Insurance Management

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INSURANCE MANAGEMENT

UNIT-I

What Is Insurance?

Insurance is a contract, represented by a policy, in which an individual or entity


receives financial protection or reimbursement against losses from an
insurance company. The company pools clients' risks to make payments more
affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both
big and small, that may result from damage to the insured or her property, or
from liability for damage or injury caused to a third party.

 Insurance is a contract (policy) in which an insurer indemnifies another


against losses from specific contingencies or perils. 1
 There are many types of insurance policies. Life, health, homeowners, and
auto are the most common forms of insurance.2

 The core components that make up most insurance policies are the
deductible, policy limit, and premium

Example:

Businesses require special types of insurance policies that insure against


specific types of risks faced by a particular business. For example, a fast-food
restaurant needs a policy that covers damage or injury that occurs as a result
of cooking with a deep fryer. An auto dealer is not subject to this type of risk
but does require coverage for damage or injury that could occur during test
drives.

Features of Insurance

From the above explanation, we can find the following characteristics, which
are generally observed in life, marine, fire, and general insurances.

1. Sharing of Risk

Insurance is a device to share the financial losses which might befall an


individual or his family on the happening of a specified event.
The event may be the death of a breadwinner to the family in the case of life
insurance, marine-perils in marine insurance, fire in fire insurance, and other
certain events in general insurance, e.g., theft in burglary insurance, accident
in motor insurance, etc. The loss arising from these events, if insured, are
shared by all the insured in the form of a premium.

2. Co-operative Device

The most important feature of every insurance plan is the cooperation of a


large number of persons who, in effect, agree to share the financial loss arising
due to a particular risk that is insured.

Such a group of persons may be brought together voluntarily or through


publicity or solicitation of the agents.

An insurer would be unable to compensate for all the losses from his own
capital. So, by insuring or underwriting a large number of persons, he can pay
the amount of loss.

Like all cooperative devices, there is no compulsion here on anybody to


purchase the insurance policy.

3. Value of Risk

The risk is evaluated before insuring to charge the share of an insured, herein
called, consideration or premium. There are several methods of evaluation of
risks.

If there is an expectation of more loss, a higher premium may be charged. So,


the probability of loss is calculated at the time of insurance.

4. Payment at Contingency

The payment is made at a certain contingency insured. If the contingency


occurs, payment is made.

Since the life insurance contract is a contract of certainty, because the


contingency, the death, or the expiry of the term will certainly occur, the
payment is certain. The contingency is the fire or the marine perils, etc., may or
may not occur in other insurance contracts.
So, if the contingency occurs, payment is made. Otherwise, no amount is given
to the policy-holder. Similarly, in certain policies, payment is not certain due to
the uncertainty of a particular contingency within a particular period.

For example, in term insurance, payment is made only when the assured death
occurs within the specified term, maybe one or two years.

Similarly, in Pure Endowment, payment is made only at the survival of the


insured at the expiry of the period.

5. Payment of Fortuitous Losses

Another characteristic of insurance is the payment of fortuitous losses. A


fortuitous loss is unforeseen and unexpected and occurs as a result of chance.
In other words, the loss must be accidental.

The law of large numbers is based on the assumption that losses are accidental
and occur randomly.

For example, a person may slip on an icy sidewalk and break a leg. The loss
would be fortuitous. Insurance policies do not cover intentional issues.

6. Amount of Payment

The amount of payment depends on the value of loss due to the particular
insured risk provided insurance is there up to that amount. In life insurance,
the purpose is not to make good the financial loss suffered. The insurer
promises to pay a fixed sum on the happening of an event.

If the event or the contingency takes place, the payment does fail due if the
policy is valid and in force at the time of the event, like property insurance, the
dependents will not be required to prove the occurring of loss and the amount
of loss.

It is immaterial in life insurance what was the amount of loss was at the time of
contingency. But in the property and general insurances, the amount of loss
and the happening of loss is required to be proved.
7. A large number of Insured Persons

To spread the loss immediately, smoothly, and cheaply, a large number of


persons should be insured. The co-operation of a small number of persons may
also be insurance, but it will be limited to the smaller area.

The cost of insurance for each member may be higher.

So, it may be unmarketable. Therefore, to make the insurance cheaper, it is


essential to ensure many persons or property because the lessor would be the
cost of insurance, so the lower would be premium.

In past years, tariff associations or mutual fire insurance associations were


found to share the loss at a cheaper rate. To function successfully, the
insurance should be joined by a large number of persons.

Insurance is a form of risk management primarily used to hedge against the


risk of potential financial loss. Again insurance is defined as the equitable
transfers of the risk of a potential loss, from one entity to another, in exchange
for a premium and duty of care.

