1 LESSON 1 INTRODUCTION TO INSURANCE

LESSON  1
INTRODUCTION TO INSURANCE
- Meenu
Asstt. Professor, SRCC,
University  of Delhi.
 
Every risk involves the loss of one or other kind. In older time, the
contribution by the person was made at the time of loss. Today, only one
business, which offers all walks of life, is insurance business. Owing to
growing complexity of life, trade and commerce, individual and business
firms and turning to insurance to manage various risks. Every individual in
this world is subject to unforeseen uncertainties which may make him
and his family vulnerable. At this place, only insurance helps him not only
to survive but also recover his loss and continue his life in a normal
manner.
 
Insurance is an important aid to commerce and industry. Every
business enterprise involves large number of risks and uncertainties. It
may involve risk to premises, plant and machinery, raw material and
other things.  Goods may be damaged or may be destroyed due to fire or
flood. Some risk can be avoided by timely precautions and some are
unavoidable and are beyond the control of a business. These unavoidable
risks can be protected by insurance. 
What is Insurance
In D.S. Hamsell words, insurance is defined “as a social device
providing financial compensation for the effects of misfortune, the
payment being made from the accumulated contributions of all parties
participating in the scheme”
In simple terms “Insurance is a co-operative device to spread the
loss caused by a particular risk over a number of persons, who are
exposed to it and who agree to insure themselves against the risk”
Thus, the insurance is
(a)  A cooperative device to spread the risk;
 (b)  the system to spread the risk over a number of persons who are
insured against the risk;
(c) the principle to share the loss of the each member of the society
on the basis of probability of loss to their risk; and
(d) the method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties
(namely insurer and insured or assured) whereby one party (insurer)
undertakes in exchange for a fixed amount of money (premium) to pay
the other party (Insured), a fixed amount of money on the happening of
certain event (death or attaining a certain age in case of life) or to pay
the amount of actual loss when it takes place through the risk insured (in
case of property)
Terminology used in definition of Insurance
-          Insurer or insurance company – The agency involved in
Insurance business is known as insurer
-          Insured/ Assured – The person who gets his property/life
insured is known as insured
-          Policy    - The agreement or contract which is put in writing
is known as a Policy
-          Premium  – The consideration in return of which the
insurer undertakes to make goods the loss or give a certain
amount in case of life insurance is known as premium

Assurance and Insurance

The two words were used synonymously at one time, but there is
fine distinction between the two. ‘Assurance’ is used in those
contracts which guarantee the payment of a certain sum on the
happening of a specified event which is bound to happen sooner or later,
for example attaining a certain age or death. Thus life policies comes
under ‘assurance’.
Insurance, on the other hand, contemplates the granting of agreed
compensation of the happening of certain events stipulated in the
contract which are not expected but which may happen, for example risk
relating to fire, accident or marine.
Nature of Insurance
 Following are the main characteristics of insurance which are
applicable to all types of insurance (life, fire, marine and general
insurance).

1. Sharing of Risks - Insurance is a device to share the financial

losses which may occur to individual or his family on the happening of
certain events
2. Co operative Device – Insurance is a co-operative device to
spread the loss caused by a particular risk over a large caused by a
particular risk over a large number of persons who are exposed to it
and who agree to insure themselves against the risk.
3. Value of Risk – Risk is evaluated at the time of insurance. There
are several methods of valuing the risk. Higher the risks, higher will be
premium
4. Payment on Contingency -If the contingency occurs, payment
is made; payment is made only for insured contingency. If there is no
contingency, no payment is made. In life insurance contract, payment
is certain because the death or the expiry of term will certainly occur.
In other insurance contract like fire, marine, the contingency may or
may not occur
5. Amount of Payment of Claim - The amount of payment
depends upon the value of loss occurred due to the particular insured
risk. The insurance is there upto that amount. In life insurance insurer
pay a fixed sum on the happening of an event or within a specified
time period.

Example – In fire insurance, if fire occurs and half the property is

destroyed, but the whole property is insured, then payment of
claim will be made only for that half building that is destroyed not
the whole amount of insured.

6. Insurance is different from Charity  - In charity, there is

no consideration but insurance is not given without premium
7. Large number of Insured Person - Insurance is spreading of
loss over a large number of persons. Larger the number of persons,
lower the cost of insurance and amount of premium and incase lower
the number of persons, higher the cost of insurance and amount of
premium.
8. Insurance is different from Gambling - In gambling, there
is no guarantee of gain, by bidding the person expose himself to risk of
losing. Whereas in insurance, by getting insured his life and property,
he protect himself against the risk of loss.

Functions of Insurance
 Functions of insurance can be divided into parts;
I     Primary functions.
II   Secondary functions.
 
I     Primary Functions
1.   Certainty of compensation of loss: Insurance provides
certainty of payment at the uncertainty of loss. The elements of
uncertainty are reduced by better planning and administration. The
insurer charges premium for providing certainty.
2.   Insurance provides protection : The main function of
insurance is to provide protection against risk of loss. The insurance
policy covers the risk of loss. The insured person is indemnified for
the actual loss suffered by him. Insurance thus provide financial
protection to the insured. Life insurance policies may also be used
as collateral security for raising loans.
3.   Risk sharing : All business concerns face the problem of risk.
Risk and insurance are interlinked with each other. Insurance, as a
device is the outcome of the existence of various risks in our day to
day life. It does not eliminate risks but it reduces the financial loss
caused by risks. Insurance spreads the whole loss over the  large
number of persons who are exposed by a particular risk.
II   Secondary Functions
1.   Prevention of losses : The insurance companies help in
prevention of losses as they join hands with those institutions which
are engaged in loss prevention measures. The reduction in losses
means that the insurance companies would  be required to pay
lesser compensations to the assured and manage to accumulate
more savings, which in turn, will assist in reducing the premiums
2.   Providing funds for investment : Insurance provide capital
for society. Accumulated funds through savings in the form of
insurance premium are invested in economic development plans or
productivity projects.
3.   Insurance increases efficiency : The insurance eliminates
the worries and miseries of losses. A person can devote his time to
other important matters for better achievement of goals.
Businessman feel more motivated  and encouraged to take risks to
enhance their profit earning. This also helps in improving their
efficiencies.
 4.   Solution to social problems : Insurance take care of many
social problems. We have insurance against industrial injuries, road
accident, old age, disability or death etc.
5.   Encouragement of savings : Insurance not only provides
protection against risks but also a number of other incentives which
encourages people to insure. Since regularity and punctuality pf
payment of premium is a perquisite for keeping the policy in force,
the insured feels compelled to save.
Principles of Insurance
The basic principles which govern the insurance are -
(1)  Utmost good faith
(2)  Insurable interest
(3)  Indemnity
(4)  Contribution
(5)  Subrogation
(6)  Causa proxima
(7)  Mitigation of loss
1.      Principle of utmost good faith : A contract of insurance is
a contract of ‘Uberrimae Fidei’ i.e., of utmost good faith. Both
insurer and insured should display the utmost good faith towards
each other in relation to the contract. In other words, each party
must reveal all material information to the other party whether
such information is asked or not. There should not be any fraud,
non disclosure or misrepresentation of material facts.
Example – in case of life insurance, the insured must revel the true
age and details of the existing illness/diseases. If he does not
disclose the true fact while getting his life insured, the insurance
company can avoid the contract.
Similarly, incase of the insurance of a building against fire, the
insured must disclose the details of the goods stored, if such goods
are of hazardous nature
A material fact means important facts which would influence the
judgment of the insurer in fixing the premium or deciding whether
he should accept the risk, on what terms. All material facts should
be disclosed in true and full form
 2.      Principle of Insurable Interest:  This principle requires
that the insured must have a insurable interest in the subject
matter of insurance. Insurance interest means some pecuniary
interest in the subject matter of contract of insurance. Insurance
interest is that interest, when the policy holders get benefited by
the existence of the subject matter and loss if there is death or
damage to the subject matter.
For example – In life insurance, a man cannot insured the life of a
stranger as he has no insurable interest in him but he can get
insured the life of himself and of persons in whose life he has a
pecuniary interest. So in the life insurance interest exists in the
following cases:-
-     Husband in the life of his wife and wife in the life of her
husband
-     Parents in the life of a child if there is pecuniary benefit
derived from the life of a   Child
 -    Creditor in the life of debtor
-     Employer in the life of an employee
-     Surety in the life of a principle debtor
            In life insurance, insurable interest must be present at the time
when the policy is taken. In fire insurance, it must be present at the time
of insurance and at the time if loss if subject matter. In marine
insurance, it must be present at the time of loss of the subject matter.
3.      Principle of Indemnity :  This principle is applicable in case
of fire and marine insurance only. It is not applicable in case of life,
personal accident and sickness insurance. A contract of indemnity
means that the insured in case of loss against which the policy has
been insured, shall be paid the actual cost of loss not exceeding the
amount of the insurance policy. The purpose of contract of
insurance is to place the insured in the same financial position, as
he was before the loss.
Example – A house is insured against fire for Rs. 50000. It is burnt down
and found that the expenditure of Rs. 30000 will restore it to its
original condition. The insurer is liable to pay only Rs. 30000.
In life insurance, principle of indemnity does not apply as there is
no question of actual loss. The insurer is required to pay a fixed
amount upon in advance in the event of accident, death or at the
expiry of the fixed term of the policy. Thus, a contract of a life
insurance is a contingent contract and not a contract of indemnity.
 4.      Principle of Contribution: The principle of contribution is a
corollary to the doctrine of indemnity. It applies to any insurance
which is a contract of indemnity. So it does not apply to life
insurance. A particular property may be insured with two or more
insurers against the same risks. In such cases, the insurers must share
the burden of payment in proportion to the amount insured by each.
If one of the insurer pays the whole loss, he is entitled to
contribution from other insurers
 
Example – B gets his house insured against fire for Rs. 10000 with
insurer P and for Rs. 20000 with insurer Q. a loss of Rs. 15000
occurs, P is liable to pay for Rs. 5000 and Q is labile to pay Rs
10000. If the whole amount pf loss is paid by Q, then Q can recover
Rs. 5000 from P. The liability of P &Q will be determined as under:
 
Sum insured with Individual insurer (i.e. P or Q )   x  Actual Loss  =
Total sum insured         
                                     
                              Liability of P =  10000   x 15000             
= Rs.5000
                                                                                 30000
 
                              Liability of Q = 20000   x 15000             
= Rs.10000
                                                                                30000
The right of contribution arises when:
(a)     There are different policies which related to the same
subject matters;
(b)     The policies cover the same period which caused the loss;
(c)     All the policies are in force at the time of loss; and
(d)    One of the insurer has paid to the insured more than his
share of loss.
5.      Principle of Subrogation :   The doctrine of subrogation is a
collorary  to the principle of indemnity and applies only to fire and
marine insurance. According to doctrine of subrogation, after the
insured is compensated for the loss caused by the damage to the
 property insured by him, the right of ownership to such property
passes to the insurer after settling the claims of the insured in
respect of the covered loss.
Example – Furniture is insured for Rs. 1 lacs against fire, it is burnt
down and the insurer pays the full value of Rs. 1 Lacs to the
insured, later on the damage Furniture is sold for Rs. 10000. The
insurer is entitled to receive the sum of Rs. 10000.        
A loss may occur accidentally or by the action or negligence of third
party. If the insured suffer a loss because of action of third party
and he is in a position to recover the loss from the insurer then
insured can not take action against third party, his right is
subrogated (substituted) to the insurer on settlement of the claim.
The insurer, therefore, can recover the claim from the third party.
If the insured recovers any compensation for the loss (due to third
party), from the third party, after he has already been indemnified
by the insurer, he holds the amount of such compensation as the
trustee if the insurer.
The insurer is entitled to the benefits out of such rights only to the
extent of the amount he has paid to the insured as compensation  
6.      Principle of Causa Proxima : Causa proxima, means
proximate cause or cause which, in a natural and unbroken series of
events, is responsible for a loss or damage. The insurer is liable for
loss only when such a loss is proximately caused by the peril insured
against. The cause should be the proximate cause and can not the
remote cause. If the risk insured is the remote cause of the loss,
then the insurer is not bound to pay compensation. The nearest
cause should be considered while determining the liability of the
insured. The insurer is liable to pay if the proximate cause is
insured.
 
