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RISK AND INSURANCE

SIBM, Rishi Trivedi

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FUNDAMENTALS OF RISK

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What is Risk?

Risk is the potential that a chosen action or activity(including the choice of inaction) will lead to a loss (anundesirable outcome). The notion implies that a choicehaving an influence on the outcome exists (or existed).Potential losses themselves may also be called "risks".Almost any human endeavour carries some risk, but someare much more risky than others.(wikipedia)

Types of risk:

Objective risk - also called degree of risk

Subjective risk

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CATEGORIES OF RISK

• Pure and speculative risk

Pure - death, accidents, fire etc (loss or no loss)

Speculative - stocks, horse racing, real estate (p/l possible)

• Fundamental and particular risk

Fundamental - inflation, war etc (effects large population)

Particular - theft, house fire (effects individuals)

• Enterprise Risk - strategic, ops, financial (related to enterprise)

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TYPES OF PURE RISK

PERSONAL PROPERTY LIABILITY

Premature Death Direct Loss Professional

RetirementIncome

ConsequentialLoss

Consumer

Health

Unemployment

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EFFECTS OF RISK

• Larger emergency fund

• Loss of goods and services

• Worry

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WAYS TO HANDLE RISK

• Avoid it

• Control it

• Retain it

•Transfer it

• Insure it

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INSURANCE

What is Insurance?

Insurance is the equitable transfer of the risk of a loss, from one entity to

another in exchange for payment.

Basic Characteristics

• Pooling of losses

• Payment of fortuitous (unexpected/unforeseen) losses

• Risk Transfer

• Indemnification

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INSURABLE RISK

• Large number of exposure units

• Loss should be accidental/unintentional

• Loss should be measurable

• Loss should not be catastrophic

• Chance of loss should be calculable

• Premium should be feasible

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INSURANCE AND HEDGING COMPARED

INSURANCE HEDGING

Covers insurable risk only(pure risk)

Covers uninsurable risk(speculative risk)

Can reduce objective risk bylaw of large numbers

Risk can be transferred butnot reduced

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TYPES OF INSURANCE

• Life

• Medical

• Property

• Vehicle

• Liability

• Social

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BENEFITS OF INSURANCE

• Indemnification for loss

• No worries

• Creates investment funds

•Prevents loss

• Enhances credit

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RISK MANAGEMENT

Risk management is the identification, assessment, and prioritisationof risks followed by coordinated and economical application ofresources to minimise, monitor, and control the probability and/or

impact of unfortunate events or to maximise the realisation ofopportunities.

Risks can come from uncertainty in financial markets, projectfailures (at any phase in design, development, production, or

sustainment life-cycles), legal liabilities, credit risk, accidents, naturalcauses and disasters as well as deliberate attack from an adversary,or events of uncertain or unpredictable root-cause

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OBJECTIVES OF RISK MANAGEMENT

Pre loss objectives

• Prepare for loss economically

• Reduce anxiety

•

Meet legal obligations

Post loss objectives

• Survival post loss

• Continuity of operations

• Earning stability

• Social responsibility

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STEPS IN RISK MANAGEMENT

1. Identify the loss exposures

2. Analyse the loss exposures - frequency and severity

3. Select techniques in handling the loss exposures

4. Implement and monitor

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IDENTIFYING THE LOSS

• Property

• Liability

• Income

• Labour

• Crime

• Employee Benefit

• Foreign loss

• Reputation

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ANALYSING THE LOSS

• Frequency- probability of occurrence during the given period

• Severity- probable size of loss

• Ranking of exposure in terms of importance

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TECHNIQUES TO HANDLE PURE RISK

• Risk Control - Avoidance, Prevention and Reduction

• Risk Financing - Retention, Transfers, Insurance

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PROS AND CONS OF RISK FINANCING

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Pros Cons

Save Money Possible higher losses

Lower Expenses Possible higher expenses

Encourage loss prevention Loss of tax savings

Better cash flow

Retention

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Pros Cons

Alternative to non-insurable risks Contract related risks

Less expensive than insuranceCompany still owns the risk if the

transferee defaults

Party excepting risk may be in a

better position to control

Transfers

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Pros Cons

Indemnification Premium is a cost

Less Uncertainity Time and effort

Insurers can help identify risk

exposuresPossible neglect in risk control

Tax benefit on premiums

Insurance

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DECISION MATRIX FOR TECHNIQUESELECTION

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Frequency Severity Technique

Low Low Retention

High Low Prevention

Low High Insurance

High High Avoidance

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MARKET DYNAMICS EFFECTINGTECHNIQUE SELECTION

• Underwriting Cycle

• Industry Capacity

• Investment Returns

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LOSS FORECASTING

• Probability Analysis

• Regression Analysis

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FINANCIAL RISK MANAGEMENT

Financial risk are speculative in nature

• Commodity price risk

• Interest rate risk

• Exchange rate risk

Financial risk management techniques

• Hedging

• Options

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FINANCIAL ANALYSIS IN RISKMANAGEMENT

• Time value of money- (premium decision example)

• Value at risk (VAR) Analysis - the worst possible loss likely tooccur in a given time period under given market conditions atsome level of confidence. E.g there is 5% probability that value

of portfolio may decline by Rs 50000 in a singly trading day.

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NEED FOR LIFE INSURANCE

Possibility of Premature Death

Between 1990 and 2010, globally overall life expectancy at birth increased by 4.7 years and 5.1 years for men and women, respectively.

However, the new estimates show that the number of years that people could expect to live in goodhealth at birth only increased by 3.9 years for men and 4 years for women in the same period.

Overall, women can expect to live for more years in better health with women in four countries Japan, Singapore, South Korea and Spain having HALE greater than 70 years in 2010; there wereno countries where this was the case for men.

- study by Lancet, UK. Dec 15, 2012

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Costs of Premature Death

• Loss of Income for family

• Post death expenses- funeral expenses, uninsuredmedical bills etc

• Non economic costs - emotional grief


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Life Insurance is justified if,

1. Insured earns an income

2. Others are dependent on this income partly or fully

3. It is not a contract for indemnity but a valued policy

that pays a stated sum

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Approaches in determining the amount

1. Human Life Value (HLV) approach

2. Needs approach

3. Capital Retention approach

Rules of thumb are bad ideas!

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VALUATION OF LIFE

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HUMAN LIFE VALUE

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It is the present value of the family's share of the deceasedbreadwinner's future earnings. It is also known as IncomeReplacement method.

Steps

1. Estimate individual's average annual earnings over productivelifetime

2. Deduct costs of self maintenance3. Determine number of years from the person's present age till

retirement

4. Determine the present value of the family's share of earnings for the period in step 3

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Example - HLV

• Age - 25

• Annual Income - Rs 5,00,000 (Do not assume increase in

income)

• Retirement Age - 60

• Interest Rate - 5%

• Self expenses p.a - 25% of income

• Existing life insurance policy - Rs 5,00,000

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Solution - HLV

• Years to retirement - 35 years

• Income available to family members - (5,00,000 less 25%) =

Rs 3, 75,000

• PV of Rs 3, 75, 000 annuity for 35 years at 5% - Rs 61,40,323

• Existing policies - Rs 5,00,000

• Insurance Required - Rs 61,40,323 - Rs 5,00,000 = Rs

56,40,323

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NEEDS BASED APPROACH

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The goal of this approach is to cover the surviving familymembers' immediate and ongoing approach. It focusses onexpenses rather than income, in determining the amount.

