INSURANCE NOTES FOR EPFO 2025
1. DEFINITION AND BASIC CONCEPTS
What is Insurance?
Insurance is a mechanism by which a person exposed to potential risk transfers the financial loss
(partially or fully) to a third party. This transfer occurs when events are beyond the individual's
control.
Key Terms and Parties
• Insured (Insure): The person whose risk is insured
• Insurer/Assurance Underwriter: The firm that insures the risk of loss
• Policy: The written agreement/contract between insured and insurer
• Premium: The fee or consideration paid by the client to the insurer for coverage
o Can be a fixed single payment or periodic payments
o Depends on type and terms of insurance
Insurance Agreement
• Client pays premium to insurance company
• In exchange, insurance company agrees to:
o Make payments to client, OR
o Bear costs of client's financial losses
• Coverage applies when certain specified events occur
2. HOW INSURANCE WORKS
Principle: Pooling of Risk
Insurance operates on the fundamental principle of risk pooling, creating a common fund through
small contributions from many people.
Practical Example - Village Fire Insurance
• Scenario: Village with 500 houses, each valued at ₹2,00,000
• Risk Assessment: Average 4 houses burn annually = ₹8,00,000 total loss
• Solution: All 500 owners contribute ₹1,600 each
• Result: Risk of 4 house owners distributed among all 500 owners
Law of Large Numbers
This principle demonstrates how individual risk gets distributed across a large insurable population.
The concept follows "All for one and one for all" - the basis of insurance cooperation.
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
Core Philosophy
Insurance is a cooperative device where:
• Risk is spread among large insurable public
• Losses of few are borne by society of insured people
• Creates financial security through collective responsibility
3. FUNCTIONS OF INSURANCE
A. Protection and Certainty
• Certainty: Provides guaranteed payment for risk of loss due to uncertain events
• Limitation: Cannot prevent risks/losses from occurring
• Benefit: Can compensate for losses arising from covered events
B. Risk Sharing
• Loss likely from uncertain events is spread over several exposed persons
• All participants prepare to insure themselves against such events
• Transforms individual burden into collective responsibility
C. Capital Formation
• Accumulated premium funds are invested in income-generating schemes
• Creates large pools of capital for economic development
• Contributes to overall economic growth
4. HISTORY OF INSURANCE IN INDIA
Ancient Roots
Insurance concepts existed in ancient Indian literature:
• Manu (Manusmrithi)
• Yagnavalkya (Dharmasastra)
• Kautilya (Arthasastra)
These writings discussed pooling resources for redistribution during calamities like fire, floods,
epidemics, and famine.
Modern Insurance Era
Life Insurance Development
1818: Modern life insurance arrived from England
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
• Oriental Life Insurance Company: Started by Europeans for European community
• Indians were excluded from coverage
• Company failed in 1834
1870: Bombay Mutual Life Assurance Society
• First Indian life insurance company
• Insured Indian lives at normal rates
• Marked beginning of inclusive insurance
1896: Bharat Insurance Company
• Established with nationalist inspiration
• Part of growing Indian insurance movement
1905-1907: Swadeshi Movement Impact
• Led to creation of multiple insurance companies:
o United India (Madras)
o National India
o National Insurance (Kolkata)
o Co-operative Assurance (Lahore)
Legislative Milestones
Early Regulation
1912: Life Assurance Companies Act & Provident Fund Act
• Required premium rate tables certification by actuary
• Mandated periodical valuations
• Discrimination: Favored foreign companies over Indian companies
1938: Insurance Act 1938
• Amended earlier legislation to protect Indian insurance companies
• Provided comprehensive provisions for effective control over insurers
• Balanced regulatory framework
Nationalization Era
January 19, 1956: Life Insurance Nationalization
• Scope: 154 Indian companies + 16 non-Indian companies + 75 Provident societies
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
• Process: Two-stage approach
1. Management takeover via Ordinance
2. Ownership transfer via comprehensive bill
