Insurance Fundamentals and Products
Insurance Fundamentals and Products tests risk pooling, the principles of insurance, policy documents, and the difference between life and general insurance products.
Core rules and concepts
- Insurance transfers risk from an individual to a pool of policyholders. Premium is the price of cover; sum insured or sum assured is the limit of benefit.
- Principles include insurable interest, utmost good faith, indemnity, subrogation, contribution and proximate cause. Life insurance is not a contract of indemnity; general insurance normally is.
- IRDAI regulates insurers, agents, brokers and product approvals. A policy may lapse if premium is not paid within the grace period.
- General insurance includes fire, marine, motor, health and liability. Life insurance includes term, endowment, whole life and unit-linked plans.
Worked example
A fire policy has sum insured Rs 5 lakh on property worth Rs 6 lakh, a Rs 10,000 deductible and a loss of Rs 3 lakh. Because the sum insured is less than the property value, the average clause applies: 3,00,000 x 5/6 = Rs 2,50,000. Deductible is subtracted: 2,50,000 - 10,000 = Rs 2,40,000 payable. Reasoning: the insured carried only five-sixths of the risk, so the claim is scaled; the deductible is the first loss retained by the insured.
Traps that cost marks
Do not apply indemnity to a life policy. Do not say insurable interest is needed only at the time of loss for life insurance; it must exist at inception. Do not confuse premium with sum assured. Do not ignore the deductible or average clause. Do not claim IRDAI pays claims; the insurer does.