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Insurance Types, IRDA, Reforms, FDI in Insurance for AFPC, LIC AAO etc exams

  1. IRDA
    1. What are the functions of IRDA?
    2. Organizational setup of IRDA
  2. Insurance Ombudsman
    1. Functions of Insurance Ombudsman
    2. Selection of Ombudsman
  3. Insurance Policies: Types
    1. General Insurance
    2. Life Insurance
  4. Nationalization of Insurance business
  5. Foreign Direct Investment in Insurance
  6. Reform in Insurance sector
    1. Already Done by IRDA
    2. Pending Reform
  7. LIC
  8. GIC- Reinsurer
  9. Mock Questions

Who can make laws on Insurance?

  • Insurance is a subject listed in the Union list in the Seventh Schedule to the Constitution of India.
  • That means only Union Government can make laws on insurance (a state Government cannot make law on this subject)
  • Insurance Regulatory and Development Authority (IRDA)
  • Created on the recommendations of the Malhotra Committee report
  • Started in 2000, it is a statutory body (i.e. made through an Act of parliament).
What are the functions of IRDA?
  • To run insurance businesss, a company has to register itself with IRDA.
  • IRDA regulates the insurance industry and protects the customers.
  • IRDA has the power to frame regulations regarding Insurance market (just like SEBI for Capital market)
  • promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums. (for example IRDA allowed Health Insurance Portability)
Organizational setup of IRDA
  • IRDA has a ten member team consisting of
    • 1 Chairman
    • 5 whole-time members
    • 4 part-time members
All of them, appointed by the Government of India.

Insurance Ombudsman

  • was created by a Government of India in 1998
Functions of Insurance Ombudsman
  • Receive and consider complaints in respect of insurance from any person who has any problem against an insurer.
  • pass an award within 3 months after receiving complaint.
  • Insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months.
  • If the policy holder [customer] is not satisfied with the award of the Ombudsman he can approach other venues like Consumer Forums and Courts of law for redressal of his grievances.
Selection of Ombudsman
  • Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services.
  • A committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central Government select the Insurance Ombudsman.
  • There are twelve Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction.
  • An insurance Ombudsman is appointed for a term of three years or till the incumbent attains the age of sixty five years, whichever is earlier.
  • Re-appointment is not permitted.
What is premium?
  • To enjoy SAB TV, Zee TV, Star Movies, AXN, HBO etc. you’ve to make regular payment to Dish TV/Tata Sky etc., we call it “subscription”.
  • Similarly to get insurance protection, you’ve to make regular payment to the insurance company, we call it “premium”.

Insurance Policies: Types

Two main types: General and Life

General Insurance

  • General Insurance = Every Insurance plan EXCEPT life insurance plan
NameSub categories
Personal Insurance policiesmedical insurance, accident, property and vehicle insurance
Rural Insurance policiesprotection against natural and climatic disasters for agriculture and rural businesses
Industrial Insurance policiescoverage for project, construction, contracts, fire, equipment loss, theft, etc.
Commercial Insurance policiesprotection against loss and damage of property during transportation, transactions, marine insurance etc.

Life Insurance Types

list is not exhastive.
Whole life plan
  • You pay the premium till you retire or till the term of the policy.
  • Your family will get money ONLY after you die.
  • You MUST DIE to get back the money.
  • Insurance company collect premium form the insured for the certain period of time like 15, 20, 25, 30 years.
  • If you die within that term, the company will pay huge money to your family.
  • If you don’t die within that term, company will return the premium you paid + some interest or bonus on it.
  • So, you DONOT NEED TO DIE to get back the money.
Term Plan
  • You keep paying premium for given period (5,10,20 etc. years)
  • If you die within that period, your family gets huge money.
  • But if you don’t die within that period, you will not get a single penny from the company.
  • So, you MUST DIE to get back the money.
  • Good part- Term Plans have cheaper premium than other plans.
ULIP(Unit Linked Insurance Policy)
  • You pay regular premium to the company.
  • Company invests it in Debt and Equity markets.
  • The profit generated by this investment, will be given to you no matter you die or not.
  • Thus you get the benefit of risk cover as well as the investment gains.
  • You DONOT NEED TO DIE to get back the money.
  • They pay higher return than Endowment.

