tybfm_ insurance 1

CA.CS.NAVEEN.ROHATGI SYBFM- INSURANCE

Insurance (Fund) ManagementUnit IIntroductionThe insurance mechanism

Fundamental principles of insurance Importance of life and general insurance Growth of evolution of business in India with specific reference to post

liberalization

Unit IIRisk Management

Risk identification Sources of Risk “Insurance policy” as a financial product

Unit IIIOrganising an insurance business

Types of organizations Role of IRDA Procedure for setting up an insurance business

Unit IVOperational aspects of Insurance business

Marketing insurance products including e-marketing Acturial role

UNIT 1 : INTRODUCTION

MEANING OF INSURANCE: facilitates reimbursement during crisis situations, insurance means promise of compensation for any potential future losses.

There are different insurance companies that offer wide range of insurance options and an insurance purchaser can select as per own convenience and preference.

Several insurances provide comprehensive coverage with affordable premiums. Premiums are periodical payment and different insurers offer diverse premium options.

The periodical insurance premiums are calculated according to the total insurance amount. The main meaning of insurance is used as effective tools of risk management.

1


Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company.

A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool.

Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type.

Insurance is a contract between two parties whereby one party (insurer) agrees to undertake the risk of another (insured) in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.

The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'.

Concept of Insurance / How Insurance WorksThe concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

2


Lets take some examples to understand how insurance actually works:

Example 1 Example 2

SUPPOSE (General) Houses in a village = 1000 Value of 1 House = Rs.

40,000/- Houses burning in a yr = 5 Total annual loss due to fire

= Rs. 2,00,000/-

Contribution of each house owner = Rs. 300/-

SUPPOSE (Life) Number of Persons = 5000 Age and Physical condition =

50 years & Healthy Number of persons dying in a

yr = 50 Economic value of loss

suffered by family of each dying person = Rs. 1,00,000/-

Total annual loss due to deaths = Rs. 50,00,000/-

Contribution per person = Rs. 1,200/-

UNDERLYING ASSUMPTIONAll 1000 house owners are exposed to a common risk, i.e. fire

UNDERLYING ASSUMPTIONAll 5000 persons are exposed to common risk, i.e. death

PROCEDUREAll owners contribute Rs. 300/- each as premium to the pool of funds

Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses * Rs. 300)

5 houses get burnt during the

PROCEDUREEverybody contributes Rs. 1200/- each as premium to the pool of funds

Total value of the fund = Rs. 60,00,000 (i.e. 5000 persons * Rs. 1,200)

50 persons die in a year on an

3


year

Insurance company pays Rs. 40,000/- out of the pool to all 5 house owners whose house got burnt

average

Insurance company pays Rs. 1,00,000/- out of the pool to the family members of all 50 persons dying in a year

EFFECT OF INSURANCERisk of 5 house owners is spread over 1000 house owners in the village, thus reducing the burden on any one of the owners.

EFFECT OF INSURANCERisk of 50 persons is spread over 5000 people, thus reducing the burden on any one person.

PRINCIPLES OF INSURANCE:

A) Insurable Interest

Insurable interest means that the person opting for insurance must have pecuniary interest in the property he is going to get insured and will suffer financial loss on the occurrence of the insured event. This is one of the essential requirements of any insurance contract. Therefore, a person can go for insurance of only those properties where he stands to benefit by the safety of the property, and will suffer loss, damage, injury if any harm takes place to such property. Thus, if you want to insure Taj Mahal or Red Fort, you will not be allowed to do so as you do not have any pecuniary interest in these properties.

B) Principle of utmost Good faith

4


Like in other contracts, the insurance contract must be based on good faith. If the insurance contract is obtained by way of fraud or misrepresentation it is void.

C) Material Facts Disclosure

In the Insurance contract, the proposer is required to disclose to the insurer all the material facts in respect of the proposed insurance. This duty of disclosing the material facts not only applies to the material facts which are known to him but also extends to material facts which he is supposed to know.

Thus, in case of Life Insurance the proposer must disclose the true age and details of the existing illnesses / diseases. Similarly, in case of the insurance of a building against fire, the proposer must disclose the details of the goods stored if such goods are of hazardous nature.

(D) Principle of Indemnity

The insurance contract should always be a contract of indemnity only and nothing more. According to this principle, the insurance contract should be such that in case of loss due to the eventialities mentioned in the contract, the insured should be neither better off nor worse off after receiving the insured amount. The main object of this principle is to ensure that the insured is not able to use this contract for speculation or gambling.

LEGAL ASPECTS OF INSURANCE CONTRACTS

Contract of indemnity

Indemnity means that the insured person is placed, financially, in the same position, as he was before the loss..

Implied conditions of a contract

Good faith & Utmost good faith

5


Both the parties to a contract are expected to observe good faith. However, the good faith assumes utmost importance when Material Facts are concerned and therefore utmost good faith should be observed on matters relating to Material facts.

Insurable Interest

Insurance contracts without insurable interests have no sanction of the law as they amount to speculation. The owner of a property has absolute insurance interest.

Existence of subject matter

Existence of subject matter of insurance is necessary.

Legality of parties to contract

At law, a minor cannot enter into a legal contract. However, so long as the contract is for the benefit of the minor himself, such contract is valid. Contracts entered with person of unsound mind or with a person from alien Country, are illegal.

Proximate cause

A loss could be due to a cause of causes. In the chain reaction, it is the dominant cause, which would be the proximate cause to be considered for the purpose of a claim. It is always the duty of the insured to prove that the loss arose out of the insured peril, which is proximate.

Consensus Ad Idem (of the same mind)

In Insurance contracts only one party - the proposer knows the details of the risk. He has a duty to disclose particularly, material facts and the same should be understood by the other party to the contract - the insurers. In other words, each party should understand what is proposed for insurance and the same

6


should be covered by the insurance contract. As the insurers issue the contract document, any ambiguity in the contract wording will be read against the insurers as they have drafted the contract.

Express conditions of a contract

These conditions are mainly framed to achieve the principle of indemnity and to ensure that the insured does not make any profit out of the loss.

The express conditions include

Contribution

Contribution condition is a corollary to the Principle of indemnity. If an insured obtains more than one policy covering the same risk, he cannot recover the same loss from more than one source so that he is not benefited by more than ‘Indemnity’. Contribution condition checks that each policy pays only a ratable portion under each separate policy.

Subrogation

Subrogation condition is another corollary to the principle of Indemnity. A loss may occur accidentally or by the action or negligence of third party (not workmen). The property owners have a right to proceed against the offending third party to recover the loss/damage and also under their insurance policy but not under both. If the insured opts to recover the loss under the insurance policy, which is faster and does not involve litigation, he will surrender his rights against the third parties in favour of the Insurers signing a ‘Letter of subrogation’ on an appropriate stamp paper.

7


An exception to this are life insurance polices wherein insured/ beneficiaries can claim under an insurance policy and also proceed againt the offending third party.

