A LISHBNHC

IC-34
GENERAL INSURANCE
ACKNOWLEDGEMENT
This course has been prepared with the assistance of:
A. N. Kaikini
Dr. S. Kutty
Madhuri Sharma
Dr. George Thomas
Sushila Venkataraman
R. Chandrasekaran

INSURANCE INSTITUTE OF INDIA
G Block, Plot No. C-46,
Bandra Kurla Complex, Bandra (E), Mumbai 400 051.
GENERAL INSURANCE
IC-34
Revised Edition - 2015
ALL RIGHTS RESERVED

This course is the copyright of the Insurance Institute of India, Mumbai. In no
circumstances may any part of the course be reproduced.
Published by: P Venugopal, Secretary-General, Insurance Institute of India, GBlock, Plot C-46, Bandra Kurla Complex, Bandra (E) Mumbai 400 051 and
Printed at
PREFACE
A critical element of financial sector reforms is the development of a pool of
human resources having right skills and expertise in each segment of the
industry to provide quality intermediation to market participants.
Quality intermediation requires personnel working in the industry to:
a) follow a certain code of conduct and
b) have an understanding of business and skills to connect with different
constituents in the market
Accordingly, the Institute has developed the course material for prerecruitment test for general insurance agents in consultation with the industry.
The course material is prepared based on the syllabus approved by IRDA.
In the context of multiplicity of products and practices among insurers, the
study course has adopted a generic treatment of fundamental principles of
insurance, regulatory aspects, selling and marketing, policy documentations,
various products and their coverage, extensions of cover, theory and practice of
premium rating, claims procedures, customer service etc. The focus is on
conceptual knowledge rather than any specific individual approach of insurers.
The study course, thus, provides basic knowledge of insurance that enables
agents to understand and appreciate their professional career in the right
perspective. Needless to say, insurance business operates in a dynamic
environment the agents will have to keep abreast of changes in law and
practice, through personal study and participation in in-house training given by
insurers.
Agents would do well to realize that passing of examination and obtaining the
license in only a beginning and the career of insurance agency is a profoundly
rewarding one, not only in terms of money but in terms of prestige and
satisfaction of having done good to others.
Value-addition is represented by the inclusion of a model questions in the study
course. This will give the students an idea of the format and types of objective
questions that may appear in the examination. The model questions will also
serve the purpose of revision and re-enforcement of knowledge acquired during
the training. Irrespective of varying practices of insurers, the licensing
examination of non-life insurance agents will be based on the contents of this
study course and questions will be framed and answers evaluated accordingly.
We thank IRDA for entrusting this work to III. We acknowledge the efforts made
by the Secretary- General of General Insurance Council in finalizing the syllabus
and reviewing the course content.
The Institute wishes all those who study this course and pass the examination,
very bright careers as insurance agents.
CONTENTS
Chapter
No.
Title
Page No.
Introduction to Insurance
Principles of Insurance
23
Marketing and Selling Insurance
57
Legal and Regulatory Aspects of

Insurance Agency
84
Documentation
113
Theory and Practice of Premium Rating
153
Personal and Retail Insurance
178
Commercial Insurance
194
Health Insurance
I. Introduction To Health Insurance
II. Health Insurance Products
III. Health Insurance Underwriting
IV. Health Insurance Claims
230
251
309
347
10
Claims Procedure
394
11
Customer Service
415
12
Insurance Career Prospects
447
CHAPTER 1
INTRODUCTION TO INSURANCE
Chapter Introduction
This chapter aims to introduce the basics of insurance; how it evolved and how
it operates today. You will also learn how insurance helps in times of
unexpected eventualities and how insurance is an important tool of transfer in
risk management.
Learning Outcomes
A.
B.
C.
D.
E.
Evolution of insurance
Working of insurance
Different approaches to risk management
Cost of risk
Role of insurance in economic development
After studying this chapter, you should be able to:

1. Trace the history of insurance and the evolution of general insurance
industry
2. Demonstrate how insurance works
3. Appraise ways of managing risk
4. Explain the concept of risk
5. Discuss the role of insurance in economic development
IC-34 GENERAL INSURANCE
A. Evolution of insurance
We live in a world of uncertainty. We hear of trains colliding; floods destroying
entire communities; earthquakes that bring grief; young people dying suddenly.
Why do these events make us anxious and afraid?
The reason is simple.
Firstly they are unpredictable; if we can anticipate and predict an event, we
can prepare for it.
Secondly, such unpredictable and untoward events are often a cause of
economic loss and grief.
A community can come to the aid of individuals who are affected by such
events, by having a system of sharing and mutual support.
The idea of insurance took birth thousands of years ago. Yet, the business of
insurance, as we know it today, goes back to just two or three centuries.
History of Insurance
Insurance has been known to exist in some form or other since 3000 BC. Various
civilisations, over the years, have practiced the concept of pooling and dividing
among themselves, all the losses suffered by some members of the community.
Let us take a look at some of the ways in which this concept was applied.
1. Insurance through the ages
a) The Babylonian traders had agreements where they would pay additional
sums to lenders, as a price for writing off the loans, in case a shipment
was lost or stolen. These were called bottomry loans. Under these
agreements, the loan taken against the security of the ship or its goods
had to be repaid only if and when the ship arrived safely after the
voyage, at its destination. Similar practices were prevalent among the
traders from Baruch and Surat sailing in Indian ships to Sri Lanka, Egypt
and Greece.
b) The Greeks had started benevolent societies in the late 7th century AD,
to take care of the funeral and families of members who died. The
Friendly societies of England were similarly constituted.
c) The inhabitants of Rhodes adopted a practice whereby, if some goods
were lost due to jettisoning1 during distress, the owners of goods (even
those who lost nothing) would bear the losses in proportion.
1
Jettisoning means throwing away some of the cargo to reduce weight of the ship and restore balance.
d) Chinese traders in ancient days would keep their goods in different boats
or ships sailing over the treacherous rivers. They assumed that if one of
the boats suffered such a fate, the loss of goods would be only partial
and not total. The loss could be distributed and thereby reduced.
2. Modern commercial insurance
The earliest kind of risks to be addressed through the concept of insurance was
losses due to misadventure at sea what we call marine risk. Marine insurance
was thus the forerunner to other kinds of insurance.
The Great Fire of London in 1666, in which more than 13000 houses were lost,
gave a boost to insurance and the first fire insurance company, called the Fire
Office, was started in 1680.
Lloyds: The origins of insurance business as practiced today, is traced to the
Lloyds Coffee House in London. Traders, who used to gather there, would agree
to share the losses to their goods being carried by ships, due to perils of the
sea. Such losses used to occur because of maritime perils, such as pirates who
robbed on the high seas or bad sea weather spoiling the goods or sinking of the
ship due to perils of the sea.
3. History of insurance in India
Important
a) India
Modern insurance in India began in early 1800 or thereabouts, with agencies of
foreign insurers starting marine insurance business. The first life insurance
company to be set up was an English company, the Oriental Life insurance Co.
Ltd. and the first non-life insurer to be established in India was the Triton
Insurance Co. Ltd. The first Indian insurance company was the Bombay Mutual
Assurance Society Ltd., formed in 1870 in Mumbai. Many other Indian companies
were set up subsequently as a result of the Swadeshi movement at the turn of
century.
In 1912, the Life Insurance Companies Act and the Provident Fund Act were
passed to regulate the insurance business. The Life Insurance Companies Act,
1912 made it compulsory that premium-rate tables and periodical valuation of
companies be certified by an actuary. However, the disparity and discrimination
between Indian and foreign companies continued. The oldest insurance
company in India which still exists is National Insurance Company Ltd., which
was founded in 1906. It is still in business.
b) Nationalisation of life insurance

Life insurance business was nationalised on 1st September 1956 and the Life
Insurance Corporation of India (LIC) was formed. There were 170 companies and
75 provident fund societies doing life insurance business in India at that time.
From 1956 to 1999, the LIC held exclusive rights to do life insurance business in
India.
c) Nationalisation of non-life insurance
With the enactment of General Insurance Business Nationalisation Act (GIBNA)
in 1972, the non-life insurance business was also nationalised and the General
Insurance Corporation of India (GIC) and its four subsidiaries were set up. At
that point of time, 106 insurers in India doing non-life insurance business were
amalgamated with the formation four subsidiaries of the GIC of India.
d) Malhotra Committee and IRDA
In 1993 the Malhotra Committee was setup to explore and recommend changes
for development of the industry including the reintroduction of an element of
competition. The Committee submitted its report in 1994. In 1997 the
Insurance Regulatory Authority (IRA) was established.
The passing of the Insurance Regulatory & Development Act1999 (IRDAI) led to
the formation of Insurance Regulatory and Development Authority of India
(IRDAI) in April 2000 as a statutory regulatory body both for Life and Non- life
insurance industry.
e) Restructuring of GIC
The GIC was converted into a national re-insurer [and the subsidiaries were
restructured as independent companies]. In December, 2000 the Parliament
passed a bill de-linking the four subsidiaries from GIC in July, 2002. These are
National Insurance Co. Ltd.

The Oriental [Fire & General] Insurance Co. Ltd.
The New India Assurance Co. Ltd
United India [Fire & General] Insurance Co. Ltd.
f) Establishment of IRDA
Insurance Regulatory and Development Authority of India (IRDAI) was
established in 2000 by an act of Parliament of 1999 to protect the interests of
holders of insurance policies and to regulate, promote and ensure orderly
growth of the insurance industry.
g) Non-Life insurance industry today

At the time of writing the study material there are 28 insurance companies
registered as General Insurance companies.
i.
General Insurance Corporation of India, a public sector company, is an

insurance company doing exclusively reinsurance business.
ii. Agriculture Insurance Company of India Limited., a public sector company, is

a specialised insurer for risk related to crop insurance/rural insurance.
iii. Export Credit and Guarantee Corporation of India, a public sector company,
is a specialised insurer for risks related to export credit.
iv. There are eight general insurance companies in the public sector while the
remaining 20 general insurance companies are in the private sector.
v. There are four stand alone health Insurance companies, in private sector,
specialised in health insurance.
Test Yourself 1
Which among the following is not a function of insurance?
I.
II.
III.
IV.
Risk mitigation
Risk transfer
Risk tracking
Risk reduction
B. Working of insurance
1. Overview
Modern commerce was founded on the principle of ownership of property. When
an asset loses value [by loss or destruction] due to a certain event, the owner of
the asset suffers an economic loss.
However if a common fund is created from small contributions from many such
owners of similar assets, this amount could be used to compensate the loss
suffered by the unfortunate few.
In simple words, the chance of suffering a certain economic loss and its
consequence could be transferred from one individual to many through the
mechanism of insurance.
Definition
Insurance may thus be defined as sharing of the losses of a few who are
unfortunate to suffer such losses, amongst those exposed to similar uncertain
events / situations.
There is a catch here.
i.
Would people agree to part with their hard earned money to create such
a common fund?
ii. How could they trust that their contributions are actually used for the
desired purpose?
iii. How do they know if they are paying too much or too little?
Obviously someone has to initiate and organise the process and bring members
of the community together for this purpose. That someone is known as an
Insurer who determines the contribution that each individual must make to
the pool and arranges to pay to those who suffer the loss. The insurer must also
win the trust of the individuals and the community.
2. Detail
How it works..
a) An ASSET may be physical [like a car or a building] or it may be nonphysical [like name and goodwill] or it may be personal [like ones eyes,
limbs and other aspect of ones body].
b) The asset may lose its value on the occurrence of a certain event. This
chance of loss is referred to as RISK. The cause of risk event is known as
PERIL.
6
c) There is a principle known as POOLING. This consists of collecting

numerous individual contributions [known as premiums] from various
persons. These persons have similar assets which are exposed to similar
risks.
d) This pool of funds is used to compensate the few who might suffer the
losses as caused by a PERIL.
e) This process of pooling funds and compensating the unlucky few is
carried out through an institution known as the INSURER.
f) The Insurer enters into an insurance CONTRACT with each person who
seeks to participate in the scheme. Each participant is known as the
INSURED
3.
Insurance and Burden of Risk
Burden of risk refers to the costs, losses and disabilities one has to bear as a
result of being exposed to a given loss situation/event.
There are two types of risk burdens that one carries:
Primary
Secondary
a) Primary burden of risk
The primary burden of risk are losses that are actually suffered by
households [and business units], as a result of pure risk events. These losses
are often direct and measurable and can be easily compensated for by
insurance.
Example
When a factory gets destroyed by fire, the actual value of goods damaged or
destroyed can be estimated and the compensation can be paid to the one who
suffers such loss or if an individual undergoes a heart surgery, the medical cost
of the same is known and can be compensated.
In addition there may be some indirect losses. For example the fire may
interrupt business operations and lead to loss of profits which also can be
estimated and the compensation can be paid to the one who suffers such a loss.
Suppose no such event occurs and there is no loss. Does it mean that those
who are exposed to the peril carry no burden? The answer is that apart from
the primary burden, one also carries a secondary burden of risk.
b) Secondary burden of risk

The secondary burden of risk consists of costs and strains that one has to
bear merely from the fact that one is exposed to a loss situation. Even if the
said event does not occur, these burdens have still to be borne. Let us
understand some of these burdens:
Example
Firstly there is physical and mental strain caused by fear and anxiety. The
anxiety may vary from person to person but it is present and can cause stress
and affect a persons wellbeing.
Secondly when one is uncertain about whether a loss would occur or not, the
prudent thing to do would be to set aside a reserve fund to meet such an
eventuality. There is a cost involved in keeping such a fund. For instance, such
funds may be held in a liquid form and yield low returns.
By transferring the risk to an insurer, it becomes possible to enjoy peace of
mind, invest funds that would otherwise have been set aside as a reserve,
and plan ones business more effectively. It is precisely for these reasons
that insurance is needed.
Test Yourself 2
Chance of loss is referred to as _________.
I.
II.
III.
IV.
Luck
Risk
Bad luck
Peril
C. Different approaches to risk management

Another question one may ask is whether insurance is the right solution to all
kinds of risk situations.
The answer is No.
Insurance is only one of the methods by which individuals may seek to transfer
the risks they face to an insurance company. Some of the other methods of
dealing with risks are explained below:
1. Risk avoidance
Controlling risk by avoiding a loss situation is known as Risk avoidance. Thus
one may try to avoid any property, person or activity with which an exposure
may be associated.
Example
One may refuse to bear certain manufacturing risks by contracting out the
manufacturing to someone else or one may not venture outside the house for
the fear of meeting with an accident or may not travel at all for the fear of
falling ill while abroad.
But risk avoidance is a negative way to handle risk. Individual and social
advancements come from activities that require for some risks to be taken. By
avoiding such activities, individuals and society would lose the benefits that
such risk taking activities can provide.
2. Risk retention
One tries to manage the impact of risk and decide to bear the risk and its
effects. This is known as self insurance.
Example
A business house may decide based on experience that it has the capacity to
bear small losses upto certain limit and decide to retain the risk with itself.
3. Risk reduction and control
It is a more practical and relevant approach than risk avoidance. It means taking
steps to lower the chance of occurrence of a loss and/or to reduce severity of
its impact, if such loss should occur.
The measures to reduce chance of occurrence are known as Loss Prevention

measures while the measures to reduce degree of loss are known as Loss
Reduction measures.
Risk reduction which involves reducing the frequency and/or size of losses
through one or more of:a) Education and training, such as holding regular fire drills for
employees, or ensuring adequate training of drivers, forklift operators,
and so on. An example could be, educating school going children to avoid
junk food.
b) Environmental changes, such as improving physical conditions, e.g.
better locks on doors, bars or shutters on windows, installing burglar or
fire alarms. The state can take measures to curb the pollution and noise
levels to improve the health status of its people. Regular spraying of
Malaria medicine helps in prevention of outbreak of the disease.
c) Changes to dangerous or hazardous operations while using machinery,
equipment and in the performance of other tasks is a way to reduce the
probability of a risk. For example, leading a healthy lifestyle and eating
properly at right time helps in reducing the incidence of falling ill.
d) Separation, spreading out various items of property into varied locations
rather than concentrating them at one location, is a method to control
risks. The idea is, if a mishap were to occur in one location, its impact
could be reduced by not keeping everything at that one place. For
example, corporate entities could carry out free health check up camps
for its employees for early signs of onset of any ailment thus reducing
the risk of high claims ratio. One could reduce the loss of inventory by
storing it in different warehouses. Even if one were to be destroyed, the
impact would be reduced considerably.
4. Risk financing
This refers to the provision of funds to meet losses that may occur.
a) Risk retention through self financing involves paying for any losses as
they occur. In this process the firm assumes and finances its own risk,
either through its own or borrowed funds. This is known as self
insurance. The firm may also engage in various risk reduction methods to
make the loss impact small enough to be retained by the firm.
b) Risk transfer is an alternative to risk retention. Risk transfer involves
transferring the responsibility for losses to another party. Here the losses
that may arise as a result of a fortuitous event [or peril] are transferred
to another entity.
10
Insurance is one of the major forms of risk transfer, and it permits

uncertainty to be replaced by certainty through insurance indemnity.
When a firm is part of a group, the risk may be transferred to the
parent group which would then finance the losses.
Thus, insurance is only one of the methods of risk transfer.
Test Yourself 3
Insurance deductible is an example of ___________.
I.
II.
III.
IV.
Risk mitigation
Risk avoidance
Risk transfer
Risk retention
11
D. Cost of risk
1. Concept
Note that when we speak about a risk, we are not referring to a loss that has
actually been suffered but a loss that is likely to occur. It is thus an expected
loss. The cost of this expected loss [which is the same as the cost of the risk] is
the product of two factors
The probability that the peril being insured against may happen, leading
to the loss
The impact or the amount of loss that may be suffered as a result

The cost of risk would increase in direct proportion with both probability and
amount of loss. However, if the amount of loss is very high, and the probability
of its occurrence is small, the cost of the risk would be low.
When deciding whether to insure or not, one needs to weigh the cost of
transferring the risk against the cost of bearing the loss that may arise, oneself.
The cost of transferring the risk is the insurance premium driven by the two
factors mentioned in the previous paragraph.
The best situations for insurance would be where the probability is very low but
the loss impact could be very high. In such instances, the cost of transferring
the risk through its insurance [the premium] would be much lower while the
cost of bearing it on oneself would be very high.
2. Cost of risk - Considerations
a) Dont risk a lot for a little:
A reasonable relationship must exist between the cost of transferring the
risk and the value derived.
Example
It would make no sense to insure an ordinary ball pen.
b) Dont risk more than you can afford to lose
If the loss that can arise as a result of an event is so large that it can lead to
a situation that is near bankruptcy, retention of the risk would not appear to
be realistic and appropriate
12
Example
What would happen if a large oil refinery were to be destroyed or damaged?
Could a company afford to bear the loss?
c) Consider the likely outcomes of the risk carefully
It is best to insure those assets for which the probability of occurrence
(frequency) of a loss is low but the possible severity (impact), is high.
An agent can easily misinterpret the above statement.
Example
For instance, could one afford to not insure a space satellite?
When the probability of occurrence (frequency) is high, but the severity to the
loss is low:
If the total amount of loss to all occurrences is more than what you can bear,
this risk should be insured.
Test Yourself 4
Cost of risk is determined by ________________.
I.
II.
III.
IV.
Probability only
Impact only
Probability and impact
Timing of risk
13
E. Role of insurance in economic development

Insurance companies play an important role in a countrys economic
development. They are contributing in a significant sense to ensuring that the
wealth of the country is protected and preserved. Some of their contributions
are given below:
Diagram 1: Role of Insurance in Economic Development
1. Pooling of resources
Their investments benefit the society at large. An insurance companys strength
lies in the fact that huge amounts are collected and pooled together in the form
of premiums.
2. Policyholder benefit
These funds are collected and held for the benefit of the policyholders.
Insurance companies need to keep this aspect in mind. All their decisions in
dealing with these funds should be made in ways that benefit the community.
This applies to investments also. That is why successful insurance companies
would not be found investing in speculative ventures .i.e. stocks and shares.
14
3. Capital protection
The system of insurance provides numerous direct and indirect benefits to the
individual, his family, to industry and commerce and to the community and the
nation as a whole. The insured- both individuals and corporate, are directly
benefitted because they are protected from consequences of the loss that may
be caused by an accident or fortuitous event. Insurance, thus, in a sense
protects the capital in industry and releases the capital for further expansion
and development of business and industry.
4. Removal of anxiety
Insurance removes the fear, worry and anxiety associated with ones future and
thus encourages free investment of capital in business enterprises and promotes
efficient use of existing resources. Thus insurance encourages commercial and
industrial development and thereby contributes to a healthy economy and
increased national productivity.
5. Increased creditworthiness
A bank or financial institution may not advance loans on property unless it is
insured against loss or damage by insurable perils. Most of them insist on adding
their name in the policy as co insured so that total loss claims are paid to them
if there is balance loan to be paid back.
6. Sharing of risk expertise
Before acceptance of a risk, insurers arrange survey and inspection of the
property to be insured, by qualified engineers and other experts. They not only
assesses the risk for rating purposes but also suggest and recommend to the
insured, various improvements in the risk, which will attract lower rates of
premium.
7. Foreign exchange
Insurance ranks with export trade, shipping and banking services as earner of
foreign exchange to the country. Indian insurers operate in more than 30
countries. These operations earn foreign exchange and represent invisible
exports.
8. Widespread industry association
Insurers are closely associated with several agencies and institutions engaged in
fire loss prevention, cargo loss prevention, industrial safety and road safety.
15
Information
Insurance and Social Security
It is now recognised that provision of social security is an obligation of the
State. Various laws, passed by the State for this purpose involve use of
insurance, compulsory or voluntary, as a tool for social security. The Employees
State Insurance Act, 1948 provides for Employees State Insurance Corporation to
pay for the expenses of sickness, disablement, maternity and death for the
benefit of industrial employees and their families, who are insured persons. The
scheme operates in certain industrial areas as notified by the Government.
Insurers play an important role in social security schemes sponsored by the
Government. The crop insurance scheme (RKBY) is a measure with considerable
social significance. The scheme benefits not only the insured farmers but also
the community directly and indirectly.
All the rural insurance schemes, operated on a commercial basis, are designed
ultimately to provide social security to the rural families.
Apart from this support to Government schemes, the insurance industry itself
offers on a commercial basis, insurance covers with an ultimate objective of
social security. Examples include Janata Personal Accident Scheme, Jan Arogya
Scheme etc.
Test Yourself 5
How does insurance help in easing access to credit?
I.
II.
III.
IV.
16
Insurer provides free credit

Banks lend easily if an application is backed by insurance
Person who can pay insurance is assumed to be creditworthy
Regulations mandate provision of credit to the insured
Summary
a) Insurance is risk transfer through risk pooling.
b) When persons having similar assets exposed to similar risks contribute into a
common pool of fund it is known as pooling.
c) Risk retention, risk avoidance, risk reduction and control, risk financing are
ways to manage risk.
d) The thumb rules of insurance state that one should risk not more than he
can afford to lose, ensure that the reward is worth the risk and study all
possible outcomes of a risk carefully.
e) Insurance plays an important role in the economic development of a
country.
Key terms
a)
b)
c)
d)
e)
f)
g)
h)
i)
Risk
Pooling
Asset
Burden of risk
Risk avoidance
Risk control
Risk retention
Risk financing
Risk transfer
List of general insurance and standalone health companies

1.
2.
3.
4.
5.
Agriculture Insurance Company

Apollo Munich Health Insurance
Bajaj Allianz General Insurance
Bharti AXA General Insurance
Cholamandalam MS General
Insurance
6. Export Credit Guarantee
Corporation
7. Future General General Insurance
8. HDFC ERGO General Insurance
9. ICICI Lombard General Insurance
10. IFFCO Tokio General Insurance
11. L&T General Insurance
12. Max Bupa Health Insurance
13. National Insurance
14. New India Assurance
15. Oriental Insurance

16. Raheja QBE General Insurance
17. Reliance General
18. Religare Health Insurance
19. Royal Sundaram General Insurance
20. SBI General Insurance
21. Shriram General Insurance
22. Star Health Insurance
23. Tata AIG General Insurance
24. United India Insurance
25. Universal Sompo General Insurance
26. Magma HDI general Insurance
Company Ltd
27. Liberty Videocon General Insurance
Co. Ltd
28. Cigna TTK Health Insurance Co.Ltd
17
Answers to Test Yourself

Answer 1
The correct option is III.
Risk tracking is not a function of insurance.
Answer 2
The correct option is II.
Chance of loss is referred to as risk.
Answer 3
The correct option is IV.
Insurance deductible is an example of risk retention.
Answer 4
Probability and impact of the risk determine the cost of risk.
Answer 5
Banks lend easily if an application is backed by insurance.
Self-Examination Questions
Question 1
Lloyds Coffee House is regarded as the place where insurance started the way it
is practised today. Lloyds is located in __________.
I.
II.
III.
IV.
18
Bangalore
Singapore
London
Dubai
Question 2
Risk transfer through risk pooling is called________.
I.
II.
III.
IV.
Savings
Investments
Insurance
Transfer
Question 3
The measures to reduce chances of occurrence of risk are known as _____.
I.
II.
III.
IV.
Risk retention
Loss prevention
Risk transfer
Risk avoidance
Question 4
By transferring risk to insurer, it becomes possible:
I.
II.
III.
IV.
To enjoy from floods

To enjoy and make money from insurance
To enjoy a fire in the factory
To enjoy peace of mind and plan ones business more effectively
Question 5
Origins of modern insurance business can be traced to________.
I.
II.
III.
IV.
Bottomry
Lloyds
Rhodes
Malhotra Committee
Question 6
In the insurance context risk retention indicates a situation where__________.
I.
II.
III.
IV.
possibility of loss or damage is not there

loss producing event has no value
property is covered by insurance
one decides to bear the risk and its effects
Question 7
Which of the following statement is true?
I. Insurance protects the asset
19
II. Insurance prevents its loss

III. Insurance reduces possibilities of loss
IV. Insurance pays when there is loss of asset
Question 8
Out of 400 houses, each valued at Rs.20, 000, on an average 4 houses get burnt
every year resulting in a combined loss of Rs.80, 000. What should be the annual
contribution of each house owner to make good this loss?
I.
II.
III.
IV.
Rs.100/Rs.200/Rs.80/Rs.400/-
Question 9
Which of the following statements is true?
I. Insurance is a method of sharing the losses of a few by the many
II. Insurance is a method of transferring the risk of an individual to another
individual
III. Insurance is a method of sharing the losses of many by a few
IV. Insurance is a method of transferring the gains of a few to the many
Question 10
Before acceptance of a risk, the insurer arranges a survey and inspection of the
property. Why?
I.
II.
III.
IV.
20
To assess the risk for rating purposes

To find out how the insured purchased the property
To find out whether other insurers have also inspected the property
To find out whether neighbouring property also can be insured
Answers to Self-Examination Questions

Answer 1
Lloyds is located in London.
Answer 2
Risk transfer through risk pooling is called insurance.
Answer 3
Loss prevention measures reduce the chance of occurrence of risk.
Answer 4
Insurance provides peace of mind and helps one plan his business effectively.
Answer 5
Origins of modern insurance can be chased to Lloyds.
Answer 6
When one decides to bear the consequence of a risk, he is said to have retained
risk.
Answer 7
Insurance compensates for the loss of an asset.
Answer 8
Each house owner needs to contribute Rs 200.
21
Answer 9
The correct option is I.
Insurance is a method of sharing the losses of a few by the many.
Answer 10
Before acceptance of the risk, an insurer conducts an investigation in order to
assess the risk for rating purpose.
22
CHAPTER 2
PRINCIPLES OF INSURANCE
In this chapter, we shall learn about the basic principles that govern the
working of insurance. The chapter is divided into two sections. The first section
deals with the elements of insurance and the second section deals with the
special features of an insurance contract.
Learning Outcomes
A. Elements of insurance
B. Insurance contract legal aspects
C. Insurance contract special features
1. Define the various elements of insurance
2. Define the features of an insurance contract
3. Identify the special features of an insurance contract
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A. Elements of insurance
We have seen that the process of insurance has four elements
Asset
Risk
Risk pooling
Insurance contract
Let us now look at the various elements of the insurance process in some detail.
1. Asset
Definition
An asset may be defined as anything that confers some benefit and has an
economic value to its owner.
An asset must have the following features:
a) Economic value
An asset must have economic value. Value can arise in two ways.
a) Income generation: Asset may be productive and generate income.
Example
A machine used to manufacture biscuits, or a cow that yields milk, both
generate income for their owner. A healthy worker is an asset to an
organisation.
b) Serving needs: An asset could also add value by satisfying one or a group of
needs.
Example
A refrigerator cools and preserves food while a car provides comfort and
convenience in transportation, similarly a body free of illness adds value to
oneself and family also.
b) Scarcity and ownership
What about air and sunlight? Are they not assets?
The answer is No.
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Indeed, few things are as valuable as air and sunlight. We cannot live without
them. Yet they are not considered as assets in the economic sense of the term.
There are two reasons for this:
Their supply is abundant and not scarce.
They are not owned by any one individual but are freely available to all.
This implies that an asset must satisfy two more conditions to qualify as such
- its scarcity and its ownership or possession by someone.
c) Insurance of assets
In insurance we are interested in economic losses that arise from unexpected
and fortuitous events, not losses arising as a result of natural wear and tear.
Insurance provides protection only against financial losses arising from
unexpected events and not natural wear and tear, of assets due to usage
over time.
We must note that insurance cannot protect an asset from loss or damage. An
earthquake will destroy a house whether it is insured or not. The insurer can
only pay a sum of money, which would reduce the economic impact of the loss.
Losses can arise in the event of breach of an agreement.
Example
An exporter would lose a great deal if the importer on the other side refused to
accept the goods or defaulted on payments.
d) Life insurance
What about our lives?
There is indeed nothing as valuable to us as our own lives and those of our loved
ones. Our lives can be seriously affected when subjected to an accident or an
illness.
This can impact in two ways:
Firstly there are costs of treatment of a particular disease.
Secondly there may be loss of economic earnings, both due to death or
disability.
These kinds of losses are covered by insurances of the person or personal
lines of insurance.
25
Insurance is possible for anyone who has assets that have value [i.e. which
generate income or meet some needs]; the loss of which [due to fortuitous
or accidental events] cause financial loss that can be [measured in terms of
money].
Thus these assets are commonly referred to as subject matter of insurance
in insurance parlance.
2. Risk
The second element in the process of insurance is the concept of risk. We shall
define risk as the chance of a loss. Risk thus refers to the likely loss or damage
that can arise on account of happening of an event. We do not usually expect
our house to burn down or our car to have an accident. Yet it can happen.
Examples of risks are the possibility of economic loss arising from the burning of
a house or a burglary or an accident which results in the loss of a limb.
This has two implications.
i. Firstly, it means that that the loss may or may not happen. The chance
or likelihood of loss can be expressed mathematically.
Example
One in a thousand chances that a house will catch fire = 1/1000 = 0.001.
Three in a thousand chances that Ram will have a heart attack = 3/1000 = 0.003
Risk always implies a probability. Its value always lies between 0 and 1,
where 0 represents certainty that a loss will not happen while 1 represents
certainty that it will happen.
ii. Secondly, the event, whose occurrence actually leads to the loss, is
known as a peril. It is the cause of the loss.
Example
Examples of perils are fire, earthquakes, floods, lightning, burglary, heart
attack etc.
What about natural wear and tear?
It is true that nothing lasts forever. Every asset has a finite lifetime during
which it is functional and yields benefits.
26
At some future date its value becomes nil. This is a natural process and we
discard or change our mobiles, our washing machines and our clothes when they
are worn out. Therefore losses arising out of normal wear and tear are not
covered in insurance.
i.
Exposure to risk: Occurrence of a peril need not necessarily lead to a

loss. A person staying in Mumbai does not suffer any loss due to a flood
in coastal Andhra. For loss to happen the asset must be exposed to the
peril.
Example
In giving protection against a car accident, an insurer would be interested in a
population of cars that are exposed to the peril called accident during a
certain year. A car regularly used for racing purposes cannot be part of this
population. It must form part of a separate group of racing cars whose chances
of accident are higher than ordinary cars.
Exposure to risk alone is not enough ground for insurance compensation.
Example
A fire may break out in factory premises without causing actual damage.
Insurance comes into play only if there is an actual economic (financial) loss
as a result of a peril.
ii. Degree of risk exposure: Two assets may be exposed to the same peril
but the likelihood of loss or the amount of loss may vary greatly.
Example
A vehicle carrying explosives can yield far greater loss from fire than tanker
carrying water.
Similarly, the probability of a person having a respiratory problem is high in a
polluted city or the individual engaged in horse racing has a higher risk of
accidental injury than one who sits in a shop.
Insurers are mainly concerned with the degree of risk exposure. When it is very
high we say that it is a bad risk.
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Basis of risk classification
a) Extent of damage likely to be suffered

This is given by the degree of loss and its impact on an individual or
business. On this basis one may identify three types of risk events or
situations:
i. Critical or Catastrophic
Where losses are of such a magnitude; that may result in total loss or
bankruptcy.
Example
An earthquake that completely destroys a village
A major fire that completely destroys a multi crore installation
A situation like the terrorist attack of 9/11 on World Trade Centre which
caused injuries to many people
ii. Major
In which the possible losses may result in serious financial losses, compelling
the firm to borrow in order to continue operations.
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Example
A fire in the plant of a large multinational company at Gurgaon destroys
inventory worth Rs 1 crore. The loss is heavy but not so high as to lead to
bankruptcy.
A major kidney transplant operation whose cost is prohibitive.
iii. Marginal/Insignificant
Where the possible losses are insignificant and can be easily met from an
individual or a firms existing assets or current income without imposing any
undue financial strain.
Example
A minor car accident results in the side being slightly grazed due to which some
of the paint is damaged and a fender is slightly bent.
An individual suffering from common cold and cough
b) Nature of risk environment
Another basis for classifying risks is by the nature of the environment.
i. Static risks
Static risks refer to events taking place within a stable environment. They
have a regular pattern of occurrence over time and can be reasonably
predicted. They are thus easier to insure. Typically such risks are caused by
natural events.
Examples are fire, earthquake, death, accident and sickness.
ii. Dynamic risks
Typically refer to perils that affect the social environment and result from
economic and social factors. They are called dynamic because they dont
necessarily have a regular pattern of occurrence and cannot be predicted
like static risks. Again these risks often have vast national and social
consequences and may affect a large section of people.
Examples are unemployment, inflation, war and political upheavals.
Insurance companies in general do not insure dynamic risks.
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c) Who is affected?
A third way of classifying risks may be provided by considering who is
affected by a particular peril or loss event.
i. Fundamental risks: affect large populations. Their impact is widespread
and tends to be catastrophic.
Examples of fundamental or systemic risks are wars, droughts, floods and
earthquakes and terrorist attacks.
ii. Particular risks: affect only specific individuals and not an entire
community or group. In this case the loss is borne only by particular
individuals and not the entire community or group.
Examples of particular risks are burning of a house or an automobile
accident or hospitalisation following an accident.
Commercial insurance is available to cover both fundamental and
particular risk.
d) Result / Consequence / Outcome
i. Speculative risk describes a situation in which the consequence can be
either a profit or a loss. Typical examples of taking such risk are
gambling on horses or stock market speculation. One assumes such risk
deliberately in the hope of a gain.
ii. Pure risk on the other hand involves situations in which the outcomes
can result only in loss or no loss, but never in gain.
For example, a flood or a fire either occurs or does not occur. If it happens
there is a loss. If it does not happen there is neither loss nor gain. Similarly,
a person may or may not fall seriously ill.
Insurance only applies in case of pure risks, where it protects against loss
that may arise. Speculative risks cannot be insured.
Examples of pure risk:
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Chemical Fire, Explosion

Natural Earthquake, Flood, Cyclone
Social Riots, Fraud, Thefts
Technical Machinery Breakdown
Personal Death, Disability, Sickness
Hazard
We have seen above that mere exposure to a peril need not cause a loss. Again,
a loss need not be severe. The condition or conditions which increase the
probability of a loss or its severity, and thus impact(s) the risk is known as
hazard. When insurers make an assessment of the risk, it is generally with
reference to the hazards to which the asset is subject.
Let us now give some examples of the link between assets, peril and hazards
Asset
Peril
Hazard
Life
Cancer
Excessive Smoking
Factory
Fire
Explosive material left Unattended
Car
Car Accident
Careless driving by driver
Cargo
Storm
Water seeping in cargo and spoiling; Cargo not

packaged in waterproof containers
Important
Types of hazards
a) Physical hazard is a physical condition that increases the chance of loss.
Example
i.
Defective wiring in a building
ii. Indulging in water sports

iii. Leading a sedentary lifestyle
b) Moral hazard refers to dishonesty or character defects in an individual that
influence the frequency or severity of the loss. A dishonest individual may
attempt to commit fraud and make money by misusing the facility of
insurance.
Example
A classic instance of moral hazard is purchasing insurance for a factory and then
burning it down to collect the insurance amount or buying health insurance
after onset of a major ailment.
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c) Legal hazard is more prevalent in cases involving a liability to pay for

damages. It arises when certain features of the legal system or regulatory
environment can increase the incidence or severity of losses.
Example
The enactment of law governing workmens compensation in the case of
accidents can raise the amount of liability payable considerably.
A major concern in insurance is the relationship between risks and associated
hazards. Assets are classified into various risk categories on this basis and the
price charged for insurance coverage [known as the premiums] would increase if
the susceptibility to loss, arising as a result of the presence of associated
hazards, is high.
3. Mathematical principle of insurance (Risk pooling)
The third element in insurance is a mathematical principle that makes insurance
possible. It is known as the principle of risk pooling.
Example
Suppose there are 100000 houses exposed to the risk of fire that can cause an
average loss of Rs 50000. If the chance of a house catching fire is 2 in 1000 [or
0.002] it would mean that the total amount of loss suffered would be Rs
10000000 [=50000 x 0.002 x 100000].
If an insurer were to get the owners of each of the hundred thousand houses to
contribute Rs 100 and if these contributions were to be pooled into a single
fund, it would be enough to pay for the loss of the unfortunate few who
suffered from the fire.
The required amount of individual contribution is evident from the
calculation below
100000 x 100 = Rs 10000000
To ensure that there is equity [fairness] among all those being insured, it is
necessary that the houses should all be similarly exposed to the risk.
a) How exactly does the principle work in insurance?
Example
Mr. Shyam, who has a factory, with plant, machinery and inventory worth Rs 70
lakhs, wants to insure them with an insurer. The chance that there would be
32
loss or damage to the factory and its contents from fire or other insured perils is
7 out of 1000 [0.007]. Both Mr. Shyam and the insurer are aware about this.
How are their positions different and why does Shyam want to insure?
Mr. Shyams position
The probability of loss (0.007) is of little use to Mr. Shyam since it only suggests
that on average about 7 out of 1000 factories like his, would be impacted by the
loss. He does not know whether his factory would be one among the unfortunate
seven? In fact nobody can predict if the particular factory would suffer a loss.
Shyam may be said to be in a state of uncertainty. Not only does he not know
the future, he cannot even predict what it will be. It is obviously a cause for
anxiety.
Insurers position
Let us now look at the insurers position. When Shyams risk of loss is combined
and pooled with that of thousands of others, who are exposed to similar
situation, it now becomes finite and predictable.
The insurer need not worry about Shyams factory as much as the latter does. It
is enough that only seven out of thousand factories be subjected to the loss.
So long as the actual losses are same or nearly same as the expected, the
insurer can meet them by drawing money from the pool of funds.
It is by pooling number of risks of all the insured similarly placed and
exposed to possibility of loss due to a peril that the insurer is able to assume
that risk and its financial impact.
b) Risk pooling and the law of large numbers

The probability of damage [derived as 7 out of 1000 or 0.007 in the example
above] forms the basis on which the premium is determined. The insurer
would face no risk of loss if the actual experience was as expected. In such a
situation the premiums of the numerous insured would be sufficient to
33
completely compensate for the losses of those who have been affected by
the peril. The insurer would however face a risk if the actual experience was
more adverse than expected and the premiums collected were not sufficient
to pay the claims.
How can the insurer be sure about its predictions?
This becomes possible because of a principle known as the Law of large
numbers. It states that the larger the size of the pool of risks, the actual
average of losses would be closer to the estimated or expected average loss.
Example
To give a simple illustration, the probability of getting heads on a toss of the
coin is . But how sure can you be that you will actually get 2 heads if you toss
the coin four times?
Only when the number of tosses gets very large and closer to infinity, the
chance of getting heads once for every two tosses will become closer to one.
It follows that insurers can be sure of their ground only when they have been
able to insure a large number of insured. An insurer who has insured only a few
hundred houses, likely would be worse affected than one who has insured
several thousand houses.
Important
Conditions for insuring a risk
When does it make sense to insure a risk from the insurers point of view?
Six broad requirements for a risk to be considered insurable are given in the box
below.
i. A sufficiently large number of homogenous [similar] exposure units to
make the losses reasonably predictable. This follows from the law of large
numbers. Without this it would be difficult to make predictions.
ii. Loss produced by the risk must be definite and measurable. It is difficult
to decide the compensation if one cannot say for sure that a loss has
occurred and how much it is.
iii. Loss must be fortuitous or accidental. It must be the result of an event
that may or may not happen. The event must be beyond the control of
insured. No insurer would cover a loss that is intentionally caused by the
insured.
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iv. Sharing of losses of the few by many can work only if a small percentage of
the insured group suffers loss at any given period of time.
v. Economic feasibility: The cost of insurance must not be high in relation to
the possible loss; otherwise the insurance would be economically unviable.
vi. Public policy: Finally the contract should not be contrary to public policy
and morality.
4. The insurance contract
The fourth element of insurance is that it involves a contractual agreement in
which the insurer agrees to provide financial protection against specified risks
for a price or consideration known as the premium. The contractual agreement
takes the form of an insurance policy.
Test Yourself 1
Which one of the following does not represent an insurable risk?
I.
II.
III.
IV.
Fire
Stolen goods
Burglary
Loss of goods due to ship capsizing
35
B. Insurance contract legal aspects

1. Legal aspects of an insurance contract
We will now look at some features involved in an insurance contract and then
consider legal principles that govern insurance contracts in general.
We have already seen that one of the elements of insurance is that it involves a
contract between insurer and insured.
A contract is an agreement between parties, enforceable at law. The provisions
of the Indian Contract Act, 1872 govern all contracts in India, including
insurance contracts.
2. Elements of a valid contract
The elements of a valid contract are:
a) Offer and acceptance:
Usually, the offer is made by the proposer, and acceptance is made by the
insurer.
b) Consideration
This means that the contract must involve some mutual benefit to the
parties. The premium is the consideration from the insured, and the promise
to indemnify, is the consideration from the insurers.
c) Agreement between the parties
Both the parties should agree to the same thing in the same sense.
d) Capacity of the parties
Both the parties to the contract must be legally competent to enter into the
contract. For example, minors cannot enter into insurance contracts.
e) Legality
The object of the contract must be legal, for example, no insurance can be
had for smuggled goods.
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Important
The following cannot be an element of Insurance contract
i. Coercion
Involves pressure applied through criminal means.
ii. Undue influence
When a person, who is able to dominate another, uses her position, influence or
power to obtain undue advantage.
iii. Fraud
When a person induces another to act on a false belief that is caused by a
representation he or she does not believe to be true. It can arise either from
deliberate concealment of facts or through misrepresenting them.
iv. Mistake
Error in judgement or interpretation of an event. This can lead to an error in
understanding and agreement about the subject matter of contract.
Test Yourself 2
Which among the following cannot be an element in a valid insurance contract?
I.
II.
III.
IV.
Offer and acceptance

Coercion
Consideration
Legality
37
C. Insurance contract special features

Let us look at the special features of an insurance contract.
1. Indemnity
The principle of indemnity is applicable to Non-life insurance policies. It means
that the policyholder, who suffers a loss, is compensated so as to put him or
her in the same financial position as he or she was before the occurrence of
the loss event. The insurance contract (evidenced through insurance policy)
guarantees that the insured would be indemnified or compensated up to the
amount of loss and no more.
The philosophy is that one should not make a profit through insuring ones
assets and recovering more than the loss. The insurer would assess the
economic value of the loss suffered and compensate accordingly.
Example
Ram has insured his house, worth Rs. 10 lakhs, for the full amount. He suffers
loss on account of fire estimated at Rs. 70000. The insurance company would
pay him an amount of Rs. 70000. The insured can claim no further amount.
Consider a situation now where the property has not been insured for its full
value. One would then be entitled to indemnity for loss only in the same
proportion as ones insurance.
Suppose the house, worth Rs. 10 lakhs has only been insured for a sum of Rs. 5
lakhs. If the loss on account of fire is Rs. 60000, one cannot claim this entire
amount. It is deemed that the house owner has insured only to the tune of half
its value and he is thus entitled to claim just 50% [Rs. 30000] of the amount of
loss. This is also known as underinsurance.
The measurement of indemnity to be paid would depend on the type of
insurance one takes.
In most types of non-life insurance policies, which deal with insurance of
property and liability, the insured is compensated to the extent of actual
amount of loss i.e. the amount of money needed to replace lost or damaged
property at current market prices less depreciation.
Indemnity might take one or more of the following modes of settlement:
38
Cash payment
Repair of a damaged item
Replacement of the lost or damaged item
Restoration, (Reinstatement) for example, rebuilding a house destroyed
by fire
Diagram 1: Indemnity
But, there is some subject matter whose value cannot be easily estimated or
ascertained at the time of loss. For instance, it may be difficult to put a price in
the case of family heirlooms or rare artefacts. Similarly in marine insurance
policies it may be difficult to estimate the extent of loss suffered in a ship
accident half way around the world.
In such instances, a principle known as the Agreed Value is adopted. The insurer
and insured agree on the value of the property to be insured, at the beginning
of the insurance contract. In the event of total loss, the insurer agrees to pay
the agreed amount of the policy. This type of policy is known as Agreed Value
Policy.
a) Subrogation
Subrogation follows from the principle of indemnity.
Subrogation means the transfer of all rights and remedies, with respect to
the subject matter of insurance, from the insured to the insurer.
It means that if the insured has suffered from loss of property caused due to
negligence of a third party and has been paid indemnity by the insurer for
that loss, the right to collect damages from the negligent party would lie
with the insurer. Note that the amount of damage that can be collected is
only to the extent of amount paid by the insurance company.
39
Important
Subrogation: It is the process an insurance company uses to recover claim
amounts paid to a policy holder from a negligent third party.
Subrogation can also be defined as surrender of rights by the insured to an
insurance company that has paid a claim against the third party.
Example
Mr. Kishores household goods were being carried in Sylvain Transport service.
They got damaged due to drivers negligence, to the extent of Rs 45000 and the
insurer paid an amount of Rs 30000 to Mr. Kishore. The insurer stands
subrogated to the extent of only Rs 30000 and can collect that amount from
Sylvain Transports.
Suppose, the claim amount is for Rs 45,000/, insured is indemnified by the
insurer for Rs 40,000, and the insurer is able to recover under subrogation Rs
45,000/ from Sylvain Transports, then the balance amount of Rs 5000 will have
to be given to the insured.
This prevents the insured from collecting twice for the loss - once from the
insurance company and then again from the third party. Subrogation arises
only in case of contracts of indemnity.
Example
Mr. Suresh dies in an air crash. His family is entitled to collect the full sum
assured of Rs 50 lakhs from the insurer who have issued a Personal Accident
Policy plus the compensation paid by the airline, say, Rs 15 lakhs.
b) Contribution
This principle is applicable to only non-life Insurance. Contribution follows
from the principle of indemnity, which implies that one cannot gain more
from insurance than one has lost through the peril
Definition
The principle of Contribution implies that if the same property is insured with
more than one insurance company, the compensation paid by all the insurers
together cannot exceed the actual loss suffered.
If insured were to collect the amount of the loss from each insurer fully,
insured would make a profit from the loss. This would violate the principle
of indemnity.
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Example
Scenario 1
Mr. Srinivas takes out a fire policy on his house valued at Rs. 24 lakhs with two
insurance companies. He insures it for Rs.12 lakhs with each company. When
the house is partially damaged in a fire, the loss is estimated at Rs. 6 lakhs. He
claims Rs. 6 lakhs each from the two insurers. The two insurers decline to give
him Rs. 6 lakhs each.
They take the position that since each of them are deemed to have shared in
the insurance to the extent of 50%, each would pay 50% of the loss, viz., Rs.3
lakhs each, thus ensuring that the insured gets no more than the value of the
actual loss.
Scenario 2
Rishi has taken two Mediclaim policies for self, Rs 2, 50,000 from X company
and for Rs 1, 50,000 from Y company. Rishi has incurred an expense of Rs 1,
60,000 on hospitalisation following an ailment. This compensation of Rs 1,
60,000 will be shared and paid by both the companies on rateable proportion
basis. The share of each company will be
X company: 1, 60,000 x 2.50,000/ (2, 50, 000 + 1, 50, 000) = RS 1, 00.000
Y company: 1, 60,000 x 150,000/ (2, 50, 000 + 1, 50, 000) = Rs 60, 000
2. Uberrima Fides or Utmost Good Faith
There is a difference between good faith and utmost good faith.
a) Good faith
All commercial contracts in general require that good faith shall be observed
in their transaction and there shall be no fraud or deceit. Apart from this
legal duty to observe good faith, the seller is not bound to disclose any
information about the subject matter of the contract to the buyer.
The rule observed here is that of Caveat Emptor which means buyer
beware.
The parties to the contract are expected to examine the subject matter of
the contract and so long as one party does not mislead the other and the
answers are given truthfully, there is no question of the other party avoiding
the contract
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Example
Mr. Chandrasekhar goes to a TV showroom and is obsessed by a fanciful brand of
TV with many features. The sales person knows from experience that the
particular brand is not very reliable and has in the past given rise to problems
for other customers. He does not reveal this for fear that it might jeopardize
the sale.
Can he be charged of deceit?
Would the situation have been different if the sales man had been asked about
the reliability of the brand and had replied that it was very reliable?
b) Utmost good faith
Insurance contracts stand on a different footing. The proposer has a legal
duty to disclose all material information about the subject matter of
insurance to the insurers who do not have this information.
Material information is that information which enables the insurers to
decide:
Whether they will accept the risk
If so, at what rate of premium and subject to what terms and
conditions
This legal duty of utmost good faith arises under common law. The duty
applies not only to material facts which the proposer knows, but also
extends to material facts which he ought to know.
Insurance contracts are subject to a higher obligation. When it comes to
insurance, good faith contracts become utmost good faith contracts. The
concept of "Uberrima fides" is defined as involving a positive duty to
voluntarily disclose, accurately and fully all facts material to the risk being
proposed, whether requested or not."
What is meant by complete disclosure?
The law imposes an obligation to disclose all material facts.
42
Example
i.
Misleading of facts by the insured
An executive is suffering from Hypertension and has had a mild heart attack
recently, following which he decides to take a medical policy but does not
reveal his true condition. The insurer is thus duped into accepting the proposal
due to misrepresentation of facts by insured.
ii. Misleading of facts by the insurer
An individual has a congenital hole in the heart and reveals the same in the
proposal form. The same is accepted by the insurer and proposer is not
informed that pre-existing diseases are not covered for at least 4 years.
c) Material fact
Material fact has been defined as a fact that would affect the judgment of
an insurance underwriter in deciding whether to accept the risk and if so,
the rate of premium and the terms and conditions.
Whether an undisclosed fact was material or not would depend on the
circumstances of the individual case and could be decided ultimately only in
a court of law. The insured has to disclose facts that affect the risk.
Let us take a look at some of the types of material facts in insurance that
one needs to disclose:
i.
Facts indicating that the particular risk represents a greater exposure

than normal. Examples are hazardous nature of cargo being carried at
sea; past history of illness
ii. Existence of past policies taken from all insurers and their present status
iii. All questions in the proposal form or application for insurance are
considered to be material, as these relate to various aspects of the
subject matter of insurance and its exposure to risk. They need to be
answered truthfully and be full in all respects
43
The following are some examples of material facts:
Example
i.
Fire Insurance
Construction of the building
Occupancy (e.g. office, residence, shop, warehouse, manufacturing unit,
etc.)
The nature of goods stored/manufactured, i.e., non-hazardous,
hazardous, extra-hazardous etc.
ii. Marine Insurance

Method of packing i.e., whether in single gunny bags or double gunny
bags, whether in new drums or second hand drums; etc.
The nature of goods (e.g. whether the machinery is new or second hand)
iii. Motor Insurance
Cubic capacity of engine (private car)

The year of manufacture
Carrying capacity of a truck (tonnage)
The purpose for which the vehicle is used
The geographical area in which it is used
iv. Personal Accident Insurance
The exact nature of occupation

Age
Height and weight
Physical disabilities etc.
v. Health Insurance
Any operations undergone
If suffering from Diabetes or Hypertension
vi. Common aspects
The fact that previous insurers had rejected the proposal or charged
extra premium, or cancelled, or refused to renew the policy
Previous losses suffered by the proposer
44
Important
Facts that need not be disclosed [unless asked for by insurer]
It is also held that unless there is a specific enquiry by underwriters, the
proposer has no obligation to disclose the following facts:
i.
Measures implemented to reduce the risk

Example: The presence of a fire extinguisher.
ii. Facts unknown to the insured

Example: An individual, who suffers from high blood pressure but was
unaware of it at the time of taking the policy, cannot be charged with
non-disclosure of this fact.
iii. Facts which could be discovered, by reasonable diligence It is not
necessary to disclose every minute material fact. The underwriters must
be conscious enough to ask for the same if they require further
information
iv. Matters of law: Everybody is supposed to know the law of the land.
Example: Municipal laws about storing of explosives
v. About which insurer appears to be indifferent [or has waived the need
for further information]. The insurer cannot later disclaim responsibility
on grounds that the answers were incomplete.
vi. Facts possible for discovery: Like when a medical examiner on behalf of
an insurer takes BP measurements in a medical examination before
taking of the policy.
d) Duty of disclosure in non-life insurance
In non-life insurance, the contract will stipulate whether changes are
required to be intimated or not. When an alteration is made to the original
contract affecting the risk, the duty of disclosure will arise. The duty of
disclosing material facts ceases when the contract is concluded by issue of a
cover note or a policy. The duty arises again at the time of renewal of the
policy, if during the period of the policy; there is any change in the risk.
Example
A house owner has insured the building and its contents.
He goes on a holiday for a week - no material change in the facts.
However if he builds another floor above and starts a beauty parlour, it will
considerably alter the risk.
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e) Breach of utmost good faith

Let us now consider situations which would involve a breach of utmost good
faith. Such breach can arise either through non-disclosure or
misrepresentation.
i. Non-Disclosure
Insured is silent in general about material facts because the insurer
has not raised any specific enquiry
Through evasive answers to questions asked by the insurer
May be inadvertent [occurs without ones knowledge or intention] or
because the proposer thought that a fact was not material. In such
case it is innocent.] When a fact is intentionally not disclosed it is
treated as concealment. In this case there is intent to deceive.
ii. Misrepresentation
A statement made during negotiation of a contract of insurance is called
representation. This may be a definite statement of fact or a statement of
belief, intention or expectation.
When it is a fact, it is expected to be substantially correct.
When it concerns matters of belief or expectation, it must be made in good
faith.
Misrepresentation is of two kinds:
Innocent Misrepresentation relates to inaccurate statements, which
are made without any fraudulent intention e.g. an individual who
occasionally smokes and is not a habitual smoker may not reveal the
same in the proposal form as he does not think it has any bearing on
the risk.
Fraudulent Misrepresentation are false statements made with
deliberate intent to deceive the insurer or are made recklessly
without due regard for truth. E.g. a chain smoker may deliberately
not reveal the fact that he smokes.
An insurance contract generally becomes void when there is concealment
with intent to deceive, or when there is fraudulent non- disclosure or
misrepresentation. In case of other breaches of utmost good faith, the
contract may be rendered voidable.
For e.g., parent at the time of covering their child in the family floater
policy may not be aware that their child has a congenital problem. There is
no intent to deceive.
3. Insurable interest
46
The existence of insurable interest is an essential ingredient of every

insurance contract and is considered as the legal pre-requisite for insurance.
Let us see how insurance differs from a gambling or wager agreement.
a) Gambling and insurance
Consider a game of cards, where one either loses or wins. The loss or gain
happens only because the person enters the bet. The person who plays the
game has no further interest or relationship with the game other than that
he might win the game.
Betting or, wagering is not legally enforceable in a court of law and thus any
contract in pursuance of it will be held to be illegal. In case someone
pledges his house if he happens to lose a game of cards, the other party
cannot approach the court to ensure its fulfilment.
Now consider a house and the event of it burning down. The individual who
insures his house has a legal relationship with the subject matter of
insurance the house. He owns it and is likely to suffer financially, if it is
destroyed or damaged. This relationship of ownership exists independent of
whether the fire happens or does not happen, and it is the relationship that
leads to the loss. The event [fire or theft] will lead to a loss regardless of
whether one takes insurance or not.
Unlike a card game, where one could win or lose, a fire can have only one
consequence loss to the owner of the house.
The owner takes insurance to ensure that the loss suffered is compensated
for in some way.
The interest that the insured has in his house or his money is termed as
insurable interest. The presence of insurable interest makes an insurance
contract valid and enforceable under the law.
Important
Three essential elements of insurable interest:
1. There must be property, right, interest, life or potential liability capable of
being insured.
2. Such property, right, interest, life or potential liability must be the subject
matter of insurance.
3. The insured must bear a legal relationship to the subject matter such that
he stands to benefit by the safety of the property, right, interest, life or
freedom of liability. By the same token, he must stand to lose financially by
any loss, damage, injury or creation of liability.
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Example
Scenario 1
Mr. Chandrasekhar owns a house for which he has taken a mortgage loan of Rs
15 lakhs from a bank.
Does he have an insurable interest in the house?
Does the bank have an insurable interest in the house?
What about his neighbour?
Scenario 2
Mr Srinivasan has a family consisting of spouse, two kids and old parents.
Does he have an insurable interest in their well being?
Does he stand to financially lose if any of them are hospitalised?
What about his neighbours kids? Would he have an insurable interest in them?
It would be relevant here to make a distinction between the subject matter
of insurance and the subject matter of an insurance contract.
Subject matter of insurance relates to property being insured against, which
has an intrinsic value of its own.
Subject matter of an insurance contract on the other hand is the insureds
financial interest in that property. It is only when the insured has such an
interest in the property that he has the legal right to insure. The insurance
policy in the strictest sense covers not the property per se, but the insureds
financial interest in the property.
Example
Consider the house which Mr. Chandrasekhar has brought with a mortgage loan
of Rs 15 lakhs from a bank. If he has repaid 12 lakhs of this amount, the banks
interest would be only to the tune of the balance three lakhs which is
outstanding.
Thus the bank also has an insurable interest financially in the house for the
balance amount of loan that is unpaid and would ensure that it is made a co
insured in the policy.
If one deliberately sets a fire to ones property and collects claims against
losses under the policy, such claims are clearly fraudulent and could be
justifiably rejected.
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b) Time when insurable interest should be present

In case of fire and accident insurance, insurable interest should be present
both at the time of taking the policy and at the time of loss.
In case of health and personal accident insurance apart from self, family can
also be insured by the proposer since he / she stands to incur financial losses
if the family meets with an accident or undergoes hospitalisation. However,
in marine cargo insurance, insurable interest is required only at the time of
loss.
4. Proximate cause
The last of the legal principles, which applies only to non-life insurance, is the
principle of proximate cause.
Non-life Insurance contracts provide indemnity only if losses that occur are
caused by insured perils, which are covered the policy. Determining the actual
cause of loss or damage is a fundamental step in the consideration of any claim.
Proximate cause is a key principle of insurance and is concerned with how the
loss or damage actually occurred and whether it is indeed as a result of an
insured peril.
Under this rule, insurer looks for the predominant cause which sets into motion
the chain of events producing the loss, which may not necessarily be the last
event that immediately preceded the loss i.e. it is an event which is closest to,
or immediately responsible for causing the loss.
Unfortunately when a loss occurs there will often be a series of events leading
up to the incident and so it is sometimes difficult to determine the nearest or
proximate cause.
For example, a fire might cause a water pipe to burst. Despite the resultant loss
being water damage, the fire would still be considered the proximate cause of
the incident.
Definition
Proximate cause is defined as the active and efficient cause that sets in motion
a chain of events which brings about a result, without the intervention of any
force started and working actively from a new and independent source.
To understand the principle of proximate cause, consider the following
situation:
49
Example
Scenario 1
Ajays car was stolen. Two days later, the police found the car in a damaged
condition. Investigation revealed that the thief had banged the car into a tree.
Ajay filed a claim with insurance company for the damages to the car. To Ajays
surprise, the insurance company rejected the claim. The reason given by the
insurance company was that theft was the reason for the damage to the car
and theft was an excluded peril in the insurance policy that Ajay had taken for
his car and hence insurance company is not liable to pay the claim.
Scenario 2
Mr. Pinto, while riding a horse, fell on the ground and had his leg broken, he
was lying on the wet ground for a long time before he was taken to hospital.
Because of lying on the wet ground, he had fever that developed into
pneumonia, finally dying of this cause. Though pneumonia might seem to be the
immediate cause, in fact it was the accidental fall that emerged as the
proximate cause and the claim was admitted under personal accident insurance.
There are certain losses which are suffered by the insured as a result of fire but
which cannot be said to be proximately caused by fire. In practice, some of
these losses are customarily paid by business under fire insurance policies.
Example of such losses can be
Damage to property caused by water used to extinguish fire
Damage to property caused by fire brigade in execution of their duty
Damage to property during its removal from a burning building to a safe
place
Test Yourself 3
Mr. Pinto contracted pneumonia as a result of lying on wet ground after a horse
riding accident. The pneumonia resulted in death of Mr. Pinto. What is the
proximate cause of the death?
I.
II.
III.
IV.
50
Pneumonia
Horse
Horse riding accident
Bad luck
Summary
a) The process of insurance has four elements (asset, risk, risk pooling and an
insurance contract).
b) An asset may be anything that confers some benefit and is of economic
value to its owner.
c) A chance of loss represents risk.
d) Condition or conditions that increase the probability or severity of the loss
are referred to as hazards.
e) The mathematical principle, that makes insurance possible is known as
principle of risk pooling.
f) The elements of a valid contract include offer and acceptance,
consideration, legality, capacity of the parties and the agreement between
parties.
g) Indemnity ensures that the insured is compensated to the extent of his loss
on the occurrence of the contingent event.
h) Subrogation means the transfer of all rights and remedies, with respect to
the subject matter of insurance, from the insured to the insurer.
i) The principle of contribution implies that if the same property is insured
with more than one insurance company, the compensation paid by all the
insurers together cannot exceed the actual loss suffered.
j) All insurance contracts are based on the principle of Uberrima Fides.
k) The existence of insurable interest is an essential ingredient of every
insurance contract and is considered as the legal pre-requisite for insurance.
l) Proximate cause is a key principle of insurance and is concerned with how
the loss or damage actually occurred and whether it is indeed as a result of
an insured peril.
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Key terms
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
52
Asset
Risk
Hazard
Risk pooling
Offer and acceptance
Lawful consideration
Consensus ad idem
Uberrima fides
Material facts
Insurable interest
Subrogation
Contribution
Proximate cause

Answer 1
Stolen goods violate the principle of legality and hence do not represent an
insurable risk.
Answer 2
Coercion is not an element of a valid contract.
Answer 3
The horse riding accident set things in motion that eventually resulted in Mr
Pintos death and hence it is the proximate cause.
Question 1
Moral hazard means:
I.
II.
III.
IV.
Dishonesty or character defects in an individual

Honesty and values in an individual
Risk of religious beliefs
Hazard of the property to be insured
Question 2
Risk indicates:
I.
II.
III.
IV.
Fear of unknown
Chance of loss
Disturbances at public place
Hazard
Question 3
______________ means spreading ones investment in different kinds of assets.
I. Pooling
II. Diversification
53
III. Gambling
IV. Dynamic risk
Question 4
_____________ is not an example of an asset.
I.
II.
III.
IV.
House
Sunlight
Plant and machinery
Motor car
Question 5
______________ is not an example of risk.
I.
II.
III.
IV.
Damage to car due to accident

Damage of cargo due to rain water
Damage to car tyre due to wear and tear
Damage to property due to fire
Question 6
Earthquake is an example of:
I.
II.
III.
IV.
Catastrophic risk
Dynamic risk
Marginal risk
Speculative risk
Question 7
Select the most appropriate logical equivalence for the statement.
Statement: Insurance cannot protect an asset from loss or damage.
I.
II.
III.
IV.
True
False
Partially true
Not necessarily true
Question 8
__________________ means transfer of all rights and remedies, with respect to
the subject matter of insurance, from insured to insurer.
I. Contribution
II. Subrogation
54
III. Legal hazard

IV. Risk pooling
Question 9
An example of a fact which need not be disclosed unless asked for is
______________ by the insurer.
I.
II.
III.
IV.
Age of the insured

Presence of fire extinguisher
Heart ailment
Other insurance details
Question 10
________________ is a wrong statement made during negotiation of a contract.
I.
II.
III.
IV.
Misrepresentation
Contribution
Offer
Representation

Answer 1
Moral hazard means dishonesty or character defects in an individual.
Answer 2
Risk indicates a chance of loss.
Answer 3
Diversification means spreading ones investment in different kinds of assets.
Answer 4
Sunlight cannot be classified as asset as it fails the test of scarcity and
ownership.
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Answer 5
Damage as a result of wear and tear cannot be treated as risk.
Answer 6
Earthquake is an example of catastrophic risk.
Answer 7
Insurance cannot protect an asset from loss or damage.
Answer 8
Subrogation means transfer of all rights and remedies, with respect to the
subject matter of insurance, from insured to insurer.
Answer 9
Presence of fire extinguisher need not be disclosed while buying insurance,
unless asked for.
Answer 10
Misrepresentation is a wrong statement made during negotiation of a contract.
56
CHAPTER 3
MARKETING AND SELLING INSURANCE
This chapter aims to provide an understanding of the selling profession and the
concept of marketing and its various activities. Here you will also learn the
sales process and its various steps. Finally the chapter provides insights into
insurance sales, its market growth and development.
Learning Outcomes
A.
B.
C.
D.
E.
Significance of selling
Marketing vs. Selling
Sales process - Steps
Selling non-life insurance
Insurance market development parameters

1.
2.
3.
4.
5.
Discuss the significance of the selling profession

Distinguish between the concepts of marketing and selling
List the various steps in the sales process
Recognise the needs of the non-life insurance market
Discuss parameters of market development
57
A. Significance of selling
Have you seen how a mother persuades, her four year old daughter, to eat
her food?
Have you observed a sixteen year old negotiating for more pocket money
and invariably winning in the end?
Have you noticed how a political leader on an election campaign tries to
convince the voters in her constituency to vote for her?
Have you seen a salesman at a car showroom explaining the features of a car
to his / her prospective customer?
Each is an example of selling
1. Significance of the selling profession
In a very general sense, every one of us is engaged in selling almost from the
day we were born. The objective is the same, to persuade, influence and try to
motivate someone else to act [or not to act] in a certain way. This act of
persuasion or influencing forms the core of the selling process.
In this chapter we are concerned with selling in a commercial sense. A sale is
thus the act of giving a product or service in return for money. Salespersons
earn their livelihood by convincing buyers to buy products or services through
them.
Insurance agents are sales persons who seek to get members of the community
to buy insurance products in exchange for a premium. They sell a variety of
insurance and financial products that most appropriately meet the needs of
their clients. They receive remuneration in the form of an agency commission.
Salesmen can trace their ancestry to the dawn of civilisation. Since ancient
times we had craftsmen who made their crafts and wares and sold them in local
markets. Similarly the traders and middlemen helped to conduct the exchange
of goods. The merchants carried the merchandise to far off lands.
Each of the above categories of people played an enormous role in shaping the
day-to-day life of mankind.
Modern selling differs from ancient times in one significant respect. The
emergence of modern industry gave rise to large volumes of goods and
associated commercial services. The revolution in information and
communication technology has made information available at customers
fingertips.
58
Persuading individuals to buy a product or service is no longer as simple as it

used to be. People have a lot of choices and are much more demanding about
what they want. Selling has thus become quite interesting and complex. Those
who are able to understand the complexity will find them amply rewarded.
Just think about all the things we have today, our TV Sets and washing
machines, our mobiles and laptops were all a result of inventions that someone
made somewhere.
Would these have reached us if someone had not worked to establish a market
for these products?
Salesmen are thus among the key architects of the modern economy.
Test Yourself 1
Which among the following is not an essential component of the sales process?
I.
II.
III.
IV.
Goodwill
Buyer
Seller
Product / Service
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B. Marketing vs. Selling

1. Selling and Marketing
The vast variety of goods and services that are available has resulted in a large
number of choices for customers. The buyer can no longer be taken for granted.
He or she has a voice and sellers cannot afford to ignore that voice.
It is this need to listen to the customer and focus on the customers concerns
that prompted the development of marketing as a discipline.
The main difference in selling insurance is that we are dealing with an
intangible product or rather we are selling services which will be experienced
only at the time of financial distress.
Marketing is the means by which the insurance company seeks to identify,
serve, satisfy, and retain or keep the customer. Customer is thus the end
purpose and focus of marketing activities.
2. Marketing activities
Let us look at the activities that are conducted by an insurance company as part
of its marketing function.
a) Understanding and segmenting customers
These are activities related to understanding the customer.
c) Markets may be divided by geography. Some companies may choose to
operate only in certain regions.

d) Insurers may differentiate between various sections of customers like
affluent, middle income white collar workers and farmers etc.

