Insurance Services (SAQs)

Commerce-2 | 4. Insurance Services – SAQs:
Welcome to SAQs in Chapter 4: Insurance Services. This page includes the most important FAQs from previous exams. Each answer is provided in simple English, followed by a Telugu explanation, and then presented in the exam format. This approach helps you prepare effectively and aim for top marks in your final exams.

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SAQ-1 : State the Features of Insurance.

Introduction

Features of Insurance Insurance is a crucial financial tool that offers protection against various risks and uncertainties for individuals and organizations. The following are detailed explanations of the features of insurance:

1. Risk-Sharing Device:
   • Description: Insurance is fundamentally a risk-sharing mechanism. It allows individuals or entities to share their financial burdens with an insurance company.
   • Functionality: In the event of a loss due to specific incidents or accidents, the insurance company bears the financial impact as per the terms of the insurance policy.
   • Benefit: Helps in mitigating the financial hardship that may occur due to unexpected events.
2. Co-operative Device:
   • Description: Insurance is a cooperative endeavor where a group of individuals collectively share the financial losses arising from specific insured events.
   • Functionality: Numerous policyholders pay premiums to create a fund, out of which claims are paid for covered events.
   • Benefit: Reduces the individual financial burden by spreading the risk among many policyholders.
3. Protective Device:
   • Description: Insurance acts as a protective shield against various types of risks and losses.
   • Functionality: By paying a premium, the insured secures financial protection against the insured risks.
   • Benefit: Offers peace of mind and financial security by minimizing the economic impact of unforeseen events.
4. Risk Measurement Device:
   • Description: Insurance involves the assessment and measurement of risks for determining premiums and coverage limits.
   • Functionality: Insurance companies use various statistical and analytical tools to evaluate the risk associated with insuring an individual or asset.
   • Benefit: Ensures fair and adequate premium charges and helps in making informed insurance decisions.
5. Payment Device:
   • Description: Insurance guarantees payment of a specified sum based on the occurrence of certain insured events.
   • Functionality: Payments, or claims, are made only upon the happening of the insured contingency, providing financial relief to the insured or beneficiaries.
   • Benefit: Ensures financial support and stability in times of distress caused by the occurrence of insured events.

Summary

Insurance plays a vital role in providing financial stability and security. Its features, including risk sharing, cooperative effort, protection, risk assessment, and guaranteed payments, are essential for individuals and organizations to understand in order to make informed choices about their insurance needs. This ensures adequate protection against potential risks and uncertainties.

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SAQ-2 : Explain the powers and functions of IRDA.

Introduction

The Insurance Regulatory and Development Authority of India (IRDAI) is a statutory body responsible for regulating and promoting the insurance and re-insurance industries in India. It ensures that insurance products provide adequate financial protection and that the interests of policyholders are safeguarded. Below is a detailed examination of the powers and functions of the IRDAI:

1. General Supervisory Power:
   • Description: IRDAI holds overall supervisory authority over the insurance sector in India.
   • Functionality: It oversees the operations and activities of all insurance companies to ensure adherence to regulatory standards.
2. Administrative Power:
   • Description: IRDAI possesses administrative authority to appoint staff for its operations.
   • Functionality: Ensures the organization is staffed with qualified individuals to effectively carry out its roles and responsibilities.
3. Regulation of Registration:
   • Description: IRDAI controls the registration process of insurers.
   • Functionality: It can issue, renew, modify, suspend, or cancel the registration of insurers, ensuring that only compliant firms operate in the market.
4. Code of Conduct Preparation:
   • Description: Responsible for preparing the code of conduct for agents, surveyors, and other intermediaries in the insurance sector.
   • Functionality: Ensures ethical and professional behavior in the insurance industry.
5. Promotion and Regulation of Professional Organizations:
   • Description: IRDAI promotes and oversees professional organizations related to insurance and re-insurance.
   • Functionality: Enhances the professionalism and integrity of the insurance industry.
6. Levy Fees and Other Charges:
   • Description: IRDAI has the authority to impose fees and charges for services provided to insurers.
   • Functionality: Generates revenue for the regulatory body to function effectively.
7. Oversight of Tariff Advisory Committee:
   • Description: Monitors the activities of the Tariff Advisory Committee.
   • Functionality: Ensures the Committee works towards the development and fairness of tariff rates in the insurance industry.
8. Regulation of Margin of Solvency:
   • Description: Regulates the solvency margins of insurance companies.
   • Functionality: Ensures insurance companies maintain adequate financial health to meet obligations to policyholders.
9. Regulation of Investment:
   • Description: Oversees the investment activities of insurance companies.
   • Functionality: Ensures insurers make sound and compliant investment decisions for the safety and growth of their funds.
10. Exercising Sanctioned Powers:
    • Description: Can execute powers granted by insurance laws and the central government as required.
    • Functionality: Enables IRDAI to take necessary actions to uphold the integrity and efficiency of the insurance sector.