Steps1. Estimate the annual household expenses2. Determine number of years from the person's present age till

retirement

3. Determine the present value of the house hold expenses for the period in step 3

4. Estimate PV any other future goals

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Example - Need Based

• Age - 25

• Annual household expenses - Rs 3,00,000 (Do not assume inflation)

• Daughter's marriage after 25 years - Rs 15,00,000 (present value)



• Estimated costs at death - Rs 50,000

• Existing life insurance policy - Rs 5,00,000

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Solution - Need Based

• Years to retirement - 35 years

• Costs at death - Rs 50,000; PV of goal - Rs 15,00,000

• PV of household expenses for 30 years at 5% = Rs 49,12,258

• Total fund requirement - (50k + 1500k + 4912k)= Rs 64,62,258

• Existing policies - Rs 5,00,000

• Insurance Required - Rs 64,62,258 - Rs 5,00,000 = Rs 59,62,258

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CAPITAL RETENTION APPROACH

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Also called capital needs analysis approach. It requires preservationof capital for distribution to heirs

Steps1. Prepare a personal balance sheet2. Determine the amount of income generating capital3. Determine the amount of additional capital needed

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Example - Capital Retention

• Age - 30

• Annual Income - Rs 5,00,000

• Annual household expenses - Rs 3,00,000 (Do not assume inflation)



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Liabilities As ets

Loan 100,000 House 2,000,000

Credit 50,000 Car 150,000

FD 500,000

Total 150,000 Total 2,650,000

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Solution - Capital Retention

• Income producing capital

Total assets less non income generating = Rs 5,00,000

Less, liabilities = Rs 2,50,000

Net capital available for income generation = Rs 2,50,000

• Income from current capital @ 5% = Rs 25000

• Additional income needed - Rs (3L - 25k)= Rs Rs 2,75,000

Capital Required (275000/0.05) = Rs 55,00,000

Insurance Required = Rs 55L + Rs 1.6L Liabilities = Rs 56.6L

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TYPES OF LIFE INSURANCE

• Term Insurance

• Whole Life Insurance

• Endowment Insurance

• Unit Linked Insurance

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TERM INSURANCE


• Period of protection is temporary, for a predetermined termlike 1,5,10 or 20 years.

• Unless the policy is renewed the protection expires at the endof the term

• Most insurers have age limit beyond which renewal is not

allowed

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ADVANTAGES OF TERM INSURANCE

• It is inexpensive because of the improved mortality rates andkeen price competition. Also the amount paid is purely for riskcover and not for investment.

• Best option if the need for the protection is temporary

• Can be used to guarantee future insurability and conversioninto endowment plan

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DISADVANTAGES OF TERM INSURANCE

• Premiums increase with the age and eventually reachprohibitive levels

•It does not accumulate any cash value and hence cannot beused to save money for any specific goal

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WHOLE LIFE INSURANCE


• It is a cash value policy which provides life time protection

• It has a saving element called cash surrender value - due to overpayment of

premium during the early years

• Sum assured is paid, if the insured is still alive at age 100

• Premiums do not increase every year but are level

• Ordinary/straight life or continuous premium whole life - provides life timeprotection to age 100 and the death claim is a certainty

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Limited Payment Policy

• Limited payment whole life insurance - provides life time protection

• Premiums are level but are paid only for certain period

• A policy is called 'paid-up' when premium paying term is over but

the protection continues

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WHOLE LIFE INSURANCE

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ENDOWMENT INSURANCE

• Guarantee a particular sum of money either on death of theinsured or on maturity of the policy, which ever is earlier

•

Typically a bonus is attached to the base policy every year andwhich is also paid on death or maturity

• The premium of endowment plans are much higher than terminsurance because they provide cash values

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UNIT LINKED INSURANCE

• A modern variant of endowment plan

• Decision on asset allocation is in the hands of the policyholder (example, equity,debt, balanced, liquid)

•Highly flexible policy

• Owner can increase or decrease life cover

• Limited premium payment option

• Allows switching between funds

• Partial or total withdrawal option after initial lock in period (5 years)

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COMPONENTS OF INSURANCE

Protection component - Premium

The cost of insurance is determined by multiplying the applicable mortalityrate by the net amount of risk

Expense component - Expenses

Insurers typically deduct 5 to 10 pc of each premium for expenses

Saving component - Interest rate

Interest earnings are credited to the cash value. Interest rate may becontractually guaranteed.

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GROUP LIFE INSURANCE

• Provides life insurance on a group of people in a single master contract

• Physical examinations are not required

• Usually a term cover

• Important employee benefit provided by employers

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RIDERS

Riders are provisions which the policyholder may agree to insert in the base policy, giving him either extra cover or expanding thescope of benefits, which are otherwise not available in the basepolicy.

Types of riders

Level Term Cover Rider - an option to increase risk coverfor a limited period. It is a plan that offers pure risk cover at a least

cost. Generally, used to get extra protection for a time when onemay be carrying extra liability

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Critical Illness Benefit Rider - it provides additionalcover for the risk of contracting a critical illness. It is usually

equal to or up to 50 pc of the sum assured of the base policyand is paid upon diagnosis of illness. Coverage of illness variesfrom company to company but usually covers cancer, heartattack, kidney failure etc

Accident and Disability Benefit Rider - it providesadditional benefit if the death or disability occurs due to anaccident. In case of death, the rider amount plus the base policysum assured is paid.

Income Benefit Rider - available with children's plans. It

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GENERAL CONTRACTUAL PROVISIONS

• Ownership Clause - owner of the proper ty can be the insured, the

beneficiary, a trust or another party. Mostly, insured and the owner are same.Policy owner possess all contractual right in the policy.

• Entire contract clause - life insurance policy and attached applicationconstitutes entire contract between the parties. Insurer cannot amend the policywithout the knowledge of the owner. The claim cannot be denied unless the

statement made in the application is a material misrepresentation.

• Incontestable clause (sec 45, Insurance Act) - insurer cannot contest

the policy after it has been in force two years during the insured's lifetime.

•Suicide clause - if the insured commits suicide within one year after the policyis issued or revived, the face amount of insurance is not paid, there is only refund

of premiums paid.

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• Grace period - policy owner has a period of 30 days to pay an

overdue premium.

• Reinstatement clause - if the policy has lapsed due to nonpayment of premium at the end of the grace period, it can be

reinstated as per this clause, provided the prescribed conditions are

met.

• Misstatement of age or sex clause - if the age or sex ismisstated, the amount payable is the amount that the premiums paid

would have purchased at the correct age and sex.

• Assignment clause - policy owner is free to assign the policy to

any party by filing a written notice. Assignment may be absolute (allrights are transferred) or collateral (only certain rights are transferred).

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EVALUATION OF LIFEINSURANCE POLICIES

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COST OF LIFE INSURANCE

Factors to be considered in determining the cost of life insurance

1. Annual premiums

2. Cash values

3. Dividends

4. Time value of money

Methods used for determining the cost of life insurance

1. Net cost method

2. Interest-Adjusted cost method

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NET COST METHOD

• Annual Premium - Rs 5,000 (paid at end of year)

• Policy period - 20 years

• Sum Assured - Rs 5,00,000

• Dividend estimated for 20 years - Rs 10,000

• Cash surrender value at the end of 20years is = Rs 1,00,000

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Particulars Amount

Total premium for 20yrs Rs 1,00,000

Dividend for 20yrs Rs 10,000

Net premium Rs 90,000

Cash value at the end Rs 1,00,000

Insurance cost for 20 yrs - Rs 10,000

Net cost per year - Rs 500

NET COST METHOD

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Drawbacks of net cost method

• Time value of money is ignored

•Insurance is often shown to be free

• The timing and amount of each dividend is ignored

• The net cost is based on the assumption that the policy will be

surrendered

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NET COST METHOD

INTEREST ADJUSTED COST METHOD

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• Annual Premium - Rs 5,000



• Dividend estimated for 20 years - Rs 15,000 (with interestaccumulation)

• Cash surrender value at the end of 20years is = Rs 1,00,000

• Interest rate - 5%

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Particulars Amount

Total premium for 20yrs Rs 1,65,330

Dividend for 20yrs Rs 15,000

Net premium Rs 1,50,330

Cash value at the end Rs 1,00,000

Insurance cost for 20 yrs Rs 50,330

FV of Re 1 after 20 years Rs 33Interest adj cost per year Rs 1,515



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Advantage of interest adjusted cost method

• More accurate measure of life insurance costs

• Time value of money is taken into consideration

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INTERNAL RATE OF RETURN

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• Annual Premium - Rs 5,000



• Accumulated dividend estimated after 20 years = Rs 1,50,000

• Total payout expected after 20 years = Rs 2,50,000

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• Compute IRR

• Compare the IRR with the another investment opportunity fordecision making

TAXATION OF LIFE INSURANCE

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TAXATION OF LIFE INSURANCE

• Falls under category of EEE

• Life insurance premiums are deductible from income under chapter VI A(section 80C)

• Any dividend or bonuses accumulated on the policy is also exempt from

tax

• The final payout of the policy including sum assured and accumulatedbonuses is exempt from tax under section 10(10D)

• The income tax deductions and exemptions are available only if the sumassured is at least 10 times the annual premium

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BUYING LIFE INSURANCE

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BUYING LIFE INSURANCE

1. Determine whether you need life insurance

2. Estimate the amount of life insurance needed

3. Decide on the best type of life insurance for you

4. Decide whether you want a policy that pays dividends

5. Look for a low cost policy

6. Consider the financial strength of the insurer

7. Deal with the competent advisor - IRDA licensed or CFP

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ANNUITIES

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ANNUITY

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ANNUITY

Annuity is defined as a periodic payment that continues for a fixedperiod or for the duration of a designated life or lives

It provides protection against living too long and exhausting one'ssavings while the individual is still alive. The fundamental purpose of anannuity is to provide lifetime income that cannot be outlived

Annuities are possible because the risk of excessive longevity is pooledby the group. Some will die early before exhausting their savings andsome will still be alive after exhausting their principal.

