Chapter 03 - Principles & Practice of Life Insurance

8/4/2019 Chapter 03 - Principles & Practice of Life Insurance

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PRACTICE

OF

LIFE INSURANCE

CHAPTER 03


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SOME DIFFERENCESDIFFERENTIATING

POINTS

LIFE INSURANCE GENERAL INSURANCE

Riskcovered

Duration of

contract

SumAssured

Indemnity

clause

Premium

Time of death -uncertain

Long term

Human LifeValue

Not a contract of

indemnity

Charged per

Mortality Table

Happening of`Event`

Short term (usually

12 m)

Assets` financialvalue

Contract of

indemnity

Calculated on past

loss experience,

probable risk

factors and fixed

Tariff plan2

Dr. S N Ghosh


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ECONOMIC BASIS OF LIFE ANDHEALTH INSURANCE

Human Life Value concept propounded by S.S.

Huebner is the economic foundation of LI Human Life Value - actual future earnings of anindividual. It is capitalised value of a persons netfuture earnings reduced by cost of mans ownmaintenance expenses

Functions of LI - protection to family, by ensuringcontinuity in income after death of the breadwinner

o A savings instrument, collateral security, old agebenefits, annuities or a lump sum after retirement,post death - higher education of children, theirmarriages, etc

o Protection against - uncertainty of non-paymentby debtors/partners, Keyman upon death

o Welfare measure on the lives of employees as a

whole Dr. S N Ghosh


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HOW MUCH INSURANCE DOES A

MAN NEED?

1.Immediate funds requirements uponafter death- medical expenses for

terminal illness, expenses for

performance of last rites and religiousceremonies etc

2.Children's Education and Marriage

expenses3.Recurring dependant spouse and

children

4.Funds for paying off debts. Dr. S N Ghosh


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ORGANISATIONAL STRUCTURE -LIC

CENTRAL OFFICE

MUMBAI

ZONAL OFFICES (8)Bhopal, Chennai, Hyderabad,

Kanpur, Kolkata, Mumbai,New Delhi, Patna

FOREIGN OFFICES

UK, Mauritius, Fiji

DIVISIONAL OFFICES(108)

BRANCH OFFICES(2048)

SATELLITE OFFICESDr. S N Ghosh


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ORGANIZATIONAL STRUCTURE-CENTRAL OFFICE

CHAIRMANMANAGING DIRECTORS (3) C. V. O

ACTUARIAL AUDIT BOARD SECRETARIAT

BANK ASSURANCE & ALTERNATE CHANNEL

CORPORATE COMMUNICATION CORP. PLANG.CRM ENGINEERING

FINANCE & ACCOUNTS MARKETING

INVESTMENT INSPECTION

HRD/OD PERSONNEL

LEGAL & HOUSING PROPERTY FIN. SCHM. SBUMANAGEMENT DEVELOPMENT CENTRE IT/BPR

HEALTH INSURANCE

MICROINSURANCE REINSURANCE

Dr. S N Ghosh


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CLASSIFICATION OF LIFE ANDHEALTH INSURANCE

Group Insurance - A group of persons, who usually

have a business or professional relationship tocontract owner, are provided insurance coverage

under a single contract. [Ex Employees, Savings

account depositors, poorer sections of society,

landless agricultural workers] Ordinaryindividually issued policies majority of

policies fall within the ordinary category

Industrial Insuranceincludes life and health

insurance policies issued to individuals in smallamounts, premiums payable on a weekly or monthly

basis. Not popular in India.

Credit insuranceThis is issued through lending

institutions to cover debtors obligations if they die orbecome disabledDr. S N Ghosh


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LIFE INSURANCE PLANS

Historically, Life Insurance benefit patterns

fit into one or a combination of :

1) Term life insurance (popular in the United

States)

2) Whole life insurance3) Endowment insurance (popular in India,

Asian many African, European and Latin

American Countries)

4) Annuity contracts - promise to pay insured

a periodic payment.Dr. S N Ghosh


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1) TERM INSURANCE Protection - limited number of years or age

such as 65 or 70 years Terminates with - no maturity value.

Upon survival - nothing paid

More comparable to property and liabilityinsurance contracts than to other LI contract

Initial premium rates low compared to otherLI products - period of protection is limited

Useful for - persons with low income and highinsurance needs

Supplementary to - an existing life insuranceprogram during the child rearing period

Dr. S N Ghosh


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2) WHOLE LIFE INSURANCE Protection - over ones entire lifetime.

Upon death of insured - payment of the faceamount regardless of when death occurs.

Face amounts payable remain at same level

throughout policy duration, althoughdividends are often used to increase total

amount paid on death.

Gross premium also remains at the samelevel through out premium payment period

with some exceptions.

