Motor Insurance

The motor insurance portfolio, falls under the miscellaneous department of insurance companies. It generates a major portion of total non-life business of companies operating in India. It was a tariff business. With the non-tariff regime introduced by IRDA now no tariff is applicable, but now companies can give discount on tariff rates.

The motor tariff has been revised from time to time keeping in view apart from other factors, the present market conditions, requirements of industry as a whole and insurance industry in particular and motor claims ratio. The current tariff has been revised with effect from 1st July 2002.

All the motor vehicles operating in India are the subject matter of insurance and for this purpose they are classified into three categories with further sub divisions according to the uses as under:

  1. Private cars
  2. Motor cycles and motor scooters
  3. Commercial vehicles

Commercial vehicles have been further classified according to their uses as under

1)                  Goods carrying vehicles

  1. a) Light motor vehicles
  2. b) Medium motor vehicles
  3. c) Heavy motor vehicles

2)                  Passenger carrying vehicles

  1. a) Motorised rickshaws
  2. b) Taxis
  3. c) Buses

3)                  Miscellaneous vehicles

  1. a) Ambulances
  2. b) Cranes
  3. c) Agricultural tractors
  4. d) Prison vans etc.

There can only be two types of losses which could arise on the above mentioned vehicles i.e.

  1. Loss or damage to the vehicle &
  2. Third party liability


Types of polices

For all classes of vehicles, there are two types of polices available under motor tariff i.e.

Liability only policy:

This policy covers third party liability for bodily injury and / or death and property damage. Personal accident cover for owner driver has also been included in the new tariff

Package policy:

This policy covers own damage losses to the vehicles in addition to the liability only cover as above.


Motor Vehicle Act

Motor vehicle act 1939 stipulates that no vehicle can run on road without liability only policy. Limited compensation was provided towards bodily injury/death. The act was amended in 1988, which made the above liability unlimited.

For proper understanding, let it be known that insured is 1st party, insurance company is 2nd party & every-body else falls under 3rd party including the passengers of private or commercial vehicles and also the employees and or workers.

The liability, in case of employees, is as per the Workman’s Compensation Act, 1923 & on payment of additional premium, it could be made wider. In such case the workmen has the option to claim either under WC Act or through MACT.

Under the WC Act the liability for death of the worker following accident is minimum Rs.80, 000/- & maximum Rs.4, 57, 080/- & for permanent total disablement it is Rs.90, 000/- & Rs.5, 48, 496/- respectively, where as it is unlimited under MACT.

As regards to the third party property damages, the statuary limit is Rs.6,000/- but under the new tariff w.e.f.1st July 2002 the insured has the option of increased TPPD limit of Rs.1 lakh for two wheelers & Rs.7.5 lakh for other vehicles.

The premium is in-built & if insured doesn’t want the increased limit; discount (ranging from Rs.50/- to Rs.200/- depending upon the type of vehicle) is allowed. In no case it could go below Rs.6000/- limit of MV Act. Mid-term change of TPPD limit is not allowed.


As explained earlier the motor vehicles are classified under three categories i.e. private cars, motorcycles and scooters and commercial vehicles. These vehicles are insured under two polices i.e. liability and or package polices.

For the purpose of rating there are four parameters for all the vehicles in case of package policies (liability premium being fixed according to class of vehicle) these parameters are:

1.Insured declared value;

It is the current dealer’s ex. show-room price less applicable depreciation as per schedule.

2.Cubic capacity (or passenger carrying capacity/gross vehicle weight);

As per registration certificate issued by the concerned RTO to determine the same

3.Age of the vehicle;

As per registration certificate (RC) & policy period.

4.Geographical zones;

Depending upon the office of registration (of the concerned vehicle), whole of India is divided under two zones:

Private cars , Two wheelers & Commercial vehicles rateable under section 4, C.1 &  C.4*  
Zone A Ahmedabad, Hyderabad, Bangalore, Pune, Delhi, Mumbai, Kolkata, Chennai  
Zone B Rest of India  
Commercial vehicles  
Zone A Delhi, Mumbai, Kolkata, Chennai  
Zone B All state capitals  
Zone C Rest of India  

Claims- Own damage

Own Damage: Losses to the vehicle may be either partial or total loss.

Partial loss: The insured will submit a detailed estimate of repairs from the workshop of his choice along with claim form. The insurance company appoints an independent surveyor or an in-house surveyor (if the loss is less than INR. 20,000), who would assess the loss and submit his report. The company will process the report, settle the loss and make payments on completion of formalities.

Total loss: Losses could be due to accident, fire or theft.

