Types of Insurance

1 Re-insurance
Every insurer has a limit to the risk that he can undertake. If at any time a profitable venture comes
his way, he may insure it even if the risk involved is beyond his capacity. Then in order to safeguard
his own interest, he may insure the same risk either wholly or partially with other insurers. This is
called reinsurance. The reason for reinsurance is the necessity of spreading the risk.

Reinsurance can be resorted to in all kinds of insurance. The insurer has an insurable interest in the subject matter, insured to the extent of the amount insured by him because a contract of reinsurance is also a contract of indemnity.
The reinsurers are liable to pay the amount of the loss to the original insurer only if the original insurer has paid the amount to the assured.
The reinsurer is, however, not liable to the insured or assured. This is because there is no privity of contract between them. But reinsurance is subject to all the conditions in the original policy and the reinsurer is entitled to all the benefits that the original insurer is entitled to under the policy. The policy of reinsurance, in other words, is co-extensive with the original policy. If the original policy for any reason comes to an end or is avoided, the policy of reinsurance also comes to an end.

2 Life Insurance
Life insurance is different from other insurance in the sense that, here the subject matter of insurance
is the life of the human being. The insurer will pay the fixed amount of insurance at the time of death
or at the expiry of a certain period. At present, life insurance enjoys maximum scope because the life is the most import property of the society or an individual.
Each and every person requires the insurance.This insurance provides the protection to the family at the premature death or gives adequate amount in the old age when earning capacities are reduced. Under personal insurance a payment is made in case of an accident.
The insurance is not only a protection but is a sort of investment because a certain sum is returnable to the insured at the death or at the expiry of a period. In India, the business of life insurance is wholly done by the Life Insurance Corporation of India (LIC).

3 General Insurance
General insurance includes property insurance, liability insurance, and other forms of insurance. Fire
and marine insurance are strictly called property insurance. Under the property insurance, property
of a person/persons is insured against a certain specified risk. The property of an individual and of
the society is insured against the loss of fire and marine perils, the crop is insured against unexpected
decline in production, unexpected death of the animals engaged in business, break-down of machines,
and theft of the property and goods.
The general insurance also covers liability insurance whereby the insured is liable to pay for the damage of property or to compensate the loss of personal injury or death. The liability insurance covers the risks of third party, compensation to employees, liability of the automobile owners, and reinsurances. Therefore, motor, theft, fidelity, and machine insurances include the extent of liability insurance to a certain extent.
The strictest form of liability insurance is fidelity insurance, whereby the insurer compensates the loss to the insured when he is under the liability of payment to the third party.

4 Property Insurance
Property insurance provides protection against most risks to property such as fire, theft, and some weather damage. This includes specialized forms of insurance such as fire insurance, earthquake insurance, flood insurance, baler insurance, etc.
Property insurance safeguards the insured’s financial future if certain damages occur to his property, a
third party files a negligence suit for damages suffered by his property. Property insurance will reimburse him for damages due to fire, theft, unforeseen calamities, as well as situations that are specified in his policy. Property insurance also provides cover for unintentional damage to someone else’s property.


5 Fire Insurance
Section 2(6A) of the Insurance Act, 1938 defines ‘Fire insurance business’ as the ‘business of effecting, otherwise that incidentally, to some other class of insurance business, contracts included among the risks insured against in fire insurance policies’.
Features of Fire Insurance Contracts
1. It is personal in nature
2. Cause of fire is immaterial
3. Indivisibility

6 Fidelity Insurance
Fidelity insurance falls under the miscellaneous class of insurance. This is the type of contract of
insurance and also a contract of guarantee to which general principles of insurance apply. It does not
mean the guarantee of the employee’s honesty. But, it guarantees the employer for any damages or loss resulting from the employee’s dishonesty or disloyalty. The insurer is liable to compensate the said loss to the employer as prescribed by the contract.

7 Liability Insurance
Liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for negligence. Liability insurance laws have been framed to provide indemnity to the insured against the financial consequences of legal liabilities including third party risks. These liabilities may be:
1. Contractual: which arise out of a contractual relationship
2. Statutory: prescribed in the various enactments

The employer in any organization is liable under the common law of the land to his employees
for negligence or injuries or diseases arising out of and in course of employment. The Workmen
Compensation Act, 1923, provides for the payment by employers to their workmen of compensation for injury by accident, arising out of, and in the course of employment.

The Public Liability Insurance Act, 1991, imposes ‘no fault’ liability in respect of use of hazardous
substances as specified by the Act. The object of this Act is to provide through insurance, immediate
relief to persons affected due to ‘accident’ while ‘handling’ ‘hazardous substance’ by the owners on
‘No fault liability basis’. The definition of owner covers any person who owns or has control over any hazardous substance at the time of accident.

