Introduction to Insurance Business: formula sheet

Key formulas

Indemnity limit

Claim payable = least of (actual loss, sum insured)

Subject to policy terms such as deductibles. The insured cannot recover more than the actual loss.

Contribution (rateable share)

Insurer's share = (its sum insured ÷ total of all sums insured) × actual loss

Each insurer's share is also capped at its own sum insured. Applies to the same subject matter, same risk and same insured.

Average (underinsurance)

Claim = (sum insured ÷ value of property at loss) × actual loss

Applies only if the policy has an average clause and the sum insured is below the value. Claim cannot exceed the sum insured.

Insurable interest test

Insurable interest exists if loss of the subject matter causes you financial loss

For life insurance, interest must exist when the policy is taken. For general insurance, it must exist at the time of loss.

Utmost good faith

Duty = disclose every material fact, truthfully

Material fact: one that would influence a prudent insurer in accepting the risk or fixing the premium.

Cap on compulsory reinsurance cession

Percentage specified for re-insurance with Indian re-insurers ≤ 30% of the sum assured on the policy

Section 101A(2)(a) proviso. It applies to general insurance policies. It is set by IRDAI by notification with prior Central Government approval, and different percentages may apply to different classes.

Reinsurance cession in rupees

Amount ceded = Sum assured × Cession percentage

Insurer retains Sum assured − Amount ceded. Use this for numerical or case-based questions.

Fire business alternative under Section 101A(3)

Annual premium paid on re-insurance with Indian re-insurers ≥ specified percentage × premium income of that fire business for the year

Premium income is taken without counting reinsurance ceded or accepted. The insurer may instead reinsure such amount out of the first surplus as it thinks fit.

Foreign insurer filing deadline

Filing with the Authority within 3 months of setting up a place of business or appointing a representative in India

Section 63. Later changes in the filed particulars must be furnished forthwith.

Registration rule (Section 3(1))

No insurance business in India without a certificate of registration from the Authority, for the particular class

Registration is class-wise. A certificate for one class does not cover another.

Four tests for registration (Section 3(2A))

Sound finance and management + adequate business, capital and earnings + public interest served + compliance with sections 2C, 5 and 31A

The Authority 'may' register once satisfied. It is not automatic.

Refusal and appeal (Section 3(2B), 3(2C))

Reasons recorded + copy to applicant; appeal to the Securities Appellate Tribunal within 30 days of receiving the decision

Time runs from receipt of the copy of the decision.

Preference for health cover (Section 3(2AA))

Preference to an applicant who agrees to carry on life or general insurance business providing health cover

Agreement must be in the form and manner specified by the regulations.

Notice period for suspension or cancellation (Section 3(5))

Under clauses (a), (d), (e), (f), (g), (i): written notice; effect from a date not less than 1 month and not more than 2 months from receipt of notice

Under clauses (b), (c), (j), (k), the order takes effect when the notice is served (Section 3(5A)).

Effect of cancellation (Section 3(5B))

No new contracts after cancellation takes effect; existing rights and liabilities continue

This protects existing policyholders.

Revival and winding up (Section 3(5C), 3(5D))

Revival at the Authority's discretion if the defect is cured within 6 months; after 6 months the Authority may apply to the Court to wind up, unless revived

Revival applies to cancellation under clauses (a), (d), (e), (f), (g), (i).

Hearing before order (Section 3(5E))

Suspension or cancellation by regulations-based order only after a reasonable opportunity of being heard

Natural justice requirement.

Core obligation (Sec 32B)

Every insurer must undertake IRDAI-specified percentages of life business and general business in the rural and social sectors

Percentages are specified by the Authority in the Official Gazette. The section does not fix a number.

Target groups (Sec 32C)

Rural residents + unorganised/informal workers + economically vulnerable or backward classes + other categories specified by regulations

Policies must include insurance for crops.

Source of the power (IRDA Act, Sec 14(2)(p))

IRDAI specifies the percentage of life and general business to be undertaken in the rural or social sector

Link 32B with section 14(2)(p) in answers.

Who is bound

Every insurer, both life and general

Applies after commencement of the IRDA Act, 1999.

Quick revision

• Insurance transfers risk from one person to a pool managed by an insurer in return for a premium.
• The main split is life insurance business and general insurance business.
• Under the IRDA Act, 1999, the Authority must regulate, promote and ensure orderly growth of insurance and re-insurance business.
• The Authority's powers include registration, renewal, modification, suspension, cancellation and withdrawal of registration.
• It protects policyholders on assignment, nomination, insurable interest, claim settlement and surrender value.
• It specifies qualifications, code of conduct and training for intermediaries and agents, and the code of conduct for surveyors and loss assessors.
• The Authority also regulates investment of funds and maintenance of solvency margin.
• Section 114A of the Insurance Act lets the Authority make regulations by notification in the Official Gazette.
• Regulations are laid before each House of Parliament for a total of thirty days.
• Section 32B: every insurer must undertake specified percentages of life and general business in the rural and social sectors.
• The percentages are specified by the Authority in the Official Gazette.
• Section 32C: serve rural residents, unorganised or informal sector workers, and economically vulnerable or backward classes; policies shall include crop insurance.

Common mistakes

• Applying indemnity to life insurance in the same way as to fire or motor insurance. Fix: Say that life insurance pays a fixed sum on the event. Life cannot be valued, so the strict indemnity principle is not applied.
• Saying insurable interest must exist at the time of loss in every type of insurance. Fix: For life insurance, state that interest must exist when the policy is taken. For general insurance, it must exist at the time of loss.
• Treating health insurance as part of general insurance with no separate identity. Fix: Remember that the Act names life, general, health and re-insurance business separately. Say that the General Insurance Council represents insurers in general, health and re-insurance business.
• Saying reinsurance is a policy the customer buys. Fix: Write that reinsurance is a contract between an insurer and a reinsurer to share risk. The original policyholder is not a party to it.
• Writing that the Controller of Insurance grants registration. Fix: Write 'the Authority (IRDAI)'. The Act's text now says Authority.
• Saying one certificate covers all insurance business. Fix: Registration is for the particular class of insurance business. Cancellation can also be for one class only.
• Quoting a fixed percentage as written in section 32B. Fix: Write that the Authority specifies the percentages in the Official Gazette. The section itself gives no number.
• Applying the duty only to life insurers or only to general insurers. Fix: Section 32B covers both life and general insurance business of every insurer.

Exam tips

• In MCQs, one keyword in the facts usually points to the principle. Find it before reading the options.
• In written answers, use the order rule, facts, conclusion. A conclusion line earns marks even when your arithmetic is partly wrong.
• Show the total sum insured and each ratio in contribution sums, so marks can be given for method.
• Know the exceptions: indemnity in life insurance, and the different timing of insurable interest for life and general insurance.
• Do not cite a section number unless you are certain it is current. State the principle in words.
• Link each class to its risk type in one phrase. Examiners reward the link, such as life for death or survival and general for property and liability.
• When a question mentions a percentage of sum assured passed to re-insurers, check it against the 30% ceiling and compute the cession and retention.
• Quote the exact section only when you are sure of it. Safe ones here are Section 64C (Councils), 101A (reinsurance with Indian re-insurers), 63 (foreign insurers) and Section 14 of the IRDA Act (IRDAI functions).