Insurance - Definition, How it Works, Types, Companies, Principles, Benefits, Purchase, Renewal, Claims, History, Quotes

What is Insurance?

Insurance is defined as the process of transferring risk by the owner (of the asset) to the Insurance Company in return for an Insurance Premium. Insurance is a financial contract between the Insurance Company and the Insured Party where the Insurance Company provides financial protection or reimbursement to the Insured in case of losses suffered by the Insured because of damage to the Insured Assets under certain circumstances. In return for the Financial Protection, the Insured pays a certain amount, known as Insurance Premium, to the Insurance Company for bearing the risk. Insurance is a form of risk transfer. In Insurance, individuals or organizations transfer the risk to the Insurance Company in return for Insurance Premium. The Insurance Company, in turn, pools the Insurance Premiums from many policyholders to cover the losses of the few who experience a Loss

How Insurance Works?

Insurance works on the concept of pooling client’s risks. Insurance Companies collect Insurance Premiums from the Insureds (Policyholders) and the companies in turn promise to reimburse the Insureds in case of losses suffered by them on account of certain specified perils. Insurance is thus an arrangement to spread the loss caused by a particular risk over a pool of people who are exposed to that particular risk. The Insurance Companies act as an intermediary to bring a group of people exposed to a common risk together.

Consider an example of a factory owner who is exposed to the risk of fire damage to his factory. A Fire Accident to the factory would mean losses of Crores of Rupees because of damage to plant and machinery, inventory, buildings etc. Thus, a factory owner would take preventive measures to secure his factory from fire accidents. Additionally, the Factory Owner will also secure himself by purchasing a Fire Insurance Policy. The Insurance Policy will reimburse the Policyholder for any damage to the insured assets because of Fire and Allied Perils.

By purchasing an insurance policy, the factory owner secures himself against the risk of damage to the factory because of a fire accident

What are the Core Concepts of Insurance?

The Core Concepts of Insurance are as follows:

1. Insurance Premium: Insurance Premium is the amount of money that an Individual or a Business pays to purchase an Insurance Policy and obtain Insurance Coverage. The Premium is calculated based on the assessed risk of an insured event occurring. Factors like the type and amount of coverage, the likelihood of a claim, and Past Claims Experience impact Insurance Premiums.
2. Insurance Policy: An Insurance Policy is a legal contract between the Insurance Company and the Policyholder (Insured) which specifies the terms and conditions of the Insurance Contract.
3. Perils: Peril in Insurance refers to an event or hazard that causes loss or damage. Covered Peril is specific event for which an Insurance Policy provides Coverage (For Example: Fire, Burglary, Earthquakes, etc.)
4. Sum Insured: Sum Insured is maximum amount that an Insurance Company will pay for a covered Claim.
5. Deductible: A Deductible is the amount of loss that the Insured must bear from his own pocket before the Insurance Company starts paying out the claim.
6. Exclusions: Exclusions refer to the specific circumstances that the Insurance Policy does not coverage against.
7. Claim: An Insurance Claim is a formal request by the Policyholder requesting for compensation from a covered loss in the Insurance Policy.
8. Risk Pooling: Insurance operates on the concept of Risk Pooling. The Premiums are collected from a large group of individuals or companies facing similar risks and are used to pay for the losses of the few within that group who actually experience a loss.
9. Underwriting: Insurance Underwriting is the process of evaluating the risks, determining appropriate coverage and premium for an Insurance Policy. The Underwriting Process is a key function in Insurance which determines the rates that will be charged for the Insurance Policy as well as whether the risk will be accepted or not.

What are the Types of Insurance?

The 2 Types of Insurance are Life Insurance and General Insurance

What is General Insurance?

General Insurance , also known as Non-Life Insurance, is an agreement between the General Insurance Company and the Policyholder where the Insurance Company provides compensation to the Policyholder for damage to the Insured Assets because of Covered Perils. All Non-Life Insurance Policies are classified as General Insurance Policies. General Insurance deals with non-human assets such as factories, cars, cargo etc. General Insurance is also known as Property and Casualty Insurance in some countries.

What are Different Types of General Insurance Policies?

There are different types of General Insurance Policies available which cover various risk exposures faced by Individuals and Businesses as listed below:

What is a Health Insurance Policy?

