CHAPTER 1

INTRODUCTION TO INSURANCE

1.1 WHAT IS INSURANCE

INSURANCE is a form of risk management in which the insured transfers the cost

of potential loss to another entity in exchange for monetary compensation known

as the premium. Insurance allows individuals, businesses and other entities to

protect themselves against significant potential losses and financial hardship at a

reasonably affordable rate. We say "significant" because if the potential loss is

small, then it doesn't make sense to pay a premium to protect against the loss. After

all, you would not pay a monthly premium to protect against a $50 loss because

this would not be considered a financial hardship for most. 

Insurance is appropriate when you want to protect against a significant monetary

loss. Take life insurance as an example. If you are the primary breadwinner in your

home, the loss of income that your family would experience as a result of our

premature death is considered a significant loss and hardship that you should

protect them against. It would be very difficult for your family to replace your

income, so the monthly premiums ensure that if you die, your income will be

replaced by the insured amount. The same principle applies to many other forms of

insurance. If the potential loss will have a detrimental effect on the person or

entity,insurancemakes sense.

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Everyone that wants to protect themselves or someone else against financial

hardship should consider insurance. This may include: 

Protecting family after one's death from loss of income

Ensuring debt repayment after death

Covering contingent liabilities

Protecting against the death of a key employee or person in your business

Buying out a partner or co-shareholder after his or her death

Protecting your business from business interruption and loss of income

Protecting yourself against unforeseeable health expenses

Protecting your home against theft, fire, flood and other hazards

Protecting yourself against lawsuits

Protecting yourself in the event of disability

Protecting your car against theft or losses incurred because of accidents

And many more

1.2 BRIEF HISTORY OF INSURANCE

 

The first two decades of the twentieth century saw lot of growth in insurance

business. From 44 companies with total business-in-force asRs.22.44 crore, it rose

to 176 companies with total business-in-force as Rs.298 crore in 1938. During the

mushrooming of insurance companies many financially unsound concerns were

also floated which failed miserably. The Insurance Act 1938 was the first

legislation governing not only life insurance but also non-life insurance to provide

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strict state control over insurance business. The demand for nationalization of life

insurance industry was made repeatedly in the past but it gathered momentum in

1944 when a bill to amend the Life Insurance Act 1938 was introduced in the

Legislative Assembly. However, it was much later on the 19th of January,

1956, that life insurance in India was nationalized. About 154 Indian insurance

companies, 16 non-Indian companies and 75 provident were operating in India at

the time of nationalization. Nationalization was accomplished in two stages;

initially the management of the companies was taken over by means of

an Ordinance, and later, the ownership too by means of a comprehensive bill.

The Parliament of India passed the Life Insurance Corporation Act on the 19th of

June1956, and the Life Insurance Corporation of India was created on

1stSeptember, 1956, with the objective of spreading life insurance much more

widely and in particular to the rural areas with a view to reach all insurable persons

in the country, providing them adequate financial cover at a reasonable cost.

LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from

its corporate office in the year 1956. Since life insurance contracts are long term

contracts and during the currency of the policy it requires a variety of services need

was felt in the later years to expand the operations and place a branch office

at each district headquarter. re-organization of LIC took place and large numbers

of new branch offices were opened. As a result of re-organisation servicing

functions were transferred to the branches, and branches were made accounting

units. It worked wonders with the performance of the corporation. It may be seen

that from about 200.00 crores of New Business in 1957 the corporation crossed

1000.00 crores only in the year 1969-70, and it took another 10 years for LIC to

cross2000.00 crore mark of new business. But with re-organization happening in

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the early eighties, by 1985-86 LIC had already crossed7000.00 crore Sum Assured

on new policies.

Today LIC functions with 2048 fully computerized branch offices, 100divisional

offices, 7 zonal offices and the Corporate office. LIC’s Wide Area Network covers

100 divisional offices and connects all thebranches through a Metro Area Network.

LIC has tied up with some Banks and Service providers to offer on-line premium

collection facility in selected cities. LIC’s ECS and ATM premium payment

facility is an addition to customer convenience. Apart from on-line Kiosks

and IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad,

Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities.

With a vision of providing easy access to its policyholders, LIC has launched its

SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and

closer to the customer. The digitalized records of the satellite offices will facilitate

anywhere servicing and many other conveniences in the future. LIC continues to

be the dominant life insurer even in the liberalized scenario of Indian insurance and

is moving fast on a new growth trajectory surpassing its own past records. LIC

has issued over one crore policies during the current year. It has crossed the

milestone of issuing 1,01,32,955 new policies by 15th Oct, 2005, posting a healthy

growth rate of 16.67% over the corresponding period of the previous year. From

then to now, LIC has crossed many milestones and has set unprecedented

performance records in various aspects of life insurance business. The same

motives which inspired our forefathers to bring insurance into existence in this

country inspire us at LIC to take this message of protection to light the lamps of

security in as many homes as possible and to help the people in providing security

to their families.

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1.3 PURPOSE AND NEED OF INSURANCE

The business of insurance is related to the protection of the economic value of

assets. Every asset has value. The asset would have been created through the

efforts of the owner, in the expectation that, either through the income generated

there from or some other output, some of his needs would be met. In the case of a

factory or a cow, the production is sold and income generated. In the case of a

motorcar, it provides comfort and convenience in transportation. There is no direct

income. There is normally expected life time for the asset during which time it is

expected to perform. The owner, aware of this, can so manage his affairs that by

the end of that life time, a substitute is made available to ensure that the value or

income is not lost. However, if the assert gets lost earlier, being destroyed or made

nonfunctional, through an accident or other unfortunate event, the owner and those

helps to reduce such adverse consequences. Insurance is mechanism that h deriving

benefits there from suffer.

Assets are insured, because they are likely to be destroyed or made non-functional

through an accidental occurrence. Such possible occurrences are called perils. Fire,

floods, breakdowns, lightning, earthquakes, etc., are perils. The damage that these

perils may cause the asset, is the risk.

The risk only means that there is possibility of loss or damage. It may or may not

happen. There has to be uncertainty about the risk. Insurance is done against the

contingency that it may happen. Insurance is relevant only if there are

uncertainties. If there is no uncertainty about the occurrence of an event, it cannot

be insured against.

There are other meanings of the term ‘risk’. To the ordinary man in the street risk

means exposure to danger. In insurance practice risk is also used to refer to the

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peril or loss producing event. For example, it is said that fire insurance covers the

risks of fire, explosion, cyclone, flood etc. again, it is used to refer to the property

covered by insurance. For example, a timber construction is considered to be a

bad risk for fire insurance purpose. Here the term risk refers to the subject matter

of insurance.

Conceptually the mechanism of insurance is very simple. People who are exposed

to the same risks come together and agree that, if any one of the members suffers a

loss, the others will share the loss and make good to the person who lost. All

people who send goods by ship are exposed to the same risk related to water

damage, ship sinking, piracy, etc. those owning factories are not exposed to these

risks, but they are exposed to different kinds of risks like, fire, hailstorms,

earthquakes, lightening, burglary, etc. like this, different kinds of risks can be

identified and separate groups, made including those exposed to such risks. By this

method, the risk is spread among the community and the likely big impact on one

is reduced to smaller manageable impacts on all.

The manner in which the loss is to be shared can be determined beforehand. It may

be proportional to the likely loss that each person is likely to suffer, which is

indicative of the benefit he would receive if the peril befell him. The share could

be collected from the members after the loss has occurred or the likely shares may

be collected in advance, at the time of admission to the group. Insurance

companies collect in advance and create a fund from which the losses are paid.

A human life is also an income generating asset. This asset also can be lost through

unexpectedly early death or made non-functional through sickness and disabilities

caused by accidents. Accidents may or may not happen. Death will happen, but the

timing is uncertain. If it happens around the time of one’s retirement, when it could

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be expected that the income will normally cease, the person concerned could have

made some other arrangements to meet the continuing needs. But if it happens

much earlier when the alternate arrangements are not in place, insurance is

necessary to help those dependent on the income.

In the case of a human being, he may have made arrangements for his needs after

his retirement. Those would have been made on the basis of some expectations like

he may live for another 15 years, or that his children will look after him. If any, of

these expectations do not become true, the original arrangement would become

inadequate and there could be difficulties. Living too long can be as much a

problem as dying too young. These are risks which need to be safeguarded against.

Insurance takes care.

Insurance does not protect the asset. It does not prevent it loss due to the peril. The

peril cannot be avoided through insurance. The peril can sometimes be avoided

through better safety and damage control management. Insurance only tries to

reduce the impact of the risk on the owner of the asset and those who depend on

that asset. It compensates, may not be fully, the losses. Only economic or financial

losses can be compensated.

