68 Insurance: Types and Regulation
68.1 Meaning
Insurance is a contract whereby one party (the insurer), in consideration of a payment (the premium), agrees to compensate another party (the insured) for a specified loss arising from a specified event during a specified period (vij2021?; irdai2024?).
| Source | Definition |
|---|---|
| D.S. Hansell | “A social device providing financial compensation for the effects of misfortune” |
| Magee | “A plan by which large numbers of people associate themselves and transfer to the shoulders of all, risks that attach to individuals” |
| Insurance Act 1938 | A contract between two parties whereby one undertakes to indemnify the other against loss |
68.2 Principles of Insurance
| Principle | Working content |
|---|---|
| Utmost good faith (uberrimae fidei) | Both parties disclose all material facts honestly |
| Insurable interest | Insured must have a financial stake in the subject matter |
| Indemnity | Compensation should not exceed the actual loss (does not apply to life and personal-accident) |
| Subrogation | After payment, insurer takes over the insured’s rights against third parties |
| Contribution | If insured with multiple insurers, each contributes proportionately |
| Causa proxima (proximate cause) | The nearest cause must be insured against |
| Mitigation of loss | Insured must take reasonable steps to minimise loss |
68.3 Types of Insurance
| Family | Sub-types | Working content |
|---|---|---|
| Life insurance | Term, Endowment, Whole-life, Money-back, ULIP, Annuity | Pays on death or maturity |
| General / Non-life insurance | Health, Motor, Fire, Marine, Liability, Property, Engineering | Indemnity-based |
| Health insurance | Individual, Family floater, Group, Critical illness, Senior citizen | Reimburses medical expenses |
| Re-insurance | GIC Re, Munich Re, Swiss Re | Insurance for insurers |
| Micro-insurance | Low-premium products for low-income | Inclusion-focused |
| Social insurance | EPFO, ESIC | Government-sponsored |
68.4 Life-Insurance Products — A Closer Look
| Product | Working content |
|---|---|
| Term insurance | Pure protection; pays only on death within term |
| Endowment | Combines protection and savings; sum assured on death or maturity |
| Whole life | Coverage for the entire life |
| Money-back | Periodic payouts during the term |
| ULIP (Unit Linked Insurance Plan) | Insurance + investment in market-linked funds |
| Annuity | Periodic payments to retiree (immediate or deferred) |
68.5 General Insurance Products — A Closer Look
| Product | Working content |
|---|---|
| Motor | Compulsory third-party + own damage; for vehicles |
| Health | Hospitalisation, day-care, OPD |
| Fire | Damage to property by fire |
| Marine | Cargo and hull insurance for shipping |
| Liability | Professional, public, product liability |
| Engineering | Contractor’s all risks, machinery breakdown |
| Property | Natural calamities, theft |
68.6 Insurance in India — A Brief History
| Year | Event |
|---|---|
| 1818 | Oriental Life Insurance Company (Calcutta) — first life insurer in India |
| 1850 | Triton Insurance Co. — first general insurance |
| 1912 | Indian Life Assurance Companies Act |
| 1938 | Insurance Act, 1938 |
| 1956 | LIC of India — life insurance nationalised |
| 1972 | General insurance nationalised; GIC and four subsidiaries |
| 1993 | Malhotra Committee — recommended liberalisation |
| 1999 | IRDA Act — IRDAI established |
| 2000 | Private players begin operations |
| 2014 | FDI cap raised to 49 % |
| 2021 | FDI cap raised to 74 % |
| 2022 | LIC IPO |
68.7 IRDAI — The Indian Insurance Regulator
The Insurance Regulatory and Development Authority of India (IRDAI) was set up under the IRDA Act 1999. Its functions (irdai2024?):
| Function | Working content |
|---|---|
| Licensing | Insurers, brokers, agents, surveyors, third-party administrators |
| Product approval | File-and-use system; standardised products |
| Solvency margin | Minimum capital and reserves |
| Investment regulation | Prescribes patterns of investment |
| Claim settlement | Time-bound settlement, IRDAI Ombudsman |
| Policy holder protection | Disclosure, fair conduct, grievance redressal |
| Market development | Promote insurance penetration and density |
The Insurance Ombudsman — established under Public Grievance Redressal Rules 1998 (now part of IRDAI) — handles policyholder complaints free of cost.
68.8 Key Indian Insurance Statutes
| Statute | Year | Coverage |
|---|---|---|
| Insurance Act | 1938 | Foundational law |
| LIC Act | 1956 | Nationalised life insurance |
| General Insurance Business (Nationalisation) Act | 1972 | Nationalised general insurance |
| IRDA Act | 1999 | Established IRDAI; opened sector |
| Insurance Laws (Amendment) Act | 2015 | Raised FDI cap to 49 %; modernised many provisions |
| Insurance (Amendment) Act | 2021 | FDI cap raised to 74 % |
68.9 Concepts and Terms
| Term | Meaning |
|---|---|
| Sum assured / sum insured | Amount the insurer agrees to pay on event |
| Premium | Periodic payment to the insurer |
| Underwriting | Risk assessment and pricing process |
| Policy | The legal contract |
| Rider | Additional cover attached to a policy |
| Bonus / surrender value | Returns and exit values in life insurance |
| No-Claim Bonus (NCB) | Discount for claim-free years |
| Deductible / Excess | First loss borne by insured |
| Co-insurance | Multiple insurers share the risk |
| Re-insurance | Insurer offloads part of risk to another insurer |
68.10 Insurance Penetration and Density — India
- Insurance penetration = premiums as % of GDP. India ≈ 4 %; world average ≈ 7 %.
