Meaning and Definition of Insurance

Meaning of Insurance :
Insurance provides financial protection against a loss arising out of happening of
an uncertain event. A person can avail this protection by paying premium to an
insurance company.
A pool is created through contributions made by persons seeking to protect
themselves from common risk. Premium is collected by insurance companies
which also act as trustee to the pool. Any loss to the insured in case of happening
of an uncertain event is paid out of this pool.
Insurance works on the basic principle of risk-sharing. A great advantage of
insurance is that it spreads the risk of a few people over a large group of people
exposed to risk of similar type.
Definition :
Insurance is a contract between two parties whereby one party agrees to
undertake the risk of another in exchange for consideration known as premium
and promises to pay a fixed sum of money to the other party on happening of an
uncertain event (death or other event) or after the expiry of a certain period in
case of life insurance or to indemnify the other party on happening of an
uncertain event in case of general insurance.
The party bearing the risk is known as the 'insurer' or 'assurer' and the party
whose risk is covered is known as the 'insured' or 'assured‘.
 How Insurance Works?
Houses in a village = 1000
Value of 1 House = Rs. 40,000/-
Houses burning in a yr = 5
Total annual loss due to fire = Rs. 2,00,000/-
Contribution of each house owner = Rs. 300/-
UNDERLYING ASSUMPTION
All 1000 house owners are exposed to a common risk, i.e. fire
PROCEDURE
All owners contribute Rs. 300/- each as premium to the pool of funds
↓
Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses * Rs. 300)
↓
5 houses get burnt during the year
↓
Insurance company pays Rs. 40,000/- out of the pool to all 5 house owners whose house
got burnt
EFFECT OF INSURANCE
Risk of 5 house owners is spread over 1000 house owners in the village, thus reducing the
burden on any one of the owners.
 How Insurance Works?
Number of Persons = 5000
Age and Physical condition = 50 years & Healthy
Number of persons dying in a yr = 50
Economic value of loss suffered by family of each dying person = Rs. 1,00,000/-
Total annual loss due to deaths = Rs. 50,00,000/-
Contribution per person = Rs. 1,200/-
UNDERLYING ASSUMPTION
All 5000 persons are exposed to common risk, i.e. death
PROCEDURE
Everybody contributes Rs. 1200/- each as premium to the pool of funds
↓
Total value of the fund = Rs. 60,00,000 (i.e. 5000 persons * Rs. 1,200)
↓
50 persons die in a year on an average
↓
Insurance company pays Rs. 1,00,000/- out of the pool to the family members of
all 50 persons dying in a year
 What is Insurance
In simple terms “Insurance is a co-operative device to spread the
loss caused by a particular risk over a number of persons, who
are exposed to it and who agree to insure themselves against
the risk”
D.S. Hamsell words, insurance is defined “as a social device
providing financial compensation for the effects of misfortune,
the payment being made from the accumulated contributions of
all parties participating in the scheme”
Thus, the insurance is
• (a) A cooperative device to spread the risk;
• (b) the system to spread the risk over a number of persons who
are insured against the risk;
• (c) the principle to share the loss of the each member of the
society on the basis of probability of loss to their risk; and
• (d) the method to provide security against losses to the insured
 Finally Insurance may be defined as
form of contract
between two parties (namely insurer and insured or assured)
whereby one party (insurer) undertakes
in exchange for a fixed amount of money (premium)
to pay the other party (Insured),
a fixed amount of money
on the happening of certain event (death or attaining a certain age
in case of life)
or to pay the amount of actual loss when it takes place through the
risk insured (in case of property)
Be Aware: Insurance can’t prevent the insured event from
happening. It can only provide compensation for the loss that
comes as a result of the insured event happening.
 Nature of Insurance
Following are the main characteristics of insurance which are
applicable to all types of insurance (life, fire, marine and general
insurance).
• Sharing of Risks - Insurance is a device to share the financial losses
which may occur to individual or his family on the happening of
certain events
• Co operative Device – Insurance is a co-operative device to spread
the loss caused by a particular risk over a large caused by a
particular risk over a large number of persons who are exposed to it
and who agree to insure themselves against the risk.
