IC [ebook] - Free ebook download as PDF File .pdf), Text File .txt) or read The rapid expansion of the life insurance profession in India over recent. IC LIFE INSURANCE. 1. CHAPTER 1. INTRODUCTION TO INSURANCE. Chapter Introduction. This chapter aims to introduce the basics of insurance, trace. These extensions are made as a minimalist ebook reader that will allow you to browse through ebooks directly from these two browsers. Click here to view IC .
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Dont Miss the chance. Subscribe NOW!!! Do you think one must be better prepared than taking half chances in Exams. Tax benets Insurance offers considerable tax benets under the Income Tax Act Premium paid up to Rs.
The death benet or the maturity benet received by the nominee or the policyholder is tax-free under Section 10 10D of the Act, as per prevailing laws, before premium paid up to Rs. Planning for life stage needs Today the insurance products that are being offered by insurance companies are designed to suit the needs of individuals in different age groups. This allows individuals to invest in insurance policies to meet their various and changing priorities.
Example A vouuu pe sou wHo Has jusl sla led ea u uu cau buv a le m usu auce p au lo pu e p olecl ou o au uLlP unit-linked insurance plan for high returns based on their risk appetite. Au ud v dua wHo s O vea s o d aud s oo uu lo uvesl lo lHe lam v's lulu e. Au ud v dua oo uu lo el emeul ucome cau uvesl u peus ou p aus.
Au ud v dua cau uvesl u a wHo e ol le po cv lo p ov de cove ove lHe cou se ol lHe eul e lel me. Develops the habit of saving An individual learns to save a certain amount of money from their income in order to pay their insurance premium. This encourages the habit of saving among individuals. Loan against insurance policy Individuals can also take out a loan against their insurance policies, subject to the conditions and privileges of the policy, without affecting any policy benets.
Releases capital and management When the management of a company knows that many of the risks faced by that company are covered by insurance, they no longer need to set funds aside to cover the impact of those risks taking place.
They are also free to concentrate on developing and growing their business. This makes the company more effective, which in turn helps to improve the overall economy of the country.
However, insurance can only make a positive contribution to society if people have condence that they will only be sold a policy that meets their needs and that the policy will protect them should an insured event happen.
If people dont feel this condence, then they will not buy the insurance and all these benets will be lost or reduced. Therefore, the insurance market needs to take a professional approach in all that it does. C Benets of a professional insurance market A professional insurance market is one that is open and honest in its dealings with customers and one that keeps the interests of its customers at the forefront of all that it does. There are numerous benets of taking such a professional approach as we shall see here.
Needs-based selling A professional market ensures that the customer gets what they are looking for rather than what the company wishes to sell them. This is called needs-based selling. A customer who is condent that they will only be sold a product that meets their needs is more likely to buy and then buy again, and recommend insurance to others.
The insurance industrys Regulator the IRDA has been proactively trying to address concerns about mis-selling, which is where a customer has been sold a policy that does not meet their needs in some way. When this happens the public becomes wary and cynical about the value of insurance. For example, with unit-linked insurance plans ULIPs a break up of the premium including all the charges is given in the policy. The Regulator has made it mandatory for companies to disclose the commissions earned by agents on the product in the benet illustration document.
This practice makes the customer aware of how much money is going towards life cover, investments and other expenses information they need to know. An insurance market that operates in this professional way will bring many benets to its customers, itself, society and the wider economy: Higher condence among policyholders A professional approach to insurance selling incorporating needs-based selling and disclosure combined with various steps like regulation, a grievance redressal system, the Ombudsman and the IRDA grievance call centre see section D4 have greatly helped to build the publics condence in the system.
The public can be assured that they are being treated fairly by the industry and, if they have a legitimate concern, that the Regulator will support them.
Therefore they are more likely to see insurance as a practical way of meeting their needs. Increase in insurance penetration India has the worlds second largest population and thereby the potential to be the second biggest insurance market. The addressable market is so vast that there is scope for all insurers to nd new customers rather than competing with each other for the same ones.
This will increase the market penetration of insurance, but will only be true if the public has condence that they are safe to address their needs through buying insurance.
Social benets As insurance spreads to more parts of the Indian community, with more people seeing it as a safe and valuable option, less people will be thrown into nancial hardship as a result of a family tragedy or other unforeseen event. Employment generation An increase in the penetration of insurance will mean more employment opportunities.
Insurance companies are continuously recruiting new employees and agents to sell their products. With a dynamic market and new roles emerging, professionals can keep looking for new opportunities. An insurance market that has a reputation as a professional industry will attract good quality personnel to a career in insurance, which will also help to promote the markets professionalism. Increase in prots for the insurance company A company that is professional in its approach to selling insurance and is, therefore, trusted by the public will nd that it is able to sell more insurance.