In case of accidents (including fire) where the vehicle is beyond the scope of economical repairs or where the liability exceeds 75% of the IDV, the claims are settled on total loss basis. The liability under such cases is the IDV of the vehicle. The insurance company would take the possession of the damaged vehicle for sale through auction (after getting it transferred in its name from the RTO concerned) & settle the claim, after completion of usual formalities.

For theft cases, there are certain additional formalities than that of accidental cases. The insured must lodge an F.I.R. and has to obtain untraced report from the police. Insured also needs to write to RTO and police station that having taken the claim from the insurance company, the vehicle should not be transferred without their permission & insurance company may be informed if the vehicle is traced out later.

The new tariff has provided compulsory excess on all vehicles. This excess has to be deducted before making the payment.

Third party claims

These claims are being dealt by advocates in the MACT. The tribunal awards the compensation based on the facts of the case & the insurance company deposits the award in the court. If the liability is not in dispute, these cases could be compromised in conciliation or Lok-Adalat.

Civil court has no jurisdiction in motor third party claims and there is no time limit to file case under the MACT (Motor Accident Claim Tribunal).

However, Sec.140 of the MV Act provides compensation to the victim under No-Fault Liability, which is Rs.50, 000/- for death & Rs.25, 000/- for if injury caused results into Permanent Total Disablement. M.A.C.T however has to pass an order for compensation. This award under no fault liability cannot be recovered but would be adjusted against the final award.

Hit & Run Sec. 163 of MV Act provides if some vehicle hit some person resulting death then Rs. 25000/- & in case of grievous injury Rs. 12500/- are payable under Solatium Fund.


Personal accident claim of owner driver

Claims under compulsory personal accident cover shall be applicable under both liability only and package policies. The owner of insured vehicle holding an ‘effective’ driving license is termed as owner-driver for the purposes of this section.

Cover is provided to the owner-driver whilst driving the vehicle including mounting into/ dismounting from or traveling in the insured vehicle as a co–driver.

The maximum liability under this cover is Rs.1 lakh for two wheelers & Rs.2 lakhs for other vehicles.-


100% of CSI for death,

100% of CSI for loss of two limbs or sight of both eyes, or one limb and sight of one eye.

50% of CSI for loss of one limb or sight of one eye

100% of CSI for permanent total disablement from injuries other than named above.



Upto 6 months 5%   Upto 6 months Nil  
6 months – 1 year 15%   6 months – 1 year 5%  
1 year – 2 years 20%   1 year – 2 years 10%  
2 years – 3 years 30%   2 years – 3 years 15%  
3 years – 4 years 40%   3 years – 4 years 25%  
4 years – 5 years 50%   4 years – 5 years 35%  
> 5 years & obsolete On consent   5 years – 10 years 40%  
SHORT PERIOD PREMIUM SCALE   Exceeding 10 years 50%  
Upto 1 month 20%   Rubber/ nylon/ Plastic 50%  
1 month – 2 months 30%   Fibre glass 30%  
2 months – 3 months 40%   Glass Nil  
3 months – 4 months 50%   # N C B – ALL VEHICLES  
4 months – 5 months 60%   1st claim free year 20%  
5 months – 6 months 70%   2 claim free years 25%  
6 months – 7 months 80%   3 claim free years 35%  
7 months – 8 months 90%   4 claim free years 45%  
Exceeding 8 months 100%   5 claim free years 50%  
2 wheelers Rs.50   2 wheeler 1 lakh  
Pvt car/ Taxi/ 3w < 1500cc Rs.500   All others 7.5 lakhs  
Pvt car/ Taxi/ 3W > 1500cc Rs.1000   RESTRICTED TP PD COVER (DISC.)  
GCV PCV EXCESS   2 wheeler Discount Rs. 50  
< 7500 KG < 17 PASS Rs. 500   Pvt car Discount Rs. 100  
7500-16500 17 – 36 PASS Rs. 1000   3 wheeler/ taxi Discount Rs. 150  
>16500 KG > 36 PASS Rs. 1500   Commercial Discount Rs. 200  
VEHICLE CSI PREMIUM   Act + fire only Act only + 25 % of OD  
2 wheeler 1 lakh Rs. 50   Act + theft only Act only + 30 % of OD  
Pvt cars 2 lakh Rs. 100   Act + fire + theft Act only + 50 % of OD  
Comm. 2 lakh Rs. 100   # Valid for 90 days-general & 365 days-military persons  
N/A in case of Firm / Company or if No licence    







Principles Of Insurance


Any contract is entered between at least two persons/parties to do or abstain from doing an act.

