Syllabus

Various Universities of Telangana State

B.Com (General) (CBCS)
BC 301: Principles Of Insurance
NIT -I: Risk Management and Insurance
Understanding of Risk Management-Different Types of Risks- Actual and Consequential
.osses - Management of Risks - Loss Minimisation Techniques- Basics, Evolution and
.ature of Insurance- Concept of Pooling in Insurance- Different Classes of Insurance-
mportance of Insurance- Unexpected Eventualities

. NIT- II: Insurance Business and Market

Management of Risks by Individuals- Management of Risks by Insurers- Fixing of
-emiums- Reinsurance and Its importance for Insurers- Role of Insurance in Economic
>e\ elopment and Social Security- Contribution of Insurance to the Society- Constituents of
-,'urance Market- Operations of Insurance Companies, Operations of Intermediaries-
'pecialist Insurance Companies- Insurance Specialists- Role of Regulators- Other Bodies
lonnected with Insurance.

I NIT III: Insurance Terminology and Insurance Customers:

Common Terms in Insurance: Life and Non Life- Specific Terms in Insurance: Life and
Non Life- Usage of Insurance Terms- Understanding Insurance Customers- Different
. ,'tomers Needs- Importance of Customers- Customer Mindsets- Customer Satisfaction-
~_stomer Behaviour at purchase point- Customer Behaviour when Claim Occurs- Importance
: f Ethical Behaviour.

UNIT IV: Insurance Contract

Insurance Contract Terms - Principles of Insurance, Principles of Insurable Interest,
Principles of Subrogation, Principles of Contribution, Relevant Information Disclosures,
Principle of Utmost Good Faith, Relevance of Proximate Cause.

UNIT V: Insurance Products:

(a) Life Insurance Products: Risk of Dying early - Risk of Living too long- Products
: t'fered- Term Plans- Pure Endorsement Plans- Combination of Plans- Traditional Products -
Pinked Policies - Features of Annuities and Group Policies.
(b) General Insurance Products: Risks faced by Owners of Assets- Exposure to Perils-
Features of Products covering Fire and Allied Perils- Products covering Marine and Transit
Risks- Products Covering Financial Losses due to Accidents- Products covering Financial
.osses due to Hospitalization- Products covering Miscellaneous Risks.
 Contents

£NO. CHAPTERS PAGES

1. RISK AND TYPES OF RISKS 1.1 - 1.15

2 RISK MANAGEMENT 2 .1 -2 .1 3

3. RISK EVALUATION AND TECHNIQUES 3.1 - 3 .8

4. MEANING NATURE AND 4.1 -4 .2 4

RELEVANCE OF INSURANCE

5 PRINCIPLES OF INSURANCE 5 .1 -5 .1 4

6 INSURANCE TERMINOLOGY AND 6 .1 -6 .2 0

INSURANCE CUSTOMERS

7 LIFE INSURANCE NATURE AND USES 7.1 - 7 .9

8 INSURANCE PRODUCTS AND PRICING 8 .1 -8 .4 2

9 INSURANCE INTERMEDIARIES 9 .1 -9 .4 5

10 PRIVATISATION OF INSURANCE IN INDIA 10.1 - 10.18

11 INSURANCE REGULATORY BODIES 11.1 - 11.37

 /

Risk and Types of Risks

| INTRODUCTION
We are exposed to many risks in our day to day life. Nobody can predict what may
:en in the next moment. There may be an accident, calamity, theft, loss due to certain
■oer cause etc. Similarly there are always risks in business. There may be loss in the future
mr to unforeseen or unpredictable circumstances. A businessman also makes assumptions
fcr die future and bases all his decisions on those predictions. Future circumstances are
n tl -enced by so many factors and change in any situation will bring the risk element into
pfay.
The increased trade and financial activity across the globe has led to most of the firms
r.g an increased level of exposure. These exposures give rise to their respective risks.
E pc 'Ure is the degree of sensitivity while risk is the degree of variability of concerned item
® any of the risk factor.
There are always risks in business. There may be losses in future due to unforeseen or
irrredictable circumstances. A businessman makes some promises or assumptions for the
iir_re and bases all his decisions on those predictions. If everything goes well and
~r : - _mptions come true as anticipated then risk may be avoided. But the future circumstances
it; influenced by so many factors and unexpected changes in demand for a product, prices
i r raw materials may increase, labour rates may go up, government may impose certain
Ksnction on the business. Besides these, there may be natural calamity like earthquake,
fcodi. etc. Even in the factory, there may be a breakdown in the machinery, strike by
i. ~xers, pilferage or theft of goods, misappropriation of cash etc. All the factors mentioned
k> ve become the causes of business risks. So the uncertainties of future create situations
* "ere business risks arise. A businessman does try to control or minimise the risks but they
cannot altogether be avoided. An effort is made to insure various risks so that some
compensation is received when something adverse happens.
The risk basically is a combination of two factors: probability and impact.
 1.2 Risk and Types of Riski

Thus two factors can help in deciding how mush risky a situation is:
• What is the probability of happening an event?
• How badly it is going to effect the aggrieved?

| CHANCE OF LO SS/ PROBABILITY

There are two factors which are closely related to the concept of risk. The risk depends
on the chance of occurring or happening of an event. In some cases the probability of
happening of an event is high. For example in case of death the probability is 1. Death is
certain and everyone will die one day. In some cases the probability of happening of an event
may vary. The probability can further be categorised into objective and subjective
probability.
Objective probability can be deductive or inductive. If we can deduce an outcome from
an event, it is called priori probability or deductive reasoning. For example there are only two
sides of a coin i.e. heads or tails. Thus the probability of coming head is Vi. This is called
deductive reasoning whereas inductive reasoning is just opposite. We cannot estimate the
probability easily. It requires other supportive information to estimate the probability.
Subjective probability is the personal estimate of chance of happening of an event. It may
vary from person to person. For example, a person can believe that he will have high chance
of winning a lottery with a particular number but other person may not believe so. Thus it is
entirely subjective and depends on the perception or belief of particular person.

| MEANING OF RISK
Risk is expressed differently by different people. To some, it is the chance or possibility
of loss, to others, it may be uncertain situations. The word risk has been derived from Latin
word ‘resecare’ where ‘re’ means ‘against’ and ‘secare’ means ‘to cut’. It means to cut
against or the part that is cut off or lost. Thus risk is losing something or suffering loss due to
future uncertainties. Risk has been defined differently.
However the term risk includes exposure to adverse situations. Risk may defined as
below:
According to the Dictionary meaning risk is existence of volatility in the occurrence of an
expected incident. “Higher the unpredictability greater is the risk. According to this definition risk
may or may not involve money.
Emmett J. Vaughan,” Risk is a condition in which there is a possibility of an adverse deviation
from a desired outcome that is expected or hoped so far.”
Harrinton and Michans,” At its most general level, risk is used to describe any situations
where there is uncertainty about what outcome will occur.”
Irving Fisher,” risk may be defined as combinations of hazards measured by probability.”
sk and Types of Risks 1.3

Blomkvist defined risk as “the possible loss of something of value”.

Friedman defined risk as “catastrophe in its latent form” .

However, these new definitions are not universally accepted.

Douglas pointed out that" Risk is the probability of an event combined with the magnitude of
he iosses and gains that it will entail.”
Merkhofer “risk allows for a number of possible outcomes, not all of which are bad.”
Adams risk “is defined, by most of those who seek to measure it, as the product of the
jr: oability and utility of some future event”.
Ballard, “Risk = Frequency x Consequences”.
Beck and Bernstein,“the perception of risk from chance of loss into opportunity for gain.

Human beings have invented the concept risk to help them understand and cope with the
tcgers and uncertainties of life. Although these dangers are real, there is no such thing as
nsk’ or ‘objective risk.’

UNCERTAINTY
m
Some authors do not make any distinction between risk and uncertainty and use these
m > interchangeably. Though risk and uncertainty go together, but they differ in perception.
refers to a situation where the decision maker knows the possible consequence of a
etrision and their related likelihoods. Uncertainty involves a situation, about which the
fcrhhood of possible outcome is not known. Uncertainty cannot be quantified whereas risk
it be quantified of the likelihood of future outcomes. The degree of risk depends upon the
ncires of assets, investment, instruments, mode of investment etc.

| RISK VS UNCERTAINTY
A risk refers to a situation where there is possibility of loss. Uncertainty, on the other
■nc refers to a situation where the outcome is not certain or is unknown. There is lack of
am- edge about what will happen or may not happen. Uncertainty is just opposite of
rru_r.ty where one is sure of the outcome. Decision making under uncertain situations is
- . ult. It is the understanding of the situation, skill and judgement of the decision maker
. Bbch r.elps in taking decisions.

| CAUSES OF RISK
-. number of factors which can cause risk in an investment arena are given below:
1. Wrong method of investment: There are number of causes of risk and one of the
main reasons is wrong method of investment. It is necessary on the part of investor
I 1.4 | Risk and Types of Risl

to have complete information on different methods and instruments of investment

A wrong method can lead to complete loss.
2. Wrong timing of investment: Wrong method of investment is dangerous. In tl
same way, timing of investment also plays an important role. It is always profitab'
to invest in the market when there is recession or when the market is low. When th
market is low, the demand is less and prices are also less. Thus it is an approprial
time to invest and sell them at high price when the market is at peak.
3. Wrong quantity of investment: Not only poor quality and wrong timings c
investments but wrong quantity of investments also lead to losses. If entire amour
is invested in a particular security or a particular type (risky) of security then it ma;
lead to loss with the fall in value of that security. It is better to create a balance
portfolio by creating a trade-off between liquidity and profitability.
4. Interest rate risk: The fluctuation in interest rate is also one of the factors causing
risk. Any increase in interest rate will increase cost of capital which will furthe
lead to expensive finance. Thus these fluctuations can multiply the loss.
5. Nature of investment instruments: The investment instruments can be safe oi
aggressive and risky. Generally safe investments lead to less profit than risky and
aggressive investments. Thus if an investor invests its money in a riskier project
then the chance of loss also increases manifold times.
6. Creditworthiness: Credibility of the issuer is also a cause of concern. It is
necessary to check creditworthiness of the issuer as it determines the chances of
default. A highly credible person will be able to pay back its liabilities on time
whereas there is high risk of default in investors with less credibility.
7. Maturity period or length of investment: The longer the maturity period of the
investment, the higher the risk. Future is uncertain and as the length of investment
increases, the chance of default also increases. Thus long term investments are
more risky than short term investments.
8. Terms of lending: The investor must consider the terms and conditions of
investment. Sometimes lack of information on terms and conditions can generate
problems in future.
9. National and international factors: Globalisation has opened up the economy and
thus the economic conditions in international market can have significant impact on
the domestic economy.
10. Natural calamities etc.: Natural calamities like earthquake, flood, famines etc. are
beyond the control of human beings and this can lead to huge loss.

i
tsk and Types of Risks 1.5

TYPE OF RISKS
The risk is broadly classified into two types:
Systematic Risk
Unsystematic Risk

:) S y ste m a tic R isk

Systematic risk refers to that portion of variation in return caused by factors that affect
te price of all securities. The effect in systematic return causes the prices of all individual
ec arities to move in the same direction. The movement is generally due to the response to
c :nomic, social and political changes. The systematic risk cannot thus be avoided.
Systematic risk disrupts the entire financial system of the economy. These disruptions
an impose negative impact on the economy. The recent financial crisis is an appropriate
sample of the same.
Systematic risks have huge negative impact on the whole of the economy and thus cannot
<e diversified. In other way we can say that these risks are prevalent within the system which
_nnot be corrected easily. However, the impact of the systematic risk can be reduced by
ertain policies. This makes it different from financial risk
• Size of market: In systematic risk the size of market is so large that it has huge
impact on the whole economy. Even if the risk is low, the impact is high due to its
size.
• Contagion effect: It is an effect in which the impact of crisis or shock travels from
one entity to another entity, one institution to another and even from economy of one
country to the economy of other country. This effect multiplies the adverse impact on
the economy of the world as whole. One of the recent examples is impact of
recession of developed countries to economy of whole world making it a global
recession. This is because all the economies are interdependent and this network
leads to chain of failures. Actual or expected failure can also propagate distress
within the financial system.
It also affects small and individual enterprises badly as they fail to cope up with the
contagion effect. It is just like effect of bad news in the market and everybody rushes to exit
vhich multiplies the problem.
• Business cycles: One of the main factors is cyclical fluctuations in the market. This
mechanism is also known as pro cyclicality. It is necessary to correctly interpret
different circumstances that may arise in different phases of business cycles.
Leverage plays key role in magnifying the risk. Leverage means presence of debt.
Leverage helps in improving the profits in normal circumstances but in adverse
situation it magnifies the losses. There can be number of factors (internal as well as
external) that may contribute to the contagion effect.
 1.6 Risk and Types of Riski

• Vicious Circle: It is a vicious circle in which one circumstance leads to another anc
it becomes difficult to break that jinx. The financial crisis leads to deep recessior
leading to slow recovery, less demand, no availability of credit, deterioration ol
creditworthiness, lack of confidence and outcome is low productivity and growth.
These economic trends affect the whole market and make situation graver. The
systematic risk cannot be eliminated by the diversification of portfolio, because every share
bond is influenced by the general market trend.
Systematic risk arises due to the following factors:
(a) Market Risk: Variation in prices sparked off due to real social, political and
economic events is referred to as market risk. Market risk arises out of changes in demand
and supply pressures in the market following the changing flow of news or expectations.
Apart from this, the subjective factors like psychology and sentiments of investors also cause
some market fluctuations and uncontrollable risk.
(b) Interest Rate Risk: generally price of securities tend to move inversely with changes
in the rate of interest. The market activity and investor perceptions are influenced by the
changes in the interest rates which in turn depend on nature of instruments, stocks, bonds,
loans etc., maturity of the periods and creditworthiness of the issuer of the securities.
Basically the monetary and credit policy which is not controllable by the investor affects the
riskiness of the investments due to their effects on returns expectations and the total principal
amount due to be refunded.
(c) Purchasing Power Risk: Uncertainty of purchasing power is referred to as risk due to
inflation. Inflation arouses optimism since the entire prices group and that lead to higher
incomes. But the effect of this hike in incomes increases cost of production due to wage rise,
rise in prices of raw materials etc. and the consequent lower margin of profit leading to low
or no. dividend. This is called cost pull inflation. Demand pull inflation is caused by the gap
between increased demand and inadequate supplies. People have more money in their hands
and they demand more consumable as well as durable goods. Purchasing power risk is the
uncertainty of the purchasing power of the amounts to be received in future due to both
inflation and deflation. There is possibility of prices of desired goods and services going up
due to inflation, during the holding period of the investment, as a consequence of which the
investor loses the real purchasing power. The element of purchasing power risk is inherent in
all investments and is uncontrollable.

(ii) U n sy ste m a tic R isk

Unsystematic risk refers to that portion of risk which is caused due to factors unique or
related to a firm or industry. This risk is a company specific risk and can be controlled if
proper measures are taken. As it is unique to a particular firm or industry it is caused by
factors like labour unrest, management policies, shortage of power , recession in a particular
industry, consumer preferences etc.
 nd Types of Risks \ 1.7 |

iis type of risk can be further divided into following types:

SINESS RISK
isiness risk can be internal as well as external. Internal Risk is caused due to improper
:t mix, non-availability of raw materials, incompetence to face competition, absence of
pc management etc. Internal risk is associated with the efficiency with which a firm
cts its operations within the broader environment thrust upon it. External business risk
due to change inn operating conditions caused by conditions thrust upon the firm which
yond its controls, changes in business laws, international market conditions etc.
here are different types of business risk. These risks arise due to many factors faced by
organisations.
hese factors can be broadly classified as under:
Human factors: These factors are the most important factor or source of risk because
no business can exist without human beings. The business is owned and operated by
human beings. Moreover the products and services provided by these organisations
are also consumed by human beings. Thus human factor is the most important factor
and an important cause of internal risks. Any activity related to human being for
example strikes and lock-outs by trade unions; fraud by an employee; accidents in the
industry; incompetent manager or other important people in the organisation or
default in payment by debtors may adversely affect the business enterprise.
> Technological factors are the changes in the techniques of production or
distribution. They may result in technological obsolescence and other business risks.
If there is some technological change but the business does not adopt that technology
then it may lose market share as the products will be costly or of inferior quality as
compared to its competitors. The consumers may shift their demand to its substitutes
available in the market
• Physical factors include the factors which result in loss or damage to the property of
the firm. These factors include the damage of machinery and equipment due to fire or
theft in the plant. These factors are internal factors and can be controlled by taking
precautions. For example Fire insurance of goods in warehouse or in transit. The
machinery and goods can be insured against theft and fire and other contingent
liability they may arise and lead to damage to the goods and equipment.
• Economic factors are the most important causes of external risks. These are the
factors which are out of control of an organisation. They may arise due to change in
the Government policies i.e. monetary policy, fiscal policy, industrial policy,. If these
policies are favourable then business may earn substantial profit but if they are
unfavourable then it may lead to substantial loss. There may be change in the demand
of the consumers due to price fluctuations, change in fashion, taste, preferences,
I 1.8 1 Risk and Types of Risk

income etc. Inflation, deflation in the economy, unemployment are also some o
dynamic factors that can also affect the business enterprise adversely or positivelj
These risks are also known as systematic risk as it is prevalent within the system an
cannot be ruled out.
• Natural factors are the unforeseen natural calamities like earthquake, flood, famine
over which an entrepreneur has very little or no control. Such events may caus
irreparable loss of life and property to the firm.
• Political factors have an important influence on the functioning of a business, bo
in the long and short term. They result from political unrest in a country like fall
change in the government, relations with outside world. Due to globalisation t]
political scenario of the other countries also have impact on the business of the enti
world.
Thus,, there are various sources of risk that an organisation needs to identify. Some
them are controllable and others are uncontrollable but the business man must identify th^
risk and take corrective measures well in time to minimise them.

I TYPES OF BUSINESS RISKS

The risk may be classified into various types. Following are the important types
business risks:

1. In tern al and E xtern al R isk s

(a) Internal Risks : The risk of loss due to internal functioning of the businesd
organization is called internal risks. These can be normally controlled by proper management.
(b) External Risks : External business risk arises due to change in operating conditior
caused by conditions thrust upon the firm which are beyond its control, changes in busines^
laws, international market conditions etc.

2. P roperty and L iability R isk

(a) Property Risks : If due to any event property of the firm destroys it will be called
property risks. For example if building of the firm destroys due to fire or theft, it will be
called property risk.
(b) Liability Risks : Sometime a firm is held liable to pay losses or damages to the other
party or the firm. Such type of losses risks are known liability risks. For example If an
employee of an organisation met with an accident while working on the machine then a fir
will be held responsible for such loss.

3. S p ec u la tiv e and Pure R isk

(i) Speculative Risks : Speculation means trying to earn profit by predicting future
- sk and Types of Risks DU
e ent. In speculation there is risk of profit and loss both. If prediction or estimation of
speculator is correct then the firm may earn profit but if his estimation is wrong then it may
ta d to substantial loss. Each firm starts the business to earn a profit. It is the main aim of
each firm but due to some uncertain events the firm suffers loss. For example a firm
innovates a new product, now there is a chance that it may create the market and earn a profit.
I n other side if it fails to create the demand then it suffers a loss.
(ii) Pure Risks: In such types of risks there is no chance of profit and only possibility of
•I'ses are pure. For example in case of earthquake, fire or theft, the damage leads to pure
loss.

4. Insurable and Non Insurable R isk

(i) Insurable Risks : Insurable risks are those risks which can be insured by the
n-urance company. In such cases loss can be. transferred from insured to the insurance
. mpany. The losses which may occur due to the fire, accident or theft are included in the
insurable risks. In case of insurable risks following conditions must be fulfilled.
1. 1 The losses must be measurable.
2. The loss must not be caused intentionally.
3. There should be an insurable interest for the insured.
4. To get insurance there should be large number of similar cases.
5. Expected loss should be spread over the total number of insured.
(ii) Non Insurable Risks: If risk cannot be insured, it is called non insurable risk. For
; -ample if the demand of a product falls in the market due to any reason, and a businessman
' offers a loss, such type of loss is not insurable.

I OTHER TYPES OF BUSINESS RISK

A) S tra teg ic R isk

They are the risks associated with the functioning of the business. These kind of risks
arise from :
(a) Business environment: The risk arising from the environment in which the business
exists. For example changes in supply and demand, competitive structures and introduction of
new technologies.
(b) Transaction: It includes risk associated with mergers and acquisitions, spin-offs,
alliances and joint ventures.
(c) Investor relations: It includes risk associated with the strategy for communicating
aith individuals who have invested in the business.
I 1.10 Risk and Types of Risks

(B) F in an cial R isk

Financial Risk is associated with the capital structure of the company. A company with
no debt financing has no financial risk. The extent of financial risk depends on the leverage of
the firm’s capital structure. Proper financial planning and other financial adjustments can be
used to correct this risk and as such it is controllable. Financial risk is one of the major
concern for every business. Financial risk is caused due to market movements and market
movements can include host of factors. Based on this, financial risk can be classified into
various types such as market risk, credit risk, liquidity risk, operational risk and legal risk.

1. Market Risk
This type of risk arises due to fluctuations in prices of financial instruments in the
market. Market risk can further be classified into Absolute, Relative, Directional, Non-
directional and volatility risk. The risk associated with the movement in stock prices is called
directional risk. Non- directional risk on the other hand can be volatility risk.

2. Credit Risk
The financial crisis in the whole world has highlighted the importance of credit risk
management. Banks and financial institutions undertake evaluation of clients and projects
before investing money or advancing loan. But still defaults do take place. There are chances
that one party fails to make payment to the other party. It can be due to number of factors i.e.
changes in foreign exchange policies or when one fails to settle the accounts. Thus the impact
and chance of default decides the magnitude of risk in a particular business or activity. Credit
risk thus can further be classified into Sovereign Risk and Settlement Risk. Difficult foreign
exchange policies may lead to sovereign risk on the other hand settlement risk arises when
one party makes the payment while the other party fails to fulfil its obligations. It is essential
to deal with this credit risk to avoid insolvency. Collateral and insurance were used to reduce
the credit risk but in the recent global recession, these instruments proved to be insufficient to
control these defaults. Portfolio can prove as saviour in this situation. A balanced portfolio
can help in managing these defaults.
Risk and Types of Risks 1.11

3. Liquidity Risk
This type of risk arises in case of financial institutions like banks. The liquidity crunch
lead to loss of customers, bad reputation due to non-payment of money to customers.
They are unable to execute their transactions. Liquidity risk can be classified into Asset
liquidity Risk and Funding Liquidity Risk. Asset Liquidity risk arises when there are no
' insufficient buyers and sellers.

- Operational Risk
Operational risk arises due to malfunctioning of internal operations of an enterprise. This
mlfunctioning can be technical in nature i.e. error in recording of transaction or poor
. mmunication system. At organisational level, there can be error in supervising, monitoring
icd formulation of policies, wrong strategies. Operational risk can be classified into Fraud
Risk and Model Risk. Lack of proper checks and controls can lead to frauds. Thus Fraud risk
_~>es due to lack of proper control and Model risk arises due to incorrect model application.
?r i’per reporting system, disclosures and transparency in the system can help an enterprise to
. ntrol operational risk.

5 Legal Risk '

This type of financial risk is also known as regulatory risk. The legal constraint such as
a - suits arises due to lack of faith, unethical behaviour or lack of transparency and reporting.
Thus proper corporate governance can reduce the legal risk and the costs associated with the
proceedings. Whenever a company needs to face financial loses out of legal
rr ceedings, it is legal risk.

C) O ther R isk s
In addition to the above major risks there are many more risks particularly associated
■ ~ investment in foreign securities. These risks are monetary value risk, political
: - ronment risk and inability of foreign government to meet its indebtedness. The investor
* - buys foreign government bonds or securities of foreign corporations often in an attempt
i: gain a slightly higher yield than obtained on domestic securities runs these risks. The
n - 'tor should weigh carefully the possibility of additional risk associated with foreign
o e -aments against his expected return when investing in foreign securities rather than
a ~.estic securities.
i) Individual and Group Risks: If a risk affects the economy or its participants on a
racro basis, it is a group risk. These risks affect most of segments of the society. These risks
be unemployment, war, floods, earthquake etc.
Individual Risks are confined to individual identities or small groups. The risks such as
rire. theft, robbery etc. are individual risks. Some of the individual risks are insurable.
ii) Financial and Non-Financial Risks: Financial Risks are those when a person stands
 1.12 Risk and Types of Risks

to loss or is adversely affected by some event or there is some type of loss or some
occurrence may expose assets or property to financial loss. When there is no possibility of
financial loss, these are non-financial risks.
(iii) Pure and Speculative Risks: Pure risks are those situations where possibility of loss
may or may not be there. If such a risk is insured and loss arises then insurance company will
compensate that loss. For example, an insurance policy for a car is purchased, there is no
accident during the period of insurance policy, there will be no compensation, if damage
occurs to car due to accident then the insurer will indemnify the loss. There is no situation of
profit under such risks.
Speculative risks are those risks where there is possibility of profit or loss. These risks I
are undertaken with the intention of earning a profit but possibility of loss also remains. An
investment in stock and shares may bring profit or loss. Pure risks have a possibility of
avoiding loss only whereas speculative risks have the possibility of gain also.
(iv) Static and Dynamic Risks: Dynamic risks are those which are the outcome of
changes in economy or the environment. These risks mainly refer to the macro economic
variables like inflation, income and output levels, technological changes, etc. Dynamic risks
emanate from the economic environment so these may not be anticipated or quantified.
Static risks are more or less predictable and are not affected by economic environment.
These risks are similar to pure risks and are suitable for insurance.
(v) Quantifiable and Non-quantiftable Risks: The risks which can be measured like
financial risks are quantifiable risks. Those risks which may result in situations like tensions, j
loss of peace etc. are non-quantifiable.

| INTER-RELATIONSHIP OF RISKS
We have discussed various types of risk in the above section. These risks cannot be
studied isolated as all these risks are interdependent on each other and for effective
management, it is must to study interrelationship of these risks. The market risk can lead to
credit risk and liquidity risk. In the same way operational risk may lead to market risk. Thus
it is essential to understand the magnitude of impact of different risks on business and
economy as whole. There are certain other risks like fraud risk which is difficult to be
managed by risk mitigation tools in the market. It is difficult to manage and satisfy greed of
speculators.
Risk management is possible only when this interplay of risk is managed properly. It is a
dynamic process. The tools of risk management should be applied according to the need.
Hedging can help a businessman to get protection against sovereign risk but cannot protect
against fraud risk.
The recent global recession has highlighted the need to review these risk management
 ~?pes of Risks 1.13

:• _:es to handle the emerging difficult economic and financial circumstances.

> a dynamic and continuous learning process.

MANAGEMENT
of the business decisions are taken on the basis of expectations, estimates and
:: future events. It involves risk since future events may or may not occur as
In order to achieve some goal one may have to take risks. Risks may mean some
r 1 " . It is where risk management is important.

ODS OF HANDLING RISKS

13-c risk cannot be eliminated however can be reduced by taking timely action.
There are two types of protection methods of risks:-
4. Insurance Policy.
5 Non Insurable Methods.

Insurance P o licy
The insurance policy helps to protect the business from losses caused due to risks. In case
■-arable risks, risk of loss can be transferred to the insurance company.

Non Insurable M ethod s

When the risks are non insurable and these can not be protected by the insurance, the
ter '.echniques can be used to protect these risks.
These are :
1. Precautionary Measures : If the risk cannot be insured then risk can be minimised by
ir preventive measures. For example machinery can be maintained properly in order to
:d accidents, break down and liability risk. Necessary measures must be taken to start the
siness.
2. Contingency Fund : A separate fund can be maintained to cover the unexpected
sses that may arise due to uncertainty. So by using this fund a firm saves itself from any
r.ancial loss.
3. To Avoid the Risks: Management can adopt techniques to minimize the risk
ssociated with the project or investment. The chance of occurring any particular event which
lay cause the loss can be minimised by proper planning. All the risks cannot be avoided but
lese can be minimized. So such policies are adopted which reduce the loss.
 1.14 Risk and Types of Ris

| IMPLICATIONS OF RISK
All businesses face some type of business risk. Business may face financial ai
operational problems in the business environment. Small businesses are often prone
business risk making it more challenging to survive in competitive environment. There a
different types of business risk and each risk carries different implications for busine
owners to overcome. Business risk can be due to human, physical or technological factors.

S tra teg ic
Strategic business risk is a risk which every business faces due to competition in tl
market. Whenever a company innovates, it earns super normal profits but as competitic
increases, market share and profits starts falling. Thus strategy is required to deal with tl
competitors and retain its market share and profits. It is easy for large organisations to survi\
but a big challenge for small business to maintain sufficient supply of economic resource
such as raw materials, labour in order to produce goods or services.

Legal
Legal environment plays very important role as no organisation can exist withoii
complying with the regulations in the business environment. High government regulation ca
create more risk for small businesses. A company spending more money on compliance ma;
not get sufficient funds for production. Business owners must review regulations and develo]
business policies or procedures to ensure their company is in compliance.

F in an cial
Finance is the lifeline of any business. No business can survive without finance. Thus
Financial risk becomes an integral part of business. It is necessary for small as well as large
organisations to manage finances properly. Any financial loss can lead to shut down of the
Company. A Company may lose money from consumer sales or facing strict credii
requirements. If sales on account are not managed properly then it may lead to bad debts.
Business owners may sell inventory or other items to consumers at reduced prices in an
attempt to make money to pay business expenses. On the other hand if there are strict credit
requirements then it may limit loan amounts, increase interest rates or create other
unfavourable financing terms for businesses.

O perational
Operational business risk is the risk associated with proper running of the business. There
is possibility that company will face problems in their production process. Broken equipment,
theft, insufficient supply of raw materials, Fire etc. may lead to operational business risks.
Business owners with high operational risks face decreasing production output, inferior

\
Rs» ~nd Types of Risks 1.15

ppcm er products, increased cost and less profit. This may lead the competitor to capture
L a r . share. Companies can earn profit if these operational risks are properly managed.

REVIEW QUESTIONS^
i. SHORT ANSWER TYPE QUESTIONS
1. What do you mean by Risk?
2. Differentiate between Systematic Risk and Unsystematic Risk.
3. What is Credit Risk?
4. Write short notes on:
(a) Pure Risk and Speculative Risk
(b) Financial Risk
(c) Business Risk
(d) Quantifiable and Non Quantifiable Risk •
(e) Risk and Uncertainty
5. What are types of Business Risk?
6. What do you mean by risk management?
7. What are steps involved in risk management?
8. Write short notes on:
(a) Implications of Risk
(b) Strategic Risk
(c) Causes of Business Risk
(d) Insurable and Non Insurable Risk
9. What are the methods of handling business risk?

5. ESSAY TYPE QUESTIONS

1. What do you mean by Business Risk? What are its types?
2. Define business risk. What are its implications? Also discuss its factors in detail.
3. What do you mean by Risk Management? What are the steps in risk management? Also
discuss methods of handling the risk?
4. “Risk cannot be eliminated” Comment.
5. What do you mean by Risk? What are its causes of risk? Discuss its types in detail.
6. Define risk. Explain systematic and unsystematic risk.
7. Write short notes on :
(a) Financial Risk
(b) Market Risk
(c) Operational Risk

<$><$><$><$>
 HAPTER J K

1Q I1 I
2 Ins nee

Risk Management
RODUCTION
Most of the decisions are taken on the basis of expectations, estimates and forecasts of
: events. It involves risk since future events may or may not occur as expected. In order
■Jtr_eve some goal one may have to take risks. Risks mean some danger or loss. A
p c >rul business is one which can handle the risk properly and timely. It is where risk
■*L-:“ ent comes into action.
T:e risk management process involves the study of impact and probability. Impact here
:- . ass and probability means chance of occurring loss. The organisation must manage

rU
a descending order i.e. risk with highest impact and probability first, followed by less
■L 5 it is difficult to assess overall risk in an activity and can be mishandled.
~-c very first step is to identify risk involved in a particular business. There are different
t c f risks. The classification that we have studied in previous chapter is traditional in
!■*: Knowledge risk (lack of knowledge), Relationship risk (lack of good relations),
- risks (ineffective operations) are some of the modem risks that are faced by
-~en now a days. These risks directly reduce profitability of the concern and thus
~imediate attention. Risk management helps in creating value by identifying and
these risks.
•\ management is usually the responsibility of the top management and is performed
managers. These managers must consider economic, social, political and legal factors
-^eng decisions as the decision taken by these managers have huge impact on not only
*>-':ness but also on the entire economy.
:_se of conflict and controversy, decision-makers must be able to justify their
They are accountable to the whole nation for their decisions. Stakeholders like
raKders, consumers, government, creditors etc. are interested in the details of the risk
as well as the overall results. It is the duty of top management to satisfy these
•<:i iers with their decision even if there is some additional cost or risk involved in it.
 2.2 Risk Managemt

Risk Management can therefore be defined as

“a group of actions that are integrated within the wider context of a company organisatior
which are directed toward assessing and measuring possible risk situations as well as elaboratira
the strategies necessary for managing them”.
“The process of identification, analysis and either acceptance or mitigation of uncertainty
investment decision-making".
“Risk management is a series of steps whose objectives are to identify, address, and eliminat
software risk items before they become either threats to successful software operation or a majo
source of expensive rework.” (Boehm, 1989
Dictionary meaning
“The identification, analysis, assessment, control and avoidance, minimization, or elimination o
unacceptable risks. An organization may use risk assumption, risk avoidance, risk retention, risl
transfer, or any other strategy (or combination of strategies) in proper management of futurt
events.”

In nut shell Risk management is a very wide concept and includes activities related
risk identification, assessment, control and minimisation. It also considers all types of risl
that affect the performance of a company and damage the reputation of the company ai
national and international economy. From this point of view, therefore, Risk management h
become a significant function which requires the risk takers, policy makers, auditors ai
everyone associated with the risk to consider not only quality, quantity but also probability i
negative impact on profits of the organisation.
Risk management thus helps an organisation to:
• enhance the value already created by the organisation;
• creating future opportunities for the growth of organisation
The methods/techniques of risk management may differ from company to company <
different types of risk.

| PRINCIPLES OF RISK MANAGEMENT

The International Organization for Standardization (ISO) identifies the followin
principles of risk management:
Risk management should:
• create value - resources expended to mitigate risk should be less than th
consequence of inaction, or (as in value engineering), the gain should exceed the pai:
• be an integral part of organizational processes
• be part of decision making process
• explicitly address uncertainty and assumptions
• be systematic and structured process
Management 2.3

be based on the best available information

be tailorable
take human factors into account
be transparent and inclusive
be dynamic, iterative and responsive to change
be capable of continual improvement and enhancement
be continually or periodically re-assessed

CPORTANCE OF RISK MANAGEMENT

k k management is the process that allows risk managers to balance the operational and
pmc costs of reducing and managing risk.
hily in recent years have organizations have realised the importance of risk management
cci'> of an organisation. Some of the large organisations have appointed risk managers
- :th these risks. It applies not only negative aspect but also positive opportunities that
ble in the future. Risk management helps the top management in taking decisions
* -.ether to accept the threat or opportunity or act upon it in some way.
process can help management to implement a strategy for risk management across
«. of their organization to establish internal control and to report to shareholders

the increase in corporate governance practices, it has become essential for the
i? well as private companies to focus on formal risk management practices. In
< to these regulations by government, new concept like ERM (Enterprise Risk
Kc: ~ ent) has emerged.
tii-k Management is particularly necessary to a business which has:
» Number of branches at different sites.
• Large scale enterprises as small scale may not afford the cost of the entire process.
• A business dealing in international trade.
• A business with number of processes and product lines.
• Many associates which are not under direct control of the business.
^ short, the larger and complex the business will benefit from risk management because
I practices involve cost which a small or medium scale organisation will not be able to
I Moreover the benefits for small organisation may get off set by the cost of these
h .; - Thus it is beneficial for large scale organisations. Some of the benefits of ideal and
a . risk management are discussed below:
• Helps in absorbing shocks
• Reduces sudden surprises
cm Risk Manage

• Optimum utilisation of resources

• Helps in reducing wastage of time and effort
• Checks frauds
• Provides better customer services, qualitative products
• Effective time management
• Better management of crisis
• Reduces cost by controlling and checking
• Encourages initiatives
• Improves adaptability
• Improves focus on core activities.
• Helps in strategy formulation.
Risk Management programmes are effective programs that improves the ov
performance of the organisation by focussing on key elements i.e. policy, procedures
standards.
• Policy deals with the objectives of the Risk Management programme.
• Procedures deals with implementation part and
• Standards provide guidance on particular issues.
A well-structured risk management methodology, when used effectively, can 1
management identify appropriate controls for providing the mission-essential secu
capabilities.

| KEY ROLES
Risk management is a management responsibility. This section describes the key role;
the personnel who should support and participate in the risk management process.
• Senior Management. Senior management plays the most important role. It is tl.
ability to assess the risk and decision making ability to take right decision at rii
time can help an organisation to survive in this competitive environment. They m
also assess and incorporate results of the risk assessment activity into the decisi
making process.
• Chief Information Officer (CIO). The CIO is responsible for planning, budgetii
and performance including its information security components. Decisions made
these areas should be based on an effective risk management program.
• Business and Functional Managers. The managers responsible for busine
operations and functional process must take an active role in the risk manageme
process. These managers are the individuals with the authority and for making tl
trade-off decisions essential to achieve the objectives.
 Management 2.5

rtsk m a n a g e m e n t p r o c e s s p h a s e s

A ' discussed earlier risk management cannot be studied in isolation as there are number
related to identification, assessment and controlling of risk in an organisation and
hd m> as whole. There must be dedicated process of Risk Management.

Traditionally, the phases of a Risk Management process are as follows:

L C on text
The first step is to define context of risk management process. This step helps in
identifying the areas of risk that need to be managed. It also provides a base on which further
ceps are taken. If this base is not proper then all the steps in this process may not yield
a.curate results. This step further identifies the resources required to start the process. It also
Jefines the limit on the basis of potential risk involved in a particular organisation on all
evels and the worst consequences in case these risks are not managed properly and timely.

2. R isk Id en tific a tio n

The next step or phase is to identify all possible sources and the source of risk can be
dentified only when one has proper knowledge of the organisation, market in which it
operate, financial strengths and weaknesses etc. The weak spots or areas of weakness should
 2.6 Risk Managemei

be identified. The identification of such areas will help in curbing weak spots within the area
of risk that were taken into consideration when defining the context.
There are different sources of potential risk such as market preferences, seasonality
business cycles, competition, technology lack of knowledge, political ideology etc. Differen
sources may generate different type of risks. The risk may differ from organisation t<
organisation due to different objectives, types of products and services provided b;
organisations, the scenarios in which organisation is working, type of market in which th<
organisation is competing with its competitors. It is essential to study all the aspects tc
identify the risk the organisation can get exposed to.
The risk managers must create a list of weaknesses (vulnerabilities) along with the list ol
sources of risk to identify all the possibilities of risk on the basis of past events that has
already occurred, Financial Statements, Risk analysis questionnaires and events of similai
nature etc. Thus risk managers will be able to build a risk profile of the organisation.

| TECHNIQUES OF RISK IDENTIFICATION

1 Project review: The risk manager reviews the project, its plans and assumptions in
detail before accepting or rejecting a particular project.
2 Information gathering: The next technique in risk identification is to collect the
information with brainstorming; Delphi; interviewing; and strengths, weaknesses,
opportunities, and threats (SWOT) analysis etc.
Brainstorming: Brainstorming helps in collecting information by jotting down the list of
ideas given by the members of the group. This process helps in finding conclusion to a
specific problem. Thj group members list all types of risks involved in a particular project
and then steps are taken to manage any kind as well as source of risk.
Delphi technique: This technique helps in solving the problem with the help of
questionnaire and this process is done anonymously to avoid any kind of biasness. The
experts then review these questionnaires and try to solicit the ideas about the source and type
of risk involved in a particular project.
Interviewing. This is one of the best techniques of risk identification as the experienced
project managers are interviewed to reach at the conclusion. As there is face to face
interaction, this technique is better than other techniques but it may lead to biasness. They
can identify risks on the basis of project information and their experience.
SWOT analysis. Each project is analysed through SWOT Analysis. This analysis helps in
identifying strengths, weakness, opportunities and threats that a project can face in future.
All these techniques are on the basis of association. There are many other creative
methods such as Analogy method (Synectics, Visualisation etc.), Method of Systematic
Variation, provocation and random methods. The use of these methods can help project
 merit 2.7

~ not only identifying the source of risk but also the solutions to these types of risk,
cation of the source of risk is the most important step of risk identification.

ASSESSMENT
Hbc identifying different type of risk that an organisation can face, the next step is to
>e risks. Risk Assessment is also known as risk measurement. It is an important
-••k management. The manager will depend upon historical data and post experience
neasuring risk. Such an exercise will help in ascertaining the estimated loss in the
of adverse situations in future. This may help in determining the volume of
;. premium amount.
Kc -v Assessment is based on:
• ± e chance of loss or probability that determine the chance of occurring an event;
• the impact of the event on the organisation .
1 :> not easy to assess the probability and impact of risk on organisation and it is must to
unbiased analysis of the situation or event that must have occurred in past. The data
analysed with the help of appropriate statistical tools depending on the circumstances
pe of risk.
r :om the above discussion, we can conclude that there are two elements which an
mat ion must study for risk assessment:
1. Probabilities: It refers to the likelihood or chance of occurring an event or loss to
an organisation. Sometimes it is easy to predict probability by studying historical
data objectively but in some cases it becomes difficult to estimate probability
subjectively.
§
2. Variability of outcomes leads to risk, and higher the variability the more the risk.
Variation in outcome can be measured by range, standard deviation etc. The highest
and lowest values can give the limit within which the variation lies. It can be used
with other statistical tools to arrive at conclusion.
Each potential risk must, however, be perceived with greater or less intensity, with regard
the real risk content, based upon the “force” with which the relevant information is made
- ailable, especially when there are specific sensibilities. Therefore, the assessment process
■.quires a constant engagement directed toward the objectivity of the judgments, in fact, if
\ie risks are assessed in an irrational manner and their corresponding priority is assigned in
on improper manner, there could be a lack of coverage and/or defence and useful resources
could be wasted that, if better applied, could lead to more effective management.
Once probability and consequences have been established, a “risk matrix” is usually
prepared that relates to the “risk profile” created in the previous phase.

✓
 2.8 Risk Manageme

1. RISK TREATMENT
The analysis of risk will help in deciding that risks are to be shifted and what risks are
be retained. When one wants to shift risks then insurance comes into picture. Risk Treatme
is next step which involves decision making processes. Different risk must be tackli
differently. After identification and evaluation of different types of risk, the risk manag
must make proper decision to mitigate risk. The risk manager will have to decide wheth
they want to transfer, exclude, reduce or accept the risk. These alternatives are evaluati
properly with reference to risk profile and risk matrix. After proper evaluation the ri:
manager can adopt either one or in combination different alternatives to control the risk.
These alternatives are discussed below:
• Risk transfer;
• Risk avoidance;
• Risk reduction;
• Risk Acceptance.
Risk treatment depends upon no. of factors like nature of organisation, probability an
intensity of risk.
1. Risk Transfer. This is a treatment for insurable risks. Those risks which can b
transferred on other party through contract is called risk transfer. Generally insuranc
companies work on this concept. The risk is transferred on number of persons thereb
reducing the impact of loss. There are two parties to this contract. The first party is insure
(insurance company) and the other party is insured (who is getting his property or lif
insured). In this case risk is transferred and the insured can get protection from various type
of property, fire, theft risk etc.
2. Risk Avoidance. This is applicable when the risk cannot be transferred or reduced. L
this case it is better to avoid a situation which can lead to loss in future. For example: one cai
avoid risk of damage in earthquake prone area by not building premises in earthquake proni
area. One of the benefits of this method is that by avoiding the risk, the risk can be reduced t<
zero but it is not possible to avoid the risk every time. Sometimes it is essential to take risk t<
earn profit. It may lead to loss of opportunity that would have generated revenue for thi
company. Thus risk avoidance is not possible in all the circumstances.
3. Risk Reduction. This alternative helps in reducing the risk by adopting variou:
precautionary measures. This will reduce the impact or severity of loss. In this variou;
managerial, technological and behavioural actions are taken that lower the probability of risl
and/or the seriousness of the possible loss. In this case also the risk cannot be eliminatec
completely. Some part of risk cannot be avoided due to the circumstances which are beyond
control of human beings.
 -jgem ent 2.9

sk Acceptance or Retention. Some of the risks which cannot be avoided or reduced

-c --cepted or retained in the organisation deliberately. It can be active or passive
ic: Active acceptance means accepting the risk consciously and deliberately. Passive
ce is due to laziness or ignorance. It is generally accepted when the probability of
- r it will generate great benefits if successful.
treatment thus helps in risk control. Right treatment at right time can generate

rAinning. Planning defines the risk control methods, that is:

the acquisition, interpretation, sending and/or storing of incoming data for the control
process;
r.e appropriate level and localisation for the decisions and actions connected to each
:. pe and condition of risk;
:he operative procedures and/or practice;
the control instruments;
» the acquisition, interpretation, sending and/or storing of output data from the control
process.
Ir’ ±e control plan is sufficiently broad and complex, it is recommended that the position
. Risk Manager is created, as it is an important position that is mainly directed toward
: noting all activities and their communication, although it does not have any direct
ibility for the risk itself.
7r.e planning activity is documented and collected in a Risk Management Plan.
A meaningful goal is specific, measurable, attainable, challenging but realistic, time
c, written, and performance based. If one achieves all conditions of a specific
ble goal, confidence increases and satisfaction results. If a measurable goal is not
objective analysis can occur and adjustments can be made to improve the likelihood
■ success.
Care should be taken to set goals over areas where one has as much control as possible.
Veiling is as discouraging and counterproductive to goal setting as failing to achieve a goal
3:t reasons beyond your control. If goals are set on performance or skills to be acquired, then
oc' trol over achievement is maintained.
There are beneficial reasons to set goals:
1. To reflect the values, interests, resources and capabilities of everyone involved in
1 the business;
2. To provide a basis for all business and family decisions;
3. To set priorities for the allocation of scarce resources; and,
4. To measure progress.
 2.10 Risk Manager

6. Communication. The profile, the matrix, the risk treatment (including the cost-be
analysis) and the control planning must be documented in detail in a Risk Manager
Report, which must be presented to all personnel that is involved in any manner and i
must not only acknowledge it, but must also share in the approach and evolution, each for
or her own area of interest and according to each person’s level of responsibility.
If information only should not be enough, targeted training courses should be develo
with the purpose of making the Risk Management Report an effective managem
instrument.
7. Checking and Supervision. Checking and supervision over time concerns (whene
applicable and possible) all control instruments (technical and managerial, preventive c
supervisory, evasive and reactive, etc.) that were implemented, or planned to
implemented, in compliance with the Risk Management Plan, in order to verify its efficier
and effectiveness.
The checking and supervision results must be documented, evaluated and recorded.
8. Review and Feedback. Risk Management is a dynamic process and therefore it mi
be reviewed in a sufficiently frequent manner (Risk Management Review), based upon t
experience gathered in a direct manner (within the organisation) or indirectly (outside o ft
organisation, in similar and comparable situations), with the purpose of:
• evaluating possible evolutions that concern any phase of the process, which con
cause changes to the risk profile, matrix and/or treatment (for example, but not onl
a different risk context, a different criterion regarding the acceptable risk, a differe
cost-benefit analysis, etc.);
• evaluating the efficiency and effectiveness o f the adopted Risk Management Plai
evaluating the checking and supervising results.
If revisions are made, another Risk Management Report must be created that is update
with regard to the changes that were made.

[ CONCLUSION
Risk management strategies are also affected by an individual’s capacity or ability to bea
(or to take) risk. Financially, risk bearing capacity is directly related to the solvency an
liquidity of one’s financial position. ’ "
Risk bearing ability is also affected by cash flow requirements. This includes thi
obligations for cash costs, taxes, loan repayment, and family living expenses that must be me
each year. The higher these obligations are as a percentage of total cash flow, the less abb
the business is to assume risk. The best source of historical production and marketing
information is the records maintained for the business. The records may be supplemented
 >nt 2.11

nted by information from outside sources. But there is no substitute for actual

be categorized into one of three broad types of risk tolerance. Risk averse

E
most cautious risk takers.

ling to give up some income to some level of avoid risk. They may value
)r financial survival more than an opportunity for higher profits. Risk neutral
■ducers findtandmany
theydifferent
must takewayssometochances
implement these
to get principal
ahead, risk responses.
but recognize that thereEven
are
risk management is challenging,
every situation. there are many professional resources available and
Bmers should not feel isolated. Extension educators and university extension specialists are
lg a decision or taking action they gather information and analyze the odds
■nied to provide educational programs and leadership to help implement the planning
dmize income Risk preferring individuals enjoy risk as challenging and
pr Insurance agents, crop and livestock consultants, livestock nutritionists, marketing
k for the chance to take risks. Some producers may be in this category with
pe. Mists, lenders, attorneys and others are available and well qualified to help with risk
marketing plans, even though they may not consciously plan to take on
■l- ^cement planning, depending upon the specific need.
y may enjoy the Steps in Risk Management Planning adventure of playing
Many of thesespeculators
professionals have a stake
are typically in category.
in this the farm business and have an incentive to
■K :de objective information and feedback on alternative strategies. The regular use of a
he multiple sources of risk, comprehensive strategies that integrate several
h. - ness advisory team keeps the business fine-tuned and on the cutting edge. Be judicious
iability are often necessary for effective risk management. The particular
a. -electing professional help. Ask for references and credentials as appropriate. Rely on the
1 by an individual farmer will depend on the individual’s situation, the types
rerience of other growers, input suppliers, implement dealers, peer groups, allied
[ the risk attitudes or preferences. Some risk responses such as vaccinations,
t : ressionals, trade association recommendations, and trusted friends and mentors.
ntenance, feed inventories, and irrigation act primarily to reduce the chance
As already mentioned,
;vent such companies
as disease, have basicallyand
breakdown, always controlled
drought many Other
will occur. of the responses
main risk
M-ditions in a of
*.e effect manner that protection
providing is often notagainst
very coordinated and with little
adverse consequences awareness, some
by transferring as their
of
iiain objective has been the recovery of damage rather
k m s .1 to someone else such as insurance and forward pricing. than managing the causes.
 2.12 Risk Managemei

This control is normally carried out by professional people that belong to tl

organisation:
- in operative positions (e.g.: technical manager, sales manager, marketing manage
administrative manager , human resources manager)
- in staff positions (e.g.: quality manager, safety manager, environmental manager),
- in consultancy relationships with the organisation itself (for ex.: chartere
accountant, insurance broker, legal council).
Each of these professional figures faces specific risk sources, sometimes in an implic
manner, in a non-systematic context, which can refer to general management that aci
through function-based interventions. In practice, therefore, this is a costly and not ver
effective condition.
Risk Management intends, therefore, to be an “approach that aims to optimise resource:
skills and behaviours, with respect to a specific risk/coverage/control configuration, which i
created based on a cost/benefit analysis that takes the main external and internal parameters
that distinguish the organisation, into account".
The level of using and implementing the Risk Management process, which is understood as
separate process, increases steadily.
Risk management is now more often correctly perceived, and by a growing number o
companies, no longer as a comparison between separate coverage alternatives, but rather a
an instrument that, with respect to a reasonable operating cost, can involve considerabL
competitive advantages, allowing capital to be used more efficiently, reducing the volatility
of the results and improving profitability.
Have the primary sources of risk been identified and classified?
Have the risk outcomes and their likelihood or probability of occurring been estimated?
Has the financial capacity of the business or ability to bear risk been evaluated?
Have the risk tolerances of the business operators been considered?
Are risk goals written and are they specific, measurable, attainable, relevant, and timed?
Have the goals been shared with everyone involved in the business?
Have risk tools and strategies been identified to help manage risks which could prevenl
achieving established goals?
Has a confident relationship been established with a team of risk management advisors,
so they can help assess and manage business and personal risk exposure?
________________ 2.13

EVIEW questions!
r ANSWER TYPE QUESTIONS
A • at do you mean by risk management?
C'-tline steps in risk management process.
I-e;ine risk avoidance.
iVnat is risk treatment?
What is risk transfer?
iVho are the key players in the risk management process?

ANSWER TYPE QUESTIONS

.Vhat do you mean by Risk Management? Why it is important for the organisation to manage
risk faced by them?
2. .Vhat are the steps involved in Risk Management? Discuss in detail.
x .‘/hat do you mean by Risk Identification? How risk can be identified?

<«><$><$><$>
.
CHAPTER

]|

Insurance
-dSS* L
Ii
Risk Evaluation And
Techniques
I
INTRODUCTION
R. >k Assessment is the main element of Risk management Process. The entire process of
Hi 'Management depends upon Risk assessment or evaluation. Risk has been defined as the
■ability of suffering loss and Risk Management is a process to protect the business from
pfennig any kind of loss. This is possible only when risk managers are able to evaluate these
appropriately. Every decision by a risk manager can create or mar the value of a firm,
firms now days do not strive to avoid the risk but try to manage the risk exposures by
:g the risk faced by them correctly. It is the duty of the risk manager to identify
?'ses associated to risk. These can be (1) Actual Loss (2) Consequential Loss
Actual Loss: Actual loss occurs under the following situations:
. The subject matter is completely destroyed.
»!* The goods are so damaged that they cease to be a thing which was insured.
. The insured is deprived of the subject matter.
■'sequential loss: Generally various policies covers the physical damage of the
in case of actual loss but do not cover the loss due to interruption in business.
ial loss is thus that loss which occurs due to actual damage in the property or the
Thus the insurance policy that covers consequential loss is Business interruption
loss of profit policy that will cover the damages or loss of profit of that period for
baseless remain interrupted.
re Risk manager must assess the loss associated with the business whether it is
■consequential. There are several methods of risk evaluation but it is necessary to
mous internal as well as external factors affecting as particular firm or project such
■Ke-m.ities, probability of event, social, technical, economic and political factors
ig . riiticular firm or project and last but not least the timing of risk assessment.
 3.2 Risk Evaluation and Technique

Risk assessment is most complex step in the entire risk management cycle. Ris
assessment techniques can be Qualitative or Quantitative depending upon the risk factors.

| RISK ASSESSMENT PROCESS

Risk assessment is a process of measuring and prioritizing risks so that optimum risk
return relationships can be established. This can help in controlling the risk levels of th
organisation.
Risk assessment process involves the following steps:

| RISK IDENTIFICATION
The first step in risk assessment is Risk identification. It is necessary to identify the risk
involved in a particular project or business. It is must to manage the risk. If the risk managers
are not able to identify the risk then it is impossible to manage the risk. Thus it is must for
every risk manager to identify all kinds of risks (financial, operational, strategic etc.) and sub
categories of risk like market, credit, liquidity etc. The risk managers have to identify key risk
involved in a particular project.

| RISK ASSESSMENT
The next step is to assess the quantity of risk by checking the likelihood and severity of
impact of risk in a particular project or business. The likelihood of risk event determines the
probability of occurrence of an event. The risk manager will have to identify the risk with
highest probability and its impact on business.
This step further involves four steps:
(a) Develop criteria
(b) Assess risk
(c) Risk interaction
(d) Prioritise risk
 mm
sk Evaluation and Techniques

: D evelop C riteria
The first step in Risk assessment process is to. develop % % ££££*
L is assessed or prioritised of a particular t a n or project. The cntena
on

S * s o f which the comparison on company basis, industry basts ts don .

L Assess R 1 assessed with the help of various qualitative and

After developing cntena, nsk is assessed
L ^ titative techniques discussed below in detail.

qualitative Techniques and Quantitative Techniques

Qualitative techniques are those lechniques which cahno, be — '” "
L . These techniques are subjective in nature and evaluate the nsk by comparing tnc
|tar.'. os and ranking the situation in ordinaisca/e iik e high- m oderate-iotV, Vltai-criticaietC .
» . oalitative techniquescanstudytheimpactormagnitude Ofrisk.

-.-imitative techniques are those techniques which give result in numerical value and are
objective in nature. It measures the risk on cardinal scale and gives resu/t in definite

of the commonly used Qualitative techniques are interviews, cross-functional

• surveys, benchmarking, and scenario analysis.

m e w s and c ro ss fu n ctio n a l w orkshops:

> one of the most important and common qualitative technique to assess the risk
e- -n any project or business. The one on one interview can facilitate solution to their
■r In the same way, the cross-functional workshop helps in building a cross functional
i erent epartments in order to solve the problem. This method is better than rK-
■ method as in this case every member of the team represents differed,
1 ' peerin g, production, finance, marketing etc. This hel:> j
 - Evaluation and Techniques 3.3

i. D evelop C riteria
7ne first step in Risk assessment process is to, develop the criteria or base on which the
tat. :s assessed or prioritised of a particular firm or project. The criteria sets a benchmark on
bis of which the comparison on company basis, industry basis is done.

b A ssess R isk s
After developing criteria, risk is assessed with the help of various qualitative and
Hi.,--native techniques discussed below in detail.

Qualitative T e ch n iq u es and Q u a n tita tiv e T ech n iq u es

Qualitative techniques are those techniques which cannot be measured in monetary
aue. These techniques are subjective in nature and evaluate the risk by comparing the
*:~_adons and ranking the situation in ordinal scale like high- moderate-low, vital-critical etc.
- - qualitative techniques can study the impact or magnitude of risk.
Quantitative techniques are those techniques which give result in numerical value and are
re objective in nature. It measures the risk on cardinal scale and gives result in definite
M ne.
Some of the commonly used Qualitative techniques are interviews, cross-functional
■» rkshops, surveys, benchmarking, and scenario analysis.

