Unit 1: Introduction MEANING OF INSURANCE: Facilitates Reimbursement During

CA.CS.NAVEEN.
ROHATGI SYBFM- INSURANCE
Insurance (Fund) Management

Unit I
Introduction
The insurance mechanism
 Fundamental principles of insurance
 Importance of life and general insurance
 Growth of evolution of business in India with specific reference to post liberalization
Unit II
Risk Management
 Risk identification
 Sources of Risk
 “Insurance policy” as a financial product
Unit III
Organising an insurance business
 Types of organizations
 Role of IRDA
 Procedure for setting up an insurance business
Unit IV
Operational aspects of Insurance business
 Marketing insurance products including e-marketing
 Acturial role
UNIT 1 : INTRODUCTION
MEANING OF INSURANCE: facilitates reimbursement during

crisis situations, insurance means promise of compensation for any
potential future losses.
There are different insurance companies that offer wide range of

insurance options and an insurance purchaser can select as per own
convenience and preference.
Several insurances provide comprehensive coverage with affordable

premiums. Premiums are periodical payment and different insurers
offer diverse premium options.
The periodical insurance premiums are calculated according to the

total insurance amount. The main meaning of insurance is used as
effective tools of risk management.
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CA.CS.NAVEEN.ROHATGI SYBFM- INSURANCE
Insurance provides financial protection against a loss arising out of

happening of an uncertain event. A person can avail this protection by
paying premium to an insurance company.
A pool is created through contributions made by persons seeking to

protect themselves from common risk. Premium is collected by
insurance companies which also act as trustee to the pool. Any loss to
the insured in case of happening of an uncertain event is paid out of
this pool.
Insurance works on the basic principle of risk-sharing. A great

advantage of insurance is that it spreads the risk of a few people over
a large group of people exposed to risk of similar type.
Insurance is a contract between two parties whereby one party

(insurer) agrees to undertake the risk of another (insured) in
exchange for consideration known as premium and promises to pay a
fixed sum of money to the other party on happening of an uncertain
event (death) or after the expiry of a certain period in case of life
insurance or to indemnify the other party on happening of an
uncertain event in case of general insurance.
The party bearing the risk is known as the 'insurer' or 'assurer' and the
party whose risk is covered is known as the 'insured' or 'assured'.
Concept of Insurance / How Insurance Works

The concept behind insurance is that a group of people exposed to
similar risk come together and make contributions towards formation
of a pool of funds. In case a person actually suffers a loss on account
of such risk, he is compensated out of the same pool of funds.
Contribution to the pool is made by a group of people sharing
common risks and collected by the insurance companies in the form
of premiums.
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Lets take some examples to understand how insurance actually

works:
Example 1 Example 2
SUPPOSE (General) SUPPOSE (Life)
 Houses in a village = 1000  Number of Persons = 5000
 Value of 1 House = Rs.  Age and Physical condition =
40,000/- 50 years & Healthy
 Houses burning in a yr = 5  Number of persons dying in a
 Total annual loss due to fire yr = 50
= Rs. 2,00,000/-  Economic value of loss
suffered by family of each
 Contribution of each house dying person = Rs. 1,00,000/-
owner = Rs. 300/-  Total annual loss due to deaths
= Rs. 50,00,000/-
 Contribution per person = Rs.

1,200/-
UNDERLYING UNDERLYING ASSUMPTION
ASSUMPTION All 5000 persons are exposed to
All 1000 house owners are common risk, i.e. death
exposed to a common risk, i.e.
fire
PROCEDURE PROCEDURE
All owners contribute Rs. 300/- Everybody contributes Rs. 1200/-
each as premium to the pool of each as premium to the pool of
funds funds
Total value of the fund = Rs. Total value of the fund = Rs.
3,00,000 (i.e. 1000 houses * Rs. 60,00,000 (i.e. 5000 persons * Rs.
300) 1,200)
5 houses get burnt during the 50 persons die in a year on an
3
year average
Insurance company pays Rs. Insurance company pays Rs.

40,000/- out of the pool to all 5 1,00,000/- out of the pool to the
house owners whose house got family members of all 50 persons
burnt dying in a year
EFFECT OF INSURANCE EFFECT OF INSURANCE
Risk of 5 house owners is spread Risk of 50 persons is spread over
over 1000 house owners in the 5000 people, thus reducing the
village, thus reducing the burden burden on any one person.
on any one of the owners.
PRINCIPLES OF INSURANCE:
A) Insurable Interest
Insurable interest means that the person opting for insurance must
have pecuniary interest in the property he is going to get insured and
will suffer financial loss on the occurrence of the insured event. This
is one of the essential requirements of any insurance contract.
Therefore, a person can go for insurance of only those properties
where he stands to benefit by the safety of the property, and will
suffer loss, damage, injury if any harm takes place to such property.
Thus, if you want to insure Taj Mahal or Red Fort, you will not be
allowed to do so as you do not have any pecuniary interest in these
properties.
B) Principle of utmost Good faith
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Like in other contracts, the insurance contract must be based on

good faith. If the insurance contract is obtained by way of fraud or
misrepresentation it is void.
C) Material Facts Disclosure
In the Insurance contract, the proposer is required to disclose to the
insurer all the material facts in respect of the proposed insurance.
This duty of disclosing the material facts not only applies to the
material facts which are known to him but also extends to material
facts which he is supposed to know.
Thus, in case of Life Insurance the proposer must disclose the true
age and details of the existing illnesses / diseases. Similarly, in case
of the insurance of a building against fire, the proposer must disclose
the details of the goods stored if such goods are of hazardous nature.
(D) Principle of Indemnity
The insurance contract should always be a contract of indemnity

only and nothing more. According to this principle, the insurance
contract should be such that in case of loss due to the eventialities
mentioned in the contract, the insured should be neither better off nor
worse off after receiving the insured amount. The main object of this
principle is to ensure that the insured is not able to use this contract
for speculation or gambling.
LEGAL ASPECTS OF INSURANCE CONTRACTS
Contract of indemnity
 Indemnity means that the insured person is placed, financially,

in the same position, as he was before the loss..
Implied conditions of a contract
 Good faith & Utmost good faith
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Both the parties to a contract are expected to observe good faith.

However, the good faith assumes utmost importance when
Material Facts are concerned and therefore utmost good faith
should be observed on matters relating to Material facts.
 Insurable Interest
Insurance contracts without insurable interests have no sanction

of the law as they amount to speculation. The owner of a
property has absolute insurance interest.
 Existence of subject matter
Existence of subject matter of insurance is necessary.
 Legality of parties to contract
At law, a minor cannot enter into a legal contract. However, so

long as the contract is for the benefit of the minor himself, such
contract is valid. Contracts entered with person of unsound mind
or with a person from alien Country, are illegal.
 Proximate cause
A loss could be due to a cause of causes. In the chain reaction, it

is the dominant cause, which would be the proximate cause to
be considered for the purpose of a claim. It is always the duty of
the insured to prove that the loss arose out of the insured peril,
which is proximate.
 Consensus Ad Idem (of the same mind)
In Insurance contracts only one party - the proposer knows the

details of the risk. He has a duty to disclose particularly,
material facts and the same should be understood by the other
party to the contract - the insurers. In other words, each party
should understand what is proposed for insurance and the same
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should be covered by the insurance contract. As the insurers

issue the contract document, any ambiguity in the contract
wording will be read against the insurers as they have drafted
the contract.
Express conditions of a contract
These conditions are mainly framed to achieve the principle of

indemnity and to ensure that the insured does not make any profit out
of the loss.
The express conditions include
 Contribution
Contribution condition is a corollary to the Principle of

indemnity. If an insured obtains more than one policy covering
the same risk, he cannot recover the same loss from more than
one source so that he is not benefited by more than ‘Indemnity’.
Contribution condition checks that each policy pays only a
ratable portion under each separate policy.
 Subrogation
Subrogation condition is another corollary to the principle of

