Concept of Insurance: formula sheet

Key formulas

Definition of insurance

Insurance = contract + premium + uncertain event + risk transfer to insurer

Use this as the opening line of any definition answer.

Risk pooling idea

Premium pool ≈ expected claims + expenses + margin

Explains why premiums can be fixed in advance when losses for the group are predictable. Treat it as a concept, not a statutory formula.

Essential characteristics

Contract; premium; uncertainty; insurable interest; utmost good faith; indemnity (general insurance)

Indemnity applies to most general insurance, not to life insurance where the sum assured is fixed.

Functions

Primary (protection, risk sharing, risk assessment); Secondary (loss prevention, support to credit); Other (savings, investment, stability)

A standard grouping for answers; state the grouping you use.

Indemnity limit

Claim payable ≤ lowest of (actual loss, sum insured)

Subject to policy terms. The insured cannot gain from the loss.

Contribution between insurers

Insurer's share = (Its sum insured ÷ Total sum insured of all policies) × Loss

Used when the same risk is covered by more than one policy. Each share is limited by that insurer's own sum insured. This is the usual independent-liability method.

Average (underinsurance)

Claim = (Sum insured ÷ Value at risk) × Loss

Applies only if the policy has an average clause. Claim cannot exceed the sum insured.

Insurable interest timing

Life: at inception. Property and general: at time of loss.

Check the type of policy before applying the rule.

Which principles apply

Indemnity, subrogation, contribution: not applicable to life insurance

Utmost good faith and insurable interest apply to all contracts.

Separate accounts for classes

Section 10(1): separate account of receipts and payments for each of life, fire, marine, miscellaneous

Applies where the insurer carries on more than one class.

Sub-classes of miscellaneous

Section 10(1): separate account for each sub-class specified by regulations, unless the Authority waives in writing

Proviso: no sub-class where contracts are terminable by the insurer at intervals not exceeding twelve months and liability ceases within one year of the claim arising.

Life insurance fund

Section 10(2): all receipts in life business form a separate fund; assets kept distinct and separate

The insurer's life-business deposit is deemed part of the fund's assets.

Fund for each sub-class

Section 10(2AA): receipts of each sub-class form a separate fund, not applied except as the Act or regulations permit

Insurer must give the Authority details of such funds as required.

Security of life fund

Section 10(3): life fund not liable for other contracts and not applied for non-life purposes

Treated as if the insurer did only life business.

Motor third party obligation

Section 32D: general insurers underwrite the minimum percentage of motor third party business specified by regulations

Authority may exempt insurers primarily in health, re-insurance, agriculture or export credit guarantee.

Councils

Section 64C: Life Insurance Council and General Insurance Council

General Insurance Council represents general, health and re-insurance insurers.

Section 48A: general bar

Insurance agent / intermediary / insurance intermediary → not eligible to be or remain a director in an insurance company

The bar covers both becoming a director and continuing as one.

Section 48A: first proviso

Existing director at commencement of the 2015 Amendment Act → not ineligible until six months from commencement

A transitional relief only. It is not a continuing exemption.

Section 48A: second proviso

Authority may permit an agent or intermediary on the Board, with conditions or restrictions

Purpose of conditions: protect policyholders or avoid conflict of interest.

Section 40: commission

Remuneration for procuring business → only to an insurance agent or intermediary or insurance intermediary, as per regulations; penalty up to ₹1,00,000 on contravening intermediary

Sub-section (3) is without prejudice to section 102.

Section 42D: registration

Registration valid 3 years; renewal application at least 30 days before expiry; unregistered intermediary: penalty up to ₹10,00,000; appointing one or transacting business through one: up to ₹1,00,00,000

Officers knowingly party in a company or firm face a penalty up to ₹10,00,000.

Section 29: loans

Advance to an agent ≤ renewal commission earned in the preceding year (aggregate); loan wrongly given must be repaid within 3 months of the event

On default, the person ceases to hold office or act for the insurer after three months.

Section 64C: constitution

Existing Life Insurance Council + existing General Insurance Council = deemed Councils under the Act

Life Council covers life insurers. General Council covers general, health insurance and re-insurance business.

Section 64E: authority of Council

Authority of each Council = its Executive Committee

The Executive Committee is the working body.

Section 64F(1): Life Executive Committee

4 elected members + 1 eminent person + 3 persons (agents, intermediaries, policyholders) + 1 each from self-help groups and Insurance Co-operative Societies

The eminent person and the three persons are nominated by the Authority. The Chairperson is elected from the four elected members.

Section 64F(2): General Executive Committee

4 elected members + 1 eminent person + 4 persons (agents, third party administrators, surveyors and loss assessors, policyholders)

The eminent person must not be connected with insurance business. The Chairperson is elected from the four elected members.

Section 64H: duration

Term = 3 years from the date of first meeting, then dissolved and a new Committee is constituted

Outgoing members continue to hold office and discharge duties until the new Committee is constituted.