Arbitration

When liability under the policy is admitted but the quantum is disputed, the insured cannot rush to a Court of law without first referring the dispute to Arbitration as per ‘Indian Arbitration and reconciliation Act -1996'. In keeping with the provisions of the Act, the insured may appoint an arbitrator to be followed by appointment of another arbitrator by the insurers. They can also appoint a single arbitrator, to represent both of them. If the two separate arbitrators cannot reach an agreement, both the arbitrators can appoint a third arbitrator called umpire. The award of the Arbitrators is binding on both the parties to the dispute and cannot be challenged unless a point of law is involved.

HISTORY OF INSURANCE

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular. 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three

8


decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade

9


and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business. 1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices. In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then. In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973. This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that

10


foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests. In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. Today there are 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 life insurance companies operating in the country. The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides

11


long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country. Life insurance

Meaning:

Life insurance is a contract between a person called insured and the company or "insurer" that is providing the insurance. If he/she dies while the contract is in force, the insurance company pays a specified sum of money free of income tax that is "cash benefits" to the person or persons he name as beneficiaries. It offers a way to replace the loss of income that happens when someone dies (generally the person who produces the majority of income in a family situation). Life insurance is a contract between the policy holder and the insurer, where the insurer agrees to pay a sum of money upon the happening of the insured individual's death or other event, such as terminal illness or critical illness. In return, the policy owner has to pay a stipulated amount called a ‘premium’ at regular intervals or in lump sums. It insures the life of the person buying the Life Insurance Certificate. Once a Life Insurance is sold by a company then the company remains legally responsible to make payment to the beneficiary after the death of the policy holder. There are designs in some countries where bills and death expenses plus catering for after funeral expenses must be included in Policy Premium.

NEED AND IMPORTANCE OF LIFE INSURANCE

Superior to any Other Savings Plan

Unlike any other savings plan, a life insurance policy affords full protection against risk of death. In the event of death of a policyholder, the insurance company makes available the full sum

12


assured to the policyholders’ near and dear ones. In comparison, any other savings plan would amount to the total savings accumulated till date. If the death occurs prematurely, such savings can be much lesser than the sum assured. Evidently, the potential financial loss to the family of the policyholder is sizable.

Encourages and Forces ThriftA savings deposit can easily be withdrawn. The payment of life insurance premiums, however, is considered sacrosanct and is viewed with the same seriousness as the payment of interest on a mortgage. Thus, a life insurance policy in effect brings about compulsory savings.

Easy Settlement and Protection Against CreditorsA life insurance policy is the only financial instrument the proceeds of which can be protected against the claims of a creditor of the assured by effecting a valid assignment of the policy.

Administering the Legacy for BeneficiariesSpeculative or unwises expenses can quickly cause the proceeds to be squandered. Several policies have foreseen this possibility and provide for payments over a period of years or in a combination of installments and lumpsum amounts.

Ready Marketability and Suitability for Quick BorrowingA life insurance policy can, after a certain time period (generally three years), be surrendered for a cash value. The policy is also acceptable as a security for a commercial loan, for example, a student loan. It is particularly advisable for housing loans when an acceptable LIC policy may also cause the lending institution to give loan at lower interest rates.

Disability BenefitsDeath is not the only hazard that is insured; many policies also include disability benefits. Typically, these provide for waiver of

13


future premiums and payment of monthly installments spread over certain time period.

Accidental Death BenefitsMany policies can also provide for an extra sum to be paid (typically equal to the sum assured) if death occurs as a result of accident.

Tax BenefitsLIC premium paid is allowed as deduction from gross total income under sec 80 C.

TYPES OF LIFE INSURANCE POLICIES:Long-term InsuranceLong term insurance is so called because it is meant for a long-term period which may stretch to several years or whole life-time of the insured. Long-term insurance covers all life insurance policies. Insurance against risk to one's life is covered under ordinary life assurance. Ordinary life assurance can be further clasified into following types:

Types of Ordinary Life Assurance

Meaning

1. Whole Life Assurance

In whole life assurance, insurance company collects premium from the insured for whole life or till the time of his retirement and pays claim to the family of the insured only after his death.

2. Endowment Assurance

In case of endowment assurance, the term of policy is defined for a specified period say 15, 20, 25 or 30 years. The insurance company pays the claim to the family of assured in an event of his death within the policy's term or in an event of the assured surviving the policy's term.

3. Assurances for Children

i). Child's Deferred Assurance: Under this policy, claim by insurance company is paid on the option date which is calculated to coincide with the child's eighteenth or twenty first birthday. In case the parent survives till option date, policy may either be continued or payment

14


may be claimed on the same date. However, if the parent dies before the option date, the policy remains continued until the option date without any need for payment of premiums. If the child dies before the option date, the parent receives back all premiums paid to the insurance company.

ii). School fee policy: School fee policy can be availed by effecting an endowment policy, on the life of the parent with the sum assured, payable in installments over the schooling period.

4. Term Assurance The basic feature of term assurance plans is that they provide death risk-cover. Term assurance policies are only for a limited time, claim for which is paid to the family of the assured only when he dies. In case the assured survives the term of policy, no claim is paid to the assured.

5. Annuities A person entering into an annuity contract agrees to pay a specified sum of capital (lump sum or by instalments) to the insurer. The insurer in return promises to pay the insured a series of payments untill insured's death. Generally, life annuity is opted by a person having surplus wealth and wants to use this money after his retirement.

There are two types of annuities, namely:Immediate Annuity: In an immediate annuity, the insured pays a lump sum amount (known as purchase price) and in return the insurer promises to pay him in installments a specified sum on a monthly/quarterly/half-yearly/yearly basis. Deferred Annuity: A deferred annuity can be purchased by paying a single premium or by way of installments. The insured starts receiving annuity payment after a lapse of a selected period (also known as Deferment period).

6. Money Back Policy

Money back policy is a policy opted by people who want periodical payments. A money back policy is generally issued for a particular period, and the sum assured is paid through periodical payments to the insured, spread over this time period. In case of death of the

15


insured within the term of the policy, full sum assured along with bonus accruing on it is payable by the insurance company to the nominee of the deceased.

NOMINATION

Q1. What is nomination? Nomination is a right conferred on the holder of the policy of life insurance on his own life to appoint a person or persons to receive the policy moneys in the event of the policy becoming a claim by death. 2Who is a nominee?The person designated by the policyholder to receive the proceeds of an insurance policy, upon the death of the insured.

3. Who can nominate?Any policyholder, who is a major and the life insured under a policy can make a Nomination. Nomination is not effective in a policy taken on the life of another person.

4. When can nomination be done?Nomination can be done at the inception of the policy itself. All that a policyholder has to do is to provide the details of the nominee in the proposal form. If a nomination was not done at the time of filing the proposal, it can be done at a later date either by an endorsement made at the back of the policy document or by making the endorsement of nomination on a piece of paper pasted on the policy.

5. How can nomination be changed? Subject to the provisions contained in Section 39 of the Insurance Act, 1938, there are no restrictions on the policyholder regarding changing his nomination at any point of time, any number of times. The life-assured is free to change or cancel a nomination and make a fresh nomination any number of times during the currency of the policy. Transfer or assignment of a policy (except when it is made to an insurer in specified cases) automatically cancels a nomination.

16

http://www.inglife.co.in/resources/faqs_nomination.shtml#%23





6. What is successive nomination?Successive nomination means that money should be paid to nominee A; failing him, to nominee B; failing whom, to nominee C, etc. Such a nomination is treated in favour of one individual in the order mentioned and is acceptable in law.

