Insurance Module

NCFM Module Examination Details

Allowable access to Candidate at
Sr. Module Name Test No. Of Maxi- Nega- Pass Test Centre
NO Dura- Ques- mum tive marks Normal Regular
tion (in tions Marks Mark- Open Distri- /Sci- Finan-
min- ing Office bution entific cial
utes) Spread Table Calcu- Calcu-
Sheet lator lator

FOUNDATION
1 Financial Markets: A Beginners’ Module 120 60 100 NO 50 NO NO YES NO
2 Mutual Funds : A Beginners' Module 120 60 100 NO 50 NO NO YES NO
3 Currency Derivatives: A Beginner’s Module 120 60 100 NO 50 NO NO YES NO
4 Equity Derivatives: A Beginner’s Module 120 60 100 NO 50 NO NO YES NO
5 Interest Rate Derivatives: A Beginner’s Module 120 60 100 NO 50 NO NO YES NO
6 Commercial Banking in India: A Beginner’s Module 120 60 100 NO 50 NO NO YES NO
7 FIMMDA-NSE Debt Market (Basic) Module 120 60 100 YES 60 YES NO YES NO
8 Securities Market (Basic) Module 120 60 100 YES 60 NO NO YES NO
9 Clearing Settlement and Risk Management Module 60 75 100 NO 60 YES NO YES NO
10 Banking Fundamental - International 90 48 48 YES 29 YES NO YES NO
11 Capital Markets Fundamental - International 90 40 50 YES 30 YES NO YES NO
INTERMEDIATE
1 Capital Market (Dealers) Module 105 60 100 YES 50 NO NO YES NO
2 Derivatives Market (Dealers) Module 120 60 100 YES 60 NO NO YES NO
3 Investment Analysis and Portfolio Management 120 60 100 YES 60 NO NO YES NO
4 Fundamental Analysis Module 120 60 100 YES 60 NO NO YES NO
5 Operation Risk Management Module 120 75 100 YES 60 NO NO YES NO
6 Options Trading Strategies Module 120 60 100 YES 60 NO NO YES NO
7 Banking Sector Module 120 60 100 YES 60 NO NO YES NO
8 Treasury Management Module 120 60 100 YES 60 YES NO YES NO
9 Insurance Module 120 60 100 YES 60 NO NO YES NO
10 Macroeconomics for Financial Markets Module 120 60 100 YES 60 NO NO YES NO
11 NSDL–Depository Operations Module # 75 60 100 YES 60 NO NO YES NO
12 Commodities Market Module 120 60 100 YES 50 NO NO YES NO
13 Surveillance in Stock Exchanges Module 120 50 100 YES 60 NO NO YES NO
14 Technical Analysis Module 120 60 100 YES 60 NO NO YES NO
15 Mergers and Acquisitions Module 120 60 100 YES 60 NO NO YES NO
16 Back Office Operations Module 120 60 100 YES 60 NO NO YES NO
17 Wealth Management Module 120 60 100 YES 60 NO NO YES NO
18 Project Finance Module 120 60 100 YES 60 NO NO YES NO
19 Venture Capital and Private Equity Module 120 70 100 YES 60 NO NO YES NO
20 Financial Services Foundation Module ### 120 45 100 YES 50 NO NO YES NO
21 NSE Certified Quality Analyst $ 120 60 100 YES 50 NO NO YES NO
22 NSE Certified Capital Market Professional (NCCMP) 120 60 100 NO 50 NO NO YES NO
23 US Securities Operation Module 90 41 50 YES 30 YES NO YES NO
ADVANCED
1 Algorithmic Trading Module 120 100 100 YES 60 YES NO YES NO
2 Financial Markets (Advanced) Module 120 60 100 YES 60 YES NO YES NO
3 Securities Markets (Advanced) Module 120 60 100 YES 60 YES NO YES NO
4 Derivatives (Advanced) Module 120 55 100 YES 60 YES YES YES NO
5 Mutual Funds (Advanced) Module 120 60 100 YES 60 YES NO YES NO
6 Options Trading (Advanced) Module 120 35 100 YES 60 YES YES YES YES
7 Retirement Analysis and Investment Planning 120 77 150 NO 50 YES NO YES YES
8 Retirement Planning and Employee Benefits ** 120 77 150 NO 50 YES NO YES YES
9 Tax Planning and Estate Planning ** 120 77 150 NO 50 YES NO YES YES
10 Investment Planning ** 120 77 150 NO 50 YES NO YES YES
11 Examination 5/Advanced Financial Planning ** 240 30 100 NO 50 YES NO YES YES
12 Equity Research Module ## 120 49 60 YES 60 YES NO YES NO
13 Financial Valuation and Modeling 120 100 100 YES 60 YES NO YES YES
14 Mutual Fund and Fixed Income Securities Module 120 100 60 YES 60 YES NO YES YES
15 Issue Management Module ## 120 55 70 YES 60 YES NO YES NO
16 Market Risk Module ## 120 40 65 YES 60 YES NO YES NO
17 Financial Modeling Module ### 120 30 100 YES 50 YES NO YES NO
18 Business Analytics Module ### 120 66 100 NO 50 YES NO YES NO

# Candidates securing 80% or more marks in NSDL-Depository Operations Module ONLY will be certified as ‘Trainers’.
### Module of IMS Proschool
## Modules of Finitiatives Learning India Pvt. Ltd. (FLIP)
** Financial Planning Standards Board India (Certified Financial Planner Certification) FPSB India Exam
$ SSA Business School
The curriculum for each of the modules (except Modules of Financial Planning Standards Board India, Finitiatives Learning
India Pvt. Ltd. and IMS Proschool) is available on our website: [Link]
Preface
About NSE Academy

NSE Academy is a subsidiary of National Stock Exchange of India. NSE Academy straddles
the entire spectrum of financial courses for students of standard VIII and right up to MBA
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has constantly innovated its education template, this has resulted in improving the financial
well-being of people at large in society. Our education courses have so far facilitated more
than 41.8 lakh individuals become financially smarter through various initiatives.

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NCFM is an online certification program aimed at upgrading skills and building competency. The

program has a widespread reach with testing centers present at more than 154+

locations across the country.

The NCFM offers certifications ranging from the Basic to Advanced.

One can register for the NCFM through:

• Online mode by creating an online login id through the link ‘Education’>‘Certifications’ >
‘Online Register / Enroll’ available on the website [Link]

• Offline mode by filling up registration form available on the website [Link] >
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Once registered, a candidate is allotted a unique NCFM registration number along with an
online login id and can avail of facilities like SMS alerts, online payment, checking of test
schedules, online enrolment, profile update etc. through their login id.
CONTENTS
CHAPTER 1: INTRODUCTION TO INSURANCE ........................................................7

1.1 Definition of Insurance ...................................................................................7

1.2 How Insurance Works......................................................................................7

1.3 Two concepts emerge: ....................................................................................9

1.3.1 Can Insurance insure all kinds of risks?....................................................9

1.3.2 Underwriting: ..................................................................................... 11

1.4 Insurance Act, 1938 ...................................................................................... 12

1.5 Insurance Regulatory and Development Authority (IRDA)................................... 12

1.5.1 Duties, Powers and Functions of IRDA ................................................... 13

1.6 Insurance Advertisements and Disclosure Regulations, 2000 .............................. 13

1.7 Protection of Policy holders Interest Regulations, 2002 ...................................... 14

1.7.1 Matters to be stated in life insurance policy ............................................ 14

1.7.2 Matters to be stated in general insurance policy ...................................... 15

1.7.3 Claims procedure in respect of a life insurance policy ............................... 16

1.7.4 Claim procedure in respect of a general insurance policy .......................... 17

1.7.5 Policyholders’ Servicing ....................................................................... 18

1.8 Third Party Administrators (TPA) - Health Insurance ......................................... 18

1.8.1 Code of conduct for TPA....................................................................... 19

CHAPTER 2: FUNDAMENTALS OF RISK MANAGEMENT .......................................... 21

2.1. Definition of Risk ......................................................................................... 21

2.1.1 Subjective Risk and Acceptable Risk ...................................................... 21

2.2 Classification of Risks ................................................................................... 21

2.3 Definition of Risk Management ....................................................................... 22

2.4 Stages of Risk Management .......................................................................... 22

2.4.1 Risk Identification .............................................................................. 23

2.4.2 Risk measurement / evaluation............................................................. 24

2.4.3 Risk Avoidance ................................................................................... 25

1
 2.4.4 Risk Transfer ..................................................................................... 26

2.4.5 Risk Financing ................................................................................... 27

2.4.6 Risk Retention .................................................................................... 27

2.4.7 Construction of a plan ......................................................................... 27

2.4.8 Implementation of a plan ..................................................................... 28

2.4.9 Monitoring the Plan ............................................................................. 28

CHAPTER 3: INSURANCE CONTRACT, TERMINOLOGY, ELEMENTS AND PRINCIPLES .... 29

3.1 Introduction. ................................................................................................ 29

3.2 Contract Terminology .................................................................................... 29

3.3 Elements of a Valid Contract .......................................................................... 30

3.3.1 Offer and Acceptance .......................................................................... 30

3.3.2 Consideration ..................................................................................... 30

3.3.3 Capacity ............................................................................................ 30

3.3.4 Legal Purpose .................................................................................... 31

3.4 Distinguishing Characteristics of Insurance Contracts ........................................ 31

3.4.1 Principle of indemnity .......................................................................... 31

3.4.2 Insurable Interest ............................................................................... 32

3.4.3 Subrogation ...................................................................................... 33

3.4.4 Utmost good faith (Uberrimae Fidei)...................................................... 33

3.4.5 Aleatory contract ............................................................................... 33

3.4.6 Contract of adhesion .......................................................................... 33

3.4.7 Unilateral contract ............................................................................. 34

3.5 Common clauses and sections in a insurance contract : ..................................... 34

CHAPTER 4: GENERAL INSURANCE ..................................................................... 35

4.1 Classification of insurance ............................................................................. 35

4.2 Classification of Non-life insurance ................................................................. 35

4.3 Types of Property Insurance : ......................................................................... 35

4.3.1 Fire Insurance ................................................................................... 35

4.3.2 Various types of Engineering Insurance.................................................. 37

4.3.3 Contractors All Risk Insurance .............................................................. 38

4.3.4 Marine Cargo Insurance ....................................................................... 42

2
 4.3.5 Features of motor insurance ................................................................. 44

4.3.6 Burglary Insurance ............................................................................ 47

4.3.7 Money Insurance ............................................................................... 48

CHAPTER 5: PERSONAL AND LIABILITY INSURANCE ........................................... 51

5.1 Personal Insurance ....................................................................................... 51

5.2 Mediclaim Policies ......................................................................................... 51

5.2.1 Individual Mediclaim ........................................................................... 51

5.2.2 Exclusions ........................................................................................ 52

5.2.3 Age Limit ........................................................................................... 52

5.2.4 Policy conditions : .............................................................................. 52

5.3 Group Mediclaim policy .................................................................................. 53

5.3.1 Bonus/Malus ...................................................................................... 54

5.3.2 Maternity Extension ............................................................................ 54

5.4 Personal Accident Insurance (PA) .................................................................... 54

5.4.1 Coverage ........................................................................................... 54

5.4.2 Definition of some of the terms used in PA policy ................................... 54

5.4.3 Types of coverage : ............................................................................. 55

5.4.4 Exclusions under PA policy ................................................................... 56

5.4.5 Policy conditions ................................................................................. 56

5.5 Liability Insurance ....................................................................................... 57

5.6 Employers Liability Insurance ........................................................................ 57

5.6.1 Coverage under the policy ................................................................... 57

5.6.2 Exclusions ......................................................................................... 58

5.7 Public Liability Insurance .............................................................................. 58

5.7.1 Compulsory Public Liability (Act Policy) .................................................. 58

5.7.2 Policy Exclusions : .............................................................................. 59

5.7.3 Conditions ........................................................................................ 60

5.8 Professional Indemnity Insurance .................................................................. 60

5.8.1 Coverage ......................................................................................... 60

5.9 Product Liability Insurance : ........................................................................... 61

5.9.1 Exclusions ........................................................................................ 61

5.9.2 Conditions ........................................................................................ 61

3
CHAPTER 6: FINANCIAL PLANNING AND LIFE INSURANCE ................................. 62

6.1 Financial Planning ........................................................................................ 62

6.1.1 Emergency funding ............................................................................. 62

6.1.2 Education Fund .................................................................................. 62

6.1.3 Unemployment ................................................................................... 63

6.1.4 Premature Death ................................................................................ 63

6.1.5 Property loss ...................................................................................... 63

6.1.6 Retirement Planning ............................................................................ 63

6.2 Ratios as a tool for financial analysis .............................................................. 64

6.3 Definition of Life Insurance ........................................................................... 64

6.4 Law of large numbers .................................................................................. 65

6.5 Factors affecting rating under Life insurance ................................................... 65

6.6 Principles of Insurance and Life Insurance ....................................................... 66

6.6.1 Utmost good faith ............................................................................... 66

6.6.2 Insurable Interest ............................................................................... 67

6.6.3 Indemnity .......................................................................................... 67

6.6.4 Subrogation ....................................................................................... 67

6.6.5 Contribution ....................................................................................... 67

CHAPTER 7: TYPES OF LIFE INSURANCE POLICIES .............................................. 68

7.1 Term Insurance ............................................................................................ 68

7.2 Types of Term Life Insurance ......................................................................... 68

7.2.1 Yearly renewable term insurance .......................................................... 68

7.2.2 Level term life insurance ...................................................................... 68

7.2.3 Decreasing term life insurance .............................................................. 69

7.2.4 Increasing term life insurance .............................................................. 69

7.3 Whole Life Insurance ..................................................................................... 69

7.3.1 Limited payment whole life insurance .................................................... 70

7.3.2 Types of Whole Life Insurance ............................................................. 70

7.4 Endowment policy ........................................................................................ 70

7.4.1 Joint Life Endowment Policy ................................................................. 70

7.4.2 Double Endowment Policy .................................................................... 71

4
7.5 Children’s policies ......................................................................................... 71

7.6 Annuities .................................................................................................... 72

7.6.1 Types of Annuity ................................................................................. 72

7.6.2 Method of Premium payment ................................................................ 73

7.7 Group Insurance .......................................................................................... 73

7.7.1 Types of groups ................................................................................. 74

7.7.2 Experience Rating ............................................................................... 74

7.8 Industrial Life Assurance................................................................................ 75

7.9 Life insurance premium and tax benefits .......................................................... 75

CHAPTER 8: INSURANCE INTERMEDIARIES ......................................................... 78

8.1 Introduction ................................................................................................ 78

8.2 Individual agent ........................................................................................... 78

8.2.1 Corporate agent ................................................................................. 78

8.2.2 Code of Conduct ................................................................................. 79

8.3 Broking regulations ....................................................................................... 80

8.3.1 Functions of a direct broker ................................................................ 81

8.3.2 Functions of a re-insurance broker ........................................................ 81

8.3.3 Functions of composite broker .............................................................. 82

8.3.4 Procedure for licensing ...................................................................... 82

8.3.5 Validity of licence ............................................................................... 82

8.3.6 Renewal of licence ............................................................................ 82

8.3.7 Remuneration .................................................................................... 83

8.3.8 Professional indemnity insurance ........................................................ 84

8.4 Indian Insurance Market ............................................................................... 86

8.4.1 Life Insurance .................................................................................... 86

8.4.2 Nationalisation of Life insurance in India ............................................... 86

8.4.3 Privatisation of Life insurance in India ................................................... 86

8.4.4 Life Insurance Players ....................................................................... 87

8.4.5 Non-Life Insurance ............................................................................ 87

8.4.6 Nationalisation of general insurance in India .......................................... 88

8.4.7 Privitisation of Non-Life Insurance :....................................................... 88

5
 Distribution of weights of the
Insurance Module Curriculum

Chapter
Title Weights (%)
No.
1. Introduction to Insurance 6
2. Fundamentals of Risk Management 14
3. Insurance Contract, Terminology, Elements and Principles 18
4. General Insurance 14
5. Personal and Liability Insurance 15
6. Financial Planning and Life Insurance 15
7. Types of Life Insurance Policies 12
8. Insurance Intermediaries 6

Note: Candidates are advised to refer to NSE’s website: [Link], click on ‘Education’
link and then go to ‘Updates & Announcements’ link, regarding revisions/updations in NCFM
modules or launch of new modules, if any.

This book has been developed for NSE by Mrs. Subhashini Prakash, Prime Career
Mentors Pvt. Ltd.

Copyright © 2018 by NSE Academy Ltd.

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reproduced, duplicated, sold, resold or exploited for any commercial purposes.
Furthermore, the book in its entirety or any part cannot be stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise.

6
Chapter 1: Introduction to Insurance

1.1 Definition of Insurance

Insurance has been defined in many ways; Willet defines insurance “as the social device for

making accumulations to meet uncertain losses of capital which is carried out through the

transfer of risks of many individuals to one person or to a group of persons”.

Dr. Pfeffer defined Insurance as a device for the reduction of the uncertainty of one party

called the insured, through the transfer of particular risks to another party called the insurer,

who offers, a restoration at least in part of economic losses suffered by the insured.

Another definition of insurance is “a promise of compensation for specific potential future

losses in exchange for a periodic payment”. Insurance is designed to protect the financial

well-being of an individual, company or other entity in the case of unexpected loss. Some

forms of insurance are required by law, while others are optional. Agreeing to the terms of

an insurance policy creates a contract between the insured and the insurer. In exchange for

payments from the insured (called premiums), the insurer agrees to pay the policy holder a

sum of money upon the occurrence of a specific event. In most cases, the policy holder pays

part of the loss (called the deductible) and the insurer pays the rest. Examples include car

insurance, health insurance, disability insurance, life insurance, etc.

Insurance therefore is a contract between two parties whereby one party agrees to undertake

the risk of another in exchange for consideration known as premium and promises to pay a

fixed sum of money to the other party on happening of an uncertain event (death) or after

the expiry of a certain period (in case of life insurance) or to indemnify the other party on

happening of an uncertain event (in case of general insurance).

The party bearing the risk is known as the ‘insurer’ or ‘assurer’ and the party whose risk is

covered is known as the ‘insured’ or ‘assured’.

1.2 How Insurance Works

The underlying concept behind insurance is sharing of risks by pooling of funds. Groups of people

sharing similar risk come together and make contribution towards a pool and the money so

collected is used towards compensating for any losses suffered by members of the pool. When

the pool is managed by the individuals it is called mutual insurance and when it is managed

by a company it is called life/general insurance.

7
1.2.1 We will understand the concept with an example:

Example 1 Example 2
(What happens if 2 houses are burnt?) (What happens if 25 persons dies?)
Assumptions Assumptions
• Houses in a village = 500 • Number of Persons = 5000

• Value of 1 House = Rs.1,00,000 • Age and Physical condition = 60 years

and Healthy
• Houses burning in a year = 2
• Number of persons dying in a yr
• Total annual loss due to fire
= 25
= Rs. 2,00,000/-
• Economic value of loss suffered by
• Contribution of each house owner
family of each dying person
= Rs. 500/-
= Rs. 2,00,000/-

• Total annual loss due to deaths

= Rs. 50,00,000/-

• Contribution per person

= Rs. 1,200/-
UNDERLYING ASSUMPTION UNDERLYING ASSUMPTION
All 500 house owners are exposed to a All 5000 persons are exposed to common
common risk, i.e. fire risk, i.e. death
PROCEDURE PROCEDURE
All owners contribute Rs. 500/- each as Everybody contributes Rs. 1200/- each as
premium to the pool of funds premium to the pool of funds

Total value of the fund = Rs. 2,50,000 Total value of the fund = Rs. 60,00,000
(i.e. 500 houses * Rs. 500) (i.e. 5000 persons * Rs. 1,200)

2 houses get burnt during the year 25 persons die in a year on an average

Insurance company pays Rs. 1,00,000/- out Insurance company pays Rs. 2,00,000/- out
of the pool to 2 house owners whose house of the pool to the family members of each of
got burnt the 25 persons dying in a year

EFFECT OF INSURANCE EFFECT OF INSURANCE

Risk of 2 house owners is spread over 500 Risk of 25 persons is spread over 5000
house owners in the village, thus reducing people
the burden on any one of the owners

8
1.3 We can see from above that two concepts emerge out of this
• Criteria for insurable Risk

• Underwriting

1.3.1 Can Insurance insure all kinds of risks?

For a risk to be considered for insurance, the following criteria should be satisfied.