Indemnity. A loss may occur accidentally or by the action or
negligence of third party (not workmen). The property owners
have a right to proceed against the offending third party to
recover the loss/damage and also under their insurance policy
but not under both. If the insured opts to recover the loss under
the insurance policy, which is faster and does not involve
litigation, he will surrender his rights against the third parties in
favour of the Insurers signing a ‘Letter of subrogation’ on an
appropriate stamp paper.
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An exception to this are life insurance polices wherein insured/

beneficiaries can claim under an insurance policy and also
proceed againt the offending third party.
 Arbitration
When liability under the policy is admitted but the quantum is

disputed, the insured cannot rush to a Court of law without first
referring the dispute to Arbitration as per ‘Indian Arbitration
and reconciliation Act -1996'. In keeping with the provisions of
the Act, the insured may appoint an arbitrator to be followed by
appointment of another arbitrator by the insurers. They can also
appoint a single arbitrator, to represent both of them. If the two
separate arbitrators cannot reach an agreement, both the
arbitrators can appoint a third arbitrator called umpire. The
award of the Arbitrators is binding on both the parties to the
dispute and cannot be challenged unless a point of law is
involved.
HISTORY OF INSURANCE
In India, insurance has a deep-rooted history. It finds mention in the

writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra )
and Kautilya ( Arthasastra ). The writings talk in terms of pooling of
resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor to
modern day insurance. Ancient Indian history has preserved the
earliest traces of insurance in the form of marine trade loans and
carriers’ contracts. Insurance in India has evolved over time heavily
drawing from other countries, England in particular. 1818 saw the
advent of life insurance business in India with the establishment of
the Oriental Life Insurance Company in Calcutta. This Company
however failed in 1834. In 1829, the Madras Equitable had begun
transacting life insurance business in the Madras Presidency. 1870
saw the enactment of the British Insurance Act and in the last three
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decades of the nineteenth century, the Bombay Mutual (1871),

Oriental (1874) and Empire of India (1897) were started in the
Bombay Residency. This era, however, was dominated by foreign
insurance offices which did good business in India, namely Albert
Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from
the foreign companies.

In 1914, the Government of India started publishing returns of
Insurance Companies in India. The Indian Life Assurance Companies
Act, 1912 was the first statutory measure to regulate life business. In
1928, the Indian Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and non-
life business transacted in India by Indian and foreign insurers
including provident insurance societies. In 1938, with a view to
protecting the interest of the Insurance public, the earlier legislation
was consolidated and amended by the Insurance Act, 1938 with
comprehensive provisions for effective control over the activities of
insurers.

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

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

The history of general insurance dates back to the Industrial
Revolution in the west and the consequent growth of sea-faring trade
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and commerce in the 17th century. It came to India as a legacy of

British occupation. General Insurance in India has its roots in the
establishment of Triton Insurance Company Ltd., in the year 1850 in
Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd,
was set up. This was the first company to transact all classes of
general insurance business.
1957 saw the formation of the General Insurance Council, a wing of
the Insurance Associaton of India. The General Insurance Council
framed a code of conduct for ensuring fair conduct and sound
business practices.

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

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

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

preferably a joint venture with Indian partners.

Following the recommendations of the Malhotra Committee
report, in 1999, the Insurance Regulatory and Development Authority
(IRDA) was constituted as an autonomous body to regulate and
develop the insurance industry. The IRDA was incorporated as a
statutory body in April, 2000. The key objectives of the IRDA include
promotion of competition so as to enhance customer satisfaction
through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market.

The IRDA opened up the market in August 2000 with the
invitation for application for registrations. Foreign companies were
allowed ownership of up to 26%. The Authority has the power to
frame regulations under Section 114A of the Insurance Act, 1938 and
has from 2000 onwards framed various regulations ranging from
registration of companies for carrying on insurance business to
protection of policyholders’ interests.

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

Today there are 14 general insurance companies including the
ECGC and Agriculture Insurance Corporation of India and 14 life
insurance companies operating in the country.

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

strengthening the risk taking ability of the country.

Life insurance
Meaning:
Life insurance is a contract between a person called insured and the

company or "insurer" that is providing the insurance. If he/she dies
while the contract is in force, the insurance company pays a specified
sum of money free of income tax that is "cash benefits" to the person
or persons he name as beneficiaries. It offers a way to replace the loss
of income that happens when someone dies (generally the person who
produces the majority of income in a family situation). Life insurance
is a contract between the policy holder and the insurer, where the
insurer agrees to pay a sum of money upon the happening of the
insured individual's death or other event, such as terminal illness or
critical illness. In return, the policy owner has to pay a stipulated
amount called a ‘premium’ at regular intervals or in lump sums. It
insures the life of the person buying the Life Insurance Certificate.
Once a Life Insurance is sold by a company then the company
remains legally responsible to make payment to the beneficiary after
the death of the policy holder. There are designs in some countries
where bills and death expenses plus catering for after funeral
expenses must be included in Policy Premium.
NEED AND IMPORTANCE OF LIFE INSURANCE
Superior to any Other Savings Plan
Unlike any other savings plan, a life insurance policy affords full
protection against risk of death. In the event of death of a
policyholder, the insurance company makes available the full sum
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assured to the policyholders’ near and dear ones. In comparison, any

other savings plan would amount to the total savings accumulated till
date. If the death occurs prematurely, such savings can be much lesser
than the sum assured. Evidently, the potential financial loss to the
family of the policyholder is sizable.
Encourages and Forces Thrift

A savings deposit can easily be withdrawn. The payment of life
insurance premiums, however, is considered sacrosanct and is viewed
with the same seriousness as the payment of interest on a mortgage.
Thus, a life insurance policy in effect brings about compulsory
savings.
Easy Settlement and Protection Against Creditors

A life insurance policy is the only financial instrument the proceeds
of which can be protected against the claims of a creditor of the
assured by effecting a valid assignment of the policy.
Administering the Legacy for Beneficiaries

Speculative or unwises expenses can quickly cause the proceeds to be
squandered. Several policies have foreseen this possibility and
provide for payments over a period of years or in a combination of
installments and lumpsum amounts.
Ready Marketability and Suitability for Quick Borrowing

A life insurance policy can, after a certain time period (generally three
years), be surrendered for a cash value. The policy is also acceptable
as a security for a commercial loan, for example, a student loan. It is
particularly advisable for housing loans when an acceptable LIC
policy may also cause the lending institution to give loan at lower
interest rates.
Disability Benefits
Death is not the only hazard that is insured; many policies also
include disability benefits. Typically, these provide for waiver of
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future premiums and payment of monthly installments spread over

certain time period.
Accidental Death Benefits

Many policies can also provide for an extra sum to be paid (typically
equal to the sum assured) if death occurs as a result of accident.
Tax Benefits
LIC premium paid is allowed as deduction from gross total income
under sec 80 C.
TYPES OF LIFE INSURANCE POLICIES:

Long-term Insurance
Long term insurance is so called because it is meant for a long-term period which may stretch
to several years or whole life-time of the insured. Long-term insurance covers all life
insurance policies. Insurance against risk to one's life is covered under ordinary life
assurance. Ordinary life assurance can be further clasified into following types:
Types of Ordinary Meaning

Life Assurance
1. Whole Life In whole life assurance, insurance company collects premium from
Assurance the insured for whole life or till the time of his retirement and pays
claim to the family of the insured only after his death.
2. Endowment In case of endowment assurance, the term of policy is defined for a
Assurance specified period say 15, 20, 25 or 30 years. The insurance company
pays the claim to the family of assured in an event of his death within
the policy's term or in an event of the assured surviving the policy's
term.
3. Assurances for i). Child's Deferred Assurance: Under this policy, claim by insurance
Children company is paid on the option date which is calculated to coincide
with the child's eighteenth or twenty first birthday. In case the parent
survives till option date, policy may either be continued or payment
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may be claimed on the same date. However, if the parent dies before
the option date, the policy remains continued until the option date
without any need for payment of premiums. If the child dies before
the option date, the parent receives back all premiums paid to the
insurance company.
ii). School fee policy: School fee policy can be availed by effecting an
endowment policy, on the life of the parent with the sum assured,
payable in installments over the schooling period.
4. Term Assurance The basic feature of term assurance plans is that they provide death
risk-cover. Term assurance policies are only for a limited time, claim
for which is paid to the family of the assured only when he dies. In
case the assured survives the term of policy, no claim is paid to the
assured.
5. Annuities A person entering into an annuity contract agrees to pay a specified
sum of capital (lump sum or by instalments) to the insurer. The
insurer in return promises to pay the insured a series of payments
untill insured's death. Generally, life annuity is opted by a person
having surplus wealth and wants to use this money after his
retirement.
There are two types of annuities, namely:

Immediate Annuity: In an immediate annuity, the insured pays a lump
sum amount (known as purchase price) and in return the insurer
promises to pay him in installments a specified sum on a
monthly/quarterly/half-yearly/yearly basis. Deferred Annuity: A
deferred annuity can be purchased by paying a single premium or by
way of installments. The insured starts receiving annuity payment
after a lapse of a selected period (also known as Deferment period).
6. Money Back Money back policy is a policy opted by people who want periodical
Policy payments. A money back policy is generally issued for a particular
period, and the sum assured is paid through periodical payments to
the insured, spread over this time period. In case of death of the
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insured within the term of the policy, full sum assured along with
bonus accruing on it is payable by the insurance company to the
nominee of the deceased.
NOMINATION
Q1. What is nomination?