7. What are the details to be provided about the nominee(s)?The following precautions are necessary at the time of filling in the proposal: Mention the Full Name, Address, age, relationship to yourself of the nominee.

Do not write the nomination in favour of wife and children as a class. Give their specific names and particulars existing at that moment.

If the nominee is a minor, appoint a person who is a major as an appointee giving his full name, age, address and relationship to the nominee. Signatures of appointee as token of consent are necessary on the proposal form.

SURRENDER VALUE OF INSURANCE

Surrender value is the sum of money an insurance company will pay to the policyholder or annuity holder in the event of his policy being voluntarily terminated before its maturity or the insured event occurring. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. This is also known as 'cash value', 'surrender value' and 'policyholder's equity'.

Surrender value is the amount payable to the policyholder should he decide to discontinue the policy and encash it. It is payable only after three full years' premiums have been paid to the insurance company. Moreover, if it is a participating policy, the bonus gets attached to it. Surrender of policy is not recommended since the surrender value will always be proportionately lower.

If you decide to go in for another insurance policy at this stage, it will

17



come at a much higher premium because your age will have advanced since taking the earlier policy. Therefore, retention of earlier policies and continuing all policies without allowing them to lapse is the best strategy.

Surrender value is what an insurance company will pay an insured, after charges are deducted, if he terminates or surrenders the policy before the original maturity date. The life cover provided by a life insurance policy ends with its surrender as it effects a termination of the contract between the insured and the insurer. On surrender, the insured basically gets the fund value of his investments minus the charges that the insurer levies on account of premature termination.

Life Insurance Claims

What are the situations when claims under life insurance arise?

A Life Insurance Policy results into claim in the following situations:

On maturity of the policy i.e. completion of the term for which the insurance was taken in case of endowment policies ; or

On death of the life insured, if it occurs before maturity of the policy, provided policy is in force on the date of death or has acquired

What is the procedure to be followed in case of claim by death of the policyholder?

The following are the main steps for receiving claims:

a. Intimation of death

18


The first requirement of the Corporation in the case of death claim is that an "intimation of death"’ should be sent to the branch office of the LIC from where the policy was issued.

The intimation needs to be sent by the person who is entitled to get the proceeds of the policy. It may be:

i. the nominee or ii. the assignee of the policy or

iii. the deceased policyholder’s nearest relative.

The letter of intimation of death should contain the following information:

i. name of the life assured ii. a statement that the life assured is dead;

iii. the date of death; iv. the cause of death; v. the place of death; and

vi. policy number / s vii. claimant’s relationship with the assured or his status (nominee,

assignee, etc.)viii. Submission of death proof

ix. Submission of proof of age.

Soon after the receipt of the intimation of the death, the branch office sends the necessary claim forms along with instructions regarding the procedure to be followed by the claimant.

Payment and Discharge

After completing all the above formalities, the insurance company issues a discharge form for completion, which is to be signed by the person entitled to receive policy money. That is, it should be signed by:

the nominee, in case nomination was made under the policy;

19


the assignee, in case the policy was validity and unconditionally assigned;

the legal representative or successor.

In due course, LIC sends the cheque for the amount due to the person entitled to receive the same.

MEANING OF GENERAL INSURANCE

Insurance other than ‘Life Insurance’ falls under the category of General Insurance. General Insurance comprises of insurance of property against fire, burglary etc, personal insurance such as Accident and Health Insurance, and liability insurance which covers legal liabilities. There are also other covers such as Errors and Omissions insurance for professionals, credit insurance etc.

Non-life insurance companies have products that cover property against Fire and allied perils, flood storm and inundation, earthquake and so on. There are products that cover property against burglary, theft etc. The non-life companies also offer policies covering machinery against breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of non-life insurance business.

In respect of insurance of property, it is important that the cover is taken for the actual value of the property to avoid being imposed a penalty should there be a claim. Where a property is undervalued for the purposes of insurance, the insured will have to bear a rateable proportion of the loss. For instance if the value of a property is Rs.100

20


and it is insured for Rs.50/-, in the event of a loss to the extent of say Rs.50/-, the maximum claim amount payable would be Rs.25/- ( 50% of the loss being borne by the insured for underinsuring the property by 50% ). This concept is quite often not understood by most insureds.

Personal insurance covers include policies for Accident, Health etc. Products offering Personal Accident cover are benefit policies. Health insurance covers offered by non-life insurers are mainly hospitalization covers either on reimbursement or cashless basis. The cashless service is offered through Third Party Administrators who have arrangements with various service providers, i.e., hospitals. The Third Party Administrators also provide service for reimbursement claims. Sometimes the insurers themselves process reimbursement claims.

Accident and health insurance policies are available for individuals as well as groups. A group could be a group of employees of an organization or holders of credit cards or deposit holders in a bank etc. Normally when a group is covered, insurers offer group discounts.

Liability insurance covers such as Motor Third Party Liability Insurance, Workmen’s Compensation Policy etc offer cover against legal liabilities that may arise under the respective statutes— Motor Vehicles Act, The Workmen’s Compensation Act etc. Some of the covers such as the foregoing (Motor Third Party and Workmen’s Compensation policy ) are compulsory by statute. Liability Insurance not compulsory by statute is also gaining popularity these days. Many industries insure against Public liability. There are liability covers available for Products as well.

There are general insurance products that are in the nature of package policies offering a combination of the covers mentioned above. For

21


instance, there are package policies available for householders, shop keepers and also for professionals such as doctors, chartered accountants etc. Apart from offering standard covers, insurers also offer customized or tailor-made ones.

Suitable general Insurance covers are necessary for every family. It is

important to protect one’s property, which one might have acquired

from one’s hard earned income. A loss or damage to one’s property

can leave one shattered. Losses created by catastrophes such as the

tsunami, earthquakes, cyclones etc have left many homeless and

penniless. Such losses can be devastating but insurance could help

mitigate them. Property can be covered, so also the people against

Personal Accident. A Health Insurance policy can provide financial

relief to a person undergoing medical treatment whether due to a

disease or an injury.

Industries also need to protect themselves by obtaining insurance covers to protect their building, machinery, stocks etc. They need to cover their liabilities as well. Financiers insist on insurance. So, most industries or businesses that are financed by banks and other institutions do obtain covers. But are they obtaining the right covers? And are they insuring adequately are questions that need to be given some thought. Also organizations or industries that are self-financed should ensure that they are protected by insurance.

22


Most general insurance covers are annual contracts. However, there are few products that are long-term.

It is important for proposers to read and understand the terms and conditions of a policy before they enter into an insurance contract. The proposal form needs to be filled in completely and correctly by a proposer to ensure that the cover is adequate and the right one.

FIRE INSURANCE

STANDARD FIRE AND SPECIAL PERILS POLICY

Coverage under the policy Buildings Machinery and Accessories Stock and stock in process

Contents including furniture

Perils Covered Fire

23


Lightning Explosion/Implosion Aircraft damage Riot, Strike Terrorism Storm, Flood, inundation Impact damage Subsidence , landslide Bursting or overflowing of tanks Bush fire etc.

What is not Covered ?