Contract of Insurance is between the Insurer & owner of the subject matter of insurance/proposer, which concludes when the premium is paid and insurer accepts the risk. The policy is then issued and the same is an evidence of a contract. The proposer, on acceptance of risk and issuance of policy, becomes insured. Condition necessary for a contract: – Consideration:

Premium is the consideration for the insurer and a promise to indemnify is a consideration for insured. In any contract common Intension is Must.

 Like mind: it is the basic element of a contract. Party desired a Mediclaim policy but the insurer issued a policy for Cancer Insurance: There is no legal Contract.

Competence: Another basic condition to the contract is party desires to enter in to a contract should be major, sound mind and has legal capacity.

Object to be legal: Stolen goods, Public property or party who has no Insurable Interest cannot insure the property. The insurance contract is subject to special principles evolved under common law.

Basic principles of insurance are:









Common contracts/commercial contract are of good faith (Caveat Emptor) “Let the buyer beware”. Although good faith in insurance is to be observed but it is absolutely essential for the proposer to disclose all information’s those are material to contract so that insurer can decide (1) about acceptance (2) rate of premium to be charged subject to term and conditions. Insured is required not only to inform the details/information’s he knows but also the material facts, which he ought to know. This condition is known as Utmost Good Faith. Utmost good faith may be defined as:

A positive duty, voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.

Material Facts:

Every circumstance is material, which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.

The categories of facts, which must be disclosed:

Facts that shows that particular risk represents a greater exposure than would be expected from its nature and class.

  • External factors, which make the risk greater than the risk normally, be expected. Previous losses and claims under other policies. Any declinature or special terms imposed on the previous proposal by other insurers. The existence of other non-indemnity policy such as life and accidents.

Full facts relating to the description of the subject matter of insurance.

Example of material facts:


1. Construction of building

2 Occupancy i.e. nature of use

3. Fire detection and fire- fighting equipment.


1. Nature of packing: single or double gunny bag, old or new drums.

2. Nature of goods: machinery new or old

3. Vessel carrying: age, condition of the vessel

4. Port of shipment: loading, security arrangement

5. Destination: unloading, security & clearance arrangement

6. Terms of sale


1. Type of vehicle

2. Cubic capacity.

3. Carrying Capacity.

4. Model

5. Age of the owner/ driver.

6. Geographical Area


 Personal Accident:

1. Nature of job of the person

2. Age, height & weight

3. Disability if any.

Theft Insurance

  • Nature of goods stored: non-hazardous, hazardous, extra hazardous
  • Value of stocks and security arrangement
  • Facts, which need not be disclosed, example:


Need not to be disclosed

  • Facts of law
  • Facts of common knowledge example: riot, flood/earthquake prone areas.
  • Facts, which lessen the risk
  • Facts, which could reasonably discover.
  • Facts which survey report will reveal.
  • Facts covered by policy conditions.


General:  Previous insurance and claim history have a bearing on deciding rates to charged, whether to accept on normal rates or to reject or load the premium.

The duty of disclosure ceases as soon as the policy/cover note is issued but at the time of renewal, again all material facts are to be disclosed. It is very important to note if some material change takes place during the `currency of policy that must be also disclosed.

The breach of utmost good faith may be defined of two types: –

  • Unintentional: If through an oversight or as per insured certain details/information were not material to disclose, in such case the contract is voidable.
  • Intentional: If non-disclosure or misrepresentation with fraudulent intention, in such case contract becomes void. A void contract is which is not legal and is not a contract at all.
  • Unenforceable: Contract, which cannot be enforced at law are unenforceable. i.e. a policy not stamped as per Stamp Act, cannot be evidence in a court of law.
  • Contractual Duty: Every proposal has a declaration clause, which is required to be signed by the insured confirming that all material facts have been disclosed. In the legal terms, an insurer can avoid the contract if any answer is not correct and may not be even material to the contract. This is a contractual duty of utmost good faith, a stricter than common law duty of good faith.


The legal right to insure arising out of a financial relationship recognised under law, between the insured and subject matter of insurance. The rightful owner suffers loss if the property he possesses is destroyed or damaged. This is known as Insurable interest. He can get such property insured. Without insurable interest, the contract of Insurance will be VOID.


Four essentials feature:

  • There must be some property, right, interest, life, limb or potential liability capable of being insured.
  • It is this property, right, interest, etc. which must be the subject matter of insurance.
  • The insured must stand in a relationship with the subject matter of insurance whereby he benefits by its safety, well-being or freedom from liability and would be prejudiced by its loss, damage or the existence of liability.
  • Law must recognise the relationship between the insured and the subject matter of insurance.



