurance business for the insurer whether
wholly or in part by employing or causing to be employed insurance agents on behalf of
the insurer, but does not include a chief agent.
(15) Insurance cooperative society means any insurer being a cooperative society, which is
registered on or after the commencement of the insurance (amendment) act, 2002, as a
cooperative society under the cooperative societies act, 1912, or under any other law for
the time being in force in any state relating to cooperative societies or under the multi-
state cooperative societies act, 1984, having a minimum paid up capital (excluding the
deposits required to be made under section 7), of rupees one hundred crores , in which no
body corporate, whether incorporated or not, formed or registered outside India, either by
itself or through its subsidiaries or nominees, any time, holds more than 26 percent of the
capital of such cooperative society, and whose sole purpose is to carry on life insurance
business or general insurance business in India.
Requirements as to capital
No insurer carrying on the business of life insurance, general insurance or re insurance in
India on or after the commencement of the Insurance Regulatory and Development authority
Act, 199, shall be registered unless he has,-
(i) paid-up equity capital of rupees one hundred crores, in case of a person carrying on the
business of life insurance or general insurance; or
(ii) a paid-up equity capital of rupees two hundred crores, in case of a person carrying on the
reinsurance business.
Further, no public company limited by shares having its registered office in India, shall
carry on life insurance business, unless the capital of the company consists only of ordinary
shares each of which have a single face value, and the same paid up amount for all shares,
whether existing or new, except during any period not exceeding one year allowed by the
company for payment of calls on shares.
The act also provides that no prompter shall any time hold more than 26 percent or such
other percentage as may be prescribed. Of the paid up capital in an Indian insurance company,
and if he does, the promoters shall divest in a phased manner the share capital in excess of the 26
percent of the paid up equity capital or such excess paid up equity capital as may be prescribed,
and within such period as may be prescribed by the central government.

34
Deposits
Every insurer shall, in respect of the insurance business carried on by him in India,
deposit and keep deposited with the Reserve Bank of India in one of the offices in India of the
Bank for and on behalf of the Central Government the amount hereafter specified, either in cash
or in approved securities estimated at the market value of the securities on the day of deposit, or
partly in cash and partly in approved securities so estimated:-
(a) in the case of life insurance business, a sum equivalent to one per cent of his total gross
premium written direct in India in any financial year commencing after the 31st day of
March, 2000, not exceeding rupees ten crores;
(b) in the case of general insurance business, a sum equivalent to three per cent of his total
gross premium written in India, in any financial year commencing after the 31st day of
March, 2000, not exceeding rupees ten crores;
(c) in the case of re-insurance business, a sum of rupees twenty crores
(d) in case the business done or to be done is marine insurance only and relates exclusively to
country craft or its cargo or both, the amount shall be one hundred thousand rupees only.
An insurer shall not be registered for any class of insurance business in addition to the class
or classes for which , he is already registered until the full deposit required has been made.
Audit
The balance-sheet, profit and loss account, revenue account and profit and loss
appropriation account of every insurer, in respect of his insurance business, shall, unless subject
to audit under the Indian Companies Act, 1913 (7 of 1913), be audited annually by an auditor
who shall in have the powers of, exercise the functions vested in, and discharge the duties and be
subject to the liabilities and penalties imposed on, auditors of companies by section 145 of the
Indian Companies Act, 1913.
Investment of assets
Every insurer shall invest and at all times keep invested assets equivalent to not less than
the sum of-

(a) the amount of his liabilities to holders of life insurance policies in India on account of
matured claims, and

(b) the amount required to meet the liability on policies of life insurance maturing for
payment in India, less-
(i) the amount of premiums which have fallen due to the insurer on such policies but
have not been paid and the days of grace for payment of which have not expired,
and
(ii) any amount due to the insurer for loans granted on and within the surrender values
of policies of life insurance maturing for payment in India issued by him or by an
insurer whose business he has acquired and in respect of which he has assumed
liability, in the manner following, namely,
(a) twenty-five per cent of the said sum in Government securities,
(b) further sum equal to not less than twenty-five per cent of the said sum in
Government securities or other approved securities and
(c) the balance in any of the approved investments specified in any over
investment.

35
 Every insurer carrying on the business of life insurance, shall every year, within thirty-
one days from the beginning of the year submit to the authority a return showing as at 31st day of
December of the preceding year the assets held invested in accordance with section 27 and 27A
and all other particulars necessary to establish that the requirements of that section have been
complied with, and such return shall be certified by a principal officer of the insurer. Every such
insurer shall also furnish, within fifteen days from the last day of March , June and September , a
return certified as aforesaid showing as at the end of each of the said months the assets held
invested in accordance with section 27.
Power to appoint staff
The Authority may appoint such staff, and at such places as it or he may consider
necessary, for the scrutiny of the returns, statements and information furnished by insurers under
this Act and generally to ensure the efficient performance of the functions of the Authority under
this Act.
Registration of principal agents, chief agents and special agents
(1) The Authority or an officer authorized by it in this behalf shall in the prescribed manner
and on payment of the prescribed fee, which shall not be more than twenty-five rupees
for a principal agent or a chief agent and ten rupees for a special agent, register any
person who makes an application to him in the prescribed manner if,
(a) in the case of an individual, he does not suffer from any of the disqualifications
mentioned in sub-section (4) of Section 42, or

(b) in the case of a company or firm, any of its directors or partners does not
suffer from any of the said disqualifications, and a certificate to Act as a principal
agent, chief agent or special agent, as the case may be, for the purpose of
procuring insurance business shall be issued to him.
(2) A certificate issued under this section shall entitle the holder thereof to act as a principal
agent, chief agent, or special agent, as the case may be, for any insurer.
(3) A certificate issued under this section shall remain in force for a period of twelve months
only from the date of issue, but shall, on application made on this behalf, be renewed
from year to year on production of a certificate from the insurer concerned that the
provisions of clauses (2) and (3) of Part A of the Sixth Schedule in the case of a principal
agent, the provisions of clauses (2) and (4) of Part B of the said Schedule in the case of a
chief agent, and the provisions of clauses (2) and (3) of Part C of the said Schedule in the
case of a special agent, have been complied with, and on payment of the prescribed fee,
which shall not be more than twenty-five rupees, in the case of a principal agent or a
chief agent, and ten rupees in the case of a special agent, and an additional fee of the
prescribed amount not exceeding five rupees by way of penalty, in cases where the
application for renewal of the certificate does not reach the issuing authority before the
date on which the certificate ceases to remain in force:
Provided that, where the applicant is an individual, he does not suffer from any of the
disqualifications mentioned in clauses (b) to (d) of sub-section (4) of section 42 and
where the applicant is a company or a firm, any of its directors or partners does not suffer
from any of the said disqualifications.
(4) Where it is found that the principal agent, chief agent or special agent being an individual
is, or being a company or firm contains a director or partner who is suffering from any of
the disqualifications mentioned in subsection (4) of section 42, without prejudice to any
other penalty to which he may be liable, the Authority shall, and where a principal agent,
36
 chief agent or special agent has contravened any of the provisions of this Act may cancel
the certificate issued under this section to such principal agent, chief agent or special
agent.
(5) The authority which issued any certificate under this section may issue a duplicate
certificate to replace a certificate lost, destroyed or mutilated on payment of the
prescribed fee, which shall not be more than two rupees.

(6) Any person who acts as a principal agent, chief agent or special agent, without holding a
certificate issued under this section to act as such, shall be punishable with fine which
may extend to five hundred rupees, and any insurer or any person acting on behalf of an
insurer, who appoints as a principal agent, chief agent or special agent any person not
entitled to act as such or transacts any insurance business in India through any such
person, shall be punishable with fine which may extend to one thousand rupees.
(7) Where the person contravening sub-section (6) is a company or a firm, then, without
prejudice to any other proceedings which may be taken against the company or firm,
every director, manager, secretary or any other officer of the company, and every partner
of the firm who is knowingly a party to such contravention shall be punishable with fine
which may extend to five hundred rupees.
(8) The provisions of sub-sections (6) and (7) shall not take effect until the expiry of six
months from the commencement of the Insurance (Amendment) Act, 1950.
(9) No insurer shall, on or after the commencement of the Insurance (Amendment) Act,
2002, appointment or transacts any insurance business in India through any principal
agent, chief agent or special agent.
Regulation of employment of principal agents
(1) No insurer shall, after the expiration of seven years from the commencement of the
Insurance (Amendment) Act, 1950, appoint, or transact any insurance business in India,
through a principal agent.
(2) Every contract between an insurer and a principal agent shall be in writing and the terms
contained in Part A of the Sixth Schedule shall be deemed to be incorporated in, and form
part of, every such contract.
(3) No insurer shall, after the commencement of the Insurance (Amendment) Act, 1950 (47
of 1950), appoint any person as a principal agent except in a presidency-town unless the
appointment is by way of renewal of any contract subsisting at such commencement.
(4) Within sixty days of the commencement of the Insurance (Amendment) Act, 1950 (47 of
1950), every principal agent shall file with the insurer concerned a full list of insurance
agents employed by him indicating the terms of the contract between the principal agent
and each of such insurance agents, and, if any principal agent fails to file such a list
within the period specified, any commission payable to such principal agent on premiums
received from the date of expiry of the said period of sixty days until the date of the filing
of the said list shall, notwithstanding anything in any contract to the contrary, cease to be
so payable.
(5) A certified copy of every contract as is referred to in sub-section (2) shall be furnished by
the insurer to the Authority within thirty days of his entering into such contract, and
intimation of any change in any such contract shall be furnished by the insurer with full
particulars thereof to the Authority within thirty days of the making of any such change.
(6) If the commission due to any insurance agent in respect of any general insurance
business procured by such agent is not paid by the principal agent for any reason, the

37
 insurer may pay the insurance agent the commission so due and recover the amount so
paid from the principal agent concerned.
(7) Every contract as is referred to in sub-section (2), subsisting at the commencement of the
Insurance (Amendment) Act, 1950 (47 of 1950), shall, with respect to terms regarding
remuneration, be deemed to have been so altered as to be in accordance with the
provisions of sub-section (4) of section 40A.
(8) If any dispute arises as to whether a person is or was a principal agent the matter shall be
referred to the Authority, whose decision shall be final.
(9) Every insurer shall maintain a register in which the name and address of every principal
agent appointed by him, the date of such appointment and the date, if any, on which the
appointment ceased shall be entered.
Commission, brokerage or fee payable to intermediary or insurance intermediary
(1) No intermediary or insurance intermediary shall be paid or contract to be paid by way of
commission, fee or as remuneration in any form, an amount exceeding thirty per cent of
the premium payable as may be specified by the regulations made by the Authority, in
respect of any policy or policies effected through him:
Provided that the Authority may specify different amounts payable by way of
commission, fee or as remuneration to an intermediary or insurance intermediary or
different classes of business of insurance.
(2) Without prejudice to the provisions contained in this Act, the Authority may, by the
regulations made in this behalf, specify the requirements of capital, form of business and
other conditions to act as an intermediary or insurance intermediary.
Register of insurance agents
Every insurer and every person who acting on behalf of an insurer employs insurance
agents shall maintain a register showing the name and address of every insurance agent
appointed by him and the date on which his appointment began and the date, if any, on which his
appointment ceased.
IRDA ACT 1999
Prior to 1999, insurance companies were owned by the Government. In 1999, the
government of India introduced the insurance regulatory and development authority act, thereby,
deregulating the insurance sector and allowing private companies into the insurance.
The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for
the establishment of an Authority to protect the interests of holders of insurance policies, to
regulate, promote and ensure orderly growth of the insurance industry and for matters connected
therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and the General insurance Business (Nationalization) Act, 1972
Extent and Commencement
The act extends to the whole of India and will come into force on such date as the Central
Government may, by notification in the Official Gazette.
The Act has defined certain terms, some of the most important ones are as follows: -
A) Appointed day means the date on which the Authority is established under the act.
B) Authority means the IRDA established under this Act.
C) Interim insurance regulatory authority means the insurance regulatory authority set up
by the central government through resolution no. 17(2)/94-InsV , dated the 23rd January
1996.
38
 D) Intermediary or insurance intermediary includes insurance brokers, reinsurance
brokers, insurance consultants , surveyors and loss assessors.
E) Member means whole time or a part time member of the authority and includes the
chairperson .
F) Notification means a notification published in the official gazette.
G) Regulations means the regulations made by the authority.
Establishment and incorporation of authority (section 3)
With effect from such date as the Central Government may, by notification, appoint the
Insurance Regulatory and Develop is to be constituted. The Authority shall be a body corporate,
having perpetual succession and a common seal with power, subject to the provisions of this Act,
to acquire, hold and dispose of property, and to contract and can be sue or be sued in its own
name. The head office of the Authority shall be at such place as the Central Government may
decide from time to time and it may establish offices at other places in India.
Composition of Authority
The Authority shall consist of the following members, namely
(a) a Chairperson;
(b) not more than five whole-time members;
(c) not more than four part-time members, to be appointed by the Central Government
Tenure of office of Chairperson and other members
The Chairperson and every other whole-time member shall hold office for a term of five
years from the date of appointment shall be eligible for reappointment:
However, no person shall hold office as a Chairperson after he has attained the age of
sixty-five years and no person shall hold office as such whole-time
member after he has attained the age of sixty-two years.
A part-time member shall hold office for a term not exceeding five years from the date of
his appointment and shall be eligible for reappointment
A member may:
resign by giving in writing to the Central Government notice of not less than three
months; or be removed from his office in accordance with the provisions.
Removal from office
The Central Government may remove from office any member who: -
(a) is, or at any time has been, adjudged as insolvent;
(b) has become physically or mentally incapable of acting as a member;
(c) has been convicted of any offence which, in the opinion of the Central Government,
involves moral turpitude;
(d) has acquired such financial or other interest as is likely to affect prejudicially his
functions as a member;
(e) has so abused his position as to render his continuation in office detrimental to the public
interest.
Salary and allowances of Chairperson and members
The act u/s 7 prescribes-The salary and allowances payable to, and other terms and
conditions of service of, the members other than part-time members shall be such as may be
prescribed. The part-time members shall receive such allowances as may be prescribed. The

39
salary, allowances and other conditions of service of a member shall not be varied to his
disadvantage after appointment in respect of all administrative matters of the Authority.
Meeting of Authority
The Authority shall meet at such times and places, and shall observe such rules and
procedures in regard to transaction of business at its meetings (including quorum at such
meetings) as may be determined by regulations. The Chairperson, or if for any reason he is
unable to attend a meeting of the Authority, any other member chosen by the members present
from amongst themselves at the meeting shall preside at the meeting. All questions which come
up before any meeting of the Authority shall be decided by a majority vote of the members
present and voting, and in the event of equality of votes, the Chairperson, or in his absence, the
person presiding shall have a second or casting vote. The Authority may make regulations for the
transaction of business at its meetings.
Duties, powers and functions of Authority
Subject to the provisions of this Act and any other law for the time being in force, the
Authority has the duty to regulate, promote and ensure orderly growth of the insurance business
and re-insurance business. The powers and functions of the Authority include:-
(a) to issue to the applicant a certificate of registration, to renew, modify, withdraw, suspend
or cancel such registration
b) protection of the interests of the policy-holders in matters concerning assigning of policy,
nomination by policy-holders, insurable interest, settlement of insurance claim, surrender
value of policy, and other terms and conditions of contracts of insurance
(c) specifying requisite qualifications code of conduct and practical training for intermediary
or insurance intermediaries and agents
(d) specifying the code of conduct for surveyors and loss assessors
(e) promoting efficiency in the conduct of insurance business
(f) promoting and regulating professional organizations connected with the insurance and
reinsurance business
(g) levying fees and other charges for carrying out the purposes of this Act
(h) calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organizations connected with the insurance business
(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
(j) prescribing the form and manner in which books of account shall be maintained and
statement of accounts will be rendered by insurers and other insurance intermediaries
(k) Regulating investment of funds by insurance companies
(l) regulating maintenance of margin of solvency
(m) adjudication of 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 organizations
(p) specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector
(q) exercising such other powers as may be prescribed

40
Fund
There shall be constituted a fund to be called "The Insurance Regulatory and
Development Authority Fund" is to be established and the following sums will be credited
thereto:
(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 income received from the insurer.
The Fund shall be applied for meeting the following expenses:
(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.
Accounts and audit
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. The accounts of the Authority
shall be audited by the Comptroller and Auditor General 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 of India. The Comptroller and Auditor-
General of India and other person appointed by him in connection with the audit of the accounts
of the Authority shall have the same rights and 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 particular, shall have the right to demand the production of books,
accounts, connected vouchers and other documents and papers and to inspect any of the officers
of the Authority. 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 audit
report thereon shall be forwarded annually to the Central Government and that Government shall
cause the same to be laid before each House of Parliament.
Powers of Central Government
Under the act
1) Power to issue directions - The Authority shall, in exercise of its powers or the
performance of its functions under this Act, be bound by such directions on questions of
policy, other than those relating to technical and administrative matters, as the Central
Government may give in writing to it from time to time
2) Power to supersede Authority -If at any time the Central Government is of the opinion:-
(a) that, on account of circumstances beyond the control of the Authority, it is unable
to discharge the functions or perform the duties imposed on it by or under the
provisions of this Act: or
(b) that the Authority has persistently defaulted in complying with any direction
given by the Central Government under this Act or in the discharge of the
functions or performance of the duties imposed on it by or under the provisions of
this Act and as a result of such default the financial position of the Authority or
the administration of the Authority has suffered; or
(c) that circumstances exist which render in necessary in the public interest so to do,
the Central Government may, by notification and for reasons to be specified
41
 therein, supersede the Authority for such period, not exceeding six months, as
may be specified in the notification and appoint a person to be the Controller of
Insurance
The Central Government shall cause a copy of the notification issued and a full report of
any action taken under this section and the circumstances leading to such action to be laid before
each House of Parliament at the earliest.
3) Power to make rules - The Central Government may, by notification, make rules for
carrying out the purposes of this Act. Such rules may provide for all or any of the
following matters, namely:
(a) the salary and allowances payable to and other conditions of service of the
members other than part-time members
(b) the allowances to be paid to the part-time members
(c) such other powers that may be performed by the Authority
(d) the form of annual statement of accounts to be prepared by the Authority
(e) the time at, the form and the manner in which returns and statements and
particulars are to be furnished to the Central Government
(f) the matters on which the Insurance Advisory Committee shall advise the authority
(g) any other matter which is to be, or may be, prescribed, or in respect of which
provision is to be or may be made by rules.
4) Power to remove difficulties - If any difficulty arises in giving effect to the provisions
of this act, the central government may, by order published in the official gazette, make
such provisions not inconsistent with the provisions of this act as may appear to be
necessary for removing the difficulty
5) Grants by central government - The central government may, after due appropriation
made by parliament by the law in this behalf, make to the authority grants of such sums
of money as the government may think fit for being utilised for the purposes of this act.
Furnishing of returns, etc., to the Central Government
The Authority must furnish to the Central Government at such time and in such form and
manner as may be prescribed, or as the Central Government may direct, to furnish such returns
and statements and such particulars in regard to any proposed or existing programme for the
promotion and development of the insurance industry as the Central Government may, from time
to time, require.
The Authority must, within nine months after the close of each financial year, submit to
the Central Government a report giving a true and full account of its activities including the
activities for promotion and development of the insurance business during the previous financial
year. Copies of the reports must be laid, as soon as may be after they are received, before each
House of Parliament.
The Chairperson, members, officers and other employees of the Authority shall in this
regard be deemed to be public servants.
Delegation of powers
The Authority may, by general or special order in writing, delegate to the Chairperson or
any other member or officer of the Authority, subject to such conditions, if any, as may be
specified in the order such of its powers and functions under this Act as it may deem necessary.
The Authority may, by a general or special order in writing, also form Committees of the
members and delegate to them the powers and functions of the Authority as may be specified by
the regulations.

42
Establishment of Insurance Advisory Committee
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. 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 forum, surveyors, agents, intermediaries, organizations engaged in safety and loss
prevention, research bodies and employees' association in the insurance sector. The Chairperson
and the members of the Authority shall be the ex officio Chairperson and ex officio members of
the Insurance Advisory Committee. The objects of the Insurance Advisory committee shall be to
advise the Authority on matters relating to the making of the regulations. The Insurance
Advisory Committee may advise the Authority on such other matters as may be prescribed.
Penalty for default in complying with, or act in contravention of, this Act
lf any person, who is required under this Act, or rules or regulations made there under,-
(a) to furnish any document, statement, account, return or report to the Authority, fail to
furnish the same; or
(b) to comply with the directions, fails to comply with such directions;
(c) to maintain solvency margin, fails to maintain such solvency margin;
(d) to comply with the directions on the insurance treaties, fails to comply with sue directions
on the insurance treaties, he shall be liable to a penalty not exceeding five lakhs rupees
for each such failure and punishable with fine.
lf a person makes a statement, or furnishes any document, statement, account, return or
report which is false and which he either knows or believes to be false or does not believe to be
true,-
(a) he shall be liable to a penalty not exceeding five lakhs rupees for each such failure; and
(b) he shall be punishable with imprisonment which may extend to three years or with fine
for each such failure.
Offences by companies
Where any offence under this Act has been committed by a company, every person who,
at the time the offence was committed, was in charge of, and was responsible to, the Company
for the conduct of the business of the company as well as the company shall be deemed to be
guilty of the offence and shall be liable to be proceeded against and punished accordingly.
Power to make regulations
The authority may, in consultation with the insurance advisory committee, by
notification, make regulations, consistent with this act and providing for all or any of the
following matters
The time and places of meetings of the authority and the procedure to be followed at such
meetings including the quorum necessary for the transaction of business.
The transaction of business at its meeting under section 10(4).
The terms and conditions of service of officers and other employees of the authority
under subsection (2) of section 12.
The powers and functions which may be delegated to committees of the members under
subsection (2)of section 23.
Any other matter which is required to be, or may be, specified by regulations or in
respect of which provisions is to be or may be made by regulations.

43
Rules and regulations to be laid before parliament
Every rule and every regulation under this act shall be laid, as soon as may be after it is
made, before each house of parliament, while it is in session, for a total period of thirty days,
which may be comprised in one session oe in two or more successive sessions, and if, before the
expiry of the session immediately following the session or the successive sessions aforesaid, both
houses agree in making any modifications in the rule or regulations or both houses agree that the
rule or regulations should not be made, the rule or regulation shall thereafter have effect only in
such modified form or be no effect, as the case may be.

44
 LESSON 5
AGENCY LAW
- Meenu
Asstt. Professor, SRCC,
University of Delhi.

At times all of us act as principals and agents. If I my friend ask me to deposit his water
bill, then he is acting as principal and I am as agent. Agency Law is contained in Chapter X
{Secs182 to 238} of the Indian Contact Act 1872.
Agent" and "principal:
An "agent" is a person employed to do any act for another, or to represent another in
dealings with third persons. The person for whom such act is done, or represented, is called the
"principal". {sec182}.
Who may employ agent: Any person who is of the age of majority according to the law to
which he is subject, and who is of sound mind, may employ an agent.
Who may be an Agent:
As between the principal and third persons, any person may become an agent, but no
person who is not of the age of majority and sound mind can become an agent, so as to be
responsible to the principal according to the provisions in that behalf herein contained.
Consideration not necessary:
No consideration is necessary to create an agency.
Agent's authority may be express or implied:
The authority of an agent may be express or implied.
Definitions of express and implied authority:
An authority is said to be express when it is given by words spoken or written. An
authority is said to be implied when it is to be inferred from the circumstances of the case; and
things spoken or written, or the ordinary course of dealing, may be accounted circumstances of
the case.
Illustration
Aman owns a shop in Serampur, living himself in Calcutta, and visiting the shop
occasionally. Bharat manages the shop, and he is in the habit of ordering goods from Chaman in
the name of Aman for the purposes of the shop, and of paying for them out of Aman's funds with
Aman's knowledge. Bharat has an implied authority from Aman to order goods from Chaman in
the name of Aman for the purpose of the shop.
Extent of agent's authority:
An agent, having an authority to do an act, has authority to do every lawful thing, which
is necessary in order to do such act. An agent having an authority to carry on a business has
authority to do every lawful thing necessary for the purpose, or usually done in the course, of
conducting such business.

