Registered Office 20, Corporation Colony, North Ambazari Road, Nagpur - 440 033. Maharashtra, India.

Operations Office 36, Atrey Layout, Near Datta Meghe Polytechnic, Nagpur - 440 022. Maharashtra, India.

RnR DataLex Pvt LtdVisit us at:: http://www.rnrdatalex.com

A brief history of Insurance

Insurance is a form of risk management, primarily used to hedge against the risk of a contingent loss. In essence, insurance is simply the equitable transfer of a risk of a loss, from one entity to another, in exchange for a premium. Early methods of transferring or distributing risk were practiced by Chinese traders as early as the 3rd millennia BC. These merchants travelling treacherous river rapids would cleverly distribute their wares across many vessels to spread the loss due to any single vessel's capsizing. Modern profit insurance manifested in Babylon almost 2000 years B.C., in a contract of loan of trading capital to travelling merchants. The contract contained a clause that the risk of loss due to robbery in transit was borne by the party providing the loan. In consideration for bearing this risk, the lender calculated interest on the loan at an exceptionally high rate.

Separate insurance contracts (i.e. insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.

On 3 December 1591, one hundred Hamburg house-owners concluded the so-called “Hamburg fire contracts”, which are generally regarded as some of the first examples of true mutual insurance contracts that we have today.

Insurance - as we know it today - can be traced to the Great Fire of London of 1666 that ravaged London from Sunday, 2 to Wednesday, 5 September.

To make a long story short, insurance (today) is being conducted over a vast array of "lines of business" that encompass personal, commercial, marine, aviation, agriculture, life, health, financial and engineering insurance. Virtually anything - from the mundane to the bizarre - can be insured, as Lloyd’s is famous for insuring the life, health, legs or even noses of actors, actresses and / or sports figures.

What do expect at the end of this session?The Fundamentals of Insurance.The basic concepts relating to the business of insurance.The types of Risks and their classifications.Acturial and Underwriting responsibilities and functions.Terms and Terminologies used in the industry.Types of Contracts and their classification.Techniques used to Manage Risks.Importance of Utmost Good Faith and insurance.Claims and their Settlement.Agent responsibilities and functions.

WHAT IS INSURANCE ?

INSURANCE IS A PROMISE MADE BY THE INSURER TO THE INSURED TO COMPENSATE AGAINST ANY

SIGNIFICANT POTENTIAL LOSSES WHICH ARE FINANCIAL IN NATURE, IN EXCHANGE OF A

PERIODIC PAYMENT THE INSURED MAKES TO THE INSURER.

WHY SHOULD ONE BUY AN INSURANCE ?

It is the utterly vital that one buy’s an insurance to ensure safety against any significant financial losses he/she may

face in future. Insurance also helps financial planning and provides tax

benefits to the insured

How is the premium decided by the insurer?

In a contract for Insurance the Insurer promises to pay to the Insured a specific amount of money in case of facing a risk or a peril. The

policy holder will pay a certain amount of consideration for the same. This is termed as the premium. The insurer will typically decide the

premium based on the value of the insured item or the risk involved. The Actuary does this complex job of premium calculation. For

general understanding the same can be explained as below.

Net premium = Investment Income + Rate of MortalityBase Premium = Net Premium + Loading Expenses

What is Bonus and how is it paid ?Bonus is basically that amount of money that is surplus to the valuation and is distributed amongst the policy

holders. Only policy holders who have opted for a participating option are paid the bonus.

The calculation of Bonus is done in two ways namely – Simple Reversionary Bonus – This is the most

common way of calculating the bonus. For instance the SA under the policy is Rs. 100000 and the bonus

declared is Rs 75 per Rs. 1000 or 7.5 % of the SA under the policy would be Rs. 107500

Compound Reversionary bonus – In this system the bonus is simply added to the existing SA

including the vested bonus. Hence the SA would now become Rs. 108062

The mode of payment of the bonus is however the discretion of the Insurer as he may offer

many options to the policy holder

What is a risk?