Interview s and c ro ss fu n ctio n a l w orkshops:

It is one of the most important and common qualitative technique to assess the risk
r volved in any project or business. The one on one interview can facilitate solution to their
rr blem. In the same way, the cross-functional workshop helps in building a cross functional
earn from different departments in order to solve the problem. This method is better than the
-rerview method as in this case every member of the team represents different departments
•_ch as engineering, production, finance, marketing etc. This helps in considering the
ED Risk Evaluation and Technique

perspectives of all the departments. They can review internal and external data with the hel
of expert judgement to assess the probability and severity of the risk.
Interviews are more suitable at the top level of management for taking importar
decisions on right time whereas Workshops may not be suitable where there is centralisatioi
of powers in few hands.

Surveys:
One of the techniques of qualitative analysis is surveys. This method is applied where th<
population is large and it is difficult to collect information from each and every individual
Surveys are generally done with the help of questionnaires filled by few individuals. Thes<
questionnaires are then analysed with the help of statistical tool to get accurate results but thi;
method is also not away from its limitations. The questionnaire method suffers from various
limitations such as low response rate, incorrect information or poor quality of informatior
and one of the major limitations is that it is confined to literate people only.
This method can also be used in support to above two methods for in depth analysis.
Quantitative techniques range from benchmarking and scenario analysis to generating
forward looking point estimates (deterministic models) and then to generating forward
looking distributions (probabilistic models). Some of the most powerful probabilistic models
from an enterprise-wide standpoint include causal at-risk models used to estimate gross profit
margins, cash flows, or earnings over a given time horizon at given confidence levels.

B enchm arking:
Benchmarking is a technique where a firm can compare itself to the best in the industry.
They can compare various practices or processes with the best practices followed in the
industry. In this they can compare themselves and identify the opportunities of improvement
for the firm. Some firms can compare themselves across the industries and study the impact
of an event across industry. Benchmarking can also be used to assess the probability and
severity of potential events across an industry. Benchmarking data are also available from
various research agencies, government surveys and regulatory bodies.

S cen a rio A nalysis:

Scenario analysis gives an analysis of future possible events. It does not show one exact
event but analyses the entire scenario and give different alternatives. The number of
alternatives is limited to three as more alternatives can create confusion rather than giving a
solution to a problem.

C ausal A t-R isk M odels

When all the above discussed models/analysis fails to give accurate results, the causal at-
risk models helps the risk managers to take right decision at right time. It is one of the most
 ion a n d Techniques 3.5

techniques of risk assessment especially in financial sector. These probabilistic

help in identifying key drivers (factors) to risk.
Margin at Risk (GMaR), Cash Flow at Risk (CFaR), and Earnings at Risk (EaR)
r____ : die metrics based on specific risk factors affecting the earnings of the firm. It is
-_ne logic that earnings or cash flows are true indicators of performance and impact
iH p icto r would ultimately lead to change in the cash flows or earnings of the firm. Thus
fcpHt : actor must be incorporated into the overall model.
model is based on past or historical data and where such information is not
expert views may be used to predict the probabilities and severity of the risk factor,
can also get biased and may not give true and exact information.
ison of Qualitative and Quantitative techniques

* a _ :a tiv e T ech n iq u es
^ v a n ta g es
• It is easy to understand.
• It leads to quick decision.
• It provides experts view on the impact and probability of risk event.
• It can give an insight of the situation on the basis of past experiences.
• It considers both financial as well as non-financial impact.
• It is easy to understand as technical knowledge is hot required.
Zisad vantages
• It is based on ordinal scale such as high, low, medium, very high etc.
• It is not precise as it gives range of information and not exact level of risk.
• It is subjective in nature and cannot give numerical data.
• Cost-benefit analysis is also not possible under this method.

"uantitative T ech n iq u es
\dvantages
• It is objective in nature.
• It gives numerical data in support of their conclusions.
• It identifies the risk involved in cash flows and earnings of a particular firm by
measuring “at risk” such as Cash Flow at Risk
• It is suitable in cost-benefit analysis.
• An optimal risk-return relationship can be established.
• It also helps in maintaining solvency under critical conditions.
 I

I 3.6 | Risk Evaluation and Techni

D isad van tages

• It is complex and technical knowledge is must.
• It is time-consuming and costly.
• In this expert opinions are ignored and thus qualitative aspects are missing.
• It is not easy to understand by the employees.

(c) R isk In ter a ctio n s

The third step within risk assessment is to determine risk interactions. Risk do
interact in isolation but its effects gets magnified when it get interacted with the environr
in which the business survives. Thus it is very essential to study and assess risk interacti
There are various techniques like bow-tie diagrams, risk interaction matrices, fault trees
event trees etc.
Fault tree analysis (FTA) was originally developed in 1962 at Bell laboratories. 1
method is generally used to analyse the system of failure in order to avoid or minimise
risk by taking precautions on the basis of this fault tree. This tree can give sequence of evt
that may occur in the event of any kind of failure. On the basis of this sequence, steps
taken to minimise the risk at different levels. It is generally used high hazard projei
aerospace, nuclear power etc. It uses various graphical symbols to make tree of failures
which main failure is broken into other failure events.

B ow -tie Diagram s:
The general structure of a bow-tie diagram is represented in the diagram below.

Events that Consequences that

trigger the Potential future occur if the incident
incident Preventative control Mitigative strategies happens
reducing the impact
of the incident All MS Fail
► N Consequences of
r<MS)(MS>> Worst Case
Scenario

One or more MS succeed

Consequences of
'—( f )— ► Next Worst Case
^ Scenario

Prevetative controls Potential future

reducing the Mitigative control
frequency of the
triggering events

Source: www.Rrisk.com
Bow-tie diagrams are graphical representation of events which helps in displaying the
cause, preventive measures of major accidents in such a way that it is easy to communicate tc
all the employees in easy and effective manner. The bow-tie diagram gets their name from
 t

and Techniques 3.7

mage they form. They are very effective risk assessment tool. They can act as a
r analysis and thus helps in assessing the risk the help of other methods

R isk:
and the last step is to prioritise the risk assessed in the above steps. These
i'-catial to manage the risk. The risk manager can pay more attention to those
iri 'ignificant in nature. This prioritisation of risk is done in two steps: first they
.a . . rding to one or more criteria like its impact, likelihood or vulnerabilities etc.

ranks are revised in the light of other factors.

ra^is of this a hierarchy is formed which has to be managed in a proper and
-runner. These risks are then plotted on the Risk map or heat map which further
?:tuation. This risk map can give detailed analysis of likelihood and impact of
?c ^n ordinal scale of high, low medium etc.

Extreme

Low

Negligible

Rare Unlikely Moderate Likely Almost Certain

Likelihood

http://www.visual-manager.ch/2013/10/09/adding-actions-and-methaphors-to-risk-maps/

a R esp ond to R is k s
The last but not least step in this risk assessment process is to minimise the risk by
t:-ponding to the risks evaluated above in a very rational manner. Various response options
-uch as accept, reject or avoid are examined in the light of the above analysis and cost benefit
iralysis is done to reach at the conclusion.

^REVIEW QUESTIONS! " '---- ~TZZ~~

A. SHORT ANSWER TYPE QUESTIONS
1. Define Risk Assessment.
1
 I

| 3.8 1 Risk Evaluation and Techniq,

2. What are steps involved in Risk Assessment process?

3. Write short notes on (a) Risk Map (b) Fault tree(c) Bow-tie diagram (c) Scenario Analysis
4. Differentiate between Qualitative and Quantitative techniques

B. LONG ANSWER TYPE QUESTIONS

1. What do you mean by Risk Assessment? What are its techniques? Discuss in detail.
2. Discuss in detail Risk Assessment process?
3. Differentiate between Qualitative and Quantitative techniques of Risk Assessment.

<$><s><s><s>
 - - T E R ... , i _ ..........j

I ° ] 1 ^— - J
) |

in s u r a n c e i » a i

Meaning Nature and

Relevance Of Insurance
, iiiiiiiiiiiiiiiiiiiiiBMiiiiiiiii ii i i w in iirin r B i i i i i i i i i f f

ITSxJDUCTION
^ jlLare exposed to various risks in our daily life. Even the wisest and cleverest person
■pi ie for or avoid all risks. Nobody can predict or foresee the calamity he may
M b Dir_re. Everybody on the road, whether on foot or in a vehicle carries some risk of
| | i * _:;h may result into serious injury, loss of limb impairing ability to earn
■ p c . : even death. One may take precautions against such risk, but the risk can not be
■MBi Similarly, there can be loss due to fire, floods, earthquakes, burglaries, illness
■ter- " causes human suffering.
|( e» possible to take precautions against such events, but the possibility of such
■■n c - : en not be completely ruled out. One can also make provision for coping up with
t r» e s b u t can not eliminate the chance of such happening. For example, security can
Upased in a particular area in view of increased burglaries, however, burglary can still
■■. One can increase life expectancy by proper health and medical care, however death
4 -^rpen. Efficient fire service can minimise the loss due to fire but can not prevent
■ttcrence of fire. In short, risks can be reduced but not eliminated.
A ->>. involves loss. Not all, but most of the losses can be expressed in terms of
r» A person exposed to some risk may incur a loss. If loss is small he may bear it
e If loss is huge he may not be able to bear it alone. Society may have to render help to
he ± e mfferer to cope up with the situation. For example, the help rendered to the
m.- :: earthquake in Gujarat. However, it will be better if a device or system is
b r e d to provide help to those who happen to suffer a loss. Such a device is 'insurance'.
□U Meaning, Nature and Relevance of Inst

I THE INSURANCE DEVICE

It is clear that all those who carry a particular type of risk do not suffer from it. C
few suffer actual loss from the risk. If at all, all suffer at one point of time or other, but
not suffer at the same time. For example, all on the road carry risk of accident. Howev
will not meet with an accident. All houses carry risk of fire, but all will not
fire. Therefore, exposure to a risk and actual suffering from it are two different things,
a few among those who are exposed to a risk will actually suffer. Who will suffer
when will he suffer ? is not known. Each one fears loss. All those who are exposed
particular kind o f risk can co-operate to spread the actual loss suffered amongst all
who are exposed to the risk. Such a co-operative device can be called ins in
device. Thus, insurance is a co- operative device which spreads, the loss caused
particular risk to some persons, over a number o f persons who are exposed to san
similar risk and who agree to 'insure' against that risk.

| ORIGIN OF INSURANCE
It is difficult to say exactly when did insurance originated. However, there is evid
which suggests that devices resembling insurance existed in old times in Babylonia
India. Manu, recognised the usefulness of making provision for sharing future losses.
Rig Veda refers to 'Yogakshema', which means 'insurance'. This suggests that insurant
some form existed more than a 1000 years ago. However, the evidence suggests that pre
form of insurance originated only in 12th century.
The traces of insurance originally appeared, mostly with regard to foreign trade,
foreign trade was generally carried through sea route. The sea going vessels carried the i
of suffering from sea storms, typhoons, Collisions, Sinking, Capture by hostile king:
looting by pirates. The merchant exporters co-operated with each other to share the
which some of them may suffer due to such risks. Thus, the marine insurance was the :
branch of insurance to become popular. It was a voluntary co-operative device. The ma
policies of the present type were sold in the beginning of 14th century by the Brugian.
the residents of Burges, in 1310 the Count permitted the setting up of a ’Charter
Assurance'. The insurance developed beyond Hansa Merchants and Lombards. '
Lombards merchants took a prominent part of the London city, where they built homes ;
gave it the name of ’Lombard Street’ which has an important place in the history of insura
alongwith Lloyd's Coffee House.
After marine insurance, fire insurance was developed. It originated in Germany in ea
16th century. The Great fire of 1666 gave it a big push in England. Fire Insurance office v
established in England in 1681. In India, the general insurance started in 1850 when Trii
Insurance, Calcutta (Kolkata) was established.
The 'Life insurance' was the last one to make its appearance in 16th century. Althouj
 Weaning, Nature and Relevance of Insurance I 4.3 1

■inuities existed earlier, the first evidence of it is the policy on the life of William Gybbons
k June 18, 1536. The first registered life office in England came up in 1696 under the name
| Hand-in-Hand Society'. In India, the first life insurance company under the name Orient Life
- surance Company was established in 1818.
The other types of insurances like fidelity insurance, accident insurance etc. developed in
19th century.

| DEFINITION OF INSURANCE
There can be two approaches for defining insurance. One is functional approach while
fee other is contractual approach.

F unctional D e fin itio n s

The functional approach definitions discussed below are noteworthy.
According to Encyclopedia Britannica, "Insurance may be defined as a social device whereby
a large group of individuals, through a system of equitable contributions, may reduce or eliminate
measurable risk of economic loss common to all members of the group." In similar sense Disnadle
-as defined that, "Insurance is an instrument of distributing the loss of few among many." Allen. C.
Wayerson states that, "Insurance is device for the transfer, to an insured, of certain risks of
economic loss that would otherwise be borne by the insured."

From the above definitions, it emerges clearly that the functional definition has the
■flowingfeatures :
(a) it is a co-operative device,
(b) it spreads the risk over a large number of persons who are insured against the risk,
(c) it provides security to the insured.

C ontractual D e fin itio n s

In contractual sense the following definitions are noteworthy.
According to Justice Tindall, "Insurance is a contract in which a sum of money is paid to the
assured in consideration of insurer's incurring the risk of paying a large sum upon a given
contingency." In the words of E.W. Patterson, "Insurance is a contract by which one party, for a
consideration, called premium, assumes a particular risk of the other party and promises to pay to
him or his nominee a certain or ascertainable sum of amount on a specified contingency.”

The contractual approach definitions highlight the following features :

(a) it is a contract,
(b) whereby an insurer assumes the risk of insured,
(c) and promises to pay a specified or ascertainable amount,
(d) on the happening of a specific event,
(e) in consideration of the premium paid by the insured,
| 4.4 Meaning, Nature and Relevance of Insurai

The person who seeks protection against a risk is known as 'insured'. The person
provides protection is 'insurer' (i.e. insurance company). The document containing terms

I
conditions of contract is called 'policy' or 'insurance policy'. The consideration from
insured is called premium.

CHARTERISTICS OF INSURANCE RISKS

All types of risks are not insurable. The risks which have some economic value can
insured. Non-economic risks such as prestige, insult, dignity etc cannot be insured.
Insurable risks have the following characteristics :
1. Insurable Interest. A person is said to have an insurable interest in the property if
financially benefitted by its existence and is prejudiced by its loss, destruction or m
existence. If a person is not affected either way by the existence or non-existence
property then he has no insurable interest in it.
2. Calculable Risks. Only those risks are insurable which can be measured in terms i
money. If the risks are not calculable then no claim may be settled.
3. Pure Risk. Pure risks always produce losses. Property damaged by fire, motor vehic
damaged by accident or pure risks. If a house catches fire, the owner will suffer financii
loss. Pure risks are insurable and can be insured against.
4. Accidental in Nature. If the event is inevitable and is bound to occur then it cannot h
insured. The risk may or may not occur and only then it can be insured. To insure the risk,
must be accidental in nature.
5. Legal Object. The object of the contract must be legal any risk whose objective i
against the public interest is not insurable. A disability or injury caused intentionally cannot
be insured under personal accident policy because the object is criminal in nature.
6. Not Against Public Policy. A public policy may be described as a set of moral ant
social policies or rules of conduct which have to be observed. Anything against policy cannot
be insured. A motor insurance policy cannot be taken to pay fines against Violation of traffic
rules.
7. Not Great Calamity in Nature. The risks which are catastrophic in nature cannot be
insured. If the losses are so huge then it may not be in the capacity of the insurable to bear
such claims. The covers are available for flood, cyclone, earth quake etc. Which maybe
catastrophic but may be capable of being borne by the insures.
8. Wide Spread Risk. The risk should be wide spread to bring it under pooling system. If
only few persons can insure some risk then it will not be practically possible to insure.
When large number of persons get a risk insured then it will be wide spread and the risk
will be borne by the insurer.
 I

ing, Nature and Relevance of Insurance 4.5

TURE AND SCOPE OF INSURANCE

. ne nature of insurance is characterised by the following aspects :
1. Sharing of risk. Insurance is a co-operative device for sharing of risk from an event
die death of an earning member of family, accident, fire etc. If such risk is insured
gh premium, then it is shared collectively by the policy holders.
2. Co-operative instrument. It is a co-operative device or instrument. A large number
rersons exposed to a particular kind of risk agree to share the risk together. It is co­
ve sharing of risk. It is not compulsory.
3. Evaluation of risk. The consideration paid by the insured to insurer is premium. The
t of premium is linked to the evaluation of risk. The greater the risk or probability of
ning of an event, higher will be the premium.
- Payment is linked to contingency. In* the case of general insurance, the payment is
!to contingency like fire or accident. If the contingent event occurs, the amount is paid
ne policy holder, otherwise no amount is paid. Similarly, in certain types of life
ce, the payment is not certain due to the uncertainty of the contingency happening or
■appening. However, generally the contract of life insurance is a contract of
Tty. The contingency in life insurance is death or expiry of term, which is certain to
Therefore, the payment is certain.
5. Contract. Insurance is a contract between the insurer and the insured where the former
the risk on behalf of the latter. Insurance contract is always in writing and must
all the essentials of a valid contract under the Indian Contract Act.
r Consideration. Insurance is a contract where one accepts the risk for a consideration
premium. The insured agrees to pay a certain sum of money in return for an
ing that the insurer will compensate him in case of loss or on the happening of the
n event. Premium paid to the insurer is the consideration against the coverage of loss.
Good faith. Insurance contract is based on the concept of good faith, on the part of
:he parties i.e. insurer and the insured. The insured should disclose all the facts about the
:t to be insured before entering into contract.
8. Contract of indemnity. Except in case of life insurance, all other contracts are
acts of indemnity. On the happening of certain contingency, the insurer compensates the
d for the loss suffered by him. The main objective of insurance contract is to shift the
• loss suffered by the insured to the insurance company. It is only the compensation of
loss suffered by the insured, nothing more or nothing less.
9. Insurable interest. No person can undertake an insurance contract unless he has an
ble interest in it. A person is said to have an insurable interest in the property if he is
-:ally benefitted by its existence and is prejudiced by its loss. Similarly in case ot life
 4.6 Meaning, Nature and Relevance of Insurant

insurance, the insured must stand financially benefitted by continuance of life and will suffa
a financial loss due to the non-existence of the subject.
10. The amount. The amount of payment depends upon (a) quantum of loss (b) d
cover of the insurance. In general insurance this principle is applicable. If the cover is ma
but the loss is less only the loss suffered will be compensated. If loss is more and d
insurance undertaken is less, only the amount covered under the policy will
paid. However, a contract of life insurance is not a contract to cover the financial loss. It is
promise to pay a fixed sum of money, in case of death or expiry of the term of the policy.
11. Large number of insured persons. To make insurance feasible or cheaper, a lars
number of persons must be insured. Larger the group, lesser will be the amount <
premium. Insurance is a co-operative device. When large number of persons insure again
risk, they share collectively the loss suffered by a few. If a number of persons take up tl
policy against a risk, only they have to share the loss suffered. Although, insurance can be a
the basis of a smaller number also, but if is cheaper when large number of persons take up th
policy.
12. It is not gambling. Insurance is not gambling. Infact, it is the opposite
gambling. In gambling, one exposes oneself to risk of loss, but in insurance one protec
oneself against loss. It is non-speculative. In fact, it brings certainty of protection instead i
uncertainty of future in case of loss. Non-insurance is more of a gamble.
13. It is not charity. To face the loss arising out of calamity like earthquake or floo<

I
social organisations come forward to help through charity. The insurance company come
forward to meet its contractual obligation.

FUNCTIONS OF INSURANCE
The functions performed by insurance can be classified into following categories:
1. Primary Functions.
2. Secondary Functions.
3. Other Functions.

1. Prim ary F u n ctio n s

The main function of insurance is to provide security for uncertain future events. This:
possible through the system of pooling. Many insurance policy holders contribute money ii
the shape of premium and it is used to meet losses of those who face adversities
future. Primary functions may be discussed as follows :-
(i) Providing Cover for Risk. Insurance is primarily meant to provide a cover fa
uncertain events happening in future. While life insurance offers to provide a specified sun
of money either on the death of a policy holder or on the maturity of the policy and geners
insurance insures to compensate a loss suffered by the insured. People are anxious to provid
 Mature and Relevance of Insurance 4.7

: any eventuality in future. Insurance is helpful for compensating the adverse

in future.
-r-tribution of Loss. Insurance is based on the principle of 'pooling system'. The
feeders provide money to the insurance company in the shape of premium. Large
: policy holders contribute to this pool. Whenever a loss is suffered by the policy
e compensated out of this premium collected. The risk of loss is distributed
rge number of persons. A company cannot assure the compensation of loss unless
: collects premium from large number of persons so insurance helps in distribution

Provides Security. People are always worried about future. A businessman may
future if things are not happening as per his plans. A family may be worried
' uture if a bread earning member is snatched away by death. The fears of future
3 limit the present activities of persons. Insurance assures the compensation of
» s affered in future and it also assures the payment of a specific amount in the event
: a policy holder. People are relieved of insecure feeling if they have insurance
I’ orovides safety to every section of society in case some adverse situation occurs

Pr wides Certainty. Insurance provides certainty by providing cover for uncertain

: - The fear of uncertain adverse happenings in future always haunts people. They
se through which adverse happenings may be insured. Insurance provides a means
ate the losses caused by uncertain events. The insured can convert his
into certainties by paying to the insurer. The insurer provides certainty in lieu of
rremium.
Skaring of Risk. Insurance concept is based on 'pooling system'. All the persons
-'Urance policies pay premium towards insurance fund. Any loss arising to the
at out of the insurance fund. It means that risk arising to any insured is shared by
have taken up insurance policy.

B
ing Businessmen. Insurance provides help to businessmen by to compensating
ng out of theft or loss by fire. A businessman has to make heavy investments on
il. rant, machinery, equipment etc. and this investment is exposed to loss due to
ei future events. Insurance provides protection to various assets in return for payment
to the insurance company.

: adary F u n ctio n s
primary functions, insurance also performs functions which are helpful for the
at of the economy. Various sectors of economy are helped by these functions :
f - vides Funds for Development. The funds collected by insurance companies in
f premiums are invested for productive activities. Most of the funds of these
are invested in encouraging the setting up of new enterprises or helping in the
 4.8 Meaning, Nature and Relevance of Insura

expansion and diversification of existing units. Insurance companies subscribe to a

capital or debentures of companies, thus helping them in getting long-term funds. T1
companies also purchase government securities and these funds are also usedjl
developmental purposes. So, insurance companies provide large funds for the econa
development of the country. 1
(ii) Helps in Increasing Efficiency. A businessman may not like to take risky dec 1si
even though he may expect to gain out of it. The main problem is the unpredictable fuf
happenings. A businessman fears that he may lose whatever he has at present. This 4
psychosis limits the growth of industry. When insurance promises to compensate for ful
uncertainties then businessman will be able to plan with courage and confidence. W1
providing security for future, insurance helps the businessmen in taking bold decisions.
increases efficiency of entrepreneurs and they do not fear to take bold decisions. 1
(iii) Helpful in Reducing Losses. Insurance Companies ensure losses of the busird
enterprises. The loss incurred on account of dislocation of work due to fire etc. is ensured!
insurance companies. The insurer also suggests ways and means of reducing chances]
losses. While giving a fire insurance cover, the insurer may also lay stress on prevention!
fire and use of fire-fighting means.
(iv) Proper Assessment of Projects. While issuing an insurance policy of any kind, i
company will try to assess the project or may value the assets etc. It will be only after pro*
assessment of the property or project that the company will issue a policy. This exercise!
the insurance company helps the businessman to know the real worth of his project or proJ
value of property.

3. O ther F u n ctio n s
Besides the above mentioned functions, insurance undertakes the following functia
also :-
(i) Inculcates Habit of Savings. The insured has to pay insurance premium at reg -
intervals and he has to save money for this purpose. It may look difficult in the beginning b
later on it becomes a routine matter. People develop the habit of saving which is very go<
for the country's economy. These savings are ultimately used for productive purposes.
(ii) Expansion of Foreign Trade. Foreign trade is not possible without the help
marine and fire insurance. There is always a fear of damage of goods and fear from perils
sea. When traders get their goods insured against losses due to fire and perils of sea, the
will be able to expand their business. The likely losses during transit of goods are insure
through insurance cover, the traders will concentrate on expanding the trade. Foreign trai
not only brings demand for domestic goods but it also earns foreign exchange for the countr
(iii) Social Security. Insurance provides social security to various sections
society. Life insurance policy helps in providing financial help to a family at the time
death of a bread earner. There are many types of policies such as medicare, children
 ning, Nature and Relevance of Insurance mm
•location, provident fund and compensation policy etc which are useful to different
^rsons. Various insurance policies provide help to people in case of need. Insurance has
fceen used as an instrument of social security.
(iv) Checks Inflation. Insurance helps in developing the habit of savings among
people. The saving habit helps in controlling spending by people which ultimately helps in
c: ntrolling inflation. The compulsory savings due to payment of premium controls spending
tobits. The Control of inflation helps in stabilising prices which directly helps various
sections of society.
(v) Credit Facilities. Insurance policies can be used for raising loans from financial
-'titutions. Banks and other financial institutions allow credit against the surrender value of
ourance policies. Even insurance companies allow loans and credit facilities to the insured
._iinst their own policies. In case of default in payment of loan, the amount is deducted
~:m the policy amount when it is due. So insurance can also be used as an instrument of
credit.
(vi) Creates Self Confidence in Insured. The insured feels safe after getting an
nsurance policy. He has the confidence of being compensated if he faces certain clamity and
- ' business is disturbed. Insurance not only provides protection against risks but it also
provides funds to the insured in case of loss. Insurance creates self confidence in the insured.
(vii) Enhances Goodwill. Insurance enhances goodwill of the insured. Those who are
sealing with the insured feel secure in their dealings because they know that he will get his
.css compensated in the event of an adverse situation. Those who provide credit facilities to
:he insured always feel secure for their payments. Banks or other financial institutions
extending credit facilities against collateral securities will ask the borrower to get the property
insured so that the loan is secure. Those who already have got insurance policies will
.ertainly have better goodwill in the market.
(viii) Social Security. Insurance is an instalment for fighting evils like poverty,
unemployment, old age, death, disease, accident etc. The insured gets relief from the
insurance in the event of certain happening. Insurance provides social security to those
'ections which need financial back up in the face of certain adversity.

| IMPORTANT TERMS USED IN INSURANCE

(i) Insurance Policy. A contract of insurance explaining its terms and conditions is
called ’Insurance Policy.’ It contains information about the subject insured, the amount of
policy, the party to the contract, the contingencies covered etc. It is properly stamped and is
normally issued by the insurance company.
(ii) Insurer. It is insurance company which undertakes the risk. It is the party which pays
money or compensation on the happening of certain event or contingency to the insured party
or its nominees. The LIC, general insurance companies or other private companies in
insurance business are the insurer.
 4.10 Meaning, Nature and Relevance of Insuran

(iii) Insured. Insure is the person who has taken up the insurance policy. Insurer shit
his risk to the insurance company on the payment of a premium. He is the person who see
protection.
(iv) Premium. It is the amount paid by insured to the insurer as a consideration f
shifting the risk. The person taking up insurance cover will pay a specified amount as p
agreement to the insurance company. It is the price of insurance cover.
(v) Compensations. It is amount paid by the insurance company to the policy holder <
his nominee, in case of death of insured. It is the amount of actual loss suffered by the insure
which is paid as compensation. In case of life insurance, it is the amount of policy which
paid either to the insured or his nominee. In life insurance, the loss of life cannot b
compensated but a specific amount is paid in this regard.
(vi) Insured Amount. It is the maximum amount which an insured may get in case c
loss. Insured amount is mentioned in the policy and the premium is fixed as per the amoun
In case of life insurance, insured is paid either on the death of the policy holder or on th
completion of policy period. In case of general insurance, insured amount is the maximur
amount upto which the claim may be settled.
(vii) Contingency. It is the actual happening of an event or not happening of an event oi
which the loss depends.

| KINDS OF INSURANCE
Insurance can be mainly classified into two categories.

1. Life In su ran ce
The subject matter of this type of insurance is human life. Most of the insurance
policies are combination of savings and security. The insured is promised by the
insurance company that during the tenure of insurance in case of his death, his nominee will
be paid the insurance amount According to section 2(ii) of Insurance Act 1938, "Life
insurance is the business of effecting contracts of insurance upon human life including any
contract, whereby the payment of money is assured on death except death by accident on the
happening of any contingency dependent on human life and any contract which is subject to
the payment of premium for a term dependent on human life. In case he survives the term of
the policy, he will be paid an amount as per terms of the policy.

2. G eneral In su ran ce
All other types of insurance are called general insurance or non- life insurance. The
common type of general insurances are discussed below :
(a) Marine Insurance. It is oldest type of insurance. It covers the sea or marine
perils. Peril is the cause of loss or hazard which is a condition that may increase the chance
 Mature and Relevance of Insurance 4.11

Marine insurance is protection against marine perils like loss or sinking of the
piracy, capture by enemy etc. The loss could be of ship, cargo or freight. Marine
i .ll cover such risks.
Fire Insurance. It covers the loss due to fire to the property like houses, shops,
(booties or godowns etc. It covers loss from fire and the consequent loss from such
loss of work due to stoppage of work due to fire.
Liability Insurance. This type of insurance covers the risk of liability against third
*bich an insurer might have to pay under certain circumstances. For example, injury
;rty and/or person of a third person in road accident or employer's liability for an
• :eath of a worker while performing duty etc.
>:<ial Insurance. This insurance is aimed at providing social security to the weaker
:he society. It may take the shape of pension plans, disability or sickness benefits
premium may come from Govt, or employers and may also be shared by

p nher Insurances. All other type of general insurances can be placed under this
pry i g. theft insurance, earthquake insurance, flood insurance, crop insurance, personal
b t : ' ' arance, cattle insurance or livestock insurance, guarantee insurance etc.
i other types of insurance, one may come across are :
■ Double Insurance. It implies that the subject matter of insurance has been insured
b : :r more insurers or with the same insurer under more than one policy. In case of
purince, all the amounts can be claimed separately, if the need arises.
ever, general insurance is contract of indemnity, where the maximum amount
by the insurer can not exceed the actual amount of loss. Thus, even if one covers
different policies with same or different insurers, he can not recover more than the
d, which is to be contributed on pro-rata basis by different insurers. Thus, there is
to the insured due to an over insurance.
Reinsurance. Reinsurance is insurance of a part of the risk insured by an insurer
r insurer. The concept of insurance is based on spreading of risk. Sometimes an
company may get a profitable opportunity to insure a huge property. In the process
;\oose itself to a major risk, which it may not be in a position to bear. In such a
it can resort to reinsurance with other companies. Thus a part of the risk gets
to other companies.
fore, in this situation there are two contracts for the same subject matter. The first
i direct insurance between direct insurer and the insured. The second one is between
end other insurers as now the insurer has acquired insurable interest in the same
matter.
Ov er Insurance. When the total insurance taken under one or more policies is more
 4.12 Meaning, Nature and Relevance of lm

than the value of the subject matter, it is called over insurance. The over insurance 1
all advantageous as under the principle of indemnity, only the actual loss \
compensated.
(d) Under Insurance. When the total insurance undertaken under a policy or pol
less than the value of the subject matter, the situation is called under-insuranc
insurance companies, in such case, penalise the insured by invoking the 'average cla
the policy. Under this, the claim payable by the insurance company is in proportion
insured sum and the value of the subject matter.

D istin c tio n B etw een In su ran ce and A ssu ran ce

In the literature of insurance one comes across two terms i.e. insuranct
assurance. These two terms are used interchangeably in the market. Technically, there
difference between the two terms.
However, if one tries to make distinction between the two, following distinctions c
made o u t:
(1) the term 'assurance' should be used for life contract and 'insurance' for ge
insurance or contracts of indemnity (but in India the terms have been used jus
opposite way)
(2) when the risk is certain but time of occurrence is not known, it may be c;
assurance (e.g. life insurance). When risk is probable and uncertain, .
insurance may be used.
(3) ’Insurance' means 'indemnity' assurance means loss can not be estimated,
(4) In assurance, claim is certain, in insurance claim is uncertain.
(5) Assurance is the principle and insurance is the practice,
However, technically and in practice there is no distinction between the two terms.

| CONTRACT OF INSURANCE
Contract of insurance may be looked upon as a special type of contract between t
parties called 'the insurer' and 'the insured'. In this contract 'the insurer', for a premiu
undertakes to pay to the 'insured' a fixed amount of money on the happening of cert;
event. Since it is a contract, it has to satisfy or meet all the requirements of a valid contr;
laid down in section 10 of the Indian contract Act 1872, which states that, "all agreements a
contracts, if they are made by free consent of the parties, competent to contract, for a law!
consideration and with a lawful object and which are not expressly declared to be void."
Therefore, like all other contracts, a contract of insurance shall also meet the followir
requirements :
(a) agreement (offer & acceptance)
(b) free consent of the parties
 g. Nature and Relevance of Insurance 4.13

parties must be competent to contract

: there must be lawful consideration
t the object must be lawful
it should not be expressly declared to be void
Farther, contract of insurance should be based on the principles of insurance, specifically
g the legal principles of insurance discussed earlier. In India, the contract of
e should further comply with provisions of the Insurance Act 1938, regulatory
ions of Insurance Regulatory & Development Authority Act, 1999 and the Indian
s Act, 1899.

>ES OF INSURANCE CONTRACTS

The contracts of insurance can be divided into various types. However the appropriate
cation will be on the basis of the nature of interest affected by the risk.
I - this basis the contracts of insurance can be divided into the following types :
a Personal Insurance Contracts. In this contract, the insurer agrees to pay an agreed
i : the insured, or his nominee in case of his death, on the happening of certain event, in
ration of the premium paid by the insured or someone on his behalf. The subject
of such contracts is life or health of the insured. It could be life insurance or general
ice like personal accident insurance and sickness or medical insurance. Such losses are
-easurable in terms of money, therefore a fixed agreed upon some is paid on the
ice rung of an event. Of course, in case of medical expenses, the amount paid will be the
n r r ursement of the expenses incurred.
b i Liability Insurance Contracts. A person could be liable to third persons under any
dt contract e.g. (a) in case of accident, the party at fault will be liable to compensate the
ved or victim party for the injury to the property or person (b) the employer is liable
^ .;rtain things under workman compensation's Act. (c) hospital is liable to the patients for
of negligence etc. Such person can take policy from the insurer, whereby, for premium,
nmrer undertakes the liability.
*c i Property Insurance Contracts. These contracts cover the risks relating to property
k tire insurance, burglary insurance, motor insurance, cattle insurance, marine
*L:ance. In such contracts, the insurer agrees to pay the actual loss incurred due to the risk
;red under the contract.
*d) Guarantee Insurance Contracts. This type of insurance is a contract under which
le insurer compensates for a fixed amount of liability arising out of guarantee of good,
KCiful, and an honest conduct of a party. This sometimes is also called fidelity
Barance. Credit insurance will also fall under this category.
A number of risks may be covered under the same policy, generally called
 4.14 Meaning, Nature and Relevance of

comprehensive policy. For example, a single policy may protect against flood, fire J
etc. It has already been discussed that other than personal insurance, these cor.rJ
contracts of indemnity. ]

| MAIN FEATURES OF INSURANCE

The roots of insurance are in the insurable risk, which should have the foi
features: I
(a) The insured must be exposed to a risk. The subject matter of insurance b e l
to the insured, should be exposed to some risk on the happening of some event.
(b) The event should be uncertain. The event on the happening of which the l «
occur should be uncertain. If the event is certain, then the time of happening
uncertain. n
(t) There must be large number of persons exposed to similar risk. The nurnfll
persons exposed to the same risk must be large and a sufficiently large number of pc
must take up the insurance cover. Only through a large group, the risk can be reduced,
group is small, the contributory burden will be more.
(d) The loss should be accidental in nature. The wear and tear loss can not be ins
(e) The potential loss should be large. Small risks can be borne by indivij
themselves. Only the threat of large losses calls for protection.
(f) The risk should be capable of estimation. The risk should be capable of estim
i.e. amount and probability should be capable of estimation. Without this estirm
premium can not be determined.
(g) The loss must not be a nature of a type of calamity likely to hit most of
insured. In such a situation, insurance will fail as the premium pooled will fall short o
loss incurred. I
(h) There must be insurable risk. The insurance provides protection for insui
interest which must be under risk.
(i) The insurance must be affordable. The premium should be affordable for
insured. If the premium is high, the insured will not find it worth insuring.
(j) The insurance must not be against public policy. In fact, all the contracts which
against public policy are void. This will apply to the contract of insurance as well e,
smuggler can not ensure against the risk involved in smuggling.

| ROLE AND IMPORTANCE/RELEVANCE OF INSURANCE

Insurance has become an integral part of business or an individual's life. The uncertai
of future prompts every section of society to take up some types of insurance pol
 g, Nature and Relevance of Insurance 4.15

e helps in compensating the loss suffered due to the happening of certain

ency. It also ensures the payment of specific amount in case of loss of life. A business
x.e to work freely when his uncertainties are insured. The growth of national and
onal business and trade has been possible only due to the facility of risk coverage,
e is not only useful to the individual and the business but it is useful to the society at

! be role, importance and relevance of insurance may be discussed of follows :

_) Relevance and useful for the individual
b Relevance and useful for business,
ic i Relevance and useful for society.

RELEVANCE AND USEFULNESS FOR INDIVIDUAL

Insurance is relevant and useful to the individual in the following ways
1. Provides Safety and Security. Insurance provides safety and security against loss
:c a particular event. In the case of life insurance, the insurance company pays a
led sum either on the death of the insured or on the maturity of the policy. The amount
ed by the family on the premature death of a bread earner will help it in meeting its
ends. Similarly, insurance provides security against loss of property, goods, machinery
by fire or other reasons. In the event of loss or damage, the insurer will indemnify the
i. This type of safety and security against unforeseen events will help the individual in
ering his loss in general insurance and receiving a specific amount in case of loss of

I. Acts as Motivator. A security against adverse situations provides peace of mind to

'dividual. A peaceful mind always endeavours to work more and more. The peace of
provided by insurance becomes a motivating factor. The fear of unpleasant situations
death, accident, storm, fire, damage etc. always weighs heavily on one's mind. These
ons are beyond the control of human agency and occurrence of such things dampen the
of persons. The insurance helps in controlling the effects of adverse situations which
.reate security in mind.
5. Encourages Savings. Life insurance encourages the habit of savings among
The amount paid against a life insurance policy will be returned either on the death
r e insured or on the maturity of the policy. Those who purchase life insurance policies do
K t r.oney atleast equivalent to the amount of the policy, feel encouraged to pay premium
fcpilarly. Initially, it may be a forced saving but it becomes a part of expenditure. The
m ney paid as insurance premium can not be refunded before the maturity of the policy. So
-ecomes a compulsory saving for a longer period. When one starts saving for paying
ce premium then he may save for other needs also. It is only in life insurance that the
d gets money back after a specified period but it is not possible in general insurance
insurer pays only if there is a loss and not otherwise.
 4.16 Meaning, Nature and Relevance of Insurant

4. Eliminates Dependency. Insurance helps in eliminating dependency on others,

case of death of a person, the family gets compensation in the shape of insuran
money. This helps a family to maintain its current standard of living. In the absence
financial help, the family will have to look towards relatives and friends. This type
dependency will create day to day difficulties for the family. Similarly, in general insurant
the loss or damage of property, goods, furniture, machinery etc. are insured and any lose
indemnified. In the absence of insurance, one has to arrange money for purchasing the lo
or damaged assets. Insurance helps in avoiding dependency on others for meeting your neo
in case of death or damage to property etc.
5. Profitable Investment. There are a number of policies which provide investme
avenue to the policy holders. Endowment policies, multipurpose policies, deferred annuitu
provide better form of investment. The insured gets higher sums than the amount of policy
the time of its maturity. The insurance company credits a part of profits to the policies evei
year and returns the total amount at the time of maturity. Insurance policies carry speci
exemption from income-tax, wealth tax, gift tax and estate tax. There are special policies ft
retiring persons who are paid regular returns if the company is allowed to retain the assure
amount. Insurance companies have professional people for dealing with the investment c
insurance funds and this type of expert advice may not be possible for an individual. S
funds collected in the form of premium are invested properly in the market. Propt
management of these funds is beneficial to the policy holders also.
6. Fulfils Needs of a Person
(i) Family Needs. The death of a bread earner may create financial problems for th
family. When a source of income stops immediately and the needs remain the same then i
becomes difficult to meet them. Insurance policy provides immediate financial help to mee
family needs.
(ii) Old-age Needs. Every person needs funds to meet old age needs. The funds providei
on the maturity of a policy can be used to meet these needs or these funds can further b
invested in secure securities and they may be available to meet needs. There are certaii
policies where lump sum amount is deposited with the insurance company and the polic;
holder is assured of a regular monthly income.
(iii) Need for Education. The education is becoming very costly these days. There ar<
certain policies and annuities which are useful for the education of children.
(iv) Marriage. Marriages in India are important occassions and lot of amount is spent tc
solemnise them. A person may not be able to arrange the required amount at a time. The
insurance provides funds for meeting marriage expenses 'if an appropriate policy is taken foi
such a purpose.
(v) Re-adjustment of Needs. At the time of death, accident, sickness, the sources ol
income may be reduced. It becomes difficult to re-adjust needs since sources of income have
\
 . Nature and Relevance of Insurance 4.17

ci. An insurance policy for such an uncertain event helps in providing funds to meet

I * * Special Needs. There may be certain special occasions when a person needs money.
■ B nay be a need to meet.medical expenses or certain other needs. Insurance companies
■K i ariety of policies which are helpful on the occurrence of those needs.

RELEVANCE AND USEFULNESS TO BUSINESS

- -ranee policies are helpful to the business in the following ways
Uncertainty of Business Losses is Contained. Every business faces many
ties. The investments in properties, plant and machinery and other assets are
'.r. case of any mishap like fire etc. everything may be destroyed. Under such
metis the businessman will be required to purchase the damaged or destroyed assets
In the event of business assets being insyred, the insurance company will compensate
The uncertainty of meeting business losses will be assured when insurance policy is

. Helpful in Raising Loans. Insurance policy can be used as a collateral security while
g loans from banks or other financial institutions. Normally the amount of loans may
•e more than that of the cash value of the policy. In case of default in payment of interest
bur., the lender can claim the amount from insurance company by surrendering the
policy. Insurance companies themselves also extend various types of loan facilities
life insurance policies. The insurance properties are the best collateral and adequate
me granted by the lenders.
• Helpful in Raising Motivation. When business uncertainties are likely to be faced
the help of insurance policies then businessmen are mentally free to concentrate on their
The businessman as well as outsiders dealing with him will be sure that in the event of
raman as well as of property, insurance company will provide funds to meet such an
ity. The assurance from uncertainties will motivate businessmen to develop and
their work and do not have fear of future losses.
i. Helpful in Partnership Concerns. In partnership business, a business is
tinued on the death of a partner. The main reason is that the remaining partners will
to pay for the share of deceased partner. Since partnership funds are limited, remaining
rs may not be in a position to raise the required funds. The partners can take insurance
^ ic ie s on their lives, jointly as well as on separate names of partners. In the event of death
a - partner, the amount of policy will be paid to the partnership firm. With the help of
■ -mance funds, the share of deceased partner will be paid without disturbing the normal
■ eving of the business.
5. Welfare of Employees. The employers are required to look after the welfare of their
employees. Employers will have to provide funds on the death, disability, accident etc. of the
* rkers. They are also required to provide funds on the retirement of workers. There are
 4.18 Meaning, Nature and Relevance of InsL

insurance policies which can help an employer in meeting these expenses. The policies
as group insurance, accident policies, pension policies, medical insurance etc. cover va
eventualities and provide funds for meeting these needs. The employees will be free fi
various worries after paying premium for various policies.

(C) RELEVANCE AND USEFULNESS FOR SOCIETY

Insurance is useful to the society in the following ways :
1. Helpful in Economic Growth. The insuring of losses against perils in indusn
agriculture and other sectors is helpful in pushing the economic growth further. The surety
compensation in the event of loss gives mental peace to the persons. This helps in putting i
vigorous efforts in accelerating the growth of industrial as well agricultural of sector. T
insurance of crops has raised the morale of farming community because they face a numt
of natural calamities which destroy crops. Insurance companies are providing huge funds
investments for the economic development of the country. So insurance helps in giving
fillip to the overall growth of the economy.
2. Protection of Wealth. The wealth of the nation is lost due to accidents, natuj
calamities, human errors, industrial mishaps etc. The loss of national assets, human as w
as physical, due to various causes leads to the national loss. When various assets will
insured against various hazards, the insurers will indemnify the losses. Similarly, the loss
human life is also insured by guaranteeing a payment of certain sum of money. T
dependents of the insured will be paid the amount of policy so that their difficulties <
mitigated. Insurance helps in protecting human as well as property resources of the nation.

| INSURANCE AND ECONOMIC DEVELOPMENT

Insurance provides social security and safety to the people in a country. Developin
countries have large sections of society living on minimum needs. There is a need to creal
funds for investment in various sectors. Insurance helps in the process of economi
development in more than one ways.
1. Providing Funds for Development. There is a need for investible funds f<
accelerating the process of economic development. Insurance companies collect large sun
of money in the shape of premium on policies. In the case of life insurance, the claim is pai
either on the death of the insured or on the maturity of the policy. There is a time ga
between the receipt of premium and payment of a claim. During this period, the func
remain with the insurance company. In case of general insurance, the policies are general]
for a year. If loss occurs during the period of policy then insurance company pays tl
claim. The insured will have to pay the premium again if the policy is renewed. S
insurance companies have surplus funds with them. These funds may be invested t
purchasing government securities, subscribing to share capitals of companies or extendir
loan facilities to institutions. All these funds are used for setting up new ventures <
 ing, Nature and Relevance of Insurance 4.19

ing the existing ones. Government also uses these funds for creating infrastructure
es in the country. There are long-term investments when funds are employed in
ting electricity, constructing roads and bridges and such similar purposes. All these
ents give fillip to economic development.
2. Helping International Trade. International trade faces a number of sea perils when
are sent from one country to the other. Insurance provides safety to goods in the sense
-surer compensates the loss in the event of their damage or destruction. The trader feels
in the event of adverse situation. When there is a feeling of security then traders will
-esitate to trade with foreign countries. International trade is essential for the
pment of every country. Only those goods are produced which have cost advantage
_re exported to those countries where these are not produced. Similarly, cheap goods are
;d from those countries where these are available and are produced at a higher cost in
.: untry. International trade helps the development of those industries which have cost
.age as compared to imports. The countries are able to specialise in some industries
;epend on imports for certain goods. It helps in raising the rate of economic growth.
3. Safety and Security of Property. The assets and other properties are insured against
by fire, theft, riots, accidents, earthquakes and other natural calamities. In the event of
r destmction of goods or other property, the insurer will indemnify the loss by meeting
daims. The money received from claims can be used to create the assets again. A
ssman will be able to reach a situation before the happening of that adverse event. The
—ement of damaged or destroyed assets etc. will help in again starting the manufacturing
Had there been no insurance facility, the replacement of assets would not have been
_ :k and development process would have been adversely affected. An insurer provides
icility for the payment of a small premium. So insurance provides continuity to the
of development by offering to indemnify the loss of assets, or other property.
4 Encouraging Savings. Capital formation is essential for the economic development
i country. Capital formation is possible only when people develop the habit of
Insurance provides one channel for savings from regular incomes. Insurance
is to be paid on a regular basis, anyone taking up an insurance policy will have to
money for this purpose. There are a variety of policies offered to the people where
ts may be returned in instalments even before the maturity of policy. This encourages
to go for such policies. Life insurance companies return the assured sum either on the
of the insured or at the time of maturity of the policy. This amount is also used for
ctive purposes by keeping it in time deposits or other forms. So insurance encourages
and these are used for the growth of the economy.
5. Availability of Capital. Insurance sector has contributed substantially in providing
to the large number of industrial organisations. LIC and GIC have been providing
by way of subscribing to shares and debentures of industrial units.
Development of Basic Facilities. The infrastructure in the form of roads, railways,
 I

4.20 Meaning, Nature and Relevance of Ins

“
communication etc. is required for accelerating the pace of development. Since insui
sector was under government control earlier it used to make huge investments for ere
and improving infrastructural facilities in the country. Such investments have been helpi
the economic development of the country. The priorities fixed by the govemmen
economic development were followed by the insurance sector also.
7. Development of Basic Industries. The development of basic industries such as
steel, dyes, chemical industry, mining industry is very important for the overall econe
development of the country. Insurance sector has specially assisted basic industries
making investments and extending loans etc.
8. Better Creditworthiness. Insurance helps in increasing the creditworthiness
commercial and industrial organisations. These organisations enjoy safety and sect
through insured godowns, factories, shops and other properties. Insured organisations
raise loans and credits from the market without much efforts. Insurance has certainly hel
in creating creditworthiness of business organisations.
9. Helping Financial Institutions. Insurance institutions have been extending It
facilities to institutions which further provide long-term loans and other facilities. Indirec
insurance sector is contributing for more and more investments in business organisations.
10. Helping the Service Sector. Insurance has contributed considerably in the field
development and expansion of service sector. Air crafts, hospitals, banking, hotel a
catering services etc. are the sectors where risk factor is considerably more. Insurar
services are available to this sector and the owners of this sector undertake their activit:
without considering the risk factor.
11. Investing in Share Market. Share markets have become the indicator of econon
growth of a country. Share markets grow with the participation of big financial institutior
Insurance institutions have been regularly investing their surplus funds in share markets l
purchasing shares and securities traded at the exchanges. Insurance companies try to eai
money out of stock exchange transactions. These institutions also subscribe to new issues
the market. All these investments create a favourable climate for economic development <
the country.
12. Protection Against Risks. Insurance institutions provide security against natur;
calamities and other risks faced by industry and trade. Plant, machinery, stocks, othe
equipments are insured against possible losses. Any type of loss suffered by busines
organisations, if insured, is compensated to the extent of loss suffered. The insured is placei
in the position before loss. One can undertake normal business activities without botherinj
about various risks.
13. Protection of Debts. Insurance is contributing largely by bringing business loans
under its cover. When goods are sold on credit, loan facilities are extended to others, loans
raised against mortgage of property etc., all these transactions may be insured with insurance
 i

Nature and Relevance of Insurance 4.21

s. Insurance also provides cover to loans given by banks, money lenders and other
institutions.
r -ranee has become an important channel which provides funds for taking up
lent activities in different forms. Developing countries have limited channels for
funds for social and economic development. Insurance sector has helped the
r ing countries in accelerating the pace of economic development. In India, insurance
__-.eve been widely used for creating infrastructure facilities and laying the foundations
rc.omic development.

1 ATTITUDE TOWARDS INSURANCE

---ranee, is a contract where both parties try to gain out of it. The insured takes
ice as a protection and safety against future uncertainties. When a person takes life
Hprrr.ce policy he is assured of the payment of certain money on the death of the insured or
■i re maturity of the'policy whichever is earlier. It means that amount of the policy is
pi? i - e either to the insured or to his nominee (in case of death). The insurance company, on
Wm «cier hand, gets regular premium from the insured. The premium is an income of the
H e r my and a pool is created for meeting policy obligations. In case of general insurance,
■ r r*:hcy is for a specific period, generally for one year and insurer promises to compensate
■lie joss if it occurs during this period. If no loss occurs during the period of policy then
H u rrr does not pay anything. Fresh premium will have to be paid reviewing the general
SpHrmce policy.
Sesides having the benefit of compensation and payment of premium, the insured takes it
investment because he is assured of the return of money. Insurance is also considered a
se of saving.
In nutshell the attitude towards insurance may be stated as follows :

G eneral A ttitu d e s
i Device for Protection. Insurance is considered as a safety by most of the people. Few
ies earlier, the head of the family used to be the bread earner of the family. In case of
or disability of the bread earner, the whole family was left without any financial
art. It was during this period that insurance policy was considered as a safety device for
members of the family. Once a person used to take life insurance policy, there used to
a feeling of protection among every one in the family. Similarly in business, an insurance
:cy against vagaries will ensure the reimbursement of loss incurred. So protection and
eery was the main aim for purchasing an insurance policy.
iii) Method of Saving. Insurance premium is paid at regular intervals, so it is considered
e compulsory saving. An employee can get his insurance premium deducted from salary
month also. A part of premium adds to the paid up value of the policy. Besides
 4.22 Meaning, Nature and Relevance of Insura

covering risk of loss of life, insurance policy is taken as a method of saving. In some polk
an amount of dividend is added to the policy and the accumulated amount is paid on
maturity of the policy.
(iii) Tax Saving Service. Insurance premium for a policy is allowed as a deduction w
calculating tax on income. Government has always allowed premium as deduction un
Income Tax Act. Many people are encouraged to take life insurance policies since
premium paid will take some of the tax to be paid on income. Insurance policy as a savi
device has been popular among all sections of society. A large number of policies are s<
simply because these help in saving income tax.
(iv) Source of Investment. Some people take insurance as a source of investment,
policy holder gets much more than the amount of the policy on maturity, it is taken aj
source of investment. Since one get lump sum amount on the maturity of the policy,
amount may further be invested for productive purposes.
(v) Recovery of Loss. In general insurance, the policy holder is compensated for the lc
suffered in business or property. In fact the insured is put in the same position where he w
before he suffered loss. Loss due to fire, accident or some other cause may render a persi
penniless in the absence of insurance policy. Such a policy helps in recovering the actual lew
So businessmen view insurance as a device to cover up the risk of business happening due
certain reasons.

(B) From S o c ia l P oin t o f View

(i) Providing Funds for Investment. Insurance companies have accumulated large fun
out of the premium received and income earned from investments. The funds are provid<
through certain agencies for further investments. Insurance companies are providing gre
help in accelerating the rate of investment. Economic development of a country gets phi
when large funds are provided for investments.
(ii) Source of Development. Insurance companies are required to provide funds ft
achieving natural priorities. Government provides guidelines to insurance companies fc
making investments in the economy. Insurance companies have been providing funds fc
creating infrastructural facilities in the country. LIC and GIC have been investing funds fc
creating basic infrastructure for accelerating the growth of the economy. From this point c
view insurance sector is considered as a source for economic development. Most of th
insurance funds are used for helping the overall development of the country.

(C) C om m on P ercep tio n

(i) Common man is not much aware of gains of taking insurance policies.
(ii) People face many hurdles in receiving their claims. Insurance officials are no
helpful to common people when time for payment of claims arises.
 tning, Nature and Relevance of Insurance 4.23

:ii) A large number of pending cases with insurance companies for payment of claims
shows that companies are not helpful while meeting their obligations.
tiv) There is a perception that false claims are paid promptly because concerned
officials are a party to it while genuine claimants are the sufferers.
(v) The rates of premium are very high as compared to the rates charged in other
countries.
vi) The monopoly of government companies in insurance has created inefficiency in
their working.
mi) Companies do not make efforts to devise products as per the requirements of
different sections of society.
iii) No attention is given towards research for finding out the needs of prospective
policy holders.

I E x p ecta tio n s in F uture

f ' i) The rates of premium should be slashed.
■ (li) Innovative policies be devised as per the changing requirements of the society and
business.
::i) Companies should be responsive to the customer needs.
• i Claims should be paid at the earliest without creating hurdles.
I | v) Insurance officials should change their attitude towards common policy holders.
f «vi) There should be no place for complacency and inefficiency in the working of
companies.
J r ii) The entry of private players in insurance sector should help in creating proper
competition and improvement of services.
i Investment policies of insurance companies should be transparent.

IREV1EW QUESTIONS^: = =
111 !

■short a n sw er type q u estio n s

1. What is an insurance device ?
2. Discuss the origin of insurance.
3. Give a functional definition of insurance.
4. Define insurance in the sense of contract.
5. What is marine insurance ?
6. What is fire insurance ?
7. What is life insurance ?
4.24 Meaning, Nature and Relevance of I
8. Describe the role of insurance.
9. . Discuss the origin of insurance.
10. Discuss the nature and scope of insurance.
11. Distinguish between insurance and assurance.
12. Discuss various kinds of insurance.

B. ESSAY TYPE QUESTIONS

1. How did insurance originate ? Discuss its nature and scope.
2. Define insurance. Describe its nature & scope.
3. What are the features of contract of insurance ? Discuss various types of contraa
insurance.
4. Discuss the nature and scope of insurance.
5. Describe the role and importance of insurance.
6. Describe the functions of insurance.
1. How does insurances help economic development of a country ?
8. Discuss the attitude of people towards insurance cover.
9. What are the expectations from an insurance cover ?

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I Principles Of Insurance
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IINTRODUCTION
Insurance is a contract in which one party (Insurer) for a compensation (consideration)
si the premium, takes risks of the other party (insured) and promises to pay to him or his
a certain sum of money on a specified contingency. In this way, a contract of
".ce, in addition to fulfilling the basic or essential characteristics of a valid contract i.e.
acceptance, free consent, competency of the parties, also observes certain basic
pies.
These principles may be described as :
- *Basic Principles
B Legal Principles

BASIC PRINCIPLES
The concept of insurance is based on two basic principles :
. Principle of Co-operation. Insurance can be described as the highest degree of Co-
3n. The insurance company or insurer collects premium from large number of insured
is and puts the premium in pool. The claims of those who actually suffer loss are paid
i c the pool. The insured are co-operating by paying premium in advance to strengthen
dI.