• Value of Risk – Risk is evaluated at the time of insurance. There are
several methods of valuing the risk. Higher the risks, higher will be
premium
• Payment on Contingency -If the contingency occurs, payment is
made; payment is made only for insured contingency. If there is no
contingency, no payment is made. In life insurance contract,
payment is certain because the death or the expiry of term will
certainly occur. In other insurance contract like fire, marine, the
contingency may or may not occur
• Amount of Payment of Claim - The amount of payment depends
upon the value of loss occurred due to the particular insured risk.
The insurance is there upto that amount. In life insurance insurer
pay a fixed sum on the happening of an event or within a specified
time period.
• Example – In fire insurance, if fire occurs and half the property is
destroyed, but the whole property is insured, then payment of
claim will be made only for that half building that is destroyed not
the whole amount of insured.
• Insurance is different from Charity - In charity, there is no
consideration but insurance is not given without premium
• Large number of Insured Person - Insurance is spreading of loss
over a large number of persons. Larger the number of persons,
lower the cost of insurance and amount of premium and incase
lower the number of persons, higher the cost of insurance and
amount of premium.
• Insurance is different from Gambling - In gambling, there is no
guarantee of gain, by bidding the person expose himself to risk of
losing. Whereas in insurance, by getting insured his life and
property, he protect himself against the risk of loss.
 Functions of Insurance
I Primary Functions
1. Certainty of compensation of loss: Insurance provides certainty of
payment at the uncertainty of loss. The elements of uncertainty are
reduced by better planning and administration. The insurer charges
premium for providing certainty.
2. Insurance provides protection : The main function of insurance is
to provide protection against risk of loss. The insurance policy covers
the risk of loss. The insured person is indemnified for the actual loss
suffered by him. Insurance thus provide financial protection to the
insured. Life insurance policies may also be used as collateral
security for raising loans.
3. Risk sharing : All business concerns face the problem of risk. Risk
and insurance are interlinked with each other. Insurance, as a device
is the outcome of the existence of various risks in our day to day life.
It does not eliminate risks but it reduces the financial loss caused by
risks. Insurance spreads the whole loss over the large number of
persons who are exposed by a particular risk.
II Secondary Functions
1. Prevention of losses : The insurance companies help in prevention of losses as
they join hands with those institutions which are engaged in loss prevention
measures. The reduction in losses means that the insurance companies would be
required to pay lesser compensations to the assured and manage to accumulate
more savings, which in turn, will assist in reducing the premiums
2. Provides funds for investment : Insurance provide capital for society. Accumulated
funds through savings in the form of insurance premium are invested in economic
development plans or productivity projects.
3. Insurance increases efficiency : The insurance eliminates the worries and miseries
of losses. A person can devote his time to other important matters for better
achievement of goals. Businessman feel more motivated and encouraged to take
risks to enhance their profit earning. This also helps in improving their efficiencies.
4. Solution to social problems : Insurance take care of many social problems. We
have insurance against industrial injuries, road accident, old age, disability or death
etc.
5. Encouragement of savings : Insurance not only provides protection against risks
but also a number of other incentives which encourages people to insure. Since
regularity and punctuality pf payment of premium is a perquisite for keeping the
policy in force, the insured feels compelled to save.
 Role and Importance of Insurance
The role and importance of insurance, here, has
been discussed in three sub points:
(i) uses to individual,
(ii) uses to a special group of individuals, viz., to
business or industry, and
(iii) uses to the society.
1. Insurance provides Security and Safety: Uses to an individual :
The insurance provides safety and security against the loss on a particular event. In case of
life insurance payment is made when death occurs or the term of insurance is expired.
The loss to the family at a premature death and payment in old age are adequately
provided by insurance. In other words, security against premature death and old age
sufferings are provided by life insurance.
Similarly, the property of insured is secured against loss on a fire in fire insurance. In other
insurance, too, this security is provided against the loss at a given contingency.
The insurance provides safety and security against the loss of earning at death or in golden
age, against the loss at fire, against the loss at damage, destruction or disappearance of
property, goods, furniture and machines, etc.