Dr. S N Ghosh


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3) ENDOWMENT INSURANCE PROMISE TO PAY - Policy amount on death

of insured during a fixed term of years (+)Full-face amount at the end of the term if

insured survives term

ENDOWMENT INSURANCE =

Term life insurance

(+) Pure endowment

[to pay face amount if insured dies during theperiod + to pay maturity amount only ifinsured is living at the end of a specificperiod, with nothing paid in case of priordeath] Dr. S N Ghosh


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COMBINATION PLANS

Sometimes traditional policies like Whole Life

and Endowment needs to be combined,

including annuity to meet requirements of

certain policyholders for maximum risk

coverage

LIC TRIPLE COVER JEEVAN MITRA

POLICY

o On maturity - basic sum becomes payable

o On death - 3 times the basic sum assured.

o Accidental death - four times of the basic sum

assured becomes payableDr. S N Ghosh


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SOME OTHER POPULAR LIFEINSURANCE CONTRACTS

HEALTH INSURANCE - contingent claimcontract on insured incurring additional

expenses or losing income because of

incapacity or loss of good health. DISABILITY INCOME INSURANCEPayment

upon loss of earning loss of earning capacity

LONG TERM CARE INSURANCEloss of

earning capacity for a substantial period

reimbursement of hospital, physician, or other

health care expensesDr. S N Ghosh


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Some other popular life insurancecontracts (Contd.)

CONVERTIBLE PLANSprovides that terms and

conditions of policy to another policy within certain

period

WITHOUT PROFIT POLICIESnot entitled to

bonuses, declared after actuarial valuations

WITH PROFIT POLICIESpay a slightly higher

premium for bonuses

JOINT LIFE POLICES- two or more lives covered

CHILDREN PLANS- made by parent or guardian; risk

on the life of child begins after specified period

RIDERSa clause or conditions added on basic

policy providing additional benefit at choice of

proposer

ANNUTIESpractically same as pensions; reverse of

life insurance Dr. S N Ghosh


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PRINCIPLES ANDPRACTICE OFREINSURANCE

Dr. S N Ghosh


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REINSURANCE PRACTICE WHEREBY a reinsurer,

o in return of a premium paid to it

o indemnifies another person/company

for a portion or all of liability

taken up by the latter (reinsured) due to a policy

of insurance that it has issued SPECIFIC REASONnature of risk insured

or business strategies of IC

REINSURANCE PRIMARILY DEALS WITH

CATASTROPHE RISKS - predictable andcause greatest exposure for the insurancecompany (9/11 attacks)

Business hinges on successful PRUDENT

PARTNERSHIPS by use of technologyDr. S N Ghosh


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Reinsurance (Contd.) RISK MANAGEMENT - involving transfer of

risk from IC to Reinsurer

CONTRACT OF INDEMNITY

basis forproviding insurance to IC

REINSURANCE AGREEMENTentered intobetween IC and Reinsurer

GLOBAL SPREAD OF RISKSlocal marketbad losses do not impact local businesses;there are tie-ups with global reinsurers

HOW IT WORKS

o IC insurer gives reinsurer a portion of the premiumit collects from the insured and

o in return IC is covered for losses above a particular

limit.Dr. S N Ghosh

T


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PRINCIPLES AND ADVANTAGESOF REINSURANCE

PRINCIPLE OF UTMOST GOOD FAITH

PRINCIPLE OF INDEMNITY NO REINSURANCE WITHOUT RETENTION:

o IC must retain a part of Risk beforereinsuring.

o No reinsurance of complete risko Those risks that are within retention

capacity of IC must be retained completely

ADVANTAGES

o Safeguards capital and reinforces stability

o Helps IC to upgrade itself

o Also helps a company to withdraw from

businessDr. S N Ghosh


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TYPES OF REINSURANCE TREATY REINSURANCEcovers entire

category of risk or line of business in

advance.

Capacity + Coverage of all prerils withadequate limits + confidence on security of

reinsurers + continuity of reinsurance aftera loss

FACULTATIVE REINSURANCE -reinsurance of

o current single risk and options are open forboth reinsured and reinsurers

o reinsurer retains the faculty or power to

either accept or reject each individual risk

offered to it by IC Dr. S N Ghosh


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IRDA REGULATIONS OBJECTIVE - to expand retention within

India, ensure best protection for reinsurance

costs incurred and simplify administration. RETENTION OF RISK - proportionate tofinancial strength and business volumes.

REINSURANCE WITH NATIONALREINSURER - 10% of sum assured (only innon-life sector)

REINSURANCE PROGRAMME - beginningF/Y and submitted to IRDA, 45 days` before

EXCESS OF REINSURANCE BUSINESS- to be

placed outside India with reinsurers having at

least BBB (S&P) rating for the preceding 5

years. (India's own sovereign rating)

LIC can continue to reinsure its policies withGIC rivate IC cannotDr. S N Ghosh


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UNDERWRITING Selection of a policyholder after recognisingand evaluating hazard, fixing a premium anddeciding all other terms and conditions

Safeguards - against any moral, morale orgeneral hazard

Limiting factorscapacity, skilled humanresources, compliance of regulatoryprovisions,availability of reinsurance

Line underwriting Where daily underwritingcarried out; underwriters usually located inoffices of insurer

Staff underwriting Where underwriter helpsmanagement in formulating and implementingunderwriting policy. They are usually locatedat H.O.

Dr. S N Ghosh

Chapter 03 - Principles & Practice of Life Insurance

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