Fundamentals of Insurance CBCFB4T05

Syllabus topics (RTMNU)

• Insurance: Concept, History, definition, meaning, scope & Importance, Purpose and need of insurance, terminologies
• Types of Insurance: Life Insurance, Health Insurance, Fire insurance, General insurance
• Insurance as a Social Security Tool: Functions, Challenges with Insurance as a Social Security tool, low Confidence in Social Security
• Insurance and economic development: Protecting against financial loss, Promoting economic growth, providing capital, and stabilising the economy in crisis

Insurance: Concept, Meaning and Definition

Concept: Insurance is a method of sharing risk. Many people who face the same risk pay a small amount (premium) into a common fund, and the few who actually suffer a loss are paid from this fund. "The loss of a few is shared by many."

Meaning: Insurance is a contract in which one party (the insurer) agrees, in return for a premium, to pay the other party (the insured) a fixed sum on the happening of an event (death, maturity) or to make good the actual loss caused by a risk (fire, accident, theft).

Definition: "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 that risk." – Sir William Beveridge.

History of Insurance

• Ancient times – traders in Babylon and China spread cargo risk; Indian texts like Manusmriti and Kautilya's Arthashastra mention pooling of resources for disasters.
• Marine insurance is the oldest form; it developed in Italy and England. Lloyd's of London began in Edward Lloyd's coffee house in the late 17th century.
• Fire insurance grew after the Great Fire of London (1666).
• Life insurance in India – Oriental Life Insurance Company, Calcutta (1818) was the first life insurer; Bombay Mutual Life Assurance Society (1870) was the first Indian-owned life insurer.
• General insurance in India – Triton Insurance Company, Calcutta (1850); Indian Mercantile Insurance (1907) was the first Indian general insurer.
• Later: Insurance Act 1938, LIC 1956, GIC 1972-73, IRDA 1999 (see Units II and III).

Scope and Importance of Insurance

Scope covers life (death, old age, maturity), health (hospital costs), property (fire, theft, flood), liability (third-party motor, professional), marine (ship and cargo), and social insurance (government schemes).

1. To individuals – security to family on death, savings habit, tax benefit, peace of mind.
2. To business – protects assets and profits, helps get bank loans (banks insist on insurance of stock), encourages new ventures.
3. To society – reduces poverty and dependence after disasters, supports widows, old and sick.
4. To the nation – mobilises savings for long-term investment in infrastructure and government securities.

Purpose and Need of Insurance

1. Provide certainty – converts uncertain big loss into certain small premium.
2. Protection – against financial loss from death, illness, fire, accident.
3. Risk sharing – loss is spread over many.
4. Savings and investment – endowment and pension policies build savings.
5. Loss prevention – insurers promote fire safety, health check-ups.
6. Credit support – policies can be pledged for loans.

Insurance Terminologies

Types of Insurance

• Life Insurance – pays a sum on death of the insured or on maturity. Types: term plan (pure risk cover, low premium), endowment (cover + savings), whole life, money-back, ULIP (unit linked), pension/annuity plans.
• Health Insurance – pays hospitalisation and medical costs: individual, family floater, critical illness, senior citizen, group health policies. Cashless treatment at network hospitals through TPAs (Third Party Administrators).
• Fire Insurance – covers loss or damage to property by fire, lightning, explosion and allied perils (e.g., Standard Fire and Special Perils policy). Based on indemnity – only actual loss is paid.
• General Insurance – all non-life insurance: fire, marine (ship, cargo, freight), motor (third-party cover compulsory under the Motor Vehicles Act), health, travel, crop (PMFBY), liability, burglary.

Insurance as a Social Security Tool

Social security means protection given by society to its members against old age, sickness, disability, death of earning member and unemployment. Insurance is a major tool for this.

Functions:

1. Income support to the family on death or disability of the earner (PMJJBY, PMSBY).
2. Health protection for poor families (Ayushman Bharat).
3. Old-age income through pensions and annuities.
4. Employees' social insurance (ESIC for workers).
5. Protection of farmers against crop loss (PMFBY).

Challenges with insurance as a social security tool:

• Low awareness and low financial literacy, especially in rural areas.
• Large unorganised sector – workers have irregular income and cannot pay premium regularly.
• Small sum assured – cover is often too little.
• Claim delays, paperwork and rejection.
• Poor reach of hospitals and insurers in villages.
• Mis-selling by agents.

Low confidence in social security: People often distrust insurance because of claim rejections, hidden conditions, past mis-selling and slow government processes. Many still depend on family, gold and land for security. Building trust needs simple products, quick claims, digital records and awareness drives.

