Professional Documents
Culture Documents
INSURANCE BACKGROUND
1
PURPOSE AND NEED OF INSURANCE
2
CHAPTER 2
LIFE INSURANCE
HISTORY OF LIFE INSURANCE
The first two decades of the twentieth century saw lot of growth in
insurance business. From 44 companies with total business-in-force as
Rs.22.44 crores, it rose to 176 companies with total business-in-force as
Rs.298 crores 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 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.
3
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. 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 cross 2000.00 crores mark of new
business. But with re-organization happening in the early eighties, by 1985-
86 LIC had already crossed 7000.00 crores Sum Assured on new policies.
4
one crores 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.
1818: Oriental Life Insurance Company, the first life insurance company on
Indian soil started functioning.
1870: Bombay Mutual Life Assurance Society, the first Indian life insurance
company started its business.
1912: The Indian Life Assurance Companies Act enacted as the first statute
to regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the
government to collect statistical information about both life and non-
life insurance businesses.
1938: Earlier legislation consolidated and amended to by the Insurance Act
with the objective of protecting the interests of the insuring public.
1956: 245 Indian and foreign insurers and provident societies are taken over
by the central government and nationalized. LIC formed by an Act of
Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5
crores from the Government of India.
5
In the financial year 2005-06, LIC has grown at 30.68%. In respect of
number of lives insured, LIC has shown a growth of over 152%. In respect
of number of schemes, LIC has a growth of 2%. LIC's market share in
number of individuals covered and number of policies stands at 77% and
81%, respectively.
Buy life insurance at the earliest. This is because the future is always
uncertain. Just as buying insurance is a necessity so also buying insurance
early in life is important too. With proper financial planning one can work
out as to how much money an individual is entitled to after the end of a
particular term. A policy that will fulfill your child's future educational
needs would have to be timed appropriately so that he receives the policy
amount at that time when he needs it the most.
6
By taking a policy early in life you not only benefit in forking out a
lower premium amount but also make a wise decision as far as insuring risks
to yourself and your family is concerned.
Among other things, the contract also provides for the payment of
premium periodically to the Corporation by the policyholder. Life insurance
is universally acknowledged to be an institution, which eliminates 'risk',
substituting certainty for uncertainty and comes to the timely aid of the
family in the unfortunate event of death of the breadwinner. By and large,
life insurance is civilization’s partial solution to the problems caused by
death.
7
Mission
Vision
8
OBJECTIVES OF LIFE INSURANCE
• Spread Life Insurance widely and in particular to the rural areas and to
the socially and economically backward classes with a view to reaching
all insurable persons in the country and providing them adequate
financial cover against death at a reasonable cost.
• Conduct business with utmost economy and with the full realization
that the moneys belong to the policyholders.
• Meet the various life insurance needs of the community that would arise
in the changing social and economic environment.
9
• Involve all people working in the Corporation to the best of their
capability in furthering the interests of the insured public by providing
efficient service with courtesy.
10
BENEFITS
Death Benefit:
On the death of the Life Assured, Sum Assured together with the
Guaranteed Additions and terminal additions, if any, become payable.
20% of such benefit amount shall be paid in lump sum and the balance
amount shall be utilized to provide an annuity of 15 years certain and for
life thereafter on the life of the handicapped dependant. The annuity rates
are guaranteed for this purpose.
Maturity Benefit:
Supplementary/Extra Benefits:
These are the optional benefits that can be added to your basic plan
11
for extra protection/option. An additional premium is required to be paid
for these benefits.
Other benefits
Aid To Thrift:
Liquidity:
Protection:
12
whereas in other savings schemes, only the amount saved (with interest)
is payable.
Tax Relief:
13
NEED FOR LIFE INSURANCE
14
These are long term investment providing protection against investment risk
and aimed to give long term return.
• Retirement:
Provisions for ones own later years become increasingly necessary
especially in a changing culture and social environment. One can buy a
suitable insurance policy, which will provide periodical payments in the old
age.
• Loan cover:
Through insurance can provide protection against outstanding loan
liability in the event of death.