Basic Functions of Insurance

It is important to understand that an insurance policy has both a financial and an


emotional aspect for the policyholder. There are certain functions that an
insurance company must promise to take care of while they are finalising the
contract with the insured party. We will attempt to explain those functions
below:

 To provide safety and security to the insured – One of the prime


reasons for entering into an insurance contract is to seek financial
security in the event of a loss from an unexpected occurrence. Insurance
offers support to the policyholder and helps to reduce the uncertainties
in the business or in human lives. With the help of a policy, the insured
party is protected against future hazards, vulnerabilities and accidents.
Although no insurer in the world can prevent the dangerous event from
occurring, they can certainly help by providing some sort of financial
protection to compensate the insured party.
 Protection for your loved ones – Medical insurance can help you and
your family get the right sort of treatment and cover hospitalisation
expenses. It helps to take care of their health in case of an accident,
illness or any other unfortunate event. The well being of your family
comes before anything, and insurance helps take care of that in the best
possible manner.
 Collective Risks – Another function of an insurance contract is that it
helps a number of individuals get an insurance policy to safeguard
themselves from the losses that may occur due to an unfortunate event.
This strategy works on the principle that not all of the policyholders for a
particular risk will face it at the same time. For example, if a total of fifty
thousand people are insured against damage to their cars due to
accidents, the most likely scenario is that only a few of them would have
accidents in a single year. So the amount that they can claim from the
insurance company for the financial losses due to the accidents would
be adequately covered by the insurance premiums from all fifty
thousand policyholders.
 Risk Assessment – Insurance organisations play an important role in
determining the actual amount of risk from the occurrence of a
particular event by assessing the situation. They analyse all the aspects
of a risk carefully to make an informed decision. It helps them to arrive
at the final insurance amount as well as fix the premium to be paid by
the insured.
 Certainty – One of the main benefits of taking a policy for the insured is
that they can feel secure about meeting the future losses after taking
coverage for a particular risk. It can be very reassuring for the insured
party and can also help them to proceed with their daily activities in a
much more assured manner without fear or hesitation.
 It helps to forestall losses – An insurance contract can help the insured
to mitigate their losses by providing some sort of security in case of an
unforeseen event. It helps businesses have a contingency plan in case
things do not go as planned. Insurance is a very important tool for
organisations as it allows them to cover their bases while operating in a
very risky environment where the losses can be huge if they do not play
their cards right. It also allows them to be able to cover these huge risks
in their businesses by paying a relatively small amount as the premium.
 Fulfil the legal requirements – In some countries, any business is
required to have certain insurance covers in order to engage in any
economic activity. So the insurance company can help organisations
fulfil these requirements.
 It allows the development of big businesses – Any large-sized
organisation is exposed to a greater amount of risk. If the chances of loss
are relatively higher, it may prevent the management in those
organisations from taking calculated risks, which has the potential of
bringing more profits. Insurance helps to mitigate that risk in a way and
encourage businesses to take bold decisions. Insurance takes away some
of the financial pressures and allows businesses to flourish in the long
run.
 It can help in boosting the economy – When the businesses have
sufficient insurance cover, they can increase their scope of economic
activity that will bring commensurate rewards. This can provide an
impetus to the overall economy of a country in the long run

Principles or elements of insurance

What is Insurance?
Represented in a form of policy, Insurance is a contract in which the
individual or an entity gets the financial protection, in other words,
reimbursement from the insurance company for the damage (big or
small) caused to their property. 
The insurer and the insured enter a legal contract for the insurance
called the insurance policy that provides financial security from the future
uncertainties.
In simple words, insurance is a contract, a legal agreement between two
parties, i.e., the individual named insured and the insurance company
called insurer. In this agreement, the insurer promises to help with the
losses of the insured on the happening contingency. The insured, on the
other hand, pays a premium in return for the promise made by the
insurer.
The contract of insurance between an insurer and insured is based on
certain principles, let us know the principles of insurance in detail.

Principles of Insurance
The concept of insurance is risk distribution among a group of people.
Hence, cooperation becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer
and the insured have to uphold the 7 principles of Insurances mentioned
below:

1. Utmost Good Faith


2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization

Let us understand each principle of insurance with an example.


