Insurance Regulatory and Development Authority Act, 1999 & Insurance Products
Simplified Notes
Part 1: Insurance Regulatory and Development Authority Act, 1999
Indian insurance has low penetration (less than 3%), despite a billion-plus population.
The IRDA Act, 1999 marked a major milestone in reforming the sector. Here's a breakdown:
Why the IRDA Act Was Introduced
- The sector opened to private players in 1999, formally liberalized in 2000.
- Aim: Encourage competition and efficiency in insurance to support India’s growing economy.
IRDA’s Key Responsibilities
- Protect Policyholders: Ensure fair treatment and protect their interests.
- Encourage Industry Growth: Focus on fast and orderly growth while providing long-term funds for economic development.
- Educate Customers: Ensure customers receive accurate and clear information about products and their responsibilities.
- Grievance Redressal: Facilitate quick settlement of claims, prevent frauds, and address grievances effectively.
- Promote Transparency: Ensure fairness and reliability in insurance financial markets.
- Encourage Self-Regulation: Allow self-regulation while maintaining prudential oversight.
Part 2: Main Life Insurance Products
Life insurance policies are categorized into five types. Here’s a quick guide:
1. Term Insurance
- Purpose: Offers financial protection for a fixed period.
- How It Works: Pays a death benefit to heirs only if the insured dies during the term.
- Key Point: No payout if the insured survives the policy period.
2. Whole Life Insurance
- Purpose: Provides lifelong coverage.
- How It Works: Pays a death benefit no matter when the insured passes away.
- Key Point: Premiums must be paid consistently to keep the policy active.
3. Endowment Insurance
- Purpose: Combines insurance and savings.
-
How It Works:
- Pays the sum assured either on death or after the term ends (maturity).
- Includes survival benefits if the insured outlives the policy term.
- Key Point: Offers dual benefits—risk cover and savings.
4. Annuities
- Purpose: Provides regular income, typically during retirement.
-
How It Works:
- Insurer makes periodic payments to the policyholder after a lump sum or installment payment.
- Payments stop on death of the insured.
- Key Point: Acts as the reverse of life insurance.
5. Unit Linked Insurance Plans (ULIPs)
- Purpose: Combines insurance with investment in mutual funds.
-
How It Works:
- Premiums are split: part goes for life cover, and the rest invests in units (mutual funds).
- Returns depend on market performance, so values can rise or fall.
- Key Point: Allows small investors to benefit from professional fund management.
Memory Tips
For IRDA Responsibilities:
Think "PRO FITS":
- Protect Policyholders
- Regulate Industry Growth
- Optimize Grievance Handling
- Foster Transparency
- Inform Customers
- Transparency in Markets
- Self-Regulation
For Insurance Products:
Use the mnemonic "TWEAU" (like "Tweet U"):
- Term Insurance
- Whole Life Insurance
- Endowment Insurance
- Annuities
- Unit Linked Policies
Part 1: Insurance Regulatory and Development Authority Act, 1999
MCQs on Insurance Industry and IRDA Act
What was the primary purpose of opening the insurance sector in India in 1999?
- A. To increase government control
- B. To create a monopoly
- C. To encourage private players and competition
- D. To eliminate competition
Answer: C
When was the insurance sector formally liberalized in India?
- A. 1995
- B. 2000
- C. 1998
- D. 2005
Answer: B
What is the insurance penetration rate in India as mentioned in the text?
- A. Less than 5%
- B. Less than 3%
- C. Over 10%
- D. Between 6% and 7%
Answer: B
What was the major reform introduced by the IRDA Act of 1999?
- A. Merging private insurers
- B. Allowing private players to enter the insurance market
- C. Nationalizing insurance companies
- D. Limiting foreign investments
Answer: B
Who is responsible for regulating the insurance sector in India?
- A. Reserve Bank of India (RBI)
- B. Ministry of Finance
- C. Insurance Regulatory and Development Authority (IRDA)
- D. Securities and Exchange Board of India (SEBI)
Answer: C
MCQs on IRDA Responsibilities
What is the primary mission of IRDA?