15
3. UTMOST GOOD FAITH: Insurance contracts, however, are
contracts uberrimae fidei that is one base on utmost good faith or the
contract of utmost good faith. The insured is bound to disclose all the
material facts and figures known to him but unknown to the insurer.
Every fact which is likely to influence the mind of the insurer in
deciding whether to accept the proposal or in fixing the rate of
premium is material for this purpose. Similarly, the insurer is bound to
exercise the same good faith is disclosing the scope of insurance
which he is prepared to grant. In life insurance, age, income,
education, occupation, health, family size etc.are some examples of
material facts that should be disclosed at the time of entering into the
contract.
4. WARRANTIES: Warranties are an important feature of life
insurance contract. Warranties are the basis of the contract between
the proposer and insurer. If any statement, whether of material or non-
material facts and figures are untrue the contract shall be null and void
and the premium paid by him may be forfeited by the insurer. The
policy insured will contain that proposal and the personal statement
shall form part of the policy and be the basis of the contract.
16
6. CAUSE IS CERTAIN: In life assurance policy, the insurer has to
pay the insured amount one day or other because the death of the
assured or his reaching a particular age is certain to happen.
7. PREMIUM: The premium is the price for the risk of loss undertaken
by the insurer. In the case of the insurance, premium is usually
required to be paid in cash and advance payment of the premium is a
condition precedent to the creation of a binding contract of insurance.
The amount of premium for payment of insured is paid monthly or on
annual installment for a certain period. In life insurance, the premium
is calculated on the average rate of mortality and the fixed periodical
premium may continue either until death or for a specific number of
years. Premium is payable till the maturity of the policy.
17
the insurers on the ground of breach of warranty the premium can
only be recovered if it is shown there was breach ab initio.
CHAPTER 3
CLASSIFICATION OF LIFE INSURANCE POLICIES
18
To meet the above said objectives, various types of life insurance
policies are being issued by the Life Insurance Corporation of India.
• Duration of Policies
• Participation in Profit
From the above basis the following are Life Insurance Policies classified
further into:
• Policies According to Duration:
19
(a) Whole Life Policies
(b) Limited Payment Whole Life Policies
(c) Convertible Whole Life Policy.
20
• On the basis of Participation in Profit:
Under this policy the premium is payable for 35 years or till age
go whichever is more. The policies where the premium is payable
21
throughout the life of the assured is called the Whole Life Whole
Term Policy. This is the cheapest policy because the premium rate is
lower. It is useful to the dependent of the assured against his/her death
and to provide for payment of Estate Duty.
22
This policy provides the protection of death risk cover. Term
Insurance Policies issued usually for a shorter period are treated as
temporary contracts. Term assurance provides for payment only in the event
of life dropping before a certain date or age. This type is frequently adopted
as collateral security for a loan.
23
The main object of this policy is the life assured under this plan,
has an option to convert the policy, provided it is in full force, into
either a Limited Payment Life Policy or an Endowment Assurance
Policy without having to undergo fresh medical examination, at
anytime during the specified term except the last two years.
24
This is a popular policy issued by the Life Insurance Corporation of
India. The basic objectives is that the policy for the sum assured becomes
matured on the policy holder’s death or on his attaining a particular age
whichever is earlier . The period for which the policy is taken is called as
Endowment period. The premium under this policy is a little higher as
compared with term assurance. This policy is useful to the family in case of
a sudden death of the policy holder.
25
This policy provides a fund for family provision and
investment. The sum assured is payable to the policy holder for a
specific term of years either on the assured’s death or on his survival
to the stipulated term i.e. until the maturity date. Premium are payable
throughout the life time of the assured or for a selected period of years
or until prior death of the life assured.
26
This plan is designed to meet the needs of the provision relating
to marriage of any one of the family members of the policy holder.
Under this plan the sum assured together with profits shall be payable
at the end of the maturity or on the death of the life assured whichever
is earlier. Premiums are payable for the selected terms of the policy or
till death of the life assured if it occurs during the selected term.