Principle of Utmost Good Faith
The fundamental principle is that both the parties in an insurance
contract should act in good faith towards each other, i.e. they must
provide clear and concise information related to the terms and conditions
of the contract.
The Insured should provide all the information related to the subject
matter, and the insurer must give precise details regarding the contract.
Example – Jacob took a health insurance policy. At the time of taking
insurance, he was a smoker and failed to disclose this fact. Later, he got
cancer. In such a situation, the Insurance company will not be liable to
bear the financial burden as Jacob concealed important facts.
Principle of Proximate Cause
This is also called the principle of ‘Causa Proxima’ or the nearest cause.
This principle applies when the loss is the result of two or more causes.
The insurance company will find the nearest cause of loss to the
property. If the proximate cause is the one in which the property is
insured, then the company must pay compensation. If it is not a cause
the property is insured against, then no payment will be made by the
insured. 
Example – 
Due to fire, a wall of a building was damaged, and the municipal
authority ordered it to be demolished. While demolition the adjoining
building was damaged. The owner of the adjoining building claimed the
loss under the fire policy. The court held that fire is the nearest cause of
loss to the adjoining building, and the claim is payable as the falling of
the wall is an inevitable result of the fire.
In the same example, the wall of the building damaged due to fire, fell
down due to storm before it could be repaired and damaged an adjoining
building. The owner of the adjoining building claimed the loss under the
fire policy. In this case, the fire was a remote cause, and the storm was
the proximate cause; hence the claim is not payable under the fire
policy.
Principle of Insurable interest
This principle says that the individual (insured) must have an insurable
interest in the subject matter. Insurable interest means that the subject
matter for which the individual enters the insurance contract must
provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss. 
Example – the owner of a vegetable cart has an insurable interest in the
cart because he is earning money from it. However, if he sells the cart,
he will no longer have an insurable interest in it. 
To claim the amount of insurance, the insured must be the owner of the
subject matter both at the time of entering the contract and at the time of
the accident. 
Principle of Indemnity
This principle says that insurance is done only for the coverage of the
loss; hence insured should not make any profit from the insurance
contract. In other words, the insured should be compensated the amount
equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same
financial position as he was before the loss occurred. Principle of
indemnity is observed strictly for property insurance and not applicable
for the life insurance contract.
Example – The owner of a commercial building enters an insurance
contract to recover the costs for any loss or damage in future. If the
building sustains structural damages from fire, then the insurer will
indemnify the owner for the costs to repair the building by way of
reimbursing the owner for the exact amount spent on repair or by
reconstructing the damaged areas using its own authorized contractors.

Principle of Subrogation
Subrogation means one party stands in for another. As per this principle,
after the insured, i.e. the individual has been compensated for the
incurred loss to him on the subject matter that was insured, the rights of
the ownership of that property goes to the insurer, i.e. the company.
Subrogation gives the right to the insurance company to claim the
amount of loss from the third-party responsible for the same.
Example – If Mr A gets injured in a road accident, due to reckless
driving of a third party, the company with which Mr A took the accidental
insurance will compensate the loss occurred to Mr A and will also sue
the third party to recover the money paid as claim. 
Principle of Contribution
Contribution principle applies when the insured takes more than one
insurance policy for the same subject matter. It states the same thing as
in the principle of indemnity, i.e. the insured cannot make a profit by
claiming the loss of one subject matter from different policies or
companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for
Rs. 3 lakhs and with company B for Rs.1 lakhs. The owner in case of
damage to the property for 3 lakhs can claim the full amount from
Company A but then he cannot claim any amount from Company B.
Now,  Company A can claim the proportional amount reimbursed value
from Company B.
Principle of Loss Minimisation
This principle says that as an owner, it is obligatory on the part of the
insurer to take necessary steps to minimise the loss to the insured
property. The principle does not allow the owner to be irresponsible or
negligent just because the subject matter is insured.
Example – If a fire breaks out in your factory, you should take
reasonable steps to put out the fire. You cannot just stand back and
allow the fire to burn down the factory because you know that the
insurance company will compensate for it.
What is IRDAI? Functions of IRDA
The concept of insurance dates back 6,000 years where individuals back then
also sought some kind of safety net. This need was realised and gave birth to the
concept of insurance. The dictionary meaning of insurance states “an
arrangement by which an organisation undertakes to provide a guarantee of
compensation for specified loss, damage, illness, or death in return for payment
of a specified premium”. With the growing need of this concept of security, it
gave rise to life insurance at first followed by general insurance. Insurance
when introduced in India was under the government regulation. However, to
institute a standalone body to oversee the functioning of the growing insurance
industry, a separate regulatory body was set up known as the Insurance
Regulatory and Development Authority of India or IRDA.