1. Law of large numbers: “ Mathematical premise stating that the greater the number of
exposures (1) the more accurate the prediction; (2) the less the deviation of the actual losses
from the expected losses (X - x approaches zero); and (3) the greater the credibility of the
prediction (credibility approaches one). This law forms the basis for the statistical expectation
of loss upon which premium rates for insurance policies are calculated”.

Insurance is based on probabilities of loss occurrence. The insurers estimate the premium
payable based on the relevant statistics and probabilities. For the actual outcome of loss
exposure to be reflective of the statistics, there must be a large number of homogenous
units. The larger the number of homogenous (similar) exposure units the more likely the loss
experience will conform to the probability statistics.

2. The loss must be accidental or fortuitous: For a risk to be insurable, it should be accidental
or of fortuitous nature because insurance is based on chance. We cannot insure an event which
is bound to happen. There should be an element of uncertainty. For e.g. in fire insurance,
the property is insured against the perils of fire, flood etc. on the assumption that loss may
or may not happen. If we are sure there is bound to be floods in the next 15 days and take
insurance, the policy will not be valid. However, in life insurance though death is certain, this
principle is still applicable as we are not sure when death would actually arise, some may die
at 20 some at 60 and so on.

i) Here we need to distinguish between Speculative risk and Pure risk:

Speculative risks are not insurable. The difference between pure risk and speculative risk
is that in speculative risk there is a possibility of loss or profit. These risks are willingly taken
by people with an aim to make profit. The typical example is a day trader in the stock market
who buys shares in the morning hoping that the price will go up before the market closes and
he can sell the shares at a profit. However, the share prices may come down in which case
the day trader incurs a loss.

Pure risks are those risks in which there is only a possibility of loss or no loss, there is no
probability of making profits. Pure risks are categorized into Personal, Property and Liability
or legal risks. Personal risks affect people directly such as illness, death, injury etc. Property
risk affects property such as building, machinery, car etc. Legal risks or Liability risks involves,
as the name suggest, the risk of being sued due to negligence or causing injury to another
person or loss/damage to property of another person.

9
Pure risk is insurable, because the law of large numbers can be applied to forecast future
losses and thus insurance companies can calculate what premium to charge based on expected
losses. On the other hand, speculative risks have more varied conditions that make estimating
future losses difficult or impossible. Also, speculative risk will generally involve a greater
frequency of loss than a pure risk.

ii) Risk can also be classified as to whether it affects many people or only a single individual.
Fundamental risk is a risk, such as an earthquake or terrorism, that can affect many people at
once. Economic risks, such as unemployment, are also fundamental risks because they affect
many people. Particular risk is a risk that affects particular individuals, such as robbery or
vandalism. Insurance companies generally insure some fundamental risks, such as hurricane
or wind damage and most particular risks.

In the case of fundamental risks that are insured, insurance companies help to reduce the
risk of great financial loss by limiting coverage in a specific geographic area and by the use
of reinsurance, which is the purchase of insurance by insurer from another insurer called
reinsurer.

Fundamental risks are risks that affect many members of society, but fundamental risks can
also affect organizations. For instance, enterprise risk is the set of all risks that affects a
business enterprise. Speculative risks that can affect an organization are usually subdivided
into strategic risk, operational risk, and financial risk.

Strategic risk results from goal-oriented behavior. A business may want to try to improve
efficiency by buying new equipment or trying a new technique, but may result in more losses
than gains. Operational risks arise from the operation of the enterprise, such as the risk of
injury to employees or the risk that customers data can be leaked to the public because of
insufficient security. Financial risk is the risk that an investment will result in losses. Because
most enterprise risk is speculative risk and because the enterprise itself can do much to lower
its own risk, many companies are learning to manage their risk by creating departments and
hiring people with the express purpose of reducing enterprise risks—also called as enterprise
risk management. Many larger firms may have a chief risk officer (CRO) with the primary
responsibility of reducing risk throughout the enterprise.

iii) Peril and Hazard

Peril is an immediate, specific event, causing a loss and giving rise to risk. An accident or
illness is a peril. If a house burns down, then fire is the peril.

A hazard is a condition that gives rise to a peril. Smoking is a physical hazard that increases
the likelihood of a house fire and illness.

10
Three types of hazards :

i) Physical hazards are characteristics of the individual that increase or reduce

the chance of peril. Examples are body structure (height related to weight), blood
pressure, sugar levels, cholesterol levels etc.

ii) Moral Hazards are habits or activities that increase risk, such as drug or alcohol
use. These have social as well as personal effects.

iii) Morale Hazards are individual activities that arise from a state of mind, such
as the casual indifference toward one’s body as exhibited by individuals with
hazardous hobbies, such as ski-diving or flying ultra-light aircraft.

3. Loss must be definite and measurable: The insurer should be able to measure the
loss in financial terms and there should be no ambiguity as to whether loss has occurred or
not. That is, there should not be any doubt on whether the payment is due under the policy
or not. For example, under health insurance, the cost of medical treatment is obtained by way
of hospital and medical bills and enables the insurer to check on the extent of loss suffered by
the insured.

4. The loss must not be catastrophic: Catastrophic losses refers to devastating losses
arising out of a single event such as an earthquake. While insurance companies do cover
catastrophic losses, they may agree to cover these losses for the insured, not as a standalone
loss but combined along with other types of losses and provided the catastrophic losses are
such that their occurrence would be rare. Most of the insurance companies protect themselves
against catastrophic losses by taking out sufficient reinsurance. We have discussed above the
criteria which should exist for a risk to be insurable. Another important aspect of insurance is
related to underwriting.

1.3.2 Underwriting:

In insurance parlance the term underwriting refers to the insurer’s decision as to whether to :

a) Accept a risk

b) Rate, terms and condition subject to which the risk is to be accepted.

For an insurer to be able to underwrite, he has to evaluate the risk as well as the exposure.
Based on the evaluation, it decides on the extent of coverage to be granted, the premium to
be charged in consideration of transfer of risk. If the nature of risk does not fit in with the
underwriting philosophy of the company, the insurer (underwriter) may decide to decline
acceptance of the risk.

While underwriting a risk, various factors are taken into account; for example, while granting
motor insurance, the past driving record of the insured, age of the insured, type of vehicle

11
etc. are of great relevance. Similarly, while underwriting health insurance, the past health
history of the assured, nature of pre-existing diseases, family history of chronic ailment are
taken into account.

The underwriters, based on information gathered, past experience on similar lines as well as
using the underwriting guidelines of the company may decide :

i) To accept the risk

ii) To accept the risk subject to special terms and conditions

iii) To reject the risk

1.4 Insurance Act, 1938

This Act came into force on 1st July 1939 and is applicable to the whole of India, except
Jammu and Kashmir. This law is applicable to all the insurance companies and other entities
participating in the insurance industry in India .

The purpose of enactment of this law is:

1. To supervise all the organisations operating in insurance business in India. This is

ensured by making registration compulsory.

2. To increase deposit of insurance companies to ensure that they are adequately

financed and conform to minimum capital requirements.

3. Full disclosure of information is enforced to ensure soundness and transparency in

management.

4. Submission of accounts and inspection of insurance companies by authorities.

5. Guidelines are laid for investment of funds by insurance companies.

6. Regulations to govern the assignment and transfer of life insurance policies besides
including the possibility of making nominations.

The Insurance Act, 1938 was amended in 1950, again in 1956 when life insurance business
was nationalized and again in 1972 when general insurance was nationalised.

1.5 Insurance Regulatory and Development Authority (IRDA)

IRDA is the regulator of the insurance industry in India and was constituted by an Act of
Parliament in 1997. It has the following mission:
To protect the interests of the policy holders. To regulate, promote and ensure orderly growth
of the insurance industry.
It is constituted by a 10 member team consisting of :
Chairman
Five whole time members
Four part time members

12
1.5.1 Duties, Powers and Functions of IRDA

Section 14 of the IRDA Act, 1999 lays down the duties, powers and functions of IRDA which
are :

1. issuance of certificate of registration, renewal, modification, withdraw, suspend or

cancel such registration;

2. Protection of the policyholders interest;

3. Laying down qualifications, training and code of conduct for intermediaries;

4. Laying down code of conduct for Surveyors;

5. Promote efficiency in the conduct of insurance business;

6. Promoting and regulating professional organisations connected with the insurance

and re-insurance business;

7. Levying fees and other charges for carrying out the purposes of this Act;

8. Calling for information, conduct of inspection, audit of all organizations associated

with the insurance business;

9. Control of the rates, terms etc. offered by general insurers in respect of business not
controlled by Tariff Advisory Committee (TAC);

10. Specifying the manner in which accounts should be maintained by insurers and
intermediaries;

11. Regulation of investment of funds by insurers ;

12. Regulation of maintenance of solvency margins;

13. Act as a dispute settlement authority between insurers and intermediaries;

14. Supervise TAC;

15. Specify the percentage of premium income to be utilised for promoting organizations
mentioned in clause 6 ;

16. Specify the rural sector obligation of insurers;

17. Exercise any other powers as prescribed.

1.6 Insurance Advertisements and Disclosure Regulations, 2000

This regulation has been formulated with a view to prevent mis-selling and misleading
information about the insurance products being sent to the potential clients. Some important
points to be kept in mind are:

Every advertisement for insurance shall:

1. State clearly and unequivocally that insurance is the subject matter of solicitation;

13
 2. State the full registered name of the insurer/ intermediary/ insurance agent;

3. Every insurance company shall be required to prominently disclose in the

advertisement, the full particulars of the insurance company and not merely any
trade name or monogram or logo;

4. Every insurer or intermediary or insurance agent shall have a compliance officer,

whose name and official position in the organisation shall be communicated to the
IRDA and he shall be responsible to oversee the advertising programme;

5. Every advertisement by an insurance agent that affects an insurer must be approved

by the insurer in writing prior to its issue. It shall be the responsibility of the insurer
while granting such approval to ensure that all advertisements that pertain to the
company or its products or performance comply with these regulations and are not
deceptive or misleading.

6. Every insurer or intermediary shall follow recognised standards of professional

conduct as prescribed by the Advertisement Standards Council of India (ASCI) and
discharge its functions in the interest of the policyholders.

1.7 Protection of Policy holders Interest Regulations, 2002

With a view to protect the end consumer, IRDA has laid down regulations which cover the
following:

1.7.1 Matters to be stated in life insurance policy

1. A life insurance policy shall clearly state:

i. the name of the plan governing the policy, its terms and conditions;

ii. whether it is participating in profits or not;

iii. the basis of participation in profits such as cash bonus, deferred bonus, simple or
compound reversionary bonus;

iv. the benefits payable and the contingencies upon which these are payable and the
other terms and conditions of the insurance contract;

v. the details of the riders attached to the main policy;

vi. the date of commencement of risk and the date of maturity or date(s) on which the
benefits are payable;

vii. the premiums payable, periodicity of payment, grace period allowed for payment
of the premium, the date for the last installment of premium, the implication of
discontinuing the payment of an instalment(s) of premium and also the provisions
of a guaranteed surrender value;

viii. the age at entry and whether the same has been admitted;

14
 ix. the policy requirements for (a) conversion of the policy into paid up policy (b)
surrender (c) non-forfeiture and (d) revival of lapsed policies;

x. contingencies excluded from the scope of the cover, both in respect of the main
policy and the riders;

xi. the provisions for nomination, assignment and loans on security of the policy and
a statement that the rate of interest payable on such loan amount shall be as
prescribed by the insurer at the time of taking the loan;

xii. any special clauses or conditions, such as, first pregnancy clause, suicide clause
etc.;

xiii. the address of the insurer to which all communications in respect of the policy shall
be sent;

xiv. the documents that are normally required to be submitted by a claimant in support
of a claim under the policy.

2. While forwarding the policy to the insured, the insurer shall inform through the letter
forwarding the policy, that the insured has a period of 15 days from the date of receipt of
the policy document to review the terms and conditions of the policy and where the insured
disagrees to any of those terms or conditions, he has the option to return the policy stating
the reasons for his objection, whereby he shall be entitled to a refund of the premium paid,
subject only to a deduction of a proportionate risk premium for the period on cover (15 days)
and the expenses incurred by the insurer on medical examination of the proposer and stamp
duty charges.

3. In respect of a unit linked policy, in addition to the deductions given under (2) above,
the insurer shall also be entitled to repurchase the unit at the price of the units on the date of
cancellation.

4. In respect of a cover, where premium charged is dependent on age, the insurer shall
ensure that the age is verified, as far as possible, before issuance of the policy document. In
case where age has not been admitted by the time the policy is issued, the insurer shall make
efforts to obtain proof of age and admit the same as soon as possible.

1.7.2 Matters to be stated in general insurance policy

1. A general insurance policy shall clearly state:

i. the name(s) and address(es) of the insured and of any bank(s) or any other person
having financial interest in the subject matter of insurance;

ii. full description of the property or interest insured;

iii. the location or locations of the property or interest insured under the policy and
where appropriate, with respective insured values;

15
 iv. period of insurance;

v. sums insured;

vi. perils covered and not covered;

vii. any franchise or deductible applicable;

viii. premium payable and where the premium is provisional subject to adjustment, the
basis of adjustment of premium be stated;

ix. policy terms, conditions and warranties;

x. action to be taken by the insured upon occurrence of a contingency likely to give rise
to a claim under the policy;

xi. the obligations of the insured in relation to the subject matter of insurance upon
occurrence of an event giving rise to a claim and the rights of the insurer in the
circumstances;

xii. any special conditions attached to the policy;

xiii. provision for cancellation of the policy on grounds of mis-representation, fraud, non-
disclosure of material facts or non-cooperation of the insured;

xiv. the address of the insurer to which all communications in respect of the insurance
contract should be sent;

xv. the details of the riders attached to the main policy;

xvi. proforma of any communication the insurer may seek from the policyholders to
service the policy.

2. Every insurer shall inform and keep informed periodically the insured on the requirements
to be fulfilled by the insured regarding lodging of a claim arising in terms of the policy and the
procedures to be followed by him to enable the insurer to settle a claim early.

1.7.3 Claims procedure in respect of a life insurance policy

1. A life insurance policy shall state the primary documents which are normally required to
be submitted by a claimant in support of a claim.

2. A life insurance company, upon receiving a claim, shall process the claim without delay.
Any queries or requirement of additional documents, to the extent possible, shall be raised
all at once and not in a piece-meal manner, within a period of 15 days of the receipt of the
claim.

3. A claim under a life policy shall be paid or be disputed giving all the relevant reasons,
within 30 days from the date of receipt of all relevant papers and clarifications required.

16
However, where the circumstances of a claim warrant an investigation in the opinion of the
insurance company, it shall initiate and complete such investigation at the earliest. Where in
the opinion of the insurance company the circumstances of a claim warrants an investigation,
it shall initiate and complete such investigation at the earliest, in any case not later than 6
months from the time of lodging the claim.

4. Subject to the provisions of section 47 of the Act, where a claim is ready for payment but
the payment cannot be made due to any reasons of a proper identification of the payee, the
life insurer shall hold the amount for the benefit of the payee and such an amount shall earn
interest at the rate applicable to a savings bank account with a scheduled bank (effective from
30 days following the submission of all papers and information).

5. Where there is a delay on the part of the insurer in processing a claim for a reason other
than the one covered by sub-regulation (4), the life insurance company shall pay interest on
the claim amount at a rate which is 2% above the bank rate prevalent at the beginning of the
financial year in which the claim is reviewed by it.

1.7.4 Claim procedure in respect of a general insurance policy

1. An insured or the claimant shall give notice to the insurer of any loss arising under
contract of insurance at the earliest or within such extended time as may be allowed by the
insurer. On receipt of such a communication, a general insurer shall respond immediately and
give clear indication to the insured on the procedures that he should follow. In cases where a
surveyor has to be appointed for assessing a loss/ claim, it shall be so done within 72 hours
of the receipt of intimation from the insured.

2. Where the insured is unable to furnish all the particulars required by the surveyor or
where the surveyor does not receive the full cooperation of the insured, the insurer or the
surveyor as the case may be, shall inform in writing the insured about the delay that may
result in the assessment of the claim. The surveyor shall be subjected to the code of conduct
laid down by the IRDA while assessing the loss and shall communicate his findings to the
insurer within 30 days of his appointment with a copy of the report being furnished to the
insured, if he so desires. In certain circumstances either due to special or complicated nature
of the case, the surveyor may, under intimation to the insured, seek an extension from the
insurer for submission of his report. In no case shall a surveyor take more than six months
from the date of his appointment to furnish his report.

3. If an insurer, on the receipt of a survey report, finds that it is incomplete in any respect,
he shall require the surveyor under intimation to the insured, to furnish an additional report
on certain specific issues as may be required by the insurer. Such a request may be made by
the insurer within 15 days of the receipt of the original survey report. Provided that the facility

17
of calling for an additional report by the insurer shall not be resorted to more than once in the
case of a claim.

4. The surveyor on receipt of this communication shall furnish an additional report within
three weeks of the date of receipt of communication from the insurer.

5. On receipt of the survey report or the additional survey report, as the case may be, an
insurer shall within a period of 30 days offer a settlement of the claim to the insured. If the
insurer, for any reasons to be recorded in writing and communicated to the insured, decides
to reject a claim under the policy, it shall do so within a period of 30 days from the receipt of
the survey report or the additional survey report, as the case may be.

6. Upon acceptance of an offer of settlement as stated in sub-regulation (5) by the insured,

the payment of the amount due shall be made within 7 days from the date of acceptance of
the offer by the insured. In the cases of delay in the payment, the insurer shall be liable to pay
interest at a rate which is 2% above the bank rate prevalent at the beginning of the financial
year in which the claim is reviewed by it.

1.7.5 Policyholders’ Servicing

1. An insurer carrying on life or general business, as the case may be, shall at all times,
respond within 10 days of the receipt of any communication from its policyholders in all
matters, such as:

1. recording change of address;

2. noting a new nomination or change of nomination under a policy;

3. noting an assignment on the policy;

4. providing information on the current status of a policy indicating matters, such as,
accrued bonus, surrender value and entitlement to a loan;

5. processing papers and disbursal of a loan on security of policy;

6. issuance of duplicate policy;

7. issuance of an endorsement under the policy; noting a change of interest or sum

assured or perils insured, financial interest of a bank and other interests; and

8. guidance on the procedure for registering a claim and early settlement

1.8 Third Party Administrators (TPA) - Health Insurance

TPAs are licensed by IRDA and are engaged for a fee or remuneration for the provision of
health services. Health services means all the services rendered by a TPA as per the terms
of agreement entered into with an insurance company in connection with health insurance

18
business, however the services rendered will not include either insurance business or soliciting
of insurance business either directly or through an intermediary. They are normally contracted
by a health insurer to administer services, including claims administration, premium collection,
enrollment and other administrative activities.