Nomination is a right conferred on the holder of the policy of life insurance on his own life to
appoint a person or persons to receive the policy moneys in the event of the policy becoming
a claim by death.

2Who is a nominee?
The person designated by the policyholder to receive the proceeds of an insurance policy
upon the death of the insured.
3. Who can nominate?

Any policyholder, who is a major and the life insured under a policy can make a Nomination
Nomination is not effective in a policy taken on the life of another person.
4. When can nomination be done?

Nomination can be done at the inception of the policy itself. All that a policyholder has to do
is to provide the details of the nominee in the proposal form. If a nomination was not done a
the time of filing the proposal, it can be done at a later date either by an endorsement made a
the back of the policy document or by making the endorsement of nomination on a piece o
paper pasted on the policy.
5. How can nomination be changed?

Subject to the provisions contained in Section 39 of the Insurance Act, 1938, there are no
restrictions on the policyholder regarding changing his nomination at any point of time, any
number of times. The life-assured is free to change or cancel a nomination and make a fresh
nomination any number of times during the currency of the policy. Transfer or assignment o
a policy (except when it is made to an insurer in specified cases) automatically cancels a
nomination.
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6. What is successive nomination?

Successive nomination means that money should be paid to nominee A; failing him, to
nominee B; failing whom, to nominee C, etc. Such a nomination is treated in favour of one
individual in the order mentioned and is acceptable in law.
7. What are the details to be provided about the nominee(s)?

The following precautions are necessary at the time of filling in the proposal: Mention the
Full Name, Address, age, relationship to yourself of the nominee.
Do not write the nomination in favour of wife and children as a class. Give their specific
names and particulars existing at that moment.
If the nominee is a minor, appoint a person who is a major as an appointee giving his ful
name, age, address and relationship to the nominee. Signatures of appointee as token o
consent are necessary on the proposal form.
SURRENDER VALUE OF INSURANCE
Surrender value is the sum of money an insurance company will pay

to the policyholder or annuity holder in the event of his policy being
voluntarily terminated before its maturity or the insured event
occurring. This cash value is the savings component of most
permanent life insurance policies, particularly whole life insurance
policies. This is also known as 'cash value', 'surrender value' and
'policyholder's equity'.
Surrender value is the amount payable to the policyholder should he

decide to discontinue the policy and encash it. It is payable only after
three full years' premiums have been paid to the insurance company.
Moreover, if it is a participating policy, the bonus gets attached to it.
Surrender of policy is not recommended since the surrender value will
always be proportionately lower.
If you decide to go in for another insurance policy at this stage, it will
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come at a much higher premium because your age will have advanced
since taking the earlier policy. Therefore, retention of earlier policies
and continuing all policies without allowing them to lapse is the best
strategy.
Surrender value is what an insurance company will pay an insured,

after charges are deducted, if he terminates or surrenders the policy
before the original maturity date. The life cover provided by a life
insurance policy ends with its surrender as it effects a termination of
the contract between the insured and the insurer. On surrender, the
insured basically gets the fund value of his investments minus the
charges that the insurer levies on account of premature termination.
Life Insurance Claims
What are the situations when claims under life insurance arise?
A Life Insurance Policy results into claim in the following situations:
 On maturity of the policy i.e. completion of the term for which

the insurance was taken in case of endowment policies ; or
 On death of the life insured, if it occurs before maturity of the

policy, provided policy is in force on the date of death or has
acquired
What is the procedure to be followed in case of claim by death of

the policyholder?
The following are the main steps for receiving claims:
a. Intimation of death
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The first requirement of the Corporation in the case of death claim is

that an "intimation of death"’ should be sent to the branch office of
the LIC from where the policy was issued.
The intimation needs to be sent by the person who is entitled to get

the proceeds of the policy. It may be:
i. the nominee or
ii. the assignee of the policy or
iii. the deceased policyholder’s nearest relative.
The letter of intimation of death should contain the following

information:
i. name of the life assured

ii. a statement that the life assured is dead;
iii. the date of death;
iv. the cause of death;
v. the place of death; and
vi. policy number / s
vii. claimant’s relationship with the assured or his status (nominee,
assignee, etc.)
viii. Submission of death proof
ix. Submission of proof of age.
Soon after the receipt of the intimation of the death, the branch office
sends the necessary claim forms along with instructions regarding the
procedure to be followed by the claimant.
Payment and Discharge
After completing all the above formalities, the insurance company

issues a discharge form for completion, which is to be signed by the
person entitled to receive policy money. That is, it should be signed
by:
 the nominee, in case nomination was made under the policy;
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 the assignee, in case the policy was validity and unconditionally

assigned;
 the legal representative or successor.
In due course, LIC sends the cheque for the amount due to the person
entitled to receive the same.
MEANING OF GENERAL INSURANCE

Insurance other than ‘Life Insurance’ falls under the category of
General Insurance. General Insurance comprises of insurance of
property against fire, burglary etc, personal insurance such as
Accident and Health Insurance, and liability insurance which covers
legal liabilities. There are also other covers such as Errors and
Omissions insurance for professionals, credit insurance etc.
Non-life insurance companies have products that cover property

against Fire and allied perils, flood storm and inundation, earthquake
and so on. There are products that cover property against burglary,
theft etc. The non-life companies also offer policies covering
machinery against breakdown, there are policies that cover the hull of
ships and so on. A Marine Cargo policy covers goods in transit
including by sea, air and road. Further, insurance of motor vehicles
against damages and theft forms a major chunk of non-life insurance
business.
In respect of insurance of property, it is important that the cover is

taken for the actual value of the property to avoid being imposed a
penalty should there be a claim. Where a property is undervalued for
the purposes of insurance, the insured will have to bear a rateable
proportion of the loss. For instance if the value of a property is Rs.100
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and it is insured for Rs.50/-, in the event of a loss to the extent of say
Rs.50/-, the maximum claim amount payable would be Rs.25/- ( 50%
of the loss being borne by the insured for underinsuring the property
by 50% ). This concept is quite often not understood by most
insureds.
Personal insurance covers include policies for Accident, Health etc.