1 Principle of Probability. Without premium, co- operation is not possible and

can not be determined without applying theory of probability. The occurence of
- each type of insurance can be estimated with the help of theory of probability. The
-:iity tells about the chances and amount of loss. The theory or inertia of large numbers
lied for calculating the probability. The companies collect the data of previous
mgs over a large number of years to form an idea about the probability of incidence in
Similarly, life insurance companies prepare and use the mortality table to determine
emium.
I
cm Principles of Insura

(B) LEGAL PRINCIPLES

Legal principles, with the exception of principle of indemnity which is not applicabl
case of personal insurance—are common for all types of insurance.
These principles are as follows :
(1) Principle of insurable interest
(2) Principle of indemnity
(3) Principle of subrogation.
(4) Principle of approximate cause or causa proxima
(5) Principle of Contribution.
(6) Principle of utmost good faith.
(7) Principle of mitigation of losses.
These principles are discussed as follows :

| 1. PRINCIPLE OF INSURABLE INTEREST

An insurance contract will be valid only if the person getting a policy must possess
insurable interest in the subject matter. In the absence of an insurable interest, the insurai
contract will be a wagering contract which is invalid and unenforceable. A person is sai<
have an insurable interest in the property if he is financially benefitted by its existence an<
prejudiced by its loss, destruction or non-existence. In the case of life insurance policy, |
insured must stand financially benefitted by the existence of continuance of life and v
suffer a financial loss due to non-existence of the subject. For example, an employer
insurable interest in the lives of his employees, a creditor has an insurable interest in the
of his debtor. A banker will have an insurable interest in the property mortgaged agains
loan by a loanee. Insurable interest does not mean that the person has ownership of |
subject matter.
Section 7 of Marine Insurance Act, 1963 lays down a statutory definition of insura
interest. As per sub-section I, subject to the provisions of the Act, every person has insura
interest who is interested in a marine adventure.

Im p ortan ce o f Insurable In ter est

The principle of insurable interest basically distinguishes insurance from gambling
wagering transactions. In case the insurer does not have insurable interest in the prope
insured then it becomes a speculative contract. Unless otherwise a person has insura
interest in the subject insured, it will not be a valid contract. The most clear and common ci
of existence of pecuniary insurable interest is the ownership of the property being insured a
insuring own life. Insurable interest may also exist due to the use, value or profit of
property such as mortgages, bailment, shipment etc.
 'iples of Insurance 5.3

ste n c e o f Insurable In ter est

The existence of insurable interest differs in different policies. In life insurance, the
taking out a life policy must have insurable interest in the life of insured at the time of
up the policy. It may or may not exist at the time of death of the person whose life
insured or at the time of making the claim on maturity. In case of fire insurance,
ble interest must exist both at the time of taking out the policy and also at the time
loss occurs and a claim is filed with the insurance company. In case of marine and
insurances, insurable interest must be present at the time of occurrence of loss. In other
. the insured has to establish insurable interest at the time when loss has occurred and
claim for indemnity is made. It may not, however, be present at the time of entering into
t.

: s sen tials o f Insurable In ter est

F allowing are the essentials of a valid insurable interest
(i) There must be a subject matter to be insured.
(ii) The policy holder should have monetary interest in the subject matter,
ui) The relationship between the policy holder and the subject matter should be
recognised by law.
■iv) The economic relationship between the policy-holder and the subject matter should
be such that the policy holder is economically benefitted by the existence or
survival of the subject-matter and/or will suffer economic loss at the destruction or
death of the subject-matter.
The subject-matter here is life in case of life insurance, property and goods in property
e and adventure in general insurance. Insurable interest is understood as an interest
preservation, existence or continuance of a thing or a life, as the case may be.

able In te r e st in Life In su ran ce

- 1lowing persons may have an insurable interest in the subject matter under life
*ce contract
i i A person has unlimited insurable interest in his own life,
ii) A husband in the life of his wife and vice-versa.
(ui) A father in the life of a dependent son and vice-versa.
H iv) A partner in the lives of his co-partners.
■i A creditor in the life of a debtor to the extent of the amount of debt,
•vi) An employer in the lives of his employees,
vii) A sister in the lives of his brothers and vice-versa.
• : i A mother and a son in the lives of each other. t
 5.4 Principles of Insui

(ix) A guarantor in life of his guarantee.

(x) An insurance company in the lives of insured for re- insurance purpose.
(xi) A principal in the life of his agent and vice-versa.

Insurable In te r e st in M arine In su ran ce

(i) The owner of the ship in the ship.
(ii) The cargo owner in the cargo.
(iii) The master and the crew of the ship in their wages.
(iv) A creditor who has lent money for the ship or the cargo to the extent of debt.
(v) The ship owner in the freight to be received.

Insurable In te r e st in Fire In su ran ce

(i) The owner of a property in his own property.
(li) Partners in the property of partnership.
(iii) The owners of joint property.
(iv) A creditor having a lien on property to the extent of debt.
(v) An agent has interest in the property of his principal.
(vi) A bailee in the properties bailed.
(vii) A trustee in the properties covered under trusteeship deed.
(viii) An insurer on the properties covered under re-insurance.
(ix) A mortgagee on the properties mortgaged.
(x) A lessee on the properties under lease.
An insurable interest is essentially a pecuniary interest. No emotional or sentiment
loss, as an expectation or an anxiety, would be the ground for insurable interest. A mei
expectation or a hope which may or may not happen is cannot be a base for insurable interes

| 2 . PRINCIPLE OF INDEMNITY
Indemnity in simple words means a promise to compensate the loss. Under insurana
contract, the insurer undertakes to indemnify the insured against loss suffered by tht
latter. Prof. Hawell has defined indemnity as "an exact financial compensation." The insurei
will compensate the insured only for the actual loss and nothing more. For example, a fire
insurance policy has been taken for ? 1,00,000, there is a loss of goods by fire to the extent ol
? 25,000, insurance company will compensate the insured for ? 25,000 only even though the
policy has been taken for a higher amount. There may be a case of loss where the actual loss
is more than that of the amount of policy but the compensation will not exceed the amount of
policy. In such cases, insurance companies have added clause to the terms and conditions of
policies. This will be a case of under-insurance. A person getting a lower policy than the
 pies of Insurance 5.5

f subject-matter can be punished by reducing his claim by applying a formula. This is

:o discourage policy holders for getting policies for a low amount than the value of
-matter. Principle of indemnity does not apply to life insurance because loss of life
be measured in monetary terms. So this principle applies to all other insurances
life insurance cases.

tures o f P rin cip le o f In d em n ity

Principle of indemnity does not apply to life insurance since value of loss of life
cannot be measured in terms of money.
There must be an actual loss and insurer has to compensate it under the policy.
The loss should have occurred from the risk insured.
The loss should be measurable in terms of money.
The compensation cannot exceed actual loss. There may be an exception in case of
marine and fire insurance cases when some percentage of profit on actual cost is
also allowed under the policy.
The compensation will be paid by the insurer.

sm nity and T y p es o f In su ran ce

e principle of indemnity does not apply to life insurance contracts. The loss of life
be compensated by paying a certain sum of money. In other words, the contract of life
is not based on the principle of compensation in money terms. Under this contract a
of money is paid either on the expiry of the term of the policy or on the death of
ed, whichever is earlier.
;ase of fire, marine and other insurances, the principle of indemnity applies in all
In fire insurance contract, the insured cannot claim anything more than the value of
:<st or damaged by the fire or the amount of policy whichever is less. Generally, the
c of compensation is the market value of the property at the time of fire or its loss or
■k The principle of indemnity does not apply to valued policy which the insurer agrees
predetermined amount in case the subject matter is damaged or destroyed by fire. In
of marine insurance, the principles of indemnity prescribes that the insured shall be
led only to the extent of actual loss sustained by him. In case of marine insurance
- a slight departure from the principle of pure or complete indemnity as the insurer
.0 indemnify the insured in cash and not by replacing the cargo or the ship. Two
ms are allowed in the principle of indemnity :
Certain amount of profit is allowed to be included in the value of cargo on the
assumption that the insured may earn some profit when the cargo reaches the port.
 5.6 Principles of Insut

(ii) The value of indemnity is decided at the time of taking out the policy i.e. v;
policies or agreed value policies under which the value of policy is de<
irrespective of the consideration of depreciation and other relevant factors.
In case of other types of insurance such as property, liability, fidelity etc. the insur
indemnified in accordance with the principle of indeminity like fire insurance contracts.

C o n d itio n s for In d em n ity

Following conditions should be satisfied for the principle of indemnity :
(i) The insured has to prove that he has suffered a loss on the subject matter and
the monetary loss.
(ii) The indemnified amount cannot exceed the amount of loss suffered.
(iii) The insurer has a right to recover the extra amount if it is paid to the insured.
(iv) This principle is not applicable to life insurance contracts since loss of life car
be measured in monetary terms.

A d van tages o f P rin cip le o f In d em n ity

1. Since the amount paid to compensate the loss suffered cannot exceed actual 1<
there is no temptation to show loss at higher figures. There may be an intentior
show loss at higher figures or inflate these figures, the compensation will in no c
exceed the value of actual loss.
2. In case the insured is given a gain in compensation then anti-social elements will
tempted to destroy their property for getting more compensation than the It
suffered. This will bring an unhealthy practices in business. The principle
indemnity clearly states that compensation cannot exceed loss suffered ; I
unhealthy practices will not be encouraged.

M ethod s o f P roviding In d em n ity

Following methods may be used to indemnify the insured :-
(i) Cash Payment. Payment of compensation in cash is the most suitable method
settling insurance claims. The insured submits a claim in a proper form to the insurer. T1
claim is got verified and a report is made by the surveyor or loss-assessor. After determinii
the genuineness of the claim, insurance company makes the payment to the insured.
(ii) Repairs. In some cases the subject-matter is partially destroyed or damaged and
capable of being repaired. In such cases the insured is ■asked to give estimates of repairs t
the subject-matter. After receiving the estimates, an authorised surveyor of the insurer checl
the subject-matter and the cost of repairs. The insured is then asked to get the subject-math
repaired and submit the bills alongwith a certificate of satisfaction. The insurer then make
 les of Insurance 5.7

•ment to the repairer. These types of claims are settled in motor vehicles, machinery
hidings cases.
i Replacement. If the insurers prefer replacement of articles rather than making cash
ats, then the subject- matter is replaced. The replacement may be of vital parts or
of the subject-matter.
• Reinstatement. It is a method whereby the subject-matter destroyed is placed in its
position or condition as it existed before the loss or damage. This method is generally
r. respect of building or other properties damaged or destroyed by fire. The insurer may
:he view that the claims submitted by the insured are inflated or some foul or fraud is
. :ed then this method of reinstating the subject-matter to its previous position may be
to settle the claim.

PRINCIPLE OF SUBROGATION
P-.nciple of subrogation supplements the principle of indemnity. In simple words,
gation means stepping into the shoes of another. Once the insurer compensates the
for the loss suffered by him, he will inherit all the rights available to the insured
the third parties with regard to the subject-matter of the insurance. Principle of
__tion also known as 'Doctrine of Rights Substitution' is in fact the extension of
le of indemnity. Under the principle of indemnity, the insured cannot be compensated
than the actual loss suffered, under the principle of subrogation, the insurer acquires all
rights of the subject-matter after making the claims. In case some amount is recovered
third party or from the sale of damaged subject-matter then it belongs to the insurer and
r e insured. The insured cannot be better placed after receiving the claim than he was
:he occurrence of the event. Principle of subrogation is not applicable to life insurance

Federation of Insurance Institutes defines subrogation, "Transfer of rights and remedies

insured to the insurer who has indemnified the insured in respect of the loss". Dinsdale
it as, "subrogation may be defined as the insurer's right to receive the benefits of all
of the assured against third parties which, if satisfied, will extinguish or diminish the
e loss sustained."
i.brogation is the substitution of one person in place of another so that he who is
Lited, succeeds to the right of the other in relation to the claim, its rights, remedies or
es.

tures o f D o ctrin e o f S u brogation

F allowing are the essential features of the doctrine of subrogation :-
i ' Corollary to Principle of Indemnity. The doctrine of principle of subrogation is the
imentary principle of indemnity. Under the principle of indemnity, the insured is to be
mz] Principles of Insurai

compensated only upto the value of loss suffered. No insured can benefit more than
amount of loss. Under the doctrine of subrogation when insured is compensated by for 1
then all rights in the subject-matter pass on to the insurer. The insurer steps into the shoes
insured. In case any claim is received from third party or some amount is received from
sale of salvage, it goes to the insurer and not to the insured because the latter has already b(
indemnified. If the insured gets the claims after being paid for the loss then he will gain <
of the event which is against the principle of indemnity.
(ii) Subrogation is the substitution. As per this principle the insurer becomes entitl
to all the rights of the insured subject-matter after paying the compensation to t
insurer. The insurer is substituted in place of insured who acts on the right and claim of t
property insured.
(iii) Subrogation only upto the Amount of Payment. The insurer is subrogated all t
rights, claims, remedies and securities of the damaged insured property aft
indemnification. The insurer is entitled to get the benefits of these rights only upto tl
amount he has paid under the claims. When the insured is compensated by a third party aft
getting full claim from the insurer then he has to part that amount to the insurer. Similarly
the insurer gets more claim from the third party than he has paid to the insured then he wi
have to part with the excess amount (over and above the claim paid) to the insured. Howeve
he is entitled to claim reasonable expenses spent on getting that claim.
(iv) Subrogation may be Applied before Payment. Generally the rights of properl
pass on to the insurer after paying the claim of the insured. The doctrine of subrogation ma
be applied even before the payment of claim because sometimes it becomes necessary t
follow an action against the defaulter in order to ensure that the legal rights against the thir
party do not lapse by any default. Sometimes the insured may get some claims from thir
parties before being fully indemnified by the insurer, the insurer can pay only the balance fo
the loss.
(v) Personal Insurance. Subrogation does not apply to personal insurance becausi
principle of indemnity does not apply to it. The insurers have no right of action against tht
third party in respect of the damages. If the insured dies due to the negligence of a third part}
then his dependents has the right to recover the amount of loss from the third party alongwitt
the policy amount. No amount of the policy would be subrogated by the insurer.

E sse n tia ls o f Su brogation

(i) Extension of principle of Indemnity. It is an extension of principle of indemnity. Ii
the principle of indemnity only the actual loss suffered is compensated to the insured. If the
subject matter is partially damaged then the insurer can .recover some amount by disposing
off the salvage. This will be done after finally settling the claim the insurer is required ta
subrogate all his rights in favour of insurer so that the latter may try to recover some amount,
if possible.
Mr cipies of Insurance 5.9

ii) Substitutes. All the rights of insured in the subject matter are transferred to the
Brer. The insurer is substituted for the insured.
iii) Subrogation only upto Payment. The insurer is substituted only upto the amount of
r oensation paid to the insured.
*iv) Subrogation for the Balance. If the insured is compensated by a third party under
ice other agreement then the insurer will pay only the balance of claim. The amount paid
:*c third party and paid by the insurer cannot exceed the amount of damage.
%i Life Insurance. The principle of subrogation is not applicable in life insurance cases.

w d oes su b ro g a tio n arise ?

5-brogation arises due to the following factors :
Tort. After indemnifying the loss suffered by the insured, the insurer is entitled to
:he damage from the party which has caused-this loss. The insurer has the rights of the
for taking action against the wrong doer.
Contract. The subrogation right may arise from the contract where a person has
sctual right to compensation regardless of fault.
ii t Subject Matter of Insurance. There may be a situation when the insured has been
sated for the loss suffered by him, the insured cannot claim the salvage or scrap. The
has the right to claim the salvage or scrap under insurer contract.

PRINCIPLE OF PROXIMATE CAUSE OR CAUSA PROXIMA

~' e principle of proximate cause lays down that proximate cause (nearest cause) is to be
pas:s of determining the liability of the insurer. While determining the liability of the
r. die nearest or proximate cause and not the remote cause of the loss is to be taken into

~:e doctrine of causa proxima is especially applicable to marine insurance. Section 55 of

j Marine Insurance Act, 1963 prescribes that the insurance company shall be liable to
fy only those losses which have been caused by proximata or nearest cause covered
policy and not other remote causes. This section further prescribes that the insurer
if' low the doctrine of causa proxima for the purpose of determining the liability in the
: : occurrence of loss.
■Coder marine insurance the loss may be attributed to many causes, it may not be
; d to any single reason or cause. Marine insurance policies generally cover a large
: risks including sinking and burning of ship or cargo, collusion of ships, jettison,
explosion etc. These may occur in a chain or in a broken chain. The principle of
cause helps in determining the nearest cause or efficient cause. The proximata is
: - 'arily the cause that was nearest to the damage either in time or in place, but is
 i

5.10 Principles of Inst

rather the cause that was responsible for loss. In case the nearest cause is covered
marine policy then insurer will indemnify the loss.

D eterm in a tio n o f P roxim ate C ause

When the loss occurs due to only one event then there is no problem in deciding
liability of the insurer. But when loss occurs due to two or more causes then the first
will be to determine the nearest cause of loss and then decide the claim. It is also nece
to differentiate between insured perils, excepted perils and not insured perils in ord
decide the liability of the insurer.
(i) Single Cause. When there is a single event which causes loss then it will be a i
case of proximate cause. If this cause is insured under the policy then the insurer will pajJ
claim.
(ii) Concurrent Causes. When a number of causes occur at the same time and the I
is the result of these causes then insured perils and excepted perils will have to
segregated. The concurrent causes may be separable or inseparable. Separable causes)
those which can be separated from each other. The loss occurred due to a particular
may be distinguishly known. In such a case if any cause is excepted peril, insurer will
to pay up to the extent of loss which occurred due to insured perils. If the circumstances |
such that the perils are inseparable then the insurers are not liable at all when there exists i
excepted peril.
(iii) Successive Causes. Where there is a chain of events causing loss to the subs a
matter insured, the insurer's liability would arise if the original cause is an insured peril,
case of direct chain of events, that can be traced to an excepted peril, the insurer shall nc
liable to indemnify the loss. In case the chain of events is broken by the intervention

I
new and independent cause then the liability of insurer will depend upon whether the
cause or peril is insured or not.

5. PRINCIPLE OF CONTRIBUTION
Principle of contribution is also an off-shoot of the principle of indemnity. When
insured has taken more than one policy for the same subject-matter against the same
during the same period, the liability of insurers will be determined on pro-rata basis,
insured cannot have the benefit of claiming same claim from more than the insurer. He
claim the amount from more than one insurer but the total claim will not exceed the act]
loss.
The principle of indemnity restricts the amount received by the insured. He cannot b
• oosition after the receipt of claim than he was before the loss. In such cases the ti
d by the insured is contributed by different insurers in the ratio of the value
I
ued by them for the same subject-matter. In case the insured prefers to collect I
 es of Insurance 5.11

of loss from one insurer, he will collect the proportionate amount from other
. For example, A takes an insurance policy for his residential house from insurer X
>0.000, from insurer Y for ? 2,00,000 and from insurer Z for ? 3,00,000. A suffers a
? 1,20,000 due to fire accident. Though A has total insurance policies of ? 6,00,000
'Tee companies but the total loss to be recovered will be ? 1,20,000 only. The insurers
tribute this loss in the ratio of 1 : 2 : 3 (the value of policies issued by them). In case
more insurers indemnify the loss of A then they will be compensated by other insurers
who paid lower amount than the proportionate liability coming to their share.

for P rincip le o f C on tribu tion

- rerson may get more than one insurance policies from different companies for the
'._bject. In case of loss he may claim the loss from different companies. In no case he
tive more amount as claim than the loss suffered by him. The claim may be provided
company or more companies put together. If the insured receives more claims than the
;red then he will be placed in a better position than that prior to loss and thereby the
:~.nciple of indemnity will fail. Each insurer will contribute the proportion of loss as
policy insured by them. In case the insured collects the amount of loss from one
insurer, the insurer paying the total loss will also collect it from other insurers with
Tie insured has insured the same subject matter, in accordance with the proportion of
•ed amount.

o n d itio n s for P rin cip le o f C on trib u tion

The subject-matter of insurance should be the same for all the policies. It means
that goods or properties to be insured must be common or same in case of all the
policies.
In order to attract the principle of contribution, the perils which cause the loss or
damage must be common to all the policies.
The policies must be enforceable under law. In case any of the policy is not
enforceable under law then the principle of contribution will not apply.
■ All the policies must be in force at the time of loss. It means that the principle of
contribution will be applicable only to those policies which shall be in force at the
time of loss.
The insurable interest under all policies must be the same and all policies must be
effected in favour of a common person. If insurable interest is different under the
policies then principle of contribution will not apply.

PRINCIPLE OF UTMOST GOOD FAITH

■he contract of insurance is based on the principle of utmost good faith on the part of all
 5.12 Principles of Insui

parties concerned. The contracts of insurance are contracts of good faith and absence of
faith may result in the invalidation of contracts of insurance.
Meaning. According to the provisions of Indian Contract Act, 1872 all commi
contracts require that good faith must be observed, otherwise these shall be null and voi<
good faith, we mean, absence of fraud or deceit on the part of parties to the contract
under the contract of insurance greater degree of good faith is expected from the insur
respect of disclosure of all material facts relevant to the contract. Insurance contract
different from ordinary business contracts which are based on the principle 'Caveat err
(let the buyer beware) as the seller has no duty to disclose any information about the su
matter of the contract. The buyer is expected to take reasonable care while underta
purchases. But in case of insurance, it is the duty of the proposer to disclose relevant mat
information which may affect the decision of the other party.
Material information is that information which enables the insurance company to dec;
(i) Whether to accept or not to accept any risk.
(ii) If accepted, at what rate of premium and on what terms and conditions.

P rin cip le o f Good F aith in Life In su ran ce

The insured is required to provide all relevant information required by the insur,
company. The company provides a printed questionnaire to the proposer and expects tha
the questions are answered honestly.
Following material facts are required to be supplied :
(i) Name, address, occupation of the insured person.
(ii) Date of birth, age, height, weight etc.
(iii) Facts about life and habits
(iv) Family history
(v) Information about health of proposer.
(vi) Quantum and nature of income of the proposer.
The proposer has to declare that all the information supplied is true to the best
knowledge. Any concealment, furnishing of inaccurate or incorrect information will lead
contract to be null and void.
The breach of disclosure of information may arise in the following cases :
(i) Non-disclosure of material facts.
(ii) Intention of non-disclosure of material facts ,
(iii) Non-disclosure of material facts by negligence.
(iv) Misrepresentation of material facts with fraudulent purposes.
 of Insurance 5.13

tc:ple o f Good F aith in M arine In su ran ce

k proposer is required to disclose full information about the subject matter of
■ - e This is necessary because the insured is in possession of all material facts of

the contract of marine insurance the insured must disclose the following material
■ B ■ die proposal form :
Method of packing
I1 : Nature of goods
>I The particulars of the ship carrying the goods,
t *r« The part of shipment and destination along with the route of journey.
Generally, the marine insurance proposal form requires the following information :
•: Name of the shipper or client, insured
Full description of goods to be insured
Method and type of packing
!Ilii i Voyage or mode of transit
h ) Cover required and conditions of insurance.
I Name of steamer
r n Sum to be insured
B in Past claims experiences

Ifcfcrciple o f Good F aith in Fire In su ran ce

Tbe principle of good faith applies to both the parties i.e. insurer and insured. The
■ ^ur 'ibility lies on the proposer since he is in possession of material facts required for the
■Kact. Non-disclosure or concealment of material facts will lead to the contract to become
■itii-le at the option of the insurer. The insurer should also disclose facts of the policy to the
p ^ r.
I Fallowing material facts are required to be disclosed in the case of fire insurance :
: Construction and description of building
ii i Location of the building.
* :i) Particulars of occupier, whether office, residence, ship, godown, manufacturing unit
or services undertaking etc.
I l iv) Nature of the goods or material i.e. normal, hazardous, extra-hazardous etc.
i v) Particularly of previous losses suffered,
i vi) Previously lodged claims and their settlement, etc.
 5.14 Principles of Insi

| 7. PRINCIPLE OF MITIGATION OF LOSS

Mitigation of loss means minimising the security of loss. Under this doctrine wh
the insured event occurs, it shall be the duty of the insured to take all such steps to mil
the loss as would have been taken by any person who is not insured. As such, it is the c
the insured to act to minimise the loss. The logic behind this principle is that the ii
should not become careless and passive at the time of loss simply because his propi
insured. So the insured must act like an uninsured prudent person. All that is expected
he must act reasonably, in the event of loss, to make the loss minimum as far as possible
The principle of mitigation of loss provides only a check on the behaviour at the ti
loss. This principle should not be limited to the time of occurrence of loss only, it m
extended even to the validity period of the policy. It so happens that the insured be<
careless about the subject matter once he takes up an insurance policy. There shoulc
genuine behaviour as regards the property insured. The insured should act in a way he s
have done if the property was not insured. This type of concern will help in mitigatii
loss if such on eventuality happens.

ee^ review questions!— E I E

A. SHORT ANSWER TYPE QUESTIONS
1. Name five principles of insurance.
2. What is insurable interest ?
3. Explain the meaning of indemnity.
4. What is cause proxima ?
5. Explain the meaning of principle of contribution.
6. What is insurable interest in life insurance ?
7. Name the advantages of principle of Indemnity.
8. What are the essentials of subrogation ?
9. Describe the meaning of principles of good faith.
10. Explain the need of principle of mitigation of loss.

B. ESSAY TYPE QUESTIONS

1. What is the principle of insurable interest ? What are its essentials ? Explain insi
interest in different types of insurance policies.
2. Describe the meaning and features of principle of indemnity. Discuss various metho
providing indemnity.
3. How is the principle of indemnity helps different categories of insurance contracts ?
4. Explain the meaning and features of principles of subrogation.
5. How is cause proxima determined in insurance contracts ?
6. What is meant by principle of good faith ? How is it essential for an insurance contract ?
7. Explain briefly various principles of insurance.
<e><j><3><5>
Insurance Terminology And
Insurance Customers
INTRODUCTION
- :ere are many terms which every individual must know before entering into an
at of insurance with the insurance companies. There are many cases where agents do
darify the meaning of these terms before agreement and at the time of claiming the
e, these parties have to suffer loss and the insurance companies exploit innocent
on the pretext of technical definitions of these terms.
have already discussed in previous chapters that Insurance can be broadly classified
: main categories i.e. LIFE and NON- LIFE Insurance. There are different terms used
ent types of insurance. It is essential on the part of insurer as well as insured to know
cal meanings of these terms. Generally, the policy document includes meaning of
e-ms and every individual must go through the document very carefully before entering
-greement. There are many terms which are common for both types of insurance.
the terms have been divided into two categories:
Terms related to Life Insurance
- erms related to Non Life Insurance

INSURANCE TERMS

insurance is an agreement where the insured party gets their life insured for a
oeriod of time and get the money either at maturity or death whichever is earlier,
cts are very important as a small mistake in understanding the terminology used
ce companies can cost the lifetime security to the family of the insured.
6.2 Insurance Terminology And Insurance Customer

Some of the important terms are discussed below:

• Beneficiary: Beneficiary is the person who gets the benefit of the life insurant
contract and the name of the person is entered into the policy as a nominee in tl
policy document. He or she will get money after the death of the insured person.
• Surrender value: Sometimes the insured person may terminate the contract befoi
maturity or death. In that case some amount of premium has been paid by the insure
but not the entire amount. In case of termination of contract, he will not get entii
amount paid by him as premium. Thus the amount which is available in cash to th
insured is called surrender value. This value is generally very less as compare to tn
amount he deposited as premium till date of termination.
• Claim: It is the amount which an insured can recover from the insurance company 1
the time maturity or occurrence of an event.
• Death benefit: It is the actual amount that the insurance company pays to th
beneficiary i.e. nominee, when the insured person dies.
The difference between claim and death benefit is the claim is made by the insure
party at the time of maturity whereas death benefit is actual benefit that is paid by thj
insurance company at the time of death to the beneficiary.
• Permanent life insurance: Permanent insurance ae of three types i.e. whole
universal and variable. It provides protection for the whole life of the insured. It wil
continue as long as premium is paid by the insured.
• Policy: Policy is an agreement between two parties i.e. Insurance Company am
insured. It is a written agreement and both the parties are bound to follow the ternd
and conditions laid in the agreement.
• Premium: It is the amount paid to the insurance company by the insured to avail thj
protection facility. It is also known as consideration. The premium can be pail
annually or six monthly. It depends upon the agreement between both the parties.
• Term life insurance: Term life insurance ranges from one year to 30 years but ii
this the life of the insured for a particular period of time and benefits of this type oj
insurance policy is available only if a person dies in the term in which he waj
insured. Thus in this type of policy if the term of policy has expired before the deatn
of the insured person, then the beneficiaries cannot claim any benefit. It is |
temporary insurance. It is beneficial as it is cheap as compare to permanent policy.
• Universal life: It is a permanent life insurance policy and it gives right to the insured
person to vary premium and death benefits within the limit of prescribed period oj
time. The rate of return also varies with the change in the premium paid but thd
minimum rate is also fixed below which the return do not fall. Thus in this police
there is flexibility. 1
ce Terminology And Insurance Customers 6.3

Variable Life: It is also a type of permanent policy but as the name suggests there is
variation. In this policy the cash value varies but these policies guarantees minimum
death benefits. In any case the value of death benefit will not fall below the minimum
amount.
Whole Life: This type of Life insurance policy is a permanent policy as it covers the
entire life of the insured and the premium is paid accordingly. This policy will
continue for the whole life till the person is alive.
Accelerated Death Benefits: It is also known as living benefits. Some insurance
policies provide this facility where the insured party can enjoy the benefits of
insurance before he or she dies. Thus they can enjoy the benefits when they are alive.
Guaranteed Issue: This plan provides protection irrespective of the health issues. In
this plan no previous records of health condition of the insured is checked.
Guaranteed Addition or Loyalty Addition: In this plan a guaranteed rate is given
at the time of maturity of the policy in addition to maturity benefits. In this plan the
extra benefit is for loyalty.
Guaranteed Surrender value: In this plan, if an insured person has paid premium
for more than 3 years, the policy will acquire a guaranteed surrender value. At least
30% of the total premium paid excluding the premium paid in first year is the
guaranteed surrender value.
Application: It is form which is filled by the insured while entering into an
agreement with the insurance company. It includes all the details of the insured i.e.
name, address, date of birth etc. This helps both the parties to enter into contact.
Insured: He or she is the person whose life is insured by the insurance company.
Cash Value: It is the value that an insured will get if he or she cancels the policy.
Renewal: The policy gets renewed when the insurance premium is paid on time.
Coverage: This is very important term. It specifies the scope of policy and what all is
covered under the insurance policy. If there is anything which is not covered by the
policy, the insured will not get any claim for that. It is necessary that the event is
covered under the insurance policy.
Underwriter: He is the reviewer of the application of the insured. He approves or
rejects the application after evaluating the medical history of the person. The process
performed by the underwriter is called underwriting.
Effective Date: It is the date when the insurance coverage starts. This date is very
important in deciding the claims.
Waiver of Premium: In some insurance plans, the insurance premium is waived off
but the coverage continues. For ex: in case of accident, the insured person has
become disable to work.
cm Insurance Terminology And Insurance Custom

I NON LIFE INSURANCE

There are many terms which are used by the insurance companies in the General or N<
Life insurance policies. The General insurance is more complex in nature as compare to 1
insurance and the study of terminology holds even more importance in these policies. It is i
duty of the insured to study the policy document in detail in order to avoid a
misunderstanding and it is also the duty of the agent of insurance company to disclose all 1
material facts.
Some of the terms are:
Accident - It is an unexpected event that may take place in future but there is no n
intention involved. It may take place out of sudden.
Accident Insurance - It is policy that covers the unexpected event.
Accident Only or AD&D - It is the policy which covers all types of accidents and bodi
injury that may take place due to accidents.AD&D means accidental death a
dismemberment and it covers all types of accidents and the insured can avail all the benef
caused by accident.
Actuarial Report- It is the main report submitted by actuary after evaluating the ev<
and the risk involved. Premiums are calculated on the basis of this report. It is also called
"Actuarial Memorandum" in case of Life and Health Insurance.
Adjuster-he is the person who evaluates the loss or damage in an accident and tells I
insurance company the different possible ways to settle the claim.
Annuities - Immediate Non-variable-It is plan where the payment is made for
particular period of time as the time may vary from one year to whole life of the person b
the annuity payouts must start within 13 months. j
Arbitration- It is technique of solving the dispute if any between the insured and tl
insurance company. I
Automobile Liability Insurance-It covers the vehicle as well as the person who is t
owner of the vehicle. In case of accident these types of plans help the owner in recovering t
loss.
Blanket Coverage - It provides coverage for property and liability that extends to mo
than one location, class of property or employee.
Burglary and Theft- The policy covers any loss incurred due to burglary or theft,
there is any damage to the property by the trespassers or there is any fraud, kidnap etc. T
insurance company will bear the loss.
Captive Agent-he is the person who sells the insurance policies to a specific insurer
fleet of insurers.
Casualty Insurance-These are insurance coverage of the insured from various acts I
 nee Terminology And Insurance Customers \ 6.5 |

nee such as errors, omissions, various malpratices, fraud or loss due to any act of the
ee working in the organisation.
_eded Premium-Any amount of premium paid to purchase reinsurance.
Coinsurance - A clause contained in most property insurance policies to encourage
holders to carry a reasonable amount of insurance. If the insured fails to maintain the
t specified in the clause (usually at least 80%), the insured shares a higher proportion
loss.
Combinations - a special form of package policy composed of personal automobile and
wners insurance to give overall protection to the insured.
Commercial Package Policy-It is a policy which can give broad coverage for
ercial activities other than those provided insurance through a business owners policy.
Commercial Property-This property insurance coverage is sold to commercial ventures
rrotect assets of the companies.
Lapse-it is the termination of a policy when the insured fails to make payment of

Level Premium Insurance-In this the premium is divided equally over the span or term
insurance.
Margin Premium-It is a premium amount that must be kept with the broker to facilitate
transaction in the futures contracts.
.Market Value-It is the fair value or the price derived from sale of an asset in the market.
Mechanical Breakdown Insurance-It covers the repair cost of the machinery. In case of
breakdown, the amount of loss in the repair of the machine is paid by the insurance
panies. This helps the insured company to save the money to be incurred on unexpected
ent. It also covers motor vehicles, mobile equipment, boats, appliances, electronics,
rsidual structures, etc.
Medicaid-This policy provide medical aid to the employees of the organisation who has
oxen policy for their employees. This helps in providing medical security for certain
individuals and families with low incomes and resources.
Moral Hazard-It includes loss due to negligence on the part of insured by not taking
rcoper care of the property.
Mortgage Insurance - It is a form of life insurance coverage payable to a third party
ender/mortgagee upon the death of the insured/mortgagor for loss of loan payments.
Multi-Peril Insurance - It covers personal as well as business property both and protects
ne insured from all the losses related to business or personal property in one policy.
Non-proportional Reinsurance-These type of reinsurance takes the entire or the major
responsibility and not on specific individual amount. The most common types of non-
rroportional reinsurance are stop loss and catastrophe.
 6.6 Insurance Terminology And Insurance Custom4

Notional Value-It is the principal value upon which future payments are based a
derivative transaction as at a specific period in time. I
Qualified Actuary-Actuary is the person meets the eligibility conditions of becominj
niq
qualified actuary. They actually assess the loss incurred in the property and they issue
ue 1|
opinion statement. Only qualified actuaries are appointed by the insurance companies to :
their claims
1
Reinsurance-It is a transaction between a primary insurer and another insurer
reinsurer.In this type of policy the primary insurer is not sure that he will be able handle i
risk or not. So he enters into an agreement with the reinsurer who agrees to cover all or pi
of the losses of the primary insurer. This is done for a consideration called premium and aa
loss can be indemnified on a proportional or non-proportional basis.
Reinsurer-It is the company who is undertaking reinsurance risk.
Renewable Term Insurance-It is an insurance which automatically gets renewed v. hi
it becomes due. There is no need of any medical examination to renew the policy as tj
policy expires after a particular period of time.
Rider- It is an amendment to a policy agreement.
Salvage- Value that can be recovered after selling the asset in scrap.
Securitization of Insurance Risk-it is a process of converting policies into securit
which can be traded in the financial market.
Short-term Disability-Short term disability for the insured such as employees work
in organisation etc. Sometimes due to accident the insured may become disable but for a si
period of time such as for 2 years or less.
Short-Term Medical- It is a medical policy which covers for a short period of tir
typically 30 to 180 days but these are renewable for multiple periods.
Situs of Contract- It is the jurisdiction in which the contract is issued or delivered and i
is stated in the contract.
Social Insurance-It is a compulsory insurance plan managed by a state governme:
agency where the main motive is to provide social security.
Soft Market-It is a buyer's market and there are so many policies available in the marke^
that the supply increases the demand giving the consumer enough choices to choose from.
Term Insurance-it is for a very specific period of time and the amount of insurance wi
be paid only of the event happens in that particular period. It can be for 5 or 10 years,
before a specified age.
Third Party-it is the third person other than the insured or insurer who has suffered
losses and is entitled to receive payment due to acts of insured.
Umbrella and Excess (Commercial)-Umbrella or excess policy covers over and abovel
 nee Terminology And Insurance Customers 6.7

amount of insurance written in the basic policy. These policies help an insured to fill the
if any in the basic amount and the actual amount. Sometimes the insured is not sure of
mount that can fulfill the loss. Such policy helps in covering that gap.
Valued Policy-In this type of insurance the value of the contract is decided in advance
is not related to amount of the insured loss.
Warranty-Once the warranty period is over, the manufacturer will not repair the
mnery or change any part of the machinery or any asset. Sometimes the product is so
v that consumers do not want to take the risk of the product even after warranty period is
If the product needs repair after warranty period, the insurance will cover the cost of
!ng or replacing the part of the product. Such type of insurance is known as warranty
ce and the includes various types of cost but not all the costs
Whole Life Insurance-It is the insurance for the whole life of the insured and the
fits can be availed only after the death of the insured. These benefits get transferred to
reneficiary of the contract. Premiums are also spread over the life span of the insured.
Written Premium-It is the consideration charged by the insurer from the insured by
lating the risk and the period of coverage provided by the insurance company. Since it is
iioned in insurance contract, it is known as written premium.

USAGE OF TERMS
We have studied different terms related to Life and Non - Life insurance. These terms are
generally defined by the insurance companies in their policy documents and thus are very
isrful in nature.
Some of the uses of these terms are discussed below:
• It helps in understanding the insurance policy in detail.
• These terms make the document simple and easy to understand.
• The terminology can help in disclosing the material facts which the insurance
company’s agent has concealed.
• The customers can compare various insurance policies and decide cautiously and
rationally. There are so many policies with different plans. It becomes sometimes
confusing to decide the best policy for them.
• These terms also defines the scope of a particular policy. Scope means coverage of
insurance policy. The insured must know the scope of their policy before entering
into agreement with the insurance company. Many times, the insurance companies
reject the claims on the basis of coverage of policy.
• The insurance agent must have complete knowledge of these terms. It can help in
convincing the customer and selling their policies.
I 6.8 | Insurance Terminology And Insurance Custon

• It can help new insurance agents in getting knowledge and awareness of t

business.
• It can help insurance agents and intermediaries to understand their business.
• These terms can help both the insured and the insurance company in legal matters
case of legal suit these terms can help the either of the parties.
• As a student of commerce, these terms can give an in depth knowledge of insura
contracts and the functioning of insurance companies.
Thus the study of insurance terminology is not only helpful to insurance age
intermediaries but also to the customers and students studying insurance.

| INSURANCE CUSTOMERS
There are two parties to a general contract and in the same way in insurance contra
these two parties are insured i.e. customers and the insurer or the insurance companies. W
the advent of privatization in this sector in India, the competition has increased manif
times. There are so many companies including banks that have entered in the field
insurance. These companies actually thrive on the sense of insecurity in the mind
consumers. These insecurities are encashed by these insurance companies. It is difficult
the companies to create new market or retain its market share in this competiti
environment. These companies can survive only when they are able to retain their existi
customers and at the same time, creating new customers. Thus customer is the backbone
any business but the real asset of an insurance company is its customer. No insurar
company can survive without its customers. It is essential for every company to understa
the needs of the customers and develop plans and policies according to their requirement.,
the profitability of insurance sector depends upon its customers, it is necessary for eve
company to look into the desires of its customers, on continuous basis. This process
identifying customer needs, in order to satisfy the needs of consumer is known as Custom
Relationship Management (CRM). The insurance sectors are opening up to the concept
CRM initiatives.

| IMPORTANCE OF CUSTOMERS
We have studied that privatisation has increased competition in the economy, there!
forcing various companies to cater to various alternatives to maximise the value of the
company. The concept of Profit maximisation has transformed into Wealth maximisation,
is very clear from financial crisis that only those companies have survived which wei
fundamentally strong.
The value of the company depends not only on capital or sales but on various oth<
factors also:
the value of market share (current and future),
 ice Terminology And Insurance Customers 6.9

LJ
the value of customers (current and future),
the ability to increase this value in future.
- ;cording to P hilip Kotler “Appreciating and satisfying customer needs are key to success.”
:he value of insurance company interdepends on the value of consumers.

' do our activities

contribute to the increase
of the value for
customers?*

Value
for the Customers

Increasing the benefits.

Reconfiguration of the
benefits. Cost reduction
and cutting.

Source: The significance of customer value in insurance company, EwaWierzbicka,Insurance

■c rew 4/2013 / WiadomosciUbezpieczeniowe 4/2013
The above figure depicts the interaction of customer value, value of customer and value
■r insurance company. The value of an insurance company depends on value of customer and
■bee versa. The activities undertaken by insurance company must focus on increase in the
«-ue of the customers. The value for customer and the value of the customer are two
afferent aspects. The value of the insurance company depends upon both the value for the
.■-'tomer and the value of the customer. Value for the customer involves activities like
increasing benefits to customers or reducing cost whereas value of the customer increases
* -'-h the increase in market share and when the value for customer and value of customer
ncrease, it will lead to increase in value of the insurance company. Customer value is thus all
be benefits that they derive from the products purchased by them by paying a cost.
Customers are important for insurance company because:
(i) The value of the insurance company depends on the customer base: The
insurance company must increase the customer base. It is possible only by retaining
old customers and by creating new customers. Old customers can be increased by
 6.10 Insurance Terminology And Insurance Custon

understanding consumer needs and offering discounts, bonus etc. New custor
can be attracted by providing new plans, offering good services etc.
(ii) The satisfied customer can attract more customers thereby increasing
sales: A satisfied customer can attract more customers by recommending
insurance products of the company to other customers. These word of me
recommendations are very important for the insurance company as they
promoting the company without any expenditure.
(iii) Customers are in direct contact with the insurance agents: Insurance agents i
collect the feedback of the customers on various plan and policies started by
insurance company and suggestion by the customer can be given to the insurai
company to improve their products. Thus insurance companies can depend upon i
feedback of consumers.
(iv) Customers help in improving goodwill of the company: The customers are l
carriers of reputation of the company. If the customer is satisfied, it can improve 1
reputation of the company in the market. Good reputation will improve sales of t
company and thus profitability of the company.
(v) Increase market share: Satisfied customers can attract more customers and ti
cross selling can increase the market share of the insurance company in t
insurance industry. A slight increase in the market share can increase the value
the company.
Customers are the king of the service industry including insurance sector. The insuran
company must direct their efforts in achieving customer satisfaction in order to improi
value of their company. The insurance sector is thus required to identify the facto
influencing the choice of customers while choosing an insurance company for insuram
plans. Since the competition is high and the customers are more demanding and have man
choices to choose from, it is important for them to retain the customers by providing thei
lucrative offers and at the same time, trying to be cost effective. The insurance compank
cannot afford to increase their cost.

| CUSTOMER BEHAVIOUR
Consumer behaviour is the process the consumer show while searching, selectin*
purchasing, using the product and services. Consumer is the person who actually consums
the product by searching, selecting, buying and using that product or service. Generally th
term consumer and customer are used interchangeably but technically, these two term at
different. Consumers become customer of a particular shop or brand when he or she regularl
consumes the product of that particular shop or brand. When the consumer become loyal to
particular company, he or she becomes customer. Thus every organisation must emphasise o
making customers from consumers. Consumer need not to buy the product whereas custome
actually buys that product for himself or others. The insurance companies are sole!
 rce Terminology And Insurance Customers 6.11

it on the customers. It is necessary for these organisations to study consumer

—r in order to convert them into customers of the organisation.

''INITIONS

Walters (1974) defines consumer behaviour as: " ... the process whereby individuals decide
r. what, when, where, how, and from whom to purchase goods and services."
Wowen (1993) provides a different definition by explaining consumer behaviour as: "... the
r. of the buying units and the exchange processes involved in acquiring, consuming, and
og of goods, services, experiences, and ideas".
Schiffman&Kanuk (1997) define consumer behaviour as: "The behavior that consumers
in searching for, purchasing, using, evaluating, and disposing of products, services, and

-:cording to Schiffman&Kanuk (1997), two different types of consumers can be distinguished,

personal and organisational consumers.

Personal consumers purchase products and services for personal or household use or
as a gift to someone else. Personal consumers, therefore, purchase for final
consumption.
Organisational consumers on the other hand purchase products and services to run an
organisation, including profitable and non-profitable organisations, government
organisations and institutions.

• ACTORS INFLUENCING CONSUMER BEHAVIOUR

It is essential for all the insurance companies to study the consumer behaviour before
.r.ing their products and policies in the market. This process of assessing consumer
dour is known as Marketing concept. In 1950’s some marketers started believing that
Je of the products can be increased by assessing consumer behaviour and their needs.
Market Needs M arketingP rofit via customer satisfaction
The process started from assessing the market, needs of the consumer and earning profit
-atisfying the needs of the consumers. A satisfied consumer can lead to high profits and
.e maximisation. Thus it is essential to study the factors influencing the consumer
■iour. There are many factors that influence the consumer behaviour.
Some of them are:
(a) Purchasing power: The purchasing power of a consumer decides the buying
behaviour of the consumer. Purchasing power is the disposable income in the hands
of the consumers which they can spend to buy commodities in the market. When
there is increase in purchasing power, it consumer will shift their demand to
superior goods. In the same way, if there is decrease in purchasing power, it may
lead to fall in the demand. Thus income plays an important factor in influencing the
behaviour pattern of the consumers.
 6.12 Insurance Terminology And Insurance Custome

(b) Taste, preference and habits: The next important factor is the taste, preferen
and habits of the consumers. If a consumer is habitual of consuming a particul
product For ex Cigarette, liquor, tobacco products etc, the consumer will buy th
product irrespective of increase in prices. The taste and preference also influen
the buying behaviour of the consumer.
(c) Availability of alternatives: The behaviour of the consumer changes with tl
increase in choices. They will shift to the company with the good quality produc
at reasonable prices.
(d) Price of the product: In this competitive environment, the consumers have mai
choices and they are fully aware of their options. If the price of the product is mo
than competitors, they will easily shift to other companies, giving same quali
products at reasonable prices. Thus it is difficult to retain consumers with tl
company.
(e) Promotion of the product: Marketing campaigns of the products can ah
influence the behaviour of the consumer. The more the promotion of the producl
the more impact on the mind of the consumers. These promotional activities lil
free samples, advertising by role models also influence the mind of consume
while buying the products.
(f) Price of related goods: The price of related goods or goods related to i
competitors can also influence the buying behaviour of the consumer. Sligjl
increase or decrease in the price pf competitive goods also influences the behavioi
of the consumer.
There are many other factors also that influence the buying behaviour of the consume
These companies must analyse all the above and other related factors while planning the
products and services for the market.

| COSTUMER BUYING BEHAVIOUR/PURCHASE DECISON

The consumers are rational and search various alternatives before buying a particul
insurance plan. They are more aware than before. The accessibility and the availability j
information is high due to internet. They can easily compare different insurance plans ai
premium payable before buying. There are many websites available on the internet providii
the detailed information of the products as well as their companies.
The decision making process was first given by Engel, Blackwell and Kollat in (196}
Engel, Blackwell has given five stages of decision making process as shown in above figure
1. Problem Recognition: The first stage is problem identification or recognition wha
the consumer will identify the need of the product or insurance policy in case insurani
companies. There can be internal stimuli as well as external stimuli that creates need of tl
consumer. Consumer will not buy the product, if he or she do not need it. The insurani
company will have to identify the need of the customers such as marriage, education i
 Terminology And Insurance Customers 6.13

life security, coverage against Fire, theft etc. The insurance companies will to
the need of the customer before approaching the customer.
of the steps involved in this process are:*•

>mrce: www.wikipedia.com
. ase of insurance companies the insurance company must:
assess the customer’s current experiences: The first step is to collect the information
consumer’s current experience of their relation with the insurance company whose
they have purchased. It depends upon the experiences faced by the customers at the time
•mg the policy or at the time getting claims approved etc. The customer will come back
renewals only when they are satisfied by the services of the company. Identify the
r’s expectations/ needs: After understanding the experiences of their existing
r’s, the companies must look into the expectations of the customers and if they are
jp to the expectations or not. Marketing research can help these companies to analyze
: -pectations as the consumers have wide choice, they can easily switch to other
_nies. The insurance companies must plan their policies according to the expectations
seeds of the consumer. According to a Research paper of KBM group published in 2013,
riences can be categorized into seven types:
a ) Shopping experience: The first type of experience is shopping experience which
s comparison of various plans and policies of different insurance companies. It deals
various insurer’s products and do they meet the expectations of the insured. The
1 6.14 Insurance Terminology And Insurance Cust

shopping experience generally has deep impact on the mind of the consumer. A p
experience can have long term impact on the mind of the consumer making him or her _ m
consumer of the insurer and vice versa.
(b) Buying experience: The next type of experience is buying experience i.e. apr
for and purchasing a policy from insurer. There are many companies in which the proc.-
buying policy is complex and cumbersome that consumers avoid buying from
companies. It becomes difficult when there are lot of formalities involved in the applk
or premium payment. Now a days, companies make sure that the buying experience i>
pleasant. There are many companies who give time to time reminders of premium dur
even send their executives to facilitate payment of premium on time.
(c) Startup experience: The third experience is start up experience. It starts after
the application form. It deals with the policy documents and doubts related to :
documents. There are many cases in which insurance agent gives false information ::
party or conceal some facts from the consumer which they come to know after entering
the agreement. The insurance regulatory authorities have tried to deal with these prob s
where the consumer can cancel the policy even after entering into the agreement but u 1
few days. If the policy documents state different picture from the information given
insurance agent, the insured can cancel the policy within 15 days of receiving the docu
(d) Relationship building experience: The other experience is relationship bu.
experience where the customers feel that he or she is important for the insurance com-
The insurance company must be take care of their customers by providing information ::
time to time about various plans. They can also give them lucrative offers. It is a contin.
process of building strong relationship. The company should not forget about their custo
after entering into the contract. Rather they should make them feel important for
organizations.
(e) “Growing with you” experience: Life changes very frequently and so our n~
Insurance companies must understand our changing needs and suggest different plans
may suit us or are best in those circumstances. The insurance advisors should take care ot
personal needs.
(f) Service experience: The next most important experience is the insurance services
grievance handling, claim settlement, documentation etc. These services must be quick. -
firm whose main aim is to reject the claim and creating trouble in settlement will not be
to survive. The services should be quick and if there are any complaints then these compl
must be resolved quickly. After sales services plays an important role in retaining
customers.
(g) Renewal experience: experience at the time of renewing the policies helps insur
companies to retain their old customers. The companies must understand the changing ne
and find the solutions to cover the gap.
 ce Terminology And Insurance Customers 6.15

These experiences thus form life cycle of the product. These companies must engage
rs at each stage of the life cycle to meet their expectations of buying a new plan or
ig an old plan. Insurers can strengthen the relationships with the customers and
increasing sales by word of mouth recommendations.
1 Information Search: The next step is to collect the information on the products of
Tent companies. The consumer will make use of these all the possible information
le in the market or online on that product. The insurance companies can provide the
tion about their products by assessing their expectations in such a way that they are
to convince them that the products given by their company can fulfill their expectations.
'•Vith the increase in number of choices available to the consumer, the consumers can
nd more and more from their insurance companies and if their demands are not fulfilled,
r.ave choice of switching themselves to other companies. Thus the expectations need to
c .amined carefully.
3. Evaluation of Alternatives: The next step is to evaluate the needs and expectations of
customers. If there are any deviations i.e. expectations are high but experience is low, the
jmer will shift to other company’s products. In the same way, if the expectations and
riences match, the insurance companies can retain them in their company. It is a
nuous process and thus in this competitive environment, the insurance companies will
i€ to evaluate the experiences and expectations and keep on focusing on fulfilling the
r rectations of the consumers.
4. Purchase Decision: The most important step in this process is the purchase decision.
The customer after evaluating all the available alternatives actually takes decision of buying
product. The consumer takes the decision to shift to new insurance company or buy new
ducts or remain loyal to their old insurance companies.
The purchase decision is influenced by various factors. There are many factors that
nfluence the consumer’s behaviour in buying an insurance policy from an insurance
. mpany.
Some of the factors are:
(a) Convenient company office location
(b) Availability of Premium collection center
(c) No. of branches across the globe
(d) Infrastructure of the insurance company
(e) Use of modem equipment
(f) Fast and efficient counter service
(g) Speed and efficiency of transactions
(h) Wide range of products and services
(i) Company opening / Operating hours
 6.16 Insurance Terminology And Insurance

(j) Interest rates

(k) Lower service charge
(l) New scheme information
(m) Secured internet banking
(n) Proper guidance and immediate complain handling
(o) Staff courtesy, Clear communication, Reputation of company, Confide- i
insurance company, Regular insurance account statement and information a
account
(p) Influential marketing campaign like Free gifts for customers, Peer group :
5. Post Purchase: The last step is post purchase activities. The consumer w;i
compare the product with the expectations. This step is very important because the w
will decide whether he or she will stick this company or shift to a new compan
consumer is satisfied, he will not change the company but if the products were -
expectations, will switch to the substitutes.

CUSTOMER VALUE, CUSTOMER SATIFACTION AND CUSTOl

I RETENTION

CUSTOMER VALUE:
Customer value is the difference between benefits derived by the consumer by b -
product and the cost paid by him to buy that product. The customer will buy the r a
when the value gets maximised. The value obtained by the customer is relativeh -. - t
in nature. These values can be measured by the insurance companies by discounting
flows in the form of revenue earned by the insured and the coverage provide: *i
insurance companies. The cost of providing coverage (executing and renewing ir j
contracts) is deducted from the revenue generated to calculate the customer value.
An increase in the customer value will increase the insurance value. It is exp:- :
attain a new customer as compare to retain an old customer. That is why the mss
companies launch various loyalty programs in order to retain old customers
The main aim of insurance companies should be a customer-focused strategy which na

I
creating long-term relationships with the existing as well as new customers. The c_ ;
value can increase the insurance value.

CUSTOMER SATIFACTION
The satisfaction of the consumer is very important in service industry. A
consumer can increase^ the value of the insurance company. It is an individual’s percep:
product or service. When the perception meets the expectations, the customers get
.On the basis of level of satisfaction, the consumers can be classified as:
 ance Terminology And Insurance Customers 6.17

(a) Loyalists: These are those persons who are completely satisfied as they got what
they expected and thus they became loyal customers of the insurance companies.
They completely trust these companies and purchase products from these
companies. They never shift to other company.
lb) Apostles: They are those type of customers who are very satisfied with the
performance as the got more than they expected and thus they never witch over
their company. They also spread recommendations of the company and attract more
customers.
ic) Defectors: They are neutral and they can switch the company. They are satisfied
but not highly satisfied. They can stop dealing with the company anytime.
Insurance companies will have to find ways to satisfy them and retain them by-
offering discounts.
(d) Terrorists: They are not satisfied by their company and give negative publicity for
the company. They not only stop buying from the company but recommend others
also to stop.
(e) Hostages: They are frequent complainers as they cannot leave the company due to
one reason or other. Sometimes policies are unfavourable for the customers but the
customers get stuck in that policy unnecessarily. It is difficult to deal with such
customers.
(f) Mercenaries: They are satisfied but are not loyalists and can switch over the
company for some extra benefits. It is difficult to retain such customers.
The insurance companies should work towards defectors and turn them into loyalist but
ney cannot deal with terrorists or hostages and mercenaries.

| CUSTOMER RETENTION
Customer retention is the process where the insurance companies tries to retai l their
existing customers by offering them various offers, discounts, bonus etc. When the existing
customers do not switch to other companies, they become loyalist i.e. loyal customers.
• These customers help in increasing the sale of the insurance company.
• These customers help in making goodwill of the company.
• They are easy and less expensive to maintain as compare to attracting new customers.
• Loyalists are less price sensitive and recommend others to buy their products.
• Competitors advertising and sale promotion techniques do not affect them.
A satisfied customer thus creates value for themselves as well as insurance compames.
The insurer must not conceal any material facts.
The insurance agent should not make any false promises
The insurance agents should not force the customers to buy the insurance policy.
These agents should guide the insured properly on different plans and how these
plans can help them.
He should not unnecessary harass the customer.
 logy And Insurance Customers 6.19

take the documents at the time of application and not unnecessary harass
>_bmit documents again and again.
_rance company should study the needs and expectations of the customers
•eiling them any plan.
ihould give reminders whenever the premium is due or incase renewal is due.

TIME OF CLAIMS
core major point where the problem may arise is at the time of claim settlement.
r.i--. grievances at the time of settlement of claims as some insurance companies
hg claims easily and this leads to breach of trust between the insured and the

-e raviour at the time of settlement of claims

insurance company must settle claims quickly,

cy must not reject claims on one pretext or the other.
Btanf complaint regarding claim settlement must be resolved quickly.
~ C insurance agent should not misguide the insured regarding claims.
"Te insurance company should not harass the customers for the documents.