Example – In a marine insurance policy, the goods were insured
against damage by sea water, some rats on the board made a hole
in a bottom of the ship causing sea water to pour into the ship and
damage the goods. Here, the proximate cause of loss is sea water
which is covered by the policy and the hole made by the rats is a
remote cause. Therefore, the insured can recover damage from the
insurer
Example – A ship was insured against loss arising from collision.  A
collision took palce resulting in a few days delay. Because of the
delay, a cargo of oranges becomes unsuitable for human
 consumption. It was held that the insurer was not liable for the the
loss because the proximate cause of loss was delay and not the
collision of the ship.
7.      Principle of Mitigation of Loss: An insured must take all
reasonable care to reduce the loss. We must act as if the property
was not insured.
Example – If a house is insured against fire, and there is accidental
fire, the owner must take all reasonable steps to keep the loss
minimum. He is supposed to take all steps which a man of ordinary
prudence will take under the circumstances to save the insured
property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1.   Benefits to Individual
2    Benefits to Business or Industry
3.   Benefits to the Society   
It can be explained as under -
1.   Benefits to Individual
(a)  Insurance provides security & safety : Insurance gives a
sense of security to the policy holder. Insurance provide security
and safety against the loss of earning at death or in old age, against
the loss at fire, against the loss at damage, destruction of property,
goods, furniture etc.
Life insurance provides protection to the dependents in case of
death of policyholders and to the policyholder in old age. Fire
insurance insured the property against loss on a fire. Similarly other
insurance provide security against the loss by indemnifying to the
extent of actual loss.
(b) Encourage Savings : Life insurance is best form of saving.
The insured person must regularly save out of his current income an
amount equal to the premium to be paid otherwise his policy get
lapsed if premium is not paid on time.
(c)  Providing Investment Opportunity : Life insurance
provide different policies in which individual can invest smoothly
and with security; like endowment policies, deferred annuities etc.
There is special exemption in the Income Tax, Wealth Tax etc.
regarding this type of investment
2    Benefits to Business or Industry
(a)  Shifting of Risk : Insurance is a social device whereby
businessmen shift specific risks to the insurance company. This
helps the businessmen to concentrate more on important business
issues.
(b) Assuring Expected Profits : An insured businessman or
policyholder can enjoy normal expected profits as he would not be
required to make provisions or allocate funds for meeting future
contingencies.
(c)  Improve Credit Standing : Insured assets are easily
accepted as security for loans by the banks and financial
institutions so insurance improve credit standing of the business
firm
(d) Business Continuation – With the help of property
insurance, the property of business is protected against disasters
and chance of closure of business is reduced
3.   Benefits to the Society  
(a)  Capital Formation : As institutional investors, insurance
companies provide funds for financing economic development. They
mobilize the saving of the people and invest these saving into more
productive channels
(b) Generating Employment Opportunities : With the
growth of the insurance business, the insurance companies are
creating more and more employment opportunities.
(c)  Promoting Social Welfare : Policies like old age pension
scheme, policies for education, marriage provide sense of security
to the policyholders and thus ensure social welfare.
(d) Helps Controlling Inflation : The insurance reduces the
inflationary pressure in two ways, first, by extracting money in
supply to the amount of premium collected and secondly, by
providing funds for production narrow down the inflationary gap.
Type of Insurance
Insurance cover various types of risks and include various insurance
policies which provide protection against various losses.
There are two different views regarding classification if insurance:-
I.   From the business point of view; and
II   From the risk points of view
I.    Business point of view
The insurance can be classified into three categories from business point
of view
1.    Life insurance;
2.   General Insurance; and
3.   Social Insurance.
1.    Life Insurance: The life insurance contract provide elements
of protection and investment after getting insurance, the
policyholder feels a sense of protection because he shall be paid a
definite sum at the death or maturity. Since a definite sum must be
paid, the element of investment is also present.   In other words,
life insurance provides against pre-mature death and a fixed sum at
the maturity of policy. At present, life insurance enjoys maximum
scope because each and every person requires the insurance.
Life insurance is a contract under which one person, in
consideration of a premium paid either in lump sum or by monthly,
quarterly, half yearly or yearly installments, undertakes to pay to
the person (for whose benefits the insurance is made), a certain
sum of money either on the death of the insured person or on the
expiry of a specified period of time.
Life insurance offers various polices according to the
requirement of the persons -
-     Term Assurance
-     Whole Life
-     Endowment Assurance  
-     Family Income Policy
-     Life Annuity Joint Life Assurance
-     Pension Plans
-     Unit Linked Plans
-     Policy for maintenance of handicapped dependent
-     Endowment Policies with Health Insurance benefits
2.   General Insurance: The general insurance includes property
insurance, liability insurance and other form of insurance. Property
insurance includes fire and marine insurance. Property of the
individual and business involves various risks like fire, theft etc.
 This need insurance Liability insurance includes motor, theft,
fidelity and machine insurance
 
Type of General Insurance policies available are -
-          Health Insurance
-          Medi- Claim Policy
-          Personal Accident Policy
-          Group Insurance Policy
-          Automobile Insurance
-          Worker’s Compensation Insurance
-          Liability Insurance
-          Aviation Insurance
-          Business Insurance
-          Fire Insurance Policy
-          Travel Insurance Policy
3.    Social Insurance: Social insurance provide protection to the
weaker sections of the society who are unable to pay the premium.
It includes pension plans, disability benefits, unemployment
benefits, sickness insurance and industrial insurance.
II   Risk Points of View
The insurance can be classified into three categories from Risk
point of view
1.   Property Insurance
2.   Liability Insurance
3.   Other forms of Insurance
1.   Property Insurance: Property of the individual and business
is exposed to risk of fire, theft marine peril etc. This needs
insurance. This is insured with the help of:-
(i)         Fire Insurance
(ii)        Marine Insurance
(iii)       Miscellaneous Insurance
 (i)   Fire Insurance: Fire insurance covers risks of fire. It is
contract of indemnity.  Fire insurance is a contract under which
the insurer agrees to indemnify the insured, in return for
payment of the premium in lump sum or by instalments, losses
suffered by the him due to destruction of or damage to the
insured property, caused by fire during an agreed period of time.
It includes losses directly caused through fire or ignition. There
are various types of fire insurance policies.
-     Consequential loss policy
-     Comprehensive policy
-     Valued policy
-     Valuable policy
-     Floating policy
-     Average policy
(ii) Marine Insurance: Marine insurance is an arrangement by
which the insurer undertakes to compensate the owner of the
ship or cargo for complete or partial loss at sea. So it provides
protection against loss because of marine perils. The marine
perils are collisions with rock, ship attack by enemies, fire etc.
Marine insurance insures ship, cargo and freight.
The following   kinds of marine policies are -
-     Voyage policy
-     Time policy
-     Valued policy
-     Hull Policy
-     Cargo Policy
-     Freight Policy
(iii)    Miscellaneous Insurance: It includes various forms of
insurance including property insurance, liability insurance,
personal injuries are also insured. The property, goods, machine,
furniture, automobile, valuable goods etc. can be insured
against the damage or destruction due to accident or
disappearance due to theft.
Miscellaneous insurance covers
-     Motor
 -     Disability
-     Engineering and aviation risks
-     Credit insurance
-     Construction risks
-     Money Insurance
-     Burglary and theft insurance
-     All risks insurance
2.   Liability Insurance: The insurer is liable top pay the damage
of the property or to compensate the loss of personal injury or
death. It includes fidelity insurance, automobile insurance and
machine insurance.    
The following   are types of liability Insurance:-
-     Third party insurance
-     Employees insurance
-     Reinsurance
3.   Other forms of Insurance: It include export credit
insurance, state employee insurance etc. whereby the insurer
guarantees to pay certain amount at the happening of certain
events.
The following are other form of Insurance-
-     Fidelity Insurance
-     Credit Insurance
-     Privilege Insurance
7 Unit 6 LESSON 7 LIFE INSURANCE
Unit 6
LESSON  7
LIFE INSURANCE
Dr Ashish Kumar
LBSIM
Introduction
Life Insurance is universally acknowledged as a tool to eliminate
risk, substitute certainty for uncertainty and ensure timely aid of the
family in the unfortunate event of the death of the breadwinner. In other
words, it is the civilized world's partial solution to the problems caused
by death. In other words, Life insurance is protection against financial
loss resulting from insured Individual’s death. In realistic terms, life
insurance provides you and your family the financial security and
certainty to deal with the aftermath of any unseen unfortunate events.
            Life Insurance is a contract for payment of a sum of money to the
person assured (or failing him/her, to the person entitled to receive the
same) on the happening of the event insured against. Usually the
insurance contract provides for the payment of an amount on the date of
maturity or at specified dates at periodic intervals or at unfortunate
death if it occurs earlier. Obviously, there is a price to be paid for this
benefit. Among other things, the contract also provides for the payment
of premiums by the assured.
In a nutshell, life insurance helps in two ways: premature death,
which leaves dependent families to fend for itself and old age without
visible means of support. Any person who has attained majority and is
eligible to enter into a valid contract can take out a life insurance policy
for himself / herself. Policies can also be taken out, subject to certain
conditions, on the life of one’s children.
The need for life insurance will change as you grow older. When
you are young, you may believe you have no need for life insurance. But
as you grow older, possibly get married and take on more responsibilities,
your desire to take out an insurance policy increases.
What is the reach and significance of Life Insurance as an economic
activity?
§  So long as the maintenance of a family depends on the earning
power of the bread-winner.
 §  So long as the earning can be destroyed by death, old age or
disability.
§  Just so long life as insurance continues to be the keystone of the
individual and those who are dependent on him.
Thus, life insurance is universal and will play a useful role as long as the
family set up survives. Life Insurance caters to an important social need.

