Telangana TSBIE TS Inter 2nd Year Commerce Study Material 4th Lesson Insurance Services Textbook Questions and Answers.
TS Inter 2nd Year Commerce Study Material 4th Lesson Insurance Services
Long Answer Type Questions
Question 1.
Define Insurance. What are the principles of Insurance?
Answer:
Meaning :
- Insurance is a social device for spreading the chance of financial loss among a large number of people.
- Insurance is “a contracct where by, for specified consideration, one party undertakes to compensate the other for a loss relating to a particvular subject as a result of the occurrence of designated hazards”.
Definition :
According to Oxford Dictionary, insurance is “an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium”.
| Principles of Insurance |
| Utmost Good Faith |
| Insurabhle Interest |
| Indemnity |
| Subrogation |
| Contribution |
| Mitigation of lose |
| causa proxima |
I. Utmost Good Faith :
- The contracts- of insurance are included in the category of contracts those contracts . which requiere absolute and utmost faith on the part of the parties concerned.
- Insurance contracts of any kind, each one of the parties is under an obligation to make the fullest disclosure all such facts which may some bearing on the decision of the other party to enter into such contract.
II. Insurable Interest:
- No person can enter into a valid contract of insurance unless he has insurable interest in the object or life insured. Insurable interest is in the nature of financial interest in a life or thing.
- If there is no insurable interest such conditions, insurance contracts would be wager- mg contracts which are not valid and therefore, cannot be enforced at law.
III. Indemnity :
- According to this principle, the insured may not collect more than actual loss.
- All contracts of insurance, expect for life insurance contracts, are contracts of indemnity the principle of indemnity does not apply to life and other kinds of personal insurance.
IV. Subrogation :
- According to the principle the insurer becomes entitled to all ‘rights of the insured regarding the subject – matter of insurance after the claim of the insured has been fully and finally settled’.
- If the goods may have been partially damaged or the property may not have been fully destroyd. In such cases, the insured may try to obtain the value of scrap in addition to the money received in settlement of the claim.
V. Contribution :
- Sometimes a person may get his goods insured with more than one insurer. In the event of loss the companies concerned will follow the principle of contribution.
- Each company will contribute that proportion of the loss which the policy issued by it bears to the total amount for which insurance has been effected with all the companies.
VI. Mitigation of lose :
- According to this principle it is the duty of the insured to take all such steps to mitigae or minimize the loss.
- The idea behind this principle is that the insured should not become careless and inactive in the event of the mishap merely because the property which is getting dam-aged is insured, he must, instead, act like any uninsured prudent man. ,
VII. Causa proxima :
- If loss is caused by series of events the insurance company will meet the losses only if it is definitely established that the said loss was caused directly by an event covered by the policy
- The maxim in this regard is ‘Causa Proxima non remota optima’ i.e. the nearest or the direct cause and not the remote cause is to be looked to.
Question 2.
Explain the functions of Insurance. .
Answer:
The functions of insurance can be divided in two parts :
i) Primary Functions
ii) Secondary Functions
I. Primary Functions :
a) Insurance provides certainty :
Insurance provides certainty of payment at the un-certainty of loss, there are uncertainty of happening of time and amount of loss. Insurance removes all these uncertainty and the assured is given certainty of payment loss. The insurer charges premium for providing the said certainty.
b) Insurance provides protection :
The main function of the insurance is to provide protection against the probable chances of loss. The insurance guarantees the payment of loss and thus protects the assured from sufferings.
c) Risk – Sharing :
When risk takes place, the loss is shared by all the persons who ae exposed to the risk. The share is obtained from each and every insured in the shape of premium
II. Secondary Functions :
a) It Prevents Loss :
The insurance joins hands with those institutions which are
engaged in preventing the losses of the assured and so more saving is possible which will assist in reducing the premium. .
b) It Provides Capital :
The insurance provides capital to the society. The accumulated funds are invested in productive channel. The industry, the business and the individual are benefited by the investment and loans of the insurers.
c) It Improves Efficiency :
The insurance eliminates worries and miseries of losses at death and destruction of property. It improves not only his efficiency, but the efficiencies of the masses are also advanced.
d) It helps in Economic Progress :
The insurance by protecting the sociey from huge losses of damage, destruction and death provides an initiative to work hdnd for the betterment of the masses.
Question 3.
Describe the Life Insurance. Explain the different types of policies.
Answer:
Meaning :
“A life insurance contract may be defined as a contract where by the insurer, in consideration of a premium, paid either in lump – sum or in periodical installments undertakes to pay an annuity or a certain sum of money, either on the death of the insured or on the expiry of a certain number of years”.