Insurance and Economic Development

1. Protecting against financial loss – businesses and families recover from fire, flood or death without falling into poverty; production continues.
2. Promoting economic growth – with risk covered, entrepreneurs take up new projects, banks give more loans, and trade (marine insurance) grows.
3. Providing capital – insurers collect huge premiums and invest them in government securities, infrastructure, shares and bonds; LIC is one of the largest investors in India.
4. Stabilising the economy in crisis – claim payments after disasters (floods, cyclones, COVID-19) put money back into the economy, support demand and reduce the burden on government.

Likely exam questions

1. (Long, 8/16 marks) Define insurance. Explain its history, scope, importance and need.
2. (Long, 8/16 marks) Explain insurance as a social security tool. Discuss its role in the economic development of a country.
3. (Short, 4 marks) Explain any four insurance terminologies: premium, sum assured, nominee and underwriting.
4. (Short, 4 marks) Write a short note on types of insurance.
5. (Short, 4 marks) State the challenges of insurance as a social security tool.

Syllabus topics (RTMNU)

• Insurance in India: Concept, Evolution, Meaning, function, Scope and Importance, challenges
• Functions of insurance companies & intermediaries: Underwriting, Claims Management, Pricing and Premium Setting, Risk Management, Reinsurance
• Insurance Agents, Brokers, and Other Intermediaries
• The role of regulators and other bodies connected with insurance: Licensing and Supervision, Solvency and Financial Stability, Consumer Protection, Market Conduct, Rate Regulation and Pricing, Claims Oversight
• Income Tax Exemptions and Deductions in India: Tax benefits on insurance (Section 80D), Scope and Nature

Insurance in India: Concept, Evolution and Meaning

Meaning: The insurance market in India is the system of insurers (life, general, health and reinsurance companies), intermediaries (agents, brokers, banks) and the regulator (IRDAI) through which risk cover is bought and sold.

Functions, Scope, Importance and Challenges

• Functions: providing protection, collecting and pooling premium, assessing risk, paying claims, investing funds, promoting risk prevention.
• Scope: life, health, motor, fire, marine, crop, travel, cyber, liability and reinsurance; serves individuals, MSMEs, large companies and government schemes.
• Importance: long-term funds for infrastructure, employment to lakhs of agents, social security, support for bank lending and trade.
• Challenges: low insurance penetration, low awareness in rural areas, mis-selling, high claim rejection in some segments, fraud, rising medical costs, climate-related disasters, and need for trust and simple products.

Functions of Insurance Companies

1. Underwriting – studying the proposal (age, health, property condition), classifying the risk, and deciding whether to accept it, on what terms and premium. E.g., a smoker pays higher life premium.
2. Claims Management – receiving the claim, verifying documents, surveying the loss (surveyors in general insurance), and settling it fairly and quickly. IRDAI fixes time limits for settlement.
3. Pricing and Premium Setting – actuaries calculate premium using mortality tables, loss history, expenses and expected return on investment; premium must be adequate, fair and not excessive.
4. Risk Management – the insurer manages its own risk by spreading business, avoiding too much concentration, keeping reserves and investing safely.
5. Reinsurance – "insurance of insurers": an insurer passes part of a big risk to a reinsurer (e.g., GIC Re). It protects the insurer from huge single losses like a refinery fire or a cyclone.

Insurance Agents, Brokers and Other Intermediaries

Role of Regulators and Other Bodies

The main regulator is the Insurance Regulatory and Development Authority of India (IRDAI), Hyderabad. Other bodies: Life Insurance Council and General Insurance Council (industry bodies), Insurance Ombudsman (grievances), Insurance Information Bureau (data), Insurance Institute of India (training).

1. Licensing and Supervision – grants registration to insurers and licences to agents/brokers; inspects their working; can cancel registration.
2. Solvency and Financial Stability – insurers must keep assets above liabilities by a required solvency margin (IRDAI expects a solvency ratio of 150%); rules on investment of policyholders' money.
3. Consumer Protection – free-look period (time to return a policy if not satisfied), grievance redressal (Bima Bharosa portal), Insurance Ombudsman, clear disclosure rules.
4. Market Conduct – checks mis-selling, false advertisements, unfair practices; limits on commission and expenses.
5. Rate Regulation and Pricing – products need IRDAI approval (file-and-use / use-and-file); third-party motor premium is fixed by the regulator.
6. Claims Oversight – fixes time limits for claim settlement, watches claim-settlement ratios and penalises delay.