Need For Life Insurance

The need for life insurance comes from the need to safeguard our
family. If you care for your family’s needs you will definitely consider
insurance. Today insurance has become even more important due to the
disintegration of the prevalent joint family system, a system in which a
number of generations co-existed in harmony, a system in which a sense
of financial security was always there as there were more earning
members. Times have changed and the nuclear family has emerged. 
Therefore you need to save a part of income for the future too.This is
where insurance helps us.
Factors such as fewer numbers of earning members, stress,
pollution, increased competition, higher ambitions etc. are some of the
reasons why insurance has gained importance and where insurance plays
a successful role. Insurance provides a sense of security to the income
earner as also to the family. Buying insurance frees the individual from
unnecessary financial burden that can otherwise make him spend
sleepless nights. The individual has a sense of consolation that he has
something to fall back on. From the very beginning of your life, to your
retirement age insurance can take care of all your needs. Your child
needs good education to mold him into a good citizen. After his schooling
he need to go for higher studies, to gain a professional edge over the
others - a necessity in this age where cut-throat competition is the rule.
His career needs have to be fulfilled. Insurance is a must also because of
the uncertain future adversities of life. Accidents, illnesses, disability
etc. are facts of life which can be extremely devastating. Disability can
be taken care of by insurance. Your family will not have to go through the
grind due to your present inability.
Moreover, retirement, an age when every individual has almost
fulfilled his responsibilities and looks forward to relaxing can be painful if
not planned properly. Have we considered the increasing inflation and
taxes? Will our investment offer us attractive returns under such
circumstances? Will it take care of our family after us? An insurance
policy will definitely take care of these and a lot more. Insurance has
become a necessity today. It provides timely financial as also rewards
with bonuses. Life Insurance has come a long way from the earlier days
when it was originally conceived as a risk covering medium for short
periods of time, covering temporary risk situations, such as sea voyages.
Therefore after going through the discussion let us summarize our
points and understand the need of life insurance :
a) Temporary needs / threats: The original purpose of life
insurance remains an important element, namely providing for
replacement of income on death etc.
b) Regular Savings / Family Protection: Providing for one's
family and oneself, as a medium to long term exercise (through a series
of regular payment of premiums). This has become more relevant in
recent times as people seek financial independence for their family.
c) Investment: Put simply, the building up of savings while
safeguarding it from the ravages of inflation. Unlike regular saving
products, investment products are traditionally lump sum investments,
where the individual makes a one off payment.
d) Old age provision: Provision for later years becomes increasingly
necessary, especially in a changing cultural and social environment. One
can buy a suitable insurance policy, which will provide periodical
payments in one's old age.
e) Children benefit: Provision for the education, marriage and start
in life for the children.
f) Special needs provision: Protection against loss arising out of
accident, disability, sickness, loan repayment on death.
g) Tax benefits: Under the Income Tax Act, premium paid is allowed
as a deduction from the total income under section 80C.
 
Why Is Insurance Superior To Other Form Of Savings?
§  An immediate estate is created in favor of the policy holder
§  Protection in case of death
§  Liquidity in case of need
§  Tax relief – income tax, wealth tax etc.
§  Policies can be offered as collateral security
§  Policies can be taken under M.W.P. Act 1874, to protect against
creditors
Let us take an example to understand the need for insurance:
Mr. Atul is 45 and self-employed. His wife Nandini, who is a housewife,
looks after their two children aged 3 and 7 years. They stay in a rented
accommodation, where the rent is 15,000 rupees per month. Mr. Atul has
taken up a loan of Rs. 2 lakh. His monthly earnings on average are 40,000
rupees. Mr. Atul passes away in an unfortunate road accident. What are
some of the financial implications of his death on his family.
There may be several financial implications on his family. Some of these
are:
a) The monthly income, previously provided by Mr. Atul would stop.
b) His wife and children may have to seek financial assistance from other
relatives.
c) His wife may not have enough money to pay back the loan of Rs. 2
lakhs.
d) The family may have to move into a cheaper accommodation.
e) His widow may have to take up work to earn money.
f) The education of his children may suffer.
 
This simple example illustrates the impact premature death can have on
a family, where the main earner has no life cover. Had Mr. Atul taken life
cover, his family would not have faced such hardships in the event of his
unfortunate death. A simple life insurance policy could have provided Mr.
Atul's family with a lump sum that could have been invested to provide an
income equal to all or part of his income. In simple words, insurance
protects against untimely losses. Insurance has been found useful in the
lives of persons both in the short term and long term. Short term needs
like sudden medical costs and long term needs like marriage expenses etc
can be met with using life insurance.
Basic Principles Of Life Insurance Contract.
Life insurance is a contract under which the insurer (Insurance
Company) in consideration of a premium paid undertakes to pay a fixed
sum of money on the death of the insured or on the expiry of a specified
period of time whichever is earlier. So basic principles of life insurance
contract are as follows:
1. Insurable interest: The insured must have insurable interest in the life
assured. In absence of insurable interest, Contract of insurance is void.
Insurable interest must be present at the time of entering into contract
with insurance company for life insurance. It is not necessary that the
assured should have insurable interest at the time of maturity
also.Insurable interest exists in the following cases:
a)      A person has an unlimited insurable interest in his/her own life.
b)      A person has an insurable interest in the life of his/her spouse.
c)      A father has an insurable interest in the life of his son or daughter on
whom he is dependent. Likewise a son may have insurable interest in life
of his parents.
d)     A creditor has an insurable interest in the life of the debtor, to the
extent of the debt.
e)      A servant employed for a specified period has insurable interest in the
life of his employer.
2. Utmost good faith: The contract of life insurance is a contract of
utmost good faith. The insured should be open and truthful and should
not conceal any material fact in giving information to the insurance
company, while entering into a contract with insurance company.
Misrepresentation or concealment of any fact will entitle the insurer to
repudiate the contract if he wishes to do so.
3.  A contract of indemnity: The life insurance contract is not a contract
of indemnity. A Contract of life insurance is not a contract of indemnity.
The loss of life cannot be compensated and only a fixed sum of money is
paid in the event of death of the insured. So, the life insurance contract
is not a contract of indemnity. The loss resulting from the death of life
assured cannot be calculated in terms of money.

Types Of Insurance Policies

Though there are a lot of policies available in the market under
different names and by different companies, the policies can broadly be
classified into the following categories:
 Term Insurance Policy
 Whole Life Policy
 Universal Life Insurance Policy
 Money Back Policy
 Endowment Policy
 Pension Plans or Annuities

§  Joint Life Policy

§  Group Insurance Policy
§  Unit Linked Insurance Plan
Term Insurance Policy
Term insurance provides life insurance coverage for a specific
period of time. Presently one year, five year, ten year, and fifteen year,
are the periods one can buy term life insurance policy. If the insured
person dies during the period the insurance is in force, the insurance
company pays off the face value of the policy. If the insured lives longer
than the term of the policy, the policy is no longer in effect and nothing
is paid. Term insurance is the least expensive form of life insurance. It is
commonly used when the insured needs temporary protection or can’t
afford the premiums for the other forms of life insurance. The other
reason an insured may want term insurance is to purchase life insurance
and invest the difference between the term policy and cash value policy
elsewhere.
Term insurance comes in several forms. There is renewable & non –
renewable. Non – renewable means that on the expiry of your policy you
must go under another physical test and filling out another questionnaire.
On the other hand, with renewable policy you don’t need to undergo
these formalities again and you automatically re – qualify to continue
your policy.Then there is convertible & non – convertible policy.
Convertible policy is the one which can be converted into a permanent
policy, whereas non – convertible is the one which cannot be converted
into a permanent policy or in other words the policy cannot be converted
to any other form of life insurance policy.

Whole Life Policy   

The whole life policy provides insurance coverage for the entire life
of the insured regardless of how many years the insurance is paid.
Premiums may be paid throughout the insured’s entire life or for a
portion of his life. Additionally, the premium can be paid in one lump –
sum when the policy is taken out. This is referred to as a single premium
whole life policy. When the premium is paid throughout the life it is
known as straight life policy, but when the premium is paid for a
specified period of time it is known as limited life policy.
            The premiums are higher for Whole life insurance as opposed to
term insurance. The reason for this is that the policy has investment
features as well as death benefits. The cash value portion of the whole
life insurance belongs to the insured. One can take it out in the form of
policy loans or can cash the policy in. Another advantage of whole life
insurance is that the premiums are fixed, i.e. regardless of your age, you
pay the same amount for the coverage each year.
Universal Life Insurance Policy
Universal Life is a type of permanent life insurance based on a cash
value. That is, the policy is established with the insurer where premium
payments above the cost of insurance are credited to the cash value. The
cash value is credited each month with interest, and the policy is debited
each month by a cost of insurance (COI) charge, and any other policy
charges and fees which are drawn from the cash value if no premium
payment is made that month. The interest credited to the account is
determined by the insurer; sometimes it is pegged to a financial index such
as a bond or other interest rate index.

Money Back Policy

Money back policies provide for periodic payments of partial
survival benefits during the term of the policy, as long as the policy
holder is alive. An important feature of this type of policies is that in the
event of the death at any time within the policy term, the death claim
comprises the full sum assured, without deduction of any survival benefit
amounts, which may have already been paid as money back components.
Similarly the bonus is also calculated on the entire sum assured.