2. Insurance affords Peace of Mind:
The security wish is the prime motivating factor. This is the wish which tends to stimulate to
more work, if this wish is unsatisfied, it will create a tension which manifests itself to the
individual in the form of an unpleasant reaction causing reduction in work.
The security banishes fear and uncertainty, fire, windstorm, auto-mobile accident, damage
and death are almost beyond the control human agency and in occurrence of any of
these events may frustrate or weaken the human mind. By means of insurance, however,
much of the uncertainty that centers about the wish for security and its attainment may
be eliminated.
3. Insurance protects Mortgaged Property: Uses to an individual :
At the death of the owner of the mortgaged property, the property is taken over by
the lender of money and the family will be deprived of the uses of the property.
On the other hand, the mortgagee wishes to get the property insured because
at the damage or destruction of the property he will lose his right to get the loan
replayed.
The insurance will provide adequate amount to the dependents at the early death
of the property-owner to pay off the unpaid loans. Similarly, the mortgagee gets
adequate amount at the destruction of the property.
4. Insurance eliminates dependency:
At the death of the husband or father, the destruction of family needs no
elaboration. Similarly, at destruction of, property and goods, the family would
suffer a lot. It brings reduced standards of living and the suffering may go to any
extent of begging from the relatives, neighbors or friends.
The economic independence of the family is reduced or, sometimes, lost totally.
What can be more pitiable condition than this that the wife and children are
looking others more benevolent than the husband and father, in absence of
protection against such dependency? The insurance is here to assist them and
provides adequate amount at the time of sufferings.
5. Life Insurance encourages saving:
The elements of protection and investment are present only in case of life insurance. In
property insurance, only protection element exists. In most of the life policies elements
of saving predominates. These policies combine the programs of insurance and savings.
The saving with insurance has certain extra advantages
(i) Systematic saving are possible because regular premiums are required to be compulsorily
paid. The saving with a bank is voluntary and one can easily omit a month or two and
then abandon the program entirely.
(ii) In insurance the deposited premium cannot be withdrawn easily before the expiry of the
term of the policy. As contrast to this, the saving which can be withdrawn at any
moment will finish within no time.
(iii) The insurance will pay the policy money irrespective of the premium deposited while in
case of bank-deposit; only the deposited amount along with the interest is paid. The
insurance, thus, provides the wished amount of insurance and the bank provides only
the deposited amount,
(iv) The compulsion or force to premium in insurance is so high that if the policy-holder fails
to pay premiums within the days of grace, he subjects his policy to causation and may
get back only a very nominal portion of the total premiums paid on the policy.
For the preservation of the policy, he has to try his level best to pay the premium. After a
certain period, it would be a part of necessary expenditure of the insured. In absence of
such forceful compulsion elsewhere life insurance is the best media of saving.
6. Life Insurance provides profitable Investment:
Individuals unwilling or unable to handle their own funds have been
pleased to find an outlet for their investment in life insurance
policies. Endowment policies, multipurpose policies, deferred
annuities are certain better form of investment.
The elements of investment i.e., regular saving, capital formation,
and return of the capital along with certain additional return are
perfectly observed, in life insurance.
In India the insurance policies carry a special exemption from
income-tax, wealth tax, and gift tax and estate duty. An individual
from his own capacity cannot invest regularly with enough of
security and profitability. The life insurance fulfils all these
requirements with a lower cost. The beneficiary of the policy-
holder can get a regular income from the life-insurer; if the
insured amount is left with him.
7. Life Insurance fulfils the needs of a person:
The needs of a person are divided into (A) Family needs, (B) Old-age needs, (C) Re-
adjustment needs, (D) Special needs, (E) The clean-up needs.
(A) Family Needs:
Death is certain, but the time is uncertain. So, there is uncertainty of the time
when the sufferings and financial stringencies may be fall on the family.
Moreover, every person is responsible to provide for the family.
It would be a more pathetic sight in the world to see the wife and children of a
man looking for someone more considerate arid benevolent than the husband
or the father, who left them unprovoked.
