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Intro to Life Insurance

Intro to Life Insurance

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Published by: m_dattaias on Aug 05, 2010
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Life Insurance A contract in which the insurer in consideration of a certain premium agrees to pay to the assured or to the person for whose benefits the policy is taken, a stated sum of money on the happening of the particular insured event

History of Life Insurance
o Life insurance had its origins in ancient Rome o where citizens formed burial clubs o that would meet the funeral expenses of its members o and help survivors by making some payments

o In India, in the year 1818 the Oriental Life Insurance Company was started at Kolkata. o In 1938, the Insurance Act was passed, that looked into investments, expenditure and management of the companies' funds

o In 1956, the LIC of India was formed under the LIC Act,1956 o In 1999, the Insurance Regulatory and Development Authority popularly known as IRDA was created by an act of the Parliament to regulate all insurance companies and businesses in India

o IRDA has evolved into an effective regulator and it has facilitated the entry and growth of private players in the insurance sector o Since then the growth of the insurance industry in India has never been the same again.

o Many major international players are operating in collaboration with Indian partners. The Joint Ventures are backed by strong capital base and latest technology o The sector was opened up for private players in the year 2000

Insurance Legislation
The Insurance Act 1938:
o Principal enactment relating to insurance o Contains provisions regarding; 
   Licensing of agents & their remuneration Protection of policyholders interests Use of funds & patterns of investments Constitution of Insurance Associations

o Till the constitution of the IRDA by the IRDA Act in 1999, the Controller of Insurance was responsible for the administration of Insurance Act o Since 1999, the IRDA has replaced the Controller of Insurance

Life Insurance Act, 1956

o Basis for the establishment of LIC as a corporate body o Members of LIC are appointed by Central Govt o The no cannot exceed 16 o One of them is appointed as Chairman

General Insurance Business Act , 1972 o This Act came into force on 1st Jan 1973

o On that day, the General insurance Corporation was formed as a Govt Company


The 4 Companies (The National Ins. Co. Ltd, The New India Assurance Co Ltd., The Oriental Ins. Co. Ltd., and The United India Ins. Co. Ltd.) were given the exclusive privilege of carrying on Gen. Ins. Business in India This privilege was removed by the amendment made in the IRDA Act of 1999 Subsequent to the changes in 1999, the above 4 companies became independent companies GICs role has become that of a National Reinsurer

o o o

Insurance Regulatory and Development Authority (IRDA) Act 1999 
Passed in Dec 1999  Provided for the establishment of IRDA  To protect the interests of policy holders  Aimed at opening up the ins. sector for Pvt. companies with a foreign equity of 26%  Also aimed at ending the monopoly of LIC & GIC in the ins. Sector  Amended the Ins Act 1938, the LIC Act 1956 & The Gen. Ins. Business Nationalisation Act 1973

o Constitution of IRDA 
A Corporate body  Not more than 10 members (Chairperson + 9 other members)  Advised by an Insurance Advisory committee, of not more than 25 members


Duties & Powers of IRDA 
Replaces the µController of Insurance¶ to administer the provisions of the Ins. Act, like registration, licensing, laying down regulations  To regulate, promote & ensure orderly growth of Ins. Business  To exercise all powers and functions of the controller of insurance 

To protect the policy holders interests  To promote & regulate professional organisations connected with ins. Business  To call for information from, undertake inspections and conduct investigations incl. audit of the insurers 

To control & regulate the terms & conditions offered by the insurers  To prescribe the manner & form in which the accounts will be maintained by the insurers  To regulate the investment of funds  To adjudicate disputes between insurers and intermediaries

Consumer Protection Act 1986 (COPA) 
Consumer can approach the various forums prescribed under the Act for redress, if he is not satisfied  Consumer dispute redressal forums are established in each district and in each state  The COPA applies to ins. Business as well 

Policy holders have the right to seek redress against unfair practices or unsatisfactory services from the insurers 

Majority of disputes in insurance arise out of repudiation and delays in claims

Appointed by the Governing body of Ins. Council  Function : To resolve the complaints in respect to disputes between the insurers and policy holders in cost effective, efficient & impartial manner

The complaints to the Ombudsman may relate to; 
Partial or Total repudiation of Claims  Any dispute regarding premium paid or payable in terms of the policy  Any dispute on the legal construction of the policy relating to claims  Delay in settlement of claims  Non-issue of any insurance document to customers after receipt of premium 

Ombudsman ± Counsel & mediator  Has to make decision on the basis of docs submitted  The complainant & the insurer can make personal submissions  But lawyers are not permitted to argue the case 

Complaints to the Ombudsman lie only 
When the insurer had rejected the complaint  Or no reply was received within one month of the complaint  Or the reply was not satisfactory 

The complaint can be made within one year after the insurer had rejected the representation  The subject matter should not be already before any court or consumer forum or arbitration 

Ombudsman should make recommendation within one month from the date of receipt of complaint  If the complainant accepts this recommendation, the insurer has to comply within 15 days and inform the Ombudsman accordingly 

If the complainant does not accept the Ombudsman's recommendation, the Ombudsman shall pass an award in writing stating the amount awarded  The award has to be passed within 3 months 

The complainant has to intimate his acceptance of the award within one month by a letter of acceptance to the insurer, and the insurer has to comply within 15 days and inform the Ombudsman 

If the complainant does not intimate the acceptance, the award cannot be implemented

The Arbitration & Conciliation Act 1996 
Provide for the settlement of disputes thru Arbitration  Arbitration is a recognized & valid process for the resolution of disputes  Speedier than proceedings in a court of law 