Income Tax Exemptions and Deductions: Tax Benefits on Insurance (Section 80D)

Section 80D of the Income-tax Act, 1961 allows a deduction from gross total income for health insurance (mediclaim) premium paid by an individual or HUF.

So the maximum total deduction is ₹1,00,000 (self senior citizen ₹50,000 + senior citizen parents ₹50,000). For uninsured senior citizens, medical expenditure up to ₹50,000 is allowed.

Nature and scope:

• Available only to individuals and HUFs.
• Premium must be paid by any mode other than cash (cash allowed only for preventive health check-up).
• It is a deduction, not an exemption – it reduces taxable income.
• Available only under the old tax regime; the new regime (Section 115BAC) does not allow it.
• Related benefits: life insurance premium deduction under Section 80C (within ₹1,50,000), and maturity amount exempt under Section 10(10D) subject to conditions.

Likely exam questions

1. (Long, 8/16 marks) Trace the evolution of the insurance market in India. Explain its functions, importance and challenges.
2. (Long, 8/16 marks) Explain the functions of insurance companies and the role of the regulator in the insurance market.
3. (Short, 4 marks) Distinguish between an insurance agent and an insurance broker.
4. (Short, 4 marks) What is reinsurance? Why is it needed?
5. (Short, 4 marks) Explain the tax benefits on health insurance under Section 80D.

Syllabus topics (RTMNU)

• Insurance Act, 1938: Introduction, Purpose, Historical Background, Regulation of Insurance Companies, Financial Provisions, Amendments and Reforms
• Life Insurance Corporation Act, 1956: Introduction, Purpose, Historical Background, Functions and Powers of LIC, Capital and Management, Licensing and Regulation, Amendments and Reforms
• General Insurance Business (Nationalization) Act, 1972: Introduction, Features, Nationalization Process, Regulation and Oversight, Post-Nationalization Developments
• Insurance Regulatory and Development Authority Act, 1999 (IRDA): Introduction, Purpose, Importance, Functions and Powers of IRDAI, Amendments and Reforms

Insurance Act, 1938: Introduction, Purpose and Historical Background

Introduction: The Insurance Act, 1938 is the main law that governs insurance business (life and general) in India. It came into force in 1939.

Historical background: Before 1938, the Indian Life Assurance Companies Act, 1912 and the Provident Insurance Societies Act, 1912 regulated only life insurance. Many companies failed and policyholders lost money. So a comprehensive law covering both life and non-life insurance was passed in 1938.

Purpose:

1. Protect the interest of policyholders.
2. Regulate the registration and working of insurers.
3. Ensure financial soundness of insurers.
4. Control investments, accounts and management.
5. Prevent unfair practices.

Regulation of Insurance Companies and Financial Provisions

• Registration (Section 3) – no one can carry on insurance business without a certificate of registration (now from IRDAI).
• Minimum capital (Section 6) – paid-up capital of ₹100 crore for life or general insurers and ₹200 crore for reinsurers (after the 2015 amendment).
• Accounts and audit – insurers must prepare accounts, balance sheet and actuarial reports in the prescribed form and submit them.
• Investment of funds (Section 27 etc.) – policyholders' funds must be invested in approved securities in the prescribed proportion.
• Solvency margin (Section 64VA) – assets must exceed liabilities by the required margin.
• No risk without premium (Section 64VB) – cover starts only after premium is received in advance.
• Assignment (Section 38) and Nomination (Section 39) of policies.
• Section 45 – a life policy cannot be questioned on any ground after 3 years from its date.
• Control over agents, commission and management expenses; penalties for violations.

Insurance Act, 1938: Amendments and Reforms

• 1950 amendment – tighter control of investment and management.
• 1999 – with the IRDA Act, powers of the Controller of Insurance shifted to IRDA; private insurers allowed with foreign holding up to 26%.
• Insurance Laws (Amendment) Act, 2015 – FDI raised to 49%, IRDA renamed IRDAI, foreign reinsurers allowed to open branches, stronger penalties, Section 45 revised.
• 2021 – FDI limit raised to 74%.
• 2025 – the Union Budget announced 100% FDI for insurers investing the whole premium in India; an amendment law followed (check the current position).

Life Insurance Corporation Act, 1956

Introduction and historical background: By 1956 about 245 Indian and foreign life insurers and provident societies were working in India; many were badly managed and failed. The government took over management by an ordinance in January 1956 and passed the LIC Act, 1956. LIC was set up on 1 September 1956 by merging all these companies.

Purpose: to spread life insurance widely, especially in rural areas; to give full security to policyholders; to mobilise savings for national development; to run the business with economy and efficiency.