Types of Life Insurance Policies :
Most of the life insumce policies are variations of the two basic types of policy, namely, ‘
i) Whole, life policiy and
ii) Endowment policy.
i) Whole life policy :
- This policy run for the whole term of life of the assured. It is also called an ordinary policy.
- The assured sum under such a policy becomes due forpayment to the beneficiary only after the death of the assured person. This means that the assured has to pay premia on such a policy throughout his life – time.
- The premium on this type of life policy is, low. It is meant for the protection of family.
ii) Endowment Life Policy :
- This policy runs only for a iimited period or up to a particular age. The policy money becomes due at the end of the period specified in the policy.
- Incase, however, the assured dies before the specified time, the policy money is paid at the time of death. The premia have to be paid till the date of maturity, i.e. the time when the policy becomes payable. This type of live policy combines the advantage of investment for oldage with that of protection for the assured’s family in the event of his premature death.
- Under pure endowment policies, he policy money becomes payable only if assured survives the endowment term; If he dies before th endowment term, nothing is payable. Under a double endowment assurance, the insurer agrees to pay to the assured double the amount of the insured sum if he lives on beyond the date of maturity of policy.
The details of various life insurance policies offered by Insurance companies are given below:
a) Annuity Policy :
In this policy, the amount of the policy is paid in the form of annuities for a specified number of years or till the death of the assured.
b) Sinking Fund Policy :
Such a policy is taken with a view to providing for the payment of a liability or replacement of an asset.
c) Term Assurance Policy :
The amount of this policy is made payable only when a person dies before a certain date or age. In such a policy, generally the premium is low at the starting but rises gradually with the passage of years. It also called as “Ascending Scale Policy.
d) Doubel Accident Indemnity Policy :
This policy provides that if the insured dies because of an accident, his survivors will get double the amount of policy.
e) Joint Life Policy :
This type of policy is taken upon the joint lives of two or more persons. Its amount can be claimed by the survivor whenever one of them dies.
f) Group Insurance Policy :
Such a policy may be taken on the lives of the members of a family or of the employees of a business concern.
g) Janata Policy Scheme :
A Janata Policy issued for terms of 10, 15 or 25 years provided that the policy should not mature beyond 60 years of age. It can be issued only up to the age of 45 years for a person. ‘No medical examination is required in regard to persons aged 35 or below at the time of taking out the policy.
Question 4.
What is the marine Insurance? What are the kinds of polices covered under Marine insurance?
Answer:
This type of insurance it is an arrangement by which the insurance company agree to indemnify the owner of a ship cargo against risks which are incidental to marine adventure.
Types of Marine Insurance :
i) Time policy :
This is a policy where by the subject matter is insured for a specific period of time. It is suitable mainly for hull insurance though it may be taken out also for movables and other goods when small quantities are involved.
ii) Voyage policy :
This policy is meant to insurance the subject matter in transit from one place to another. The subject matter insured under such a policy is generally cargo which is exposed to marine risks in the course of transit.
iii) Mixed policy :
It is also known as time and voyage policy. It seeks to insure the subject matter on particular voyage for a specific period of time.
iv) Floating policy :
It is used by the cargo owners who make regular shipments of cargo’s to insure the shipments expected to be* made during a certain period by one policy.
v) Blanket policy :
It is taken for a certain amount but the premium is paidtm the whole of it in the beginning of the policy and is read justed at the end of the term of the policy in accordance with the actual amount and risks as shown by records of the insured.
vi) Fleet insurance policy :
It is designed to insurance a whole fleet of liners or steamers.
vii) Valued policy :
In this policy the value of the subject matter is agreed between the under writers and the insured at the time of taking the insurance and is specified in the policy itself.
viii) Miscellaneous Insurance policies :
A number of insurance policies meant to cover a variety of other risks are also issued by general insurance companies.
Question 5.
What is Fire Insurance Explain various types of Fire Insurance?
Answer:
Fire Insurance Meaning :
Fire Insurance is an agreement where by one party, in return for a consideration, undertakes to indemnity the other party against financial loss or damage or goods destroyed by fire or other defined perils upto an agreed amount.
The following types of fife policies are commonly used :
I. Types Fire Insurance Policies :
- Valued Policy
- Average Policy
- Specific policy
- Floating Policy
- Excess Policy
- Blanket Policy
- Comprehensive Policy
- Consequential Policy
- Re-instayrmmy Policy
1) Valued Policy :
It is a policy in which the value of the property is ascertained and / or agreed upon and the insurer undertakes to pay his agreed value in the event of the destruction of property by fire.
