Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part IV)

Functions of Insurance Companies: Underwriting and Claims

Updated 11 October 2026 · Fact-checked

An insurer's core functions are underwriting (selecting and pricing risk), issuing the policy, collecting premium, settling claims and reinsuring part of the risk. Each carries compliance duties under the Insurance Act, 1938, such as the premium-in-advance rule in section 64VB and Indian reinsurance under section 101A. In exams, state the function, the rule, apply it, conclude.

Understand Functions of Insurance Companies: Underwriting and Claims

An insurance company takes on risk from many policyholders for a price called the premium. To stay solvent and fair, it runs a chain of functions. Each function has a purpose and a legal check.

Underwriting is the first step. The underwriter studies the proposal, decides whether to accept the risk, and fixes the premium and terms. Good underwriting keeps risky proposals from pushing up the cost for everyone else. The insurer may accept, accept with extra premium or conditions, or decline.

Policy issuance and premium collection follow. The insurer issues the policy document once the contract is concluded. Under section 64VB of the Insurance Act, 1938, no insurer may assume any risk in India, on business where premium is not ordinarily payable outside India, unless the premium is received in advance, or guaranteed to be paid in the prescribed manner and time, or a prescribed deposit is made. Where premium can be ascertained in advance, risk may be assumed not earlier than the date the premium is paid in cash or by cheque. If the premium is sent by postal money order or cheque by post, risk may be assumed from the date of booking or posting.

Claims settlement is where the promise is kept. The insurer receives the claim intimation, verifies documents, assesses the loss and pays if the claim is covered. Refunds of premium, for example on cancellation, must be paid directly to the insured by crossed or order cheque or postal money order, with a proper receipt, and never credited to the agent's account (section 64VB(3)).

Reinsurance lets the insurer pass part of the risk to other insurers. Under section 101A, every insurer must reinsure with Indian re-insurers the percentage of sum assured on each policy specified by the Authority. That percentage cannot exceed thirty per cent of the sum assured. Throughout, the insurer must also keep its assets in India in its own corporate name or the name of an approved public officer (section 31).

Key rules to remember

Premium in advance rule: Risk assumed only after premium is received, guaranteed as prescribed, or deposit made (s. 64VB(1)); Applies to insurance business in India on which premium is not ordinarily payable outside India. The Central Government may relax it for particular categories by rules (s. 64VB(5)).
Date of risk where premium is ascertainable: Risk not earlier than the date premium is paid in cash or by cheque (s. 64VB(2)); If sent by postal money order or cheque by post, risk may start on the booking or posting date.
Agent's deposit of premium: Deposit or post the full premium, without deducting commission, within 24 hours of collection, excluding bank and postal holidays (s. 64VB(4)); The agent cannot keep commission out of the collection.
Premium refund: Refund directly to the insured by crossed or order cheque or postal money order, with receipt; never to the agent's account (s. 64VB(3)); Applies to cancellation, alteration of terms or otherwise.
Indian reinsurance cession: Percentage of sum assured on each policy, as specified by the Authority, with previous approval of the Central Government, capped at 30% of sum assured (s. 101A); Can differ by class. The insurer may reinsure more than the percentage with any Indian re-insurer or other insurer (s. 101A(7)).
Fire insurance option: Reinsure an amount out of the first surplus, provided annual reinsurance premiums are not less than the specified percentage of premium income for that business (s. 101A(3)); Available to insurers carrying on fire insurance in India, in lieu of the percentage cession.
Custody of assets: Assets in India kept in the name of an approved public officer or in the insurer's corporate name (s. 31); Endorsement to a bank solely for collection or realisation of interest, bonus or dividend is allowed.

How to solve Functions of Insurance Companies: Underwriting and Claims questions

Use this method for any question on insurer functions, underwriting, premium or claims. Keep the answer in provision, analysis, conclusion form.

1Identify the function being tested: underwriting, issuance, premium collection, claims, reinsurance or asset custody.
2State the rule in plain words, with the section number only where you are sure (64VB, 101A, 31).
3List the facts that matter: who paid, how, on what date, who collected, which class of business.
4Apply the rule fact by fact. For premium cases, fix the date risk could start. For reinsurance, check the percentage against the 30% cap.
5Check for exceptions: Central Government relaxation, postal payment, fire insurance option, excess reinsurance.
6Conclude clearly: valid or invalid, risk on or off, compliant or in breach.
7Add one practical compliance point, such as receipt on refund, record keeping or documentation.

Quickest way: Rule, date, party check

When to use it: Short case questions with a time limit where facts involve premium, an agent or reinsurance.

Ask: was premium received, guaranteed or deposited before the risk date?
Ask: how was it paid? Postal means the date of booking or posting counts.
Ask: who handled the money? Agent: 24 hours, full amount. Refund: to the insured, not the agent.
Ask: is reinsurance involved? Check it is with Indian re-insurers and within the 30% cap.
Write the conclusion in one line, then the section.