A Health Insurance Policy provide cover for hospitalisation expenses of an Insured Individual incurred due to illness or injury. The Policy also provides coverage for Pre and Post-Hospitalisation Expenses, Daycare Procedures, AYUSH Treatments etc.

What is a Motor Insurance Policy?

A Motor Insurance Policy provides coverage for accidental damage to the Insured Vehicle as well as legal liabilities incurred because of Bodily Injury or Property Damage caused to the Third Parties because of an accident caused by the Insured Vehicle

What is a Travel Insurance Policy?

A Travel Insurance Policy provides cover for medical expenses that may arise because of illness or injury to the Insured during a trip as well as for various unexpected incidents that may occur during a trip.

What is a Fire Insurance Policy?

A Fire Insurance Policy provides coverage for Loss or Damage to the Insured Assets because of Fire and allied perils. The Policy covers the cost of repairing or replacing damaged assets and property.

What is a Cyber Insurance Policy?

A Cyber Insurance Policy protects an Insured’s Business from financial losses and third-party liabilities incurred following a Cyberattack or a Data Breach Incident

What is a Commercial General Liability Insurance Policy?

A Commercial General Liability Insurance Policy, also referred to as CGL Insurance Policy, provides coverage for Defence Costs and Compensatory Damages incurred by the Insured due to Bodily Injury or Property Damage suffered by a third party because of incidents arising from an Insured Company’s business operations or because of consuming the Insured Company’s products.

What is a Product Liability Insurance Policy?

A Product Liability Insurance Policy protects a company against the legal liability arising from claims of Bodily Injury or Property Damage to third parties because of consuming the Insured Company’s products.

What is a Public Liability Insurance Policy?

A Public Liability Insurance Policy provides coverage for Defence Costs and Compensatory Damages that the Insured Company becomes legally liable to pay on account of Bodily Injury or Property Damage suffered by a Third Party because of Accidents occurring on the Insured’s Business Premises.

What is a Directors and Officers Liability Insurance Policy?

A Directors and Officers Liability Insurance Policy, also known as D&O Liability Insurance Policy, protects Directors and Officers of a Company from lawsuits alleging Wrongful Acts committed by them in their managerial capacity. Wrongful Acts include Breach of Duty, Breach of Trust, Errors, Omissions, Negligence, Misstatements, or Misleading statements.

What is a Trade Credit Insurance Policy?

A Trade Credit Insurance Policy provides Insurance Coverage against the Risk that the Company’s Customer fails to pay for the Goods or Services that he has received.

What is a Group Health Insurance Policy?

A Group Health Insurance Policy provides coverage for hospitalization expenses incurred by employees throughout the year. In addition to coverage for hospitalisation expenses, a Group Medical Insurance Policy also covers Pre and Post-Hospitalization Expenses, coverage for Pre-Existing Diseases and Daycare Procedures.

What is a Contractors All Risk Insurance Policy?

A Contractors All Risk Insurance Policy provides coverage for Material Damage and Third-Party Liability to Civil Construction Projects.

What are Surety Bonds?

Surety Bonds are legally enforceable three-party contract that guarantee performance and/or payment. Surety Bonds are used to guarantee the performance of a contractor, supplier, or other party in a business transaction.

What is an Erection All Risk Insurance Policy?

An Erection All Risk Insurance Policy, also known as an EAR Insurance Policy provides comprehensive Insurance Cover for the entire project of installation/erection of machinery and equipments from the time of arrival of first consignment at site and terminates on completion of erection/testing/commissioning or the plant is taken over, whichever occurs first and the maintenance period thereafter.

What is a Marine Insurance Policy?

A Marine Insurance Policy protects the Insured Party for the damage to the Insured Cargo whilst in transit.

What are the General Insurance Companies in India?

