Important Definitions and Terms Under Insurance Law

Insurance Business (Section 2(7))

Definition:

“Insurance business” refers to the business of effecting contracts of insurance or reinsurance, or both.

Explanation:

This includes both life insurance (insuring human life, health, and accidents) and general insurance (covering property, liability, and other non-life risks).

Illustration:

• A company that offers policies for life insurance, such as providing financial compensation in the event of the policyholder’s death, is engaged in insurance business.
• A company that offers auto insurance or fire insurance, covering risks associated with vehicles and property, is also engaged in insurance business.

Insurer (Section 2(9))

Definition:

An insurer is any company or individual that provides insurance policies and assumes the risks in return for premium payments.

Explanation:

The insurer assumes the financial risk of the insured in exchange for premiums. Insurers can be private companies, public sector entities, or even government-owned entities like LIC (Life Insurance Corporation of India).

Illustration:

• LIC is a public sector insurer providing life insurance policies.
• Bajaj Allianz is a private sector insurer offering health, life, and motor insurance policies.

Policyholder (Section 2(10))

Definition:

A policyholder is a person or entity who owns an insurance policy. The policyholder can be the person insured, but they can also be different from the insured person (e.g., a parent purchasing life insurance for their child).

Explanation:

The policyholder is responsible for paying the premium for the insurance policy and holds the legal rights to the policy benefits. They may claim the sum assured in case of an insured event (e.g., death, accident).

Illustration:

• A parent purchasing a life insurance policy for their child is the policyholder, while the child is the insured person.
• A company purchasing health insurance for its employees is the policyholder, while the employees are the insured persons.

Insured (Section 2(11))

Definition:

The insured is the person whose life, health, or property is covered by the insurance policy.

Explanation:

In life insurance, the insured is the person whose death triggers the payout. In non-life insurance (like vehicle or home insurance), the insured is the entity or individual whose property or health is covered.

Illustration:

• In a life insurance policy where the policyholder is a parent and the beneficiary is a child, the insured is the child.
• In a home insurance policy, the property owner is the insured, and the policy covers the house against events like fire or theft.

Life Insurance (Section 2(21))

Definition:

Life insurance refers to the insurance of human life, where the insurer provides a sum of money to the beneficiary upon the death of the insured or after a certain period.

Explanation:

Life insurance can be in the form of term insurance (which provides coverage for a specified period), whole life insurance (provides coverage for the insured’s entire life), or endowment policies (which pay the sum assured after a specified time or upon death).

Illustration:

• A term life insurance policy provides a payout to the beneficiaries only if the policyholder dies within the term (e.g., 20 years).
• An endowment policy pays the sum assured to the policyholder after a specified period (e.g., 10 years), or to their beneficiaries in case of the policyholder’s death.

General Insurance (Section 2(13))

Definition:

General insurance refers to insurance other than life insurance. It covers property, casualty, and liability risks, such as auto insurance, health insurance, fire insurance, and marine insurance.

Explanation:

General insurance policies provide coverage for risks like accidents, theft, damage to property, or health-related expenses. These policies are usually for a fixed term (e.g., one year).

Illustration:

• A motor insurance policy covers damages to a car in case of accidents or theft.
• A health insurance policy covers medical expenses in case of illness or hospitalization.
• A fire insurance policy compensates the insured for damages caused by fire to their property.

Proposal (Section 2(14))

Definition:

A proposal is the application submitted by a person to the insurer seeking insurance coverage, along with the required details and premium.

Explanation:

The proposal is the first step in obtaining an insurance policy. It includes details such as the type of insurance, the coverage amount, and personal details of the insured. Once accepted by the insurer, it becomes the basis for issuing the policy.

Illustration:

• A person fills out a proposal form for a life insurance policy, providing their personal details (e.g., age, health status), the sum assured, and the type of coverage (term life, whole life).
• After the insurer reviews the proposal and agrees to the terms, they issue the policy.

Policy (Section 2(12))

Definition:

A policy is the written contract between the insurer and the policyholder that outlines the terms and conditions of the insurance coverage.