This, combined with the spread of insurance to new customers as condence in insurance grows, will increase the protability of the insurance company. We can see that these benets of a professional insurance market will contribute to an increase in the overall benets that insurance offers to the wider economy, as discussed in section B. More protable companies, more jobs, and less nancial hardship at an individual and corporate level will all enhance the overall economic success of the Indian economy and release more funds for investment in its businesses and infrastructure.
Now that we have looked at how insurance can benet not just individuals but society as a whole, lets pause for a moment to consider how we came to be where we are today. The insurance market in India has not always been the way it is today, and we shall look at how it has developed over the years in the next section. Since the earliest times insurance has been carried out in some form or other. Insurance in India has developed over time and has taken ideas from other countries England in particular.
The history of insurance in India can be divided into three phases as follows: Figure 1. However, the company failed in In the Madras Equitable had begun transacting life insurance business in the Madras Presidency.
The Government of India therefore decided to nationalize insurance business. The Council speaks out on issues of common interest, participates in discussions related to policy formation, and acts as an advocate for high standards of customer service in the insurance industry.
It was incorporated on 22 November under the Companies Act as a private company limited by shares. The Government only had enough foreign currency reserves to nance a few days of imports. In its report in , the committee recommended, among other things, that the private sector and foreign companies but only through a joint venture with an Indian partner be permitted to enter the insurance industry.
D3 Phase III Post-liberalisation As we have seen, following the recommendations of the Malhotra Committee, the insurance sector was opened to private companies. Foreign companies were also allowed to participate in the Indian insurance market through joint ventures JVs with Indian companies. The key objectives of the IRDA include the promotion of competition with a view to increasing customer satisfaction through more consumer choice and lower premiums, while ensuring the nancial security of the insurance market.
Since it has introduced various regulations ranging from the registration of companies for carrying on insurance business to the protection of policyholders interests. As a result, general insurance business was opened up to the private sector. Their ownership was vested with the Government of India.
GIC was notied as a reinsurance company. In appendix 1 we have provided lists of the life and general insurance companies that are active in India at the present time. Take a look at it now and get a feel for how many companies operate in the different sectors.
D4 Recent developments in the insurance industry By India was the fth largest insurance market in the world and it is still growing rapidly. There has been a lot of change in the decade since the market was opened up to the private sector. In this section we will look at some of the important developments of the last few years.
Growing importance of IT All insurance companies now use information technology IT to benet their business and to improve convenience for their customers. Today, customers can pay their premiums and check the status and other details of their policy using the companys website. Updates relating to the receipt of premiums or changes to their policy are sent to the customer through mobile SMS. Bancassurance Many banks have joined with insurance companies to cross-sell insurance products to their customers.
Insurance companies benet from the wide network and loyal customer base of banks, and the contribution that bancassurance makes to insurance sales has steadily grown over the last few years. The banks benet through being able to provide value-added products to their customers and from the fee income they receive in return from the insurance companies. Many banks have started their own life insurance subsidiaries. This eliminates the need for an intermediary and reduces costs.
This saving can be passed to customers in the form of reduced premiums. Micro-insurance products provide insurance protection to people in lower income groups, such as self-help group SHG members, farmers, rickshaw pullers and others against the risks that they and their assets are exposed to.
The premiums for these products may be as low as Rs. The minimum life insurance cover specied by the Regulator for this category is Rs. People who work in agriculture and allied activities are exposed to the hazards of nature so they need protection against risks like monsoon failure, oods etc.
This is where micro-insurance can come to their rescue. Grievance redressal Whenever any industry is experiencing fast growth there are bound to be concerns, and the insurance industry is no different. There has been an increase in complaints from customers about the settlement of their claims and customer service in general.
As we saw earlier, the IRDA has taken steps to protect the interest of the policyholders. The latest initiative from the IRDA is the setting up of a call centre which an insured can contact to seek the resolution of a grievance they have against their insurer. The unhappy customer can either call a toll-free number or email complaints irda.
We will return to some of these topics in more detail later in this chapter. First, however, we will continue our overview of the insurance industry in India by looking at the organisations and roles that feature within it. E Insurance organisations and roles E1 Types of insurance organisations Insurance organisations are divided into three main categories, as the following gure shows. We will look briey at the various products the different types of insurance organisations offer in section G.
Types of insurance organisation Insurance Life insurance Non-life insurance Reinsurance E1A Life insurance companies Life insurance companies cover risks that relate to human lives. They offer different benets under different types of products and cover the risk of early death, as well as the risk of living into old age. Under traditional plans, like term insurance plans, insurance companies provide death cover.
We saw an example of this when we looked at the case of Ajay at the start of this chapter. Under pension plans, insurance companies offer periodic monthly payments annuities to support the insured during their retirement. The exceptions to this are personal accident and health insurance, which are provided by non-life insurance companies.