General Insurance Companies in India are:

• The New India Assurance Company
• Oriental Insurance Company
• National Insurance Company
• United India Insurance Company
• HDFC Ergo General Insurance Company
• ICICI Lombard General Insurance Company
• Tata AIG General Insurance Company
• Bajaj Allianz General Insurance Company
• SBI General Insurance Company
• IFFCO-TOKIO General Insurance Company
• GoDigit General Insurance Company
• Zurich Kotak General Insurance Company
• Future Generali General Insurance Company
• Cholamandalam MS General Insurance Company
• Royal Sundaram General Insurance Company
• Shriram General Insurance Company
• Reliance General Insurance Company
• Acko General Insurance Company
• Magma HDI General Insurance Company
• Raheja QBE General Insurance Company
• Universal Sompo General Insurance Company
• Aditya Birla Health Insurance Company
• Manipal Cigna Health Insurance Company
• Care Health Insurance Company
• Niva Bupa Health Insurance Company
• Star Health and Allied Health Insurance Company

What is Life Insurance?

‘ Life Insurance ’ is an agreement between the Policyholder and a Life Insurance Company, whereby the Insurance Company pays a Death Benefit to the Beneficiary upon the death of the Insured Person or a Maturity Benefit upon Maturity of the Policy, in exchange for an Insurance Premium. Life Insurance insures the life of human beings. Life Insurance insures the human capital or the earning capacity of the Insured Person.

The family members benefit from the earnings of the person and the death of the Insured Person through unexpected events means that the people dependent on the Insured Person lose out on the benefits. A Life Insurance Policy will provide assistance to the dependents of the Insured Person by providing compensation in case of the death of the Insured Person.

What are Different Types of Life Insurance Policies?

There are different types of Life Insurance Policies available to cover requirements of the Policyholder as listed below:

What is Term Life Insurance Policy?

A Term Life Insurance Policy is a type of Life Insurance Plan which provides a lumpsum payout as a Death Benefit to the Nominee in case of the death of the Life Assured.

What is Group Term Life Insurance Policy?

A Group Term Life Insurance Policy provides a lumpsum payout as a death benefit to the employee’s family member in case of the death of the employee.

What is Unit Linked Insurance Plan?

A Unit Linked Insurance Plan, also known as ULIP, is a type of a Life Insurance Policy that combines the benefits of an Investment Plan to fulfil long-term goals and an Insurance Cover to provide financial security in case of an unfortunate event.

What are Child Insurance Plans?

Child Insurance Plans are a type of Life Insurance Plan which are primarily used to secure the child’s future higher education needs. A Child Insurance Plan combines Savings and Insurance where the parents pay Premium on behalf of the child.

What are Pension Plans?

A Retirement Plan, also known as a Pension Plan, is a type of a Life Insurance Policy which allows you to save money over the years so that you can enjoy a steady and a fixed income stream during the retirement years. The Policyholder receives a Pension Payment until his death in a Pension Plan.

What are Endowment Plans?

A Endowment Plan, also referred to as Savings Plan, combines a Savings Plan which allows you to build a financial corpus to help you meet your short term and long-term financial goals as well as provides Life Insurance Cover.

What are the Life Insurance Companies in India?

Life Insurance Companies in India are:

• Aditya Birla Sun Life Insurance Company
• Aegon Life Insurance Company
• Ageas Federal Life Insurance Company
• Aviva Life Insurance Company
• Bajaj Allianz Life Insurance Company
• Bharti Axa Sun Life Insurance Company
• Canara HSBC Life Insurance Company
• Edelweiss Tokio Life Insurance Company
• Future Generali Life Insurance Company
• HDFC Life Insurance Company
• ICICI Prudential Life Insurance Company
• Kotak Mahindra Life Insurance Company
• Life Insurance Corporation of India
• Max Life Insurance Company
• PNB Metlife India Insurance Company
• Indiafirst Life Insurance Company
• Pramerica Life Insurance Limited
• Reliance Nippon Life Insurance Company
• SBI Life Insurance Company
• Shriram Life Insurance Company
• Star Union Dai-ichi Life Insurance Company
• Tata AIA Life Insurance Company

What is the difference between General and Life Insurance?

The difference between General and Life Insurance is listed below:

What are 7 Principles of Insurance?

The 7 Principles of Insurance are as follows:

1. Principle of Insurable Interest

Insurable Interest means that a person benefits from the continued presence of the asset or is prejudiced by the loss of the subject-matter. Principle of Insurable Interest in Insurance means that the Insured can insure only those assets in which he has a legitimate financial interest.