e) Non-life insurance companies may also differentiate between
individuals, small and medium enterprises [SMEs] and large enterprises.
The division and classification of customers into various market segments,
each of which have some common features, is known as Segmentation.
b) Targeting and positioning Implementing the marketing plan
After deciding which segments of customers to serve, insurance companies
target these customers. For this purpose it is necessary to know
i.
What kinds of needs the customers have and create products and
services that are appropriate for meeting these needs
ii. How to reach these customers? The agents of the company are an
important part of this strategy.
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An insurer needs to highlight how it is different from other competitors. This

differentiation is necessary to answer the customers question Why should I
buy your product rather than that of some other company? Establishing this
differentiation is known as competitive strategy
Diagram 1: Marketing literature speaks about four Ps Product, Price,
Promotion and Place.
Insurance as an industry falls under the broad sector we call services. The
product that is sold is intangible. To sell the product one needs to first win the
trust and confidence of the customer. This is achieved through creating
memorable service experiences for customers and also maintaining strong
relations with them over the long term.
In recent years there has been a lot of interest in the area known as Customer
Relationship Management. It emphasises the need to build strong customer
relationships that go beyond just the business transaction. It has been
considered an important source for getting repeat business and also for cross
selling other products to loyal customers who are nurtured through such
relationships.
It can be seen that marketing is a much broader term than selling and includes
many other activities among which selling is just one.
The basic difference between traditional selling and the marketing orientation
is a question of focus.
61
The distinction between the two philosophies is given below:

Selling and Marketing Orientations Differences
Traditional Selling
Marketing
Spotlight is on oneself and ones

products and services rather than the
customers
needs,
desires
and
concerns
Spotlight shifts to finding the gap

between customers need, want and
desire and what is made available to
them today
A firm using a sales orientation focuses

primarily on somehow pushing its
already existing products and services,
using aggressive promotion techniques
to attain the highest sales possible
A firm with a marketing orientation

tries to create and deliver products
and services that are appropriate and
ideal, from the customers standpoint.
This is seen as the way to
engage
customers gainfully and build a
mutually beneficial relationship
Selling is essentially a strategy of push
Marketing is a strategy of pull
3. Selling insurance
We can see from above that marketing activities are very important in order to
make the products and services of a company attractive and enhance their
appeal to the customer. Yet there are many products in which a purchase may
not take place just because they are attractive. They have to be sold.
While selling involves motivating someone to buy, the nature of the sales
process differs from industry to industry. The context of the sale would depend
on the nature of the product and industry. The sales persons role also
consequently changes. Mostly the sales process is related to a product or service
which is tangible and whose consumption provides direct and immediate
pleasure or satisfaction.
Example
A car and its features, like speed, comfortable leg space etc. can be enjoyed
while driving the car, just as a TV set provides sound and picture quality that
you can instantly experience. Even in services like that of a haircut, the
experience is direct and instant.
In insurance, unlike other products, one is not selling any tangible product but
only a promise [in the form of an insurance policy] to pay in the event of a
fortuitous / contingent event causing financial loss. The sales person has to
make the prospective customer realise the importance of buying such a policy
even when it offers no direct tangible benefit or means of pleasure via its
consumption.
62
He also has to relate to the prospective customer in such a way as to win trust
and confidence. The element of person to person selling is perhaps far more
evident in insurance than any other business.
Some of the worlds greatest and best known salesmen achieved great success
in their careers by starting as agents in the insurance industry.
Test Yourself 2
Which among the following activities can be classified as promotion?
I.
II.
III.
IV.
Product development
Quality control
Product advertisement
Product benchmarking
63
C. Sales Process - Steps

Selling is both an art and a science. It is an art in the sense that every sales
person brings her own distinct style in the way she communicates; builds
rapport and relates with prospective customers; engages in fact finding and
presents solutions.
Does this mean that only a few individuals who have these distinctive skills can
succeed?
The truth one needs to know is that so long as one does not give up or slacken
but persists on the path, even when there are failures, the law of averages
would come to ones aid.
What is this law?
It means that if a sales person on average is able to convert one out of every
ten persons she contacts, into a customer, she simply needs to adopt a standard
process and keep contacting more and more individual prospects without giving
up. The customer base will begin to build over time. Persistence is what pays
off in the insurance business.
This process applies to agents of both life and non-life insurance. In fact, in a
broader sense it may apply to sales persons of any other industry. We shall
however consider it in the context of insurance selling.
This brings us to the importance of adhering to a well-defined sales process with
clearly sequenced steps. Let us understand the steps:
Diagram 2: Sales Process
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1. Prospecting - (To Identify and build up a list of prospects) (Step I)

Prospects are people to whom we can sell insurance. Prospecting is the process
of gathering names of people whom we can approach and secure a sales
interview with. Continuous prospecting is absolutely vital to a successful agency
career.
Generally speaking, the best prospects are those people who can get interested
in insurance because it can relate to them in some particular way. By
developing particular "markets", we can make the process of prospecting much
easier because we will be calling on people who have one or more
characteristics in common.
After all, this business of selling [insurance] narrows down to one thing,
just one thing; seeing the people. Show me any man of ordinary ability who
will get out and earnestly tell his story to four or five people every day and I
show you a man who just cant help making good
a) Immediate Group
The easiest people to approach are people with whom we do business;
people who work in a particular area, market, owners of the businesses we
deal with.
b) The Natural Market
The second source of contacts for prospecting has been termed as the
Natural Market. This consists of people who may not be part of ones
immediate circle but can be known and developed as acquaintances since
the sales person shares something in common with these people.
If we just look around we would see many groups who may form part of our
natural markets like members of a caste or community association, members
of a church congregation or a sat-sang group or members of a cultural
association.
c) Centres of Influence [COIs]
One way to get to a large number of prospects is by taking help from people
who are visible and influential and whose words are valued by others. We
are referring to Centres of Influence community leaders, social and
political workers, professionals like chartered accountants or lawyers or
well-known businessmen.
The secret is to secure this person as a satisfied client whom you have
served well and then to seek his or her help to find other new prospects.
Even if he or she is not yet your client, it is enough that he or she should
know about your dedication and passion to help other people and should be
confident about your knowledge and sense of professionalism. Another
65
important condition is that he or she should like you and be interested in

helping you.
d) References, Introductions and Testimonials
Just as you can tap a centre of influence, you can also seek the help of
other satisfied customers as well as prospects who have not yet bought or
may not buy from you for some reason, but still have been impressed and
favourably disposed to you by your dedication and professionalism.
Information
i. Reference
A reference is a name of another potential prospect which is provided as a
lead, by your client or prospect or centre of influence or any other person,
whom you may be able to support with your solutions.
ii. Introduction
An even better way may be to ask for an introduction. Here the salesperson
asks for a small letter of introduction or a note to be made out to the person
referred. Typically one could ask for a visiting card at the back of which or
attached to which, a small note may be added, introducing the sales person to
the referred person.
The best form of introduction would of course be where ones benefactor picks
up the phone and calls his or her contact to introduce the agent, intimating that
she would be contacting that person shortly. Ones chances of success would
multiply, especially if the person who refers is one whose word is respected and
taken seriously.
iii. Testimonial
A testimonial is kind of a statement which one may seek from a satisfied
customer, affirming that the latter has done business with the salesperson and
has been very satisfied with the services and solutions rendered. It is a kind of
an endorsement for the sales persons credentials. A testimonial would be very
relevant when one is dealing with a circle of professionals who want adequate
proof about the sales persons professional credentials.
e) Other Service Providers
There is a whole range of service providers who are not our competitors.
They may include real estate agents, lawyers, shop keepers, doctors and
others whose services are regularly needed and sought by members of the
public. The basic principle applied here is that of reciprocity. The agent
agrees to be the eyes and ears for the other party, and in turn gets them to
make her visible and recommended. Successful agents use this source very
effectively.
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f) Conducting Seminars and Events

This is a professional and efficient method of selling, on a group basis. We
can use it to attract both new and existing customers. Since we are already
dealing with existing customers, we can ask them to invite a friend or
partner too. Advertisements put up in the area where the seminar is being
held, also can increase the numbers.
g) Information pieces, Newsletters, Blogs and Web based networking
It may not be easy or even viable to conduct seminars and events regularly.
Another way to get your message and presence registered in the minds of a
large number of prospects is to send information by mail or hand drops on a
regular basis.
This can be done free today in the form of emails. Another way to
communicate regularly is through a newsletter. In both cases, the purpose is
to inform readers about various subjects. In designing newsletters you can
involve some of your important customers and prospects, especially if their
views are sought by members of their network.
Yet another approach is to have a presence on the World Wide Web [www]
in the form of a personal website or a blog. It may be a little expensive to
begin with but helps you to get across to a wide circle of individuals who
spend a lot of their time in cyberspace. Finally there are social networking
sites where you can access millions of others almost anywhere in the world.
h) Cold calling
This approach is used by sales people in many different industries, not just
financial services. This is where we make approaches to people or
companies unannounced. It is difficult and we have to be ready to accept
rejection, but it can be a very quick way of gathering names and getting
people to see. A good number of top sales people allocate some of their
time to cold calling simply because it works.
Important
It is very important that we establish a prospect file. This is simply a book or
register or database containing all vital information about each of our prospects
with details and date when the prospect- should be called on. A prospect file is
an ever-changing tool. New names must be added continuously on a daily basis
and old names must be discarded if the individual is not receptive to our sales
efforts. We must be sure that we have enough prospects to call on each day.
2. The Pre-Interview Approach (Step II)
Qualifying every prospect in the list and getting appointments is the next step.
67
"Qualified" prospects are those people who can pay for insurance, who can pass
the company underwriting requirements, who have one or more needs for
insurance products, and who can be approached on a favourable basis.
The process is called qualifying the prospects. It is important to collect as much
relevant information as possible in order to proactively ensure that our efforts
are in the desired direction. This also enables us to convince the prospect that
we do possess necessary knowledge and skills to meet his or her particular
needs, thus making a favourable impression.
Cultivate the art of asking questions. Questions rather than positive
statements can be most effective means of making a sale. Inquire rather
than attack.
The initial contact can be made via letter, by telephone, or in a face-to-face
meeting. Whatever method is used, the objective is the same: to get the
prospect to consent to an interview where we can understand needs and in turn
get an opportunity to explain the service that we have to offer.
In order to do this our pre-approach communication should include:
Saying something that will arouse the prospects interest

Offering of valuable service
Making it clear that no commitment is being asked for
Use of a third party influence, if possible
Use of alternatives in order to get an affirmative response
Obtaining a definite appointment
It is important that during our first contact with the client, we introduce
ourselves in a manner that can generate rapport and also some trust and
comfort feeling.
3. The Sales Interview - Conducting a Need Gap Analysis (Step III)
After being successful in obtaining an interview, it is vital to do it in a
systematic and professional manner. It is essential to make a proper approach
which automatically and smoothly leads to the fact finding part of the sales
interview.
The approach basically consists of introductory conversation in the course of
which we are able to identify one or more needs of the prospect and get the
latter to agree that these are significant needs for insurance protection. Once
there is mutual agreement on these one can move forward.
First sell the appointment second sell your product.
In need-gap analysis we engage in a process of gathering detailed information
about the prospects insurance requirements, to identify and determine the
assets and perils for which there is inadequate coverage. The objective here is
68
to collect as much additional information about the prospect as possible. This

additional information helps to identify specific needs of the prospect in a more
cogent way. It also helps to suggest solutions to those needs, and helps the
prospect find the money to pay the premiums.
4. Determining the appropriate solutions for the prospect (Step IV)
After completing the previous steps and conducting a detailed gap analysis, we
should know enough about the prospect to recommend an appropriate set of
insurance covers [as solutions] that would best address her needs for insurance
protection, at this point in time, given all of her financial circumstances.
It is important to remember here that while insurance is very important, it is
only one of the tools of risk management. A good agent would not only be a
sales person who tries to sell an insurance cover, but would also play the role of
a risk management advisor who helps the client to identify, understand and
address the various kinds of exposures to risk that are faced through a variety
of other risk management measures.
The agent must thus be able to not only recommend the right kind of covers
that are available with the company he or she represents, but also needs to
educate the prospect about other risk management activities that the latter
may take up, to protect against the risk.
Example
The protection against losses from a fire may include installation of fire alarms
or knowledge of fire drills, or taking steps to reduce the chance of electrical
short circuits.
In many cases, especially if the problems and solutions are of a simple nature,
we would be able to recommend a solution and move on to closing the sale in
one interview. In other cases, where the situation is more complicated, we may
need to spend some time in the office developing the proper solution, then
return to the prospect and make our recommendation in a second interview.
Typically we should conclude the initial fact finding interview with a promise to
return soon with appropriate solutions to the prospects identified needs. We
should then return to our office where we can analyse the prospect's problems
in depth, decide what the best solutions to these problems are, prepare our
proposals and recommendations regarding the best solutions, which would lead
to the sale, then make an appointment with the prospect for the second
interview.
There is no specific rule which states the number of interviews we must have
with the prospect. It will depend from case to case. There may be situations
where we may have to conduct more interviews to develop a satisfactory
69
solution and also win the prospects consent to listen to the solution and
consider it.
5. Presenting the solution (Step V)
Now that we have understood the gaps and determined the right kind of
solutions, the next task is to present the solution to the prospect in a way that
motivates the latter to buy insurance and follow our advice.
The most important point to remember when presenting our solution is to be
thoroughly prepared. Prior to making our proposal we would want to review the
prospect's needs in detail, go over our solution one final time, and plan to make
our presentation so that it will appeal to our prospect's buying motives. We
would also want to anticipate what objections the prospect might raise to our
proposal.
It is necessary to present our proposal to the prospect at a time and place that
will be free from interruptions and distractions. As we begin presenting our
solution, we must put the prospect at ease while at the same time making sure
that he or she understands that this is a decision-making session.
We need to begin by reviewing all the data we obtained in the fact-finding
session and stating each of the prospect's problems in an affirmative manner.
We must ensure we convey to our prospect that we have spent enough time
reviewing her situation, and that we are quite confident our recommendations
are the best possible solutions to these problems.
It is very important that we relate each feature of our recommendation to some
particular benefit which the prospect will realise if he or she buys our proposal.
Rather than describing what we have to offer in technical terms, we should
explain how the prospect will be getting what he or she wants and needs.
6. Closing the sale (Step VI)
Closing is the process of persuading the prospect to buy now. The key to
successful closing lies in helping the prospect to say "yes".
a) Begin by summarising the presentation
b) Ensure that the prospect understands the proposal exactly in the same
sense as presented
c) Lead the prospect into an affirmative answer
d) When we know that the prospect understands the proposal and is in an
affirmative mood, we can conduct a definite close
Another closing method is to offer the prospect an alternative between two
minor decisions, either of which would lead to a close.
70
Example
We may ask the prospect if she would prefer to make his payments in cash or
through cheque. Here assumed consent is combined with a seemingly minor
decision.
While making a close it is important that one should not use high pressure
tactics to make a prospect buy something for which there is no real need or
where the prospect cannot afford what is being recommended. Such practices
of selling are unethical.
In other cases where we are persuading the prospect to take positive action, we
must be aware that we are actually rendering an important service to the
prospective customer, which the latter would eventually recognise and
appreciate.
7. Sales follow-through (Step VII)
Between the time that the application is submitted and the policy is completed
and delivered, the four most important responsibilities of the agent are to see
that:
a) The application is clear, complete, and accurate
b) Being actively involved in making sure that any further investigations
that are required get completed in a convenient and timely manner
c) The client's advisors, such as accountants or attorneys, are treated in
the same manner that our client is treated and that we do not invade
their areas of expertise
d) That all questions and requests are promptly followed up
8. Commitment to service (Step VIII):
Service on the part of the agent is an integral element of the sales cycle.
Essential to a commitment to service is a structured program for maintaining
contact with our clients. Such a program could consist of:
a) Conveying commitment: We need to make a service commitment to our
client. We should tell the client that at least once a year we would call
to carefully review her insurance program. Many good agents set the
exact date for this service call before leaving the delivery interview.
b) Committing to continuous contact: Throughout the year a good agent
should keep in touch with the client in as many ways as possible. The
agent may wish to send greeting cards on birthdays, festivals, etc. A
small gift that is personal and useful may be sent from time to time.
Newspaper clippings, insurance related items, are all tokens of the
agent's thoughtfulness and may be sent to the client on a random basis.
71
c) Annual service review plan: At least once a year, we must schedule an

annual service review with the client. We should schedule this service
call well in advance. During the annual service review, we can take the
opportunity to remind the client why he purchased his latest policy,
discuss any needs of the client which are yet unfulfilled, and, if
appropriate, suggest to the client that additional insurance be purchased
at this time to cover his outstanding needs.
The importance of continuous service cannot be overemphasised. It is one of
the critical keys to high persistency. We, particularly in insurance sales, always
need to remember that while our purpose is to provide a need based solution to
the customers we must also sincerely commit to continuous service in a way
that cannot be matched by any other competitor.
Never forget a customer; never let a customer forget you
Important
Negotiation
An important issue that arises when matching the product to customer needs is
the dilemma faced when the customer wants a complete and comprehensive
coverage for all kinds of assets against all kinds of perils but is not willing to
pay the price. In such cases, there is a need for establishing a trade off
between the benefit and the premium and getting the customer to agree to
the same.
This is achieved through negotiation.
The challenge of negotiation arises from the need to reconcile the differences
between what the customer wants and what the insurer has to offer. The agent
needs to skilfully act to reconcile these differences so as to arrive at a win win
situation. Certain rules that she can follow towards achieving a successful
resolution to the problem are given below:
a) First of all there is a need to separate the person from the problem.
Very often, when we come across difficult customers, there is a
tendency to stereotype and brand them as being such kind of person.
Do not brand the customer as being too greedy or too miserly or a fool
for making such a demand.
If this image is stuck in the sales persons mind, it would silently
influence the way in which she responds to the customer, often to the
detriment of the sale. It is very important that the sales person must be
objective and stay focussed on the issues raised rather than the person
raising them.
b) Much skill is also required when the sales person has to negotiate her
way through an objection [to the sale] that has been raised by the
prospect. Once again, the danger is that one gets too caught up by the
72
position that the other party is taking and tries to beat the objection
through argument. The crucial insight here is that behind the objection
and the position that is assumed, there is an underlying interest and
point of concern. The second major principle in sound negotiation is to
go beyond the position and understand and address the underlying
concern [or interest].
c) A third pitfall in negotiations is when both parties assume a black or
white position, being caught up in a winlose situation. For instance,
when a customer wants a certain concession in premium for a given level
of risk cover, the immediate tendency may be to say it is not possible.
Negotiation is the art of finding a third alternative or the shade of grey
between black and white. Often it may be useful to ask what exactly the
customer wants. Can his or her interests be served by offering something
else in return?
The objective must be to arrive at a winwin situation at the end.
Test Yourself 3
Which among the following statements best describes a Testimonial?
I.
II.
III.
IV.
An endorsement from a satisfied customer

Test result for a product in a benchmarking test
List of tests that a product must pass
Money required to test a product
73
D. Selling non-life insurance

It is obvious from the above paragraphs that one of the most important tasks
that the insurance agent has to undertake is to understand the customers world
and identify the areas where insurance protection is needed by him. Let us now
look at some of the non-life insurance needs as they are emerging today. This is
done by conducting the need-gap analysis.
The most important secret of salesmanship is to find out what the proposer
needs, then help him to find the best way to get it
1. Need for non-life insurance products
What is the need for non-life insurance products?
People own assets/property - a resource with economic value that an individual,
corporation or country owns or controls with the expectation that it will provide
future benefit. It means that the owner or controller always has interest in the
continued life of the asset till the end of life time of the asset.
This is known as insurable interest. They would, therefore, insure their assets or
properties against unfortunate incidents caused by perils, which they think may
damage the longevity or value of their assets or property.
Important
Retail customers: catered through insurance policies meant for the individual
and families. Examples are motor insurance, householders insurance; travel
insurance, health insurance etc.
Commercial / Industrial customers: catered through insurance policies that
protect assets, profit, and wealth and provide indemnity against legal liability
of commercial/industrial enterprise. Examples are insurance like fire,
engineering, business interruption, marine insurance, liability insurance etc.
2. Customers covered
Non-life insurance in India covers following categories of customers.
a) Individuals
Individuals typically would need to protect assets which are of high value,
the loss and replacement of which can take a heavy toll on their wealth.
One of the important trends in non-life insurance today is the rapid growth
of personal insurance policies.
74
b) Business owners
Running a business presents many challenges. Business owners consider some
risks to be retainable, while others are unaffordable because the loss would
seriously harm the business or even force it to close down. Many of these
unaffordable risks can be transferred to an insurance company.
Businesses need insurance to:
Protect assets
Replace damaged property that has been affected by loss or theft
Provide for lost income
Cover liability arising out of legal obligations.
Provide coverage for their workmen
As stated above, if the business owners are not adequately protected, they
risk losing the business. Non-life insurance thus plays a major role in keeping
the Indian economy moving.
Customers however have the option to choose between products and policy
features of various competitive insurance companies. This holds true for
both commercial as well as retail non-life insurance products. The approach
to non-life insurance customers involves looking for trigger points that would
bring out the need to protect and preserve ones wealth and assets.
3. Cross selling
Cross selling opportunities are major sources for generating sales.
If you have a good relationship with a set of clients, you could be their single
point of contact for a range of covers that they may need for their house, their
health, their car, their travel abroad, their cargo and consignments, their
liability/professional indemnity etc.
Key to success lies in building client relationships and a formidable
reputation for service and professionalism.
Important
In case of retail selling to individuals one must look for the following:
i.
One way of approach is to look at the asset, which is the subject matter of
insurance. In many instances like a car, the insurance has to be made at the
time of the purchase. Many insurers would typically tie up with motor
insurance dealers who arrange the insurance at the time of sale of vehicles.
75
ii. The second chance to approach the customer comes up at the time of
renewal when the client may be motivated to continue with the present
insurer or switch insurers.
iii. Yet another point of approach would be when purchase of an asset is
financed through a loan. In such case, the asset is hypothecated to the
financier who grants the loan. A typical case in point is the purchase of a
house through mortgage finance. Insurance of the asset could ensure that
the loaner / financiers insurable interest in the property is secured in the
wake of any unforeseen risk event. This affords an opportunity to sell
insurance.
iv. Similarly, when somebody becomes a professional like a surgeon it would be
necessary to consider the risk of professional liability. In these cases
professional liability insurance may be suggested.
v. Another concern is about health. A person can fall sick or get injured in an
accident. Hospital costs can be very high or even unaffordable. Hence,
health insurance can help people.
vi. While travelling overseas, health issues are of a higher concern as cost can
be significantly higher in foreign currency; loss of baggage is another area of
concern. Overseas travel policies would be suitable for such a traveller.
Test Yourself 4
General insurance could help in achieving all of the following objectives
EXCEPT:
I.
II.
III.
IV.
76
Protection against loss to business premises

Making windfall gains on the occurrence of a contingent event
Protection against errors and omissions
Protection against property losses
E. Insurance market development parameters

Let us take a brief look at what we mean by development of the insurance
market and the facets of this development. In quantitative terms, market
development in insurance has been generally measured in terms of three
parameter indicators:
Diagram 3: Insurance market development parameters
Looking at the various aspects of marketing and sales of insurance, one should
appreciate the potential of huge market with different special needs.
Challenges include connecting with market and identifying their needs for
insurance.
A successful insurance agent should be able to recommend the most appropriate
product available with her company to the prospect so that needs for insurance
are precisely addressed.
Test Yourself 5
How can insurance penetration be determined?
I.
II.
III.
IV.
Ratio of
Ratio of
Ratio of
Ratio of
insurance premiums to GDP.

insurance companies to the local population
insurance premium to per capita income
subscribers to the insurance policies available
77
Summary
a) A sale is the act of giving product or service in return for money.
b) Marketing is the means by which the insurance company seeks to identify,
serve, satisfy and retain or keep the customer.
c) The four Ps of marketing are product, price, promotion and place.
d) The different steps in the sales processes are:
Prospecting
Preparing for interview
Conducting the sales interview
Determining what are the appropriate solutions
prospects various risk exposures
for addressing the
Presenting the solution

Closing the sale
Carrying out a Sale follow-through
Demonstrating Commitment to service
e) Prospecting is the process of gathering names of people who can be
approached for a sales interview.
f) The process of prospecting can include references, testimonials, seminars
and cold calling etc.
g) Closing a sale involves persuading the prospect to buy now.
h) Service on the part of the agent is an integral element of the sales cycle.
i) Cross selling opportunities are major sources for generating sales.
j) The parameters to insurance market development include premiums,
insurance market penetration and market density.
78
PRACTICE QUESTIONS AND ANSWERS
CHAPTER 3
Key terms
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
Prospecting
Cold calling
Negotiation
Closing the sales
Insurance penetration
Insurance density
The importance of selling as profession
The concept of selling & marketing
The importance of sales negotiation
Need for general insurance products
Different approaches to retail selling
Parameters of market development- volume of premium, penetration &
density
79

Answer 1
Goodwill is not an essential component of the sales process.
Answer 2
Product advertisement is a means of promotion.
Answer 3
A testimonial is an endorsement from a satisfied customer.
Answer 4
General insurance cannot be used to make windfall gains on the occurrence of a
contingent event.
Answer 5
Insurance penetration is the ratio of insurance premiums to GDP.
Question 1
Classification of customers into various market segments, having common
features is known as _____________.
I.
II.
III.
IV.
Sales
Segmentation
Marketing
Prospecting
Question 2
The key to successful closing lies in helping the prospect to say ________.
80
I.
II.
III.
IV.
No
Dont know
Yes
Maybe
Question 3
Which of the following is not part of sales process?
I.
II.
III.
IV.
Prospecting
Sales interview
Loss assessment
Closing
Question 4
_______________ is not among the Ps of marketing.
I.
II.
III.
IV.
Price
Product
Protection
Place
Question 5
Insurance is part of ___________ industry.
I.
II.
III.
IV.
Manufacturing
Financial services
Consumer goods
Share market
Question 6
Negotiation is a process _____________.
I.
II.
III.
IV.
To win some how

To give discounts to the customer
To reach a win-win situation
To argue and defeat the prospect
Question 7
Prospecting in an insurance sale is
I.
II.
III.
IV.
Gathering the names of people who may be interested in insurance

Preparing a list of all the persons in the city
Enlisting all the policyholders of the branch office
Preparing list of all the agents in the neighbourhood
81
Question 8
Need-gap analysis involves, finding about prospect:
I.
II.
III.
IV.
Identifying the areas where the prospect needs insurance protection

Identifying people to work as insurance agents
Identifying how much assets a prospect has
Indentifying the poverty level of the prospects
Question 9
Insurance density is:
I.
II.
III.
IV.
Life insurance premium

Ratio of premium to income
Premium per capita
Coverage per capita
Question 10
Cold Calling is:
I.
II.
III.
IV.
Meeting
Meeting
Meeting
Meeting
customers in winter
customers when they are suffering from cold
people unannounced
customer after fire was extinguished

Answer 1
Classification of customers into various market segments, having common
features is known as segmentation.
Answer 2
The key to successful closing lies in helping the prospect to say Yes.
Answer 3
Loss assessment is not a part of the sales process.
82
Answer 4
Protection is not among one of the Ps of marketing.
Answer 5
Insurance is a part of the financial services industry.
Answer 6
Negotiation is a process to reach at a win-win situation.
Answer 7
Prospecting in an insurance sale is gathering the names of people who may be
interested in insurance.
Answer 8
Need-gap analysis involves, finding about prospect and identifying the areas
where the prospect needs insurance protection.
Answer 9
Insurance density is premium per capita.
Answer 10
Cold calling involves meeting people unannounced.
83
CHAPTER 4
LEGAL AND REGULATORY ASPECTS OF INSURANCE
AGENCY
This chapter aims to provide you with the understanding of importance of
insurance regulations. This chapter also provides you with an understanding of
the legal status of an insurance agent. You will also learn the various rules and
regulations applicable to agents in general; and to insurance agents in
particular.
Learning Outcomes
A.
B.
C.
D.
E.
Importance of Insurance Regulations

Insurance Regulatory Framework - India
Regulations applicable to Insurance Agents
Insurance Intermediaries and their Roles
Indian Contract Act, 1872: Principal Agent Relationship

1.
2.
3.
4.
5.
Illustrate the importance of insurance regulations

Explain the insurance regulatory framework of the country
Interpret regulations that apply to insurance agents
Appreciate code of conduct applicable to agents
Explain relevance of the Indian Contract Act, 1872 to insurance agents
84
A. Importance of Insurance Regulations

1. Importance of Insurance Regulations
An insurance agent should always bear in mind that she is selling a promise that
the insurance company will pay a certain amount of money if a misfortune
occurs. The insured person would undoubtedly have many worries about the
insurance purchased.
Some common concerns of an insured would be:
a.
b.
c.
d.
e.
f.
g.
Is insurance legal?
Are insurance agents recognised by law?
Are these insurance companies regulated or supervised?
Is the document given to me by the insurer legally valid?
Will the insurance company pay me the money if a loss happens?
Will they pay me the full money that I lose?
If I do not get a claim, can I go to court based on the documents they
have given me?
h. Are there any hidden provisions in the insurance contract, whereby the
insurance company can avoid paying me a claim?
i. Do I have to go through any complicated procedures to get my claim
paid?
2. Need for insurance regulations
Why are insurance regulations required?
The prime purpose of insurance regulation is to protect the policyholder. The
policyholder has paid the money and bought the insurance policy. She should be
assured that the insurance policy she bought will be honoured by the insurance
company.
a) First and foremost, an insured should understand that insurance is an
absolutely legal contract, in compliance with the provisions of the
Indian Contract Act and other laws of the country.
b) The Government is duty bound to protect all its citizens and all entities
in the country through its legal and judicial systems.
Regulations made by IRDA are to ensure that insurance companies should exist
as financially sound organisations to honour the contracts that they have
entered into. IRDA regulates companies from their registration onwards and
monitor all their major activities like investments, accounting etc.
85
Information
In specialised sectors of economy, the Government creates bodies to regulate
the sector. Thus we have bodies like Reserve Bank of India (RBI) to regulate
banks and the Securities and Exchange Board of India (SEBI) to regulate the
capital market. Similarly, to regulate the insurance sector the office of
controller / Tariff Advisory Committee of insurance were created by; the
Government under the Insurance Act in 1938, which was amended from time to
time, to make it relevant to the changes in the industry subsequently.
Insurance Regulatory and Development Authority of India (IRDAI) Act 1999,
created the IRDAI as an independent authority for the purpose of regulating the
insurance industry.
All insurance policy wordings, rates and the documents issued by insurance
companies are scrutinised and approved by IRDAI. The advertisements issued by
insurers are also regulated. There are guidelines regarding prompt settlement of
claims, grievance handling systems in every company and at IRDA level to
address complaints at the company and at IRDAI level.
IRDAI has issued directions to ensure that the insurance company targets rural
areas of the country and weaker sections of the population equally. All people
dealing with selling and servicing of insurance policies, viz. agents, corporate
agents, brokers, surveyors, Third Party Administrators and insurance companies
are licensed as well as regulated by IRDA as per various regulations.
Test Yourself 1
What is the primary purpose of insurance regulations?
I.
II.
III.
IV.
86
To generate fee income

Protect the interests of policyholders
To settle customer disputes
To control the market share of private insurers
B. Insurance Regulatory Framework - India

The Insurance Act, 1938 read with the Insurance Laws Amendment Act, 2015
and the Insurance Regulatory and Development Authority of India Act, 1999
form the basis of insurance regulations in India. There are a few other
legislations in the country that are directly or indirectly applicable to insurance
business.
1. The Insurance Act, 1938 read with the Insurance Laws Amendment Act,
2015 and the Insurance Regulatory and Development Authority Act, 1999 (in
brief known as "Insurance Laws"):
The Insurance Laws are the basic insurance legislation of the country, governing
insurance business in India. These were created to protect the interests of
insured population, with comprehensive provisions for effective control over the
activities of insurers. The main Act that is Insurance Act 1938 came into effect
on 1st July, 1939. This Act has been amended from time to time to strengthen
the legal provisions of the Act.
The Insurance Laws have provisions for monitoring and control of operations
of insurance companies; some important sections of the said acts are listed
below:
a. Registration of insurance companies and renewal of registrations (Sections 3
and 70 of the Insurance Act 1938.
b. Requirement to have sufficient capital for the company and to maintain
solvency (Sections 64 V and 64VA)
c. Compulsion that assets of insurance companies should be invested only as
per norms prescribed for the same (Revised Section 27 and Section 85 of the
1938 Act)
d. Requirement to maintain audit and submit returns to the regulator (Revised
Section 28)
e. Obligations of insurers towards the rural and social sectors (Revised Sections
32B and 32C).
f. Rules for assignment and transfer of policies and nominations (Revised
Sections 38 & 39)
g. Limitations on the expenses of the management (Revised Sections 40, 40B
and 40C)
h. Licensing of agents and their remunerations (Revised Sections 42 to 44)
i. Prohibition of using rebates as an inducement to any person to take, renew
or continue an insurance policy in India (Revised Section 41)
j. Solvency (Financial strength) of the insurance companies to meet all their
commitments to policyholders (Revised Sections 64V and 64VA)
k. Advance payment of premium (Section 64VB)
l. Need for survey of losses (Revised Section 64UM )
87
Note: Unless otherwise specified the section no.s referred above pertain
to those of Insurance Act 1938. Many of these are revised by the
Insurance Laws amended Act 2015)
2. The Insurance Regulatory & Development Authority Act, 1999
Insurance Regulatory and Development Authority of India (IRDAI) was
established in 2000 as an independent authority to regulate and develop the
insurance industry by an act of Parliament, [namely Insurance Regulatory &
Development Authority Act, 1999]. IRDAI stands changed to "IRDAI" vide
notification no. IRDAI/CAD/MISC/PRE/12/2014 dated 30.12.2014. Hence,
wherever "IRDAI" appears, the same be read as "IRDAI".
The preamble of the IRDA Act states:
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.
IRDAI has prescribed regulations for protecting the interests of policyholders
stipulating obligations on both insurers as well as intermediaries. These
regulations prescribe insurers. obligations at the point of sale, towards policy
servicing, claims servicing, and control on their expenses, investment and
financial strength to meet the commitments to policyholders.
3. Other Acts / Regulations linked to insurance
In addition, insurance business in India is linked to various other Acts /
legislations of the country, some of which are listed below:
a) The Workmen's Compensation Act, 1923 [amended and renamed as
Employees Compensation Act 1923 in the year 2010]
b) Employees. State Insurance Act, 1948
c) Life Insurance Corporation Act, 1956
d) Deposit Insurance and Credit Guarantee Corporation Act, 1961
e) Marine Insurance Act, 1963
f) Export Credit Guarantee Corporation Act, 1964
g) General Insurance Business (Nationalisation) Act, 1972
h) General Insurance Business (Nationalisation) Amendment Act, 2002
i) Motor Vehicles Act, 1988
j) Public Liability Insurance Act, 1991
Apart from these specific laws, there are many regulations, orders and circulars
issued by IRDAI from time to time relating to conduct of insurance business and
for policyholders protection.
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4. Consequent upon the Parliament of India passing the Insurance Laws

(Amendment) Act 2015, IRDAI have framed the "Guidelines on Appointment of
Insurance Agents 2015" vide Notification no.IRDA/AGTS/CIR/GLD/046/03/2015
dated 17.3.2015. In due course "Corporate Agency Regulations" will 17.3.2015.
In due course "Corporate Agency Regulations" will be notified by IRDAI.
Students are advised to study the aforesaid two notifications of IRDAI carefully.
Test Yourself 2
Which among the following activities is prohibited as per the provisions of
Insurance Act, 1938?
I.
II.
III.
IV.
Keeping aside reserves to meet solvency requirements

Using rebates as a tool to sell insurance policies
Prospecting customers
Limiting management expenses
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C. Regulations applicable to Insurance Agents

1. Regulations for insurance agents
iv)
Appointment of Insurance Agent by the Insurer:

1) An applicant seeking appointment as an Insurance Agent of an Insurer
shall submit an application in Form I-A to the Designated Official of the
Insurer
2) The Designated Official of the insurer, on receipt of the application,
shall satisfy himself that the applicant:a) has furnished the Agency Application in Form I-A complete in all
respects;
b) has submitted the PAN details along with the Agency Application
Form;
c) has passed the insurance examination as specified under Clause VI;
d) does not suffer from any of the disqualifications mentioned in Clause
VII
e) has the requisite knowledge to solicit and procure insurance
business; and capable of providing the necessary service to the
policyholders;
3) The Designated Official shall exercise due diligence in verifying the
agency application and ascertaining that the applicant does not hold
agency appointment for more than one life insurer, one general insurer,
one health insurer and one of each of the mono-line insurers and is not
in the centralised list of blacklisted agents.
4) The Designated Official shall also verify
1. The centralised list of agents maintained by the Authority with the
PAN Number of the applicant to ascertain the information as in sub
clause (3) above.
2. The centralised list of black listed agents maintained by the
Authority to ascertain that the applicant is not black listed.
5) The Designated Official on satisfying himself that the applicant has
complied with all the conditions mentioned in Clause IV (2) to IV (4)
above, and also does not suffer from any of the disqualifications
mentioned in sub-section (3) of Section 42 of the Act, may process the
agency application and if found fit and proper, grant appointment to the
applicant as an insurance agent by issuing an appointment letter within
15 days of receipt of all documents from the applicant. The Designated
Official shall allot an agency code number to the appointed agent and
the agency code number shall be prefixed by the abbreviation of the
insurers name.
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6) The agency appointment letter issued as mentioned in sub-clause (5)

above shall lay down the terms of appointment covering all conditions
governing appointment and functioning of the applicant as insurance
agent and the code of conduct as outlined in Clause VIII. The letter of
appointment shall be dispatched not later than 7 days after the
appointment of the agent as mentioned in sub-clause (5) above.
7) The applicant so appointed as an insurance agent shall be provided an
identity card, by the insurer which shall identify the agent with the
insurer of which he/she is acting as an agent.
8) The Designated Official shall enter and update the Agency Data of the
applicant appointed as an Insurance agent in the Agency Portal
maintained by the Authority through online mode immediately after the
appointment of the agent. The online up-dation of Agency database
records by the insurer is to maintain the updated centralised list of
agents maintained by the Authority. The Designated Official shall be
responsible to ensure that the centralized list of agents is up to date
and accurate.
9) The Designated Official may refuse to grant Agency Appointment to any
applicant if the applicant does not fulfil any of the conditions mentioned
in these Guidelines. The Designated Official shall communicate the
reasons for refusal for appointment as agent to the application writing
in, within 21 days of receipt of the application.
10) An applicant who is aggrieved by the decision of the Designated Official
refusing to grant the agency appointment may submit a review
application to the appellate officer of the insurer for review of the
decision. The insurer shall designate an Appellate Officer to consider the
review application of the applicant. The Appellate Officer shall consider
the application and communicate the final decision in writing within 15
days of receipt of the review application.
v)
Appointment of Composite Insurance Agent by the insurer:

1. An applicant seeking appointment as a Composite Insurance Agent shall
make separate application to the Designated Official of respective life,
general, health insurer or mono line insurer as the case may be, in the
Composite Agency Application Form I-B. The Designated Official of the
respective insurers shall deal with the application in the manner and
procedure outlined in Clause IV.
vi)
Insurance Agency Examination.

1) 1)
An applicant shall pass in the Insurance Agency Examination
conducted by the Examination Body in the subjects of Life, General,
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Health Insurance as the case may be, as per the syllabus prescribed by
the Authority to be eligible for appointment as an insurance agent. The
insurer shall provide the necessary assistance and guidance to the
candidates to equip them with adequate insurance knowledge required
to qualify in the agency examination.
2) The applicant who has successfully passed the Insurance Agency
Examination as mentioned in (1) above shall be issued a pass certificate
by the Examination body. The pass certificate issued by the Examining
body shall be in force for a period of twelve months, for the purpose of
seeking appointment as an agent with any insurer for the first time.
3) Only candidates who have qualified in the Insurance Agency Examination
as mentioned above and who hold a valid pass certificate issued by the
Examination Body shall be eligible to be considered for appointment as
agents.
vii)
Disqualification to act as an Insurance Agent: The conditions for

disqualification shall be as stipulated under Section 42 (3) of the Act.
The disqualifications referred to in the proviso to sub-section (1) shall be
the following:
a) that the person is a minor;
b) that he is found to be of unsound mind by a court of competent
jurisdiction;
c) that he has been found guilty of criminal misappropriation or criminal
breach of trust or cheating or forgery or an abetment of or attempt to
commit any such offence by a court of competent jurisdiction:
Provided that where at least five years have elapsed since the
completion of the sentence imposed on any person in respect of any such
offence, the Authority shall ordinarily declare in respect of such person
that his conviction shall cease to operate as a disqualification under this
clause;
d) that in the course of any judicial proceeding relating to any policy of
insurance or the winding up of an insurer or in the course of an
investigation of the affairs of an insurer it has been found that he has
been guilty of or has knowingly participated in or connived at any fraud,
dishonesty or misrepresentation against an insurer or insured;
e) that in the case of an individual, who does not possess the requisite
qualifications or practical training or passed the examination, as may be
specified by the regulations;
f) that in the case of a company or firm making, a director or a partner or
one or more of its officers or other employees so designated by it and in
the case of any other person the chief executive, by whatever name
called, or one or more of his employees designated by him, do not
92
possess the requisite qualifications or practical training and have not

passed such an examination as required under clauses (e) and (g);
g) that he has not passed such examination as may be specified by the
regulations;
h) that he has violated the code of conduct as may be specified by the
regulations.
(4) Any person who acts as an insurance agent in contravention of the provision
of this Act, shall be liable to a penalty which may extend to ten thousand
rupees and any insurer or any person acting on behalf of an insurer, who
appoints any person as an insurance agent not permitted to act as such or
transacts any insurance business in India through any such person shall be liable
to penalty which may extend to one crore rupees.
(5) The insurer shall be responsible for all the acts and omissions of its agents
including violation of code of conduct specified under clause (h) of sub-section
(3) and liable to a penalty which may extend to one crore rupees.".
viii) Code of Conduct.

1) Every agent, shall adhere to the code of conduct specified below:a)
Every insurance agent shall,--i.

identify himself and the insurer of whom he is an insurance agent;
ii.
show the agency identity card to the prospect, and also disclose
the agency appointment letter to the prospect on demand;
iii.
disseminate the requisite information in respect of insurance
products offered for sale by his insurer and take into account the
needs of the prospect while recommending a specific insurance
plan;
iv.
where the Insurance agent represents more than one insurer
offering same line of products, he should dispassionately advice
the policyholder on the products of all Insurers whom he is
representing and the product best suited to the specific needs of
the prospect.
v.
disclose the scales of commission in respect of the insurance
product offered for sale, if asked by the prospect;
vi.
indicate the premium to be charged by the insurer for the
insurance product offered for sale;
vii.
explain to the prospect the nature of information required in the
proposal form by the insurer, and also the importance of disclosure
of material information in the purchase of an insurance contract;
viii.
bring to the notice of the insurer every fact about the prospect
relevant to insurance underwriting, including any adverse habits or
income inconsistency of the prospect, within the knowledge of the
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ix.
x.
xi.
xii.
xiii.
agent, in the form of a report called Insurance Agents

Confidential Report along with every proposal submitted to the
insurer wherever applicable, and any material fact that may
adversely affect the underwriting decision of the insurer as regards
acceptance of the proposal, by making all reasonable enquiries
about the prospect;
obtain the requisite documents at the time of filing the proposal
form with the insurer; and other documents subsequently asked for
by the insurer for completion of the proposal;
advise every prospect to effect nomination under the policy
inform promptly the prospect about the acceptance or rejection of
the proposal by the insurer;
render necessary assistance and advice to every policyholder on all
policy servicing matters including assignment of policy, change of
address or exercise of options under the policy or any other policy
service, wherever necessary;
render necessary assistance to the policyholders or claimants or
beneficiaries in complying with the requirements for settlement of
claims by the insurer;
2) No insurance agent shall,---a. solicit or procure insurance business without being appointed to act
as such by the insurer
b. induce the prospect to omit any material information in the proposal
form;
c. induce the prospect to submit wrong information in the proposal
form or documents submitted to the insurer for acceptance of the
proposal;
d. resort to multilevel marketing for soliciting and procuring insurance
policies and/or induct any prospect/policyholder to join a multilevel
level marketing scheme.
e. behave in a discourteous manner with the prospect;
f. interfere with any proposal introduced by any other insurance agent;
g. offer different rates, advantages, terms and conditions other than
those offered by his insurer;
h. demand or receive a share of proceeds from the beneficiary under an
insurance contract;
i. force a policyholder to terminate the existing policy and to effect a
new policy from him within three years from the date of such
termination of the earlier policy;
j. apply for fresh agency appointment to act as an insurance agent, if
his agency appointment was earlier cancelled by the designated
94
official, and a period of five years has elapsed from the date of such
cancellation;
k. become or remain a director of any insurer;
3) Every insurance agent shall, with a view to conserve the insurance business
already procured through him, make every attempt to ensure remittance of
the premiums by the policyholders within the stipulated time, by giving
notice to the policyholder orally and in writing;
4) Any person who acts as an insurance agent in contravention of the provisions
of this Act shall be liable to a penalty which may extend to ten thousand
rupees and any insurer or any person acting on behalf of an insurer, who
appoints any person as an insurance agent not permitted to act as such or
transact any insurance business in India through any such person shall be
liable to penalty which may extend to one crore rupees.
5) The insurer shall be responsible for all acts and omissions of its agents
including violation of code of conduct specified under these guidelines, and
shall be liable to a penalty which may extend to one crore rupees.
x)
Suspension of Appointment of an Agent:

1) The appointment of an agent may be cancelled or suspended after due
notice and after giving him/her a reasonable opportunity of being heard
if he/she:a. violates the provisions of the Insurance Act,1938 (4 of 1938),
Insurance Regulatory and Development Authority Act, 1999 (41 of
1999) or rules or regulations, made there under as amended from
time to time;
b. attracts any of the disqualifications mentioned in Clause VII.
c. Fails to comply with the code of conduct stipulated in Clause VIII and
directions issued by the Authority from time to time.
d. Violates terms of appointment.
e. Fails to furnish any information relating to his/her activities as an
agent as required by the Insurer or the Authority;
f. Fails to comply with the directions issued by the Authority;
g. Furnishes wrong or false information; or conceals or fails to disclose
material facts in the application submitted for appointment of Agent
or during the period of its validity.
h. does not submit periodical returns as required by the
Insurer/Authority;
i. does not co-operate with any inspection or enquiry conducted by the
Authority;
95
j. fails to resolve the complaints of the policyholders or fails to give a

satisfactory reply to the Authority in this behalf;
xi)
Manner of holding enquiry before/after suspension of appointment of

the insurance Agent:
1. The appointment of an insurance agent shall not be cancelled unless an
enquiry has been conducted in accordance with the procedure specified
in this clause.
2. For the purpose of holding an enquiry under this clause, the insurer may
appoint an Officer as an Enquiry Officer within 15 days of the issue of
the suspension order;
3. The Enquiry Officer shall issue a show cause notice to the insurance
agent at the registered address of the insurance agent calling for all
information / data as deemed necessary to conduct the enquiry and
grant the insurance agent a time of 21 days from date of receipt of the
show cause notice, for submission of his/her reply and such information
/ data called for;
4. The insurance Agent may, within 21 days from the date of receipt of
such notice, furnish to the enquiry officer a reply to the Show
cause notice together with copies of documentary or other evidence
relied on by him or sought by the Enquiry Officer;
5. The Enquiry Officer shall give a reasonable opportunity of hearing to the
insurance agent to enable him to make submissions in support of his/her
reply;
6. The insurance agent may either appear in person or through any person
duly authorised by him to present his case, provided however that the
prior approval of the Insurer is obtained for the appearance of the
Authorised Person;
7. If it is considered necessary, the Enquiry Officer may require the Insurer
to present its case through one of its officers;
8. If it is considered necessary, the Enquiry Officer may call for
feedback/information from any other related entity during the course of
enquiry;
9. If it is considered necessary, the Enquiry Officer may call for additional
papers from the insurance agent;
10. The Enquiry Officer shall make all necessary efforts to complete the
proceeding at the earliest but in no case beyond 45 days of the
commencement of the enquiry:
11. Provided that in case the enquiry cannot be completed within the
prescribed time limit of 45 days as mentioned in (10) above; the enquiry
officer may seek additional time from the Insurer stating the reason
thereof;
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12. The Enquiry Officer shall, after taking into account all relevant facts and
submissions made by the insurance agent, shall furnish a report making
his/her recommendations to the Designated Official. The Designated
Official shall pass a final order in writing with reasons. The order of
designated official shall be signed and dated and communicated to the
agent.
xii)
Procedure for Cancellation of Agency:
On the issue of the final order for cancellation of agency of the insurance agent,
the agent shall cease to act as an insurance agent from the date of the final
order.
xiii)
Publication of order of suspension/ Cancellation.
1. The order of suspension/cancellation of appointment of the insurance Agent

made under clause XI and XII shall be displayed on website of the Insurer
and updated in centralised list of agents maintained by the Authority, so
that registration of new business by the suspended/Cancelled agent is
stopped forthwith by the insurers.
2. On and from the date of suspension or cancellation of agency appointment,
the insurance agent, shall cease to function as an insurance agent.
xiv)
Effect of suspension/cancellation of Agency appointment.
1) On and from the date of suspension or cancellation of the agency, the

insurance Agent, shall cease to act as an insurance agent.
a. The insurer shall recover the Appointment letter and Identity card
from the agent whose appointment has been cancelled under these
Guidelines within 7 days of issuance of final order effecting
cancellation of appointment.
b. The insurer shall black list the agent and enter the details of the
agent whose appointment is suspended/cancelled into the black
listed agents database maintained by the Authority and the
centralised list of agents database maintained by the Authority, in
online mode, immediately after issuance of the order effecting
suspension/cancellation.
c. In case a suspension is revoked in respect of any agent on conclusion
of disciplinary action by way of issuance of a speaking order by
Designated Official, the details of such agent shall be removed from
list of black listed Agents as soon as the Speaking Order revoking
his/her suspension is issued.
d. The insurer shall also inform other insurers, Life or General or Health
Insurer or mono line insurer with whom he/she is acting as an agent,
97
of the action taken against the Agent for their records and necessary
action.
2) Nothing contained in the above regulation shall prevent the Authority to
initiate penal action keeping in mind the extent of violation and level of
violation as per the provisions of the Insurance Act, 1938, regulations
and rules there under.
xv)
Appeal Provision: An agent who is aggrieved by the order of cancellation

can appeal to the insurer within 45 days of the order. The insurer shall
appoint an Appellate Officer who shall examine the appeal and give his
decision in the matter in writing within 30 days of the receipt of the
appeal.
xvi)
Procedure to be followed in respect of resignation/surrender of

appointment by an insurance agent:
In case an insurance agent appointed by an insurer wishes to surrender
his agency with his/her insurer, he/she shall surrender his appointment
letter and identity card to the designated official of the insurer with
whom he/she is currently holding agency.
The Insurer shall issue the cessation certificate as detailed in Form 1-C
within a period of 15 days from the date of resignation or surrender of
appointment.
An agent who has surrendered his appointment may seek fresh
appointment with other insurer. In such a case, the agent has to furnish
to the new insurer all the details of his/her previous agency and produce
Cessation Certificate issued by the previous insurer issued in Form I-C,
along with his agency application form.
The insurer will consider the agency application as outlined in Clause IV
after a period of NINETY DAYS from the date of the issue of the cessation
certificate by the previous insurer.
1)
2)
3)
4)
xvii)
General conditions for appointment of Agents by the insurer:
1) The Insurer shall frame a Board Approved Policy covering Agency

Matters as listed in Annexure I and file the same with the Authority
before 31st March every year. The details of these guidelines appear in
Annexure 1
2) No individual shall act as an insurance agent for more than one life
insurer, one general insurer, one health insurer and one of each of other
mono-line insurers
3) Any individual, who acts as an insurance agent in contravention of the
provisions of this Act, shall be liable to a penalty which may extend to
ten thousand rupees.
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4) Any insurer or any representative of the insurer acting on behalf of the

insurer, who appoints an individual as an insurance agent not permitted
to act as such or transact any insurance business in India shall be liable
to penalty which may extend to one crore rupees.
5) No insurer shall, on or after the commencement of the Insurance Laws
(Amendment) Ordinance 2014 appoint any Principal Agent, Chief Agent,
and Special Agent and transact any insurance business in India through
them.
6) No person shall allow or offer to allow, either directly or indirectly or an
inducement to any person to take out or renew or continue an insurance
policy through multilevel marketing scheme.
7) The Authority may through an officer authorized in this behalf, make a
complaint to the appropriate police authorities relating to the entity or
persons involved in the Multi-Level Marketing schemes
8) Every insurer and every Designated Official who is acting on behalf of an
insurer in appointing insurance agents shall maintain a register showing
the name and address of every insurance agent appointed by him and
the date on which his appointment began and the date, if any, on which
his appointment ceased.
9) The records as mentioned in (8) above shall be maintained by the insurer
as long as the insurance agent is in service and for a period of five years
from the cessation of the appointment.
xviii) Existing Agents licensed by Authority--1. Insurance agents holding a valid license issued by the Authority to act as
insurance agents of different insurers and agents whose licenses are
tagged to standalone health insurers / Agriculture Insurance Company
Ltd under special permission granted by the Authority to Standalone
Health Insurers /AIC of India shall be deemed to have been appointed by
the respective insurers, and shall continue to operate as insurance
agents of the respective Standalone Health insurers /AIC of India.
2. The Designated Official of insurer shall recover the agency license and
identity cards issued on behalf of the Authority to the agent before
commencement of these Guidelines, and issue the agents, appointment
letters and fresh identity cards under these guidelines within 90 days of
commencement of these Guidelines.
3. The agency license and identity card issued on behalf of the authority
and recovered by the insurer and the fresh appointment letter issued
by the insurer should be carefully preserved by the insurer for submission
to the Authority as and when called for.
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Important
2. Adverse Selection (Anti-selection)
Agents represent insurance companies and they act as the main link between
the insurance company and the insured. Their role is to recommend to clients
the right products that address the clients' needs. Atthe same time, they must
act in the interests of the insurance company by understanding the risk insured
properly enough so as to avoid any adverse selection against the insurance
company.
This denotes insurance firm's acceptance of applicants who are at a greater
than normal risk (or uninsurable), but conceal/ falsify information about their
actual condition or situation. Acceptance of their application has an 'adverse'
effect on insurance companies, because normally insurance premiums are
computed on the basis of policyholders being in average circumstances (E.g.
Enjoying good health/ employed in non-hazardous environments.)
3. Qualifications of the applicant
The applicant must possess the minimum qualification as per the "Board
Approved Policy of the Insurer" concerned.
Annexure I.
GUIDELINES FOR BOARD APPROVED POLICY TO BE FRAMED BY INSURERS:
a) Insures shall frame a Board Approved Policy on the following Agency
Matters and file the same with the Authority before 31stMarch every
year.
b) The Board approved Policy shall encompass the following
1.
Eligibility conditions for appointment of Insurance Agents which inter
alia shall include
i. Eligible Age for appointment
ii. Eligible Educational qualification, suggested minimum qualification to
be prescribed by the insurer is a pass in 10th standard or equivalent
examination from a recognised Board / Institution.
iii. Interview procedure if any for appointment.
2. Pre-Recruitment Training on Insurance to applicants: Every insurer shall
endeavor to impart insurance training to the applicants for agency, so as to
equip them with the insurance knowledge to appear for insurance agency
examination. It is suggested to prescribe a practical training in accordance with
the syllabus prescribed by the Authority in Life / General / Heath Insurance as
the case may be for not less than 25 hours. The details thereof shall be
mentioned in the Board Approved Policy.
100
3. Skill Development Training Every insurer shall endeavor to utilize the Skill
Development Training conducted by National Skill Development Council (NSDC),
Government of India; BFSI SSC financial sector skill council in a phased manner.
4. Agency Performance Review Policy: Every Insurer shall specify the following
criteria:
a) The Minimum Business Guarantee norms to be achieved by agents during
the agency year
b) The criteria for termination of agency for failure to achieve the Minimum
Business Guarantee
c) The criteria for re-appointment/re-instatement of agents terminated for
failure to achieve the Minimum Business Guarantee
5. Agency Remuneration and Benefits: Every Insurer shall specify the following
criteria and file the same with the Authority:
a. Criteria for payment of incentive (bonus) commission if any, to agents
over and above the standard commission as prescribed in the product,
b. Criteria for considering eligibility for payment of renewal commission
(ERC status) if any, to agents after termination of agency.
c. Criteria for payment of hereditary commission if any, to the heirs of
agent in the event of unfortunate death of agent.
d. Criteria to offer group life insurance cover, group personal accident
cover, group health insurance cover and any other such benefits, if any,
to the agents.
e. Schedule of payments of commission and various other benefits to the
agents
The Board of Directors of the Insurer shall review the Board Approved Policy
every year; and file changes if any, in the Policy by 31st March of that year.
4. Prohibition of rebates
No intermediary is allowed to induce anyone to take a policy. Section 41 of the
Insurance Act, 1938 is hence an important section for an insurance agent. It
reads as follows:
Section 41 of the Insurance Act, 1938
41. (1) No person shall allow or offer to allow, either directly or indirectly, as
an inducement to any person to take or renew or continue an insurance in
respect of any kind of risk relating to lives or property in India, any rebate of
the whole or part of the commission payable or any rebate of the premium
shown on the policy, nor shall any person taking out or renewing or continuing a
policy accept any rebate, except such rebate as may be allowed in accordance
101
with the published prospectuses or tables of the insurer; Provided that

acceptance by an insurance agent of commission in connection with a policy of
life insurance taken out by herself / himself on her / his own life shall not be
deemed to be acceptance of a rebate of premium within the meaning of this
sub section if at the time of such acceptance the insurance agent satisfies the
prescribed conditions establishing that she / he is a bona fide insurance agent
employed by the insurer.
41. (2) Any person making default in complying with the provisions of this
section shall be punishable with fine which may extend to ten lakh rupees.
Note: An agent cannot offer any rebates on premium as an inducement to the
policyholder, except as allowed by the insurer.
Test Yourself 3
Insurance agents who hold licence to act as an agent for a life insurer and a
general insurer are called _______________.
i.
ii.
iii.
iv.
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Common insurance agents

Composite insurance agents
Multiple insurance agents
General insurance agents
D. Insurance Intermediaries and their Roles

1. Other insurance intermediaries
Apart from the agents, there are other insurance intermediaries like corporate
agents including banks and brokers who intermediate between the customer and
the insurance company.
a) Corporate agents
Corporate agents are licensed by the IRDA and governed by the Insurance
Regulatory and Development Authority of India (Licensing of Corporate Agents)
Regulations, 2002.
Corporate Agency Regulations are under revision by IRDAI. Students are advised
to refer to IRDAI website from time to time and note the changes in these
Regulations.
b) Insurance brokers:
These are licensed by the IRDA and governed by the Insurance Regulatory and
Development Authority (Insurance Brokers) Regulations, 2013. These regulations
lay down the code of conduct for the respective intermediaries. An insurance
broker is licensed by IRDA to arrange insurance contracts with insurance
companies on behalf of clients. A broker may deal with any of the insurance
companies for the purpose.
c) Surveyors and third party administrators:
These are intermediaries who are not involved in procurement of business.
Surveyors assess losses on behalf of the insurance companies or insured. Third
party administrators provide services related to health insurance for insurance
companies.
Test Yourself 4
Which of the below intermediary is not involved in procurement of business?
I.
II.
III.
IV.
Insurance brokers
Individual agents
Surveyors
Corporate agents
103
E. Indian Contract Act, 1872: Principal Agent Relationship

An insurance contract is an agreement between the insurer and the insured and
falls under the provisions of the Indian Contracts Act, 1872.
The contract of insurance
Definition
A contract of insurance is an agreement whereby one party, called the insurer,
undertakes, in return for an agreed consideration, called the premium, to pay
the other party, namely, the insured, a sum of money or its equivalent in kind,
upon the occurrence of a specified event resulting in loss to her / him.
Insurance contracts, like other contracts, are governed by the general principles
of the law of contract as codified in the Indian Contract Act, 1872. (This has
been discussed in Chapter 2).
In addition to the general principles of law, insurance contracts are also
governed by certain special principles evolved under common law and later
codified in the Marine Insurance Act, 1963. The legal principles applicable to
insurance contract are dealt in Chapter 2.
Information
Relevance of Sale of Goods Act, 1930 to Insurance Agents
Though basic provisions of Contract Act apply to contract of sale of goods also,
Sale of Goods is considered one of the special types of Contract. Hence, the
Sale of Goods Act 1930 is complementary to the Contract Act 1872.
Caveat Emptor:
The principle termed as caveat emptor. means buyer be aware. or Buyer
Beware. Generally, the buyer is expected to be careful while purchasing the
goods and seller is not liable for any defects in goods sold by her / him.
References to the Sale of Goods Act as also the principle of caveat emptor are
usually made in the context of Marine Cargo insurances.
Information
Annexure A
The Indian Contract Act, 1872 Excerpts from Chapter X Agency
[The contents of this annexure are general in nature and applicable to agents,
in general. Specific Rules applicable to insurance agents are detailed in IRDAI
Agents guidelines
a. "Agent" and "principal" defined Section 182
104
An "agent" is a person employed to do any act for another, or to represent

another in dealing with third persons. The person for whom such act is done,
or who is so represented, is called the "principal".
b. Who may employ agent. Section 183
Any person who is of the age of majority according to the law to which she /
he is subject, and who is of sound mind, may employ an agent.
c. Who may be an agent. Section 184
As between the principal and third persons, any person may become an
agent, but no person who is not of the age of majority and sound mind can
become an agent, so as to be responsible to the principal according to the
provisions in that behalf herein contained.
d. Extent of agent's authority Section 188
An agent, having an authority to do an act, has authority do every lawful
thing which is necessary in order to do so such act. An agent having an
authority to carry on a business has authority to do every lawful thing
necessary for the purpose, or usually done in the course, of conducting such
business.
e. When agent cannot delegate Section 190
An agent cannot lawfully employ another to perform acts which she / he has
expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub-agent may, or, from the nature or agency, a
sub-agent must, be employed.
f. Termination of agency Section 201
An agency is terminated by the principal revoking her / his authority, or by
the agent renouncing the business of the agency; or by the business of the
agency being completed; or by either the principal or agent dying or
becoming of unsound mind; or by the principal being adjudicated an
insolvent under the provisions of any Act for the time being in force for the
relief of insolvent debtors.
g. Agent's duty in conducting principal's business Section 211
An agent is bound to conduct the business of her / his principal according to
the directions given by the principal, or in the absence of any such
directions according to the customs which prevails in doing business of the
same kind at the place where the agent conducts such business. When the
agent acts otherwise, if any loss be sustained, she / he must make it good to
her / his principal and if any profit accrues, she / he must account for it.
105
h. Skill and diligence required from agent Section 212

An agent is bound to conduct the business of the agency with as much skill
as is generally possessed by person engaged in similar business unless the
principal has notice of her / his want of skill. The agent is always bound to
act with reasonable diligence, and to use such skill as she / he possesses;
and to make compensation to her / his principal in respect of the direct
consequences of her / his own neglect, want of skill, or misconduct, but not
in respect of loss or damage which are indirectly or remotely caused by such
neglect, want of skill, or misconduct.
i. Agent's accounts Section 213
An agent is bound to render proper accounts to her / his principal on
demand.
j. Agent's duty to communicate with principal Section 214
It is the duty of an agent in case of difficulty, to use all reasonable diligence
in communicating with her / his principal, and in seeking to obtain her / his
instructions.
k. Right of principal when agent deals, on her / his own account, in business of
agency without principal's consent Section 215
If an agent deals on her / his own account in the business of the agency,
without first obtaining the consent of her / his principal and acquainting her
/ his with all material circumstances which have come to her / his own
knowledge on the subject, the principal may repudiate the transaction, if
the case shows, either that any material fact has been dishonestly
concealed from her / his by the agent, or that the dealings of the agent
have been disadvantageous to her / him.
l. Principal's right to benefit gained by agent dealing on her / his own account
in business of agency Section 216
If an agent, without the knowledge of her / his principal, deals in the
business of the agency on her / his own account instead of on account to her
/ his principal, the principal is entitled to claim from the agent any benefit
which may have resulted to her / his from the transaction.
m. Agent not entitled to remuneration for business misconduct Section 220
An agent, who is guilty of misconduct in the business of the agency, is not
entitled to any remuneration in respect of that part of the business which
she / he has misconduct.
n. Agent to be indemnified against consequences of acts done in good faith
Section 223
106
Where one person employs another to do an act, and the agent does the act
in good faith, the employer is liable to indemnify the agent against the
consequences of that act, though it may cause an injury to the rights of
third persons.
Test Yourself 5
What does the term Caveat Emptor mean?
I. Buyer beware
II. Seller beware
III. Insurance buyer beware of miselling
IV. Insurance agent beware of customer requirement
107
Summary
a) The prime purpose of insurance regulations is to protect the policyholder.
b) Insurance Regulatory and Development Authority of India (IRDAI) Act 1999,
created the IRDAI as an independent authority for the purpose of regulating
the insurance industry.
c) The Insurance Act, 1938 has provisions for monitoring and control of
operations of insurance companies.
d) An individual agent is an individual representing an insurance company while
a corporate agent is other than an individual, representing an insurance
company.
e) Insurance agents who hold licence to act as agent for a life insurer and a
general insurer are called composite insurance agents.
f) The first time applicant for agency licence shall have completed from an
IRDAI approved institution, at least, fifty hours. practical training in life or
general insurance business.
g) If the insurance agent suffers, at any time during the currency of the
licence, from any of the disqualifications mentioned in the regulations, then
her / his license can be cancelled.
h) An agent cannot offer any rebates on premium as an inducement to the
policyholder, except as allowed by the insurer
Key terms
a)
b)
c)
d)
Agent
Rebate
Intermediaries
Caveat Emptor
108

Answer 1
The primary purpose of insurance regulations is to protect the interests of
policyholders.
Answer 2
Using rebates as a tool to sell insurance policies is prohibited under Insurance
Act 1938.
Answer 3
Insurance agents who hold licence to act as an agent for both a life insurer and
a general insurer are called composite insurance agents.
Answer 4
Surveyors are not involved in procurement of insurance business.
Answer 5
The principle of Caveat Emptor implies buyer beware.
109
Question 1
Moral hazard means:
I. Dishonesty or character defects in an individual
II. Honesty and values in an individual
III. Risk of religious beliefs
IV. Hazard of the property to be insured
Question 2
Insurance agent represents the ______________.
I. Insurance company
II. Sub-agent
III. Co-agent
IV. Broker
Question 3
Appointment as an insurance agent is done by __________.
I. General Insurance Corporation (GIC)
II. Insurance Regulatory & Development Authority of India (IRDAI)
III. By the respective insurance company
IV. Finance Ministry
Question 5
Identify the statement which is not correct. Insurance agent should __________.
I. Indicate the scale of commission if asked by the customer
II. Share the commission by way of rebate
III. Disclose his status with the Insurer on demand
IV. Indicate the premium to be charged
Question 6
If an agent is found guilty of criminal misappropriation, the designated person
will _______________.
I. Terminate the agency appointment.
II. Issue a duplicate appointment letter
110
III. Renew the existing appointment

IV. Take some fees from the agent
Question 7
Minimum qualification required for an insurance agent is _______
I. Graduate
II. As per Board Approved Policy of each Insurer
III. Post-Graduate
IV. 7th
Question 8
________________ may deal with all Life Insurance Companies and/or general
insurance companies.
I. Agent
II. Broker
III. Corporate agent
IV. Retail agent
111

Answer 1
I. Dishonesty or character defects in an individual
Answer 2
Insurance agent represents the insurance company.
Answer 3
Appointment as an insurance agent is done by __________.
II. By the respective insurance company
Answer 5
Insurance agent cannot share commission through rebates.
Answer 6
If an agent is found guilty of criminal misappropriation the designated person
will terminate the agency.
Answer 7
II. As per Board Approved Policy of each Insurer
Answer 8
BROKER may deal with all Life Insurance Companies and/or general insurance
companies.
112
CHAPTER 5
DOCUMENTATION
In the insurance industry, we deal with a large number of forms, documents etc.
This chapter takes us through the various documents and their importance in an
insurance contract. It also gives an insight to the exact nature of each form, how
to fill it and the reasons for calling specific information.
Learning Outcomes
A.
B.
C.
D.
E.
F.
G.
H.
Proposal forms
Acceptance of the proposal (underwriting)
Premium receipt
Cover Notes / Certificate of Insurance / Policy Document
Warranties
Endorsements
Interpretation of policies
Renewal notice

a)
b)
c)
d)
e)
Explain the contents of proposal form.