What is IRDA?
IRDA or Insurance Regulatory and Development Authority of India is the apex
body that supervises and regulates the insurance sector in India. The primary
purpose of IRDA is to safeguard the interest of the policyholders and ensure the
growth of insurance in the country. When it comes to regulating the insurance
industry, IRDA not only looks over the life insurance, but also general
insurance companies operating within the country.

What are the functions of IRDA?


As discussed above, the primary objective of the Insurance Regulatory and
Development Authority of India is to ensure the implementation of provisions
as mentioned in the Insurance Act. This can be further understood by its mission
statement which is as follows-

 To safeguard the policyholder’s interest while ensuring a fair and just treatment.
 To have a fair regulation of the insurance industry while ensuring financial
soundness of the applicable laws and regulations.
 To frame regulations periodically so that there is no ambiguity in the insurance
industry.
What is the role and importance of IRDA in the insurance sector?
India began to witness the concept of insurance through a formal channel back
in the 1800s and has seen a positive improvement ever since. This was further
supported by the regulatory body that streamlined various laws and brought
about the necessary amendment in the interest of the policyholders. Below
mentioned are the important roles of IRDA -

 First and foremost is safeguarding the policyholder’s interest.


 Improve the rate at which the insurance industry is growing in an organised
manner to benefit the common man.
 To ensure the dealing are carried on in a fair, integral manner along with
financial soundness keeping in mind the competence of the insurance company.
 To ensure faster and a hassle-free settlement of genuine insurance claims.
 To address the grievances of the policyholder through a proper channel.
 To avoid malpractices and prevent fraud.
 To promote fairness, transparency and oversee the conduct of insurance
companies in the financial markets.
 To form a reliable management system with high standards of financial
stability.
What are the types of insurance policies regulated by IRDA?
The broad classification of the insurance sector is in two parts - life and non-life
which is also known as general insurance. For life insurance, as the name
suggests, it governs the policies that ensure the safety of your life. But what is
general insurance? General insurance covers everything other than life which
includes health insurance, car insurance, two wheeler insurance, home
insurance, commercial insurance, travel insurance and more. These are some of
the critical roles that IRDA oversees. While they are not limited to the above-
mentioned roles, they also include granting registration to insurance companies
to conduct their business in the country. It also settles the disputes that arise
between the insurer and the policyholders and many such other functions.

UNIT-II

Fire Insurance:

What is Fire Insurance?

A fire insurance could be bought as a part of property insurance or as a


stand-alone policy. It offers compensation for the costs incurred in the
replacement, repair or reconstruction of a property that was damaged
due to fire. Since the estimation of loss from fire is unpredictable, this
policy is issued with fixed value compensation as an upper limit set by
the property insurance policy. The actual loss or the maximum amount
agreed beforehand is paid as compensation when you file a claim for fire
insurance.

Types of Fire Insurance Plans

To avoid ambiguity for the claim amount, certain types of clauses are
included in this policy. Such types give more clarity on premium payable
and claim amount payable without any scope of a dispute. Businessmen
should be clear about the type of policy they need and whether it suits
his/her business operations. Let us look at some of the types of fire
insurance.

a) Valued Policy: When it is difficult to ascertain the value of the


property or articles at the time of claim, a valued policy is issued. For
example, the value of paint or art or jewellery is not constant during all
the days of the year. For such cases, the estimated value is fixed in
advance by the insurance company and policyholder, at the time of
taking the insurance. In case of an unfortunate event, the predetermined
value is paid, and actual loss is not assessed. Here the principle of
indemnity is not applied, but the attempt is made to compensate the
losses to the insured at a predetermined rate without entering into
debates or disputes at the time of actual loss.

b) Specific Policy: Under this policy, the maximum amount payable is


fixed in advance. In case of an unfortunate event, the amount equivalent
to the actual loss or prefixed amount, whichever is less, is paid. For
example, if a fire insurance policy is taken with a specific value of Rs. 2
lakh, then in case the loss due to fire is worth Rs.3 lakh, the amount
payable is Rs. 2 lakh. However, if the loss is worth Rs. 1.5 lakh, the full
amount of Rs. 1.5 lakh will be payable.

c) Average Policy: Many a times, the applicant prefers the insured


amount to be less than the value of the property. In such cases, the
insurance company imposes the “average clause” to penalise the
insured for taking up a policy less than the value of the property. For
example, the valuation of your shop and goods inside the shop is Rs. 20
lakh, but you are taking a fire insurance of Rs. 10 lakh. In such a
situation, if a fire in the shop leads to damage worth Rs. 20 lakh, the
insurance company will pay you Rs. 10 lakh only, under the average
policy clause.

