Insurance Policy is a legal document that sets forth in writing the contract between the insured and the insurer. It describes the main characteristics of the property in detail and the perils against which the property is covered and the conditions of the insurance. Since it is a written contract between the two parties, it should therefore fulfill the essential conditions for a valid contract. They are namely,
- Offer and acceptance. Corporate agreement (a consensus and indemnity) has been reached by the parties.
- Absence of fraud or misrepresentation
- Capacity of the parties
Non-life insurance refers to the property and liability insurance. Fire insurance covers stationary property. Marine insurance covers mobile property. Bonding is a special coverage that guarantees the performance of the contract by one party to another. Casualty coverage includes accident and health insurance besides the above mentioned categories. Miscellaneous Insurance Business means all other general insurance contracts, including therein motor insurance.
Importance of Non-Life Insurance
The role of insurance is twofold. Insurance achieves both risk transfer and risk reduction. The insurer collects the premium from a group of business firms who want to protect their property against the damage caused by fire. The insurer will then indemnify the firm that suffers a loss of property due to fire out of the premium so collected. So the collective contributions of this entire group of the covered have been utilized to pay for the losses of the unfortunate few who sustain losses. Insurance also acts as a risk reduction mechanism in various senses. Firstly, the individual risk has been shifted to the insurance company by way of pooling. Secondly, firm’s risk exposure is well spread out because the insurer has an access to thereinsurance market making possible a further spread of risk. If an aircraft is destroyed, the airline company will have a big hole in its finances. If the aircraft is insured, the loss would be spread out among a large number of insurance companies throughout the world.
Every business enterprise is exposed to a large number of risks and uncertainties to its premises, plant and machinery, raw materials, finished stock and other things. Goods may be damaged or lost in the process of transportation and may be destroyed due to fire or flood while in storage. As a matter of fact, business means risk and uncertainties. Some of the risks can be avoided by timely precautions, but some are unavoidable and are beyond the control of a businessman. For those types of risks, Insurance is the best protection. By providing protection against at least some of these risks, the insurance industry helps him better manage his risks and contributes to capital formation in the economy. After transferring risks and uncertainties of the business to the insurance company, the entrepreneur can focus on his core activity- of running the business. Also, the insurance companies bring their experience and expertise to the field of risk management. Thus, they are able to add value to the customer’s business processes.
Types of Non-Life Insurance
Segments covered under Indian Non-life Insurance industry are briefly explained:
1. FIRE INSURANCE Fire insurance is one of the most popular forms of insurance. The hazards of fire and the losses due to these continue to rise despite the discovery of various preventive measures. Fire insurance is a device, the most popular to compensate for the loss caused to a property by fire. It relieves the insured from the fire losses to which he is exposed. Sec 2 (6A) of the Insurance Act, 1938 defines fire insurance as “the business of effecting, otherwise than incidentally, to some other class of insurance business, contracts of insurance against loss by incidental to fire or other occurrence customarily included among the risks insured against fire insurance policies”. Fire insurance contracts cover the risks of damage by fire. It insures the risk of loss caused, whether by fire or incidental to fire. The policy should mention clearly the subject matter or asset insured. Occurrence of fire is essential and should be accidental and the damage should be caused to the asset.
2. MARINE INSURANCE According to the Insurance Act, 1938, marine insurance business includes the business of effecting contracts of insurance upon vessels of any description, including cargoes, freights, and other interests which may be legally insured in or in relation to such vessels, cargoes, freights, goods, merchandise and property whatever description insured for any transit by land or water or both, and whether or not including warehouse risks or similar risks in addition or as incidental to such transit and includes any other risks customarily included among the risks insured against in marine policies.
3. MISCELLANEOUS INSURANCE Miscellaneous Insurance refers to contracts of insurance other than those of Life, Fire and Marine insurance. It covers a variety of risks, the chief of which are: –
- Health Insurance: The saying “health is wealth” is very much true in the present fast-paced life. Ill health not only leads to financial bankruptcy, but also gives a lot of suffering for the affected individual and also to his/her family. Health insurance in a narrow sense would be “an individual or group purchasing health care coverage in advance by paying premium”. In a broader sense, it would be any arrangement that helps to defer, delay, reduce or altogether avoid paying for health care incurred by individuals and households.