- A. To promote fraud in the insurance sector
- B. To protect policyholders and ensure fair treatment
- C. To discourage private insurers
- D. To reduce competition
Answer: B
Which responsibility of IRDA focuses on preventing fraud and ensuring quick claims settlement?
- A. Promoting self-regulation
- B. Ensuring grievance redressal
- C. Promoting transparency
- D. Educating customers
Answer: B
IRDA is tasked with creating:
- A. A monopoly in the insurance sector
- B. A competitive and efficient insurance market
- C. A system to discourage private investments
- D. A single insurer in India
Answer: B
What role does IRDA play in educating customers?
- A. Providing subsidies for premiums
- B. Informing customers about products and responsibilities
- C. Creating mandatory savings schemes
- D. Eliminating competition among insurers
Answer: B
What is the aim of promoting self-regulation in the insurance sector?
- A. To reduce regulatory oversight completely
- B. To balance self-regulation with prudential norms
- C. To discourage foreign insurers
- D. To eliminate competition
Answer: B
Part 2: Main Life Insurance Products
MCQs on Term Insurance
What is the main feature of term insurance?
- A. Provides lifelong coverage
- B. Provides coverage for a specific period
- C. Combines savings and insurance
- D. Offers guaranteed returns
Answer: B
When does a term insurance policy pay the sum assured?
- A. On maturity
- B. On the death of the insured during the term
- C. After a specific number of years
- D. In monthly installments
Answer: B
What happens if the insured outlives the term in term insurance?
- A. A partial amount is paid
- B. No payout is made
- C. The full sum assured is paid
- D. Premiums are refunded
Answer: B
MCQs on Whole Life Insurance
Whole life insurance provides coverage until:
- A. A specific term ends
- B. The death of the insured
- C. The insured reaches 60 years of age
- D. Premiums are refunded
Answer: B
Which of the following is a key advantage of whole life insurance?
- A. Temporary coverage
- B. Guaranteed lifelong protection
- C. No premium payments required
- D. Linked to market performance
Answer: B
MCQs on Endowment Insurance
Endowment insurance offers benefits:
- A. Only on death
- B. Only on maturity
- C. On death or maturity
- D. On death of the nominee
Answer: C
What is the primary difference between term insurance and endowment insurance?
- A. Term insurance includes savings
- B. Endowment combines risk cover and savings
- C. Term insurance has lifelong coverage
- D. Endowment has no maturity benefits
Answer: B
MCQs on Annuities
Annuities are designed to provide:
- A. A lump sum payment on death
- B. Regular income for a fixed period
- C. Market-linked returns
- D. Coverage against accidental death
Answer: B
What stops annuity payments?
- A. Maturity of the policy
- B. The insured’s death
- C. Market fluctuations
- D. Non-payment of premiums
Answer: B
How are annuities different from life insurance?
- A. Life insurance pays on death; annuities stop at death
- B. Annuities pay lump sums; life insurance offers regular income
- C. Both offer the same benefits
- D. Annuities are free from premiums
Answer: A
MCQs on Unit Linked Policies (ULIPs)
What do unit-linked policies combine?
- A. Insurance and pension
- B. Insurance and investment
- C. Insurance and loans
- D. Insurance and annuities
Answer: B
In ULIPs, premiums are:
- A. Fully allocated for life cover
- B. Split between life cover and mutual fund units
- C. Used only for risk cover
- D. Guaranteed with fixed returns
Answer: B
What affects the value of ULIP benefits?
- A. The insured’s health
- B. Market performance
- C. Claim settlement history
- D. Fixed interest rates
Answer: B
True/False Questions
- IRDA ensures self-regulation with no oversight. (False)
- Term insurance guarantees payouts regardless of survival. (False)
- Annuities provide lump sum payments on the death of the insured. (False)
- ULIPs are linked to mutual fund performance. (True)
- Whole life insurance provides benefits only after a fixed term. (False)
Part 3: Additional MCQs on IRDA and Insurance Products
MCQs on the Role of IRDA
Which of the following is NOT a responsibility of IRDA?