Explain the premium receipt.
Appreciate and explain cover notes and certificate of insurance.
Explain terms and wordings in insurance policy document.
Interpret the policy warranties and endorsement.
113
A. Proposal forms
The insurance documentation is provided for the purpose of bringing understanding
and clarity between insured and insurer. There are certain documents that are
conventionally used in the insurance business. The insurance agent, being the
person closest to the customer, has to face the customer and clarify all doubts
about the documents involved and help her in filling them up. The insurance
company comes to know the customer and her insurance needs only from the
documents that are submitted by customer. They help the insurer to understand
the risk better.
Agents should understand the purpose of each document involved and the
importance and relevance of information contained in the documents used in
insurance.
1. Proposal forms
The first stage of documentation is essentially the proposal forms through which
the insured informs:
who she is,

what kind of insurance she needs,
details of what she wants to insure, and
for what period of time
Details would mean the monetary value of and all material facts connected
with the subject matter of insurance.
a)
Risk assessment by insurer
i. Proposal form is to be filled in by the proposer for insurance, for

furnishing all material information required by the insurer in respect of a
risk, in order to enable the insurer to decide:
whether to accept or decline and
in the event of acceptance of the risk, to determine the rates,
terms and conditions of a cover to be granted
Proposal form contains information which are useful for the insurance
company to accept the risk offered for insurance. The principle of utmost
good faith and the duty of disclosure of material information begin with the
proposal form for insurance.
The duty of disclosure of material information arises prior to the inception
of the policy, and continues even after the conclusion of the contract. (This
principle has been discussed in Chapter 2 in detail.)
114
Example
If the insured was required to maintain an alarm or had stated that he has an
automatic alarm system in his gold jewelry showroom, then not only is he
required to disclose it, he has to ensure the same remains in a working
condition throughout the policy period. The existence of the alarm is a material
fact for the insurer who will be accepting the proposal based on these facts and
pricing the risk accordingly.
Proposal forms are printed by insurers usually with the insurance companys
name, logo, address and the class / type of insurance / product that it is
used for. It is customary for insurance companies to add a printed note in
the proposal form, though there is no standard format or practice in this
regard.
Example
Some examples of such notes are:
Non-disclosure of facts material to the assessment of the risk, providing
misleading information, fraud or non-co-operation by the insured will nullify the
cover under the policy issued,
The company will not be on risk until the proposal has been accepted by the
Company and full premium paid.
Important
Material facts: These are important, essential and relevant information for
underwriting of the risk to be covered by the insurer. In other words, these are
facts connected with the subject matter of insurance which may influence an
insurers decision in the following:
i. Accepting or not accepting a risk for insurance,
ii. Fixing the amount of premium to be charged, and
iii. Including special provisions in the contract about the conditions under
which the risk would be covered and how a loss would be payable.
Declaration in the proposal form: Insurance companies usually add a
declaration at the end of the proposal form to be signed by the insurer. This
ensures that the insured has filled up the form accurately and understood the
facts given therein, so that at the time of a claim there is no scope for
disagreements, on account of misrepresentation of facts. This serves the main
principle of utmost good faith on the part of the insured.
IC-34 GENERAL INSURANCEIC-34
GENERAL INSURANCE
115
Example
Examples of such declarations are:
I/We hereby declare and warrant that the above statements are true and
complete in all respects and that there is no other information which is relevant
to the application for insurance that has not been disclosed to you.
I/We agree that this proposal and the declarations shall be the basis of the
contract between me/us and (insurers name).
b)
Nature of questions in a proposal form
The number and nature of questions in a proposal form vary according to the
class of insurance concerned.
i. Fire insurance proposal forms are usually used for relatively simple /
standard risks like houses, shops etc. For large industrial risks, inspection
of the risk is arranged by insurer before acceptance of the risk. Special
questionnaire are sometimes used in addition to the proposal form to
gather specific information.
Fire insurance proposal form seeks, among other things, the description
of the property which would include the following information:
Construction of external walls and roof, number of story

Occupation of each portion of the building
Presence of hazardous goods
Process of manufacture
The sums proposed for insurance
The period of insurance, etc.
ii. For motor insurance, questions are asked about the vehicle, its
operations, make and carrying capacity, how it is managed by the owner
and related insurance history.
iii. In personal lines like health, personal accident and travel insurance,
proposal forms are designed to get information about the proposers
health, way of life and habits, pre-existing health conditions, medical
history, hereditary traits, past insurance experience etc.
iv. In other miscellaneous insurances, proposal forms are compulsory and
they incorporate a declaration which extends the common law duty of
good faith.
116
c)
Elements of a proposal
i. Proposers name in full

The proposer should be able to identify herself unambiguously. It is
important for the insurer to know with whom the contract has been entered,
so that the benefits under the policy would be received only by the insured.
Establishing identity is important even in cases where someone else may
have acquired an interest in the risk insured (like a mortgagee, bank or legal
heirs in case of death) and has to make a claim.
ii. Proposers address and contact details
The reasons stated above are applicable for collecting the proposers address
and contact details as well.
iii. Proposers profession, occupation or business
In some cases like health and personal accident insurance, the proposers
profession, occupation or business are of importance as they could have a
material bearing on the risk.
Example
A delivery man of a fast-food restaurant, who has to frequently travel on motor
bikes at a high speed to deliver food to his customers, may be more exposed to
accidents than the accountant of the same restaurant.
iv. Details and identity of the subject matter of insurance
The proposer is required to clearly state the subject matter that is proposed
for insurance.
Example
The proposer is required to state if it is:
i.
A private car [with its identification like engine number, chassis number,
registration number] or
ii. A residential house [with its full address and identification numbers] or
iii. An overseas travel [by whom, when, to which country, for what purpose]
or
iv. A persons health [with persons name, address and identification] etc.
depending on the case
GENERAL INSURANCE
117
v. Sum insured indicates limit of liability of the insurer under the policy and
has to be indicated in all proposal forms.
Example
In case of property insurance, it is the monetary value of the subject matter
proposed for insurance. For health, it could be the cost of hospital treatment,
while for personal accident insurance this could be a fixed amount for loss of
life, loss of a limb, or loss of sight due to an accident.
vi. Previous and present insurance
The proposer is required to inform the details about his previous insurances
to the insurer. This is to understand his insurance history. In some markets
there are systems by which insurers confidentially share data about the
insured.
The proposer is also required to state whether any insurer had declined his
proposal, imposed special conditions, required an increased premium at
renewal or refused to renew or cancelled the policy.
Details of current insurance with any other insurer including the names of the
insurers are also required to be disclosed. Especially in property insurance,
there is a chance that insured may take policies from different insurers and
when a loss happens, claim from more than one insurer. This information is
required to ensure that the principle of contribution is applied so that the
insured is indemnified and does not gain/profit due to multiple insurance
policies for the same risk.
Further, in personal accident insurance an insurer would like to restrict the
amount of coverage (sum insured) depending on the sum insured under other
PA policies taken by the same insured.
Exercise
Look up references to the principles of insurance in the previous chapters and
try to connect how indemnity, contribution, utmost good-faith, disclosure are
practically applied in the design of the proposal form.
A sample each of a motor and fire proposal form is given in Annexure A and B.
Please study the proposal forms carefully and understand the implications of the
contents of the proposal form and their relevance to insurance contracts.
118
vii. Loss experience

The proposer is asked to declare full details of all losses suffered by him /
her, whether or not they were insured. This will give the insurer information
about the subject matter of insurance and how the insured has managed the
risk in the past. Underwriters can understand the risk better from such
answers and decide on conducting risk inspections or collecting further
details.
viii. Declaration by insured
As the purpose of the proposal form is to provide all material information to
the insurers, the form includes a declaration by the insured that the
answers are true and accurate and he agrees that the form shall be the
basis of the insurance contract. Any wrong answer will give the right to
insurers to avoid the contract. Other sections common to all proposal forms
relate to signature, date and in some cases agents recommendation.
ix. Where a proposal form is not used, the insurer shall record the information
obtained orally or in writing, and confirm it within a period of 15 days thereof
with, the proposer and incorporate the information in its cover note or policy.
The onus of proof shall rest with the insurer in respect of any information not so
recorded, where the insurer claims that the proposer suppressed any material
information or provided misleading or false information on any matter
material to the grant of a cover.
It means the insurance company has a duty to record all the information
received even orally, which the agent has to keep in mind by way of
follow up.
2. Role of intermediary
The intermediary has a responsibility towards both parties i.e. insured and
insurer
An agent or a broker, who acts as the intermediary between the insurance
company and the insured has the responsibility to ensure all material
information about the risk is provided by the insured to insurer.
IRDA regulation provides that intermediary has responsibility towards prospect.
GENERAL INSURANCE
119
Important
Duty of an intermediary towards prospect
IRDA regulation states that An insurer or its agent or other intermediary shall
provide all material information in respect of a proposed cover to the prospect
to enable the prospect to decide on the best cover that would be in his or her
interest
Where the prospect depends upon the advice of the insurer or his agent or an
insurance intermediary, such a person must advise the prospect dispassionately.
Where, for any reason, the proposal and other connected papers are not filled
by the prospect, a certificate may be incorporated at the end of proposal form
from the prospect that the contents of the form and documents have been fully
explained to him and that he has fully understood the significance of the
proposed contract.
Test Yourself 1
What is the significance of the principle of contribution?
I. It ensures that the insured also contributes a certain portion of the claim
along with the insurer
II. It ensures that all the insured who are a part of the pool, contribute to the
claim made by a participant of the pool, in the proportion of the premium
paid by them
III. It ensures that multiple insurers covering the same subject matter; come
together and contribute the claim amount in proportion to their exposure to
the subject matter
IV. It ensures that the premium is contributed by the insured in equal
installments over the year.
120
B. Acceptance of the proposal (underwriting)

We have seen that a completed proposal form broadly gives the following
information:
Details of the insured
Details of the subject matter
Type of cover required
Details of the physical features both positive and negative - including
type and quality of construction, age, presence of firefighting
equipments, the type of security etc.,
Previous history of insurance and loss
The insurer may also arrange for pre-inspection survey of the risk before
acceptance, depending on the nature and value of the risk. Based on the
information available in the proposal and in the risk inspection report,
additional questionnaire and other documents, the insurer takes the decision.
The insurer then decides about the rate to be applied to the risk factor and
calculates the premium based on various parameters, which is then conveyed to
the insured.
Proposals are processed by the insurer with speed and efficiency and all decisions
thereof are communicated by it in writing within a reasonable period.
Definition
Underwriting: As per guidelines, the company has to process the proposal
within 15 days time. The agent is expected to keep track of these timelines,
follow up internally and communicate with the prospect / insured as and when
required by way of customer service. This entire process of scrutinizing the
proposal and deciding about acceptance is known as underwriting.
Test Yourself 2
As per guidelines, an insurance company has to process an insurance proposal
within __________.
I.
II.
III.
IV.
7 days
15 days
30 days
45 days
GENERAL INSURANCE
121
C. Premium receipt
Definition
Premium is the consideration or amount paid by the insured to the insurer for
insuring the subject matter of insurance, under a contract of insurance.
1. Payment of Premium in Advance (Section 64 VB of Insurance Act, 1938)
As per Insurance Act, premium is to be paid in advance, before the inception
date of the insurance contract. This is an important provision, which ensures
that only when the premium is received by the insurance company, a valid
insurance contract can be completed and the risk can be assumed by the
insurance company. This section is a special feature of non-life insurance
industry in India.
Important
a) Section 64 VB of the Insurance Act-1938 provides that no insurer shall
assume any risk unless and until the premium is received in advance or is
guaranteed to be paid or a deposit is made in advance in the prescribed
manner
b) Where an insurance agent collects a premium on a policy of insurance on
behalf of an insurer, he shall deposit with or dispatch by post to the insurer
the premium so collected in full without deduction of his commission within
twenty-four hours of the collection excluding bank and postal holidays.
c) It is also provided that the risk may be assumed only from the date on which
the premium has been paid in cash or by cheque.
d) Where the premium is tendered by postal or money order or cheque sent by
post, the risk may be assumed on the date on which the money order is
booked or the cheque is posted as the case may be.
e) Any refund of premium which may become due to an insured on account of
the cancellation of policy or alteration in its terms and conditions or
otherwise, shall be paid by the insurer directly to the insured by a crossed or
order cheque or by postal / money order and a proper receipt shall be
obtained by the insurer from the insured, and such refund shall in no case be
credited to the account of the agent.
There are exceptions to the above pre-condition payment of premium, provided
in the Insurance Rules 58 and 59.
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2. Method of payment of premium
Important
The premium to be paid by any person proposing to take an insurance policy or
by the policyholder to an insurer may be made in any one or more of the
following methods:
a) Cash
b) Any recognised banking negotiable instrument such as cheques, demand
drafts, pay order, bankers cheques drawn on any schedule bank in India;
c) Postal money order;
d) Credit or debit cards;
e) Bank guarantee or cash deposit;
f) Internet;
g) E-transfer
h) Direct credits via standing instruction of proposer or the policyholder or
the life insured through bank transfers;
i) Any other method or payment as may be approved by the Authority from
time to time;
As per IRDA Regulations, in case the proposer / policyholder opts for premium
payment through net banking or credit / debit card, the payment must be made
only through net banking account or credit / debit card issued on the name of
such proposer / policyholder.
Test Yourself 3
In case the premium payment is made by cheque, then which of the below
statement will hold true?
I. The risk may be assumed on the date on which the cheque is posted
II. The risk may be assumed on the date on which the cheque is deposited by
the insurance company
III. The risk may be assumed on the date on which the cheque is received by the
insurance company
IV. The risk may be assumed on the date on which the cheque is issued by the
proposer
GENERAL INSURANCE
123
D. Cover Notes / Certificate of Insurance / Policy Document

After underwriting is completed it may take some time before the policy is issued.
Pending the preparation of the policy or when the negotiations for insurance
are in progress and it is necessary to provide cover on a provisional basis or
when the premises are being inspected for determining the actual rate
applicable, a cover note is issued to confirm protection under the policy. It
gives description of cover. Sometimes, insurers issue a letter confirming the
provisional insurance cover instead of a cover note.
Although the cover note is not stamped, the wording of the cover note makes it
clear that it is subject to the usual terms and conditions of the insurers' policy for the
class of insurance concerned. If the risk is governed by any warranties, then the cover
note would state that the insurance is subject to such warranties. The cover note is
also made subject to special clauses, if applicable e.g. Agreed Bank Clause,
Declaration Clause etc.
A cover note would incorporate the following:
a) Name and address of insured
b) Sum insured
c) Period of insurance
d) Risk covered
e) Rate and premium: if rate is not known, the provisional premium
f) Description of the risk covered: for example a fire cover note would
indicate identification particulars of the building, its construction and
occupancy.
g) Serial number of the cover note
h) Date of issue
i) Validity of cover note is usually for a period of a fortnight and rarely up
to 60 days
Cover notes are used predominantly in marine and motor classes of business.
1. Marine Cover Notes
These are normally issued when details required for the issue of policy such as
name of the steamer, number of packages, or exact value etc. are not known.
Even in respect of exports, a cover note may be issued e.g. a certain quantity of
cargo meant for shipment is sent by the exporter to the docks. It may happen
124
that, owing to difficulty of securing adequate shipping space, shipment of the

cargo by the intended vessel does not take place. The quantity therefore, that
may be sent by a particular vessel cannot be known. In the circumstances, a
cover note may be required which is to be followed subsequently by the issue of
regular policy when full details are available and made known to the insurance
company.
Marine cover note may be worded along the following lines:
i.
ii.
iii.
iv.
Marine Cover Note Number

Date of issue
Name of the insured
Valid up to
As requested you are hereby held covered subject to usual conditions of the
company's policy to the extent of Rs. _____________.
a) Clauses: Institute Cargo Clauses A, B or C including War SRCC risks as per
Institute Clauses, but subject to 7 days notice of cancellation.
b) Conditions: Details of shipment to be supplied on receipt of shipping
documents for issue of policy. In the event of loss or damage prior to
declaration and / or shipment on board the steamer, it is hereby agreed
that the basis of valuation shall be prime cost of the goods plus charges
actually incurred and for which the assured is liable.
With regard to inland transit normally all relevant data required for issue of
policy are available and therefore a cover note is rarely required. There may
however, be some occasions when cover notes are issued and substituted later on
by policies containing full description of the cargo, transit etc.
2. Motor Cover Notes
These are to be issued in the form prescribed by the respective companies the
operative clause of a motor cover note may read as follows:
The insured described in the form, referred to below, having proposed for
insurance in respect of the Motor Vehicle(s) described therein and having paid
the sum of Rs.as premium the risk is hereby held covered under the terms of
the companys usual form ofPolicy applicable thereto (subject to any Special
Conditions mentioned below) unless the cover be terminated by the Company by
notice in writing in which case the insurance will thereupon cease and a
proportionate part of the premium otherwise payable for such insurance will be
charged for the time the company had been on risk.
The Motor Cover Note generally contains the following particulars:
a) Registration mark and number, or description of the vehicles insured /
cubic capacity / carrying capacity / make / year of manufacture, engine
number, chassis number
GENERAL INSURANCE
125
b) Name and address of the insured

c) Effective date and time of commencement of insurance for the purpose
of the Act. Time, Date
d) Date of expiry of insurance
e) Persons or classes of persons entitled to drive
f) Limitations as to use
g) Additional risks, if any
The Motor Cover Note incorporates a certificate to the effect that it is issued in
accordance with the provisions of Chapters X and XI of the Motor Vehicles Act,
1988.
Important
The validity of the Cover Note may be extended for a further period of 15 days
at a time, but in, but in no case the total period of validity of a Cover Note shall
exceed two months.
Note: The wordings of the cover note may vary from insurer to insurer
Use of cover notes is being discouraged by most companies. Present day
technology facilitates issuance of policy document immediately.
3. Certificate of Insurance Motor Insurance
A certificate of insurance provides existence of insurance in cases where proof
may be required. For instance in motor insurance, in addition to the policy, a
certificate of insurance is issued as required by the Motor Vehicles Act. This
certificate provides evidence of insurance to the Police and Registration
Authorities. A specimen certificate for private cars is reproduced below,
showing salient features.
126
MOTOR VEHICLES ACT, 1988

CERTIFICATE OF INSURANCE
Certificate No.
Policy No.
1. Registration mark and Number, Place of registration, Engine No. / Chassis

No. / Make / Year of manufacture.
2. Type of Body / C.C / Seating capacity / Net Premium / Name of Registration
Authority,
3. Geographical area India. `
4. Insured declared value (IDV)
5. Name and address of the Insured, Business or profession.
6. Effective date of commencement of Insurance for the purpose of the Act.
From. 'O' clock on
7. Date of expiry of insurance: midnight on
8. Persons or classes of persons entitled to drive.
Any of the following:
(a) The insured:
(b) Any other person who is driving on the insured's order or with his permission
Provided that the person driving holds an effective driving license at the time of
the accident and is not disqualified from holding or obtaining such a license.
Provided also that the person holding an effective learner's license may also
drive the vehicle and such a person satisfies the requirement of Rule 3 of
Central Motor Vehicles Rules 1989.
LIMITATIONS AS TO USE
The policy covers use for any purpose other than:
(a) Hire or reward;
(b) Carriage of goods (other than personal luggage)
(c) Organised racing,
(d) Race making,
(e) Speed testing
(f) Reliability Trials
(g) Any purpose in connection with Motor Trade.
I/we hereby certify that the Policy to which this Certificate relates as well as this
Certificate of Insurance are issued in accordance with the provisions of Chapter X
and Chapter XI of the Motor Vehicles Act, 1988.
Examined .......
(Authorized Insurer)
GENERAL INSURANCE
127
Motor certificate of Insurance is required to be carried in the vehicle at all times

for the scrutiny of the relevant authorities.
4. Policy Document
The policy is a formal document which provides an evidence of the contract of
insurance. This document has to be stamped in accordance with the provisions of the
Indian Stamp Act, 1899.
A general insurance policy usually contains:
a) The name(s) and address(es) of the insured and any other person having
insurable interest in the subject matter;
b) Full description of the property or interest insured;
c) The location/s of the property or interest insured under the policy and
where appropriate, with respective insured values;
d) Period of insurance;
e) Sums insured;
f) Perils covered and exclusions ;
g) Any excess / deductible applicable;
h) Premium payable and where the premium is provisional subject to
adjustment, the basis of adjustment of premium ;
i) Policy terms, conditions and warranties;
j) Action to be taken by the insured upon occurrence of a contingency
likely to give rise to a claim under the policy;
k) The obligations of the insured in relation to the subject-matter of
insurance upon occurrence of an event giving rise to a claim and the
rights of the insurer in the circumstances;
l) Any special conditions ;
m) Provision for cancellation of the policy on grounds of misrepresentation,
fraud, non-disclosure of material facts or non-cooperation of the
insured;
n) The address of the insurer to which all communications in respect of the
policy should be sent;
o) The details of the riders if any;
p) Details of grievance redressal mechanism and address of ombudsman
Every insurer has to inform and keep (the insured) informed periodically on the
requirements to be fulfilled by the insured regarding lodging of a claim arising in
terms of the policy and the procedures to be followed by him to enable the insurer to
settle a claim early.
128
Test Yourself 4
Which of the below statement is true with regards to cover notes?
I.
II.
III.
IV.
Cover notes are predominantly used in life insurance

Cover notes are predominantly used in all classes of general insurance
Cover notes are predominantly used in health insurance
Cover notes are predominantly used in marine and motor classes of general
insurance
GENERAL INSURANCE
129
E. Warranties
Warranties are used in an insurance contract to limit the liability of the insurer
under a contract. Insurers incorporate appropriate warranties to reduce the
hazard. With a warranty, one party to the insurance contract, the insured,
undertakes certain obligations that need to be complied within a certain period
of time and the liability of the insurer depends on the insureds compliance with
these obligations. Warranties play an essential role in managing and improving
the risk.
A warranty is a condition expressly stated in the policy which has to be
literally complied with for validity of the contract. Warranty is not a
separate document. It is part of both cover notes and policy document. It is a
condition precedent to the contract. It must be observed and complied with
strictly and literally, irrespective of the fact whether it is material to the risk or
not. If a warranty is breached, the policy becomes voidable at the option of the
insurers even when it is clearly established that the breach has not caused or
contributed to a particular loss. However, in practice, if the breach of warranty
is of a purely technical nature and does not, in any way, contribute to or
aggravate the loss, (losses can be treated as non-standard claims and settled)
insurers at their discretion may process the claims according to norms and
guidelines as per company policy.
1. Fire Insurances warranties are as given below
Warranted, that no hazards goods shall be stored in the insured premises during
the currency of policy.
Silent Risk: Warranted that no manufacturing activity is carried out in the
insured premises for consecutive period of 30 days or more.
Cigarette Filter Manufacturing: Warranted that no solvents having flash point
below 300C are used/stored in the premises
2. In Marine Insurance, a warranty is defined as follows: a promissory
warranty, there is to say, a warranty by which the assured undertake that
some particular thing shall or shall not be done, or that some condition will
be fulfilled, or whereby he affirms or negatives the existence of a particular
state of facts
In Marine Cargo Insurance, a warranty is inserted to the effect that goods (e.g.
tea) are packed in tin-lined cases. In Marine Hull insurance by inserting a
warranty that the insured vessel will not navigate in a certain area, gives an
idea to the insurer about the extent of risk he has agreed to provide cover for.
If the warranty is breached, the risk agreed to initially is altered and the insurer
is allowed to discharge himself from further liability from the date of breach
130
3. In Burglary Insurance, it is warranted that the property is guarded by a

watchman for twenty four hours. The rates, terms and conditions of the
policy continue to be the same only if the warranties attached to the policy
are complied with.
Test Yourself 5
Which of the below statement is correct with regards to a warranty?
I. A warranty is a condition which is implied without being stated in the policy
II. A warranty is a condition expressly stated in the policy
III. A warranty is a condition expressly stated in the policy and communicated
to the insured separately and not as part of the policy document
IV. If a warranty is breached, the claim can still be paid if it is not material to
the risk
GENERAL INSURANCE
131
F. Endorsements
It is the practice of insurers to issue policies in a standard form; covering certain
perils and excluding certain others.
Definition
If certain terms and conditions of the policy need to be modified at the time of
issuance, it is done by setting out the amendments / changes through a document
called endorsement.
It is attached to the policy and forms part of it. The policy and the endorsement
together constitute the evidence of the contract. Endorsements may also be issued
during the currency of the policy to record changes / amendments.
Whenever material information changes, the insured has to advice the insurance
company who will take note of this and incorporate the same as part of the
insurance contract through the endorsement.
Endorsements normally required under a policy related to:
a) Variations /changes in sum insured
b) Change of insurable interest by way of sale, mortgage, etc.
c) Extension of insurance to cover additional perils / extension of policy period
d) Change in risk, e.g. change of construction, or occupancy of the building in
fire insurance
e) Transfer of property to another location
f) Cancellation of insurance
g) Change in name or address etc.
Specimen
For the purpose of illustration, specimen wordings of some endorsements are
reproduced below:
Cancellation
At the request of the insured the insurance by this Policy is hereby declared to
be cancelled as from . The insurance having been in force for a period over
. Months, no refund is due to the Insured.
132
Increase in Stock Value Cover:

"The Insured having advised that the stock covered by this policy has been
increased it is hereby agreed that the sum insured is accordingly altered to
Rs..... discussed as follows:
On
On
(Describe)
(Describe)
Rs.
Rs.
In consideration whereof an additional premium is hereby charged.

Further annual premium Rs.
The total insurance now stands at Rs
Subject otherwise to the terms, provisions and conditions of this policy.

Extension of cover to include extraneous peril in a Marine Policy
At the request of the insured, it is hereby agreed to include the risks of breakage
under the above policy.
In consideration, thereof an additional premium as under is charged to the insured on
Rs.
Changes in Mode of Carriage
The assured having declared that out of the consignment under the above policy 2
barrels perfumery valued at Rs. have been shipped on deck, it is hereby
agreed to cover the same against jettison and washing overboard.
In consideration, thereof, an additional premium as under is charged to the
assured.
Additional premium Rs .
Test Yourself 6
issuance, it is done by setting out the amendments through __________.
I.
II.
III.
IV.
Warranty
Endorsement
Alteration
Modifications are not possible
GENERAL INSURANCE
133
G. Interpretation of policies
Contracts of insurance are expressed in writing and the insurance policy
wordings are drafted by insurers. These policies have to be interpreted
according to certain well-defined rules of construction or interpretation which
have been established by various courts. The most important rule of
construction is that the intention of the parties must prevail and this
intention is to be looked for in the policy itself. If the policy is issued in an
ambiguous manner, it will be interpreted by the courts in favour of the insured
and against the insurer on the general principle that the policy was drafted by
the latter.
Policy wordings are understood and interpreted as per the following rules:
a) An express condition overrides an implied condition except where there
is inconsistency in doing so.
b) In the event of a contradiction in terms between the standard printed
policy form and the typed or handwritten parts, the typed or
handwritten part is deemed to express the intention of the parties in the
particular contract, and their meaning will overrule those of the original
printed words.
c) If an endorsement contradicts other parts of the contract the meaning of
the endorsement will prevail as it is the later document.
d) Clauses in italics over-ride the ordinary printed wording where they are
inconsistent.
e) Clauses printed or typed in the margin of the policy are to be given more
importance than the wording within the body of the policy.
f) Clauses attached or pasted to the policy override both marginal clauses
and the clauses in the body of the policy.
g) Printed wording is over-ridden by typewritten wording or wording
impressed by an inked rubber stamp.
h) Handwriting takes precedence over typed or impressed wording.
i) Finally, the ordinary rules of grammar and punctuation are applied if
there is any ambiguity or lack of clarity.
134
Important
1. Construction of policies
An insurance policy is evidence of a commercial contract and the general

rules of construction and interpretation adopted by courts apply to insurance
contracts as in the case of other contracts.
The principal rule of construction is that the intention of the parties of the
contract must prevail, that intention must be gathered from the policy
document itself and the proposal form, clauses, endorsements, warranties etc.
attached to it and forming a part of the contract.
2. Meaning of wordings
The words used are to be construed in their ordinary and popular sense. The
meaning to be used for words is the meaning that the ordinary man in the
street would construe. Thus, fire means flame or actual burning.
On the other hand, words which have a common business or trade meaning
will be construed with that meaning unless the context of the sentence
indicates otherwise. Where words are defined by statute, the meaning of that
definition will be used, such as theft as in the Indian Penal Code.
Many words used in insurance policies have been the subject of previous legal
decisions and those decisions of a higher court will be binding on a lower court
decision. Technical terms must always be given their technical meaning, unless
there is an indication to the contrary.
GENERAL INSURANCE
135
H. Renewal Notice
Most of the non-life insurance policies are insured on annual basis.
Although there is no legal obligation on the part of insurers to advise the
insured that his policy is due to expire on a particular date, yet as a matter of
courtesy and healthy business practice, insurers issue a renewal notice in
advance of the date of expiry, inviting renewal of the policy. The notice
incorporates all the relevant particulars of the policy such as sum insured, the
annual premium, etc. It is also the practice to include a note advising the
insured that he should intimate any material alterations in the risk.
In motor renewal notice, for example, the insureds attention is to be drawn
to revise the sum insured (i.e. the insureds declared value of the vehicle) in
the light of current requirements
The insureds attention is also to be invited to the statutory provision that no
risk can be assumed unless the premium is paid in advance.
Test Yourself 7
Which of the below statement is correct with regards to renewal notice?
I. As per regulations there is a legal obligation on insurers to send
notice to insured, 30 days before the expiry of the policy
II. As per regulations there is a legal obligation on insurers to send
III. As per regulations there is a legal obligation on insurers to send
IV. As per regulations there is no legal obligation on insurers to send
notice to insured before the expiry of the policy
136
a renewal
a renewal
a renewal
a renewal
Summary
a) The first stage of documentation is essentially the proposal forms through
which the insured informs about herself
b) The duty of disclosure of material information arises prior to the inception
of the policy, and continues even after the conclusion of the contract
c) Insurance companies usually add a declaration at the end of the Proposal
form to be signed by the insurer
d) Elements of a proposal form include:
i. Proposers name in full
ii. Proposers address and contact details
iii. Proposers profession, occupation or business
iv. Details and identity of the subject matter of insurance
v. Sum insured
vi. Previous and present insurance
vii. Loss experience
viii. Declaration by the insured
e) An agent, who acts as the intermediary, has the responsibility to ensure all
material information about the risk is provided by the insured to insurer.
f) The process of scrutinising the proposal and deciding about acceptance is
known as underwriting.
g) Premium is the consideration or amount paid by the insured to the insurer
for insuring the subject matter of insurance, under a contract of insurance.
h) Payment of premium can be made by cash, any recognised banking
negotiable instrument, postal money order, credit or debit card, internet, etransfer, direct credit or any other method approved by authority from time
to time.
i) A cover note is issued when preparation of policy is pending or when
negotiations for insurance are in progress and it is necessary to provide
insurance cover on provisional basis.
j) Cover notes are used predominantly in marine and motor classes of business.
k) A certificate of insurance provides existence of insurance in cases where
proof may be required
l) The policy is a formal document which provides an evidence of the contract
of insurance.
137
m) A warranty is a condition expressly stated in the policy which has to be

literally complied with for validity of the contract.
n) If certain terms and conditions of the policy need to be modified at the time
of issuance, it is done by setting out the amendments / changes through a
document called endorsement.
o) The most important rule of construction is that the intention of the parties
must prevail and this intention is to be looked for in the policy itself.
Key Terms
a)
b)
c)
d)
e)
f)
Policy form
Advance payment of premium
Cover note
Certificate of Insurance
Renewal notice
Warranty
138

Answer 1
The principle of contribution ensures that multiple insurers covering the same
subject matter; come together and contribute the claim amount in proportion
to their exposure to the subject matter
Answer 2
As per guidelines, an insurance company has to process an insurance proposal
within 15 days.
Answer 3
In case the premium payment is made by cheque, then the risk may be assumed
on the date on which the cheque is posted.
Answer 4
The correct option answer is IV.
Cover notes are predominantly used in marine and motor classes of general
insurance.
Answer 5
A warranty is a condition expressly stated in the policy.
Answer 6
issuance, it is done by setting out the amendments through endorsement.
Answer 7
As per regulations there is no legal obligation on insurers to send a renewal
notice to insured before the expiry of the policy.
139
Question 1
__________ is the maximum limit of liability of insurer under the policy
I.
II.
III.
IV.
Sum insured
Premium
Surrender value
Amount of loss
Question 2
_______________ is the consideration or price paid by insured under a contract
I.
II.
III.
IV.
Claim amount
Surrender value
Maturity amount
Premium
Question 3
A document which provides an evidence of contract of insurance is
called________
I.
II.
III.
IV.
Policy
Cover note
Endorsement
Certificate of insurance
Question 4
The duty of disclosure arises
I.
II.
III.
IV.
Prior to inception of the policy

After inception of the policy
Prior to inception and continues during the policy
There is no such duty
Question 5
Material fact
I.
II.
III.
IV.
Is the value of all material covered in a policy

Not important for assessing the risk
Is important as it influences the decision of the underwriter
Is not important as it has no bearing on the decision of the underwriter
140
Question 6
Fire proposal seeks to know
I.
II.
III.
IV.
Process of manufacture
Details of material stored
Construction of building
All the above
Question 7
Premium cannot be received
I.
II.
III.
IV.
In cash
By cheque
By promissory note
By credit card
Question 8
The certificate of Motor Insurance
I.
II.
III.
IV.
Is not mandatory
Has to be kept with self always
Has to be kept in the car always
Has to be kept in the bank locker
Question 9
A warranty
I.
II.
III.
IV.
Is a condition expressly stated in the policy

Has to be complied with
Both a and b
None of the above
Question 10
Renewal Notice for Motor insurance is issued by
I.
II.
III.
IV.
The Insured before expiry of the policy

The Insurer before expiry of the policy
The Insured after expiry of the policy
The Insurer after expiry of the policy
141

Answer 1
Sum insured is the maximum limit of liability of insurer under the policy.
Answer 2
Premium is the consideration or price paid by insured under a contract.
Answer 3
A document which provides an evidence of contract of insurance is called
policy.
Answer 4
The duty of disclosure arises prior to the inception and continues even during
the policy
Answer 5
Material fact is important as it influences the decision of the underwriter.
Answer 6
Fire proposal seeks to know process of manufacture, details of material stored
and construction of the building.
Answer 7
The correct option is III
Premium cannot be received by promissory note.
142
Answer 8
The certificate of Motor Insurance has to be kept in car always.
Answer 9
The correct option is III
A warranty is a condition expressly stated in a policy and has to be complied
with.
Answer 10
Renewal Notice for Motor insurance is issued by the insurer before expiry of the
policy
143
Annexures
144
145
146
147
148
149
150
151
152
CHAPTER 6
THEORY AND PRACTICE OF PREMIUM RATING
In this chapter you will learn the basics of underwriting and rate making. You
will learn about the different methods of dealing with hazards in the process of
rating of risks. You will learn how to decide the Sum Insured for various types
of insurance policies.
Learning Outcomes
A.
B.
C.
D.
Underwriting basics
Ratemaking basics
Rating factors
Sum insured

1. Define the basics of underwriting
2. Explain the basics of ratemaking
3. Determine Sum Insured under various policies
153
A. Underwriting basics
In the previous chapters we have seen that the concept of insurance involves
managing risk through pooling. Insurers create a pool consisting of premiums
that are made by several individuals / commercial / industrial firms /
organizations.
The amount of premium to be paid by each depends on a rate, which is
determined by two factors;
The probability of loss due to a loss event (caused by an insured peril)
and
The estimated amount of loss that may arise due to the loss event
Example
Assume the average amount of loss as a result of a fire was Rs 100000 [which we
denote as L]
The average or mean probability of the loss [denoted by P] was 1 out of 100 [or
0.01].
The mean or average expected loss would then be given by: L x P = 0.01 x
100000 = 1000
How can the insurer ensure that the pool is sufficient to compensate for the
losses that are actually incurred?
As we have seen earlier, the whole mechanism of insurance involves pooling of a
large numbers of statistically similar risks so that the law of large numbers
would operate and the probability of number of losses (frequency) as well as
the extent of loss (severity) becomes predictable.
The problem is that all exposures are not alike. A pool of exactly similar [or
identical] risks may be quite small.
For instance, how many houses would you find that are exactly similar and
located in exactly the same external environment? Not many.
As the pool size increases, it is likely to include non similar risks, which are
exposed to same or similar perils. The insurer faces a dilemma here.
How to create a pool which is large enough so that the risk becomes more
predictable while at the same time ensuring that the pool is sufficiently
homogenous and contains similar risks?.
Insurers have found a solution to the problem.
154
They create a pool that is sufficiently large, while also creating sub pools within
it and locating individual risks within one or the other sub pool. The sub pools
are created by dividing the risks into different categories, depending on the
degree of risk that is present.
Example
In the field of property insurance, the chances of a wooden structure catching
fire are more than stone structures; hence, a higher premium is required to
insure the wooden structure.
The same concept applies to health insurance also. An individual suffering from
high blood pressure or Diabetes has higher chances of suffering a heart attack
Consider the risk of high medical costs of treatment for a disease. The risk
would be different for a person who suffers from high BP and Diabetes
compared to a person who is in good health.
This process of classifying risks and deciding into which category they fall is
important for rate making.
1. Basics of Underwriting
Definition
Underwriting is the process of determining whether a risk offered for
insurance is acceptable, and if so, at what rate, terms and conditions the
insurance cover will be accepted.
Underwriting, in a technical sense, comprises the following steps:
i. Assessment and evaluation of hazard and risk in terms of frequency and
severity of loss
ii. Formulation of policy coverage and terms and conditions
iii. Fixing of rates of premium
The underwriter firstly decides on whether or not to accept the risk.
The next step would be to decide the rates, terms and conditions under which
the risk is to be accepted.
Underwriting skills are acquired through a continuous learning process involving
adequate training, field exposure and deep insights. To be a fire insurance
underwriter one needs to have a good knowledge of the likely causes of fire,
impact of fire on various physical goods and property, the process involved in an
industry, geography, climatic conditions etc.
155
Similarly a marine insurance underwriter must be aware about port/road

conditions, problems encountered by cargo/goods in transit or storage, ships
and their seaworthiness and so on.
A health underwriter needs to understand the risk profile of the insured, age,
medical aspects, fitness levels and family history and measure the effect of
each factor affecting the risk
a) Underwriting, equity and business sustainability
The need for careful underwriting and risk classification in insurance arises from
the simple fact that not all risks are equal. Each risk thus needs to be
appropriately assessed and priced in accordance with the likelihood of loss
occurrence and severity
Since all risks are not equal, it would not be equitable to ask all those who are
to be insured, to pay equal premium. The purpose of underwriting is to
classify risks so that, depending on their characteristics and degree of risk
posed, an appropriate rate of premium may be levied.
Every insurer has a responsibility to its current policyholders to make sure that
it is able to meet all the contractual obligations of existing policies. If the
insurance company issues policies on risks that are uninsurable or charges
premiums much lower than is required to cover the risk, it would result in
jeopardising the insurers ability to meet its contractual obligations.
On the other hand, an insurer who wants to charge very high rates for risks that
do not warrant such high rates may find that its business is non-competitive and
unsustainable. Therefore in the interest of equity and sustainability, the
underwriting process needs to be meticulously followed
The main features of underwriting are as follows
i. To identify risk based upon the characteristics
ii. To determine the level of risk presented by the proposer
iii. To ensure that the insurance business is conducted on sound lines
The objectives of underwriting are achieved, in short, by deciding the level of
acceptability, adequacy of premium and other terms.
Test Yourself 1
Identify the two factors that affect insurance ratemaking.
I.
II.
III.
IV.
Probability and severity of risk

Source and nature of risk
Source and timing of risk
Nature and impact of risk
156
B. Ratemaking basics
Insurance is based on transfer of risk to the insurer. By purchasing an insurance
policy, the insured is able to reduce the impact of financial losses arising from
the peril against which the property is insured.
Example
If one drives a car, there is a risk that it may be damaged in an accident. If the
owner has motor insurance, in the event the car gets damaged, the insurance
company will pay for the repairs.
The company needs to adopt a process of calculating a price to cover the future
cost of insurance claims and expenses, including a margin for profit. This is
known as ratemaking.
A rate is the price of a given unit of insurance.
For example, a rate may be expressed as Rs.1.00 per mille for earthquake
coverage
Rates vary according to the likelihood and potential size of loss. Each rate is
established after looking at past trends and changes in the current environment
that may affect potential losses in the future.
Example
Consider the above example of earthquake insurance, the rates charged would
be higher near a fault line and for a brick house, which is more susceptible to
damage, than for a concrete structure.
Taking an example of health insurance, numerical or percentage assessments
are made on each component of the risk. Factors like age, race, occupation,
habits etc. are examined and scored numerically based on predetermined
criteria.
Note that rates are not the same as premiums.
Premium = (Sum Insured) x (rate)
1. Objectives of rating
The basic objective of rate making is to ensure that price of insurance should be
adequate and reasonable, both from the point of view of the insurer and the
insured.
157
From the point of view of the insurer, this means that the rates in the
aggregate must be sufficient to provide for the payment of claims, expenses and
taxation and leave an adequate margin for catastrophes and for profit.
From the point of view of the insured, reasonable rates imply that one should
not be required to pay more than a sufficient sum to cover the hazards
involved, together with a reasonable charge for expenses, catastrophes and
profits.
Fire premium rates can be considered reasonable if they take into account all
major factors, which affect the risk but ignore minor factors, which in
aggregate may cause only a small variation in the estimated rate.
2. Determining the rate of premium
The pure rate of premium is arrived at on the basis of past loss experience.
Therefore, statistical data regarding past losses is most essential for purposes of
calculating rates.
To fix the rates, it is necessary to give a mathematical value to the risks.
Example
If loss experience of a large number of motor cycles is collected for a period of
say 10 years, we will get the sum total of the losses resulting from damage to
the vehicles. By expressing this amount of loss as percentage of the total value
of motor cycles we can fix the mathematical value of the risk. This may be
expressed in the formula given below:
M=
L
X
100
V
L refers to the sum total of the losses and V to the total values of all the motor
cycles
Let us suppose that:
Value of a motor cycle Rs. 50,000/ Loss experience: out of 1000 motor cycles in 10 years, 50 cycles are
stolen
On an average, five motor cycles become total losses due to theft every
year
Applying the formula, the result will be:
Losses (Rs. 50,000 X 5) = Rs. 2,50,000
Values (Rs. 50,000 X 1000) = Rs. 5,00,00,000
158
This means that (L / V) x 100 = [2,50,000 / 5,00,00,000] x 100 = 0.5%

Therefore the rate of premium that a motor cycle owner pays is half a percent
of Rs. 50,000/- i.e. Rs. 250/- per year. This is called the Pure premium.
At the rate of Rs. 250 per cycle, Rs. 2.5 lakhs is collected which is paid out in
claims on total losses of 5 vehicles.
If the pure premium, which is arrived above, is collected it would constitute a
fund which will be sufficient only to pay for losses.
In the example above we can see that there is no surplus. But insurance
operations also involve costs of administration (expenses of management) and
costs of procurement of business (agency commission). It is also necessary to
provide a margin for unexpected heavy losses.
Finally, since insurance is transacted on a commercial basis, like any other
business, it is necessary to provide for a margin of profit which is a return on
the capital invested in the business.
Therefore, the pure premium is suitably loaded or increased by adding
percentages to provide for expenses, reserves and profits.
The final rate of premium will consist of the following components:
Loss payments
Loss expenses (e.g. survey fees)
Agency commission
Expenses of management
Margin for reserves for unexpected heavy losses e.g. 7 total losses
against 5 assumed
Margin for profits
It is necessary to have a careful selection of the experience period. The most

recent loss experience period must be used. The selected period must contain
sufficient loss experience data so that the results have necessary statistical
significance or credibility. Finally where the business is subject to catastrophic
losses, the experience period must be representative of the average
catastrophic incident.
By taking all the relevant rating factors into consideration, one can ensure the
rates are not inadequate, excessive or unfairly discriminatory as between risks
of similar type and quality.
Test Yourself 2
What is pure premium?
I. Premium sufficiently big enough to pay for losses only
159
II. Premium applicable to marginal members of the society

III. Premium after loading for administrative costs
IV. Premium derived from the most recent loss experience period
160
C. Rating factors
The relevant elements that are used to add up the rates and make the rating
plan are referred to as rating factors. Insurers use rating factors to determine
the risk and to decide the price they will charge.
The insurer uses his assessments to firstly establish a base rate
Insurer then adjusts this rate with discounts applied for positive features
such as superior fire protection on property risk and loadings applied for
adverse features such as drivers with poor conviction records on motor
risks
Important
Sources of information for underwriting
The first stage in any numerical (or statistical) analysis is the collection of data.
When pricing a risk, an underwriter should gather as much information as
possible to aid accurate assessment.
Sources of information are:
i. Proposal form or underwriting presentation
ii. Risk surveys
iii. Historic claims experience data: For some classes of business, such as
personal and motor lines, underwriters often utilise historic claims
experience data to provide an indication of the likely future claims
experience, and to arrive at a suitable premium.
Accurate interpretation and effective use of claims experience is vital to the
pricing process. Catastrophic losses are unpredictable and infrequent in nature.
Hence, statistical information is not always available or meaningful as a basis
for calculation. (With the advent of modern computers various simulation
models are used nowadays to measure the likely impact of natural catastrophic
events)
1. Hazard
The term hazard in insurance language refers to those conditions or features
or characteristics which create or increase the chance of loss arising from a
given peril. A thorough knowledge of various hazards to which property and
persons are exposed is most essential for underwriting.
Hazards can be classified into physical and moral. Physical hazard refers to the
risk arising from material features of the subject matter of insurance, whereas
moral hazard may arise from human weakness (e.g. dishonesty, carelessness,
161
etc.) or from general economic and social conditions. At the operating level,
ratemaking process involves assessment of physical and moral hazards.
2. Physical hazards
Physical hazard can be ascertained from the information given in a proposal
form. It can be better ascertained by a survey or inspection of the risk. The
following are some examples of physical hazard in various classes of insurance.
a) Fire
i. Construction
Construction refers to the building materials used in walls and roof. A
concrete building is superior to a timber building.
ii. The height
Greater the number of storeys, the greater the hazard because of
difficulties of extinguishing fire. Besides, a greater number of floors involve
risk of collapse of the upper floors causing heavy impact damage.
iii. Nature of flooring
Wooden floors add fuel to fire. Besides, wooden floors collapse easily in the
event of fire, causing damage to property on lower floors through falling
machinery or goods from upper floors.
iv. Occupancy
The occupancy of a building, and the purpose for which it is used. Various
types of hazards arise from occupancy.
v. Ignition hazard
Buildings in which chemicals are produced or used in large quantity involve a
considerable ignition hazard. A timber yard presents a high combustibility
hazard because once a fire starts, timber burns quickly. The contents may
be highly susceptible to damage in the event of fire.
For example, paper, clothing etc. are susceptible not only to fire damage
but also to damage by water, heat etc.
vi. The process of manufacture
If work is carried during the night, the hazard is increased due to the use of
artificial lights, continuous use of machinery leading to friction and the
likely carelessness of workers due to fatigue.
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vii. Situation
Location in a congested area, exposure to hazardous adjacent premises and
distance from the fire brigade is an example of physical hazard.
b) Marine
i. The age and condition of vessel
Older vessels are inferior risks.
ii. The voyage to be undertaken
The route of the voyage, loading and unloading conditions and warehousing
facilities at the ports are factors.
iii. The nature of the stocks
Articles of high value are exposed to theft; machinery is liable to breakage
in transit.
iv. The method of packing
Cargo packed in bales is considered to be better than cargo in bags. Again,
double bags are safer than single bags.
Liquid cargo in second-hand drums constitute bad physical hazard.
c) Motor
i. The age and condition of the vehicle
Older vehicles are more prone to accidents.
ii. The type of vehicle
Sports cars involve greater physical hazard etc.
d) Burglary
i. The nature of the stocks
Articles of high value in small bulk (e.g. Jewellery) and easily disposable are
considered to be bad risks.
ii. Situation
Ground floor risks are inferior to upper floor risks: private dwellings situated
in isolated areas are hazardous.
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iii. Constructional hazard

Too many doors and windows constitute bad physical hazard.
e) Personal accident
i. The age of the person
Very old persons are accident prone; besides they will take longer to recover
in the event of an accident.
ii. Nature of occupation
Jockeys, mining engineers, manual workers are examples of bad physical
hazard.
iii. Health and physical condition
A person suffering from Diabetes may not respond to surgical treatment in
the event of accidental bodily injury.
f)
Health insurance
i. Age of the person

Younger age bracket are less prone to falling ill frequently.
ii. Health status of the person i.e. if presently suffering from any illness
iii. Consumption of alcohol or tobacco
iv. Nature of occupation
Working in factories where there is an excessive exposure to smoke or dust.
3. Addressing physical hazards in rating
Underwriters use the following methods to deal with physical hazards:
164
Loading of premium
Applying warranties on the policy
Applying certain clauses
Imposition of excess/ deductibles
Restricting the cover granted
Declinature of cover
a) Loading of premium
There may be some adverse features in a risk exposure for which the
underwriters may decide to charge an extra premium before acceptance of
the same.
By loading the premium the higher probability of claims or occurrence of
large claims is taken into consideration.
Example
i. Normal rate of premium is charged for cargo shipped by liners or other
vessels, which comply with the prescribed standards. However, if an overaged or under-tonnage vessel ships the cargo then extra premium is
charged.
ii. In personal accident insurance if the insured is engaged in hazardous
pursuits like mountaineering, racing on wheels, big game hunting etc. extra
premium is charged.
iii. In health insurance if there are adverse features at the time of
underwriting, it can also lead to loading of premium.
Sometimes loading of premium is also done for adverse claims ratio, as in case
of motor insurance or health insurance policies.
As per the recent regulation of IRDAI Individual claim based loading cannot be
applied. Loading can only be applied to the overall portfolio, based on objective
criteria.
b) Imposition of warranties
Insurers incorporate appropriate warranties to reduce the physical hazard.
Some examples are provided below.
Example
i. Marine cargo
A warranty is inserted to the effect that goods (e.g. Tea) are packed in tin lined
cases.
ii. Burglary
It is warranted that the property is guarded by a watchman for twenty four
hours.
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iii. Fire
In fire insurance, it is warranted the premises would not be used beyond normal
working hours.
iv. Motor
It is warranted that the vehicle will not be used for speed testing or racing.
c) Application of some clauses that will reduce the claim/loss amounts
Example
Marine cargo: Small damage to parts may cause costly machinery to be a
constructive total loss. Such machinery are subject to the Replacement Clause,
which limits underwriters liability only to the cost of replacing, forwarding and
refitting any broken part.
Cast pipes, hard board sometimes get damaged only at the edges. Marine
policies on cast pipes, hardboard etc, are subject to the cutting clause
warranting that the damaged portion should be cut off and the balance utilised.
Many a time marine insurance for inland transit is demanded on goods imported
from abroad. Its quite possible that loss or damage on such goods may have
already occurred during the ocean voyage but may not be apparent on external
examination.
Such risks are accepted subject to an inspection of the goods on landing in port.
Policy is subject to survey before acceptance.
d) Imposition of Excess / Deductibles
When the loss amount exceeds the deductible/excess mentioned the
balance is paid under 'excess' clause. Loss below the limit is not payable.
The object of these clauses is to eliminate small claims. As the insured is
made to pay part of a loss, he is encouraged to exercise more care and to
practice loss prevention.
e) Restriction of cover
Example
i. Motor: A proposal for an old motor vehicle will not be accepted on
comprehensive terms but insurers will offer a restricted cover i.e. against
third party risks only.
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ii. Personal accident: A personal accident proposer who has crossed the
maximum acceptance age limit may be covered for death risk only instead
of on comprehensive terms i.e. including disablement benefits.
iii. Health: At times the insurer may impose a restriction of cover for certain
surgical procedures or conditions and the cover would be to a limited extent
only. E.g. cataract or eye lens procedures.
f) Discounts
Lower rates are charged or a discount is given in the normal premium if the
risk is favourable.
The following features are considered to contribute to improvement of risk
in fire insurance.
i. Installation of sprinkler system within the premises
ii. Installation of hydrant system in the compound
iii. Installation of hand appliances consisting of
extinguishers and manual fire pumps
iv. Installation of automatic fire alarm
buckets,
portable
Example
Under motor insurance a discount in the premium is provided if the motor cycle
is always used with a side-car attached, as this feature contributes to improved
risk because of the greater stability of the vehicle.
In marine insurance, the insurer may consider giving discounts on premium for
Full Load container as this reduces the incidence of theft and shortage.
Under a group personal accident cover, discounts would be given for coverage
of a large group, which reduces the administrative work and expenses of the
insurer.
g) No claim bonus (NCB)
A certain percentage is given as bonus for every claim free renewal year
with a limit to the maximum bonus that can be availed. It is allowed by way
of deduction on the total premium at renewal only, depending upon the
incurred claim ratio for the entire group.
No claim bonus is a powerful strategy to improve underwriting
experience and forms an integral part of rating systems. This bonus
recognises the factor of moral hazard in the insured. It rewards the insured
for not lodging claims either by adopting better driving skills as in motor
insurance or taking better care of his health as in mediclaim policies.
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h) Declinature
If the physical hazard involved is considerably bad, the risk becomes
uninsurable and is declined. Based on their past loss experience, knowledge
of hazards and overall underwriting policy, insurers have formulated a list of
risks to be declined in each class of insurance.
4. Moral hazard
Moral hazard could arise in the following ways:
a) Dishonesty
An extreme example of bad moral hazard is that an insured taking insurance
with deliberate intention of creating or making a loss to collect a claim.
Even, an honest insured may be tempted to stage a loss, if he happens to be
in financial difficulties.
b) Carelessness
Indifference towards loss is an example of carelessness. Because of the
existence of insurance, the insured may tend to adopt a careless attitude
towards the insured property.
If the insured does not take the same care of the property as a prudent and
reasonable man would if he were uninsured the moral hazard is
unsatisfactory.
c) Industrial relations
Employer-employee relationship may involve an element of bad moral
hazard.
d) Wrong claims
This kind of moral hazard arises when claims occur. An insured may not
deliberately bring about a loss but once a loss occurs, he would attempt to
demand unreasonably high amount of compensation, in total disregard of
the principle of indemnity.
Example
Examples of such moral hazard arise in personal accident insurance, where the
claimant would tend to prolong his period of disablement in order to obtain
more benefits of insurance than is justified by the nature of injury.
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In motor claims such a hazard would arise when the insured unreasonably insists
on replacement of new parts whereas the damage could be satisfactorily
repaired or attempts to carry out certain repairs or replacements which are not
related to accidental damage.
Moral hazard can be reduced using the mechanisms of co-payment, deductible,
sub-limits and offering incentives like no-claim bonus in health insurance.
Information
i. Co-payment
When an insured event occurs, many health policies require the insured to share
a part of the insured loss. E.g. If the insured loss is INR 20000 and the co-pay
amount is 10% in the policy, then insured pays INR 2000.
ii. Sub-limits
The insurer may impose a limit on the total payout separately each for room
expenses, surgical procedures or doctor fees to check the inflated bills.
iii. Deductible
Also called as excess, it is the fixed amount of money the insured is required to
pay initially before the claim is paid by insurer, for e.g. if the deductible in a
policy is INR 10000,the insured pays first INR 1000 in each insured loss claimed
for.
Where the moral hazard of the insured is suspected, the agent should not
entertain or bring such proposals to the insurance company. She should also
bring such issues before the insurance company officials.
5. Short period scales
Normally, premium rates are quoted for a period of twelve months. If a policy is
taken for a shorter period, the premium is charged according to a special scale,
known as short period scale.
It may be observed that according to the scale, the premium chargeable for
short period insurance is not on proportionate basis.
Need for short period scales
a) These rates are applied because the expenses involved in the issue of
the policy whether for a 12 months period or a shorter period, are
almost the same.
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b) Further, an annual policy requires renewal procedure only once during a

year whereas short period insurances involve more frequent renewals. If
a proportionate premium is allowed, there would be a tendency on the
part of the insured to go on taking short period policies and thereby, in
effect, pay premiums in instalments.
c) Besides, some insurance are seasonal in character and the risk is greater
during that season. Insurances are sometimes taken during such period
when the risk is greatest and thereby selection takes place against the
insurers. Short period scales are evolved to prevent such selection
against the insurers. They are also applicable when annual insurance is
cancelled by the insured.
6. Minimum premium
It is the practice to charge minimum premium under each policy so that
administrative expenses of issuing the policy are covered.
Test Yourself 3
What is expected of an agent when she detects a moral hazard?
I.
II.
III.
IV.
Continue with the insurance as before

Report the same to the insurer
Ask for a share in the claims
Turn a blind eye
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D. Sum Insured
Its the maximum amount that an insurance company will indemnify as per
policy condition. An insured has to be very careful in choosing the limit of
indemnity, for that is the maximum amount that would be reimbursed at the
time of claim.
The sum insured is always fixed by the insured and is the limit of liability under
the policy. It is an amount on which rate is applied to arrive at the premium
under the policy.
It should be representative of the actual value of the property. If there is over
insurance, no benefit accrues to the insured and in case of under insurance, the
claim gets proportionately reduced.
1. Deciding the sum insured
Under each class of business the insured should be advised of the following
points which have to be borne in mind while deciding the sum insured:
a) Personal accident insurance: The sum insured offered by a company
can be a fixed amount or it can also be based on the insureds income.
Some insurance companies may give a benefit equal to 60 times or 100
times of the insureds monthly income for a particular disability. There
could be an upper limit or cap on the maximum amount.
Compensations can vary from company to company. In group personal
accident policies the sum insured may be fixed separately for each
insured person or may be linked to emoluments payable to the insured
person.
b) Health insurance: The sum insured is available within a certain range. It
depends on the age bracket too. Let us say for age group of 25 -40 years
the insurer may offer a sum insured of 10 lakhs or higher and for age
group of 3 months to 5 years it could be 2 lakhs or so.
c) Motor insurance: In case of motor insurance the sum insured is the
insured's declared value [IDV]. It is the value of the vehicle, which is
arrived at by adjusting the current manufacture's listed selling price of
the vehicle with depreciation percentage as prescribed in the IRDA
regulations. Manufacturer's listed selling price will include local duties /
taxes excluding registration and insurance.
IDV = (Manufacturers listed selling price depreciation) + (Accessories that
are not included in listed selling price-depreciation) and excludes
registration and insurance costs.
The IDV of vehicles that are obsolete or aged over 5 years is calculated by
mutual agreement between insurer and the insured. Instead of depreciation,
IDV of old cars is arrived at by assessment of vehicles condition done by
surveyors, car dealers etc.
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IDV is the amount of compensation given in case a vehicle is stolen or suffers

total loss. It is highly recommended to get IDV which is near the market
value of the car. Insurers provide a range of 5% to 10% to decrease IDV to
the insured. Less IDV would mean lesser premium.
d) Fire insurance
In fire insurance the sum insured may be fixed on the basis of market value
or reinstatement value for buildings / plant and machinery and fixtures.
Contents are covered on the basis of their market value which is cost of the
item less depreciation.
e) Stocks insurance
In case of stocks, sum insured is their market value. The insured will be
reimbursed at the cost at which these stocks can be purchased in the market
to replace the damaged raw material, after the loss.
f) Marine cargo insurance
It is an agreed valued policy and the sum insured is as per the agreement
between insurer and insured at the time of contract. Normally it would
consist of the sum of cost of the commodity plus Insurance + freight i.e. CIF
value.
g) Marine hull insurance
In marine hull insurance, the sum insured is the value, agreed between the
insured and the insurer at the beginning of the contract. This value would be
arrived at by a certified valuer after an inspection of the hull/ship.
h) Liability insurance
In case of liability policies, the sum insured is the liability exposure of the
industrial units based on the degree of exposure, geographical spread.
Additional legal costs and expenses may also form part of claim
compensation. The sum insured is decided by the insured based on the
above parameters.
Test Yourself 4
Suggest an insurance scheme for a doctor to protect him from any claims of
negligence against him.
I.
II.
III.
IV.
Personal accident insurance

Liability insurance
Marine hull insurance
Health insurance
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Summary
a) Process of classifying risks and deciding into which category they fall is
important for rate making.
b) Underwriting is the process of determining whether a risk offered for
insurance is acceptable, and if so, at what rate, terms and conditions the
insurance cover will be accepted.
c) A rate is the price of a given unit of insurance.
d) The basic objective of rate making is to ensure that price of insurance
should be adequate and reasonable.
e) Pure premium is suitably loaded or increased by adding percentages to
provide for expenses, reserves and profits.
f) The term hazard in insurance language refers to those conditions or features
or characteristics which create or increase the chance of loss arising from a
given peril.
g) The objective of imposing deductible / excess clauses is to eliminate small
claims.
h) No claim bonus is a powerful strategy to improve underwriting experience
and forms an integral part of rating systems.
i) Sum insured is the maximum amount that an insurance company will
indemnify as per policy condition.
Key terms
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
Underwriting
Rate making
Physical hazards
Moral hazards
Indemnity
Benefit
Loading of premium
Warranties
Deductibles
Excess
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Answer 1
Probability and severity of risk affect insurance ratemaking.
Answer 2
Pure premium is sufficient enough to pay for losses, however it does not
account for administrative expenses or profit.
Answer 3
An insurance agent should report to the insurer any detection of moral hazard.
Answer 4
Liability insurance can insure the doctor against claims of negligence.
Question 1
_____________ decides whether to accept or not to accept the risk.
I.
II.
III.
IV.
Assured
Underwriter
Agent
Surveyor
Question 2
_______________ is the price of a given unit of insurance.
I.
II.
III.
IV.
Rate
Premium
Sum Assured
Bonus
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Question 3
___________ is the maximum amount that an insurance company will indemnify
to someone who files a claim.
I.
II.
III.
IV.
Sum insured
Premium
Rider
Benefits
Question 4
______________ is not a source of information for underwriter.
I.
II.
III.
IV.
Annual accounts of a proposer

Pre-acceptance risk survey of the asset
Proposal form
Registration certificate of insurer
Question 5
Hazards are:
I.
II.
III.
IV.
Factors
Factors
Factors
Factors
that increase the impact of losses

that increases the frequency of loss
that increase the impact and severity of losses
that decrease the impact and severity of losses
Question 6
Which of the following is true?
Physical Hazards:
I.
II.
III.
IV.
Are not important for rate making

Cannot be ascertained
Can be calculated from the balance sheet
Can be ascertained from information given in a proposal form
Question 7
In motor insurance one of the warranties is:
I.
II.
III.
IV.
The vehicle
The vehicle
The vehicle
The vehicle
should
should
should
should
be washed daily
not be used for speed testing
not be used for carrying luggage for personal use
not be run more than 200 km per day.
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Question 8
The purpose of deductible clause is to:
I.
II.
III.
IV.
To avoid claim payment

To eliminate payment of small claims
To harass the policyholder
To increase the premium
Question 9
Installation of sprinkler system in the premises:
I.
II.
III.
IV.
Increases risk
Decreases the risk
Neither increases nor decreases risk
Increases risk of hooding
Question 10
Insureds declared value in motor insurance includes:
I.
II.
III.
IV.
Registration
Manufacturers cost price
Manufacturers selling price
Arbitrary price component

Answer 1
Underwriter decides whether to accept or not to accept the risk.
Answer 2
Rate is the price of a given unit of insurance.
Answer 3
Sum insured is the maximum amount that an insurance company will indemnify
to someone who files a claim.
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Answer 4
Registration certificate of insurer is not a source of information for underwriter.
Answer 5
Hazards are factors that increase the impact and severity of losses.
Answer 6
Physical hazards can be ascertained from information given in a proposal form.
Answer 7
In motor insurance one of the warranties is that vehicle should not be used for
speed testing.
Answer 8
The purpose of deductible clause is to eliminate small claims.
Answer 9
Installation of sprinkler system in the premises decreases the risk of fire.
Answer 10
Insureds declared value in motor insurance includes manufacturers selling
price.
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CHAPTER 7
PERSONAL AND RETAIL INSURANCE
In the previous chapters we have learnt various concepts and principles related
to general insurance. General insurance products are classified differently in
different markets. Some classify them as property, casualty and liability.
Elsewhere, they are grouped as fire, marine, motor and miscellaneous. In this
chapter, common products such as personal accident, health, travel, home and
shop keepers and motor insurance that are bought by such retail customers are
discussed.
Learning Outcomes
A. Householders insurance
B. Shopkeepers Insurance
C. Motor Insurance
1.
2.
3.
4.
5.
6.
Explain personal accident insurance cover

Discuss health insurance cover
Appraise travel insurance covers
Explain householders insurance
Prepare shop insurance cover
Discuss motor insurance
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A. Householders Insurance
a. Retail Insurance Products
There are some insurance products that are purchased for individuals for
covering certain interests. Though small commercial or business interests could
be there for such insurances, these are generally sold to individuals. In some
markets these are called small ticket policies or retail policies or retail
products. Insurances of the home, motor cars, two-wheelers, small businesses
like shops etc. fall under this category. These products are usually sold by the
same agents / distribution channels that deal with personal lines of insurance as
the buyers also are essentially from the same consumer segment.
b. Householders Insurance
a) Why do we need householders insurance?
Important
Named Perils Insurance Policy
i. A householders insurance policy only provides coverage on losses incurred
to the insureds property from hazards or events named in the policy. The
perils covered will be clearly spelt out.
ii. Named peril policies may be purchased as a less expensive alternative to a
comprehensive coverage or broad policies, which are policies that tend to
offer coverage to most perils.
'All Risks'
i. "All risks" means that any risk that the contract does not specifically
excludes is automatically covered. For example, if an all-risks house holder
policy does not expressly exclude flood coverage, then the house will be
covered in the event of flood damage.
ii. A type of insurance coverage that can exclude only risks that have been
specifically outlined in the contract. What is excluded will be clearly spelt
out.
iii. All-risks insurance is obviously the most comprehensive type of coverage
available. It is therefore priced proportionately higher than other types of
policies, and the cost of this type of insurance should be measured against
the probability of a claim.
A home is a place where dreams are built and memories are treasured. It's a
long cherished dream for most of us to own a home and it is one of the most
important financial decisions made. Most of us who decide to buy a home opt
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for a home loan. A home loan is one of the longest debts in our life, which
requires a long term commitment. For the sake of procuring the loan we need
to take insurance to give to the banks and secure the loan.
Apart from the house as such, the contents of the house are also important. The
house would contain pieces of furniture and costly appliances like television,
refrigerator, washing machine etc. There would be some gold or silver
ornaments and artwork like paintings or curios. All these could be damaged by
fire, earthquake, flood etc. or stolen as well. As these possessions are
purchased at high values using family savings, losses would cause financial
hardship. Householders insurance is a comprehensive policy that seeks to
address all the above situations.
b) What is covered in Householders Insurance Policies?
Information
Package or Umbrella policies
i. Package or umbrella covers give, under a single document, a combination of
covers.
ii. For instance there are covers such as Householders Policy, Shopkeepers
Policy, Office Package Policy etc. that, under one policy, seek to cover
various physical assets including buildings, contents etc.
iii. Such policies may also include certain personal lines or liability covers.
iv. Package covers could have common terms and conditions for all sections as
also specific terms for specific sections of the policy.
Householders insurance covers the house structure and its contents against
fire, riots, bursting of pipes, earthquakes etc. Apart from the structure, it
covers the contents against burglary, housebreaking, larceny and theft.
Jewelry whilst being worn or kept in locked safe can also be insured under
householders insurance. Cover is also given for antiques and works of art.
Householders insurance also provides coverage for loss of personal baggage,
electrical and mechanical failure of domestic and electronic appliances. Some
insurers also provide coverage for pedal cycle, personal accident and workmens
compensation.
Losses normally covered include fire, lightning, explosion and aircraft fall /
impact damage (commonly known as FLEXA); storm, tempest, flood and
inundation (commonly known as STFI); and burglary. Coverage differs from
company to company and from policy to policy. With the growth of High
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Networth Individuals (HNIs) who own expensive homes, there is a growing need
for this insurance.
Note
Plate glass and television insurance, though covered under this insurance, can
also be taken separately if desired by the insured. Terrorism is generally
excluded but can be given as an extension. War and allied perils; depreciation,
wear and tear; consequential loss and nuclear perils are excluded.
c) Sum Insured and Premium
Important
How does one fix the Sum Insured?
i. Generally, there are two methods of fixing the Sum Insured. One is Market
Value (MV) and the other is Reinstatement Value (RIV). In the case of M.V.,
in the event of a loss, depreciation is levied on the asset depending on its
age. Under this method, the insured is not paid amount sufficient to replace
the property.
ii. In the RIV method, the insurance company will pay the cost of replacement
subject to ceiling of sum insured. Under this method, no depreciation is
levied. One condition is that the damaged asset should be repaired /
replaced in order to get the claim. It may be noted that RIV method is
allowed only for fixed assets and not for other assets like stocks and stocks
in process.
Most policies insure the structure of the home for its reconstruction value (and
not for market value). Reconstruction value is the cost incurred to reconstruct
the home if it is damaged. On the other hand market value depends on factors
like demand, supply etc.
Sum insured is generally calculated by multiplying the built up area of insured's
home with the construction rate per square foot. The contents of the home furniture, durables, clothes, utensils, etc. - are valued on market value basis
i.e. the current market value of similar items after depreciation.
Premium would depend on the value insured and the coverage taken.
181
Test Yourself 1
Which of the below statement is correct with regards to a householders insurance
policy?
I. A named peril policy may be purchased as a less expensive alternative to a
comprehensive coverage policy that tends to offer coverage to most perils.
II. A comprehensive policy that tends to offer coverage to most perils; may be
purchased as a less expensive alternative to a named peril policy.
III. A named peril policy or comprehensive policy comes at the same price.
IV. With regards to a householders policy, only a named peril policy can be
bought and comprehensive policies are not available.
182
B. Shopkeepers Insurance
Trading is an economic activity and every entrepreneur would want her / his
business venture to be profitable. Shops are sources of revenue for many in our
country. It not only provides income but is also an asset. The shop owner would
like to be free of all worries unrelated to trading that could hamper her / his
business. An unfortunate incident could severely affect business finances or
operations and lead to bankruptcy or closure. A shop owner is not a corporate
house that has large reserves of money to restart business. A single mishap may
lead to closure of her / his shop and could probably ruin her / his family. There
may be bank loans also to repay.
There is always the possibility that a member of the public suffers a personal
injury or damage to her / his property, caused by the shop owners operations
and a court holds the shop owner liable to pay the damages. Such situations can
also ruin a shopkeeper. Therefore, it's very essential to secure this means of
livelihood.
Shopkeepers Insurance policies are devised to cover many of such aspects
of commercial shop/retail business. There are policies that are customised to
cover specific interests of many types of shops such as antique shop,
barbershop, beauty parlour, bookstore, department store, dry cleaners, gift
shop, pharmacy, stationery shop, toy shop, apparel store etc.
1. What does shopkeepers insurance cover?
The policy can be tailored to provide cover to protect the specific areas of
retail business. It usually covers damage to the shop structure and contents due
to fire, earthquake, flooding or malicious damage; and burglary. Shop insurance
can also include business interruption protection. This will cover any lost
income or additional expenditure in the event of an unexpected claim. The
coverage can be selected by the insured depending on her / his range of
activities.
The additional covers the insured can opt may vary from insurer to insurer and
can be verified from the respective websites of the non-life insurance
companies.
These could be:
i.
Burglary and Housebreaking: Cover for housebreaking, theft, and

larceny of office content
ii. Machinery Breakdown: Cover for breakdown of electrical / mechanical

appliances
iii. Electronic Equipment and Appliances:
Provides all-risk cover for electronic appliances
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Cover for loss of electronic installations

iv. Money Insurance: Provides coverage against loss of money due to an
accident while it is in:
Transit from the business premises to bank and vice versa
A safe at the business premises
A till (box/drawer/ counter) at the business premises
v. Baggage: Compensates for loss of baggage while on travel for official
purposes
vi. Fixed Plate Glass and Sanitary Fittings covers accidental loss of
damage to:
Fixed plate glass
Sanitary fittings
Neon Sign / Glow Sign / Hoarding
vii. Personal Accident
viii. Infidelity / Dishonesty of employees: Covers loss or damage caused by
dishonest acts of employees
ix. Legal Liability:
Compensation for accidents arising out of and in the course of
employment
Provides cover for legal liability to third parties
Fire / Burglary / Baggage / Plate Glass / Fidelity Guarantee / Workmen
Compensation and Public Liability Polices (dealt with next chapter) can be
taken separately also.
Terrorism cover may also be extended. The exclusions are generally the
same as in householders insurance.
2. Sum Insured and Premium
Industrial units or offices will maintain books of accounts showing therein value
of assets, therefore, it may not be difficult to arrive at the sum insured. In the
case of shop and house this may not be always possible.
As already stated under householders insurance, generally, there are two
methods of fixing the sum insured, viz. market value and reinstatement /
replacement value.
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For additional coverage like money, baggage, personal accident the premium
would depend on the sum insured and the covers opted for.
Definition
Some important definitions
a) Burglary means the unforeseen and unauthorised entry to or exit from the
insured premises by aggressive and detectable means with the intent to
steal contents there from.
b) Housebreaking is said to have taken place when a house trespass has been
committed by entering it for the purpose of committing an offence.
c) Robbery means the theft of contents at the insureds premises using
aggressive and violent means against the Insured and / or insureds
employees.
d) Safe means a strong cabinet within the insureds premises designed for the
safe and secure storage of valuable items, and access to which is restricted.
e) Theft is a generic term for all crimes in which a person intentionally and
fraudulently takes the property of another without permission or consent
and with the intent to convert it to the takers use or potential sale. Theft is
synonymous with larceny.
Test Yourself 2
Under the shopkeeper policy, the insured may opt for an additional Fixed plate glass
and sanitary fittings cover. This will cover accidental loss of damage to which of the
following?
I.
II.
III.
IV.
Fixed plate glass

