SECURITIES AND EXCHANGE BOARD OF INDIA (CAPITAL MARKET REGULATOR)

Securities and Exchange Board of India was established on April 12, 1988 and was given a
statutory recognition in 1992 by an act of parliament. Controller of capital issue was abolished
and SEBI assumed a single authority to control a capital market. SEBI act of 1992 is a vital
component in improving the quality of financial market in India and were Instrument in
attracting India and overseas Investors.

SEBI was able to restore investors confidence and regulate and control stock exchange in India
and effectively deal with formation, management, staffing, accounting and financial report and
conduct audit. The SEBI has been mandated to create an environment which would facilitate
mobilization of adequate resources through the securities market and it's efficient allocation.

OBJECTIVES

According to the preamble of the SEBI Act, the primary objectives of the SEBI is to promotes
healthy and orderly growth of the securities market and secure investor protection. For this
purpose SEBI monitors the activities of not only stock exchange but also merchant bankers etc.

The objectives of SEBI are as follows:

1) To promote the interest of investors so that there is a steady flow of savings into the
capital market.

2) TO regulate the securities market and ensure fair practices by the issuers of securities so
that they can resources at minimum cost.

3) To promote efficient service by brokers, merchant bankers and other intermediaries so

that they become competitive and professional.

FUNCTIONS
The following are the functions of SEBI;

1) Regulatory Function:-

a) Regulation of stock exchange and self regulatory organizations.

b) Registration and regulation of stock brokers, sub-brokers, registrar to all issue,

merchant bankers, underwriters, portfolio managers and such other intermediaries
who are associated with the securities market.

c) Registration and regulation of the working of collective investment schemes

including mutual funds.

d) Prohibition fraudulent and unfair trade practices relating to the securities market.

e) Prohibition of insider trading in securities.

f) Regulating substantial acquisitions of share and take over of companies.

2) Developmental functions:-

a) Promoting investors education.

b) Training of intermediaries.

c) Conducting research and published information useful to all market participants.

d) Promotions of fair practices. Code of conduct for self regulatory organization.

 e) Promoting self-regulatory organizations.

POWERS

SEBI has been vested with the following powers:

1) Power to call periodical returns from the recognized stock exchanges.

2) Power to call any information or explanation from the recognized stock exchanges or
their members.

3) Power to direct enquiries to be made in relation to affairs of stock exchanges or their

members.

4) Power to grant approval to buy-laws of recognized stock exchanges.

5) Power to make or amend buy-laws of recognized stock exchanges.

6) Power to compel listing of securities by public companies.

7) Power to control and regulate stock exchanges.

8) Power to levy fees or other charges for carrying out the purpose of regulation.

8) Power to grant registration to the market intermediaries.

SEBI GUIDLINES

SEBI has brought out a number of guidelines separately, from time to time, for primary
market and secondary market. The guidelines are follows:

A) Guidelines for primary market

Company

New Company : A new company is one (a) which has not completed 12 months
commercial production and does not have audited result and (b) where the promoters
do not have a track record .These companies will have to issue shares only at par.

New company set-up by existing company : When a new company is being set-up by
existing companies with a five year track record of consistent profitability and a
contribution of at least 50% in the equity of new company, it will be free to price its
issue, i.e., it can issue its share at premium.

Private and closely held companies: The private and closely held companies having a
track record of consistent profitability for at least three years, shall be permitted to price
their issues freely. The issue price shall be determined only by the issues in consultation
with lead managers to the issue.

Existing Listed Companies : The existing listed companies will be allowed to raise fresh
capital by freely pricing expanded capital provided the promoters contribution is 50% on
first Rs. 100 crores of issue, 40% on the next Rs. 200 crores, 30 % on next Rs. 300 crores
and 15% on balance issue amount.
Reservation of Issues

Reservation under the public subscription for the various categories of persons is made in
the following manner:

1. Permanent employees - 10%

2. Indian Mutual Funds - 20%
3. Foreign Institutional Investors - 15%
4. Development Financial Institutions - 20%
5. Shareholder of group of companies - 10%

Composite Issues

In the case of composite issue, i.e., right cum public issue by existing listed companies
differential pricing shall be allowed. In other words, issue to the public can be priced
differentially as compared to issue to right shareholders. However, justification for price
difference should be given in the offer document.

Lock in Period

Lock in period is five years for promoter’s contribution from the date of allotment or from
the commencement of commercial production whichever is late. At present, the lock in period
has been reduced to one years.

Guidelines for Public issues

 Abridged prospectus has to attached with every application.

 A company has to highlight the risk factors in the prospectus.
  Objectives of the issue and cost of project should be mentioned in the prospectus.
 Company’s management, past history and present business of the firms shold be
highlighted in the prospectus.
 Particulars in regard to company and other listed companies under the same
management which made any capital issues during the last three years are to be stated.
 Justification for the premium, in the case of premium is to be stated.
 Subscription list for public issues should be kept open for a minimum of three days and a
maximum of 10 working days.
 The collection centers should be at least 30 which include all centers with stock
exchanges.
 The quantum of issue, whether through a right or public, shall not exceed the amount
specified in the prospectus. No retention of over subscription is permissible under any
circumstances.
 A compliance report in the prescribed form should be submitted to SEBI within 45 days
from the of closure of issue.
 Minimum number of shares per application has been fixed at 500 shares face value of
Rs. 100.
 The allotments have to be made in the multiples of tradable lot of 100 shares of rs. 10
each.
 Issues by way of bonus, right etc. to be made in appropriate lots to minimize odd lots.
 If minimum subscription of 90% has not been received, the entire amount is to be
refunded to investors within 120 days.
 The capital issue should be fully paid up within 120 days.
 Underwriting has been made mandatory.
 Limit of listing of companies issue in the stock exchange has been increased from Rs. 3
crores to 5 corers.
 The time gap between the closure dates of various issues viz. rights and public should
not exceed 30 days.
 Issues should make adequate disclosure regarding the terms and condition of
redemption, security conversion and other relevant features of the new issue
instrument so that as investor can make reasonable determination of risks, returns,
safety and liquidity of the instrument. The disclosure shall be vetted by SEBI in this
regard.

B) Secondary Market

Stock Exchange

 Board of Directors of stock exchange has to be reconstituted so as to include non-

members, public representatives, government representative to the extent of 50% of
the total number of members.
  Capital adequacy norms have been laid down for members of various stock exchanges
depending upon their turnover of trade and other factors.
 Working hours for all stock exchange have been fixed uniformly.
 All the recognized stock exchange will have to inform about the transaction within 24
hours.
 Guidelines have been issued for introducing the system of the market making in less
liquid scrips in a phased manner in all stock exchanges.

Brokers

 Registration of brokers and sub-brokers is made compulsory.

 In order to ensure that brokers are professionally qualified and financially
solvent, capital adequacy norms for registration of brokers have been evolved.
 Compulsory audit of brokers book and filling of audit report with SEBI have been
made mandatory.
 To bring about greater transparency and accountability in the broker- client
relationship, SEBI has made it mandatory for brokers to disclose transaction
price and brokerage separately in the contract note issued to client.
 No broker is allowed to underwrite more than 5% of public issue.

THE INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY (IRDA)

Reforms in the Insurance sector were initiated with the passage of the
IRDA Bill in Parliament in December 1999. The IRDA since its
incorporation as a statutory body in April 2000 has fastidiously stuck to its
schedule of framing regulations and registering the private sector insurance
companies.

The other decision taken simultaneously to provide the supporting

systems to the insurance sector and in particular the life insurance companies
was the launch of the IRDA’s online service for issue and renewal of
licenses to agents.

The approval of institutions for imparting training to agents has also

ensured that the insurance companies would have a trained workforce of
insurance agents in place to sell their products, which are expected to be
introduced by early next year.

Since being set up as an independent statutory body the IRDA has put
in a framework of globally compatible regulations. In the private sector 16
life insurance and 15 general insurance companies have been registered.

FUNCTIONS OF IRDA:

The important functions of the IRDA as per the IRDA Act 1999 include
the following:

i) Licensing and regulating the insurance sector by acting as an

independent and regulatory body.

ii) Specifying requisite qualifications, code of conduct and practical

training for insurance intermediaries and agents.

iii) Protecting the interests of the policyholders in matters concerning

assigning of policy, settlement of insurance claim etc.

iv) Regulating investment of funds by insurance companies.

v) Calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers and other
organizations connected with the insurance business.

vi) Regulating maintenance of margin of solvency of the insurer.

vii) Adjudication of disputes between insurers and intermediaries or

insurance intermediaries.

viii) Supervising the functioning of the Tariff Advisory Committee.

ix) Promoting efficiency in the conduct of insurance business.

COMPOSITION OF AUTHORITY UNDER IRDA ACT,

1999:

As per the section 4 of IRDA Act' 1999, Insurance Regulatory and

Development Authority (IRDA, which was constituted by an act of
parliament) specify the composition of Authority.

The Authority is a ten member team consisting of:

1) A Chairman;

2) Five whole-time members;

3) Four part-time members,

(All appointed by the Government of India)

DUTIES AND POWERS OF IRDA:

Section 14 of IRDA Act, 1999 lays down the duties, powers and
functions of IRDA as under:

1) Subject to the provisions of this Act and any other law for the time being
in force, the Authority shall have the duty to regulate, promote and
ensure orderly growth of the insurance business and re-insurance
business.

2) Without prejudice to the generality of the provisions contained in Sub-sec

(1), the powers and functions of the Authority shall include:

 issue to the applicant a certificate of registration, renew, modify,

withdraw, suspend or cancel such registration;

 protection of the interests of the policy holders in matters

concerning assigning of policy, nomination by policy holders,
insurable interest, settlement of insurance claim, surrender value of
policy and other terms and conditions of contracts of insurance;

 specifying requisite qualifications, code of conduct and practical

training for intermediary or insurance intermediaries and agents;

 specifying the code of conduct for surveyors and loss assessors;

 promoting efficiency in the conduct of insurance business;

 promoting and regulating professional organizations
connected with the insurance and re-insurance business;

 levying fees and other charges for carrying out the purposes
of this Act;

 calling for information from, undertaking inspection of, conducting

enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organisations
connected with the insurance business;

 control and regulation of the rates, advantages, terms and conditions

that may be offered by insurers in respect of general insurance
business not so controlled and regulated by the Tariff Advisory
Committee under section 64U of the Insurance Act, 1938 (4 of
1938);

 specifying the form and manner in which books of account shall be

maintained and statement of accounts shall be rendered by insurers
and other insurance intermediaries;

 regulating investment of funds by insurance companies;

 regulating maintenance of margin of solvency;

 adjudication of disputes between insurers and intermediaries or

insurance intermediaries;
 supervising the functioning of the Tariff Advisory Committee;

 specifying the percentage of premium income of the insurer to finance

schemes for promoting and regulating professional organisations
referred to in clause (f);

 specifying the percentage of life insurance business and general

insurance business to be undertaken by the insurer in the rural or
social sector; and

 exercising such other powers as may be prescribed.

 GOALS OF INSURANCE REGULATION

The function of insurance regulation was to promote the welfare

of the public by ensuring fair contracts at the fair prices from financially
strong companies.

The market failures that insurance regulation was intended to

correct were insolvencies and unfair treatment of insured by insurers .in
short the dual goal of the regulation were solvency and equity.

New goals still emerging focus on availability and affordability of

insurance to all who desire it at affordable rates.

REGULATIONS GOVERNING INSURANCE COMPANIES

 THE INSURANCE ACT 1938:-

In 1938, with a view to protecting the interest of the insuring public,
earlier legislation was consolidated and amended by the insurance act 1938
with comprehensive provisions for the detailed and effective control over
the activities of the insurers. The actuarial and the operational matters
were looked after by the controller of insurance.
 This act was amended in 1950, making far reaching changes such
as:-

1. Requirement of the equity capital for the companies carrying on life

insurance business,
2. Ceiling on shareholding in such companies
3. Stricter controls on the investments of life insurance companies,
4. Submission of the periodic returns relating to the investment and
such other information to the controller as he may call for,
5. Appointment of the administrators for mismanaged companies,
6. Ceiling on the expenses of the management and the agency
commission
7. Incorporation of the insurance association of India and formation
of councils and committees thereof.

 LIC ACT, 1956

In 1956, the management of the life insurance business of all the
insurers and provident societies, then operating in India, was taken over by
the central government and these businesses were nationalized .LIC was
formed in September ,1956with capital contribution of Rs 5 crore from the
government of India. The LIC ACT, 1956 was passed by the parliament.

The objectives are:-

1. To conduct the business with utmost economy, in the spirit of
trusteeship,
2. To charge premium no higher than warranted by the strict actuarial
considerations,
3. To invest the funds from obtaining max. yield for the
policyholders consistent with the safety of the capital

SALIENT FEATURES OF THIS ACT

It laid the basis for crating LIC out of the several insurance companies
which existed prior to nationalization

LIC of India was vested with exclusive privilege to transect life

insurance business n India. This has been done away with as a result
of amendments made in 1999.

Section 38 of this act provides that LIC can not be terminated by any
law relating to the winding up of companies or corporations, unless
the central government orders for and directs it to be so.
  INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
ACT 1999
After liberalization of the financial sector after 1991, the government of
India constituted the Malhotra committee for suggesting reforms in the
insurance sector. This committee recommended opening of the insurance
sector and suggested setting up of the statutory body called Insurance
regulatory authority In 1996 ,interim IRA was formed and in 1999, the IRDA
bill was passed.IRA was renamed as insurance regulator and development
authority (IRDA) to reflect the development of the insurance sector.

IRDA Act provides for the establishment of the authority to protect the
interest of the policyholder ,to regulate ,to promote and ensure the orderly
growth of the insurance industry .An authority called IRDA was established
under this act.

The authority consist of the following members

1. A chairperson
2. Not more than five whole time members
3. Not more than four part time members
The important functions of IRDA are:-

1. To exercise all powers an functions of controller of insurance

2. Protection of the interest of the policyholders
 3. To issue, renew, modify ,withdraw or suspend certificate of the
registration
4. To specify requisite qualification and training for insurance
intermediaries and agents
5. To promote and regulate the professional organizations connected
with the insurance
6. To conduct inspection ,investigations
7. To prescribe method of insurance accounting
8. To regulate investment of funds and the margins of the solvency
9. To adjudicate upon disputes
10.To conduct inspection and the audit of the insurers ,intermediaries
and other organizations concerned with insurance

SALIENT FEATURES OF THE ACT

The IRDA replaces the controller under the insurance act 1938.

Sections 2(f) defines an intermediary to include insurance brokers ,re-insurance

brokers , insuanceconsultants,surveyors and loss assessors.
In addition to the above there are some more acts which have bearing on the
field of the insurance. They are as under:-

CONSUMER PROTECTION ACT,1986

This act applies to all goods and services. It covers private public and co operative
sectors. The act seeks to protect the following rights of the consumers

 The right to be protected against marketing of goods which are

hazardous to the life and the property.
 The right to inform about the quality, quantity
,potency,purity,standard and the price of the goods
 The right to be heard and assured that consumers interest will
receive due consideration at appropriate forum.
 The right to seek redressal against unfair trade practices and
unscrupulous exploitation of the consumers
 The right to the consumer education

The ACT defines a consumer as a person who buys goods or hires service in
return of the payment
Policyholders are the consumers within the preview of the consumer
protection act and therefore acquire all the rights available to the
consumers under this act.

SALIENT FEATURES OF THE ACT

Under this act consumers as an individual or along with other individuals, or

through a consumer organization ,can approach the various forums
prescribed under the act for redressal, in case he is not satisfied with the
goods and services provided. He has to allege a defect in the goods and
services.

In order to attend the complaints under this act consumer disputes redessal
forums are to be established in each district and each state. Forums at the
district level will hear complaints up to the value of Rs 500,000 and forums
at the state levels will hear complaints up to Rs 20,00,000 . Any complaints
pertaining to the amount above Rs 20,00,000 will have to be heard by the
National Commission ,which will also hear appeals against the decisions of
the State forum.

OMBUDSMAN SCHEME (Redressal of Public Grievances

Rules,1998)

In exercise of the powers confers by the Sec.114(1) of the insurance act,

1938, the Central Government has framed rules known as Redressal of
Public Grievances Rules 1998.under this rule one of the scheme is
Ombudsman Scheme. It was created to resolve all complaints relating to
settlement of the claims on the part of the insurance company in cost
effective ,efficient and impartial manner.

An ombudsman defined to be a person appointed to investigate the

grievances against the mal administration.

Ombudsman may receive the complaints relating to:-

 Partial or total repudiation of claims

 Any disputed regarding the premium paid or payable in terms of
policy relating to the claims.
 Delay in settlement of claims
 No issue of any insurance document to customers after the receipt of
premium

The Ombudsman shall act as councilor and mediator in terms within the
terms of reference. His decision as to whether the complaint is fit and
proper for being considers shall be the final.

Complaints to Ombudsman may be made only when :-

 The insurer has rejected the complaint

 No reply was received within one month of the complaint
  The reply was not satisfactory

The complaint can be made within one year after the insurer has rejected
the representation.

REGULATORY PRCEDURES:-

REGISTRATION AND LICENCING OF THE INSURANCE

Companies in India are governed by the IRDA Regulations 2000,the

important provisions contained in these stipulation are:-

 Any applicant desiring to carry on insurance business in India has to

make application to the authority.
 Separate to application has to be made for
1. Life insurance business consisting of linked business ,non linked
business or both
2. General insurance business including health insurance business
 The paid up capital of the insurer shall not have more than 26%
shares in the form of the foreign equity
 While evaluating the application the authority will consider the track
records of promoters ,the extent of obligation to the promote life
and general insurance products I any priority sector , nature of the
 product, planned infrastructure of the applicant of the company level
of the actual and other professional expertise ,organization structure
etc.
 If the authority is satisfied with the criterion like insurance obligation,
volume of the business available to ,capital structure earning
prospects, serving of the public interest and the fulfillment of the
provisions contained in various sections of the act, it may register
and grant him a certificate.
 Within 12 months from the date of the registration the insurer has to
commence business and extended period if any
 The capital requirements are minimum paid up capital of Rs 100
crores for life and general insurance and Rs 200 crores for the non
life insurance business.

REGULATIONS FRAMED UNDER INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY ACT 1999 AND THE INSURANCE
(AMENDMENT) ACT 2002:-

1. IRDA authority (actuarial report and abstract )regulations 2000

2. IRDA authority (obligation of insure of rural or social sectors )
Regulation 2000
3. IRDA authority (Insurance advertisement and disclosure )Regulation
2000
4. IRDA authority (licensing of the insurance agents)Regulation 2000
5. IRDA authority(General insurance and Reinsurance) Regulation 2000
6. IRDA authority (appointed actuary) Regulation 2000
7. IRDA authority (asset ,liability and solvency margin of
insurer)Regulation 2000
8. IRDA authority (meeting) Regulation 2000
9. IRDA authority (registration of Indian Insurance
companies)Regulation 2000
10.Insurance advisory committee(meeting)2000
11.IRDA authority (Investment) Regulation 2000
12.IRDA authority (preparation of financial statement and auditors
report of insurance companies) Regulation 2002
13.IRDA authority (licensing, professional requirement and code of
conduct ) regulation 2000
14.IRDA authority (conditions of services of officers and other
employees) Regulation 2000
15.IRDA authority (life insurance reinsurance) Regulation 2000
16.IRDA authority (investment) (amendment) regulation 2002
17.IRDA authority (Third party administration –Health
services)Regulation 2001
18.IRDA authority (reinsurance advisory committee) Regulations 2001
19.IRDA authority (protection of the policy holders interest)Regulation
2001
20.IRDA authority (licencing of the corporate agents) Regulation 2002
21.IRDA authority (insurance bookers) Regulation 2002
22.IRDA authority (manner of payment of premium) Regulation 2002
REGULATORY PRCEDURES:-

REGISTRATION AND LICENCING OF THE INSURANCE

Companies in India are governed by the IRDA Regulations 2000,the

important provisions contained in these stipulation are:-

 Any applicant desiring to carry on insurance business in India has to

make application to the authority.
 Separate to application has to be made for
3. Life insurance business consisting of linked business ,non linked
business or both
4. General insurance business including health insurance business
 The paid up capital of the insurer shall not have more than 26%
shares in the form of the foreign equity
 While evaluating the application the authority will consider the track
records of promoters ,the extent of obligation to the promote life
and general insurance products I any priority sector , nature of the
product, planned infrastructure of the applicant of the company level
of the actual and other professional expertise ,organization structure
etc.
 If the authority is satisfied with the criterion like insurance obligation,
volume of the business available to ,capital structure earning
 prospects, serving of the public interest and the fulfillment of the
provisions contained in various sections of the act, it may register
and grant him a certificate.
 Within 12 months from the date of the registration the insurer has to
commence business and extended period if any
 The capital requirements are minimum paid up capital of Rs 100
crores for life and general insurance and Rs 200 crores for the non
life insurance business.