Disputes regarding admissibility of claim is not subject to arbitration Differences with regard to the amount of the loss to be paid can be referred to arbitration The sole arbitrator may be agreed to by the parties in writing Otherwise, each party will appoint one arbitrator and the two arbitrators will appoint a third ± called the Umpire Any disagreement between the 2 arbitrators shall be referred to an umpire

Other Laws:
The WC Act 1923 The Employee State Ins. Act 1948 The Marine Ins. Act 1963 Motor Vehicles Act, 1988 The Public Liability Ins Act 1991

Lok Adalats: 

The Motor vehicle Act provided for the constitution of MACT (Motor Accidents Claims Tribunals) by the State Govts.  The objective was to ensure speedy settlement of TP claims  To clear the backlog of claims in the MACTs, Lok Adalats were formed  From the pending cases, claims upto certain limits are submitted to the lok Adalats  The selection of cases is made by MACT in consultation with the insurer

Essential Features of Life Insurance
o o o o o o o o o Elements of a valid contract Insurable interest Utmost Good Faith Warranties Assignment & Nomination Cause is certain Premium Terms of Policy Return of Premium

Peculiar Nature of Life Ins.: The contracted event is bound to happen Life insurance is a longtime contract

Important activities in a Life Insurance Organisation

o Procuring applications or proposals o Scrutinising & making decisions on the proposals o Issuing the policy documents, incorporating the terms & conditions

o Keeping track of the performance of the insurance contract by either party, like payment of premium or payment of benefits o Attending to various requirements during the duration of contract o Other supporting activities (like advertising, maintenance of accounts, management of personnel, compliance with regulations and laws)

Modern concepts of Life Insurance
o Economic Concepts o Actuarial Concepts o Legal Concepts

o Economic Concept: Based on the economic principle. I.e., Spreading of risks

o Actuarial Concept: Based on the actuarial or mathematical principle 
I.e., How much should be paid. (Premium)  Premium should be proportional to the risk  This process of fixing premium is done thru the Actuarial principle

o Legal Concept: Based on Legal Principles 
Restrict the members of the pool to enjoy the benefits of insurance without violating the laws


Basic Elements of Life Insurance Products
The 2 basic needs of all individuals are; 

Risk Coverage  Savings for Future

Risk here means ³Death´ The first basic need is to provide a lump sum amount to the family in the event of untimely death of the bread winner Here the amount is payable only if the death of the insured occurs during the selected period

The second is accumulation of savings for a specific purpose. Here the amount is payable only if the insured survives till the end of the selected period

These 2 concepts ± Basic elements of every Life Ins. Product Basic Building Blocks in all Life Insurance Product design Life Ins. Products are developed by combining these 2 elements in different proportions, according to the needs of individuals

Types of Life Insurance Products
Conventional Plans Unit Linked Plans Annuities & Pensions Besides there are Group Insurance Plans & other special plans

Conventional Plans:
Oldest types of plans available Cater to customers with a low risk appetite Steady and almost assured returns over the long term Premium to Sum Assured ratios are fixed for each plan and age. Generally withdrawals are not allowed before maturity

Conventional Plans-Types
Conventional Plans:
a) Participating Plans a) Non Participating Plans

Conventional Plans - Types
a) Participating Plans:
‡ Share of profits are distributed to the Policy holders ‡ Also called µWith Profit Policies¶

a) Participating Plans:
i. Endowment Plans ii. Money Back Plans iii. Whole life Plans iv. Children¶s Plans v. Joint Life Plans

i. Endowment Plans:
‡ ‡ ‡ ‡ Primarily Provides a living benefit More of an investment Benefits are paid after the specified period The period for which the policy is taken is called the µEndowment Period¶

‡ Many investors use this to fund anticipated financial needs ‡ Premium is comparatively higher

ii. Money Back Policies: ‡ Part of the Sum Assured is paid to the policy holder in the form of survival benefits, at fixed intervals, before the maturity date

‡ Risk cover on life continues for the full Sum Assured ‡ Bonus is also calculated on the full Sum Assured

‡ If the policyholder survives till the end of the policy term, the survival benefits are deducted from the maturity value ‡ Money Back Policies give Money in hand + Insurance cover

‡ Money back policies are normally for a fixed tenure, normally up to 25 years or so ‡ The policy holder pays a fixed premium periodically during the paying period

iii. Whole Life Policies ‡ ‡ ‡ Cover extends to the whole life Premiums are paid till death Premium rates are comparatively lower

iv. Children's Plans
Insurance can be taken on the lives of children, who are minors The proposal will have to be made by a parent or guardian Generally, in these plans risk on the life of the insured child will begin only when the child attains a specified age

iv. Joint Life Policies ‡ Cover the risk of two or more lives ‡ Under a single policy ‡ Usually cover Husband & Wife, Partners etc ‡ SA becomes payable; 
Either at maturity  Or during the death of one of the assureds

b) Non Participating Plans i. ii. Pure Endowment Plans Term Insurance Plans

b) Non Participating Plans Not entitled to share the profits of the insurer The policy holders get only the Sum Assured, without any bonus Also known as µWithout Profit¶ Policies

Bonus Loading ± is not charged in Non Participating policies The amount of insurance to be paid is certain in Non Participating policies

i. Pure Endowment Plans
To Pay the insurance money in the event of the insured surviving till the end of the endowment term Provides only Survival Benefits

Pays the face value of the policy only if the insured survives the period of insurance In case of death of the insured during the period of insurance, nothing becomes payable

