CU-BBA-SEM-III-Fundamentals of Insurance-Second Draft-converted

BACHELOR OF BUSINESS ADMINISTRATION SEMESTER-III FUNDAMENTALS OF INSURANCE BBA216

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:- 01133002345 For: CHANDIGARH UNIVERSITY 2 Institute of Distance and Online Learning CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1: Insurance .....................................................................................................................5 Unit - 2: Reforms In Indian Insurance .....................................................................................18 Unit - 3: Legal Dimension Of Insurance..................................................................................44 Unit - 4: An Overview Of Insurance Industry .........................................................................67 Unit - 5: Insurance Intermediaries ...........................................................................................90 Unit - 6: Rules And Regulation Of Insurance Industry .........................................................102 Unit - 7: Underwriting ...........................................................................................................123 Unit - 8: Reinsurance .............................................................................................................146 Unit - 9: Irdai .........................................................................................................................159 Unit - 10: Distribution Channels In Insurance.......................................................................170 Unit - 11: Banc Assurance And Brokers................................................................................184 Unit - 12: Insurance Specialists .............................................................................................196 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 1: INSURANCE Structure 1.0. Learning Objectives 1.1. Introduction 1.2. Insurance – Mechanism of Covering Risk 1.3. Purpose of Insurance 1.4. Need for Insurance 1.5. Insurance as a Security Tool 1.6. Summary 1.7. Keywords 1.8. Learning Activity 1.9. Unit End Questions 1.10 References 1.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Explain the purpose and need for insurance. • Describe how insurance works. • Explain the role of the financial services sector and within that the role of the insurance sector in building the country’s economy. • Outline the history of insurance in India together with the recent developments in the insurance industry • Explain the benefits brought about by a professional insurance market. 1.1 INTRODUCTION What is insurance? We can define insurance as follows: Insurance is a relationship between the policyholder and the insurance provider (insurer) (insured). The insurance provider agrees to pay a fixed amount to the insured if a specific incident occurs in exchange for a consideration (the premium). 5 CU IDOL SELF LEARNING MATERIAL (SLM)

In his life, a man, his family, or his company can be exposed to various risks. Risk arises as a result of unavoidable ambiguity. Human beings have no control over uncertainties. Death, sickness, accident, fire, earthquake, and other unexpected events can cause a person or their property to suffer significant losses. These dangers can lead to financial loss. He needs to make up for the financial damage to the property or to the person's life. Insurance is a tool for reducing the loss of property or life that occurs as a result of such a danger or peril. It is a cooperative device for spreading the loss caused by a specific risk through a group of people. As a result, insurance cannot prevent risk or loss, however it may distribute it. Among those that are insured. As a result, insurance is a financial instrument designed to mitigate the financial risk of unpredictable incidents and provide financial protection. In fact, anybody who wants to protect himself from financial distress should think about getting insurance. Risk : Risk is an integral part of life. It can be defined as a probability or threat that amounts to: • Damage • Injury • Liability • Loss due to occurrence of a negative event that may be caused because of internal factors or external factors. Risk retention: Retaining these threats is an unwise way of dealing with them. Risk transfer: Another option is to transfer these risks to someone who can better manage them. In simple terms, insurance is the method of moving risks from one individual who does not have the capacity to bear them to another who does. Illustration : 6 CU IDOL SELF LEARNING MATERIAL (SLM)

A. You're walking down the street on your way home. There's a good chance you'll arrive safely at your destination. However, it is possible that you would be struck by a car. This may result in a minor, major, or even fatal injury. As a result, there is a risk while walking on the lane. However, only if an accident occurs can the risk result in injury. As a consequence, an accident is an incident that causes harm. B. You live a balanced lifestyle. There is a good chance that you will live a safe life before you die. You are diagnosed with cancer one day. Apart from shortening life expectancy, it can result in high medical care costs. As a result, a person's life is still in jeopardy. 1.2 INSURANCE—MECHANISM OF COVERING Insurance is a process by which an individual who is exposed to a potential risk as a result of circumstances outside his control transfers the financial liability to a third party, in part or in full. The ‘Insured' is the party who passes the potential loss, while the ‘Insurer' is the party who indemnifies or agrees to pay the other party for such potential loss. For a charge or a consideration known as the \"Premium,\" the insurer offers compensation for a possible financial loss. As a result, insurance is a unique form of arrangement between the Insurer (the insurance company) and the Insured (the client), in which the Insurer (the insurance company): A. The customer agrees to pay the Insurance Company a fee. This premium may be charged in one lump sum or over time. This will be determined by the form of insurance and its conditions. 7 CU IDOL SELF LEARNING MATERIAL (SLM)

B. In lieu of payment of such premium, the Insurance Company offers to make a payment to the client or to bear the expenses incurred by the client as a result of financial damage incurred as a result of such incidents. In the case of auto insurance, for example, the insurance company pays for the cost of repairs if the car is damaged in an accident. 1.3 PURPOSE OF INSURANCE Insurance should be purchased based on a person's specific needs. There are several insurance options on the market and deciding one to purchase should be done after due thought. Individuals can buy a whole life insurance policy, an endowment policy, a money- back policy, a child plan, or a retirement plan, depending on their needs. Fear exists in the minds of all people. The fear of not being able to meet his basic needs, such as food, clothing, and shelter. Not only for himself, but also for his dependents, he is terrified. Service or company can be a source of income to meet his basic needs. If he is able to fulfil his basic needs, he can accumulate properties such as cars, real estate, or jewellery. Then he has the added fear of having to save the properties from being destroyed. (Assets may be destroyed by disaster, fire, or earthquake, for example, and profits may be lost due to certainty, such as old age and death, or confusion, such as accident, sickness, or disability.) As you may be aware, every human being will reach old age and die, while accidents, disease, impairment, and asset destruction may occur at any time. There will be a variety of injuries, but who will be involved is unknown. As a result, insurance plays a critical role in resolving this problem. The compensation for work done by an individual is the primary source of income for that person. If this source of income is lost, the following will occur: - The family may make social and financial changes, such as: • Wife can work at the expense of household responsibilities. • Children may be forced to work instead of attending school; family members may be forced to accept charity from families, acquaintances, and others at the expense of their individuality and self-respect. • The standard of living for a family may have to be lowered to a degree that is insufficient for health and happiness. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

The basic threats that all of us may face to varying degrees and that result in a loss of income or an unexpected rise in - unjustified expenditures (beyond our means or higher than our earnings), i.e. disrupts human life, are: - • Illness (malnutrition, climate, chronic) – uncertain (uncertain) • Permanent or temporary disability (uncertain) • Old Age– (certain) • Death – (certain). LIFE INSURANCE is a financial arrangement that allows a person to plan for the continuation of his or her income when unforeseen events (such as illness, accident, death, or old age) disrupt or destroy his or her ability to earn a living. As a result, insurance is 1. Related to the protection of human life, human created assets, human disability, and business liabilities possessed by human beings with a definite value, 2. Assets and human life generate benefit and income for the owner and his/her family members, and 3. loss of assets / human life for any purpose stops the benefits and income to the owner and family members respectively. 4. Results in falling of living standards in the family, quality of life and future growth of the associated family members, and 5. Insurance is a mechanism that helps to reduce such adverse consequences through pooling, spreading and sharing of risk. 1.4 NEED FOR INSURANCE The primary purpose of insurance is to cover against financial loss as a result of the occurrence of an accident. In most cases, an insurance company performs this role. In exchange for a premium, the Insurance Company offers various forms of insurance to various individuals. The Insurance Companies receive these premiums and use them to compensate those who have suffered a loss. The following are some of the benefits or advantages of insurance: A. Peace of Mind 9 CU IDOL SELF LEARNING MATERIAL (SLM)