Sanitary fittings
Neon signs
All of the above
185
C. Motor Insurance
Think of a situation where you have bought a new car using all your savings and
taken it for a drive. Out of nowhere, a dog comes in your way and to avoid
hitting it, you swerve sharply, go over the divider and hit another car and injure
the other person. So the outcome of a single incident has resulted in damage to
own car, public property and another car as also injury to another person.
In this scenario, if you do not have a car insurance, you may end up paying far
more than what it costs to purchase your car.
Do you have that much money to pay?
Should the other partys insurance pay for your actions?
What if they don't have insurance?
That is why the laws of the land make it mandatory to have car insurance. While
motor insurance doesnt prevent these things from happening, it provides a
financial security blanket for you.
Apart from an accident, the car can also be stolen, damaged by an accident or
destroyed by fire and you would suffer financially.
Motor insurance must be taken by a vehicle owner whose vehicle is registered in
her / his name with the Regional Transport Authority in India.
Important
Mandatory Third Party Insurance
As per the Motor Vehicles Act, 1988, it is mandatory for every owner of a
vehicle plying on public roads, to take an insurance policy, to cover the amount,
which the owner becomes legally liable to pay as damages to third parties as a
result of accidental death, bodily injury or damage to property. A Certificate of
Insurance must be carried in the vehicle as a proof of such insurance.
1. Motor insurance coverage
The country has a large vehicle population. A number of new vehicles keep
coming on to the road every day. Many of them are very costly as well. People
say that in India, vehicles do not get junked, but only keep changing hands. This
means that old vehicles continue to be on the road and new vehicles get added.
The area of the roads (the space for driving) is not growing correspondingly with
the number of vehicles. The number of people walking on the road is also
increasing. Police and hospital statistics say that the number of road accidents
in the country is increasing. The amount of compensations awarded to accident
victims by Courts of Law are increasing. Even vehicle repair costs are going up.
All these show the importance of motor insurance in the country
186
Motor insurance covers the loss of vehicles and the damages to them due to
accidents and some other reasons. Motor insurance also covers the legal liability
of vehicle owners to compensate the victims of the accidents caused by their
vehicles.
Do you think all the vehicles in the country are insured?
Motor Insurance covers all types of vehicles plying on public roads such as:
Scooters and motorcycles
Private cars
All types of commercial vehicles: Goods carrying and passenger carrying
Miscellaneous type of vehicles e.g. cranes,
Motor Trade (Vehicles in Showrooms and Garages)
Information
Third-Party Insurance
An insurance policy purchased for protection against the legal actions of
another party. Third-party insurance is purchased by the insured (first party)
from an insurance company (second party) for protection against another party's
claims (third party) for liability arising out of the action of the insured
Third party insurance is called Liability Insurance as well.
Two important types of covers that are popular in the market are discussed
below:
a) Act [Liability] Only Policy: As per Motor Vehicles Act it is mandatory for
any vehicle plying in public place to insure liabilities towards third
parties.
The policy only covers the vehicle owner's legal liability to pay compensation
for:
Third party bodily injury or death
Third party property damage
Liability is covered for an unlimited amount in respect of death or injury and
damage.
187
The claims for compensation to third party victims in case of death or injury
caused by a motor accident are to be filed by the complainant in Motor
Accident Claim Tribunal (MACT).
b) Package Policy / Comprehensive Policy: (Own damage + Third party
liability)
In addition to the above, the loss or damage to the vehicle insured by
specified perils (known as own damage to motor vehicles) is also covered
subject to the value declared (called IDV - already discussed in chapter 5)
and other terms and conditions in the policy. Some of these perils are fire,
theft, riot and strike, earthquake, flood, accident etc.
Some insurers may also pay for towing charges from the place of accident to
the workshop. A restricted cover is also available covering the risk of fire
and / or theft only, in addition to the compulsory cover granted under Act
(Liability) Only Policy.
The policy can also cover loss or damage to accessories fitted in the vehicle,
personal accident cover under private car policies for passengers, paid
driver; legal liability to employees and non-fare paying passengers in
commercial vehicles. Insurers also provide free emergency services or use of
alternative car in case of breakdown.
2. Exclusions
Some of the important exclusions under the policies are wear and tear,
breakdowns, consequential loss, and loss due to driving with invalid driving
license or under the influence of alcohol. Use of vehicle not in accordance with
`limitations as to use ' (e.g. private car being used as a taxi) is not covered.
3. Sum Insured and Premium
The sum insured of a vehicle in a Motor Policy is referred to as Insured's
Declared Value (I.D.V.).
In case of theft of vehicle or total damage beyond repairs in an accident, the
claim amount will be determined on the basis of the IDV. The IDV of the vehicle
is fixed on the basis of the manufacturers / dealers listed selling price of the
brand and model of the vehicle proposed for insurance at the commencement of
insurance / renewal and adjusted for depreciation as per schedule.
IDV of vehicle which is beyond 5 years of age and of obsolete models of the
vehicles (i.e. models which the manufacturers have discontinued to
manufacture) is determined on the basis of an understanding between insurers
and insured.
188
Rating / premium calculation depends on factors like the Insured's Declared

Value, cubic capacity, geographical zone, age of the vehicle etc.
Test Yourself 3
Motor insurance should be taken in whose name?
I. In the name of the vehicle owner whose name is registered with Regional
Transport Authority
II. If the person who will be driving the vehicle is different from the owner,
then in the name of the person who will be driving the vehicle, subject to
approval from Regional Transport Authority
III. In the name of any family member of the vehicle owner, including the
vehicle owner, subject to approval from the Regional Transport Authority
IV. If the person who will be driving the vehicle is different from the owner,
then primary policy should be in the name of the vehicle owner and add-on
cover in the name of the person who will be driving the vehicle.
189
Summary
a) A householders insurance policy only provides coverage on losses incurred
to an insured property from hazards or events named in the policy. The
perils covered will be clearly spelt out.
b) Householders insurance covers the structure and its contents against fire,
riots, bursting of pipes, earthquakes etc. Apart from the structure, it covers
the contents against burglary, housebreaking, larceny and theft.
c) Package or umbrella covers give, under a single document, a combination of
covers.
d) For a householders insurance policy generally there are two methods of
fixing the sum insured: Market Value (MV) and Reinstatement Value (RIV).
e) Shopkeepers insurance usually covers damage to the shop structure and
contents due to fire, earthquake, flooding or malicious damage; and
burglary. Shop insurance can also include business interruption protection.
f) Motor insurance covers the loss of vehicles and the damages to them due to
accidents and some other reasons. Motor insurance also covers the legal
liability of vehicle owners to compensate the victims of the accidents
caused by their vehicles.
Key terms
a)
b)
c)
d)
e)
f)
g)
h)
Personal accident insurance

Group policy
Health insurance
Family cover
Travel insurance policy
Householders insurance
Shopkeepers insurance
Motor insurance
190

Answer 1
A named peril policy may be purchased as a less expensive alternative to a
comprehensive coverage policy that tends to offer coverage to most perils.
Answer 2
Under the shopkeeper policy, the insured may opt for an additional Fixed plate glass
and sanitary fittings cover. This will cover accidental loss of damage to fixed plate
glass, sanitary fittings and neon signs.
Answer 3
Motor insurance should be taken in the name of the vehicle owner whose name
is registered with Regional Transport Authority
191
Question 1
In householders insurance
I.
II.
III.
IV.
Gold and silver ornaments are covered

Contents of ones shop is covered
Cars owned by the family are covered
Parcels sent by post are covered during transit.
Question 2
Householders insurance covers
I.
II.
III.
IV.
Only the structure of the home

Only the Contents of the home
Both the structure and contents
Both Structure and contents only when insured is not at home
Question 3
In shop keepers insurance, which of the following are not covered?
I.
II.
III.
IV.
Machinery breakdown
Malicious damage
Business interruption
Willful destruction by insured
Question 4
In shop keepers insurance which of the following are usually not covered
I.
II.
III.
IV.
Money in till/counter at business premises

Money in transit from bank to business premises
Money in safe at business premises
Money carried by customer to business premises.
Question 5
Shop insurance covers
I.
II.
III.
IV.
Dishonest acts
Dishonest acts
Dishonest acts
Dishonest acts
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of
of
of
of
employees
insured
customers
money lenders

Answer 1
In householders insurance gold and silver ornaments are covered.
Answer 2
Householders insurance covers both the structure and contents.
Answer 3
In shopkeepers insurance, willful destruction by insured is not covered.
Answer 4
In shopkeepers insurance money carried by customer to business premises is
usually not covered.
Answer 5
Shop insurance covers dishonest act of employees.
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CHAPTER 8
COMMERCIAL INSURANCE
In the previous chapter we considered various kinds of insurance products that
cover the risks faced by individuals and households. There is another set of
customers who have other needs for protection. These are the commercial or
business enterprises or firms, who are engaged in or deal with of various kinds
of goods and services. In this chapter we shall consider the insurance products
available to cover the risks faced by this segment.
Learning Outcomes
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
Property / Fire Insurance

Business Interruption Insurance
Burglary Insurance
Money Insurance
Fidelity Guarantee Insurance
Bankers Indemnity Insurance
Jewelers Block Policy
Engineering Insurance
Industrial All Risks Insurance
Marine Insurance
Liability policies

1. Recommend property / fire insurance
2. Define consequential loss (fire) insurance
3. Design burglary insurance cover
4. Illustrate money insurance
5. Describe fidelity guarantee insurance
6. Define bankers indemnity insurance
7. Propose jewelers block policy
8. Appraise engineering insurance
9. Appreciate industrial all risks insurance
10. Summarise marine insurance
11. Appraise liability insurance
194
A. Property / Fire Insurance

Commercial enterprises are broadly divided into two types:
Small and Medium Enterprises [SMEs] and
Large Business Enterprises
Historically, general insurance sector has largely developed by catering to the
needs of these customers.
Selling general insurance products to commercial enterprises calls for a careful
matching of insurance products with their needs. Agents must have a proper
understanding of the products available. Let us briefly consider some of these
general insurance products.
Property / Fire Insurance
Fire insurance policy is suitable for commercial establishments as well as for the
owner of property, one who holds property in trust or in commission and for,
individuals / financial institutions who have financial interest in the property.
All immovable and movable property located at a particular premises such as
buildings, plant and machinery, furniture, fixtures, fittings and other contents,
stocks and stock in process, including stocks at suppliers / customer's premises,
machinery temporarily removed from the premises for repairs can be insured.
Monetary relief is essential to rebuild and renew the property damaged to bring
back the business to its normal course. It is here that fire insurance plays its
role.
1. What does the Fire policy cover?
Some of the perils covered by the fire policy are discussed below.
The fire policy for commercial risks covers the perils of:
Fire
Lightning
Explosion / implosion
Riot strike and malicious damage
Impact damage
Aircraft damage
Storm, tempest, cyclone, typhoon, hurricane, tornado, flood and
inundation
Earthquake
Subsidence and landslide including rock slide
Bursting and overflowing of water tanks, apparatus and pipes
Missile testing operations
Leakages from automatic sprinkler installation
Bush fire
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There are two important features which differentiate commercial insurance

from individual and retail lines.
a) The insurance needs of firms or business enterprises are much larger
than that of individuals. The reason is that the value of the assets of a
commercial enterprise is much larger than that of an individuals assets.
Their loss or damage could adversely impact the very survival and future
of the company.
b) The demand for insurance of commercial enterprise is often mandated or
made necessary by legal or other requirements. For instance, when
plants and assets are set up through a bank loan, their insurance may be
a condition of the loan. Many corporate enterprises in India are
professionally run companies and a number of them are multinationals.
They are required to maintain global quality standards, including the
adoption of appropriate risk management strategies and insurance for
protecting their assets.
Any loss arising out of the above perils is covered by the policy subject to some
exclusion.
2. What are the exclusions?
The exclusions are:
a) Losses due to excepted perils like
i.
ii.
iii.
iv.
War and war like activities.

Nuclear perils
Ionisation and radiation
Pollution and contamination losses
b) Perils that are covered by other policies in General Insurance
i. Machinery Breakdown,
ii. Business Interruption
ADD- ON COVERS
However some perils can be covered by payment of additional premium like
earth quake, fire and shock; deterioration of stock in the cold storages following
power failure as a result of insured peril, additional expenditure involved in
removal of debris, architect, consulting engineers fee over and above the
amount covered by the policy, forest fire, spontaneous combustion and impact
damage due to own vehicles.
196
3. Variants of fire policy

Fire policies are generally issued for a period of 12 months. Only for dwellings,
insurance companies offer long term policies, i.e. for a period over 12 months.
In some cases short period policies are also issued, to which the short period
scales are applicable.
4. Market Value or Reinstatement Value Policies
In the event of a loss, the insurer would normally pay the market value [which is
the depreciated value]. Under Reinstatement Value Policy however, the insurers
would pay cost of replacement of the damaged property by new property of the
same kind. The sum insured is required to reflect the new replacement value
and not the market value as under the normal fire policy.
Reinstatement value policies are issued for covering buildings, plant, machinery
and furniture, fixture, fittings. Reinstatement value policies are not issued to
cover stocks, which are covered on market value basis
5. Declaration Policy
Stocks stored in warehouse can be covered by what in termed as a declaration
policy as such stocks are subject to fluctuation in quantity. The sum insured
should be the highest value that is expected to be stored in the godown during
the period of policy. On this value a provisional premium is charged. The
insured has to declare the value of his stocks at agreed intervals, during the
currency of policy. This is adjustable along with the premium at the end of the
policy period.
6. Floater Policies
Another kind of policy is the Floater Policy. These policies may be issued for
stocks of goods which are stored at various specified locations under one sum
insured. Unspecified locations are not covered. The premium rate is the highest
rate applicable to insureds stocks at any one location with a loading of 10%.
These are also called fire floater policies as the sum insured floats over
multiple locations.
Premium rating depends on:
a) The type of occupancy-whether industrial or otherwise.
b) All property located in an industrial complex will be charged one rate
depending on the product(s) made.
c) Facilities outside industrial complexes will be rated depending on the
nature of occupancy at individual location.
d) Storage areas will be rated based on the hazardous nature of goods held.
e) Additional premium is charged to include "Add on" covers.
197
f) Discount in premium is given based on past claims history & fire

protection facilities provided at the premises.
g) One can also opt out of riot, strike, malicious damage covers and flood
group perils for reduction in premium.
The rating pattern may again vary from insurer to insurer.
Test Yourself 1
A fire policy for commercial risks covers the perils of ________
I.
II.
III.
IV.
Explosion
Implosion
Both of the above
None of the above
198
B. Business Interruption Insurance

This type of insurance is also known as Consequential Loss Insurance or Loss of
Profit Insurance
Fire insurance provides indemnity against material or property damage or loss
suffered to building, plant, machinery fixtures, fittings, merchandise goods,
etc. by insured perils. This may result in total or partial interruption of the
insureds business, resulting in various economic losses, during the period of
interruption.
1. Coverage under Business Interruption Policy
Consequential Loss (CL) Policy [Business Interruption (BI)] provides indemnity
for loss of what is termed as gross profit which includes Net Profit plus
Standing Charges along with the increased cost of working incurred by the
insured to get the business back to normalcy, as soon as possible to reduce the
final loss. The perils covered and conditions are the same as those covered
under the fire policy.
Example
If an earthquake results in damage to the car manufacturer's plant, the
production loss will result in loss of income to the manufacturer. This loss of
income along with extra expenses incurred can be insured provided it has
resulted from a peril insured.
This policy can be taken only in conjunction with standard fire and special
perils policy as claims under this policy are admissible only if there is a claim
under standard fire and special perils policy.
Test Yourself 2
A business interruption insurance policy can be taken only in conjunction with
____________.
I.
II.
III.
IV.
Standard
Standard
Standard
Standard
fire and special perils policy

fire and marine policy
and special perils policy
Engineering and marine policy
199
C. Burglary Insurance
The policy is meant for business premises like factories, shops, offices,
warehouses and godowns which may contain stocks, goods, furniture fixtures
and cash in a locked safe which can be stolen. The scope of clearly expressed
in the policy.
1. Risks covered under burglary insurance
a) Loss of property following actual forcible and violent entry into the
premises or loss followed by actual, forcible and violent exit from the
premises or hold up.
b) Damage to insured property or premises by burglars. Property insured is
covered only when it is lost from the insured premises and not from any
other premises.
2. A) Cash cover
An important part of burglary cover is cash cover. It operates only when the
cash is secured in a safe, which is burglar proof and is of an approved make and
design. The common conditions applicable for granting cash cover are given
below:
a) Cash lost from the safe following the use of the original key to open it is
covered only where such key has been obtained by violence or threats of
violence or through means of force. This is generally known as key
clause.
b) A complete list of the amounts of cash in safe is kept secure in some
place other than the safe. The liability of the insurer is limited to the
amount actually shown by such records.
B)
First Loss Insurance
In the cases, which are of low value in high bulk, (such as cotton in bales, grain,
sugar etc.) the risk of losing the entire stock on a single occasion is considered
remote. The value that can be burgled is ascertained as probable maximum loss
and the premium is charged for this maximum probable loss while covering the
entire stock at risk. It is assumed that a second burglary may not follow
immediately or the insured may take additional security measures from its
recurrence.
C) Declaration cover and floater cover is also possible in respect of
stocks, similar to fire insurance.
3. Exclusions
200
The policy does not cover theft by employees, family members or other persons
who are lawfully on the premises, nor does it cover larceny or ordinary theft.
It also excludes losses that are covered by a fire or plate glass policy.
4. Extensions
The policy can be extended to cover riot, strikes and terrorism risks at extra
premium.
5. Premium
Rates of premium for burglary policy depend upon the nature of insured
property, the moral hazard of the insured himself, construction and location of
premises, safety measures (e.g. watchmen, burglar alarm), previous claims
experience etc.
In addition to details given in the proposal form, a pre-acceptance inspection is
done by insurers where high values are involved.
Test Yourself 3
The premium for burglary policy depends on ______________.
I.
II.
III.
IV.
Nature of insured policy

Moral hazard of the insured himself
Construction and location of the premises
All of the above
201
D. Money Insurance
Handling of cash is an integral part of any business. Its intended to protect
banks and industrial business establishments against loss of money. Money is at
risk in the premises as well as outside. It can be unlawfully taken away while
withdrawing, depositing, making payments or collections.
1. Coverage of Money Insurance
Money insurance policy is designed to cover the losses that may occur while
cash, cheques / postal orders / postal stamps are being handled. The policy
normally provides cover under two sections
a) Transit section
It covers loss of cash as a result of robbery or theft or similar actions whilst
it is carried outside by the insured or her authorised employees.
The transit section specifies two amounts:
i. Limit per carrying: This is the maximum amount that insurers may be
required to pay in respect of each loss.
ii. Estimated amount in transit during the policy period: It represents the
amount to which the rate of premium is to be applied to arrive at the
amount of premium.
Policies can be issued on declaration basis, similar to the practice in fire
insurance. Insurers thus charge a provisional premium on the estimated
amount in transit and adjust this premium at the time of expiry of the
policy, based on actual amount in transit during the policy period, as
declared by the insured.
b) Premises section
This section covers loss of cash from ones premises / locked safe due to
burglary, housebreaking, hold up etc. Other features of the policy are
normally the same as of burglary insurance (of business premises) that we
have discussed under Learning Outcome C above.
2. Important exclusions
These include:
a) Shortage due to error or omission,
b) Loss of money that has been entrusted to other than authorized person
and
c) Riot strike and terrorism: This can be covered as an extension by paying
an extra premium.
202
3. Extensions
On payment of additional premium the policy may be extended to cover:
a) Dishonesty of persons carrying cash,
b) Riot, strike and terrorism risks
c) Disbursement risk, which is the loss suffered during payment of wages to
employees
4. Premium
Premium rate is fixed depending on the insured, cash carrying liability of the
company at any one time, the mode of conveyance, distance involved, safety
measures taken etc. Premium is adjustable according to actual cash carried
throughout the year based on declaration made within 30 days of expiry of the
policy.
Test Yourself 4
Which of the below is covered under a money insurance policy?
I.
II.
III.
IV.
Shortage due to error or omission

Loss of cash from ones premises due to burglary
Loss of money that has been entrusted to other than authorized person
Riot strike and terrorism
203
E. Fidelity Guarantee Insurance

Companies suffer financial loss due to what are termed as white collar crimes
like fraud or dishonesty of their employees. Fidelity guarantee insurance
indemnifies employers against the financial loss suffered by them due to fraud
or dishonesty of their employees by forgery, embezzlement, larceny,
misappropriation and default.
1. Coverage under Fidelity Guarantee Insurance
Cover is granted against a direct pecuniary loss and does not include
consequential losses.
a) The loss should be in respect of moneys, securities or goods
b) The act should be committed in the course of the duties specified;
c) The loss has be discovered within 12 months of expiry of the policy or
death retirement resignation or dismissal of the employee, whichever is
earlier
d) No cover is provided in respect of a dishonest employee who has been
re-employed
2. Types of Fidelity Guarantee Policy
There are various types of fidelity guarantee policies, as discussed below:
a) Individual policy
This type of policy is used where only one individual is to be guaranteed.
Name, designation of the employee and amount of guarantee has to be
specified.
b) Collective policy
This policy comprises a schedule listing out the names of those employees to
whom the guarantee applies, along with a note on the duties of each
employee and separate individual sums insured.
c) Floating policy or floater
In this policy, the names and duties of the individuals to be covered are
inserted in a schedule, but instead of individual amounts of guarantee, a
specified amount of guarantee is floated over the whole group. A claim in
respect of any one employee will, therefore, reduce the floated guarantee,
unless the original sum is reinstated by payment of an extra premium.
d) Positions policy
204
This is similar to a collective policy with the difference that, the schedule
lists out only the "positions that are to be guaranteed for a specified
amount and the name are not mentioned.
e) Blanket policy
This policy covers the entire staff without showing names or positions. No
enquiries about the employees are made by the insurers. Such policies are
only suitable for an employer with a large staff and the organization makes
adequate enquiries into the antecedents of employees. The references that
the employer obtains must be available to the insurers in the event of a
claim. The policy is granted only to large firms of repute.
3. Premium
The rate of premium depends upon the type of business occupation, status of
the employee, the system of check and supervision.
Test Yourself 5
Fidelity guarantee insurance indemnifies ________________.
I. Employers against the financial loss suffered by them due to fraud
dishonesty of their employees
II. employees against the financial loss suffered by them due to fraud
dishonesty of their employer
III. Employees and employers against the financial loss suffered by them due
fraud or dishonesty of third party
IV. Shareholders against the financial loss suffered by them due to fraud
dishonesty of the company management
or
or
to
or
205
F. Bankers Indemnity Insurance

This comprehensive cover was drafted for the banks, NBFC's and other
institutions who deal with operations involving money, considering the special
risks faced by them regarding money and securities.
1. Coverage under Bankers Indemnity Insurance
There are different variations to this policy based on the requirement of
banker.
a) Money securities lost or damaged whilst within the premises due to fire,
burglary, riot and strike.
b) Loss suffered due to any cause whatsoever including negligence of the
employees, when the property is carried outside the premises in the
hands of authorized employees.
c) Forgery or alteration of cheques, drafts, fixed deposit receipts etc.
d) Dishonesty of employees with reference to money/securities or in
respect of goods pledged.
e) Dispatches by registered post parcels.
f) Dishonesty of appraisers.
g) Money lost while in the hands of agents of the bank like Janata Agents,
Chhoti Bachat Yojana Agents.
The cover is issued on discovery basis, this means the policy will respond to a
period during which a loss is discovered and not necessarily the period when it
occurred. But a cover should have been in existence when the loss actually
occurred.
Conventionally losses within a period of 2 years prior to date of discovery
only are payable, subject to the cover having been continuous, from a date
earlier than that when the loss has occurred.
2. Important exclusions
These include:
a) Trading losses
b) Negligence
c) software crimes and
206
d) dishonesty of the partners / directors]

3. Sum insured
The bank has to fix the sum insured which would usually float over the first 5
sections. This is termed as basic sum insured. Additional sum insured can be
purchased for section (1) and (2) if the basic sum insured is not sufficient. The
policy also allows one compulsory and automatic reinstatement of sum insured
by payment of an extra premium
4. Rating
The premium calculation is based on:
a)
b)
c)
d)
Basic sum insured

Additional sum insured
Number of staff
Number of branches.
Test Yourself 6
Which of the below can be covered under a bankers indemnity insurance policy?
I.
II.
III.
IV.
Money securities lost or damaged whilst within the premises due to fire
Forgery or alteration of cheques
Dishonesty of employees with reference to money
All of the above
207
G. Jewelers Block Policy

In recent years India has emerged as a leading center in world trade for
jewelry, especially diamonds. Imported raw diamonds are cut, polished and
exported. It takes care of all risks of a jeweler whose business involves sale of
articles of high value in small bulk like jewelry gold & silver articles, diamonds
and precious stones, wrist watches etc. The trade involves stocking these
expensive items in large quantity and moving them between different premises.
1. Coverage of Jewelers Block Policy
Jewelers block policy covers such risks. It is divided into four sections.
Coverage under Section 1 is compulsory. The insured can avail of other sections
at her option. Its a package policy.
a) Section I: Covers loss of or damage to property whilst in the premises
insured, as a result of fire, explosion, lightning burglary, house-breaking,
theft, hold-up, robbery, riot, strikes and malicious damage and
terrorism.
b) Section II: Covers loss or damage whilst the property insured is in the
custody of the insured and other specified persons.
c) Section III: Covers loss or damage whilst such property is in transit by
registered insured parcel post, air freight etc.
d) Section IV: Provides cover for trade and office furniture and fittings in
the premises against the perils specified in Section I.
Each section is separately rated for calculating premium.
2. Important exclusions are:
a)
b)
c)
d)
e)
f)
Dishonesty of agents, cutters, goldsmiths,

Property kept during public exhibition
Lost whilst being worn / carried for personal purpose
Property not kept in safe outside business hours
Property kept in display windows at night
Loss due to infidelity of employees or members of the insured family is
not covered.
Fidelity guarantee cover should also be taken by the insured for full
protection.
3. Premium
Risks are rated on merits of each case. Different premium rates are applied for
each section with discounts for exclusive round the clock watchman, close
208
circuit TV / alarm system, exclusive strong room and for any other safety device
etc.
Test Yourself 7
In case of a Jewelers Block Policy, damage to property insured when it is in
transit by registered parcel will be covered under ____________.
I.
II.
III.
IV.
Section
Section
Section
Section
I
II
III
IV
209
H. Engineering Insurance
Engineering insurance is a branch of general insurance that developed parallel
with the growth of fire insurance. Its origins can be traced to the development
of industrialization, which highlighted the need for a separate cover for plant
and machinery. Concept of All Risks cover was also developed with regard to
engineering projects - covering damage due to any cause except those
specifically excluded. The products covered various stages from construction
to testing till the plant became operational. The customers for this insurance
are both large and small industrial units. This also includes units having
electronic equipment and contractors doing big projects.
Types of engineering insurance policies
Let us briefly consider the major policies that fall under this type of insurance
1. Contractors All Risks (C.A.R.) Policy
This is designed to protect the interests of contractors and principals engaged in
civil engineering projects from small buildings to massive dams, buildings,
bridges, tunnels, etc. The policy provides an All Risk cover thus providing
indemnity against any sudden and unforeseen loss or damage that occurs to
property insured at the construction site. This can be extended to cover third
party liability and other exposures. Premium chargeable depends on the nature
of the project, the project cost, the project period, geographic location and the
period of testing.
2. Contractors Plant & Machinery (CPM) Policy
Suitable for contractors involved in construction business for covering all kinds
of machinery like cranes, excavators, from unforeseen and sudden physical loss
or damage from any cause including:
a) Burglary, theft, R.S.M.D.T.
b) Fire and lightning, external explosion, earthquake and other Acts of God
perils
c) Accidental damage while at work due to faulty manhandling, dropping or
falling, collapse, collision and impact; can be extended for third party
damage.
Premium depends on the type of equipment and the location at which it
operates.
The cover is operative whilst the equipment is at work or at rest or being
dismantled for cleaning or overhauling or re-assembling thereafter. The
cover also applies while the same are lying at contractors own premises.
210
3. Erection All Risks (EAR) Policy

This policy is also known as Storage-cum-Erection (SCE) policy. It is suitable for
the principal or contractors of a project whilst plan and machinery is being
erected as it is exposed to various external risks. This is a comprehensive
insurance policy that covers any sort of contingency right from the moment the
materials are unloaded at the project site and continues during the entire
project period until the project is tested, commissioned and handed over.
Premium chargeable depends on the nature of the project, the cost, the project
period, geographic location, and the period of testing.
If required an marine cover can be issued along with the erection policy for
providing coverage to the equipment and materials during the transit phase
till delivered at the project site.
4. Machinery Breakdown Policy (MB)
This policy is suitable for every industry which operates on machines and for
whom breakdown of plant and machinery is of serious consequence. This policy
covers machines like generators, transformer and other electrical, mechanical
and lifting equipment.
The policy covers unforeseen and sudden physical damage by mechanical or
electrical breakdown by any cause (subject to excepted risks) to the insured
property:
a) While it is at work or at rest.
b) While being dismantled for cleaning or overhauling
c) During cleaning or overhauling operations and during reassembly
thereafter.
d) When being shifted within the premise.
Premium is charged on the reinstatement / replacement value of individual
machinery. The machine as a whole should be insured. Rates depend on the
type of machine; the industry in which it is used and its value. Discounts are
offered based on factors such as stand-by facilities, spares available and claims
experience.
5. Boiler and Pressure Plant Policy
This covers boilers and pressure vessels, against:
a) Damage, other than by fire, to the boilers and / or other pressure plant
and to surrounding property of the insured; and
211
b) Legal liability of the insured on account of bodily injury to the person, or

damage to the property, of third parties, caused by explosion or collapse
due to internal pressures of such boiler and / or pressure plant.
Since fire policy and boiler insurance policy are mutually exclusive, for
adequate cover, both the policies need to be taken. Sum insured under all
Engineering Policies should be the current replacement value.
6. Machinery Loss of Profits (MLOP) Policy
This policy is suitable for industries where interruptions or delays as a result of
machinery breakdown or boiler explosion result in huge consequential losses.
Where the time lag between the breakdown or loss and the restoration is large,
this policy compensates for the loss of profits during the intervening period due
to reduction in turnover and increase in cost of working. The terms and
conditions and coverage of business interruption policy is the same as the
business interruption policy following a fire policy loss, which has been
discussed earlier in this chapter.
7. Deterioration of Stock Policy
This policy is suitable for the owner of the cold storage (individual or a
cooperative society) or those who take the cold storage on lease or hire for
storage of perishable commodities. The cover is against the risk of deterioration
and contamination following breakdown of the refrigeration plant and
machinery and also due to rise in temperature and sudden and unforeseen
escape of refrigerants into the cold storage rooms.
8. Electronic Equipment Policy
This covers various kinds of electronic equipment, which includes the entire
computer system consisting of CPU, keyboards, monitors, printers, UPS, system
software etc. Auxiliary equipment such as air-conditioning, heating and power
conversion, etc. are also covered.
This policy is a combination of fire policy, machinery insurance policy and
burglary policy. The policy covers the contingencies such as defective design
(not covered under a warranty), effects of natural phenomena; defective
functioning due to voltage fluctuations, impact shock etc., burglary,
housebreaking & theft are also covered.
The policy is available to the owner, lessor or hirer, depending upon the
responsibility or liability in each case. It has usually three sections that cover
various types of losses:
a) Section 1: Loss and damage to equipment
212
b) Section 2: Loss and damage to external data media like computer

external hard disks
c) Section 3: Increased cost of working - to ensure continued data
processing on substitute equipment upto 12, 26, 40 or 52 weeks.
9. Advance Loss of Profit Cover (ALOP) or Delay in Start-up Policy (D.S.U.)
This covers financial consequences of a project being delayed because of
accidental damages during the project. It is suitable for the insured who is
deprived of the anticipated earning and the financial institutions to the extent
of their interest in the project. It is issued as an extension to the MCE/EAR/CAR
Policy before the actual commencement of project.
The policy also covers financial losses in the form of continuing expenses such
as interest on term loan, debentures, wages and salaries etc. and on the
anticipated net profit which the business could have earned if it had
commenced on the scheduled date.
Premium rating depends on various critical factors and on re-insurance support
available. The anticipated gross profit or turnover and the indemnity period are
also critical factors in deciding the premium payable.
Test Yourself 8
Delay in start-up policy is also known as ______________.
I.
II.
III.
IV.
Machinery Loss of Profits cover

Advance Loss of Profits cover
Contractors All Risk cover
Contractors Plant & Machinery cover
213
I. Industrial All Risks Insurance

The Industrial All Risks Policy was designed to cover, industrial properties both
manufacturing and storage facilities, anywhere in India under one policy. It
provides indemnification against material damage and business interruption.
Usually, the policy provides cover for the following:
i. Fire and specified perils as per fire insurance practice,
ii. Burglary (except larceny)
iii. Machinery breakdown / boiler explosion / electronic equipment
iv. Business interruption following operation of perils mentioned above
(Note: Business interruption following perils under (c) above is usually not
included in the package cover but available as optional cover)
The policy offers widest range of cover compared to that provided by
individual operational policies.
Premium rates for the policy depend on the cover opted, claims
experience, and deductibles opted, risk assessment report for MLOP etc.
Test Yourself 9
Which of the following is not covered under Industrial All Risks insurance?
I.
II.
III.
IV.
Fire and special perils as per fire insurance practice

Larceny
Machinery breakdown
Electronic equipment
214
J. Marine Insurance
Marine insurance is classified into two types: marine cargo and marine hull
1. Marine Cargo Insurance
Though the term marine may indicate only losses due to sea (marine) misadventures, marine cargo insurance covers much more. It provides indemnity
in respect of loss of or damage to goods during transit by rail, road, sea, air or
registered post, within the country as well as abroad. Type of goods may range
from diamonds to household goods, bulk items like cement, grains, over
dimensional cargoes for projects etc.
Cargo insurance plays an important role in domestic trade as well as in
international trade. Most contracts of sale require that the goods must be
covered, either by the seller or the buyer, against loss or damage.
Who effects the insurance: The seller or the buyer of the goods [consignment]
may insure the cargo depending upon the contract of sale.
Marine insurance contract needs to have provisions that apply internationally.
This is because it covers goods that are in transit beyond any countrys borders.
The covers are accordingly governed by international conventions and certain
clauses attached to the policy.
While the basic policy document contains general conditions, the scope of cover
and exceptions and special exclusions are attached by separate clauses known
as Institute cargo Clauses (ICC). These are drafted by the Institute of London
Underwriters.
a) Coverage under Marine Cargo Insurance
Cargo policies are essentially voyage policies, i.e. they cover the subject
matter from one place to another. However, the insured is required to
always act with reasonable care in all circumstances within his control. The
main feature of this policy is that it's an Agreed Value Policy. The valuation
is agreed between the insurer and insured and is not subject to revaluation
later unless fraud is suspected. Another unique feature is that the policy is
freely assignable.
The cover normally commences from the time the goods leave the
warehouse at the place named in the policy and terminates at the
destination named in the policy, depending on the terms of the contract of
sale.
The terms and conditions applicable are governed by either;
i. Inland Transit Clause (ITC) A, B or C for inland transit
215
ii. Institute Cargo Clause (ICC) A, B, or C for voyage by sea

iii. Institute Cargo (Air) Clause A for transport by air
Institute Cargo Clause C grants the minimum cover, which is loss or damage
due to accident to the vehicle or vessel carrying the cargo due to:
i.
ii.
iii.
iv.
Fire or explosion
Derailment or overturning of the vehicle
Stranding, grounding or sinking of the vessel (in case of ship)
Collision with an external object
Institute Cargo Clause B is wider than C. Apart from the perils covered in C
it also covers loss or damage due to:
i.
ii.
iii.
iv.
Act of God (AOG) perils like earthquake, volcanic eruption and lightning
Collapse of bridges in Inland transit
Washing overboard and sling loss in case of ocean transit
Entry of water into the vessel.
Institute Cargo Clause A is the widest cover as it covers all perils of B and C
and loss or damage due to any other risk except some exclusion specified
such as:
i. Loss or damage due to willful conduct of the insured
ii. Ordinary leakage, breakage, wear and tear or ordinary loss in weight /
volume
iii. Insufficiency in packing
iv. Inherent vice
v. Delays
vi. Loss due to insolvency of owners
vii. Nuclear perils
These exclusions are common to all clauses of inland, air and sea. There are
separate clauses also for trading of specific commodities like coal, bulk oil and
tea etc. Marine cover can be extended by paying additional premium to cover
War, Strikes, Riots, Civil Commotion and Terrorism. Marine and Aviation policies
is the only branch of insurance that offer cover against War perils.
Important
Risks covered under a marine policy, under the standard policy form and under
the various clauses attached to the policy broadly fall into three categories:
i. Marine perils,
ii. Extraneous perils and
iii. War, strike riot, civil commotion and terrorism risks.
216
b) Different types of marine policies

i. Specific Policy
This policy covers a single shipment. It is valid for the particular voyage or
transit. Merchants who are engaged in regular import and export trade or
who are sending consignments regularly by inland transit would find it
convenient to arrange insurances under special arrangements like the open
policy.
ii. Open Policy
The carriage of goods within the country can be covered under an open
policy. The policy is valid for one year and all consignments during this
period have to be declared by the insured to the insurer as agreed between
them on a fortnightly, monthly or quarterly basis.
iii. Open Cover
For large exporters and importers who have continuous trade, an open cover
is issued. It sets out the terms of cover and rates of premium for one-year
transaction of marine dispatches. The open cover is not a policy and it is not
stamped. A certificate of insurance is issued for each declaration duly
stamped for appropriate value.
iv. Duty and increased value insurance
These policies provide extra insurance if the value of the cargo is increased
due to payment of customs duty or increase in the market value of the goods
at the destination on the date of the landing.
v. Delay in Start Up
Many insured are opting for this cover. In case of new project any loss or
damage to the equipment during transit may involve ordering of fresh
equipment which leads to delay in completion of the project, and thereby
loss of profits. The financial institutions who are interested in timely
completion of the project for their debt servicing, would like this risk
covered by an insurance contract and the marine (cargo) insurance policy
can be extended against consequential loss due to marine delays' or simply delay start up.
Premium: Rate depends upon the nature of goods, the mode of
transshipment, type of package, the voyage route and the past claims
experience. However extended covers like SRCC and War risks (for overseas
cargo) risks are governed by special regulations and the premiums collected
will be credited to the Central Government
217
2. Marine Hull insurance

The term Hull refers to the body of a ship or other water transport vessel.
Marine hull insurance is done as per international clauses applicable across
different countries. Marine hull covers are essentially of two types:
a) Covering a particular Voyage: The set of clauses used here are called
Institute Voyage Clauses
b) Covering a period of time: Usually one year. The set of clauses used
here are called Institute (Time) Clauses
Information
Hull insurance also includes the following insurances:
i.
ii.
iii.
iv.
v.
vi.
Inland vessels such as barges, launches, passenger vessels etc.

Dredgers (Mechanized or non-mechanized)
Fishing Vessels (Mechanized or non-mechanized)
Sailing Vessels (Mechanized or non-mechanized)
Jetties and Wharves
Vessels in the course of construction
The ship owner has insurable interest not only in the ship, but also in the
freight to be earned during the period of insurance. In addition to freight the
ship owner has insurable interest in the amount spent by him in fitting out the
vessel, including provisions and stores. These expenses are termed
disbursements and are insured concurrently with the hull policy for a period
of time.
Important
Aviation insurance: A comprehensive policy is also available for aircraft which
covers loss or damage to the aircraft as also the legal liability to third parties
and to passengers arising out of the operation of the aircraft.
Test Yourself 10
Which branch of insurance offers cover against war perils?
I.
II.
III.
IV.
Marine policies
Aviation policies
Both of the above
None of the above
218
K. Liability Policies
Accidents cannot be avoided altogether, however careful a person is. This could
result in injury to oneself and damage to ones property and also may
simultaneously cause injury to third parties and damage to their property. The
persons thus affected would claim compensation for such loss.
A liability could also arise from a defect in a product manufactured and sold,
say chocolates or medicines, causing harm to the consumer. Similarly, liability
could arise from wrong diagnosis / treatment of a patient or from a case
improperly handled by a lawyer for his client.
In all such cases, where a third party, consumer or the patient would demand
compensation for the alleged wrong doing, it would raise a need for payment of
compensation or meeting expenses involved in defending the suits filed by the
claimants. In other words there is a financial loss arising from a liability to pay.
The existence of such a liability and the amount of compensation to be paid
would be decided by a civil court which would go into the aspect of alleged
negligence / fraud. Liability insurance policies provide coverage of such
liabilities.
Let us look at some of the liability policies.
Statutory liability
There are certain laws or statutes which provide for the payment of
compensation. The laws are:
Public Liability Insurance Act, 1991 and
Employees Compensation Act 1923 amended in 2010
Insurance policies are available for protection in respect of such liabilities. Let
us look at some of them.
1. Compulsory Public Liability Policy
The Public Liability Insurance Act, 1991 imposes liability on no fault basis on
those who handle hazardous substances if a third party is injured or his property
is damaged during the course of such handling. The names of hazardous
substances and the quantity of each, is listed in the 'Act'
The amount of compensation payable per person is fixed as shown below.
Compensation payable
Fatal Accident
Permanent Total Disability
Permanent Partial Disability
Temporary Partial Disablement
Actual Medical Expenses
Actual damage to property up to
Rs. 25,000
Rs. 25,000
% of Rs. 25,000 based on % of disability
Rs. 1000 per month, maximum 3 months
Upto a maximum of Rs. 12,500
Rs. 6,000
219
The premium is based on the AOA (Any One Accident) limit and the turnover of
the client. A special feature of this policy is that the insured has to pay
compulsorily an amount equal to the premium as contribution to Environment
Relief Fund. If large numbers of third parties are affected and the total amount
of relief payable exceeds A.O.A. limit, the balance amount will be paid by the
fund.
2. Public Liability Policy (Industrial / Non-industrial Risks)
This type of policy covers liability arising out of fault / negligence of the
insured causing third party personal injury or property destruction [TPPI OR
TPPD].
There are separate policies covering industrial risks as well as non-industrial
risks like those affecting hotels, cinema halls, auditoriums, residential premises,
offices, stadiums, godowns and shops. It covers the legal liability to pay
compensation including claimants costs, fees and expense according to Indian
Law, in respect of TPPI/TPPD.
The policy does not cover:
a)
b)
c)
d)
Products liability
Pollution liability
Transportation and
Injuries to workmen / employees
3. Products Liability Policy

The demand for products liability insurance has arisen because of the wide
variety of products (e.g. canned food stuff, aerated waters, medicines and
injections, electrical appliances, mechanical equipment, chemicals etc.) that
are today manufactured and sold to the public. If a defect in the product causes
death, bodily injury or illness or even damage to the property of third parties, it
could cause a claim to arise. Product liability policies cover this liability of the
insured.
Cover is available for exports as well as domestic sales.
4. Lift (Third Party) Liability Insurance
The policy provides indemnity to owners of buildings in respect of liabilities
arising out of the use and operation of lifts. It covers legal liabilities for:
a) Death / bodily injury of any person (excluding employees of the insured)
b) Damage to property (excluding insureds own or employees property)
The premium rates depend upon the limit of indemnity, any one person, any
one accident and any one year.
220
5. Professional Liability
Professional indemnities are designed to provide insurance protection to
professional people against their legal liability to pay damages arising out of
negligence in the performance of their professional duties. Such covers are
available for doctors hospitals; engineers, architects; chartered accountants,
financial consultants, lawyers, insurance brokers.
6. Directors' and Officers' Liability Policy
Directors and Officers of a company hold positions of trust and responsibility.
They may become liable to pay damages to shareholders, employees, creditors
and other stakeholders of the company, for wrongful acts committed by them in
the supervision and management of the affairs of the company. A policy has
been devised to cover such liability and is issued to the company covering all
their directors.
7. Employees Compensation Insurance
This policy provides indemnity to the insured in respect of his legal liability to
pay compensation to his employees who sustain personal injury by accident or
disease arising out of and in the course of his employment. This is also called
Workmans Compensation Insurance.
Two forms of insurance are prevalent in the market:
a) Table A: Indemnity against legal liability for accidents to employees
under the Employees Compensation Act, 1923, (Workmans
Compensation Act, 1923), Fatal Accident Act, 1855 & Common Law.
b) Table B: Indemnity against legal liability under Fatal Accidents Act, 1855
and Common law.
The premium rate is applied on the estimated wages of employees as declared
in the proposal form and premium is adjusted on the basis of actual wages
declared by the insured on expiry of the policy.
The policy may be extended to cover:
i. Medical and hospital expenses incurred by the insured for treatment of
employee injuries, up to specific amounts
ii. Liability for occupational diseases listed in the Act
iii. Liability towards employees of contractors
Test Yourself 11
Under the Public Liability Insurance Act, 1991, how much is the compensation
payable for actual medical expenses?
I.
II.
III.
IV.
Rs.
Rs,
Rs.
Rs.
6,250
12,500
25,000
50,000
221
Summary
a) Fire insurance policy is suitable for commercial establishments as well as for
the owner of property, and for individuals / financial institutions who have
financial interest in the property.
b) Variants of fire policy include:
Market value basis policy
Rreinstatement value policies
Declaration policy
Floater policy
c) Consequential Loss (CL) Policy or Business Interruption (BI) policy provides
indemnity for loss of what is termed as gross profit which includes Net
Profit plus Standing Charges along with the increased cost of working
incurred by the insured to get the business back to normalcy, as soon as
possible to reduce the final loss.
d) Burglary policy is meant for business premises like factories, shops, offices,
warehouses and go-downs which may contain stocks, goods, furniture
fixtures and cash in a locked safe which can be stolen.
e) Money insurance policy is designed to cover the losses that may occur while
cash cheques/postal orders/postal stamps are being handled.
f) Money insurance policy provides cover under two sections: transit section
and premises section.
g) Fidelity guarantee insurance indemnifies employers against the financial loss
suffered by them due to fraud or dishonesty of their employees by forgery,
embezzlement, larceny, misappropriation and default.
h) Types of fidelity guarantee policy include: individual policy, collective
floating policy, positions policy and blanket policy.
i) Bankers indemnity policy is a comprehensive cover, drafted for the banks,
NBFC's and other institutions who deal with operations involving money,
considering the special risks faced by them regarding money and securities.
j) The major policies that fall under engineering insurance include:
Contractors All Risks Policy

Contractors Plant & Machinery Policy
Erection All Risks Policy
Machinery Breakdown Policy
Boiler and Pressure Plant Policy
Machinery Loss of Profits Policy
Deterioration of Stock Policy
Electronic Equipment Policy
Advance Loss of Profit Cover
222
k) The Industrial All Risks Policy was designed to cover, industrial properties
both manufacturing and storage facilities, anywhere in India under one
policy.
l) Marine insurance is classified into: marine cargo and marine hull.
m) Cargo policies are essentially voyage policies, i.e. they cover the subject
matter from one place to another.
n) Different types of marine policies include:
Specific policy
Open policy
Open cover
Duty and increased value insurance
Delay in start up
o) Marine hull covers are essentially of two types: covering a particular voyage
and covering a period of time.
p) A public liability policy covers liability arising out of fault / negligence of
the insured causing third party personal injury or property destruction.
q) Product liability policies cover liability of the insured related to defect in
the product causing death, bodily injury or illness or even damage to the
property of third parties.
r) Professional indemnities are designed to provide insurance protection to
professional people against their legal liability to pay damages arising out of
negligence in the performance of their professional duties.
Key Terms
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
Fire insurance of Property

Burglary insurance
Money insurance
Fidelity guarantee insurance
Bankers indemnity insurance
Jewelers block policy
Engineering insurance
Industrial All risk insurance
Marine insurance
Hull insurance
Liability policy
223

Answer 1
Fire policy for commercial risks covers the perils of explosion and implosion.
Answer 2
A business interruption insurance policy can be taken only in conjugation with
standard fire and special perils policy.
Answer 3
The premium for burglary policy depends on the nature of number of things like
insured property, the moral hazard of the insured himself, construction and
location of premises, safety measures (e.g. watchmen, burglar alarm), previous
claims experience etc.
Answer 4
Loss of cash from ones premises due to burglary is covered under a money
insurance policy. Riot strike and terrorism can be covered as an extension by
paying an extra premium
Answer 5
A fidelity guarantee insurance policy indemnifies employers against the
financial loss suffered by them due to fraud or dishonesty of their employees.
Answer 6
A bankers indemnity insurance policy can cover: money securities lost or
damaged whilst within the premises due to fire, forgery or alteration of
cheques, dishonesty of employees with reference to money.
224
Answer 7
In case of a Jewelers Block Policy, damage to property insured when it is in
transit by registered parcel will be covered under Section III.
Answer 8
Delay in start-up policy is also known as Advance Loss of Profit cover.
Answer 9
Larceny is not covered under Industrial All Risks insurance
Answer 10
Marine and aviation is the only branch of insurance that offer cover against war
perils.
Answer 11
Under the Public Liability Insurance Act, 1991, the compensation payable for
actual medical expenses is Rs. 12,500.
225
Question 1
In Engineering insurance CAR stands for
I.
II.
III.
IV.
Motor Car
Contractors All Risks
Companys All Risks
Companies All Requirements
Question 2
An employer insures himself from dishonest act of his employees by _________
I.
II.
III.
IV.
Employees compensation policy

Public Liability Insurance policy
Fidelity Guarantee Insurance policy
Declaration policy.
Question 3
_________ refers to the body of the ship.
I.
II.
III.
IV.
Hull
Cargo
Piracy
Jettison
Question 4
Policy which covers loss or damage to aircraft is ______________.
I.
II.
III.
IV.
Statutory liability
Property insurance
Aviation insurance
Money insurance
Question 5
Fire Insurance Policy does not cover damage to property even as add-on cover
due to___________.
I.
II.
III.
IV.
Floods
Earthquake
Fire
Bombing due to war
226
Question 6
Consequential Loss (Fire Policy) covers:
I.
II.
III.
IV.
Loss of profit due to damage to factory

Loss of Goodwill
Material wear & tear in machinery
Losses due to foreign exchange fluctuations
Question 7
Premium in Burglary depends on:
I.
II.
III.
IV.
Security measures
Location of Premises
Nature of property
All of the above
Question 8
Contractors All Risk Policy is a variation of:
I.
II.
III.
IV.
Fire Insurance
Life Insurance
Marine Insurance
Question 9
Employees Compensation Policy is a type of
I.
II.
III.
IV.
Liability Insurance
Fire Insurance
Marine Cargo Insurance
Question 10
Money Insurance Policy covers:
I.
II.
III.
IV.
Cash in hand
Money invested in Mutual Fund
Money lying in Saving Bank
Money deposited with post office.
227

Answer 1
In Engineering insurance CAR stands for Contractors All Risks.
Answer 2
An employer insures himself from dishonest act of his employees by Fidelity
Guarantee Insurance policy.
Answer 3
Hull refers to the body of the ship.
Answer 4
Policy which covers loss or damage to aircraft is aviation insurance.
Answer 5
Fire Insurance Policy does not cover damage to property even as add-on cover,
due to bombing or war.
Answer 6
Consequential Loss (Fire Policy) covers loss of profit due to damage to factory.
Answer 7
Premium in burglary depends on security measures, location of premises, nature
of property etc.
228
Answer 8
Contractors All Risk Policy is a variation of Engineering Insurance.
Answer 9
Employees Compensation Policy is a type of Liability Insurance.
Answer 10
Money insurance policy covers cash in hand.
229
CHAPTER 9
(9.I) INTRODUCTION TO HEALTH INSURANCE
This chapter will tell you about how insurance evolved over time. It will also explain
what healthcare is, levels of healthcare and types of healthcare. You will also learn
about the healthcare system in India and factors affecting it. Finally, it will explain
how health insurance evolved in India and also the various players in the health
insurance market in India.
Learning Outcomes
A.
B.
C.
D.
E.
F.
G.
History of Insurance and Evolution of Insurance in India

What is Healthcare
Levels of Healthcare
Types of Healthcare
Factors affecting health systems in India
Evolution of Health Insurance in India
Health Insurance Market

6. Understand how insurance evolved.
7. Explain the concept of healthcare and the types and levels of healthcare.
8. Appreciate the factors affecting healthcare in India and the progress made since
independence.
9. Discuss the evolution of health insurance in India.
10. Know the health insurance market in India.
230
A. History of Insurance and Evolution of Insurance in India

Insurance, in some form or the other, is known to have existed thousands of years ago.
Various civilisations, over the years, have practised the concept of pooling and
dividing among themselves, all the losses suffered by some members of the
community. Yet, the business of insurance, as we know it today, began only two or
three centuries ago.
4. Modern commercial insurance
The earliest kind of risks to be handled through the concept of insurance was losses
due to misadventure at sea what we call marine risk. Marine insurance was thus the
first of many kinds of insurance.
However, the earliest type of modern insurance was in the form of protection by
business guilds or societies in Europe especially in Italy in the 14th century. These
guilds operated on a subscription basis funding losses by members due to shipping
losses, fire, death of members, or loss of livestock. A form of fire insurance as we
know it today appears to have been in existence in Hamburg in 1591.
As for England, the Great Fire of London in 1666, in which most of the city and more
than 13,000 houses were destroyed, gave a boost to insurance and the first fire
insurance company, called the Fire Office, was started in 1680.
Lloyds: The origins of insurance business as practiced today, is traced to the Lloyds
Coffee House in London. Traders, who used to gather there, would agree to share the
losses to their goods being carried by ships, due to perils of the sea. Such losses used
to occur because of perils of the sea, such as pirates who robbed on the high seas or
bad sea weather spoiling the goods or sinking of the ship due to any reason.
5. History of Modern Commercial Insurance in India
Modern insurance in India began in early 1800 or thereabouts, with agencies of foreign
insurers starting marine insurance business. The first life insurance company to be set
up was an English company, the Oriental Life insurance Co. Ltd. in 1818 and the first
non-life insurer to be established in India was the Triton Insurance Co. Ltd. in 1850
both established in Calcutta.
The first wholly Indian insurance company was the Bombay Mutual Assurance Society
Ltd., formed in 1870 in Mumbai. Many other Indian companies were set up
subsequently as a result of the Swadeshi movement at the turn of century.
In 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to
regulate the insurance business. The Life Insurance Companies Act, 1912 made it
compulsory that premium-rate tables and periodical valuation of companies be
231
certified by an actuary. However, the discrimination between Indian and foreign

companies continued.
The oldest insurance company in India which still exists today is National Insurance
Company Ltd., which was founded in 1906.
Depending on the need of the situation, the Indian insurance industry has been
monitored by the Government, nationalized and then de-nationalized and this is how
it happened:
a) Nationalisation of life insurance
Life insurance business was nationalised on 1st September 1956 and the Life Insurance
Corporation of India (LIC) was formed. There were 170 companies and 75 provident
fund societies doing life insurance business in India at that time. From 1956 to 1999,
the LIC held the sole right to do life insurance business in India.
b) Nationalisation of non-life insurance
With the passing of General Insurance Business Nationalisation Act (GIBNA) in 1972,
the non-life insurance business was also nationalised and the General Insurance
Corporation of India (GIC) and its four subsidiaries were set up. At that point of time,
106 insurers in India doing non-life insurance business were merged with the formation
four subsidiaries of the GIC of India.
c) Malhotra Committee and IRDA
In 1993 the Malhotra Committee was setup to explore and recommend changes for
development of the industry including the reintroduction of an element of competition
in the form of entry of private players. The Committee submitted its report in 1994.
In 1997 the Insurance Regulatory Authority (IRA) was established.
d)
The passing of the Insurance Regulatory & Development Act 1999 led to the
formation of Insurance Regulatory and Development Authority of India (IRDAI) in April
2000 as a statutory regulatory body to protect the interests of policy holders and
regulate promote and ensure orderly growth of the insurance industry.
e) Restructuring of GIC
The GIC was converted into a national re-insurer and its four subsidiaries were
restructured as independent companies. In December, 2000 the Parliament passed a
bill de-linking the four subsidiaries from GIC in July, 2002. These are
National Insurance Co. Ltd.
The Oriental Insurance Co. Ltd.
The New India Assurance Co. Ltd
232
United India Insurance Co. Ltd.

f) Life insurance industry today
There are 24 insurance companies registered as Life Insurance companies. The list is
given below.
g) Non-Life insurance industry today
There are 28 insurance companies registered as General Insurance companies.
i. Agriculture Insurance Company of India Limited is a specialised insurer for risk
related to crop insurance/rural insurance.
ii. Export Credit and Guarantee Corporation of India, is a specialised insurer for risks
related to export credit.
iii. There are 5 standalone Health Insurance companies.
iv. Rest of the companies handle all types of general insurance business.
List of life insurance companies:
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
Aegon Religare Life Insurance

Aviva Life Insurance
Bajaj Allianz Life Insurance
Bharti AXA Life Insurance
Birla Sun Life Insurance
Canara HSBC OBC Life Insurance
DHFL Pramerica Life Insurance
Edelweiss Life Insurance
Exide Life Insurance
Future Generali Life Insurance
HDFC Standard Life Insurance
ICICI Prudential Life Insurance
41. IDBI Federal Life Insurance

42. India First Life Insurance
43. Kotak Mahindra Old Mutual Life
Insurance
44. Life Insurance Corporation
45. Max Life Insurance
46. PNB Metlife
47. Reliance Life Insurance
48. Sahara India Life Insurance
49. SBI Life Insurance
50. Sriram Life Insurance
51. Star Union Dai-Ichi Life Insurance
52. Tata AIA Life Insurance
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List of standalone health insurance companies

1.
2.
3.
4.
5.
Apollo Munich Health Insurance

Cigna TTK Health Insurance
Max Bupa Health Insurance
Religare Health Insurance
Star Health Insurance
List of general insurance companies:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
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Agriculture Insurance Company

Bajaj Allianz General Insurance
Bharti AXA General Insurance
Cholamandalam MS General
Insurance
Export Credit Guarantee
Corporation
Future Generali General Insurance
HDFC ERGO General Insurance
ICICI Lombard General Insurance
IFFCO Tokio General Insurance
L&T General Insurance
Liberty Videocon General
Insurance
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
Magma HDI General Insurance

National Insurance
New India Assurance
Oriental Insurance
Raheja QBE General Insurance
Reliance General Insurance
Royal Sundaram General Insurance
SBI General Insurance
Shriram General Insurance
Tata AIG General Insurance
United India Insurance
Universal Sompo General Insurance
B. What is Healthcare
You have heard of the saying Health is Wealth. Have you ever tried to know what
Health actually means? The word Health was derived from the word hoelth, which
means soundness of the body.
In olden days, health was considered to be a Divine Gift and illness was believed to
have been caused due to the sins committed by the concerned person. It was
Hippocrates (460 to 370 BC) who came up with the reasons behind illness. According to
him, illness is caused due to various factors relating to environment, sanitation,
personal hygiene and diets.
The Indian system of Ayurveda which existed many centuries before Hippocrates,
considered health as a delicate balance of four fluids: blood, yellow bile, black bile
and phlegm and an imbalance of these fluids causes ill health. Susruta, the Father of
Indian medicine is even credited with complex surgeries unknown to the West in those
times.
Over a period of time, modern medicine has evolved into a complex science and the
goal of modern medicine is no longer mere treatment of sickness but includes
prevention of disease and promotion of quality of life. A widely accepted definition of
health is the one given by World Health Organisation in 1948; it states that Health is
a state of complete physical, mental and social wellbeing and not merely the absence
of disease. It is to be noted that Indian system of medicine like Ayurveda
incorporated such a complete view of health from times immemorial.
Definition
World Health Organisation (WHO): Health is a state of complete physical, mental and
social wellbeing and not merely the absence of disease.
Determinants of health
It is generally believed that the following factors determine the health of any
individual:
a) Lifestyle factors
Lifestyle factors are those which are mostly in the control of the individual
concerned e.g. exercising and eating within limits, avoiding worry and the like
leading to good health; and bad lifestyles and habits such as smoking, drug abuse,
unprotected sex and sedentary life style (with no exercise) etc. leading to diseases
such as cancer, aids, hypertension and diabetes, to name a few.
235
Though the Government plays a critical role in controlling / influencing such

behaviour (e.g. punishing people with non-bailable imprisonment who abuse drugs,
imposing high taxes on tobacco products etc.), the personal responsibility of an
individual plays a deciding role in controlling diseases due to life style factors.
b) Environmental factors
Safe drinking water, sanitation and nutrition are crucial to health, lack of which
leads to serious health issues as seen all over the world, especially in developing
countries. Communicable diseases like Influenza and Chickenpox etc. are spread
due to bad hygiene, diseases like Malaria and Dengue are spread due to bad
environmental sanitation, while certain diseases are also caused due to
environmental factors e.g. people working in certain manufacturing industries are
prone to diseases related to occupational hazards such as Asbestos in workers in
asbestos manufacture and also diseases of the lungs in coal miners.
c) Genetic factors
Diseases may be passed on from parents to children through genes. Such genetic
factors result in differing health trends amongst the population spread across the
globe based on race, geographical location and even communities.
It is quite obvious that a countrys social and economic progress depends on the health
of its people. A healthy population not only provides productive workforce for
economic activity but also frees precious resources which is all the more crucial for a
developing country like India. At an individual level, ill health can cause loss of
livelihood, inability to perform daily essential activities and push people to poverty
and even commit suicide.
Thus the world over, governments take measures to provide for health and wellbeing
of their people and ensuring access and affordability of healthcare for all citizens.
Thus spend on healthcare usually forms a significant part of every countrys GDP.
This poses a question as to whether different types of healthcare are required for
different situations.
236
C. Levels of healthcare
Healthcare is nothing but a set of services provided by various agencies and providers
including the government, to promote, maintain, monitor or restore health of people.
Health care to be effective must be:
Appropriate to the needs of the people
Comprehensive
Adequate
Easily available
Affordable
Health status of a person varies from person to person. It is neither feasible nor
necessary to make the infrastructure available at same level for all types of health
problems. The health care facilities should be based upon the probability of the
incidence of disease for the population. For example, a person may get fever, cold,
cough, skin allergies etc. many times a year, but the probability of him/her suffering
from Hepatitis B is less as compared to cold and cough.
Similarly, the probability of the same person suffering from a critical illness such as
heart disease or Cancer is less as compared to Hepatitis B. Hence, the need to set up
the healthcare facilities in any area whether a village or a district or a state will be
based upon the various health care factors called indicators of that area such as:
Size of population
Death rate
Sickness rate
Disability rate
Social and mental health of the people
General nutritional status of the people
Environmental factors such as if it is a mining area or an industrial area
The possible health care provider system e.g. heart doctors may not be readily
available in a village but may be in a district town
How much of the health care system is likely to be used
Socio-economic factors such as affordability
237
Based on the above factors, the government decides upon setting up of centres for
primary, secondary and tertiary health care and takes other measures to make
appropriate healthcare affordable and accessible to the population.
238
D. Types of Healthcare
Healthcare is broadly categorized as follows:
1. Primary healthcare
Primary health care refers to the services offered by the doctors, nurses and other
small clinics which are contacted first by the patient for any sickness, that is to say
that primary healthcare provider is the first point of contact for all patients within a
health system.
In developed countries, more attention is paid to primary health care so as to deal
with health issues before the same become widespread, complicated and chronic or
severe. Primary health care establishments also focus on preventive health care,
vaccinations, awareness, medical counselling etc. and refer the patient to the next
level of specialists when required.
For example, if a person visits a doctor for fever and the first diagnosis is indicative of
Dengue fever, the primary health care provider will prescribe some medicines but also
direct the patient to get admitted in a hospital for specialized treatment. For most of
the primary care cases, the doctor acts like a Family Doctor where all the members
of the family visit the doctor for any minor sickness.
This method also helps the medical practitioner in prescribing for symptoms based on
genetic factors and give medical advice appropriately. For example, the doctor will
advise a patient with parental diabetic history to be watchful of the lifestyle from
young age to avoid diabetes to the extent possible.
At a country level, Primary Health care centres are set up both by Government and
private players. Government primary health care centres are established depending
upon the population size and are present right up to the village level in some form or
the other.
2. Secondary healthcare
Secondary health care refers to the healthcare services provided by medical specialists
and other health professionals who generally do not have first contact with patient. It
includes acute care requiring treatment for a short period for a serious illness, often
(but not necessarily) as an in-patient, including Intensive Care services, ambulance
facilities, pathology, diagnostic and other relevant medical services.
Most of the times, the patients are referred to the secondary care by primary health
care providers / primary physician. In some instances, the secondary care providers
239
also run an In-house Primary healthcare facility in order to provide integrated

services.
Mostly, the secondary health care providers are present at the Taluk / Block level
depending upon the population size.
3. Tertiary healthcare
Tertiary Health care is specialized consultative healthcare, usually for inpatients and
on referral from primary/secondary care providers. The tertiary care providers are
present mostly in the state capitals and a few at the district headquarters.
Examples of Tertiary Health care providers are those who have advanced medical
facilities and medical professionals, beyond the scope of secondary health care
providers e.g. Oncology (cancer treatment), Organ Transplant facilities, High risk
pregnancy specialists etc.
It is to be noted that as the level of care increases, the expenses associated with the
care also increase. While people may find it relatively easy to pay for the primary
care, it becomes difficult for them to spend when it comes to secondary care and
much more difficult when it comes to tertiary care. The infrastructure for different
levels of care also varies from country to country, rural-urban areas, while socioeconomic factors also influence the same.
240
E. Factors affecting the health systems in India

The Indian health system has had and continues to face many problems and
challenges. These, in turn, affect the nature and extent of the healthcare system and
the requirement at the individual level and healthcare organization at the structural
level. These are discussed below:
1. Demographic or Population related trends
a)
India is second largest populated country in the world.
b)
This exposes us to the problems associated with population growth.
c)
The level of poverty has also had its effect on the peoples ability to pay for
medical care.
2. Social trends
a)
Increase in urbanization or people moving from rural to urban areas has posed
challenges in providing healthcare.
b)
Health issues in rural areas also remain, mainly due to lack of availability and
accessibility to medical facilities as well as affordability.
c)
The move to a more sedentary lifestyle with reduced need to exercise oneself
has led to newer types of diseases like diabetes and high blood pressure.
3. Life expectancy
a)
Life expectancy refers to the expected number of years that a child born today
will survive.
b)
Life expectancy has increased from 30 years at the time of independence to

over 60 years today but does not address the issues related to quality of that
longer lifespan.
c)
This leads to a new concept of healthy life expectancy.
d)
This also requires the creation of infrastructure for Geriatric (old age related)
diseases.
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F. Evolution of Health Insurance in India

