Insurance: Features, Working & Issues Explained for LIC AAO

Published on 12 September 2025 by
Insurance Features & Working

Insurance Features and Working: Insurance plays a very important role in India’s financial system, as it provides protection against risk and uncertainty. For a developing country like India, insurance not only safeguards individuals and families but also supports economic stability by mobilizing long-term savings. For LIC AAO aspirants, understanding the concept, features, and working of insurance is essential because it forms the core of their professional responsibilities.

What is Insurance?

Insurance is a legal contract between two parties—the insurer and the insured. The insurer promises to compensate the insured for a loss, damage, or death in exchange for a premium. In simple words, it is a way to transfer financial risk from an individual or business to an insurance company. By paying a small premium, a person gains financial protection against uncertain events.

History of Insurance in India

The history of insurance in India dates back to the early 19th century. The first life insurance company in India was the Oriental Life Insurance Company established in 1818 in Calcutta. However, the industry was largely unregulated until the Life Insurance Corporation of India (LIC) was formed in 1956 by merging 245 private insurers. This was a turning point as LIC became the sole provider of life insurance for decades. In 2000, the sector was liberalized with the establishment of the Insurance Regulatory and Development Authority of India (IRDAI), allowing private companies to enter the market. Today, both public and private insurers operate in India.

How Does Insurance Work in India?

The working of insurance in India is based on the principle of “pooling of risk.” A large number of people pay premiums to the insurer, and this pooled money is used to compensate those who face a loss. The basic steps are:

  1. Proposal – The customer fills out a proposal form giving details of risk (like age, health, or business details).
  2. Underwriting – The insurer evaluates the risk and decides whether to provide coverage and at what premium.
  3. Policy Issuance – Once accepted, the insurance contract (policy) is issued.
  4. Premium Payment – The insured pays regular premiums as per the contract.
  5. Claim Settlement – In case of loss, the insured files a claim, and the insurer verifies and settles it.

This process ensures financial security for policyholders while maintaining sustainability for insurance companies.

Popular Insurance Companies in India

These companies offer a wide range of life, health, and general insurance products to customers. Some of the major insurance companies in India are:

  • Life Insurance Corporation of India (LIC) – The largest and oldest life insurer.
  • General Insurance Corporation of India (GIC Re) – The only reinsurance company in India.
  • ICICI Prudential Life Insurance
  • HDFC Life Insurance
  • SBI Life Insurance
  • New India Assurance Company (general insurance)
  • United India Insurance (general insurance)

Features of Insurance in India

Insurance in India not only provides financial security but also promotes long-term savings and investments. Many life insurance policies combine protection with wealth creation, making them popular among families. Additionally, tax benefits on premiums further encourage people to buy insurance as part of their financial planning.

  1. Risk Coverage – Provides protection against financial loss due to death, accident, illness, or damage.
  2. Premium-Based Contract – The insured pays a premium, which is the cost of transferring risk.
  3. Legal Contract – Governed by the Insurance Act and regulated by IRDAI.
  4. Pooling of Risk – Many people contribute to a common pool, which helps compensate those facing loss.
  5. Savings and Investment Element – Many life insurance policies also act as long-term savings and investment instruments.
  6. Regulated Industry – All insurance companies must follow IRDAI rules to ensure transparency and customer protection.

Working of Insurance Agencies in India

Insurance agencies play a vital role in distributing policies. Insurance agencies not only sell policies but also help in after-sales services like premium reminders, claim assistance, and policy renewals. The key points are:

  • Agents and Advisors – They act as intermediaries between insurance companies and customers.
  • Banking Channels (Bancassurance) – Banks partner with insurers to sell policies.
  • Online Platforms – Growing digital platforms allow customers to compare and buy policies easily.
  • Corporate Agents and Brokers – These entities provide multiple product options and advisory services.

Other Issues Related to Insurance in India

Despite growth, the insurance sector faces issues like low awareness, mis-selling, and delays in claim settlement. Many people still see insurance only as an investment rather than risk protection. To improve trust, insurers must focus on transparency, better customer service, and wider rural reach.

  1. Low Penetration – Insurance penetration in India is still lower compared to global standards.
  2. Awareness Issues – Many people lack awareness about the importance of insurance.
  3. Frauds and Mis-Selling – Misleading practices by agents sometimes create mistrust.
  4. Rural Reach – Though improving, insurance coverage in rural areas is still limited.
  5. Technological Advancements – The use of digital tools and AI is changing claim settlement and fraud detection.

Why is this Important for LIC AAO Aspirants?

For LIC AAO aspirants, having a strong understanding of insurance is necessary because the job role involves policy servicing, customer handling, and working closely with insurance products. Knowledge of the features, working process, and challenges of the insurance sector helps in both the exam and practical job responsibilities. Since LIC is the largest insurer in India, aspirants are expected to be well-versed in the insurance industry’s basics as well as its advanced nuances.

Key Takeaways

  • Insurance is a financial tool to manage risk and uncertainty.
  • It works on the principle of pooling of risk and premium contribution.
  • LIC has been the backbone of India’s life insurance sector since 1956.
  • The industry is regulated by IRDAI and has both public and private players.
  • Features include risk coverage, savings, legal contracts, and regulated operations.
  • Agencies, banks, and online platforms are the key distribution channels.
  • Awareness, rural penetration, and fraud prevention remain challenges.
  • For LIC AAO aspirants, deep knowledge of insurance is critical for exams and professional duties.

FAQs

Q1. What is the basic meaning of insurance in India?
Insurance in India is a financial contract where the insurer provides risk coverage to the insured in exchange for a premium, ensuring financial security.

Q2. What are the main features of insurance policies?
The main features of insurance include risk coverage, pooling of risk, legal contract, premium-based structure, savings and investment benefits, and tax advantages.

Q3. How does insurance work in India?
Insurance in India works on the principle of pooling risk, where many policyholders pay premiums to create a fund used for claim settlements during uncertain events.

Q4. Why is understanding insurance important for LIC AAO exam?
For LIC AAO aspirants, knowledge of insurance concepts, features, and working is crucial as it forms the foundation of their job role and exam preparation.

Q5. What are the common issues faced by the insurance sector in India?
The insurance sector in India faces challenges such as low awareness, mis-selling, claim settlement delays, rural reach issues, and limited financial literacy.