Pure Endowment is for the benefit of the policy holder Pure Endowment has the element of investment Pure Endowment grants protection against µliving long¶ Pure Endowment provides old age protection

ii. Term Insurance Plans A contract that furnishes life insurance protection for a limited no. of years

The face value of the policy becomes payable only if death occurs during the stipulated term In case of survival, nothing will be paid Provides only death cover

Advantage ± Low cost (since only death is covered) Suitable where risk coverage is needed for a restricted period

Disadvantage ± The Insurance Money is payable only in case of death If death occurs later, i.e. after the expiry of the selected term, nothing becomes payable, irrespective of how long the original term might have been

Term Insurance ± Similar to the General insurance Policies Provides Risk cover only for the term selected These plans are not very popular, as there is no saving content

Term Insurance is for the benefit of others Term Insurance has the element of Protection Term Insurance grants protection against µliving too short¶ Term Insurance provides Family protection

Term Insurance ± Provides protection against death during a specified period (Unlike Whole life policies, which provide protection against death at any time)

ii. Term Insurance Plans - Types 


Level Term Insurance Decreasing Term Insurance Increasing Term Insurance Renewable Term Insurance Convertible Term Insurance

Level Term Insurance 
Uniform premium & benefit through out the term of the policy  In the event of death anytime during the term, the SA is payable  Most popular amongst the Term Insurance plans, because of its simplicity

Decreasing Term Insurance 

From an initial amount of insurance, the risk protection decreases year after year, becoming zero at the end of the period of insurance  Premium is constant, but the benefit decreases 

Suited to cases where there is a temporary need

Increasing Term Insurance 
Generally added as rider to another policy contract  At the option of the insured, the Sum Assured increases by fixed percentage or by fixed amount periodically under the contract  This amount will be available as death benefit

Renewable Term Insurance 
Have built in automatic renewal feature  At the end of the fixed period, the policy can be renewed automatically by the policy owner  Without the necessity of medical examination / irrespective of the status of his health 

Premiums will be for a given period, based on the age at beginning of the period  At the time of each renewal, premium will be the at the rate applicable to the age attained at the beginning of each such renewal 

Hence, the premium payable will be increasing with each renewal  At advanced ages, the premium will be very high

Convertible Term Insurance 

Insured has the option to exchange his term insurance policy for a permanent type of policy viz, Whole Life or Endowment, without having to produce evidence for continued insurability 

Such conversion is allowed during the period of insurance, and effected for the µAttained Age¶ or µOriginal Age¶  No further medical examination or underwriting decisions, when the right of conversion is exercised 

Conversion at the µAttained Age¶:
‡ Premium rate for the new policy will be for the age attained on the date of conversion 

If the method of Conversion is at the µ Original Age¶:
‡ Conversion will take effect from the date of commencement of the original term insurance policy ‡ Premium for the converted policy, is related to the age at the original date of commencement 

Suitable for young people, in the early stages of their careers  These policies are also useful for people who have low income today and hence cannot afford to pay high premium in the initial years

Unit Linked Plans
Combination of Life insurance protection + Investment 

Offers the benefits of Life Insurance  Provides option to participate in the growth of capital market

ULIPs : An endeavor of IRDA to enable the buyer to make the most informed decision possible when planning for financial security

ULIP - abbreviation for Unit Linked Insurance Policy The dynamics of the capital market have a direct bearing on the performance of the ULIPs.

IN ULIPS THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR. ULIPs contribute nearly 50% of the premium for some insurers

Out of the Premium, amounts are adjusted towards 
Cost of Insurance (Death Cover)  Adjustment towards charges  Allocated Premium ± Invested in a fund chosen by the investor

In ULIPs, 

Death Benefits ± Fixed  Maturity Benefits ± Not Guaranteed
Maturity Benefits: 
Based on Market Conditions  Fund in which premium has been invested

ULIPs provide flexibility to the Policy Holders Option of switching Policy Holders can make lump sum additional contribution at any time Top up ± the expression used to refer to the
policyholder increasing the contribution for investment. There could be a top up charge

As per IRDA guidelines; 

Top up is allowed only if the regular premium is paid up to date

Policyholders may not pay the premium in a year, subject to certain conditions If that happens, no new units will be added to this funds Some units will be reduced to pay for the annual charges for cover, for administration, for fund management etc. This is called Premium Holiday

Net Assets Value (NAV) Represents the net value of the fund on a particular date Reflects the total value of the assets of that fund, after some adjustments for expenses

Surrender Value:  Cash Value payable on voluntary termination of the policy contract at the desire of the policy holder, but before the expiry term  A policy can be surrendered, provided it is kept in force for atleast 3 years  Mode of calculating surrender value differs from company to company

Lock in Period: Period during which withdrawals are not allowed It is 3 years, according to IRDA Guidelines Surrender value will be allowed only after 3 years

Differences between ULIPs & Traditional Plans
The Premiums, in excess of Risk Cover, is invested as desired by the policy holder Investment returns vary based on the market movements. Investment Risk ± borne by the policy holder

Investment - Insurer¶s Discretion Guaranteed benefits ± Insurer bears the investment Risk Non Guaranteed benefits like bonuses ± based on the performance of insurers

Withdrawals are allowed Loss, if any, depends on NAV No bonuses (there are few exceptions) Benefits are variable Gains likely, depending on market movements

Surrenders are allowed, but at a loss Bonuses are payable in participating policies Benefits are pre determined Gains unlikely, except through bonuses

Charges applicable in ULIPs
These charges are subject to various conditions & vary between insurers 

Accident Benefit Charges : If the accident
rider is availed of 

Administration or Fixed charges: Fees for
the administration of the plan 

Flat Fee: charged every month, regardless of
the size of the premium

Fund Administration Charges: Being a
percentage of the fund & deducted daily

Fund Switching Charges : Levied when
there is a switch from one fund to another

Insurance or Risk Cover Charges:
Premium for the death cover

Service Tax Surrender Charges: May be charged for
partial or full encashing of units before a certain period of time

Attractive Features of ULIPs
Flexibility to choose Sum Assured.  Flexibility to choose premium amount.  Option to change level of Premium even after the plan has started (Top up facility).  Flexibility to change asset allocation by switching between funds.