Therefore, the provision for children up to their reaching earning period and for
widow up to long life should he made. Any other provision except life
insurance will not adequately meet this financial requirement of the family.
Whole life policies are the better means of meeting such requirements.
(B) Old-age heeds:
The provision for old-age is required where the person is surviving more than his
earning period. The reduction of income in old-age is serious to the person
and his family.
If no other family member starts earning, they will be left with nothing and if
there is no property, it would be more piteous state. The life insurance
provides old age funds along with the protection of the family by issuing
various policies.
(C) Re-adjustment Needs:
At the time of reduction in income whether by loss of unemployment, disability, or death, adjustment
in the standard of living of family is required. The family members will have to be satisfied with
meager income and they have to settle down to lower income and social obligations.
Before coming down to the lower standard and to be satisfied with that, they require certain
adjustment income so that the primary obstacles may be reduced to minimum. The life insurance
helps to accumulate adequate funds. Endowment policy anticipated endowment policy and
guaranteed triple benefit policies are seemed to be a good substitute for old age needs.
(D) Special Needs:
There is certain special requirement of the family which is fulfilled by the earning member of the
family. If the member becomes disable to earn the income due to old age or death, those needs
may remain unfulfilled and the family will suffer.
(i) Need for Education. There are certain insurance policies, and annuities which are useful for
education of the children irrespective of the death or survival of the father or guardian.
(ii) Marriage. The daughter may remain unmarried in case of father's death or in case of inadequate
provision for meeting the expenses of marriage. The insurance can provide funds for the marriage
if policy is taken for the purpose.
(iii) Insurance needs for settlement of children. After education, settlement of children takes time and
in absence of adequate funds, the children cannot be well placed and all the education go to
waste.
(E) Clean-up funds:
After death, ritual ceremonies, payment of wealth taxes and income taxes are certain requirements
which decrease the amount of funds of the family member. Insurance comes to help for meeting
these requirements. Multipurpose policy, education and marriage policies, capital redemption
policies are the better policies for the special needs.
 Importance to business :
The insurance has been useful to the business society also. Some of the uses are discussed below:
1. Uncertainty of business losses is reduced:
In world of business, commerce and industry a huge number of properties are employed. With a slight slackness or negligence, the
property may be turned into ashes. The accident may be fatal not only to the individual or property but to the third party also. New
construction and new establishment are possible only with the help of insurance.
In absence of it, uncertainty will be to the maximum level and nobody would like to invest a huge amount in the business or industry. A
person may not be sure of his life and health and cannot continue the business up to longer period to support his dependents. By
purchasing policy, he can be sure of his earning because the insurer will pay a fed amount at the time of death.
Again, the owner of a business might foresee contingencies that would bring great loss. To meet such situations they might decide to set
aside annually a reserve, but it could not be accumulated due to death. However, by making an annual payment, to secure immediately,
insure policy can be taken.
2. Business-efficiency is increased with insurance:
When the owner of a business is free from the botheration of losses, he will certainly devote much time to the business. The care free
owner can work better for the maximisation of the profit. The new as well as old businessmen are guaranteed payment of certain
amount with the insurance policies at the death of the person; at the damage, destruction or disappearance of the property or goods.
The uncertainty of loss may affect the mind of the businessmen adversely. The insurance, removing the uncertainty, stimulates the
businessmen to work hard.
3. Key Man Indemnification:
Key man is that particular man whose capital, expertise, experience, energy, ability to control, goodwill and dutifulness make him the
most valuable asset in the business and whose absence will reduce the income of the employer tremendously and up to that time when
such employee is not substituted.
The death or disability of such valuable lives will, in many instances, prove a more serious loss than that by fire or any hazard. The
potential loss to be suffered and the compensation to the dependents of such employee require an adequate provision which is met by
purchasing adequate life-policies.
The amount of loss may be up to the amount of reduced profit, expenses involved in appointing and training, of such persons and
payment to the dependents of the key man. The Term Insurance Policy or Convertible Term Insurance Policy is more suitable in this case.