June 1956: Life Insurance Corporation Act
• LIC Creation: September 1, 1956
• Capital: ₹5 crores from Government of India
• Objective: Spread life insurance widely, especially in rural areas
• Goal: Reach all insurable persons with adequate financial cover at reasonable cost
5. CHRONOLOGICAL TIMELINE
Life Insurance Milestones
• 1818: Oriental Life Insurance Company (first on Indian soil)
• 1870: Bombay Mutual Life Assurance Society (first Indian company)
• 1912: Indian Life Assurance Companies Act (first regulatory statute)
• 1928: Indian Insurance Companies Act (statistical information collection)
• 1938: Insurance Act (consolidated consumer protection)
• 1956: LIC formation (nationalization of 245 insurers)
General Insurance Milestones
• 1850: Triton Insurance Company Ltd (first general insurance, Calcutta)
• 1907: Indian Mercantile Insurance Ltd (first comprehensive general insurance)
• 1957: General Insurance Council established (code of conduct)
• 1968: Insurance Act amended (investment regulation, solvency margins)
• 1972: General Insurance Business (Nationalisation) Act
• 1973: General insurance nationalization effective (January 1)
6. KEY CONCEPTS FOR EXAMINATION
Essential Definitions
• Insurance mechanism and risk transfer
• Roles of insured, insurer, and policy
• Premium structure and payment methods
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
Core Principles
• Risk pooling and Law of Large Numbers
• Cooperative nature of insurance
• "All for one and one for all" philosophy
Functions to Remember
• Protection and certainty provision
• Risk sharing mechanism
• Capital formation contribution
Historical Knowledge
• Ancient Indian insurance concepts
• Colonial period developments
• Independence era nationalization
• Regulatory evolution
Important Acts and Years
• 1912: Life Assurance Companies Act
• 1938: Insurance Act
• 1956: LIC Act and nationalization
• 1972: General Insurance nationalization
7. PRINCIPLES OF INSURANCE
A. Utmost Good Faith (Uberrimae Fidei)
Definition: Both insurer and insured must display complete good faith toward each other regarding
the contract.
Responsibilities:
• Insured's Duty: Voluntarily make full, accurate disclosure of all material facts related to the
risk being proposed
• Insurer's Duty: Make clear all terms and conditions in the insurance contract
Consequences:
• Insurer may terminate the contract if insured fails to disclose significant information
• Breach of good faith can void the entire policy
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
B. Insurable Interest
Definition: The insured must have a monetary interest in the subject matter of the insurance
contract.
Key Requirements:
• Must have financial interest in preservation of the insured item/life
• Must suffer financially if the insured event occurs
• Important: Ownership is NOT required (e.g., trustee has insurable interest in trust property)
Purpose: Prevents insurance from becoming a gambling instrument
C. Indemnity
Definition: Insured shall be compensated appropriately for losses, but only to the extent that no
profit is made from the loss.
Example:
• Mr. A insured goods worth ₹10 lakhs
• Fire damaged goods worth ₹2 lakhs only
• Compensation: Only ₹2 lakhs (not full ₹10 lakhs claimed)
Limitations:
• Compensation subject to sum insured and policy terms
• Applies to fire and marine insurance
• Does NOT apply to life insurance
D. Proximate Cause
Definition: The nearest, immediate, dominating, and most effective cause of loss when multiple
factors are involved.
Application: Insurance provides compensation only for losses caused by perils specifically covered
in the policy.
Example:
• Mr. A had fire insurance for ₹10 lakhs
• Goods destroyed by water leakage in warehouse
• Proximate cause: Water leakage (not fire)
• Result: No compensation as water damage not covered
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
E. Subrogation
Definition: After compensation is paid, the right of ownership of damaged/lost property passes to
the insurer.
Purpose:
• Prevents insured from making profit by selling damaged property
• Prevents double recovery if lost property is later found
• Insurer can recover costs from third parties responsible for loss
F. Contribution
Definition: If multiple insurance policies cover the same risk, all insurers contribute proportionally
to the loss.
