Insurance Products | Principles, Types, and Schemes Explained with Examples | MODULE D: FINANCIAL PRODUCTS AND SERVICES
Insurance Products: Comprehensive Guide
What is Insurance?
Insurance is a financial product that provides protection against financial loss. It is a contract (policy) in which an individual or entity receives financial reimbursement or protection against losses from an insurance company, in exchange for premiums paid.
Fundamental Principles Governing Insurance Products
- Principle of Utmost Good Faith (Uberrimae fidei): Both parties must disclose all material facts.
- Principle of Insurable Interest: The insured must have a financial interest in the subject matter of insurance.
- Principle of Indemnity: Compensation is limited to the extent of loss.
- Principle of Contribution: If insured with multiple insurers, the compensation is shared.
- Principle of Subrogation: Transfer of rights from insured to insurer after settlement.
- Principle of Proximate Cause: Nearest cause of loss is considered for claim settlement.
Classification of Insurance
Insurance products are generally classified into:
- Life Insurance: Deals with life-related risks.
- General Insurance: Deals with non-life risks (property, health, vehicles, etc.).
Types of Insurance Business
- Life Insurance (e.g., term life, whole life, endowment plans)
- Health Insurance (e.g., mediclaim policies)
- Motor Insurance (e.g., vehicle coverage)
- Home Insurance (e.g., property coverage)
- Travel Insurance (e.g., emergency coverage while traveling)
Group Insurance Schemes
Group insurance policies cover multiple individuals under a single master policy. These are usually offered by employers to their employees, or by associations to their members.
Example: A company offers group term life insurance to all employees, covering up to ₹10 lakh per employee.
Micro Insurance
Micro insurance is designed to be affordable for low-income groups. It aims to provide financial protection against specific perils to those who otherwise have little or no access to traditional insurance services.
Insurance Based Social Security Schemes
These schemes aim to provide insurance coverage to large sections of the population, particularly the economically weaker sections.
- Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY): Life cover of ₹2 lakh for a premium of ₹436 per annum.
- Pradhan Mantri Suraksha Bima Yojana (PMSBY): Accident insurance cover of ₹2 lakh for a premium of ₹20 per annum.
Bancassurance
Bancassurance refers to the partnership between a bank and an insurance company wherein the bank sells the insurance products of the company to its customers. It allows banks to earn revenue and helps insurance companies reach a larger customer base.
Insurance Ombudsman Scheme
The Insurance Ombudsman provides an efficient and inexpensive forum for the resolution of customer complaints relating to insurance policies.
Key Features:
- Free service to policyholders.
- Settlement through mediation and recommendations.
- Final awards are binding on insurers.
Government Business Products (Social Security Schemes)
The Government of India has launched several insurance-based social security products:
- PMJJBY: Life insurance cover for death due to any reason.
- PMSBY: Accidental death and disability cover.
Advanced Mathematical Example: Expected Claim Cost Calculation
Suppose a micro-insurance policy has a probability of 0.02 (2%) of a claim occurring in a year, and the average claim payout is ₹50,000. The insurer wants to calculate the expected annual claim cost per policy.
Solution:
Expected Claim Cost (E) is calculated by:
E = Probability of Claim × Average Claim Amount
E = 0.02 × 50,000 = ₹1,000
Thus, on average, the insurer expects to pay ₹1,000 per policy annually in claims. Premiums must be set higher to cover administrative expenses and profit margins.
Further Complex Calculation: Premium Pricing Including Expenses
If the insurer wants a 10% profit margin and expects 5% administrative costs, the premium (P) should be:
P = E × (1 + Expense Ratio + Profit Margin)
Where,
Expense Ratio = 5% = 0.05
Profit Margin = 10% = 0.10
Therefore,
P = 1,000 × (1 + 0.05 + 0.10)
P = 1,000 × 1.15
P = ₹1,150
Conclusion: The insurer should charge a premium of at least ₹1,150 per policy annually.
Chapter List: MODULE D: FINANCIAL PRODUCTS AND SERVICES
- Overview of Financial Markets
- Money Markets and Capital Markets
- Fixed Income Markets - Debt / Bond Markets
- Forex Markets
- Interconnection of various markets/Market Dynamics
- Merchant Banking Services
- Derivatives Market including Credit Default Swaps
- Factoring, forfaiting & Trade Receivables Discounting System (TReDS)
- Venture capital
- Leasing and Hire Purchase
- Credit Rating agencies & their functions
- Mutual Funds
- Insurance Products
- Pension Funds (include APY, NPS)
- Guidelines on Para Banking & Financial Services provided by Banks
- Real Estate Investment Funds / Infrastructure Investment Fund (concept)
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