The insured should not make any false claims.

The insured should not submit any fake documents.
The insured should protect the property to the best in case of accident or fire.
The insured should not damage the property in order to have benefit of claims.
The insured should satisfy the insurance company for the cause of the damage.
The insurance company as well as insured should follow an ethical behaviour otherwise
company may attract negative publicity and customers will switch to other companies. In
'ame way the insured should also behave ethically and do not make any false claims. A
redressal system, an effective communication can make a long term relationship with
: customers.

jREVIEW QUESTIONSF-------------- =
A. SHORT ANSWER TYPE QUESTIONS
1. What do you mean by customer?
2. What is difference between customer and consumer?
 6.20 Insurance Terminology And Insurance C
3. Why customer is important in insurance industry?
4. Write short note on types of customers?
5. What is customer value, customer satisfaction and customer retention?

B. LONG ANSWER TYPE QUESTIONS

1. Discuss important terms related to Life Insurance and Non Life insurance? Why these t
are important?
2. Why customers are important in insurance industry? What are the factors influen
customer behaviour?
3. Discuss in detail the decision making process?
4. What do you mean by Ethical Behaviour? Why it is important and also discuss it from in
and insured point of view?
5. How customer value is important for an insurance industry? How it can be created?

<$><$><$><$>
 ( Life Insurance
Nature and Uses
-------------------------------------------- --------------------------------------------------------------------- -----

I INTRODUCTION
Life insurance is a contract between insurer and the insured. In this contract, the insurer,
L . t >!deration of premium, undertakes to pay a certain sum of money either on the death of
Ik : osured or on the expiry of certain period, whichever is earlier. It is not a contract of
fcfc—nity but only a contract to pay a specific amount on the happening of an event.

I FEATURES OF LIFE INSURANCE CONTRACT

Following are the important features of life insurance contract:
Nature of general contract
I Insurable interest
5. Utmost good faith
4 Warranties
5 Proximate cause
~ Assignment and nomination
7. Return of premium
8. Other features

| 1. NATURE OF GENERAL CONTRACT

Life insurance contract is a contract and is appended by the Indian Contract Act so it
-could have all the elements of a contract. According to Section 2(H) and Section 10 of
Iz iian Contract Act, the valid contracts must have the following essentialities :
(i) Agreement (offer and acceptance)
(ii) Competency of the parties
 7.2 Life Insurance Nature and U

(Hi) Free consent of the parties

(iv) Legal consideration
(v) Legal objective
(i) Agreement (Offer and Acceptance). A contract starts with a proposal (offer) and it
either accepted or rejected by the person to whom it is addressed. If it is accepted it beco
a contract. In life insurance contract, the offer is given by the insured and it is accepted by
insurer. An offer is defined as, "When one person signifies to another his willingness to do
to abstain from doing anything with a view to obtaining assent to that offer to such act
abstinence, he is said to make a proposal." When a person to whom this proposal is made1
indicates his assent then offer is called accepted and gives rise to an agreement.
(ii) Competency of the Parties. The essential element of valid contract is that the partie-
to it must be legally competent to contract. Following persons are competent to enter into £
contract:
(a) Who is a major
(b) Who is of sound mind
(c) Who is not disqualified from contracting.
Under Section 11 of the Indian Contract Act, every person is competent to contract wh
is of the age of majority according to law to which he is subject to and who is of sound mine, j
and is not disqualified from contracting by any law to which he is subject to.
Under life insurance contract both the insurer and the insured must be capable of enterin.
into a valid contract.
The insurer will be competent if he has got the licence to carry on insurance busines
The insured will be major if he has attained the age of \?> years.
A person who is of sound mind can enter into a contract. A person is said to be of :
mind if at the time of contract he is capable of understanding it and is in a position to form!
rational judgement as to its effects upon his interests.
(iii) Free Consent of the Parties. Free consent is present only when parties agree on i
thing in the same sense. Both the parties must be of the same mind at the time of contract. I:
the two parties do not meet in this respect there is no perfect agreement between them. It wiL
be a free consent of the parties if the contract is not made through....undue influence, fraud
misrepresentation or mistake.
In life insurance both parties must know the exact nature of the risk to be underwritten. If
the consent is not free, the contract is generally voidable at the option of the party whose
consent was not freely given.
f ,
'•(iv) Legal Consideration. The presence of lawful consideration is essential for a legal
contract. The insurer must have some consideration in return of his promise to pay a fixed
sum at maturity or death, whichever may be the case. The consideration need not be money
 nsurance Nature and Uses 7.3

It should be anything valuable or to which value may be assigned. The consideration for
the insurance company undertakes to compensate the risk of insured is called the
m. The premium may be paid in lumpsum, or periodical instalments. The life
rice contract cannot be initiated without the payment of premium.
\ i Legal Object. A contract will be legal only when the object is legal.
The object of a legal life insurance contract is to protect oneself or one's family against
;ial losses at the death of the insured. The objective will be legal only when there is an
le interest. Without having interest, object of the contract would not be legal.

INSURABLE INTEREST
Insurable interest is an important element of insurance contract. The insured must have an
ble interest in the life to be insured for a valid contract. Insurable interest arises out of
r-ecuniary relationship that exists between the policy-holder and the life assured so that
f rimer stands to lose by the death of the latter and/or continues to gain by his survival. If
type of relationship exists then the former has insurable interest in the life of the later.
Insurable interest may be divided into two categories :
<
urable In te r e st in Own's Life
A person has unlimited insurable interest in his own life, there is no need to prove this
t Bunyou says, "Every man is presumed to possess an insurable interest in his estate for
loss of his future gains or savings which might be the result of his premature death." A
*ers on continues to gain financially while he is surviving and will suffer loss if he is dead
lee anse he will be unable to earn or protect the property. The loss of life cannot be measured
monetary terms so this loss is unlimited. It means that a person may take an insurance
-y of any amount. Theoretically it may be correct but in practical situation the means of
applicant and the circumstances are taken into consideration. Generally it is said that a
jerson is not issued a policy for more than ten times of his annual income. There may be a
ation that third party may pay the premium but there should be no speculation.

Lasurable In ter est in O ther's Life

A life insurance policy can be purchased on the lives of third persons also provided the
rr poser has insurable interest in their lives.
Insurable interest in the lives of others can be discussed in two ways :
(a) Where proof is not required
(b) Where proof is required
\ J a 2 Life Insurance Nature and U s e s

(a) P roof n o t required

In the following cases no proof is required for providing insurable interest: v
(i) Husband has insurable interest in the life of wife. The insurable interest >
presumed to exist in this case and there is no need for proof. The insurable interest exists
because wife performs domestic services for the husband. In the event of the death of wit;
husband has to employ some other person to render domestic services and has to inc_rj
financial expenditure. The husband is benefited by the survival of his wife. So husband has
unlimited insurable interest in the life of his wife.
(ii) Wife has Insurable interest in the life of Husband. Husband is legally bound
support his wife. Wife has insurable interest in the life of the husband because she will suffer
financial loss in the death of her husband and will financially gain if he survives. Therefore
wife has unlimited insurable interest in the life of her husband.

(b) P roof o f in surable in te r e st required

Insurable interest has to be proved in the following cases :

B u sin e ss R ela tio n sh ip .

The policy holder may have insurable interest in the life of assured due to business or
contractual relationship.
Some of the examples are mentioned below.
(i) Creditor in the life of debtor. The creditor may lose money if the debtor dies beforr
the loan is repaid. The continuation of debtor's life is financially meaningful to the credit r
because he will get loan back only if debtor survives. The loss to a creditor may be tie
amount of loan unpaid, interest thereon and the amount of premium paid. The insurant
company will pay the full amount of the policy in the event of debtor's death irrespective dj
how much amount is due to the creditor.
(ii) Partner has insurable interest in the life of each partner. In the event of death of J
partner, the partnership firm is dissolved and surviving partners suffer financial losd
Therefore, all partners have insurable interest in the lives of all other partners.
(iii) Employee has interest in the life of key-man. A key-man is one who>q
MJl

continuation in the business is profitable to it. In the event of death of the key-man
profitability of the business may be reduced to a certain extent. Besides reduced profits,
business will have to incur expenses for employing replacement and the compensation w j
have to be paid to the family of the key-man.
(iv) Surety has insurable interest in the life of principal. In the case of death
principal (debtor) the surety will be required to pay the amount of loan or obligated amouml
1fs Insurance Nature and Uses 7.5
i
A: the survival of the principal, he will not suffer this loss. The insurable interest is limited
■dy to the outstanding amount of loan, interest therein and premium paid.

Family R ela tio n sh ip

Insurable interest may arise due to family relationship if pecuniary interest exists between
Ik policy-holder and life assured because mere relationship does not 'constitute insurable
~:erest. The proposer must have a reasonable expectation of financial benefit from the
. mtinuance of the life of the person to be insured or financial loss from his death.

General R u les For Insurable In ter est

Following are the general rules for insurable interest in life insurance :
(i) Time of insurable interest. The insurable interest should be present at the time of
rroposal. It is not necessary that insurable interest should be present at the time of claim.
(ii) Insurable interest must be valuable. The value of insurable interest must be
tetermined properly in business relationship. Insurance is limited only upto the amount of
r.surable interest.
(iii) Services. Except the services of a wife, the services of other relatives will not
r'sentially form insurable interest. There must be financial relationship between the proposer
md the life insured. The services performed by the son without dependence of his father will
aot constitute insurable interest of the father in the life of his son.
(iv) Insurable interest should be valid. Insurable interest should not be against public
rolicy and it should be recognised by law.
(v) Legal responsibility may form the basis of insurable interest. Since the proposer
- ill suffer financially upto the extent of responsibility, he has insurable interest to that extent.
For example, a person under legal responsibility to incur expenses at the funeral of his wife
md children, can purchase insurance policy on the lives upto that extent.
(vi) Insurable interest must be definite. Insurable interest must be definite at the time
?f proposal. More expectation of gains or support will not constitute insurable interest.
(vii) Legal consequence. Insurable interest must be there to form a legal and valid
insurance contract. It would be null and void without insurable interest.

| 3. PRINCIPLE OF UTMOST GOOD FAITH

Life insurance contract requires that the principle of utmost good faith should be
preserved by both the parties to the contracts, insurer and the insured. The insurer and insured
must be of the same mind at the time of contract because the risk cannot be correctly
measured in its absence. Both the parties must disclose all the material facts affecting risk, to
each other.
 7.6 Life Insurance Nature and Use)

In life insurance following are the material facts:

(i) Name, address and occupation of insured person
(ii) Date of birth
(Hi) Facts about health and habits
(iv) Family history
(v) Plan of insurance
The proposer should disclose not only those matters which he may feel are material - a
all the facts which are material. The insurer should also disclose the material facts which
going to influence the decision of the proposer, whether they apply or not for insurance.
The duty of disclosure finishes at the moment when the proposal form has been fully anr
correctly fulfilled provided there is no such fact which he considers or expected to >.
considered material and has not been disclosed. In the absence of utmost good faith the
contract would be voidable at the option of the person who suffered loss due to nor-
disclosure.

F a cts n o t required to be d isc lo se d

The non-disqlosure of following facts do not affect the validity of the policy :
(i) The disclosure in regard to universal facts.
(ii) The facts which are superfluous to disclose by reason of any condition.
(iii) The facts which reduce the risk of the insurer.
(iv) The facts which are marked by the insurer
(v) The facts which are known to the insurer in the ordinary course of the business.

| 4. WARRANTIES
Representation. The representations which are contained by the policies and expressly or
implicitly forming the part of the contract are known as warranties. The representation mear.-
any information which a person gives to the insurer during negotiations for effecting
insurance contract. A warranty may also be stated as a stipulation which is collateral to the
main purpose of the contract. Warranties are the basis of the contract between the propose:
and insurer. In case any statement, whether material or non-material, is untrue the contrac:
shall be null and void and the premium paid by him may be forfeited by the insurer
Warranties may be informative and promissory.
(i) Informative Warranties. In life insurance information warranties are more important
The proposer is required to disclose all the material facts to the best of his knowledge anc
belief.
(ii) Promissory warranties. Future warranties may only be the statements about his
 r<jrance Nature and Uses 7.7

ion or intention. For example, the proposer may say that he will not take up any
js occupation and will inform the insurer if he does so.

i i Breach of Warranty. In case of breach of warranty, the insurer is not bound to

his part of the contract unless he chooses to ignore it. The breach of warranty is to
^ _ r the contract voidable at the option of the other party provided there is no element of
The contract will be void in case of fraudulent representation.

\ PROXIMATE CAUSE
The efficient or effective cause which causes the loss is called Proximate cause. It is the
H i xnd actual cause of loss. If the cause of loss is insured then insurer will pay the claim,
iiMCe-.' ise the claim will not be met.
The principle of causa proxima or proximate cause does not apply in case of life
kirance contracts. In these cases the insurance company pays the claim irrespective of the
Lese of death. The cause may be natural or unnatural but the insurer is bound to pay the
iL ~ in case of death of the insured.
The doctrine of proximate cause is not applicable in life insurance cases except the
■ttlrwing cases.
i) War risk. Where policy is issued on exclusion of war and aviation risks, the
|p" \imate cause of death is important. The insurer can waive its liability if death occurs while
lie insured was in field or is engaged in operation of war and aviation. Only premium paid or
■^-render value which is higher is payable and the total policy amount is not payable.
(ii) Suicide. If the insured commits suicide within one year of taking the insurance
prdey, or there was intention to commit suicide, then payment of policy would be restricted,
jr upto the interest of the third party in the policy provided the interest was expressed at
east one month before the suicide.
(iii) Accident benefit. A problem arises when an insured under the accident policy is
tilled or suffers an injury which has an immediate cause and also a remote cause. In accident
'enefit policy, the amount of claim is double the amount of policy. So the cause of death in
n s case is important.

| 6. ASSIGNMENT AND NOMINATION

A life insurance policy can be assigned freely for a legal consideration or love and
iffection. The assignment will be complete only on the executions of such endorsement either
n the party itself or by a separate deed. The notice of assignment must be given to the
nsurer who will acknowledge the assignment. Once the assignment is completed it cannot be
-evoked by the assignor because he ceases to be the owner of the policy. The assigner will
receive the amount of the policy on its maturity or on the death of the insured. Life policies
| 7.8 | Life Insurance Nature or<:

are the only policies which can be assigned whether the assigner has an insurable ir/.r-:
not.
The holder of a life insurance policy on his own life may either at the time of afi s a
policy or at any subsequent time before the policy matures, nominates the person or -
to whom the money of the policy will be paid in the event of his death. A nomination zm
cancelled before maturity but a notice must be given to the insurer.

| 7. RETURN OF PREMIUM
Generally, the premium paid is not returned but in following cases premium : _.
returnable :
(i) For reason of equity. Equity implies a condition that the insurer shall not rece. ;
price of running a risk he runs. Thus the contract does not come into effect in this case :r
held to be void ab into.
(ii) By agreement in the policy. The insured may pay full premium while effecta(
insurance, but it may be agreed to return it wholly or partially on the happening of ce—juii
events.

| 8. OTHER FEATURES
Life insurance policies have the following additional features :
(i) Aleatory contract. Aleatory contract means contract depends on chance. It. :n
insurance contract the full amount of policy is payable even if all the premium has not
paid. Thus, in the event of death, higher amount is payable.
(ii) Unilateral contract. Life insurance contract is a unilateral contract because
insurer makes an enforceable promise. The proposer has already performed his duty nl
payment of premium. If the first premium is paid, the insurer is bound to accept in
subsequent premiums and to pay the amount of claim when it arises except in case of frauc
(iii) Conditional contract. This is a conditional contract because the insurer shall pay
assured sum only when the contract is continuing by payment of premium. The paymeni »
policy amount is also conditional on the submitting of proof of death of the insured.
(iv) Contract of adhesion. It means that the terms of the contract are not arrived r
mutual negotiations between the parties as is done in other contracts. The proposer is not ::
position to bargain because the terms are already determined.
(v) Indemnity contract is not applied. The indemnity contract is not applicable in ca<
of life insurance contracts because the value of life cannot be measured in terms of monetr
 Insurance Nature and Uses 7.9

value. It is not possible to ascertain the time upto which the insured would have survived and
if is also difficult to ascertain how much money he would have earned during his life time.
The doctrine of subrogation is also not applicable in life insurance contract.

^ R E V IE W QUESTIONSp ~
A. SHORT ANSWER TYPE QUESTIONS
1. What is meant by life insurance contract ?
2. Discuss the competency of parties for a contract.
3. What is legal consideration for a contract ?
4. Explain the nature of insurable interest.
5. Name the policies where proof of insurable interest is not required in life insurance.
6. How is good faith essential for a contract ?
7. Explain the meaning of warranties.
8. What is proximate cause ?

B. ESSAY TYPE QUESTIONS

1. Discuss the salient features of an insurance contract.
2. Discuss the conditions of a general contract which are essential for every contract.
3. What is insurable interest ? Why is it essential in a life insurance contract ?
4. Can there be a valid contract without insurable interest ?
5. What are the situations in a life insurance contract when proof of insurable contract is
needed and when it is not needed ?
6. Explain the general rules required for insurable interest.
7. Why is the principle of utmost good faith needed in a life insurance contract ?
8. Discuss the principle of proximate cause and its exception in a life insurance contract.
9. What is nomination in a policy ? Is it essential for a contract ?
10. "The policies are freely assignable in case of life insurance". Discuss.
11. Under what circumstances the premium paid is returnable in life insurance policy ?
12. What is the difference between nomination and assignment? Are they necessary for a
contract ?

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| INTRODUCTION
Insurance is the most essential aspect of risk management. There different types of
insurance policies that deal with different types of risks faced by an individual or an
organisation. There are basically two types of policies i.e. Life Insurance and General
Insurance. It is also known as Life and Non-Life Insurance policies. Different insurance
companies deal in different Life and Non-Life insurance products and policies covering
different risks faced by the other party.

| LIFE INSURANCE
Section 2(11) of the Insurance Act, 1938 defines Life Insurance Business as follows:
"life insurance business" means the business of effecting contracts of insurance upon
human life, including any contract whereby the payment of money is assured on death
(except death by accident only) or the happening of any contingency dependent on human
life, and any contract which is subject to payment of premiums for a term dependent on
human life and shall be deemed to include—
(a) the granting of disability and double or triple indemnity accident benefits, if so
provided in the contract of insurance,
(b) the granting of annuities upon human life; and
(c) the granting of superannuation allowances and annuities payable out of any fund
applicable solely to the relief and maintenance of persons engaged or who have
been engaged in any particular profession, trade or employment or of the
dependents of such persons;
 8.2 In su ran ce P ro d u cts a n d Pricing

This definition is proposed to be amended in the Insurance Law Amendment Bill, 2008 1
where for the words “annuities payable out of any fund”, the words “benefit payable out of
any fund’’ have been substituted;
While under the current Act, health insurance has not been identified as a separate sector,
the Bill proposes to introduce a separate sub-section to define health insurance business as
follows:
(6C) “health insurance business” means the effecting of contracts which provide for
sickness benefits or medical, surgical or hospital expense benefits, whether in-patient or out­
patient on an indemnity, reimbursement, service, prepaid, hospital or other plans basis
including assured benefits, long term care, overseas travel cover and personal accident cover
Given the above, life insurance products can be broadly classified into:
(a) Pure protection plans;
(b) Protection cum savings plans;
(c) Pure savings and pension plans;

| TYPES OF INSURANCE POLICIES

These can be further classified into:
(i) Term insurance & Health Insurance plans
(ii) Whole life plans
(iii) Endowment & Money-back plans
(iv) Unit linked insurance plans (ULIPs)
(v) Variable Insurance plans (VIPs)
(vi) Pension and savings plans
There are many companies dealing in Health insurance only but some life insurance
companies also provide health insurances both as riders to other products and as an individual
health plan. Riders means the insurance company is giving health plan as additional benefit to
the insured while taking another policy.
Pure term insurance and Pension plans are covered under Group insurance •
policies/schemes where the policy is done for number of person as a group. Various
organisations take these policies to cover the life of their employees as a whole. The group is ;
generally of homogenous nature.
IRDA is the authority which issues various guidelines and regulations from time to time
to effectively regulate different types of insurance products sold by different insurance
companies in the market. These regulations provide an effective outline within which all
these policies provide protection to the policy holders. There are three main types of
protection plans. The features of some of them are discussed below:
 ranee P ro d u cts a n d P ricin g 8.3

1. PURE PROTECTION INSURANCE

The first and the most important type of protection is Pure Protection Plan. The main aim
oure protection plan is to give just the protection and cover the risk. If the event occurs
ng insurance policy period, the pure protection plan comes into action and the sum
■ ■ared will become payable.
Pure protection plan can be further classified into:

1 Term Insurance plan

A term insurance plan as the name suggests is a plan which is for a particular period of
:~e. In this policy the premium is generally low. In this, the policy covers only risk and the
i~ount of sum assured is given only on the occurrence of that particular event in that
rarticular policy period. For example Mr. X has taken life insurance cover of 20 years. If Mr
X survives during that period, nothing will be paid to him but if he dies, the family member
nil get insured amount after his death. It is essential that the death takes place during the
reriod of 20 years. Thus it is known as pure protection term plan which will come into action
:oly when event actually takes place.
Since there is only a risk cover, the premiums are usually low and affordable.lt provides
r'nancial security to its members. But there are some policies in which benefit is given to the
ensured even if he/she survives the policy period.
The main income of the insurance company is premium amount paid by the insured.

2. Health Insurance plan

This is another type in which the insured is covered for risk of illness. It is also known as
mediclaim policy. This policy can be taken by individual himself or by the company for his
employees and their family. This type of policy covers the medical expenses incurred on the
msured or his family upto a particular amount. Thus a health insurance plan provides a pure
risk cover if a person is diagnosed of certain identified illness during the term of the policy.
The premium in this policy depends upon the scope of illness covered in the policy and the
amount of insurance. They are also available as riders in group insurance schemes.
Now days, with the increase in the medical expenses and hospitalisation cost, it has
become essential for every person to have medical insurance for himself as well his family.
There are many companies which provide protection in case of critical illness also.
Therefore it is wise to have health cover at every stage of life. Having health insurance cover
can help in solving the problem of finance in case of critical illness. Thus medical insurance
can protect the family from huge debts that they may have to take to overcome this problem.
There are many factors that insurance companies consider while providing this cover to
the individual. For example Age, medical condition of person at the time of taking policy,
amount of insurance cover required. There are many companies that do not provide medical
insurance after a particular age. The insurance company can also get the insured medically
examined before issuing him any policy. Usually health plans are annually renewable pc z
and the cost will increase as the person gets older.
Some of the critical illnesses that are usually covered under a health insurance plan a:
• Blindness
• Stroke
• Major organ transplant
• Multiple Sclerosis
• Paraplegia
• Arota Surgery
• Kidney failure
• Heart attack
• Cancer
• Coma
The list of illnesses may differ from health insurance plan and according to scope
illness covered by these policies.

B. PROTECTION + SAVINGS INSURANCE

The other type of plan is protection cum saving plan. Since Life insurance is usual; J
long term contract and an effective investment opportunity. In Protection cum Saviraa
insurance products, the insurance companies will provide protection to the insured and
give an opportunity to earn on this long term investment. In this plan, the insured will
money even if the event or risk does not occur during the policy period. Thus it will cover :-r
risk during the policy period and as the policy matures, the insured will get money v. :
interest back.
It is more beneficial to the customers as their money is not lost after the policy mature
This policy is generally expensive as compare to the simple pure protection plan.
It generally fulfils long term needs like children’s education and marriage, retirement et.
In such plans, the premium payable is divided into two parts:
• Premium for life coverage - provides financial protection in case of death
• Premium for savings element - which is invested by the insurance company ox
behalf of the policyholders.
The amount thus invested by the company on behalf of the policy holder will earn retu~
which is further transferred to the policy holder after deducting expenses on the due da':
when the policy actually matures.

1. E n d ow m en t In su ran ce
This policy also helps an insured to get protection cum saving plan. In this the insure;
Insurance P ro d u cts a n d P ricin g 1 8.5 |

gets his life covered and after the death of the insured, the sum assured will be paid to his /her
family members. It also offers benefit, if insured survives during the policy period.
Some of the key features of an Endowment insurance plan are -
• A specified amount is paid to insured on maturity of the plan, incase of survival.
• In case of death of the insured, death cover benefit is paid to the nominee/beneficiary
• The amount of insurance premium is invested after deducting expenses. There is a
saving element also.
• This amount is then paid back to the investor on the due date.
• This investment is done for a particular purpose such as education, marriage or
retirement.
• Some insurance companies also allow partial withdrawal or loans against these
policies
• There are different variants under this plan -
• Higher death cover than the maturity benefit
• Maturity benefit is double.the death cover, known as a double endowment
insurance plan

2. W hole o f Life In su ran ce

It is plan for whole life. It is also a kind of term insurance plan but the term is not fixed.
The term spreads to the entire life of the insured. It will continue till the insured survives.
This plan also provides protection cover as well as saving element. The insurance company
also transfer benefit to the insured by declaring bonuses for these plans.
This plan covers the entire life of the insured. On the death of the life insured,
thenominee/beneficiary will get the entire amount of sum assured as well as saving benefit
accumulated during the policy period. This kind of protection is taken to help the daily
members after the death of the insured. In some families, the head of the family is the only
bread earner and after the death of head of family, the survivors have to struggle to earn their
living. This policy can help the family of the insured after the death.
There are policies under this plan where during the individual’s lifetime they can make
partial withdrawals to meet emergency requirements. They can also take loan against these
policies to meet their needs. This loan has to be repaid within a period of policy or it will be
adjusted from the amount to be paid to the nominee or beneficiary.

3 . U n it L inked In su ran ce Plan

A Unit Linked Insurance Plan or ‘ULIP’ is a popular plan but was under criticism
recently. This plan invests a part of the premium in debt and equity instruments of other
company. These investments generate return which is transferred to the insured.
Lm J In su ran ce P ro d u cts a n d Prici -:

The major drawback in this policy is that this investment is linked to market fluctuati :
and the risk arising from that investment is also borne by the insured and not the insurant c
company as in the case of other protection cum saving plan.
This is similar to mutual fund system. A fund is created from a pool of premiums
collected from policyholders and the fund is used to invest in various market instrument
(debt and equity). The Policyholders can select the type of funds (debt or equity) or a mix :
both based on their investment need and risk appetite but generally investors are not aware
the risk attached to the investment and they are depend completely on the guidance
insurance intermediaries.
ULIP policy holders are allotted units and each unit has a net asset value (NAV) that
declared on a daily basis. The NAV varies from one ULIP to another based on mark;
conditions and the fund’s performance.
Features -
• ULIP policy holders can adjust the features in order to get maximum coverage.
• There are different types of ULIP plans based on type of investments.
• It depends upon the risk appetite of investor.
• There are certain charges in ULIP plan as compared to other plans thus making it no-
attractive. These charges such as policy administration charges, premium allocatio-
charges, fund switching charges, mortality charges, and a policy surrender or
withdrawal charge reduces the effective amount of investment.
• Some Insurer also charge "Guarantee Charge" as a percentage of Fund Value for bur­
in minimum guarantee under the policy.
• There is high amount of risk because ULIP plan is related to market risk and an;,
fluctuation in market will affect the returns on ULIP plan.

4 . Variable In su ran ce Plan

Variable life insurance is a permanent life insurance policy is also protection plus
investment plan. It also has an investment component but it is different from other plans. It is
useful for those who want to build cash value. The policy has a cash value account, which is
invested in a number of sub-accounts available in the policy. A sub-account is just like _
mutual fund which a portfolio of investments. The investor can invest in number of sub
accounts. The cash value is linked to these sub accounts. The value may increase with the
increase in the value of sub account and the cash value will fall with the fall in value of sub
account. The value of sub account is linked to the market fluctuations.
The tax benefit makes this kind of investment most appealing. Similar to mutual funds
and other types of investments, a variable life insurance policy must be presented with a
prospectus detailing all policy charges, fees and sub-account expenses.
Insurance P ro d u cts a n d P ricin g \ 8.7 |

C. PURE SAVINGS AND PENSIONS

These plans have more of saving element as compared to protection element. Pure
savings and Pension plans address the risk of living too long. With the increase in life span, it
is essential that every individual must have enough money to meet their financial needs after
retirement, when they will stop earning and get dependent.
These retirement and saving plans helps in meeting the future uncertainties of life. In the
Indian context, with the growth of the Indian economy, the nuclear family system is fast
spreading and therefore old aged parents are left to fend for themselves. In order to mitigate
the risk of not being able to meet financial needs during such old age, the savings and pension
plans are effective tools.
There are two possible phases for an annuity:
• The accumulation phase in which the annuitant deposits money into an account
either lump sum or regular series of deposits, and ;
• The distribution phase is one which starts after the accumulation or collection phase
ends. In this phase the distribution of income starts until the death of annuitants.
It is possible to have an annuity contract in which there is only one phase that is
distribution phase. Such a contract is called an immediate annuity.
Thus these annuity plans when combined with the retirement saving plan helps in
retirement planning. In the annuitant will pay till particular age and then stops making any
deposits but start getting regular income (yearly, monthly) as per the policy documents until
die death of annuitant.
Some of the types of immediate annuities available in the market are:
• Life Annuity
• Life Annuity with returns
• Joint Life Annuity
• Guaranteed Annuity
• Increasing Annuity

| NON-CONVENTIONAL POLICIES
In order to meet the requirements of people, LIC has introduced several non-conventional
policies. The conventional policies have the main attributes of protection at early death or
living too long, but most of the people are interested in investment. LIC has devised policies
:o meet these requirements.
Some of these policies are as follows :
(i) Policies under LIC Mutual Fund
Cm ] In su ran ce P ro d u cts a n d P r ic i'i

(ii) Jeevan Akshay

(iii) Jeevan Dhara
(iv) Jeevan Kishore
(v) Jeevan Chhaya
These policy are discussed as follows :
(i) Policies under LIC Mutual Fund. Life Insurance Corporation launched a mutua
fund in June 1989 with a promise to the investors to provide high returns alongwith safe'
and security of investment. The fund came out with five schemes which provide spec:,
benefits to various sections of society. Out of those 5 schemes, 3 are close ended schemr
viz, Dhanshree 1989, Dhan 80 CC (1) and Dhanvarsha while the other two viz, Dhanraks:
1989 and Dhanavridhi 1989 are open ended schemes.
LIC Mutual Fund raised nearly ? 375 crores in the very first year of operation from 1
lakh investors. The other schemes of the mutual fund were also well received by
investors. The fund declared a dividend for 1989-90 which was higher than the promi
under the scheme. For example, a rate of 12% was promised under Dhanashree — 1989
the dividend declared was 13.5%.
LIC Mutual Fund was set up as a separate trust by LIC and the main aim is to mop
savings of people from rural and semi-urban areas by providing good returns, liqudity an.
security to the investors. LIC Mutual Fund has already launched seven schemes which ar:
primarily income and growth oriented. There are demands for starting an income and grow
oriented scheme which should be available on tap so that investors can invest in the scherrc
depending upon their liquid position and convenience.
(ii) Jeevan Akshay. It is a pension plan which guarantees payments on a monthly ba>
during the life time of the policy purchases. On the death of the pensioner, the origin,
amount invested by the employer alongwith an additional bonus will be returned to tht
nominee or his legal heirs. Only the persons at the age of 50 years and above are eligible f<
this scheme. There is no restriction as regards maximum age at entry. The minimum amoui
to be invested (premium) is ? 10,000 and in multiples of ? 100 thereafter. For every ? 10,0f»
purchase price, pension payable would be ? 100 per month. Post-dated monthly cheques ar-.
sent in advance for the whole year and cheques are payable at par on all branches of centra,
bank of India and other notified banks. The scheme is quite rewarding and the annual retun
works out to nearly 12.7 per cent.
(iii) Jeevan Dhara. This is also a pension plan where payment of annuities in respect cf
policies has to start one month after the completion of the determination period. Unde-
Jeevan Dhara plan, the premium paying term is one year less than the deferment period. Fcr
example if the policy is for 20 years then the premium will be payable in 19 years instead d

i
-iu ra n c e P ro d u cts a n d P ricin g 8.9

. ears. Since the records of the scheme are centralised at zonal office, there will be delay in
•ment of annuities. Under this plan, the premium can be paid yearly, half-yearly or salary
ings scheme. A rebate 1.5 of tabular premium is allowed if the mode of payment of
mium is yearly.
(iv) Jeevan Kishore. This is a deferred assurance plan devised for children. As per the
visions of the policy, risk commences either two years from the date of commencement,
from the policy anniversary following immediately after the completion of 7 years of age,
chever is later. This policy allows the participation in bonus from the very date of
encement of policy. The plan is meant for the welfare of small children.
(v) Jeevan Chhaya. The policy was introduced in March, 1991. It is a combination of
van Mitra and Money Back plan. The premium in this plan is payable during the life time
;he insured and ceases on the death of the insured or on the expiry of the policy, whichever
earlier.
After the nationalisation of insurance business by Government of India in mid-fifties, the
e Insurance Corporation of India (LIC) enjoyed monopoly over the life insurance business
the advent of 21st century. Under the Act, it has enjoyed various types of policies.
A typical Policy document contains the following :-
(1) Preamble. The preamble states "WHERE AS THE LIFE INSURANCE
RPORATION OF INDIA has received a Proposal and Declaration for Assurance which
posal and Declaration with the Statements contained and referred to therein the proposer
Life Assured named in the Schedule here to has agreed shall be and are hereby declared
be the basis of this Assurance, and has received the first premium for an assurance of the
ount and on the terms stated in the said schedule.
(2) Operative Clause. The mutual obligations of the parties are dealt with in the
rative clause. The assured has to pay premium as stipulated in the policy. In
sideration of this, the insurer undertakes to pay the sum assured on the happening of the
ent at which the amount is payable with profits, if any, at a specified place subject to, the
e of the life assured being found correct and the title of person claiming the money being
ablished so that the benefits are paid to the correct party, legally entitled to receive
vment.
(3) Proviso. The proviso makes the policy subject to the privileges and conditions
hich are printed overleaf. This clause is necessary because signature of the Divisional
icer is on the first page and privileges and conditions follow later.
(4) Schedule. The particulars usually printed in the Schedule are :-
(a) Policy number,
(b) Name, residence, occupation of the life assured,
(c) Date of commencement of insurance,
(d) The sum assured amount, to whom and when payable.
 8.10 In su ran ce P ro d u cts a n d P

(e) The premium amount per annum, how payable i.e. yearly, half-yearly, m
date o f final payment etc.
(f) Date of birth of the life assured.
(g) Class of assurance
(h) Dates of proposal and personal statement.
(i) Special conditions and provisions.
(5) Attestation. Attestation appears at the end of the policy testifying to the insurr
entering into the assurance contract. The policy is signed by the authorised officer of
insurer.
(6) Privileges and conditions. These conditions are discussed below

(A) C o n d itio n s E xp lain in g The Nature O f C on tract And Its Legal

Im p lica tio n s
The first group of conditions is intended for information of the insured. For exam:
there is a clause which states that if the proposer had made any untrue or incorrect staterr.; -
the policy shall be void subject to the provisions of the Insurance Act. Another clause str.- j
that in case premiums are not paid as and when due, the policy shall lapse. Similarly, the:, i
a clause regarding claims which indicates the place where the policy money is payable, x
in the first group of conditions, every information for the insured is given.

(B) C o n d itio n s L im itin g The S co p e O f The A ssu ran ces

Conditions which limit the scope of the assurance are restrictive conditions. Th
restrictive conditions are designed to eliminate certain risks which are not taken into accour
when fixing the premiums. If any such risk is incurred, the assurance is limited to tie
payment of the surrender value or the return of the premiums or some specific proportion
the sum assured.
The risks against which generally restrictive conditions are imposed are :
(i) Suicide ;
(ii) Hazardous occupations.
(iii) Foreign residence and travel.
(iv) War and aviation.

(C) C o n d itio n s A dding To T he B e n e fits O f T he A d d ition al

P rivileges
On a strict interpretation of the contract, premiums are payable when they fall due an:
failure'bf the policy-holder to pay any of the renewal premiums, strictly on the due date
d Pricing Insurance Products and Pricing 8.11

monthly would involve complete forfeiture of the assurance. However, it has been the practice of the
insurer to offer certain concessions to the policy-holder.

C o n d itio n s A dding to th e B e n e fits o f th e A d d ition al P rivileges

(I) Days of Grace. It is a condition that the policy will not lapse if the renewal premium
be paid within 15 days in case of monthly premiums and in all other cases, 30 days or one
calendar month whichever is longer after it becomes due. This means the premium will be
insurer > accepted within days of grace without any charge of interest. If death occurs during the days
er of the of grace and the premiums be unpaid, the claim would be made subject to the deduction of
unpaid renewal premium.
(II) Revival of Lapsed Policies. When a policy lapses, this condition enables the
policy-holder to apply for its revival within 5 years from the due date of the first unpaid
egal
premium. The revival must be effected during the life-time of the life assured. Medical or
other evidence of any alteration of the risk is called for by the Corporation. The overdue
;xample. premiums with interest or revival fee must be paid. Then the Corporation assumes full
atement. liability again. The insured may revive the policy through ordinary revival scheme, special
se state> revival scheme in which the date of commencement will be shifted to a date prior to the date
, there is of revival or through revival by instalment method or with loan-cum-revival scheme.
ble. So.
(III) Non-forfeiture Regulations. This represents a valuable privilege to the policy­
holder in case the premiums could not be paid by him. The basic principle underlying this
regulation is to utilize the surrender value to provide reduced life insurance
cover. Corporation offers automatic paid up benefits under its non-forfeiture regulations.
ns. The
account (IV) Surrender Value. The Surrender value of the policy is stated in the policy
1 to the document. It is 30% of all the premium paid excluding the first year's and all etc. premiums
rtion or for single premium policies guaranteed surrender value is 90% of the single premium. But
more liberal surrender value than this amount is offered.
(V) Loans. Availability of loan on the security of the policy is an important privilege to
the policy-holder. It provides ready money in times of emergency, business need etc. Loans
are generally granted upto 90% of the surrender value and 85% for reduced paid up
policies. The rate of interest currently charged is 10.5% per annum payable half-yearly.

| (A) ACCIDENTAL BENEFIT

Accident Benefit provides for payment of an additional benefit equal to the sum assured
in instalments on permanent total disability and also waiver of subsequent premiums payable
under the policy. In case of a policy to be entitled to this additional benefit (a) it must be in
ue anc
force for full sum assured (b) before the expiry of the period for which premium is payable
e date.
or (c) before the policy anniversary on which the life assured is 65, whichever is earlier
 8.12 In s u ra n c e P ro d u cts a n d Pricing

(d) if assured meets an accident resulting in either permanent disability or death (e) the same)
is proved to the satisfaction of the Corporation.

| (B) DISABILITY BENEFIT

This benefit will not be granted on the first ? 20,000 of assurance on any male or female I
life. No extra premium is payable and this benefit, unless explicitly excluded, as a rule is
available to all policy-holders. In the event of permanent and total disablement through
accident, the payment of future premiums is waived. Disablement is of such a nature that the
life assured is wholly disabled by bodily injury and he is permanently and continuoush
unable to engage himself in any work for example
(1) Loss of sight of both eyes (2) Amputation of both hands or feet.
The disability benefit is applicable only when such disability occurs before the police
anniversary or satisfactory proof of disability must be furnished within 90 days of its
occurrence. This benefit is specially excluded in the case of those persons engaged in certain
harzardous occupations.
Extended Disability Benefits. This is another form of disability benefit where in
addition to the waiver of future premiums, Corporation will pay in monthly Installments
spread over ten years an additional sum equal to the sum assured, if the policy becomes a
claim before the expiry of ten years period.
The extended Disability benefit is available only to those who avail of Double Accident
Benefit.

| (C) DOUBLE ACCIDENT BENEFIT

This provides for payment of double the sum assured on death by accident at an annual
extra premium of ? 1.00 per thousand of sum assured.
The following conditions apply
(1) The benefit is given on satisfactory proof being given to the corporation to show
that death of the life assured resulted directly from bodily injury sustained through
(i) accident, (ii) violence, (iii) visible (iv) external means and such death
occurred within 90 days after sustaining such accidental injury.
(2) This benefit is not granted to (i) persons following hazardous occupation
(ii) certain categories of substandard lives with physical impairment such as loss of
one eye or deaf in one ear (iii) female lives except certain categories and
(iv) students.
(3) The additional benefit ceases when the premiums cease.
(4) Maximum accidental benefit, allowed on one life under One or more policies is
limited to ? 1,00,000.
 P ro d u cts a n d P ricin g 8.13

5 This benefit is granted by the corporation under most of its plans.

- Additional benefit is not payable if the death of the assured is caused by certain
causes or exclusions. Examples are suicide, insanity, aviation, commotion or any
breach of law.
") The extra premiums payable till the date of last payment of premium under the
policy or till the policy anniversary on which the life assured will be 65 years nearer
birthday, whichever is earlier.

PRICING OF LIFE INSURANCE PRODUCTS

We have discussed different types of Life Insurance products. These Life insurance
ar ducts are designed by the insurance company in order to meet the requirement of the
beoeral public at large.

The insurance company will have to look into several factors like profitability,
rorketability, competitiveness, financial requirements, sensitivity of the product, extent of
.r>ss subsidies, administrative systems, service standards, policyholder’s reasonable
: \pectations, demands level of risk, compliance with regulations etc.
The Life insurance contract may vary with the different design. It is the obligation of the
insurance company to pay the amount as the policy matures or as the event occurs, whichever
>earlier for which the insurance policy has been taken.
It is essential on the part of the insurance company to charge premium appropriately and
_dequately in order to meet the obligation at the end of the policy. If less premium is charged,
there will be shortage of funds and if more premium is charged, the policy may not be
competitive in the market. Thus the calculation of the amount of premium has to be
appropriate.
Pricing is done by actuary who evaluates all the factors. It is the responsibility of an
actuary to determine premium rate appropriate to an insurance contract, which is viable on a
long term basis.

P ricing A ssu m p tio n s

According to IRDA regulations, “Pricing involves various assumptions in order to assess
the real cost of the insurance.” The assumptions themselves give rise to risks which need to
be managed.
Some of the assumptions broadly are:
1. Demographic assumptions
2. Investment return
3. Expenses and commission
4. Inflation of expenses
 In su ran ce P ro d u cts a n d P~

5. Withdrawals
6. Bonus (for Participating Policy Contracts)
7. Profit and other contingency margins
The considerations involved in making various assumptions are covered in the follov
sections.

D em ograp hic a ssu m p tio n s

1. Generally, this heading covers:
Mortality rates
• Morbidity rates (accident, disability, critical illness rates)
The values assigned to these rates reflect the expected future experience of the li
who will take out the contract being priced. These rates would be derived
analyzing a life insurer's own experience or industry experience or reinsi
experience. The rates vary according to the age and gender of the insured. Furth
differentials could arise on account of occupation, geographical location, habits (er
smoking) and race.
3. Rate may differ due to different type of contract such as protection plan r protecti
cum saving plan or pure saving plan.
4. Standard table of rates of mortality (based on the above factors) can be adjuster
according to the factors evaluated above to be used for pricing insurance contracts, j
5. In respect of pension and annuity contracts, age, future improvement in mortal::
rates must be considered before pricing owing to its significant financial impact or
the liabilities.

In v e stm e n t return
1. An insurer has to set up reserves for every contract of insurance in order to meet the
liabilities. Such reserves need to be invested in a prudential manner. Suer
investments can help the insurance company in generating enough return that the\
can meet their expenses also.
2. The investments returns are also affected by taxation rates applicable to the
insurance funds and returns to be made to the insured at the end of the term of the
policy.

E x p en ses and c o m m issio n

1. All the expenses for acquiring the business must be considered before pricing the
insurance product. It will also include the commission paid to the insurance agents
for bringing business to the insurance company in this competitive industry. This
requires an analysis of the company's experience for the type of business written.
rs u ra n c e P ro d u cts a n d P ricin g 8.15

2. Usually, the expenses analyzed fall into categories like expenses related to premium
(eg: commission), the amount of insurance (sum assured) and per contract. There
are many expenses incurred at the time of initiation of the contract and at the
settlement of the contract. The analysis of expense will help in estimating the
different components as above.
A new insurance company can look into industry data or reinsurer data to analyse these
. unponents of expenses

Inflation o f e x p e n se s
It is difficult to predict future value as there is component of inflation that can affect the
actual value. The expenses may change with the time due to inflation. Salary of the staff,
Commission, establishment expenses etc. will change in future due to inflation. Thus the
actuary must consider inflation rate before deciding the price of the product. IT is also
necessary because the insurance companies will have to make payment to the insured in
future say after 20, 30 years etc.
This rate should be consistent with the rate of interest assumed for pricing.

W ithdrawals
Withdrawal means cancellation of policy or surrender of policy before the policy actually
matures. Every policy has the surrender value. This value is decided by the insurance
companies in advance. There is penalty on the part of the insured if they withdraw the policy
or if they fail to make payment of premium to the insurance companies. In this policy will
lapse and the insured will be required to pay penalty or fine to renew the policy. In case of
cancellation of policy, the insurance company will not be required to pay entire amount of the
sum assured. The insured will have to forego a particular amount which is called surrender
value. Withdrawal rates vary byproduct types, distribution channel, economic environment
and the surrender terms (generous or conservative).
In case of conventional With Profits (participating) contract, a bonus loading is required
to be provided in the pricing.

Profit and o th er c o n tin g e n c y m argin s

1. The amount of consideration must also include profit margin because the company
cannot survive without profits.
2. In the same way, provision for contingencies is also required. These levels of profit
margin and contingency margin should also be considered before finalising the
price of the product.
3. The shareholders of a company invest capital in the insurance business expecting a
reasonable rate of return on the investment made. The rate of return expected will
be higher from a risky investment than from a safe investment. Investing in the life
insurance company is riskier than investing in an ideal risk free asset.
 8.16 In su ran ce P ro d u cts a n d Pricing

Therefore the investor will expect a 'risk premium' over a risk free rate of return. The
actuary is required to take into consideration the amount of risk involved in the insurance
policy and add the premium amount as cost in the price of the product.

C o n siste n c y
Certain of the assumptions are inter-related and it is important that assumptions form -
consistency in the rates.

R ider b e n e fits
Rider benefits such as cover for accidental death / disability, critical illness etc are the
extra benefits attached to some insurance policies or group insurance schemes. These rider-
also have a cost and are generally priced on marginal costing basis.

C ertifica tio n
Every insurance company are free to make assumption but these assumptions should be
reasonable and practically possible. The insurance company is responsible for any unrealistic
assumptions.

R eview o f p rem iu m rates

Premium rates need to be reviewed or repriced by considering changes in circumstances
They should determine the value of liabilities and ensure that the premium charged is
adequate or not. If there is deficiency then the actuary should revise the rates. If there are
significant changes, then the actuary must also consider the practical relevance to continue
the policy.

| GENERAL INSURANCE PRODUCTS

General Insurance has been taken up by General Insurance Corporation of India through
its five subsidiaries. Insurance Sector has now been opened to private sector also. The GIC
was established in 1972 as a holding company and general insurance is done by four
* subsidiary companies namely National Insurance Co. Ltd., The New India Assurance Co.
Ltd., the oriental Insurance Co. Ltd. And United India Insurance Co. Ltd. These four
companies have their independent working and the broad policy framework is decided b\
GIC.
General Insurance policies are broadly classified into following categories:
1. Marine Insurance Policies
2. Fire Insurance Policies
3. Motor Insurance Policies
4. Burglary Insurance Policies
ncing
nsurance Products and Pricing 8.17
, The
ranee 5. Personal Accident Policies
6. Rural Insurance Policies

| I. MARINE INSURANCE
> rm

Marine insurance is concerned with overseas trade. International trade involves

■.ransportation of goods from one country to another country by ships. There are many
-angers during the transshipment. The persons who are importing the goods will like to
e the insure the safe arrival of their goods. The shipping company wants the safety of the ship. So
iders marine insurance insures the coverage of all types of risks which occur during the transit.
Marine insurance may be called a contract whereby the insurer undertakes to indemnify
:he insured in a manner and to the extent thereby agreed upon against marine losses.
Marine insurance has two branches :
d be (i) Ocean Marine Insurance
istic
(ii) Inland Marine Insurance.
Ocean marine insurance covers the perils of the sea whereas inland marine insurance is
•elated to the inland risks on the land.
ees. Marine insurance is one of the oldest forms of insurance. It has developed with the
d is expansion of trade. It was started during the middle ages in Italy and then in England. The
are sending of goods by the sea involves many perils ; so it was necessary to get the goods
nue insured. In modem times, marine insurance business is well organised and is carried on
-cientific lines.
Lloyd's Association. This association has played an important role in marine insurance
n England. During the middle of seventeenth century some persons used to assemble in
coffee houses of London and transact marine insurance business. They used to transact
ugh
■•usiness in their own names. One of the coffee houses was owned by Edward Lloyd. For the
IIC
acility of his customers, he started publishing a paper called Lloyd's News in 1696. This
our
caper contained all types information about of the movement of ships. The persons who used
Co.
to assemble in Lloyd's Coffee House formed an association called Lloyd's Association. This
3ur
association provided only the requisite information, but business was contracted by the
by
underwriters in their own names. Anybody interested in entering marine insurance business
could become the member of this association. The member's reputation and financial position
was scrutinised properly. The association earned a great name in marine insurance and is
considered one of the best organisations in the world even today.

S u bject M atters to be Insured

The marine insurance may cover three types of things :
(i) Cargo Insurance. The person who is importing the goods and the person who is
 8.18 Insurance Products and Pric

sending them are interested in the safety of goods durings the sea journey. The goods tc
insured are called 'cargo'. Any loss of goods during journey is indemnified by the insur
company. The goods are generally insured according to their value but some percentage
profit can also be included in the value. The cargo policies may be special, reporting
floating. The special policy is only for one shipment, Reporting or open cargo policy, on
other hand, covers all shipments made by an exporter over a long period of time. The floa‘
policy is just similar to open cargo policy but differs from it only in respect of the methoc
paying the premium. In floating policies the value of the future shipments is estimated
premium is deposited with the company. Later on, actual shipments are compared with
estimates and the premium is adjusted.
(ii) Hull Insurance. When the ship is insured against any type of danger it is called H
Insurance. The ship may be insured for a particular trip or for a particular period.
(iii) Freight Insurance. The shipping company has an interest in freight. The freight m.
be paid in advance or on the arrival of goods. The shipping company will not get freight if
goods are lost during transit. The shipping company may insure the freight to be receiv
which is known as freight insurance.

P rin cip les o f M arine In su ran ce

The principles of all types of insurance are generally the same and they have bee:
discussed earlier, in detail. Some of the principles related to marine insurance are given _
under:
1. Utmost Good Faith. The marine contract is based on utmost good faith on the part
the parties. The burden of this principles is more on the insured than on the underwrit. -
(insurance company). The insured should give full information about the subject to the
insured. He should not withhold any information. If a party does act in good faith, the oth -
party is at liberty to cancel the contract.
2. Insurable Interest. Insurable interest means that the insured should have interest i:
the subject when it is to be insured. He should be benefited by the safe arrival of commodities
and he should be prejudiced by loss or damage of goods. The insured may not have ail
insurable interest at the time of acquiring a marine insurance policy, but he should have .
reasonable interest at the time of loss of damage, otherwise he will not be able to claim
compensation.
3. Indemnity. This principle means that the insured will be compensated only to the
extent of loss suffered. He will not be allowed to earn profit from marine insurance. The
underwriter provides to compensate the insured in cash and not to replace the cargo or the
ship. The money value of the subject-matter is decided at the time of taking up the policy.
Sometimes the value is calculated at the time of loss also.
There is one exception to the principle of indemnity in marine insurance. Some profit
Insurance Products and Pricing 8.19

margin is also allowed to be included in the value of the goods. The assumption is that the
insured will earn profit when goods reach at their destination.
4. Causa Proxima. This is a Latin word which means the nearest or proximate cause. It
helps in deciding the actual cause of loss when a number of causes have contributed to the
loss. The immediate cause of loss should be determined to fix the responsibility of the
insurer. The remote cause for loss is not important in determining the liability. If the
proximate cause is insured against, the insurer will indemnify the loss.

| MARINE INSURANCE POLICY

A marine insurance policy generally contains the following information :
(i) Name of insured or his agent
(ii) Subject matter insured. It may be ship, cargo and freight
(iii) Risks insured against
(iv) Name of vessel and offices.
(v) Description of Voyage or period of insurance.
(vi) Amount and term of insurance.
(vii) Premium.

K inds o f M arine P o licie s

There are a number of marine insurance policies to cover varied risks. The important
policies are discussed below :
1. Voyage Policy. It covers the risk from the port of departure upto the port of
arrival. The policy ends when the ship reaches the port of arrival. This type of policy is
purchased generally for cargo. The risk coverage starts when the ship leaves the port of
departure.
2. Time Policy. This policy is issued for a particular period. All the marine perils
during that period are insured. This type of policy is suitable for full insurance. The ship is
insured for a fixed period irrespective of voyages. This policy is generally issued for one
year. Time policies may sometimes be issued for more than a year or they may be extended
beyond a year to enable a ship to complete a voyage. In India, a time policy is not issued for
more than a year.
3. Mixed Policy. This policy is a mixture of time and voyage policies. A ship may be
insured during a particular voyage for a period, e.g., a ship may be insured between Bombay
and London for one year. These policies are issued to ships operating on a particular route.
4. Valued Policy. Under this policy, the value of the policy is decided at the, time of
contract. The value is written on the face of the policy. In case of loss, the agreed amount
 8.20 Insurance Products and Prici

will be paid. There is no dispute later on for determining the value of compensation,
value of goods includes cost, freight, insurance charges, some margin of profit and o
incidental expenses. The ships are insured in this manner.
5. Unvalued Policy. When the value of insurance policy is not decided at the time
taking up a policy, it is called unvalued policy. The amount of loss is ascertained when a 1.
occurs. At the time of loss or damage the value of the subject- matter is determined, is
finding out the value of goods, freight, insurable charges and some margin of profit is
allowed to the policy in common use.
6. Floating Policy. When a person ships goods regularly in a particular geographic J
area, he will have to purchase a marine policy every time. It involves a lot of time an;
formalities. He purchases a policy for a lump sum amount without mentioning the value of
goods and name of the ship etc. When he sends the goods, a declaration is made about the
particulars of goods and the name of the ship. The insurer will make an entry in the polic%
and the amount of policy will be reduced to that extent. This policy is called an open or .
floating policy. The declaration by the insured is a must. When the total amount of policy :?
reduced, it is called 'fully declared' or 'run off. The underwriter will inform the insured who
will take another policy. The premium is called on the basis of declarations made.
7. Block Policy. Sometimes a policy is issued to cover both land and sea risks. If the
goods are sent by rail or by truck to the port of departure, then it will involve risk on lane
also. One single policy can be issued to cover risks from the point of despatch to the point of
ultimate arrival. This policy is called a Block Policy.
8. Wager Policy. This is a policy held by a person who does not have any insurable
interest in the subject insured. He simply bets or gambles with the underwriter. The police
is not enforced by law. But still underwriters claims under this policy. The wager policy is
also called 'Honour Policy' or 'Policies Proof of Interest' (P.P.I.).
9. Composite Policy. A policy may be undertaken by more than one underwriter. The
obligation of each underwriter is distinctly fixed. This is called a composite policy.
10. Fleet Policy. A policy may be taken up for one ship or for the whole fleet. If it is
taken for each ship, it is called as single vessel policy. When a company purchases one
policy for all its ships, it is called a fleet policy. The insured has an advantage of covering
even old ships at an average rate of premium. This policy is generally a time policy.
11. Port Policy. It covers the risks when a ship is anchored in a port.

