Life and General Insurance: What Genuinely Differs

Cover on a life pays a sum agreed at the outset if a stated event happens to a named person, and that contract can run for decades. General insurance meets the cost of damage to a thing, or of a liability owed to another party, across a period the contract states, and at its close both parties choose afresh. Almost every other difference follows from how long the contract runs.

Most households have met exactly one of these two. Somebody has sat through a conversation about cover on a life, or somebody has renewed cover on a vehicle, and the other is a shape they have never had to think about. Both are therefore built completely, on their own terms, before either is set against the other. A comparison that starts comparing before both sides are built leaves somebody confidently holding one accurate half and one invented half.

Then one set of criteria is run across both, in order. The criteria are not chosen for tidiness. Each one changes the answer to a question somebody actually asks: how long the contract runs, how often the price can be reset, how the amount paid out is arrived at, how long the insurer keeps the money, which measures each business is read on, and what happens when the stated period ends. Worked through in that order, the first one turns out not to be one difference among six: it is the difference the other five come out of.

What is cover on a life, stated completely enough to use?

Cover on a life is a contract under which an insurer pays a stated sum to the people named in the contract if a stated event happens to a named person, in exchange for premium paid either once or across many years. The arrangement is no more than that, and four properties of it do all the work below.

The first property is that the amount is agreed at the outset rather than measured afterwards. The figure written into the contract at the beginning, usually called the sum assuredThe amount written into a contract on a life at the start, payable if the stated event happens. The sum assured is fixed by agreement rather than worked out from anything that occurs later., is the amount that becomes payable. Size was settled before the ink dried, so nobody visits anything, nobody assesses anything and nobody argues about size.

The second property is the length. The term can run for decades, and on some contracts it runs for the whole of a life with no fixed end date at all. Think about what a household actually signs up to here. A couple in their early thirties taking cover to the age of sixty have handed an insurer a promise that outlives the car they drive, the house they live in and quite possibly the town they live in.

The third property follows from the second and is the one people miss. The premium is usually fixed at the outset for the whole term. The estimate behind that premium therefore has to hold for the whole term. The insurer is not quoting a price for next year. The insurer is quoting a price for a stretch of time whose end it cannot see, and it is doing that once.

The fourth property is that the obligation outlives the premium by a distance nothing else in this subject comes close to. Premium may finish arriving after ten or fifteen years while the promise stays open for another thirty. The money is in the insurer's hands the whole of that time. How long an insurer holds the money is taken up below.

What is general insurance, stated completely enough to use?

General insurance is a contract under which an insurer meets the cost of damage to a thing, or of a liability owed to another party, across a period the contract states. Cover on a vehicle, on a shop, on goods in transit, on a building, and cover against what somebody may be held liable to pay another party, all sit here. Four properties again, and each of them is close to the opposite of one above.

The first is that the payment is sized by the damage that actually happened, and not by a number written down before anything happened. The principle has a name, indemnityThe ordinary term for a payment sized by what was actually lost, so the covered party is put back where they were and taken no further than that., and the plain meaning is the useful part: the payment puts the covered party back where they were and stops there. A shop covered for a large sum that loses one shutter is paid for one shutter.

The second property is that the period is stated and short, commonly a year. The cover starts, it runs, and on a stated date it stops. The third is that at the end of it there is no continuation of any kind: a new contract is written, or none is. Nothing rolls forward by itself, and both parties are free.

The fourth property is that the whole cycle from premium taken to claim settled usually completes inside a year or two, so the estimate behind the price is answered quickly, and then answered again. A price set this year is answered by this year's claims. An insurer writing cover for a stated period therefore learns within a year or two where its price was wrong. Cover on a life gives its insurer no such answer for decades.

How long does each contract run, and how often can the price be reset?

Here is the criterion the other five come out of, so it is worth slowing down on. Set the two arrangements side by side over the same stretch of time, say twenty years, and count one thing only: the number of separate occasions on which the insurer gets to decide a price.

On a contract running for decades at a price fixed at the outset, the insurer has one chance to be right, and everything it learns afterwards applies only to policies it has not yet written. Suppose that in year seven it discovers its estimate was too optimistic. The insurer can raise the price for people signing in year eight. The contract it wrote in year one is beyond reach. The year one contract keeps running on the terms set then, for another thirteen years, whatever the insurer now knows.