Common mistakes in Functions of Insurance Companies: Underwriting and Claims

Saying risk can start on the date the proposal is signed.
Students confuse contract formation with commencement of risk.
Fix: Under section 64VB, tie the start of risk to receipt of premium, a valid guarantee or a prescribed deposit.
Ignoring the postal rule.
The Explanation to section 64VB is short and gets skipped.
Fix: Remember that for a postal money order or cheque sent by post, risk may be assumed from the booking or posting date.
Letting the agent deduct commission before depositing the premium.
Commission deduction is common in trade practice.
Fix: State that the agent must pay the full premium within 24 hours of collection, excluding bank and postal holidays, without deducting commission.
Saying refunds can be paid through the agent.
It seems convenient and is how some intermediaries work.
Fix: Write that the refund goes directly to the insured by crossed or order cheque or postal money order, with a receipt, and never to the agent's account.
Quoting the reinsurance cap as a fixed 30% for every policy.
Students remember the number but not the structure.
Fix: Say that the Authority specifies the percentage, which may differ by class, and that no specified percentage can exceed thirty per cent of the sum assured.
Treating section 64VB as having no exceptions.
Students learn it as an absolute ban.
Fix: Mention the guarantee or deposit routes and the Central Government's power to relax it for particular categories by rules.

Worked examples

Example 1

A general insurer in India receives a motor proposal from Ravi on 5 March. Ravi posts a cheque for the premium on 8 March, and it reaches the insurer on 11 March. The insurer wants to cover the vehicle from 9 March. Advise whether this is permissible.

Show the solution

Rule: under section 64VB, risk can be assumed only after premium is received, guaranteed or deposited. Where premium is ascertainable in advance, risk may be assumed not earlier than the date the premium is paid in cash or by cheque.
Postal rule: where the cheque is sent by post, risk may be assumed on the date the cheque is posted.
Facts: the cheque was posted on 8 March, so the earliest date for assuming risk is 8 March.
Application: cover from 9 March is later than 8 March, so it is permissible. Cover from 6 or 7 March would not be.
Practical point: the insurer should keep proof of posting and record the premium in its books.

Answer: Yes. The insurer may assume the risk from 9 March, because the earliest permitted date is 8 March, when the cheque was posted.

Example 2

An insurer cedes reinsurance on a general insurance policy with a sum assured of ₹80,00,000. The Authority has specified a cession of 5% to Indian re-insurers for this class. (a) How much must be reinsured with Indian re-insurers? (b) Can the insurer reinsure ₹20,00,000 with an Indian re-insurer?

Show the solution

Rule: under section 101A, the insurer reinsures with Indian re-insurers the specified percentage of the sum assured on each policy.
(a) Compute 5% of ₹80,00,000 = 80,00,000 × 5 ÷ 100 = ₹4,00,000.
Check the cap: 5% is below the 30% ceiling, so the specification is within the law.
(b) Section 101A(7) states that nothing prevents the insurer from reinsuring with an Indian re-insurer or other insurer the entire sum assured or any portion in excess of the specified percentage.
₹20,00,000 exceeds the compulsory ₹4,00,000, so the additional cession is permitted.

Answer: (a) ₹4,00,000 must be reinsured with Indian re-insurers. (b) Yes, the insurer may reinsure ₹20,00,000, since the excess over the specified percentage can be placed with any Indian re-insurer or other insurer.

Exam tips

Write section 64VB in its four parts: advance premium, date of risk, refund, and agent's 24-hour deposit. Many questions test just one.
In case questions, work out the date of risk first. It decides the answer.
Quote the 30% ceiling in section 101A with the words 'as specified by the Authority'. It shows you know who sets the rate.
Link each function to its compliance. A one-line link, such as claims with receipt on refund, earns marks.
If you are not sure of a section number, state the rule in words and skip the number.

Practice questions from Functions in Insurance and Compliance related thereto (Part IV)

Functions of Insurance Companies: Underwriting and Claims in other exams

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

CMA FinalUnderwriting Risk and Risk Selection

Functions of Insurance Companies: Underwriting and Claims: frequently asked questions

What are the main functions of an insurance company?

They are underwriting, policy issuance, premium collection, claims settlement and reinsurance. Insurers also manage investments and assets under regulation. Each function must follow the Insurance Act, 1938 and the Authority's rules.

What does section 64VB say about premium?

No insurer may assume a risk in India unless the premium is received in advance, is guaranteed to be paid as prescribed, or a prescribed deposit is made. For ascertainable premiums, risk starts no earlier than the date of payment by cash or cheque. For postal payment, it is the booking or posting date.

How quickly must an agent deposit the premium collected?

Within twenty-four hours of collection, excluding bank and postal holidays. The full premium must be deposited or posted to the insurer, without deducting commission.

Must every insurer reinsure with Indian re-insurers?

Yes, under section 101A, every insurer reinsures the percentage of sum assured on each policy specified by the Authority. That percentage can never exceed thirty per cent of the sum assured. Fire insurers have an alternative based on the first surplus.