Understanding the Distinction Between Life Insurance and General Insurance Under the Insurance Act, 1938
The Insurance Act of 1938 forms the basis of vast documentation for insurance in India and its subsequent history, but more specifically, it has played a vital role in regulating, understanding and governing insurance companies operating under health, life and general insurance often as complementary offerings. The distinction between life and general insurance in the Insurance Act is critical to understanding the nuances and implications of both types of insurance insurance professionals. However, understanding pseudo-regulations pertaining to the legislation enabling regulated value for policy holders is equally critical for policy-holders alike who simply wish to make educated financial decisions. With this in mind, we will delve deeply into the legislation to get a better understanding of how the Insurance Act, 1938 outlines, governs, and regulates life and general insurance to clarify what both types of insurance mean and how they function in the wider ecosystem.
1. A Quick Introduction to the Insurance Act, 1938
The Insurance Act of 1938 was established to consolidate and amend the law relating to the business of insurance in India, and was India’s first legislative provision to provide a comprehensive model of legislation for life insurance and general insurance;integration was as an improvement to the statutory provisions until the Act now governs many classic collaborations.
The key aims of the Act are:
- Regulate the insurance business in India
- Supervise the financial soundness of insurance companies,
- Protect the interest of policy holders alone.
- The purpose of that control
The Act encompasses all fields of the insurance business, including registration of companies, funds investment, solvency margins, and filings of annual accounts and actuarial reports.
2. Types of Insurance Defined in the Act
The Insurance Act, 1938 separates insurance into two broad categories:
a. Life Insurance Business (Section 2(11))
As defined by the Act, a life insurance business means the business of making contracts upon human life. This includes:
- Insurance on human life (life cover)
- Annuity (for life periodic payments)
- Disability and health riders
- Pension products
These contracts promise payment of a pre-determined sum of money at the death of the insured (or a pre-determined time period).
b. General Insurance Business (Section 2(6B))
The general insurance business is everything else that is not life insurance. The term general insurance is umbrella definition of:
- Fire insurance
- Marine insurance
- Motor insurance
- Health insurance (non-life)
- Miscellaneous insurance (liability, burglary, travel)
General insurance is usually a short-term contract that must be renewed annually and indemnifies the insured against loss or damage.
3. Core Differences: Life and General Insurance
Understanding the difference between life and general insurance is important from a legal, operational and customer viewpoint.
- Nature of the Contract
Life insurance: life insurance is a contract of assurance. The event (death or survival) has a certainty of happening in the future. It guarantees a payoff at death or at maturity.
General insurance: general insurance is a contract of indemnity therefore you are compensated for the actual loss (up to the insured amount), and the event is uncertain, an accident or fire for example.
- Duration
Life insurance: Generally long-term or whole of life.
General insurance: Simple, short-term one year, as a minimum.
- Subject Matter
Life insurance: human life.
General insurance: a physical asset, health, liability, and other interests.
- Premium Payment
Life insurance: Payments made on a regular basis over a number of years, or in a lump sum.
General insurance: Payments are generally annual, as a one off on the issue or renewal of the policy.
- Claim Payout
Life insurance: Payout is either on death or after a fixed period, (maturity benefit)
General insurance: Payout only if/following the event happening and up to actual loss.
- Beneficiary
Life insurance: Payout made to the nominated beneficiary.
General insurance: As the policyholder you are paid, or directly for the benefit
4. Regulatory and Legal Framework
Registration and Licensing.
The insurance act of 1938 provides that every insurer should obtain a registration certificate from the Insurance Regulatory and Development Authority of India (IRDAI), which was only established as a regulator in 1999.
Section 3 of the act states that:
- “no person shall carry on the business of insurance, unless that person is registered.”
- The general insurance and life insurance segments must each be separately registered.
Investment Norms – In general, life and general insurers will be regulated by different investment regulations as the liabilities have different characteristics:
Life insurers must predominantly invest in long term safer instruments (government securities).
General insurers, require liquidity, and tend to invest in instruments of up to medium term duration. Solvency Requirements – In relation to solvency, the solvency margin in Section 64VA of the act is described as the surplus of assets over liabilities, which is considered compulsory reserves to allow for unforeseen contingencies claims.
Life and General insurance companies also have differing requirements based on respective risk profiles.
5. Reforms and Contemporary Interpretations
The insurance market has evolved since the introduction of the Insurance Act 1938, which has undergone a variety of amendments to respond to market changes, particularly the Insurance Laws (Amendment) Act, passed in 2015 which allowed for:
- The increase of FDI in insurance from 26% to 49%
- The introduction of focused health insurance lines
- More autonomy and responsibilities for IRDAI
- Introduction of Standalone Health Insurance
Though there have traditionally been grouped as general insurance, health insurance has emerged as an appealing standalone line of business. The IRDAI has recognized it separately, and created room for specialized insurers to offer health insurance while simultaneously softening the traditional life/general distinction.
6. Market Structure and Major Players
- Life Insurance Companies
- Life Insurance Corporation of India (LIC)
- HDFC Life
- SBI Life
- ICICI Prudential Life
- General Insurance Companies
- New India Assurance
- ICICI Lombard
- Bajaj Allianz General Insurance
- Tata AIG General Insurance
These companies operate under licenses issued by IRDAI, and are required to comply with the terms of the Insurance Act.
7. Consumer Implications and Education
Distinguishing life insurance from general insurance allows consumers to make better financial decisions.
- Selecting the Right Insurance
- If seeking life protection and family financial protection, the consumer should select term or endowment policies.
- If the consumers seeks asset protection or insurance for health-related risk, they should select general insurance (motor, property, health, etc.).
Understanding Insurance Policy Terms
Each type of insurance policy will contain its own jargon attached to the products such as: sum assured vs sum insured, maturity benefits vs indemnity limits, etc. Knowing the difference in the types of jargon will help consumers avoid disputes or misunderstanding when making their claim.
Tax Benefits
- Life insurance and general insurance both provide tax deductions.
- Life Insurance includes both Section 80C and Section 10(10D).
- Health insurance provides tax deductions under Section 80D.
8. Challenges and the Way Forward
Consumer confusion remains in spite of the legislative clarity that has given the industries two different lanes.
- Examples of overlap in products include: ULIP – investment + insurance.
- As products become increasingly complex, Darwin’s theory become less meaningful “survival of the fittest”.
- The gap of insurance penetration and financial literacy will likely continue in the interim.
- The IRDAI and government are working on reform, disclosure, and raising consumer awareness to create better clarity.
Conclusion: A Useful Distinction
The Insurance Act, 1938 provides us with a significant legal framework for the understanding and regulation of life insurance and general insurance in India. They both aim at risk management, but they are distinct with respect to their constructs, objectives and governing architecture.
Life insurance renders secure the future of an individual or individuals and their families with long term protection against old age or death.
General insurance protects an inanimate object, element, health, or interest that would be worthy to protect, on loss arising from an accident or disaster that a person did not expect.
All participants in the insurance market must understand this is an important distinction, including policy holders, regulators and insurers, and these participants should keep it in mind when developing an orderly and functional insurance market.
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