INSURANCE POOLING

For any type of insurance coverage, some people and businesses are more likely to file a claim
at some point during the policy’s term. Whether the policy covers health care, professional
malpractice or loss of any other type, there will be some insured people who are at a greater risk
of needing that coverage. One definition of risk pooling could be "a group formed by insurance
companies to provide catastrophic coverage by sharing costs and potential exposure." Risk pools
help insurance companies offer coverage to both high- and low-risk customers. They also lessen
the risk borne by any single insurance company by spreading it among many.

Insurance pooling is a practice wherein a group of small firms join together to secure better
insurance rates and coverage plans by virtue of their increased buying power as a block. This
practice is primarily used for securing health and disability insurance coverage. Those doing
insurance pooling are often referred to as insurance purchasing cooperatives.

Small business enterprises have long complained that insurers hand out discounts to big clients,
who have substantial purchasing power and large numbers of employees, and that those insurers
too often try to make up those discount losses by hiking rates for their smaller clients. Unable to
buy good coverage on their own, smaller companies were forced to rely on pooling plans created
and managed by trade associations or other affiliated business groups, or pass on providing
coverage altogether. In recent years, however, another alternative, in which private businesses band
together and organize their own pools, has emerged. Distinct entities have been created to address
both health and disability coverage needs.

Risk Management for Individuals and corporations:

Over the last couple of decades, institutional risk management has become an integral process at
almost every large organization. Corporate risk managers concern themselves not only with
financial risks, but with strategic and operational risks as well, evaluating possible future outcomes
and their effect on their organizations.

The International Standards Organization has even attempted to standardize the process of
organizational risk management, defining it as "the effect of uncertainty on objectives." It defines
risk management as "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."
While these definitions look good on slide presentations at corporate risk management departments,
they are probably a bit too abstract for the real world practice of managing assets for people. Still,

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they offer a framework to systematically evaluate and manage client risk. By explicitly defining
what could happen, focusing in on the uncertainties and estimating costs, it's possible for investors
to minimize and control their impact.

Most individuals, too, and their advisors are already managing risk in their investment process,
even if they don't know it. Specifically, they try to curb the risk of suffering shortfalls when it
comes time to cover future liabilities. The insurance they buy protects them against certain rare but
costly events. But saving and investing is a type of insurance as well-essentially it's selfinsuring
against all other future liabilities, trying to prevent catastrophes in the future that you can't predict
and whose magnitude is uncertain.
The goal of diversification is to manage liquidity and uncertainty in the asset class returns of a
client's portfolio to cover future expenditures.

There are two ways we can tweak a portfolio to meet liabilities. First, after identifying and
segregating uncertain future liabilities, we can match them to assets that are highly correlated with
them. Second, we can imagine different scenarios that help us manage those risks better by
ensuring sufficient liquidity.
The interesting thing about this approach is that, besides helping us prepare for catastrophe, it also
gives us a higher overall portfolio return-because the risk profile is now better defined.

People can buy insurance in preparation for a number of horrible circumstances. They can insure
against death, disability, health problems and medical emergencies, property loss and legal trouble.
They can also partially insure things such as educational outlays (through prepaid tuition plans) and
retirement income (through annuities). Of course, there are also catastrophic risks such as war,
natural disasters and the government confiscation of property that can't be insured against-things
that would hurt almost every asset class if they came to pass. But since there is no feasible way to
manage these events short of building a survivalist compound stocked with food, weapons and gold
bars, we will ignore them.
What we manage instead is the uncertainty in future asset values by putting them next to
comparable future liabilities. We take investment risk and then divide it into further components of
inflation risk, market risk, interest rate risk, credit risk, liquidity risk, etc. The historical effects of
these risks on the returns of various asset classes are quantified as annual standard deviations,
which are then used to compare the "riskiness" of expected returns

Identify and Analyze Loss Exposures

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This is the process of determining the potential sources of loss, or “hazards”, that your school board
is exposed to which may result in loss or injury. This is a critical component, as it will
assist you in determining where to divert your resources.

Risk Identification:
There are several ways to identify sources of loss, but the most common approaches are:
a. Analyze past claims experience and determine categories or types of losses that you have had
(Contact OSBIE Risk Management).

b. Analyze past incident report data to determine where minor injuries that did not result in claims
were occurring. Based on the law of large numbers, large clusters of incidents from a specific
source can be predictors of where claims will eventually occur. (Contact OSBIE Risk
Management).

c. Conduct a survey of each department or operating division to determine where potential losses
can occur. Such surveys can be done professionally, or can be completed in-house using the sample
template (Figure 1). Within a department, each activity can also be assessed using this form. Once
completed, each risk factor can be ranked Low, Medium or High and appropriate strategies can be
documented to address each one (see Risk Management Steps 2 and

d. Site inspections can also be used to provide a visual perspective of where your exposures are –
e.g. proximity to nuclear facilities, manufacturing plants, transportation arteries, natural hazards,
isolated/remote location, high crime area, etc. Again, these inspections can be conducted
professionally or could be done in-house.

The types of risk identified by any of the above methods generally fall into the following
categories, and can be charted as illustrated in
Financial Risks – Also known as “Net Income Risks” (because they impact the bottom line of an
organization), these are the risks that are not paid for by insurance, whether by choice or by
exclusion – e.g. Fines, penalties, clean-up orders, losses below your insurance deductible, punitive
damages, losses excluded by insurance policy, increases in premiums due to claims experience, etc.

Liability Risks – These are the risks you face of being held legally responsible as the result of an
employee’s negligent act causing injury or damage to someone else. That includes all the activities
your board approves, organizes, directs, controls and supervises, as well as what is imposed on you

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by law, such as Occupier’s Liability, Employer’s Vicarious Liability, Joint and Several Liability,
etc.

Property Risks – These are the risks you face of losing your buildings or property resulting from
natural events (tornado, flood, etc.), technological events (fire, chemical, explosion, electrical, etc.)
or man-made events (arson, vandalism, terrorism, etc.)

Analyzing/Assessing Risk:
It must be recognized that all risk elements are not equal in terms of frequency (how often a loss
will occur) and severity (how serious the loss is). Since scarce resources cannot be devoted to
address all risks equally, it is necessary to rank or prioritize your risks into categories that can be
dealt with based on the degree of threat that is posed to the school board

MEANING AND DEFINITION OF INSURANCE

Insurance is defined as a co-operative device to spread the loss caused by a particular risk
over a number of persons who are exposed to it and who agree to ensure themselves against
the risk. Risk is uncertainty of a financial loss. The risk cannot be avoided but the resultant
loss occurring due to the risk can be avoided by reimbursement of the loss. The insurance
contract works under this principle.
Insurance is a contract between-two parties by which one of them, called the insurer agrees
to indemnify the other, called the insured or assured against a loss, which may be caused by
the happening of a certain event.

The contract is embodied in a document known as the “Policy”. The insurer undertakes to
indemnify the insured for a consideration in the form of money called the premium. The
contingency insured against is called the “Risk”.

Everyone is exposed to various risks. Future is very uncertain, but there is way to protect
one’s family and make one’s children’s future safe. Life Insurance companies help us to
ensure that our family’s future is not just secure but also prosperous. Life Insurance is
particularly important if you are the sole breadwinner for your family. The loss of you and
your income could devastate your family. Life insurance will ensure that if anything happens
to you, your loved ones will be able to manage financially. This study titled “Study of
Consumers Perception about Life Insurance Policies” enables the Life Insurance Companies
to understand how consumer’s perception differs from person to person. How a consumer

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selects, organizes and interprets the service qualityand the product quality of different Life
Insurance Policies, offered by various Life
Insurance Companies

Insurance is a tool by which fatalities of a small number are compensated out of funds
(premium payment) collected from plenteous. Insurance companies pay back for financial
losses arising out of occurrence of insured events e.g. in personal accident policy death due
to accident, in fire policy the insured events are fire and other allied perils like riot and strike,
explosion etc. hence insurance safeguard against uncertainties. It provides financial
recompense for losses suffered due to incident of
unanticipated events, insured with in policy of insurance. Moreover, through a number of
acts of parliament, specific types of insurance are legally enforced in our country e.g. third
party insurance under motor vehicles Act, public liability insurance for handlers of
hazardous substances under environment protection Act. Etc.

It is a commonly acknowledged phenomenon that there are countless risks in every sphere of
life .for property, there are fire risk; for shipment of goods. There are perils ofsea; for human
life there are risk of death or disability; and so on .the chances of occurrences of the events
causing losses are quite uncertain because these may or may not take place. Therefore, with
this view in mind, people facing common risks come together and make their small
contribution to the common fund. While it may not be possible to tell in advance, which
person willsuffer the losses, it is possible to work out how many persons on an average out
of the group, may suffer losses. When risk occurs, the loss is made good out of the common
fund .in this way each and every one shares the risk .in fact they share the loss by payment of
premium, which is calculated on the likelihood of loss .in olden time, the contribution make
the above-stated notion of insurance

DEFINITION OF INSURANCE
Insurance has been defined to be that in, which a sum of money as a premium
is paid by the insured in consideration of the insurer’s bearings the risk of paying a larges
um upon a given contingency. The insurance thus is a contract whereby:

a.Certain sum, termed as premium, is charged in consideration,

b.Against the said consideration, a large amount is guaranteed to be paid bythe insurer who
received the premium,
c. The compensation will be made in certain definite sum, i.e., the loss or the policy

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amount which ever may be, and
d. The payment is made only upon a contingency More specifically, insurance may be
defined as a contact between two parties, wherein one party (the insurer) agrees to pay to the
other party (the insured) or the beneficiary, ascertain sum upon a given contingency (the
risk) against which insurance is required.

CHARACTERISTICS OF INSURANCE
1. SHARING OF RISKS
Insurance is a device to share the financial loss, which may fall on an individual or his family
on the happening of a specified event. The nature of the risk, of course, may differ. However,
the loss arising from the risk i.e. occurrence of the specified event, is shared by all the
insured in the form of premium.
At this stage, it may occur, how all the insured share the loss of an individual. The common
fund from which the loss is met is build up from the premiums received from a number of
persons. Hence, there is nothing wrong to say that the loss of an individual is shared by all
the insured.

2. CO-OPERATIVE DEVICE
Another notable feature of an insurance plan is the co-operation of large number of persons,
who agree to share financial loss arising due to a specified risk. In other words, there is no
compulsion for joining in any scheme of insurance. It is purely voluntary.

3. VALUE OF RISK
The risk should be valued before insuring. The amount of premium depends on the quantum
or value of the risk involved. If the expected loss is estimated higher, the insurance premium
will also be higher; whatever it may be, the probable value of loss should be estimated at the
time of making the insurance contract.

4. PAYMENT AT CONTINGENCY
In a contract of insurance, the payment is made only on the happening of a certain
contingency. If the expected event i.e. contingency occurs, payment is made. In a life
insurance contract, the amount will be paid if the insured dies or the period of insurance
expires.
However, in case of general insurance, the loss is uncertain i.e. the contingency may or may
not occur. So if the contingency occurs, payment will be made. Otherwise, the insurance
company pays nothing to the policyholders.

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5. AMOUNT OF PAYMENT
It is already stated that the probable loss will be estimated first and the premium will be
determined on that basis. In case of life insurance the amount assured will be paid in the
event of death of the insured. But in other cases, the insurance company will reimburse only
the actual loss and not the amount insured. Further, the insured should prove his loss and
then make a claim.

6. LARGE NUMBER OF INSURED PERSONS

To spread the loss – immediately, smoothly and cheaply, large number of persons should be
insured. It is stated already that insurance is a co-operative endeavor of a large number of
persons. Then only the cost of insurance will be the minimum.

7. INSURANCE IS DIFFERENT FROM GAMBLING

Insurance should not be confused with gambling. Even though there is a chance factor in
both, insurance is totally different from gambling. In gambling, the gambler is exposed to the
risk of losing whereas in insurance the insured is opposed to risk and in fact, he has to bear
the loss if he is not insured. By getting insured his life and property, the insured can protect
himself against the probable loss that may occur.

8. INSURANCE IS NOT CHARITY

Charity is given without consideration. Hence, charity is different from insurance. In the case
of insurance, the premium paid by the insured is the consideration. Without premium, it is
not possible to take out an insurance policy.

History of insurance sector

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in
terms of pooling of resources that could be re-distributed in times of calamities such as fire,
floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient
Indian history has preserved the earliest traces of insurance in the form of marine trade loans and
carriers’ contracts. Insurance in India has evolved over time heavily drawing from other
countries, England in particular.

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 1818 saw the advent of life insurance business in India with the establishment of the Oriental
Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras
Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the
enactment of the British Insurance Act and in the last three decades of the nineteenth century, the
Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay
Residency. This era, however, was dominated by foreign insurance offices which did good
business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance Companies in India. The
Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life
business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to
collect statistical information about both life and non-life business transacted in India by Indian
and foreign insurers including provident insurance societies. In 1938, with a view to protecting
the interest of the Insurance public, the earlier legislation was consolidated and amended by the
Insurance Act, 1938 with comprehensive provisions for effective control over the activities of
insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a
large number of insurance companies and the level of competition was high. There were also
allegations of unfair trade practices. The Government of India, therefore, decided to nationalize
insurance business.

An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life
Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16
non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The
LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

The history of general insurance dates back to the Industrial Revolution in the west and the
consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a
legacy of British occupation. General Insurance in India has its roots in the establishment of
Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian
Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general
insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of
India. The General Insurance Council framed a code of conduct for ensuring fair conduct and
sound business practices.

8
 In 1968, the Insurance Act was amended to regulate investments and set minimum solvency
margins. The Tariff Advisory Committee was also set up then.

In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general
insurance business was nationalized with effect from 1st January, 1973. 107 insurers were
amalgamated and grouped into four companies, namely National Insurance Company Ltd., the
New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India
Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a
company in 1971 and it commence business on January 1sst 1973.

This millennium has seen insurance come a full circle in a journey extending to nearly 200
years. The process of re-opening of the sector had begun in the early 1990s and the last decade
and more has seen it been opened up substantially. In 1993, the Government set up a committee
under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations
for reforms in the insurance sector.The objective was to complement the reforms initiated in the
financial sector. The committee submitted its report in 1994 wherein , among other things, it
recommended that the private sector be permitted to enter the insurance industry. They stated that
foreign companies be allowed to enter by floating Indian companies, preferably a joint venture
with Indian partners.

Following the recommendations of the Malhotra Committee report, in 1999, the Insurance
Regulatory and Development Authority (IRDA) was constituted as an autonomous body to
regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in
April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance
customer satisfaction through increased consumer choice and lower premiums, while ensuring the
financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the
power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000
onwards framed various regulations ranging from registration of companies for carrying on
insurance business to protection of policyholders’ interests.

In December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a national
re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.

9
 Today there are 31 general insurance companies including the ECGC and Agriculture Insurance
Corporation of India and 24 life insurance companies operating in the country.

The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with
banking services, insurance services add about 7% to the country’s GDP. A well-developed and
evolved insurance sector is a boon for economic development as it provides long- term funds for
infrastructure development at the same time strengthening the risk taking ability of the country.

Important Developments in the History of Indian Insurance Business

DEVELOPMENTS OF INSURANCE
Before deregulation in 1999, the insurance industry in India consisted of only two state insurers,
namely Life Insurance Corporation of India (LIC) for life insurance, and General Insurance
Corporation of India (GIC) with its four subsidiaries for general insurance According to the
Insurance Regulatory and Development Authority (IRDA), the insurance industry in India at
present consists of 24 general insurance companies including specialised insurers such as Export
Credit Guarantee Corporation of India andthe Agricultural Insurance Corporation of India, and 23
life insurance companies. Of the 22 insurers who set up operations in life insurance after the
industry was opened up for the private sector, 20 are joint ventures with foreign companies.
Similarly, of the 17 nonlife insurers, including health insurers operating in the private sector, 16
are in collaboration with foreign partners. Thus, 36 insurance companies in the private sector are
operating in collaboration with well-established foreign companies. Prior to the opening up of
insurance for the were introduced and these included products’ liability, corporate cover,
professional indemnity policies, weather insurance, credit insurance and travel insurance.

