Valuation of human life

 How much of life insurance does one need?

 Value or worth of an individual’s life can be assessed by three
approaches.
 (1) Rule of thumb/traditional approach
 (2) Human life value approach
 (3) Needs approach
 (4) Capital retention approach
Valuation in property risks

 Coverage must be for reinstatement/replacement value of

property or else there would be penalty for under-insurance.
Over-insurance only results in needless loss of premium, as
recovery in excess of actual loss is impossible( doctrine of
indemnity).
 Agreed value policies are issued for certain property like vintage
cars, antique furniture, paintings etc.
 Indemnity offered is subject to depreciation of asset and
deductible if any.
 Only accidental losses are covered, clearly excluding gradual
deterioration of asset caused by corrosion or other atmospheric
conditions.
Valuation in liability risk

 One has to assess potential liability risk & take coverage

accordingly.
 Sometimes potential liability can be unlimited as in road
accidents.
 In certain liability insurances, insurers fix separate liability limit
per occurrence (AOA-Any one accident limit) and for aggregate
occurrences for the entire policy period (AOY-Any one year
limit).
Some basic questions
 How much of risk coverage can one have?
 Can someone cover the same risk under separate policies to make
a gain after having a loss?
 Who is legally entitled to cover a risk?
 What if someone obtains a health insurance policy, concealing
material facts or suppressing vital information and then makes a
huge claim?
 How can insurers manage fraud claims?
Life & non-life (general)
insurance
Life Insurance-features

Proposal forms the basis of the life-insurance contract.

Essentially long-term policies. Insurable interest mandatory at
inception only.
Premiums payable periodically i. e monthly/quarterly /annually
/single installment.
Barring term policies, all have risk coverage with savings
component. Hence all Policy holders/ nominees get either a
death claim or a maturity claim.
Policies are freely assignable.
Default in premium-payment could be rectified by paying
fines/dues.
Policy could be cancelled to obtain a surrender-value on certain
policies.
Policies are benefit policies & not Indemnity policies.
Premium-calculation done on the basis of the mortality-rates, which
are correlated to age of individuals.
Non-life insurance-features

• Proposal forms the basis of the insurance contract.

• Covers all property, liability, health, consequential loss risks
• Generally, indemnity policies ( except Personal accident/Crit. illness)
• Agreed value policies can be issued in certain cases (like vintage cars)
• Essentially annual policies(with few exceptions)
• Premiums need to be paid upfront & there is no instalment facility.
• Unlike life insurance, default in premium cannot be rectified by payment of
fines and back-dated or retrospective coverage is never granted.
• Indemnification is done after assessment of loss by an IRDA certified loss
assessor for property losses.
• For liability insurance, indemnification is done after legal liability is
ascertained by a designated court.
• TPA services are used for claims management in Health insurance.
Functions in Insurance industry

 Traditionally, Insurance companies like other organizations, have the

functional areas of Marketing, I.T, Finance, HR & Operations. The
functions at the line level are:
 1.Underwriting
 2.Marketing & Sales
 3.Claims Management
 4.Finance & Accounting
 The functions at the corporate level are:
 1.Re-Insurance Management
 2.Investment Management
Operations in
insurance industry
 1.Underwriting

 The entire gamut of activities which go into acceptance of risks

by insurers.
 Entails risk inspection, scrutiny of proposals, decision on
acceptance/rejection of proposals, fixing of premium rates,
deductibles, setting special policy conditions etc.
 A line function at the operational level.
 Insurers maintain a panel of experts due to specialized for of
insurances like project insurance, aviation insurance, livestock
insurance etc.
 The dept. has to function in close liaison with Actuaries
 2.Claims Management

 Entails all activities which handle losses preferred by policy

holders on the insurers.
 Involves arranging expert loss assessors to ascertain the extent of
damages, obtaining corroborative documents from claimants,
scrutiny of survey report, and then arriving at a decision on
admissibility of liability.
 It also involves coordinating loss-minimization operations,
disposal of salvage etc.
3. Reinsurance

 Reinsurance is an arrangement by which the Primary insurer who

underwrites risks transfers to another insurer (called Reinsurer)
part or all of the potential losses associated with such insurance.
 The primary insurer is also called Ceding company. The amount
of insurance parted with is called ‘Cession’ and the amount of
insurance retained is called ‘Net Retention’.
 The Ceding company receives ‘Ceding commission’.
4. Investment Management

 Major portfolio on account of underwriting losses resulting from

severe competition.
 Manages short-term investments, without causing strain on
liquidity.
 Most insurers worldwide survive on ‘Investment Profits’ even if
they make ‘underwriting losses’.
 Experts in finance/wealth management handle this portfolio.
Construct of a Policy document

 Heading: Name of Insurer+ Regd. Office

 Preamble/Recital clause: Names of parties to contract, Proposal
being made basis of contract, Premium payment
 Operative/Insuring clause: Contains essence of the contract,
indicating perils covered with exclusions.
 Schedule: Subject matter of insurance
 Attestation/Signature clause
 Conditions/Endorsements