REGULATIONS FRAMED UNDER INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY ACT 1999 AND THE INSURANCE
(AMENDMENT) ACT 2002:-

23.IRDA authority (actuarial report and abstract )regulations 2000

24. IRDA authority (obligation of insure of rural or social sectors )
Regulation 2000
25.IRDA authority (Insurance advertisement and disclosure )Regulation
2000
26.IRDA authority (licensing of the insurance agents)Regulation 2000
27.IRDA authority(General insurance and Reinsurance) Regulation 2000
28.IRDA authority (appointed actuary) Regulation 2000
29.IRDA authority (asset ,liability and solvency margin of
insurer)Regulation 2000
30.IRDA authority (meeting) Regulation 2000
31.IRDA authority (registration of Indian Insurance
companies)Regulation 2000
32.Insurance advisory committee(meeting)2000
33.IRDA authority (Investment) Regulation 2000
34.IRDA authority (preparation of financial statement and auditors
report of insurance companies) Regulation 2002
35.IRDA authority (licensing, professional requirement and code of
conduct ) regulation 2000
36.IRDA authority (conditions of services of officers and other
employees) Regulation 2000
37.IRDA authority (life insurance reinsurance) Regulation 2000
38.IRDA authority (investment) (amendment) regulation 2002
39.IRDA authority (Third party administration –Health
services)Regulation 2001
40.IRDA authority (reinsurance advisory committee) Regulations 2001
41.IRDA authority (protection of the policy holders interest)Regulation
2001
42.IRDA authority (licencing of the corporate agents) Regulation 2002
43.IRDA authority (insurance bookers) Regulation 2002
44.IRDA authority (manner of payment of premium) Regulation 2002
 CHAPTER 1

INTRODUCTION TO INSURANCE

The business of insurance is related to the protection of the economic

values of assets. Every asset is expected to last for a certain period of time
during which it will perform. After that the benefit may not be available.
There is a life time for a machine in a factory or a cow or a motor car. None
of them will last for ever. The owner is aware of this and he can so manage
his affairs that by the end of that period or lifetime, a substitute is made
available. Thus, he makes sure that the value or income is not lost.
However, the asset may get lost earlier. An accident or some other
unfortunate event may destroy it or make it non functional. In that case the
owner and those depriving benefits there from would be deprived of the
benefits and the planned substitute would not have been ready. There is an
adverse or unpleasant situation. Insurance is a mechanism that helps to
reduce the effect of such adverse situations.
 Insurance industry has always been a growth-oriented industry
globally. On the Indian scene too, the insurance industry has always
recorded noticeable growth vis-à-vis other Indian industries.

The Triton General Insurance Co. Ltd. was the first general insurance
company to be established in India in 1850, which was a wholly British-
owned company. The first general insurance company to be set up by an
Indian was Indian Mercantile Insurance Co. Ltd., which was established in
1907. There emerged many a player on the Indian scene thereafter.

The general insurance business was nationalized after the promulgation

of General Insurance Business (Nationalization) Act, 1972. The post-
nationalization general insurance business was undertaken by the General
Insurance Corporation of India (GIC) and its 4 subsidiaries:

1. Oriental Insurance Company Limited;

2. New India Assurance Company Limited;

3. National Insurance Company Limited; and

4. United India Insurance Company Limited.

Towards the end of 2000, the relation ceased to exist and the four
companies are, at present, operating as independent companies.

The Life Insurance Corporation (LIC) was established on 01.09.1956

and had been the sole corporation to write the life insurance business in
India.
 The Indian insurance industry saw a new sun when the Insurance
Regulatory & Development Authority (IRDA) invited the applications for
registration as insurers in August, 2000. With the liberalization and opening
up of the sector to private players, the industry has presented promising
prospects for the coming future. The transition has also resulted into
introduction of ample opportunities for the professionals including Chartered
Accountants.

The Indian Insurance industry is featured by the attributes:

 Low market penetration;

 Ever-growing middle class component in population.

 Growth of consumer movement with an increasing demand for

better insurance products;

 Inadequate application of information technology for business.

 Adequate fillip from the Government in the form of tax incentives to

the insured, etc.

The industry formations need to keep vigil on these characteristics of

the Indian market and formulate their strategies to entail maximum
contribution to the output of the sector.

The Indian life and non-life insurance business accounted for merely
0.42 percent of the world's life and non-life business in 1997.

The insurance sector in India has come a full circle from being an open
competitive market to nationalisation and back to a liberalized market
again. Tracing the developments in the Indian insurance sector reveals the
360-degree turn witnessed over a period of almost two centuries.

DEFINITIONS:

General Definition:

In the words of John Magee, “Insurance is a plan by themselves which

large number of people associate and transfer to the shoulders of all, risks that
attach to individuals.”

Fundamental Definition:

In the words of D.S. Hansell, “Insurance accumulated contributions of all

parties participating in the scheme.”

Contractual Definition:

In the words of justice Tindall, “Insurance is a contract in which a sum of

money is paid to the assured as consideration of insurer’s incurring the risk of
paying a large sum upon a given contingency.”

CHARACTERISTICS OF INSURANCE :

1. Sharing of risks

2. Cooperative device

3. Evaluation of risk

4. Payment on happening of a special event

5. The amount of payment depends on the nature of losses incurred.

 6. The success of insurance business depends on the large number of
people insured against similar risk.

7. Insurance is a plan, which spreads the risk and losses of few people
among a large number of people.

8. The insurance is a plan in which the insured transfers his risk on the
insurer.

9. Insurance is a legal contract which is based upon certain principles of

insurance which includes utmost good faith, insurable interest,
contribution, indemnity, causes proxima, subrogation, etc.

10. The scope of insurance is much wider and extensive

FUNCTIONS OF INSURANCE:

The functions of Insurance can be bifurcated into three parts:

1. Primary Functions

2. Secondary Functions
3. Other Functions

1) The primary functions of insurance include the following:

a) Provide Protection - The primary function of insurance is to provide

protection against future risk, accidents and uncertainty. Insurance
 cannot check the happening of the risk, but can certainly provide for
the losses of risk. Insurance is actually a protection against economic
loss, by sharing the risk with others.

b) Collective bearing of risk - Insurance is a device to share the

financial loss of few among many others. Insurance is a mean by which
few losses are shared among larger number of people. All the insured
contribute the premiums towards a fund and out of which the persons
exposed to a particular risk is paid.

c) Assessment of risk - Insurance determines the probable volume of

risk by evaluating various factors that give rise to risk. Risk is the basis
for determining the premium rate also.

d) Provide Certainty - Insurance is a device, which helps to change

from uncertainty to certainty. Insurance is device whereby the
uncertain risks may be made more certain.

2) The secondary functions of insurance include the following:

a) Prevention of Losses - Insurance cautions individuals and

businessmen to adopt suitable device to prevent unfortunate
consequences of risk by observing safety instructions; installation of
automatic sparkler or alarm systems, etc. Prevention of losses causes
lesser payment to the assured by the insurer and this will encourage
for more savings by way of premium. Reduced rate of premiums
stimulate for more business and better protection to the insured.
 b) Small capital to cover larger risks - Insurance relieves the
businessmen from security investments, by paying small amount of
premium against larger risks and uncertainty.

Contributes towards the development of larger industries - Insurance

provides development opportunity to those larger industries having more
risks in their setting up. Even the financial institutions may be prepared to
give credit to sick industrial units which have insured their assets including
plant and machinery.

3) The other functions of insurance include the following:

a) Means of savings and investment - Insurance serves as savings and

investment, insurance is a compulsory way of savings and it restricts
the unnecessary expenses by the insured's. For the purpose of availing
income-tax exemptions also, people invest in insurance.

b) Source of earning foreign exchange - Insurance is an international

business. The country can earn foreign exchange by way of issue of
marine insurance policies and various other ways.

c) Risk Free trade - Insurance promotes exports insurance, which

makes the foreign trade risk free with the help of different types of
policies under marine insurance cover.

INSURANCE INDUSTRY: CLASSIFICATION:

 INSURANC

LIFE INSURANCE GENERAL INSURANCE

FIRE INSURANCE MARINE INSURANCE MEDICLAIM MOTOR VEHICLE

SOME PLAYERS IN THE INDUSTRY:

Life Insurance General Insurance

Life Insurance Corporation of India.

General Insurance Corporation of India.

1. Oriental Insurance Company Ltd.

2. New India Assurance Company

Ltd.

3. National Insurance Company Ltd.

4. United India Insurance Company

Ltd.

NEW ENTRANTS
 Bajaj Alliaz General Insurance Company
ICICI Prudential Life Insurance Ltd.
Ltd.

Tata AIG Life Insurance Corporation Reliance General Insurance Company

Ltd. Ltd.

ING Vysya Life Insurance Corporation Tata AIG General Insurance Company
Ltd. Ltd.

Royal Sundaram Alliance Insurance

Om Kotak Mahindra Life Insurance
Company Ltd.
Corporation Ltd.

CHAPTER 2

LIFE INSURANCE IN INDIA

WHAT IS LIFE INSURANCE?

Life insurance is a contract between the insurer and policy owner.

Insurer is agreed to pay an amount to the person insured or his nominee
either at the date or maturity or a periodic intervals or unfortunate death
of the policy owner. Policy owner has to pay a fixed amount called
premium in periodic intervals. This can be monthly, quarterly, half yearly or
yearly. Policy owner is allowed to choose the type of payment and payment
cycle. There are many life insurance schemes availability today in India.
Premium amount varies depends on many factors like age of the policy
owner, scheme, type of the policy, sum assured etc. 

According to Sec. (2) (11) of the Insurance Act, Life Insurance business
means “the business of effecting contracts upon human life. It includes:

 Any contracts whereby the payment of money is assured upon death

(except death by accident only) or the happening of any contingency
dependent on human life;

 Any contract which is subject to the payment of premiums for a term

dependent on human life;

 Any contract which include the granting of disability and double or

triple indemnity, accident benefits, the granting of annuities upon
human life, and the granting of superannuation allowances.”

The contract is valid for payment of the insured amount during:

 The date of maturity, or

 Specified dates at periodic intervals, or

  Unfortunate death, if it occurs earlier.

Among other things, the contract also provides for the payment of
premium periodically to the Corporation by the policyholder. Life insurance
is universally acknowledged to be an institution, which eliminates 'risk',
substituting certainty for uncertainty and comes to the timely aid of the
family in the unfortunate event of death of the breadwinner.

By and large, life insurance is civilization’s partial solution to the

problems caused by death.

Life insurance, in short, is concerned with two hazards that stand

across the life-path of every person:

1. That of dying prematurely is leaving a dependent family to fend for

itself.

2. That of living till old age without visible means of support.

OVERVIEW:

Life Insurance in India was nationalised by incorporating Life Insurance

Corporation (LIC) in 1956. All private life insurance companies at that time
were taken over by LIC.

In 1993 the Government of Republic of India appointed RN Malhotra

Committee to lay down a road map for privatisation of the life insurance
sector.
 While the committee submitted its report in 1994, it took another six
years before the enabling legislation was passed in the year 2000,
legislation amending the Insurance Act of 1938 and legislating the
Insurance Regulatory and Development Authority Act of 2000. The same
year that the newly appointed insurance regulator – Insurance Regulatory
and Development Authority IRDA – started issuing licenses to private life
insurers.

All life insurance companies in India have to comply with the strict
regulations laid out Insurance Regulatory Development Authority of India
(IRDA). Therefore there is no risk in going in for private insurance players. In
terms of being rated for financial strength like international players, only
ICICI Prudential s rated by Fitch India at National Insurer Financial Strength
Rating of AAA (Ind) with stable outlook indicating the highest claims paying
ability rating.

Life Insurance Corporation of India (LIC), the state owned behemoth,

remains by the largest player in the market. Among the private sector
players, ICICI Prudential Life Insurance (JV between ICICI Bank and
Prudential PLC) is the largest

followed by Bajaj Allianz Life Insurance Company Limited (JV between Bajaj
Group and Allianz). The private companies are coming out with better
products which are more beneficial to the customer.

Among such products are the ULIPs or the Unit Linked Investment
Plans which offer both life cover as well as scope for savings or investment
options as the customer desires. Further, these types of plans are subject to
a minimum lock-in period of three years to prevent misuse of the
significant tax benefits offered to such plans under the Income Tax Act.
Hence, comparison of such products with mutual funds would be
erroneous.

BRIEF HISTORY OF THE LIFE INSURANCE SECTOR:

The business of life insurance in India in its existing form started in
India in the year 1818 with the establishment of the Oriental Life Insurance
Company in Calcutta. It was conceived as a means to provide for English
Widows. In those days a higher premium was charged for Indian lives than
the non-Indian lives as Indian lives were considered riskier for coverage.
The Bombay Mutual Life Insurance Society that started its business in 1870
was the first company to charge same premium for both Indian and non-
Indian lives.

Some of the important milestones in the life insurance business in India

are:

191 The Indian Life Assurance Companies Act enacted as the first statute
2 to regulate the life insurance business.

192 The Indian Insurance Companies Act enacted to enable the

8 government to collect statistical information about both life and
non-life insurance businesses
193 Earlier legislation consolidated and amended to by the Insurance Act
8 with the objective of protecting the interests of the insuring public

195 245 Indian and foreign insurers and provident societies taken over
6 by the central government and nationalized. LIC formed by an Act of
Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5
crore from the Government of India

197 Nationalization of general insurance business in India with the

2 formation of a holding company General Insurance Corporation

199 Setting up of Malhotra Committee

3

199 Recommendation of Malhotra Committee published

4

199 Setting up of Mukherjee Committee

5

199 Setting up of( interim) Insurance Regulatory Authority (IRA)

6 Recommendations of the IRA

199 Mukherjee Committee report submitted but not made public

7

199 The Government gave greater autonomy to Life Insurance

7 Corporation. General Corporation and its subsidiaries with regard to
restricting of boards and flexibility in investment norms aimed at
channeling funds to the infrastructure sector

199 The cabinet decided to allow 40% foreign equity in private insurance
 8 companies- 26% to foreign companies and 14% to NRI’s and FII’s

199 The standing committee headed by Murali Deora deiced that foreign
9 equity in private insurance should be limited to 26%. The IRA bill
renamed the Insurance Regulatory and Development Authority Bill

199 Cabinet clears Insurance Regulatory and Development Authority Bill

9

The early developments of life insurance were closely linked with that of
marine insurance. The first insurers of life were the marine insurance
underwriters who started issuing life insurance policies on the life of master
and crew of the ship, and the merchants. The early insurance contracts took
the nature of policies for a short period only. The underwriters issued
annuities and pension for a fixed period or for life to provide relief to widows
on the death of their husbands. The first life insurance policy was issued on
18th June 1583, on the life of William Gibbons for a period of 12 months.
 

The British companies started life insurance business in India, by issuing

policies exclusively on the lives of European soldiers and civilians. They
sometimes issued policies on the lives of Indian’s by charging extra. Different
insurance companies like Bombay Insurance Company LTD. (1793) and
Oriental Life Assurance Company (1818) was formed to issue life assurance
policies in India. Gradually, the first Indian Company named as Bombay
Mutual Life Insurance Society Ltd. was formed in Dec. 1870. By 1971, the
total numbers of companies working in India were 15, out of which 7 were
Indian and the remaining were British companies.
 After several changes have been made for the period from 1930 to
1938, the Government of India passed Insurance Act, 1938. The act still
applies to all kinds of insurance business by instituting necessary
amendments from time to time.

WHO CAN BUY A LIFE INSURANCE?

Any person who has attained majority and is eligible to enter into a
valid contract can insure himself/herself and those in whom he/she has
insurable interest. Policies can also be taken, subject to certain conditions,
on the life of one's spouse or children. While underwriting proposals,
certain factors such as the policyholder’s state of health, the proponent's
income and other relevant factors are considered by the Corporation.

WHAT ARE THE OBJECTIVES OF LIFE INSURANCE?

 Spread Life Insurance widely and in particular to the rural areas and
to the socially and economically backward classes with a view to
reaching all insurable persons in the country and providing them
adequate financial cover against death at a reasonable cost.

 Maximize mobilization of people's savings by making insurance-

linked savings adequately attractive.

 Bear in mind, in the investment of funds, the primary obligation to its

policyholders, whose money it holds in trust, without losing sight of
 the interest of the community as a whole; the funds to be deployed
to the best advantage of the investors as well as the community as a
whole, keeping in view national priorities and obligations of
attractive return.

 Conduct business with utmost economy and with the full realization
that the moneys belong to the policyholders.

 Act as trustees of the insured public in their individual and collective

capacities.

 Meet the various life insurance needs of the community that would
arise in the changing social and economic environment.

 Involve all people working in the Corporation to the best of their

capability in furthering the interests of the insured public by
providing efficient service with courtesy.

Promote amongst all agents and employees of the Corporation a sense

of participation, pride and job satisfaction through discharge of their duties
with dedication towards achievement of Corporate Objective.

WHO NEEDS LIFE INSURANCE?

Life insurance is designed to protect your family and other people who
may depend on you for financial support. If you die and lose your income,
the people that are dependent on your financial support will lose that
income, so life insurance can help cover some or all of that loss depending
on the policy you choose.

But there are instances where life insurance can be beneficial even if
you have no dependents, such as your desire to cover your own funeral
expenses. Here are some guidelines to help you decide if life insurance is
the right choice for you:

 Children: Children do not need life insurance. Yes, there have been
cases where life insurance for one's child has been a blessing, but in
the majority of cases, children do not need life insurance since no one
depends on income from them.

 Beginning Families: Life insurance should be purchased if you are

considering starting a family. Your rates will be cheaper now than
when you get older and your future children will be depending on your
income.

 Established Families: If you have a family that depends on you, you

need life insurance now! This does not include only the spouse or
partner working outside the home. Life insurance also needs to be
considered for the person working in the home. The costs of replacing
someone to do domestic chores, home budgeting and childcare can
cause significant financial problems for the surviving family.

 Young Single Adults: The reason a single adult would typically need
life insurance would be to pay for their own funeral costs or if they
 help support an elderly parent or other person they may care for
financially. Otherwise, if one has other sources of money for a funeral
and has no other persons that depend on their income then life
insurance would not be a necessity.

 Non-Child working couples: Both persons in this situation would

need to decide if they would want life insurance. If both persons are
bringing in an income that they feel comfortable living on alone if their
partner should pass away, then life insurance would not be necessary
except if they wanted to cover their funeral costs. But, maybe in some
instances one working spouse contributes more to the income or
would want to leave their significant other in a better financial
position, then as long as purchasing a life insurance policy would not
be a financial burden, it could be an option. For a low cost life
insurance option look into Term Life Insurance.

 Elderly: As long as you do not have people depending on your

income for support, life insurance at this stage in life would not be
necessary, unless again, you do not have any other means to pay for
your funeral expenses. But, be aware that purchasing a life insurance
policy at this age can be very expensive. Before doing so, first talk to a
financial advisor or accountant about looking into other saving options
to pay for your funeral costs before considering life insurance.
 CHAPTER 3

FEATURES OF LIFE INSURANCE

The following are the essential features of a valid contract of life insurance.

1) Elements of a valid contract

2) Insurable interest

3) Utmost good faith

4) Warranties

5) Assignment and nomination

6) Cause is certain

7) Premium

8) Terms of policy

9) Return of premium

Now we shall consider the above features of life insurance.

1) Elements of a Valid Contract: Contract of life insurance has the essential

elements of a general contract, since the life insurance contract is a
contract, as defined in the Indian Contract Act. A valid contract of life
 insurance comes into existence where the essential elements of
agreement (offer and acceptance, competency of the parties, free
consent of the parties, legal consideration and legal objectives) are
present. A contract of life insurance may be defined as a contract
between two parties where by a person undertakes in consideration of
a fixed sum of money to pay to the other a fixed amount of money on
the death of a certain person. A contract of life insurance comes into
existence when there is an offer or proposal on one side and
acceptance of the same by the other. The contract of life insurance
must be entered into by a competent person in order to be valid. The
competent person must be of the age of majority according to law and
of sound mind. Premium is the consideration that must be given for
the commencement of the life insurance contract. The object of this
contract should be lawful. Free consent is also one of the essential
features of the contract of life insurance. Every person entering into a
life insurance contract should enter into it by free consent.

2) Insurable Interest: A person cannot insure the life of another unless he

has an insurable interest in it. The risk against this policy is the death
of the insured. in life insurance the insurable interest must exist at the
time of the contract of insurance. The insurance act, 1938 does not
define insurable interest. Court judgments have established the
circumstance in which insurable interest is deemed to exist. It has
been held that a person has unlimited insurable interest in his own life.
Other classifications relevant for life insurance are:
  A husband has insurable interest in the life of his wife and vice
versa.

 An employer has insurable interest in his employee to the extent

of the value of his service.

 An employee has insurable interest in the life of his employer to

the extent of his remuneration for the period of his notice.

 A creditor has an insurable interest in the life of the debtor, to the

extent of the debt.

 Partners have the insurable interest in the lives of each other.

 A company has an insurable interest in the life of a key valuable

employee.

3) Utmost Good Faith: Insurance contracts, however, are contracts of

uberrimae fidei i.e. one base on utmost good faith or the contract of
utmost good faith. The insured is bound to disclose all the material
facts and figures known to him but unknown to the insurer. Every fact
which is likely to influence the mind of the insurer in deciding whether
to accept the proposal or in fixing the rate of premium is material for
this purpose. Similarly, the insurer is bound to exercise the same good
faith in disclosing the scope of insurance which he is prepared to grant.
In life insurance age, income, education, occupation, health, family size
 etc. are some examples of material facts that should be disclosed at
the time of entering into the contract.

4) Warranties: Warranties are an important feature of life insurance

contract. Warranties are the basis of the contract between the
proposer and insurer. If any statement, whether of material or non-
material facts and figures are untrue the contract shall be null and void
and the premium paid by him may be forfeited by the insurer. The
policy insured will contain that proposal and the personal statement
shall form part of the policy and be the basis of the contract.