The concept of insurance has been extended beyond the coverage of tangible

assets. Exporters run the risk of the importers in the other country defaulting as

well as losses due to sudden changes in currency exchange rates, economic policies

or political disturbances. These risks are now insured. Doctors run the risk of being

charged with negligence and subsequent liability for damages. The amounts in

question can be fairly large, beyond the capacity of individuals to bear. These are

insured. Thus, insurance is extended to intangibles. In some countries, the voice of

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a singer or the legs of a dancer may be insured; even through the advantages of

spread may not be available in these cases.

Satisfaction of economic needs requires generation of income from some source. If

the property, which is the source of such income, is lost fully or partially,

permanently or temporarily, the income too would stop. The purpose of insurance

is to safeguard against such misfortunes by making good the losses of the

unfortunate few, through the help of the fortunate many, who were exposed to the

same risk but saved from the misfortune. Thus the essence of insurance is to share

losses and substitute certainty by uncertainty.

There are certain basic principles which make it possible for insurance to remain

popular and a fair arrangement. The first is the fact that people are exposed to risks

and that the consequences of such risks are difficult for anyone individuals to bear.

It becomes bearable when the community shares the burden. The second is that no

one person should be in a position to make the risk happen. In other words, none in

the group should set fire to his assets and ask others to share the costs of damage.

This would be taking unfair advantage of as arrangement put into place to protect

people from the risks they are exposed to. The occurrence has to be random,

accidental and not the deliberate creation of the insured person.

1.4 EXPECTATIONS FROM IRDA

The law of India has following expectations from IRDA

1. To protect the interest of and secure fair treatment to policyholders.

2. To bring about speedy and orderly growth of the insurance industry (including

annuity and superannuation payments), for the benefit of the common man, and to

provide long term funds for accelerating growth of the economy.

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3. To set, promote, monitor and enforce high standards of integrity, financial

soundness, air dealing and competence of those it regulates.

4. To ensure that insurance customers receive precise, clear and correct

information about products and services and make them aware of their

responsibilities and duties in this regard.

5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and

other malpractices and put in place effective grievance redressal machinery.

6. To promote fairness, transparency and orderly conduct in financial markets

dealing with insurance and build a reliable management information system to

enforce high standards of financial soundness amongst market players.

7. To take action where such standards are inadequate or ineffectively enforced.

8. To bring about optimum amount of self-regulation in day to day working of the

industry consistent with the requirements of prudential regulation.

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CHAPTER 2

IRDA RULES AND REGULATIONS

2.1 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 policies, 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.

BE it enacted by Parliament in Fiftieth Year of Republic of India as follows:-

PRELIMINARY

 

1. SHORT TITLE, EXTENT AND COMMENCEMENT.

(1) This Act may be called the Insurance Regulatory and Development

Authority Act, 1999.

(2) It extends to the whole of India.

(3) It shall come into force on such date as the Central Government may, by

notification in the Official Gazette, appoint:

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Provided that different dates may be appointed for different provisions of this Act

and any reference in any such provision to the commencement of this Act shall be

construed as a reference to the coming into force of that provision.

2. DEFINITIONS.

(1) In this Act, unless the context otherwise requires, -

(a) "appointed day" means the date on which the Authority is established under

sub-section (1) of section 3;

(b) "Authority" means the Insurance Regulatory and Development Authority

established under sub-section (1) of section 3;

(c) "Chairperson" means the Chairperson of the Authority;

(d) "Fund" means the Insurance Regulatory and Development Authority Fund

constituted under sub-section (1) of section 16;

(e) "Interim Insurance Regulatory Authority" means the Insurance Regulatory

Authority set up by the Central Government through Resolution No.17(2)/94-Ins-

V, dated the 23rd January, 1996;

(f) "intermediary or insurance intermediary" includes insurance brokers,

reinsurance brokers, insurance consultants, surveyors and loss assessors;

(g) "member" means a whole time or a part time member of the Authority and

includes the Chairperson;

(h) "notification" means a notification published in the Official Gazette;

(i) "prescribed" means prescribed by rules made under this Act;

(j) "regulations" means the regulations made by the Authority.

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(2) Words and expressions used and not defined in this Act but defined in the

Insurance Act, 1938 (4 of 1938) or the Life Insurance Corporation Act, 1956 (31 of

1956) or the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972)

shall have the meanings respectively assigned to them in those Acts.

   

2.2ESTABLISHMENT AND INCORPORATION OF

AUTHORITY

(1) With effect from such date as the Central Government may, by notification,

appoint, there shall be established, for the purposes of this Act, an Authority to be

called "the Insurance Regulatory and Development Authority".

(2) The Authority shall be a body corporate by the name aforesaid having

perpetual succession and a common seal with power, subject to the provisions of

this Act, to acquire, hold and dispose of property, both movable and immovable,

and to contract and shall, by the said name, sue or be sued.

(3) The head office of the Authority shall be at such place as the Central

Government may decide from time to time.

(4) The Authority may establish offices at other places in India.

 

1. COMPOSITION OF AUTHORITY.

The Authority shall consist of the following members, namely:-

(a) a Chairperson;

(b) not more than five whole-time members;

(c) not more than four part-time members,

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to be appointed by the Central Government from amongst persons of ability,

integrity and standing who have knowledge or experience in life insurance, general

insurance, actuarial science, finance, economics, law, accountancy, administration

or any other discipline which would, in the opinion of the Central Government, be

useful to the Authority:

Provided that the Central Government shall, while appointing the Chairperson and

the whole-time members, ensure that at least one person each is a person having

knowledge or experience in life insurance, general insurance or actuarial science,

respectively.

 

2. TENURE OF OFFICE OF CHAIRPERSON AND OTHER MEMBERS.

(1) The Chairperson and every other whole-time member shall hold office for a

term of five years from the date on which he enters upon his office and shall be

eligible for reappointment:

Provided that no person shall hold office as a Chairperson after he has attained the

age of sixty-five years:

Provided further that no person shall hold office as a whole-time member after he

has attained the age of sixty-two years.

(2) A part-time member shall hold office for a term not exceeding five years

from the date on which he enters upon his office.

(3) Notwithstanding anything contained in sub-section (1) or sub-section (2), a

member may -

(a) relinquish his office by giving in writing to the Central Government

notice of not less than three months; or

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(b) be removed from his office in accordance with the provisions of section

  3. REMOVAL FROM OFFICE.

(1) The Central Government may remove from office any member who-

(a) is, or at any time has been, adjudged as an insolvent; or

(b) has become physically or mentally incapable of acting as a member;

or

(c) has been convicted of any offence which, in the opinion of the Central

Government, involves moral turpitude; or

(d) has acquired such financial or other interest as is likely to affect

prejudicially his functions as a member; or

(e) has so abused his position as to render his continuation in office

detrimental to the public interest.

(2) No such member shall be removed under clause (d) or clause (e) of sub-

section (1) unless he has been given a reasonable opportunity of being heard in the

matter.

 

4. SALARY AND ALLOWANCES OF CHAIRPERSON AND MEMBERS.

(1) The salary and allowances payable to, and other terms and conditions of

service of, the members other than part-time members shall be such as may be

prescribed.

(2) The part-time members shall receive such allowances as may be prescribed.

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(3) The salary, allowances and other conditions of service of a member shall not

be varied to his disadvantage after appointment.

 

5. BAR ON FUTURE EMPLOYMENT OF MEMBERS.

The Chairperson and the whole-time members shall not, for a period of two

years from the date on which they cease to hold office as such, except with the

previous approval of the Central Government, accept-

(a) any employment either under the Central Government or under any State

Government; or

(b) any appointment in any company in the insurance sector.

 

6. ADMINISTRATIVE POWERS OF CHAIRPERSON.

The Chairperson shall have the powers of general superintendence and direction in

respect of all administrative matters of the Authority.

 

7. MEETINGS OF AUTHORITY.

(1) The Authority shall meet at such times and places and shall observe such

rules and procedures in regard to transaction of business at its meetings (including

quorum at such meetings) as may be determined by the regulations.

(2) The Chairperson, or if for any reason he is unable to attend a meeting of the

Authority, any other member chosen by the members present from amongst

themselves at the meeting shall preside at the meeting.

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(3) All questions which come up before any meeting of the Authority shall be

decided by a majority of votes by the members present and voting, and in the event

of an equality of votes, the Chairperson, or in his absence, the person presiding

shall have a second or casting vote.

(4) The Authority may make regulations for the transaction of business at its

meetings.

 

8. VACANCIES, ETC., NOT TO INVALIDATE PROCEEDINGS OF

AUTHORITY.

