What Is Insurance?

Insurance may be defined as a social device to reduce or eliminate risk

of life and property. Under the plan of insurance, a large number of people associate
themselves by sharing risk, attached to individual. The risk, which can be insured against
include fire, the peril of sea, death, incident, & burglary. Any risk contingent upon these may
be insured against at a premium commensurate with risk is involved.

Insurance is actually a contract between 2 parties whereby one party called insurer undertakes
in exchange for a fixed sum called premium to pay the other party on happening of a certain
event.

Insurance is a contract whereby, in return for the payment of promise by the insured, the
insurers pay the financial losses suffered by the insured as a result of the occurrence of
unforeseen events. With the help of insurance, large number of people exposed to similar
risks makes contributions to a common fund out of which the losses suffered by the
unfortunate few, due to accidental events, are made good.

An insurer is a company selling the insurance, an insured or policyholder is the person or

entity buying the insurance. The insurance rate is a factor used to determine the amount to be
charged for a certain amount of insurance coverage, called the premium.

According to J.B. Maclean, “Insurance is a method of spreading over a large number of

person a possible financial loss too serious to be conveniently borne by an individual.”

Introduction to Insurance:
A contact whereby, first specified consideration, one party
undertake to compensate the other for a loss relating to a particular subject as a result of the
occurrence of a designated hazards.

The normal activities of daily life carrier the risk of enormous financial loss. many person are
willing to pay a small amount for a protection against certain risk because that protection
provides valuable peace of mind. The term insurance describe any measure taken for
protection against risks. When insurance takes the firm of a contract in an insurance policy, it
is subject to requirements in statutes, Administrative Agency regulation, and court decision.

In an insurance contract, one party, the insured, pays a specified amount of money, called a
premium, to another party, the insurer. The insurer, in turn agrees to compensate the insured
for specific future loss. The losses covered are listed on a contract, at the contract is called a
policy.
When an insured suffer a loss or damage that is covered policy, the insured can collect on the
proceeds of the policy by filing a plain, or request for coverage, with the insurance company.
The company than decides whether or not to pay the claim. The recipient of any proceed
from the policy is called the beneficiary. The beneficiary can be the insured person or other
person designated by the insured.

NEED FOR INSURANCE:

All assets have some economic value attached to them. There is
also a possibility that these assets may get damaged / destroyed or became non – operational
due to risks like breakdowns, fire, floods, earthquakes etc. Different assets are exposed to
different types of risks like a car has a risk of theft or meeting an accident, a house is exposed
to risk of catching fire, a human is exposed to risk of death / accident. Hence Insurance is
required for the following reason:

 Insurance acts as an important tool in providing a sense of security to the society on a

whole. In case the bread earner of a family dies, the family suffers from direct
financial loss as family’s income ceases. Life Insurance is one alternate arrangement
that offers some respite to the family from financial distress.

 The basic need of insurance arises as risks are uncertain and unpredictable in nature.
Getting insurance for an asset does not mean that the asset is protected against risks or
its exposure to risk is reduces, but it actually implies that in case the asset suffers any
loss in value due to such risk, the insurance company bears the loss and compensates
the insured by making payment to him.

 Insurance acts as a useful instrument in promoting savings and investments,

particularly within the lower income and middle income families. These savings are
used as investments to fuel economic growth.
 INSURANCE SCENARIO IN INDIA

Classification of Insurance Industry In India

Insurance Industry - India

Life Insurance Non-Life Insurance / General

Insurance

Motor Insurance Fire Insurance Health Insurance Marine

Insurance

In life insurance, India ranked 9th among the 156 countries, for which data are published by
Swiss Re. During 2010-2011, the estimated life insurance premium in India grew by 4.2 per
cent. However, during the same period, the global life insurance premium expanded by 3.2
per cent. The share of Indian life insurance sector in global market was 2.69 per cent during
2010, as against 2.45 per cent in 2009.
IMPORTANT ASPECTS UNDER INSURANCE CONTRACT

1.) Contract and policy:

An insurance contract cannot cover all conceivable risk. An

insurance contract that violates a statute, is contrary to public policy, or a place a part in some
prohibited activity will be held unenforceable in court. A contract that protects against the
loss of burglary tools, for example, is a contrary to public policy and thus unenforceable.