Changes in the plan & net amount invested are known to the customer  Convenience of tracking one¶s investment performance on a daily basis.

Option to withdraw money after few years  Low minimum tenure  Partial / Systematic withdrawal allowed

Fund Options 
A choice of funds



Annuities ± form of pension Practically the same as Pensions Provide periodical payments

help individuals plan effectively for their retirement. provide individuals with a regular income in their golden years.

Insurance Company makes a series of periodic payments to a person (annuitant) Or to his dependants Over a No of years (Term) In return of the money paid to the Insurance Company

Annuities start where Life Insurance ends Called the reverse of Life insurance Annuity stops at death of a person No part of the premium is returnable on death

Differences ± Annuities & Other Life Insurance Contracts
Annuity Contracts Other Life Insurance Policies

Liquidates gradually Provides gradual the accumulated funds accumulation of funds Taken for one¶s own benefit Generally for benefits of dependants

The insurer¶s payment The insurer¶s payment is usually given at stops at death death

Annuity Contracts Premium is calculated on the basis of longevity of the annuitant Provides protection against living long

Other Life Insurance Policies Premium is based on the mortality of the policy holder Protection against living short

Conventional pension plans 

In these, major portion of the premium monies is invested in bonds and government securities  The returns are on the lower side

Unit Linked Pension Plans 

Play an important role in the retirement planning exercise  These Plans invest a portion of the premium in the stock market apart from bonds and government securities

Immediate Annuity: 

Provides income for a guaranteed period of time  Payments begin within one year of purchase 

Begins at once or immediately on expiry of the designated period  Immediate annuity is purchased with a single premium called Purchase Price

Deferred Annuity 

Annuity payments to the annuitant commence at some specified time or specified age of the annuitant  This specified period is called µDeferment Period¶

Generally purchased by working persons to make arrangements of the annuities after their date of retirement Unlike immediate annuities, deferred annuities start at a date in the future

An Annuity can be made payable;

During the Life time of the annuitant, in which case it ceases on his death. This is called a µLife Annuity¶ or Annuity for life

During the life time of the annuitant or his spouse, whichever is longer (Joint Life Annuity)

For a fixed no of years like 5, 10, 15, 20 etc. This is called Annuity Certain

As long as the annuitant lives, and thereafter at 50% to the spouse as long as the spouse lives

On any of the above terms, but with annuity increasing every year by a fixed rate or amount

Benefits of Annuities
Long Term Savings Maximize the retirement income Regular income for the lifetime Tax benefits


Group Insurance
A large no. of individuals are covered under a single policy called the ³Master Policy´ The contract is between the insurer and a body that represents the group of individuals, may be employer or the association

Since the contract is with the body, that body is the policy holder The individuals in the group are beneficiaries The amount and terms are negotiated with the policy holder and not with the individual beneficiaries

The premium will be paid to the insured by the policyholder who may or may not collect the same from the individuals concerned As many persons are covered under a single contract, the administrative costs are low

Essential Features of a Group Insurance Scheme

The Group must not have been formed for the purpose of taking advantage of the Insurance Scheme. The group must have some other reasons for bonding

There must be a minimum no. of members in a group The individual beneficiary will not be allowed to choose the amount of the insurance cover. The amount will be determined by certain criteria, which are applied uniformly to all the Group members

Generally, the individual lives are not separately assessed for the risks. The underwriting or selection is of the group as a whole. The terms, amount of cover & the premium will vary from year to year, based on the exits, new entrants and the mortality experience

Types of Group Insurance Schemes
One year Renewable Group Term Insurance Scheme: 

Members are covered for specific amounts, payable on their death within the year  Simplest and cheapest of the schemes

Group Savings Linked Insurance Schemes:  Offered to Employers for the benefit of employees  Part of the premium is used for Term Insurance Cover of the agreed amount  Balance is credited to a Savings scheme 


Group Gratuity Schemes Offered to the employers Related to the Gratuity of the employees The scheme guarantees a certain amount of gratuity Make easier to fund the gratuity liability of the employer

In Group Gratuity Scheme, the funds are transferred to the insurer who have better capabilities for managing the funds

Group Superannuation Schemes: 

Offered to employers  Related to the payment of pensions to employees  Help employers in administering the pension funds  Easier administration and availability of actuarial and investment expertise

Group Leave Encashment Scheme: 

Enables employers in funding the liability in respect of leave encashment  Including medical leave encashment

Reasons for opposition to Group Insurance Schemes in India
There is perceptible opposition from Agents & Development Officers because; The commission rates offered to Agents is low Development officers are not given credit for the no. of lives covered under Group scheme nor the premium collected, while calculating Incentives


Social Security Schemes Industrial Assurance Plans Salary Savings Scheme Policies Riders Plans Covering handicapped Key-man Insurance

Social Security Schemes 

Social Security ± a major concern in all the countries  Most of the social welfare measures are administered by the Govt 

Govts find it difficult to administer these schemes  Insurers take over these functions  Social welfare schemes ± elementary level in India  In India, few social security schemes are available for poorer sections 