Functions and powers of LIC (Section 6):

1. Carry on life insurance business in India and abroad.
2. Carry on capital redemption and annuity business.
3. Invest its funds and give loans (e.g., loans against policies, housing loans through LIC Housing Finance).
4. Set up subsidiaries (LIC Pension Fund, LIC Mutual Fund, LIC Cards).
5. Do any other business the government permits.

Capital and management: The original capital of ₹5 crore was provided by the Central Government. LIC is managed by a Board of Directors headed by a Chairperson, with Managing Directors, appointed by the government. Its headquarters is in Mumbai with zonal and divisional offices.

Licensing and regulation: LIC works under the LIC Act, the Insurance Act (as applicable) and is regulated by IRDAI like other insurers. The government guarantees sums assured under LIC policies (Section 37).

Amendments and reforms: LIC lost its monopoly when private insurers entered after 1999–2000. The LIC Act was amended in 2021 (through the Finance Act) to allow listing; LIC's IPO came in May 2022 and its shares are listed on NSE and BSE, while the government remains the majority owner.

General Insurance Business (Nationalization) Act, 1972

Introduction: This Act nationalised the general (non-life) insurance business. It came into effect on 1 January 1973.

Features and nationalisation process:

1. About 107 Indian and foreign general insurers were taken over.
2. They were merged into four companies: National Insurance (Kolkata), New India Assurance (Mumbai), Oriental Insurance (New Delhi) and United India Insurance (Chennai).
3. General Insurance Corporation of India (GIC) was formed as the holding company of these four.
4. Compensation was paid to the former owners.
5. Aim: serve the needs of the economy, ensure fair premium and promote general insurance across the country.

Regulation and oversight: GIC supervised and coordinated the four subsidiaries; the government controlled them; tariffs were fixed by the Tariff Advisory Committee.

Post-nationalisation developments: After 2000 private general insurers entered. In 2000 GIC was made the national reinsurer (GIC Re), and by the 2002 amendment the four companies were delinked from GIC and made directly government-owned. Tariffs were removed (detariffing) from 2007. The 2021 amendment removed the rule that the government must hold at least 51% in these companies.

IRDA Act, 1999 (Insurance Regulatory and Development Authority)

Introduction and purpose: On the recommendation of the Malhotra Committee (1994), the IRDA Act, 1999 set up a statutory, independent regulator in April 2000. Headquarters: Hyderabad. It was renamed IRDAI in 2015. Purpose: protect policyholders' interests and regulate, promote and ensure orderly growth of the insurance industry.

Importance: opened insurance to private and foreign players; brought competition, better products and service; built confidence through strong supervision.

Composition: Chairperson, up to five whole-time members and up to four part-time members, appointed by the Central Government.

Functions and powers of IRDAI (Section 14):

1. Issue, renew, modify, suspend or cancel registration of insurers.
2. Protect policyholders in matters of nomination, claims, surrender value and policy terms.
3. Specify qualifications and code of conduct for agents, brokers and intermediaries; license surveyors.
4. Promote efficiency and professional organisations in insurance.
5. Regulate investment of funds and maintain solvency margins.
6. Call for information, inspect, investigate and audit insurers.
7. Control rates, terms and conditions where needed; adjudicate disputes between insurers and intermediaries.
8. Specify the share of business in rural and social sectors.

Amendments and reforms: 2015 renaming and wider powers; regulations on health portability, standard products (Arogya Sanjeevani, Saral Jeevan Bima), Bima Sugam digital marketplace, and the goal "Insurance for All by 2047".

Likely exam questions

1. (Long, 8/16 marks) Explain the purpose, historical background and main provisions of the Insurance Act, 1938 along with its amendments.
2. (Long, 8/16 marks) Explain the purpose and importance of the IRDA Act, 1999. Discuss the functions and powers of IRDAI.
3. (Short, 4 marks) State the functions and powers of LIC under the LIC Act, 1956.
4. (Short, 4 marks) Write a note on the nationalisation of general insurance in 1972.
5. (Short, 4 marks) What are the post-nationalisation developments in general insurance?