10
TYPES OF INSURANCE

Classification from business point of view

a)Life insurance
b)General insurance

2.Classification on the basis of nature of insurance

a)Life insurance

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b)Fire insurance
c)Marine insurance
d)Social insurance, and
e)Miscellaneous insurance

3.Classification from risk point of view

a)Personal insurance
b)Property insurance
c)Liability insurance
d)Fidelity general insurance

Life Insurance :
Life insurance may be defined as a contract in which the insurer, in consideration of a certain
premium, either in a lump sum or by other periodical payments, agrees to pay the assured, or to
the person for whose benefit the policy is taken, the assured sum of money, on the happening of a
specified event contingent on the human life.
A contract of life insurance, as in other forms of insurance, requires that the assured must have at
the time of the contract an insurable interest in his life upon which the insurance
is affected. In a contract of life insurance, unlike other insurance, interest has only to be
proved at the date of the contract, and not necessarily present at the time when the policy
falls due.
A person can assure in his own life and every part of it, and can insure for any sum whatsoever,
as he likes. Similarly, a wife has an insurable interest in her husband and vice-versa. However,
mere natural love and affection is not sufficient to constitute an insurable interest. It must be
shown that the person affecting an assurance on the life of another is so related to that other
person as to have a claim for support. For example, a sister has an insurable interest in the life of
a brother who supports her.
A person not related to the other can have insurable interest on that other person. For
example, a creditor has insurable interest in the life of his debtor to the extent of the debt.
A creditor can insure the life of his debtor upto the amount of the debt, at the time of issue
of the policy.
An employee has an insurable interest in the life of the employer arising out of
contractual obligation to employ him for a stipulated period at fixed salary. Similarly,
from an employer to the employee, who is bound by the contract to serve for a certain
period of time.

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General insurance:
Insurance other than ‘Life Insurance’ falls under the category of General Insurance.
General Insurance comprises of insurance of property against fire, burglary etc, personal
insurance such as Accident and Health Insurance, and liability insurance which covers
legal liabilities. There are also other covers such as Errors and Omissions insurance for
professionals, credit insurance etc.
Non-life insurance companies have products that cover property against Fire and allied
perils, flood storm and inundation, earthquake and so on. There are products that cover property
against burglary, theft etc. The non-life companies also offer policies covering machinery against
breakdown,there are policies that cover the hull of ships and so on. A Marine Cargo policy covers
goods in transit including by sea, air and road. Further, insurance of motor vehicles against
damages and theft forms a major chunk of non-life insurance business.
Personal insurance covers include policies for Accident, Health etc. Products offering Personal
Accident cover are benefit policies. Health insurance covers offered by non-life insurers are
mainly hospitalization covers either on reimbursement or cashless basis. The cashless service is
offered through Third Party Administrators who have arrangements with various service
providers, i.e., hospitals. The Third Party Administrators also provide service for reimbursement
claims. Sometimes the insurers themselves process reimbursement claims

Marine Insurance :
A contract of marine insurance is an agreement whereby the insurer undertakes to indemnity the
assured in a manner and to the extent thereby agreed, against marine losses, that is, the losses
incidental to marine adventure. There is a marine adventure when any insurable property is
exposed to marine perils. Marine perils also known as perils of the seas, means the perils
consequent on, or incidental to, the navigation of the sea or the perils of the seas, such as fire, war
perils, pirates, robbers, thieves; captures, jettisons, barratry and any other perils which are either
of the like kind or may be designed by the policy.
There are different types of marine policies known by different names according to the manner of
their execution or the risk they cover. They are : voyage policy, time policyvalued policy,
unvalued policy, floating policy, wager or honour policy. Marine insurance provides protection
against loss of marine perils. The marine perils are collision with rock, or ship attacks by
enemies, fire and capture by pirates etc. These perils cause damage, destruction or appearance of
the ship and cargo and non-payment of freight. So, marine insurance insures ship (Hull), cargo
and freight.

Types of policies are:

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 Voyage policies
- Time policies
- Valued policies
- Hull insurance
- Cargo insurance
- Freight insurance

SOACIAL INSURANCE
who are unable to pay the premium for adequate insurance. The following types of insurance can
be included in social insurance

(i) Sickness Insurance : In this type of insurance medical benefits, medicines and reimbursement
of pay during the sickness period, etc. are given to the insured person who fell sick.

ii) Death Insurance : Economic assistance is provided to dependants of the assured in case of
death during employment. The employer can transfer his such liability by getting insurance
policy against employees.
iii) Disability Insurance : There is provision for compensation in case of total or partial
disability suffered by factory employees due to accident while working in factories. According to
Employees Compensation Act, the responsibility to pay compensation is vest with the employer.
But the employer transfers his liability on the insurer by taking group insurance policy.
iv) Unemployment Insurance : In case insured person becomes unemployed due certain specific
reasons, he is given economic support till he gets employment.
v) Old-age Insurance : In this category of insurance, the insured or his dependents is paid, after
certain age, economic assistance.

For the last few years, the Indian Government has extended the scope of Social Insurance. Under
the concept of social justice, this scheme now extended to Daily-wages earnersRickshaw pullers,
Landless labourers, Sweepers, Craftsmen, etc. through different Insurance

(i) Vehicle insurance on buses, cars, trucks, motorcycles, etc. and made compulsory so that the
losses due to accidents can be claimed from the insurance company.

(ii) Personal accident insurance by paying an annual premium Rs.12 on policy worth
Rs.12,000. In case of accidental death or total/partial disability, a fixed amount as per conditions
of insurance, is paid to the insured.

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(iii) Burglary insurance -- (against theft, decoity etc.)

(iv) Legal liability insurance (insurance whereby the assured is liable to pay the damages to
property or to compensate the loss of personal injury or death. This is in the form of fidelity
guarantee insurance, automobiles insurance and machines etc.)

(v) Crop insurance (crops are insured against losses due to heavy rains and floods, cyclone,
draughts, crop diseases, etc.)

(vi) Cattle insurance (Insurance for indemnity against the loss of cattle from various kinds of
diseases)

In addition to the above, insurance plans are available against crime, medical insurance, bullock
cart, jewellery, cycle rickshaw, radio, T.Vs., etc.

Personal Insurance
Personal insurance refers, the loss of life by accident, or sickness to individual which is covered
by the policy. The insurer undertakes to pay the sum insured on the happening of certain event or
on maturity of the period of insurance. This insurable sum is determined at the time of affecting
the policy and include life insurance, accident insurance, and sickness insurance. Life insurance
contains the element of investment and protection, while the accidental, sickness or health
insurance contain the element of indemnity only.

Property Insurance
Contract of property insurance is a contract of indemnity. Proof by the assured of loss is an
essential element of property insurance. The policies of insurance against burglary, home-
breaking or theft etc. fall under this category. The assured is required to protect the insured
property. After the loss has taken place, the assured usually required to notify the
police as to losses.

Liability Insurance
Liability insurance is the major field of general insurance whereby the insurer promises to pay the
damage of property or to compensate the losses to a third party. The amount of compensation is
paid directly to third party. The fields of liability insurance include workmen compensation
insurance, third party motor insurance, professional indemnity insurance and third party liability

15
insurance etc. In liability insurance, there may be various reasons for the arising of liability; viz.
accident to a worker at the workplace, defective goods, explosion in the factory during the
process of production, formation of poisonous gas within the factory, due to the uses of chemicals
and other such substances in the manufacturing process.

Fidelity Guarantee Insurance :

In this type of insurance, the insurer undertakes to indemnify the assured (employer) in
consideration of certain premium, for losses arising out of fraud, or embezzlement on the part of
the employees. This kind of insurance is frequently adopted as a precautionary measure in cases
where new and untrained employees are given positions of trust and confidence.

There are many Life Insurance Companies like:

LIFE INSURANCE CORPORATION OF INDIA

BAJAJ ALLIANCE LIFE INSURANCE COMPANY
ICICI PRUDENTIAL LIFE INSURANCE COMPANY
HDFC STANDARD LIFE INSURANCE COMPANY
BIRLA SUN LIFE INSURANCE COMPANY
ING VYSYA LIFE INSURANCE COMPANY
METLIFE INSURANCE COMPANY
TATA AIG LIFE INSURANCE COMPANY
MAX NEWYORK LIFE INSURANCE COMPANY
KOTAK MAHINDRA LIFE INSURANCE COMPANY

IRDA

History of IRDA:
The Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous,
statutory agency tasked with regulating and promoting the insurance and re-insurance
industries in India and established in 1999. It was constituted by the Insurance Regulatory
and Development Authority(IRDA) Act, 1999.
IRDA Act was passed based on the recommendations of Malhotra Committee report (1994),
headed by Former Governor of RBI Mr R.N. Malhotra. Following the recommendations of
the Malhotra Committee, in 1999 the Insurance Regulatory and Development Authority
(IRDA) was constituted to regulate and develop the insurance industry and was incorporated

16
in April 2000. The IRDAI’s headquartered in Hyderabad, Telangana, where it moved from
Delhi in 2001.

Organisation Structure of IRDA:

The IRDA consists of ten members authority team. They are:

1. a Chairman
2. Five full-time members
3. Four part-time members
All the members are appointed by the government of India. The current chairman of the
IRDAI is T.S. Vijayan.

INTRODUCTION
The Insurance Act, 1938 had provided for setting up of the Controller of Insurance to act as a
strong and powerful supervisory and regulatory authority for insurance. Post nationalization,
the role of Controller of Insurance diminished considerably in significance since the
Government owned the insurance companies.

But the scenario changed with the private and foreign companies foraying in to the insurance
sector. This necessitated the need for a strong, independent and autonomous Insurance
Regulatory Authority was felt. As the enacting of legislation would have taken time, the then
Government constituted through a Government resolution an Interim Insurance Regulatory
Authority pending the enactment of a comprehensive legislation.
The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for the
establishment of an Authority to protect the interests of holders of insurance policies, to
regulate, promote and ensure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the
Life Insurance Corporation Act, 1956 and the General insurance Business (Nationalization)
Act, 1972 to end the monopoly of the Life Insurance Corporation of India (for life insurance
business) and General Insurance Corporation and its subsidiaries (for general
insurancebusiness).

The act extends to the whole of India and will come into force on such date as the Central
Government may, by notification in the Official Gazette specify. Different dates may be
appointed for different provisions of this Act.

17
The Act has defined certain terms; some of the most important ones are as follows
appointed day means the date on which the Authority is established under the act. Authority
means the established under this Act.

Interim Insurance Regulatory Authority means the Insurance Regulatory Authority set up by
the Central Government through Resolution No. 17(2)/ 94-lns-V dated the 23rd January,
1996.

Words and expressions used and not defined in this Act but defined in the Insurance Act,
1938 or the Life Insurance Corporation Act, 1956 or the General Insurance Business
(Nationalization) Act, 1972 shall have the meanings respectively assigned to them in those
Acts.

A new definition of "Indian Insurance Company" has been inserted. "Indian insurance
company" means any insurer being a company

1) Which is formed and registered under the Companies Act, 1956

2) In which the aggregate holdings of equity shares by a foreign company, either by

itself or through its subsidiary companies or its nominees, do not exceed twenty-six per
cent. Paid up capital in such Indian insurance company

3) Whose sole purpose is to carry on life insurance business, general insurance

business or re-insurance business?

Insurance Regulatory and Development Authority of India(IRDAI) is a statutory body set up

for protecting the interests of the policyholders and regulating, promoting and ensuring
orderly growth of the insurance industry in India.
IRDAI has played a very important role in the growth and development of the sector by
protecting policyholders' interests; registering and regulating insurance companies; licensing
and establishing norms for insurance intermediaries, regulating and overseeing premium
rates and terms of non-life insurance covers; specifying financial reporting norms, regulating
investment of policyholders' funds and ensuring the maintenance of solvency margin by
insurance companies; ensuring insurance coverage in rural areas and of vulnerable sections

18
of society; promoting professional organisations connected with insurance and all other
allied and development functions.

ROLE OF IRDA (PSII-CTMAS)

==========================
1. To (protect) the interest of and secure fair treatment to policyholders.
2. To bring about (speedy) and orderly growth of the insurance industry (including annuity and
superannuation payments), for the benefit of the common man, and to provide long term funds for
accelerating growth of the economy.
3. To set, promote, monitor and enforce high standards of (integrity), financial soundness, fair
dealing and competence of those it regulates.
4. To ensure that insurance customers receive precise, clear and correct (information) about
products and services and make them aware of their responsibilities and duties in this regard.
5. To ensure speedy settlement of genuine (claims), to prevent insurance frauds and other
malpractices and put in place effective grievance redressal machinery.
6. To promote fairness, (transparency) and orderly conduct in financial markets dealing with
insurance and build a reliable management information system to enforce high standards of
financial soundness amongst market players.
7. To take (action) where such standards are inadequate or ineffectively enforced.
8. To bring about optimum amount of (self-regulation)in day to day working of the industry
consistent with the requirements of prudential regulation.

Functions of IRDA
====================
Section 14 of IRDA Act, 1999 laysdown the duties,powers and functions of IRDA (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-section (1), the powers
and functions of the Authority shall include,
(a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel
such registration;
(b) 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;

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(c) specifying requisite qualifications, code of conduct and practical training for intermediary or
insurance intermediaries and agents;
(d) specifying the code of conduct for surveyors and loss assessors;
(e) promoting efficiency in the conduct of insurance business;
(f) promoting and regulating professional organisations connected with the insurance and re-
insurance business;
(g) levying fees and other charges for carrying out the purposes of this Act;
(h) 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;
(i) 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);
(j) 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;
(k) regulating investment of funds by insurance companies;
(l) regulating maintenance of margin of solvency;
(m) adjudication of disputes between insurers and intermediaries or insurance intermediaries;
(n) supervising the functioning of the Tariff Advisory Committee;
(o) specifying the percentage of premium income of the insurer to finance schemes for promoting
and regulating professional organisations referred to in clause
(p) specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector; and
(q) exercising such other powers as may be prescribed

DISTRIBUTION CHANNELS IN INSURANCE

Insurers and underwriters need to decide on the way, or channel through which, their
products are distributed. The aim of a distribution channel is to allow customers to access
and purchase products in the most efficient way for the business.
A variety of distribution channels are available, and the business's choice will be determined
by its structure, strategy and position in the market. Each channel requires different resources
to be effective and will impact the pricing structure.

Distribution channels can be divided into two categories:

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Direct channels- these give the insurer direct contact with the customer. The business
employs sales personnel with the skills to provide the product to the customer.

Indirect channels - these contain a break in the link between the customer and the business.
The break is filled by a skilled intermediary with a customer base that is the insurer's target
audience.

Direct channels
Call centres provide insurance companies with an efficient method of transacting insurance
with customers. Their sales activities are focused on achieving specific targets, such as
defined sales volumes, call queuing times and numbers' of customers purchasing. The
popularity of call centres has grown out of the competitive market as their efficiency reduces
the transaction costs of policies.
Employees, who are often referred to as agents or operators, are guided by the software through a
series of question prompts to ask customers. Telephone calls are held in a queue until one of the
agents is ready to handle the call. The process is automated with the caller hearing an
introductory message before the agent begins the conversation.

Call centres may collate data that can be used to improve the efficiency of their operations. For
example, this could help the business to provide ways of ensuring that the centre has a sufficient
number of employees available in peak times. Another way of increasing operational efficiency is
to use computer-based, rather than paper-based, records when answering customer queries.

Insurance agents
An agent is an individual who acts on behalf of another person or group. For example, a call
centre employee. Some insurers use external sales employees to act as agents and visit
customers; they are paid a commission based on sales in addition to a basic salary. In Britain,
insurance agents were a popular method for selling home and accident insurance, and life
assurance. However, with the introduction of other channels, such as the internet, the
administration costs of using agents were too high in the competitive market and customers
began choosing other channels with lower priced offerings. This is partly because customers
are now better educated in insurance products as a result of the discussions often had across
various media, such as magazines, radio, TV and websites.

Lloyd's agents

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These agents are appointed by Lloyd's as marine service providers to supply local shipping
and casualty information. They also carry out pre- and post-loss marine cargo surveys, so are
specialists in hull and machinery surveys. They perform a number of claims activities as
well. There are approximately 300 agents worldwide in major ports and commercial centres,
with a similar number of sub-agents, and they carry out around 100,000 surveys each year.

Appointed representatives
An agent can be appointed to provide advice and sell insurance products for a particular
insurance company, but be independent of that company. These agents are referred to as
appointed representatives, and may be an individual or a business which is representing
another Financial Conduct Authority (FCA) regulated business. The appointed representative
is only able to operate within the regulated activity of that insurer. If it carries out any other
activities outside of its appointed representative status, it must be registered directly with the
FCA. The insurer that grants appointed representative status is known as the 'principal' and is
responsible for the activities of the appointed representative. The principal must monitor the
appointed representative's activities to ensure that it acts in accordance with the regulations
at all times.