In financial industry, the term annuity means a contract under which oneparty -the insurer- promises to make a series of periodic payments inexchange for a premium or series of premiums.

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COMPONENTS OF ANNUITY FUND

Annuity funds consists of 3 sources

• Premium payments

• Interest earnings

• The unliquidated principal of annuitants who die early

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CLASSIFICATION OF ANNUITIES

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CLASSIFICATION OF ANNUITIES

Single premium annuity - is an annuity that is purchased by thepayment of a single, lump sum premium. Benefit payments under a singlepremium annuity may begin shortly after the premium is paid or many yearsafter the premium is paid.

Flexible premium annuity - is an annuity wherein the contract holder

pays a premium on a periodic basis over a stated period of time. Manyinsurance companies provide flexibility of the premium amount as well as thefrequency in payments.

The operation of annuity is basically the same regardless of whether thepremium is paid in one sum or in a series of payments. The choice of method,

however effects the length of time that the insurer holds the principal atinterest. The longer the insurer holds a given premium, the larger will be theinvestment earnings generated by the principal.

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Immediate annuity - is an annuity under which payments are

scheduled to begin one annuity period after the annuity is purchased.

Because benefit payments begin soon after an immediate annuity is

purchased, an immediate annuity is generally purchased with a single

premium; such a policy is known as single premium immediate annuity

(SPIA)

Deferred Annuity - is an annuity under which periodic benefitsare scheduled to begin more than one annuity period after the date

on which the annuity was purchased. People often purchase deferred

annuities during their working years in anticipation of the need for

retirement income later in their lives.

Life Annuity - is an annuity that provides periodic benefit

payments for the lifetime of a named individual.

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Temporary life annuity - provides periodic benefit payments until the end of

a specified number of years or until the death of the holder, which ever occurs first.

Once the stated period expires or the holder dies, the annuity benefit ceases. These

annuities are purchased to fill a gap between the end of an earning period and the time some other anticipated income begins.

Annuity with return of purchase price on death - is paid to the life

assured as long as he/she is alive. On the death of the life assured, the purchase

price of the annuity is paid as death benefit. The purchase price includes the Sum

Assured under the Basic Plan, the accrued Guaranteed Additions and any accruedbonuses, excluding the commuted value, if any.

Increasing annuity - is paid to the life assured as long as he/she is alive. The

amount of annuity increases every year at a simple rate of 3% per annum.

Joint Life Last Survivor Annuity - is paid to the life assured as long as he/

she is alive. On death of the life assured, 50% of the annuity is payable to the

nominated spouse as long as the spouse is alive.

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TAXATION OF ANNUITIES

• Premium paid towards annuity policy is deductible from taxable income under chapter VI A (sec 80CCC) within theoverall limit.

• Money received as per the annuity contract are treated asincome and taxed

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ANNUITY AND LIFE INSURANCE

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ANNUITY AND LIFE INSURANCE

Annuity Life Insurance

It covers the risk of living too long It covers the risk of premature death

It is not an insurance so no additionalrisk covers

It covers risk of death and disability

Receive the interest on fixed

investment as promised

Accumulated bonus on the sum

assured is paid at maturiity

Taxable as ETT Tax exempt as EEE

ANNUITY EXAMPLE

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ANNUITY EXAMPLE

Ramesh is 35 years old. He decides to invest in an pension plan toaccumulate a corpus for his retirement. He buys a deferred annuity planwhich requires him to invest Rs 30,000 annually for next 25 years. At

the vesting age of 60, the fund value shall be used to provide monthlyannuities. During the accumulation phase he expects a return of 10% onhis investment.

1. Find the accumulated corpus at the vesting age

2. If pension is paid for next 15 years and the rate of return during thedistribution is 7%, find out monthly pension to be received by

Ramesh, assuming the corpus gets fully exhausted in 15years

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ANNUITY EXAMPLE

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Return expected - 10%

Time to vesting age - 25 years

Investment p.a - Rs 30,000

Value of corpus at vesting age = Rs 32,45,452

________________

Return during distribution phase - 7% p.a (0.07/12 pm)

Annuity payment period - 15x12 =180

Present Value = Rs 32,45,452

Annuity payment pm = Rs 29,000

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ANNUITY EXAMPLE

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HEALTH INSURANCE

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HEALTH INSURANCE

Need

Throughout person's lifetime, it is not uncommon for health related problems to strike. These problems can be in form of illness or disability requiring seriousand/or constant medical treatment.

While you cannot prevent the occurrence of these problems, you canhowever, implement a risk management plan, which seeks to minimise thefinancial impact of such events.

In managing health related risks, health insurance probably is the most powerful tool that can be used to minimise the consequences. This is particularly so in

the context today, where medical costs have escalated tremendously.

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FACTORS RESPONSIBLE FOR HIGH HEALTH CARE COSTS

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FACTORS RESPONSIBLE FOR HIGH HEALTH CARE COSTS

• Rising hospital costs - more than half of the increase in private health care is due to

rising hospital costs. This is due to increased use of expensive technology, higher

labour costs and increased cost of hospital administration.

• Prescription drug costs - prescription drugs continue to be a major driver of health

care costs. This is mostly due to price inflation.

• New technology - is a major driver of health care costs. It is estimated that between

10-40 pc of the growth in personal health care spending is attributable to technological changes.

• Physician cost trends - the number of specialists has increased over time. Specialist

charges average more than twice the charges by primary care physicians.

• Other costs - such as administrative costs, health care frauds etc

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TYPES OF HEALTH INSURANCE COVERS

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TYPES OF HEALTH INSURANCE COVERS

• Individual Mediclaim Policy - simple medical policy withindividual sum assured. Each person is entitled to full sum assured.

•Family Floater Policy - enhanced version of mediclaim policy. The

sum assured floats amongst the family members. Utilisation of the policyduring the year by any member decreases the sum assured available toother during the year.

•Unit Linked Health Policy - these policies link health insurancewith investment and pay back certain amount at the end of the term.Not a recommended type of covering health risk

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MEDICLAIM INSURANCE

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MEDICLAIM INSURANCE

Mediclaim insurance is a cover, which takes care of hospitalisation expenses subject to a

maximum sum insured in respect of the following eventualities:

• Sudden illness

• An accident

• Any surgery

Expenses that are reimbursed under this policy

• Hospitalisation due to accidental injury, illness, surgery

• Domiciliary Treatment

• Pre-hospitalization up to 45 days

• Post-hospitalization up to 60 days

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Age limit

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Age limit

• 3 years to 75 years

• Children between 3 months to 3 years can be covered provided one or both parents are

covered concurrently

Treatment procedure

• The claim is payable only for the treatment in a hospital in India

• It is listed in the approved list of the insurer

• Hospital should have at least 15 beds or 10 beds in small towns

• Should have fully equipped operation theatre of its own where surgical operations are carried

out

• Fully qualified doctors and nursing staff should be available round the clock

• The minimum period of hospitalisation for claiming expenses is 24hours. However, the time limit

is not applicable in case of treatment like Dialysis, Chemotherapy, Lithotripsy, Radiotherapy, Eye

surgery, Dental surgery, Tonsillectomy taken in hospital

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Requirements for taking up the policy

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• Pre-Medical Health Check Up - to ensure that the applicant is free from the

major ailments as may be prescribed by the insurer.

• Sum Insured - is a minimum of Rs 50,000 with multiples of Rs 50,000 thereafter.

Exclusions

• Diseases, which have been in existence at the time of proposing insurance cover.

• Pre or post hospitalisation treatment of specified diseases in the policy.

• Any disease or injury within 30days of commencement of policy.

• Certain specified diseases are not covered during first year of the contract

• Vaccination, cosmetic or aesthetic treatment etc unless the treatment

necessitating hospitalisation is necessary.