Risks are basically the consequential losses or damages to assets making them non-functional before their expected life time or

entire destruction of the assets. The risk actually only means that there is a possibility of a loss or damage. It may or may not

happen. Insurance covers such risks if they do happen. Although the word possibility implies uncertainty , it has a great relevance to Insurance which applies only in such cases where there is an

amount of uncertainty and predictability

What are the types of risks that an insurer would cover?

Insurance covers only the significant financial losses occurring due to any critical or catastrophic risks

that are pure and speculative.Perils that arise out of fire, natural disasters,

breakdowns, accidents, illnesses and that are static in nature are some which are covered by the insurer

Types of Risks

Personal Risk

Death

Poor

Health

Outlivin

g Financia

l Resourc

es

Risk to Property

Losses due to manmade and

natural disasters

Third Party Risk

Classification of risks

Risks are classified into speculative and pure risks. Speculative risks are never insurable. Pure risks are further classified into fundamental and

particular risks. Pure risks are always insurable as they are specific and

static. Fundamental risks can affect many people at a time

and may be caused due to natural calamities, wars, epidemics etc. and hence are not always insurable

What is risk management ?

The identification and assessment of a financial risk is known as Risk Management.The risk can be managed in four simple waysAvoid the risk to a possible extent.Control the risk within limits.Accept the risk if any peril occurs.Transfer the risk to decrease the burden.

Risk Transfer mechanism in Insurance

What are the characteristics of an insurance risk ?

The risk must happen by chance. Losses occurring should have a significant value. The loss must be definite in terms of time and

amount. Risk must have a predictable loss rate. The loss must not be catastrophic to the insurance

company.

Terms and terminologies in life insurance

Insurer - The Insurance Company is the insurer and will take instructions only from the policy holder.Policy holder – the person who enters into a contract with the insurance company to cover someone's life is known as the policy holder or the policy owner.Insured – The person whose life is covered under an Insurance policy is known as the insured.

Sum insured/assured – The amount of cover mentioned on the policy is known as the sum insured/assured.Premium – The amount paid to the Insurer in order to keep the policy active is known as premiums.Proposal form – The application for insurance to be filled by the policy holder for buying an insurance.Initial premium – The first payment/premium that is sent to the Insurer along with the proposal form is called the initial premium.Cooling off period – The time allowed to the applicant to decide whether or not to accept the policy.

What are actuaries and underwriters ?

• These are basically mathematicians or statisticians who identify, assess and evaluate the risk involved in a group.

• They also decide the base premium.

• They design policies for the Insurance Company.

• They identify, assess and evaluate the risk involved in an individual proposal.

• They decide the final premium that is to be charged to the insured.

• They decide whether or not to accept a proposal and also modify the terms and conditions.

Actuaries Underwriters

WHAT IS THE PREMIUM BLOCK ?(% AGES MENTIONED ARE AN EXAMPLE)

• Government bonds, share markets, infrastructure, banks, real estate, gold etc.

• Expenses required to meet salary expenses, infrastructural maintenance, stationery etc.

• The Insurer would at times declare bonus to the insured to attract more business.

• The amount required to settle claims as and when they occur

Investment Income

(10%)

Operating Expenses

(15%)

Cash Reserves

(60%)

Policy Reserves

(10%)

Investment Income – This is a part of the premiums which is invested in secured and unsecured markets. The profit from such investments is used by the insurance company for it’s own benefit.Operating Expenses – These are the funds that are kept aside to meet the operating expenses to run the business of the company like payment of salaries, infrastructure maintenance, stationery etc.Cash Reserves – Cash reserves are a part of the premiums which are invested in secured and unsecured markets. The profit from such investments is used by the Insurance Company to be distributed amongst the policy holders/beneficiaries in the form of Bonus.Policy Reserves – Policy reserves are a part of the premiums which are kept aside in order to pay up claims whenever they arise. This portion determines the standing of an Insurance Company in the market. Money once kept aside in the policy reserves is not spent unless there is a claim.

