Explain insurance in detail.

07/December/2025 22:46 Share:

INSURANCE — Detailed Notes

1. Meaning and Definition of Insurance

Insurance is a financial arrangement or contract in which an individual or organization (the insured) pays a premium to an insurance company (insurer) in exchange for protection against specified risks. If a defined loss occurs, the insurer provides financial compensation.

Formal Definitions

1. ICAI / Business Definition:

> “Insurance is a mechanism for transferring risk of loss from an individual or business to a financial institution in exchange for a premium.”

2. Insurance Institute of India:

> “Insurance is the equitable transfer of the risk of a loss from one entity to another in exchange for payment.”

In simple words:

Insurance is risk management through financial protection against uncertainty.

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2. Principles of Insurance

Insurance operations are guided by certain key principles:

1. Principle of Utmost Good Faith (Uberrimae Fidei)

Both insurer and insured must disclose all material facts.

Example: Health insurance disclosure of medical history.

2. Principle of Insurable Interest

Insured must have a financial stake in the subject matter.

Example: Life insurance of self or spouse.

3. Principle of Indemnity

Insurance provides compensation equal to the loss; no profit from claim.

Example: Property damage insurance compensates repair cost.

4. Principle of Contribution

If multiple policies exist, insurers share the compensation proportionally.

5. Principle of Subrogation

Insurer takes legal rights to recover loss from a third party after claim payment.

6. Principle of Proximate Cause

Only losses caused by the insured peril are covered.

7. Principle of Loss Minimization

Insured must take all reasonable steps to minimize loss.

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3. Insurance Business Model

Insurance business works on a risk-pooling and risk-transfer model:

1. Premium Collection

Insured pays periodic premium.

2. Risk Pooling

Insurance company collects premiums from many insureds and creates a pool of funds.

3. Investment of Funds

Premiums are invested in bonds, equities, government securities to generate returns.

4. Claim Settlement

Losses occurring to insureds are paid from the pool.

5. Profit & Sustainability

Profitable insurers manage risk assessment, pricing, and claims efficiently.

Revenue Sources: Premiums, investment income, fees.

Example: LIC of India collects premiums from millions of policyholders and pays claims while investing surplus in government bonds.

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4. Types of Insurance

A. Life Insurance

Covers risk of death or disability

Types: Term insurance, Whole life, Endowment, ULIP

Example: LIC Jeevan Anand, HDFC Life Click 2 Protect

B. Health Insurance

Covers medical expenses

Example: ICICI Lombard Health Insurance, Star Health Mediclaim

C. General / Non-Life Insurance

1. Motor Insurance – Vehicle damages, third-party liability

2. Property Insurance – Fire, burglary, natural disasters

3. Travel Insurance – Trip cancellations, emergencies abroad

4. Marine Insurance – Goods in transit

5. Liability Insurance – Professional, product, public liability

D. Specialized Insurance

Crop insurance, aviation insurance, cyber risk insurance

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5. Insurance Agencies / Intermediaries

Insurance Agents – Individual or corporate selling policies

Brokers – Facilitate insurance purchase for clients

Banks / NBFCs – Bancassurance partners

Corporate Agents – Companies authorized to sell insurance

Example: SBI Life Insurance sells policies via SBI branches, acting as bancassurance.

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6. Insurance Financing Vehicles

Insurance companies invest premiums in financial instruments to maintain liquidity and returns:

1. Government Securities – Safe, stable returns

2. Corporate Bonds / Debentures – Medium risk-return

3. Equity Markets – High return potential, market risk

4. Real Estate & Infrastructure Projects – Long-term investment

5. Mutual Funds / Fixed Deposits – Diversification

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7. Insurance Companies

A. Life Insurance Companies

Provide life insurance and investment products

Example: LIC, HDFC Life, ICICI Prudential

B. General Insurance Companies

Cover non-life risks like property, motor, health

Example: ICICI Lombard, New India Assurance, Bajaj Allianz

C. Specialized Insurers

Crop, micro, and government-supported insurance schemes

Key Functions

Risk assessment and underwriting

Premium collection

Claim processing

Investment of funds

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8. Insurance in India

Historical Overview

First Life Insurance Company: Oriental Life Insurance Company, 1818

Life Insurance Nationalization: LIC formed in 1956

General Insurance Nationalization: 1972, leading to GIC formation

Liberalization: 2000, private players like HDFC Life, ICICI Prudential, SBI Life entered

Current Scenario

Over 60 life insurance and 30 general insurance companies

Insurance penetration: ~4% of GDP (2025)

Government initiatives: PMFBY, Rashtriya Swasthya Bima Yojana, Aam Aadmi Bima Yojana

Digital transformation: Online policy purchase, claim processing

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9. Examples & Case Studies

Case Study 1: LIC of India

Largest life insurer in India

Collected premiums from millions, pays claims, invests in infrastructure projects

Promotes financial inclusion via rural agents

Case Study 2: ICICI Lombard Health Insurance

Covers hospitalization and surgeries

Introduced cashless claim network across India

Demonstrates innovation and customer-centric approach

Case Study 3: PMFBY (Pradhan Mantri Fasal Bima Yojana)

Crop insurance scheme for farmers

Government subsidizes premium, protects farmers from crop loss due to natural calamities

Example: Farmers in Maharashtra received compensation after drought

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10. Conclusion

Insurance is a cornerstone of financial planning and risk management. It transfers financial risks from individuals and businesses to insurers, who pool resources, invest, and manage claims efficiently. In India, the insurance sector has evolved from nationalized dominance to liberalized, competitive, and digitally-driven markets, offering diverse life, health, and general insurance products.

Importance: Provides financial security, promotes investments, supports economic growth, and protects against uncertainties.