Index

1 Introduction.................................................................................................................................................................4

2 The History of Insurance............................................................................................................................................5

2.1 Ancient times .........................................................................................................................................................5 2.2 The Babylonians....................................................................................................................................................5 2.3 The Romans...........................................................................................................................................................5 2.4 Modern times.........................................................................................................................................................6 2.5 Test ........................................................................................................................................................................9

3 Mutuality....................................................................................................................................................................10

3.1 Concept of Mutuality ...........................................................................................................................................10 3.2 Technical aspect of mutuality..............................................................................................................................10 3.3 Mutual organizations ..........................................................................................................................................10

4 Social security ............................................................................................................................................................11

4.1 Risk Management ................................................................................................................................................11

5. Risks of low income group households ....................................................................................................................12

5.1 The concept of Risk .............................................................................................................................................12 5.2 Risk and Insurance ..............................................................................................................................................13 5.3 Situation & Risk ..................................................................................................................................................13

6 Risks and the law of big numbers ............................................................................................................................15

6.1 Risk......................................................................................................................................................................15 6.2 Example...............................................................................................................................................................15 6.3 Question ..............................................................................................................................................................15 6.4 Examples .............................................................................................................................................................16 6.5 Example...............................................................................................................................................................16 6.6 Test ......................................................................................................................................................................17

7 Calculating the premium of life insurance..............................................................................................................18

7.1 Costs....................................................................................................................................................................18 7.2 Interest.................................................................................................................................................................18 7.3 Mortality..............................................................................................................................................................18 7.4 Difference between temporary and lifelong insurance........................................................................................19 7.5 Test ......................................................................................................................................................................19

8 Fixed Amount Insurance and Indemnity Insurance ..............................................................................................20

8.1 The Indemnity Insurance .....................................................................................................................................20

8.2 Forms of Indemnity Insurance ............................................................................................................................20 8.3 Fixed Amount Insurance .....................................................................................................................................20 8.4 Consequences Fixed Amount Insurance..............................................................................................................21 8.5 Difference Fixed Amount Insurance and Indemnity Insurance ...........................................................................21 8.6 Test ......................................................................................................................................................................21

9 The Insurance Products............................................................................................................................................23

9.1 The client.............................................................................................................................................................23 9.2 The insured..........................................................................................................................................................23 9.3 The beneficiary....................................................................................................................................................23 9.4 Difference between client and insured ................................................................................................................23 9.5 Death through natural causes .............................................................................................................................23 9.6 Death through an accident ..................................................................................................................................24 9.7 Disability as the result of an accident .................................................................................................................24 9.8 Underwriting and premium-setting .....................................................................................................................24 9.9 Test ......................................................................................................................................................................25

10 Underwriting .........................................................................................................................................................27

10.1 Agreement ...........................................................................................................................................................27 10.1 Security................................................................................................................................................................27 10.2 Saving or insuring ...............................................................................................................................................27 10.3 The product .........................................................................................................................................................28 10.4 Premium ..............................................................................................................................................................28 10.5 Determining the premium....................................................................................................................................28 10.6 Selection and anti-selection.................................................................................................................................29 10.7 Test ......................................................................................................................................................................29

11 Claims Handling....................................................................................................................................................31

11.1 Claim...................................................................................................................................................................31 11.2 Claims handling ..................................................................................................................................................31 11.3 For which person was the claim filed?................................................................................................................32 11.4 On which date did the uncertain event take place?.............................................................................................32 11.5 What did exactly happen? ...................................................................................................................................32 11.6 Where the premiums paid on time? .....................................................................................................................32

12 Reinsurance ...........................................................................................................................................................33

12.1 Spread .................................................................................................................................................................33 12.2 Insurers Risks ......................................................................................................................................................33 12.3 Kinds of reinsurance ...........................................................................................................................................33 12.4 Final thoughts .....................................................................................................................................................35

13 The Mutual Insurance Institutions ......................................................................................................................36

13.1 Member Administration: .....................................................................................................................................36

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13.2 Policy Administration: ........................................................................................................................................38 13.2 Claim Administration:.........................................................................................................................................38 13.3 Nalathittam Committee: ......................................................................................................................................39

14 Tips for trainers.....................................................................................................................................................41

14.1 Talk slowly ..........................................................................................................................................................41 14.2 Use the tell, tell, tell principle .............................................................................................................................41 14.3 Use eye-to-eye contact.........................................................................................................................................41 14.4 Organize the classroom.......................................................................................................................................41 14.5 Use examples.......................................................................................................................................................41 14.6 Use a whiteboard or blackboard.........................................................................................................................41 14.7 Use different colours ...........................................................................................................................................42 14.8 Give compliments ................................................................................................................................................42 14.9 Ask questions: open and closed, broad and in-depth ..........................................................................................42 14.10 Have breaks.....................................................................................................................................................42 14.11 Gesticulate.......................................................................................................................................................43 14.12 Make schematics .............................................................................................................................................43 14.13 Stand in front of the group and walk up and down a bit .................................................................................43 14.14 Test if people understand you..........................................................................................................................43 14.15 Assignment ......................................................................................................................................................44 14.16 Test ..................................................................................................................................................................44

Animal that can be covered ..............................................................................................................................................56

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1 Introduction Development implies an enhancement in quality of human life consistent with human dignity. The quality of life covers not only the basic human needs in terms of nutrition, health and education but also meta economic wants such as individual freedom, human dignity and cultural widening. Development will not come as long as people surrender their initiative either to God or Government, So far, development programmes are being looked upon by the people as programme of the Government for the people. It is well known that no government can take the whole responsibility of the people in toto. Unless and until people participate in the development initiatives, development will be lopsided and the fruits of development would not reach the right quarter. Hence people are encouraged to take up development activities through self-help programmes. The life of poor and marginalized people is full of crises. Such crises – personal, social or natural – often involve high expenditure and neutralise the effect of developmental efforts thereby driving poor families either back to their original deprived state or even to a worse condition. Hence the high degree of uncertainity of events causes a greater damage in the lives of the poor. The range of uncertain crises/risks is very wide. Most common among them are accidents, sudden hospitalization, death of breadwinner, loss of crops or assets and natural calamities like floods, cyclones and droughts. Expenses incurred during such crises are met either by borrowing from moneylenders, sales or mortgage of assets or by drawing from scarce savings. The affected household suffers a simultaneous reduction in income and savings and an increase in debt and expenditure. Each crisis leaves a poor family weaker and more vulnerable. Ultimately, women, who are invariably responsible for managing the household, bear the brunt of coping with such crises. Micro insurance / Social Security is a mechanism that can help the poor to combat such vulnerable situations.

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2 The History of Insurance The era of Insurance can be seen as ancient and modern times.

2.1 Ancient times Insurance came into existence because of a growing need to protect against fate. The first communities did not have this need. People lived in tight families or in self-sufficient tribes. In the bad times they could count on the help of family or tribe. This system disappeared with the rise of civilisation. People became familiar with risks that neither the family nor the tribe could cover. Protection was sought elsewhere. The spontaneous solidarity of kinship was slowly replaced by organised assistance between groups of people with common interests and running comparable risks; think of professional categories.

2.2 The Babylonians Civilisation in the Middle East developed relatively quickly. However, the area was poor in natural resources. That created the need for trade. Maritime trade routes and caravans for trade over land were developed. But trade routes are dangerous. Traders gave transporters a kind of credit. The credit only had to be paid back, with interest, when the journey ended safely. This form is called ‘bottomry’ for sea transports. You give money “on the bottom of a ship”. The Hammurabi codex (2100 BC) already had rules for mortgages and contains the first legislation on accidents: a compulsory accident insurance for free labourers who had become the victim of an accident.

2.3 The Romans Lending against big risks is one of the many habits that the Romans inherited from the Greeks and the Middle East. The Greek saw credit to a merchant fleet as a commercial undertaking. The Romans saw it as an investment. When the journey went well the captain had to return the money plus an interest of around 33%. The Romans also had a user’s credit, an interest-free loan. The lender could hold on to some of the amount. On the due date all of the capital had to be returned. The difference was considered an indemnity for the risk to the lender. Roman law stipulated that in the case of a sale delivery had to precede payment. The expansion of the Roman Empire meant that traders established contacts with suppliers from very remote areas. When they sent their goods to Rome they ran the risk of falling victim of storms, pirates or thieves or defaulters. Suppliers have an interest in selling their goods in their own country. To encourage them to yet trade with Rome new ways of paying were invented. Henceforward the purchase price had to be agreed before the goods were loaded. As such the seller is sure of payment. The risk is to the Roman buyer. Some contracts included a clause in which the seller takes on the risks. The price of goods was then increased accordingly. The seller carries the risk against the payment of a certain amount. We have already pointed out the importance of trade to Rome. The supply of grain was of utmost importance, first from Sicily and then from Egypt. The city’s governors wanted to control the grain trade for fear of famines. The grain trade enjoyed certain advantages. Seutonius (75-160 AD) described that the state bore the consequences of piracy. During the Republic (3rd century BC) the Senate was forced, against its will, to relinquish military transports to civilians. The vastness of Roman conquests made it impossible for the Roman fleet to take care of all of its transports. To attract traders the state guaranteed all damages caused by bad weather to food shipments for the troops (Titus Livius, 64 BC, book XXI, p 49).

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A sizeable insurance fraud also happened during this period. Two Etruscan traders loaded worthless goods onto old boats that were in a bad state. They let them sink in the open sea; the sailors were rescued with specially provided ships. They presented the excessive bill to the Roman authorities. Later on they limited themselves to making up shipping disasters. Insurance fraud is of all times. Around 100 BC Gaius Gracchus set up a professional army. The soldiers founded societies to guarantee an income to soldiers too old to fight. Sometimes they also paid out when some one changed garrison. Manual labourers set up “collegia” per profession. At first they were little more than social clubs. Sometimes they intended to help members in dire straits. The big funeral businesses have their origin here (the collegia funeratica). Members’ contributions covered the funeral expenses. If there was no money for a funeral a body would just be thrown in a canal. These are the precursors of pension and funeral insurance.

2.3.1 Conclusion We can draw the conclusion that different kinds of insurance have contributed to provisioning the city of Rome. These forms of insurance offered traders and transporters a certain protection, making the risk of losses more manageable. Insurance provides an impulse to the economy. They also have a social aspect in societies and professional groups. People living in comparable circumstance know that they will sooner or later be confronted with similar problems. A society fund then functions as a pension and accident insurance.

2.4 Modern times In the late Middle Ages different forms of annuities came into existence. An annuity is a periodic payment that somebody gets for as long as he is alive. Governments and cities collected money from their citizens to fill their coffers. They promised citizens lifelong payments. The tontine is an example.

2.4.1 The Tontine In the 17th century tontines or survival funds had a short-lived success. They were amed after the Italian Lorenzo Tonti, the state’s banker. When they first started the tontines were meant to maintain the state’s financing. They are groups you join until you die. A group of people collects capital that is deposited, e.g., in a state fund against a fixed interest. The tontine’s manager pays the interest to the members in proportion to their share. In the mean time the fund’s manager avails of capital that he can use for other things. The interest must be paid until the death of the last member. The interest meant for the group members who had already died is divided among the living members. As the number of living members drops with every death interest payments to the surviving members goes up. In this manner the payment gets the character of an incremental annuity. When the last member dies the money goes to the state. For the individual insured person it is an annuity with a rising rate of interest as others die.

2.4.2 The disappearance of the tontine. In his days Lorenzo Tonti was very successful with his tontine. Yet the tontines have disappeared. How do we explain their success, and the fact that there are now no more tontines? The win-win situation explains the temporary success of the tontines. The city council needed money and acquired it through a tontine. For the city council the advantage was that the loan never needed to be paid back and that interest only had to be paid over a relatively short period of time, namely until the last contributor had died. The advantage for the contributors was that they would get lifelong

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interest payments, increasing in the course of the years as the other contributors died off. So far so good. Until people began to realise that young contributors had a bigger chance of surviving than old contributors. In fact, older contributors paid a higher amount over which they only received an interest for several years and their heirs were left empty-handed on the contributor’s demise. People began to realise ever more that it was disadvantageous for the older contributors. The only option was to organised tontines for a group of people from the same age category. But then people began to question the advantage of a tontine over saving at the bank and getting an annual interest payment. A tontine has the advantage only when a person expects to outlive the other contributors. But that is how all contributors think, and saving with the bank then has the edge over contributing to a tontine. History teaches us that inventing a product is not sufficient. It is also about considering the needs of potential participants. You must be able to assess in advance which group of insured people would be interested in the product. When the group offers more advantages to one group or category than to others, the risk of anti-selection is created.

2.4.3 Mathematics There was no mathematical basis until modern times. Around the middle of the 17th century mathematicians discovered that it is possible to calculate the probability of a certain event. Observing a long series of experiments of the same kind allowed them to derive fixed rules. The mathematicians began to calculate probability. Did we not say that insurance is based on the law of big numbers? As the probability of a damages claim can be calculated it is also possible to determine the height of premiums for covering particular risks. The French mathematician Blaise Pascal laid the basis for the theory of probability. He was the first to suggest to calculate the premium of an annuity on the basis of mortality data. The Dutchman Johan de Witt is the true founder of the actuarial science. In the registers of the beneficiaries of annuities he recorded all the data about the evolution of mortality. De Witt calculated the probability of dying using the age at which the different beneficiaries died.

