Assignment of

Banking And Insurance

What is Insurance?
Insurance is a contract in which an insurer promises to pay the insured party a sum
of money if one or more specified events occurs in the future, in return for regular
small payments - known as premiums.
Purpose of Insurance
It reduces your business' exposure to the effects of particular risks. These could
include:
Damage to, or the loss of, physical assets such as your premises or
equipment
Illness or death of key members of staff
Compensation claims against the business or its directors by employees or
customers
Business interruption caused by external events such as terrorism
Volatility and cash flow pressures following an incident
Why do we need insurance?
Insurance is there to provide protection for yourself, your investment and your
business. Disaster could take any form; car breaks down, roof leaks, a major home
fire, an automobile accident that leads to a legal action and someone in the family
becomes ill.
Insurance gives you peace of mind and you know that if anything happens to you,
your family or your business that you will be financially secure.
The best course of action is to prepare for the worst and hope for the best.
Insurance is a way of managing risks. When you buy insurance, you transfer the
cost of a potential loss to the insurance company in exchange for a fee, known as
the premium. Insurance companies invest the funds securely, so it can grow, and
pay out when theres a claim.
Insurance helps you:

 Own a home, because mortgage lenders need to know your home

is protected
Drive vehicles, because few people could afford the repairs, health care
costs and legal expenses associated with collisions and injuries without
coverage
Maintain your current standard of living if you become disabled or have
a critical illness
Cover health care costs like prescription drugs, dental care, vision care and
other health-related items
Provide for your family in the event of a death
Run a small business or family farm by managing the risks of ownership
Take vacations without worrying about flight cancellations or other potential
issues.

What are the functions of insurance?

The functions of insurance can be studied into two parts (i) Primary Functions, and
(ii) Secondary Functions.
Primary Functions:
(i) Insurance provides certainty:
Insurance provides certainty of payment at the uncertainty of loss. The uncertainty
of loss can be reduced by better planning and administration. But, the insurance
relieves the person from such difficult task. Moreover, if the subject matters are not
adequate, the self-provision may prove costlier.
(ii) Insurance provides protection:
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The main function of the insurance is to provide protection against the probable
chances of loss. The time and amount of loss are uncertain and at the happening of
risk, the person will suffer loss in absence of insurance. The insurance guarantees
the payment of loss and thus protects the assured from sufferings. The insurance
cannot check the happening of risk but can provide for losses at the happening of
the risk.
(iii) Risk-Sharing:
The risk is uncertain, and therefore, the loss arising from the risk is also uncertain.
When risk takes place, the loss is shared by all the persons who are exposed to the
risk. The risk-sharing in ancient time was done only at time of damage or death;
but today, on the basis of probability of risk, the share is obtained from each and
every insured in the shape of premium without which protection is not guaranteed
by the insurer.
Secondary functions:
Besides the above primary functions, the insurance works for the following
functions:

(i) Prevention of Loss:

The insurance joins hands with those institutions which are engaged in preventing
the losses of the society because the reduction in loss causes lesser payment to the
assured and so more saving is possible which will assist in reducing the premium.
Lesser premium invites more business and more business cause lesser share to the
assured.
(ii) It Provides Capital:
The insurance provides capital to the society. The accumulated funds are invested
in productive channel. The dearth of capital of the society is minimized to a greater
extent with the help of investment of insurance. The industry, the business and the
individual are benefited by the investment and loans of the insurers.

(iii) It Improves Efficiency:

The insurance eliminates worries and miseries of losses at death and destruction of
property. The carefree person can devote his body and soul together for better
achievement. It improves not only his efficiency, but the efficiencies of the masses
are also advanced.
(iv) It helps Economic Progress:
The insurance by protecting the society from huge losses of damage, destruction
and death, provides an initiative to work hard for the betterment of the masses. The
next factor of economic progress, the capital, is also immensely provided by the
masses. The property, the valuable assets, the man, the machine and the society
cannot lose much at the disaster.