45
Illustrations
(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A may
adopt any legal process necessary for the purpose of recovering the debt, and may give a
valid discharge for the same.
(b) A constitutes B his agent to carry on his business of a shipbuilder. B may purchase
timber and other materials, and hire workmen, for the purpose of carrying on the
business.
Agent's authority in an emergency:
An agent has authority, in an emergency, to do all such acts for the purpose of protecting
his principal from loss and would be done by a person or ordinary prudence, in his own case,
under similar circumstances.
SUB AGENT
When agent cannot delegate
An agent cannot lawfully employ another to perform acts, which he has expressly, or
impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent
may, or, from the nature of agency, a sub-agent must, be employed.
"Sub-agent" defined
A "sub-agent" is a person employed by, and acting under the control of, the original agent
in the business of the agency.
Representation of principal by sub-agent properly appointed
Where a sub-agent is properly appointed, the principal is, so far as regards third persons,
represented by the sub-agent, and is bound by and responsible for his acts, as if he were an agent
originally appointed by the principal.
Agent's responsibility for sub-agents: The agent is responsible to the principal for the acts
of the sub-agent.
Sub-agent's responsibility: The sub-agent is responsible for his acts to the agent, but not
to the principal, except in case of fraud or willful wrong.
Agent's responsibility for sub-agent appointed without authority
Where an agent, without having authority to do so, has appointed a person to act as a sub-
agent, the agent stands towards such person in the relation of a principal to an agent, and is
responsible for his acts both to the principal and to third person; the principal is not represented,
by or responsible for the acts of the person so employed, nor is that person responsible to the
principal.
Relation between principal and person duly appointed by agent to act in business of agency
When an agent, holding an express or implied authority to name another person to act for
the principal in the business of the agency, has named another person accordingly, such person is
not a sub-agent, but an agent of the principal for such part of the business of the agency as is
entrusted to him.
Agent's duty in naming such person
In selecting such agent for his principal, an agent is bound to exercise the same amount of
discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he
is not responsible to the principal for the acts of negligence of the agent so selected.
46
Illustrations
A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of good
reputation to choose a ship for A. The surveyor makes the choice negligently and the ship
turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A.
Right of person as to acts done for him without his authority-effect of Ratification
Where acts are done by one person on behalf of another, but without his knowledge or
authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will
follow as if they had been performed by his authority.
Ratification may be expressed or implied
Ratification may be expressed or may be implied in the conduct of the person on whose
behalf the acts are done.
Illustrations
(a) A, without authority, buys goods, for B. Afterwards B sells them to C on his own
account; B's conduct implies a ratification of the purchase made for him by A.
(b) A, without B's authority, lends B's money to C. Afterwards B accepts interest on the
money from C. B's conduct implies a ratification of the loan.
Knowledge requisite for valid ratification
No valid ratification can be made by a person whose knowledge of the facts of the case is
materially defective.
Effect of ratifying unauthorized act forming part of a transaction
A person ratifying any unauthorized act done on his behalf ratifies the whole of the
transaction of which such act formed a part.
Ratification of unauthorized act cannot injure third person
An act done by one person on behalf of another, without such other person's
authority, which, if done with authority would have the effect of subjecting a third person to
damages, or of terminating any right to interest of a third person cannot, by ratification, be made
to have such effect.
REVOCATION OF AUTHORITY
Termination of agency
An agency is terminated by the principal revoking his authority, or by the agent
renouncing the business of the agency; or by the business of the agency being completed; or by
either the principal or agent dying or becoming of unsound mind; or by the principal being
adjudicated an insolvent under the provisions of any Act for the time being in force for the relief
of insolvent debtors.
Termination of agency, where agent has an interest in subject-matter
Where the agent has himself an interest in the property, which forms the subject matter of
the agency, the agency cannot, in the absence of an express contract, be terminated to the
prejudice of such interest.
Illustration
A, gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts
due to him from A. A cannot revoke this authority, nor can it be terminated by his
insanity or death.
47
When principal may revoke agent's authority
The principal may, save as is otherwise provided by the last preceding section, revoke the
authority given to his agent at any time before the authority has been exercised, so as to bind the
principal.
Revocation where authority has been partly exercised
The principal cannot revoke the authority given to his agent after the authority has been
partly exercised; so far as regards such acts and obligations as arise from acts already done in the
agency.
Compensation for revocation by principal, or renunciation by agent where there is an
express or implied contract that the agency should be continued for any period of time, the
principal must make compensation to the agent, or the agent to the principal, as the case may be,
for any previous revocation or renunciation of the agency without sufficient cause.
Notice of revocation or renunciation
Reasonable notice must be given of such revocation or renunciation, otherwise the
damage thereby resulting to the principal or the agent, as the case may be, must be made good to
the one by the other.
Revocation and renunciation may be expressed or implied
Revocation or renunciation may be expressed or may be implied in the conduct of that
principal or agent respectively.

Illustration
A empowers B to let A's house. Afterwards A lets it himself. This is an implied revocation of
B's authority.
When termination of agent's authority takes effect as to agent, and as to third persons
The termination of the authority of an agent does not, so far as regards the agent, take
effect before it becomes known to him, or, so far as regards third persons, before it becomes
known to them.
Agent's duty on termination of agency by principal's death or insanity
When an agency is terminated by the principal dying or becoming of unsound mind, the
agent is bound to take on behalf of the representative, of his late principal, all reasonable steps
for the protection and reservation of the interests entrusted to him.
Termination of sub-agent's authority
The termination of the authority of an agent causes the termination (subject to the rules
herein contained regarding the termination of an agent's authority) of the authority of all sub-
agents appointed by him.
AGENT'S DUTY TO PRINCIPAL
Agent's duty in conducting principal's business
An agent is bound to conduct the business of his principal according to the directions
given by the principal, or in the absence of any such directions according to the customs, which
prevails in doing business of the same kind at the place where the agent conducts such business.
48
When the agent acts otherwise, if any loss be sustained, he must make it good to his principal
and if any profit accrues, he must account for it.
Skill and diligence required from agent
An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by person engaged in similar business unless the principal has notice of his
want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as
he possesses; and to make compensation to his principal in respect of the direct consequences of
his own neglect, want of skill, or misconduct, but not in respect of loss or damage which are
indirectly or remotely caused by such neglect, want of skill, or misconduct.
Agent's accounts
An agent is bound to render proper accounts to his principal on demand.
Agent's, duty to communicate with principal
It is the duty of an agent in case of difficulty, to use all reasonable diligence in
communicating with his principal, and in seeking to obtain his instructions.
Right of principal when agent deals, on his own account, in business of agency without
principal's consent If an agent deals on his own account in the business of the agency, without
first obtaining the consent of his principal and acquainting him with all material circumstances,
which have come to his own knowledge on the subject, the principal may repudiate the
transaction, if the case shows, either that any material fact has been dishonestly concealed from
him by the agent, or that the dealings of the agent have been disadvantageous to him.
Illustrations
(a) A direct B to sell A's estate. B buys the estate for himself in the name of C. A, on
discovering that B has bought the estate for himself, may repudiate the sale, if he can
show that B has dishonestly concealed any material fact, or that the seals has been
disadvantageous to him.

(b) A directs B to sell A's estate. B, on looking over the estate before selling it, finds a mine
on the estate which is unknown to A. B informs A that he wished to buy the estate for
himself but conceals the discovery of the mine. A allows B to buy, in ignorance of the
existence of the mine. A, on discovering that B knew of the mine at the time he bought
the estate, may either repudiate or adopt the sale at his option.
Principal's right to benefit gained by agent dealing on his own account in business of
agency
If an agent, without the knowledge of his principal, deals in the business of the agency on
his own account instead of on account to his principal, the principal is entitled to claim from the
agent any benefit which may have resulted to him from the transaction.
Agent's right of retainer out of sums received on principal's account
An agent may retain, out of any sums received on account of the principal in the business
of the agency, all moneys due to himself in respect of advances made or expenses properly
incurred by him in conducting such business, and also such remuneration as may be payable to
him for acting as agent.

49
Agent's duty to pay sums received for principal
Subject to such deductions, the agent is bound to pay to his principal all sums received on
his account.
When agent's remuneration becomes due
In the absence of any special contract, payment for the performance of any act is not due
to the agent until the completion of such act; but an agent may detain moneys received by him on
account of goods sold, although the whole of the goods consigned to him for sale may not have
been sold, or although the sale may not be actually complete.
Agent not entitled to remuneration for business misconduct
An agent, who is guilty of misconduct in the business of the agency, is not entitled to any
remuneration in respect of that part of the business, which he has misconduct.
Illustrations
A employs B to recover 1,000 rupees from C. Through B's misconduct the money is not
recovered. B is entitled to no remuneration for his services and must make good the loss.
Agent's lien on principal's property
In the absence of any contract to the contrary, an agent is entitled to retain goods, papers,
and other property, whether movable or immovable of the principal received by him, until the
amount due to himself for commission, disbursements and services in respect of the same has
been paid or accounted for to him.
PRINCIPAL'S DUTY TO AGENT
Agent to be indemnified against consequences of lawful acts
The employer of an agent is bound to indemnify him against the consequences of all
lawful acts done by such agent in exercise of the authority conferred upon him.
Agent to be indemnified against consequences of acts done in good faith
Where one person employs another to do an act, and the agent does the act in good faith,
the employer is liable to indemnify the agent against the consequences of that act, though it may
cause an injury to the rights of third persons.
Non-liability of employer of agent to do a criminal act
Where one person employees another to do an act which is criminal, the employer is not
liable to the agent, either upon an express or an implied promise to indemnify him against the
consequences of that Act.
Illustrations
A employs B to beat C, and agrees to indemnify him against all consequences of the act. B
thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B
for those damages.
Compensation to agent for injury caused by principal's neglect
The principal must make compensation to his agent in respect of injury caused to such
agent by the principal's neglect or want of skill.
Illustration
A employs B as a bricklayer in building a house, and put up the scaffolding himself. The
scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation
to B.
50
EFFECT OF AGENCY ON CONTRACTS WITH THIRD PERSONS
Enforcement and consequences of agent's contract
Contracts entered into through an agent, and obligations arising from acts done by an
agent, may be enforced in the same manner, and will have the same legal consequences as if the
contracts had been entered into the acts done by the principal in person.
Illustrations
(a) A buys goods from B, knowing that he is an agent for their sale, but not knowing who the
principal is. B's principal is the person entitled to claim from A, the price of the goods,
and A cannot, in a suit by the principal, set-off against that claim a debt due to himself
from B.
(b) A, being B's agent; with authority to receive money on his behalf, receives from C a sum
of money due to B. C is discharged of his obligation to pay the sum in question to B.
Principal how far bound, when agent exceeds authority
When an agent does more than he is authorized to do, and when the part of what he does,
which is within his authority, can be separated from the part, which is beyond his authority, so
much only of what he does as is within his authority is binding as between him and his principal.
Principal not bound when excess of agent's authority is not separable
Where an agent does more than he is authorized to do, and what he does beyond the
scope of his authority cannot be separated from what is within it, the principal is not bound to
recognize the transaction.
Illustration
A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for a sum of
6,000 rupees. A may repudiate the whole transaction.
Consequences of notice given to agent
Any notice given to or information obtained by the agent, provided it be given or
obtained in the course of the business transacted by him for the principal, shall, as between the
principal and third parties, have the same legal consequences as if it had been given to or
obtained by the principal.
Illustrations
A is employed by B to buy from C goods of which C is the apparent owner. A was, before he
was so employed a servant of C, and then learnt that the goods really belonged to D, but B is
ignorant of that fact. In spite of the knowledge of his agent, B may set-off against the price of
the goods a debt owing to him from C.
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
In the absence of any contract to that effect an agent cannot personally enforce contracts
entered into by him on behalf of his principal, nor is he personally bound by them.
Presumption of contract to the contrary: Such a contract shall be presumed to exit in the
following cases-
(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant
resident abroad;
(2) Where agent does not disclose the name of his principal;
(3) Where the principal, though disclosed, cannot be sued.

51
Right of parties to a contract made by agent not disclosed
If an agent makes a contract with a person who neither, knows nor has reason to suspect,
that he is an agent, his principal may require the performance of the contract; but the other
contracting party has, as against the principal, the same right as he would have had as against if
the agent had been the principal.
If the principal discloses himself before the contract is completed, the other contracting
party may refuse to fulfill the contract, if he can show that, if he had known who was the
principal in the contract, or if he had known that the agent was not a principal, he would not have
entered into the contract.
Performance of contract with agent supposed to be principal
Where one man makes a contract with another, neither knowing nor having reasonable
ground to suspect that the other is an agent, the principal, if he requires the performance of the
contract, can only obtain such performance subject to the right and obligations subsisting
between the agent and the other party of the contract.
Liability of principal inducing belief that agent's unauthorized acts were authorized
When an agent has, without authority, done acts or incurred obligations to third person on
behalf of his principal, the principal is bound by such acts or obligations, if he has by his word or
conduct induced such third person to believe that such acts and obligations were within the scope
of the agent's authority.
Illustrations
(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price.
C, being ignorant of B's instruction, enters into a contract with B to buy the goods at a
price lower than the reserved price. A is bound by the contract
(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation
of private order from A. The sale is good.
Effect, on agreement, of misrepresentation or fraud by agent
Misrepresentation made or fraud committed, by agent acting in the course of their
business for their principals, have the same effect on agreements made by such agents as if such
misrepresentations of frauds had been made or committed by the principals; but
misrepresentations made, or frauds committed, by agents, in matters which do not affect their
authority, do not affect their principals
Illustrations
(a) A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation,
which he was not authorized by B to make. The contract is voidable, as between B and C,
at the option of C.
(b) A, the captain of B's ship, signs bills of lading without having received on board the
goods mentioned therein. The bills of lading are void as between B and the pretended
consignor.

52
 LESSON 6
CONSUMER PROTECTION ACT, 1986
- Meenu
Asstt. Professor, SRCC,
University of Delhi.

The Consumer Protection Act was passed by the Parliament in 1986 and it came into
force from 1987. Its purposes to protect consumers against defective goods, unsatisfactory
services, unfair trade practices, etc. The Act provides for three-tier machinery consisting of
District Forum, State Commission and National Commission. It also provides for the formation
protection councils in every state.
The consumers can file their complaints at the appropriate forum for quick redressal. The
complaint may relate to defective refrigerator or TV set, non-functional telephone, lack of due
cares in medical treatment and so on. Any service or product given free of charge is not covered
by the Act.
Definitions of Important Terms
Before studying the provisions of the CPA, it is necessary to understand the terms used in
the Act. Let us understand some of the more important definitions.
Complainant means:
1. A consumer; or
2. Any voluntary consumer association registered under the Companies Act, 1956 or under
any other law for the time being in force; or
3. The Central Government or any State Government, who or which makes a complaint; or
one or more consumers where there are numerous consumers having the same interest.
Complaint means any allegation in writing made by a complainant that:
1. An unfair trade practice or a restricted trade practice has been adopted by any trader.
2. The goods bought by him or agreed to be bought by him suffer from one more defects.
3. The services hired or availed of or agreed to be hired or availed of by him suffer from
deficiency in any respect.
4. The trader has charged for the goods mentioned in the complaint a price excess. of the
price fixed by or under any law for the time being in force or displayed on the goods or
any package containing such goods.
Goods which will be hazardous to life and safety when used, are being offered for sale to
the public in contravention of the provisions of any law for the time being in force, requiring
traders to display information in regard to the contents, manner and effect of use of such goods;
with a view to obtaining any relief provided by law under the CPA.
Consumer means any person who:
1. buys any goods for a consideration which has been paid or promised or partly paid and
partly promised, or under any system of deferred payment (for example hire purchase or
installment sales) and includes any other user of such goods when such use is made with
the approval of the buyer, but does not include a person who obtains such goods for
resale or for any commercial purpose; or
2. hires or avails of any services for a consideration which has been paid or promised, or
partly paid and partly promised, or under any system of deferred payment and includes

53
 any beneficiary of such services when such services are availed of with the approval of
the first mentioned person

For the purposes of this definition "commercial purpose" does not include use by a consumer
of goods bought and used by him exclusively for the purpose of earning his livelihood by means
of self-employment.
Goods mean goods as defined in the Sale of Goods Act, 1930. Under that act, goods means
every kind of movable property other than actionable claims and money and includes stocks and
shares, growing crops, grass and things attached to or forming part of the land which are agreed
to be severed before sale or under the contract of sale.
Service is defined to mean service of any description which is made available to potential users
and includes the provision of facilities in connection with banking, financing, insurance,
transport, processing, supply of electrical or other energy, board or lodging or both, housing
construction, entertainment, amusement or the purveying of news or other information but does
not include the rendering of any service free of charge or under a contract of personal service.
Consumer dispute means dispute where the person against whom a complaint has been made,
denies or disputes the allegation contained in the complaint.
Restrictive Trade Practice means any trade practice which requires a consumer to buy, hire, or
avail of any good or as the case may be, services as a condition precedent for buying, hiring or
availing of any other goods or services.
Unfair Trade Practice means unfair trade practice as defined under the Monopolies and
Restrictive Trade Practices Act. The MRTP act has defined certain practices to be unfair trade
practices.
Defect means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or
standard which is required to be maintained by or under any law for the time being in force or
under any contract, express or implied, or as is claimed by the trade in any manner whatsoever in
relation to any goods.
Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality, nature
and manner of performance which is required to be maintained by or under any law for the time
being in force or has been undertaken to be performed by a person in pursuance of a contract or
otherwise in relation to any service. A consumer is a user of goods and services. Any person
paying for goods and services, which he uses, is entitled to expect that the goods and services be
of a nature and quality promised to him by the seller.
The earlier principle of "Caveat Emptor" or "let the buyer beware" which was prevalent
has given way to the principle of "Consumer is King". The origins of this principle lie in the fact
that in today's mass production economy where there is little contact between the producer and
consumer, often sellers make exaggerated claims and advertisements, which they do not intend
to fulfill. This leaves the consumer in a difficult position with very few avenues for redressal.
The onset on intense competition also made producers aware of the benefits of customer
satisfaction and hence by and large, the principle of consumer is king" is now accepted.
Objects of the Consumer Protection Act, 1986
The preamble to the Act states that the Act is legislated to provide for better protection of
the interests of consumers and for that purpose to make provision for the establishment of
consumer councils and other authorities for the settlement of consumer's disputes and for matters
connected therewith. The CPA extends to the whole of India except the State of Jammu and
Kashmir and applies to all goods and services unless otherwise notified by the Central
Government.
The basic rights of consumers as per the Consumer Protection Act (CPA) are:
54
 1. Right to safety.
2. Right to be informed.
3. Right to choose.
4. Right to representation (or to be heard).
5. Right to seek redressal.
6. Right to consumer education.
1. Right to Safety :
It is the consumer right to be protected against goods and services which is hazardous to
health or life.
2. Right to be Informed:
The consumer has the right to be informed about the quality, quantity, purity, standard
and price of goods he intends to purchase. Therefore, the manufacture must mention
complete information about the product, its ingredients, date of manufacture, price,
precaution of use, etc. on the label and package of the product.
3. Right to Choose:
The consumer should be assured of freedom to choose from a variety of products at
competitive prices. Every consumer wants to buy a product on his free will. There should
be free competition in the market so that the consumer may make the right choice in
satisfying his needs.
4. Right to Representation (or to be Heard):
The consumer has right to register dissatisfaction with any product and get his complaint
heard. Most of the reputed firms have set up consumer service cells to listen to the
consumers complaint and take appropriate steps to redress their grievances.
5. Right to Seek Redressal:
It is the right to seek redressal against any defect in goods or unfair trader suffered by the
consumer. If the quality and performance of a product falls short of sellers claims, the
consumer has a right to certain remedies. The Consumer Protection Act requires that the
product must be repaired, replaced or taken back by the seller as provided under the
contract between the buyer and the seller.
6. Right to Consumer Education:
It means right of acquiring knowledge and being a well-informed consumer throughout
his life. He should also be made aware of his rights and the remedies available through
publicity in the mass media.
Consumer Responsibilities
(i) To provide adequate information to the seller: The consumer has the responsibility to
provide adequate information about his needs and expectation to the sellers.
(ii) To exercise caution in purchasing: The consumer must try to get full information on the
quality, design, utility, quantity, price, etc. of the product before purchasing it.
(iii) To insist on cash memo or receipt: The consumer must get a cash memo or receipt as a
proof of purchase of goods from the seller. This would help him in making a complaint to
the seller in case of any defect in the goods.
(iv) To file complaint against genuine grievance: The consumer must file a complaint with
the seller or manufacturer about any defects or shortcoming in the products and services.
(v) To be quality conscious: The consumer should never compromise on the quality of
goods. While making purchases, the consumers must look for standard quality
certification marks such as ISI, Agmark, Woolmark, FPO, etc. For example, electric
iron must carry ISI mark.

55
Redressal Machinery under the Act
Consumer Protection Councils
The interests of consumers are enforced through various authorities set up under the
CPA. The CPA provides for the setting up of the Central Consumer Protection Council, the State
Consumer Protection Council and the District Forum.
Central Consumer Protection Council
The Central Government has set up the Central Consumer Protection Council, which
consists of the following members:
(a) The Minister in charge of Consumer Affairs in the Central Government who is its
Chairman, and
(b) Other official and non-official members representing varied interests. The Central council
consists of 150 members and its term is 3 years. The Council meets as and when
necessary but at least one meeting is held in a year.
State Consumer Protection Council
The State Council consists of:
(a) The Minister in charge of Consumer Affairs in the State Government who is its
Chairman, and
(b) Other official and non-official members representing varied interests. The State Council
meets as and when necessary but not less than two meetings must be held every year.
Redressal Machinery under the Act
The CPA provides for a 3-tier approach in resolving consumer disputes. The District
Forum has jurisdiction to entertain complaints where the value of goods / services complained
against and the compensation claimed is less than Rs. 20 lakhs, the State Commission for claims
exceeding Rs. 20 lakhs but not exceeding Rs. 1crore and the National Commission for claims
exceeding Rs.1 crore.
District Forum
Under the CPA, the State Government has to set up a district Forum in each district of the
State. The government may establish more than one District Forum in a district if it deems fit.
Each District Forum consists of:
(a) A person who is, or who has been, or is qualified to be, a District Judge who shall be its
President
(b) Two other members who shall be persons of ability, integrity and standing and have
adequate knowledge or experience of or have shown capacity in dealing with problems
relating to economics, law, commerce, accountancy, industry, public affairs or
administration, one of whom shall be a woman.
Appointments to the State Commission shall be made by the State Government on the
recommendation of a Selection Committee consisting of the President of the State Committee,
the Secretary - Law Department of the State and the secretary in charge of Consumer Affairs
Every member of the District Forum holds office for 5 years or up to the age of 65 years,
whichever is earlier and is not eligible for re-appointment. A member may resign by giving
notice in writing to the State Government whereupon the vacancy will be filled up by the State
Government.

56
 The District Forum can entertain complaints where the value of goods or services and the
compensation, if any, claimed is less than rupees twenty lakhs. However, in addition to
jurisdiction over consumer goods services valued upto Rs.20 lakhs, the District Forum also may
pass orders against traders indulging in unfair trade practices, sale of defective goods or render
deficient services provided the turnover of goods or value of services does not exceed rupees
twenty lakhs.
A complaint shall be instituted in the District Forum within the local limits of whose
jurisdiction-
(a) The opposite party or the defendant actually and voluntarily resides or carries on business
or has a branch office or personally works for gain at the time of institution of the
complaint; or
(b) Any one of the opposite parties (where there are more than one) actually and voluntarily
resides or carries on business or has a branch office or personally works for gain, at the
time of institution of the complaint provided that the other opposite party/parties
acquiescence in such institution or the permission of the Forum is obtained in respect of
such opposite parties; or
(c) The cause of action arises, wholly or in part.
State Commission
The Act provides for the establishment of the State Consumer Disputes Redressal
Commission by the State Government in the State by notification.
Each State Commission shall consist of:
(a) A person who is or has been a judge of a High Court appointed by State Government (in
consultation with the Chief Justice of the High Court ) who shall be its President;
(b) Two other members who shall be persons of ability, integrity, and standing and have
adequate knowledge or experience of, or have shown capacity in dealing with, problems
relating to economics, law, commerce, accountancy, industry, public affairs or
administration, one of whom must be a woman.
Every appointment made under this is made by the State Government on the
recommendation of a Selection Committee consisting of the President of the State Commission,
Secretary -Law Department of the State and Secretary in charge of Consumer Affairs in the
State.
Every member of the District Forum holds office for 5 years or upto the age of 65 years,
whichever is earlier and is not eligible for re-appointment. A member may resign by giving
notice in writing to the State Government whereupon the vacancy will be filled up by the State
Government.
The State Commission can entertain complaints where the value of goods or services and the
compensation, if any, exceeds Rs. 20 lakhs but does not exceed Rs. 1crore.
The State Commission also has the jurisdiction to entertain appeal against the orders of any
District Forum within the State
The State Commission also has the power to call for the records and appropriate orders in
any consumer dispute which is pending before or has been decided by any District Forum within
the State if it appears that such District Forum has exercised any power not vested in it by law or
has failed to exercise a power rightfully vested in it by law or has acted illegally or with material
irregularity.
National Commission
The Central Government provides for the establishment of the National Consumer
Disputes Redressal Commission. The National Commission shall consist of:-
57
 (a) A person who is or has been a judge of the Supreme Court, to be appoint by the Central
Government (in consultation with the Chief Justice of India ) who be its President;
(b) Four other members who shall be persons of ability, integrity and standing and have
adequate knowledge or experience of, or have shown capacity in dealing with, problems
relating to economics, law, commerce, accountancy, industry, public affairs or
administration, one of whom shall be a woman

Appointments shall be by the Central Government on the recommendation of a Selection

Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of
India, the Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer
Affairs in the Government of India.
Every member of the National Commission shall hold office for a term of five years or
upto seventy years of age, whichever is earlier and shall not be eligible for reappointment.
The National Commission shall have jurisdiction:
(a) to entertain complaints where the value of the goods or services and the compensation, if
any, claimed exceeds rupees one crores:
(b) to entertain appeals against the orders of any State Commission; and
(c) to call for the records and pass appropriate orders in any consumer dispute which is
pending before, or has been decided by any State Commission where it appears to the
National Commission that such Commission has exercised a jurisdiction not vested in it
by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its
jurisdiction illegally or with material irregularity.
Complaints may be filed with the District Forum by:
1. The consumer to whom such goods are sold or delivered or agreed to be sold or
delivered or such service provided or agreed to be provided
2. Any recognized consumer association, whether the consumer to whom goods sold or
delivered or agreed to be sold or delivered or service provided or agreed to be provided,
is a member of such association or not
3. One or more consumers, where there are numerous consumers having the same interest
with the permission of the District Forum, on behalf of or for the benefit of, all
consumers so interested
4. The Central or the State Government. On receipt of a complaint, a copy of the complaint
is to be referred to the opposite party, directing him to give his version of the case within
30 days. This period may be extended by another 15 days. If the opposite party admits the
allegations contained in the complaint, the complaint will be decided on the basis of
materials on the record. Where the opposite party denies or disputes the allegations or
omits or fails to take any action to represent his case within the time provided,
The dispute will be settled in the following manner:
In case of dispute relating to any goods: Where the complaint alleges a defect in the
goods which cannot be determined without proper analysis or test of the goods, a sample of the
goods shall be obtained from the complainant, sealed and authenticated in the manner prescribed
for referring to the appropriate laboratory for the purpose of any analysis or test whichever may
be necessary, so as to find out whether such goods suffer from any other defect. The appropriate
laboratory' would be required to report its finding to the referring authority, i.e. the District
Forum or the State Commission within a period of forty- five days from the receipt of the
reference or within such extended period as may be granted by these agencies.
58
Limitation period for filing of complaint:
The District Forum, the State Commission, or the National Commission shall not admit a
complaint unless it is filed within two years from the date on which the cause of action has
arisen. However, where the complainant satisfies the District Forum / State Commission, that he
had sufficient cause for not filing the complaint within two years; such complaint may be
entertained by it after recording the reasons for condoning the delay.
Powers of the Redressal Agencies:
The District Forum, State Commission and the National Commission are vested with the
powers of a civil court under the Code of Civil Procedure while trying a suit in respect of the
following matters:-
1. The summoning and enforcing attendance of any defendant or witness examining the
witness on oath;
2. The discovery and production of any document or other material producible as evidence;
3. The reception of evidence on affidavits:
4. The requisitioning of the report of the concerned analysis or test from the appropriate
laboratory or from any other relevant source;
5. Issuing of any commission for the examination of any witness; and
6. Any other matter which may be prescribed.
Under the Consumer Protection Rules, 1987, the District Forum, Commission and the
National Commission have the power to require any person: -
(i) to produce before, and allow to be examined by an officer of any authorities, such books
of accounts, documents or commodities as may be required and to keep such book,
documents etc. under its custody for the purposes of the Act;
(ii) to furnish such information which may be required for the purposes to any officer so
specified.
They have the power to:
(i) To pass written orders authorizing any officer to exercise power of entry and search of
any premises where these books, papers, commodities, or documents are kept if there is
any ground to believe that these may be destroyed, altered, falsified or secreted. Such
authorized officer may also seize books, papers, documents or commodities if they are
required for the purposes of the Act, provided the seizure is communicated to the District
Forum / State Commission / National commission within 72 hours. On examination of
such documents or commodities, the agency concerned may order the retention thereof or
may return it to the party concerned.
(ii) to issue remedial orders to the opposite party.
(iii) to dismiss frivolous and vexatious complaints and to order the complainant to make
payment of costs, not exceeding Rs. 10,000 to the opposite party.
Remedies Granted under the Act :
The District Forum / State Commission / National Commission may pass one or more of
the following orders to grant relief to the aggrieved consumer: -
1. To remove the defects pointed out by the appropriate laboratory from goods in question;
2. To replace the goods with new goods of similar description, which shall be free from any
defect;

59
 3. To return to the complainant the price, or, as the case may be, the charges paid by the
complainant;
4. To pay such amount as may be awarded by it as compensation to the consumer for any
loss or injury suffered by the consumer due to negligence of the opposite party;
5. To remove the defects or deficiencies in the services in question;
6. To discontinue the unfair trade practice or the restrictive trade practice or not to repeat
them;
7. Not to offer the hazardous goods for sale:
8. To withdraw the hazardous goods from being offered for sale:
9. To provide for adequate costs to parties.
Appeals :
Any person aggrieved by an order made by the Forum may prefer an appeal to the State
Commission in the prescribed form and manner. Similarly, any person aggrieved by any original
order of the State Commission may prefer an appeal to the National Commission in the
prescribed form and manner. Any person aggrieved by any original order of the National
Commission may prefer an appeal to the Supreme Court.
All such appeals are to be made within thirty days from the date of the order provided
that the concerned Appellate authority may entertain an appeal after the said period of thirty days
if it is satisfied that there was sufficient cause for not filling it within that period. The period of
30 days is to be computed from the date of receipt of the order by the appellant.
Where no appeal has been preferred against any of the orders of the authorities, such
orders would be final. The District Forum, State Commission or National Commission may
enforce respective orders as if it was a decree or order made by a Court and in the event of their
inability to execute the same; they may send the order to the Court for execution by it as if it
were a Court decree or order.
Penalties :
Failure or omission by a trader or other person against whom a complaint is made or the
complainant to comply with any order of the State Commission or the National Commission
shall be punishable with imprisonment for a term which shall not be less than one month but
which may extend to 3 years, or with fine of not less than Rs. 2,000 but which may to Rs. 10000
or with both.
However, if it is satisfied that the circumstances of any case so requires, then the District
Forum or the State Commission or the National Commission may impose a lower fine or a
shorter term of imprisonment.

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 Unit 6
LESSON 7

LIFE INSURANCE
Dr Ashish Kumar
LBSIM
Introduction
Life Insurance is universally acknowledged as a tool to eliminate risk, substitute certainty
for uncertainty and ensure timely aid of the family in the unfortunate event of the death of the
breadwinner. In other words, it is the civilized world's partial solution to the problems caused by
death. In other words, Life insurance is protection against financial loss resulting from insured
Individuals death. In realistic terms, life insurance provides you and your family the financial
security and certainty to deal with the aftermath of any unseen unfortunate events.
Life Insurance is a contract for payment of a sum of money to the person assured (or
failing him/her, to the person entitled to receive the same) on the happening of the event insured
against. Usually the insurance contract provides for the payment of an amount on the date of
maturity or at specified dates at periodic intervals or at unfortunate death if it occurs earlier.
Obviously, there is a price to be paid for this benefit. Among other things, the contract also
provides for the payment of premiums by the assured.
In a nutshell, life insurance helps in two ways: premature death, which leaves dependent
families to fend for itself and old age without visible means of support. Any person who has
attained majority and is eligible to enter into a valid contract can take out a life insurance policy
for himself / herself. Policies can also be taken out, subject to certain conditions, on the life of
ones children.
The need for life insurance will change as you grow older. When you are young, you may
believe you have no need for life insurance. But as you grow older, possibly get married and take
on more responsibilities, your desire to take out an insurance policy increases.
What is the reach and significance of Life Insurance as an economic activity?
So long as the maintenance of a family depends on the earning power of the bread-
winner.
So long as the earning can be destroyed by death, old age or disability.
Just so long life as insurance continues to be the keystone of the individual and those who
are dependent on him.
Thus, life insurance is universal and will play a useful role as long as the family set up survives.
Life Insurance caters to an important social need.
Need For Life Insurance
The need for life insurance comes from the need to safeguard our family. If you care for
your familys needs you will definitely consider insurance. Today insurance has become even
more important due to the disintegration of the prevalent joint family system, a system in which
a number of generations co-existed in harmony, a system in which a sense of financial security
was always there as there were more earning members. Times have changed and the nuclear
family has emerged. Therefore you need to save a part of income for the future too.This is where
insurance helps us.
Factors such as fewer numbers of earning members, stress, pollution, increased
competition, higher ambitions etc. are some of the reasons why insurance has gained importance
and where insurance plays a successful role. Insurance provides a sense of security to the income
earner as also to the family. Buying insurance frees the individual from unnecessary financial
burden that can otherwise make him spend sleepless nights. The individual has a sense of
consolation that he has something to fall back on. From the very beginning of your life, to your
retirement age insurance can take care of all your needs. Your child needs good education to
mold him into a good citizen. After his schooling he need to go for higher studies, to gain a
professional edge over the others - a necessity in this age where cut-throat competition is the
rule. His career needs have to be fulfilled. Insurance is a must also because of the uncertain
future adversities of life. Accidents, illnesses, disability etc. are facts of life which can be
extremely devastating. Disability can be taken care of by insurance. Your family will not have to
go through the grind due to your present inability.
Moreover, retirement, an age when every individual has almost fulfilled his
responsibilities and looks forward to relaxing can be painful if not planned properly. Have we
considered the increasing inflation and taxes? Will our investment offer us attractive returns
under such circumstances? Will it take care of our family after us? An insurance policy will
definitely take care of these and a lot more. Insurance has become a necessity today. It provides
timely financial as also rewards with bonuses. Life Insurance has come a long way from the
earlier days when it was originally conceived as a risk covering medium for short periods of
time, covering temporary risk situations, such as sea voyages.
Therefore after going through the discussion let us summarize our points and understand
the need of life insurance :
a) Temporary needs / threats: The original purpose of life insurance remains an important
element, namely providing for replacement of income on death etc.
b) Regular Savings / Family Protection: Providing for one's family and oneself, as a medium
to long term exercise (through a series of regular payment of premiums). This has become more
relevant in recent times as people seek financial independence for their family.
c) Investment: Put simply, the building up of savings while safeguarding it from the ravages of
inflation. Unlike regular saving products, investment products are traditionally lump sum
investments, where the individual makes a one off payment.
d) Old age provision: Provision for later years becomes increasingly necessary, especially in a
changing cultural and social environment. One can buy a suitable insurance policy, which will
provide periodical payments in one's old age.
e) Children benefit: Provision for the education, marriage and start in life for the children.
f) Special needs provision: Protection against loss arising out of accident, disability, sickness,
loan repayment on death.
g) Tax benefits: Under the Income Tax Act, premium paid is allowed as a deduction from the
total income under section 80C.

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Why Is Insurance Superior To Other Form Of Savings?
An immediate estate is created in favor of the policy holder
Protection in case of death
Liquidity in case of need
Tax relief income tax, wealth tax etc.
Policies can be offered as collateral security
Policies can be taken under M.W.P. Act 1874, to protect against creditors
Let us take an example to understand the need for insurance:
Mr. Atul is 45 and self-employed. His wife Nandini, who is a housewife, looks after their two
children aged 3 and 7 years. They stay in a rented accommodation, where the rent is 15,000
rupees per month. Mr. Atul has taken up a loan of Rs. 2 lakh. His monthly earnings on average
are 40,000 rupees. Mr. Atul passes away in an unfortunate road accident. What are some of the
financial implications of his death on his family.
There may be several financial implications on his family. Some of these are:
a) The monthly income, previously provided by Mr. Atul would stop.
b) His wife and children may have to seek financial assistance from other relatives.
c) His wife may not have enough money to pay back the loan of Rs. 2 lakhs.
d) The family may have to move into a cheaper accommodation.
e) His widow may have to take up work to earn money.
f) The education of his children may suffer.

This simple example illustrates the impact premature death can have on a family, where the main
earner has no life cover. Had Mr. Atul taken life cover, his family would not have faced such
hardships in the event of his unfortunate death. A simple life insurance policy could have
provided Mr. Atul's family with a lump sum that could have been invested to provide an income
equal to all or part of his income. In simple words, insurance protects against untimely losses.
Insurance has been found useful in the lives of persons both in the short term and long term.
Short term needs like sudden medical costs and long term needs like marriage expenses etc can
be met with using life insurance.
Basic Principles Of Life Insurance Contract.
Life insurance is a contract under which the insurer (Insurance Company) in
consideration of a premium paid undertakes to pay a fixed sum of money on the death of the
insured or on the expiry of a specified period of time whichever is earlier. So basic principles of
life insurance contract are as follows:
1. Insurable interest: The insured must have insurable interest in the life assured. In absence of
insurable interest, Contract of insurance is void. Insurable interest must be present at the time of
entering into contract with insurance company for life insurance. It is not necessary that the

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assured should have insurable interest at the time of maturity also.Insurable interest exists in the
following cases:
a) A person has an unlimited insurable interest in his/her own life.
b) A person has an insurable interest in the life of his/her spouse.
c) A father has an insurable interest in the life of his son or daughter on whom he is
dependent. Likewise a son may have insurable interest in life of his parents.
d) A creditor has an insurable interest in the life of the debtor, to the extent of the debt.
e) A servant employed for a specified period has insurable interest in the life of his
employer.
2. Utmost good faith: The contract of life insurance is a contract of utmost good faith. The
insured should be open and truthful and should not conceal any material fact in giving
information to the insurance company, while entering into a contract with insurance company.
Misrepresentation or concealment of any fact will entitle the insurer to repudiate the contract if
he wishes to do so.
3. A contract of indemnity: The life insurance contract is not a contract of indemnity. A Contract
of life insurance is not a contract of indemnity. The loss of life cannot be compensated and only
a fixed sum of money is paid in the event of death of the insured. So, the life insurance contract
is not a contract of indemnity. The loss resulting from the death of life assured cannot be
calculated in terms of money.
Types Of Insurance Policies
Though there are a lot of policies available in the market under different names and by
different companies, the policies can broadly be classified into the following categories:
Term Insurance Policy
Whole Life Policy
Universal Life Insurance Policy
Money Back Policy
Endowment Policy
Pension Plans or Annuities
Joint Life Policy
Group Insurance Policy
Unit Linked Insurance Plan
Term Insurance Policy
Term insurance provides life insurance coverage for a specific period of time. Presently
one year, five year, ten year, and fifteen year, are the periods one can buy term life insurance
policy. If the insured person dies during the period the insurance is in force, the insurance
company pays off the face value of the policy. If the insured lives longer than the term of the
policy, the policy is no longer in effect and nothing is paid. Term insurance is the least expensive
form of life insurance. It is commonly used when the insured needs temporary protection or cant
afford the premiums for the other forms of life insurance. The other reason an insured may want

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term insurance is to purchase life insurance and invest the difference between the term policy
and cash value policy elsewhere.
Term insurance comes in several forms. There is renewable & non renewable. Non
renewable means that on the expiry of your policy you must go under another physical test and
filling out another questionnaire. On the other hand, with renewable policy you dont need to
undergo these formalities again and you automatically re qualify to continue your policy.Then
there is convertible & non convertible policy. Convertible policy is the one which can be
converted into a permanent policy, whereas non convertible is the one which cannot be
converted into a permanent policy or in other words the policy cannot be converted to any other
form of life insurance policy.
Whole Life Policy
The whole life policy provides insurance coverage for the entire life of the insured
regardless of how many years the insurance is paid. Premiums may be paid throughout the
insureds entire life or for a portion of his life. Additionally, the premium can be paid in one
lump sum when the policy is taken out. This is referred to as a single premium whole life
policy. When the premium is paid throughout the life it is known as straight life policy, but when
the premium is paid for a specified period of time it is known as limited life policy.
The premiums are higher for Whole life insurance as opposed to term insurance. The
reason for this is that the policy has investment features as well as death benefits. The cash value
portion of the whole life insurance belongs to the insured. One can take it out in the form of
policy loans or can cash the policy in. Another advantage of whole life insurance is that the
premiums are fixed, i.e. regardless of your age, you pay the same amount for the coverage each
year.
Universal Life Insurance Policy
Universal Life is a type of permanent life insurance based on a cash value. That is, the
policy is established with the insurer where premium payments above the cost of insurance are
credited to the cash value. The cash value is credited each month with interest, and the policy is
debited each month by a cost of insurance (COI) charge, and any other policy charges and fees
which are drawn from the cash value if no premium payment is made that month. The interest
credited to the account is determined by the insurer; sometimes it is pegged to a financial index
such as a bond or other interest rate index.
Money Back Policy
Money back policies provide for periodic payments of partial survival benefits during the
term of the policy, as long as the policy holder is alive. An important feature of this type of
policies is that in the event of the death at any time within the policy term, the death claim
comprises the full sum assured, without deduction of any survival benefit amounts, which may
have already been paid as money back components. Similarly the bonus is also calculated on the
entire sum assured.
Endowment Policy
An endowment policy covers the risk for a specified period, at the end of which the sum
assured is paid back to the policy holder, along with the bonus accumulated during the term of
the policy. This feature of payment of endowment to the policy holder when the policys term is

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complete is responsible for the popularity of endowment policies. The amount received on
maturity can either be utilized either to buy an annuity policy to generate a monthly pension for
the rest of the life, or put it into any other suitable investment of our choice. This is one
important benefit which the endowment policy offers over a whole life insurance policy.
Overall, endowment policies are the most suitable of all insurance plans for covering the
risks to a family breadwinners life. Not only do these policies provide financial risk cover for
the family, were the policy holder to die prematurely but the insurance amount is also repaid
once this risk is over. The endowment amount can then be used for meeting major expenditures
such as childrens education and marriage, etc.
Alternately, the endowment sum is available for a suitable investment geared to
providing an income for the remainder of ones own life. These types of plans are particularly
suitable to those who other than having a risk cover are also interested in a savings component
simultaneously.
Pension Plan or Annuities
An annuity is an investment that we make, either in a single lump sum or through
installments paid over a certain number of years, in return for which we receive a specific sum
every year, every half year or every month, either for whole life or a fixed number of years.
After the death of an annuitant or after the fixed annuity period expires for annuity payments, the
invested annuity fund is refunded, perhaps along with a small addition, calculated at that time.
Annuities differ from all the other form of life insurance in one fundamental way an annuity
does not provide any life insurance cover but, instead offers a guaranteed income either for life
or a certain period.
Typically annuities are bought to generate income during ones retired life, which is why
they are also called pension plans. Annuity premiums and payments are fixed with reference to
the duration of human life.
Joint Life Policy
Joint life insurance policies are similar to endowment policies as they too offer maturity
benefits to the policyholders, apart form covering risks like all life insurance policies. But joint
life policies are categorized separately as they cover two lives simultaneously, thus offering a
unique advantage in some cases, notably, for a married couple or for partners in a business
firm. Under a joint life policy the sum assured is payable on the first death and again on the
death of the survivor during the term of the policy. Vested bonuses would also be paid besides
the sum assured after the death of the survivor. If one or both the lives survive to the maturity
date, the sum assured as well as the vested bonuses are payable on the maturity date. The
premiums payable cease on the first death or on the expiry of the selected term, whichever is
earlier.
Accident benefits equivalent to the sum assured are available under Joint life insurance
policies on the first death. In case both the lives are covered under Double Accident Benefit
(DAB), the surviving life is covered under DAB until the end of the policy year, in which the
first life dies under the cover of the policy. Both the policy holders can avail these benefits, if
Both the policy holders die simultaneously owing to an accident. To avoid such an
eventuality, nomination is allowed under the policy OR

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 Both of them die within the specified period as a result of the same accident OR
The second policy holder also dies in the same policy year as result of another accident.
To avoid such an eventuality, nomination is allowed under the policy.
Joint life insurance policy is ideal for married couples as it provides financial security and risk
protection to both the individuals.
Group Insurance Policy
Group insurance offers life insurance protection under group policies to various groups
such as employers-employees, professionals, co-operatives, weaker sections of society, etc. It
also provides insurance coverage for people in certain approved occupations at the lowest
possible premium cost. Group insurance plans have low premiums. Such plans are particularly
beneficial to those for whom other regular policies are a costlier proposition. Group insurance
plans extend cover to large segments of the population including those who cannot afford
individual insurance. A number of group insurance schemes have been designed for various
groups. These include employer-employee groups, associations of professionals (such as doctors,
lawyers, chartered accountants etc.), members of cooperative banks, welfare funds, credit
societies and weaker sections of society.
Many employees see group insurance coverage as a major perk for faithful company
service. The premium payments are usually deducted automatically from the pay itself. Some
companies will absorb the entire cost of the policy as a benefit for employees. The main
advantages of the group insurance schemes are low premium and simple insurability conditions.
Premiums are based upon age combination of members, occupation and working conditions of
the group.
A major feature of group insurance is that the premium cost on an individual basis may
not be risk-based. Instead it is the same amount for all the insured persons in the group. Another
distinctive feature is that under group insurance a person will normally remain covered as long as
he or she continues to work for a certain employer and pays their insurance premiums. This is
different from the individual insurance policy where the insurance company often has the right to
reject the renewal of a person's policy, depending on his risk profile.
Unit Linked Insurance Plan
Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits
of risk protection and flexibility in investment. The investment is denoted as units and is
represented by the value that it has attained called as Net Asset Value (NAV). The policy value
at any time varies according to the value of the underlying assets at the time.
In a ULIP, the invested amount of the premiums after deducting for all the charges and premium
for risk cover under all policies in a particular fund as chosen by the policy holders are pooled
together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance
Policy.
The returns in a ULIP depend upon the performance of the fund in the capital market.
ULIP investors have the option of investing across various schemes, i.e, diversified equity funds,
balanced funds, debt funds etc. It is important to remember that in a ULIP, the investment risk is
generally borne by the investor. In a ULIP, investors have the choice of investing in a lump sum
(single premium) or making premium payments on an annual, half-yearly, quarterly or monthly
basis. Investors also have the flexibility to alter the premium amount during the policy's tenure.

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For example, if an individual has surplus funds, he can enhance the contribution in ULIP.
Conversely an individual faced with a liquidity crunch has the option of paying a lower amount
(the difference being adjusted in the accumulated value of his ULIP). ULIP investors can shift
their investments across various plans/asset classes (diversified equity funds, balanced funds,
debt funds) either at a nominal or no cost. Expenses Charged in a ULIP are as follows:
Premium Allocation Charge: A percentage of the premium is appropriated towards charges
initial and renewal expenses apart from commission expenses before allocating the units under
the policy.
Mortality Charges: These are charges for the cost of insurance coverage and depend on
number of factors such as age, amount of coverage, state of health etc.
Fund Management Fees: Fees levied for management of the fund and is deducted before
arriving at the NAV.
Administration Charges: This is the charge for administration of the plan and is levied by
cancellation of units.
Surrender Charges: Deducted for premature partial or full encashment of units.
Fund Switching Charge: Usually a limited number of fund switches are allowed each
year without charge, with subsequent switches, subject to a charge.
Service Tax Deductions: Service tax is deducted from the risk portion of the premium.
Pricing
For life insurance policy you must pay a price in terms of premium. All insurance
companies employ actuaries to fix the premiums of their policies. The actuaries need to consider
various factors (both measurable and non-measurable) and build them into the premiums. There
are some factors that the actuaries already have information on (like mortality rate, claims paid
percentages, etc.,) and the rest of the information comes from the applicant. We will first look at
the information provided by the applicants that play a part in Life Insurance Price, one by one.
Age: Young, fit people who are just about to begin the most productive part of their lives
are the ones who get the cheapest policies. The premium component gradually increases
as the age of the applicant progresses. There is no intentional discrimination here against
older people. Mortality trends state that the chances of mortality increase is directly
proportional to age increase and the insurance companies base their calculations on the
age risk factor. So, the older you are the higher you pay!
Type of policy: There are various types of policies; term, partial payment, pension plans,
cash value..etc., As a general rule, you can be sure that premiums increase directly
proportional to the cash value benefits and complexity. Term plans are the cheapest and
any other investment based policy will cost you higher. The coverage amount also plays a
part. Higher the coverage, higher the premium.
Duration of the policy: This plays a more important part in wealth building insurance
policies but even otherwise, longer duration policies are priced cheaper.
Medical history and health: History of previous illness is a risk while underwriting a
policy and therefore carries such people carry higher premium. This is a very important
factor and if an applicant has illness history or have existing ailments, they have to be
disclosed to the company, otherwise, the insurance company will outright reject the claim
(when the need arises) citing suppression of vital information. Height and weight details
are also used as factors.

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 Personal habits and occupation: Habitual smokers and drinkers will be charged higher, as
will people employed in hazardous jobs (Fire fighters, scuba divers). Some hobbies
(bungee jumping, car racing) are also deemed high risk and will attract higher premiums.
Other factors: Apart from the information provided by the applicant, the insurance
actuaries need to input many other factors listed below:
o Mortality Life insurance is based on the sharing of the risk of death by a large
group of people. The amount at risk must be known to predict the cost to each
member of the group. Mortality tables are used to give the company a basic
estimate of how much money it will need to pay for death claims each year. By
using a mortality table a life insurer can determine the average life expectancy for
each age group.
o Interest The second factor used in calculating the premium is interest earnings.
Companies invest your premiums in bonds, stocks, mortgages, real estate, etc.,
and assume they will earn a certain rate of interest on these invested funds.
o Expense The third consideration is the expenses of operating the company.
The company estimates such expenses as salaries, agents compensation, rent,
legal fees, postage, etc. The amount charged to cover each policys share of
expenses of operation is called the expense loading. This is a cost area that can
vary from company to company based on its operations and efficiency
Underwriting
The process of assessing the risk profile of the life insurance applicant whether individual
or group and then fixing the rate of premium is called risk classification or underwriting. The
methods by which an insurer manages risks are:
[a] Risk avoidance
[b] Risk transfer
[c] Risk sharing, and
[d] Risk acceptance and management.
Risk acceptance would be through a process of underwriting. The typical underwriting decisions
[on a proposal] of a life insurer are as follows:
Accepted [on ordinary terms/rates], that is, the insurer has decided to undertake the risk
on the proposed life on standard terms of the company.
Accepted [on terms other than those suggested] and offered some other plan /term / other
condition like imposing an extra premium to meet higher health/occupation risk etc. for
undertaking risk on the proposed life.
Postponed, consideration of the proposal is postponed anticipating that the effects of
some of the high risk factors faced by the proposed life may come down in future.
Declined, the proposed life would almost definitely result in a claim by death within the
proposed term.
Underwriters of insurance Companies arrive at the above decisions, or rather conclusions, based
on the analysis of the risks they are likely to face on the life of the proposer or applicant for
insurance. Risks on a life are associated with his family history, personal history, individual and
social habits, occupation, hobbies and the future possibilities of joining the armed forces or Para

69
trooping, diving or hazardous researches etc. Broadly speaking these factors usually consider for
appraising the risk of an applicant:
Age
Sex (except in several states that require "uni-sex" rates, even though actuarial data
shows women live longer than men)
Height and weight,
Health history (and often family health history -- parents and siblings),
The purpose of the insurance (such as for estate planning, or business or for family
protection)
Marital status and number of children
The amount of insurance the applicant already has, and any additional insurance s/he
proposes to buy (as people with far more life insurance than they need tend to be poor
insurance risks)
Occupation (some are hazardous, and increase the risk of death)
Income (to help determine suitability)
Smoking or tobacco use (this is an important factor, as smokers have shorter lives)
Alcohol (excessive drinking seriously hurts life expectancy)
Certain hobbies (such as race car driving, hang-gliding, piloting non-commercial aircraft)
and
Foreign travel (certain foreign travel is risky).