Consumers can obtain peace of mind by purchasing an insurance policy. They would feel more at ease if they knew that if anything bad happened, at the very least the financial loss they would suffer would be covered. B. Asset Security: The aim of purchasing an insurance policy for a property or asset is to cover it. This will apply to properties such as residences, automobiles, jewellery, and other important tangible objects. If these properties are damaged, lost, or destroyed, the insurer will replace or restore them if an insurance policy is purchased. C. Physical Protection Certain types of insurance policies are designated in such a way that they safeguard the human body. These insurances may pay for losses if an individual is sick, disabled, or otherwise physically harmed. D. Income Protection Certain insurance plans are intended to secure a person's ability to make a living. If an individual is no longer able to work for a living, these policies may be set up to offset a large portion of their lost income. E. Lifestyle Protection When a person dies, his or her family suffers the most, particularly if the person who died was the sole or primary source of income? In this scenario, a Life Insurance Policy will provide money to the next of kin, allowing them to sustain their lifestyle, if not entirely, or at the very least meet their basic needs. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

1.5 INSURANCE AS A SOCIAL SECURITY TOOL Traditionally, “the joint family” has been an informal social security in India. In modern society, social security is available only to those who are employed in the organised sector. Insurance is considered one of the tools of social security for formal and informal sectors and is largely carried out in two ways. The first method is referred to as Social Insurance. In this case, the state or government looks after those who have suffered damages as a result of a danger occurrence. For example, offering a pension when one reaches retirement age or providing free medical care, covering hospitalisation costs, and so on. The money for this comes from a pool of taxes and mandatory social security payments that must be paid by anyone who works and earns money. Employees' State Insurance (ESI), which offers medical coverage and other compensation to employees, and Employees' Provident Fund Organization (EPFO), which provides pensions and survivors' benefits in the event of an employee's death, are two of the most well-known programmes in this category. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

The second choice is to purchase private insurance on a voluntary basis. Individuals and associations can purchase insurance from an insurance broker by signing an insurance policy with them. The insurance agent enters into an arrangement (an insurance policy) in which it (insurer) agrees to offer financial security to the insuring individual (insured) in return for a small amount of money (premium) by promising to pay the insuring person (insured) a fixed amount of money (sum assured) if a specific occurrence occurs (insured peril). Premiums are received from the insuring public to provide this insurance, and losses are compensated out of the premiums collected. In other terms, an insurance policy agrees to pay a certain amount to the insured in exchange for the premium paid by the insured. As an illustration The concepts of insurance are explained in the following two examples. 1st example: There are 400 houses in a village, each worth Rs.20,000. On average, four houses are burned down each year, resulting in a total loss of Rs.80,000. Number of houses 400 Value of each house Rs. 20,000 Houses that get burnt every year (average) 4 Total loss (4 houses X Rs. 20,000) Rs. 80,000 Contribution to be made by 400 house owners to compensate for loss of Rs. 200 Rs. 80,000 = Rs. 80,000 / 400 Table 1.1 Example-1 If all the 400 owners come together and contribute Rs.200 each, the common fund would be Rs.80,000. This is enough to pay Rs.20,000 to each of the 4 owners whose houses got burnt. Thus, the risk of 4 owners is spread over 400 houses/ house-owners of the village. 12 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 1.1 Example-1 Example – 2: There are 1000 persons, who are all aged 50 and are healthy. It is expected that of these, 10 persons may probably die during the year. If the economic value of the loss suffered by the family of each dying person is taken to be Rs.20,000, the total loss would work out to Rs.2,00,000. Number of persons 1000 Economic value of each person Rs. 20,000 Persons that may die during the year (probable) Total loss (10 persons X Rs. 20,000) 10 Contribution to be made by 1000 people to compensate for Rs. 2,00,000 loss of Rs. 2,00,000 = Rs. 2,00,000 / 1000 Rs. 200 Table 1.2 Examples 2 13 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 1.2 Example-2 If each person of the group contributes Rs.200 a year, the common fund would be Rs.2,00,000. This would be enough to pay Rs.20,000 to the family of each of the ten persons who may die. Thus, 1000 persons share the risk of loss due to death suffered by 10 persons. From the above, it can be seen that insurance is a very useful financial tool for pooling, sharing and transfer of the risk so that the financial loss caused to a person who suffers due to a peril is compensated. 1.6 SUMMARY • Insurance is a way of safeguarding against financial loss. It's a form of risk management that's mainly used to protect against the risk of a speculative or unpredictable loss. • The insured is given a contract, known as an insurance policy, that outlines the terms and conditions under which the insurer will pay them. The premium is the amount of money paid by the insurer to the policyholder for the coverage specified in the insurance policy. • Life is full of risks, some of which can be avoided or at least reduced, while others are entirely unpredictable. • Insurance is a process by which a person who is exposed to a potential risk as a result of circumstances outside his control transfers the financial liability to a third party, in part or in full. • The primary purpose of insurance is to cover against financial loss as a result of the occurrence of an accident. • Insurance is one of the social security mechanisms available to both the formal and informal industries. 1.7 KEYWORDS • Insurance –is a contact between an individual (Policyholder) and an insurance company (Provider). • Risk Transfer – is the method of moving risks from one individual who does not have the capacity to bear them to another who does. • Risk Retention – Retaining these threats is an unwise way of dealing with them. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

• Life Insurance – Insurance that pays out a sum of money either on the death of the insured person or after a set period • Non-Life Insurance – he losses that are incurred from a specific financial event are compensated to the insured. • Social Insurance - a system of compulsory contribution to enable the provision of state assistance in sickness, unemployment, etc 1.8 LEARNING ACTIVITY 1. Speak to your family members or friends who have bought insurance. Ask them the points they considered before buying the insurance and the reason(s) they bought it. ___________________________________________________________________________ ____________________________________________________________________ 2. What would be happen if a large oil refinery were to be destroyed or damaged? Could a company afford to bear the loss? What would be the solution? List out? ___________________________________________________________________________ ____________________________________________________________________ 1.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Risk and its types? 2. Explain the purpose of Insurance? 3. Most common example of insurance? 4. Define nature of Insurance? 5. What are the components of the Premium? Long Questions 15 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Describe the need of Insurance? 16 2. Describe the mechanism of Insurance? 3. Describe how insurance works as a Security tool for society? 4. Insurance is a need of life. Explain 5. How the insurance helps in the economic development of the country? B. Multiple Choice Questions 1. Which is correct? The act of buying insurance is an act of: a. risk transfer b. risk retention c. Both the answers are correct d. None of these 2. Which among the following is a method of risk transfer? a. Bank FD b. Insurance c. Equity Shares d. Real Estate 3. Which among the following scenarios warrants insurance? a. The sole bread winner of a family might die untimely b. A person may lose his wallet c. Stock prices may fall drastically. d. A house may lose value due to natural wear and tear. 4. Insurance is a Contract between? a. Insurer and Insured Person CU IDOL SELF LEARNING MATERIAL (SLM)

b. Insurer and Government c. Private Bank and Company d. Insured person and Society. Answers 1-a 2-b 3-a 4-a 1.10 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. • IC-33 – Insurance Institute of India. Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J. Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 17 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 2: REFORMS IN INDIAN INSURANCE Structure 2.0. Learning Objectives 2.1. Introduction 2.2. History of Insurance in India 2.3. Nationalization of Insurance Sector 2.4. Liberalization of Insurance Sector 2.5. Principles of Insurance 2.6. Summary 2.7. Keywords 2.8. Learning Activity 2.9. Unit End Questions 2.10 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain the Historical background and emergence of Insurance in India • Describe Nationalization and Liberalization of Insurance sector. • To know that insurance follows law of large numbers. • Know what insurable interest is. • Know that Utmost good faith operates in Insurance Contract • Discuss the Indemnity. • Learn about Subrogation and Contribution • State the Proximate cause. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