2.) Insurable interest:

To qualify for a insurance policy, the insured must have an

insurable interest, meaning that the insured must derive some benefits from the continued
preservation of the article insured, or stand to suffer some loss as a result of that article's loss
or a destruction. Life Insurance required some familial and pecuniary relationship between
the insured and the beneficiary. Property insurance required that the insured must simply
have a lawful interest in the safety or preservations of the property.

3.) Premiums:

Different types of policy required different premiums based on the

degree of risk that the situation presents. Foe example, a policy insuring a homeowner for all
risks associated with a home value at $200,000 requires a higher premium that 1insuring a
boat valued at $20,000. Although the liabilities for injuries other might be similar under both
policies, the cost of replacing and repairing the boat would be the less than cost of repairing
or replacing the home, and the difference is reflected in the premium paid by the insured.

Premium rates also depends on the characteristics of the insured. For example, a person with
a poor driving record generally has to pay more for auto insurance than does a person with a
good driving record. Furthermore, insurers are free to deny policies to the person who present
an unacceptable risk. For example, most insurance companies do not offer life or health
insurance to person who have being diagnosed with a terminal illness
4.) Claims:

The most common issue in insurance disputes is whether the insurer is

obligated to pay a claim. The determinations of the insurer’s obligation depend on many
factors, such as the circumstances surrounding the loss and the precise coverage of the
insurance policy. If a dispute arise over the language of the policy, the general rule is that a
court should choose the interpretation that is most favorable to the insure. Many insurance
contracts contain an incontestability clause to protect the insured. These clause provides that
the insurer losses the right to contest the validity of the contract after a specified period of
time.

An insurer may have a duty to depend an insured in a lawsuit filed against the insured by a
third party. These duties usually arise if the claims in a suit against the insured fall within the
coverage of the liability policy.
 HISTORY

Insurance in its current form has its history dating back until 1818, when oriental life
insurance company was started by Anita Bhavsar in Kolkata to cater to the needs of European
community. The pre independence era in India saw discriminations between the life's of
foreigners and Indians with higher premium being charged for the latter. In 1870, Bombay
Mutual Life Assurance Society became the first Indian insurer.

At the down of the 20th century, many insurance companies were founded. In the year 1912,
the life insurance companies act and the provident fund act were passed to regulate the
insurance business. The life insurance company act,1912 made it necessary that the premium-
rate tables and periodical variations of the company should be certified by an actuary. The
oldest insurance company in India is the National Insurance Company, which was founded in
1906, and is still in business.

The Government of India issued an ordinance on 19th January 1956 nationalizing the life
insurance sector and life insurance corporation came into existence in the same year. The Life
Insurance Corporation absorbed 154 Indian, 16 Non-Indian insurers as also 75 provident
societies- 245 Indian and Foreign insurers in all. In 1972 with the general insurance business
act was passed by the Indian Parliament, and consequently, General Insurance business was
nationalized in effect from 1st January 1973. 107 insurers were amalgamated and group into
4 companies, namely National Insurance Company Ltd., The New India Assurance Company
Ltd., The Oriental Insurance Company Ltd, and United India Insurance Company Ltd. The
general corporation of India was incorporated as a company in 1971and it commenced
business on 1st January 1973.
The LIC had monopoly till the late 90s when the insurance sector was reopened to the private
sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life
Insurance Corporation Of India) and general insurers ( General Insurance Corporation Of
India, GIC). GIC had four subsidiary companies. With effect from December 2000, these
subsidiaries have been de-linked from the parent company and were set up as independent
insurance companies: namely National Insurance Company Ltd., The New India Assurance
Company Ltd., The Oriental Insurance Company Ltd, and United India Insurance Company
Ltd.

Insurance Companies began to operate for profit in England during the seventeenth century.
They devised the table to mathematically predict losses based on various data, including the
characteristics of the insured and the probability of loss related to particular risk. These
calculation made it possible for the insurance companies to anticipated the likelihood of
claims, and these made the business of insurance reliable and profitable.