The principles of insurance

The main objective of every insurance contract is to give financial security and
protection to the insured from any future uncertainties. Insured must never ever try
to misuse this safe financial cover.
The seven principles of insurance are: Principle of Uberrimae fidei (Utmost Good Faith) -Under this insurance
contract both the parties should have faith over each other. As a client it is
the duty of the insured to disclose all the facts to the insurance company.
Any fraud or misrepresentation of facts can result into cancellation of the
contract.
Principle of Insurable Interest-Under this principle of insurance, the
insured must have interest in the subject matter of the insurance. Absence of
insurance makes the contract null and void. If there is no insurable interest,
an insurance company will not issue a policy.

 Principle of Indemnity- Indemnity means security or compensation against

loss or damage. The principle of indemnity is such principle of insurance
stating that an insured may not be compensated by the insurance company in
an amount exceeding the insureds economic loss.
Principle of Contribution- In case the insured took more than one
insurance policy for same subject matter, he/she can't make profit by making
claim for same loss more than once

Principle of Subrogation-The principle of subrogation enables the insured

to claim the amount from the third party responsible for the loss. It allows
the insurer to pursue legal methods to recover the amount of loss, For
example, if you get injured in a road accident, due to reckless driving of a
third party, the insurance company will compensate your loss and will also
sue the third party to recover the money paid as claim.
Principle of Loss Minimization -This principle states that the insured must
take all the necessary steps to minimize the losses to inured assets.
For example - Ram took insurance policy fo his house. In a cylinder blast,
his house burnt. He should have called nearest fire station so that the loss
could be minimized.
Principle of Causa Proxima (Nearest Cause) - proximate cause literally
means the nearest cause or direct cause. This principle is applicable when
the loss is the result of two or more causes. The proximate cause means; the
most dominant and most effective cause of loss is considered. This principle
is applicable when there are series of causes of damage or loss.
Difference between Insurance Contract and Wagering Agreement
Contract of Insurance
1. A contract of insurance is a contract to make good the loss of property (or
life) of another person against some consideration called premium.
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2. In a contract of insurance the insured must have insurable interest.

Without insurable interest it will be a wagering agreement.
3. In a contract of insurance both the parties are interested in the protection
of the subject matter, i.e., there is mutuality of interest.
4. Except life insurance, a contract of insurance is a contract of indemnity,
i.e. a contract to make good the loss.

Wagering Agreement
1. A wagering agreement is an agreement to pay money or money's worth on
the happening of an uncertain event.
2. No insurable interest is necessary in case of a wagering agreement.
3. In a wagering agreement there is conflict of interest and in reality there is
no interest at all to protect.
4. In case of a wagering agreement there is no question of indemnity. On the
happening of the event fixed amount becomes payable.

Types of Insurance
Life Insurance
A life insurance policy is a contract with an insurance company. In exchange
for premium payments, the insurance company provides a lump-sum
payment, known as a death benefit, to beneficiaries upon the insured's death.
Typically, life insurance is chosen based on the needs and goals of the
owner. Term life insurance generally provides protection for a set period of
time, while permanent insurance, such as whole and universal life, provides
lifetime coverage. There are many varieties of life insurance. Some of the
more common types are discussed below.
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Term life insurance