Section 64L(1): functions of General Committee

(a) aid and advise insurers; (b) advise the Authority on expenses; (c) report prejudicial insurers; (d) incidental matters

For clause (d), the matters need the Authority's approval and notification by the Council in the Gazette of India.

Section 64M(1): annual meeting

General Executive Committee must meet at least once before 31 March every year

It advises the Authority on limits under the proviso to section 40C(1) for expenses of management.

Who may carry on insurance business (s 2C(1))

Public company OR registered co-operative society OR statutory body set up by an Act of Parliament OR foreign reinsurer branch (reinsurance only)

After the 1999 IRDA Act commenced, a new insurer must be an Indian insurance company. A foreign body may do reinsurance only.

Name protection (s 2C(4))

Only an insurer may use 'insurance', 'insurer', 'assurance', 're-insurance', 'insurance company' or derivatives in its name

Intermediaries and associations of insurers may use only 'insurance', 'assurance' or 'insurance company' to show the nature of their organisation, in accordance with the regulations.

Agents on the Board (s 48A)

Agent/intermediary/insurance intermediary: not eligible to be or remain a director in an insurance company, unless the Authority permits on conditions

The Authority's conditions aim to protect policyholders or avoid conflict of interest.

Rural and social obligation (ss 32B, 32C)

Specified percentages of life and general business in rural and social sectors, as notified by the Authority

Section 32C extends this to rural residents, unorganised workers, vulnerable or backward classes and crop insurance.

Executive Committee composition (s 64F)

General Insurance Council EC: 4 elected members + 1 eminent person nominated by the Authority + 4 nominated representatives

The four nominees represent agents, third party administrators, surveyors and loss assessors, and policyholders. The Chairperson is elected from the four elected members.

Quick revision

• Insurance is a contract where the insurer takes on a risk for a premium and promises to pay on the insured event.
• Know the principles by name: utmost good faith, insurable interest, indemnity, subrogation, contribution, proximate cause.
• Always apply a principle to the facts before concluding. Do not just define it.
• The Life Insurance Council represents insurers carrying on life insurance business in India.
• The General Insurance Council represents insurers carrying on general, health insurance business and reinsurance in India.
• Section 48A: no insurance agent, intermediary or insurance intermediary can be or remain a director in an insurance company.
• Under Section 48A, the Authority may permit such a person to be on the Board, subject to conditions to protect policyholders or avoid conflict of interest.
• Section 64E: the authorities of the Councils are the Executive Committee.
• Section 64F: each Executive Committee has four elected insurer representatives, one of whom is elected Chairperson.
• Section 64F: the Authority nominates an eminent person not connected with insurance business to each Executive Committee.
• Section 64M: the General Insurance Council's Executive Committee meets at least once before 31 March every year to advise on expense limits.
• Section 32B: insurers must undertake specified percentages of business in the rural and social sectors.

Common mistakes

• Saying insurance prevents the loss. Fix: Write that insurance transfers the financial consequence of loss. Loss prevention is only a secondary function.
• Treating insurance as a gamble. Fix: Point out that insurance needs insurable interest and reduces an existing risk, while a wager creates a new one.
• Applying indemnity to life insurance. Fix: State that life insurance pays a fixed sum assured, so indemnity, subrogation and contribution do not apply.
• Mixing up subrogation and contribution. Fix: Subrogation is recovery from a third-party wrongdoer. Contribution is sharing among insurers covering the same risk.
• Listing motor and health as separate classes under the Act Fix: Say Section 10 names life, fire, marine and miscellaneous; motor and health are usually miscellaneous products.
• Saying life and general funds can be pooled Fix: Cite Section 10(2) and (3): the life fund is kept distinct and cannot be applied to other business.
• Saying the bar applies to directors of any company Fix: Write 'director in an insurance company'. The section protects insurers and policyholders.
• Treating the bar as absolute Fix: Always mention that the Authority may permit such a person on the Board, with conditions or restrictions.
• Saying section 64C creates the Councils from scratch. Fix: Write that the existing Councils are deemed to be constituted under the Act. The Act recognised bodies that already existed.
• Saying the General Council covers only general insurance. Fix: Section 64C says it represents insurers carrying on general, health insurance business and re-insurance.

Exam tips

• Start every answer with a crisp definition containing contract, premium and uncertain event.
• Always write both transfer and pooling; examiners look for the pair.
• For distinction questions (insurance vs gambling, insurance vs assurance), use two or three clear points of difference.
• Add a short rupee example to make a theory answer stand out, but check the arithmetic.
• Link to the Insurance Act, 1938 only with provisions you are certain of.
• Define each principle in one sentence, then give a short example. Examiners reward the application to the facts.
• Always state which principles do not apply to life insurance.
• In calculation questions, show the formula and each step so marks are earned even if arithmetic slips.