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Exclusions (contd)

• Registration fees, admission fees, ambulance charges, service fees

and non medical expenses.

• Any treatment related to pregnancy, childbirth or voluntary

termination of pregnancy.

• Naturopathy treatment.

Domiciliary Hospitalisation - means medical treatment at

home (in India) for a period exceeding 3 days for such illness which

in normal course would require care and treatment in hospital.Domiciliary hospitalisation does not cover expenses incurred for

pre and post hospital treatment and any other specific exclusions.

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Income Tax Benefit

• Premium paid for mediclaim insurance is eligible for deduction

under section 80D

• For individuals less than 65 years of age, the maximum limit is

Rs 15,000. For individuals above 65 years, the maximum limit

is Rs 20,000.

• A further deduction of Rs 15,000 could be claimed, for buying

health insurance policy for your parents (Rs 20,000 if either of

your parents is a senior citizen). This is irrespective of whether they’re dependent on you or not. No deductions can be

claimed for in-laws.

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THIRD PARTY ADMINISTRATION (TPA)

Since October 2002, a new system of claim settlement has been introduced.The responsibility is given to selected TPA. The insurance company gives out the insurance policies and insures the risk. Subsequently they submit all thedata about the insured to TPA to provide following services to the insured:

•Issue of identity cards to all policyholders

• Provide information to policyholders about hospitals

• Provide cashless access

• Provide a toll-free number to contact TPA

• Examples of TPA companies - Medicare, TTK etc

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GROUP MEDICAL INSURANCE

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GROUP MEDICAL INSURANCE

Group medical insurance is available to any group/association/institution/corporatebody of more than 50 persons provided it has a central administration point.

• All members must be covered under one policy

• Policy is issued with schedule of names including eligible family members

• Policy covers reimbursement of hospitalisation/domiciliary expenses

• Exclusions are specified in the policy

• Policy is eligible for group discount on renewal. Also eligible for low claim ratiodiscount.

• Malus (high claim ratio loading) is loaded on the premium depending upon theincurred claims ratio for the entire group

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OVERSEAS MEDICLAIM INSURANCE

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OVERSEAS MEDICLAIM INSURANCEPOLICY

• Covers unexpected medical and non-medical expenses when a person is travelling abroad

• The policy should be taken prior to departure in India

• Premiums are payable in Indian Rupees but claims are settled in foreigncurrency

• Does not require medical checkup

• Does not cover mental disorder, anxiety and depression

• First USD100 of all claims are to be borne by the traveler

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SO CC S C

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PERSONAL ACCIDENT INSURANCE

Personal accident plans are policies which covers a person fromaccidental death, accidental disability and have other features.

A life insurance plan can only help in death and a health plancan help in case of hospitalisation. Some of these policies alsooffer accidental riders but, these riders are not ascomprehensive as full fledged personal accident insurance

policies.

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COVERAGE OF ACCIDENT POLICY

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Covers accidental damage caused to the insured by any physical perils resulting into injuries, which may

cause death, or make insured permanently or temporary disabled.

Death - In case of death due to accident, 100% of sum assured is paid to the nominee

Disability Insurance - as of now in India, insurance companies do not cover disability benefits

protecting against disability due to sickness. The existing products cover only the risk of disability due to

accidents.

Permanent partial disablement (PPD) - covers disablement that is not complete but only

partial. The applicable percentages of compensation of various par tial losses are generally mentioned in

the insurance contract. Examples of PPD:

• loss of index finger or thumb

• loss of hearing of ears

• loss of eye sight

• loss of one hand

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COVERAGE OF ACCIDENT POLICY

Temporary Total Disablement (TTD) disablement which is total in the sense that

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Temporary Total Disablement (TTD) - disablement which is total in the sense that

the insured is unable to engage in any gainful employment for a temporary period. Usually

part of sum assured is paid. Examples of TTD:

• bed rest for few months

• fracture of hand

Permanent Total Disablement (PTD) - the disablement due to accident should be

of permanent and irrecoverable nature and should be absolute total which means the

insured person is prevented from earning through any gainful employment of any kind, like

total paralysis. Sum assured is paid in such cases. Sum companies even pay more than 100%

of SA. Examples of PTD:

• both hands or both feet

• one hand and one feet

• one (hand or foot) and one eye

• loss of sight of both eyes or speech or hearing of both ears

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Oth f t f A id t P li i

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Other features of Accident Policies

• Some companies may cover acts of terrorism

• No medical checkup is required

• Coverage is world wide

• Coverage usually range from Rs 5 to Rs 50 Lacs

Exclusions

• Intentional self injury, suicide or attempted suicide

• Influence of intoxicating liquor or drugs

• Suffering from any pre-existing condition or pre-existing physical or mental defect or

infirmity

• Aircraft pilots and crew, Armed Forces personnel and Artistes engaged in hazardous

performances are totally excluded

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Sum Assured and Premium

• The sum assured depends on the annual income of the insured

and is generally restricted to 25-36 times the monthly income.

• The premium of the policy does not depend on age but upon the occupation of the client.

• Each kind of occupation is divided into risk levels, usually 1 to

3. 1 being least risky like bankers, doctors, accountants etc.

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TERMS AND GENERAL PROVISIONS

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TERMS AND GENERAL PROVISIONS

• Broad Coverage - most policies provides broad coverage of all reasonable

and necessary medical expenses and other related expenses from a coveredillness or injury. It covers hospital room charges, services and supplies, treatmentby doctor, prescription drugs and medical equipment.

• Benefit period - refers to the length of time that major medical benefits willbe paid

• Deductible - a policy may contain a deductible clause. It is a minimum amount that must be paid by the insured before the benefit is paid by the insurer. Thepurpose of the deductible is to eliminate payment of small claims and relativelyhigh administrative expenses of processing small claims.

• Coinsurance - a policy may contain a coinsurance provision that requires theinsured to pay a certain percentage of eligible medical expenses in excess of thedeductible. The purpose of the coinsurance clause is to reduce premiums and toprevent over-utilisation of policy benefits

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Example of deductible and coinsurance

Rahul has incurred medical expenses of Rs 20,000. He

has Rs 1Lac medical policy with Rs 1,000 as deductible

and 80:20 coinsurance provision.

In this case insurer will pay Rs 15,200 (80% of Rs 19,000)

and Rahul will pay Rs 4,800 (20% of Rs 19,000 plus

deductible Rs 1,000)

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EMPLOYEE STATE INSURANCE (ESI)

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( )

ESI is a self-financing social security and health insurance scheme for Indianworkers. The ESI Act was enacted in India in 1948, but come in to reality from 1952starting at Kanpur and Delhi. Initially intended for workers working in factories andcompanies only, It is now applicable to all all establishments having 10 or moreworkers including educational institutions, hospitals, etc., covering 15.5 millionemployees working with about 450,000 employers. Total beneficiaries as of2011-12 are above 65.5 million

For all employees earning 15,000 or less per month as wages, the employercontributes 4.75 percentage and employee contributes 1.75 percentage, total share6.5 percentage. This fund is managed by the ESI Corporation (ESIC) according torules and regulations stipulated therein the ESI Act 1948, which oversees theprovision of medical and cash benefits to the employees and their family through itslarge network of branch offices, dispensaries and hospitals throughout India. ESIC isan autonomous corporation under Ministry of Labour and Employment,Government of India. But most of the dispensaries and hospitals are run byconcerned state governments.

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In ESI scheme, a worker in insurable employment is called insured person (IP). Insured

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S sc e e, a wo e su ab e e p oy e t s ca ed su ed pe so ( ) su ed

persons and their family are entitles to different types of benefits. The benefits are broadly

classified into two: (1) Medical benefit and (2) cash benefit.

The employees registered under the scheme are entitled to:

• Medical treatment for themselves and their dependants,

• Unemployment cash benefit in certain contingencies, and

• Maternity benefit in case of women employees.

• In case of employment-related disablement or death, there is provision for a disablement

benefit and a family pension, respectively. Funeral Benefit to dependants of Insured.

• Outpatient medical facilities are available in 1398 ESI dispensaries, and through 1678

empanelled private medical practitioners.

• Inpatient care is available in 145 ESI Hospitals and 42 Hospital annexes; a total of 19387

beds. In addition, several state government hospitals also have beds for exclusive use of

ESI Beneficiaries.

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BUYING HEALTH INSURANCE

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Factors to consider while taking health insurance policy

• Insure for catastrophic loss - The cost of serious illness is extremely high. You shouldpurchase a policy that can cover such illness at best medical facility at minimum cost toyou.