4. Enhancement of Credit:
The business can obtain loan by pledging the policy as collateral for the loan. The insured persons are getting
more loans due to certainty of payment at their deaths. The amount of loan that can be obtained with such
pledging of policy, with interest thereon will not exceed the cash value of the policy. In case of death, this
value can be utilised for setting of the loan along with the interest.
If the borrower is unwilling to repay the loan and interest, the lender can surrender the policy and get the
amount of loan and interest thereon repaid. The redeemable debentures can be issued on the collateral of
capital redemption policies. The' insurance properties are the best collateral and adequate loans are granted
by the lenders.
5. Business Continuation:
In any business particularly partnership business may discontinue at the death of any partner although the
surviving partners can restart the business, but in both the cases the business and the partners will suffer
economically.
The insurance policies provide adequate funds at the time of death. Each partner may be insured for the
amount of his interest in the partnership and his dependents may get that amount at the death of the partner.
With the help of property insurance, the property of the business is protected against disasters and the
chance of disclosure of the business due to the tremendous waste or loss.
6. Welfare of Employees:
The welfare of employees is the responsibility of the employer. The former are working for the latter.
Therefore, the latter has to look after the welfare of the former which can be provision for early death,
provision for disability and provision for old age.
These requirements are easily met by the life insurance, accident and sickness benefit, and pensions which
are generally provided by group insurance. The premium for group insurance is generally paid by the
employer. This plan is the cheapest form of insurance for employers to fulfill their responsibilities.
The employees will devote their maximum capacities to complete their jobs when they are assured of the
above benefits. The struggle and strife between employees and employer can be minimised easily with the
help of such schemes.
 Importance for country and society
1. Wealth of the society is protected :
The loss of a particular wealth can be protected with the insurance. Life insurance provides loss of human wealth. The human
material, if it is strong, educated and care-free, will generate more income.
Similarly, the loss of damage of property at fire, accident, etc., can be well indemnified by the property insurance; cattle, crop,
profit and machines are also protected against their accidental and economic losses.
With the advancement of the society, the wealth or the property of the society attracts more hazardous and, so new types of
insurance are also invented to protect them against the possible losses.
Each and every member will have financial security against old age, death, damage, destruction and disappearance of his
wealth including the life wealth. Through prevention of economic losses, instance protects the society against degradation.
Through stabilization and expansion of business and industry, the economic security is maximised. The present, future and
potential human and property resources are well-protected. The children are getting expertise education, working classes are
free from botherations and older people are guiding at ease. The happiness and prosperity are observed everywhere with the
help of insurance.
2. Economic Growth of the Country:
For the economic growth of the country, insurance provides strong hand and mind, protection against loss of property and
adequate capital to produce more wealth. The agriculture will experience protection against losses of cattle, machines, tools
and crop.
This sort of protection stimulates more production hi agriculture, in industry, the factory premises, machines, boilers and
profit insurances provide more confidence to start and operate the industry welfare of employees create a conducive
atmosphere to work: Adequate capital from insurers accelerate the production cycle.
Similarly in business, too, the property and human material are protected against certain losses; capital and credit are
expanded with the help of insurance. Thus, the insurance meets all the requirements of the economic growth of a country.
3. Reduction in Inflation:
The insurance reduces the inflationary resource in two ways. First, by extracting money in supply to the amount of premium
collected and secondly, by providing sufficient funds for production narrow down the inflationary gap.
With reference to Indian context it has been observed that about 5.0 per cent of the money in supply was collected in form of
premium.
The share of premium contributed to the total investment of the country was about 10.0 per cent. The two main causes of
inflation, namely, increased money in supply and decreased production are properly controlled by insurance business,
Insurance Need and Selling.
 Rights and Duties Insurer and Insured
As a smart consumer, you should be aware of your duties and rights about your
policy coverage and claims.