Any asset either gives a monetary return e. All assets are exposed to various risks: If the asset is damaged by any of these risks, the owner will be at a disadvantage and they will lose the income or the convenience the asset provided.
Non-life insurance companies offer products that cover these risks and compensate the owner should the asset be damaged by one of them. It is a product from this type of company that an individual would buy to protect their assets, for example, their home against re etc.
E1C Reinsurance companies We saw in section A2 earlier that insurance is a risk transfer mechanism. Risk is transferred from those who are unable to bear it to those who can. However, insurance companies can only take on so much risk.
Once that limit is reached, the insurer itself is exposed to the risk of loss. When this happens insurers look to transfer some of their risks to someone else to shield themselves from overexposure. This is where reinsurance companies come into use. A reinsurance company is an insurer for the insurance company. Reinsurance companies take on a certain percentage of the risks on the insurance companys books, in return for the payment of a consideration.
E2 Roles in the insurance industry Apart from the insurer and the insured the other roles in the insurance industry include the following. It is the agents primary responsibility to meet the prospective client, understand their needs, and accordingly recommend suitable products. We shall discuss the role of agents in more detail in section H. Corporate agents These include banks and brokers.
More details about these are included in section F2. Intermediaries These can be individuals as well as organisations, like rms, banks and composite brokers. Intermediaries solicit and procure business from prospective clients for the insurance company. Underwriters These decide whether to accept or reject the insurance proposal.
If the proposal is to be accepted, then the underwriter decides at what price it should be accepted. Actuaries These calculate the standard price of products. They take into account statistical data and the past claims experience of the company. Apart from pricing individual products, they also do an overall nancial assessment of the insurance company from time to time to make sure that the company has sufcient reserves to pay for future liabilities.
Third party administrators TPAs These do the work of building hospital networks. They also help with approvals at the time of cashless admission to a hospital and with settling the bill with the insurer on discharge.
They have a major role to play in non-life insurance business. The Regulator The Regulator has the responsibility of ensuring the smooth running of the insurance sector. The IRDA grants licences to insurance companies and makes sure all insurance companies are in compliance with the regulations at all times. It also has a responsibility to protect the interests of the small policyholders against the mighty insurance companies. Training institutes These have the responsibility of supplying trained manpower to meet the ever growing need for skilled labour in the insurance industry.
NGOs Protecting the customers rights Non-Governmental Organisations NGOs play an important role in spreading awareness about insurance products and protecting the rights of the customers. The role of NGOs is more important in the rural areas where they work with Self Help Groups SHGs and insurance companies on deeper penetration of micro-insurance products at the grassroots level. You will see that some of these roles in the market are to do with the selling of insurance products or insurance distribution as it is known.
How do they do this? Lets take a look in this next section. F Insurance distribution Marketing of insurance products is done through two channels: Of those involved in the distribution of insurance which do you think would be a direct marketing channel and which an indirect marketing channel?
F1 Direct marketing channels A direct marketing channel may involve a sales force employed by the insurer and will certainly include the activities of the insurers full-time staff based in the ofce. Advertising will focus on the target audience, whether it is done through television, email marketing, newspapers, hoardings or online advertising.
The contract is concluded between the insurance company and the insured with no middleman. This channel for the sale of insurance products is relatively new in India, but is fast catching up with more traditional methods.
For some time, insurance companies have been using online payment gateways to collect renewal premiums and their websites to solicit sales inquiries for their insurance products, but it was only late in that insurance companies in India introduced products that are exclusively sold via the internet.
Because these online products are being sold directly to the end customer, with no intermediaries, insurance companies can sell these products much cheaper, as the intermediary commissions are eliminated. F2 Indirect marketing channels Although, as we have seen, online insurance sales are increasing at a fast rate, intermediaries still make a major contribution to the sale of insurance company products.
Intermediaries include the following: Indirect marketing channels Indirect marketing channels Individual agents Bancassurance Insurance brokers Comparison websites Direct brokers Reinsurance brokers Composite brokers Individual agents These are hired by insurance companies and given the required training.
After passing the prescribed examination and getting their licence, these agents seek and gain insurance business for the insurer. Agents are not on the payroll of the insurance company but are paid commission based on the sales they make.
Current regulations in India mean that an individual can act as an insurance agent for only one life insurance company at a time. Bancassurance As we saw in section D4, insurance companies partner with banks to sell their products through them. Current regulations in India state that a bank can only act as an insurance agent for one life insurance company at a time.
Insurance brokers These can sell the products of a number of life insurance companies. They have the advantage of being able to compare the insurance products of various insurance companies and then offer a plan that best suits the requirements of the customer. The broker represents the client: Comparison websites These are a recent phenomenon and use the internet to collect together and provide quotes from various life insurance companies.
