## General Insurance – Indemnity

Posted by Prashant Shah on December 8, 2013

This principle sets the rule according to which insurance companies undertake to compensate the insured upon fulfillment of all the stipulations that are agreed upon in the insurance contract. The insurer charges a small amount as premium for undertaking the liability to cover the risk and in return promises to pay the value of the insurance policy or the amount of loss whichever is lower.

The principle of Indemnity ensures that the insurer is liable to pay up to the amount of loss and not more than that. In other words it implies that the insured should not derive any unwarranted benefit from a loss.

Normally the principle of indemnity applies to property and liability insurance contracts and it promises that the insured be restored to the same financial position that existed prior to the occurrence of loss.

Whenever the insurance company indemnifies the insurer for the full value of the insurance policy (when the asset is completely damaged) the insurer takes possession of the damaged asset to realize the salvage value.

**Example –**

Mr. A had insured his car for Rs. 5 lakhs. The car met with an accident and was damaged. The loss suffered was valued at Rs.1 lakh. As per the principle of indemnity the compensation to be paid will be based on the amount of loss, i.e. Rs. 1 lakh. In case the compensation exceeds Rs. 1 lakh, Mr. A stands to gain from the loss.

**Even though the property is fully covered, all covered losses are not actually paid in full amount of loss since it would contravene the provisions and implications of the principle of indemnity.**

As per certain provisions in force the amount of compensation paid can be less than the loss suffered. They are:

**Actual Cash Value (ACV)**

The actual amount of payment to be made by the insurer for the loss is based on ACV of the property, which is insured. Usually ACV is determined using the following methods:

**Replacement cost less depreciation**

In this method ACV is the written down value of the property after taking into account the depreciation and inflation in the value of the property over a period of time.

Thus actual cash value = (replacement cost – depreciation)

**Example –**

Suppose a Machinery is purchased by A five years ago at a cost of Rs. 10 lakhs. The cumulative depreciation on the machine for the five years (@ 10% Straight Line Method) = Rs. 5 lakhs

Replacement cost = Rs. 10 lakhs

Hence ACV = Rs. (10 – 5) lakhs = Rs. 5 lakhs

*Continued….*

## Kanti said

Dear prashant sir,

plz help me on this question

a bunglow was constructed at a cost of rs 2crore in 2006 and a further rs1crore was spent over on furnishing in 2008.the bunglow is valued at rs12 crore in 2012.the costs of construction and furnishing have escalated rate 10% and 15% respectively over the period.the owner wants to totally obsolve himself of any expences,in case bunglow is razed down due to some peril.at what value would you advise the owner to insure the property?

Regards

## Kanti said

a policy holder having a 20year endowment policy and paying an annual premium of rs 26147 has s.a rs 10lakh.he has paid 15 premiums and has rs 825000 towards declared bonus on this policy.he has in the meanwhile obtained enough life cover and accumulated wealth.he doesnot wish to continue in the policy.he had the option to make policy paid up or surrender the same at a factor of 75% of paid up value,what return he should earn on the surrender value to offset the paid up value?

## Kanti said

4.an executive aged 50 has current savings of rs 80lakh and rs 1.2cr life cover on sum assured rs 20 lakh a 20 years money back. And rs 20 lakh,rs 30 lakh and rs 50 lakh on three term policies.all are due to near his age of 60.his liabilities are housing loan rs 12lakh, lump sums of rs 20lakh each for his daughter’s higher studies in 3 years and marriage in 5years.he desires for his wife inflation linked stream of rs 25000 per month for 40 years,you review his life cover by taking inflation 6%p.a.,investment return 8.5%p.a. and advise that_________

a)he needs covers of rs 50 lakh today,he may surrender two term policies of total cover rs 70 lakh.

b)he needs cover rs 1.2cr today he should continue all policies.

c)he needs coved of rs 25lakh today he may surrender all term policies of total cover rs 1cr.

d)he needs covers of rs 40 lakh today,he may surrender two term policies of total cover rs 80 lakh.

## Neelima U said

2.