5) Assignment and Nomination: Both assignment and nomination are

essential features of life insurance policy. Assignment of a life policy
means transferring the rights of the assured in respect of the policy
holder to the assignee. In the case of the nomination, a person is
merely named to collect the amount to be paid by the insurer on the
death of the assured.

6) Cause is Certain: In life insurance policy, the insurer has to pay the
assured amount one day or other because the death of the assured or
his reaching a particular age is certain to happen.

7) Premium: The premium is the price for the risk of loss undertaken by
the insurer. In the case of the insurance, premium is usually required
to be paid in cash and advance payment of the premium is a condition
precedent to the creation of a binding contract of insurance. The
amount of premium for payment of insured is paid monthly or on
 annual instalments for a certain period. In life insurance, the premium
is calculated on the average rate of mortality and the fixed periodical
premium may continue either until death or for a specified number of
years. Premium is payable till the maturity of the policy.

8) Terms of Policy: An insurance policy specifies the terms and conditions

or period of time, it covers often the nature of risk against which
insurance is sought, determines the period or life of the policy. A life
insurance policy may cover a specified number of years or the balance
of the insured life.

9) Return of Premium: Premium is the consideration for the risk run by the
insurers, and if risk insured against it is not run, then the consideration
fails, the policy does not attach, and as a consequence the premium
paid can be recovered from the insurer. The general principle
applicable to the claim for the return of the premium is that if the
insurers have never been on the risk, they cannot be said to have
earned the premium. But where the insurance is avoided by the
insurers on the ground of breach of warranty, the premium can only
be recovered if it is shown there was breach ab initio.

CHAPTER 4

ADVANTAGES OF LIFE INSURANCE

 Life insurance has no competition from any other business. Many
people think that life insurance is an investment or a means of saving. This
is not a correct view. When a person saves, the amount of funds available
at any time is equal to the amount of money set aside in the past, plus
interest. This is so in a fixed deposit in the bank, in national savings
certificates, in mutual funds and all other savings instruments. If the money
is invested in buying shares and stocks, there is the risk of the money being
lost in the fluctuations of the stock market. Even if there is no loss, the
available money at any time is the amount invested plus appreciation. In
life insurance, however, the fund available is not the total of the savings
already made (premiums paid), but the amount one wished to have at the
end of the savings period (which is the next 20 or 30 years). The final fund is
secured from the very beginning. One is paying for it later, out of the
savings. One has to pay for it only as long as one life or for a lesser period if
so chosen. There is no other scheme which provides this kind of benefit.
Therefore life insurance has no substitute.

Even so, a comparison with other forms of savings will show that life
insurance has the following advantages.

 In the event of death, the settlement is easy. The heirs can collect the
moneys quicker, because of the facility of nomination and assignment.
The facility of nomination is now available for some bank accounts.
 There is a certain amount of compulsion to go though the plan of
savings. In other forms, if one changes the original plan of savings,
there is no loss. In insurance, there is a loss.

 Certain cannot claim the life insurance moneys. They can be

protected against attachments by courts.

 There are tax benefits, both in income tax and in

capital gains.

 Marketability and liquidity are better. A life insurance policy is

property and can be transferred or mortgaged. Loans can be raised
against the policy.

 The following tenets help agents to believe in the benefits of life

insurance. Such faith will enhance their determination to sell and their
perseverance.

 Life insurance is not only the best possible way for family protection.
There is no other way.

 Insurance is the only way to safeguard against the unpredictable risks

of the future. It is unavoidable.

 The terms of life are hard. The terms of insurance are easy.
 The value of human life is far greater than the value of property. Only
insurance can preserve it.

 Life insurance is not surpassed by many other savings or investment

instrument, in terms of security, marketability, stability of value or
liquidity.

 Insurance, including life insurance, is essential for the conservation of

many businesses, just as it is in the preservation of homes.

 Life insurance enhances the existing standards of living.

 Life insurance helps people live financially solvent lives.

 Life insurance perpetuates life, liberty and the pursuit of happiness.

 Life insurance is a way of life.

CHAPTER 5

INDIAN SCENARIO OF LIFE INSURANCE

With an annual growth rate of 15-20% and the largest number of life
insurance policies in force, the potential of the Indian insurance industry is
huge. Total value of the Indian insurance market is estimated at Rs. 450
billion (US$10 billion). According to government sources, the insurance and
banking services’ contribution to the country's gross domestic product
(GDP) is 7% out of which the gross premium collection forms a significant
part.

The funds available with the state-owned Life Insurance Corporation

(LIC) for investments are 8% of GDP. Till date, only 20% of the total
insurable population of India is covered under various life insurance
schemes, the penetration rates of health and other non-life insurances in
India is also well below the international level. These facts indicate the of
immense growth potential of the insurance sector.

The year 1999 saw a revolution in the Indian insurance sector, ending
of government monopoly and the passage of the Insurance Regulatory and
Development Authority (IRDA) Bill, lifting all entry restrictions for private
players and allowing foreign players to enter the market with some limits
on direct foreign ownership.

Though, the existing rule says that a foreign partner can hold 26%
equity in an insurance company, a proposal to increase this limit to 49% is
pending with the government. Since opening up of the insurance sector in
1999, foreign investments of Rs. 8.7 billion have poured into the Indian
market and 21 private companies have been granted licenses.
 Innovative products, smart marketing, and aggressive distribution have
enabled fledgling private insurance companies to sign up Indian customers
faster than anyone expected. Indians, who had always seen life insurance
as a tax saving device, are now suddenly turning to the private sector and
snapping up the new innovative products on offer.

The life insurance industry in India grew by an impressive 36%, with

premium income from new business at Rs. 253.43 billion, braving stiff
competition from private insurers. LIC has clocked 21.87% growth in
business at Rs.197.86 billion by selling 2.4 billion new policies in. But this
was still not enough to arrest the fall in its market share, as private players
grew by 129% to mop up Rs. 55.57 billion. Though the total volume of LIC's
business increased, its market share came down from 87.04 to 78.07%. The
14 private insurers increased their market share from about 13% to about
22% in a year's time. The figures also speak of the growing share of the
private insurers. The share of LIC for this period has further come down to
75 percent, while the private players have grabbed over 24 percent.

The rate at which the private share has increased, it clearly shows the
potential of this sector. In the globalize market scenario India has big role
to play. People in India are brand conscious and show loyalty to a brand if
they believe in it or have known it for quite a long time is one of the
features of Indian market which needs to be understood.

Not many of us are aware of the fact that the life insurance industry of
India is as old as it is in any other part of the world. Oriental Life Insurance
Company was the first Indian life insurance company, which was started in
1818 at Kolkata. And within a span of 100 to 150 years, the number grew
more than 350 (over 250 in life and about 100 in non-life), mainly with
regional focus, flourished all across the country.

However, the Government of India, concerned by the unethical

standards adopted by some players against the consumers, nationalised the
industry in two

phases in 1956 (life) and in 1972 (non-life). The insurance business of the
country was then brought under two public sector companies, Life
Insurance Corporation of India (LIC) and General Insurance Corporation of
India (GIC). Subsequently with the economic reforms that were ushered in
India in early nineties, the Government set up a Committee on Reforms
(the Malhotra Committee) in April 1993 to suggest reforms in the insurance
sector. The Committee recommended throwing open the sector to private
players to usher in competition and bring more choice to the consumer.
The objective was to improve the penetration of insurance as a percentage
of GDP, which remains low in India even compared to some developing
countries in Asia.

But with the coming of private players, rules of the game have
changed. Never were common men so rigorously targeted. It is today an
industry which is growing at the rate more than 25%. “In the last five years,
the growth (of the Indian insurance industry) has been of the order of 25%
plus.” And the remarkable point yet is that the penetration level is only 2%.
“The Insurance penetration level (in India), which was always stuck near an
average of 1.5%, has today crossed the 2% mark and is likely to get perched
at about 3%.” Imagine the kind of potential it has for the years to come!
May be this is one of the major reasons why almost all global players are
too keen to be in India. Another could be the saturation of insurance
markets in many developed economies.

The changes those have been bought in by privatization in the

insurance sector can be categorized into followings;

1) New Market Development

2) New Product Development

3) Customer Centric Approach

4) New Channel Development

New Market Development: It a logical step to look for new and newer
markets when competition grows. Naturally, with as many as 16 players,
latest being Bharti-AXA and six still in the offing, the competition has never
been so intense. Advertising campaigns, awareness campaigns and other
promotional tools players are ensuring that they make dent into right
markets by educating prospects. The strategy to hunt for new markets has
been aptly supplemented by new product offerings.

New Product Development: There has been a plethora of new and

innovative products offered by the new players, mainly from the stable of
their international partners. The main concept underlying new product
development has been of two kinds, Need-Based positioning development
and Variety –Based development. Now, the customers have tremendous
choice from a large variety of products from pure term (risk) insurance to
unit-linked investment products. Customers are offered unbundled
products with a variety of benefits as riders from which they can choose.
More customers are buying products and services based on their true
needs and not just traditional money-back policies, which is not considered
very appropriate for long-term protection and savings.

Customer Centric Approach: CRM is a buzz word so is the customer

satisfaction. People are courteous, processes are being made simple.
Customer is treated as king in true sense. Service, be it pre-selling or be it
post-selling, is readily available at a click away! International best practices
in service and operational efficiency has started to make an inward way
giving away the bureaucratic, cumbersome difficulties. Albeit, the use of
latest technologies have complimented the process even further.

Trained and technically qualified sales force and advisors are now
concentrating on sound financial consultancy and need based selling.
Prompt and accurate response and turnaround times in specific areas such
as delivery of first policy receipt, policy document, premium notice, final
maturity payment, settlement of claims etc. are some of the sea changes
that this industry is experiencing.
New Channel Development: Sales and distributions channels also have
gone a paradigm shift. Till recently, Agents were the only mode of
distribution of life insurance products. But today a number of innovative
alternative channels are being utilized by insurance marketers such as
bancassurance, brokers, the internet and direct marketing. It is predicted
that the wide spread of bank branch network in India could lead to
bancassurance emerging as a significant distribution mechanism. However,
as of today, agents still continue to be the main distribution channel. Some
life insurance companies focusing on rural markets have gone one step
further in adopting new innovative means of distributions. “Instead of
appointing agents as is done typically, they have used gramsevaks in
different villages across the country to promote life insurance and act as
their sales arm.”

As the days pass off, we are likely to see many more actions in this
arena. The government is also keen to continue with its financial sector
reforms. The insurance industry is now hot and happening! The marketing
wizards are breaking their heads to think for ideas to penetrate new
markets, financial wiz-kids wracking their brains for new product categories
and lot more actions are taking place even behind the scene. But whatever
happens, one thing is for sure that the customers are going to be the
greatest beneficiary of this revolution
 CHAPTER 6

REFORMS IN LIFE INSURANCE SECTOR

As is typical with monopolies, the premium rates charged by LIC are

among the highest in the world, and its track record in customer service can,
at best, be called shabby. With a huge unionized, rigid workforce mostly in
the clerical category, LIC runs the risk of high fixed cost, which will be the
deciding factor in productivity in the competitive scenario. 80% of LIC's
business is procured by 20% of its ill-trained agent force. Below satisfactory
level performance of the public sector insurance company in terms of
coverage and service providing has put pressure on the government to open
the insurance sector to the private sector.

Insurance has always been a politically sensitive subject in India.

Attempts to open this sector to private players have met with resistance and
agitation from the insurance employees unions. But due to excessive
pressure by private players and foreign investors the government formed
Malhotra Committee in 1993 headed by former Finance Secretary and RBI
Governor R.N. Malhotra to evaluate the Indian insurance industry and
recommend its future direction.

In 1994, the committee submitted the report and some of the key
recommendations included:
1) Structure:

 Government stake in the insurance Companies to be brought

down to 50%.

 Government should take over the holdings of LIC and its

subsidiaries so that these subsidiaries can act as independent
corporations.

 All the insurance companies should be given greater freedom to

operate.

2) Competition:

 Private Companies with a minimum paid up capital of Rs.1bn

should be allowed to enter the industry.

 No Company should deal in both Life and General Insurance

through a single entity.

 Foreign companies may be allowed to enter the industry in

collaboration with the domestic companies.

3) Regulatory Body:

 The Insurance Act should be changed.

 An Insurance Regulatory body should be set up.

 Controller of Insurance (Currently a part from the Finance
Ministry) should be made independent.

4) Investments:

 Mandatory Investments of LIC Life Fund in government

securities to be reduced from 75% to 50%.

5) Customer Service:

 LIC should pay interest on delays in payments beyond 30 days

 Insurance companies must be encouraged to set up unit linked

pension plans

 Computerization of operations and updating of technology to be

carried out in the insurance industry.

The objective of Malhotra committee was to create a more efficient and

capable financial system suitable for the structural changes that is currently
underway in the economy.

So ultimately Insurance Regulatory Development Act (IRDA) was

passed in 1999 replacing the IRA. Under this new Act, insurance sector is
open to private players. Private players including the foreign players can
float their own insurance company after fulfilling certain conditions outlined
by IRDA.
 The committee emphasized that in order to improve the customer
services and increase the coverage of the insurance industry should be
opened up to competition. But at the same time, the committee felt the
need to exercise caution as any failure on the part of new players could ruin
the public confidence in the industry.

Hence, it was decided to allow competition in a limited way by

stipulating the minimum capital requirement of Rs.100 crores. The
committee felt the need to provide greater autonomy to insurance
companies in order to improve their performance and enable them to act
as independent companies with economic motives. For this purpose, it had
proposed setting up an independent regulatory body.

CHAPTER 7
 THE INSURANCE REGULATORY AND
DEVELOPMENT AUTHORITY (IRDA)

Reforms in the Insurance sector were initiated with the passage of the
IRDA Bill in Parliament in December 1999. The IRDA since its
incorporation as a statutory body in April 2000 has fastidiously stuck to its
schedule of framing regulations and registering the private sector insurance
companies.

The other decision taken simultaneously to provide the supporting

systems to the insurance sector and in particular the life insurance companies
was the launch of the IRDA’s online service for issue and renewal of
licenses to agents.

The approval of institutions for imparting training to agents has also

ensured that the insurance companies would have a trained workforce of
insurance agents in place to sell their products, which are expected to be
introduced by early next year.

Since being set up as an independent statutory body the IRDA has put
in a framework of globally compatible regulations. In the private sector 16
life insurance and 15 general insurance companies have been registered.

FUNCTIONS OF IRDA:

The important functions of the IRDA as per the IRDA Act 1999 include
the following:
x) Licensing and regulating the insurance sector by acting as an
independent and regulatory body.

xi) Specifying requisite qualifications, code of conduct and practical

training for insurance intermediaries and agents.

xii) Protecting the interests of the policyholders in matters concerning

assigning of policy, settlement of insurance claim etc.

xiii) Regulating investment of funds by insurance companies.

xiv) Calling for information from, undertaking inspection of, conducting

enquiries and investigations including audit of the insurers and other
organizations connected with the insurance business.

xv) Regulating maintenance of margin of solvency of the insurer.

xvi) Adjudication of disputes between insurers and intermediaries or

insurance intermediaries.

xvii) Supervising the functioning of the Tariff Advisory Committee.

xviii) Promoting efficiency in the conduct of insurance business.

COMPOSITION OF AUTHORITY UNDER IRDA ACT,

1999:

As per the section 4 of IRDA Act' 1999, Insurance Regulatory and

Development Authority (IRDA, which was constituted by an act of
parliament) specify the composition of Authority.
The Authority is a ten member team consisting of:

4) A Chairman;

5) Five whole-time members;

6) Four part-time members,

(All appointed by the Government of India)

DUTIES AND POWERS OF IRDA:

Section 14 of IRDA Act, 1999 lays down the duties, powers and
functions of IRDA as under:

3) Subject to the provisions of this Act and any other law for the time being
in force, the Authority shall have the duty to regulate, promote and
ensure orderly growth of the insurance business and re-insurance
business.

4) Without prejudice to the generality of the provisions contained in Sub-sec

(1), the powers and functions of the Authority shall include:

 issue to the applicant a certificate of registration, renew, modify,

withdraw, suspend or cancel such registration;

 protection of the interests of the policy holders in matters

concerning assigning of policy, nomination by policy holders,
insurable interest, settlement of insurance claim, surrender value of
policy and other terms and conditions of contracts of insurance;
 specifying requisite qualifications, code of conduct and practical
training for intermediary or insurance intermediaries and agents;

 specifying the code of conduct for surveyors and loss assessors;

 promoting efficiency in the conduct of insurance business;

 promoting and regulating professional organizations

connected with the insurance and re-insurance business;

 levying fees and other charges for carrying out the purposes
of this Act;

 calling for information from, undertaking inspection of, conducting

enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organisations
connected with the insurance business;

 control and regulation of the rates, advantages, terms and conditions

that may be offered by insurers in respect of general insurance
business not so controlled and regulated by the Tariff Advisory
Committee under section 64U of the Insurance Act, 1938 (4 of
1938);

 specifying the form and manner in which books of account shall be

maintained and statement of accounts shall be rendered by insurers
and other insurance intermediaries;
  regulating investment of funds by insurance companies;

 regulating maintenance of margin of solvency;

 adjudication of disputes between insurers and intermediaries or

insurance intermediaries;

 supervising the functioning of the Tariff Advisory Committee;

 specifying the percentage of premium income of the insurer to finance

schemes for promoting and regulating professional organisations
referred to in clause (f);

 specifying the percentage of life insurance business and general

insurance business to be undertaken by the insurer in the rural or
social sector; and

 exercising such other powers as may be prescribed.

CHAPTER 8

CHALLENGES FACED BY LIFE INSURANCE INDUSTRY

Life insurance industry all over the world is in a state of turbulence and
turmoil due to rapid changes in the financial global market place and
challenges from the competitors. The challenges being faced by the life
insurance industry at present are the result of:

 Reforms in industrial policy and industrial licensing investment

promotions expenditure control etc.

 Reforms in trade policy and changing regulations, price stability,

and taxation etc.

 Industry image problems and methods of conducting business;

 Low productivity and high cost of agency organisation;

 Reducing controls on imports of investment norms;

 Changes in external environment for life insurance market;

 Customers expectations – return on investment;

 Changes in the population structure;

 Changes in structure of personal financial assets;

 Aggressive inroads made by banking and other financial

institutions;
 Change in the product design with shifting of priorities from
product to distribution channel to product designed to suit the
customers;

 Aggressive competitors whose publicity is targeted to ridicule

traditional life insurance companies;

 High expense margins specially for companies who solely rely on

captive insurance agents for selling.
 CHAPTER 9

CLAIM SETTLING PROCESS

(LIFE INSURANCE)

Claim by maturity/ Installment Payment: The Company strives to settle

maturity claims and make periodic payments, as in case of Money Back
Policies, on date itself. The office which services the policy sends out an
intimation regarding the payment along with the necessary discharge
voucher for the execution by the assured approximately two months
before the due date of such payment.

Death Claim / Intimation of Death: In the event of the death of the

policy holder, the claimant or the nominee should immediately intimate
the branch office where the policy is serviced, the fact of such death,
along with the following particulars: (a) Policy number, (b) name of the
life assured, (c) Date of death and (d) claimant‘s relationship with the
assured.

Claim Forms: Soon after the receipt of the intimation of death, the
branch office will send the necessary claim forms for completion along
 with instructions regarding the procedure to be followed by the
claimant.

Evidence of Title: The claim is usually payable to the nominee as the

case may be. However, if the deceased policy holder has not nominated
or hasn‘t made a suitable provision regarding the policy money by the
way of will, the claim is payable to the holder of a succession certificate
or some such evidence of title from a court of law. 

Payment of Claim: The Company then makes payment to the rightful

recipient.

CHAPTER 10

METHOD FOR TAKING OUT LIFE INSURANCE

POLICY

As insurance policy is a contract it has to follow a particular method

(steps) which are follows:

 SELECTION OF A COMPANY

 CALLING AN AGENT

 SUBMISSION OF PROPOSAL FORM

 SUBMISSION OF REQIRED DOCUMENTS

 MEDICAL EXAMINATION

 UNDERWRITING

 ACCEPTANCE OF THE PROPOSAL

 PAYMENT OF PRIMIUM

 ISSUE OF POLICY

CHAPTER 12

LIFE INSURANCE DOCUMENTS

A life insurance policy is a contract. The stakes in the contract are

usually large and those interested in the stakes, many. There could be
disputes involving the insurer and the insured or the insurer and the
beneficiaries of the policy or between the beneficiaries. The terms and
conditions of the policy will provide the grounds to decide the issues in the
dispute. These terms will be based on and will relate to statements and
actions at various times during the policy. These will have to be proved
through documents. Documentation, therefore, is important in the life
insurance business.
 The life insurance contract is a long-term one, lasting 30 or 40 years.
Transactions may be few and far between. If the premiums are paid
without any default and no changes are made in address, nominations, etc.,
the policy file may not be opened till the claim arises. In the absence of
proper documentation, it may not be possible to know the dues and the
rights or even the identities of the persons concerned.

There are various documents which are used in life insurance

transactions which are as follows:

 Proposal Forms: The first document in the insurance file is the

proposal or application for insurance. It usual to obtain the proposal in
a standardized, printed form. This is to be completed by the proposer
in his handwriting and signed in the presence of a witness. Contracts
require signatures to be authenticated through witnesses.