2) Average Policy :
a) An average policy is that which contains the average clause. The average clause in such a policy lays down that if the property is under insured, the insurer shall bear only that proportion of the actual loss as his insurance bears to the actual value of property at the time of loss.
For example :
If a person insures his property for Rs. 15,000 while the loss is assessed at Rs. 8,000 and the market value of the property at the time of loww is Rs. 20,000, the claim will be settled Rs 6,000. i.e., [\(\frac{15,000}{20,000}\) × 8000]
3) Specific policy :
A specific policy is that which insures a risk for specific sum. In case of any loss to the property insured under such a policy, the insurer will pay the whole loss of the insured provided that it does not exceed the specified sum mentioned in the policy. The value of the whole property is not considered for, this purpose.
4) Floating Policy :
A floating policy is that which covers one or several kinds of goods lying in different localities under one sum and for one premium.
5) Excess Policy :
a) When the stock of a merchant fluctuates, he may take out a policy for an amount below which his stocks do not fall and another policy to cover the maximum additional amount by which the stock may rise at times for example : If a merchant’s stock varies between Rs. 1,00,000 and Rs. 1,50,000, he may take the first loss polity for Rs. 1,00,000 and an Excess Policy for Rs. 50,000.
6) Blanket Policy :
It is issued to cover al assets – fixed as well as current, Of the insured under one insurance.
7) Comprehensive Policy :
Such Policies are generally issued to cover such risks as fire, explosion, lightning, thunderbolt, riot, civil, commotion, strikes, burglary, loss of rent oipto a certain limit, etc. These are also called ‘AH Insurance Policies.
8) Consequential Policy :
The purpose of this type of policy is to indemnify the insured against the loss of profit caused by any interruption of business by fire. It is also caUed ‘Loss of Profit Policy’.
9) Reinstalment Polity :
Under such a policy, the insurer pays the amount which is required to reinstate the asset or property destroyed. Thus, in calculating the amount of claim, depreciation is not deducted from the original value of the asset.
Question 6.
What is IRDA? Explain the powers and functions of IRDA?
Answer:
- IRDA means Insurance Regulatory and Development Authority. On the recommendation of Malhotra Committee, the Government of India set up the IRDA as regulatory body to regulate and control the insurance business in India and to protect the interests of the policy holders.
- IRDA was established by an act in indian Parliament known as IRDA Act, 1999, and it was amended in 2002.
Powers and functions of IRDA :
a) Protection of interests of policy holders in matters concerning assigning of policy nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contract of insurance.
b) Specifying-the requisite qualifications and practical training for insurance intermediaries or agents.
c) Specifying in the code of conduct for surveyors and loss assessors.
d) Promoting efficiency in the conduct of insurance business.
e) Promoting and regulating professional organizations connected with insurance, reinsurance business, levying fees and other charges for carrying out the purpose of IRDA Act.
f) Calling for information from undertaking inspection of conducting enquiries and litigations, including audit of insurers, insurance, intermediaries and other organizations connected with the insurance business.
g) Regulating investment of funds by insurance companies, regulating maintenance of margin of solvency.
h) Adjudication of disputes between insurers and intermediaries.
i) Supervising the functioning of the tariff advisory committee.
j) Excercising such other powers as may be prescribed.
Short Answer type Questions
Question 1.
State the features of Insurance.
Answer:
The following all the characteristic features of insurance :
I. Risk sharing device :
The basic function of insurance is to provide protection against certain or uncertain losses. The financial loss on the happening of certain events like death, fire, theft, accident etc. which an individual entity alone cannot bear it. This risk is equitably distributed over many through insurance. Thus, risk sharing forms the core featue of insurance.
II. Co-operative device :
The peculiar featue of an insurance contract is that a alarge number of persons, who are subject to similar losses come forward and agree to share the loss, arising due to a certain risk which is insured. Thus, it is a cooperative endeavor.
III. Protective device :
Insurance provides protection against all risks of loss. In absence of insurance, all losses have to be borne by the insured himself which is humanly impossible, Thus insurance serves as a tool of protection.
IV. Risk measurement device :
The insurance contract presupposes the evaluation of risk before insuring so that the amount of share of each insured towards the probable loss can be determined.
V. Payment device :
In an insurance contract, the insurer agrees to pay a certain sum on the happening of a certain event, which may or may not occur.
Question 2.
Differentiate Insurance and Assurance.