No act or proceeding of the Authority shall be invalid merely by reason of -

(a) any vacancy in, or any defect in the constitution of, the Authority; or

(b) any defect in the appointment of a person acting as a member of the

Authority; or

(c) any irregularity in the procedure of the Authority not affecting the

merits of the case.

 

9. OFFICERS AND EMPLOYEES OF AUTHORITY.

(1) The Authority may appoint officers and such other employees as it

considered necessary for the efficient discharge of its function under this Act.

(2) The terms and other conditions of service of officers and other employees of

the Authority appointed under sub-section (1) shall be governed by regulations

made under this Act.

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2.3DUTIES, POWERS AND FUNCTIONS OF AUTHORITY

 

1. DUTIES, POWERS AND FUNCTIONS OF AUTHORITY.

(1) Subject to the provisions of this Act and any other law for the time being in

force, the Authority shall have the duty to regulate, promote and ensure orderly

growth of the insurance business and re-insurance business.

(2) Without prejudice to the generality of the provisions contained in sub-

section (1), the powers and functions of the Authority shall include, -

(a) issue to the applicant a certificate of registration, renew, modify,

withdraw, suspend or cancel such registration;

(b) protection of the interests of the policy holders in matters concerning

assigning of policy, nomination by policy holders, insurable interest, settlement of

insurance claim, surrender value of policy and other terms and conditions of

contracts of insurance;

(c) specifying requisite qualifications, code of conduct and practical training

for intermediary or insurance intermediaries and agents;

(d) specifying the code of conduct for surveyors and loss assessors;

(e) promoting efficiency in the conduct of insurance business;

(f) promoting and regulating professional organisations connected with the

insurance and re-insurance business;

(g) levying fees and other charges for carrying out the purposes of this Act;

(h) calling for information from, undertaking inspection of, conducting

enquiries and investigations including audit of the insurers, intermediaries,

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insurance intermediaries and other organisations connected with the insurance

business;

(i) control and regulation of the rates, advantages, terms and conditions that

may be offered by insurers in respect of general insurance business not so

controlled and regulated by the Tariff Advisory Committee under section 64U of

the Insurance Act, 1938 (4 of 1938);

(j) specifying the form and manner in which books of account shall be

maintained and statement of accounts shall be rendered by insurers and other

insurance intermediaries;

(k) regulating investment of funds by insurance companies;

(l) regulating maintenance of margin of solvency;

(m) adjudication of disputes between insurers and intermediaries or

insurance intermediaries;

(n) supervising the functioning of the Tariff Advisory Committee;

(o) specifying the percentage of premium income of the insurer to finance

schemes for promoting and regulating professional organisations referred to in

clause (f);

(p) specifying the percentage of life insurance business and general

insurance business to be undertaken by the insurer in the rural or social sector; and

(q) exercising such other powers as may be prescribed.

 

2.4 MISSION STATEMENT OF IRDA

1.To protect the interest and secure fair treatment to policyholders.

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2.To bring about speedy and orderly growth of the insurance industry

(includingannuity and superannuation payments) for the benefit of the common

man, and to provide long-term funds for accelerating growth of the economy.

3.To set, promote, monitor, and enforce high standards of integrity,

financialsoundness, fair dealing, and competence of those it regulates

.4.To ensure that insurance customers receive precise, clear and correct

information about products and services and make them aware of their

responsibilities and duties in this regard.

5.To ensure speedy settlement of genuine claims, to prevent insurance frauds, and

other malpractices and put in place effective grievance redressal machinery.

6.To promote fairness, transparency, and orderly conduct in financial markets

dealing with insurance and to build a reliable management information system to

enforce high standards of financial soundness amongst market players.

7. To take action where such standards are inadequate or ineffectively enforced.

8. To bring about optimum amount of self-regulation in day-to-day working of the

industry, consistent with the requirements of prudential regulation.

2.5 FINANCE, ACCOUNTS AND AUDIT

1.GRANTS BY CENTRAL GOVERNMENT.

The Central Government may, after due appropriation made by Parliament by law

in this behalf, make to the Authority grants of such sums of money as the

Government may think fit for being utilised for the purposes of this Act.

 

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2. CONSTITUTION OF FUNDS.

(1) There shall be constituted a fund to be called "the Insurance Regulatory and

Development Authority Fund" and there shall be credited thereto-

(a) all Government grants, fees and charges received by the Authority;

(b) all sums received by the Authority from such other source as may be

decided upon by the Central Government;

(c) the percentage of prescribed premium income received from the insurer.

(2) The Fund shall be applied for meeting -

(a) the salaries, allowances and other remuneration of the members, officers

and other employees of the Authority;

(b) the other expenses of the Authority in connection with the discharge of

its functions and for the purposes of this Act.

3. ACCOUNTS AND AUDIT.

(1) The Authority shall maintain proper accounts and other relevant records and

prepare an annual statement of accounts in such form as may be prescribed by the

Central Government in consultation with the Comptroller and Auditor-General of

India.

(2) The accounts of the Authority shall be audited by the Comptroller and

Auditor-General of India at such intervals as may be specified by him and any

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expenditure incurred in connection with such audit shall be payable by the

Authority to the Comptroller and Auditor-General.

(3) The Comptroller and Auditor-General of India and any other person

appointed by him in connection with the audit of the accounts of the Authority

shall have the same rights, privileges and authority in connection with such audit

as the Comptroller and Auditor-General generally has in connection with the audit

of the Government accounts and, in particular, shall have the right to demand the

production of books of account, connected vouchers and other documents and

papers and to inspect any of the offices of the Authority.

(4) The accounts of the Authority as certified by the Comptroller and Auditor-

General of India or any other person appointed by him in this behalf together with

the audit-report thereon shall be forwarded annually to the Central Government

and that Government shall cause the same to be laid before each House of

Parliament.

 

2.6 MISCELLANEOUS

  1. POWER OF CENTRAL GOVERNMENT TO ISSUE DIRECTIONS.

(1) Without prejudice to the foregoing provisions of this Act, the Authority

shall, in exercise of its powers or the performance of its functions under this Act,

be bound by such directions on questions of policy, other than those relating to

technical and administrative matters, as the Central Government may give in

writing to it from time to time.

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PROVIDED that the Authority shall, as far as practicable, be given an opportunity

to express its views before any direction is given under this sub-section.

(2) The decision of the Central Government, whether a question is one of policy or

not, shall be final.

 

1. POWER OF CENTRAL GOVERNMENT TO SUPERSEDE

AUTHORITY.

(1) If at any time the Central Government is of the opinion-

(a) that, on account of circumstances beyond the control of the Authority, it

is unable to discharge the functions or perform the duties imposed on it by or under

the provisions of this Act, or

(b) that the Authority has persistently defaulted in complying with any

direction given by the Central Government under this Act or in the discharge of the

functions or performance of the duties imposed on it by or under the provisions of

this Act and as a result of such default the financial position of the Authority or the

administration of the Authority has suffered; or

(c) that circumstances exist which render it necessary in the public interest

so to do,

the Central Government may, be notification and for reasons to be specified

therein, supersede the Authority for such period, not exceeding six months, as may

be specified in the notification and appoint a person to be the Controller of

Insurance under section 2B of the Insurance Act, 1938 (4 of 1938), if not already

done :

Provided that before issuing any such notification, the Central Government shall

give a reasonable opportunity to the Authority to make representations, if any, of

the Authority.

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(2) Upon the publication of a notification under sub-section(1) superseding the

Authority, -

(a) the Chairperson and other members shall, as from the date of

supersession, vacate their offices as such;

(b) all the powers, functions and duties which may, by or under the

provisions of this Act, be exercised or discharged by or on behalf of the Authority

shall, until the Authority is reconstituted under sub-section(3), be exercised and

discharged by the Controller of Insurance; and

(c) all properties owned or controlled by the Authority shall, until the

Authority is reconstituted under sub-section(3), vest in the Central Government.

(3) On or before the expiration of the period of supersession specified in the

notification issued under sub-section(1), the Central Government shall reconstitute

the Authority by a fresh appointment of its Chairperson and other members and in

such case any person who had vacated his office under clause(a) of sub-section(2)

shall not be deemed to be disqualified for reappointment.

(4) The Central Government shall cause a copy of the notification issued under

sub-section(1) and a full report to any action to be laid before each House of

Parliament at the earliest.

 

3. FURNISHING OF RETURNS, ETC., TO CENTRAL GOVERNMENT.

(1) The Authority shall furnish to the Central Government at such time and in such

form and manner as may be prescribed, or as the Central Government may direct to

furnish such returns, statements and other particulars in regard to any proposed or

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existing programme for the promotion and development of the insurance industry

as the Central Government may, from time to time, require.