C lau ses in a M arine In su ran ce P olicy

A marine insurance policy may have a number of clausses. These clauses may be general
for all types of policies, or may be special to cover certain agreed points. A policy should
cover all types of things so that it may avoid misunderstanding or avoid disputes at a later
stage. Some of the clauses covered in a marine insurance policy are given as under :
Insurance Products and Pricing 8.21

1. Valuation Clause. The value of the subject is given in the clause. The value is
agreed upon between both the parties. In case of loss or damage the compensation will not
exceed the amount given in the policy. If the value of the policy is to be decided at the time
of loss, then this column is left blank.
2. 'At and From' Clause. This clause refers to the time when risk commences.
According to this clause the risk coverage starts when the ship is lying at the port of its
departure and from the time it leaves the port. If insurance policy states the words, 'at and
from Madras', it means the risk is covered when the ship is at Madras port and also when it
leaves this port. This clause applies to Hull and Freight Insurance.
3. Sue and Labour Clause. This clause enables the insured and the insurer in trying to
save the subject-matter of insurance from any type of loss. If the insured spends some money
in an attempt to save the goods from an impending loss, he can recover this amount from the
insurer. The act of saving the subject- matter or minimising loss does not amount to
deviation and the contract will not be void.
4. Warehouse to Warehouse Clause. This clause covers the risk from the warehouse
of the shipper or consignor to the warehouse at the destination. If the cargo is to be brought
from the hinterland to the port, one marine policy will cover the risk at land and also at
sea. The risk of taking goods to the port from sender's warehouse to the arrival of goods at
the receiver's warehouse is covered. This clause saves the shipper from lot of troubles and he
is sure of the safe arrival of the subject-matter not only at the port but also at the warehouse.
5. Change of Voyage. The details of the voyage are mentioned in the policy. The parts
of departure and arrival are mentioned in the policy. The route to be followed by the ship is
also given. In case of any deviation, the insurer will be relieved of his liability. If the ship
changes its original route and follows same route later on, it will be taken as deviation. The
insurer will not be liable to indemnify the loss if the original route is changed.
6. Touch and Stay Clause. The ship should go and stay only at those ports which are
mentioned in the policy. In case the ports are not mentioned, then the ship should take the
customary route and stay at the ports coming on that route only. If the ship goes to any other
port, it will amount to deviation. The calling at ports must be for justifiable reasons.
7. Inchmaree Clause. Under this clause any loss caused by the negligence of the master
or a crew member is also covered. The damage caused to the cargo in loading and unloading
operations is also recoverable.
This clause was inserted after a famous case involving a ship named 'Inchmare' in
1857. This ship was damaged by the negligence of the crew and the insured could not get the
claim for damaged because it was not covered under the 'perils of the sea'. Later on,
underwriters included this clause in Marine Insurance.
8. Jettison. It means throwing off certain cargo in order to lighten the load on a ship in
emergency situations. It is necessitated to avoid a marine peril. The jettisoning must be done
 I

8.22 Insurance Products and Prici

deliberately. The load to be thrown off is left to the master of the ship. The loss caused r
jettisoning is covered under general clause.
9. Memorandum Clause. Sometimes perishable goods are the subject-matter
insurance. The memorandum clause is used to save the insurer from paying small losses :>
perishable goods. Under this clause the insurer is not liable for partial losses. In certa_•
commodities this loss is allowed upto 50%. However, if there is a general loss or the ship
stranded, the insurer will be liable to pay the loss.

| MARINE LOSSES
Marine losses arise due to various parts. Marine insurance policy does not cover all the
parts being faced. An insurer specifies the policy against which the loss will be compensatec
If a peril causing a loss was not covered in the policy then the insured will have to bear the
loss.

| MARINE PERILS
Marine perils means perils consequent on or incidental to navigation of the sea. Some of
the perils are described as follows :
1. Perils of Sea. Under perils of sea, ordinary action of the winds and waves, ordinan
wear and tear to the vessel, inherent risk of the cargo are not included. Perils of sea refers to
fortuitous accidents or casualties of the sea.
2. Fire. Damage resulting from fire and smoke is included under fire peril. The water
used for extinguishing the fire may also damage the cargo so it is also include under fire peril.
The damage due to spontaneous combustion may be maritime peril and be insured against.
3. Enemies. The ships belonging to the foe (family) may cause loss to the insured and is
re-underwritten by the marine policy. This policy extends to all the persons of the enemy
country and to their hostile acts provided such acts form part of the enemy actions.
4. Jettison. Jettison means voluntary throwing away a part of the cargo or an equipment
of the ship for lightning the weight of the ship for common safety. Accidental falling of
things not constitute jettison.
5. Barratry. Barratry includes every wrongful act willfully committed by the master or
the crew. This act must be committed without the knowledge of the owner. The theft, setting
of fire to ship, fraudulent selling of vessel and cargo without the coninvance of the ship
owner are some of the examples of the barratry. The insurer is liable for losses of barratry.
6. Man-of-War. This is the vessel which is authorised by nations for the purpose of
defence or attack in the event of hostilities. Any damage to the goods or ships arising out of
collision against on man-of-war is insurable.

1
Insurance Products and Pricing 8.23

| CLASSIFICATION OF MARINE LOSSES

Marine losses may be divided into the following categories :

MARINE LOSSES
4
r 1
TOTAL LOSS PARTIAL LOSS
1 4
r~ 4
ACTUAL CONSTRUCTIVE PARTICULAR GENERAL
TOTAL TOTAL AVERAGE AVERAGE
LOSS LOSS LOSS LOSS

A. T otal L oss
Total loss is divided into two categories :
1. Actual Total Loss. Actual total loss occurs under the following situations :
(a) The subject-matter is completely destroyed.
(b) The goods are so damaged that they cease to be a thing of the kind which were
insured.
(c) The insured is deprived of the subject-matter.
When a ship is sunk or is completely destroyed by fire, it will be a case of actual total
loss. There may be a case when the goods are so damaged that they do not look like goods
which were insured e.g. if crockery is reduced to pieces, it is a case of actual total loss. In
another case if the insured is not able to get the things back i.e., if the ship is missing and
there is no trace of it, it is also a caseof actual total loss. In case of actual total loss the insured
is entitled to recover full amount of loss. When the insured has been compensated the title of
goods passes on to the insurer. If some amount is received from the sale of damaged goods,
the amount will goto the insurer and not be the insured.
2. Constructive Total Loss. This occurs when the ship is abandoned for certain reasons.
It is not commercially viable to retrieve the ship or cargo. The ship or the cargo is not wholly
destroyed but it is not particable to get it repaired and restore it to its original position. When
a ship is badly damaged and the cost of repairs is expected to be more than the value of the
ship, it will be advisable to abandon the ship. In the same way if the cargo is safe in the
abandoned ship but the cost of bringing the cargo to the coast is more than the cost of cargo,
then, it will be proper to leave the cargo.
In case of constructive total loss, the insured gives a notice of abandonment and
surrenders its interest in the subject matter to the insurer. The insured can claim damage for
total loss.
 8.24 Insurance Products and Pricing

B. Partial L oss
When the subject-matter is partially damaged, it will be a case of partial loss. It is of tw.
types:
1. Particular Average Loss. A particular average loss has been defined as, "a partial los'
of subject-matter insured, caused by a peril insured against, and which is not general average
loss." A particular average loss is not caused voluntarily. The insured subject-matter should
be damaged and this damage should be caused by marine peril which is insured.
2. General Average Loss. A general average loss is caused voluntarily to avoid an
impending danger. "A general average loss is one which is caused by an extra-ordinan
sacrifice or expenditure voluntarily and reasonably made or incurred under fortuitous
circumstances, for the sole purpose of preserving the common interest from an impending
peril."
If a ship is sinking because of overload, some of the cargo may be thrown out of the ship
with a purpose to save the ship and the crew. It will be a case of general average loss.
Some conditions are to be satisfied before deciding about a general average loss :
(a) There must be an extra-ordinary situation.
(b) The peril must be real and not imaginary.
(c) The loss must be voluntary and deliberate.
(d) The sacrifice must be made prudently.
(e) The purpose should be to save the whole adventure.
(f) The act should be successful at least partially.

| PAYMENT OF CLAIMS UNDER MARINE INSURANCE

Under marine insurance a claim is payable only when actual loss occurs due to the peril
insured under policy. It loss does not occur, no payment would be made to the insured. For
making a claim under marine insurance, following steps are taken.
1. Evidence. Before admitting a claim, relevant evidence in connection with the policy is
required. In marine insurance, a policy is issued on mutual understanding and good faith of
both the parties. At the time of claim, the insurer should satisfy himself on the information
furnished by the insured. At the time of evidence, the value of subject matter, nature of the
subject matter, warranties, insurable interest etc. are some of the matters to be considered.
2. Notice of claim. The receipt of notice by the insure does not mean that the claim is
admitted or liability is acknowledge. The damage notice must be given prior to survey by
insurer's representative and the survey report signed by him.
3. Documents Required for Claim. Following documents are required at the time of
claim :
Insurance Products and Pricing 8.25

(i) Policy or certificate of insurance

(ii) Bill of lading
(iii) Invoice or bill stating terms and conditions of sale.
(iv) Copy of protest the master of the ship notes 'protest' before a counsel or notary in
the event of accident or stranding of the ship.
(v) Certificate of survey.
(vi) Account sales or Bill of sale. The difference between gross value and sale proceeds
is accepted as the amount of loss.
(vii) Letter of subrogation. It gives powers to underwriters to sue and recover
compensation from third parties where the same is due.
4. Extent of Liability. The insured can recover from the underwriter a loss to the extent
of the insurable value of the property insured if it was an unvalued policy. In case of valued
policy, the assured can recover the loss to the full extent of the value fixed by the policy.

| II. FIRE INSURANCE

Fire insurance was started after marine insurance. Marine insurance was useful only to
person engaged in some kind of trade. The fire havoc can be experienced by persons of all
walks of life. The Great Fire of London in 1956 destroyed 1300 houses in four days. This
'Great Fire' gave birth to fire insurance. Fire Insurance is a contract to indemnify the loss
suffered by the insured. This contract does not help in controlling or preventing fire but it is a
promise to compensate the loss.
V-
A fire insurance is an agreement between two parties i.e., insurer and insured, whereby
insurer undertakes to indemnify the loss suffered by the insured in consideration for his
(insured) paying of certain sum called 'premium'.
A fire insurance contract may be defined as 'an agreement' whereby one party in return
for a consideration undertakes to indemnify the other party against financial loss which the
latter may sustain by reason of certain subject-matter being damaged or destroyed by fire or
other defined perils upto an agreed amount.
The term 'fire' must satisfy two conditions :
(a) There must be actual fire or ignition ;
(b) The fire should be accidental. The property must be damaged or burnt by fire. If the
property is damaged by heat or smoke without ignition it will not be covered under
the word 'fire'.

E lem e n ts o f Fire In su ran ce C on tract

Fire insurance contract has the following elements :
 8.26 Insurance Products and Prici

(a) Proposal. The proposal for fire insurance contract can be made either verbally or nj
writing. The description of the property to be insured is given. In actual practice, there
printed forms available with insurance companies for making a proposal for fire insurar.:
The information required include types of property value of properties, construction
occupations, etc. The assured must disclose all material facts and should observe utmost goon
faith.
(b) Acceptance. The insurer will assess the risk on receipt of proposal. When the subjen-
matter is of larger magnitude and where the hazard involved is of a variable unknown natu:-_
the insurer may send his surcharge to assess the proverty. The insured is required to subir.r
certificate from some known and respectable person about honesty and integrity. The insure:
is informed when the proposal is accepted.
(c) Commencement of Risk. The risk commences irrespective of the fact that no pol:.
has been issued and no premium has been paid. Where risks are unknown and tremendous,
the payment of premium will be the basis of the completion of the contract.

P rocedure for Fire In su ran ce

Whenever a person or a business house wants to get its property insured, a proposal for-
is duly filled. The form has columns for information about the property to be insured. T: -.
details of property, its location and contents are given in the proposal. The insured shou :
give correct answers to all the questions in the form. Fire insurance contract is based *
mutual faith. On receipt of the proposal the underwriter assesses the possible loss involved :i
the proposal. The proposal may be accepted on its receipt or a surveyor may be sent to asse-
the proposal. When the underwriter accepts the proposal, the contract comes into existenc;
Sometimes a cover note is issued immediately and the policy is sent later-on. A cover nc;:
binds the insurer to indemnify the risk. The risk coverage starts on the payment of premium.
Generally, a fire insurance policy is issued for one year but it may be periodical
reviewed. The insurance company informs the insured two weeks before the expiry of ire
policy so that it may be renewed. However, two weeks are given as grace period after t:;
expiry of the policy. The insured can get it renewed within the grace period and insurar...:
coverage continues in the mean time. ,
The insured must have insurable interest in the property to be insured both at the time
taking up of the policy and at the time of occurrence of the loss. If the insurable inter;
passes on to another person, the insurance coverage ends unless otherwise the underwr..;
(insurance company) agrees to continue it.

K inds o f Fire In su ran ce P o licie s

There are a number of fire insurance policies to suit different interest. A number
factors are considered before deciding about the kinds of policies to be taken. These facte -
are :
Insurance Products and Pricing 8.27

1. The type of risk involved.

2. The nature of property to be insured.
3. The contents of the property.
4. Occupancy hazards.
5. Exposure hazards.
6. The time element.
The following kinds of policies are generally issued for fire insurance.
1. Valued Policy. In this policy the value of the subject- matter is agreed upon at the
time of taking up the policy. The insurer agrees to pay a pre-determined amount if the
subject- matter is destroyed or damaged by fire. The principle of indemnity is not applicable
to this policy. The agreed value may be more or less than the market value at the time of
loss. These policies are generally issued for those goods or property whose value cannot be
determined after their loss or damage. These goods may include works of art, jewellery,
paintings, etc.
2. Specific Policy. Under this policy the risk is insured for a specific sum. In case of
property, the insurer will pay the loss if it is less than the specified amount. It can be
explained with an example : An insurance policy is taken for ? 50,000 and the value of the
property is ? 80,000. If the property worth ? 40,000 is lost, the insured will get the whole
amount of loss. If the loss is upto ? 50,000, it will be paid in full. In case loss exceeds ?
50,000 say it is ? 60,000 the indemnity will only be upto the amount insured i.e., f 7
50,000. Under this policy the insured is not punished for getting a policy for lesser sum. The
actual value of property is not taken into consideration.
3. Average Policy. If the 'average clause' is applicable to a policy, it is called Average
Policy. Average clause is added to penalise the insured for taking up a policy for a lesser
sum than the value of the property. The compensation payable is proportionately reduced if
the value of policy is less than the value of the property. Suppose a person takes up a fire
insurance policy of ? 20,000 and the value of the property is ? 30,000. If there is a loss of
20,000
property worth ? 50,000 the underwriter pays compensation o f? 10,000 x 15,000
30,000
and not ? 15,000. It discourages the insured to get under-valued policy.
4. Floating Policy. A floating policy is taken up to cover the risk of goods lying at
different places. The goods should belong to the same person and one policy will cover the
risk of all these goods. This policy is useful to those businessmen who are engaged in import
and export of goods and the goods lie in warehouses at different places.
The premium charged is generally the average of the premium that would have been paid,
if specific policies would have been taken for all these goods. Average clause always applies
to these policies.
 8.28 Insurance Products and Prici

5. Comprehensive Policy. A policy may be taken up to cover up all types of riskd

including fire. A policy may be issued to cover risk like fire, explosion, lightning, burglar*,
riots, labour disturbances etc. This is called a comprehensive policy or all risk policy.
6. Consequential Loss Policy. Fire may dislocate work in the factory. Production mu
go down while the fixed expenses continue at the same rate. A policy may be taken up sa
cover up consequential loss or loss of profits. The loss of profits is calculated on the basis cd
loss of sales. A separate policy may be taken up for standing charges also.
7. Replacement Policy. The underwriter provides compensation on the basis of market
price of the property. The amount of compensation is calculated after taking into account thel
amount of depreciation. A replacement policy provides that compensation will be accordir.sl
to the replacement price. The new asset should be similar to the one which has been!
lost. The amount of compensation will depend upon the market price of the new assets s:l
that it is replaced without additional cost to the insured.

P aym en t o f C laim Under Fire In su ran ce

Following steps are taken to meet the claim under fire insurance contract:
1. Information about Loss. On the occurrence of loss, the insured is required to inform
the insurance company at the earliest.
2. Appointment of Assessor. The insurance company appoints an assessor to examir:
the facts of the case and determine the amount of liability. An assessee is a technical person
having the ability and experience in handling claims. The assessor examines the damaged
property and collects all available information.
3. Checking of Documents. The insurer checks the following information for expecting
the claim :
(i) that the policy is in force on the date of occurrence of loss.
(ii) the loss or damage is by a peril insured in the policy.
(iii) The property affected by the loss is the same as insured under the policy.
(iv) Notice of loss is received without undue delay.
After checking the above given information a number is allotted to the claim and is
entered in the register.
4. Issue of Claim Form. A claim form is issued to the policy holder. This form requires
the following information :
(i) Rate of loss, time of loss, place of fire.
(ii) Cause of fire.
(iii) Particulars of the property affected by the loss.
(iv) Statement of other insurances on the property.
Insurance Products and Pricing 8.29

(v) Sound value of all the property.

On the receipt of the claim form and survey report, the claim is processed and, if it is in
order, a discharge voucher is to be signed by the insured.
Before the cheque in settlement of the claim is released, the payment is recorded in the
claims register and the claim docket.

| III. MOTOR INSURANCE

Motor insurance belongs to miscellaneous class of insurance. The business of motor
insurance is so big that every company has a separate department to deal with this category of
insurance. In motor insurance the risks are of two types (i) legal liability for damages for
bodily injuries or damage to property caused to other (ii) damage to or loss of one's own
automobile. Every one who owns an automobile assumes a risk because the property is
subject to damage and the law imposes upon owners responsibility to public. In India first
Motor Vehicle Act was passed in 1939. Under the provisions of this act the owner of the
vehicle is bound to keep a certificate of insurance relating to the vehicle. The claim of
damage may arise due to the loss to the vehicle or its body or parts. This may be caused by
fire, theft, collision, mishandling and other reasons or happenings.

L ia b ilities R equiring C om pulsory In su ran ce

Following liabilities require compulsory insurance under motor insurance ;
(i) Liabilities arising in respect of damage to any property of a third party.
(ii) Liabilities arising in respect of death or body injury of any passenger of a public
service vehicle.
(iii) Any liability arising by the insured in respect of death or bodily injury of any
person including owner of goods or his authorised representative carried in the
carriage.
(iv) Liability arising under Workmen's Compensation Act in respect of death or bodily
injury of paid driver of the vehicle, conductor or ticket examiner, workers carried
in a goods vehicle.
(v) Liability in respect of death or bodily injury of passengers who are carried for hire
or reward or by reason of or in pursuance of contract of employment.

M ain F ea tu res o f M otor In su ran ce

The concept of motor insurance is concentrated around three points :
(a) Motor insurance is obligatory under the provisions of Motor Vehicles Act.
(b) Motor risks may be divided into three categories.
(i) Risk of Property Damage;
I r ■
1 8.30 | Insurance Products and Prict ~c

(ii) Risk of Personal Accident; and

v
(iii) Liability Risks
(c) Motor Vehicles may be divided into three parts with respect to the motor insurar.. t
(i) Private Vehicles
(ii) Commercial Vehicles
(iii) Motor Cycles and two Wheelers.

M otor In su ran ce P o licie s

Motor insurance policies are discussed as follows :
(1) Act Only Policy. As the name suggests this policy is compulsory under Mi ad
Vehicle Act. The owners of vehicles who ply the vehicles in public places must abide r
Motor Vehicle Act. In this policy the risk of injury to third party's body and properr. ■
included here. The amount or policy is fixed by the Act. The Act also compels the insure. *»
cover risk to life and property of the employee engaged in vehicle as driver or attender an;
carried in vehicle. These risks are provided in Workmen's Compensation Act. In India b a
the risks of bodily injury to third party and to employees can be covered under ts
policy. But Act provides for a legal liability of an insured toward third party for injury to hsJ
body and property.
2. Third Party Policy. This policy covers all risks mentioned in Motor vehicle Act art
a few things more. The insurer on behalf of the insured liability pays all sums of liabil:: ,
costs and expenses which insured becomes liable. The policy aims to protect the insured
against liability to others for accidental death or personal injuries caused by his m ow
Vehicle and in addition it also covers the damages caused to the property of the ton!
parties. The insured can cover additional risks of fire and theft by paying additu
premium.
3. Comprehensive Policy. This policy covers all risks to insured arising out of le n t
liability i.e. to third parties under Motor Vehicles Act, Total Accident Act and Common
law. It also covers loss or damage to vehicle. It covers all risks mentioned in form .
provided in private car Tariff. By paying additional premium the loss due to riots, stri».r
theft, larany, loss of rugs and death of injury to family members who are above 16 years d
below 65 years can also be covered.

S e ttle m e n t o f C laim s in M otor In su ran ce

Under motor vehicle insurance following procedure is followed for settlement of clairr.-
1. Receipts of Claim Intimation. As soon as there is a damage under motor insurar..:
an intimation of claim must be filed with insurer. The insured or his nominee can file /:
intimation by mentioning evidence etc. The insurance company checks the main content' rf
the insurance policy.
Insurance Products and Pricing 8.31

2. Entering in Claim Register. After receiving the intimation of claim the insurer checks
the contents of the policy and enters the claim in the register and intimates the number of
claim to the insured.
3. Claim Form. After entering the claim in register, a claim form is sent to the insured
for filling up the required information. It contains name and address of the insured, policy
number, details of loss date and time of the accident, cause and circumstances of accident,
amount claimed etc. In addition, the statement of the driver, his license details, details about
accident, post-mortem report (in case the accident is fatal), medical report of the injury etc.
4. Quantum of Damages. In case of fatal accident, the status of the deceased, monthly
income, contribution to family, relationship with claimout etc. are enquired to fix the
quantum of damages. In case of injury, medical report, extent of disability, medical
expenditure etc. are determined for fixing claims.

| IV. BURGLARY INSURANCE POLICIES

Everybody is exposed to the risks of robbery, theft, dacoities, house-breaking etc. causing
loss to human lives, valuable and other properties of individuals. Lloyd's Association
introduced the burglary acts in which the need for the burglary insurance is considered to be
of vital importance. Under burglary insurance the insurance company agrees to indemnify the
financial losses due to theft, dacrity, burglary, house-breaking etc. during a certain period of
time as may be determined under the contract of insurance. Following types of policies can
be issued under burglary insurance :
1. Private Dwelling Burglary Policy. Burglary insurance policies are provided for
residential buildings. In such policies owner's or occupier's personal belongings, personal
effects, property articles, jewellery, ornaments etc. are secured against the risks of theft,
dacoity, burglary, house breaking, etc. The residential house to be insured should not remain
vacant for more than 60 days in a year. A combined fire and burglary policy may be issued to
cover both the risks.
2. Business Premises Burglary Policy. A business premises burglary policy covers the
following risks :
(a) Personal assets and properties of the insured.
(b) Articles of decorations and display in the business premises.
(c) Goods or property in the contract of bailment, trust, etc.
(d) Valuables and cash kept in the locked safe or security boxes or strong rooms, etc.
(e) Stock in trade lying in the business premises or godowns of the business premises.
Under burglary policy insurance company undertakes to indemnify the losses caused to
the business properties due to the risks involved in theft, burglary, dacoity and house
breaking.
 8.32 Insurance Products and Pricing

3. Policy for Money-in-Transit. Under this policy insurance company agrees tc

indemnify the losses of cash, postal orders, bank drafts, cheques, money orders stamps anc
bills of exchange of the insured while in transit.
4. Legal Opinion. Legal opinion about the case is obtained by the company. If necessan
it may file compromise petition if there is negligence on the part of the driver or he i>
convicted on some charges.
5. Inspection of Claim. After the receipt of claim form, there is an inspection of the
claim through surveyors or investigators to find out the truth in the cases. The causes of
accident or loss, loss to be indemnified by the company, ultimate liability of the insurer are
determined by the investigators. In case of serious accidents, the copy of the FIR.
photographs of the accident, nature of evidence are also investigated.
6. Settlement of Claim. On the basis of report submitted by the surveyor or investigator
the company determines the extent of its liability and the loss is indemnified. In case of
damage of the vehicle in accident the insurance company gets the vehicle repaired from
authorised workshops instead of paying claim in cash to the insured. After getting a
satisfaction report about repair from the insured, the company makes payment to the repairer.
In case the company is to meet partial claim of the repair then the balance amount of the bill
is paid by the insured to the repairer.

C laim s Procedure
All losses under burglary insurance are required to be reported to the police authorities
through formal written complaint. A copy of the FIR needs to be sent to the insurer. The
ensured is required to give immediate intimation of loss to the insurance company. A claim
form is issued by the company after entering the loss in register. After receiving the claim
form, the insurer make a scrutiny of the loss suffered. If the burglary claim is upto ? 2500
then such a claim is settled on the basis of claim form and copy of FIR received from the
insured. If the claim is more than ? 2500 then it is surveyed by an independent surveyor. If
needed, the matter may be got investigated through professional investigator also.

| V. PERSONAL ACCIDENT POLICIES

Personal accident insurance is one of the popular class of miscellaneous insurance and is
a supplement to life insurance. It provides a better protection against death or disability. With
the increasing industrialisation and more use of accident prone machineries, the industrial
have become more frequent. Personal recident policy provides monetary compensation in
case of death or disability resulting from accidental injury as defined in the policy. Generally
these policies are issued for periods of 12 months but it can also be issued for less than 12
months also.
(i) Personal Accident and specified Disease Insurance. In addition to death or
I
 Insurance Products and Pricing 8.33
ricing
disability due to accident, insurance may also provide for benefits for disablement arising out
:es to
of specified diseases. This is done by issuing a personal accident and specified diseases
>s and
insurance policies.
(ii) Medical Benefits and Hospitalisation schemes. Insurance has devised medical
ssary,
benefits and hospitalisation policies which they offer to the employees. Such policies help
he is
employees in reimbursing the medical and hospitability expenses of the employers whenever
they use such services. The employees do not of use their own funds for reimbursing the
if the expenses rather take the advantage of insurance policies.
es of ; -
:r are
HR,
| VI. RURAL INSURANCE POLICIES
Insurance companies are bringing out policies for rural people in meeting growing risks
?ator in their areas.
;e of Some of these policies are as follows :
from
(i) Janta Personal Accident Insurance. The Janta Accident policy is a personal accident
lg a
insurance policy. As the name suggests it is meant for low income groups. This policy covers
lirer.
risks such as death due to accident, permanent total disablement, loss of one eye or one limb,
i bill
loss of two limbs etc the policy is insured for a sum of ? 25,000. The policy can be taken for
a maximum period of 15 years and maximum sum of ? 10 lakhs. The policy involves
minimum formalities to be completed by the parties to the insurance.
ities (ii) Group Personal Accident Insurance. A single group accident policy covering
The homogenous group of person is called group personal accident insurance. Due to increasing
aim interest in the welfare of employees by their employees, this class of insurance came into
aim existence. A firm or association of persons may be given a policy to insurer the members of
500 the group. The benefits are ? 15,000 at the time of death or permanent disability due to
the accident.
•. If (iii) Livestock Insurance. Livestock includes all animals kept for use of profit. Under
the scheme of livestock insurance, the insurance company agrees to indemnify the loss
caused to the owner by the death of livestock. Generally, livestock of 3 to 8 years of age
group are insured but the livestock in the age group of 8 to 10 years may also be insured by
paying little more premium.
l is
ith (iv) Crop Insurance. Crop insurance is a devise under which insurance company agrees
ial to indemnify the loss caused due to the occurrence of uncertain events, to the standing crops
in of farmers. Such a measures proves to be a great boost to the farmers in case of natural
iiy calamities destroying standing crops. The GIC has been entrusted this task of administering
12 policy on behalf of government of India. The insurance charges and claims on respect of
crops insured in any state is shared between the central crop insurance fund and crop
or insurance fund setup by the state government in the ratio of 2 : 1.
 8.34 Insurance Products and Prit

| PROCEDURE FOR GETTING NON-LIFE INSURANCE POLICY

Non-life insurance policy is a contract between the insured and General Insura* I
Corporation of India/any other company. It gives details of the property insured, the pf- J
against which the property is insured and the conditions of insurance.
Since it is a written contract between two parties, it should satisfy the follow tj|
conditions:
(a) Offer and Acceptance
(b) Capacity of the parties to undertake contract
(c) Absence of fraud or misrepresentation
(d) Lawful object
(e) Consideration
1. Who can Insure. Every person cannot take non-life insurance policy. Only the*:
persons who have insurable interest in the subject matter of insurance can obtain this polic\
Following may take up policy :
(a) Absolute owner of property.
(b) Wife can insure property of her husband and vice-versa till such time they are]
living together.
(c) 1/64 th owner of a ship can insure ship upto his interest in the ship.
(d) A person can insure his life as he has unlimited interest in his life.
(e) Somebody may be authorised to take up a policy under some statute.
2. Documents Required for Taking a Policy. An insurance is a written legal evident ,
of contract between insured and the insurance company.
Following documents are required for a non-life policy :
(a) Proposal. It is an offer to take an insurance policy and covering the risks of propert
interest etc. The companies provide printed proposal forms to the customers and these forms
are submitted after filing the columns and duly signed by the insured. This form contain
information required by the insurer.
(b) Cover Note. Cover not is issued after receiving the premium and the risks insured are
being covered after the issue of this note. It is used when negotiations are on or a big risk i
being surveyed by the company or by the surveyor. Whether a policy is issued or not, the
risk coverage starts after the receipt of premium and issue of cover note. It provide*
immediate protection to the insured and contains all necessary particulars, name and address
of the insured, sum insured, cover granted basis of valuation etc.
(c) Certificate of Insurance. This document is used in motor insurance. Motor Vehicle*
Act provides that the motor policy shall have no effect until and unless a certificate of
Insurance Products and Pricing 8.35

insurance is issued in a prescribed format. This certificate contains serial number, registration
number or the vehicle, engine and chassis number, model and make of the vehicle, name and
address of the insured etc. Certificate of insurance is also issued in Marine Cargo policies
under open cover and declaration policies.
(d) Policy. The contract is completed when an offer is followed by unqualified
acceptance. A policy contains details about the description of the subject, exceptions,
conditions, endorsements etc.
3. Warranties. In addition to implied and express conditions, there may be certain
express warranties incorporated in a non-life policy. The warranties may be printed on the
policy or may be attached on a sheet. Warranties may be attached to a policy to ensure that
risk remains the same throughout the period of the policy. Warranties also protect insurers
against introduction of new feature that may increase the risk during the term period of the
policy.
4. Construction of Policies. In order to avoid misunderstanding and disputes the policies
should be framed properly. The intention of both the parties should be clearly incorporated in
the policy. If the intentions of the parties are not clear then courts interpret if later when case
goes to court.
The wordings of the policies are drafted by insurers and the insured should understand
the meaning properly. If typed or handwritten words are given in the policy then these
override the printed matter given in the policy because it shows that both the parties have
agreed to it.
5. Duration of the Contract. Most of the non-life policies are issued for one year. These
policies can be renewed at the end of the year. There can be policies for short period also say
less than a year.
The policies issued for two or more years are called long-term policies. Such policies are
issued for big projects which take more time for completion.
6. Alterations in Non-life Policies. Normally the conditions inserted in the policy are not
altered. There can be an exception if both the parties agree to make an alteration to the policy.
7. Assignment. An assignment is the passing of interest in property or a right from one
person to another when a policy cover specifies property or liability arising from the
possession of such property. A contract cannot grant any profit or impose liability upon a
third party. A third person may take the place of one of the original parties when insured
voluntarily assigns the subject matter of non-life policy by way of sale, mortgage or gift. The
policy remains in force only to the extent to cover the remaining interest of the insured. The
assignment may take place by way of operation of law also. On the death of a person, the
property may pass on to the heirs or to the persons as per the will of the deceased.
8. Termination of Contract. A policy remains in force upto the end of its expiry. But it
may terminate before expiry under circumstances such as ruction of subject matter, breach of
 8.36 Insurance Products and Prictng

conditions, cancellation by material alteration without the consent of insurer by paymen v

total loss, cancellations by mutual consent etc.
9. Refund of Premium. Premium once paid is not refunded by the insurance comp_-w
but it may be refunded in full if the contract ultravires, subject matter is destroyed be: «
contract is concluded, when policy is void and where contract is illegal. A partial prenr j j
may also be refunded under certain circumstances.

[ LIFE INSURANCE VS GENERAL INSURANCE

Insurance is classified into two categories i.e. life Insurance and general or non- c
insurance. Life insurance deals with the insurance of human beings and general insurar
covers marine insurance, fire insurance and other insurance. The nature of insurance is ra;
same in all categories but the payment claims or meeting or liabilities have different criten :
In life insurance, the claim is paid, it is the difference of term when it is paid. The claim
paid either on maturity of policy or death of the policy holder. In general insurance, d is­
may or may not be paid. In case there is a loss of property or goods during the period of ire
policy then the loss is compensated, otherwise not. Both the categories of insurance ma\ >.
distinguished as follows :

D ifferen ce B etw een Life In su ran ce and G eneral In su ran ce

Basis Life Insurance General Insurance
1. Nature of Risk The risk is certain. The amount of policy The risk is not certain. Risk arises onh
has to be paid either on death or on there is loss or damage of happening
maturity of policy, whichever is earlier. certain event. Claim will not arise if the-:
is no loss or damage.
2. Object To Object is to secure future and also to The object is to get security or
make investment. The amount of policy compensation in the event of loss i
is returned with profits. It is a safe damage.
method of investment.
3. Time Period The policy is generally for a longer The policy is gradually for on year, it me
period, say 10 years,, 15 years or for life. be renewed again.
4. Premium The amount of premium is linked to the Premium is fixed as per the nature of riv
age of the insured and period of the involved.
policy.
5. Insurable Interest In life Insurance, insurable interest must In fire insurance,, insurable interest must
exist at the time of acquiring policy. exist at the time of contract and also at the
time of loss but in marine Insurance it mu-'
exist at the time of loss.
6. Compensation A fixed amount of money is paid on loss The loss is compensated in general
of life and the loss is not compensated. insurance. In some cases the amount of
claim may be even more than the loss
because a certain percentage may be added
to the loss.
Insurance Products and Pricing 8.37

7. Surrender of The policy can be surrendered before its General Insurance policies cannot be
Policy maturity. Some money calculated on the surrendered.
basis of certain formula is relumed to the
insured if the policy is surrendered
before maturity.
8. Moral Obligation There is no moral obligation to protect In case of file,, there is an obligation to
the insured. Nobody commits suicide to protect the goods insured. The loss should
get insurance money. be accidential and not international. In
marine insurance,, there is no moral
obligations since goods are on the sea.
9. Payment of The premium is paid in instalments. The amount of premium is paid in lump
Premium sum.

| NATIONALISATION OF GENERAL INSURANCE

There has always been a demand to nationalise insurance industry. From time to time
government has been putting restrictions such as licensing of surveyors, guidelines on
investments, maintenance of statutory accounts, payment of premium in advance before
insurance can be accepted etc. Finally the government nationalised general insurance
business by promulgating an ordinance on 13 May 1971. The General Insurance business
(Nationalisation) Act, 1972 was passed by the Government of India. Under the provisions of
this Act, General Insurance Corporation of India was established for the purpose of directing,
controlling, and carrying on the general insurance business. All the 106, insurers, undertaking
general insurance business were merged into four subsidiaries of the General Insurance
Corporation of India. The subsidiaries are :
(i) The New India Assurance Company Ltd., with head office at Bombay
(ii) National Insurance Company Ltd., head office at Calcutta
(iii) The Oriental Insurance Company Ltd., head office at New Delhi.
(iv) The United India Insurance Company Ltd., head office at Madras.
The objective of those subsidiaries was to ensure the rendering of effective service
throughout India and ensure services through mutual competition.

PRICING GENERAL INSURANCE PRODUCTS (IRDA JOURNAL,

I SE P T .2006)

Pricing is very important whether it is Life Insurance Product or Non Life Insurance
product. It depends upon number of factors which an actuary must consider before deciding
price of a product. The most important factor is Pure Risk Premium. It is the amount of
premium that an insurance company must cover the cost of claims.
In order to compute the risk premium, one has to estimate the future claims distribution.
How many claims can arise in future? The probability of claims arising in future is also one
 I
8.38

of the factors that insurance company must consider before deciding price of the pro•_.;

depends on the frequency and severity distributions of claims which in turn are depender.
several risk factors. Generalised Linear Models (GLMs) and Multivariate Analyses he.:
determining such factors. The higher the risk, the higher is the premium of the product. T
actuary must also consider profits, commission and other expenses in the price of the pc
as discussed above.
Some of the techniques of calculating premium are:
Pure Risk Premium
Add:
Expected Commission
Expected Expenses
Net Reinsurance Costs
Profit
Office Premium (amount paid by policyholder)
The Pricing Flowchart

r y r ■\
Checking Data
Procuring Data Filtering Data Trending Developing Fitting
(If required) Losses Distributions
J

Generally, determination of pure risk premium goes through the above process.

A p proach es to Pricing(IRDA)
There are several ways of pricing general insurance products. They are:
1. Burning Cost Approach. It is historically a property insurance technique, hence the
name. Burning cost is an experience rating approach which can be defined as the average
claim cost per year, per unit of exposure. It is a very simple and widely used method. It
ignores the number of claims.
Burning Cost Premium (BCP) = Total Claims Amount/ Total Exposure to Risk
BCP can also be estimated through an alternative formula:
Expected claim frequency per policy x Expected cost per claim
Average exp osure per policy
\
1 Pricing Insurance Products and Pricing 8.39
product, This approach makes use of simple regressive models, based entirely on historical data.
premium The historical data may be adjusted for inflation, IBNR and so on.
ndent on
This method requires very less data, but sometimes it may prove to be a very crude
; help in method of pricing. The user might find it hard to spot trends.
uct. The
Generally this approach is used to compute pure risk premiums for commercial lines of
e policy
business.
Here the Pure Risk Premium is calculated as follows:
Pure Risk premium = Frequency x Severity
Where,
Frequency = Ultimate Number of Losses/ Exposure Measure
Severity = Ultimate Cost of Losses/Ultimate Number of Losses
2. Frequency - Severity Approach. This method can be used in case of complex product
structures. It helps to a great extent in identifying trends.
However, this approach can't be used in case data is very less.
3. Original Loss Curves Approach. The above mentioned approaches are useful if the
data size is significant. But sometimes there will be need to price products with sparse data
available. Here Original Curves Approach comes in handy.
Here different statistical curves are fitted to the data available. Different fitting methods
like Maximum Likelihood Estimation, Method of Least Squares or Method of Moments can
be applied. While fitting the distribution one needs to be aware of the underlying fitting
algorithm.
The future claims distribution is estimated based on the Statistical characteristics of the
fitted curves.
4. Rating scales. Rating factors are the risk factors that can be used to determine the Pure
Risk premium. The objective behind using rating factors is to categorize policyholders into
homogeneous risk groups, so that premium rates charged to each subgroup are commensurate
with its risk profile. Rating factors should define the risks clearly, verifiable and factual in
:e the nature. These factors also are easy to obtain and record.
erage
R atin g F actors
od. It
1. Rating Factors: Generalised Linear Modelling (GLM) regression by allowing the
linear model to be related to the response variable via a link function and by allowing the
magnitude of the variance of each measurement to be a function of its predicted value.
G£M can be used to model the behaviour of a random variable that is believed to depend
on the values of several other characteristics, e.g., age, sex, vehicle group.
A GLM generally consists of: a distribution for the data, a linear predictor, a link function
I 8.40 | Insurance Products and Pricing

2. Rating Factors: Multivariate Analysis. Multivariate analysis comprises a set

techniques dedicated to the analysis of data sets with more than one variable. The technique
in this category can be minimum bias methods, generalised non-linear models or generally.
additive models.
These techniques generally involve assessing the effect of one factor on aoneway bas;
and then assessing the effect of a second factor having standardized for the effect of the fir>-
factor.
Other Factors Affecting Pricing In addition to the rating factors, there are other factor-
affecting which should be taken into consideration for pricing. They are:
1. Economic Scenario. Pricing must consider the level of economic activity. If the
market is favourable then less premium is charged and if the market is not favourable, higher
premium is charged.
2. Underwriting Cycle. Underwriting cycle is also known as insurance cycle. Insurance
premium can vary from hard to soft and this tendency is called underwriting cycle. Pricing
indicate rates, but the market sets prices.
3. Claims Inflation. Inflation cannot be ignored and thus be considered while deciding
the premium rates. These includes factors like increasing cost of medical treatment, prices o:
auto spare parts, and fresh levy of excise duty on automobiles, etc. impact the claims severity
Thus price must be forward looking.
4. Court Awards. There can be third party claims in which court cases are filed. Hence a
proper pricing should factor in trends in court awards during the policy exposure period.
5. Insurer's business objective. Whether the insurer wants to capture a significant
market share or it wants to focus on profitability.
6. Availability of capital. An insurer's ability to write insurance is limited by the amount
of capital that it holds. If it has a large capital base it would allow it to write riskier products
or larger volumes of business.
7. Availability of reinsurance. While pricing, the insurer may also attempt to allow for
the risk of reinsurer default, availability & cost of reinsurance coverage, risk of failure to
assess the coverage or limit of reinsurance, inability to recover losses from reinsurers etc.
8. Segment mix. Any change in the parameters like region, age, type of business (roll
over, renewed) etc. have different impact on pricing. One needs to capture the changing
trend.
9. Competition in market. Pricing can only indicate the premium, but the market
determines ijt. Competition can take its toll on pricing as well qs profitability of general
insurance products.
nd Pricing
Insurance Products and Pricing | 8.41 l
s a set of
techniques How is P ricing d o n e in d ifferen t p o lic ie s?
eneralised Motor insurance is priced by predicting a certain number and amount of claims in the
future based on exhaustive analysis of prior year trends. In addition to such predictive
modelling, Motor insurance pricing can be made better with demand or policyholder
/ay basis,
behaviour modelling.
f the first
Pricing in Accident and Health accounts for costs involved in medical care, income
protection and workers compensation.
;r factors
Fire insurance pricing takes into account losses to cover property and business
interruption; and is largely based on attritional and large loss models.
If the
Aviation being a closed finite market drives pricing through special models that are based
, higher on total market data.
Marine pricing takes into account special clauses as it plays out in the world-wide
mrance market.
Pricing
Financial insurance pricing has a high correlation with asset risk across underwriting
years and depends on economic scenarios.
ciding Engineering pricing takes into account multi-year exposures and such exposure rating is
ces of expert driven.
ferity. Pricing for General liability is based generally on occurrence basis whereas subclasses
like professional or product liability are often on claims made basis.
nee a It is important to have knowledge of the market, inflation and legal environment when
pricing for this line.
icant For all other lines of business or for lines with limited loss history, pricing is mostly
exposure driven. For example, coverage for travel versus legal expense drives claims
behaviour and the exposure period which in turns defines the pricing. Finally, for large
aunt
industrial risks or for risks where pricing expertise is unavailable, the risk is often ceded to
acts
reinsurers who in turn areexperts in pricing due to writing such lines of business on an
aggregated basis.
for Throughout all areas of general insurance work, be it reserving, pricing or capital
to modeling; actuaries begin with the frequency and severity distributions of claims. In
particular, the estimation of claim distributions allows a pricing actuary to calculate the pure
all “risk premium”, i.e. the amount of premium that is required to exactly cover the expected
cost of claims alone.
ig
I ^ R E V IE W QUESTIONS!
it
a A. SHORT ANSWER TYPE QUESTIONS
1. Explain the meaning of fire insurance?
2. What is life insurance?
8.42 Insurance Products and Pric
3. What are different types of life insurance plans.?
4. What are pricing assumptions in life insurance policies?
5. Explain meaning of marine insurance?
6. Name contents of a general Insurance policy.
7. What is voyage policy?
8. What is meant by total loss?
9. Explain the meaning of personal accident policy.
10. List approaches of calculating Price of General Insurance.

B. LONG ANSWER TYPE QUESTIONS

1. Explain Life Insurance Protection Plans?
2. Explain any two marine policies?
3. Discuss two principles of marine insurance?
4. Discuss the nature of marine insurance. Explain various marine insurance policies?
5. Explain various clauses in a marine insurance contract?
6. Discuss main features of Motor Insurance Policies?
7. Discuss different approaches of Pricing General Insurance Policies?
8. Discuss in detail the pricing of Life Insurance Policies.

<S><$><$><$>
 Insurance Intermediaries
| INTRODUCTION AND MEANING
Insurance is a promise to compensate the insured or third party for a consideration called
premium, on occurrence of an event for which party has insured them against. Generally
insurance is usually done with the help of an insurance intermediary/ agent1 broker. The
insurance intermediary can be an individual or a body corporate.
Insurance intermediaries thus act as a link between the insurer and insured. They
are called agents as they work on behalf of the principal company. These insurance
companies authorize these agents to sell their insurance policies to the customers who want to
get protection.
Insurance brokers/agents are licensed by the IRDA after clearing all the requirements laid
down by IRDA. According to IRDA Regulations, 2002, no one can become insurance agent
without the licence issued by IRDA. IRDA will issue licence only when they are satisfied
with the candidate. This licence thus ensures the authenticity of the broker whether individual
or body corporate. IRDA also lay down the Code of Conduct for the respective
intermediaries.
An intermediary or insurance agent is required to disclose the complete information of
the policy amount, coverage, surrender value and all the terms and conditions of the contract.
It is the duty of the agent to settle the claims that may arise due to contingency.
It is on the trust on the insurance agents that clients enter into contract with insurance
companies. If the customer feel that he or she has been cheated on by the insurance agent by
concealing the important information, then the customer has right to cancel the policy within
stipulated period of time from the date of issue of policy. Generally it is 15 days from the
issue date of policy. After a stipulated period of time clients can go to Insurance ombudsman
created by IRDA to deal with the complaints.
While dealing with insurance intermediaries, the clients must check out the following:
• A client can ask for the licence from these intermediaries. Insurance agents are
 9.2 Insurance Intermediaries

supposed to carry licence with them. This can help in checking the authenticity of the
agent and whether the agents are authorised to deal in these policies or not.
• An insurance intermediary should have complete information on all the insurance
products before dealing with the customers.
• Clients should not come under the influence of insurance agent tactics. They shot.;
identify their needs before taking insurance policies.
• It is the right of the customer to ask as many questions as they want and ensir:
themselves completely before buying their policies. They should not have any dour
in their mind.
• Clients or customers must have complete knowledge of the policy document i.e
insurance value, premium, surrender value etc.
• Insist on quality delivery and timely service.
• The customer must fill the proposal form on its own. They should not sign the
document without reading complete terms and conditions.
• The customer should make any payment to the insurance agents only after ensurin:
that the insurance agent/intermediary is authorised to do so.
• The customer can return the policy if they are not satisfied but only within stipulated
period of time.
• The clients must collect complete information regarding the claim settlement. The;,
must know in advance the entire procedure of claim settlement.
There are different types of policies and umbrella covers available which give, under a
single document, a combination of covers. Such policies not only cover property but also
include certain personal lines or liability covers.
Insurance intermediaries are thus legal entities and individuals who act as a link between
buyer and the seller and helps in concluding contracts.

| TYPES OF INSURANCE INTERMEDIARIES

There are different types of intermediaries which can help both insured and insurer. They
generally act on behalf of the insurance companies and helps in concluding contracts between
both parties. IRDA has given guidelines for these insurance intermediaries. It is essential for
every intermediary to get themselves registered with IRDA to carry out its activities. IRDA
registers only those persons who satisfy the regulations laid down in the code of conduct for
the respective intermediaries.
The insurance intermediaries are required to play an important role right from entering
into the contract to claim setting of the insured. They must not conceal any material
information from the insurer as well as insured and should remain in touch with the insured
party even after sale of the policy.
Insurance Intermediaries 9.3

Some of the types of insurance intermediaries are:

(A) INSURANCE AGENTS

They are individual persons who have been authorised by IRDA to procure business for
the insurance company. They are authorised to deal for one insurance company and their
main aim is to convert the potential customers into actual customers. They have to register
themselves with IRDA to become an insurance agent. These agents get commission on the
sale of policy to the party. They will have to get their licence renewed after a particular
period of time as per regulations of IRDA, 2002

(B) CORPORATE AGENTS

All those agents which are not individual but represents insurance company and helps in
procuring business for the company is called corporate agent. The main difference between
an insurance agent and corporate agents is that insurance agents are individual persons but
corporate agents are not.

R eg u la tion for in su ra n ce a g e n ts (Individual and corp orate agen ts)

(IRDA)

Issu e or R enew al o f L icen ce

(1) A person desiring to obtain or renew a licence (hereinafter referred to as “the
applicant”) to act as an insurance agent or a composite insurance agent shall
proceed as follows:-
(a) the applicant shall make an application to a designated person—
(i) in Form IRDA-Agents-VA, if the applicant is an individual;
(ii) in Form IRDA-Agents-VC, if the applicant is a firm or a company:
Provided that the applicant, who desires to be a composite insurance agent, shall
make two separate applications.
(b) The fees payable by the applicant to the Authority shall be as specified in
Regulation.
(2) The designated person may, on receipt of the application along with the evidence of
payment of fees to the Authority, and on being satisfied that the applicant, —
(i) possesses the qualifications under Regulation;
(ii) possesses the practical training as specified under Regulation;
(iii) has passed the examination as specified under Regulation ;
(iv) has furnished the application complete in all respects;
\TT\ Insurance Intermediaries

(v) has the requisite knowledge to solicit and procure insurance business; and
(vi) is capable of providing the necessary service to the policyholders;
grant or renew, as the case may be, a licence in Form IRDA-Agents-VB, along with
identity card in Form IRDA-Agents-VZ:
Provided that in the case of a corporate agent, the identity card shall be in Forir.
IRDA-Agent-VY.
Provided further that such identity card from one life insurer and such identity care
from one general insurer shall be provided to the applicant seeking licence to act as
a composite insurance agent.
Provided further that in the case of a firm or a company, all of its partners or
directors, as the case may be, shall fulfil the requirements of sub-clauses (i) to (iii).
Provided further a licence issued in accordance with this regulation shall entitle the
applicant to act as insurance agent for one life insurer or one general insurer or
both, as the case may be.
(3) If the designated person refuses to grant or renew a licence under this regulation, he
shall give the reasons therefor to the applicant.

Q u a lifica tio n s o f th e A p plican t

The applicant shall possess the minimum qualification of a pass in 12th Standard or
equivalent examination conducted by any recognised Board/Institution, where the applicar
resides in a place with a population of five thousand or more as per the last census, and a pa- -
in 10th Standard or equivalent examination from a recognised Board/ Institution if the
applicant resides in any other place.

P ractical T raining
(1) The applicant shall have completed from an approved institution, at least, or-
hundred hours’ practical training in life or general insurance business, as the ca-=
may be, which may be spread over three to four weeks, where such applicant
seeking licence for the first time to act as insurance agent.
/ Provided that the applicant shall have completed from an approved institution, a:
least, one hundred fifty hours’ practical training in life and general insurance
business, which may be spread over six to eight weeks, where such applicant .
seeking licence for the first time to act as a composite insurance agent.
(2) Where the applicant, referred to under sub-regulation (1), is—
(a) an Associate/Fellow of the Insurance Institute of India, Mumbai;
(b) ap Associate/Fellow of the Institute of Chartered Accountants of India, New
Delhi;
Insurance Intermediaries 9.5

(c) an Associate/Fellow of the Institute of Costs and Works Accountants of India,

Calcutta;
(d) an Associate/Fellow of the Institute of Company Secretaries of India, New
Delhi;
(e) an Associate/Fellow of the Actuarial Society of India, Mumbai;
(f) a Master of Business Administration of any Institution / University recognised
by any State Government or the Central Government; or
(g) possessing any professional qualification in marketing from any Institution /
University recognised by any State Government or the Central Govemment-
he shall have completed, at least, fifty hours’ practical training from an approved
institution.
Provided that such applicant shall have completed from an approved institution, at
least, seventy hours’ practical training in life and general insurance business, where
such applicant is seeking licence for the first time to act as a composite insurance
agent.
(3) An applicant, who has been granted a licence after the commencement of these
regulations, before seeking renewal of licence to act as an insurance agent, shall
have completed, at least twenty-five hours’ practical training in life or general
insurance business, as the case may be, from an approved institution.
Provided that such applicant before seeking renewal of licence to act as a composite
insurance agent shall have completed from an approved institution, at least, fifty
hours’ practical training in life and general insurance business.

E xam ination
The Applicant shall have passed the pre-recruitment examination in life or general
insurance business, or both, as the case may be, conducted by the Insurance Institute of India,
Mumbai, or any other examination body.
si

Fees Payable
1. The fees payable to the Authority for issue or renewal of licence to act as insurance
agent or a composite insurance agent shall be rupees two hundred and fifty.
2. The additional fees payable to the Authority, under the circumstances mentioned in
sub-section (3) of section 42 of the Act, shall be rupees one hundred.

Code o f C on du ct
(1) Every person holding a licence, shall adhere to the code of conduct specified below :-
(i) Every insurance agent shall, >
(a) identify himself and the insurance company of whom he is an insurance agent;
mu Insurance Intermediaries

(b) disclose his licence to the prospect on demand;

(c) disseminate the requisite information in respect of insurance products offered fo:
sale by his insurer and take into account the needs of the prospect while
recommending a specific insurance plan;
(d) disclose the scales of commission in respect of the insurance product offered for
sale, if asked by the prospect;
(e) indicate the premium to be charged by the insurer for the insurance product offeree
for sale;
(f) explain to the prospect the nature of information required in the proposal form b_\
the insurer, and also the importance of disclosure of material information in the
purchase of an insurance contract;
(g) bring to the notice of the insurer any adverse habits or income inconsistency of the
prospect, in the form of a report (called “Insurance Agent’s Confidential Report"
along with every proposal submitted to the insurer, and any material fact that ma\
adversely affect the underwriting decision of the insurer as regards acceptance of
the proposal, by making all reasonable enquiries about the prospect;
(h) inform promptly the prospect about the acceptance or rejection of the proposal by
the insurer;
(i) 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;
(j) render necessary assistance to the policyholders or claimants or beneficiaries in
complying with the requirements for settlement of claims by the insurer;
(k) advise every individual policyholder to effect nomination or assignment or change
of address or exercise of options, as the case may be, and offer necessary assistance
in this behalf, wherever necessary;
(ii) No insurance agent shall,
(a) solicit or procure insurance business without holding a valid licence;
(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) behave in a discourteous manner with the prospect;
(e) interfere with any proposal introduced by any other insurance agent;
(f) offer different rates, advantages, terms and conditions other than those offered by
his insurer;
(g) demand or receive a share of proceeds from the beneficiary under an insurance
contract;
Insurance Intermediaries | 9.7 |

(h) force a policyholder to terminate the existing policy and to effect a new proposal
from him within three years from the date of such termination;
(i) have, in case of a corporate agent, a portfolio of insurance business under which the
premium is in excess of fifty percent of total premium procured, in any year, from
one person (who is not an individual) or one organisation or one group of
organisations;
(j) apply for fresh licence to act as an insurance agent, if his licence was earlier
cancelled by the designated person, and a period of five years has not elapsed from
the date of such cancellation;
(k) become or remain a director of any insurance company
(iii) 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.
Cancellation of licence. The designated person may cancel a licence of an insurance
agent, if the insurance agent suffers, at any time during the currency of the licence, from any
of the disqualifications mentioned in sub-section (4) of section 42 of the Act, and recover
from him the licence and the identity card issued earlier.
Issue of duplicate licence. The Authority may issue a duplicate licence replace a licence
lost, destroyed, or mutilated on payment a fee of rupees fifty.
Non-application to existing insurance agents. Nothing contained in Regulations 4 to 6
of these Regulations shall apply to the existing agents before the commencement of these
Regulations.

(C) BROKERS
Brokers are different from insurance agents and corporate agents. The brokers can
represent more than one insurance company. They can deal in different policies of different
companies so that he can provide policies to the buyer according to their needs. They can deal
in more than one type of insurance business i.e. life general or both. They also have to apply
to IRDA to get licence. Without licence they cannot represent insurance company.
According to IRDA The term “insurance broker" wherever it appears in these regulations shall
be deemed to mean a direct broker, a reinsurance broker or a composite broker, as the case may
be, unless expressly stated to the contrary;

“person” includes
(i) an individual; or
(ii) a firm; or
(iii) a company formed under the Companies Act, 1956 (1 of 1956); or
Cm ] Insurance Intermediari

(iv) a co-operative society registered under the Co-operative Societies Act, 1912 aJ
under any law for the registration of co-operative societies; or
(v) any other person recognized by the Authority to act as an insurance broker;
(k) "principal officer" means —
(i) proprietor, in the case of a proprietary concern; or
(ii) a partner, in the case of a partnership firm; or
(iii) a director, who is responsible for the activities of the insurance broking in the ca>c
of a body corporate;
(iv) or the chief executive officer appointed exclusively to carryout the functions of
insurance broker;
(l) "regulations" means Insurance Regulatory and Development Authority (Insurant:
Brokers) Regulations, 2002;
(m) "reinsurance broker" means an insurance broker who, for a remuneration, arran:.
reinsurance for direct insurers with insurance and reinsurance companies.

F u n c tio n s o f a D irect Broker

The functions of a direct broker shall include any one or more of the following:
(a) obtaining detailed information of the client's business and risk manageme*
philosophy;
(b) familiarising himself with the client's business and underwriting information so tha:
this can be explained to an insurer and others;
(c) rendering advice on appropriate insurance cover and terms;
(d) maintaining detailed knowledge of available insurance markets, as may
applicable;
(e) submitting quotation received from insurer/s for consideration of a client;
(f) providing requisite underwriting information as required by an insurer in assessir.:
the risk to decide pricing terms and conditions for cover;
(g) acting promptly on instructions from a client and providing him written
acknowledgements and progress reports;
(h) assisting clients in paying premium under section 64VB of Insurance Act, 1938
(4 of 1938);
(i) providing services related to insurance consultancy and risk management;
(j) assisting in the negotiation of the claims; and
(k) maintaining proper records of claims;
 ce Intermediaries 9.9

ctio n s o f a R e-In su ran ce Broker

The functions of a re-insurance broker shall include any one or more of the following:
a) familiarising himself with the client’s business and risk retention philosophy;
<b) maintaining clear records of the insurer's business to assist the reinsurer(s) or
others.
(c) rendering advice based on technical data on the reinsurance covers available in the
international insurance and the reinsurance markets;
id) maintaining a database of available reinsurance markets, including solvency ratings
of individual reinsurers;
(e) rendering consultancy and risk management services for reinsurance;
(f) selecting and recommending a reinsurer or a group of reinsurers;
(g) negotiating with a reinsurer on the client’s behalf;
(h) assisting in case of commutation of reinsurance contracts placed with them;
(i) acting promptly on instructions from a client and providing it written
acknowledgements and progress reports;
(j) collecting and remitting premiums and claims within such time as agreed upon;
(k) assisting in the negotiation and settlement of claims;
(l) maintaining proper records of claims; and
(m) exercising due care and diligence at the time of selection of reinsurers and
international insurance brokers having regard to their respective security rating and
establishing respective responsibilities at the time of engaging their services.

F u n ctio n s o f C o m p o site Broker

A composite broker shall carry out any one or more of the functions mentioned in
regulations.

