Which of the following is NOT a contract of indemnity?

A life policy on a person's life

A motor own-damage policy on a car

A cargo policy on goods shipped by sea

A life policy on a person's life

Sunil wants to take a fire policy on his neighbour's house, hoping to gain if it burns. The insurer should refuse because Sunil lacks which essential element?

Insurable interest in the property

A proposer for a health policy knows he has had a serious heart ailment but ticks “no” on the proposal form, and the insurer later finds out. Which principle has he broken, and what may the insurer do?

Utmost good faith; the insurer may avoid the contract

Indemnity; the insurer may recover from a third party

Utmost good faith; the insurer may avoid the contract

Contribution; the insurer may share the loss with others

Proximate cause; the insurer may choose the dominant cause

A factory is covered against fire only. A fire breaks out, and water used by the fire brigade ruins the stock. A separate flood a month later ruins other stock. Which result is correct?

The fire-brigade water loss is payable; the flood loss is not

Both losses are payable, since both involve water

Neither loss is payable, because water is not insured

The fire-brigade water loss is payable; the flood loss is not

The flood loss is payable; the fire-brigade water loss is not

A negligent truck driver wrecks an insured car. The car's insurer pays ₹2,50,000 to its owner and then recovers ₹1,80,000 from the truck owner. How much may the car's insurer keep, and under which principle?

₹2,50,000, under contribution

Nothing, because the owner already holds the claim money

A property policy carries a franchise of ₹10,000, and a separate policy elsewhere carries a deductible of ₹10,000. A loss of ₹30,000 occurs under each. What do the two insurers pay?

₹30,000 under the franchise and ₹20,000 under the deductible

₹10,000 under the franchise and ₹30,000 under the deductible

₹30,000 under the franchise and ₹20,000 under the deductible

Which of the following is NOT a requirement for the principle of contribution to apply?

Both policies must be issued by the same insurer

Both policies must cover the same subject matter

Both policies must be issued by the same insurer

Both policies must cover the same peril

Both policies must be in force at the time of loss

Under Section 64VB of the Insurance Act, 1938, a general insurer may not assume risk unless

a licensed surveyor has inspected the property

a reinsurer has accepted a share of the risk

the proposer has held the policy for one full year

Which of the following losses is generally NOT insurable because it arises from a speculative risk?

A fall in the market price of shares an investor holds

Damage to a shop by an accidental fire

A fall in the market price of shares an investor holds

Death of an earning member of a family

Which pairing of the time at which insurable interest must exist is correct?

Life insurance: at inception; marine insurance: at the time of loss

Life insurance: only at the time of claim; marine insurance: only at the time of proposal

Life insurance: at every renewal; marine insurance: at inception only

Life insurance: at the time of loss; marine insurance: at inception

Life insurance: at inception; marine insurance: at the time of loss

A life policy has lapsed because the premium was unpaid beyond the grace period. Which step normally restores it?

Revival, by paying arrears with interest and, if required, giving fresh proof of health

Endorsement, by writing a new address on it

Subrogation, by suing the person who caused the lapse

Contribution, by asking another insurer to pay the premium

Principles and Vocabulary of Insurance

This chapter is the foundation for the “Insurance and Financial Market Awareness” test that insurance company recruitment exams and some bank exams set as a graduate-level objective paper. The bodies publish no topic list, so the scope here is the stable, widely examined core: what risk is and which risks can be insured; the principles (insurable interest, utmost good faith, indemnity, subrogation, contribution, proximate cause); the working vocabulary (premium, sum assured and sum insured, deductible, no-claim bonus, co-insurance, reinsurance); how an insurance contract is formed and altered; underwriting; and how claims are surveyed and settled. Four worked numericals are included: the average clause, contribution between two insurers, subrogation recovery and no-claim bonus. Product lists, the public-sector insurers and the regulator come in the next two chapters. All rupee amounts in this chapter are illustrations, not current rates.

Risk and what can be insured

Risk is the uncertainty of a loss. Insurance is a contract in which one party, the insurer, agrees in return for a premium to pay the other, the insured or policyholder, if a stated uncertain event happens. Many people pay small premiums into a pool, and the few who suffer loss are paid from it. This works because of the law of large numbers: across many similar exposures, the actual number of losses settles close to the expected number, so the insurer can price the risk.

Kinds of risk
Pair	Meaning	Insurable?
Pure risk	Only loss or no loss: fire, theft, death, accident	Yes, normally
Speculative risk	Loss, gain or no change: gambling, share-price moves, business profit	No
Fundamental risk	Affects a whole society: war, widespread famine, major economic collapse	Generally not, or only with state support
Particular risk	Hits an individual or a few: a house fire, a road accident	Yes

A risk is practically insurable when the loss is fortuitous (not planned by the insured), measurable in money, one of many similar exposures, not so large that it would ruin the insurer, and not against law or public policy. A peril is the cause of loss (fire, flood); a hazard is a condition that raises the chance or size of loss. Physical hazard is a feature of the property (wooden roof, stored chemicals). Moral hazard is dishonesty, such as burning one's own shop to claim. Morale hazard is carelessness because cover exists, such as leaving the shutter unlocked since “the insurer will pay”.

⚠️ Moral and morale are not the same

Moral hazard is dishonest intent (deliberate loss, false claim). Morale hazard is indifference or carelessness, with no wish for the loss. Exam scenarios swap them; decide whether the person is cheating or merely careless.

Insurable interest and utmost good faith

Insurable interest is a financial or legal relationship with the subject matter such that the insured gains by its safety and suffers by its loss. Without it the contract is a wager and is void. A person has interest in his own life without limit; in a spouse, a minor child or a dependant through natural love and dependence; a creditor in the debtor's life to the extent of the debt; an owner, mortgagee or bailee in goods. Timing differs: in life insurance the interest must exist when the policy is taken, and need not exist at death; in marine cover it must exist at the time of loss. For ordinary property cover, the insured must have an interest when the loss occurs.

Utmost good faith (Latin: uberrimae fidei) goes beyond ordinary contracts, where a buyer may stay silent about what the seller does not ask. The proposer knows the facts about his health, property and habits; the insurer cannot easily check them. So the proposer must disclose every material fact truthfully, meaning any fact that would influence a prudent insurer in accepting the risk or fixing the premium. The insurer in turn must not mislead. Concealment or misstatement of a material fact lets the insurer avoid the contract; Section 45 of the Insurance Act, 1938 (as amended in 2015) sets a time limit, generally three years, after which a life insurer cannot call a policy in question; within that period it may do so on grounds such as fraud or misstatement, and must give its grounds in writing.

🧠 Interest and faith in one line

Interest asks “do you stand to lose?”; good faith asks “have you told everything that matters?”. Life: interest at inception. Marine: interest at loss.

Indemnity, average, subrogation and contribution

Indemnity means restoring the insured to the financial position just before the loss, no better. The payment is the actual loss, limited by the sum insured. Property, motor, fire, marine and most health policies are indemnity contracts. Life insurance is not: a life has no measurable money value, so a fixed sum is paid on the event. Fixed-benefit personal accident cover is likewise not indemnity. Because indemnity forbids profit, two corollaries follow: subrogation and contribution.

Average clause (underinsurance). If the sum insured is less than the real value at risk, the insured is treated as his own insurer for the gap, and the claim is cut in proportion: Claim = Loss × Sum insured ÷ Value at risk (not above the sum insured). Example: stock worth ₹10,00,000 is insured for ₹6,00,000; a fire causes a loss of ₹5,00,000. Claim = 5,00,000 × 6,00,000 ÷ 10,00,000 = ₹3,00,000, not ₹5,00,000. Had the stock been insured for its full value, the whole ₹5,00,000 would be paid.

Subrogation. After paying an indemnity claim, the insurer steps into the insured's shoes and may recover from a negligent third party what it paid; the insured cannot keep both the insurance money and damages. The insurer recovers only up to what it paid. Example: a truck owner's negligence wrecks an insured car; the insurer pays ₹2,50,000 and then recovers ₹1,80,000 from the truck owner. The insurer keeps ₹1,80,000, and its net cost is ₹70,000. If the truck owner's insurer had paid ₹4,00,000 instead, the insurer could keep only ₹2,50,000; the rest belongs to the insured, to cover any uninsured loss. Subrogation does not apply to life insurance.

Contribution. When the same property and the same peril are covered by two or more policies (double insurance), the insured may claim from any insurer but may not recover more than the loss; the paying insurer can make the others share, in the usual textbook method, in proportion to their sums insured. Example: loss ₹5,00,000; insurer X has a sum insured of ₹6,00,000, insurer Y ₹4,00,000. X bears 6/10, which is ₹3,00,000, and Y bears 4/10, which is ₹2,00,000. It needs the same subject matter, the same peril, the same insured and policies in force. Contribution is accidental double cover; co-insurance (next section) is deliberate sharing.

⚠️ Do not apply indemnity to a life policy

A life policy pays the agreed sum assured whatever the family's actual financial loss, and the insurer cannot recover it from a person who caused the death. Subrogation and contribution therefore belong to non-life contracts only. Several life policies on one life are all payable in full.

Proximate cause

Proximate cause (causa proxima non remota) asks which cause is the dominant, effective cause of the loss, not the nearest in time. The loss is payable if that cause is an insured peril, and refused if it is an excluded peril or an uninsured one. When several perils act in a chain, trace the chain without a break: an unbroken chain from an insured peril means payable.

Fire policy; fire breaks out and firemen's water ruins stock. The water damage flows from the fire, so the whole loss is payable.
Fire policy; flood water damages stock with no fire. The dominant cause, flood, is not an insured peril, so the claim fails.
Deliberate act of the insured. A loss caused by the insured's own wilful act is not paid.

The six principles at a glance
Principle	Core idea	Applies to
Insurable interest	Must stand to lose	All insurance
Utmost good faith	Disclose material facts	All insurance
Indemnity	Compensate actual loss, no profit	Non-life
Subrogation	Insurer recovers from wrongdoer	Non-life
Contribution	Insurers share double cover	Non-life
Proximate cause	Dominant cause decides	All insurance

Premium and the vocabulary of cover

The premium is the price of cover, set from the likelihood and size of loss (the pure premium), plus expenses, commission and a margin. In general insurance, Section 64VB of the Insurance Act, 1938 bars an insurer from assuming risk unless the premium is received in advance or its payment is guaranteed in the prescribed manner: “no premium, no cover”. Sum assured is the amount a life policy promises; sum insured is the maximum an insurer pays under a non-life policy (and it is a limit, not a promise to pay that amount).

Working terms
Term	Meaning and a point to remember
Deductible / excess	A fixed amount of each loss the insured bears first; the insurer pays the rest. Loss ₹70,000 with deductible ₹10,000 gives ₹60,000.
Franchise	A threshold: below it nothing is paid; above it the whole loss is paid. Franchise ₹10,000: loss ₹8,000 pays nil, loss ₹30,000 pays ₹30,000.
No-claim bonus (NCB)	A discount on renewal for a claim-free year, best known in motor own-damage cover. Own-damage premium ₹8,000 with a stated NCB of 25% gives ₹6,000. It lapses or falls if a claim is made.
Co-insurance	Two or more insurers deliberately share one risk, each with a stated percentage, usually through a leader, for large risks. In health cover the same idea of sharing appears as co-payment, a percentage of every claim paid by the insured.
Reinsurance	The insurer (cedant) insures part of its own risk with a reinsurer. The policyholder has no contract with the reinsurer, and the insurer stays fully liable to the policyholder.

Reinsurance may be facultative (each risk offered and accepted separately) or by treaty (a standing agreement covering a class automatically). It may be proportional, where premium and loss are split in agreed shares, for example a quota share of 30%, or non-proportional, for example excess of loss, where the reinsurer pays only above a retention. Example: with a 30% quota share, a loss of ₹8,00,000 means the reinsurer pays ₹2,40,000. With excess of loss above a retention of ₹5,00,000, a loss of ₹12,00,000 means the insurer pays ₹5,00,000 and the reinsurer ₹7,00,000. A reinsurer passing risk on to others is called retrocession.

⚠️ Deductible versus franchise

Both leave small losses with the insured. A deductible is subtracted from every claim; a franchise vanishes once the loss crosses it. Sum assured is a life term; sum insured a non-life term.

The insurance contract and underwriting

Insurance is a contract under the general law of contracts: offer and acceptance, consideration (the premium), free consent, capacity and a lawful object. The proposal form is the applicant's offer and carries the facts he declares; the insurer's acceptance, after underwriting, is followed by the policy, the formal document of schedule, terms, conditions and exclusions. A cover note is a short-term document issued before the policy is ready, giving temporary cover. An endorsement is a written change to a policy during its life, such as a new address or a changed sum insured. Insurance wording is drafted by the insurer, so an ambiguity is read against it (contra proferentem).

A policy lapses when the premium is not paid by the due date and the end of the grace period allowed; cover then stops (in a life policy, subject to any paid-up or surrender value). Revival restores a lapsed policy within the period allowed, usually on payment of the arrears with interest and, where the insurer requires it, fresh evidence of good health. Life policies and their grace and revival rules are taken up in the next chapter.

Underwriting is the insurer's process of selecting and classifying risks and fixing their terms and price. A life underwriter weighs age, health, family history, occupation and habits; a property underwriter weighs construction, use, location and protection. Risks that are standard get the normal premium; substandard risks get a loading (extra premium), a restriction, or a refusal. Good underwriting guards against adverse selection, the tendency of people who know they face high risk to buy cover most eagerly, and it is where moral hazard is screened. The actuary prices; the underwriter decides.

Claims and settlement

A claim follows a sequence: intimation to the insurer without delay, documents (claim form, proof of loss, identity and policy papers), verification, assessment of the amount payable, then settlement or repudiation with written reasons. In a death claim the insurer checks the cause, the age and the proposal statements, and looks closely at early claims, since non-disclosure shows up there. A claim settlement ratio is claims settled divided by claims received: if 2,000 claims were received and 1,840 settled, the ratio is 1,840 ÷ 2,000 = 92%.

In general insurance a surveyor is a licensed professional who inspects the loss and reports its cause, extent and amount, so that the insurer can apply the policy terms, the average clause and the deductible. A loss assessor is a licensed professional who may be engaged to help assess and present a claim. For losses above a statutory threshold the insurer needs a licensed surveyor's report; the threshold is not tested here. A disappointed policyholder complains first to the insurer's grievance channel, then may approach the Insurance Ombudsman, a free, informal forum for individual policyholders; the monetary limit is amended from time to time and is not taught here.

💡 Why the surveyor matters

Think of the surveyor as the independent referee between the claimant and the insurer: the report fixes the cause (proximate cause), the value at risk (average clause) and the loss, so the arithmetic in this chapter is applied to proved figures.

Key takeaways

Insurance pools many small premiums to pay the few large losses; only fortuitous, measurable, pure risks of many similar exposures are insurable. Speculative risks are not.
Interest must exist (life: at inception; marine: at loss) and material facts must be disclosed; moral hazard is dishonesty, morale hazard is carelessness.
Indemnity applies to non-life cover, not life: pay the actual loss up to the sum insured. Underinsurance cuts the claim: loss × sum insured ÷ value at risk.
Subrogation lets the insurer recover from the wrongdoer up to what it paid; contribution makes insurers share double cover in proportion to sums insured.
Proximate cause is the dominant cause; deductible is taken off every claim, franchise vanishes above its limit, no-claim bonus discounts the renewal premium, and reinsurance spreads the insurer's own risk without touching the policyholder's contract.
Proposal, cover note, policy and endorsement mark the contract's life; Section 64VB means no general-insurance risk without premium in advance; surveyors assess non-life losses before settlement.