Endowment Policy
An endowment policy covers the risk for a specified period, at the
end of which the sum assured is paid back to the policy holder, along with
the bonus accumulated during the term of the policy. This feature of
payment of endowment to the policy holder when the policy’s term is
complete is responsible for the popularity of endowment policies. The
amount received on maturity can either be utilized either to buy an
annuity policy to generate a monthly pension for the rest of the life, or
put it into any other suitable investment of our choice. This is one
important benefit which the endowment policy offers over a whole life
insurance policy.
Overall, endowment policies are the most suitable of all insurance
plans for covering the risks to a family breadwinner’s life. Not only do
these policies provide financial risk cover for the family, were the policy
holder to die prematurely but the insurance amount is also repaid once
this risk is over. The endowment amount can then be used for meeting
major expenditures such as children’s education and marriage, etc.
Alternately, the endowment sum is available for a suitable
investment geared to providing an income for the remainder of one’s own
life. These types of plans are particularly suitable to those who other
than having a risk cover are also interested in a savings component
simultaneously.                                                              
Pension Plan or Annuities
            An annuity is an investment that we make, either in a single lump
sum or through installments paid over a certain number of years, in
return for which we receive a specific sum every year, every half – year
or every month, either for whole life or a fixed number of years. After
the death of an annuitant or after the fixed annuity period expires for
annuity payments, the invested annuity fund is refunded, perhaps along
with a small addition, calculated at that time. Annuities differ from all
the other form of life insurance in one fundamental way – an annuity does
not provide any life insurance cover but, instead offers a guaranteed
income either for life or a certain period.
            Typically annuities are bought to generate income during one’s
retired life, which is why they are also called pension plans. Annuity
premiums and payments are fixed with reference to the duration of
human life.
Joint Life Policy
Joint life insurance policies are similar to endowment policies as
they too offer maturity benefits to the policyholders, apart form
covering risks like all life insurance policies. But joint life policies are
categorized separately as they cover two lives simultaneously, thus
offering a unique advantage in some cases, notably, for a married
couple or for partners in a business firm. Under a joint life policy the
sum assured is payable on the first death and again on the death of the
survivor during the term of the policy. Vested bonuses would also be
paid besides the sum assured after the death of the survivor. If one or
both the lives survive to the maturity date, the sum assured as well as
the vested bonuses are payable on the maturity date. The premiums
payable cease on the first death or on the expiry of the selected term,
whichever is earlier.
Accident benefits equivalent to the sum assured are available
under Joint life insurance policies on the first death. In case both the
lives are covered under Double Accident Benefit (DAB), the surviving life
is covered under DAB until the end of the policy year, in which the first
life dies under the cover of the policy. Both the policy holders can avail
these benefits, if
·            Both the policy holders die simultaneously owing to
an accident. To avoid such an eventuality, nomination is
allowed under the policy OR
 ·            Both of them die within the specified period as a
result of the same accident OR
·            The second policy holder also dies in the same policy
year as result of another accident. To avoid such an
eventuality, nomination is allowed under the policy.
Joint life insurance policy is ideal for married couples as it provides
financial security and risk protection to both the individuals.
Group Insurance Policy
Group insurance offers life insurance protection under group
policies to various groups such as employers-employees, professionals,
co-operatives, weaker sections of society, etc. It also provides insurance
coverage for people in certain approved occupations at the lowest
possible premium cost. Group insurance plans have low premiums. Such
plans are particularly beneficial to those for whom other regular policies
are a costlier proposition. Group insurance plans extend cover to large
segments of the population including those who cannot afford individual
insurance.   A number of group insurance schemes have been designed for
various groups. These include employer-employee groups, associations of
professionals (such as doctors, lawyers, chartered accountants etc.),
members of cooperative banks, welfare funds, credit societies and
weaker sections of society.
Many employees see group insurance coverage as a major perk for
faithful company service. The premium payments are usually deducted
automatically from the pay itself. Some companies will absorb the entire
cost of the policy as a benefit for employees. The main advantages of the
group insurance schemes are low premium and simple insurability
conditions. Premiums are based upon age combination of members,
occupation and working conditions of the group.
A major feature of group insurance is that the premium cost on an
individual basis may not be risk-based. Instead it is the same amount for
all the insured persons in the group. Another distinctive feature is that
under group insurance a person will normally remain covered as long as
he or she continues to work for a certain employer and pays their
insurance premiums. This is different from the individual insurance policy
where the insurance company often has the right to reject the renewal of
a person's policy, depending on his risk profile.
Unit Linked Insurance Plan
Unit linked insurance plan (ULIP) is life insurance solution that
provides for the benefits of risk protection and flexibility in investment.
The investment is denoted as units and is represented by the value that it
 has attained called as Net Asset Value (NAV). The policy value at any
time varies according to the value of the underlying assets at the time. 
In a ULIP, the invested amount of the premiums after deducting for all
the charges and premium for risk cover under all policies in a particular
fund as chosen by the policy holders are pooled together to form a Unit
fund. A Unit is the component of the Fund in a Unit Linked Insurance
Policy. 
            The returns in a ULIP depend upon the performance of the fund in
the capital market. ULIP investors have the option of investing across
various schemes, i.e, diversified equity funds, balanced funds, debt funds
etc. It is important to remember that in a ULIP, the investment risk is
generally borne by the investor. In a ULIP, investors have the choice of
investing in a lump sum (single premium) or making premium payments
on an annual, half-yearly, quarterly or monthly basis. Investors also have
the flexibility to alter the premium amount during the policy's tenure. For
example, if an individual has surplus funds, he can enhance the
contribution in ULIP. Conversely an individual faced with a liquidity
crunch has the option of paying a lower amount (the difference being
adjusted in the accumulated value of his ULIP). ULIP investors can shift
their investments across various plans/asset classes (diversified equity
funds, balanced funds, debt funds) either at a nominal or no cost.
Expenses Charged in a ULIP are as follows: 
Premium Allocation Charge: A percentage of the premium is appropriated
towards charges initial and renewal expenses apart from commission
expenses before allocating the units under the policy.
·         Mortality Charges: These are charges for the cost of insurance
coverage and depend on number of factors such as age, amount of
coverage, state of health etc.
·         Fund Management Fees: Fees levied for management of the fund and
is deducted before arriving at the NAV.
·         Administration Charges: This is the charge for administration of the
plan and is levied by cancellation of units.
·         Surrender Charges: Deducted for premature partial or full
encashment of units. 
Fund Switching Charge: Usually a limited number of fund switches are
allowed each year without charge, with subsequent switches, subject to a
charge.
·         Service Tax Deductions: Service tax is deducted from the risk portion
of the premium.
Pricing
 For life insurance policy you must pay a price in terms of premium.
All insurance companies employ actuaries to fix the premiums of their
policies. The actuaries need to consider various factors (both measurable
and non-measurable) and build them into the premiums. There are some
factors that the actuaries already have information on (like mortality
rate, claims paid percentages, etc.,) and the rest of the information
comes from the applicant. We will first look at the information provided
by the applicants that play a part in Life Insurance Price, one by one.
·         Age: Young, fit people who are just about to begin the most
productive part of their lives are the ones who get the cheapest policies.
The premium component gradually increases as the age of the applicant
progresses. There is no intentional discrimination here against older
people. Mortality trends state that the chances of mortality increase is
directly proportional to age increase and the insurance companies base
their calculations on the age risk factor. So, the older you are the higher
you pay!
·         Type of policy: There are various types of policies; term, partial
payment, pension plans, cash value…..etc., As a general rule, you can be
sure that premiums increase directly proportional to the cash value
benefits and complexity. Term plans are the cheapest and any other
investment based policy will cost you higher. The coverage amount also
plays a part. Higher the coverage, higher the premium.
·         Duration of the policy: This plays a more important part in wealth
building insurance policies but even otherwise, longer duration policies
are priced cheaper.
·         Medical history and health: History of previous illness is a risk while
underwriting a policy and therefore carries such people carry higher
premium. This is a very important factor and if an applicant has illness
history or have existing ailments, they have to be disclosed to the
company, otherwise, the insurance company will outright reject the
claim (when the need arises) citing suppression of vital information.
Height and weight details are also used as factors.
·         Personal habits and occupation: Habitual smokers and drinkers will
be charged higher, as will people employed in hazardous jobs (Fire
fighters, scuba divers). Some hobbies (bungee jumping, car racing) are
also deemed high risk and will attract higher premiums.
·         Other factors: Apart from the information provided by the applicant,
the insurance actuaries need to input many other factors listed below:
o   Mortality – Life insurance is based on the sharing of the risk
of death by a large group of people. The amount at risk must
 be known to predict the cost to each member of the group.
Mortality tables are used to give the company a basic
estimate of how much money it will need to pay for death
claims each year. By using a mortality table a life insurer can
determine the average life expectancy for each age group.
o   Interest – The second factor used in calculating the premium
is interest earnings. Companies invest your premiums in
bonds, stocks, mortgages, real estate, etc., and assume they
will earn a certain rate of interest on these invested funds.
o        Expense – The third consideration is the expenses
of operating the company. The company estimates
such expenses as salaries, agents’ compensation, rent,
legal fees, postage, etc. The amount charged to cover
each policy’s share of expenses of operation is called
the expense loading. This is a cost area that can vary
from company to company based on its operations and
efficiency
Underwriting
The process of assessing the risk profile of the life insurance
applicant whether individual or group and then fixing the rate of premium
is called risk classification or underwriting. The methods by which an
insurer manages risks are:
[a] Risk avoidance
[b] Risk transfer
[c] Risk sharing, and
[d] Risk acceptance and management.
Risk acceptance would be through a process of underwriting. The typical
underwriting decisions [on a proposal] of a life insurer are as follows:
·         Accepted [on ordinary terms/rates], that is, the insurer has
decided to undertake the risk on the proposed life on standard
terms of the company.
·         Accepted [on terms other than those suggested] and offered
some other plan /term / other condition like imposing an extra
premium to meet higher health/occupation risk etc. for
undertaking risk on the proposed life.
·         Postponed, consideration of the proposal is postponed
anticipating that the effects of some of the high risk factors faced
by the proposed life may come down in future.
·         Declined, the proposed life would almost definitely result in a
claim by death within the proposed term.
Underwriters of insurance Companies arrive at the above decisions, or
rather conclusions, based on the analysis of the risks they are likely to
face on the life of the proposer or applicant for insurance. Risks on a life
are associated with his family history, personal history, individual and
social habits, occupation, hobbies and the future possibilities of joining
the armed forces or Para trooping, diving or hazardous researches etc.
Broadly speaking these factors usually consider for appraising the risk of
an applicant:
·         Age
·         Sex (except in several states that require "uni-sex"
rates, even though actuarial data shows women live
longer than men)
·         Height and weight,
·         Health history (and often family health history --
parents and siblings),
·         The purpose of the insurance (such as for estate
planning, or business or for family protection)
·         Marital status and number of children
·         The amount of insurance the applicant already has, and
any additional insurance s/he proposes to buy (as people
with far more life insurance than they need tend to be
poor insurance risks)
·         Occupation (some are hazardous, and increase the risk
of death)
·         Income (to help determine suitability)
·         Smoking or tobacco use (this is an important factor, as
smokers have shorter lives)
·         Alcohol (excessive drinking seriously hurts life
expectancy)
·         Certain hobbies (such as race car driving, hang-gliding,
piloting non-commercial aircraft) and
·         Foreign travel (certain foreign travel is risky).
 