2.4.4 The fire hazard insurance The late Middle Ages had municipal aid funds, the fire guilds. Their purpose was to assist members in the case of fire. Members’ contributions fed the fund. They also appealed to public charity. Destruction by fire was a risk that the city-dwellers could well imagine. Most houses were made from wood and packed tightly along narrow streets and alleys. In 1591 around one hundred traders from Hamburg set up a fire hazard insurance: the Hamburg Feuerkasse. In 1663 in the Netherlands owners of oil-crushers took the initiative to set up a fire hazard insurance company. It offered coverage for damages to grains and natural resources. In 1666 a big fire laid waste to large parts of London. It drew the attention to the usefulness and even the need of fire hazard insurance. The fire hazard insurance was organised quickly in England. The first company of the country was the Fire Office from 1667. In Germany too fire insurance companies were founded. The state or the municipality managed them. In some regions fire hazard insurance became compulsory. The oldest fire hazard insurance company, the General Feuerkasse from Hamburg, was the result of a merger of existing mutual aid funds (17th century). Special measures were taken to encourage people to join this company. Nobody was able to get a mortgage on a building without taking out a fire insurance in advance. This measure still exists.

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2.4.5 Transport Lloyd’s has its roots in the 18th century. Lloyd’s is not really an insurance company. It acts as a kind of insurance market for a group of independent insurers. The subscribers are grouped in syndicates. They are fully and personally liable. They must meet strict conditions. The public cannot negotiate directly with Lloyd’s insurers. They must go to a broker recognised by Lloyd’s. Every member of a syndicate has a fixed and predetermined share in the risk. They bear the same share in any case of damages. Thanks to the big spread of risks over a large number of insurers Lloyd’s was able to grow into a powerful insurance organism. In fact it has had a monopoly on maritime insurance in England since the 18th century. Lloyd’s name came from an inn, the Lloyd’s Inn. Edward Lloyd was its landlord. It was a place where maritime traders met. To protect their trade they gave themselves guarantees against maritime risks. What had started as a sideline activity slowly developed into an autonomous economic activity. Lloyd’s Inn became an insurance centre.

2.4.6 Employees The workmen’s compensation Act of 1897 in Britain required employers to insure their employees against industrial accidents. Public liability insurance, fostered by legislation, made its appearance in the 1880s; it attained major importance with the advent of the automobile.

2.4.7 America In the year 1735, the first insurance company in the American colonies was founded at Charleston, S.C.Fire insurance corporations were formed in New York City (1787) and in Philadelphia (1794). The Presbyterian Synod of Philadelphia sponsored (1759) the first life insurance corporation in America, for the benefit for Presbyterian ministers and their dependents. After 1840, with the decline of religious prejudice against the practice, life insurance entered a boom period. In the 1830s the practice of classifying risks was begun.

The New York fire of 1835 called attention to the need for adequate reserves to meet unexpectedly large losses; Massachusetts was the first state to require companies by law (1834) to maintain such reserves. The great Chicago fire (1871) emphasized the costly nature of fires in structurally dense modern cities. The U.S. government has also experimented with various types of crop insurance, a landmark in this field being the Federal Crop Insurance Act of 1938. In World War II the government provided life insurance for members of the armed forces; since then it has provided other forms of insurance such as pensions for veterans and for government employees. In the 19th century, in the developed countries, many friendly or benefit societies were founded to insure the life and health of their members, and many fraternal orders were created to provide low – cost, members-only insurance. Fraternal orders continue to provide insurance coverage, as do most labor organizations. Many employers sponsor group insurance policies for their employees; such policies generally include not only life insurance, but sickness and accident benefits and old-age pensions, and old-age pensions, and the employees usually contribute a certain percentage of the premium. Since the late 19th century, there has been a growing tendency for the state to enter the field of insurance, especially with respect to safeguarding workers, against sickness and disability, either temporary or permanent, destitute old age, and unemployment.

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2.4.8 Conclusion We see that the demand for insurance came from the state and traders. The state needed money and traders wanted to cover their risks. A nice example is the compulsory fire hazard insurance for getting a mortgage on a building. Large disasters also raised the demand for insurance. An insurance company was founded one year after the London fire. Edward Lloyd’s inn was where maritime traders and ship owners met, and there they met people willing to bear the risks.

2.5 Test Below there are several questions meant for you to find out which parts of the course you have understood. You can find out for yourself how you have arrived at the answers to the following questions. Do you half-know the answer and do you have to read back a bit? Or do you immediately know the answer? You can also try to answer the questions a week after you have read the text.

a) When did the need arise for insurance?

b) How was it that Lloyd’s could grow into one of the largest risk-bearers in the world?

c) Why did people in Germany have to take out fire hazard insurance as a condition for getting

a mortgage?

d) First read the chapter on damages and sums insurance and then see if the tontine and the

bottomry are damage insurance or sums insurance.

e) If the larger part of the population in your region were to take out an insurance, what would

be the consequences in a couple of years?

f) Which two measures did the Roman government take to stimulate traders to provision

Rome?

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3 Mutuality

3.1 Concept of Mutuality

Mutuality is the central concept of all social processes. The mutuality is the basis of Self Help Groups. It is the one which is responsible for the sustainability of any institution. Mutuality is not a new concept to Indian society. People are practicing this already in their day to day activities especially during crisis.

Events like death of a family member in which the whole village participates in the funeral ceremony and shares the expenditure among them, mutually sharing labour among households, sharing water from common waterbodies like tank, sharing the expenditure of marriage through a system of social obligation etc. are a few examples of events where people follow the mutuality principle.

This principle when practiced helps the people to feel themselves as a strong community. Hence insurance which requires large numbers when offered through the principle of mutuality, is realized in its true sense and helps the poor to manage their risk better.

3.2 Technical aspect of mutuality

Technically, mutual / mutuality refers to a contractual arrangement, which may be unspoken, between a group of people, as few as two.

Where it is understood that no member of the group stands in a superior position to any other in terms of voting power, ownership rights or accrued benefits,

No matter what the legally sanctioned position held by any individual within the group might be

No matter what the length or kind of membership or contribution of any member might be

No matter what financial arrangements may be entered into to raise capital and

No matter what administrative arrangements may be entered into to enhance expertise of the group.

Into this definition could then be inserted the aims of the ‘mutual’, e.g. mutual aid, mutual insurance, mutual admiration.

3.3 Mutual organizations

Mutual organizations grew out of a belief that a group of people can act more efficiently through co-operation for their mutual benefit than if they act alone. A mutual is an enterprise owned by its members, providing a variety of services to the members for their benefit.

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4 Social security

4.1 Risk Management Risk Management is a process that identifies loss exposures faced and uses a number of methods, including insurance, to handle these exposures. Risk management process involves three steps: 1. Identify potential losses 2. Evaluate potential losses 3. Select the appropriate techniques for treating loss exposures

The techniques are:

a. Risk control: techniques that reduce the frequency and severity of loss.

I. Risk avoidance: The technique will result in the non occurrence of the risk. E.g. Avoiding flood risks by constructing a house in a flood plain.

II. Risk prevention: The technique will reduce the frequency and severity of the loss. E.g. Non use of alcohol, while driving.

III. Risk reduction: The technique that reduce the severity of a loss after it occurs. E.g. Limiting the cash on hand.

b. Risk Financing: Major risk financing techniques include

i. Risk retention: This technique is used when there is difficulty in obtaining commercial insurance for risks. E.g. self insurance

ii. Risk transfers: These are non insurance transfers by which a pure risk and its consequences are transferred to another party. E.g. Annual Maintenance contract for computer.

iii. Commercial insurance: This technique is appropriate for managing risks that have a low probability of loss, but for which the severity of loss is high.

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5. Risks of low income group households

5.1 The concept of Risk We have already seen that the range of crisis in poor families is large. Most common are accidents, sudden hospitalization, and death of breadwinner, loss of crops or assets and natural calamities like floods, cyclones and droughts. Exposure to these risks affects the households in two ways. First, households affected by a risky event incur a potentially substantial monitary loss, such as lose of an asset or added burden of debt. Second, they suffer on-going uncertainity about whether and when a loss might occur. The financial cost to a household that loses a valuable asset or an income earner is reasonably clear and substantial. But the impact of on-going uncertainity is potentially more damaging. As a result, households exposed to a great deal of uncertainity, which tend to be the poorer households, are often unable or unwilling to use the traditional growth-focused products provided by most microfinance institutions.

5.1.1 Case :1 Packiam, a member of Karuppusamy Kalanjiam in Theppakulam location is a flower vendor. Her husband is a worker in a rice mill. The couple is bestowed with two school going children. The average monthly income of the family is Rs.3000. During December 2001 her husband met with an accident when he was engaged in duty in the rice mill. He had to undergo a major surgery. An amount of Rs.40000 was needed to meet out the expenses. They could generate Rs.2000 only from local moneylenders, at an interest of 60 percent per annum. She could receive a loan of Rs.8000 from Kalanjiam for this purpose. The owner of the rice mill in which her husband was working provided an amount of Rs.5000. For generating remaining amount, the member sold out her jewels. Due to the injury the member’s husband could not go for work, for three months. During that period, the family could make the livelihood only through Packiam’s earnings. Since it was not sufficient to manage, the member had to borrow from local moneylenders at exorbitant interest rates, apart from loans from kalanjiam. What is the degree of uncertainity and size of loss in the above case?

5.1.2 Case: 2 Rajamma aged 40, is a member of Vinayakar Kalanjiam in Uchipuli location. She lives with her two children. Her son elder of the two is school going and daughter discontinued her studies after seventh standard. Her husband expired six years age. Rajamma is an agricultural labourer, and now, she is the only earning member of the family. Employment opportunity available for her is quit fluctuating, and unpredictable. Hardly, she can go for agricultural works 25 days during peak seasons (normally 3-6 months in a year) and 7 – 10 days during lean season. She can earn Rs.25 per day, if she works for a day. Her husband was a middleman in mat trade and was earning around Rs.2000 per month. He got an opportunity to work in a gulf country, after sever attempts. To meet out the expenses for travel and other arrangements he had borrowed close to Rs.50000 from local lenders at an interest rate of 60 percent per annum. He worked there for one year. From there he was sending around Rs.4000 per month to his family. One day Rajamma received information that her husband expired. The reason for his death is still unknown.

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Rajamma found it very difficult to cope up the sudden change in the situation. She was a housewife and had no experience on agricultural works. The debt burden was quite high. Insurance programme was not introduced in the location by then. She could repay a portion of debt using the loan issued from her kalanjiam, and her relatives also supported in repaying the loan. Economic situation of the family forced her daughter to discontinue her studies even though Rajamma and her daughter were willing to study further. Now Rajamma is making her livelihood only through her meager earnings. Living status of the family has come down considerably. “When my husband was alive there was no problem of food availability in the house. Somehow he used to manage the situation. Moreover his earning was relatively regular and sufficient to manage day-to-day activities of the family. But now, I have to struggle a lot for purchase of food articles even for once in a day. I feel guilty that I am not able to educate my daughter”, says Rajamma. Even though she has received a considerable amount of loan from Kalanjiam, it was utilised only to repay her debt, borrowed from local moneylenders. Now a days, her health status has also started worsen, which has made Rajamma more worried.

5.2 Risk and Insurance Integral to the concept of insurance is the concept of risk. In insurance parlance, risk is called peril. Only where risk prevails and that too when it is uncertain, insurance is applicable. Hence the first step in developing Insurance products to assist poor households to cope up with this uncertainity is to understand the range of risks they face. Situation-1: Alibaba has to cross the river in order to go the a city and sell his goods. He has a boat but he knows that the boat has a leak in it. Alibaba does not know swimming. However he decides to row the boat across the river and leave the rest in the hand of God. Is there any element of risk existing in the given situation? Well there is no risk as it is a certainty that Alibaba will drown and all his goods will be lost in the river. Risk is defined as the possibility of adverse results flowing from any occurrence. Uncertainty gives rise to risk and for risk to exit, there should be at least two possible outcomes of which, one is undesirable. Death is the ultimate truth of life, but the timing of death is uncertain. Life insurance exists because of this element of uncertainty. Situation-2: A kalanjiam member is requesting for insurance for her husband who is suffering from cancer. The doctors opined that his days are counted and he will meet death at any time. Suppose, the member is insisting the leaders to immediately arrange for insurance to his husband. What will be reply from the leader for her request?

5.3 Situation & Risk Can you group people, who drive within the city and people, who drive on highways into the same group for risk classification? No. This is so because people who drive on highways are prone to more fatal accidents as compared to people who drive within the city. There is a story, which goes as follows: There was a Guru who had seven disciples. These seven disciples used to quarrel and fight amongst themselves. One day, the Guru called them and told them to take one stick each and break it. One by one, the disciples broke the sticks. Next, the Guru gave each one of them, bundles of two sticks, and told them to break the sticks. With a little effort, the disciples broke the

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sticks. Then, the Guru gave each of them bundles of seven sticks and told them to broke the sticks. The disciples could not break the sticks. What is the moral of the story? Well, if we stand together, then we can support each other. If we are alone, then anyone can break us. The basic mechanism of Insurance works with the same principle. Here, people exposed to the same risks come together and pool funds to protect each individual against risk. Therefore, risk is spread out.