Duties:
When you buy a policy:
Fill the proposal form yourself correctly and truthfully, it is the basis of the
insurance contract
Do not leave any column blank, do not sign a blank proposal form
You will be responsible for any information in this document as it bears your
signature. Disclose “all material information” about the risk you want to cover
Select the term of the policy as per your needs
Select the amount of premium you can afford to pay
Choose between Single Premium or Regular Premium
Choose your premium paying frequency such as annual, half-yearly, quarterly
or monthly
Opt for electronic payment of your premium (ECS) for your convenience,
safety and records
Ensure to register nomination under your policy. Fill the nominee’s name
correctly
 Rights and Duties of Insured
After you buy the policy:
Once the proposal is submitted, you should hear from the insurance
company in 15 days
If not, take up the matter in writing
If any additional documents are asked for, comply immediately
Once the proposal is accepted by the insurance company, the policy
bond should reach you within a reasonable amount of time
If not contact the insurance company about it
When policy bond is received, check it and be sure that the policy is
the one that you wanted.
Go through all the policy conditions and be sure that these are the
same that were explained to you by the intermediary/ insurance
company official at the time of sale
In case of doubts, contact the intermediary/ insurance company official
immediately for clarification.
If necessary contact the insurance company directly
Maintaining the policy:
Pay your premium regularly on the due dates/ within the grace period
Do not wait for a premium notice. It is only a courtesy. It is your duty
to pay the premium to avoid lapsation or other penalties
Do not wait for your intermediary or anyone to pick your cheque up.
Make your own arrangement for paying the premium on time
If there is a change of address, please intimate the insurance company
immediately.
Nomination:
After the policy is issued, you can change the nomination by:
Filling a notice of change of nomination and
Sending them to the insurance company for them to register it in their
records
If the nominee is a minor, appoint an appointee to receive any claim
paid while the nominee is still a minor
Get the appointee to sign in the endorsement showing consent to act
as an appointee
If your policy lapses:
If you fail to pay the premium in time, your policy may
lapse. Contact the insurance company for reviving it.
If you lose your policy:
If you lose your policy bond, report it to the insurance
company immediately
Get a duplicate policy by complying with the formalities
The duplicate policy confers the same rights as the
original policy bond
At the time of a claim:
Comply with all the requirements of the insurance
company
Whenever required, you should help the insurer in a
prosecution or for recovery of claims which the insurer
has against third parties
Rights:
You have the right to
Cancel a life insurance policy within 15 days from the
date of receipt of the policy document. If you
disagree to any of the terms or conditions in the
policy
You can
Return the policy stating the reasons for objection
You will be entitled to a refund of the premium paid
A proportionate risk premium for the period on cover
and the expenses incurred by the insurer on medical
examination and stamp duty charges will be deducted
If it is a unit linked insurance policy (ULIP) in addition,
the insurer can repurchase the units at the price on the
cancellation date
Rights:
ULIPs
You have the right to partial withdrawal
You have the right to switch funds
You can surrender the policy after the lock-in period
from the date of commencement of the policy
The nominee/assignee under a life insurance policy
has the right to the death claim amount
You can ask for alterations in the policy such as:
Mode of payment of premium
Term of the policy
Increase in sum assured and
Premium redirection
Rights available to Insurer (Insurance Company):
Right to accept/ reject the proposal (application
form for insurance)
Right to offer multiple schemes / products
under single head or different heads
Right to make changes in existing policies as per
the guidelines of IRDA
Right to retain funds within lock-in-period
Right to switch funds to other profitable sectors
Right to provide claim amount after completion
of required formalities
 General principles of contract of insurance:

Uberrimae Fidei (Utmost Good Faith):

A contract of insurance is a contract uberrimae fidei, i.e.
a contract requiring utmost good faith of the parties. So,
all material facts which are likely to influence the insurer
in deciding the amount of premium payable by the
insured must be disclosed by the insured. Failure
to disclose material facts renders the contract voidable at
the option of the insurer.
Insurable Interest:
The assured must have “insurable interest” in the subject
matter of the contract of insurance. “He must be so
situated with regard to the thing insured that he
would have benefit from its existence, loss from its
destruction”.
Indemnity: Every contract of insurance such as life
insurance and personal accident and sickness insurance, is a
contract of indemnity. So, the insurer pays the actual loss
suffered by the insured. He does not pay the specified
amount unless this amount is the actual loss to the insured.
Mitigation of Loss: The insured must take reasonable
precautions to save the property, in the event of some
mishap to the insured property. He must act as a prudent
uninsured person would act in his own case under similar
circumstances to mitigate or minimize losses.