2. Principle of Utmost Good Faith

Principle of Uberrimae Fidei, a Latin Phrase meaning Principle of Utmost Good Faith is one of the fundamental principles of Insurance which states that both parties to an Insurance Contract, that is, the Insured and Insurance Company, should act in Good Faith towards one another The Insured has a duty to disclose all material facts and not conceal, misrepresent, or withhold any material facts which might change the decision of the insurance company to accept or reject the risk proposal while the Insurance Company has a duty to inform the Insured of the Terms and Conditions of the Insurance Policy.

3. Principle of Proximate Cause

Proximate Cause or Efficient Proximate Cause is the primary or the dominant risk factor in the chain of causation which has caused the loss. It is the cause which sets a chain of events in motion, leading to the ultimate loss. Proximate Cause need not be the initiating or last act in the chain of events. Proximate Cause helps to identify the reason for the loss has occurred and whether the Loss is covered under the Insurance Policy or not.

4. Principle of Indemnity

Principle of Indemnity in Insurance aims to place the Policyholder in the same financial position after the loss, as he was in, before the loss. In other words, this means that the Insured cannot use Insurance to earn profits. Thus, the Insurance Policy will reimburse the Insured Party only to the extent of his loss.

5. Principle of Subrogation

The Principle of Subrogation in Insurance is a fundamental concept that places the Insurance Company in the shoes of the Insured and allows the insurer to assume the policyholder’s legal rights to recover damages from the faulty party which were paid out under the Insurance Policy. Simply put, when an Insurance Company compensates the Insured for his loss, the Insured, in return, transfers his legal rights to pursue recovery against the third party who is responsible for the loss.

6. Principle of Contribution

Principle of Contribution in Insurance is one of the fundamental principles in Insurance which states that if multiple Insurance Policies insure the same subject matter, the Insured cannot recover his loss from all the Insurance Policies. The Insured is not allowed to make profit out of his Insurance Policy. So, if multiple Insurance Policies are covering the same risk, the Insurance Companies will only pay the proportionate portion of the loss.

What are the Benefits of Insurance?

Insurance provides protection against unexpected financial losses. Insurance protects you and your assets from which you derive benefits. The Benefits of Insurance are as follows:

1. Provides Protection: Insurance provides protection to the Insured against unforeseen accidents. The Policy provides reimbursement for damage to Insured assets from which you derive financial benefits. The compensation received allows the Policyholder to reinstate damaged assets.
2. Manage Uncertainty of Cash Flows: Insurance helps to manage uncertainty of cash flows as it provides compensation whenever losses happen due to insured perils. This reduces the uncertainty for insured party as he does not have to pay out of his own pocket to reinstate damaged assets.
3. Risk Management: Another important benefit of Insurance is that Insurance Companies incentivise risk control measures to protect the assets by providing discounts in premiums.
4. Efficient use of Resources: Another benefit of Insurance is that it promotes efficient use of resources as the Insured need not set aside a large amount of resources to pay for damages due to accidents. The Insured can deploy the money elsewhere.
5. Business Continuity: Insurance can help businesses recover from disruptions and ensure continuity.

How to Purchase Insurance?

You can purchase Insurance directly from the Insurance Company or through an Insurance Broker like Qian Insurance Broking. The steps to purchase Insurance are as follows:

1. Determine Insurance Requirements: The first step is to decide the type of Asset you need to Insure (Car, Factory, Home etc) and determine the Sum Insured of the Insurance Policy.
2. Compare Features and Quotes: The next step is to compare features and quotes from multiple Insurers. Seek out customer reviews and Claims Experience of the Insurance Company.
3. Finalise Insurance Company and Pay Premium:* Finalise the Insurance Company after comparing features, benefits and Premiums and pay the Policy Premium.
4. Receive Insurance Policy: You will receive the Insurance Policy Document which will outline the Policy Terms and Conditions. Carefully review the same.

How to Renew Insurance?

You can Renew Insurance directly from the Insurance Company or through an Insurance Broker like Qian Insurance Broking. The steps to renew Insurance are as follows:

1. Visit Insurance Company Website: Go to the Official Website of the Insurance Company or Contact an Insurance Broker like Qian Insurance Broking.
2. Provide Policy Details: The next step is to provide existing Insurance Policy details like Policy Number, Sum Insured etc.
3. Compare Features and Quotes: The next step is to compare features and quotes from multiple Insurers.
4. Finalise Insurance Company and Pay Premium: Finalise the Insurance Company after comparing features, benefits and Premiums and pay the Renewal Premium.
5. Receive Insurance Policy: The Insurance Policy will be renewed and you will receive the Insurance Policy Document which will outline the Policy Terms and Conditions.