Industrial Assurance Plans Designed for workers with low incomes Policies are issued for small Sum Assureds With weekly premiums Agents meet the policy holders every week to collect the premium

Disadvantage ± High administrative costs Agents have to be remunerated differently Janata Policies ± Industrial Assurance plans introduced in India in the early days of LIC In India, Janata policies did not become popular

Salary Savings Scheme (SSS) Policies  Also called Payroll insurance  To cater to the needs of working classes  Insurer arranges with the employer to deduct premium from the salary of the workers

Beneficial for the policyholder: as the
premium is deducted making the premium payment easy

Beneficial for the insurer : he is assured
of the premium, less administrative costs

Beneficial for the agent : as the chances
of lapses are less and he gets regular renewal commission


Clause or condition that is added on to a basic policy providing an additional benefit  Riders add variety and attractiveness to the nature of the policy 

Riders are added at the choice of the proposer  Riders allow lot of flexibility  Riders enable customization of the product

Some of the riders offered by insurers in India are; 

Increased Death benefit  Accident Disability Benefit Rider: if the death is due to accident  Permanent Disability benefits  Premium waiver in child plans in case of parents death  Dreaded disease or critical illness cover 

Major Surgical Assistance Benefit Rider : Cover to meet major surgical expenses  Cover to continue beyond maturity age for same or higher SA  Option to increase cover  Option to cover spouse without medical examination

IRDA Regulations on Riders

The premium on all the riders relating to health or critical illnesses, in the case of term or group products shall not exceed 100% of the premium of the mail policy

The premium on all the other riders put together should not exceed 30% of the premium on the main policy The benefits arising under each of the riders shall not exceed the SA under the basic product

Plans covering handicapped: 

To insure physically handicapped persons  Extras are charged in some cases  Partially handicapped persons are mostly accepted without extra premium

Key Man Insurance: 

Insurance taken by a company on the life of important employee ± key man ± of the company against financial loss that may occur from the employee¶s premature death

The Key-man can be; 


an Expert a Technocrat a Director a Shareholder a Executive

A key man may be defined as an employee whose death would result in a financial loss to the company, including replacement There can be more than one key man in a company

Features of Key Man Insurance 

Company will be the proposer  Term allowed is usually 10 ± 15 years subject to retirement age or service contract  Restricted to 10 times of Key Man¶s Annual Compensation package  Riders are usually not allowed

Advantages of Key-man Insurance 
Company is protected against financial loss in the event of key man¶s death  Gives substantial income tax savings to the company  An asset for the company in the form of premiums paid and added bonus  Generates confidence, sense of security and loyalty in the minds of key-men




Marketing Underwriting Claims Loss control Premium auditing Reinsurance Actuarial Investments

A successful marketing program includes;

Market Research ± To determine buyer¶s

Advertising & Public relations programs Training programs Setting production goals and strategies Effective motivation & management

Underwriting Dept decides; 
Price  Terms and conditions  Which applicants will be insured  No of applicants

Primary purpose ± to ensure profitability Acts as counterbalance to the marketing dept

loss adjustment function Purpose - to achieve a fair settlement

Loss Control:
To prevent and minimize losses Provides necessary information Assists the Underwriting dept

Performs the mathematical functions 
Calculation of rates  Development of rating plans  Estimation of loss reserves

Other functions:
Accounting Information systems Personnel Legal services Training

Objectives of Insurers
Earning Profit Meeting Customer Needs Complying with legal requirements Fulfilling humanitarian and societal duties

Measurement of Insurer¶s Performance Profit Measurement:
Financial figures to be considered to measure insurers¶ profits include; 
Reserves Premiums Expenses Losses Combined Ratios Investment Income Operating profit or loss

For losses that have already happened but not paid  Reserves include an amount for IBNR Losses 

IBNR ± Incurred but not reported losses
(losses that have already happened, but not yet reported to the insurer)

Premium : 
Creates funds for investment  Determines insurer¶s profits  Growth in premiums should be real and should result from new business


Expense Ratio : Ratio of expenses to premiums  Expense Ratio varies among various line of business  Expense ratio varies over time  Also varies among distribution systems


Loss Ratio: Ratio of incurred losses to earned premiums
Earned Premium=(Total Premium/365)*Expired days

Combined Ratio: It is the sum of loss ratio & expense ratio Combined ratio less than 100% indicates Underwriting profit (does not include any investment profit or loss)

Investment Income: 

Main source of profit for many insurers  Most stable source

Operating profit or loss: 

Sum of Underwriting profit/loss and Investment profit/loss

Meeting Customer Needs 

Evaluation of complaints  No of complaints indicates one company¶s success of failure in relation to other companies in the industry

Meeting Legal Requirements 

No of criminal, civil and regulatory actions taken against an insurer indicates its success or failure in meeting legal requirements

State insurance depts. monitor; 
Sales & Advertising  Underwriting  Ratemaking  Claim settlement  Treatment of insureds  Applicants for insurance  Claimants

Meeting Social Responsibilities 

No. & type of benefits for its employees  Insurers expenditure on loss control activities  Contributions to medical, welfare and educational institutions and programs

Constraints in achieving the objectives
Internal Constraints 
Efficiency  Expertise  Size  Financial Resources  Miscellaneous Internal constraints

External Constraints 
Regulation  Public Opinion  Competition  Economic Conditions  Distribution Systems  Miscellaneous External Constraints

Individual Agents Corporate Agents Insurance Brokers Third Party Administrators Surveyors/Loss Assessors Banc assurance Motor Dealers