The contributions were determined without reference to a member's each, and without precise
identification of what claims would be covered. Without the system to anticipate risks and
potential liability, many of the first friendly societies were unable to pay claims, and many
eventually disbanded. Insurance gradually claim to be seen as a matter best handle by a
company in the business of providing insurance.
 Nature of Insurance

1.) Sharing of Risk-

Insurance is a device to share the financial losses which might

befall on an individual or his family on the of a specified event. These event can be death i.e.
life insurance, fire in fire insurance etc. The loss arising from these events if insured are
shared by all the insured in the form of premium.

2.) Co-operative device-

The most important features of every insurance plan is the

cooperation of large number of person, in effect, agreed to share the financial loss arising due
to a particular risk which is insured. An insurer would be unable to compensate all the losses
from his own capital. So, by insuring or underwriting a large number of persons, he is able to
pay the amount of loss.

3.) Value Of Risk-

The risk is evaluated before insuring to charge the amount of share of

an insured, herein called, consideration or premium. There are several methods of evaluation
of risk. If there is expectation of more loss, higher premium may be charged. So, the
probability of loss calculated at the time of insurance.

4.) Payment At Contingencies-

The payment is made at a certain contingency insured. IF the

contingency occurs, payment is made. Since the life insurance contract is a contract of
certainty because the contingency, the death or the expiry of term, will certainly occur, the
payment is certain.
5.) Amount Of Payment-

The amount of payment depends on the value of loss occurred due to

the particular insured risk provided insurance is there up to that amount. In life insurance, the
purpose is to make the good financial loss suffered. The insurer promise to pay a fix sum on a
happening of an event.

6.) Large Number Of Insured Person-

To separate the loss immediately, smoothly and cheaply, large number of

person should be insured. The co-operation of a small number of persons may also be
insurance but it will be limited to a smaller area. The cost of insurance to each member may
be higher. So, it may be unmarketable.

7.) Insurance is not a Gambling -

The insurance serves indirectly to increase the productivity of the

community by eliminating worry and increasing initiative. The uncertainly is changes in to
certainty by insuring property and life because the insurer promises to pay a definite sum at
damage or death.

8.) Insurance is not Charity -

Charity is given without consideration but insurance is not possible

without premium its provide security and safety to an individual and to the society although it
is a kind of business because inconsideration of premium is guarantee the payment of loss. It
is a profession because its provides adequate sources at the time of disasters only by charging
a nominal premium for the service.
 PRNCIPLES OF INSURANCE

1.) Principe of cooperation

2.) Principle of probability

PRINCIPLE OF CO-OPERATION:

Insurance is co-operative device. If a one person is

providing for his own losses, it cannot be strictly an insurance because in insurance, the loss
is shared by a group of person who are willing to co-operate. The mutual co-operation was
prevailing from the very beginning up to the era of Christ in most of the countries. Lately, the
co-operation took the another form were it was agreed between the individual or the society
to pay a certain sum in advance to be a member of the society. The society by accumulating
the funds, guarantees the payment of certain amount at the time of loss to any member of the
society. The accumulation of funds and charging of the share from the member in advance
because the job of one institution called insurer. Now it become the duty and responsibility of
the insurer to obtain adequate funds from the members of the society to pay than at the
happening of the insured risk. Thus, the shares of loss took the firm of premium. Today, all
the insured give a premium to join the scheme of insurance. Thus, the insured are co-
operating to share the loss of an individual by payment of a premium in advance.
THEORY OF PROBABILITY

The loss in the shape of premium can be distributed only on the basis of theory of probability.
The chances of loss are estimated in advance to affix the amount of premium. Since the
degree of loss depends upon various factors, the affecting factors are analyzed before
determining the amount of loss. With the help of this principal, the uncertainty of loss is
converted into certainty. The insurer while have not to suffer loss as well have to gain
windfall. Therefore, the insurer has to charge only so much of amount which is adequate to
meet the losses. The probability tells what the chances of losses are and what will be the
amount of losses.