Risk must Attach: The insurer must run the risk of
indemnifying the insured. If he does not run the risk, the
consideration for which the premium is paid, fails and
consequently, he must return the premium paid by the
insured.
Causa Proxima: The insurer is liable for loss which is
proximately caused by the risk insured against. The rule is
“causa proxima non remota spectatur”, i.e. the proximate but
not the remote cause is to be looked to. So, the loss must be
proximately caused in order that the insurer is to become
liable.
Period of Insurance: Except in the case of life insurance, every
contract of insurance comes to an end of the expiry of every
year, unless the insured continues the same and pays the
premium before the expiry of the year.
Subrogation: According to the rule of subrogation, when the
loss is caused to the insured by the conduct of a third party,
the insurer shall have to make good such loss and then have a
right to step into the shoes of the insured and bring an action
against such third party who caused the loss to the insured.
This right of subrogation is enforceable only when there is an
assignment of cause of action by the insured in favour of the
insurer. The doctrine of subrogation does not apply to life
insurance.
Contribution:
Where there are two or more insurances on one risk,
the principle of contribution applies as between
different insurers.
The aim of contribution is to distribute the actual
amount of loss among the different insurers who are
liable for the same risk under different policies in
respect of the same subject-matter.
In case of loss, any one insurer may pay to the
assured the full amount of the loss covered by the
policy. Having paid this amount, he is entitled to
contribution from his coinsurers in proportion to the
amount which each has undertaken to pay in case of
loss of the same subject-matter.
 Insurance as a contract
The Contract of Insurance is a contract whereby
a person undertakes to indemnify
another against a loss arising on the happening
of an event or to pay a sum of money on the
happening of an event.
The person who insures is called “Insurer”. The
person who effects the insurance is called
the “Insured” or “Assured”.
The price for the risk undertaken by the insurer
and paid by the insured to the insurer is called
“Premium” and the document which
contains the contract of insurance is called
“Policy”.
Insurance as a contract
Offer and Acceptance:
A contract of Life Insurance, like any other contract, begins with the
proposal (offer). If the insurer, after considering the proposal and other
related information, is willing to issue a policy, he sends a letter termed
“letter of acceptance”. In the letter it is stated that he will grant a policy
provided remittance of the premium is received within a specified period
and the state of health of the prosper remains unchanged till the date of
remittance of premium or date of the letter of acceptance whichever is
later.
The letter of acceptance is a counter offer and the proposer accepts the
counter offer by paying the premium within the stipulated time. Offer and
acceptance constitute an agreement and an agreement enforceable by
law is a contract. The communication of a proposal is complete when it
comes to the knowledge of the person to whom it is made.
Consideration:
Consideration is something which moves from one party to the other in
return for what the other party give. In Life Insurance contract, the
payment of the premium is consideration for the contract on the part of
the life assured and the undertaking of the insurer to pay a sum of money
when the claim arises is consideration on the part of the insurer.
Capacity to Contract: The parties to an assurance
contract must be capable of entering into contracts.
Every person is competent to contract who is of the
age of majority, who is of sound mind and is not
disqualified from contracting by any law to which
he is subject.
Consent of the Parties to the Contract: Two or
more persons are said to consent when they agree
upon the same thing in the same sense. Similarly,
the parties to contract of Insurance, must agree the
terms of agreement in the same sense.
Legality of Consideration and Object: Every
agreement wherein the consideration or object is
unlawful is void. Therefore, for a valid contract
there should be proper consideration and legally
valid object.
 Application of general rules of Law of Contracts to Life Insurance

A contract of insurance is a contract of utmost good faith

technically known as uberrimae fide.
The doctrine of disclosing all material facts is embodied in
this important principles, which applies to all forms of
insurance.
The Proposer, who is one of the parties to the contract, is
presumed to have means of knowledge, which are not
accessible to the insurer, who is the other party to the
contract.
Therefore, the proposer is bound to tell the insurer,
everything affecting the judgement of the insurer. In all
contract of insurance, the proposer is bound to make full
disclosure of all material facts and not merely those which he
thinks material.