d) Floating Policy: If a businessman has warehouses at different


locations, s/he may opt for a floating policy. With the help of this single
policy, all the goods lying in different warehouses can be insured
together. Such an arrangement eliminates the need for buying separate
policies for every warehouse. Moreover, you can opt for an average
clause if you want to reduce the premium. However, at the time of loss,
the amount payable is substantially lower than actual loss, in case of the
average clause.

e) Consequential Loss Policy: The loss due to fire is not the only loss
an insured person faces after fire break. Your factory may lose important
machinery and the production line could go down for several weeks or
months after the fire. The loss of production is a loss of business or
profit. Such indemnity can be claimed under consequential loss policy.
The business in which continuous production is the essence must take
consequential loss policy to make good of such losses.

f) Comprehensive Policy: It can happen that business owners want to


cover their properties against all possible mishaps like fire, burglary,
theft, explosion, earthquake, lightning, labour unrest, and similar other
reasons. In such a case, the business owner should go for
comprehensive policy or all risk policy, which can take care of all
possible causes of loss. 

g) Replacement Policy: The loss of property due to fire raises the need


to get a new property to restart business operations.
The policy comes with two variants. In the first option, it makes good of
lost property on depreciated value bases. Alternatively, it makes good to
compensate for the actual cost of the replaced property. While taking the
fire insurance, you must understand the replacement policy clause to get
appropriate claim at the time of the unfortunate event.

Coverage under Fire Insurance Policy

It covers all the losses arising out of the accidental fire, subject to terms
and conditions of the fire policy which is limited by the policy value and
not by the extent of damage sustained by the property owner. In general,
the following losses are covered:

 Actual loss of goods due to fire


 Additional living expenses due to damage to personal property
 Loss to adjacent building or property due to fire in the insured
building
 Compensation paid to fire fighters
 Fire triggered by electricity
 Overflowing of a water tank or pipes

Claim Process

If you happen to encounter an eventuality because of fire, you need to


make claims under fire insurance. To avoid rejection and fasten the
claim process, you should be clear of the procedure and the documents
needed.

 Immediately inform the insurance provider either online or by


calling on their 24/7 toll-free number
 Also, contact the fire brigade and the police
 Insurance company will appoint a surveyor for scrutiny of the
situation
 Submit the duly filled in claim form and other proofs and
photographs
 If approved, the claim can be settled from 15-30 days, as the time
duration is different for the insurance companies

Exclusions in Fire Insurance Policy

Not all situations and cases are covered by fire insurance. Some
situations are excluded.
 Fire caused by war, nuclear risks, riot or earthquake
 Planned or intentional fire by the enemy or public authority for
whatsoever reasons
 Underground fire
 Loss because of theft during or after the fire
 Malicious or hostile, human-made causes of fire

This list does not include all the exclusions as they vary for
different providers

Important Aspects

The concept of a fire insurance is based on three essential conditions


which should be met before you can file a claim

 There must be an actual fire in the insured premises


 The fire must be accidental and beyond the reasonable control of
the policyholder
 Loss or damage must be due to burning triggered by accidental
fire. The damage by heat or fire, if not accidental, won’t be
considered as loss due to fire. Hence, insurance is not applicable
in such instances

Advantages of Buying Fire Insurance

Considering the amount that the insurance company can pay for the
losses and save you from further problems, you should not ignore and
underestimate fire insurance. Let us look at some of the advantages of
buying this policy:

 Homeowners can get back the cost of damage to the structure of


the house
 It also covers the cost of replacement of the items in the house,
such as AC, television, computer, etc.
 In case of factory and office, the insurance can cover the cost of
damaged stocks
 The insurance can cover the cost of repair of machines, if they are
damaged

MARINE INSURANCE:

What is Marine Insurance?


Marine insurance refers to a contract of indemnity. It is an assurance that the
goods dispatched from the country of origin to the land of destination are
insured. Marine insurance covers the loss/damage of ships, cargo, terminals,
and includes any other means of transport by which goods are transferred,
acquired, or held between the points of origin and the final destination.

The term originated when parties began to ship goods via sea. Despite what
the name implies, marine insurance applies to all modes of transportation of
goods. For instance, when goods are shipped by air, the insurance is known as
the contract of marine cargo insurance.

Principles of Marine Insurance

 Principle of Good faith - Parties demand absolute trust on the part of


both; the insurer and the guaranteed.
 Principle of Proximate Cause - The proximate cause is not adjacent in
time; also, it is inefficient. Nevertheless, it is the definitive and adequate
cause of loss.
 Principle of Insurable Interest - Any object presented as a marine risk
and the assured covering the insurance of goods - both should have legal
relevance. Also, a series is devoted called 'Incoterms' to respectfully
assign the insurance of goods to each party.
 Principle of Indemnity - The insurance extended to the parties will only
be applicable up to the loss. The parties can't buy insurance to gain
profits. If they do, they won't get more than the actual loss.
 Principle of Contribution - Sometimes, the risk coverage for goods has
more than one insurer. In such cases, the amount has to be fairly
distributed amongst the insurers.