Nationalization of Insurance business

  • In 1972, Government of India passed of the General Insurance Business (Nationalisation) Act,
  • With this Act, Government took control of all the private insurance companies of India and created 4 companies
Insurance Company and their HQ
National Insurance Company LtdGeneral Insurance.HQ: Kolkata
New India Assurance Company LtdGeneral InsuranceHQ: Mumbai
Oriental Insurance Company LtdGeneral InsuranceHQ: New Delhi
United India Insurance Company Ltd.General InsuranceHQ: Chennai

Foreign Direct Investment in Insurance

  • up to 26% is allowed.Update: 49% allowed after Mamta Left the UPA alliance.
  • For example “Bajaj Allianz Life Insurance Company Limited” is a joint venture between
    • The Indian Company Bajaj (that scooter maker, has 74% stakes in this company.)
    • The Foreign Company Allianz AG (German Company, has 26% stakes in this company)
  • Similar arrangement was present in “Max New York Life Insurance Company” But the New York Life sold its stakes and left the game hence the new name of the company is Max Life Insurance Company. [You might have seen the ads on TV about its name change.]

Reform in Insurance sector

Already Done by IRDA
  • If an Insurance company has been in business for 10 years, it can launch IPO.
  • Mobility / Portability in Health Insurance= if you’re unhappy with your Health (Medical) insurance company, you can change it.
Pending Reform
PM Mohan Singh: I want to increase the FDI limit from 26% to 49%. Then more foreign companies would come up = more products = lower premiums.
Mamatha: But I’m opposed to FDI in Retail, Insurance and Aviation.
PM Mohan Singh: Ok I drop the idea sir-ji.
New PM Narendra Modi: But, I’ll get this passed with an ordinance!


  • Life Insurance Corporation of India
  • 100% owned by Government.
  • Started in 1956
  • HQ: Mumbai
  • Motto: “Yogakshemam Vahamyaham” (taken from Gita, meaning “I carry what you require”.)
  • Provides Life Insurance, Health Insurance

GIC- Reinsurer

  • Suppose LIC sells 1000 life insurance policies, each with a 1 crore policy limit (e.g. I, the customer pay Rs.10,000 premium every year and If I die my family should get 1 crore- that type of Policy).
  • Theoretically, the LIC could lose 1000 crores in a day, if every customer dies on the same day!
  • So to prevent itself from such a loss, LIC itself should take some insurance from a third insurance company (GIC).
  • for example “I, the LIC Manager shall continue to pay the GIC 1 lakh every month, and in return GIC insures that if my company LIC has to pay more than 100 crores in policy claims within 1 week, then GIC will cover the cost.
  • So, This third party, General Insurance Corporation of India (GIC) = Reinsurer.
  • GIC is the ONLY Reinsurer in India.

Mock Questions for APFC, LIC AAO

Which of the following statements are correct?
  1. IRDA is a statutory body.
  2. IRDA is made up of 1 chairman and 3 members.
  3. IRDA members are selected by RBI governor.
  4. Oriental Insurance LTD is the only Reinsurer in India.
  5. Government owns only 51% in LIC.
  6. LIC’s motto is “Nabha Sparsha Diptam
  7. Health insurance is a type of Life insurance.
  8. In ULIP policy, customer’s money in invested in Government securities only.
  9. The premium of a Term plan is cheaper than Endowment plan.
  10. Every Insurance Company has to appoint an Insurance Ombudsman in its head office.
  11. Currently, a foreign company can invest upto 49% in an Indian Insurance company.
  12. IRDA has allowed portability in life insurance products from 2011.

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