An individual can input their details and compare quotes from different companies. They can then choose the one that best suits their needs. However, these websites are not regulated so the customer would be wise to check with the insurance company before making a nal decision on the purchase. Consider this Which is better selling insurance by direct marketing or indirect marketing?
Why do you think this? What sort of products are available? We will be taking the time to look at life insurance products later in this study text. For now, we will give a very brief overview of the types of insurance that are available.
G Insurance products As we saw in section E1, apart from reinsurance, the insurance market is broadly divided into two categories life insurance and non-life insurance. Life insurance covers risks related to human lives. All other risks are covered under non-life insurance or general insurance.
G1 Non-life insurance market The non-life insurance market is further divided into sub-categories. Non-life insurance market Fire insurance Non-life insurance market Marine insurance Miscellaneous Liability insurance Property insurance Motor insurance Health insurance Travel insurance It is a continuously developing market with new products being introduced from time to time as society has a need for them.
G2 Life insurance market There are many products available in the life insurance market and we will consider them in detail in chapters 5, 6 and 7. However, here we will give a brief description of the main types of product so that you can start to see what sort of products you could be involved in selling.
The main products offered under life insurance are show below. Main life insurance products Whole life insurance plans Main life insurance products Endowment insurance plans Term insurance plans Pension and savings plans Unit linked insurance plans ULIPs A discussion of specic general insurance products is outside the scope of this book.
Suggested activity Ask your family members or friends about the life insurance plan s they have. Ask them why they chose that particular plan. We have now concluded our overview of the insurance market, the roles within it and the products it provides.
Before we move on in the next chapter to look at the concepts behind insurance, lets conclude this one by looking at what it means to be an agent. The Insurance Act requires that an insurance agent must have a licence, and the IRDA deals with all issues of licences and other matters relating to agents.
There are regulations which must be complied with at all stages in the process. Full details of these regulations and requirements will be covered later in the study text.
In this introductory chapter we shall just outline the process of becoming an agent and explain what an agent does. H2 Role of an agent As stated in section F2, agents are hired by insurance companies and they act as the main link between the insurance company and the insured. Their role is to recommend to clients the right products that address the clients needs.
At the same time they must act in the interests of the insurance company by using their unique position of knowing their clients well enough to protect the insurance company from any undue adverse product selection. This makes the role of the agent in the entire insurance business very crucial. Agents facilitate the smooth sale of insurance products by assisting their clients with completing the paperwork involved, and after the policy is sold the agent should ensure it is serviced properly until maturity or in the event of a claim.
At the time of a claim, the agent should also assist the client to complete the required formalities to ensure quick settlement. In India, life insurance agents deal with a range of insurances which are generally considered under the following headings: All these products will be looked at in later chapters.
Once licensed and appointed, the agent is an independent professional. At the heart of this is the need for agents to put the interests of their clients above all else. For instance, the agent should disclose all information relating to the insurance company that they represent and the products they are recommending. They should act in the best interests of the client while at the same time making sure that there is no adverse selection against the insurance company we will discuss adverse selection further in chapter 4.
In addition, the insurance agent needs to take steps to keep the business they have secured for their company. To do this they need to make every attempt both orally and in writing to ensure that the policyholder pays the premium within the required time. We will return to the Code of Conduct for agents later.
Role of nancial services THe huauc a se v ces seclo uc ud uu lHe usu auce seclo Has a majo o e lo p av u lHe ove a ecouom c u owlH of the country. Benets of professional insurance market A p oless oua usu auce ma el based ou ueeds-based se uu aud p ope d sc osu es w ead lo H uHe couhdeuce among policyholders, an increase in the penetration of insurance, job creation and enhancement of the overall success of the insurance company.
THe h sl pHase p e- be a sal ou was dom ualed bv p vale aud lo e uu usu auce compau es belo e lHe ove umeul nationalised the sector in Private participation was invited and also FDI.
Currently there are 23 life insurance companies operating in India. Baucassu auce aud m c o- usu auce Have beeu introduced and grievance redressal systems established.
Insurance organisations and roles lusu auce bus uess s c ass hed ulo lH ee ma u lvpes - le. THe usu auce ma el s made up ol aueuls. Insurance distribution lusu auce s so d lH ouuH d ecl ma uu cHauue s emp ovees aud ule uel sa es aud ud ecl ma el uu cHauue s agents, bancassurance, brokers. Insurance products P oducls olle ed bv le usu auce compau es uc ude le m usu auce p aus.
IC [ebook] | Underwriting | Insurance
Becoming an agent To become au aueul a pe sou Has lo subm l lHe uecessa v lo m aud lees. Have lHe euu ed uua hcal ou. Au aueul sHou d ecommeud lo c euls lHe besl p oducls lHal add ess lHe ueeds aud al lHe same l me ma e su e there is no adverse selection for the insurer. Au aueul sHou d coul uuous v sl ve lo mp ove lHe uow edue ol lHe owu usu e 's p oducls. You are transferring the risk you face to the insurance company to bear for you.
