flowchart TB
I[Insurance] --> L[Life<br/>LIC + 23 private]
I --> NL[Non-Life<br/>4 PSU + 21 private]
I --> H[Health<br/>standalone HIs 7]
I --> R[Re-insurance<br/>GIC Re · foreign branches]
I --> Reg[IRDAI<br/>Hyderabad · IRDA Act 1999]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
69 Insurance: Types of insurance — Life and Non-life insurance; Risk classification and management; Factors limiting the insurability of risk; Re-insurance; Regulatory framework of insurance — IRDA and its role
69.1 Concept of Insurance
Insurance is “a contract whereby one party (the insurer) undertakes — in exchange for a premium — to indemnify the other (the insured) against a defined loss arising from a specified contingency”. It is essentially a risk-transfer and risk-pooling mechanism rooted in the law of large numbers: predict the average loss over many similar exposures and charge each a fair premium. Modern Indian insurance is regulated by IRDAI under the IRDA Act 1999 and the Insurance Act 1938.
69.2 Essential Features of Insurance Contracts
TipSix Pillars of Insurance Contracts
- Utmost good faith (uberrima fides) — full disclosure by both parties.
- Insurable interest — financial stake in subject matter (life: spouse, parent, child, partner, key man; property: owner, mortgagee, lessee).
- Indemnity — make-good loss, no profit (does not apply to life and personal accident).
- Subrogation — insurer steps into insured’s rights after payment.
- Contribution — among co-insurers, pro-rata.
- Proximate cause — nearest dominant cause of loss.
69.3 Types of Insurance
TipLife vs Non-Life
| Aspect | Life Insurance | Non-Life (General) Insurance |
|---|---|---|
| Subject | Human life | Property / liability |
| Indemnity | No (assured sum) | Yes |
| Term | Long-term (years to lifetime) | Usually 1 year |
| Renewals | Periodic premiums | Annual |
| Surrender | Possible (with value) | Not generally |
| Tax (premium / payout) | §80C / §10(10D) | §80D for health |
69.3.1 Life Insurance — Major Products
TipLife Insurance Products
- Term insurance — pure protection.
- Whole-life — covers entire life.
- Endowment — protection + saving.
- Money-back — periodic payouts.
- ULIP — protection + market-linked investment.
- Annuity / pension plans — retirement income.
- Group insurance — employer/employee.
- Child plans.
69.3.2 Non-Life (General) Insurance — Categories
TipNon-Life Categories
- Health insurance — hospital, OPD, critical illness, cashless.
- Motor insurance — third-party (mandatory under MV Act 1988), own damage (comprehensive).
- Fire insurance — buildings, plant, stock.
- Marine insurance — hull, cargo (under Marine Insurance Act 1963).
- Liability insurance — product, professional, directors & officers.
- Crop insurance — PMFBY 2016 (Pradhan Mantri Fasal Bima Yojana).
- Travel, home, cyber, pet, miscellaneous.
69.4 Risk Classification & Risk Management
69.4.1 Types of Risk
TipRisk Classification
- Pure risk (insurable: loss or no-loss) vs Speculative risk (gain or loss — uninsurable).
- Static (fire, theft) vs Dynamic (technology, economic).
- Fundamental (war, earthquake — group-wide) vs Particular (auto theft).
- Personal, Property, Liability — based on object.
69.4.2 Risk Management Process
TipFive Steps of Risk Management
- Identification — what could go wrong?
- Evaluation — frequency × severity.
- Selection of technique — avoid, retain, control, transfer, share.
- Implementation.
- Review & monitoring.
69.4.3 Risk Treatment Techniques
Tip4Ts of Risk Treatment
- Tolerate (retain) — accept; self-insure / deductible.
- Treat (reduce) — loss-prevention, safety controls.
- Transfer (insure or contract) — to insurer, contractor.
- Terminate (avoid) — abandon the activity.
