Foundation — The two illustrations, why insurance exists, the seven requirements of an insurable risk, and the two fundamental principles

Think of it like this

Key terms in this chapter

Asset protection need

The need to protect assets created from theft or destruction, met by products such as household insurance.

Bancassurance

The arrangement or partnership that exists when a bank becomes the corporate agent of an insurance company.

Beneficial nominee

Under Section 39(7) of the Insurance Act, 1938, inserted by the February 2015 amendment, a life insurance nominee who is the parent, spouse, children, or spouse and children is beneficially entitled to the proceeds and is not accountable to the legal heirs.

Cashless claim payment

An arrangement in indemnity insurance under which the insurer approves the claim on submission of the bill and pays the hospital or garage directly. Because the claim amount is unchanged, there is no impact on the premium.

Composite broker

An insurance broker who is both a direct broker and a reinsurance broker.

Composite insurance agent

An individual appointed as agent by two or more insurers, who may not act for more than one life insurer, one general insurer, one health insurer and one each of the mono-line insurers.

Compulsory deductible

A health insurance deductible either fixed by the insurer or expressed as a percentage of sum assured. Top-up and super top-up policies are designed with a fixed deductible, giving lower premiums than a basic plan of the same coverage.

Contribution

The right of one insurer to a proportionate share of the claim where the insured holds more than one policy covering the same risk. It applies only to indemnity policies, since the total claim cannot exceed the ascertained loss.

Co-pay

The proportion of the claim amount met by the insured person, used in car and health insurance. It makes the insured sensitive to the claim amount and lowers the premium; the higher the co-pay, the lower the premium.

Corporate agent (composite)

A corporate entity representing insurers, which can work with a maximum of three life insurers, three general insurance companies and three health insurance companies.

Deductible

The portion of the claim paid by the insured person, after which the claim becomes admissible. Indian car insurance has a compulsory deductible of Rs 1,000 for cars up to 1600 CC.

Defined benefit insurance

A plan under which a fixed sum of money, based on a pre-estimated amount of loss, is paid on the happening of a covered event, used where the exact loss is difficult to ascertain or too small to be worth ascertaining.

Direct broker

An insurance broker who represents the client, can charge a fee to clients or earn commission from insurers, works with multiple insurers in India, and may provide claims consultancy and risk management services.

E-Insurance policy

An insurance policy issued in electronic form and exempt from issuance in physical form, on which insurers may offer a discount on premiums.

Health insurance moratorium

A period of five continuous years of premium payment without breaks, after which no health insurance claim is contestable except for proven fraud and permanent exclusions. A fresh five years applies from the date of any enhancement of sum insured, for the enhanced limit.

Income protection need

The need to protect available income from an unexpected charge, met by products such as health insurance and motor insurance.

Income replacement need

The need arising from risk to the earning ability of an asset, including a person's life, met by life insurance, critical illness and accidental disability insurance, plant and machinery cover and annuities.

Indemnity insurance

A contract embodying a duty to make good any loss, damage or liability incurred by another. It requires determination of the actual loss suffered before a claim is paid.

Insurable interest

The requirement that the insured will face monetary and not merely emotional loss if the subject matter is lost, the interest being lawful. The test is that the insured is better off if the risk does not materialise and adversely affected if it does.

Insurance

A basic form of risk management that provides protection against the loss of the economic benefits that can be enjoyed from assets, whether physical assets such as ships or human assets such as employees.

Insurance agent

An individual appointed by an insurer for the purpose of soliciting or procuring insurance business, including the continuance, renewal or revival of policies. The agent represents the insurance company.

Insurance web aggregator

An insurance intermediary that maintains a website providing online price comparison and information on the products of different insurers and other related matters.

Large number of exposure units

The requirement that large groups of similar though not identical units face the same peril, so that the insurer operates a common pool in which only a few are expected to suffer loss in any one year.

No claim bonus

A benefit that can be used to reduce premiums in the following years, one of the levers for optimising the insurance premium.

Over-insurance

Insuring for more than necessary, which imposes unnecessary costs in the form of higher premiums.

Principle of Indemnity

The principle that insurance will restore the financial situation of the insured to where it was before the event that caused the loss or damage, and that the intent of insurance should not be to make a profit or gain.

Pure risk

Risk involving only the possibility of full or partial loss, with no prospect of gain or profit. Only pure risk is insurable; speculative risk such as stock market investment is not.

Reinsurance

The practice whereby insurance companies transfer portions of their risk to other parties or reinsurance firms, to reduce the likelihood of paying a large obligation from a single claim and to spread risk so that no single party is affected by a large claim.

Risk retention

Bearing the consequences of a loss oneself, being the person to whom the benefits of the asset accrue.

Risk transfer

Transferring the consequences of a loss to another. Insurance enables risk transfer from the insured to the insurer, which undertakes to indemnify the insured for the financial loss suffered in return for a premium.

Section 45 of the Insurance Act, 1938

The provision that no life insurance policy can be called into question three years from issue, commencement of risk or revival, whichever is later, after which a death claim cannot be denied on any ground. Within those three years a claim may be repudiated on grounds of fraud.

Subrogation

The insurer stepping into the shoes of the insured after paying the claim and taking all actions the insured could have taken, such as pursuing an at-fault driver. A policy without subrogation rights would be more expensive.

Suitability analysis in insurance

The IRDAI requirement that agents justify product suitability before selling, assessed from age, income, family status, life stage, goals, investment objectives and existing insurance. It may be skipped only on written consent that the policyholder consciously chose to bypass it.

Uberrimae fidei

Utmost good faith. Because the insured is better informed about himself than the insurer, the obligation is on the insured to disclose all relevant information truthfully; anything that can influence the insurer's risk perception is material.

Under-insurance

Insuring for less than the loss likely to be suffered, which means the beneficiary is retaining a portion of the risk with themselves.

Voluntary deductible

A health insurance deductible chosen by the insured based on affordability or expected medical expenses; choosing a higher deductible lowers the premium.