8 Critical Illness Insurance
Critical illness insurance is an insurance product, where the insurer is contracted to typically make a
lump sum cash payment if the policyholder is diagnosed with one of the critical illness listed in the
insurance policy.
The policy may also be structured to pay out regular income, and the payout may also be on the policyholder undergoing a surgical procedure. The policy may require the policyholder to survive a minimum number of days (the survival period) from when the illness was first diagnosed.

Critical illness cover, is provided by the general insurance companies as individual policies whereas life insurance companies provide it as a rider attached to the life insurance policy. Cancer, renal failure (failure of both kidneys), coronary artery bypass surgery, heart valve replacement, paralysis, stroke, major organ transplants like lung, pancreas, kidney, or bone-marrow, etc. are the common illnesses which are covered under critical insurance.

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Rural and Social Sector Obligations of Insurance

With a view to ensuring that benefits of life and non-life insurance also reaches the weaker sections of our people, the IRDA has stipulated a minimum obligation on every insurer for rural as well as social sectors.

Every insurer shall, after the commencement of the IRDA Act, 1999, discharge the obligations
specified under Section 32B to provide life insurance and general insurance policies to the persons
residing in the rural sector, workers in the unorganized or informal sector, or for economically
vulnerable or backward classes of the society and other categories of persons as may be specified by
regulations made by the Authority and such insurance policies shall include insurance for crops.

Under these regulations, the two sectors have been defined as under:

1 Rural Sector
Any place as per the latest census which has:
1. A population of less than five thousand.
2. A density of population of less than 400 per square kilometer.
3. More than 25 per cent of the male working population is engaged in agricultural pursuits. The categories of workers falling under agricultural pursuits are as under:
i. Cultivators
ii. Agricultural labourers
iii. Workers in livestock, forestry, fishing, hunting, plantations, orchards, and allied activities.

2 Social Sector
It includes unorganized sector, informal sector, economically vulnerable or backward classes, and other categories of persons, both in rural and urban areas.
Classification of the Social Sector

(A) Unorganized Sector:
(1) Beedi workers
(2) Brick-kiln workers
(3) Carpenters
(4) Cobblers
(5) Fishermen
(6) Hamals
(7) Handicraft artisans
(8) Agricultural labourers
(9) Handloom and Khadi weavers
(10) Lady tailors
(11) Leather and tannery workers
(12) Papad workers
(13) Physically handicapped self-employed persons
(14) Primary milk producers
(15) Rickshaw pullers/auto-rickshaw drivers
(16) Safai karmacharis
(17) Salt producers
(18) Tenduleaf collectors
(19) Vegetable vendors
(20) Construction workers
(21)Sericulture workers
(22) Toddy tappers
(23) Powerloom workers
(24) Working women in remote rural hilly areas
(25) Sugarcane cutters
(26) Worker women.

(B) Economically Vulnerable or Backward Classes
It includes persons below poverty line.

(C) Other Categories of Persons
In includes:
1. Persons with disability as per ‘Persons With Disability Act, 1995’, and who are not gainfully employed.
2. Guardians who need insurance to protect spastic or disabled persons.

(D) Informal Sector
It includes small scale, self-employed workers typically at a low level of organization and technology,
with the primary objective of generating employment and income, with heterogeneous activities like retail trade, transport and maintenance, construction, personal and domestic services, and manufacturing, with the work mostly labour-intensive, having often unwritten and informal employer - employee relationship.
The above-said sections of society, are normally neglected by insurers. They are difficult to reach and
the scope for insurance is limited. But they need insurance more than the other segments.

3 Obligations
Every new insurer is required to fulfill the following obligations during the first five years:

Rural Sector
1. In the first financial year, going up to at least 5 per cent (in the year 2000, but in 2002 it was amended
and changed to 7 per cent) of the total policies written direct
2. In the first financial year, going up to 9 per cent in the second financial year
3. 12 per cent in the third financial year
4. 14 per cent in the fourth financial year
5. 16 per cent in the fifth financial year

Social Sector
With regard to the social sector, the obligations are laid down as
1. 5,000 lives in the first financial year
2. 7,500 lives in the second financial year
3. 10,000 lives in the third financial year
4. 15,000 lives in the fourth financial year
5. 20,000 lives in the fifth financial year

It has also been provided that in the first year, if the period of operation is less than 12 months, the
obligation of lives in the social sector, could be proportionately less. It is also provided that the IRDA
may normally revise the obligations once in five years.