Mutual organisations
In the past, tradesmen grouped together to form mutual organisations which provided
protection for the risks that insurance companies were not willing to cover. For example,
risks such as liability insurance or accident and injury benefits may be too high for an
insurer's portfolio. Members own the mutual organisation and receive a variety of financial
benefits, so it is in their best interests to support the organisation that represents them.
Examples include the following:

 P&I clubs - offer marine liability cover

 National Farmers' Union - represents the agricultural and horticultural industries;
provides a variety of financial services products
 DG Mutual - originally formed to provide injury and accident benefits to dentists,
now represents most professional persons.

Indirect channels
Insurance brokers
Insurance brokers are independent of any insurance company and therefore able to provide advice
and products to the customers from a variety of companies. Brokers select a panel of insurers they

22
would like to represent and which meets the needs of their customers. The FCA requires brokers
to have access to a sufficient number of insurers on their panel so that customers can make an
informed choice. Some markets may be limited as a result of their specialist nature with few
insurers offering cover. In these circumstances, the broker will advise the customer on why only
these insurers may be approached.

Some brokers offer additional services to customers, such as business continuity planning or risk
management advice. As no insurance product is provided with these services, the broker charges
a fee for their use so that they create an additional revenue stream. Offering such services helps
the broker to negotiate terms with the insurer, as the additional details supplied by customers can
be used to help the underwriter understand their risks.

Reinsurance brokers
An insurer may place a proportion of its risk with reinsurers in order to reduce the possibility
of it suffering a major loss or catastrophe to its own account. Spreading the risk in this way
allows the insurer to write higher limits of cover. Reinsurance brokers have specialist
knowledge of which reinsurers an insurer may share its account with or place one-off risks
with under a facultative facility.
The amount that can be reinsured depends on the account and the risk, and the cover may be
proportional or non-proportional. Proportional reinsurance can be provided on a quota share
basis where the insurer and reinsurer share an agreed quota of the premium and claims. It can
also be provided on a surplus basis where the insurer requires reinsurance above a set limit,
known as a 'line'; the reinsurance is arranged on the basis of a number of these lines which
add up to the overall limit required by the insurer.
Non-proportional risks can be covered on an excess of loss, stop loss or catastrophe excess of
loss basis:

 Excess of loss basis - the reinsurer is responsible for any claim amount above an
agreed limit
 Stop loss basis - applies across the account and stops account loss at an agreed level,
so that the reinsurer is responsible for losses above that limit
 Catastrophe excess of loss basis - provides protection when a catastrophe occurs on
the account as a result of an event which has caused an accumulation of losses, such as storm
damage.
As well as having a risk management team, major corporations often appoint a captive
insurer. Captive insurers offer a number of benefits; for example, they can provide wider

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cover than that given by the risk management team and retain premiums that would normally
be passed to the insurance market. They are usually based in regions with lower tax rates,
such as Bermuda. A reinsurance broker may then help to provide the captive insurer with
reinsurance cover in order to protect it from catastrophic loss.

Independent financial advisers (IFAs)

Independent financial advisers (IFAs) provide advice to customers and businesses on life
assurance, pensions and investments, and are regulated in the UK by the FCA. IFAs may
also offer products that contain no investment element, such as personal accident insurance,
permanent health insurance and medical insurance. They may belong to an insurance broking
firm and use their specialist knowledge to provide non-life insurance products in addition to
financial advice. Broking firms can also refer their customers to IFAs for financial advice.

Financial organisations
Financial organisations, such as banks and building societies, provide insurance to their
customers in various ways. For example, a bank may have its own insurance broking firm. If
a bank has provided a loan for premises or equipment, it will have an interest in making sure
that adequate cover is arranged to protect the item. The bank's broking team will be able to
assist with arranging insurance to protect both the customer's and the bank's interests.
'Bancassurance' refers to when a bank owns an insurer or works directly with an insurer
through an affinity group. When a bank incorporates an insurance company into part of its
group, this creates a direct relationship between the customer and the insurer. Not all banks
have their own insurance company or broker; some have an affinity group, discussed later in
this fact file, which are operated by their employees or white label products provided by an
insurer for the bank.

Managing general agents (MGAs)

According to the Managing General Agents' Association, a managing general agent (MGA)
is 'an agency whose primary function and focus is the provision of underwriting services and
whose primary fiduciary duty is to its insurer.' As an underwriting facility, MGAs focus on
the small medium enterprise (SME) sector of the market. They provide either a package of
cover or specific insurance such as property owners' liabilities and professional indemnity
covers.
MGAs are operated by experienced underwriters with underwriting knowledge and expertise
of risks, who have the authority to write risks. This underwriting capacity may have been
given by one insurer or a panel of insurers, which wants to enter the market but does not

24
have the resources to do so. For example, this could be appealing to an overseas insurer
which would like to enter the SME market by using another organisation's brand and
management, or to an underwriting team which has chosen to leave an insurer and start its
own underwriting agency. MGAs also have claims authority, and act as a link in the chain
between the insurer which is providing the capacity and the customer. They seek business
from insurance brokers.

Retail organisations
When a customer acquires a retailer's loyalty card, the retailer gains information about the
customer which enables it to target them with other branded products. Customers are more
likely to buy products, such as insurance policies, from brands they trust. Retailers selling
insurance policies offer white label products that are administered by an insurer through a
call centre. The call centre may either have a team which is dedicated to that insurer or
answer calls in the name of the retailer, having identified which is being used by the specific
telephone number that callers have been given. Selling insurance in this way provides the
retailer with an additional revenue stream in a short period of time, without the costs of
setting up an insurance company.

Affinity groups
An affinity group is a group of people with similar or common interests. It may use its
customer buying power to obtain insurance cover through a broker. For example, members
of a car club are likely to support its promotions, as the commission that the club receives
when they place insurance through the scheme will provide it with a revenue stream which
supports members' interests. In addition, sports organisations can use their membership
volume to arrange cover for particular risks that may not be available to individuals. This
cover is then received by members as part of their membership; it could include liability
cover for injury to another member. An affinity group can use a broker to obtain specific
wording in their cover which is underwritten by a specialist underwriter. The group handles
the scheme's administration, adding another link between the insurer and the customer.

Peer-to-peer (P2P) groups

Peer-to-peer (P2P) group insurance is a recent innovation which has created interest in the
USA, UK and Germany. It aims to save money by removing inefficiencies and the conflicts
of interest that arise between the insurer and customer at the time of a claim. A P2P group is
made up of people who share similar characteristics; its premiums are calculated by
assessing a number of factors that are common to all members. A motor insurer, for example,

25
will consider a driver's age, location, car and experience, and then add them to a group of
similar motorists, or peers.
Half of the premium paid by the group's members contributes to its management and the
other half is injected into the premium pool. Claims made during the year are paid from the
pool; if funds become depleted, they are topped up by the group's fees. Any premium in the
pool that is not used will be carried forward to the next year, when the group's members will
pay premiums to top up the pool again. The group's members have an interest in keeping
claims low so that they will benefit from lower premiums.

Broker networks
A broker network is made up of predominantly small, independent insurance brokers who
join to form a club. The network uses its collective buying power to obtain terms of cover,
premiums, facilities and commissions that are normally only available to larger broking
organisations. The network requires its members to commit a level of premium to a panel of
partner insurers. This enables members to demonstrate their support for the panel and
network without compromising their customer relationships.
Additional services provided by broker networks include marketing advice and business
planning support, which can help to increase brokers' incomes, and regulatory support and
advice, which helps brokers to remain compliant. Insurers may review their agency network
with the aim of reducing their overall operating costs; however, broker networks are
protected by their collective relationships with insurers. Networks charge a fee to brokers for
the support they provide, which may be based on either the volume of premium income
arranged with the insurers or an agreed fixed charge for services.

Aggregators
Aggregators are online quotation services that can calculate premiums in minutes from a
number of different insurers on to one website. Customers are prompted by selected
questions to enter the details of their insurance requirements, and the aggregator website then
calculates and displays a range of premiums and terms. Aggregators compete with each
other, relying on their technology systems to provide fast quotations from a variety of
providers. The premiums are displayed in ascending order, allowing the customer to select a
quotation based on price. Quotation terms are also shown to help the customer in their
comparison. If the customer selects a quotation, they will be transferred to the insurer's
website for confirmation of the quotation and processing of documentation. To complete the
purchase, the premium is paid online and the policy documents are sent electronically to the
customer.

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An advantage of aggregators is that they are available at all times, so the customer can make
their choice at a time convenient to them. The aggregator is paid a fee for each customer
purchase. Quotations are available on motor, home, personal accident, travel, van and
tradesman liability insurance, but aggregators' systems are adaptable and other financial
services, utilities and communication quotations are sometimes provided. However, not all
insurers are quoted by aggregators; some choose to promote their products directly so that
they can control the purchasing process without being compared to other insurers. These
insurers encourage customers to make decisions based on the services provided and other
benefits, rather than on price.
Bancassurance
Bancassurance means selling insurance product through banks. Banks and insurance
company come up in a partnership wherein the bank sells the tied insurance company's
insurance products to its clients.
Bancassurance arrangement benefits both the firms. On the one hand, the bank earns fee
amount (non interest income) from the insurance company apart from the interest income
whereas on the other hand, the insurance firm increases its market reach and customers. The
bank acts as an intermediary, helping insurance firm reach its target customer in order to
increase its market share.
It was developed in Europe.
In Asia, Singapore, Taiwan and Hong Kong are ahead in Bancassurance , with India and
China taking tentative steps towards it.
Bancassurance is a French term referring to the selling of insurance through a bank's
established distribution channels. In other words, we can say Bancassurance is the provision
of insurance (assurance) products by a bank. The usage of the word picked up as banks and
insurance companies merged and banks sought to provide insurance, especially in markets
that have been liberalised recently. It is a controversial idea, and many feel it gives banks too
great a control over the financial industry. In some countries, bancassurance is still largely
prohibited, but it was recently legalized in countries like USA when the Glass Steagall Act
was repealed after the passage of the Gramm Leach Bililey Act.
Bancassurance is the selling of insurance and banking products through the same channel,
most commonly through bank branches. Selling insurance.means distribution of insurance
and other financial products through Banks. Bancassurance concept originated in France and
soon became a success story even in other countries of Europe. In India a number of insurers
have already tied up with banks and some banks have already flagged off bancassurance
through select products.

27
Bancassurance has become significant. Banks are now a major distribution channel for
insurers, and insurance sales a significant source of profits for banks. The latter partly being
because banks can often sell insurance at better prices (i.e., higher premiums) than many
other channels, and they have low costs as they use the infrastructure (branches and systems)
that they use for banking.
Bancassurance primarily rests on the relationship the customer has developed over a period
of time with the bank. And pushing risk products through banks is a much more cost-
effective affair for an insurance company compared to the agent route, while, for banks,
considering the falling interest rates, fee based income coming in at a minimum cost is more
than welcome.

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

Types of bancassurance products:

Life insurance products:

Term insurance plans( with accident and death benefits).
Endowment plans
ULIPs( Unit Linked Insurance Plans)

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Non-life Insurance products:
Health insurance
Marine insurance( for cargo shipments)
Property insurance( against natural calamities)
Key Men insurance( Top executives of companies, partnership firms,etc)

Types of Bancassurance models in India:

1. Pure distributer Model:
In pure distributer, Model bank acts as a distributer of insurance schemes of Insurance
company.
Example: Indian Overseas Bank acts as a distributer of Life Insurance Corporation of India

2. Strategic alliance Model:

In this model there would be an agreement between the bank and the insurance company to
market banca products, other insurance functions are not carried out by the bank.
Example: HDFC bank with HDFC life insurance company and HDFC ERGO general
insurance company.

3. Joint venture Model:

In a joint venture model a new joint venture company is established in which the bank(s) and
the insurance company will have shareholdings in agreed ratio.
Example: IndiaFirst Life insurance Co. Ltd is a Joint venture between Bank of Baroda
(44%), Andhra Bank (30%) and UK's financial and investment company ' Legal and General'
(26%).

Key issues to the success ofBancassurance

1. Both the bank and insurance company need to improve effectiveness of the sales channels
by identifying and gaining access to target customers, adding push to market pull, training of
sales staff, differentiating performance from competition and controlling selling cost per unit
sold.
2. Product need to be tailored to meet the need of the customer base and for new distribution
channels
3.Communication needs to be streamlined to address any cultural issues between the bank
staff and the insurance staff.
4. Traditional processes need to be redesigned not only to take advantage of the new
technology, but also to effective a streamlined system between bank and the insurance

29
company. Technology can be used to put effective use in sales support function, staff
training etc.
5 Information system needs to be reviewed and performed measurement parameters need to
be specially adapted to Bancassurance.
6 Skill needs to be developed an reallocation of asset and resources –financial and human
may also be required between the bank and insurance company.

BANCASSURANCE IN INDIA
In India banking and insurance sectors are regulated by two different entities.
The banking sector is governed by Reserve Bank of India (RBI) and the insurance sector
is regulated by Insurance Regulatory and Development Authority (IRDA).
Advantages for the insurance company :
Through this new distribution network, the insurance company significantly extends its
customer base and enjoys access to customers who were previously difficult to reach.
An insurance company can establish itself more quickly in a new market, using a local
bank’s existing network.
Advantages for the banks :
The bank sees bancassurance as a way of creating a new revenue flow and diversifying its
business activities.
The bank becomes a sort of “supermarket”, a “one-stop shop” for financial services, where
all customers’ needs – whether financial or insurance-related – can be met.

DEMERITS OF BANCASSURANCE
Compromising on data security.
Conflict of interest between the other products of bank and insurance policies.
Better approach and services provided by banks to customer is a hope rather than a fact.

BANCASSURANCE - TYPES
1. Leveraged Life Distribution
2. Leveraged Bank Distribution
3. Bank / Life Venture

1. Leveraged Life Distribution

This model of Life insurance company takes the lead in partnership, while several banks
act as corporate agents to provide access to middle market leads.

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2. Leveraged Bank Distribution
This Leveraged Bank Distribution model, it is the bank that takes the leads as in the
partnership, while the life insurance companies supply products for its bancassurance efforts.
This models calls for a large bank with a range of effective distribution channels.

3. Bank/Life Joint Venture

The final type of partnership brings a bank with a well developed customer database
together with a large life insurer with strong product and channel experience to develop a
powerful new distribution model.
In this model of venture the bank provides the lead and its reputation and brand name,
while
the insurer bring the products and underwriting and servicing expertise. The partners
combine
their individual expertise to forge a best practice bancassurance operation with tailored
products, tailored distribution and lead generation mechanism.

INSURANCE MARKETING
The term insurance marketing refers to the marketing of insurance services with the aim to
create customer and generate profit through customer satisfaction. The insurance marketing
focuses on the formulation of an ideal mix for Insurance Business so that the insurance
organization survives and thrives in the right perspective. The organizations can successfully
increase the market share, maximize the profitability and keep on the process of development
with the help of marketing.

In Indian perspective where rural orientation needs a prime attention, the insurance
marketing may prove to be a deice for combating regional imbalance by maintaining the
sectoral balance as an investment institution; the rural development oriented projects make
ways for the transformation of rural society. It is right to mention that the marketing concept
in both bank and insurance business is a matter of recent origin. The marketing concept in
the insurance business is concerned with the expansion of insurance business in the best
interest of the society vis-à-vis the insurance organization. The selection of risks (product
planning), policy writing (customer service) rating or actuarial (pricing) and agency
management (distribution)- all marketing activities make up an integrated marketing
strategy. We can’t negate that during the yester decades, there have been considerable
developments in the perception of customer servicing firms like banking and insurance
companies. The marketing concept in the insurance business focuses o the formulation of

31
marketing mix or a control over the whole marketing activities that make up an integrated
marketing strategy.

In a view of the above, we observe the following facts regarding the concepts of insurance
marketing:
 It is a managerial process

 It is a conceptualization of marketing principles.

 It is a process of formulating the marketing mix.

 It is an advice to make possible customer orientation.

 It is another name of marketing professionally.

 It is even a social process that paves avenues for social transformation.

 It is to make possible product attractiveness.

 It is to energize the process of quality upgradation.