This plan is most suitable for housing loan purpose. Under this
plan the benefits availing the policy holders on death of the life
assured during the term of the policy is thrice the basic sum payable
or on survival to the date of maturity, only the basic sum assured is
27
payable. Premiums are payable for the selected term of the policy or
till prior death of the life assured. As per the method of calculation,
paid up value will be the same as a Whole Life limited payment and a
Pure Endowment Policy.
Under this policy the sum assured will be payable on the basis
of behalf of the sum assured paid before the death of the policy
holders and the balance of the sum assured is payable at the end of the
maturity date. In the event of the death of the assured before the
attainment of the term period, full lump sum assured amount is
payable to the policy holders. Premiums are payable during the
selected term or till death if earlier.
This form of life insurance not only makes provision for the
family of the life assured in the event of his death but also to meet the
needs of a person in old age. It is also useful to meet the expenses
relating to family and provision for education and marriage of his
children. Premiums are payable during selected period of years r until
prior death of the life assured. Several purposes are fulfilled under one
single policy which is called Multi Purposes Policy.
28
This policy is designed to meet the expenses relating to
children’s education and marriage. Policies under this plan are issued
on lives of both male and female children who have not completed 18
years. This is an Endowment Assurance Policy; it provides the
protection of risk from the date of commencement of policy or from
the deferred date to the date on which the policy emerges as claimed
by the death of child or its survival to a stipulated date. This is the
cheapest form of life insurance because of low rate of premium. The
main object of this policy is to cover the risk against the life of
children on behalf of their parents and guardian.
29
Unlike single premium policy, under this policy premiums are
payable on a regular basis for selected term or till prior death. It is
useful to those persons having regular earnings. Premium is lesser as
compared to a single premium policy. The sum assured becomes
payable if the assured reaches a particular age or on the assured’s
death whichever is earlier.
30
6. On the basis of the Number of Persons Assured:
31
On the basis of Methods of Payment of Policy amount, the
policy may be:
8. Other Policies
32
This type of policy provides money back at regular intervals
before the policy expires. For example:, on a 15 years policy, one
gets 20percent of the sum assured after five years, another 20
percent on the expiry of another five years and the balance at the
end of 15 years. In case death of the sum assured occurs during the
2 years, the full sum assured is paid irrespective of installments
already paid. Thus, the policy gives money in hand plus insurance
cover. Premiums are payable for the selected term of years or till
death if it occurs within that period. The bonus additions to the
policy will be reckoned on the full sum assured and are payable at
the end of the selected term of years or at the life assured’s death,
if earlier. No loan will be granted under this policy.
Special plans
(I) Jeevan Shree: This plan also refers to “an exclusive policy for
exclusive people”. Under this plan, the maximum sum assured is 5
lakhs. Hence, it is specifically suited to high- income groups.
Basically an endowment plan with flexibility in premium paying
term including single premium. The investment will be so
managed as to ensure of guaranteed and loyalty additions-higher
liquidity.
33
(II) Capital Redemption Assurance: This plan provides for payment
of a sum of money on a specified date in exchange for periodical
premiums. There is no life assurance element and they are
independent of the duration of human life, the main factor being
accumulation of interest. In other words, to secure a capital sum to
replace a wasting asset such as machinery or leasehold property.
(III) Jeevan Aadhar: specially designed for the benefit of specific type
of handicapped dependents. This is limited payment whole life
policy with guaranteed additions at the rate of Rs.100/- per 1000
sum assured per annum, where the claimant is paid party in lump
sum and party in the form of an annuity. Full Income Tax benefit
under the section 80DD up to a premium of Rs.40, 000 per annum.
Minimum age entry at 60 years. Minimum sum assured is Rs.
50,000 premium payment term is 10, 15, 20, 25, 30 and 35.
(IV) Policies For Women: Women, now a days are free to take life
assurance policies. However, some specially designed policies suit
their needs in a unique manner; the synopsis of some these policies
are as follows:
A. Jeevan Sathi is also known a Life Partner plan where the husband and
wife are covered under this endowment policy, which gives the following
benefits.