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6 Risks and the law of big numbers

6.1 Risk With the word ‘risk’ we mean dangerous chances or bad chances. Risk thus implies a possibility. There is a chance of something happening that creates an unfavourable situation. The chance of a flood or the chance of a dry period. That chance we call risk. Risk as against luck. There is a possibility of a favourable situation ensuing: luck. Against the chance of profit there is the chance of loss: risk. Good chances as against bad chances. Once certainty has become the case, there are no more possibilities. We do not talk of chances when certainty is concerned, but of facts.

6.1.1 Consequences of risk. Risks lead to financial consequences. As soon as bad chance happens, there is a financial problem. When, for example, a house burns down or a breadwinner dies. People facing bad chance find that their capital is affected. They have a financial problem. They must buy a new house or have one built, and that takes money. That is why people have a natural tendency to reduce the effects of risks. As long as there are big risks, there is also uncertainty.

6.2 Example I am building a simple hut for storing reserves. I run the risk that the hut collapses during a storm. There is the chance of a storm. We call that possibility a risk. The storm’s effect is for the hut to collapse. I suffer financial damages, because my reserves are damaged. Because I do not know when there will be a storm strong enough to destroy the hut, I am experiencing uncertainty. I want to get rid of that uncertainty. That is what I have got to do to reduce bad chance.

6.2.1 Measures against risks There are two ways in which people can cover themselves against risks. In the first place there are measures that can be taken to prevent bad chance or risks from striking. We call this prevention. The measures you then take are called preventive measures. The second manner in which to cover against bad chance is to pass the financial consequences of risks on to someone else. This can, for example, be done by taking out insurance. In both cases it is about people’s need to replace a situation of uncertainty with one of certainty.

6.3 Question What two ways exist for avoiding risks and financial damages in the example of the hut? Which way is preferred and why?

6.3.1 Risk = chance With risk we mean bad chance. Risk is the possibility of a situation occurring. If the chance will happen, we do not know. From experience we know that one chance is bigger than the other. We compare situations.

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6.4 Examples Most people die before they turn 70. Some live longer but most people die before their 70th birthday. There is a big chance of you dying before you turn 70. Every year some houses catch fire. Most houses do not catch fire every year, but there is a chance that it may happen to you.

6.4.1 Many risks can be calculated The chance of a situation occurring can be calculated by comparing the same situations. You can record every death in a certain district, record the person’s age at the time of his or her death. If you do that for the next 1,000 deaths, you can calculate the average age at which people die. This could be 65. On the basis of the rules of experience you can then say that any person has a 50% chance of getting older than 65. The chance of a baby reaching the age of 65 can thus be calculated. In a similar fashion you can calculate the chance of crop failure due to insufficient rainfall. On the basis of data from the past you can calculate the chance of a similar situation reoccurring in the future. The assumption of this method is that the future can be compared with the past. Should prosperity increase and healthcare improve it is reasonable to assume that the population is going to live longer on average. The chance of a baby reaching the age of 65 increases to over 50%, and, in contrast, the chance of a baby dying before the age of 65 decreases to under 50%.

6.4.2 The law of big numbers The law of big numbers says that calculations become more accurate when more cases are included. We explain with an example.

6.5 Example The chance of throwing 6 when playing dice is 1 in 6. Suppose you throw a die 6 times. The expectation is then that of the 6 throws one will be a 6. But it may well be that you did not throw any 6 or that you threw 6 twice. When you throw the die 600 times the calculated chance of throwing 6 100 times will be closer to the real result.

6.5.1 Theoretical approach In theory it amounts to the following. The law of big numbers says that the variation in the distribution of the mean is inversely proportional to the number of observations (i.e. the spread is inversely proportional to the square root of the number of observations). Which is why after a large number of observations the mean converges to the true average value of the probability density function.

6.5.2 Insurers use the law of big numbers Insurers use the law of big numbers to calculate a premium. Should data from the past show that out of 1,000 house 1 burns down every year, then the chance of fire damage to a house is 1 to 1,000. The insurer can then calculated the premium required for insuring against fire damages.

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When the insurer insures 100,000 houses he will take into account that 100 house will burn down next year. It could be 90 or 110. The law of big numbers says that the chance is very small of fewer than 90 houses burning down. The chance of more than 110 houses burning down is also very small. When 10 million houses are insured, the theoretical chance is for 10,000 to burn down. It could be 9,000 or 11,000. The chance of more than 11,000 houses of out of 10 million burning down, and not 10,000, is 10 times smaller than the chance of 110 houses of out 100,000 burning down. After all, the spread of variation [the difference between the theoretical result and the deviation] is inversely proportional to the square root of the number of observations. In this case the number of observations is 10 million; it is 100 times that for 100,000. So the chance of a deviation is √100 = 10 times smaller. In this way an individual can pass on his risks to the insurer by taking out insurance. The individual insured then has the financial security that the risks are covered. There is also a chance that the risks do not manifest themselves. Then there is no problem. Should the chance strike and the risk manifest itself, then there is no financial problem either, because the insured is compensated by the insurer. The insurer too has no problem, because experience had taught him that bad chance does not happen to everybody. The insurer thus uses the law of big numbers. The insurer can cover a too big a deviation between the real chance and theoretical chance by means of reinsuring. It is clear that the insurer runs fewer risks of a large deviation between the theoretical and real results with large numbers of policies. The number of policies and the spread of risk therefore also helps to determine the kind of reinsurance or the reinsurance package that is needed. See the chapter on reinsuring.

6.6 Test Below there are several questions meant for you to find out which parts of the course you have understood. You can find out for yourself how you have arrived at the answers to the following questions. Do you half-know the answer and do you have to read back a bit? Or do you immediately know the answer? You can also try to answer the questions a week after you have read the text. 1. Explain the law of big numbers in your own words. 2. What 2 ways exist of taking measures against risks? 3. Explain in insurance technical jargon what is meant with risks? 4. How does the insurer calculate the chance of risk? 5. Explain in your own words or with an example what is meant by the mean average of a big

number of observations converging to the true average value of the probability density function?

6. Suppose that in a particular region the average age that people die on is 64 years. Explain that when someone is 60 the chance of turning 65 is bigger than the chance of turning 63.

7. Insurer A has sold 25 times as many policies for a certain product as insurer B. For insurer A people have calculated that there is a chance of 3% of his claims deviating more than 10% of the calculated expectations. How big is the chance then for insurer B?

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7 Calculating the premium of life insurance Calculating the premium is about calculating the chance of having to pay out. For non-life insurance this can be simplified to calculating the chance, multiplied by the costs. For life insurance the premium depends on three factors: costs, interest and mortality.

7.1 Costs The insurer’s office expenses make up the costs. Think of salaries, computers, and maintenance of buildings. It also includes the commissions to be paid to the agents. It is advisable to base the premium calculation needed for the risk on a fixed percentage of costs in the premium

7.2 Interest Especially with regard to life insurance you have to consider interest. When the policy provides for a pay-out for when the insured person dies, then the insurer knows that he will have to pay out at some time. He only does not know when. In the course of the years he will receive insurance premiums that he has to reserve for the pay-out that will happen one day. Suppose that 32 years have lapsed between taking out an insurance policy and the moment of dying, then the insurer will have received interest over 32 years on the first premium payment, over 31 years on the second payment, etc. If we assume a premium of Rs 100 and a rate of interest of 5% per year, the insurer will receive in premiums and interest: [100*1.0532] + [100*1.0531] + [100*1.0530] + etc. This is 476+454+432+ etc. = 7,906. Especially when it involves a longer period the effects on interest income are huge. In 30 years a 5% rate of interest has more than quadrupled the amount.

7.3 Mortality Mortality tables allow the insurer to calculate the average chance of someone dying within one year. This also applies to the person who dies after two years, etc. In the Madurai 2004 statistical handbook I found the following data: St. No. Age group Persons 2001 Percentage of total

1 0-6 279,144 10.9 2 7-14 745,767 29.1 3 15-29 717,438 28.0 4 30-44 486,833 19.0 5 45-59 307,474 12.0 6 60 and above 25,623 1.0 total 2,562,279 100.0

This data is too limited to immediately draw conclusions, but they do provide an indication. To not make it unnecessarily difficult we assume a proportionate distribution of age groups1. We are also assuming that the future rate of mortality is the same as the past one. The conclusion then is that the group now aged between 30 and 44 will be aged 45 to 59 in 15 years. The chance that the people are the still alive is 307,474 divided by 486,833, or 63%. The rate of mortality for the 30-44 age group is then 100% minus the rate of survival. That is 100% minus 63% is 37%. This is the 1 In this case there clearly is no proportionate distribution of age groups. There are many more people in the 7-14 age category than in the 0-6 one; they should be roughly equal.

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mortality rate over 15 years. That does not say if the 37% dies at the start of the 15 years or at the end. For that we need more detailed information.

7.4 Difference between temporary and lifelong insurance There is a difference between a temporary insurance that leads to pay-out in the case of a death and a lifelong insurance in the case of death. With a temporary insurance one only pays premium over the risk that one dies within a year. With a lifelong insurance it is clear that the insurer must always pay. The insurer does not know if this is going to happen within one year or only after 32 years. The insurer does not know if he is going to get one premium payment or 32, and he does not know how much interests he is going to get over these payments. It is clear that for lifelong insurance premiums are much higher than for temporary insurance. The insured sum must one day be paid out. As soon as some one is older than sixty that chance will increase enormously (see table). If one takes out such insurance at the age of 55 then the chance is big that the insurer is going to have to pay out within ten years. The insurer must then have received Rs 20,000 in premiums and interest and also an amount for costs. It is clear that this is impossible with premium payments of around Rs 100. Such insurance is only possible when one takes one out at an early age, or when the turn-around system with non-selection2 is used.

7.5 Test 1. What is the difference between life insurance and non-life insurance when calculating

premiums? 2. What do life insurance and non-life insurance have in common when calculating premiums? 3. What are the three foundations for calculating a life insurance premium? 4. Suppose an interest rate of 4% and an annual premium of Rs 150. Calculate the amount that

the insurer will have after four years of premium receipts multiplied by interest. 5. Why is a temporary insurance that pays out in the case of death more expensive for an older

person than for a younger person, even though both have paid premiums for one year?

age number of persons 57 100,000 58 98,563 59 96,094 60 93,699

6. Use the table above and calculate the chance, expressed as a percentage, of a 57-year old

person dying within one year. 7. How big is the chance that a 58-year old person is still alive at 60? 8. In what manner can you insure older people?

2 See elsewhere in this course for these concepts.

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8 Fixed Amount Insurance and Indemnity Insurance

8.1 The Indemnity Insurance The indemnity insurance is an insurance agreement. The idea of indemnity insurance is to compensate an insured person for damages. This compensation is paid when the insured event takes place. Compensating damages is about compensating financial loss. The financial compensation allows the insured person to return to the same position.

8.1.1 Example A person insures his home against the risk of storms. Two years after taking out the policy an enormous storm happens. The storm destroys, among others, the insured person’s home. The insurance then bears the costs of building a comparable home. The insured person has been returned to his old situation. It did not improve, it did not get worse.

8.2 Forms of Indemnity Insurance The best known form of indemnity insurance is that of insuring objects. The insurance covers the losses that happen when the insured objects are damaged.

8.2.1 Examples The insurance of homes, furniture, cars, machines. An insurance that compensates certain costs is also an indemnity insurance. Then too insured persons are compensated. They are returned to their former financial position. They are financially compensated for the expenses they had.

8.2.2 Example The insurance of health costs.

8.3 Fixed Amount Insurance In addition to indemnity insurance there is the fixed amount insurance. The fixed amount insurance is not based on the principle of compensating damages or full financial compensation. It is the case though that certain damage has occurred. These damages also lead to a more difficult financial situation. In the case of fixed amount insurance it is not about the exact size of the financial damages. The policy determines in advance what sum to pay. It may be that the real financial damages are higher or lower than the sum that the policy compensates.

8.3.1 Examples Casualty- term life- or pension insurance. In some situations the financial detriment is difficult to determine. There are situations in which different people have very different opinions about the height of the loss. The fixed amount insurance is then a solution. You agree in advance how much to pay when a situation happens.

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8.3.2 Example The costs of a funeral or cremation depend on the number of people invited. The nature of the ceremony also influences costs. This problem can be solved with fixed amount insurance. The insured sum to be paid out in the case of death is agreed in advance.

8.4 Consequences Fixed Amount Insurance The fixed amount insurance is not based on a precise compensation of damages. This can mean that in some cases the sum paid is higher than the real financial damages. Such a situation can invite claims. The insurer must therefore always determine whether the sum insured is in balance with the financial losses.