On a contract of a stated period, the position reverses completely. Each renewalWriting a contract again at the end of a stated period, on terms set afresh. In general insurance nothing continues by itself, so a renewal is a new decision by both parties rather than a continuation. is a fresh decision, and what the insurer learned last year goes straight into this year's price. Twenty years of that arrangement contains twenty separate pricing decisions, each informed by everything that came before it.

Think of a vegetable seller who agrees in March to supply a hostel at a fixed rate for the next ten years, and another who quotes a fresh rate each March. Both may be equally shrewd. Only one of them is carrying ten years of unknown weather inside a number written down once. The two arrangements are exposed to being wrong in completely different ways. The longer contract has to carry a margin for that exposure in its price from the very beginning.

The default setting is worth reading in plain text. At a term of twenty years the long contract carries one pricing point and the row of one year contracts carries twenty. The long contract's single price is fixed for the whole term, and each short contract's price is fixed for 5.00 per cent of it. Push the control to thirty years and the short arrangement drops to 3.33 per cent while the long one stays at the whole term, because it has nowhere to go.

How is the amount paid out arrived at?

The second criterion, and the one that explains why a whole occupation exists on one side of this comparison and not the other.

On cover for a life, the amount was settled when the contract was written and depends on measuring nothing afterwards. The stated event either happened or it did not. If it did, the agreed sum is payable; the arithmetic was done years ago and nobody re-opens it. If it did not, nothing is payable. There is no middle.

On general insurance the amount is whatever the damage came to, worked out after the event. Measuring damage after the event is precisely why a surveyorThe role that goes and establishes what a loss actually was, so that a payment measured by the loss can be worked out. On cover measured by an agreed sum there is nothing for such a role to establish. exists as a role at all. Somebody has to go and look at the burnt godown, count what was in it and put a figure on it. The surveyor's figure is the claim. A vehicle scratched in a lane and a vehicle written off entirely sit under the same contract and produce completely different payments.

Two consequences fall straight out of that, and they are worth holding separately. The first is a real difference in what each business has to be able to do. General insurance needs a mechanism for establishing the size of a loss, and cover on a life does not. The second is the shape of what gets paid. General insurance can pay anything from nothing at all to the whole sum covered, a continuous band. Cover on a life pays the agreed sum or nothing, two points with no ground in between.

How long does the insurer hold the money between premium and claim?

The difference stops being a matter of contract wording here and starts showing up in the size of the balance sheet. A number that large is harder to argue with than a clause.

Chandrika Life Insurance Limited, invented and a life insurer, took total premium of Rs 15,600 crore in the stated year, and its policyholder funds stand at Rs 72,000 crore. Do the division rather than reading past it. Rs 72,000 crore divided by Rs 15,600 crore is 4.62. Chandrika Life Insurance is holding roughly four and a half years of premium receipts. The figure is not a measure of wealth at all. It measures how long the average rupee stays with the insurer before it is paid out. A household with one month of expenses in the bank and a household with four years of it are not differently rich in any interesting sense if the second one has promised the money to somebody else on a date it cannot choose.

Now the other side, stated as a property of the contract because no figures exist for it. On a contract of a stated period the money moves through in months: premium arrives, cover runs, claims for that period mostly arrive inside a year or two, and what is left is settled. The same volume of business written on stated period contracts leaves a far smaller sum standing behind it at any moment, not because the insurer is smaller but because the money does not stay.

What do one insurer's own premium figures show about a long book?

One more division on the same invented life insurer, and this one shows the length of the contract from a completely different angle. The total premium of Rs 15,600 crore splits into Rs 5,200 crore written this year and Rs 10,400 crore arriving on contracts written earlier. Set the second against the first and Rs 10,400 crore against Rs 5,200 crore comes to 2.0 times, exactly.

Two rupees in every three of this year's premium came from contracts written in earlier years. One division carries the whole of the life side of this comparison. A book of long contracts carries most of its premium forward from decisions taken before this year began, and the decisions themselves cannot be revisited. Run the same thought about a business written entirely on stated period contracts and it does not survive. Every contract was written again this year on terms set this year. No premium arrives from a decision that can no longer be changed.

The last row is the one to sit with. The insurer's own capital is Rs 7,200 crore and the money sitting with it is ten times that, and every rupee of the bigger number is owed onward to somebody, on a date the insurer does not choose. An insurer read as though it were a manager of its own money has misread the biggest line in the accounts.

What is each one measured on, and why do the measures not carry across?