34
On maturity, provided both are alive, full sum assured with bonus
is paid.
On the death of one of the assured during the period of the
If she/he dies, then the sum assured is paid to the nominee, but
this is before the maturity date.
The surviving partner will be paid sum assured with bonuses if
35
(IV) BIMA Nivesh: A single premium savings/ investment oriented
plan of assurance with compounding guaranteed addition to the
sum assured at the rate of 6 percent available in 5 years and 10
years terms. The scheme accepts premium for minimum sum
assured of Rs.25, 000 and the upper limit, touches the sum of Rs.
50 lakhs.
Eligibility:
(1) The key-man is holding less than 51% shares in the company
(2) Key-man and his family is holding less than 70 percent shares in
the company.
(3) Key-man is matriculate.
(4) Age at entry is less than 50 years.
Salient Features:
36
(2) Term allowed is 10 to 15 years subject to retirement age or service
contract.
(3) Key-Man Insurance is restricted to 10 times of key-man’s Annual
compensation package. Annual package include: Salary + perquisites.
National value of perquisites will be taken at 30% of Gross Annual
Salary.
(4) Double Accident benefit, extended permanent disability benefit and
term riders benefits are not allowed under key-man insurance policy.
(1) The company is protected against the financial loss in the event of
key man’s death.
(2) The company is able to create an asset for itself in the form of
premiums paid and added bonus.
(3) It generates confidence, sense of security and loyalty in the minds of
key-men.
(4) It can be given as security to bankers; it is guarantee to the creditors.
37
groups schemes. Besides providing insurance coverage which provide
funding of gratuity and pension liabilities of the employers.
38
(3) Group Gratuity Scheme: Gratuity is a statutory liability of most of
the employers which accrues to an employee for every year, of service
put in by him. As the liability accrues every year, from the point of
view of sound accounting practice year, it is desirable to provide for
this liability before the profits are determined. The Group Gratuity
Scheme provides a scientific method for funding gratuity as the
premiums are based on actuarial principles. The attractive features of
the scheme is the life insurance cover to every employee, his
dependents become entitled to substantially higher benefits.
39
private sectors who keep accurate records of their employees. Under
this scheme, out of the contribution received in respect of each
employee, a portion is utilized for the insurance cover and the
balance, known as contribution for savings, is accumulated till exit at
an attractive rate of interest, which at present is 10% p.a. The savings
contribution is returned with interest at the time of retirement, or exit
by other mode.
40
Guaranteed maintenance of lifestyle
Replacement of income
41
has grown accustomed to can prove to be severely detrimental to their
metaphysical and social well being.
These days, people tend to constantly compete within their peers and
social groups with regards to their lifestyles and related expenses. The
spending pattern is governed by advertising and credit facilities offered by
numerous financial institutions.
Since liquid funds are available at a very marginal rate from various
financial institutions, people go forth and borrow without a care being
seduced by the "Buy now, Pay later" philosophy. They are able to make the
installment payments from their regular sources of income and sustain a
standard of living that would have been beyond their means under ordinary
circumstances.
42
such painful ignominy comes from the proceeds due to the insured's family
thanks to his or her insurance policy.
The funds that will be obtained from the insurance company will
provide a buffer that will curtail any impending calamity before it can come
close enough to cause any real damage.
CHAPTER 4
ASSIGNMENT OF LIFE POLICIES
43
(2) On valid assignment, a written notice must be given to the insurer
together with a certified copy of the endorsement or instrument. Only
then the assignment or transfer becomes complete and effective on the
insurer.
(5) From the date of the receipt of the notice the insurer shall recognize
the transferee or the assignee named in the notice as the only person
entitled to the benefits named under the policy and such a person shall
be subject to the liabilities and the equities to which the transfer or
assignor was subject at the time of the transfer or assignment.
44
happening of specified event during the life time of the person whose
life is insured is valid.