 Personal Statements: The personal statement is to be completed

along with the proposal. This asks for particulars about the state of
health of the person proposed to be insure, his family history, his
personal habits, medical consultations and illnesses, absence from
work due to medical grounds, etc. If the proposal is to be considered
as a non-medical case, particulars will be required about the employer.
If the person is a female, additional questions will have to be
answered. All there details are used for underwriting purposes. The
declaration at the end of the proposal form applies to the statements
in the personal statement as will.
 First Premium Receipt (FPR): The underwriter’s decision on the
proposal may be to accept at OR on modified terms. If it is accepted at
OR the policy can be commenced immediately, provided the full
premium has been paid. The FPR will be issued. If the acceptance is on
modified terms, the proposer has to agree to the modified terms and
pay the balance premium if any, before the FPR can be issued. The
IRDA Regulations require that the decision of the proposer has to
agree to the modified terms and pay the balance premium if any,
before the FPR can be issued. The IRDA Regulations require that the
decision of the proposal should be made by the insurer within 15 days.
The FPR is the evidence that the insurance contract has begun. The
policy document, which is the evidence of the contract, may be issued
only after some time, if the claim arises before the policy is issued, but
after the FPR is issued, the insurer is liable. Once the policy document
is issued, the FPR becomes irrelevant.

 Renewal Premium Receipt: When the policyholder pays the

subsequent premium due under the policy Renewal Premium Receipt
(RPR) are issued. This RPR’S are important to prove payments, has
defaults can lead to termination of the contract. Disputes may arise as
to whether particular payment has been made or not. If such disputes
may rise at the time of the claim, the RPR’S will provide conclusive
evidence. The adjustment of subsequent premiums do not consist
conclusive evidence. This is because insurers do adjust later payment
leaving ‘gaps’ for earlier defaults to be collected at the time of claim.
 Renewal receipts are not issued in respect of policies under SSS
(SALARY SAVING SCHEME). The consolidated cheque received from
the employer is adjusted as one transaction. Individual policyholders
do not get receipts. Salary slips would show deduction in premium
from salary. That should be sufficient proof of continuance of
insurance. A certificate from the employer about the deduction having
been made and sent to the insurer should also suffice.

 The Policy Documents: The policy document is the most important

document. It is the evidence of the contract. It is prepared to reflect
the terms of the contract. Pre-printed policy forms containing standard
policy conditions and schedules are used. The policy document is to be
signed by the competent authority and stamped, according to the
Indian Stamp Act. New technology may enable insurers to avoid pre-
printed forms and print a policy every time, with appropriate
schedules and terms.

 Endorsements Forms: In a pre-printed policy forms, the standard

policy conditions and privileges are printed. If any of them need
modification, in keeping with the terms of acceptance, endorsements
are attached to the policy. If individual policies are printed by
computers, such endorsements may be avoided.
 CHAPTER 13

POLICY CONDITIONS

The policy states the obligations and the rights of the policyholders, as
well as the terms and conditions of the policy. These could differ between
insurers and also between plans of the same insurer. There are some basic
conditions which apply to all the life insurance policies which are as follows:

1) Age: The policy conditions provide that, if the age of the life assured is
found to be higher than the age as stated in the proposal, apart from
any other rights and remedies available to the insurer, premium at the
higher rate will have to be paid from the commencement, with
interest. This is largely redundant nowadays, as the proof of age is
made available with the proposal itself.

The following are usually accepted as proofs of age :

 Certified extracts from the municipal records.

  Certificate of baptism.

 Certified extracts from family bible if it contains date of birth.

 Certified extracts from school or college records.

 Certified extracts from service register of employer.

 Passport.

 Identity cards issued by Defence department in case of defence

personnel.

 Marriage certificate issued by a roman catholic church.

If none of them is available then Horoscopes, Self declaration by

way of Affidavit, Declaration, or Certificate by village panchayat may b
accepted as proof of age. If the proof of age is found to be false then
the insurers right’s and remedies would be declared as void ab initio
on the ground of suppression of material facts.

2) Days of Grace: Premiums are required to be paid on the due dates

mentioned in the policy. Insurers however allow a grace period for
payment of premium. Payment within the grace period is considered
to be payment on time. The grace period would be one month, but not
less than 30 days for yearly, half-yearly or quarterly modes of premium
and 15 days for monthly modes of premium. In case of SSS, if the
 premiums are deducted by the employer and there is a delay in
remitting the same to the insurer’s office, the delay is usually
condoned. If the delays happen frequently, the SSS arrangement may
be terminated. If the premium is not paid within the days of grace, it
considers a default and the policy is said to be lapsed. No claims arise
on the policy after a lapse, and all premiums are forfeited.

3) Lapse and Non-Forfeiture: When the premium is not paid within the
days of grace, then the policy is terminated or comes to an end. Such
termination of policy is called as ‘lapse’. After the lapse of the policy all
the premiums are forfeited. But the Insurance Act does not allow such
forfeiture because of the two reasons:

 Premiums in the early years of the policy being more than what is
justified and

 The saving element in the premium.

It would not be fair to forfeit the reserves. The policy conditions

provide various safeguards to policyholders, when there is a premium
default. These provisions are called Non-forfeiture provisions.

There are three Non-forfeiture options which are as follows:

a) Paid up value: Under this option, the Sum Assured is reduced to a sum
which bears the same ratio to the full sum assured as the number of
premiums actually paid bears to the total number originally stipulated
 in the policy. Premiums are not paid to a policy which has become
paid-up. The paid up policy is not participate in bonus. Therefore, the
policy will not have further bonuses added to it. It will also not be
entitled to any interim bonus.

b) Keeping policy in force: The option of continuing thru policy as in full

force is made possible by notionally advancing the premium as a loan
from the surrender value. This can continue as long as the total
premiums advanced, is not more than the surrender value.
(Incidentally, the surrender value will increase with every premium
advanced and treated as increase with every premium advanced and
treated as paid). At the stage when the surrender value is not
sufficient to advance a full instalment of premium, the policy is finally
determined and any surrender value left over is paid to the
policyholder.

c) Extended Term Insurance: The third option is of extended term

insurance cover. Under this option, the insurer converts the policy into
a single – premium term insurance for the full SA of the policy for such
a period as the net surrender value will purchase, at the insured’s age
at the time of lapse of the policy. This is similar to the second, except
that the premium advanced from the surrender value as not the
premium due under the policy, but the premium necessary to provide
a term insurance cover, equal to the SA. It has the same advantage of
securing cover, as the second option of automatic advance of
premium. The policy may last for a longer time because the premium
 advanced is lower. But the surrender value would not increase as in
the second option, as the saving element of the premium is not being
advanced. Under the extended term, the policy remains in full
force for the full sum assured for a limited period instead of a
reduced paid-up amount of insurance remaining in force for the entire
policy period, in the first option. Under the last two options, at some
time, the amount payable will become zero. In the third option, even if
the extended term continues till the original date of maturity, the
amount paid at maturity will not be the SA. At such timed, there is a
sense of having being “cheated”. The LIC allows only the paid-up value
option and this is printed as an item under the caption, “Non-forfeiture
regulations” on the back of the policy. The policy becomes
automatically paid-up, unless the policy-holder surrenders the policy.

4) Revival: When the policy lapses it benefit neither the insurer

nor the insured. The insured loses the insurance risk cover for the full
amount. It is also a reflection on the agent’s efforts as it (the lapse)
suggests that the policyholder has not been fully convinced about the
usefulness of the insurance plan. The insurer also loses. The level
premium is based on the assumption that, barring death claims, the
policies will run for the full term. The initial expenses incurred on
proposals are high and the insurer can recover them, only if the
policies remain in force.

Because lapsation affects both the parties adversely and

because lapsation is not always intended by the insured to happen as
 lapsation may occur due to just neglect to pay or because of
temporary financial difficulties that is the reason why insurers facilitate
revival of the lapsed policies. The different schemes for revival offered
by the LIC are as follows:

a) Special Revival Scheme: On revival under this scheme, there will be a

new policy with the same plan and term as the original policy bit with
the following changes, the date of commencement will be advanced
by a period equal to the duration of the lapse, but not more than two
years. Premium will be recalculated for the age corresponding to the
date of commencement after revival. The Special Revival Scheme is
allowed only if:

 The policy had acquired any Surrender Value on the date of lapse.

 The period expired after lapse is not less than 6 months and not
more than 3 years.

 The policy had not been revived under this scheme before.

b) Instalment Revival Scheme: Under this scheme, the

policyholder will not be required to pay the full arrears but only six
monthly premiums, two quarterly premiums, only half yearly or half of
the yearly premium. The balance of the arrears will be spread over the
remaining due dates in the policy year current on the date of revival,
and two full policy years thereafter. This scheme is made available if
the policy cannot be revived under the special revival scheme, where
 the premium is outstanding for more than one year and no loan is
outstanding.

c) Loan-cum-revival scheme: Another scheme offered is

the Loan-cum-revival scheme, where under the arrears required for
revival are advanced out of the Surrender Value of the policy, as a loan
under the policy. The policy will be revived immediately, and the loan
will have to be repaid like any other loan under insurance policies. If
the loan available under the policy is more than the amount required
for revival, the excess may be paid to the policyholder, on request.

5) Assignment: Life insurance policy is a property. It represents

rights. A life insurance policy forms a part of estate of the assured and
can be sold, mortgaged, charged, gifted or bequeathed. Sections 130
and 131 of the Transfer of Property Act detail the procedure of
transfer of the interest in the policy. The assignment transfers the
rights, title interest of the assignor to the assignee. The person making
the assignment should have the right or the title to the property in
question. The assigner must be the major and competent to contract.
An assignment once made cannot be cancelled or even altered in form,
by the assignor unless the assignee reassigns the policy. Assignments
are of two kinds:

a. Absolute assignment: In this kind of assignment, there

is no repayment of any money. The property is transferred either by
way of gift. Here there is no loan taken from the assignee by the
 assignor. In this type of assignment there are least chances of
reassigning the policy by the assignee to the assignor.

b. Conditional assignment: In this type of assignment

there is a loan taken by the assignor from the assignee and due to
some financial difficulties the assignor is not able to pay the loan on
time and assigns the policy as a guarantee. The interest of the policy
automatically reverts to the assignor or the life assured on the
payment of the loan or on occurrence of some specified conditions.

6) Nomination: As per the Section 39 Insurance Act, 1938 the holder

of the policy on his own life, may nominate the person or persons to
whom the money secured by the policy shall be paid in the event of his
death. This can be made either on the time of its proposal or at any
time during the currency of the policy. When the policy is assigned
the existing nomination is automatically cancelled but when the
assignment is made in favor of the insurer then the nomination is not
cancelled. The assignee, not being the life assured cannot make any
nomination. When the policy is reassigned the life assured have to
make a fresh nomination. A nomination gives the nominee the right to
receive the policy money in the event of the death of the life assured.
When the nominee is a minor, an appointee should be appointed by
the policy holder. The life assured has a right to revoke the
appointment of the appointee and appoint a fresh appointee. The
appointee loses his status when the nominee becomes major. If the
nominee dies after the death of the life assured, but before the
 payment of the death claim, the policy moneys would form the part of
the estate of the life assured and would be paid to his representatives.

7) Surrenders and Loans: Surrender is a voluntary termination of

contract, by the policyholder. A policyholder can surrender the life
insurance policy at any time before it becomes a claim. The amount
payable on surrender is called the surrender value. Surrender values
are published and known to the policyholders by some insurer either
as part of the prospects or by mentions in the policy conditions. Some
insurers prefer to announce a guaranteed surrender value as required
by law, which may be a given percentage of the premiums paid. The
actual surrender value will be better than the guaranteed surrender
value. In most of the life insurance policies, insurers provide the facility
of loans. Loans are given up to 80% or 90% of the surrender value of
the policy in question. Interest is charged on loans. They may be
repaid, in full or in part, during the currency of the policy or may
remain as a debt on the policy monies until the claim arises.

8) Alterations: Insurers allow alterations in the policies that have

been issued. Some alterations may be very simple, like change in
address, change of mode in payment of premium, or change in
nomination. Some changes may be to make a participating policy, non-
participating or vice versa or to break one policy into two or more
policies of smaller SA. The governing principle followed in these
 matters is that alterations in existing policies may be allowed if the risk
does not increase.

9) Restrictions: While considering a proposal for insurance, the

underwriter takes note of the risks based on the health, occupation,
life styles, habits, etc, of the life to be insured. After the acceptance
and the completion of the contract, there are no restrictions on these
and changes therein do not affect the insurance contract, unless there
are specific exclusion clauses. A person with the sober habits may
become an alcoholic, but as long as the policy remains in force, this is
of no consequence. It may affect the revival of the policy is allowed to
lapse.

CHAPTER 14

LIFE INSURANCE PRODUCTS

Life insurance products are usually referred to as ‘PLANS’ of insurance.

If we see in the market there are 100s of products, different products with
different companies.
 By seeing all these products individuals always ask about why all these
many products are required. The answer is that the insurance companies
operate in the world of demand driven market where it is very necessary to
introduce the products as per the need of the customer. So a company
should always be innovative in its insurance product and customer tailored.
It is not very easy to come out with these innovative products as there are
many technical issues involved in it

1) Endowment plans: An endowment policy covers risk for a specified

period, at the end of which the sum assured is paid back to the
policyholder, along with the bonus accumulated during the term of the
policy. An endowment life insurance policy is designed primarily to
provide a living benefit and only secondarily to provide life insurance
protection. Therefore, it is more of an investment than a whole life
policy. Endowment life insurance pays the face value of the policy
either at the insured's death or at a certain age or after a number of
years of premium payment. Endowment policy is an instrument of
accumulating capital for a specific purpose and protecting this savings
program against the saver's premature death.

2) Group Insurance plans: Group insurance offers life insurance

protection under group policies to various groups such as employers-
employees, professionals, co-operatives, weaker sections of society,
etc. It also provides insurance coverage for people in certain approved
occupations at the lowest possible premium cost. Group insurance
plans have low premiums. Such plans are particularly beneficial to
 those for whom other regular policies are a costlier proposition. Group
insurance plans extend cover to large segments of the population
including those who cannot afford individual insurance. A number of
group insurance schemes have been designed for various groups.
These include employer-employee groups, associations of
professionals (such as doctors, lawyers, chartered accountants etc.),
and members of cooperative banks, welfare funds, credit societies and
weaker sections of society.

3) Joint Life Insurance Plans: Joint life insurance policies are similar to
endowment policies as they too offer maturity benefits to the
policyholders, apart form covering risks like all life insurance policies.
But joint life policies are categorized separately as they cover two lives
simultaneously, thus offering a unique advantage in some cases
notably for a married couple or for partners in a business firm. Under a
joint life policy the sum assured is payable on the first death and again
on the death of the survivor during the term of the policy. Vested
bonuses would also be paid besides the sum assured after the death of
the survivor. If one or both the lives survive to the maturity date, the
sum assured as well as the vested bonuses are payable on the maturity
date. The premiums payable cease on the first death or on the expiry
of the selected term, whichever is earlier.

4) Term Assurance Plans: Term assurance provides for life insurance

coverage for a specified term of years for a specified premium. The
policy does not accumulate cash value. Term is generally considered
"pure" insurance; where the premium buys protection in the event of
 death and nothing else. Term insurance premiums are typically low
because both the insurer and the policy owner agree that the death of
the insured is unlikely during the term of coverage. The three key
factors to be considered in term insurance are: face amount
(protection or death benefit), premium to be paid (cost to the
insured), and length of coverage (term).

5) Pension Plans: A pension plan or an annuity is an investment that is

made either in a single lump sum payment or through instalments paid
over a certain number of years, in return for a specific sum that is
received every year, every half-year or every month, either for life or
for a fixed number of years. Annuities differ from all the other forms of
life insurance in that an annuity does not provide any life insurance
cover but, instead, offers a guaranteed income either for life or a
certain period. Typically annuities are bought to generate income
during one's retired life, which is why they are also called pension
plans. By buying an annuity or a pension plan the annuitant receives
guaranteed income throughout his life. He also receives lump sum
benefits for the annuitant's estate in addition to the payments during
the annuitant's lifetime.

6) Unit Linked Insurance Plans (ULIP): Unit linked insurance plan (ULIP) is
life insurance solution that provides for the benefits of protection and
flexibility in investment. The investment is denoted as units and is
represented by the value that it has attained called as Net Asset Value
 (NAV). The policy value at any time varies according to the value of the
underlying assets at the time. ULIP provides multiple benefits to the
consumer. The benefits include:

 Life protection
 Investment and Savings
 Flexibility
 Adjustable Life Cover
 Investment Options
 Transparency
 Options to take additional cover against
 Death due to accident
 Disability
 Critical Illness
 Surgeries

7) Children’s plans: Insurance can be taken on the lives of the

children, who are not majors. The proposal will have to be made by a
parent or a guardian. In these plans, the risk on the life of the insured
child will begin only when the child attains a specified age. Practices
vary widely. The time gap between the date of commencement of
the policy and the commencement of risk is called the “Deferment
Period”. The date on which the risk will commence, at the end of the
deferment period, is called the “Deferred Date”. There is no
insurance cover during the deferment period. If the child dies during
the deferment period, the premiums will be returned. Risk will
 commence automatically on the deferred date, without any medical
examination. The main advantages of these plans is that the
premiums would be relatively low (age of the child at
commencement) and cover will be obtained irrespective of the state
of health of the child. These policies have conditions whereby the
title will automatically pass on to the insured child, on attaining the
age of maturity. This process is called vesting. The vesting age cannot
be earlier than 18. After vesting, the policy becomes a contract
between the insurer and the insured person.

8) Annuity plans: Annuities are practically the same as pensions.

They provide regular periodical payments (depending upon the
mode) to employees, who have retired. They are paid as long as the
recipient is alive. Sometimes the pension is also paid to the
dependents after the pensioner’s death. Annuities are called the
reverse of life insurance. In annuity contract, a person agrees to pay
to the insurer a specified capital sum in returns for a promise from
the insurer to make a series of payments to him so long as they lives,
while in insurance, the insured pays a series of payments in return for
a promise to pay a lump sum on his death. Theoretically, under a life
insurance contract, the insurer starts paying upon the death of the
insured but under an annuity contract, the insurer stops paying upon
the death of the annuitant. Practically no underwriting is done in
annuities. In fact, annuitants are supposed to exercise self-selection.
Therefore, a medical examination of annuitants is not insisted upon.
 The risk, that is to be covered, under annuities, is of living too long.
There are two types of annuity policies:

(a) Immediate Annuity: The annuity which commence immediately after

the contract is concluded. Such an annuity is called an Immediate
Annuity. The purchaser of an immediate annuity pays the purchase
price in lump sum. The first instalment will start at the end of the
month, quarter, half yearly or on the yearly basis, as the case may be.

(b) Deferred Annuity: The alternative to the Immediate Annuity is a

Deferred Annuity. In this case, the annuity payment will start after the
lapse of a specified period, called the Deferment period. The purchase
price can be paid as a single premium at the commencement or may
be paid in instalments during the deferment period. If the annuitant
dies during the deferment period, the premiums paid are returned to
the nominee or heirs.

9) Accidental death: Accidental death is a limited life insurance that

is designed to cover the insured when they pass away due to an
accident. Accidents include anything from an injury, but do not
typically cover any deaths resulting from health problems or suicide.
Because they only cover accidents, these policies are much less
expensive than other life insurances. It is also very commonly offered
as "accidental death and dismemberment insurance", also known as
an AD&D policy. In an AD&D policy, benefits are available not only for
accidental death, but also for loss of limbs or bodily functions such as
sight and hearing, etc. Accidental death and AD&D policies very rarely
 pay a benefit; either the cause of death is not covered, or the coverage
is not maintained after the accident until death occurs. To be aware of
what coverage they have, an insured should always review their policy
for what it covers and what it excludes. Often, it does not cover an
insured that puts themselves at risk in activities such as: parachuting,
flying an airplane, professional sports, or involvement in a war (military
or not). Also, some insurers will exclude death and injury caused by
proximate causes due to (but not limited to) racing on wheels and
mountaineering. Accidental death benefits can also be added to a
standard life insurance policy as a rider. If this rider is purchased, the
policy will generally pay double the face amount if the insured dies due
to an accident. This used to be commonly referred to as double
indemnity coverage. In some cases, some companies may even offer a
triple indemnity cover.

Related life insurance products:

Riders are modifications to the insurance policy added at the same time the
policy is issued. These riders change the basic policy to provide some
feature desired by the policy owner. A common rider is accidental death,
which used to be commonly referred to as "double indemnity", which pays
twice the amount of the policy face value if death results from accidental
causes, as if both a full coverage policy and an accidental death policy were
in effect on the insured. Another common rider is premium waiver, which
waives future premiums if the insured becomes disabled.
Joint life insurance is either a term or permanent policy insuring two or
more lives with the proceeds payable on the first death.

Survivorship life or second-to-die life is a whole life policy insuring two

lives with the proceeds payable on the second (later) death.

Single premium whole life is a policy with only one premium which is
payable at the time the policy is issued.

Modified whole life is a whole life policy that charges smaller premiums for
a specified period of time after which the premiums increase for the
remainder of the policy.