The guidelines and regulations for underwriting are different for different insurance
companies. As mentioned above, the life insurance underwriting process takes a series of factors
into consideration to decide the premium amount for an applicant for a particular coverage
policy. After an individual applies for a life insurance quote, the insurance company will
circulate a questionnaire form that the applicant has to fill up with the answers. Underwriting is
confidential, which is maintained under strict regulations. Depending upon the underwriting
standards of the insurance company, the questions may vary. After the applicant fills up the
answers to these queries, the form is sent back to the insurance company.
Once the form is received, the underwriters of the life insurance company review the risk
profile of the applicant and accordingly, the final premium amount is charged to the
policyholder. In general there are four categories of risks, which are classified according to the
standard underwriting guidelines. The four risk classifications include proffered (charge with low
premium), standard (standard premium amount), rated (relatively high premium amount) and
declined (uninsurable). This way, life insurance underwriting process is a crucial step to
calculate the premium amount for policyholders.
For better understanding about life insurance underwriting, let's take an example of two
individuals applying for the same life insurance quote. Let's consider that first is below 30 years
without any underlying health condition (low death risk), while the second applicant is above 45
years with hypertension condition (high death risk). With underwriting process, the death risks
for the two applicants are examined, after which the insurance company will charge a low
premium for the first applicant (preferred), while charging a higher premium rate for the second
policyholder (rated).

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Documentation
The contract for the life insurance starts with the proposal made by the proposer in
standard application form available with insurance company and then various other documents
are prepared.
Proposal Forms
The proposal form is a standardized form. The proposal form is a type of an application form,
which a proposer has to fill all the relevant details about the life to be assured. The agent has the
proposal form with him provided by the insurer. There are different types of policies and so the
different types of proposal forms are there. It has the entire details regarding the duration of the
policy, type of plan, mode of payment, etc. A proposal form is to be to be completed by the
proposer in his own handwriting and signed in the presence of the agent. The proposal form
contains a declaration at the end, to ensure the authenticity of the information given.
Usually the proposal form contains the following information to be filled by the
prospective insured:
1. Name of life assured
2. Address
3. Date of Birth
4. Occupation
5. Age
6. Name of the employer (if any)
7. Sum assured of the proposed policy
8. Number and age of the family members
9. Family medical history
10. Proposers Medical history
Besides these there are other related forms regarding health, occupation, the agents confidential
report and many others. In addition there is a consent letter which shows the consent of the life
assured to the imposition of some clause or extra premium, duly signed by the life assured.
First Premium Receipt
The agent provides the proposal form and other related documents and the underwriter
examines the form and other documents and then determines the terms on which to accept the
risk or reject the same. The consent of the person assured is obtained in the form of payment of
premium. After receiving the payment, the insurance company issues the First Premium Receipt,
which acknowledges the proposal of the life-assured. It contains all particulars of the policy. It
has the details of the next premium to be paid. The policy bond is sent within 45-50 days from
the date of first premium receipt to the life assured. The First Premium Receipt is an important
and powerful document on the basis of which the life-assured can ask the insurer to issue the
policy bond, which is treated as Evidence of the Contract of Life assurance.
Policy Bond

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 After issuing the First Premium Receipt, the next step is that of the insurer of sending the
policy bond to the life-assured and this document is also known as Policy Contract, which is the
ultimate evidence of the life-assured. The Policy Contract contains all the terms and conditions
of the contract between insurance company and the life assured, duly stamped as per the Indian
Stamp Act. The policy is sent to the life assured by the insurer. The policy contract contains the
details of the insurance such as duration of the policy, the type of policy, sum assured, premium
amount and the date of maturity, extra premium, nominee, assignee etc.
Alterations and Endorsements
Endorsement is an authenticated noting on the back of Policy Contract and forms a part
of the contract. In the case of lack of space, the endorsements can be put on a separated sheet of
papers and attached to the policy. Endorsements are required because life assurance is a long-
term contract and the life assured may want certain changes in the terms of contract. There are
different type of alterations or modifications that can be made during the tenure of the policy
such as changes regarding increase or reduction in the sum assured, mode of payment of
premium, modification related on account of mistakes in the preparation of the policy by the
insurer, modifications related to reduction in term, conversion from Non-profit to With
Profit and similar other like change of name, plan-term and so on.
Reminding Notice
It is basically information sent by the insurer to the policyholder, reminding the latter
about the due date of a particular premium and the amount of premium. However it is not the
duty of the insurance company (insurer) to do so. The insurer also informs the policyholder about
the lapse of a policy if the premiums are not paid in time.
Other Documents
Apart from other documents there are some other specialized documents, which are as
follows:
i. Proposal on the lives of Non Resident Indians, which consists of some special
questionnaire asking for relevant information.
ii. Partnership Insurance which consist of papers asking for the Profit & Loss account of the
firm for the last three years, the insurance of the partner, the partnership deed and the
deed of variation allowing the purchase of the assurance policy.
Policy Servicing And Settlement Options
Servicing of policy holders include:
(1) Proof of age: The age of the life assured must be proved either during the period of the
policy or after the claim arises, because age is an important factor for calculating at the rate of
premium to be charged for a particular policy.
(2) Nomination: The Policyholder should be advised for nomination, if no nomination was
effected. When nomination or assignment is effected by a policyholder, it should be scrutinized
thoroughly to see whether it was in order or not. If there is any material omission or mistake, it
may be returned to the policyholder or the assignee with a covering letter giving instructions as
to the corrections to be made in the assignment or nomination. When a document is sent for
correction, reminders should be sent every fortnight until the requirements are complied with.
The policyholder should follow the instructions printed on the back of assignment or nomination.

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(3) Assignment: Assignment is a means whereby the right and title under a policy gets
transferred from assignor to assignee. Assignor is the policyholder who transfers the title and
assignee is the person who gets the title of the policy from the assignor. Assignment can be made
either by endorsement on the policy or on a separate paper duly stamped. Assignor must be a
major. Assignment must be in writing and assignors signature along with a witness is required.
Notice of assignment should be submitted to the insurer by the assignor.
(4) Alteration / Changes: After issue of a Policy, the Policy holder desires an alteration in the
terms thereof to suit his convenience, e.g., an alteration in the mode of payment of premiums,
Plan of Assurance, reduction in the premium-paying period, etc. An alteration may be allowed
provided the policy is in force and has not become fully paid up. It is stated in the prospectus that
no alteration from one class of Assurance to another subject to a lower scale of premium is
permissible. However, an alteration from the with profits Limited Payment plan to the with
profits Endowment Assurance Plan with premiums payable for a term not exceeding the original
premium-paying term will be allowed even if the premium payable on alteration is lower.
Alterations from certain Classes of Assurance to certain other Classes are not allowed at all.
(5) Paid up value & surrender value: When a policyholder wants to terminate the policy, he
may convert the same into paid-up policy. In this case, the amount of paid-up value is payable to
the insured only after the full term (maturity) of the policy. The option of converting the policy
into paid up policy and stop paying the further premiums can be taken only if the policy has been
in force for at least two years.
If the insured is unwilling or unable to pay the premium of the policy, he may surrender
the policy and ask for its surrender value. Surrender value is the cash value payable by the
insurance on voluntary termination of the policy contract by the life assured before the expiry of
the term of the policy. Surrender value depends on the type of policy and number of premia paid.
A policy can be surrendered only when the premia is paid for the three years.
Settlement:
The easy and timely settlement of a valid claim is an important function of an insurance
company. The yardstick to judge insurance companys efficiency is as to how quick the claim
settlement is. The speed, kindness and fairness with which an insurer handles claims show the
maturity of the company and may lead to great satisfaction of the client. In every insurance
company claim handling is of immense importance. It is the liability of the insurance company to
honour valid and legal claims. At the same the company must identify the fraudulent and invalid
claims. A claim may arise:
On death of Policyholder before the maturity date.
On maturity, i.e. after expiry of the endowment period specified in the policy contract
when the policy money becomes payable.

Certain features are common to all life insurance claims. These are:
1. Policy must be in force at the time of claims.
2. Insured must be covered by the policy.
3. Nothing was outstanding to the insurer at the time of claim.

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4. Claim is covered by the policy.
Death Claims
I. Intimation of Death
The death of the life assured has to be intimated in writing to the insurer. It can be done
by the Assignee or nominee under the policy or from a person representing such Assignee or
Nominee or when there is no nomination or assignment by a relative of the life assured, the
employer, the agent or the development officer. Where policy is assigned to a creditor or a bank
for valuable consideration, intimation of death may be received from such assignee. Sometimes,
the office need not wait till the intimation of claim is received. The concerned agent, newspaper
reports in case of accidents or air crashes, obituary columns may give information and claim
action can be started. However, the identity of the deceased should be established carefully. The
intimation of the death of the life assured by the claimant should contain the following
particulars: (1) his or her relationship with the deceased, (2) the name of the policyholder, (3) the
number/s of the policy/policies, (4) the date of death (5) the cause of death and (6) sum assured
etc. If any of these particulars are missing the claimant can be asked to furnish the same to the
insurer. The intimation must satisfy two conditions (1) It must establish properly the identity of
the deceased person as the life assured under the policy, (2) It must be from a concerned person.
II. Proof of Death and Other Documents
In case of claim by death, after the receiving the intimation of death the insurance
company ensures that the insurance policy has been in force for the sum assured on the date of
death and the intimation has been received from assignee, nominee or other claimant.
The following documents are required:
(i) Certificate of death.
(ii) Proof of age of the life assured (if not already given).
(iii) Deeds of assignment / reassignments.
(iv) Policy document.
(v) Form of discharge.
If the claim has accrued within three years from the beginning of the policy, the following
additional requirements may be called for:
a) Statement from the hospital if the deceased had been admitted to hospital.
b) Certificate of medical attendant of the deceased giving details of his/her last illness.
c) Certificate of cremation or burial to be given by a person of known character and
responsibility present at the cremation or burial of the body of the deceased.
d) Certificate by employer if the deceased was an employee.
Proof of death and other documents to be submitted will depend upon the cause of death and
circumstances of each case.
1. In case of an air crash the certificate from the airline authorities would be necessary
certifying that the assured was a passenger on the plane. In case of ship accident a
certified extract from the logbook of the ship is required. In case of sudden cardiac arrest,
murder the doctors certificate may not be available.

74
 2. The insurance may waive strict evidence of title if the sum assured of the policy is small
and there is no dispute among the survivors of the policy moneys.
3. If the life assured had a death due to accident, suicide or unknown cause the police
inquest report, panchanama, post mortem report, etc would be required.
If by any chance policy contract is lost, advertisement of the lost of policy is to be given.
Payment can be made on the basis of an indemnity given by the policyholder. If the deceased has
taken out policies with more than one branch and the claimant has produced proof of death to
any one of them and desires that the other branch or branches, may act on the same proof, his
request should be complied with. The Branch requiring proof of death should directly call for the
certified copies from the branch concerned.
III. Net Payable Amount of Claim
After receiving the required documents the company calculates the amount payable under
the policy. For this purpose, a form is filled in which the particulars of the policy, assignment,
nomination, bonus etc. should be entered by reference to the Policy Ledger Sheet. If a loan exists
under the policy, then the section dealing with loan is contacted to give the details of outstanding
loan and interest amount, which is deducted from the gross policy amount to calculate net
payable claim amount. The net amount of claim payable is calculated and is called payment
voucher. In the case of in force policy unpaid premiums if any due before the Assureds death
with late fee where necessary and the premium falling due in the policy year current at the time
of death should be deducted from the claim amount.
Maturity Claims
If the life insured survives to the full term, then basic sum assured is payable. This
payment by the insurer to the insured on the date of maturity is called maturity payment. The
amount payable at the time of the maturity includes a sum assured and bonus/incentives. The
insurer sends in advance the intimation to the insured with a blank discharge form for filling
various details in it. It is to be returned to the office along with
Original Policy document
Age proof if age is not already submitted
Assignment /reassignment, if any. .
Legally no claim is acceptable in respect for a lapsed policy or death of the Life assured
happening within 3 years from the date of beginning of the policy. However, some concessions
are given and payment of claims is made:
If the Life assured had paid at least 3 years' premiums and thereafter if premiums have
not been paid, the nominees/life assured get proportionate paid up value.
In the event of the death of' the Life assured within 3 years and the policy is under the
lapsed position, nothing is payable.
Procedure of the Maturity Claims
Settlement procedure for maturity claim is simple after receipt of completed and stamped
discharge form from the person entitled to the policy money along with policy documents, claim
amount will be paid by account payee cheque.

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 If the life assured is reported to have died after the date of maturity but before the receipt
is discharged, the claim is to be treated as the maturity claim and paid to the legal heirs.
In this case death certificate and evidence of title is required.
Where the assured is known to be mentally deranged, a certificate from the court of law
under the Indian Lunacy Act appointing a person to act as guardian to manage the
properties of the lunatic should be called.
Additional Benefits apart from Regular Claims
Double Accident Benefit: For claiming the benefits under the Double Accident Benefit the
claimant has to produce the proof to the satisfaction of the Corporation that the accident is
defined as per the policy conditions. Normally for claiming this benefit documents like FIR,
Post-mortem Report are required.
Disability Benefit Claims include waiver of all premiums to be paid in future till the expiry of the
policy of the life assured if a person is totally and permanently disabled and cannot earn any
wage/compensation/profit as a result of the accident.
Presently, all over the country there are 12 centers where the Insurance Ombudsman has
been appointed. They are part of grievance redressal machinery. They consider the complaints
regarding disputes related to premiums, claims etc.
Distribution Channel
The channel of distribution (place) is an important ingredient of marketing mix as
however useful the product might be and how so ever suitable its price be, unless and until the
products/services are mad available to consumers at centres of convenient buying the
consumers will not be buying the same. Insurance being a service business requires marketing
department to play a key role in delivery of service.
The marketing department conducts research for identification of target customers, help
in maintaining and promoting the distribution system and also plays an active role in
development of new products. It is the most vibrant department in an insurance organization
since it has to necessarily deal with all the other department of the organization. Insurance
business is business of law of large numbers. The law requires the insurer to attract a sufficient
number of exposures to allow credible ratio prediction.
The major task of sales managers in charge of the sales section of insurance company is
the supervision of the sales functions of the branches. This section is also responsible for
spreading awareness among the general public about the benefits of life Insurance. Sales training
section is entrusted with responsibility for training in product, in selling and sales planning in the
personnel such as development officers and agents.
Insurance policies are mainly sold by the agents of insurance company. Beside insurance
agents, Banks and cooperative societies have emerged as strong business partners amongst
alternate channels in terms of first premium mobilization.
Life Insurance Sector In India
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (
Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in
terms of pooling of resources that could be re-distributed in times of calamities such as fire,

76
floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient
Indian history has preserved the earliest traces of insurance in the form of marine trade loans and
carriers contracts. Insurance in India has evolved over time heavily drawing from other
countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829,
the Madras Equitable had begun transacting life insurance business in the Madras Presidency.
1870 saw the enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were
started in the Bombay Residency. This era, however, was dominated by foreign insurance offices
which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and
London Globe Insurance and the Indian offices were up for hard competition from the foreign
companies.
In 1914, the Government of India started publishing returns of Insurance Companies in
India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to
regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and non-life business transacted in
India by Indian and foreign insurers including provident insurance societies. In 1938, with a view
to protecting the interest of the Insurance public, the earlier legislation was consolidated and
amended by the Insurance Act, 1938 with comprehensive provisions for effective control over
the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there
were a large number of insurance companies and the level of competition was high. There were
also allegations of unfair trade practices. The Government of India, therefore, decided to
nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the
Life Insurance sector and Life Insurance Corporation came into existence in the same year. The
LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and
foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.
Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous
body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory
body in April, 2000. The key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the
power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000
onwards framed various regulations ranging from registration of companies for carrying on
insurance business to protection of policyholders interests. In December, 2000, the subsidiaries
of the General Insurance Corporation of India were restructured as independent companies and at
the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking
the four subsidiaries from GIC in July, 2002. Today there are 24 general insurance companies
including the ECGC and Agriculture Insurance Corporation of India and 23 life insurance

77
companies operating in the country. The insurance sector is a colossal one and is growing at a
speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the
countrys GDP. A well-developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure development at the same time
strengthening the risk taking ability of the country.
Check List For Buying The Right Policy
DOS
Look out for no commission policies.
low load life insurance policies have fewer expenses built into them, such as agent
commissions and fees for marketing. This can translate into lower premiums or for
variable life insurance, these lower expenses mean that a higher percentage of your
premium goes to work for you right away so that you can build your cash faster.
Buy as soon as the need exists
An advantage to buy life insurance earlier in life is that your premiums will be low. As
you grow old, the likelihood that you will die increases, which is why older individuals
pay more for life insurance.
DONTS
Dont buy a guaranteed issue policy if you are healthy
Guaranteed issue term life insurance policies normally require no medical exam and
are sold to anyone who comes along. While these policies can be a great way for people
who have medical problems to obtain a life insurance policy, if you are healthy dont buy
these policies as you will get better rates by taking the tests.
Dont buy more or less than you need
Many experts say the best way to pinpoint a smart life insurance benefit amount is
through a needs analysis which can be broken into a simple formula
Short term needs + long term needs resources = how much life insurance you need
Self-Assessment:
1. Explain Fundamental Principles of Life Insurance contract.
2. Discuss various documents prepared by the insurance company while entering a life
insurance contract with the proposer.
3. Explain the procedure of settlement of claims in case of maturity of the policy.
4. Explain the claim settlement procedure in case of death of the assured.
5. Explain the procedure of underwriting of new business.
6. Discuss various life insurance pricing elements.
References:
Mishra M.N., Life Insurance, Administration and Management, Sultan Chand & Co.,
New Delhi.
Gupta C.B., Business Organization and Management, 2005, Sultan Chand & Co., New
Delhi.

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 Gupta P.K. Insurance and Risk Management, 2005, Himalaya Publishing House, New
Delhi.
Ray R.M. Life Insurance in India, 1999, Indian Institute of Public Administration.
Mann T.S., Law and Practice of life Insurance in India, 2000, Deep and Deep
Publication, New Delhi.
www.licindia.com
www.irdaindia.org

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 LESSON 8
UNDERSTANDING OF THE ANNUAL REPORT
OF LIFE INSURANCE COMPANIES
Dr Ashish Kumar
LBSIM
Introduction:
The primary legislations including the Insurance Act, 1938 and the IRDA Act, 1999 that deal with
insurance business in India provide the legal framework of insurance accounting in India, over and
above the principles and practices prescribed by Generally Accepted Accounting Principles (GAAP)
and the various Accounting Standards (AS) issued by the Institute of Chartered Accountants of
India(ICAI) and the international organization Financial Accounting Standards Board (FASB).
However, the following statutes, rules and regulations are the major considerations for accounting and
financial management for insurance companies in India:
1. The Insurance Act, 1938 and Insurance Rules, 1939
2. The Insurance Regulatory and Development Authority Act, 1999
3. The Companies Act, 1956
4. The Life Insurance Corporation Act, 1956
5. The General Insurance Business (Nationalization) Act, 1972
Section 11 of the Insurance Act, 1938 provides that every insurer, on or after the commencement of
the IRDA Act, 1999 in respect of insurance business transacted by him and in respect of his
shareholders' fund, shall at the expiration of each financial year, prepare a Balance Sheet, a Profit and
Loss account, a separate Account of Receipts and Payments (Cash Flow Statement), Revenue
Accounts in accordance with the regulations made by the Authority. Every Insurer shall keep separate
accounts relating to funds of shareholders and policyholders.

Accounting Regulations and Financial Statements:

The IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies)
Regulations, 2002 provide that-
An insurer carrying on life insurance business shall comply with the requirements of Schedule' A' to
prepare financial statements.
An insurer carrying on general insurance business shall comply with the requirements of Schedule
'B' to prepare financial statements.
The Report of the Auditors on the Financial Statements of every insurer/ re-insurer shall be in
conformity with the requirements of Schedule 'C'.
The said regulation further provides that financial statements comprising (i) Balance Sheet, (ii)
Receipts and Payments Account (Cash Flow Statement) (iii) Profit & Loss Account (Shareholders'
Account) and (iv) Revenue Account (policyholders' Account) shall be in conformity with the
Accounting Standards (AS) issued by the Institute of Chartered Accountants of India to the extent
applicable to the insurer except that:
Accounting Standard 3-Cash-flow Statement shall be only under Direct Method
Accounting Standard 13-Accounting for Investment shall not be applicable
Accounting Standard 17-Segment reporting shall apply to all insurers irrespective of the
requirements for listing and turnover mentioned therein.
 Section 2C of the Regulation provides that all words and expressions used herein and not
defined in the Insurance Act, 1938 or in the IRDAAct, 1999 or in the Companies Act, 1956 shall have
the meanings respectively assigned to those Acts. However, regulatory provisions prescribed by the
IRDA and the specific and relevant Accounting Standards promulgated by the Institute of Charted
Accountants of India are being separately discussed in detail in subsequent units.
Financial statements of insurance companies comprise the following as stated earlier:
Balance sheet,
Revenue accounts,
Profit and loss account, and
Receipts and payments account
Besides the financial statements, the annual reports of an insurance company also contain the
following statutory documents for the review and analysis of the various interested groups including
shareholders, policyholders, regulators, reinsurers, employees, co-insurers, etc.
1. Report of the board of directors
2. Management report
3. Auditors report
4. Segment reporting
5. Significant accounting policies
6. Notes and disclosures forming part of accounts
Let us now discuss the above financial statements and reports with reference to legal
requirements, accepted principles and practices with a few examples and exercises. Certain examples
with hypothetical data are also given in Annexure for clarity of understanding of students in respect of
financial statements
Directors Report: legal Requirement as Regards Directors Report (Companies Act 1956)
As per Section 217 of the Companies Act, 1956 there shall be attached to every balance sheet
laid before a company general meeting a report by its Board of Directors with respect to following
particulars:
The state of affairs of the company.
The amounts, if any, which it proposes to carry to any reserve in balance sheet.
The amount, if any, which it recommends, should be paid by way of dividend.
The material changes and commitments, if any, affecting the financial position of the company,
which have occurred between the end of the financial year of the company to which the
balance relates and the date of the report.
The technology absorption, foreign exchange earnings and outgo and the manners thereof.
The material changes, if occurred during the financial year in respect of the nature and class of
business of the company or its subsidiary.

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 The statement showing the name of every employee of the company who, if employed
throughout the financial year, was in receipt of remuneration for that year, which in the
aggregate was not less than Rs. 24,00,000 per annum or if employed for a part of the financial
year was not less than Rs. 2,00,000 per month. Such state shall also indicate that whether any
such employee is a relative of any director or manager of the company.
The Directors' Responsibility Statement must mention that
a) In the preparation of the annual accounts, the applicable accounting standards have
been followed along with proper explanations relating to material departure,
b) The directors had selected such accounting policies and applied them consistently,
c) The results and estimates are reasonable and prudent so as to give.a true and fair view
of the state of affairs of the company at the end of the financial year and of the profit or
loss of the company for that period,
d) That the directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the Companies Act, 1956 for
safeguarding the assets of the company and for preventing and detecting frauds and
other irregularities and that the directors had prepared the annual accounts on a going
concern basis.
The reasons for the failure, if any, to complete the buy back within the time specified in
Section 77 A of the Act.
The fullest and explanations on every reservation, qualification or adverse remarks contained
in the auditors' report.

Common Disclosures in Directors Report Contained in the Annual Report of a General

Insurance Company:
Director report of an insurance company generally furnishes the following information specifically as
per the above requirements of the Companies Act, 1956:
1. Comparative Performance Analysis (Class-wise Underwriting Performance) for the financial
year under report with reference to previous year) as appended in Annexure A.2 showing
performance analysis of XYZ General Insurance Co. Ltd. in respect of the following
performance review for FY 2005-06.
Gross direct premium and percentage of growth over previous year
Reinsurance premium ceded
Reinsurance accepted
Net premium and percentage of growth over previous year
Increase in unexpired risks reserve and percentage to net premium
Net premium earned
Net incurred claims and percentage to net premium
Others
2. Review of accounts as an annexure to accounts
3. Profit before tax and after tax
4. Proposed dividend
5. General reserves and current year transfer of profit to that reserve
6. Total assets and the contribution of increase of fair value change account

82
 7. Total investments, its composition/portfolio, its increase over the last year
8. Solvency margin and its change over the previous year
9. Compliance with Section 40C in regard to prescribed % of expenses

Financial Statements:
As mentioned earlier, as per the IRDA (Preparation of Financial Statements and Auditors'
Report of Insurance companies) Regulations, 2000, an insurer shall prepare the Financial Statements
including Balance sheet, Revenue Account (Policyholders Account), Receipts and Payments
Account (Cash Flow Statements) and Profit and Loss Account (Shareholders' account) as
Accounting Standard (AS) issued by the ICAI to the extent applicable to the insurers except that:
1. Accounting Standard 3 (AS 3) and Accounting Standard 17 (AS 17) in case of insurers carrying
on life insurance business
2. Accounting Standard 3 (AS 3), Accounting Standard 13 (AS 13) and Accounting Standard 17
(AS17) in case of insurers carrying on non-life insurance business

Cash flow statements will be prepared only under direct method and segment reporting shall apply
irrespective of whether the securities of the insurer are traded publicly or not in both the cases and in
case of non-life insurance company AS 13-Accounting for investments shall not be applicable.