8.4.1 Example The casualty policy is a form of fixed amount insurance. A certain amount is paid when some one loses a limb. This can encourage the insured person to maim himself. He is prepared to maim himself in order to qualify for a payment.

8.5 Difference Fixed Amount Insurance and Indemnity Insurance The indemnity insurance means to compensate the exact financial losses. The fixed amount insurance means to contribute to the costs after an insured event. The fixed amount insurance does not mean to compensate the exact financial losses. The fixed amount insurance often occurs in insurance products that insure persons. A person’s value, after all, cannot be expressed in money. An accident does affect a person’s ability to work. A reduced ability to work results in financial disadvantages. The casualty insurance offers a solution to this problem. As such a casualty insurance is a form of fixed amount insurance.

8.6 Test The exercises below are meant for you to determine for yourself which parts of the course you understand well. You can find out for yourself how you arrived at the answer to the following questions? When you do not know the answer you must return to the text? Or maybe you know the answer immediately? You can also try to answer the questions a week after you read the text.

a) Is insurance of a building a fixed amount insurance or an indemnity insurance?

b) Give two examples of fixed amount insurance.

c) What is the principle of indemnity insurance?

d) What kind of insurance may sooner encourage an insured person to deliberately inflict

damages? An indemnity insurance or a fixed amount insurance?

e) Is an insurance for health costs a fixed amount insurance or a indemnity insurance?

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f) And what about an insurance that pays 1,000 rps per day when you are in hospital?

g) Can you describe in your own words the difference between a fixed amount insurance and a

indemnity insurance.

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9 The Insurance Products The policy conditions describe the product the insured person takes out. In many cases there is a combination of different products. For the insured person the policy is a single-whole and financial protection in the case of accident or death. For a proper understanding it is necessary to distinguish the parts. But first we take a look at the people who play a role in the insurance.

9.1 The client We call the person who takes out the insurance policy and pays the premium, the client. The client enters into the contract with the insurer. The client’s name is mentioned in the policy. The client pays premiums to cover certain financial risks of himself and his family.

9.2 The insured We call the person whose risk, health or life is covered the insured. The client is also one of the insured. After all, he insures himself against the risk of an accident or death. His family members are also among the insured. In case of an accident or death of a family member the policy pays out as well.

9.3 The beneficiary The beneficiary is the person to whom the insurer pays out in the case of a claim. In the case of death the beneficiary is always some one other than the insured. In the case of disability or hospitalisation the beneficiary may be the same person as the insured.

9.4 Difference between client and insured The difference between the client and the insured is important. The client pays the premiums. Should the client die the insurer no longer receives any premiums. Should one of the insured die the insurer makes a payment, but the client must continue to make premium payments.

9.5 Death through natural causes The intention of the insurance is to offer protection from an uncertain event. Every human being dies sooner or later. Death is therefore not an uncertain event. However, the moment of dying is uncertain. The insurance offers a financial protection from that uncertain moment. The beneficiary receives a payment the moment an insured person dies. For the insurer there are therefore two elements that are uncertain. In the first place it is uncertain how much premium the insurer will receive. The moment someone dies who bought the policy (client), all premium payments cease. Should one of the co-insured die, the insurer will continue to receive premiums. In the second place the insurer must make a payment the moment one of the people insured by the policy dies. In setting premium payments the insurer takes into consideration the average life expectancy of the client and the insured. This also means that people over a certain age can no longer buy a policy. The chance is too big that the insurer must then pay within several years.

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9.6 Death through an accident Every human being dies sooner or later. The difference between dying through natural causes and dying as the result of an accident is that it happens suddenly in the case of an accident. A process of illness and ageing usually precedes death through natural causes. One sees death come closer. Often there is also a case of work disability as the result of illness or weakness. This is different for accidents. An accident happens suddenly. That is why the financial consequences of a death through an accident are more drastic for the beneficiary than those of death through natural causes. In the case of an accident a person is not prepared (financially) for death. That is why the insurer pays a higher amount with death through an accident than with death through natural causes. In the claims handling process it is important to obtain clarity about the cause of death.

9.7 Disability as the result of an accident Death is not always the result of an accident. In many cases accidents cause permanent disabilities. Then too there is a case of financial damages. The insured person may, for instance, no longer be able to practise his profession. The insurer then pays the fixed amount that is pre-determined in case of permanent disability. The disability must have been caused, of course, by an accident and not, for instance, by an illness.

9.8 Underwriting and premium-setting

9.8.1 Premium tables The insurer uses premium tables for underwriting insurance contracts. These tables show that one can choose between different packages. The client has a choice of lower and higher insured amounts. Higher premiums relate to the higher insured amounts. The insurer does not allow a client to take out several policies. Otherwise a client who is ill and expects to depart this life within several years can take out as many as 10 policies with the highest insured amounts. In that case the insurer is exposed to a disproportionately high risk. The premium tables are after all based on the average life expectancy. A large number of insured people pass away on average at a certain age. The ‘law of large numbers’ allow the insurer to know what is happening. This mechanism becomes distorted when only people with bad health take out policies. It is therefore the task of the insurance underwriters to be alert and not only sell policies to certain categories of people who run higher risks than average.

9.8.2 Pro rata payment Insurers too take measures to prevent this undesirable effect. In the conditions the insurer says, for instance, that in the case of death through natural causes within 2 or 3 years after the policy’s starting date the insured amount is not fully paid, but only over the premiums paid till then. In the case of death through an accident the insured amount is fully paid. In this way the insurer prevent people from buying policies because they expect to pass away within a couple of months.

9.8.3 Age A second measure that insurers take to prevent having a clientele of insured people who are not expected to live for long, is to set a last-age for concluding a policy. It makes no sense to sell a policy to a seventy-year old. The insurer knows that the chance is big that he will have to pay within a couple of years. The premiums received are then always too little. The insurer can only compensate by really putting up the premiums. This is contrary to the insurance philosophy of solidarity and shared risks of the whole group. After all, young people would be burdened with the risks of the elderly. Because the insurer is a mutual (see relevant chapter of the course) the

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insurer’s interest is that of all the members and vice versa. Should the insurer incur losses nothing is transferred to members’ accounts. In the course of the years the situation will come about of itself in which the elderly are insured. After all, the young people buying policies today will become the elderly insured in several years. But then they will have been paying premiums over a period of 25 years. In the present context under mainstream insurance products, once reaching the age of 60, people

are no longer insured, although they paid premium for a greater part of the life. They need a funeral

cover and some compensation for loss of income and additional costs for their relatives. It is

unacceptable that people who have reached a phase in their life when they need a cover the most

are not able to find a solution for that. How to cover this risk?

a) Ask the members to enroll in savings cum insurance in early parts of their life so that they will be in a position to have sufficient sum of money in their member account at later part of their life.

b) Whole life insurance c) Cross subsidization by young through some mechanisms.

9.9 Test The exercises below are meant for you to determine for yourself which parts of the course you understand well. You can find out for yourself how you arrived at the answers to the following questions? When you do not know the answer you must return to the text? Or maybe you know the answer immediately? You can also try to answer the questions a week after you read the text.

a) Whom do we call the beneficiary?

b) In which cases can the beneficiary be the same person as the insured?

c) Describe the difference between client and insured.

d) The reason for insuring oneself is an uncertain event. Every person dies some time. Why do

insurers call dying an uncertain event?

e) What distinction does the policy make between dying through natural causes and dying

through an accident?

f) How do insurers prevent having to pay for people with a high risk of dying?

g) Give 3 examples of an accident in which the policy pays out?

h) When an insured person dies within 3 months of the starting date as the result of an illness

the insurer only pays the premiums paid. When an insured person dies after 3 months of the

starting date of the policy the insurer pays the insured amount. Explain this difference.

i) In which case does an insurer pay when there is no case of death? Elaborate your answer

with an example.

j) Find in the premium tables the premium to be paid by a 38-year old person if he wants to

ensure a family of husband, wife and 5 live-in children. Which premium will he pay when he

selects the package with the lowest sum insured?

k) Why can older people no longer be insured?

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l) The death of a client through natural causes creates two disadvantages for the insurer.

Elaborate on this statement.

m) The death of another insured person only creates one disadvantage for the insurer. Explain.

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10 Underwriting

10.1 Agreement An insurance is an agreement. Members of the Mutual Insurance take out policies with the Mutual. This agreement is called insurance. The document that lays down the agreement is called policy. Members pay a price for the agreement. We call that price premium. The insurance pays out an amount in certain cases. We call these cases claims. The members are therefore buying security. Every term they pay a small amount. In return they get security. This security means that they will get an amount of money in the case of claims. If there are no claims, compensation is not needed. The Mutual Insurance then looks like an office that collects money off its members. The Mutual pays this money to members who have suffered claims. The people entitled to a payout when there are claims are called the insured. They can be the members, but also other people from their family.

10.1 Security Security is the basis of every insurance. Members pay premiums and know for sure that they will not be hit financially by certain disasters. Members never pay premiums for nothing. Even when a member suffers no claims, he still does not pay premiums for nothing. After all he has received security over that period.

10.2 Saving or insuring There are several ways to protect against a calamity. One can get financial protection either by saving or by insuring. Saving is appropriate for goals that one selects; insuring is appropriate for calamities of which one does not know if and when they may happen. Saving can be done individually for an individual goal. Insuring cannot be done individually per definition. One does that together with others. Insuring rests on the principle of solidarity. People do not all die at the same time, therefore one can get insured against the financial consequences of dying.

10.2.1 Saving and borrowing Saving is an appropriate method for a specific goal. You can, e.g., save for a machine. You know its price. You can calculate how long you must save a certain monthly amount to get the needed capital. You can decide how long you want to save and then calculate the monthly amount. And vice versa. Borrowing is really delayed saving. You first buy a product with somebody else’s money and then you pay him back in monthly instalments. A problem occurs when you cannot pay back the loan, because of disability or an accident or death. The family is then stuck with a debt.

10.2.2 Insuring Insuring is an appropriate method when you do not have your eyes set on a specific goal. The purpose of insurance is to provide financial protection; protection against the consequences of a disaster. In insurance-speak we call a disaster the claims. You can protect yourself against, e.g., accidents or against (an unnatural) death. As you do not know in advance when the disaster (claims) is going to strike, saving is not an appropriate solution. Should it happen within a year, then you will not have saved enough. You must then save a lot in a short time to have sufficient funds should the disaster strike early. The disadvantage is that you cannot use the money for other

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purposes. Another disadvantage is that you may be saving for something that never happens, looking back. Not everybody has accidents.

10.3 The product The insurance agreement clearly describes the security you are buying. Not every financial setback is insured. Certain products offer security in the case of death. Other products offer to cover accidents. Each product has a certain price. The price is related to the product’s security.

10.4 Premium The members pay a premium for the insurance they take out. The premiums paid by all members together are the Mutual’s income. The sum of all the premiums is in a sense the Mutual’s budget. The Mutual pays claims from the premiums. For this it needs a reserve. See below with claims. The Mutual also pays its agents. Finally a certain amount of money is needed for office expenses. The office expenses are made up of material and staff salaries. Materials are office furniture, computers, leaflets, etc. The sum of the premiums collected is therefore higher than the sum of the Mutual’s claims payments. The Mutual’s articles of association can also determine what share of premiums can be spent on paying agents. The articles of association can also determine the share meant for office materials. So, for a particular year: The sum of all premiums = all claims + office costs + payments to agents + contribution to general reserves.

10.5 Determining the premium It is important to set the right premium for every product. When the premium is too low the Mutual may one day no longer be able to pay for claims. When the premium is too high the Mutual runs the risk that people will not buy the product when the risks are low in their estimate. This is called anti-selection. This means, that only people who estimate the risk of claims as high buy a policy. In the end the Mutual then also pays many claims and gets into financial problems. Determining a premium is in fact an exercise in estimating the probability of incurring claims. Determining a premium is therefore about calculating the probability of dying or an accident.

10.5.1 Premium and age For products that insure the risk of dying the premium very much depends on the risk. After all: the older, the bigger the chance of dying. For the premium this means the following:

• The premium for old people is higher, because an older person dies sooner than a young person and pays the premium over a fewer number of years, but the payout for claims remains the same.

• In the case of old people the period between the start of premium payments and the claims is shorter than for young people. This means that the insurer earns less interest on premiums collected from old people.

• The costs of selling a policy, its administration and claims procedures are the same for young and old people. These fixed costs impact relatively more on the policies of older people, because they have made fewer premium payments.

• The above factors imply an extremely high premium for old people and hence create the danger of anti-selection. You can only break out of this when there is sufficient solidarity and

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the option of an apportionment system3. The insurer then chooses deliberately to set high premiums for young people so as to lower the premiums for old people. To prevent anti-selection you can set a quota, for instance, no more than one old person insured for every five young people insured.

An alternative for insuring old people is to turn it into a kind of savings scheme. When some one dies the total amount of paid premiums is paid out, possibly increased with a generous interest.