Features of Marine Insurance

How Marine Insurance works?

Marine insurance best transfers the liability of the goods from the parties and
intermediaries involved to the insurance company. The legal liability of the
intermediaries handling the goods is limited to begin with. The exporter,
instead of bearing the sole responsibility of the goods, can buy an insurance
policy and get maritime insurance coverage for the exported goods against any
possible loss or damage.

The carrier of the goods, be it the airline or the shipping company, may bear
the cost of damages and losses to the goods while on board. However, the
compensation agreed upon is mostly on a ‘per package’ or ‘per consignment’
basis. The coverage so provided may not be sufficient to cover the cost of the
goods shipped. Therefore, exporters prefer to ship their products after getting
it insured the same with an insurance company.

The Scope of Marine insurance is necessary to meet the contractual


obligations of exports. To align with agreements such as cost insurance and
freight (CIF) or carriage and insurance paid (CIP) , the exporter needs to take
marine insurance to protect the buyer’s or their bank’s interest and honor the
contractual obligation. Similarly, in the case of Delivered Duty Unpaid (DDU)
and Delivered Duty Paid (DDP)  terms, the seller may not be obligated to
insure the goods, although in practice they generally do.
To get marine insurance and avoid insurance claims, ensure the following:

 Packing of goods should be done keeping in mind their safety during


loading and unloading
 Packing should be good enough to withstand natural hazards to the best
extent possible
 Keep in mind the possibility of clumsy handling or theft when packing
goods.

How to calculate Marine Insurance Premium?

Types of Marine Insurance

 Freight Insurance
 Liability Insurance
 Hull Insurance
 Marine Cargo Insurance
Freight Insurance
In freight insurance, for example, if the goods are damaged in transit, the
operator would lose freight receivables & so the insurance will be provided on
compensation for loss of freight.

Liability Insurance
Marine Liability insurance is where compensation is bought to provide any
liability occurring on account of a ship crashing or colliding.

Hull Insurance
Hull Insurance covers the hull & torso of the transportation vehicle. It covers
the transportation against damages and accidents.

Marine Cargo Insurance


Marine cargo policy refers to the insurance of goods dispatched from the
country of origin to the country of destination.

Types of Marine Insurance policies

 Floating Policy
 Voyage Policy
 Time Policy
 Mixed Policy
 Named Policy
 Port Risk Policy
 Fleet Policy
 Single Vessel Policy
 Blanket Policy
Floating policy
Floating in Marine Insurance policy, large exporters may opt for an open
policy, also known as a blanket policy, instead of taking insurance separately
for each shipment. An open policy is a one-time insurance that provides
insurance cover against all shipments made during the agreed period, often a
year. The exporter may need to declare periodically (say, once a month) the
detail of all shipments made during the period, type of goods, modes of
transport, destinations, etc.

Voyage policy
A specific policy can be taken for a single lot or consignment only. The
exporter needs to purchase insurance cover every time a shipment is sent
overseas. The drawback is that extra effort and time is involved each time an
exporter sends a consignment. With open policies, on the other hand,
shipments are insured automatically.

Time policy
Time policy in marine insurance is generally issued for a year’s period. One
can issue for more than a year or they may extend to complete a specific
voyage. But it is normally for a fixed period. Also under marine insurance in
India, time policy can be issued only once a year.

Mixed policy
Mixed policy is a mixture of two policies i.e Voyage policy and Time policy.

Named policy
Named policy is one of the most popular policies in marine insurance policy.
The name of the ship is mentioned in the insurance document, stating the
policy issued is in the name of the ship.

Port Risk policy


It is a policy taken to ensure the safety of the ship when it is stationed in a
port.

Fleet policy
Several ships belonging to the company/owner are covered under one policy.
Where it has the advantage of covering even the old ships. Also the policy is a
time based policy.

Single Vessel policy


In single vessel policy only one vessel is covered under marine insurance
policy.

Blanket policy
In this policy, the owner has to pay the maximum protection amount at the
time of buying the policy.

Which clauses cover Marine Insurance?