Financial Statements for life Insurers:

Life Insurers shall prepare Financial Statements as per specified Forms such as Revenue
Account (Form A-RA), Profit and Loss Account (Form A-PL) and Balance Sheet (Form A-BS) as per
Part V in Schedule A of Regulation III. The said financial statements will be prepared in accordance
with General Instructions for preparations as per Part III. The said financial statements shall be
supported by disclosures forming part of financial statements and the comments of management report
as per Part II and Part IV respectively, of the Schedule A. The specified forms of financial statements
are given hereinafter as ready reference.
Form A-BS
Balance Sheet of Life Insurance Company

Current Previous
Particulars Schedule No.
Year Year
SOURCES OF FUNDS
Shareholders' Funds:
Share capital
Reserves and surplus
Credit/debit fair value change account
Sub-total
Borrowings
Policyholders' Funds:
Credit/debit fair value change account
Policy liabilities
Insurance reserves
Provision for linked

83
liabilities
Sub-total
Funds for Future Appropriations
Total (Sources of Funds)
APPLICATION OF
FUNDS
Investments
Shareholders'
Policyholders'
Assets Held to Cover linked liabilities
loans
Fixed Assets
Current Assets
Cash & bank balances
Advances and other assets
Sub-total (A)
Current liabilities
Provisions
Sub-total (B)
Net Current Assets (C ) = (A-B)
Miscellaneous Expenditure (not written off)
Debit Balance in Profit & loss Account
(Shareholders' account)
Total (application of

Form A-RA
Revenue Account of Life Insurance Company
Policyholders Account

Particulars Schedule Current Previous

Premiums Earned-(Net)
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from Investments
(a) Interest, dividends & rent-(Gross)
(b) Profit on sale/redemption of investments
(c) Loss on sale/redemption of investments
(d) Transfer/Gain on revaluation/change in fair value*
Other Income (to be Specified)
TOTAL (A)
Commission 2
Operating Expenses Related to Insurance Business 3

84
 Provision for DoubUul Debts
Bad debts written off
Provision for Tax
Provisions (other than taxation)
(a) For diminution in the value of
(b) Others (to be specified)
TOTAL (B)
Benefits Paid (Net) 4
Interim Bonuses Paid
Change in Valuation of liability in Respect of life
Policies
(a) Gross
(b) Amount ceded in reinsurance
(c) Amount accepted in reinsurance
TOTAL (C)
Surplus/Deficit (D) = (A)-(B)-(C)
APPROPRIATIONS
Transfer to Shareholders' Account
Transfer to Other Reserves (to be Specified)
Balance Being Funds for Future Appropriations
TOTAL (D)

The above financial statements are to be prepared in accordance with applicable accounting standard
issued by leAL These financial statements will be supported by specified schedules giving the required
details as per regulations.

Disclosures forming part of financial statements (Life Insurer) Part II

A. The following shall be disclosed by way of notes to the balance sheet:
1. Contingent liabilities:
Partly-paid up investments
Underwriting commitments outstanding
Claims, other than those under policies, not acknowledged as debts
Guarantees given by or on behalf of the company
Statutory demands/liabilities in dispute, not provided for
Reinsurance Obligations to the extent not provided for ill accounts
Others (to be specified).
2. Actuarial assumptions for valuation of liabilities for life policies in force.
3. Encumbrances to assets of the company in and outside India.
4. Commitments made and outstanding for Loans, Investments and Fixed Assets.
5. Basis of amortization of debt securities.
6. Claims registered and remaining unpaid for a period of more than six months as on the balance
sheet date.
7. Value of contracts in relation to investments, for:

85
 Purchases where deliveries are pending;
Sales where payments are overdue.
8. Operating expenses relating to insurance business: basis of allocation of expenditure to various
segments of business.
9. Computation of managerial remuneration.
10. Historical costs of those investments valued on fair value basis.
11. Basis of revaluation of investment property.

B.Following accounting policies shall form an integral part of the financial statements:
1. All significant accounting policies in terms of the accounting standards issued by the ICAI,
and significant principles and policies given in Part I of Accounting Principles. Any other
accounting policies, followed by the insurer, shall be stated in the manner required under
Accounting Standard AS 1 issued by the ICAL
2. Any departure from the accounting policies shall be separately disclosed with reasons for such
departure.

C.The following information shall also be disclosed:

1. Investments made in accordance with any statutory requirement together with its amount,
nature, security and any special rights in and outside India;
2. Segregation into performing/non performing investments for income recognition.
Assets to the extent required to be deposited under local laws Percentage of business sector-wise;
A summary of financial statements for the last five years, in the manner as may be prescribed by the
Authority;
Bases of allocation of investments and income thereon between Policyholders' Account and
Shareholders' Account;
Accounting Ratios as may be prescribed by the Authority.
Example:

Financial Statements for non-life Insurance

Non-life Insurers shall prepare Financial Statements as per specified Forms such as Revenue Account
(Form A-RA), Profit and Loss Account (Form A-PL) and Balance Sheet (Form A-BS) as per Part V in
Schedule B of Regulation 3. The said financial statements will be prepared in accordance with General
Instructions for preparations as per Part III. The said financial statements shall be supported by
disclosures forming part of financial statements and the comments of management report as per Part II
and Part IV respectively, of the Schedule B.
The specified forms of financial statements are given hereinafter as ready reference for the
purpose of necessary discussion and analytical study for financial management based on insurance
accounting.
Form B-BS
Balance Sheet: Non-Life Insurer
Particulars Schedule No. Current Year Previous
SOURCES OF FUNDS
Share capital 5
Reserves and surplus 6
Fair value change account

86
Borrowings 7
TOTAL
APPLICATION OF FUNDS
Investments 8
Loans 9
Fixed assets 10
Current Assets
Cash and bank balances 11
Advances and other assets 12
Sub-total (A)
Current Liabilities 13
Provisions 14
Sub-total (B)
Net Current Assets (C) = (A - B)
Miscellaneous Expenditure (not written off ) 15
Debit Balance in pal Account
TOTAL

The above financial statements are to be prepared according to the general instruction for preparation
of financial statements as specified in Part III of the IRDA Regulation. Again said financial statements
will be supported by specific disclosure forming part of financial statements as specified by Part II and
comments of management report specified by Part IV of Schedule B of the Regulation. It should also
mention about the contingent liability in respect of the following items:
Party paid-up investments.
Underwriting commitments outstanding.
Claims, other than those under policies, not acknowledged as debts.
Guarantees given by or on behalf of the company.
Statutory demands/liabilities in dispute, not provided for.
Reinsurance obligations to the extent not provided for in accounts.
Others (to be specified).

Form B-RA
Non-life Revenue Account

Particulars Schedule No. Current Year Previous

1. Premium earned (Net) 1
2. Profit/loss on sale/redemption of investments
3. Others (to be specified)
4. Interest, dividend & rent (Gross)
TOTAL (A)
1. Claims incurred (Net) 2
2. Commission 3

87
 3. Operating expenses related to insurance 4
TOTAL (B)
Operating profit/loss from Fire/Marine/Misc.
Business C = (A - B)
APPROPRIATIONS
Transter to Shareholders' Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be specified)
TOTAL (C)

Form B-PL
Profit and Loss A/c of a General Insurance Company
Particulars Schedule No. Current Year Previous Year
1. Operating profits/loss
(a) Fire insurance
(b) Marine insurance I
(c) Miscellaneous insurance
2. Income from investments
(a) Interest, dividends & rents (Gross)
(b) Profit on sale of investments
3. Other income (to be specified)
TOTAL (A)
4. Provisions (other than taxation)
(a) For diminution in value of investment
(b) For doubtful debts
(c) Others (to be specified)
5. Other expenses
(a) Expenses other than those related to Ins. Business
(b) Bad debts written off
(c) Others (to be Specified)
TOTAL (B)
Profit before tax
Provisions for taxation
Appropriations
(a) Interim dividend paid during the year
(b) Proposed final dividend
(c) Dividend distribution tax
(d) Transfer to any reserve or other account
Balance of Profit/loss Brought Forward from Last yr.
Balance Carried Forward to Balance Sheet

88
 Ratio Analysis:
Importantly, the users of financial statements cannot form any opinion on any of the trends for their
economic decisions with the company only on the basis of financial statements unless they use various
ratio analysis and trend analysis with comparative and classified accounting or financial statement. In
using the financial statement including balance sheet, and income statements along with required
disclosure and management report and computing percentage change, trend change, component
percentages, and ratios as exemplified in annexure, the finance manager and analyst constantly search
for some standard of comparison to establish whether the information and relationship they have found
are favourable or adverse for their future economic decisions. Generally two standards of comparison
used by financial analysts are (i) the past performance of the company, and (ii) the position of the
company with respect to industry performance in the country and overseas. The insurance business is
carried on with international process, principle and perspective because of its very nature of
international character. So its trend analysis or trend percentage needs to be compared with industry
data and international standard to judge the company's position in respect of growth, profitability,
liquidity, solvency, etc. In the following table, certain performance analysis has been done with some
hypothetical figures just to show accounting information are used for trend analysis.

Performance Analysis and Trend Percentage (rs. In Lakh) of Ram Insurance Ltd.

Information 2009-10 2010-11 Remarks/Observations of Analyst

1 Gross direct premium 5,676 5,103 Growth in the current year
2 Percentage growth 11% 4% Better growth in the current year
3 Reinsurance accepted 332 314 More acceptance in the current year
4 Reinsurance Ceded 1665 1522 More retention in the current year
5 Net premium 4342 3895 Net premium increase in the current year
Increase over previous year 11% 7% Better growth trend in the current year
% to gross premium 77% 76% Better trend in current year
These ratios are the most vital tools of financial analysis in management accounting. The corporate
management will take many financial decisions for their strategic issues. With this accounting
information many more analysis like the following few can be done.
Gross Premium to Shareholders' Funds Ratio (Rs. in lakh)
2009-10 2010-11
1. Gross Premium 5675.54 5103.16
2. Shareholders' Fund 4161.69 3735.22
3. Ratio (times) 1.36 1.37

Better the ratio, greater is the capacity utilization and better will be the return. But again this ratio must
be within permissible limits laid down by regulators.

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Net Retention Ratio
Gross Premium Net Premium Retention Ratio P. Y. Retention
Fire 1,103.49 830.76 75.28% 78.12%
Marine 349.33 164.38 47.05% 55.97%
Misc. 4,222.73 3,347.52 79.27% 77.46%
Total 5,675.54 4,342.65 76.52% 76.33%
What does it indicate? What is the necessity of comparative study?
What does excessively high or abnormally low retention ratio imply?

Fund and Investment: How to calculate Shareholders' Fund and Policyholders' Fund.
Shareholders' Fund (2010-11) (Rs. in lakh)
Share Capital 200.00
Capital Reserve 0.06
General Reserve 4,622.79
Misc. Reserve (-)14.82 4,808.03
Policyholders' Fund (2010-11) (Rs. in lakh)
Unexpired Reserves 2,253.51
Outstanding Claims 5,505.40 7,758.91
Total Funds 12,566.94
Ratio between the two funds: 38:62

Total Investments 2010-11 2009-10

In India 20344.89 14238.54
Outside India 30.36 336.69
Total Investments 20375.25 14575.23

Long Term 20274.07 14195.57

Short Term 391.18 379.66
Total Investments 20665.25 14575.23

Government Investment 4459.81 3989.16

Equity & Debt 16205.44 10586.07
Total Investments 20665.25 14575.23

Cash Flow Statement

Cash flow statement is useful in providing users with financial statements with a basis to assess the
ability of the firm to generate cash and cash equivalent and the needs of the firm to utilize those cash
flows. The financial decisions that are taken by users require an evaluation of the ability of the firm to
generate cash and cash equivalent and the timing and certainty of their generation. In insurance
industry, the cash flow statement is of prime importance to the users of the financial statements as the
insurance company carries on risk-taking business dealing with intangible product, i.e., promise to
indemnity loss in future as and when accident will occur in consideration of premium collected

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currently. The insurance companies need to have both solvency and liquidity sufficiently to pay off
their liabilities for claims at the time of accident, i.e., occurrence of perils. Thus, an insurer should
always prepare a cash flow statement and should present it for each period for which financial
statements are presented as per regulatory norms and forms. As per the IRDA Regulations, Cash Flow
statement in an insurance company is to be prepared in a Direct Method where AS 3 will not be
applicable. A cash flow statement, if used in conjunction with other financial statements, provides
information that enables the User to evaluate the charges in the net assets of the insurance company
and its financial structure (including its liquidity and solvency). For the purpose of preparation of cash
flow statement of an insurance company, following terms need to be defined for proper interpretation
and use.
1. Cash comprises on hand and demand deposits with banks of the corporate office and its all
operational units including overseas ones.
2. Cash equivalents are short term, highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of a firm (insurer) and other
activities that are not investing or financing activities. In insurance company cash flow from
operating activates (insurance activities) is a key indicator of the extent to which the operations of
the enterprise have generated sufficient cash flows to maintain the operating capability of the
insurers, pay claims, commission, management expenses and dividends, and repay loans and
borrowings.
5. Investing activities are the acquisitions and disposals of long term assets and other investments not
included in cash equivalent.
6. Financing activities are activities that result in changes in the size and composition of the
shareholders' funds and policyholders' funds (in case of insurance company) and borrowings of the
firm.
7. Preparation of cash flow statement Includes classification and segregation of operating, investing
and financing activities.

Direct Method of cash Flow Statement

Cash Flows from Operating Activities Amount Total
Cash receipts from customers .
Cash paid to suppliers and employees
Cash generated from operations
Income taxes paid
Cash flow before extraordinary item
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cash Flows from Investing Activities
Purchase of fixed assets
Proceeds from sale of equipment
Interest received

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Dividends received
Net cash from investing activities
Cash Flows from Financing Activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayment of long-term borrowings
Interest paid Dividends paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period

Indirect Method of Cash Flow Statement

Cash Flows from Operating Activities Amount Total
Net profit before taxation, and extraordinary item
Adjustments for
Depreciation
Foreign exchange loss
Interest income
Dividend income
Interest expense
Operating profit before working capital changes
Increase in sundry debtors
Decrease in inventories
Decrease in sundry creditors
Cash generated from operations
Income tax paid
Cash flow before extraordinary item
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cash Flows from Investing Activities
Purchase of fixed assets
Proceeds from sale of equipment
I nterest received
Dividend received
Net cash flows from financing activities
Cash Flows from Financing Activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayment of long-term borrowings
Interest paid

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Dividend paid
Net cash used in financing activities
Net increases in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
Example of Financial Statement of a Non-life insurance companies:

93
94
95
Example of Financial Statements of Life Insurance Companies

96
97
98
Self-Assessment Questions:
Question 1: Define the legal requirements of Directors Report as per the Companies Act 1956.
Question 2: State IRDA requirements regarding the Financial Statements.
Question 3: Draft Balance sheet and Revenue Account of a life insurance company using imaginary
figures.
Question 4: Prepare the dummy financial statements of a non-life insurance company.

References:
Mishra, K.C. and Guria, R.C.(2009), Practical Approach to General Insurance Underwriting,
Cengage Learning, Delhi.
Gupta C. B., (2005), Business Organization and Management, Sultan Chand & Sons, New
Delhi.
Gupta P. K., (2005), Insurance and Risk management, Himalaya Publisher, New Delhi.

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 LESSON 9
GENERAL INSURANCE 9NON LIFE INSURANCE
FIRE/MARINE
Dr Ashish Kumar
LBSIM
Meaning And Importance Of General Insurance
Insurance other than Life Insurance falls under the category of General Insurance.
General Insurance comprises of insurance of property against fire, burglary etc., personal
insurance such as Accident and Health Insurance, and liability insurance which covers legal
liabilities. There are also other covers such as Errors and Omissions insurance for professionals,
credit insurance etc. Non-life insurance companies have products that cover property against Fire
and allied perils, flood storm and inundation, earthquake and so on. There are products that cover
property against burglary, theft etc. The non-life companies also offer policies covering
machinery against breakdown, there are policies that cover the hull of ships and so on. A Marine
Cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor
vehicles against damages and theft forms a major chunk of non-life insurance business.
A non-life insurance contract is different from a life insurance contract. A life insurance
contract is a long term contract, while general insurance contract is a one-year renewable
contract. 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. It is
difficult to determine the economic value of life, whereas the financial value of any asset to be
insured under a general insurance policy can be determined. Because of these peculiar features, a
non life insurance contract is different from a life insurance contract. In this lesson we will learn
in detail the treatment of each type of non-life insurance.
Section 2(6B) of the Insurance Act 1938, defines general insurance business. According
to this general insurance business means fire, marine, or miscellaneous insurance whether carried
separately or in combination. General Insurance Corporation of India (GIC) was set up with
exclusive privilege for transacting General Insurance business. After the passage of IRDA Act
1999, GIC has been delinked from its subsidiaries and has been assigned the role of Indian
reinsurer.
General Insurance covers are necessary for every family. It is important to protect ones
property, which one might have acquired from ones hard earned income. A loss or damage to
ones property can leave one shattered. Losses created by catastrophes such as the tsunami,
earthquakes. Cyclones etc. have left many homeless and penniless. Such losses can be
devastating but insurance could help mitigate them. Property can be covered, so also the people
against Personal Accident. A Health Insurance policy can provide financial relief to a person
undergoing medical treatment whether due to a disease or an injury. Industries also need to
protect themselves by obtaining insurance covers to protect their building, machinery, stocks etc.
They need to cover their liabilities as well. Financiers insist on insurance. So, most industries or
businesses that are financed by banks and other institutions do obtain covers. But are they
obtaining the right covers? And are they insuring adequately are questions that need to be given
some thought. Also organizations or industries that are self-financed should ensure that they are
protected by insurance.
Types of General Insurance
Basically there are four type of general insurance stated below. Beside these a number of
different kinds of policies for hedging against the various kind of risk are available in the market
these days.
Fire Insurance
Marine Insurance
Motor Insurance
Health Insurance
Miscellaneous Insurance

Fire Insurance
Fire is hazardous to human life as well as property. Loss of life by fire is covered under
Life insurance and loss of property by fire is covered under fire insurance. Fire causes enormous
damage by physically reducing the materials to ashes. A fire insurance policy provides protection
strictly against fire. There could be enormous reasons for fire. In practice certain other related
perils are also covered by the fire insurance policy. The General Insurance Act (Tariff)
recommends the form of the contract in which a fire insurance is to be written. The policy form
contains a preamble and operative clause, general exclusions and general conditions. Fire
Insurance comes under tariff class of business. All India Fire Tariff is the revised fire insurance
tariff, which came into force on May1, 2001. Now a single policy was introduced to cover all
property risks called standard fire and special peril policy in the place of three standard policies
i.e. A, B&C.
A contract of fire insurance can be defined as a contract under which one party ( the
insurer) agrees for consideration (premium) to indemnify the other party (The insured) for the
financial loss which the latter may suffer due to damage to the property insured by fire during a
specified period of time and up to an agreed amount. The document containing the terms and
conditions of the contract is known as Fire Insurance Policy. A fire policy contains the name of
the parties, description of the insured property, the sum for which the property is insured, amount
of premium payable and the period insured against. The premium may be paid either in single
installment or by way of installments. The insurer is liable to make good the loss only when loss
is caused by actual fire. The phrase loss or damage by fire also includes the loss or damage
caused by efforts to extinguish fire.

Scope of cover
Standard Fire and special perils policy usually cover loss due to the following perils:
1. Fire: Destruction or damage to the property insured by its own fermentation, natural heating
or spontaneous combustion or drying process can not be treated as damage due to fire.
2. Lightning: It may result in fire damage or other type of damage, such as cracks in a building
due to a lightning strike.
3. Explosion: An explosion is caused inside a vessel when the pressure within the vessel exceeds
the atmospheric pressure acting externally on its surface. This policy, however, does not cover
destruction or damage caused to the boilers or other vessels where heat is generated.
4. Storm, cyclone, typhoon, hurricane, tornado, landslide: These are all various types of
violent natural disturbances accompanied by thunder or strong winds or heavy rain fall. Loss or

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damage directly caused by these disturbances are covered excluding those resulting from
earthquake, volcanic eruption etc.
5. Bush fire: This covers damage caused by burning of bush and jungles but excluding
destruction or damage caused by forest fire.
6. Riot, strike, malicious, and terrorism damages: Any loss or physical damage to the
property insured directly caused by such activity or by the action of any lawful authorities in
suppressing such disturbance is covered.
7. Aircraft damage: Loss, destruction or damage caused by Aircraft, other aerial or space
devices and articles dropped there from excluding those caused by pressure waves.
8. Overflowing of water tanks and pipes etc.: Loss or damage to property by water or
otherwise on account of bursting or accidental overflowing of water tanks, apparatus and pipes is
covered.
9. Add-on Covers: The insurer can issue the standard fire policy with added benefits at the
option of the policyholders by charging additional premium. These added benefits are as follows:
1. Architects, Surveyors and Consulting engineers fees ( in excess of 3% claim amount)
2. Debris removal ( in excess of 1% of claim amount)
3. Deterioration of stocks in cold storage due to power failure
4. Forest fire
5. Spontaneous combustion
6. Earthquake as per minimum rates and excess applicable as specified in the tariff.
7. Omission to insure additions, alterations or extensions.

The following types of losses, however, are not covered by a fire policy:
Loss by theft during and after the occurrence of fire.
Loss caused by burning of property by order of any public authority.
Loss caused by underground fire.
Loss or damage to property occasioned by its own fermentation or spontaneous
combustion.
Loss happening by fire which is caused by earthquake, invasion, act of foreign enemy,
warlike operations, civil wars, riot etc.
In all the above cases the insurer is not liable, unless specifically provided for in the fire
insurance policy. The insurer can issue the standard fire policy as per the New Fire Tariff along
with added benefits at the option of the policyholders by charging additional premium.

Types of Fire Policies

The important fire insurance policies are discussed below:
(i) Valued Policy. They are the exception in fire insurance. Under valued policy, the
value declared in the policy is the amount the insurer will have to pay to the insured
in the event of a total loss irrespective of the actual value of loss. The policy violates
the principle of indemnity. The insurer has to pay a specified amount quite
independent of the market or actual value of the property at the time of loss. So such a
policy is very rarely issued. It may be issued only on artistic work, antiques and
similar rare articles whose value cannot be determined easily.

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(ii) Specific Policy. Under this policy, the insurer undertakes to make good the loss to the
insured upto the amount specified in the policy. Supposing, a building worth
Rs.2,00,000 is insured against fire for Rs. 1,00,000. If the damage to the property is
Rs.75,000 the insurer will get the full compensation. Even if the loss is Rs.1,00,000
the insurer will get the full amount. But if the loss is more than Rs. 1, 00,000 the
insured will get Rs. 1,00,000 only. Hence, the value of property is not relevant in
determining the amount of indemnity in case of a specific policy.
(iii) Average Policy. Under a fire insurance policy containing the average clause the
insured is liable for such proportion of the loss as the value of the uncovered property
bears to the whole property. e.g. if a person gets his house insured for Rs. 4,00,000
though its actual value is Rs. 6,00,000 , if a part of the house is damaged in fire and
the insured suffers a loss of Rs. 3,00,000 , the amount of compensation to be paid by
the insurer comes out to Rs. 2,00,000 calculated as follows:

Amount of claim= (Insured amount X Actual loss) /Actual value of

property
(4,00,000 X 3,00,000)/6,00,000 =2,00,000
(iv) Floating policy. A floating policy is used for covering fluctuating stocks of goods
held in different lots for one premium. With every transaction of sale or purchase, the
quantities of goods kept at different places fluctuate. It is difficult for the owner to
take a policy for a specific amount. The best way is to take out a floating policy for
all the stocks of goods.
(v) Reinstatement Policy. In such a policy, the insurer has the right to reinstate or
replenish the property destroyed instead of paying compensation to the insured in
cash. It may be granted on building, machinery, furniture, fixture and fittings only.
(vi) Consequential loss Policy. Sometimes the insured has to suffer a greater financial loss
on account of dislocation of business caused by fire .e.g. close down business after
fire for repair, to meet fixed expenses such as rent, salaries, taxes and other expenses
as usual. Such considerable loss to the insured is not covered by the ordinary fire
policy. In order to cover such loss by fire, the Consequential Loss Policy has been
introduced. The loss so suffered is separately calculated from the loss actually
suffered.
(vii) Comprehensive policy. This policy covers the risks of the fire arising out of any cause
that is civil commotion, lightening, riots, thefts, labor disturbances and strikes etc. It
is also known as all insurance policy.
(viii) A Blanket policy. This policy is issued to cover all the fixed and current assets of an
enterprise by one insurance.
(ix) Declaration policy. In this policy, trader takes out a policy for the maximum value of
stock which may be expected to hold during the year. At a fixed date each month, the
insured has to make a declaration regarding the actual value of stock at risk on that
date. On the basis of such declaration, the average amount of stock at risk in the year
is calculated and this amount becomes the sum assured.
(x) Sprinklers leakage policy. It covers the loss arising out of water leakage from
sprinklers which are setup to extinguish fire.