2.1 INTRODUCTION The Indian Insurance Companies (Foreign Investment) Rules, 2015 were enacted by the government to regulate how foreign investors can hold equity shares in Indian insurance companies. These Rules integrated the current / prevalent Regulations and practises in place with respect to IRDA's treatment of foreign investment in Indian insurance firms, as well as the Government of India's existing FDI policy. On the 19th of February, 2015, the said Rules were published in the Gazette. Following that, on July 3, 2015, the government released a clarification in relation to rule 2(l) of the Indian Insurance Companies (Foreign Investment) Rules, 2015, specifying “Indian Ownership.” Furthermore, the Indian Insurance Companies (Foreign Investment) Rules, 2015 were amended by the Indian Insurance Companies (Foreign Investment) Amendment Rules, 2016, which were notified on March 16, 2016, to allow foreign investment up to 49 percent in the insurance sector through an automatic route rather than the government route for foreign investment greater than 26 percent and less than 49 percent. The Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) (Seventh Amendment) Regulations, 2016 and the Insurance Regulatory and Development Authority of India (Registration of Indian Insurance Companies) (Eighth Amendment) Regulations, 2016 regulate how foreign investments are calculated. 2.2 HISTORY OF INSURANCE IN INDIA Insurance has a long and illustrious tradition in India. It is mentioned in Manu's (Manusmrithi), Yagnavalkya's (Dharmasastra), and Kautilya's writings (Arthasastra). The writings discuss the pooling of resources that could be re-distributed in the event of disasters including fire, floods, epidemics, and famine. This was most likely a forerunner of today's insurance. The Oriental Life Insurance Company was established in Calcutta in 1818, marking the beginning of the life insurance industry in India. However, in 1834, this company went bankrupt. The Madras Equitable started doing life insurance business in the Madras Presidency in 1829. The British Insurance Act was passed in 1870, and the Bombay Mutual (1871), Oriental (1874), and Empire of India (1897) insurance companies were established in the Bombay Residency during the last three decades of the nineteenth century. 19 CU IDOL SELF LEARNING MATERIAL (SLM)

However, international insurance offices that did well in India, such as Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance, dominated this period, and the Indian offices faced stiff competition from the foreign firms. The Government of India began publishing the returns of Indian insurance companies in 1914. The Indian Life Assurance Companies Act of 1912 was the first piece of legislation to govern the life insurance industry in India. The Indian Insurance Companies Act was passed in 1928 to enable the government to collect statistical data on both life and non-life insurance transactions conducted in India by Indian and foreign insurers, including provident insurance societies. The earlier statute was consolidated and modified by the Insurance Act, 1938, with comprehensive provisions for effective regulation over insurers' operations, with the aim of protecting the interests of the insurance public. Principal Agencies were repealed by the Insurance Amendment Act of 1950. However, there were a lot of insurance firms, so there was a lot of competition. There were also claims of deceptive business practises. As a result, India's government agreed to nationalise the insurance industry. General insurance has a long tradition dating back to the western Industrial Revolution and the subsequent rise of sea-faring trade and commerce in the 17th century. It was brought to India as a result of the British occupation. General insurance in India dates back to the British establishment of Triton Insurance Company Ltd. in Calcutta in 1850. The Indian Mercantile Insurance Ltd. was established in 1907. This was the first firm to do business with all types of general insurance.The General Insurance Council, a wing of the Insurance Association of India, was established in 1957. The General Insurance Council drafted a code of ethics to ensure ethical behaviour and good business practises. The Insurance Act was revised in 1968 in order to control investments and provide minimum solvency margins. At the time, the Tariff Advisory Committee was also created. 20 CU IDOL SELF LEARNING MATERIAL (SLM)

Table 2.1 Insurance in India The start of reform: The international payment crisis of the 1990s forced the Government to re-think its industrial policies and regulations. The Government only had enough foreign currency reserves to finance a few days of imports. 2.3 NATIONALIZATION OF INSURANCE SECTOR In the early 1970s, there were approximately 100 Indian insurers operating in India's general insurance market. Malpractices and mismanagement had infiltrated into these businesses' management. Any insurance firms either went bankrupt or defrauded policyholders. Many 21 CU IDOL SELF LEARNING MATERIAL (SLM)

insurance firms have been accused of falsifying and denying claims, interlocking funds, and other malpractices. The government began considering nationalisation of the insurance industry to safeguard public funds. On January 19, 1956, an ordinance was passed to nationalise the life insurance industry, and the Life Insurance Corporation was formed the same year. The LIC took on 154 Indian and 16 non-Indian insurers, as well as 75 provident societies, for a total of 245 Indian and international insurers. Until the late 1990s, when the insurance industry was reopened to the private sector, the LIC had a monopoly. The government of India took over the control of all private general insurance companies in 1971 as a prelude to nationalisation of the sector. The General Insurance Business was nationalised in 1972. The primary goal of nationalisation was to channel insurance funds for the benefit of the entire population. The General Insurance Corporation of India (GIC) was formed as a Holding Company with the passage of the General Insurance Act 1972. New India, Oriental, United India, and National Insurance Companies were its four subsidiaries. GIC was in charge of large policy issues that could impact India's general insurance industry. Except for the aviation insurance policies of Air India, Indian Airlines, Hindustan Aeronautics, and Crop insurance, the company did not sell any direct insurance policies. As a result, General Insurance was largely handled by GIC's four subsidiaries. GIC founded the GIC Asset Management Company to manage the GIC Mutual Fund, GIC Housing Finance, and Export Credit Guarantee Corporation, in addition to the four subsidiaries. The nationalisation of life insurance is a significant move forward in our socialist transformation. Its goal will be to serve both the citizen and the state. We need life insurance to spread quickly across the country and provide a sense of protection to our citizens. – Jawaharlal Nehru, 1st Prime Minister of India The Life Insurance (Emergency Provisions) Ordinance, 1956, was passed on January 19, 1956, and was the first step toward nationalisation of life insurance. The management of insurers' \"managed industry\" was vested in the central government under this Ordinance. The time period between 19 January 1956 and 31 August 1956 was used to prepare for the eventual merger of the different insurers into a single state-owned corporation. The insurance industry was previously organised into 243 autonomous units, each with its own administrative structure of office and field personnel, as well as its own collection of agents and medical examiners. Their offices were located in major cities, and their operating area was limited to major metropolitan areas. There were 103 Indian insurance companies with headquarters in the four cities of Bombay, Calcutta, Delhi, and Madras, out of a total of 145. When the Corporation was formed on September 1, 1956, it combined the managed business of 243 different units, both Indian and international, that were engaged in the transaction of life insurance business in India into one 22 CU IDOL SELF LEARNING MATERIAL (SLM)