Why do people need life insurance? What are the benets of having a professional insurance market? List the participants who make up the insurance market. What indirect marketing channels are available to insurance companies?
What are the different types of products sold by life insurance companies? People need life insurance to help take care of their obligations should they die prematurely.
These include the: The benets of a professional insurance market that focuses on needs-based selling and disclosure include: H uHe couhdeuce amouu po cvHo de s, au uc ease u usu auce peuel al ou, soc a beuehls, emp ovmeul ueue al ou, uc eased p ohls lo usu auce compau es, p em ums ava ab e lo cHauue ulo uveslmeul p ojecls, aud au mp ovemeul u lHe ove a u owlH ol lHe ecouomv.
The constituents of the insurance market include: The indirect marketing channels include: The different types of products sold by life insurance companies include: Insurance companies active in India January Table 1. In this chapter we will look at the nature of risk in more detail and the types of risks that can be insured against, in addition to explaining a little more about how risks are transferred and pooled.
Of course, as a life insurance agent you are concerned with the risks relating to human life and we shall focus our attention on these aspects in this chapter. However, we shall also be making reference to some risks that apply to general insurances as this will help you to gain a good understanding of the concept of risk in its broadest sense. In insurance, risk is applied to certain assets that can be insured, such as a human life, a house, a car, etc.
There is no single denition of risk because of the different contexts in which it can be used. Here are some of the denitions of risk: Risk is the chance of damage or loss. Risk is doubt concerning the outcome of a situation. Risk is something or someone considered to be a potential hazard. Be aware In life insurance the word risk is used to describe the possibility of an unfavourable event occurring, for example untimely death or an unforeseen disability.
During a lifetime an individual can be exposed to many risks, some of these are: Figure 2. Life insurance mainly deals with two risks premature death and living too long. The other risks relating to human life are mostly covered under non-life insurance.
However, life insurance companies offer additional benets or riders along with life insurance plans to cover the following risks death or disability due to accidents, illness and unemployment. His job involves frequent travelling to meet various retailers in his region in order to achieve his monthly and quarterly sales targets. Sometimes he has to travel continuously for days, without any rest. Rakesh Gupta is exposed to the following risks, for which he should consider buying insurance: Premature death Rakeshs job prole is quite stressful and involves intense travelling.
He is exposed to the risk of early death which could occur due to an accident or illness caused by stress. A life insurance plan can protect his family against the risk of Rakeshs early death. Accident Due to the frequent travelling that Rakesh has to do, he is prone to the risk of accidents that can result in either permanent or temporary disability. A life insurance plan with a disability benet rider or a separate accidental death policy can protect his family against the risk of Rakesh becoming disabled.
Illness Due to the stressful nature of his job, Rakesh is exposed to the risk of suffering from critical illnesses. A life insurance plan with a critical illness rider, or a health insurance policy, can help meet the hospitalisation expenses should Rakesh suffer from any critical illness. Unemployment If Rakesh has an accident and becomes disabled, he risks losing his job and becoming unemployed.
Living too long Should none of the above events occur during his working life and Rakesh retires, he may be exposed to the risk of living too long beyond retirement. He is working for a private company that does not provide a monthly pension after retirement as part of his employee benets. Hence he needs to work towards building a retirement fund during his working life by investing in a retirement pension plan.
On retirement he can purchase an annuity plan from a life insurance company that will pay him regular annuity payments during his retirement years. Details about various life insurance plans, health insurance plans and riders will be discussed in later chapters.
Be aware Insurance companies provide cover for only a specied number of risks. These risks are listed in the policy document. The insurance company will not provide protection for claims arising out of risks other than the specied risks.
Suggested activity After studying the risks that an individual is exposed to, discuss with your family income provider which risks they are exposed to due to the nature of their job. If you are the main income provider what risks are you personally exposed to? A2 Attitude to risk Each persons attitude to risk is different. Therefore, we all respond to risks in different ways. Some people are willing to retain risks and carry them themselves, while others act cautiously and transfer them to an insurance company.
B Components of risk The components of risk include: If we could know in advance that an event is going to take place we could plan to prevent it or overcome it, and thereby limit or even remove the risk involved. As a general principle insurance is only available for risks that are uncertain.
This statement raises a question: So how can this statement be true? It is true because, although we will all die one day, when we will die is uncertain. It is the uncertainty about the timing of death that makes death insurable. Once the timing of death becomes certain, when an individual is suffering from a fatal disease, for example, then an insurance company will not cover the risk. The following case studies show how this works. Case studies 1. Rishbah Agrawal is a year-old businessman who leads a healthy lifestyle.