While the government had been busy with its policy decisions on healthcare, it
also put in place health insurance schemes. Insurance companies came with their
health insurance policies only later. Here is how health insurance developed in
India:
a) Employees State Insurance Scheme
Health Insurance in India formally began with the beginning of the Employees
State Insurance Scheme, introduced vide the ESI Act, 1948, shortly after the
countrys independence in 1947. This scheme was introduced for blue-collar
workers employed in the formal private sector and provides comprehensive health
services through a network of its own dispensaries and hospitals.
ESIC (Employees State Insurance Corporation) is the implementing agency which
runs its own hospitals and dispensaries and also contracts public/private providers
wherever its own facilities are inadequate.
All workers earning wages up to Rs. 15,000 are covered under the contributory
scheme wherein employee and employer contribute 1.75% and 4.75% of pay roll
respectively; state governments contribute 12.5% of the medical expenses.
The benefits covered include:
a) Free comprehensive healthcare at ESIS facilities
b) Maternity benefit
c) Disability benefit
d) Cash compensation for loss of wages due to sickness and survivorship and
e) Funeral expenses in case of death of worker
It is also supplemented by services purchased from authorized medical attendants
and private hospitals. The ESIS covers over 65.5 million beneficiaries as of March
2012.
b) Central Government Health Scheme
The ESIS was soon followed by the Central Government Health Scheme (CGHS),
which was introduced in 1954 for the central government employees including
pensioners and their family members working in civilian jobs. It aims to provide
242
comprehensive medical care to employees and their families and is partly funded
by the employees and largely by the employer (central government).
The services are provided through CGHSs own dispensaries, polyclinics and
empanelled private hospitals.
It covers all systems of medicine, emergency services in allopathic system, free
drugs, pathology and radiology, domiciliary visits to seriously ill patients, specialist
consultations etc.
The contribution from employees is quite nominal though progressively linked to
salary scale Rs.15 per month to Rs.150 per month.
In 2010, CGHS had a membership base of over 800,000 families representing over 3
million beneficiaries.
c) Commercial health insurance
Commercial health insurance was offered by some of the non-life insurers before
as well as after nationalisation of insurance industry. But, as it was mostly loss
making for the insurers, in the beginning, it was largely available for corporate
clients only and that too for a limited extent.
In 1986, the first standardised health insurance product for individuals and their
families was launched in the Indian market by all the four nationalized non-life
insurance companies (these were then the subsidiaries of the General Insurance
Corporation of India). This product, Mediclaim was introduced to provide coverage
for the hospitalisation expenses up to a certain annual limit of indemnity with
certain exclusions such as maternity, pre-existing diseases etc. It underwent
several rounds of revisions as the market evolved, the last being in 2012.
However, even after undergoing several revisions, the hospitalization indemnitybased annual contract continues to be the most popular form of private health
insurance in India today, led by the current versions of Mediclaim. So popular is
this product that private health insurance products are often termed by many
people as Mediclaim covers considering it as a product category rather than a
specific product offered by the insurers.
With private players coming into the insurance sector in 2001, health insurance has
grown tremendously but there is a large untapped market even today.
Considerable variations in covers, exclusions and newer add-on covers have been
introduced which will be discussed in later chapters.
Today, more than 300 health insurance products are available in the Indian
market.
243
G. Health Insurance Market

The health insurance market today consists of a number of players some providing the
health care facilities called providers, others the insurance services and also various
intermediaries. Some form the basic infrastructure while others provide support
facilities. Some are in the government sector while others are in the private sector.
These are briefly described below:
A. INFRASTRUCTURE:
1. Public health sector
The Public health system operates at the national level, state level, district level and
to a limited extent at the village level where, to implement the national health
policies in villages, community volunteers have been involved to serve as links
between the village community and government infrastructure. These include:
a) The Anganwadi workers (1 for every 1,000 population) who are enrolled under
the nutrition supplementation programme and the Integrated Child
Development Service scheme (ICDS) of Ministry of Human Resource
Development.
b) The Trained Birth Attendants (TBA) and the Village Health guides (an earlier
scheme of health departments in states).
c) ASHA (Accredited Social Health Activist) volunteers, selected by the
community under the NRHM (National Rural Health Mission) programme, who
are new, village-level, voluntary health workers trained to serve as health
sectors links in the rural areas.
Sub-centres have been established for every 5,000 population (3,000 in hilly, tribal
and backward areas) and are manned by a female health worker, also called the
Auxiliary Nurse Mid-wife (ANM) and a male health worker.
Primary Health Centres which are referral units for about six sub-centres have been
established for every 30,000 population (20,000 in hilly, tribal and backward areas).
All PHCs provide outpatient services, and the majority also have four to six in-patient
beds. Their staff comprises of one medical officer and 14 para-medical workers (which
includes a male and a female health assistant, a nurse-midwife, a laboratory
technician, a pharmacist and other supporting staff).
Community Health Centres are the first referral units for four PHCs and also provides
specialist care. According to the norms each CHC (for every 1 lakh population) should
have at least 30 beds, one operation theatre, X-ray machine, labour room and
laboratory facilities and should be staffed by at least four specialists i.e. a surgeon, a
244
physician, a gynaecologist and a paediatrician supported by 21 para-medical and other

staff.
Rural hospitals have also been set up and these includes the sub-district hospitals
called as the sub-divisional / Taluk hospitals / specialty hospitals (estimated to be
about 2000 in the country);
Speciality and teaching hospitals are fewer and these include the medical colleges
(about 300 in number presently) and other tertiary referral centres. These are mostly
in district towns and urban areas but some of them provide very specialized and
advanced medical services.
Other agencies belonging to the government, such as hospitals and dispensaries of
railways, defence and similar large departments (Ports/ Mines etc.) also play a role in
providing health services. However, their services are often restricted to the
employees of the concerned organizations and their dependents.
2. Private sector providers
India has a very large private health sector providing all three types of healthcare
services - primary, secondary as well as tertiary. These range from voluntary, not-forprofit organisations and individuals to for-profit corporate, trusts, solo practitioners,
stand-alone specialist services, diagnostic laboratories, pharmacy shops, and also the
unqualified providers (quacks). In India nearly 77% of the allopathic (MBBS and above)
doctors are practicing in the private sector. Private health expenditure accounts for
more than 75% of all health spending in India. The private sector accounts for 82% of
all outpatient visits and 52% of hospitalization at the all India level2.
India also has the largest number of qualified practitioners in other systems of
Medicine (Ayurveda/ Siddha/ Unani/ Homeopathy) which is over 7 lakh practitioners.
These are located in the public as well as the private sector.
Apart from the for-profit private providers of health care, the NGOs and the voluntary
sector have also been engaged in providing health care services to the community.
It is estimated that more than 7,000 voluntary agencies are involved in health-related
activities. A large number of secondary and tertiary hospitals are also registered as
non-profit societies or trusts, and contribute significantly to provision of inpatient
services to insured persons.
3. Pharmaceutical industry
Coming to provider of medicines and health related products, India has a large
pharmaceutical industry, which has grown from a Rs 10 crore industry in 1950 to a Rs
245
55,000 crore business today (including exports). It employs about 5 million people,
with manufacturing taking place in over 6000 units.
The central level price regulator for the industry is the National Pharmaceuticals
Pricing Authority (NPPA), while the pharma sector is under the Ministry of Chemicals.
Only a small number of drugs (76 out of the 500 or so bulk drugs) are under price
control, while the remaining drugs and manufacture are under the free-pricing regime,
carefully watched by the price regulator. The Drug Controllers of the States manage
the field force which oversees quality and pricing of drugs and formulations in their
respective areas.
B. INSURANCE PROVIDERS:
Insurance Companies especially in the general insurance sector provide the bulk of
the health insurance services. These have been listed earlier. What is most
encouraging is the presence of stand-alone health insurance companies - five as on
date - with likelihood of a few more coming in to increase the health insurance
provider network.
C. INTERMEDIARIES:
A number of people and organizations providing services as part of the insurance
industry also form part of the health insurance market. All such intermediaries are
governed by IRDA. These include:
1. Insurance Brokers who may be individuals or corporates and work independently
of insurance companies. They represent the people who want insurance and
connect them to insurance companies obtaining best possible insurance covers at
best possible premium rates. They also assist the insuring people during times of
loss and making insurance claims. Brokers may place insurance business with any
insurance company handling such business. They are remunerated by insurance
companies by way of insurance commission.
2. Insurance Agents are usually individuals but some can be corporate agents too.
Unlike brokers, agents cannot place insurance with any insurance company but
only with the company for which they have been granted an agency. As per
current regulations, an agent can act only on behalf of one general insurance
company and one life insurance company one health insurer and one of each of
the mono line insurers. at the most. They too are remunerated by insurance
companies by way of insurance commission.
3. Third Party Administrators are a new type of service providers who came into
business since 2001. They are not authorized to sell insurance but provide
administrative services to insurance companies. Once a health insurance policy is
sold, the details of the insured persons are shared with a appointed TPA who then
246
prepares the data base and issues health cards to the insured persons. Such health
cards enable the insured person to avail cashless medical facilities (treatment
without having to pay cash immediately) at hospitals and clinics. Even if the
insured person does not use cashless facility, he can pay the bills and seek
reimbursement from the appointed TPA. TPAs are funded by the insurance
companies for their respective claims and are remunerated by them by way of
fees which are a percentage of the premium.
4. Insurance Web Aggregators are one of the newest types of service providers to be
governed by IRDAI regulations. Through their web site and/or telemarketing, they
can solicit insurance business through distance marketing without coming face to
face with the prospect and generate leads of interested prospects to insurers with
whom they have an agreement. They also display products of such insurance
companies for comparison. They may also seek IRDAI authorization to perform
telemarketing and outsourcing functions for the insurers such as premium
collection through online portal, sending premium reminders and also various
types of policy related services. They are remunerated by insurance companies
based on the leads converted to business, display of insurance products as well as
the outsourcing services performed by them.
5. Insurance Marketing Firms are the latest types of intermediaries to be governed
by IRDAI. They can perform the following activities by employing individuals
licensed to market, distribute and service such products:
Insurance Selling Activities: To sell by engaging Insurance Sales Persons (ISP)
insurance products of two Life, two General and two Health Insurance companies
at any point of time, under intimation to the Authority. In respect of general
insurance, the IMF is allowed to solicit or procure only retail lines of insurance
products as given in the file & use guidelines namely motor, health, personal
accident, householders, shopkeepers and such other insurance products approved
by the Authority from time to time. Any change in the engagement with the
insurance companies can be done only with the prior approval of the Authority
and with suitable arrangements for servicing existing policyholders.
Insurance Servicing Activities: These servicing activities shall be only for those
insurance companies with whom they have an agreement for soliciting or
procuring insurance products and are enumerated below:
a. undertaking back office activities of insurers as allowed in the Guidelines on
Outsourcing Activities by Insurance Companies issued by the Authority;
b. becoming approved person of Insurance Repositories;
c. undertaking survey and loss assessment work by employing on their rolls
licensed surveyor & loss assessors;
d. any other insurance related activity permitted by the Authority from time to
time.
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Financial Products Distribution: To distribute by engaging Financial Service

Executives (FSE) who are individuals licensed to market, distribute and service
such other financial products namely:
a.
b.
c.
d.
e.
f.
mutual funds of mutual fund companies regulated by SEBI;

pension products regulated by PFRDA;
other financial products distributed by SEBI licensed Investment Advisors;
banking/ financial products of banks/ NBFC regulated by RBI;
non-insurance products offered by Department of Posts, Government of India;
any other financial product or activity permitted by the Authority from time to
time.
D. OTHERS IMPORTANT ORGANIZATIONS

There are a few more entities which form part of the health insurance market and
these include:
1. Insurance Regulatory and Development Authority of India (IRDAI) which is the
Insurance regulator formed by an Act of Parliament which regulates all business and
players in the insurance market. It came into being in 2000 and is entrusted with
the task of not only regulating but also developing insurance business.
2. General Insurance and Life Insurance Councils, who also make recommendations
to IRDAI for governing their respective life or general insurance business.
3. Insurance Information Bureau of India was promoted in year 2009 by IRDA and is a
registered society with a governing council of 20 members mostly from the
insurance sector. It collects analyses and creates various sector-level reports for
the insurance sector to enable data-based and scientific decision making including
pricing and framing of business strategies. It also provides key inputs to the
Regulator and the Government to assist them in policymaking. The Bureau has
generated many reports, both periodic and one-time, for the benefit of the
industry.
IIB handles the Central Index Server which acts as a nodal point between different
Insurance Repositories and helps in de-duplication of demat accounts at the stage
of creation of a new account. The Central Index Server also acts as an exchange for
transmission/routing of information pertaining to transactions on each policy
between an insurer and the insurance repository.
IIB has already launched its hospital unique ID master programme by enlisting the
hospitals in 'the preferred provider network' serving the health insurance sector.
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The latest initiative of IIB would be maintaining a health insurance grid connecting
TPAs, insurers and hospitals. The aim of the initiative is to help the health
insurance sector to come out with a system of insurance claims management with
transparency in treatment costs and efficient pricing of health insurance products.
4. Educational institutions such as Insurance Institute of India and National Insurance
Academy which provide a wide variety of insurance and management related
training and a host of private training institutes which provide training to would-be
agents
5. Medical Practitioners also assist insurance companies and TPAs in assessing health
insurance risks of prospective clients during acceptance of risks and also advise
insurance companies in case of difficult claims.
6. Legal entities such as the Insurance Ombudsman, Consumer courts as well as civil
courts also play a role in the health insurance market when it comes to redressal of
consumer grievances.
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Summary
f) Insurance in some form or other existed many centuries ago but its modern form is
only a few centuries old. Insurance in India has passed through many stages with
government regulation.
g)
Health of its citizens being very important, governments play a major role in
creating a suitable healthcare system.
h) Level of healthcare provided depends on many factors relating to a countrys

population.
i) The three type of healthcare are primary, secondary and tertiary depending on the
level of medical attention required. Cost of healthcare rises with each level with
tertiary care being the costliest.
j) India has its own peculiar challenges such as population growth and urbanization
which require proper healthcare.
k) The government was also the first to come up with schemes for health insurance
followed later by commercial insurance by private insurance companies.
l) The health insurance market is made up of many players some providing the
infrastructure, with others providing insurance services, intermediaries such as
brokers, agents and third party administrators servicing health insurance business
and also other regulatory, educational as well as legal entities playing their role.
Key terms
j) Healthcare
k) Commercial insurance
l) Nationalization
m) Primary, Secondary and Tertiary Healthcare
n) Mediclaim
o) Broker
p) Agent
q) Third Party Administrator
r) IRDAI
s) Ombudsman
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(9.II) HEALTH INSURANCE PRODUCTS
This chapter will give you an overall insight into the various health insurance products
offered by insurance companies in India. From just one product Mediclaim to
hundreds of products of different kinds, the customer has a wide range to choose
appropriate cover. The chapter explains the features of various health products that
can cover individuals, family and group.
Learning Outcomes
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
R.
Classification of health insurance products

IRDA guidelines on Standardization in health insurance
Hospitalization indemnity product
Top-up covers or high deductible insurance plans
Senior citizen policy
Fixed benefit covers Hospital cash, critical illness
Long term care product
Combi-products
Package policies
Micro insurance and health insurance for poorer sections
Rashtriya Swasthya Bima Yojana
Pradhan Mantri Suraksha Bima Yojana
Pradhan Mantri Jan Dhan Yojana
Personal accident and disability cover
Overseas travel insurance
Group health cover
Special products
Key terms in health policies

a)
b)
c)
d)
e)
f)
Explain the various classes of health insurance

Describe the IRDAI guidelines on standardization in health insurance
Discuss the various types of health products available in the Indian market today
Explain Personal Accident insurance
Discuss overseas travel insurance
Understand key terms and clauses in health policies
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A. Classification of health insurance products

1. Introduction to health insurance products
The Health Insurance Regulations of IRDA define health cover as follows
Definition
Health insurance business or health cover means the effecting of insurance
contracts which provide for sickness benefits or medical, surgical or hospital expense
benefits, including assured benefits and long-term care, travel insurance and personal
accident cover.
Health insurance products available in the Indian market are mostly in the nature of
hospitalization products. These products cover the expenses incurred by an individual
during hospitalization. Again, these types of expenses are very high and mostly beyond
the reach of the common man due to increasing cost of healthcare, surgical
procedures, new and more expensive technology coming in the market and cost of
newer generation of medicines. In fact, it is becoming very difficult for an individual
even if he is financially sound to bear such high expenses without any health
insurance.
Therefore, health insurance is important mainly for two reasons:
Providing financial assistance to pay for medical facilities in case of any
illness.
Preserving the savings of an individual which may otherwise be wiped out due
to illness.
The first retail health insurance product covering hospitalization costs Mediclaim was introduced by the 4 public sector insurers in 1986. These companies also
introduced a couple of other covers like Bhavishya Arogya Policy covering proposers at
a young age for their post-retirement medical costs, the Overseas Mediclaim policy
offering travel insurance and Jana Arogya Bima policy for the poorer people.
Later insurance sector was opened up to the private sector players, which led to many
more companies entering including the health insurance market. With that came
greater spread of this business, a number of variations in these covers and also a few
new covers too.
Today, the health insurance segment has developed to a large extent, with hundreds
of products offered by almost all general Insurance companies stand along health
insurers and life insurers. However, the basic benefit structure of the Mediclaim policy
i.e. cover against hospitalization expenses still remains the most popular form of
insurance.
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As per Insurance Regulatory and Development Authority

Regulations, 2013
(Health Insurance)
1. Life Insurance Companies may offer long term health products but the premium
for such products shall remain unchanged for at least a period of every block of
three years, thereafter the premium may be reviewed and modified as
necessary.
2. Non-Life and Standalone Health insurance companies may offer individual
health products with a minimum tenure of one year and a maximum tenure of
three years, provided that the premium shall remain unchanged for the tenure.
2. Features of health policies
Health insurance basically deals with sickness and therefore expenses incurred due to
sickness. Sometimes, the disease contracted by a person could be chronic or long
lasting, lifelong or critical in terms of impact on day to day living activities. Expenses
could also be incurred due to accidental injuries or due to disablement arising out of
accident.
Various customers with different life styles, paying capacity and health status would
have different requirements which need to be considered while designing suitable
products to be offered to each customer segment.
Customers also desire
comprehensive cover while buying health insurance which would cover all their needs.
At the same time, to achieve greater acceptability and bigger volume, health
insurance products need to be kept affordable, they should also be easy to understand
for the customer and also for the sales team to market them.
These are some of the desirable features of health insurance products which the
insurance companies try to achieve in different forms for the customer.
3. Broad classification of health insurance products
Whatever be the product design, health insurance products can be broadly classified
into 3 categories:
a) Indemnity covers
These products constitute the bulk of the health insurance market and pay for
actual medical expenses incurred due to hospitalization.
b) Fixed benefit covers
Also called as hospital cash, these products pay for a fixed sum per day for the
period of hospitalization. Some products also have a fixed graded surgery benefit
incorporated in the product.
c) Critical illness covers
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This is a fixed benefit plan for payout on occurrence of a pre-defined critical

illness like heart attack, stroke, cancer etc.
The world over health and disability insurance go together but in India, personal
accident cover has traditionally been sold independent of health insurance.
Also health insurance usually does not include expenses incurred whilst outside India.
For this purpose, another product overseas health insurance or travel insurance needs to be purchased. Only in recent times, a few high end health insurance products
of private insurers include overseas insurance cover as part of regular health insurance
cover, subject to certain terms and conditions.
4. Classification based on customer segment
Products are also designed keeping in mind the target customer segment. The benefit
structure, pricing, underwriting and marketing for each segment is quite distinct.
Products classified based on customer segments are:
a) Individual cover offered to retail customers and their family members
b) Group cover offered to corporate clients, covering employees and groups,
covering their members
c) Mass policies for government schemes like RSBY covering very poor sections of the
population.
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B. IRDA Guidelines on Standardization in health insurance

With so many insurers providing numerous varied products and with different
definitions of various terms and exclusions, confusion arose in the market. It became
difficult for the customer to compare products and for third party administrators to
pay claims against products of individual companies. Moreover, in critical illness
policies, there was no clear understanding as to what was a critical illness and what
was not. Maintaining electronic data for the health insurance industry was also
becoming difficult.
To remove the confusion among insurers, service providers, TPAs and hospitals and the
grievances of the insuring public, various organizations like IRDA, service providers,
hospitals, Health Advisory Committee of the Federation of Chambers of Commerce and
Industry got together to provide some kind of standardization in health insurance.
Based on a common understanding, IRDA issued Guidelines on standardization in health
insurance in 2013.
The guidelines now provide for standardization of:
1.
2.
3.
4.
5.
6.
7.
8.
definitions of commonly used insurance terms

definitions of critical illnesses
list of excluded items of expenses in hospitalization indemnity policies
claim forms and pre-authorization forms
billing formats
discharge summary of hospitals
standard contracts between TPAs, insurers and hospitals
standard File and Use format for getting IRDAI for new policies
This has been a big step to improve the quality of service of the health providers and
the insurance industry and will also help in collection of meaningful health and health
insurance
data.
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C. Hospitalization indemnity product

An indemnity based health insurance policy is the most common and highest sold
health insurance product in India. The Mediclaim policy introduced in the eighties by
the PSU insurers was the earliest standard health product and was the only product
available in the market for a long time. Though this product, with a few changes, is
marketed by different insurers under different brand names, Mediclaim continues to
be the largest selling health insurance in the country.
Hospitalization indemnity products protect individuals from the expenditure they may
need to incur in the event of hospitalisation. In most of the cases, they also cover a
specific number of days before and after hospitalisation, but exclude any expenses not
involving hospitalisation.
Such a cover is provided on an indemnity basis, that is, by making good part or all of
the expenses incurred or amount spent during hospitalisation. This may be contrasted
with the insurance coverage on benefit basis, where the amount that will be paid on
the occurrence of a certain event (like hospitalisation, diagnosis of critical illness or
each day of admission) is as stated in the insurance policy and is not related to the
actual expenditure incurred.
Example
Raghu has a small family consisting of his wife and a 14 year old son. He has taken a
Mediclaim policy, covering each member of his family, from a health insurance
company, for an individual cover of Rs. 1 lakh each. Each of them could get recovery
of medical expenses up to Rs. 1 lakh in case of hospitalisation.
Raghu was hospitalised due to heart attack and required surgery. The medical bill
raised was Rs. 1.25 lakhs. The insurance company paid Rs 1 lakh according to the plan
coverage and Raghu had to pay the remaining amount of Rs. 25,000 from his own
pocket.
The main features of the indemnity based Mediclaim policy are detailed below,
though variations in limits of cover, additional exclusions or benefits or some addons may apply to products marketed by each insurer. The student is advised that
the following is only a broad idea about the product and he should acquaint himself
with the product of the particular insurer he wishes to know more about. He also
needs to educate himself about some of the medical terms that may be used.
1. Inpatient hospitalization expenses
An indemnity policy pays the insured the cost of hospitalization expenses incurred on
account of illness / accident.
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All expenses may not be payable and most products define the expenses covered
which normally include:
i.
Room, boarding and nursing expenses as provided by the hospital / nursing

home. This includes nursing care, RMO charges, IV fluids / blood transfusion /
injection administration charges and similar expenses
ii. Intensive Care Unit (ICU) expenses

iii. Surgeon, anesthetist, medical practitioner, consultants, specialists fees
iv. Anesthetic, blood, oxygen, operation theatre charges, surgical appliances,
v. Medicines and drugs,
vi. Dialysis, chemotherapy, radiotherapy
vii. Cost of prosthetic devices implanted during surgical procedure like pacemaker,
orthopedic implants, infra cardiac valve replacements, vascular stents
viii. Relevant laboratory / diagnostic tests and other medical expenses related to
the treatment
ix. Hospitalization expenses (excluding cost of organ) incurred on donor in respect
of organ transplant to the insured
A regular hospitalization indemnity policy covers expenses only if the duration of stay
in hospital is for 24 hours or more. However with advancements in medical
technologies, treatment procedures for many surgeries do not require hospitalization.
Now as daycare procedures, they can be conducted at specialized daycare centers or
hospitals as the case may be. Treatments such as eye surgeries, chemotherapy;
dialysis etc. can be classified under daycare surgeries and the list is ever growing.
These are also covered under the policy.
Coverage of outpatient expenses is still very limited in India, with very few such
products offering OPD covers. However there are some plans that cover treatment as
outpatient and also related health care expenses associated with doctor visits, regular
medical tests, dental and pharmacy costs.
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2. Pre and post hospitalization expenses

i. Pre hospitalization expenses
Hospitalization could be either emergency hospitalization or planned. If a patient
goes in for a planned surgery, there would be expenses incurred by him prior to
the hospitalization.
Definition
IRDA Health Insurance Standardization guidelines define Pre-hospital expenses as:
Medical expenses incurred immediately before the insured person is hospitalized,
provided that:
a) Such Medical Expenses are incurred for the same condition for which the Insured
Persons Hospitalization was required, and
b) The In-patient Hospitalization claim for such Hospitalization is admissible by the
Insurance Company.
Pre hospitalization expenses could be in the form of tests, medicines, doctors fees
etc. Such expenses relevant and pertaining to the hospitalization are covered
under the health policies.
ii. Post hospitalization expenses
After stay in the hospital, in most cases there would be expenses related to
recovery and follow-up.
Definition
Medical Expenses incurred immediately after the Insured Person is dischared from
hospital, provided that:
a) Such Medical Expenses are incurred for the same condition for which the Insured
Persons Hospitalization was required, and
b) The In-patient Hospitalization claim for such Hospitalization is admissible by the
Insurance Company.
Post hospitalization expenses would be relevant medical expenses incurred during
period up to the defined number of days after hospitalization and will be considered
as part of claim.
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Post hospitalization expenses could be in the form of medicines, drugs, review by

doctors etc. after discharge from hospital. Such expenses have to be related to the
treatment taken in hospital and are covered under the health policies.
Though the duration of cover for pre and post hospitalization expenses would vary
from insurer to insurer and is defined in the policy, the most common cover is for
thirty days pre and sixty days post hospitalization.
Pre and post-hospitalization expenses form part of the overall sum insured for which
cover is granted under the policy.
a) DOMICILIARY HOSPITALIZATION
Although this benefit is not commonly used by policyholders, an individual health
policy also has a provision to take care of expenses incurred for medical treatment
taken at home without being admitted to a hospital. However, the condition is
that though the illness requires attention at a hospital, the condition of the
patient is such that he cannot be moved to a hospital or there is lack of
accommodation in hospitals.
This cover usually carries an excess clause of three to five days meaning that
treatment costs for the first three to five days have to be borne by the insured.
The cover also excludes domiciliary treatments for certain chronic or common
oilments such as Asthma, Bronchitis, Chronic Nephritis and Nephritic Syndrome,
Diarrhoea and all type of Dysenteries including Gastroenteritis, Diabetes Mellitus
Epilepsy, Hypertension, Influenza, Cough and Cold, fevers.
b) COMMON EXCLUSIONS
Some of the usual exclusions under hospitalization indemnity policies are given
below. These are based on the suggested exclusions detailed in the Guidelines on
Standardization in Health Insurance issued by IRDAI particularly Annexure IV. The
student is advised to acquaint himself with the guidelines available on the IRDAI
website.
It must be noted that if any of the exclusions are waived or any additional
exclusions are imposed as per File and Use approved terms, these must be stated
separately in the Customer Information Sheet and the policy.
1. Pre-existing diseases
This is almost always excluded under individual health plans since otherwise it
would mean covering a certainty and poses a high risk to the insurer. One of the
important disclosures required at the time of taking a health policy is regarding
previous history of ailments / injuries of each insured person covered. This will
enable the insurer to decide on accepting the proposal for insurance.
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Definition
The IRDA guidelines on standardisation define Pre-existing as
Any condition, ailment or injury or related condition(s) for which you had signs or
symptoms, and/or were diagnosed, and/or received medical advice/treatment within
48 months prior to the first policy issued by the insurer.
The exclusion is: Any pre-existing condition(s) as defined in the policy, until 48 months
of continuous coverage of such insured person have elapsed, since inception of his /
her first policy with the company.
1. Weight control programs/ supplies/ services
2. Cost of spectacles/ contact lenses/ hearing aids etc.
3. Dental treatment expenses that do not require hospitalisation
4. Hormone replacement
5. Home visit charges
6. Infertility/ subfertility/ assisted conception procedure
7. Obesity (including morbid obesity) treatment
8. Psychiatric & psychosomatic disorders
9. Corrective surgery for refractive error
10. Treatment of sexually transmitted diseases
11. Donor screening charges
12. Admission/registration charges
13. Hospitalisation for evaluation/ diagnostic purpose
14. Expenses for investigation/ treatment irrelevant to the disease for which
admitted or diagnosed
15. Any expenses when the patient is diagnosed with retro virus and/or suffering
from HIV/ AIDS etc. is detected directly or indirectly
16. Stem cell implantation/ surgery and storage
17. War and nuclear related causes
18. All non-medical items such as registration charges, admission fees, telephone,
television charges, toiletries, etc.
19. A waiting period of 30 days from inception of policy is normally applicable in
most policies for making any claim. This however will not be applied for
hospitalization due to an accident.
Example
Mira had taken a health insurance policy for coverage of expenses in the event of
hospitalisation. The policy had a clause for initial waiting period of 30 days.
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Unfortunately, 20 days after she took the policy, Mira contracted malaria and was
hospitalised for 5 days. She had to pay heavy hospital bills.
When she asked for reimbursement from the insurance company, they denied payment
of the claim because the event of hospitalization occurred within the waiting period of
30 days from taking the policy.
i.
Waiting periods: This is applicable for diseases for which typically treatment
can be delayed and planned. Depending on the product, waiting periods of one
/ two / four years apply for diseases such as Cataract, Benign Prostatic
Hypertrophy, Hysterectomy for Menorrhagia or Fibromyoma, Hernia, Hydrocele,
Congenital internal disease, Fistula in anus, piles, Sinusitis and related
disorders, Gall Bladder Stone removal, Gout and Rheumatism, Calculus
Diseases, gout and rheumatism, age related osteoarthritis, osteoporosis.
c) COVERAGE OPTIONS AVAILABLE

i.
Individual coverage
An individual insured can cover himself along with family members such as spouse,
dependent children, dependent parents, dependent parents in law, dependent
siblings etc. Some insurers do not have a restriction on the dependents who can be
covered. It is possible to cover each of such dependent insureds under a single
policy with a separate sum insured chosen for each insured person. In such covers,
each person insured under the policy can claim upto the maximum amount of his
sum insured during the currency of the policy. Premium will be charged for each
individual insured according to his age and sum insured chosen and any other
rating factor.
ii. Family floater
In the variant known as a family floater policy, the family consisting of spouse,
dependent children and dependent parents are offered a single sum insured which
floats over the entire family.
Example
If a floater policy of Rs. 5 lacs is taken for a family of four, it means that during the
policy period, it will pay for claims related to more than one family member or
multiple claims of a single member of the family. All these together cannot exceed the
total coverage of Rs. 5 lacs. Premium will normally be charged based on the age of the
oldest member of the family proposed for insurance.
The covers and exclusions under both these policies would be the same. Family
floater policies are getting popular in the market as the entire family gets
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coverage for an overall sum insured which can be chosen at a higher level at a
reasonable premium.
d) SPECIAL FEATURES
A number of changes to existing coverages and new value added features have
been added to the basic indemnity cover offered under the earlier Mediclaim
product. We shall discuss some of these changes. It is to be noted that not all
products carry all the below mentioned features, and they may vary from insurer
to insurer and product to product.
i. Sub limits and Disease specific capping
Some of the products have disease specific capping e.g. cataract. A few also have
sub limits on room rent linked to sum insured e.g. per day room rent restricted to
1% of sum insured and ICU charges to 2% of sum insured. As expenses under other
heads such as ICU charges, OT charges and even surgeons fees are linked to the
type of room opted for, room rent capping helps in restricting expenses under
other heads also and hence the overall hospitalization expenses.
ii. Co-payment (popularly called Co-pay)
A co-payment is a cost-sharing requirement under a health insurance policy that
provides that the policyholder/insured will bear a specified percentage of the
admissible claim amount. A co-payment does not reduce the Sum Insured.
This ensures that the insured exercises caution in selecting his options and thus
reduces his overall hospitalization expenses voluntarily.
iii. Deductible
Deductible is a cost-sharing requirement under a health insurance policy that
provides that the insurer will not be liable for a specified rupee amount in case of
indemnity policies and for a specified number of days/hours in case of hospital
cash policies which will apply before any benefits are payable by the insurer. A
deductible does not reduce the Sum Insured.
Insurers are to define whether the deductible is applicable per year, per life or per
event and the specific deductible to be applied.
iv. New exclusions have been introduced and later standardized by IRDAI:
Genetic disorders and stem cell implantation / surgery.
External and or durable Medical / Non-medical equipment of any kind used
for diagnosis and or treatment including CPAP, CAPD, Infusion pump etc.,
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ambulatory devices i.e. walker, crutches, belts, collars, caps, splints,

slings, braces, stockings etc. of any kind, diabetic foot wear, glucometer /
thermometer and similar related items etc. and also any medical
equipment which is subsequently used at home etc.
Any kind of Service charges, Surcharges, Admission fees / Registration
charges etc. levied by the hospital
Doctors home visit charges, Attendant / Nursing charges during pre and
post hospitalization period
v. Zone wise premium
Normally, the premium would depend on the age of the insured person and the
sum insured selected. Premium differential has been introduced in certain zones
with higher claims cost e.g. Delhi and Mumbai form part of highest premium zone
for certain products by some insurers.
vi. Coverage of pre-existing diseases
In view of regulatory requirement, pre-existing diseases which were excluded
earlier are specifically mentioned with a waiting period of four years. Few high
end products by some insurance companies have reduced the period to 2 and 3
years.
vii. Renewability
Lifelong renewability was introduced by few insurers. Now, this has been made
compulsory by IRDAI for all policies.
viii. Coverage for Day care procedure
Advancement of medical science has seen inclusion of large number of procedures
under day care category.
Earlier only seven procedures were specifically
mentioned under daycare - Cataract, D and C, Dialysis, Chemotherapy,
Radiotherapy, Lithotripsy and Tonsillectomy. Now, more than 150 procedures are
covered and the list keeps growing.
ix. Cost of pre policy check up
Cost of medical examination was earlier borne by prospective clients. Now insurer
reimburses the cost, provided the proposal is accepted for underwriting, the
reimbursement varying from 50% to 100%. Now this has also been mandated by
IRDAI that insurer would bear at least 50% of health checkup expenses.
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x.
Duration of pre and post hospital cover
Duration of pre and post hospital coverage is extended to 60 days and 90 days by
most insurers especially in their high end product. Few insurers have also capped
these expenses linked to certain percentage of claim amount, subject to a
maximum limit.
xi. Add on covers
Various new additional covers called Add-on covers have been introduced by some
of the insurers. Some of them are:
Maternity cover: Maternity was not offered earlier under retail policies but is
now offered by most insurers, with varying waiting periods.
Critical illness cover: Available as an option under the high end version
products for certain ailments which are life threatening and entail expensive
treatment.
Reinstatement of sum insured: After payment of claim, the sum insured
(which gets reduced on payment of a claim) can be restored to the original
limit by paying extra premium.
Coverage for AYUSH Ayurvedic Yoga - Unani Siddha Homeopath: Few
policies cover expenses towards AYUSH treatment up to a certain percentage of
the hospitalization expenses.
xii. Value added covers
Few indemnity products include value added covers as listed below. The benefits
are payable up to the limit of sum insured specified against each cover in the
schedule of the policy, not exceeding the overall sum insured.
Outpatient cover: As we know health insurance products in India mostly cover
only in-patient hospitalization expenses. Few companies now offer limited
cover for out-patient expenses under some of the high-end plans.
Hospital cash: This provides for fixed lump sum payment for each day of
hospitalization for a specified period. Normally the period is granted for 7 days
excluding the policies deductible of 2/3 days. Thus, the benefit would trigger
only if hospitalization period is beyond the deductible period. This is in
addition to the hospitalization claim but within the overall sum insured of the
policy or may be with a separate sub-limit.
Recovery benefit: Lump sum benefit is paid if the total period of stay in
hospital due to sickness and/or accident is not less than 10 days.
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Donors expenses: The policy provides for reimbursement of expenses towards

donor in case of major organ transplant as per the terms and condition defined
in the policy.
Reimbursement of ambulance: Expenses incurred towards ambulance by
Insured/insured person are reimbursed up to a certain limit specified in the
schedule of the policy.
Expenses for accompanying person: This is intended to cover the expenses
incurred by accompanying person towards food, transportation whilst attending
to insured patient during the period of hospitalization. Lump sum payment or
reimbursement payment as per the policy terms is paid, up to the limit
specified in the schedule of the policy.
Family definition: Definition of family has undergone changes in few health
products. Earlier, primary insured, spouse, dependent children were granted
cover. Now there are policies where parents and in-laws can also be granted
cover under the same policy.
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D. Top-up covers or high deductible insurance plans

A top-up cover is also known as a high deductible policy. Most people in the
international markets buy top-up covers in addition to high co-pay policies or
uncovered diseases or treatment. However in India, the key reason for introduction of
top-up cover initially seems to be lack of high sum insured products, though the same
is no longer the case. The maximum amount of cover under a health policy remained
at Rs 5,00,000 for a very long time. Anyone wanting a higher cover was forced to buy
two policies paying double the premium. This led to the development of the Top-Up
policies by insurers, which offers cover for high sums insured over and above a
specified amount (called threshold).
This policy works along with a basic health cover having a low sum insured and comes
at a comparatively reasonable premium. For example, Individuals covered by their
employers can also opt for a top-up cover for additional protection (keeping the sum
insured of the first policy as the threshold). This can be for self and family, which
comes in handy in the unfortunate event of high cost treatment.
To be eligible to receive a claim under the top-up policy, the medical costs must be
greater than the deductible (or threshold) level chosen under the plan and the
reimbursement under the high deductible plan would be the amount of expense
incurred i.e. greater than the deductible
Example
An individual is covered for a sum insured of Rs. 3 lacs by his employer. He could opt
for a top-up policy of Rs. 10 lacs in excess of Rs. three lacs.
If the cost of a single hospitalization is Rs. 5 lacs, the basic policy would cover up to
Rs. three lacs only. With the top-up cover, the balance sum of Rs. two lacs would be
paid out by the top-up policy.
Top-up policies come cheap and the cost of a single Rs. 10 lacs policy would be far
higher than the top-up policy of Rs. 10 lacs in excess of Rs. three lacs.
These covers are available on individual basis and family basis. Individual sum insured
for each family member covered or a single sum insured floating over the family are
offered in the market today.
In case the top-up plan requires the deductible amount to be crossed at every single
event of hospitalization, the plan is known as a Catastrophe based high deductible
plan. This means that to be payable, in the example given above, each and every
claim must cross Rs. 3 lacs
However top-up plans that allow the deductible to be crossed post a series of
hospitalizations during the policy period are known as Aggregate based high
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deductible plans or Super top-up cover as known in the Indian market. This means
that, in the example given above, each and every claim is added and when this crosses
Rs. 3 lacs, the Top-up cover would start paying claims.
Most of the standard terms, conditions and exclusions of a hospital indemnity policy
apply to these products. In some markets, where basic health cover is provided by the
Government, insurers mostly deal only with granting the Top-Up covers.
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E. Senior citizen policy

These plans are designed to offer cover to elderly people who often were denied
coverage after certain age (e.g. people over 60 years of age). The structure of the
coverage and exclusions are much like a hospitalization policy.
Special attention is paid to diseases of the elderly in setting coverage and waiting
period. Entry age is mostly after 60 years and renewable lifelong. Sum insured range
from Rs. 50,000 to Rs. 5,00,000. There is variation of waiting period applicable to
certain ailments. Example: Cataract may have 1 year waiting for one insurer and 2
year waiting period for some other insurer.
Also certain ailments may not have waiting period for a particular insurer where as
another may have. Example: Sinusitis does not fall in waiting period clause of some
insurers but few others include it in their waiting period clause.
Pre-existing disease has either a waiting period or capping in some policies. Pre-post
hospital expenses are either paid as a percentage of hospital claims or a sub limit
whichever is higher. In some policies they follow the typical indemnity plans such as
expenses falling within specified period of 30/60 days or 60/90 days.
IRDAI has mandated special provisions for insured persons who are Senior Citizens:
1. The premium charged for health insurance products offered to senior citizens
shall be fair, justified, transparent and duly disclosed upfront.
2. The insured shall be informed in writing of any underwriting loading charged
over and above the premium and the specific consent of the policyholder for
such loadings shall be obtained before issuance of a policy.
3. All health insurers and TPAs shall establish a separate channel to address the
health insurance related claims and grievances of senior citizens.
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F. Fixed benefit covers - Hospital cash, critical illness

The greatest risk to an insurer in a health insurance policy is unnecessary and
unreasonable use of the policy benefits. Knowing that the patient is covered under a
health policy, doctors, surgeons and hospitals tend to over treat him. They prolong the
length of stay in the hospital, carry out unnecessary diagnostic and laboratory tests
and thus inflate the cost of treatment beyond the necessary amount. Another major
impact on insurers costs is the constant rise in medical costs, usually higher than the
increase in premium rates.
The answer to this is the Fixed Benefit cover. While providing adequate protection to
the insured persons, the fixed benefits cover also help the insurer to effectively price
his policy for a reasonable duration. In this product, commonly occurring treatments
are listed under each system such as ENT, Ophthalmology, Obstetrics and
Gynaecology, etc. and the maximum pay out for each of these is spelt out in the
policy.
The insured also gets a fixed sum as claim amount irrespective of the amount spent by
him for the named treatment. The package charges payable for each of these
treatments is generally based on a study of the reasonable cost that would be needed
for treating the condition.
The package charges would include all components of the cost such as:
a)
b)
c)
d)
e)
Room rent,
Professional fees,
Diagnostics,
Drugs,
Pre and post hospitalization expenses etc.
The package charges could even include diet, transport, ambulance charges etc.
depending on the product.
These policies are simple to administer as only proof of hospitalization and coverage
of ailment under the policy are sufficient to process the claim.
Some products package a daily cash benefit along with the fixed benefit cover. The
list of treatments covered could vary from around 75 to about 200 depending on the
definitions of the treatments in the product.
A provision is made to pay a fixed sum for surgeries / treatment which do not find a
place in the list named in the policy. Multiple claims for different treatments are
possible during the policy period. However the claims are finally limited by the sum
insured chosen under the policy.
Some of the fixed benefit insurance plans are:
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Hospital daily cash insurance plans

Critical illness insurance plans
1. HOSPITAL DAILY CASH POLICY
a) Per day amount limit
Hospital cash coverage provides a fixed sum to the insured person for each day of
hospitalization. Per day cash coverage could vary from (for example) Rs. 1,500 per
day to Rs. 5,000 or even more per day. An upper limit is provided on the daily cash
payout per illness as well as for the duration of the policy, which is usually an
annual policy.
b) Number of payment days
In some of the variants of this policy, the number of days of daily cash allowed is
linked to the disease for which treatment is being taken. A detailed list of
treatments and duration of stay for each is stipulated which limits the daily cash
benefit allowed for each type of procedure/ illness.
c) Standalone cover or add-on cover
The hospital daily cash policy is available as a standalone policy as offered by some
insurers while, in other cases, it is an add-on cover to a regular indemnity policy.
These policies help the insured to cover incidental expenses as the payout is a
fixed sum and not related to the actual cost of treatment. This also allows the
payout under the policy to be provided in addition to any cover received under an
indemnity based health insurance plan.
d) Supplementary cover
These policies could supplement a regular hospital expenses policy as it is cost
effective and provides compensation for incidental expenses and also expenses not
payable under the indemnity policy such as exclusions, co-pay etc.
e) Other advantages of the cover
From the insurers point of view, this plan has several advantages as it is easy to
explain to a customer and hence can be sold more easily. It beats medical inflation
as a fixed sum per day is paid for the duration of hospitalization whatever may be
the actual expense. Also, acceptance of such insurance covers and claims
settlements are really simplified.
2. CRITICAL ILLNESS POLICY
This product is also known as the dreaded disease cover or a trauma care cover.
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With advancement in medical science, people are surviving some of the major
diseases like cancer, strokes and heart attack etc. which in earlier times would
have resulted in death. Again, life expectancy has increased considerably after
surviving such major illnesses. However surviving a major illness entails huge
expense for treatment as well as for living expenses post treatment. Thus onset of
critical illness threatens financial security of a person
a) Critical illness policy is a benefit policy with a provision to pay a lump sum
amount on diagnosis of certain named critical illness.
b) It is sold:
As a standalone policy or
As an add-on cover to a few health policies or
As an add-on cover in some life insurance policies
In India, critical illness benefits are most commonly sold by life insurers as riders to
life policies and two forms of cover are offered by them accelerated CI benefit plan
and standalone CI benefit plan. Precise definition of the covered illnesses and good
underwriting are extremely important when this benefit is sold. To avoid confusion,
the definitions of 20 most common critical illnesses have been standardized under
IRDA Health Insurance Standardization guidelines. (Please refer to the Annexure at the
end).
However, the chance for adverse selection (whereby mostly those people most likely
to be affected take this insurance) at issuance stage is quite high and it is important to
determine health status of the proposers. Due to lack of sufficient data, currently
pricing of critical illness plans is being supported through reinsurers data.
c) Critical illnesses are major illnesses that could not only lead to very high
hospitalization costs, but could also cause disability, loss of limbs, loss of
earning etc. and may require prolonged care post hospitalization.
d) A critical illness policy is often recommended to be taken in addition to a
hospital indemnity policy, so that the compensation under the policy could help
in overcoming the financial burden of a family whose member is affected by
such illness.
e) The critical illnesses covered vary across insurers and products, but the
common ones include:
Cancers of specified severity

Acute myocardial infarction
Coronary artery surgery
Heart valve replacement
Coma of specified severity
Renal failure
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Stroke resulting in permanent symptoms

Major organ / bone marrow transplant
Multiple sclerosis
Motor Neuron disease
Permanent paralysis of limbs
Permanent disability due to major accidents
The list of critical illnesses is not static and keeps evolving. In a few international
markets insurers classify conditions into core and additional, even covering
conditions like Alzheimers disease. Sometimes terminal illness is also included
for coverage though premium would obviously be very high.
f) While most critical illness policies provide for a lump sum payment on diagnosis
of illness, there are a few policies which provide hospitalization expenses cover
only in the form of reimbursement of expenses. Few products offer
combination of both covers i.e. indemnity for in patient hospitalization
expenses and lump sum payment upon diagnosis of major diseases named in the
policy.
g) Critical illness policies are usually available for persons in the age group of 21
years to 65 years.
h) The sum insured offered under these policies is quite high as the primary
reason of such a policy would be to provide for the financial burden of long
term care associated with such diseases.
i) Under these policies generally 100% of the sum insured is paid on diagnosis of a
critical illness. In some cases compensation could vary from 25% to 100% of sum
insured depending on the policy terms and conditions and severity of illness.
j) A standard condition seen in all critical illness policies is the waiting period of
90 days from inception of policy for any benefit to become payable under the
policy and the survival clause of 30 days after diagnosis of the illness. The
survival clause has been included as this benefit must not be confused with a
death benefit but more interpreted as a survival (living) benefit i.e. the
benefit provided to overcome the hardships that may follow a critical illness.
k) Rigorous medical examinations are to be undergone for persons especially over
45 years of age who wish to take the critical illness policy. Standard exclusions
are quite similar to those found in health insurance products, failure to seek or
follow medical advice, or delaying medical treatment in order to dodge the
waiting period is also specifically excluded.
l) The insurer may compensate the insured only once for any one or more of the
covered diseases of the policy or offer multiple payouts but up to a certain
limited number. The policy terminates, once compensation is paid under the
policy in respect of any of the insured person.
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m) The critical illness policy is also offered to groups especially corporates who
take policies for their employees.
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G. Long term care insurance

Today, with increasing life expectancy, the population of aged people in the world is
going up. With an ageing population, the world over, long term care insurance is also
gaining importance. Elderly people require long term care and also those people
suffering from any kind of disability. Long term care means all forms of continuing
personal or nursing care for people who are unable to look after themselves without a
degree of support and whose health is not going to get better in future.
There are two types of plans for long term care:
a) Pre-funded plans which are purchased by healthy insured to take care of their
future medical expenses and
b) Immediate need plans which are purchased by a lump sum premium when the
insured is requiring long term care.
The severity of disability (and expected survival period) decides the quantum of
benefit. Long term care products are yet to be developed in Indian market.
Bhavishya Arogya policy
The first pre-funded insurance plan was the Bhavishya Arogya policy marketed by the
four public sector general insurance companies. Introduced in the year 1990, the
policy is basically meant to take care of the healthcare needs of an insured person
after his retirement, while he pays premium during his productive life. It is similar to
taking a life insurance policy except that it covers future medical expenses rather than
death.
a) Deferred Mediclaim
The policy is a sort of deferred or future Mediclaim policy and provides cover
similar to the Mediclaim policy. The proposer can join the scheme any time
between the age of 25 and 55 years.
b) Retirement age
He can choose a retirement age between 55 and 60 years with a condition that
there should be a clear gap of 4 years between the date of joining and the
retirement age chosen. The policy retirement age means the age selected by the
insured at the time of signing the proposal and specified in the schedule for the
purpose of start of benefit under the policy. This age cannot be advanced.
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c) Pre-retirement period
The pre-retirement period means the period starting from the date of acceptance
of the proposal and ending with the policy retirement age specified in the
schedule. During this period the insured shall be paying installment/single
premium amount as applicable. The insured has the option of paying either one
lump-sum premium or in installments.
d) Withdrawal
In case, the insured dies or wishes to withdraw from the scheme either before the
retirement age or after retirement age chosen, then appropriate refund of
premium would be allowed subject to no claim having occurred under the policy.
There is a provision of grace period of 7 days for payment of premium in the event
of satisfactory reason for delay in renewal.
e) Assignment
The scheme provides for assignment.
f) Exclusions
The policy does not have exclusion of pre-existing diseases, 30 days waiting period
and first year exclusion for specified diseases as in Mediclaim. Since it is a future
Mediclaim policy, this is quite logical.
g) Group insurance variant
Policy can also be availed of on group basis in which case, facility of group
discount is available.
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H. Combi-products
Sometimes, products pertaining to life insurance are combined with health insurance
products. This is a good way of promoting more products in a packaged way through
two insurers coming together and entering into an understanding.
Health plus Life Combi Products therefore mean products which offer the
combination of a life insurance cover of a life insurance company and a health
insurance cover offered by non-life and/or standalone health insurance company.
The products are jointly designed by the two insurers and marketed through the
distribution channels of both insurers. Obviously, this would entail a tie-up between
two companies and as per current guidelines, such tie-up is permitted only between
one life insurer and one non-life insurer at any time. A Memorandum of Understanding
between such companies must be in place for the way marketing, policy servicing and
sharing of common expenses will be carried out and also policy servicing parameters
and transmission of premium. Approval of IRDAI for the tie-up may be sought by any
one of the insurers. The agreement should be of a long term nature and withdrawal
from the tie-up will not be permitted except under exceptional circumstances and to
the satisfaction of the IRDAI.
One of the insurance companies may be mutually agreed to act as a lead insurer to
play a critical role in facilitating the policy service as a contact point for rendering
various services as required for combi products. The lead insurer may play a major
role in facilitating underwriting and policy service. However, the claims and
commission payouts are handled by the respective insurers depending on which section
of the policy is affected.
'Combi Product' filing shall follow the File and Use guidelines issued from time to time
and individually cleared. The premium components of both risks are to be separately
identifiable and disclosed to the policyholders at both pre-sale stage and post-sale
stage and in all documents like policy document, sales literature etc.
The product may be offered both as individual insurance policy and on group insurance
basis. However in respect of health insurance floater policies, the pure term life
insurance coverage is allowed on the life of one of the earning members of the family
who is also the proposer on health insurance policy subject to insurable interest and
other applicable underwriting norms of respective insurers.
Free Look option is available to the insured and is to be applied to the 'Combi Product'
as a whole. However, the Health portion of the 'Combi Product' shall entitle its
renewability at the option of policyholder from the respective Non-Life/standalone
health Insurance Company.
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Marketing of Combi Products can be done through Direct marketing channels, Brokers
and Composite Individual and Corporate Agents common to both insurers but not
through Bank referral arrangements. However, they cannot be intermediaries who are
not authorized to market either of the products of either of the insurers.
Specific disclosures have to be made in the proposal and sales literature especially
features like there are two insurers involved, that each risk is distinct from the other,
who will settle claims, matters relating to renewability of both or only one of the
covers at the option of the insured, servicing facilities etc.
The IT system to service this business must be robust and seamless as it means a lot of
integration of data between the two insurers and data generation to IRDAI as required.
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I. Package policies
Package or umbrella covers give, under a single document, a combination of covers.
For instance in other classes of business, there are covers such as Householders
Policy, Shopkeepers Policy, Office Package Policy etc. that, under one policy, seek to
cover various physical assets including buildings, contents etc. Such policies may also
include certain personal lines or liability covers.
Examples of package policy in health insurance include combining Critical illness cover
benefits with indemnity policies and even life insurance policies and hospital daily
cash benefits with indemnity policies.
In the case of travel insurance, the policy offered is also a package policy covering not
only health insurance but also accidental death / disability benefits along with Medical
expenses due to illness / accident, Loss of or delay in arrival of checked in baggage,
Loss of passport and documents, Third party liability for property / personal damages,
Cancellation of trips and even Hijack cover.
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J. Micro insurance and health insurance for poorer sections

Micro-insurance products are specifically designed to aim for the protection of low
income people from rural and informal sectors. The low income people form a sizable
part of our population and usually dont have any health security cover. Therefore,
this low value product, with an affordable premium and benefit package, is initiated
to help these people to cope with and recover from common risks. Micro insurance is
governed by the IRDA Micro Insurance Regulations, 2005.
These products come with a small premium and typically, the sum insured is below
Rs.30,000, as required vide the IRDA micro-insurance regulations, 2005. Such covers
are mostly taken on a group basis by various community organizations or nongovernmental organizations (NGOs) for their members. The IRDAs rural and social
sector obligations also require that insurers should sell a defined proportion of their
policies as micro-insurance products, to enable wider reach of insurance.
Two policies particularly created by PSUs to cater to the poorer sections of society are
described below:
1. Jan Arogya Bima Policy
Following are the features of Jan Arogya Bima Policy:
a. This policy is designed to provide cheap medical insurance to poorer sections of
the society.
b. The coverage is along the lines of the individual Mediclaim policy. Cumulative
bonus and medical check-up benefits are not included.

c. The policy is available to individuals and family members.
d. The age limit is five to 70 years.
e. Children between the age of three months and five years can be covered provided
one or both parents are covered concurrently.

f.
The sum insured per insured person is restricted to Rs.5,000 and the premium
payable as per the following table.
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Table 2.1
Age of the person insured
Head of the family
Spouse
Dependent child up to 25 years
For family of 2+1 dependent child
For family of 2+2 dependent children
Up to
years
70
70
50
190
240
46 46-55
100
100
50
250
300
56-65
66-70
120
120
50
290
340
140
140
50
330
380
Premium qualifies for tax benefit under Section 80D of the Income Tax Act.
Service tax is not applicable to the policy.
2. Universal Health Insurance Scheme (UHIS)

This policy is available to groups of 100 or more families. In recent times even
individual UHIS Policies were made available to the public.
Benefits
Following is the list of benefits of universal health insurance scheme:
Medical reimbursement
The policy provides reimbursement of hospitalization expenses up to Rs.30,000 to an
individual / family subject to the following sub limits.
Table 2.2
Particulars
Room, boarding expenses
If admitted in ICU
Surgeon, Anaesthetist, Consultant, Specialists
fees, Nursing expenses
Anaesthesia, Blood, Oxygen, OT charges,
Medicines, Diagnostic material and X-Ray,
Dialysis, Radiotherapy,
Chemotherapy, Cost of pacemaker, Artificial
limb, etc.
Total expenses incurred for any one illness
Limit
Up to Rs.150/- per day
Up to Rs.300/- per day
Up to Rs.4,500/- per illness/
injury
Up to Rs.4,500/- per illness/
injury
Up to Rs. 15,000/-
Personal accident cover
Coverage for death of the earning head of the family (as named in the schedule)
due to accident: Rs.25,000/-.
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Disability cover
If the earning head of the family is hospitalised due to an accident / illness
compensation of Rs. 50/- per day will be paid per day of hospitalisation up to a
maximum of 15 days after a waiting period of three days.
Premium
Table 2.3
Entity
Premium
For an individual
Rs.365/- per annum
For a family up to five

(including the first three children)
Rs.548/- per annum
For a family up to seven

Rs.730/- per annum
(including the first three children and
dependent parents)
Premium subsidy for BPL families
For families below the poverty line the

Government will provide a premium
subsidy.
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K. Rashtriya Swasthya Bima Yojana

The government has also launched various health schemes, some of them applicable to
particular states. To extend the reach of health benefits to the masses, it has
implemented the Rashtriya Swasthya Bima Yojana in association with insurance
companies. RSBY has been launched by the Ministry of Labour and Employment,
Government of India, to provide health insurance coverage for the below poverty line
(BPL) families.
Following are the features of Rashtriya Swasthya Bima Yojana:
a. Total sum insured of Rs. 30,000 per BPL family on a family floater basis.
b. Pre-existing diseases to be covered.
c. Coverage of health services related to hospitalization and services of surgical
nature which can be provided on a day-care basis.
d. Cashless coverage of all eligible health services.
e. Provision of smart card.
f. Provision of pre and post hospitalization expenses.
g. Transport allowance of Rs.100/- per visit.
h. The Central and State Government pays the premium to the insurer.
i. Insurers are selected by the State Government on the basis of a competitive
bidding.
j. Choice to the beneficiary between public and private hospitals.
k. Premium to be borne by the Central and State governments in the proportion of
3:1. Central Government to contribute a maximum amount of Rs. 565/- per
family.
l. Contribution by the State Governments: 25 percent of the annual premium and
any additional premium beyond Rs 750.
m. Beneficiary to pay Rs. 30/- per annum as registration fee/ renewal fee.
n. Administrative cost to be borne by the State Government.
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o. Cost of smart card additional amount of Rs. 60/- per beneficiary would be
available for this purpose.
p. The scheme shall commence operation from the first of the month after the next
month from the date of issue of smart card. Thus, if the initial smart cards are
issued anytime during the month of February in a particular district, the scheme
will commence from 1st of April.
q. The scheme will last for one year till 31st March of next year. This would be the
terminal date of the scheme in that particular district. Thus, cards issued during
the intervening period will also have the terminal date as 31st March of the
following year.
Claim settlement to be done through TPAs mentioned in the schedule or by the
insurance company. The settlement is to be made cashless as far as possible
through listed hospitals.
Any one illness will be deemed to mean continuous period of illness and it includes
relapse within 60 days from the date of last consultation with the hospital.
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L. Pradhan Mantri Suraksha Bima Yojana

The recently announced PMSBY covering personal accident death and disability
cover insurance has attracted lot of interest and the scheme details are as under:
Scope of coverage: All savings bank account holders in the age 18 to 70 years in
participating banks are entitled to join. Participating banks must tie up with any
approved non-life insurer who will offer a Master Policy to such bank for the cover.
Any person would be eligible to join the scheme through one savings bank account
only and if he enrols in more than one bank, he gets no extra benefit and the extra
premium paid will stand forfeited. Aadhar would be the primary KYC for the bank
account.
Enrollment Modality / Period: The cover shall be for the one year period from 1st
June to 31st May for which option to join / pay by auto-debit from the designated
savings bank account on the prescribed forms will be required to be given by 31st
May of every year, extendable up to 31st August 2015 in the initial year. Initially
on launch, the period for joining may be extended by Govt. of India for another
three months, i.e. up to 30th of November, 2015.
Joining subsequently on payment of full annual premium may be possible on
specified terms. Applicants may give an indefinite / longer option for enrolment /
auto-debit, subject to continuation of the scheme with terms as may be revised on
the basis of past experience. Individuals who exit the scheme at any point may rejoin the scheme in future years through the above modality. New entrants into the
eligible category from year to year or currently eligible individuals who did not join
earlier shall be able to join in future years while the scheme is continuing.
Benefits under the insurance are as follows:
Table of Benefits
Death
Total and irrecoverable loss of both
eyes or loss of use of both hands or
feet or loss of sight of one eye and
loss of use of hand or foot
Total and irrecoverable loss of sight
of one eye or loss of use of one hand
or foot
Sum Insured
Rs. 2 Lakh
Rs. 2 Lakh
Rs. 1 Lakh
Joining and Nomination facility is available by sms, email or personal visit.