The holder of a life policy has the right to nominate any person to
whom the insured money shall be payable in the event of the death before
the maturity of the policy, it is called as Nomination. The person to be
nominated is called Nominee. Nomination can be made at the time when
policy is taken. In the case of nomination, a person can nominate only on the
insurance of his own life. Thus, a policy holder of insurance is entitled to
make a nomination. The assignee or transferee of a policy can not do this.
Nomination can be changed or cancelled any number of times by the insured
before the policy matures for payment under notice to the insurers.
45
• The nomination in order to be effectual, by incorporating in the text of
the policy or by an endorsement on the policy itself and
communicated to the insures who shall register it.
• The policyholder is entitled to receive from the insurer an
acknowledgement of having registered a nomination or a cancellation
or change thereof.
• When a policy is transferred or assigned any nomination made in that
policy automatically stands cancelled.
• Where the policy matures for the payment during the life time of the
person whose life is insured, or where the nominee dies before the
policy matures for payment, the amount is payable to the policy
holders or his heirs or legal representatives.
• Where the nominee survives the person whose life is insured, the
amount shall be payable to the nominee.
Surrender Value
The term surrender value refers to the amount of money which the
insurer agrees to pay, in case the assured decides to surrender his policy
before its maturity. It is said that the policy holder wishes to surrender his
policy to the insurer and gives up his claim on it. Surrender of policy
indicates termination of the contract of insurance. The amount of surrender
value is calculated on the basis of actual premium paid and the number of
years the policy has been alive. Surrender value increases with each payment
of premium.
46
According to LIC a policy acquires surrender value only after the
payment of two or three years premium. Thus, the policy is required to have
run for three years before it acquires surrender value. In this regard some
insurance companies guarantee a minimum surrender value of 40% of the
total premium paid.
Paid Up Value
Days of Grace
47
A life insurance policy creates a continuing risk and it merely lapses if
the premium is not paid. Death of the insured during the days of grace makes
the insurance company liable to pay the money due under the policy.
When the premium is not paid within the days of grace, the policy
lapses. It may be revived during the life time of the life assured. It can be
revived within a period of five years from the due date of the first unpaid
premium and before the date of maturity.
Loans on Policies
Where a policy has a surrender value, it also has a loan value, and
assurance companies usually lend 95% of the surrender value, keeping the
balance of 5% as margin for a year’s arrears of interest. The loan may be
repaid at the convenience of the borrower. In case it is not repaid it keeps
alive with interest accumulation, to be deducted from the policy money. It
can be payable by the insurers either on its final surrender or on its maturity.
This is the best investment that an insurance company can make, as there is
never any danger of the money being lost.
Proof of Age
48
In life insurance the age of the life to the assured is important because
premium and annuity rates are based on age attained at inception of the
contract. It is particularly important in endowment policies wherein the
money is payable to the assured on attaining a certain age. The insurer may
require proof of age to be furnished at the time of proposal itself or at any
time after the issue of the policy. The evidence may be a birth certificate or
any family record of document.
Proof of Death
49
CHAPTER 5
CLAIMS
50
A Claim refers to the demand for the commitment made by the insurer
at the time of entering into the contract. For Term Insurance or Whole Life
Policies, the claim has to be paid on death of the insured. For Endowment
Policies, the claim has to be paid on death or maturity.
• Age proof
51
• Discharge voucher completely filled in.
52
f. Form of discharge executed and witnessed.
The insurer makes the payment of the claim after ensuring that the
claim is valid. In cases where death has occurred within 2-3 years of the
policy’s commencement or revival, the insurer conducts investigations to
rule out the possibility of foul play or suppression of evidence.
53
PREMIUMS
Premium is the price paid by the insured for purchasing the insurance
policy, i.e. the plan and term of assurance for the sum assured chosen by
him/her.
The premium has got to be paid by the insured person at the
commencement of the policy and at regular intervals as specified in the
contract.
54
Normally the insurance companies publish tables of premium rates.
These tables give us the tabular premium. The tabular premium is arrived at
as follows-
55
premium earns interest so as to compensate for the increased risk in the latter
years.