10.6 Selection and anti-selection The premium the Mutual sets is based on the probability of claims. That probability is based on historical data. The probability is thus an average of past claims for a particular region or a particular age group. The principle only works when future claims are in the same group of people. That is why it is important that the products are sold to members who do not deviate too much from the average. We call this selection. When the premium of a certain product is too high anti-selection can happen. When anti-selection happens only people with a high probability of claims buy a policy. The danger of anti-selection is that future claims turn out to be higher than had been estimated in advance. An example will make this clear. Suppose you are selling a product that offers a payment when the insured dies. When the premium for this product is much too high the average person will not buy this product. But it is still attractive to people who are seriously ill or so old that they expect to die in a couple of years. The Mutual is then confronted with many claims. Should you then decide to increase the premiums in order to cover the claims, the problem will only get worse. You must select well the people you want to insure. For instance, by setting age limits. Another method is to not fully pay out claims that happen within 2 or 3 years of buying a policy, but only to payout the premiums already paid.

10.6.1 Group insurance Insuring a group of people as a whole has several advantages. In this construction it is not the individual person or family that is insured, but a certain group of people, of e.g. 20 adults, that exhibits solidarity. The group is acting like a collective. It pays the premium in one go for the entire group, and there is only one policy. The advantage of this construction is a functioning mutual solidarity. People watch over each other to ensure that the premium is collected. It leads to fewer problems with arrears. It also reduces the chance of anti-selection because the other members of the group compensate the individual bad risk. It is in a sense the law of big numbers for small-scale operations.

10.7 Test Below there are several questions meant for you to find out which parts of the course you have understood. You can find out for yourself how you have arrived at the answers to the following questions. Do you half-know the answer and do you have to read back a bit? Or do 3 Normally when premium tariffs are set it is assumed that every risk has its own premium. Every new policyholder pays the premium that belongs to his risk. Premiums are set on the basis of a risk calculation. In an apportionment system the claims are the point of departure. Everybody who wants to join can do so and you calculate how much premium is needed. The premium is then divided over the insured using certaina standards (slight age tariff). In a premium system one really saves, and in an apportionment system one is really borrowing. Current payouts are done from current and future risks. In fact, you do not need reserves in an apportionment system. The danger is, you are not sure of the future inflow of newly insured people; especially when there are many payouts in an early phase, the premium has to go up quite a bit and the question then remains if people are still prepared to get insured. However, when it works the demand for insurance will be very high and in the long-term premiums go down and a high degree of mutual solidarity has been reached.

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you immediately know the answer? You can also try to answer the questions a week after you have read the text.

a) What do we call the price of insurance?

b) What does a person buy when he concludes an insurance agreement?

c) What is the risk to the Mutual when it is asking a too low price for certain insurance?

d) When is there the danger of anti-selection?

e) Why is anti-selection a threat to the Mutual?

f) What are claims?

g) What is the advantage of a collective insurance?

h) In which situation is it better to insure than to save?

i) In which situation is it better to save than to insure?

j) The Mutual uses around half of the premiums received to pay for claims. What does the

Mutual use the other half of the premiums received for?

k) What are the questions that an employee must ask when an insured person claims?

l) After three years an insured person claims that he has been paying premiums for nothing.

How do you explain to him that this is not so?

m) Why is it really impossible to insure people over the age of 60 against the risk of dying and

what are the consequences when an insurer does take on these risks?

n) What would happen if too low a premium were asked for certain insurance?

o) What is the purpose of general reserves?

p) What is the difference between saving and insuring?

q) What are the advantages to a member when he takes out insurance?

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11 Claims Handling

11.1 Claim The Mutual pays out the moment an insured person suffers claims. It can happen that in a certain year there is more claim than in an average year. This is why general reserves are needed. Re-insurance can be bought for exceptional calamities. The general reserves are in fact a buffer capable of absorbing a year with much claim, because the general reserves are replenished in a year with little claim. See the chapter Mutual Insurance Company paragraph General Assembly. It is important that the Mutual only pays for claims to people who have bought a policy. The Mutual must judge if the claim complies with the policy’s standards. Staff must, e.g., appraise the following:

1. Is the claimant insured with a policy? 2. Have the premiums been paid? 3. When did the claim happen? 4. Under what circumstances did the claim happen? 5. How old is de claimant and how long has he had the policy? 6. How is the claim amount to be paid out?

11.1.1 The concept of claims What is claim? Claim is a reduction in capital. At a particular moment a person can give a monetary value to all of his possessions. The total sum of his possessions minus his debts and obligations is his capital. Claim is the difference in capital: the difference in capital owned before the insured event and the capital owned immediately after that event. For instance, somebody is building a house and borrows 100,000. When the house is completed it can be valued at 150,000. His capital is 50,000: 150,000 in property minus 100,000 in debts. A month later there is a fire in the house. The partly burnt house now has a value of 90,000. His capital has become minus 10,000: 90,000 in property minus 100,000 in debts. The fire has reduced his capital. The claims are therefore 60,000. In principle this person should be able to have his house repaired for 60,000. In principle, because the height of the repairs do not always equal the claims. There could be a maintenance backlog. Or the repairs use better materials than original. After the repairs the house is worth more than 150,000 and we can speak of an increase in capital.

11.1.2 Bodily Injury Claims The value of people cannot be expressed in terms of money. That is why the amount to be paid out in the case of death or disability is set in advance in such insurance. You do have to keep an eye out that these amounts are not set so high that people main themselves or even sacrifice themselves to obtain a payment for the survivors. This is why some insurers exclude suicide in the first two years after taking out insurance. This prevents people with suicide plans from taking out insurance just before the deed to benefit their survivors.

11.2 Claims handling With claims handling we mean the entire process that takes place when there is an event that is covered by the insurance policy. The client took out an insurance to cover financial risks. When such an event happens, it is a nice opportunity for the insurer to show that the insurance product

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works. The claims handling take place using the following checklist. The insurer’s assistant must be able to answer precisely to the questions below. A claim must be dealt with very accurately. Should payment be refused when the policy does give the right to a payment, the insurer acquires a bad reputation. Should claims be paid out unjustly, it damages solidarity. The insurer is then left with less money to transfer to the members’ accounts or for contributing to certain projects. It is also important for the insurer’s management to monitor if the claims are spread proportionally over the insured persons. If after a while it turns out that particular groups incur more damages, the cause must be investigated. Are there any irregularities? Was the insurance sold to groups with an above-average risk? From time to time overviews must be made of the claims to draw conclusions for future policy.

11.3 For which person was the claim filed? The insurer must judge if the person for whom the claim is filed is also registered in the administration as insured. If not, the claim cannot be processed.

11.4 On which date did the uncertain event take place? We call this the ‘date of occurrence’. The date of occurrence must be entered into the administration. It speaks for itself that the date of occurrence must fall after the date that the insurance began. Should the date of occurrence lie before the starting date, then no payment will be done. Should the date of occurrence lie within 2 or 3 years of the starting date, the payment is pro rata in the case of a natural death.

11.5 What did exactly happen? To be able to assess the amount of money that the insurer must pay, we must first know what exactly happened. Is death the case, or a permanent disability? Or is it only a case of a temporary disability? If some one died, what was the cause? Is it a case of a natural death or was an accident with deadly consequences?

11.6 Where the premiums paid on time? The policy is only valid when the client has always paid the premium on time. The management decides what exceptions to allow and what period to accept for premiums to be in arrears. Some insurers work with the system of pro rata payments when not all premiums have been paid.

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12 Reinsurance Reinsurance is important to the insurer. It allows insurer to protect himself against large or sizeable claims. As such reinsurance serves the interests of the insured in the end. Without a good reinsurance the insurer can get into big financial problems. One must then, e.g., substantially increase premiums. Finally, when new contracts do not come in because premiums are too high, this could lead to insolvency. When reinsuring the reinsurer becomes the risk-bearer and the insurer himself is insured.

12.1 Spread The principle of reinsuring is based on the law of big numbers. An example will make this clear. An insurer has 1,000 policies and the reinsurer insures in turn 100 such insurance companies. Indirectly the reinsurer insures 100,000 insured people. In addition there is also the effect of spreading risks. Insurers work at the regional or national level, whilst reinsurers insure insurers from different countries. This leads to a spread by region. In this manner claims resulting from natural disasters can be insured.

12.2 Insurers Risks An insurer calculates in advance the expected probability of claims. Certain factors see to it that the real sum of the claims deviates considerably from the calculated probability of claims: Large claims on individual risks. Large claims resulting from an event which may lead to many cases of individual claims, e.g. natural disasters. A high frequency of many small claims. Altered risk structures, caused by social changes. Sociological, economic or demographic changes can lead to changes in the number of claims or in their size. This also applies to technological advances. Think of the risk of motorised traffic or the use of computer directed business or production processes.

12.3 Kinds of reinsurance There are different kinds of reinsurance contracts. An insurer has to make a good analysis of his risks and can then use that to make a choice from among the different reinsurance contracts. In practice a combination of different forms occurs. The primary distinction is between proportional reinsurance and non-proportional reinsurance. Proportional reinsurance re-insures a certain portion of the insured risk. Non-proportional reinsurance is not concerned with reinsuring the insured risk, but is based on the amount of claims to the insurer.

12.3.1 A. Proportional reinsurance The risk the insurer insures is the point of departure for proportional reinsurance. The reinsurer’s contribution in the case of a claim is determined as a portion of the insured risk. For every policy the reinsurer’s contribution when claims occur has been determined. In proportional treaties the insurer pays a fixed portion of the premium to the reinsurer. This can differ per policy. A part of the insurance premium is meant to cover costs, which are made by the insurer above all. This is why the reinsurer pays the insurer a commission to cover these costs. This is usually a fixed percentage of the ceded premiums. We distinguish between the Quota Treaty, also called the Quota-Share Treaty, and the Excess Treaty or Surplus Treaty.

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12.3.2 The Quota-Share Treaty In the case of a Quota-Share Treaty all the assets (premiums) and liabilities (claims) are divided between the insurer and reinsurer using an agreed ratio. This form has an obligatory character, which sees to it that the reinsurer cannot select a client. The advantage is that it is a simple system and it does not lead to extra administration costs.

12.3.3 Example 1 The insurer can enter into a Quota-Share Treaty, which determines that of every policy 30% is reinsured in the Quota-Share Treaty. In that case, 30% of every premium goes to the reinsurer and the reinsurer pays out 30% of any claims in a claim. The insurer also receives a commission because of administrative burdens. The advantage for the insurer is that the peaks in paying out for claims are muffled, so to speak. The law of big numbers is applied and the insurer’s liabilities are divided as if he had 30% more policyholders.

12.3.4 Example 2 The insurer enters into a Quota-Share Treaty on the basis of 30%, but only for frequently occurring risks and with reasonably low insured amounts. A fire hazard insurer has, e.g., a portfolio in which 95% of the objects has an insured value less than 1,000,000. The treaty can stipulate that there is a 30% Quota up to 1,000,000. In 95% of the cases this construction has the same result as example 1. For the other 5% of cases it means that the reinsurer’s share of the premium and claims has to be determined per policy. For a policy with an insured value of 2,000,000 this is 50%, and for a policy of an insured value of 10,000,000 this is 10%. It is always the ratio of the maximum in the Share contract; in this case 1,000,000 up to the amount insured with the insurer. It will be clear that the administrative burden is much higher in example 2 than in example 1. Example 2 demands much more from a computer programme.

12.3.5 Excess Here the insurer does not reinsure his entire portfolio. Only policies with a high insured amount are reinsured in part. Of every insurance the insurer takes the first segment of an insured amount to a certain maximum. One calls this the retention. The premium is determined by looking at the ratio in every policy between the insured segment and the uninsured segment. In the case of claims the reinsurer pays the corresponding share.

12.3.6 Example An insurer sells accident insurance with different insured amounts, e.g., of 10,000, 30,000 or 50,000. The insurer could decide to include all posts with an amount higher than 25,000 in an Excess or Surplus Treaty. In this case this means that all policies of 10,000 are excluded from the reinsurance contract in any case. The policies with an insured sum of 30,000 fall under the reinsurance contract for 5/30 part and the policies with an insured sum of 50,000 fall under the reinsurance contract for 25/50 part. Of these policies 5/30 and 25/50 part of the premium is for reinsurance, and vice versa the reinsurance pays these shares of the claims.

12.3.7 B. Non-proportional reinsurance treaties

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The non-proportional reinsurance treaties are not based on the amount insured or a part thereof, but on the claims. The insurer insures his portfolio with a reinsurer and has in a sense his own risk whenever claims are claimed. This can be an own-risk per policy, but it can also be an own-risk per event or an own-risk over a whole year. An own-risk per event protects an insurer from, e.g., storm claims. Another example is the explosion of a fireworks factory. All the claims of the different policies are then added for this one disaster. Should total claims exceed the agreed priority or retention, the insurer then pays the excess. The same procedure is applied for an annual retention.

12.3.8 Excess of Loss In the case of Excess of Loss the reinsurer participates in the claims when they are bigger than the priority (i.e. retention) up to a certain maximum. For claim amounts over this maximum a new re-insurance treaty is entered into up to a next maximum. As such the claims sum can be divided over different layers, whereby the maximum of layer t is also the bottom of layer t+1. Within Excess of Loss two forms are distinguished: the Working Excess of Loss (WXL), in the case of one or more claim claims per year, and the Catastrophe Excess of Loss (cat.XL), which is only invoked when different risks lead to claims. This form offers the insurer protection against the accumulation of different losses caused by one event (catastrophe). Storm claims, e.g., fall into this category.