The larger the number of exposed person, the better and the more practical would be finding
of the probability. Therefore, the law of large number is applied in the principle of
probability. In each and every field of insurance the law of large number is essential. These
principles keep in account that the past events will incur in the same inertia. The insurance,
on the basis of past experience, present conditions and future prospects fixes the amount of
premium. Without premium, no co-operation is possible and the premium cannot be
calculated without the help of theory of probability, and consequently no insurance is
possible. So, these two principles are the two main legs of insurance.
 What is insurance policy?

In insurance, the insurance policy is a contract (generally a standard form contract) between
the insurer and the insured, known as the policyholder, which determines the claims which
the insurer is legally required to pay. In exchange for an initial payment, known as the
premium, the insurer promises to pay for loss caused by perils covered under the policy
language.
Insurance contracts are designed to meet specific needs and thus have many features not
found in many other types of contracts. Since insurance policies are standard forms, they
feature boilerplate language which is similar across a wide variety of different types of
insurance policies.
The insurance policy is generally an integrated contract, meaning that it includes all forms
associated with the agreement between the insured and insurer.[2]:10 In some cases, however,
supplementary writings such as letters sent after the final agreement can make the insurance
policy a non-integrated contract. One insurance textbook states that generally "courts
consider all prior negotiations or agreements every contractual term in the policy at the time
of delivery, as well as those written afterward as policy riders and endorsements with both
parties' consent, are part of the written policy," The textbook also states that the policy must
refer to all papers which are part of the policy. Oral agreements are subject to the parole, and
may not be considered part of the policy if the contract appears to be whole. Advertising
materials and circulars are typically not part of a policy. Oral contracts pending the issuance
of a written policy can occur.

General features

The insurance contract or agreement is a contract whereby the insurer promises to pay
benefits to the insured or on their behalf to a third party if certain defined events occur.
Subject to the "fortuity principle", the event must be uncertain. The uncertainty can be either
as to when the event will happen (e.g. in a life insurance policy, the time of the insured's
death is uncertain) or as to if it will happen at all (e.g. in a fire insurance policy, whether or
not a fire will occur at all).

 Insurance contracts are generally considered contracts of adhesion because the insurer
draws up the contract and the insured has little or no ability to make material changes to
it. This is interpreted to mean that the insurer bears the burden if there is any ambiguity in
any terms of the contract. Insurance policies are sold without the policyholder even
seeing a copy of the contract.[2]:27 In 1970 Robert Keeton suggested that many courts
were actually applying 'reasonable expectations' rather than interpreting ambiguities,
which he called the 'reasonable expectations doctrine'. This doctrine has been
controversial, with some courts adopting it and others explicitly rejecting it.[5] In several
jurisdictions, including California, Wyoming, and Pennsylvania, the insured is bound by
clear and conspicuous terms in the contract even if the evidence suggests that the insured
did not read or understand them.
 Insurance contracts are aleatory in that the amounts exchanged by the insured and insurer
are unequal and depend upon uncertain future events. In contrast, ordinary non-insurance
contracts are commutative in that the amounts (or values) exchanged is usually intended
by the parties to be roughly equal. This distinction is particularly important in the context
of exotic products like finite risk insurance which contain "commutation" provisions.

 Insurance contracts are unilateral, meaning that only the insurer makes legally
enforceable promises in the contract. The insured is not required to pay the premiums, but
the insurer is required to pay the benefits under the contract if the insured has paid the
premiums and met certain other basic provisions.

 Insurance contracts are governed by the principle of utmost good faith (uberrima fides)
which requires both parties of the insurance contract to deal in good faith and in
particular it imparts on the insured a duty to disclose all material facts which relate to the
risk to be covered. This contrasts with the legal doctrine that covers most other types of
contracts, caveat emptor (let the buyer beware). In the United States, the insured can sue
an insurer in tort for acting in bad faith.

