Unit 1: Concept of insurance & risk
Insurance Services Management notes · PTU syllabus (BCOP 522-18)
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Unit summary
Insurance turns uncertain, large losses into small, certain premiums. This unit covers the basic principles of insurance, its role and importance in society, micro insurance, types of insurance, insurance documents and policy terms, insurance agents, risk and uncertainty, classification and sources of risk, and risk management.
After this unit you can
- Explain the concept, principles, role and importance of insurance
- Describe types of insurance, micro insurance and insurance documents
- Explain the role and regulation of insurance agents
- Distinguish risk and uncertainty and explain classification of risk and risk management
PTU syllabus topics
- Basic principles of insurance
- role and importance of insurance in society
- micro insurance
- types of insurance
- insurance documents and policy terms
- insurance agents
- risk and uncertainty
- classification and sources of risk
- risk management
- Utmost good faith
- Disclose all material facts
- Insurable interest
- You must suffer a loss from the event
- Indemnity
- Restore the loss, not profit from it
- Subrogation
- Insurer takes over rights against third parties
- Contribution
- Several insurers share a loss
Topic 1
Concept and basic principles of insurance
Insurance is a contract whereby one party (the insurer) undertakes, in return for a premium, to compensate the other (the insured) for loss from a specified event, or to pay a sum on the happening of an event (death, maturity). It works on pooling of risk — the losses of a few are shared by many.
Utmost good faith (uberrimae fidei)
Disclose all material facts
Insurable interest
Financial interest in the subject matter
Indemnity
Restore to the pre-loss position, no profit (not for life insurance)
Contribution
Several insurers share the loss proportionately
Subrogation
Insurer steps into the insured's rights after paying
Proximate cause
Nearest effective cause of loss must be an insured peril
Loss minimisation
Insured must take reasonable steps to reduce loss
Example
A car insured for ₹6 lakh is damaged in an accident caused by a truck driver. After paying the claim, the insurer can sue the truck owner — subrogation.
Topic 2
Role and importance of insurance in society
| To individuals and families | To business | To the economy and society |
|---|---|---|
| Financial security against death, illness, accidents | Protects assets and continuity | Mobilises long-term savings for infrastructure |
| Savings and investment | Enables credit (insured collateral) | Generates employment |
| Peace of mind | Covers liabilities, employees' welfare | Reduces burden on government in disasters |
| Tax benefits (old regime) | Facilitates trade (marine insurance) | Promotes loss prevention and safety |
- Insurance penetration (premium as % of GDP) in India is about 3.7% and density (premium per capita) is about US$ 95 — low compared with developed economies, showing growth potential (IRDAI's "Insurance for All by 2047").
Topic 3
Micro insurance and types of insurance
- Micro insurance: low-premium, low-cover products for low-income people — governed by IRDAI micro insurance regulations; distributed by NGOs, SHGs, MFIs; examples — PMJJBY (₹2 lakh life cover, ₹436 a year), PMSBY (₹2 lakh accident cover, ₹20 a year), Ayushman Bharat PM-JAY (₹5 lakh hospital cover per family).
Life insurance
Term, whole life, endowment, money-back, ULIP, pension
Health insurance
Individual, family floater, critical illness, group
General insurance — property
Fire, burglary, home, engineering
General insurance — marine
Cargo, hull, freight
General insurance — motor
Third-party (compulsory), comprehensive
Liability
Public, product, professional indemnity, D&O
Others
Travel, crop (PMFBY), cyber, credit insurance, reinsurance
- Life vs general: life insurance is a contract of assurance (event certain); general insurance is a contract of indemnity.
Topic 4
Insurance documents and policy terms
- 1
Prospectus/brochure
Product features
- 2
Proposal form
Basis of contract — utmost good faith
- 3
Premium receipt / first premium receipt
- 4
Cover note
Temporary cover (general insurance)
- 5
Policy document
Terms, conditions, exclusions
- 6
Endorsement
Changes during the policy term
- 7
Renewal notice
- 8
Claim form
- Key terms: sum assured/insured, premium, policy term, maturity, nominee, assignment, grace period (30 days for non-monthly premiums, 15 days for monthly), lapse and revival, free-look period (30 days for new life and health policies), exclusions, deductibles, waiting period, co-payment, no-claim bonus.
Topic 5
Insurance agents
- An insurance agent solicits and procures insurance business for an insurer for commission.
- Regulation: IRDAI (Registration of Corporate Agents) and (Appointment of Insurance Agents) Regulations; agents appointed by insurers after pre-licensing training and examination; since 2022, an individual agent may represent more than one insurer in each category (life, general, health) within the limits set by IRDAI.
- Other intermediaries: corporate agents (banks — bancassurance), brokers (represent the buyer), web aggregators, insurance marketing firms, point-of-sales persons (POSP), Bima Sugam platform (upcoming).
- Duties of agents: disclose material information, explain policy features honestly, help in claims, maintain records, avoid misrepresentation and rebating.
Topic 6
Risk and uncertainty; classification and sources of risk
Meaning
Possibility of loss with measurable probability
Outcome and probability cannot be estimated
Measurement
Quantifiable (statistics, past data)
Not quantifiable
Insurability
Insurable
Not insurable
Example
Fire in a factory
A new technology making a product obsolete
Pure vs speculative
Only loss or no loss (insurable) vs loss or gain (gambling, business)
Static vs dynamic
Not due to economic change (fire) vs due to change in economy
Fundamental vs particular
Affects large groups (flood, war) vs individual (theft)
Personal, property and liability risks
Death, illness; damage to property; legal liability to others
Financial vs non-financial
Measurable in money or not
- Sources of risk: physical environment (natural disasters), social environment (riots), political (policy change), legal (lawsuits), operational (process failures), economic (recession, inflation), cognitive (misjudgement).
- Peril (cause of loss — fire) vs hazard (condition increasing the chance of loss — physical, moral, morale).
Topic 7
Risk management
- 1Identify risks
- 2Measure and evaluate
Frequency and severity
- 3Select methods
Avoidance, loss control, retention, transfer (insurance), combination
- 4Implement
- 5Monitor and review
| Frequency / severity | Low severity | High severity |
|---|---|---|
| Low frequency | Retain | Transfer (insure) |
| High frequency | Reduce (loss control) and retain | Avoid |
Exam tip
Insurance is best for low-frequency, high-severity risks — say this with the matrix in any risk management answer.
Key terms
- Insurance
- Contract transferring risk to an insurer for a premium
- Utmost good faith
- Duty to disclose all material facts
- Subrogation
- Insurer's right to recover from third parties after paying a claim
- Micro insurance
- Low-cost insurance for low-income people
- Pure risk
- Risk with only the possibility of loss or no loss
Quick revision
- Principles: utmost good faith, insurable interest, indemnity, contribution, subrogation, proximate cause.
- Penetration about 3.7%; micro insurance — PMJJBY, PMSBY, PM-JAY.
- Documents: proposal, cover note, policy, endorsement.
- Risk vs uncertainty; pure vs speculative; peril vs hazard.
- Risk management: avoid, reduce, retain, transfer.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define insurance.
- Q2.What is insurable interest?
- Q3.What is micro insurance?
- Q4.What is a cover note?
- Q5.Distinguish risk and uncertainty.
- Q6.Distinguish peril and hazard.
Long-answer questions
- Q1.Explain the principles of insurance with examples.
- Q2.Discuss the role and importance of insurance in society.
- Q3.Explain the types of insurance and insurance documents.
- Q4.Explain the classification and sources of risk and the risk management process.
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