            The guidelines and regulations for underwriting are different
for different insurance companies. As mentioned above, the life
insurance underwriting process takes a series of factors into
consideration to decide the premium amount for an applicant for a
particular coverage policy. After an individual applies for a life insurance
quote, the insurance company will circulate a questionnaire form that the
applicant has to fill up with the answers. Underwriting is confidential,
which is maintained under strict regulations. Depending upon the
underwriting standards of the insurance company, the questions may
vary. After the applicant fills up the answers to these queries, the form is
sent back to the insurance company.
            Once the form is received, the underwriters of the life
insurance company review the risk profile of the applicant and
accordingly, the final premium amount is charged to the policyholder. In
general there are four categories of risks, which are classified according
to the standard underwriting guidelines. The four risk classifications
include proffered (charge with low premium), standard (standard
premium amount), rated (relatively high premium amount) and declined
(uninsurable). This way, life insurance underwriting process is a crucial
step to calculate the premium amount for policyholders.
For better understanding about life insurance underwriting, let's
take an example of two individuals applying for the same life insurance
quote. Let's consider that first is below 30 years without any underlying
health condition (low death risk), while the second applicant is above 45
years with hypertension condition (high death risk). With underwriting
process, the death risks for the two applicants are examined, after which
the insurance company will charge a low premium for the first applicant
(preferred), while charging a higher premium rate for the second
policyholder (rated).
Documentation
The contract for the life insurance starts with the proposal made by
the proposer in standard application form available with insurance
company and then various other documents are prepared.
Proposal Forms
The proposal form is a standardized form. The proposal form is a type of
an application form, which a proposer has to fill all the relevant details
about the life to be assured. The agent has the proposal form with him
provided by the insurer. There are different types of policies and so the
different types of proposal forms are there. It has the entire details
regarding the duration of the policy, type of plan, mode of payment, etc.
A proposal form is to be to be completed by the proposer in his own
handwriting and signed in the presence of the agent. The proposal form
contains a declaration at the end, to ensure the authenticity of the
information given.
Usually the proposal form contains the following information to be
filled by the prospective insured:
1. Name of life assured
2. Address
3. Date of Birth
4. Occupation
5. Age
6. Name of the employer (if any)
7. Sum assured of the proposed policy
8. Number and age of the family members
9. Family medical history
10. Proposer’s Medical history
Besides these there are other related forms regarding health, occupation,
the agent’s confidential report and many others. In addition there is a
consent letter which shows the consent of the life assured to the
imposition of some clause or extra premium, duly signed by the life
assured.
First Premium Receipt
The agent provides the proposal form and other related documents
and the underwriter examines the form and other documents and then
determines the terms on which to accept the risk or reject the same. The
consent of the person assured is obtained in the form of payment of
premium. After receiving the payment, the insurance company issues the
First Premium Receipt, which acknowledges the proposal of the life-
assured. It contains all particulars of the policy. It has the details of the
next premium to be paid. The policy bond is sent within 45-50 days from
the date of first premium receipt to the life assured. The First Premium
Receipt is an important and powerful document on the basis of which the
life-assured can ask the insurer to issue the policy bond, which is treated
as Evidence of the Contract of Life assurance.
Policy Bond
After issuing the First Premium Receipt, the next step is that of the
insurer of sending the policy bond to the life-assured and this document is
also known as Policy Contract, which is the ultimate evidence of the life-
 assured. The Policy Contract contains all the terms and conditions of the
contract between insurance company and the life assured, duly stamped
as per the Indian Stamp Act. The policy is sent to the life assured by the
insurer. The policy contract contains the details of the insurance such as
duration of the policy, the type of policy, sum assured, premium amount
and the date of maturity, extra premium, nominee, assignee etc.
Alterations and Endorsements
Endorsement is an authenticated noting on the back of Policy
Contract and forms a part of the contract. In the case of lack of space,
the endorsements can be put on a separated sheet of papers and
attached to the policy. Endorsements are required because life assurance
is a long-term contract and the life assured may want certain changes in
the terms of contract. There are  different type of alterations or
modifications that can be made during the tenure of the policy such as
changes regarding increase or reduction in the sum assured, mode of
payment of premium, modification related on account of mistakes in the
preparation of the policy by the insurer, modifications related to
reduction in term, conversion from “Non-profit” to “With Profit” and
similar other like change of name, plan-term and so on.
Reminding Notice
It is basically information sent by the insurer to the policyholder,
reminding the latter about the due date of a particular premium and the
amount of premium. However it is not the duty of the insurance company
(insurer) to do so. The insurer also informs the policyholder about the
lapse of a policy if the premiums are not paid in time.
Other Documents
Apart from other documents there are some other specialized
documents, which are as follows:
i.        Proposal on the lives of Non Resident Indians, which consists of some
special questionnaire asking for relevant information.
ii.      Partnership Insurance which consist of papers asking for the Profit &
Loss account of the firm for the last three years, the insurance of the
partner, the partnership deed and the deed of variation allowing the
purchase of the assurance policy.
Policy Servicing And Settlement Options 
Servicing of policy holders include:
(1) Proof of age: The age of the life assured must be proved either
during the period of the policy or after the claim arises, because age is an
important factor for calculating at the rate of premium to be charged for
a particular policy.
(2) Nomination: The Policyholder should be advised for nomination, if
no nomination was effected. When nomination or assignment is effected
by a policyholder, it should be scrutinized thoroughly to see whether it
was in order or not. If there is any material omission or mistake, it may
be returned to the policyholder or the assignee with a covering letter
giving instructions as to the corrections to be made in the assignment or
nomination. When a document is sent for correction, reminders should be
sent every fortnight until the requirements are complied with. The
policyholder should follow the instructions printed on the back of
assignment or nomination.
(3) Assignment: Assignment is a means whereby the right and title
under a policy gets transferred from assignor to assignee. Assignor is the
policyholder who transfers the title and assignee is the person who gets
the title of the policy from the assignor. Assignment can be made either
by endorsement on the policy or on a separate paper duly stamped.
Assignor must be a major. Assignment must be in writing and assignor’s
signature along with a witness is required. Notice of assignment should be
submitted to the insurer by the assignor.
(4) Alteration / Changes: After issue of a Policy, the Policy holder
desires an alteration in the terms thereof to suit his convenience, e.g.,
an alteration in the mode of payment of premiums, Plan of Assurance,
reduction in the premium-paying period, etc. An alteration may be
allowed provided the policy is in force and has not become fully paid up.
It is stated in the prospectus that no alteration from one class of
Assurance to another subject to a lower scale of premium is permissible.
However, an alteration from the with profits Limited Payment plan to the
with profits Endowment Assurance Plan with premiums payable for a term
not exceeding the original premium-paying term will be allowed even if
the premium payable on alteration is lower. Alterations from certain
Classes of Assurance to certain other Classes are not allowed at all.
(5) Paid up value & surrender value: When a policyholder wants
to terminate the policy, he may convert the same into paid-up policy. In
this case, the amount of paid-up value is payable to the insured only
after the full term (maturity) of the policy. The option of converting the
policy into paid up policy and stop paying the further premiums can be
taken only if the policy has been in force for at least two years.
If the insured is unwilling or unable to pay the premium of the
policy, he may surrender the policy and ask for its surrender value.
Surrender value is the cash value payable by the insurance on voluntary
 termination of the policy contract by the life assured before the expiry of
the term of the policy. Surrender value depends on the type of policy and
number of premia paid. A policy can be surrendered only when the
premia is paid for the three years.
Settlement:
The easy and timely settlement of a valid claim is an important
function of an insurance company. The yardstick to judge insurance
company’s efficiency is as to how quick the claim settlement is. The
speed, kindness and fairness with which an insurer handles claims show
the maturity of the company and may lead to great satisfaction of the
client. In every insurance company claim handling is of immense
importance. It is the liability of the insurance company to honour valid
and legal claims. At the same the company must identify the fraudulent
and invalid claims. A claim may arise:
·         On death of Policyholder before the maturity date.
·         On maturity, i.e. after expiry of the endowment period specified in
the policy contract when the policy money becomes payable.
 
Certain features are common to all life insurance claims. These are:
1. Policy must be in force at the time of claims.
2. Insured must be covered by the policy.
3. Nothing was outstanding to the insurer at the time of claim.
4. Claim is covered by the policy.
Death Claims
I. Intimation of Death
The death of the life assured has to be intimated in writing to the
insurer. It can be done by the Assignee or nominee under the policy or
from a person representing such Assignee or Nominee or when there is no
nomination or assignment by a relative of the life assured, the employer,
the agent or the development officer. Where policy is assigned to a
creditor or a bank for valuable consideration, intimation of death may be
received from such assignee. Sometimes, the office need not wait till the
intimation of claim is received. The concerned agent, newspaper reports
in case of accidents or air crashes, obituary columns may give information
and claim action can be started. However, the identity of the deceased
should be established carefully. The intimation of the death of the life
assured by the claimant should contain the following particulars: (1) his
 or her relationship with the deceased, (2) the name of the policyholder,
(3) the number/s of the policy/policies, (4) the date of death (5) the
cause of death and (6) sum assured etc. If any of these particulars are
missing the claimant can be asked to furnish the same to the insurer. The
intimation must satisfy two conditions (1) It must establish properly the
identity of the deceased person as the life assured under the policy, (2) It
must be from a concerned person.
II. Proof of Death and Other Documents
In case of claim by death, after the receiving the intimation of
death the insurance company ensures that the insurance policy has been
in force for the sum assured on the date of death and the intimation has
been received from assignee, nominee or other claimant.
The following documents are required:
(i) Certificate of death.
(ii) Proof of age of the life assured (if not already given).
(iii) Deeds of assignment / reassignments.
(iv) Policy document.
(v) Form of discharge.
If the claim has accrued within three years from the beginning of the
policy, the following additional requirements may be called for:
a)      Statement from the hospital if the deceased had been admitted to
hospital.
b)      Certificate of medical attendant of the deceased giving details of
his/her last illness.
c)      Certificate of cremation or burial to be given by a person of known
character and responsibility present at the cremation or burial of the
body of the deceased.
d)     Certificate by employer if the deceased was an employee.
Proof of death and other documents to be submitted will depend upon
the cause of death and circumstances of each case.
1.      In case of an air crash the certificate from the airline authorities
would be necessary certifying that the assured was a passenger on the
plane. In case of ship accident a certified extract from the logbook of the
ship is required. In case of sudden cardiac arrest, murder the doctors’
certificate may not be available.
2.      The insurance may waive strict evidence of title if the sum assured of
the policy is small and there is no dispute among the survivors of the
policy moneys.
3.      If the life assured had a death due to accident, suicide or unknown
cause the police inquest report, panchanama, post mortem report, etc
would be required.
If by any chance policy contract is lost, advertisement of the lost of
policy is to be given. Payment can be made on the basis of an indemnity
given by the policyholder. If the deceased has taken out policies with
more than one branch and the claimant has produced proof of death to
any one of them and desires that the other branch or branches, may act
on the same proof, his request should be complied with. The Branch
requiring proof of death should directly call for the certified copies from
the branch concerned.
III. Net Payable Amount of Claim
After receiving the required documents the company calculates the
amount payable under the policy. For this purpose, a form is filled in
which the particulars of the policy, assignment, nomination, bonus etc.
should be entered by reference to the Policy Ledger Sheet. If a loan
exists under the policy, then the section dealing with loan is contacted to
give the details of outstanding
loan and interest amount, which is deducted from the gross policy
amount to calculate net payable claim amount. The net amount of claim
payable is calculated and is called payment voucher. In the case of ‘in
force’ policy unpaid premiums if any due before the Assured’s death with
late fee where necessary and the premium falling due in the policy year
current at the time of death should be deducted from the claim amount.
Maturity Claims
If the life insured survives to the full term, then basic sum assured
is payable. This payment by the insurer to the insured on the date of
maturity is called maturity payment. The amount payable at the time of
the maturity includes a sum assured and bonus/incentives. The insurer
sends in advance the intimation to the insured with a blank discharge
form for filling various details in it. It is to be returned to the office along
with
• Original Policy document
• Age proof if age is not already submitted
• Assignment /reassignment, if any. .
 Legally no claim is acceptable in respect for a lapsed policy or death of
the Life assured happening within 3 years from the date of beginning of
the policy. However, some concessions are given and payment of claims is
made:
·         If the Life assured had paid at least 3 years' premiums and thereafter
if premiums have not been paid, the nominees/life assured get
proportionate paid up value.
·         In the event of the death of' the Life assured within 3 years and the
policy is under the lapsed position, nothing is payable.
Procedure of the Maturity Claims
Settlement procedure for maturity claim is simple after receipt of
completed and stamped discharge form from the person entitled to the
policy money along with policy documents, claim amount will be paid by
account payee cheque.
·         If the life assured is reported to have died after the date of maturity
but before the receipt is discharged, the claim is to be treated as the
maturity claim and paid to the legal heirs. In this case death certificate
and evidence of title is required.
·         Where the assured is known to be mentally deranged, a certificate
from the court of law under the Indian Lunacy Act appointing a person to
act as guardian to manage the properties of the lunatic should be called.
Additional Benefits apart from Regular Claims
Double Accident Benefit: For claiming the benefits under the Double
Accident Benefit the claimant has to produce the proof to the satisfaction
of the Corporation that the accident is defined as per the policy
conditions. Normally for claiming this benefit documents like FIR, Post-
mortem Report are required.
Disability Benefit Claims include waiver of all premiums to be paid in
future till the expiry of the policy of the life assured if a person is totally
and permanently disabled and cannot earn any
wage/compensation/profit as a result of the accident.
Presently, all over the country there are 12 centers where the
Insurance Ombudsman has been appointed. They are part of grievance
redressal machinery. They consider the complaints regarding disputes
related to premiums, claims etc.
Distribution Channel
The channel of distribution (place) is an important ingredient of
marketing mix as however useful the product might be and how so ever
suitable its price be, unless and until the products/services are mad
available to consumers at ‘centres of convenient buying’ the consumers
will not be buying the same. Insurance being a service business requires
marketing department to play a key role in delivery of service.
The marketing department conducts research for identification of
target customers, help in maintaining and promoting the distribution
system and also plays an active role in development of new products. It is
the most vibrant department in an insurance organization since it has to
necessarily deal with all the other department of the organization.
Insurance business is business of law of large numbers. The law requires
the insurer to attract a sufficient number of exposures to allow credible
ratio prediction.
The major task of sales managers in charge of the sales section of
insurance company is the supervision of the sales functions of the
branches. This section is also responsible for spreading awareness among
the general public about the benefits of life Insurance. Sales training
section is entrusted with responsibility for training in product, in selling
and sales planning in the
personnel such as development officers and agents.
            Insurance policies are mainly sold by the agents of insurance
company. Beside insurance agents, Banks and cooperative societies have
emerged as strong business partners amongst alternate channels in terms
of first premium mobilization.
Life Insurance Sector In India
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
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 19  January,
th

