Irm Module 1

IRM- MODULE- 1 S.P.SEN

SYLLABUS • BASIC PRINCIPLES OF INSURANCE • INDEMNITY, INSURABLE INTEREST, MATERIALITY OF FACTS, UBERIMMAE FIDAE AND IMPLICATION, DUTY OF DISCLOSURE. • TYPES OF INSURANCE: LIFE INSURANCE, GENERAL INSURANCE, HEALTH & MEDICAL INSURANCE, PROPERTY RELATED INSURANCE, LIABILITY INSURANCE, CRITICAL ILLNESS OR DREAD DISEASE INSURANCE, REINSURANCE. • PRINCIPLES GOVERNING MARKETING OF INSURANCE PRODUCTS.

International Comparison of Insurance Penetration

Country

2002

2003

2004

Total

Life

Non- Total Life life

Non- Total Life life

Nonlife

USA

9.58

4.6

4.98

4.25

5.15

9.17

4.12

5.05

UK

14.75 10.19 4.56

13.37 8.62

4.75

12.6

8.92

3.68

Germany

6.76

3.7

6.99

3.82

6.97

3.11

3.86

Japan

10.86 8.64

2.22

10.81 8.61

2.2

9.52

6.75

2.77

India

3.26

2.59

0.67

2.88

2.26

0.62

3.17

2.53

0.65

China

2.98

2.03

0.96

3.33

2.3

1.03

3.06

2.21

1.05

World

8.14

4.76

3.38

8.06

4.59

3.48

7.99

4.55

3.43

3.06

9.61

3.17

International Comparison of Insurance Density Country

2003 Total

Life

USA

3637.7

1657.5

UK

4058.5

Germany Japan

2004 Non-life

Total

Life

Non-life

1980.2

3755.1

1692.5

2062.6

2617.1

1441.4

4508.4

3190.4

1318.0

2051.2

930.4

1120.8

2286.6

1021.3

1265.3

3770.9

3002.9

768

3874.8

3044

830.8

India

16.4

12.9

3.5

19.7

15.7

4.0

China

36.3

25.1

12.2

40.2

27.3

12.9

World

469.6

267.1

202.5

511.5

291.5

220

-Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. -Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. -Risk management- the practice of appraising and controlling risk.

FUNCTIONAL DEFINITION Insurance is a co-operative device to spread 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. Analysis shows following points: 1. Co-operative device to spread risk. 2. System to cover a number of persons who are insured against the risk. 3. The principle to share the loss on the basis of probability of loss to the risk. 4. Method to provide security against losses to the insured. 5. Co-operative device of distributing losses.

Contractual Definition Insurance is a contract where one party (insurer) agrees to pay to the other party (insured) or his beneficiary, a certain sum upon a given contingency (risk) against which insurance is sought. Analysis indicates; 1. Certain sum, called premium, is charged in consideration. 2. A large sum is guaranteed by the insurer who received the premium. 3. Payment will be made in a certain definite sum (loss or the policy amount whichever may be) 4. The payment is made only upon a contingency.

FEATURES OF INSURANCE • • • • • • • • • • • •

Offer & Acceptance Lawful object Contract Consideration Co-operative device Protection of financial risk. Good faith Contract of indemnity Certainty and contingency Subrogation Insurable interest Insurance is neither gambling nor charity.

FUNCTIONS Primary function: • Provides certainty and security. • Distributes risks. Secondary Function: 1. Provides capital. 2. Increases efficiency 3. Helps in loss reduction 4. Helps in judging viability of major project. Other Function: 1. Economic development. 2. Expansion of foreign trade 3. Provides funds to invest. 4. Encourage savings 5. Checks inflation. 6. Social security. 7. Credit facilities.

ORIGIN AND GROWTH (INDIA) • Some of the important milestones in the life insurance business in India are: • 1912 - The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. • 1928- The Indian Insurance Companies Act enacted to enable the govt. to collect statistical information about both life and non-life insurance business. • 1938- Consolidation of earlier legislation to protect the interest of the insuring public.

ORIGIN AND GROWTH (INDIA) • 1956 - 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crores from the Government of India.