MARKETTING STRATEGIES IN INSURANCE

In today's economy, the financial services industry is exposed to increasing performance

pressure and competitive forces. Modern media, such as the internet, have created new
challenges for this industry. New business concept, a change in client sophastication, and an
increasing number of new competitors entering into the market, such as independent
financial consultants, have changed the business models and the competitive forces that
established financial services organisations are facing today worldwide. A marketing
strategy serves as the foundation of a marketing plan. A marketing plan contains a list of
specific actions required to successfully implement a specific marketing strategy. A strategy
is different than a tactic. While it is possible to write a tactical marketing plan without a
sound, well considered strategy, it's is not recommended. Without a sound marketing
strategy, a marketing plan has no foundation. Marketing startegies serves as the fundamental
underpinning of marketing plans designed to reach marketing objectives. It's important that
these objective have measurable results. A good marketing strategy should integrate an
organization's marketing goals, policies, and action sequence into a cohesive whole. The

32
objective of marketing strategy is to provide a foundation form which a tactical plan is
developed.
The following techniques are implemented to device the marketing strategy for the
product and services.
segmentation
targeting
positioning

Segmentation
Market segmentation is widely defined as being complex process costing into two main
phases as follows
- Identification of broad, large market
- segmentation of these markets in order to select the most appropriate target market and
developed marketing mixes accordingly.

Positioning
Simply, positioning is how your target market defines you in relation to your competitors a
good positioning is
- what makes you unique
- this is considered by your target market.

Positioning is important because you are competing with all the noise out there competing
for your potential fans attention if you can stand out with unique benefits, you have changed
their getting their attention. It's important to understand your product from the customer's
point of view relative to competition.

Targeting
Targeting involves breaking a market into segament and then concentrating your marketing
efforts on one or few key segaments. Target marketing can be the key to small business's
success. The beauty of target marketing is that makes the promotion, pricing and distribution
of your product and services easier and more cost effective. Target marketing provides a
focussed to all of your marketing activities.

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4 IMPORTANT STRATEGIES

These are the 4 most important strategies for online insurance marketing. First, building
links to your website is the best thing you can do to help your website rank better. The
reason links are so important is because they count as a “vote” for your site to the search
engines. When search engines rank websites they take into account the number of links
(votes) pointing at that site and the quality of those links.

To maximize your results from link building, your marketing plan should include building
links from a number of different, yet relative, online sources. Some places you can get these
links are from forum posts, blog comments, local directories for your city, or even writing
articles for article directories. Make sure to choose to build links at websites that are also
“trusted” by Google that will be seen as “high quality” by the engines. Links from “spammy”
looking sites won’t do you a bit of good.

Article Writing
The concept here is to write 400 to 500 word articles about an insurance topic and post it at
various article directories. If you are afraid you won’t know what to write just focus on the
questions that you are most commonly asked by your clients and start writing from there.
Pretend you’re answering those questions as you write each article.
You create the link back to your website through these article directories by using the
resource or author’s box located beneath the finished article that is provided by the website.
So, you’re getting a trusted back link and sharing some of your insurance acumen.

Website Tweaks
There are a lot of bad websites out there on the Internet today and unfortunately the word
“bad” doesn’t refer to the graphic design or appearance, but something more important. In
order for your website to rank well for, lets say “Your Town Auto Insurance”, you need to
have that keyword in the right quantities on your website.
You should add the key phrase to your site’s meta description, meta keywords, the h1
headline tag and the page’s title tag. While it’s true that only about 20% of how the search
engines view your website comes from the website itself (the rest is from those back links), it
would be short sighted to correct this easy problem. Every little bit helps, especially when
your site’s rank is on the line.

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Forum Posting
Posting at online forums can be a fun way to add back links to your site. Find a forum for
your niche (maybe your town has a forum, or find an insurance forum) and contribute to that
community with your knowledge. Most of the online forums provide a space for you to add a
link in your signature line.
While this may seem pretty straight forward, some have abused this technique and just
spammed these website with junk comments and posts. You should be careful not to fall into
that trap. Try to be a trusted insurance professional (shouldn’t be a stretch) while answering
peoples’ questions. Don’t just promote your site with stuff like “hey, if anyone wants a
quote, visit blahblah.com”. Not only will you probably be ignored but you’ll also very likely
get banned.
There are other insurance marketing techniques to get your website to the top of the search
engines. But the four that I’ve outlined here are my personal favorites.

LIMITATION OF INSURANCE MARKETING

Some of the difficulties and limitations faced by me during my training are as follows:

Lack of awareness among the people–

This is the biggest limitation found in this sector. Most of the people are not aware about the
importance and the necessity of the insurance in their life. They are not aware how useful life
insurance can be for their family members if something happens to them.

Perception of the people towards insurance sector–

People still consider insurance just as a Tax saving device. So today also there is always a
rush to buy an Insurance Policy only at the end of the financial year like January, February
and March making the other 9 months dry for this business.

Insurance does not give good returns–

Still today people think that Insurance does not give good returns. They are not aware of the
modern Unit Linked Insurance Plans which are offered by most of the Private sector players.
They are still under the perception that if they take Insurance they will get only 5-6% returns
which is not true nowadays. Nowadays most of the modern Unit Linked Insurance Plans
gives returns which are many times more than that of bank Fixed deposits, National saving
certificate, Post office deposits and Public provident fund.

35
Lack of awareness about the earning opportunity in the insurance sector–
People still today are not aware about the earning opportunity that the Insurance sector gives.
After the privatization of the insurance sector many private giants have entered the insurance
sector. These private companies in order to beat the competition and to increase their
Insurance Advisors to increase their reach to the customers are giving very high commission
rates but people are not aware of that.

Increased competition–
Today the competition in the Insurance sector has became very stiff. Currently there are 14
Life Insurance companies working in India including the LIC (life insurance Corporation of
India). Today each and every company is trying to increase their Insurance Advisors so that
they can increase their reach in the market. This situation has created a scenario in which to
recruit Life insurance Advisors and to sell life Insurance Policy has became very very
difficult.

LIFE INSURANCE
Life Insurance can be termed as an agreement betweenthe policy owner and the insurer,
where the insurer for a consideration agrees to pay a sum of money uponthe occurrence of
the insured individual's orindividuals' death or other event, such as terminalillness, critical
illness or maturity of the policy.

HISTORY OF LIFE INSURANCE

Insurance in India can be traced back to the Vedas. For instance,yogakshema, the name of
Life Insurance Corporation of India'scorporate headquarters, is derived from the Rig Veda.

Bombay Mutual Assurance Society, the first Indian life assurancesociety, was formed in
1870.

Other companies like Oriental, Bharatand Empire of India were also set upin the 1870-
90s.

It was during the swadeshi movement in the early 20th century that insurance witnessed a
big boom in India with several more companies being set up.

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 By the mid-1950s, there were around 170 insurance companies and 80 provident fund
societies in the country's life insurance scene. However, in the absence of regulatory systems,
scams and irregularities were prevalent in most of these companies.

As a result, the government decided to nationalize the life assurance business in India. The
Life Insurance Corporation of India was set up in 1956 to take over around 250 life insurance
companies.
For years thereafter, insurance remained a monopoly of the public sector. The sector was
finally opened up to private players in 2001.

The Insurance Regulatory & Development Authority, an autonomous insurance regulator

set up in 2000, has extensive powers to oversee the insurance business and regulate in
amanner that will safeguard the interests of the insured.

1. Benefits of Life Insurance

1. Risk Coverage: Insurance provides risk coverage to the insured family in form of
monetary compensation in lieu of premium paid.
2. Difference plans for different uses: Insurance companies offer a different type of plan to
the insured depending on his need for insurance. More benefits come with the more
premium.
3. Cover for Health Expenses: These policies also cover hospitalization expenses and critical
illness treatment.
4. Promotes Savings/ Helps in Wealth creation: Insurance policies also come with the saving
plan i.e. they invest your money in profitable ventures.
5. Guaranteed Income: Insurance policies come with the guaranteed sum assured amount
which is payable on happening of the event.
6. Loan Facility: Insurance companies provide the option to the insured that they can borrow
a certain sum of amount. This option is available on selected policies only.
7. Tax Benefits: Insurance premium is tax deductible under section 80C of the income tax
Act, 1961.

Types of Life Insurance Policies

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1. Term insurance plan
As the name says Term insurance plan are those plan that is purchased for a fixed period of
time, say 10, 20 or 30 years. As these policies don’t carry any cash value their policies do not
carry any maturity benefits, hence their policies are cheaper as compared to other policies.
This policy turns beneficial only on the occurrence of the event.
2. Endowment policy
The only difference between the term insurance plan and the endowment policy is that
endowment policy comes with the extra benefit that the policyholder will receive a lump sum
amount in case if he survives until the date of maturity. Rest details of term policy are same
and also applicable to an endowment policy.
3. Unit Linked Insurance Plan
These plans offer policyholder to build wealth in addition to life security. Premium paid into
this policy is bifurcated into two parts, one for the purpose of Life insurance and another for
the purpose of building wealth. This plan offers to partially withdraw the amount.
4. Money Back Policy
This policy is similar to endowment policy, the only difference is that this policy provides
many survival benefits which are allotted proportionately over the period of the policy term.
5. Whole Life Policy
Unlike other policies which expire at the end of a specified period of time, this policy
extends up to the whole life of the insured. This policy also provides the survival benefit to
the insured. In this type of policy, the policyholder has an option to partially withdraw the
sum insured. Policyholder also has the option to borrow sum against the policy.
6. Annuity/ Pension Plan
Under this policy, the amount collected in the form of a premium is accumulated as assets
and distributed to the policyholder in form of income by way of annuity or lump sum
depending on the instruction of insured.

4. Principles of Life Insurance?

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Life insurance is based on a number of principles that are tailored to meet market conditions
and ensure insurance companies make profits, while offering security policies to insured
individuals.
There are broadly four major insurance principles applied in India, these being:

Insurable Interest – This principle pertains to the level of interest an individual is expected
to have in a particular policy. The interest could be a family bond, a personal relationship
and so on. Based on the interest level, an insurance company can choose to accept or reject
an application in order to protect the misuse of a policy.

Law of large numbers – This is a theory that ensures long-term stability and minimises
losses in the long run when experiments are done with large numbers.

Good faith – Purchasing an insurance is entering into a contract between company and
individual. This should be done in good faith by providing all relevant details with honesty.
Covering any information from the insurance company may result in serious consequences
for the individual in the future. This being said, the insurer must explain all aspects of a
policy and ensure that there are no unexplained or hidden clauses and that the applicant is
made aware of all terms and conditions.

Risk & Minimal loss – Insurance is a risky and companies have to do business and make
profits keeping in mind the risk factor. The principle of minimal risk states that the insured
individual is expected to take necessary action to limit him/her self from any hazards. This
includes following a healthy lifestyle, getting a regular health check-up and more.

Points to Consider for Life Insurance

Research: As an applicant for life insurance, there are numerous policy options at your
fingertips to choose from. It is essential that you do your research before making an informed
decision on purchasing a life insurance policy, as it can help you save money and receive
maximum benefits.

Read terms and conditions: The terms and conditions of an insurance plan contain all
relevant information regarding the particular policy. Make sure that you read the fine print in
detail and completely understand it before purchasing an insurance policy of your choice.

39
Remember lock-in period: There are instances when individuals purchase insurance
policies without making an informed decision and later realise that they are unhappy with the
insurance policy. In such scenarios, some insurance companies offer a lock-in time frame,
which is a short time usually 15 days where a policyholder can return the policy to the
insurer and purchase another in case they were unsatisfied with the initial purchase.

Consider premium payment options: Almost all insurance providers offer premium
payment options consisting of annual, semi-annual, quarterly or on monthly basis. It is
essential that you opt for Electronic Check System (ECS) payment that will periodically
debit your bank account with the required insurance amount. Also, you can choose from a
schedule that will allow you to make a premium payment with the convenience of interval
payments.

Don’t Mask Information: There are times where individuals try to hide information when
filling out the insurance application form. All personal credentials and medical history must
be accurately presented to the insurance company. Misinformation can cause serious issues
when trying to make claims later on.

Life Insurance Companies in India

Some of the prominent life insurance companies in India are:
1. LIC – Life insurance corporation of India
2. SBI Life Insurance
3. ICICI Prudential Life Insurance
4. HDFC Standard Life Insurance
CLAIM SETTLEMENT OF LIFE INSURANCE

40
5. Bajaj Allianz Life Insurance
6. Max Life Insurance
7. Birla Sun Life Insurance
8. Kotak Life Insurance

Claim Settlement Process: Death Claim

Step One: Intimation of Claim
The claimant must submit the written intimation as soon as possible to enable the insurance
company to initiate the claim processing. The claim intimation should consist of basic
information such as policy number, name of the insured, date of death, cause of death, place
of death, name of the claimant etc .Claim intimation form can be availed from nearest branch
of the insurance company or/and by downloading it from the company website.

Step Two: Documentation

The claimant will be required to provide the following documents along with a claimant's
statement:

I. Certificate of Death
II. Proof of age of the life assured (if not already given)
III. Deeds of assignment / reassignments (if required)
IV. Policy document
V. Any other document as per requirement of the insurer

41
For early death Claim, (If the claim has accrued within three years from the beginning of the
policy), the following additional requirements may be called for:

I. Statement from the hospital if the deceased had been admitted to hospital
II. Certificate of medical attendant of the deceased giving details of his/her last illness
III. Certificate of cremation or burial to be given by a person of known character and
responsibility present at the cremation or burial of the body of the deceased
IV. Certificate by employer if the deceased was an employee

In special cases as per following the poof of death will be different from the standard
specification
 In case of an air crash the certificate from the airline authorities would be necessary
certifying that the assured was a passenger on the plane.
 In case of ship accident a certified extract from the logbook of the ship is required.
 In case of death from medical causes, the doctors’ certificate and/or treatment
records may be required.
 If the life assured had a death due to accident, murder, suicide or unknown cause the
police inquest report, panchanama, post mortem report, etc would be required.

Step Three: Submission of required Documents for Claim Processing

For faster claim processing, it is essential that the claimant submits complete documentation
as early as possible.

Step Four: Settlement of Claim

As per the regulation 8 of the IRDA (Policy holder's Interest) Regulations, 2002, the insurer
is required to settle a claim within 30 days of receipt of all documents including clarification
sought by the insurer. If the claim requires further investigation, the insurer has to complete
its procedures within six months from receiving the written intimation of claim.

After receiving the required documents the company calculates the amount payable under the
policy. For this purpose, a form is filled in which the particulars of the policy, bonus,
nomination, assignment etc. should be entered by reference to the Policy Ledger Sheet. If a
loan exists under the policy, then the section dealing with loan is contacted to give the details
of outstanding loan and interest amount, which is deducted from the gross policy amount to

42
calculate net payable claim amount. Generally all claim payments would be made through
the electronic fund transfer.

Maturity & Survival Claims:

The payment by the insurer to the insured on the date of maturity is called maturity payment.
The amount payable at the time of the maturity includes a sum assured and bonus/incentives,
if any. The insurer sends in advance them intimation to the insured with a blank discharge
form for filling various details in it. It is to be returned to the office along with Original
Policy document, ID proof, Age proof if age is not already submitted, Assignment
/reassignment, if any and Copy of claimant’s Bank Passbook & Cancelled Cheque.
Settlement procedure for maturity claim is simple after receipt of completed and stamped
discharge form from the person entitled to the policy money along with policy documents,
claim amount will be paid by account payee cheque.

Regarding maturity claims certain points are to be remembered:

 If the life assured is reported to have died after the date of maturity but before the
receipt is discharged, the claim is to be treated as the maturity claim and paid to the legal
heirs. In this case death certificate and evidence of title is required.
 Where the assured is known to be mentally deranged, a certificate from the court of
law under the Indian Lunacy Act appointing a person to act as guardian to manage the
properties of the lunatic should be called.
For Survival Benefit claim, Policy bond and discharge voucher is required.

Rider Claims:
The life insurance policy can be attached with different riders like accidental rider, Critical
illness Rider, Hospital cash Rider, waiver of Premium Rider etc. For different Riders
different proceedings can be opted for claim settlement. In some cases the claim may
proceed as well as with the death Claim (Like Waiver of premium rider, accidental death
Rider etc). But in some other cases different documents can be required for along with the
duly filled Claim form & Policy Copy:

 For Critical Illness Rider, necessary medical documents such as first investigation
report, Doctor’s prescription, Discharge Summery etc are required
 For Accidental disability rider, Attested copy of FIR, Doctor Certificate of
disability, Photograph of the injured with reflecting disablement, Original Medical bills with
prescriptions/ treatment papers etc are required.