69.5 Factors Limiting Insurability of a Risk
TipInsurability Criteria (Mehr & Cammack)
- Large number of similar exposures — for predictability.
- Loss must be definite and measurable — time, place, amount.
- Loss must be accidental and unintentional.
- Loss not catastrophic — insurer can pay.
- Calculable chance of loss.
- Premium economically feasible — not prohibitive.
- Moral hazard limited.
69.6 Reinsurance
Reinsurance is “insurance for insurers — a primary insurer (cedent) transfers part of its risk to a reinsurer for a portion of the premium”. Indian regulator: IRDAI. Indian reinsurer: GIC Re (established 1972, restructured 2000). Branch offices of foreign reinsurers allowed since 2015 (Munich Re, Swiss Re, Hannover Re, SCOR, Lloyd’s India).
69.6.1 Reinsurance Methods
TipReinsurance Types
- Facultative — risk-by-risk negotiation.
- Treaty — predefined portfolio cover.
- Proportional — Quota-share, Surplus.
- Non-proportional — Excess of Loss (XL), Stop-loss.
- Retrocession — reinsurer reinsures with another reinsurer.
69.7 Regulatory Framework — IRDAI and Statutes
69.7.1 Key Statutes
TipStatutes Governing Insurance in India
- Insurance Act 1938 — primary statute (substantially amended 2015).
- LIC Act 1956 — nationalisation of life insurance.
- General Insurance Business (Nationalisation) Act 1972 — GIBNA.
- Marine Insurance Act 1963.
- Motor Vehicles Act 1988 — compulsory motor TP.
- IRDA Act 1999 — sets up IRDAI.
- Insurance Laws (Amendment) Act 2015 — raised FDI to 49 %.
- Finance Act 2021 — FDI to 74 % in insurance.
69.7.2 IRDAI — Composition and Role
TipIRDAI
- Headquarters: Hyderabad.
- Composition — Chairperson + 5 whole-time + 4 part-time members (max 10).
- Functions: licensing, capital adequacy, product approval, dispute resolution, consumer protection, rural & social sector quotas.
- Solvency Margin — minimum 150 %.
- File-and-Use system — replaced by Use-and-File (2021) for most products.
69.7.3 Bodies under IRDAI
TipBodies under IRDAI
- Insurance Ombudsman (12 zones) — under RPG Rules 2017.
- IIB — Insurance Information Bureau.
- IRDAI Council of Insurance Ombudsman.
- IIRM — Institute of Insurance & Risk Management (Hyderabad).
- IRDAI Insurance Repositories — for electronic insurance accounts (e-IAs).
69.8 Insurance Penetration & Density
- Penetration = premium / GDP. India ~ 4 % (life ~ 3 %, non-life ~ 1 %) (2024).
- Density = premium per capita. India ~ USD 90.
- Government target: Insurance for All by 2047.
NoteDistractor warning
PYQ trap: LIC nationalised 1956, GIC 1972; IRDA Act 1999; FDI 74 % from 2021. Indemnity does not apply to life insurance (it’s a value contract). Subrogation only in non-life.
69.9 Practice Questions
Q 01UGFEasy
"Uberrima fides" in insurance means:
View solution
Correct Option: B
**Utmost good faith** — full disclosure of material facts.
Q 02IndemnityMedium
Principle of indemnity does NOT apply to:
View solution
Correct Option: B
**Life and personal accident** — contracts of value, not indemnity.
Q 03LICEasy
LIC was set up by nationalising life insurers in:
View solution
Correct Option: B
**LIC Act 1956** — 245 private life insurers nationalised.
Q 04GIBNAMedium
General insurance was nationalised in India under GIBNA, in:
View solution
Correct Option: B
**General Insurance Business (Nationalisation) Act 1972** — created GIC and 4 subsidiaries (now PSU GIs: National, New India, Oriental, United India).