Term life insurance is designed to provide financial protection for a specific
period of time, such as 10 or 20 years. With traditional term insurance, the
premium payment amount stays the same for the coverage period you select.
After that period, policies may offer continued coverage, usually at a
substantially higher premium payment rate. Term life insurance is generally
less expensive than permanent life insurance.
Universal life insurance
Universal life insurance is a type of permanent life insurance designed to
provide lifetime coverage. Unlike whole life insurance, universal life
insurance policies are flexible and may allow you to raise or lower your
premium payment or coverage amounts throughout your lifetime.
Additionally, due to its lifetime coverage, universal life typically has higher
premium payments than term.
Whole life insurance
Whole life insurance is a type of permanent life insurance designed to
provide lifetime coverage. Because of the lifetime coverage period, whole
life usually has higher premium payments than term life. Policy premium
payments are typically fixed, and, unlike term, whole life has a cash value,
which functions as a savings component and may accumulate tax-deferred
over time.
Non-life / General Insurance - In todays age of consumerism, insurance
requirements have expanded to keep pace with the increasing risks. Gone are
the days when life insurances ruled the roost; today we have a wide
assortment of risk coverage commencing from health insurance to travel
insurance to theft insurance to even a wedding insurance. With affluence and
spending capacity on the surge there is a growing trend to fulfill needs, deal
with responsibilities and secure ones possessions, be it good health or
worldly wealth.
Categories of General Insurance
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Marine Insurance- covers the loss or damage of ships, cargo, terminals, and any
transport or cargo by which property is transferred, acquired, or held between the
points of origin and final destination.
Fire Insurance- A fire insurance is a contract under which the insurer in return for
a consideration (premium) agrees to indemnify the insured for the financial loss
which the latter may suffer due to destruction of or damage to property or goods,
caused by fire, during a specified period.
Personal Accident- Accidental death or injury of a breadwinner can create serious
financial problems for the family. Our Personal Guard health insurance plan
ensures total security and peace of mind. Personal Guard is a policy that covers the
insured against bodily injury or death caused due to accidents.
Motor Vehicle- Motor vehicle insurance, also called automotive insurance , a
contract by which the insurer assumes the risk of any loss the owner or operator of
a car may incur through damage to property or persons as the result of an accident.
There are many specific forms of motor vehicle insurance, varying not only in the
kinds of risk that they cover but also in the legal principles underlying them.
Health- Health insurance is a type of insurance coverage that covers the cost of an
insured individual's medical and surgical expenses. Depending on the type of
health insurance coverage, either the insured pays costs out-of-pocket and is then
reimbursed, or the insurer makes payments directly to the provider.
Miscellaneous- Miscellaneous Insurance refers to contracts of insurance other than
those of Life, Fire and Marine insurance. It covers a variety of risks, the chief of
which are:

Personal Accident insurance

Motor Vehicle Insurance
Fidelity Insurance
Credit Insurance
Workmen's Compensation Insurance
Travel insurance

Types of Life Insurance Policies

There are certain basic forms of life insurance. The different types of life
insurance policies include:
1. Term Life Insurance- Term plans are the most basic form of life insurance.
They provide life cover with no savings / profits component. They are the
most affordable form of life insurance as premiums are cheaper compared to
other life insurance plans.
2. Whole Life Policy- A whole life insurance policy covers a policyholder over
his life. The main feature of a whole life policy is that the validity of the
policy is not defined so the individual enjoys the life cover throughout his
life. The policyholder pays regular premiums until his death, upon which the
corpus is paid out to the family. The policy expires only in case of an
eventuality as there is no pre-defined policy tenure
3. Endowment Plans- Endowment plans differ from term plans in one critical
aspect i.e. maturity benefit. Unlike term plans which pay out the sum
assured, along with profits, only in case of an eventuality over the policy
term, endowment plans pay out the sum assured under both scenarios
death and survival.
4. Unit Linked Insurance Plans- ULIPs are a variant of the traditional
endowment plan. They pay out the sum assured (or the investment portfolio
if its higher) on death/maturity.
5. Money Back Policy- A money back policy is a variant of the endowment
plan. It gives periodic payments over the policy term. To that end, a portion
of the sum assured is paid out at regular intervals. If the policy holder
survives the term, he gets the balance sum assured. In case of death over the
policy term, the beneficiary gets the full sum assured.
What Reinsurance?
Reinsurance is basically a form of coverage intended for insurance providers.
Generally speaking, this type of policy reduces the losses sustained by insurance
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companies by allowing them to recover all, or part, of the amounts they pay to
claimants. Reinsurers help insurance providers avoid financial ruin in case a huge
number of policyholders turn out to make their claims during catastrophic events.
Below are some of the major types of reinsurance policies.
Types of reinsurance
1. Facultative Coverage
This type of policy protects an insurance provider only for an individual, or a
specified risk, or contract. If there are several risks or contracts that needed to be
reinsured, each one must be negotiated separately. The reinsurer has all the right to
accept or deny a facultative reinsurance proposal.
2. Reinsurance Treaty
Unlike a facultative policy, a treaty type of coverage is in effect for a specified
period of time, rather than on a per risk, or contract basis. For the duration of the
contract, the reinsurer agrees to cover all or a portion of the risks that may be
incurred by the insurance company being covered.

