Insurance Overview

An Overview

Insurance business is divided into four classes :

1) Life Insurance business
2) Fire
3) Marine
4) Miscellaneous Insurance.

Life Insurers transact life insurance business; the rest is transacted by General Insurers. No composites are permitted as per law.

The business of Insurance essentially means defraying risks attached to any activity over time (including life) and sharing the risks between various entities, both persons and organisations. Insurance companies (ICs) are important players in financial markets as they collect and invest large amounts of premium. Insurance products are multi purpose and offer the following benefits :

1. Protection to the investors
2. Accumulate savings
3. Channelise savings into sectors needing huge long term investments.

ICs receive, without much default, a steady cash stream of premium or contributions to pension plans. Various actuary studies and models enable them to predict, relatively accurately, their expected cash outflows. Liabilities of ICs being long-term or contingent in nature, liquidity is excellent and their investments are also long-term in nature. Since they offer more than the return on savings in the shape of life-cover to the investors, the rate of return guaranteed in their insurance policies is relatively low.

Consequently, the need to seek high rates of returns on their investments is also low. The risk-return trade off is heavily tilted in favour of risk. As a combined result of all this, investments of insurance companies have been largely in bonds floated by GOI, PSUs, state governments, local bodies, corporate bodies and mortgages of long term nature. The last place where Insurance companies are expected to be over-active is bourses.


Lately ICs have ventured into pension schemes and mutual funds also. However, life insurance, constitutes the major share of insurance business. Life Insurance depends upon the laws of mortality and there lies the difference between life and general insurance businesses. Life has to extinguish sooner or later and the claim in respect of life is certain. In case of general insurance, however, there may never be a claim and the amount can never be ascertained in advance. Hence, Life Insurance includes, besides covering the risk of early happening of an event, an element of savings also for the beneficiaries.

Pension business also derives from life insurance in as much as the pension outgo again depends upon the laws of mortality. The forays made by insurance companies in this area are, therefore, natural corollary of their business.