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.
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 24
general insurance companies including the ECGC and Agriculture
 Insurance Corporation of India and 23 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 long-
term funds for infrastructure development at the same time
strengthening the risk taking ability of the country.
Check List For Buying The Right Policy
DO’S
§  Look out for no commission policies.
“ low load “ life insurance policies have fewer expenses built into
them, such as agent commissions and fees for marketing. This can
translate into lower premiums or for variable life insurance, these
lower expenses mean that a higher percentage of your premium
goes to work for you right away so that you can build your cash
faster.
§  Buy as soon as the need exists
An advantage to buy life insurance earlier in life is that your
premiums will be low. As you grow old, the likelihood that you will
die increases, which is why older individuals pay more for life
insurance.
DONT’S
§  Don’t buy a guaranteed issue policy if you are healthy
“ Guaranteed issue” term life insurance policies normally require
no medical exam and are sold to anyone who comes along. While
these policies can be a great way for people who have medical
problems to obtain a life insurance policy, if you are healthy don’t
buy these policies as you will get better rates by taking the tests.
§  Don’t buy more or less than you need
Many experts say the best way to pinpoint a smart life insurance
benefit amount is through a needs analysis which can be broken
into a simple formula
Short term needs + long term needs – resources  = how much life
insurance you need
Self-Assessment:
1.      Explain Fundamental Principles of Life Insurance contract.
2.      Discuss various documents prepared by the insurance company while
entering a life insurance contract with the proposer.
3.      Explain the procedure of settlement of claims in case of maturity of
the policy.
4.      Explain the claim settlement procedure in case of death of the
assured.
5.      Explain the procedure of underwriting of new business.
6.      Discuss various life insurance pricing elements.
9 LESSON 9 GENERAL INSURANCE 9NON
LIFE INSURANCE – FIRE/MARINE
LESSON  9
GENERAL INSURANCE 9NON LIFE INSURANCE –
FIRE/MARINE
Dr Ashish Kumar
LBSIM
Meaning And Importance 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.
A non-life insurance contract is different from a life insurance
contract. A life insurance contract is a long term contract, while general
insurance contract is a one-year renewable contract. The risk namely
‘death’ is certain in life insurance. The only uncertainty is as to when it
will take place, whereas in general insurance, the insured event may or
may not take place. It is difficult to determine the economic value of
life, whereas the financial value of any asset to be insured under a
general insurance policy can be determined. Because of these peculiar
features, a non life insurance contract is different from a life insurance
contract. In this lesson we will learn in detail the treatment of each type
of non-life insurance.
Section 2(6B) of the Insurance Act 1938, defines general insurance
business. According to this general insurance business means fire, marine,
or miscellaneous insurance whether carried separately or in combination.
General Insurance Corporation of India (GIC) was set up with exclusive
privilege for transacting General Insurance business. After the passage of
 IRDA Act 1999, GIC has been delinked from its subsidiaries and has been
assigned the role of Indian reinsurer.
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.
 
Types of General Insurance
Basically there are four type of general insurance stated below. Beside
these a number of different kinds of policies for hedging against the
various kind of risk are available in the market these days.
·         Fire Insurance
·         Marine Insurance
·         Motor Insurance
·         Health Insurance
·         Miscellaneous Insurance
 
Fire Insurance
Fire is hazardous to human life as well as property. Loss of life by
fire is covered under Life insurance and loss of property by fire is covered
under fire insurance. Fire causes enormous damage by physically reducing
the materials to ashes. A fire insurance policy provides protection strictly
against fire. There could be enormous reasons for fire. In practice certain
other related perils are also covered by the fire insurance policy. The
General Insurance Act (Tariff) recommends the form of the contract in
which a fire insurance is to be written. The policy form contains a
preamble and operative clause, general exclusions and general
conditions. Fire Insurance comes under tariff class of business. All India
Fire Tariff is the revised fire insurance tariff, which came into force on
May1, 2001. Now a single policy was introduced to cover all property risks
called standard fire and special peril policy in the place of three standard
policies i.e. A, B&C.
A contract of fire insurance can be defined as a contract under
which one party ( the insurer) agrees for consideration (premium) to
indemnify the other party (The insured) for the financial loss which the
latter may suffer due to damage to the property insured by fire during a
specified period of time and up to an agreed amount. The document
containing the terms and conditions of the contract is known as ‘Fire
Insurance Policy’. A fire policy contains the name of the parties,
description of the insured property, the sum for which the property is
insured, amount of premium payable and the period insured against. The
premium may be paid either in single installment or by way of
installments. The insurer is liable to make good the loss only when loss is
caused by actual fire. The phrase ‘loss or damage by fire’ also includes
the loss or damage caused by efforts to extinguish fire.
 
Scope of cover
Standard Fire and special perils policy usually cover loss due to the
following perils:
1. Fire: Destruction or damage to the property insured by its own
fermentation, natural heating or spontaneous combustion or drying
process can not be treated as damage due to fire.
2. Lightning: It may result in fire damage or other type of damage,
such as cracks in a building due to a lightning strike.
3. Explosion: An explosion is caused inside a vessel when the pressure
within the vessel exceeds the atmospheric pressure acting externally on
its surface. This policy, however, does not cover destruction or damage
caused to the boilers or other vessels where heat is generated.
4. Storm, cyclone, typhoon, hurricane, tornado, landslide:
These are all various types of violent natural disturbances accompanied
by thunder or strong winds or heavy rain fall. Loss or damage directly
caused by these disturbances are covered excluding those resulting from
earthquake, volcanic eruption etc.
5. Bush fire: This covers damage caused by burning of bush and jungles
but excluding destruction or damage caused by forest fire.
6. Riot, strike, malicious, and terrorism damages: Any loss or
physical damage to the property insured directly caused by such activity
or by the action of any lawful authorities in suppressing such disturbance
is covered.
 7. Aircraft damage: Loss, destruction or damage caused by Aircraft,
other aerial or space devices and articles dropped there from excluding
those caused by pressure waves.
8. Overflowing of water tanks and pipes etc.: Loss or damage
to property by water or otherwise on account of bursting or accidental
overflowing of water tanks, apparatus and pipes is covered.
9. Add-on Covers: The insurer can issue the standard fire policy with
added benefits at the option of the policyholders by charging additional
premium. These added benefits are as follows:
1. Architects, Surveyors and Consulting engineer’s fees ( in excess
of 3% claim amount)
2. Debris removal ( in excess of 1% of claim amount)
3. Deterioration of stocks in cold storage due to power failure
4. Forest fire
5. Spontaneous combustion
6. Earthquake as per minimum rates and excess applicable as
specified in the tariff.
7. Omission to insure additions, alterations or extensions.
 
The following types of losses, however, are not covered by a fire policy:
·         Loss by theft during and after the occurrence of fire.
·         Loss caused by burning of property by order of any public authority.
·         Loss caused by underground fire.
·         Loss or damage to property occasioned by its own fermentation or
spontaneous combustion.
·         Loss happening by fire which is caused by earthquake, invasion, act
of foreign enemy, warlike operations, civil wars, riot etc.
In all the above cases the insurer is not liable, unless specifically provided
for in the fire insurance policy. The insurer can issue the standard fire
policy as per the New Fire Tariff along with added benefits at the option
of the policyholders by charging additional premium.
 
Types of Fire Policies
The important fire insurance policies are discussed below:
(i)          Valued Policy. They are the exception in fire insurance.
Under valued policy, the value declared in the policy is the
amount the insurer will have to pay to the insured in the event
of a total loss irrespective of the actual value of loss. The policy
violates the principle of indemnity. The insurer has to pay a
specified amount quite independent of the market or actual
value of the property at the time of loss. So such a policy is very
rarely issued. It may be issued only on artistic work, antiques
 and similar rare articles whose value cannot be determined
easily.
(ii)        Specific Policy. Under this policy, the insurer undertakes to
make good the loss to the insured upto the amount specified in
the policy. Supposing, a building worth Rs.2,00,000 is insured
against fire for Rs. 1,00,000. If the damage to the property is
Rs.75,000 the insurer will get the full compensation. Even if the
loss is Rs.1,00,000 the insurer will get the full amount. But if the
loss is more than Rs. 1, 00,000 the insured will get Rs. 1,00,000
only. Hence, the value of property is not relevant in determining
the amount of indemnity in case of a specific policy.

(iii)       Average Policy. Under a fire insurance policy containing the

‘average clause’ the insured is liable for such proportion of the
loss as the value of the uncovered property bears to the whole
property. e.g. if a person gets his house insured for Rs. 4,00,000
though its actual value is Rs. 6,00,000 , if a part of the house is
damaged in fire and the insured suffers a loss of Rs. 3,00,000 ,
the amount of compensation to be paid by the insurer comes out
to Rs. 2,00,000 calculated as follows:      
 
Amount of claim= (Insured amount X Actual loss)
/Actual value of property
(4,00,000 X 3,00,000)/6,00,000
=2,00,000
(iv)       Floating policy. A floating policy is used for covering
fluctuating stocks of goods held in different lots for one
premium. With every transaction of sale or purchase, the
quantities of goods kept at different places fluctuate. It is
difficult for the owner to take a policy for a specific amount.
The best way is to take out a floating policy for all the stocks of
goods.
(v)         Reinstatement Policy. In such a policy, the insurer has the
right to reinstate or replenish the property destroyed instead of
paying compensation to the insured in cash. It may be granted
on building, machinery, furniture, fixture and fittings only.
(vi)       Consequential loss Policy. Sometimes the insured has to suffer
a greater financial loss on account of dislocation of business
caused by fire .e.g. close down business after fire for repair, to
meet fixed expenses such as rent, salaries, taxes and other
expenses as usual. Such considerable loss to the insured is not
covered by the ordinary fire policy. In order to cover such loss by
fire, the ‘Consequential Loss Policy’ has been introduced. The
 loss so suffered is separately calculated from the loss actually
suffered.
(vii)           Comprehensive policy. This policy covers the risks of the
fire arising out of any cause that is civil commotion, lightening,
riots, thefts, labor disturbances and strikes etc. It is also known
as ‘all insurance policy’.
(viii)         A Blanket policy. This policy is issued to cover all the fixed
and current assets of an enterprise by one insurance.
(ix)       Declaration policy. In this policy, trader takes out a policy for
the maximum value of stock which may be expected to hold
during the year. At a fixed date each month, the insured has to
make a declaration regarding the actual value of stock at risk on
that date. On the basis of such declaration, the average amount
of stock at risk in the year is calculated and this amount
becomes the sum assured.
(x)         Sprinklers leakage policy. It covers the loss arising out of
water leakage from sprinklers which are setup to extinguish fire.
 
 
Claim Procedure for Fire Insurance
1.      In the event of fire the insured must immediately give the
insurer a notice about the loss caused by fire. A written claim
should be delivered with in 15days from the date of loss. The
insured is required to furnish all plans, invoices, documents, proofs
and other relevant informations required by the insurer. If the
insured failed to submit these documents within 6 months from the
date of loss, the insurer has the right to consider it as no claim.
2.      On receipt of the claim the insurer verifies whether the
essentials of a valid claim are satisfied or not. e.g. The cause of fire
should be an insured peril.
3.      The insured completes the form, signs the declaration given in
the form as to the truthfulness and accuracy of the information and
returns the same.
4.      An official employed by the insurer investigates small and
simple claims. For large claims, the insurance company employs
independent loss surveyor.
5.      On the basis of the claim form and the investigation report, the
company then settles the claim.
 