Senior and preened products:

Insurance companies have in recent years developed products to offer to

niche markets, most notably targeting the senior market to address needs
of an aging

population. Many companies offer policies tailored to the needs of senior

applicants. These are often low to moderate face value whole life
insurance policies, to allow a senior citizen purchasing insurance at an older
issue age an opportunity to buy affordable insurance. This may also be
marketed as final expense insurance, and an agent or company may
suggest (but not require) that the policy proceeds could be used for end-of-
life expenses.

Preened (or prepaid) insurance policies are whole life policies that,
although available at any age, are usually offered to older applicants as
well. This type of insurance is designed specifically to cover funeral
expenses when the insured person dies. In many cases, the applicant signs
a prefunded funeral arrangement with a funeral home at the time the
policy is applied for. The death proceeds are then guaranteed to be
directed first to the funeral services provider for payment of services
rendered. Most contracts dictate that any excess proceeds will go either to
the insured's estate or a designated beneficiary.

These products are sometimes assigned into a trust at the time of issue, or
shortly after issue. The policies are irrevocably assigned to the trust, and
the trust becomes the owner. Since a whole life policy has a cash value
component, and a loan provision, it may be considered an asset; assigning
the policy to a trust means that it can no longer be considered an asset for
that individual. This can impact an individual's ability to qualify for
Medicare or Medicaid. CHAPTER 1

INTRODUCTION TO RISK IN INSURANCE

What is Risk?

Risk is the probability that a hazard will turn into a disaster. Vulnerability
and hazards are not dangerous, taken separately. But if they come
together, they become a risk or, in other words, the probability that a
disaster will happen.
Nevertheless, risks can be reduced or managed. If we are careful about how
we treat the environment, and if we are aware of our weaknesses and
vulnerabilities to existing hazards, then we can take measures to make sure
that hazards do not turn into disasters.

Risk is defined in ISO 31000 as the effect of uncertainty on objectives

(whether positive or negative). Risk management can therefore be
considered the identification, assessment, and prioritization of risks followed
by coordinated and economical application of resources to minimize,
monitor, and control the probability and/or impact of unfortunate events [1] or
to maximize the realization of opportunities. Risks can come from
uncertainty in financial markets, project failures, legal liabilities, credit risk,
accidents, natural causes and disasters as well as deliberate attacks from an
adversary. Several risk management standards have been developed
including the Project Management Institute, the National Institute of Science
and Technology, actuarial societies, and ISO standards. [2][3] Methods,
definitions and goals vary widely according to whether the risk management
method is in the context of project management, security, engineering,
industrial processes, financial portfolios, actuarial assessments, or public
health and safety.

The strategies to manage risk include transferring the risk to another party,
avoiding the risk, reducing the negative effect of the risk, and accepting
some or all of the consequences of a particular risk.
Risk in Insurance

People seek security. A sense of security may be the next basic goal after
food, clothing, and shelter. An individual with economic security is fairly
certain that he can satisfy his needs (food, shelter, medical care, and so on)
in the present and in the future. Economic risk (which we will refer to
simply as risk) is the possibility of losing economic security. Most economic
risk derives from variation from the expected outcome.

One measure of risk, used in this study note, is the standard deviation of
the possible outcomes.

As an example, consider the cost of a car accident for two different cars, a
Porsche and a Toyota. In the event of an accident the expected value of
repairs for both cars is 2500. However, the standard deviation for the
Porsche is 1000 and the standard deviation for the Toyota is 400. If the cost
of repairs is normally distributed, then the probability that the repairs will
cost more than 3000 is 31% for the Porsche but only 11% for the Toyota.
Modern society provides many examples of risk. A homeowner faces a
large potential for variation associated with the possibility of economic loss
caused by a house fire. A driver faces a potential economic loss if his car is
damaged. A larger possible economic risk exists with respect to potential
damages a driver might have to pay if he injures a third party in a car
accident for which he is responsible. Historically, economic risk was
managed through informal agreements within a defined community. If
someone’s barn burned down and a herd of milking cows was destroyed,
the community would pitch in to rebuild the barn and to provide the farmer
with enough cows to replenish the milking stock. This cooperative (pooling)
concept became formalized in the insurance industry. Under a formal
insurance arrangement, each insurance policy purchaser (policyholder) still
implicitly pools his risk with all other policyholders. However, it is no longer
necessary for any individual policyholder to know or have any direct
connection with any other policyholder.

Why manage your risk?

An organization should have a risk management strategy because:

 People are now more likely to sue. Taking the steps to reduce injuries
could help in defending against a claim.

 Courts are often sympathetic to injured claimants and give them the
benefit of the doubt.
  Organizations and individuals are held to very high standards of care.

 People are more aware of the level of service to expect, and the
recourse they can take if they have been wronged.

 Organizations are being held liable for the actions of their

employees/volunteers.

 Organizations are perceived as having a lot of assets and/or high

insurance policy limits.

Definition

Banking definition

1. Procedures to manage a bank's exposure to various types of risks

associated with banking. This is done through a combination of internal
policies, contractual arrangements with insurance companies for Banker's
Blanket Bond coverage, Directors & Officers Insurance and Self-Insurance
to reduce the costs from accidental loss.

2. Corporate service sold by commercial banks. Risk management is a set of

services, rather than a specific product, aimed at controlling financing risk,
including credit risk, and interest rate risk, through hedging devices,
financial futures, and interest rate caps. The aim is to control corporate
funding costs, budget interest rate expense, and limit exposure to interest
rate fluctuations.

3. Insurance and Risk Management Planning is the process of identifying

the source and extent of an individual’s risk of financial, physical, and
personal loss, and developing strategies to manage exposure to risk and
minimize the probability and amount of potential loss.

What is risk management?

Risk management ensures that an organization identifies and understands

the risks to which it is exposed. Risk management also guarantees that the
organization creates and implements an effective plan to prevent losses or
reduce the impact if a loss occurs.

A risk management plan includes strategies and techniques for recognizing

and confronting these threats. Good risk management doesn’t have to be
expensive or time consuming; it may be as uncomplicated as answering
these three questions:
 1) What can go wrong?

2) What will we do, both to prevent the harm from occurring and in
response to the harm or loss?

3) If something happens, how will we pay for it?

RISK MANAGEMENT TASK

Risk management major task is to identify and manage information security

risks to achieve business objectives.

OTHER TASKS LIST INCLUDES

 Develop a systematic, analytical and continuous risk management
process.

 Ensure that risk identification, analysis and mitigation activities are

integrated into life cycle processes.

 Apply risk identification and analysis methods.

 Define strategies and prioritize options to mitigate risk to levels

acceptable to the enterprise.
  Report significant changes in risk to appropriate levels of
management on both a periodic and event-driven basis.

Role of insurance in risk management

Insurance is a valuable risk-financing tool. Few organizations have the

reserves or funds necessary to take on the risk themselves and pay the total
costs following a loss. Purchasing insurance, however, is not risk
management. A thorough and thoughtful risk management plan is the
commitment to prevent harm. Risk management also addresses many risks
that are not insurable, including brand integrity, potential loss of tax-
exempt status for volunteer groups, public goodwill and continuing donor
support.

Insurance has traditionally been termed a risk management tool where one
party (the insured) transfers, for a front-loaded cost (the premium), part or
all of its specific loss exposure to another party (the insurer) through a
legally binding contract.

(1)The insurer in return promises to fulfill its obligations upon the

occurrence of a qualified loss (the claim). This promise can be described as
contingent capital that the insured secures for future use, subject to the
terms and conditions of the contract. This risk transfer-financing
arrangement helps the insured be less subject to the volatility in cash flow
and preserve its current wealth (interchangeably, firm value), less
premiums, against a risk or a group of risks throughout the contract period.
Depending on the scope of activities that it decides to take with this
financial guarantee, the insured may also enhance its firm value. Whether
insurance will be selected as a tool for the materialization of the objective
of value preservation or enhancement depends on a number of factors.
This includes, among others, cost effectiveness of insurance as a risk
financing technique as compared to other financing techniques, perceived
value of ancillary services available from the insurer, the capacity of the
insurance market, government and tax regulation on insurance
transactions, risk attitude of the insured, and, in the case of the corporate
insured, the structure of the corporation. Before we discuss these factors in
depth, it seems necessary to examine the nature of insurance claims and
the continuity of insurance purchase. A claim represents a manifestation of
the loss financing activity through insurance. That is, the property-liability
insurance firm indemnifies the insured suffering from a covered loss so that
they can restore their financial positions to, or near, the level they had prior
to the loss. However, the insured often hopes that it does not have to
materialize this claim.

(2) "The reasons are multifold. First, insurance is available or pure, not
speculative, risk protection.
(3) Put differently, insurers are willing to assume the risks having an
outcome of loss or no loss. If an activity contains a gain possibility as in
typical business activities that corporations take for profit-generating
purposes, the risk related to that activity is not the subject matter of
insurance; otherwise, insurance would induce problems of moral hazard
(e.g., being less careful in production operations or investment in higher
risk areas). An insurance contract may include coverage for operating
expenses and a loss of future income. However, this supplementary benefit
is extremely limited in time scope, and is available only when a proximate
causal relationship is established between those indirect losses and a
preceding pure loss.

(4) Second, insurance does not cover administrative distress or expenses

that the insured incurs to file for claims or to regain its reputation and
loyalty from various stakeholders. Third, insurance often requires the
insured to retain a share of the claim through a deductible (fully retaining
small losses individually, in aggregate, or both) or through coinsurance
(sharing losses at a predetermined percentage.

(5) Finally, insurers, set the maximum amount of coverage per claim or in
aggregate of all claims per contractual period. Any loss hi excess of the
maximum limit is thus the responsibility of the insured, unless it has
another financing arrangement for the excess. This nature of insurance
claims warrants examination of the cost-effectiveness of insurance as a risk
financing approach as well as the size of risk a corporation is willing to
finance through insurance.

Benefits of managing risk

Risk management provides a clear and structured approach to identifying

risks. Having a clear understanding of all risks allows an organization to
measure and prioritize them and take the appropriate actions to reduce
losses.

Risk management has other benefits for an organization, including:

 Saving resources: Time, assets, income, property and people are all
valuable resources that can be saved if fewer claims occur.

 Protecting the reputation and public image of the organization.

 Preventing or reducing legal liability and increasing the stability of

operations.

 Protecting people from harm.

 Protecting the environment.

  Enhancing the ability to prepare for various circumstances.

 Reducing liabilities.

 Assisting in clearly defining insurance needs.

An effective risk management practice does not eliminate risks. However,

having an effective and operational risk management practice shows an
insurer that your organization is committed to loss reduction or prevention.
It makes your organization a better risk to insure.

PROCESS OF RISK IDENTIFICATION & MANAGEMENT

Identification

After establishing the context, the next step in the process of managing risk
is to identify potential risks. Risks are about events that, when triggered,
cause problems. Hence, risk identification can start with the source of
problems, or with the problem itself.
 Source analysis: Risk sources may be internal or external to the
system that is the target of risk management. Examples of risk
sources are: stakeholders of a project, employees of a company or
the weather over an airport.

 Problem analysis: Risks are related to identify threats. For example:

the threat of losing money, the threat of abuse of privacy
information or the threat of accidents and casualties. The threats
may exist with various entities, most important with shareholders,
customers and legislative bodies such as the government. When
either source or problem is known, the events that a source may
trigger or the events that can lead to a problem can be investigated.
For example: stakeholders withdrawing during a project may
endanger funding of the project; privacy information may be stolen
by employees even within a closed network; lightning striking a
Boeing 747 during takeoff may make all people onboard immediate
casualties. The chosen method of identifying risks may depend on
culture, industry practice and compliance. The identification methods
are formed by templates or the development of templates for
identifying source, problem or event. Common risk identification
methods are:

 Objectives-based risk identification: Organizations and project

teams have objectives. Any event that may endanger achieving an
objective partly or completely is identified as risk.
 Scenario-based risk identification: In scenario analysis different
scenarios are created. The scenarios may be the alternative ways to
achieve an objective, or an analysis of the interaction of forces in, for
example, a market or battle. Any event that triggers an undesired
scenario alternative is identified as risk - see Futures Studies for
methodology used by Futurists.

 Taxonomy-based risk identification: The taxonomy in taxonomy-

based risk identification is a breakdown of possible risk sources.
Based on the taxonomy and knowledge of best practices, a
questionnaire is compiled. The answers to the questions reveal risks.

 Common-risk checking: In several industries lists with known risks

are available. Each risk in the list can be checked for application to a
particular situation.

 Risk charting: This method combines the above approaches by

listing resources at risk, Threats to those resources Modifying Factors
which may increase or decrease the risk and Consequences it is
 wished to avoid. Creating a matrix under these headings enables a
variety of approaches. One can begin with resources and consider
the threats they are exposed to and the consequences of each.
Alternatively one can start with the threats and examine which
resources they would affect, or one can begin with the consequences
and determine which combination of threats and resources would be
involved to bring them about.

ASSESSMENT

Once risks have been identified, they must then be assessed as to their
potential severity of loss and to the probability of occurrence. These
quantities can be either simple to measure, in the case of the value of a lost
building, or impossible to know for sure in the case of the probability of an
unlikely event occurring. Therefore, in the assessment process it is critical to
make the best educated guesses possible in order to properly prioritize the
implementation of the risk management plan.

The fundamental difficulty in risk assessment is determining the rate of

occurrence since statistical information is not available on all kinds of past
incidents. Furthermore, evaluating the severity of the consequences (impact)
is often quite difficult for immaterial assets. Asset valuation is another
question that needs to be addressed. Thus, best educated opinions and
available statistics are the primary sources of information. Nevertheless, risk
assessment should produce such information for the management of the
organization that the primary risks are easy to understand and that the risk
management decisions may be prioritized. Thus, there have been several
theories and attempts to quantify risks. Numerous different risk formulae
exist, but perhaps the most widely accepted formula for risk quantification
is:

Rate of occurrence multiplied by the impact of the event equals risk

Later research has shown that the financial benefits of risk management are
less dependent on the formula used but are more dependent on the frequency
and how risk assessment is performed.

In business it is imperative to be able to present the findings of risk

assessments in financial terms. Robert Courtney Jr. (IBM, 1970) proposed a
formula for presenting risks in financial terms. The Courtney formula was
accepted as the official risk analysis method for the US governmental
agencies. The formula proposes calculation of ALE (annualized loss
expectancy) and compares the expected loss value to the security control
implementation costs (cost-benefit analysis).

POTENTIAL RISK TREATMENTS

Once risks have been identified and assessed, all techniques to manage the
risk fall into one or more of these four major categories:

 Avoidance (eliminate, withdraw from or not become involved)

  Reduction (optimize - mitigate)
 Sharing (transfer - outsource or insure)
 Retention (accept and budget)

Ideal use of these strategies may not be possible. Some of them may involve
trade-offs that are not acceptable to the organization or person making the
risk management decisions. Another source, from the US Department of
Defense, Defense Acquisition University, calls these categories ACAT, for
Avoid, Control, Accept, or Transfer. This use of the ACAT acronym is
reminiscent of another ACAT (for Acquisition Category) used in US
Defense industry procurements, in which Risk Management figures
prominently in decision making and planning.

R ISK AVOIDANCE

Includes not performing an activity that could carry risk. An example would
be not buying a property or business in order to not take on the liability that
comes with it. Another would be not flying in order to not take the risk that
the airplanes were to be hijacked. Avoidance may seem the answer to all
risks, but avoiding risks also means losing out on the potential gain that
accepting (retaining) the risk may have allowed. Not entering a business to
avoid the risk of loss also avoids the possibility of earning profits.

H AZARD P REVENTION

H AZARD PREVENTION REFERS TO THE PREVENTION OF RISKS IN AN

EMERGENCY . T HE FIRST AND MOST EFFECTIVE STAGE OF HAZARD

PREVENTION IS THE ELIMINATION OF HAZARDS . I F THIS TAKES TOO

LONG , IS TOO COSTLY , OR IS OTHERWISE IMPRACTICAL , THE SECOND

STAGE IS MITIGATION .

R ISK REDUCTION

Risk reduction or "optimization" involves reducing the severity of the loss or

the likelihood of the loss from occurring. For example, sprinklers are
designed to put out a fire to reduce the risk of loss by fire. This method may
cause a greater loss by water damage and therefore may not be suitable.
Halon fire suppression systems may mitigate that risk, but the cost may be
prohibitive as a strategy.

Acknowledging that risks can be positive or negative, optimising risks

means finding a balance between negative risk and the benefit of the
operation or activity; and between risk reduction and effort applied. By an
offshore drilling contractor effectively applying HSE Management in its
organisation, it can optimise risk to achieve levels of residual risk that are
tolerable.

Modern software development methodologies reduce risk by developing and

delivering software incrementally. Early methodologies suffered from the
fact that they only delivered software in the final phase of development; any
problems encountered in earlier phases meant costly rework and often
jeopardized the whole project. By developing in iterations, software projects
can limit effort wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can

demonstrate higher capability at managing or reducing risks. For example, a
company may outsource only its software development, the manufacturing
of hard goods, or customer support needs to another company, while
handling the business management itself. This way, the company can
concentrate more on business development without having to worry as much
about the manufacturing process, managing the development team, or
finding a physical location for a call center.

R ISK SHARING

Briefly defined as “sharing with another party the burden of loss or the
benefit of gain, from a risk, and the measures to reduce a risk."

The term of 'risk transfer' is often used in place of risk sharing in the
mistaken belief that you can transfer a risk to a third party through insurance
or outsourcing. In practice if the insurance company or contractor go
bankrupt or end up in court, the original risk is likely to still revert to the
first party. As such in the terminology of practitioners and scholars alike, the
purchase of an insurance contract is often described as a "transfer of risk."
However, technically speaking, the buyer of the contract generally retains
legal responsibility for the losses "transferred", meaning that insurance may
be described more accurately as a post-event compensatory mechanism. For
example, a personal injuries insurance policy does not transfer the risk of a
car accident to the insurance company. The risk still lies with the policy
holder namely the person who has been in the accident. The insurance policy
simply provides that if an accident (the event) occurs involving the policy
holder then some compensation may be payable to the policy holder that is
commensurate to the suffering/damage.
Some ways of managing risk fall into multiple categories. Risk retention
pools are technically retaining the risk for the group, but spreading it over
the whole group involves transfer among individual members of the group.
This is different from traditional insurance, in that no premium is exchanged
between members of the group up front, but instead losses are assessed to all
members of the group.

R ISK RETENTION

Involves accepting the loss, or benefit of gain, from a risk when it occurs.
True self insurance falls in this category. Risk retention is a viable strategy
for small risks where the cost of insuring against the risk would be greater
over time than the total losses sustained. All risks that are not avoided or
transferred are retained by default. This includes risks that are so large or
catastrophic that they either cannot be insured against or the premiums
would be infeasible. War is an example since most property and risks are not
insured against war, so the loss attributed by war is retained by the insured.
Also any amounts of potential loss (risk) over the amount insured are
retained risk. This may also be acceptable if the chance of a very large loss
is small or if the cost to insure for greater coverage amounts is so great it
would hinder the goals of the organization too much.

CREATE A RISK-MANAGEMENT PLAN

Select appropriate controls or countermeasures to measure each risk. Risk

mitigation needs to be approved by the appropriate level of management.
For example, a risk concerning the image of the organization should have
top management decision behind it whereas IT management would have the
authority to decide on computer virus risks.

The risk management plan should propose applicable and effective security
controls for managing the risks. For example, an observed high risk of
computer viruses could be mitigated by acquiring and implementing
antivirus software. A good risk management plan should contain a schedule
for control implementation and responsible persons for those actions.

According to ISO/IEC 27001, the stage immediately after completion of the

risk assessment phase consists of preparing a Risk Treatment Plan, which
should document the decisions about how each of the identified risks should
be handled. Mitigation of risks often means selection of security controls,
which should be documented in a Statement of Applicability, which
identifies which particular control objectives and controls from the standard
have been selected, and why.

IMPLEMENTATION

Implementation follows all of the planned methods for mitigating the effect
of the risks. Purchase insurance policies for the risks that have been decided
to be transferred to an insurer, avoid all risks that can be avoided without
sacrificing the entity's goals, reduce others, and retain the rest.

REVIEW AND EVALUATION OF THE PLAN

Initial risk management plans will never be perfect. Practice, experience, and
actual loss results will necessitate changes in the plan and contribute
information to allow possible different decisions to be made in dealing with
the risks being faced.

Risk analysis results and management plans should be updated periodically.

There are two primary reasons for this:

1. to evaluate whether the previously selected security controls are still

applicable and effective, and
2. to evaluate the possible risk level changes in the business
environment. For example, information risks are a good example of
rapidly changing business environment.

LIMITATIONS

If risks are improperly assessed and prioritized, time can be wasted in

dealing with risk of losses that are not likely to occur. Spending too much
time assessing and managing unlikely risks can divert resources that could
be used more profitably. Unlikely events do occur but if the risk is unlikely
enough to occur it may be better to simply retain the risk and deal with the
result if the loss does in fact occur. Qualitative risk assessment is subjective
and lacks consistency. The primary justification for a formal risk assessment
process is legal and bureaucratic.

Prioritizing the risk management processes too highly could keep an

organization from ever completing a project or even getting started. This is
especially true if other work is suspended until the risk management process
is considered complete.
It is also important to keep in mind the distinction between risk and
uncertainty. Risk can be measured by impacts x probability.

