Basics of Insurance: formula sheet

Key formulas

Pure risk

Outcomes = loss or no loss

Insurable in general. Examples: death, fire, accident, theft.

Speculative risk

Outcomes = loss, no loss or gain

Not insurable. Examples: share trading, business ventures, gambling.

Fundamental vs particular risk

Fundamental = affects large groups; Particular = affects individuals

Floods and war are fundamental. A house fire is particular.

Risk handling techniques

Avoidance | Retention | Reduction | Transfer

Insurance is a form of transfer.

Frequency-severity matching

Low freq + low sev → retain; High freq + low sev → reduce; Low freq + high sev → transfer; High freq + high sev → avoid

A guide to choosing a technique, not a fixed legal rule.

Risk management process

Identify → Evaluate → Select technique → Implement → Monitor

It is continuous. Review as the client's life changes.

Utmost good faith

Duty to disclose all material facts, by both parties

Applies to all insurance contracts. Breach can make the contract voidable by the innocent party.

Insurable interest timing

Life: required at inception. Non-life: required at time of loss

A very common trap. Do not swap the two.

Indemnity payout

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

Subject to policy terms such as deductibles and average clause. Not applicable to life insurance.

Subrogation

Insurer's recovery right = after paying the claim, up to the amount paid

Arises only after the claim is paid. Applies to indemnity contracts.

Contribution (rateable proportion)

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

Applies only when the same risk, same subject matter and same insured are covered by two or more policies. The share is also capped at the insurer's own sum insured.

Proximate cause

Claim paid if dominant cause = insured peril; not paid if dominant cause = excluded peril

The nearest cause in time is not always the proximate cause.

Loss minimisation

Insured must act as a prudent uninsured person

Reasonable minimisation costs are typically payable by the insurer. Check policy wording.

Essentials of a valid insurance contract

Offer + Acceptance + Consideration + Capacity + Free consent + Lawful object

Add utmost good faith and insurable interest as the insurance-specific features.

Offer and acceptance

Proposal = offer; Insurer's acceptance = contract formed

Premium is the consideration paid by the policyholder.

Nomination

Nomination = right to receive proceeds, not ownership

Made by the policyholder on own life, can be changed, and is cancelled by assignment.

Assignment

Assignment = transfer of rights in the policy

Can be absolute or conditional; needs a written endorsement and notice to the insurer.

Rider

Rider = optional add-on benefit for extra premium

Attached to a base policy; it cannot exist on its own.

Life vs general: core difference

Life = benefit on death/survival, long term; General = indemnity for loss, usually 1 year

Use this split first. Most type-identification questions can be settled with it.

Indemnity principle

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

Applies to most general insurance. The insurer does not pay a profit. Policy conditions such as deductibles can reduce the claim further.

Health insurance settlement modes

Cashless (insurer pays network hospital) or Reimbursement (you pay, then claim)

Do not mix these up with fixed-benefit health plans, which pay a set sum on a defined event.

Motor insurance cover levels

Third-party only (liability) or Comprehensive (own damage + third-party)

Third-party liability cover is compulsory for motor vehicles under Indian law.

Underwriting outcomes

Accept at standard terms | Accept with extra premium or conditions | Decline

These are the three standard decisions on a proposal.

Reinsurance relationship

Policyholder ↔ Insurer (ceding company) ↔ Reinsurer

The contract of reinsurance is between the two insurers. The policyholder has no claim on the reinsurer.

Representation

Agent (including corporate agent) → acts for insurer | Broker → acts for client | Web aggregator → comparison and lead channel, neither of the two

A common trap in MCQs on intermediaries. A web aggregator does not fit the agent-versus-broker split.

Underwriting purpose

Underwriting objectives: risk selection, risk classification, pricing

This is a list, not an equation. Together these objectives help guard against adverse selection. Use it to recognise underwriting objectives.

IRDAI's nature

IRDAI = statutory regulator of insurance, set up under the IRDA Act, 1999

It regulates and also develops the sector. Do not confuse it with SEBI, which regulates securities markets.