Structure
Insurance contracts were traditionally written on the basis of every single type of risk (where
risks were defined extremely narrowly), and a separate premium was calculated and charged
for each. Only those individual risks expressly described or "scheduled" in the policy were
covered; hence, those policies are now described as "individual" or "schedule" policies. This
system of "named perils"[14] or "specific perils"coverage proved to be unsustainable in the
context of the Second Industrial Revolution, in that a typical large conglomerate might have
dozens of types of risks to insure against. For example, in 1926, an insurance industry
spokesman noted that a bakery would have to buy a separate policy for each of the following
risks: manufacturing operations, elevators, teamsters, product liability, contractual liability
(for a spur track connecting the bakery to a nearby railroad), premises liability (for a retail
store), and owners' protective liability (for negligence of contractors hired to make any
building modifications).
In 1941, the insurance industry began to shift to the current system where covered risks are
initially defined broadly in an "all risk" or "all sums" insuring agreement on a general policy
form (e.g., “We will pay all sums that the insured becomes legally obligated to pay as
damages"), then narrowed down by subsequent exclusion clauses (e.g., "This insurance does
not apply to"). If the insured desires coverage for a risk taken out by exclusion on the
standard form, the insured can sometimes pay an additional premium for an endorsement to
the policy that overrides the exclusion.
Insurers have been criticized in some quarters for the development of complex policies with
layers of interactions between coverage clauses, conditions, exclusions, and exceptions to
exclusions. In a case interpreting one ancestor of the modern "products-completed operations
hazard" clause, the Supreme Court of California complained:

“The instant case presents yet another illustration of the dangers of the present complex
structuring of insurance policies. Unfortunately the insurance industry has become addicted
to the practice of building into policies one condition or exception upon another in the shape
of a linguistic Tower of Babel. We join other courts in decrying a trend which both plunges
the insured into a state of uncertainty and burdens the judiciary with the task of resolving it.
We reiterate our plea for clarity and simplicity in policies that fulfill so important a public
service.”

Industry standard forms

In the United States, property and casualty insurers typically use similar or even identical
language in their standard insurance policies, which are drafted by advisory organizations
such as the Insurance Services Office and the American Association of Insurance
Services. This reduces the regulatory burden for insurers as policy forms must be approved
by states; it also allows consumers to more readily compare policies, albeit at the expense of
consumer choice. In addition, as policy forms are reviewed by courts, the interpretations
become more predictable as courts elaborate upon the interpretation of the same clauses in
the same policy forms, rather than different policies from different insurers.
In recent years, however, insurers have increasingly modified the standard forms in company-
specific ways or declined to adopt changes to standard forms. For example, a review of home
insurance policies found substantial differences in various provisions.[33] In some areas such
as directors and officers liability insurance[34] and personal umbrella insurance[35] there is
little industry-wide standardization.

Manuscript policies and endorsements

For the vast majority of insurance policies, the only page that is heavily custom-written to the
insured's needs is the declarations page. All other pages are standard forms that refer back to
terms defined in the declarations as needed. However, certain types of insurance, such as
media insurance, are written as manuscript policies, which are either custom-drafted from
scratch or written from a mix of standard and nonstandard forms. By analogy, policy
endorsements which are not written on standard forms or whose language is custom-written
to fit the insured's particular circumstances are known as manuscript endorsements.
 TAXATION IN INSURANCE SECTOR

History of Insurance Company Taxation The federal government has historically taxed the
life insurance industry on the basis of income rather than premiums. Prior to 1959, the federal
income tax base for such insurers was net investment income. A deduction was permitted for
a portion of income deemed necessary to meet future obligations to policyholders. However,
the amount of the deduction was based on a specified percentage of reserves or investment
income, rather than on the particular experience of individual insurers. Thus, for certain
insurance companies, the amount of the allowable deduction was too high while for others
the deduction was lower than necessary to accurately reflect the company's financial
condition. A further concern was that only investment income was taxed. Underwriting
income and profits from other sources were not subject to taxation.

The Life Insurance Company Income Tax Act of 1959 attempted to rationalize the taxation of
the life insurance industry. The act taxed life insurance company income from all sources
(rather than just investment income) and based the deduction for reserve liabilities on the
experience of the individual insurer, rather than on the general experience of the industry. In
addition, in order to treat stock corporations and mutual insurers equitably, a limited
deduction for policyholder dividends was provided. However, as outlined below, a number of
provisions of the 1959 law resulted in taxable income differing from economic income:

1. While net investment income was fully taxable, income from other sources was taxed at
50% or less. This created an incentive for insurers to artificially allocate income and expenses
among investment and noninvestment sources.