Proposal Forms Personal Statements Premium Receipts Covernotes Policy Documents Endorsements Claim forms Renewal Notices

Double Insurance
When more than one policy is taken to cover the same risk, it is called double insurance Subject matter is insured with two or more insurers

Splitting of risk among multiple parties It is a way of spreading the risk on larger insurances between two or more direct insurers Coinsurers - Two or more insurers jointly covering the same risk


A contractual agreement under which one insurer (Primary Insurer) transfers to another insurer (Reinsurer) some or all of the loss exposures accepted by the primary insurer, under insurance contracts it has issued or will issue in future Portion kept by primary insurer ± Insurer¶s Retention

Reinsurers in turn share loss exposures with other reinsurers Retrocession : Transaction between reinsurers and other reinsurers Thus loss exposures are shared globally in the reinsurance community

Insurance Vs Reinsurance
Insurance Reinsurance

Contract between an insurer & a member of the public Insurer deals with the insured

Contract between two insuring organizations Reinsurer deals with the insurer

Functions of Reinsurance
Stabilization of Loss Experience Large line capacity Financing Catastrophe protection Underwriting Assistance Withdrawal from a Territory or Class of Business

Types of Reinsurance
Facultative Reinsurance: 
Primary insurer negotiates a separate reinsurance agreement for each risk it wishes to reinsure  Primary insurer is not under obligation to reinsure a policy it does not wish to reinsure, and reinsurer is not obligated to reinsure policies submitted to it

Treaty Reinsurance: 
Primary insurer agrees in advance to reinsure certain lines of business as per the terms & conditions of the treaty  Reinsurer agrees to accept the business that falls within the treaty  Most preferred type

Primary insurers can underwrite, accept and reinsure such businesses under treaty without prior consultation with reinsurers Reinsurer is obligated to accept all businesses that falls within the terms of the treaty Prior negotiation is not required Lower handling expenses

Facultative Treaty: 
Hybrid Reinsurance Contracts Ceding company has the option to cede Reinsurer has the option to accept or decline classified risks of a specific business line

Factors determining Reinsurance needs

Kinds of insurance written Exposures subject to catastrophic loss Volume of insurance written Available financial resources Growth plans

Some of the Reinsurance Companies are;
Munich Swiss Berkshire Hathaway Hannover Lloyd's of London SCOR Everest Re Group Partner Transatlantic Holdings ACE Tempest Reinsurance


Recognizing and evaluating hazards Establishing prices Determining policy terms and conditions Determining selection criteria Determining markets for insurer¶s products Essential for profitable growth 


Knowledge of individual risk peculiarities Assessing how the risk & a peril produce potential losses Estimating magnitude of losses²perilwise Estimating insured¶s systems & capabilities for prevention & minimization of losses

Main purpose ± To develop and maintain profitable book of business Avoids µAdverse Selection¶ Highly important for the success of insurers, hence cannot be subcontracted or delegated to outside companies

Underwriting audit: 
Management control tool to check the implementation of underwriting policy  To reveal whether the existing guidelines cause undesirable results

Classification of Risks in Life Insurance Physical Hazards: 
Age  Gender  Build  Physical condition  Physical impairments  Personal History  Family History  Increasing extra risk

Occupational Hazards Moral Hazards

Claims Management
To fulfill the insurer¶s obligations to its policy holders Claim : demand that the insurer should redeem the promise made in the contract

Claims personnel should check;
Occurrence of the insured event Obligations under the contract, which should be

Policy status Persons entitled to demand performance

Objectives of Claims Dept.
Complying with the contractual promise 
Fair, prompt and equitable service

Achieving insurer¶s profit objective 
Overpaid Claims Underpaid Claims goodwill Reduced profits Decreased

Advantages of Insurance
Financial security to the family Potent instrument for savings Financial independence in old age Collateral security for housing loan Acts as emergency fund at times Income tax benefits Safe and profitable investment

Availability of policies of various durations (short term to long term) Policy holder can be free of tensions Economically and socially backward sections can be benefited through Group schemes

After the IRDA Act of 1999, the ins. sector was opened for Pvt. companies with a foreign equity of 26% Insurance sector witnessed substantial growth after privatization

If there is increase in FDI from 26% to 49% further entry of players can be expected


Creation of jobs New and innovative business Greater management skill Greater operation of freedom

International experience Cutting edge technology New products Expansion of insurance market Social security

Developments in Indian Insurance industry
Entry of private players Foreign collaboration New products New training institutions New employment generation Flexibility in products New marketing channels

Establishment of Insurance Ombudsman New marketing concepts and strategies Stand alone health insurers

Indian insurance sector is likely to register a growth of 200% and a size of Rs. 2000 billion A private sector insurance business will achieve a growth rate of 140% as a result of aggressive marketing technique being adopted by them against 35-40% growth rate of state owned insurance companies. In rural markets, the share of private insurance players would increase substantially as these have been able to generate a faith among their rural consumers


India's insurance sector to see 500 per cent growth by 2010: Study
India's insurance sector - 500 % growth over the next three years - 60 billion-dollar industry by 2010 India's more than one billion people are uninsured, the study by the Associated Chambers of Commerce and Industry (Assocham) said. 'A large part of rural India is still untapped due to poor distribution, large distances & high costs relative to returns,µ said Assocham president Anil K Agarwal He said the study had revealed that rural & semi-urban India would contribute 35 billion dollars to the Indian insurance industry by 2010. The study added that the urban sector insurance was estimated to reach 25 billion dollars by 2010, life insurance 15 billion and non- life insurance 10 billion dollars.