Every morning he practices yoga and abstains from smoking, tobacco and alcohol. There is a family medical history of diabetes and both his parents suffer from it. But Rishbah Agrawal himself has not been diagnosed with diabetes.
Can Rishbah be provided with life insurance? The answer is Yes, because Rishbah maintains a healthy lifestyle and he has not been diagnosed with any disease. The timing of his death is uncertain. Rakesh Sharma has been diagnosed with a brain tumour at a very advanced stage. The doctors know that they cannot save him and sadly Rakeshs death is almost certain in the near future.
Can Rakesh Sharma be provided life insurance? The answer is No, life insurance companies will not take the risk of providing insurance cover for Rakesh as his death in a very short time span is almost certain. B2 Level of risk We know that there is a greater likelihood of some things happening than others and this affects the level of risk involved. The level of risk is normally assessed in terms of the: Frequency The probability that a certain person will die within one year is calculated by actuaries, from the past data collected, and is made available as mortality tables.
This allows insurance companies to determine the probability of a particular event, such as death, occurring under various circumstances.
The probability of risk to life for individuals will differ on the basis of their age, medical wellbeing, family medical history, lifestyle, job prole etc. The mortality rate is the chance of dying at a specied age based on the proportion of deaths among a specic number of a sample population.
Example Lets look at two different groups of people. The rst group is aged Of these one person dies before the age of The second group is aged The frequency of death in the second group is therefore greater than in the rst group. Severity Insurance companies attempt to determine the amount of claims they would experience if the insured events were to actually occur based on the likely severity of the losses.
Be aware Life insurance companies determine the level of risk based on past data claims experience.
If the past data indicates that individuals within a certain age group say, are more prone to heart attacks, then the level of risk will be considered to be higher for that age group. The total insurance claim for Air India is expected to run into crores of rupees for the plane crash victims.
The nature of airline insurance can be categorised as low frequency but high severity impact since the probability of an air crash is low, but when it does occur, the extent of the loss is very high. B3 Peril and hazard This is the nal aspect of risk and relates to the cause of losses. Peril refers to a specic event which might cause a loss.
This loss can be loss of life or loss of property. Natural disasters such as earthquakes, storms, oods etc. Perils are the risk being insured against, e. A hazard, on the other hand, is a condition that either increases the chance that a peril will happen or may cause its effect to be worse if it does.
Ic-33 life insurance ebook
Be aware A hazard inuences the operation of the peril. Example If lung cancer is a peril then smoking can be a hazard that may increase the chance that the peril lung cancer will occur. Case study On 26 January one of the worst earthquakes in Indias history hit Gujarat. Thousands of people lost their lives in this tragic event.
Lakhs of people were injured and property worth thousands of crores of rupees was destroyed. The epicentre of the earthquake was located northeast of Bhuj Town in Western Gujarat. In this case the earthquake was the peril and the poorly constructed houses and schools which were not earthquake resistant and easily collapsed were a hazard.
Similarly in the event of a tsunami such as the one that happened on 26 December leading to widespread loss of life and property, the tsunami will be the peril and imsy houses and buildings constructed near the seashore which are washed away causing their occupants to drown will be a hazard.
Remember that while insurance cannot prevent the peril from happening, the resulting loss from the occurrence of the peril can be insured against. Types of hazard Hazards can be categorised into one of the following types: Physical hazards Moral hazards Refer to the dimensions and physical characteristics of the risk. Refer to the habits and activities of the individual that increase risks. They may also arise from a state of mind, i.
This categorisation also extends to the assets owned by the policyholder if they wish to insure them as well. Some of the hazards that would cause an individual to be categorised as high risk are: Risky job prole: For example, a person working in a chemicals factory, explosives factory, underground mine etc.
Existing medical conditions: Lifestyle of the individual: In contrast, an individual who is a heavy smoker or drinker has a higher exposure to risk. Age group of the individual: If the individual is categorised as high risk, insurance companies can either accept or reject the proposal.
High risk proposals can be accepted on other than standard terms such as charging a higher premium, imposing restrictions on the sum insured, term or a lien etc. We will look at this topic in more detail in chapter 4. Think Identify any three perils that can happen in an individuals life. What are the hazards that might give rise to these perils?
Question 2. C Insurable risks The following types of risk can be insured against: C1 Financial risks The outcomes of risks that can be measured in monetary terms are known as nancial risks. Some of the nancial risks for which an individual needs to plan are as follows: Loss of life this refers to risk of death of the income provider of the family with unfullled nancial liabilities.
To p ov de a sleadv sou ce ol ucome lo depeudauls alle dealH. To He p depeudauls u lu h uu va ous huauc a ab l es sucH as a home loan, car loan etc. Savings accumulation To p ov de lo cH d eu's H uHe educal ou. Retirement this refers to the risk of insufcient income following retirement.