The Maritime insurance coverage provided by marine insurance can be understood by
going through the risks handled by the insurance policies loaded with various marine
insurance clauses:
LIFE INSURANCE:

Life Insurance is an arrangement between the Insurance company/Government


which guarantees of compensation for loss of life in return for payment of a specified
premium. In Life Insurance, the beneficiary whose name has been mentioned in the
contract receives the specified sum, from the insurer in case of happening of the
event i.e. Loss of Life.

1. Benefits of Life Insurance


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

2. Types of Life Insurance Policies


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

3. Claim Settlement Process


On the happening of the event, the beneficiary is required to send claim intimation
form to the insurance company as soon as possible. Claim intimation should contain
details such as Date, Place, and Cause of Death. On successful submission of claim
intimation form, an insurance company can ask for additional information about 1.
Certificate of Death 2. Copy of Insurance Policy 3. Legal Evidence of title in case
insured has not appointed a beneficiary 4. Deeds of assignment On successful
submission of all the document, the insurance company shall verify the claim and
settle the same.   

4. Principles of Life Insurance?


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

 Insurable Interest – This principle pertains to the level of interest an


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

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

 Risk & Minimal loss – Insurance is a risky and companies have to do


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

UNIT –III

RE-INSURANCE

What Is Reinsurance?
A reinsurance, in its most basic sense, is insurance for insurers. It is the process through
which insurers minimise the possibility of paying high amounts of money, in case of an
insurance claim, by transferring a part of their risk portfolio to other parties. 

But, to understand reinsurance better, let us first look at a more familiar term —
Insurance. By definition, insurance means — “an arrangement by which a company or
the state undertakes to provide a guarantee of compensation for specified loss, damage,
illness, or death in return for payment of a specified premium.” (Oxford Dictionary) 

Hence, in case of an insurance claim, the insurer (ceding party) has to pay the
compensation to the claimant, which in most cases is large sums of money. However, to
minimise the risk of paying the entire amount by themselves, insurance providers opt for
diversifying their risk by sharing it through another party (reinsurer). Which brings us to
the question: How does reinsurance work?

How Does Reinsurance Work?


As mentioned earlier, reinsurance is a way for insurance agencies to reduce the risk of
paying large amounts of money all by themselves. A reinsurance helps insurers stay
afloat by recouping either part or all of the money they’ve paid out to claims. It also
lowers the net liability and protects against large or numerous losses in a disaster.
Reinsurance also helps ceding companies to expand their underwriting capabilities in
terms of quantity along with the risk they may take on. 

Understanding with the help of an example:

Daniel Finance (DF) is a small electronic gadget insurance company with an annual
turnover of over Rs. 60,00,000 collected through premiums. Recently, a hefty insurance
claim was made to DF, owing to a huge fire in a client’s company building. The claim
amount could have almost led the company to insolvency. However, to the company’s
benefit, Daniel Finance had already used a part of the premiums received to purchase a
reinsurance contract that would pay out part or entire claim (as per the contract) to avoid
large losses. Therefore, Daniel Finance could split the claim with the reinsurer and keep
the company afloat. 

Though it is important to note that legally, insurers are required to maintain enough
reserves to pay all potential claims from all policies issued. Having a reinsurer can be
looked at as protective gear, in place to avoid bankruptcy. 

Further, depending on the needs and demands of an insurance company, the contracts
with a reinsurer can change. Sometimes, an insurance company might need a risk-
sharing of either part of their portfolio, or the entire portfolio. Based on this, there are two
types of reinsurers. 

Types of Reinsurances
The two primary forms of reinsurance contracts are — Treaty reinsurance and
Facultative reinsurance. Each of these reinsurances caters to different levels of risk
subletting. 

Treaty reinsurance
A reinsurance contract that involves an insurance business acquiring insurance from
another insurer is known as treaty reinsurance. The cedent is the firm that issues the
insurance and transfers all of the risks associated with a specific class of policies to the
purchasing company, the reinsurer. 

Treaty reinsurances are contracts based on an understanding of premium sharing. It


provides better security for the ceding insurer’s equity and more stability in the case of
exceptional or major events. Treaty reinsurance is less transactional, and risks are less
likely to be reduced.

Facultative
A primary insurer purchases facultative reinsurance to cover a specific risk (or a group of
risks) in the business. This form of contract offers a beneficial edge to the reinsurance
business, as it helps in reviewing individual risks. On the other hand, reinsurance
provides the insurer with additional protection for its equity and solvency in case of
extreme events, 

Facultative reinsurance agreements are considered to be long-term coverage between


two parties as compared to treaty reinsurance. 

