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How Does Insurance Work?

So, you’ve recently purchased an insurance policy or are looking to purchase one. Smart choice!
That being said, it is not enough to just buy an insurance policy, you should also have a grasp on how does insurance work? You may have a variety of questions about insurance. This article will attempt to answer each of the following questions about insurance:


  • Who are the participants to an insurance contract?
  • What are the components of an insurance contract?
  • How does insurance work?
  • Who regulates the insurance industry?

Who are the participants to an insurance contract?

An insurance contract generally has 2 participants, the insurer and the insured.
Insurer: The insurer agrees to indemnify the insured against losses incurred by him. In exchange for this protection, the insured provides a fee to the insured. This fee is commonly referred to as an insurance premium.
Insured: The insured is protected by the insurer, in the event of an unforeseen incident.

What are the components of an insurance contract?

The insured and the insurer need to adhere to the components of an insurance contract. It is these components that decide the scope of the insurance contract. One must stringently go through these components with a keen eye. Some of the general components of an insurance contract include:

  • Definitions
  • Conditions
  • Exclusions
  • Payment terms
  • Insuring agreement
  • Other conditions

How does insurance work?

Understanding how insurance works is quite simple actually. Let us illustrate this through a simple example.

Example 1: Let us assume, Mr. Ricky bought a car insurance policy for his brand new Honda City. A few weeks later, his car got stolen. Mr. Ricky intimates the insurance company, files an FIR, and requests a claim. The insurance company now does its due diligence and furnishes Mr. Ricky with his claim amount.


Example 2: Let us state, Mr. Hari has purchased a ULIP life insurance policy from an insurance company on his 50th birthday. The insurance company invests his premium in equity/debt markets. Upon policy maturity, the insurance company will return the invested premium to Mr. Hari, along with any appreciation of capital.

Who regulates the insurance industry?

The insurance sector cannot be a completely self-governing industry. It needs a strong regulator that looks after the overall benefit of the industry and all its players. Most importantly, the regulator looks after the interests of the policyholders.

The insurance industry in India is regulated by the IRDA. Policyholders can approach the IRDA anytime they feel they have been wronged by an insurance company. It would then be the IRDA’s job to investigate and look into the matter.

Throughout the course of this article, we have understood the participants, components, regulators, and other important aspects of how insurance works. We trust that you will use this information to make a more prudent insurance decision in the future.

Are you looking for a new insurance policy or a policy renewal? Reach out to us and let us assist you.