Explanation:

The policy contains all the important details such as the scope of coverage, premium amounts, exclusions, terms of renewal, claims procedures, and more.

Illustration:

• A motor insurance policy will list the types of damages covered (accidents, theft, natural disasters), exclusions (e.g., damage due to negligence), and the process for claiming the insurance amount.

Premium (Section 2(23))

Definition:

Premium is the amount paid by the policyholder to the insurer in exchange for coverage under the insurance policy.

Explanation:

Premiums are typically paid regularly (e.g., monthly, annually) and are determined based on factors such as the type of insurance, sum assured, age of the insured, and the insurer’s underwriting norms.

• Illustration:
  In a health insurance policy, the policyholder may pay a premium of ₹10,000 annually to ensure coverage for medical expenses up to ₹5,00,000.
• In a life insurance policy, the premium amount may vary based on the policyholder’s age, lifestyle, and health conditions.

Sum Assured (Section 2(22))

Definition:

Sum assured is the amount that the insurer agrees to pay the beneficiary in case of a covered event, such as death or the maturity of the policy.

Explanation:

In a life insurance policy, the sum assured is the amount payable on death or the policy maturity, depending on the policy terms. For general insurance, the sum assured is the maximum amount payable in case of loss or damage.

Illustration:

• A life insurance policy might have a sum assured of ₹10,00,000, which means the beneficiary will receive ₹10,00,000 upon the death of the insured.
• A home insurance policy may have a sum assured of ₹5,00,000, which will cover damage to the insured property up to that amount.

Claim (Section 2(6))

Definition:

A claim is the demand made by the policyholder or the beneficiary for the settlement of a covered loss under the insurance policy.

Explanation:

The claim can be filed when an insured event occurs, such as an accident, health issue, or death. The insurer is required to assess the claim and provide compensation in accordance with the policy terms.

Illustration:

• If a policyholder is hospitalized, they can file a health insurance claim to reimburse medical expenses incurred during the treatment.
• In the event of an accident, the policyholder can file a motor insurance claim to recover the costs of repairs or damages.

Re-insurance (Section 2(24))

Definition:

Re-insurance refers to the practice of an insurer transferring a portion of the risk to another insurer (called the re-insurer) in exchange for a premium.

Re-insurance helps primary insurers manage risk by reducing their liability for large claims. It is common in the insurance industry to ensure that insurers are not overexposed to high levels of risk.

Illustration:

• If an insurer provides health insurance to a large number of people, they may re-insure part of this risk to another company to ensure that they do not face huge losses if multiple claims are made in a short period.
• Similarly, a property insurer might re-insure a large property portfolio to spread the risk of losses across multiple insurers.

Insured Event (Section 2(11))

Definition:

An insured event refers to a specific event or occurrence covered by the insurance policy that triggers the insurer’s liability to pay the claim.
Explanation: The insured event can vary depending on the type of insurance. It may include incidents like the death of the insured (life insurance), an accident or natural disaster (general insurance), or a hospitalization event (health insurance).

Illustration:

• In a life insurance policy, the insured event is the death of the policyholder.
• In a health insurance policy, the insured event is typically the hospitalization of the policyholder due to illness or injury.

Beneficiary (Section 2(4))

Definition:

A beneficiary is the person or entity designated to receive the insurance benefits or sum assured when an insured event occurs.

Explanation:

In life insurance, the beneficiary is the individual or individuals who will receive the death benefit upon the insured’s death. In health or accident insurance, the beneficiary may be the policyholder or the insured individual.

Illustration:

• A spouse may be named as the beneficiary of a life insurance policy, and will receive the sum assured if the policyholder passes away.
• In a critical illness policy, the insured might directly receive the benefit for covering medical expenses related to specific illnesses.

Underwriting (Section 2(18))

Definition:

Underwriting refers to the process by which an insurer evaluates the risks of insuring a person or entity and determines the premium to be charged based on that evaluation.

Explanation:

Underwriting involves assessing the applicant’s health, occupation, lifestyle, and other risk factors to determine whether the person is insurable and at what cost (i.e., premium). It is an essential process in both life and general insurance.