Types of Risks

With regards insurability, there are basically two categories of

risks;

  speculative or dynamic risk; and

  pure or static risk

Speculative or Dynamic Risk

Speculative (dynamic) risk is a situation in which either profit OR

loss is possible.  Examples of speculative risks are betting on a
horse race, investing in stocks/bonds and real estate.  In the
business level, in the daily conduct of its affairs, every business
establishment faces decisions that entail an element of risk.  The
decision to venture into a new market, purchase new equipments,
diversify on the existing product line, expand or contract areas of
operations, commit more to advertising, borrow additional
capital, etc., carry risks inherent to the business.  The outcome of
such speculative risk is either beneficial (profitable) or loss.
Speculative risk is uninsurable.
Pure or Static Risk

The second category of risk is known as pure or static risk.  Pure

(static) risk is a situation in which there are only the possibilities of
loss or no loss, as oppose to loss or profit with speculative risk.
The only outcome of pure risks are adverse (in a loss) or neutral
(with no loss), never beneficial.  Examples of pure risks include
premature death, occupational disability, catastrophic medical
expenses, and damage to property due to fire, lightning, or flood.

It is important to distinguish between pure and speculative risks

for three reasons.  First, through the use of commercial, personal,
and liability insurance policies, insurance companies in the private
sector generally insure only pure risks.  Speculative risks are not
considered insurable, with some exceptions.  

Second, the law of large numbers can be applied more easily to

pure risks than to speculative risks.  The law of large numbers is
important in insurance because it enables insurers to predict loss
figures in advance.  It is generally more difficult to apply the law of
large numbers to speculative risks in order to predict future
losses.  One of the exceptions is the speculative risk of gambling,
where casinos can apply the law of large numbers in a very
efficient manner.

Finally, society as a whole may benefit from a speculative risk

even though a loss occurs, but it is harmed if a pure risk is present
and a loss occurs.  For instance, a computer manufacturer's
competitor develops a new technology to produce faster
computer processors more cheaply.  
As a result, it forces the computer manufacturer into bankruptcy.  
Despite the bankruptcy, society as a whole benefits since the
competitor's computers work faster and are sold at a lower price.
On the other hand, society would not benefit when most pure
risks, such as an earthquake, occur.

Types of Pure (Static) Risk

The major types of pure risk that are associated with great
economic and
financial insecurity include;

personal risks;
property risks; and
Liability risks.

Personal risks are risks that directly affect an individual.  They

involve the possibility of loss or reduction of income, of extra
expenses, and the elimination of financial assets.  
There are four major personal risks;

premature death
old age
poor health
unemployment
PREMATURE DEATH RISK IS DEFINED AS THE RISK OF THE
DEATH OF THE HEAD OF A HOUSEHOLD WITH UNFULFILLED
FINANCIAL OBLIGATIONS .  THESE CAN INCLUDE DEPENDENTS
TO SUPPORT, A MORTGAGE TO BE
PAID OFF, OR CHILDREN TO EDUCATE.

OLD AGE IS A RISK OF INSUFFICIENT INCOME DURING

RETIREMENT.  WHEN OLDER WORKERS RETIRE , THEY LOSE
THEIR NORMAL AMOUNT OF EARNINGS.  UNLESS THEY HAVE
ACCUMULATED SUFFICIENT ASSETS FROM WHICH TO DRAW
ON, THEY WOULD BE FACING A SERIOUS PROBLEM OF
ECONOMIC INSECURITY.

RISK OF POOR HEALTH INCLUDES BOTH CATASTROPHIC

MEDICAL BILLS AND THE LOSS OF EARNED INCOME.  THE
COST OF HEALTH CARE HAS INCREASED SUBSTANTIALLY IN
RECENT YEARS.  THE LOSS OF INCOME IS ANOTHER MAJOR
CAUSE OF FINANCIAL INSTABILITY.  IN CASES OF SEVERE
LONG TERM DISABILITY, THEIR IS A SUBSTANTIAL
LOSS OF EARNED INCOME, MEDICAL BILLS ARE INCURRED,
EMPLOYEE BENEFITS MAY
BE LOST, AND SAVINGS DEPLETED.

THE RISK OF UNEMPLOYMENT IS ANOTHER MAJOR THREAT

TO MOST FAMILIES.  UNEMPLOYMENT CAN BE THE RESULT OF
A INDUSTRY CYCLE DOWNSWING ,
ECONOMIC CHANGES, SEASONAL FACTORS AND FRICTIONS IN
THE LABOR MARKET.  REGARDLESS OF THE CAUSE ,
UNEMPLOYMENT CAN CREATE FINANCIAL HAVOC IN THE
AVERAGE FAMILIES BY WAY OF LOSS OF INCOME AND
EMPLOYMENT BENEFITS.

PROPERTY RISK IS THE RISK OF HAVING PROPERTY DAMAGED

OR LOSS FROM NUMEROUS PERILS.  PROPERTY  LOSS CAN
OCCUR AS A RESULT OF FIRE , LIGHTNING , WINDSTORMS ,
HAIL, AND A NUMBER OF OTHER CAUSES.

LIABILITY RISKS ARE ANOTHER IMPORTANT TYPE OF PURE

RISK THAT MANY PEOPLE FACE.  MORE THAN EVER , WE ARE
LIVING IN A LITIGIOUS SOCIETY.  ONE CAN BE SUED FOR ANY
FRIVOLOUS REASON.  ONE HAS TO DEFEND HIMSELF WHEN
SUED, EVEN WHEN THE SUIT IS WITHOUT MERIT.  

FUNDAMENTAL RISKS AND PARTICULAR RISKS

FUNDAMENTAL RISKS AFFECT THE ENTIRE ECONOMY OR

LARGE NUMBERS OF PEOPLE OR GROUPS WITHIN THE
ECONOMY.  EXAMPLES OF FUNDAMENTAL RISKS ARE HIGH
INFLATION, UNEMPLOYMENT, WAR, AND NATURAL DISASTERS
SUCH AS EARTHQUAKES, HURRICANES, TORNADOES, AND
FLOODS.

PARTICULAR RISKS ARE RISKS THAT AFFECT ONLY

INDIVIDUALS AND NOT THE ENTIRE COMMUNITY.  EXAMPLES
OF PARTICULAR RISKS ARE BURGLARY, THEFT, AUTO
ACCIDENT, DWELLING FIRES.  WITH PARTICULAR RISKS, ONLY
INDIVIDUALS EXPERIENCE LOSSES, AND THE REST OF THE
COMMUNITY ARE LEFT UNAFFECTED.

THE DISTINCTION BETWEEN A FUNDAMENTAL AND A

PARTICULAR RISK IS IMPORTANT, SINCE GOVERNMENT
ASSISTANCE MAY BE NECESSARY IN ORDER TO INSURE
FUNDAMENTAL RISK .  SOCIAL INSURANCE , GOVERNMENT
INSURANCE PROGRAMS, AND GOVERNMENT GUARANTEES AND
SUBSIDIES ARE USED TO MEET CERTAIN
FUNDAMENTAL RISKS IN OUR COUNTRY.  FOR EXAMPLE , THE
RISK OF UNEMPLOYMENT IS GENERALLY NOT INSURABLE BY
PRIVATE INSURANCE COMPANIES BUT CAN BE INSURED
PUBLICLY BY FEDERAL OR STATE AGENCIES.   IN ADDITION ,
FLOOD INSURANCE IS ONLY AVAILABLE THROUGH AND /OR
SUBSIDIZED BY THE FEDERAL
GOVERNMENT

MARINE INSURANCE

AN INTRODUCTION

MEANING
The law relating to Marine Insurance is found in the Marine Insurance Act,
1963. A contract of marine insurance is an agreement whereby the insurers
undertakes to indemnify the insured, in the manner and to the extent
thereby agreed upon, against marine losses, that is to say, the losses
incidental to marine adventure.

Arnold defines marine insurance as “A contract whereby one party for an

agreed consideration, undertakes to indemnify the other against loss
arising from certain perils and sea risks to which a shipment merchandised
and other interests in a maritime adventure may be exposed during a
certain voyage or certain period of time.”

According to Section 2(d) of Marine Insurance Act, “There is a marine

adventure when:

1. any insurable property is exposed to marine perils;

2. the earnings or acquisition of any freight, postage money,
commission, profit or other preliminary benefit, or the security for
any advance, loans, or disbursement is endangered by the exposure
of insurable property to marine perils; and
3. any liability to a third party may be insured by the owner of, or other
person interested in or responsible for, insurable property by reason
of marine perils.”

According to Section 2(c) of the Marine Insurance Act, “Marine perils

(sometimes called perils of the sea) means the perils consequent on, or
incidental to, the navigation of the sea, that is to say, perils of the sea, fire,
war perils, pirates, robbers, thieves, captures, seizures, restraints and
detainments of princes and peoples, jettisons, barratry, and any other perils
which are either of the like kind or may be designed by the policy.”

The term ‘perils of the seas’ refers only to fortuitous accidents or casualties
of the sea, and does not include the ordinary action of the winds and
waves.

SCOPE OF MARINE INSURANCE

Under the marine insurance policies, the insurer undertakes to indemnify

against different subject-matter of insurance. As such, the scope of marine
insurance can be based on:
 I. Subject matter of marine insurance.
II. Risks covered/insured in marine insurance.

I. SUBJECT MATTER OF MARINE INSURANCE

The subject matter of marine insurance is the insurable property
against which the risks can be covered. The risks against cargo,
vessel, freight and liability to a third party can be insured.

1. CARGO:
The ‘cargo’ is the most important subject matter of marine
insurance. The following types of cargo can be insured:

i. Cargo in the process of export-import.

ii. The goods transported through water ways to reach the
port city.
iii. The goods transported through rail, road and other
means of transport.

2. HULL/SHIP OR VESSEL:
Vessel is the valuable asset in the voyage which carries the
cargo from one destination to another. The sea voyage risk is
always involved to the ship. Therefore, insurance of the ship is
very essential. But shipping companies get one policy issued to
cover the risks of the complete fleet, which is known as “Fleet
insurance.”

3. FREIGHT:
The object of providing shipping services is to earn freight. The
freight is paid either in advance or on reaching the goods to
the destination port. In case the ship could not be reached to
the destination port due to sea perils, the ship owner losses his
 freight. In such a situation he can recover the freight by
obtaining a marine policy covering freight, which is known as
freight insurance. Where the owner of the cargo pays the
freight in advance, and the ship is subjected to marine perils,
he may be loosing the cargo as well as freight, both. In such a
situation, the owner can include freight charges in the value of
the cargo, while getting the marine insurance policy.

4. LIABILITY:
This is another subject matter of insurance, which arises due to
marine risks. This is the liability of the owner of ship to a third
party by reason of marine perils. For ship shall be liable to the
owner ship (third party). By obtaining an insurance policy, such
a risk can be transferred with shoulder of the marine insurer.
This is known as liability insurance.

II. RISKS COVERED/INSURED IN MARINE INSURANCE

In early days, only the marine risks were covered by the marine
policies. But, in modern time, along with marine risks, the policy
covers ‘land risks’ also. The following types of risks are covered by
the marine insurance policies:

1. PERILS OF THE SEA:

Perils of the sea means the perils consequent on, or incidental
to, the navigation of the sea, which includes, rovers, captures,
seizures, restraints, collision, foundering, stranding, capsize,
etc.
2. FIRE:
Fire is the next risk. Coals, oils, electricity, gas etc. used in the
ship may be caught by fire at any time. Similarly, lightening,
explosion in the sea, fire from the oils spread in the sea water
etc. cause fire and damages to vessels as well as cargo.

3. NAVIGATION BY NEGLIGENCE, OR BARRATARY:

It is the wrongful act willfully committed by the master of the
ship or crew members in contravertion of their duties, thereby
causing prejudice to the owner or charters, and is covered by
the policy. Example, of barratary are: wrongfully scuttling a
ship, intentionally running he on shore, or setting fire,
disposing of cargo, sub-letting the ship for private use,
commencement of voyage without paying the port charges,
etc.

4. JETTISON:
Jettison is the throwing (overboard) of cargo, or the cutting
and casting away of masts, spars, rigging or sails to tighten the
ship in an emergency. Losses by jettison are revocable under
the marine insurance policy.

5. RISKS OF THEFT:
The marine insurance policy may cover the risk of theft of
decoism. Here theft means which is done at the open, but not
by the employee or officer of the ship.

6. RISK OF WAR:
 During the period of war, the risk against cargo, ship/vessel,
etc. may increase. The risks of loss of ship and cargo, seizure of
ship by the enemies, etc. can be possible. Sometimes the
Captain of the ship has to divert the voyage from its usual
route to get rid from the enemy. Sometimes, as per direction
of the authorities, the Captain of the ship is forced to sell the
cargo or to vacate the cargos from the ship. The marine
insurance policies are available to cover all these types of risks.

7. OTHER INCIDENTAL RISKS:

There is a practice in marine insurance to cover the risks of
incidental nature. The incidental risks are those risks involved
for carrying the cargoes from the godowns to destination port,
by rail or road transports. Such risks are covered by the marine
insurance policies. In addition to these, ocean risks and inland
water transport risks are also covered by the marine insurance
policies.

From the foregoing description, it is clear that the scope of

marine insurance is much larger.

It is, therefore, clear that the scope of marine insurance is not

restricted to the cargo and marine perils, but it covers various
other risks relating to transportation of cargo from one
destination to another. This may be the reason that marine
insurance is also known as “Transportation Insurance.”
 ESSENTIAL ELEMENTS OF MARINE INSURANCE CONTRACTS

The following are the essential elements of marine insurance contract:

1. Essentials of valid contracts.

2. Insurable Interest.
3. Utmost Good Faith.
4. Warranties.
5. Indemnity; and
6. Application of other principles of Insurance.

1. ESSENTIALS OF VALID CONTRACT:

Marine insurance is a contract and, therefore, it must satisfy the
essential elements of a valid contract as provided in Indian Contract Act,
1872. Such as a proposal and its acceptance, competency to contract,
free consent, consideration, legality of object, enforceability under the
Act, etc. In the absence of any of these essentials, the contract of marine
insurance becomes void.

2. INSURABLE INTEREST:
In marine insurance, the assured must have insurable interest at the
time of the loss though he may not have been interested when the
insurance was actually affected. According to this principle, the person
who affects insurance must have an insurable interest in the subject
matter. According to Section 7 of the Marine Insurance Act, 1963, a
person has an insurable interest if he is interested in marine adventure
in the consequences of which he may benefit by the safe arrival of
insurable property or be prejudiced by its loss, damage or detention.
Thus, the owners, shippers, agents and others have insurable interest in
respect of money advanced.
In the case of marine insurance, the following persons have insurable
interest in marine adventure:

1) The owners of cargo

2) The shippers
3) The agents
4) The captain and crew of ship of their wages
5) A mortgagee of vessel to the extent of his mortgage
6) A bailee in respect of property left in custody and care
7) Charterers of vessels
8) An underwriter in respect of risk underwritten
9) The lender of money on bottomry or respondentia in respect
of loan.

3. UTMOST GOOD FAITH:

Insurance contracts are based on utmost good faith. When this is not
observed by either of the parties, the contract can be avoided by the
other. According to Sections 20, 21, and 22 of the Marine Insurance
Act, 1963, some important facts about utmost good faith are as
under:

1) It is the prime responsibility of the assured to observe utmost

good faith. He must disclose all material facts before the
insurer that he has full knowledge.
2) Even in the case of affecting the marine insurance through the
agent of the assured, all the material facts should be disclosed
in good faith.
3) It is expected from every assured or his agent that he is having
full knowledge of important matters as one would have in the
ordinary course of his business.
4) The statement may be of fact or trust, but it should be
expressed in utmost good faith.
5) If an assured or his agent expresses any untrue statement in
connection with the insurance contract the insurer has the
right to declare the contracts as void.
4. WARRANTIES:
In a contract of marine insurance there is a condition known as
Warranties. According to Section 35 of the Act, a Warranty is an
undertaking by the assured that some condition shall be fulfilled, or
that a certain thing shall be or shall not be done, or whereby he
confirms or negatives the existence of a particular state of facts. A
warranty may be implied or expressed.

Implied Warranties: Implied warranties are in the nature of

preliminary essential conditions which must be complied with in
order to render a contract of marine insurance valid and their non-
compliance is fatal to the contract. These warranties are:

a) SEA-WORTHINESS:
In every “voyage” policy the ship must be sea-worthy at the
commencement of the voyage, or if the voyage is divisible into
distinct stages, at the commencement of each stage. To be
sea-worthy a ship must be reasonably fit in all respect to
encounter the perils of the voyage. She is about to undertake.
In other words, she must be sound as regards her hull, must
not be overloaded, and the cargo must be properly stowed.
She must be fully manned and her captain and crew must be
efficient. The ship must be fit to carry the cargo to the
destination contemplated by the policy, i.e., “She must be
cargo-worthy.”
 However, in ‘Time Policies’ there is no implied warranty of sea-
worthiness.

b) LEGALITY OF VOYAGE:
The second implied warranty is that the venture insured must
be lawful one, that so far as the assured can control the
matter, the adventure shall be carried out in a lawful manner.
Therefore, an insurance of an adventure which is illegal
according to law, e.g., smuggling, is void. If the adventure is
legal one, but the master and the crew members, without the
knowledge of the owner, indulge in smuggling on their own
account, there would be no breach of the implied warranty. A
policy of insurance affected for the purpose of insuring an alien
enemy is void, because it is illegal.

According to Section 39 of the Act, however, there is no

implied warranty as to the nationality of a ship, or that her
nationality shall not be changed during the risk. In a policy on
goods or other movables there is no implied warranty that the
goods or movables are sea-worthy [Sec. 42].

c) NON-DEVIATION:
The voyage must be accurately described in the policy, and
properly performed. The ship must follow the course specified
in the policy. When a ship starts from the port of departure for
her port of destination, but proceeds by an unusual or by an
improper cause, or takes the ports of call by an order different
from the one specified or customary, there is a deviation. If the
deviation takes place without any lawful excuse, the insurer is
discharged from his liability as from the time of deviation, even
if the ship may have regained her original route. If the
adventure insured is not prosecuted throughout its course
with reasonable dispatch, there will be a variation in the risk,
and the insurer will be discharged of his liability. On the other
hand, the insurer is liable for any loss from perils insured
against which occurs previous to the destruction.

CHANGE OF VOYAGE

Change of voyage differs from destination in that the policy is

void from the moment of voyage was contemplated. Where
destination is specified in the policy and the ship, after the
commencement of risk, sails for another destination, no risk
attaches to the policy from time when the determination to
change the voyage became manifest.

JUSTIFIABLE DEVIATION:

There are certain circumstances in which deviation or delay

would be excused under the provisions of the Act. They are:

1) Where authorized by any special term in policy.

2) Where caused by circumstances beyond the control of
the master and his employer.
3) Where deviation being ordered during way by the naval
authorities to deviate from her ordinary course in order
to avoid the danger of submarines.
 4) Where reasonably necessary in order to comply with an
express or implied warranty.
5) Where reasonably necessary for the safety of the ship or
subject matter insured (e.g., putting into part for
repairing ship).
6) Where it is necessary to save human life (Where it is in
danger).
7) Where reasonably necessary for the purpose of
obtaining medical or surgical aid to any person on board
the ship.
8) Where caused by the barratrous conduct of the master
or crew, if barratry be one of the perils insured against.

When the cause which excuses deviation or delay cease to be

operative, the ship must resume her course with reasonable
dispatch.

EXPRESS WARRANTIES:

The Marine Insurance Act specifies two forms of express

warranties, namely

i. A warranty of neutrality, and

ii. A warranty of good safety.
Sections 38 and 40 specifically deal with these. Where the
subject matter is expressly warranted neutral, it must be so at
the commencement of the risk, and, so far as the assured can
control the matter, the neutral character is preserved during
the risk. Where the subject matter insured is warranted “well”
or “in good safety” on a particular day, it is sufficient if it be
safe at any time during the day.
5. INDEMNITY:
Indemnity principle is applied in marine insurance also. According to
this principle the insured is entitled to claim the actual loss only,
subject to a maximum of sum assured.

In modern time, this principle is not strictly followed in marine

insurance, as in fire insurance. Practically, certain such policies are
issued, in which the payment is made for more than the actual
indemnity.

As, for example, in case of valued policy, the sum insured is fully paid
to the insured, where the value of the ship or cargo is assessed at the
time of affecting the policy. The value of the subject matter at the
time of loss is not made, and the insured value is fully paid.

The market value of the ship fluctuates and, therefore, it is important

for the ship owner to recover the freight accruing capacity of the
ship. At the time of peril, the insured value is paid to the owner,
which is always being higher than the insured value of the ship.

Similarly, the value of the cargo is fixed by including freight charges,

insurance, certain percentage of profits, and other expenses. In the
case of losses or damage, the insured value is paid by the insurer.

Thus, in marine insurance the concept of pure indemnity is not

followed, only the commercial indemnity.
 6. APPLICATION OF OTHER PRINCIPLES OF INSURANCE:
In marine insurance also, the other principles of insurance, such as
subrogation, cause proxima, etc. are applied.