The policy does not cover any loss if

Loss or damage to property due to : Spontaneous combustion, fermentation Burning of property by order of any Public Authority Its undergoing any heating or drying process Explosion of boilers (other than domestic boilers) Total or partial cessation of work Permanent or temporary dispossession by order of

Government Burglary, House breaking, theft Normal Cracking or settlement or bedding down of new

structures War or war like operations Defective design, workmanship, defective materials Pollution or contamination Over-running, short circuit etc. Earthquake Spoilage loss

Add on Covers

24

http://www.uiic.co.in/firepolicy.jsp#TOP%23TOP

http://www.uiic.co.in/firepolicy.jsp#TOP%23TOP


Some Add on covers..

Terrorism Removal Of Debris Architects, Surveyors, Consulting Engineers fees Earthquake (Fire and Shock only) Spontaneous combustion Startup expenses Spoilage Material Damage Cover Leakage and Contamination cover

These additional covers are available by payment of additional premium.

Fi Loss of Profit Policy

Pre-Requisite for the Policy

This policy can be taken only if a Standard fire and Special Perils Policy exists for the risk.What Can Be Insured ?

Net profit due to the stoppage of business as a result of an insured peril

Standing charges which continue to accrue in spite of stoppage of business

Additional expenditure incurred by the insured to maintain normal business activity, during the period in which the normal business is affected.

Indemnity Period

The indemnity period commences with the date of damage and lasts till such a time as the business is restored to its pre

25

http://www.uiic.co.in/firepolicy.jsp

http://www.uiic.co.in/firepolicy.jsp

http://www.uiic.co.in/firelop.jsp#TOP%23TOP


damaged level or the period stipulated policy which ever comes first. The policy insures earnings of the business lost during the indemnity period.

MARINE INSURANCE

MARINE CARGO INSURANCE

Coverage

Any loss or damage to goods in transit by rail, sea, road, air or post.

Who can Insure ?

Owners or bankers of goods in transit/shipment.

Insured against what Risks ?

The policy covers loss/damage to the property insured due to:

Fire or explosion; stranding, sinking etc. Overturning, derailment ( of land conveyance) Collision Discharge of cargo at port of distress Jettison General average sacrifice, salvage charges Earthquake, lightning Washing overboard

26

http://www.uiic.co.in/mcargo.jsp#TOP%23TOP



Sea, lake, river water Total loss of package lost overboard or dropped in loading or unloading War and SRCC is specifically covered

Premium Rating

The normal basis of valuation for ocean/air consignment will be CIF + incidentals up to a percentage which is agreed upon at the inception of the policy ( normally this is 10 %)

Open Cover

Open cover is usually issued for import/export. The open cover is a contract effected for a period of 12 months , whereby the insurance company agrees to provide insurance cover to all shipments coming within the scope of the open cover. Open cover is not a policy. It is an unstamped agreement. As and when shipments are declared , specific policies are issued as evidence of the contract and on collection of premium.

Open Policy

This policy is issued for transit of goods within India. Policy is valid for one year and all transits during the policy period and declared are automatically covered by the insurance company subject to the availability of the overall suminsured.

It is a stamped document. In this case specific policies are not issued for each consignment . Premium can be collected in advance for the entire estimated value during the policy period . Stamp duty is collected in advance along with premium for despatches to be declared periodically

27






Specific Voyage Policy

This policy is valid for a single voyage or transit. The policy will be issued before the voyage starts. The coverage will cease immediately on completion of the voyage.

The specific voyage policy must show complete details of the risk..It should contain particulars of conveyance/Vessel name/ Bill of Lading or Way bill and date , sum insured ,terms and conditions of cover, voyage , cargo description etc like all other marine policies.

Annual Policy

This policy may be issued to cover goods in transit by road or rail or sea from specified depots or processing units owned or hired by the insured. The goods covered must belong to or held in trust by the insured . These policies can not be issued to transport operators , clearing , forwarding and commission agents or freight forwarders or in joint names.. They can not be assigned or transferred. For such policies the sum insured should not be less than Rs 5000/-.

Marine Hull Insurance

Coverage

28



Any loss or damage to ships, tankers, bulk carriers, smaller vessels, fishing boats and sailing vessels.

Who can Insure ?

Owners or bankers of ships or vessels.

What is Insured

The various vessels that are covered under this policy are :

Fishing Vessels Ocean Going Vessels Sailing Vessels Other Vessels

Insured against what Risks ?

The policy covers loss/damage to the property insured due to:

Fire or explosion; stranding, sinking etc. Overturning, derailment ( of land conveyance) Collusion General average sacrifice, salvage charges

What is not Insured?

The policy does not pay any loss/damage caused by, attributable to, due to

29

http://www.uiic.co.in/mhull.jsp#TOP%23TOP





Deliberate damage/destruction of the vessel by wrongful act of any person

Use of any weapon of war employing atomic / nuclear fission and or fusion

Insolvency or financial default of the vessel owner / operators / charterers

War / civil war · Strike, Riot or Civil Commotion

Any terrorist or person/s acting with political motive

MOTOR INSURANCE

Motor Package and Liability only Policies

Motor vehicle which includes private cars, Two wheelers and Commercial vehicles excluding vehicles running on rails

Who can Insure ? Owners of the vehicle, Financiers or Lessee, who have insurable

interest in a motor vehicle.

Insured's Declared Value (IDV)

(a) In case of vehicle not exceeding 5 years of age, the IDV has to be arrived at by applying the percentage of depreciation specified in the tariff on the showroom price of the particular make and model of the vehicle.

(b) In case of vehicles exceeding 5 years of age and Obsolete models (manufacture of those vehicles which have been stopped by the manufacturers), they have to be insured for the prevailing market value of the same as agreed to between the insurer and the insured.

30

http://www.uiic.co.in/motorA.jsp#TOP%23TOP




Package Policy - Section I

Section I (Own Damage - OD) of Package Policy :

Section I of package policy covers loss or damage to the vehicle and / or accessories due to

Accidental external means Fire, Self ignition, lightning Burglary, house breaking or theft Terrorist activity Riot, Strike and Malicious Damage Earthquake Flood, cyclone and Inundation etc While in transit by rail, road, air, elevator, lift or inland waterways Landslide or workslide

None of the above perils can be excluded from the scope of a policy.

Loss or damage to accessories by burglary/house breaking/theft

1. For private car it is covered 2. In case of Motorised Two Wheelers this can be covered on payment of

an additional premium at 3% of the IDV of such accessories 3. Loss or damage to Lamp, Tyres, mudguard and / or bonner side parts,

bumpers etc., can be covered on payment of additional premium. This is applicatble only to Commercial Vehicles.

If the vehicle is disabled in an accident, cover is provided for the reasonable cost of the following :

Its removal to nearest reapirers The cost of reasonalble repairs immediately necessary

subject to the limit provided for.

31


(a) Package Policy - Section II

Section II (Liability) of Package Policy :

1. Liability to third parties bodily injury and or death and property damage 2. Personal accident cover for the owner driver for a specified sum insured

The following are payable under Section II of the Package Policy subject to the limit of liability laid down in the Motor Vehicles Act :

The insured's legal liability for death / disability of third party Loss or damage to third party property Claimant's cost as decided by the court All costs and expenses incurred with company's written consent In case of death of an Insured person, entitled to indemnity for a

liability incurred under this policy, his legal representative will be indemnified in place of insured, if he observed all conditions as the insured himself.