The paid up value of the policy is Rs 15,75,000/-

( Rs1000000 x 15Y/ 20y) + bonus Rs 825000/-

Surrender value is Rs 11,81,250/- (75% of Rs 15,75,000/- )

Now return on the surrender value to offset the paid up value.

is 5.92% ( nper = 5,PV = 11,81,250 , FV= 15,75,000)

## Neelima U said

4.

Amount required :

Loan Rs 12 Lakhs

Education Rs 16.79 lakh (PV of Rs 20 Lakhs for 3 yrs)

Marriage Rs 14.95 lakh (PV of Rs 20 Lakhs for 5 yrs)

Annuity Rs 77.97 lakh (PV of Rs 25000 p.m for 40 yrs)

Total 1.21 cr cover is required .so option b can be considered

Another point is this case is term policies can not be surrendered or has no SV so 3 other options can not be considered .

## Kanti said

a client’s 20 year money back policy of sum assured rs 2 lakh has annual premium of rs 13672, Policy pays back 20% of s.a after each of first three 5-years survival periods and another 40% of s.a on surviving full term. The client has received the third money back. You estimate the gross returns presently in the policy considering reversionary bonus of rs 50 per thousands s.a. you compare the cost benifit if the client pays all premiums and survives the policy and also gets rs 150 per thousand s.a as loyalty bonus. you conclude that _________.

a)the overall return improves marginally by 1.15% p.a

b)the additional in flow on 5 future premiums would amount to over 19% p.a returns

c) the additional in flow on 5 future premiums would amount to nearly 30% p.a returns

d) the additional in flow on 5 future premiums less opportunity cost would amount to nearly 12% p.a

## Neelima U said

Hi Kanthi !

I tried to solve your questions & got the following

1.

The escalated cost of bungalow as on 2012 @ 10% is Rs 3.54 crores (over 6 years period)

The escalated cost of bungalow as on 2012 @ 15% is Rs 1.75 Crores (over 4 years period)

so the cost to be considered for insurance is Rs 5.29 Crores

## kanti said

thank u so much nilimaji…i have doubt on the sum”an executive aged…”why we not consider the saving factor??

## kanti said

now plz help me to solve more three questions….

1..a client’s 20 year money back policy of sum assured rs 2 lakh has annual premium of rs 13672, Policy pays back 20% of s.a after each of first three 5-years survival periods and another 40% of s.a on surviving full term. The client has received the third money back. You estimate the gross returns presently in the policy considering reversionary bonus of rs 50 per thousands s.a. you compare the cost benifit if the client pays all premiums and survives the policy and also gets rs 150 per thousand s.a as loyalty bonus. you conclude that _________.

a)the overall return improves marginally by 1.15% p.a

b)the additional in flow on 5 future premiums would amount to over 19% p.a returns

c) the additional in flow on 5 future premiums would amount to nearly 30% p.a returns

d) the additional in flow on 5 future premiums less opportunity cost would amount to nearly 12% p.a

2..an industrialist started a project on 1st nov 2009 with own capital of rs 1crore.He arranged a project of rs 1.5crore by a back on 1st july 2009 at a rate of 12%p.a. the terms of finance were quarterly invested.only payments up to six quarter and the repayment of premium in three equal installments from the end of seven quarter along with interest on the loan outstanding.he infuced fresh own funds towards working capital of rs 20 lakh on 7th december 2009 and rs 30 lakh on 4th november 2010.the project completed with a profit of rs 4.5crore on 6th september 2012.find the return generated by the project…

a)22.59%p.a.

b)30.16%p.a.

c)30.57%p.a.

d)32.37%p.a.

regards…

## kanti said

3..21.a company in the business of warehousing.in 2012,insured its warehouse premises also calamity for a value of rs 1.65cr towards liability coverage,separate insurance towards clients for rs 15cr each were taken to cover the goods kept at any time.the company has cover of rs 10cr also.the warehouse was completely destroyed in fire.the registered amount of rs 30cr.what insurance can be setteled in the company’s claim?

a)rs 1.65 cr to the company and rs 30cr towards liablity to clients.

b) nil to the company and rs 26.65cr towards liablity to clients.

c) rs 1.65 cr to the company and rs 17.5cr towards liablity to clients.

d) rs 1.65cr to the company and rs 25cr towards liability to clients.