(2) Without prejudice to the provisions of sub-section(1), the Authority shall,

within nine months after the close of each financial year, submit to the Central

Government a report giving a true and full account of its activities including the

activities for promotion and development of the insurance business during the

previous financial year.

(3) Copies of the reports received under sub-section(2) shall be laid , as soon as

may be after they are received, before each House of Parliament.

 

4. CHAIRPERSON, MEMBERS, OFFICERS AND OTHER EMPLOYEES

OF AUTHORITY TO BE PUBLIC SERVANTS.

The Chairperson, members, officers and other employees of Authority shall be

deemed, when acting or purporting to act in pursuance of any of the provisions of

this Act, to be public servants within the meaning of section 21 of the Indian Penal

Code (45 of 1860).

 

5. PROTECTION OF ACTION TAKEN IN GOOD FAITH.

No suit, prosecution or other legal proceedings shall lie against the Central

Government or any officer of the Central Government or any member, officer or

other employee of the Authority for anything which is in good faith done or

intended to be done under this Act or the rules or regulations made thereunder:

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Provided that nothing in this Act shall exempt any person from any suit or other

proceedings which might, apart from this Act, be brought against him.

 

6. DELEGATION OF POWERS.

(1) The Authority may, by general or special order in writing, delegate to the

Chairperson or any other member or office of the Authority subject to such

conditions, if any, as may be specified in the order such of its powers and functions

under this Act as it may deem necessary.

(2) The Authority may, by a general or special order in writing, also form

committees of the members and delegate to them the powers and functions of the

Authority as may be specified by the regulations.

 

7. POWER TO MAKE RULES.

(1) The Central Government may, by notification, make rules for carrying out the

provisions of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power,

such rules may provide for all or any of the following matters, namely :

(a) the salary and allowances payable to, and other terms and conditions of

service of, the members other than part-time members under sub-section(1) of

section 7;

(b) the allowances to be paid to the part-time members under sub-section(2)

of section 7;

(c) such other powers that may be exercised by the Authority under clause

(q) of sub-section(2) of section 14;

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(d) the form of annual statement of accounts to be maintained by the

Authority under sub-section(1) of section 17;

(e) the form and the manner in which and the time within which returns and

statements and particulars are to be furnished to the Central Government under

sub-section(1) of section 20;

(f) the matters under sub-section(5) of section 25 on which the Insurance

Advisory Committee shall advise the Authority;

(g) any other matter which is required to be, or may be, prescribed, or in

respect of which provision is to be or may be made by rules.

 

8. ESTABLISHMENT OF INSURANCE ADVISORY COMMITTEE.

(1)The Authority may, by notification, establish with effect from such date as it

may specify in such notification, a Committee to be known as the Insurance

Advisory Committee.

(2)The Insurance Advisory Committee shall consist of not more than twenty-five

members excluding ex-officio members to represent the interests of commerce,

industry, transport, agriculture, consumer fora, surveyors, agents, intermediaries,

organisations engaged in safety and loss prevention, research bodies and

employees' association in the insurance sector.

(3)The Chairperson and the members of the Authority shall be the ex officio

Chairperson and ex officio members of the Insurance Advisory Committee.

(4)The objects of the Insurance Advisory Committee shall be to advise the

Authority on matters relating to the making of the regulations under section 26.

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(5)Without prejudice to the provisions of sub-section(4), the Insurance Advisory

Committee may advise the Authority on such other matters as may be prescribed.

 

9. POWER TO MAKE REGULATIONS.

(1) The Authority may, in consultation with the Insurance Advisory Committee, by

notification, make regulations consistent with this Act and the rules made

thereunder to carry out the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power,

such regulations may provide for all or any of the following matters, namely :-

(a) the time and places of meetings of the Authority and the procedure to be

followed at such meetings including the quorum necessary for the transaction of

business under sub-section(1) of section 10;

(b) the transactions of business at its meetings under sub-section(4) of

section 10;

(c) the terms and other conditions of service of officers and other employees

of the Authority under sub-section(2) of section 12;

(d) the powers and functions which may be delegated to Committees of the

members under sub-section(2) of section 23; and

(e) any other matter which is required to be, or may be, specified by

regulations or in respect of which provision is to be or may be made by

regulations.

 

10. RULES AND REGULATIONS TO BE LAID BEFORE PARLIAMENT.

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Every rule and every regulation made under this Act shall be laid, as soon as may

be after it is made, before each House of Parliament, while it is in session, for a

total period of thirty days which may be comprised in one session or in two or

more successive sessions, and if, before the expiry of the session immediately

following the session or the successive session aforesaid, both Houses agree in

making any, modification in the rule or regulation or both Houses agree that the

rule or regulation should not be made, the rule or regulation shall thereafter have

effect only in such modified form or be of no effect, as the case may be; so,

however, that any such modification or annulment shall be without prejudice to the

validity of anything previously done under that rule or regulation.

 

11. APPLICATION OF OTHER LAWS NOT BARRED.

The provisions of this Act shall be in addition to, and not in derogation of, the

provisions of any other law for the time being in force.

12. POWER TO REMOVE DIFFICULTIES.

(1) If any difficulty arises in giving effect to the provisions of this Act, the Central

Government may, by order published in the Official Gazette, make such provisions

not inconsistent with the provisions of this Act as may appear to be necessary for

removing the difficulty:

Provided that no order shall be made under this section after the expiry of two

years from the appointed day.

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(2) Every order made under this section shall be laid, as soon as may be, after it

is made, before each House of Parliament.

NEW LAWS AND GUIDELINES:

The Insurance Regulatory and Development Authority (IRDA) have issued

disclosure norms for insurance companies, mandating them to publish accounts on

a half-yearly basis. The disclosure norms are seen as a precursor to allowing

insurance companies to hit the primary market.

According to the new norms, insurers will have to publish their balance sheet on

half-yearly basis starting from the period ending March 31, 2010, i.e. beginning

with the October-March period. Such disclosures will be necessary for all insurers

even if they are not listed on any stock exchange, the IRDA said.

IRDA said several insurance companies will be completing 10 years shortly, after

which they may be allowed to go for an initial public offer (IPO).

It is also essential that investors are made fully aware of the financial performance,

company profile, financial position, the risk exposure, elements of corporate

governance in place and the management of the insurance companies. Such data

shall preferably be made available for at least a 5-year period prior to the IPO.

The regulator has directed all firms to come up with a public disclosure framework

to ensure a fair and stable insurance market.

IRDA has also said that key analytical ratios of insurance companies have to be

published in at least one English daily circulating substantially in the whole of

India and in one regional language newspaper.

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Insurers have also been asked to host all the forms including revenue account,

profit &loss account, balance sheet, segmental reporting, schedules to accounts and

other forms, on their websites, on a quarterly/half-yearly/ yearly basis.

According to the IRDA, the International Association of Insurance Supervisors

(IAIS) has recognized that insurers have an equal if not greater responsibility

towards policyholders than their duty towards the investors. This is because if

insurers become insolvent, loss to policyholders is much more than that to

investors.

Public disclosures, on the risks faced by the insurers, provide information to

policyholders that help them make informed decisions before entering into an

insurance contract.

At present, in India, it may not be possible for an individual policyholder to have

necessary ability and resources to undertake the task of assessing the insurers.

However, various expert stakeholders in the market can provide necessary inputs

based on the disclosures, which will help them in assessing the risk exposure of an

insurer while entering into a contract with an insurer.

For better understanding of Unit-linked life insurance products (ULIP) by

intending investors/policyholders, the Insurance Regulatory and Development

Authority (IRDA) have put forth detailed guidelines for companies selling these.

There has to now be a minimum lock-in period of three years and all insurance

companies selling ULIP need to provide for reasonable insurance cover, with a

linkage to the premium payment during the term of the contract, along with

availability of the greater part of the targeted sum at the longer end.

For better understanding of the complexities of ULIP, the insurance companies

should provide separate training to all agents/intermediaries before they are

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authorized to sell ULIP. Also, periodical in-house refresher training to those

involved in soliciting business. Insurance companies are being asked to follow a

uniform practice for rounding off the unit prices.

Further, any advertisement by insurance companies should clearly distinguish

ULIP from traditional life insurance products and also make clear that the

premiums and funds are subject to certain charges related to the fund or to the

premium paid. IRDA has also asked all life insurers to furnish data on switching

options exercised by policyholders,

IRDA New Guidelines for Life Insurance Agents

In a first of its kind measure, Insurance Regulatory & Development Authority has

decided to penalize agents if the insurance policies are not renewed. The move,

aimed at curtailing wrong selling, will entail commissions being retracted from

agents and credited to the policyholders account. And such not renewed policy to

be treated as Single Premium Policy".