Key Rules:
• Insured cannot recover more than actual loss amount
• Each insurer pays according to their coverage proportion
• Insurers have right to claim contribution from co-insurers
Example - Health Insurance:
• Kapil has two policies: Company A (₹4 lakh) + Company B (₹6 lakh)
• Total coverage: ₹10 lakh
• Claim amount: ₹2 lakh
• If Company A pays full ₹2 lakh, Company B owes Company A ₹1.2 lakh
• Calculation: B's share = (₹6L/₹10L) × ₹2L = ₹1.2L
G. Mitigation
Definition: Insured has duty to take reasonable steps to minimize loss or damage to insured
property.
Requirements:
• Act with prudence even with insurance coverage
• Take active steps to prevent/reduce losses when possible
• Cannot be careless just because insurance exists
Example: If storehouse catches fire, owner must attempt to save goods and minimize damage.
Consequences: Failure to take reasonable care may result in claim rejection.
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
8. IMPORTANT DISTINCTIONS
Insurance vs. Gambling
Insurance:
• Person compensated only for actual loss suffered
• Based on insurable interest
• Risk mitigation tool
Gambling:
• Either profit or loss outcome
• No insurable interest required
• Speculative activity
9. INSURER INCOME SOURCES
Insurance companies have two primary sources of income:
A. Insurance Premium
• Direct income from policyholders
• Payment for risk coverage provided
B. Investment Income
• Income from investing premium amounts received
• Insurers not required to keep premiums idle
• Creates additional revenue stream for sustainability
10. TYPES OF INSURANCE
A. LIFE INSURANCE
Definition: A life insurance policy is protection against the uncertainty of life. It's a contract where
the insurer agrees to pay the assured sum to the insured (or beneficiary) either on death or upon
attaining a certain age.
Key Features:
• Premium paid in exchange for life coverage
• Premium can be lump sum or periodic (monthly/quarterly/half-yearly/yearly)
• Premium is tax deductible under Income Tax Act 1961
• Assured: The person whose life is insured
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
Types of Life Insurance Policies
1. Term Insurance Plan
• Duration: Fixed period (10, 20, or 30 years)
• Benefit: Lump sum payable only on death during policy term
• Purpose: Covers risk of dying early, provides financial security to nominees
• Features:
o Lowest premium among all life insurance products
o No savings component
o Premium increases with age due to higher risk
2. Whole Life Policy
• Duration: Extends until death of insured
• Premium Payment: Fixed period (20-30 years) or whole life
• Benefit: Amount payable only after death of assured
• Continuation: Policy continues even after premium payment period ends
3. Endowment Life Assurance Policy
• Dual Benefit: Lump sum on death OR survival until maturity
• Payout Scenarios:
o Death during policy term: Sum assured to nominees
o Survival to maturity: Sum assured to policyholder
4. Joint Life Policy
• Coverage: Two or more persons under single policy
• Premium: Paid jointly or by either party
• Benefit: Payable on death of any one person to survivors
5. Annuity Policy
• Purpose: Regular income after certain age
• Payout: Monthly/quarterly/half-yearly/annual installments
• Premium: Installments over period or single premium
• Target: Those preferring regular post-retirement income
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
6. Children's Endowment Policy
• Purpose: Meet children's education or marriage expenses
• Policyholder: Parent/guardian for child's benefit
7. Unit Linked Insurance Plan (ULIP)
• Dual Benefit: Investment + Life cover
• Premium Split: Part for life cover, part for investment
• Investment Options: Equity, debt, or combination based on risk appetite
• Goal: Long-term wealth creation with protection
B. FIRE INSURANCE
Definition: Contract against loss/damage by accidental fire or other occurrences included in fire
policy.
Key Features:
• Duration: Usually one year, renewable
• Claim Conditions:
1. Must be actual loss
2. Fire must be accidental and non-intentional
• Important: Overheating without ignition is NOT covered
C. MARINE INSURANCE
Definition: Covers physical loss or damage of ships, cargo, terminals, and transport property
between origin and destination.