Demand for Pension Plans Separateness of Banking and InsuranceBancassurance Role of Information Techno-logy Using Postal Network Creating Insurance awareness Innovative Products

Private Insurers in IndiaGrowth Prospects and challenges

India is the fifth largest life insurance market in the emerging insurance economies globally and is growing at 3234% annually The total number of life insurers registered with IRDA has gone up to 23, with registration of IndiaFirst Life Insurance Company Limited

The total number of general insurers registered with IRDA has gone up to 22, with registration of SBI General Insurance Company Limited

New players have significantly enhanced product awareness and promoted consumer education and information The strong growth potential of the country has also made international players to look at the Indian insurance market

1. Industry Challenges  Commoditization in personal line products  Customer requirements  Heightened competition  Global economic meltdown

2. Business Challenges 

To reduce the turnaround time  To improve their speed to market their products  Distribution Channel pressures  Emerging consumer demands for mass customization and hybrid products

3. Process Challenges 
Lack of stream lined processes, change management, automated processes, central repository

Solutions and future prospects

Innovative products Product customizations Meeting demand for combination products which have multiple features Speed to match the competition

Judicious Underwriting Organizational Solutions: Providing proper trainings to the employees etc Technology Solutions Smart Marketing Aggressive distribution

Insurance industry abroad
Japan, USA, UK and France are some of the leading countries in the world insurance market At the global level, life insurance market has been bigger and growing faster, compared to non life business

Regulations vary between the countries The UK, Chile, Hong Kong and Netherlands generally rely more on market forces Germany, Japan, Korea, Switzerland and majority of the developing countries have historically practised intensive regulation

As in the USA, regulation of the Canadian insurance market is shared by the provincial governments and the federal govt. After the passage of North American Free Trade Agreement (NAFTA), foreign investment was allowed in the insurance industry in Mexico since 1990. CNSF-Supervisory authority

Dept of Trade and Industry is responsible for regulating the UK insurance market Japan dominates Asian insurance market. Automobile insurance dominates Japan¶s non life insurance market

South Korea has also been growing substantially The insurance market in South Korea is regulated by the Finance and Economic Bureau and the Insurance Supervisory Board China¶s premier national insurer is the Peoples Insurance Company of China The African continent represents a minute percentage of the world¶s insurance market

Life insurance companies in India

Bajaj Allianz Life Insurance Company Limited Birla Sun Life Insurance Co. Ltd HDFC Standard Life Insurance Co. Ltd ICICI Prudential Life Insurance Co. Ltd ING Vysya Life Insurance Company Ltd. Life Insurance Corporation of India

Max New York Life Insurance Co. Ltd Met Life India Insurance Company Ltd. Kotak Mahindra Old Mutual Life Insurance Limited SBI Life Insurance Co. Ltd Tata AIG Life Insurance Company Limited Reliance Life Insurance Company Limited. Aviva Life Insurance Company India Limited Sahara India Life Insurance Co, Ltd.

Shriram Life Insurance Co, Ltd. Bharti AXA Life Insurance Company Ltd Future Generali India Life Insurance Company Limited IDBI Fortis Life Insurance Company Ltd., Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. AEGON Religare Life Insurance Company Limited. DLF Pramerica Life Insurance Co. Ltd. Star Union Dai-ichi Life Insurance Co. Ltd., IndiaFirst Life Insurance Company Limited

Players in Indian General Insurance market

Bajaj Allianz General Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. IFFCO Tokio General Insurance Co. Ltd. National Insurance Co.Ltd. The New India Assurance Co. Ltd. The Oriental Insurance Co. Ltd

Reliance General Insurance Co. Ltd. Royal Sundaram Alliance Insurance Co. Ltd Tata AIG General Insurance Co. Ltd. United India Insurance Co. Ltd Cholamandalam MS General Insurance Co. Ltd. HDFC ERGO General Insurance Co. Ltd Export Credit Guarantee Corporation of India Ltd.

Agriculture Insurance Co. of India Ltd. Star Health and Allied Insurance Company Limited Apollo Munich Health Insurance Company Limited Future Generali India Insurance Company Limited Universal Sompo General Insurance Co. Ltd.

Shriram General Insurance Company Limited, Bharti AXA General Insurance Company Limited Raheja QBE General Insurance Company Limited, SBI General Insurance Co. Ltd.

Currently 23 life insurers in the country Share of LIC raising to 66% Total life business growing by 22% Launching new products 
Aviva Life launched 9 new ULIP products

Contributed to 4.1% of GDP 22 general insurance companies

Scope of the Indian Insurance Market
Expected to reach 80-100% by 2012 Premium to increase between 5.1% and 6.2% by 2012 Demand for pension plans increasing 
113 million Indians expected to be over 60 by 2016 and over 179 by 2026

Government planning to raise the FDI cap to 49%

Innovative Marketing Techniques
Online health quiz by Tata AIG 
The customers can take the interactive quiz and the data will be stored in the database which will act as leads for the company

Starting of newsletters which are send to the customers which will create more rapport with them Volunteering and Supporting in local society Innovative product development

Entering in local networking events like those conducted by CII etc. Conducting seminars and distribution of business cards and newsletters Providing emergency info wallet card Automated voice message calls which can include customer appreciation message, renewal info etc.

Keychain tags which contains information about the company Sponsoring of car shows Writing and Publishing articles on insurance magazines Referral marketing exchange Customer Surveys

Send Marketing Materials with every customer communication Handwritten Letters for best customers Annual policy reviews Selecting an internet marketing specialist

Highway advertisement Advertising through eco friendliness


What is Credit Insurance
Credit insurance covers businesses and an individual¶s family members against losses resulting from the inability to repay a loan. A credit insurance policy usually provides security cover for a specific reason for which a borrower defaults.