3. Proportional Reinsurance
Under this type of coverage, the reinsurer will receive a prorated share of the
premiums of all the policies sold by the insurance company being covered.
Consequently, when claims are made, the reinsurer will also bear a portion of the
losses. The proportion of the premiums and losses that will be shared by the
reinsurer will be based on an agreed percentage. In a proportional coverage, the
reinsurance company will also reimburse the insurance company for all processing,
business acquisition and writing costs. Also known as ceding commission, such
costs may be paid to the insurance company upfront.
4. Non-proportional Reinsurance
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In a non-proportional type of coverage, the reinsurer will only get involved if the
insurance companys losses exceed a specified amount, which is referred to as
priority or retention limit. Hence, the reinsurer does not have a proportional share
in the premiums and losses of the insurance provider. The priority or retention limit
may be based on a single type of risk or an entire business category.
5. Excess-of-Loss Reinsurance
This is actually a form of non-proportional coverage. The reinsurer will only cover
the losses that exceed the insurance companys retained limit. However, what
makes this type of contract unique is that it is typically applied to catastrophic
events. It can cover the insurance company either on a per occurrence basis or for
all the cumulative losses within a specified period.
6. Risk-Attaching Reinsurance
Under this type of contract, all policy claims that are established during the
effective period of the reinsurance coverage will be covered, regardless of whether
the losses occurred outside the coverage period. Conversely, no coverage will be
given on claims that originate outside the coverage period, even if the losses
occurred while the reinsurance contract is in effect.
7. Loss-occurring Coverage
This is a type of treaty coverage where the insurance company can claim all losses
that occur during the reinsurance contract period. The important factor to consider
is when the losses have occurred and not when the claims have been made.

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Insurance Pricing Methods

Rating Methods Rate making (aka insurance pricing) is the determination of
what rates, or premiums, to charge for insurance. A rate is the price per unit of
insurance for each exposure unit, which is a unit of liability or property with
similar characteristics. The main business objective is to charge an adequate
premium to cover losses, expenses, and allow for a profit; otherwise the insurance
company would not be successful. The pure premium, which is what is determined
by actuarial studies, consists of that part of the premium that is necessary to pay for
losses and loss related expenses. Judgment Rating is used when the factors that
determine potential losses are varied and cannot easily be quantified. There are no
statistics regarding quantity of future losses and probability. This means an
underwriter each exposure individually.
Loading Method- A loading is a percentage increase on the standard premium,
usually due to a pre-existing medical condition. These increases are relatively
common and ensure that people can obtain cover in situations where they may
have previously thought they werent eligible.
A loading is calculated if there is a higher than average probability that you will
make a claim in the future, based on the information in your application.
Premium Calculation- An insurance premium is the money charged by insurance
companies for coverage. Insurance premiums for services differ from company to
company, so it is advisable that individuals shop around for insurance premiums.
However, it is important to note that, sometimes, insurance premiums quoted are
slightly different from the premiums charged. The difference between the quote
and the actual charge can be attributed to the way the insurance premium is
calculated. The amount of insurance premiums charged by the insurance
companies is determined by statistics and mathematical calculations done by the
underwriting department of the insurance company.

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Like any type of insurance, the amount you pay for life cover depends on a number
of factors.
1. Amount of life insurance protection needed
2. Continue living in your home
3. Decreasing payouts
4. Length of cover
5. Your own health
6. Your age
7. Joint cover
8. Critical illness insurance