IDV Depreciation ScheduleThe premium is calculated on the basis of something called the Insured Declared Value (IDV) of the vehicle, which is basically the depreciated value of the vehicle agreed upon by the insurer and the policyholder.The IDV of a vehicle reduces with age. Insurers give a depreciation schedule for up to five years, which is the starting point for deciding the IDV of a vehicle: this IDV figure is scaled up or down depending on the condition of the vehicle. The depreciation schedule is identical for two-wheelers and four-wheelers (See table: IDV Depreciation Schedule) You can get your vehicle insured for a value greater than the IDV calculated on the basis of the specified depreciation schedule, on account of, say, better maintenance

32

http://www.indiacar.com/insurance_new/idv.asp






or high-priced accessories. However, in case of a claim, the onus is on you to justify the higher IDV.

Cover for occupants of vehicle. This section provides cover against death or injury to the vehicle driver and passengers. The maximum cover that can be taken under this section is Rs 1 lakh for a driver and Rs 2 lakh for each passenger.

IDV Depreciation ScheduleVehicle Age Depreciation(%) IDV (Rs)6 Months 5 Year 1: 2,00,0006 Months - 1 year 15 Year 2: 1,60,0001-2 years 20 Year 3: 1,28,0002-3 years 30 Year 4: 89,6003-4 years 40 Year 5: 53,7604-5 years 50 Year 6: 26,880Note: The depreciation rate is charged as a percentage of the cost of a new vehicle, on a reducing balance basis. IDV of vehicles that are more than 5 years oldand of models that manufacturers have discontinued is to be determined on the basis of an understanding between the insurer and the insured.

LIABILITIES POLICIES

Public Liability Insurance

33




Coverage

The Public Liability Act, 1991 was made effective from 1st April 1991. The object of this Act is to provide through insurance immediate relief to persons affected due to “accident” while “handling” “hazardous substance” by the owners on “no fault liability basis”. This has also been brought under Tariff. The definition of “Owner” is so comprehensive as to cover any person who owns or has control over any hazardous substance at the time of accident. This includes any Firm or its partners. Association or its members, Company or its Directors and all other persons associated and responsible to that Company in the conduct of their business.

The various terms like “Accident”, “Hazardous substances” as defined in the Act are given below.

“Accident” means an accident involving a fortuitous, sudden or unintentional occurrence while handling any hazardous substance resulting in continuous, intermittent or repeated exposure to death of, or injury to any person or damage to any property but does not include an accident by reason only of war or radioactivity.

“Handling”in relation to any hazardous substance, means the manufacture, processing, treatment, package, storage, transportation by vehicle, use, collection, destruction, conversion, offering for sale, transfer or the like of such hazardous substance.

“Hazardous Substance” means any substance or preparation which is defined as hazardous substance under the Environment (Protection) Act, 1986 and exceeding such quantity as may be specified by notification by the

34


Central Government.

“Hazardous Substance”means any substance or preparation which, by reason of its chemical properties or handling is liable to cause harm to human beings, other living creatures, plants, micro-organism, property or the environment (as per the Environment (Protection) Act, 1986).

Insurance Limits

Any one accident : Minimum equal to Paid up Capital upto a maximum of Rs.5 crores.

Any one year : 3 times of `Any one accident’ limit subject to a maximum of Rs.15 crores.

Liability beyond Insurance

In case of claim/s exceeding the above statutory limit/s, it is to be met by the Environmental Relief Fund to be set up under Section 7A of the Act and managed by the Authority appointed by the Central Government.

The liability beyond the total of the insurance and the Relief / Fund is to be borne by the “Owner”.

Contribution to the relief fund

An amount equal to the insurance premium chargeable is to be paid simultaneously by every owner with the insurance premium to the underwriting Company.

All proposals can be rated and accepted at DO level in terms of the rating structure laid down.

LIABILITIES INSURANCE

35

http://www.uiic.co.in/publicliability.jsp#TOP%23TOP


Product Liability Insurance

Coverage

This insurance is intended to provide an indemnity to the insured (upto the limit of liability) in the event of a claim being brought against him. This may be caused by anything harmful or defective in the products sold or supplied by the insured in connection with the business specified. The Company in addition will reimburse all costs and expenses incurred with its written consent defending such a claim for compensation. The insurance will however not cover the cost of removing, replacing or repairing defective products or loss of use thereof.

Liability Covered

The policy seeks to indemnify the insured against his legal liability to pay compensation (including claimants costs, fees and expenses) in respect of injury damage or pollution for third parties for claims arising out of accidents due to any defects in the products specified in the policy during the period of the insurance and first made against the insured during the policy period. For the purpose of determining the indemnity granted :

36

http://www.uiic.co.in/productliab.jsp#TOP%23TOP


1. Injury shall mean death, bodily injury, illness or disease of or to any person 2. Damage shall mean actual and / or physical damage to the atmosphere or of any water, land or

other tangible property 3. Pollution shall mean pollution or contamination of the atmosphere or of any water, land or

other tangible property 4. Product shall mean any tangible property after it has left the custody or control of the Insured

which has been designed, specified, formulated, manufactured, constructed, installed, sold, supplied, distributed, treated, serviced, altered or repaired by on behalf of the Insured

5. Accident shall mean a fortuitous event or circumstance which is sudden, unexpected and unintentional including resultant continuous, intermittent or repeated exposures arising out of the same fortuitous event or circumstances

Special Exclusions1. The policy excludes liability for costs in the repair, reconditioning, modification or

replacement of any part of any product which is or is alleged to be defective. 2. For cost arising out of the recall of any product or part thereof. 3. Arising out of any product which is intended for incorporation into the structure, machinery or

control of any aircraft. 4. Arising out of deliberate, willful or intentional non-compliance of any statutory provision. 5. Arising out of pure financial loss such as loss of goodwill, loss of market, etc. 6. Arising out of fines, penalties, punitive and exemplary damages. 7. For injury and/or damage occurring prior to the Retroactive date shown in the schedule. 8. Arising out of deliberate, conscious or intentional disregard of the insured’s technical or

administrative management of the need to take all reasonable steps to prevent claims. 9. For injury to any person under a contract of employment or apprenticeship with insured where

such injury arises out of the execution of such contract. 10. Arising out of contractual liability which would not have existed in the absence of the

specific contract. 11. Arising out of any product guarantee. 12. Arising out of claims for failure of the goods or products to fulfill the purpose for which

they were intended

37




What will Policy not Pay ?Loss or damage due to

War and war like perils Wear and tear, depreciation, consequential loss Nuclear group of perils Gross and wilful negligence of Insured Violation of policy conditions Loss/damage/liability where Insured’s family or Insured’s employee are involved as

principal/accessory

Intentional act/self injury/ influence of drug/intoxicant.

Public Liability Insurance

38


39


40


41


42


43


44


45


46


47


48


49


50


51


52


53


54


55


56


57


58


59


Insurance Limits

Any one accident : Minimum equal to Paid up Capital upto a maximum of Rs.5 crores.