Types of policies and their details

Heading•Duration•Bonus•Premiums•Claims paid from•Maturity/Survival benefit•Purpose

Term Policy•Min- 5 years Max – 20 years•No Bonus•Lowest Premiums•Policy reserves•NA•Risk Protection for a certain period

Whole of life

•Till death max – 99 years•Yes•Moderate premiums•Sum assured- policy reserves, Bonus – Cash reserves•NA•Investment and protection

Endowment Policy

•Min- 5 years Max – 20 years•Yes•Highest premiums•Sum assured- policy reserves, Bonus – Cash reserves•Yes thro’ cash reserves(Entire maturity value)•Investment

What is a linked policy ?

The urge of the Investor to participate in the Capital Market to reap benefits of the Market BOOM diverted a lot of funds to this arena. The Insurance Companies developed plans that combine the benefits of Life

Insurance while giving the prospect an option of participating in the growth of the capital market.

Such plans are called Linked Life Insurance Plans They are also termed as Unit Linked Insurance Plans. (ULIP)

The terms for such plans are usually fixed (not less than 5 years or age 70 for whole life plans) and the premium is in multiples of say Rs 500 or Rs. 1000. the Prospect has an option to pay in monthly, quarterly, half yearly

or yearly payment modes. The Policy holder can also top-up his investments in such plans to a maximum of 25% of the regular premiums

paid till date.

What are the fund options that one can select ?

There are a variety of options that the policy holder can select in terms of funds.Equity Funds – Also christened as Growth Fund the Insurer would make more investments in the share and stock marketsDebt Fund – Also christened as the Bond fund the investments would be in majority done in Government and Government guaranteed securities.Money Market Funds – Also Christened as Liquid Fund the investment of such funds may be more in short term money market investments as treasury bills, commercial papers etc.Balanced Funds – In this type the Insurer will invest in both the equity as well as the debt funds.

What is NAV (Nett Assets Value) ?As the word itself suggests NAV represents the net

value of the fund on a particular date and also reflects the total value of the assets of that fund, after some adjustments for expenses. The NAV keeps fluctuating as per the market value of the shares. NAV is basis for

new entrants and for exits from the fund. The NAV used at the time of entry is termed as the Offer Price and that while exiting is termed as the Bid Price. This

difference is termed as the Bid-offer Spread and is normally around 5 %. There is a minimum of 3 years lock-in period for such funds per the IRDA guidelines.

What are the Insurable/Non insurable interests?

Financial Relation –

Banks, Financial Institutions etc.

Legal Relations - Business Partners i.e. Employer-

employee, Adopted children/parents, Legal

guardians, trust and trustees

Immediate Family

Relations – Spouse,

Children, Siblings,

Grandparents

Grand children cannot insure their Grand

parents

Beneficiary is the Bank or the institution and the policy amount is limited to the Loan

amount

In this case the beneficiary is the court and not the

legal guardian

**Insurable interest reduces the possibility that one person will benefitFrom the death of the other. The concept was introduced in 1774 under the Life Assurance Act Prior to which Life Assurance was governed under the Gambling Act**

What does the Insurance tree look like?

Insurance tree

Life Assurance

Death Disability

General Insurance

Health Non-Life

Property Casualty

Assurance – The claim is based on the amount mentioned in the Policy Cover. There can be only one claimInsurance – The claim is based on the actual loss incurred by the claimant. There can be any number of claims on insurance

Definition and types of a contract

A contract is a legally enforceable agreement between two or more parties.

Types of contracts –Contract of Indemnity – Under such contracts the benefit is based on the actual financial losses incurred. eg. health, property, liability etc.Valued Contract - Under such contracts the benefit is actually mentioned in the contract . eg. Life, One off (Lata’s voice)Bilateral Contract - Under such contracts both the parties involved make legally enforceable promises eg. marriagesUnilateral Contracts - Under such contracts only one of the parties involved makes legally enforceable promises eg. The Insurance Companies.