Summary

The extensive powers and functions of the IRDAI are crucial for the smooth functioning, development, and integrity of the insurance sector in India. By regulating aspects such as registration, conduct, and investments of insurance companies, IRDAI ensures the protection of policyholders’ interests and the overall stability of the insurance market.

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SAQ-3 : Explain different types of life policies.

Introduction

Life insurance policies come in various forms, each designed to meet specific needs and objectives. Here’s an explanation of the different types of life insurance policies:

1. Whole Life Policy:
   • Description: This policy covers the policyholder for their entire lifetime.
   • Benefits: Guarantees a death benefit to beneficiaries and may accumulate cash value over time. Premiums are generally fixed and paid throughout the life of the insured.
2. Endowment Life Policy:
   • Description: An endowment policy covers the insured for a specific period.
   • Benefits: If the insured survives the term, they receive a lump sum amount (endowment). Provides both death and survival benefits, acting as an insurance and investment tool.
3. Annuity Policy:
   • Description: Involves the insured depositing a lump sum amount with the insurer.
   • Benefits: Returns are in the form of regular payments (annuities) for a specified period or for life, offering a steady income stream, often used for retirement planning.
4. Sinking Fund Policy:
   • Description: Aimed to accumulate funds for a future liability or asset replacement.
   • Benefits: Helps in financial preparation for future obligations, ensuring the necessary funds are available when needed.
5. Joint Life Policy:
   • Description: Covers two or more individuals, paying out the benefit upon the first death.
   • Benefits: Beneficial for couples or partners, ensuring the surviving party is financially secure. Commonly used for estate planning and loan co-signing.
6. Term Assurance Policy:
   • Description: Offers coverage for a specified term. Pays the death benefit if the insured dies within the term.
   • Benefits: Typically has lower premiums and is suitable for high coverage at a lower cost. Provides no cash value or survival benefits.
7. Group Insurance Policy:
   • Description: Covers a group of individuals, often employees or organization members.
   • Benefits: Offers life insurance coverage at a lower cost, providing financial security to employees’ families and serving as an employee benefit.
8. Double Accident Indemnity Policy:
   • Description: Pays double the policy amount if the insured dies due to an accident.
   • Benefits: Provides additional financial support to beneficiaries in case of accidental death, offering enhanced financial security.
9. Janata Policy:
   • Description: Introduced by the Life Insurance Corporation of India to provide affordable insurance to the masses.
   • Benefits: Offers life insurance coverage at a lower cost, ensuring broader accessibility for various socioeconomic groups.

Summary

Life insurance policies cater to a range of needs and objectives, from providing financial security to beneficiaries to accumulating savings or ensuring a steady income. It’s crucial for individuals to assess their financial goals and coverage requirements before choosing a suitable policy. Understanding these different types helps in making an informed decision aligned with one’s financial and life objectives.

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SAQ-4 : Write any five principles of Insurance. (OR) What are the five principle of Insurance?

Introduction

Insurance operates on several fundamental principles that form the basis of the insurance contract. Understanding these principles is essential for both insurers and policyholders. Below are five key principles of insurance:

1. Principle of Utmost Good Faith:
   • Description: This principle emphasizes the need for honesty and transparency in all insurance dealings.
   • Importance: Both the insurer and the insured must disclose all material facts clearly and completely. Non-disclosure or misrepresentation can lead to the voiding of the contract.
2. Principle of Insurable Interest:
   • Description: The principle of insurable interest states that the policyholder must have a financial interest in the insured item or person.
   • Importance: This ensures that insurance protects against genuine losses or damages, preventing insurance from being used for unjust enrichment.
3. Principle of Indemnity:
   • Description: This principle ensures that insurance policies provide compensation only up to the extent of the financial loss incurred.
   • Importance: The insured should not profit from an insurance claim but should be restored to approximately the same financial position as before the loss.
4. Principle of Contribution:
   • Description: In situations where multiple policies cover the same risk, the principle of contribution allows insurers to share the cost of the claim.
   • Importance: This prevents the insured from claiming the full amount from multiple insurers, thereby avoiding over-compensation.
5. Principle of Subrogation:
   • Description: Under the principle of subrogation, once the insurer pays for the loss, they gain the rights to claim any recovery from a third party responsible for the loss.
   • Importance: It allows the insurer to recoup some or all of the paid-out claim, ensuring that the insured does not receive a double recovery.

Summary

The principles of insurance, including utmost good faith, insurable interest, indemnity, contribution, and subrogation, are foundational to the functioning of the insurance sector. They ensure fair dealing, prevent exploitation, and maintain the financial stability of the insurance system. Understanding these principles is crucial for both insurers and policyholders to ensure the legitimacy and effectiveness of the insurance process.