- Agriculture Insurance: Agriculture is becoming a risky business. Besides, agricultural activities are exposed to controllable risks like pest, diseases etc and uncontrollable risks include national calamities like rainfall, extreme temperature conditions, extreme wind speeds etc. The main aim of agricultural insurance is to reduce the economic distress of the farmers by providing insurance coverage in the event of failure of any of the notified crops as a result of natural calamities, or protect the crop from large scale damage caused by pest attacks, crop disease and vagaries of weather.
- Accident Insurance: Accident insurance provides a cash cover to a policyholder when she/he suffers injuries as a result of an accident. While insurance helps the policyholder pay off hospital and medical bills in case of accident injuries, it provides cash benefits to family members if the policyholder dies in the accident. This insurance applicable for 24 hours a day, 365 days a year, is commonly referred to as personal accident insurance.
- Micro Insurance: Micro Insurance is insurance with low premiums and low caps/ coverage. It is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.
- Terrorism Insurance: Terrorism presents many challenges to the global insurance industry. There is greater potential today for exceptionally large losses due to terrorism than in the past decade. Insurers find difficulty in pricing terrorism insurance because of uncertainty associated with the risk. Also, the data on terrorist groups and their activities are generally not revealed by the government for national security reasons.
- Property Insurance: Property insurance covers a business’s building and its contents-money and securities, accounts-receivable records, inventory, furniture, machinery, supplies and even intangible assets such as trademarks- when damage, theft or loss occurs.
- Personal Liability Insurance: Personal liability insurance provides protection against the legal liability, which arises due to insured’s personal acts. The insurance company will pay for legal defense to third party damages or injuries up to the policy limit. Except legal liability, which arises due to automobile accidents and professional liability, most other personal acts are covered under personal liability insurance. The personal liability insurance covers damages caused to properties and injuries to other people due to the negligence of the insured.
- Auto/ Motor Insurance: Motor insurance policy is a contract between the insured and the insurer, in which the insurer promises to indemnify the financial liability in the event of loss to the insured. Motor Vehicles Act 1939 was passed to mainly safeguard the interests of pedestrians. According to Section 24 of Motor Vehicles Act, “No person shall use or allow any other person to use a motor vehicle in a public place, unless the vehicle is covered by a policy of insurance”.
- Workmen’s Compensation Insurance: In India, Workmen’s Compensation Act was passed in 1934 and 1946. According to this act, an employer is required to pay compensation to his workers who receive injuries or contract occupational diseases during the course of their work. An employer may obtain an insurance policy to cover such liability. The premiums are usually payable on the basis of wages. It is also known as ‘Employers Liability Insurance’.
DURATION OF THE NON-LIFE INSURANCE CONTRACT
The Non-life insurance policies may be issued for
- i. A short period
- ii. A period of one year
- iii. Long-term policies
i. A Short Period
Short period policies are those policies that are issued for less than a year. Those business men who are dealing with seasonal crops like cotton, jute, etc. take these policies generally. Since these policies are for a short period, there is no provision for renewal of such policies. Moreover, instead of prorate premium a higher premium is charged known as short period scale because they are sometimes taken when the risk is greater.
ii. A Period of One Year
Most of the policies are issued for one year. They are known as annual policies. There is a provision for renewal of such policies. Policies can be extended on prorate basis to bring the renewal date to a particular day or some other mutually convenient date.
iii. Long Term Policies
Policies issued for two or more years are termed as long-term policies. They are issued for completion of big projects, dwelling losses and building in course of construction and Janta Personal Accident Policies.
Under annual policies, there is a provision for renewal of the policy for a further period of one year. To make the renewal effective the insured must pay the premium and the insurers have to accept it. The consent of both the parties is necessary. If this provision is not there the policy will terminate automatically on the expiry date of the policy. It is to be noted that renewal of policy constitutes a fresh contract. In case there is a change in the subject matter or any other change, then it will constitute a fresh offer and the insurer must agree to the changes.
The offer for renewal may come either from insurers by inviting renewal of the policy through renewal notice to the insured and the insured must pay the premium or the offer may come from an insured for renewal of his policy and the insurers must accept it by renewing the policy. The general practice is that well before the expiry of the policy the insurers send renewal notice indicating the premium and consent to renew the policy. However, there is no obligation on insurers to send a renewal notice. If the renewal notice is not received by the insured, they may tender the premium to the insurers, which they may accept or refuse at their discretion.
For citing this article, use:
Muthumeena, M. (2017). Business and financial performance of non life insurance companies in India.