Unit-1Basic Principles of Insurance

8/2/2019 Unit-1Basic Principles of Insurance

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UNIT-1LIFE INSURANCE

BASIC PRINCIPLES

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INDIAN INSURANCE SECTOR

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The three phases

PhaseI (1918-1972)

245 Life insurancecompanies (pvt)

107 General insuranceCompanies (Pvt)

Phase II (1956-2000)

All Pvt Life insurance cos

Nationalized & LIC emergedin 1956.

All General Insurance Cosnationalized one cos with 4subsidiaries emerged.

Phase III (After 2000)

Opened for privatesector.

16 life & 16 geninsurance

cos emerged apart fromexisting public sectorunits


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INSURANCE INDUSTRY IN INDIA

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Public Sector Private sector

Life

LIC

Post officeinsurance

General

GIC & its

4 subsidiaries

Life

16 Cos

General

16 Cos

IRDA April-2000


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TYPES OF INSURANCE

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Life insurance Non life insurance

General insurance Miscellaneous insurance

Marine insuranceFire insurancePersonal accident insurance

Fidelity guarantee insuranceCrop insuranceBurglary insurance

Flood insurance


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ROLE & FUNCTIONS OF INSURANCE

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Primary Others

Providing protection

Collective risk bearing

Evaluating risk

Provide Certainty

Preventing losses

Covering larger risks with

small capital

Helps in the developmentof larger industries

Risk Free trade

Medium of earning

foreign exchange

Is a savings andinvestment tool

Secondary


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LIFE INSURANCE DEFINED

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A contract of life insurance is that in which one party agrees to pay a given

sum on the happening of a particular event contingent upon the duration

of human life, in consideration of the immediate payment of a smaller sum

or certain equivalent periodical payments by another.

..Bunion

Life insurance business is the business of effecting contract upon human life

insurance acts


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SALIENT FEATURES OF LIFE INSURANCE

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1. Instrument of savings

2. Provides social security

3. Risk coverage starts from the date of accepting of proposal.

4. Beneficiary nominee/ legal heir stands to gain

5. Policy can be assigned / mortgaged.

6. Policy holders can seek loan against the policy

7. Certain policies cover up for treatment to serious ailments

8. Money can be set aside for childrens education/ marriage

9. Provision for old age.

10.I T benefits


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POLICY SPECIFICATIONS

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A life insurance contract will specify

Sum assured Term

Premium Mode of paymentof premium

Premium payingperiod

Participation inprofits


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Encourages compulsorysavings & forces thrift

Easy settlement & protection

against creditors

Superior to an ordinary

Savings plan with tax relief

Marketable & Liquid


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MODERN CONCEPT OF LIFE INSURANCE

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Economic principle Legal principles

Risk suffered by few isspread over large number ofpeople who face the same

risk.

Spread of risk is theeconomic principle of lifeinsurance

Fixing the contribution orpremium

Everyone shouldcontribute premiumcommensurate with therisk he brings to the fund.

Establishing relationshipbetween individual & the fund.

Relevant law of land will haveto be abided to establishlegally acceptableunderstanding , relationships &mutual understanding.

Actuarial principles


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SCIENTIFIC BASIS OF LIFE INSURANCE

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Shared risk Predictablemortality

Law of largenumbers

Investedassets

Fair & accurateRisk selection

Principle of shared risk works when law of large numbers is applied. Larger the

group less impact on the death of an individual.

Though it is not possible to predict an individuals death, tracking & recording data

about health , lifestyle & mortality trends can give insurer a reasonable informationabout life expectancies. This data is recorded in mortality tables. Once this is known,the insurance companies can predict the number of people who may die in a given

Year & can calculate the premium rates.

The premium is invested for earning income . The projected income is factored intopremium. A % of assets is set aside in company reserves to reduce the impact ofunexpected events.

Insuring people of good health. Every insurance policy coverage is with reasonablerisk


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LAW OF LARGE NUMBERS

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The principle of risk sharing works only when the law of largenumbers Is operational

This is a scientific principle which states that larger the group

lesser the impact of death of one member of the group.

A group with just few hundred members will not work. The base willbe fragile.

Hence larger the group , successful will be the insurance business


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ECONOMIC BASIS OF INSURANCE

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Threats / risks for economic stability

a. Physical & mental disability due to accident or disease.

b. Retirement from active work

c. Death

Three ways to ensure economic stability

1. Social security scheme of the government for BPL categories.

2. Group effort (group life/ general/ health schemes)

3. Individual effort


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VARIOUS ECONOMIC USES OF INSURANCE

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1. Financial security to the family

2. Potent savings instrument

3. Education for children / marriage for daughters

4. Repay the outstanding of housing loan

5. Financial independence at old age in case of survival of the person

6. Insuring debtors in case of business organizations if the debtordies .

7. Insuring the life of partners to pay to the legal heirs & ensure thatthe amount in business is retained.

8. Group insurance for employees .

In the event of the untimely & premature death of bread winner


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HUMAN LIFE VALUE (HLV)

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Proposed by Late S S Hubner in 1924.

HLV is one segment of the general theory of human capital.

People are important element of national wealth

The productive superiority of technically advanced countries is dueto Human capital

Human life is subject to loss due to premature death, temporarydisability , total disability & retirement.

The purpose of life insurance is to protect the family in the event ofany effect on the earning potential of the individual.

HLV is the measure of the actual future earnings of an individual.

It is the capitalized value of an individuals net future earnings

(after maintenance expenses)


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TYPES OF INSURANCE POLICIES

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All the plans of insurance are a combination of both term insurance element& pure endowments element in different proportions.