  • The owner of property can insure.
  • Banks/Financiers/Mortgagee and Mortgagor have an insurable interest in vehicle or property for which they have given a loan.
  • Buyers, Sellers, Shipper all have an insurable interest in cargo.
  • Everyone has an insurable interest in Self, wife & children.
  • The owner of the vehicle has an insurable interest in, third party, and occupants of a car as well as in the vehicle.
  • Executors and Trustees have an insurable interest in the property under their charge.
  • Bailees have an insurable interest in the property under their custody either for repair or cleaning. Example motor garage owner, dry-cleaner or watch repairer, required to take reasonable care as if their own.


  INSURANCE CONTRACTS are not gambling transaction & insurable interest must be there. The subject matter of insurance contract is related to financial interest one has in the property to be insured. What is that is insured in a fire policy? Not the bricks and material used in the building the house but the interest of the insured in the subject matter of insurance.


In case of Fire & Miscellaneous Insurance: At all the time i.e. at the time of effecting insurance as well as at the time of Loss/Claim.

In case of Marine Insurance: The insurable interests need not to exist at the time of effecting insurance but it must exist at the time of loss. Exporter, Importer, Shipper and Carrier can affect insurance.

In case of Life insurance: The insurable interest is required to exist at the time of entering in to a contract.

Lawful possession of property will normally support insurable interest provided that possession also includes responsibilities i.e. future challans, any accident future liabilities while vehicle in use or not.

Assignment: Transfer of Right and liabilities to another person who has attained Insurable Interest in property insured. The person is known as Assignee. He can directly deal with the insurance company in his own name.0

Fire & Miscellaneous policy: Can be assigned with the consent of insurer.

Marine policy: Is freely assignable without knowledge and consent of insurer. Mere signing/ Endorsing at the back of policy documents is sufficient. But Marine Hull Policy cannot be assigned without consent of insurer.

Insurer’s insurable interest: having insured the subject matter insurers has assumed the liability. They can insure this property fully or partly by way of Reinsurance.


The principle of indemnity arises under common law and requires that insurance contract is a contract of indemnity only and nothing more.

The object of this principle is to place the insured in the same financial position as far as possible he occupied immediately before the loss. The effect of this principle is to prevent the insured from making profit out of his loss or gaining benefit or advantage. If it is not there the insured himself will bring about the losses so as to make profit.

How Indemnity is provided:

The company may at its option indemnify the insured by payment of the amount of the loss or damage by cash, repair, reinstatement or replacement.

ü  Cash Payment: An insurance contract is a contract to pay money. In most of the cases Insurance Company pays claim by way of a cheques to indemnify the insured. In liability claims insurers pay by way of cheques the liability amount as established either by court or arrived at compromise.

ü  Repair: Insurers make extensive use of repair as a measure of providing indemnity. In most of cases especially motor insurance company authorizes repairer to carry out repair work on damaged vehicles.

ü  Replacement: This method is where insurance company provides replacement although this not quite commonly applied. The company may exercise this method where the market is low but insurance is quite high.

ü  Reinstatement: In this method company undertakes to restore or rebuild the damaged property or machinery. The company would normally not exercise this right because of difficulties to face later on.


 Liability of insurer: Major factors considered at the time of settlement of claims are:

  • What is the extent of loss of the insured?
  • To what extent policy will respond?


The measures, which are important, are as under:

  • Sum Insured is the highest amount payable in case of loss.
  • Average applicable in case of under insurance. In case property is not insured for actual value then it’s applied. Insured is self-insurer for proportionate value. The average is applied based on formula (Sum Insured/value) x Loss


Other factors which applies to indemnify:

  • Excess or franchise applied as the case may be.
  • Deductible: is used where large excess is applicable
  • Limits: restricting value to pay in event of claim say 5% of total sum insured.
  • Salvage application.


Extension in the operation of Indemnity


It normally applies to building and machinery. In this type of settlement the following is included:

  1. Indemnity;
  2. Wear, tear and depreciation;
  3. The effect of inflation between the date of loss and eventually date of replacement. In case of reinstatement if machinery replaced were of better quality or performance then contribution would be equitable from the insured.


Additional Agreed Cost: This also is payable if the same is agreed and premium is paid for it. Valued Policy: In case of fire policy where value is not ascertained the insurance is granted on agreed value. At the time of claim in case of total loss sum insured is paid but in case of partial loss principle of indemnity is applied.


Transfer of rights and remedies by the insured to the insurer who has indemnified the insured in respect of loss suffered by him.

The principle of subrogation arises from principle of indemnity. After payment of claim the insurer steps into the shoes of insured and can claim recovery from third party responsible for the loss and can sue in the name of the insured. The insured is entitled to indemnity – but no more than that. It avoids   the situation where an insured might profit from an insured event. It also enables the insurer to pursue rights and remedies, which the insured may possess, always in the name of the insured, which may reduce the loss. In case he recovers the loss from other source the money received is held in trust and it belongs to the insurer.