The license to act as TPA is granted by IRDA only to companies which have a share capital
and are registered under Companies Act, 1956. As per the memorandum of the company, the
primary objective should be to carry on business in India as TPA in the health services and
they are not permitted to transact any other business. The minimum capital prescribed is Rs.
1,00,00,000 .

As per the act at least one of the directors should be a qualified medical doctor registered with
Medical Council of India. The Chief Executive Officer (CEO) of the company has to under go
training as prescribed by the IRDA.

The TPA can enter into agreement with more than one insurance company and the insurance
companies can also deal with more than one TPA.

1.8.1 Code of conduct for TPA

The code of conduct for TPA has been prescribed by the Act.

TPA licensed under these regulations shall as far as possible act in the best professional
manner.

In particular and without prejudice to the generality of the provisions contained above, it shall
be the duty of every TPA, its Chief Administrative Officer or Chief Executive Officer and its
employees or representatives to :-

1. establish its or his or their identity to the public and the insured/policyholder and
that of the insurance company with which it has entered into an agreement.

2. disclose its licence to the insured/policyholder/prospect.

3. disclose the details of the services it is authorised to render in respect of health

insurance products under an agreement with an insurance company;

4. bring to the notice of the insurance company with whom it has an agreement,
any adverse report or inconsistencies or any material fact that is relevant for the
insurance company’s business;

5. obtain all the requisite documents pertaining to the examination of an insurance

claim arising out of insurance contract concluded by the insurance company with the
insured/policyholder;

6. render necessary assistance specified under the agreement and advice to policyholders
or claimants or beneficiaries in complying with the requirements for settlement of
claims with the insurance company;

19
7. conduct itself /himself in a courteous and professional manner;

8. refrain from acting in a manner, which may influence directly or indirectly insured/
policyholder of a particular insurance company to shift the insurance portfolio from
the existing insurance company to another insurance company;

9. refrain from trading on information and the records of its business;

10. maintain the confidentiality of the data collected by it in the course of its
agreement;

11. refrain from resorting to advertisements of its business or the services carried out
by it on behalf of a particular insurance company, without the prior written approval
by the insurance company;

12. refrain from inducing an insured/policyholder to omit any material information, or

submit wrong information;

13. refrain from demanding or receiving a share of the proceeds or indemnity from the
claimant under an insurance contract;

14. follow the guidelines/directions that may be issued down by the IRDA from time to
time.

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Chapter 2 : Fundamentals of Risk
Management
2.1. Definition of Risk
Risk is a condition whereby there is a possibility of loss occurring. In insurance the subject
matter insured is called the Risk.

There are two main components in definition of risk:

i) Uncertainty: Uncertainty refers to a situation where an event may or may not happen.
For eg. a building may or may not have a fire accident.

ii) Undesired consequences: Undesired consequences refers to the negative results

that may arise out of an event, such as a fire accident which may result in damage to a
property as well as result in consequential loss of business due to stoppage of work.

Risk is distinguished from peril and hazard.

Peril is a cause of loss, eg. fire.

Hazard is a condition that may create or increase the chance of a loss arising from a given
peril.

Physical hazard refers to the hazards / features associated with a risk, such as storage of
cotton near chemicals in a factory (chemicals increase chances of igniting the cotton).

Moral hazard refers to the moral risk of the insured. For instance if the insured has a history
of making fictitious claim in the past, insurers would not like to insure him.

2.1.1 Subjective Risk and Acceptable Risk

Subjective risk is the extent to which a person feels threatened by a particular risk.
Uncertainty of an event, as seen by an individual, varies from person to person based on the
quality of data available of past events.

Acceptable risk is the level of subjective risk which an individual or company feels comfortable
in facing and the size of loss that could be absorbed. Acceptable risk will always be influenced
by financial considerations.

2.2 Classification of Risks

i. Pure Risks and Speculative Risks
Pure risks are those which present the possibility of a loss or no loss but not a profit.
The person who buys a car immediately faces the possibility that something may
happen which could damage or destroy the car. The possible outcomes are loss or
no loss.

21
 Speculative risks may produce a profit or loss. Most typical example is day trading,
i.e. buying a share expecting to make profit which may not be the case always.

It is possible a risk may be both pure and speculative, e.g. loss of property by fire is
a pure risk for owner. But speculative for the insurer who underwrites large number
of risks hoping to achieve an overall profit on his portfolio.

ii. Dynamic and Static Risk

Dynamic risks are those resulting from changes in the economy, changes in price
level, consumer tastes, income and output, technology and may cause financial loss
to members of the society.

Static risk involves those losses that would occur even if there were no changes in
the economy. These losses arise from causes other than changes in economy – eg.
fire, flood.

iii. Fundamental and Particular Risks

Fundamental risks are those which affect the whole or significant part of the society
- wars, major natural calamities etc.

Particular risks involve losses that arise out of individual events and affect an
individual or a single firm and arise from factors over which he or it may exert some
control.

2.3 Definition of Risk Management

Most definitions stress two points:

i. Risk management is concerned primarily with pure risk and

ii. Managing pure risks

Risk manager’s job is:

i. Identification of the problem.

ii. Evaluation / measurement of its potential effects.

iii. Identification and analysis of possible solutions.

iv. Adoption of-the most appropriate solution.

v. Monitoring the results.

2.4 Stages of Risk Management - Two Stages

i. Risk identification - until a risk is identified as a threat, it cannot be managed.

ii. Risk measurement / evaluation - is essential to decide on the appropriate method of

dealing with the risk.

The process of risk identification and evaluation/ measurement is called Risk Analysis.

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2.4.1 Risk Identification

Consists of -

• Risk perception - ability to perceive that there is an exposure to risk.

• Identification of causes which can lead to a loss and its effect.

Whether the risk is actually a threat? How it might be caused? What perils would be involved?
What are the likely consequences?

Tools of risk identification :

i. Exposure check list - this is simply a listing of common exposures. It is good to

prepare a list of exposures, that is the peril to which the business is exposed to.

ii. Event analysis is a technique for considering likely events which could cause problems
and then investigating the causes and effects. This technique uses as its starting
point a particular loss producing event such as fire. Use of Hazard Logic Trees which
is a method in which the various hazards which can increase the risk and increase
the chance of operation of a peril is drawn, so that it is possible to identify the cause
of and event which would produce a loss.

iii. Fault Tree Analysis - It highlights situations which may present no risk on themselves
but which could endanger the organization if they were to exist together. Eg. if
flammable vapours are produced in a chemical factory, this might not be a hazard in
itself. However, if it is exposed to electrical spark or ignited cigarettes, the hazard is
enhanced.

iv. Hazards and Operability Studies - this technique is used at the planning stage of
process plants in order to identify and eliminate potential causes of failure. It consists
of posing of the repeated question “what would happen if …….” at every stage.

v. Dow Index - Dow Chemicals in the USA developed a system for identification and
evaluation of fire and explosion hazard potential based on the study of many plant
accidents. The technique is to:

• List all materials in the operation

• Identify the dominant substance in terms of quality and hazard

• Quantify the hazards according to heats of combustion, decomposition or

reaction

• Apply DOW rating factors.

For eg. in a factory manufacturing chemicals, as a first step, all the materials used in
the plant are listed, once the listing is done, the chemicals which are most hazardous

23
 are identified. The next step is to evaluate each chemical in terms of its various
attributes to understand the risks to which it is most susceptible to. Once these are
done, the rating which has been developed by DOW is applied. In this way the risk
is identified and classified.

vi. Safety Audit – fire plus explosion safety, accident precaution, products safety, statistical
analysis of experience, contingency plan, final report with recommendation and time
bound implementations. To be done internally or by an outsider consultant.

vii. Flow charts - A flow chart of the entire process is drawn and risks the process is
exposed to is identified.

viii. Site visits - standard of maintenance and housekeeping which have a bearing on
exposure to losses arising out of fire, explosion etc. are analysed.

2.4.2 Risk measurement / evaluation

Once the risks are identified, the risk manager must evaluate them. Evaluation implies
some ranking in terms of importance. In the case of loss exposures, two facts must be
considered:

1. possible frequency or probability of loss

2. possible severity of loss

Measuring probability is difficult due to –

• Risks facing a company are not of a kind where the number of possible outcomes
are known for certain.

• Therefore, statistical probability cannot be exactly calculated.

• What can be done is to calculate a probability of future occurrences based on

information about the past.

• The probability arrived at will never be more than an estimate.

Two important conclusions :

i. Better the record keeping of past occurrences of a similar kind, better the measurement
of a particular risk is likely to be.

ii. Catastrophic events happen so infrequently compared to small losses. The

measurement of the probability of such events is likely to be least exact.

While measuring probability, severity must not be ignored as the effect of a risk is most
important to risk manager. The most accurate determination of the probability of a fire
occurring is of little use if the prediction does not distinguish between a trivial fire and one
which destroys the factory.

24
Measuring Severity

Purpose is to locate a risk in the scale of risks facing an organization.

Risks facing any organization can be categorised as :

Trivial - effects can be borne by organization as part of normal operations.

Minor - effects can be born within a single accounting period.

Major - effects would be too great for the organization to bear in a single accounting
period, but which could be acceptable if spread over a period of time.

Catastrophe - effects would destroy the organization.

The divisions between these categories can be expressed in financial terms and there tends
to be an inverse ratio between size of a risk and its frequency.

Risk Occurence

Catastrophe Rare

Major Infrequent

Minor Fairly Frequent

Trivial Frequent

2.4.3 Risk Avoidance

Risk avoidance is the most drastic method of dealing with risks. Whereas other methods
are aimed at reducing the potential impact of risks, either by reducing loss probabilities or
reducing financial consequences, risk avoidance results in total elimination of exposure to
loss due to specific risk. But it is most limited in practical application because it involves
abandoning some activity and so losing the benefits that may accompany it. It is a negative
rather than a positive approach.

Depending on the type of risk involved risk avoidance can be achieved by :

• Changing the activity which brings about risk.

• Changing materials used in the activity.

• Changing the method by which the activity is done.

Plan for risk avoidance at planning stages - saves expenses, disruption of business etc.

Risk Reduction

Risk avoidance is limited in scope. A more common approach is risk reduction.

Risk reduction may relate either to the probability or severity and may take effect before,
during or after a loss.

25
 STAGE TECHNIQUE AIM

Pre Loss Preventive - eliminate cause of loss Reduce Probability

During Loss Protection - salvaging to preserve as much as possible Reduce severity

of the value of damaged property or ability of injured
person

Post Loss 1. Protecting things or persons exposed to damage or Reduce severity

injury.
2. To limit loss to as small a compass as possible.

All forms of risk and loss reduction will involve the following:

1. Physical Devices

i) Active devices which continually operate to reduce the probability of a loss producing
event occurring - e.g. thermostats on boilers and refrigerating equipment, overload
switches on electrical equipment.

ii) Passive devices like security and fire alarm, sprinklers, automatic fire door etc.

2. Organisational measures - structure and responsibility geared towards risk control

goals.

3. Education and training of employees.

4. Management education and training - to create awareness of the risk to which the
organization is exposed and of the ways in which they may be controlled.

5. Contingency planning - prepares the organization for 3 phases:

i) Pre-loss - emphasis on ways of preventing the risk from producing its effects and
ensuring that those effects are minimized if loss occurs.

ii) At the time of loss - main concern is to save life and salvage property and to bring
the disaster to end as quickly and as safely as possible, so as to limit its effects.

iii) Post loss - a recovery plan to be implemented to bring the organization back to its
normal pre-loss level of operations as quickly as possible.

2.4.4 Risk Transfer

1. Transfer of the activity that creates the risk.

2. Transfer of financial losses arising from the occurrence of the risk e.g. subcontracting
hazardous activities - transfer of liability to contractor etc.

Transfer of liability risks by contract, is by exclusion clause, hold harmless clause or indemnity
clause.
This contract for transfer of risks is entered into by the parties to the contract whereby
one party is relieved of his responsibility for loss/damage for which he is responsible under

26
common law. For eg. an owner of a building is responsible for any damages to the building
and has to incur expense to rectify it. He may enter into a contract with the tenant whereby
the tenant takes over the responsibility for damages to the property.

Exclusion clause - clauses that relieves one party of the liabilities that he may otherwise incur
towards the other.

Hold Harmless clause - a contract usually written such that one party assumes legal liability
on behalf of another party.

Indemnity clause – contract to indemnify one party for losses sustained in lieu of consideration
received.

2.4.5 Risk Financing

After risk is identified, measured and treated appropriately, the question of financing the risk
arises:

Options

1. Pay for losses as they arise out of operating budgets with no specific financial
provision being made.

2. Set up internal contingency fund to meet loss.

3. Borrow to meet cost of losses - from subsidiaries.

4. Risk transfer by insurance.

2.4.6 Risk Retention

Factors influencing risk retention decision:

1. Risk Appetite of the organization - management philosophy, size of company etc.

2. Nature and size of risk

3. External incentives and disincentives - this refers to the incentive which a company
derives for retaining risk or disincentive for transferring risk. For eg. some of the
rating agencies from Japan do not confer quality rating to a company if the company
avails loss of profit insurance. Loss of profit insurance is an insurance where losses
in revenue sustained due to stoppage of business due to an insured peril is covered.
If such coverage is taken, it implies (as per the rating agencies) that the insured
does not have an alternative plan to continue with production and cannot commence
operations within a short period of time from an unforeseen event.

2.4.7 Construction of a plan

Once the risk exposure is identified and analysed, the next step is to take a decision on the

27
combination of measures which an enterprise wishes to adopt to minimize or eliminate the
risk. This is done by putting up an appropriate risk management plan. The plan should clearly
state the various techniques of risk management adopted with regard to various risks. The
plan for a shop may state that:

a) The measures for risk reduction such as putting up fire extinguishers, warning boards
etc.

b) Risk avoidance measures such as undertaking not to sell crackers, cigarettes etc.

c) Risk transfer measures such as availing Fire, Burglary, Money Insurance

d) Risks retained; such as, since the employees are highly trusted, the insured decides
not to avail of fidelity polices

2.4.8 Implementation of a plan

Once the risk management plan is adopted, the next step is to implement it. The plan so
adopted should be economical, efficient and should be constantly updated.

2.4.9 Monitoring the Plan

The risk management program does not end with the implementation of a plan. The success
of the plan has to be constantly monitored, the outcome should be reviewed. This would
enable the risk manager to detect risks which might have escaped his attention earlier and
plug holes in the plan to ensure that the optimal program is formulated.

28
Chapter 3: Insurance Contract,
Terminology, Elements and
Principles

3.1 Introduction
All insurance purchases involve contracts. In fact, insurance is a distinct branch of contract law.
It would be easier to understand insurance, if general knowledge of contract law is available
with a person. It is important to understand the term ‘contract’ as it is used in general and
the distinguishing feature of insurance contract.

A ‘contract’ is an agreement between two or more parties which, if it contains the elements of
a valid legal agreement, is enforceable by law or in other words a ‘contract’ involves exchange
of promise and in case of breach the parties to the contract can avail of legal remedy. The law
of contract in India is governed by the Indian Contract Act, 1872.

3.2 Contract Terminology

Contracts are legally binding agreements which mean that the parties to the contract have
legal recourse in the event of one of the parties not adhering to the terms of the contract. The
court can either ask the party to the contract to honour the commitment and perform an act
as laid down in the contract or it can instruct the offender to compensate the affected party
financially.

Depending on the nature of breach, a contract may either become :

i) Void, or

ii) Voidable

A contract becomes void if the purpose of the contract is illegal for e.g. an insurance policy
taken to cover a smuggled item becomes void and cannot be enforced. Similarly, if a person
not competent to enter into a contract, such as a person of unsound mind is party to a
contract, the contract becomes void ab initio (which means the contract is void from the very
beginning of the contract). The courts cannot enforce such a contract as the contract, in strict
terms, never existed.

A contract becomes voidable when one of the parties to the contract can exercise the option
of breaking the contract when the other party commits a breach of any of the terms of the
contract. For instance, in an insurance policy, if the insured changes the nature of business,
from that of an office to a shop, then, in the event of a claim, the insurer can refuse to admit
a claim and can consider the contract as voidable as the insured has failed to inform them
about change in the nature of risk.

29
3.3 Elements of a Valid Contract

All valid contracts must have the following four elements: offer and acceptance, consideration,
capacity and legal purpose.

3.3.1 Offer and Acceptance

In any valid contract, there should be an offer and acceptance. If we take the insurance policy
as an example, the insured makes an offer by way of filling up a proposal and the insurer
accepts the offer by quoting rates and terms under which he is willing to accept the offer to
insure. It is of absolute importance in a contract that both the offer and acceptance should be
expressed in terms which are unambiguous and clear.

It is also important that the acceptance should be on the same terms on which the offer is
made. For instance, if an insured makes an offer to cover his house in Karol Bagh, Delhi, then
the acceptance should be for coverage of the same house and not a different property. If the
second party to whom the offer is made wishes to make a counteroffer, he may do so and the
contract is valid only when the first party agrees to the terms proposed by the second party.
This is called “consensus ad idem”.

The acceptance of an offer should be unconditional. If any conditions are imposed then those
conditions have to be agreed to by both the parties for the contract to come into existence.

While it is good for the offer and acceptance to be in writing, both oral and written offer and
acceptance are recognised by law.

3.3.2 Consideration

Consideration is the price paid by both the parties for the promise and is a key requirement
for a valid contract. The logic for this is that each part to the contract should confer some
benefit on the other. In insurance, the consideration on the part of the insured is the money
he pays as premium and the insurer makes a promise to indemnify the insured in the event
of the happening of the contingency insured against.

3.3.3 Capacity

The third requirement for a valid contract is the capacity of the parties to enter into a contract.
The reason being a person entering into the agreement should have the ability to honour
the commitment made under the contract. Minors, a person of unsound mind, those in an
intoxicated state etc. cannot enter into a legally binding agreement. The purpose is to ensure
that people who are not in a fit state should not be taken advantage of.

Similarly the insurer should possess the necessary qualification to enter into a contract. In
India only those insurers who have been licensed by IRDA to carry on the business of insurance
can issue insurance policies.

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3.3.4 Legal Purpose

The purpose of the agreement/contract should be legal. If two parties enter into an agreement
the purpose of which is not legal, the same cannot be enforced in a court of law and hence the
contract would not be valid. For example, if an insurance policy is issued to cover the results
of a race, the contract would become invalid.

3.4 Distinguishing Characteristics of Insurance Contracts

While all the contracts should have the abovementioned four features to be legally binding,
an insurance contract has some special characteristics while at the same time adhering to the
above mentioned features.
The special features of an insurance contract are :
1. Principle of indemnity
2. Rules of insurable interest
3. Subrogation in insurance
4. Doctrine of utmost good faith
5. Aleatory contract concept

3.4.1 Principle of indemnity

Insurance contracts are generally based on the principle of indemnity. As per this principle,
the insured should be in the same financial position after the settlement of claim as he was
immediately prior to the loss. The rationale being that the insured should not benefit from an
insured loss.

However there are some insurance policies which are an exception to the above rule, such as:

1. Life Insurance

Since the value of human life cannot be assessed, life insurance policies are not strict policies
of indemnity. These are more of a benefit policy. However, this does not mean that one can
take insurance policy for any value, as this would create a moral hazard. Most of the insurers
determine the sum assured based on some benchmark, such as the earning capacity of the
assured.