Misrepresentation, non-disclosure or fraud in any
document leading to acceptance of the risk automatically
discharges the insurer from all liabilities under the contract.
•A contract of life insurance is in many respects governed
by the general law of contracts. There are also some
peculiar aspects relating to life insurance contracts.
•As a general rule the terms of contracts are ascertained
from the document embodying the contract.
•In Life Insurance, the policy is the document which
expresses the contract between the insurer and the
insured.
•The contract comes into existence when the proposal
from a party is accepted by the insurer and the terms of
the acceptance are complied with by the party.
•The contract will have to be interpreted according to the
policy document, though in certain circumstances, the life
assured may rely on the prospectus published by the
insurer.
 Insurance vs Wagering
Contract of Insurance
1. A contract of insurance is a contract to make good the loss of property (or life)
of another person against some consideration called premium.
2. In a contract of insurance the insured must have insurable interest. Without
insurable interest it will be a wagering agreement.
3. In a contract of insurance both the parties are interested in the protection of
the subject matter, i.e., there is mutuality of interest.
4. Except life insurance, a contract of insurance is a contract of indemnity, i.e. a
contract to make good the loss.
5. Contracts of insurance are based on scientific and actuarial calculation of risks.
Wagering Agreement
1. A wagering agreement is an agreement to pay money or money's worth on the
happening of an uncertain event.
2. No insurable interest is necessary in case of a wagering agreement.
3. In a wagering agreement there is conflict of interest and in reality there is no
interest at all to protect.
4. In case of a wagering agreement there is no question of indemnity. On the
happening of the event fixed amount becomes payable.
5. Wagering agreements are not based on such calculations and are in the nature
of gambling.
 Distinctions between an insurance contract and a wagering contract

They are similar in only one respect. In both, one party promises to pay a given sum to the
other upon the occurrence of a given future event, the promise being condition upon the
payment of, or agreement to pay, a stipulated amount by the other party to the contract.

Insurance Gambling
In either case, one party may receive more, much more, than he paid or
agreed to pay.
Contract contract
Parties seek to distribute loss by reason of Parties contemplate gain through mere chance or
mischance the occurrence of a contingent event.
Insured avoids misfortune. Gambler courts fortune
Tends to equalize fortune. Tends to increase the inequality of fortune.
What one insured gains is not at the expense of Essence is whatever one person wins from a
another insured. The entire group of insureds wager is lost by the other wagering party.
provides through the premiums paid, the funds
which make possible the payment of all claims;
Purchase of insurance does not create a new and As soon as a party makes a wager, he creates a
non-existing risk of loss to the purchaser. In risk of loss to himself where no such risk existed
purchasing insurance, the insurer faces an previously.
already existing risk of economic loss.
 Assurance and Insurance
The two words were used synonymously at one
time, but there is fine distinction between the
two. ‘Assurance’ is used in those contracts which
guarantee the payment of a certain sum on the
happening of a specified event which is bound to
happen sooner or later, for example attaining a
certain age or death. Thus life policies comes
under ‘assurance’.
Insurance, on the other hand, contemplates the
granting of agreed compensation of the
happening of certain events stipulated in the
contract which are not expected but which may
happen, for example risk relating to fire, accident
or marine.
List of Life Insurance Companies
Aegon Religare Life Insurance
Aviva Life Insurance
Bajaj Allianz Life Insurance
Bharti Axa Life Insurance
Birla Sun Life Insurance
Canara HSBC OBC Life Insurance
DLF Pramerica Life Insurance
Edelweiss Tokio Life Insurance
Future Generali India Life Insurance
HDFC Life Insurance
ICICI Pru Life Insurance
IDBI Federal Life Insurance
IndiaFirst Life Insurance
ING Vysya Life Insurance
Kotak Mahindra life Insurance
LIC
Max Life Insurance
Metlife India Insurance
Reliance Life Insurance
Sahara India Life Insurance
SBI Life Insurance
Shriram Life Insurance
Star Union Dai-Ichi Life
Tata AIA Life Insurance
List of General (Non-life) Insurance Companies