TYPES OF MARINE INSURANCE

The two broad categories of marine insurance are –

1. Ocean Marine Insurance and

2. Inland Marine Insurance.

1. OCEAN MARINE INSURANCE

Ocean marine insurance is one of the forms of transportation
insurance. The ocean marine contracts are incredibly complex,
reflecting basic marine law, trade customs, and court
interpretations of the various policy provisions. Ocean marine
insurance can be divided into four basic classes to reflect the
various insurable interests:

a) HULL INSURANCE
It covers physical damage to the ship or vessel. It is similar to
collision insurance that covers physical damage to a
automobile caused by collision. Hull insurance is always written
with a deductible. In addition, it contains a collision liability
clause that covers the owner’s legal liability if the ship collides
with another vessel or damages its cargo. However, the
running down clause does not cover legal liability on that vessel
arising out of injury or other persons, damage to piers and
docks, and personal injury and death of crew members.

b) CARGO INSURANCE
It covers the shipper of the goods if the goods are damaged or
lost. The policy can be written to cover a single shipment. If
regular shipments are made, an open-cargo policy can be used
that insures the goods automatically when a shipment is made.
The open-cargo policy has no expiration date and remains in
force until it is cancelled.

c) PROTECTION AND INDEMNITY (P&I) INSURANCE

It is usually written as a separate contract that provides
comprehensive liability insurance for property damage or
bodily injury to third parties. P&I insurance protects the ship
owner for damage caused by the ship to piers, docks and
harbour installations, damage to the ship’s cargo, illness or
injury to the passengers or crew, and fines and penalties.

d) FREIGHT INSURANCE
It indemnifies the ship owner for the loss of earnings if the
goods are damaged or lost and are not delivered.
Ocean marine insurance has certain fundamental concepts:

COVERED PERILS:

An ocean marine policy provides broad coverage for certain

specified perils including perils of the sea, such as damage or
loss from bad weather, high waves, collision, sinking, and
stranding. Other covered perils include loss from fire, enemies,
pirates, thieves, and jettison (throwing goods overboard to
save the ship), barratry (fraud by the master or crew at the
expense of the ship or cargo owners), and similar perils. Ocean
marine insurance can also be written on an “all-risks” basis. All
unexpected and fortuitous losses are covered except those
losses specifically excluded. Common exclusions are losses due
to delay, war, inherent vice (tendency of certain types of
property to decompose), and strikes, riots or civil commotions.

PARTICULAR AVERAGE:

In marine insurance the word average refers to a partial loss. A

particular average is a loss that falls entirely on a particular
interest, as contrasted with a general average, a loss that falls
on all parties to the voyage. Under the free of particular
average clause (FPA), partial losses are not covered unless the
loss is caused by certain perils, such as stranding, sinking,
burning or collision of the vessel. The FPA clause can be written
with franchise deductible, where the franchise amount is
stated as a percentage of the insured property. Thus, an FPA
 clause of 3% means that a covered loss under 3% falls entirely
on the insured; if the loss is 3% or more, the insurer pays the
loss in full.

GENERAL AVERAGE:

A general average is a loss incurred for the common good and

consequently is shared by all parties to the venture. Each party
must pay its share of the loss based on the proportion that its
interest bears to the total value in the venture. Four conditions
must be satisfied to have a general average loss:

 Necessary: the sacrifice is necessary to protect all

interests in the venture-ship, cargo, and freight.

 Voluntary: the sacrifice must be voluntary.

 Successful: the effort must be successful. At least

part of the value must be saved.

 Free from fault: any party that claims a general average

contribution from other interests in the voyage must
be free from fault with respect to the risk that
threatens the venture.
SUE AND LABOUR:

Under this the insured is required to do everything possible to

save and preserve the goods in case of loss. The insured who fails
to do this has violated a policy condition, hence loses the rights of
recovery.

ABANDONMENT:

In ocean marine insurance, two types of losses are recognized:

actual and constructive. Actual total loss occurs when the
property is completely destroyed. Constructive total loss occurs
when, even though the ship or other subject matter of insurance
is not totally destroyed, it would cost more to restore it than it is
worth. The ship may be abandoned to the insurer and the insured
collects the full amount of the policy. The salvage then belongs to
the insurer, who is usually in a better position to dispose of it than
the insured because the insurer deals with salvage companies all
over the world and is experienced in such matters.

WAREHOUSE TO WAREHOUSE:

Under the terms of the warehouse clause, such protection as is

afforded under the insuring agreement extends from the time the
 goods leave the warehouse of the shipper, even if it is located far
inland, until they reach the warehouse of the consignee.

COINSURANCE:

Although an ocean marine policy does not contain a specific

coinsurance clause, losses are settled as if there is a 100%
coinsurance clause. An ocean marine policy is valued contract, by
which the face amount is paid if a total loss occurs. If the
insurance carried does not equal the full value of the goods at the
time of loss, the insured must share in the loss.

WARRANTIES:

There are two types of warranties in marine insurance: express

and implied. Express warranties are written into the contract and
become a condition of the coverage relating to potential causes of
an insured event. And can be of the type free of capture and
seizure warranty (FC&S), strike, riot and civil commotion (SR&CC),
delay warranty and trading warranty. Implied warranties are not
written into the policy but become a part of it by custom. Breach
of warranty in marine insurance voids the coverage, even if the
breach is immaterial to the risk. It can be of types of
seaworthiness, deviation and legality.

2. INLAND MARINE INSURANCE

Inland marine insurance grew out of ocean marine insurance.
Ocean marine insurance first covered property from the point of
embarkation to the place where the goods landed. As commerce
and trade developed in the 1920s to cover property being
transported over land, means of transportation such as bridges
and tunnels, and property of a mobile nature.

Commercial property that can be insured by inland marine

contracts can be conveniently classified into five categories:

 Domestic Goods in Transit.

 Property Held by Bailees: bailees are legally liable for
damage to customer’s property only if they or their
employees are negligent.
 Mobile Equipment and Property: inland marine property
floaters can be used to cover property that is frequently
moved from one location to another.
 Property of Certain Dealers: certain “block” policies are used
to insure dealers. Most policies provide coverage on an “all-
risks” basis.
 Means of Transportation and Communication: this refers to
property at a fixed location that is used in transportation or
communication.

For purposes of regulation, inland marine contracts are classified

into two categories; filed forms and non-filed forms. With filed
forms, the policy forms and rates are filed with the state
insurance department. Filed forms are typically used in situations
where there are a large number of potential insured’s and the loss
exposures are reasonably homogenous. In contrast, non-filed
forms refer to policy forms and rates that are not filed with the
state insurance department. Non-filed forms are used in
situations where the insured has specialized or unique needs, the
number of potential insured’s is relatively small, and the loss
exposures are diverse.

RBI GUIDELINES ON MARINE INSURANCE

INTRODUCTION

Persons, firms, companies, etc. resident in India are not permitted

to take general insurance of any kind with insurance companies in
foreign countries without prior approval of Reserve Bank of India.
Besides, permission of Government of India under General
Insurance Business (Nationalization) Act, 1972, is also required in
such cases. Proposals for direct insurance outside India should be
submitted to Reserve Bank explaining reasons for seeking such
insurance cover and producing a certificate issued by GIC or any
of its subsidiaries to the effect that the proposed insurance cover
cannot be obtained from them.

I. MARINE INSURANCE ON EXPORTS

 GIC has been permitted to accept premiums in rupees from
exporters against export of goods from India on production of
certificate from them to the effect that –

a) the insurance charges on the shipment in question have to

be borne by exporter in terms of the contract with overseas
buyer and that he is not making the payment on behalf of
any non-resident; or
b) the exporter is defraying the insurance charges on the
shipment in question on account of overseas buyer of the
goods and that he undertakes to add the amount on the
invoice and recover the payment so made from the buyer in
an approved manner.

While handling shipping documents against exports contracted on

free on board (f.o.b.), cost and freight (c. &f.) or any other terms
under which liability on account of marine insurance on the
shipment rests with overseas buyers but exporters have taken the
insurance cover on non-resident party’s account, authorized
dealers should verify that the actual premium has been added on
the invoice for being recovered from buyers.

 PROTECTION AGAINST TRANSIT RISKS UNDER FREE ON

BOARD, COST & FREIGHT, ETC. CONTRACTS FOR EXPORTS
Sometimes in case of exports contracted on f.o.b., c. & f., etc.
terms, exporters ship cargo without verifying that the goods
have been adequately insured against transit and insurance is
available for protection of exporter until ownership in the
 goods passes to buyer, the exporter will be liable to suffer
financial losses apart from loss of foreign exchange caused by
damage/loss to the goods, except where the export is covered
by an irrevocable letter of credit opened by the buyer. It is,
therefore, necessary for the exporter to verify even before
goods are shipped out of India, that they are insured against all
risks of loss or damage during the entire course of transit and
that such insurance is available to him by virtue of
incorporation of sellers’ interest clause in the policy.

II. MARINE INSURANCE ON IMPORTS

GIC has been permitted to accept premiums in rupees from
importers against import of goods into India on production of
a certificate from them to the effect that –

a) the insurance charges on the shipment in question have to

be borne by importer in terms of the contract with the
overseas seller, and
b) where the import is covered under an Import License, he
undertakes to ensure that the amount of insurance
premium paid will be endorsed on the import license in due
course.
1) CLAIMS AGAINST MARINE INSURANCE POLICIES
COVERING EXPORTS

i. GIC and its subsidiaries have been permitted to settle

claims against marine insurance policies covering
exports from India out of foreign currency balances
 held by them, provided they are satisfied that
ownership of goods lost, damaged, etc. vests in such
claimant that the latter is not making the claim merely
as an agent of the real owner of the goods in India. In
cases where the funds held by the insurers abroad are
inadequate, claims will have to be settled by
remittances from India.
ii. GIC and its subsidiaries may sometimes make
arrangements with overseas claims-settling agents for
facilitating speedy settlement of claims relating to
exports from India. In such cases, authorized dealers
may on receipt of requests from GIC/its subsidiaries,
open revolving letters of credit in favor of established
claims-settling agents abroad providing payment
against production of documentary evidence viz.
statement of claim, survey report or other
documentary evidence of loss/damage, original policy
or certificate of insurance, etc.
iii. Reimbursement of claims under the credit may be
made by authorized dealers on verification of the
required documents.

Where GIC and its subsidiaries have settled claims against

marine insurance policies covering exports from India in
favor of Indian exporters, authorized dealers may allow
remittance of claims by Indian exporters to overseas buyers
on production of documentary evidence in support of the
claim, provided export proceeds have been realized in full by
the exporter. A declaration from the Indian exporter that the
overseas buyer has not been compensated in any other
manner for the loss of/damage to goods exported from India
 in respect of which claim has been settled by GIC or its
subsidiary, should also be obtained.

2) CLAIMS AGAINST MARINE INSURANCE POLICIES COVERING

IMPORTS INTO INDIA AND MERCHANTING TRADE
Remittances against claims under marine policies covering
imports into India may be allowed by authorized dealers on
verification of the certificates regarding ownership of the
goods etc.

3) PREMIUM FOR EXTENSION OF INSURANCE COVER ON

IMPORTS
Sometimes importers may not retire documents received
letters of credit promptly and goods may meanwhile arrive
at the Indian port and remain unprotected in the docks. In
cases where marine insurance has been taken abroad and
normal period has expired, authorized dealers have been
granted permission to have the insurance cover extended ad
to remit the insurance premium.

4) RISK INSURANCE ON MARINE HULLS

GIC is operating a scheme of comprehensive insurance on Indian
marine hulls covering all risks against war and other allied risks
arising out of civil commotion, political or labor disturbances, etc.
Ship owners should, therefore, normally obtain such insurance
cover only in India. PROCEDURE OF EFFECTING MARINE
INSURANCE

The procedure of marine insurance is affected as per conditions

prescribed by the General Insurance Corporation of India. These
conditions and procedure are controlled by the international
standards; although the conditions and procedures differ between
countries. After the nationalization of marine insurance in India,
the procedure relating to the issue of policies is standardized. This
process can be divided into the following steps:

1. SELECTION OF INSURANCE COMPANY:

After the nationalization of general insurance business in
India, the marine insurance policies are issued by the four
subsidiary companies of the General Insurance Corporation
of India. One has to select any of these companies keeping
in view of premium rate, facilities and security provided by
each.

2. COMPLETION OF PROPOSAL FORM:

After the selection of the proposed insurance company, the
proper is required to complete the proposal form available
with the company manager or agent.
 The proposer is required to give all details about the risk in a
marine declaration form. The following nature of
information is asked for in the declaration form:

i. Name of the proposer.

ii. Full details of insurable property.
iii. Method of packing, type and form.
iv. Details of voyage.
v. Type of policy required and conditions of insurance.
vi. Name of the carrying vessel.
vii. Value of goods to be insured (which is usually 10%
higher than the actual value).
viii. The place where the claim is payable.
ix. Details of previous claims, if any.

The marine declaration form must be completed with great

care, accuracy and in utmost good faith. The assistance of
insurance agent may be sought in completing the proposal
form.

3. PRESENTING THE PROPOSAL WITH THE INSURANCE

COMPANY:
The proposal form duly completed in all respect is sent
directly in the company office or handed over to the
insurance Agent. The Agent will see that the declaration
requisition form is in order and then pass it on to the
insurance company. The amount for which the insurance is
affected shall be the value of goods together with shipping
 expenses plus 10 to 15 per cent added thereto for
anticipated profits.

It is not customary in marine insurance to fill up the

proposal form. The marine declaration form serves this
purpose.

4. INSPECTION OF THE SUBJECT MATTER:

Having received the marine declaration form duly completed
by the proposer, the insurance company makes suitable
arrangement for the inspection of the subject matter
keeping in view of the particulars given in the proposal form.
Since the marine policy involves very little moral or
behavioral hazards, the insurance company is not so
bothered about such an inspection of the subject matter. If
necessary, sea worthiness of the ship is got assessed by the
expert inspectors or surveyors of the company.

5. INSPECTION REPORT:
After the inspection of the subject matter, the inspectors
present their report to the insurance company. After making
proper evaluation of the report, the actual risk is assessed
for determination of premium.

6. DETERMINATION OF PREMIUM:
 The determination of premium is done by the under-writing
department. Usually it happens that the Agent himself
calculates the premium when he forwards the completed
proposal to the company office.

The method of premium calculation is not so simple in

marine insurance keeping in view of diversity of marine
perils. The physical and behavioral aspects of risks are taken
into consideration while fixing the premium rate. The sea
worthiness of the ship, condition of the sea port,
geographical conditions of voyage, nature of cargo, method
of packing of the cargo, reputation and goodwill of the
owner of cargo and many other factors are considered in the
process of determination of premium.

7. ACCEPTANCE OF PROPOSAL:
On fixing the premium rate, the insurance company conveys
the acceptance of proposal and the proposer is asked to
deposit the premium within the prescribed time limit. In
case the company has already received the premium cheque
along with the proposal, the company may adjust it towards
premium and the money received, in excess or in case of
short receipt, gives instructions to the proposer accordingly.

8. DEPOSITING OF PREMIUM MONEY:

 On receipt of the message for the acceptance of proposal,
the proposer deposits the premium and thus a contract is
entered into between the insurer and the insured. The
insurer’s risk commences as soon as the contract is entered
into.

9. ISSUE OF ‘COVER NOTE’:

On receipt of premium money, the company issues a
temporary receipt, which is called ‘Cover Note’. It gives an
indication that the proposer has deposited the premium
money and the company has accepted his proposal.

After the issue of the policy, the validity of the Cover Note
lapses automatically.

10. ISSUE OF POLICY AND POLICY CERTIFICATE:

On completion of all legal requirements, the insurance
company issues the policy. It is the evidence of lawful
conclusion of the contract. Sometimes, the Insurance
Company issues a policy certificate also in addition to the
prescribed policy. The certificate is usually issued for a year
only.

In the case of Marine Insurance, the assignment of the

policy can be made without prior permission of the marine
 insurance company. Only intimation is needed to be given to
the insurance company to this effect.

CLASSIFICATION OF MARINE POLICIES

Marine policies can be classified into as follows:

I. ON THE BASIS OF TIME PERIOD

1. Fixed period policy.
2. Voyage policy.
3. Combined policy/mixed policy.

II. ON THE BASIS OF VALUATION

1. Valued policy.
2. Unvalued policy.

III. ON THE BASIS OF HULL/VESSEL

1. Single vessel policy.
2. Fleet policy.
3. Ship construction policy.

IV. ON THE BASIS OF CARGO

 1. Named policy.
2. Floating policy.
3. All risks policy.

V. ON THE BASIS OF INLAND TRANSPORTATION

1. Marine-cum-errection policy.
2. Inland transit policy.
3. Passenger baggage policy.

VI. MISCELLANEOUS TYPE

1. Freight policy.
2. With interest policy.
3. Wager policy.
4. Currency policy.

A brief description of each is given below:

I. ON THE BASIS OF TIME PERIOD OF POLICY

On the basis of time period, the policies can be of the
following types:

1. FIXED PERIOD POLICY:

Where the tenure of the marine policy is fixed for a
certain period of time, it is known as fixed period
policy. For example, where a policy was issued for a
period of one year with effect from April 1, to 31st
March of the next year. It is called fixed period
 policy. Time period policies are usually issued for a
year on the vessel.

2. VOYAGE POLICY:
Where the contract is to insure the subject matter
“at and from” or from one place to another, the
policy is called a voyage policy. Where the subject
matter is insured from a particular place, the risk
attaches only when the ship starts on the voyage
insured and ends as soon as the ship enters the port
of destination.

3. MIXED POLICY OR COMBINED POLICY: Wherein a

marine insurance policy, the time period and the
voyage, both are included, it is known as mixed
policy. It insures the subject matter “from and to”
certain places between a specified period of time,
and covers the risk during that particular voyage. For
example, it contains the clause “from 1st January to
30th June – Calcutta to Mumbai.” This policy is also
known as “Time and voyage policy.” Such policies are
issued for ships and steamers operating on a
particular route between certain specified ports.

II. ON THE BASIS OF VALUATION

On the basis of valuation of the subject matter, the
marine policies can be of the following two types:
1. VALUED POLICY:
A valued policy is a policy which specifies the agreed
value of the subject matter insured. In the absence of
fraud, this value is conclusive as between the insurer
and the assured, whether the loss be partial or total,
but it is not conclusive in determining whether there
has been a constructive total loss [Sec. 29].

In the case of cargo, the insured value is calculated by

adding the price of goods, freight and shipping
charges, insurance and 10 to 15 per cent to cover the
anticipated profits. In the absence of fraud or
misrepresentation, the declared value of the policy is
the measures of indemnity.

2. UNVALUED POLICY:
An unvalued policy is a policy which does not specify
the value of the subject matter of insurance, but
subject to the limit of the sum insured, leaves the
insurable value to be subsequently ascertained [Sec.
30]. The insurable value is ascertained as follows:

i. In the case insurance on ship, the

insurable value is the value at the commencement
of the risk, of the ship including (a) outlet of the
ship, (b) provisions and stores for the officers and
crew, (c) money advanced for seamen’s wages, (d)
 other disbursements incurred to make the ship fit
for the voyage or adventure, (e) charges of
insurance upon the whole.

In the case of steamship, the insurable value

includes: (a) machinery, boilers and coals;(b)

engine stores owned by the assured.

ii. In the case of freight, the insurable value is the (a)

gross amount of the freight at the risk of assured,
and (b) the charges of insurance.

iii. In the case of insurance on goods or merchandise,

the insurable value is the (a) prime cost of the
property insured, (b) the expenses of and
incidental shipping, and (c) the charges of
insurance upon the whole.

iv. In the case of insurance on any other subject

matter, the insurable value is (a) the amount at the
risk of the assured when the policy attaches, and
(b) the charges of insurance [Sec. 18].

III. ON THE BASIS OF HULL/VESSEL

On the basis of vessel, policies are of three types:
1. SINGLE VESSEL POLICY:
Where the owner of the ship insures his individual
vessels separately, it is called “single vessel policy.”
For the purpose of determining the insurable value,
the value of the specific ship, outfit, provision and
stores of the officers and crew, their salaries and
wages, money advanced against salaries, shipping
charges etc. are included.

2. FLEET POLICY:
Where an individual or a corporation insures whole
fleet of liners or steamers under one policy (instead
of taking individual policies on every vessel) it is
called a “Fleet policy.” Fleet means a number of
ships, aircraft, buses etc. moving or working under
one command or ownership. Fleet insurance
policies have become popular with the advent of
steamships and the development of large
companies. These policies save the duplication of
efforts in affecting different policies on different
ships and avoid much wastage of time. The
premium is also comparatively small. Fleet policy is
also affected where the ships are old, obsolete and
not seaworthy. The ship owners share part of risk
upon their own shoulders. In fleet insurance the
insurers’ risk is larger, which can be minimized by
re-insurance.
 3. SHIP CONSTRUCTION
POLICY:
This policy is also known as ship builders’ policy.
This is a policy issued for covering the risk of ship
during its construction. It is for the period from the
commencement of ship building to its completion
and sea-worthiness. This policy can be obtained at
any stage of ship under construction. This policy
covers the risks of vessel during the period of
construction.

IV. ON THE BASIS OF CARGO

On the basis of cargo, the marine policies can be of
the following types:

1. NAMED POLICY:
Named policy is the one in which the name of the
ship and the name of the insured are written. The
owner of cargo obtains the policy in advance and
thereafter the name of the ship is entered in the
policy, in which the cargo is boarded.