• Get insured under group health insurance first - Group policies are beneficial in manyways. They have less exclusions, do not require individual underwriting and is usually paid

by the employer saving you the premium cost.

• Purchase a policy that has wide hospital network

• Do not ignore disability income insurance

• Avoid limited disease coverage policies

• Check for restrictive policy provisions and exclusions

• Use deductibles to reduce premiums

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PROPERTY INSURANCE

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PROPERTY INSURANCE

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FIRE INSURANCE

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FIRE INSURANCE

Commercial property insurance is also called fire insurance. Itsone of the oldest forms of insurance and the origin lies in theage old fear of fire and failure to control fire. In the earlydevelopment of the industrial society, fire was the main sourceof energy. No industrial activity was possible without fire andhence the need to insure the risk of uncontrolled fire.

Fire insurance is designed to provide for financial loss toproperty due to fire and other hazards. Fire insurance is

governed by Tariff Advisory Committee (TAC).

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Examples of property that can be covered under fire insurance policy

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Examples of property that can be covered under fire insurance policy

are:

• Buildings

• Contents of buildings such as machinery, equipment, accessories or

goods

• Electrical installations of a building

• Goods in the open

• Dwellings and contents of dwellings

• Furniture, fixture and fittings

• Pipelines located inside and outside buildings, dwellings and compounds

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COVERAGE

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• Fire

• Explosion or implosion (except in cases of boiler etc where steam is generated as part of process)

• Aircraft damage - destruction or damage caused by aircraft, other aerial or spatial devices and articlesdropped from them

• Riot, strikes, malicious and terrorism damage - direct visible physical loss, destruction or damage byexternal violent means caused to property

• Impact damage - impact by any rail/road vehicle or animal by direct contact not belonging to or owned

by insured or any occupier of the premises or their employees

• Storm, cyclone, flood etc

• Subsidence and landslides including rock slides

• Missile testing operations

• Burning or overflowing of water tanks, apparatus and pipes

• Leakage from automatic sprinkler installations

• Bush fire, excluding fire caused by forest fires

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PROPOSAL FOR FIRE INSURANCE

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A proposal for a fire insurance policy seeks information from the insurer that covers following aspects:

1. Description of property -

1. construction of external walls, roof and number of floors

2. occupation of each floors

3. storage of hazardous goods

4. manufacturing process employed in the building

2. Proposed sum for which the building and its contents are to be insured

3. The period of insurance

4. History of previous losses

5. History of insurance (e.g has an insurer previously declined the risk)

6. Risk inspection report of the insurer's engineers in the case of large factories, plants or industrialcomplexes is required to be submitted

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TERMS

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• Cover note - it is an unstamped document of the evidence of the insurance

cover until the issuance of the policy. The cover note provides insurance against the specific perils on the usual terms and conditions of the insurer, and it isissued once the insurer receives the duly completed proposal with theinspection report and other information sought by the insurance company.

• Policy document - the printed policy document is the final contract between the insurer and the insured and is required to be stamped. It contains details of the contract with relevant schedules and rates. Though similar to cover note insubject matter, it provides greater details.

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• Claims - The claim is obviously raised in the event of a loss or damage. It is to be

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y g

filed using a claim form prescribed by the insurer. Typically the claim form covers

the following information:

• Name and address of the insured and reference to the policy

• Date time and place of damage

• Cause of damage

• Details of property damaged

• Details of the policy

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• Survey Report - whether or not a survey report needs to be prepared is

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Su vey epo t w et e o ot a su vey epo t eeds to be p epa ed s

governed usually by the size of the claim. If the claim is small, the insurer may

assign an officer to inspect the damage/loss and decide on the validity of the

claim on the spot. However, if the loss is large, an independent surveyor is to be

appointed by the insurer to assess the claim independently and give a report of

loss. Such report would generally deal with the following issue in a fire policy

claim:

• Cause of the fire

• Extent of loss

• Degree of under-insurance

• Detailed value of salvage and how it is disposed or proposed to be disposed

• Details of expenses (if any, example fire fighting)

• Details of other insurance policies covering the same risk and property.

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C ti l l i i fi li i fi i i d i d

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• Consequential loss insurance in fire policies - fire insurance is designed to cover

the risk of damage or loss due to fire or damage to buildings, machinery etc. It does not

cover consequential losses. Whereas in fire insurance the main subject of the claim is the

property of the insured, in consequential loss insurance, the main object of the cover is the business of the insured. So usually such policies cover the trading loss or loss due to

interruption of business. They intend to cover the loss of profit due to the damage.

The basis of loss of profit is related to the revenue or the total income of the business. If

this is stopped or reduced, the profits are effected. The loss of profit is, therefore,

determined with reference to reduction of revenue or turnover.

It usually consists of the following components:

• Variable charges - these are expenses incurred in the production of goods which vary in

direct proportion to the volume

• Fixed charges - these expenses are fixed amounts irrespective of the volume of business

Gross profit is likely to get affected due to loss of turnover

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• Indemnity period - is a period selected by the insured as one which

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Indemnity period is a period selected by the insured as one which

would be taken to reinstate the building or machinery, stocks etc.

Usually, the insured would select an indemnity period that represents

the longest period during which his business is likely to be affected.

• The sum insured usually will represent the gross profit of the selected

indemnity period. For instance, if the indemnity period is 12months,

then the sum insured will be the gross profit of the 12 months.

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EXCLUSIONS

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• 5% of each and every claim resulting from the operation of lighting/subsidence & lighting

including rockslide covered under the policy

• Loss, destruction or damage caused by war

• Loss, destruction or damage directly or indirectly caused to the property due to nuclear hazard

• Loss, destruction or damage caused to the insured property by pollution or contamination

excluding any insured hazard which itself results in pollution or contamination

•Loss, destruction or damage to bullion or precious stones, works of art for an amountexceeding Rs 10,000. Manuscripts, plans, drawings, securities, documents, stamps, coins or paper money,

computer system records, explosives unless otherwise expressly stated in the policy

• If the insured neglects to use all reasonable means to save and preserve at or after the time of loss,

the loss is not recovered

• Loss, destruction or damage to any electrical or electronic machine, apparatus arising from over

running, excessive pressure, short circuit, self heating or leakage of electricity

• Expenses incurred on surveyor's fees and debris removal, following loss to the property in

excess of 3% and 1% of the claim amount respectively

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GENERAL CONDITIONS

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• Policy will become void in the event of non-disclosure of material facts ormisrepresentation by the insured

• Insurance under the policy will cease if the building or structure covered by the policy, fallsor is displaced in full or in part, unless the insurer is given a notice within 7 days of theevent

• Under any of the following circumstances, the insurance ceases as regards propertyinsured if the insured does not obtain prior sanction of, or endorsement of the insurer:

• trade or manufacture carried out in the property is altered, or nature of the occupationhas changed or other circumstances are changed in a way that enhances the risk

• building insured becomes unoccupied and remains so for 30 days or more

• the interest in the property passes from insured to someone else, except by

succession, will or similar operation of law

• In case of death of the insured his legal heirs automatically become the insured

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• If there is a marine policy covering the property and the loss the fire

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• If there is a marine policy covering the property and the loss, the fire

policy will pay only the excess over the amount payable under the

marine policy

• The insured must give notice of loss/damage to the insurer immediately

and submit a claim within 15days

• The insurer is not liable for any loss after the expiry of 12months from

the date of loss unless the claim is subject of pending action, arbitrationor litigation

• Post 12months, the claim is deemed to be abandoned by the insured. It

is not recoverable thereafter

• On occurrence of loss, the insurer has right to enter and take possession

of the building, salvage the insured property, sell the damaged property

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• If the claim is fraudulent or any false evidence is produced by the

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y p y

insured to avail benefit under the policy, then the insured loses all

the benefits under the policy. Same applies for loss or damage

caused wilfully by the insured

• The insurer has the right to replace or reinstate the property that

is loss/damage instead of paying for the loss. This condition is

invoked when the insured is claiming disproportionately large

quantum of loss than what the insurer is willing to admit

• In the event where the insured has not covered the full value of

the property, insurer will pay for only portion of the loss. example:

value of property, Rs 5L, sum assured Rs 3L, loss was Rs 1L

amount payable by insurer = 3/5 x 1 = Rs 60,000

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• In the event of one or more policies covering the same property