2. Replacement cost insurance

This policy offers new for old and came into vogue during the second world war. Due to high
inflation in those days, the claim amount received on market value basis was found to be
inadequate to carry on businesses. Such type of policies are issued under Fire and Engineering
branch of insurance and they are granted for relatively new property, project insurance etc.
In such policies no depreciation is deducted and the claim settlement is made on replacement
value of the property on the date of loss.

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3. Valued insurance policies

A valued insurance policy is another exception to the rule of indemnity. Valued policies pay
the full face value of the policy whenever an insured’s loss occurs. The value of the insured
property is agreed to before the policy is written. Marine insurance contracts are issued on
a valued basis. Under marine insurance, the policies are generally issued for Invoice cost +
Freight + Insurance + 10% being margin for profit.

For eg. marine insurance is taken for 100 cartons of readymade garments which has an
invoice value of Rs 1,00,000, the freight payable for transporting it is Rs. 2,000, marine
insurance payable for covering the transportation risk is Rs. 1,500. Insurance can be taken for
Rs. 1,00,000 + Rs. 2,000 + Rs. 1,500 = Rs. 1,03,500 . Additional 10% can be added for the
profit which the seller may make on the transaction, as the profit would be lost in case of any
loss or damage while the consignment is in transit. Hence, the value for which insurance can
be taken is Rs 1,03,500 + 10% (of Rs. 1,03,500) = Rs. 1,13,850. This is the amount that will
be paid by the insured to the insurer in case of loss, damage to the cartons.

Claim settlements are also based on the valuation agreed upon.

Similarly while insuring obsolete machinery, antiques, works of art which does not have a
regular market, the valuation is agreed prior to the commencement of the policy to avoid
disputes in the event of claims.

3.4.2 Insurable Interest

For an insurance contract to be valid, the proposer should have insurable interest in the subject
matter of insurance. Insurable interest implies that the proposer should benefit financially by
the continued existence of the insured property/life or should be put into financial loss by the
loss/damage/death of the subject matter insured.

i) Property Insurance

In all types of property insurance other than marine, the insurable interest should
exist at the time of inception of the risk as well as at the time of claim. Marine
insurance, by its nature, is taken to cover trade related activities wherein the rights
to the goods is passed on from one party another. Hence, insurable interest under
marine insurance should exist at the time of claim. The person with insurable interest
is the person in whom the ownership of the property vests at the time of loss.

ii) Life Insurance

In life insurance, insurable interest should exist at the time of entering into the
contract. Further, in life insurance it is the owner of the policy and not the beneficiary
who should possess insurable interest. However, it is quite possible that owner and
the beneficiary are the same though it is not mandatory.

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3.4.3 Subrogation

Subrogation is the legal substitution of one person in another’s place. Subrogation means
“stepping into the shoes” of another person. In insurance it implies if the insured has any
rights against third parties, the insurer on payment of the claim takes over these rights. This
is a corollary to the principle of indemnity and enforcing the principle of subrogation ensures
that the principle of indemnity is upheld. In insurance, subrogation gives the insurer the right
to collect from a third party, any rights which the insured has against such a third party, after
paying the insured’s claim(s). A typical case of subrogation arises in automobile insurance
claims. Suppose Satish is responsible for the collision of his car with Rahul’s car. Rahul may
sue Satish for damages or he may collect money from his own automobile insurance. If he
chooses to collect money from his own insurance, his insurance company will be subrogated
to his right to sue Satish (insurance company replaces Rahul). Rahul cannot collect money for
his loss both from his insurer and from Satish.

Subrogation does not exist in life insurance because life insurance is not a contract of
indemnity. Thus, if Mr. Rahul Kumar is killed by his neighbor’s negligence, Mrs. Kumar may
collect whatever damages a court will award for her husband’s wrongful death. She may also
collect the life insurance proceeds. The life insurer is not subrogated to the liability claim and
cannot sue the negligent party.

3.4.4 Utmost good faith (Uberrimae Fidei)

In all legal contracts, it is essential that the parties to the contract exercise good faith.
However, in insurance the emphasis is on utmost good faith which should be exercised by
the insured. As the insured alone has complete information about the subject of insurance,
he should reveal all the facts to the insurer. In case of breach of this condition the contract
becomes void abinitio.

3.4.5 Aleatory contract

Aleatory contract is a contract wherein the performance of one or both the parties is based
on the occurrence of an event. Such insurance contracts may be a boon to one party but
create a major loss for the other, as more in benefits may be paid out than actual premiums
received, or vice versa (a large amount is paid by way of claim where as the amount received
as premium is very small, or when there is no claim, the entire premium is retained without
any outflow to the insured).

3.4.6 Contract of adhesion

The wordings of the insurance policy is written by the insurer and the insured either accepts
the contract in full or rejects it but cannot modify it. Because of the one sided nature of the
contract, the courts interpret the policy wordings and clauses, in case of any ambiguity, in
favour of the insured.

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3.4.7 Unilateral contract

Insurance contracts are unilateral in nature as only the insurer can be held accountable in a
court of law.

3.5 Common clauses and sections in a insurance contract :

The insurance contract contains the following sections and clauses :

1. Declaration section where in the insured declares that the information provided by
him is true to the best of his knowledge.

2. The operative clause which describes the insured and the extent of coverage.

3. Exclusions under the policy.

4. Conditions which need to be fulfilled for the cover to be valid.

5. Riders and endorsements which are not standard part of the policy but can be
covered subject to extra premium. The term rider is used in Life policies. A common
rider is accidental death also called double indemnity, whereby if death occurs due
to an accident, the claim amount payable is double the face value of the policy.

34
Chapter 4: General Insurance

4.1 Insurance can be broadly classified as:

A) Life Insurance

B) Non- Life Insurance

As the name denotes, Life Insurance deals with insurance of human life and Non – life deals
with all insurance other than life.

4.2 Non-Life insurance can be further classified into:

A) Property Insurance

B) Personal Insurance

C) Liability Insurance

In this chapter we will deal with various types of Property Insurances.

4.3 Types of Property Insurance :

A) Fire Insurance

B) Various types of Engineering Insurance

C) Marine Insurance, etc.

4.3.1 Fire Insurance

[Link] Suitability

Fire insurance policy is suitable for the owner of a property, one who holds property in trust or
in commission, individuals/financial institutions who have financial interest in the property. All
immovable and movable property located at a particular premises such as buildings, plant and
machinery, furniture, fixtures, fittings and other contents, stocks and stock in process along
with goods held in trust or in commission including stocks at supplier’s/ customer’s premises,
machinery temporarily removed from the premises for repairs can be insured.

[Link] Salient Features

Along with the basic coverage against loss or damage by occasional fire, the standard fire and
special perils policy provides protection from a host of other perils such as:

1. Lightning

2. Explosion/implosion

35
 3. Aircraft and articles dropped therefrom, i.e. any damage to the insured property
caused either due to an aircraft falling on the property or any object dropped from
the aircraft damaging the insured’s property.

4. Impact damage due to rail/road or animal; other than insured’s own vehicle

5. Riots, strike, malicious and terrorism damage

6. Subsidence (motion of a surface as it shifts downward) and landslides (including

rockslide)

7. Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation, damage
caused by sprinkler leakage, overflow, leakage of water tanks, pipes etc.

[Link] Extra covers

The policy may be extended to cover earth quake, fire and shock; deterioration of stock in
the cold storages following power failure as a result of insured peril, additional expenditure
involved in removal of debris, architect / consulting engineers’ fee over and above the amount
covered by the policy, forest fire, spontaneous combustion and impact damage due to own
vehicles.

[Link] Benefits

In case of a partial loss, the insurance company effects payment for repairs and replacement.
In case of policy with reinstatement value clause, cost of reinstatement will be paid on
completion of reinstatement subject to overall limit of the sum insured. The insurance company
may at its option, also repair or replace the affected property instead of paying for the cost
of restoration.

[Link] Premium

• Premium rating depends on the type of occupancy-whether industrial or otherwise.

• All properties located in an industrial complex will be charged one rate depending on
the product(s) made.

• Facilities outside industrial complexes will be rated depending on the nature of

occupancy at individual location.

• Storage areas will be rated based on the hazardous nature of goods held.

• Additional premium is charged to include “Add on” covers.

• Discount in premium is given based on past claims history and - fire protection
facilities provided at the premises.

• The insured has the option not to avail riot, strike, malicious and terrorism damage
cover. Similarly the insured can decide not to take coverage against the risks of
flood, storm, typhoon and inundation in which case the insured may be entitled to
some discounts.

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4.3.2 Various types of Engineering Insurance

[Link] Machinery insurance policy

Machinery Insurance Policy was developed to grant industry effective insurance cover for plant
and machinery and mechanical equipment at work, at rest or during maintenance operations.
Normally financial institutions insist on insurance cover against fire, riot and strike and Acts
of God perils. With the advancement of technology, the machines used in the industry are
becoming increasingly complicated. Now machines are manufactured with increased capacities,
higher speeds of operation, reduced energy consumption, reduced maintenance time, reduced
life, cheaper substitutes for reducing costs etc.

The machineries are getting more and more sophisticated and delicate. The guarantees given
by the manufacturers are very vague. It is very difficult to prove whether a loss was due to
manufacturing defect or not.

Since a modern machine replaces a number of small machines, the cost of replacement is high.
The cost of repairs of most of the machinery would be rather high due to the expertise required
to carry out the repairs as well as frequent changes in technology making the earlier machines
redundant or making it difficult to get spare parts etc. A major breakdown in the machinery
may have a severe affect and wipe out a large portion of profit for a businessman.

[Link] Machinery covered under the policy

Under machinery insurance, it is possible to insure practically all stationary and mobile
machinery, mechanical and electrical equipments, machineries and apparatus used in industry.
Fertilizer plants have many critical types of equipments. The vital equipments such as main
compressors, turbine, turbo alternator sets, process and their motors blowers, transformers
and boiler feed water pumps, ID fan, FD fan, etc. can be insured.

[Link] Basis of sum insured

The sum insured to be declared under this policy should be its new replacement value including
freight, customs duty if any, handling and erection charges.

[Link] Deductible / excess under the policy

Every item in this policy is subject to a deductible excess. This is the amount which the
insured has to bear in each and every loss or damage that occurs to the item. Over and above
this amount only the insurers are liable under this policy. Thus in case of a claim, the insurers
deduct this excess from the claim amount and pay the rest of the amount.

[Link] Basis of claim settlement

The basis of claim settlement is as follows :

1. Partial loss : Cost of replacement of parts in full without depreciation plus the labour
charges, cost of dismantling, re-erection, freight to and from repair shop, customs

37
 duty, if any. In case of items with limited life, appropriate depreciation is taken into
consideration.

2. Total loss : Total loss is destruction of an asset or property to the extent that nothing
of value is left and the item cannot be repaired or rebuilt to its pre-destruction state.
In case of total loss the settlement is based on the actual value of item immediately
before the occurrence, taking into account appropriate depreciation.

4.3.3 Contractors All Risk Insurance

[Link] Introduction

Contractor’s All Risks (CAR) Insurance is a relatively modern branch of engineering insurance.
The basic concept of CAR Insurance is to offer comprehensive and adequate protection against
loss or damage in respect of the contract works, as well as for third party claims in respect of
property damage or bodily injury arising in connection with the execution of a civil engineering
project.

[Link] Insured

CAR insurance may be availed by :

- the principal

- the contractors engaged in the project, including all subcontractors.

In order to prevent overlaps or gaps in the cover provided, the insured under CAR insurance
can be all parties concerned, such as the Principal, the contractor and sub contractor (where
applicable) so that the interests of all the parties are protected.

[Link] Subject matter insured

CAR insurance can be taken out for all buildings and civil engineering projects, such as:

- office buildings, hospitals, schools and theaters

- factories, power plants

- roads and railway facilities, airports

- bridges, dams, tunnels, water supply and drainage systems, canals and harbours
etc.

The cover relates to the following:

• Bantras Works :

This denotes the property being erected including preparatory work on the site, such as
excavation, grading and leveling work, the execution of’ temporary structures like diversion
and protective dams etc.

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• Temporary Structures and Equipments :

This includes workers’ temporary accommodations, storage sheds, scaffolding, construction

utilities for temporary electricity, water supply etc.

• Construction Machinery :

This includes earthmoving equipments cranes and the like as well as site vehicles not licensed
for use on public roads, no matter whether such machinery is owned or hired by the contractors.
These are to be covered under separate Contrator’s Plant and Machinery (CPM) policy.

• Costs at Clearance of Debris :

This term implies the expenses incurred for the removal of debris from the site in the event
of a loss indemnifiable under the policy.

• Third Party Liability :

This refers to legal liability arising out of property damage or bodily injury suffered by third
parties and occurring in connection with the contract work on or near the building site.
However, the cover does not extend to indemnify insured against any claims from the insured’s
employees or workmen who are connected with the construction project.

• Surrounding Property :

The term implies property located on the site as well as property surrounding the site.

A distinction is made however, between :

Property belonging to or held in care, custody or control of persons named in the policy as the
insured (in this case cover is only granted by way of an endorsement) and property belonging
to or held in care, custody or control of persons, who may be regarded as third parties for the
purposes of the policy, (in this case indemnity is payable according to the principles of third
party liability cover of the CAR policy).

[Link] Scope of cover

CAR insurance provides an ‘all risk’ cover whereby every hazard is covered which is not
specifically excluded. This means that almost any sudden and unforeseen loss or damage
occurring during the period of insurance to the property insured on the building site is
indemnified. The most important causes of loss indemnification under CAR insurance are:

- Fire, lightning and explosion

- flood, inundation, rain, snow avalanche, wind storm

- earthquake, subsidence, landslide, rockslide

- theft, burglary

- bad workmanship, lack of skill, negligence, malicious act or human error

39
CAR insurance also covers loss of or damage to building material; on site, while being
transported, while in intermediate storage or during assembly or disassembly.

The cover provided for CAR insurance is only subject to a few exclusions which the international
insurance markets usually apply. These are normally what are termed as uninsurable risks.
These exclusions are named in the policy and essentially comprise:

i. loss or damage due to war or warlike operations, strike, riot, civil commotion,
cessation of work, requisition by order of any public authority (it is possible to
include the risks of strikes and riot in special cases but such an inclusion is subject
to careful prior examination)

ii. loss or damage due to wilful act or wilful negligence of the insured or of his
representatives.

iii. loss or damage due to nuclear reaction, nuclear radiation or radioactive

contamination

iv. consequential loss of any kind or description whatsoever such as claims from penalty
losses due to delay, loss of contract

v. loss or damage due to mechanical and/or electrical breakdown or derangement of

construction machinery, plant and equipment

vi. loss or damage due to faulty design

vii. the cost of replacement; repair or rectification of any deficiencies in the contract
works (i.e. use of defective or inadequate material). While the cost of rectification
of a defective material/work is excluded, if this defective material/workmanship
causes any other damage, such losses are payable. For eg. if a part of the building
develops cracks and falls down due to defective workmanship, which in turns falls on
a machinery and damages the machinery, loss to such machinery is payable though
damage to the part of the building which developed cracks is not payable.

[Link] Period of cover

The cover attaches as from the commencement of Work or after the items entered in the
schedule of the policy have been unloaded at the site and terminates when the completed
structure or any completed part thereof is taken over or put into service. In addition, it is
possible to extend the period of cover to include maintenance period.

[Link] Calculation of sum insured and premium

a. Sum insured

The sum insured must be equal to the amount stated in the building contract, plus the value
of any construction material supplied and/or additional work performed by the principal. Any

40
increase in the contract sum must be notified immediately to the insurers in order to avoid
under insurance.

Usually, separate sums insured are fixed for:

- construction machinery and construction plant and equipment (the relevant sum
insured must be equal to the replacement value applicable when the contract is
concluded, including freight, erection costs and customs duties) ;

- existing buildings and clearance of debris (in this connection it is essential that the
respective sums insured are adequate)

Third party liability cover is likewise subject to a separate limit of indemnity for any one
accident or series of accidents arising out of an event.

b. Premiums

The premium rates for CAR insurance is based on the nature of the project and period of
contract taking into account peculiarities of each individual project. Basically, the following
factors are considered for proper risk assessment:

i. experience and ability of the contractor

ii. conditions on and exposure of the site e.g. the probability of earthquakes, flood,
inundation etc.

iii. design features and building material

iv. construction techniques

v. safety factors considered in the construction; time schedule measures provided to

ensure safe execution of the project

To be able to arrive at premium rate which are reasonable and commensurate with
the risk involved, the insurers must be given an opportunity of checking the building
contract, drawings and specifications, construction time schedule as well as other
relevant information. The more complete the information given to the insurers, the
more accurate the assessment of the risk will be and the more appropriate and fair
the premium for the insured.

If it is not possible to complete a project within the policy period, the insurance may
be extended, subject to the payment of an additional premium.

[Link] Indemnification

While the CAR policy undertakes to indemnify the insured against loss or damage specified in
the policy, it is customary to make the insured responsible for a small portion of the loss. This
is achieved by stipulating a deductible:

41
 • A deductible is stipulated for each CAR insurance. This is the share in each and every
loss which the insured has to bear from his own account and which is thus deducted
from the amount of indemnity of indemnity. The deductible varies according to the
type and size of a building project and the hazards involved in each individual case.
The purpose of each deductible is to stimulate the insured’s interest in loss prevention
and to relieve the insurers as also the insured from dealing with the many minor
losses where the administrative expenses incurred would be excessive compared
with the indemnity. Usually, separate deductibles are applied for the contract works,
the temporary structures for normal losses and losses due to Act of God perils such
as flood, storm, earthquake etc. The limit of indemnity over all is the sum insured.

4.3.4 Marine Cargo Insurance

[Link] Brief History :

Marine insurance is as old as civilization. This system of marine insurance owes its origin and
evolution to mankind’s fear of future uncertainty and consequent search for security. It began
probably in the cities of Northern Italy by the Lombardy merchants around the end of the
12th century. Marine insurance became a full-fledged and specialised activity some centuries
later. The humble coffee house of the Lloyds opened by Edward Lloyd around 1680 AD saw
the beginning of marine insurance. From these humble beginnings it has now grown into a
business of vast proportions.

[Link] What is marine insurance?

It is a system of financial protection against the happenings of accidental or fortuitous events,

such as;

a) During sea transportation’ the goods may be lost due to sinking of the vessel.

b) Damaged due to incursion of seawater into the holds of the ship during rough
weather.

c) During land transit, the goods may be lost damaged by the derailment of railway
wagons or collision of motor goods vehicle.

d) During transit and whilst in storage incidental to transit, the goods may catch fire or
may be stolen.

These hazards or causes of loss are referred to as perils or risks in insurance terminology
And may result in the following types of losses:

a) Total loss - e.g. an entire shipment is lost due to the sinking of the vessel or due to
outbreak of fire

b) Partial loss - cargo is damaged by seawater during heavy weather or cargo is

jettisoned (thrown away) to save the marine voyage threatened by heavy weather.

42
 c) Expenses - The insured may incur certain expenses to prevent aggravation of loss or
damage - e.g. hides (animal skin before it is converted to leather) / leather slightly
damaged by seawater may be - re-conditioned at an intermediate port to reduce the
loss or prevent the total loss.

The purpose of marine insurance is to indemnify such losses. The types of losses paid for
and the extent of payment depends upon the terms and conditions of the marine insurance
policy. Marine insurance covers cargo when it is in transit not only over the sea but also when
in transit by air, overland, inland, waterways, costal seas and also when being sent by post
(registered or otherwise) etc. In fact anything in transit under a valid contract can be covered
under a marine policy.