Premium: Rs.12/- per annum per member. The premium will be deducted from
the account holders savings bank account through auto debit facility in one
instalment on or before 1st June of each annual coverage period. However, in
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cases where auto debit takes place after 1st June, the cover shall commence from
the first day of the month following the auto debit. Participating banks will deduct
the premium amount in the same month when the auto debit option is given,
preferably in May of every year, and remit the amount due to the Insurance
Company in that month itself.
The premium would be reviewed based on annual claims experience but efforts
would be made to ensure that there is no upward revision of premium in the first
three years.
Termination of cover: The accident cover for the member shall terminate:
1. On member attaining the age of 70 years (age nearest birth day) or
2. Closure of account with the Bank or insufficiency of balance to keep the
insurance in force or
3. In case a member is covered through more than one account, insurance cover
will be restricted to one only and the other cover will terminate while the
premium shall be forfeited.
If the insurance cover is ceased due to any technical reasons such as insufficient
balance on due date or due to any administrative issues, the same can be
reinstated on receipt of full annual premium, subject to conditions that may be
laid down. During this period, the risk cover will be suspended and reinstatement
of risk cover will be at the sole discretion of Insurance Company.
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M. Pradhan Mantri Jan Dhan Yojana

This financial inclusion campaign for Indian citizens in Banking Savings & Deposit
Accounts, Remittance, Credit, Insurance and Pension in an affordable manner was
launched by the Prime Minister of India, Narendra Modi on 28 August 2014 as
announced on his first Independence Day speech on 15 August 2014. This scheme has
set a world record in bank account opening during any one week. Aimed at including
maximum number of people in the banking mainstream
An account can be opened in any bank branch or Business Correspondent (Bank Mitra)
outlet. PMJDY accounts are being opened with Zero balance. However, if the
account-holder wishes to get cheque book, he/she will have to fulfill minimum
balance criteria.
Special Benefits under PMJDY Scheme
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Interest on deposit.
Accidental insurance cover of Rs.1.00 lac
No minimum balance required.
Life insurance cover of Rs.30,000/Easy Transfer of money across India
Beneficiaries of Government Schemes will get Direct Benefit Transfer in these
accounts.
After satisfactory operation of the account for 6 months, an overdraft facility
will be permitted
Access to Pension, insurance products.
Accidental Insurance Cover
RuPay Debit Card which must be used at least once in 45 days.
Overdraft facility upto Rs.5000/- is available in only one account per
household, preferably lady of the household.
As on 13th May 2015, a record 15.59 Crore accounts have been opened with a balance
in account of Rs. 16,918.91 Crores. Of these, 8.50 Crore accounts have been opened
with zero balance.
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N. Personal Accident and disability cover

A Personal Accident (PA) Cover provides compensation due to death and disability in
the event of unforeseen accident. Often these policies provide some form of medical
cover along with the accident benefit.
In a PA policy, while the death benefit is payment of 100% of the sum insured, in the
event of disability, compensation varies from a fixed percentage of the sum insured in
the case of permanent disability to weekly compensation for temporary disablement.
Weekly compensation means payment of a fixed sum per week of disablement subject
to a maximum limit in terms of number of weeks for which the compensation would be
payable.
1. Types of disability covered
Types of disability which are normally covered under the policy are:
i. Permanent total disability (PTD): means becoming totally disabled for lifetime
viz. paralysis of all four limbs, comatose condition, loss of both eyes/ both
hands/ both limbs or one hand and one eye or one eye and one leg or one hand
and one leg,
ii. Permanent partial disability (PPD): means becoming partially disabled for
lifetime viz. loss of fingers, toes, phalanges etc.
iii. Temporary total disability (TTD): means becoming totally disabled for a
temporary period of time. This section of cover is intended to cover the loss of
income during the disability period.
The client has choice to select only death cover or death plus permanent
disablement of Or Death plus permanent disablement and also temporary total
disablement.
2. Sum insured
Sums insured for PA policies are usually decided on the basis of gross monthly income.
Typically, it is 60 times of the gross monthly income. However, some insurers also
offer on fixed plan basis without considering the income level. In such policies sum
insured for each section of cover varies as per the plan opted.
3. Benefit plan
Being a benefit plan, PA policies do not attract contribution. Thus, if a person has
more than one policy with different insurers, in the event of accidental death, PTD or
PPD, claims would be paid under all the policies.
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4. Scope of cover
These policies are often extended to cover medical expenses, which reimburses the
hospitalization and other medical costs incurred following the accident. Today we
have health policies which are issued to cover medical/ hospitalization expenses
incurred consequent to an accident. Such policies do not cover diseases and their
treatment and instead cover only accident related medical costs.
5. Value added benefits
Along with personal accident, many insurers also offer value added benefits like
hospital cash on account of hospitalization due to accident, cost of transportation of
mortal remains, education benefit for a fixed sum and ambulance charges on the basis
of actual or fixed limit whichever is lower.
6. Exclusions
Common exclusions under personal accident cover are:
i.
Any existing disability prior to the inception of policy
ii. Death or disability due to mental disorders or any sickness

iii. Directly or indirectly caused by venereal disease, sexually transmitted diseases,
AIDS or insanity.
iv. Death or disability caused by radiation, infection, poisoning except where
these arise from an accident.
v. Any injury arising or resulting from the Insured or any of his family members
committing any breach of law with criminal intent.
vi. Death or disability or Injury due to accidental injury arising out of or directly or
indirectly connected with or traceable to war, invasion, act of foreign enemy,
hostilities (whether war be declared or not), civil war, rebellion, revolution,
insurrection, mutiny, military or usurped power, seizure, capture, arrests,
restraints and detainments.
vii. In the event the insured person is a victim of culpable homicide, i.e. murder.
However, in most policies, in case of murder where the insured is not himself
involved in criminal activity, it is treated as an accident and covered under the
policy.
viii. Death/Disablement/Hospitalization resulting, directly or indirectly, caused by,
contributed to or aggravated or prolonged by child birth or from pregnancy or
in consequence thereof.
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ix. While the Insured/Insured Person is participating or training for any sport as a
professional, serving in any branch of the Military or Armed Forces of any
country, whether in peace or war.
x. Intentional self-injury, suicide or attempted suicide (whether sane or insane)
xi. abuse of intoxicants or drugs and alcohol
xii. whilst engaging in aviation or ballooning, whilst mounting into, dismounting
from or travelling in any aircraft or balloon other than as a passenger (fare
paying or otherwise) in any duly licensed standard type of aircraft anywhere in
the world
Certain policies also exclude loss arising out of driving any vehicle without a valid
driving license.
PA policies are offered to individuals, family and also to groups.
Family Package Cover
Family package cover may be granted on the following pattern:
Earning member (Persons Insured) and Spouse, if earning: Independent

capital sum insured for each, as desired, within usual limitations as in
individual.
Spouse (if not earning member): usually 50 percent of the capital sum insured
of the earning member. This may be limited to a specified upper limit e.g.
Rs.1,00,000 or Rs. 3,00,000.
Children (between the age of 5 years and 25 years): usually 25 percent of the
capital sum insured of the earning parent subject to a specified upper limit
e.g. Rs. 50,000 per child.
Group Personal Accident Policies

Group Personal Accident Policies are usually annual policies only renewal being
allowed on anniversary. However, non-life and standalone health insurers may offer
group personal accident products with term less than one year also to provide
coverage to any specific events.
Following are different types of group policies:
Employer and Employee relationship

These policies are granted to firms, association etc. to cover:
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o
o
Named employees
Unnamed employees
Non Employer-Employee relationship

These policies are granted to associations, societies, clubs, etc. to cover:
o
o
Named members
Members not identified by name
(Note: Employees may be covered separately)

Broken bone policy and compensation for loss of daily activities
This is a specialised PA policy. This policy is designed to provide cover against listed
fractures.
i.
Fixed benefit or percentage of sum insured mentioned against each fracture is

paid at the time of claim.
ii. Quantum of benefit depends on the type of bone covered and nature of
fracture sustained.
iii. To illustrate further, compound fracture would have higher percentage of
benefit than simple fracture. Again, percentage of benefit for femur bone
(thigh bone) would have higher percentage over benefit of finger bone.
iv. The policy also covers fixed benefit defined in the policy for loss of daily
activities viz. eating, toileting, dressing, continence (ability to hold urine or
stools) or immobility so that insured can take care of cost associated to
maintain his/her life.
v. It also covers hospital cash benefit and accidental death cover. Different plans
are available with varying sums insured and benefit payout.
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O. Overseas travel insurance

1. Need for the policy
An Indian citizen travelling outside India for business, holidays or studies is exposed to
the risk of accident, injury and sickness during his stay overseas. The cost of medical
care, especially in countries such as USA and Canada, is very high and could cause
major financial problems if a person travelling to these countries were to meet with
an unfortunate accident/ illness. To protect against such unfortunate events, travel
policies or overseas health and accident policies are available.
2. Scope of coverage
Such policies are primarily meant for accident and sickness benefits, but most
products available in the market package a range of covers within one product. The
covers offered are:
i. Accidental death / disability
ii. Medical expenses due to illness / accident
iii. Loss of checked in baggage
iv. Delay in arrival of checked in baggage
v. Loss of passport and documents
vi. Third party liability for property / personal damages
vii. Cancellation of trips
viii. Hijack cover
3. Types of plans
The popular policies are the Business and Holiday Plans, the Study Plans and the
Employment Plans.
4. Who can provide this insurance
Overseas or Domestic Travel Insurance policies may only be offered by non-life and
standalone health insurance companies, either as a standalone product or as an add-on
cover to an existing health policy, provided that the premium for the add-on cover is
approved by the Authority under File And Use Procedure.
5. Who can take the policy
An Indian citizen travelling abroad on business, holiday or for studies can avail this
policy. Employees of Indian employers sent on contracts abroad can also be covered.
6. Sum insured and premiums
The cover is granted in US Dollars and generally varies from USD 100,000 to USD
500,000. For the section covering medical expenses evacuation, repariation,
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which is the main section. For other sections the S.I. is lower, expect for the
liability cover. Premiums can be paid in Indian rupees except in the case of the
employment plan where premium has to be paid in dollars. The plans are usually of
two types:
World-wide excluding USA / Canada
World-wide including USA / Canada
Some products provide for cover in Asian countries only, Schengen countries only etc.
1. Corporate frequent travellers plans
This is an annual policy whereby a corporate/employer takes individual policies for its
executives who frequently make trips outside India. This cover can also be taken by
individuals who fly overseas many times during a year. There are limits on the
maximum duration of each trip and also the maximum number of trips that can be
availed in a year.
An increasingly popular cover today is an annual declaration policy whereby an
advance premium is paid based on the estimated man days of travel in a year by a
companys employees.
Declarations are made weekly / fortnightly on the number of days of travel employee
wise and premium is adjusted against the advance. Provision is also given for increase
in the number of man days during the currency of the policy, as it gets exhausted on
payment of additional advance premium.
The above policies are granted only for business and holiday travels.
Common exclusions under the OMP include pre-existing diseases. Persons with existing
ailments cannot obtain cover for taking treatment abroad.
The health related claims under these policies are totally cashless wherein each
insurer ties up with an international service provider with network in major countries
who service the policies abroad.
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P. Group health cover

1. GROUP POLICIES
As explained earlier in the chapter a group policy is taken by a group owner who could
be an employer, an association, a banks credit card division, where a single policy
covers the entire group of individuals.
Group Health Insurance Policies may be offered by any insurance company, provided
that all such products shall only be one year renewable contracts.
Features of group policies- Hospitalisation benefit covers.
1. Scope of coverage
The most common form of group health insurance is the policy taken by employers
covering employees and their families including dependent spouse, children and
parents / parents in law.
2. Tailor-made cover
Group policies are often tailor-made covers to suit the requirements of the group.
Thus, in group policies, one will find several standard exclusions of the individual
policy being covered under the group policy.
3. Maternity cover
One of the most common extensions in a group policy is the maternity cover. This is
now being offered by some insurers under individual policies, but with a waiting period
of two to three years. In a group policy, it normally has a waiting period of nine
months only and in some cases, even this is waived. Maternity cover would provide for
the expenses incurred in hospitalization for delivery of child and includes C- section
delivery. This cover is generally restricted to Rs. 25,000 to Rs. 50,000 within the
overall sum insured of the family.
4. Child cover
Children are normally covered from the age of three months only in individual health
policies. In group policies, coverage is given to babies from day one, sometimes
restricted to the maternity cover limit and sometimes extended to include the full
sum insured of the family.
5. Pre-existing diseases covered, waiting period waived off
Several exclusions such as the pre-existing disease exclusion, thirty days waiting
period, two years waiting period, congenital diseases may be covered in a tailor-made
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group policy.
6. Premium calculation
The premium charged for a group policy is based on the age profile of the group
members, the size of the group and most importantly the claims experience of the
group. As the premium varies year on year based on experience, additional covers as
mentioned above are freely given to the groups, as it is in the interest of the group
policyholder to manage his claims within the premiums paid.
7. Non-employer employee groups
In India, regulatory provisions strictly prohibit formation of groups primarily for the
purpose of taking out a group insurance cover. When group policies are given to other
than employers, it is important to determine the relation of the group owner to its
members.
Example
A bank taking a policy for its saving bank account holders or credit card holders
constitutes a homogenous group, whereby a large group is able to benefit by a tailormade policy designed to suit their requirements.
Here the premium collected from each individual account holder may be quite low,
but as a group the premium obtained by the insurer would be substantial and the bank
offers a value add to its customers in the form of a superior policy and at better
premium rates.
8. Pricing
In group policies, there is provision for discount on premium based on size of the group
as also the claims experience of the group. Group insurance reduces the risk of
adverse selection, as the entire group is covered in a policy and enables the group
holder to bargain for better terms. However, in recent years, this segment has seen
high loss ratios, primarily due to underpricing of premium due to competition. While,
this has led to some to review of premium and cover by insurers, it is still difficult to
declare that the situation has since been corrected.
9. Premium payment
The premiums could be either totally paid by the employer or group owner, but it is
usually on a contribution basis by the employees or group members. However it is a
single contract with the insurer, with the employer/group owner collecting the
premium and paying the premium covering all the members.
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10. Add-on benefits

Tailor-made group policies offer covers such as dental care, vision care, and cost of
health checkup and sometimes, critical illness cover too at additional premiums or as
complimentary benefits.
Notes:
IRDAI has laid down conditions for granting of group accident and health covers. This
protects individuals from being misled by fraudsters into joining invalid and money
making group policy schemes.
Recently introduced government health insurance schemes and mass products can also
be classified as group health covers since the policies are purchased for an entire
segment of the population by the government.
Definition
Group definition could be summarized as below:
a) A group should consist of persons with a commonality of purpose, and the group
organizer should have the mandate from a majority of the members of the group
to arrange insurance on their behalf.
b) No group should be formed with the main purpose of availing insurance.
c) The premium charged and benefits available should be clearly indicated in the
group policy issued to individual members.
d) Group discounts should be passed on to individual members and premium charged
should not be more than that given to the insurance company.
2. CORPORATE BUFFER OR FLOATER COVER
In most group policies, each family is covered for a defined sum insured, varying from
Rs. One lac to five lacs and sometimes more. There arise situations where the sum
insured of the family is exhausted, especially in the case of major illness of a family
member. In such situations, the buffer cover brings relief, whereby the excess
expenses over and above the family sum insured are met from this buffer amount.
In short the buffer cover would have a sum insured varying from Rs. ten lacs to a crore
or more. Amounts are drawn from the buffer, once a familys sum insured is
exhausted. However this utilization is usually restricted to major illness / critical
illness expenses where a single hospitalization exhausts the sum insured.
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The amount that could be utilized by each member from this buffer is also capped,
often up to the original sum insured. Such buffer covers should be given for medium
sized policies and a prudent underwriter would not provide this cover for low sum
insured policies.
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Q. Special Products
1. Disease covers
In recent years, disease specific covers like cancer, diabetes have been introduced in
the Indian market, mostly by life insurance companies. The cover is long term - 5
years to 20 years and a wellness benefit is also included a regular health check-up
paid for by the insurer. There is incentive for better control of factors like blood
glucose, LDL, blood pressure etc. in the form of reduced premiums from second year
of policy onwards. On the other hand, a higher premium would be chargeable for poor
control.
2. Product designed to cover diabetic persons
This policy can be taken by persons between 26 and 65 years and is renewable up to
70 years. Sum Insured ranges from Rs. 50,000 to Rs. 5,00,000. Capping on Room rent is
applicable. Product is aimed to cover hospitalization complications of diabetes like
diabetic retinopathy (eye), kidney, diabetic foot, kidney transplant including donor
expenses.
Test Yourself 1
Though the duration of cover for pre-hospitalization expenses would vary from insurer
to insurer and is defined in the policy, the most common cover is for ________ prehospitalization.
I.
II.
III.
IV.
Fifteen days
Thirty days
Forty Five days
Sixty days
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R. Key terms in health policies

1. Network Provider
Network provider refers to a hospital/nursing home/day care center which is under
tie-up with an insurer/TPA for providing cashless treatment to insured patients.
Insurers / TPAs normally negotiate favourable discounts on charges and fees from such
providers who also guarantee a good level of service. Patients are free to go to out-ofnetwork providers but there they are generally charged much higher fees.
2. Preferred provider network (PPN)
An insurer has the option to create a preferred network of hospitals to ensure quality
treatment and at best rates. When this group is limited to only a select few by the
insurer based on experience, utilization and cost of providing care, then we have what
is known as the preferred provider network.
3. Cashless service
Experience has shown that one of the causes of debt is borrowing for treatment of
illness. A cashless service enables the insured to avail of the treatment up to the limit
of cover without any payment to the hospitals. All that the insured has to do is
approach a network hospital and present his medical card as proof of insurance. The
insurer facilitates a cashless access to the health service and directly makes payment
to the network provider for the admissible amount. However, the insured has to make
payment for amounts beyond the policy limits and for expenses not payable as per
policy conditions.
4. Third party administrator (TPA)
A major development in the field of health insurance is the introduction of the third
party administrator or TPA. Several insurers across the world utilize the services of
independent organizations for managing health insurance claims. These agencies are
known as the TPAs.
In India, a TPA is engaged by an insurer for provision of health services which includes
among other things:
i. Providing an identity card to the policyholder which is proof of his insurance
policy and can be used for admission into a hospital
ii. Providing a cashless service at network hospitals
iii. Processing of claims
TPAs are independent entities who are appointed by insurers for processing and
finalizing health claims. TPAs service health policyholders starting from issuance of
unique identity cards for hospital admissions up to settlement of claims either on
cashless basis or reimbursement basis.
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Third party administrators were introduced in the year 2001. They are licensed and
regulated by IRDAI and mandated to provide health services. The minimum capital and
other stipulations to qualify as a TPA are prescribed by IRDAI.
Thus health claims servicing are now outsourced by the insurers to the TPAs, at a
remuneration of five-six percent of the premium collected.
Third party administrators enter into an MOU with hospitals or health service providers
and ensure that any person who undergoes treatment in the network hospitals is given
a cashless service. They are the intermediaries between the insurer(s) and the
insured(s), who co-ordinate with the hospitals and finalize health claims.
5. Hospital
A hospital means any institution established for in-patient care and day care
treatment of sickness and / or injuries and which has been registered as a hospital
with the local authorities, wherever applicable, and is under the supervision of a
registered and qualified medical practitioner AND must comply with all minimum
criteria as under:
a) has at least 10 inpatient beds in those towns having a population of less than
10,00,000 and 15 inpatient beds in all other places;
b) has qualified nursing staff under its employment round the clock;
c) has qualified medical practitioner(s) in charge round the clock;
d) has a fully equipped operation theatre of its own where surgical procedures are
carried out;
e) maintains daily records of patients and will make these accessible to the
Insurance companys authorized personnel.
6. Medical practitioner
A Medical practitioner is a person who holds a valid registration from the medical
council of any state of India and is thereby entitled to practice medicine within its
jurisdiction; and is acting within the scope and jurisdiction of his license. However,
insurance companies are free to make a restriction that the registered practitioner
should not be the insured or any close family member.
7. Qualified nurse
Qualified nurse means a person who holds a valid registration from the Nursing Council
of India or the Nursing Council of any state in India.
8. Reasonable and necessary expenses
A health insurance policy always contains this clause as the policy provides for
compensation of expenses that would be deemed to be reasonable for treatment of a
particular ailment and in a particular geographical area.
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A common meaning would be the charges incurred that are medically necessary to
treat the condition, does not exceed the usual level of charges for similar treatment in
the locality in which it is incurred and does not include charges that would not have
been made if no insurance existed.
IRDAI defines Reasonable Charges as the charges for services or supplies, which are the
standard charges for the specific provider and consistent with the prevailing charges in
the geographical area for identical or similar services, taking into account the nature
of the illness / injury involved .
This clause provides protection to the insurer against inflation of bills by the provider
and also prevents insured from going in for high end hospitals for treatment of
common ailments, which could be otherwise done at reasonably low costs.
9. Notice of claim
Every insurance policy provides for immediate intimation of claim and specified time
limits for document submission. In health insurance policies, wherever cashless facility
is desired by the customer, intimations are given well before the hospitalization.
However in cases of reimbursement claims, the insured sometimes does not bother to
intimate insurers of the claim and submits the documents after a lapse of several days
/ months. Delay in submission of bills could lead to inflation of bills, frauds by insured
/ hospital, etc. It also affects making proper provisions for claims by the insurance
company. Hence insurance companies usually insist on immediate intimation of
claims. The time limit for submission of claim documents is normally fixed at 15 days
from the date of discharge. This enables quick and accurate reporting of claims, and
also enables the insurer to carry out investigations wherever required.
IRDA guidelines stipulate that claim intimation/paper submission beyond stipulated
time should be considered if there is a justifiable reason for the same.
10. Free health check
In individual health policies, a provision is generally available to give some form of
incentive to a claim free policyholder. Many policies provide for reimbursement of the
cost of health check-up at the end of four continuous, claim free policy periods. This
is normally capped at 1% of the average sum insured of the preceding three years.
11. Cumulative bonus
Another form of encouraging a claim free policyholder is providing a cumulative
bonus on the sum insured for every claim free year. This means that the sum
insured gets increased on renewal by a fixed percentage say 5% annually and is
allowed up to a maximum of 50% for ten claim-free renewals. The insured pays the
premium for the original sum insured and enjoys a higher cover.
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As per IRDAI guidelines, cumulative bonus can be provided only on indemnity based
health insurance policies and not benefit policies (except PA policies). The operation
of cumulative bonus should be stated explicitly in the prospectus and the policy
document. Moreover, if a claim is made in any particular year, the cumulative bonus
accrued can only be reduced at the same rate at which it is accrued.
Example
A person takes a policy for Rs. 3 lacs at a premium of Rs. 5,000. In the second year, in
case of no claims in the first year, he gets a sum insured of Rs. 3.15 lacs (5% more than
the previous year) at the same premium of Rs. 5,000. This could go up to Rs. 4.5 lacs
over a ten year claim free renewal.
12. Malus/ Bonus
Just as there is an incentive to keep the health policy free of claims, the opposite is
called a malus. Here, if the claims under a policy are very high, a malus or loading of
premium is collected at renewal.
Keeping in view that health policy is a social benefit policy, so far malus is not charged
on individual health policies.
However, in case of group policies, the malus is charged by way of loading the overall
premium suitably to keep the claim ratio within reasonable limits. On the other hand
if experience is good a discount in premium rate is allowed which is turned as Bonus.
13. No claim discount
Some products provide for a discount on premium for every claim free year instead of
a bonus on sum insured.
14. Co-payment
Co-payment is the concept of the insured bearing a portion of each and every claim
under a health policy. These could be compulsory or voluntary depending on the
product. Co-payment brings in a certain discipline among the insured to avoid
unnecessary hospitalizations.
Some products in the market have co-payment clauses in respect of certain diseases
only, such as major surgeries, or commonly occurring surgeries, or for persons above a
certain age.
15. Deductible / Excess
Also called as excess, in health policies, it is the fixed amount of money the insured is
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required to pay initially before the claim is paid by insurer, for e.g. if the deductible
in a policy is Rs. 10,000, the insured pays first Rs. 10,000 in each insured loss claimed
for. To illustrate, if the claim is for Rs. 80,000, the insured bears the first Rs. 10,000
and the insurer pays Rs. 70,000.
Deductible may also be a specified number of days/hours in case of hospital cash
policies which will apply before any benefits are payable by the insurer.
16. Room rent restrictions
While several products are open ended with the sum insured being the maximum
amount payable in the event of a claim, several products today place a restriction on
the category of room that an insured chooses by linking it to the sum insured.
Experience shows that all expenses of hospitalization follow the room rent, with
higher room rent leading to proportionately higher charges under all heads of
expenses. Hence a person with a sum insured of one lac would be entitled to a room of
Rs 1,000 per day if the policy has a room rent restriction of 1% of sum insured per day.
This clearly indicates that if one prefers luxury treatment at high end hospitals, then
the policy too should be purchased for high sums insured at appropriate premium.
17. Renewability clause
The IRDA guidelines on renewability of health insurance policies makes lifetime
guaranteed renewal of the health policies compulsory. An insurance company can deny
renewal only on the grounds of fraud or misrepresentation or suppression by insured
(or on his behalf) either in obtaining insurance or subsequently in relation thereto.
18. Cancellation clause
The cancellation clause is also standardized by regulatory provisions and an insurance
company may at any time cancel the policy only on grounds of misrepresentation,
fraud, non-disclosure of material fact or non-cooperation by the insured.
A minimum of fifteen days notice in writing by registered A/D to the insured at his
last known address is required. Where a policy is cancelled by the insurer, the
company shall return to the insured a proportion of the last premium corresponding to
the unexpired period of insurance provided no claim has been paid under the policy.
In the event of cancellation by the insured, premium refund is on short period rates,
meaning insured would receive refund of premium for a percentage less than the prorata. If a claim is made no refund would be made.
19. Free look in period
If a customer has bought a new insurance policy and received the policy document and
then finds that the terms and conditions are not what he wanted, what are his
options?
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IRDAI has built into its regulations a consumer-friendly provision that takes care this
problem. The customer can return it and get a refund subject to the following
conditions:
1. This applies only to life insurance policies and to health insurance policies with
tenure of at least one year.
2. The customer must exercise this right within 15 days of receiving the policy
document
3. He has to communicate the same to the insurer in writing
4. The premium refund will be available only if no claim has been made on the
policy and will be adjusted for
a) proportionate risk premium for the period on cover
b) expenses incurred by the insurer on medical examination and
c) stamp duty charges
20. Grace period for renewal
A significant feature of a health insurance policy is maintaining continuity of
insurance. As benefits under a policy are maintained only if policies are renewed
without break, timely renewal is of great importance.
As per IRDAI guidelines, a 30 days grace period is allowed for renewal of individual
health policies.
All continuity benefits are maintained if the policy is renewed within 30 days from
expiry of the earlier insurance. Claims, if any, during the break period will not be
considered.
Insurers may consider granting a longer grace period for renewal, depending on
individual products.
Most of above key clauses, definitions, exclusions have been standardized under
Health Regulations and Health Insurance Standardization guidelines issued by IRDA.
Students are advised to go through the same and also keep themselves updated on
guidelines and circulars issued by IRDA from time to time.
Test Yourself 2
As per IRDA guidelines, a ________ grace period is allowed for renewal of individual
health policies.
I.
II.
III.
IV.
Fifteen days
Thirty days
Forty Five days
Sixty days
303
Summary
a) A health insurance policy provides financial protection to the insured person in the
event of an unforeseen and sudden accident / illness leading to hospitalization.
b) Health insurance products can be classified on the basis of number of people
covered under the policy: individual policy, family floater policy, group policy.
c) A hospitalization expenses policy or Mediclaim reimburses
hospitalization expenses incurred on account of illness / accident.
the
cost
of
d) Pre hospitalization expenses would be relevant medical expenses incurred during

period up to the defined number of days (generally 30 days) prior to hospitalization
and will be considered as part of claim.
e) Post hospitalization expenses would be relevant medical expenses incurred during
period up to the defined number of days (generally 60 days) after hospitalization
and will be considered as part of claim.
f) In a family floater policy, the family consisting of spouse, dependent children and
dependent parents are offered a single sum insured which floats over the entire
family.
g) A hospital daily cash policy provides a fixed sum to the insured person for each day
of hospitalization.
h) Critical illness policy is a benefit policy with a provision to pay a lump sum amount
on diagnosis of certain named critical illness.
i) High Deductible or Top-up Covers offer cover for higher sum insured over and
above a specified chosen amount (called threshold or deductible).
j) The fixed benefits cover provides adequate cover to the insured person and also
helps the insurer to effectively price his policy
k) A Personal Accident (PA) Cover provides compensation in the form of death and
disability benefits due to unforeseen accidents.
l) Out-patient covers provide for medical expenses like dental treatments, vision
care expenses, routine medical examinations and tests etc. that do not require
hospitalization.
m) A group policy is taken by a group owner who could be an employer, an
association, a banks credit card division, where a single policy covers the entire
group of individuals.
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n) Corporate Floater or Buffer Cover amount helps meet excess expenses over and
above the family sum insured.
o) Overseas Mediclaim / Travel Policies provide cover to an individual against
exposure to the risk of accident, injury and sickness during his stay overseas.
p) Corporate Frequent Travelers Plan is an annual policy whereby a corporate takes
individual policies for its executives who frequently make trips outside India.
q) Many terms used in health insurance have been standardized by IRDA by regulation
to avoid confusion especially for the insureds.
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Answer 1
Though the duration of cover for pre-hospitalization expenses would vary from insurer
to insurer and is defined in the policy, the most common cover is for thirty days prehospitalization.
Answer 2
As per IRDA guidelines, a 30 days grace period is allowed for renewal of individual
health policies.
Question 1
Which of the below statement is correct with regards to a hospitalization expenses
policy?
I. Only hospitalization expenses are covered
II. Hospitalization as well as pre and post hospitalization expenses are covered
III. Hospitalization as well as pre and post hospitalization expenses are covered and a
lump sum amount is paid to the family members in the event of insureds death
IV. Hospitalization expenses are covered from the first year and pre and post
hospitalization expenses are covered from the second year if the first year is claim
free.
Question 2
Identify which of the below statement is correct?
I.
II.
III.
IV.
Health
Health
Health
Health
insurance
insurance
insurance
insurance
deals with morbidity

deals with mortality
deals with morbidity as well as mortality
neither deals with morbidity or mortality
Question 3
Which of the below statement is correct with regards to cashless service provided in
health insurance?
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I. It is an environment friendly go-green initiative started by insurance companies to

promote electronic payments so that circulation of physical cash notes can be
reduced and trees can be saved.
II. Service is provided free of cost to the insured and no cash is to be paid as the
payment is made by the Government to the insurance company under a special
scheme
III. All payments made by insured have to be made only through internet banking or
cards as cash is not accepted by the insurance company
IV. The insured does not pay and the insurance company settles the bill directly with
the hospital
Question 4
Identify the correct full form of PPN with regards to hospitals in health insurance.
I.
II.
III.
IV.
Public Preferred Network

Preferred Provider Network
Public Private Network
Provider Preferential Network
Question 5
Identify which of the below statement is incorrect?
I.
II.
III.
IV.
An employer can take a group policy for his employees

A bank can take a group policy for its customers
A shopkeeper can take a group policy for its customers
A group policy taken by the employer for his employees can be extended to include
the family members of the employees
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Answer 1
In a hospitalization expenses policy, hospitalization as well as pre and post
hospitalization expenses are covered.
Answer 2
Health insurance deals with morbidity (rate of incidence of disease).
Answer 3
Under the cashless service, the insured does not pay and the insurance company
settles the bill directly with the hospital.
Answer 4
PPN stands for Preferred Provider Network.
Answer 5
Statements I, II and IV are correct. Statement III is incorrect as a shopkeeper cannot
take group insurance for its customers.
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(9.III) HEALTH INSURANCE UNDERWRITING
This chapter aims to provide you detailed knowledge about underwriting in health
insurance. Underwriting is a very important aspect of any type of insurance and plays
a vital role in issuance of an insurance policy. In this chapter, you will get an
understanding about basic principles, tools, methods and process of underwriting. It
will also provide you the knowledge about group health insurance underwriting.
Learning Outcomes
A.
B.
C.
D.
E.
F.
G.
H.
I.
What is underwriting?
Underwriting - Basic concepts
File and Use guidelines
Other health insurance regulations of IRDAI
Basic principles and tools for underwriting
Underwriting process
Group health insurance
Underwriting of Overseas Travel Insurance
Underwriting of Personal Accident Insurance

a)
b)
c)
d)
e)
Explain what is meant by underwriting

Describe the basic concepts of underwriting
Explain the principles and the various tools followed by underwriters
Appreciate the complete process of underwriting individual health policies
Discuss how group health policies are underwritten
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Look at this Scenario

Manish aged 48 years, working as a software engineer, decided to take a health
insurance policy for himself. He went to an insurance company, where they gave him a
proposal form in which he was required to answer a number of questions related to his
physical build and health, mental health, pre-existing illnesses, his family health
history, habits and so on.
On receipt of his proposal form, he was also required to submit many documents such
as identity and age proof, proof of address and previous medical records. Then they
told him to undergo a health check-up and some medical tests which frustrated him.
Manish, who considered himself a healthy person and with a good income level,
started wondering why such a lengthy process was being followed by the insurance
company in his case. Even after going through all this, the insurance company told him
that high cholesterol and high BP had been diagnosed in his medical tests, which
increased the chances of heart diseases later. Though they offered him a policy, the
premium was much higher than what his friend had paid and so he refused to take the
policy.
Here, the insurance company was following all these steps as part of their
underwriting process. While providing risk coverage, an insurer needs to evaluate risks
properly and also to make reasonable profit. If the risk is not assessed properly and
there is a claim, it will result in a loss. Moreover, insurers collect premiums on behalf
of all insuring persons and have to handle these moneys like a trust.
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A. What is underwriting?
1. Underwriting
Insurance companies try to insure people who are expected to pay adequate premium
in proportion to the risk they bring to the insurance pool. This process of collecting
and analyzing information from a proposer for the risk selection is known as
underwriting. On the basis of information collected through this process, they decide
whether they want to insure a proposer. If they decide to do so, then at what
premium, terms and conditions so as to make a reasonable profit from taking such
risk.
Health insurance is based on the concept of morbidity. Here morbidity is defined as
the likelihood and risk of a person becoming ill or sick thereby requiring treatment or
hospitalization. To a large extent, morbidity is influenced by age (generally being
higher in senior citizens than in young adults) and also increases due to various other
adverse factors, such as being overweight or underweight, personal history of certain
past and present diseases or ailments, personal habits like smoking, current health
status and also occupation of the proposer if it is deemed to be hazardous. Conversely,
morbidity also decreases due to certain favourable factors like lower age, a healthy
lifestyle etc.
Definition
Underwriting is the process of assessing the risk appropriately and deciding the terms
on which the insurance cover is to be granted. Thus, it is a process of risk selection
and risk pricing.
2. Need for underwriting
Underwriting is the backbone of an insurance company as acceptance of the risk
carelessly or for insufficient premiums will lead to insurers insolvency. On the other
hand, being too selective or careful will prevent the insurance company from creating
a big pool so as to spread the risk uniformly. It is therefore critical to strike the
correct balance between risk and business, thereby being competitive and yet
profitable for the organization.
This process of balancing is done by the underwriter, in accordance with the
philosophy, policies and risk hunger of the insurance company concerned. The job of
the underwriter is to classify the risk and decide the terms of acceptance at a proper
price. It is important to note that acceptance of risk is like giving a promise of future
claim settlement to the insured.
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3. Underwriting risk assessment

Underwriting is a process of risk selection which is based upon the characteristics of a
group or individual. Here based on the degree of the risk, the underwriter decides
whether to accept the risk and at what price. Under any circumstances, the process of
acceptance has to be done with fairness and on an equitable basis i.e. every similar
risk should be classified equally without any prejudice. This classification is normally
done through standard acceptance charts whereby every represented risk is quantified
and premiums are calculated accordingly.
Although age affects the chance of sickness as well as death, it must be remembered
that sickness usually comes much before death and could be frequent. Hence, it is
quite logical that the underwriting norms and guidelines are much tighter for health
coverage than death coverage.
Example
An individual who is diabetic has a far higher chance of developing a cardiac or kidney
complication requiring hospitalization than of death, and also health episodes can
happen multiple times during the course of insurance coverage. A life insurance
underwriting guideline might rate this individual as an average risk. However, for
medical underwriting, he would be rated as a higher risk.
In health insurance, there is a higher focus on medical or health findings than financial
or income based underwriting. However, the latter cannot be ignored as there has to
be an insurable interest and financial underwriting is important to rule out any
adverse selection and ensure continuity in health insurance.
4. Factors which affect chance of illness
The factors which affect morbidity (risk of falling ill) should be considered carefully
while assessing risk are as follows:
a) Age: Premiums are charged corresponding with age and the degree of risk. For
e.g. the morbidity premiums for infants and children are higher than young
adults due to increased risk of infections and accidents. Similarly, for adults
beyond the age of 45 years, the premiums are higher, as the probability of an
individual suffering from a chronic ailment like diabetes, a sudden heart
ailment or other such morbidity is much higher.
b) Gender: Women are exposed to additional risk of morbidity during child
bearing period. However, men are more likely to get affected by heart attacks
than women or suffer job related accidents than women as they may be more
involved in hazardous employment.
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c) Habits: Consumption of tobacco, alcohol or narcotics in any form has a direct

bearing on the morbidity risk.
d) Occupation: Extra risk to accidents is possible in certain occupations, e.g.
driver, blaster, aviator etc. Likewise, certain occupations may have higher
health risks, like an X-Ray machine operator, asbestos industry workers, miners
etc.
e) Family history: This has greater relevance, as genetic factors influence
diseases like asthma, diabetes and certain cancers. This does impact the
morbidity and should be taken into consideration while accepting risk.
f) Build: Stout, thin or average build may also be linked to morbidity in certain
groups.
g) Past illness or surgery: It has to be ascertained whether the past illness has
any possibility of causing increased physical weakness or even recur and
accordingly the policy terms should be decided. For e.g. kidney stones are
known to recur and similarly, cataract in one eye increases possibility of
cataract in the other eye.
h) Current health status and other factors or complaints: This is important to
ascertain the degree of risk and insurability and can be established by proper
disclosure and medical examination.
i) Environment and residence: These also have a bearing on morbidity rates.
Test Yourself 1
Underwriting is the process of ___________.
I.
II.
III.
IV.
Marketing insurance products

Collecting premiums from customers
Risk selection and risk pricing
Selling various insurance products
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B. Underwriting Basic concepts

1. Underwriting purpose
We begin with examining the purpose of underwriting. There are two purposes
i. To prevent anti-selection that is selection against the insurer
ii. To classify risks and ensure equity among risks
Definition
The term selection of risks refers to the process of evaluating each proposal for
health insurance in terms of the degree of risk it represents and then deciding
whether or not to grant insurance and on what terms.
Anti-selection (or adverse selection) is the tendency of people, who suspect or know
that their chance of experiencing a loss is high, to seek out insurance eagerly and to
gain in the process.
Example
If insurers were not selective about whom and how they offered insurance, there is a
chance that people with serious ailments like diabetes, high BP, heart problems or
cancer, who knew that they would soon require hospitalization, would seek to buy
health insurance, create losses for the insurer.
In other words, if an insurer did not exercise selection it would be selected against
and suffer losses in the process.
2. Equity among risks
Let us now consider equity among risks. The term Equity means that applicants who
are exposed to similar degrees of risk must be placed in the same premium class.
Insurers would like to have some type of standardization to determine the premiums
to be charged. Thus people posing average risks should pay similar premium while
people who pose higher risks should pay higher premium. They would like
standardization to apply to the vast majority of individuals who pose average risks
while they could devote more time to decide upon and rate risks which are more risky.
a) Risk classification
To usher equity, the underwriter engages in a process known as risk classification
i.e. individuals are categorized and assigned to different risk classes depending on
the degree of risks they pose. There are four such risk classes.
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i. Standard risks
These consist of those people whose anticipated morbidity (chance of falling ill) is
average.
ii. Preferred risks
These are the ones whose anticipated morbidity is significantly lower than average
and hence could be charged a lower premium.
iii. Substandard risks
These are the ones whose anticipated morbidity is higher than the average, but are
still considered to be insurable. They may be accepted for insurance with higher
(or extra) premiums or subjected to certain restrictions.
iv. Declined risks
These are the ones whose impairments and anticipated extra morbidity are so
great that they could not be provided insurance coverage at an affordable cost.
Sometimes an individuals proposal may also be temporarily declined if he or she
has been exposed to a recent medical event, like an operation.
3. Selection process
Underwriting or the selection process may be said to take place at two levels:
At field level
At underwriting department level
Diagram 1: Underwriting or the selection process
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a) Field or Primary level

Field level underwriting may also be known as primary underwriting. It includes
information gathering by an agent or company representative to decide whether an
applicant is suitable for granting insurance coverage. The agent plays a critical role
as primary underwriter. He is in the best position to know the prospective client to
be insured.
A few insurance companies may require that agents complete a statement or a
confidential report, asking for specific information, opinion and recommendations
to be provided by the agent with respect to the proposer.
A similar kind of report, which has been called as Moral Hazard report, may also be
sought from an official of the insurance company. These reports typically cover the
occupation, income and financial standing and reputation of the proposed life.
What is Moral Hazard?
While factors like age, gender, habits etc. refer to the physical hazard of a health
risk, there is something else that needs to be closely watched. This is the moral
hazard of the client which can prove very costly to the insurance company.
An extreme example of bad moral hazard is that of an insured taking health
insurance knowing that he will undergo a surgical operation within a short time but
not disclosing this to the insurer. There is thus a deliberate intention of taking
insurance just to collect a claim.
Indifference towards loss is another example. Because of the existence of
insurance, the insured may be tempted to adopt a careless attitude towards his
health knowing that any hospitalization would be paid by his insurer.
Another type of hazard called morale hazard is also worthy of mention. Here the
insured would not commit any fraud but, knowing that he has a large sum insured,
he would prefer to take the most expensive treatment, staying in the most
expensive hospital room etc. which he would not have done had he not been
insured.
Fraud monitoring and role of agent as primary underwriter

Much of the decision with regard to selection of a risk depends on the facts that
have been disclosed by the proposer in the proposal form. It may be difficult for an
underwriter who is sitting in the underwriting department to know whether these
facts are untrue and have been fraudulently misrepresented with deliberate intent
to deceive.
316
The agent plays a significant role here. He or she is in the best position to ascertain
that the facts that have been represented are true, since the agent has direct and
personal contact with the proposer and can thus monitor if any willful nondisclosure or misrepresentation has been made with an intent to mislead.
b) Underwriting department level
The second level of underwriting is at the department or office level. It involves
specialists and persons who are proficient in such work and who consider all the
relevant data on the case to decide whether to accept a proposal for insurance and
on what terms.
317
C. File and Use guidelines

It must be remembered that every insurer has to create it products before marketing
them and this is also one of the functions of the underwriting department. The IRDAI
has issued guidelines for this which are summarized below:
Every company designs its products keeping in mind the target customers needs,
wants and affordability, underwriting considerations, actuarial pricing, competitive
conditions in the market etc.
Thus we see high number of options for different
categories of customers to choose from even though at the base level, hospitalization
expense indemnity products dominate the Indian market.
Every new product needs approval of IRDA before introduction. The product needs to
be filed with the Regulator under File and Use provisions as mentioned below. Once
introduced, product withdrawal also needs to follow guidelines. Students are advised
to familiarize themselves with all provisions, forms, returns etc. related to File and
Use guidelines.
File and use procedure for health insurance products as per IRDA guidelines:
a) No health insurance product shall be marketed by any insurer unless it has the
prior clearance of the Authority accorded as per the File and Use Procedure.
b) Any subsequent revision or modification of any approved health insurance
product shall also require the prior clearance of the Authority as per the
guidelines issued from time to time.
1.
Any revision or modification in a policy which is approved by the

Authority shall be notified to each policy holder at least three months
prior to the date when such revision or modification comes into effect.
The notice shall set out the reasons for such revision or modification, in
particular the reason for an increase in premium and the quantum of such
increase.
2.
The possibility of a revision or modification of the terms of the policy

including the premium must be disclosed in the prospectus.
c) The File and Use application form has been standardized by IRDAI and has to be
sent along with many annexures including the Database sheet and the Customer
Information Sheet.
The Customer Information Sheet which is to be given to every insured along
with the prospectus and the policy contains details of the cover, the
exclusions, waiting period if any before claim becomes payable, whether the
318
payout will be on reimbursement basis or a fixed amount, renewal conditions

and benefits, details of co-pay or deductible and cancellation conditions etc.
The File and Use application for the prior approval of the Authority shall be
certified by the Appointed Actuary and the CEO of the insurance company and
shall be in such formats and accompanied by such documentation as may be
stipulated by the Authority from time to time.
d) Withdrawal of health insurance product
1.
To withdraw a health insurance product, the insurer shall take prior

approval of the Authority by giving reasons for withdrawal and complete
details of the treatment to the existing -policyholders.
2.
The policy document shall clearly indicate the possibility of withdrawal of

the products in the future and the options that would be available to the
policyholder on withdrawal of the products.
3.
If the existing customer does not respond to the insurers intimation, the
policy shall be withdrawn on the renewal date and the insured shall have
to take a new policy available with the insurer, subject to portability
conditions.
4.
The withdrawn product shall not be offered to the prospective customers.
e) All particulars of any product shall after introduction be reviewed by the

Appointed Actuary at least once a year. If the product is found to be financially
unviable, or is deficient in any particular the Appointed Actuary may revise the
product appropriately and apply for revision under File and Use procedure.
f) Five years after a product has been accorded File and Use approval, the
Appointed Actuary shall review the performance of the product in terms of
morbidity, lapse, interest rates, inflation, expenses and other relevant
particulars as compared to the original assumptions made while designing such
product and seek fresh approval with suitable justifications or modifications of
the earlier assumptions made.
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D. Other Health Insurance regulations of IRDAI

In addition to the File and Use guidelines, the Health Insurance regulations also
require the following:
a. All Insurance Companys shall evolve a Health Insurance Underwriting
Policy which shall be approved by the Board of the Company. The policy
should among other matters prescribe the proposal form in which
prospects may apply for purchasing a Health Policy. Such form should
capture all the information necessary to underwrite a proposal in
accordance with the stated Policy of the Company.
b. The Underwriting Policy shall be filed with the Authority. The Company
retains the right to modify the Policy as it deems necessary, but every
modification shall also be filed with the Authority.
c. Any proposal for health insurance may be accepted or denied wholly
based on the Board approved underwriting policy. A denial of a proposal
shall be communicated to the prospect in writing, recording the reasons
for denial.
d. The insured shall be informed of any underwriting loading charged over
and above the premium and the specific consent of the policyholder for
such loadings shall be obtained before issuance of a policy.
e. If an insurance company requires any further information, such as
change of occupation, at any subsequent stage of a policy or at the time
of its renewal, it shall prescribe standard forms to be filled up by the
insured and shall make these forms part of the policy document, cl early
state the events which will require the submission of such information and the
conditions applicable in such event.
f. Insurers may devise mechanisms or incentives to reward policyholders for early
entry, continued renewals, favourable claims experience etc. with the same
insurer and disclose upfront such mechanism or incentives in the prospectus
and the policy document, as approved under File and Use guidelines.
Guidelines regarding portability of health policies

IRDAI has brought out very clear guidelines regarding portability of life and
health insurance policies. These are enumerated below:
1. Portability shall be allowed in the following cases:
a. All individual health insurance policies issued by non-life insurance
companies including family floater policies
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b. Individual members, including the family members covered under any

group health insurance policy of a non-life insurance company shall
have the right to migrate from such a group policy to an individual
health insurance policy or a family floater policy with the same insurer.
Thereafter, he/she shall be accorded the right for portability at next
renewal.
2. Portability can be opted by the policyholder only at renewal and not during
currency of the policy.
3. A policyholder wanting to port his policy to another insurance company has
to apply to such insurance company, to port the entire policy along with all
the members of the family, if any, at least 45 days before the premium
renewal date of the existing policy.
4. The new insurer may or may not offer portability if policyholder fails to
make an application in the IRDAI-prescribed form at least 45 days before
the premium renewal date.
5. On receipt of such intimation, the insurance company shall furnish the
applicant, the Portability Form as set out in Annexure 'I' to the IRDAI
guidelines together with a proposal form and relevant product literature on
the various health insurance products which could be offered.
6. The policyholder shall fill in the portability form along with proposal form
and submit the same to the insurance company.
7. On receipt of the Portability Form, the insurance company shall address the
existing insurance company seeking necessary details of medical history
and claim history of the concerned policyholder. This shall be done through
the web portal of the IRDA.
8. The insurance company receiving such a request on portability shall furnish
the requisite data in the data format for porting insurance policies
prescribed in the web portal of IRDA within 7 working days of the receipt of
the request.
9. In case the existing insurer fails to provide the requisite data in the data
format to the new insurance company within the specified time frame, it
shall be viewed as violation of directions issued by the IRDA and the insurer
shall be subject to penal provisions under the Insurance Act, 1938.
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10. On receipt of the data from the existing insurance company, the new
insurance company may underwrite the proposal and convey its decision to
the policyholder in accordance with the Regulation 4 (6) of the IRDA
(Protection of Policyholders' interest) Regulations, 2002.
11. If on receipt of data within the above time frame, the insurance company
does not communicate its decision to the requesting policyholder within 15
days in accordance with its underwriting policy as filed by the company
with the Authority, then the insurance company shall not retain the right to
reject such proposal and shall have to accept the proposal.
12. Where the outcome of acceptance of portability is still awaited from the
new insurer on the date of renewal
a.
the existing policy shall be allowed to be extended, if requested by the

policyholder, for the short period by accepting a pro- rate premium for
such short period, which shall be of at least one month and
b.
the existing policy shall not be cancelled until such time a confirmed
policy from new insurer is received or at the specific written request
of the insured
c.
the new insurer, in all such cases, shall reckon the date of the
commencement of risk to match with date of expiry of the short
period, wherever relevant.
d.
if for any reason the insured intends to continue the policy further
with the existing insurer, it shall be allowed to continue by charging a
regular premium and without imposing any new condition.
13. In case the policyholder has opted short period extension as stated above
and there is a claim, then existing insurer may charge the balance premium
for remaining part of the policy year provided the claims is accepted by the
existing insurer. In such cases, policyholder shall be liable to pay the
premium for the balance period and continue with existing insurer for that
policy year.
14. In order to accept a policy which is porting-in, insurer shall not levy any
additional loading or charges exclusively for the purpose of porting.
15. No commission shall be payable to any intermediary on the acceptance of a
ported policy.
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16. For any health insurance policy, waiting period already elapsed under the
existing policy with respect to pre-existing diseases and time bound
exclusions shall be taken into account and reduced to that extent under
the newly ported policy.
Note 1: In case the waiting period for a certain disease or treatment in the
new policy is longer than that in the earlier policy for the same
disease or treatment, the additional waiting period should be
clearly explained to the incoming policy holder in the portability
form to be submitted by the porting policyholder.
Note 2: For group health insurance policies, the individual member's shall
be given credit as stated above based on the number of years of
continuous insurance cover, irrespective of, whether the previous
policy had any pre-existing disease exclusion/time bound
exclusions.
17. The portability shall be applicable to the sum insured under the previous
policy and also to an enhanced sum insured, if requested by the insured, to
the extent of cumulative bonus acquired from the previous insurer(s) under
the previous policies.
For e.g. - If a person had a SI of Rs. 2 lakhs and accrued bonus of Rs. 50,000
with insurer A; when he shifts to insurer B and the proposal is accepted,
insurer B has to offer him SI of Rs. 2.50 lakhs by charging the premium
applicable for Rs. 2.50 lakhs. If insurer B has no product for Rs. 2.50 lakhs,
insurer B would offer the nearest higher slab say Rs. 3 lakhs to insured by
charging premium applicable for Rs. 3 lakhs SI. However, portability would
be available only up to Rs 2.50 lakhs.
18. Insurers shall clearly draw the attention of the policyholder in the policy
contract and the promotional material like prospectus, sales literature or
any other documents in any form whatsoever, that:
a. all health insurance policies are portable;
b. policyholder should initiate action to approach another insurer, to
take advantage of portability, well before the renewal date to
avoid any break in the policy coverage due to delays in acceptance
of the proposal by the other insurer.
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E. Basic principles of insurance and tools for underwriting

1. Basic principles relevant to underwriting
In any form of insurance, whether it is life insurance or general insurance, there are
certain legal principles which operate along with acceptance of risks. Health insurance
is equally governed by these principles and any violation of the principles results in the
insurer deciding to avoid the liability, much to the dissatisfaction and frustration of
the policyholders. These core principles are:
1. Utmost good faith (Uberrima fides) and the insurable interest
2. Tools for underwriting
These are the sources of information for the underwriter and the basis on which the
risk classification is done and premiums finally decided. The following are the key
tools for underwriting:
a) Proposal form
This document is the base of the contract where all the critical information
pertaining to the health and personal details of the proposer (i.e. age, occupation,
build, habits, health status, income, premium payment details etc.) are collected.
This could range from a set of simple questions to a fully detailed questionnaire
according to product and the needs/policy of the company, so as to ensure that all
material facts are disclosed and the coverage is given accordingly. Any breach or
concealment of information by the insured shall render the policy void.
b) Age proof
Premiums are determined on the basis of the age of the insured. Hence it is
imperative that the age disclosed at the time of enrollment is verified through
submission of an age proof.
Example
In India, there are many documents which can be considered as age proof but all of
them are not legally acceptable. Mostly valid documents are divided into two broad
categories. They are as follows:
a) Standard age proof: Some of these include school certificate, passport,
domicile certificate, PAN card etc.
b) Non-standard age proof: Some of these include ration card, voter ID, elders
declaration, gram panchayat certificate etc.
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c) Financial documents
Knowing the financial status of the proposer is particularly relevant for benefit
products and to reduce the moral hazard. However, normally the financial
documents are only asked for in cases of
a) Personal accident covers or
b) high sum assured coverage or
c) when the stated income and occupation as compared to the coverage
sought, show a mismatch.
d) Medical reports
Requirement of medical reports is based on the norms of the insurer, and usually
depends upon the age of the insured and sometimes on the amount of cover opted.
Some replies in the proposal form may also contain some information that leads to
medical reports being asked for.
e) Reports of sales personnel
Sales personnel can also be seen as grassroots level underwriters for the company
and the information given by them in their report could form an important
consideration. However, as the sales personnel have an incentive to generate more
business, there is a conflict of interest which has to be watched out for.
Test Yourself 2
The principle of utmost good faith in underwriting is required to be followed by
___________.
I.
II.
III.
IV.
The insurer
The insured
Both the insurer and the insured
The medical examiners
Test Yourself 3
Insurable interest refers to ____________.
I.
II.
III.
IV.
Financial interest of the person in the asset to be insured

The asset which is already insured
Each insurers share of loss when more than one company covers the same loss
The amount of the loss that can be recovered from the insurer
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F. Underwriting process
Once the required information is received, the underwriter decides the terms of the
policy. The common forms used for underwriting health insurance business are as
below:
1. Medical underwriting
Medical underwriting is a process in which medical reports are called for from the
proposer to determine the health status of an individual applying for health insurance
policy. The health information collected is then evaluated by the insurers to
determine whether to offer coverage, up to what limit and on what conditions and
exclusions. Thus medical underwriting can determine the acceptance or declining of a
risk and also the terms of cover.
However, medical underwriting involves high costs in terms of receiving and examining
medical reports. Also, when insurers use a high degree of medical underwriting, they
are blamed for cream-skimming (accepting only the best kind of risk and denying
others). It also causes frustration among prospective clients and reduces the number
of people willing to insure with those insurers as they do not want to provide the
requisite information and detail and to undergo the required tests.
Health status and age are important underwriting considerations for individual health
insurance. Also current health status, personal and family medical history enable an
underwriter to determine presence of any pre-existing diseases or conditions and
eventually the probability of future health problems that may require hospitalization
or surgical intervention.
Further proposal forms are designed in a manner to elicit information about past
treatments taken, hospitalizations and surgeries undergone. This helps an underwriter
to evaluate the possibility of recurrence of an earlier ailment, its impact on current or
future health status or future complications. Some diseases for which the proposer is
taking medicines only may soon require hospitalization any time soon or recur.
Example
Medical conditions like hypertension, overweight/obesity and raised sugar levels have
a high probability of future hospitalization for diseases of the heart, kidney and the
nervous system. So, these conditions should be carefully considered while assessing
the risk for medical underwriting.
Since adverse changes in health status generally occur post 40 years, mainly due to
normal ageing process, insurers do not require any medical examination or tests of the
proposer earlier than the age of 45 years (some insurers could raise this requirement
326
to 50 or 55 years too). Medical underwriting guidelines may also require a signed

declaration of the proposers health status by his/her family physician.
In the Indian health insurance market, the key medical underwriting factor for
individual health insurance is the age of the person. Persons above the age of 45-50
years, enrolling for the first time are normally required to undergo specified
pathological investigations to assess health risk profile and to obtain information on
their current health status. Such investigations also provide an indication of
prevalence of any pre-existing medical conditions or diseases.
Example
Drugs, alcohol and tobacco consumption may be difficult to detect and seldom
declared by the proposer in the proposal form. Non-disclosure of these poses a major
challenge in underwriting of health insurance. Obesity is another problem which
threatens to become a major public health problem and underwriters need to develop
underwriting tools to be able to adequately price the complications arising out of the
same.
2. Non-medical underwriting
Most of the proposers which apply for health insurance do not need medical
examination. If it could be known with a fair degree of accuracy that only one-tenth or
less of such cases will bring the adverse results during medical examination, insurers
could dispense with medical examination in majority of the cases.
Even, if the proposer were to disclose all material facts completely and truthfully and
the same were checked by agent carefully, then also the need for medical
examination could have been much less. In fact, a slight increase in the claims ratio
can be accepted if there is savings in the costs of medical checkup and other expenses
and also as it will reduce the inconvenience to the proposer.
Therefore, insurance companies are coming up with some medical policies where the
proposer is not required to undergo any medical examination. In such cases,
companies usually create a medical grid to indicate at what age and stage should a
medical underwriting be done, and therefore these non- medical limits are carefully
designed so as to strike a proper balance between business and risk.
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Example
If an individual has to take health insurance coverage quickly without going through a
long process of medical examinations, waiting periods and processing delays, then he
can opt for a non-medical underwriting policy. In a non-medical underwriting policy,
premium rates and sum assured are usually decided on the basis of answers to a few
health questions mostly based on age, gender, smoking class, build etc. The process is
speedy but the premiums may be relatively higher.
3. Numerical rating method
This is a process adopted in underwriting, wherein numerical or percentage
assessments are made on each component of the risk.
Factors like age, sex, race, occupation, residence, environment, build, habits, family
and personal history are examined and scored numerically based on pre-determined
criteria.
4. Underwriting decisions
The underwriting process is completed when the received information is carefully
assessed and classified into appropriate risk categories. Based on the above tools and
his judgment, the underwriter classifies the risk into the following categories:
a) Accept risk at standard rates
b) Accept risk at an extra premium (loading), though it may not be practiced in all
companies
c) Postpone the cover for a stipulated period/term
d) Decline the cover
e) Counter offer (either restrict or deny part of the cover)
f) Impose a higher deductible or Co-pay
g) Levy permanent exclusion(s) under the policy
If any illness is permanently excluded, it is endorsed on the policy certificate. This
becomes an additional exclusion apart from the standard policy exclusion and shall
form the part of the contract.
Expert individual risk assessment by underwriters is vital to insurance companies as it
keeps the insurance system in balance. Underwriting enables insurers to group
together those with the same level of expected risk and to charge them the same
premium for the protection they choose. The benefit for the policyholder is
availability of insurance at a fair and competitive price whereas the benefit for an
insurer is the ability to maintain the experience of its portfolio in line with the
morbidity assumptions.
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5. Use of general or standard exclusions

The majority of policies impose exclusions that apply to all their members. These are
known as standard exclusions or sometimes referred to as general exclusions. Insurers
limit their exposure by the implementation of standard exclusions.
The same have been discussed in earlier chapter.
Test Yourself 4
Which of the following statements about medical underwriting is incorrect?
I. It involves high cost in collecting and assessing medical reports.
II. Current health status and age are the key factors in medical underwriting for
health insurance.
III. Proposers have to undergo medical and pathological investigations to assess their
health risk profile.
IV. Percentage assessment is made on each component of the risk.
V.
Diagram 1: Underwriting process
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G. Group health insurance

1. Group health insurance
Group insurance is underwritten mainly on the law of averages, implying that when all
members of a standard group are covered under a group health insurance policy, the
individuals constituting the group cannot anti-select against the insurer. Thus, while
accepting a group for health insurance, the insurers take into consideration the
possibility of existence of a few members in the group who may have severe and
frequent health problems.
Underwriting of group health insurance requires analyzing the characteristics of the
group to evaluate whether it falls within the insurance companys underwriting
guidelines as well as the guidelines laid down for group insurance by the insurance
regulators.
Standard underwriting process for group health insurance requires evaluating the
proposed group on the following factors:
a) Type of group
b) Group size
c) Type of industry
d) Eligible persons for coverage
e) Whether entire group is being covered or there is an option for members to opt
out
f) Level of coverage whether uniform for all or differently
g) Composition of the group in terms of sex, age, single or multiple locations,
income levels of group members, employee turnover rate, whether premium
paid entirely by the group holder or members are required to participate in
premium payment
h) Difference in healthcare costs across regions in case of multiple locations
spread in different geographical locations
i) Preference of the group holder for administration of the group insurance by a
third party administrator (of his choice or one selected by the insurer) or by
the insurer itself
j) Past claims experience of the proposed group
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Example
A group of members working in mines or factories is at higher health risk than a group
of members working in air-conditioned offices. Also the nature of diseases (thereby
claims) are also likely to be quite different for both groups. Therefore, the insurer
will price the group health insurance policy accordingly in both the cases.
Similarly to avoid adverse selection in case of groups with high turnover such as IT
companies, insurers can introduce precautionary criteria requiring employees to serve
their probationary period before becoming eligible for insurance.
Due to highly competitive nature of group health insurance business, insurers allow
substantial flexibility and customization in benefits of the group insurance plans. In
employer-employee group insurance plans, the benefits design is usually developed
over time and used as an employee retention tool by the human resources department
of the employer. Often, the flexibility is the result of competition among insurers to
match or improve the benefits of the existing group insurance plan given by another
insurer to capture and shift business.
2. Underwriting other than employer- employee groups
Employer-employee groups are traditionally the most common groups offered group
health insurance. However, as health insurance gains acceptance as an effective
vehicle of financing healthcare expenditure, different types of group formations have
now developed. In such a scenario, it is important for group health insurance
underwriters to take into consideration the character of the group composition while
underwriting the group.
In addition to employee-employer groups, insurers have provided group health
insurance coverage to varied type of groups such as: labour unions, trusts and
societies, multiple-employer groups, franchisee dealers, professional associations,
clubs and other brotherhood organizations.
Governments in different countries have been buyers of group health insurance
coverage for poorer sections of the society. In India, governments both at the central
and state level have aggressively been sponsoring group health insurance schemes for
the poor e.g. RSBY, Yeshaswini etc.
Though basic underwriting considerations for such diverse groups are similar to
generally accepted group underwriting factors, additional aspects include:
a) Size of the group (small group size may suffer from frequent changes)
b) Different levels of healthcare cost in different geographical regions
c) Risk of adverse selection in case all group constituents do not participate in the
group health insurance plan
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d) Continuation of members in the group in the policy

There has been a growth in irregular types of group formations just to take advantage
of such group health insurance benefits at cheap prices, called groups of
convenience. The insurance regulator IRDA has therefore issued group insurance
guidelines with a view to regulate the approach to be adopted by insurers in dealing
with various groups. Such non-employer groups include:
a) Employer welfare associations
b) Holders of credit cards issued by a specific company
c) Customers of a particular business where insurance is offered as an add-on
benefit
d) Borrowers of a bank and professional associations or societies
The rationale of the group insurance guidelines is to restrict formation of groups for
the sole purpose of availing insurance with advantage of flexible design, coverage of
benefits not available on individual policies and cost savings. It has been observed that
such groups of convenience have often led to adverse selection against the insurers
and eventually high claim ratios. Group insurance guidelines by the regulatory
authority, thus, help in responsible market conduct by the insurers. They instill
discipline in underwriting by insurance companies and also in canvassing group
insurance schemes by setting up administration standards for group schemes.
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H. Underwriting of Overseas Travel Insurance

Since the main cover under Overseas Travel Insurance policies is the health cover, the
underwriting would follow the pattern for health insurance in general.
The premium rating and acceptance would as per individual company guidelines but a
few important considerations are given below:
1. Premium rate would depend on the age of the proposer and the duration of
foreign travel.
2. As medical treatment is costly overseas, the premium rates are normally much
higher compared to domestic health insurance policies.
3. Even among the foreign countries, USA and Canada premium is the highest.
4. Care should be taken to rule out the possibility of a proposer using the policy to
take medical treatment abroad and hence the existence of any pre-existing
disease must be carefully considered at the proposal stage.
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I. Underwriting of Personal Accident Insurance

The underwriting considerations for personal accident policies are discussed below:
Rating
In personal accident insurance, the main factor considered is the occupation of the
insured. Generally speaking exposure to personal accidents at home, on the street etc.
is the same for all persons. But the risks associated with profession or occupation
varies in accordance with the nature of work performed. For example, an office
manager is less exposed to risk at work than a civil engineer working at a site where a
building is being constructed.
It is not practical, to fix a rate for each profession or occupation. Hence, occupations
are classified into groups, each group reflecting, more or less, similar risk exposure.
The following system of classification is simple and found to be feasible in practice.
Individual companies may have their own basis of classification.
Classification of Risk
On the basis of occupation, the risks associated with the insured person may be
classified into three groups:
Risk group I
Accountants, Doctors, Lawyers, Architects, Consulting Engineers, Teachers,
Bankers, persons engaged in administration functions, persons primarily
engaged in occupations of similar hazards.
Risk group II
Builders, Contractors and Engineers engaged in superintending functions only,
Veterinary Doctors, paid drivers of motor cars and light motor vehicles and
persons engaged in occupation of similar hazards.
All persons engaged in manual labour (except those falling under Group III),
cash carrying employees, garage and motor Mechanics, Machine operators,
Drivers of trucks or lorries and other heavy vehicles, professional athletes and
sportsmen, woodworking Machinists and persons engaged in occupations of
similar hazards.
Risk group III

Persons working in underground mines, explosives magazines, workers involved
in electrical installation with high tension supply, Jockeys, circus personnel,
persons engaged in activities like racing on wheels or horseback, big game
hunting, mountaineering, winter sports, skiing, ice hockey, ballooning, hang
gliding, river rafting, polo and persons engaged in occupations / activities of
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similar hazard.
Risk groups are also known in the form of Normal, Medium and High
respectively.
Age Limits
The minimum and maximum age for being covered and renewed varies from company
to company. Generally a band of 5 years to 70 years is the norm. However, in case of
persons who already have a cover, policies may be renewed after they complete 70
years but up to the age of 80 subject to a loading of the renewal premium.
No medical examination is usually required for renewal or fresh cover.
Medical Expenses
The medical expenses cover is as follows:
A personal accident policy can be extended by endorsement, on payment of

extra premium to cover medical expenses incurred by the insured in connection
with the accidental bodily injury.
These benefits are in addition to the other benefits under the policies.
It is not necessary that person has to be hospitalised.
War and Allied Risks

War risk cover may be covered to Indian personnel / experts working in foreign
countries on civilian duties with additional premium.
o
P.A. policies issued during peace time or normal period would be at say 50
percent extra over the normal rate (i.e. 150 percent of the normal rate.)
P.A. policies issued during abnormal/ apprehensive period (i.e. during the
period when warlike conditions have already occurred or are imminent in
foreign country/i.e. where the Indian personnel are working on civilian duties)
at say 150 percent extra over the normal rate (i.e. 250 percent of the normal
rate)
The Proposal Form

The form elicits information on the following:
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Personal details
Physical condition
Habits and pastimes
Other or previous insurances
Previous accidents or illness
Selection of benefits and sum insured
Declaration
The above required details can be explained as follows:
Personal details relate to, inter alia, age, height and weight, full description of
occupation and average monthly income.
Age will show whether the proposer is within the limits of age for entrants for
the policy desired. Weight and height should be compared with a table of
average weight for sex, height and age and further investigation would be
made if the proposer is say 15 percent or more over or under the average.
Physical condition details relate to any physical infirmity or defect, chronic

diseases etc.
Proposers who have lost a limb or the sight of an eye may only be accepted on
special terms in approved cases. They constitute abnormal risks because they
are less able to avoid certain types of accidents and in view of the fact that if
the remaining arm or leg is injured or the sight or the remaining eye is
affected, the degree and length of disablement is likely to be much greater
than normal.
Diabetes may retard recovery as the wound may not heal quickly and the
disablement may be unduly prolonged. The medical history of the proposer
must be examined in order to determine whether and to what extent injuries
or illnesses may affect the future accident risks. There are many complaints of
such an obviously serious nature as to make the risk uninsurable, e.g. valvular
disease of the heart.
Hazardous pastimes like mountaineering, polo, motor racing, acrobatics etc.,

require extra premium.
Sum Insured
The sum insured in a personal accident policy has to be fixed with caution, as they are
benefit policies and not subject to strict indemnity. Care should be taken to consider
income derived through gainful employment. In other words, income which will not
be affected by accident to the proposer should not be considered while determining
the sum insured.
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As practices of fixing the S.I varies among insures/underwriters, the exact amount for
which the cover could be granted depends on the underwriters. However the general
practice that the cover granted should not exceed the equivalent of 72 months / 6
years earning of the insured.
This restriction is not strictly applied if the policy is for capital benefits only. For
temporary total disablement cover however it should not happen that in the event of
compensation payable, the same is disproportionate to his earnings during the same
period. If the cover is for weekly compensation for TTD, the sum insured usually does
not exceed twice his/her annual income.
While giving cover to persons who are not gainfully employed e.g. housewives,
students etc. the insurers make sure that they provide for capital benefits only and
that no weekly compensation is provided for.
Family Package Cover
For children and non-earning spouse the cover is limited to death and permanent
disablement (total or partial). However, based on individual companys norms the
Table of Benefits may be considered. Some Companies allow TTD cover to non-earning
spouse also up to a particular limit.
A discount of 5 percent is usually granted on the gross premium.
Group Policies
A group discount is allowed off the premium, if the number of insured person exceeds
a certain number say 100. Group policy however may be issued when number is
smaller, say 25 but without any discount.
Normally, policies on unnamed basis are issued only to very valued clients, where the
identity of the member is clearly ascertainable beyond doubt.
Group discount criteria
Group policies should be issued only in respect of the named groups. For the purpose
of availing of group discount and other benefits, the proposed Group should fall
clearly under any one of the following categories:
Employer employee relationship including dependents of the employee
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Pre identified segments / groups where the premium is to be paid by the

State / Central Governments
Members of a registered co-operative society
Members of registered service clubs
Holders of credit card of banks / Diners / Master / Visa
Holders of deposit certificates issued by banks / NBFCs
Shareholders of banks / public limited companies
In case of proposals relating to any further category different from the above
categories, they may be deliberated and decided upon by the technical department of
the respective insurers.
No group discount can be offered on the anticipated group size. Group discount is to
be considered and worked out only on the actual number of members registered in the
Group at the time of taking out the policy. It can be reviewed at renewals.
Sum insured
The sum insured may be fixed for specific amounts separately for each insured person
or it may be linked to emoluments payable to the insured persons.
The principle of All or None applies in a group insurance. Additions and deletions are
made thereto with pro rata additional premium or refund.
Premium
Varying rates of premium are applicable to named employees as per the classification
of risks and the benefits selected. Thus rates will vary according to the occupation of
persons covered.
Example
The same rate will apply to well defined groups of employee all of whom, broadly
speaking follow the same type of occupation.
In respect of unnamed employees the employer is required to declare the number of
employees in each classification based on authentic records maintained by him.
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Premium rates for named member of an association, clubs etc. apply according to the
classification of risk.
When the membership is of a general nature and not restricted to any particular
occupation, underwriters use their discretion in applying the rates.
On-duty covers
The cover provided during the on-duty hours is as follows:
If P.A cover is required only for the restricted hours of duty (and not for 24
hours a day), a reduced premium say 75 percent of the appropriate premium is
charged.
The cover applies to accident to the employees arising out of and in the course
of employment only.
Off-duty covers
If cover is required only for the restricted hours, when the employee is not at work
and/or not on official duty, the reduced premium of say 50 percent of the appropriate
premium may be charged.
Exclusion of death cover
It is possible to issue group P.A. policies excluding the death benefit, subject to
individual company guidelines.
Group discount and Bonus/Malus
Since a large number of persons are covered under one policy, there is less
administrative work and expense. Besides, usually all members of the group will be
insured and there will be no adverse selection against the insurers. Hence, a discount
in premium is allowed, according to a scale.
Rating under renewal of group policies is determined with reference to the claims
experience.
Favourable experience is rewarded with a discount in the renewal premium

(bonus)
Adverse experience is penalised by loading of renewal premium (malus),

according to a scale
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Normal rates will apply for renewal if the claims experience is, say, 70 percent
Proposal form
It is customary to dispense the forms for completion by the members and to

have one document only, completed by the insured.
He is required to make a declaration that no member suffers from a physical

infirmity or defect that would render his participation unacceptable.
Sometimes even this precaution is waived, it being understood and/or made

clear by endorsement that disability prior to the commencement of cover and
also any cumulative effect as a result of such disability stand excluded.
However the practice may vary among the companies.
Test Yourself 5
1) In a group health insurance, any of the individual constituting the group could antiselect against the insurer.
2) Group health insurance provides coverage only to employer-employee groups.
I.
II.
III.
IV.
Statement 1
Statement 2
Statement 1
Statement 1
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is true and statement 2 is false

is true and statement 1 is false
and statement 2 are true
and statement 2 are false
Information
As part of the risk management process, the underwriter uses two methods of
transferring his risks especially in case of large group policies:
Coinsurance: This refers to the acceptance of a risk by more than one insurer.
Normally, this is done by way of allocating a percentage of the risk to each insurer.
Thus the policy may be accepted by two insurers say, Insurer A with a 60% share and
Insurer B with a 40% share. Normally, insurer A would be the lead insurer handling all
matters relating to the policy, including issuance of the policy and settlement of
claims. Insurer B would reimburse insurer A for 40% of the claims paid.
Reinsurance: The insurer accepts risks of various types and sizes. How can he protect
his various risks? He does this by re-insuring his risks with other insurance companies
and this is called reinsurance. Reinsurers therefore accept risks of insurers either by
way of standing arrangements called treaties or on a case to case basis called
facultative reinsurance. Reinsurance is done word-wide and hence it spreads risk far
and wide.
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Summary
a) Health insurance is based on the concept of morbidity which is defined as the risk
of a person falling ill or sick.
b) Underwriting is the process of risk selection and risk pricing.
c) Underwriting is required to strike a proper balance between risk and business
thereby maintaining the competitiveness and yet profitability for the organisation.
d) Some of the factors which affect a persons morbidity are age, gender, habits,
occupation, build, family history, past illness or surgery, current health status and
place of residence.
e) The purpose of underwriting to prevent adverse selection against the insurer and
also ensure proper classification and equity among risks.
f) The agent is the first level underwriter as he is in the best position to know the
prospective client to be insured.
g) The core principles of insurance are: utmost good faith, insurable interest,
indemnity, contribution, subrogation and proximate cause.
h) The key tools for underwriting are: proposal form, age proof, financial documents,
medical reports and sales reports.
i) Medical underwriting is a process which is used by the insurance companies to
determine the health status of an individual applying for health insurance policy.
j) Non-medical underwriting is a process where the proposer is not required to
undergo any medical examination.
k) Numerical rating method is a process adopted in underwriting, wherein numerical
or percentage assessments are made on each aspect of the risk.
l) The underwriting process is completed when the received information is carefully
assessed and classified into appropriate risk categories.
m) Group insurance is mainly underwritten based on the law of averages, implying
that when all members of a standard group are covered under a group health
insurance policy, the individuals constituting the group cannot anti-select against
the insurer.
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Answer 1
Underwriting is the process of risk selection and risk pricing.
Answer 2
The principle of utmost good faith in underwriting has to be followed by both the
insurer and the insured.
Answer 3
Insurable interest refers to the pecuniary or the financial interest of a person in the
asset he is going to get insured and can suffer financial loss in the event of any
damage to such asset.
Answer 4
Percentage and numerical assessment is made on each component of the risk in
numerical rating method, and not medical underwriting method.
Answer 5
In a group health insurance, when all members of a group are covered under a group
health insurance policy, the individuals constituting the group cannot anti-select
against the insurer.
In addition to employee-employer groups, insurers have provided group health
insurance coverage to varied type of groups such as: labour unions, trusts and
societies, professional associations, clubs and other fraternal organisations.
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Question 1
Which of the following factor does not affect the morbidity of an individual?
I.
II.
III.
IV.
Gender
Spouse job
Habits
Residence location
Question 2
According to the principle of indemnity, the insured is paid for __________.
I.
II.
III.
IV.
The actual losses to the extent of the sum insured

The sum insured irrespective of the amount actually spent
A fixed amount agreed between both the parties
The actual losses irrespective of the sum assured
Question 3
The first and the primary source of information about an applicant, for the
underwriter is his ________________.
I.
II.
III.
IV.
Age proof documents

Financial documents
Previous medical records
Proposal form
Question 4
The underwriting process is completed when ___________________.
I. All the critical information related to the health and personal details of the
proposer are collected through the proposal form
II. All the medical examinations and tests of the proposer are completed
III. The received information is carefully assessed and classified into appropriate risk
categories
IV. The policy is issued to the proposer after risk selection and pricing.
Question 5
Which of the following statements about the numerical rating method is incorrect?
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I. Numerical rating method provides greater speed in the handling of a large business
with the help of trained personnel.
II. Analysis of difficult or doubtful cases is not possible on the basis of numerical
points without medical referees or experts.
III. This method can be used by persons without any specific knowledge of medical
science.
IV. It ensures consistency between the decisions of different underwriters.

