Insurance and risk

The possibility of happining unwanted result or outcome is called risk Risk conc
erns the deviation of one or more results of one or more future events from thei
r expected value. Technically, the value of those results may be positive or neg
ative. However, general usage tends to focus only on potential harm that may ari
se from a future event, which may accrue either from incurring a cost Risk is th
e possibility of a loss. Risk sometimes denotes an object that is a cause of ris
k, or a person or property that would be risky to insure. Thus, a heavy drinker
would probably be a risk as a driver, or a wooden building would be a poor risk
for fire insurance. There are two approaches of risk estimation. Subjective risk
is what an individual perceives to be a possible unwanted event. Most people re
alize, for instance, that it’s possible for them to have an accident, or a heart a
ttack or some other health problem. Or that they will lose money buying lottery
tickets. How much subjective risk people experience depends on their history and
their expected possibility of its occurrence. Somebody who has lost a lot of mo
ney in the stock market will probably feel more risk investing in the market tha
n someone who has profited handsomely. Subjective risk may alter the behavior of
the risk taker if it is a very undesirable risk, or one that has a good chance
of occurring if something is done. Thus, someone who was in a bad auto accident
might drive much more carefully than someone who has never been in one.
Objective Risk is the deviation of the actual outcome from the expected.
Types of Risk
Risk can be categorized as to why the risk exists, and to whom it affects. Pure
risk is a risk in which there is only a possibility of loss or no loss—there is no
possibility of gain. Pure risk can be categorized as personal, property, or leg
al risk. Personal risks are risks that affect someone directly, such as illness,
disability, or death. Property risk affects either personal or real property. T
hus, a house fire or car theft are examples of property risk. A property loss of
ten involves both a direct loss and consequential losses. A direct loss is the l
oss or damage to the property itself. A consequential loss ( indirect loss) is a
loss created by the direct loss. . Legal risk is a particular type of personal
risk that you will be sued because of neglect, malpractice, or causing willful i
njury either to another person or to someone else s property. Legal risk is the
possibility of financial loss if you are found liable, or the financial loss inc
urred just defending yourself, even if you are not found liable. Most personal,
property, and legal risks are insurable. Speculative risk differs from pure risk
because these is the possibility of profit or a loss. This
characterizes most financial investments. Most speculative risks are uninsurable
, because they are undertaken willingly for the hope of profit. Pure risk is ins
urable, because the law of large numbers can be applied to forecast future losse
s, and, thus, insurance companies can calculate what premium to charge based on
expected losses. On the other hand, speculative risks have more varied condition
s that make estimating future losses difficult or impossible. Also, speculative
risk will generally involve a greater frequency of loss than a pure risk. For in
stance, people do many things to protect their lives, or their property, but peo
ple willingly engage in speculative risks, such as investing in the stock market
, to make a profit; otherwise, a person can avoid most speculative risks simply
by avoiding the activity that gives rise to it. However, unlike pure risk, socie
ty benefits from speculative risks. Investments benefit society, or the risk of
starting a business helps to create jobs and pay taxes for society, and can lead
to economic growth, or even technological advancement. Because the only possibi
lity of a pure risk is loss or no loss, there is no possibility of a gain. Risk
can also be classified as to whether it affects many people or only a single ind
ividual. Fundamental risk is a risk, such as an earthquake or terrorism, that ca
n affect many people at once. Economic risks, such as unemployment, are also fun
damental risks because they affect many people. Particular risk is a risk that a
ffects particular individuals, such as robbery or vandalism. Insurance companies
generally insure some fundamental risks, such as hurricane or wind damage, and
most particular risks. In the case of fundamental risks that are insured, insura
nce companies help to reduce their risk of great financial loss by limiting cove
rage in a specific geographic area and by the use of reinsurance, which is the p
urchase of insurance from other companies to cover their potential losses. Howev
er, private insurers do not insure many fundamental risks, such as unemployment.
These risks are generally insured by the government, because the government has
some control over economic risks through specific policies, such as monetary po
licy, and law. Fundamental and particular risks can be pure or speculative risks
. Fundamental risks are risks that affect many members of society, but fundament
al risks can also affect organizations. For instance, Enterprise risk is the set
of all risks that affects a business enterprise. Speculative risks that can aff
ect an organization are usually subdivided into strategic risk, operational risk
, and financial risk. Strategic risk results from goal-oriented behavior. A busi
ness may want to try to improve efficiency by buying new equipment or trying a n
ew technique, but may result in more losses than gains. Operational risks arise
from the operation of the enterprise, such as the risk of injury to employees, o
r the risk that customers data can be leaked to the public because of insufficie
nt security.
Financial risk is the risk that an investment will result in losses. Because mos
t enterprise risk is a speculative risk, and because the enterprise itself can d
o much to lower its own risk, many companies are learning to manage their risk b
y creating departments and hiring people with the express purpose of reducing en
terprise risks.
Peril and Hazard
Risk is the chance of loss, and peril is the direct cause of the loss. If a hous
e burns down, then fire is the peril. A hazard is anything that either causes or
increases the likelihood of a loss. There are different types of hazard. A phys
ical hazard is a physical condition that increases the possibility of a loss. Th
us, smoking is a physical hazard that increases the likelihood of a house fire a
nd illness. Moral hazards are losses that results from dishonesty. Thus, insuran
ce companies suffer losses because of fraudulent or inflated claims. In other wo
rds the possibility of occuring lossesbecause of the wrong and dishonest behavio
r of the insured is called maral hazard.
Distinction Between Moral Hazard and Morale Hazard
The distinction between moral and morale hazard in insurance is one of intention
, but in other disciplines, such as banking, the term moral hazard is used in a
more general sense that includes morale hazard. Moral hazard is often applied to
a receiver of funds, such as a borrower, and means that there is a risk that th
e receiver of funds will not use the money as was intended or that they may take
unnecessary risks or not be vigilant in reducing risk. This definition includes
not only intentional dishonesty, but also a change in behavior that results fro
m using someone else s money, which, in insurance, would be described as morale
hazard.
Insurance
Insurance is the transference of financial loss due to risk to a company or othe
r organization. The company accepts this transference for a periodic premium, an
d profits by collecting more in premiums and making more from the investments of
those premiums than it pays out in claims, which are payments to the insured fo
r the losses they incurred.Insurance companies can only make a profit if they un
derstand risk and the frequency and severity of its occurrence. One way to study
risk is to observe the actual number of losses to the total possible.
The Importance of Insurance :
When you hear the word insurance, the words boring and mundane probably enter yo
ur mind. It is realized that insurance is not a fun topic to discuss or think ab
out, yet it is important and serves to protect your financial future. It is comf
orting to think that nothing will ever happen to you and that you are invincible
. But odds are that you are likely to get into a car accident or have some type
of health problem at some point in your life, and when that happens, you will wa
nt to have insurance. So when you question whether you need insurance, the answe
r is a resounding yes, you definitely need insurance.
It may seem like insurance is a waste of resources- spending money on something
that may or may not happen. Since you cannot predict the future, it is important
to protect yourself and your possessions against damage and harm. Insurance is
all about protection- it protects you against an unfortunate incident such as a
car accident, a robbery, or an illness. The moment an unexpected ill-fated event
happens, you will be so glad you have insurance. Medical bills from a minor acc
ident can deplete your savings and force you into bankruptcy. Insurance is not a
rip off, but rather an essential financial service. Insurance can be tedious, s
tressful, and mind boggling-- trying to figure out what you need, what you don t
need, and how much you need. Basically, there are four areas that most people a
re concerned about insuring: their life, their health, their possessions, and th
eir finances. When deciding on what type of insurance you need, you must first a
sk yourself some basic questions. What is most valuable to you? Your health? You
r car? Your material possessions? If you die what would the financial result be?
Are you supporting any dependents such as a child or other family member? Most
of you probably do not support dependents, so life insurance is not necessary. W
hat type of health are you in? Would you be able to support yourself if you beca
me sick or disabled? For most people, the answer is no, so you probably need to
buy disability insurance. What would happen if you got sick? Can you afford to g
o to the doctor without health insurance? Health insurance is something you simp
ly must have. Most employers offer health insurance to employees at reasonable r
ates, so definitely choose a health insurance plan that your employer offers.
Functions Of Insurance
In simple terms, insurance is a protection against financial loss arising on the
happening of an unexpected event. In most countries especially the third world
the insurance sector is still in its infancy state and it comes last on the prio
rity list due to a number of reasons among which ignorance is out standing. All
individuals have assets both tangible ;the house, car, factory, or intangible; v
oice of a singer, leg of a footballer the hand of an author.....etc all these ca
n be insured because they run risk of becoming non functional through a disaster
or an accident.The concept of insurance is quite advantageous and plays a numbe
r of basic roles as may be seen below. The functions of Insurance can be bifurca
ted into two parts: 1. Primary Functions 2. Secondary Functions 3. Other Functio
ns The primary functions of insurance include the following: Provide Protection
- The primary function of insurance is to provide protection against future risk
, accidents and uncertainty. Insurance cannot check the happening of the risk, b
ut can certainly provide for the losses of risk. Insurance is actually a protect
ion against economic loss, by sharing the risk with others. Collective bearing o
f risk - Insurance is a device to share the financial loss of few among many oth
ers. Insurance is a mean by which few losses are shared among larger number of p
eople. All
the insured contribute the premiums towards a fund and out of which the persons
exposed to a particular risk is paid. Assessment of risk - Insurance determines
the probable volume of risk by evaluating various factors that give rise to risk
. Risk is the basis for determining the premium rate also Provide Certainty - In
surance is a device, which helps to change from uncertainty to certainty. Insura
nce is device whereby the uncertain risks may be made more certain. The secondar
y functions of insurance include the following: Prevention of Losses - Insurance
cautions individuals and businessmen to adopt suitable device to prevent unfort
unate consequences of risk by observing safety instructions; installation of aut
omatic sparkler or alarm systems, etc. Prevention of losses causes lesser paymen
t to the assured by the insurer and this will encourage for more savings by way
of premium. Reduced rate of premiums stimulate for more business and better prot
ection to the insured. Small capital to cover larger risks - Insurance relieves
the businessmen from security investments, by paying small amount of premium aga
inst larger risks and uncertainty. Contributes towards the development of larger
industries - Insurance provides development opportunity to those larger industr
ies having more risks in their setting up. Even the financial institutions may b
e prepared to give credit to sick industrial units which have insured their asse
ts including plant and machinery. The other functions of insurance include the f
ollowing: Means of savings and investment - Insurance serves as savings and inve
stment, insurance is a compulsory way of savings and it restricts the unnecessar
y expenses by the insured s For the purpose of availing income-tax exemptions a
lso, people invest in insurance. Source of earning foreign exchange - Insurance
is an international business. The country can earn foreign exchange by way of is
sue of marine insurance policies and various other ways. Risk Free trade - Insur
ance promotes exports insurance, which makes the foreign trade risk free with th
e help of different types of policies under marine insurance cover.
Essentials of insurance contract
1. Offer and Acceptance: When applying for insurance, the first thing we do is t
o get the proposal form of a particular insurance company. After filling in the
requested details, we send the form to the company. This is our offer. If the in
surance company accepts our offer and agrees to insure us, this is called an acc
eptance. .
2. Free consent3.Legal consideration: This is the premium or the future premiums
that you have pay to your insurance company. For insurers, consideration also r
efers to the money paid out to you should you file an insurance claim. This mean
s that each party to the contract must provide some value to the relationship. 4
. Legal Capacity: You need to be legally competent to enter into an agreement wi
th your insurer. If you are a minor or are mentally ill, for example, then you m
ay not be qualified to make contracts. Similarly, insurers are considered to be
competent if they are licensed under the prevailing regulations that govern them
. 5. Lawful objective: If the purpose of your contract is to encourage illegal a
ctivities, it is invalid.Therefore, the objective of insurance must be lawful. I
nsurance is a cover used for protecting a person from the financial losses. Fina
ncial losses can take many forms. There are risks to our investments, liabilitie
s for our actions, and risks to our ability to earn income.The insurer and the i
nsured are the main two parties involved in insurance. The insurer is the insura
nce company which will provide the cover to the insured against any financial lo
sses. The insured may be an individual person or a group of people like an emplo
yer, members of a society, etc.
Basic categorization of Insurance
There are mainly two broad categories of insurance •Life insurance •Non-life insuran
ce Life insurance products include Life term policies, which give clean risk cov
erage of only the death benefit, whereas endowment or money back policies have a
risk as well as savings component i.e. death as well as maturity benefit. The l
ife insurance also includes Unit - Linked Policies in which there is a risk comp
onent and a savings component, which is invested in equity, debt or gilt funds,
depending on the insurance company. Non Life insurance products include property
or casualty, health insurance or house, fire, marine insurance etc. This insura
nce category deals with all the non-life aspects of an insured like their house,
health, land, office, etc which might bring financial loss. All risk are not in
surable, therefore for a risk to be an insurable the following things must be pr
esented in a particular risk. In other words, from the view point of insurer the
following essentials must be presented in the insurable risk. •Definite Loss - Th
e event that gives rise to the loss that is subject to insurance should, at leas
t in principle, take place at a known time, in a known place, and from a known c
ause. The classic example is death of an insured on a life insurance policy.
•Unintentional or Accidental Loss - The event that comprises the trigger of a clai
m should
be accidental, or at least outside the control of the beneficiary of the insuran
ce The loss should be pure, in the sense that it results from an event for whi
ch there is only the
opportunity for cost. •Huge Loss - The size of the loss must be meaningful from th
e perspective of the insured. Insurance premiums need to cover both the expected
cost of losses, plus the cost of issuing and administering the policy, adjustin
g losses, and supplying the capital needed to rationally assure that the insurer
will be able to pay claims. •Affordable Premium - If the probability of an insure
d event is so high, or the cost of the event is so large, that the resulting pre
mium is large relative to the amount of protection offered, it is not likely tha
t anyone will buy insurance, even if on offer. •A large number of identical covera
ge units - The vast majority of insurance policies are provided for individual m
embers of very large classes. The existence of a large number of identical cover
age units allows insurers to benefit from the so-called "law of large numbers,"
which in effect states that as the number of coverage units increases, the actua
l results are increasingly likely to become close to expected results. •Measurable
Loss - There are two elements that must be at least estimatable, if not formall
y calculable: the probability of loss, and the attendant cost. Probability of lo
ss is generally an empirical exercise, while cost has more to do with the abilit
y of a reasonable person in possession of a copy of the insurance policy and a p
roof of loss associated with a claim presented under that policy to make a reaso
nably definite and objective evaluation of the amount of the loss recoverable as
a result of the claim.
•Limited risk of terribly large losses - If the same event can cause losses to num
erous
policyholders of the same insurer, the ability of that insurer to issue policies
becomes constrained, not by factors surrounding the individual characteristics
of a given policyholder, but by the factors surrounding the sum of all policyhol
ders so exposed.
•
priciples of insurance
1. Insurable Interest
The person getting an insurance policy must have an insurable interest in the pr
operty or life insured. A person is said to have an insurable interest in the pr
operty if he is benefited by its existence and be prejudiced by its destruction.
Without insurable interest the insurance contract is void. The ownership of a p
roperty is not necessary for establishing insurable interest. A banker has an in
surable interest in the property mortgaged to it against a loan. An employer can
insure the lives of his employees because of his pecuniary interest in them. In
the same way, a creditor can insure the life of his debtor. A person cannot ins
ure the property of a third party, because he does not have an insurable interes
t in it. In case of fire insurance, insurable interest must exist both at the ti
me of contract and at the time
of loss. In marine insurance, however, insurable interest must exist at the time
of loss. It may or may not exist at the time of contract. In case of life insur
ance, the persons taking up a policy should have insurable interest in the life
of insured person at the time of taking up the policy. It is not necessary that
he should have insurable interest at the time of maturity also. Suppose a person
gets an insurance policy on the life of his wife. Later on the wife is divorced
. The policy will not become void because the husband ceases to have an insurabl
e interest. Insurable interest in different polices can be explained as follows:
Life Insurance Following persons have insurable interest in life insurance cont
ract: •An employer in the life of an employee during the course of employment. •A pa
rtner is the life of other partners in case of partnership. •Husband in the life o
f his wife or vice-versa. •A creditor in the life of his debtor to the limit of th
e amount of his debt. •A son in the life of his father on whom he is dependent. •A d
ependent to the extent of support he is getting. •A surety in the life of his prin
cipal to the extent of his guarantee. Fire and Marine Insurance Under these cont
racts, following persons have insurable interest; •Mortgagee to the extent of amou
nt of loan he has given. •Owner of the property in his property. •Wife and husband i
n each other’s property. •An agent in the goods of his principal.
2. Utmost Good Faith
The insurance contract is founded on the basis of utmost good faith on the part
of both the parties. It is obligatory on the part of the proposer (one who wants
to get an insurance policy) to disclose all material facts about the subject to
be insured. If some material facts come to light later on then the contract can
be avoided at the discretion of the insurer. The amount of premium is fixed on
the basis of all the facts supplied to the insurance company. If some facts are
withheld, then the amount of premium will not be properly settled. The insurer s
hould also disclose the facts of the policy to the proposer. So utmost good fait
h on the part of
both the parties is a must.
3. Indemnity
The principle of indemnity is applicable to all types of insurance policies exce
pt life insurance. Indemnity means a promise to compensate in case of a loss. Th
e insurer promise to help the insured in restoring the position before loss. Whe
never there is a loss of property, the loss is compensated. The compensation pay
able and the loss suffered should be measurable in term of money. The insured wi
ll be compensated only upto the amount of loss suffered by him. He will not earn
profit from the contractor. The maximum amount of compensation will be upto the
value of the policy. The value of the policy undertaken is fixed at the time of
contract. The actual amount of loss suffered is compensated and the value of po
licy is only the maximum limit. The principle of indemnity is not applicable in
case of life insurance contracts, because it is not based on the principle of co
mpensation. The loss of life cannot be compensated by any amount of money.
4. Principle of Contribution
Sometimes a property is insured with more than one company. The insured cannot c
laim more than total loss from all the companies put together. He cannot claim t
he same loss from different companies. In this case he will be benefited by the
insurance which runs counter to the principle of indemnity. A person cannot be r
estored to a better position than before the loss occurred. The total loss suffe
red by the insured will be contributed by different companies in the ratio of th
e value of policies issued by them. So companies make a contribution to restore
the previous position of the insured. For example, A has a property of one lakh
rupees. He gets an insurance policy for Rs. 50,000 from R & C. and Rs. 50,000 fr
om S & Co. Because of fire, property is destroyed to the extent of Rs. 40,000. A
cannot claim a total sum of Rs. 40,000 from either of companies from both compa
nies to the extent of Rs. 20,000 from each. In case he claims Rs. 40,000 from R
& Co. then S & Co. will pay Rs. 20,000 to R & Co. So this is known as the princi
ple of contribution.
5. Principle of Subrogation
The principle of subrogation is applicable to all insurances other than the life
insurance. If the insured party gets a compensation for the loss suffered by hi
m, he cannot claim the same amount of loss from any other party. The rights of c
laiming the loss are shifted to the insurer (Insurance Company), for example, a
gets his house insured for Rs. 50,000 with an insurance company. The house is in
tentionally destroyed by B. A claims the loss from the insurance company. A cann
ot sue B for getting the compensation because he has already been compensated by
the insurance company. Now, insurance company can sue B on behalf of A because
of making good the loss suffered by A, the insurance company steps into the shoe
s of A. 6. Mitigation of loss When the event insured against takes place, the po
licy holder must do every thing to minimize the loss and to save what is left. T
his principle makes the insured more careful in respect of this
insured property. 7. Doctrine of proximate cause This principle is found very us
eful when the loss occurred due to series of events. It means that in deciding w
hether the loss has arisen through any of the risks insured against, the proxima
te or the nearest cause should be considered. To take an illustration in one cas
e where a policy holder sustains an accident while hunting. He was unable to wal
k after the accident and as a result of lying on wet ground before being picked
up, he suffered pneumonia. There was an unbroken change of cause between the acc
ident and the death, and the proximate cause of the death, therefore, was the ac
cident and not the pneumonia
Reinsurance
The practice of insurers transferring portions of risk portfolios to other parti
es by some form of agreement in order to reduce the likelihood of having to pay
a large obligation resulting from an insurance claim. The intent of reinsurance
is for an insurance company to reduce the risks associated with underwritten pol
icies by spreading risks across alternative institutions.There are two basic typ
es of reinsurance :-
1.Facultative Reinsurance
This is the arrangement of separate reinsurance for each risk that the insurer u
nderwrites. This is normally part of an on-going arrangement and the insurer con
tinually offers policies to the reinsurer, and the reinsurer decides whether to
accept each or not individually. Obviously this requires a lot of work and is no
w generally regarded as too expensive in human resources to be practical.
2.Treaty Reinsurance
Treaty reinsurance is arranged for a block an insurer s underwritten policies. T
he reinsurer reinsurers a whole large chunk of the insurer s business. This mean
s that the reinsurer does not need to scrutinise each policy individually and th
e insurer does not have the added workload of providing the reinsurer details of
each and every risk it underwrites. In another way, reinsurance is classified a
s proportional and non-proportional reinsurances. Proportional Reinsurances: The
two companies share the premium as well as risk. The reinsurer usually pays a c
eding commission. Pro-Rata Reinsurance: It is a classification based on the way
the two companies share the risk. The cedent and the reinsurer share a pre decid
ed percentage of the premium and losses. It is used widely as it provides surplu
s protection. There are two types of pro-rata reinsurance, quota share and surpl
us share. Quota Share Pro-Rata Reinsurance: The primary insurer cedes a fixed pe
rcentage of premiums and loses for every risk accepted.
Surplus Share Pro-Rata Reinsurance: It is different in that not every risk is ce
ded but only those that exceed certain predetermined amounts. Non-Proportional R
einsurance: As the name suggests it is not proportional and the reinsurer only r
esponds if the loss suffered by the insurer exceeds a certain amount. Excess of
Loss: It covers a single risk or a certain type of business. Catastrophe reinsur
ance is a type of excess of loss reinsurance. It provides the captive with a gre
at deal of flexibility. Stop Loss Reinsurance: It covers the whole account and i
s also known as excessive loss ratio reinsurance. These are the various types of
reinsurances. There are firms that offer their services as well as their produc
ts to help new business start up flourish and succeed.
Life insurance
Life insurance is a contract between the policy owner and the insurer, where the
insurer agrees to pay a designated beneficiary a sum of money upon the occurren
ce of the insured individual s or individuals death or other event, such as ter
minal illness or critical illness. In return, the policy owner agrees to pay a s
tipulated amount at regular intervals or in lump sums. There may be designs in s
ome countries where bills and death expenses plus catering for after funeral exp
enses should be included in Policy Premium. In the United States, the predominan
t form simply specifies a lump sum to be paid on the insured s demise The genera
l principles discussed in element of valid contract apply to life insurance cont
ract also with a few exceptions. The main elements of life insurancecontract are
: (i) The life insurance contract must have all the essentials of a valid contra
ct. Certain elements like offer and acceptance, free consent, capacityto enter i
nto a contract, lawful object must be present for the contract to be valid. (ii)
The contract of life insurance is a contrcat of utmost good faith. The assured
should be honest and truthful in giving information to the insurance company. He
must disclose all material facts about his health to the insurer. It is his dut
y to disclose aacurately all the material facts known to him even if the insurer
does not ask him. (iii) In life insurance, the insured must have insurable inte
rest in the life of the assured. Without interest the cotract of insurance is vo
id. In case of life insurance, insurable interst must be present at the time the
policy is affected. It is not necessary that the assured shoould have insurable
intersrt at the time of maturity also.Following persons have insurable interest
in life insurance contract: •An employer in the life of an employee during the cou
rse of employment. •A partner is the life of other partners in case of partnership
. •Husband in the life of his wife or vice-versa. •A creditor in the life of his deb
tor to the limit of the amount of his debt. •A son in the life of his father on wh
om he is dependent. •A dependent to the extent of support he is getting. A surety
in the life of his principal to the extent of his guarantee (iv) Life insurance
contract is not a contract of indemnity. The life of a human being can not be co
mpensated and only a specified sum of money is paid. That is why the amount paya
ble in life insurance on the ahppening of an event is fixed in advance. The sum
of money payable is fixed, at the time of entering into contract
procedures of life insurance
The procedure of taking life policy is very easy. The following are the differen
t steps involved in taking the life insurance policy. Submission of proposal for
m: A person desiring to take policy of life insurance will have to fill in the p
roposal form supplied by the insurance company. The proposal form requires infor
mation with regard to the health, the proposer, his family history, his age habi
ts of life, the amount a kind and term of policy. Submission of agent s report:
The agent prepares a report on the basis of proposal from duly filled in. the re
port 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
. Doctor s report: The doctor of insurance company also presents a report regard
ing the proposer 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 insura
nce policy. The report I very important because the company evaluates the risk o
f life on the basis of this report. Certificate of age: The proposer will have t
o 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 o
f concealment and wrong information, the insurance company has a right to cancel
the policy.
Scrutiny of documents: The insurance company has the right to check the document
s filed by the customers. The contents of the proposal form, medical report and
the certificate of age are examined by the insurance company. 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. 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 complete
d in receipt of the first premium. The company issues a receipt for the amount o
f premium. The receipt acts as a contract between the insurance company and the
insured person. Later on, the company issues the life insurance policy.
.