Insurance Principles and Products
What the exam tests here
Risk pooling and the legal principles that decide whether a claim is payable. Questions test the seven principles, product classification (life, general, health), policy terms and the average clause.
Core rules and concepts
- Insurable interest: in life insurance it must exist at inception only; in general insurance it must exist at both inception and loss.
- Utmost good faith (uberrimae fidei): every material fact must be disclosed; non-disclosure makes the contract voidable.
- Indemnity: general insurance restores the insured to the pre-loss financial position; life insurance is not a contract of indemnity because a life cannot be valued.
- Subrogation transfers the insured's recovery rights to the insurer after payment; contribution shares a loss among insurers when the same risk is doubly insured; proximate cause is the dominant, effective cause of loss.
- Products: term, endowment, whole life, money-back, ULIP (5-year lock-in); fire, marine, motor (third-party cover is mandatory under the Motor Vehicles Act, 1988), health, crop under PMFBY, personal accident.
- Free-look period is 30 days, during which a policy can be returned for a refund of premium less expenses.
Worked example
A shop insured for ₹5 lakh is damaged by fire; the loss is ₹8 lakh and the property's actual value is ₹10 lakh. Average clause claim = loss × (sum insured ÷ actual value) = 8 × (5 ÷ 10) = ₹4 lakh, less any deductible. Reasoning: underinsurance makes the insured a self-insurer for the shortfall; the same ratio is applied to the loss.
Traps that cost marks
- Calling life insurance a contract of indemnity.
- Requiring insurable interest at death in a life policy.
- Ignoring the average clause when the sum insured is below value.
- Forgetting that motor third-party cover is compulsory.