The subrogation applies to all losses other than life and personal accident in which case the person can money from third party who negligently caused death to a person who holds a life policy also can recover compensation from him as well as from life/non-life insurance company payment in respect of his insurance.

Extent of Subrogation Rights

There is strong link between indemnity and subrogation; an insurer is not entitled to recover more than he has paid out. The insured may succeed to recover more than claim amount he has received from third party. There are circumstances in which the insured has been considered his own insurer for part of the risk. This would apply in a case where there is excess or where average applies. In this event he is entitled to retain an amount equal to that share of the risk out of any money recovered.

How subrogation Arises

  • Tort
  • Contract
  • Statute
  • Subject matter of insurance


Tort: Where insured has sustained some damages, lost rights or incurred liability due to tortuous acts of some other person then the insurer, having indemnified for the loss is entitled to take action to recover the outlay from the wrongdoer.

Contract: Subrogation relates to the rights, which arise out of certain contracts. This may arise where there is a custom of the trade to which the contract applies. The other situation where subrogation may arise from contract is where a person has a contractual right to compensation regardless to fault. Insurer will assume the benefits of these rights

Statute: In U.K. the insurance company has the right to recover from police for loss to the property for which claim has been paid for the damage sustained due to riot.

Subject Matter of Insurance: After payment of claim of lost property the insurance company procures the right of taking over the property if recovered.

When Subrogation right arises: The common law right of common law arises when insurance company has admitted the claim and paid it.

Modification of subrogation: The Company can exercise the right before payment or even may not exercise the right under Knock for Knock agreement. The right may also be waived in case the injury or damage to employee is due to negligence of other employee.

               5. CONTRIBUTION

An insured may have insurances of the same subject matter with different insurer. In the event of loss he can recover the loss from any one insurer to the extent of sum insured or from all insurers as per insurances with them. But in case he recovers from all insurers he will obviously make profit out of loss. The right of insurer who has paid the loss under the policy can recover proportionate amount from the other insurers who are liable for the loss. The insured can recover full amount within the sum insured from insurer he likes. This is known as principle of Contribution.

Contribution is the right of insurer to call upon other similarly, but not necessarily equally liable to the same insured to share the cost of an indemnity payment. The crucial point is if an insured has paid a full indemnity, that insured can recoup an equitable portion from the other insurer of the risk. If the full indemnity has not been paid then insured will wish to claim from insurers also to receive an indemnity. The principle of contribution enables the total claim to be shared in a fair way.

How Contribution Arises

Requirement of common law needs following to be met:

  • Two or more policies of indemnity must exist.
  • The policies must cover common interest.
  • The policies must cover the common peril which gives rise to the loss.
  • The policies must cover a common subject matter.
  • Each policy must be liable for loss rateable proportion.
  • Each insurer pay in proportion to the sums insured on the policies.




Policy A sum Insured                    Rs. 100,000

Policy B sum Insured                     Rs. 200,000

Policy C sums Insured                    Rs. 300,000

TOTAL                                           Rs. 600,000


In case the loss is Rs 60000 which works out to 10% of the total sum insured, the share of loss for the three insurers will be Rs.10000 for insurer A, Rs.20000 for insurer B and Rs.30000 for insurer C.



Proximate cause means the active, efficient cause that sets in motion a train of events, which brings about a result, without the intervention of any force started and working actively from a new and independent source.

The object of insurance is to provide for such loss, which are covered under the insured perils. If the loss is brought about by one event there is no problem to clear the question of liability. If it is due to two or more events then it is important to see for the most effective, most powerful cause, which has brought about the loss. This cause is termed as proximate cause all other causes being considered as remote cause.

The insurance company is liable for the injuries /damages caused by the event and looks into the proximate cause of the loss when fixing the liability. The question therefore arises as to how is a proximate cause to be determined in order to fix the liability?



A person insured under personal accident policy went on hunting and met with an accident. Due to shock and weakness he was unable to walk. While lying on wet ground he contracted cold which developed into pneumonia, which caused the death.


An insured suffered accidental injury and was taken to the hospital while undergoing treatment he contracted infectious disease, which caused death.

In case of example 1, the proximate cause of death is accident hence death claim is payable whereas in example 2, death is due to infectious disease contracted after the chain has broken hence only accidental loss is payable and not death claim.



Insurance may be defined as the transfer of risk from the insured to the insurer.

The insured is the person (or firm or company) confronted by risk, who transfers the risk to the insurance company, which specialize in the assumption of risk and accepts the risk.