Illustration:

• If a person with a history of heart disease applies for a life insurance policy, the insurer’s underwriter will evaluate the risk of insuring that individual and may offer coverage with a higher premium or impose exclusions on certain health conditions.
• For a car insurance policy, the underwriter will assess the applicant’s driving history and the model of the car to determine the premium rate.

Actuary (Section 2(2))

Definition:

An actuary is a professional who uses mathematics, statistics, and financial theory to evaluate and assess risks in the insurance industry, including setting premiums, determining reserves, and forecasting future claims.

Explanation:

Actuaries play a crucial role in pricing insurance policies, calculating reserves, and ensuring the financial stability of insurance companies. They analyze past data, risk factors, and trends to predict the future behavior of claims and pricing.

Illustration:

• An actuary working for a life insurance company will help determine the premium rates for different age groups and health conditions based on statistical models of mortality rates and life expectancy.
• Similarly, an actuary in health insurance will analyze the probability of a policyholder requiring hospitalization and set premiums accordingly.

Morbidity (Section 2(17))

Definition:

Morbidity refers to the incidence of disease, injury, or other health conditions that affect an individual’s ability to function normally.

Explanation:

In the context of health insurance, morbidity is a key factor that influences the underwriting process and premium setting. Insurers assess the morbidity of a population to determine the likelihood of policyholders making claims related to illnesses or medical conditions.

Illustration:

• A health insurance company will consider the morbidity rates in a region when deciding premiums. If there is a high prevalence of chronic illnesses like diabetes, premiums for health policies may be higher in that region.

Mortality (Section 2(16))

Definition:

Mortality refers to the incidence of death within a specific population during a given time period.

Explanation:

Mortality rates are a significant factor in life insurance underwriting. Insurers assess mortality data to set premiums for life insurance policies. Higher mortality rates in a certain demographic (age group, occupation, etc.) can result in higher premiums.

Illustration:

• A life insurance company will set higher premiums for a policyholder who is 60 years old compared to one who is 30 years old because the mortality risk for the 60-year-old is higher.
• Similarly, individuals in high-risk occupations (e.g., mining, aviation) may face higher premiums due to the increased likelihood of death in such professions.

Lapse (Section 2(19))

Definition:

A lapse refers to the termination of an insurance policy due to the policyholder’s failure to pay the premium within the grace period.

Explanation:

When a policyholder fails to pay their premiums, the policy enters a “lapsed” state, meaning it is no longer in force and no coverage is provided until the policy is reinstated. The insurer typically offers a grace period for late premium payment.

Illustration:

• If a life insurance policyholder misses a premium payment but does not pay within the grace period (e.g., 30 days), the policy will lapse, and the insurer will no longer be liable to pay out the sum assured in case of the insured’s death during the lapse period.

Nominee (Section 2(13))

Definition:

A nominee is a person designated by the policyholder to receive the insurance benefits upon the occurrence of an insured event.

Explanation:

A nominee is typically named in the life insurance policy and is the recipient of the sum assured or benefits upon the death of the insured. A nominee can also be designated in some general insurance policies, like health insurance, to receive benefits in case of hospitalization.

Illustration:

• In a life insurance policy, a policyholder may name their spouse or child as the nominee to receive the death benefits in the event of their death.
• In a health insurance policy, the nominee may be the person who can receive the benefits in the case of the policyholder’s hospitalization, especially if the policyholder is unable to make claims themselves due to illness or incapacity.

Premium Paying Term (Section 2(24))

Definition:

The premium paying term is the period during which the policyholder is required to pay premiums for the insurance policy.

Explanation:

The premium paying term can vary depending on the type of policy. In life insurance, the term may be for a fixed number of years (e.g., 5 years) or until the policyholder reaches a certain age.

Illustration:

• In a 5-year premium paying term life insurance policy, the policyholder is required to pay premiums only for the first 5 years, after which the policy continues without further premiums.
• In contrast, in an endowment policy, the premium paying term may continue until the policyholder turns 60 or until the policy matures.

Surrender Value (Section 2(20))

Definition:

The surrender value is the amount the policyholder is entitled to receive if they decide to terminate the policy before its maturity date.