organisation. As of August 31, 1956, the above 243 units' gross assets were about Rs 4,110 million, with over five million policies in place, insuring a total amount of more than Rs 12,500 million. There were almost 27,000 salaried workers in total. These diagrams depict the scope of the problem involved in establishing an integrated framework. When parliament established the LIC as a monopolistic public undertaking, it was argued and believed that eliminating competition and the malpractice that competition has spawned will result in: a) Better and more cost-effective management of the life insurance business. b) Operating costs are reduced. c) A higher level of service efficiency. d) An increase in business volume. e) Maximizing the social benefits that insurance can offer by increasing the returns on life fund assets while maintaining the stability and liquidity of the invested funds. The Corporation's Executive Committee was made up of the Chairman, two Managing Directors, and two other Corporation members. An Investment Committee, comprised of the Chairman, a Functional Director, and five other individuals, was also formed to advise the company on matters relating to the investment of its funds. Bombay, Calcutta, Madras, Delhi, and Kanpur served as the zonal head offices, with the zonal head offices situated in Bombay, Calcutta, Madras, Delhi, and Kanpur. The Corporation's headquarters is situated in Bombay. Any full-time employee of the insurers whose company was transferred to the Corporation and vested in it became a Corporation employee. They continued to work in the same roles for the same pay, on the same terms and conditions, and with the same rights and benefits as before. The Corporation was mandated to have actuaries investigate the financial state of the Corporation's business, including a valuation of its liabilities, at least once every two years, and send a report to the Central Government. Other than Indian insurers, there were many types of life insurance offices, with non-Indian life offices constituting the largest category. Then there were provident societies, which were established with the aim of selling small- dollar life insurance policies to low-income people. 23 CU IDOL SELF LEARNING MATERIAL (SLM)

As compared to the total life fund that it can come to manage, the amount of capital needed to start or operate an insurance business is incredibly small. After control has been established, the trend has been to use the funds to meet the capital needs of businesses that are of concern to the companies rather than those that are obviously in the interests of policyholders. Another justification given for the nationalization of the insurance industry was this. Many small units were insolvent, as shown by their valuation deficits, and they ultimately struggled to fulfil claims on matured policies. They either found absorption with another corporation or went into liquidation in such a situation. Between 1950 and 1954, 43 life offices closed their doors. This can be attributed in part to the amendment Act of 1950, which required reorganization and cost control. On February 29, 1956, when the Life Insurance (Emergency Provisions) Bill 1956 was introduced in the Lok Sabha, then-Finance Minister C D Deshmukh said, \"Insurance is an important social service that a welfare state must make available to its citizens, and the State must assume responsibility for rendering this service once it cannot be given in any other way.\" 24 CU IDOL SELF LEARNING MATERIAL (SLM)

Although the inability of the insurance industry as a whole to live up to the high standards expected of them has prompted the government to take this action. I'd like to emphasize that nationalization in this area is justified in and of itself. With the profit motive removed and service quality as the sole requirement under nationalization, it would be possible to spread the message of insurance as widely as possible, reaching out beyond the more developed urban areas and into previously overlooked rural areas. The Finance Minister also announced that the government began an inquiry into the private sector's operation in the Life Insurance Industry in 1951. He stated that the insurance industry is not fulfilling the position that is expected of it in modern times, and that efforts to improve standards are needed. In response to the insurance industry's poor results, he claimed that private insurers had incurred excessive expenses. According to him, the management cost to premium income ratio for Indian insurers was 27 percent. And the imposition of legislative cost limits had failed to rein in extravagant spending. In terms of policy servicing, he said that with all of this high spending, one would think that policyholders would be well served, but that was not the case. There were no post-sale programmes, and lapses remained high. He also claimed that numerous corporations engaged in large-scale fraudulent investments in order to redirect funds to other uses. He stated that between 1944 and 1954, private companies engaged in mismanagement and outright fraud, resulting in the liquidation of as many as 25 insurance companies. Approximately 75 of the operating companies were unable to declare any incentive at their valuations. Furthermore, according to Shri Deshmukh, insurance firms have remained restricted to urban areas and the creamiest layers of the insuring public, completely ignoring the common citizens and the rural areas. In terms of claim settlement, he stated that several businesses routinely delayed or avoided paying claims until compelled by legal means. In 1954, the government received a thousand complaints alleging claim delays and non- payment. Under Section 47 A of the Insurance Act of 1938, a number of grievances were referred to the Controller of Insurance. The insurance firms were found to be incorrect in the majority of cases, and there were strong attempts to defraud the insuring public. As a result, it was felt that private insurance firms in India had failed to meet the standards of the insured. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

2.4 LIBERALIZATION IN INSURANCE SECTOR Although Indian Economy started opening up both to private sector and to foreign investment in the year 1991, Insurance sector still remained the domain of Govt. of India. However, the Government realized that there was a need to bring reforms in the Insurance Sector in case this sector has to evolve. Fig 2.1 Liberalization in Insurance Sector In 1993, the Central Government formed the Malhotra Committee, led by former Finance Secretary and RBI Governor R.N. Malhotra, with the aim of reforming the insurance sector. As a result, the Malhotra committee was established with the aim of completing the financial sector reforms. The reforms sought to create a more stable and sustainable financial system that could meet the needs of the economy, while also taking into account the systemic changes that are currently taking place and understanding that insurance is an integral part of the overall financial system that required similar reforms. The committee submitted its report in 1994, with the following main recommendations: A. Organization: a. The government's interest in insurance companies will be reduced to 50%. b. The government should take over GIC's holdings and branches, allowing them to operate as separate entities. 26 CU IDOL SELF LEARNING MATERIAL (SLM)

c. All insurance firms should be allowed more flexibility in their operations. B. Competition: a. Private companies with a minimum paid-up capital of Rs.1 billion should be permitted to participate in the market. b. No one company should be involved in both life and general insurance. c. Foreign companies may be required to collaborate with domestic companies to join the industry. d. Postal Life Insurance should be permitted to do business in rural areas. e. Each state should only allow one State Level Life Insurance Company to operate. C. Regulatory Authority a. The Insurance Act needs to be revised. b. A regulatory body for insurance should be created. c. The Insurance Controller, which is part of the Finance Ministry, should be made autonomous. D. Investments : a. The LIC Life Fund's mandatory investments in government securities will be reduced from 75% to 50%. b. GIC and its subsidiaries are not allowed to own more than 5% of any corporation (current holdings must be reduced to this amount over time). E. Customer Service : a. LIC should pay interest on payments that are more than 30 days late. b. Insurance firms should be enticed to develop unit-linked pension schemes. c. The insurance industry's processes will be computerised, and equipment will be updated. The committee stressed that the insurance sector should be opened up to competition in order to boost customer support and expand policy scope. However, the committee felt compelled to be cautious, as any failure on the part of new entrants could jeopardise public trust in the industry. As a result, it was agreed to enable restricted competition by setting a minimum capital requirement of Rs.100 crores. The committee thought it was necessary to give insurance companies more control in order to boost their efficiency and allow them to operate as self- 27 CU IDOL SELF LEARNING MATERIAL (SLM)

contained businesses with profit motives. It had suggested establishing an independent regulatory body for this reason. Phase I – Pre-liberalisation: Phase II – Liberalisation: The international payment crisis of the 1990s forced the Government to re-think its industrial policies and regulations. The Government only had enough foreign currency reserves to finance a few days of imports 28 CU IDOL SELF LEARNING MATERIAL (SLM)