ORIGIN AND GROWTH (INDIA) • The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. • Some of the important milestones in the general insurance business in India are: • 1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.

• 1907- The Indian Mercantile Insurance Ltd was set up, the first company to transact all classes of general insurance business. • 1957- General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. • 1968- The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. • 1972 - The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973.

• 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company. • The process of re-opening of the sector had begun in the early 1990s. - In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector

ORIGIN AND GROWTH (INDIA) • -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. • 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.

ORIGIN AND GROWTH (INDIA) • 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 country’s GDP.

IMPORTANCE (INDIVIDUAL) • • • • • • •

Provides security and safety. Provides peace of mind. Eliminates dependency. Source of savings. Source of investment. Protects mortgaged property. Others- family needs, old age, need for education, marriage etc.

IMPORTANCE (business) • • • • • • •

Financial help. Reduces uncertainty of business losses. Improves efficiency. Indemnification. Grant of credit facilities. Continuous business. Employee's security.

IMPORTANCE (society) • • • • • • • • •

Protection to society’s wealth. Economic growth. Maintaining standard of living. Social security. Distribution of loss. Removal of social evils. Accelerate production. Reduces inflationary pressure. Capital formation.

ESSENTIALS OF INSURANCE CONTRACT • • • • • • • • •

Written agreement. Consideration. Competency. Lawful object. Mutual faith. Certainty. Possibility of performance. Contract of subrogation. Insurable interest.

IMPORTANCE (commerce & Industry) • • • •

Economic development Earns foreign exchanges. Source of capital formation. Source of income

PRINCIPLES OF INSURANCE •

Insurable Interest- insured must be interested in the subject matter of insurance. The insured must positively stand benefited financially due to existence. A person is said to have insurable interest in the property if he is financially benefited by its existence and is prejudiced by its loss. • It must exist both at the time of the proposal and at the time of claims. In case of marine insurance insurable interest must exist at the time of claim only as it is assignable without the consent of the insurer. • Sec.7(2) of the Marine Insurance Act, 1963 provides following essentials, 1. Subject matter of insurance must be certain. 2. There must have legal relationship between insured and subject matter (owner or may possess the legal right or interest in the subject matter)

UTMOST GOOD FAITH • Utmost good faith- contract of ubereimae fidei: implies that contract require absolute and utmost good faith on the part of all the parties to the contract. • It implies absence of fraud or deceit on the part of the parties to the contract. • Parties are duty bound to disclose all material facts relating to the risk covered and underwrites.

INDEMNITY • 1. 2. 3. • • 1. 2.

Indemnity- implies to make good the loss and nothing more than the actual loss. It lays down that; The insured can be indemnified only up to the extent of actual loss. The sum of indemnity can never exceed the value of the policy taken In case of under insurance the loss is indemnified proportionally. As loss can not be measured in terms of money in case of life insurance, so life insurance contract is not a contract of indemnity. Principle of indemnity is applicable where; Loss can be measured in money terms. A mode of putting the insured after the mitigation of loss in same position in which he was placed just before the occurrence of loss.

• All insurance contract except life insurance is the contract of indemnity. • There are indirect relationship between principle of indemnity and principle of insurable interest. • The amount of compensation shall never exceed the amount of actual loss or the value of the policy. • Doctrine of subrogation applies after the settlement of claims. • Valued policies are not covered. • Different methods of indemnity are cash payment, repairs, replacements and reinstatement.

SUBROGATION • It is also known as ‘ Doctrine of Rights substitution’ and outcome of indemnity. • It is the transfer of rights and remedies of the insured in the subject matter to the insurer after indemnification. • The right of ownership of affected property passes on to the insurer. • Introduced to safeguard the interest if insurer. • The doctrine of subrogation is applicable to all contracts of indemnity even without the existence of express condition in the contract of insurance.

Features of Subrogation • Subrogation is an extension and an outcome of the principle of indemnity. • It is not applicable to life insurance contract. • It is applied to all contract of indemnity- arises only after the payment of claim to insured. • It may arise even before indemnification of the insured except in case of marine Insurance policies. • Excess amount realized by insured should refund to insurer. • It is only up to the amount of payment. • Insurer is substituted in the place of other person who act on the right and claim of the property insured.