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CHAPTER 3

PRINCIPLES OF LIFE ASSURANCE

3.1 LIFE INSURANCE CONTRACTS

Almost all of us have insurance. When your insurer gives you the policy document,

generally, all you do is glance over the decorated words in the policy and pile it up

with the other bunch of financial papers on your desk, right? If you spend

thousands of dollars each year on insurance, don't you think that you should know

all about it? Your insurance advisor is always there for you to help you understand

the tricky terms in the insurance forms, but you should also know for yourself what

your contract says. In this article, we'll make reading your insurance contract easy.

Read on to take a look at the basic principles of insurance contracts and how they

are put to use in daily life.

3.2 ESSENTIALS OF A VALID INSURANCE CONTRACT

Offer and Acceptance: When applying for insurance, the first thing you do is

get the proposal form of a particular insurance company. After filling in the

requested details, you send the form to the company (sometimes with

a premium check). This is your offer. If the insurance company accepts your

offer and agrees to insure you, this is called an acceptance. In some cases,

your insurer may agree to accept your offer after making some changes to

your proposed terms (for example, charging you a double premium for your

chain-smoking habit). 

Consideration: This is the premium or the future premiums that you have

pay to your insurance company. For insurers, consideration also refers to the

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money paid out to you should you file an insurance claim. This means that

each party to the contract must provide some value to the relationship. 

Legal Capacity:You need to be legally competent to enter into an agreement

with your insurer. If you are a minor or are mentally ill, for example, then

you may not be qualified to make contracts. Similarly, insurers are

considered to be competent if they are licensed under the prevailing

regulations that govern them.

Legal Purpose: If the purpose of your contract is to encourage illegal

activities, it is invalid.

Find the Value in Indemnity contracts

Most insurance contracts are indemnity contracts. Indemnity contracts apply to

insurances where the loss suffered can be measured in terms of money.

Principle of Indemnity

This states that insurers pay no more than the actual loss suffered. The purpose of

an insurance contract is to leave you in the same financial position you were in

immediately prior to the incident leading to an insurance claim. When your old

Chevy Cavalier is stolen, you can't expect your insurer to replace it with a brand

new Mercedes-Benz. In other words, you will be remunerated according to the

total sum you have assured for the car. (To read more on indemnity contracts,

see shopping For Car Insurance and How does the 80% rule for home insurance

work?)

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3.3ADDITIONALFACTORSThere are some additional factors of your insurance contract that also need to be

considered, including under-insurance and excess clauses that create situations in

which the full value of an insured asset is not remunerated.

Under-Insurance

Often, in order to save on premiums, you may insure your house at $80,000

when the total value of the house actually comes to $100,000. At the time of

partial loss, your insurer will pay only a proportion of $80,000 while you have

to dig into your savings to cover the remaining portion of the loss. This is called

under-insurance, and you should try to avoid it as much as possible. 

Excess

To avoid trivial claims, the insurers have introduced provisions like excess. For

example, you have auto insurance with the applicable excess of $5,000.

Unfortunately, your car had an accident with the loss amounting to $7,000. Your

insurer will pay you the $7,000 because the loss has exceeded the specified limit of

$5,000. But, if the loss comes to $3,000 then the insurance company will not pay a

single penny and you have to bear the loss expenses yourself. In short, the insurers

will not entertain claims unless and until your losses exceed a minimum amount set

by the insurer.

Not all insurance contracts are indemnity contracts. Life insurance contracts and

most personal accident insurance contracts are non-indemnity contracts. You may

purchase a life insurance policy of $1 million, but that does not imply that your

life's value is equal to this dollar amount. Because you can't calculate your life's net

34

worth and fix a price on it, an indemnity contract does not apply. (For more

information on non-indemnity contracts, read Buying Life Insurance: Term Versus

Permanent,Long-Term Care Insurance: Who Needs It? and Shifting Life Insurance

Ownership.) 

1) Insurable Interest:

It is your legal right to insure any type of property or any event that may cause

financial loss or create a legal liability to you. This is called insurable interest.

Suppose you are living in your uncle's house, and you apply for homeowners'

insurance because you believe that you may inherit the house later. Insurers will

decline your offer because you are not the owner of the house and, therefore, you

do not stand to suffer financially in the event of a loss.

This example demonstrates that when it comes to insurance, it is not the house, car

or machinery that is insured. Rather, it is the monetary interest in that house, car or

machinery to which your policy applies. 

It is also the principle of insurable interest that allows married couples to take out

insurance policies on the lives of their spouses - they may suffer financially if the

spouse dies. Insurable interest also exists in some business arrangements, as seen

between a creditor and debtor, between business partners or between employers

and employees. 

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2) Principle of Subrogation:

Subrogation allows an insurer to sue a third party that has caused a loss to the

insured and pursue all methods of getting back some of the money that it has paid

to the insured as a result of the loss.

For example, if you are injured in a road accident that is caused by the reckless

driving of another party, you will be compensated by your insurer. However, your

insurance company may also sue the reckless driver in an attempt to recover that

money.

3) Doctrine of Utmost Good Faith:

All insurance contracts are based on the concept of "uberrima fidei", or

the doctrine of utmost good faith. This doctrine emphasizes the presence of mutual

faith between the insured and the insurer. In simple terms, while applying for life

insurance, it becomes your duty to disclose your past illnesses to the insurer.

Likewise, the insurer cannot hide information about the insurance coverage that is

being sold.

4) Doctrine of Adhesion:

The doctrine of adhesion states that you must accept the entire insurance contract

and all of its terms and conditions without bargaining. Because the insured has no

opportunity to change the terms, any ambiguities in the contract will be interpreted

in favor of the insured.

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CHAPTER 4

PREMIUMS AND BONUSES

4.1 WHAT IS PREMIUM

The sum paid by a policyholder to keep an insurance policy in force. It is amount

paid to secure an insurance policy. Rate that an insured is charged, reflecting his or

her expectation of loss or risk. The insurance company will assume the risks of the

insured (length of life, state of health, property damage or destruction, or liability

exposure) in exchange for a premium payment. Premiums are calculated by

combining expectation of loss and expense and profit loading.

Usually, the periodic cost of insurance is computed by multiplying the premium

rate per unit of insurance by the number of units purchased. The rate class in which

the insured is placed includes large numbers of individuals with like characteristics

who pose the same risk. Every individual in a given class will not incur the same

loss; rather each has approximately the same expectation of loss (known as the

Principle of Equity).

An insurance premium is the amount of money charged by a company for active

coverage. The sum a person pays in premiums, also referred to as the rate, is

determined by several factors, including age, health, and the area a person lives in.

People pay these rates annually or in smaller payments over the course of the year,

and the amount can change over time. When insurance premiums are not paid, the

policy is typically considered void and companies will not honor claims against it.

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What Premiums Cover

Generally, premiums cover whatever is detailed in the insurance policy, and the

services provided or paid for depend entirely on the specific policy and type of

protection. The following are the most common varieties and the basic services

they often cover. Consumers should keep in mind that not all of these types of

insurance are available or common in all countries, and there are many other kinds.

Life insurance typically pays a lump sum in the event of the policyholder's death

to those detailed in the person’s will or the plan itself. It may pay for funeral

arrangements, outstanding debt, living expenses for those left behind, or other

expenses related to the deceased's estate.

4.2 PURE PREMIUM

Analysis of uncertainty of financial loss. This classification can be done according

to whether a risk is fundamental, particular, pure, speculative, dynamic, or static.

In life insurance the process by which a company determines how much to charge

for a policy based upon an applicant’s age, occupation, sex, and health is not or

pure Premium.

The cost to meet the risk of death for one year at a particular age is called the risk

premium.

Eg. 1000 persons→ the cost of covering the risk of death of person age 50 for one

year. This cost is for insurance of Rs. 20,000 which can be expressed also as Rs. 10

per 1000. The risk premium is based on the probability of death at various ages,

mortality tables prepared for the use of insurance offices; contain data relating to

such probabilities.

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The balance premium remaining with the insurer will be invested and will earn

some interest. To the extent of the expected interest earnings, the premium charged

can be reduced. The premium worked out after taking into account the interest, is

called the net premium or pure premium.

LOADING

Addition to the pure cost of insurance that reflects agent’s commissions, premium

taxes, and administrative costs associated with putting business on an insurance

company’s book.

The additions to the pure premium are called loadings. One of the loading is due to

administrative expenses. One of them would be for unexpected contingencies and

fluctuations.