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Claim Procedure for Fire Insurance
1. In the event of fire the insured must immediately give the insurer a notice about the loss
caused by fire. A written claim should be delivered with in 15days from the date of loss.
The insured is required to furnish all plans, invoices, documents, proofs and other
relevant informations required by the insurer. If the insured failed to submit these
documents within 6 months from the date of loss, the insurer has the right to consider it
as no claim.
2. On receipt of the claim the insurer verifies whether the essentials of a valid claim are
satisfied or not. e.g. The cause of fire should be an insured peril.
3. The insured completes the form, signs the declaration given in the form as to the
truthfulness and accuracy of the information and returns the same.
4. An official employed by the insurer investigates small and simple claims. For large
claims, the insurance company employs independent loss surveyor.
5. On the basis of the claim form and the investigation report, the company then settles the
claim.

Marine Insurance
Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport
or cargo by which property is transferred, acquired, or held between the points of origin and final
destination. Cargo insurance discussed here is a sub-branch of marine insurance, though Marine
also includes Onshore and Offshore exposed property (container terminals, ports, oil platforms,
pipelines); Hull; Marine Casualty; and Marine Liability.
The general principles of marine insurance are the same as with other types of insurance
in that there are two parties: the assured and assurer (or carrier). The assured or insured agrees to
pay a premium and the insurer agrees that, if certain losses or damage occurs to certain interests
of the insured, the insurer will indemnify the insured. The similarities pretty much end here. The
complex circumstances involved in sea voyages require very specific arrangements for the
provision of marine insurance. The fixing of rates and special conditions, for example, requires a
vast knowledge of the nature of vessels and cargos and of the conditions of navigation.
The marine policy may cover the risks of a single voyage, or may insure for a certain
period of time. Cargo is almost always insured by voyage. Vessels are usually insured for certain
duration of time, usually year by the year. Cargo policies may be on a single lot or may be open
to cover cargo as shipped by the insured. Hull insurance, or vessel insurance, may cover a ship or
a whole fleet.
Typical of marine insurance is the principle that no contract of marine insurance is valid
unless the insured has an insurable interest in the subject matter at the time of loss. The term
insurable interest has been variously defined. According to the English Marine Insurance Act of
1906, "every person has an insurable interest who is interested in a marine adventure.... a person
is interested in a marine adventure where he stands in any legal or equitable relation to the
adventure or to any insurable property at risk therein, in consequence of which he may benefit by
the safety or due arrival of insurable property, or may be prejudiced by its loss, or damage
thereto, or by the detention thereof, or may incur liability in respect thereof".
The nature and scope of marine insurance is determined by reference to s. 6 of the Marine
Insurance Act and by the definitions of marine adventure and maritime perils. A contract of

104
marine insurance is a contract whereby the insurer undertakes to indemnify the insured, in the
manner and to the extent agreed in the contract, against losses that are incidental to a marine
adventure or an adventure analogous to a marine adventure, including losses arising from a land
or air peril incidental to such an adventure if they are provided for in the contract or by usage of
the trade; or losses that are incidental to the building, repair or launch of a ship.
"Marine adventure" means any situation where insurable property is exposed to maritime
perils, and includes any situation where the earning or acquisition of any freight, commission,
profit or other pecuniary benefit, or the security for any advance, loan or disbursement, is
endangered by the exposure of insurable property to maritime perils, and any liability to a third
party may be incurred by the owner of, or other person interested in or responsible for, insurable
property, by reason of maritime perils. "Maritime perils" means the perils consequent on or
incidental to navigation, including perils of the seas, fire, war perils, acts of pirates or thieves,
captures, seizures, restraints, detainments of princes and peoples, jettisons, barratry and all other
perils of a like kind and, in respect of a marine policy, any peril designated by the policy.

Subject Matter of Marine Insurance

The insured may be the owner of the ship, owner of the cargo or the person interested in
freight. In case the ship carrying the cargo sinks, the ship will be lost along with the cargo. The
income that the cargo would have generated would also be lost. Based on this we can classify the
marine insurance into four categories:
1. Hull Insurance: Hull refers to the ocean going vessels (ships trawlers etc.) as well as its
machinery. The hull insurance also covers the construction risk when the vessel is under
construction. A vessel is exposed to many dangers or risks at sea during the voyage. An
insurance effected to indemnify the insured for such losses is known as Hull insurance.
2. Cargo Insurance: Cargo refers to the goods and commodities carried in the ship from one
place to another. The cargo transported by sea is also subject to manifold risks at the port
and during the voyage. Cargo insurance covers the shipper of the goods if the goods are
damaged or lost. The cargo policy covers the risks associated with the transshipment of
goods. The policy can be written to cover a single shipment. If regular shipments are
made, an open cargo policy can be used that insures the goods automatically when a
shipment is made.
3. Freight Insurance: Freight refers to the fee received for the carriage of goods in the ship.
Usually the ship owner and the freight receiver are the same person. Freight can be
received in two ways- in advance or after the goods reach the destination. In the former
case, freight is secure. In the latter the marine laws say that the freight is payable only
when the goods reach the destination port safely. Hence if the ship is destroyed on the
way the ship owner will loose the freight along with the ship. That is why, the ship
owners purchase freight insurance policy along with the hull policy.
4. Liability Insurance: It is usually written as a separate contract that provides
comprehensive liability insurance for property damage or bodily injury to third parties. It
is also known as protection and indemnity insurance which protects the ship owner for
damage caused by the ship to docks, cargo, illness or injury to the passengers or crew,
and fines and penalties.

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Types of Marine Policy
There are different types of marine policies known by different names according to the manner
of their execution or the risk they cover. They are:
(i) Voyage Policy: Under the policy, the subject matter is insured against risk in respect of a
particular voyage from a port of departure to the port of destination, e.g. Mumbai to New
York. The risk starts from the departure of ship from the port and it ends on its arrival at
the port of destination. This policy covers the subject matter irrespective of the time
factor. This policy is not suitable for hull insurance as a ship usually does not operate
over a particular route only. The policy is used mostly in case of cargo insurance.
(ii) Time Policy: It is one under which the insurance is affected for a specified period of time,
usually not exceeded twelve months. Time policies are generally used in connection with
the insurance of ship. Thus if the voyage is not completed with in the specified period,
the risk shall be covered until the voyage is completed or till the arrival of the ship at the
port of call.
(iii) Mixed Policies: It is one under which insurance contract is entered into for a certain time
period and for a certain voyage or voyages, e.g., Kolkata to New York, for a period of
one year. Mixed Policies are generally issued to ships operating on particular routes. It is
a mixture of voyage and time policies.
(iv) Valued Policies: It is one under which the value of subject matter insured is specified on
the face of the policy itself. This kind of policy specifies the settled value of the subject
matter that is being provided cover for. The value which is agreed upon is called the
insured value. It forms the measure of indemnity in the event of loss. Insured value is not
necessarily the actual value. It includes (a) invoice price of goods (b) freight, insurance
and other charges (c) ten to fifteen percent margin to cover expected profits.
(v) Unvalued policy: It is the policy under which the value of subject matter insured is not
fixed at the time of effecting insurance but has to be ascertained wherever the subject
matter is lost or damaged.
(vi) Open policy: An open policy is issued for a period of 12 months and all consignments
cleared during the period are covered by the insurer. This form of insurance Policy is
suitable for big companies that have regular shipments. It saves them the tedious and
expensive process of acquiring an insurance policy for each shipment. The rates are fixed
in advance, without taking the total value of the cargo being shipped into consideration.
The assured has to declare the nature of each shipment, and the cover is provided to all
the shipments. The assured also deposits a premium for the estimated value of the
consignment during the policy period.
(vii) Floating Policy: A merchant who is a regular shipper of goods can take out a floating
policy to avoid botheration and waste of time involved in taking a new policy for every
shipment. This policy stands for the contract of insurance in general terms. It does not
include the name of the ship and other details. The other details are required to be
furnished through subsequent declarations. Thus, the insured takes a policy for a huge
amount and he informs the underwriter as and when he makes shipment of goods. The
underwriter goes on recording the entries in the policy. When the sum assured is
exhausted, the policy is said to be fully declared or run off.
(viii) Block Policy: This policy covers other risks also in addition to marine risks. When goods
are to be transported by ship to the place of destination, a single policy known as block
policy may be taken to cover all risks. E.g. when the goods are dispatched by rail or road

106
 transport for shipment, a single policy may cover all the risks from the point of origin to
the point of destination.
Assignment of Marine Policy
A marine insurance policy may be transferred by assignment unless the terms of the
policy expressly prohibit the same. The policy may be assigned either before or after loss. The
assignment may be made either by endorsement on the policy itself or on a separate document.
The insured need not give a notice or information to the insurer or underwriter about assignment.
In case of death of the insured, a marine policy is automatically assigned to his heirs. At the time
of assignment, the assignor must possess an insurable interest in the subject matter insured. An
insured who has parted with or lost interest in the subject matter insured cannot make a valid
assignment. After the occurrence of the loss, the policy can be assigned freely to any person. The
assignor merely transfers his own right to claim to the assignee.
Clauses in a Marine Policy
A policy of marine insurance may contain several clauses. Some of the clauses are
common to all marine policies while others are included to meet special requirements of the
insured. Hull, cargo and freight policies have different standard clauses. There are standard
clauses which are invariably used in marine insurance. Firstly, policies are constructed in
general, ordinary and popular sense, and, later on, specific clauses are added to them according
to terms and conditions of the contract. Some of the important clauses in a marine policy are
described below:
1. Valuation Clause. This clause states the value of the subject matter insured as agreed
upon between both the parties.
2. Sue and Labour clause. This clause authorizes the insured to take all possible steps to
avert or minimize the loss or to protect the subject matter insured in case of danger. The
insurer is liable to pay the expenses, if any, incurred by the insured for this purpose.
3. Waiver Clause. This clause is an extension of the above clause. The clause states that any
act of the insured or the insurer to protect, recover or preserve the subject matter of
insurance shall not be taken to mean that the insured wants to forgo the compensation,
nor will it mean that the insurer accepts the act as abandonment of the policy.
4. Touch and Stay Clause. This clause requires the ship to touch and stay at such ports and
in such order as specified in the policy. Any departure from the route mentioned in the
policy or the ordinary trade route followed will be considered as deviation unless such
departure is essential to save the ship or the lives on board in an emergency.
5. Warehouse to warehouse clause. This clause is inserted to cover the risks to goods from
the time they are dispatched from the consignors warehouse until their delivery at the
consignees warehouse at the port of destination.
6. In charge Clause. This clause covers the loss or damage caused to the ship or machinery
by the negligence of the master of the ship as well as by explosives or latent defect in the
machinery or the hull.
7. F.P.A. and F.A.A. Clause. The F.P.A. (Free of Particular Average) clause relieves the
insurer from particular average liability. The F.A.A. ( free of all average) clause relieves
the insurer from liability arising from both particular average and general average.
8. Lost or Not Lost Clause. Under this clause, the insurer is liable even if the ship insured is
found not to be lost prior to the contact of insurance, provided the insurer had no

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 knowledge of such loss and does not commit any fraud. This clause covers the risks
between the issue of the policy and the shipment of the goods.
9. Running down Clause. This clause covers the risk arising out of collision between two
ships. The insurer is liable to pay compensation to the owner of the damaged ship. This
clause is used in hull insurance.
10. Free of Capture and Seizure Clause. This clause relieves the insurer from the liability of
making compensation for the capture and seizure of the vessel by enemy countries. The
insured can insure such abnormal risks by taking an extra war risks policy.
11. Continuation Clause. This clause authorizes the vessel to continue and complete her
voyage even if the time of the policy has expired. This clause is used in a time policy.
The insured has to give prior notice for this and deposit a monthly prorate premium.
12. Barratry Clause. This clause covers losses sustained by the ship owner or the cargo owner
due to willful conduct of the master or crew of the ship.
13. Jettison Clause. Jettison means throwing overboard a part of the ships cargo so as to
reduce her weight or to save other goods. This clause covers the loss arising out of such
throwing of goods. The owner of jettisoned goods is compensated by all interested
parties.
14. At and From Clause. This clause covers the subject matter while it is lying at the port of
departure and until it reaches the port of destination. It is used in voyage policies. If the
policy consists of the word from only instead of at and from, the risk is covered only
from the time of departure of the ship.
Warranties
Warranty means a promissory warranty by which the insured undertakes that some
particular thing will or will not be done or that some condition will be fulfilled; or affirms or
negates the existence of particular facts. A warranty may be an implied warranty and express
warranty.
Express Warranties: An express warranty may be in any form of words from which the
intention to warrant may be inferred. (2) An express warranty must be included in, or written on,
the marine policy or be contained in a document incorporated by reference into the policy. It
does not exclude an implied warranty, unless they are inconsistent.
An express warranty may be in any form of words from which the intention to warrant may be
inferred. Unfortunately, it has proven difficult for insurers to find the exact words that will lead
to the required inference. Words such as warranted that have been held to not necessarily
delineate a warranty. Similarly, the words warranted free from any claim... were held not to
delineate a warranty. Examples of express warranties are as follows:
The number and type of express warranties are limited only by the imagination and
ingenuity of underwriters. Almost anything can be made to be an express warranty provided the
proper words are used. Notwithstanding this total freedom to make almost anything a warranty
most policies contain relatively few. The more common express warranties are:
Navigation and trading warranties that limit the geographical areas in which a vessel may
operate;
Laid up and out of commission warranties that require a vessel to be laid up for a defined
period or generally;
Identity of the master warranties that require a named person to command the vessel;

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 Towing warranties that prohibit the insured vessel from being towed except where
customary or when the vessel is in need of assistance;
Private pleasure use warranties that prohibit any commercial use of a yacht; and
Warranties regarding surveys and inspections that require inspections to be conducted or
recommendations by surveyors to be complied with.
Implied Warranty: these are the warranties which are not expressly mentioned in the contract
but the law takes it for granted that such warranty exists. An express warranty does not exclude
implied warranty unless it is inconsistent therewith. Implied warranties do not appear in the
policy documents at all, but are understood without being put into words, and as such, are
automatically applicable. These are included in the policy by law, general practice, long
established custom or usage. There are three warranties implied by the Act. They are the
warranty of legality, neutrality and
seaworthiness.
Legality: The warranty of legality is one which is often expressly included in policies as
well as implied. The journey undertaken by the ship must be for legal purposes. Carrying
prohibited or smuggled goods is illegal and therefore, the insurer shall not be liable for
the loss.
Neutrality: Where in any marine policy insurable property is expressly warranted to be
neutral, there is an implied condition in the policy (a) that the property will have a neutral
character at the commencement of the risk and that, in so far as the insured has control,
that character will be preserved during the risk; and (b) where the property is a ship, that,
in so far as the insured has control, the papers necessary to establish the neutrality of the
ship will be carried on the ship and will not be falsified or suppressed and no simulated
papers will be used.
Seaworthiness: There is an implied warranty in every voyage policy that, at the
commencement of the voyage, the ship will be seaworthy for the purpose of the particular
marine adventure insured.
Types of Marine Losses
A loss arising in a marine adventure due to perils of the sea is a marine loss. Marine loss may be
classified into two categories:
Total loss: A total loss implies that the subject matter insured is fully destroyed and is
totally lost to its owner. It can be Actual total loss or Constructive total loss. In actual
total loss subject matter is completely destroyed or so damaged that it ceases to be a thing
of the kind insured. e.g. sinking of ship, complete destruction of cargo by fire, etc. In case
of constructive total loss the ship or cargo insured is not completely destroyed but is so
badly damaged that the cost of repair or recovery would be greater than the value of the
property saved. e.g. a ship dashed against the rock and is stranded in a badly damaged
position. If the expenses of bringing it back and repairing it would be more than the
actual value of the damaged ship, it is abandoned.
Partial loss: A partial loss occurs when the subject matter is partially destroyed or
damaged. Partial loss can be general average or particular average. General average refers
to the sacrifice made during extreme circumstances for the safety of the ship and the
cargo. This loss has to be borne by all the parties who have an interest in the marine

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adventure. e.g. A loss caused by throwing overboard of goods is a general average and
must be shared by various parties. Particular average may be defined as a loss arising
from damage accidentally caused by the perils insured against. Such a loss is borne by the
underwriter who insured the object damaged. e.g. If a ship is damaged due to bad weather
the loss incurred is a particular average loss.

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 LESSON 10

GENERAL INSURANCEMOTORHEALTH
& MISCELLANEOUS
Dr Ashish Kumar
LBSIM
Introduction:
The primary legislations including the Insurance Act, 1938 and the IRDA Act, 1999 that deal
with insurance business in India provide the legal framework of insurance accounting in India,
over and above the principles and practices prescribed by Generally Accepted Accounting
Principles (GAAP) and the various Accounting Standards (AS) issued by the Institute of
Chartered Accountants of India(ICAI) and the international organization Financial Accounting
Standards Board (FASB). However, the following statutes, rules and regulations are the major
considerations for accounting and financial management for insurance companies in India:
1. The Insurance Act, 1938 and Insurance Rules, 1939
2. The Insurance Regulatory and Development Authority Act, 1999
3. The Companies Act, 1956
4. The Life Insurance Corporation Act, 1956
5. The General Insurance Business (Nationalization) Act, 1972
Section 11 of the Insurance Act, 1938 provides that every insurer, on or after the
commencement of the IRDA Act, 1999 in respect of insurance business transacted by him and
in respect of his shareholders' fund, shall at the expiration of each financial year, prepare a
Balance Sheet, a Profit and Loss account, a separate Account of Receipts and Payments (Cash
Flow Statement), Revenue Accounts in accordance with the regulations made by the Authority.
Every Insurer shall keep separate accounts relating to funds of shareholders and policyholders.
Accounting Regulations and Financial Statements:
The IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies)
Regulations, 2002 provide that-
An insurer carrying on life insurance business shall comply with the requirements of
Schedule' A' to prepare financial statements.
An insurer carrying on general insurance business shall comply with the requirements of
Schedule 'B' to prepare financial statements.
The Report of the Auditors on the Financial Statements of every insurer/ re-insurer shall be in
conformity with the requirements of Schedule 'C'.
The said regulation further provides that financial statements comprising (i) Balance
Sheet, (ii) Receipts and Payments Account (Cash Flow Statement) (iii) Profit & Loss Account
(Shareholders' Account) and (iv) Revenue Account (policyholders' Account) shall be in
conformity with the Accounting Standards (AS) issued by the Institute of Chartered
Accountants of India to the extent applicable to the insurer except that:
Accounting Standard 3-Cash-flow Statement shall be only under Direct Method
Accounting Standard 13-Accounting for Investment shall not be applicable
Accounting Standard 17-Segment reporting shall apply to all insurers irrespective of the
 requirements for listing and turnover mentioned therein.
Section 2C of the Regulation provides that all words and expressions used herein and not
defined in the Insurance Act, 1938 or in the IRDAAct, 1999 or in the Companies Act, 1956
shall have the meanings respectively assigned to those Acts. However, regulatory provisions
prescribed by the IRDA and the specific and relevant Accounting Standards promulgated by the
Institute of Charted Accountants of India are being separately discussed in detail in subsequent
units.
Financial statements of insurance companies comprise the following as stated earlier:
Balance sheet,
Revenue accounts,
Profit and loss account, and
Receipts and payments account
Besides the financial statements, the annual reports of an insurance company also contain
the following statutory documents for the review and analysis of the various interested groups
including shareholders, policyholders, regulators, reinsurers, employees, co-insurers, etc.
1. Report of the board of directors
2. Management report
3. Auditors report
4. Segment reporting
5. Significant accounting policies
6. Notes and disclosures forming part of accounts
Let us now discuss the above financial statements and reports with reference to legal
requirements, accepted principles and practices with a few examples and exercises. Certain
examples with hypothetical data are also given in Annexure for clarity of understanding of
students in respect of financial statements
Directors Report: legal Requirement as Regards Directors Report (Companies Act 1956)
As per Section 217 of the Companies Act, 1956 there shall be attached to every balance
sheet laid before a company general meeting a report by its Board of Directors with respect to
following particulars:
The state of affairs of the company.
The amounts, if any, which it proposes to carry to any reserve in balance sheet.
The amount, if any, which it recommends, should be paid by way of dividend.
The material changes and commitments, if any, affecting the financial position of the
company, which have occurred between the end of the financial year of the company to
which the balance relates and the date of the report.
The technology absorption, foreign exchange earnings and outgo and the manners
thereof.

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 The material changes, if occurred during the financial year in respect of the nature and
class of business of the company or its subsidiary.
The statement showing the name of every employee of the company who, if employed
throughout the financial year, was in receipt of remuneration for that year, which in the
aggregate was not less than Rs. 24,00,000 per annum or if employed for a part of the
financial year was not less than Rs. 2,00,000 per month. Such state shall also indicate that
whether any such employee is a relative of any director or manager of the company.
The Directors' Responsibility Statement must mention that
a) In the preparation of the annual accounts, the applicable accounting standards
have been followed along with proper explanations relating to material departure,
b) The directors had selected such accounting policies and applied them consistently,
c) The results and estimates are reasonable and prudent so as to give.a true and fair
view of the state of affairs of the company at the end of the financial year and of
the profit or loss of the company for that period,
d) That the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of the Companies
Act, 1956 for safeguarding the assets of the company and for preventing and
detecting frauds and other irregularities and that the directors had prepared the
annual accounts on a going concern basis.
The reasons for the failure, if any, to complete the buy back within the time specified in
Section 77 A of the Act.
The fullest and explanations on every reservation, qualification or adverse remarks
contained in the auditors' report.

Common Disclosures in Directors Report Contained in the Annual Report of a General

Insurance Company:
Director report of an insurance company generally furnishes the following information
specifically as per the above requirements of the Companies Act, 1956:
1. Comparative Performance Analysis (Class-wise Underwriting Performance) for the
financial year under report with reference to previous year) as appended in Annexure
A.2 showing performance analysis of XYZ General Insurance Co. Ltd. in respect of the
following performance review for FY 2005-06.
Gross direct premium and percentage of growth over previous year
Reinsurance premium ceded
Reinsurance accepted
Net premium and percentage of growth over previous year
Increase in unexpired risks reserve and percentage to net premium
Net premium earned
Net incurred claims and percentage to net premium
Others
2. Review of accounts as an annexure to accounts
3. Profit before tax and after tax

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 4. Proposed dividend
5. General reserves and current year transfer of profit to that reserve
6. Total assets and the contribution of increase of fair value change account
7. Total investments, its composition/portfolio, its increase over the last year
8. Solvency margin and its change over the previous year
9. Compliance with Section 40C in regard to prescribed % of expenses

Financial Statements:
As mentioned earlier, as per the IRDA (Preparation of Financial Statements and
Auditors' Report of Insurance companies) Regulations, 2000, an insurer shall prepare the
Financial Statements including Balance sheet, Revenue Account (Policyholders Account),
Receipts and Payments Account (Cash Flow Statements) and Profit and Loss Account
(Shareholders' account) as Accounting Standard (AS) issued by the ICAI to the extent
applicable to the insurers except that:
1. Accounting Standard 3 (AS 3) and Accounting Standard 17 (AS 17) in case of insurers
carrying on life insurance business
2. Accounting Standard 3 (AS 3), Accounting Standard 13 (AS 13) and Accounting Standard
17 (AS17) in case of insurers carrying on non-life insurance business

Cash flow statements will be prepared only under direct method and segment reporting shall apply
irrespective of whether the securities of the insurer are traded publicly or not in both the cases and in
case of non-life insurance company AS 13-Accounting for investments shall not be applicable.
Motor Insurance
Motor insurance policy is a contract between the insured and the insurer in which the
insurer promises to indemnify the financial liability in event of loss to the insured. Motor
Vehicles Act in 1939 was passed to mainly safeguard the interests of pedestrians. According to
the Act, a vehicle cannot be used in a public place without insuring the third part liability.
According to Section 24 of Motor Vehicles Act, No person shall use or allow any other person
to use a motor vehicle in a public place, unless the vehicle is covered by a policy of insurance.
Classification of Motor Vehicles As per the Motor Vehicles Act for the purpose of insurance the
vehicles are classified into three broad categories such as.
Private cars:
a) Private Cars - vehicles used only for social, domestic and pleasure purposes
b) Private vehicles - Two wheeled
1. Motorcycle / Scooters
2. Auto cycles
3. Mechanically assisted pedal cycles

Commercial vehicles:

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 1. Goods carrying vehicles
2. Passengers carrying vehicles
3. Miscellaneous & Special types of vehicles

The risks under motor insurance are of two types:

1) Legal liability due to bodily injury, death or damage caused to the property of others.
2) Loss or damage to ones own vehicle\ injury to or death of self and other occupants of the
vehicle.
Types of motor policies
When you buy a motor vehicle, you need to buy a motor insurance. There are, however, many
types of motor insurance policies available. The common types are:
Third party cover - This policy insures you against claims for bodily injuries or deaths
caused to other persons (known as the third party), as well as loss or damage to third
party property caused by your vehicle.
Third party, fire and theft cover - This policy provides insurance against claims for third
party bodily injury and death, third party property loss or damage, and loss or damage to
your own vehicle due to accidental fire or theft.
Comprehensive cover - This policy provides the widest coverage, i.e. third party bodily
injury and death, third party property loss or damage and loss or damage to your own
vehicle due to accidental fire, theft or an accident.
Exclusions/Extensions
A standard motor insurance will not cover certain losses, such as your own death or
bodily injury due to a motor accident, your liability against claims from passengers in your
vehicle (except for passengers of hired vehicles such as taxis and buses) and loss or damage
arising from an act of nature, such as flood, storm and landslide. However, you may pay
additional premiums to extend your policy to cover flood, landslide, landslip as well as cover
your passengers. It is important to check your policy for the exclusions.
Important points to consider when buying motor insurance policies
Insured value/sum insured: If you are buying a policy against loss/damage to your vehicle, you
must ensure that your vehicle is adequately insured as it will affect the amount you can claim in
the event of loss/damage. For a new vehicle, the insured value will be the purchase price while
for other vehicles, the insured value is the market value of the vehicle at the point you apply for
the insurance policy.
Under-insurance If you insure your vehicle at a lower sum than its market value, you
will be deemed as self-insured for the difference, i.e. in the event of loss/damage, you
will only be partially compensated (up to the proportion of insurance) by your insurance
company.