Phase III – Post-liberalisation : As we have seen, the insurance market was opened to private companies in response to the Malhotra Committee's recommendations. Joint ventures (JVs) with Indian companies permitted foreign companies to participate in the Indian insurance market. The foreign partner cannot own more than a 26 percent interest in the joint venture under current regulations. The IRDA's main goals are to promote competition with the aim of rising customer loyalty through more consumer choice and lower premiums while also maintaining the insurance market's financial stability. Section 114A of the Insurance Act of 1938 gives the IRDA the authority to make regulations. It has implemented a number of regulations since 2000, ranging from the registration of insurance companies to the protection of policyholders' interests. The Insurance Act of 1938 and the GIBNA were revised, excluding GIC's and its four subsidiaries' exclusive right to write general insurance in India. As a result, the private sector was allowed to enter the general insurance market. GIC ceased to be a holding company with its four subsidiaries with the General Insurance Business (Nationalisation) Amendment Act 2002, which took effect on March 21, 2003. Their ownership was transferred to the Indian government. As a reinsurance firm, GIC was told. 2.5 PRINCIPLES OF INSURANCE The principles of insurance are: i. Law of large numbers ii. Insurable interest iii. Utmost good faith iv. Indemnity v. Subrogation and contribution 29 CU IDOL SELF LEARNING MATERIAL (SLM)

vi. Proximate cause A. Law of large numbers : Imagine that in a village there are 1000 persons who are all aged 50 and are healthy. Based on previous experience, it is expected that of these, 10 persons may die during the year. If the economic value of the loss suffered by the family of each dying person is taken to be Rs.20,000, the total loss would work out to Rs.2, 00,000. If each member contributes Rs.200 a year, this would be enough to pay Rs.20, 000 to the family of each of the ten persons who dies. You would have wondered whether the prediction of number of actual deaths of ten is accurate. What would be the impact if the insurance company’s predictions about the risk turned out to be wrong or inaccurate and the number of deaths turns out to be 15 or 5? If the actual number of persons who die during a year were to be higher than ten, the amount collected would not be sufficient to compensate those who suffer the loss. You need not worry too much about the accuracy of estimates. What saves the insurer is a wonderful principle of nature known as the law of large numbers. Simply put, it states that the more the number of members who are insured, the more likely it is that the actual result would be closer to the expected. Example Try this simple experiment. Toss one rupee coin. We all know that the theoretical probability that the outcome will be ‘heads’ is equal to ½. Does this mean that if you toss a coin four times you will always get two heads and two tails? When can you be hundred percent sure that you will get heads exactly half the time? The answer is, you would have to toss it a very large number of times. You would also notice that the more number of times you toss the coin, the more you would find that the result is coming closer to half. Law of large numbers -Number of tosses of a coin 30 Insurance works on this law of large numbers. Insurance companies are able to make near accurate predictions about their risks because they typically spread that risk amongst thousands, even millions, of members who have signed contracts with them and who are their policy holders. This is the reason why when you purchase an insurance policy, the insurance company is able to give you an assurance that your CU IDOL SELF LEARNING MATERIAL (SLM)

losses would be compensated if they occur due to the insured event. B. Insurable interest Another important principle is insurable interest. Let us understand it with the help of a few examples. Example 1 Shri Manoj was staying with his wife and son. An insurance agent visited him offering health insurance. Manoj indicated that he wanted to take health insurance for all the members of his family. He also wanted to take a policy for his good neighbour. The insurer said that Manoj can take a policy for his family but cannot take a policy for his neighbour. The reasons why the insurer refused to issue insurance policy to Manoj’s neighbour was because Manoj did not have an insurable interest in his neighbour’s health. Insurable interest is the term we use to describe the relationship between the insured and the subject matter of insurance (in the above case it is the health of Manoj and his family on one hand and Manoj’s neighbour). This relationship gives Manoj a particular type of interest in the health of himself, his wife and child, whereby he benefits from the good health and suffers a financial loss by way of hospital expenses if one of the members of his family falls ill. We buy insurance to ensure that the loss suffered is compensated for in some way. The position is not so in case of Manoj’s neighbour as Manoj does not suffer any financial loss due to his neighbour falling ill. Insurable interest exists when an insured person Derives a financial benefit from the continued existence of the insured object or suffers a financial loss from the loss of the insured object. A person has an insurable interest in something when loss-of or damage-to that thing would cause the person to suffer a financial loss. C. Utmost good faith: While ordinary commercial contracts are good faith contracts, insurance contracts are contracts of utmost good faith. Let us distinguish between good faith and utmost good faith with the help of example. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

The commercial contracts are normally subject to the principle of “Caveat Emptor” i.e. let the buyer beware. In most of these contracts each party to the contract can examine the item or services which is the subject matter of contract. For e.g. If you go to the market to buy vegetables then you have to be careful yourselves about quality while buying the vegetables and after buying you cannot question the vendor. Each party believes in the statement of the other party. So long as there is no attempt to mislead & the answers are given truthfully, the question of avoiding the contract would not arise. In the Insurance contract the product sold is intangible. It cannot be seen or felt. Most of the facts relating to health, habits, personal history and family history are known to one party only, the proposer. The insurer can know most of these facts only if the proposer decides to disclose these facts. It is true that the underwriter can have the assistance of medical report for life Insurance proposal. Sometimes, these aspects are not detected by the medical examination. e.g., a person suffering from high B.P. or diabetes can manage to hide these facts from the examining doctor. The history of past serious sickness, operations and injuries can be suppressed. These aspects may affect the life expectancy of the proposer. Hence, these constitute material information from the underwriter’s point of view. Non-disclosure of such facts would put the insurer as well as the community of policyholders at a disadvantage. For these purposes, the statute imposes a higher level of responsibility on the parties to an insurance contract than it does on the parties to other contractual contracts. This is an obligation of the highest good faith (uberrima fides). The assured must make a complete report to the underwriter without being questioned. There is an implicit clause of an insurance policy that each party must reveal all relevant facts that he is aware of. This form of contract is known as uberrima fides, which means \"absolute good faith.\" As a result, utmost good faith can be characterized as a positive obligation to report accurately and completely all information relevant to the risk being proposed, whether or not requested. The material fact is the information that would affect a cautious insurer's decision to set the premium or decide whether or not to cover the danger. As a result, information such as age, height, weight, previous medical history, smoking/drinking habits, operations, previous insurance details, and dangerous occupation must be reported. Example 1: 32 CU IDOL SELF LEARNING MATERIAL (SLM)

You went to a car dealership with your parents to look at cars. Your father enquires about the car being considered with the salesman. The salesperson is obligated to have accurate responses to the questions. Similarly, brochures regarding a specific car model cannot render a misrepresentation (lie) about the vehicle. When it comes to good faith contracts, this duty to reveal only the facts exists. Is the car salesperson required to reveal (tell) everything he knows about the vehicle? No, that is not the case. The customer must understand what he is purchasing. Example 2: Shri Kishore, a 45-year-old man, applied for life insurance with a 15-year policy period. If Kishore dies during the policy term, the insurer agrees to pay the amount assured to his legal heirs. The insurer must forecast Kishore's chances of survival over the life of the policy, which is fifteen years. Can the insurer make an accurate forecast without understanding any of Kishore's medical background, past illnesses, family health history, behaviors, and so on? Kishore will not be able to tell the insurer these details unless he fully revealed them. Any health issue will reduce the likelihood of surviving until the end of the insurance term, resulting in the insurer paying the amount assured to Kishore's claimants. As a result, the cost of insurance is higher for the provider if the insured's illness is not revealed. Consider the following scenario: the policy being sold has unique features and requirements specified in the policy text. Can Kishore be aware of these features and conditions unless the insurer informs him of them? Although the buyer of a car can see, touch, and test-drive the vehicle, the buyer of insurance just gets a guarantee that he or claimants acting on his behalf will be paid a sum if anything goes wrong. On the other hand, the car seller is well aware of what he is offering and what his production costs are. In the case of the insurer (Example 2), he can guess (estimate) the probability of loss and the amount of loss that might occur (which will be enormous in comparison to the premium collected) when entering into a contract based on his knowledge of the ‘risk' that he is accepting. It's worth noting that when an insurance policy is signed, the insured person knows everything there is to know about the danger being insured, but the insurer doesn't. Only what the insured tells him about the risk will the insurer determine the likelihood of loss (depending on whether he accepts the risk and charges the premium). Similarly, unless the benefits are made clear to the insured in relation to the amount charged (premium paid), he would not be able to make an informed decision. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