Products offering Personal Accident cover are benefit policies. Health
insurance covers offered by non-life insurers are mainly
hospitalization covers either on reimbursement or cashless basis. The
cashless service is offered through Third Party Administrators who
have arrangements with various service providers, i.e., hospitals. The
Third Party Administrators also provide service for reimbursement
claims. Sometimes the insurers themselves process reimbursement
claims.
Accident and health insurance policies are available for individuals as

well as groups. A group could be a group of employees of an
organization or holders of credit cards or deposit holders in a bank
etc. Normally when a group is covered, insurers offer group
discounts.
Liability insurance covers such as Motor Third Party Liability

Insurance, Workmen’s Compensation Policy etc offer cover against
legal liabilities that may arise under the respective statutes— Motor
Vehicles Act, The Workmen’s Compensation Act etc. Some of the
covers such as the foregoing (Motor Third Party and Workmen’s
Compensation policy ) are compulsory by statute. Liability Insurance
not compulsory by statute is also gaining popularity these days. Many
industries insure against Public liability. There are liability covers
available for Products as well.
There are general insurance products that are in the nature of package
policies offering a combination of the covers mentioned above. For
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instance, there are package policies available for householders, shop

keepers and also for professionals such as doctors, chartered
accountants etc. Apart from offering standard covers, insurers also
offer customized or tailor-made ones.
Suitable general Insurance covers are necessary for every family. It is
important to protect one’s property, which one might have acquired
from one’s hard earned income. A loss or damage to one’s property
can leave one shattered. Losses created by catastrophes such as the
tsunami, earthquakes, cyclones etc have left many homeless and
penniless. Such losses can be devastating but insurance could help
mitigate them. Property can be covered, so also the people against
Personal Accident. A Health Insurance policy can provide financial
relief to a person undergoing medical treatment whether due to a
disease or an injury.
Industries also need to protect themselves by obtaining insurance

covers to protect their building, machinery, stocks etc. They need to
cover their liabilities as well. Financiers insist on insurance. So, most
industries or businesses that are financed by banks and other
institutions do obtain covers. But are they obtaining the right covers?
And are they insuring adequately are questions that need to be given
some thought. Also organizations or industries that are self-financed
should ensure that they are protected by insurance.
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Most general insurance covers are annual contracts. However, there

are few products that are long-term.
It is important for proposers to read and understand the terms and

conditions of a policy before they enter into an insurance contract.
The proposal form needs to be filled in completely and correctly by a
proposer to ensure that the cover is adequate and the right one.
FIRE INSURANCE
STANDARD FIRE AND SPECIAL PERILS POLICY
Coverage under the policy

 Buildings
 Machinery and Accessories
 Stock and stock in process
 Contents including furniture
Perils Covered
 Fire
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 Lightning
 Explosion/Implosion
 Aircraft damage
 Riot, Strike
 Terrorism
 Storm, Flood, inundation
 Impact damage
 Subsidence , landslide
 Bursting or overflowing of tanks
 Bush fire etc.
What is not Covered ?
The policy does not cover any loss if
 Loss or damage to property due to :

 Spontaneous combustion, fermentation
 Burning of property by order of any Public Authority
 Its undergoing any heating or drying process
 Explosion of boilers (other than domestic boilers)
 Total or partial cessation of work
 Permanent or temporary dispossession by order of
Government
 Burglary, House breaking, theft
 Normal Cracking or settlement or bedding down of new
structures
 War or war like operations
 Defective design, workmanship, defective materials
 Pollution or contamination
 Over-running, short circuit etc.
 Earthquake
 Spoilage loss
Add on Covers
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Some Add on covers..
 Terrorism
 Removal Of Debris
 Architects, Surveyors, Consulting Engineers fees
 Earthquake (Fire and Shock only)
 Spontaneous combustion
 Startup expenses
 Spoilage Material Damage Cover
 Leakage and Contamination cover
These additional covers are available by payment of additional

premium.
Fi Loss of Profit Policy
Pre-Requisite for the Policy
This policy can be taken only if a Standard fire and Special

Perils Policy exists for the risk.
What Can Be Insured ?
 Net profit due to the stoppage of business as a result of
an insured peril
 Standing charges which continue to accrue in spite of
stoppage of business
 Additional expenditure incurred by the insured to
maintain normal business activity, during the period in
which the normal business is affected.
Indemnity Period
The indemnity period commences with the date of damage and

lasts till such a time as the business is restored to its pre
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damaged level or the period stipulated policy which ever

comes first. The policy insures earnings of the business lost
during the indemnity period.
MARINE INSURANCE
MARINE CARGO INSURANCE
Coverage
Any loss or damage to goods in transit by rail, sea, road, air or post.
Who can Insure ?

Owners or bankers of goods in transit/shipment.
Insured against what Risks ?

The policy covers loss/damage to the property insured due to:
 Fire or explosion; stranding, sinking etc.

 Overturning, derailment ( of land conveyance)
 Collision
 Discharge of cargo at port of distress
 Jettison
 General average sacrifice, salvage charges
 Earthquake, lightning
 Washing overboard
 Sea, lake, river water
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 Total loss of package lost overboard or dropped in loading or unloading

 War and SRCC is specifically covered
Premium Rating
The normal basis of valuation for ocean/air consignment will be CIF + incidentals
up to a percentage which is agreed upon at the inception of the policy ( normally
this is 10 %)

Open Cover

Open cover is usually issued for import/export. The open cover is a contract
effected for a period of 12 months , whereby the insurance company agrees to
provide insurance cover to all shipments coming within the scope of the open cover.
Open cover is not a policy. It is an unstamped agreement. As and when shipments
are declared , specific policies are issued as evidence of the contract and on
collection of premium.
Open Policy

This policy is issued for transit of goods within India. Policy is valid for one year
and all transits during the policy period and declared are automatically covered by
the insurance company subject to the availability of the overall suminsured.
It is a stamped document. In this case specific policies are not issued for each
consignment . Premium can be collected in advance for the entire estimated value
during the policy period . Stamp duty is collected in advance along with premium
for despatches to be declared periodically
Specific Voyage Policy
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This policy is valid for a single voyage or transit. The policy will be issued before
the voyage starts. The coverage will cease immediately on completion of the
voyage.
The specific voyage policy must show complete details of the risk..It should contain
particulars of conveyance/Vessel name/ Bill of Lading or Way bill and date , sum
insured ,terms and conditions of cover, voyage , cargo description etc like all other
marine policies.
Annual Policy

This policy may be issued to cover goods in transit by road or rail or sea from
specified depots or processing units owned or hired by the insured. The goods
covered must belong to or held in trust by the insured . These policies can not be
issued to transport operators , clearing , forwarding and commission agents or
freight forwarders or in joint names.. They can not be assigned or transferred. For
such policies the sum insured should not be less than Rs 5000/-.
Marine Hull Insurance

Coverage
Any loss or damage to ships, tankers, bulk carriers, smaller vessels,
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fishing boats and sailing vessels.
Who can Insure ?

Owners or bankers of ships or vessels.
What is Insured
The various vessels that are covered under this policy are :
 Fishing Vessels
 Ocean Going Vessels
 Sailing Vessels
 Other Vessels
Insured against what Risks ?

The policy covers loss/damage to the property insured due to:
 Fire or explosion; stranding, sinking etc.

 Overturning, derailment ( of land conveyance)
 Collusion
 General average sacrifice, salvage charges
What is not Insured?
The policy does not pay any loss/damage caused by, attributable to,
due to
 Deliberate damage/destruction of the vessel by wrongful act of
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any person
 Use of any weapon of war employing atomic / nuclear fission
and or fusion
 Insolvency or financial default of the vessel owner / operators /
charterers
 War / civil war · Strike, Riot or Civil Commotion
 Any terrorist or person/s acting with political motive
MOTOR INSURANCE
Motor Package and Liability only Policies
 Motor vehicle which includes private cars, Two wheelers and

Commercial vehicles excluding vehicles running on rails
Who can Insure ?

