Insurance

Mission

to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto

IRDA

The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements.

Defining Insurance


  • Insurance in broad terms may be described as a method of sharing financial losses of few from a common fund who are equally exposed to the same loss.
  • Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of a guaranteed small loss to prevent a large, possibly devastating loss.
  • An insurer is a company selling the insurance. The insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage.

Basic Characteristics of Insurance

Pooling of losses

  • Spreading losses incurred by the few over the entire group
  • Risk reduction based on the Law of Large Numbers

Payment of fortuitous losses Insurance pays for losses that are unforeseen, unexpected, and occur as a result of chance

Risk transfer A pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position

Indemnification The insured is restored to his or her approximate financial position prior to the occurrence of the loss

Example

  • Say 1000 motor cars valued @ 300000/- are observed over a period of five years. On an average say per year two are total loss by accident. Then the total annual loss would be Rs.600000. If the loss is to shared by all the thousand owners then they have to contribute Rs.600/-
  • The loss experience will be established by taking the past experience, geographical area in which the vehicles are used and density of traffic.

Basic terms


  • Insurer The party to an insurance arrangement who undertakes to indemnify for losses.

  • Insured A person whose interests are protected by an insurance policy.

  • Premium Financial cost of obtaining an insurance cover, paid as a lump sum or in installments during the duration of the policy.

  • Policy Written contract or certificate of insurance

  • Exposure to Loss In insurance, areas in which the risk of loss exists. Four loss risk areas are:
    (1) Property
    (2) Income
    (3) Legal Vulnerability
    (4) Key Personnel in an Organization

Benefits of Insurance to an Individual

  • Peace of mind
  • Aversion of risk
  • Protects mortgaged properties
  • Provides self dependency
  • Tool of savings
  • Tool of investment
  • Satisfies various needs

Benefits of Insurance to Business

  • Reduced reserve requirements
  • Capital freed for investment
  • Indemnification
  • Reduction of uncertainty
  • Reduced cost of capital
  • Reduced credit risk
  • Loss control activities
  • Business and social stability

Benefits of Insurance to Society

  • Protects wealth of the country
  • Helps in economic growth
  • Control inflation

Cost of Insurance


  • Operating Expense
  • Distribution cost
  • Underwriting cost
  • Policy Administration Cost
  • Reserve cost
  • Moral Hazard resulting in extra cost
  • Exaggerated Losses
  • Benefit-cost Tradeoff