[Link] What is the need for marine insurance?

Marine cargo insurance and banking are considered to be the life blood of commerce. Domestic
and international trade is financed by the banking system and this financing is dependent on
“collateral security” against loss, which is provided by the marine insurance policy. The cargo
might constitute the “physical security” for the bank finance, but if the goods are lost or
damaged by transportation hazards, this “physical security” is of no use to the banks. Hence,
the marine cargo insurance provides the supportive security.

[Link] Limited liability of the carrier (shipper):

At times shipping and trading circles argue that the carrier’s liability can take the place of an
insurance policy. The Carriage of Goods by Sea Act, 1925, statutorily determines the carrier’s
liability and responsibility. Unless it can be proved that the carrier did not perform his duties
as provided for in the statute, he cannot be held liable. The undertaking to make good the loss
under insurance policy is wider in scope than under the various statutes governing carriers.
The per package limitation and provisions relating to excluded articles also act as limitations
to recovery of the full value of the goods from the carriers.

[Link] What are the special features of marine insurance?

a) Marine cargo policies are freely assignable because the interest in the goods passes
through various hands till the ultimate consignee takes final delivery. A cargo policy
may be assigned either before or after a loss.

Since the policies are freely assignable the existence of the insurance interest of the
claimant should exist at the time of loss. There is no need of insurable interest to
exist at the time of taking up the policy. However, the insured should have reasonable
expectation of acquiring such interest at a later date.

b) The sum insured indicated in the policy is the value agreed between the insured
and the insurer. Hence the policies are on agreed value basis. The value so agreed

43
 upon cannot be reopened i.e. the value once agreed upon cannot be changed unless
fraud is suspected. In addition to cost, insurance and freight a percentage loading is
included to arrive at the agreed value. An element of anticipated profit can also be
added to arrive at such an agreed value. The indemnity provided by the policy is of
course subject to the actual amount of the loss or damage and is also subject to the
overall limit i.e. the sum insured.

c) The duration of cover in a marine policy is subject to the transit clause of the
respected cargo clause. This differs from one mode of transit to another (sea, rail,
road and air). While the duration of cover in other clauses of insurance is fixed at
the time of the issue of the policy itself - in marine insurance it is governed by the
nature of transit, time of discharge, time of arrival at destination.

d) The interpretation and applicability of various Statutes, the legislation of various

countries, port conditions, customs procedures, and the legal systems in various
parts of the world, govern the operation and interpretation of a marine insurance
policy.

[Link] Scope of cover

A marine insurance policy undertakes to indemnify the insured in the event of a loss caused
by an insured peril during the currency of the policy. The cargo is exposed to various perils
from the time it leaves the supplier’s warehouse till received at the final warehouse of the
consignee. The policy should offer cover against these various types of losses. The minimum
extent of cover is against the total loss or damage of the cargo. This can be caused by fire,
sinking, stranding, washing over-board etc. Cargo remaining undelivered is also a loss to the
insured. The total loss may be of the entire cargo or a part thereof may be totally lost. The
scope of cover afforded under different types of policies is determined by the clauses attached
to them.

4.3.5 Features of motor insurance

[Link] Types of covers

We shall now see how motor insurers meet the insurance requirements of their clients- both
compulsory and optional.

Irrespective of the type of vehicle involved, motor insurers usually will grant one of four main
types of policy cover, namely:

 Statutory Third Party Liability Only

 Extended Third Party Liability only

 Third party, fire and or theft

 Comprehensive

44
In many countries the third party liability cover is broken in two parts, viz; third party bodily
injury and third party property damage. The conditions of the policies issued may vary in
many respects according to the class of vehicle insured.

[Link] Classification of motor insurance business

For proper and equitable rating of any insurance portfolio the insurable population has to be
divided into homogeneous groups, more popularly known as classifications, such that the
constituents of each class present more or less the same degree of risk for the insurer. If a
group consists of constituents having diverse risk levels, the pricing of insurance for such a
group would be very difficult and may expose the insurer to the risk of adverse selection.
Motor insurance business is commonly divided as follows:

a) Private cars (not used for carrying passengers for hire or reward)

b) Motor cycles

c) Commercial vehicles (including private cars carrying passengers for hire or reward)

d) Motor trade road risk

e) Motor trade internal risk

• Private Cars

This category comprises cars of private type including station wagons used for social, domestic
and pleasure purposes and business or professional purposes (excluding the carriage of goods
other than samples).

• Motor Cycles

Motorcycles with or without sidecars, pedal cycles or mechanically assisted pedal cycles and
motor scooters with or without sidecars come under this category.

• Commercial vehicles

All vehicles other than Private Cars or Motor Cycles excluding vehicles running on rails come
under this category.

• Motor trade road risk

Essentially this classification is a sub class of commercial vehicles and the road risks of vehicles
belonging to motor traders, before being sold to the ultimate customers, are covered under
this class.

• Motor trade internal risk

This class covers the risk that the motor trader is exposed to while the vehicles are either
brand new or belong to customers and are on premises of the motor traded for servicing or
repair.

45
Besides this broad classification, each class is further divided into sub classes of homogeneous
risks. The broad classification will usually be same in most of the countries. However the
sub-classifications may vary slightly from country to country.

[Link] Motor Insurance Coverage

The motor insurance usually covers three kinds of financial losses:

1. Loss or damage to the vehicle

2. Liability to third parties

3. Loss of use of vehicle

Loss of use of vehicle cover is available in most of the developed insurance markets. For eg.
due to an accident, the insured vehicle cannot be used for may be a week in which case an
alternate vehicle is given by the insurer for the period when his vehicle is under repairs. This
cover is currently not available in India.

[Link] The Perils (please check this once again)

The most common perils covered by motor insurance policies are:

i. Fire, explosion, self ignition or lightning;

ii. Burglary, housebreaking or theft;

iii. Riot and strike;

iv. Earthquake (fire and shock damage);

iv. Flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost;

vi. Accidental external means (all accidents are covered under this);

vii. Malicious act;

viii. Terrorist activity;

ix. Transit by road, rail, inland-waterway, lift, elevator or air;

x. Landslide or rockslide.

xi. Legal liability of the insured to third parties for death, bodily injury or damage to
property arising out of the use of the vehicle. The legal cost and expenses incurred
by the insurance with the insurers’ consent are also payable.

xii. Personal accident to owner driver

[Link] Additional Benefits

Apart from the standard coverage as discussed above some extra benefits are also
available:
i. Wider legal liability to drivers
ii. Legal liability to employees travelling in the vehicle

46
 iii. Personal accident cover for unnamed passengers of vehicle

iv. Coverage for trailers

v. Coverage for rallies, reliability trials, motor racing etc.

4.3.6 Burglary Insurance

[Link] Scope

The Burglary policy covers theft of property after forcible violent entry or theft followed
by actual violent forcible exit. The policy is issued to cover the stocks, furniture, fixtures,
calculators etc. as well as damage to the building caused by burglary. Cash in safe can also
be covered provided the cash is kept in burglar proof safe and the burglary happens following
violent and forcible methods to obtain the key or in opening the safe. The policy can be
extended to cover the risk of riots, strike and terrorism.

[Link] Exclusions

• Loss or damage caused by the family members or employee of the insured.

• Committed by any person lawfully present in the premises.

• Bills, promissory notes, cheques etc. unless specifically covered.

• War and nuclear perils

[Link] Conditions

i) Each and every item is separately subject to the condition of average.

If the insured value of the property is less than the value of the property immediately
prior to the loss, the insurance company will pay only proportionate amount towards
the claim and the balance has to be borne by the insured. Each and every item is
separately subject to the condition of average.

For eg.

Insured value Value at the time of Loss

Insured Items
(In Rs.) loss (In Rs.) (In Rs.)

Stock in process 2,50,000 3,00,000 Nil

Raw material 1,00,000 1,00,000 Nil

Finished Goods 1,50,000 1,00,000 75,000

Total 5,00,000 5,00,000 75,000

In this case even though total value insured is equal to the value at risk on the date
of loss, since principle of average is applicable to each item, the claim payable for
finished goods would be =75,000*1,00,000/1,50,000= Rs. 50,000.

47
 ii) Notice of loss: Immediate notice of loss should be given to the insurer. Within 7 days
of loss, completed information of lost items, their estimate should be submitted.

iii) Prevention and minimization of loss: The insured should act as though he is uninsured
and take all steps to prevent and minimize the loss.

iv) The indemnity may be by way of replacement, repair or reinstatement at the option
of the insurer. The principle of contribution shall apply which means that if the
insured has taken insurance for the same property with more than one insurer,
each insurer shall pay proportionate amount towards the claim. For eg. stock of Rs.
3,00,000 is insured both with Insurer A and with insurer B for Rs. 3,00,000 each.
Due to burglary, stocks worth Rs. 50,000 is stolen. Both Insurer A and Insurer B
would pay Rs. 25,000 towards the loss.

v) Unless notice is given to the insurer and approved by them, any transfer of property
other than by will, shall render the policy void.

vi) If liability is admitted, any dispute on quantum shall be referred to arbitration.

4.3.7 Money Insurance

[Link] Scope

Money in transit covers :

i. wages in transit form bank to the insured’s premises.

ii. cash in transit from the insured’s premises to post office for purchase of stamps,
money order etc.

iii. postal order, money order, postage etc. in transit from post office to the insured’s
premises.

iv. wages in transit from the insured’s main office to branch office.

v. cash other than wages, in transit from the bank to the insured’s premises, from the
insured’s premises to the bank and between offices of the insured.

vi. Cheques, bills of exchange, money order etc. in transit form the insured’s premises
to the bank.

vii. Cash collected by employees from the time of collection until delivery at the insured’s
premises or bank. Money retained in safe at the insured’s premises upto 48 hours
from the time of collection.

[Link] Extensions

i. Infidelity of the employees – the normal policy does not cover infidelity of employees
unless discovered within 48 hours. However, on payment of additional premium, the
policy can be extended to cover the act of dishonesty by an employee.

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 ii. Disbursement risk : the normal policy does not cover loss of money while the wages
are being disbursed. However, this risk can be covered by charging additional
premium.

iii. Riots, strike : These risks too can be covered on payment of extra premium.

iv. Over 48 hours : Money retained in safe in the insured’s premises is ordinarily covered
only for 48 hours. This means that if the money is kept in the premises for over 48
hours and not deposited in the bank, the policy will not cover the money in safe
beyond 48 hours. Cover in excess of this period can be agreed at an additional
premium.

v. In till / counter : Money in counter during the insured’s office hours can also be
covered at additional premium. The theft should be accompanied by violence by any
person other than the employee of the insured.

[Link] Exclusions

i. Shortages due to errors or omissions.

ii. Loss of cash entrusted to any person other than an employee.

iii. Loss where the insured or employee is involved, unless loss is caused by fraud by a
cash carrying employee and discovered within 48 hours.

iv. Losses which are covered by other policies.

v. Loss arising from war and allied war perils.

vi. Losses arising from riot, strike and civil commotion and acts of terrorism.

vii. Loss of cash from the safe by the use of key to the safe unless the key has been
obtained by force.

viii. Loss after business hours, unless the money is locked in a safe or strong room.

[Link] Sum Insured

Under money insurance, two sums are relevant:

i. The maximum amount carried in any one single transit.

ii. The total estimated amount of money in transit during the policy period.

The premium is charged on (ii) above i.e. on the total estimated amount of money in transit
during the entire policy period which is considered as provisional premium. On expiry of the
policy, the insured has to declare the actual value of money in transit. The premium is then
calculated again on this amount. This premium is called the ‘earned premium’. The difference
between the estimated premium and the earned premium is refunded /charged to the insured.
The limit mentioned in (i) above is the maximum liability of the insurer in a single loss.

49
[Link] Underwriting considerations

The insurer needs some information based on which he can decide whether he wishes to offer
coverage to the inured. The information elicited to underwrite money insurance are:

i. Maximum amount carried in a single transit.

ii. No. of employees carrying cash, the no. of years of service with the company, any
history of previous default.

iii. Mode of carrying money, i.e. by bus, taxi etc.

iv. Manner of carrying cash.

v. Whether there are any armed guards accompanying the cash carrying employees.

vi. Nature of location of office, the distance between office and the bank etc.

vii. Distance over which money is carried.

viii. General condition of law and order in the area in which money is being carried.

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Chapter 5: Personal and Liability Insurance

5.1 Personal Insurance

Though general insurance does not insure the life of a person, as in the case of life insurance
policies, there are certain personal insurance policies which are issued under the non-life
section. The major amongst these are the Mediclaim and Personal Accident policies.

5.2 Mediclaim Policies

Mediclaim policy was introduced in India 1981 and later on modified in 1996. These policies
offer health insurance and can be issued either as individual policies or as a group policy.

5.2.1 Individual Mediclaim

This policy seeks to reimburse the expenses incurred by the insured for hospitalization/
domiciliary (residence) hospitalisation arising out of an illness/accident.

• Hospitalisation

The following expenses are reimbursed under this policy provided the illness /accident is
sustained during the policy period:

1. Room and Boarding charges in hospital/nursing home.

2. Nursing expenses.

3. Surgeon, anaesthesia and other specialist doctor fees.

4. Operation theatre, diagnostic materials, blood, pacemaker requirements etc.

5. The treatment should be taken in a nursing home/hospital which is -

i. registered

ii. has at least 15 inpatient beds ( 10 for C class cities )

iii. has an operation theatre which is fully equipped

iv. fully qualified nursing staff round the clock.

6. It is a requirement that patient should be admitted for at least 24 hrs. However

this is not applicable for dialysis, chemotherapy, dental surgery etc., that is those
ailments where the treatment is given and the patient is discharged on the same
day.

7. Medical expenses incurred 30 days prior to and 60 days after hospitalization are
also paid provided it is incurred for the same ailment for which the patient has been
hospitalised.

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• Domiciliary Hospitalisation

Means treatment given for an ailment, for a period of more than 3 days, which normally needs
hospitalization but the treatment has to be given at home because the patient’s condition is
such that he cannot be physically moved or lack of accommodation in the hospital. However,
certain diseases which are chronic in nature such asthma, bronchitis, diabetes, hypertension,
arthritis and fever for less than 10 day etc. are not considered for domiciliary hospitalization
benefit.

5.2.2 Exclusions

Claims made for the following will not be considered for payment as they are excluded from
the scope of the policy:

1. Pre-existing diseases.

2. 30 days exclusion – certain ailments are excluded for the first 30 days from the
time of inception of the policy, as it is felt that these could not have been contracted
within such a short period and they were probably pre-existing.

3. Some ailments are excluded in the first year of the policy, as again, these are of such
a nature that they take time to manifest for eg. cataract, hysterectomy, hernia, piles
etc.

4. War and nuclear perils.

5. Circumcision is not paid for unless necessary for treatment of a disease.

6. Spectacle, hearing aids etc.

7. Dental treatment, unless requiring hospitalization.

8. General weakness, venereal diseases (VD), rest cure etc.

9. AIDS

10. Hospitalisation merely for diagnostic purpose.

11. Vitamins, tonics.

12. Treatment related to childbirth. Voluntary abortion.

13. Naturopathy.

5.2.3 Age Limit

Mediclaim policies are issued to those in the age group of 5 to 80 years. However, children can
be covered from 3 months to 5 years provided either of the parents have taken a mediclaim
policy.

5.2.4 Policy conditions :

Some of the policy conditions which are common and incorporated by most of the insurers
are:

i. All notices to the insurance company should be in writing.

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 ii. Premium to be paid before commencement of the policy.

iii. Claim intimation should be given within 7 days with details about the hospital,
illness, doctor etc.

iv. Final claim with bills and required documents should be given to the insurer within
30 days from the date of completion of treatment.

v. All bills in original should be submitted.

vi. Fraudulent claims will not be paid.

vii. Principle of contribution shall apply.

viii. Policy can be cancelled by 30 days notice. If cancelled by insurer, refund is made on
prorate basis. If done by insured refund is on short period basis. Most of the general
insurance policies are issued for one year. It is not advisable to issue shorter period
policies. However, all insurers provide for short period rates which are much higher
than annual rates. These rates are mentioned in the policy. Hence, if the insured
wishes to cancel the policy midterm the insurer will not refund the entire premium
for the balance period. He will retain the premium for the period for which the policy
has been in existence on short period rates.

For eg. let us say the short period rate for a policy of 3 months is 40% and the
premium paid is Rs. 10,000. If the insured wishes to cancel the policy after 3 months
the refund will be Rs. 10,000 - ( 40% of Rs. 10,000)= Rs. 6,000/-

Whereas if the insurer cancels the policy the refund will be on prorate, i.e. on
proportionate basis. In the example above, if the insurer cancels the policy, the
refund amount would be Rs. 10,000 - (10000 * 3/12) = Rs. 7,500/-

ix. If liability is denied, the insured should file a case within 12 months from the date of
denial. If quantum is in dispute it should be referred to arbitration.

5.3 Group Mediclaim policy

Group policy is issued to a homogenous group such as employees of a company, members

of credit card etc. For eg. Citibank can take a Group policy for all the credit card holders of
Citibank.

The benefits are the same as for an individual policy with some variations, which are;

a) Cumulative bonus and health check up are not allowed.

b) Group discount based on size is allowed.

c) Renewal is subject to bonus/ malus clause

d) Maternity benefit extension is available.

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5.3.1 Bonus/Malus

Depending on the claims ratios for the preceding 3 policies, bonus or low claim discount is
allowed. Similarly, if the claims ratio is adverse, malus or claim loading is charged.

For eg. for a policy, the sum insured is Rs. 1,00,000 and the claims ratio for the past three
years is 120% and the premium paid is Rs. 10,000. If the insurance company wishes to apply
malus of say 20%, the renewal premium would be Rs 12,000/-.

Coversely, if the claims ratio is 50% and the insurer gives a low claim discount of 20%, then
the renewal premium payable would be Rs. 8,000/-.

5.3.2 Maternity Extension

The policy can be extended to cover expenses incurred towards child birth; this extension
is granted by charging 10% loading on the total basic premium. The maximum sum insured
allowed is Rs. 50,000 or sum insured under the policy, whichever is lower. The maternity
benefit is available only if incurred in a hospital.

• For childbirth the waiting period is 9 months; this can be relaxed in case of a
miscarriage.

• The claim is payable only for 2 children; if someone has 2 children already they will
not be eligible.

• Voluntary medical termination of pregnancy within 12 weeks is not payable.

• Pre natal and post natal expenses not payable unless hospitalized.

5.4 Personal Accident Insurance (PA)

5.4.1 Coverage

If during the currency of the policy the insured sustains any bodily injury directly and solely
from accident caused by external violent means, the insurance company shall pay to the
insured or his legal personal representative, the sum indicated in the policy if the accident
results in death or disability.

5.4.2 Definition of some of the terms used in PA policy

i. Bodily injury – While this excludes any disease from natural causes, however
any disease proximately caused by accident is payable. While shock or grief is not
covered, disablement arising out of shock is payable.

ii. Solely and Directly - This means that the bodily injury should be a direct and sole
cause of the accident. An accident may cause a disease, which in turn may result in
death. The proximate cause is accident, hence the claim will be paid. For eg. a man

54
 is thrown off a horse and is so injured he cannot walk. While lying in bed as a result
of the injury, he contacts pneumonia and dies. The proximate cause is the accident
and there is no break in the chain of events, hence a claim under PA policy would be
considered.

iii. Accident – An accident is an unexpected, unintended act. However, sometimes even

voluntary acts are considered as accidents. For eg. a man jumping from a burning
building sustaining injuries, murder, snakebite, frostbite etc. are also considered as
accidents.

iv. External, violent and visible means – Cause of accident should be external but
injuries can be internal.

v. Disablement – Disability refers to the inability of the insured to attend to occupation/

work.