  • The insurer accepts the risk for a fee called the “PREMIUM”.
  • The insurer assesses the loss and ‘underwriters’ the risk for a “PREMIUM”.

Insurance as a security is the need of all human beings.

Man is afraid of uncertainty, fears and death. Although it is a reality, that one day each one will die; sooner or later, timely or untimely is the question, which has no answer.

  • Man is afraid of risk & losses in future.
  • Man is ever in search of security & certainty.

In early history, man lived in a joint family, groups and communities to be secure.

At the earlier days, whenever an earning member would die due to disease or death, the other member of the social group (or family or clan) would contribute to bail the survivors in the family out of financial difficulties. This contribution was in the shape of food, clothing and shelter.

Later, as commercial considerations grew stronger and stronger; nucleus family growth became a common practice, and these contributions and sharing started becoming individualistic.

The ‘assurances’ which were earlier, a common practice, became rare.

This is the concept of growth of Insurance.

Concept of Insurance

The basic concept of the insurance business is the protection of the economic value of the asset. Every asset has a value. If some asset is damaged or destroyed, the owner suffers the monetary loss. If the asset is insured, then the insurance company pays for the loss and the extent of loss suffered by the subject is limited. Losses of an unfortunate few are shared by and spread over to many people exposed to the same risk.

The asset whichever is purchased or created is for the purpose of its expectation of future needs/benefits.

Loss of assets by any reason deprives the owner of the expected benefit.

Insurance helps to reduce the adverse consequences due to loss of assets.

For example, a cow is purchased: milk is sold in the market and income is generated. The factory is established to produce goods and sell them and funds are generated.  Another example is that of a motorcar if purchased for personal use it only provides comfort and convenience to the owner in his day-to-day requirement in normal life and there is no monitory gain rather its value reduces due to use. In case if the same car is purchased to be used as a taxi, it generates income for the owner and he gains.

Every asset has a limited life and during that time it performs to the expectation of the owner. Knowing this well, the owner keeps a provision to replace the same when the asset is not functioning satisfactorily.

But in case of early destruction or non-functioning of the asset, because of an accident or fire or any other unfortunate event the owner is deprived and suffers financially. Insurance is a method, which helps to reduce such adverse consequences.

The concept of insurance is that people exposed to the same risk pool money, and all of them share the loss suffered by a few. The insurance companies play the role of implementing the said concept collect in advance the shares in the shape of premiums and create a fund out of which the losses of few are paid.

Following is an example to show how insurance concept actually works.


There are 1000 motorcycles all valued at Rs. 50000/-.  It is expected that out of these 10 motorcycles either are stolen or total loss during the year. The loss of each person is Rs.50, 000/-, the total loss would be Rs.5, 00,000/-. If each motorcycle owner contributes Rs.500/- the common fund would be Rs.5, 00,000/-.  This would be enough to pay Rs.50, 000/- to each of the 10 owners of the motorcycle. Thus 1000 persons share the risk in case of 10 motorcycle owners.


Purpose & need of Insurance

Assets are likely to be destroyed or made non-functional due to perils like fire, floods, breakdowns, lightning and earthquake etc. Every asset is exposed to risk means the possibility of loss or damage, which may or may not happen. This is because of uncertainty about the risk that insurance plays the role. Insurance becomes relevant only if there are uncertainties of occurrence of the event leading to a loss.

 No uncertainty – No Insurance.

An asset generates income, which can be lost on early destruction due to an accident. Insurance does not protect the assets but only compensates the insured by way of payment of a claim.

Basically, insurance covers tangible assets but in itself, it is an intangible product.

People are exposed to risks the consequences of which are difficult to be borne by the individual.


Risk involves the chance an investment’s actual return will differ from the expected return. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical

A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action. … A risk is not an uncertainty (where neither the probability nor the mode of …

What is a hazard?

A hazard is a situation that poses a level of threat to life, health, property, or environment. Hazards can be dormant or potential, with only a theoretical risk of harm; however, once a hazard becomes “active”, it can create an emergency. A hazardous situation that has come to pass is called an incident.

Types of hazard

Hazards are generally labelled as one of the following five types.

Physical hazards are conditions or situations that are concerned with the subject matter of insurance i.e. building, machinery or human being. The description of the same helps insurer to decide the rates to be charged. Physical hazards can be both natural and human-made elements.

Chemical hazards are substances that can cause harm or damage to the body, property or the environment.

Moral Hazards relate to the human beings approach towards the insured property whether he cares for the same “Prudent as if uninsured”, if not then his moral hazard is not good and cause loss to insured property of its own to have more amount at the time of loss.

Legal hazards are a type of moral hazard that results from laws or regulations that force insurance companies to cover risks that they would otherwise not cover, such as including coverage for alcoholism in health insurance.