Coverage: Loss by marine perils (collision, enemy attack, piracy, crew actions) Underwriter: The
insurer in marine insurance
Types of Marine Insurance:
1. Ship/Hull Insurance
• Coverage: Damage to ship itself
• Purpose: Indemnify losses from ship damage at sea
2. Cargo Insurance
• Coverage: Goods during transport
• Risks: Theft, loss at port, voyage damage
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
3. Freight Insurance
• Coverage: Loss of freight charges
• Beneficiary: Shipping company
• Trigger: Cargo doesn't reach destination due to damage/loss
D. COMPARATIVE ANALYSIS: Life vs Fire vs Marine Insurance
Aspect Life Insurance Fire Insurance Marine Insurance
Subject Matter Human life Physical Ship, cargo, freight
property/assets
Elements Protection + Investment Protection only Protection only
Insurable Interest At policy inception only At inception AND At claim/loss only
Timing claim
Duration 5-30 years or whole life Usually one year One year/voyage
period/mixed
Indemnity Principle NOT applicable Applicable Applicable
Loss Measurement Not measurable Measurable Measurable
Surrender Value Available Not available Not available
Policy Amount Any amount Cannot exceed Market value of
property value ship/cargo
Risk Contingency Certain (death/maturity Uncertain (fire may Uncertain (loss may
will occur) not occur) not occur)
E. OTHER TYPES OF INSURANCE
1. Motor Insurance
Legal Framework: Motor Vehicles Act, 1939
Types:
• Third-Party Insurance:
o Covers injury to third parties
o Statutory requirement (mandatory)
o Illegal to drive without it
• Own-Damage Insurance:
o Covers vehicle damage (fire, rain, theft)
o Compensates repair expenses
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
• Comprehensive Insurance:
o Combines third-party + own-damage coverage
2. Property Insurance
• Coverage: Individual and business property
• Risks: Fire, theft, and related perils
3. Liability Insurance
• Purpose: Protection against claims from injuries/damage to others
• Example: Business liability for employee injuries during operations
4. Health Insurance
Definition: Covers medical expenses from illness (hospitalization, medicines, consultation)
Types:
1. Indemnity-Based Health Insurance:
o Offered by non-life and standalone health insurers
o Actual amount spent is reimbursed/paid directly
o Within sum assured limits
o Cashless or reimbursement options
2. Fixed Benefit-Based Health Insurance:
o Also known as Defined Health Benefit Plan
o Fixed amount for pre-determined critical illnesses
o Covers specific conditions (cardiovascular, cancer, kidney issues)
o Useful for those with family history/lifestyle risks
5. Social Insurance
• Target: Weaker sections unable to pay premiums
• Coverage: Pension plans, disability benefits, unemployment benefits, sickness insurance,
industrial insurance
6. Other Specialized Insurance
• Export credit insurance
• State employee insurance
• Fidelity insurance
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
• Credit and privilege insurance
F. INSURANCE VS REINSURANCE
Reinsurance: Insurance that an insurance company buys from another insurance company to
protect against significant claims.