5.4.3 Types of coverage :

i. Permanent Total Disablement (PTD) – Disablement is permanent, irrevocable

and total. Loss of eye sight, loss of limbs etc. are examples.

ii. Permanent Partial Disablement (PPD) – Here the disablement is permanent and
partial. For eg. the loss of finger(s). The policy carries a table of compensation for
different disabilities which is expressed as a percentage of capital sum inured.

iii. Temporary Total Disablement (TTD) – The disability is total but temporary. For
instance a fracture in the leg due to which the insured is unable to attend to work.

Benefit chart to give an idea as to the benefits available in a PA policy

Contingency Compensation payable

Death 100% of capital sum insured

Loss of 2 limbs, 2 eyes, one 100% of capital sum insured

limb and one eye

Loss of one limb or one eye 50% of capital sum insured

PTD other than above 100% of capital sum insured

PPD As per table attached to the policy

TTD Weekly 1% of capital sum insured subject to

maximum of Rs. 3,000

55
 Additional Benefits

Nature of benefit coverage Amount payable

Carriage of dead body Expense incurred in 2% of capital sum insured or
carrying dead body to Rs. 2500, whichever is less
residence
Education Fund Education benefits to If one dependent child,
insured’s dependent 10% of capital sum insured
children subject to a maximum of Rs.
5000
If more than one dependent
child, 10% of capital sum
insured, subject to a
maximum of Rs. 10,000

5.4.4 Exclusions under PA policy

Common exclusions :

i. Suicide, intentional self injury.

ii. While under the influence of liquor or drugs.

iii. While engaged in aviation, ballooning etc.

iv. Venereal diseases, Insanity.

v. Breach of law with criminal intent.

vi. Service in armed forces.

vii. Child birth/pregnancy.

viii. War and similar perils.

5.4.5 Policy conditions

The conditions applicable to a personal accident policy are:

1. Claims intimation should be given in writing.

2. In case of death, notice to be given before cremation and in any case, latest, within
a month.

3. In case of any permanent total disablement, notice to be given within a month.

4. Proof of claim to be given.

5. In case of any disability, the company can exercise the right to examine the
insured.

6. In case of death, post mortem should be done and report submitted within 14
days.

56
 7. The insurer may ask the insured to undergo any operation at insured’s expense in
case of loss of sight.

8. In case of death/PTD/PPD, the claim shall be settled on submission of policy for

cancellation.

9. No interest shall be payable.

10. Claims will not be settled if the claim made is fraudulent

5.5 Liability Insurance

The third type of general insurance is liability insurance, this form of insurance is gaining
popularity of late with the society getting more and more litigious. Liability insurance provides
indemnity for financial consequences arising from legal liability. The indemnity payable under
this insurance covers compensation awarded against the insured, legal costs awarded against
the insured and the defence costs. This insurance is concerned with the civil liability and not
the criminal liability.

Civil liability arises under :

a) The law of tort - tort in French means wrong. Tort laws deals with wrong doing. If
an act of a person caused injury to another person or damages his property, the
wrongdoer will be held responsible for the losses caused by such damage/injury.

b) Statutory law – the liability arising under the statutory law. For eg. an employer
is responsible to compensate a workman for injuries sustained at work under the
Workman’s Compensation Act, 1923.

c) Law of contract – Liabilities arising out of breach of a contract.

5.6 Employers Liability Insurance

If an employee, during the course of employment, sustains injury or contacts any disease
which can be considered as an occupational disease, the employer is liable under the law to
pay compensation as laid down in the Act. In India this type of liability is governed by the
Workman’s Compensation Act, 1923. The act clearly lays down the compensation for death,
permanent and temporary disablement. The amount of compensation payable depends on the
age of the employee and the wages drawn at the time of death/injury, the lower the age the
higher would be the compensation payable. Similarly, higher the wages drawn higher would
be the compensation payable.

5.6.1 Coverage under the policy

• This policy provides coverage against legal liability arising under the -

i) Workmen’s Compensation Act, 1923

57
 ii) The Fatal Accidents Act, 1855

iii) Common law

• Personal injury or disease should have occurred during the course of the policy
period.

• Legal expenses incurred by the insured to defend their liability, provided the same
is incurred with the consent of the insurer.

5.6.2 Exclusions

The policy will not be liable for claims arising due to -

1) Any disease or injury arising out of nuclear risks.

2) Liability of the insured to its contractor’s employees, unless agreed to by payment

of extra premium.

3) Contractual liabilities.

5.7 Public Liability Insurance

To indemnify the insured, in respect of all sums which they become legally liable to pay to
third parties, as compensation for damages in respect of :

i. Death, personal injury, bodily injury or illness of any person.

ii. Loss of or damage to property as a result of an occurrence happening in the territorial

limits (all liability policies specify the territorial limit covered) in connection with and
during the course of the business activities or caused by any of its (the insured’s)
products.

5.7.1 Compulsory Public Liability (Act Policy)

In India, under Public Liability Insurance Act, 1991, certain guidelines have been laid down
about the liability of industries dealing in certain types of commodities.

• Under Public Liability Insurance Act 1991, the liability of the enterprise dealing in
hazardous substance is defined. If death/injury or damage to property is caused by
an accident the owner shall be liable.

• If it is a no fault liability, the claimant need not establish that the death/injury etc.
was caused by the default/negligence of the insured.

• The compensation payable is Rs. 25,000 for death and permanent total disablement,
a percentage of Rs. 25,000 for partial total disablement as certified by a physician
and Rs. 1,000 per month for temporary total disablement. Medical expense upto Rs.
12,500 can be paid and Rs. 6,000 is the maximum limit for property damage.

• The liability of the owner has to be compulsorily insured.

58
 • The sum insured is equal to the paid up capital of the company. If the owner is not
a company, the sum assured should be equal to all assets of the undertaking.

• The insurer’s liability is restricted to Rs. 5 crores per accident and Rs. 15 crores
during the entire policy period.

• An amount equal to premium is collected towards Environment Relief Fund by the

insurer and remitted to the goverment.

• If the award for an accident exceeds the limit of insurer, the amount shall be paid
from the above fund and the amount in excess of this has to be borne by the
insured.

• While this is a compulsory insurance, the Central Goverment may exempt some
goverment undertakings from this insurance, provided, a fund for Rs. 5 crores or an
amount equal to the paid up capital is maintained is maintained by these government
entities.

• Accident is defined as fortuitous, sudden occurrence such as handling any hazardous

material resulting in exposure to death or injury.

• Handling means processing, storage, transportation etc. of hazardous substance.

• Hazardous substances are listed and grouped in the Act.

• Owner is refered to a partner in the case of a firm; directors, managers etc. in the
case of a company.

• Turnover means the entire gross sales turnover for manufacturing units and total
annual receipt for godowns/warehouses. For transport operators it would be annual
freight receipts.

The policy has an operative clause which essentially details the following:

The first part of the clause spells out –

a) the parties to the contract

b) business carried out

c) payment of premium

d) contribution to environment relief fund etc.

While the second part states that the insured will be indemnified against statutory liability
arising out of handling hazardous substances.

5.7.2 Policy Exclusions:

Liability arising out of -

• Wilful non-compliance with statutory provisions.

• Fines, Penalties.

• Any other legislations other than the Act.

59
While Act policy provides coverage as per the Public Liability act, the insurer may be legally
held liable to pay compensation much in excess of what is covered under the Act Policy, in
which case the Public Liability Act Policy would compensate to the extent specified in the
operative clause and the balance has to be paid by the insured himself or he should take
additional liability policy to cover such legal liability.

5.7.3 Conditions

i. Written notice of claim and of any claims received against the insured should be
given to the insurance company.

ii. No liability should be admitted without the written consent of the insurer.

iii. The liability under the policy is invoked for claims made within 5 years from the date
of accident.

iv. Written records of annual turnover should be maintained by the insured.

v. Condition of contribution shall be applicable.

vi. Policy can be cancelled by either party by giving 30 days notice. Refund is made on
prorata basis if cancelled by the insurer and on short period basis if cancelled by the
insured.

vii. If claim is disputed, the insured should file a suit within 12 months.

viii. Fraudulent claims will not be paid as, the principle of utmost good faith for disclosure
of material facts, is applicable.

ix. In case of any dispute about the meaning of any word, the definition given by the
Act is applicable.

5.8 Professional Indemnity Insurance

This policy provides indemnification to the policyholder against loss incurred only as a result of
their negligent act, error or omission in carrying out their business. This policy is also known
as Errors and Omissions Insurance as well as malpractice insurance. The liability under this
policy primarily arises due to the negligence of the insured in performance of their professional
duties.

5.8.1 Coverage

“To indemnify the insured against all sums for which they shall become legally liable to pay as
compensation to third parties for bodily injury or for loss or damage to third party property
arising out of or from any negligent act, error or omission committed or omitted or alleged to
have been done during the course of the conduct or performance of the professional services
and duties, including all legal costs and expenses.” Professional Indemnity policy is usually
availed by Accountants, Doctors, Architects etc.

60
5.9 Product Liability Insurance :

The liability under this section arises as per the terms of the Sale of Goods Act, 1930 (date of
the Act). As per this provision, only those who have purchased the goods can file a claim and
secondly the claimant need not prove negligence on the part of the seller. The policy aims at
making good the losses incurred by the claimant in terms of -

i. personal injury/death sustained as a result of use of the product.

ii. Loss/damage to property sustained as a result of the use of the product.

5.9.1 Exclusions

i. Mere defect in the product for which the claimant incurs cost for reconditioning,
repairing etc. does not fall within the scope of coverage.

ii. Liability arising out of product guarantee.

iii. Liability arising for products which have left the control of the insured prior to
retroactive date.

iv. Costs incurred for product recall, unless specifically covered.

5.9.2 Conditions

The conditions applicable to public liability (given earlier) shall apply for product liability,
except condition no. viii as this is not applicable for this policy.

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Chapter 6: Financial Planning and Life
Insurance

6.1 Financial Planning

A financial plan is a process, which helps an individual to achieve his or her financial objectives.
It involves careful and well thought out spending, savings and investment planning.

The need for financial planning has become essential more so with economic uncertainty,
erratic job situation, longer life span etc. In financial planning, the first and foremost is to set
the investment objectives. This could vary from person to person. Some typical objectives
are :

• Building a home

• Children’s education

• Marriage - own/childrens’

• Retirement provision

• In addition there might be some emergency funding required which could be caused
by :

o Illness

o Accident

o Job loss etc.

Financial planning provides security in times of uncertainity. Let us understand in a little more
detail the need for financial planning :

6.1.1 Emergency funding:

An emergency fund may be needed for meeting sudden contingencies such as, major illness in
the family requiring medical expenses, property losses, loss of job etc. Any prudent individual
would set aside an amount to meet such contingencies. This can be achieved through the help
of insurance. The amount of the fund required depends upon the level of insurance coverage
the individual or household can get, attitude of the individual and the family towards risks
etc. Generally the emergency fund is expressed as ‘x’ number of months of a family’s income
depending on the financial capacity of the family.

6.1.2 Education Fund:

Unlike the earlier days, the education of children has become prohibitively high in many fields
and most of the families aim to set aside a part of their earnings to provide for the higher

62
education of their children. Again insurance products which provide funding for educational
purposes are available. The size of fund to be insured for would depend upon the number of
children, their educational aspirations etc. Further, the educational institution in which the
children plan to go for their higher education also makes a substantial impact on the size of
funds required.

6.1.3 Unemployment :

In times of recession, economic downturns etc., there is a possibility of a person being out job
and hence every family needs to have some money set aside to take care of possible periods
of unemployment. Insurance comes useful in such cases.

6.1.4 Premature Death :

The earning member(s) of the family are worried about the possibility of premature death,
which would result in the drop in the standard of living of the family left behind. Hence, one
of the key objectives of people while carrying out financial planning is to effectively provide
for this contingency.

6.1.5 Property loss :

One of the major objectives of most families is to build a house. The house faces certain
threats such as fire, floods etc. If such an event happens and the house had been bought on a
loan, not only the loan needs to be repaid but also an additional burden of having to pay rent
to live in a rented premises till the house is repaired. This is another contingency any family
should take into account while carrying out the financial planning.

6.1.6 Retirement Planning :

Most people would like to ensure that in their post retirement life they can live with the same
comforts they are accustomed to during their working life. However, after retirement, the
monthly salary a person earns stops while expenses, particularly medical expenses, stays the
same or increases.

Most individuals plan for the above contingencies by setting aside a part of their income and
investing them in various investment options / insurance products available.

However, one crucial component of financial planning is to take care of uncertainty of life.
What would happen if the earning member of the family dies an untimely death? Who would
pay for the housing loan, childrens’ education, medical expenses etc. Life is uncertain and
therefore we have life insurance to take care of this uncertainty.

Life insurance policies are very innovative. Besides taking care of the survivors in the event
of the death of the earning member, various options are available by which one can plan for
pension, education for the children, marriage of the children etc.

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6.2 Ratios as a tool for financial analysis

Ratios can be very effective tools for financial analysis for individuals as well as companies.
Discussed below are some of the ratios which can help in providing benchmarks to help in
personal financial planning -

i) Basic Liquidity ratio (BLR)

BLR = Liquid assets/monthly expenses.

BLR helps in working out the number of months one can live with the available cash
assets should you lose your job or for whatever reason the source of income of a
person dries up. While there is no ideal ratio, if it is anywhere between 3 and 6 it
means that one has adequate cash to support monthly expenses for a period of 3 to
6 months which could be considered as adequate.

ii) Savings Ratio (SR)

SR = Savings/gross income.

This ratio indicates the percentage of income that is saved. The higher the savings,
higher would be the funds available for future financial requirements.

iii) Debt to Asset ratio = Debt (total liabilities )/total assets

This ratio gives a clear picture of how much of the assets have been financed by
debt, a very high ratio indicates low networth.

iv) Debt service ratio = Total amount of debt repayment/ annual take home income

This ratio indicates the proportion of income which is used up towards loan repayments.
While granting loans, most of the companies take this ratio into account to satisfy
themselves that the borrower can service further borrowings.

6.3 Definition of Life Insurance

6.3.1 Life Insurance is a contract between two parties, the insured and the insurer, wherein
the insurer agrees to pay a specified sum of money upon the occurrence of insured’s death or
any other event specified in the policy. The consideration from the insured is that he or she
agrees to pay an agreed amount (premium) at specified time periods to the insurer.

6.3.2 Like all contracts, this contract has offer and acceptance. The insured by of completing
the proposal form makes an offer and the insurer accepts the offer by way of quoting the terms
and conditions. The consideration from the insured’s end is payment of premium and from the
insurer it is promise to compensate in the event of occurrence of the insured event.

6.3.3 The purpose of the contract is legal and both the parties should be competent to
enter into a contract, i.e. the insurer should have the license to carry on the business of
insurance and the insured should be of stable mind and not a minor.

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6.4 Law of large numbers
The law of large numbers is the foundation of all Insurance and was discovered 300 years
ago by a Swiss mathematician, Jacob Bernoulli. When an event based on chance is observed,
the larger the number of observations, the more likely the actual result will coincide with the
expected result.

This principle also demonstrates that an event with a low probability of occurrence in a small
number of trials has a high probability of occurrence in a large number of trials. The actual
outcome of a statistical process converges towards the expected value as the number of
observation increases.

“When a coin is flipped once, the expected value of the number of heads is equal to one half.
Therefore, according to the law of large numbers, the proportion of heads in a large number
of coin flips should be roughly one half. In particular, the proportion of heads after n flips will
surely converge to one half as n approaches infinity “.

In insurance premium calculations are done on the basis of the probability of occurrence
of an event such as death, fire etc. The costing which is done on the basis of using the
probability theory works more accurately when the number of people insured is large and the
geographical spread is greater.

6.5 Factors affecting rating under Life insurance

i) In life insurance we take into account the life expectancy or the rate of mortality
for the purpose of premium calculation. Insurance is spreading the loss of few to
many. It is primarily aimed at sharing the losses. Premium amount is collected from
a number of people and claims paid to a few people. For eg. if the policy is issued
for Rs. 1,00,000 and a group of 100 are part of the insurance scheme, the amount
to be charged from each person would depend upon the estimation of loss ratio. If
one out of 100 is expected to die then the premium for each person in the group
would be Rs. 1,000 so that an amount of Rs. 1,00,000 can be paid on the death
of one person. However, if 2 out 100 are expected to die, then the premium would
be Rs. 2,000 to create the pool of Rs. 2,00,000. The estimation of losses is done
by way of mortality tables. These tables depict age wise probability of death and
survival. Mortality tables are used as a basis for calculating the cost of insurance by
all insurance companies.

ii) Actuaries take into account the time value of money i.e. the interest that can be
earned on the premium. The assumption in the earlier example was very simplistic.
We assumed collecting premium in such a manner that it became equivalent to the
value of the claim. In actual practice it is not so because the premium collected from
various insured persons is invested in certain forms of investments. Such investments
yield returns which helps in subsidizing (reducing) the premium amount.

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 Some of the factors which should be taken into account while calculating the time
value of money is whether the premium is collected in one lumpsum from the insured
or is it annual payments. If single premium is received, the returns on it would be
higher as the entire amount is available for investment over a longer period of
time as against annual premiums. In insurance, a single payment is a lumpsum
payment made once during the entire policy period, whereas annual premium refers
to premium paid annually.

Similarly, the rate of return on investments is also of great importance. Correct

estimation of the rate of return is critical. If erroneously, a higher rate of return on
an investment is taken for calculating the premium payable, the insurance company
stands to incur losses as it might collect lower premium and pay out higher sums.

iii) The terms and conditions of the policy and the benefits accruing under it are critical.
The premium rate to be charged would depend on the type of policy issued. There
are many different types of Life insurance policies available in the market. Under
some policies, the benefits are payable either on death or on expiry of a fixed period
of time, whereas other policies provide for payment of fixed amount of money in
periodic intervals. Similarly, there is difference in the mode of payment of premium
too. It could be single premium or annual premium. Hence, the premium charged
would depend upon the benefits of the policy to a great extend.

iv) In the example given in (i) above no consideration has been given to administrative
expenses that would be incurred by the insurer. Any insurance company has to incur
lot of costs while administrating the policy. Further, at the inception of the policy
high amount of expenses are incurred. However, premium to be charged has to be
uniform and can’t be high in year one compared to the rest of the policy period.

The insurance companies also have to incur expenses such as rent, electricity,
salaries, the insured has to bear these expenses too, hence the pure premium
calculated in example given in A above is loaded for all the expenses and the gross
premium is arrived at, the insurers charge the gross premium from the insured and
not the pure premium.

6.6 Principles of Insurance and Life Insurance

We will see below how the principles of Insurance are applicable for Life Insurance
contracts:

6.6.1 Utmost good faith :

When insured decides to insure himself he has access to all the information about the insurance
company. However the insurer does not have adequate information about the insured. Hence,
it becomes imperative for the proposer to disclose to the insurer all material facts regarding

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the proposed insurance. This duty is not limited to facts known to him but also to facts which
he is expected to know.

Material fact is a fact which affects the decision of a prudent underwriter in deciding the terms
of acceptance of the risk as well as whether to accept or reject the risk. If a material fact is
not disclosed to the insurer, the contract becomes voidable at the option of the insurer.