Any one year : 3 times of `Any one accident’ limit subject to a maximum of Rs.15 crores.

Liability beyond Insurance

In case of claim/s exceeding the above statutory limit/s, it is to be met by the Environmental Relief Fund to be set up under Section 7A of the Act and managed by the Authority appointed by the Central Government.

The liability beyond the total of the insurance and the Relief / Fund is to be borne by the “Owner”.

Contribution to the relief fund

An amount equal to the insurance premium chargeable is to be paid simultaneously by every

60


owner with the insurance premium to the underwriting Company.

All proposals can be rated and accepted at DO level in terms of the rating structure laid downProfessional Indemnity Policy

Coverage The cover granted under the policy provide indemnity for legal liability to third party arising

out of errors and omissions or negligence in professional service rendered by the insured Policies will be issued for a period of 12 months (1 year) .

Who can be Insured ? Doctors Medical Establishments Engineers Architects Chartered Accountants Lawyers

What is not Covered ?

Applicable in case of Doctors Policy

Any criminal act or violation of any Act of Statute Services rendered under the influence of intoxicants or narcotics Performance by Dentists under general anesthesia or any procedures carried out under

general anesthesia unless performed in a hospital.

61

http://www.uiic.co.in/professionalindemnity.jsp#TOP%23TOP



Willful neglect or deliberate act Third Party Public Liability Pure financial loss due to loss of goodwill or loss of market

Workmen Compensation Insurance

Coverage

Liability of an employer for employment injury (including death) of any of his employees who is a ‘workman’ as defined under Workmen Compensation Act.

Who can be Insured ?

Any employer whether as a Principal or contractor engaging "workmen" as defined in WC Act to cover his liability to them under statute and at common law. Employer can cover Employees who do not qualify as "Workmen" under separate table

Insured against what risks ? Indemnity to insured against his liability as an ‘employer’ to accidental injuries

(including fatal) sustained by the ‘workman’ whilst at work.

On extra premium-medical, surgical, and hospital expenses including the cost of transport to hospital for accidental employment injuries

Liability in respect of diseases mentioned in Part C / schedule III of WC Act, on

62


http://www.uiic.co.in/workmenliab.jsp#TOP%23TOP



additional premium; which arise out of and in the course of employment

What will Policy not Pay ? Any injury which does not result in fatality or partial disablement for period

exceeding 3 days First 3 days of disablement where the total disablement is less than 28 days For any non-fatal injury caused by any accident which is directly attributable to

a) Influence of drinks or drugsb) Willful disobedience of an order for securing safety of the workmanc) Willful removal or disregard of safety guard device.

War group and nuclear group of perils Liability to employees of contractors of the insured (unless specifically declared) Employee who is not a "workman" as per WC act. Liability of insured assumed under an agreement For occupational diseases mentioned in part "C" of schedule III of WC Act , unless

cover is extended on extra premium.

Increase due to any change in statute provisions after policy had incepted. Under more than one statute / one forum for the same injury

HEALTH INSURANCE: Over the last 50 years India has achieved a lot in terms of health

improvement. But still India is way behind many fast developing countries such as China, Vietnam

and Sri Lanka in health indicators (Satia et al 1999). In case of government funded health care

system, the quality and access of services has always remained major concern. A very rapidly

growing private health market has developed in India. This private sector bridges most of the gaps

between what government offers and what people need. However, with proliferation of various

63



health care technologies and general price rise, the cost of care has also become very expensive

and unaffordable to large segment of population. The government and people have started

exploring various health financing options to manage problems arising out of growing set of

complexities of private sector growth, increasing cost of care and changing epidemiological pattern

of diseases.

The new economic policy and liberalization process followed by the Government of India since

What are the types of Health Insurance?

Group insurance:Group medical insurance offers insurance cover to a group with a common trait – it may be employees of a company, members of a club or an association or members of a co-operative society etc. Many employers now provide medical insurance as a perquisite to their employees.

Individual insurance:Individual insurance caters to the specific needs of an individual. Premium for an individual insurance is higher than group insurance.

Floater:A floater is a unique plan wherein the value of sum insured opted can be used by all the members of the family or by a single-family member. Basically, the sum insured amount floats over all the members covered. For example: if the policy is bought for 3 lacs, then either all three members of the family can use Rs 1 lac each or one member can use the entire cover of 3 lacs.top

What are the benefits of Group Insurance?Benefits of Group Insurance:

Premium under group insurance is less than a stand-alone personal insurance policy.Discount offered depends of the size of the group.A quick and effective way to extend cover to a large chunk of population.

64

http://www.icicilombard.com/app/ilom-en/Classroom/Health/Types.aspx#top%23top


An effective tool to cross sell various products to the members of the group.Products can be customised to the size of the group.Group insurance is more flexible and provide more benefits.For additional benefits, a loading is charged on the premium.

top

What are the benefits of a Floater Plan?Benefits of a floater plan are :-

A single policy takes care of your entire family.Single premium for the entire family.The sum insured floats over the entire family.One single policy covers the details of entire family.No hassles of tracking renewals for different members.

top

What are the kind of groups?Group can be of various types:

Employer-employee group.Association of professionals viz. doctors, lawyers, chartered accountants etc.Members of co-op societies, banks, credit societies etcWeaker sections of society.

top

What is the difference between Group and Individual insurance?One of the major difference between group and individual insurance is evidence of insurability. To purchase individual insurance, a person must generally answer a health questionnaire and undergo a medical examination to provide evidence of insurability to the insurance company. An insurer may decline coverage on the basis of the applicant's personal habits, health, medical history, age, income or any other factors that bear on risk acceptance. Or the insurer may issue a

65





policy with limitations on coverage.

However, group insurance is issued without medical examination or any other evidence of individual insurability. Group insurance ensures that all the members of the group are insured regardless of their health. Thus, even those with health problems, who might not be eligible for individual insurance, can be covered. top

What is the difference between Individual and Floater Plan?

Floater offers common cover for all members while an individual policy offers single cover for each member.Floater offers flexibility to a policyholder since any member of the family can use the sum insured amount. Moreover, the unutilized limit can be transferred to other members.

top

How does a Floater Plan work?You make a claim to an insurance company. You have to support your claim with bills. The insurance company will reimburse the amount. In case of your treatment in a network hospital, you can opt for cashless settlement. The insurance company will directly settle the hospital bills. For speedy reimbursement, choose the right insurer, inform the company at the earliest, keep all bills safely, check for exclusions, read the fine print (policy wordings) carefully and present your claim at the earliest.

Procedure for lodging and settlement of Claims in case of general insurance The following steps are involved in general for lodging and settlement of claims :--

1. After the occurrence of a loss normally intimation to be given to the Policy issuing office immediately.

2. Above step will be preceded by lodging a FIR to the nearest Police Station , in case the loss has occurred due to any cause like Fire, Burglary, Theft, Damage to third party, Accident etc., i.e. for any reason other than Act of God Peril e.g. Flood, Earthquake, inundation etc.

66




3. Collect relevant claim form.4. Fill up the claim form correctly after reading it thoroughly.5. Submit claim form to the Policy issuing office either directly or by an authorised

Agent along with documents required /asked for, such as Police Reports, Doctors Prescriptions, Reports of Pathological tests, Cash Memos from the Chemists Shop for the medicine purchased, Admission and Discharge Certificates, Receipts from Surgeon, Doctors etc. as the case may be.