12.3.9 Stop Loss In a Stop Loss contract the reinsurer compensates that part of the total claims of a particular sector in a year that exceeds a certain amount. This amount is expressed as a fixed percentage of the premium income. Stop Loss serves to protect an insurer’s year results in a particular sector against negative deviations resulting from a noticeable increase in the number and height of claims. This form is rarely used because the costs are rather high. These high costs are due to the fact that Stop Loss offers coverage of many kinds of risks (frequency, size claims and fluctuations in external factors).

12.4 Final thoughts Reinsurance serves to protect the insurer. The size of claims can be bigger than the insurer had anticipated. The insurer can cover these risks by reinsuring his own portfolio in part. Proportional reinsurance treaties serve above all to allow the law of big numbers to work better. A Quota Treaty provides a better spread and caps peaks in claims. An Excess Treaty allows the insurer to also insure individual big risks. Non-proportional reinsurance treaties serve to limit the burden of claims. The Stop Loss treaty does this very directly. The insurer then knows that annually he will never lose more than a certain amount on claims. The Excess of Loss Treaty protects the insurer against individual big claims. This can be big claims in one particular policy, but it can also be a particular event leading to a large number of policies submitting a claim. Think of an insurance for storm claims, for a building, or an epidemic or accidents. Many insurers prefer a mix of different reinsurance treaties. You then get a greater spread of risks because the law on big numbers is operating, and protection against higher claims than anticipated.

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13 The Mutual Insurance Institutions The people Institutions (Kalanjiams, Vayalagams etc) promoted by DHAN through its various thematic programmes are functioning with the concept of mutuality. With that concept they are providing various services to their members. Since they are providing insurance services those institutions also act as mutual insurance institutions. The role of these institutions is discussed in the following three areas:

13.1 Member Administration: Member administration denotes the selection of eligible members and collection/ maintenance of details of the insured (memberwise).

13.1.1 Eligibility: Members (and their family members) of various People organisations promoted DHAN Foundation are eligible to join the scheme. They should be poor and their age should be between 18 to 59 years. It is very essential to check adverse selection. Adverse selection means selection of the persons for insurance who are not insurable and also the persons in adversity of insurance. E.g. the persons who are imminent to death may try to purchase insurance at any cost. It has to be checked.

13.1.2 Exclusion:

1. To reduce moral hazard that gives incentives to policyholders increase the likelihood that the insured event will occur

2. To reduce the adverse selection problem caused by people who have been diagnosed with progressive illness and

3. To protect the insurer from covariant risks. For life polices, suicide is generally excluded as it presents as moral hazard problem. Two other common exclusions include a. Driving while intoxicated and b. Participating in an illegal activity. As exclusions, if a policyholder dies from these caused, the

insurer is not obliged to honor the claim. Similarly, a common exclusion for disability is self-mutilation, blindness caused by cataracts.

13.1.3 Collection of contributions from members: Members should have the necessary knowledge / literacy on insurance. Street plays, Video film and training are being utilized as effective tools to bring the desired results under literacy on insurance. In Group meetings, contributions are collected from the members against receipts duly mentioning the collected amount with the narration “ Nalathittam”. The details of insured should be collected by the group at the time of receipt of the contribution from the members as follows :

1. Name of the insured

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2. Member / Spouse

3. Name of the kalanjiam / Vayalagam

4. Name of the cluster

5. Age of the insured - Completed age (Ration card, Voter’s identity card, School certificate,

Horoscope, etc., to be verified and kept at Cluster level)

6. Sex of the insured

7. Occupation

8. Name of the Nominee

9. Age of the Nominee

10. Relationship to Nominee

11. Name of the Guardian, if the nominee is a minor

12. Relationship of the Guardian to the insurer

13. Death, Disability, Health, Livestock, Assets, Pension – Name of the product / insured.

14. Premium amount

15. Name of the Insurance Company*

16. From date

17. Due date

*Federation will decide after consulting People Mutuals Groups should remit the member contributions to cluster along with the covered member / spouse details. The cluster should keep proper records of these details. These records should be readily available for reference at any time. Also, the cluster should remit the amount to federation along with these details. The federations should have consolidated data and details of lives covered in their location. The premium collection should commence at least 2 months in advance in a location. Suppose the policy period is from 01, October 2004 to 31 September 2005, groups should start collecting the contributions for renewal from their members / spouses during the period from 01 September 2005 to 15 September 2005 and see that the collected contributions reach the clusters along with individual member / spouse insurance details immediately for onward transmission to federation.

Insurance transactions in every federation will be audited by People Mutuals during the months of September and March of a financial year.

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13.2 Policy Administration: 1. The premiums thus pooled in the federation (In this case, during the period September 15 to

September 30, 2005) and should be sent to concerned insurance companies with in a week as advised by the People Mutuals.

2. Original proposal, the details of lives covered (Soft copy and Hard copy) and demand draft for the premium amount should be sent by the federation to the insurance company and Xerox copy to be sent to People Mutuals for updating the data and monitoring.

3. After receiving the policy from the insurance company, federation should check its correctness by comparing with the details furnished in the copy of proposal kept at the federation. Discrepancies if any, should be brought to the notice of the insurance company and got rectified.

4. Every year federation should renew the insurance policy / policies. Efforts are to be taken before 2 months to the expiry period of the policy. Suppose the policy is due for renewal on 1st October, efforts should be intensified during the month of August itself.

5. New members should be identified and insured along with the renewal.

6. Selection of Insurance company and remittance of premium have to be done duly consulting People Mutuals.

7. People Mutuals collects individual member / spouse data from the location and creates a base line data. Further, it updates the insurance details as follows for analytical purpose.

- Programme wise - Region wise - Federation wise - Year wise - Insurance company wise - Sex wise

The gap between total members and insured members is being monitored by People Mutuals and suitable instructions are given to federations to bridge the gap.

8. People Mutuals diarise the due dates of policies and intimates them to federations well in advance enabling them to get the policies renewed on time.

9. People Mutuals will conduct insurance steering committee meetings twice a year with the insurance partners to sort out the issues and enable further collaboration.

13.2 Claim Administration: This denotes the instructions to be carried out by the people institutions when a covered event takes place.

1. Death details has to reach the group immediately.

2. Death details of the deceased member should be informed to federation by the group within 24 hours.

3. If a member / spouse of the member died, all group members / federation & cluster EC representatives / cluster associates along with MD should go to the deceased member’s house and share the condolence with the other family members. The following system may be put into practice.

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The other members of group should not go for work and should be with the family of deceased member & extend the necessary help required for them.

At Cluster level, arranging for Tea, coffee, and food to the relatives of the deceased member may be done.

At federation level, arrangement for immediate release Rs.3000/- to the nominee to meet the funeral expenses of deceased. The amount may be adjusted from the death claim benefits.

At movement level, steps to offer the Kalanjia Kodi

4. Duly filled up & signed claim form along with the Death Certificate should be submitted to federation by the group with in a week

5. Federation will send it to insurance company with in a week.

6. If the member died in an accident, or had permanent / partial disability, claim should be preferred in special claim form meant for that purpose. In the case of accidental death FIR, postmortem certificate, Police Inquisit Report (PIR) should be annexed with the claim form.

7. If the claim is not preferred with in 45 days of death of the member, Insurance Company may not accept the claim.

8. Time schedule : The following time schedule may be followed by the location.

Duly filled claim applications from Nominee to Federation - 1 week

Federation to insurance company - 1 week

Ensuring claim settlement from the company - 1 week

Payment of claim to member through group by federation - with in a week

9. After receiving the claim amount from the insurance company, federation should give the claim amount to the nominee in a regular / special meeting of kalanjam after adjusting the amount of Rs.3000/- given to the nominee on the day of death of the member.

13.3 Nalathittam Committee: Separate Nalathittam Committee, consisting of 4 Board of Directors and Managing Director should be constituted for implementation and operation of Nalathittam. The Nalathittam should be a permanent agenda in the board meetings. The contributions, benefit payments should be shared by way of report to every month by Managing Director.

In the case of federations, they have to open a Savings Bank account with the name “Nalathittam Account” and transact all transaction related to insurance under this account only. If there is no federation, a designated cluster could open a Savings Bank Account on the above lines and transact the insurance transactions. Once the federation is formed, the Nalathittam amount available under the cluster account have to be transferred to the federation’s Nalathittam Account.

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13.3.1 Monitoring:

1. Half yearly review meetings of member federation will be conducted by People Mutuals for review and further directions

2. Half yearly auditing of Nalathittam accounts by People Mutuals 3. Copy of monthly report of Nalathittam shared by Managing Director in the board meeting

should be sent to People Mutuals. Rating system on Nalathittam implementation by federations will be designed by People Mutuals

and half yearly rating will be shared in the review meetings.

13.3.2 Accounting :

Step Activity

1. On receiving the contribution from the members.

Get Cash Issue receipt to the member

2. When the group is remitting the contributions to the cluster.

Prepare voucher Credit the bank account of cluster and get the bank counterfoil and cluster receipts ( The receipt from Cluster has to be attached after remitting to Cluster)

3. When the cluster is receiving the contribution from the group,

Verify bank counterfoil and the bank pass book entry Issue receipt to the group

4. When the cluster is remitting the contribution to the federation

Prepare voucher Credit to bank account of federation and get the bank counterfoil & federation receipt (The receipt from Federation has to be attached after remitting to federation)

5. When the federation is receiving the contribution from the cluster,

Verify bank counterfoil and bank pass book entry Issue receipts to the cluster (Bank counterfoil to be attached)

(Please note that the amount has to credited only to the Nalathittam account of the Location / Federation.)

6. When the federation is

remitting the contribution to the insurance company,

Prepare voucher Send the cheque or Demand Draft (Bank counterfoil to be attached)

In the balance sheet of group / cluster, the amount of contribution kept with them should be

shown under accounts payable, and in case of federation, the amount will be shown as

“Specified funds” named as Nalathittam.

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14 Tips for trainers

14.1 Talk slowly It is about communicating ideas and principles, not about the words themselves. The students must get the time to convert the words into an understanding of their own. Most principles are logical. When some one understands the logic of the cases, it will not be difficult to remember them.

14.2 Use the tell, tell, tell principle Use the introduction to say what you are going to tell. Then you can really talk in detail about what you have to say. And finally, summarise what you have just said. People will have heard three versions of the same, increasing the chance that people remember and understand it. After all, it is not about knowing, but about understanding.

14.3 Use eye-to-eye contact Look at the students. Not all the time and always at the same students, but at different ones. You then see the problems they have to understand things and know if you need to explain it again with the help of an example. When you have problems looking at individuals, then look at the people in the back row. When you look at the people in the front row, the ones in the back row will think that you are not looking at them; when you look at the people in the back row, the ones in the front will think that you are looking at everybody.

14.4 Organize the classroom The ideal organisation is for students to sit with their backs to the window and for you to at least stand alongside a blind wall. See to it that people have pens and paper and the facility for taking notes.

14.5 Use examples Clarify your explanation with examples that you have chosen, and use different examples all the time. The examples must also appear new to you each time. Examples linked to the students’ world are to be preferred.

14.6 Use a whiteboard or blackboard Do not write entire sentences on the board. Only write down keywords and key concepts. Use circles and lines to link one concept with another. In particular, use the board to write down lists or contradictions, and also number them or assign letters. The board is ideal for you to make an inventory when you are asking questions to the students. For example: you have explained the difference between saving and insuring. You then draw the following schematic on the board and let your students name the advantages and disadvantages. saving insuring advantage disadvantage advantage disadvantage

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1. 1. 1. 1. 2. 2. 2. 2. 3. 3. 3. 3. Pick a student and let him or her name one advantage or disadvantage. Do not let others whisper the answer or take over, and pick another student for the next advantage or disadvantage. The less vocal students must also have their turn. Prepare the schematic at home, because they may forget something, and then you will have to complete it. Do not just give the answer then, but name aspects and ask a student where to fill it in. Preferably, do not use a Powerpoint presentation. You are then tied too much to what you had prepared in advance. A board allows you to be more flexible. You can then go deeper into issues, depending on your students’ needs.

14.7 Use different colours If available, use different colours to emphasise matters or to highlight contradictions. For example, advantages in green and disadvantages in red, or words in one colour and relationships or lines in another.

14.8 Give compliments People appreciate getting compliments. Therefore, thank a student when he takes the initiative to ask a question. He or she at least dares to do so, and gives you an opportunity to explain again. When you ask a question and find that it is a difficult one, or when you write down a question on the board for the students to work on, you can then also go around the classroom and ask everybody for their answers. Do not react directly to the answers, but make an inventory. At the end you pay a compliment to the student who got the right answer. The others you let be for the time being.