6.6.2 Insurable Interest:

The proposer should have insurable interest in the life of the assured. Insurable interest exists
when the proposer derives financial benefit from the continuous existence of the assured or
suffers financial loss by the death of the assured. Every person has insurable interest in his
own life as he can protect his estate from loss of future earnings by insuring his life. Spouse
has insurance interest in the life of his wife/ husband.

Others who are said to have insurable interest are

Employer in the name of the employee

Creditor in the name of the debtor
Partner in the life of his partner etc…

6.6.3 Indemnity

As per this principle, the insured should neither be better off nor worse after the claim is
settled. This principle requires that the financial loss is measurable. The insured should neither
profit nor suffer a loss.

Life insurance is not a strict insurance of indemnity as the value of a human life cannot be
calculated, however the insurers are careful while insuring the life of an individual and take
into account his earning capacity while deciding on the value for which insurance is granted.
The sum assured is fixed in such a way that the proceeds of the policy help the insured’s
family to maintain the same standard of living.

6.6.4 Subrogation

Subrogation involves transfer of rights of the insured to the insurer who indemnifies the
insured on the happening of the loss. This principle is a corollary of the principle of Indemnity
and is imposed to ensure that the insured does not profit by insurance. Since the value of life
cannot be determined this principle is not applicable for life insurance .

6.6.5 Contribution

This means sharing of losses between multiple insurers for the same risk. This is not possible
in Life insurance for the same reason as mentioned for subrogation.

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Chapter 7: Types of Life Insurance Policies

7.1 Term Insurance :

As the name implies, these policies are issued for a term or a period of time and if the death
of the assured occurs during the term of the policy, the policy pays the sum assured. If the
insured lives beyond the period stated in the policy, no payment under the policy is envisaged.
The term insurance provides pure death protection and does not have any savings element
as some other insurance policies do. The premium under the term policies are lower as the
policies are issued for a fixed period. However, this type of policy is not a great option as a
saving instrument as the assured does not get any amount from the policy should he survive
the policy period i.e. if the policy is issued for a period of 20 years expiring on 31st December
2012 and the insured is still alive on that date, he will not be entitled to receive any money
under the policy.

7.2 Types of Term Life Insurance

7.2.1 Yearly renewable term insurance :

This policy is issued for one year period and if the insured dies during the policy period, the
insurer settles the claim. This might be issued with a renewable term, for 5 years, 10 years
and so on. Instead of a time period, the policies are also issued offering coverage upto a
specified age such as 60 years etc. The insurer settles the claim if the assured dies before the
specified age.

7.2.2 Level term life insurance :

Under this policy, the premium amount stays the same for a given period of years (10, 15,
20 years etc.). The policy is generally issued for a period of 10, 15, 20, or 30 years. The
longer the term, the higher is the annual premium (the premium payable remains the same,
however if the policy has been taken for a longer period, say 30 years, the premium rate
would be higher (than say a 10 year policy) as the policy covers the insured at a older age
when the chances of death are higher). For eg , if a policy is taken for a sum assured of Rs.
10,00,000 at an annual premium of Rs. 25,000 per year for 10 years, the insured continues
to pay Rs. 25,000 every year and for the same sum assured if the policy is for 20 years, the
premium may be Rs. 40,000 per year.

Most level term policy have a renewal option and allow the insured to renew and extend the
period if they so desire. The renewal is not guaranteed. However, as long as the insured is of
normal health it is permitted.

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7.2.3 Decreasing term life insurance:

This type of contract factors in payment of lesser benefits each year the policy is in force. For
eg. should the assured die in the very first year of availing the policy, the beneficiary receives
the face value of the policy, say for eg. Rs. 50,00,000. If death occurs in year two, the
proceeds would come down (would be less than Rs. 50,00,000) and in year 20 the proceeds
may be a mere Rs. 15,00,000. The premium during the years remains constant while the
benefit comes down as the probability of death goes up with age.

7.2.4 Increasing term life insurance:

Under this contract, the benefit goes up with passing year and the premium under this policy
also goes up every year.

The term life insurance policies are useful as they provide maximum coverage to people
whose resources may be limited. The premium for term insurance is lower than Whole Life
insurance.

7.3 Whole Life Insurance :

The oldest and the purest form of life assurance is Whole Life insurance. The premium is
paid by the assured throughout the life time of the assured and the sum assured is paid to
the beneficiary on the death of the assured. This policy satisfies the original intention of life
insurance which is to provide security to dependants on the death of the assured, Under this
type of policy the beneficiary named in the policy is paid the benefits under the policy on the
death of the assured. The payment under the policy is assured and this policy does not have
an end date.

As these policies provide for payment only in the event of death, the premium under this policy
is lower than other policies. The assured can insure himself or herself for higher amounts (at
comparatively low premiums) so that his dependants are well provided for in the event of his
or her death.

However, these policies are not very popular as it does not meet the expectations and changing
needs of many investors, who look at insurance as an investment option besides being a
means to provide for the survivors in the event of the insured’s death. Further, this type of
policy requires premium payment to be made indefinitely and the policy holder may find it
difficult to continue the premium payment during his old age. This type of policy is ideally
suited to take care of estate duty liability. Duties or property tax is payable on the death of
the assured by the legal heirs for transfer of property in their name. This duty at times can be
very steep. The proceeds of the policy is useful for paying up these taxes.

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7.3.1 Limited payment whole life insurance:

Under this policy while the policy continues to provide coverage to the assured till his death,
the premium payments are for a fixed period of time. The last premium, depending on the
policy, may be paid at the age of 60 years.

It is needless to mention that the amount of premium paid is a function of the duration for
which the premium is paid, hence in limited payment policies, the premium payable shall be
higher for the same sum assured as compared to Whole Life Insurance.

7.3.2 Types of Whole Life Insurance

1) Single Premium : This policy envisages one single payment of premium regardless of
when the death would occur. It involves front ending premium payment i.e. payment
of the entire premium in one lumpsum payment at the inception of the cover.

2) Continuous Premium : The insured continues to pay the same premium as long
as he or she lives. These are also called level premium whole life insurance. The
amount of premium to be paid is calculated taking into account the probability of
insured’s death and compound interest.

3) Modified whole life insurance : The premium payable is staggered so that the insured
pays a lower level of premium in the initial years and much higher amount in the
later years as the earning capacity of the insured goes up.

Whole Life insurance provides permanent protection by way of payment of sum

assured on the death of the assured to his family.

7.4 Endowment policy :

The sum assured is payable on the death of the assured or after a fixed period of years
whichever occurs first. This type of policy combines the advantage of security or protection
for the family in the event of the assured’s premature death and /or facilitates retirement by
paying out a lumpsum amount at an age agreed upon, should the assured continue to live upto
that age. Generally, people try to coincide this with their retirement age of say 60 years.

Endowment policies are popular in India as it combines life assurance with investment option
and appeals to the security conscious people. However, the premium under this policy is
higher as the insurer has to definitely pay out a claim either to the beneficiary in the event of
the death of the assured or to the insured if he lives upto a certain age.

7.4.1 Joint Life Endowment Policy:

This is a variation of the endowment policy and is generally issued to cover the husband
and wife together. The sum insured is payable under this policy either on expiry of a stated

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number of years or on death of one of the assured whichever is earlier. With this payment
the policy comes to an end and does not continue to cover the second assured. This policy is
jointly taken by a husband and wife.

7.4.2 Double Endowment Policy:

The amount of sum assured, which is paid by the insurer on survival of the insured, is double
the amount payable in the event of the insured’s death (within policy period). For eg. if under
the policy the sum assured payable on death might be Rs. 5,00,000, whereas the amount
payable on survival would be Rs. 10,00,000/-.

Under term insurance, the policy proceeds are paid in the event of the death of the insured
during the specified term. Whereas, under endowment policy, insured may either avail an
endowment policy for a specified period at the end of which, if he or she is alive, collects the
proceeds of the policy or alternately, the insured may choose an age at which he or she would
like to be paid the policy benefits.

7.5 Children’s policies

1. Fixed Term (Marriage) endowment : Policy is taken by the parent or guardian

and for the purpose of this insurance, they are regarded as the assured. A particular term is
selected and on expiry of the term the sum assured is paid to the assured. During this term,
premium is paid but payment of premium ceases in case of death of the assured. The sum
assured is payable on the death of the assured or on completing the period fixed for insurance
whichever should occur first. The logic behind this policy is to create a capital for any major
expense such as marriage of the child or higher education of the child.

2. Educational Annuity Assurance : It is similar to the above policy except that

instead of lump sum payment of the sum assured, the benefit is disbursed in half yearly
installments for 5 years. This is ideal for higher education needs as it helps in the payment of
semester fees.

These types of policies are taken when parents are aware that after a lapse of say 10 years,
the education of the child or marriage of the child has to be provided for.

3. Children’s deferred assurance :

The purpose is to provide for life assurance to a child. The parents propose the life of the child
as assured. As the name suggests the insurance is deferred :

a) The life assurance for the child commences when he or she reaches the age of 18
to 22 (i.e. any age between 18 and 22 can be chosen for the commencement of life
assurance) No claims are paid during the deferment period, i.e. the period between
commencement of premium payment and the chosen age when the life assurance

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 begins. For eg. if a parent starts a policy for his child when the child is 10 and wishes
to commence life assurance from the age of 22, then the deferment period would be
12 years from the time the child is 10 years old till he reaches the age of 22.

b) In case of death of the child before the agreed age when the risk commences, the
premium is returned.

c) In case the parent (the premium payer) dies, the premium must be continued to be
paid by someone else till the deferred date.

d) Once the child reaches the vesting age, i.e. the age when the life assurance
commences, he or she can claim cash option i.e. he can opt to receive the premium
amount paid so far under the policy in case the policy is discontinued.

e) On reaching majority i.e. the age of 18, irrespective of the vesting age chosen under
the policy, the life assured signs an agreement with the insurer and from that date
the contract is between the insurer and the life assured.

f) Health proof is not asked for once the assured attains the vesting age.

7.6 Annuities

Annuity: Annuity is the periodical payment made by the insurer to the assured, in consideration
for the capital payment or lumpsum payment received by them. For capital payment received,
the insurer agrees to pay the annuitant an agreed amount of money periodically throughout
life. The purpose is the opposite of life insurance, where the payment is made on the death of
the assured. In the case of annuity the payments are made as long as the annuitant is alive.

There are two phases of an annuity; they are :

1) The accumulation phase is the phase during which the annuitant pays premium to
the insurer.

2) The distribution phase / liquidation period is when the insurer makes annuity payment
to the annuitant till his death.

7.6.1 Types of Annuity

1) Immediate Annuity : This type of annuity should be purchased with a single

premium. The benefit payment i.e. the payment made by the insurer to the insured,
is made within a short period of taking the policy. The annuitant receives annuity
either till his death or for a fixed period of time such as 10 years, 20 years etc.
depending on the type of contract entered into. The payment is made as long as the
annuitant is alive .

2) Deferred Annuity : Under this type of policy, the annuitant starts receiving the

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 annuity payment after lapse of fixed number of years as agreed upon at the inception
of the policy. The premium may be paid either as one lumpsum payment or it
could be monthly, quarterly, half yearly or yearly payments during the deferment
period (i.e. the period intervening between the commencement of the policy and the
commencement of benefit payment by the insurer to the annuitant). In case of the
death of the annuitant during the deferment period, the premium will be returned
without interest.

3) Guaranteed Annuity : The insurer is required to make annuity payments for

at least a certain number of years, which is called period certain, irrespective of
whether the annuitant is alive or dead. If the annuitant survives this period, the
annuity payments then continue until the annuitant’s death and if the annuitant
dies before the expiry of the period certain, the beneficiary is entitled to collect the
remaining payments certain i.e. the amount to which the annuitant would have
been eligible had he been alive till period certain. For e.g. a policy commences on 1st
January 2005, the period certain is upto 31st December 2010 and the annuitant was
to receive Rs. 10,000 every year. However, the annuitant dies on 30th June 2009.
The annuitant would have received the payment for 2009 and thereafter his heirs
would receive an amount of Rs. 10,000 in 2010 being the amount they are entitled
for the year 2010 as the period certain lapses on 31-12-2010.

7.6.2 Method of Premium payment

1) Single premium annuity : The annuity is purchased by remitting a single premium.

2) Annual Premium annuity : When annuity is purchased by payment of annual

premiums for a fixed period of time.

7.7 Group Insurance

While most of the individuals avail life insurance policy for the purpose of security as well as
for investment purposes, group insurance policies are becoming increasingly popular as many
employers are seeking to provide benefits to the employees, by way of taking a life policy in
the employer’s name. The group has to be homogeneous, i.e. all the members of the group
should either be employed by the same employer or should belong to the same association
etc. for the group policy to be issued.

A master policy, in the name of the employer or any association which takes the policy, is
issued. Unlike individual policies here the risk assessment is done for the group as a whole.
It is important that the group should not have been formed for the sole purpose of availing
insurance. There should be a steady flow of members into the group to ensure that the risk
profile is maintained and the policy does not end up servicing only aging members.

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In case of group policies, the premium rates are periodically reviewed based on the claims
experience of the group. This is known as experience rating. Most of the policies offer sharing
of profits based on actual claims experience. If the overall claims experience of the group
over a period of years is favourable, the excess of premium paid over claims and other
administrative expenses of the insurer, is shared with the assured by way of bonus etc.

7.7.1 Types of groups

which avail group insurance are :

1) Employer-Employee groups : The employer takes a master policy for all his
employees. The premium payment may be made either by the employer fully or it
might be shared with the employees in agreed ratios. However, it is insisted that the
share of the employer should be atleast 25% and also that all the employees in the
company should be insured and there should be no adverse selection against the
insurance company. That is, if given as an option to the employees, it is likely that
the younger employees may not wish to take life insurance and the company may
take the group insurance only for the senior members (in terms of age). This would
lead to increase in the average age of the group insured, as life insurance is based
on calculation of life expectancy. A group consisting of senior, aged employees,
from the point of view of the insurer, is an adverse risk and deemed as an adverse
selection against the insurer.

2) Creditor-Debtor Groups : The creditor takes out a master policy is favour of all
its debtors. This is most common where a housing loan has been sanctioned. The
housing financier may take out a policy in favour of all those who have availed
housing loan from the housing financier and the claim amount can be used to repay
the balance amount of the housing loan, in the event of the unfortunate death of a
debtor.

3) Government schemes : Either the central or state government often take out a group
policy for the lives of a section of the people as a welfare measure. For instance
some of the state governments take a life policy for fishermen, policemen etc.

7.7.2 Experience Rating :

Experience rating as the name implies means that the rating of premium based on the experience.
In individual policy, the premium rates are arrived at based on the age and occupation of the
assured and once the premium is stated, there would be no further adjustment made during
the policy period.

Whereas, under group policies, the rate for premium are quoted on the basis of the overall
experience of the insurer for similar groups. Once the policy has been in force, the insurer

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may realize that the experience of the group in question is vastly different from the insurer’s
original assumptions. If the experience of the group is favourable i.e. if the claims ratio are
attractive, then the insurer offers a share in the surplus or profit.

However for the concept to work, the size of the group has to be fairly large; the insurers
insist on a group size of atleast 200. Experience rating does not mean that after every year the
excess of premium over claims is shared with the policy holder, rather the insurer deducts from
the gross premium, the amount of claims paid, administrative expenses etc. and out of the
amount so arrived at, a percentage of the balance is used for experience rating adjustment. For
eg., let us assume the premium received from a group in a year is Rs. 10,00,000. The amount
of claims and administrative expenses comes to Rs. 6,00,000. The insurer wishes to distribute
60% of the surplus. Then the amount available for profit sharing is Rs. 2,40,000. This profit
is shared with the group either by way of reduction in future premium(s) or enhancement in
sum assured or payment of bonus.

In case of negative balance in a year, the amount is carried forward and adjusted against
profits made in the later years and till the net balance becomes positive, no adjustment would
be made.

Year Profit/loss under Profit /loss Adjustment – Profit/loss

the policy (in brought for (B-A) under the policy
Rs.) adjustment available for
(A) (B) sharing (in Rs.)

2007 (-) 5,00,000 0 0 0

2008 3,00,000 (-) 5,00,000 (-) 2,00,000 0

2009 5,0,0000 (-) 2,00,000 3,00,000 3,00,000

7.8 Industrial Life Assurance

Industrial Life assurance originated in the United Kingdom. The policy was issued for the
benefit of low income workers. The agents collected premium on a weekly basis as the workers
were paid weekly wages and the purpose of the insurance was to provide for a burial fund.

These policies are high cost policies for insurance companies mainly because the target
clientele was the low income workers whose life expectancy is low and secondly due to high
administrative cost involved in collecting premiums from large number of workers. These
policies are almost extinct now.

7.9 Life insurance premium and tax benefits

In India, life insurance has been popularized by offering a number of tax incentives. The

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Income Tax act provides tax relief for investing in life insurance and investors use this form of
investment for tax planning as well.

Any amount that you pay towards life insurance premium for yourself, your spouse or your
children can be included under section 80C deduction. Please note that life insurance premium
paid by you for your parents (father / mother / both) or your in-laws is not eligible for
deduction under section 80C. If you are paying premium for more than one insurance policy,
all the premiums can be included. It is not necessary to have the insurance policy from Life
Insurance Corporation (LIC) – even insurance bought from private players are eligible.

Deductions allowable from income for payment of life insurance premium :

• Under Section 80C

a. Life insurance premium paid in order to effect or to keep in force an insurance on

the life of the assessee (tax payer) or on the life of the spouse or any child of the
assessee and in the case of Hindu Undivided Family (HUF), premium paid on the life
of any member thereof, provided premium paid is not in excess of 20% of capital
sum assured. For eg. if the capital sum assured under the policy is Rs. 5,00,000, the
premium paid under the policy should be less than Rs. 1,00,000 for it to be eligible
for deduction.

b. Contribution to deferred annuity plans in order to effect or to keep in force a contract

for deferred annuity on his own life or the life of his spouse or any child of such
individual, provided such contract does not contain a provision to exercise an option
by the insured to receive a cash payment in lieu of the payment of annuity.

• Under Section 80CCC

A deduction is allowed, to an individual assessee, for any amount paid or deposited by

him from his taxable income in the annuity plans for receiving pension (from the fund set
up under the Pension Scheme).

NOTE: The premium can be paid upto Rs. 1,00,000 to avail deduction u/s. 80C,
80CCC and 80CCD. However, there is no sectoral cap i.e. the limit of Rs. 1,00,000
can be exhausted by paying premium under any one of the said sections.

• Under Section 80D

Deduction allowable upto Rs.15,000/- if an amount is paid to keep in force an insurance

on health of assessee or his family (i.e. spouse and children)

Additional deduction upto Rs.15,000/- if an amount is paid to keep in force an insurance

on health of parents.

In case of Hindu Undivided Family (HUF), deduction allowable upto Rs.15,000/- if an

amount is paid to keep in force an insurance on health of any member of that HUF

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 Note: If the sum specified in (a) or (b) or (c) is paid to effect or keep in force an insurance
on the health of any person specified therein who is a senior citizen, then the deduction
available will be upto Rs.20,000/-, provided that such insurance is in accordance with the
scheme framed by

a) the General Insurance Corporation of India (GIC) as approved by the Central

Government in this behalf or;

b) Any other insurer approved by the Insurance Regulatory and Development

Authority.