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 For Hospital cash rider medical documents are required such as Medical &
Investigation report, Prescriptions, Medical and Investigation Bills, Discharge Card etc.

UNDERWRITING OF LIFE INSURANCE

INTRODUCTION
Life Insurance Underwriting is the process of accepting the proposal of the customer based
on the guidelines formulated by the insurance company. The insurance companies codify a
set of procedures which must be followed before accepting any new business. When a new
proposal comes to the insurance company its underwriting department scrutinizes the
proposal whether or not it fulfills the criteria laid down by the company. If they find any
lacunae they ask the agent to get it corrected. It is not that one can get whatever cover one
wants. The issue of policy depends on income of the insured and whether he has the capacity
to pay the premium over the years. Once the underwriters are satisfied that all the conditions
have been fulfilled they go ahead to accept the premium and issue the policy. Underwriting
can be defined as the decision making process during which the company decides whether to
insure or not and if yes at what rate.

OBJECTIVE
After going through this lesson you will be able to
1. Recall the various underwriting procedures
2. Remember the points to be considered while examining a proposal

LIFE INSURANCE IN OPERATION - FROM PROPOSAL TO POLICY

Since life insurance is a financial contract, and a long-term contract and that a contract which
may come to be executedwhen one of the parties to the contract may not exist and may be
called upto a court of law in case of dispute in future, it is essential that all the terms and
conditions of the contract must be clearly understood and put in writing legibly.
Looking at the importance of the contract combined with the raised expectation of a benefit
which is still in the womb of a promise, unstinted trust should be created in the mind of the
insured so that he remains confident of its benefit and continues to perform his part of the
duty during the continuance of the contract.

The proposal form, as prescribed by the insurer for the type of insurance that the prospect
has agreed to buy, must be appropriately selected. The proposer, must go through the
proposal column by column, appreciate the meaning and importance of each information
sought and fill it up legibly and completely.

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Hyphens and obliques, dittos and blanks should be avoided as they are likely to be
misunderstood or can be misused. An incomplete proposal leads to further queries and in the
process a lot of valuable time and effort is wasted.
While different insurance companies will have different formats for the proposal form the
points on which information is sought, are substantially the same.

Wherever medical report is required, the medical examiner is required to endorse the
answers to the questions relating to personal history and personal health as stated in this
form. If no medical report is required, the life proposed has to give additional information
about his physical measurements as required.
However, most insurers insist upon medical reports only in cases where either the sum
assured is very high, or the life proposed is beyond certain age limit or the plan of insurance
carries a lot of risk element. We shall discuss these points later on in this chapter. However it
is sufficient to state here that a medical report has to be given by a company approved
medical examiner.

Medical examination has to be conducted at a well-equipped clinic. A lady life has to be

examined by a lady doctor only. The medical examiner should not be related to the life
proposedand the report should be submitted confidentially to the insurer who pays for the
medical examination. However, if the prospect decides ultimately not to go ahead with the
completion of the proposal, he bears the cost of the medical examination and the initial
deposit is refunded less this cost.
Every insurance company has its own policy as to the need for the medical report and
therefore company rules must be consulted before taking the life proposed to the doctor.
The insurer may also ask for special reports like X-ray, ECG, Blood Sugar Test etc. after
examining the proposal. There are also standard rules for obtaining these reports depending
upon age at entry, sum under consideration or personal history of illness etc. These
circumstances are provided in the company manual.
The cost of these special reports is initially paid by the prospect but it is reimbursable by the
insurer, after the proposal is completed. The rates of payment for these reports are fixed by
the insurers in advance and these reports are confidential and are the property of the insurer
irrespective of who ultimately pays for those reports.
A host of other documents are required depending upon special need. While the prospect has
the obligation to disclose all information about himself relating to his health, habit and
occupation, the agent has the responsibility of being circumspect, see the overall posture of

45
the prospect, to note any obvious physical deformity, appearance and physical environment
of his residence or work place to know about his financial standing.
The amount of Insurance should commensurate with the income. Too much of insurance
may mean a propensity to die early either due to an undisclosed disease or suicide, due to
financial problem or family circumstances. Technically this is called moral hazards, which
can be uncovered by diligent enquiries made about the prospect by the agent.
Personal statement regarding health declaration- This statement is required at the time of
revival of a policy either with or without a medical report depending upon the duration of
policy-lapses and physical condition of the life assured. However if there is a delay in
completing the proposal say 3 months to one year, the insurer may ask for a statement in the
prescribed form

CLASSIFICATION OF RISKS
The Life Insurance underwriting involves classification of risks affecting the policyholders.
The factors that affect risk on the life of an individual is known as hazard. The hazard may
be classified as
1) Physical 2) Occupational 3) Moral
3.2.1 Physical hazard The physical hazard that affects a human life are as follows:-
a) Age - The probability of death increases as the age increases. So the premium also
increases with the age.

b) Sex - The female lives have different underwriting consideration due to various factors
such as employment, child birth etc

C) Built - The built of person indicates whether a person is healthy or not. The height,
weight and chest measurements helps to find out whether the person is suffering from any
ailment or not. Height and weight must be given after taking actual measurement. This gives
an idea of the body built. In fact, most insurers publish a chart of desirable height and weight
which even medical practitioners follow. This is a product of medico-actuarial study. While
writing the height and weight, do not quote from the build-chart. Write the actual
measurement only.
d) Physical Condition - The Physical condition of the person helps to decide about the
premium.
e) Physical Impairments - Blindness, deafness and other conditions which are not illness or
degenerative are hazards affecting the probabilities of death.

46
 f) Personal History - Personal history of illness affects the prognosis. Some diseases leave
their mark and may relapse or weaken the resistance. Hence a detailed information regarding
present and past illness relating to different body systems is called for. Let it be noted that
any affirmative answer regarding any past or present disease does not mean decline of a life
cover or extra premium. Most of the common diseases are either ignored or the insurers may
advise for a waiting period of 3 to 6 months.
But correct answer must be given so that the insurance cover remains indisputable and
security, which is the object of insurance, is guaranteed. Mention the exact disease and the
duration if the answer is in the affirmative. Give details of the treatment received. Bodily
deformity or previous accident are also important information. Alcohol, drugs are bad for
health and habit forming. This is a risk which an insurer would like to avoid unless it is of
casual nature. Some insurers treat non-smokers as better than standard lives.
g) Insurance history - The next question relates to the insurance history of the proposer. If
at any time earlier, any proposal for revival has been declined or considered with certain
conditions like extra premium, the underwriters would like to know the reason thereof in
order to eliminate the possibility of concealment of any material fact relating to personal
history.
h) Family History - Family history is another important source of information for the
insurer to have a prognosis about the prospect’s life. Prognosis as opposed to diagnosis, is a
long term estimation about the longevity of the prospect. The children of parents who live to
a very ripe old age are supposed to live long.
Diabetes, blood pressure, insanity etc are some of the problems which run in a family.
Family members sometimes get infected if some close relatives suffer from infective
diseases like tuberculosis. Aids of course is a dread which all insurers would like to avoid. A
correct information as far as possible about the family history should be given. Of course,
what is not known cannot be declared.

3.2.2 Occupational hazard We have already explained else where that the nature of
occupation has an impact on the life style of the insured. A hazardous occupation calls for
special treatment by the insurer either by charging an extra premium or excluding the risk of
death due to such hazard. The insurer normally lists out occupations on the basis of the
hazard and mentions the special treatment expected.
There is a social angle to this problem of occupational hazard. People working in mines, on
electricity poles, or insanitary condition like stone crushers or road cleaning are normally the
socially disadvantaged people doing a great service to society. While facing the hazard of

47
their occupation, should they be penalised by paying a higher premium or exclusion of the
risk?
Name and address of the present employer is useful for contact and also to appreciate his
social standing. Similarly information regarding education, annual income, sources of
income and whether the prospect is an income tax payee indicate his social and financial
status.
Whenever the proposer is employed in armed forces, his physical health is assured to be
excellent. There is a provision for regular medical examination and the army people are
categorised on grounds of health. The army personnel can insure without any medical
examination for a very high sum assured, a benefit which is not available to the general
public.

3.2.3 Moral hazard

As we have said earlier too much insurance may lead to moral hazard. Insurer, therefore,
would like to know how much insurance he is having or going to have. Therefore insurance
policies taken through separate proposals or revival of a lapsed policy are important
information for undertaking life risk.

3.2.4 Previous Insurance policies

A detailed list of all previous policies has to be provided along with their present status so
that the underwriter is able to know the total life cover that this proposer has taken and
proposes to take. No insurer would like that anybody should take a fresh insurance
immediately after surrendering the previous policy.
As we have explained elsewhere this is bad for all concerned. IRDA has also provided in the
agents regulation that no agent shall advise a prospect to take a fresh insurance, if the
previous policy has been terminated within a period of six months. Concealment of this fact
may affect the validity of the insurance policy.

3.4 FEMALE LIFE

Certain special questions are asked to female proposals relating to pregnancy, and previous
history of miscarriages if any. These questions are health related and therefore correct
information is relevant to the insurer. Pregnancy is considered an extra risk and particularly
first pregnancy. Underwriter takes extra care to cover this risk.
Information relating to husband are important to know about the financial standing of the
family vis-a-vis his total insurance. It is true that in case of an insurance proposal on a male

48
life, such questions about wife are not called for. Probably it is a vestige of our social
conditions which are extremely important for an insurer.
If husband is insurable and not sufficiently insured, the underwriter would like to know why
the wife is proposing for a sum which is higher than that of her husband. It is particularly
important if wife has no independent income. Of course if the wife is educated and has her
own source of income, inadequate insurance of husband is not very material.

3.5 PROPOSAL FORM

That this form has to be filled in with utmost care needs no emphasis for this form is the
basis of life insurance contract. All the answers must be given completely and legibly and no
ambiguity is to be left. All answers should be preferably given in block letters for clarity’s
sake. The complete address with pin code must be written. If the present address is different
from the permanent address, both should be mentioned. Insurance being a long-term
contract, one never knows the position say 20 or 30 years hence. A paid up policy is likely to
be forgotten.
Sometimes the family members are not aware of the insurance being taken by the
breadwinner, who may become victim of a sudden accident. Instances are not unknown
when the insurance company traces the life assured through his permanent address which
may be in a rural area, where some relatives are staying.
Occupation must be clearly stated so that the nature of the job performed becomes clear.
Business, engineer, operator, service etc. are too vague terms to indicate the hazards
involved. Of course whenever, special hazard is involved in the occupation, requisite form
must be filled in. Any concealment or non-disclosure in this area may lead to the insurance
contract being declared void.

3.6 AGE PROOF

Date of birth is important, for premium rate is age dependent. A proposal signed by a minor
is invalid. In case of a minor, the risk starts only on attainment of a certain age. Amount of
annuity instalment is based upon age and is not much concerned with health. In case
premium waiver benefit is desired on a proposal of minor life, proposer’s life risk is taken
and therefore age proof is a must.
Hence it is advisable that an acceptable and genuine proof of age should accompany the
proposal for life insurance. Sometimes proposal is acceptable under certain conditions with
an undertaking to submit the age proof at a later date. But such situations should be avoided
as non-compliance of the undertaking may lead to various avoidable complications in case of

49
unexpected death of the life assured. Generally school certificate and passport are considered
acceptable proofs of age.

3.7 SELECTION OF PLAN AND TERM

The plan should be carefully selected taking into consideration the special need of the life to
be insured. A plan well selected generates lot of goodwill for the company which means a lot
more business, a lot more income. Term of course means the period of the plan after which it
matures for payment. Here again the need of the proposer alone is to be considered. Term
also determines the rate of commission to the agent, but this is of no consideration while
canvassing insurance plan and term.

3.8 OBJECTS OF INSURANCE

Objects of insurance can be family provision or old age provision etc. Irrespective of what is
stated here, the payment of claim money is decided by the nature of the plan of insurance
purchased. There are plans specially designed to provide for the marriage of the female child,
maintenance of a handicapped child, a child’s insurance to give him the benefits of lower
premium etc. Therefore the object stated must match the plan selected.

An endowment plan benefits the family in case of early death of the insured, when the claim
money is paid in a lump sum. In case of maturity also, the money is paid in lump sum.
However, it is also possible to opt for instalment payment of the lump sum money, in the
shape of a pension if option is so exercised in good time, say one year in advance. It is called
“settlement option”.

A danger inherent in lump sum settlements is though it is most flexible in the hands of the
receiver, that the money may be mismanaged, poorly invested or spent foolishly. The
surviving beneficiaries of the family need a guaranteed income rather than cash. Of course it
is possible to purchase an annuity policy with the cash amount available, even if no such
advance arrangement has been made

3.9 SUM PROPOSED

This is the amount insured and is paid as claim money either on death or maturity along with
bonus or guaranteed addition etc. as per the conditions of the policy. As stated earlier, life
insurance is not a contract of indemnity and therefore, the claim amount is not related to the
financial status of the life assured. It is therefore, advised, while deciding the sum proposed,
a proper estimate on lines of Human Life Value theory should be made.

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In case, the prospect finds it difficult to pay the required premium for a certain sum assured,
which is proper, the agent can select a plan, which permits high sum assured with a low
premium like a convertible whole life policy. Alternatively he keep in continuous contact
with the life insured to sell him additional insurance, whenever, his financial situation
improves.

In any case, everybody needs a review of his insurance cover from time to time at least for
two reasons - One - the income goes up along with the liability in course of time. Two-the
continuous inflation in the market, reduces the money value of the insurance over time and
therefore additional insurance has to be purchased, at least every five years, to maintain the
value of sum assured, at the original rate planned for.

For example, the sum assured of one lakh taken today may find it worth only if compared in
terms of its purchasing power ten years from now. The problem is, that as people pay more
for goods and services and as their income and wages rise, they often do not increase the life
insurance protection to compensate for the other changes. An agent would do well to
appreciate this for continuous business.

3.10 ACCIDENT BENEFIT

This part refers to the double accident and permanent disability benefit and for this a small
extra premium is charged. We will discuss this benefit a little later. But first let it be
known that there is a normal provision for disability benefit allowed in all policies for free
and the benefit relates to the waiving of all future premium after the total permanent
disability has been caused due to an accident as defined hereafter within stipulated period of
the accident and provided the policy is in force.

The Double Accident and Permanent Disability benefit has parts - one relating to death due
to accident and second permanent disability suffered due to such accident

The benefit payable on the death of the life assured is an additional sum equal to the sum
assured, provided the policy was in force at the time of accident and the bodily injury has
been sustained directly due to an accident caused by an outward, violent and visible means
and the death has been caused solely, directly and independent of all other intervening
causes, within the stipulated period, due to the bodily injury.

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Thus the above definition of accident excludes self injury, attempted suicide, insanity,
immorality or when the lifeassured is under the influence of any liquor, drug etc. The
injury suffered by a person while flying in any capacity otherthan as a passenger without any
duty on board is alsoexcluded. So also injury caused during riots, civil commotion,war,
mountaineering etc. or while the life assured iscommitting any breach of law or while in the
employment ofthe armed forces or navigation.

3.11 MODE OF PAYMENT OF PREMIUM

This is an important aspect of selling life insurance becausethe immediate sacrifice of cost
burden to the policyholder canbe regulated by selecting carefully the mode of instalment
payment. In the prospectus, the insurer prints only annualpremiums and if the mode of
payment is chosen yearly, arebate in premium is allowed.

In case the mode selected is half-yearly lesser rebate is allowed.Quarterly rate is exactly one
fourth of the published annualrate. Monthly instalments invite 5 % extra. The reason is the
higher administrative cost to account for more frequentpayments

3.12 DECLARATIONS
At the end of the proposal, the proposer makes threedeclarations which make the answers in
the proposal the basisof the insurance contract:
1. The proposer guarantees as to the truthfulness of theinformation so far it is within his
knowledge. Thus thefoundation of the basic principle of “utmost good faith’’ islaid and the
breach of it makes the contract void.
2. The proposer authorises the doctor to divulge allinformation known to him about the
health and habit tothe insurer whenever necessary. Thus a doctor givingsuch information to
the insurer at any time, either at thetime of proposal or at the time of claim, cannot be
heldguilty of divulging any confidential information.
3. The third declaration relates to a period between the dateof signing the proposal
andacceptance of the risk by theinsurer. This is a period during which the underwriterhas not
yet seen the proposal and has, therefore, notundertaken any risk. Any unfavourable incident
duringthis period shall, therefore, materially affect the decision.