LIFE FUND

The principles of prudent life insurance management require that all the income

form the life insurance business (including the earnings from the investments) be

kept aside in a life fund, earmarked exclusively to meet the liabilities under the life

insurance policies. The laws in India also stipulate this requirement. The life fund

can be utilized only to pay the claims and the expenses of running the business.

The life fund represents the Reserve for life insurer policies.

It is a long term contract. The income from the life insurance business (Including

the earnings from the investments) is kept aside in a Life Fund, earmarked

exclusively to meet the liabilities under the life insurance policies. Life fund can be

utilized mainly to pay claims and expenses. It represents the reserve for life

insurance policies.

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A premium is calculated in respect of mortality, Interest and expenses.

The practice followed by all prudent insurers is that periodically, they check the

validity of these assumptions to make sure that the business is on sound lines. The

process of doing so is called an Actuarial Valuation.

The insurance act in India requires that actuarial valuations be done every year.

The method of estimating the liability of the business and of the future premiums is

very technical and complex, involving actuarial principles. It has to be done by an

actuary with recognized professional qualifications. This is one of the reasons why

every life insurer has an actuary, either as a full time employee or as a consultant.

The insurer is required to maintain separate funds in respect of non-participating

policies and in respect of participating policies. Separate valuations will be made in

respect of these 2 funds. The surplus in the fund for participating policies, not more

than 10% of the surplus can be distributed to the shareholders. The rest will have to

be distributed to the policyholders as bonus.

BONUS

The distribution of the valuation surplus to policyholders is done through the

declaration of ‘Bonus’ only policy holders who opt for participating or with profit

policies would be entitled to bonus. It is declared out of the surpluses determined

after actuarial valuations. Surpluses, in a way reflect the profitability of the

business or the quality of management of the business.

Non-participating or without profit policies would be paying a slightly lesser

amount of premium for the same kind of insurance cover, because of the factor of

bonus loading. The most common bonus ‘Simple Reversionary Bonus’ and

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‘Compound Reversionary System’ added to the existing SA.A one-time bonus

called Terminal Bonus or Final Additional Bonus was declared for policies which

had been in force for 15 yrs.

CHAPTER 5

UNDERWRITING

5.1 WHAT IS UNDERWRITING

Not all life insurance policies are underwritten, but because some are it is

important to understand what it means.

Underwriting is a term used by life insurers to describe the process of assessing

risk, ensuring that the cost of the cover is proportionate to the risks faced by the

individual concerned. People with the same or similar risk pay the same or similar

premium rates.

The process of underwriting takes place when you submit your application. To

assess a person’s risk, life insurers rely on information from a range of sources. If

you are applying for a policy that is underwritten, as a minimum you will be asked

to complete an application form and a medical questionnaire. 

Approximately 93% of applicants that go through the underwriting process will not

experience any difficulty and will end up paying the standard premium rates for

their life insurance.

People who have a higher risk of developing chronic illness or who work in high

risk occupations are usually required to complete additional forms and may be

asked to pay an extra premium to cover this risk. This only happens to a low

41

proportion of applicants. And an even smaller number may not be eligible for

cover at all.

Remember, if you have access to insurance through your super or through your

employer, the insurance company may decide not to assess the risks for every

individual in the policy. Instead they may spread the risk across everyone in the

group. This is called a ‘Group Policy’.

5.2 FINANCIAL UNDERWRITING

Concept Of Financial Underwriting

The term financial underwriting does not carry too much meaning to many people.

The purpose is to determine if the amount of insurance can be justified by the

insurance need.

Financial Underwriting

During a typical underwriting training process we usually begin with the theory of

mortality tables, premium rates, and the concept of homogenous groupings of

insured. Most times it is only after this, almost as an afterthought, that we look at

the financial aspect. It would seem that we have put the cart before the horse. The

first thing we should think about is the basic idea that, above all, an application for

insurance is a contract between one or two other parties and the company, and it

must make economic sense.

It is within the concerns of the underwriter to also therefore understand the

apparent reasons for the client’s proposal, and if he stands to benefit from the

happening of the event insured, and whether the sum assured applied for is vastly

in excess of the human life value of the individual. For example, if a car’s market

value is Rs 5 lakhs, and it is insured for 8 lakhs, there will be added incentive for

42

the car’s owner to dispose off the car and seek insurance indemnity for the amount

of 8 lakhs (sum assured). That is not just unfair but also illogical. The car owner

will make a fool of the insurance company, and all insurance companies shall have

to shut shop, if that were to be the case. However, the car is never insured for a

greater value than its present market value, and that explains the reason why the

owner cannot make a profit of his car’s destruction. Quite rightly, this rule also

applies to life and disability risks. The proposer should be proposing for a sum

assured that does not exceed the present human life value of the proposed life

assured, and should not be in a position to benefit from the event happening, nor

benefit the family members. Life insurance, we have already seen is an instrument

to compensate for the financial loss to the dependents in the unfortunate event of

the death or disability of the insured, and put the family back to the same standards

of living as earlier, but not to a better one.

NEED FOR FINANCIAL UNDERWRITING

The purpose of Life Insurance is to protect against economic loss resulting from

the death of the insured. If the amount applied for is in excess of the amount of the

potential economic loss, then poor persistency or adverse selection may occur. The

role of the Underwriter is to insure that the amount applied for is justified based on

the potential economic loss. This process is called Financial Underwriting.

Financial underwriting is an essential part of risk analysis in personal life

insurance. It helps the insurer monitor and control risks, protect the portfolio and

optimise the results of the insurance activity.The term ‘financial underwriting’

prima facie; appears to convey some vast wealth assessment of highly paid

executives, wealthy businessmen, lengthy balance sheets and financial statements,

etc. It is true that one or many of these may come into play while determining

acceptable levels of insurance. However, it should be understood that financial

43

underwriting does not always necessarily involve huge sums of money. We know

that “moral hazard” refers to the intention of the proposer. If the proposal is made

with an intention to seek undue advantage from the policy, then there is some

moral hazard. The intention may be to get a lower premium, or make some quick

money

Financial Underwriting to judge the existence of moral hazard through secondary

factors such as lifestyles, income as compared to premium payable, reputation for

integrity, present financial condition, etc. If moral hazard is suspected, the proposal

is declined. One of the indicators of moral hazard is the size of the insurance

proposed compared to the income. The extent of insurable interest of a person in

his own life is unlimited. It is not limited to his current levels of income, since it is

assumed that these levels of income can go up in the near future. Dreams may

become reality at the turn of a day. A bankrupt may go on to win a million dollar

lottery, and a struggling actor may become an overnight sensation. However, this

theory or projection may not be valid while proposing for life insurance policy,

because insurance premiums are to be paid out of the present income, and a

person’s worth is calculated by his present income; and not by what he thinks he

may become a decade later. The source of income needs to be checked. If he is not

paying the premium, and someone else pays on his behalf, then there could be

issues of insurable interest and wager (betting).

The need for insurance has to be related to current situations and not to a desirable

situation of the future. If the premium paid is large compared to the income, the

possibility of lapse is very high. Other possibilities include higher claims, money

laundering and fraud. The underwriter has to keep an eye on these risk factors.

Making a judgment on these factors is called financial underwriting. Thumb rules

are just guidelines, and may not do justice in all cases. The need for the

44

underwriter to be aware of financial considerations starts at the lowest level, the

criterion being whether the proposor can afford to pay the premiums. This can be

assessed through a financial check on his income, source of income, and the total

insurance sum assured already in his name. If he cannot afford the premium, which

is a matter of judgment at the time of underwriting the proposal, then there will be

a case of over insurance involved and every underwriter is aware of the dangers

inherent in such a situation. It is a well known fact that what is considered

reasonable assessment of sum assured, premium and financial background in one

case could well be a disastrous situation in another.

Over the years, insurers have combined income and potential worth with insurable

interest giving rise to some “rule of thumb”, methods for determining acceptable

limits. The underwriting of “financial risks” is a matter of experience, and involves

a greater use of common sense and the ability to reach a logical and sensible

conclusion. In the final analysis, the question that insurers need to ask is: “Does it

make sense?”Financial Underwriting may be therefore defined as that area of

underwriting which aims at ensuring that there is no question of over-insurance, or

speculation or possibility of fraud arising out of pure monetary considerations. If

there is evidence of over-insurance or fraud, there exists moral hazard, and there is

only one decision in such cases, and that is to decline the proposal.

