Insurance Explained | Types of Insurance

Assume that there are 10,000 houses in a city and every year 10 houses destroyed by fire. The amount of loss occurs due to fire is Rs. 1,00,000 per house. It means the total estimated loss will be 1,00,000 x 10 = Rs.10,00,000. If this loss is divided into 10,000 house owners, the amount of share of each house owner will be Rs.100. Thus, by contributing a small amount of Rs.100 every year all the 10,000 house owners get protection against the risk of fire. This is the concept of insurance.

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What is Insurance?

Insurance is a social device for spreading the chance of financial loss among a large number of people. By insurance a person can protect himself and his dependents from loss arising from future uncertain events like fire, accidents, early death and so on. Thus the risk is not averted but the loss on the occurrence is shared by the members. The function of insurance is to spread this loss over a large number of persons through the mechanism of co-operation

Types of Insurance

Insurance can be classified into:

Life Insurance
Non-Life Insurance or General Insurance

What is Life Insurance

Life Insurance is a financial cover for a contingency linked with human life, like death, disability, accident, retirement etc. Human life is subject to risks of death and disability due to natural and accidental causes. When human life is lost or a person is disabled permanently or temporarily, there is loss of income to the household.

Though human life cannot be valued, a monetary sum could be determined based on the loss of income in future years. Hence, in life insurance, the Sum Assured ( or the amount guaranteed to be paid in the event of a loss) is by way of a ‘benefit’. Life Insurance products provide a definite amount of money in case the life insured dies during the term of the policy or becomes disabled on account of an accident.

Life insurance is a contract whereby the insurer, in consideration of a premium paid either in lumpsum or in periodical instalments, undertakes to pay an annuity or a certain sum of money either on death of the insured or on the expiry of a certain number of years

History of Life Insurance in India

The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta, which failed in 1834.
In the period of 1829, Madras Equitable Company was started for performing for life insurance trade in Madras Presidency
During 1870 – 1900, some of European based insurance companies like Albert Life Insurance, Royal Insurance, Liver Pool and London Global were dominating entire insurance industry
The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life insurance business
In 1914 Government of India started publishing returns of Insurance Companies in India.
In 1928 the Indian Insurance Companies Act was enacted
Insurance act 1938 helped to consolidate and reconstruct earlier legislation. It was implemented for view to protect the interest of the public interest and comprehensive provisions for effective control over the activities of insurers
The Insurance Amendment Act of 1950 abolished Principal Agencies
The Government of India decided to nationalise the insurance business. On 19th January 1956 nationalised the Life Insurance sector and Life Insurance Corporation of India (LIC) came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies
In 1990s Insurance sector was reopened for the private sector

Types of Life Insurance

Term Insurance: Term Insurance provides protection for a set period of time. In the event of death or Total and Permanent Disability if the benefit is offered), your dependants will be paid a benefit. In Term Insurance, no benefit is normally payable if the life assured survives the term.
Whole Life Insurance: With whole life insurance, you are guaranteed lifelong protection. Whole life insurance pays out a death benefit so you can be assured that your family is protected against financial loss that can happen after your death. It is also an ideal way of creating an estate for your heirs as an inheritance
Endowment Policy: An Endowment Policy is a savings linked insurance policy with a specific maturity date. Should an unfortunate event by way of death or disability occur to you during the period, the Sum Assured will be paid to your beneficiaries. On your surviving the term, the maturity proceeds on the policy become payable.
Money back plans or cash back plans: Under this plan, certain percent of the sum assured is returned to the insured person periodically as survival benefit. On the expiry of the term, the balance amount is paid as maturity value. The life risk may be covered for the full sum assured during the term of the policy irrespective of the survival benefits paid.
Children Policies: These types of policies are taken on the life of the parent/children for the benefit of the child. By such policy the parent can plan to get funds when the child attains various stages in life. Some insurers offer waiver of premiums in case of unfortunate death of the parent/proposer during the term of the policy.
Annuity (Pension) Plans: When an employee retires he no longer gets his salary while his need for a regular income continues. Pension is therefore an ideal method of retirement provision because the benefit is in the form of regular income. There are two types of annuities (pension plans):
1. Immediate Annuity: In case of immediate Annuity, the Annuity payment from the Insurance Company starts immediately. Purchase price (premium) for immediate Annuity is to be paid in Iumpsum in one installment only
2. Deferred Annuity: Under deferred Annuity policy, the person pays regular contributions to the Insurance Company, till the vesting age/vesting date. He has the option to pay as single premium also. The fund will accumulate with interest and fund will be available on the vesting date. The insurance company will take care of the investment of funds and the policyholder has the option to encash 1/3rd of this corpus fund on the vesting age / vesting date tax free. The balance amount of 2/3rd of the fund will be utilized for purchase of Annuity (pension) to the Annuitant.
Unit Linked Insurance Policy: Unit Linked Insurance Policies (ULIPs) offer a combination of investment and protection and allow you the flexibility and choice on how your premiums are invested. IN UNIT LINKED PLANS, THE INVESTMENT RISK PORTFOLIO IS BORNE BY YOU AS YOU ARE THE INVESTOR

What is Non-Life Insurance or General Insurance

Every asset has a value and it provides for some benefit to the owner. The benefit may be income or in some other form. So, if the asset is destroyed, there would be some financial loss to the owner. To protect this financial loss, insurance is done. All insurances, other than life insurance, fall under general insurance