- A. Protecting the interests of policyholders
- B. Speedy settlement of genuine claims
- C. Encouraging monopolies in the insurance sector
- D. Promoting transparency and fairness
Answer: C
IRDA is tasked with building a reliable:
- A. Grievance redressal mechanism
- B. Insurance monopoly
- C. Financial management system for insurers
- D. Management Information System (MIS)
Answer: D
Why is IRDA focused on making customers aware of their duties and responsibilities?
- A. To reduce competition
- B. To empower policyholders for better decisions
- C. To limit insurance claims
- D. To avoid transparency in the market
Answer: B
What is one way IRDA ensures financial soundness in the insurance market?
- A. By reducing competition
- B. By implementing high financial standards
- C. By allowing insurers to work without guidelines
- D. By focusing only on public sector insurers
Answer: B
MCQs on Term and Whole Life Insurance
What is the key difference between term insurance and whole life insurance?
- A. Term insurance includes savings, while whole life does not
- B. Term insurance provides coverage for a specific period, while whole life is lifelong
- C. Whole life insurance is cheaper than term insurance
- D. Term insurance pays out even after maturity
Answer: B
Which insurance product is described as “temporary insurance”?
- A. Term Insurance
- B. Whole Life Insurance
- C. Endowment Insurance
- D. ULIPs
Answer: A
In whole life insurance, the payout occurs:
- A. Only on death
- B. On maturity
- C. On death or survival
- D. After a specific term
Answer: A
MCQs on Endowment Insurance
Endowment insurance provides benefits:
- A. Only on death during the term
- B. Only on survival of the term
- C. On death or survival of the policy term
- D. Only after a fixed number of years
Answer: C
What is a unique feature of endowment insurance?
- A. It guarantees lifelong coverage
- B. It combines term assurance and savings
- C. It starts payment after death of the insured
- D. It depends on market performance
Answer: B
MCQs on Annuities
What type of payment structure do annuities offer?
- A. Lump sum on death
- B. Regular periodic payments
- C. One-time benefit at maturity
- D. Savings with market-linked returns
Answer: B
Annuities can be described as the reverse of:
- A. ULIPs
- B. Whole life insurance
- C. Term insurance
- D. Life insurance
Answer: D
How are annuities funded?
- A. Through government contributions
- B. Through lump sum or installment payments
- C. Through mutual funds
- D. By regular employer deductions
Answer: B
MCQs on Unit Linked Insurance Plans (ULIPs)
ULIP premiums are split into:
- A. Risk cover and maturity benefits
- B. Life insurance and investment components
- C. Death benefits and loans
- D. Annuity and savings components
Answer: B
What makes ULIPs attractive to small investors?
- A. Low market risk
- B. Fixed returns
- C. Access to managed funds without a large commitment
- D. Guaranteed payout regardless of performance
Answer: C
Which of the following is true about ULIPs?
- A. They are only available for high-net-worth individuals
- B. Their value depends on mutual fund performance
- C. They do not include any life insurance cover
- D. They provide fixed returns over time
Answer: B
Part 4: Advanced Conceptual MCQs
MCQs on Principles of Insurance
What is the primary goal of insurance as described in the principle of indemnity?
- A. To ensure profit for the insured
- B. To restore the insured’s financial position before the loss
- C. To promote market speculation
- D. To avoid claims altogether
Answer: B
In the principle of subrogation, what happens to the insured’s rights?
- A. The insured retains all rights to the asset
- B. The rights transfer to the insurer after the claim is settled
- C. The rights are shared equally with the insurer
- D. The rights are annulled after the claim
Answer: B
The principle of contribution applies when:
- A. The insured has multiple policies for the same risk
- B. The insured has only one policy
- C. The insurer denies the claim
- D. The policy lapses
Answer: A
Which principle requires full disclosure of material facts in insurance contracts?
- A. Principle of Indemnity
- B. Principle of Utmost Good Faith
- C. Principle of Contribution
- D. Principle of Subrogation
Answer: B
True/False Questions
- Term insurance provides a payout only if the insured dies within the policy term. (True)
- Whole life insurance policies mature at the end of the insured’s life. (True)
- Endowment insurance does not provide maturity benefits. (False)
- Annuities guarantee payments until the death of the insured. (True)
- ULIPs are unaffected by stock market fluctuations. (False)