A general insurer's underwriting resultWhat is left of the premium once claims and the cost of running the business are set against it, before anything earned on the money held is counted. How that result is arrived at is covered separately. is read on the loss ratio, the expense ratio and the two of them added, and all three are struck on earned premiumThe slice of premium belonging to cover the insurer has already provided in the period being reported on, as against everything it happened to collect in that period. How the two get separated is covered separately.. Cover is provided across a stated period. The premium belonging to that period can therefore be identified, and the claims arriving against it set on top of it. The three ratios, the forms they take and the bases they are struck on are covered separately and are used here rather than rebuilt.

A life insurer is read on a different set entirely: on how much premium came in and in which of its two halves, on how much of the book remains in forceWhat a policy is called while it is still running and the cover is still on. A book gets measured by how much of it stays that way as the years pass. after a year or five, on what is held against what has already been promised, and on the margin held above that. Each of those is a different question, and each of them exists because the obligation is long.

The measures refuse to carry across because of what sits underneath them: what a life insurer collects in a year is not what it has earned for the risk it actually carried in those twelve months, so a division struck on money collected answers a different question from one struck on cover provided, however alike the two look side by side. Two divisions can have the same shape, the same units and the same appearance in print while being answers to different questions, and there is no way to tell from the number itself. The base has to be printed beside it.

What happens when the stated period ends?

The last of the six criteria, and it is the pricing point criterion again, seen from the other side of the table.

On general insurance the contract ends, and a new one is written or none is. Both sides decide again, and the insurer may decline what it accepted last year. That freedom runs in both directions. The party covered may go elsewhere, may cover less, or may cover nothing. Nothing continues by itself.

On cover for a life the contract continues on its original terms for as long as the premium is paid, and the insurer cannot reopen the decision it made at the outset. Whatever it now knows about the risk, about its own pricing, or about how the book has behaved, the contract it wrote is the contract it has.

One mechanism a reader has to have, stated carefully. If premium on a long contract stops being paid, the contract itself provides for what happens next, and what it provides for varies by product: some contracts stop, some continue in a reduced form, some can be restarted within stated conditions. All of that is settled by the wording of the particular contract, and by rules IRDAI keeps current at irdai.gov.in, and none of it is written out here. A policy that ends this way is a thing the contract does, and it is not evidence about the person who held it. Money moves in and out of households for a hundred reasons, and none of them is a verdict on anybody.

Six criteria have now been run across both sides, and laid out together they show something the running order hides. Every one of the last five is downstream of the first.

Where do the two overlap in practice?

Treating the two as separate industries is a false division.

Underneath, both run the identical arrangement: many parties each hand over an amount known in advance, the pool meets the losses that land on a few of them, and the price is fixed before anybody knows what the cost turned out to be. Every difference above belongs to the contract sitting on top of that arrangement, and none of them changes the arrangement underneath. The pooling, the pricing before the cost is known, the fact that the many pay so that the few can be met, all of it is identical.

Both are registered, supervised and reported under conditions IRDAI sets, and a good deal of the surrounding machinery is shared: the roles that bring business in, the roles that check what is claimed, the requirement to file before offering, the route a complaint takes. The line drawn above is a teaching line rather than a legal one, and some covers sit naturally on neither side of it. Which line of businessThe kind of cover an insurer is registered to write. Which kinds may sit together under one registration is a question of registration rather than of contract shape. a given insurer may write at all is a registration question, and it belongs to IRDAI, which keeps the current position at irdai.gov.in.

What does somebody reading an insurer do with this on the first morning?

Here is the practical shape of it. An analyst, a lender assessing an insurer as a counterparty, or an investor reading a set of published statements for the first time all do the same thing before reading a single ratio: establish which of the two kinds of cover produced the figures in front of them. Not as a formality. As the step that decides what every number below it means.

The first question is never how good is this ratio, it is what quantity is underneath it, and the answer to that comes from the contract rather than from the statement. Long contracts mean premium received and premium earned are far apart, mean the sum being held dwarfs any single year's premium, and mean this year's result is mostly the consequence of decisions taken well before it. Stated period contracts mean the opposite on all three counts.

The same instinct works one level up. Somebody reading Suvarna Commercial Bank Limited, a lender, would start by asking what the biggest liability on it actually is and when it can be called. Reading an insurer, the equivalent first question is what the policyholder funds are owed against, and over what stretch of time. Different institutions, one habit: find out what the largest number in the accounts is a promise about before treating it as a resource.