2. FLOATING POLICY:
 A floating policy is a policy which describes the
insurance in general terms, and leaves the name of
the ship and other particulars to be defined by the
subsequent declaration. According to the condition
of the policy wherever the consignments are
shipped, the insurer shall be informed about the
quantity of the goods, name of the ship, date etc.
Nothing of this sort is stated in the policy at the time
of affecting the policy. All these consignments
comprise within the terms of policy, and the value of
goods, or other property must be honestly stated.
This policy is suitable for those exporters who export
the goods in different consignments. Section 31 of
Marine Insurance Act, 1963 provides the following
rules in respect of floating policy:

i. The declaration of the consignment

sent may be made by endorsement on the
policy, or in any other customary manner.
ii. The declaration may be made in order
of shipment.
iii. The value of goods must be honestly
stated.
iv. If the value is not stated until after
notice of loss or arrival, the policy must be
treated as an unvalued policy as regards the
subject matter of that declaration.

This policy is known as in different names, such as,

Declaration policy, Open Policy or Unnamed Policy.
 3. ALL RISK POLICY:
This is a policy in which all types of risks are
covered. The insurer’s risk commences as soon as
the goods are taken out from the warehouse and
continues till the consignment is reached to the
destination is kept in the warehouse of the
importers. This way the policy covers all the risks of
transportation including ocean perils, pirates,
barratry, etc. It covers inland transit and ocean
transit both.

This policy is more popular and known among the

people as “warehouse to warehouse” policy.

V. ON THE BASIS OF INLAND TRANSPORTATION

On the basis of inland transportation, the policies
are of following types:
1. MARINE-CUM-ERRECTION POLICY:
This policy covers risks of ocean voyage as well as
the risk involved in inland transportation so as to
install the consignment at the destination place.

This policy is largely used in the export-import

trade, of plants and machinery, equipment, etc.
because the risks, till the plants are installed at the
factory, are covered by the policy. The liability of the
insurer continues to exist for another four weeks
after the installation of plant and machines.

As a whole, the policy covers the risks involve at

different places such as fire, theft, decoity,
earthquakes, floods, explosion, lightening, riots, civil
disturbances, and the loss due to negligence of the
persons in installing the plant and machinery.

2. INLAND TRANSIT POLICY:

It is a policy which covers the risks of inland
transportation of consignment from one place to
another through the rail, road, and airways or by
registered postal service. In the case of rail or road
transportation, the possible risks like fire, accident,
derailment of goods train, etc. are covered. The
policy also covers all ocean risks. In addition to these
 the insurer’s liability exists for three days more after
the consignment reaches to the destination port.

3. PASSENGER BAGGAGE POLICY:

This policy is issued to cover the risk of passengers’
baggage that travel by sea. The risks during the
travel by sea involve theft, fire, civil disturbances, or
other accidents, which are covered by this type of
marine policy.

VI. MISCELLANEOUS POLICIES

They include the following:

1. FREIGHT POLICY:
Where the owner of the ship does not receive the
freight charges in advance from the cargo owner he
obtains freight policy also along with the vessel, so
as to protect him from the loss of freight in case the
vessel fails to reach the destination.

2. WITH INTEREST POLICY:

In a marine policy, it is not so essential that the
insurable interest in the subject matter be present
at the time of affecting the policy, but be present at
 the time of claim. Many occasions, people with no
insurable interest gets marine insurance policies.

Really speaking, ‘With Interest Policy’ is one, where

the insured has the insurable interest at the time of
affecting the policy.

3. POLICY PROOF OF INTEREST OR WAGER OR

HONOUR POLICY:
This is a policy which does not carry any evidence
that the insured has any insurable interest in the
subject matter of insurance or the insurer dispenses
with any proof of interest, clearly indicated by such
words as “Policy Proof of Interest” (PPI), or by other
expressions like ‘Wager’ or ‘Honour’ policy.

Since such policies are void under the provisions of

the Act, they cannot be enforced, in case the insurer
refuses to meet his liability. However, it does not
mean that wagering/honoured policies without they
arise. Though no legal action can be taken against
the insurer if he refused to pay the losses on such a
policy, yet to maintain his known business
prestigious and goodwill, the insurer invariably pay
 the claim. This is the reason that such policies are
also known as “Honour Policies.”

4. CURRENCY POLICY:
This type of policy contains a condition to pay the
claim in a specified currency. It ensures the assured
from the loss of fluctuations in the value of different
currencies. The insurer undertakes to compensate
the insured in the same currency desired by him and
specified in the policy irrespective of any rise or fall
in the value of international currencies. In such
policies, the premium is collected in the currency
which is stated in the policy.

CONDITIONS OF MARINE POLICIES

A marine policy is issued subject to the following conditions

which form the clauses of policy in order to meet the special
requirements of the insured’s.

1. NAME CLAUSE:
The opening words in a marine policy are a blank space to
be filled up by the name of insured or his agent. If the name
 is not inserted in the policy, the document does not
constitute a marine policy.

2. ASSIGNMENT CLAUSE:
This clause makes the provision for the assignment of the
policy so that a person who later requires insurable interest
in the subject matter of insurance can avail the protection
given by the policy.

3. LOST OR NOT LOST CLAUSE:

This clause is a portion of ocean marine insurance policy
providing for coverage even if loss has happened before the
insurance was affected.

The clause ‘lost or not lost’ condition is applied in a policy

which is affected after the cargo or the vessel has already
departed for its destination. Because of this condition, the
insurer is liable to the claim of the insured in case of loss,
provided both the parties are unaware of the loss when it
took place. These types of policies have retrospective effect.

4. ‘AT AND FROM’ CLAUSE:

This condition is related to the point of time and place from
where the risk commences. Usually the risk of the insurer
commences when the ship departs for its destination. Many
 occasions, the liability commences as per conditions stated
in the policy. In case the ‘From Clause’ is given the policy,
the liability commences as soon as the ship departs from the
port.

Where the ‘At and From’ clause is stated in the policy, it is

not necessary that the ship is present at the sea port when
the contract is considered. In such a situation the liability of
the insurer commences when the ship comes to the port
safely for departure. In case the ship requires bringing it
suitable for voyage, the liability of the insurer commences
only after the repairs. In the case of merchandise, the
liability of the insurer commences only after the
merchandise are boarded on ship.

5. NAME OF SHIP CLAUSE:

The name of the ship in which the cargo is boarded is
written in this clause.

6. NAME OF CAPTAIN CLAUSE:

The name of the captain of the ship is written in this
clause.

7. TERMINATION OF RISK CLAUSE:

 This clause contains the details of information about
termination of insurer’s risk. Under the following situations,
the insurer’s liability automatically terminates:

i. Where the ship is not departed from its beginning

point.
ii. Where the ship deviate from its original route.
iii. Where the ship reaches a place different from its
destination port.

iv. Where the period of insurance ceases.

v. Where the unboarding the cargo takes mush delay.

Usually 24 hours time is given for unboarding the cargo.

For some special kinds of cargo, 30 days time is given.
After this, the liability of the insurer terminates
automatically.

8. TOUCH AND STAY CLAUSE:

It is written in this clause that during the period of voyage, in
what order the ship has to touch through the different ports
and at what places it has to halt. The places of such ports are
stated in this clause. In this case, the following are to be
complied with:

i. The ship should travel in its usual route; the touching

and halting should be in the usual order.
ii. The ship should reach the ports in the geographical
order they are situated.
 iii. It should halt at such a port, the stoppage that is
formed.
iv. Every ship should halt at a port for a reasonable period
only.
v. The ship should not deviate from its usual route.

9. VALUATION CLAUSE:
The value of the insured property is written in this clause. If
the value is written at the time of affecting the policy, it is
called valued policy. If the value is to be written after the
loss, such a policy is called non-valuated policy.

10. PERILS CLAUSE:

All such perils and factors that cause loss to the insured
consignments are stated under this clause, for which the
insurer is liable to make the payment of claim. Usually they
include ocean risks, fire, war perils, theft, seizures,
negligence of officers and crew members, etc.

11. SUE AND LABOUR CLAUSE:

According to this condition, it is the duty of the insured to
take all possible steps to protect the insured consignment
in the vent of loss, as a man of ordinary prudence may do
in his own case. Any expenses made by the insured in this
effort, shall be the liability of the insurer, under the rules
laid down for this purpose.
12. WAIVER CLAUSE:
Under this condition, the insured and the insurer, both
have individual freedom to act in much a manner so as to
minimize the risk of loss. In many occasions, the cargo as
well as the ship, both may suffer maximum loss by ocean
perils. The insured demands for full indemnity. The insured
has to abandon the salvage, for claiming the loss in full by
sending a ‘notice of abandonment’ to the insurer.

13. PREMIUM CLAUSE:

The premium money and the period of its payment are
stated under this clause.

14. MEMORANDUM CLAUSE:

The details of perishable notice of items are stated under
this clause, for which the insurer does not undertake to
indemnify.

15. NEGLIGENCE OR ‘INCHMAREE’ CLAUSE:

This clause is included in the policy to provide wider scope
of security to the insured, which are not covered by the
ordinary policy. It is written under this clause that even in
case of loss due to certain specific reasons, the insurer shall
be liable to pay the claim, and such special causes may be:
 i. The loss due to damage of the cargo while
boarding or unboarding.

ii. Loss by explosion in ship or elsewhere.

iii. Loss due to defective machinery or explosion of

boiler.

iv. Loss by accident occurred due to the equipment

installed in the ship, etc.

16. MISCELLANEOUS CLAUSE:

Due to the increasing needs of marine insurance and its
wide scope, many other small or larger clauses are also
included in the policy. They include:

i. Free from particular average

ii. With particular average
iii. Free of all average
iv. Foreign general average
v. Against all risks
vi. Free of capture of seizure
vii. Running down or collision
viii. Free of strikes, riots etc.
ix. Sister ship clause
x. Continuation clause, etc.
Under all these clauses, the insurer undertakes to pay the claim of
insured within the condition agreed upon by the parties.

Mediclaim Insurance

Salient Features

 Provides cover which takes care of medical expenses following

hospitalization from sudden illness or accident.

 Cover Extends to pre hospitalization and post hospitalization for periods

of 30 days and 60 days respectively.

 Domiciliary hospitalization is also covered

ADVANTAGES OF MEDICLAIM INSURANCE PLAN

1. Cumulative Bonus: Most companies offer discounts on premium, on

successful renewals, for limited period of time; these discounts are
offered in the name of cumulative bonus.
2. No-Claim Bonus: one gets the benefit of no0claim bonus if he does
not make any insurance claims. Here, the insurance company adds
15% towards the coverage or policy amount during every claim-free
year. Some companies even offer a free health checkup in a year,
after completion of a certain number of years during which no claim
has been made against the policy; this too is offered in the name of
‘No-Claim Bonus’.
3. Pre- and post-medical expenses: A mediclaim policy als0 cover Pre-
and post-medical expenses. Suppose you appoint a nurse upon the
doctor’s recommendation to take care of your dependant mother
who has been discharged from the hospital after a critical operation,
the expenses of the nurse can be claimed under post-medical
expenses, provided the expenses are within the policy amount and
should be within the days prescribed by the insurance company.
4. The premium paid by a cheque upto a maximum of Rs.10, 000 is

totally exempt from income tax.

DISADVANTAGES OF MEDICLAIM INSURANCE PLAN

The main drawbacks of this scheme are as follows:

1. It covers only hospitalization and domiciliary expenses. Thus,
outpatient care and related expenses, which are more frequent in
nature, are totally left out.
2. The eligibility conditions are many times embedded in so much of
fine print that the policy holder realizes that he is ineligible for a
particular coverage only at the time of claim.
3. The scheme has also been criticized for being too costly, for the
features it offers.

TYPES OF MEDICLAIM POLICIES

INDIVIDUAL MEDICLAIM POLICY:

Coverage:
This policy provides for both reimbursement and cashless facility on
Hospitalization/ Domiciliary Hospitalization in India for illness / diseases or
injuries sustained.
 Expenses on Hospitalization are covered when the insured is admitted in
the hospital for a minimum period of 24 hours. An individual can opt for the
sum insured ranging from Rs.15, 000 to Rs. 5, 00,000 in multiples of Rs.5,
000.

Eligibility:
People between the age group of 5 and 80 years are eligible for the policy.

Children between the ages 3 months to 5 years can be covered provided

one or both the parents opt for Mediclaim cover.

Benefits:
i. Cashless Hospitalization / Domiciliary Hospitalization through Third Party
Administration.
ii. Family Discount – A discount of 10 percent in the total premium is available
if the policyholder opts for cover under the policy for any one of the
following: Spouse, Dependent children, and Dependent parents.
iii. Cost of Health Check-ups – this cost is payable to the insured at the end of
every four years block provided there is no claim reported during the block.
The cost reimburse will be the amount equal to 1 percent of the average
sum insured during the block.
iv. Cumulative bonus – The sum insured under the policy increases by 5
percent every year if there is no claim during the period of the policy,
maximum up to 10 claim free years of insurance. If there is a claim reported
by the policy holder who has earned cumulative bonus, the increased
 percentage will be reduced by 10 percent of the amount of insurance at the
time of the next renewal.
v. Premium of Rs.15, 000 is exempted under Income Tax Section 80D, if paid
by cheque.

Exclusions
i. This policy does not cover any illness suffered within the first 30 days from
the commencement of policy except in case of accidents.
ii. Expenses incurred for the treatment of cataracts, benign prostatic
hypertrophy, hydrocele, congenital internal diseases, fistula, piles, sinusitis
and related disorders are not payable during the first year of the policy.
iii. All the expenses incurred in respect of any treatment relating to pregnancy
or childbirth including caesarean are not covered.
iv. AIDS or similar conditions.
v. Diseases directly or indirectly connected with war or nuclear materials,
invasion, act of foreign enemy whether declared or not.
vi. Expenses incurred for cosmetics, vaccination or foe plastic surgery are
excluded unless necessary due to an accident or any kind of illness.
vii. The cost incurred for spectacles and contact lenses, hearing aids.
viii. Any kind of surgery or dental treatment is excluded unless the policyholder
has undergone hospitalization treatment.
ix. Expenses incurred on tonics and vitamins are not covered unless they form
a part of the treatment for injury or disease as certified by the attending
doctor.
 x. Charges incurred at the hospital or nursing home for diagnostic, x-ray or
laboratory examinations resulting in positive existence or presence of any
ailment, injury requiring hospital treatment are only payable.

Conditions
i. In case of claim, the insured should contact the TPA, whose name and
address has been mentioned under the policy. Reimbursement for
treatment at non-network hospital is made through TPA.
ii. Claim must be filed within 30 days from the date of discharge from the
hospital.
iii. Policyholder should furnish all original bills, receipts and other documents
as required by the insurance company. Policyholder should cooperate with
the insurance company at all stages.
iv. Policyholder should allow any medical practitioner appointed by the
company to examine on behalf of the company, in case of alleged injury or
disease, which requires hospitalization.
v. All medical / surgical treatment should be taken in India and the claim will
be payable in Indian currency only.
vi. The company will not be liable for any payment for claims, which are
fraudulent or supported by any fraudulent device.
vii. At the time of the claim if the policyholder has more than one policy giving
same coverage (excerpt Cancer Insurance Policy in collaboration with
Indian Cancer Society), then the company will not be liable to pay or
contribute for more than its ratable proportion of loss, expenses,
compensation.
Domiciliary Hospitalization

The term means that a patient can be treated at home when he is not in a

fit Radiation to be moved to the hospital or where there is no

accommodation in the specialist hospital provided.

1) The treatment was for a period not less than 3 days

2) The sub limits of sum insured towards domiciliary hospitalization are

furnished in the sum insured and premium schedules.

GROUP MEDICLAIM POLICY:

The Group Mediclaim Policy is available to any group or association,

institution or corporate body of more than 100 persons provided it has
central administration point. Each insurer should cover all eligible
candidates under one group policy only which means that different
categories of eligible members are not allowed to be covered under
different Group Mediclaim Policies.
The group discount is permissible depending upon the total number
of insured persons covered under the Group Mediclaim Policy at the
inception of the policy. It is to be noted that no discount is offered to a
group with less than 101 members. This policy can also be extended to
cover maternity benefit.

OVERSEAS MEDICLAIM POLICY

The Overseas Mediclaim Policy was originally introduced in the year 1984,
in order to provide payment of medical expenses incurred in respect of
illness suffered or sustained by Indian residents during their overseas trips.
The insurance scheme, since 1984, has been modified several times to
provide for additional benefits like in-flight personal accident, loss of
passport etc. in the year 1991, employment of study policy was introduced
for Indian citizens temporarily living abroad.

Scope of the policy

Overseas Mediclaim Policy covers medical expenses, while a person
is traveling abroad. The travel may be undertaken for business, holiday,
employment, or studies. This policy is also available for the frequent
corporate travelers. Overseas medical policy aims at reducing financial
burden of those who go abroad for medical treatments or operations. This
policy caters to the abnormally high medical costs in some overseas
countries. The highlight of the policy is that the premiums are payable in
Indian currency and the claim is settled in the foreign currency.
The policy has Eight Plans, which are discussed below:

PLAN A-1: For travel to countries excluding USA and Canada for business
and holiday limited to USD 50,000.
PLAN A-2: Same as (A-1) above except that benefits stand increased to USD
2, 50,000.
PLAN B-1: For travel worldwide including USA and Canada for business and
holiday limited to USD 1, 00,000.
PLAN B-2: Same as (B-1) above except that benefits stand increased to USD
5, 00,000.
PLAN C: For travel to countries excluding USA and Canada for employment
and studies limited to USD 1, 50,000.
PLAN D: For travel worldwide including USA and Canada for employment
and studies limited to USD 1, 50,000.
PLAN E-1: For travel worldwide including USA and Canada for corporate
frequent travelers limited to USD 1, 00,000.
PLAN E-2: Same as (E-1) above except that benefits stand increased to USD
5, 00,000.

CFT Cover is available for executives of corporate clients and partners of

registered firms annually subject to the duration of anyone trip not
exceeding 60 days.
 Add-on benefits under the policy
Besides the benefits mentioned above, the following additional add-on
benefits are also available under Business & Holiday and CFT cover (Except
Plan C and Plan D):
 Personal Accident
 Loss of checked in Baggage
 Delay of checked in Baggage
 Loss of passport
 Personal Liability

Premium Rate
The premium rates under the policy depend on the following factors:
 Age-band of the proposer
 Trip-band and
 Country of visits to be made by proposer.

Coverage
Under the policy, cover up to180 days is provided in the beginning for
business and holiday plan. Also an extension is allowed on original policy
for further period of 180 days subject to declaration of good health by
proposer.
 Eligibility Conditions
 Age Limit covered: 6 months and above up to the age of 70 years.
 Before departure from India, policy needs to be taken.
 Traveler who is above 60 years of age and person who is traveling to USA
and Canada with age above 40 years needs to submit a Medical report
(from an MD Cardiologist) along with the proposal form at the time of
taking insurance. The following reports are also required to be submitted:
i. ECG
ii. Fasting Blood Sugar or Urine Strip test.
The above reports are required if the travel period exceeds 60 days and
above.
If a person is unable to submit the above mentioned medical reports, then
the cover is restricted to USD 10,000.

Major exclusion under the Policy

All pre-existing disease/illnesses (known and unknown) are not covered
under the policy:
 Traveling against medical advice or for Medical treatment including routine
check-up.
 First USD 100 of all claims is to be borne by the traveler.

The policy pays the following expenses of medical treatment taken by the
insured person outside India as a direct result of body injury suffered or
sickness/disease contracted during the overseas travel.
 Expenses for physician service, hospitalization, physician-ordered medical
services and local emergency medical transportation.
 Expenses for physician-ordered emergency, medical evacuation, including
medically appropriate transportation and medical care.
 In the event of death of insured person outside India, expenses for
repatriation of the remains to India or, up to an equivalent amount for local
burial or cremation.
 Expenses of dental services for the immediate relief of dental pain only (the
amount payable is limited to US $225 per occurrence).
 It is equally important to note what expenses are not payable under the
scheme.
 Expenses of treatment in respect of a medical condition that was known by
the insured person to exist and/or had been treated in the year
immediately preceding the effective date of the policy, which commences
on the day and time of boarding the aircraft from India.
 Expenses of treatment which could be reasonably delayed until the insured
person’s return to India.
 Expenses of routine medical or other examinations where there are no
objective symptoms of impairment of normal health.
 Expenses of treatment where the insured person:
a. Is traveling against the advice of a physician
b. Is on a waiting list for specific medical treatment prescribed by the
physician when the insurance is purchased.
c. Is traveling for the purpose of obtaining medical treatment.
d. Has received a terminal prognosis for a medical condition.
e. Is six months pregnant or more.
The policy has been modified several times providing additional benefits
like (a) in flight personal accident cover and (b) loss of passport. In 1991,
employment and study policies meant for Indian citizens temporarily
working abroad and for students who go for higher studies were
introduced. From 1998, under the brand name of Videsh Yatra Mitra, a
policy was introduced incorporating overseas mediclaim policy.

Cancelation of policy
Where travel has been canceled, the policy can be canceled subject
to retention of a minimum premium.

Extension of policy
The policy can be extended, before its expiry for a further period in
case of change in the travel schedule, subject to the payment of additional
premium. This facility is subjected to certain conditions.
Corporate frequent traveler policy
For the benefit of executives who need to travel abroad regularly, an
annual policy can be issued to corporate organizations. The policy will cover
a total of 180 days in a year, but with an inner limit of maximum 30 days,
per trip. Where medical examination is needed an annual check-up at the
inception of the policy is sufficient.