To accumu ale sulhc eul cap la lo ve comlo lab v posl- el emeul. To p ov de a sleadv sou ce ol ucome posl- el emeul. He is married with two children. His wife Kavya is a housewife. His elderly father, Suhas, also lives with them.
Suhas Mishra is a farmer and owns a small piece of farmland. However, income from the farmland is not sufcient to help him meet his expenses, hence he is reliant on Raghav. Being the main earning member of the family, Raghav has a considerable responsibility to provide for different contingencies in the future, such as: Loss of life Raghav needs to make sure that his wife, children and father are able to have a steady source of income in case something happens to him.
This income should be sufcient to meet liabilities such as daily living expenses, childrens school fees, managing his fathers medical expenses etc. To protect against this, he should have sufcient funds for meeting medical expenses and also routine living expenses. Savings accumulation Raghav should make sure that his childrens education is not affected due to a shortage of funds.
He therefore needs to save for his childrens higher education and marriage expenses. Retirement Raghav needs to make sure that he receives a steady source of income post-retirement which should be sufcient to meet his medical and other living expenses. C2 Pure risks Pure risks are those risks where there is no possibility of making a prot. In pure risks there can be a loss and the best possible outcome is one of breaking even.
With a pure risk the possibility of any benet occurring as a result of the insured event taking place is nil. This type of risk is associated with those events which are totally out of the control of an individual. C3 Particular risks Particular risks are personal or local in their effect. The consequences of these risks occurring affect specic individuals or local communities.
D Risk transfer As we saw in chapter 1, the primary function of insurance is to transfer the risk from an individual to an insurance company. The insurance company which bears the risk is known as the insurer and the individual who transfers his risk is known as the insured. Risk transfer provides a sense of nancial security to the insured in that if anything happens to them or their nancial assets, the losses would be compensated for by the insurance company as per the policy terms and conditions.
Against this transferred risk, the insured will have to pay a certain amount consideration to the insurer, which is known as the premium. E Pooling of risks Pooling of risks is one of the fundamental principles of insurance. With pooling of risks an insurance company pools the premium collected from several individuals to insure them against similar risks.
The insurance company maintains different sets of pools for different risks. Example Separate pools will be maintained by insurance companies for: When there is a claim to be settled it is paid out of this pool. The insurance company has to make sure that the premium that is collected is enough to meet the claim payments.
The premium that is charged by the insurance company should also be sufcient to meet the administrative and other expenses for maintaining the pool. The insurance company includes a certain percentage of the prot in the premium as well. Can the same pool be used for car insurance and life insurance for claims payment?
E1 Law of large numbers Insurance companies apply the law of large numbers to determine the cost of total annual claims. Insurance companies determine the probability that a certain amount of claims will have to be paid by them if a large number of people are insured for a similar risk. An insurance company will set the rates of its premiums according to the number of claims it will expect to pay over the term of the policy.
Concept of risk lu usu auce. Components of risk Compoueuls ol s uc ude uuce la ulv. Pe ele s lo a spec hc eveul wH cH m uHl cause a oss. Insurable risks R s s. Pooling of risks Au usu auce compauv poo s lHe p em um co ecled l om seve a ud v dua s lo usu e lHem aua usl s m a s s.
Perils are the risks being insured against, e. A hazard inuences the operation of the peril. To p ov de a sleadv sou ce ol ucome lo lHe depeudauls alle dealH. To He p lHe depeudauls u lu h uu va ous huauc a ab l es sucH as Home oau. To secu e lHe ud v dua huauc a v. The insurance company maintains different sets of pools for different types of risks.
The pool account for life insurance will be maintained separately from the pool account for car insurance. The pool account for one risk cannot be used to settle the claim for another type of risk. List the main components of risk. List the types of risks that can be insured. The main components of risk are: The following types of risks can be insured: Insurance principles Part 2: Insurance principles Contents Syllabus learning outcomes Learning objectives Introduction Key terms A Essentials of a valid contract of insurance 3.
In this chapter we will learn what the essential features of a valid contract are, including some unique principles that apply only to contracts of insurance. Offer and acceptance Consideration Consensus ad idem Insurable interest Key person insurance Utmost good faith Duty of disclosure Material facts Ab initio Indisputability clause Indemnity Capacity to contract Contract of indemnity Value contracts A Essentials of a valid contract of insurance An insurance contract is an agreement, enforceable by law, between the insurance company and the insured person; the insured person agrees to pay a premium to the insurance company and the insurance company agrees to pay a sum of money, on the happening of a specied event, to the insured person.
How do both parties enter into this legally binding agreement and what conditions must be satised by both parties to ensure that the contract is a valid one? To answer these questions, we will rst look at the essential features of a valid contract, and then we will move on to see how an insurance contract differs from other contracts.