Practice questions (18)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Which of the following is NOT a contract of indemnity?
1. A fire policy on a warehouse
2. A motor own-damage policy on a car
3. A cargo policy on goods shipped by sea
4. A life policy on a person's life
Show answer
Answer: D — A life policy on a person's life
A life policy pays a fixed sum assured because a life cannot be valued in money, so it is not an indemnity contract. Fire, motor own-damage and cargo policies pay the actual loss up to the sum insured and are indemnity contracts.
Sunil wants to take a fire policy on his neighbour's house, hoping to gain if it burns. The insurer should refuse because Sunil lacks which essential element?
1. Insurable interest in the property
2. A minimum sum insured
3. A licensed surveyor's report
4. A cover note from the insurer
Show answer
Answer: A — Insurable interest in the property
Sunil stands to lose nothing if the neighbour's house burns, so the contract would be a wager. Insurable interest is the missing element. A surveyor reports on a loss only after it happens, so it cannot be what blocks the policy.
A proposer for a health policy knows he has had a serious heart ailment but ticks “no” on the proposal form, and the insurer later finds out. Which principle has he broken, and what may the insurer do?
1. Indemnity; the insurer may recover from a third party
2. Utmost good faith; the insurer may avoid the contract
3. Contribution; the insurer may share the loss with others
4. Proximate cause; the insurer may choose the dominant cause
Show answer
Answer: B — Utmost good faith; the insurer may avoid the contract
Hiding a material fact breaches utmost good faith, so the insurer may avoid the contract. Indemnity is wrong because that principle governs the amount paid on a loss, not what is said on the form.
A factory is covered against fire only. A fire breaks out, and water used by the fire brigade ruins the stock. A separate flood a month later ruins other stock. Which result is correct?
1. Both losses are payable, since both involve water
2. Neither loss is payable, because water is not insured
3. The fire-brigade water loss is payable; the flood loss is not
4. The flood loss is payable; the fire-brigade water loss is not
Show answer
Answer: C — The fire-brigade water loss is payable; the flood loss is not
The dominant cause of the first loss is fire, an insured peril, and the water damage follows unbroken from it. The second loss has flood as its cause, which the policy does not cover. Water as such is not the test; the proximate cause is.
A negligent truck driver wrecks an insured car. The car's insurer pays ₹2,50,000 to its owner and then recovers ₹1,80,000 from the truck owner. How much may the car's insurer keep, and under which principle?
1. ₹2,50,000, under contribution
2. ₹1,80,000, under subrogation
3. ₹70,000, under subrogation
4. Nothing, because the owner already holds the claim money
Show answer
Answer: B — ₹1,80,000, under subrogation
By subrogation the insurer takes over the owner's right against the wrongdoer and keeps what it recovers, up to the ₹2,50,000 it paid, so it keeps all ₹1,80,000. ₹70,000 is its net loss after recovery, not the amount recovered.
Consider these statements about reinsurance.
P: The policyholder can claim directly from the reinsurer.
Q: The original insurer transfers part of its risk to the reinsurer.
R: A reinsurer passing part of its risk to another reinsurer is called retrocession.
S: Reinsurance ends the original insurer's liability to the policyholder.
Which statements are correct?
1. P and Q only
2. P and S only
3. Q and S only
4. Q and R only
Show answer
Answer: D — Q and R only
Q and R are correct. P is wrong because the policyholder has no contract with the reinsurer. S is wrong because the original insurer stays fully liable to the policyholder; reinsurance only protects the insurer.
Match each term (P to S) with its meaning.
P: Endorsement
Q: Cover note
R: Proposal form
S: Lapse
(i) Applicant's written offer with declared facts
(ii) Temporary evidence of cover before the policy issues
(iii) Written change to a policy during its term
(iv) Cover stops for non-payment of premium
1. P-iii, Q-ii, R-i and S-iv
2. P-ii, Q-iii, R-i and S-iv
3. P-iii, Q-i, R-ii and S-iv
4. P-iv, Q-ii, R-i and S-iii
Show answer
Answer: A — P-iii, Q-ii, R-i and S-iv
An endorsement alters a running policy, a cover note is temporary cover, a proposal form is the applicant's offer, and a lapse follows non-payment. Pairing endorsement with temporary cover and cover note with a mid-term change swaps the two, the usual slip.
The amount that a life insurance policy promises to pay on death or maturity is called the
1. sum insured
2. deductible
3. sum assured
4. retention
Show answer
Answer: C — sum assured
Sum assured is the life-insurance term for the promised amount. Sum insured is the non-life term and is a maximum limit on the insurer's payment, which is why it is the tempting but wrong choice here.
A property policy carries a franchise of ₹10,000, and a separate policy elsewhere carries a deductible of ₹10,000. A loss of ₹30,000 occurs under each. What do the two insurers pay?
1. ₹20,000 under both
2. ₹30,000 under both
3. ₹10,000 under the franchise and ₹30,000 under the deductible