A p plication for Grant o f L icen ce

(1) An application by a person for grant of a licence as an insurance broker shall be
made in Form A to the Authority.
(2) The application under sub-regulation (1) shall be made for any one or more of the
following categories, namely :
(a) direct broker;
(b) reinsurance broker;
(c) composite broker; alongwith the requisite fees as specified in regulation 18.

A p p lication to C onform to th e R eq u irem en ts

An application, not complete in all respects and not conforming to the instructions
specified in the Form A and these regulations, shall be rejected.
 9.10 Insurance Intermediaries

Provided that, before rejecting any such application, the applicant shall be given
reasonable opportunity to complete the application in all respects and rectify the errors,
any.
Furnishing of information, clarification and personal representation —
(1) The Authority may require an applicant to furnish any further information orl
clarification for the purpose of disposal of the application, and, thereafter, in regard|
to any other matter as may be deemed necessary by the Authority.
(2) The applicant or its principal officer shall, if so required, appear before the
Authority for a personal representation in connection with an application.

C o n sid era tio n o f A p p lication

(1) The Authority while considering an application for grant of a licence shall take into
account, all matters relevant to the carrying out of the functions by the insurance
broker.
(2) Without prejudice to the above, the Authority in particular, shall take into account
the following, namely:-
(A) whether the applicant is not suffering from any of the disqualifications
specified under sub-section (5) of section 42 D of the Act;
(B) whether the applicant has the necessary infrastructure, such as, adequate office
space, equipment and trained manpower to effectively discharge his activities;
(C) whether the applicant has in his employment a minimum of two persons who
have the necessary qualifications specified in clause (F) below and experience
to conduct the business of insurance broker;
(D) whether any person, directly or indirectly connected with the applicant, has
L,een refused in the past the grant of a licence by the Authority.
(E) whether the applicant fulfils the capital requirements as specified in regulation
10 and deposit requirements as specified in regulation 22;
(F) whether the principal officer of the applicant -
(i) possesses the minimum qualification o f :
(a) Bachelors/Masters degree in Arts, Science, or Social Sciences or
Commerce or its equivalent from any institution/ university
recognized by any State Government or the Central Government; or
(b) Bachelor’s degree in engineering or its equivalent from any
institution/ university recognized by any State government or the
Central government; or
rsurance Intermediaries 9.11

(c) Bachelor’s degree in law or its equivalent from any institution/

University recognized by any State Government or the Central
Government; or
(d) Masters in Business Administration or its equivalent from any
institution/ university recognized by any State Government or the
Central Government; or
(e) Associate/ Fellow of the Insurance Institute of India, Mumbai; or
(f) Associate/ Fellow of the Institute of Risk Management, Mumbai; or
(g) any post graduate qualification of the Institute of Insurance and Risk
Management, Hyderabad; or
(h) Associate/ Fellow of the Institute of Chartered Accountants of India ,
New Delhi; or
(i) Associate/ Fellow of the Institute of Cost and Works Accountants of
India, Kolkata; or
(j) Associate/ Fellow of the Institute of Company Secretaries of India,
New Delhi; or
(k) Associate/ Fellow of the Actuarial Society of India; or
(l) Certified Associateship of the Indian Institute of Bankers, Mumbai;
or
(m) any other qualification specified from time to time by the Authority
under these regulations; and
(ii) the principal officer of the applicant has received at least one hundred
hours of theoretical and practical training from an institution recognised
by the Authority from time to time.
Provided that where the principal officer of the applicant:
(a) has been carrying on reinsurance related activity or insurance
consultancy for a continuous period of seven years, preceding the
year in which such an application is made; or
(b) has for a period of, not less than seven years prior to the application
made to the Authority has been a principal underwriter or has held
the position of a Manager in any one of the nationalised insurance
companies in India; or
(c) is an Associate/ Fellow of the Insurance Institute of India, Mumbai; ,
or Associate/ Fellow of the Institute of Risk Management, Mumbai;
or Associate/ Fellow of the Actuarial Society of India; or any post
graduate qualification of the Institute of Insurance and Risk
 9.12 Insurance Intermediarit

Management, Hyderabad; the theoretical and practical training f r o J

an institution recognised by the Authority from time to tin J
according to a syllabus approved by the Authority shall be fifnl
hours.
(iii) has passed an examination, at the end of the period of training mentioned
in the proviso above, conducted by the National Insurance Acaderm J
Pune or any other examining body recognised by the Authority.
(G) Whether the principal officer has not violated the code of conduct as specified
in Schedule III to these regulations
(H) that the applicant is not engaged in any other business other than the m ajJ
objects of the applicant; and
(I) the Authority is of the opinion that the grant of licence will be in the interest ofl
• policyholders.
Exception: In the case of applications made to the Authority immediate;* I
following the notification of these regulations, the requirements under sub-1
regulation (2)(C) shall stand modified to the extent that instead of two qualified!
persons mentioned in the requirement be scaled down to one person, who shoui;]
have qualified himself at the latest by the time of the grant of a licence under the-;
regulations. This exception may be available only to applications made to the I
authority upto 31st March, 2003.
(3) Any employee responsible for soliciting and procuring insurance business on behalf]
on an insurance broker shall also have to fulfill the requirements mentioned in sub­
regulations (1) and (2) above and a list of such employees need to be provided to
the Authority and acknowledged by it.

R eq u irem en ts o f C apital—
(1) Any applicant seeking to become an insurance broker under these regulations
should satisfy the following conditions:
(i) it shall have a minimum amount of capital as mentioned below:

Category Minimum amount (Rupees)

(a) Direct broker fifty lakhs

(b) Reinsurance broker two hundred lakhs
(c) Composite broker two hundred and fifty lakhs

(ii) the capital in the case of a company limited by shares and a cooperative
society shall be in the form of equity shares ;
rsurance Intermediaries 9.13

(iii) the capital in the case of other applicants shall be brought in cash;
(iv) the applicant shall exclusively carry on the business of an insurance broker as
licensed under these regulations.
(2) No part of the capital of an applicant shall be held by a non-Indian interest beyond
26% at any time. For the purposes of these regulations, the calculations of non-
Indian interest shall be made in the same manner as specified in Insurance
Regulatory And Development Authority (Registration of Indian Insurance
Companies) Regulations, 2000 for an insurer.

Procedure for L icen sin g

The Authority on being satisfied that the applicant fulfills all the conditions specified for
me grant of licence, shall grant a licence in Form B and send an intimation thereof to the
applicant mentioning the category for which the Authority has granted the licence. The
licence shall be issued subject to the insurance broker adhering to the conditions and the code
of conduct as specified by the Authority from time to time.

V alidity o f L icen ce
A licence once issued shall be valid for a period of three years from the date of its issue,
unless the same is suspended or cancelled pursuant to these regulations.

R enew al o f L icen ce
(1) An insurance broker may, within thirty days before the expiry of the licence, make
an application in Form A to the Authority for renewal of licence.
Provided however that if the application reaches the Authority later than that period
but before the actual expiry of the current licence, an additional fee of rupees one
hundred only shall be payable by the applicant to the Authority.
Provided further that the Authority may for sufficient reasons offered in writing by
the applicant for a delay not covered by the previous proviso, accept an application
for renewal after the date of the expiry of the licence on a payment of an additional
fee of seven hundred and fifty rupees only by the applicant.
(2) An insurance broker before seeking a renewal of licence, shall have completed,
atleast twenty five hours of theoretical and practical training, imparted by an
institution recognized by the Authority from time to time.
(3) The application for a renewal, under sub-regulation (1) shall be dealt with in the
same manner as is specified under regulation 9.
(4) The Authority, on being satisfied that the applicant fulfills all the conditions
specified for a renewal of the licence, shall renew the licence in Form B for a period
of three years and send an intimation to that effect to the applicant.
 9.14 Insurance Intermedia

(5) An insurance broker licensed under these regulations for a specified category n_v
also apply for the grant of a licence by the Authority for any other category - r
fulfilling the requirements of these regulations. However, such application shall bq
made only after a lapse of one year from the grant of a licence in the first instance. ]

P rocedure W here a L icen ce is N ot G ranted

(1) Where an application for grant of a licence under regulation 6 or of a renews
thereof under regulation 13, does not satisfy the conditions set out in regulation -
the Authority may refuse to grant the licence.
(2) Provided that no application shall be rejected unless the applicant has been given i
reasonable opportunity of being heard.
(3) The refusal to grant a licence shall be communicated by the Authority within thirty
days of such refusal to the applicant stating therein the grounds on which the
application has been rejected.
(4) Any applicant, if aggrieved by the decision of the Authority, may apply within a
period of thirty days from the date of receipt of such intimation, to the Chairman of
the Authority for a reconsideration of its decision.
(5) The Chairman of the Authority shall consider such an application and communicate
his decision thereon to the applicant in writing within six weeks of the receipt
thereof.

E ffect o f R efu sal to Grant L icen ce

Any applicant, whose application for grant of a licence under regulation 6 or of a renewal
thereof under regulation 13 has been refused by the Authority, shall, on and from the date of
the receipt of the communication under regulation 13(2) cease to act as an insurance broker.
He, however, shall continue to be liable to provide services in respect of contracts alread}
entered into through him. Such a service shall continue only upto the period of expiry of
those current contracts, details of which shall be disclosed to the Authority on receipt of the
communication under regulation 13.

Issu e o f a d u p lica te lic e n c e

(1) In the event of a licence being lost or destroyed or mutilated, an insurance broker
shall submit to the Authority an application alongwith a fee of rupees one thousand
requesting for the issue of a duplicate licence and with a declaration giving full
details regarding the issue of the licence and its loss or destruction or mutilation.
(2) The Authority, after satisfying itself that the original licence has been lost,
destroyed or mutilated, shall issue a duplicate licence in Form B with an
endorsement thereon that it is a duplicate one.
Insurance Intermediaries 9.15

A ction a g a in st a p erson a c tin g as an in su ra n ce broker w ith o u t a

valid lic e n c e
(1) Notwithstanding and without prejudice to initiation of any criminal proceedings
against any person, who acts as an insurance broker without holding a valid licence
issued under these regulations, the Authority may invoke against such a person
penal action under the Act.
(2) Where the person falling under sub-regulation (1), is a company or firm or body
corporate, without prejudice to any other proceedings which may be taken by the
Authority against the company or firm or body corporate, every director, manager,
secretary or other officer of the company or body corporate, and every partner of
the firm, who is knowingly a party to such a contravention shall also be liable to be
proceeded against.

P aym en t o f fe e s and th e c o n se q u e n c e s o f failure to pay fe e s

(1) Every applicant eligible for the grant of a licence shall pay such fees in such a
manner and within such a period as specified in Schedule II.
(2) Where an insurance broker fails to pay the annual fees payable under sub-regulation
(1), the Authority may suspend the licence, whereupon the insurance broker shall
cease to carry on business for the period during which the suspension subsists.
R em u n eration
(1) No insurance broker shall be paid or contract to be paid by way of remuneration
(including royalty or licence fees or administration charges or such other
compensation), an amount exceeding:
(A) on direct general insurance business -
(i) on tariff products:
(a) 10 percent of the premium on that part of the business which is compulsory
under any statute or any law in force;
(b) 12Vipercent of the premium on others.
(ii) on non- tariff products: 171/2 percent of the premium on direct business.
(B) on direct life insurance business -
(i) individual insurance
(a) 30 percent of first year’s premium
(b) 5 per cent of each renewal premium
(ii) annuity
(a) immediate annuity or a deferred annuity in consideration of a single
premium, or where only one premium is payable on the policy:2
percent of premium
 9.16 Insurance Intermediaries

(b) deferred annuity in consideration of more than one premium:

(i) 7*4 percent of first year’s premium
(ii) 2 percent of each renewal premium
(iii) group insurance and pension schemes:
(a) one year renewable group term insurance, gratuity.]
superannuation, group savings linked insurance —
IVi percent of risk premium
Note: Under group insurance schemes there will be no j
remuneration for the savings component.
(b) single premium - 2 percent of risk premium
(c) annual contributions, at new business procurement stage - 5
. percent of non risk premium with a ceiling of Rupees three
lakhs per scheme.
(d) single premium new business procurement stage - 0.5
percent with a ceiling of Rupees five lakhs per scheme.
(e) remuneration for subsequent servicing -
(i) one year renewable group term assurance -2 percent of
risk premium with a ceiling of rupees 50, 000/- per
scheme.
(C) on reinsurance business-
(i) as per market practices prevalent from time to time.
Explanation: For purposes of the procurement of business, an insurer shall not pay
an agency commission, allow a special discount, and pay a remuneration to brokers
for the same insurance contract.
(2) The settlement of accounts by insurers in respect of remuneration of brokers shall
be done on a monthly basis and it must be ensured that there is no cross settlement
of outstanding balances.

C eilin g on b u sin e ss from sin g le c lie n t

(1) The business of the insurance broker shall be carried in such a manner that, not
more than 50 percent of the premium (quantum, receipts, etc. as the case may be) in
the first year of business, 40 percent of the premium in the second year of business,
and 30 percent of the premium from the third year of business onwards shall
emanate from any one client.
Note: For the purposes of this regulation, the term “client” shall include, in the case
of a firm or a company, an associate or a subsidiary or a group concern under the
same management.
- surarice Intermediaries 9.17

(2) The decision of the Authority as to whether a company, a business or an

organisation is under the same management shall be final.
Code of conduct — Every insurance broker shall abide by the Code of Conduct as
-cecified in Schedule III.
Deposit requirements — (1) Every insurance broker shall before the commencement of
r> business, deposit and keep deposited with any scheduled bank a sum equivalent to 20% of
3Qe initial capital in fixed deposit, which shall not be released to him unless the prior
rermission of the Authority is obtained.
Provided that the Authority may impose a separate limit of deposit, in any case not
:\ceeding Rupees one hundred lakhs, for a person covered by regulation 2(l)(j)(v).
(2) Every insurance broker shall furnish to the Authority as and when called upon to do
-o a statement certified by the Bank in which such fixed deposit is kept.
Segregation of insurance money — (1) The provisions of section 64VB of the Act shall
: ontinue to determine the question of assumption of risk by an insurer.
(2) In the case of reinsurance contracts, it may be agreed between the parties specifically
:r as part of international market practices that the licensed reinsurance broker or composite
rroker can collect the premium and remit to the reinsurer and/or collect the claims due from
die reinsurer to be passed on to the insured. In these circumstances the money collected by
die licensed insurance broker shall be dealt with in the following manner:
(a) he shall act as the trustee of the insurance money that he is required to handle in
order to discharge his function as a reinsurance broker and for the purposes of this
regulation it shall be deemed that a payment made to the reinsurance broker shall be
considered as payment made to the reinsurer;
(b) ensure that ‘insurance money’ is held in an ‘Insurance Bank Account’ with one or
more of the Scheduled Banks or with such other institutions as may be approved by
the Authority;
(c) give written notice to, and receive written confirmation from, a bank, or other
institution that he is not entitled to combine the account with any other account, or
to exercise any right of set-off, charge or lien against money in that account;
(d) ensure that all monies received from or on behalf of an insured is paid into the
‘Insurance Bank Account’ which remains in the 'Insurance Bank Account’ to
remain in deposit until it is transferred on to the reinsurer or to the direct insurer.
(e) ensure that any refund of premium which may become due to a direct insurer on
account of the cancellation of a policy or alteration in its terms and conditions or
otherwise shall be paid by the reinsurer directly to the direct insurer.
(f) Interest on recovery/payment received shall be for the benefit of the direct insurer
or reinsurer;
 9.18 Insurance Intermedia

(g) only remove from the ‘Insurance Bank Account’ charges, fees or commis- m
earned and interest received from any funds comprising the account;
(h) take immediate steps to restore the required position if at any time he becor J
aware of any deficiency in the required “segregated amount”.
Professional indemnity insurance —
(1) Every insurance broker shall take out and maintain and continue to maintain a
professional indemnity insurance cover throughout the validity of the period of the licenai
granted to him by the Authority.
Provided that the Authority shall in suitable cases allow a newly licensed insurant I
broker to produce such a guarantee within fifteen months from the date of issue of origin*
licence.
(2) The insurance cover must indemnify an insurance broker against
(a) any error or omission or negligence on his part or on the part of his employees arc!
directors;
(b) any loss of money or other property for which the broker is legally liable -
consequence of any financial or fraudulent act or omission;
(c) any loss of documents and costs and expenses incurred in replacing or restorir:
such documents;
(d) dishonest or fraudulent acts or omissions by brokers’ employees or forme *
employees.
(3) The indemnity cover —
(a) shall be on a yearly basis for the entire period of licence;
(b) shall not contain any terms to the effect that payments of claims depend upon the
insurance broker having first met the liability;
(c) shall indemnify in respect of all claims made during the period of the insurance
regardless of the time at which the event giving rise to the claim may have
occurred.
Provided that an indemnity insurance cover not fully conforming to the above
requirements shall be permitted by the Authority in special cases for reasons to be recorded
by it in writing.
(4) Limit of indemnity for any one claim and in the aggregate for the year in the case of
insurance brokers shall be as follows :
Category of
Limit of indemnity
Insurance broker

(a) Direct broker three times remuneration received at the end of every financial year
subject to a minimum limit of rupees fifty lakhs.

j
Insurance Intermediaries 9.19

(b) Reinsurance broker three times remuneration received at the end of every financial year
subject to a minimum limit of rupees two crores and fifty lakhs.

(c) Composite broker three times remuneration received at the end of every financial year
subject to a minimum limit of rupees five crores

(5) The un-insured excess in respect of each claim shall not exceed five percent of the
capital employed by the insurance broker in the business.
(6) The insurance policy shall be obtained from any registered insurer in India who has
agreed to —
(a) provide the insurance broker with an annual certificate containing the name and
address, including the licence number of the insurance broker, the policy number,
the limit of indemnity, the excess and the name of the insurer as evidence that the
cover meets the requirements of the Authority;
(b) send a duplicate certificate to the Authority at the time the certificate is issued to the
insurance broker ; and
(c) inform the insurer immediately of any case of voidance, non-renewal or
cancellation of cover mid-term.
(7) Every insurance broker shall—
(a) inform immediately the Authority should any cover be cancelled or voided or if any
policy is not renewed;
(b) inform immediately the insurer in writing of any claim made by or against it;
(c) advise immediately the insurer of all circumstances or occurrences that may give
rise to a claim under the policy ; and
(d) advise the Authority as soon as an insurer has notified that it intends to decline
indemnity in respect of a claim under the policy.
Maintenance of books of account, records, etc. — (1) Every insurance broker shall
prepare for every accounting year —
(i) a balance sheet or a statement of affairs as at the end of each accounting period;
(ii) a profit and loss account for that period;
(iii) a statement of cash/fund flow;
(iv) additional statements on insurance broking business as may be required by the
Authority.
Note: For purposes of this regulation, the accounting year shall be a period of 12 months
or less where a business is started after 1st April) commencing on the first day of the April of
an year and ending on the 31st day of March of the year following, and the accounts shall be
maintained on accrual basis.
 9.20 Insurance Intermediar

(2) Every insurance broker shall submit to the Authority, a copy of the audited finar.c,
statements as stated in sub-regulation (1) alongwith the auditor’s report thereon within nir:-T|
days from the close of the accounting year alongwith the remarks or observations of
auditors, if any, on the conduct of the business, state of accounts, etc., and a suitablj
explanation on such observations shall be appended to such accounts filed with the Authonrjj
(3) Every insurance broker shall, within ninety days from the date of the Auditor’s re:
take steps to rectify any deficiencies, made out in the auditor’s report and inform
Authority accordingly.
(4) All the books of account, statements, document, etc., shall be maintained at the he
office of the insurance broker or such other branch office as may be designated by him
notified to the Authority, and shall be available on all working days to such officers of i
Authority, authorised in this behalf by it for an inspection.
(5) All* the books and documents, statements, contract notes etc., referred to in t
regulation and maintained by the insurance broker shall be retained for a period of atleast
years from the end of the year to which they relate.
Submission of half-yearly results—(1) Every insurance broker shall before ?1
October and 30th April each year furnish to the Authority a half-yearly un- audited finan:
statement containing details of performance, financial position, etc., alongwith a declarati i
confirming the fulfillment of requirements of capital in accordance with the provisions
regulation 10 and deposit requirements in accordance with the provisions of regulation 22.
(2) Failure to comply with the regulation of sub-regulation (1) will lead to an action
accordance with the provisions of regulation 34 being taken against the insurance broker.
Internal control and systems — Every insurance broker shall ensure that a prc
system of internal audit is practised in business and that his internal controls and systems at
adequate for tb. 'ze, nature and complexity of his business.
Disclosur the Authority — (1) An insurance broker shall disclose to the Authorirj|
as and when 'd by it, in any event not later than thirty days of a requisition,
following inf rmation, namely—
(i) his responsibilities with regard to the placement of an insurance contract;
(ii) any change in the information or particulars previously furnished, which have
bearing on the licence granted to it;
(iii) the names of the clients whose insurance portfolio he manages or has managed;
(iv) any other requirement specified by the Authority from time to time.
Provided that in case of a person specified in regulation 2(l)(j)(v) the Authority may ca
for and obtain such information as it deems fit.
Authority’s right to inspect — (1) The Authority may appoint one or more of il
officers as an “inspecting authority” to undertake inspection of the premises of the insuranc
■ Insurance Intermediaries 9.21

broker to ascertain and see how the business is carried on , and also to inspect the books of
accounts, records and documents of the insurance broker for any of the purposes specified in
sub-regulation (2).
(2) The purposes referred to in sub-regulation (1) may be as follows, namely : —
(i) to ensure that the books of account are being maintained in the manner required
(ii) to ensure that the provisions of the Act, rules, regulations are being complied with;
(iii) to investigate the complaints received from any insured, any insurer, other
insurance brokers or any other person on any matter having a bearing on the
activities of the insurance broker; and
(iv) to investigate the affairs of the insurance broker suomotu in the, interest of proper
development of insurance business or in policy holders’ interest.

N o tice before in s p e c tio n

(1) Before undertaking an inspection under regulation, the Authority shall give a notice
of ten days to an insurance broker for that purpose.
(2) Notwithstanding anything contained in sub-regulation (1), where the Authority is
satisfied that in the interests of the policyholders no such notice shall be given, it
may, for reasons recorded in writing, direct that the inspection of the affairs of the
insurance broker be taken up without such notice.
(3) The insurance broker shall allow the inspecting authority to have full access to the
premises occupied by such insurance broker or by any other person on his behalf
and also extend all facilities for examining books, records, documents and computer
data in the possession of the insurance broker.
(4) The inspecting authority, in the course of inspection, shall be entitled to examine or
record statements of any principal officer or employee of the insurance broker and
have the powers to seize or make copies of documents/ records.
(5) It shall be the duty of every such person to give to the inspecting authority all
assistance in connection with the inspection which the insurance broker may
reasonably be expected to give.
(6) Failure to comply with the requirements of the Authority in this regard or failure to
cooperate with the inspecting officers shall result in suspension of licence.
Submission of report to the Authority — The inspecting authority shall submit an
inspection report to the Authority within 90 days of the completion of the inspection.

C o m m u n ica tio n o f fin d in g s, e tc .

(1) The Authority shall, after consideration of the inspection report, communicate its
findings to the insurance broker and give him a reasonable opportunity of being
 9.22 Insurance Intermediaries

heard before any action is taken by the Authority on the findings of the inspecting
authority.
(2) On receipt of the explanation, if any, from the insurance broker, the Authority may
direct the insurance broker to take such measures as the Authority may deem fit.
Appointment of investigator
(1) The Authority may appoint a chartered accountant or an actuary or any qualified and
experienced individual in the field of insurance to investigate the books of accounts or the
affairs of the insurance broker.
Provided that the person so appointed shall have the same powers of the inspecting
authority as are mentioned in regulation 29 and the obligations of the insurance broker in
regulation 29 shall be applicable to the investigation under this regulation.
Explanation - For the purposes of this regulation the expression “chartered accountant"
shall have the same meaning as given in Section 226 of the Companies Act, 1956 (1 of 1956),
and the expression ‘actuary’ shall mean a member of the Actuarial Society of India.
(2) The expenses and costs of such an investigation shall be recovered by the Authority
from the insurance broker whose affairs had been caused to be investigated.

C a n cella tio n or su sp e n sio n o f lic e n c e w ith n o tic e

(1) The licence of an insurance broker may be cancelled or suspended after due notice
and after giving him a reasonable opportunity of being heard if he -—
(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
thereunder;
(b) fails to furnish any information relating to his activities as an insurance broker as
required by the Authority;
(c) furnishes wrong or false information; or conceals or fails to disclose material facts
in the application submitted for obtaining a licence;
(d) does not submit periodical returns as required by the Authority;
(e) does not co-operate with any inspection or enquiry conducted by the Authority;
(f) fails to resolve the complaints of the policy holders or fails to give a satisfactory
reply to the Authority in this behalf;
(g) indulges in rebates or inducements in cash or kind to a client or any of the client’s
directors or other employees or any person acting as an introducer;
(h) is found guilty of misconduct or his conduct is not in accordance with the Code of
Conduct specified in Schedule III;
(i) fails to maintain the capital requirements in accordance with the provisions
of regulation 10;
Insurance Intermediaries 9.23

(j) fails to pay the fees or the reimbursement of expenses under these regulations;
(k) violates the conditions of licence;
(l) does not carry out his obligations as specified in the regulations;
(m) if the principal officer does not acquire practical training and pass the examination
within the stipulated period as specified in regulation 9.
(2) In the circumstances where the Authority feels that the establishment of an insurance
broker is only to divert funds within a group of companies or their associates, it can after due
enquiries made by it cancel the licence granted to the insurance broker.
Cancellation or suspension of licence without notice — The licence of an insurance
broker may be cancelled or suspended without notice, if he
(a) violates any one or more of the requirements under the code of conduct specified in
Schedule III;
(b) is found guilty of fraud, or is convicted of a criminal offence;
(c) commits such defaults, which require immediate action in the opinion of the
Authority, provided that the Authority has communicated the reasons for
the cancellation in writing;
(d) the insurance broker has not commenced the business within six months of being
granted a licence.
Manner of making order of cancellation/suspension with notice. The licence of an
insurance broker shall not be cancelled unless an enquiry has been held in accordance with
the procedure specified in regulation 37.

M anner o f h o ld in g en q u iry before su sp e n sio n or c a n c e lla tio n

(1) For the purpose of holding an enquiry under regulation 36, the Authority may
appoint an enquiry officer;
(2) the enquiry officer shall issue to the insurance broker a notice at the registered
office or the principal place of business of the insurance broker, as the case may
be, calling for such information as he considers necessary for the conduct of an
enquiry.
(3) the insurance broker may, within fifteen days from the date of receipt of such a
notice, furnish to the enquiry officer a reply together with copies of documentary or
other evidence relied on by him or sought by the enquiry officer;
(4) the enquiry officer shall, give a reasonable opportunity of hearing to the insurance
broker to enable him to make submissions in support of his reply made under sub-
regulation(3); .
(5) the insurance broker may either appear in person or through any person duly
authorised by him to present its case;

/
 9.24 Insurance Intermediaries

(6) if it is considered necessary, the enquiry officer may require the Authority to
present its case through one of its officers; and
(7) the enquiry officer shall, after taking into account all relevant facts and submissions
made by the insurance broker, submit a report to the Authority within 90 days of
the completion of the enquiry proceedings.
Show-cause notice and order. (1) On receipt of the report from the enquiry officer, the
Authority shall consider it and issue a show-cause notice to the insurance broker if the
contents of the report warrant a suspension or cancellation of the licence granted to him.
Provided that no such notice is required, in case the provisions of regulation 35 are
attracted.
(2) The insurance broker shall within twenty-one days of the date of receipt of the show
cause notice send a reply to the Authority.
(3) The Authority after considering the reply to the show cause notice shall, as soon as
possible, but not later than thirty days from the receipt of the reply, pass such an order as it
deems fit.
Provided, however, where the insurance broker on serving of the notice under this
regulation fails to furnish any reply within the stated period, the Authority may after the
expiry of such time proceed to decide the case ex parte.
(4) The Authority shall send a copy of the order made under clause (3) to the insurance
broker.
Publication of order of suspension or cancellation. The order of cancellation or
suspension of the licence made under sub-regulation (3) of regulation 38, shall be
published in one of the daily newspapers in the English language and one newspaper in the
regional language as the Authority may consider fit.
Effect of cancellation or suspension of licence
(1) On and from the date of suspension or cancellation of the licence, the insurance
broker, shall cease to act as an insurance broker.
(2) An insurance broker however shall continue to service the contracts already
concluded through him for a period of six months within which suitable
arrangements shall be made by him for having the contracts attended to by another
licensed insurance broker.
(3) The Authority in such an event may pass such an order as it thinks fit for the
disposal of the deposit of the insurance broker made under regulation 22.
General—(1) From the date of commencement of these regulations no person can
function as a broker or an insurance intermediary unless a licence has been granted to him by
the Authority under these regulations.
isurance Intermediaries 9.25

(2) Any disputes arising between an insurance broker and an insurer or any other person
either in the course of his engagement as an insurance broker or otherwise may be referred to
die Authority by the person so affected; and on receipt of the complaint or representation, the
Authority may examine the complaint and if found necessary proceed to conduct an enquiry
?r an inspection or an investigation in terms of these regulations.

(D) SURVEYORS
These are also intermediaries as per IRDA act but these are not involved in the marketing
of the insurance policies. The surveyors play important role in settling claims of the insured
party. In the event of loss (Fire or General Insurance), the surveyors evaluate the quantum of
loss and the amount of claim required to be settled. They are appointed by insurance
companies.

(E) TPA HEALTH SERVICES:

TPA stands for Third Party Administrators. They deal in settlement of health services
claims. They are also not involved in marketing insurance policies. They also deal in
settlement of claims in Health related policies. Medical insurance has become necessity now.
With rising medical expenses and expensive medical treatments, these policies provide a
relief to common man. Generally employers of reputed organisation provide this facility to
their employees. Thus in case of any claim the third party administrators verify all the details
in order to avoid any fraud on the part of employees filing claim.

REGULATIONS OF IRDA

C o n d itio n s o f L icen sin g o f TPA

• Only a company with a share capital and registered under the Companies Act, 1956
can function as a TPA.
• The main or primary object of the company shall be to carry on business in India as a
TPA in the health services, and on being licensed by the Authority, the company
shall not engage itself in any other business.
• The minimum paid up capital of the company shall be in equity shares amounting to
? 1 crore (Rupees One crore only);
• At no point of time of its functioning the TPA shall have a working capital of less
than ? 1 crore;
• At least one of the directors of the TPA shall be a qualified medical doctor registered
with the Medical Council of India;
• The aggregate holdings of equity shares by a foreign company shall not at any time
exceed twenty-six percent of the paid up equity capital of a third party administrator.
 9.26 Insurance Intermediaries

• Any transfer of shares exceeding 5% of the paid up share capital shall be intimated
by the TPA to the Authority within 15 days of the transfer indicating the names anc
particulars of the transferor and transferee.

P rocedure o f L icen sin g o f TPA

• The TPA shall obtain from the Authority a licence to function as a TPA for rendering
health services.
• The application for licence shall be made in writing to the Authority in Form TPA-1
appended to these regulations and shall be accompanied by a non-refundable
processing fee of ? 20,000 (Rupees Twenty Thousand only) to the Authority by way
of a crossed demand draft in favour of the Authority payable in Delhi.
• The Authority may, in the course of examination of the application, call for such
information or ask for production of such documents, as it may deem fit, and it shall
be incumbent upon the applicant to furnish the same within the specified time.
• The Authority, on examination of the application and details furnished by the
applicant, may issue a licence, if it is satisfied that the applicant TPA is eligible to
function as a TPA.
• Every TPA approved by the Authority shall pay a further sum of ? 30,000 (Rupee-
Thirty Thousand only) to the Authority as licence fee before the licence is granted to
it and the same shall be paid to the Authority in the manner as stated in sub­
regulation (2) of this regulation.
• A TPA whose application has been rejected by the Authority shall not, for a period of
two years from the date of such a rejection, apply once again to the Authority for a
licence.
• A copy of the agreement entered into between the TPA and the insurance company or
any modification thereof, shall be filed, within 15 days of its execution or
modification, as the case may be, with the Authority.
• More than one TPA may be engaged by an insurance company and, similarly, a TPA
can serve more than one insurance company.
• The parties to the agreement shall agree between themselves on the scope of the
contract and the facilities that have to be provided. Such an agreement shall also
prescribe the remuneration that may be payable to the TPA by the insurance
company.
• Every application received by the Authority pursuant to these Regulations shall be
considered by it within a reasonable time and its decision thereon communicated to
the applicant.
Insurance Intermediaries 9.27

• On an examination of the material placed before it and on the basis of enquiries made
by it, where the Authority is of the opinion that the application does not deserve
acceptance, it shall communicate its opinion to the applicant, who shall be given a
reasonable opportunity to represent against the proposed rejection of the application.
• Where on a complete examination of the materials, documents, information, etc.,
available to it, the Authority finally comes to the conclusion that an application be
rejected, it shall do so by making an order in writing, which shall be communicated
to the applicant at the earliest.
• Where the Authority decides to issue a licence to the applicant to act as TPA, it shall
issue the same in Form TPA-2.
• Every licence granted by the Authority to a TPA or any renewal thereof, in terms of
these regulations, shall remain in force for three years, unless the Authority decides,
either to revoke or cancel it earlier, as provided in these regulations.

R enew al o f L icen ce
• A licence granted to a TPA may be renewed for a further period of three years on
submission of the prescribed renewal application in Form TPA-3 alongwith a
renewal fee of ? 30,000/-(Rupees Thirty Thousand only), atleast thirty days prior to
the date of expiry of the licence.
• Any failure on the part of the TPA to get its licence renewed before its expiry has to
be explained to the Authority. A delayed application shall state the reasons for the
delay and be accompanied by a late fee o f? 100/- (Rupees One Hundred only).
• The Authority after examining the reasons given in the application by the TPA may
renew the licence, if it is satisfied that the TPA was prevented by sufficient cause
from applying for the renewal of its licence at least 30 days (Thirty days) before the
date on which the licence ceased to remain in force.
• The Authority may, if it is satisfied that undue hardship would be caused otherwise,
accept any application after the licence ceased to remain in force, on payment by the
applicant of a payment of ? 750/- (Rupees Seven Hundred Fifty only).
• Where a licence granted by the Authority is lost or mutilated, the Authority may issue
a duplicate licence on payment of a fee of ? 1,000/-(Rupees One Thousand only)
accompanied by an application in writing made by the TPA.

R ev o ca tio n or C a n cella tio n o f A L icen ce

• A licence granted to a TPA may after due notice be revoked or cancelled by the
Authority for one or more of the reasons.
• Before proceeding to revoke or cancel a licence granted to a TPA, the Authority shall
grant a reasonable opportunity of being heard to the TPA.
 9.28 Insurance Intermediaries

• Every order made by the Authority under regulation 13 shall be in writing, stating
clearly the reasons for the revocation or cancellation of the licence and the order shall
be served on the TPA as soon as same is made. The Authority shall also send copies
thereof to the insurance company with whom the TPA has subsisting agreement(s).
• The TPA on receipt of an order under regulation 13 shall forthwith cease to carry on
its functions as TPA in relation to the insurance company and the insurance company
shall immediately take such alternative steps including appointment of another TPA.
as may be necessary to continue to cater to the insured/policyholders served by the
TPA whose licence has been revoked or cancelled.
• A TPA whose licence has been revoked or cancelled in terms of these regulations
may fde a review application with the Authority within 30 days of the receipt of the
order cancelling or revoking the licence.
• Within reasonable period of the receipt of the application for review but not later than
90 days thereof, the Authority shall dispose of the application after affording the
applicant a reasonable opportunity of being heard.

C ode o f C on d u ct for TPA

• A TPA licensed under these regulations shall as far as possible act in the best
professional manner.
• In particular and without prejudice to the generality of the provisions contained
above, it shall be the duty of every TPA, its Chief Administrative Officer or Chief
Executive Officer and its employees or representatives to
(a) establish its or his or their identity to the public and the insured/policyholder and
that of the insurance company with which it has entered into an agreement.
(b) disclose its licence to the insured/policyholder/prospect.
(c) disclose the details of the services it is authorised to render in respect of health
insurance products under an agreement with an insurance company;
(d) bring to the notice of the insurance company with whom it has an agreement,
any adverse report or inconsistencies or any material fact that is relevant for the
insurance company’s business;
(e) obtain all the requisite documents pertaining to the examination of an insurance
claim arising out of insurance contract concluded by the insurance company
with the insured/policyholder;
(f) render necessary assistance specified under th e, agreement and advice to
policyholders or claimants or beneficiaries in complying with the requirements
for settlement of claims with the insurance company;
(g) conduct itself /himself in a courteous and professional manner;
5
Insurance Intermediaries 9.29

(h) refrain from acting in a manner, which may influence directly or indirectly
insured/policyholder of a particular insurance company to shift the insurance
portfolio from the existing insurance company to another insurance company;
(i) refrain from trading on information and the records of its business;
(j) maintain the confidentiality of the data collected by it in the course of its
agreement;
(k) refrain from resorting to advertisements of its business or the services carried
out by it on behalf of a particular insurance company, without the prior written
approval by the insurance company;
(l) refrain from inducing an insured/policyholder to omit any material information,
or submit wrong information;
(m) refrain from demanding or receiving a share of the proceeds or indemnity from
the claimant under an insurance contract;
(n) follow the guidelines/directions that may be issued down by the Authority from
time to time.

M aintenance and c o n fid e n tia lity o f in form ation

• A TPA shall maintain proper records, documents, evidence and books of all
transactions carried out by it on behalf of an insurance company in terms of its
agreement.
• Every TPA shall follow strictly the professional confidentiality between the parties as
required, but this does not prevent the TPA from parting with the relevant
information to any Court of Law/Tribunal, the Government, or the Authority in the
case of any investigation carried out or proposed to be carried out by the Authority
against the insurance company, TPA or any other person or for any other reason.
• If the licence granted to the TPA is either revoked or cancelled in terms of these
regulations, the data collected by the TPA and all the books, records or documents,
etc., relating to the business carried on by it with regard to an insurance company,
shall be handed over to that insurance company by the TPA forthwith, complete in all
respects.

M iscella n eo u s P rovision s
• The Authority may, from time to time, constitute Committees consisting of members
drawn from various sources including the TPAs, insurance companies, Authority, or
any other persons as may be decided by the Authority to look into the proper and1
efficient performance of the TPAs.
• Every TPA shall furnish to the insurance company and the Authority an annual report
and any other return, as may be, required by the Authority on its activities.
 j
9.30 Insurance Intermedia

The Annual Report, duly verified by a director of TPA and the Chief Administrat:
Officer or the Chief Executive Officer shall be submitted in Form TPA-4 (No. 1 to
within a period of sixty days of the end of its financial year or within such exten
time as the Authority may grant.
The TPA shall also make available to the Authority for inspection, copies of
contracts with insurance company.

G eneral
• Any changes made from time to time in the agreement entered into by an insurer and j
a TPA shall be filed with the Authority;
• A TPA shall not charge any separate fees from the policyholders which it server
under the terms of the agreement with the insurance company.
• If any person fails to furnish any document, statement, return, etc., to the Authority
the same shall be construed as a non-compliance of the Act.

(F) WEB AGGREGATORS

Web Aggregator is a person who aggregates or collects the information of different
insurance policies displays the information on the website. Thus any person who has display
the information on the web site is also required to get themselves registered with IRDA for
the licence.

A p p lication S e e k in g G rant o f L icen se

• The application, seeking grant of License as Web Aggregator shall be made by the
applicant to the Authority in the application form as shown in Schedule I - Form A of
this regulation.
• The application shall be accompanied by a non-refundable fee of rupees ten thousand
paid by way of a bank draft drawn in favour of ‘Insurance Regulatory and
Development Authority’ payable at Hyderabad.
• Applicants seeking permission for Outsourcing and Telemarketing functions / facility
shall mention the same specifically in the application Form.
• The applicant / application for grant of license as Web Aggregator shall fulfill the all
the eligibility conditions as specified under the relevant sections of these regulations
and fulfill the conditions mentioned in this regulation.
• The application for grant of license as Web Aggregator shall be dealt with by the
authority as per the applicable provisions and under this regulation.
• On the applicant fulfilling all the eligibility criteria and requirements mentioned in
this regulations; the authority shall grant License to the applicant to function as a
Web aggregator as shown in Schedule II Form B of this regulations.
rsurance Intermediaries 9.31

• Validity of license — A license once issued shall be valid for a period of three years
from the date of its issue, unless the same is suspended or cancelled pursuant to this
regulation.
• An application, which is not complete in all respects, shall be liable to be rejected.

A pplication S e e k in g R enew al o f L icen se

• Web Aggregators interested in continuing in the businessshall apply with the
Authority for renewal of the License NINETY DAYS before expiry of the previous
License accompanied by a fee of rupees ten thousand paid by way of a bank draft in
favour of ‘Insurance Regulatory and Development Authority’ payable at Hyderabad
and containing such information as specified in Form A of Schedule I of this
regulation. Applicants seeking permission for Outsourcing and Telemarketing
functions / facility shall mention the same specifically in the application Form.
• The Authority shall not consider an application submitted for renewal, which is NOT
submitted at least 30 days before the date of expiry of the License, and such renewal
application shall follow the new application procedure as specified under section 3 of
this regulation.
• The application for renewal of license as Web Aggregator shall be dealt with by the
authority as per the applicable provisions and under this regulation.
• A Web Aggregator, before seeking a renewal of license, shall have completed, at
least twenty-five hours of theoretical and practical training, imparted by an institution
recognized by the Authority from time to time.
• The Authority, on being satisfied that the applicant fulfills all the conditions specified
for a renewal of the license, shall renew the license as shown in Schedule II Form B
for a period of three years and send intimation to that effect to the applicant.

E ligib ility C riteria for L icen se o f th e Web A ggregator

• For the grant of License / Renewal of license of the web aggregator, the applicant
shall ensure the fulfillment of the conditions laid down by IRDA
• The applicant company shall employ / designate a Director as Principal Officer to
manage the company on full time.
• The Principal Officer shall possess the qualification as specified in Schedule V.
• The Principal officer should fulfill the conditions in the FIT and PROPER criteria set
by the Authority as notified by the authority.
• The Principal officer should not have violated the obligations of web aggregator as
specified in Schedule VI and the code of conduct as specified in Schedule VII to this
regulation and
 9.32 Insurance Intermedic

• The Authority is of the opinion that the grant of license will be in the intere-
policyholders.

A nnual F ees
• Every Web Aggregator shall pay annual license fees of ?5,000/-.
• The annual license fee shall be paid before the expiry of 15 days from the finaliz
of annual audited accounts of the Web Aggregator or till the 30th of Septer
whichever is earlier.
• The fees shall be payable by an Account Payee draft in favour of “The Insur
Regulatory and Development Authority” payable at Hyderabad.

C apital R eq u irem en ts
• The applicant shall have a net worth not less than rupees ten lakh as on the dak
application and continue to maintain the minimum net worth prescribed during
license period.
• The Web Aggregator shall submit to the Authority a net worth certificate c J
certified by a Chartered Accountant every year after finalisation of book'
accounts.

P ro fessio n a l In d em n ity In su ran ce

• Every Web Aggregator shall take out and maintain and continue to maintain
professional indemnity insurance cover throughout the validity of the period of td
license granted to them by the Authority.

P rocedure W here L icen se / R enew al is N ot G ranted

• The Authority may reject the application made by the applicant to the A uthorJ
seeking grant of License / renewal, if it does not satisfy the eligibility criteria
down under this regulation or if the grant of such License is not found to be in pu :i*|
interest.

D u ties and F u n c tio n s o f Web A ggregators

• The Web Aggregator shall display Information pertaining to the Insurers who ha^
signed agreement with the Web Aggregators.

A greem en t o f Insurer w ith a Web A ggregator

An Insurer desirous of obtaining leads from web aggregator shall enter into
“agreement” with the web aggregator approved by the Authority.
nsurance Intermediaries 9.33

• The agreement between an insurer and web aggregator shall be valid for a period of
three years from its date.
• The web aggregator shall file the agreement to the Authority within fifteen days from
the date of entering the agreement.

Display o f P rod uct C om p arison s on th e Web S ite

• Web aggregators shall disclose prominently on the home page, a notice that that the
client / visitor’s particulars could be shared with insurers.
• Product information displayed by web aggregators shall be authentic and be based
solely on information received from insurers.
• Web aggregators shall not display ratings, rankings, endorsements or bestsellers of
insurance products on their website. The content of the websites of the web
aggregators shall be unbiased and factual in nature; they shall desist from
commenting on insurers or their products in their editorials or at any other location in
their websites.
• Products can be compared on the basis of features, eligibility criteria, premium etc.
• Templates can be mutually worked out between the Web Aggregators and Insurers
whose products are compared.
• Product comparisons that are displayed shall be up to date and reflect a true picture of
the products.
• Web aggregators shall display product information purely on the basis of the
information furnished to them by insurers.
• Web Aggregators can use published data for “Additional Information to Customers”
based on IRDA Data.
• Web Aggregators can integrate their websites with the with insurers website for
(i) Online Sale
(ii) Registration of Customer data or Proposal Form
(iii) Online Underwriting decision
• Web aggregators shall not carry any advertisements or sponsored content on their
websites.

R em u n era tio n
Remuneration shall be payable to web aggregators by insurers in compliance with the
following provisions:
(a) A flat fee not exceeding Fifty thousand per year towards each product displayed by
the web aggregator in the comparison charts of its web site.
 9.34 Insurance Intermediaries I

(b) Web aggregator will put in place a robust LMS and transmit leads to the insurers as
outlined in Section V above. No charges will be payable for leads by the Insurer.
(c) The Remuneration made by the Insurer towards a policy procured through tc
services of the Web Aggregator or lead provided by the web aggregator including
the remuneration made towards such a policy to any insurance intermediary
deployed by the insurer for procuring the business shall not exceed the limit?
prescribed in the Sec. 40-A of the Insurance Act.
(d) Web Aggregator can engage in Outsourcing functions to provide ‘Insurance
Services’ as per Schedule IX of this regulation in respect of policies procured
through them.
(e) Web Aggregator can use the Telemarketing / Distance Marketing modes as per
instructions outlined in Schedule X in this regulations for solicitation of Insurance
business. #

C on d u ct o f B u sin e ss by th e Web A ggregator

• The Web aggregator shall conduct the business in a fair manner and shall abide by
(a) The Obligations of the Web Aggregators as outlined in Schedule VI
(b) The Code of conduct of the Web Aggregators as outlined in Schedule VII. (

C a n cella tio n or S u sp e n sio n o f L icen se w ith N otice

b
• The license of an Web Aggregator may be cancelled or suspended after due notice
and after giving him a reasonable opportunity of being heard if he —
(i) 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;
(ii) fails to act in accordance with the Obligations of the Web Aggregators as
specified in Schedule VI of this regulation;
(iii) fails to adhere to the Code of Conduct specified in Schedule VII of this
regulation;
(iv) furnishes wrong or false information for obtaining a license; or conceals or fails
to disclose material facts in the application submitted for obtaining a license;
(v) fails to furnish any information relating to his activities as an insurance Web
Aggregator as required by the Authority or furnishes wrong or false information
or conceals or fails to disclose material facts to the Authority during the validity
of license;
(vi) does not submit periodical returns as required by the Authority;
(vii) does not co-operate with any inspection or enquiry conducted by the Authority;
s nsurance Intermediaries 9.35

(viii) fails to resolve the complaints of the policy holders or fails to give a satisfactory
reply to the Authority in this behalf;
(ix) indulges in rebates or inducements in cash or kind to a client or any of the
client’s directors or other employees or any person acting as an introducer;
(x) fails to pay the fees or the reimbursement of expenses under this regulation as
per section 7 of this regulation;
(xi) fails to maintain the capital requirements in accordance with the provisions of
section 8 of this regulation ;
(xii) if the principal officer does fulfill the conditions mentioned in the regulation
(xiii) If the Web Aggregator indulges in sourcing of business by themselves or
through call centers by way of misleading calls or spurious calls;
• A Web Aggregator whose license is suspended after due notice and after giving him
a reasonable opportunity of being heard, shall not solicit any new business from the
date of receipt of such Suspension Order till such time the suspension is revoked.
However, he shall continue to serve the existing policyholders during the suspension
period.

C an cella tio n or su sp e n sio n o f lic e n s e w ith o u t n o tic e

The license of an Web Aggregator may be cancelled or suspended without notice, if
he —
(a) violates any one or more of the provisions under the obligations of web aggregators
as specified in Schedule VI of this regulation;
(b) violates any one or more of the provisions under the code of conduct specified in
Schedule VII of this regulation;
(c) is found guilty of fraud, or is convicted of a criminal offence;
(d) commits such defaults, which require immediate action in the opinion of the
Authority, provided that the Authority has communicated the reasons for the
cancellation in writing;
(e) has not commenced business within six months of being granted a license.
(f) in case the license of a Web Aggregator is suspended without notice, such license
shall not be cancelled unless an enquiry has been held in accordance with the
procedure specified in this regulation.
(g) a Web Aggregator whose license is suspended without notice shall not solicit any
new business from the date of receipt of such Suspension'Order till such time the
suspension is revoked. However, he shall continue to serve the existing
policyholders during the suspension period.
 9.36 Insurance Intermedia - m

M ain ten an ce o f b o o k s o f a c c o u n t, record s

• Every Web Aggregator shall prepare for every accounting year —
(i) a balance sheet or a statement of affairs as at the end of each accounting pence.
(ii) a profit and loss account for that period;
(iii) a statement of cash/fund flow;
(iv) Additional statements on Web Aggregators business as may be required by
Authority.
• Every Web Aggregator shall submit to the Authority, a copy of the audited finan. a
statements along with the auditor’s report thereon within ninety days from the c k *
of the accounting year along with the remarks or observations of the auditors, if ary
on the conduct of the business, state of accounts, etc., and a suitable explanation
such observations shall be appended to such accounts filed with the Authority.
• Every Web Aggregator shall, within ninety days from the date of the Auditor’s rep- -
take steps to rectify any deficiencies, made out in the auditor’s report and inform tbs
Authority accordingly.
• All the books of account, statements, document, etc., shall be maintained at the he a:,
office of the Web Aggregator or such other branch office as may be designated :
them and notified to the Authority, and shall be available on all working days to suer
officers of the Authority, authorised in this behalf by it for an inspection.
• All the Electronic Records, books and documents, statements, contract notes eu
referred to in this regulation and maintained by the Web Aggregator shall be retained
for a period of at least ten years from the end of the year to which they relai;
However the Digital Records / documents pertaining to the cases of legal dispute
reported and the disposal of the same is pending for a decision from courts the
Records are required to be maintained till the disposal of the cases by the court.

GENERAL
tffr

• Any disputes arising between an Web Aggregator and an insurer may be referred :
the Authority by the person so affected; and on receipt of the complaint or
representation, the Authority may examine the complaint and if found necessar.
proceed to conduct an enquiry or an inspection or an investigation in terms of th
regulation.
• In case the license of a Web Aggregator has been cancelled or an applicant -
application has been rejected, the Web Aggregator or the applicant is allowed tc
reapply after one year from the date of Authority’s order/court order whichever :>
later. The Authority may consider the application afresh on merits.
 nee Intermediaries 9.37

• Wherever it is found that the Web Aggregator who has been licensed is not doing any
amount of business during the entire/ part of the previous licensed period, the
Authority may refuse to renew the license.

7 INSURANCE REPOSITORIES
"Insurance Repository” means a company formed and registered under the Companies
V.~t_ 1956 (1 of 1956) and which has been granted a certificate of registration under these
Guidelines by Insurance Regulatory and Development Authority for maintaining a data of
tt' jrance policies in electronic form on behalf of insurers including the history of
r-T.'actions during the term of policy.

Eligibility N orm s for S e ttin g up an In su ran ce R ep o sito ry

(1) The Authority shall not consider an application for insurance repository, unless the
applicant belongs to one of the following categories, namely
(i) a public limited company registered under the Companies Act, 1956 with a
minimum share capital of ? 5 lakhs;
(ii) a public financial institution as defined in section 4A of the Companies Act,
1956 (1 of 1956);
(iii) a wholly owned subsidiary of an existing depository registered with Securities
and Exchange Board of India under the Depositories Act, 1996
(iv) a company fully promoted by either life insurance council or general insurance
council or by both together or jointly with any of the above.
(v) any other institution permitted by the Authority
(2) One of the main objects of the company shall be to act as an insurance repository of
“e insurance policies” issued by insurers and to undertake their changes,
modifications and revisions based on such requests by policyholders.
(3) The Net Worth of the applicant, on grant of in-principle approval by the Authority,
shall be at least ? 25 Crores before issuance of certificate of registration to it.
(4) The applicant or its sponsors shall have demonstrable competence and experience
of similar activities, volumes and technology.
(5) The applicant or its sponsors shall have proven financial and organizational strength
to undertake and execute the project.
(6) The applicant or its sponsors shall have no conflict of interest with insurance
business.
(7) The insurance activities to be undertaken by the applicant shall be under the sole
supervision of the Authority with no conflict with the supervisory role of other
regulatory bodies.
 9.38 Insurance Intermedia ■a

(8) The applicant shall have no foreign direct investment.

(9) Any transfer of shares exceeding 5% of the paid up capital in the applic..-
company shall require prior approval of the Authority.
(10) The insurance repository or its approved person shall not be engaged in insurants
solicitation or in any of insurance related activities and services. Provided that ar
IRDA licensed entity may act as approved person.
(11) To avoid a potential conflict of interest no insurance company shall hold more thr:
10% of the paid-up capital of the applicant company or hold any manager..
position in the applicant company.

A p p lica tio n for Grant o f C ertifica te o f R eg istra tio n

(1) The Authority shall have power to limit the number of insurance repositories ar .
shall call for “Request for Proposals” as and when deemed necessary.
(2) On calling for ‘Request for Proposal’ an application for the grant of a certificate
registration as an “insurance repository” shall be made to the Authority in Form -
Insurance Repository -1. It shall be accompanied by a non refundable processing
fee of ? 10,000/- drawn on IRDA, Hyderabad.
(3) No person shall act as an insurance repository unless it obtains a certificate of
registration from the Authority and no insurer shall engage an insurance repository
who has not obtained a certification of registration from the Authority.
(4) The power of the Authority to grant the certificate of registration shall be final.
(5) The certificate of registration shall be renewed every year on payment of an annua]
fee of ? 20,000 in favour of IRDA payable at Hyderabad unless the Authority
decides, either to suspend or cancel it, as provided in these Guidelines.

F u rn ish in g o f in fo rm a tio n , cla r ific a tio n and p erson al

r ep re sen ta tio n
(1) The Authority may require the applicant to furnish such further information or
clarification regarding matters relevant to the activity of the insurance repository for
consideration of the application.
>. (2) The applicant shall, if so required, appear before the Authority for personal
representation, in connection with the grant of certificate of registration.

C on sid eration o f A p p lication for Grant o f C ertifica te o f

R egistration
Every application received by the Authority pursuant to these Guidelines shall be
considered by it within a reasonable time and its decision thereon communicated to the
applicant.
nsurance Intermediaries 9.39

Grant o f C ertifica te o f R eg istra tio n

(1) If the authority is satisfied that the company is eligible to act as an insurance
repository, may grant it a certificate of registration in Form - Insurance Repository
- 2 subject to the following, namely:
(a) the insurance repository shall pay the registration fee of Rs 50,000 drawn in
favour of IRDA, Hyderabad within fifteen days of receipt of intimation from
the Authority.
(b) the insurance repository shall comply with the provisions of the Insurance Act,
1938, the IRDA Act, 1999, the Regulations made there under, guidelines and
circulars issued by IRDA from time to time;
(c) the insurance repository shall carry on insurance activity as given in the main
objects of the company.

P h y sica l V erification
The Authority shall do a physical verification of the infrastructure facilities before
granting a certificate of registration.

P rocedure W here C ertifica te o f R eg istra tio n is n o t G ranted

(1) Where an application for the grant of certificate of registration does not satisfy the
requirements, the Authority shall reject the application after giving the applicant an
opportunity of being heard.
(2) The decision of the Authority to reject the application shall be communicated to the
applicant in writing within thirty days of such decision, stating therein the grounds
on which the application has been rejected.

In ternal M onitoring, R eview and E valu ation o f S y s te m s and

C on trols
(1) An insurance repository granted certification of registration shall ensure:
(i) adequate internal mechanisms for reviewing, monitoring and evaluating its
controls, systems, procedures and safeguards.
(ii) that the integrity of the automatic data processing systems is maintained at all
times and take all precautions necessary to ensure that the records are not lost,
destroyed or tampered with and ensure that sufficient back up of records is
available at all times at a different place.

A p p o in tm en t o f C om p lian ce O fficer
(1) An insurance repository shall appoint a compliance officer who shall be responsible
for monitoring the compliance of the Act, Regulations, guideline' c:r-----'
| 9.40 | Insurance Intermediar s

instructions, etc., issued by the Authority or the Central Government and

redressal of policyholder’s grievances.
(2) The compliance officer shall immediately and independently report to the Boan
any non-compliance observed by him.