PRINCIPLE OF CONTRIBUTION • Outcome of doctrine of indemnity and applied to all contract of indemnity. • Contribution is the right of an insurer, who has paid under a policy, to call upon other insurers or otherwise liable for the same loss to contribute the payment. The doctrine ensures equitable distribution of losses between different insurers. • Sec 80(1) of Marine Insurance Act 1963 states: where assured is over insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute to the loss in proportion to the amount which is liable under this contract. • The company shall only be liable to contribute pro-rata with any other guarantee whether by policy or otherwise held by the insured.

PRE CONDITION FOR APPLICATION

• The subject matter of insurance must be common to all policies. • The peril which causes the loss or damage must be common to all policies to attract the principle of contribution. • The policies must be legally enforceable. • The policies must be in force at the time of loss. • The insurable interest under all policies must be the same and all policies must be effected in favour of a common person (insured).

CAUSA PROXIMA • •

Proximate cause or nearest cause. The efficient or effective cause which causes the loss is called proximate cause. • It is real and actual cause of loss. It is not of much practical importance in life insurance. • In following cases proximate causes are observed; 1. War risk. 2. Suicide 3. Accident benefit.

MITIGATION OF LOSS • MINIMISE OR DECREASE THE SEVERITY OF LOSS. • CHECK ON THE BEHAVIOUR AT THE TIME OF LOSS AS IT IS IMPLIED THAT INSURED HAS TO TAKE ALL PREVENTIVE STEPS AS A PRUDENT OR REASONABLE MAN.

CLASSIFICATION ON THE BASIS OF RISK • PERSONAL INSURANCE 1. Life Insurance – dealing with life if individuals. 2. Personal accident insurance 3. Health Insurance • PROPERTY INSURANCE 1. Fire Insurance 2. Marine Insurance 3. Rural Insurance 4. Theft or Dacoity Insurance 5. Machinery Insurance 6. Aircraft Insurance 7. Motor Insurance

ON THE BASIS OF RISK (contd..) • 1. 2. 3. 4. • 1. 2. 3. 4.

LIABILITY INSURANCE Re- insurance Workmen’s compensation Insurance Public liability Insurance Motor Insurance (Third Party) GUARANTEE INSURANCE Fidelity Insurance Right Insurance Credit Insurance Hire Purchase Guarantee Insurance

COMMERCIAL POINT OF VIEW • 1. 2. • • 1. 2. 3. 4. 5. 6.

GENERAL INSURANCE Fire Insurance Marine Insurance LIFE INSURANCE SOCIAL INSURANCE Accident Sickness Disablement Maternity Old age unemployment

DEVELOPMENT POINT OF VIEW • • • • • •

MARINE INSURANCE FIRE INSURANCE LIFE INSURANCE MISCELLANEOUS INSURANCE SOCIAL INSURANCE These types of insurance are under common practice.

MARINE INSURANCE • It is an arrangement by which the insurance company or the underwriter agrees to indemnify the owner of the ship or cargo against the risk involved to marine cargo and ship. • It covers the perils of sea as well as inland risks relating to the cargos, ship, and freight etc. like the act of nature, sea perils and pirates, fire and many others. • It has two main branches such as 1) ocean Marine Insurance 2) Inland Marine Insurance or transportation insurance. • It is classified into 1) cargo insurance 2) Hull insurance and 3) Freight insurance

Cargo – goods carried by ship. It may be single or special policy covers single shipment only. Reporting or open cargo policy covers all shipment over a period of time. Floating policy is similar to reporting policy but different in the method of premium payment. Hull insurance- insurance of ship. It may be for particular journey or for a particular period. Freight Insurance- insurance for freight charges.

FIRE INSURANCE • Sec 2 of Indian Insurance Act 1938 states “fire insurance business means the business of affecting, otherwise than incidentally the some other class of insurance business, contracts of insurance against loss by or incidental to fire or other, the occurrence customarily included among the risks insured against fire insurance policies” • Fire insurance institution was established only after the “Great Fire” of London in 1660 A.D. • Indemnification of loss caused by fire.