Q 05IRDAEasy
IRDA was established under:
View solution
Correct Option: C
**IRDA Act 1999** — Malhotra Committee recommendation.
Q 06FDIMedium
FDI cap in insurance in India:
View solution
Correct Option: C
**74 %** since 2021 (was 49 % from 2015; insurance intermediaries 100 %).
Q 07ReinsuranceMedium
India's domestic reinsurer is:
View solution
Correct Option: B
**GIC Re** — sole national reinsurer; foreign reinsurer branches since 2015.
Q 08Insurable interestHard
Insurable interest in marine insurance must exist:
View solution
Correct Option: B
**Marine — at loss**. (Life — at inception; Fire — both.)
Q 09SolvencyMedium
Minimum solvency margin required by IRDAI:
View solution
Correct Option: C
**150 %** — current minimum.
Q 10PMFBYMedium
PMFBY launched in 2016 covers:
View solution
Correct Option: B
**Pradhan Mantri Fasal Bima Yojana** — crop insurance.
Q 11SubrogationHard
Subrogation applies only in:
View solution
Correct Option: B
**Subrogation applies only in indemnity contracts** (non-life).
Q 12XLHard
"Excess of Loss" (XL) is a:
View solution
Correct Option: B
**XL** — reinsurer pays only above an attachment point.
Q 13Motor TPMedium
Compulsory motor third-party insurance is mandated by:
View solution
Correct Option: B
**Motor Vehicles Act 1988** — TP cover compulsory.
Q 14Pure riskMedium
Which is NOT insurable?
View solution
Correct Option: B
**Speculative risk** (gain or loss) — uninsurable.
Q 15§80DMedium
Deduction for health insurance premium under Income-tax Act:
View solution
Correct Option: C
**§80D** — health insurance premium deduction.
Q 16ProximateHard
Principle of proximate cause means:
View solution
Correct Option: C
**Active and efficient (dominant) cause** nearest in time.
Q 17MarineMedium
Marine Insurance Act in India:
View solution
Correct Option: B
**Marine Insurance Act 1963**.
Q 18Use & FileHard
IRDAI moved most non-life products from "File-and-Use" to "Use-and-File" in:
View solution
Correct Option: B
**2021** — Use-and-File for most retail products.
Q 192047Hard
Government / IRDAI vision for insurance penetration:
View solution
Correct Option: C
**Insurance for All by 2047** — IRDAI vision.
Q 20MatchMedium
Match statute with subject:
| Statute | Subject | ||
| (i) | Insurance Act 1938 | (a) | Establishment of IRDA |
| (ii) | LIC Act 1956 | (b) | Nationalisation of life insurance |
| (iii) | GIBNA 1972 | (c) | Nationalisation of general insurance |
| (iv) | IRDA Act 1999 | (d) | Primary insurance statute |
View solution
Correct Option: A
1938-primary; 1956-LIC; 1972-GIBNA; 1999-IRDA.
69.10 Quick Recall
ImportantQuick recall
- 6 pillars: Utmost good faith, Insurable interest, Indemnity, Subrogation, Contribution, Proximate cause.
- Life vs Non-life: Life = value contract (no indemnity); Non-life = indemnity.
- Statutes: Insurance Act 1938 (primary), LIC Act 1956, GIBNA 1972, Marine 1963, MV Act 1988, IRDA Act 1999, Insurance Amendment 2015 (FDI 49 %), 2021 (FDI 74 %).
- IRDAI — Hyderabad; max 10 members; solvency 150 %; Use-and-File since 2021; Vision Insurance for All 2047.
- Risk treatment — 4Ts: Tolerate, Treat, Transfer, Terminate.
- Insurability — large numbers, definite, accidental, not catastrophic, calculable, economical, low moral hazard.
- Reinsurance: Facultative vs Treaty; Proportional (QS, Surplus) vs Non-proportional (XL, Stop-loss); Retrocession. GIC Re 1972.
- Schemes: PMFBY 2016 (crops); PMJJBY/PMSBY 2015; Ayushman Bharat 2018.