As a result, insurance contracts are treated differently than other types of commercial contracts. Both parties to the contract are required to disclose all material details. As a result, insurance policies are referred to as \"contracts of utmost good faith.\" These contracts are known as contingent contracts because they are dependent on the prediction of an event (known as a contingency). The prediction is contingent on full disclosure of all information that could affect the risk. As a result, the insurance proposer has a legal obligation (legal duty) to report all material information applicable to the insurance subject matter. Definition: A material fact is one that would influence a cautious insurer's decision on whether or not to accept a risk, and if so, at what rate or premium, and under what terms and conditions. Consider the following scenario: i. When insuring a warehouse, the form of construction of the building and the condition of the products stored must be disclosed; ii. The type of packaging and mode of transportation must be disclosed in the case of goods in transit (Marine Cargo insurance). iii. In the case of life insurance, the wellbeing of those who are being insured, as well as knowledge of previous illnesses and procedures, must be revealed. D. Principle of indemnity: Let's look at an example to better grasp the concept of indemnity. For instance, Jayesh had a shop that caught fire, and as a result, a portion of the merchandise was destroyed. The shop's entire amount of Rs.5,00,000 was insured. Since Jayesh had insured his shop for Rs. 5,00,000, he asserted Rs. 5,00,000. The harm was investigated by an insurance company surveyor, who determined the loss to be just Rs. 64,000. Even though Jayesh had a policy worth Rs. 5,00,000 and claimed for more, the insurance firm paid Rs. 64,000 in compensation. The insurer was enforcing the \"Principle of Indemnity,\" a legal principle. You are paid for the amount of money you lose - nothing more, nothing less. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

Fig 2.2 Principle of indemnity The indemnity principle states that only the loss, and only the loss, is paid. The insurer is required to indemnify (pay for the insured's financial loss). At the same time, the insured should not be compensated for any more than his financial loss. To put it another way, the insured should not be able to benefit from the loss. The purpose of an insurance policy is to compensate an individual who has suffered a loss in order to put him back in the same financial condition as before the loss. The insurance policy only compensates or indemnifies you for the amount of your loss and nothing else. It's important to remember that insurance plans have an amount insured, which is the cumulative value of the liability that the insurer assumes in the policy. Depending on the form of policy, the amount insured should be understood as follows: i. The value of a vehicle, ii. The value of a home, iii. The expected medical expense, or iv. The sum that will cover a family's financial needs in the event that the breadwinner died. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

Any higher amount paid will usually result in a benefit for the insured. Under insurance policies, payments for loss or injury are restricted to the total cost of the loss or damage or the sum covered, which is the insurer's overall liability. The aim is to demonstrate that one does not hope to benefit from a loss by purchasing insurance. Consider the following scenario: Consider the example of Mrs. X, who buys life insurance. Assume she passes away. Is it possible to calculate the exact amount of loss or harm that has occurred? You will discover that the above questions are difficult to answer. The worth of a person's life is impossible to quantify. As a result, life insurance plans operate under a different premise. The life insurance pays a predetermined sum at the start of the contract. Sum assured is the term for this volume. As a result, rather than contracts of indemnity, life insurance contracts are referred to as contracts of guarantee. E. Contribution and Subrogation: What is the difference between subrogation and contribution? Subrogation and contribution are both derived from the concept of indemnity. a) Subrogation: This is a legal term that refers to the right of a party. Consider the following scenario: Mr. Rajan sends his household goods worth Rs.1,000,000 via M/s. Jayant Transports during his move from Kolkata to Mumbai. Owing to the truck driver's incompetence, some of the goods were damaged during transit. The insurer measured the loss and determined that the damage was worth Rs. 30,000, which it paid to Mr. Rajan as indemnity. Mr. Rajan, on the other hand, took the matter to court against M/s Jayant Transports, and the court directed M/s Jayant Transports to pay Mr. Rajan Rs.30,000. Mr. Rajan would benefit from the loss if he already got Rs.30,000 from the transporter, having already received Rs.30,000 from the insurer. The following should be noted as a result of this situation: i. The insurance firm must pay Mr. Rajan in accordance with the insurance contract as soon as possible, rather than making him wait for the Court's decision. ii. Mr. Rajan should not be entitled to two compensations or benefit from his loss. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

When an insurer pays a claim, the insured's right to claim from somewhere else is taken over by the insurer. Since the insurer has paid the insured the sum of the liability, the insurer is the one who has borne the loss. As a result, the insurer's name should be substituted for the insured's, and the right to sue the person who caused the loss should be transferred to the insurer who paid for the loss and compensated the insured. In the insurance world, this process of the insurer assuming the insured's right is known as \"subrogation.\" In other words, after a premium is paid, the insured's right to file a claim elsewhere is \"subrogated\" to the insurer. When it comes to subrogation, it's important to remember that the insurer's subrogation privileges are restricted to the sum he's paid out in claims. If the Court had directed M/s. Jayant Transports to pay Mr. Rajan Rs.50,000 instead of Rs.30,000, the insurer's subrogation rights will be limited to the amount it paid, with the remaining Rs.20,000 going to Mr. Rajan. How subrogation works : Fig 2.3 How subrogation works: 37 b) Contribution: Consider this situation CU IDOL SELF LEARNING MATERIAL (SLM)

Mr. Kishore had a car worth Rs.5,00,000 and he took full insurance for this car from two insurance companies. The car was totally damaged in an accident and total loss was Rs.5,00,000. Mr. Kishore filed a claim with the 1st company and got paid Rs.5,00,000. He goes to the 2nd insurance company and makes a claim for Rs.5,00,000. The second company informed Mr. Kishore that he was not eligible for getting any more sum because he was already indemnified by the 1st Company. If the 2nd company had also paid him, he would have made a profit out of his loss, to the disadvantage of all the other members who had contributed premiums. This situation is against the principle of indemnity in insurance as Mr. Kishore would be making a profit out of his loss. The principle of contribution refers to the right of an insurer who has paid a loss under a policy to recover a proportionate amount from other insurers who are also liable for the loss. Example : If a property is insured under two fire policies each for Rs. 300,000, in the event of a partial loss of Rs.1,00,000, the insured is entitled to recover his full loss from any one of the insurers who, thereafter is entitled to recover from the other insurer his proportionate share . i.e., Rs.50,000. So, the different insurers under different policies contribute in indemnifying and paying for the loss caused by an insured peril. F. Principle of proximate cause: Let us understand the principle of proximate cause with the help of an example. Example : Mr. Prathamesh had taken an accident insurance policy which covered death by accident. While walking on the road one day, he was hit by a car. He was rushed to the hospital. Being a person with a weak heart, he could not stand the shock of the event and died after a few hours from heart failure. The insurance company disputed the claim saying it was the heart attack rather than the accident which had caused his death. The court ruled that even though the immediate cause of death may have been collapse of the heart, the proximate cause of death was the accident and ordered the company to pay the claim. The above example is a case of a key principle in insurance, known as proximate cause. The word ‘proximate’ means ‘nearness’ or ‘closeness’. The concept is that the cause that is ‘closest’ (in its effect) to the loss, is considered to decide whether a claim is payable or not. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

