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UNIT-1 LIFE INSURANCE BASIC PRINCIPLES
INDIAN INSURANCE SECTOR
The three phases
Phase –I (1918-1972)
Phase II (1956-2000)
Phase III (After 2000)
245 Life insurance companies (pvt)
107 General insurance Companies (Pvt)
All Pvt Life insurance cos
Nationalized & LIC emerged in 1956. All General Insurance Cos nationalized one cos with 4 subsidiaries emerged.
Opened for private sector.
16 life & 16 gen insurance cos emerged apart from existing public sector units
INSURANCE INDUSTRY IN INDIA
IRDA – April-2000
Life LIC Post office insurance
General GIC & its 4 subsidiaries
Life 16 Cos
General 16 Cos
09/04/2012 TYPES OF INSURANCE Life insurance Non life insurance General insurance Miscellaneous insurance Marine insurance Fire insurance Personal accident insurance Fidelity guarantee insurance Crop insurance Burglary insurance Flood insurance 4 .
09/04/2012 ROLE & FUNCTIONS OF INSURANCE Primary Providing protection Collective risk bearing Secondary Preventing losses Covering larger risks with small capital Helps in the development of larger industries Others Risk Free trade Medium of earning foreign exchange Is a savings and investment tool Evaluating risk Provide Certainty 5 .
in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another.. ….09/04/2012 LIFE INSURANCE DEFINED A contract of life insurance is that in which one party agrees to pay a given sum on the happening of a particular event contingent upon the duration of human life.Bunion Life insurance business is the business of effecting contract upon human life ……insurance acts 6 .
09/04/2012 SALIENT FEATURES OF LIFE INSURANCE 1. Provides social security 3. Policy can be assigned / mortgaged. Beneficiary nominee/ legal heir stands to gain 5. 10. Policy holders can seek loan against the policy 7. Provision for old age. I T benefits 7 . Certain policies cover up for treatment to serious ailments 8. 6. 4. Instrument of savings 2. Risk coverage starts from the date of accepting of proposal. Money can be set aside for children’s education/ marriage 9.
09/04/2012 POLICY SPECIFICATIONS A life insurance contract will specify Sum assured Term Premium Mode of payment of premium Premium paying period Participation in profits 8 .
ADVANTAGES 09/04/2012 Marketable & Liquid Encourages compulsory savings & forces thrift Superior to an ordinary Easy settlement & protection Savings plan with tax relief against creditors 9 .
Legal principles Establishing relationship between individual & the fund. Spread of risk is the economic principle of life insurance Actuarial principles Fixing the contribution or premium Everyone should contribute premium commensurate with the risk he brings to the fund. Relevant law of land will have to be abided to establish legally acceptable understanding . 10 . relationships & mutual understanding.09/04/2012 MODERN CONCEPT OF LIFE INSURANCE Economic principle Risk suffered by few is spread over large number of people who face the same risk.
The premium is invested for earning income . Once this is known. Insuring people of good health. A % of assets is set aside in company reserves to reduce the impact of unexpected events. The projected income is factored into premium. lifestyle & mortality trends can give insurer a reasonable information about life expectancies. tracking & recording data about health . Larger the group less impact on the death of an individual. Though it is not possible to predict an individual’s death. Every insurance policy coverage is with reasonable risk 11 . This data is recorded in mortality tables.09/04/2012 SCIENTIFIC BASIS OF LIFE INSURANCE Shared risk Law of large numbers Predictable mortality Invested assets Fair & accurate Risk selection Principle of shared risk works when law of large numbers is applied. the insurance companies can predict the number of people who may die in a given Year & can calculate the premium rates.
09/04/2012 LAW OF LARGE NUMBERS The principle of risk sharing works only when the law of large numbers Is operational This is a scientific principle which states that larger the group lesser the impact of death of one member of the group. successful will be the insurance business 12 . A group with just few hundred members will not work. Hence larger the group . The base will be fragile.
Retirement from active work c. Group effort (group life/ general/ health schemes) 3. Death Three ways to ensure economic stability 1. Individual effort 13 .09/04/2012 ECONOMIC BASIS OF INSURANCE Threats / risks for economic stability a. Physical & mental disability due to accident or disease. b. 2. Social security scheme of the government for BPL categories.
09/04/2012 VARIOUS ECONOMIC USES OF INSURANCE In the event of the untimely & premature death of bread winner 1. 14 . Insuring the life of partners to pay to the legal heirs & ensure that the amount in business is retained. Repay the outstanding of housing loan 5. Potent savings instrument 3. Insuring debtors in case of business organizations if the debtor dies . Financial security to the family 2. Education for children / marriage for daughters 4. 8. 7. Financial independence at old age in case of survival of the person 6. Group insurance for employees .
The purpose of life insurance is to protect the family in the event of any effect on the earning potential of the individual. People are important element of national wealth The productive superiority of technically advanced countries is due to Human capital Human life is subject to loss due to premature death. It is the capitalized value of an individual’s net future earnings (after maintenance expenses) 15 . HLV is one segment of the general theory of human capital. HLV is the measure of the actual future earnings of an individual. temporary disability .09/04/2012 HUMAN LIFE VALUE (HLV) Proposed by Late S S Hubner in 1924. total disability & retirement.
Thus life insurance products can be divided on the basis of the following 1. Duration of the policy 2. Participation in profits 4. 5. Number of lives covered. These two elements (Term & endowment ) are the basic building blocks of all Life insurance products. Methods of payment of the sum. 16 . Methods of premium 3.09/04/2012 TYPES OF INSURANCE POLICIES All the plans of insurance are a combination of both term insurance element & pure endowments element in different proportions.
profits b. Limited plan c. Single premium d.09/04/2012 IMPORTANT POLICIES Endowments Assurance Whole life with a. Convertible W L plan Children’s deferred Assurance plan Money back With profits Mediclaim policy Group insurance ULIP Key man AssignmentTo study & submit a note on the LI plans with features of different companies 17 .
4. Combination of term insurance & pure endowment Flexible premium plans Variable annuities Family protection policies Disability income policies ULIP . 6. 3.BASIC PLANS OF LIFE INSURANCE Term insurance plan Whole life plan Endowments plan Special plans Unit linked Insurance plans Assignment Study in detail the following aspects 1. 2. 5.
09/04/2012 STANDARD TYPE OF POLICY DOCUMENT Heading Operative clause Preamble Proviso Schedule Attestation Conditions & privileges governing the agreement Assignment Any special clause or endorsement Attached to the policy To discuss in detail the various aspects as mentioned above 19 .
09/04/2012 RIDERS Add-ons to the basic policy to supplement the cover provided. Accelerated benefit riders. 4.An early payment of some portion due to injury/ illness 20 . Guaranteed purchase option. Accidental death & dismemberment – Twice the amount of face value. 3. Waiver of premium in case of total disability 2. The most commonly used riders in life policies are 1. It can also be set of riders.Additional cover without any medical checkup.
It can be conditional/ absolute.NOMINATION Assignment is legal transference. It is a method by which a policy holder can transfer his interest to another person.09/04/2012 ASSIGNMENT. It can be done by endorsement on the policy/ as a separate deed. 21 . Nomination is an act by which the policy holder authorizes another person to receive the policy money’s . The authorized person is nominee.
Consideration essential Irrevocable Property in the policy passes to Assignee Assignee has right to sue under the policy Nominee has no right to sue 22 .09/04/2012 ASSIGNMENT & NOMINATION All rights pass to assignee Entitled to receive the amount in the event of the death of policy holder Not essential Revocable. Nominee can be changed Gets right to receive the insured amount.
premium is paid.PAID UP VALUE S V is the amount which is payable by the insurer before the maturity date S V is the expression of desire of non continuation of the policy S V represents the present cash value of the policy S V is calculated for each class of policy . payable & sum assured with profits Always higher than the S V since it not required to be paid. 23 .09/04/2012 SURRENDER VALUE. premium paid for years for which policy is in force Increases with each premium paid Entitlement of the policy holder Regarding portion of policy amt That bears to the premium till date No such desire Value payable on assureds death Or at the time of maturity Calculated on the basis of no of years .
Normally it can be revived within a period of 5 years From the due date of last paid premium. Revival Policy lapses When premium is not paid within grace period. Suicide Liability of insurer is modified & limited in case of suicide. If principle / interest on the loan is more than S V .09/04/2012 OTHER ASPECTS Foreclosure Closing before maturity date. Action taken when two or more installments on loan are due Days of grace 15 to 30 days is given to the policy holder beyond the due date to make payment of the premium. the policy will be subject to foreclosure. Insurer will not pay the insured amount in some cases though Indian law states that the company cannot avoid payment on the ground of suicide. 24 .
09/04/2012 RISK & INSURANCE Risk is the un certainty of loss Personal Property Loss due to other’s failure Fidelity risk Risk due to ownership or transport vehicle The pyramid of nature of risk 25 .
09/04/2012 CLASSIFICATION OF RISK Personal Property Liability Others failure Fidelity Ownership Premature death Old age death Damage / use of The property Wrong failure to meet committed The obligation Due to Human mistakes effecting others Dishonesty Of employees Damage Or Loss to The vehicle 26 .
27 . selects & implements the plan of action that are required to control the risk Risk management is vital tool in the modern business / trade/human activities It is not only essential to prevent the risks but also to control & reduce them Risk management leads to maximum social . analysis of risk & economic Control of the risk Risk management evaluates the risks identified in the risk assessment process .09/04/2012 FEATURES OF RISK MANAGEMENT Risk management may be defined as identification of risk. political & economic development.
09/04/2012 FEATURES OF RISK MANAGEMENT Risk management helps to 1. 2. Create right corporate policies & strategy. Manage men/ machine effectively 3. Evaluate risk confronted by the business. Introduce various plans & techniques to minimize the risks. spread . Effectively handle. Avoid cost . 6. monitor & insure the risks 5. 28 . 4. 7. Create risk awareness among the people. disruption & unhappiness relating to risks.
09/04/2012 OBJECTIVES OF RISK MANAGEMENT Protecting employees from accidents that might result in death / injury. Due attention given to cost of handling risks. 29 . Effective utilization of resources Maintaining good relation with the society & public.
09/04/2012 SCOPE OF RISK MANAGEMENT Control of loss Financing of loss Internal risk control Extra precautions Reduce level of risky activities Risk retention & self insurance Diversification Investment in risk information Buy insurance policy Contracts Non insurance risk transfer 30 .
09/04/2012 METHODS OF HANDLING RISKS Prevention Of risk Reduction Of risks Shifting/ transferring risk Acceptance Spreading of Of risk risks Assignment Discuss various aspects of the 5 components of handling the risks 31 .
09/04/2012 UNIT-1 CONCLUDED 32 .