Thus, the risk premium charged should be after taking into account
the factors like the health, habits and age of the insured. This amount is
decided upon by the actuary.
Premium amounts also get affected if the payment is made in a
monthly, quarterly, half-yearly or yearly manner. Where the premiums are
payable on half-yearly or yearly mode, there is saving in administrative costs
as compared to the quarterly or monthly mode. Moreover, in the yearly
mode, the insurer can utilize this amount the entire year and earn interest on
it. Hence, the usual practice is to allow rebates on half-yearly and yearly
mode of payments. For monthly mode of payments, by the same logic, extra
loading is to be charged to cover up the additional administrative expenses
involved.
1. MORTALITY
2. INVESTMENT
56
As all premiums received by the insurer are invested and the insurer
expects to earn interest on the investments the actuary makes assumptions
about the future rate of interest and allows for it in the premium charged.
3. EXPENSES
4. CONTINGENCY
Premium calculation
57
The insurer grants life insurance to the life assured on the basis of the
information supplied through documents like proposal form, medical repots.
Based on this information, the insurer underwrites the life of the insured at
an appropriate rate of premium. The premium charged has to be appropriate
to the risk involved.
Before the actual calculation of premiums, one needs to understand
the various factors which affect the calculation of the amount to be paid as
premium:
• Type of Policy: Different types of policies have different benefits and
different circumstances under which the benefits become payable. The
expected cost of these benefits, based on the risk of claims, helps
determine the amount of premium.
• Age: As discussed earlier, age has a bearing on the risk of death. The
risk of death increases with age. Therefore, the premium rate usually
increases with age.
Calculation of age-
There are 3 different ways of calculating age.
Mr. Seth is a proposer for life insurance on 13-7-2002. his date of
birth is 3-9-1970.
Date of proposal 13.07.2002
Date of birth 03.09.1970
Difference 10 10 31
58
2. His age last birthday is the number of completed years of age i.e. 31
years.
3. His age next birthday is 32 years.
An insurer may follow any of the above 3 methods for calculation of
age for the purpose of premium calculation.
• Term of the Policy: For savings plan like endowments, the longer the
term, the lesser the Tabular premium, other things being equal. For
pure protection plans like term insurance, the longer the term, the
higher the tabular premium, other things being equal.
• Additional Benefits: Where the client selects additional benefits e.g.
double accident benefit or extended permanent disability benefit along
with the basic plan, there will be an additional charge.
• Sum assured: Higher the sum assured, higher is the premium
charged.
• Mode of payment of premium: The premium paid per year for
annual premiums will be lower than the sum of premiums paid per
year for policies with more frequent premium payments like quarterly,
half-yearly.
CHAPTER 6
LIFE INSURANCE UNDERWRITING
Concept of Underwriting:
Underwriting in life insurance presents more problems than other
areas, as the subjective factor is more manifest. The principles Ubberrimae
59
Fides has all the more importance in this areas as the insurer has absolutely
no opportunities to know the past history and in some cases the present
condition, unless the proposer present voluntarily discloses several traits. As
such, it is important that the proposer present a comprehensive and realistic
picture of his or her health status and other relevant areas so that risk
projected by him or her is commensurate with the premium that he or she is
going to pay. In the long run, the pooling of risk should be as close to the
expected result as possible so that the premium setting does not deviate
largely for the ultimate results.
60
It therefore, becomes the task of every life insurance company to
assess the risk it wishes to accept and on basis fix a fair and equitable
premium payable by the applicant. This possible only if the company
carefully selects and classifies the risk it assumes. The process through
which the life insurance company decides whether an application received
by it can be accepted at standard rate premium or on different terms for
rejected is called underwriting. It is otherwise called ‘Selection and
Classification of Risk’. while selection represent the first part viz., decision
to accept a proposal, classification of risks represent the second part viz., the
term on which the proposal can be accepted.