The proposal is to be signed in the presence of a witnessbecause that is the legal requirement
to enter into a contract.Normally agent should sign as a witness as that is the properway. If
the proposer has signed in a language other than theone in which the questions have been

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asked in the proposalform, he must declare that he has understood the questionsand has
answered in his own language

USE OF LIFE INSURANCE IN PERSONAL PLANNING

 Protection for your loved ones

A life insurance policy acts as a financial backup plan for your loved ones. You pay a fixed
amount of premium to the insurer, and in return,you get a life cover against your life in the
form of a death benefit.So, in the event of your unfortunate demise, your family will
be financially compensated with the sum assured plus additional benefits(if any) as per your
life insurance policy.

 Saving and Investment

Life insurance policy acts as an appropriate saving and investment tool.With the periodic,
regular and systematic payment of premium, the sum assured increases with various
cumulative benefits like simple/compounded bonuses, guaranteed additions, loyalty benefits,
etc. during the term of your life insurance policy. Additionally, it brings discipline in your
investment approach.You may either invest in market linked or traditional life insurance
plans as per your risk appetite and capacity to pay.The life insurance policy acts as a saving
tool as it offers a guaranteed maturity benefit to attain various financial goals set in your life.

 Manage risk against debts

By investing in a life insurance plan, the benefit of managing risk against debts and loans is
covered. A term insurance policy with a similar policy term as of your outstanding loan will
reduce the risk of inability of repayment of loans in the event of your untimely demise. So,
after your death, the burden of outstanding loans and debts will not be passed to your loved
ones.

 Achieve long term goals

Long term goals like buying a car, home, education of your kids, marriage of your children
and planning for your retirement, need a well analyzed and early start of financial
planning. A life insurance policy with an adequate life insurance cover will help you attain
different long term financial goals. Life insurance policies are a long term contract which

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offers a variety of insurance plans to achieve your specific or multiple financial goals by
opting the right mix of insurance plans. It keeps your investment intact for a long and
continuous period of time towards a planned and secure financial future.

 Tax saving
A life insurance policy also acts as a tax saving tool as the premium which you pay towards
your policyis available for tax benefit under section 80C of Income Tax Act, 1961. The
insurance policy proceeds which you receive from your life insurance policy are also tax
deductible under section 10 (10)D of the Income Tax Act,1961.
Financial planning is a major step towards a better and prosperous tomorrow. Making life
insurance policy as a part of your financial plan is a stepping stone to safeguard the future of
your loved ones. A life insurance policy offers a bundle of benefits to accomplish your set
financial goals with a disciplined outflow of money in the form of a premium. A life
insurance policy will prove to be more fruitful if taken at an early stage as the premiums are
directly proportional to the age at which the policy is bought. It is a safe and secure form of
saving which needs to be reviewed periodically to accomplish the changing objectives of life
as per the evolution of scenarios of life.
USE OF LIFE INSURANCE IN BUSINESS PLANNING
1. Key Person Insurance
Business owners are often concerned about protecting the business from the death of a key
employee whose knowledge and contributions to the company are invaluable. The loss of a
key employee may result in not only a loss in sales, but also a potential loss of brand value,
important contacts and goodwill. The company’s credit position may also be at risk.

The business owner can protect the business from the loss of a key person by implementing a
Key-Person insurance plan (also referred to as Key-Man) in which the company purchases
and owns a life insurance policy on the life of a key employee. By implementing such a plan,
the insurance advisor:

 can illustrate how a life policy offers liquidity to keep the business running during a
transition in the event of a key person’s premature death or disability;
 provides cash needed to hire a qualified replacement and/or to purchase the additional
human capital or assets necessary to keep the business operating;
 helps to replace lost profits.

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2. Business Succession Planning
The owners of a successful business, including a closely-held family business, should plan
for the transfer of the business to the next generation. Different types of Buy-Sell plans can
go a long way in transferring business interests to surviving business owners in the event of
the death of one of them. However, having a Buy-Sell arrangement is only 50% of the task.
Funding the Buy-Sell is the other part of the planning. Without the funding, the arrangements
themselves may be compromised. Further, it is best to establish the Buy-Sell arrangement
when a formal valuation of the business value is completed.

Generally, there are 2 main types of Buy-Sell arrangements:

 Cross Purchase Buy-Sell

 Entity Purchase Buy-Sell, or a Stock Redemption Agreement
Cross Purchase arrangements refer to each business owner having a policy on the life of each
of the other business owners based on each business owner’s share of the business.
Typically, the arrangement will look to buy-out whoever is due to inherit the business
interest of that deceased owner, often the surviving spouse or family member. Because this
arrangement can be very cumbersome when there are more than 2 owners, an Entity
Purchase agreement is often considered as an alternative when there are more than 2 owners.

Entity Purchase arrangements refer to the entity or business owning each policy, with the life
insurance proceeds being paid into the business, at which point the business facilitates the
buy-out of the interests or shares with the surviving family members who inherited them.
Often, these Entity Purchase agreements are set up as stock redemptions.

There are various other ways to set up a buy-sell arrangement, including a One-Way Buy-
Sell or a Cross Endorsement Buy-Sell:

 One-Way Buy-Sell is exactly what it sounds like: only one of the two parties
purchases life insurance on the other’s life. Typically, this is the case between an older and a
younger employee, like a father and a son, because the younger one is designated as the
successor.
 Cross Endorsement Buy Sell is helpful when the business owner wants to own the
policy on his life and prefers to endorse over to the surviving business owner a portion of the
death benefit to facilitate the buy-out. This type of Buy-Sell is appealing but does come with

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some tax issues relative to transfer-for-value rules that the client’s attorney will need to
assess.
Business Succession for Families can be a bit more complex and may require consideration
of how to equalize inheritance among heirs not involved in the business. To this end,
arrangements for family business transfers may include the use of succession trusts such as:

 Sale to a Defective Trust, or Sale of Asset to Grantor Trust (IDGIT/DIGT/SAGT)

 Grantor Retained Annuity Trust (GRAT)
 Irrevocable Life Insurance Trust (ILIT)
Sale to Defective Trust, or transfer of the business to a grantor trust (IGIT/DIGT/SAGT),
a GRAT, or an ILIT allows the business to transfer over time through the use of an
installment note, annuity payment, or a one-time liquidity event, to the designated successor,
respectively. Life insurance can fund these types of ‘succession’ trusts to provide the
liquidity needed to pay income and transfer taxes, to equalize an inheritance, and/or to
provide the repayment of the note connected to the sale or transfer.

3. Executive Benefit Plans

Executive Benefit plans are used by employers to attract, retain and reward key employees of
the business. There are two main types of plans in this category:

 Executive Bonus Plan

 Restricted Bonus Arrangement (REBA)
Executive Bonus Plan, refers to an employer paying a bonus to the executive in an amount
equal to the annual premium on a life insurance policy that is owned by the executive and is
on his or her life. The executive, as the owner of the policy, has the right to name the
beneficiaries of the policy and to enjoy the potential accumulation of cash values on the
policy, if any. This can serve as a valuable non-qualified benefit to the executive because it
provides income protection for survivors, as well as access to tax-favored cash values for the
executive to use toward supplementing and diversifying his or her income from other sources
at retirement. In addition, the policy can include a rider to cover longer term care expenses
on a tax advantaged basis. In this way, the cash value life insurance policy provides the
flexibility to cover various needs over lifetime without committing the policy today to any
one need.

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When an employer imposes a vesting schedule on the bonuses to create a ‘golden handcuff’,
or an incentive to remain with the company, the Executive Bonus Plan becomes a Restricted
Bonus Plan or REBA. The restrictions can be minimal or extensive. The more extensive the
restrictions are the more complex and the more administrative it may become. Although the
executive owns the policy subject to the restrictions, the restrictions are typically in the form
of restricted access to the policy’s potential cash values.

4. Deferred Compensation Plans and Supplemental Executive Retirement Plans (SERP)

Executives, like all employees, are limited in the amount they can contribute to a qualified
plan, like a 401(k) or 403(b) plan, annually. A non-qualified plan like a deferred
compensation plan– also referred to as a salary deferral plan or 401(k) mirror plan– may help
executives to save more for retirement. Although the contributions to the plan cannot be
made on a pre-tax basis like contributions to a 401(k), the contributions grow on a tax-
deferred basis like a 401(k). And unlike a 401(k) plan, the amount that can be contributed to
a salary deferral plan is unlimited. A Salary Deferral Plan can mirror a 401(k) plan in that the
executive makes contributions to the plan while the employer may match those non-qualified
contributions.

A Supplemental Executive Retirement Plan (SERP) is another type of non-qualified plan that
an employer can sponsor. However, in this type of plan the employer makes all the
contributions on behalf of the executive. When the employer makes the contributions to the
plan, they are non-deductible. However, when the benefits are paid out, the employer gets
the tax deduction at that point and the employee pays taxes as he or she receives the benefit.

Both of these types of non-qualified plans allow executives to save more for retirement on a
tax-deferred basis to supplement other employer-sponsored plans, if any. These types of
plans generally have vesting schedules on the employer matches that serve as incentive for
executives to remain with the company.

INSURANCE PRICING

Rate making, or insurance pricing, is the determination of rates charged by insurance

companies. The benefit of rate making is to ensure insurance companies are setting fair and
adequate premiums given the competitive nature.

A rate is the price per unit of insurance.

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An exposure unit is the unit of measurement used in insurance pricing. It varies by line of
insurance.
The pure premium refers to that portion of the rate needed to pay losses and loss adjustment
expenses.
Loading refers to the amount that must be added to the pure premium for other expenses,
profit and a margin for contingencies.
The gross rate consists of the pure premium and a loading element. Finally, the gross
premium paid by the insured consists of the gross rate multiplied by the number of exposure
units.

Objectives of insurance Pricing or Rate Making

Regulatory Objectives

Adequate Rates

Not Excessive

Not unfairly Discriminatory

Business Objectives

Simplicity

Stability

Responsiveness

Encouragement of loss control

Types of Rating
Judgment Rating
Class rating
Merit rating
Schedule rating
Experience rating

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 Retrospective rating

Judgment Rating
Judgment Rating means that each exposure is individually evaluated, and the rate
isdetermined largely by the underwriter’s judgment.

This method is used when the loss exposures are so diverse that a class rate cannot be
calculated or when credible loss statistics are not available.
Eg: Ocean marine insurance.

Class Rating or Manual Rating

Class Rating means that exposures with similar characteristics are placed in the same
underwriting class, and each is charged the same rate.

The rate charged reflects the average loss experience for the class as a whole.

Class rating is based on the assumption that future losses to the insureds will be
determined largely by the same set of factors.

Advantages of Class rating

Simple to apply.
Premium quotations can be quickly obtained.
Ideal for personal lines market.

Class rating is widely used in:

Home owner’s insurance
Private passenger auto insurance
Workers compensation
Life and health insurance, etc.

Methods of Class Rating

Pure Premium Method

Loss Ratio Method

Pure Premium Method

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 The pure premium can be determined by dividing the amount of incurred losses and loss
adjustment expenses by the number of exposure units.

First step:
Pure premium =
Incurred losses and loss adjustment expenses
Number of exposure units

Final step:
Gross Rate = Pure Premium
1 – Expense Ratio
given underwriting class generate incurred losses and loss adjustment
expenses of Rs.30 million over a one year period. Expenses ratio
expected to be 40%.
First step:
Pure premium =
Incurred losses and loss adjustment expenses/
Number of exposure units
= 30,000,000 = Rs. 60
500,000
Final step:
Gross Rate = Pure Premium
1 – Expense Ratio

= Rs. 60 / = Rs. 100

1- 0.40

Loss Ratio Method

Under the loss ratio method, the actual loss ratio compared with the expected loss ratio,
and the rate is adjusted accordingly.
The actual loss ratio is the ratio of incurred losses and lossadjustment expenses to earned
premiums.
The expected loss ratio is the percentage of the premiums that is expected to be used to
pay losses.
Rate Change = A – E /E where A= Actual loss ratio
E = Expected loss ratio

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Illustration
A line of insurance has incurred losses and lossadjustment expenses in the amount of
Rs.800,000 and earned premiums are Rs.1 million. The actual loss ratio is 80%. The
expected loss rate to be 70%. Calculate the rate.

Illustration
A line of insurance has incurred losses and lossadjustment expenses in the amount of
Rs.800,000 and
earned premiums are Rs.1 million. The actual loss
ratio is 80%. The expected loss rate to be 70%.
Calculate the rate.
Rate Change = A – E /E where A= Actual loss ratio
E = Expected loss ratio
= 0.80 – 0.70/0.70
= 0.143 or 14.3%

Merit Rating
Merit rating is a rating plan by which class rates (manual rates) are adjusted upward and
downward based on individual loss experience.
Merit rating is based on the assumption that the loss experience of a particular insured will
differ substantially from the loss experience of other insureds.
Thus class rates are modified upward and downward
depending on individual loss experience.

Merit rating - Types

1. Schedule rating
2. Experience rating
3. Retrospective rating
.
Schedule rating
Under a schedule rating plan, each exposure is individually rated. A basis rate is determined
for each exposure, which is then modified by debits or credits for undesirable or desirable
physical features.

Experience rating

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Under experience rating , the class or manual rate is adjusted upward or downward based on
past loss experience.
Insured’s past loss experience is used to determine the premium for the next policy period.

Retrospective rating
Under a retrospective rating plan, the insured’s loss experience during the current policy
period determines the actual premium paid for that period.

Under this rating plan, a provisional premium is paid at the beginning of the policy period.
At the end of the period, a final premium is calculated based on actual losses that occur
during the policy period.

LIFE INSURANCE PRODUCT DESIGN

“Different people want different benefits and different mixes of benefits .” Philip Kotler
What is a product ?
“ A product is anything that can be offered to a market for attention, acquisition , use or
consumption and that might satisfy a need or want .” Philip Kotler
Introduction
Companies may possess variety product mix
 Half of profits of all US Fortune companies
 came from products that did not exist ten years ago. Companies introduce new products to
tap
 existing clients and explore new segments

Why is there a need for new products ?

Changes in tastes of customers
 Intense competition
 Change in economic/social environment
 Increase in purchasing power
 Failure of old products/ recently launched
 products - actual product may not have been properly designed, incorrectly positioned,
poorly advertised, greater competition.

Insurance products

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 Are described as UNSOUGHT consumer goods by Kotler.
“ There are consumer goods that a customer does not know or knows about but does not
normally think of buying. Classic examples are life insurance.”
Unsought goods require lot of advertising, personal selling and marketing efforts.
Life insurance is seldom bought, always sold .
Life Insurance Products
1. All products require approval of IRDA beforelaunch, designed by actuaries.
2. Individual (including pension ) and group products
3. Products may be packaged/ straight-jacketed (“take it or leave it “) - could work
only in monopoly environment
4. Non-packaged -flexibility –with riders/add-ons -available with competition by
private players
5. One single product cannot suit all customers
6. Indian consumer is curious and demanding

Features of any life insurance product

 Who can be insured ?
 What can be the sum assured ?
 Under what events would SA be payable ?
 How/when would the SA be payable ?
 Term of the policy – minimax
 Age at entry
 Premium payment modes
 Any additional benefits like riders
 Conditions/exclusions under each policy

Basic elements of life products

 Life insurance business based on two basic instincts – fear and greed
 Term insurance takes care of fear of death
 Pure endowment fulfills the greed for money
 TI & PE are basic elements in every life insurance plan
 Called the basic building blocks in all LI product design. Every company has
different products to suit the need of every customer.
 PE (savings only) seldom issued by insurance companies as a separate policy
 TI has always been one of the product range ofeach LI company

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 A TI policy is a contract that provides life cover for a limited number of years, the
face value of the policy being payable only when death occurs and nothing in case of
survival

Features of term insurance

 Can be issued for a short period of short, fixedterms.
 Most important feature is it’s low cost –high value.
 Suitable for budget-conscious individuals who are looking for family protection
against financial liabilities like loan, loss of income
 Employers can cover life of employees
 Best form of collateral security against housing/education loan
 No risk coverage beyond specified term
 Conditions/flexibility may vary between companies
 Unsuitable for those interested in maturitybenefits, except premium-back cases
 May have renewable or convertible features
 Some with fixed terms of 5-10 years have built-in automatic renewal feature,
whereby at end of each fixed period, automatic renewal takes place. Premium increases with
each renewal.
 Restrictions may be placed by each company onthe number of such
renewals/maximum age for such renewals.
 Convertible feature allows policy owner to have the option to exchange his term
policy for a permanent policy, viz Whole life or Endowment policy without having to
produce further evidence of insurability.
 Good for young people fresh into careers.

