Introduction to Insurance
What this domain tests
This domain introduces risk pooling and the governing principles of insurance. The exam usually checks whether you can distinguish insurance from gambling, name the principles correctly, and identify the correct insurer for a given risk.
Core rules
- Insurance is a contract in which the insurer, for a premium, agrees to compensate the insured for a specified loss. It works by pooling many independent risks.
- Insurable interest: the legal right to insure. In life insurance it must exist at inception; in general insurance it must exist at the time of loss.
- Utmost good faith: both parties must disclose all material facts; non-disclosure or misrepresentation allows repudiation.
- Indemnity: general insurance restores the insured to the pre-loss position, never better. Life insurance is a benefit contract and pays the sum assured.
- Subrogation: after paying, the insurer steps into the insured's legal rights against the wrongdoer.
- Contribution: where several policies cover the same risk, insurers share the loss rateably.
- Proximate cause: the nearest effective cause of loss decides whether the policy responds.
- Milestones: Oriental Life Insurance Company (1818), Bombay Mutual (1870), Insurance Act (1938), nationalisation of life insurance into LIC (1956, merging 245 insurers), GIC (1972), IRDA (1999), FDI raised to 74% in 2021.
Worked example
A house worth ₹20 lakh is insured for ₹20 lakh and a fire causes ₹4 lakh of damage. The insurer pays ₹4 lakh, not ₹20 lakh, because indemnity replaces the loss. If the same house were covered by two policies of ₹10 lakh each, contribution would apply and each insurer would pay half the ₹4 lakh.
Traps that cost marks
- Claiming life insurance is a contract of indemnity.
- Putting insurable interest at the time of loss for life policies.
- Confusing insurance with gambling; gambling creates a new risk, insurance transfers an existing one.