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In the event of one or more policies covering the same property

for the same hazard, all policies will contribute towards the claim in

the same proportion as they bear individually to the sum assured

• If the loss is caused by a third party the insured is required to help

and assist the insurer to enable it to recover the loss from the third

party responsible

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TYPES OF FIRE INSURANCE POLICIES

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Floater Policy - Under this policy stocks lying at different locations are covered under one suminsured. This could be at different warehouses or godowns or factories. Such a floater policy is alsopermitted for stock in process at different factories

Declaration Policy - Such a policy is created to take care of frequent fluctuations in stocks andstock values at godowns, factories etc. The basic idea is that the insured should only pay premium forstock at risk rather than an aggregate value of stock. The insurer refunds premium to the insured basedon frequent declarations made on the value of the stock. The policy is subject to following conditions:

• minimum sum assured must be at least Rs 1cr

• a monthly declaration is required to be made of the highest daily value or highest monthly value by the insured, within a specific period

• the refund of premium based on the declarations is not permitted beyond 50% of the premium

• the basis of value is market value unless specific valuation system is otherwise agreed upon

• these policies cannot be issued for insurance required for short periods or stocks under process

• these can also be floater policies, if the sum assured is Rs 2 cr and the minimum retentionpremium is 80% of the annual premium

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Reinstatement value Policy - This is a fire policy that specifies that in event

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y p y p

of loss, the policy will pay an amount required for the reinstatement of the

property insured. Usually the insurers issue policies of reinstatement only for such

properties that are relatively new. If in the process of replacement the insured isbenefited over and above the original property, then he is liable to indemnify the

insurer against such benefit. For instance, in replacing the machine, the new model

may render the machine more productive, then the insured would have to bear a

part of the replacement cost. Some provisions of the policy are:

• if the insured is unwilling to replace the damage property, then such cases will

be settled on the basis of normal indemnity

• reinstatement must be carried out within 12 months of loss, failing which

normal indemnity principle will apply

• reinstatement will not apply if the insured fails to intimate the insurer within 6

months, his intention to reinstate the property

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Industrial all risk Policy - This type of policy is a package cover meant

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y yp p y p g

for industries (both manufacturing and storage risks) with an overall sum

insured of Rs 100cr. Generally, large insurers look for such policies since

administratively they are less cumbersome to both the insurer and theinsured. As a result they tend to be cheaper than taking a set of specific

policies to cover different industrial risks. The policy covers the following perils:

• Fire

• Burglary

• Machine breakdown, boiler explosion and material damage to electronic

equipment

• Business interruption, as an optional cover

• Under insurance of up to 15% is permitted in this policy

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AGREED BANK CLAUSE

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Wherever there is a bank involved as a mortgage holder on a particular property, thename of the bank and the owner are both included in the policy. Usually the name of the

bank included in such cases as the Agreed Bank in a clause separately added to the policy.

The main features of an Agreed Bank clause are:

The claim is payable to the bank

Breach of policy contract due to material alteration does not affect the interest of thebank

Any settlement or compromise in relation to any dispute reached with the bank isbinding on all parties

Any alteration in risk does not invalidate the policy, provided the bank notifies alteration

as soon as it comes to know of it

The basic principle here is to protect the bank as the par ty having financial interest in the property and claims against it

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HOME INSURANCE

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Home insurance is primarily a cover that is provided as protection for one’s home

against various kinds of risks and hazards such as natural calamities including floods,earthquakes, tsunami or accidents such as fire and occurrences such as theft.

There are two basic types:

Building Insurance: This provides cover to any form of building or the structure of

the building against damage due to man made reasons or natural calamities to theextent of providing for the entire cost of reconstruction in case the building sufferscomplete destruction.

Content Insurance: This provides cover to the contents in the house such as jewellery, movable goods and any valuable item which is not fixed to the home like

electronic goods, clothing or furniture. There are various types of covers availablewith different insurers which the customer can choose from.

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Coverage Exclusions

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• Fire and allied perils

• Burglary and robbery

• Jewellery and precious stones

• Plate glass

• Domestic appliances

• Electronic equipment

• Pedal cycles

• Baggage insurance

• Personal accident insurance

• Public liability

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• Cash

• Jewelry: Having value more than Rs.

15000/- and if the same was not included

in the proposal form along with valuation

report of a government approved valuation

IMPORTANT POINTS ON COVERAGE

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• You don't need to insure the house for the value of the property but only for

the cost of reconstructing it

• Contents of the house needs to be insured against fire, flood, burglary andbreakage

• If you are a tenant then only insure the contents and if you are the owner of alet out property then you may only insure the structure

• Under a standard policy, only up to Rs15k worth of jewelry is covered, and nocash.

• To insure jewellery, you have taken a separate all risk policy, which costs Rs10per Rs1000.

• The entire building has to be covered for earthquake risk. You cannot insure acertain section of the house in isolation

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IMPORTANT POINTS ON PREMIUM ANDTENURE

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TENURE

• It is advisable to go for comprehensive cover. The insurance companies offer a 15% discount

if you take at least four different covers. If you take six covers, the discount is raised to 20%.

• It is beneficial to opt for a long-term policy, which not only offers peace of mind but alsodiscounts of almost 50%.

• Before you sign up for a 10-year plan, remember that the cost of construction keeps rising.So, you may need to review your home insurance every few years.

• Some plans are structured to take care of the rise in prices

• Though long-term policies are definitely cheaper, keep in mind that you will be required topay a huge sum upfront. Also, this ties you down to the same insurer. In case you are notsatisfied with the service or there is a better deal from another company, discontinuing yourlong-term policy and switching to another company won't exactly be easy

• If you live in an apartment complex, chances are your house is already covered againstdamage. Check with your resident welfare association or builder about this.

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INVENTORY OF CONTENTS

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• If you are insuring the contents, start by making an inventory of the itemsyou want covered

• Photographs, bills, warranty cards, video serve as good proof of the contentsand it is advisable to have this evidence to avoid issues at the time of claim.

• It's important to revisit this list every year when your policy comes up forrenewal. Some of the stuff may have been discarded during the year, so youneed to cross them out. Any new purchase will have to be included in thelist, otherwise it won't be covered. If you buy a new gadget after your policycommences, you need to give in writing the details of the item.

• You will also have to submit the valuation certificate for jewellery. If youdon't have one, ask a government-approved valuer to ascer tain its value.

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CLAIMS

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• Insurance companies have deadlines within which you have to inform them about a loss.These can vary from 7-15 days, so do it as soon as possible. Even if you are not in aposition to fill and submit a detailed claim form, call up the call centre and intimate themabout the loss. Some firms even let you do this with an SMS or e-mail.

• Don’t choose a company only on the basis of the premium it charges or the features ofits plans, but also by its claim settlement record. That is the litmus test for any insurancecompany.

• Your policy will not compensate you fully. The first 5% of the sum assured or Rs10k ofevery claim is not paid by the company

• The payment is subject to limits. Architect fee is limited to 3% of sum assured and debrisclearance to 1%. The payment made to the architect or engineer for processing theclaim papers cannot be included in claim

• Your claim against burglary will not be valid if the house remained unoccupied for over30days at a stretch or if your household help was involved in the theft

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HOW TO BRING DOWN PREMIUM COST

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• Raise voluntary deductible: You can reduce the liability of the insurer by agreeing to pay a minimumamount for the repairs. This helps reduce your premium

• Don't include everything: Leave out very old items from the coverage. Your 10- year-old toaster might beworking fine, but there is no point in insuring the low-value item at a depreciated rate. Be choosy whilemaking an inventory of the items to be covered.

• Combine covers: Comprehensive coverage gives you discounted rates. There is a 15% discount on the total premium if you take four different covers, and a 20% discount if you opt for six covers.

• Instal safety equipment: Insurers want to know about the safety measures installed in the house. If you

have security guards posted 24x7 in the building, the premium is lower. Installing fire safety alarms andfire-fighting equipment can get you discounts ranging from 10-15%.

• Seek discounts: This is a good option for flat owners. Companies offer 10-50% bulk discounts to groupcustomers. The quantum of the discount depends on the condition and age of the building as well as itslocation. Get your resident welfare association to bargain for an attractive discount.

• Avail of tax benefits: This does not apply to self-occupied homes. If you have given your house on rent,

you can deduct the premium you pay for insuring the structure from the rentals earned from theproperty.

• Avoid unnecessary add-on covers: Don't take a cover just because it is there. Add- ons like a terrorismcover or rent paid due to displacement will only bloat up your premium. Think twice before buying them.