Commutative Contracts - Under such contracts both the parties involved specify in advance the values of exchange. Eg. Sales agreementBargaining Contract - Under such contracts both the parties involved specify in advance the terms and conditions of the contract and reserve the right to accept or reject the same. Eg. Insurance Companies.Adhesion - Under such contracts one of the parties involved dictates the terms and conditions.Aleatory Contract - Under such contracts one of the parties involved provides something of value in exchange of a conditional promise. Eg. Insurance.

Legal status and requirements of a valid contractValid – A contract is held to be a valid contract only if it is enforceable by law.Void – A void contract is that contract which was never deemed to be valid under the law.Voidable – A voidable contract can be terminated by either of the parties involved.A contract is valid only if it meets the following criteria –

Mutual Assent

•Policy holder applies for a policy•Insurance Company Accepts the application

Contractual Capacity

•Policy holder is a Major and of sound health•Insurance Company is registered

Adequate Consideration•Policy holder pays the initial premium•Insurance Company promises to pay claims

Lawful Purpose

•Policy holder has insurable interest•Insurance Company is registered

What is utmost good faith ?It is the primary duty of the applicant to voluntarily and fully disclose all facts which are material to the

risk being proposed. It is also the duty of the Insurance Company to disclose all benefits, risks and

material facts to the applicant. Any misrepresentation whether material or fraudulent between the contracting parties will affect or influence the

decision making process. Hence it is expected that no party involved makes any misrepresentation of the material facts to each other. The entire process of

insurance revolves around this faith.

What is a claim ?A claim is the demand that the Insurer should redeem the promise made in the Insurance Contract. This is the time when the Insurer has to play his part of the contract and settle the claim after he is satisfied that all the terms and conditions in the original contract have been complied with. He should check that :The Insured event has in fact taken place.The obligations to pay per the contract are complied with. The persons asking for performance are eligible to do so.

Nominees, Income tax Officials, Prohibitory orders, assignees are some of the relevant eligible's.

Maturity Claims – The survival amount in the endowment type of policies is to be paid when the term of the policy expires (Maturity Date). Such claims are settled by the Insurer after he confirms that there are no assignments , the identity of the insured is clear, the age stands admitted, the premiums are fully paid up, the original policy is handed over to the insurer and the discharge voucher is duly completed and signed by the insured.

Type of claims

Survival Benefit Payments – In this case the benefit on a Money Back Policy is paid during the existence of the policy before the date of maturity and the procedure is the same as in the case of a Maturity Claim except for the fact that the payments are made by post dated cheques placed with the insured in advance.

Death Claim – Settlement of a death claim is rather complex as it involves too many factors –The facts relating to the death and the identity of the deceased has to be established beyond any doubt.Has the death occurred within 3 years from the commencement of the policy or the date of revival.Whether the death was natural or unnatural due to reasons like accident, suicide etc.Documents like the Policy, Deeds of assignments, proof of age, certificate of death, legal evidence of the title, form of discharge are referred to while settling such claims.

Accidents and Disability Benefits – There are certain parameters that govern such claims. Such claims should not arise out of intentional self injury, attempted suicide, insanity, immorality or intoxication. Claims arising out of accidents caused due to aeronautics, riots, civil commotion are excluded in such cases.Settlement of such claims will depend on the FIR, Panchnama, police report, post mortem report, chemical analysis of the viscera, hospital reports etc.

Critical Illness Claims – Such claims are settled after satisfactory evidence is placed before the insurer along with all the reports. It is necessary under such payments that the conditions of criticality, waiting period and the illness are met.

Vital functions of an Broker/AdvisorThe Broker’s/Advisor’s primary functional area is to solicit and procure life insurance business for the Insurer, who has appointed him for the purpose. Incidentally he is also trusted by the prospect to provide suitable advise keeping in mind the circumstances and needs. The agent has a unique role to play between the prospect and the insurer. He would be required to –Understand the prospects needs and persuade him to buy a plan that suits him the best.Help the prospect complete all the paper work expeditiously.Assist the prospect to clear his claims if they occur.To be ethical and honest to both the prospect and the insurer.

Thank you for your attention and wish you all the best