There is no question of charging extra premiums for the risks involved in case of

moral hazard, as these risks are different from the special risks that exist in medical

extramortality; which can be compensated by charging extra premiums on standard

rates. It is important to understand that the proposal does not come into scrutiny

only when the sum assured is very large, but that it can come into scrutiny even if

the proposal is for a smaller CIFP Knowledge series

45

Financial Underwritingsum assured, for instance, if the annual premium is

disproportionate to net annual income, or if the existing insurance cover is large

enough and the proposed sum assured will make the combined or total insurance

covers disproportionately larger than the acceptable value. For example, if the

proposer has applied for life insurance cover of Rs 50 lakhs; and his annual income

is Rs 3 lakhs, then even under the “maximum insurable interest/ HLV” method; he

can be insured only for an maximum amount of Rs 30 lakhs (10 times annual

income). If he already has an insurance cover of Rs 10 lakhs, then he will be

entitled to only Rs 20 lakhs sum assured, and not the Rs50 lakhs cover he applied

for.

FINANCIAL UNDERWRITING ISSUES

Like medical underwriting and underwriting special risks (residence, transport,

sporting, occupational), financial underwriting forms an integral part of risk

assessment in insurance. The development of money laundering and financial

criminality has served to emphasize its importance. Today, it is a global market

practice. In this respect, the insurer has many, vital concerns, namely:

Taking the economic environment into account (i.e. any economic and financial

difficulties encountered by company directors). This type of underwriting will not

be reflected in a increase price, but will result in a decision to either underwrite the

business, or decline the offer or limit the sum assured.

Adjusting the insurance cover to the insured’s real needs. In this way, the insurer

is able to provide the insured with the right advice.

Assessing the risk more accurately: In order to offer appropriate insurance terms

and have a clear picture of the portfolio; both the insurer and reinsurer need to

know exactly what they are covering.

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Limiting anti-selection and thereby avoiding the influx of poor risks in the

portfolio.In insurance, financial underwriting mainly applies to cases with high

sums assured. In such cases from a medical point of view, applicants can usually

be accepted under normal conditions, or may be slightly rated. It is then the

financial aspects that will determine the decision of acceptance. Financial

underwriting entails carrying out specific checks which should lead the insurer to

fully comprehend the overall risk. It entails monitoring:

Insured accumulations (to prevent policyholders from taking out several policies

for small amounts with several companies resulting in less screening).

The overall insurance arrangement.

The existence and financial health of any company or individual person

(contracting party, beneficiary, insured, payer of premiums).

The financial and/or economic justification for the amounts requested to cover

the risk to make sure that coverage reflects the insured’s real needs to avoid over-

insurance. It is experience acquired from studying cases, but also access to relevant

information and the means to check this information which make it possible to

highlight certain “suspicious” risks, which should then be declined.

5.3 DATA FOR UNDERWRITING

One might consider this topic redundant to the last submission around application

requirements and that assessment would be partially true.  As such we are not

going to go over the data that has already been collected in the application such as

the demographic information of the applicant and guarantors or the business

financial information or personal financial information.  That discussion like Elvis

has “left the building”.

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Rather, we will discuss the use of additional data to support the

underwriting/decisioning process - namely:

Personal/Consumer credit data

Business data

Scorecards

Fraud data

 5.4 NON-MEDICAL UNDERWRITING

Non-Medical Life Insurance is for those who want the quickest possible coverage

without going through a longer underwriting policy.  To get the best rates require

some form of medical underwriting.  This often involves a medical examiner who

comes to your home or office to ask medical questions,

then take a blood and urine specimen. This is evaluated along with your medical

records if necessary to determine your health status, whether you are preferred

best, preferred, standard or rated. With non-medical life these steps are avoided,

underwriting is accomplished through questions and electronically available

information.  The tradeoff is slightly higher rates then a medically underwritten

policy if you are healthy, but coverage is put if force at a quicker pace.

 This product is a fully underwritten product which allows for rapid decision on 

available medical criteria.  If you have any of the following medical conditions we

recommend you use our fully underwritten products. 

Cancer

Diabetes

Heart attack, 

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Heart by-pass/angioplasty, 

Sleep apnea and stroke/TIA

Web-based technology and underwriting innovation enable Fidelity Life to offer a

fast, hassle-free purchase experience. With our Rapid Decision Term product and

our state-of-the-art Rapid App application, approval and delivery process has been

streamlined to allow you to obtain coverage from Fidelity Life in days, not months.

There are no exams, no tests, no waiting periods and processing delays.* Issuance

depends only on the answers to a few health questions. This rapid decision-making

process is the work of experts who have the knowledge and experience to provide

solutions that are both forward looking and practical. It's a benefit you won't likely

get from any other insurer.

Rapid Decision Term is a level death benefit term life insurance product to age 95.

Guaranteed level premium periods of 5, 10, 15, 20 and 30 years are available.

After the level premium period, rates increase each year through age 94. The

policy is convertible during the first 10 policy years or to age 65, whichever comes

first.

Our Rapid Decision Term product also features a number of valuable riders such as

Accelerated Death Benefit which is included with the policy and optional riders

such as Return of Premium, Waiver of Premium, Dependent Child, and Accidental

Death.

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5.5 PROCESS OF UNDERWRITING

The ability to evaluate and adequately price risk determines the success or lack of

success of any risk entity. Because of the continually changing and evolving nature

of risk – especially in commercial and specialty risks, it is difficult to determine the

appropriate coverage and the associated costs of risk.

Same Info but Different Conclusions

Underwriters, like all people, think and process information differently. Two

experienced underwriters can look at the same information and come to different

conclusions on the risk class, underwriting class, or exposure class that is the best

representation for an insured. Furthermore, Underwriter A can be effective and

thorough in their underwriting process, write an account and then get hit with some

big losses. Underwriter B can take some shortcuts, miss some critical things, write

an account and then have great loss experience.

No Two Risks are the same

From another perspective, there are no two risks that are the same. Yet, processes

force underwriters to classify or code risks into one of the available code

selections. It is only when there is a clear and obvious problem that companies

decide new codes are needed. Subsequently, they undertake a lengthy process to

evaluate a bunch of files and come up with new codes and train people on the use

of the new codes.

Identify Bad Underwriting Quickly

Of course, over a long period of time Underwriter A will stand out as the superior

underwriter. In the mean time, Underwriter B could put a lot of bad risk on the

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books. The ability to analyze a portfolio of underwriting file unstructured data

enables operational executives to more quickly and efficiently identify issues,

problems, and inconsistencies in the way accounts are being evaluated.

Analyzing Without Coding

The ability to evaluate risks without codes enables executives to more quickly

react to issues BEFORE they become clear and obvious problems. This is because

ALL of the information about a particular risk issue is being included in the

unstructured data analysis – rather than just the code selected by an underwriter.

CHAPTER 6

INSURANCE DOCUMENTS

6.1 DOCUMENT REQUIRED FOR INSURANCE

The life insurance sector has grown tremendously over the years, and have more

people covered under its policy than ever before. The Insurance Regulatory

Development Authority now has laid certain guidelines with concern to the

documents required for the policy to be insured.

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 The insurance companies have to follow all the requirements of the IRDA

regarding the address proofs and identity proofs of the insurer.The company has

the entire right to verify the address proof and identity proofs. The policy market

has changed a lot with the advent of ULIPs.

Unit-linked policies are more in demand because of certain advantages such as

flexibility, transparency, simplicity, liquidity and efficiency in fund management.

The ULIP markets saw a lot of changes recently which has made them better and

more transparent to invest. The documents required are:

For identity proof:

Passport PAN Card

Voter's Identity Card

Driving License

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Letter from a recognized public authority or public servant verifying the identity

and residence of the customer

For address proof:

Telephone bill

Bank account statement

Letter from any recognized public authority

To understand the nuances of different types of policies and its price, feel free to

seek the help of Insurance Mall to select the right products based on your need. Or

you can directly call them on +91-22-30503050

 

Insurance Mall is the leading and first online insurance broker in India. With the

motto to make our customer delighted and proud about their decisions, we’re

always there to help them with best possible policy

 

6.2 THE PROPER PROCEDURE OF TAKING INSURANCE

POLICY?

The procedure of taking life policy is very easy. The following are the different

steps involved in taking the life insurance policy.

1. Submission of proposal form:A person desiring to take policy of life insurance

will have to fill in the proposal form supplied by the insurance company. The

proposal form requires information with regard to the health, the proposer, his

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family history, his age habits of life, the amount a kind and term of policy.

2. Submission of agent's report:The agent prepares a report on the basis of

proposal from duly filled in. the report contains the facts on the basis of proposal

form and also from the enquiry made by the agent. The contract of insurance

largely depends upon agent's report.

3.Doctor's report:The doctor of insurance company also presents a report

regarding the proposed to the company. The doctor certifies that the customer is

free from fatal diseases and there is no risk if the company issues him a life

insurance policy. The report I very important because the company evaluates the

risk of life on the basis of this report.