If loss to an insured property is the result of two or more causes acting simultaneously or in succession (one after another), it becomes necessary to choose the most important, the most effective or the most powerful cause which has brought about the loss. It is the active efficient cause that sets into motion a train of events which brings about a result, without the intervention of any other force. This cause is termed as “proximate cause”, all other causes being considered as “remote”. If the proximate cause of loss is covered under the policy, the claim becomes payable. 2.6 SUMMARY ▪ After India's independence, the insurance industry has been a fast-growing market. The Insurance Sector was regulated by the British entity Oriental Life Insurance Company, which was established in Calcutta in 1818. However, the scope of insurance topics was very narrow at the time. ▪ The author of this paper has concentrated on the incremental advancements made in the field of insurance. This dates back to ancient historical and British times, when British companies and a few other foreign companies dominated the market. ▪ In 1956, the government began nationalizing the financial sector, and all insurance companies were taken over by the government. The Life Insurance Corporation Act was passed in 1956 for the sole purpose of conducting life insurance business. ▪ In 1993, an eight-member committee was created, chaired by M.N. Malhotra, to make recommendations for improving the regulatory system. The Insurance Sector should be privatized, and an Insurance Regulatory Authority should be created, according to the major recommendations. The Insurance Regulatory and Development Authority Act was passed with the aim of safeguarding insurance policyholders' interests. ▪ As a result, the legislature's interest can be seen in the successful enactments that regulate and promote the insurance industry in India. Following independence, there has been a rapid shift in this market. ▪ After liberalization and nationalization, the insurance sector has been brought under the supervision of IRDA and other authoritative bodies in a very regulated atmosphere. ▪ The seven principles of insurance are: - 39 CU IDOL SELF LEARNING MATERIAL (SLM)

• Principle of Uberrimae fidei (Utmost Good Faith), • Principle of Insurable Interest, • Principle of Indemnity, • Principle of Contribution, • Principle of Subrogation, • Principle of Loss Minimization, and • Principle of Causa Proxima (Nearest Cause). 2.7 KEYWORDS • Pre-Liberalisation –In the Indian context economic reforms were based on the assumption that market forces could guide the economy in a more effective manner than government control • Post Liberalisation –The major effect of Liberalization is in the opening of the economy, making it more competitive, getting the government out of the huge morass of regulation, empowering the states to take more responsibility for economic management • Insurable Interest – refers to the interest of a person, financial, or otherwise, in obtaining insurance for a person or property • Utmost good faith – as a positive duty to disclose accurately & fully all facts material to the risk being proposed whether requested or not • Indemnity - is a comprehensive form of insurance compensation for damages or loss • Subrogation - Subrogation is the assumption by a third party of another party's legal right to collect a debt or damages • Proximate cause - cause that is closest’ (in its effect) to the loss, is considered to decide whether a claim is payable or not • Contribution - refers to the right of an insurer who has paid a loss under a policy to recover a proportionate amount from other insurers who are also liable for the loss 40 CU IDOL SELF LEARNING MATERIAL (SLM)

2.8 LEARNING ACTIVITY 1. If a property is insured under two fire policies each for Rs. 300,000, in the event of a partial loss of Rs.1,00,000. What would be the share given to the insured? ___________________________________________________________________________ ____________________________________________________________________ 2.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Why do people need life insurance? 2. What are the three phases of the development of the insurance sector in India? 3. Describe what happened in the most recent phase in insurance sector in India? 4. If a person is suffering from Cancer/heart disease whether it is duty of person to inform to the insurance company? 5. Whether can you take life insurance policy of Mr. Amitabh Bachchan? Long Questions 1. Why did the Government think it necessary to nationalize the life insurance industry in the 1950s? 2. Describe the principles of Insurance? 3. Is it essential that insurable interest should be present in every insurance contract? If yes, explain. 4. Explain the provisions of Article of 41 of Indian Constitution. 5. Explain various risk assumption B. Multiple Choice Questions 1.The first Insurance company in India a. Oriental Life insurance company – Kolkata b. LIC 41 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Max New York life insurance company 42 d. Old mutual Life insurance company. 2. Insurance Act was amended in the year a. 1939 b.1938 c. 1872 d.1999 3. The name of the committee formed for the insurance reforms a. Malhotra b. Jagadish committee c. Insurance Regulatory Committee d. IRDA Regulatory committee 4. LIC abbreviation a. Life insurance corporation b. Life insurance council c. Life investment company d. Life insurance company. 5. Postal Life Insurance should be allowed to operate in a. Rural market b. Foreign c. Urban market d. Both Rural and urban market. CU IDOL SELF LEARNING MATERIAL (SLM)

Answers 1-a,2-a,3-a,4-a,5-d 2.10 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. • IC- 33 – Insurance Institute of India. Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 43 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 3: LEGAL DIMENSION OF INSURANCE Structure 3.0. Learning Objectives 3.1. Introduction 3.2. Contract of Insurance 3.3. Insurance Act 1938 3.4. LIC Act 1956 3.5. GIC Act 1972 3.6. IRDA 1999 3.7. Summary 3.8. Keywords 3.9. Learning Activity 3.10. Unit End Questions 3.11. References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • Outline the Insurance Contract • Outline about Insurance Act 1938 • Outline about LIC Act 1956 • State the GIC Act 1972 • Explain the IRDA 1999 3.1 INTRODUCTION A contract of insurance is an arrangement in which one party, the insurer, agrees to pay the other party, the insured, a sum of money or its counterpart in kind in the event of a stated event resulting in a loss to him in exchange for a negotiated consideration, called the 44 CU IDOL SELF LEARNING MATERIAL (SLM)

premium. The policy is a paper that serves as proof of the insurance arrangement. According to Anson, a contract is an enforceable legal arrangement between two or more people in which one party gains rights to certain actions or forbearance on the part of another or others. In order to be legally legitimate, an insurance policy must meet four requirements: it must be for a lawful purpose; the parties must have legal ability to contract; there must be proof of a meeting of minds between the insurer and the insured; and there must be payment or consideration. We will look at different Actions that are specifically related to the insurance business as well as some Acts that are indirectly related to the insurance business in this module. We have listed two Acts in the following paragraphs, the LIC Act 1956 and the GIBN Act 1972, but we will not clarify these acts because they have lost their significance due to the changing scenario in the country's insurance market. The Insurance Act of 1938 is the main piece of legislation that governs the insurance industry in India. The Life Insurance Corporation (LIC) Act, 1956, the Marine Insurance Act, 1963, the General Insurance Business (GIB) (Nationalization) Act, 1972, and the Insurance Regulatory and Development Authority (IRDA) Act, 1999 are some of the other current laws in the region. The terms of the Indian Contract Act of 1872 apply to all insurance policies, whether they be for life or non-life. Similarly, businesses engaged in the insurance industry are subject to the rules of the Companies Act, 1956. The Insurance Rules, 1939, and the Ombudsman Rules, 1998, framed by the Central Government under Sec.114 of the principal Act, as well as 32 regulations framed by the IRDA under Sec.114 A of the principal Act and Sec.26 of the IRDA Act 1999, are among the subordinate legislation. The new industrial strategy, announced in 1991, envisioned a transformation of the economy from a controlled to a liberalized and deregulated system, culminating in the privatization of the insurance industry in order to provide better coverage to people and increase long-term financial capital. With the entry of several private players into the market, especially foreign companies in joint ventures with Indian partners, competition was bound to heat up in the future. It was critical to have an effective regulatory framework in place to deter insurers from misusing policyholders' and shareholders' funds and to ensure transparency. As repositories of public trust, insurers needed to regulate their operations effectively to ensure that they remained worthy custodians of that trust. Furthermore, insurance cash flows 45 CU IDOL SELF LEARNING MATERIAL (SLM)

provided funds for social sector investments as well as infrastructure growth. As a result, insurance regulation needed to transition from a supervisory and supervision position to a development role in order for the insurance industry to foster economic growth. 3.2 CONTRACT OF INSURANCE The Indian Contract Act of 1872 lays out the fundamentals of a contract. • “All arrangements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful item, and are not hereby explicitly declared to be void.....,” according to Section 10 of the Act. • An insurance policy is also a contract between two parties, the Insurance Company and the Policyholder, that complies with the Indian Contract Act's requirements. Essentials of a valid Insurance contract : Fig 3.1 Contract of Insurance 1. Proposal: When one person expresses his or her desire to do or refrain from doing anything in order to gain the other's consent to that act or abstinence, he or she is said to make a proposal (“Promisor”). 46 CU IDOL SELF LEARNING MATERIAL (SLM)