Marine Insurance
 Marine insurance covers the loss or damage of ships, cargo,
terminals, and any transport or cargo by which property is transferred,
acquired, or held between the points of origin and final destination.
Cargo insurance discussed here is a sub-branch of marine insurance,
though Marine also includes Onshore and Offshore exposed property
(container terminals, ports, oil platforms, pipelines); Hull; Marine
Casualty; and Marine Liability.
The general principles of marine insurance are the same as with
other types of insurance in that there are two parties: the assured and
assurer (or carrier). The assured or insured agrees to pay a premium and
the insurer agrees that, if certain losses or damage occurs to certain
interests of the insured, the insurer will indemnify the insured. The
similarities pretty much end here. The complex circumstances involved in
sea voyages require very specific arrangements for the provision of
marine insurance. The fixing of rates and special conditions, for example,
requires a vast knowledge of the nature of vessels and cargos and of the
conditions of navigation.
The marine policy may cover the risks of a single voyage, or may
insure for a certain period of time. Cargo is almost always insured by
voyage. Vessels are usually insured for certain duration of time, usually
year by the year. Cargo policies may be on a single lot or may be open to
cover cargo as shipped by the insured. Hull insurance, or vessel
insurance, may cover a ship or a whole fleet.
Typical of marine insurance is the principle that no contract of
marine insurance is valid unless the insured has an insurable interest in
the subject matter at the time of loss. The term insurable interest has
been variously defined. According to the English Marine
Insurance Act of 1906, "every person has an insurable interest who is
interested in a marine adventure.... a person is interested in a marine
adventure where he stands in any legal or equitable relation to the
adventure or to any insurable property at risk therein, in consequence of
which he may benefit by the safety or due arrival of insurable property,
or may be prejudiced by its loss, or damage thereto, or by the detention
thereof, or may incur liability in respect thereof".
The nature and scope of marine insurance is determined by
reference to s. 6 of the Marine Insurance Act and by the definitions of
“marine adventure” and “maritime perils”. A contract of marine
insurance is a contract whereby the insurer undertakes to indemnify the
insured, in the manner and to the extent agreed in the contract, against
losses that are incidental to a marine adventure or an adventure
analogous to a marine adventure, including losses arising from a land or
air peril incidental to such an adventure if they are provided for in the
contract or by usage of the trade; or losses that are incidental to the
building, repair or launch of a ship.
"Marine adventure" means any situation where insurable property is
exposed to maritime perils, and includes any situation where the earning
or acquisition of any freight, commission, profit or other pecuniary
benefit, or the security for any advance, loan or disbursement, is
endangered by the exposure of insurable property to maritime perils, and
any liability to a third party may be incurred by the owner of, or other
person interested in or responsible for, insurable property, by reason of
maritime perils. "Maritime perils" means the perils consequent on or
incidental to navigation, including perils of the seas, fire, war perils, acts
of pirates or thieves, captures, seizures, restraints, detainments of
princes and peoples, jettisons, barratry and all other perils of a like kind
and, in respect of a marine policy, any peril designated by the policy.
 
Subject Matter of Marine Insurance
The insured may be the owner of the ship, owner of the cargo or
the person interested in freight. In case the ship carrying the cargo sinks,
the ship will be lost along with the cargo. The income that the cargo
would have generated would also be lost. Based on this we can classify
the marine insurance into four categories:
1.      Hull Insurance: Hull refers to the ocean going vessels (ships
trawlers etc.) as well as its machinery. The hull insurance also
covers the construction risk when the vessel is under construction.
A vessel is exposed to many dangers or risks at sea during the
voyage. An insurance effected to indemnify the insured for such
losses is known as Hull insurance.
2.      Cargo Insurance: Cargo refers to the goods and commodities
carried in the ship from one place to another. The cargo
transported by sea is also subject to manifold risks at the port and
during the voyage. Cargo insurance covers the shipper of the goods
if the goods are damaged or lost. The cargo policy covers the risks
associated with the transshipment of goods. The policy can be
written to cover a single shipment. If regular shipments are made,
an open cargo policy can be used that insures the goods
automatically when a shipment is made.
3.      Freight Insurance: Freight refers to the fee received for the
carriage of goods in the ship. Usually the ship owner and the freight
receiver are the same person. Freight can be received in two ways-
in advance or after the goods reach the destination. In the former
case, freight is secure. In the latter the marine laws say that the
freight is payable only when the goods reach the destination port
 safely. Hence if the ship is destroyed on the way the ship owner will
loose the freight along with the ship. That is why, the ship owners
purchase freight insurance policy along with the hull policy.
4.      Liability Insurance: It is usually written as a separate contract
that provides comprehensive liability insurance for property
damage or bodily injury to third parties. It is also known as
protection and indemnity insurance which protects the ship owner
for damage caused by the ship to docks, cargo, illness or injury to
the passengers or crew, and fines and penalties.
 
 
Types of Marine Policy
There are different types of marine policies known by different names
according to the manner of their execution or the risk they cover. They
are:
(i)              Voyage Policy: Under the policy, the subject matter is
insured against risk in respect of a particular voyage from a port of
departure to the port of destination, e.g. Mumbai to New York. The
risk starts from the departure of ship from the port and it ends on
its arrival at the port of destination. This policy covers the subject
matter irrespective of the time factor. This policy is not suitable for
hull insurance as a ship usually does not operate over a particular
route only. The policy is used mostly in case of cargo insurance.
(ii)            Time Policy: It is one under which the insurance is affected
for a specified period of time, usually not exceeded twelve months.
Time policies are generally used in connection with the insurance of
ship. Thus if the voyage is not completed with in the specified
period, the risk shall be covered until the voyage is completed or
till the arrival of the ship at the port of call.
(iii)          Mixed Policies: It is one under which insurance contract is
entered into for a certain time period and for a certain voyage or
voyages, e.g., Kolkata to New York, for a period of one year. Mixed
Policies are generally issued to ships operating on particular routes.
It is a mixture of voyage and time policies.
(iv)          Valued Policies: It is one under which the value of subject
matter insured is specified on the face of the policy itself. This kind
of policy specifies the settled value of the subject matter that is
being provided cover for. The value which is agreed upon is called
the insured value. It forms the measure of indemnity in the event
of loss. Insured value is not necessarily the actual value. It includes
 (a) invoice price of goods (b) freight, insurance and other charges
(c) ten to fifteen percent margin to cover expected profits.
(v)            Unvalued policy: It is the policy under which the value of
subject matter insured is not fixed at the time of effecting
insurance but has to be ascertained wherever the subject matter is
lost or damaged.
(vi)          Open policy: An open policy is issued for a period of 12
months and all consignments cleared during the period are covered
by the insurer. This form of insurance Policy is suitable for big
companies that have regular shipments. It saves them the tedious
and expensive process of acquiring an insurance policy for each
shipment. The rates are fixed in advance, without taking the total
value of the cargo being shipped into consideration. The assured
has to declare the nature of each shipment, and the cover is
provided to all the shipments. The assured also deposits a premium
for the estimated value of the consignment during the policy
period.
(vii)        Floating Policy: A merchant who is a regular shipper of goods
can take out a ‘floating policy’ to avoid botheration and waste of
time involved in taking a new policy for every shipment. This policy
stands for the contract of insurance in general terms. It does not
include the name of the ship and other details. The other details
are required to be furnished through subsequent declarations. Thus,
the insured takes a policy for a huge amount and he informs the
underwriter as and when he makes shipment of goods. The
underwriter goes on recording the entries in the policy. When the
sum assured is exhausted, the policy is said to be “fully declared”
or “run off”.
(viii)      Block Policy: This policy covers other risks also in addition to
marine risks. When goods are to be transported by ship to the place
of destination, a single policy known as block policy may be taken
to cover all risks. E.g. when the goods are dispatched by rail or
road transport for shipment, a single policy may cover all the risks
from the point of origin to the point of destination.
Assignment of Marine Policy
A marine insurance policy may be transferred by assignment unless
the terms of the policy expressly prohibit the same. The policy may be
assigned either before or after loss. The assignment may be made either
by endorsement on the policy itself or on a separate document. The
insured need not give a notice or information to the insurer or
underwriter about assignment. In case of death of the insured, a marine
policy is automatically assigned to his heirs. At the time of assignment,
the assignor must possess an insurable interest in the subject matter
insured. An insured who has parted with or lost interest in the subject
matter insured cannot make a valid assignment. After the occurrence of
the loss, the policy can be assigned freely to any person. The assignor
merely transfers his own right to claim to the assignee.
Clauses in a Marine Policy
A policy of marine insurance may contain several clauses. Some of
the clauses are common to all marine policies while others are included
to meet special requirements of the insured. Hull, cargo and freight
policies have different standard clauses. There are standard clauses
which are invariably used in marine insurance. Firstly, policies are
constructed in general, ordinary and popular sense, and, later on,
specific clauses are added to them according to terms and conditions of
the contract. Some of the important clauses in a marine policy are
described below:
1.            Valuation Clause. This clause states the value of the subject
matter insured as agreed upon between both the parties.
2.            Sue and Labour clause. This clause authorizes the insured to
take all possible steps to avert or minimize the loss or to protect
the subject matter insured in case of danger. The insurer is liable
to pay the expenses, if any, incurred by the insured for this
purpose.
3.            Waiver Clause. This clause is an extension of the above
clause. The clause states that any act of the insured or the insurer
to protect, recover or preserve the subject matter of insurance
shall not be taken to mean that the insured wants to forgo the
compensation, nor will it mean that the insurer accepts the act as
abandonment of the policy.
4.            Touch and Stay Clause. This clause requires the ship to touch
and stay at such ports and in such order as specified in the policy.
Any departure from the route mentioned in the policy or the
ordinary trade route followed will be considered as deviation unless
such departure is essential to save the ship or the lives on board in
an emergency.
5.            Warehouse to warehouse clause. This clause is inserted to
cover the risks to goods from the time they are dispatched from the
consignor’s warehouse until their delivery at the consignee’s
warehouse at the port of destination.
6.            In charge Clause. This clause covers the loss or damage
caused to the ship or machinery by the negligence of the master of
 the ship as well as by explosives or latent defect in the machinery
or the hull.
7.            F.P.A. and F.A.A. Clause. The F.P.A. (Free of Particular
Average) clause relieves the insurer from particular average
liability. The F.A.A. ( free of all average) clause relieves the insurer
from liability arising from both particular average and general
average.
8.            Lost or Not Lost Clause. Under this clause, the insurer is
liable even if the ship insured is found not to be lost prior to the
contact of insurance, provided the insurer had no knowledge of
such loss and does not commit any fraud. This clause covers the
risks between the issue of the policy and the shipment of the goods.
9.            Running down Clause. This clause covers the risk arising out
of collision between two ships. The insurer is liable to pay
compensation to the owner of the damaged ship. This clause is used
in hull insurance.
10.        Free of Capture and Seizure Clause. This clause relieves the
insurer from the liability of making compensation for the capture
and seizure of the vessel by enemy countries. The insured can
insure such abnormal risks by taking an extra ‘war risks’ policy.
11.        Continuation Clause. This clause authorizes the vessel to
continue and complete her voyage even if the time of the policy
has expired. This clause is used in a time policy. The insured has to
give prior notice for this and deposit a monthly prorate premium.
12.        Barratry Clause. This clause covers losses sustained by the ship
owner or the cargo owner due to willful conduct of the master or
crew of the ship.
13.        Jettison Clause. Jettison means throwing overboard a part of
the ship’s cargo so as to reduce her weight or to save other goods.
This clause covers the loss arising out of such throwing of goods.
The owner of jettisoned goods is compensated by all interested
parties.
14.        At and From Clause. This clause covers the subject matter
while it is lying at the port of departure and until it reaches the
port of destination. It is used in voyage policies. If the policy
consists of the word ‘from’ only instead of ‘at and from’, the risk is
covered only from the time of departure of the ship.
Warranties
Warranty means a promissory warranty by which the insured
undertakes that some particular thing will or will not be done or that
some condition will be fulfilled; or affirms or negates the existence of
particular facts. A warranty may be an implied warranty and express
warranty.
Express Warranties:  An express warranty may be in any form of
words from which the intention to warrant may be inferred. (2) An
express warranty must be included in, or written on, the marine policy or
be contained in a document incorporated by reference into the policy. It
does not exclude an implied warranty, unless they are inconsistent.
An express warranty may be in any form of words from which the
intention to warrant may be inferred. Unfortunately, it has proven
difficult for insurers to find the exact words that will lead to the required
inference. Words such as “warranted that” have been held to not
necessarily delineate a warranty. Similarly, the words “warranted free
from any claim...” were held not to delineate a warranty. Examples of
express warranties are as follows:
The number and type of express warranties are limited only by the
imagination and ingenuity of underwriters. Almost anything can be made
to be an express warranty provided the proper words are used.
Notwithstanding this total freedom to make almost anything a warranty
most policies contain relatively few. The more common express
warranties are:
·            Navigation and trading warranties that limit the geographical
areas in which a vessel may operate;
·            Laid up and out of commission warranties that require a
vessel to be laid up for a defined period or generally;
·            Identity of the master warranties that require a named
person to command the vessel;
·            Towing warranties that prohibit the insured vessel from being
towed except where customary or when the vessel is in need of
assistance;
·            Private pleasure use warranties that prohibit any commercial
use of a yacht; and
·            Warranties regarding surveys and inspections that require
inspections to be conducted or recommendations by surveyors to be
complied with.
Implied Warranty:  these are the warranties which are not expressly
mentioned in the contract but the law takes it for  granted that such
warranty exists. An express warranty does not exclude implied warranty
unless it is inconsistent therewith. Implied warranties do not appear in
the policy documents at all, but are understood without being put into
words, and as such, are automatically applicable. These are included in
the policy by law, general practice, long established custom or usage.
There are three warranties implied by the Act. They are the warranty of
legality, neutrality and
seaworthiness.
·         Legality: The warranty of legality is one which is often
expressly included in policies as well as implied. The journey
undertaken by the ship must be for legal purposes. Carrying
prohibited or smuggled goods is illegal and therefore, the insurer
shall not be liable for the loss.
·         Neutrality: Where in any marine policy insurable property is
expressly warranted to be neutral, there is an implied condition in
the policy (a) that the property will have a neutral character at the
commencement of the risk and that, in so far as the insured has
control, that character will be preserved during the risk; and (b)
where the property is a ship, that, in so far as the insured has
control, the papers necessary to establish the neutrality of the ship
will be carried on the ship and will not be falsified or suppressed
and no simulated papers will be used.
·         Seaworthiness: There is an implied warranty in every voyage
policy that, at the commencement of the voyage, the ship will be
seaworthy for the purpose of the particular marine adventure
insured.
Types of Marine Losses
A loss arising in a marine adventure due to perils of the sea is a marine
loss. Marine loss may be classified into two categories:
·         Total loss: A total loss implies that the subject matter
insured is fully destroyed and is totally lost to its owner. It can be
Actual total loss or Constructive total loss. In actual total loss
subject matter is completely destroyed or so damaged that it
ceases to be a thing of the kind insured. e.g. sinking of ship,
complete destruction of cargo by fire, etc. In case of constructive
total loss the ship or cargo insured is not completely destroyed but
is so badly damaged that the cost of repair or recovery would be
greater than the value of the property saved. e.g. a ship dashed
against the rock and is stranded in a badly damaged position. If the
expenses of bringing it back and repairing it would be more than
the actual value of the damaged ship, it is abandoned.
·         Partial loss: A partial loss occurs when the subject matter is
partially destroyed or damaged. Partial loss can be general average
or particular average. General average refers to the sacrifice made
during extreme circumstances for the safety of the ship and the
cargo. This loss has to be borne by all the parties who have an
interest in the marine adventure. e.g. A loss caused by throwing
overboard of goods is a general average and must be shared by
various parties. Particular average may be defined as a loss arising
from damage accidentally caused by the perils insured against.
Such a loss is borne by the underwriter who insured the object
damaged. e.g. If a ship is damaged due to bad weather the loss
incurred is a particular average loss.
Q1. Limit of FDI in Insurance sector :
a) 47%
b) 50%
c) 49%
d) 51%
e) None of These

