Frequently Asked Question

What is Insurance?

Insurance is a method of managing risk, primarily used to protect against the financial impact of unexpected, uncertain events. It involves transferring the financial burden of potential losses from one entity to another, in exchange for a fee. Insurance involves two parties: the policyholder (the insured) and the insurer (the insurance company). The policyholder pays a premium, usually at regular intervals, to the insurer. In return, the insurer agrees to cover the policyholder’s financial losses in specified circumstances. The policyholder receives a document called an insurance policy, which outlines the conditions under which the insurer will provide compensation.

How does Insurance Work?

When an individual purchases an insurance policy, they pay a premium to the insurance company. This premium is pooled together with the premiums from other policyholders who have similar coverage. The collected funds form a pool used to settle claims when needed. The underlying assumption is that not all policyholders will need to file claims, making it a viable arrangement for the insurer to manage.

Types of Insurance

Insurance serves many different purposes and is categorized into two main types: Life Insurance and Non-Life Insurance. Within the Non-Life category, there are numerous specific types of insurance:

Life Insurance: Coverage in the event of death or injury of the policyholder.
Health Insurance: Provides medical and accident coverage in case of illness or injury.
Motor Insurance: Covers damage to vehicles and third-party claims arising from accidents.
Travel Insurance: Protects against losses such as lost luggage, illness, or accidents while traveling.
Credit Insurance: Safeguards loans against unforeseen events or defaults.
Property Insurance: Covers properties like homes, factories, and movable assets against risks such as fire, theft, and calamities.
Fire Insurance: Protects property against fire, accidents, floods, and other perils.
Marine Insurance: Covers risks associated with sea travel, including damage to ships, cargo, and freight.
Professional Indemnity Insurance: Provides coverage for professionals against errors, negligence, or omissions while carrying out their work.

Principles of Insurance

The operation of insurance is based on several key principles that apply to all parties involved:

Insurable Interest: The policyholder must have a financial interest in the life, property, or event being insured. Without this interest, they cannot legally insure the risk.
Indemnity: The goal of indemnity is to restore the insured to the same financial position they were in before the loss occurred. This principle doesn't apply to life insurance, as human life cannot be replaced.
Utmost Good Faith: Both the insurer and the policyholder must act with honesty and transparency in their dealings.
Contribution: If more than one insurer is responsible for the same loss, each insurer may share in covering the claim. This ensures that the insured does not receive more than the loss amount.
Subrogation: After paying a claim, the insurer has the right to pursue legal action to recover the loss from the responsible party.
Proximate Cause: This refers to the most immediate cause of the loss, which leads directly to the event resulting in a claim.

Insurance in India

The history of insurance in India dates back to 1818, when the Oriental Life Insurance Company was established in Kolkata to serve the European community. In 1870, the Bombay Mutual Life Assurance Society became the first Indian insurer. The National Insurance Company Ltd., founded in 1906, is the oldest insurance company still operating in India. The Life Insurance Companies Act of 1912 and the Provident Fund Act were implemented to regulate the insurance sector.

In 1999, the government liberalized the insurance industry, allowing private companies to enter the market and permitting foreign direct investment (FDI) up to 26%. By December 2000, four subsidiaries of the General Insurance Corporation of India (GIC) were de-linked and became independent insurance companies. Today, India has 24 private life insurance companies and 22 private general insurance companies, with 1 life insurance company and 6 general insurance companies in the public sector.

The insurance sector in India is rapidly growing, contributing around 7% to the country's GDP, and expanding at a rate of 15-20%. A well-developed insurance industry plays a crucial role in economic growth by providing long-term funding for infrastructure projects and strengthening the financial resilience of the nation.

Insurance Regulations

The Insurance Regulatory and Development Authority of India (IRDAI) is the primary regulatory body overseeing the insurance industry. It sets guidelines for life insurance companies and ensures that the interests of policyholders are protected.

Other key organizations supporting the functioning of the insurance sector include:

Tariff Advisory Committee: Regulates rates, benefits, terms, and conditions set by life insurance companies.
Insurance Association of India: The umbrella organization for all insurance companies in India, with two councils — the Life Insurance Council and the General Insurance Council.
Ombudsman: Addresses grievances related to insurance claim settlements, providing a redressal mechanism for policyholders.

Insurance Terms

Insured: The individual or entity whose life, health, or property is covered by an insurance policy.
Insurer: The company or individual that provides coverage against risks in return for a premium.
Premium: The amount paid by the policyholder to the insurer for coverage.
Sum Assured: The amount payable by the insurer to the insured or their beneficiaries in the event of a claim.
Claim: A request for compensation made by the insured to the insurer after a covered event occurs.
Broker: An intermediary who helps policyholders find suitable insurance policies from various companies. Brokers are distinct from agents, as they deal with multiple insurers and can negotiate better deals for clients.
Certificate of Insurance: A document that proves the insured's coverage, listing policy details such as the policy number and validity dates.
Cover Note: A temporary certificate of insurance issued before the official policy is issued. It is valid for up to 60 days and serves as proof of insurance coverage until the final policy is delivered.