M ain ten an ce o f record s by in su ra n ce r ep o sito ries

(1) Every insurance repository shall maintain the following electronic records at*;
documents, insurer wise, namely:
(a) Records of e-insurance accounts with an unique number;
(b) records of e insurance policies issued and records of e insurance polici;
converted back into physical form;
(c) the date of assignment in insurance policies issued in electronic form;
(d) a register and an index of policyholders and their nominees / assignees
beneficiaries in the respective life insurance policies;
(e) record of instructions received from and sent to policyholders and insurers;
(f) History of claim data;
(g) such other records as may be specified by the Authority from time to time for
carrying on the activities as an insurance repository.
(2) Every insurance repository shall intimate the Authority the place where the records,
documents and their back up facilities are maintained.
(3) Subject to the provisions of any other law, the insurance repository shall preserve
records and documents for a minimum period of ten years from the date of
termination or assignment of insurance policies from its records.

S y s te m s to m a in ta in p rivacy o f data
The insurance repository before commencing the operations shall put in place measures
to safeguard the privacy of the data maintained and adequate systems to prevent manipulation
of records and transactions.

In su ran ce p o lic ie s elig ib le to hold in e le c tr o n ic form

(1) The following classes of insurance policies are eligible to be held in the electronic
form;
(a) All individual life insurance policies including health and pension policies
including those issued to groups issued by registered life insurance companies
with IRDA
(b) All general insurance policies held by individuals including groups policies
Insurance Intermediaries 9.41

(c) Any other class of insurance policies that may be notified by IRDA under
these Guidelines from time to time

Norm s for o p en in g o f E -Insurance A ccou n t

In order to hold e insurance policies a separate and distinct e-insurance account shall be
opened with insurance repositories for keeping insurance policies in electronic form.

A greem en t b e tw e en In su rers and In su ran ce R ep o sito ry

(1) An Insurer shall enter into an agreement with one or more insurance repositories for
maintaining the electronic insurance policies of their respective policyholders.
(2) An agreement referred herein shall be in such form as may be specified by the
Authority, if any, from time to time.
(3) A copy of the agreement entered into between the insurance repository and the
insurer or any modification thereof, shall be filed, within 15 days of its execution or
modification, as the case may be, with the Authority.
(4) The parties to the agreement shall agree between themselves on the scope of the
contract and the facilities that have to be provided. Such an agreement shall also
prescribe the remuneration that may be payable to the insurance repository by the
insurance company.

A pproved P erso n s o f In su ran ce R e p o sito r ies

(1) In order to discharge the services and obligations, an insurance repository may
appoint any number of approved persons to represent it before policyholders,
subject to prior permission of IRDA. In its application for permission to appoint
approved persons, the insurance repository shall specifically spell out the duties and
obligations of these approved persons.
(2) The insurance repository shall remain liable to the omissions and commissions of
its approved persons while attending to the request of the policyholders.
(3) An approved person shall not be allowed to access the e Insurance Accounts.

S e r v ic es o f In su ran ce R e p o sito r ies

(1) A policyholder who opens an e Insurance Account may avail the services of any
insurance repositories to which Certificate of Registration is issued by Authority
(2) An insurance repository shall make available provision in its systems to enable the
policyholder to pay the premiums online through the portal of the insurance
repository.
(3) Eyery insurance policy held in e-Insurance Account shall be identified with a
unique policy number as allotted by the insurer.
 9.42 Insurance Intermediaries

(4) In addition to the offices of insurance companies, an insurance repository shall also
be a servicing center to the extent of insurance repository related services in respec:
of e Insurance Policies held in the elA. An insurer, at its option, may delegate
certain pre determined policy services subject to these Guidelines.
(5) An insurance repository shall acknowledge all the servicing requests received frorr.
the policyholder.

In su ran ce r ep o sito r ie s to in d em n ify lo s s in c e r ta in c a s e s

(1) Due to the negligence of the insurance repository or its approved person.
(2) Every insurance repository shall maintain adequate amount throughout the val idity
period of Certificate of Registration.
(3) The insurance cover shall indemnify an insurance repository against any error,
omission or default (unintentional or fraudulent or breakdown of system).

G rievan ces R ed ressal C ell o f In su ran ce R e p o sito r ies

A grievance cell is must for the policyholders managed by Integrated Grievance
management system. They must solve the problem within the time frame specified by the
authority.

P ow ers o f A u th ority to call for in fo rm a tio n , carry o u t in s p e c tio n

and enqu iry
The Authority has complete power to call for any information , on being satisfied that i;
is necessary in the public interest or in the interest of policyholders so to do, may, by order in
writing.

Pow er o f A u th ority to ap p o in t an A uditor

The Authority shall have the power to appoint an auditor to inspect or investigate, into
the books of accounts, records, documents, infrastructures, systems and procedures or affairs
of a insurance repository or its approved person:

A u th ority to recover th e E x p en ses

The Authority shall be entitled to recover from the insurance repository, such expenses
including fees paid to the auditors as may be incurred by it for the purposes of inspecting or
investigating the books of accounts, records, documents, infrastructures, systems and
procedures of the insurance repository or its approved person as the case may be.

P en a lty for F ailure to F urnish In form ation , R eturn

There is penalty for failure to enter into an agreement, to redress policyholders
grievances, for delay in issue of electronic issuance of insurance policies, failure to reconcile
Insurance Intermediaries 9.43

records or when the insurance repository fail to comply with directions issued by Authority
under these Guidelines

C a n cella tio n or S u sp e n sio n o f C ertifica te o f R eg istra tio n

The Certificate of Registration of the insurance repository may be cancelled or suspended
after due notice and after giving the insurance repository a reasonable opportunity of being
heard.

R eports to th e A u th ority
(a) The insurance repository shall submit periodical reports to the Authority as
specified hereunder
(b) The insurance repository shall furnish to the insurance company and the Authority
an annual report and any other return, as may be, required by the Authority on its
activities.
(c) The Annual Report, duly certified by the directors of insurance repository and the
Chief Executive Officer shall be submitted within a period of sixty days of the end
of its financial year or within such extended time as the Authority may grant.
The insurance repository shall submit to the Authority information, statistics and other
MIS reports in the forms as the Authority may specify from time to time.

OTHERS
Insurance companies are upgrading to new technologies and the most of insurance
companies are working with the help of information technology. With the advent of internet,
the profile of the insurance agents are also changing. The complexities are solved and
managed by various insurance specialists.
• Insurance specialists are those experts who are specialized in the field of insurance.
These specialist can be Life insurance specialists where they maintain the complete
record of the life insurance policies as well as Health and other insurance policies.
The coding, billing of all the insurance policies is done by these specialists.
• These are trained professionals who have certification in the field of insurance. These
specialist actually analyse the insurance laws and policies made by the government
from time to time and help the insurance companies in smooth functioning of the
insurance companies.Theyalos help the government in implementing the Medicare
and other Life insurance policies to the public at large.
• Many insurance specialists are also employed in the health care industry where they
deal with billsand payments including by deciphering the billing codes and
processing claims. Specialists may also keep the record of all the persons who have
taken different types of policies in the insurance company.
 9.44 Insurance Interne: mm

• Insurance Regulators: Insurance regulators are the authorities and the bod:- a J
actually regulate the activities of the insurance companies. The insurance sect -
losing its business due to numerous complaints from the insured. These :•
actually help the insured by regulating the insurance companies and their monor* •* .1
These regulatory body includes:
• IRDA Insurance Regulatory and Development Authority Explained in detail ir. n
chapter
• Tariff Advisory Committee
• The Tariff Advisory Committee is a body corporate, which controls and regulate- m t
general insurance business.
Role of Advisory Committee
(a) It determines the rates, terms and conditions offered by insurance companies
(b) The Advisory Committee disseminates the information required by i d
insurance companies to perform their functions efficiently.
• Every insurer is required to make an annual payment of fees to the Advisor
Committee. Generally it is one percent of the total premiums
Insurance Association of India, Councils and Committees
Insurance association is an association of all the insurance companies incorporatec a
India and all those which are not domiciled in India are associate members of the Insurar .
Association.
There are two councils of the Insurance Association, namely the Life Insurance Coun.
and the General Insurance Council. These association regulates the functioning of tr
insurance companies by making sure that these work under the provisions laid in tie
Insurance Act.

OMBUDSMEN
The next insurance regulatory body is the Ombudsmen appointed in accordance with tr;
Redressal of Public Grievances Rules, 1998, to resolve all complaints made by the insurers ::
claims settlement in a cost-effective, efficient and effective manner.
Any person can complain to the Ombudsman to solve their problem in a proper manner
It is essential the complainant must have approached the insurance company before makin.
any complaint to the ombudsman and that complaint was rejected by the insurance company.
The complaint should not be more than one year old.
There is no case pending in the court.
The complaints can be related to the dispute relates to claims, delay in settlement of
<
claims and the non-issue of any insurance document to customers after receipt of premium.
Insurance Intermediaries 9.45

The Ombudsmen act as a counsellor and mediator and try to solve their problem by
mutual understanding.
The ombudsman can take decision which will be binding on the party to solve the
problem.

| CONCLUSION
Insurance intermediaries are the link pin between the buyers and the sellers of the
insurance policies. Thus it is necessary on the part of insurance intermediaries to act more
responsibly and create trustworthy relations with the buyers of the insurance policy.

^ R E V IE W QUESTIONSl------------- ~
A. SHORT ANSWER TYPE QUESTIONS
1. What do you mean by insurance intermediaries?
2. What are different types of insurance intermediaries?
3. Who is an insurance agent?
4. What do you mean by TPA?
5. Who are Web aggregators?
6. What do you mean by insurance repositories?
7. What are the conditions for establishing insurance repository?

B. LONG ANSWER TYPE QUESTIONS

1. What do you mean by Insurance intermediaries? Explain different types of insurance
intermediaries?
2. Who is an insurance agent? Discuss the provisions for appointment and removal of
insurance agent?
3. What do you understand by TPA? Discuss TPA in heath services in detail.
4. Who are Web aggregators? Also discuss the provisions laid by IRDA for web aggregators
5. What do you mean by Insurance Repositories? Discuss in detail.

<$><$><j><e>
 Privatisation Of
Insurance In India
| INTRODUCTION
India adopted mixed economy as a system for economic development. The public and
private sectors were given specific roles to play. The public sector was given more
importance in industrialising the country in the beginning. With the passage of time, the role
of private sector was expanded whereas the areas for public sector shrinked. The main
reason for this change was the low productivity, inefficiency and almost nil profitability at
most of the public sector undertakings. The Industrial Policy of 1991 brought a sea change in
the roles of these two sectors. The Government of P.V. Narsimha Rao adopted liberalisation
and globalisation approach towards economic development and opened almost all sectors of
economy to the private sector. World Trade Organisation also pleaded for opening up of
economies to foreign investments. The decision to privatise insurance sector was taken in
this context in the year 2002.

| HISTORICAL BACKGROUND
The history of Indian insurance industry can be traced back to early civilisation of
India. With the progress of civilisation, the incidence of losses started increasing. It gave
rise to the concept of loss sharing during Aryan period through co-operatives. General
insurance business in its refined form started in India from the beginning of the 19th
century. Oriental Insurance Company was the first British Insurance Company to start its
business 1818. The main aim of this company was to help widows of British community in
India. During the next fifty years, a number of companies started insurance business. It was
in 1870 that the first Indian Company, Bombay Mutual Life Assurance Society was
started. British Companies earlier used to charge 10 to 15 per cent more premium from
Indians as compared to rates charged from British nationals. The first Indian Company
 10.2 Privatisation of Insurance in Inch ■

aimed to provide insurance to Indians on normal premium rates. The Life Insurant d
Companies Act of 1912 was the first legislation for regulating insurance business in India.
The Insurance Act 1938 was, however, the first comprehensive legislation governing non
only life but also non-life insurance business. This act was passed to regulate insurant; i
business in India and to exercise government control over the funds and expenditure of the]
insurance companies. Life insurance business was nationalised in 1956 following the
pursuance of philosophy of socialistic pattern of society. Government had taken over thej
working of 245 companies working in this sector. Re-insurance work in India was started i*
1951. Accordingly insurance companies were required to go for compulsory re-insurant:
with India Re-insurance Corporation Ltd. and Indian Guarantee and General Insurant:
Company Ltd.
There was unhealthy state of affairs in insurance sector in India. The benefits from this
sector were not percolating to policy holders. General insurance was nationalised in 19“
through an Act of Parliament. A General Insurance Business (Nationalisation) Act was
passed and General Insurance Corporation of India was established on 1st January 1973. The
business of 107 companies, foreign as well Indian, was amalgamated into four subsidiaries
under General Insurance Corporation of India. The four subsidaries were the New Indie
Assurance Co. Ltd. New Delhi ; Oriental Insurance Co. Ltd with head office at Mumbai;
National Insurance Co. Ltd. with head office at Kolkata and United Insurance Co. Ltd..
Chennai. Both LIC and GIC are state owned monolithic and monopolistic corporations which
face no competition. The rationale behind creating four subsidiaries for general insurance was
to create healthy competition among these companies and to provide better and efficier.:
services to the customers.
The main aims of nationalising insurance business was to spread the insurance message
to rural areas and to mobilise savings of rural people for national development. Inspite of
monopoly situation in life and general insurance, the aim of the government was not
achieved. The business of government corporations mostly remained confined to urban area-
only. Government regulations were framed to utilise funds of this sector for the betterment of
social infrastructure and eradication of poverty through various schemes.

PROGRESS OF GENERAL INSURANCE SECTOR POST

I NATIONALISATION

Insurance sector was nationalised with a view to create awarenss among people about
insurance and mobilise their savings for the economic development of the country. Thi-
sector has shown growth after nationalisation but it has not achieved the desired results. The
progress of insurance sector after nationalisation can be assessed as follows:
1. Growth of Business. Insurance sector has substantially grown after nationalisation
There is a tremendous increase in revenue from premium. The profitability of this sector ha-
'nvatisation of Insurance in India 10.3

-creased by 42 times after nationalisation. The net worth of general insurance sector has also
rone up many times.
2. Wide Product Range. Since nationalisation general insurance companies have added
arge number of insurance products depending upon the needs of the customers. The range of
Toducts and quality of service has substantially increased. A whole lot of new covers were
-troduced to keep pace with the technological changes. Customer satisfaction has become
he guiding philosophy of the subsidiary companies. In order to handle customer complaints,
pievances cells have been established at the divisional, regional and head office levels.
3. Tariff Advisory Committee. After nationalisation a Tarrif Advisory Committee has
>een established through parliament proclaimation. It will help in creating healthy practices
n underwriting and profitability portfolio management. This committee also helps in fixing
ariff rates for different types of businesses. Foreign companies entering insurance business in
ndia also wanted a regulatory authority to prevent rate wars among companies and ensure
:ompetition based on quality of service rendered to the customer.
4. Taking up Socially Desirable Projects. Insurance companies in India have helped in
aking up many socially desirable projects. There are efforts for improving housing, create
obs, promote and create socially desirable investments and a host of other programmes. The
irudent policies of insurance sector have helped Indian society and economy.
5. Growth of Trade, Commerce and Industry. Insurance sector has greatly helped the
irganised industry, commerce and trade. This sector has ensured risk of every new
ievelopment for the betterment of economy. It also provides technical expertise to underwrite
ugh technology risks including satellites off share oil installations etc. Fire insurance
premium has been reduced twice and at present it is considered lowest in the world.
6. Expansion of Organisational Network. In order to help common man and persons at
every place, insurance companies have expanded their organisational network. It has been
msured that no area is left uncovered by insurance network. All segements of society have
Deen provided with insurance services.
Insurance industry has expanded its activities after nationalisation. It has contributed a lot
for the economic development of the country and has helped all sections of society by
providing them different types of insurance services.

| DRABACKS OF RELULATED INSURANCE SECTOR

Insurance companies acquired monopoly after nationalisation. There was no competition
from private sector. It created a complacency in the working of life and general insurance
companies. There was a feeling that nationalisation of insurance has not helped in achieving
its objectives.
1. Dissatisfaction of Customers. It is generally said that customers are not satisfied by
the service provided by insurance companies. The main reason may be the complacency of
 10.4 Privatisation of Insurance in I n : *

the employees of insurance companies because of lack of competition from private sec: r.
The other reasons may be the absence of suitable product range, gap between custo-r
aspirations and companies' performance and poor quality of pre and post insurance service
2. Lack of Suitable Product Range. There is a lack of effort on the part of : r
management to select product range as per needs of the customers and innovate new prod- .a
with the passage of time. Companies after nationalisation went for standard product rar._
and continued with them for long and customers' needs were not taken into account.
3. Lack of Education to Customers. Insurance Companies have not educated :
customers about the need for insurance and about the utility of various products offered i
them. This is the reason that large population of India is not going for insurance polic:r
Rural areas are the most neglected places where few offices have been opened by insurarv;
companies and no products are devised for the benefit of these sections of society.
4. Emphasis on Tax Planning Instrument. The emphasis of LIC has always been -
telling people that insurance policies help in saving income tax for the assured. Normal,
people who wanted to save some tax will go for insurance cover. This emphasis on the part
LIC has limited the scope of insurance products. Instead, insurance should have be^-
propogated as an instrument of investment and instrument for saving.
5. Retail Business Ignored. LIC and GIC have large number of agents and developme-
officers for getting business from the market but only small section of them are career agent
People take up this work as a part time work and do not devote much time for insurance
Such type of workforce is not serious about this profession. So full insurance potential is n
tapped.
6. Tardy Claim Settlement. Insurance companies have a tardy procedure of claim
settlement. The insured are unnecessarily harassed at the time of settlement of claims. Th:
type of system discourages people from taking up insurance claims.
7. Less Emphasis on Health Insurance. Health insurance is an accepted way of life al
over the world and is taken up as a necessity. In India, health insurance has not bee:
popularised. The procedure followed for meeting claims is defective. The claimant will have
to meet the medical bills first and then submit bills for claims. There are no arrangement'
with hospitals where insured may get free treatment. There is a need to simplify the claim'
procedures so that more and more people may take advantage of health insurance schemes.

| NEED FOR REFORMS IN INSURANCE SECTOR

The monopoly of government companies in insurance sector has restricted the growth of
this sector. This sector can make substantial contribution to the economic growth of the
country through mobilising savings of large number as persons. Insurers can act as important
constituent for facilitating capital accumulation and infrastructure development. Since
insurance companies come under Ministry of Finance, there is limited operational flexibility.
Privatisation of Insurance in India 10.5

Innovation in products have become restrained of the companies were required to take
clearance from Finance Ministry. The monopoly of the whole sector in the hands of LIC and
GIC is against the philosophy of economic liberalisation.
Reforms in insurance sector are necessary for the following reasons.
1. Bringing efficiency in Working. Public sector enterprises are known for inefficiency
in India. Government has been investing funds in these undertakings for keeping them going.
In order to create efficiency and competitiveness in insurance sector it is essential that it
should be privatised.
2. Growth and Customer Oriented Approach. Growth is essential for the survival of
every enterprise. Growth is possible only if the customer feels satisfied by the service
provided by the organisation. Insurance companies were not providing service to the
satisfaction of customers. There is a need for change in approach of management. Policies
need to be provided as per the needs of the customer and after sale service should be
improved.
3. Avoiding Losses of General Insurance. General insurance sector has grown
tremendously and revenue receipts have substantially increased. More general policies bring
more insurance claims also. Road accidents account for most of the claims. There is a need to
create awareness about road safety measures. Insurance companies should take up such
causes and this will help in reducing losses from road accident claims.
4. Professional Outlook by Surveyors. The role of surveyors is very important in
general insurance. The surveyors are generally not professionally qualified people for the job.
Most of the surveyors take up this work as a part time assignment. Insurance companies settle
claims of crores of rupees on the recommendation of surveyors. There is a need to have
professional people for serving as surveyors so that claim settlement work becomes smooth
and fair.
5. Human Resource Development. In order to cope with the changing business
environment there is a need for human resource development. Human factor plays an
important role in insurance sector. In order to increase efficiency of the business there is a
need for professional approach among employees. There should be orientation programmes
for the staff to update their knowledge.
6. Need for Regulatory Body. There is a need for regulatory body for insurance on the
lines of SEBI. Such an authority can help in increasing the insurance service base,
diversification, high quality of service, making insurance industry an effective instrument for
financial resource mobilisation and for achieving the objective of social welfare.
7. Mobilising Rural Insurance. Indian economy is dominated by agriculture sector and
70% of its population lives in villages. This sector has remained ignored for insurance
purpose. There is a need to explore insurance possibilities of this sector. There is a need to
devise innovative products for rural sector so that people are willing to utilise their savings in
insurance sector.
 10.6 Privatisation of Insurance in India

8. Liberation from Government Controls. There is a need to liberate insurance sector

from unnecessary controls. Since LIC and GIC work under finance ministry, there are
possibilities of government interference due to political reasons. Though there is Tariff
Advisory Committee for recommending tariff rates but its decisions are sometimes not
implemented due to political reasons. There is a need to liberate insurance sector from
government controls so that companies are able to take decisions based on the needs of the
industry.

| REFORM MEASURES IN INSURANCE SECTOR

These was a need for reforms in insurance sector. The liberalisation and privatisation
policy followed by Government of India since 1991 necessitated reform measures in this
sector. The first step in this direction was the appointment of a committee to suggest
measures for the improvement of this sector.

| MALHOTRA COMMITTEE REPORT

In the beginning of 1990's, Government of India, in the light of developments in the rest
of the World, decided to globalise Indian economy. The policy involved deregulation and
privatisation of sectors which were controlled by the government. A committee under the
chairmanship of Sh. R.N. Malhotra, a former Governor of Reserve Bank of India, was set up
to study the insurance sector. The main object of the Committee was to study the need for
opening up of insurance business to private sector. The committee gave far reaching
recommendations for making basic structural changes in insurance sector.
Some of the recommendations were as follows :
(i) Private sector be allowed entry into insurance sector. The number of new entrants
should be controlled.
(ii) The minimum paid up capital for a new entrant should be ? 100 crore. However, a
lower capital requirement can be prescribed for state level co-operative institutions
taking up life insurance business.
(iii) The holdings of promoters in a private company should not exceed 40 per cent of
capital. However, if promoters want have higher holdings in the beginning, this
holding should be brought down to 40 per cent within a specified time by offering
the excess holding to public. No person other than the promoters should be allowed
to hold more than one per cent of the equity. The promoters, however, should not
hold less than 26 per cent of the paid up capital.
(iv) The foreign insurance companies should be allowed entry on selective basis
only. They should be required to float Indian companies or have joint ventures with
Indian partners.
Privatisation of Insurance in India 10.7

(v) The committee recommended that General Insurance Corporation of India (GIC)
should cease to be a holding company of other four subsidiary companies. GIC
should function exclusively as a reinsurance company and act as Indian reinsurer
under the Insurance Act.
(vi) The paid up capital of GIC be raised to ? 2000 crore, 50 per cent of which should
held by the government and remainder be held by the public at large including
some reserved part by its employers.
(vii) All the four subsidiaries of GIC be under the control of government and their
capitals be raised to ? 100 crore each.
Malhotra Committee which submitted its report on 7.1.1994 felt that the insurance
regulatory apparatus should be activated even in the present set up of nationalised set up. The
committee was of the view that Insurance Regulatory Authority (IRA) in the form of
statutory autonomous, in the lines of Securities and Exchange Board of India (SEBI) be set
up. In order to avoid delay involved in bringing out a legislation, the government established
an independent Insurance Regulatory Authority for insurance industry vide its resolution on
23-1-1996. The authority will have a chairperson and other members not exceeding seven in
number, to be appointed by Central Government. IRA has been given the role of a watchdog
and regulator for insurance sector in India.
Insurance sector was opened to private sector in February 1997. Insurance Regulatory
and Development Authority Act, 1999 was passed by Parliament and President of India gave
his consent on 29th December, 1999.
IRDA aims to fulfil the following objectives :
(1) To provide for the establishment of an autonomous authority to protect the interests
of insurance policy holders.
(2) To regulate, promote and ensure orderly growth and development of insurance
industry in India.
(3) To regulate the matter connected with and incidental to insurance industry.
(4) The Act aims to amend the Insurance Act, 1938, Life Insurance Corporation Act,
1956 and General Insurance Business (Nationalisation) Act, 1972.

| REGISTRATION OF COMPANIES FOR INSURANCE BUSINESS

As a result of opening up of insurance to private sector, following insurers have already
got registered with IRDA.

Life In su ran ce
1. LIC of India.
2. HDFC Standard Life Insurance Company Ltd.
 10.8 Privatisation of Insurance in I n c :

3. Max-New York Life Insurance Company Ltd.

4. ICICI Prudential Life Insurance Company Ltd.
5. Om Kotak Mohindra Life Insurance Company Ltd.
6. Birla Sun Life Insurance Company Ltd.
7. Reliance Life Insurance Company Ltd.
8. Tata AIG Life Insurance Company Ltd.
9. SBI Life Insurance Co. Ltd.
10. ING Vysya Life Insurance Company (Pvt.) Ltd.
11. Bajaj Allianz Life Insurance Company Ltd.
12. The Metilife India Insurance Company (Pvt.) Ltd.

G eneral In su ran ce
Following'Companies registered themselves for general insurance business.
1. New India Assurance Company Ltd.
2. United India Assurance Company Ltd.
3. National Insurance Company Ltd.
4. Oriental Insurance Company Ltd.
5. Royal Sundram Alliance Insurance Ltd.
6. Reliance General Insurance Company Ltd.
7. Tata AIG General Insurance Company Ltd.
8. Bajaj Allianz General Insurance Company Ltd.
LIC and GIC are not having monopoly in insurance sector. Most of the private operate-
are alligning with established foreign insurance companies and entering into joint venture
The private operators are offering new policies as per the requirements of different sectors
society. SBI Life Insurance has launched three products, sanjeevan, sukhjeevan and your .
sanjeevan and has sold over 300 policies by this time. The insurance companies are ab
trying up with banks to reach customers at every place. The rural and semi-urban place
which have so far been neglected by insurance companies are being taped by offerir.;
attractive policies. So far only 20% of the insurable population has been covered unde­
insurance while the remaining population has yet to be insured. Birla Sunlite has brought o_-
a number of policies in life insurance sector. Similarly Allianz Bajaj has offered a new 15
year policy, ICICI Prudential has brought out a number of insurance plans offerir.:
pensionary benefits. Other companies are also bringing out newer and attractive products fo:
different social groups. Similarly efforts are made to bring 'out new policies in general
insurance. The competitive situation created by private sector companies has raised the
growth rate of insurance sector. The growth rate which was stagering at 5.8% per annum
the nineties is likely to grow at a faster pace.
Privatisation of Insurance in India 10.9

ARGUMENTS AGAINST PRIVATISATION OF INSURANCE

I SECTOR

In India, insurance sector, life as well as general insurance, is under the government
control. LIC and GIC have monopoly over insurance business. With the globalisation of
Indian economy, insurance sector opened to private sector and foreign companies. There
were opinions which disfavoured privatisation of insurance sector in India.
Following are the arguments advanced against privatisation of insurance sector.
1. Surplus Funds. Insurance is such a sector where inflows are more than
outflows. The policy holders pay premium in advance and claims are met only at a later
stage. This sector does not require additional resources from outside. When a sector is
financially viable by itself then where is the need of inviting private and foreign
investments. Insurance companies are working as public sector enterprises. Emphasis can be
laid on the expansion of activities of LIC and GIC without allowing the entry of private
sector. These companies have huge surpluses with them. One can see the real position from
the fact that LIC was established in 1956 with a capital of ? 5 crore, its business was ?
361392 crore on March 31, 1996. When this sector is growing at a rapid pace'then there is no
need for privatisation.
2. Scope for Competition in Present Set up. Generally it is said that no sector can
grow properly in the absence of competition. Since LIC and GIC have monopoly over
insurance business, they do not face any competition from outside and their working is not
improving as it should have been. In general insurance there are four subsidiaries of GlC\and
they are competing with each other and show their independent performance. Similarly, LIC
has a competitor in Postal Life Insurance. If competition is the only factor, there can be more
subsidiaries which should provide competition to each other. Competition can be created
even without privatising insurance business.
3. Long-term Solvency Needed. The companies undertaking insurance business,
especially life insurance, are required to have long-term solvency. In life insurance policies
mature after fairly a long-time. For example, a policy purchased for 20 years will mature
either on the death of a policy holder or after 20 years whereas the insured will pay the
premium at regular intervals. The insured should be sure that the company will remain in
working in 20 years and his policy amount will be paid on maturity. This type of confidence
has been built up in LIC but the same may not be true for new companies. So long-term
solvency is essential for the growth of insurance business. When people have confidence in
already existing companies there is no need to bring in new companies.
4. MNC's to Benefit More. With the entry of multinational insurance companies in
Indian sector, they will benefit more as compared to Indian companies. LIC has not been
able to make much headway in foreign countries inspite of its best efforts. On the other hand
 10.10 Privatisation of Insurance in

foreign companies are sure to grab much of the insurance business in India. The ch_rj
the revenue of Indian companies will be lost to foreign companies.
5. Pricing Wars. Insurance at present is a monopoly of LIC and GIC, there
problem in fixing premium rates for different types of policies. When private and fcc=
companies enter this sector, there will be a in cutting of premiums in various segme-
policies. This will adversely affect the solvency of insurance companies. There are
segments like Motor Insurance where companies would like to set very high premas
because of more third party claims. A fear of making cartels for fixing premium'
remains.
6. Absence of Social Obligations. Private sector does not pay much attention to - •_
obligations. The rural sector is vastly untaped for insurance. If this sector is not luc:_:
then private companies will not extend their business to rural areas even though
necessary from social point of view. Public sector undertakings take up even those whicr ,
not profitable but are important for the society. Private and foreign companies will enter -
those areas of insurance business which are lucrative and profitable, leaving out those w:
may not give more profits even if these areas are important.
7. Large Insurance Funds. Insurance sector collects huge funds from public M
business. LIC and GIC have huge investible funds. In case of privatisation, these funds »
go to private hands. Insurance companies are providing these surplus funds for the econc -
development of the country. Government makes use of insurance funds for the upliftme:
weaker sections and for development of underdeveloped areas. With the privatisatior
insurance business, these funds will be used as per the requirements of owner compa- m
private companies will use the surpluses for expanding their business or in those aroJ
where these companies have business. Private companies do not think of nati -jl
priorities but have their own plans for investments. With the privatisation of insurajJ
business, huge funds will go to private hands.
8. Efficiency not Linked to Ownership. Malhotra Committee recommended, r
privatisation of insurance sector that it will bring efficiency and productivity. There is m
link between efficiency and ownership of a concern. Private sector concerns are not ah'. -
efficient and public sector units need not be assumed to be inefficient. Public sector units . ji
be efficient if they are properly managed. Efforts should be made to improve efficienc;. -
LIC and GIC instead of opening this sector for private entrepreneurs. Had all private urns
been efficient, there would not have been any failure in this sector. So privatisation is no:
answer for success or failure of a concern.

| RATIONALE FOR PRIVATISING INSURANCE BUSINESS

The membership of World Trade Organisation (WTO) has put many responsibilities oil
member countries. The developed countries want Indian Government to open up insuran.;
sector for entry of foreign firms. The policy of privatisation of public sector units which w_
Privatisation of Insurance in India 10.11

started after the New Industrial policy of 1991 was carried to insurance sector also. Insurance
sector, being a monopoly sector, developed certain lethargy and inefficiencies. In order to
improve its working and make it responsible to the market needs this sector was selectively
opened for private sector in 1997.
Following are the grounds on the basis of which the opening up of the insurance sector to
private sector can be justified.
1. Size of the Market. The potential market is estimated at 312 million people. Some
estimates suggest that only 25 percent insurable population has taken up the insurance
policies. According to National Council for Applied Research, 50 million people have the
capacity to pay an annual premium of ? 10,000, 100 million have the capacity to pay annual
premiums of ? 7,000 and another 50 million have the capacity to pay ? 3,500 per
annum. Thus, there is a huge market to be tapped.
2. Enough for All Companies. There is no reason for LIC & GIC to worry about their
future. There is enough market for everyone *to work upon. Each has to create their own
place in the insurance market.
3. Low Penetration Ratio. The penetration ratio is extremely low in India. Per Capita
Insurance premium in India, in 1999, was $ 8 only as against $ 4,800 in Japan. In the year
before that the per capita long term insurance was estimated at $ 5 (? 202) only. The life
insurance premium was only 1.4 percent of GDP. The penetration of non-life business is still
lower at ? 81.26 or 0.56 per cent of GDP. LIC and GIC have been able to tap only 10 per
cent of the market and 90 per cent of the market is still untapped.
4. Growth in Economy & Insurance Business. The economy has grown at the rate of
5.6 per cent per annum during 1990's. The gross domestic savings are around 25 per cent,
which has the potential to grow to 45 per cent. The Insurance business life and non life has
been showing growth rate of 17 and 12 percent respectively. Therefore, there is need to have
more players in the field.
5. Good Prospects for Rural & Social Sector The IRDA through its notification has
ensured that the insurers do not ignore the rural and social sectors. Since, they have statutory
obligation to do business in these sectors, the two sectors will get benefit.
6. Funds for Development of economy. Insurance funds are a good source for longterm
needs of funds in an economy. The untapped market has great potential for providing funds
for the long term projects, particularly, in the infrastructure.
7. The Regulatory Framework. The insurance sector was opened by the Govt, is
1998. The requisite regulatory framework, has been put in place by IRDA, through various
notifications. The IRDA and advisory committee have started functioning, therefore, the
private sector will work according to the guidelines given to them.
8. More Products Required. With the large potential customer base, it is required that
the products tailor made for requirement of customers should be introduced. This will be
possible only when, there will be competition in the market.
 10.12 Privatisation of Insurance in India

9. Employment Generation. When the economies grow, the contribution of the services
to the GDP increases. This trend has also been observed in India. There is great potential of
growth in employment through insurance and insurance related services.

| ADVANTAGES OF PRIVATISATION
Insurance business has mostly remained in government owned companies. Life insurance
was in the hands of LIC whereas general insurance was controlled by General Insurance
Corporation of India. It has been felt that monopoly of government companies has not helped
in the growth of insurance business as it should been. Privatisation of insurance has been
considered as an important step in the direction of liberalisation of this business.
Following are the advantages of privatisation of insurance business.
1. Boon for Financial Market. Insurance business collects huge funds in the form of
premium. This premium could not be invested as per the priorities of the business but
according to the guidelines of the government. While this business has been privatised,
financial markets will receive more funds in future. The growth of any economy is linked to
the volume of funds available in financial markets. The funds invested in financial markets
will prove to be a boon to the economy.
2. More Options for Customers. The entry of new players in insurance business will
bring more options for customers. Every company try to bring out newer and better products
for the customers so that they are able to get more business. The options offered to the
customers in the last few years shows that competition always helps customers. It is expected
that global players with their expertise and technology will use the network and expertise of
the local players to launch the quality products. New players will be focussing on market
requirements and introduce different products catering to the needs of various segments.
3. Innovative Strategies. The earlier insurance companies did not assign much
significance to the concept of niche marketing. A case in point is that of Mediclaim Policy,
the main health insurance product available in non-life sector. It is a single policy with the
terms and conditions applicable for all customers, the only difference being the option to
choose the sum insured. For private players innovation will be the main theme and
requirements of different sectors of society will be taken care of. This has started happening
at present. Various companies are offering products as per the needs of different sectors of
society.
4. Cheaper Products. The competition in insurance business will require the new
players to use the internationally tried techniques for better and cheaper customer service.
Every new company will try to attract more and more customers for their products. This will
be possible only when customers get cheaper products. New entrants may also be willing to
sacrifice margins in the initial years to build considerable presence in the long term.
5. Source of Employment. Employment will increase in both direct and indirect forms.
'rivatisation of Insurance in India 10.13

"he entry of new companies in insurance business has increased lot of employment. Every
ompany has set up offices at various places and has appointed large number of agents to
irocure business.
6. Increased Market Size. Competition will increase market size which will have its
>wn effects on the economy. LIC and GIC have been following conventional routes doing
'usiness. Besides old companies in business, a large number of new companies have entered
nsurance business. This entry has substantially increased market share of insurance business
ind this business is growing at a fast rate.
7. Increase in Efficiency and Productivity. Privatisation has helped in increasing
efficiency and productivity of insurance sector. The service to customers is improving and the
performance of this sector is going better as compared to past records. In fact the competition
has helped in improving overall working of insurance companies.

| DISADVANTAGES OF PRIVATISATION
Following are the disadvantages of privatisation of insurance sector.
1. Price War. The first fear of open competition is of price war. So far insurance sector
•vas the monopoly of two government companies. These companies fixed premium as they
Liked. In the present scenario, every company will try to attract customers for its products by
offering lower premiums. There is a feeling that price war may have adverse impact on the
long term performance of the companies.
2. Dominance of Foreign Companies. Insurance companies from many countries
nave shown interest in India markets. These companies have long experience of this line and
are likely to offer innovative products. Indian companies, on the other hand, having being
working under monopoly conditions may not be able to face the new challenge. There is a
rear that foreign companies may dominate Indian Insurance sector.
3. No emphasis on social obligations. Indian insurance companies have been keeping
social obligations as one of their aim and were devising their priorities accordingly. Private
olayers will have no social obligations to fulfil. They will have their profits in mind and
nothing more. One such example is that Appolo Hospital is tying up with a foreign company
:o bring out medicare policies for executives having a minimum of specific salary. It means
diat medical facilities will be available to only selected rich persons. Such players will prove
:o be non-judicious, not pro- social and only profit minded.
4. Inclination towards Urban Sector. In India three-fourth of the population is living in
rural areas whereas insurance facilities are mostly available to urban sector only. The
agriculture sector has been the most neglected sector. The farmers face natural vagaries and
are adversely affected many a times. There is a need for crop insurance but little has been
done in this sector. The private companies will concentrate on those sections of society which
 10.14 Privatisation of Insurance in Inc.;

have better financial strength and are able to pay premium. It is feared that rural sector v.
remain ignored under privatisation of insurance sector.
5. Misuse of Funds. Insurance sector has the potential of raising huge funds by way
premium. Earlier government used to give guidelines for the use of these funds for the prop;-
development of the economy. Now these funds are to be used by private players by having
their own priorities. They will invest mainly in those areas where investments fetch m -
returns and without having any regard for social needs. There is a huge time lag between v
collection of premium and meeting of claim, especially in life insurance, the fore:_-
companies may not flee with the funds when the claims are due after long term.
6. Fulfilling vested Interests. Private companies will have their own priorities for use
funds. They may be using the funds to consolidate their other business. Such situation v, .
not help in the development of social sector which has been the practise so far. Foreir:
companies may also repatriate insurance funds to their foreign destinations for achiev _
some other objectives.
7. Unhealthy Practices. There is a fear that competition may not lead to unhealti
practices. The companies will bother about collection of more and more premium -
whichever method it may be possible. The companies may offer attractive products withe _
the intention of meeting the needs later. Such practices will adversely affect the insurant,
sector and people may not lose faith in such players. The regulator should constantly kee: .
vigil on the unhealthy practices of various companies so that people's faith is not shaken -
insurance sector.

| FOREIGN INSURERS IN INDIA

Privatisation has increased the business in the insurance industry. The Government
India has proposed to raise the foreign investment from 26% to 49% recently. This «
further improve the market of insurance in India.
Foreign insurer or foreign insurance company is a company having head office outsit
India but branch office in India and paid up capital of 50% or more is held by Ind;_-
Company. It means Indian company will have control on management of the insuran,:
company.

EXPANDING THE SCOPE

• Ceiling: Proposed to be raised from 26% to 49%
• Composite cap: Includes both FII and FDI inflows
• Rider: Management and control should stay with Indians
• Capital: Immediate inflows of around ? 6,000 crore expected
• Benefit: Creation of jobs, long-term savings, innovative products
Privatisation of Insurance in India 10.15

• Reach: More funds for expansion to improve insurance penetration

• Status: Currently, non-life insurance penetration is 0.78%, life insurance penetration
is 3.2%
• Side-effect: FDI in pension sector will also go up from 26% to 49%

| KEY AMENDMENTS

After the amendments ratified by India Parliament on March 12, 2015, the scope of
Foreign Insurers has increased manifold times leading to huge inflow of capital in India
through FDI, FPI and Fils.
Some of the key amendments are :
1. There is increase in foreign investment from 26% to 49% which implies that inflow
of foreign capital will increase but Government still has kept control in the hands of
Indian companies.
2. The decision making control will remain with Indian companies.
3. Indian companies can raise various forms of capital instruments to foreign investors
(within cap of 49%).
4. Foreign reinsures can deal in reinsurance business also. Earlier they were not
allowed to do so.
5. IRDA has given detailed guidelines as well as rules to deal with these amendments.
6. Foreign insurers will not require any government approval upto 26% but beyond
26% to 49% the investments will be done with prior approval of the government.
7. Foreign investments can be done in any capital instrument but with the approval of
the governments.
8. Indian companies can appoint majority of directors in management of the company
leading to ‘control’ of the company in the hands of Indian companies but veto
rights can be given to foreign partners.

A pproved Public /P r iv a te In su ran ce C om p an ies

The Insurance Regulatory and Development Authority (IRDA) has informed that in
India, foreign companies can only form joint ventures with Indian companies. The list of the t
approved private life insurance companies operating in India and details of their joint venture
partners company-wise, year-wise and State-wise details of registered office are enclosed in
Annexure I.
 10.16 Privatisation of Insurance in India

ANNEXURE I -LIST OF INSURANCE COMPANIES

WITH FOREIGN PARTNERS
Annexure-I
List of Private Life Insurance Companies
Registered
SI. Regn Date of Year of Office
Insurers Foreign Partners
No. No. Registration Operation located in
(City/State)
1. HDFC Standard Life (Mauritius 101 23.10.2000 2000-01 Mumbai
Standard Holdings), 2006 Ltd. (Maharashtra)
Life
Insurance
Co. Ltd.
2. Max Life Mitsui Sumitomo Insurance 104 15.11.2000 2000-01 Mumbai
Insurance * co.Ltd, Japan (Maharashtra)
Co. Ltd.
3. ICICI- Prudential Corporation Holdings 105 24.11.2000 2000-01 Mumbai
Prudential Ltd , UK (Maharashtra)
Life
Insurance
Co. Ltd.
4. OM Kotak Old Mutual Plc„ South Africa 107 10.01.2001 2001-02 Mumbai
Life (Maharashtra)
Insurance
Co. Ltd.
5. Birla Sun Sun Life Financial (India) 109 31.01.2001 2000-01 Mumbai
Life insurance Investment Inc, (Maharashtra)
Insurance Canada
Co. Ltd.
6. Tata-AIG American International 110 12.02.2001 2000-01 Mumbai
Life Assurance Co.(Bermuda Ltd.) (Maharashtra)
Insurance
Co. Ltd.
7. SBl Life BNP Paribas Cardif, France 111 29.03.2001 2001-02 Mumbai
Insurance (Maharashtra)
Co. Ltd.
8. ING Vysya ING Insurance International 114 02.08.2001 2001-02 Bangalore
Life B.V., Netherlands (Karnataka)
Insurance
Co. Ltd.
9. Bajaj Allianz, SE Germany 116 03.08.2001 2001-02 Pune
Allianz Life (Maharashtra)
Insurance
Co. Ltd.
Privatisation of Insurance in India 10.17

Metlife Metlife International Holdings 117 06.08.2001 2001-02 Bangalore

India Inc, USA (Karnataka)
Insurance
Co. Ltd.
Reliance Nippon Life Insurance Co.Ltd. 121 03.01.2002 2001-02 Mumbai
Life Japan. (Maharashtra)
Insurance
Co. Ltd.
AVIVA Aviva International Holdings 122 14.05.2002 2002-03 Gurgaon
India Life Ltd., UK (Haryana)
Insurance
Co.Ltd
Sahara Life 127 06.02.2004 2004-05 Lucknow
Insurance (Uttar
Co. Ltd. Pradesh)
Shriram 128 17.11.2005 2005-06 Hyderabad
Life (Andhra
Insurance Pradesh)
Co. Ltd.
Bharti AXA AXA India Holdings, France 130 14.07.2006 2006-07 Mumbai
Life (Maharashtra)
Insurance
Co. Ltd.
Future ParticipatieMaatschapijGraafssc 133 04.09.2007 2007-08 Mumbai
Generali hap Holland NV, Netherlands (Maharashtra)
India Life (“Generali”)
Insurance
Company
Ltd.
. IDBI Aegis Insurance International 135 19.12.2007 2007-08 Mumbai
Federal NV. Netherlands (Maharashtra)
Life
Insurance
Company
Ltd.
Canara HSBC Insurance (Asia Pacific) 136 08.05.2008 2008-09 Gurgaon
HSBC Holdings Ltd. (Haryana)
OBC Life
Insurance
Company
Ltd.
'. AegonRelig Aegon India Holdings BV, 138 27.06.2008 2008-09 Mumbai
are Life Netherlands (Maharashtra)
Insurance
Company
Ltd.
 10.18 Privatisation of Insurance in India

DLF Prudential International 140 27.06.2008 2008-09 Gurgaon

Pramerica Insurance Holdings Ltd. USA (Haryana)
Life
Insurance
Co. Ltd.
Star Union Dai-lchi Life Insurance Co Ltd. 142 26.12.2008 2008-09 Mumbai
Dai-lchi Japan (Maharashtra)
Life
Insurance
Co. Ltd.
IndiaFirst Legal & General Middle East 143 05.11.2009 2009-10 Mumbai
Life Ltd. (Maharashtra)
Insurance
Co. I td.
Edelweiss Tokio Marine & Nichido Fire 147 10.05.2011 2011-12 Mumbai
Tokio Life •Insurance Co.Ltd. Japan (Maharashtra)
Insurance
Company
Ltd.

(Source : Press Information Bureau, GOI, Ministry of Finance 30th November, 2012)

^ R E V IE W QUESTIONSI ~ ~ — ~ — --------
A. SHORT ANSWER QUESTIONS
1. Describe the concept of privatisation.
2. What was the purpose of appointing Malhotra Committee ?
3. Name some private concerns entering life insurance.
4. Explain the background of privatisation of insurance sector.
5. Name the recommendations of Malhotra Committee Report.
6. Give three arguments against privatisation of insurance sector,

B. ESSAY TYPE QUESTIONS

1. Describe the reference and recommendations of Malhotra Committee regarding insurance
sector.
2. Discuss the reasons for not privatisation of insurance sector in India.
3. What is the rationale for privatising insurance sector in India ?
4. 'Is it essential to privatise insurance sector'. Explain with reasons.

<s><s><e><e>
 Insurance Regulatory
Bodies
| INTRODUCTION
Insurance is a contract between the insurer and the insured whereby the insurer agrees to
compensate the insured from the loss suffered from a risk against which he took the insurance
policy. This spreads the risk of a few actual sufferers amongst the large number of policy
holders. However, insurance serves another important purpose in the growth and economic
development of a country. The business of insurance has the capacity to provide huge funds
for the economy. It is a very important constituent of the financial sector.
In view of the interest involved, the business of insurance all over the world is regulated
by the state. The extent of regulation depends upon the political ideology, administrative set
up and economic philosophy of the state. The main purpose of the regulation is to ensure that
the business is run fairly, is run by competent persons and does not result into undue risk to
the insurers resulting into losses which may result into insolvency. At the same time genuine
interest of the insuring public need to be protected. The regulation tries to ensure that the
insurance companies do not drift towards mis-management and insolvency.

| BACKGROUND OF REGULATION IN INDIA

The Insurance Act, 1938 provided comprehensive regulation of the insurance business in
India. It created a powerful supervisory authority in the Controller of Insurance. The
Controller of Insurance had the powers to direct, advice, caution, investigate, inspect, search,
seize, amalgamate authorise, register and liquidate insurance companies. However after the
nationalisation of life insurance, in 1956 and General Insurance in 1972, the applicability of
these provisions was extremely diluted. Due to nationalisation, most of the powers of the
Controller of Insurance got vested in the LIC and GIC.
In 1993, Govt, of India, with a view to examine the structure of the Insurance industry
 11.2 Insurance Regulatory Boa es

and to recommend changes to make it more competitive and efficient, in the light 1
structural changes in the other segments of the financial system, appointed a committee unar
the chairmanship of former Govemer of Reserve Bank of India, Sh. R.N. Malhotra. T ::
committee submitted its report in January 1994. It recommended setting up of
independent Insurance Regulatory Authority on the lines of Securities and Exchange B o r; j
of India. The Govt, accepted the recommendation and in January 1996 established an interin
Insurance Regulatory Authority. In 1999 the bill titled as Insurance Regulatory ar _
Development Authority Bill 1999 was introduced in the parliament along with thm?
schedules containing the amendments to the Insurance Act, 1938, Life Insurance Corporatk:
Act, 1956, and General Insurance Business (Nationalisation Act, 1972). After discussion ar;
debate the Bill became an Act known as Insurance Regulatory and Development Authorr
(IRDA) Act, 1999.

| THE INSURANCE ACT, 1 9 3 8

The Insurance Act, 1938 was the most comprehensive and balanced Act covering bon
life and non-life business of insurance. It provided regulations to prevent the mushroo-
growth of companies and to enforce working on sound principles. Since 1938, the Act w_
amended six times. The amendment of 1950 was mainly meant to provide provision?
pertaining to administration. The Central Government Controls the insurance business b>
appointing Controller of Insurance. The Companies not following rules and regulations wiL
be penalised under the Act.

S a lie n t F eatu res o f th e A ct

The main salient features of Insurance Act, 1938 are discussed as follows ;
1. Registration of Insurance Companies.
2. Duties or obligations of insurance companies after registration.
3. Powers and functions of controller of Insurance.
4. Rules relating to Agency.
5. Rules relating to the formation and organisations of Insurance Companies.
6. Tariff Advisory Committee.

C overage
This Act applies to all types of insurance business—Life, fire, marine etc. done b\
companies in India or elsewhere. It also governs the provident companies, mutual offices and
co-operative societies.

1. R e g istra tio n o f In su ran ce C om p an ies

Section 3 of the Act lays down that every insurer, in order to carry on insurance business
 Insurance Regulatory Bodies 11.3

in India, is required to obtain a certificate of registration from 'The Controller of

Insurance'. The certificate of registration is issued for a period of one year and may be
renewed each year. Section 2 of the Act lays down that only such organisations are allowed
to carry on business of insurance in India which are : (i) registered co- operative societies
(ii) public companies (iii) a company registered under any foreign Act. An organisation
willing to obtain registration certificate will have to deposit a sum of ? 10 lakhs with the
Reserve Bank of India before making an application.
Procedure for Registration. The application for registration must have the following
documents attached to i t :
(i) Memorandum of association and articles of association of the applicant company.
(ii) Names, occupations and addresses of directors and their main business in India.
(iii) Scope of proposed insurance business.
(iv) A statement declaring that required security amount is deposited with RBI.
(v) Forms and rates of premiums, provisions, terms and conditions of various insurance
policies to be dealt with.
Certificate of Registration. After verifying the documents and information submitted,
the controller of Insurance registers the name of applicant organisation in the register and
issues the certificate of registration to the insurer.

2. D u tie s o f Insurer A fter R eg istra tio n

After getting a certificate of registration, the insurer is required to maintain proper
registers and accounts and file returns regularly.
Registers (Sec. 14) An insurer is required to maintain (i) Register of policies
I (ii) Register of Claims (iii) Register of agents.
Accounts (Sec. 10) Account books to be maintained include register of proposals and
proposal advance cash book, first year's premium cash book, petty cash book, claims cash
book, general cash book, bank cash book, commission register, lapsed and cancelled policies
book, journal, agency ledger, policy loan ledger, general loan ledger, investment ledger etc.
Annual accounts preparations include preparation of revenue account and balance sheet.
Returns. Insurance companies are required to submit periodically various returns and
reports to the controller of Insurance. Section 11 prescribes that annual accounts, annual
| reports, details about directors to be submitted within 6 months of preparation of annual
accounts. A copy of proceedings of the General Meeting, annual statement and quarterly
statements of investments etc. are also submitted with the controller.

3. Pow ers and F u n c tio n s o f th e C on troller o f In su ran ce

The controller of Insurance is the supreme authority under Insurance Act.
 11.4 Insurance Regulatory Bod e;

General Functions and Powers. The Controller has the following powers :
(i) Registration and renewal of registration of insurance companies. (Section 3 and 3A
(ii) Power to check security deposits of insurance companies. (Section 7)
(iii) Power to receive periodically annual accounts, reports and returns from insurant e
companies.
(iv) Powers to issue licences to the underwriters, indemnifies and insurers etc.
(v) Power to sanction the schemes of transfers, acquisitions and amalgamations of the
insurance business. (Sec. 36)
(vi) Power to delegate the authorities to some subordinate authority.
(vii) Power to solve disputes of settlement of claims involving small amount'
(Sec. 47 A)
Powers of investigation. Central Government may direct the controller of Insurance tc
investigate the affairs of any insurance company so as to judge its financial position anc
report the facts of investigation to the government.

4 . R u les R egarding A gen cy

Under Insurance Act, 1938 agents were classified as :
(i) Chief Agents.
(ii) Special Agents.
(iii) Principal Agents.
(iv) Insurance Agents.
The chief agents and special agents used to be concerned with the conduct of life
insurance business and with the passage of Life Insurance Act, 1938, these agents cease to
exist under this Act. The main functions of insurance agents are to contract with, pursue
and communicate the terms and conditions of insurance policies to the customers. Any
person desirous of becoming an insurance agent is required to obtain licence from the
controller of Insurance under section 42. He will have to apply to the controller or to any
other authorised authority in a prescribed form alongwith a fee of ? 25. The licence is issued
for 3 years and may be renewed further. Section 40 of the Act deals with the fixation of
remuneration or commission of the agents.

5. O rgan isation o f th e In su ran ce C om p an ies

The Insurance (Amendment) Act, 1950 inserted 20 new sections (Sections 64 A to 64 T)
in order to organise insurance companies in proper manner. Every insurer is required to
become the member of Insurance Association of India. Originally this Association was
Insurance Regulatory Bodies 11.5

constituted of two councils : (i) Life Insurance Council and (ii) General Insurance
council. With the passage of Life Insurance Corporation of India in 1956, Life Insurance
Council ceased to exist. General Insurance Council consisted of 16 members out of which 8
were nominated by Central Government and remaining elected by members.

6. T ariff A dvisory C o m m ittee

Tariff Advisory Committee has been constituted in 1968 under section 64 U of the
Act. The main object of this committee is to control, regulate and suggest the rates of
premium, rules, terms and conditions of various insurance policies issued by various
insurance companies. Its head office is in Bombay. It has an Executive Committee
consisting of 16 members and they are nominated on the recommendation of Central
Government.

Pow ers o f T ariff A dvisory C o m m ittee

The Committee has the following powers under the Act.
(i) It has the power to regulate, recommend and control rates of premium, rules, terms
and conditions of various insurance policies.
(ii) In order to determine tariff rules and terms, it may invite some information from
any corporation by serving proper notice on them.
(iii) It may further constitute and organise Regional Committees.
(iv) The Committee may collect fees from member corporations in order to meet its
expenditures.
(v) There are certain organisations which deal with inspecting risks, adjusting risks and
providing fire-fighting appliances etc. The tariff committee prepares suitability and
feasibility reports relating to the dealings with such organisations, if requested to do
so by any insurance company.

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

■ A C T ,1 9 9 9

The Mahrotra Committee in its report, submitted to the Government of India on 7th of
January, 1994 made strong recommendation for the establishment of a strong and effective
Insurance Regulatory Authority in the form of a statuatory autonomous board can the lines of
Securities and Exchange Board of India (SEBI). The Government of India introduced Interim
Insurance Regulatory Authority (IRA) bill in Parbiamoun in 1996. The Bill was rectified as
Insurance Regulatory and development Authority and introduced again in 1999 along with
three schedules containing amendments to the Insurance Act, 1938, LIC Act, 1956 and GIC
Act, 1972 and was passed.
 11.6 Insurance Regulatory Bodies

| SALIENT FEATURES OF IRDA ACT

Following are the salient features of the Act—

1. A ct to e sta b lish th e R egu latory A u th ority

The preamble of the Act states that it is, "An Act, to provide for the establishment of :-~l
authority to protect the interests of holders of insurance policies, to regulate, promote ar il
ensure orderly growth of the Insurance Industry and for matters connected there with or
incidental thereto."
It is clear from the preamble that the Act is to establish authority which w ill:
(a) Protect the interests of holders of insurance policies;
(b) Regulate, promote and ensure orderly growth of Insurance Industry;
(c) and other matters which may be connected with or incidental to the above
mentioned purposes.
Section 3 of the Act, provides that the authorities shall be a Body Corporate with the
name "The Insurance Regulatory Authority". It also provides that it shall have the perpetual
succession and a common seal. Subject to the Act, it shall have the power to acquire, hold
and dispose of the property both movable and immovable. It shall have contractual authority
as well as power to sue and be sued.

2. C o m p o sitio n o f A u th ority
Section 4 of the Act, lays down the Composition of the Authority to be as follows:
The Authority shall consist of the following members, namely :
(a) a Chairperson;
(b) not more than five whole-time members;
(c) not more than four part-time members;
to be appointed by the Central Government from amongst persons of ability, integrity and
standing who have knowledge or experience in life insurance, general insurance, actuarial
science, finance, economics, law, accountancy, administration or any other discipline which
would, in the opinion of the Central Government, be useful to the Authority.
Provided that the Central Government shall, while appointing the Chairperson and the
whole-time members, ensure that at least one person each is a person having knowledge or
experience in life insurance, general insurance or actuarial science, respectively.
The Chairman and every other whole time member shall hold an office for a term of five
years from the date of his joining and shall be eligible for reappointment. The age of
retirement for whole time members is sixty two years and for the Chairperson sixty five
years. Similarly, there can be part time members.
nsurance Regulatory Bodies 11.7

The Chairman and the whole time members are barred from taking up an employment
-ithin two years from leaving the office under Central Govt, State Govt, or an Insurance
Company except with the approval of the Central Govt.