Grievance escalation route

Insurer's grievance officer first → if the complaint is rejected or not answered, the Insurance Ombudsman; IRDAI's grievance channel is a parallel supervisory route; consumer commission or court remain available

Approaching IRDAI (Bima Bharosa) is not a mandatory stage before the Ombudsman. Under the Insurance Ombudsman Rules, 2017, the Ombudsman is approached after the insurer rejects the complaint or fails to reply within 30 days. Remember: insurer first.

Insurance Ombudsman scope

Individual policyholder complaints against insurers and intermediaries, within the monetary limit set in the Ombudsman rules

It is free of cost to the complainant and decides by recommendation or award. Check the current monetary limit in your workbook; do not guess it.

Ombudsman complaint time limit

Complaint must be made to the Ombudsman within one year of the insurer's rejection or final reply. If the insurer gives no reply, the complainant may approach the Ombudsman after 30 days from the date the complaint was made to the insurer, and the one-year limit also applies.

Under the Insurance Ombudsman Rules, 2017, the one-year limit applies to the rejection or final reply case. If the insurer stays silent, the complainant can go to the Ombudsman once 30 days have passed since the complaint was made to the insurer, and the complaint must still be filed within one year. Verify the exact timing in your workbook.

No parallel proceedings

Ombudsman will not entertain a complaint if the same matter is pending in a court, consumer forum or arbitration

Choose one forum for the same dispute.

Quick revision

• Pure risk offers only loss or no loss. Speculative risk offers loss or gain. Insurance deals with pure risk.
• Risk can be avoided, reduced, retained or transferred. Insurance is a form of transfer.
• Utmost good faith means both parties must disclose all material facts.
• Insurable interest means the policyholder must stand to suffer a financial loss if the event occurs.
• Indemnity means compensation limited to the actual loss. It applies to general insurance, not to life insurance.
• Subrogation and contribution are corollaries of indemnity.
• Proximate cause is the dominant, effective cause of the loss.
• Term insurance gives pure protection with no maturity benefit.
• A ULIP combines life cover with market-linked investment.
• Underwriting is how an insurer selects and prices risk.
• IRDAI is the regulator of the insurance sector in India.
• Check each time limit and condition against the workbook wording before the exam.

Common mistakes

• Calling investment in shares a pure risk Fix: Always check for a gain outcome. If gain is possible, it is speculative and not insurable.
• Confusing avoidance with reduction Fix: Avoidance means not taking the activity at all. Reduction means doing it with safeguards, such as fire alarms or a seat belt.
• Saying indemnity applies to life insurance. Fix: Remember life insurance pays a fixed sum on the event, since a life has no measurable value. Indemnity, subrogation and contribution are for non-life.
• Mixing up when insurable interest is needed. Fix: Life: at inception. Non-life: at time of loss. Write this pair on your revision sheet.
• Treating the nominee as the owner of the policy money. Fix: Remember nomination only names who collects the proceeds. It is not a transfer of ownership.
• Saying assignment and nomination are the same. Fix: Nomination names a receiver of proceeds. Assignment transfers rights in the policy itself.
• Treating health insurance as life insurance because it covers a person. Fix: Health insurance is a general insurance class. It pays for treatment costs, usually on a yearly contract. Life insurance pays on death or survival.
• Saying all insurance pays only the actual loss. Fix: Indemnity applies mainly to general insurance. Life insurance pays the agreed sum assured, not a measured loss.
• Saying the policyholder can claim directly from the reinsurer. Fix: Remember reinsurance is a contract between insurers. The insurer stays liable to the policyholder.
• Treating a broker as the insurer's representative. Fix: Agents, including corporate agents, act for the insurer. A broker acts for the client. A web aggregator is a comparison and lead channel and fits neither side.

Exam tips

• Expect direct definition questions: pure vs speculative, fundamental vs particular. Learn one example for each.
• Know the four techniques by who bears the loss and whether the activity continues. Many options differ only in this detail.
• Watch for traps that call a speculative risk insurable. Insurance covers pure risks.
• Scenario questions often give frequency and severity. Use the matching guide to pick the technique.
• NISM X-B has negative marking of 25% of the marks for a question, so skip only if you cannot narrow the options to two.
• Expect scenario questions where one fact, such as a hidden illness or a second policy, signals the principle. Spot that fact first.
• Always check whether the question is about life or non-life before choosing indemnity-based answers.
• Watch for absolute words like 'always' or 'only'. Options that overstate a principle are usually traps.