With regard to existing insurers like LIC and GIC, the regulations provide that obligations would be
decided by the IRDA after consultation but the quantum would not be less than what had been recorded for the year ended 31 March 2002.
The insurer would develop appropriate polices to comply with the obligations under the Act. The
extent of the compliance will depend on the vigour with which the agents will carry forward the efforts in these sectors.

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History of Insurance Policies

           The business of insurance started with marine business. Traders, who used to gather in Lloyd’s Coffee House in London, agreed to share the losses to their goods while being carried by ships. The loss used to occur because of pirates who robbed on the high seas or because of bad weather spoiling the goods or sinking the ship. The first insurance policy was issued in 1583 CE in England.

             In India insurance began in 1870 CE with life insurance being transacted by an English company, ‘The European and The Albert’. The first Indian insurance, company was the Bombay Mutual Assurance Society Ltd., formed in 1870 CE. This was followed by the Oriental Life Assurance Co., in 1874 CE, the Bharat in 1896 CE, and the Empire of India in 1897 CE. Later Hindusthan Cooperative was formed in Calcutta, United India in Madras, Bombay Life in Bombay, National in Calcutta, New India in Bombay, Jupiter in Bombay, and Lakshmi in New Delhi.

These were all Indian companies, started as a result of the Swadeshi Movement in the early 1900s. In the year 1956 life insurance business was nationalized with the primary objective of harnessing the investment of insurance companies for national development and also spread of life insurance to every nook and corner of the country.

Life Insurance Corporation (LIC) of India was set up on 1 January 1956 with the assets and liabilities
of 245 insurance companies existing in 1956. LIC gave a phenomenal growth to the volume of business and acceptability of life insurance rose very high.

The General Insurance Corporation (GIC) of India established under the General Insurance
Corporation of India Act, 1972 classified into four distinct companies which are
(i) National Insurance Company Ltd.
(ii) New India Insurance Company Ltd.
(iii) Oriental Fire and General Insurance Company Ltd., and
(iv) United India Fire and General Insurance Company Ltd.

These companies would work separately maintaining their distinct features but they are controlled and guided by the General Insurance Corporation of India. This is a neo-techno scheme of nationalization where the companies are also to work freely in the market. They will suffer and gain their own losses and profits. The monopoly of the Corporation has gone in this new technique. Now these companies are not the subsidiaries of the GIC.

India, being a member of WTO, was under the obligation to throw open its insurance business to
private players. Therefore Malhotra Committee was appointed in April 1993 to give its recommendation.
This committee recommended opening-up of the insurance industry. Some of the reasons and
recommendations are given here under:
1. Choice available in price, service, and product, inadequate.
2. Spread of business at slow pace.
3. Integration with world’s insurance services/market, lacking.
4. Operational flexibility to be increased.
5. Full use of Information Technology needed.
6. Customer-focused policies needed.
7. Effective regulator to overview the insurance industry.

Accordingly, the government promulgated the Insurance Regulatory and Development Authority
Act (IRDA), 1999, which came into force in April, 2000. IRDA brought out quite a good number
of regulations that paved the way for launch of private insurers. By middle of the year 2000, private
players started appearing on the national scene. As of now, fifteen new companies have entered the life insurance field while only nine are in the non-life business.

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Insurance – An Introduction

The business of insurance is related to the protection of the economic values of assets. Every asset hasa value. The asset is valuable to the owner, because he expects to get some benefits from it. The benefit may be an income or something else. It is a benefit because it meets some of his needs.

Every asset is expected to last for a certain period of time during which it will perform. After that, the
benefit may not be available. None of the assets will last forever. The owner is aware of this and he can so manage his affairs that by the end of the period of its lifetime, a substitute is made available. Thus he makes sure that the value of income is not lost. However the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it non-functional.

In that case the owner and those deriving benefits there form, would be deprived of the benefit and the planned substitute would not have been ready. This is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situations.

Insurance is a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk. (Risk is uncertainty of financial loss.)

Thus the insurance is:
1. A cooperative device to spread the risk.
2. The system to spread the risk over a number of persons who are insured against the risk.
3. The principle to share the loss of each member of the society—on the basis of probability of loss—to their risk.

4. The method to provide security against losses to the insured.

Insurance may also be defined as ‘An agreement where one party (the insurer) agrees to pay to the
other party (the insured) or his beneficiary, a certain sum upon a given contingency (the risk) against

which insurance is sought’.

Insurance is a contract whereby
1. Certain sum, called premium is charged in consideration.
2. Against the said consideration, a large sum is guaranteed to be paid by the insurer who received the
premium.
3. The payment will be made in a certain definite sum, i.e. the loss or the policy amount which ever
may be.
4. The payment is made only upon a contingency.

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