AN OVERVIEW OF INSURANCE SECTOR AND EFFECTS OF PANDEMIC
Updated: Jul 29, 2020
[Authored by Rudraksh Mathur, 1st year B.B.A. LL.B. (Hons.) student at Vivekanand School of Law and Legal Studies, Vivekanand Institute of Professional Studies ]
WHAT IS INSURANCE?
Insurance is a type of contract in which a party, i.e. insurer,agrees to indemnify the other party, i.e. insured, from losses arising out a certain event. In exchange for this the insured pays a premium as consideration. Premium is a monetary amount paid periodically by the insured to the insurer.
Under English Law, contract of insurance other than life insurance comes under the contract of indemnity.In Indian Law, contract of insurance is not a contract of indemnity. Section 124 of the Indian Contract Act, 1872 defines indemnity as a contract by which one party, i.e. promisor or indemnifier, promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. This definition of indemnity only covers losses caused by human agency and not by any other event. Therefore, contract of insurance is not covered under contract of indemnity. However, The Law Commission of India in its 13th report on the Indian Contract Act, 1872 has recommended an amendment to Section 124 to broaden the definition of indemnity to include contract of insurance.
Does this mean insurancein India is not covered in contracts? Answer to this question is no. Contract of insurance is covered in Section 31 of the Indian Contract Act, 1872 as contingent contract. Acontingent contract is a contract to do or abstain from doing something in case of happening or not happening of some event. Therefore, In India contract of insurance is a contingent contract.
AN OVERVIEW OF INSURANCE SECTOR
The insurance sector is divided into two categories, i.e. non-life insurance (also known as general insurance) and life insurance. Insurance sector consists of various insurance companies, some are owned by the government, while the others are private. In India, Insurance industry is regulated by an authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999. This regulatory body is known by the name of Insurance Regulatory and Development Authority of India (IRDAI). Section 14 of the Insurance Regulatory and Development Authority Act, 1999 gives duties, powers and functions of the authority. IRDAI protects the interest of policyholders as well as promote, regulate and ensures orderly growth of the insurance industry. IRDAI frames regulations for insurance sector as per Section 114A of the Insurance Act, 1938. Apart from regulating Insurance Companies, IRDAI also regulates Insurance Brokers, Individual Agents, Corporate Agents, Surveyors & Loss Assessors, Third Party Administrators, Referral Providers, Web Aggregators, Insurance Repositories andInsurance Marketing Firms.
HOW DOES INSURANCE SECTOR WORKS?
To understand the working of insurance sector and the business model on which insurance sector work, we need to understand the working of insurance companies and understand how do insurance companies make profits.
There are different types of Insurance companies, selling different kinds of products (insurance policies). Insurance companies offer risk management as consideration for the insurance policy and in exchange insured gives premium as consideration. Insurance companies offer different kinds of policies. Some companies offer non-life insurances, while others offer life insurances.
Some non-life insurances are health insurance, automobile insurance, accidental insurance, errors and omission insurance, homeowner or home insurance, etc. Health insurance relates to medical expenses, hospitalization charges, etc. Automobile insurance covers damages related to cars and vehicles. Automobile insurance is required by law. Home insurance relates to a particular property. Errors and omission insurance covers specific needs, such as kidnap and ransom (K&R),professional liability insurance and medical malpractice.
Life insurance companies offer policies that pay a death benefit as a lump sum upon the death of the insured to their beneficiaries. Life insurance policies may be sold as universal life (permanent or whole life insurance) or term life insurance. Whole life insurance is generally expensive, but this type of insurance has a cash accumulation system. Acash accumulation system provides the insuredwith a way to extract money in times of need. Insured can also use this accumulated cash as a retirement fund.Term life insurance are generally less expensive and expires at the end of the term. If an insured dies in the term of life insurance, then the beneficiary of insured is given a lump sum amount.
There is a type of insurance known as reinsurance. Reinsurance is an insurance that insurance companies take to reduce risk of becoming insolvent. Reinsurer is an insurer that gives insurance to insurers, i.e. insurance companies.
Insurance companies generally make profit by two ways, i.e. underwriting and investment income. There are other ways of generating revenue like coverage lapse and cash value cancellations. For an insurance company underwriting and investment income are main sources of income.