3. In su ran ce A dvisory C o m m ittee

Section 25 of the Act provides that an Insurance Advisory Committee consisting of not
-lore than twenty five members (including ex-officio) will be constituted. The members will
represent the interest of Commerce, Industry, Transport, Agriculture, Consumer forum,
surveyers, Agents, Intermediaries, Organisations engaged in Safety and Loss Prevention,
Research Bodies and Employees' Association of the Insurance Sector. The Chairperson and
rhe members of the Authority shall be Ex officio members of the committee.
The Authority in consultation with the committee can make regulations to achieve its
objectives. In exercise of this authority IRDA has framed a number of regulations. The
client features emerging out of these regulations are discussed in subsequent parts.

4. E nding th e M onopoly o f LIC and GIC

Section 30, 31, & 32 of the IRDA Act have amended certain provisions of the Insurance
Act, 1938, LIC Act of 1956 and the General Insurance Business (Nationalisation) Act, 1972
in line with First, Second and third schedule of the Act.
These amendments have ended the exclusive privilage of LIC, GIC and its subsidiaries to
carry on life and general insurance business respectively. Thus, it has allowed the entry of
private sector into life and non-life insurance.

5. T he In su ra n ce B u sin e ss h as b e e n o p en ed to Indian C om p an ies

only
The business has been opened to Indian Companies only. The Indian Company for the
purpose has been defined by Section 2 of the Insurance Act, 1938, as follows.
An Indian insurance company has been defined in Section 2 as an insurer being a
company :
(a) formed and registered under the Companies Act, 1956;
(b) in which the aggregate holdings of equity shares by foreign company either by itself
or through its subsidiary companies or nominees do not exceed 26% of paid up
equity share capital of such Indian Insurance Company;
(c) The sole purpose is to carry on life insurance or general insurance or re-insurance
business.
As per Clause 11 of the IRDA (Registration of Indian Insurance Companies) Regulations
2000, the quantum of paid up equity capital held by the foreign company either by itself or
through its subsidiary company or its nominees, foreign investors, non- resident Indians,
I
 11.8 Insurance Regulatory Bodies

overseas corporate bodies and multinational agencies will be considered for determining 26%
of the paid up equity capital held by the foreign company.

6 . R eg istra tio n
Section 3 of the Insurance Act, 1938 read with IRDA (Registration of Indian Insurance
Companies) Regulations, 2000 provide that any applicant desirous of carrying on Insurance
business in India shall make a requisition for registration application in Form IRDA/R1. The
applicant shall make a separate requisition for registration application for each class of
business of insurance i.e. life insurance business consisting of linked business, non-linked
business or both, or general insurance business including health insurance business.
The applicant shall be an Indian insurance company who shall submit along with the
application :
(i) certified copy of the memorandum and articles of association;
(ii) names, addresses and occupations of the directors and principal officer;
(iii) a statement of class(es) of insurance business proposed to be carried on;
(iv) a statement indicating the sources that will contribute the share capital.
The authority on being satisfied may accept the application. In case if it rejects, the
applicant may be given reasonable opportunity to represent his case. Alternatively, he may
approach the authority with fresh request for registration after a period of two years from the
data of rejection with a new set of promoters.
An applicant whose requisition for registration application has been accepted by the
Authority shall make an application in Form IRDA/R2 for grant of certificate of registration.
The application shall be accompanied by :
(a) documentary proof evidencing the making of deposit under Section 7 of Act;
(b) evidence of having paid up equity capital of ? 100 crores or more in case of life
insurance or general insurance business;
(c) evidence of having paid up equity capital of ? 200 crores or more in case of
reinsurance business;
(d) an affidavit by the principal officer and the promoters of the applicant certifying
that the requirements of paid up share capital and deposits referred in Section 6 and
7 have been satisfied. Principal Officer means any person connected with the
management of the applicant or any person upon whom the Authority has served
notice of its intention of treating him as the principal officer thereof;
(e) a statement indicating the distinctive numbers issued to each promoter and
shareholder in respect of share capital of the applicant;
(f) an affidavit by the Principal Officer and the promoters of the applicant certifying
that paid up equity capital of the foreign company does not exceed 26%.
Insurance Regulatory Bodies 11.9

(g) a certified copy of the published prospectus, if any;

(h) a certified copy of the standard forms of the insurer and statement of assured rates,
advantages, terms and conditions to be offered in connection with the insurance
policies together with a certificate by an actuary in case of life insurance business
(ft
that such rates, advantages, terms and conditions are workable and sound;
(i) a certified copy of the memorandum of understanding entered into between the
Indian promoters and the foreign promoters;
(j) original receipt showing payment of fee of ? 50,000/- for each class of
business. This fee shall be remitted by a bank draft issued by any scheduled bank
in favour of the Insurance Regulatory and Development Authority payable at New
Delhi;
(k) a certificate from a practicing Chartered Accountant or practicing Company
Secretary certifying that all requirements relating to registration fees, share capital,
deposits and other requirements of the Act have been complied with.
(l) The Authority shall consider the following matters before grant of a certificate to
the applicant:
(i) record of the performance of each of the promoters in the fields of
business/profession they are engaged in;
(ii) record of performance of the directors and persons in management of the
promoters;
(iii) capital structure.
(iv) nature of insurance products;
(v) extent of obligations to provide life insurance or general insurance policies to
persons residing in rural sector, workers in unorganized sector, informal sector
or economically vulnerable or backward classes of the society;
(vi) organisation structure;
(vii) the planned infrastructure including branches in rural areas to effectively carry
out insurance business;
(viii) the level of actuarial and other professional expertise with the managerne- :
The Authority will grant a certificate of registration in IRDA/R3 and shut r :
preference to those applicants who propose to carry business of providing heal ± . o<e « me
individuals. An existing Insurance Company i.e. Life Insurance C q x n n ■ a 'mam
General Insurance Corporation of India, its four subsidiarie' - aiM tejpfta r p i n n w
under the Act. It shall make an application within three ns naant af h r J O H a s a i a •
IRDA Act, 1999.
 11.10 Insurance Regulatory Bodies

7. R enew al o f R eg istra tio n

An insurer who has been granted a certificate shall make application in Form IRDA/R5
for renewal of certificate before the 31st of December each year and such application shall be
accompanied by evidence of payment of fee which shall be higher of the following :
(a) ? 50,000/- for each class of Insurance business and
(b) One fifth of one percent of total gross premium written direct by an insurer in India
during the financial year preceding the year in which the application for renewal i-
required to be made or ? 5 crore whichever is less (in case of general or life
insurance business).

8. C apital A d eq uacy R eq u irem en t

Any Insurance company carrying the business of life insurance, general insurance or re­
insurance shall not be registered unless it has paid up equity capital of ? 100 crores in case of
a person carrying life insurance or general insurance business and a paid up equity capital of
? 200 crores in case of a Company carrying business exclusively as reinsurer.
In terms of section 6AA of the Insurance Act, 1938, a promoter shall not at any time hold
more than 26% of the paid up equity capital in an Indian insurance company. In case where it
holds more than 26%, it shall divest in a phased manner the share capital in excess of 26%
after the period of ten years from the date of commencement of business.

9 . D e p o sits
Section 7 of the Act provides that an insurance company shall in respect of the insurance
business carried by it in India deposits and keep deposited with the Reserve Bank of India
either cash or approved securities.
(a) In the case of life insurance business, a sum equivalent to one percent of his total
gross premium written in India in any financial year and not exceeding Rupees ten
crores.
(b) In the case of general insurance business , a sum equivalent to three percent of his
total gross premium written in India in any financial year not exceeding ? ten
crores.
(c) In case of re-insurance business, a sum of Rupees twenty crores.
If at any time, any part of the deposit is used in discharge of any liability of the insurer,
the insurer shall deposit such additional sum in cash or approved securities estimated at the
market value of the securities on the day of deposit or partly in cash and partly in such
securities to make good the amount so used. This deposit shall be deemed to be a part of the
assets of the insurer and shall not be susceptible to any assignment or charge nor shall it be
available for discharge of any liability of the insurer other than liabilities arising out of
-surance Regulatory Bodies 11.11

:• aes of insurance. It shall also not be liable to attachment in execution of any decree
£■.ept a decree obtained by a policy holder.

10. A cco u n ts and B alan ce S h e e t

Section 11 of the Insurance Act, 1938 provides that an Insurance Company shall at the
t vpiry of each financial year, prepare :
(a) Balance sheet in accordance with the regulations and form set in Part I and Part II
of the first schedule.
(b) Profit and Loss Account in the regulations and form set forth in second schedule.
(c) A Revenue Account in respect of each class of Insurance business in accordance
with the regulations and form set forth in third Schedule.
(d) Receipt and payments Account.
A Life Insurance Company carrying insurance business shall in each year cause an
investigation to be made by an actuary into the financial condition of the life insurance
business carried by the Company including valuation of its liabilities and shall cause an
abstract of the report of such actuary to be made. Actuarial Report and abstract shall be made
:n accordance with the regulations and requirements in conformity with fourth schedule. The
abstract of the report shall be made in the manner specified by the IRDA (Actuarial Report)
Regulations, 2000.
Besides this, an Insurer carrying life insurance or general insurance business shall comply
with the requirements of schedule A or schedule B of the IRDA (Preparation of Financial
Statements and Auditor's Report of Insurance Companies) Regulations, 2000. The accounts
and statements will be signed by the chairman, if any and two directors and the principal
officer of the company and will be accompanied by a statement containing the names,
description and occupations of and the directorships held by persons in charge of the
management. The audited accounts, statements and the abstracts shall be printed and four
copies shall be filed with the Authority within six months.

11. In v e stm e n t o f A sse ts

Section 27 provides that the Authority shall in the interest of policy holders, by means of
regulations, specify the time, manner and conditions of investments of assets in the
infrastructure and social sector. Under the new norms atleast 50% of the funds will be parked
in the government securities and insurers can invest upto 20% of their funds in corporate
debts in addition to 15% in market investment. Infrastructure has been included in the social
sector, where companies have to mandatorily invest atleast 15% of their funds.
Infrastructure facility means :
(i) road, highway, bridge, airport, port, railways, road transport systems, water supply
project, irrigation project, industrial parks, water treatment systems, sanitation and
sewage systems;
 11.12 Insurance Regulatory Bodies

(ii) generation or distribution or transmission of power;

(iii) telecommunication;
(iv) housing project;
(v) any other public facility of a similar nature.
An insurer shall not directly or indirectly invest outside India, the funds of the policy
holders.

12. In su ran ce B u sin e ss in Rural or S o c ia l S e c to r

In terms of Section 32B and Section 32C, every insurance company shall discharge the
obligations to provide life insurance or general insurance policies to the persons residing in
the rural sectors, workers in the unorganized or informal sector or for economically
vulnerable or backward classes of society and other categories of persons as may be specified
by regulations made by the authority and such insurance policies shall include insurance for
crops. The Regulatory Authority has issued the IRDA (Obligations of Insurer to Rural or
Social Sector) Regulations, 2000. Rural sector has been defined as any place which as per
the latest census has a :
(i) a population of not more than five thousand;
(ii) a density of population is not more than 400 persons per sq. km.;
(iii) at least seventy-five percent of the male working population is engaged in
agriculture.
"Social sector" includes unorganized sector, informal sector, economically vulnerable or
backward classes and other categories, both in rural and urban areas.
"Unorganized sector" includes self-employed workers such as agricultural labourers, bidi
workers, carpenters, construction workers, fishermen, handicraft artisans, khadi workers, lady
tailors etc.
"Economically vulnerable or backward classes" means persons living below the poverty
line.
Every insurer carrying on insurance business shall undertake to perform :
(a) the following obligations in the rural sector
(i) In case of life insurer
(1) 5% in the first financial year
(2) 7% in the second financial year
(3) 10% in the third financial year
(4) 12% in the fourth financial year
(5) 15%) in the fifth financial year of total policies written direct in that year.
I

In su ran ce R e g u la to ry B od ies 11.13

(ii) In respect of a general insurer

(1) two per cent in the first financial year
(2) three per cent in the second financial year
(3) five per cent thereafter, of total gross premium income written direct in that
year.
(4) Social sector, in respect of all insurers :
(5) 5000 lives in the first financial year
(6) 7500 lives in the second financial year
(7) 10,000 lives in the third financial year
(8) 15,000 lives in the fourth financial year
(9) 20,000 lives in the fifth financial year

13. Power o f In v e stig a tio n and In sp e c tio n

The Authority may by an order direct any person to investigate the affairs of the insurer
and to report to it. It may take the services of auditor or actuary for the purpose of assisting
him in any investigation. The authority on receipt of the report may require the insurer to
take such action in respect of any matter arising out of the report or cancel the registration of
the insurer or direct any person to apply to the court for the winding of the insurer.

14. L im ita tio n o f E xp en d itu re on C o m m issio n

The insurer shall not pay to an insurance agent by way of remuneration or commission in
respect of any policy of life insurance, an amount exceeding :
(a) where the policy grants an immediate annuity or a deferred annuity in consideration
of a single premium, 2% of that premium;
(b) where the policy grants a deferred annuity in consideration of more than one

premium, 7-^ per cent of first year's premium and 2% of each renewal premium

payable on the policy;

(c) In any other case, 35% of the first year's premium, 7 per cent of the second and

third year's renewal premium and thereafter five per cent of each renewal premium
payable on the policy;
(d) where the policy relates to fire, marine or misc. insurance, total commission paid
shall not exceed 15% of the premium payable on the policy.

15. L icen sin g o f In su ran ce A gen ts

Section 42 of the Insurance Act, 1938 read with the IRDA (Licensing of Insurance
 11.14 Insurance Regulatory Bodies

Agents) Regulations, 2000 provides that any person desiring to obtain a licence to act as an
insurance agent or as a composite insurance agent shall make an application to the designated
person in form IRDA-Agents-VA, if the applicant is an individual and in Form IRDA-
Agents-VC, if the applicant is a firm or company. The regulations have defined the term
'person' as
(i) an individual
(ii) a firm
(iii) a Company, formed under the Companies Act 1956 and includes a banking
company.
A designated person is an officer-in-charge of marketing operations as specified by the
insurer and authoized by the Authority to issue or renew licences under these
regulations. Insurance agent is a person who receives payments by way of commission or
any other remuneration in consideration of his soliciting or procuring insurance business
including business relating to the continuance, renewal or revival of the policies of insurance.
An applicant desirous to be composite insurance agent will have to submit two separate
applications. Composite Insurance Agent is a person who holds a licence to act as an
insurance agent for a life insurer and general insurer. The designated person may on receipt
of application along with a fee of ? 250/- satisfy himself that the applicant possesses:
(a) Requisite qualification. He should have a minimum qualification of 12th standard
pass or equivalent examination where the applicant resides at a place with a population of
five thousand or more as per the last census. In cases where the applicant resides in any other
place, the qualification shall be 10th standard or an equivalent examination.
(b) Practical training. Practical training includes orientation particularly in the area of
insurance sales, service and marketing through training manuals as approved by the
Authority. The applicant should have completed from an approved institution at least 100
hours practical training in life or general insurance business. It may be spread over three to
four weeks. In case of composite insurance business, the applicant shall have completed
from an approved Institution, at least 150 hours practical training which may be spread over
six to eight weeks. Approved Institution is an institution engaged in education and/or
training particularly in the area of insurance sales, service and marketing approved and
notified by the Authority.
Where the applicant happens to be an Associate/fellow member of the Insurance
Institute/C.A. Institute/C.S. Institute/ICWA Institute or MBA or any other qualification
recognized by the Central Government or State Government, the applicant should have
completed at least 50 hours of practical training from an approved institute and in case of
composite insurance agent he shall have completed atleast 70 hours of practical training in
cases.
(c) Examination. The applicant has passed the pre- recruitment examination in life or
Insurance Regulatory Bodies 11.15

general insurance business conducted by the Insurance Institute of India, Mumbai or any
other examination body. Examination Body means an institute which conducts pre­
recruitment test for insurance agent and which is duly recognized by the Authority.
(a) has furnished the application completed in all respects.
(b) has the requisite knowledge to solicit and procure insurance business and
(c) is capable of providing necessary services to the policyholders.
In case of Corporate agents, all directors of the Company or in a firm, all its partners
must possess the requisite qualifications, practical training and should have passed
examination. Licence issued shall remain in force for a period of three years and may be
renewed for a further period of three years at any one time.
The functions of an insurance agent shall include :
(i) identify himself and the insurance company of which he is an agent,
(ii) disclose his licence to the prospect. Prospect means a potential purchaser of an
insurance product,
(iii) disseminate information in respect of insurance products offered for sale,
(iv) disclose the scales of commission in respect of the insurance product to the
prospect,
(v) indicate the premium to be charged by the insurer. Premium is the price for the risk
undertaken by the insurers,
(vi) explain to the prospect the nature of information required in the proposal form by
the insurer,
(vii) bring to the notice of insurer any adverse habits or income inconsistency of the
prospect through a report called insurance agent confidential report,
(viii) inform promptly the prospect about the acceptance or rejection of the proposal by
the insurer,
(ix) to render necessary assistance to the policyholders or claimants in complying with
the requirements for settlement of claims.
The provisions relating to qualifications, practical training and examination shall not
apply to existing agents. Notes to Form VA provide that an insurance agent shall work
exclusively for one insurance company i.e. for one life insurer, one general insurer or
both. However, the application form a corporate insurance agent does not specify any such
limitation. Section 42 of the Insurance Act, 1938 prescribes certain disqualifications for an
insurance agent:
(a) the person is minor;
(b) the person is of unsound mind;
 I

11.16 | Insurance Regulatory Bodies

(c) guilty of misappropriation;

(d) he does not possess prescribed qualifications and practical training;
(e) has not passed examination as specified by the Authority;
(f) violation of code of conduct.
Every insurance company employing insurance agents shall maintain a register disclosing
the name and address of every agent appointed by him, the date of appointment date of
cessation of appointment.

16. Issu e o f L icen ce to In su ran ce In term ed iary

Section 42D of the Act provides that the Authority shall have the power to issue licence
to other intermediaries in the insurance segments and this licence will be valid for a period
of three years. The Insurance Regulatory and Development Authority have framed draft
broker regulations.
Insurance brokers will be regulated in the following areas : —
(i) registration,
(ii) experience, training and qualification and other restrictions on entry into the
profession,
(iii) solvency requirements,
(iv) professional indemnity or a minimum level of errors.
There is also a central fund to protect clients against broker malpractice.

(A) C ategories o f Brokers

Clause 2(d) defines an Insurance broker as a person to whom licence has been granted by
the authority to act as an insurance broker. The regulations have classified the insurance
broker into four categories. Cateogiry 1A shall be Direct General Insurance Broker engaged
in insurance business but not reinsurance business. Category IB shall be a Direct Life
Insurance Broker engaged in life insurance business but not in reinsurance
business. Category II shall be a Reinsurance Broker while Category III shall be a
Composite Broker whose functions will include Direct Insurance Broker and Reinsurance
Broker. Category IV shall he an insurance consultant for risk management consultation.

(B) F u n c tio n s o f G eneral and Life In su ran ce Broker

(i) Obtaining detailed knowledge of the client's business and philosophy.
(ii) Maintaing clear records of the client's business.
(iii) Provision of providing technical advice to the client and advise on developments in
insurance market and law.
(iv) Maintaining a detailed knowledge of available markets.
Bodies Insurance Regulatory Bodies 11.17

(v) Selection and recommendation of an insurer or group of insurers.

(vi) Negotiating with insurer on the client's behalf.
(vii) Acting promptly on client's instructions and providing written acknowledgements
and progress report.
'losing (viii) Collecting and remitting premiums and claims.
ate of (ix) Provide insurance consultancy services, risk management services.
(x) Assisting in the negotiation of claims.
(xi) Maintaining precise records of past claims.
:ence
(C) C riteria for Grant o f L icen ce
eriod
draft The Authority while examining the application for grant of licence shall, inter alia,
consider the following
(a) the infrastructure of the applicant include adequate office space, equipment and
manpower to effectively discharge his activities.
the (b) the applicant in his employment a minimum of two persons who have the
experience to conduct the business of insurance broker;
(c) the applicant has minimum of two Directors possessing :
(i) A minimum qualification of an Associate of the Insurance Institute of India or
equivalent or any professional qualification from the institutions recognized by
the Government in finance, law, engineering or business management.
(ii) Practical training for specified period conducted by the National Insurance
t>y Academy, Pune.
ce
;d (d) Capital adequacy requirement
fe The draft regulations also specify capital adequacy requirement of the applicants seeking
e grant of licence.
a
Category 1A — 25.00 lakhs
Category 1 B — 25.00 lakh
Category II — 100.00 lakhs
Category III — 125.00 lakhs
Category IV — 10.00 lakhs
Application for licence will be made in form B as mentioned in the draft regu^: ' '
applicant shall on grant of licence be liable to pay fee to the Authority in ac_ rdar.; m tt m:
Schedule II of these regulations. A licence granted to an insurance broker, in ism s a n o t
regulations shall remain valid for a period of three years from the date :: >«iue n c flrf
I 11.18 Insurance Regulatory Bodies

(D) R em u n era tio n o f Brokers

Clause 15 provides for remuneration to be paid to brokers. According to it, the
remuneration to brokers will be determined by market forces except in case of life and non
life insurance who will be paid by way of brokerage an amount not exceeding 17.5% of the
premium payable on the policy. The brokerage levels prescribed may not, work in case of
life insurance brokers as here the policy continues for a certain number of years. The broker
should be given brokerage as certain percentage of premium of first year and percentage on
renewal premium also. The code of conduct as provided in the regulations provide that the
broker must disclose all the fee or charges (not commission) which he proposes to charge
from the client which v/ill be in addition to the insurance premium. The broker shall advise
the client in writing of the insurance premium, any fee or charges separately and the purpose
related to services.

(B) S eg reg a tin g In su ran ce M oney

Clause 17 of the draft regulations provide that every' insurance broker must treat all
money received from or on behalf of insured as insurance money and that this shall be kept in
a Insurance Bank Account with one or more approved scheduled banks. The broker shall
ensure that all money received for or on behalf of insured is paid to the Insurance Bank
Account and will remain there until it is passed on to the Insurance company. The insurance
broker shall only remove from the insurance bank account, charges, fees to commission and
interest received from any funds comprising the account. The regulations, however, are silent
on the time frame within which the funds ought to be transferred from the Banker's Insurance
Bank Account' to the Insurance Company.

(F) S o lv e n c y R eq u irem en t
The Insurance broker shall throughout the licence period maintain an excess of the value
of assets over the amount of liabilities as solvency and shall vary according to the category of
licence.
The insurance broker is required to furnish to the Authority the statement certified by the
auditor that solvency requirement has been maintained.

(G) P ro fessio n a l In d em n ity In su ran ce

Every Insurance broker shall take out and maintain a professional indemnity insurance
cover throughout the validity of the period of licence granted by the Authority. This cover
must indemnify the insurance broker. For instance, the Composite Insurance Broker will
have to take a cover equivalent to four times of brokerage and fees in a year subject to
minimum limit of ? 6.00 crores. The brokers will be under obligation to maintain books of
accounts, records, documents, i.e. book ledger, client ledger, bank accounts, brokerage note
etc. He shall prepare the balance sheet, profit and loss account, statement of fund flow which
Insurance Regulatory Bodies 11.19

will be submitted to the Authority along with the auditor's report within 90 days of the close
of the accounting year. The Insurance Broker shall furnish to the Authority unaudited
financial results within 30 days of the close of the half year.
Besides this, the Authority has the right to inspect/suspend/cancel the licence, hold an
enquiry before suspension, issue show-cause notices and orders, levy penalties etc.

17. T ariff A dvisory C o m m ittee

Section 64U provides that a Tariff Advisory Committee shall control and regulate the
rates, advantages, terms and conditions that may be offered by that insurer in respect of
general insurance business.
This Tariff Advisory Committee shall consist of members including chairman of the
Authority, a senior officer of the office of the authority nominated to be as vice chairman of
the committee and not more than 14 representatives of the insurance companies.

18. L icen sin g o f S u rveyors and L oss A sse sso r s

Section 64UM provides that a person shall not act as surveyors or loss assessors in
respect of general insurance unless he holds a valid licence issued to him by the
authority. Every person who attempts to act as a surveyor or loss assessor shall have to make
an application to the authority and licence will be issued to him for a period of five years.
No claim in respect of a loss which has occurred in India which exceeds ? 20,000 in
value or any policy of insurance shall be admitted in payments by the insurer, unless he
obtains report on the loss from a person who holds the licence to act as a surveyor or loss
assessor.

19. S u ffic ie n c y o f A s se ts (S e ctio n 6 4 VA)

An insurer shall maintain, at all times an excess of assets over its liabilities of not less
than the amount in case of an insurer carrying general insurance business, the solvency
margin shall be the highest of the following :
(a) fifty crores Rupees (? one hundred crores in case of reinsurer); or
(b) a sum equivalent to 20% of net premium income; or
(c) a sum equivalent to 30% of net incurred claims.
Net incurred claims means the average of net incurred claims during the specified
period, not exceeding three preceeding financial years.

2 0 . No R isk to A ssu m e u n le s s P rem ium is R eceiv ed in A dvance

An insurance company shall not assume any risk in respect of any insurance business of
which premium payable is received by him or is guaranteed to be paid by a person within
such time or unless and until deposit of such amount is made in advance in the prescribed
 11.20 Insurance Regulatory Bodies

manner. Risk may be assumed not earlier than the date on which premium has been paid in
cash by the insurer. Where the premium is tendered by means of postal money order or
cheque sent by post, risk may be assumed on the date on which money order is booked or
cheque is posted.

2 1 . R ein su ran ce
If the insurers find that they have entered into a contract of insurance which is an
expensive proposition for them or if they wish to minimize the clearances of any possible
loss, without at the same time, giving up the contract, resort is to have reinsurance. It is
basically the practice of insuring again. The Company with which the public insurer is called
a direct or ceding office and the Company accepting business from ceding office is called a
reinsurer.

2 2 . Power o f th e A u th ority to M ake R eg u la tio n s

Section 114A has been inserted by an amendment in the Insurance Act. It provides that
the authority may make regulations consistent with this Act and rules made here under to
carry out the purpose of this Act. The regulations made provide for matters connected with
registration of the insurer, manner of suspension and cancellation of registration, renewal of
registration, divesting of excess equity, share capital, preparation of balance sheet, profit &
loss accounts, revenue Account, and a separate account of receipts and payments, extracts of
report of actuary, manner and conditions of investment of assets, manner for making an
application for issue of licence to act as an insurance agent, passing of examination as an
insurance agent, qualification and practical training or intermediaries, matters related to Tariff
Advisory Committee, matters related to reinsurance, matters related to redressal and
grievances of policy holders and to regulate, promote orderly growth of insurance industry.
In exercise of the powers conferred by Section 114A of the Insurance Act, 1938 the
Authority in consultation with the Insurance Advisory Committee have issued the following
regulations :
►
► Insurance Regulatory and Development Authority (Actuarial Report and Abstract)
Regulations, 2000
►
► Insurance Regulatory and Development Authority (Obligations of Insurers to Rural
or Social Sectors) Regulations, 2000
►
► Insurance Regulatory and Development Authority (Insurance Advertisements and
Disclosure) Regulations, 2000
►
► Insurance Regulatory and Development Authority (Licensing of insurance Agents)
Regulations, 2000
►
► Insurance Regulatory and Development Authority (General Insurance-Reinsurance)
Regulations, 2000
In su ran ce Regulatory Bodies 11.21

►
► Insurance Regulatory and Development Authority (Appointed Actuary) Regulations,
2000
►
► Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency
Margin of Insurers) Regulations, 2000
►
► Insurance Regulatory and Development Authority (Meetings) Regulations, 2000
►
► Insurance Regulatory and Development Authority (Registration of Indian Insurance
Companies) Regulations, 2000
►
► Insurance Advisory Committee (Meetings) Regulations, 2000

POWER OF CENTRAL GOVERNMENT TO SUPERSEDE

I AUTHORITY (SECTION 19)

According to the provisions of Section 19 of the Act; the Central Government is

empowered to supersede Insurance Regulatory and Development Authority, under the
following circumstances.
(1) On Opinion of the Central Government
(a) that, on account of circumstances beyond the control of the Authority, it is unable
to discharge the functions or perform the duties imposed on it by a under the
provisions of this Act, or
(b) that the Authority has persistently defaulted in complying with any direction given
by the Central Government under this Act or in the discharge of the functions or
performance of the duties imposed on it by or under the provisions of this Act and
as a result of such default the financial position of the Authority or the
Administration or the Administration of the Authority has suffered;
(c) that circumstances exist which render it necessary in the public interest so to do,
The Central Government may, by notification and for reasons to be specified therein,
supersede the Authority for such period; not exceeding six months, as may be specified in the
notification and appoint a person to be the Controller of Insurance under Section 2B of the
Insurance Act, 1983 (4 of 1938), if not already done :
Provided that before issuing any such notification, the Central Government shall give a
reasonable opportunity to the Authority to make representations against the proposed
mpersession and shall consider the representations, if any, of the Authority.
(2) Upon the publication of a notification under sub-section (1) superseding the
Authority;
(a) the Chairperson and other members shall, as from the date of supersession, Vacate
their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this
Act, be exercised and discharged by the Controller or Insurance; and
 11.22 Insurance Regulatory Bodies

(c) all properties owned or controlled by the Authority shall, until the Authority is
reconstituted under sub-section (3), vest in the Central Government.

| DUTIES, POWERS AND FUNCTIONS OF AUTHORITY

Chapter IV of the IRDA Act lays down the duties, powers and functions of the
authority. These are given in section 14 of the Act, which runs as follows :—
14. (1) Subject to the provision of this Act and any other law for the time being in force,
the Authority shall have the duty to regulate, promote and ensure (2) Without prejudice to the
generality of the provisions contained in sub-section (1), the powers and functions of the
Authority shall include—
(a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend
or cancel such registration;
(b) protection of the interests of the policy holders in matters concerning assigning of
policy, nomination by policy holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance;
(c) specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;
(d) specifying the code of conduct for surveyors and loss assessors;
(e) promoting efficiency in the conduct of insurance business;
(f) promoting and regulating professional organisations connected with the insurance
and re-insurance business;
(g) levying fees and other charges for carrying out the purposes of this Act;
(h) calling for information from, undertaking inspection of , conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organisations connected with the insurance business;
(i) control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under section 64U of the Insurance
Act, 1938 (4 of 1938);
(j) specifying the form and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurers and other insurance
intermediaries;
(k) regulating investment of funds by insurance companies;
(l) regulating maintenance of margin of solvency;
(m) adjudication of disputes between insurers and intermediaries or insurance
intermediaries;
Insurance Regulatory Bodies 11.23

(n) supervising the functioning of the Tariff Advisory Committee;

(o) specifying the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organisations referred to in clause (f);
(p) specifying the percentage of life insurance business and general insurance business
to be undertaken by the insurer in the rural or social sector ; and
(q) exercising such other powers as may be prescribed.
In view of the duties assigned to it and powers given under the Act. The Authority has
notified number of regulations to discharge of its function. These notifications have been
discussed earlier.

| FINANCE ACCOUNTS AND AUDIT

The provisions regarding Finance, Accounts and Audit are contained in chapter V of the
Act. The main provisions are—

1. G rants by C entral G overnm ent

Section 15 of the Act provides as follows :—
The Central Government may, after due appropriation made by Parliament by law in this
behalf, make to the Authority grants of such sums of money as the Government may think fit
for being utilised for the purposes of this Act.
Thus, the grants from the Central Govt, are one of the main sources of funds for the
Authority at least to begin with.

2 . C o n stitu tio n o f F unds

Section 16(1) of the Act makes provisions regarding constitution of funds. According to
this section.
There shall be constituted a fund to be called "the Insurance Regulatory and Development
Authority Fund" and there shall be credited thereto—
(a) all Government grants, fees and charges received by the Authority;
(b) all sums received by the Authority from such other source as may be decided upon
the Central Government;
(c) the percentage of prescribed premium income received from the insurer."

3 . A p p lica tio n o f F und

Section 16(2) provides for application of Fund as follows :
\ The Fund shall be applied for meeting—
(a) the salaries, allowances and other remuneration of the members, officers and other
employees of the Authority;
 11.24 Insurance Regulatory Bodies

(b) the other expenses of the Authority in connection with the discharge of its functions
and for the purposes of this Act.

| ACCOUNTS AND AUDITS

Section 17(1) of the Act lays down the provisions regarding maintenance of accounts.

A cco u n ts
According to section 17(1) —
"The Authority shall maintain proper accounts and other relevant records and prepare an
annual statement of accounts in such form as may be prescribed by the Central Government
in consultation with the Comptroller and Auditor-General of India."

A udit
Section 17(2), (3) & (4) contain the provisions, regarding audit of accounts and their
placement on the table of the Parliament. These provisions are as follows:—
(1) The accounts of the Authority shall be audited by the Comptroller and Auditor-
General of India at such intervals as may be specified by him and any expenditure
incurred in connection with such audit shall be payable by the Authority to the
Comptroller and Auditor-General.
(2) The Comptroller and Auditor-General of India and any other person appointed by
him in connection with the audit of the accounts of the Authority shall have the
same rights, privileges and authority in connection with such audit as the
Comptroller and Auditor-General generally has in connection with the audit of the
Government accounts and, in particular, shall have the right to demand the
production of books of account, connected vouchers and other documents and
papers and to inspect any of the offices of the Authority.
(3) The accounts of the Authority as certified by the Comptroller and Auditor-General
of India or any other person appointed by him in this behalf together with the audit-
report thereon shall be forwarded annually to the Central Government and that
Government shall cause the same to be laid before each House of Parliament.

| POWERS OF CENTRAL GOVT TO ISSUE DIRECTIONS

Section 18 of the Act given in chapter VI lays down the Powers of the Central Govt to
issue directions as follows :—
(1) Without prejudice to the foregoing provisions of this Act, the Authority shall, in
exercise of its powers or the performance of its functions under this Act, be bound by such
directions on questions of policy, other than those relating to technical and administrative
matters, as the Central Government may give in writing to it from time to time :
insurance Regulatory Bodies 11.25

Provided that the Authority shall, as far as practicable, be given an opportunity to express
its views before any direction is given under this sub-section.
(2) The decision of the Central Government, whether a question is one of policy or not,
shall be final.

IRDA (PROTECTION OF POLICY HOLDERS INTERESTS)

I REGULATIONS, 2 0 0 2

The Insurance Regulatory and Development Authority in exercise of the powers

conferred by section 114 A of the Insurance Act, 1938 read with sections 14 & 26 of IRDA
Act, 1999 and in consultation with the Insurance Advisory Council has made the IRDA
(Protection of Policy holders Interests) Regulations 2002. These regulations have been
notified on 26th of April, 2002. These regulations establish in life insurances in the quality of
sales as well as service in life insurance and it is necessary that every employee and agent in
the organisation is fully aware of regulation as well as their implications.

S a lien t F ea tu res o f IRDA R eg u la tio n s, 2 0 0 2

Following are the features of these regulations :

1. P oin t o f S ale
Following points should be clear to the prospective client.
(i) A prospect of any insurance product shall clearly state the scope of benefits, the
entent of insurance cover, inceptions and conditions of the insurance cover and, in
case of life insurance, whether the product is participating or not. The riders in the
policy should be clearly mentioned.
(ii) Material information about the proposed cover should be given to the prospect so as
to enable him to take a decision.
(iii) If the prospect defends upon the insurance or his agent, such a person must advise
the prospect dispassionately
(iv) In case the proposal is not filed by the prospectus, it should be certified that
contents of the form and contents were explained to him.

2 . P roposal for In su ran ce

(i) The insurance should provided a copy of the proposal form which was accepted
earlier to the insured.
(ii) Where is a porposal form is not used the insurer shall record the information
obtained orally or in writing and but if in the course note of the policy.
(iii) The propose should be informed of the nomination facility in the policy.
 11.26 Insurance Regulatory Bodies

(iv) Proposal should be processed speedily and decision communicated within 15 days
from the receipt of proposal.

3. G rievan ce R ed ressal Procedure

Every insurer should have grievance redressal system in place and policy holder should
be informed about it.

4 . M atters to be S ta te d in Life In su ran ce P o licy

(l) A life insurance policy shall clearly state :
(a) the name of the plan governing the policy, its terms and conditions;
(b) whether it is participating in profits or not;
(c) the basis of participation in profits such as cash bonus, deferred bonus, simple or
compound reversionary bonus;
(d) the benefits payable and the contingencies upon which these are payable and the
other terms and conditions of the insurance contract;
(e) the details of the riders attaching to the main policy;
(f) the date of commencement of risk and the date of maturity or date(s) on which the
benefits are payable;
(g) the premiums payable, periodicity of payment, grace period, allowed for payment
of the premium, the date of the last instalment of Premium, the implication of
discontinuing the payment of an instalment(s) of premium and also the provisions
of a guaranteed surrender value;
(h) the age at entry and whether the same has been admitted;
(i) the policy requirements for (a) conversion of the policy into paid up policy, (b)
surrender (c) non- forfeiture, and (d) revival of lapsed policies;
(j) contingencies excluded from the scope of the cover, both in respect of the main
policy and the riders;
(k) the provisions for nomination, assignment, and loans on security of the policy and a
statement that the rate of interest payable on such loan amount shall be as
prescribed by the insurer at the time of taking the loan;
(l) any special clauses or conditions, such as, first pregnancy clause, suicide clause
etc.;
(m) the address of the insurer to which all communications in respect of the policy shall
be sent.
(n) the documents that are normally required to be submitted by a claimant in support
of a claim under the policy.
Insurance Regulatory Bodies | 11.27~

(2) While acting under regulation 6(1) in forwarding the policy to the insured, the insurer
shall inform by the letter forwarding the policy that he has period of 15 days from the date of
receipt of the policy document to review the terms and conditions of the policy and where the
insured disagrees to any of those terms or conditions, he has the option to return the policy
stating the reasons for his objection, when he shall be entitled of a proportionate risk
premium for the period on cover and the expenses incurred by the insurer on medical
examination of the proposer and stamp duty charges.
(3) In respect of a unit linked policy, in addition to the deductions under sub-regulation
(2) of this regulation, the insurer shall also be entitled to repurchase the unit at the price of the
units on the date of cancellation.
(4) In respect of a cover, where premium charged is dependent on age, the insurer shall
ensure that the age is admitted as far as possible before insurer of the policy document. In
case where age has not been admitted by the time the policy is issued, the insurer shall make
efforts to obtain proof of age and admit the same as soon as possible.

5. M atters to be S ta te d in G eneral In su ran ce P olicy

(1) A general insurance policy shall clearly state :
(a) the name(s) and address(es) of the insured and of any bank(s) or any other person
having financial interest in the subject matter of insurance;
(b) full description of the property or interest insured;
(c) the location or locations 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 not covered;
(g) any franchise or deductible applicable;
(h) premium payable and where the premium is provisional subject to adjustment, the
basis of adjustment of premium be stated;
(i) policy terms, conditions and warranties;
(j) action to be taken by the insured upon occurrence of a contingency likey 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 rising to a claim and the rights of the insurer in the
circumstances;
(l) any special conditions attaching to the policy;
(m) provision for cancellation of the policy on grounds of mis-reprsentation, fraud, non­
disclosure or material facts or non-coopertion of the insured;
 11.28 Insurance Regulatory Bodies

(n) the address of the insurer to which all communications in respect of the insurance
contract should be sent;
(o) the details of the riders attaching to the main policy;
(p) proforma of any communication the insurer may seek from the policy holders to
service the policy.
(2) Every insurer shall inform and keep informed periodically the insured on the
requirements to be fulfilled by the insured regarding lodging of a claim arising in terms of the
policy and the procedure to be followed by him to enable the insurer to settle a claim early.

6. C laim s P rocedure for Life In su ran ce P o licy

(i) The policy state the type of document needed to be submitted at the time of claim.
(ii) The claim will be processed speedily and additional documents required will be
stated once and not in a piece meal manner.
(iii) The acceptance of claim or otherwise should be done within 30 days of receipt of
all relevant papers and clarification required.
(iv) In case the claim is ready to be paid but is not paid for want of identification of the
claimant, the company shall pay interest can the amount of the claim at the rate of
interest payable on saving bank account.
(v) If the insurer has not paid the claim within the required period without any tangible
reason, it will pay interest @ 2 percent higher than the saving bank interest rate.

7. C laim s o f G eneral In su ran ce P olicy

(i) Under general insurance policy, the insured or claimant will give notice of loss to
the insurer. The insurer will respond immediately in receipt of communication and
indicate the procedure to be followed by the insured. In case a surveyor needs to be
appointed, it should be done within 72 hours.
(ii) When the insured is unable to furnish the relevant documents to the insurer or
survey or, this fact should be intimated to the insured in writing and stating that
delay in payment of claim may occur due to this reason. The surveys is required to
submit his report within 30 days, in no case he will take more than 6 months for
furnishing his report.
(iii) In an insurer, on the receipt of a survey report, finds that it is incomplete in any
respect, he shall require the surveys under intimation to the insured to furnish
additional report on certain specific issued as may be required. Such a request
should be made within 15 days of the receipt of such report.
(iv) The surveyor shall furnish such additional information within 3 weeks.
Insurance Regulatory Bodies 11.29

(v) After the receipt of survey & repot or additional survey report, the insurer shall
setter the claim within 30 days.
(vi) The amount of the claim will be made within 7 days, otherwise the insurer will
have to pay interest @ 2% above the saving bank interest rate prevailing in the
beginning of the year.

8. P olicyh old ers' S erv icin g

(1) An insurer carrying on life or general business, as the case may be, shall at all times,
respond within 10 days of the receipt of any communication from its policyholders in all
matters, such as :
(a) recording change of address;
(b) nothing a new nomination or change of nomination under a policy;
(c) nothing an assignment on the policy;
(d) providing information on the current status of a policy indicating matters, such as,
accrued, bonus, surrender value and entitlement to a loan;
(e) processing papers and disbursal of a loan on security of policy;
(f) issuance of duplicate policy
(g) issuance of an endorsement under the policy; noting a change of interest or sum
assured, financial interest of a bank and other interests; and
(h) guidance on the procedure for registering a claim and early settlement thereof.

9 . G eneral
(1) The requirements of disclosure of "material information" regarding a proposal or
policy apply, under these regulations, both to the insurer and the insured.
(2) The policyholder shall assist the insurer, if the latter so requires, the prosecution of
a proceeding or in the matter of recovery of claims which the insurer has against
third parties.
(3) The policyholder shall furnish all information that is sought from him by the insurer
and also any other information which the insurer considered as having a bearing on
other risk to enable the latter to assess properly the risk sought to be covered by a
policy.
(4) Any breaches of the obligations cast on an insurer or insurance agent or insurance
intermediary in terms of these regulations may enable the Authority to initiate
action against each or all them, jointly or severally, under the Act and/or the
Insurance Regulatory and Development Authority Act, 1999.
 11.30 Insurance Regulatory Bodies

| GUIDELINES FOR GRIEVANCE REDRESSAL

In tro d u ctio n
The Insurance Regulatory and Development Authority (IRDA) Regulations for
policyholder Interest, 2002 provide for insurers to have in place speedy and effective
grievance redressal systems. The IRDA has issued guidelines for grievance redressal b>
insurance companies. These guidelines, issued on 27th July 2010, are applicable for disposal
of grievances/complaints and all insurers are required to insure that the guidelines are
followed.

1. D e fin itio n o f G rievance /C o m p la in t

There shall be a uniform definition of “Grievance or Complaint”. Grievances shall be
clearly distinguished from Inquiries and Requests, which do not fall within the scope of these
guidelines.
The following definition of grievance shall be adopted:
Grievance/Complaint: A “Grievance/Complaint” is defined as any communication that
expresses dissatisfaction about an action or lack of action, about the standard of
service/deficiency of service of an insurance company and/or any intermediary or asks for
remedial action.
On the other hand, an Inquiry and Request would mean the following:
Inquiry: An “Inquiry” is defined as any communication from a customer for the primary
purpose of requesting information about a company and/or its services.
Request: A “Request” is defined as any communication from a customer soliciting a
service such as a change or modification in the policy.

2. G rievan ce R ed ressal P o licy

Every insurer shall have a Board approved Grievance Redressal Policy which shall be
filed with IRDA.

3. G rievance O fficers
Every insurer shall have a designated Grievance Officer of a senior management level.
Senior Management would mean either the CEO or the Compliance Officer of the company.
Every office other than the Head/Corporate/Principal officer of an insurer shall also have an
officer nominated as the Grievance Officer for that office.

4. G rievance R ed ressal S y stem /P ro c ed u r e:

Every insurer shall have a system and a procedure for receiving, registering and disposing
nsurance Regulatory Bodies 11.31

r grievances in each of its offices. This and all other relevant details along with details of
Turnaround Times (TATs) shall be clearly laid down in the policy. While insurers may lay
down their own TATs, they shall ensure that the following minimum time-frames are
adopted:
(a) An insurer shall send a written acknowledgement to a complainant within 3
working days of the receipt of the grievance.
(b) The acknowledgement shall contain the name and designation of the officer who
will deal with the grievance.
(c) It shall also contain the details of the insurer’s grievance redressal procedure and
the time taken for resolution of disputes.
(d) Where the insurer resolves the complaint within 3 days, it may communicate the
resolution along with the acknowledgement.
(e) Where the grievance is not resolved within 3 working days, an insurer shall resolve
the grievance within 2 weeks of its receipt and send a final letter of resolution.
(f) Where, within 2 weeks, the company sends the complainant a written response
which offers redress or rejects the complaint and gives reasons for doing so,
(i) the insurer shall inform the complainant about how he/she may pursue the
complaint, if dissatisfied.
(ii) the insurer shall inform that it will regard the complaint as closed if it does not
receive a reply within 8 weeks from the date of receipt of response by the
insured/policyholder.
Any failure on the part of insurers to follow the above-mentioned procedures and time-
frames would attract penalties by the Insurance Regulatory and Development Authority.
It may be noted that it is necessary for each and every office of the insurer to adopt a
system of grievance registration and disposal.

5. T urnaround T im es
There are two types of turnaround times involved.
(i) The service level turnaround times, which are mapped to each classification of
complaint ( which is itself based on the service aspect involved).
(ii) The turnaround time involved for the grievance redressal.
As to (i), the TATs are as mapped to the classification and prescribed by the Authority to
insurers. These TATs reflect the time-frames as already laid down in the IRDA Regulations
for Protection of Policyholders Interests and more, as, wherever considered necessary : r
certain service aspects not getting specifically reflected in the Regulations), specific TATs
indicated in the classification and mapping provided by the Authority.
 11.32 Insurance Regulatory Bodies

As regards (ii) above, the minimum TATs required to be followed shall be as prescribed
in guideline 4 (a) to (g) as prescribed above.

6. C losure o f G rievance
A complaint shall be considered as disposed of and closed when
(a) the company has acceded to the request of the complainant fully.
(b) where the complainant has indicated in writing , acceptance of the response of the
insurer.
(c) where the complainant has not responded to the insurer within 8 weeks of the
company’s written response.
(d) where the Grievance Redressal Officer has certified that the company has
discharged its contractual, statutory and regulatory obligations and therefore closes
the cofnplaint.

7. C a teg o risa tio n o f C om p lain ts

(a) Categorisation of complaints as prescribed by the Authority from time to time shall
be adopted by insurers and incorporated in their systems.
(b) The present classification prescribed by the Authority is placed at Annexure A. All
insurers shall provide for these classification categories in their respective systems.

8. M inim um Softw are R eq u irem en ts

It is necessary for insurers to have automated systems that will enable online registration,
tracking of status of grievances by complainants and periodical reports as prescribed by
IRDA. The system should also be one which can integrate seamlessly with the Authority’s
system in the manner prescribed by the Authority. The Authority shall define these
requirements from time to time and insurers shall ensure that they provide for such
software/system modifications as may be required. The objective is to create the required
industry level database and systems that would enable speedy and effective redressal of
complaints.

9 . Calls rela tin g to G rievan ces

Insurers shall also have in place a system to receive and deal with all kinds of calls
including voice/e-mail, relating to grievances, from prospects and policyholders. The system
should enable and facilitate the required interfacing with IRDA’s system of handling calls/e-
mails.

10. P u b licizin g G rievan ce R ed ressal P rocedure

Every insurer shall publicize its grievance redressal procedure and ensure that it is
specifically made available on its website.
-surance Regulatory Bodies 11.33

11. P o licy h o ld er P r o te ctio n C o m m ittee

Every insurer that ensure that the Policyholder Protection Committee, as stipulated in the
r_:delines for Corporate Governance issued by the Authority, is in place and is receiving and
an.Jyzing the required reports from the management and is carrying out all other requisite
a : nitoring activities.

| PROCESS OF GRIEVANCE REDRESSAL

The following process should be followed by policyholders for the redressal of their
grievances :
(i) The policyholders who have grievances should register their complaints first with
the Grievance Redressal Channel of the insurance company directly.
(ii) If policyholders are not able to access the insurance company directly for any
reason, then the complaint can be registered through the Integrated Grievance
Management System (IGMS) of the IRDA. A complaint registered through IGMS
will flow to the insurer’s system as well as IRDA repository. The IGMS provides
a standard platform to all insurers to resolve policyholder grievances and provides
IRDA with a tool to monitor the effectiveness of the grievance redress system of
insurers.
The following figure depicts the process of grievance redressal.
 11.34 Insurance Regulatory Bodies

(iii) If the complaint is not resolved by the insurance company, the Policyholder can
escalate the complaint to IRDA.
(iv) The complainant can also approach the Insurance Ombudsman for redressal of his
grievances.
(v) If a complaint is dismissed by the Insurance Ombudsman, the policyholder can seek
legal remedy against the insurers as per normal process of law.

| INSURANCE OMBUDSMAN
In exercise of the powers conferred by the Insurance Act, 1938, the Central Government
framed Redressal of Public Grievances Rules, 1998 which came into force w.e.f. 11th
November, 1998. These Rules apply to all the insurance companies operating in general
insurance business and life insurance business, whether in public or private sector. The
objects of these Rules are to resolve all complaints relating to settlement of claims on part of
insurance companies in cost effective, efficient and impartial manner.
For the implementation of the above Rules the institution of Insurance Ombudsman was
created by the Government of India vide notification dated 11th November, 1998 with the
purpose of quick disposal of the grievances of the insured customers and to mitigate their
problems involved in redressal of their grievances. In institution is of great importance
and relevance for the protection of interests of policyholders and also in building their
confidence in the system.

A p p o in tm en t o f In su ran ce O m budsm an
The governing body of insurance council issues orders of appointment of the insurance
Ombudsman on the recommendations of the committee comprising of Chairman, IRDA.
Chairman, LIC, Chairman, GIC and a representative of the Central Government. Insurance
council comprises of members of the Life Insurance council and general insurance council
formed under Section 40 C of the Insurance Act, 1938. The governing body of insurance
council consists of representatives of insurance companies.

E ligib ility o f O m budsm an

Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services.

T erm s o f O ffice
An insurance Ombudsman is appointed for a term of three years or till the incumbent
attains the age of sixty five years, whichever is earlier. Re-appointment is not permitted.

T erritorial J u r isd ic tio n o f O m budsm an

The governing body has appointed seventeen (17) Ombudsman across the country as on
Insurance Regulatory Bodies 11.35

1st January, 2015. These are located at (1) Ahmedabad, (2) Bengaluru, (3) Bhopal,
(4) Bhubaneswar, (5) Chandigarh, (6) Chennai, (7) Delhi, (8) Guwahati, (9) Hyderabad,
(lO)Jaiput, (11) Emakulam, (12) Kolkalta, (13) Lucknow, (14) Mumbai, (15) Noida,
(16) Patna and (17) Pune. The area of jurisdiction of each ombudsman has been mentioned
in the list of Ombudsman. Complaint is to be lodged with the Insurance Ombudsman
under whose territorial jurisdiction the branched or insurer’s office falls. However, in
case of group insurance policies, the complaint may be lodged with the Insurance
Ombudsman under whose territorial jurisdiction the place of residence of the complaint falls.

O ffice M anagem ent

The Ombudsman has a secretarial staff provided to him by the insurance council to assist
him in discharging his duties. The total expenses on Ombudsman and his staff are incurred by
the insurance companies who are members of the insurance council in such proportion as
may be decided by the governing body.

R em oval from O ffice

An Ombudsman may be removed from service for gross misconduct committed by him
during his term of office. The governing body may appoint such person as it thinks fit to
conduct enquiry in relation to misconduct of the Ombudsman. All enquiries on misconduct
will be sent to Insurance Regulatory and Development Authority which may take a decision
as to the proposed action to be taken against the Ombudsman. On recommendations of the
IRDA, the Governing Body may terminate his services, in case he is found guilty.

Power o f O m budsm an
Insurance Ombudsman has two types of functions to perform (1) conciliation, (2) Award
making. The insurance Ombudsman is empowered to receive and consider complaints in
respect of personal lines of insurance from any person who has any grievance against an
insurer. The complaint may relate to any grievance against the insurer i.e.
(a) any partial or total repudiation of claims by the insurance companies, (b) dispute with
regard to premium paid or payable in terms of the policy, (c) dispute on the legal construction
of the policy wordings in case such dispute relates to claims; (d) delay in settlement of claims
and (e) non-issuance of any insurance document to customers after receipt of premium.
Ombudsman's powers are restricted to insurance contracts of value not exceeding Rs. 20
lakhs. The insurance companies are required to honour the awards passed by an Insurance
Ombudsman within three months.

M anner o f Lodging C om p lain t

The complaint by an aggrieved person has to be in writing, and addressed to the
insurance Ombudsman of the jurisdiction under which the office of the insurer falls. The
 11.36 Insurance Regulatory Bodies

complaint can also be lodged through the legal heirs of the insured. Before lodging a
complaint:
(i) the complainant should have made a representation to the insurer named in the
complaint and the insurer either should have rejected the complaint or the
complainant have not received any reply within a period of one month after the
concerned insurer has received his complaint or he is not satisfied with the reply of
the insurer.
(ii) The complaint is not made later than one year after the insurer had replied.
(iii) The same complaint on the subject should not be pending with before any court,
consumer forum or arbitrator.

R eco m m e n d a tio n s o f th e O m budsm an

When a complaint is settled through the mediation of the Ombudsman, he shall make the
recommendations which he thinks fair in the circumstances of the case. Such a
recommendation shall be made not later than one month and copies of the same sent to
complainant and the insurance company concerned. If the complainant accepts
recommendations, he will send a communication in writing within 15 days of the date of
receipt accepting the settlement.

Award
The ombudsman shall pass an award within a period of three months from the receipt of
the complaint. The awards are binding upon the insurance companies.
If the policy holder is not satisfied with the award of the Ombudsman he can approach
other venues like Consumer Forums and Courts of law for redressal of his grievances.
As per the policy-holder's protection regulations, every insurer shall inform the policy
holder along with the policy document in respect of the insurance Ombudsman in whose
jurisdiction his office falls for the purpose of grievances redressal arising if any
subsequently.
Steady increase in number of complaints received by various Ombudsman shows that the
policy-holders are reposing their confidence in the institution of Insurance Ombudsman.

^ R E V IE W QUESTIONS^ ----------- ~ ________ E

A. SHORT ANSWER TYPE QUESTIONS
1. What is the composition of the Authority under the IRDA Act ?
2. What is the Composition of Insurance Advisory Committee under IRDA Act ?
3. Discuss the Capital Adequacy requirement for an insurance Company.
4. Discuss the provisions regarding renewal of insurance.
5. Discuss the limitations on Expenditure on Commission.
Insurance Regulatory Bodies 11.37

6. Discuss the background for setting up of Regulatory Authority for the Insurance Sector.
7. Discuss the provisions regarding registration of the insurers under the iRDA Act.
8. Discuss the provisions regarding accounts and balance sheet. Also discuss provisions
regarding investment of assets.
9. Discuss the provisions regarding Insurance business in rural and Insurance Sector.
10. Discuss the provisions regarding licensing of Insurance intermediary.
11. Discuss duties, powers and functions of the Authority.
12. Discuss provisions of IRDA regarding Finance, Accounts and Audit alongwith powers of the
Central Government to issue directions.
13. Define Grievance.
14. Write in brief the grievance redressal procedure.
15. What do you understand by TATs ?
16. What is the process of grievance redressal ?
17. What do you understand by Insurance Ombudsman ?
18. Does Insurance Ombudsman operate in any territorial jurisdiction ?
19. Who can approach Ombudsman ?
20. How is the complaint to be lodged ?
21. What is the time limit to approach the Ombudsman ?
22. Is there any limit for the amount under dispute that can be entertained by the Ombudsman.

B. ESSAY TYPE QUESTIONS

1. Explain the salient features of IRDA Act.
2. Discuss the background of setting up of IRDA. What is the composition of Authority. What
are its duties, powers and functions.
3. Discuss the provisions of IRDA Act regarding licencing of agents and insurance
intermediaries.
4. Discuss the provisions of IRDA Act for registration and renewal of registration of insurers.
5. Discuss the provisions regarding duties, powers and functions of the 'Authority' with special
reference to make regulations.
6. Write in brief the guidelines issued by IRDA for grievance redressal by insurance companies.
7. Define ‘grievance’ and explain the grievance redressal procedure.
8. Discuss the grievance mechanism for redressal of insurance complaints.
9. Explain the process of grievance redressal.
10. Discuss the eligibility, powers and removal of Insurance Ombudsman.
11. Write a detailed note on the functioning of the Insurance Ombudsman.
12. Write short notes on
(a) Award of Ombudsman
(b) Manner of lodging complaint to the Insurance Ombudsman.
(c) Turnaround Times (TATs).
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 For B. Com., (General) (CBCS) 3rd Semester
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