Morale hazard is not like moral hazard but his indifferent attitude towards the insured property which may cause loss without the instinct of dishonesty. It can be said a moral hazard is an act of dishonesty whereas morale hazard is indifferent intention with no intention to put insurer to loss.


What is Peril?

A peril is the cause of loss which is essentially important as most of the general insurance policies are not issuing comprehensive policies which cover all the risk/ cause of losses. There are so many exclusions/ conditions which deprive the insured of getting the loss.


Nature of Perils

The perils relevant to an insurance claim can be classified under three headings:

Insured perils: Those named in the policy as insured e.g. fire, lightning, storm and theft;

Excepted or excluded perils: Those stated in the policy as excluded either as causes of insured perils e.g. riot, earthquake or war or a result of insured perils e.g. certain type of explosion;

Uninsured or other perils: Those perils not mentioned in the policy at all. Smoke and water may not be excluded nor mentioned as insured in a fire policy.


Theory of probability:

Let us assume that a particular city has a population of 1 lakh.

In the city, on an average in a year 10000 are affected by way:

  • 200 people die in accident
  • 800 people get injured and disabled,
  • 2000 die natural death,
  • 7000 die of disease

This data as per statistic is certain.

Then what is uncertain?

Uncertainty is as to who will die or get disabled during day-to-day high-risk prone fast life.

Though the number of deaths, accidents etc. is known,

What is not known is the name, age, time, place and of the ‘PERSONS’.

If it is known that 200 persons are prone to accidental death in a year, it is not known which 200 individuals?

Due to this certainty, that 10000 peoples will die in an accident, or get injured and disabled or die a natural death or die of disease; all 1 lakh people will fear.

  • Accident
  • The possibility of injury or death and its consequences to varying degree as per their age, behaviour, nature of work, environment hazards and many other factors. Grownups and breadwinners may fear more and dependents may fearless.

If in a city of 1 lakh houses & shops, there are about 1000 thefts every year, though some particular 1000 people are affected by the theft, all other (maybe more than 90000) will fear theft and will like some solution to this problem.

“Many would contribute to mitigate losses of a few”.

This method of sharing losses of a few by many is the basis or core philosophy of insurance.


Every human being has fear in his mind.

  • The fear whether he will be also to meet the basic needs of the life i.e. Food, clothing and Housing (Roti, Kapda and Makkan).
  • He has fear not only for himself but also for his dependents.
  • The source of income to meet his basic needs may be through service or business.
  • If he has able to meet his basic needs then he acquires the assets i.e. vehicles, property or jewellery etc.
  •  Then he gets the additional fear of saving the assets from destruction. ( The assets may be destroyed by accident, fire or earthquake etc. and the income may be cut off due to certainty i.e. old age and death or uncertainty i.e. accident, illness or disability.)
  • As you know, the old age and death are certain for every human being while the accident, illness, disability and destruction of assets may be by random.
  • The number of accidents will take place but with whom is uncertain.

Therefore, to overcome these problems, the Insurance plays a very important role.

The principal source of income of an individual comes from the compensation for work performed by him. If this source of income gets cut off then: —

A family will make social and economic adjustments like:

  • Wife may take employment at the cost of homemaking responsibilities
  • Children may have to go to work at the cost of education.
  • Family members might have to accept charity from relatives, friends etc. at the cost of their independence and self-respect.
  • The family standard of living might have to be reduced to a level below the essentials for health and happiness.


The basic threats which all of us may encounter to a varied extent and which result in cut off of income or sudden increase in – uncalled for expenses (beyond our means or higher than our earnings) i.e. dislocates the human life, are:-

  • Illness  (malnutrition, environment, chronic) – uncertain
  • Accident (uncertain)
  • Disability – Permanent or temporary (uncertain)
  • Old age-  (certain)
  • Death – (certain)

v  The business of insurance is related to protection of human life, created assets, human disability and business liabilities possessed by human beings which have a definite value, and

v  Assets and human life generate benefit and income for the owner and his/her family members, and

v  Loss of assets/ human life for any reason stop the benefits and income to the owner and family members respectively, and

v  Results in falling of living standards in the family, quality of life and future growth of the associated family members, and

v  Insurance is a mechanism that helps to reduce such adverse consequences through pooling, spreading and sharing of risk.


To provide Security and Safety

v  In general Insurance, the property can be insured against any contingency i.e. fire, earthquake etc.

v  The uncertainty due to fire, accident, death, illness, disability in the human life, is compensated financially by general insurance.

v  Insurance is the only way to assist and provide adequate cover at the time of sufferings.

v General Insurance provides only protection to the human life and property respectively.