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MOTOR INSURANCE

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MOTOR INSURANCE

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Motor insurance is one of the largest non-life insurance businessin the world. This is because it is statutorily mandated in mostparts of the world. All motor vehicles are required to beregistered with the road transport authorities and insured for

third party liability.

The basic premise is that the motor vehicles could either causeinjury or be a subject of damage and injury, and thus requireinsurance.

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MOTOR VEHICLES ACT

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First introduced in 1939 and revamped in 1988, the Motor Vehicle Act requires

compulsory insurance of any motor vehicle that plies in public places. The liabilities thatrequire to be covered under this act are:

• any liability arising in respect of death or bodily injury to any person including theowner of the vehicle

• any liability incurred in respect of damage to any property of a third party

• liability incurred in respect of the death or bodily injury of any passenger of a publicservice vehicle

• liability arising under Workmen's Compensation Act, in respect of injury or death of1) a paid driver of the vehicle 2) conductor 3) workers carried in the vehicle

• liability for bodily injury or death of passengers who are carried for reward or hire byreason of a contract of employment

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CATEGORIES OF VEHICLES

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Following categories of vehicles are covered under motor insurancepolicy:

• Private cars, motor cycles and scooters

• Commercial vehicles

• Goods carrying vehicles

• Passenger carrying vehicles - auto rickshaws, taxis, buses

• Misc vehicles - ambulances, cinema vans etc

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MOTOR INSURANCE POLICY

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Third party legal liability - it is mandatory for every motor vehicle

owner to get a third par ty insurance cover. It covers the vehicle ownersagainst risks as per section 146 of Motor Vehicle Act 1988

Coverage

• Accidental loss or damage to vehicle - accident, burglary, fire, earthquake etc

• Liability to third parties, personal accident cover to owner driver

Exclusions

• Damage by person driving without valid driving license

• Mechanical or electrical breakdown, failure

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• Damage by a person driving under the influence of liquor/

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• Damage by a person driving under the influence of liquor/alcohol/drugs

• Depreciation

• loss/damage attributable to war, nuclear risks etc

• Damage to tyre/tubes of the car, unless damage to the vehiclein the accident with liability maximum fifty percent of value

• Damage outside India unless covered by extra premium for

Nepal, Bhutan, Bangladesh, Pakistan, Sri Lanka & Maldives(depending on the insurer)

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FACTORS AFFECTING PREMIUM

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• IDV - the value of vehicle is calculated on the basis of current

showroom price of the vehicle multiplied by the depreciation rate setby the Tariff Advisory Commitee. This is called IDV (Insured's DeclaredValue)

• Type of vehicle - the type of vehicle is determined by its cubic capacityof gross vehicle weight and its carrying capacity. In private cars, taxisand motorcycles, the factor is the cubic capacity - the more the CC

the higher the premium rate. In case of goods vehicles and passengercarrying vehicles, the criteria are gross vehicle weight and passengercarrying capacity respectively

• Age of the vehicle - age of the vehicle is another important factor indetermining the premium of the insurance.

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• city of registration - certain areas of operation are more

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congested with high densities of population and road traffic

than others and pose higher exposure to accidents. The

premium therefore depends upon the area of registration,

irrespective of the place whereit is used. Two zones in India

are:

• Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkatta,Mumbai, New Delhi and Pune

• Rest of India

The difference is however, not applicable to trucks and buses as

they generally ply throughout India

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• use of the vehicle - taxies attract higher premium rate than

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private cars, as the former is used extensively for maximum

revenue. Similarly, goods carrying vehicles, which are used as

private carriers and transport only their owners' goods attract

lower premium, than those used as public carriers for

transporting goods for hire

• voluntary excess - is an option that the insured can opt, forbearing a certain amount of loss from every claim. (voluntary

deductible)

• anti lock system and anti-theft alarm - an additional discount

can be availed in case the vehicle is fitted with anti theft

devices

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NO CLAIM BONUS

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NCB is rewarded to the owner of the vehicle who is also the policy holder for noclaim in the previous policy year. It can be accumulated over a period of time.

NCB enables the insured to avail a discount ranging from 20-50% on own damage(OD) premium. It is a reward for being a good driver by saving on insurance.

• NCB becomes nil in case of claim

• It can be transferred to the new vehicle in case of substitution of vehicle of the sameclass

• NCB recovery can be done in case of name transfer

• NCB from the old vehicle can be transferred to a new one for the same class and type of vehicle

• Full benefits of NCB can be transferred when the insured shifts the policy from onecompany to another

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NEW DEVELOPMENTS - MOTOR INSURANCE

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New factors being used in pricing car insurance premium (under approval by IRDA)

• Type of parking space - if the car is parked in open space then higher premium ischarged

• Gender - woman are given discount

• Income group - higher income group are expected to use more than one vehicle

• Occupation - by nature some are mild users and some are not

• Fuel Type

• Vehicle colour - based on risk analytics

Motor insurance contributes over 35% of premium income and is he fastest growingsegment for General Insurance companies

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BUSINESS LIABILITY INSURANCE

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WORKMEN COMPENSATION INSURANCE

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The Workmen's Compensation Act, 1923, aims to provide workmen and/or theirdependents some relief in case of accidents arising out of and in the course of

employment and causing either death or disablement of workmen. This insurance policy isessential for all employers who engage workmen as defined in workmen's compensationact to cover their liability towards them.

It covers the employer against any:

• legal liability arising out of accident or fatal injury sustained by his workmen during work

• medical, surgical and hospitalisation expenses including transpor tation costs

Exclusions

• injury that does not result in fatality or disability for period exceeding 3days

• injury due to wars, influence of drinks or drugs or wilful disregard of safety device / rules

Wherever ESI Act applies, this act ceases to apply automatically

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Compensation - 3 main factors in working out the

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compensation are - nature of injury, monthly wages and a relevant

factor for working out lump sum equivalent of compensation

amount.

• In case of death - Rs 80k or 50% of monthly wages multiplied by

relevant factor, whichever is more

• In case of PTD - Rs 90k or 60% of monthly wages multiplied by

relevant factor, whichever is more

• In case of PPD - proportionate to the loss of earning capacity

• Temp Disablement (partial or perm) - half months payment of

the sum equivalent to 25% of the monthly wages

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PUBLIC LIABILITY INSURANCE ACT 1991

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With the growth of hazardous industr ies, risks from accidents processes and operat ions, not

only to the persons employed in such undertakings but also to the public who may be in

vicinity, have increased.The people who are affected by accidents in the hazardous installations

are,very often, economically weaker sections and suffer great hardships because ofdelayed relief and compensation. While the workers and employees of hazardous installations

are protected under separate laws, members of the public are not assured of any relief except

through long legal process. To ameliorate the sufferings of members of the public due to

accidents which take place in hazardous installations it was found essential to provide formandatory Public Liability Insurance. To achieve this objective the Public Li ab il i ty In su rance

Bil l was introduced in the Par l iament.

The Public Liability Insurance Act 1991 is in consonance with the spirit of principle 13 of the

Rio Declaration, in as much as it aims at providing for public liability insurance for the purpose

of providing immediate relief to persons affected by accident occurring while handling any

hazardous substance or matters connected therewith or incidental thereto

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BACKGROUND

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This Act has been enacted subsequent to the Bhopal Gas leak disasterwhere MIC leaked from the plant of Union Carbide India Ltd, andcaused the death of over 3000 persons and serious injuries to a largenumber of others. The government of India responded to the tragedywith a number of concrete legislative measures. Most notable was the

umbrella Environment ProtectionAct 1986 which materially expanded the Central government’s powers to enter, inspect and close downfacilities that had formerly under inadequate supervision. The FactoriesAct 1987 and the Hazardous Wastes (Management and HandlingRules) 1989 also imposed various responsibilities on such industries.The innovative Public Liability Insurance Act of 1991 required factoryowners to insure against potential personal injury and propertydamage in surrounding communities

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INDUSTRIAL RISKS

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As per the Public Liability Policy covering the industrial risks, there exists a No-Fault liability i.eirrespective of any negligence, wrongdoing or default on part of any employer or owner in the eventof death or injury to any person or damage to property out of an accident handling hazardous

material. This is known as compulsory liability. The claimant is not required to prove that death, injuryor damage occurred due to any neglect. The amount of relief payable under such a policy is as under:

1. Fatal Accident - Rs 25,000 per person

2. Permanent Total Disability - Rs 25,000 per person

3. Permanent Partial Disability - amount of relief on the basis of percentage of disablement certifiedby a doctor

4. Temporary Partial Disability - a monthly fixed relief not exceeding Rs 1000 pm

5. Actual medical expenses - up to a maximum of Rs 12,500

6. Actual damage to property - Up to Rs 6,000

This is compulsory liability and has to be insured for an amount not less than the paid up capital of anundertaking handling hazardous substances. If not a company, paid-up capital would mean the marketvalue of all its assets and stocks on the date of the insurance contract.