14.9 Ask questions: open and closed, broad and in-depth Ask question to see what your students are thinking and to test if they understand it all, or to involve the students in the lesson. When a student asks a question you can ask another student to give the answer, and then possibly ask a third one whether number two had given the right answer. You thus encourage the thinking process. Already think of a few questions when you are preparing, and be deliberate about asking open or closed questions. Open questions inventorise thoughts, ideas and opinions: What do you think of…? How important is it in your situation for….? How would you solve this? Closed questions ask for facts: What is the time? What forms of insurance exist? To what age can you get insurance? What is the price of….? Maintain the dialogue with your students by asking broad and in-depth questions. A broad question is asking for more information. For instance, your question is about the advantages of an aspect. The student spontaneously mentions two. You then ask: what other advantages can you think of? It is about you encouraging a student to become involved and think. In-depth questions inquire into the meaning of an answer. For instance: can you elaborate on your response? Can you give an example of it? What did you mean with ………….. in your answer?

14.10 Have breaks After half an hour the students’ span of attention will drop clearly. Therefore, have a short break every, e.g., hour. Preferably, let them out and enjoy a different environment for a while, and tell them that you will be seeing them again in ten minutes. The break will reward you twice over, you and your students have refreshed their brains. A break is not a waste of time, but an investment.

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14.11 Gesticulate Talk with your hands and arms. Especially when you are discussing advantages and disadvantages or contradictions, look to the left when you are listing advantages and to the right when you are listing disadvantages. Or first move both hands to the left when you are talking and then to the right. It stimulates students to better absorb the material.

14.12 Make schematics When it is about processes, lists, advantages, disadvantages, contradictions or relationships between matters, make the material insightful with the help of schematics or graphs. This makes it easier to remember than a long text would.

14.13 Stand in front of the group and walk up and down a bit Do not sit on a chair in front of the students, but stand up. You then get a better overview of the class and it forces you to think and talk, instead of read and talk. The second advantage is that it is easy to write down a concept on the board when you are talking. You are more flexible, literally, when you stand up and walk around a bit. It also provides more authority, when you need that.

14.14 Test if people understand you Ask control questions to break the lesson to see if people understand the material, e.g. right before a break. During the break you can think the answers over and consider whether or not to present the material differently after the break. An ideal method for testing if the class understands the materials is to call a student to the head of the class to present to the class what he or she had understand of the subject. You then quickly notice if a student only knows or also understands. The student will find this hard to dare and do, which is why you must always thank and pay a compliment. Even though it was not good enough. When a students fails to understand a subject it is just as much, or even more so, the teacher’s fault as it is the student’s.

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14.15 Assignment Make a new list of the above-mentioned fourteen tips, and place the tip that appeals most to you on top of the list. Then prepare a lesson and take it home to practice without an audience. When finished, judge if you had really applied the three most important tips for you. Success!

14.16 Test a. What is a closed question? b. What is the difference between knowing and understanding? c. Why would you have breaks? d. What is meant with the tell, tell, tell principle? e. What is a broad question? f. How can you best use a blackboard or whiteboard? g. What is the advantage of a board over a Powerpoint presentation? h. Can a closed question be an in-depth question at the same time? If no, why not? If yes, give

an example? i. What tip did you place on top in the assignment of paragraph 15? Why did that tip appeal

strongest to you? j. How would you define teaching? k. Which of the above questions a to j are open questions, and which are closed questions?

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People Mutuals

Operational Guidelines To protect the poor from various vulnerabilities and to provide social security services to poor, who are members of the various development programmes of DHAN Foundation, People Mutuals was promoted by seven people organisations / Federations of Kalanjiam / Vayalagam on October 2, 2003. It was registered as a public mutual trust by the founders (Kalanjiam federations of Kanakapura, Kadamalaigundu, Mandapam, Tiruppathi, Appanthiruppathy and Vayalagam Federations of Punganur and Ramanathapuram) on 11.12.2003. Role of People Mutuals

• Providing social security services to the individual members, to support and protect them and their families against the vulnerabilities caused due to:

Natural or accidental death of individual member or member’s spouse,

Permanent partial or total disability of the individual member or member’s spouse.

Ill health of individual member and their family members.

Death of livestock belonging to the individual members

Loss or damage to movable and immovable properties / assets of the individual members by theft or natural calamities like flood, fire, earthquake etc.

Loss due to failure/damage of / to crops /agricultural produces

• Providing annuity and pension benefits to individual members • Acting as an intermediary to link the poor who are part of people organisations with

various social security schemes and development programs of governments, formal insurance companies and insurance providers.

• Organising and conduct training and capacity building programmes and impart skills to individual members, leaders, staff of people institutions, self help groups for educating the poor in building awareness about various social security programmes and welfare schemes

• Conducting research on social security programmes to poor. • Extending support by way of training and consultancy to other similar organisations for

promotion and development of social security for the poor. • Developing knowledge base on social security schemes and act as a resource centre for

micro insurance. • Organising and conduct short duration training programmes and exposure visits,

seminars and workshops on social security involve in policy advocacy by participation in various events and policy forum.

• Engaging in poverty alleviation initiatives with specific focus on social security to poor. • Enrolling eligible federations, clusters, cascades as members of People Mutuals. • Collecting individual member / spouse data from the location and creating a base line

data and updating the insurance details as follows for analytical purpose. Programme wise

Region wise

Federation wise

Year wise

Insurance company wise

Sex wise

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• Monitoring the gap between total members and insured members and giving suitable instructions to locations to bridge the gap.

• Diarising the due dates of policies and intimating them to federations well in advance enabling them to get the policies renewed on time.

• Conducting insurance steering committee meetings twice a year with the insurance partners to sort out the issues and enable further collaboration.

• Conducting Half yearly review meetings of member federation for review and further directions to provide social security.

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• Designing Rating system on Nalathittam implementation by federations and half yearly rating will be shared in the review meetings.

Role of Programme:

1. Ensuring social security to all members of the people organizations of the locations by one year through regions.

2. Ensuring coverage of life risk to spouse by the second year 3. Ensuring coverage of livestock immediately 4. Ensuring coverage of house building constructed under housing loan programmes

immediately. 5. Ensuring coverage of health risks by the third year 6. Ensuring coverage of other problems / risks through evolved mutual solution 7. Interfacing with programmes through CGMs, half yearly and yearly review meetings 8. Identifying facilitating / conducting trainings on social security to professionals 9. Identifying and facilitating of social security training programmes on social security to people

staff & leaders to be conducted by People Academy 10. Ensuring conduct of social security training programmes at regional and locational level to

people staff and leaders through trainers trained by People Academy 11. Facilitating insurance literacy afforts through campaigns, Mobile teatre programmes, street

plays etc. 12. Facilitating monitoring of performance of locations under social security 13. Facilitating information flow and MIS on social security 14. Providing assistance to People Mutuals in research and documentation.

Role of Regions:

1. Ensuring coverage of life risk to members by the first year 2. Ensuring coverage of life risk to spouse by the second year 3. Ensuring coverage of livestock immediately 4. Ensuring coverage of house building constructed under housing loan programmes

immediately 5. Ensuring coverage of health risks by the third year 6. Ensuring coverage of other problems / risks through evolved mutual solution 7. Identifying facilitating / conducting trainings on social security to professionals 8. Identifying and facilitating of social security training programmes on social security to people

staff & leader to be conducted by People Academy 9. Ensuring conduct of social security training programmes at regional and locational level to

people staff and leaders through trainers trained by People Academy 10. Facilitating insurance literacy afforts through campaigns, Mobile teatre programmes, street

plays etc. 11. Facilitating monitoring of performance of locations under social security 12. Facilitating informations and consolidation of information and MIS on social security 13. Providing assistance to People Mutuals in research and documentation. 14. Half yearly auditing of Nalathittam accounts.

Role of Locations:

Various thematic organization of DHAN Foundation like federations cluster development association of Kalanjiam Federations and cascade of Vayalagams, people institutions of other themes by remitting the precreibed fee of Rs.150/- could become members of People Mutuals. 1. Insurance literacy to members through campaigns, mobile theatre programmes, street plays 2. Training to leaders on social security by professionals. 3. Training to People Staff on social security by professionals. 4. Organising workshop and brainstorming session among people to initiate social security

programmes in the location. The problems of social security and mutual solutions for the

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problems to be evolved from people. The workshops and brainstorming sessions can to be conducted involving People Mutuals

5. Ensuring coverage of life risk to members by the first year 6. Ensuring coverage of life risk to spouse by the second year 7. Ensuring coverage of livestock immediately 8. Ensuring coverage of house building constructed under housing loan programmes

immediately 9. Ensuring coverage of health risks by the third year 10. Ensuring coverage of other problems / risks through evolved mutual solution 11. Sending copy of monthly report of Nalathittam shared by Managing Director in the board

meeting to the regions

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Member Administrations: Group level Collection of contributions from members:

• Contributions should be collected yearly. • In group meetings, contribution should be collected from the members against receipts

with the narration nalathittam. • Groups should remit the member contributions to cluster along with the covered member

/ spouse details as follows :

18. Name of the insured member

19. Name of the insured spouse (If the insured is spouse)

20. Name of the kalanjiam / Vayalagam / Uzhavar Kuzhu

21. Name of the cluster

22. Age of the insured - Completed age (Ration card, Voter’s identity card, School certificate,

Horoscope, etc., to be verified and kept at Cluster level)

23. Sex of the insured

24. Occupation

25. Name of the Nominee

26. Age of the Nominee

27. Relationship to Nominee

28. Name of the Guardian, if the nominee is a minor

29. Relationship of the Guardian to the insurer

30. Name of the head of the family (bread winner of the family) Name of the product / insured Death, Disability, Health, Livestock, Assets, Pension

31. Premium amount

32. Name of the Insurance Company

33. From date

34. Due date At Cluster level • The cluster should collect and keep proper records of these details. These records

should be readily available for reference at any time. • The cluster should remit the amount to federation along with these details. At Federation level • The federations should have consolidated data and details of lives covered in their

locations as mentioned above in the case of clusters. • The premium collection should commence at least 2 months in advance in a

location. Suppose the policy period is from 01, October 2004 to 31 September 2005, groups should start collecting the renewal premiums from their members / spouses during the period from 01 September 2005 to 15 September 2005 and see that the

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collected premiums reach the clusters along with individual member / spouse insurance details immediately for onward transmission to federation specific insurance month should be fixed for each location by them.

• Insurance transactions in every federation will be audited by Region during the months of September and March of a financial year and report should be sent to People Mutuals.

The federations Nalathittam associate should keep all the information of the programme and activity operationalise of field level. Policy Administration:

- The premiums thus pooled in the federation should be sent to concerned insurance providers companies with in a week as advised by the People Mutuals.

- Original proposal, the details of lives covered (Soft copy and Hard copy) and demand draft for the premium amount should be sent by the federation to the insurance company and soft copy, Xerox copy of hard copy to be sent to People Mutuals for updating the data and monitoring.

- After receiving the policy from the insurance company, federation should check its correctness by comparing with the details furnished in the copy of proposal kept at the federation. Discrepancies if any, should be brought to the notice of the insurance company and got rectified.

- Every year federation should renew the insurance policy / policies.

- New members should be identified and insured along with the renewal.

- Selection of Insurance company and remittance of premium have to be done duly consulting People Mutuals.

Accounting :

Step Activity 7. On receiving the contribution

from the members.

Get Cash Issue receipt to the member

8. When the group is remitting the contributions to the cluster.

Prepare voucher Credit the bank account of cluster and get the bank counterfoil and cluster receipts ( The receipt from Cluster has to be attached after remitting to Cluster)

9. When the cluster is receiving the contribution from the group,

Verify bank counterfoil and the bank pass book entry Issue receipt to the group

10. When the cluster is remitting the contribution to the federation

Prepare voucher Credit to bank account of federation and get the bank counterfoil & federation receipt (The receipt from Federation has to be attached after remitting to federation)

11. When the federation is receiving the contribution from the cluster,

Verify bank counterfoil and bank pass book entry Issue receipts to the cluster (Bank counterfoil to be attached)

(Please note that the amount has to credited only to the Nalathittam account of the Location / Federation.)

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12. When the federation is remitting the contribution to the insurance company,

Prepare voucher Send the cheque or Demand Draft (Bank counterfoil to be attached)

• In the balance sheet of group / cluster, the amount of contribution kept with them should be shown under accounts payable, and in case of federation, the amount will be shown as “Specified funds” named as Nalathittam.

Claim Administration:

10. Death information has to reach the group immediately within an hour by any EC member of the group.

11. Death details of the deceased member should be informed to federation by the group within 24 hours by the EC members with the following information to Federation associate (insurance) / Managing Director

Name of the deceased

Cause of death

Time of death

Time of cremation

12. If a member / spouse of the member died, all group members / federation & cluster EC representatives / cluster associates along with MD should go to the deceased member’s house and share the condolence with the other family members. The following system may be put into practice.

The other members of group should not go for work and should be with the family of deceased member & extend the necessary help required for them.

At Cluster level, arranging for Tea, coffee, and food to the relatives of the deceased member to be done.

At federation level, arrangement for immediate release Rs.3000/- to the nominee to meet the funeral expenses of deceased. The amount should be adjusted from the death claim benefits.