Endowment Plans
 Combination of PE & TI.
 This plan offers face value plus accumulated bonuses on maturity & death.
 May have single or regular premium paying modes
 Several companies may offer choice of riders likeAB/PDB
 Suitable when life cover along with medium termto long term savings needed.
 Not suitable for those looking for flexibility to meet future lifestyle changes
 Income/occupation may prevent policyholder from taking this plan.
 Loans can be taken.
 PH wants guaranteed MC/DC

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 Interest sensitive product - life insurance products give low returns & due to
inflation, money value gets reduced long –term.
 Insurers try to add additional benefits like loyaltY / guaranteed additions.
 Allowing periodic returns of a portion of face value – money back plans - risk ,
growth, liquidity. Endowment plans allow people to SAVE, building a corpus for old age.
 EI is decreasing TI & increasing investment (saving accumulation ).
 Traditional & unit-linked plans offered.

Money back plans

 Features of risk , growth & liquidity
 Periodical cash outflow to PH
 No loan granted under this plan Suitable for those who need periodic cash flow
tomeet expenses, investments
 Premium higher than regular endowment plan

Whole Life plans

 Provides protection throughout life
 Payment on death is certainty in contrast to TI.
 An excellent way to give person’s family financial protection throughout life and
help them after his death.
 An estate planning tool, tax-free returns
 Ongoing & future family expenses

Types of whole life plans

 Ordinary whole life - plain vanilla policies.
 Insured pays premium lifelong depending on his survival/death
 Certain maximum age fixed, treating as maturity claim if survival occurs.
 Convertible whole life -option to convert intoendowment after, say, 5 years. Helpful
to people who need higher insurance , but temporarily cannot afford endowment plan

Children’s Plans
 Parent or guardian is propose
 Risk on life of child begins after child attains a specified age.
 If age at commencement is 6 and specified age is 15, the gap of 9 years is
deferrment period.

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 Date at which risk begins is deferred date.
 No insurance cover during deferrment period – if child dies, the premiums are
refunded.
 Risk begins automatically on deferred date without any medical test.
 When risk commences , premium is low .
 Title automatically passes to child on attaining
 Process called vesting.
 After vesting, policy becomes a contract between insurer and insured person.
 Vesting cannot be less than 18.
 Can be market-linked and traditional
 Benefits for the child like premium waiver and payment of instalment claim in case
of death of proposer – useful for continuing education/expenses

Rural insurance
 Several companies have primarily microinsuranceterm plans with refund of premia
on survival.
 Microinsurance (life) is protection of poor, rural people and their families against
3Ds.
 Microinsurance also deals with health and general insurance for the rural consumer

UNIT-LINKED INSURANCE PLANS

 Combination of insurance & investment of choice
 PH gets benefits from markets without keeping track of market movements or
monitoring his investment portfolio
 Ulips balance risk & return, investing premia in a variety of funds –
debt/equity/balanced
 Amount invested is expressed in units.
 Based on fund value, value of units vary.
 Value of plan directly linked to value of fund.
 On death, prior to maturity, PH paid SA or value of units whichever is greater

UNITS
 Unit prices calculated regularly for each fund

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 UP = Total market value of assets plus current assets less current provisions / Total
number of units on issue
 Unit account can be enhanced by top-up premium
 Switches from funds are allowed
 Full value of unit account paid on maturity.

Defining General Insurance

General insurance or non-life insurance policies, including automobile and homeowners
policies, provide payments depending on the loss from a particular financial event.
General insurance typically comprises any insurance that is not determined to be life
insurance.
It is called property and casualty insurance in the U.S. and Non-Life Insurance in
Continental Europe.

Classification
Commercial lines:
products are usually designed for relatively small legal entities. These would include
workers' comp (employers liability), public liability, product liability, commercial fleet and
other general insurance products sold in a relatively standard fashion to many organizations.
There are many companies that supply comprehensive commercial insurance packages for a
wide range of different industries, including shops, restaurants and hotels.

Personal lines:
products are designed to be sold in large quantities. This would include autos (private car),
homeowners (household), pet insurance, creditor insurance and others.

Principles of Insurance

Utmost Good Faith

Both the parties i.e. the insured and the insurer should a good faith towards each other.
The insurer must provide the insured complete ,correct and clear information of subject
matter.
The insurer must provide the insured complete ,correct and clear information regarding
terms and conditions of the contract.
This principle is applicable to all contracts of insurance i.e. life, fire and marine insurance

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insurable Interest
The insured must have insurable interest in the subject matter of insurance.
In life insurance it refers to the life insured.
In marine insurance it is enough if the insurable interest exits only at the time of occurrence
of the loss
In fire and general insurance it must be present at the time of taking policy and also at the
time of the occurrence of loss.
The owner of the party is said to have insurable interest as long as he is the owner of the it.
It is applicable to all contracts of insurance.

Principle of Indemnity
Indemnity means a guarantee or assurance to put the insured in the same position in which
he was immediately prior to the happening of the uncertain event. The insurer undertakes to
make good the loss.
It is applicable to fire ,marine and other general insurance.
Under this the insurer agrees to compensate the insured for the actual loss suffered.

Principle of Contribution
The principle is a corollary of the principle of indemnity.
It is applicable to all contracts of indemnity.
Under this principle the insured can claim the compensation only to the extent of actual
loss either from any one insurer or all the insurers.

Principle of Subrogation
As per this principle after the insured is compensated for the loss due to damage to property
insured , then the right of ownership of such property passes on to the insurer.
This principle is corollary of the principle of indemnity and is applicable to all contracts
of indemnity

Principle of Loss of Minimization

Under this principle it is the duty of the insured to take all possible steps to minimize the loss
to the insured property on the happening of uncertain event.

Principle of ‘Causa Proxima’

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 The loss of insured property can be caused by more than one cause in succession to
another.
The property may be insured against some causes and not against all causes.
In such an instance, the proximate cause or nearest cause of loss is to be found out.
If the proximate cause is the one which is insured against ,the insurance company is bound
to pay the compensation and vice versa.

Types of General Insurance

Main types of general insurance are:
 Fire
 Health
 Marine
 Motor Vehicle

Fire Insurance
Fire insurance is a form of property insurance which protects people from the costs incurred
by fires. When a structure is covered by fire insurance, the insurance policy will pay out in
the event that the structure is damaged or destroyed by fire.

Types of Fire Insurance Policies

Specific policy: In this type of policy, the insurance company is liable to pay a sum, which
may be less than the property’s real value. The insured is called to bear a part of the loss, as
the actual value of the property is not considered in deciding the amount of indemnity.

Comprehensive policy: Known as “all-in-one” policy, the insurance company indemnifies

the policyholder for loss arising out of fire, burglary, theft and third party risks. In this type
of policy, the policyholder also gets paid for loss of profits incurred, due to fire, till the time
the business remains shut.

Valued policy: In this type of policy, the value of the commodity is already set and actual
loss is not taken into consideration. The policy follows a standard contract of indemnity,
wherein the policyholder gets paid a specific amount of indemnity, without considering the
actual loss.

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Floating policy: This type of policy is subject to average clause and the extent of coverage
expands to different properties, belonging to the policyholder, under the same contract and
one premium. The floating policy also provides protection of goods kept at two different
stores.

Replacement or Re-instatement policy: As per replacement or reinstatement policy, the

insurance company instead of paying the policyholder the amount of indemnity in cash,
replaces the damaged property/commodity with a new one.

Fire Insurance Claim Procedure

Individuals/corporate must inform insurer as early as possible , in no case later than
24 hours.
Provide relevant information to the surveyor/claim representative appointed by the
insurer.
The surveyor then analyzes the extent/ value of loss or damage.
The claim process takes anywhere between one to three weeks.

Documents Required
True copy of the policy along with schedule
Report of fire brigade
Claim Form
Photographs
Past claims experience

Need of Fire Insurance

Fire insurance is important because a disaster can occur at any time. There could be
many factors behind a fire, for example arson, natural elements, faulty wiring, etc.
Some facts that stress the importance of fire insurance include:
Fire contributes to the maximum number of deaths occurring in America
due to natural disasters.
Eight out of ten fire deaths take place at home.
A residential fire takes place after every 77 seconds.
The major reason for a residential fire is unattended cooking.

Fire Insurance in India

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Fire insurance business in India is governed by the All India Fire Tariff that lays
down the terms of coverage, the premium rates and the conditions of the Fire Policy.
The fire insurance policy has been renamed as Standard Fire and Special Perils
Policy. The risks covered are as follows:
Dwellings, Offices, Shops, Hospitals (Located outside the compounds of
industrial/manufacturing risks) Industrial / Manufacturing Risks Utilities located
outside industrial/manufacturing risks Machinery and Accessories Storage Risks
outside the compound of industrial risks Tank farms / Gas holders located outside
the compound of industrial risks

Perils Covered: Cause of Loss Fire Lightning Explosion/Implosion Aircraft

damage Riot, Strike Terrorism Storm, Flood, inundation Impact damage
Subsidence, landslide Bursting or overflowing of tanks Missile Testing Operations
Bush fire etc.
Exclusions:
Loss or damage caused by war, civil war and kindered perils Loss or
damage caused by nuclear activity
Loss or damage to the stocks in cold storage caused by change in
temperature
Loss or damage due to over-running of electric and/ or
electronic machines
Claims: In the event of a fire loss covered under the fire insurance policy, the
Insured shall immediately give notice there of to the insurance company. Within
15 days of the occurrence of such loss the Insured should submit a claim in
writing giving the details of damages and their estimated values. Details of other
insurances on the same property should also be declared.

Indian Companies Offering FI

ICICI Lombard General Insurance (Pvt.)
United India Insurance (Govt.)
New India Insurance (Govt.)
Bajaj Allianz Insurance (Pvt.)
Oriental Insurance (Govt.)
Tata-AIG General Insurance (Pvt.)

Health Insurance

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Health insurance, like other forms of insurance, is a form of collectivism by means
of which people collectively pool their risk, in this case the risk of incurring
medical expenses.
Importance of Health
Rising medical costs
Sharing of health related risk
uncertain hospital bills
Expensive/quality health care services
Money value – Sick Vs Healthy
Family health insurance
Tax benefit
Productivity of workforce
Removes some of the burden from the state
Keeping pace with the customer needs while achieving profitability

Initiatives of IRDA

Committee to formulate regulations

Pure health insurance products
Allowing the formation of an stand alone health insurance
company
Standalone health insurance companies
Renewability
Senior citizens
Impediments in Health Insurance
Lack of Data
Moral Hazard/Adverse Selection
Complex nature of the product
Medical Inflation
New treatments
Unnecessary treatments
Difficulty in pricing
Government provision of health care
Long term nature
Changing life style
Mis-selling/fraud

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 Efficient training of sales force

Types of Health Insurance Plans

Individual health plan
Family floater plan
Senior Citizens’ plan
Critical illness plan
Daily hospital cash and
Unit-linked health plan (ULHP).
Individual Health Plans
Largely, an individual health insurance plan (IHIP), or ‘mediclaim’, would cover
expenses if you are hospitalised for at least 24 hours.
These plans are indemnity policies, that is, they reimburse the actual expenses
incurred up to the amount of the cover that you buy.
Some of the expenses that are covered are room rent, doctor’s fees,
anaesthetist’s fees, cost of blood and oxygen, and operation theatre charges.

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Family Floater Plans
This is a fairly new entrant in the health insurance firmament.
It takes advantage of the fact that the possibility of all members of a family falling
ill at the same time or within the same year is low.
Under a family floater (FF) health plan, the entire sum insured can be availed
by any or all members and is not restricted to one individual only as is the
case in an individual health plan.
Let’s look at an example. Say, a family of four has individual covers of Rs 1 lakh
each. If the cost of treating one person crosses Rs 1 lakh, then the rest has to
be borne by the family out of its own money. If, however, the entire family
is insured for Rs 4 lakh through a floater policy, then any of the members will
be covered for that amount in any year. To the extent of the annual cover, any
number of members can avail the money.

Senior Citizens’ Plans

Insurance is considered a form of long-term savings for senior citizens.

This money provides financial stability and also helps them in times of need.
Medical insurance enables senior citizens to pay for health checkups, emergency
medical costs and long-term treatment. The income tax benefit on insurance
premiums is up to Rs. 15,000 under Section 80 D of the Income Tax Act, as on
March 31, 2007. Medical insurance is provided through several private
insurance companies and four public sector general insurance companies.
These are:
National Insurance
Company
Oriental Insurance
Company
New India Assurance
United India Insurance Company

Senior Citizens’ Plans

The National Insurance Company offers the Varistha Mediclaim Policy
for senior citizens. This policy covers hospitalization and domiciliary
hospitalization expenses under Section I as well as expenses for treatment

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 of critical illnesses, if opted for, under Section II. Diseases covered under
critical illnesses are coronary artery surgery, cancer, renal failure, stroke, multiple
sclerosis and major organ transplants. Paralysis and blindness are covered at
extra premium.
Oriental Insurance Company provides a Comprehensive Health Insurance
Scheme, a Group Insurance and an Individual Mediclaim Policy. These policies
pay for hospitalization or domiciliary hospitalization of the insured in
case of a sudden illness, an accident or surgery. These conditions should
have arisen during the policy period
Critical Illness Plans
A Critical Illness plan means to insure against the risk of serious illness. It
will give the same security of knowing that a guaranteed cash sum will be paid
if the unexpected happens and one is diagnosed with a critical illness.
The purpose of a critical illness plan is to let you put aside a small regular
amount now, as an insurance against all this happening.
Bajaj Allianz, in its efforts to provide a customer centric solution is offering
an insurance policy to cover to some of these critical illnesses like Cancer
Coronary Artery bypass surgery First Heart attack Kidney Failure Multiple
sclerosis Major organ transplant Stroke Arota graft surgery Paralysis Primary
Pulmonary Arterial Hypertension.
Daily Hospital Cash
Expense benefit is paid on per day basis after hospitalization (most plans mandate
at least 48 hours of hospitalization).
The pre-decided daily benefit amount is paid in full, irrespective of the actual
expenses.
For example, a person buys a DHC plan with a limit of Rs 2,000 per day. He gets
hospitalised for 7 days and the total bill is Rs 35,000. He would be reimbursed Rs
14,000 (2,000x7). If the bill is Rs 8,000, he would still be reimbursed Rs 14,000.
Unit-linked health plan (ULHP)
 All ULHPs offer one or more combination of the other benefits (forwhich risk
premium is deducted from fund value). Also, charges such as premium allocation
charge and policyadministration charge are deducted from the fund value.
 LIC has launched Health Plus plan, a unique long term healthinsurance plan that combines
health insurance covers for theentire family (husband, wife and the children) – Hospital
CashBenefit (HCB) and Major Surgical Benefit (MSB) along with a ULIPcomponent

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(investment in the form of Units) that is specificallydesigned to meet domiciliary treatment
(DTB) related expenses forthe insured members.

Voluntary health insurance schemes

In private insurance, buyers are willing to pay premium to an insurance
company that pools similar risks and insures them for health related expenses.
The main distinction is that the premiums are set at a level, which are based on
assessment of risk status of the consumer (or of the group of employees) and
the level of benefits provided, rather than as a proportion of consumer’s income.
In the public sector, the General Insurance Corporation (GIC) and its four
subsidiary companies (National Insurance Corporation, New India Assurance
Company, Oriental Insurance Company and United Insurance Company) provide
voluntary insurance schemes.
The most popular health insurance cover offered by GIC is
Mediclaim policy.
Mediclaim policy: It was introduced in 1986. It reimburses the
hospitalization expenses owing to illness or injury suffered by the insured, whether
the hospitalization is domiciliary or otherwise.
Some of the various other voluntary health insurance schemes available in
the market are :- Asha deep plan II , Jeevan Asha plan II, Jan Arogya policy,
Raja Rajeswari policy, Overseas Mediclaim policy, Cancer Insurance policy,
Bhavishya Arogya policy, Dreaded disease policy, Health Guard, Critical illness
policy, Group Health insurance policy, Shakti Shield etc.