Aspect Insurance Reinsurance
Definition Agreement where one party compensates Insurance purchased by insurers to
another for loss/death share risk with other insurers
Protection Given to individuals/entities Taken by large insurance firms against
significant losses
Premium Paid by individual to insurance company Split between insurance companies per
predetermined ratio
Purpose Individual/business protection Insurance company risk management
11. EXAMINATION KEY POINTS
Life Insurance Essentials
• Seven types of life insurance policies and their features
• Term vs whole life vs endowment differences
• ULIP dual benefit structure
• Tax benefits under Income Tax Act 1961
General Insurance Categories
• Fire insurance claim conditions
• Marine insurance three-component structure
• Motor insurance legal requirements
• Health insurance types and mechanisms
Comparative Knowledge
• Life vs Fire vs Marine insurance differences
• Indemnity principle applications and exceptions
• Insurable interest timing requirements
• Duration and renewal patterns
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
Principle Applications
• Utmost Good Faith: Material disclosure requirements
• Insurable Interest: Financial stake requirement
• Indemnity: No profit from loss principle (exceptions noted)
• Proximate Cause: Nearest cause determination
• Subrogation: Rights transfer after compensation
• Contribution: Proportional sharing among insurers
• Mitigation: Duty to minimize losses
12. REGULATORY BODIES IN INSURANCE
A. IRDAI (Insurance Regulatory and Development Authority of India)
Establishment:
• Act: Insurance Regulatory and Development Authority Act, 1999
• Basis: Recommendations of Malhotra Committee (1993) headed by R.N. Malhotra (Retired
RBI Governor)
• Setup: April 2000 as statutory body
• Headquarters: Initially New Delhi, shifted to Hyderabad in 2001
• Jurisdiction: Under Ministry of Finance, Government of India
Composition: 10 members (all appointed by Government of India)
• 1 Chairman
• 5 whole-time members
• 4 part-time members
Objectives of IRDAI:
• Protect the interest of policyholders
• Promote and ensure growth of insurance industry
• Set, promote, monitor and enforce high standards of integrity, financial soundness, fair
dealing and competence
• Ensure speedy settlement of genuine claims
• Prevent insurance frauds and malpractices
• Establish effective grievance redressal machinery
• Take action against inadequate standards
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
• Encourage fairness, transparency, and orderly behaviour in financial markets
• Achieve maximum self-regulation in industry operations
Functions of IRDAI:
• Regulate, promote and ensure orderly growth of insurance and re-insurance business
• Issue, renew, modify, withdraw, suspend, or cancel registration certificates
• Protect policyholders' interests
• Specify qualifications, code of conduct and training for intermediaries and agents
• Promote and regulate professional organizations in insurance
• Levy fees and charges for IRDAI Act purposes
• Call for information, conduct inspections, enquiries and investigations
• Regulate investment of funds by insurance companies
B. LIC (Life Insurance Corporation of India)
Establishment:
• Date: September 1, 1956
• Act: Life Insurance of India Act (nationalization of insurance industry)
• Merger: Over 243 insurance companies merged
Objective:
• Spread life insurance widely, particularly to rural areas
• Reach socially and economically backward classes
• Provide adequate financial cover against death at reasonable cost
• Cover all insurable persons in the country
Role:
• India's largest government-owned life insurance and investment corporation
• Invest in global financial markets and government securities
• Gather funds through various life insurance policies
C. GIC (General Insurance Corporation of India)
Background:
• Act: General Insurance Business (Nationalisation) Act, 1972 (GIBNA)
• Nationalization: Government took over 55 Indian + 52 foreign general insurance companies
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
• Formation: Under Section 9(1) of GIBNA
• Incorporation: November 22, 1972 under Companies Act, 1956
Purpose: Superintend, control and carry on general insurance business
Structure Evolution:
• Initially: GIC as holding company with four subsidiaries
• Four Subsidiaries:
o National Insurance Company Limited
o The Oriental Insurance Company Limited
o The New India Assurance Company Limited
o United India Insurance Company Limited
Key Changes:
• April 19, 2000: IRDAA came into force, ended GIC's exclusive privilege
• November 2000: GIC renotified as Indian Reinsurer, supervisory role over subsidiaries ended
• March 21, 2003: GIC ceased to be holding company for subsidiaries
D. PFRDA (Pension Fund Regulatory and Development Authority)
Background:
• 1999: Government initiated Old Age Social and Income Security (OASIS) project
• Objective: Examine policies related to old age income security
• Decision: Replace defined benefit pension system with defined contribution pension system
Establishment:
• 2003: PFRDA Bill passed by Parliament
• 2013: PFRDA established as permanent body
• Headquarters: Delhi
Scope:
• Initially for government employees (except armed forces)
• Extended to all Indian citizens and NRIs including self-employed
• Central autonomous body with quasi-government status
• Executive, legislative and judicial powers
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
Functions of PFRDA:
• Regulate NPS (National Pension System) and pension schemes
• Establish and regulate pension funds
• Protect interest of pension fund subscribers
• Register and regulate intermediaries
• Approve scheme terms and conditions
• Lay down norms for pension fund corpus management
• Establish grievance redressal mechanism
• Promote professional organizations in pension system
• Settle disputes among intermediaries and subscribers
• Train intermediaries and educate subscribers
• Regulate assets and conduct audits
PFRDA Intermediaries:
1. Pension Fund
• Registered entity receiving contributions
• Invests funds and pays subscribers
• Certificate of registration required from PFRDA
2. Central Record Keeping Agency (CRA)
• Performs record keeping and accounting
• Administration and customer service
• For pension scheme subscribers
3. Trustee Bank
• Handles day-to-day fund flows
• Provides banking facilities
• Receives NPS funds and transfers to intermediaries
4. Custodian
• Safe keeping of securities/assets under NPS
• Maintains accounts
• Acts as domestic depository
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
13. INSURANCE TERMINOLOGIES
Core Terms
Underwriting: Process of risk assessment on insurance proposals, deciding to accept/reject/rate-
up/postpone and determining terms and conditions.
