Risk Management in Banking and Insurance · Concept and Types of Health Insurance Policies

Concept and Nature of Health Insurance for CMA Final

Updated 11 October 2026 · Fact-checked

Health insurance is a contract in which an insurer, for a premium, agrees to cover medical expense risk or pay a fixed sum on a defined health event. It works as indemnity cover (reimburses actual loss up to the sum insured) or benefit cover (pays a pre-agreed amount). To answer questions, identify the cover type, then apply the principles.

Understand Concept and Nature of Health Insurance

Medical treatment is costly and unpredictable. A single hospital stay can wipe out years of savings. Health insurance is a way to transfer that risk. You pay a small, certain premium. The insurer pays for covered medical events. Many policyholders pool their risk, so the insurer can predict total claims better than any one person can.

There are two broad ways a health policy pays. Indemnity cover reimburses the actual medical expense you incur, up to the sum insured. You cannot gain more than your loss. Benefit cover pays a fixed, pre-agreed amount when a defined event happens, such as diagnosis of a listed critical illness or a hospital stay for a day. The payment does not depend on the bill you actually paid.

The main features are: a pooled risk, a premium paid for cover, a sum insured as the limit, defined covered events, and exclusions and waiting periods that limit the insurer's exposure. Health risk is also subject to moral hazard (the insured may take less care, or use more medical services than needed, because the insurer pays) and adverse selection (people who expect to claim are more likely to buy). Insurers handle these with underwriting, waiting periods, co-payment and exclusions.

For risk management, health insurance is a risk transfer tool. It protects individuals and employers from large medical costs and makes household and business finances more stable. For the insurer, health business needs careful pricing and control of claims and expenses.

On law, the Insurance Act, 1938 is the base. Section 40C, as substituted in 2015, requires every insurer transacting insurance business in India to furnish to the Authority the details of expenses of management, in the manner and form specified by regulations made under the Act. So the Act today is about reporting management expenses to the regulator, not a fixed percentage limit. Do not write the old limit rules from memory.

Key rules to remember

Indemnity claim payable: Claim payable = lower of (admissible actual expense, sum insured remaining), after any co-payment or deductible; Applies to reimbursement cover. Never pay above actual loss.
Co-payment: Insured's share = co-payment % × admissible expense; Insurer pays the balance, subject to the sum insured.
Benefit cover payout: Payout = fixed benefit amount on occurrence of the defined event; Independent of actual expense incurred.
Section 40C rule (Insurance Act, 1938): Every insurer must furnish details of expenses of management to the Authority in the specified manner and form; Substituted by Act 5 of 2015 with effect from 26-12-2014; the manner and form come from regulations.

How to solve Concept and Nature of Health Insurance questions

Use this order for any theory or case question on the nature of health insurance.

1Read the question and mark whether it asks for meaning, features, type of cover, or a calculation.
2Define health insurance as risk transfer of medical expense risk for a premium.
3Decide if the policy is indemnity (reimbursement of actual loss) or benefit (fixed sum on defined event).
4List relevant features: pooling, sum insured, covered events, exclusions, waiting period, co-payment.
5For numbers, compute admissible expense, apply co-payment or deductible, then cap at the sum insured.
6Link to risk management: moral hazard, adverse selection and how the insurer controls them.
7If law is asked, state Section 40C accurately: insurers furnish expense of management details to the Authority as per regulations.
8Close with a one-line conclusion.

Quickest way: Indemnity or benefit in 20 seconds

When to use it: Use in MCQs and case scenarios where a policy type or payout must be identified.

Ask: does the payout depend on the actual bill? If yes, indemnity; if no, benefit.
For indemnity, take the lower of admissible bill and balance sum insured, after co-payment.
For benefit, pay the fixed amount if the defined event occurred and is not excluded.
Check exclusions and waiting period before paying anything.

Common mistakes in Concept and Nature of Health Insurance

Saying a benefit policy reimburses the actual hospital bill.
Students treat all health cover as reimbursement.
Fix: Remember benefit cover pays a fixed agreed sum, whatever the bill is.
Paying an indemnity claim above the actual loss.
Students pay the full sum insured automatically.
Fix: The sum insured is only a ceiling. Pay the lower of admissible expense and the balance sum insured.
Applying co-payment to the sum insured instead of the expense.
Confusion between limit and claim amount.
Fix: Apply co-payment to the admissible expense first, then check the cap.
Stating that Section 40C sets a percentage limit on management expenses.
Old notes describe the pre-2015 section.
Fix: Write that the current Section 40C requires insurers to furnish management expense details to the Authority as the regulations specify.
Mixing up moral hazard and adverse selection.
Both relate to information and behaviour.
Fix: Adverse selection happens before the contract (riskier people buy). Moral hazard happens after (behaviour changes once covered).

Worked examples

Example 1

Rohit has an indemnity health policy with sum insured ₹5,00,000 and 10% co-payment. His admissible hospital expense is ₹3,20,000. Find the amount the insurer pays.

Show the solution

Admissible expense = ₹3,20,000.
Co-payment borne by Rohit = 10% × ₹3,20,000 = ₹32,000.
Insurer's share = ₹3,20,000 − ₹32,000 = ₹2,88,000.
Check cap: ₹2,88,000 is below the sum insured of ₹5,00,000, so no reduction.

Answer: The insurer pays ₹2,88,000.

Example 2

Meera holds a benefit policy paying ₹4,00,000 on diagnosis of a listed critical illness, and a separate indemnity policy. She is diagnosed with a listed illness, and her treatment bills are ₹2,50,000. Explain how the benefit policy pays and how it differs from indemnity.

Show the solution

The benefit policy pays a fixed ₹4,00,000 once the listed illness is diagnosed, subject to exclusions and waiting periods.
The payment does not depend on the ₹2,50,000 bills, so it is not reduced to the actual expense.
An indemnity policy would pay at most the admissible ₹2,50,000, after any co-payment, and within the sum insured.
Hence the benefit cover can pay more than the loss, while indemnity never does.

Answer: The benefit policy pays ₹4,00,000 regardless of the ₹2,50,000 bills. An indemnity policy would reimburse only the actual admissible expense up to the sum insured.

Exam tips

Always state the indemnity versus benefit distinction with a one-line example; examiners reward it.
In numerical MCQs, apply co-payment before checking the sum insured cap.
For law, write Section 40C as a reporting duty to the Authority on expenses of management, as per regulations.
Tie answers to risk transfer, moral hazard and adverse selection in case-based questions.

Practice questions from Concept and Types of Health Insurance Policies

Concept and Nature of Health Insurance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Concept and Nature of Health Insurance: frequently asked questions

What is the difference between indemnity and benefit health insurance?

Indemnity cover reimburses the actual medical expense up to the sum insured. Benefit cover pays a fixed sum on a defined event, whatever the actual bill is.

Why is health insurance important in risk management?

It transfers the risk of large and uncertain medical costs from the individual or employer to the insurer. This stabilises finances and spreads risk across a pool.

What does Section 40C of the Insurance Act, 1938 say now?

After its substitution in 2015, it requires every insurer transacting insurance business in India to furnish details of expenses of management to the Authority. The manner and form are specified by regulations under the Act.

What are moral hazard and adverse selection in health insurance?

Adverse selection is when people more likely to claim buy cover more often. Moral hazard is when the insured take less care, or use more medical services than needed, because the insurer pays. Insurers use underwriting, waiting periods and co-payment to manage both.