Insurance & Its Types: Life Insurance, General Insurance; Classification of Risks; IRDA Commerce YouTube Lecture Handouts Part 3

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Insurance & Its Types: Life Insurance, General Insurance; Classification of Risks; IRDA|Commerce

Classification of Risks

Classification of Risks

Financial Risk

  • Risk measured in monetary terms for which value can be assigned
  • Theft/Material damage to assets/property
  • Business loss and death of an individual

Non-Financial Risk

  • Risk cannot be measured in monetary terms
  • Inappropriate choice-based risk so not insurable in nature
  • Incorrect choice of property, car, career, etc.

Pure Risk

  • Also called absolute risk, measured in monetary terms is a category of threat that is beyond human control and has only one possible outcome if it occurs: loss.
  • Pure risk includes such incidents as natural disasters, fire or untimely death.

Speculative Risk

  • A category of risk that, when undertaken, results in an uncertain degree of gain or loss
  • Three possible outcomes exist in speculative risk: something good (gain) , something bad (loss) or nothing (staying even) . Gambling and investing in the stock market.

Fundamental Risk

  • Fundamental risks affect the entire economy or large numbers of people or groups within the economy and are now insurable.
  • Examples are high inflation, unemployment, war, and natural disasters such as earthquakes, and floods

Particular Risk

  • Insurable risks that affect only individuals and not the entire community.
  • Examples are burglary, theft, auto accident, dwelling fires


  • It is a process whereby one entity (the reinsurer) takes on all or part of the risk covered under a policy issued by an insurance company in consideration of a premium payment.
  • In other words, it is a form of an insurance cover for insurance companies.
  • There are two basic types of reinsurance arrangements: facultative reinsurance and treaty reinsurance.
  • Facultative reinsurance is reinsurance for a single risk or a defined package of risks.
  • The ceding company in treaty reinsurance agrees to cede all risks to the reinsurer.
  • The reinsurer in treaty reinsurance agrees to cover all risks, even though the reinsurer hasn՚t performed individual underwriting for each policy.


  • General Insurance Corporation of India Limited abbreviated as GIC Re is an Indian government owned reinsurance company under the ownership of Ministry of Finance, Government of India.
  • It was incorporated on 22 November 1972 under Companies Act, 1956.
  • GIC Re has its registered office and headquarters in Mumbai. It was the sole reinsurance company in the Indian insurance market until the insurance market was open to foreign reinsurance players by late 2016 including companies from Germany, Switzerland and France.
  • GIC Re՚s shares are listed on BSE Limited and National Stock Exchange of India Ltd.
  • Until 1999, there were no private insurance companies in India. The government then introduced the Insurance Regulatory and Development Authority Act in 1999, to regulate insurance domain, thereby de-regulating the insurance sector and allowing private companies.

Insurance Regulatory & Development Authority & It՚s Role

  • The Insurance Regulatory and Development Authority of India (IRDAI) is a regulatory body under the jurisdiction of Ministry of Finance, Government of India and is tasked with regulating and promoting the insurance and re- insurance industries in India.
  • It was constituted by the Insurance Regulatory and Development Authority Act, 1999, an Act of Parliament passed by the Government of India.
  • The agency՚s headquarters are in Hyderabad, Telangana.

Role of IRDA

  • Monitors the investment of funds by insurance companies.
    • Specifying qualifications, the code of conduct and training for intermediaries and agents
      • Judges the disputes between insurers and intermediaries or insurance intermediaries.
      • Regulating a margin of solvency
      • Regulating company investment of funds
      • Specifying how books should be kept
  • Issuing, renewing, modifying, withdrawing, suspending or cancelling registrations and protecting policyholder interests.
    • Specifying the percentage of premium income to finance schemes for promoting and regulating professional organizations.
      • Supervises the functioning of the Tariff Advisory Committee.
      • Specifying the percentage of life- and general insurance business undertaken in the rural or social sector.
    • Governs the maintenance of margin of solvency


Q. ________ is the regulator of insurance sector in India.

Answer: IRDA

Q. Give an example of a re-insurance company in India.

Answer: GIC Re.

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