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 Over-insurance Should you insure your vehicle at a higher sum than its market value, the
maximum compensation you will receive is the market value of the vehicle as the policy
owner cannot profit from a motor insurance claim.
Duty of disclosure: You should disclose fully all material facts, including previous accidents (if
any), modification to engines, etc. When in doubt as to whether a fact is relevant or not, it is best
to ask your insurance company. If you fail to disclose any material fact, your insurance company
may refuse to pay your claim or any claim made by a third party against you. In such cases, you
are personally liable for such claims.
Price: The price you pay for your motor insurance will depend on the type of policy selected.
The insurance premium charged by your insurance company is the standard minimum rate in
accordance with the Motor Tariff. However, in addition to the standard minimum rate, your
insurance company may impose additional premiums known as loadings to the premium payable
in view of higher risk factors involved such as age of vehicle and claims experience.
No-claim-discount: The premium payable may be reduced if you have no-claim-discount
(NCD) entitlement. NCD is a reward scheme for you if no claim was made against your policy
during the preceding 12 months of policy. Different NCD rates are applicable for different
classes of vehicles. For a private car, the scale of NCD ranges from 25% to 55% as provided in
the policy.
Transfer of ownership: In case of any sale of vehicle involving transfer of policy, the insured
should apply to the insurer for consent to such transfer. The transfer is allowed, if within 15 days
of receipt of application, the insurer does not reject the plea. The transferee shall apply within
fourteen days from the date of transfer in writing to the insurer who has insured the vehicle, with
the details of the registration of the vehicle, the date of transfer of the vehicle, the previous
owner of the vehicle and the number and date of the insurance policy so that the insurer may
make the necessary changes in his record and issue fresh Certificate of Insurance.
Excess: Also known as a deductible. This is the amount of loss you have to bear before your
insurance company will pay for the balance of your vehicle damage claim. The types of excess
applicable are as follows:
Compulsory excess of RM400: If your vehicle is driven by a person not named in
your policy or a person named in your policy who is under the age of 21, the holder of
a provisional (L) driving license or the holder of a full driving license of less than two
years.
Other excess: applicable at the discretion of your insurance company and in some
cases, no excess is imposed. You can negotiate with your insurance company on this
excess.
What you should do in the event of an accident/loss
Take notes of the accident If you are involved in a motor accident, take notes of the
accident, i.e. the names and addresses of all drivers and passengers involved, vehicle
registration numbers, make and model of each vehicle involved, the drivers licence numbers
and insurance identification as well as the names and addresses of as many witnesses as
possible

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 Make a police report You are required by law to lodge a police report within 24 hours of a
road accident.
Notify your insurance company You must notify your insurance company in writing with
full details as soon as possible. Depending on the type of claim you intend to make, you may
have to notify other insurance companies. If you fail to report the accident, you will be liable
for your own loss as well as any third party claim against you.
Select the workshop You must send your damaged vehicle to a workshop approved by
your insurance company. If the accident occurs during office hours, you may call the hotline/
emergency assistance numbers provided by your insurance company. Otherwise, you may
call your insurance company for the nearest approved workshop. Should the accident occur
outside office hours and you are making a claim against your policy, i.e. an own damage
claim, you should ensure that your vehicle is towed to a workshop approved under Repairers
Scheme.
Claim Settlement
Claim arises when:
1) The insureds vehicle is damaged or any loss incurred.
2) Any legal liability is incurred for death of or bodily injury
3) Or damage to the third partys property.
The claim settlement in India is done by opting for any of the following by the insurance
company.
Replacement or reinstatement of vehicle
Payment of repair charges
In case, the motor vehicle is damaged due to accident it can be repaired and brought back to
working condition. If the repair is beyond repair then the insured can claim for total loss or for a
new vehicle. It is based on the market value of the vehicle at the time of loss. Motor insurance
claims are settled in three stages. In the first stage the insured will inform the insurer about loss.
The loss is registered in claim register. In the second stage, the automobile surveyor will assess
the causes of loss and extent of loss. He will submit the claim report showing the cost of repairs
and replacement charges etc. In the third stage, the claim is examined based on the report
submitted by the surveyor and his recommendations. The insurance company may then authorize
the repairs. After the vehicle is repaired, insurance company pays the charges directly to the
repairer or to the insured if he had paid the repair charges.
Section 110 of Motor Vehicle Act, 1939 empowers the State Government in establishing
motor claim tribunals. These tribunals will help in settling the third party claims for the
minimum amount
Theft claims
After submission of the claim form, you must cooperate fully with your insurance company
or its representative during the course of investigation of the theft claim.
In view that the police and your insurance company will require time to investigate your
claim, you will receive the offer of settlement from your insurance company within six

117
 months from the theft notification or upon completion of police investigations, whichever
is earlier
Heath Insurance
Health insurance, like other forms of insurance, is a form of collectivism by means of
which people collectively pool their risk, in this case the risk of incurring medical expenses. The
collective is usually publicly owned or else is organized on a non-profit basis for the members of
the pool, though in some countries health insurance pools may also be managed by for-profit
companies. It is sometimes used more broadly to include insurance covering disability or long-
term nursing or custodial care needs. It may be provided universally through government as a
feature of social solidarity, as is typical in many industrial countries, or as form of government
charity such as the United States Medicaid program. It may be purchased privately on a group
basis (e.g., by a firm to cover its employees) or purchased by an individual for himself or his
family. In each case, the covered groups or individuals pay a fee, premium, or tax, to help protect
themselves from health care expenses.
Health insurance is an insurance, which covers the financial loss arising out of poor
health condition or due to permanent disability, which results in loss of income. A health
insurance policy is a contract between an insurer and an individual or group, in which the insurer
agrees to provide specified health insurance at an agreed upon price (premium). It usually
provides either direct payment or reimbursement for expenses associated with illness and
injuries. The cost and range of protection provided by health insurance depends on the insurance
provider and the policy purchased.

Health Insurance Policies and Main Features:

Types of Health Insurance Policies:
Health Insurance policies are broadly classified into types-Individual Health Insurance and
Group Health Insurance. The following Health Insurance policies are available in India:
1. Individual Mediclaim Insurance
2. Group Mediclaim Insurance
3. Overseas Mediclaim Insurance
4. UHI
5. Health Plus Medical Expenses Policy
6. Group Health Plus Medical Expenses Policy
Major Characteristics of Individual Health Insurance Policy
Coverage: Individual coverage are generally classified into the following broad heads:
1. Hospital Surgical Insurance
2. Major Medical Insurance
3. Long-term Care Insurance
4. Disability Income Insurance

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Hospital Surgical Insurance: It covers the following expenses:
Hospital expenses: A typical Individual Health Insurance policy covers impatient
hospital expenses subject to a specified limit and subject to certain amount of
deductible or co-insurance
Surgical expenses
Cost of medicines and nursing
Domiciliary expenses up to certain limits
Major characteristics of Medical Insurance :It covers major or broader coverage than basic
coverage with the following characteristics:
1. Broad coverage for hospital charges, drugs, nursing, medical equipments, etc.
2. High maximum limit, say Rs. 5,00,000 or Rs. 10,0000, etc.
3. Benefit period: maximum amount paid under a major benefit policy depending on the
length of the policy
4. Deductible that must be satisfied before the benefit is granted, which may be
yearly deductible, family deductible, etc.
5. Co-insura'lce is provided in most of the policies to avoid moral hazards
6. Taxation benefits subject to compliance of certain requirements
7. Pre-exiting conditions clause to avoid adverse selection
Common exclusions
1. Expenses caused by war or military conflict
2. Cosmetic surgery
3. Dental care except as a result of an accident
4. Eye and examination aids unless there is an accident
5. Pregnancy or childbirth unless specifically provided
6. Expenses covered under W.C. laws or similar laws
7. Services furnished by governmental agencies unless the patient has the obligation to
pay
8. Experimental surgery
Standard Individual Mediclaim Insurance- Underwriting Guidelines
Coverage: This policy covers reimbursement of hospital is at ion or domiciliary hospitalization
expenses for illness or diseases or injury sustained. In the event of any claim becoming
admissible under this scheme, the insurer will pay to the insured person the amount of such
expenses as would fall under different heads of medical expenses mentioned below and as are
reasonable and necessarily incurred by or on behalf of such insured persons but not exceeding
the sum insured in anyone period of insurance:

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 1. Room and boarding expenses provided by hospital or nursing home
2. Nursing expenses
3. Fees of surgeon, anesthetist, consultant etc.
4. Anesthesia, blood oxygen, OT, X-ray, surgical appliances, medicines etc.
The sum insured in this policy varies from ` 15,000 to 5,00,000 per person. This policy
provides for family discount on total premium for the members of the family. In case of no
claim, cumulative discount is also available as per the company's underwriting policy. In case of
cost of health check, as per the policy conditions, generally once in four years is available.
Underwriting Guidelines: Individual Mediclaim Insurance has been showing very high incurred
claim ratio since long. In the tariff market, this product has been sold by almost all underwriters
with huge cross-subsidy from profitable products like fire and engineering. But in the de-tariff
market, the prevalence of cross-subsidy is ruled out. Every product must stand on its own
revenue. One product cannot subsidize other product. In view of our huge claim ratio of around
140 per cent of Individual Mediclaim Insurance, the underwriters have adopted the following
underwriting measures to ensure prudent underwriting for this product today:
1. Fresh proposal for a single person above 45 years of age is discouraged.
2. Though mediclaim policy is available to persons between 5 years and 80 years of age, fresh
acceptance of cover for a person beyond 60 years is discouraged, unless he is a member of a
big family or group to be covered or otherwise potential.
3. Policy already in force for insured exceeding 75 years of age may be renewed on the basis of
claim experience and risk evaluation with or without restrictive condition as per the risk
analysis findings.
4. Cancellation of policy is done subject to the following underwriting policy:
a. Policy to be renewed by mutual consent.
b. Company is not bound to notify that policy is due for renewal.
c. Policy may be cancelled by company after giving 30-days notice and pro rata premium to
be refunded, provided no claim has been paid under this policy.
d. Company remains liable for any claim arising prior to date of cancellation.
e. The insured may cancel the policy any time; the company would refund premium subject
to 'No-claim' during the policy period.
5. Renewal of policy is done on the basis of the following norms:
a. In case renewal is agreed, the illness for which the expenses have been paid in previous
policy are not to be excluded. Renewal is done on earlier terms.
b. If policy is renewed for enhanced sum insured, reimbursement of illness occurred in the
previous policy shall be restricted to old sum insured.
6. Cost of health check up is allowed up to I per cent of average sum insured of four claims-free
underwriting years.
7. Issuance of policies for period less than one year is prohibited.
8. Policies for persons above 75 years to be decided on the claim experience merit.

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9. Extension for suspended mediclaim may be allowed only when overseas mediclaim policy
has been taken by an individual or family as whole when one of the person goes abroad by
taking overseas mediclaim policy.
10. Tax-benefit under Section 80D of the IT Act available when premium is paid by cheque.
11. General exclusions: provided under the policy:
a. All diseases or injuries which are pre-existing when the cover incepts for the first time.
b. Any diseases other than those mentioned below contracted by the insured person during
the first thirty days from the commencement of the policy.
c. During the first year of the operation of insurance cover, the expenses on treatment of
diseases such as cataract, benign prostatic hypertrophy, hysterectomy for menorrhagia
or fibromyoma, hernia, hydrocele, congenital internal diseases, fistula in anus, piles,
sinusitis and related disorders.
d. Injury or disease directly or indirectly caused by or arising from or attributable to war,
invasion, act of foreign enemy, war-like operations (whether war be declared or not).
e. Circumcision unless necessary for treatment of a disease not excluded hereunder or as
may be necessitated due to an accident, vaccination or inoculation or change of life or
cosmetic or aesthetic treatment of any description, plastic surgery other than as may be
necessitated due to an accident or as a part of any illness.
f. Cost of spectacles, contact lenses, hearing aids.
g. Any dental treatment or surgery which is a corrective, cosmetic or aesthetic procedure,
including wear and tear, unless arising from disease injury and requires hospitalisation
for treatment.
h. Convalescene, general debility, 'run-down' condition or rest corrective, congenital
external disease defects or anomalies, sterility, venereal disease, intentional self-injury
and use of intoxicating drugs or a1chol.
1. All expenses arising out of any condition directly or indirectly caused to or associated
with human T cell lymph tropic virus type III (HTD-III) or lymphadinopathy-associated
virus (LAV) or the mutants derivative or variations deficiency syndrome or any HTTB-
III syndrome or condition of a similar kind commonly referred to as AIDs.
J. Charges incurred at hospital or nursing home primarily for diagnostic, X-ray or
laboratory examinations not consistent with or incidental to the diagnosis and treatment
of the positive existence or presence of any ailment, sickness or injury for which
confinement is required at a hospital or nursing home.
k. Expenses on vitamins and tonics unless forming part of treatment for injury or disease as
certified by the attending physician.
1. Injury or disease directly or indirectly caused by or contributed to by nuclear weapons or
materials. '
m. Treatment arising from or traceable to pregnancy, childbirth, miscarriage, abortion or
complications of this kind, including caesrian section.
n. Naturopathy treatment.

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Guidelines for Group Mediclaim Policy: The underwriters generally follow the underwriting
procedures mentioned below to ensure prudent underwriting and high incurred claim ratio:
1. Group policy will be issued for named persons only.
2. Group shall be of any of seven specified categories, namely, (i) Employer-employee
relationship, (ii) Pre-defined segment where premium is paid by Government, (iii)
Members of a registered club, (iv) Members of a registered co-society, (v) Holders of
credit cards of banks, visa or master cards (vi) Holders of deposit certificates of banks
/NBFC, and (vii) Shareholders of a company.
3. Group discount generally varies from 2.5 per cent to 30 per cent available for various
groups from 101 to 50,000 and above.
4. Monthly endorsement for any addition or deletion of any number of members shall be
without any change in discount.
5. Group below 100 persons may be given group policy without discount.
6. Maternity benefit up to Rs. 50,000 available with 10 per cent loading on basic premium.
7. Cost of health check-up will not be available in group policy.
8. 5 per cent service charges on group policy.
Universal Health Insurance
This Health Insurance is a very important policy for people below the poverty line and is thus of
great importance for social security and National Health Policy. Let us now discuss the
important provisions of such Health Insurance as a matter of case study on underwriting of a
Health Insurance product essential for National Health Policy.
Sum Insured:
1. Section I: Hospitalisation benefit per family-Rs. 30,000
2. Section II: Accidental death benefit for head of family-Rs. 25,000
3. Section III: Disability compensation on hosptalisation for head of family for maximum
period of 15 days- Rs. 50 per day
Premium:
1. Individual person: Rs. 365 p.a.
2. Family of five persons (insured + spouse + 3 children): Rs. 548 p.a.
3. Family of seven persons (as above + parents): Rs. 730 p.a.
Benefits
Section I
1. Reimbursement of total medical expenses for anyone accident: Rs. 15,000
2. Reimbursement for a member of family-individually or collectively: Rs. 30,000, subject to
following sub-limits of hospital expenses:
a. Room or boarding expenses: up to Rs. 150 per day

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 b. ICU reimbursement: up to Rs. 150 per day
c. Fees of surgeon, anaesthesist, consultant, etc.: up to Rs. 4,500 per illness
d. Anesthesia, blood, oxygen, QT, X-ray, surgical appliances, medicines, etc.: up to Rs.
4,500 per illness
The insurer's liability in respect of all claims admitted during period of insurance shall not
exceed the SI ofRs. 30,000 per person or per family.
Section II
Death Compensation for earning head of the family solely and directly due to accident caused by
outward, violent and visible means will be to SI, i.e. Rs. 25,000

Section III
Disable compensation for earning head the family solely and directly due to accident for which a
valid claim under Section I is admitted will be up to Rs. 50 per day with excess of three days for
a maximum period of 15 days.
General Exclusions:
1. All pre-existing diseases are not admissible.
2. Any disease other than those stated in the policy contracted by the insured person
during the first 30 days of commencement of the policy, provided that in the opinion
of panel doctors the insured could not have known the existence of the disease or any
symptom and had not taken any consultation treatment or medication.
3. Some diseases like cataract, benign prostate hypertrophy, hysterectomy, hernia,
menorrhagia or fibromyoma, hydrocele, congenital, internal disease, fistula, piles,
sinusitis and related disorders are not payable.
4. Disease arising from or attributable to war or war-like operations.
5. Circumcision unless necessary for treatment or due to accident.
6. Cost of spectacles, contact lenses and hearing aids.
7. Dental treatment, which is cosmetic, corrective or aesthetic.
8. Convalescence general debility, 'run down' condition or rest cure, congenital external
disease or defects or anomalies, sterility, venereal disease, intentional self-injury and
use of drugs.
9. Any cosmetic treatment or surgery, sterility, venereal disease, HIV, AIDS 10.
10. Diagnostic, X-ray or laboratory examination not consistent with diagnosis
11. Vitamins and tonics not forming part of treatment.
12. Disease or injuries attributable to nuclear weapons.
13. Treatment arising from pregnancy, childbirth, miscarriage, etc.
14. Naturopathy treatment.

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Specific Exclusion for Section II
1. Compensation in respect of death directly or indirectly contributed or traceable to any
disability existing on the commencement of the policy.
2. Death arising directly or indirectly from:
a. Internal self-injury or suicide.
b. Pregnancy or any complication thereof.
c. Whilst engaging in aviation, ballooning, mounting or traveling in any
aircraft other than as a passenger.
d. Whilst under the influence of intoxication, liquor or drugs.
e. Directly or indirectly caused by venereal diseases or insanity.
f. Breach of law with criminal intent.
General Conditions:
1. Only one policy will be issued to one family.
2. The pre- and post-hospitalization expenses are excluded.
3. Proposal form and prospectus to be signed by the proposer with all details.

Health Insurance Policies in India: The health insurance policies available in India are:
(a) Mediclaim policy (individuals and groups)
(b) Overseas mediclaim policy
(c) Raj Rajeshwari Mahila Kalyan Yojna
(d) Bhagyashree Child Welfare Policy
(e) Cancer Insurance Policy
(f) Jan Arogya Bima Policy
Mediclaim policy (individuals and groups): Mediclaim policy is offered to individuals
and groups exceeding 50 members. It covers the hospitalization for diseases or sickness
and for injuries. Under group mediclaim policy, group discount is allowed to groups
exceeding 101 people. The medical expenses will be reimbursed only if the insured is
admitted in the hospital for a minimum duration of 24 hours. Cost of treatment includes
consultation fee of doctors, cost of medicines and hospitalization charges. Health
insurance in India is available at very economical rates. It is very popular among
professionals like Chartered accountants, Advocates, Engineers etc. It is very suitable for
self-employed persons because it covers risks against several general and serious
diseases.
Overseas Mediclaim Policy: In 1984, the Overseas Mediclaim Policy was developed.
This policy will reimburse the medical expenses incurred by Indians upto 70 years of age
while traveling abroad. The premium will be charged based on their age, purpose of
travel, duration and plan selected by the insured under the policy. This policy is provided

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 is provided to businessmen , people going on holiday tour, traveling for educational
professional and official purposes.
Raj Rajeshwari Mahila Kalyan Yojna: It is a personal accident policy offered by an
insurance company for the welfare of women. It is offered to women residing in rural and
urban areas. Women between 10-75 years of age are eligible for this policy irrespective
of their occupation and income level.
Bhagyashree Child Welfare Policy: It is offered to girls between 0-18 years. The age of
the parents of the girls shouldnt be more than 60 years. It provides coverage to one girl
child in a family who loses her father or mother in an accident.
Cancer insurance policy: It is designed for cancer patients aid association members. The
persons insured under this policy will pay premium to their association along with the
membership fee. This policy will offer coverage to the insured in case he develops
cancer. All the expenses incurred for treatment of cancer not exceeding the sum insured
will be paid directly to the insured person.
Jan Arogya Bima Policy: This policy provides medical insurance to poorer section of the
people. This policy covers illness like heart attack, jaundice, food poisoning, and
accidents etc. that requires immediate hospitalization.
Miscellaneous Insurance:
Personal Accident Insurance: Personal Accident is an insurance cover wherein, in the event of
the person sustaining bodily injuries resulting solely and directly from an accident caused by
EXTERNAL, VIOLENT & VISIBLE means , resulting into death or disablement. An accident
may include events like: Rail / Road / Air Accident, Injury due to any collision/fall, Injury due to
Bursting of gas cylinder, Snake-bite, Frost bite/Dog bite , Burn Injury, Drowning, Poisoning etc.
Personal Accidental policy covers accidental death, loss of limbs, permanent total and
partial disablement as selected and granted by the insurance companies based on the
underwriting norms. On payment of additional premium, medical expenses reimbursement can
be covered. These expenses are payable, in case, if the claim is admitted under the basic policy
cover. In addition to the Personal Accident Insurance cover the policies available are : Nagrik
Suraksha Poicy, Janta Personal Accident Policy, Gramin Personal Accidental Policy , Student
Package Policies for students, Bhagashree for Girl-children, Raj Rajeshwari for Women etc.
Further as an ad-on cover Motor Vehicle Package Policy & Overseas Mediclaim Policy too offer
personal accidental injuries cover.
Sum insured is based on various factors namely:
(1) Income from gainful employment,
(2) Type of occupation,
(3) Age as on date of proposal,
(4) Period of insurance
(5) Conditions prevailing at the place from where the proposal is made etc.
(6) As regards the non-earning spouse of the insured the sum insured in respect of such spouse
shall not exceed 50% of the eligibility of the insured, subject to a limit of Rs. One Lakh
under benefits available under Table III of the policy.

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(7) Dependent children can be offered a sum insured not exceeding Rs.50000/- to cover death
and disablement only. No temporary disablement cover shall be offered.
Generally Personal Accident policies are maximum for one year only. However, depending upon
the requirement of the proposer it can be offered for a period which could even be lesser than 12
months.

Fidelity Insurance: Fidelity insurance protects organizations from loss of money, securities, or
inventory resulting from crime. Common Fidelity claims allege employee dishonesty,
embezzlement, forgery, robbery, safe burglary, computer fraud, wire transfer fraud,
counterfeiting, and other criminal acts. These schemes involve every possible angle, taking
advantage of any potential weakness in your companys financial controls. From fictitious
employees, dummy accounts payable, non-existent suppliers to outright theft of money,
securities and property. Fraud and embezzlement in the workplace is on the rise, occurring in
even the best work environments. Liabilities covered by crime insurance usually fall into two
categories, although many polices combine both types of coverage:
Money and security coverage pays for money and securities taken by burglary, robbery,
theft, disappearance and destruction.
Employee dishonesty coverage pays for losses caused by most dishonest acts of your
employees, such as embezzlement and theft.
Fidelity insurance includes comprehensive coverage of:
Employee theft
Money and securities while on premises or in transit
Forgery
Funds transfer fraud
Computer fraud
Money order and counterfeit currency fraud
Credit card fraud
Optional client coverage
Coverage for investigative costs for covered losses
Responds to Employee Retirement Income Security Act of 1974 (ERISA) plan bonding
requirement.
Broad definition of employee, including directors and officers; employees, including
part-time, leased, temporary, and seasonal employees; and volunteers.
Worldwide coverage.

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Burglary Insurance: Such a policy provides protection against loss or damage caused by
housebreaking, robbery or theft. It is also known as robbery, theft or larceny insurance. For this
purpose a comprehensive policy may be taken or each risk may be separately insured. Full
details of the article insured are given in the policy. Insured items include gold and gold
ornaments and other assets including household items such as TV, fridge, air conditioner etc. A
burglary policy for business premises would provide cover against loss to damage by house
breaking and burglary of stock-in -trade, goods in- transit, cash-in-safe, fixture and fittings etc.

Credit Insurance: Credit insurance policy is taken to cover the loss which may arise due to bad
debts or non-payment of dues by the debtors. This insurance is very useful to businessmen who
sell goods on credit. It protects them from loss arising out of insolvency of their debtors. In India,
Export Credit and Guarantee Corporation (ECGC) provide credit insurance to exporters.

Workmens Compensation Insurance: In India, Workmens Compensation Act was passed in

1934 and 1946. According to this act, an employer is required to pay compensation to his
workers who receive injuries or contract occupational diseases during the course of their work.
An employer may obtain an insurance policy to cover such liability. The premiums are payable
usually on the basis of wages. It is also known as Employers Liability Insurance. This policy is
essential to every employer who employs workmen as defined under the Workmens
Compensation Act in order to protect himself against the legal liabilities arising out of death or
bodily injury to this workman. It also extends coverage through reimbursement of medical,
surgical and hospitalization expenses including transportation costs on the payment of additional
premium. The National Insurance Company Ltd, United India Insurance Company Ltd, Oriental
Insurance Company Ltd, and the New India Assurance Company Ltd offer workmens
compensation policies.