Answer 1
The morbidity of an individual is not affected by their spouses job, though their own
occupation is one of the important factors which can affect their morbidity.
Answer 2
According to the principle of indemnity, insured is compensated for the actual costs or
losses, but to the extent of the sum insured.
Answer 3
The primary source of information about an applicant, for the underwriter is his
proposal form or application form, in which all the critical information related to the
health and personal details of the proposer are collected.
Answer 4
The underwriting process is completed when the received information is carefully
assessed and classified into appropriate risk categories.
Answer 5
The correct answer is II.
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A more careful analysis of difficult or doubtful cases is made possible by numerical

rating method because past experience with reference to the doubtful points is
expressed numerically in terms of a known standard and shadings.
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9.IV HEALTH INSURANCE CLAIMS
In this chapter we will discuss about claim management process in health
insurance, documentation required and the process of claim reserving. Apart
from this we will also look into claims management under personal accident
insurance and understand the role of TPAs.
Learning Outcomes
A.
B.
C.
D.
E.
F.
G.
Claims management in insurance

Management of health insurance claims
Documentation in health insurance claims
Claims reserving
Role of third party administrators (TPA)
Claims management personal accident
Claims management- Overseas travel insurance

a) Explain the various stakeholders in insurance claims
b) Describe how health insurance claims are managed
c) Discuss the various documents required for settlement of health insurance
claims
d) Explain how reserves for claims are provided for by insurers
e) Discuss personal accident claims
f) Understand the concept and role of TPAs
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A. Claims management in insurance

It is very well understood that insurance is a promise and the policy is a
witness to that promise. The occurrence of an insured event leading to a
claim under the policy is the true test of that promise. How well an insurer
performs is evaluated by how well it keeps its claims promises. One of the key
rating factors in insurance is the claims paying ability of the insurance company.
1. Stakeholders in claim process
Before we look in detail at how claims are managed, we need to understand
who are the interested parties in the claims process.
Diagram 1: Stakeholders in claim process
Customer
The person who buys insurance is the first stakeholder and

receiver of the claim.
Owners
Owners of the insurance company have a big stake as the

payers of the claims. Even if the claims are met from the
policy holders funds, in most cases, it is they who are
liable to keep the promise.
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Underwriters
Underwriters within an insurance company and across all

insurers have the responsibility to understand the claims
and design the products, decide policy terms, conditions
and pricing etc.
Regulator
The regulator (Insurance Regulatory and Development

Authority of India) is a key stakeholder in its objective to:
Maintain order in the insurance environment
Protect policy holders interest
Ensure long term financial health of insurers.
Third Party
Administrators
Service intermediaries known as Third Party Administrators,

who process health insurance claims.
Insurance agents
/ brokers
Insurance agents / brokers not only sell policies but are

also expected to service the customers in the event of a
claim.
Providers /
Hospitals
They ensure that the customer gets a smooth claim

experience, especially when the hospital is on the panel of
the TPA the Insurer to provide cashless hospitalization.
Thus managing claims well means managing the objectives of the each of these
stakeholders related to the claims. Of course, it may happen that some of these
objectives can conflict with each other.
2. Role of claims management in insurance company
As per industry data- the health insurance loss ratio of various insurers ranges
from 65% to above 120%, with major part of the market operating at above 100%
loss ratio. Most companies are making losses in health insurance business.
This means that there is a great need to adopt sound underwriting practices and
efficient management of claims to bring better results to the company and the
policyholders.
Test Yourself 1
Who among the following is not a stakeholder in insurance claim process?
I.
II.
III.
IV.
Insurance company shareholders

Human Resource Department
Regulator
TPA
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B. Management of health insurance claims

1. Challenges in health insurance
It is important to understand the peculiar features of the health insurance
portfolio in depth so that health claims can be effectively managed. These are:
a) Majority of the policies are for hospitalization indemnity where the
subject matter covered is a human being. This brings forth emotional
issues that are not normally faced in other classes of insurance.
b) India presents very peculiar patterns of illnesses, approach to treatment
and follow up. These result in some people being excessively cautious
with some others being unworried about their illness and treatment.
c) Health insurance can be purchased by an individual, a group such as a
corporate organization or through a retail selling channel like a bank.
This results in the product being sold as a standard commodity at one
extreme while being tailored to satisfy needs of the customer at the
other.
d) Health insurance depends on the act of being hospitalized, to trigger a
claim under the policy. However, there is great difference in the
availability, specialization, treatment methods, billing patterns and
charges of all health service providers whether doctors, surgeons or
hospitals which make it very difficult to assess claims.
e) The discipline of healthcare is the fastest developing one. New diseases
and conditions keep occurring resulting in development of new
treatment methods. Examples of this are key-hole surgeries, laser
treatments, etc.
This makes health insurance more technical and the skills to handle the
insurance claims for such procedure needs constant improvement.
f) More than all these factors, the fact that a human body cannot be
standardized adds a completely new dimension. Two people could
respond differently to the same treatment for the same illness or require
different treatments or varying periods of hospitalization.
The portfolio of health insurance is growing rapidly. The challenge of such rapid
growth is the huge number of products. There are hundreds of health insurance
products in the market and even within a company one can find many different
products. Each product and its variant has its peculiarity and therefore needs to
be studied before a claim can be handled.
Growth of the health portfolio also brings about the challenge of numbers a
company selling 100,000 health policies to retail customers covering say,
300,000 members under these policies, has to be prepared to service about
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20,000 claims at least! With the expectation of cashless service and speedy
settlement of claims, organizing health insurance claims department is a
significant challenge.
Typically health insurance policies written in India cover hospitalization
anywhere within the country. The team handling claims must understand the
practices across the country to be able to appreciate the claim presented.
The health claims manager meets these challenges using expertise, experience
and various tools available to him.
In the final analysis, health insurance offers the satisfaction of having assisted a
person who is in need and is undergoing the physical and emotional stress of
illness of himself or his family.
Efficient claims management ensures that right claim is paid to right person
at the right time.
2.
Claim process in health insurance
A claim may be serviced either by the insurance company itself or through the
services of a Third Party Administrator (TPA) authorized by the insurance
company.
From the time a claim is made known to the insurer / TPA to the time the
payment is made as per the policy terms, the health claim passes through a set
of well-defined steps, each having its own relevance.
The processes detailed below are in specific reference to health insurance
(hospitalization) indemnity products which form the major part of health
insurance business.
The general process and supporting documents for a claim under fixed benefit
product or critical illness or daily cash product etc. would be quite similar,
except for the fact that such products may not come with cashless facility.
The claim under an indemnity policy could be a:
a)
Cashless claim
The customer does not pay the expenses at the time of admission or
treatment. The network hospital provides the services based on a preapproval from the insurer/TPA and later submits the documents to the
insurer/TPA for settlement of the claim.
b)
Reimbursement claim
The customer pays the hospital from his own resources and then files his
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claim with Insurer/TPA for payment of the admissible claim.

In both cases, the basic steps remain the same.
Diagram 2: Claim process broadly comprises of following steps (not in exact
order)
a) Intimation
Claim intimation is the first instance of contact between the customer and
the claims team. The customer could inform the company that he is
planning to avail a hospitalization or the intimation would be made after the
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hospitalization has taken place, especially in case of emergency admission

to a hospital.
Till recently, the act of intimation of a claim event was a formality.
However, recently insurers have started insisting on the intimation of claim
as soon as practicable. Typically it is required before hospitalization in case
of planned admission, and within 24 hours of hospitalization in case of an
emergency.
The timely availability of information about hospitalization helps the
Insurer/TPA to verify that the hospitalization of the customer is genuine and
there is no impersonation or fraud and sometimes, to negotiate the charges.
Intimation earlier meant a letter written, submitted and acknowledged or
by fax. With development in communication and technology, intimation is
now possible through call centres run by insurers/TPAs open 24 hours as well
as through the internet and e-mail.
b) Registration
Registration of a claim is the process of entering the claim in the system and
creating a reference number using which the claim can be traced any time.
This number is called Claim number, Claim reference number or Claim
control number. The claim number could be numeric or alpha-numeric based
on the system and processes used by the processing organization
Registration and generation of a reference no. is usually done once the
claim intimation is received and the correct policy number and insured
persons particulars are matched.
Once a claim is registered in the system, a reserve for the same would be
created simultaneously in the accounts of the insurer. At the time of
intimation/registration, the exact claim amount or estimate may not be
known. The initial reserve amount is therefore a standard reserve (mostly
based on historical average claim size). Once the estimate or expected
amount of liability is known, the reserve is revised upward/downward to
reflect the same.
c) Verification of documents
Once a claim is registered, the next step is to check for the receipt of all
the required documents for processing.
It must be appreciated that for a claim to be processed following are the
most important requirements:
1. The documentary evidence of the illness
2. Treatment provided
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3.
4.
5.
6.
7.
In-patient duration
Investigation Reports
Payment made to the hospital
Further advice for treatment
Payment proofs for implants etc.
Verification of documents follows a checklist which the claim processor

checks out. Most of the companies ensure that such checklists are part of
the processing documentation.
The missing documentation is noted at this stage while some processes
involve requesting for the documents not submitted by the customer /
hospital at this point, most of the companies first complete the scrutiny of
all the documents submitted before requesting for additional information so
that the customer is not inconvenienced.
d) Capturing the billing information
Billing is an important part of the claim processing cycle. Typical health
insurance policies provide for indemnifying expenses incurred in the
treatment with specific limits under various heads. The standard practice is
to classify the treatment charges into:
Room, board and nursing expenses including registration and service
charges.
Charges for ICU and any intensive care operations.
Operation theatre charges, anaesthesia, blood, oxygen, operation
theatre charges, surgical appliances, medicines and drugs, diagnostic
materials and X-ray, dialysis, chemotherapy, radiotherapy, cost of
pacemaker, artificial limbs and any medical expenses incurred which is
integral part of the operation.
Surgeon, anaesthetist, medical practitioner, consultant's, specialists
fees.
Ambulance charges.
Investigation charges covering blood test, X-ray, scans, etc.
Medicines and drugs.
Documents submitted by the customer are examined to capture information
under these heads so that the settlement of claims can be done with
accuracy.
Though there are efforts being made to standardize the billing pattern of
hospitals, it is common for each hospital to use a different method for
billing and the challenges faced in this are:
Room charges can include some non-payables such as service charges
or diet.
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Single bill can include different headings or a lump-sum bill for all
investigations or all medicines.
Non-standard names being used e.g. nursing charges being called
service charges.
Use of words like similar charges, etc., allied expenses in the
bill.
Where the billing is not clear, the processor seeks the break up or additional
information, so that the doubts on the classification and admissibility are
resolved.
To address this issue, IRDAI issued Health Insurance Standardization
Guidelines which have standardized the format of such bills and the list of
non-payable items.
Package rates
Many hospitals have agreed package rates for treatment of certain diseases.
This is based on the ability of the hospital to standardize the treatment
procedure and use of resources. In recent times, for treatment at Preferred
Provider Network and also in case of RSBY, package cost of many procedures
has been pre-fixed.
Example
a) Cardiac packages: Angiogram, Angioplasty, CABG or Open heart surgery, etc.
b) Gynaecological
packages:
hysterectomy, etc.
Normal
delivery,
Caesarean
delivery,
c) Orthopaedic packages
d) Ophthalmological packages
Additional costs due to complications after surgery are charged separately
on actual basis if incurred over and above these.
Packages have the advantages of certainty of the cost involved and
standardization of the procedures and so such claims are easier to handle.
e) Coding of claims
The most important code set used is the World Health Organization (WHO)
developed International Classification of Diseases (ICD) codes.
While ICD is used to capture the disease in a standardized format, procedure
codes such as Current Procedure Terminology (CPT) codes capture the
procedures performed to treat the illness.
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Insurers are relying on the coding increasingly and Insurance Information

Bureau (IIB), which is part of Insurance Regulatory and Development
Authority (IRDAI), has started an information bank where such information
that can be analyzed.
f) Processing of claim
A reading of the health insurance policy shows that while it is a commercial
contract, it involves medical terms that define when a claim is payable and
to what extent. The heart of claims processing in any insurance policy, is in
answering two key questions:
Is the claim payable under the policy?
If yes, what is the net payable amount?
Each of these questions requires understanding of a number of terms and
conditions of the policy issued as well as the rates agreed with the hospital
in case treatment has taken place at a network hospital.
Admissibility of a claim
For a health claim to be admissible the following conditions must be
satisfied.
i. The member hospitalized must be covered under the insurance policy
While this looks simple, we come across situations where the names (and in
more cases, the age) of the person covered and person hospitalized do not
match. This could be because of:
It is important to ensure that the person covered under the policy and the
person hospitalized is the same. This kind of fraud is very common in health
insurance.
ii. Admission of the patient within the period of insurance
iii. Hospital definition
The hospital where the person was admitted should be as per the definition
of hospital or nursing home under the policy otherwise the claim is not
payable.
iv. Domiciliary hospitalization
Some policies cover domiciliary hospitalization i.e. treatment taken at home
in India for a period exceeding 3 days for an ailment which normally requires
treatment at hospital/nursing home.
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Domiciliary hospitalization, if covered in a policy, is payable only if:

The condition of the patient is such that he/she cannot be removed
to the Hospital/Nursing Home or
The patient cannot be removed to Hospital/Nursing Home for lack of
accommodation therein
v. Duration of hospitalization
Health insurance policies normally cover hospitalization exceeding 24 hours
as an in-patient. Therefore the date and time of admission as well as
discharge becomes important to note if this condition is satisfied.
Day-care treatments
Technological developments in the healthcare industry have led to
simplification of many procedures that earlier required complex and
prolonged hospitalization. There are a number of procedures carried out on
day care basis without need for hospitalization exceeding 24 hours.
Most of the day care procedures are on pre-agreed package rate basis,
resulting in certainty in costs.
vi. OPD
Some policies cover treatment/consultations taken as an out-patient also,
subject to a specific sum insured which is usually less than the
hospitalization sum insured.
The coverage under OPD varies from policy to policy. For such
reimbursements, the clause for 24 hours hospitalization is not applicable.
vii. Treatment procedure/line of treatment
Hospitalization is typically associated with Allopathic method of treatment.
However, the patient could undergo other modes of treatment such as:
Unani
Siddha
Homeopathy
Ayurveda
Naturopathy etc.
Most policies exclude these treatments while some policies cover one or
more of these treatments with sub-limits.
viii. Pre-existing illnesses
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Definition
Pre-existing illnesses refer to Any condition, ailment or injury or related
condition(s) for which insured person had signs or symptoms and/or was
diagnosed and/or received medical advice/treatment within 48 months prior to
his/her health policy with the company whether explicitly known to him or
not.
The reason for excluding pre-existing illnesses is due to the fundamental
principles of insurance that a certainty cannot be covered under insurance.
However, application of this principle is quite difficult and involves a
systematic check of the symptoms and treatment to find out whether the
person had the condition at the time of insuring. As medical professionals
can differ in the opinions of duration of the illness, the opinion of when the
disease first showed up is carefully taken before applying this condition to
deny any claim.
In the evolution of health insurance, we come across two modifications to
this exclusion.
The first is in the case of group insurance where the entire group of
people is insured, with no selection against the insurer. Group policies
covering, say all government employees, all families below poverty line,
all families of employees of a major corporate group, etc. are treated
favorably as compared to a single family opting to cover for the first
time. These policies often deleted the exception, with exception
adequate price built in.
The second modification is that pre-existing illnesses are covered after
the a certain period of continuous coverage. This follows the principle
that even a condition is present in a person, if it does not show up for a
certain period of time, it cannot be treated as a certainty.
ix. Initial waiting period
A typical health insurance policy covers illnesses only after an initial 30 days
(except accident related hospitalization).
Similarly, there are lists of illnesses such as:
Cataract,
Benign Prostatic Hypertrophy,
Hysterectomy,
Fistula,
Piles,
Hernia,
Hydrocele,
Sinusitis,
Knee / Hip Joint replacement
etc.
These are not covered for an initial period that could be one year or two
years or more depending on specific insurance companys product.
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The claim processor identifies if the illness is one of these and how long the
person has been covered to check if it falls within this admissibility
condition.
x. Exclusions
The policy lists out a set of exclusions which in general can be classified as:
Benefits such as maternity (though this is covered in some policies).
Outpatient and Dental treatments.
Illnesses which are not intended to be covered such as HIV, Hormone
therapy, obesity treatment, fertility treatment, cosmetic surgeries, etc.
Diseases caused by alcohol/drug abuse.
Medical treatment outside India.
High hazard activities, suicide attempt, radioactive contamination.
Admission for tests/investigation purpose only.
In such a case it is extremely important for the claims handler to specifically
explain the circumstances so that the specialist opinion is exactly to the
point and will stand the scrutiny in a court of law, if challenged.
xi. Compliance with conditions with respect to the claims.
The insurance policy also defines certain actions to be taken by the Insured
in case of a claim, some of which are important for admissibility of the
claim.
In general, these relate to:
Intimation of claim within certain period we have seen the
importance of intimation earlier. The policy could stipulate a time
within which such intimation must reach the company.
Submission of claim documents within a certain period.
Not being involved in misrepresentation, misdescription or nondisclosure of material facts.
g) Arriving at the final claim payable
Once the claim is admissible, the next step is to decide the the amount of
claim payable. To compute this we need to understand the factors that
decide the claim amount payable. These factors are:
i. Sum insured available for the member under the policy
There are policies issued with individual sum insured, some issued on floater
basis where the sum insured is available across the family or policies which
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are on floater basis but with a limit per member.

ii. Balance sum insured available under the policy for the member after
taking into account any claim made already:
While calculating the balance of sum insured available after deducting
claims already paid, any later cashless authorization provided to the
hospitals will also have to be noted.
iii. Sub-Limits
Most policies specify room rent limitation, nursing charges etc. either as a
percentage of sum insured or as a limit per day. Similar limitation could be
in force for consultant fee, or ambulance charges, etc.
iv. Check for any limits specific to illness
The policy could specify a certain amount or capping for maternity cover or
for other diseases say, cardiac illness.
v. Check whether entitled or not to cumulative bonus
Verify whether the insured is entitled to any no-claim bonus (in case the
insured has not claimed from his policy in the previous year/s). No-claim
bonus often comes in the form of additional sum insured, which in fact
increases the sum insured of the patient/insured. Sometimes, the
cumulative bonus may also be wrongly stated as claims intimated towards
the end of the previous year may not have been taken into account.
vi. Other expenses covered with limitation:
There could be other limits e.g. if treatment is undertaken under Ayurvedic
system of medicine, usually the same has a much lower limit. Health checkup costs are only up to a certain limit after four years of the policy. Hospital
cash payment also has a per day limit.
vii. Co-payment
This is normally a flat percentage of the assessed claim before payment. The
co-pay could also be applicable only in select circumstances only for
parent claims, only for maternity claims, only from second claim onwards or
even only on claims exceeding a certain amount.
Before the payable amount is adjusted to these limits, the claim amount
payable is computed net of deductions for non-payable items.
Non-payable items in a health claim
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The expenses incurred in treating an illness can be classified into:

Expenses for cure and
Expenses for care.
Expenses for curing an illness comprise of all the medical costs and the
normal related facilities. In addition, there could be costs incurred to make
the stay in a hospital more comfortable or even luxurious.
A typical health insurance policy attends to the expenses for curing an
illness and unless stated specifically, the extra expenses for luxury are not
payable.
These expenses can be classified into non-treatment charges such as
registration charge, documentation charges, etc. and to items that can be
considered if directly relating to the cure (e.g. protein supplement during
the inpatient period specifically prescribed).
Earlier every TPA/insurer had its own list of non-payable items, now the
same has been standardized under IRDAI Health Insurance Standardization
Guidelines.
The order of arriving at the final claim payable is as follows:
Table 2.1
Step I
List all the bills and receipts under the various heads of room rent,
consultant fee, etc.
Step II
Deduct the non-payable items from the amount claimed under each
head
Step III
Apply any limits applicable for each head of expense
Step IV
Arrive at the total payable amount and check if it is within sum

insured overall
Step V
Deduct any co-pay if applicable to arrive at the net claim payable
h) Payment of claim
Once the payable claim amount is arrived at, payment is done to the
customer or the hospital as the case may be. The approved claim amount is
advised to the Finance / Accounts function and the payment may be made
either by cheque or by transferring the claim money to the customers bank
account.
When the payment is made to the hospital, necessary tax deduction, if any
is made from the payment.
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Where the payment is handled by the Third Party Administrator, the

payment process may vary from insurer to insurer. A more detailed insight
into working of TPAs is provided later on.
Payment updates in the system are crucial for handling customer inquiries.
Typically these details will be shared through the system with the call
centre / customer service team.
Once payment is made, the claim is treated as settled. Reports have to be
periodically sent to the companys management, intermediaries, customers
and IRDAI for number and amount of settled claims. The typical analysis of
settled claims includes the % settled, amount of non-payables as a
proportion, average time taken to settle claims, etc.
i) Management of deficiency of documents / additional information
required
Processing of a claim requires the scrutiny of a list of key documents. These
are:
Discharge summary with admission notes,

Supporting investigation reports,
Final consolidated bill with break up into various parts,
Prescriptions and pharmacy bills,
Payment receipts,
Claim form and
Customer identification.
Experience shows that one out of four claims submitted has a suffer from
being incomplete in terms of the basic documents. It is therefore required
that the customer is advised of the documents not submitted and is given a
time limit within which he can attach them to his claim.
Similarly, it may happen that while a claim is being processed, additional
information may be required because:
i. The discharge summary provided is not in the correct format as
prescribed by IRDAI or does not capture some details of the diagnosis or
the history of the illness.
ii. Treatment given has not been described in enough detail or requires
clarification.
iii. The treatment is not in line with the diagnosis as per discharge summary
or medicines prescribed are not related to the illness for which
treatment was provided.
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iv. The bills provided do not have the required break up.
v. Mismatch of age of the person between two of the documents.
vi. Mismatch in date of admission / date of discharge between discharge
summary and the bill.
vii. The claim requires a more detailed scrutiny of the hospitalization and
for this, the hospitals indoor case papers are required.
In both the cases, the customer is informed in writing or through email
detailing the requirement of additional information. In most cases, the
customer will be able to provide the information required. However, there
are circumstances where the information required is too important to be
overlooked but the customer does not respond. In such cases, the customer
is sent reminders that the information is needed to process the claim and
after three such reminders, a claim closure notice is sent.
In all correspondence relating to a claim when it is in process, you will see
that the words Without Prejudice are mentioned on top of the letter. This
is a legal requirement to ensure that the right of the insurer to reject a
claim after these correspondences remains intact.
Example
The insurer may ask for indoor case papers to study the case in detail and may
come to a conclusion that the procedure / treatment does not fall within the
policy conditions. The act of asking for more information should not be treated
as an act that implies that the insurer has accepted the claim.
Managing shortfalls in documentation and explanation and additional
information required is a key challenge in claims management. While the
claim cannot be processed without all the required information, the
customer cannot be put to inconvenience by frequent requests for more and
more information.
Good practice requires that such request is raised once with a consolidated
list of all information that may be needed and no new requirement is raised
thereafter.
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j) Denial claims
The experience in health claims show that 10% to 15% of the claims
submitted do not fall within the terms of the policy. This could be because
of a variety of reasons some of which are:
i. Date of admission is not within the period of insurance.
ii. The Member for whom the claim is made is not covered.
iii. Due to Pre-existing illness (where the policy excludes such condition).
iv. Undue delay in submission without valid reason.
v. No active treatment; admission is only for investigation purpose.
vi. Illness treated is excluded under the policy.
vii. The cause of illness is abuse of alcohol or drugs
viii. Hospitalization is less than 24 hours.
Denial or repudiation of a claim (due to whatever reason) has to be informed
to the customer in writing. Usually, such denial letter clearly states the
reason for denial, narrating the policy term / condition on which the claim
was denied.
Most insurers have a process by which a denial is authorized by a manager
senior to the one authorized to approve the claim. This is to ensure that any
denial is fully justified and will be explained in case the insured seeks any
legal remedy.
Apart from the representation to the insurer, the customer has the option,
to approach the following in case of denial of claim:
Insurance Ombudsman or
The consumer forums or
IRDAI or
Law courts.
In case of each denial the file is checked to assess if the denial will stand
the legal scrutiny in the normal course and the documents are stored in a
safe location, should a need to defend the decision arise.
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k) Suspect claims for more detailed investigation

Insurers have been trying to handle the problem of fraud in all lines of
business. In terms of sheer number of fraud claims handled, health
insurance presents a great challenge to the insurers.
Few examples of frauds committed in health insurance are:
i. Impersonation, the person insured is different from person treated.
ii. Fabrication of documents to make a claim where there is no
hospitalization.
iii. Inflation of expenses, either with the help of the hospital or by addition
of external bills fraudulently created.
iv. Outpatient treatment converted to in-patient / hospitalization to
cover cost of diagnosis, which could be high in some conditions.
With newer methods of frauds emerging on a daily basis, the insurers and
TPAs have to continuously monitor the situation on the ground and come up
with measures to find and control such frauds.
Claims are chosen for investigation based on two methods:
Routine claims and
Triggered claims
A TPA or an insurer may set an internal standard that a specific percentage
of the claims be physically verified; this percentage could be different for
cashless and reimbursement claims.
Under this method, claims are chosen using random sampling method. Some
insurers stipulate that all claims above a certain value be investigated and a
sampled set of claims which are below that limit are taken up for
verification.
In the second method, each claim goes through a set of checkpoints which if
not in line, trigger investigation such as
i. a high portion of the claim relating to medical tests or medicines
ii. customer too eager to settle
iii. bills with over-writing, etc.
If the claim is suspected to be not genuine, the claim is investigated,
however small it is.
n. Cashless settlement process by TPA
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How does the cashless facility work? At the heart of this is an agreement
that the TPA insurer enters into, with the hospital. There are agreements
possible with other medical service providers as well. We shall look at the
process used for providing cashless facility in this section:
Table 3.1
Step 1
A customer covered under health insurance suffers from an illness or

sustains an injury and so is advised admission into a hospital. He/she
(or someone on his/her behalf) approaches the hospitals insurance
desk with the insurance details such as:
i. TPA name,
ii. His membership number,
iii. Insurer name, etc.
The hospital compiles the necessary information such as:
Step 2
i.
ii.
iii.
iv.
v.
Illness diagnosis
Treatment,
Name of treating doctor,
Number of days of proposed hospitalization and
The estimated cost
This is presented in a format, called the cashless authorization

form.
The TPA studies the information provided in the cashless
authorization form. It checks the information with the policy terms
and the agreed tariff with the hospital, if any, and arrives at the
decision on whether the cashless authorization could be provided and
if so, for how much amount it should be authorized.
Step 3
The TPA could ask for more information to arrive at the decision.
Once the decision is made, it is communicated to the hospital without
delay.
Both forms have now been standardized under IRDAI Health Insurance
Standardization Guidelines; refer to Annexure at the end).
Step 4
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The patient is treated by the hospital, keeping the amount authorized

by the TPA as credit in the patients account. The member may be
called on to make a deposit payment to cover the non-treatment
expenses and any co-pay required under the policy.
When the patient is ready for discharge, the hospital checks the
amount of credit in the account of the patient approved by the TPA
against the actual treatment charges covered by insurance.
Step 5
If the credit is less, the hospital requests for additional approval of

credit for the cashless treatment.
TPA analyses the same and approves the additional amount.
Step 6
Patient pays the non-admissible charges and gets discharged. He will

be asked to sign the claim form and the bill, to complete the
documentation.
Hospital consolidates all the documents and presents to the TPA the
following documents for processing of the bill:
Step 7
i. Claim form
ii. Discharge summary / admission notes
iii. Patient / proposer identification card issued by the TPA and
photo ID proof.
iv. Final consolidated bill
v. Detailed bill
vi. Investigation reports
vii. Prescription and pharmacy bills
viii. Approval letters sent by the TPA
TPA will process the claim and recommend for payment to the
hospital after verifying details such as the following:
Step 8
i. The Patient treated is the same person for whom approval was
provided.
ii. Treated the patient for the same condition that it requested the
approval for.
iii. Expenses for treatment of excluded illness, if any, is not part of
the bill.
iv. All limits that were communicated to the hospital have been
adhered to.
v. Tariff rates agreed with the hospital have been adhered to,
calculate the net payable amount.
The value of cashless facility is not in doubt. It is also important for the
customer to know how to make the best use of the facility. The points to note
are:
i.
Customer must make sure that he/she has his/her insurance details with
him/her. This includes his:
TPA card,
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Policy copy,
Terms and conditions of cover etc.
When this is not available, he can contact the TPA (through a 24 hour
helpline) and seek the details.
ii. Customer must check if the hospital suggested by his/her consulting
doctor is in the network of the TPA. If not, he needs to check with the
TPA the options available where cashless facility for such treatment is
available.
iii. He/she needs to make sure that the correct details are entered into the
pre-authorization form. This form has been standardized by IRDAI as per
Guidelines on Standardization in Health Insurance issued in 2013. If the
case is not clear, the TPA could deny the cashless facility or raise query.
iv. He/she needs to ensure that the hospital charges are consistent with the
limits such as room rent or caps on specified treatments such as
cataract.
In case he/she wants to spend more than what is allowed by the policy, it is
better to know, in advance, what would be his/her share of expenses.
v. The customer must inform the TPA in advance of the discharge and
request the hospital to send to the TPA any additional approval that may
be required before discharge. This will ensure the patient does not wait
unnecessarily at the hospital.
It is also possible that the customer requests and takes an approval for
cashless treatment at a hospital but decides to admit the patient elsewhere.
In such cases, the customer must inform and ask the hospital to
communicate to the TPA that the cashless approval is not being used.
If this is not done, the amount approved could get blocked in the customers
policy and could prejudice the approval of the subsequent request.
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C. Documentation in health insurance claims

Health insurance claims require a range of documents for processing, as
explained earlier. Each document is expected to assist in answering the two key
questions admissibility (Is it payable?) and extent of claim (how much?).
This section explains the need for and content of each of the documents
required to be submitted by the customers:
1. Discharge summary
Discharge summary can be termed as the most important document that is
required to process a health insurance claim. It details the complete
information about the condition of the patient and the line of treatment.
As per IRDAI Standardization Guidelines the contents of a standard Discharge
Summary are as follows:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Patients Name
Telephone No / Mobile No
IPD No
Admission No
Treating Consultant/s Name, contact numbers and Department /
Specialty
Date of Admission with Time
Date of Discharge with Time
MLC No / FIR No
Provisional Diagnosis at the time of Admission
Final Diagnosis at the time of Discharge
ICD-10 code(s) or any other codes, as recommended by the
Authority, for Final diagnosis
Presenting Complaints with Duration and Reason for Admission
Summary of Presenting Illness
Key findings on physical examination at the time of admission
History of alcoholism, tobacco or substance abuse, if any
Significant Past Medical and Surgical History, if any
Family History if significant/relevant to diagnosis or treatment
Summary of key investigations during Hospitalization
Course in the Hospital including complications if any
Advice on Discharge
Name & Signature of treating Consultant/ Authorized Team
Doctor
Name & Signature of Patient / Attendant
A well written discharge summary helps the claim processing person immensely
to understand the illness / injury and the line of treatment, thereby speeding
up the process of settlement. Where the patient unfortunately does not survive,
the discharge summary is termed Death Summary in many hospitals.
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The discharge summary is always sought in original.

2. Investigation reports
Investigation reports assist in comparing the diagnosis and the treatment,
thereby providing the necessary information to understand the exact condition
that prompted the treatment and the progress made during the hospitalization.
Investigation reports usually consist of:
a) Blood test reports;
b) X-ray reports;
c) Scan reports and
d) Biopsy reports
All investigation reports carry the name, age, gender, date of test etc. and
typically presented in original. The insurer may return the X-ray and other films
to the customer on specific request.
3. Consolidated and detailed bills:
This is the document that decides what needs to be paid under the insurance
policy. Earlier there was no standard format for the bill, but IRDAI
Standardization Guidelines provide format for consolidated and detailed bills.
The student is advised to understand the details available on the IRDAI website.
While the consolidated bill presents the overall picture, the detailed bill will
provide the break up, with reference codes.
Scrutiny of non-payable expenses is done using the detailed bill, where the nonadmissible expenses are rounded off and used for deduction under the expense
head to which it belongs.
The bills have to be received in original.
4. Receipt for payment
Being a contract of indemnity, the reimbursement of a health insurance claim
will also require the formal receipt from the hospital of the amount paid.
While the amount paid must correspond to the total of the bill, many hospitals
do provide an element of concession or discount in the payable amount. In such
a case, the insurer is called to pay only the amount actually paid on behalf of
the patient.
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The receipt should be numbered and or stamped and be presented in original.

5. Claim form
Claim form is the formal and legal request for processing the claim and is
submitted in original signed by the customer. The claim form has now been
standardized by IRDAI and broadly consists of:
a) Details of the primary insured and the policy number under which the
claim is made.
b) Details of the insurance history
c) Details of the insured person hospitalized.
d) Details of the hospitalization such as hospital, room category, date and
time of admission and discharge, whether reported to police in case of
accident, system of medicine etc.
e) Details of the claim for which the hospitalization was done including
breakdown of the costs, pre and post-hospitalization period, details of
lump-sum/cash benefit claimed etc.
f) Details of bills enclosed
g) Details of bank account of primary insured for remittance of sanctioned
claim
h) Declaration from the insured.
Besides information on disease, treatment etc., the declaration from the
insured person makes the claim form the most important document in the legal
sense.
It is this declaration which applies the doctrine of utmost good faith into the
claim, breach of which attracts the misrepresentation clause under the policy.
6. Identity proof
With the increasing use of identity proof across various activities in our life, the
general proof of identity serves an important purpose that of verifying
whether the person covered and the person treated are one and the same.
Usually identification document which is sought could be:
a) Voters identity card,
b) Driving license,
371
c) PAN card,
d) Aadhaar card etc.
Insistence on identity proof has resulted in a significant reduction of
impersonation cases in cashless claims as the identity proof is sought before
hospitalization, making it a duty of the hospital to verify and present the same
to the insurer or the TPA.
In reimbursement claims, the identity proof serves a lesser purpose.
7. Documents contingent to specific claims
There are certain types of claims that require additional documents apart from
what has been stated above. These are:
a) Accident claims, where FIR or Medico-legal certificate issued by the
hospital to the registered police station, may be required. It states the
cause of accident and if the person was under the influence of alcohol,
in case of traffic accidents.
b) Case indoor papers in case of complicated or high value claims. Indoor
case paper or case sheet is a document which is maintained at the
hospital end, detailing all treatment given to patient on day to day basis
for entire duration of hospitalization.
c) Dialysis / Chemotherapy / Physiotherapy charts where applicable.
d) Hospital registration certificate, where the compliance with the
definition of hospital needs to be checked.
The claims team uses certain internal document formats for processing a claim.
These are:
i. Checklists for document verification,
ii. Scrutiny/ settlement sheet,
iii. Quality checks / control format.
Though these formats are not uniform across the insurers, let us study the
purpose of the documents with a specimen of the usual contents.
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Table 2.2
1.
Document
verification
sheet
It is the simplest of all, a check mark placed on the

list of documents received to note that these have
been submitted by the customer. Some insurers may
provide a copy of this as an acknowledgement to the
customer.
It is usually a single sheet where the entire processing
notes are captured.
2.
a)
b)
c)
Scrutiny/process d)
sheet
e)
f)
g)
Name of the customer and id number

Claim number, date of receipt of the claim papers
Policy overview, Section 64VB compliance
Sum insured and utilization of sum insured
Date of hospitalization and discharge
Diagnosis and treatment
Claim admissibility / processing comments with
reason thereof
h) Computation of claim amount
i) Movement of the claim with dates and names of
people who processed
Final check or quality control format for checking of
claim by person other than claim handler
3.
Quality checks /
control format
Besides check list and claim scrutiny questionnaire,

the quality control/audit format shall also include
information relating to:
a) Settlement of claim,
b) Rejection of claim or
c) Requesting for additional information.
Test Yourself 2
Which of the following document is maintained at the hospital detailing all
treatment done to an in-patient?
I.
II.
III.
IV.
Investigation report
Settlement sheet
Case paper
Hospital registration certificate
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D. Claims reserving
1. Reserving
This refers to the amount of provision made for all claims in the books of the
insurer based on the status of the claims. While this looks very simple, the
process of reserving requires enormous care any mistake in reserving affects
the insurers profits and solvency margin calculation.
Processing systems today have built in capability to compute the reserves as at
any point of time.
Test Yourself 3
The amount of provision made for all claims in the books of the insurer based on
the status of the claims is known as ________.
I.
II.
III.
IV.
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Pooling
Provisioning
Reserving
Investing
E. Role of third party administrators (TPA)

1. Introduction of TPAs in India
The insurance sector was opened to private players in the year 2000.
Meanwhile, the demand for healthcare products was also growing with new
products being launched. A need was therefore felt for the introduction of a
channel for post-sale services in health insurance. This offered the opportunity
for professional Third Party Administrators to be introduced.
Seeing this, the Insurance Regulatory and Development Authority allowed TPAs
to be introduced into the market under license from IRDAI, provided they
complied with The IRDAI (Third Party Administrators Health Insurance)
Regulations, 2001 notified on 17th Sept 2001.
Definition
As per Regulations,
"Third Party Administrators or TPA means any person who is licensed under the
IRDAI (Third Party Administrators - Health Services) Regulations, 2001 by the
Authority, and is engaged, for a fee or remuneration by an insurance company,
for the purposes of providing health services.
"Health Services by TPA" means the services rendered by a TPA to an insurer
under an agreement in connection with health insurance business but does not
include the business of an insurance company or the soliciting either directly or
indirectly, of health insurance business or deciding on the admissibility of a
claim or its rejection.
Thus the scope of TPA services starts after the sale and issue of the insurance
policy. In case of insurers not using TPAs, the services are performed by inhouse team.
2. Post sale service of health insurance
a) Once the proposal (and the premium) is accepted, the coverage
commences.
b) If a TPA is to be used for servicing the policy, the insurer passes on the
information about the customer and the policy to the TPA.
c) The TPA enrolls the members (while the proposer is the person taking
the policy, members are those covered under the policy) and may issue a
membership identification in the form of a card, either physical or
electronic.
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d) The membership with the TPA is used for availing cashless facility as well
as processing of claims when the member requires the support of the
policy for a hospitalization or treatment that is covered.
e) TPA processes the claim or cashless request and provides the services
within the time agreed with the insurer.
The cut-off point from which the role of a TPA begins is the moment of
allocation of the policy in the name of the TPA as the servicing entity. The
servicing requirement continues through the policy period and through any
further period that is allowed under the policy for reporting a claim.
When thousands of policies are serviced, this activity is continuous, especially
when the same policy is renewed and the same TPA is servicing the policy.
3. Objectives of third party administration (TPA)
The concept of Third Party Administration in health insurance can be said to
have been created with the following objectives:
a) To facilitate service to a customer of health insurance in all possible
manners at the time of need.
b) To organise cashless treatment for the insured patient at network
hospitals.
c) To provide fair and fast settlement of claims to the customers based on
the claim documents submitted and as per procedure and guidelines of
d) To create functional expertise in handling health insurance claims and
related services.
e) To respond to customers in a timely and proper manner.
f) To create an environment where the market objective of an insured
person being able to access quality healthcare at a reasonable cost is
achieved and
g) To help generate/collate relevant data pertaining to morbidity, costs,
procedures, length of stay etc.,
4. Relationship between insurer and TPA
Many insurers utilize the services of the TPA for post-sale service of health
insurance policies while few insurers, especially from the life insurance sector
also seek assistance of a TPA for arranging pre-policy medical check-up service.
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The relationship between an insurer and the TPA is contractual with a host of
requirements and process steps built into the contract. IRDAI Health Insurance
Standardization guidelines now lay down guidelines and provide a set of
suggested standard clauses for contract between TPA and insurance company,
The services that an insurer expects out of the TPA are as follows:
A. Provider networking services
The TPA is expected to build a relationship with a network of hospitals across
the country, with the objective of providing cashless claim payments for health
claims to the insured persons. The recent guidelines by IRDAI require the
relationship to be tri-partite including the insurer and not just between the
TPA and the provider.
They also negotiate good scheduled rates for various hospitalization procedures
and packages from such network hospitals reducing costs to insureds and also
insurers.
B. Call centre services
The TPA is usually expected to maintain a call centre with toll-free numbers
reachable at all times including nights, weekends and holidays i.e. 24*7*365.
The call centre of the TPA will provide information relating to:
a) Coverage and benefits available under the policy.
b) Processes and procedures relating to health claims.
c) Guidance relating to the services and cashless hospitalization.
d) Information on network hospitals.
e) Information on balance sum insured available under the policy.
f) Information on claim status.
g) Advice on missing documents in case of claims.
The call centre should be accessible through a national toll free number and
the customer service staff should be able to communicate in the major
languages normally spoken by the customers. These details are of course
governed by the contract between the insurers and their TPAs.
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C. Cashless access services
Definition
"Cashless facility" means a facility extended by the insurer to the insured where
the payments, of the costs of treatment undergone by the insured in
accordance with the policy terms and conditions, are directly made to the
network provider by the insurer to the extent pre-authorization approved.
To provide this service, the requirements of the insurer under the contract are:
a) All policy related information must be available with the TPA. It is the
duty of the insurer to provide this to the TPA.
b) Data of members included in the policy should be available and
accessible, without any error or deficiency.
c) The insured persons must carry an Identity Card that relates them to the
policy and the TPA. This Identity Card must be issued by the TPA in an
agreed format, reach the member within a reasonable time and should
be valid throughout the policy period.
d) TPA must issue a pre-authorization or a Letter of Guarantee to the
hospital based on the information provided for requesting the cashless
facility. It could seek more information to understand the nature of
illness, treatment proposed and the cost involved.
e) Where the information is not clear or not available, the TPA can reject
the cashless request, making it clear that denial of cashless facility is not
to be construed as denial of treatment. The member is also free to pay
and file a claim later, which will be considered on its merits.
f) In emergency cases, the intimation should be done within 24 hours of
admission and the decision on cashless communicated.
D. Customer relationship and contact management
The TPA needs to provide a mechanism by which the customers can represent
their grievances. It is usual for health insurance claims to be subjected to
scrutiny and verification. It is also noted that a small percentage of the health
insurance claims are denied which are outside the purview of the policy terms
and conditions.
In addition, almost all health insurance claims are subject to deduction on some
amount of the claim. These deductions cause customer dissatisfaction,
especially where the reason for the deduction or denial is not properly
explained to the customer.
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To make sure that such grievances are resolved as quickly as possible, the
insurer requires the TPA to have an effective grievance solution management.
E. Billing services
Under billing services, the insurer expects the TPA to provide three functions:
a) Standardized billing pattern that can help the insurer analyze the use of
coverage under various heads as well as decide the pricing.
b) Confirmation that the amount charged is relevant to the treatment
really required for the illness.
c) Diagnosis and procedure codes are captured so that standardization of
data is possible across all TPAs in accordance with national or
international standards.
This requires trained and skilled manpower in the TPA who are capable of
coding, verifying the tariff and standardizing the billing data capture.
F. Claim processing and payment services
This is the most critical service offered by the TPAs. Claim processing services
offered by the TPA to the insurer is usually end-to-end service from registering
intimation to processing to recommending approval and payment.
Payment of claims is done through the funds received from the insurer. The
funds may be provided to the TPA in the form of advance money or may be
settled directly by the insurer through its bank to the customer or to the
hospital.
The TPA is expected to keep an account of the monies and provide periodic
reconciliation of the amounts received from the insurance company. The
money cannot be used for any other purpose except for payment of approved
claims.
G. Management Information Services
Since the TPA performs claim processing, all information relating to the claims
individually or collectively is available with the TPA. The insurer requires the
data for various purposes and such data must be provided accurately and on a
timely basis by the TPA.
Thus the scope of a TPAs services can be stated as end-to-end service of the
health insurance policies issued by the insurers, could be restricted to few
activities, depending on requirements and MOU with particular insurer.
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H. TPA Remuneration
For these services, the TPA is paid a fee on one of the following basis:
a) A percentage of the premium (excluding service tax) charged to the
customer,
b) A fixed amount for each member serviced by the TPA for a defined time
period, or
c) A fixed amount for each transaction of the service provided by the TPA
e.g. cost per member card issued, per claim etc.
Thus through services of TPA, insurers gain access to:
i.
Cashless services
ii. Data compilation and analysis

iii. A 24 hour call centre and assistance for the customers
iv. Network of hospitals and other medical facilities
v. Support to major group customers
vi. Facilitation of the claims interaction with the customer
vii. Negotiation of tariffs and procedure prices with the hospitals
viii. Technology enabled services to ease customer service
ix. Verification and investigation of suspect cases
x. Analysis of claim patterns across companies and provision of crucial
information on costs, newer methods of treatment, emerging trends and
in controlling frauds
xi. Expansion of reach of services quickly
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F. Claims management personal accident

1. Personal accident
Definition
Personal accident is a benefit policy and covers accidental death, accidental
disability (permanent / partial), Temporary total disability and may also have
add-on coverage of accidental medical expenses, funeral expenses, educational
expenses etc. depending on particular product.
The peril covered under the PA policy is Accident.
Definition
Accident is defined as anything sudden, unforeseen, unintentional, external,
violent and by visible means.
Claims manager should mark caution and check following areas on receipt of the
notification of the claim:
a) Person in respect of whom the claim is made is covered under the policy
b) Policy is valid as on date of loss and premium is received
c) Loss is within the policy period
d) Loss has arisen out of Accident and not sickness
e) Check for any fraud triggers and assign investigation if need be
f) Register the claim and create reserve for the same
g) Maintain the turnaround time (claim servicing time) and keep the
customer informed of the development of the claim.
2. Claims investigation
If any red alert is noticed in the claim intimation or on receipt of the claim
documents, claim may be assigned to a professional investigator for verification
simultaneously.
Example
Examples of red alerts for personal accident claims (for purpose of further
381
investigation, but does not indicate positive indication of fraud or claim being
fraudulent):
Close proximity claims (claim within a short time of start of insurance)

High weekly benefit amount with longer period of disability
Discrepancy in the claim documents
Multiple claims by same insured
Indication of alcohol
Suspected suicide
Late night Road Traffic Accident while vehicle was being driven by
insured
Snake bite
Drowning
Fall from height
Suspected sickness related cases
Poisoning
Murder
Bullet injury
Frost bite disappearance
Homicide etc.
The main objectives of investigation are:

a) Examine the cause of loss.
b) Ascertain the extent and nature of loss.
c) Collection of evidence and information.
d) To ascertain if there is element of fraud or exaggeration of claim
amount.
Please note: the objective of investigation is to verify the facts of the case and
gather necessary evidence.
It is important that Claims examiner guides the investigator as to the focus of
investigation.
Example
Example of case guideline:
Road traffic accident
i. When did the incident take place exact time and date place? Date and
time
ii. Was the insured a pedestrian, traveling as passenger/pillion rider or
driving the vehicle involved in accident?
382
iii. Description on the accident, how did it take place?

iv. Was the insured under the influence of alcohol at the time of accident?
v. In case of death, what was the exact time and date of death, treatment
provided before death, at which hospital etc?
The possible reason for the accident:
Mechanical failure (steering, brake etc. failure) of the insureds or opponent
vehicle, due to any sickness (heart attack, seizure etc.) of the driver of the
vehicle, influence of alcohol, bad road condition, weather condition, speed of
the vehicle etc.
Some examples of possible fraud and leakage in personal accident claims:

i. Exaggeration in TTD period.
ii. Illness presented as accident e.g. backache due to pathological reasons
converted into a PA claim after reported fall/slip at home.
iii. Pre-existing accidents are claimed as fresh, by fabricating documentsNatural death presented as accidental case or pre-existing morbidity
leading to death after accident
iv. Suicidal deaths presented as accidental deaths
Discharge voucher is an important document for settlement of personal accident
claim, especially those involving death claims. It is also important to obtain
nominee details at the time of proposal and the same should form part of policy
document.
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3. Claim documentation
Table 2.3
Death claim
Permanent
Total Disability
(PTD) and
Permanent
Partial
Disability(PPD)
Claim
Temporary
Total
Disability(TTD)
Claim
a) Duly completed Personal Accident claim form signed by

the claimants nominee/family member
b) Original or Attested copy of First Information Report.
(Attested copy of FIR / Panchnama / Inquest Panchnama)
c) Original or Attested copy of Death certificate.
d) Attested copy of Post Mortem Report if conducted.
e) Attested copy of AML documents (Anti-money laundering)
- for name verification (passport / PAN card / Voter's ID /
Driving license) for address verification (Telephone bill /
Bank account statement / Electricity bill / Ration card).
f) Legal heir certificate containing affidavit and indemnity
bond both duly signed by all legal heirs and notarized
a) Duly completed Personal Accident claim form signed by
the claimant.
b) Attested copy of First Information Report if applicable.
c) Permanent disability certificate from a civil surgeon or
any equivalent competent doctors certifying the
disability of the insured.
a) Medical certificate from treating doctor mentioning the
type of disability and disability period. Leave certificate
from employer giving details of exact leave period, duly
signed and sealed by the employer.
b) Fitness certificate from the treating doctor certifying
that the insured is fit to perform his normal duties.
The above list is only indicative, further documents (including photographs of

scar marks, site of accident etc.) may be required depending on particular facts
of the case, especially the cases with suspected fraud angle to be investigated.
Test Yourself 4
Which of the following documents are not required to be submitted for
Permanent Total Disability claim?
I. Duly completed Personal Accident claim form signed by the claimant.
II. Attested copy of First Information Report if applicable.
III. Permanent disability certificate from a civil surgeon or any equivalent
competent doctors certifying the disability of the insured.
IV. Fitness certificate from the treating doctor certifying that the insured is fit
to perform his normal duties.
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G. Claims management- Overseas travel insurance

1. Overseas travel insurance policy
Though Overseas travel insurance policy has many sections covering nonmedical benefits, its underwriting and claims management has traditionally
been under health insurance portfolio because medical and sickness benefit is
the main cover under the policy.
The covers under the policy can be broadly divided into following sections. A
specific product may cover all or few of the below mentioned benefits:
a) Medical and sickness section
b) Repatriation and evacuation
c) Personal accident cover
d) Personal liability
e) Other non-medical covers:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
Trip Cancellation
Trip Delay
Trip interruption
Missed Connection
Delay of Checked Baggage
Loss of Checked Baggage
Loss of Passport
Emergency Cash Advance
Hijack Allowance
Bail Bond insurance
Hijack cover
Sponsor Protection
Compassionate Visit
Study Interruption
Home burglary
As the name suggests, the policy is intended for people travelling abroad, it is
natural that loss would happen outside India and claims would need to be
serviced appropriately as and when reported. In case of overseas travel
insurance the claim servicing usually involves a Third Party service provider
(Assistance Company) who has established a network for providing necessary
support and assistance all over the world.
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Claims services essentially include:

a)
b)
c)
d)
e)
Taking down the claim notification 24*7 basis;

Sending the claim form and procedure;
Guiding customer on what to do immediately after loss;
Extending cashless services for medical and sickness claims;
Arranging for repatriation and evacuation, emergency cash advance.
2. Assistance companies Role in overseas claims

Assistance companies have their own offices and tie ups with other similar
providers world over. These companies offer assistance to the customers of
insurance companies in case of contingencies covered under the policy.
These companies operate a 24*7 call centre including international toll free
numbers for claim registration and information. They also offer the following
services and charges for the services vary depending on agreement with the
particular insurance company, benefits covered etc.
a)
i.
ii.
iii.
iv.
v.
vi.
vii.
Medical assistance services:

Medical service provider referrals
Arrangement of hospital admission
Arrangement of Emergency Medical Evacuation
Arrangement of Emergency Medical Repatriation
Mortal remains repatriation
Compassionate visit arrangements
Minor children assistance/escort
b)
Monitoring of Medical Condition during and after hospitalisation
c)
Delivery of Essential Medicines
d)
Guarantee of Medical Expenses Incurred during hospitalization subject to

terms and condition of the policy and approval of insurance company.
e)
Pre-trip information services and other services:
i.
ii.
iii.
iv.
v.
vi.
f)
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Visas and inoculation requirements

Embassy referral services
Lost passport and lost luggage assistance services
Emergency message transmission services
Bail bond arrangement
Financial Emergency Assistance
Interpreter Referral
g)
Legal Referral
h)
Appointment with lawyer
3. Claims management for cashless medical cases

Claims management approach differs for cashless medical cases, reimbursement
medical cases and other non-medical cases. Again, cashless medical claims
management differs in US than cashless medical in other countries. We shall
now study step by step process
a) Claim notification
As and when loss happens, the patient takes admission into the hospital and
shows the insurance details to the admission counter. Assistance Company
receives notification of a new case from hospital and/or from patient or
relatives/friends. Claim procedure is then explained to the claimant.
b) Case management steps:
These may vary from company to company, common steps are listed below:
i.
Assistance Company case manager verifies the benefits, sum insured,

policy period, name of the policy holder.
ii. Case manager then gets in touch with the hospital to obtain clinical
/medical notes for an update on the patients medical condition, billing
information, estimates of cost. Assistance Company receives the clinical
notes and estimate of medical cost and send an update to the Insurer.
iii. Admissibility of the claim is determined and Guarantee of payment is
placed to hospital subject to approval from Insurance Company.
iv. There can be scenario where investigation may be necessary in India
(local place of insured) and/or in loss location. Process of investigation is
similar to what is explained in personal accident claims section.
Investigator abroad is selected with the help of Assistance Company or
through direct contact of insurance company.
v. Assistance Companys case manager continues to monitor the case on a
daily basis to provide Insurer with a clinical and cost update, progress
notes, etc. in order to obtain authorization for continuation of
treatment.
vi. Once the patient is discharged, case manager works diligently with the
hospital to confirm final charges.
387
vii. Assistance Company ensures that the bill is properly scrutinized,

scrubbed and audited. Any error found is notified to the billing
department of the hospital for rectification.
viii. Final bill is then re-priced as per the rates agreed between the provider
and Assistance Company or its associate reprising agent. The earlier the
payment assurance made to hospital, better discount through re-pricing
is possible.
Re-pricing is typically characteristic of US healthcare and as such, is not
applicable for non US cases. This is a major difference between cashless
medical case in US and non-US cases.
c) Claims processing Steps:
i.
The claims assessor receives the re-priced/original bill, verifies and

ensures that coverage was in place for the dates of service and
treatment rendered. The bill received by the Assistance Company is
audited by the claims department to ensure the charges are in line and
as per the treatment protocol. The discount is re-confirmed and the bill
is processed.
ii.
The bill is then sent to Insurer for payment accompanied by re-pricing

notification sheet and explanation of benefits (EOB).
iii.
Insurance company receives the bill and authorizes immediate payment

to Assistance Company.
d) Payment process steps:

i.
Assistance Company receives authorization from Insurer to release

payment to the hospital via local office.
ii.
The finance department releases the payment
e) Hospitalization Procedures
i.
The system in overseas countries, especially US and Europe are quite

different from the hospitals in India since majority of population has
universal health coverage either through private insurance or through
government schemes. Most hospitals accept Guarantee of Payments from
all international insurance companies once the insured provides them
with a valid health or overseas travel insurance policy.
In most countries treatment is not delayed for want of confirmation of

insurance coverage or cash deposit.
388
Hospitals start the treatment immediately. If there is insurance cover the

insurance policy pays or the patient person has to pay. The hospitals tend to
inflate charges since payments are delayed.
If payment is immediate, hospitals tend to offer very high discounts for
immediate payment. Re-pricing agencies generally negotiate with hospitals
for discounts for early settlement of hospital bills.
ii.
Information regarding network hospitals and the procedures is available

to the insured on the toll free numbers provided by the assistance
companies.
iii.
In event of the necessity of a hospitalization the insured needs to

intimate the same at the call centre and proceed to a specified hospital
with the valid travel insurance policy.
iv.
Hospitals usually contact the assistance companies/insurers on the call

centre numbers to check the validity of the policy and verify coverages.
v.
Once the policy is accepted by the hospital the insured would undergo
treatment in the hospital on a cashless basis.
vi.
Some basic information required by the insurer/assistance provider to

determine admissibility are
1. Details of ailment
2. In case of any previous history ,details of hospital, local medical
officer in India:
Past history, current treatment and further planned course in
hospital and request for immediate sending of
Claim form along with attending physicians statement
Passport copy
Release of medical information form
f) Reimbursement of medical expenses and other non-medical claims:

Reimbursement claims are normally filed by insured after they return to
India. Upon receipt of the claim papers, claim is processed as per usual
process. Payments for all admissible claims are made in Indian Rupee (INR),
unlike in cashless claims where payment is made in foreign currency.
While processing the reimbursement claims, currency conversion rate is
applied as on date of loss to arrive at quantum of liability in INR. Then the
payment is made though cheque or electronic transfer.
389
i. Personal accident claims are processed in similar fashion as explained in

personal accident claims section.
ii. Bail bond cases and financial emergency cases are paid upfront by
Assistance Company and later claimed from insurance company.
iii. Claims repudiation of untenable claims follows the same process as for
all other claims.
g) Claim documentation for Medical Accident and Sickness Expenses
i. Claim form
ii. Doctors report
iii. Original Admission/discharge card
iv. Original Bills/Receipts/Prescription
v. Original X-ray reports/ Pathological/ Investigative reports
vi. Copy of passport/Visa with Entry and exit stamp
The above list is only indicative. Additional information/documents may be
required depending on specific case details or depending upon claim
settlement policy/procedure followed by particular insurer.
Test Yourself 5
________________ are paid upfront by Assistance Company and later claimed
from insurance company.
I.
II.
III.
IV.
Bail bond cases

Personal accident claims
Overseas travel insurance claims
Untenable claims
Summary
a) Insurance is a promise and the policy is a witness to that promise. The
occurrence of insured event leading to a claim under the policy is the true
test of that promise.
b) One of the key rating parameter in insurance is the claims paying ability of
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c) Customers, who buys insurance is the primary stakeholder as well as the

receiver of the claim.
d) In Cashless claim a network hospital provides the medical services based on
a pre-approval from the insurer / TPA and later submits the documents for
settlement of the claim.
e) In reimbursement claim, the customer pays the hospital from his own
resources and then files claim with Insurer / TPA for payment.
f) Claim intimation is the first instance of contact between the customer and
the claims team.
g) If a fraud is suspected by insurance company in case of insurance claim, it is
sent for investigation. Investigation of a claim could be done in-house by an
insurer/TPA or be entrusted to a professional investigation agency.
h) Reserving refers to the amount of provision made for all claims in the books
of the insurer based on the status of the claims.
i) In case of a denial, the customer has the option, apart from the
representation to the insurer, to approach the Insurance Ombudsman or the
consumer forums or even the legal authorities.
j) Frauds occur mostly in hospitalization indemnity policies but Personal
accident policies also are used to make fraud claims.
k) The TPA provides many important services to the insurer and gets
remunerated in the form of fees.
lf-Examination Questions
Question 1
Who among the following is considered as primary stakeholder in insurance
claim process?
I.
II.
III.
IV.
Customers
Owners
Underwriters
Insurance agents/brokers
Question 2
Girish Saxenas insurance claim was denied by insurance company. In case of a
denial, what is the option available to Girish Saxena, apart from the
representation to the insurer?
391
I.
II.
III.
IV.
To approach Government
To approach legal authorities
To approach insurance agent
Nothing could be done in case of case denial
Question 3
During investigation, of a health insurance claim presented by Rajiv Mehto,
insurance company finds that instead of Rajiv Mehto, his brother Rajesh Mehto
had been admitted to hospital for treatment. The policy of Rajiv Mehto is not a
family floater plan. This is an example of ___________fraud.
I.
II.
III.
IV.
Impersonation
Fabrication of documents
Exaggeration of expenses
Outpatient treatment converted to in-patient / hospitalization
Question 4
Under which of the following condition, is domiciliary hospitalization is covered
in a health insurance policy?
I. The condition of the patient is such that he/she can be removed to the
Hospital/Nursing Home , but prefer not to
II. The patient cannot be removed to Hospital/Nursing Home for lack of
III. The treatment can be carried out only in hospital/Nursing home
IV. Duration of hospitalization is exceeding 24 hours
Question 5
Which of the following codes capture the procedures performed to treat the
illness?
I.
II.
III.
IV.
ICD
DCI
CPT
PCT

Answer 1
Customers are primary stakeholder in insurance claim process
Answer 2
392

In case of insurance claim denial, individuals can approach legal authorities.
Answer 3
This is an example of impersonation, as the person insured is different from
person treated.
Answer 4
Domiciliary treatment is provided in health insurance policy, only when the
patient cannot be removed to Hospital/Nursing Home for lack of
Answer 5
Current Procedure Terminology (CPT) codes capture the procedures performed
to treat the illness.
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CHAPTER 10
CLAIMS PROCEDURE
At the core of any insurance contract is the promise made at the beginning i.e.
to indemnify the insured in the event of a loss. This chapter talks about the
procedures and documents involved, from the time loss takes place, making it
easier to comprehend the entire process of claims settlement. It also explains
the method of dealing with disputed claims either by insured or insurer.
Learning Outcomes
A. Claims settlement process
1.
2.
3.
4.
5.
6.
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Argue the importance of claim settlement functions

Describe the procedures for intimation of loss
Appraise claim investigation and assessment
Explain the importance of surveyors and loss assessors
Illustrate the contents of claim forms
Define claims adjustment and settlement
A. Claims settlement process

1. Importance of settling claims
The most important function of an insurance company is to settle claims of
policyholders on the happening of a loss event. Insurer fulfils this promise by
providing prompt, fair and equitable service in either paying the policyholder
or paying claims made against the insured by a third party.
Insurance is marketed as a financial mechanism to provide indemnity on losses
due to insured perils. Were it not for insurance and the claim settlement
process, recovery to normal state after an unfortunate accident / event might
be slow, inefficient and difficult.
One of the non-life insurance companies had the inscription Pay if you can;
repudiate if you must in its board room. That is the spirit of the noble business
of insurance.
Settling claims professionally is regarded the biggest advertisement for an
insurance company.
a) Promptness
Prompt settlement of claims, whether the insured is a corporate client or an
individual or whether the size of the loss is big or small is very important. It
must be understood that the insured needs insurance compensation as soon
as the possible after the loss.
If he gets the money promptly, it is of maximum use to him. It is insurance
companys duty to pay the claim amount when insured needs it most as
early as possible after the loss.
b) Professionalism
The insurance officials consider each and every claim on its merits and do
not apply prejudicial or pre-conceived notions to reject the claim without
examining all the documents that would answer the following questions.
i. Did the loss really happen?
ii. If so, did the loss making event really cause the damage?
iii. The extent of damage out of this event.
iv. What was the reason for the loss?
v. Was the loss covered under the policy?
vi. Is the claim payable as per the contract/ policy conditions?
vii. If so, how much is payable?
The answers to all these questions need to be found out by the insurance
company.
395
Processing claims is an important activity. All claims forms, procedures and

processes have been carefully designed by the company to ensure that all
claims payable under the policy are promptly paid and those that are not
payable are not paid.
The agent, being the representative of the company known to the insured,
has to ensure that all the relevant forms are properly filled up with correct
information, all documents evidencing the loss are attached and all
prescribed procedures are followed in a timely manner and duly submitted
to the company. The role of the agent at the time of loss has already been
discussed earlier.
2. Intimation or Notice of Loss
Policy conditions provide that the loss be intimated to the insurer immediately.
The purpose of an immediate notice is to allow the insurer to investigate a loss
at its early stages. Delays may result in loss of valuable information relating to
the loss. It would also enable the insurer to suggest measures to minimise the
loss and to take steps to protect salvage. The notice of loss is to be given as
soon as reasonably possible.
After this initial check/scrutiny, the claim is allotted a number and entered in
the claims register, with details like policy number, name of insured, estimate
of amount of loss, date of loss, the claim is now ready to be processed.
Under certain types of policies (e.g. Burglary) notice is also to be given to
police authorities. Under cargo rail transit policies, notice has to be served
on the Railways.
3. Investigation and assessment
a) Overview
On receipt of the claim form, from the insured, the insurers decide about
investigation and assessment of the loss. If the claim amount is small, the
investigation to determine the cause and extent of loss is done, by an
officer of the insurers.
The investigation of other claims is entrusted to independent licensed
professional surveyors who are specialists in loss assessment. The
assessment of loss by independent surveyors is based on the principle that
since both the insurers and insured are interested parties, the unbiased
opinion of an independent professional person should be acceptable to both
the parties as well as to a court of law in the event of any dispute.
396
b) Claims assessment
In case of fire, claim is assessed on the basis of a police report, investigators
report if cause is unknown and a survey report. For personal accident
claims, the insured is required to submit a report from the attending doctor
specifying the cause of accident or the nature of illness as the case may be,
and the duration of disablement.
Under policy conditions, the insurers reserve the right to arrange an
independent medical examination. Medical evidence is also required in
support of Workmens Compensation claims. Livestock and cattle claims
are assessed on the basis of the report of a veterinary doctor.
Information
On receipt of intimation of loss or damage insurers check whether:
1. The insurance policy is in force on the date of occurrence of the loss or
damage
2. The loss or damage is caused by an insured peril
3. The property (subject matter of insurance) affected by the loss is the same
as insured under the policy
4. Notice of loss has been received without delay.
Motor third party claims involving death and personal injuries are assessed on
the basis of doctors report. These claims are dealt by Motor Accident Claims
Tribunal and the amount to be paid is decided by factors like the age and
income of the claimant.
Claims involving third party property damage are assessed on the basis of a
survey report.
Motor own damage claim is assessed on the basis of surveyors report.
It may require police report if third party damage is involved.
Information
Investigation is different from the assessment of loss. Investigation is done to
ensure that a valid claim has been made and verify the important details and
doubts like absence of insurable interest, suppression or misrepresentation of
material facts, deliberately creating the loss, etc. are ruled out.
Health insurance claims are assessed either in house or by third party
administrators (TPAs) on behalf of the non-life insurance companies. The
assessment is based on the medical reports and expert opinion.
397
Insurance surveyors undertake the work of investigation also. It helps if a

surveyor gets on to the job as early as possible. Therefore, the practice is to
appoint the surveyor, as soon as possible after the intimation of the claim is
received.
4. Surveyors and Loss Assessors
a) Surveyors
Surveyors are professionals licensed by IRDAI. They are experts in inspecting
and evaluating losses in specific areas. Surveyors are generally paid fees by
the insurance company, engaging them. Surveyors and loss assessors are
hired by general insurance companies normally, at the time of a claim. They
inspect the property in question, examine and verify the causes and
circumstances of the loss. They also estimate the quantum of the loss and
submit reports to the insurance company.
They also advise insurers, regarding appropriate measures to prevent further
losses. Surveyors are governed by provisions of the Insurance Act, 1938,
Insurance Rules 1939 and specific regulations issued by IRDAI. Claims made
outside the country in case of Travel Policy or Marine Open Cover for
exports, are assessed by the claims settling agents abroad named in the
policy.
These agents may assess the loss and make payment, which is reimbursed by
the insurers along with their settling fees. Alternatively, all the claims
papers are collected by the insurance claim settling agents and submitted to
the insurers, along with their assessment.
Important
Section 64 UM of Insurance Act
Where, in the case of a claim of less than twenty thousand rupees in value on
any policy of insurance it is not practicable for an insurer to employ an
approved surveyor or loss assessor without incurring expenses disproportionate
to the amount of the claim, the insurer may employ any other person (not being
a person disqualified for the time being for being employed as a surveyor or
loss assessor) for surveying such loss and may pay such reasonable fee or
remuneration to the person so employed as he may think fit.
5. Claim forms
The contents of the claim form vary with each class of insurance. In general the
claim form is designed to get full information regarding the circumstances of
the loss, such as date of loss, time, cause of loss, extent of loss, etc. The other
questions vary from one class of insurance to another.
398
Example
An example of information sought in a fire claim form is given here under:
i.
ii.
iii.
iv.
Name of the insured, policy number and address

Date, time, cause and circumstances of the fire
Details of damaged property
Sound value of the property at the time of fire. Where the insurance
consists of several items under which the claim is made. [The claim must
be based on actual value of property at the place and time of occurrence
after allowance for depreciation, wear and tear (unless the policy in
respect of building, plant and machinery is on reinstatement value
basis). It shall not include profit]
v. Amount claimed after deduction of salvage value
vi. Situation and occupancy of the premises in which the fire occurred
vii. Capacity in which the insured claims, whether as owner, mortgage or the
like
viii. If any other person is interested in the property damaged
ix. If any other insurance is in force upon such property if so, details thereof
This is followed by the declaration as to the truth and accuracy of the
statement of in the form and signature of the insured and the date.
A sample of fire claim form of an insurance company is given as Exhibit 1 in
this chapter.
The issuance of claim form by the insurance company does not imply or mean
that liability for the claim is admitted by insurers. Claim forms are issued with
the remark without prejudice.
a) Supporting documents
In addition to the claim form, certain documents are required to be
submitted by the claimant or secured by the insurers to substantiate the
claim.
i. For fire claims, a report from the Fire Brigade would be necessary.
ii. For cyclone damage, a report from the Meteorological office may be
called for
iii. In burglary claims, a report from the Police may be necessary.
iv. For fatal accident claims, reports may be necessary from the Coroner
and the Police.
v. For motor claims, the insurer may like to examine driving license,
registration book, police report etc.
vi. In marine cargo claims, the nature of documents varies according to the
type of loss i.e. total loss, particular average, inland or overseas transit
claims etc.
399
6. Loss Assessment and Claim settlement

Claims assessment is the process of determining whether the loss suffered by
the insured is caused by the insured peril and there is no breach of warranty.
Settlement of claims has to be based on considerations of fairness and equity.
For a non-life Insurance company, expeditious settlement of claim is the
benchmark of efficiency for its services. Each company has internal guidelines
about time taken in claims processing, which its employees follow.
This is generally known by the term Turnaround time (TAT). Some insurers
have also put in place, facility for the insured to check claim status online from
time to time. Some non-life insurance companies have also set up claims hub for
speedy processing of claims.
Important
Important aspects in an insurance claim
i. The first aspect to be decided is whether the loss is within the scope of the
policy. The legal doctrine of proximate cause provides guidelines to decide
whether the loss is caused by an insured peril or an excluded peril. The
burden of proof that the loss is within the scope of the policy is upon the
insured. However, if the loss is caused by an excluded peril the onus of
proof is on the insurer.
ii. The second aspect to be decided is whether the insured has complied with
policy conditions, especially conditions which are precedent to liability.
iii. The third aspect is in respect of compliance with warranties. The survey
report would indicate whether or not warranties have been complied with.
iv. The fourth aspect relates to the observance of utmost good faith by the
proposer, during the currency of the policy.
v. On the occurrence of a loss, the insured is expected to act as if he is
uninsured. In other words, he has a duty to take measures to minimise the
loss.
vi. The sixth aspect concerns the determination of the amount payable. The
amount of loss payable is subject to the sum insured. However, the amount
payable will also depend upon the following:
400
The extent of the insureds insurable interest in the property affected

The value of salvage
Application of underinsurance
Application of contribution and subrogation conditions
a) Categories of claim
The claims which are dealt with in insurance policies fall into the following
categories:
i. Standard claims
These are claims which are clearly within the terms and conditions of the
policy. The assessment of claim is done keeping in view scope and the sum
insured opted for and other methods of indemnity laid down for various
classes of insurance.
The claim amount payable by the insurer takes into account various factors
like valuation at time of loss, insurable interest, salvage prospects, loss of
earnings, loss of use, depreciation, replacement value depending on the
policy taken.
ii. Non-Standard claims
These are claims where the insured may have committed a breach of
condition or warranty. The settlement of these claims is considered subject
to rules and regulations framed by the non-life insurance companies.
iii. Condition of average or average clause
This is a condition in some policies which penalises the insured for insuring
his property at a sum insured less than its actual value known as
underinsurance. In the event of a claim the insured gets an amount that is
proportionately reduced from his actual loss in accordance to the amount
underinsured.
iv. Act of God perils - Catastrophic losses
Natural perils like storm, cyclone, flood, inundation, and earthquake are
termed as Act of God perils. These perils may result in losses to many
policies of insurer in the affected region.
In such major and catastrophic losses, the surveyor is asked to proceed to
the loss site immediately for an early assessment and loss minimisation
efforts. Simultaneously, insurers officials also visit the scene of loss
particularly when the amount involved is large. The purpose of the visit is to
obtain an immediate, on the spot idea of the nature and extent of loss.
Preliminary reports are also submitted if the surveyors face some problems
in regards to the assessment and may desire guidance and instructions from
insurers who are thus given an opportunity to discuss the issues with the
insured, if necessary.
401
v. On account payment
Apart from preliminary reports, interim reports are submitted from time to
time where repairs and/or replacements are made over a long period.
Interim reports also give the insurer an idea of the development of
assessment of loss. It also helps in recommendation of "On account payment"
of the claim if desired by the insured. This usually happens if the loss is
large and the completion of assessment may take some time.
If the claim is found to be in order, payment is made to the claimant and
entries made in the company records. Appropriate recoveries are made from
the co-insurers and reinsurers, if any. In some cases, the insured may not be
the person to whom the money is to be paid.
Example
If the property insured under a fire policy is mortgaged to a bank, then
according to the Agreed Bank Clause, claim monies are to be paid to the
bank. Similarly claims for Total Loss on vehicles subject to hire purchase
agreements are paid to financiers.
Marine cargo claims are paid to the claimant who produces the marine policy
duly endorsed in his favour, at the time of the loss.
b) Discharge vouchers
Settlement of the claim is made only after obtaining a discharge under the
policy. A sample of discharge receipt for claims (under personal accident
insurance) for injuries is worded along the following lines: (may vary from
company to company)
Name of the Insured
Claim No.
Received from
Policy No.
the Company Ltd.
The sum of Rs. ___________ in full and final settlement of compensation

me/us on account of injuries sustained by me/us due to accident
occurred on or about the___________ I/we give this discharge receipt
Company in full and final settlement of all my/our claim present or
arising directly or indirectly in respect of the said claim.
Date
402
due to
which
to the
future
(Signature)
The wording of the discharge receipt for third party liability claims may be on
the following lines:
I (Name of the claimant), of___________________________________ hereby
acknowledge to have received the sum of Rs.________________ Which amount
is paid by _________________________________________________ (name of
the insured) in respect of the claim made by me upon him for bodily injuries
and other losses sustained through an accident which occurred to me on or
about the _________ day of ___________ at _____________ and I agree that the
sum is paid with a denial of liability on the part of the said
___________________________ (or any other person) in respect of the said
occurrence and for damage whether now or hereafter to become manifest and
to the intent that the said and all other persons be absolutely and finally
discharged from the further and other claims of every nature and kind
whatsoever by me or in my behalf arising out of the said occurrence.
Date
Signature
Witness
(Note: These wordings are not standard but are given as illustrations only and
may vary).
c) Post settlement action
The action taken after settlement of the claim in relation to underwriting
varies from one class of business to another.
Example
Sum insured under a fire policy stands reduced to the extent of the amount of
claim paid. However, it can be reinstated on payment of pro-rata premium,
which is deducted from the amount of claim paid.
On payment of the capital sum insured under a personal accident policy, the
policy stands cancelled.
Similarly, payment of a claim under individual fidelity guarantee policy
automatically terminates the policy.
d) Salvage
Salvage generally refers to damaged property. On payment of loss, the
salvage belongs to insurers.
403
Example
When motor claims are settled on total loss basis, the damaged vehicle is taken
over by insurers. Salvage can also arise in fire claims, marine cargo claims etc.
Salvage is disposed off according to the procedure laid down by the
companies for the purpose. Surveyors, who have assessed the loss, will also
recommend methods of disposal.
e) Recoveries
After settlement of claims, the insurers under subrogation rights applicable
to insurance contracts, are entitled to the rights and remedies of the
insured and to recover the loss paid from a third party who may be
responsible for the loss under respective laws applicable. Thus, insurers can
recover the loss from shipping companies, railways, road carriers, airlines,
port trust authorities etc.
Example
In the case of non-delivery of consignment, the carriers are responsible for the
loss. Similarly, the port trust is liable for goods which are safely landed but
subsequently missing. For this purpose, a letter of subrogation duly stamped is
obtained from the insured before the settlement of the claim.
7. Disputes related to claims
Despite best efforts, there could be reasons for either delay or non-payment
(repudiation) of claim, either due to delay in notice of loss or non-submission of
documents by clients.
Apart from these, the most common reasons, to name a few are:
Non-disclosure of material facts

Lack of coverage
Loss caused by excluded perils
Lack of adequate sum insured
Breach of warranty
Issues regarding quantum due to underinsurance, depreciation, etc.
All this could cause considerable grief to the insured at a time when he is
already suffering from financial constraints arising due to losses.
In order to reduce his sufferings, grievance redressal and dispute handling
procedures are well laid out in the policy itself. Policies of fire or property have
the condition of Arbitration in the policy itself.
404
a) Arbitration
Arbitration is a method of settling disputes arising out of contracts.
Arbitration is done in accordance with the provisions of the Arbitration and
Conciliation Act, 1996. The normal method of enforcing a contract or
settling a dispute there under would be to go to a court of law. Such
litigation, however, involves considerable delay and expense. The
Arbitration Act allows the parties to submit disputes under a contract to the
more informal, less costly and private process of arbitration.
Arbitration may be done by a single arbitrator or by more than one, chosen
by the parties to the dispute themselves. In the event of a single arbitrator,
the parties have to agree about that person. Many commercial insurance
policies contain an arbitration clause stating that disputes will be subject to
arbitration. Fire and most miscellaneous policies also contain an arbitration
clause which provides that if the liability under the policy is admitted by the
company, and there is a difference concerning the quantum to be paid, such
a difference must be referred to arbitration. Normally the arbitrators
decision is considered final and binding on both the parties.
The wording of the condition varies from policy to policy. Generally, it
provides as follows:
i. The dispute is submitted to the decision of a single arbitrator to be
appointed by the parties, or in the event of any disagreement between
them upon appointment of a single arbitrator, to the decision of two
arbitrators each appointed by the parties.
ii. These two arbitrators shall appoint an Umpire, who presides at the
meetings. The procedure during these meetings resembles that of a
court of law. Each party states his case, if necessary, with the help of a
counsel and witnesses are examined.
iii. If the two arbitrators do not agree on a decision, the matter is submitted
before the Umpire, who makes his award.
iv. Costs are awarded at the discretion of the arbitrator/arbitrators or
Umpire making the award.
Disputes relating to question of liability are to be settled through litigation.
Example
If the insurers contend that the loss is not payable because it is not covered
under the policy, the matter has to be decided by a Court of Law. Again, if the
insurers refuse to pay the claim on the ground that the policy is void because it
was obtained through fraudulent non-disclosure of material facts (breach of the
legal duty of utmost good faith), the issue has to be resolved through
litigation.
405
Note: There is no arbitration condition in marine cargo policies.