 Owners of the vehicle, Financiers or Lessee, who have insurable
interest in a motor vehicle.
Insured's Declared Value (IDV)
(a) In case of vehicle not exceeding 5 years of age, the IDV has to be arrived
at by applying the percentage of depreciation specified in the tariff on the
showroom price of the particular make and model of the vehicle.
(b) In case of vehicles exceeding 5 years of age and Obsolete models

(manufacture of those vehicles which have been stopped by the
manufacturers), they have to be insured for the prevailing market value of the
same as agreed to between the insurer and the insured.
Package Policy - Section I
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Section I (Own Damage - OD) of Package Policy :
Section I of package policy covers loss or damage to the vehicle and / or

accessories due to
 Accidental external means

 Fire, Self ignition, lightning
 Burglary, house breaking or theft
 Terrorist activity
 Riot, Strike and Malicious Damage
 Earthquake
 Flood, cyclone and Inundation etc
 While in transit by rail, road, air, elevator, lift or inland waterways
 Landslide or workslide
None of the above perils can be excluded from the scope of a policy.
Loss or damage to accessories by burglary/house breaking/theft
1. For private car it is covered

2. In case of Motorised Two Wheelers this can be covered on payment of
an additional premium at 3% of the IDV of such accessories
3. Loss or damage to Lamp, Tyres, mudguard and / or bonner side parts,
bumpers etc., can be covered on payment of additional premium. This
is applicatble only to Commercial Vehicles.
If the vehicle is disabled in an accident, cover is provided for the reasonable

cost of the following :
 Its removal to nearest reapirers

 The cost of reasonalble repairs immediately necessary
subject to the limit provided for.
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(a) Package Policy - Section II

Section II (Liability) of Package Policy :
1. Liability to third parties bodily injury and or death and property damage
2. Personal accident cover for the owner driver for a specified sum insured
The following are payable under Section II of the Package Policy subject to
the limit of liability laid down in the Motor Vehicles Act :
 The insured's legal liability for death / disability of third party

 Loss or damage to third party property
 Claimant's cost as decided by the court
 All costs and expenses incurred with company's written consent
 In case of death of an Insured person, entitled to indemnity for a
liability incurred under this policy, his legal representative will be
indemnified in place of insured, if he observed all conditions as the
insured himself.
IDV Depreciation Schedule

The premium is calculated on the basis of something called the Insured Declared
Value (IDV) of the vehicle, which is basically the depreciated value of the vehicle
agreed upon by the insurer and the policyholder.The IDV of a vehicle reduces with
age. Insurers give a depreciation schedule for up to five years, which is the starting
point for deciding the IDV of a vehicle: this IDV figure is scaled up or down
depending on the condition of the vehicle. The depreciation schedule is identical
for two-wheelers and four-wheelers (See table: IDV Depreciation Schedule) You
can get your vehicle insured for a value greater than the IDV calculated on the
basis of the specified depreciation schedule, on account of, say, better maintenance
or high-priced accessories. However, in case of a claim, the onus is on you to
justify the higher IDV.
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Cover for occupants of vehicle. This section provides cover against death or injury to the vehicle
driver and passengers. The maximum cover that can be taken under this section is Rs 1 lakh for a driver and
Rs 2 lakh for each passenger.
IDV Depreciation Schedule

Vehicle Age Depreciation(%) IDV (Rs)
6 Months 5 Year 1: 2,00,000
6 Months - 1 year 15 Year 2: 1,60,000
1-2 years 20 Year 3: 1,28,000
2-3 years 30 Year 4: 89,600
3-4 years 40 Year 5: 53,760
4-5 years 50 Year 6: 26,880
Note: The depreciation rate is charged as a percentage of the cost of a new
vehicle, on a reducing balance basis. IDV of vehicles that are more than 5 years
oldand of models that manufacturers have discontinued is to be determined on the
basis of an understanding between the insurer and the insured.
LIABILITIES POLICIES
Public Liability Insurance
Coverage
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The Public Liability Act, 1991 was made effective from 1st April 1991. The
object of this Act is to provide through insurance immediate relief to persons
affected due to “accident” while “handling” “hazardous substance” by the
owners on “no fault liability basis”. This has also been brought under Tariff.
The definition of “Owner” is so comprehensive as to cover any person who
owns or has control over any hazardous substance at the time of accident.
This includes any Firm or its partners. Association or its members, Company
or its Directors and all other persons associated and responsible to that
Company in the conduct of their business.
The various terms like “Accident”, “Hazardous substances” as defined in the

Act are given below.
“Accident” means an accident involving a fortuitous, sudden or unintentional

occurrence while handling any hazardous substance resulting in continuous,
intermittent or repeated exposure to death of, or injury to any person or
damage to any property but does not include an accident by reason only of
war or radioactivity.
“Handling”in relation to any hazardous substance, means the manufacture,

processing, treatment, package, storage, transportation by vehicle, use,
collection, destruction, conversion, offering for sale, transfer or the like of
such hazardous substance.
“Hazardous Substance” means any substance or preparation which is

defined as hazardous substance under the Environment (Protection) Act, 1986
and exceeding such quantity as may be specified by notification by the
Central Government.
“Hazardous Substance”means any substance or preparation which, by

reason of its chemical properties or handling is liable to cause harm to human
beings, other living creatures, plants, micro-organism, property or the
environment (as per the Environment (Protection) Act, 1986).
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Insurance Limits

Any one accident : Minimum equal to Paid up Capital upto a maximum of

Rs.5 crores.
Any one year : 3 times of `Any one accident’ limit subject to a maximum of
Rs.15 crores.
Liability beyond Insurance
In case of claim/s exceeding the above statutory limit/s, it is to be met by the

Environmental Relief Fund to be set up under Section 7A of the Act and
managed by the Authority appointed by the Central Government.
The liability beyond the total of the insurance and the Relief / Fund is to be
borne by the “Owner”.
Contribution to the relief fund
An amount equal to the insurance premium chargeable is to be paid

simultaneously by every owner with the insurance premium to the
underwriting Company.
All proposals can be rated and accepted at DO level in terms of the rating
structure laid down.
LIABILITIES INSURANCE
roduct Liability Insurance

35
Coverage
This insurance is intended to provide an indemnity to the insured (upto the limit of liability) in
vent of a claim being brought against him. This may be caused by anything harmful or defectiv
he products sold or supplied by the insured in connection with the business specified. The Comp
n addition will reimburse all costs and expenses incurred with its written consent defending suc
laim for compensation. The insurance will however not cover the cost of removing, replacing
epairing defective products or loss of use thereof.
Liability Covered
The policy seeks to indemnify the insured against his legal liability to pay compensation (includ
laimants costs, fees and expenses) in respect of injury damage or pollution for third parties
laims arising out of accidents due to any defects in the products specified in the policy during
eriod of the insurance and first made against the insured during the policy period. For the purp
f determining the indemnity granted :
1. Injury shall mean death, bodily injury, illness or disease of or to any person
2. Damage shall mean actual and / or physical damage to the atmosphere or of any water, lan
other tangible property
3. Pollution shall mean pollution or contamination of the atmosphere or of any water, land
other tangible property
36
4. Product shall mean any tangible property after it has left the custody or control of the Insu
which has been designed, specified, formulated, manufactured, constructed, installed, s
supplied, distributed, treated, serviced, altered or repaired by on behalf of the Insured
5. Accident shall mean a fortuitous event or circumstance which is sudden, unexpected
unintentional including resultant continuous, intermittent or repeated exposures arising ou
the same fortuitous event or circumstances
Special Exclusions
1. The policy excludes liability for costs in the repair, reconditioning, modification
replacement of any part of any product which is or is alleged to be defective.
2. For cost arising out of the recall of any product or part thereof.
3. Arising out of any product which is intended for incorporation into the structure, machiner
control of any aircraft.
4. Arising out of deliberate, willful or intentional non-compliance of any statutory provision.
5. Arising out of pure financial loss such as loss of goodwill, loss of market, etc.
6. Arising out of fines, penalties, punitive and exemplary damages.
7. For injury and/or damage occurring prior to the Retroactive date shown in the schedule.
8. Arising out of deliberate, conscious or intentional disregard of the insured’s technica
administrative management of the need to take all reasonable steps to prevent claims.
9. For injury to any person under a contract of employment or apprenticeship with insured wh
such injury arises out of the execution of such contract.
10. Arising out of contractual liability which would not have existed in the absence of
specific contract.
11. Arising out of any product guarantee.
12. Arising out of claims for failure of the goods or products to fulfill the purpose for wh
they were intended
What will Policy not Pay ?