Travel Insurance: Travel insurance covers travel related accidents also. While traveling outside
India, individuals face risks such as loss of baggage, accidents involving injuries, illnesses and
medical emergencies requiring hospitalization treatment. All this can pose serious consequences
to the overseas travellers. A rational person should therefore secure the required coverage before
leaving his home country. In India travel insurance has become popular among International
travellers. The coverage offered under travel insurance policies in India are as follows:
Medical assistance in case of an emergency
Covers Personal Accident, Medical Expenses & Medical Evacuation & Repatriation
Loss & delay of Checked Baggage
Covers pre-existing medical conditions
Convalescence after hospitalization
Takes care of sudden and unforeseen expenditure Convenient and hassle free trip for
the family

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Wedding Insurance: These days, weddings have become quite an expensive and elaborate
affair. People do take care to make this once-in-a-lifetime event a memorable one. In case of any
postponement or cancellation, there is a certain risk of monetary loss. The wedding insurance
package can compensate for the monetary loss. This unique product covers the specific risks
related to weddings. This Policy can protect you against certain types of financial losses you may
incur in the event of unpredictable situations during the period leading up to and including your
wedding day. The period of insurance will be 24 hours prior to the start of the customary
functions or rituals or programmes of events mentioned in the printed invitations till the end of
the function or five days from the beginning whichever occurs earlier. This policy provides cover
for expenses actually and already incurred or advances paid in connection with marriage hall,
catering, pandit, guests, music parties, photos and videography, loss on cancellation of travel
tickets etc. Liability is restricted only when such cancellation arises out of cancellation or
postponement of marriage. The policy does not cover any loss arises when marriage is cancelled
or postponed because of dispute between marriage parties, willful negligence and criminal
misconduct of the bride, bridegroom or their parents.

Employee State Insurance Scheme: The Employee State Insurance Scheme (ESIS) is an
insurance system which provides both the cash and medical benefits. It is managed by the
Employee State nsurance Corporation (ESIC), a wholly government-owned enterprise. It was
conceived as a compulsory social security benefit for workers in the formal sector. The original
legislation creating the scheme allowed it to cover only factories which has been using power
and employing 10 or more workers. However, since 1989 the scheme has been expanded, and it
now includes all such factories which are not using power and employing 20 or more persons.
Mines and plantations are explicitly excluded from coverage under the ESIS Act.

Unemployment Insurance: Unemployment insurance is designed to provide short term

protection for regularly employed persons who lose their jobs and who are willing and able to
work. Unemployment insurance has several basic objectives:
1) Provide cash income during involuntary unemployment.
2) Help unemployed workers find jobs.
3) Encourage employees to stabilize employment.
4) Help stabilize economy.
Unemployment insurance is a popular concept in developed countries like U.S. where they have
well defined laws and regulations. However in India it will take a long time to come.
Personal Liability Insurance: Personal liability insurance provides protection against the legal
liability, which arises due to insureds personal acts. The insurance company will pay for legal
defense to third party damages or injuries up to policy limit. Except legal liability, which arises
due to automobile accidents and professional liability, most other personal acts are covered under
personal liability insurance. The personal liability insurance covers damages caused to properties
and injuries to other people due to the negligence of the insured. Under this policy, the insurance
company is bound to defend the insured, should the matter go to court of law. It can also settle
the matter out of court by negotiating with parties for a settlement within the policy limit.

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Personal liability policy offers very wide coverage. The following instances of loss, damages or
injuries caused by an insured individual come under the purview of personal liability insurance
in which coverage will be available up to the policy limit.
Accidental fire to neighbors house as a result of insureds negligence
Accidental injury to a third party while playing
Damaging costly antique accidentally belonging to neighbor
Injuring another person while riding a bicycle

Self Assessment Questions

1) Define fire insurance. What are the essential features of a fire insurance contract?
2) What is the claim settlement procedure followed for a fire insurance policy?
3) What is a floating policy?
4) What is marine insurance? How it is different from fire insurance?
5) What is meant by perils of the sea?
6) Briefly describe the different types of losses under marine insurance.
7) Is third party insurance a must under motor vehicle Act?
8) How is subrogation helpful to the insurer?
9) What would be the status of the claim if the vehicle were covered under liability policy?
10) Explain Travel insurance.
11) Explain the scope of Fidelity insurance.
12) Discuss the main clauses of marine policies.
13) Enumerate the various types of marine insurance policies.
14) What do you mean by assignment of policy? Indicate the manner in which a marine policy
can be assigned.
15) Distinguish between express warranties and implied warranties in relation to marine
insurance policy.
16) Write a short note on the following:
i) Unemployment insurance
ii) Wedding insurance

References:
Bhatia R.C., (2005), Business Organization and Management, One Books, New Delhi.
Gupta C. B., (2005), Business Organization and Management, Sultan Chand & Sons,
New Delhi.
Gupta P. K., (2005), Insurance and Risk management, Himalaya Publisher, New Delhi.

129
 Prakash Jagdish, (1995), Business Organization and Management, Kitab Mahal, New
Delhi.
Singh B.P. & Chhabra T.N., (2004), Business Organization and Management, Dhanpat
Rai & Co., New Delhi.
Mishra, K.C. and Guria, R.C.(2009), Practical Approach to General Insurance
Underwriting, Cengage Learning, Delhi.

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 LESSON 11
UNDERSTANDING ANNUAL REPORT OF A NON-LIFE
INSURANCE COMPANY
Dr Ashish Kumar
LBSIM
Introduction:
The primary legislations including the Insurance Act, 1938 and the IRDA Act, 1999 that deal
with insurance business in India provide the legal framework of insurance accounting in India,
over and above the principles and practices prescribed by Generally Accepted Accounting
Principles (GAAP) and the various Accounting Standards (AS) issued by the Institute of
Chartered Accountants of India(ICAI) and the international organization Financial Accounting
Standards Board (FASB). However, the following statutes, rules and regulations are the major
considerations for accounting and financial management for insurance companies in India:
1. The Insurance Act, 1938 and Insurance Rules, 1939
2. The Insurance Regulatory and Development Authority Act, 1999
3. The Companies Act, 1956
4. The Life Insurance Corporation Act, 1956
5. The General Insurance Business (Nationalization) Act, 1972
Section 11 of the Insurance Act, 1938 provides that every insurer, on or after the
commencement of the IRDA Act, 1999 in respect of insurance business transacted by him and
in respect of his shareholders' fund, shall at the expiration of each financial year, prepare a
Balance Sheet, a Profit and Loss account, a separate Account of Receipts and Payments (Cash
Flow Statement), Revenue Accounts in accordance with the regulations made by the Authority.
Every Insurer shall keep separate accounts relating to funds of shareholders and policyholders.
Accounting Regulations and Financial Statements:
The IRDA (Preparation of Financial Statements and Auditor's Report of Insurance Companies)
Regulations, 2002 provide that-
An insurer carrying on life insurance business shall comply with the requirements of
Schedule' A' to prepare financial statements.
An insurer carrying on general insurance business shall comply with the requirements of
Schedule 'B' to prepare financial statements.
The Report of the Auditors on the Financial Statements of every insurer/ re-insurer shall be in
conformity with the requirements of Schedule 'C'.
The said regulation further provides that financial statements comprising (i) Balance
Sheet, (ii) Receipts and Payments Account (Cash Flow Statement) (iii) Profit & Loss Account
(Shareholders' Account) and (iv) Revenue Account (policyholders' Account) shall be in
conformity with the Accounting Standards (AS) issued by the Institute of Chartered
Accountants of India to the extent applicable to the insurer except that:
Accounting Standard 3-Cash-flow Statement shall be only under Direct Method
Accounting Standard 13-Accounting for Investment shall not be applicable
Accounting Standard 17-Segment reporting shall apply to all insurers irrespective of the
requirements for listing and turnover mentioned therein.
Section 2C of the Regulation provides that all words and expressions used herein and not
defined in the Insurance Act, 1938 or in the IRDAAct, 1999 or in the Companies Act, 1956
shall have the meanings respectively assigned to those Acts. However, regulatory provisions
prescribed by the IRDA and the specific and relevant Accounting Standards promulgated by the
Institute of Charted Accountants of India are being separately discussed in detail in subsequent
units.
Financial statements of insurance companies comprise the following as stated earlier:
Balance sheet,
Revenue accounts,
Profit and loss account, and
Receipts and payments account
Besides the financial statements, the annual reports of an insurance company also contain
the following statutory documents for the review and analysis of the various interested groups
including shareholders, policyholders, regulators, reinsurers, employees, co-insurers, etc.
1. Report of the board of directors
2. Management report
3. Auditors report
4. Segment reporting
5. Significant accounting policies
6. Notes and disclosures forming part of accounts
Let us now discuss the above financial statements and reports with reference to legal
requirements, accepted principles and practices with a few examples and exercises. Certain
examples with hypothetical data are also given in Annexure for clarity of understanding of
students in respect of financial statements
Directors Report: legal Requirement as Regards Directors Report (Companies Act 1956)
As per Section 217 of the Companies Act, 1956 there shall be attached to every balance
sheet laid before a company general meeting a report by its Board of Directors with respect to
following particulars:
The state of affairs of the company.
The amounts, if any, which it proposes to carry to any reserve in balance sheet.
The amount, if any, which it recommends, should be paid by way of dividend.
The material changes and commitments, if any, affecting the financial position of the
company, which have occurred between the end of the financial year of the company to
which the balance relates and the date of the report.
The technology absorption, foreign exchange earnings and outgo and the manners
thereof.
The material changes, if occurred during the financial year in respect of the nature and
class of business of the company or its subsidiary.
The statement showing the name of every employee of the company who, if employed
throughout the financial year, was in receipt of remuneration for that year, which in the
aggregate was not less than Rs. 24,00,000 per annum or if employed for a part of the
financial year was not less than Rs. 2,00,000 per month. Such state shall also indicate that
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 whether any such employee is a relative of any director or manager of the company.
The Directors' Responsibility Statement must mention that
a) In the preparation of the annual accounts, the applicable accounting standards
have been followed along with proper explanations relating to material departure,
b) The directors had selected such accounting policies and applied them consistently,
c) The results and estimates are reasonable and prudent so as to give.a true and fair
view of the state of affairs of the company at the end of the financial year and of
the profit or loss of the company for that period,
d) That the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of the Companies
Act, 1956 for safeguarding the assets of the company and for preventing and
detecting frauds and other irregularities and that the directors had prepared the
annual accounts on a going concern basis.
The reasons for the failure, if any, to complete the buy back within the time specified in
Section 77 A of the Act.
The fullest and explanations on every reservation, qualification or adverse remarks
contained in the auditors' report.

Common Disclosures in Directors Report Contained in the Annual Report of a General

Insurance Company:
Director report of an insurance company generally furnishes the following information
specifically as per the above requirements of the Companies Act, 1956:
1. Comparative Performance Analysis (Class-wise Underwriting Performance) for the
financial year under report with reference to previous year) as appended in Annexure
A.2 showing performance analysis of XYZ General Insurance Co. Ltd. in respect of the
following performance review for FY 2005-06.
Gross direct premium and percentage of growth over previous year
Reinsurance premium ceded
Reinsurance accepted
Net premium and percentage of growth over previous year
Increase in unexpired risks reserve and percentage to net premium
Net premium earned
Net incurred claims and percentage to net premium
Others
2. Review of accounts as an annexure to accounts
3. Profit before tax and after tax
4. Proposed dividend
5. General reserves and current year transfer of profit to that reserve
6. Total assets and the contribution of increase of fair value change account
7. Total investments, its composition/portfolio, its increase over the last year
8. Solvency margin and its change over the previous year
9. Compliance with Section 40C in regard to prescribed % of expenses

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 Financial Statements for life Insurers:
Life Insurers shall prepare Financial Statements as per specified Forms such as Revenue
Account (Form A-RA), Profit and Loss Account (Form A-PL) and Balance Sheet (Form A-BS)
as per Part V in Schedule A of Regulation III. The said financial statements will be prepared in
accordance with General Instructions for preparations as per Part III. The said financial
statements shall be supported by disclosures forming part of financial statements and the com-
ments of management report as per Part II and Part IV respectively, of the Schedule A. The
specified forms of financial statements are given hereinafter as ready reference.

Form A-BS
Balance Sheet of Life Insurance Company

Current Previous
Particulars Schedule No.
Year Year
SOURCES OF FUNDS
Shareholders' Funds:
Share capital
Reserves and surplus
Credit/debit fair value change account
Sub-total
Borrowings
Policyholders' Funds:
Credit/debit fair value change account
Policy liabilities
Insurance reserves
Provision for linked
liabilities
Sub-total
Funds for Future Appropriations
Total (Sources of Funds)
APPLICATION OF
FUNDS
Investments
Shareholders'
Policyholders'
Assets Held to Cover linked liabilities
loans
Fixed Assets
Current Assets
Cash & bank balances
Advances and other assets
Sub-total (A)
Current liabilities
Provisions
Sub-total (B)
Net Current Assets (C ) = (A-B)

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 Miscellaneous Expenditure (not written off)
Debit Balance in Profit & loss Account
(Shareholders' account)
Total (application of

Form A-RA
Revenue Account of Life Insurance Company
Policyholders Account

Particulars Schedule Current Previous

Premiums Earned-(Net)
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from Investments
(a) Interest, dividends & rent-(Gross)
(b) Profit on sale/redemption of investments
(c) Loss on sale/redemption of investments
(d) Transfer/Gain on revaluation/change in fair value*
Other Income (to be Specified)
TOTAL (A)
Commission 2
Operating Expenses Related to Insurance Business 3
Provision for DoubUul Debts
Bad debts written off
Provision for Tax
Provisions (other than taxation)
(a) For diminution in the value of
(b) Others (to be specified)
TOTAL (B)
Benefits Paid (Net) 4
Interim Bonuses Paid
Change in Valuation of liability in Respect of life
Policies
(a) Gross
(b) Amount ceded in reinsurance
(c) Amount accepted in reinsurance
TOTAL (C)
Surplus/Deficit (D) = (A)-(B)-(C)
APPROPRIATIONS
Transfer to Shareholders' Account
Transfer to Other Reserves (to be Specified)
Balance Being Funds for Future Appropriations
TOTAL (D)

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The above financial statements are to be prepared in accordance with applicable accounting
standard issued by leAL These financial statements will be supported by specified schedules
giving the required details as per regulations.

Disclosures forming part of financial statements (Life Insurer) Part II

A. The following shall be disclosed by way of notes to the balance sheet:
1. Contingent liabilities:
Partly-paid up investments
Underwriting commitments outstanding
Claims, other than those under policies, not acknowledged as debts
Guarantees given by or on behalf of the company
Statutory demands/liabilities in dispute, not provided for
Reinsurance Obligations to the extent not provided for ill accounts
Others (to be specified).
2. Actuarial assumptions for valuation of liabilities for life policies in force.
3. Encumbrances to assets of the company in and outside India.
4. Commitments made and outstanding for Loans, Investments and Fixed Assets.
5. Basis of amortization of debt securities.
6. Claims registered and remaining unpaid for a period of more than six months as on the
balance sheet date.
7. Value of contracts in relation to investments, for:

Purchases where deliveries are pending;

Sales where payments are overdue.
8. Operating expenses relating to insurance business: basis of allocation of expenditure to
various segments of business.
9. Computation of managerial remuneration.
10. Historical costs of those investments valued on fair value basis.
11. Basis of revaluation of investment property.

B.Following accounting policies shall form an integral part of the financial statements:
1. All significant accounting policies in terms of the accounting standards issued by the
ICAI, and significant principles and policies given in Part I of Accounting Principles.
Any other accounting policies, followed by the insurer, shall be stated in the manner
required under Accounting Standard AS 1 issued by the ICAL

2. Any departure from the accounting policies shall be separately disclosed with reasons
for such departure.

C.The following information shall also be disclosed:

1. Investments made in accordance with any statutory requirement together with its
amount, nature, security and any special rights in and outside India;
2. Segregation into performing/non performing investments for income recognition.
Assets to the extent required to be deposited under local laws Percentage of business sector-wise;
A summary of financial statements for the last five years, in the manner as may be prescribed by
the Authority;
Bases of allocation of investments and income thereon between Policyholders' Account and
Shareholders' Account;
Accounting Ratios as may be prescribed by the Authority.
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 Example:

Financial Statements for non-life Insurance

Non-life Insurers shall prepare Financial Statements as per specified Forms such as Revenue
Account (Form A-RA), Profit and Loss Account (Form A-PL) and Balance Sheet (Form A-BS)
as per Part V in Schedule B of Regulation 3. The said financial statements will be prepared in
accordance with General Instructions for preparations as per Part III. The said financial
statements shall be supported by disclosures forming part of financial statements and the
comments of management report as per Part II and Part IV respectively, of the Schedule B.
The specified forms of financial statements are given hereinafter as ready reference for
the purpose of necessary discussion and analytical study for financial management based on
insurance accounting.
Form B-BS
Balance Sheet: Non-Life Insurer
Particulars Schedule No. Current Year Previous
SOURCES OF FUNDS
Share capital 5
Reserves and surplus 6
Fair value change account
Borrowings 7
TOTAL
APPLICATION OF FUNDS
Investments 8
Loans 9
Fixed assets 10
Current Assets
Cash and bank balances 11
Advances and other assets 12
Sub-total (A)
Current Liabilities 13
Provisions 14
Sub-total (B)
Net Current Assets (C) = (A - B)
Miscellaneous Expenditure (not written off ) 15
Debit Balance in pal Account
TOTAL

The above financial statements are to be prepared according to the general instruction for
preparation of financial statements as specified in Part III of the IRDA Regulation. Again said
financial statements will be supported by specific disclosure forming part of financial statements
as specified by Part II and comments of management report specified by Part IV of Schedule B
of the Regulation. It should also mention about the contingent liability in respect of the following
items:
Party paid-up investments.
Underwriting commitments outstanding.
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 Claims, other than those under policies, not acknowledged as debts.
Guarantees given by or on behalf of the company.
Statutory demands/liabilities in dispute, not provided for.
Reinsurance obligations to the extent not provided for in accounts.
Others (to be specified).

Form B-RA
Non-life Revenue Account

Particulars Schedul Current Previou

1. Premium earned (Net) 1
2. Profit/loss on sale/redemption of investments
3. Others (to be specified)
4. Interest, dividend & rent (Gross)
TOTAL (A)
Particulars Schedu 2
2. Commission 3
3. Operating expenses related to insurance business 4
TOTAL (B)
Operating profit/loss from Fire/Marine/Misc.
Business C = (A - B)
APPROPRIATIONS
Transter to Shareholders' Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (to be specified)
TOTAL (C)

Form B-PL
Profit and Loss A/c of a General Insurance Company

Ratio Analysis:
Importantly, the users of financial statements cannot form any opinion on any of the trends for
their economic decisions with the company only on the basis of financial statements unless they
use various ratio analysis and trend analysis with comparative and classified accounting or
financial statement. In using the financial statement including balance sheet, and income
statements along with required disclosure and management report and computing percentage
change, trend change, component percentages, and ratios as exemplified in annexure, the finance
manager and analyst constantly search for some standard of comparison to establish whether the
information and relationship they have found are favourable or adverse for their future economic
decisions. Generally two standards of comparison used by financial analysts are (i) the past
performance of the company, and (ii) the position of the company with respect to industry
performance in the country and overseas. The insurance business is carried on with international
process, principle and perspective because of its very nature of international character. So its
trend analysis or trend percentage needs to be compared with industry data and international
standard to judge the company's position in respect of growth, profitability, liquidity, solvency,
etc. In the following table, certain performance analysis has been done with some hypothetical
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 figures just to show accounting information are used for trend analysis.

Performance Analysis and Trend Percentage (rs. In Lakh) of Ram Insurance Ltd.

Information 2009-10 2010-11 Remarks/Observations of Analyst

1 Gross direct premium 5,676 5,103 Growth in the current year
2 Percentage growth 11% 4% Better growth in the current year
3 Reinsurance accepted 332 314 More acceptance in the current year
4 Reinsurance Ceded 1665 1522 More retention in the current year
5 Net premium 4342 3895 Net premium increase in the current year
Increase over previous year 11% 7% Better growth trend in the current year
% to gross premium 77% 76% Better trend in current year
These ratios are the most vital tools of financial analysis in management accounting. The
corporate management will take many financial decisions for their strategic issues. With this
accounting information many more analysis like the following few can be done.
Gross Premium to Shareholders' Funds Ratio (Rs. in lakh)
2009-10 2010-11
1. Gross Premium 5675.54 5103.16
2. Shareholders' Fund 4161.69 3735.22
3. Ratio (times) 1.36 1.37

Better the ratio, greater is the capacity utilization and better will be the return. But again this ratio must
be within permissible limits laid down by regulators.

Net Retention Ratio

Gross Premium Net Premium Retention Ratio P. Y. Retention
Fire 1,103.49 830.76 75.28% 78.12%
Marine 349.33 164.38 47.05% 55.97%
Misc. 4,222.73 3,347.52 79.27% 77.46%
Total 5,675.54 4,342.65 76.52% 76.33%
What does it indicate? What is the necessity of comparative study?
What does excessively high or abnormally low retention ratio imply?

Fund and Investment: How to calculate Shareholders' Fund and Policyholders' Fund.
Shareholders' Fund (2010-11) (Rs. in lakh)
Share Capital 200.00
Capital Reserve 0.06
General Reserve 4,622.79
Misc. Reserve (-)14.82 4,808.03
Policyholders' Fund (2010-11) (Rs. in lakh)
Unexpired Reserves 2,253.51
Outstanding Claims 5,505.40 7,758.91
Total Funds 12,566.94

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Ratio between the two funds: 38:62

Total Investments 2010-11 2009-10

In India 20344.89 14238.54
Outside India 30.36 336.69
Total Investments 20375.25 14575.23

Long Term 20274.07 14195.57

Short Term 391.18 379.66
Total Investments 20665.25 14575.23

Government Investment 4459.81 3989.16

Equity & Debt 16205.44 10586.07
Total Investments 20665.25 14575.23

Cash Flow Statement

Cash flow statement is useful in providing users with financial statements with a basis to assess
the ability of the firm to generate cash and cash equivalent and the needs of the firm to utilize
those cash flows. The financial decisions that are taken by users require an evaluation of the
ability of the firm to generate cash and cash equivalent and the timing and certainty of their
generation. In insurance industry, the cash flow statement is of prime importance to the users of
the financial statements as the insurance company carries on risk-taking business dealing with
intangible product, i.e., promise to indemnity loss in future as and when accident will occur in
consideration of premium collected currently. The insurance companies need to have both
solvency and liquidity sufficiently to pay off their liabilities for claims at the time of accident,
i.e., occurrence of perils. Thus, an insurer should always prepare a cash flow statement and
should present it for each period for which financial statements are presented as per regulatory
norms and forms. As per the IRDA Regulations, Cash Flow statement in an insurance company
is to be prepared in a Direct Method where AS 3 will not be applicable. A cash flow statement, if
used in conjunction with other financial statements, provides information that enables the User to
evaluate the charges in the net assets of the insurance company and its financial structure
(including its liquidity and solvency). For the purpose of preparation of cash flow statement of an
insurance company, following terms need to be defined for proper interpretation and use.
1. Cash comprises on hand and demand deposits with banks of the corporate office and its all
operational units including overseas ones.
2. Cash equivalents are short term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.
4. Operating activities are the principal revenue-producing activities of a firm (insurer) and other
activities that are not investing or financing activities. In insurance company cash flow from
operating activates (insurance activities) is a key indicator of the extent to which the
operations of the enterprise have generated sufficient cash flows to maintain the operating
capability of the insurers, pay claims, commission, management expenses and dividends, and
repay loans and borrowings.

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5. Investing activities are the acquisitions and disposals of long term assets and other
investments not included in cash equivalent.
6. Financing activities are activities that result in changes in the size and composition of the
shareholders' funds and policyholders' funds (in case of insurance company) and borrowings
of the firm.
7. Preparation of cash flow statement Includes classification and segregation of operating,
investing and financing activities.

Direct Method of cash Flow Statement

Cash Flows from Operating Activities Amount Total
Cash receipts from customers .
Cash paid to suppliers and employees
Cash generated from operations
Income taxes paid
Cash flow before extraordinary item
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cash Flows from Investing Activities
Purchase of fixed assets
Proceeds from sale of equipment
Interest received
Dividends received
Net cash from investing activities
Cash Flows from Financing Activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayment of long-term borrowings
Interest paid Dividends paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period

Indirect Method of Cash Flow Statement

Cash Flows from Operating Activities Amount Total
Net profit before taxation, and extraordinary item
Adjustments for
Depreciation
Foreign exchange loss
Interest income
Dividend income
Interest expense
Operating profit before working capital changes

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Increase in sundry debtors
Decrease in inventories
Decrease in sundry creditors
Cash generated from operations
Income tax paid
Cash flow before extraordinary item
Proceeds from earthquake disaster settlement
Net cash from operating activities
Cash Flows from Investing Activities
Purchase of fixed assets
Proceeds from sale of equipment
I nterest received
Dividend received
Net cash flows from financing activities
Cash Flows from Financing Activities
Proceeds from issuance of share capital
Proceeds from long-term borrowings
Repayment of long-term borrowings
Interest paid
Dividend paid
Net cash used in financing activities
Net increases in cash and cash equivalents
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period

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Example of Financial Statement of a Non-life insurance companies:

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144
145
Example of Financial Statements of Life Insurance Companies

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147
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Self-Assessment Questions:
Question 1: Define the legal requirements of Directors Report as per the Companies Act 1956.
Question 2: State IRDA requirements regarding the Financial Statements.
Question 3: Draft Balance sheet and Revenue Account of a life insurance company using
imaginary figures.
Question 4: Prepare the dummy financial statements of a non-life insurance company.

References:
Mishra, K.C. and Guria, R.C.(2009), Practical Approach to General Insurance
Underwriting, Cengage Learning, Delhi.
Gupta C. B., (2005), Business Organization and Management, Sultan Chand & Sons,
New Delhi.
Gupta P. K., (2005), Insurance and Risk management, Himalaya Publisher, New Delhi.

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