Underwriting
Insurance underwriting is a common but vague term referring to the process of
determining risk for potential clients. It largely takes place behind the scenes;
agents and brokers traditionally use the terms set by underwriters and present them
to customers.
The term underwriter likely got its start from financiers accepting risks on sea
voyages in exchange for premiums more than a century ago. Lloyds of London
created this market, along with the piece of paper on which the agreement was
formalized; the banks would quite literally sign their names under the space
allotted for risk information.
Underwriting is a term used by life insurers to describe the process of assessing
risk, ensuring that the cost of the cover is proportionate to the risks faced by the
individual concerned. People with the same or similar risk pay the same or similar
premium rates.
Policy servicing and Claim settlement
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Policy Servicing- This section will provide you various information about your
policy. The section also consists of different forms which can be used for making
any changes in your policy.
Claim Settlement- A claim settlement is an agreement between two or more
parties to settle a legal claim with payment and other terms. Claim settlements can
come up in a number of legal contexts. It is important to be aware that settling a
claim usually also eliminates the right to make future claims about the legal matter
in the future. If people are not satisfied with the terms of a settlement, they should
renegotiate, rather than accepting and resolving to pursue the matter further at a
later date.
The terms of a claim settlement can vary and both parties are usually required to
abide by certain terms. The party paying out is required to pay out in full within a
set time limit. The party receiving a payment may be required to waive future
claims about the matter and to indicate acceptance of the settlement. Other terms
may be attached to the agreement, depending on the case.
Role of Insurance Intermediaries and Bancassurance
Bancassurance is a French term referring to the selling of insurance through a
bank's established distribution channels.
In other words, we can say
Bancassurance is the provision of insurance (assurance) products by a bank. The
usage of the word picked up as banks and insurance companies merged and banks
sought to provide insurance, especially in markets that have been liberalized
recently. It is a controversial idea, and many feel it gives banks too great a control
over the financial industry.
In some countries, bancassurance is still largely
prohibited, but it was recently legalized in countries like USA when the Glass
Steagall Act was repealed after the passage of the Gramm Leach Bililey Act.

Advantages of Bancassurance:
The following factors have mainly led to success of bancassurance

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(i) Pressure on banks' profit margins. Bancassurance offers another area of

profitability to banks with little or no capital outlay. A small capital outlay in
turn means a high return on equity.
(ii) A desire to provide one-stop customer service. Today, convenience is a
major issue in managing a person's day to day activities. A bank, which is
able to market insurance products, has a competitive edge over its
competitors. It can provide complete financial planning services to its
customers under one roof.
(iii) Opportunities for sophisticated product offerings.
(iv) Opportunities for greater customer lifecycle management.
(v) Diversify and grow revenue base from existing relationships.
(vi) Diversify risks by tapping another area of profitability.
(vii) The realization that insurance is a necessary consumer need. Banks can
use their large base of existing customers to sell insurance products.
(viii) Bank aims to increase percentage of non-interest fee income
(ix) Cost effective use of premises

Regulation in India
Introduced with Indian Life Assurance Companies Act, 1912
The Insurance Act, 1938 created a strong and powerful regulatory authorityController of Insurance.
Nationalizations of the life insurance business and creation of LIC in 1956 and
nationalization of the general insurance business and creation of GIC and its
subsidiaries in 1973.
The powers of Controller of Insurance were diluted on the belief that the
nationalized industry does not require any supervision and that its accountability to
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the government through the Insurance Division of the Finance Ministry would be
adequate.

Insurance Regulatory and Development Authority Act, (IRDA) 1999

To open the insurance sector in India to private and foreign players
To grant statutory status to the interim Insurance Regulatory Authority and amend
the 1938 Insurance Act, the 1956 Life Insurance Corporation Act and the 1972
General Insurance Business (Nationalization) Act to end the public sector
monopoly
To regulate, promote and ensure orderly growth of the insurance industry and
provides for solvency norms and specifies that the funds of policyholders would be
retained within the country.
The minimum capital requirement for life and general insurance retained at Rs
100 crore and for reinsurance firms at Rs 200 crore

Amendments to the Insurance Act, 1938

Amendments provided forrequirements as to paid-up equity capital for both insurers and reinsurers,
manner of divesting of excess shareholding by promoters
manner and conditions of investment,
maintenance of required solvency margin at all times by the insurers;
issue of license to insurance agents, intermediary or insurance intermediary and
surveyors by the Authority as also suspension and cancellation thereof;
obligations of insurers to compulsorily undertake specified percentage of
insurance business in rural and social sector;
enhanced penalties for contravention of and failure to comply with, the provisions
of the Act and offences by companies; and
powers of Authority make regulations as required by the Act.

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