Explanation:

When a policyholder decides to surrender their policy (usually before maturity), they may receive a surrender value based on the premiums paid, the duration of the policy, and other terms. The surrender value is usually less than the sum assured.

Illustration:

• A policyholder who surrenders a life insurance policy after 5 years may receive a surrender value based on a percentage of the premiums paid, which would be lower than the sum assured but still offers some compensation for the premiums they have invested.

Reinstatement (Section 2(5))

Definition:

Reinstatement refers to the process of restoring a lapsed insurance policy to its active status after the policyholder pays the overdue premiums.

Explanation:

If a policy has lapsed due to non-payment of premiums, the policyholder may request reinstatement by paying the outstanding premiums along with any applicable penalties. Reinstatement is subject to the insurer’s approval.

Illustration:

• If a life insurance policy lapses due to missed premiums, the policyholder can request reinstatement within a specified period (e.g., two years) by paying all overdue premiums along with interest. The policy will then continue, and the insurer will resume coverage.

Moral Hazard

Definition:

Moral hazard refers to the tendency of a person to take on higher risks because they know that they are covered by insurance.

Explanation:

Moral hazard occurs when the insured behaves in a riskier manner because they do not bear the full financial consequences of their actions due to insurance coverage.

Illustration:

• A driver with comprehensive car insurance may drive recklessly because they know that the insurance will cover the costs of any accidents or damages.
• A policyholder with life insurance may engage in unhealthy behaviors like smoking or overeating because they know their family will receive the death benefit in case of their demise.

Insurance Contract

Definition:

An insurance contract is an agreement between the insurer and the insured where the insurer promises to compensate the insured or a third party for certain losses, damages, or liabilities in exchange for a premium payment.

Explanation:

The contract outlines the terms and conditions, including the risks covered, exclusions, premiums, and the insured event that triggers the insurer’s liability. It is legally binding and must comply with regulatory standards.

Illustration:

• A motor insurance contract between an individual and an insurance company may cover damages due to accidents, theft, or fire, but exclude damages from wear and tear or negligence. The insured agrees to pay an annual premium to the insurer for this coverage.

Exclusion

Definition:

Exclusions are specific situations or conditions that are not covered under the terms of an insurance policy.

Explanation:

While insurance provides broad coverage for various risks, exclusions are detailed in the policy document to define what is not covered. Insurers use exclusions to limit their liability and avoid compensating for high-risk activities or events.

Illustration:

• A health insurance policy might exclude coverage for pre-existing medical conditions or cosmetic surgeries.
• A home insurance policy might exclude coverage for damages caused by earthquakes or floods unless a separate rider is added.

Endorsement

Definition:

An endorsement is an amendment or addition to the original insurance policy that alters its terms, such as changes in coverage, exclusions, or the insured amount.

Explanation:

An endorsement is used to make changes to an existing insurance policy without the need to create a new one. It can increase or decrease coverage, change the sum assured, or modify other aspects of the policy.

Illustration:

• A life insurance policy holder may add an endorsement to include coverage for accidental death in addition to the standard life coverage.
• A car insurance policy may be endorsed to increase coverage for natural disasters if the original policy only covered accidents and theft.

Co-payment

Definition:

Co-payment is a clause in health insurance policies where the insured has to pay a fixed percentage of the claim amount, and the insurer pays the remaining portion.

Explanation:

Co-payment reduces the insurer’s liability in claims and ensures that the policyholder shares some of the costs. It is typically used in health insurance to curb excessive or unnecessary claims.
Illustration:

• If a health insurance policy has a 20% co-payment clause and the insured incurs ₹1,00,000 in medical bills, the insured must pay ₹20,000, and the insurer will cover the remaining ₹80,000.

No Claim Bonus (NCB)

Definition:

The No Claim Bonus (NCB) is a discount or reward provided to the policyholder for not making any claims during the previous policy term.

Explanation:

NCB is commonly applied in motor insurance policies and is an incentive for policyholders to drive carefully and avoid making small claims. This bonus can result in a discount on premiums for the next year.