How to Claim Insurance?

The steps to file an Insurance Claim are listed below:

1. Notify the Insurance Company: The first step is to notify the Insurance Company via email or through an Insurance Broker.
2. Submit Documents: The next step is to submit the required documents like the Insurance Policy, Claim Form, etc. and to the Insurance Company
3. Claim Review and Assessment: The Insurance Company will review the Claim Documents and ask for additional information if necessary.
4. Claim Settlement: Once the Claim is verified, the Insurance Company will approve or reject the Claim. If the Claim is approved, the Claim amount will be deposited in the bank account of the Policyholder. The Specific Claim Process will vary on the type of Insurance like Car Insurance, Fire Insurance Health Insurance etc.

History of Insurance

The History of Insurance is as old as Human Existence. Some of the milestones related to Insurance are listed below:

1. Over 5000 years ago, Chinese Traders used Insurance as a preventive measure against Piracy by distributing the cargo to be transported among several ships so that if one ship got lost or captured by pirates, the traders suffered only a partial loss.
2. The First Written Insurance Policy dates to 1750 B.C when Babylonian Traders carved the Code of Hammurabi into a stone monument and clay tablets. The Hammurabi Code was one of the first forms of written laws of Insurance where the ship’s cargo could be pledged for a loan and the repayment of the loan was contingent upon the ship reaching its destination safely. The understanding was that if the goods reached safely, and the goods were sold, the merchant would return the loan to the financier with interest. But if the ship sank or caught fire and the cargo was destroyed, the merchant would not pay back the loan amount. So, in essence, the Interest being charged was actually an Insurance Premium.
3. In 1666, the Great Fire of London destroyed more than 13000 houses. In response, the First Fire Insurance Company was started in 1680.

History of Insurance in India

1. Insurance began formally in India in the 18^th The year 1818 saw the start of life insurance in India when Oriental Life Insurance Company was established in Kolkata.
2. The year 1850 saw the establishment of first non-life insurance company, Triton Insurance Company Limited in Kolkata by the British.
3. The Year 1870 saw the enactment of British Insurance Act
4. Bombay Mutual and Oriental started in Mumbai in the year 1871 and 1874 respectively.
5. The Life Insurance Companies Act, 1912 was enacted as a first statutory measure to regulate life insurance business.
6. Insurance Act 1938 was enacted to control the activities of the insurance companies.
7. Life Insurance Corporation of India came into existence in the year 1956.
8. General Insurance Council was formed in the year 1957 which formed a code of conduct for ensuring fair conduct and sound business practices.
9. The Insurance Act was amended in 1968 to regulate and set minimum solvency margins. The Tarriff Advisory Committee was also set up.
10. The General Insurance Business was nationalised with effect from 1^st Jan 1973, where 107 insurance companies were amalgamated and grouped into 4 companies, namely, National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd.
11. The General Insurance Corporation of India was incorporated as a company in 1971 and started operations on 1^st Jan 1973
12. Insurance Regulatory and Development Authority of India (IRDA) was incorporated as a statutory body in April 2000 to regulate and develop the insurance industry.
13. The IRDA opened up the Insurance Industry in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938.

Insurance Act, 1938

Insurance Act, 1938 was a law passed in the year 1938 in India to regulate the Insurance Sector. Prior to the Insurance Act, 1938, only Marine Insurance Act of 1906 was applicable to Marine Insurance in India while for other Insurance, the British Common Law applied. The Insurance Act, 1938 provides power to IRDA to frame regulations for supervision of entities operating in Insurance Sector in India. The Insurance Act 1938 lays down the organisations which are allowed to operate Insurance Business in India. The Insurance Act, 1938 also lists down the duties of Insurance Companies such as maintaining a register of policies, claims and agents.

Final Take

The importance of insurance cannot be understated. It provides assistance and compensation exactly at the time you need it. The compensation allows you to recover from a setback.If you have any queries regarding insurance, feel free to reach out to us at 📧 insurance@qian.co.in or call us on 📞 022-35134695 We would be glad to assist you.