These two elements (Term & endowment ) are the basic building blocks of allLife insurance products.

Thus life insurance products can be divided on the basis of the following

1. Duration of the policy

2. Methods of premium

3. Participation in profits

4. Number of lives covered.

5. Methods of payment of the sum.


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IMPORTANT POLICIES

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EndowmentsAssurance

Whole life witha. profitsb. Limited planc. Single premiumd. Convertible W L plan

Money backWith profits

Childrens deferred

Assurance plan

Mediclaim policy Group insurance

ULIP Key man

Assignment-To study & submit a note on the LI plans with features of different companies


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BASIC PLANS OF LIFE INSURANCE

Term insuranceplan

Wholelife plan

Endowmentsplan

Special plans Unit linkedInsuranceplans

Assignment

Study in detail the following aspects

1. Combination of term insurance & pure endowment2. Flexible premium plans3. Variable annuities4. Family protection policies5. Disability income policies6. ULIP


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STANDARD TYPE OF POLICY DOCUMENT

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Heading Preamble

Operative clause Proviso

Schedule Attestation

Conditions &

privilegesgoverningthe agreement

Any special clause

or endorsementAttached to the policy

Assignment

To discuss in detail the various aspects as mentioned above


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RIDERS

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Add-ons to the basic policy to supplement the cover provided.

It can also be set of riders.

The most commonly used riders in life policies are

1. Waiver of premium in case of total disability

2. Accidental death & dismemberment Twice the amount of face value.

3. Guaranteed purchase option- Additional cover without any medical checkup.

4. Accelerated benefit riders- An early payment of some portion due toinjury/ illness


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ASSIGNMENT- NOMINATION

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Assignment is legal transference. It is a method by which a policy holdercan transfer his interest to another person.

It can be done by endorsement on the policy/ as a separate deed.

It can be conditional/ absolute.

Nomination is an act by which the policy holder authorizes anotherperson to receive the policy moneys . The authorized person is nominee.

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ASSIGNMENT & NOMINATION

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All rights pass to assignee

Consideration essential

Irrevocable

Property in the policy passes toAssignee

Assignee has right to sueunder the policy

Entitled to receive the amount in the eventof the death of policy holder

Not essential

Revocable. Nominee can be changed

Gets right to receive the insured amount.

Nominee has no right to sue

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SURRENDER VALUE- PAID UP VALUE

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S V is the amount which is payableby the insurer before the maturitydate

S V is the expression of desire ofnon continuation of the policy

S V represents the present cashvalue of the policy

S V is calculated for each class ofpolicy , premium paid for years for

which policy is in force

Increases with each premium paid

Entitlement of the policy holderRegarding portion of policy amtThat bears to the premium till date

No such desire

Value payable on assureds deathOr at the time of maturity

Calculated on the basis of no ofyears , premium is paid, payable &

sum assured with profits

Always higher than the S V since itnot required to be paid.

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OTHER ASPECTS

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Foreclosure Suicide

Closing beforematurity date.

Action taken whentwo or moreinstallments on loanare due

If principle / intereston the loan is morethan S V , the policywill be subject toforeclosure.

15 to 30 days is

given to thepolicy holderbeyond the duedate to makepayment of thepremium.

Liability of insurer is

modified& limited in case ofsuicide.

Insurer will not paythe insured amount in

some cases thoughIndian law states thatthe company cannotavoid payment on theground of suicide.

Days of grace Revival

Policy lapses

When premium isnot paid withingrace period.

Normally it can berevived within a

period of 5 yearsFrom the due dateof last paidpremium.

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RISK & INSURANCE

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Risk is the un certainty of loss

Risk due to ownership or transport vehicle

Fidelity risk

Loss due to others failure

Property

Personal

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CLASSIFICATION OF RISK

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Personal Property Liability Others failure Fidelity Ownership

Prematuredeath

Old agedeath

Damage/ use ofThe property

WrongcommittedDue toHuman mistakeseffecting others

failure to meetThe obligation

DishonestyOf employees

DamageOrLoss toThevehicle

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FEATURES OF RISK MANAGEMENT

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Risk management may be defined as identification of risk, analysis of risk& economic Control of the risk

Risk management evaluates the risks identified in the risk assessmentprocess , selects & implements the plan of action that are required to

control the risk

Risk management is vital tool in the modern business / trade/human activities

It is not only essential to prevent the risks but also to control & reduce them

Risk management leads to maximum social , political & economic development.

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FEATURES OF RISK MANAGEMENT

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Risk management helps to

1. Create right corporate policies & strategy.

2. Manage men/ machine effectively

3. Evaluate risk confronted by the business.

4. Effectively handle, spread , monitor & insure the risks

5. Introduce various plans & techniques to minimize the risks.

6. Create risk awareness among the people.

7. Avoid cost , disruption & unhappiness relating to risks.

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OBJECTIVES OF RISK MANAGEMENT

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Protecting employees from accidents that might result in death / injury.

Due attention given to cost of handling risks.

Effective utilization of resources

Maintaining good relation with the society & public.

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SCOPE OF RISK MANAGEMENT

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Control of loss Financing of loss Internal risk control

Extra precautions

Reduce level of riskyactivities

Risk retention &self insurance

Buy insurance policyContracts

Non insurance risktransfer

Diversification

Investment in riskinformation

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METHODS OF HANDLING RISKS

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PreventionOf risk

Shifting/transferring

risk

ReductionOf risks

AcceptanceOf risk

Spreading ofrisks

Assignment

Discuss various aspects of the 5 components of handling the risks

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UNIT-1CONCLUDED

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Unit-1Basic Principles of Insurance

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