History of General Insurance in India

1907: The Indian Mercantile Insurance Ltd. 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.
The General Insurance Corporation of India was incorporated as a company in 1971.
1972: The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from 1 January 1973. 107 insurers were amalgamated and grouped into four companies as National Insurance Company Ltd., New India Assurance Company Ltd., Oriental Insurance Company Ltd., and United India Insurance Company Ltd

Types of Non-Life Insurance

There are basically 3 types of Non-Life or General Insurance:

Fire Insurance: The fire insurance covers the risk of fire to property because there is every likelihood of fire spreading in big factories, godowns, warehouses, houses, shops and ships. The fire insurance not only covers the risk of fire, but also the consequential losses from such fire
Marine Insurance: The marine insurance is the oldest form of insurance and covers all the marine perils. Due to marine perils, the ship can be or destroyed, cargo can be lost and consequently there can be loss of freight. Therefore, the marine insurance covers the risk to ship, cargo and freight on the high seas
Miscellaneous: The three most common types of insurance under Miscellaneous Insurance of General Insurance are:
1. Motor Insurance: Motor insurance is compulsory under the Motor Vehicles Act, 1988. it is compulsory for all motorized vehicles to have an insurance policy against third party liability before they can come on road. It also covers damage or loss to vehicles caused by accidents, theft, fire, or natural disasters.
2. Health Insurance: With the increasing cost of health services and medical bills which a common man cannot afford. Health insurance is an insurance product which covers medical and surgical expenses of an insured individual. It reimburses the expenses incurred due to illness or injury or pays the care provider of the insured individual directly
3. Travel Insurance: Travel Insurance offers insurance protection while you travel. It protects you and/or family against travel related accidents, unexpected medical expenditure during travel, losses such as baggage loss, loss of passport etc and interruption or delays in flights or delayed arrival of baggage etc.

Insurance Sector Reforms in India

In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N. Malhotra was formed to evaluate the Indian Insurance Industry and to recommend its future direction. The basic objective of the committee was to complement the reforms initiated in the financial sector.

Committee submitted its report in 1994 and suggested:

stake in the Insurance Co. to be brought down to 50%.
Take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations.
Allowing the private company with a minimum paid up capital of INR one billion to enter the sector.
No company should deal in both life and general insurance through a single entity.
Foreign company to enter the industry only through collaboration with Indian company. FDI limit upto 49% from 26%
Setting up of an independent insurance regulatory body.
Reduce the mandatory investment of LIC Life Fund in government securities to 50% from 75%.
GIC and its subsidiaries are not to hold more than 5% in any company.
Payment of interest by LIC on delays in payment beyond of 30 days.
Computerization of operations.
Issues of long-term unit linked insurance plans

Insurance Regulatory and Development Authority of India (IRDAI)

Insurance Regulatory and Development Authority of India (IRDAI) is a statutory body set up for protecting the interests of the policyholders and regulating, promoting and ensuring orderly growth of the insurance industry in India. It was constituted as an autonomous body to regulate and develop the insurance industry. It was incorporated as a statutory body in April, 2000. Its headquarters is situated at Hyderabad, Andhra Pradesh.

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.

Duties, Powers and Functions of IRDAI

Regulate, promote and ensure orderly growth of the insurance business and re-insurance business
Issue certificate of registration, renewal, modification, withdrawal, suspension or cancellation of such registration
Protect 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
To call 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
Specify requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents
Control over management of insurers
regulate investment of funds by insurance companies
investigate and inspect the affairs of the insurers
adjudicate of disputes between insurers and insurance intermediaries.
specify the code of conduct for surveyors and loss assessors
promote efficiency in the conduct of insurance business.
To levy fees and other charges for carrying out the purposes of this Act

IRDAI Vision 2047

Insurance Regulatory and Development Authority of India (IRDAI) has committed to enable ‘Insurance for All’ by 2047. It aims that every citizen has an appropriate life, health and property insurance cover and every enterprise is supported by appropriate insurance solutions.

The focus of IRDAI is to strengthen the three pillars of the entire insurance ecosystem viz.

Insurance customers (policyholders)
Insurance providers (insurers)
Insurance distributers (intermediaries)

The focus is:

making available right products to right customers
creating robust grievance redressal mechanism
facilitating ease of doing business in the insurance sector
ensuring the regulatory architecture is aligned with the market dynamics
boosting innovation, competition and distribution efficiencies while mainstreaming technology and moving towards principle based regulatory regime

Life and Non-Life Insurance Companies in India

In India, the insurance market is dominated by two government owned companies, namely Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).

Life Insurance Corporation of India (LIC)

LIFE INSURATION CORPORATION OF INDIA (abbreviated as LIC) is an Indian government owned insurance and investment corporation. It is under the owned insurance and investment corporation. The Government of India nationalised the Life Insurance sector in 1956 and Life Insurance Corporation came into existence. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. LIC has its headquarters at Mumbai.

The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Now there are 23 private life insurance companies in India

General Insurance Company (GIC)

General Insurance Business (Nationalisation) Act was passed by the Indian Parliament in 1972 and consequently, General Insurance business was nationalized with effect from 1 January 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on 1 January 1973.

GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been de-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company.

It is notified as “Indian Reinsurer” has ceased to carry on direct insurance business with effect from 21 March 2003.

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