Companies conducting insurance business are known as ‘Insurers’. Insurers bring together persons exposed to the same risk by collecting premium from them and pay compensation to those who suffer. The insurer on the lines explained in examples determines the premium. Insurer’s role is that of a trustee and has to ensure that nobody takes undue advantage of the arrangement.

In a nutshell, both underwriting and claim settlement are to be done with great care.


Social security is an obligation of the state. Subject has been included in list III of the seventh schedule of the constitution of India as “Social Security and Social Insurance” and “Welfare of labour including, inter alia, liability for workmen’s compensation, etc.” Further, Article 41 of the Directive Principles of State Policy called upon the state to make provision for public assistance in the case of, inter alia, sickness and disablement and in other cases of undeserved want.

Various laws, passed by the state for this purpose involve the use of insurance, compulsory or voluntary, as a tool of social security. The Employees State Insurance Act, 1948 provides for the Employees State Insurance Corporation to pay the expenses of sickness, disability, maternity and death and for the maintenance of hospitals, dispensaries, etc. for the benefit of industrial employees and their families, who are insured persons. The scheme operates in certain industrial areas as notified by the government.

Insurers play an important role in the social security schemes sponsored by the government i.e. Solatium Fund, the Personal Accident Social Security Scheme and the Hut Insurance Scheme. The Crop Insurance Scheme (RKBY) is also of social significance.

Rural insurance schemes are designed to provide social security to the rural families. The insurance companies have introduced special insurance schemes, at subsidised rates of premium to cover cattle and other livestock for the beneficiaries of IRDP and various other government sponsored programmes and financial institutions.

Companies of their own also offer on commercial basis insurance covers, which have the objective of social security. Examples: Janata Personal Accident, Jan Arogya, Bhavishya Arogya, Raj Rajeshwari Mahila Kalyan Yojana, etc.


Insurers play a vital role in mobilising funds for economic developments of the country. Savings out of insurance fund are utilised in investments for economic growth.

The strength of an insurance company lies in that of a huge amount collected and pooled together. This so collected amount is called premiums. This is known as pooling of risks.

The very existence of a risk that is uncertainty concerning the future is a severe handicap in economic activities. Insurance removes the fear; worry and anxiety associated this future uncertainty and thus encourages free investment of capital in business enterprises and promotes efficient use of existing resources. Thus insurance encourages commercial and industrial development and thereby contributes to a vigorous economy and increased national productivity.

These days organisation of industries, commerce and trade depend on insurance, because no bank or financial institutions lend money without having insurance cover as collateral security. Insurers are closely associated with agencies and institutions engaged in fire loss prevention, cargo loss prevention, and Industrial and road safety. Insurers have established Loss Prevention Association of India with intention of creating awareness of the need of loss prevention and implementing loss prevention measure in various sectors.

Before acceptance of risk, insurer arranges for the survey and inspection of the property to be insured by a qualified engineer and other experts not only to evaluate but also to suggest improvements to avoid losses, which in turn, not only reduces the rates but also reduces the loss potentials.

Insurance ranks with export trade, shipping and banking services as an earner of foreign exchange to the country. Insurers are also operating in foreign countries and earning foreign exchange and represent invisible export.

Cattle and other livestock and also pieces of equipment like pump sets are rural business. Various rural schemes provide necessary financial protection against loss or damage to poor farmers and other peoples of weaker section of society.


Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

Definition: A financial risk management tool in which the insured transfers a risk of potential financial loss to the insurance company that mitigates it in exchange for monetary compensation known as the premium.

Description: Insurance policies, a contract between the policyholder and the insurance company, are of different types depending on the risk they mitigate. Broad categories include life, health, motor, travel, home, rural, commercial and business insurance.

The Insurance Regulatory and Development Authority, an agency of the Government of India, is the regulatory body for the insurance sector’s supervision and development in India.


Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be an insurable risk, the risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.

Social effects

Insurance can have various effects on society through the way that it changes who bears the cost of losses and damage. On one hand it can increase fraud; on the other it can help societies and individuals prepare for catastrophes and mitigate the effects of catastrophes on both households and societies.

Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive steps by the insurance company. Insurance scholars have typically used moral hazard to refer to the increased loss due to unintentional carelessness and insurance fraud to refer to increased risk due to intentional carelessness or indifference. Insurers attempt to address carelessness through inspections, policy provisions requiring certain types of maintenance, and possible discounts for loss mitigation efforts. While in theory insurers could encourage investment in loss reduction, some commentators have argued that in practice insurers had historically not aggressively pursued loss control measures—particularly to prevent disaster losses such as hurricanes—because of concerns over rate reductions and legal battles.