Answer:
The two terms “insurance” and Assurance are frequently used to mean one and the same thing. But the terms insurance and assurance are not synonymous.
| Insurance | Assurance |
| 1. Insurance is a contract for paying compensation for any damage or loss that may o r may not occur | 1. Assurance is a contract under which the sum assured is bound to be payable. |
| 2. Insurance amount is paid when damage or loss is occur if there is no such loss, the claim does not arise. | 2. The amount assured by a life policy becomes payable on death of the policy holder, if the policy holder survives, he will get the sum assured along with bonus and other benefits. |
Question 3.
What is the composition of IRDA?
Answer:
The IRDA would consist of a chairperson and not more than nine members of whom not more than five would be full-time members, to be appointed by the Government from amongst persons of ability, intergrity and standing who have knowledge or experience of life insurance or general insurance or actuarial service, finance, economics, law, accountancy, administration or any other discipline which can be extended upto the age of 62 for full-time members. However, the chairman can hold office upto the age of 65.
Question 4.
Explain the endowment policies offered under life insurance.
Answer:
- This policy runs only for a limited period or up to a particular age. The policy money becomes due at the end of the period specified in the policy.
- In case, however, the asured dies before the specified time, the policy money is paid at the time of death. The premia have to be paid til the date of maturity, i.e the time when the policy becomes payable.
- Under pure endowment policies, the policy money becomes payable only if assured survives the endowment term; if he dies before the endowment term, nothing is payable. Under a double endowment assurance, the insurer agrees to pay to the assured double the amount of the insured sum if he lives on beyond the date of maturity of policy.
Very Short Answer type Questions
Question 1.
Fire Insurance.
Answer:
It is an agreement where by one party in return for a consideration, undertakes to indemnify the other party against financial loss or damage or goods destroyed by fire or other defined perils upto an agreed amount.
Question 2.
Role of IRDA.
Answer:
- To protect the interest of the policy holders.
- To promote, regulate and ensure orderly growth of the insurance industry.
- Conduct insurance business across India in an ethical manner.
Question 3.
Mixed policy.
Answer:
It is also known a time and voyage policy. It seeks to insurance the subject matter on a particular voyage for a specific period of time.
Question 4.
Endowment policy.
Answer:
It runs only for a limited period or upto a particular age. The policy money becomes due at the end of the period specified in the policy. In case however, the assured dies before the specified time the policy money is paid at the time of death.
Question 5.
Insurance
Answer:
Insurance is a contract where by, for specified consideration, one party undertakes to compensate the other for a loss relating to aparticular subject as a result of the occurence of designated hazards.
Question 6.
Surrender value.
Answer:
It is the value at which policy holder devides to surrender his policy before its maturity. A policy acquires surrender value after it has run for at least 3 years.
Question 7.
Valued policy.
Answer:
It is a policy in which the value of the property is ascertained and / or agreed upon and the insurer undertakes to pay his agreed value in the event of the destruction of property by fire.
Question 8.
Floating policy.
Answer:
It is used by the cargo owners who make regular shipments of cargo’s to insure the shipments expected to be made during a certain period by one policy.
Question 9.
Average policy.
Answer:
a) An average policy is that which contains the average clause. The average clause in such a policy lays down tht if the property is under insured, the insurer shall bear only that proportion of the actual loss as his insurance bears to the actual value of property at the time of loss.
b) For example :
If a person insures his property for Rs. 15,000 while the loss is assessed at Rs. 8,000 and the market value of the property at the time of loss is Rs. 20,000, the claim will settled at Rs 6,000 i.e [\(\frac{15,000}{20,000}\) × 8000]
Question 10.
Comprehensive policy.
Answer:
Such Policies are’ generally issued to cover such risks as fire, explosion, lightning, thunderbolt, riot, civil, commotion, strikes, burglary, loss of rent upto a certain limit, etc. These are also called ‘All Insurance Policies.
Question 11.
Marine policy.
Answer:
Marine insurance policy is an arrangement by which the insurance company or the under writer, agree to idemntify the owner of a ship or cargo against risks which are incidental to marine adventure.
Question 12.
Time policy.
Answer:
This is a policy where by the subject matter is insured for a specific period of time. It is suitable mainly for hull insurance though it may be taken out also for movables and other goods when small quantities are involved.
Question 13.
Voyage policy.
Answer:
This policy is meant to insure the subject matter is in transit from one place to another. The subject matter insured under such a policy is general cargo that is exposed to marine risks in the course of transit.
Question 14.
Whole life policy.
Answer:
- This policy runs for the whole term of life of the assured. It is also called an ordinary policy.
- The assured sum under such a policy becomes due for payment to the beneficiary only after the death of the assured person. This means that the assured has to pay premia on such a policy throughout his lifetime.
- The premium on this type of life policy is low. It is meant for the protection of the family.