What is underwriting?
Profit made by underwriting is collection of premiums in a specific time period minus claims paid in that particular time period. For example, if an insurance company collected 10 crores as premium in a specific time period and in that particular time period this insurance company also paid 6 crores as claims made on insurance policies. Now the net profit made by underwriting in that particular time period is 4 crores (collection of premium, i.e. 10 crores – claims paid, i.e. 6 crores = profit by underwriting, i.e. 4 crores)
What is investment income?
When an insured pays a premium, insurance company takes that premium and invests it into financial markets. This increases the revenues of insurance companies. Even if the investments gave losses, insurance company may increase the premiums given by the insured and let the insured take care of losses incurred in financial markets.
HOW DOES A PANDEMIC EFFECT INSURANCE SECTOR?
The general Insurance sector contains insurances such as travel insurance, health insurance, motor insurance, accidental insurance, etc. Due to restrain in travel and low tourism, travel industry is one of the worst hit sectors. There will be no new travel insurances for a while. This will be adversely effecting collection of premiums. Due to lockdowns in various countries, financial services are running on slow pace, effecting the collection of premium. Due to increased travel restriction, the claims arising out of travel insurance policies will increase.Health sector may also lose some of its credibility in the eyes of general public. Before a disease being declared pandemic, it was covered in some insurance policies. In case of COVID-19, IRDAI issued guideline to settle all claims related to coronavirus, but after this disease was declared a pandemic, some insurance companies are not settling claims related to COVID-19. IRDAI also advised insurance companies to come out with policies specific to COVID-19. Some insurance companies who still maintain claims related to COVID-19 may turn to reinsurers. This whole scenario will affect one of the main profit-making methods known as undertaking. Financial markets all over the world are also affected by the pandemic. This will affect another profit-making method of investment. Insurers may suffer losses in financial markets. This will add more to the loss.Due to losses in underwriting and investment,the insurers may turn to reinsurers. There is a possibility that many insurers turn to reinsurers, which may burden reinsurers. Some insurers and reinsurers may become insolvent.
Pandemic also affects life insurance sector. Insurance policies related to total coverage may suffer losses. Claims related to life insurance will increase in pandemic. Due to slower financial services, the premium collection may be affected. This will affect underwriting and investment in financial markets. Due to losses in underwriting and investment the insurers may turn to reinsurers. There is a possibility that many insurers turn to reinsurers, which may burden reinsurers. Some insurers and reinsurers may become insolvent.
POST PANDEMIC STEPS
Financial assistance to insurance sector may help to maintain solvency. This will help in the overall combating of pandemic. Insurance policy related to pandemic disease may help in long run. While at first there might be more claims, but afterward more premium might result in profit in underwriting. Investment in sectors such as fertilizers, diagnostics, pharmaceuticals, consumer goods and utilities that might have some gain due to pandemic can result in profit. This will help companies to remain solvent.
DEALING WITH PRESENT PANDEMIC CRISIS
The IRDA is reviewing the situation and has announced various measures. On 4th March 2020 the IRDA issued guideline on handling all claims related to COVID-19. Insurers are also directed to come up with products related to corona virus. On 30th March the IRDA has issued instructions related to COVID-19. Some measures given in the circular are:
1. Insurers are are required to display helpline number for policyholders on their website.
2. Insurers are required to put business continuity plan.
3. Insurers are required to set up Crisis Management Committee and Risk Management Committee.
4. The Crisis Management Committee should provide regular inputs to the Risk Management Committee.
5. Insurers should devise a way for insured to pay premium digitally.
6. Claims should be processed in the prescribed time period.
7. Insurers should keep their board informed about every progress.
8. In case of any special circumstances affecting the business operations of insurers, IRDA should be informed immediately.
Regulatory bodies all around the world are doing their best to deal with pandemic related issues. For the time being the most needed step is to sustain the sector and maintain solvency of insurance companies. Processing claims arising out of pandemic and coming up with new policies specific to pandemic is also needed. Regulatory body such as IRDA is needed to assist insurers, as well as with the help of insurers IRDA needs to protect the claims of policyholders. New players in the insurance sectors might help to reinsure the insurers. The only way out of the situation is to sustain effectively.