Loss or damage due to
 War and war like perils
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 Wear and tear, depreciation, consequential loss

 Nuclear group of perils
 Gross and wilful negligence of Insured
 Violation of policy conditions
 Loss/damage/liability where Insured’s family or Insured’s employee are involved
principal/accessory
 Intentional act/self injury/ influence of drug/intoxicant.
Public Liability Insurance
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39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
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Insurance Limits

Any one accident : Minimum equal to Paid up Capital upto a maximum of Rs.5 crores.
Any one year : 3 times of `Any one accident’ limit subject to a maximum of Rs.15 crores.
Liability beyond Insurance
In case of claim/s exceeding the above statutory limit/s, it is to be met by the Environmental
Relief Fund to be set up under Section 7A of the Act and managed by the Authority appointed
by the Central Government.
The liability beyond the total of the insurance and the Relief / Fund is to be borne by the
“Owner”.
Contribution to the relief fund
An amount equal to the insurance premium chargeable is to be paid simultaneously by every

owner with the insurance premium to the underwriting Company.
All proposals can be rated and accepted at DO level in terms of the rating structure laid down
Professional Indemnity Policy

60

Coverage
 The cover granted under the policy provide indemnity for legal liability to third party arisi
out of errors and omissions or negligence in professional service rendered by the insured
 Policies will be issued for a period of 12 months (1 year) .
Who can be Insured ?

 Doctors
 Medical Establishments
 Engineers
 Architects
 Chartered Accountants
 Lawyers
What is not Covered ?
Applicable in case of Doctors Policy
 Any criminal act or violation of any Act of Statute

 Services rendered under the influence of intoxicants or narcotics
 Performance by Dentists under general anesthesia or any procedures carried out un
general anesthesia unless performed in a hospital.
 Willful neglect or deliberate act
 Third Party Public Liability
 Pure financial loss due to loss of goodwill or loss of market
Workmen Compensation Insurance
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Coverage
Liability of an employer for employment injury (including death) of any of his

employees who is a ‘workman’ as defined under Workmen Compensation Act.
Who can be Insured ?

Any employer whether as a Principal or contractor engaging "workmen" as defined in

WC Act to cover his liability to them under statute and at common law. Employer can
cover Employees who do not qualify as "Workmen" under separate table
Insured against what risks ?

 Indemnity to insured against his liability as an ‘employer’ to accidental injuries
(including fatal) sustained by the ‘workman’ whilst at work.
 On extra premium-medical, surgical, and hospital expenses including the cost of

transport to hospital for accidental employment injuries
 Liability in respect of diseases mentioned in Part C / schedule III of WC Act, on
additional premium; which arise out of and in the course of employment
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What will Policy not Pay ?

 Any injury which does not result in fatality or partial disablement for period
exceeding 3 days
 First 3 days of disablement where the total disablement is less than 28 days
 For any non-fatal injury caused by any accident which is directly attributable to
a) Influence of drinks or drugs
b) Willful disobedience of an order for securing safety of the workman
c) Willful removal or disregard of safety guard device.
 War group and nuclear group of perils
 Liability to employees of contractors of the insured (unless specifically declared)
 Employee who is not a "workman" as per WC act.
 Liability of insured assumed under an agreement
 For occupational diseases mentioned in part "C" of schedule III of WC Act , unless
cover is extended on extra premium.
Increase due to any change in statute provisions after policy had incepted.

Under more than one statute / one forum for the same injury
HEALTH INSURANCE: Over the last 50 years India has achieved a lot in terms of hea
improvement. But still India is way behind many fast developing countries such as China, Vietn
and Sri Lanka in health indicators (Satia et al 1999). In case of government funded health c
system, the quality and access of services has always remained major concern. A very rapi
growing private health market has developed in India. This private sector bridges most of the ga
between what government offers and what people need. However, with proliferation of vario
health care technologies and general price rise, the cost of care has also become very expens
and unaffordable to large segment of population. The government and people have star
exploring various health financing options to manage problems arising out of growing set
63
complexities of private sector growth, increasing cost of care and changing epidemiological patt
of diseases.
The new economic policy and liberalization process followed by the Government of India since
What are the types of Health Insurance?

Group insurance:
Group medical insurance offers insurance cover to a group with a common trait – it may be employees of a company, membe
of a club or an association or members of a co-operative society etc. Many employers now provide medical insurance as
perquisite to their employees.
Individual insurance:
Individual insurance caters to the specific needs of an individual. Premium for an individual insurance is higher than grou
insurance.
Floater:
A floater is a unique plan wherein the value of sum insured opted can be used by all th
members of the family or by a single-family member. Basically, the sum insured amount float
over all the members covered. For example: if the policy is bought for 3 lacs, then either a
three members of the family can use Rs 1 lac each or one member can use the entire cover of
lacs.
top
What are the benefits of Group Insurance?

Benefits of Group Insurance:
Premium under group insurance is less than a stand-alone personal insurance policy.
Discount offered depends of the size of the group.
A quick and effective way to extend cover to a large chunk of population.
An effective tool to cross sell various products to the members of the group.
Products can be customised to the size of the group.
Group insurance is more flexible and provide more benefits.
For additional benefits, a loading is charged on the premium.
top
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What are the benefits of a Floater Plan?

Benefits of a floater plan are :-
A single policy takes care of your entire family.
Single premium for the entire family.
The sum insured floats over the entire family.
One single policy covers the details of entire family.
No hassles of tracking renewals for different members.
top
What are the kind of groups?

Group can be of various types:
Employer-employee group.
Association of professionals viz. doctors, lawyers, chartered accountants etc.
Members of co-op societies, banks, credit societies etc
Weaker sections of society.
top
What is the difference between Group and Individual insurance?

One of the major difference between group and individual insurance is evidence of insurability
To purchase individual insurance, a person must generally answer a health questionnaire an
undergo a medical examination to provide evidence of insurability to the insurance company
An insurer may decline coverage on the basis of the applicant's personal habits, health, medica
history, age, income or any other factors that bear on risk acceptance. Or the insurer may issue
policy with limitations on coverage
However, group insurance is issued without medical examination or any other evidence o
individual insurability. Group insurance ensures that all the members of the group are insure
regardless of their health. Thus, even those with health problems, who might not be eligible fo
individual insurance, can be covered.
65
top
What is the difference between Individual and Floater Plan?

Floater offers common cover for all members while an individual policy offers single cove
for each member.
Floater offers flexibility to a policyholder since any member of the family can use the sum
insured amount. Moreover, the unutilized limit can be transferred to other members.
top
How does a Floater Plan work?

You make a claim to an insurance company. You have to support your claim with bills. Th
insurance company will reimburse the amount. In case of your treatment in a network hospita
you can opt for cashless settlement. The insurance company will directly settle the hospita
bills. For speedy reimbursement, choose the right insurer, inform the company at the earlies
keep all bills safely, check for exclusions, read the fine print (policy wordings) carefully an
present your claim at the earliest.
Procedure for lodging and settlement of Claims in case of general insurance

The following steps are involved in general for lodging and settlement of claims :--
1. After the occurrence of a loss normally intimation to be given to the Policy issuing
office immediately.
2. Above step will be preceded by lodging a FIR to the nearest Police Station , in case
the loss has occurred due to any cause like Fire, Burglary, Theft, Damage to third
party, Accident etc., i.e. for any reason other than Act of God Peril e.g. Flood,
Earthquake, inundation etc.
3. Collect relevant claim form.
4. Fill up the claim form correctly after reading it thoroughly.
5. Submit claim form to the Policy issuing office either directly or by an authorised
Agent along with documents required /asked for, such as Police Reports, Doctors
Prescriptions, Reports of Pathological tests, Cash Memos from the Chemists Shop for
the medicine purchased, Admission and Discharge Certificates, Receipts from
66
Surgeon, Doctors etc. as the case may be.