Illustration:

• If a motor insurance policyholder does not file any claims during the policy period, they may be eligible for an NCB of 20% on their renewal premium, thereby reducing the overall cost.

Grace Period

Definition:

The grace period is the additional time given to the policyholder to pay the premium after the due date without losing coverage.

Explanation:

The grace period typically ranges from 15 to 30 days, depending on the type of policy. During this period, the policy remains active, and the insurer will still honor claims made for covered events. However, failure to pay within the grace period may result in policy lapse.

Illustration:

• A life insurance policy may have a grace period of 30 days. If the policyholder misses the premium due date, they can still pay within the next 30 days without losing their coverage or benefits.
• In health insurance, missing the premium payment within the grace period may result in the termination of the policy, and the insured might lose coverage.

Claim Settlement Ratio

Definition:

The claim settlement ratio is the ratio of the number of claims settled by an insurer to the total number of claims received during a particular period.

Explanation:

This ratio is an important indicator of an insurer’s efficiency and trustworthiness. A higher ratio suggests that the insurer is more likely to honor claims and pay out the due sums.

Illustration:

• If an insurer receives 1,000 claims and settles 950 of them, the claim settlement ratio is 95%. A higher ratio indicates better performance in terms of customer satisfaction and claims handling.

Premium

Definition:

Premium is the amount of money paid by the policyholder to the insurer in exchange for coverage. The premium is usually paid annually, semi-annually, or monthly.

Explanation:

The premium is determined based on several factors, such as the type of insurance, the sum assured, the insured’s age, occupation, and health condition, and other risk factors. It can be calculated using an underwriting process and actuarial models.

Illustration:

• In life insurance, a policyholder pays a premium based on their age, health, and lifestyle. A healthy individual may pay a lower premium than a person with medical conditions.
• In motor insurance, the premium is determined based on factors such as the vehicle’s model, age, and the driving history of the owner.

Insurable Interest

Definition:

Insurable interest is a legal requirement that ensures the policyholder has a direct financial stake in the subject matter of the insurance policy.

Explanation:

Insurable interest must exist at the time of purchasing the insurance policy, and it must also exist at the time of the claim. This requirement prevents the creation of speculative or gambling insurance contracts.

Illustration:

• A policyholder can only take out life insurance on themselves or a family member, as they have an insurable interest in their life. They cannot insure a random individual or stranger as there is no financial stake.
• In property insurance, the owner of a house can insure the property as they have an insurable interest in it, but a tenant cannot insure the property unless they have insurable interest in the contents.

Ex-Gratia Payment

Definition:

Ex-gratia payment is a voluntary payment made by the insurer to the policyholder or beneficiary in cases where the claim is not strictly covered under the terms of the policy, but the insurer wishes to provide some financial relief.

Explanation:

Ex-gratia payments are typically made by insurers in exceptional cases or where a policyholder experiences extreme hardship. These payments are not legally required but are offered as a goodwill gesture.

Illustration:

• If an accident occurs that is not fully covered under a motor insurance policy, the insurer might offer an ex-gratia payment to the policyholder for partial reimbursement of medical expenses or repairs.
• Similarly, if the cause of death is not covered under a life insurance policy (e.g., suicide within two years), the insurer may still offer an ex-gratia payment to the family.

Policyholder Protection

Definition:

Policyholder protection refers to the rights and safeguards put in place to ensure that the policyholders are treated fairly by insurance companies.

Explanation:

Insurance regulators, like the IRDAI, enforce regulations that protect the interests of policyholders. These include transparency in policy terms, grievance redressal mechanisms, and ensuring that the insurers honor claims in a timely and equitable manner.

Illustration:

• A policyholder can lodge a complaint with the insurer’s grievance redressal cell if they believe their claim has been unjustly denied.
• In case of dispute, the insurance ombudsman provides an avenue for policyholders to seek resolution.

These insurance terms provide a deeper understanding of how the Insurance Act, 1938 works and the fundamental concepts that govern the Indian insurance industry. They not only help consumers understand their rights and obligations but also ensure transparency, accountability, and fairness in the system, which benefits both insurers and policyholders.