- Insurance density = premium per capita. India is far below the world average.
The IRDAI’s Vision 2047 sets a target of insurance for all by 2047 — universal coverage in life, health and motor.
68.11 Recent Developments
- Account Aggregator access for insurance KYC.
- Use-and-File product approval for general insurance (faster launches).
- Bima Sugam (2024) — unified online insurance marketplace.
- Bima Vahak — local agents (women-led) for last-mile distribution.
- Bima Vistaar — composite affordable bundle (life + health + property + accident).
- LIC IPO (May 2022) — partial divestment.
68.12 Exam-Pattern MCQs
Q1. Which of the following is not a principle of insurance?
A. Utmost good faith B. Indemnity C. Subrogation D. Profit maximisation
Answer: D. Profit maximisation is not a principle of insurance; insurance is built on risk-pooling.
Q2. Match each insurance principle with its content:
| Principle | Content | ||
|---|---|---|---|
| (i) | Utmost good faith | (a) | Insurer steps into the shoes of the insured against third parties |
| (ii) | Insurable interest | (b) | Both parties disclose material facts |
| (iii) | Indemnity | (c) | Insured must have a financial stake |
| (iv) | Subrogation | (d) | Compensation should not exceed actual loss |
A. (i)-(b), (ii)-(c), (iii)-(d), (iv)-(a) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(a), (iii)-(b), (iv)-(c)
Answer: A.
Q3. Match each life-insurance product with its content:
| Product | Content | ||
|---|---|---|---|
| (i) | Term insurance | (a) | Combines protection and savings |
| (ii) | Endowment | (b) | Pure protection; pays only on death within term |
| (iii) | ULIP | (c) | Periodic payouts during the term |
| (iv) | Money-back | (d) | Insurance + market-linked investment |
A. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q4. The Indian general-insurance sector was nationalised in:
A. 1956 B. 1972 C. 1991 D. 1999
Answer: B. General-insurance nationalisation = 1972 (life insurance was nationalised in 1956).
Q5. The Indian insurance regulator was set up under the:
A. Insurance Act, 1938 B. IRDA Act, 1999 C. Companies Act, 2013 D. RBI Act, 1934
Answer: B. IRDA Act, 1999 established IRDAI.
Q6. The current FDI cap in the Indian insurance sector is:
A. 26 % B. 49 % C. 74 % D. 100 %
Answer: C. Raised to 74 % by the Insurance (Amendment) Act 2021.
Q7. Arrange the following Indian insurance milestones in chronological order:
- IRDA Act
- Insurance Act
- LIC nationalisation
- FDI cap to 74 %
A. (ii), (iii), (i), (iv) B. (i), (ii), (iii), (iv) C. (iii), (i), (iv), (ii) D. (iv), (iii), (i), (ii)
Answer: A. Insurance Act 1938 → LIC nationalised 1956 → IRDA Act 1999 → FDI 74 % 2021.
Q8. Match each modern IRDAI initiative with its content:
| Initiative | Content | ||
|---|---|---|---|
| (i) | Bima Sugam | (a) | Composite bundle — life + health + property + accident |
| (ii) | Bima Vahak | (b) | Unified online insurance marketplace |
| (iii) | Bima Vistaar | (c) | Last-mile distribution by local women agents |
A. (i)-(b), (ii)-(c), (iii)-(a) B. (i)-(a), (ii)-(b), (iii)-(c) C. (i)-(c), (ii)-(a), (iii)-(b) D. (i)-(c), (ii)-(b), (iii)-(a)
Answer: A.
- Insurance — contract; insurer indemnifies insured for specified loss in return for premium.
- Seven principles: utmost good faith, insurable interest, indemnity, subrogation, contribution, causa proxima, mitigation of loss.
- Indemnity does not apply to life and personal-accident insurance (sum assured paid).
- Types: Life, General, Health, Re-insurance, Micro, Social. Life products: term, endowment, whole-life, money-back, ULIP, annuity.
- General products: motor, health, fire, marine, liability, engineering, property.
- History: Oriental Life 1818, Triton 1850, Insurance Act 1938, LIC 1956, GIC 1972, Malhotra 1993, IRDA 1999, Private entry 2000, FDI 49 % (2014), 74 % (2021), LIC IPO (2022).
- IRDAI under IRDA Act 1999; functions — licensing, product approval, solvency, investment, claim settlement, policyholder protection, market development.
- Insurance Ombudsman handles policyholder complaints.
- India insurance penetration ≈ 4 % of GDP; world ≈ 7 %.
- IRDAI Vision 2047: Insurance for all by 2047.
- Modern initiatives: Bima Sugam, Bima Vahak, Bima Vistaar.