Insurance Fundamentals and Risk Protection
Insurance fundamentals and risk protection tests how risk is pooled and how policies pay claims. Candidates must know principles, policy terms and the difference between insurance and investment.
Core principles
- Insurable interest: the policyholder must suffer financial loss if the insured event occurs.
- Utmost good faith: material facts, such as smoking or pre-existing illness, must be disclosed.
- Indemnity: general insurance restores the insured to the pre-loss financial position, subject to sum insured and deductible.
- Proximate cause: the nearest effective cause of loss decides coverage.
- Contribution and subrogation prevent double recovery and allow the insurer to recover from a negligent third party.
- IRDAI regulates insurers, agents and POSPs; life, health and general insurance are separate product lines.
Worked example
A shopkeeper’s stock worth ₹5 lakh is damaged by fire. The policy has a sum insured of ₹4 lakh and a ₹10,000 deductible. Reasoning: indemnity pays the lower of loss and sum insured, minus deductible: ₹4,00,000 − ₹10,000 = ₹3,90,000, not ₹5 lakh.
Traps that cost marks
- Hiding pre-existing illness or smoking history.
- Treating life insurance as a guaranteed high-return investment.
- Ignoring exclusions, waiting periods and deductibles.
- Assuming all losses are covered because the premium is paid.