4. Certificate of age:The proposer will have to submit the certificate of his actual

age. The certificate is the proof of age. It is very important because the rate of

premium is determined on the basis of actual age. The customer must provide true

information to the company. In case of concealment and wrong information, the

insurance company has a right to cancel the policy.

5. Scrutiny of documents:The insurance company has the right to check the

documents filed by the customers. The contents of the proposal form, medical

report and the certificate of age are examined by the insurance company.

6. Acceptance of the proposal:On consideration of the above facts, the insurance

company decides to insure or not to insure the life of the proposer. When the

proposal is accepted the insurance company informs the customer and demands the

first premium. If the proposal is rejected, the letter of regret is sent to the customer.

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7. Payment of first premium:The proposer should pay the premium amount to the

company on the receipt of the demand notice for the premium. The insurance

contract is completed in receipt of the first premium. The company issues a receipt

for the amount of premium. The receipt acts as a contract between the insurance

company and the insured person. Later on, the company issues the life insurance

policy.

CHAPTER 7

POLICY CONDITIONS AND CLAIMS

7.1 WHAT ARE CONDITIONS FOR TAKING POLICY

1. Terms and Conditions 

At Worldwide Dive and Sail we commit to all the services offered in any of our

literature and promotional materials. The following terms and conditions form the

basis of a contract with our customer and Worldwide Dive and Sail. This is the

customers’ commitment to our company, and our commitment to our customers.

Definitions:

Unless otherwise indicated, all references to: ’us’, ’we’ or ’our’ refer to

Worldwide Dive and Sail. Likewise, any references to: ’you’, refer specifically

to Worldwide Dive and Sail’s prospective and actual clients. Clients are defined

as persons who undertake to employ any of Worldwide Dive and Sail’s

services. All references to expeditions include our dive trips, and extras

including PADI dive courses.

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Payment of Balance:

To receive confirmation of your booking, the customer must pay a minimum of

30% deposit or payment in full. The remaining balance will be due no later than 60

days before the departure date of your diving expedition. Bookings made within 2

calendar months of the departure date of your expedition must be paid in full at the

time of the booking. We reserve the right to consider the contract cancelled by you

if any payment is late.

For the convenience of all our guests we accept payment in Euro, GBP and US$.

We use XE.com to determine the rate of exchange at the time of your booking.

Please note that the revised trip cost in GBP or US$ will remain for the duration of

your booking regardless of currency fluctuations between the time of booking and

your trip departure.

Changes by you:

For a booking, if change of expedition date is requested we will try to

accommodate your date change within our space availability. If we are unable to

meet your date change requirements, normal conditions apply for cancellations.

We always reserve the right to refuse any change of expedition date once a deposit

has been made by you.

Cancellations by you:

You are entitled to cancel your holiday at any point. All cancellations are to be

made in writing, and the following charge will apply: Any cancellation made up to

2 calendar months before the sailing departure date, the customer will forfeit 30%

of the trip price.Any cancellation made after 2 calendar months prior to sailing

departure date, the customer will forfeit 100% of the trip price.Any extra bookings

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such as transfers and hotels may be 100% non-refundable and will be treated on a

case-by-case basis. You may of course, make a claim on your insurance if your

cancellation comes within the terms of the policy. When undertaking a contract

with us as a group, the leader binds the whole group contractually. If any person

cancels from within the group and that persons place cannot be substituted for any

reason, the group will be liable for the full cancellation charges for that person and

any other costs incurred.

Single Supplement:

The single supplement applies if single occupancy is requested. Single

occupancy will be charged an additional 80% of that trip rate for individual

bookings. Where the yacht has been booked as a full charter by a group, the

single supplement rate payable will be decided by the group leader or boat

charterer.Single occupancy is subject to availability.Single guests who by

default occupy a cabin to themselves and who did not request the single

occupancy, will not be charged the additional single supplement rate.

Responsibility/ Supervision/ Behaviour/ Damage & Disturbance:

On group bookings, the party leader accepts full responsibility for the good

conduct of all participants during the expedition. The party leader also

accepts responsibility for ensuring that all members of his/her group carry

adequate insurance for their diving activities. We cannot be held responsible

for ensuring that their client(s) have adequate travel insurance. Furthermore,

we cannot be held responsible for costs arising due to failure of obtaining

such a policy.

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If any equipment or property belonging to us or our suppliers is damaged or lost,

we reserve the right to make a charge to make good the damage or loss. The

members of the party will be deemed to be jointly and severable liable for any such

damage and in certain cases (at our discretion) a damage deposit may be taken at

the time of issue or occupation. You will be liable for any damage caused while

using Worldwide Dive and Sail services.

Alcohol consumption:

There are times when alcohol consumption is not responsible or appropriate.

Alcohol should be avoided prior to sunbathing or swimming as it causes

dehydration and increases the chances of an incident.The consumption of alcohol

before diving with us is not permitted. If alcohol is consumed before diving against

our advice, we will have no further responsibility of you, and at our discretion, we

may repudiate our contract with you.

Non-prescription Drug Use:

Worldwide Dive and Sail holds a strict policy against drug possession and drug use

on our yachts. We remind you that drug possession and use within Thailand is a

serious offence. We reserve the right to take appropriate action against customers

using drugs aboard our yachts.

Medical Requirements:

All passengers scuba diving whilst on holiday may be required by Worldwide Dive

and Sail to complete a medical questionnaire. If we are in any way unsure of your

fitness to dive, you will be required to undergo a medical examination. This may

result in extra cost for which you will be charged locally. No refunds will be given

if you are refused medical clearance to dive. You are strongly advised to undergo a

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full medical examination before booking your holiday.For a copy of our medical

questionnaire, please if you currently hold a diving medical be sure you take it with

you.

Pregnancy:

All females who are over 28 weeks pregnant must have a valid medical

fitness certificate prior to travel. Once 32 weeks of pregnancy has passed it

is no longer acceptable to travel by air. If you or a member of your party is

pregnant always seek doctor’s advice on whether such a service is safe. If

your GP advises against taking such a service, then we accept no liability for

you throughout the trip. This also applies to any person whose GP advices

against participating in one of our services.

Qualified Divers:

If you are a qualified diver be sure to take your certification card and log book with

you. If it has been a while since your last dive a review dive may be required by us

subject to our discretion and you will be charged according to our advertised rates.

Airport Arrival:

In light of increased airport security it has become necessary to extend pre-flight

check in times to 3 hours prior to the scheduled take-off time for your flight. If you

fail to check in on time the airline is within its rights to refuse your travel. We

cannot accept responsibility if this situation arises and any costs or losses incurred

will be your responsibility. You may of course make a claim under the terms of

your insurance policy.

Delays:

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We cannot accept any liability for delays in your flight from or to your point of

origin whether the cancellation or delay is caused by adverse weather conditions,

re-scheduling by the airline, airport authority and / or action by air traffic

controllers, mechanical breakdown or industrial action. Also, we can not be held

liable for delay of departure or lost diving days due to baggage being lost, stolen or

delayed by the airline carriers. You should check that these eventualities are

covered within your insurance policy.

Passports, Visas and Vaccinations:

Any individual entering into contract with us is entirely responsible for obtaining a

full passport (valid for at least 6 months after the return date from your travels),

visa and any vaccinations required. You must contact your GP in good time to

arrange this. We recommend that all travelers check with the relevant embassies to

ensure your entry into their country. We cannot accept any liability or costs if you

are refused entry into any of our destinations.

Diving and Weather Conditions:

Unfortunately weather patterns are hard to predict. In light of this you will have to

accept that on some occasions at the discretion of the Divemaster or Instructor it

may not be suitable or safe to conduct diving activities at your chosen diving

location. On our yachts an alternative itinerary may be necessary if weather

conditions prove too difficult for diving. We cannot be held responsible or liable

for weather patterns and the resulting loss of diving days, courses or activities. You

may of course make a claim under the terms and conditions of your insurance

policy.

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Liability:

We will accept full liability for acts and/or omissions of our employees be they

negligent or otherwise, in carrying out their contractual obligations. In addition we

accept responsibility should the service fall below a reasonable standard or prove

deficient, or unsafe.We cannot be held liable for any loss of the duration of your

stay and diving days as a result of incidences beyond our reasonable control.

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ConclusionThe Indian market offers significant top-line growth opportunities due to younger

country demographics and working population, an increasing customer base, and

regulations that maintain the development of a financially sound industry. As

regulations extend further, insurers need to acclimatize their products and business

models accordingly. Since time is running out, managing this large scale product

portfolio transition while minimizing disruption to business continuity requires the

regulator and industry players to work in tandem.

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