Syllabus topics (RTMNU)

• Market Growth and Trends: Non-Life Insurance Growth, Life Insurance Expansion, Market value and Share, FDI limit, Insurance penetration
• Technological Advancements: Artificial Intelligence (AI) and Machine Learning, Data Analytics, Blockchain Technology, Internet of Things, Digital Platforms
• Foreign Direct Investment: FDI Cap, Recent Changes in FDI Policies, Ownership and Control
• Insurance Schemes provided by the government: Ayushman Bharat, PMJJBY, PMSBY, Rashtriya Swasthya Bima Yojana (RSBY)

Market Growth and Trends

• Non-Life Insurance Growth – general insurance has grown fast after private entry. Health insurance is now the largest segment of non-life premium, followed by motor. Growth drivers: COVID-19 awareness, rising medical costs, new vehicles, crop insurance (PMFBY), and standard products like Arogya Sanjeevani. Standalone health insurers (e.g., Star Health) and private insurers (ICICI Lombard, Bajaj Allianz) have gained share.
• Life Insurance Expansion – more term plans, pension and annuity products, ULIPs and group policies. Private life insurers (SBI Life, HDFC Life, ICICI Prudential) are growing fast through bancassurance and digital sales, while LIC still has the largest share of the life market.
• Market value and share – the market is shared between public sector insurers (LIC, New India Assurance, etc.) and many private insurers. Several insurers are listed on stock exchanges (LIC, SBI Life, HDFC Life, ICICI Lombard, Star Health), showing investor confidence. (For current premium and share figures, check the latest IRDAI Annual Report.)
• FDI limit – raised step by step: 26% (2000), 49% (2015), 74% (2021); 100% announced in the 2025 Budget (details below).
• Insurance penetration – the ratio of total premium to GDP. Insurance density = premium per person. India's penetration is still low compared with the world average, and non-life penetration is especially low. IRDAI's mission "Insurance for All by 2047" aims to raise it. (Check the latest IRDAI figure; do not memorise an old number.)

Technological Advancements

1. Artificial Intelligence (AI) and Machine Learning – chatbots answer customer queries 24×7; AI checks claim photos (e.g., motor damage) and settles small claims quickly; ML models detect fraud and help underwriting by studying past data.
2. Data Analytics – study of large data on customers, health and claims to set fair premiums, design personalised products, predict lapses and target rural markets.
3. Blockchain Technology – a secure shared digital ledger; helps in tamper-proof policy records, faster claim settlement, sharing data between insurers to stop duplicate claims, and smart contracts that pay automatically when a condition is met (e.g., flight delay).
4. Internet of Things (IoT) – connected devices like car telematics and fitness bands; "pay-as-you-drive" motor insurance and wellness discounts in health insurance based on steps walked.
5. Digital Platforms – online buying and renewal, web aggregators, insurer apps, DigiLocker for e-policies, e-Insurance Accounts (e-IA), and IRDAI's planned Bima Sugam – a single online marketplace to buy, service and claim insurance.

Benefits: lower cost, faster service, better fraud control, wider reach. Challenges: data privacy, cyber risk, digital divide in villages.

Foreign Direct Investment: FDI Cap and Recent Changes

FDI (Foreign Direct Investment) means a foreign company investing in the share capital of an Indian insurance company. Example: joint ventures like Bajaj Allianz (Allianz of Germany) and ICICI Prudential (Prudential of UK).

Why FDI is raised: brings long-term capital, new technology and global expertise; increases competition, products and penetration; helps achieve "Insurance for All by 2047". Insurance intermediaries (brokers, TPAs, etc.) were already allowed 100% FDI.

Ownership and Control: With 74% FDI, conditions apply: the majority of directors and key management persons must be resident Indians; at least one of the Chairperson, MD or CEO must be a resident Indian; and a part of profits must be retained as general reserve when solvency is low. The idea is to keep effective control and policyholders' money safe in India while allowing foreign capital.

Insurance Schemes Provided by the Government

• PMJJBY – a one-year renewable term life cover (1 June to 31 May); offered through LIC and other life insurers via banks.
• PMSBY – a one-year accident cover renewable every year; very cheap so that even poor people can join.
• Ayushman Bharat PM-JAY – the world's largest government-funded health assurance scheme; cashless and paperless treatment at empanelled public and private hospitals using the Ayushman card; covers pre-existing diseases from day one.
• RSBY – launched by the Ministry of Labour and Employment; used a biometric smart card for cashless treatment in empanelled hospitals; it has been merged (subsumed) into PM-JAY.

Likely exam questions

1. (Long, 8/16 marks) Discuss the recent trends in market growth of life and non-life insurance in India. Explain the role of technology in the insurance sector.
2. (Long, 8/16 marks) Explain the insurance schemes provided by the Government of India: Ayushman Bharat, PMJJBY, PMSBY and RSBY.
3. (Short, 4 marks) What is insurance penetration? Why is it low in India?
4. (Short, 4 marks) Write a note on the FDI cap and recent changes in FDI policy in insurance.
5. (Short, 4 marks) Explain the use of blockchain and IoT in insurance.