• Jeevan Aadhar Plan (Sec.80DD):

Deduction from total income upto Rs. 50,000/- allowable on amount deposited with LIC
under Jeevan Aadhar Plan for maintenance of an handicapped dependent (Rs.1,00,000/-
where handicapped dependent is suffering from severe disability)

Exemption in respect of commutation of pension

• Under Section 10 (10A) (iii) of the Income Tax Act, any payment received by way of
commutations of pension (commutation of pension means payment of lump sum amount
in lieu of a portion of pension surrendered voluntarily by the pensioner based on duration
of period in relation to the age). For eg. if a person retiring at 60 is expected to live
upto 80, he may surrender a portion of his pension say Rs 5,000 per month and receive
lumpsum amount of perhaps Rs. 8,00,000 which would be equivalent to Rs. 60,000 for
20 years discounted for interest factor out of the Annuity plans is exempt from tax.

Income tax exemption on maturity/death claims proceeds under Section 10 (10D)

• Any sum received from Life insurance policy as maturity proceeds, death benefits is
exempt from tax.

• However, the proceeds of the following policies are taxable :

a) Key man insurance is taxable. (It is a type of policy where key executives of a company
are insured by the company as their sudden demise may lead to a management
crisis for the company.)

b) Single premium policies will be taxed as income in the year benefits under the policy
are received assuming the premium exceeds 20% of the sum assured.

c) An insurance policy in respect of which the premium payable for any of the years
during the term of the policy exceeds 20 % of the actual capital sum assured. This
will not be applicable for any sum received on the death of a person.

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Chapter 8: Insurance Intermediaries
8.1 Introduction
Insurance products can be either sold directly by the licensed insurance companies or it can
be marketed through intermediaries holding authorised sanction from IRDA. With a view to
ensure that the insurance policies are marketed only by licensed agents and brokers, the
regulator has laid down stringent regulations for granting of license to the intermediaries.
While agents play a key role in marketing insurance products, the role played in life insurance
and personal insurance by the agents is far greater than in commercial, property and liability
insurance which is by and large availed by corporates.

8.2 Individual agent :

As per the Licensing of Insured Agents Regulations, 2000, the agents are required to hold
a license issued by IRDA/ authorised office of the insurance company (usually the corporate
office is designated as the authorised office by the insurer). The license once issued is valid for
a period of three years and a license fee is applicable. On expiry of three years the license has
to be renewed. The applications for renewable should reach the insurance company atleast 30
days prior to the expiry of the license.

To qualify as an agent, the agent should :

1. At least have passed 12th standard where he resides in a place with population of
5000 or more / or should have atleast passed 10th standard when a applicant resides
in any other place.

2. Have completed from an approved institution certain number hours of training in life
or general insurance business when he is seeking license for the first time to act as
an insurance agent.

3. Have completed from an approved institution certain number of hours of training in

life and general insurance business when he is seeking license for the first time to
act as a composite agent (an agent who works for both life and general insurance
business)

4. Should be a major.

5. Should not be of unsound mind.

8.2.1 Corporate agent :

The following entities can apply to become a corporate agent :

i. A firm

ii. Company formed under the Company’s Act, 1956

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 iii. Banking company

iv. Regional Rural Bank (RRBs)

v. Co-operative societies, Co-operative Banks

vi. Panchayat/ Local Authority

vii. NGO as approved by the IRDA

8.2.2 Code of Conduct.

Every person holding a licence, shall adhere to the code of conduct specified below :-

1. Every insurance agent shall :

i. identify himself (through an identity card issued by the insurance company) and the
insurance company of whom he is an insurance agent;

ii. disclose his licence to the prospect on demand;

iii. disseminate the requisite information in respect of insurance products offered for
sale by his insurer (insurance company) and take into account the needs of the
prospect while recommending a specific insurance plan;

iv. disclose the scales of commission in respect of the insurance products offered for
sale, if asked by the prospect;

v. indicate the premium to be charged by the insurer for the insurance products offered
for sale;

vi. explain to the prospect the nature of information required in the proposal form by
the insurer and also the importance of disclosure of material information in the
purchase of an insurance contract;

vii. bring to the notice of the insurer any adverse habits or income inconsistency of the
prospect, in the form of a report (called “Insurance Agent’s Confidential Report”)
along with every proposal submitted to the insurer and any material fact that may
adversely affect the underwriting decision of the insurer as regards acceptance of
the proposal, by making all reasonable enquiries about the prospect;

viii. inform promptly the prospect about the acceptance or rejection of the proposal by
the insurer;

ix. obtain the requisite documents at the time of filing the proposal form with the
insurer and other documents subsequently asked for by the insurer for completion
of the proposal;

x. render necessary assistance to the policyholders or claimants or beneficiaries in

complying with the requirements for settlement of claims by the insurer;

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 xi. advise every individual policyholder to effect nomination or assignment or change of
address or exercise of options, as the case may be and offer necessary assistance in
this behalf, wherever necessary;

xii. with a view to conserve the insurance business already procured through him, make
every attempt to ensure remittance of the premiums by the policyholders within the
stipulated time, by giving notice to the policyholder orally and in writing.

2. No insurance agent shall :

i. solicit or procure insurance business without holding a valid licence;

ii. induce the prospect to omit any material information in the proposal form;

iii. induce the prospect to submit wrong information in the proposal form or documents
submitted to the insurer for acceptance of the proposal;

iv. behave in a discourteous manner with the prospect;

v. interfere with any proposal introduced by any other insurance agent;

vi. offer different rates, advantages, terms and conditions other than those offered by
his insurer;

vii. demand or receive a share of proceeds from the beneficiary under an insurance
contract;

viii. force a policyholder to terminate the existing policy and to effect a new proposal
from him within three years from the date of such termination;

ix. have, in case of a corporate agent, a portfolio of insurance business under which
the premium is in excess of fifty percent of total premium procured, in any year,
from one person (who is not an individual) or one organisation or one group of
organisations;

x. apply for fresh licence to act as an insurance agent, if his licence was earlier cancelled
by the designated person and a period of five years has not elapsed from the date
of such cancellation;

xi. become or remain a director of any insurance company;

8.3 Broking regulations

IRDA regulations classify brokers into three categories :

i. Direct brokers

ii. Reinsurance Brokers

iii. Composite Brokers

Brokers represent a client while agents represents an insurer. The direct brokers are authorised
to represent clients and arrange insurance policies for them in life as well as in general

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insurance and can place business with any of the insurance companies. Reinsurance brokers
represent direct insurers and arrange reinsurance (when an insurance company insures a part
of the business underwritten by them with another insurance, it is called reinsurance) with
Reinsurance companies. Composite brokers are licensed to place direct as well as reinsurance
business with insurers.

The broker can be an individual, partnership firm, company or a society. The principal officer
of the broker should possess the minimum qualifications prescribed in the IRDA Act, he has
to undergo 100 hours of practical training and pass the exams conducted by the National
Insurance Academy (NIA) or any other body recognised by the IRDA.

The brokers have to comply with minimum capital requirements specified by IRDA.

8.3.1 Functions of a direct broker :

The functions of a direct broker includes any one or more of the following:

a. obtaining detailed information of the client’s business and risk management

philosophy;

b. familiarising himself with the client’s business and underwriting information so that
this can be explained to an insurer and others;

c. rendering advice on appropriate insurance cover and terms;

d. maintaining detailed knowledge of available insurance markets, as may be

applicable;

e. submitting quotation received from insurer/s for consideration of a client;

f. providing requisite underwriting information as required by an insurer in assessing

the risk to decide pricing terms and conditions for cover;

g. acting promptly on instructions from a client and providing him written

acknowledgements and progress reports;

h. assisting clients in paying premium under section 64VB of Insurance Act, 1938 (4 of
1938);

i. providing services related to insurance consultancy and risk management;

j. assisting in the negotiation of the claims; and

k. maintaining proper records of claims;

8.3.2 Functions of a re-insurance broker:

The functions of a re-insurance broker includes any one or more of the following:

a. familiarising himself with the client’s business and risk retention philosophy;

b. maintaining clear records of the insurer’s business to assist the reinsurer(s) or

others;

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 c. rendering advice based on technical data on the reinsurance covers available in the
international insurance and the reinsurance markets;

d. maintaining a database of available reinsurance markets, including solvency ratings

of individual reinsurers;

e. rendering consultancy and risk management services for reinsurance;

f. selecting and recommending a reinsurer or a group of reinsurers;

g. negotiating with a reinsurer on the client’s behalf;

h. assisting in case of commutation of reinsurance contracts placed with them;

i. acting promptly on instructions from a client and providing it written acknowledgements

and progress reports;

j. collecting and remitting premiums and claims within such time as agreed upon;

k. assisting in the negotiation and settlement of claims;

l. maintaining proper records of claims; and

m. exercising due care and diligence at the time of selection of reinsurers and international
insurance brokers having regard to their respective security rating and establishing
respective responsibilities at the time of engaging their services.

8.3.3 Functions of composite broker:

A composite broker carries out any one or more of the functions mentioned in 8.3.1 and 8.3.2
above.

8.8.4 Procedure for licensing

The IRDA on being satisfied that the applicant fulfills all the conditions specified for the
grant of licence, grants a licence in Form B and sends an intimation thereof to the applicant
mentioning the category for which the IRDA has granted the licence. The licence shall be
issued subject to the insurance broker adhering to the conditions and the code of conduct as
specified by the IRDA from time to time.

8.3.5 Validity of licence

A licence once issued shall be valid for a period of three years from the date of its issue, unless
the same is suspended or cancelled pursuant to these regulations.

8.4.6 Renewal of licence

1. An insurance broker may, within thirty days before the expiry of the licence, make an
application in Form A to the IRDA for renewal of licence.

Provided however that if the application reaches the IRDA later than that period but before
the actual expiry of the current licence, an additional fee of rupees one hundred only shall

82
be payable by the applicant to the IRDA. Provided further that the IRDA may for sufficient
reasons offered in writing by the applicant for a delay not covered by the previous proviso,
accept an application for renewal after the date of the expiry of the licence on a payment of
an additional fee of seven hundred and fifty rupees only by the applicant.

2. An insurance broker before seeking a renewal of licence, shall have completed, atleast
twenty five hours of theoretical and practical training, imparted by an institution recognized
by the IRDA from time to time.

3. The IRDA, on being satisfied that the applicant fulfills all the conditions specified for a
renewal of the licence, shall renew the licence in Form B for a period of three years and send
an intimation to that effect to the applicant.

4. An insurance broker licensed under these regulations for a specified category may also
apply for the grant of a licence by the IRDA for any other category by fulfilling the requirements
of these regulations. However, such application shall be made only after a lapse of one year
from the grant of a licence in the first instance.

8.3.7 Remuneration

No insurance broker shall be paid or contracted to be paid by way of remuneration (including

royalty or licence fees or administration charges or such other compensation), an amount
exceeding:

1. on direct general insurance business -

i. on tariff products:

a. 10 percent of the premium on that part of the business which is compulsory

under any statute or any law in force;

b. 12½ percent of the premium on others.

ii. on non- tariff products:

17½ percent of the premium on direct business.

2. on direct life insurance business -

i. individual insurance

a. 30 percent of first year’s premium

b. 5 per cent of each renewal premium

ii. annuity

a. immediate annuity or a deferred annuity in consideration of a single premium, or

where only one premium is payable on the policy, 2 percent of the premium

b. deferred annuity in consideration of more than one premium:

i. 7½ percent of first year’s premium

ii. 2 percent of each renewal premium

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3. group insurance and pension schemes:

i. one year renewable group term insurance, gratuity, superannuation, group savings
linked insurance — 7½ percent of risk premium

Note: Under group insurance schemes there will be no remuneration for the savings
component.

ii. single premium - 2 percent of risk premium

iii. annual contributions, at new business procurement stage - 5 percent of non risk
premium with a ceiling of Rupees three lakhs per scheme.

iv. single premium new business procurement stage - 0.5 percent with a ceiling of
Rupees five lakhs per scheme.

v. remuneration for subsequent servicing - one year renewable group term assurance
- 2 percent of risk premium with a ceiling of rupees 50, 000/- per scheme.

4. on reinsurance business

i. as per market practices prevalent from time to time.

8.3.8 Professional indemnity insurance —

1. Every insurance broker shall take out and maintain and continue to maintain a professional
indemnity insurance cover throughout the validity of the period of the licence granted to him
by the IRDA, provided that the IRDA shall in suitable cases allow a newly licensed insurance
broker to produce such a guarantee within fifteen months from the date of issue of original
licence.

2. The insurance cover must indemnify an insurance broker against —

ii. any error or omission or negligence on his part or on the part of his employees and
directors;

iii. any loss of money or other property for which the broker is legally liable in consequence
of any financial or fraudulent act or omission;

iv. any loss of documents and costs and expenses incurred in replacing or restoring
such documents;

v. dishonest or fraudulent acts or omissions by brokers’ employees or former

employees.

3. The indemnity cover —

i. shall be on a yearly basis for the entire period of licence;

ii. shall not contain any terms to the effect that payments of claims depend upon the
insurance broker having first met the liability;

84
 iii. shall indemnify in respect of all claims made during the period of the insurance
regardless of the time at which the event giving rise to the claim may have occurred,
provided that an indemnity insurance cover not fully conforming to the above
requirements shall be permitted by the IRDA in special cases for reasons to be
recorded by it in writing.

4. Limit of indemnity for any one claim and in the aggregate for the year in the case of
insurance brokers are as follows :

Category of insurance Limit of indemnity

broker

(i) Direct broker three times of the remuneration received at the end of every
financial year subject to a minimum limit of rupees fifty
lakhs.

(ii) Reinsurance broker three times of the remuneration received at the end of every
financial year subject to a minimum limit of rupees two crores
and fifty lakhs.

(iii) Composite broker three times of the remuneration received at the end of every
financial year subject to a minimum limit of rupees five
crores

5. The un-insured excess in respect of each claim shall not exceed five percent of the capital
employed by the insurance broker in the business.

6. The insurance policy shall be obtained from any registered insurer in India who has
agreed to —

i. provide the insurance broker with an annual certificate containing the name, address,
licence number of the insurance broker, the policy number, the limit of indemnity,
the excess (i.e. the balance amount, which as per policy, has to be borne by the
insured in the event of a claim) and the name of the insurer, as evidence that the
cover meets the requirements of the IRDA;

ii. send a duplicate certificate to the IRDA at the time the certificate is issued to the
insurance broker; and

iii. inform the insurer immediately of any case of voidance, non-renewal or cancellation
of cover mid-term.

7. Every insurance broker shall—

i. inform immediately the IRDA should any cover be cancelled or voided or if any policy
is not renewed;

85
 ii. inform immediately the insurer in writing of any claim made by or against it;

iii. advise immediately the insurer of all circumstances or occurrences that may give
rise to a claim under the policy ; and

iv. advise the IRDA as soon as an insurer has notified that it intends to decline indemnity
in respect of a claim under the policy.

8.4 Indian Insurance Market

8.4.1 Life Insurance

The first Life Insurance Company which came into existence in India was “The Oriental
Life Insurance Company”, established in 1818. This was a British company. The first Indian
insurance company subsequently came into being in 1871 called the “Bombay Mutual Life
Assurance Society”.

8.4.2 Nationalisation of Life insurance in India

Life insurance in India was nationalized on January 19, 1956, through the Life Insurance
Corporation Act. At the time of nationalisation of life insurance in India, there were 154 domestic
insurers, 16 foreign insurers and 75 provident funds operating under the Insurance Act of 1938.
All the 245 Indian and foreign insurers and provident societies were taken over by the central
government as a result of their nationalisation. Life Insurance Corporation of India (LIC), which
is the largest insurance company in India, was formed by an act of Parliament, viz. the LIC Act,
1956. LIC was promoted with a capital of Rs. 5 crore by the Government of India.

8.4.3 Privatisation Of Life insurance in India

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 includes 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 insurance 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.

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8.4.4 Life Insurance Players

Some licensed life insurers operating in India* :

1. Bajaj Allianz Life Insurance Company Ltd.

2. Birla Sun Life Insurance Co. Ltd.

3. HDFC Standard Life Insurance Co. Ltd.

4. ICICI Prudential Life Insurance Co. Ltd.

5. ING Vysya Life Insurance Company Ltd.

6. Life Insurance Corporation of India

7. Max New York Life Insurance Co. Ltd.

8. Met Life India Insurance Company Ltd.

9. Kotak Mahindra Old Mutual Life Insurance Ltd.

10. SBI Life Insurance Co. Ltd.

11. Tata AIG Life Insurance Company Ltd.

12. Reliance Life Insurance Company Ltd.

13. Aviva Life Insurance Company India Ltd.

14. Sahara India Life Insurance Co, Ltd.

15. Shriram Life Insurance Co, Ltd.

16. Bharti AXA Life Insurance Company Ltd.

17. Future Generali India Life Insurance Company Ltd.

18. IDBI Fortis Life Insurance Company Ltd.,

19. Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd.

20. AEGON Religare Life Insurance Company Ltd.

21. DLF Pramerica Life Insurance Co. Ltd.

22. Star Union Dai-ichi Life Insurance Co. Ltd.

23. India First Life Insurance Company Ltd.

*Please check IRDA’s website for latest details

8.4.5 Non-Life Insurance

“Triton Insurance Company Ltd.” (the first general insurance company) was formed in the
year 1850 in Kolkata by the British. The first Indian general insurer to commence operations

87
was the “Indian Mercantile Insurance Company” in the year 1907. The New India Assurance
Company Ltd. a leading public sector non-life insurance company was incorporated in 1919.

8.4.6 Nationalisation of general insurance In India

In 1972, the non-life insurance business was nationalized and General Insurance Corporation
of India (GIC) was formed with four subsidiaries:

• The National Insurance Co. Ltd.

• Oriental Insurance Co. Ltd.

• United India Insurance Co. Ltd.

• New India Assurance Co. Ltd.

All the 107 Indian and Foreign insurers operating at the time of nationalisation were integrated
and grouped into the above mentioned four companies and operated as subsidiaries of GIC.

8.4.7 Privitisation of Non-Life Insurance :

The general insurance market was opened for competition in December 2000 and the four
public sector companies have been made autonomous and no longer function as a subsidiary
of the GIC. They have been de-linked from the parent company and made as independent
insurance companies, though they continue to operate as government owned entities. Private
sector general insurance companies have also been allowed to open up business in India.

Licensed non-life insurers operating in India* :

1. Bajaj Allianz General Insurance Co. Ltd.

2. ICICI Lombard General Insurance Co. Ltd.

3. IIFFCO Tokio General Insurance Co. Ltd.

4. National Insurance [Link].

5. The New India Assurance Co. Ltd.

6. The Oriental Insurance Co. Ltd.

7. Reliance General Insurance Co. Ltd.

8. Royal Sundaram Alliance Insurance Co. Ltd

9. Tata AIG General insurance Co. Ltd

10. United India Insurance Co. Ltd.

11. Cholamandalam MS General Insurance Co. Ltd.

12. HDFC ERGO General Insurance Co. Ltd.

13. Export Credit Guarantee Corporation of India Ltd.

14. Agriculture Insurance Co. of India Ltd.

88
 15. Star Health and Allied Insurance Company Ltd.

16. Apollo Munich Health Insurance Company Ltd.

17. Future Generali India Insurance Company Ltd.

18. Universal Sompo General Insurance Co. Ltd.

19. Shriram General Insurance Company Ltd.

20. Bharti AXA General Insurance Company Ltd.

21. Raheja QBE General Insurance Company Ltd.

22. SBI General Insurance Company Ltd.

23. Max Bupa Health Insurance Company Ltd.

24. L&T General Insurance Company Ltd.

*Please check IRDA’s website for latest details

(Model test paper for the module is available on the

website [Link] > ‘Education’ > ‘Prepare for a Testing’ link)

89
NOTES

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