At movement level, steps to offer the Kalanjia Kodi

13. Duly filled up & signed claim form along with the Death Certificate should be submitted to federation by the group with in a week

14. Federation will send it to insurance company with in a week.

15. If the member died in an accident, or had permanent / partial disability, claim should be preferred in special claim form meant for that purpose. In the case of accidental death FIR, postmortem certificate, Police Investigation Report (PIR) should be annexed with the claim form.

(If the claim is not preferred with in 45 days of death of the member, Insurance Company may not accept the claim.)

16. Time schedule : The following time schedule may be followed by the location.

Duly filled claim applications from Nominee to Federation - 1 week

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Federation to insurance providers - 1 week

Ensuring claim settlement from the providers - 1 week

Payment of claim to member through group by federation - 1 week

17. After receiving the claim amount from the insurance company, federation should give the claim amount to the nominee in a regular / special meeting of kalanjam after adjusting the amount of Rs.3000/- given to the nominee on the day of death of the member.

Nalathittam Committee:

• Separate Nalathittam Committee, consisting of 4 Board of Directors and Managing Director

should be constituted for implementation and operation of Nalathittam.

• Where federation is yet to be registered the committee could be constituted with 4 identified

leaders and the Block Integrator

• The Nalathittam should be a permanent agenda in the board meetings.

• The contributions, benefit payments should be shared by way of report to every month by

Managing Director.

• In the case of federations, they have to open a Savings Bank account with the name

“Nalathittam Account” and transact all transaction related to insurance under this account

only.

• If there is no federation, a designated cluster could open a Savings Bank Account on the

above lines and transact the insurance transactions with the joint operations of Nalathittam

Committee leaders and Block Integrator

• Once the federation is formed, the Nalathittam amount available under the cluster account

have to be transferred to the federation’s Nalathittam Account.

Note :

Products – Life:

• New locations can cover the lives of members and spouses for Rs.10000/- and accident disability cover for Rs.25000/- with private insurance companies, duly consulting People Mutuals. No LIC product is available at present for a life coverage, of Rs.10000/-.

• Young locations could cover the lives for Rs.20000/- life cover & 50000 accident disability cover by having insurance with LIC – JBY.

• Matured locations could cover the lives for average loan size by insurance with LIC and private insurance company’s.

• Advanced federations could cover for average loan size by insurance with LIC, Private insurance companies’ They should graduate for community based self managed schemes.

Annex I

For poor: Life risk coverage products S.No

Company / Scheme

Annual premium for the year – 2004 to 05 payable per life Benefits Remarks

1 LIC – JBY Rs.100/- for age between 18 – 59 Normal Death:Rs. 20000/- Accidental death: Rs. 50000/- Total disability: Rs. 50000/- Partial disability: Rs. 25000/-

a. Educational scholarship of Rs.300 per quarter available for children studying IX to XII std. For a maximum of 2 children under ‘Shiksha Sahayag Yojana ‘. The scholarship will be released on discretionary basis by LIC subject to availability of funds under the above scheme.

b. Administrative cost of Rs.4/- per life to the location for I year & Rs.2 per life for 2nd year if the lives covered under policy are above 250 under a policy.

c. Any numbers of lives can be covered for this premium – minimum 25 lives

2 MetLife India 31.80 for age between 18 to 59 63.60 for age between 18 to 59

Normal & Accidental death: Rs.10000/- Normal & accidental death: Rs.20000/-

a. Administrative cost Rs.2/- per life b. Maximum of 10000 lives only will be

covered under these terms

3 Birla Sunlife Rs. 50, 100, 150, 200 for 3 years For ages between 18-50 ( for ages 45 years and above, age proof is necessary. Eligibility: a) Poorest of poor b) Residing in Rural Area.

100 times of Premium Death benefit - 100 times of premium Maturity benefit - 1.10 times of premium after 3 years

Surrender Benefit i) Only Premium - I year ii) 1.04 times premium - II year

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- Individual policy iii) 1.08 times premium - III year

For non-poor: Life risk coverage products

Company Age Sum

Assured Annual premium Remarks

LIC of India – Group Insurance scheme

18-59 years

10000 (Maximum 50000)

60 for 10000 for average age of 40 (Vary according to average age)

Renewable term policy

ICICI Prudential – Suraksha

18–45 years

5000/10000/15000/20000

50/100/150/200 Renewable term policy

ICICI Prudential - Mitr

18–45 years

5000/10000/15000 / 20000

5000 – 5y: 961 – 972 10y: 424 - 441 15y: 253 - 277 10000 – 5y: 1922 - 1945 10y: 847 - 882 15y: 507 - 553 15000 – 5y: 2884 - 2917 10y: 1271 - 1323 15y: 760 - 830 20000 – 5y: 3845 - 3890 10y: 1695 - 1764 15y: 1013 - 1107

Maturity benefit 5000/10000/ 15000 / 20000

General insurance products:

S.No

Name of the company / Scheme

Annual premium 2004 – 05 payable per life Benefits

1 Janatha Personal Accident insurance policies - Death / disability

a. Rs.15/- for 10 to 70 years of age by UIIC, NIC, OIC, NIIC. b. Rs.10.50 for 10 to 70

Total disability / death – Rs.25000/- Partial disability – Rs.12500 25000 (Can be covered up to

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due to accident years of age by Royal Sundaram Insurance company

Rs.1 lakh by paying proportionate premium)

2 Cattle insurance (Milk cows and buffaloes, sted bulls, Bullocks,He buffaloes,

2.25 % by Royal Sandaram According to value of animal and premium paid

3. Sheep/Goat insurance

Sheep of 4 months to 7 years. 2.75 % by Royal Sundaram

According to value of animal and premium paid

4. House property & other assets

Royal Sundaram Insurance Company Rs.162 for 60000 worth of house for 10 years without earthquake cover and Rs.227/- with earthquake cover

According to value of house & premium paid

Annex II Insurance of Animals – Special arrangement (Royal Sundaram Insurance Company private limited) Cover offered: The animal is covered for death due to disease or accident (including fire, flood, cyclone, riot strike and civil commotion)

Animal that can be covered Cows – 2-10 years of age Buffaloes – 3-12 years of age Sheep & Goat – 4 months to 7 years Animal not to be covered: Dry animal i.e. animal that is not yielding milk should not be covered. Premium For Cows, Buffaloes, Plough Bullocks Premium @ 2.25% of the Sum Insured per annum (the standard rate is 4%) Service tax @ 8% on the premium will be charged. Service tax is exempted for covering animals falling under govt scheme. For Sheep & Goat @ 2.75 % of the sum insured per annum. Identification:

Royal Sundaram will supply required tags, applications and specially designed proposal forms.

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Block integrator arrange for tagging the animal, enters the details in the form and certify for insurance.

The Ear Tag should be firmly fixed to animal and should remain intact in the Ear at all

times.

If the tag is fallen it should be reported to Royal Sundaram.

Animals recently calved, sound in health and yielding milk alone should be covered. Premium remittance:

Block integrator collect the premium and take a DD in favour of Royal Sundaram Alliance Insurance Company Limited payable at Madurai

The above DD should be sent to People Mutuals, Madurai.

Royal Sundaram collects the details with the premium and issue policy.

Cover commences from the date of DD, if the papers are sent to Madurai on the

same day.

Monthly review meeting will be held on this business operations during the last week of the month. Minutes of the meeting will be recorded and follow-up of the same will be addressed in the next meting.

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Important conditions:

15 Days waiting period: Death of animal due to disease occurring within 15days of insurance is not covered. However this 15days waiting period will not be applicable for animals died out of accident.

No tag – No claim: Ear Tag should be surrendered while submitting the claim form.

No claim will be entertained if tag is not surrendered. Claims process-

Insured intimate the death of animal immediately to Federation / Location office. Federation / Location office informs Royal Sundaram & People Mutuals through mail on the same day and also uses the services of veterinarian for certifying the loss.

Claim form will be sent to Federation / Location which inturn will handover to the

insured (Member).

The Insured obtain the veterinary certificate on this format. The management committee (4 Federation / Cluster EC members & Managing Director / Block Integrator) should also certify the genuiness of the death.

The insured surrender the tag along with the claim form.

Federation / location conducts enquiry and forward the claim form and the tag, with

recommendation to People Mutuals, Madurai.

Royal Sundaram process the claim and settle within 15 days of receipt of all claim papers.

Royal Sundaram will arrange for investigation at random. The settlement period will

be extended for another 15 days where it is referred for investigation.

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Annex III Insurance for Dwellings (Royal Sundaram Insurance Company private limited)

Premium Amount

Per annum (Rs.)

Basic Premium 30 10 Years Premium 300 Less 50% Long Term Discount

150

150 Service Tax @ 8% 12 162 Plus Earthquake cover additional

65

Including 8% Service Tax 227 Hence without Earthquake cover

162

With Earthquake cover 227

Premium remittance:

DD in favour of Royal Sundaram Alliance Insurance Company Limited payable at Madurai

The above DD should be sent to People Mutuals, Madurai.

Royal Sundaram collects the details with the premium from them and issue policy.

Cover commences from the date of DD, if the papers are sent to Madurai on the

same day. Claims process-

Insured intimate the loss to Federation / Cluster office. Federation / Cluster office informs Royal Sundaram & People Mutuals through mail on the same day and also uses the services of veterinarian for certifying the loss.

Royal Sundaram will appoint surveyor to assess the loss.

Claim form will be sent to Federation / Cluster which in turn will handover to the

insured.

Royal Sundaram process the claim and settle within 15 days of receipt of all claim papers

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GLOSSARY

Sl. No. Terminology Explanation

1 Accident A loss causing event that is sudden, unforeseen, and unintentional.

2 Adverse selection Tendency of persons with a highter-than average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher than expected loss levels.

3 Annuity Periodic payment to an individual that continues for a fixed period or for the duration of a designated life or lives.

4 Concealment Deliberate failure of an applicant for insurance to reveal a material fact to the insurer.

5 Claim A claim is a demand for the promise made by the insurer 6 Death Claim Death Claim is due on the death of the life assured during

the term 7 Deductible A provision by which a specified amount is subtracted from

the total loss payment that would otherwise be paid. 8 Exclusions Provisions in an insurance contract that list the perils,

losses, and property excluded from coverage. 9 Group Insurance Group Insurance is a scheme which provides insurance

benefits to a number of people under a single policy 10 Indemnification Compensation to the victim of a loss, in whole or in part, by

payment, repair or replacement. 11 Insurance Pooling of fortuitous losses by transfer of risks to insurers

who agree to indemnify insured for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.

12 Insurance Regulatory and development Authority Act, 1999

An Act to provide for the establishment of an Authority to protect the interests of holders of insurance polices, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the general Insurance Business (Nationalisation) Act, 1972

13 Law of Large Numbers Concept that the greater the number of exposure, the more closely will actual results approach the probable results expected from an infinite number of exposures.

14 Moral Hazard Dishonesty or character defects in an individual that increase the chance of loss.

15 Morale hazard • Carelessness or indifference t a loss because of the existence of insurance

16 Mutual insurer • Insurance Corporation owned by the policy owners, who elect the board of directors. The board appoints managing executives and the company may pay a dividend or give a rate reduction in advance insured

17 Obligations of General Insurer towards Rural Sector

• Two percent in the first financial year • Three percent in the second financial year

• Fiver percent thereafter of total gross premium income written direct in that year.

18 Obligations of Life Insurer towards Rural Sector

• Five percent in the first financial year • Seven percent in the second financial year • Ten percent in the third financial year • Twelve percent in the fourth financial year • Fifteen percent in the fifth year of total policies written

direct in that year 19 Obligations of the Insurer

towards Social Sector • Five thousand lives in the first financial year • Seven thousand five hundred lives in the second

financial year • Ten thousand lives in the third financial year • Fifteen thousand lives in the third financial year • Twenty thousand lives in the fifth year If the period of operation is less than twelve months, proportionate percentage or number of lives, as the case may be, can be undertaken.

20 Peril Cause or source of loss. 21 Premium The consideration payable for a contract of insurance or life

assurance. 22 Reinsurance The shifting of part or all of the insurance originally written

by one insurer to another insurer. 23 Riders They are a special policy provision or a group of provisions

that can be added to a policy to expand or limit the benefits otherwise payable

24 Risk Risk is a condition where is a possibility of an adverse deviation from an expected outcome.

25 Rural Sector Rural sector is defined as a place which as per latest census has • A population of not more than five thousand • A density of population of not more than four hundred

per square kilometer and • At least seventy five percent of the male working

population is engaged in agriculture 26 Social Insurance Government insurance programs with certain characteristics

that distinguish them from other government insurance programs. Programs are generally compulsory; specific earmarked taxes fund the program; benefits are heavily weighted in favor of low-income groups; and programs are designed to achieve certain social goals.

27 Social Sector Social sector includes • Unorganized sector • Informal sector • Economically vulnerable or backward • Other categories of persons, both in rural and urban

areas 28 The Insurance Act, 1938 An Act to consolidate and amend the low relating to the

business of Insurance. It provides for the registration of insurance companies, and the various rules and

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regulation they need to follow. It also vests IRDA with enormous power to ensure that the insurance sector is managed well.

29 Underwriting The selection and classification of applicants for insurance through a clearly stated company policy consistent with company objectives.

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