Q2. Largest  Life Insurance Company in India is:

a) The New India Assurance Company Limited
b)  Life Insurance Corporation of India (LIC)
c) United India Insurance Company Limited 
d) National Insurance Company Limited
e) None of These

Q3. Which was oldest insurance company, found in 1906:

a) LIC
b) National Insurance Company
c) Agriculture Insurance Company of India
d) United India Insurance Comp
e) None of These

Q4. Life Insurance Corporation was found on:

a) 1 April, 1955
b) 6 Decemberr, 1960
c) 4 September, 1956
d) 1 September, 1956
e) None of These

Q5. Headquarter of LIC is situated at:

a) Kolkata
b) Delhi
c) Mumbai
d) Hyderabad
e) None of These

Q6. Oldest (1818) life insurance company is:

a) Postal Life Insurance Company
b) Max Life Insurance Company
c) Oriental Life Insurance Company
d) Bharat Life Insurance Company
e) None of These

Q7. Insurance is listed in the constitution of India in ______scheduled as Union List

subject:
a) Eighth  
b) Ninth
c) Seventh
d) Tenth
e) None of These

Q8. Insurance is legislated by:

a) Insurance Company
b) State Government
c) Central Government
d) Government of India
e) None of These

Q9. Chairman of Life Insurance Corporation of India is:

a) Arundhati Bhattacharya
b) U K Sinha
c) S K Roy
d) Vimal Khanna
e) None of These

Q11. Which of the following is not the principal of insurance:

a) Utmost Good Faith
b) Principle of Contribution
c) Maximization of Profit
d) Causa Proxima
e) None of These

Q12. "Stepping into shoes of other" related with:

a) Principle of CAUSA PROXIMA
b) Principle of Subrogation
c) Principle of Contribution
d) Principle of Indemnity 
e) None of These

Q13. A person must be benefited by that thing which he wants to be insured is

called:
a) Interest
b) Insurable Interest 
c) Causa Proxima
d) Contribution of That person
e) None of These

Q14. Supervision and Development of Insurance in India is in the hands of:

a) SEBI
b) Insurance Regulatory Development Authority
c) Life Insurance Corporation of India
d) Central Government
e) None of These

Q15. IRDA was constituted by which of the following committee's

recommendations:
a) Kumarmangalam Committee
b) Malhotra Committee
c) Singh Committee
d) Sahota Committee
e) None of These

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Insurance Sector in India: Quiz-1

 1.
 What are the main functions performed by the IRDA?
[A]Protect the rights of policy holders
[B]Adjudication on insurance related matters
[C]Promoting insurance business
[D]All of these
Hide Answer
 All of these
All of these The functions of IRDA are:
1. Protect the rights of policy holders
2. Provide registration certification to life insurance companies
3. Renew, Modify, Cancel or Suspend this registration certificate as and when appropriate.
4. Promoting efficiency in the conduct of insurance business;
5. Promoting and regulating professional organisations connected with the insurance and
reinsurance business
6. Regulating investment of funds by insurance companies;
7. Adjudication of disputes between insurers and intermediaries or insurance intermediaries
 Report Error
 2.
 If an insurance policy holder is not satisfied with the award of the insurance ombudsman,
he / she can approach to__?
[A]Courts of law
[B] Consumer forums
[C]Either a or b
[D]The award of insurance ombudsman can not be challenged
Hide Answer
 Either A or B
The Insurance Ombudsman is created by Government of India for individual policyholders to
have their complaints settled out of the courts in an impartial, efficient and cost- effective
way. There are 12 Insurance Ombudsman in different locations in India that an insured person
can approach regarding their complaints related to insurance policy. If the policy holder is not
satisfied with the award of the insurance ombudsman he can approach to other venues viz.
Consumer Forums and Courts of law for redressal of his grievances.
 Report Error
 3.
 Which one of the following is the example of Insurance depositories?
[A]Central Insurance Repository Limited (CIRL)
[B]Karvy Insurance repository Limited
[C]NSDL Database Management Limited
[D]All of these
Hide Answer
 All of these
The term “Insurance Repository” means a company formed and registered under the
Companies Act, 1956 and that has granted a certificate of registration by Insurance
Regulatory and Development Authority (IRDA) of India for maintaining data of insurance
policies in Electronic form on behalf of Insurers. The Insurance Repositories provides the
ease of holding insurance policies issued in an electronic form. In 2013 ,IRDA has issued
licences to five entities to act as Insurance depositories —
 a) Central Insurance Repository Limited (CIRL).
b) NSDL Database Management Limited.
c) SHCIL Projects Limited.
d) Karvy Insurance repository Limited.
e) CAMS Repository Services Limited.
 Report Error
 4.
 Which of the following is correct full form of IGMS with reference to insurance sector?
[A]Integrated Grievance Management System
[B]Internal Grievance Management System
[C]Important Grievance Management System
[D]Integral Grievance Management System
Hide Answer
 Integrated Grievance Management System
IGMS stands for Integrated Grievance Management System. It is a grievance redress
monitoring tool for IRDA.
 Report Error
 5.
 Up to what extent, FDI in Insurance sector is allowed by the Government of India (GOI)?
[A]26%
[B]49%
[C]51%
[D]100%
Hide Answer
 49%
The Government of India (GOI) has allowed 49% Foreign Direct Investment (FDI) in the
insurance sector.
 Report Error
 6.
 Which Insurance policy gives holder the benefits of both Insurance and Investment?
[A]Term Insurance Policies
[B]Money-back Policies
[C]Unit-linked Investment Policies
[D]Pension Policies
Hide Answer
 Unit-linked Investment Policies
A Unit-linked Investment Policies (ULIP) is a product offered by insurance companies gives
investors the benefits of both insurance and investment under a single integrated plan, unlike
a pure insurance policy which only provides financial cover without the added advantage of
an investment.
 Report Error
 7.
 Which among the following is the correct full form of ESIC?
[A]Employee’s State Insurance Corporation
[B]Employer’s State Insurance Corporation
[C]External State Insurance Corporation
 [D]Exact State Insurance Corporation
Hide Answer
 Employee State Insurance Corporation
Employee’s State Insurance Corporation (ESIC) is a self-financing health insurance and social
security scheme for all Indian workers earning less than Rs.15000 per month as wages.
 Report Error
 8.
 Under ESIC, Employer contribution rate and Employee contribution rate respectively is –
[A]4.75% & 1.75%
[B]1.75 % & 4.75%
[C]12% & 12%
[D]none
Hide Answer
 4.75% & 1.75%
Under Employee’s State Insurance Corporation (ESIC) , Employer contributes 4.75% and
employee contributes 1.75% .
 Report Error
 9.
 The process of identifying and classifying the degree of risk represented by a proposed
insured. As per insurance sector, what does the term stands for?
[A]Underwriting
[B]Collateralized Mortgage Obligation
[C]Actuary
[D]Annuity
Hide Answer
 Underwriting
Underwriting is the process by which an insurance company examines risk and determines
whether the insurer will accept the risk or not, classifies those accepted and determines the
appropriate rate for coverage provided.
 Report Error
 10.
 A person who identifies, examines and classifies the degree of risk represented by a
proposed insured in order to determine whether or not coverage should be provided and,
if so, at what rate. In terms of insurance, what does a person stands for?
[A]Underwriter
[B]Merchant Banker
[C]Forex dealers
[D]Registrars
Hide Answer
 Underwriter
Underwriter is a person who identifies, examines and classifies the degree of risk represented
by a proposed insured in order to determine whether or not coverage should be provided and,
if so, at what rate.
If a company cancels an auto policy mid-term, the refund will be
made on
A. pro rata basis
B. short rate basis
C. retroactive basis
D. coinsurance basis

Which is the best example of an indirect loss?

A. sequential loss
B. liability loss
C. employee theft
D. loss of use