6. The Policy issuing office may appoint Surveyor/ Loss Assessor or may refer the case to panel Doctors, if necessary.

7. Claim is finally settled by the Policy issuing office and payment is made to the Policy holder as a full and final settlement of claim.

8. Please note in some cases provisional payment is also made to the Policy holder pending the final processing of the claim, depending on the merits of the case.

9. The above list is not exhaustive but only indicative. Further details can be ascertained from the nearest office.

Underwriting :

UNDERWRITING PROCESS AND METHODS

Underwriting as an art began in the United Kingdom since Victorian times. Where upon a group of sailors/traders began the practice to insure against the perils involved in a sea voyage, it included the insuring of the goods in transit against known perils such as piracy, weather perils and goods getting destroyed in the voyage against the payment of a pre-agreed sum by the trader(s). The practice evolved with the times and the insurance model took shape. In the early days of marine insurance, the details of a ship or cargo to be insured were described on a slip. This slip was taken to Lloyd’s and the person, who was to carry the risk read the details, then signed the slip under the details of the risk. In this way, the person carrying the risk became known as the underwriter. The genesis of the insurance business also evolved from the United Kingdom and the first insurers were the Lloyd’s industries.

Underwriting Defined

67


Underwriting is the prices of selecting and classifying exposures. It is directly related to rate- making or the pricing function of an insurer, because computed rates contemplate some composition of loss-producing characteristics to which they will be applied.

Underwriting is the insurance function that is responsible for assessing and classifying the degree of risk a proposed insured or group represents and making a decision concerning coverage of that risk.

Underwriting includes all the activities necessary to select risks offered to the insurer in such a manner that general company objectives are fulfilled.

The person responsible for evaluation and acceptance/rejection of risks and computation of premium is called as the underwriter. Accordingly, the decision made by the underwriter concerning risk classification and rating is called as the underwriting decision. Underwriting decisions are crucial for insurers since they can make or mar an insurance company. Good underwriting helps the insurance companies in many ways. It make them financially stronger and helps secure competitive advantage. This is obvious in the sense that if risks are assessed properly, pricing will be effective and therefore the company can well compete and build up reputation.

In life insurance business, underwriting is performed by home or regional office personnel, who scrutinize applications for coverage and make decisions as to whether they will be accepted, and by agents, who produce the applications initially in the field, but these decisions may be subject to post underwriting at a higher level because the contracts are cancellable on due notice to the insured. In life insurance, agents seldom have authority to make binding underwriting decisions. In all fields of insurance, however, agency personnel usually do considerable screening of risks before submitting them to home office underwriters.

5.2 The Objectives and Principles of Underwriting

The primary objective of underwriting is to see that the applicant accepted will not have a loss experience that is very different from that assumed when the rates were formulated. To this end, certain standards of selection relating to physical and moral hazards are set up when rates are calculated, and the underwriter must see that these standards are observed when a risk is accepted. For e.g., a company may decide that it will accept no fire exposures situated in areas where there is no fire department protection or will accept no one for life insurance who has had cancer within the

68


previous five years.

When reviewing an application for property insurance for a piece of property, such as a farm, that is located where there is no fire department protection or when reviewing an application for life insurance in which the individual had cancer four and half years ago, the underwriter asks the question, “Can I make an exception for this application, or must I reject it because it does not come within the technical limitations of my instructions?” In answering this question, the underwriter visualises what would happen to the company’s loss experience if a very large number of identical risks were accepted. If the aggregate experience would be very unfavourable, the underwriter will probably reject the application.

The objectives of underwriting can be therefore expressed as follows:1. Product Equitable to Customer—The underwriter should fairly assess the risk in a proposal and

fix the premium justifiable to the consumer.2. Deliverable to the Customer—Consumers are the final authority for buying the products. If the

marketers are not able to sell so that the product becomes undeliverable, the onus is on the underwriters to carry an introspection of the various factors that caused differences between the consumers and company’s expectations.

3. Financially Feasible to the insurance Company—The insurers are not in the business of charity. The underwriting benefit must be reflected by the financial statements. Although, the underwriters are not directly involved in the pricing of insurance products, yet their contribution is as vital as that of actuaries, because they operationalise the business of risk.

Most of the insurance companies formulate underwriting policy which provides the framework for underwriting decisions. It is also called as the underwriting philosophy. The underwriting policy specifies the line of insurance that will be written as well as prohibited exposures, the amount of coverage to be permitted on various types of exposure, the area of the country in which each line will be written, and similar restrictions. Generally, the individual who applies the underwriting rules and guidelines, called the desk underwriter, do not involve in forming the company underwriting.

The underwriting philosophy also describes in general terms how the underwriter will use reinsurance for its risk management. The underwriting philosophy can be translated into underwriting guidelines which specify the general standards that specify which applicants are to be assigned to the risk established for each insurance product.

69


In life insurance, the underwriter is assisted by medical reports from the physicians that exam med the applicant, by information from the agent, by an independent report (called inspection report) on the applicant prepared by an outside agency created for that purpose, and by advice from the company’s own medical advisor. In property-liability insurance (as well as life insurance), the underwriter has the services of reinsurance facilities and credit departments to report on the financial standing of applicants and also can review loss histories of applicant.

5.3 Underwriting in Life Insurance

Life insurance underwriting is mainly concerned with mortality. Mortality risk for an insurer is that the insured will die prior to the stipulated life. An impairment in any respect of a proposed insured’s personal health, medical history, health habits, family history, occupation, or other activities that could increase that person’s expected mortality risk.

While underwriting risk of an individual in life insurance, following factors are generally considered by life insurance companies:

(a)Age,(b) Sex,(c)Height and weight,(d) Health history (and often family health history—parents and siblings),(e)The purpose of the insurance (such as for estate planning, or business or for family protection),(f) Marital status and number of children,(g) The amount of insurance the applicant already has, and any additional insurance s/he proposes

to buy,(h) Occupation (some are hazardous, and increase the rise of death),(i) Income (to help determine suitability),(j) Smoking or tobacco use this is an important factor, as smokers have shorter lives),(k) Alcohol (excessive drinking seriously hurts life expectancy),(l) Certain hobbies (e.g., race .car driving, hang-gliding, piloting non-commercial aircraft), and(m) Foreign travel (certain foreign travel is risky).

Similarly in case of group insurance the following factors are considered:(a)Proposed Coverage—which includes assessment of eligibility, level of benefits which can be

offered, administration of the group and the mode of payment to intermediaries.(b) Cause of existence of the relevant group—classified on the basis of the nature of job, specific

agendas etc.

70


(c)Size of the group—large groups are always better than small groups for obvious reasons.(d) Nature of Group’s business-based on nature of industry, cement plants and coal mines workers

are more prone to respiratory/kidney problems.(e)Geographical location of the group.(f) Stability of the group.(g) Attributes of group members—sex, age and work profile.(h) Level of participation—contribution by members or else, no contribution by members.(i) Persistency and prior experiences.

