Insurance fundamentals

A material fact is anything that would change the insurer's decision to accept the risk or the price. The customer must answer the proposal form honestly; the insurer must explain the cover and its exclusions clearly.

ExampleA proposer with diabetes answers 'No' to the medical history question. If a diabetes-related claim arrives in year two, the insurer can reject it for non-disclosure. After the 5-year moratorium it could do so only by proving fraud.

This stops insurance becoming a bet. In motor, the owner named on the registration certificate (RC) must be the policyholder. The proposer is the person who signs and pays; the insured is the person or thing covered, and the two can differ.

ExampleA car is sold but the policy stays in the seller's name. The seller no longer loses anything if the car is damaged, so the buyer must ask the insurer to transfer the policy (an endorsement) into their own name.

General insurance pays the actual loss, no more. That is why motor claims deduct depreciation on parts, why the IDV falls as a vehicle ages and why deductibles exist. Life and personal accident cover are not indemnity contracts: they pay a fixed sum, because a life cannot be valued.

ExampleA 3-year-old car's plastic bumper costing ₹10,000 is replaced. Plastic parts carry 50% depreciation, so without zero-depreciation cover the insurer pays ₹5,000 less the ₹1,000 compulsory deductible: ₹4,000. With zero depreciation it pays ₹9,000.

The customer cannot claim the full loss twice. In health, the customer can choose which policy to claim from first and then claim the balance from the other. The CPA waiver follows the same idea: an owner who already has ₹15 lakh of personal accident cover need not buy CPA again.

ExampleHospital bill ₹6 lakh. The employer's group policy covers ₹3 lakh and the personal floater ₹10 lakh. The customer claims ₹3 lakh from the group policy, then ₹3 lakh from the floater using the first insurer's settlement letter.

Once the insurer pays its own customer, it steps into the customer's shoes and can recover the money from whoever caused the loss. The customer cannot then recover the same amount again.

ExampleA parked car is hit by a truck. The car's insurer pays ₹80,000 under own damage, then recovers it from the truck's third-party insurer. The customer signs a subrogation letter as part of the claim documents.

When several events lead to a loss, cover depends on the main cause that set the chain in motion, not the last event in time.

ExampleAn earthquake breaks a gas pipe and the gas catches fire. Under a policy that excludes earthquake, the fire damage is excluded too, because the earthquake was the proximate cause.

Life insurers cover dying too soon (term) or living too long (annuity), often combined with savings. Policies run 10 to 40 years, so persistency and long-term promises matter more than claim volumes.

ExampleA 30-year-old buys ₹1 crore of term cover for 30 years. The insurer collects premium for three decades and pays only if death happens in that window.

General insurers cover property, liability and other non-life risks, mostly on indemnity terms. Motor is the largest retail line. Most policies run for a year, but motor TP is sold for 3 years with a new car and 5 years with a new two-wheeler.

ExampleA trader buys fire cover for the shop, marine cover for goods in transit and motor cover for the delivery van, all from one general insurer.

Standalone health insurers (SAHIs) write only health, personal accident and travel business. General insurers also sell health, so a health BA could work at either kind of company.

ExampleStar Health, Niva Bupa, Care Health and Aditya Birla Health are standalone health insurers; ICICI Lombard and HDFC ERGO sell health as general insurers.

Life and non-life business must still sit in separate companies, even when they share a brand. Each has its own licence, systems and regulatory returns.

ExampleHDFC Life and HDFC ERGO are separate companies under one group, so a customer buying term and car cover deals with two insurers.

The proposer signs the proposal and pays. The insured is the person or asset covered. The nominee receives the money on death. If the nominee is under 18, an appointee receives it on their behalf.

ExampleA father (proposer) buys a health policy covering himself, his wife and his son (insured members). On his term plan he names his 12-year-old daughter as nominee and his wife as appointee.

The actuary designs the product and sets base rates from past claims. The underwriter decides on individual cases within an authority limit: accept, load the premium, add conditions or decline.

ExampleThe actuary sets health rates by age band. An underwriter sees a 52-year-old proposer with high blood pressure and accepts with a 20% loading.

Agents sell on behalf of the insurers they are tied to. Corporate agents are mostly banks and can work with several insurers. Brokers act for the customer and can place cover with any insurer. Web aggregators compare prices online. POSPs (point of sales persons) sell simple, pre-underwritten products after short training. Insurance Marketing Firms sell several insurers' products locally.

ExampleOne customer might buy car cover on a comparison website (web aggregator), health cover at a bank branch (corporate agent) and factory fire cover through a broker.

A third party administrator (TPA) processes health claims and runs cashless desks for the insurer, but carries no risk. A licensed surveyor inspects larger motor and property losses and reports on the cause and amount.

ExampleAfter a car accident, the insurer appoints a surveyor who inspects the car at the garage, agrees the repair estimate and decides which parts are repaired and which replaced.

Insurers pass part of large or volatile risks to reinsurers. GIC Re is India's national reinsurer, and foreign reinsurers run branches here. IRDAI licenses insurers and intermediaries, approves products and issues the circulars that BAs turn into requirements.

ExampleAn insurer covering a ₹2,000 crore refinery keeps ₹100 crore of the risk and passes the rest to several reinsurers.

GWP is the premium on policies written in a period. Earned premium is the part for which cover has already been given; the rest sits in an unearned premium reserve.

ExampleA ₹12,000 annual policy starts on 1 October. At the financial year end on 31 March, ₹6,000 is earned and ₹6,000 is unearned.

Shows how much premium goes on claims. Claims incurred include claims paid plus the change in reserves for open claims and for claims incurred but not yet reported (IBNR).

ExampleEarned premium ₹100 crore and claims incurred ₹78 crore give a loss ratio of 78%.

Adds commission and operating expenses to claims. Above 100%, the insurer loses money on underwriting and relies on investment income. Many Indian general insurers run above 100%.

ExampleClaims 78% + commission 15% + other expenses 17% = 110%: an underwriting loss of 10% of earned premium.

Solvency ratio = available solvency margin ÷ required margin. It shows whether the insurer holds enough capital to pay claims in a bad year. A risk-based capital regime will link the requirement to the risks each insurer carries.

ExampleAvailable margin ₹3,000 crore against a required ₹1,800 crore gives 1.67, comfortably above the 1.5 minimum.

Claim settlement ratio is claims paid ÷ claims received, by number. Persistency is the share of life policies still paying premium after 13, 25, 37, 49 and 61 months. Renewal retention is renewals ÷ policies due for renewal.

Example1,000 life policies were sold in March 2025 and 820 paid their March 2026 premium, so 13th-month persistency is 82%.