Depending on the form of agreement between the two parties, the reinsurance —
treaty or facultative — can be further divided into two categories. 
Proportional reinsurance
The reinsurer receives a prorated share of all policy premiums sold by the insurer under
proportional reinsurance. In the event of a claim, based on a pre-determined proportion,
the reinsurer is responsible for a share of the losses. The ceding company is also
reimbursed for processing, business acquisition, and writing costs by the reinsurer.

Non-proportional reinsurance
In a non-proportional form of agreement, the reinsurer is liable to pay if the insurer’s
losses reach a certain amount, known as the priority or retention limit. As a result, the
reinsurer receives no proportional part of the insurer’s premiums or losses. One type of
risk or an entire risk category determines the priority or retention limit.

Related Blog: Types of Reinsurance

Functions of Reinsurance 
While the main function of any reinsurance company is to reduce the risk associated
with the insurance claims. There are a few other functions that a reinsurance company
performs. 

Income Smoothing
By absorbing big losses, reinsurance may make an insurance company’s results more
predictable. This will very certainly lower the amount of cash required to offer coverage.
The risks are spread out, with the reinsurer or reinsurers covering a portion of the
insurance company’s losses. Because the cedent’s losses are restricted, income
smoothing occurs. This ensures that claim payouts are consistent and that
indemnification expenses are kept to a minimum.

Risk Transfer
The risk is transferred from the main insurance company to the reinsurer, which helps
the insurance company manage portfolios better. 

Offering Expertise
In the case of a specific risk, the insurance company may desire to use the experience
of a reinsurer, or the reinsurer’s ability to determine a suitable premium. In order to
safeguard their own interests, the reinsurer will want to apply this knowledge to
underwriting. This is particularly true in the field of facultative reinsurance.
Expanding Portfolio
The reinsurer helps insurance companies expanding their portfolio by taking over some
part of the risk. This helps both the insurer and the reinsurer.

Assurance Of Claim Settlement


The involvement of a reinsurer also offers an assurance of claim settlement to the
policyholders in case of a catastrophic event. 

Objective of Reinsurance
 Risk is distributed to guarantee that a claim is covered.
 It gives a high level of underwriting stability during the claim period.
 Financial obligations that exceed the insurance firm’s capability are outsourced to
another company with the necessary resources. As a result, the ceding business is only
left with the financial responsibility that it can meet.
 Profiting from a premium on the net amount.
 To settle their claims, the real insured individual must work with just one insurance
provider.
 Enhance the risk exposure capacity.

Reinsurance Advantages
1. Insurance funds protected: In the case of reinsurance, the insurance funds are
protected and kept safe in case of any unforeseen claim. It also helps the insurance
company manage their funds better.

 Encourages new underwriters: Having reinsurance encourages insurance companies


to have new underwriters. Which further leads to an increase and expansion in business.

 It provides a limit on the quantum of liabilities: By sharing the risk, the reinsurance
also helps in reducing the size and number of liabilities that any insurance company has
to bear. Which also helps in bettering the operations of the said insurer.

 It further increases the goodwill of the main insurer:  A reinsurer helps in building
goodwill for the insurance company. The better the claim settlement, the better the
business in the future as a rule. 

 Stability to profits: With the addition of a reinsurer, profit is stable for insurance


companies. 

What Is Bancassurance?
Bancassurance is an arrangement between a bank and an insurance
company allowing the insurance company to sell its products to the bank's
client base. This partnership arrangement can be profitable for both
companies. Banks earn additional revenue by selling insurance products,
and insurance companies expand their customer bases without increasing
their sales force.

KEY TAKEAWAYS

 Bancassurance is an arrangement between a bank and an insurance


company, through which the insurer can sell its products to the
bank's customers.
 The insurance company benefits from increased sales and a broader
client base without having to expand its sales force.
 The bank benefits by receiving additional revenue from the sale of
insurance products.

Understanding Bancassurance
Bancassurance arrangements are common in Europe, where the practice
has a long history. European banks, such as Crédit Agricole (France),
ABN AMRO (Netherlands), BNP Paribas (France), and ING (Netherlands),
dominate the global bancassurance market.

But the picture varies widely from country to country. A 2013 report found
that while bancassurance accounted for 83.6% of life insurance sales in
Italy, 66.2% in Spain, 64.2% in France, and 62.6% in Austria, its market
share was lower in Eastern Europe and nonexistent in the United Kingdom
and Ireland.1

The United States has been slower than many nations to embrace the
concept. In part, that's because the question of whether banks in the U.S.
should be allowed to sell insurance was a matter of contentious debate for
many years. Among the issues: unfair competition for insurance agents,
possible risks to the banking sector, and the potential for banks to
pressure customers into buying insurance in order to qualify for loans.

UNIT-IV

INSURANCE CLAIM:

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