In case of renewals, the most important factor is the claims experience. Underwriters place the potential insureds in the appropriate risk class (based on various criterion) generally classified as follows:(a)Preferred Class where the happening of an adverse event or the possibility of claims is the least,

i.e., the inherent risk is lesser than average risk.(b) Standard Class—where the risk exposed is at par with the average risk. Most of the insured

belong to this class.(c)Sub-standard Class—where the anticipated risk is -higher than the average risk. Insurance

companies typically establish this risk class for proposed insureds that have permanent medical impairments or conditions, are recovering from serious illnesses or accidents, or have occupations or avocations that significantly increase their degree of risk.

5.4 Underwriting in Non-life Insurance

The underwriting of commercial, business insurances is a much more complicated and involved task. Commercial insurances range from small shops and factories to large multinational corporations, with operations in many countries throughout the world. The degree of complexity of the underwriting required would obviously vary with the sheer size of the risk, but certain basic principles are fundamental.

The essence of the task is that the underwriter has to evaluate the hazard associated with the risk, which is being proposed. In small cases he may be able to do this from reading a proposal form and corresponding with the sponsor. It may be that a local inspector is asked to call and see the shop or factory for himself. In large cases this is simply impossible. Detail of the risk could not be confined to a proposal form since there is just too much information to condense, no matter how large the form may be. The insurance companies may take the help of brokers in these cases. The broker in

71


these cases will be in a position to prepare the case for the underwriter. This may mean site inspections by the broker and the preparation of plans and reports on the relevant aspects of the risk. This documentation, which may be extremely extensive, is then passed to the underwriter and negotiation can commence on the terms, conditions, cover and price.

Several sources of information are available to the underwriter regarding the hazards of a commercial applicant for property and liability insurance:(a)Application Containing the Insurers Statements : The basic source of underwriting information is

the application, which varies for each line of insurance and for each type of coverage. The broader and more liberal the contract, usually more detailed information is required. The questions on the application are designed to give the underwriter the information needed to decide whether to accept the exposure, reject it or ask for additional information.

(b) Information from the Agent or Broker : In some line of non-life insurance, the agent may exercise his underwriting authority. For commercial insurances, the profit-sharing contracts are also entered with the agents, whereby the agent derives a special incentive if the business brought by him has resulted in a profit to the company.

(c)Prior Experiences : The past history of claims is also a source of information. In case of existing clients where the claims experience has been unfavourable, the insurance company penalises i.e. loads premium for new businesses or renewals of the existing ones.

(d) Inspection : Surveys are also conducted by the company’s specialists/consultants to find out the accuracy of information as contained in the proposal form.

REINSURANCE

Although to many, reinsurance is a relatively unknown aspect of the insurance industry, its roots can be traced as far back as the late 14th century. From that time forward, reinsurance evolved into the business as it operates today. While the early focus of reinsurance was in the marine and fire insurance lines, it has expanded during the last century to encompass virtually every aspect of the modern insurance market. Reinsurance is a device whereby the insurance company may reduce its risk by transferring a portion to one or more insurance companies. Reinsurance is a special, highly technical, competitive industry whose existence makes possible a more effective institution of risk.

Reinsurance DefinedReinsurance is a transaction in which one insurer agrees, for a premium, to indemnify another insurer against all or part of the loss that insurer may sustain under its policy or policies of insurance. The

72


company purchasing reinsurance is known as the ceding insurer; the company selling reinsurance is known as the assuming insurer, or, more simply, the reinsurer. Reinsurance can also be de scribed as the “insurance of insurance companies”.

Reinsurance provides reimbursement to the ceding insurer for losses covered by the reinsurance agreement. It enhances the fundamental objective of insurance—to spread the risk so that no single entity finds itself saddled with a financial burden beyond its ability to pay. Reinsurance can be acquired either directly from a reinsurer or through a broker or reinsurance intermediary.

6.2 Objectives of ReinsuranceInsurers purchase reinsurance for essentially four reasons: (1) to limit liability on specific risks; (2) to stabilise loss experience; (3) to protect against catastrophes; and (4) to increase capacity. Different types of reinsurance contracts are available in the market commensurate with the ceding company’s goals

Types of Reinsurance

Following are the important types of Reinsurance 1. Proportional reinsurance 2. Non-proportional 3. Facultative Reinsurance: 1. Proportional reinsuranceProportional reinsurance involves one or more reinsurers taking a stated percent share of each policy that an insurer produces. This means that the reinsurer will accept that stated percentage of each of premiums and will pay that percentage of each loss. The insurer may appear for such coverage for many reasons for example, the insurer may not have sufficient capital to carefully keep all of the exposure that it is capable of producing. There are two types of proportional reinsurance.

73


a. Quota Share Reinsurance

The ceding company and the reinsurer take a balanced share of losses and premiums, which is generally expressed as a fixed percentage of loss on each risk. A ceding charge is paid by the reinsurer to the primary insurer to reimburse for the expenses incurred in writing the business.

b. Surplus Share Reinsurance

Surplus share reinsurance is related to quota share reinsurance, apart from the risks are not ceded to the reinsurer; instead, only risks exceeding a minimum dollar amount, or "line", are ceded

2. Non-proportionalUnder this type of reinsurance, insurer is responds to the loss suffered by the insurer exceeds a certain amount, it is called as, the retention or priority. 3. Facultative Reinsurance:Facultative reinsurance is coverage where the reinsurer evaluates a particular risk on a case-by-case basis. Facultative reinsurance is negotiated separately for each insurance contract that is to be reinsured. The flexibility of facultative reinsurance allows various ceding insurers to reinsure dangerous risks which are not covered by continuing contract, so they can reduce the insurer's responsibility in certain high-risk areas. Facultative reinsurance also allows the prime insurers to get the reinsurer's advice on uncertain risks. This type of reinsurance contract can be in pro-rata form or excess of loss. Advantages of the Facultative Reinsurance:

Flexibility - The capability to arrange a reinsurance contract to fit any particular case.

Stability - Stability in the operations of the insurer as losses can be transferred to the reinsurer.

74


More Business – It Increases the insurer's capability to take on larger amounts of insurance business.

Disadvantages of the Facultative Reinsurance:

Uncertainty - The ceding insurer cannot plan before as it does not know whether the reinsurer will accept the risk.

Delays for the Insurer - The policy will not be issued apart from the reinsurance is obtained, it leads to delay

Unreliability - Dire market circumstances and poor loss outcomes can decline the reinsurance market, making it difficult for the insurer to reach reinsurance.

4. Treaty ReinsuranceTreaty reinsurance is a contract between insurers and reinsurers. The ceding company is contractually bound to cede and the reinsurer is bound to assume a particular element or kind of risk insured by the ceding company. Once the negotiations of the contract are over, the reinsurer must automatically allow all business included within the conditions of the reinsurance contract with the ceding company. Advantages of Treaty Reinsurance:

Economical - The insurer does not have to shop for a reinsurer before underwriting the policy so it is economical.

Fast - There is no delay or uncertainty involved in Treaty Reinsurance.

Disadvantages of Treaty Reinsurance:

75


Expensive - Administrative expenditure can be quite high in Treaty Reinsurance.

Complex - Treaty Reinsurance is difficult and requires larger record keeping.

76

tybfm_ insurance 1

Documents