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Insurance

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What is Insurance?

Insurance is a method of spreading the risk. It is based on the legal maxim ‘Uberima Fidae’ which means utmost good faith. In simple terms, it can be called as a method of collecting premium from a large section of the society and pay the claim of a comparatively smaller section of the society, which suffers loss of damage due to certain sudden and unforeseen event.

Insurance is a contract of indemnity to the person who suffers a loss due to any unforeseen sudden event. In India, the ‘Life’ and ‘Non-Life’ insurances are managed by two different authorities. The non-life insurance is also known as general insurance in common parlance. While life insurance coverage is exclusively handled by the LIC of India and other life insurance companies, the non-life insurance portfolio like health insurance, agricultural insurance, motor insurance, marine insurance, fire insurance, miscellaneous insurance etc. are managed by the general insurance companies.

What is the Trend of Insurance?

In USA, in 2005, about 16% of people were not insured for healthcare.1 The scenario in India is very different. Currently, at least 90% of Indians are not insured. But the insurance industry has grown steadily over the last few years. While there were five insurance companies in 2000, the number went up to 30 in 2007.2 According to US census 2007 there are 116 million consumers have a choice of health insurance as of now. This is expected to grow up to 151 million by 20113

History of insurance

In the year 1818, a life insurance company was started in Kolkata by the Europeans in the name of ‘Oriental Life Insurance Company’, solely to cater to the needs of their community. There was therefore, discrimination in premium rating and the Indian lives were covered at a higher premium as compared to that charged for the Europeans. In the year 1870, the first Indian insurance company called, ‘Bombay Mutual Life Assurance Society’ started collecting normal premium for Indian lives as well.  

The initial stages were not ‘easy sail’ for the insurance companies and the various wars fought affected the country adversely and this triggered great depression. These developments world over resulted in the bankruptcy of the insurance companies and they were liquidated. This led to a situation where the public lost faith in these companies and did not utilize the life insurance cover.

This situation prompted the government to introduce certain enactments in order to regulate the mechanisms in the life insurance industry.

The Life Insurance Act and the Provident Fund Act were passed in 1912, providing the first regulatory mechanisms.

The Indian Insurance Companies Act enacted in the year 1928, authorized the government to obtain statistical information on various aspects, from companies operating in both life and non-life insurance areas.

Later, Insurance Act of 1938 introduced stricter measures and issued guide lines for carrying on the insurance business in India both life and general insurances.

The Government of India unearthed frauds played by some of the owners of the private insurance companies, which led to the nationalization of the life insurance industry in the year 1956. By an Act of parliament, the LIC of India Act was passed in the year 1956 and all the 245 private life insurance companies and other entities offering life insurance cover were consolidated into one single company called Life Insurance Corporation of India.

Nationalization of the life insurance business in India was a result of the Industrial Policy Resolution of 1956, which had created a policy framework for extending state control over at least 17 sectors of the economy, including the life insurance. The company began operations with 5 zonal offices, 33 divisional offices and 212 branch offices.

The organization today comprises 2048 branches, 100 divisional offices and 8 zonal offices, and employs over 1 million agents. It also operates in 12 other countries, primarily to cater to the needs of Non-Resident Indians (NRIs).

In the changing economic policies and the philosophy of the government, and due to the decision of the government to liberalize the investment policies in the industry, the monopoly of the LIC was diluted and the private players were permitted to enter the industry with whom the LIC also has to compete today.

In the fiscal year 2006–07, number of policy holders in LIC are said to have crossed a whopping 200 million (fourth in terms of population of the countries of the world).

Individuals also have the option of covering themselves for medical expenses by opting for the ‘Critical Illness (CI)’ rider available with life insurance policies. Life insurance companies have their own list of CIs as defined by them. In case of a CI rider, on the occurrence of a ‘critical illness’ during the policy tenure, an amount as proposed in the policy will be paid out to the individual. This is irrespective of the expenses incurred by the individual on hospitalization, medicines and other such costs.

LIC has introduced various plans to cater to the needs of different sections of people. Perhaps it is the first life insurance company. LIC of India is the first company to sponsor ‘LIC Pension Fund Company’ in the country for managing the pension fund of the Central Govt. employees.4

The policies issued by the life insurer are for a fixed term and the policyholder keeps his policy alive by paying the premium regularly as per the terms and conditions of the contract.

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What are the Types of Insurance?

Broadly speaking there are two kinds of insurance namely Life and Non-Life insurances. These portfolios are handled separately by the Life insurance companies and General insurance companies respectively. No composites are permitted as per law.5

General Insurance

Prior to nationalization of the general insurance companies there were about 108 companies transacting general insurance business in India, LIC was also one of them. However, in the year 1972, by a central Act of parliament, the Government of India nationalized the general insurance business in the country and constituted the General Insurance Corporation of India under the General Insurance Business (Nationalisation) Act, 1972. All the companies were merged to form four companies wholly owned by the Government of India and they were subsidiaries to the GIC.

While life insurance policies cover the life of the insured person with extended cover for accidents, critical illness etc. according to the requirements of the person insuring, the non-life insurance policies cover all the other things under the sun.