6. The Policy issuing office may appoint Surveyor/ Loss Assessor or may refer the case
to panel Doctors, if necessary.
7. Claim is finally settled by the Policy issuing office and payment is made to the Policy
holder as a full and final settlement of claim.
8. Please note in some cases provisional payment is also made to the Policy holder
pending the final processing of the claim, depending on the merits of the case.
9. The above list is not exhaustive but only indicative. Further details can be ascertained
from the nearest office.
Underwriting :
UNDERWRITING PROCESS AND METHODS
Underwriting as an art began in the United Kingdom since Victorian times. Where upon a grou
ailors/traders began the practice to insure against the perils involved in a sea voyage, it included
nsuring of the goods in transit against known perils such as piracy, weather perils and goods get
estroyed in the voyage against the payment of a pre-agreed sum by the trader(s). The prac
volved with the times and the insurance model took shape. In the early days of marine insura
he details of a ship or cargo to be insured were described on a slip. This slip was taken to Lloy
nd the person, who was to carry the risk read the details, then signed the slip under the details of
isk. In this way, the person carrying the risk became known as the underwriter. The genesis of
nsurance business also evolved from the United Kingdom and the first insurers were the Lloy
ndustries.
Underwriting Defined
Underwriting is the prices of selecting and classifying exposures. It is directly related to rate- mak
r the pricing function of an insurer, because computed rates contemplate some composition of l
roducing characteristics to which they will be applied.
Underwriting is the insurance function that is responsible for assessing and classifying the degre
67
isk a proposed insured or group represents and making a decision concerning coverage of that ris
Underwriting includes all the activities necessary to select risks offered to the insurer in suc
manner that general company objectives are fulfilled.
The person responsible for evaluation and acceptance/rejection of risks and computation of prem
s called as the underwriter. Accordingly, the decision made by the underwriter concerning
lassification and rating is called as the underwriting decision. Underwriting decisions are crucial
nsurers since they can make or mar an insurance company. Good underwriting helps the insura
ompanies in many ways. It make them financially stronger and helps secure competitive advant
This is obvious in the sense that if risks are assessed properly, pricing will be effective and there
he company can well compete and build up reputation.
n life insurance business, underwriting is performed by home or regional office personnel, w

crutinize applications for coverage and make decisions as to whether they will be accepted, and
gents, who produce the applications initially in the field, but these decisions may be subject to
nderwriting at a higher level because the contracts are cancellable on due notice to the insured
fe insurance, agents seldom have authority to make binding underwriting decisions. In all field
nsurance, however, agency personnel usually do considerable screening of risks before submit
hem to home office underwriters.
.2 The Objectives and Principles of Underwriting
The primary objective of underwriting is to see that the applicant accepted will not have a
xperience that is very different from that assumed when the rates were formulated. To this
ertain standards of selection relating to physical and moral hazards are set up when rates
alculated, and the underwriter must see that these standards are observed when a risk is accep
or e.g., a company may decide that it will accept no fire exposures situated in areas where ther
o fire department protection or will accept no one for life insurance who has had cancer within
revious five years.
When reviewing an application for property insurance for a piece of property, such as a farm, th
ocated where there is no fire department protection or when reviewing an application for
nsurance in which the individual had cancer four and half years ago, the underwriter asks
uestion, “Can I make an exception for this application, or must I reject it because it does not co
68
within the technical limitations of my instructions?” In answering this question, the underw
isualises what would happen to the company’s loss experience if a very large number of ident
isks were accepted. If the aggregate experience would be very unfavourable, the underwriter
robably reject the application.
The objectives of underwriting can be therefore expressed as follows:

1. Product Equitable to Customer—The underwriter should fairly assess the risk in a proposal
fix the premium justifiable to the consumer.
2. Deliverable to the Customer—Consumers are the final authority for buying the products. If
marketers are not able to sell so that the product becomes undeliverable, the onus is on
underwriters to carry an introspection of the various factors that caused differences between
consumers and company’s expectations.
3. Financially Feasible to the insurance Company—The insurers are not in the business of cha
The underwriting benefit must be reflected by the financial statements. Although,
underwriters are not directly involved in the pricing of insurance products, yet their contribu
is as vital as that of actuaries, because they operationalise the business of risk.
Most of the insurance companies formulate underwriting policy which provides the framework
nderwriting decisions. It is also called as the underwriting philosophy. The underwriting po
pecifies the line of insurance that will be written as well as prohibited exposures, the amoun
overage to be permitted on various types of exposure, the area of the country in which each line
e written, and similar restrictions. Generally, the individual who applies the underwriting rules
uidelines, called the desk underwriter, do not involve in forming the company underwriting.
The underwriting philosophy also describes in general terms how the underwriter will
einsurance for its risk management. The underwriting philosophy can be translated
nderwriting guidelines which specify the general standards that specify which applicants are to
ssigned to the risk established for each insurance product.
n life insurance, the underwriter is assisted by medical reports from the physicians that exam m
he applicant, by information from the agent, by an independent report (called inspection report
he applicant prepared by an outside agency created for that purpose, and by advice from
ompany’s own medical advisor. In property-liability insurance (as well as life insurance),
nderwriter has the services of reinsurance facilities and credit departments to report on the finan
tanding of applicants and also can review loss histories of applicant.
69
.3 Underwriting in Life Insurance
Life insurance underwriting is mainly concerned with mortality. Mortality risk for an insurer is
he insured will die prior to the stipulated life. An impairment in any respect of a proposed insure
ersonal health, medical history, health habits, family history, occupation, or other activities
ould increase that person’s expected mortality risk.
While underwriting risk of an individual in life insurance, following factors are generally conside
y life insurance companies:
(a)Age,
(b) Sex,
(c)Height and weight,
(d) Health history (and often family health history—parents and siblings),
(e)The purpose of the insurance (such as for estate planning, or business or for family protection
(f) Marital status and number of children,
(g) The amount of insurance the applicant already has, and any additional insurance s/he propo
to buy,
(h) Occupation (some are hazardous, and increase the rise of death),
(i) Income (to help determine suitability),
(j) Smoking or tobacco use this is an important factor, as smokers have shorter lives),
(k) Alcohol (excessive drinking seriously hurts life expectancy),
(l) Certain hobbies (e.g., race .car driving, hang-gliding, piloting non-commercial aircraft), and
(m) Foreign travel (certain foreign travel is risky).
imilarly in case of group insurance the following factors are considered:
(a)Proposed Coverage—which includes assessment of eligibility, level of benefits which can
offered, administration of the group and the mode of payment to intermediaries.
(b) Cause of existence of the relevant group—classified on the basis of the nature of job, spec
agendas etc.
(c)Size of the group—large groups are always better than small groups for obvious reasons.
(d) Nature of Group’s business-based on nature of industry, cement plants and coal mines wor
are more prone to respiratory/kidney problems.
(e)Geographical location of the group.
(f) Stability of the group.
(g) Attributes of group members—sex, age and work profile.
70
(h) Level of participation—contribution by members or else, no contribution by members.

(i) Persistency and prior experiences.
n case of renewals, the most important factor is the claims experience. Underwriters place
otential insureds in the appropriate risk class (based on various criterion) generally classified
ollows:
a)Preferred Class where the happening of an adverse event or the possibility of claims is the le
i.e., the inherent risk is lesser than average risk.
b) Standard Class—where the risk exposed is at par with the average risk. Most of the insu
belong to this class.
c)Sub-standard Class—where the anticipated risk is -higher than the average risk. Insura
companies typically establish this risk class for proposed insureds that have permanent med
impairments or conditions, are recovering from serious illnesses or accidents, or have occupat
or avocations that significantly increase their degree of risk.
.4 Underwriting in Non-life Insurance
The underwriting of commercial, business insurances is a much more complicated and involved t
Commercial insurances range from small shops and factories to large multinational corporati
with operations in many countries throughout the world. The degree of complexity of
nderwriting required would obviously vary with the sheer size of the risk, but certain b
rinciples are fundamental.
The essence of the task is that the underwriter has to evaluate the hazard associated with the r
which is being proposed. In small cases he may be able to do this from reading a proposal form
orresponding with the sponsor. It may be that a local inspector is asked to call and see the sho
actory for himself. In large cases this is simply impossible. Detail of the risk could not be confi
o a proposal form since there is just too much information to condense, no matter how large
orm may be. The insurance companies may take the help of brokers in these cases. The broke
hese cases will be in a position to prepare the case for the underwriter. This may mean
nspections by the broker and the preparation of plans and reports on the relevant aspects of the r
This documentation, which may be extremely extensive, is then passed to the underwriter
egotiation can commence on the terms, conditions, cover and price.
everal sources of information are available to the underwriter regarding the hazards o
71
ommercial applicant for property and liability insurance:

a)Application Containing the Insurers Statements : The basic source of underwriting informatio
the application, which varies for each line of insurance and for each type of coverage. The broa
and more liberal the contract, usually more detailed information is required. The questions on
application are designed to give the underwriter the information needed to decide whethe
accept the exposure, reject it or ask for additional information.
b) Information from the Agent or Broker : In some line of non-life insurance, the agent m
exercise his underwriting authority. For commercial insurances, the profit-sharing contracts
also entered with the agents, whereby the agent derives a special incentive if the business brou
by him has resulted in a profit to the company.
c)Prior Experiences : The past history of claims is also a source of information. In case of exis
clients where the claims experience has been unfavourable, the insurance company penalises
loads premium for new businesses or renewals of the existing ones.
d) Inspection : Surveys are also conducted by the company’s specialists/consultants to find out
accuracy of information as contained in the proposal form.
REINSURANCE
Although to many, reinsurance is a relatively unknown aspect of the insurance industry, its roots
e traced as far back as the late 14th century. From that time forward, reinsurance evolved into
usiness as it operates today. While the early focus of reinsurance was in the marine and
nsurance lines, it has expanded during the last century to encompass virtually every aspect of
modern insurance market. Reinsurance is a device whereby the insurance company may reduce
isk by transferring a portion to one or more insurance companies. Reinsurance is a special, hig
echnical, competitive industry whose existence makes possible a more effective institution of risk
Reinsurance Defined
Reinsurance is a transaction in which one insurer agrees, for a premium, to indemnify another ins
gainst all or part of the loss that insurer may sustain under its policy or policies of insurance.
ompany purchasing reinsurance is known as the ceding insurer; the company selling reinsuranc
nown as the assuming insurer, or, more simply, the reinsurer. Reinsurance can also be de scribe
he “insurance of insurance companies”.
Reinsurance provides reimbursement to the ceding insurer for losses covered by the reinsura
greement. It enhances the fundamental objective of insurance—to spread the risk so that no sin
72
ntity finds itself saddled with a financial burden beyond its ability to pay. Reinsurance can
cquired either directly from a reinsurer or through a broker or reinsurance intermediary.
.2 Objectives of Reinsurance
nsurers purchase reinsurance for essentially four reasons: (1) to limit liability on specific risks;
o stabilise loss experience; (3) to protect against catastrophes; and (4) to increase capacity. Diffe
ypes of reinsurance contracts are available in the market commensurate with the ceding compan
oals
ypes of Reinsurance
Following are the important types of Reinsurance
1. Proportional reinsurance

2. Non-proportional
3. Facultative Reinsurance:
1. Proportional reinsurance
Proportional reinsurance involves one or more reinsurers taking a stated
percent share of each policy that an insurer produces. This means that the
einsurer will accept that stated percentage of each of premiums and will pay
hat percentage of each loss. The insurer may appear for such coverage for
many reasons for example, the insurer may not have sufficient capital to
carefully keep all of the exposure that it is capable of producing.
There are two types of proportional reinsurance.
a. Quota Share Reinsurance
The ceding company and the reinsurer take a balanced share of losses and
premiums, which is generally expressed as a fixed percentage of loss on
each risk. A ceding charge is paid by the reinsurer to the primary insurer
to reimburse for the expenses incurred in writing the business.
73
b. Surplus Share Reinsurance
Surplus share reinsurance is related to quota share reinsurance, apart

from the risks are not ceded to the reinsurer; instead, only risks exceeding
a minimum dollar amount, or "line", are ceded
2. Non-proportional
Under this type of reinsurance, insurer is responds to the loss suffered by the
nsurer exceeds a certain amount, it is called as, the retention or priority.
3. Facultative Reinsurance:
Facultative reinsurance is coverage where the reinsurer evaluates a particular
isk on a case-by-case basis. Facultative reinsurance is negotiated separately
or each insurance contract that is to be reinsured. The flexibility of facultative
einsurance allows various ceding insurers to reinsure dangerous risks which
are not covered by continuing contract, so they can reduce the insurer's
esponsibility in certain high-risk areas. Facultative reinsurance also allows the
prime insurers to get the reinsurer's advice on uncertain risks. This type of
einsurance contract can be in pro-rata form or excess of loss.
Advantages of the Facultative Reinsurance:
 Flexibility - The capability to arrange a reinsurance contract to fit any

particular case.
 Stability - Stability in the operations of the insurer as losses can be
transferred to the reinsurer.
 More Business – It Increases the insurer's capability to take on larger
amounts of insurance business.
Disadvantages of the Facultative Reinsurance:
 Uncertainty - The ceding insurer cannot plan before as it does not know
74
whether the reinsurer will accept the risk.
 Delays for the Insurer - The policy will not be issued apart from the
reinsurance is obtained, it leads to delay
 Unreliability - Dire market circumstances and poor loss outcomes can

decline the reinsurance market, making it difficult for the insurer to reach
reinsurance.
4. Treaty Reinsurance
Treaty reinsurance is a contract between insurers and reinsurers. The ceding
company is contractually bound to cede and the reinsurer is bound to assume a
particular element or kind of risk insured by the ceding company. Once the
negotiations of the contract are over, the reinsurer must automatically allow all
business included within the conditions of the reinsurance contract with the
ceding company.
Advantages of Treaty Reinsurance:
 Economical - The insurer does not have to shop for a reinsurer before
underwriting the policy so it is economical.
 Fast - There is no delay or uncertainty involved in Treaty Reinsurance.
Disadvantages of Treaty Reinsurance:
 Expensive - Administrative expenditure can be quite high in Treaty

Reinsurance.
 Complex - Treaty Reinsurance is difficult and requires larger record
keeping.
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CA.CS.NAVEEN.

ROHATGI SYBFM- INSURANCE

Insurance (Fund) Management

MEANING OF INSURANCE: facilitates reimbursement during

There are different insurance companies that offer wide range of

Several insurances provide comprehensive coverage with affordable

The periodical insurance premiums are calculated according to the

Insurance provides financial protection against a loss arising out of

A pool is created through contributions made by persons seeking to

Insurance works on the basic principle of risk-sharing. A great

Insurance is a contract between two parties whereby one party

Concept of Insurance / How Insurance Works

Lets take some examples to understand how insurance actually

 Contribution per person = Rs.

5 houses get burnt during the 50 persons die in a year on an

Insurance company pays Rs. Insurance company pays Rs.

B) Principle of utmost Good faith

Like in other contracts, the insurance contract must be based on

C) Material Facts Disclosure

(D) Principle of Indemnity

The insurance contract should always be a contract of indemnity

LEGAL ASPECTS OF INSURANCE CONTRACTS

 Indemnity means that the insured person is placed, financially,

Implied conditions of a contract

 Good faith & Utmost good faith

Both the parties to a contract are expected to observe good faith.

Insurance contracts without insurable interests have no sanction

 Existence of subject matter

Existence of subject matter of insurance is necessary.

 Legality of parties to contract

At law, a minor cannot enter into a legal contract. However, so

A loss could be due to a cause of causes. In the chain reaction, it

 Consensus Ad Idem (of the same mind)

In Insurance contracts only one party - the proposer knows the

should be covered by the insurance contract. As the insurers

Express conditions of a contract

These conditions are mainly framed to achieve the principle of

The express conditions include

Contribution condition is a corollary to the Principle of

Subrogation condition is another corollary to the principle of

An exception to this are life insurance polices wherein insured/

When liability under the policy is admitted but the quantum is

In India, insurance has a deep-rooted history. It finds mention in the

decades of the nineteenth century, the Bombay Mutual (1871),

and commerce in the 17th century. It came to India as a legacy of

foreign companies be allowed to enter by floating Indian companies,

long- term funds for infrastructure development at the same time

Life insurance is a contract between a person called insured and the

NEED AND IMPORTANCE OF LIFE INSURANCE

Superior to any Other Savings Plan

assured to the policyholders’ near and dear ones. In comparison, any

Encourages and Forces Thrift

Easy Settlement and Protection Against Creditors

Administering the Legacy for Beneficiaries

Ready Marketability and Suitability for Quick Borrowing

future premiums and payment of monthly installments spread over

Accidental Death Benefits

TYPES OF LIFE INSURANCE POLICIES:

Types of Ordinary Meaning

There are two types of annuities, namely:

Q1. What is nomination?

3. Who can nominate?