Insurance Fundamentals and Types of Insurance
This domain tests the principles that make a risk transferable, the differences between life and general insurance, and the policy terms that decide how much a claim actually pays.
Principles
Insurance pools risk: many policyholders pay small premiums into a fund from which the few who suffer loss are paid. Core principles are insurable interest (the insured benefits from the subject's continuance and loses from its loss), utmost good faith (full and honest disclosure of material facts), indemnity (restoring the pre-loss financial position - general insurance only), subrogation (the insurer steps into the insured's shoes after payment), contribution (two policies on the same risk share the loss) and proximate cause (the nearest efficient cause decides liability).
Types
Life insurance - term, whole life, endowment, money-back, ULIP - pays a sum assured on death or maturity and is not a contract of indemnity. General insurance covers fire, marine, motor, health, crop, liability and miscellaneous risks. IRDAI licenses insurers and agents, approves products and protects policyholders; the Insurance Act, 1938 and the IRDA Act, 1999 are the base statutes. Nomination, assignment, surrender value, paid-up value and a 30-day grace period (15 days for monthly mode) are commonly examined.
Worked example
A fire policy carries a sum insured of ₹8 lakh on property worth ₹10 lakh; the loss is ₹4 lakh. Under the average clause, claim = (8,00,000 ÷ 10,00,000) × 4,00,000 = ₹3,20,000. Reasoning: the property is insured to only 80% of its value, so the insurer pays 80% of the loss and the insured bears ₹80,000.
Traps
Applying indemnity, subrogation or contribution to life policies; claiming insurable interest in life insurance must exist at death (it must exist at inception); and ignoring the excess or deductible when computing a claim.