Some of the non-life policies for example are:

  • Fire insurance
  • Miscellaneous insurance
  • Marine insurance
  • Motor insurance
  • Cattle insurance
  • Other rural insurances
  • Personal accident

Health insurance comes as a branch under the miscellaneous class of business. The companies offer under this class, Mediclaim policies to individuals, families or to groups of persons. The entry age and the exit age are fixed by the companies. The premium would vary depending on the limit of cover opted, age of the insured and certain other aspects. The pre-existing diseases are not generally covered under this policy.

All the policies issued by the general insurance companies are annual contracts and every renewal is deemed as a fresh contract.

Life Insurance and Health Insurance

Till recently, the awareness about the personal line of insurance was not up to a level to which it should have been. The rising costs of medical treatment, the increasing accidents either on roads or at workplace or elsewhere has necessitated the coverage under this policy.

How Consumers React to the Health Issues

The cost of health care is a major concern for the consumers. A recent McKinsey report has pointed out that their respondents in a survey were more concerned about the financial implications of injury or illness than about injury or illness itself.

Around 48% of those who are concerned were prepared for common medical problems, whereas only 15% for more disruptive medical conditions, which leads to impairment and require long-term medical and care. It was noticed that young people between 18 and 34 years were more concerned about their dental needs and safeguarding themselves from the consequences of major accidents. Older people were more concerned about managing major medical events and long-term care. The older people believed that they are the most prepared and the middle age the least prepared for managing major medical events but when it comes to financial preparedness for health problems only 32% and 23% of the respondents respectively, were reported that they are prepared.

Thus, people are ill-prepared and confused about the medical care requirements. This confusion can lead to inappropriate financial planning and affect the way consumers purchase health insurance. It is found that majority of the buyers stick with products that they know because of the confusion and the difficulty in evaluating different available options. 6

Which is a Good Insurance Policy?

Different people have different requirements. Since there are many plans under the life insurance policies, it is difficult to specify which one is a good policy. However, the covers granted by the companies cater to requirement of almost all people. The insured has to choose the type of policy best suited to his/her needs.

What One Should Look for Before Taking a Policy?

Since the insurance contract is based on the principle ‘Uberima Fidae’, (utmost good faith), it is the duty of the person buying the insurance policy to furnish all the details correctly.

One should, first of all, assess one’s requirement. He/she should then discuss with the agent who is selling him the policy and choose the right policy.

He/she should estimate the outgo towards premium and ensure his/her capability to pay the same without break. Otherwise, the policy would lapse.

It is necessary that the terms and conditions of the policy that he/she taking is properly understood.

Before finalizing the policy, he should understand clearly what are the risks covered under the policy and what are the exclusions.

He should also understand the claims procedure in the event of one arising, and maintain all the documents required or are helpful in processing the claim.

In the event of the claim occurring, he should immediately inform the insurer concerned and furnish all the details called for by the insurer in order to facilitate them to settle the claim as early as possible.

Benefits of  insurance

Since the insurance is a method of spreading the risk, the needy person would be able to avail greater benefits for a small premium. It helps one to manage an unforeseen and sudden emergent situation.

Covering one’s life relieves one of his/her worries about his/her family in any unfortunate situation happening.

Health insurance takes care of the high costs of treatment, which an ordinary person may not afford otherwise. Critical illness cover would relieve the burden of high costs. The cashless facility at the hospitals, offered by the companies also saves  botheration of arranging the costs of treatment in a sudden development.

In short, insurance relieves the insured of the worries about ‘what after me or what next’.

Drawbacks of insurance

The common man is still not properly educated about the importance/necessity of the insurance. The companies do not sufficiently advise the insuring public about the coverage and the exclusions under the policy. The general impression is that once the policy is taken, all under the sun is covered. This leads to a shocking situation to the insured when the claim becomes not payable.

The conditions under the policy are printed in very small letters and are not in vernacular. Many an insured would not be in a position to understand the same. Claim dealing involves heavy documentation. Delay in settlement, if any, would put the insured into avoidable problems.

Conclusion

Insurance is a ‘must’ for the society as a whole and it shall be the prime concern/duty of the Government to popularize and provide insurance cover to all especially to the rural sector who are still not aware of what an insurance is. The consumers are concerned, confused, and unprepared and rely heavily on personal recommendations and brand recognition. The over all industry is shifting towards a retail model from the current wholesale model. The providers should take care of the needs, desires and habits of the consumers to provide better health insurance policy.

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References

1. An Overview of the U.S. Health Care System Chart Book. Centers for Medicare and Medicaid Services And Office of the Assistant Secretary for Planning and Evaluation. 2007. Available at: http://aspe.hhs.gov/health/reports/07/chartbook/report.pdf . Accessed on: June 23, 2008.

2. http://www.thaindian.com/newsportal/health/only-17-percent-insured-indians-get-medical-reimbursement_10045345.html. Accessed on: June 23, 2008.

3. US census 2007.

4. Life Insurance Corporation of India. Available at: www.licindia.com. Accessed on: June 23, 2008.

5. Insurance Regulatory and Development Authority. Available at: www.irdaindia.org. Accessed on: June 23, 2008.

6. Cordina J, Shubham S. What Consumers Want in Health Care. The McKinsey Quarterly, June 2008, pp. 1–6.

Written by: healthplus24.com team

Date last updated: February 02, 2015