Insurance Principles and Claims
Insurance transfers risk from one person to a pool of policyholders who each pay a premium. The exam tests the principles that decide whether a claim is paid, plus the structure of the Indian insurance market.
Structure and terms
Life insurance (nationalised in 1956, LIC Act) covers death and longevity through term, endowment, money-back, ULIP and annuity plans. General insurance (nationalised in 1972, GIBNA) covers fire, marine, motor, health, crop and liability. IRDAI licenses insurers, agents, brokers and third-party administrators, and sets policyholder-protection rules. Premium, sum assured, nominee, grace period, surrender value, deductible and free-look period are standard definitions.
The principles
- Insurable interest: the policyholder must benefit from the subject's safety. In general insurance it must exist at the time of loss; for life it is presumed.
- Utmost good faith: every material fact, including illness history, must be disclosed.
- Indemnity: the insured is restored to the pre-loss position, never better off. Not applied to life insurance.
- Subrogation: after paying, the insurer takes over the insured's right to recover from the wrongdoer.
- Contribution: if two policies cover the same risk, insurers share the loss proportionately.
- Proximate cause: the nearest efficient cause decides whether the peril is covered.
Worked example: underinsurance
Goods worth ₹20,00,000 are insured for ₹10,00,000. Fire causes a loss of ₹4,00,000. Under the average clause: claim = (sum insured ÷ value at risk) × loss = (10,00,000 ÷ 20,00,000) × 4,00,000 = ₹2,00,000. Reasoning: the sum insured is only half the property's value, so the insurer pays half the loss, even though the loss itself is well below ₹10 lakh.
Traps that cost marks
- Paying the full loss when the sum insured is below the property's value.
- Applying indemnity to a life policy.
- Confusing the nominee (receives the payout) with a legal heir.
- Ignoring exclusions and the deductible, or forgetting that non-disclosure lets an insurer repudiate a claim.