Mandatory health insurance schemes

Employer State Insurance Scheme (ESI)

Enacted in 1948, the employers’ state insurance (ESI) Act was the first major
legislation on social security in India.

The scheme applies to power using factories employing 10 persons or more

and non-power & other specified establishments employing 20 persons or
more.

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 It covers employees and the dependents against loss of wages due to sickness,
maternity, disability and death due to employment injury. It also covers funeral
expenses and rehabilitation allowance. Medical care comprises outpatient care,
hospitalization, medicines and specialist care.

These services are provided through network of ESIS facilities, public

care centers, non-governmental organizations (NGOs) and empanelled private
practitioners.

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Mandatory health insurance schemes

Central Government Health Insurance Scheme (CGHS)

Established in 1954, the CGHS covers employees and retirees of the
central government and certain autonomous and semi autonomous and
semi-government organizations.
It also covers Members of Parliament, Governors, accredited
journalists and members of general public in some specified areas.
Benefits under the scheme include medical care, home visits/care, free medicines
and diagnostic services.
These services are provided through public facilities with some
specialized treatment (with reimbursement ceiling
Most of the expenditure is met by the central government as only 12% is the
share of contribution.

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Mandatory health insurance schemes

Universal Health Insurance Scheme (UHIS)

For providing financial risk protection to the poor, the government announced UHIS in
2003.
Under this scheme, for a premium of Rs. 165 per year per person, Rs.248 for a family of
five and Rs.330 for a family of seven , health care for sum assured of Rs. 30000/- was provided.
This scheme has been made eligible for below poverty line families only. T
o make the scheme more saleable, the insurance companies provided for a
floater clause that made any member of family eligible as against mediclaim policy
which is for an individual member.

Insurance offered by NGOs

Insurance offered by NGOs/Community based schemes are typically targeted at poorer
population living in communities. Such schemes are generally run by charitable trusts or non-
governmental organizations (NGOs).
In these schemes the members prepay a set amount each year for specified services. The
premia are usually flat rate (not income related) and therefore not progressive.
The benefits offered are mainly in terms of preventive care, though ambulatory and
inpatient care is also covered.
Such schemes tend to be financed through patient collection, government grants
and donations.
Some of the popular Community Based Health Insurance schemes are: - Self-Employed
Women’s Association (SEWA), Tribuvandas Foundation (TF), The Mullur Milk Co-operative,
Sewagram, Action for Community Organization, Rehabilitation and Development
(ACCORD), Voluntary Health Services (VHS) etc.

Employer based schemes

Employers in both public and private sector offers employer based insurance schemes
through their own employer.
These facilities are by way of lump sum payments, reimbursement of employees’ health
expenditure for out patient care and hospitalization, fixed medical allowance or
covering them under the group health insurance schemes.
The Railways, Defense and Security forces, Plantation sector and Mining sector run
their own health services for employees and their families.

Marine Insurance

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Marine Insurance covers the loss or damage of ships, cargo, terminals, and any transport or
cargo by which property is transferred, acquired, or held between the points of origin and final
destination.

Two Broad Categories

Ocean marine insurance
Inland marine insurance

Ocean Marine Insurance

Hull
Cargo
Freight
Protection and indemnity insurance

Inland Marine Insurance

Extension of Ocean marine insurance
Domestic goods in transit
Property held by Bailees
Mobile equipment and property
Block Policies- “all-risks” basis
Means of transport and communication

Cargo Insurance
Covers the loss to the shipper if the goods are damaged or lost
Policy can be single or open cargo policy
Salvage loss
Follows forced sale of badly damaged cargo

Freight Insurance
Insures the profit made by a ship owners out of ships used to carry cargo, both their own and
others
Loss occurs when cargo is not deliverable

Liability Insurance
Covers the property damage or bodily injury to third party
Damage caused by the ship to docks, harbor installation, fines, penalties, injury to
crew members, etc

Major Types of Policy

Time policy
Voyage policy
Mixed policy
Open policy

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Time Policy
A time policy is one that runs for a period of time usually not exceeding 12
months.
In using a time policy, the most important question is whether the loss occurred at a time in
which the policy was running because sometimes it is difficult to prove in case where it is
alleged that the conditions giving rise to the loss (e.g. a hole in the ship) occurred during the
policy, although the final consequence (the foundering of the vessel) occurred afterwards.

Voyage Policy
This is a policy that operates for the period of the voyage.
For cargo, the cover is from warehouse to warehouse.
The policy will not apply if the actual voyage and/or ports are different from those
in the policy.

Mixed Policy
This is a policy that covers the subject matter for the voyage within a time period.
It is used to cover the cargo from warehouse to warehouse with a time limit.
The cargo has to be warehoused within 60 days after discharge or the policy will no longer
cover the cargo.

Open Policy
This is an arrangement in which terms such as types of risks to be covered, validity of
the insurance contract, rate, premium, maximum value of each shipment and
geographical limits, etc are worked out when the contract is signed.
Each shipment is covered once the assured declares the details. The assured may be
authorized to issue against payment a pre-printed insurance certificate which is valid
after completion of shipment details and his signature for documentation purposes.
The insurance certificate is pre signed by the insurer. If the contract is effective only for a
specified period, a clause of termination should be included.

Defining Auto Insurance

Auto insurance (also known as vehicle insurance, car insurance, or motor insurance) is insurance
purchased for cars, trucks, and other vehicles. Its primary use is to provide protection against
losses incurred as a result of traffic accidents and against liability that could be incurred in an
accident.

Auto Insurance Coverage

Auto insurance provides property, liability and medical coverage:
Property coverage pays for damage to or theft of the car.
Liability coverage pays for the legal responsibility to others for bodily injury or property
damage.
Medical coverage pays for the cost of treating injuries, rehabilitation and
sometimes lost wages and funeral expenses

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Types of Auto Insurance in India
There are different types of Auto Insurance in India :
Private car insurance: It is the fastest growing sector as it is compulsory
for all the new cars. The amount of premium depends on the make and value of the car, state
where the car is registered and the year of manufacture.
Two wheeler insurance: It covers accidental insurance for the drivers of the vehicle.
The amount of premium depends on the current showroom price multiplied by the
depreciation rate fixed by the Tariff Advisory Committee at the time of the beginning of policy
period.
Commercial vehicle insurance: It provides cover for all the vehicles which are not
used for personal purposes, like the Trucks and HMVs. The amount of premium depends
on the showroom price of the vehicle at the commencement of the insurance period,
make of the vehicle and the place of registration of the vehicle.

Indian Companies Offering AI

HSBC India - Auto Secure
Bajaj Allianz - Bajaj Allianz's Motor Insurance
ICICI Lombard - Motor Plans, Two Wheeler Package Policy
United India Insurance Co. - Motor Package and Liability Only Policies
The New India Assurance Co. - Motor Policy

UNDERWRITING PROCEDURES
1.2.1 Quotations It is very common, in several classes of general insurance, for a prospective insured
or his representative (usually an insurance broker) to seek information about the 1/8 terms the insurer
might be prepared to offer, without any commitment on the part of the prospective insured. Such
information is obtained in the form of a quotation, which will consist of one or more of the following
features:
(a) it may be in writing or verbal;
(b) it may concern the envisaged premium only, or refer to other contract terms as well;
(c) as a quotation, it will normally be interpreted in law as representing a formal offer from the insurer
(with proposal forms generally, the completed form is usually the offer, from the proposer);
(d) if the insurer does not wish to be formally bound by a quotation, he must indicate appropriately,
e.g. by saying that the quotation is for illustration purposes only (or similar qualifying remarks), or
make it subject to certain other conditions (satisfactory proposal etc.);
(e) if a proposer is seeking information about terms, he or his representative, could mark his
completed proposal form with words such as "for quotation purposes only". This means that the
completed form is not the formal offer in the proposed contract;
(f) the quotation may be a relatively minor "price enquiry" for a personal insurance, or it may concern a
very formal major contract issue (e.g. the insurance of huge developments, such as the airport and/or
ferry terminal contracts). The latter effectively become sophisticated tenders for the insurance
package concerned, requiring great expertise and a considerable effort to formulate. Almost certainly,

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insurance brokers will be much involved with such quotations, in requesting them and often providing
considerable expertise and help in their formation.

1.2.2 Proposal Forms

These we have already considered, from various perspectives. As part of the underwriting process, we
may note (or note again):
(a) only source of underwriting material: with relatively minor risks, the proposal form is the only
enquiry made, and risks may be accepted or otherwise solely on its answers;
(b) the "trigger" for other enquiries: answers or deductions from the information supplied on proposal
forms may indicate that further enquiries need to be made. These may be additional questions to the
proposer, or more formal enquiries through surveyors or other professional experts;
(c) basis of the contract: the information supplied on the proposal is the main (and sometimes the
only) information available to the underwriter, and on which he bases his acceptance and terms. All
proposal forms contain a declaration which 1/9 will bring this face to the proposer's attention, and may
well be in the form of a warranty, which has considerable legal significance with the contract;
(d) a "permanent" document: because the completed proposal has a fundamental role with the
contract, it should not be regarded as a temporary document. Because of its importance, some
insurers may include a photocopy of the completed proposal when sending out the policy document.
This will be a reminder to the insured of the information he supplied, which formed the basis of the
insurer's undertakings;
(e) supplementary information: any experts' reports or other documentation, perhaps arising with (b)
above, must be considered part of the proposal, and this fact should be brought to the proposer's
attention.

1.2.3 Issue of Cover Notes, Policies and Certificates of Insurance

These documents all fulfil roles in the underwriting process. A brief reminder of their respective
functions will be sufficient to identify the roles concerned:
(a) Cover Notes A cover note is a temporary document, effectively constituting a temporary
policy. However, as its name suggests, it does provide cover, i.e. it is not conditional upon a
satisfactory proposal form, to be submitted later. A cover note binds the insurer. The following
features may be noted
(i) primary purpose: is to give documentary evidence to the insured that an
insurance exists. Commonly, cover notes are issued with motor insurance,
when they include a temporary certificate of insurance (see below). This
confirms that insurance as required by law exists. The cover note may then
be used to assist with vehicle registration etc.;
(ii) ii) other functions: motor is not the only class of business where cover notes
may be found. A bank, for example, may require evidence that fire
insurance exists, before it advances an agreed mortgage loan;
(iii) (iii) not "conditional": to repeat what was said above, the document does
provide "cover". However, cover notes frequently have cancellation

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 provisions, so that the insurer may come off cover, after giving appropriate
notice, if this becomes appropriate
(iv) ; (iv) "temporary": again to reinforce previous comment, a cover note is a
convenient way of confirming the insurance immediately, but cover is likely
to be effectively for only say 30 days, or other short period. The intention is
that the policy should replace the cover note, although it is common for
additional (continuation) cover notes to be issued, as necessary;
(v) (v) premium collected: it is normal to collect at least some premium before
1/10 issuing a cover note. This is certainly true with motor cover notes, but
see 1.2.4 regarding other classes of business.
(b) Policies A policy is visible evidence of the invisible contract of insurance. As
previously mentioned, most general insurances are simple contracts, which
technically do not have to be in writing. In practice, a policy is almost invariably
issued. However, issuing the policy is usually the last stage in the underwriting
process, representing as it does the final result of all enquiries, deliberations and
decisions of the underwriter. We shall look in more detail at policy structures in
1.3, but within the underwriting context we may note the following
: (i) evidence of the contract: legally, the correctness of the policy may be
challenged, but the law will assume that its contents represent the intentions of
the parties, unless compelling evidence is produced proving otherwise;
(ii) incorporates other material: the policy will specifically incorporate the proposal
form and any other supplementary documentation etc. as being part of the overall
contract;
(iii) replaces any cover notes: as noted above, cover notes may be considered as
temporary policies. As such, the final policy document replaces them.
(c) Certificates of Insurance Insurance certificates may have differing roles. When issued as a
summary of cover provided under a master policy, as is sometimes the case with travel and
marine cargo insurance, certificates have more or less the same function as cover notes (see
above), except that a separate policy is not subsequently issued
The more usual understanding of an insurance certificate, however, embraces the following
features:

(i) proof of compulsory insurance: found with motor and EC insurances, a

certificate of insurance provides proof to people who need to know (e.g.
police, registration authorities and victims) that insurance as required by
law does exist;
(ii) (ii) unconnected with the policy: a certificate is a totally separate and
permanent document (unlike a cover note). A temporary certificate is
usually incorporated in a cover note, as noted above, but the final
document has a totally distinct function from that of the policy;

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 (iii) (iii) contents and format: a cover note will have an abbreviated summary of
policy cover, but a certificate will not. The latter only confirms the existence
of compulsory insurance. Thus, you cannot tell from a certificate of motor
insurance, for example, whether the policy is 1/11 Comprehensive or Third
Party Risks. Its format is as required under the appropriate Ordinance;
(iv) (iv) why issued: certificates are issued solely because the law requires them.
If a certificate is not issued by an insurer, this constitutes a criminal offence,
for which both the insured and the insurer may be prosecuted. In motor
insurance, the certificate has such a formal importance that it is essential to
recover the document if the policy is cancelled.
1.2.4 Premium
(a) Method of Calculation
The premium represents the insured's consideration in the contract. At any given time, this
may be:
(i) executed consideration, i.e. already paid; or
(ii) (ii) executory consideration, i.e. not yet paid (although the contract may still
be valid, see below)
. As to its method of calculation, within the context of underwriting procedures, individual
comments will be made in respect of different classes of business under Chapter 2 and 3 of
these Notes, but we may also note the following:
(i) Risk classification: with many types of insurance, the risk is classified
according to a particular category, to which pre-calculated premium rates
will apply.
(ii) (ii) Risk discrimination: the word "discrimination" is not politically correct
these days, but the term is of very long standing with insurance
underwriting. It has no sinister implication, but refers merely to
distinguishing the features (good or bad) of individual risks, so that
adjustment up or down to the broad classification premium can be made.
(iii) (iii) Different bases: general insurance has a very wide range of different
products, so it is only to be expected that the premium base will differ
between various classes. Frequently, a designated rate (usually per cent or
per mille) is applied to some factor such as:
(iv) (1) the sum insured;
(v) (2) the annual turnover;
(vi) (3) the annual wageroll; but different classes may have other criteria, as
previously noted. 1/12
(B)Relevance of Premium Payment for Valid Cover
With life insurance, it is almost the invariable practice that cover does not commence until
after the first premium has been received. This is not necessarily the case with non-life
insurance. The subject can be considered under the following aspects: (

85
 i) Commercial Code position: unless the contract terms specify to the contrary,
payment of the premium should be paid punctually by the insured and directly to the
insurer or to another entity explicity designated by the insurer for that purpose. The
initial premium or first installment of the initial premium should be paid on the date
the contract is signed.
If it is impossible for the insurer to issue a debit note on the date stated in the
preceding paragraph, payment of the initial premium or first installment of the initial premium
should be made within 10 days from the date the debit note is issued by the insurer.
Insurers have the obligation to inform the insured in writing, the amount of premium
to be paid and the payment date, at least 8 days before the premium payment due date
Moreover, the consequences of non-payment of premium (i.e. termination of contract) shall
also be notified to the insured. Failure to pay appropriate premium by the insured within the
stipulated period constitutes delay in the payment of premium. The contract will be
automatically terminated 30 days after the expiry of the stipulated payment period. However,
before the expiry of the 30 days, the insurance contract shall remain effective.
(ii) Policy provisions: practice varies with policy wordings. Some (e.g. most fire policies)
strictly provide that cover is conditional upon the premium having been received. Other
policies may have a wording to the effect that the insured 'has paid or agreed to pay' the
premium. The distinction is quite obvious.

1.2.5 Levies
Motor and Marine Guarantee Fund (MMGF) These Notes do not examine the operations of the
MMGF, but by way of reminder it exists to give substance to the intentions of compulsory
motor insurance, in cases where the required insurance is ineffective or does not exist. By
formal agreements with Government, all motor insurers in Macau must belong to the MMGF.
1/13
Funding for any payments made by the MMGF comes from a premium levy, imposed by
insurers on all motor policies they issue. The levy does not belong to the insurer, but must be
passed to the MMGF. 2.5% of all Motor Premiums (after NCB allowances) is collected from the
policyholders and paid into the MMGF
The MMGF is competent to pay compensation for death or bodily injuries resulting from traffic
accidents involving motor vehicles and pleasure vessels subject to compulsory insurance:
a) When the person responsible in unknown or does not benefit from valid or efficient
insurance;
b) In case of bankruptcy of the insurer

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