In insurance jargon, a Proposal form (also known as an insurance application) is filled out by the individual who wishes to obtain insurance coverage, including the details needed by the insurance provider to assess the risk and determine the amount to be paid for covering the risk (known as the \"premium\"). Based on the details provided in the proposal form, the insurance agent assesses the risk (also known as underwriting) and communicates the decision – if approved, at what premium, and under what terms and conditions. In insurance terms, this is referred to as a \"counter bid\" from the insurance provider to the customer. Before making a counter bid, a medical test is performed if necessary. The plan is rejected if the insurance provider cannot consider the risk. A proposal is when an insurance provider expresses its willingness to consider a risk by citing a premium. 2. Acceptance: The proposal is said to be approved (“Promisee”) when the individual to whom it is made indicates his assent to it. When a proposal is approved, it becomes a guarantee. 3. Consideration: When the promisee or another person has done or abstained from doing, or does or abstains from doing, or agrees to do or abstain from doing something at the request of the promisor, the act, abstinence, or promise is referred to as a consideration for the promise. As can be seen from the above, the consideration for the contract is a sum equal to the Premium charged by the Customer. Every promise, or collection of promises, that forms the basis of mutual consideration, is an agreement. 4. Competency to contract: Any person who is of legal age according to the law to which he is subject, is of sound mind, and is not barred from contracting by any law to which he is subject is competent to contract. In the case of insurance, the person with whom the contract is entered into is referred to as the \"Policyholder\" or \"Policy Owner,\" who may or may not be the insured subject matter. For example, in life insurance policies, the individual whose life is insured will be different. The 47 CU IDOL SELF LEARNING MATERIAL (SLM)

Policyholder, for example, may be the father and the Life Assured, the son. In the case of fire insurance, the policy owner may be the owner of a house, and the building itself would be the focus of the insurance. At the time of signing the proposal, the Policyholder must have reached the age of majority, be of sound mind, and not be excluded by any statute. The guaranteed life, on the other hand, could be afflicted by the aforementioned flaws. 5. Consensus ad idem: When two or more people agree to the same issue in the same way, they are said to consent. In the same way, the insurance provider and the policyholder must agree to the same matter. The insurer's obligations and the terms and conditions on which the Insurance contract is issued are specifically described in the Policy document issued to the Policyholder (\"Customer\"). Consent given freely: When consent is not influenced by – it is said to be free. 1. Threats or coercion 2. Excessive power or 3. Deception or 4. Fraud or misrepresentation 5. Errors In insurance, the third and fourth grounds for voiding consent are more relevant. The values of 'utmost good faith' underpin insurance contracts. The Policyholder is required to tell the truth about his or her health, family background, wages, occupation, or the subject matter insured, without concealing any material reality, in order for the underwriter to properly assess the risk. The insurance insurer has the right to terminate the contract if it is determined by the insurance company that the Policyholder did not truthfully report any fact in the Proposal form that had a material effect on the underwriter's decision. When a party's consent to an agreement is obtained by intimidation, deception, or misrepresentation, the agreement becomes a contract that can be cancelled at the request of the party whose consent was obtained in this manner. 6. Lawful object: An agreement's consideration or object must be legal. In the following situations, the consideration or object of an arrangement is illegal: (a) Where a contract is forbidden by law or 48 CU IDOL SELF LEARNING MATERIAL (SLM)

(b) Where the contract is of such nature that, if permitted, it would defeat the provisions of any law or is fraudulent; (c) Where the contract involves or implies, injury to the person or property of another; or (d) Where the Court regards it as immoral, or opposed to public policy. Every agreement of which the object or consideration is unlawful is void An insurance contract's goal, i.e., to cover a risk by purchasing an insurance policy, is a legal one. 7. Agreement must not be in restraint of trade or legal proceedings: Any arrangement prohibiting anyone from engaging in a lawful occupation, trade, or enterprise of any sort is null and void to that degree. All arrangement that prevents any party from exercising his rights under or in respect of a contract by ordinary legal proceedings in ordinary tribunals, or that restricts the time during which he can do so, is void to the degree that it does so. 8. Agreement must be certain and not be a wagering contract: Agreements whose value is uncertain or incapable of being determined are void. Agreements made in the form of a wager are void, and no action can be brought to recover something allegedly gained on a wager, or assigned to any person to abide the outcome of any game or other unknown occurrence on which a wager is made. Features of an Insurance Contract: While all contracts have the same basic principles and elements, insurance contracts have a variety of characteristics that aren't common in other forms of contracts. The most common characteristics are described below: (a) Aleatory : The contract is said to be aleatory if one of the parties to it stands to gain significantly more in value than he or she gives up under the terms of the agreement. This form of insurance policy exists because the insured (or his or her beneficiaries) can earn significantly more in claim proceeds than was charged to the insurance provider in premium, depending on chance or any number of unpredictable outcomes. On the other hand, if no claim is filed, the insurer will end up with substantially more money than the insured party. Insurance plans, on the other hand, are based on the principle of \"risk pooling.\" . 49 CU IDOL SELF LEARNING MATERIAL (SLM)

Although insurance firms may pay claims in some instances, they may not in others. Overall, the insurance company would be profitable if the Premiums collected were adequate to cover the remuneration charged to intermediaries, expenses, administration expenses, profit margins, and Claims. (b) Adherence: In a contract of adhesion, one party draughts the contract in its entirety and presents it to the other on a 'take it or leave it' basis; the receiving party is unable to negotiate, revise, or delete any part or clause of the agreement. This is the case of insurance policies, in which the insurer writes the policy and the insured either 'adheres' to it or is refused coverage. When a court of law must make legal determinations due to uncertainty in a contract of adhesion, the court will view the contract against the party who wrote it. Typically, any rational presumption on the part of the insured (or his or her beneficiaries) resulting from an insurer-prepared contract would be granted by the court. (c) Utmost good faith : While all arrangements should ideally be carried out in good faith, insurance contracts are held to a higher standard, requiring the highest level of trust between the parties. Because of the existence of an insurance contract, each party must depend on the other's representations and statements, and is legally entitled to do so. Each party must have a reasonable expectation that the other is not trying to defraud, mislead, or conceal information, and that they are acting in good faith. - party has an obligation to disclose all material information (that is, information that will possibly affect a party's decision to enter into or reject a contract) in a contract of utmost good faith, and if any such data is not revealed, the other party would normally have the right to cancel the contract. (d). Executory: An executory contract is one in which the covenants of one or more parties to the contract remain partially or completely unfulfilled. Insurance contracts necessarily fall under this strict definition; of course, it's stated in the insurance and agreement that the insurer will only perform its obligation after certain events take place (in other words, losses occur). (e) Unilateral: 50 CU IDOL SELF LEARNING MATERIAL (SLM)