Trade Credit Insurance 
For business entities Both domestic & export business.

Credit Life Insurance 
For individuals To ensure family doesn¶t suffer


For Businesses; 
Improved Financing Terms. Credit Terms. Cash Flow Problems. Balance sheet protection. Enter new markets safely.

For Individuals 
Frees family from the responsibility of paying your debt. Reduces your monthly costs. Provides you and your family with peace of mind. Protects you from using or losing your savings.

Rs 450 Cr Business Expects to rise to Rs 600 Cr by 2010. Still in its nascent stage. Premium ranges from 0.35% to 1% of sum insured. Main Player ± ECGC Other players are also there like Bajaj Allianz, TATA AIG, ICICI Lombard, IFFCO TOKIO & New India Assurance.


The virtual classroom Online learning Rapid e-learning Mobile learning

Participants 1)Customers 2)Agents 3)IRDA 4)Insurance company 5)sales officers

For the trainer or insurance provider Reduced overall cost Learning times reduced Increased retention Consistent delivery Expert knowledge Proof of completion and certification

Advantages for the Learner

On-demand availability Self-pacing Interactivity Confidence

Trainer or Organization
Up-front investment Technology issues Inappropriate content Cultural acceptance

Technology issues Portability Reduced social and cultural interaction

Micro insurance in India

Micro-insurance is protection of poor people and their families against specific perils like death, illness, weather catastrophes, etc. In principle, microinsurance works like any typical insurance business. But there are several things that differentiate it from normal insurance.

‡ It is group insurance that can cover thousands of customers under one contract. ‡ Micro-insurance requires an intermediary between the customer and the insurance company. Preferably, this intermediary is a non-governmental organization (NGO) or microfinance institution.

Micro Insurance Models
Partnership model Agency model Micro-agent model

Partnership Model
A partnership between an insurer and an agent that provides some kind of financial service to large numbers of low-income people. This could be a microfinance organization, an NGO, or a business that supplies precuts to large numbers of lowincome people, such as a fertilizer supplier.

Agency model
In this model the insurer uses its normal agency office and sells microinsurance products directly. The client comes to the agency office for sales and servicing of the product.

Micro-agent model
It is the invention of Tata-AIG The central building blocks of the model are Rural Community Insurance Groups (CRIGs) supervised by rural organizations such as churches, NGOs or MFIs. The leader of the CRIG is licensed as an agent. This practice reduces training costs.

Distribution Channels
Agents Formal Banks Regional Rural Banks Cooperative Bank NGOs & MFIs Post Office

Challenges in Micro Insurance Penetration
Designing of products suiting the rural market. Using the right distribution channel mix to reach the potential customer at an affordable cost. Intermediaries being able to build personal credibility with the clients. Lack of products

Social Insurance

What is it?
Government provides it on a compulsory basis It comes into picture when private parties fail to cover all risks. Government can use its power and resources to apply the insurance method in its original or modified form

Based on law, and not on contract. Cost and benefits set by the govt. Coverage is compulsory. Benefits can¶t be chosen Objective is to provide some min level of economic security and stress on free enterprise and individual initiative Focus on providing max benefits to the LIG Assures an interruption of income does not happen in the case of death or unemployment

Social Insurance in India
UNICEF and World Bank provide evidence that direct public support will lead to success of social security programs Countries with primary social security became rich. Eg: China, Cuba, Jamaica, Kuwait etc.

Need for SI in India
Large percentage employed in the unorganized sector State support negligible Social changes in the country

A comprehensive social security system includes social insurance, health insurance, disability compensation, unemployment compensation, old-age pension schemes, etc.

SI Schemes of GIC
Krishi Bima Yojana, Personal Accident social security scheme, hut insurance scheme etc. Most of them are failures due to incompatibility with the objectives.

SI Schemes of LIC

Landless Agricultural Laborers Scheme, Group Insurance Schemes, Krishi Shramik Samajik Suraksha Yojana etc. Most of them failed due to lack of awareness among people Another scheme launched was Janashree Bima Yojana to replace older schemes Objective was to provide LI to rural and urban poor


Shopassurance is a concept of selling insurance policies with retail products through supermarkets and retail chains

Insurance products + retail products First in UK by Tesco, Marks & Spencer. India by Bharti AXA Life through Bharti retail and Field fresh foods. Mallassurance ± a shopassurance format by Future Generali

Pantaloons, WestSide, Big Baazar, FoodWorld, Reliance Fresh, Shoppers Stop, Spencers and Subhiksha have built strong reputations on the shopassurance front. Wal-Mart has been selling life and mortgage insurance in addition to motor, travel and home insurance, through its stores worldwide.

‡ Kishore Biyani's Future group, which owns Pantaloons and Big Baazar, is a stakeholder in Future Generali India Life Insurance Company and Future Generali India Insurance Company ‡ Ambani's Reliance Fresh is into life and non-life insurance ‡ ITC has an insurance brokering venture called ITC Choupal

‡ ICICI Lombard has already entered into an agreement with Reliance Retail ‡ MetLife Insurance has tied up with Mumbai's Apna Bazar co-operative stores

Benefits From the view point of Insurer:Increase the volume of business. Solve problems of price competetion & compensation need of agents. Cover huge middle-class income holders. Cost cutting leading to low premium. Risk coverage through product diversification.

Benefits From the view point of Customer:Product innovation & distribution ± customer satisfaction. Low cost premium. Easy accessibility of insurance products. Hassle-free experience with minimum human intervention.

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