2. For certain policies, deductions were based on a percentage of premiums, as under prior
law, rather than on the actual experience of the insurer.

3. The amount of gross income treated as interest expense exceeded the amounts credited to
policyholders to compensate them for the use of their money.
4. Estimates of the amount of reserves for tax purposes often were greater than the amounts
required statutorily. Because statutory reserve requirements are set with the objective of
preventing insurance company failures, state regulators were primarily concerned with the
understatement of reserves by insurers. However, the overstatement of reserves had the effect
of reducing taxable income and eroding the tax base. In addition to these problems, disputes
and litigation arose over the classification of various expenditures as interest expenses. The
next major change in the federal taxation of life insurance companies was provided in the Tax
Reform Act of 1984. This legislation sought to remedy the shortcomings of the 1959 law by
taxing all income on the same basis (thus eliminating the incentive to artificially allocate
income and expenses) and basing the deductibility of additions to reserve liabilities on
Internal Revenue Service actuarial rules. In addition, modifications were made regarding the
treatment of policyholder dividends. Further minor adjustments were made in subsequent
legislation. In contrast to the federal government, states have generally attempted to avoid the
problem of determining net income for tax purposes by imposing premiums taxes rather than
income-based taxes on insurance companies. The first premiums tax was imposed by the state
of New York in 1836. This tax was initially imposed only on fire insurance agents
representing foreign companies. In response to this tax, Massachusetts imposed a tax that was
limited to insurance companies domiciled in states that imposed a tax or fee on Massachusetts
insurers doing business in that state. The Massachusetts tax was the first retaliatory tax
enacted in the United States. Subsequently, every state has imposed some form of premiums
tax at some time and most states have enacted retaliatory provisions. In addition, several
states (including Wisconsin) impose income or franchise taxes on certain insurers. Current
insurance tax provisions in other states are discussed in greater detail in a later section of this
paper.

Premiums Tax Versus Income-Based Taxes As noted, the federal and state governments have
differed in the tax treatment of insurance companies, with the federal government imposing
income-based taxes and the states primarily utilizing premiums taxes. In a study of the
taxation of the insurance industry, DOR identified a number of generally recognized policy
and administrative advantages and disadvantages of the premiums tax as opposed to income-
based taxes. The advantages and disadvantages noted by the Department and by other sources
are outlined below.

The premiums tax is generally acknowledged to have the following advantages:

1. The tax is relatively uncomplicated to compute, collect, and administer. Further,

difficulties in determining insurance company net income are avoided. Also, due to its
relative simplicity, the premiums tax lends itself to a single audit which may be utilized by all
states, and the tax more easily fits the concept of retaliation.

2. Because the tax is not dependent upon profitable operations in a given year and premium
volume tends to increase in an expanding economy, the tax provides a relatively stable source
of revenue.

3. The stability of the tax lends itself to actuarial treatment which allows the tax to be passed
on to policyholders relatively easily.
The following disadvantages have been attributed to the premiums tax:

1. The tax is unrelated to the insurer's profitability.

2. In the case of cash-value life insurance, the tax has been criticized as being a levy on thrift
because it is imposed on the entire premium, a portion of which represents savings of the
policyholder.

3. Because the tax is generally passed through to the policyholder, it may impose a greater
burden on persons least able to afford it, such as older insureds and high-risk policyholders
paying higher premiums than standard risks might pay.

4. In relation to income, the tax may impose a greater burden on new or small insurers as
opposed to larger, more established firms with greater reserves and, thus, proportionately
greater investment income.

5. Unequal tax burdens may arise between holders of new versus old policies and between
policyholders in low- and high-premiums tax states. Often, premiums on old policies cannot
be increased to accommodate a premiums tax increase. Thus, such increases must be passed
on to new policyholders to the extent that they are not borne by the insurer. This problem is
more likely to occur with life insurance than nonlife insurance due to the long-term nature of
life policies. In addition, if an insurer cannot vary premium rates from state to state, insured
in low-tax states may have to bear a portion of the tax imposed by 11 a higher tax state.