4. ₹30,000 under the franchise and ₹20,000 under the deductible
Show answer
Answer: D — ₹30,000 under the franchise and ₹20,000 under the deductible
The loss of ₹30,000 is above the franchise, so the whole ₹30,000 is paid. A deductible is taken off every claim, leaving ₹30,000 − ₹10,000 = ₹20,000. Treating both alike as ₹20,000 confuses the two terms.
Which of the following is NOT a requirement for the principle of contribution to apply?
1. Both policies must cover the same subject matter
2. Both policies must be issued by the same insurer
3. Both policies must cover the same peril
4. Both policies must be in force at the time of loss
Show answer
Answer: B — Both policies must be issued by the same insurer
Contribution needs two or more different insurers sharing double cover; if one insurer issued both, there is nobody to share with. The other three conditions (same subject matter, same peril, both in force) are genuine requirements.
Under Section 64VB of the Insurance Act, 1938, a general insurer may not assume risk unless
1. the premium is received in advance or its payment is guaranteed in the prescribed manner
2. a licensed surveyor has inspected the property
3. a reinsurer has accepted a share of the risk
4. the proposer has held the policy for one full year
Show answer
Answer: A — the premium is received in advance or its payment is guaranteed in the prescribed manner
Section 64VB is the “no premium, no risk” rule for general insurance. A surveyor is involved only at claim stage and reinsurance is the insurer's own arrangement, so neither is a precondition for assuming risk.
A shopkeeper leaves his shutter unlocked at night, thinking “the insurer will pay anyway if anything is stolen”. Which type of hazard does this show?
1. Physical hazard
2. Moral hazard
3. Morale hazard
4. Fundamental risk
Show answer
Answer: C — Morale hazard
Carelessness because insurance exists is morale hazard. It is not moral hazard, which needs dishonest intent such as arranging the theft; here there is no wish for the loss, only indifference.
Which of the following losses is generally NOT insurable because it arises from a speculative risk?
1. Damage to a shop by an accidental fire
2. A fall in the market price of shares an investor holds
3. Theft of goods from a godown
4. Death of an earning member of a family
Show answer
Answer: B — A fall in the market price of shares an investor holds
A share price can rise, fall or stay the same, so the risk is speculative and not insurable. Accidental fire, theft and death are pure risks, where the only outcomes are loss or no loss.
Which pairing of the time at which insurable interest must exist is correct?
1. Life insurance: only at the time of claim; marine insurance: only at the time of proposal
2. Life insurance: at every renewal; marine insurance: at inception only
3. Life insurance: at the time of loss; marine insurance: at inception
4. Life insurance: at inception; marine insurance: at the time of loss
Show answer
Answer: D — Life insurance: at inception; marine insurance: at the time of loss
In life insurance the interest must exist when the policy is taken and need not survive to death; in marine insurance it must exist at the time of loss. The pairing that reverses them is the common trap.
A life policy has lapsed because the premium was unpaid beyond the grace period. Which step normally restores it?
1. Revival, by paying arrears with interest and, if required, giving fresh proof of health
2. Endorsement, by writing a new address on it
3. Subrogation, by suing the person who caused the lapse
4. Contribution, by asking another insurer to pay the premium
Show answer
Answer: A — Revival, by paying arrears with interest and, if required, giving fresh proof of health
Revival restores a lapsed policy within the allowed period, normally on payment of arrears with interest and sometimes fresh health evidence. An endorsement only amends the terms of a policy that is still running.
Stock worth ₹12,00,000 is insured for ₹9,00,000 under a policy with an average clause. A fire causes a loss of ₹6,00,000. What is the claim payable?
1. ₹6,00,000
2. ₹4,50,000
3. ₹9,00,000
4. ₹3,00,000
Show answer
Answer: B — ₹4,50,000
Claim = 6,00,000 × 9,00,000 ÷ 12,00,000 = ₹4,50,000. Paying the full ₹6,00,000 ignores underinsurance, and ₹9,00,000 is the sum insured, a ceiling, not what is payable for a smaller loss.
The same shop is insured against fire with insurer X for ₹6,00,000 and with insurer Y for ₹3,00,000. A fire causes a loss of ₹4,50,000. Both policies are in force and cover the same peril. Contribution is made in proportion to sums insured. What does X finally bear?
1. ₹3,00,000
2. ₹2,25,000
3. ₹1,50,000
4. ₹4,50,000
Show answer
Answer: A — ₹3,00,000
Sums insured are in the ratio 6:3, so X bears 2/3 of ₹4,50,000, which is ₹3,00,000, and Y bears ₹1,50,000. Splitting equally gives ₹2,25,000 each, which ignores the proportion to sums insured.
A motor policy's own-damage premium is ₹8,000. After a claim-free year the insurer's stated no-claim bonus for renewal is 25%. What own-damage premium is payable at renewal on that basis?
1. ₹2,000
2. ₹6,000
3. ₹10,000
4. ₹7,500
Show answer
Answer: B — ₹6,000
The bonus is 25% of ₹8,000 = ₹2,000, so the payable premium is ₹8,000 − ₹2,000 = ₹6,000. ₹2,000 is the discount itself, not the premium left to pay.