Policyholder: Person or group who has purchased and owns an insurance policy.
Life Assured: The person for whom insurance is bought (may or may not be same as policyholder).
Insurance Policy Document: Contract between insurance company and policyholder stating terms
and conditions of coverage.
Adjuster (Claims Adjuster): Person who investigates insurance claims to determine if insurer should
pay and how much.
Financial Terms
Annuity: Series of regular periodic payments payable in consideration of usually a lump sum.
Deductible: Portion of loss that policyholder must pay before insurance coverage responds.
• Example: ₹200 deductible on ₹1000 loss = policyholder pays ₹200, insurer pays ₹800
Coinsurance: Percentage of healthcare costs insurance pays after deductibles are met.
• Example: 80% coinsurance on ₹1000 bill = insurance pays ₹800, policyholder pays ₹200
Rider: Optional extra terms added to basic policy, often at additional cost.
Policy Status Terms
Lapse: Termination of policy due to failure to pay premium.
Defined Benefit vs Defined Contribution:
• Defined Benefit: Specifies exact retirement income amount
• Defined Contribution: Specifies only contribution amount, pension not pre-defined
Valuation Terms
Actual Cash Value: Current cost of replacing article with similar item in same condition.
Consequential Damage: Loss that is indirect result of accident/fire (e.g., food spoilage from
refrigerator breakdown).
Insurance Types
Liability Insurance: Covers legal defense costs and damages when charged with injuring another
person or damaging their property.
No Fault Insurance: Person's own insurance pays for losses (medical expenses, lost wages)
regardless of who caused accident. Designed to speed up claims payment.
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
Prohibited Risk: Any class of business that insurance company will not insure under any condition.
14. EXAMINATION KEY POINTS
Regulatory Bodies Knowledge
• IRDAI: Establishment, composition, objectives, and functions
• LIC: Nationalization process and current role
• GIC: Evolution from holding company to reinsurer
• PFRDA: NPS regulation and intermediary structure
Historical Milestones
• 1956: LIC establishment and life insurance nationalization
• 1972: General insurance nationalization and GIC formation
• 1999: IRDAI Act and insurance sector liberalization
• 2000: End of GIC's exclusive privilege
• 2013: PFRDA establishment
Terminology Applications
• Underwriting process and risk assessment
• Policy stakeholder distinctions (policyholder vs life assured)
• Financial terms (deductible, coinsurance, annuity)
• Policy status and valuation concepts
• Specialized insurance terminology
Regulatory Functions
• Consumer protection mechanisms
• Industry growth promotion
• Standards enforcement and monitoring
• Grievance redressal systems
• Professional development and training
Remember
• Life insurance exception to indemnity principle
• Multiple policy scenarios and contribution calculations
• Mandatory vs optional insurance types
Vyasa IAS
INSURANCE NOTES FOR EPFO 2025
• Reinsurance as risk management tool for insurers
• Regulatory evolution from nationalization to liberalization
Note: These comprehensive notes cover fundamental concepts, principles, historical development,
and regulatory framework of insurance in India. Focus on understanding both theoretical
principles and their practical applications for thorough exam preparation.
NOTES-
Vyasa IAS