## manisha said

hi prashant sir

pls provide me solution of these two questions . i’m also facing problem in these questions

1..a client’s 20 year money back policy of sum assured rs 2 lakh has annual premium of rs 13672, Policy pays back 20% of s.a after each of first three 5-years survival periods and another 40% of s.a on surviving full term. The client has received the third money back. You estimate the gross returns presently in the policy considering reversionary bonus of rs 50 per thousands s.a. you compare the cost benifit if the client pays all premiums and survives the policy and also gets rs 150 per thousand s.a as loyalty bonus. you conclude that _________.

a)the overall return improves marginally by 1.15% p.a

b)the additional in flow on 5 future premiums would amount to over 19% p.a returns

c) the additional in flow on 5 future premiums would amount to nearly 30% p.a returns

d) the additional in flow on 5 future premiums less opportunity cost would amount to nearly 12% p.a

2..an industrialist started a project on 1st nov 2009 with own capital of rs 1crore.He arranged a project of rs 1.5crore by a back on 1st july 2009 at a rate of 12%p.a. the terms of finance were quarterly invested.only payments up to six quarter and the repayment of premium in three equal installments from the end of seven quarter along with interest on the loan outstanding.he infuced fresh own funds towards working capital of rs 20 lakh on 7th december 2009 and rs 30 lakh on 4th november 2010.the project completed with a profit of rs 4.5crore on 6th september 2012.find the return generated by the project…

a)22.59%p.a.

b)30.16%p.a.

c)30.57%p.a.

d)32.37%p.a.

regards…

manisha

## akash singhal said

answer for the first question is given on the main page.

## vrinda pal said

hello

i cleared my module of insurance on 26 march 2015 . but the paper was really difficult . practical portion was tuff . theory actually helped me clearing . the 7 questions posted by prashant sir all came . rather some questions twice of same type .

thanks to prashant sir and everyone who posted .

## anamikajoshi said

Hello prashant sir,

I am going to apper for my insurance module next week and i am having trouble wIth the practicle questions . Plz help me

## Trimurthy said

Dear Prashant sir,

I was completed my insurance planing module with C grade!

Questions on this site are very important even they ask some questions Truly same on this site.

Thank you sir..!

## Prashant Shah said

Hi,

Congratulation. Please share some of the questions which were there in your exam.

Regards

Prashant.

## Surya said

what is the answers to these questions??

A family spends 35000 pm. There is a loan outstanding of 42 lakhs. The client’s son wants to study abroad after 5 years and 50 lakhs is the cost against which he has a saving of 27 lakhs. Find Inflation adjusted life cover for replacing the client, for 5 years of family expense & such life expenses @ 40% for souse’s 30 years survival. Inflation is 5.5% and Return is 9.5%

109 Lakhs

101 Lakhs

106 Lakhs

91 Lakhs

A client has a cash asset of 70 Lakhs, a housing loan of 52 lakhs. 6 years hence wants 1 cr to set up child business and 10 years hence wants 50 Lakh for daughter’s marriage. What is the life cover required? Inflation adjusted monthly expense 50000 now for his family & that of the spouse 35 years survival continuing after 10 years. Inflation is 7% & investment rate is 11%

220 Lakh

299 Lakh

144 Lakh

162 Lakh

## Surya said

Sir please help wme with these questions??

A family spends 35000 pm. There is a loan outstanding of 42 lakhs. The client’s son wants to study abroad after 5 years and 50 lakhs is the cost against which he has a saving of 27 lakhs. Find Inflation adjusted life cover for replacing the client, for 5 years of family expense & such life expenses @ 40% for souse’s 30 years survival. Inflation is 5.5% and Return is 9.5%

109 Lakhs

101 Lakhs

106 Lakhs

91 Lakhs

A client has a cash asset of 70 Lakhs, a housing loan of 52 lakhs. 6 years hence wants 1 cr to set up child business and 10 years hence wants 50 Lakh for daughter’s marriage. What is the life cover required? Inflation adjusted monthly expense 50000 now for his family & that of the spouse 35 years survival continuing after 10 years. Inflation is 7% & investment rate is 11%

220 Lakh

299 Lakh

144 Lakh

162 Lakh