Purpose of Selection:
61
impaired health or face unusual risks because of occupation etc. a
knowledge and understanding of the various factor which influence morality
enables the company not only to select applicants but also classify them into
different group depending on the rate of the morality they are likely to
present. The main purpose of this process is to be determine the rate of
premium payable by the prospect for a risk presented by him to the company
and accepted by the company. Those lives to whom the company can offer
the same premium rates as mentioned in their in the Premium Table are
called Standard Lives. All other lives are called Sub-standard Lives that is
a. Lives subject to higher than normal morality and who can be
accepted at term different from those offered at Standard Lives
b. Those risk which the company cannot accept, otherwise called as
Declined Lives.
62
will decide on the most favorable basis open to him. This tendency is know
as ‘adverse selection’ or ‘anti selection’. This will be present whenever an
individual has freedom to buy or not to buy. To choose the plan and amount
of insurance, and to continue or discontinue a policy. The underwriting
procedures should attempt to screen out such applicants and classify them
appropriately. The process of underwriting should thus attempt to protect the
company against such adverse selection.
Factors of insurability
63
higher or lower than what was declared at the time of application.
Based on the actual age, the company will have the discretion in such
cases to modify the application, it can be submitted later; but
settlement of a claim under the policy will be subject to proof of age
being submitted.
Life Insurance Corporation of India accepts several types of
proof of age some of which are standard and some non-standard.
Usually the standard proof of age are Municipal Birth Certificate,
School/College Certificate and a Certified extract from service record
in respect of applicant who is an employment of Government, Quasi-
government or Public sector Undertakings. Where such standard proof
are not available, non-standard proofs like self-declaration are also
accepted. But certain restriction as regards plan, term of assurance,
maximum sum assured, and maximum maturity age are imposed.
There is an additional premium is payable by the applicant in such
cases.
64
a. Risk of accident to professionals as pilots, auto-racers,
electrical high tension line men, and those working in great heights.
b. Risk of health to workers in chemical factories, who are
exposed to toxic gases, fumes, etc, underground drainage workers in mines,
workers in textile/cotton mills, who are exposed to cotton dust.
c. Risk of both accident and health to workers in underground
mines.
d. Risk of environmental hazards to workers in entertainment and
liquor trades.
Occupational risk have declined in importance as a factor
affecting life insurance underwriting because of increased attention to
job safety and working conditions. Rating have either been estimated
or reduced in many occupations. LIC of India has a chart of
occupational hazards, but it removed all occupational extras up to
Rs.4 per thousand sum assured under all its life insurance plans.
5. Females lives: Females lives or be treated separately for underwriting
purpose, because they bear children and are born to diseases peculiar
to their sex. Insurable interest is another factor to be considered.
65
Personal insurance history is equally important. How much life
insurance the applicant is already carrying is a moot point. If an
applicant, who already has a large amount of life insurance in force
with one or more companies, again comes up request for new
application is not justified by the present income and finance.
CHAPTER 7
REINSURANCE
66
Functions
Risk transfer
The main use of reinsurance is to allow the ceding company to assume
individual risks greater than its size would otherwise allow, and to protect
the cedant against catastrophic losses. Reinsurance allows an insurance
company to offer larger limits of protection to a policyholder than its own
capital would otherwise allow.
Income smoothing
Reinsurance can help to make an insurance company’s results more
predictable by absorbing larger losses and reducing the amount of capital
needed to provide coverage.
Surplus relief
Reinsurance can improve an insurance company's balance sheet by
reducing the amount of liabilities, and thereby increasing surplus. Surplus =
assets less liabilities, is roughly the same as shareholder equity on a balance
sheet of a non-insurance company.
67
Arbitrage
The insurance company may be motivated by arbitrage in purchasing
reinsurance coverage at a lower rate than what they charge the insured for
the underlying risk.
Retrocession
68
In a 50% quota share the insurance company could then be left with
half the premium and the entire loss. This is a genuine concern when
purchasing reinsurance from a reinsurer that is not domiciled in the same
country as the insurer.
CHAPTER 8
PRICING & CHANNELS OF DISTRIBUTION
69
premium rates to be charged for different policies and from people of
different age.
If the premium charged is very low, the company would not be able to
collect sufficient amount to pay claims, bear expenses and earn some profit.
On the other hand, excessively high premium charged will result in loss of
prospective clients of the insurance company because company may lose the
prospective insurer to its competitors in the market.
PRICING OBJECTIVES
The following are the objectives kept in mind while deciding upon the
pricing of various insurance products:
I. ADEQUACY OF RATES
70
to pay various operating expenses, to pay the claims and at some profit
margin. Insurers do conduct periodic reviews to assess whether the initial
premium levels established are equitable and not too high i.e. adequate.
III. REASONABLENESS
71
The rates of the premium charged to the policyholders should
not be too high because it will lead to loss of insurance business to the
competitors in the industry. Charging excessive premium is therefore
unfair to the customers.
IV. SIMPLICITY
72
Every insurer incurs certain expenses or administrative costs
related to the service provided. The administration cost incurred may
depend on frequency of payment of premium and the volume of records
kept. If the premium is paid annually, cost is lesser as compared to
quarterly and half yearly or monthly payments.
CHANNELS OF DISTRIBUTION
73
channels of distribution i.e. intermediaries which fetch products/services
from the place of the manufacture to the place of ultimate consumers.
74
CHAPTER 9
INFORMATION RELATING TO PRIVATE INSURANCE
(Life)
Bank of Punjab (BoP) announced its tie up with the state-owned life
insurance major LICI for distributing the latter’s insurance products. The
Indian Cricket Board will launch a unique insurance policy offered by LICI
for its players wherein their returns would rise by 43 percent annually
compared to an existing benevolent fund.
75
insurance venture. Private insurance players are targeting Non-resident
Indians (NRIs) as the premiums coming from this segment of society are
huge. Birla Sun Life Insurance Company and SBI Life Insurance are coming
up the special insurance-cum-investment products targeted at NRIs.
The Supreme Court has ruled that an insurance company which has
issued a Third Party (TP) liability policy has to pay compensation to the
victims of a road accident even if the driver of the vehicle which meets with
an accident had a fake driving license.
76
Important activities in life insurance companies
77
Keeping track of the performance of insurance contract like timely
payment of renewal premium.
CASE STUDY
78
reduce cost, focus on growing market segments, and provide a wide range of
services. The insurance company therefore decided to stay ahead of the pack
by implementing Enterprise Content Management (ECM). by Kumar
Dawada
CENTRALISED MODEL
79
The paradox of a service industry is that it relies upon standardisation
but requires customisation. “The insurance application forms and papers
were standard but there was a need to know that it was sent by an individual.
Hence, there was a scope for incorporation of unique features and
processing. Parameters were required to route the data intelligently to the
right people,” recalls Subramanian.
CHANGE MANAGEMENT
80
then converted into business and technical specifications. Then a prototype
was created to see how comfortable people were with its usage. As the staff
was already IT-savvy the transition was smoother than expected,” confides
Subramanian.
COMPATIBILITY ISSUES
81
pay dividends. So, we focussed on integration from the transaction
processing system into the overflow system,” elaborates Subramanian.
82
ING security requirements. We are not fully-compliant but are moving in
that direction. We have a Disaster Recovery (DR) site in Hyderabad. The
DR is based on overnight transfer of tapes. We are planning to make it a
warm site in the not too distant future,” reveals Subramanian.
CONCLUSION
The industry is fast becoming customer centric. With more and more
customers demanding innovative insurance solution to their problems,
insurers are competing with each other. Still life insurance products are more
attractive to the investors. The key information regarding investor’s
preference that will guide future life insurance product mangers.
83
Thus, Life insurance today plays a major role in ones life at various
stages. Considering the benefits it offers one cannot but give a thought to
buying an insurance policy at the earliest.
Most important of all insurance provides you with that unique sense
of security that no other form of investment provides. It gives you a sense of
financial support especially during that time of crisis irrespective of the
fluctuations in the stock market.
BIBLIOGRAPHY
84
WEBLIOGRAPHY
www.licindia.com
www.ingvysya.com
85