8. Other dispute resolution mechanisms
As per IRDA regulations, all policies have to mention about the grievance
redressal system available to the insured in the event the insured is dissatisfied
with the service of the insurer for any reason.
In case of claims under personal lines of business, a dissatisfied insured can
approach the ombudsman, the details of whose office are provided in the
policy.
Test Yourself 1
Which of the following activities would not be categorised under professional
settlement of claims?
I.
II.
III.
IV.
Seeking information relating to the cause of the loss

Approaching the claim with a prejudice
Ascertaining whether the loss was a result of an insured peril
Quantifying the amount payable under the claim
Test Yourself 2
Raj is involved in a car accident. His car is insured under a motor insurance
policy. Which among the following is the most appropriate thing for Raj to do?
I.
II.
III.
IV.
Notify the insurer of the loss as soon as reasonably possible

Notify the insurer at the time of insurance renewal
Damage the car further so as to receive a bigger compensation
Ignore the damage
Test Yourself 3
Compare claims investigation and claims assessment.
I. Both claims investigation and assessment are the same thing
II. Investigation tries to determine the validity of the claim whereas assessment
is more concerned with the cause and extent of the loss
III. Assessment tries to determine the validity of the claim whereas
investigation is more concerned with the cause and extent of the loss
IV. Investigation is done before the claim is paid and assessment is done after
the claim is paid
406
Test Yourself 4
Who is the licensing authority for surveyors?
I.
II.
III.
IV.
Surveyor Association of India

Surveyor Regulatory and Development Authority
Insurance Regulatory and Development Authority of India
Government of India
Test Yourself 5
Which among the following documents is most likely to be requested while
examining a cyclone damage claim?
I.
II.
III.
IV.
Coroners report
Report from Fire Brigade
Police report
Report from Meteorological Department
Test Yourself 6
Under which principle can the insurer assume the rights of the insured in order
to recover from a third party the loss paid under a policy?
I.
II.
III.
IV.
Contribution
Discharge
Subrogation
Indemnity
Test Yourself 7
If the insurer decides that a certain loss is not payable because it is not covered
under the policy then who decides on such matters?
I.
II.
III.
IV.
Insurers decision is final

Umpire
Arbitrator
Court of Law
407
Summary
a) Settling claims professionally is regarded as the biggest advertisement for an
insurance company.
b) Policy conditions provide that the loss be intimated to the insurer
immediately.
c) If the claim amount is small, the investigation to determine the cause and
extent of loss is done by an officer of the insurer. But for other claims it is
entrusted to independent licensed professional surveyors who are specialists
in loss assessment.
d) In general the claim form is designed to get full information regarding the
circumstances of the loss, such as date of loss, time, cause of loss, extent of
loss, etc.
e) Claims assessment is the process of determining whether the loss suffered
by the insured is caused by the insured peril that there is no breach of
warranty the quantum of loss suffered by the insured and the insurers
liability under the policy.
f) Settlement of the claim is made only after obtaining a discharge under the
policy.
g) Arbitration is a method of settling disputes arising out of contracts.
Key terms
a)
b)
c)
d)
e)
f)
g)
Intimation of loss
Investigation and Assessment
Surveyors and Loss Assessors
Claim forms
Adjustment and Settlement
Disputes in claim settlement
Arbitration
408

Answer 1
Professional settlement of claims does not involve approaching a claim with
prejudice.
Answer 2
A claim needs to be notified as soon as reasonably possible.
Answer 3
Investigation tries to determine the validity of the claim whereas assessment is
more concerned with the cause and extent of the loss.
Answer 4
IRDAI is the licensing authority for surveyors.
Answer 5
Report from Meteorological Department is most likely to be requested while
examining a cyclone damage claim.
Answer 6
Under the principle of subrogation the insurer can assume the rights of the
insured in order to recover from a third party the loss paid under a policy.
Answer 7
If the insurer decides that a certain loss is not payable because it is not covered
under the policy then such matters will be decided in the Court of Law.
409
Question 1
Intimation of loss is to be made:
I.
II.
III.
IV.
at the exact time of the loss

after 15 days
as soon as reasonably possible
any time after the loss
Question 2
Investigation of loss is done by:
I.
II.
III.
IV.
unlicensed surveyor
licensed and qualified surveyor
insureds representative
any person with a degree in engineering
Question 3
For personal accident claims, report of________ is necessary.
I.
II.
III.
IV.
Surveyor
Doctor
Police
Coroner
Question 4
Independent surveyors are required for claims equal to or above_______ as per
the Insurance Act.
I.
II.
III.
IV.
Rs.
Rs.
Rs.
Rs.
40,000
15,000
20,000
25,000
Question 5
Claims assessed outside the country in case of travel insurance polices are
assessed by:
I.
II.
III.
IV.
Indian surveyors
Local surveyors in the country of loss
Insurers own employees
Claims settling agents named in the policy
410
Question 6
In case of a fire claim, a report from the fire brigade:
I.
II.
III.
IV.
is not required
is optional for the insured
is necessary
is part of the police report
Question 7
What is TAT?
I.
II.
III.
IV.
Time and Turn

Till a Time
Time and Tide
Turnaround Time
Question 8
On payment of loss, salvage belongs to:
I.
II.
III.
IV.
Surveyors
Insured
Insurer
Local authorities
Question 9
Arbitration is a claim settlement process done ______________.
I.
II.
III.
IV.
in the court of law

by a group of surveyors
by arbitrator(s) chosen by the parties involved
arbitrarily by the insurance companys employees
Question 10
Insurers under right of subrogation are allowed to recover the loss paid from:
I.
II.
III.
IV.
Shipping companies only

Railways and road carriers only
Airlines and Port Trusts only
Shipping companies and railway and road carriers and airlines and port trusts
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Answer 1
Intimation of loss is to be made as soon as reasonably possible.
Answer 2
Investigation of loss is done by licensed and qualified surveyor.
Answer 3
For personal accident claims report of a Doctor is necessary.
Answer 4
Independent surveyors are required for claims equal to or above Rs 20000 as per
the Insurance Act.
Answer 5
Claims assessed outside the country in case of travel insurance policies are
assessed by claims settling agents named in the policy.
Answer 6
In case of a fire claim, a report from the fire brigade is required.
Answer 7
TAT is turnaround time.
412
Answer 8
On payment of loss, salvage belongs to insurer.
Answer 9
Arbitration is a claim settlement process done by arbitrator(s) chosen by the
parties involved.
Answer 10
Insurers under right of subrogation are allowed to recover the loss paid from
shipping companies and railway and road carriers and airlines and port trusts.
413
414
CHAPTER 11
CUSTOMER SERVICE
In this chapter you will learn the importance of customer service. You will learn
the role of agents in providing service to customers. You will learn different
grievances redressal mechanisms available for Insurance policyholders. You will
also learn how to communicate and relate with customer.
Learning Outcomes
A.
B.
C.
D.
E.
F.
Customer service General concepts

Insurance agents role in providing great customer service
Grievance redressal
Communication process
Non-verbal communication
Ethical behaviour

1.
2.
3.
4.
5.
6.
7.
8.
Illustrate the importance of customer services

Describe quality of service
Examine importance of service in the insurance industry
Discuss the role of an insurance agent in providing good service
Review grievance redressal mechanism in insurance
Explain the process of communication
Demonstrate the importance of non-verbal communication
Recommend ethical behaviour
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A. Customer service General concepts

1. Why Customer Service?
Customers provide the bread and butter of a business and no enterprise can
afford to treat them indifferently. The role of customer service and
relationships is far more critical in the case of insurance than in other products.
This is because insurance is a service and very different from real goods.
Let us examine how buying insurance differs from purchasing a car.
A Car
Insurance of the car
It is a tangible good, that can It is a contract to compensate against loss or
be seen, test driven and damage to the car due to an unforeseen
experienced.
accident in future. One cannot see or touch
or experience the insurance benefit till the
unfortunate event occurs.
The buyer of the car has an The purchase of insurance is not based on
expectation of some pleasure expectation of immediate pleasure, but
at the time of purchase. The fear/anxiety about a possible tragedy.
experience is real and easy to It is unlikely that any insurance customer
understand.
would look forward to a situation where the
benefit becomes payable.
A car is produced in a factory In case of insurance it can be seen that
assembly line, sold in a production
and
consumption
happen
showroom and used on the simultaneously.
This
simultaneity
of
road.
production and consumption is a distinctive
The three processes of making, feature of all services.
selling and using take place at
three different times and
places.
What the customer really derives is a service experience. If this is less than
satisfactory, it causes dissatisfaction. If the service exceeds expectations, the
customer would be delighted. The goal of every enterprise should thus be to
delight its customers.
2. Quality of service
It is necessary for insurance companies and their personnel, which includes their
agents, to render high quality service and delight the customer.
But what is high quality service? What are its attributes?
A well-known model on service quality [named SERVQUAL] would give us
some insights. It highlights five major indicators of service quality:
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a) Reliability: the ability to perform the promised service dependably and

accurately. Most customers regard reliability as being the most
important of the five dimensions of service quality. It is the foundation
on which trust is built.
b) Responsiveness: refers to the willingness and ability of service
personnel to help customers and provide prompt response to the
customers needs. It may be measured by indicators like speed,
accuracy, and attitude while giving the service.
c) Assurance: refers to the knowledge, competence and courtesy of service
providers and their ability to convey trust and confidence. It is given by
the customers evaluation of how well the service employee has
understood needs and is capable of meeting them.
d) Empathy: is described as the human touch. It is reflected in the caring
attitude and individualised attention provided to customers.
e) Tangibles: represent the physical environmental factors that the
customer can see, hear and touch. For instance the location, the layout
and cleanliness and the sense of order and professionalism that one gets
when visiting an insurance companys office can make a great impression
on the customer. The physical ambience becomes especially important
because it creates first and lasting impressions, before and after the
actual service is experienced.
3. Customer service and insurance
Ask any leading sales producers in the insurance industry about how they
managed to reach the top and stay there. You are likely to get a common
answer, that it was the patronage and support of their existing clients that
helped them build their business.
You would also learn that a large part of their income comes from the
commissions for renewal of the contracts. Their clients are also the source for
acquiring new customers.
What is the secret of their success?
The answer, most likely is, commitment to serving their customers.
How does keeping a customer happy benefit the agent and the company?
To answer this question, it would be useful to look at customers lifetime value.
Customer lifetime value may be defined as the sum of economic benefits that
can be derived from building a sound relationship with a customer over a long
period of time.
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Diagram 1: Customer Lifetime Value
An agent who renders service and builds close relationships with her customers,
builds goodwill and brand value, which helps in expanding the business.
Test Yourself 1
What is meant by customer lifetime value?
I. Sum of costs incurred while servicing the customer over his lifetime
II. Rank given to customer based on business generated
III. Sum of economic benefits that can be achieved by building a long term
relationship with the customer
IV. Maximum insurance that can be attributed to the customer
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B. Insurance agents role in providing great customer service

Let us now consider how an agent can render great service to the customer. The
role begins at the stage of sale and continues through the duration of the
contract, and includes the following steps. Let us look at some of the
milestones in a contract and the role played at each step.
1. The Point of Sale - Best advice
The first point for service is the point of sale. One of the critical issues involved
in purchase of non-life Insurance is to determine the amount of coverage [Sum
Insured] to be bought.
Here it is important to keep a basic percept in mind - Do not recommend
insuring where the risk can be managed otherwise. The insured needs to make
sure that the expected loss involved is greater than the cost of insurance.
If the premium payments are high compared to the loss involved, it may be
advisable to just bear the risk.
On the other hand, if the occurrence of any contingency would lead to financial
burden, it is wise to insure against such contingency.
Whether insurance is needed or not, depends on the circumstances. If the
probability of loss or damage to an asset due to a peril is negligible, one may
retain the risk rather than insure it. Similarly if an item has insignificant value,
one may not insure it.
Example
To a homeowner living in a flood prone area, purchasing cover against floods
would prove to be helpful.
On the other hand, if the home owner owns a home at a place where the risk of
floods is negligible it may not be necessary to obtain cover.
In India, motor insurance against third party is compulsory under the law. In
that case, the debate about whether one needs insurance or not is irrelevant.
One must purchase third party insurance if he owns a vehicle because it is
mandatory if one wants to drive on a public road. At the same time it would be
prudent to cover the possibility of loss of own damage to the car which is not
mandatory.
In case a portion of the possible loss can be borne by oneself, it would be
economical for the insured to opt for a deductible. A corporate customer may
have varied needs, right from the coverage of factory, people, cars, liability
exposures etc. She needs the right advice for the coverage and policies to be
taken.
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Most non-life insurance policies broadly fall in two categories:

Named peril policies
All risk policies
The latter are costlier as they cover all losses which are specifically not
excluded under the policy. Hence opting for named peril policies where the
most probable causes of loss are covered by the perils named in the policy may
be more beneficial, as such a step could save premiums and provide need based
cover to the insured.
The agent really begins to earn her commission when she renders best advice on
the matter. It would be worthwhile for the agent to remember that while one
may view insurance as the standard approach for dealing with the risk, there
are other techniques like risk retention or loss prevention that are available as
options for reducing the cost of insurance.
From the standpoint of an insured the relevant questions for instance may be:
How much premium will be saved by considering deductibles?
How much would a loss prevention activity result in reduction in
premiums?
When approaching the customer as a non-life insurance sales person the
question an agent needs to ask herself is about her role vis--vis the customer.
Is she going there just to get a sale or to relate to the customer as a coach and
partner who would help him to manage his risks more effectively?
The customers angle is different. He is not so much concerned with getting
maximum insurance per rupee spent, but rather in reducing the cost of
handling risk. The concern would be thus on identifying those risks which
customer cannot retain and hence must be insured.
In other words the role of an insurance agent is more than that of a mere sales
person. She also needs to be a risk assessor, underwriter, risk management
counsellor, designer of customised solutions and a relationship builder who
thrives on building trust and long-term relationships, all rolled into one.
2. The proposal stage
The agent has to support the customer in filling out the proposal for insurance.
The insured is required to take responsibility for the statements made therein.
The salient aspects of a proposal form have been discussed in chapter 5.
It is very important that the agent should explain and clarify to proposer the
details to be filled as answer to each of questions in the proposal form. In the
event of a claim, a failure to give proper and complete information can
jeopardise the customers claim.
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Sometimes there may be additional information that may be required to

complete the policy. In such cases the company may inform the customer
directly or through the agent / advisor. In either case, it becomes necessary to
help the customer complete all the required formalities and even explain to him
or her why these are necessary.
3. Acceptance stage
a) Cover note
The cover note has been discussed in chapter 5. It is the agents
responsibility to ensure that the cover note is issued by the company, where
applicable, to the insured. Promptness in this regard communicates to the
client that his interests are safe in the hands of the agent and the company.
b) Delivery of the policy document
Delivery of the policy is another major opportunity that an agent gets to
make contact with the customer. If company rules permit a policy document
being delivered in person, it may be a good idea to collect it and present
the document to the customer.
If the policy is being sent directly by mail, one must contact the customer,
once it is known that the policy document has been sent. This is an
opportunity to visit the customer and explain anything that is unclear in
the document received. This is also an occasion to clarify various kinds of
policy provisions, and the policy holders rights and privileges that the
customer can avail of. This act demonstrates a willingness to provide a level
of service beyond the sale.
This meeting is also an occasion to pledge the agents commitment to
serving the customer and communicating full support.
The next logical step would be to ask for the names and particulars of other
individuals he knows who can possibly benefit from the agents services. If
the client can himself contact these people and introduce the agent to
them, it would mean a great breakthrough in business.
c) Policy renewal
Non-life insurance policies have to be renewed each year and the customer
has a choice at the time of each renewal, to continue insuring with the same
company or switch to another company. This is a critical point where the
goodwill and trust created by the agent and the company gets tested.
421
Although there is no legal obligation on the part of insurers to advise the

insured that his policy is due to expire on a particular date, yet as a matter
of courtesy and decidedly a healthy business practice, insurers issue a
Renewal Notice one month in advance of the date of expiry, inviting
renewal of the policy. The agent needs to be in touch with the customer
well before the renewal due date to remind the latter about renewal so that
he can make provision for the same.
The relationship gets strengthened by keeping in touch with the client from
time to time, by greeting him on some occasion like a festival or a family
event. Similarly when there is a moment of difficulty or sorrow by to
offering assistance.
4. The claim stage
The agent has a crucial role to play at the time of claim settlement. It is her
task to ensure that the incident giving rise to the claim is immediately informed
to the insurer and that the customer carefully follows all the formalities and
assists in all the investigations that may need to be done to assess the loss.
Test Yourself 2
Identify the scenario where a debate on the need for insurance is not required.
I.
II.
III.
IV.
Property insurance
Business liability insurance
Motor insurance for third party liability
Fire insurance
422
C. Grievance redressal
1. Overview
The time for high priority action is when the customer has a complaint.
Remember that in the case of a complaint, the issue of service failure [it can
range from delay in correcting the records of the insurer to a lack of promptness
in settling a claim] which has aggrieved the customer is only a part of the story.
Customers get upset and infuriated a lot more because of their interpretations
about such failure. There are two types of feelings and related emotions that
arise with each service failure:
Firstly there is a sense of unfairness, a feeling of being cheated
The second feeling is one of hurt ego of being made to look and feel
small
A complaint is a crucial moment of truth in the customer relationship; if the
company gets it right there is potential to actually improve customer loyalty.
The human touch is critical in this; customers want to feel valued.
If you are a professional insurance advisor, you would not allow such a situation
to happen in the first place. You would take the matter up with the appropriate
officer of the company. Remember, no one else in the company has
ownership of the clients problems as much as you do.
Complaints / grievances provide us the opportunity to demonstrate how much
we care for the customers interests. They are in fact the solid pillars on which
an insurance agents goodwill and business is built. At the end of every policy
document, the insurance companies have detailed the procedure of grievance
redressal, which should be brought to the notice of the customers at the time of
explaining the document provisions.
Word of mouth publicity (Good/Bad) has significant role in selling and
servicing. Remember good service gets rewarded by 5 people being informed,
where as bad service is passed on to 20 people.
2. Integrated Grievance Management System (IGMS)
IRDA has launched an Integrated Grievance Management System (IGMS) which
acts as a central repository of insurance grievance data and as a tool for
monitoring grievance redress in the industry.
Policyholders can register on this system with their policy details and lodge
their complaints. Complaints are then forwarded to respective insurance
company. IGMS tracks complaints and the time taken for redressal. The
complaints can be registered at:
http://www.policyholder.gov.in/Integrated_Grievance_Management.aspx
423
3. The Consumer Protection Act, 1986

This Act was passed to provide for better protection of the interest of
consumers and to make provision for the establishment of consumer councils
and other authorities for the settlement of consumers disputes. The Act has
been amended by the Consumer Protection (Amendment) Act, 2002.
a) Definitions under the Act
Some definitions provided in the Act are as follows:
Definition
Service means service of any description which is made available to potential
users and includes the provision of facilities in connection with banking,
financing, insurance, transport, processing, supply of electrical or other energy,
board or lodging or both, housing construction, entertainment, amusement or
the purveying of news or other information. But it does not include the
rendering of any service free of charge or under a contract of personal service.
Insurance is included as a service
Consumer means any person who:
i. Buys any goods for a consideration and includes any user of such goods.
But does not include a person who obtains such goods for resale or for
any commercial purpose or
ii. Hires or avails of any services for a consideration and includes
beneficiary of such services.
'Defect' means any fault, imperfection, shortcoming inadequacy in the quality,
nature and manner of performance which is required to be maintained by or
under any law or has been undertaken to be performed by a person in pursuance
of a contract or otherwise in relation to any service.
'Complaint' means any allegation in writing made by a complainant that:
i. An unfair trade practice or restrictive trade practice has been adopted
ii. The goods bought by him suffer from one or more defects
iii. The services hired or availed of by him suffer from deficiency in any
respect
iv. Price charged is in excess of that fixed by law or displayed on package
Goods which will be hazardous to life and safety when used are being
offered for sale to the public in contravention of the provisions of any law
requiring trader to display information in regard to the contents, manner
and effect of use of such goods
'Consumer dispute' means a dispute where the person against whom a
complaint has been made, denies and disputes the allegations contained in the
complaint.
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b) Consumer disputes redressal agencies

Consumer disputes redressal agencies are established in each district and
state and at national level.
i. District Forum: The forum has jurisdiction to entertain complaints,
where value of the goods or services and the compensation claimed is up
to Rs. 20 lakhs The District Forum is empowered to send its order/decree
for execution to appropriate Civil Court.
ii. State Commission: This redressal authority has original, appellate and
supervisory jurisdiction. It entertains appeals from the District Forum. It
also has original jurisdiction to entertain complaints where the value of
goods/service and compensation, if any claimed exceeds Rs. 20 lakhs but
does not exceed Rs. 100 lakhs. Other powers and authority are similar to
those of the District Forum.
iii. National Commission: The final authority established under the Act is
the National Commission. It has original; appellate as well as supervisory
jurisdiction. It can hear the appeals from the order passed by the State
Commission and in its original jurisdiction it will entertain disputes,
where goods/services and the compensation claimed exceeds Rs.100
lakhs. It has supervisory jurisdiction over State Commission.
All the three agencies have powers of a Civil Court.
c) Procedure for filing a complaint
The procedure for filing a complaint for the three redressal agencies
mentioned above is very simple. There is no fee for filing a complaint or
filing an appeal whether before the State Commission or National
Commission.
The complaint can be filed by the complainant himself or by his authorised
agent. It can be filed personally or can even be sent by post. It may be
noted that no advocate is necessary for the purpose of filing a complaint.
d) Consumer Forum orders
If the forum is satisfied that the goods complained against suffer from any of
the defects specified in the complaint or that any of the allegations
contained in the complaint about the services are proved, the forum can
issue an order directing the opposite party to do one or more of the
following namely,
i. To return to the complainant the price, [or premium in case of
insurance], the charges paid by the complainant
425
ii. To award such amount as compensation to the consumers for any loss or
injury suffered by the consumer due to negligence of the opposite party
iii. To remove the defects or deficiencies in the services in question
iv. To discontinue the unfair trade practice or the restrictive trade
practice or not to repeat them
v. To provide for adequate costs to parties
e) Consumer disputes categories
The majority of consumer disputes with the three forums fall in the
following main categories, as far as the insurance business is concerned:
i.
ii.
iii.
iv.
v.
Delay in settlement of claims

Non-settlement of claims
Repudiation of claims
Quantum of loss
Policy terms, conditions etc
4. The Insurance Ombudsman

The Central Government under the powers of the Insurance Act, 1938 made
Redressal of Public Grievances Rules, 1998 by a notification published in the
official gazette on November 11, 1998. These rules apply to life and non-life
insurance, for all personal lines of insurances, that is, insurances taken in an
individual capacity.
The objective of these rules is to resolve all complaints relating to settlement
of claim on the part of the insurance companies in a cost effective, efficient
and impartial manner.
The Ombudsman, by mutual agreement of the insured and the insurer can
act as a mediator and counsellor within the terms of reference.
The decision of the Ombudsman, whether to accept or reject the complaint,
is final.
a) Complaint to the Ombudsman
Any complaint made to the Ombudsman should be in writing, signed by the
insured or his legal heirs, addressed to an Ombudsman within whose
jurisdiction, the insurer has a branch / office, supported by documents, if
any, along with an estimate of the nature and extent of loss to the
complainant and the relief sought.
Complaints can be made to the Ombudsman if:
i. The complainant had made a previous written representation to the
insurance company and the insurance company had:
426
Rejected the complaint or

The complainant had not received any reply within one month after
receipt of the complaint by the insurer
The complainant is not satisfied with the reply given by the insurer.
ii. The complaint is made within one year from the date of rejection by the
insurance company.
iii. The complaint is not pending in any Court or Consumer Forum or in
arbitration.
b) Recommendations by the Ombudsman
There are certain duties/protocols that the Ombudsman is expected to
follow:
i. Recommendations should be made within one month of the receipt of
such a complaint
ii. The copies should be sent to both the complainant and the insurance
company
iii. Recommendations have to be accepted in writing by the complainant
within 15 days of receipt of such recommendation
iv. A copy of acceptance letter by the insured should be sent to the insurer
and his written confirmation sought within 15 days of his receiving such
acceptance letter
If the dispute is not settled by intermediation, the Ombudsman will pass
award to the insured which he thinks is fair, and is not more than what is
necessary to cover the loss of the insured.
c) Awards by Ombudsman
The awards by Ombudsman are governed by the following rules:
i. The award should not be more than Rs. 20 lakh (inclusive of ex-gratia
payment and other expenses)
ii. The award should be made within a period of 3 months from the date of
receipt of such a complaint, and the insured should acknowledge the
receipt of the award in full as a final settlement within one month of the
receipt of such award
iii. The insurer shall comply with the award and send a written intimation to
the Ombudsman within 15 days of the receipt of such acceptance letter
iv. If the insured does not intimate in writing the acceptance of such award,
the insurer may not implement the award
Test Yourself 3
As per the Consumer Protection Act, 1986, who cannot be classified as a
consumer?
427
I.
II.
III.
IV.
Hires goods / services for personal use

A person who buys goods for resale purpose
Buys goods and services for a consideration and uses them
Uses the services of another for a consideration
428
D. Communication process
Communication skills in customer service
One of the most important set of skills that an agent or service employee needs
to possess, for effective performance in the work place, is soft skills.
Unlike hard skills which deal with an individuals ability to perform a certain
type of task or activity, soft skills relate to ones ability to interact effectively
with other workers and customers, both at work and outside.
Communication skills are one of the most important of these soft skills.
1. Communication and customer relationships
Customer service is one of the key elements in creating satisfied and loyal
customers. But it is not enough. Customers are human beings with whom the
company needs to build a strong relationship.
It is both the service and the relationship experience that ultimately shapes
how the customer would look at the company.
What goes to make a healthy relationship?
At its heart, of course, there is trust. At the same time there are other
elements, which reinforce and promote that trust. Let us illustrate some of the
elements
Diagram 2: Elements for Trust
i. Every relationship begins with attraction:

One needs to be simply liked and must be able to build a rapport with the
customer. Attraction is very often the result of first impressions that are
derived when a customer comes in touch with the organisation or its
representatives. Attraction is the first key to unlocking every heart.
Without it a relationship is hardly possible. Consider a sales person who is
not liked. Do you really think she will be able to make much headway in the
sales career?
429
ii. The second element of a relationship is ones presence being there

when needed:
The best example is perhaps that of a marriage. Is it important for the
husband to be available when the wife needs him? Similarly in a customer
relationship, the issue is whether and how the company or its
representative is available when needed. Is she or he fully present and
listening to the customers needs?
There may be instances when one is not fully present and do justice to all the
expectations of ones customers. One can still maintain a strong relationship if
one can speak to the customer, in a manner that is assuring, full of empathy
and conveys a sense of responsibility.
All of the above points like:
The impression one creates or
The way one is present and listens or
The message one sends across to another
are dimensions of communication and call for discipline and skills. In a sense
what one communicates is ultimately a function of how one thinks and sees.
The companies emphasise a lot on customer relationship management as the
cost of retaining a customer is far lower than acquiring a new customer. The
customer relation occurs across many touch points e.g. while understanding
customers insurance needs, explaining coverages, handing over forms. So,
there are many opportunities for the agent to strengthen the relation at each of
these points.
2. Process of communication
What is communication?
All communications require a sender, who transmits a message, and a recipient
of that message. The process is complete once the receiver has understood the
message of the sender.
Diagram 3: Forms of communication
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Communication may take place several forms
Oral
Written
Non-verbal
Using body language
It may be face to face, over the phone, or by mail or internet. It may be formal
or informal. Whatever the content or form of the message or the media used,
the essence of communication is given by what the recipient has understood as
being communicated.
It is important for a business to choose how and when it will send messages to
intended receivers.
The communication process is illustrated below.
Let us define the terms in the diagram:
Diagram 4: Communication process
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Definition
i. Source: As the source of the message, the agent must be clear about why
she is communicating, and what she wants to communicate, and confident
that the information being communicated is useful and accurate.
ii. Message is the information that one wants to communicate.
iii. Encoding is the process of transferring the information one wants to
communicate into a form that can be sent and correctly decoded at the
other end. Success in encoding depends on how well one is able to convey
information and eliminate sources of confusion. For this it is necessary to
know ones audience. Failure to do so can result in delivering messages that
are misunderstood.
iv. A Message is conveyed through a channel, which has to be selected for the
purpose. The channel may be verbal including personal face-to-face
meetings, telephone and videoconferencing; or it may be written including
letters, emails, memos, and reports.
v. Decoding is the step wherein the information gets received, interpreted and
understood in a certain way, at its destination. It can be seen that decoding
[or how one receives a message] is as important as encoding [how one
conveys it].
vi. Receiver: Finally there is the receiver, the individual or individuals [the
audience] to whom the message is sent. Each member of this audience has
his own ideas, beliefs and feelings and these would influence how the
message has been received and acted upon. The sender obviously needs to
consider these factors when deciding what message to send.
vii. Feedback: Even as the message is being sent and received, the receiver is
likely to send feedback in the form of verbal and non-verbal messages to the
sender. The latter needs to look for such feedback and carefully understand
these reactions as it would help to determine how the message has been
received and acted upon. If necessary the message could be changed or
rephrased.
3. Barriers to effective communication
Barriers to effective communication can arise at each step in the above process.
Communication can get distorted because of the impression created about the
sender, or because the message has been poorly designed, or because too much
or too little has been conveyed, or because the sender has not understood the
receivers culture. The challenge is to remove all these barriers.
432
Test Yourself 4
What does not go on to make a healthy relationship?
I.
II.
III.
IV.
Attraction
Trust
Communication
Scepticism
433
E. Non-verbal communication
Let us now look at some concepts that the agent needs to understand.
Important
Making a great first impression
We have already seen that attraction is the first pillar of any relationship. You
can hardly expect to get business from a customer who does not like you. In fact
many individuals need just a quick glance, of maybe a few seconds, to judge
and evaluate you when you meet for the first time. Their opinion about you gets
based on your appearance, your body language, your mannerisms, and how you
are dressed and speak. Remember that first impressions last for long. Some
useful tips for making a good first impression are:
i. Be on time always. Plan to arrive a few minutes early, allowing
flexibility for all kinds of possible delays.
ii. Present yourself appropriately. Your prospect, whom you are meeting
for the first time, does not know you and your appearance is usually the
first clue he or she has to go on.
Is your appearance helping to create the right first impression?
Is the way you dress appropriate for the meeting or occasion?
Is your grooming clean and tidy with good haircut and shave, clean
and tidy clothes, neat and tidy make up?
iii. A warm, confident and winning smile puts you and your audience
immediately at ease with one another.
iv. Being open, confident and positive
Does your body language project confidence and self-assurance?
Do you stand tall, smile, make eye contact, greet with a firm
handshake?
Do you remain positive even in the face of some criticism or when
the meeting is not going as well as expected?
v. Interest in the other person - The most important thing is about being
genuinely interested in the other person.
Do you take some time to find out about the customer as a person?
Are you caring and attentive to what he or she says?
Are you totally present and available to your customer or is your
mobile phone engaging you during half your interview?
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1. Body language
Body language refers to movements, gestures, facial expressions. The way we
talk, walk, sit and stand, all says something about us, and what is happening
inside us.
It is often said that people listen to only a small percentage of what is actually
said. What we dont say speaks a lot more and a lot louder. Obviously, one
needs to be very careful about ones body language.
a) Confidence
Here are a few tips about how to appear confident and self-assured, giving
the impression of someone to be seriously listened to:
Posture standing tall with shoulders held back.
Solid eye contact - with a "smiling" face
Purposeful and deliberate gestures
b) Trust
Quite often, a sales persons words fall on deaf ears because the audience
does not trust her her body language does not give the assurance that she
is sincere about what she says. It is very important to be aware of some of
the typical signs that may indicate when one is not honest and believable
and be on guard against them as listed below:
Eyes maintaining little or no eye contact, or rapid eye movements

Hand or fingers are in front of ones mouth when speaking
Ones body is physically turned away from the other
Ones breathing rate increases
Complexion changes colour; red in face or neck area
Perspiration increases
Voice changes such as change in pitch, stammering, throat clearing
Speech slow and clear with tone of voice kept moderate to low
Some body movements that indicate defensiveness and non-receptivity

include:
Hand/arm gestures are small and close to one s body

Facial expressions are minimal
Body is physically turned away from you
Arms are crossed in front of body
Eyes maintain little contact, or are downcast
If your customer expresses any of these, perhaps it is time you checked

yourself and paid more attention to what is going on in the customers mind.
435
2. Listening skills
The third set of communication skills that one needs to be aware about and
cultivate are listening skills. These follow from a well-known principle of
personal effectiveness first to understand before being understood.
How well you listen has a major impact on your job effectiveness, and on the
quality of your relationships with others. Let us look at some listening tips.
a) Active listening:
It is where we consciously try to hear not only the words but also, more
importantly, try to understand the complete message being sent by another.
Let us look at some of the elements of active listening. They are:i. Paying attention
We need to give the speaker our undivided attention, and acknowledge the
message. Note, non-verbal communication also "speaks" loudly. Some
aspects of paying attention are as follows:
Look at the speaker directly
Put aside distracting thoughts
Don't mentally prepare a rebuttal
Avoid all external distractions [for instance, keep your mobile on
silent mode]
"Listen" to the speaker's body language
ii. Demonstrating that you are listening:

Use of body language plays an important role here. For instance one may:
Give an occasional nod and smile
Adopt a posture that is open and draws out the other to speak freely
Have small verbal comments like yes and uh huh.
iii. Provide feedback:
A lot of what we hear may get distorted by our personal filters, like the
assumptions, judgments, and beliefs we carry. As a listener, we need to be
aware of these filters and try to understand what really is being said.
This may require you to reflect on the message and ask questions to
clarify what was said
Another important way to provide feedback is to paraphrase the
speakers words
Yet a third way is to periodically stop the speaker and make a
summary of what the speaker has said and repeat it back to him or
her.
436
Example
Asking for clarity - From what I have heard, am I right in assuming, that you
have issues about the benefits of some of our health plans, could you be more
specific?
Paraphrasing the speakers exact words - So you are saying that our health
plans are not providing benefits that are attractive enough have I understood
you correctly?
iv. Not being judgemental:
One of the biggest hurdles to active listening is our tendency to be
judgmental and biased about the speaker. The result is that the listener
may hear what the speaker says but listens according to her own biased
interpretation of what the speaker might be saying.
Such judgmental approach can result in the listener being unwilling to
allow the speaker to continue speaking, considering it a waste of time. It
can also result in interrupting the speaker and rebutting the speaker with
counter arguments, even before he or she has been able to convey the
message in full.
This will only frustrate the speaker and limits full understanding of the
message. Active listening calls for:
Allowing the speaker to finish each point before asking questions
Not interrupting the speaker with any counter arguments
v. Responding appropriately:
Active listening implies much more than just hearing what a speaker says.
The communication can be completed only when the listener responds in
some way, through word or action. Certain rules need to be followed for
ensuring that the speaker is not put down but treated with respect and
deference. These include:
Being candid, open, and honest in your response
Asserting ones opinions respectfully
Treating another person in a way you would like to be treated
yourself
vi. Empathetic listening:
Being empathetic literally means putting yourself in the other persons shoes
and feeling his or her experience as he or she would feel it.
437
Listening with empathy is an important aspect of all great customer service.

It becomes especially critical when the other person is a customer with a
grievance and in a lot of pain.
Empathy implies hearing and listening patiently, and with full attention, to
what the other person has to say, even when you do not agree with it. It is
important to show the speaker acceptance, not necessarily agreement. One
can do so by simply nodding or injecting phrases such as "I understand" or "I
see."
Test Yourself 5
Which among the following is not an element of active listening?
I.
II.
III.
IV.
Paying good attention

Being extremely judgemental
Empathetic listening
Responding appropriately
438
F. Ethical behaviour
1. Overview
Of late, serious concerns are voiced about the proprieties in business, because
increasingly there are reports of improper behaviour. Some of the worlds
biggest companies have been found to have cheated through false accounts and
dishonest audit certification. The funds of banks have been misused by their
managements to bolster the greed of some friends. Officials have used their
authority to promote personal benefits. Increasingly, people who are trusted by
the community to perform their tasks are seen to have betrayed the trust.
Personal aggrandisement and greed prevails.
Consequently, there is increasing discussion about accountability and corporate
governance, all of which together can be called Ethics in business. Acts like
the Right to Information Act and developments like Public Interest
Litigation have assumed considerable importance as instruments to achieve
better accountability and governance.
Ethical behaviour automatically leads to good governance. When one does her
duty conscientiously and sincerely, there is good governance. Unethical
behaviour shows little concern for others and high concern for self. When one
tries to serve self-interest through ones official position, there is unethical
behaviour. It is not wrong to look after ones interests. But it is wrong to do so
at the cost of the interests of others.
Insurance is a business of trust. Issues of propriety and ethics are extremely
important in this business of insurance. Breach of trust amounts to cheating and
is wrong. Things go wrong when wrong information is given to the prospects
tempting them to buy insurance or the plan of insurance suggested does not
cater to all the needs of the prospect.
Unethical behaviour happens when the benefits of self are considered more
important than of the other. The code of ethics spelt out by the IRDA in the
various regulations is directed towards ethical behaviour (discussed in chapter
4).
While it is important to know every clause in the code of conduct to ensure that
there is no violation of the code, compliance would be automatic if the insurer
and its representatives always kept the interests of the prospect in mind. Things
go wrong when the officers of insurers become concerned with the targets of
business, rather than the benefits to the prospect.
439
2. Characteristics
Some characteristics of ethical behaviour are:
a) Placing best interests of the client above ones own direct or indirect
benefits
b) Holding in strictest confidence and considering as privileged, all business
and personal information pertaining to clients affairs
c) Making full and adequate disclosure of all facts to enable clients make
informed decisions
There could be a likelihood of ethics being compromised in the following
situations:
a) Having to choose between two plans, one giving much less premium or
commission than the other
b) Temptation to recommend discontinuance of an existing policy and
taking out a new one
c) Becoming aware of circumstances that, if known to the insurer, could
adversely affect the interests of the client or the beneficiaries of the
claim
Test Yourself 6
Which among the following is not a characteristic of ethical behaviour?
I. Making adequate disclosures to enable the clients to make an informed
decision
II. Maintaining confidentiality of clients business and personal information
III. Placing self-interest ahead of clients interests
IV. Placing clients interest ahead of self interest
440
Summary
a) The role of customer service and relationships is far more critical in the case
of insurance than in other products.
b) Five major indicators of service quality include reliability, assurance,
responsiveness, empathy and tangibles.
c) Customer lifetime value may be defined as the sum of economic benefits
that can be derived from building a sound relationship with a customer over
a long period of time.
d) The role of an insurance agent in the area of customer service is absolutely
critical.
e) IRDA has launched an Integrated Grievance Management System (IGMS)
which acts as a central repository of insurance grievance data and as a tool
for monitoring grievance redress in the industry.
f) The Ombudsman, by mutual agreement of the insured and the insurer can
act as a mediator and counsellor within the terms of reference.
g) Active listening involves
responding appropriately.
paying
attention,
providing
feedback
and
h) Ethical behaviour involves placing the customers interest before self.
Key terms
a)
b)
c)
d)
e)
f)
g)
h)
i)
Quality of service
Empathy
Integrated Grievance Management System (IGMS)
Customer Protection Act, 1986
District Consumer Forum
Insurance Ombudsman
Body language
Active listening
Ethical behaviour
441

Answer 1
Sum of economic benefits that can be achieved by building a long term
relationship with the customer is referred to as customer lifetime value.
Answer 2
Motor insurance for third party liability is mandatory by law and hence a debate
on its need is not required.
Answer 3
As per the Consumer Protection Act, 1986, a person who buys goods for resale
purpose cannot be classified as consumer.
Answer 4
Scepticism does not go on to make a healthy relationship.
Answer 5
Being extremely judgemental is not an element of active listening.
Answer 6
Placing self-interest ahead of clients interests is not ethical behaviour.
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Question 1
_____________ is not a tangible good.
I.
II.
III.
IV.
House
Insurance
Mobile Phone
A pair of jeans
Question 2
_______________ is not an indicator of service quality.
I.
II.
III.
IV.
Cleverness
Reliability
Empathy
Responsiveness
Question 3
In India _______________ insurance is mandatory.
I.
II.
III.
IV.
Motor third party liability

Fire insurance for houses
Travel insurance for domestic travel
Personal accident
Question 4
One of the methods of reducing insurance cost of an insured is __________
I.
II.
III.
IV.
Reinsurance
Deductible
Co-insurance
Rebate
Question 5
A customer having complaint regarding his insurance policy can approach IRDA
through
I.
II.
III.
IV.
IGMS
District Consumer Forum
Ombudsman
IGMS or District Consumer Forum or Ombudsman
443
Question 6
Consumer Protection Act deals with:
I.
II.
III.
IV.
Complaint against insurance companies

Complaint against shopkeepers
Complaint against brand
Complaint against insurance companies, brand and shopkeepers
Question 7
___________ has jurisdiction to entertain matters where value of goods or
services and the compensation claim is up to 20 lakhs
I.
II.
III.
IV.
High Court
District Forum
State Commission
National Commission
Question 8
In customer relationship the first impression is created:
I.
II.
III.
IV.
By being confident
By being on time
By showing interest
By being on time, showing interest and being confident
Question 9
Select the correct statement:
I. Ethical behaviour is impossible while selling insurance
II. Ethical behaviour is not necessary for insurance agents
III. Ethical behaviour helps in developing trust between the agent and the
insurer
IV. Ethical behaviour is expected from the top management only
Question 10
Active Listening involves:
I.
II.
III.
IV.
Paying attention to the speaker

Giving an occasional nod and smile
Providing feedback
Paying attention to the speaker, giving an occasional nod and smile and
providing feedback
444

Answer 1
Insurance is not a tangible good.
Answer 2
Cleverness is not an indicator of service quality.
Answer 3
Motor third party liability insurance is mandatory in India.
Answer 4
One of the methods of reducing insurance cost of an insured is the deductible
clause in a policy.
Answer 5
A customer having complaint regarding his insurance policy can approach IRDA
through IGMS.
Answer 6
Consumer Protection Act deals with complaint against insurance companies,
shopkeepers and brands.
Answer 7
District Forum has jurisdiction to entertain where value of goods or services and
the compensation claim is up to 20 lakhs.
445
Answer 8
In customer relationship the first impression is created by being confident, on
time and by showing interest.
Answer 9
Ethical behaviour helps in developing trust in the agent and the insurer.
Answer 10
Active Listening involves paying attention to the speaker, giving an occasional
nod and smile and providing feedback.
446
CHAPTER 12
INSURANCE CAREER PROSPECTS
In the previous chapters we studied various concepts and practices in the
general insurance business, including the processes of selling and customer
service. This final chapter is to introduce to you to the career of an agent in the
nonlife insurance industry and also offer a brief perspective about what you
could look forward to in this industry.
Learning Outcomes
A. Insurance agency as a career
B. Different careers in insurance
1. Assess insurance agency as a career.
2. Discuss different careers in insurance.
447
A. Insurance agency as a career

The first question that one might have while starting a career in sales is
whether or not she is really suited for the job, and whether she would be
successful. This raises the question of what makes a good sales person.
1. What makes a good sales person?
In 1964, an interesting study on What makes a good salesman? was published
in the Harvard Business Review. The authors, David Mayer and Herbert M.
Greenberg, after seven years of intensive field research, came up with an
interesting insight.
They found that a good salesman should have two basic qualities empathy
and ego drives.
Empathy is the ability to feel as the other person does in order to be able to
sell him a product or service. A sales person needs to be sensitive to what goes
on in the customers mind and adopt an appropriate approach and communicate
accordingly.
Ego drive refers to the sales persons intense drive and effort to make the sale,
not merely for the money to be gained, but because it gives a feeling of selfachievement.
In other words great sales people typically have a massive hunger to excel and
to improve their financial standing in the process. They also have an
entrepreneurial spirit the ability to see their work as an exciting adventure
and look forward to a job environment where security comes from the ability to
achieve results. They also have the ability to relate and connect with people.
They are comfortable in networking with others, making friends and influencing
them.
2. Rewards of a career in non-life insurance sales
By now you would also be aware that the nature of the selling business in
insurance is quite different from others. Unlike other products, insurance is
intangible. One has to often create a need in the prospects mind and motivate
the latter to buy insurance.
This involves a very high level of concept selling and thus insurance sales
persons are generally among the most accomplished of sales professionals.
They are remunerated through commissions so that there is no limit to what an
agent can earn. The limit is set by whatever premium revenues the agent
generates.
448
Apart from the scope to earn high incomes, an insurance agent can also attract
tremendous amount of job satisfaction and social respect if ones job is done in
an ethical and professional manner. The rewards and recognitions can be listed
as:
i. Being recognised by the society as a knowledgeable professional
ii. Being able to provide insurance solutions to problems of people is a
matter of immense social value that non-life insurance agents enjoy
iii. Social prestige that comes from being instrumental in financially helping
out people who are affected by a misfortune
iv. Being able to help people by advising them to take the right policy to
cover an accident, an illness, an earthquake, flood or fire loss, is a
matter of immense personal satisfaction for non-life insurance agents
v. Agents deal with multiple clients and keep learning during their
interactions. Over a period of time, insurance agents become fairly
knowledgeable in many areas simply through dealing with multiple
experts
vi. Successful insurance agents are able to build a brand around them and
are recognised as single window for acquiring insurance knowledge and
claims advice
Insurance agents are present in practically every nook and corner of the world.
They are called insurance advisors in some markets. They are regarded as
people with good product knowledge in the realm of insurance, who can advise
people regarding the right kind of insurance cover required to cover personal or
industrial risks.
Important
Unique advantages of insurance agents
Insurance agents have unique advantages of working as per their own career
ambitions.
a) If an agent wishes to have a regular commission income, she will meet a
fixed number of prospects or a fixed number of existing customers for
renewal.
b) If she wants to earn more commission, she will step up her efforts depending
on her appetite for growth. She may even decide to be more active in some
months and less active in other months based on her other priorities.
c) If she has appetite for sales, she may be able to synergise with fields of life
insurance, banking etc.
The work life balance that one can achieve when one is working as per her
own career and ambitions is a plus point for insurance agents.
449
3. The emerging environment

An agent should be aware of the external environment in which she is working.
a) The insurance industry in India has seen a high growth in the last decade,
both in the life and non-life segments.
b) In the year 2012-13, the non-life [general] insurance sector underwrote a
total premium of almost Rs 69,000 crores, offering insurance cover under
more than 100 million policies during the year.
c) As on 31st March, 2012, the non-life insurance companies were operating
from 7,050 offices all over the country, of which 5,354 were in the
public sector and 1,696 were in the private sector.
Today general insurance products are also sold through a range of distribution
channels like brokers, bancassurance and direct marketing.
Indian non-life insurance market is still at a stage of growth. The penetration
[given by premiums as a percentage of GDP] of the non-life sector in India, as
per 2012 data is still around 0.7 % and the density [premiums per capita] is still
around Rs. 550/-. This shows that the market is virtually still untapped and
there is tremendous scope for growth in the sector.
At the end of the financial year 2014-15, there are 28 companies in the general
insurance industry and many more companies may be formed as there is huge
untapped potential. This potential can be realised through agency channel of
selling. Along with the growth of the sector, there would also be openings for
new jobs, particularly in insurance selling.
Test Yourself 1
Which among the following are the two basic qualities that make a good sales
person?
I.
II.
III.
IV.
Empathy and ego drive

Prejudice and loathing
Pride and honesty
Scepticism and perseverance
450
B. Different careers in insurance

A career as an insurance agent is for many, a starting point for an opening in
other areas in the nonlife insurance segment. There are jobs available, both at
the field level and also the office level of insurance companies. An insurance
agent who seeks to move into these careers would of course need to equip
herself with the required knowledge and skills that are needed for respective
roles.
Some of these careers are discussed below:
1. Corporate agents
This is a channel that has emerged only in recent years as a part of the
liberalisation process. It is similar to the Individual Agency model. Here a
corporate body, which has its own set of customers, tries to reach out and sell
insurance products.
Example
A large co-operative society, which is engaged in distributing various products
to its members, may decide to become a corporate agent of an insurance
company.
The corporate agent could be:
a)
b)
c)
d)
e)
f)
A
A
A
A
A
A
firm
company formed under Companies Act, 1956
Banking Company
Regional Rural Bank
Co-op. Society/Co-op. Bank
Panchayat/Local Authority
IRDAIs regulations require that the corporate agent needs to set up a separate
unit with a Principal Officer and trained manpower which has undergone
compulsory training from an institute recognised by the regulator.
One can have a career as an insurance executive in a corporate agency. One
would need to be properly trained, skilled and knowledgeable in insurance
products.
2. Insurance brokers
IRDAI (Insurance Brokers) Regulations, 2002 gives details of the broking
profession. Brokers are insurance intermediaries representing the customer. A
broking firm requires a minimum amount of capital and its officers are required
to undergo 50 hours training and pass an examination.
451
A career with a broking firm would be an attractive option for those opting for
anybody interested in insurance marketing.
Both agents and brokers are intermediaries who interact with the insurance
company and the customer.
There are however differences between the two as given in the box below.
Agent
Is a representative of the
insurance company and is
governed by the principal agent relationship.
The
agent's
primary
relationship
and
responsibility is to the
insurance company and not
the insurance buyer.
Broker
An insurance broker represents the insured. His
principal is the client/insured.
The agent is expected to

faithfully represent his or
her company and offer
whatever is available in the
companys product line to
the customer.
Brokers assist their customers and prospective

customers in developing risk management
strategies appropriate to their risk profiles.
They also work with their customers to find out
what kinds of risks they regularly encounter,
and educate them about what policies are
available in the market for each type of risk.
Brokers also advise and assist their customers
in carefully selecting their insurance policies
and reducing their premiums through the use of
deductibles or self-insured retentions.
Does not have any contractual agreements to

exclusively serve any one insurance company
and is expected to represent the customers
interest in choosing the right product and
company that would best fit the customers
particular needs.
3. Bancassurance
The term Bancassurance broadly refers to the tie up between banks and
insurers to distribute insurance products to their customer base. It has emerged
as an important distribution channel globally and has risen in a relatively short
time due to the benefits it offered in terms of operational cost and efficiencies.
This was due to the wide consumer network that banks had access to.
In India, bancassurance is still quite new. However it has immense potential
which is seen from the rapid strides it has already made. India has two broad
bancassurance models:
a) One, where a bank becomes a corporate agent of an insurer and taps its
customer base to sell insurance products. In this case the employees of
the bank take up the task of selling the products of the insurance
company.
452
b) A referral model, where the bank supports the insurance company with
the data base while the sale of insurance products is done by the
insurance company.
The first one, where banks become corporate agents of an insurance company,
is gaining momentum. The potential is immense for this channel, as banks have
a huge reach, across the entire geographical spread and are a strong brand
supported by their customers.
Bancassurance is growing rapidly and needs a large number of insurance sales
personnel. This offers attractive prospects for the insurance agent. Already this
channel has taken a position of having almost a monopoly when it comes to
distributing the insurance products of some of the companies.
4. Other career opportunities
In the previous paragraphs we considered various types of distribution channels
in addition to the individual agency channel that provides selling / marketing
career opportunities in the insurance industry. Let us now examine some other
areas of opportunity for growth in an insurance company.
a) Marketing professionals
The insurance agents work and career is likely to be connected with the
branch to which they are attached or the professional executives who are
responsible for guiding and supporting the agent to achieve success in the
business. These include the following persons:
i. The Branch Manager: is the key person for promoting a congenial
atmosphere for work and productivity in the branch. She represents the
company in the branch area and is Head of the branch family. She has
ultimate responsibility for growth and profitability of the branch. Branch
manager also plays the role of an administrator, responsible for
managing the day to day service and administration functions of the
branch.
ii. The Development Officer / Unit Manager / Sales Manager: The
immediate person to whom every agent reports and looks up to, for
guidance and support, is the Development Officer or Sales / Unit
Manager. She may also be known as an Agency Manager. The Agency
Manager is responsible for recruitment, development, supervision and
providing leadership to help the agent in building a successful agency
career.
Sales managers may also be managing other kinds of sales forces. For
instance, a company may have a direct sales force and appoint sales
managers to look after these units.
453
The manager has also to take up certain administrative functions and spend
time on:
Follow ups on business logins / proposal introductions and
conversions
Follow-ups on claims and renewals etc.
iii. Sales trainer
Many insurance companies have established training departments to train
the sales-force.
Trainers are engaged in varied types of training interventions:
Pre-recruitment training: meant for prospective agent advisors, it
consists of the IRDAI stipulated training to help prospects clear the
IRDAI examination.
Product training: for introducing the advisor to the products and
services offered by the principal. This training is meant for both new
and existing advisors, normally after they clear licensing exams. Only
then the advisor is considered ready to approach prospects in the
market place. Training is also provided when a new product is
launched in the market by the principal.
Sales training: most of the agents need to get equipped with proper
sales training to be effective in the field.
Process training: every organisation (principal) has its own defined
systems and processes. Agents are trained so that they can adhere to
the same. It is also the responsibility of the principal to ensure that
agents undergo trainings on AML (Anti-Money-Laundering) guidelines,
under-writing guidelines etc.
Soft skills training: another area of training where sessions are
conducted on a continuous basis for behavioural and other topics
like:
Goal setting
Time management
Business planning
Work habits
Leadership and personal effectiveness
iv. Counsellor
Trainers also play the role of counsellors for the agents and agency or sales
managers, especially when they are de-motivated and need a fresh dose of
454
motivation to get up and start meeting customers all over again. Insurance
agents who have got experience of the above and seek to enter a career in
teaching and mentoring others can consider the option of a trainer.
b) Other roles beyond marketing
The marketing department is responsible for a range of activities related to
understanding and satisfying the needs of customers in the marketplace.
Many aspirants to a marketing career are engaged in these and an agent can
consider some of them in future.
i. Marketing research: to determine who the customers are and build a
profile of their needs and wants.
ii. Brand management: Marketing determines how to position the company
and its products in the minds of customers. This is done through
branding. Marketing executives who are responsible for brand
management may also have to work with media, ad agencies and other
bodies for marketing communication campaigns and promotion activities.
iii. Product development: The marketing department also initiates and is
responsible for new product development on the basis of analysis of
market studies and competitor activities. For this purpose marketing
department executives may team up with officials from other
departments like actuarial and legal.
iv. Promotion: Marketing department is also responsible for promotion of
the products and the company. Their executives develop marketing
plans, design promotional material for the different products, market
the products to the customers and provide them services. The marketing
departments role starts even before the inception of a product and
carries on well after the product has been sold to the customer.
v. Underwriters: Every proposal [or application] for insurance has to enter
through a gate where a gatekeeper determines whether the proposal
should be admitted, whether the risk can be accepted, and if so, on
what terms. This gatekeeper is known as the underwriter.
Underwriting essentially serves two purposes. Firstly the screening of
applications and selection of risks for insuring is done to prevent antiselection. Secondly underwriting helps in properly classifying and pricing
the risk so that equity is maintained among policyholders.
An insurance agency career is just the beginning of a career in an industry
that plays a critical role in advancing human and social welfare. It can not
only be a gateway to financial success but also confers much satisfaction to
those who embark upon it.
455
Test Yourself 2
Which among the following is the most likely to contain the IRDAi stipulated 50
hours training to help prospects clear the IRDAI examination?
I.
II.
III.
IV.
Process training
Product training
Pre-recruitment training
Sales training
456
Summary
a) A good salesman should have two basic qualities: empathy and ego drive.
b) The rewards of being an insurance agent include being recognised by the
society as knowledgeable professional, ability to recommend insurance
solutions to people in need etc.
c) Other career options in the field of insurance include corporate agents,
insurance brokers and bancassurance etc.
Key terms
a)
b)
c)
d)
Empathy
Ego drive
Broker
Bancassurance
457

Answer 1
Empathy and ego drive are the two basic qualities that make a good sales
person.
Answer 2
Pre-recruitment training is the most likely to contain the IRDA stipulated 50
hours training to help prospects clear the IRDA examination.
Question 1
____________ is a representative of the insurance company and is governed by
the principal agent relationship.
I.
II.
III.
IV.
Insurance agent
Broker
Banks
Underwriter
Question 2
_________________ is collaboration between banks and insurers to distribute
insurance products.
I.
II.
III.
IV.
Bancassurance
Agent
Broker
Insurance company
Question 3
_____________ determines whether the proposal should be admitted, whether
risk can be accepted.
I.
II.
III.
IV.
Agent
Insurer
Underwriter
Insured
458
Question 4
Broker represents:
I.
II.
III.
IV.
One insurance company

Multiple insurance companies
Insurance Regulatory and Development Authority
Customer
Question 5
_________________ cannot become corporate agent.
I.
II.
III.
IV.
A co-operative society
An individual
A bank
A broker
Question 6
Insurance brokers are licensed by:
I.
II.
III.
IV.
Insurance Regulatory & Development Authority

Reserve Bank of India
Security Exchange Board of India
Government of India
Question 7
The following is not a benefit of insurance agency.
I.
II.
III.
IV.
No limit on income from commission

Fixed salary income
Freedom to decide working hours
Social prestige
Question 8
Following is required in insurance agency career for achieving success:
I.
II.
III.
IV.
Will to excel
Empathy towards customer
Truthfulness
Will to excel, empathy towards customer and truthfulness
Question 9
Following is not an insurance intermediary:
459
I.
II.
III.
IV.
Corporate agent
Share broker
Insurance broker
Insurance agent
Question 10
An agent can earn upto:
I.
II.
III.
IV.
20,000 per month

Rs. 10,00,000 per month
Rs.1 Crore per year
Unlimited amount based on her efforts

Answer 1
Insurance agent is a representative of the insurance company and is governed by
the principal agent relationship.
Answer 2
Bancassurance is collaboration between banks and insurers to distribute
insurance products.
Answer 3
Underwriter determines whether the proposal should be admitted, whether risk
can be accepted.
Answer 4
An insurance broker can represent multiple insurance companies.
Answer 5
460
An individual cannot become a corporate agent.

Answer 6
Insurance Brokers are licensed by the Insurance Regulatory & Development
Authority.
Answer 7
Fixed salary income is not a benefit of insurance agency.
Answer 8
Will to excel, empathy towards customer and truthfulness is required for a
successful insurance agency career.
Answer 9
Share broker is not an insurance intermediary.
Answer 10
An agent can earn unlimited amounts of money based on her efforts.
461

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IC-34

Revised Edition - 2015

ALL RIGHTS RESERVED

Marketing and Selling Insurance

Legal and Regulatory Aspects of

Theory and Practice of Premium Rating

Personal and Retail Insurance

Insurance Career Prospects

After studying this chapter, you should be able to:

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

b) Nationalisation of life insurance

National Insurance Co. Ltd.

IC-34 GENERAL INSURANCE

g) Non-Life insurance industry today

General Insurance Corporation of India, a public sector company, is an

ii. Agriculture Insurance Company of India Limited., a public sector company, is

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

c) There is a principle known as POOLING. This consists of collecting

Insurance and Burden of Risk

IC-34 GENERAL INSURANCE

b) Secondary burden of risk

IC-34 GENERAL INSURANCE

C. Different approaches to risk management

IC-34 GENERAL INSURANCE

The measures to reduce chance of occurrence are known as Loss Prevention

IC-34 GENERAL INSURANCE

Insurance is one of the major forms of risk transfer, and it permits

IC-34 GENERAL INSURANCE

The impact or the amount of loss that may be suffered as a result

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

E. Role of insurance in economic development

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

Insurer provides free credit

IC-34 GENERAL INSURANCE

List of general insurance and standalone health companies

Agriculture Insurance Company

IC-34 GENERAL INSURANCE

15. Oriental Insurance

Answers to Test Yourself

IC-34 GENERAL INSURANCE

To enjoy from floods

possibility of loss or damage is not there

II. Insurance prevents its loss

To assess the risk for rating purposes

IC-34 GENERAL INSURANCE

Answers to Self-Examination Questions

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

IC-34 GENERAL INSURANCE

Exposure to risk: Occurrence of a peril need not necessarily lead to a

IC-34 GENERAL INSURANCE