A1 Features of a valid contract The following features are essential if a legal contract is to be valid: Figure 3. Chapter 3 Part 1: It is easier to see how unconditional acceptance works by looking at an example. Lets consider the following conversation: Example ABC insurance company: On the basis of your proposal form we can offer you cover, with a sum insured of Rs. Ganesh, the proposer the person who wants to take out the insurance: I accept. In this example, Ganeshs acceptance does not alter any of the terms of ABCs offer and the acceptance is said to be unconditional.
A contract is formed, subject to the other essential elements being present. Now, consider an alternative response by Ganesh: I accept, but I would like to increase the sum insured to Rs. In this case, a contract has not been formed as Ganesh has not unconditionally accepted the offer. Not until ABC accepts Ganeshs counter-offer, without further conditions, is a contract formed.
A1B Consideration A contract must be supported by consideration in order to be valid. Consideration may be described as each persons side of the bargain which supports the contract.
Consideration in contract law is merely something of value that is provided and which acts as the inducement to enter into the agreement. The payment of money is a common form of consideration, although not the only form. In terms of insurance policies, we refer to the premium as the insureds consideration.
A1C Capacity to contract Persons entering into contracts should be competent to do so. An individual is said to be competent to enter into a contract if they are: In addition, people who are legally considered to be of unsound mind and any person who has been barred by law cannot enter into an insurance contract.
Any contracts entered into by the above people will be null and void.
A1D Consensus ad idem In simple terms this means both the parties to the contract must understand and agree upon the same thing, in the same sense. The proposer should have understood the features of the insurance policy in the same sense manner in which it was explained to them by the agent.
A1E Legality of object or purpose The objective of both the parties to the contract should be to create a legal relationship.
The purpose of the contract should also be legal. Example It is illegal for a husband to insure his wifes life, and then to kill her and present it as a case of accidental death in order to benet from the claim amount that he will receive as the legal beneciary.
Insurance cannot be used for illegal purposes or to derive monetary benets from it. Another example of an illegal act is a person who is heavily in debt, taking out life insurance for a large amount and then committing suicide so that their family can benet from the claim money. Claims for death due to suicide in the rst year are excluded by most life insurance companies. For example, a person requesting life insurance for a very high amount should be capable of paying the premium required.
The agreement and its term must be certain and capable of performance and in a form that complies with the requirements of the laws of the land. Consider this Jigar makes a proposal to an insurance company for life insurance cover of Rs.
During the medical check-up the company nds out that Jigar is suffering from a disease and considers that he presents a higher than normal risk. The insurance company therefore tells him that the premium chargeable will be Rs. How will you treat the above scenario in terms of offer and acceptance? Question 3. A2 The policy document In order that both the insured person and the insurance company are clear as to the terms that have been agreed between them, a policy is issued.
The policy contains all the details of cover, period of cover, exceptions, conditions, the premium and other relevant information. The policy is not the contract of insurance in itself; rather, it is evidence of the contract. The contract of insurance comes into effect once the insurance company has accepted the insurance proposal, terms have been agreed and the premium has been paid or agreed to be paid. Thus, the contract exists irrespective of the existence of an actual policy document.
The absence or loss of the policy does not invalidate the contract, but the policy is useful as proof in the event of a dispute over the terms agreed. We will examine the structure and contents of the policy in detail in Part 2 of this chapter. A3 The role of insurance agents in insurance contracts In the eyes of the law, anyone who acts on behalf of another person is an agent. If we allow someone to act for us, we probably have to accept responsibility for whatever is done by them on our behalf within the terms of the arrangement.
This is true in insurance, and whenever there is the involvement of an intermediary, legal relationships are set up. We saw in chapter 1 that there are different types of intermediaries involved in the insurance industry and that the term agent is applied to a licensed intermediary hired by an insurance company to sell that companys products on its behalf.
In doing so the intermediary becomes the legal agent and is deemed to be acting on behalf of the principal in this case, the insurance company. Be aware You will also remember from chapter 1 that certain intermediaries called composite brokers are independant advisers.
Their legal status is complicated because they do some things on behalf of their client and some on behalf of the insurer, and so they can be deemed to be both the agent of the insured and the agent of the insurer depending upon the nature of the function they are performing. Be aware Insurance contracts are specialised contracts and are subject to additional principles as well as the essentials of a valid contract described above.
We will now look at these additional principles in the following section. B1 What is insurable interest? The following case study will help you to understand the meaning of insurable interest: Case study Ganesh is a year-old man working for a multinational company MNC. Ganeshs wife works for a domestic rm and she is a co-applicant in the loan on their home together with Ganesh. Whilst Ganesh has a well-paid job, as well as managing the monthly living expenses he has a running home loan and a car loan to take care of.
Ganesh has worked hard to build these assets. So far everything has been going as Ganesh has planned. Imagine, however, the following scenarios: