Q.1.

Why insurance market required healthy and efficient

market?
In this part we show why a healthy insurance industry is of crucial importance for the
welfare and for the development of a country. The social and economic benefits of a
functioning insurance market are huge and they reach all groups and sectors of the
economy. But also the costs of insurance should be taken into account.

Benefits of Insurance:
 The insurance mechanism is an essential method to handle and control
risk in a rational and sophisticated way.
 Insurance enables people to choose which risks they take and which they
protect themselves against.
 An efficient insurance industry provides important and unique benefits for
households, enterprises, commerce, government, and the financial sector.
Private households benefit through personal lines of insurance such as
life, health or property insurance.
 Insurance can enable a higher quality of life by satisfying the universal
desire for security and guaranteeing an assured level of income.
 Compulsory insurance such as motor liability insurance establishes an
indispensable system of social protection. It can protect potential victims
against the insolvency of injurers.
 Insurances quantify the consequences of risk-taking behavior by setting
insurance premiums according to individual risk (risk pricing). This allows
insured people to deal more rationally with risks and can prevent them
from unreasonably risky actions/decisions. Individuals have strong
economic incentives to reduce their risks and control loss potentials.
 Automobile drivers are encouraged to prevent accidents and improve
their car’s safety conditions to avoid higher insurance premiums.
Furthermore insurance companies have an interest themselves to help
their clients prevent and reduce losses. They are likely to promote a
variety of preventive measures (safer cars or production) and introduce
loss control programmes
 Insurance promotes and stabilizes entrepreneurship, production and
commerce. Many products and services are produced and sold only if
adequate insurance is available.
 Entrepreneurs are much more likely to invest in innovative ventures if they
can secure adequate insurance protection. E.g. a pharmaceutical
company, Life Science Company is unlikely to develop and market a
highly beneficial product without access to product liability insurance.
Accordingly, insurance allows industry managers to encounter the risk of
damage to production facilities, which will increase their willingness to
invest in them.
 Besides, insurance enhances the credibility of economic agents. Trade
and commerce are facilitated when transportation, payment and goods are
insured. Consumers on the other hand are encouraged to purchase large-
expense items, such as automobiles or real estate.
 Insurance consequently serves as a “lubricant of commerce” fostering
consumption, entrepreneurship and innovation. Likewise property/liability
insurers can reduce costly interruption or even the entire liquidation of
firms in case of unforeseen losses.
 Insurance can minimize follow-up costs of financial distress. This helps to
avoid substantial capital waste and stabilizes business and the economy
as a whole.
 Insurances can help to reduce government spending significantly.
Insurers can in part substitute for government security programs (such as
insurance against premature death or disability). They relieve pressure on
social welfare systems, reserving government resources for essential
social security purposes.
 Moreover, insurance can cushion negative economic effects of natural
calamities (such as crop loss) reducing the need for financial firefighting
interventions by the state.
 Insurance markets play a crucial role for the development and efficient
functioning of the financial sector:
 Insurance companies are financial intermediaries. They reduce
transaction costs from savers to borrowers by amassing large sums from
thousands of small premium payers.
 Life insurers help to mobilize and channel significant amounts of savings
to investments in corporate and government bonds, commercial
mortgages and equity.
 Worldwide, life insurers have become a key source of long-term finance,
which is particularly important for emerging economies in need of
investment for infrastructure projects.
 An efficient insurance market is likely to:
 Considerably reduce the amount of risk and losses and increase
risk awareness
 Enable a higher quality of life, ensure social protection and relieve
the public sector
 Promote commerce and entrepreneurship and stabilize the
economy
 Foster capital mobilization and its efficient investment through
financial markets
 Q.2. Cost of benefit aspect?
Costs of Insurance:
 Although insurance provides enormous benefits its economic and social costs
can be great and have to be taken seriously.
 Insurers tie economic resources and cause sales and administrative
expenses.
 Insurance coverage can incite dishonest and incautious behaviour (moral
hazard). The assured financial indemnification can result in fraudulent or
inflated claims and an inappropriately lax attitude towards potential losses.
Auto accidents for instance may be faked or damage may be overstated to
collect benefits from the insurance companies.
 There may also be significant potential social and economic costs if regulation
and surveillance of insurance companies is insufficient:
 Without a strong regulatory and competitive framework policyholders would
not be protected against the insolvency or unscrupulous behavior of
insurance companies.
 Insured would be unable to enforce their rights and might be strained to pay
overly high premiums.
 Insurance could also be misused for criminal purposes such as money
laundering, tax evasion or illegal self-enrichment.
Net Effect of Insurance: Costs vs. Benefits
 Taken together the social and economic benefits of insurance generally
outweigh its potential costs by far.
 It is however the responsibility of the government to ensure that this precondition
is guaranteed.
 Only an appropriate regulatory and legal framework with proper surveillance will
allow to control and minimize the costs of insurance.

Q.3. Features and structure of insurance policy

Basic Features of Insurance Contract :

 The insurance contract is a contract whereby the insurer will pay the insured (the
person whom benefits would be paid to, or on the behalf of), if certain defined
events occur. Subject to the "fortuity principle", the event must be uncertain. The
uncertainty can be either as to when the event will happen (i.e. in a life insurance
policy, the time of the insured's death is uncertain) or as to if it will happen at all
(i.e. in a fire insurance policy, whether or not a fire will occur at all).

 Adhesion: Insurance contracts are generally considered contracts of adhesion

because the insurer draws up the contract and the insured has little or no ability
 to make material changes to it. This is interpreted to mean that the insurer bears
the burden if there is any ambiguity in any terms of the contract. Insurance
policies are sold without the policyholder even seeing a copy of the contract.

 Aleatory: Insurance contracts are aleatory in that the amounts exchanged by the
insured and insurer are unequal and depend upon uncertain future events. In
contrast, ordinary non-insurance contracts are commutative in that the amounts
(or values) exchanged are usually intended by the parties to be roughly equal.

 Unilateral: Insurance contracts are unilateral, meaning that only the insurer
makes legally enforceable promises in the contract. The insured is not required
to pay the premiums, but the insurer is required to pay the benefits under the
contract if the insured has paid the premiums and met certain other basic
provisions.

 Utmost Good Faith: Insurance contracts are governed by the principle of utmost
good faith (uberrimae fide) which requires both parties of the insurance contact to
deal in good faith and in particular it imparts on the insured a duty to disclose all
material facts which relate to the risk to be covered. This contrasts with the legal
doctrine that covers most other types of contracts, caveat emptor (let the buyer
beware). In the United States, the insured can sue an insurer in tort for acting in
bad faith

Basic Structure of an Insurance Policy:

 Declarations :

o The following details are usually provided on a form that is filled out by the
insurer based on the insured's application and attached on top of or
inserted within the first few pages of the standard policy form.

 Identifies with details who is the Policy Holder/Owner and who is

the beneficiary

 Identifies with details who is an insured, the insured's address

 The insuring company

 What risks [E.g accident] or property [e.g. House] are covered

 The policy limits (amount of insurance)

 The policy period and premium amount.

 Details of Nomination if any

  Details of Assignment if any

 Definitions - define important terms used in the policy language.

 Insuring agreement - describes the covered perils, or risks assumed, or nature of

coverage, or makes some reference to the contractual agreement between
insurer and insured. It summarizes the major promises of the insurance
company, as well as stating what is covered.

 Exclusions - take coverage away from the Insuring Agreement by describing

property, perils, hazards or losses arising from specific causes which are not
covered by the policy.

 Conditions - provisions, rules of conduct, duties and obligations required for

coverage. If policy conditions are not met, the insurer can deny the claim.

 Endorsements - additional forms attached to the policy form that modify it in

some way, either unconditionally or upon the existence of some condition.
Instead of allowing nonlawyer underwriters to directly customize core policy
language with word processors, insurers usually direct underwriters to modify
standard forms by attaching endorsements preapproved by counsel for various
common modifications

 Deductible: In insurance policy terms, a deductible is the amount of money which

the insured party must pay before the insurance company's own coverage plan
begins. In practical terms, insurance companies include a deductible in their
policies to avoid paying out benefits on relatively small claims. A typical auto
insurance policy, for example, may carry a Rs 5,000 deductible. If the owner of
that car accidentally hits another car while parking and both drivers agree the
damage is minimal, the owner would pay the Rs 5,000 repair bill out of own
pocket. Insurance companies would not encourage a claim for such minor
damages. However, this payment of Rs 5,000 means that the next accident
claim would be covered by the insurance company. The car owner is said to
have 'met the deductible' and is now eligible for complete protection. The same
holds true for medical insurance and other insurances [except Life Insurance for
death].

Q.4. Importance of Renewal dates?

 An insurance policy is issued for a limited time, and, at the end of that period, the
insurance company renews the policy. Renewal dates are important times for
insurance companies and policyholders.
 Definition: A renewal date is when a policy period expires and a new policy
period begins. Renewal dates typically occur six months or one year after the
policy began or the last renewal date occurred.
  Purpose: Renewal dates give both the insurance company and the insured the
opportunity to make any necessary changes to the policy.
 Policy Changes: If the insurance company determines that the risk posed by the
policyholder has changed, it may amend the policy, add restrictions or terminate
coverage. General policy changes that affect all insureds also take place at
policy renewal.
 Premium Changes: A change in risk may also trigger a premium change at
renewal. A policyholder who has not filed any claims may see a premium
reduction, while a policyholder with several claims may see an increase.
 Changing Policies: If the insured find a better rate with another company or are
unhappy with the insurance company's service, consider switching policies at
renewal. The insurer will avoid cancellation fees that may be imposed for mid-
term cancellations.

Q.5. Methods for calculation of premium on LIP?

Life Insurance Premium Calculation:

Example:

 A Insurer is going to sell life insurance cover to 10,000 for persons aged 25 for
sum assured of Rs 10,000/-

 The contract provides for payment of the sum assured in case of death of any
insured within 1 year term

 From the mortality table it is found that the probability of death of a healthy
person aged 25 years within one year is 0.0011

 It means that out of the 10,000 persons insured 11 persons die within the one
year term

 Hence the cost of benefit payment is estimated as Rs 10,000 * 11 = Rs 1,10,000

 By the principle of insurance this is expected to be shared by all persons taking

insurance cover and hence the premium per person would be Rs
1,10,000/10,000 = Rs 11 Or Rs 1.10 per mille [ cost per Rs 1,000 sum assured]

 The premium thus arrived at by using the expected mortality rate is called Pure
or Natural Premium
  From the above it is noted that if no expenses are to be incurred and no
investments are made and no profits are to considered then the premium as
computed by the insurer would be sufficient for the term policy insurance period
of one year

 However in actual practice the insurer incur operations and admin expenses, is
able to invest the premium received and earn income and profit earning is
important for sustainable insurance business

 Hence there is need to compute correct premium based on all above factors

 The basis for computing the appropriate premium is as shown in Table: Life
Insurance Premium Computation below

Table: Life Insurance Premium Calculation

No. of
perso Pure or Present
ns Natural Cost of Presen value of
living Premiu benefit t value Prese Re 1 from
at age m [as paymen of nt each
X& No. of claims per t @ Rs benefit value surviving
sharin by actuari 10,000/ payme factor the
Age - g the death/Probabi al claiman nt @ @ policyhold
yrs claims lity of death table] t 6%pa 6%pa er
1 2 3 4 5 6 7 8=2*7
10,00
25 0 11 11.00 110,000 92,359 1.000 10,000.00
133,50
26 9,989 15 15.02 150,000 0 0.943 9,423.62
 167,92
27 9,974 20 20.05 200,000 4 0.890 8,876.86
198,02
28 9,954 25 25.11 250,000 2 0.840 8,357.58
216,70
29 9,929 29 29.21 290,000 5 0.792 7,864.66
49,84 1,000,0 808,51
Total 8   00 0   44,522.72

Pure or Natural Premium:

 The premium arrived by using the expected mortality rate is called pure or natural
premium

 From column 4 of above Table it is noted that pure premium increases with age
because the mortality increases with age and the number of surviving persons
reduces with age.

 Hence the premium burden increases with the age of the insured.

 Based on above Table 1 the insurer will devise premium recovery rate

 As noted the pure premium is Stepped Up as the age increase

 However the major disadvantage is the insureds may find it difficult to service
policy with increasing premium rate, as they age

Level Premium:

 Considering the disadvantage of pure premium scheme especially for the aged
insureds the insurer will devise a system to collect higher premium in early
stages which will offset lower collection at latter stages

 Alternatively the insurer will be able to meet all the claims if the collection is
made uniformly over the term of 5 years at a single rate of premium from the
surviving policy holders

 From the above table level premium is arrived by diving the total cost of benefit
which Rs 1,000,000/- [column 5] by the total number of surviving members which
is 49,848 [column 2] The level premium works out to 1,000,000/49848 = 20.06

 So instead of charging 5 different premiums in the 5 years of the policy term the
insurer will collect uniform premium for all the 5 years at 20.06

 This system is called level premium


Net Premium

 In the above example it may be noted that the insurer collect the premium in
advance [ at the beginning of the period] and settle claim at the end of the period

 Thus the insurer is able to invest the premium amount for one year and can earn
interest.

 To that extent the insurer can pass on the benefit to the policy holders

 By incorporating interest factor say at a reasonable rate of 6%pa the present

value of the total benefit of Rs 1,000,000/- is computed as Rs 808,510/-
[column 6].

 Further the insurer should also consider the present value of Re 1/- of
contribution from each surviving member at the same interest rate of 6%pa. The
same amounts to 44522.72 [column 8]

 The level premium after considering interest factor is 808,510/44522.72 = 18.16

 The net premium is lower than level premium and significantly lower than pure
premium

 In India it is observed that Unit Linked Insurance products charge stepped

premium and endowment products charge whole life level premium

Office Premium:

 The operation of insurance company involves expenses

 So the premium should contain an element of these expenses

 Hence to recover these costs insurer adds expense component to net premium

 The insurer should also note to include an element of profit in the above.

 Further there will be loadings such as bonus loading and mortality options
loading.

 The insurer should also provide for adverse fluctuations in all the 3 components
viz. mortality, interest and expenses and also for the profits.

 Thus office premium can be stated as the premium than an insurer publishes as
the premium rates for lives that are considered to be standard in underwriting
 Q.6. Different types of Insurance Policy?
Types of Insurance:
Basic broad types of insurance are:
Personal Insurance: Taken by an Individual [for himself or his relative/s] or for group of
peoples [by a company for its employees] covering perils of death, accident, health,
disability, medical expenses, funeral expenses, pension, annuity etc
Property Insurance: Taken by an Individual/ group of persons/company covering
property like house, vehicle, plant & machinery, inventory, other property against losses
from fire, theft, burglary, earthquake, machinery breakdown, accident, etc
Liability Insurance: Taken for covering claims arising due to professional conduct,
product/services , acts of directors & officers, environmental liability, etc
Credit Insurance: Taken by the lender as protection in the in the event that the
borrower/Sundry Debtor/Credit Card holder passes away, becomes unemployed, or
becomes ill before the debt is fulfilled.
Catastrophe [CAT] Insurance: For covering for specific disastrous events like
hurricane, flood, earthquake, etc that can cause severe losses to insured

Lists of many different types of Insurance:

Below are (non-exhaustive) lists of the many different types of insurance that exist. A
single policy may cover risks in one or more of the categories set out below. For
example, auto insurance would typically cover both property risk (covering the risk of
theft or damage to the car) and liability risk (covering legal claims from causing an
accident).

 Automobile Insurance: Insurance that protects an insured from financial losses

arising from the operation of a vehicle
 Automobile Liability Insurance: Insurance specifically designed to indemnify for
loss incurred through legal liability for bodily injury and damage to property of
others caused by accident arising out of ownership or operation of an automobile
 Aviation Insurance: Aircraft insurance including coverage of aircraft or their
contents, the owner’s liability and accident insurance on the passengers
 Boiler & Machinery Insurance: Coverage for loss arising out of the operations of
pressure, mechanical and electrical equipment. It may cover loss suffered by the
 boiler and machinery itself and may include damage done to other property as
well a business interruption losses
 Burglary & Theft Insurance: Coverage against property losses due to burglary,
robbery or larceny
 Business Insurance: A policy which primarily provides coverage of benefits to
business as contrasted to an individual for indemnifying a business for the loss
of services of a key employee or a partner who becomes disabled
 Business Interruption Insurance: Known also Loss of Profit Insurance covers
losses from unforeseen circumstances[perils which are listed in the policy]
which reduce the output both physical and financial of a business
 Business Life Insurance: Life insurance purchased by a business unit on the life
of a member of the firm like by a partnership to protect surviving partners against
loss caused by death of a partner or by a corporate on death of a key employee
 Casualty Insurance: A type of insurance that is primarily concerned with the legal
liability for losses caused by injury to persons or damages to the property of
others
 Commercial Lease Payment Insurance: A form of financial guaranty insurance
that guarantees periodic commercial lease payments owned by the tenant
lessee
 Commercial Paper [CP] Insurance: Insurance guaranteeing the prompt payment
of principal and interest on CP issued by firms. It is a form of credit enhancement
insurance
 Completed Operations Insurance: A form of insurance issue particularly to
various types of contractors. It covers a contractor’s liability for accidents arising
out of jobs or operations that the contractor has completed
 Comprehensive Motor Insurance: Protection against loss resulting from damage
to the insured motor vehicle including third party insurance and death/bodily
injury and damage/loss of property of a third party or liability to pay money to
third party

 Compulsory Personal Liability Insurance: Insurance that covers the insured from
liability losses they incur that are not the result of practicing their profession or
operating a vehicle
 Compulsory Insurance: Any form of insurance which is required by law e.g.
Motor Third Party Liability Insurance, Public Liability Act Insurance.
 Consequential Loss Insurance: Insurance against monetary loss other than
material damage caused by insured perils. This is policy is often taken to cover
irrigated agriculture to cover loss or damage to crop consequent to breakdown of
irrigation equipment
 Contingency Insurance: Backup insurance that protects a party’s interest if
certain events occur. Insurance against relatively remote possibilities
 Contractual [or Assumed] Liability Insurance: Insurance to protect for a loss for
which the insured has assumed liability express or implied under a written
agreement
 Credit Crop Insurance [Crop Insurance, Crop Credit Insurance] : Linked with
Agricultural production and credit system
 Credit Enhancement Insurance: Under which the insurer guarantees the
payment of interest and/or principal of the insured in connection with debt
instruments issued by the insured
 Credit Insurance [ Creditor Group Insurance] : Insurance against loss resulting
from failure of debtors to pay their obligations to the insured. The insurance can
be general covering all debtors or specific covering selective debtors
 Credit Life Insurance: Term life insurance issued to a lender or lending firm to
cover repayment of a specific loan / debt obligation in case of debtor’s death
 Credit Unemployment Insurance: Provide funds for the payment of amounts due
under a specific credit transaction while the insured debtor is involuntarily
unemployed
 Critical Illness [CI] Insurance: Also known as Critical Diagnosis Insurance is an
individual health insurance that pays lumpsum benefit when the insured is
diagnosed with a specified illness
 Decreasing Term Life Insurance: Provides a death benefit that decreases in
amount over the policy term
 Directors and Officers Liability Insurance [ Officers & Directors Liability
Insurance]: Protects directors and officers from liability claims arising out of
alleged errors in judgment, breaches of duty and wrongful acts related to their
organizational activities which may harm the organization , stakeholders and
shareholders.
 Dismemberment Insurance: A health insurance that provides payment in case of
loss by bodily injury.
 Druggists Liability insurance: Protects a druggist in case of suit arising out of
filing prescriptions
 Endowment Insurance: Life insurance that provides a policy benefit payable
either when the insured dies or if the insured is still alive on the stated date.
 Equipment Value Insurance: A policy covering lease equipment guaranteeing its
value on a specified date. If the equipment’s fair value is less than the value
stated in the policy on the agreed date the insurer would pay the difference
 Export Credit Insurance: A form of credit insurance that protects an exporter
against losses resulting from the inability to collect on credit that has been
extended to commercial customers in other countries
 Group [Life] Insurance: Insurance written on a number of employees under a
single policy issued to their employer
 Health[Expense] Insurance: A policy that will pay specific sums for medical
expenses/treatments and it can offer many options to the insured
 Home Owners’ Insurance: An elective combination of coverage for the risks of
owning a home to cover losses due to fire, burglary, vandalism, earthquake and
other perils
 Income Protection Insurance: Provides coverage of income benefit while the
insured is disabled and not able to work/ due to disability is earning less than
before.
 Kidnap and ransom insurance: Kidnap and ransom insurance or K&R insurance
is designed to protect individuals and corporations operating in high-risk areas
around the world K&R insurance policies typically cover the perils of kidnap,
extortion, wrongful detention and hijacking. K&R policies are indemnity policies -
they reimburse a loss incurred by the insured. The policies do not pay ransoms
on the behalf of the insured. The insured must first pay the ransom, thus
incurring the loss, and then seek reimbursement under the policy. Losses
typically reimbursed by K&R polices are ransom payments, loss-of-ransom-in-
transit and additional expenses, such as medical expenses .The policies also
typically indemnify personal accident losses caused by a kidnap. These include
death, dismemberment, and permanent total disablement of a kidnapped person.
They also typically pay for the fees and expenses of crisis management
consultants. These consultants provide advice to the insured on how to best
respond to the incident.
 Level Term Life Insurance: Provides a death benefit that remains the same
amount over the term of the policy
 Life Insurance: A policy that will pay a specified sum to beneficiaries upon death
of the insured
 Limited Partnership Investor Bond Insurance: A form of financial guaranty
insurance to fulfill the obligations of a person investing in a limited partnership
 Limited Payment Life Insurance: Whole life insurance on which premiums are
payable for a specified number of years or until death if death occurs before the
end of the specified period
 Limited Coverage Deposit Insurance: A guarantee that the principal and interest
accrued on protected deposit will be paid up to a specified limit
 Livestock Insurance: A class of agricultural insurance providing mortality covers
for livestock [cattle] due to named disease and accidental injury
 Loss Insurance: Provide indemnity for the financial loss caused to the insured by
the happening of the event insured against
 Marine Insurance: Insurance of ships. This may include the marine hull the ship
itself, the cargo and damage to third parties and the environment
 Medical Expense [Medi Claim] Insurance: A type of health insurance that pay
benefits for all or part of the treatment of an insured’s sickness or injury
 Money Market Fund Insurance: Private insurance that protects insured investors
in a money market mutual fund against loss in the event the fund fails or defaults
in redemption of investments
 Mortgage Guaranty Insurance: Insurance purchased by a lender to provide
indemnification in case a borrower fails for any reason to meet the due mortgage
payment
 Mortgage Protection Insurance: A term insurance with a sum assured
decreasing in step with the debt outstanding under a mortgage loan
 Mortgage Redemption Insurance: A decreasing premium term life insurance plan
to provide death benefit amount corresponding to amount owned on mortgage
loan
 Motor Fleet Insurance: Covering a fleet of vehicle under a single policy
 Motor Insurance: Basic insurance to protect owners of motor vehicle against
damage to vehicle, injury/damage to third parties person/property etc..[Refer
Comprehensive Motor Insurance above]
 Multiple Line Insurance: Policies that combine many perils previously covered by
individual policies of fire and liability companies. Homeowner’s policy is a good
example.
 Municipal Bond Guaranty Insurance: Coverage that guarantees bondholders
against default by a municipality
 Mutual Fund Insurance: A form of financial guaranty insurance that guarantees
repayment of principal invested in mutual fund
 No Fault Insurance: A form of insurance written in conjunction with a no-fault law
under which person causing injury is granted immunity from legal action and
person injured must collect for the loss from own insurer
 Nuclear Energy Insurance: Covers property damage, liability and accident risks
entailed in the operation of nuclear installation
 Oil and Gas Deficiency Insurance: A guarantee to indemnify if an oil or gas
field’s actual output falls short of engineering report projections
 Permanent Health Insurance [PHI]: To cover against long term sickness or
invalidity
 Pollution Insurance: Provides protection to business from claims of third parties
who have been harmed by chemical emissions, spillages or radiation
 Premises and Operational Liability Insurance: Liability coverage for exposures
arising out of an insured’s premises or business operations
 Professional Liability [Indemnity] Insurance: Covers professional like doctors,
lawyers, others from losses they incur as a result of being responsible for the
losses to their clients
  Property Damage Liability Insurance: Protection against liability for damage to
the property of another including loss of use of the property
 Property Insurance: Insurance against loss of or damage to real and personal
property caused by perlis as fire, theft, strike,riot, civil commotion [SRCC],
explosion, etc.
 Public Liability Insurance: A general term applied to forms of third party liability
insurance with respect to both bodily injury and property damage liability. It
protects the insured against suits brought by members of the public
 Specific Risk Insurance: A policy that defines the perils to be covered by the
insurance as opposed to “All Risks” policy which covers multitude of perils
 Stock Repurchase [ Redemption] Insurance: A type of business insurance
coverage that provides the remaining stock [share] holders of the company with
funds to buy the stock [share] of a deceased partner
 Stop Loss Insurance: Insurance purchased by an insurance company or health
plan from another insurance company to protect itself against losses
 Workers’ [Workmen] Compensation Insurance: A government mandated
program providing insurance coverage for work related injuries and disabilities
 Other types of Insurance are:
o Cash in transit Insurance
o Cash in Safe Insurance
o Fidelity Guarantee [Risk] Insurance
o Inland Goods in Transit Insurance
o Overseas Goods in Transit Insurance
o Stock in Trade/ Stock Throughput Policy
o Erection All Risk Policy
o Goods in Storage Policy
o General Commercial Liability Policy,

Q.7. History of Insurance (World)

History of Insurance in the World:

 In some sense we can say that insurance appears simultaneously with the
appearance of human society.
 In the first type of economy I.e non-money or natural economies (without money,
markets, financial instruments and so on) which is more ancient we can see
insurance in the form of people helping each other and this type of insurance
 has survived to the present day in some countries where modern money
economy with its financial instruments is not widespread.
 Early methods of transferring or distributing risk were practised in 2 nd millenia BC
by Chinese merchants travelling treacherous river rapids who would redistribute
their wares across many vessels to limit the loss due to any single vessel's
capsizing
 The Babylonians developed a system which was recorded in the famous Code
of Hammurabi, c. 1750 BC, and practised by early Mediterranean sailing
merchants. If a merchant received a loan to fund his shipment, he would pay the
lender an additional sum in exchange for the lender's guarantee to cancel the
loan should the shipment be stolen or lost at sea
 Achaemenian monarchs of Ancient Persia were the first to insure their people
and made it official by registering the insuring process in governmental notary
offices. The insurance tradition was performed each year in Norouz (beginning of
the Iranian New Year)
 The inhabitants of Rhodes invented the concept of the 'general average'.
Merchants whose goods were being shipped together would pay a proportionally
divided premium which would be used to reimburse any merchant whose goods
were jettisoned during storm or sinkage.
 The Greeks and Romans introduced the origins of health and life insurance c.
600 AD when they organized guilds called "benevolent societies" which cared for
the families and paid funeral expenses of members upon death. Guilds in the
Middle Ages served a similar purpose. The Talmud deals with several aspects of
insuring goods.
 Before insurance was established in the late 17th century, "friendly societies"
existed in England, in which people donated amounts of money to a general sum
that could be used for emergencies.
 Separate insurance contracts (i.e., insurance policies not bundled with loans or
other kinds of contracts) were invented in Genoa in the 14th century, as were
insurance pools backed by pledges of landed estates. These new insurance
contracts allowed insurance to be separated from investment, a separation of
roles that first proved useful in marine insurance. Insurance became far more
sophisticated in post-Renaissance Europe, and specialized varieties developed.
 Toward the end of the seventeenth century, London's growing importance as a
centre for trade increased demand for marine insurance. In the late 1680s,
Edward Lloyd opened a coffee house that became the meeting place for parties
wishing to insure cargoes and ships, and those willing to underwrite such
ventures. Today, Lloyd's of London remains the leading market more for
reinsurance for marine and other specialist types of insurance, and it works
rather differently than the more familiar kinds of insurance.
  Insurance as we know it today can be traced to the Great Fire of London, which
in 1666 devoured more than 13,000 houses. The devastating effects of the fire
converted the development of insurance "from a matter of convenience into one
of urgency” and after a number of attempted fire insurance schemes came to
nothing, in 1681 Nicholas Barbon, and eleven associates, established England's
first fire insurance company
 The first insurance company in the United States underwrote fire insurance and
was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.
Benjamin Franklin helped to popularize and make standard the practice of
insurance, particularly against fire in the form of perpetual insurance. In 1752, he
founded the Philadelphia Contributionship for the Insurance of Houses from Loss
by Fire. Franklin's company was the first to make contributions toward fire
prevention. Not only did his company warn against certain fire hazards, it refused
to insure certain buildings where the risk of fire was too great, such as all wooden
houses.
 In the second type of economy I.e money economies (with markets, money,
financial instruments and so on) insurance markets have become centralized
nationally and internationally and insurance in a modern money economy is part
of the financial sphere.

Q.8. Features of Motor vehicle policy?

 Motor Car Insurance in India is governed by the Indian Car Tariff, so the
coverage for the vehicle would be the same regardless of the Insurance
Company

 Moreover, car insurance is mandatory and needs to be renewed every year

 A comprehensive Motor Insurance policy for the car that keeps it secure against
damage caused by natural and man-made calamities, including acts of terrorism,
Own Damage, Personal Accident and Liability cover all in one policy

 What is covered:

o Loss or Damage to the vehicle against Natural Calamities

o Fire, explosion, self-ignition or lightning, earthquake, flood, typhoon,

hurricane, storm, tempest, inundation, cyclone, hailstorm, frost, landslide,
rockslide

o Loss or Damage to your vehicle against Man-made Calamities

 o Burglary, theft, riot, strike, malicious act, accident by external means,
terrorist activity, any damage in transit by road, rail, inland waterway, lift,

 Personal Accident Cover: Coverage of Rs. 2 Lakhs for the individual driver of the
vehicle while travelling, mounting or dismounting from the car. Optional personal
accident covers for co-passengers available.

 Third Party Legal Liability: Protection against legal liability due to accidental
damages resulting in the permanent injury or death of a person, and damage
caused to the surrounding property.

 What is not covered:

o Normal wear and tear and general ageing of the vehicle

o Depreciation or any consequential loss

o Mechanical/ electrical breakdown

o Wear and tear of consumables like tyres and tubes unless the vehicle is
damaged at the same time, in which case the liability of the company shall
be limited to 50% of the cost of replacement.

o Vehicles including cars being used otherwise than in accordance with

limitations as to use

o Damage to/ by a person driving any vehicles or cars without a valid

o Damage to/ by a person driving the vehicle under the influence of drugs or
liquor

o Loss/ damage due to war, mutiny or nuclear risk

 Sum Insured:

o All vehicles are insured at a fixed value called the Insured’s Declared
Value (IDV).

o IDV is calculated on the basis of the manufacturer’s listed selling price of

the vehicle(plus the listed price of any accessories) after deducting the
depreciation for every year as per the schedule provided by the Indian
Motor Tariff

o If the price of any electrical and / or electronic item installed in the vehicle
is not included in the manufacturer’s listed selling price, then the actual
 value (after depreciation) of this item can be added to the sum insured
over and above the IDV

o In case of vehicles fitted with bi-fuel system such as Petrol/ Diesel and
CNG/ LPG, permitted by the concerned RTO, the CNG/LPG kit fitted to
the vehicle is to be insured separately at an additional premium of 4% on
the value of such kit. This is to be specifically declared in the proposal
form.

 The compulsory deductible amount is Rs 500 or Rs 1000 based on capacity of

the vehicle

 No claim bonus: The insurer is entitled for a No Claim Bonus [NBC] on the own
damage section of the policy if no claim is made or pending during the preceding
3 years. The bonus is adjusted from the premium payable and is subject to
applicable terms and conditions

Q.9.Role of Insurance Ombudsman

 The institution of Insurance Ombudsman was created by a Government of India
Notification dated 11th November, 1998 with the purpose of quick disposal of the
grievances of the insured customers and to mitigate their problems involved in
redressal of those grievances.
 This institution is of great importance and relevance for the protection of interests
of policy holders and also in building their confidence in the system.
 The institution has helped to generate and sustain the faith and confidence
amongst the consumers and insurers.
 Appointment of Ombudsman: The governing body of insurance council issues
orders of appointment of the insurance Ombudsman on the recommendations of
the committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC
and a representative of the Central Government. Insurance council comprises of
members of the Life Insurance council and general insurance council formed
under Section 40 C of the Insurance Act, 1938. The governing body of insurance
council consists of representatives of insurance companies.
 Eligibility: Ombudsman are drawn from Insurance Industry, Civil Services and
Judicial Services.
 Terms of office: An insurance Ombudsman is appointed for a term of three years
or till the incumbent attains the age of sixty five years, whichever is earlier. Re-
appointment is not permitted.
 Territorial jurisdiction of Ombudsman: The governing body has appointed twelve
Ombudsman across the country allotting them different geographical areas as
their areas of jurisdiction. The Ombudsman may hold sitting at various places
within their area of jurisdiction in order to expedite disposal of complaints.
 The offices of the twelve insurance Ombudsmans are located at (1) Bhopal, (2)
Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6) New Delhi, (7)
Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai, (12)
Hyderabad. The areas of jurisdiction of each Ombudsman has been mentioned
in the list of Ombudsman.
 Office Management ;The Ombudsman has a secretarial staff provided to him by
the insurance council to assist him in discharging his duties. The total expenses
on Ombudsman and his staff are incurred by the insurance companies who are
members of the insurance council in such proportion as may be decided by the
governing body.
 Removal from office: An Ombudsman may be removed from service for gross
misconduct committed by him during his term of office.
o The governing body may appoint such person as it thinks fit to conduct
enquiry in relation to misconduct of the Ombudsman.
o All enquiries on misconduct will be sent to Insurance Regulatory and
Development Authority which may take a decision as to the proposed
action to be taken against the Ombudsman.
o On recommendations of the IRDA, the Governing Body may terminate his
services, in case he is found guilty

 Power of Ombudsman: Insurance Ombudsman has two types of functions to

perform (1) conciliation, (2) Award making.
 The insurance Ombudsman is empowered to receive and consider complaints in
respect of personal lines of insurance from any person who has any grievance
against an insurer.
 The complaint may relate to any grievance against the insurer i.e.
(a) any partial or total repudiation of claims by the insurance companies,
(b) dispute with regard to premium paid or payable in terms of the policy,
(c) dispute on the legal construction of the policy wordings in case such dispute
relates to claims;
(d) delay in settlement of claims and
(e) non-issuance of any insurance document to customers after receipt of
premium.
 Ombudsman's powers are restricted to insurance contracts of value not
exceeding Rs. 20 lakhs. The insurance companies are required to honour the
awards passed by an Insurance Ombudsman within three months.
 Manner of lodging complaint: The complaint by an aggrieved person has to be in
writing, and addressed to the insurance Ombudsman of the jurisdiction under
 which the office of the insurer falls. The complaint can also be lodged through the
legal heirs of the insured. Before lodging a complaint:
 The complainant should have made a representation to the insurer named in the
complaint and the insurer either should have rejected the complaint or the
complainant have not received any reply within a period of one month after the
concerned insurer has received his complaint or he is not satisfied with the reply
of the insurer.
 The complaint is not made later than one year after the insurer had replied.
 The same complaint on the subject should not be pending with before any court,
consumer forum or arbitrator.
 Recommendations of the Ombudsman:When a complaint is settled through the
mediation of the Ombudsman, he shall make the recommendations which he
thinks fair in the circumstances of the case. Such a recommendation shall be
made not later than one month and copies of the same sent to complainant and
the insurance company concerned. If the complainant accepts recommendations,
he will send a communication in writing within 15 days of the date of receipt
accepting the settlement.
 Award:The ombudsman shall pass an award within a period of three months from
the receipt of the complaint. The awards are binding upon the insurance
companies.
 If the policy holder is not satisfied with the award of the Ombudsman he can
approach other venues like Consumer Forums and Courts of law for redressal of
his grievances.
 As per the policy-holder's protection regulations, every insurer shall inform the
policy holder along with the policy document in respect of the insurance
Ombudsman in whose jurisdiction his office falls for the purpose of grievances
redressal arising if any subsequently.
 Steady increase in number of complaints received by various Ombudsman
shows that the policy-holders are reposing their confidence in the institution of
Insurance Ombudsman.

Q.10. various aspects of LIP and Assurance policy

 Life insurance/ assurance is a contract between the Policy Owner/Holder and

the Insurer, where the insurer agrees to pay a designated beneficiary a sum of
money upon the occurrence of the insured individual's or individuals' death or
other event, such as terminal illness or critical illness.
 Life Insurance is a contract between the insurer and the Policy Holder whereby a
benefit is paid to the designated beneficiaries if an insured event occurs which is
covered by the policy
 The specific uses of the terms "insurance" and "assurance" are sometimes
confused. In general, in these jurisdictions "insurance" refers to providing cover
for an event that might happen (fire, theft, flood, etc.), while "assurance" is the
provision of cover for an event that is certain to happen (death).
 Life Insurance is a policy that people buy from a life insurance company, which
can be the basis of protection and financial stability after one's death. Its function
is to help beneficiaries financially after the owner of /person named in the policy
dies
 In return, the Policy Holder agrees to pay a stipulated amount called premiums at
regular intervals or in lump sums.
 There may be conditions in some countries where bills and death expenses
plus catering for after funeral expenses should be included in Policy Premium
.
 The value for the policyholder is derived, not from an actual claim event, rather it
is the value derived from the 'peace of mind' experienced by the policyholder,
due to the negating of adverse financial consequences caused by the death of
the Life Assured.
 To be a life policy the insured event must be based upon the lives of the people
named in the policy.
 Insured events that may be covered include:
o Death
o Accidents
o Serious Illness
o Disability
o Dismemberment
 Life insurance
o Provide security for insured’s family
o Protect insured’s home mortgage
o Take care of insured’s estate planning needs
o Offer insured other tax savings ,retirement savings and investment
options
 Life policies are legal contracts and the terms of the contract describe the
limitations of the insured events. Specific exclusions are often written into the
contract to limit the liability of the insurer; for example claims relating to
o Suicide
o Fraud
o War
 o Riot and civil commotion.
 There is a difference between the insured and the policy owner (policy holder),
although the owner and the insured are often the same person.
o For example, if A buys a policy on his own life, he is both the owner and
the insured.
o But if A buys a policy on his wife B then A is the owner and B is the
insured .
 The policy owner is the guarantee and he or she will be the person who will pay
for the policy.
 The insured is a participant in the contract, but not necessarily a party to it.
 However, "insurable interest" is required to limit an unrelated party from taking
life insurance on, for example, A or his wife B
 The beneficiary receives policy proceeds upon the insured's death. The owner
designates the beneficiary, but the beneficiary is not a party to the policy.
 The Policy Owner can change the beneficiary unless the policy has an
irrevocable beneficiary designation. With an irrevocable beneficiary, that
beneficiary must agree to any beneficiary changes, policy assignments, or cash
value borrowing.
 In cases where the policy owner is not the insured or also referred to as Celui
Qui Vit [CQV] insurance companies have sought to limit policy purchases to
those with an "insurable interest" in the CQV.
 For life insurance policies, close family members and business partners will
usually be found to have an insurable interest.
 The "insurable interest" requirement usually demonstrates that the purchaser will
actually suffer some kind of loss if the CQV dies. Such a requirement prevents
people from benefiting from the purchase of purely speculative policies on people
they expect to die. With no insurable interest requirement, the risk that a
purchaser would murder the CQV for insurance proceeds would be great.
 Stranger Originated Life Insurance [STOLI] is a life insurance policy that is held
or financed by a person who has no relationship to the insured person. STOLI
has often been used as an investment technique whereby investors will
encourage someone (usually an elderly person) to purchase life insurance and
name the investors as the beneficiary of the policy. This undermines the primary
purpose of life insurance as the investors have no financial loss that would occur
if the insured person were to die. In some jurisdictions, there are laws to
discourage or prevent STOLI.
 Life-based contracts tend to fall into two major categories:
o Protection policies: Designed to provide a benefit in the event of specified
event, typically a lump sum payment. A common form of this design is
term insurance.
 o Investment policies: Where the main objective is to facilitate the growth of
capital by regular or single premiums. Common forms are whole life,
universal life and variable life policies.
 Special provisions may apply, such as suicide clauses wherein the policy
becomes null if the insured commits suicide within a specified time (usually two
years after the purchase date; some states provide a statutory one-year suicide
clause). Any misrepresentations by the insured on the application is also grounds
for nullification
 The face amount on the policy is the initial amount that the policy will pay at the
death of the insured or when the policy matures, although the actual death
benefit can provide for greater or lesser than the face amount. The policy
matures when the insured dies or reaches a specified age (such as 100 years
old).
 The premium computation for all life insurance is a function of Mortality Table,
Morbidity Table, Longevity Table
 With all life insurance, there are basically two functions that make it work. There's
a mortality function and a cash function.
 The mortality function would be the classical notion of pooling risk where the
premiums paid by everybody else would cover the death benefit for the one or
two who will die for a given period of time.
 The cash function inherent in all life insurance says that if a person is to reach
age 95 to 100 (the age varies depending on state and company), then the policy
matures and endows the face value of the policy.
 Actuarially, it is reasoned that out of a group of 1000 people, if even 10 of them
live to age 95, then the mortality function alone will not be able to cover the cash
function. So in order to cover the cash function, a minimum rate of investment
return on the premiums will be required in the event that a policy matures.
 Life insurance may be divided into two basic classes And in the following
subclasses
o Temporary
o Permanent
 Term
 Universal
 Whole life
 Endowment life
 Temporary Life Insurance Policy
o Term Insurance:
 Provides life insurance coverage for a specified term of years in
exchange for a specified premium.
 The policy does not accumulate cash value.
  Term insurance is generally considered "pure" insurance, where
the premium buys protection in the event of death and nothing else.
 There are three key factors to be considered in term insurance:
1. Face amount (protection or death benefit),
2. Premium to be paid (cost to the insured), and
3. Length of coverage (term).
 Various insurance companies sell term insurance with many
different combinations of above three parameters.
 The face amount can remain constant or decline.
 The term can be for one or more years.
 The premium can remain level or increase.
 Common types of term insurance include
 Level Term
 Annual Renewable Term
 Mortgage insurance Term
 Level Term:
 It has the premium fixed for a period of time longer than a
year.
 These terms are commonly 5, 10, 15, 20, 25, 30 and even
35 years.
 Level term is often used for long term planning and asset
management because premiums remain consistent year to
year and can be budgeted long term.
 At the end of the term, some policies contain a renewal or
conversion option.
 Annual Renewable Term: It is a one year policy but the insurance
company guarantees it will issue a policy of equal or lesser amount
without regard to the insurability of the insured and with a premium
set for the insured's age at that time.
 Mortgage Insurance Term: This is usually a level premium,
declining face value policy. The face amount is intended to equal
the amount of the mortgage on the policy owner’s residence so the
mortgage will be paid if the insured dies.
 Permanent Life Insurance Policy:
o It is life insurance that remains in force (in-line) until the policy matures
(pays out), unless the owner fails to pay the premium when due (the policy
expires OR policies lapse).
o The policy cannot be canceled by the insurer for any reason except fraud
in the application, and that cancellation must occur within a period of time
defined by law (usually two years).
 o Permanent insurance builds a cash value that reduces the amount at risk
to the insurance company and thus the insurance expense over time. This
means that a policy with a million rupee face value can be relatively
expensive to a 70 year old.
o The owner can access the money in the cash value by withdrawing
money, borrowing the cash value, or surrendering the policy and receiving
the surrender value.
 The basic types of permanent insurance are:
o Whole Life
o Universal Life
o Limited Pay
o Endowment

Whole Life Insurance:

 Whole Life Insurance provides for a level premium, and a cash

value table included in the policy guaranteed by the company.
 The primary advantages of whole life are guaranteed death
benefits, guaranteed cash values, fixed and known annual
premiums, and mortality and expense charges will not reduce the
cash value shown in the policy.
 The primary disadvantages of whole life are premium inflexibility,
and the internal rate of return in the policy may not be competitive
with other savings alternatives
 Also, the cash values are generally kept by the insurance company
at the time of death, the death benefit only to the beneficiaries.
 Riders are available that can allow one to increase the death
benefit by paying additional premium.
 Cash value can be accessed at any time through policy loans and
are received income-tax free. Since these loans decrease the death
benefit if not paid back, payback is optional. Cash values support
the death benefit so only the death benefit is paid out


Universal Life Insurance

 Universal Life Insurance [UL] is relatively new insurance product

intended to provide permanent insurance coverage with greater
flexibility in premium payment and the potential for a higher internal
rate of return.
  There are several types of universal life insurance policies which
include interest sensitive (also known as traditional fixed universal
life insurance), variable universal life insurance, and equity indexed
universal life insurance.
 A ULP is akin to ULIP and does not work in a recession or low
interest rate environment.

Limited Pay

 Limited Pay Life Insurance is a type all the premiums are paid over
a specified period after which no additional premiums are due to
keep the policy in force. Common limited pay periods include 10-
year, 20-year, and paid-up at age 65.

Endowments Policy

 Endowments Policy is a type in which the cash value built up

inside the policy, equals the death benefit (face amount) at a
certain age. The age this commences is known as the endowment
age.
 Endowments are considerably more expensive (in terms of annual
premiums) than either whole life or universal life because the
premium paying period is shortened and the endowment date is
earlier.
 Endowment Insurance is paid out whether the insured lives or dies,
after a specific period (e.g. 15 years) or a specific age (e.g. 65).
 Riders are modifications to the insurance policy added at the same time the
policy is issued. These riders change the basic policy to provide some feature
desired by the policy owner. Some of the riders are:
o Accidental Death and Dismemberment Insurance [AD & D Policy]:
 In an AD&D policy, benefits are available not only for accidental
death, but also for loss of limbs or bodily functions such as sight
and hearing, etc.
 AD&D policies very rarely pay a benefit; either the cause of death is
not covered [e.g an insured who puts themselves at risk in activities
such as parachuting, flying an airplane, professional sports, or
involvement in a war] or the coverage is not maintained after the
accident until death occurs
 AD & D rider may provide for double [double the face value of
amount insured] accidental death benefits or even a triple indemnity
cover.
o Joint Life Insurance: Is either a term or permanent policy insuring two or
more lives with the proceeds payable on the first death or second death.
o Survivorship life: Is a whole life policy insuring two lives with the proceeds
payable on the second (later) death.
 o Single Premium Whole Life: Is a policy with only one premium which is
payable at the time the policy is issued.
o Modified Whole Life: Is a whole life policy that charges smaller premiums
for a specified period of time after which the premiums increase for the
remainder of the policy.
o Group Life insurance: Is term insurance covering a group of people,
usually employees of a company or members of a union or association.
The underwriter [insurer] considers the size and turnover of the group, and
the financial strength of the group. Contract provisions will attempt to
exclude the possibility of adverse selection.
o Senior Citizen Insurance: Insurance companies have developed products
notably targeting the senior citizen to address needs of an aging
population and offer senior citizen an opportunity to buy affordable
insurance. This may also be marketed as final expense insurance
o Preneed (or Prepaid) Insurance Policies: Are whole life policies that,
although available at any age, are usually offered to older applicants as
well designed specifically to cover funeral expenses when the insured
person dies.
 Investment Policies:
o With-Profits Policy: Some policies allow the policyholder to participate in
the profits of the insurance company. Others have no rights to participate
in the profits of the company, these are non-profit policies.
 With-profits Policy is used as a form of collective investment
achieve capital growth. Other policies offer a guaranteed return not
dependent on the company's underlying investment performance;
these are often referred to as without-profit policies which may be
construed as a misnomer.
o Pension Policy: Pensions are a form of life assurance. For pension insurer
include besides an amount of mortality risk, morbidity risk and also include
longevity risk. A pension fund will be built up throughout a person's
working life. When the person retires, the pension will become in
payment, and at some stage the pensioner will buy an annuity contract,
which will guarantee a certain pay-out each month until death.
o Annuity Policy: An annuity is a contract with an insurance company
whereby the insured pays an initial premium or premiums into a tax-
deferred account, which pays out a sum at pre-determined intervals.
There are two periods: the accumulation (when payments are paid into the
account) and the annuitization (when the insurance company pays out).