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NON INDUSTRIAL RISKS

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There are 8 different categories under which the non-industrial establishments are

classified for the purpose of indemnity insurance:

1. Hotels, motels, restaurants, club houses, boarding and lodging houses and other

establishments in hospitality businesses

2. Residential premises owned and used for private purposes

3. Offices, administrative premises, medical premises, airports, research institutes and labs

4. Schools, educational institutes, public libraries

5. Exhibitions, fairs, fetes, melas, stadia and public grounds

6. Permanent amusement parks

7. Depots, warehouses, godowns, shops, tank farms and other similar non industrial risks

8. Farm studios - indoor and outdoor, circus, zoological parks

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LIMITS OF INDEMNITY

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• The insured has to select limits of indemnity based on Any One Accident (AOA)

and Any One Year (AOY) basis, in a ratio of 1:1, 1:2, 1:3 or 1:4 basis. For example,

for AOA the limit may be Rs 10L, with AOY going up to from 10L to 40L

• The insured has to bear a compulsory excess of 0.5% in case of industrial risks

(subject to minimum of Rs 2000 and maximum of Rs 3L) and 0.25% in case of

non industrial risks (min Rs 1000 and max Rs 1L)

• The indemnity is restricted to only that which arises out of accidents during the

period of insurance

• Policy can cover the insured only against legal liabilities and other than that, which

is covered under the Public Liability Insurance Act

• Indemnity is provided only for accidents occurring in India and those covered in

Indian Law and in respect of accidents caused only to third parties

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PREMIUM

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Premium rates for indemnity insurances is based on the following factors:

• Risk group

• Limits of indemnity - AOA

• The ratio of AOA to AOY

• Turnover of the insured

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RISK CATEGORIES

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• Group I - Biscuit factories, coir factories, glass and ceramic factories,

silk factories etc

• Group II - Breweries, cigarette factories, shoe factories, sugar factories

etc

• Group III - Distilleries, man-made yarn factories, fibre manufacturers,

papers and cardboard mills etc

• Group IV - celluloid goods manufacturing, fertiliser factories, match

factories, synthetic rubber factories etc

The rates are lowest on Group I risks and move up along the scale

risking towards the Group IV risks

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TURNOVER

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• Turnover is defined for most risk groups for the purpose of the

indemnity policies:

• Manufacturing units - gross sales turnover, including all levies of

taxes of the manufacturing unit and taxes for handling

hazardous goods, if any

• Godowns and warehouses - total annual receipts of the

premises building or storehouse

•Transport operators - total annual freight receipts

• Other businesses - total annual gross receipts

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PRODUCTS LIABILITY INSURANCE

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Safety of a product is of prime importance to the manufacturer and seller. Faulty and defective products can be harmful toconsumer resulting into death or bodily injury. In such cases, the manufacturer or seller has to pay huge compensation.

Product liability insurance protects the companies exposed to the above risk by financially assisting policyholders in such situations.

The policy broadly covers the legal liability of the insured, where the insured has to pay damages to the third party as aconsequence of :

• accidental death

• bodily injury or disease

• loss or damage to property

The defect in the product may be a manufacturing defect or a result of faulty packaging, delivery specifications or flawedinstructions as how to use the product

Exclusions:

• Product recall and product guarantee

• Pure financial loss such as loss of goodwill or loss of market

•Cost incurred for repairing or reconditioning or modifying the defective part of the product

• Deliberate non compliance with statutory provision

• Fines, penalties, punitive or exemplary damages

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PROFESSIONAL INDEMNITY

This policy is for professionals like doctors to cover liability falling on them due to mistakes and

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This policy is for professionals like doctors to cover liability falling on them due to mistakes andomissions committed by them while rendering professional service.

Covers following

• Bodily injury or death caused by mistakes, negligence and miscalculation

• Legal liability including defence costs incurred while investigations, court cases andcompensation

Professionals who can take such cover

• Doctors and registered medical practitioners

• Medical establishments such as hospitals and nursing homes

• Engineers and interior decorators

• Lawyers and counsels

• Chartered Accountants, management consultants etc

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Exclusions from professional indemnity

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• Any liability arising out of or in connection with any criminal act or act

committed in violation of any law

• Act committed under the influence of drugs

• Weight reduction

•

Plastic surgery

• HIV Aids

• Radioactivity

• Blood Banks

• Non compliance with statutory provisions

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DIRECTORS AND OFFICERS LIABILITYDirectors' and Officers' liability insurance policy is specifically tailored for directors and others holding senior and

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Directors and Officers liability insurance policy is specifically tailored for directors and others holding senior andimportant positions in an organisation. It is meant for those who are in the decision making process. Directorsare bound by duty towards the company, its shareholders, employees, creditors, customers, competitors,members of the public, government and other regulatory bodies. This policy covers any financial liability imposedupon them, arising out of (indicative list):

• Misleading statements

• Lack of judgment and good faith

• Unfair allotment of shares

• Mis-statement in prospectus

• Using inside information

Exclusions

• Prior and pending litigation submitted under previous policies

• Bodily injury, sickness, disease etc

• Criminal wrongs

• Deliberate, dishonest or fraudulent acts

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Premium

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Premium

Premium depends on profile of the client, the Sum Insured selected, present and past functioning of

the company, information in the balance sheet and annual report, degree of exposure etc.

Special Conditions

1. Directors and the Company shall give to underwriters immediate notice in writing of any claim

2. Directors and the Company shall not disclose to anyone the existence of the policy without

underwrites' consent3. Directors of the Company shall not be required to contest any legal proceedings. Counsel shall

advise that such proceedings should be contested.4. Underwriters shall not settle any claim without the consents of the Directors or the Company

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FIDELITY GUARANTEE INSURANCE

G f fi

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The term “Fidelity Guarantee Insurance” embraces policies indemnifying employers against financial losson account of forgery, defalcation, embezzlement and fraudulent conversion by employees. The object is

to provide protection in respect of the default of an individual acting in capacity such as Cashier,

Accountant, Store-keeper etc.

The cover may be required in respect of a single employee or a number of employees. There are three types of policies normally issued for this class of business viz. Individual Policy, Collective Policy and FloatingPolicy.

Policy Types

1. Individual Policy : The policy covers one individual only for a stated amount.

2. Collective Policy : A schedule is included in the policy. The Insured decides the amount ofguarantee required for each individual according to his or her responsibilities and position.

3. Floater Policy : A single amount is shown in the policy which represent the Company’s liability inrespect of any one individual and its total liability in respect of all the employees guaranteed who areindividually named in the schedule. Such policies can be granted where the number of persons to beguaranteed is not less than five.

4. Blanket Policy : It is possible to issue in certain selected cases, blanket policies without the names of the guaranteed persons being shown, in respect of all employees who are grouped according tocategories, e.g. employees handling cash, other clerical staff, etc. They are issued only to large well-established business houses conducted on sound lines.

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Premium

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Rates vary from 0.50% to 1.50% per annum on the amount of guarantee, depending upon the

merits of each case. Following rates are indicated only as a guide.

For Individual and/or Collective Policies

(a) Managers, Executives, Officers and Clerks 0.5%

(b) Accountants, Cashiers, Wage pay Clerks and

Cash Clerks 0.75%

(c) Rent and Bill Collectors, Cash Messengers &

Godown/Store keeper 1% to 1.50%

•

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KEYMAN INSURANCE

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Key Man is the life Insurance, taken by a Company, on the life of an Employee Director whoseservices have significant effect on the profitability of the company and whose premature death will

adversely effect its profitability, stability and progress. There can be even more than one Key man in a

company.

The object of key man Insurance is to protect the company from the adverse financial effect by the

Key Employee or Key Director’s death by making funds available to the company in his absence. The

company’s progress and profit, usually depends upon the vital decision or technical expertise & skill,knowledge, entrepreneurial vision of its Key Director or Key Employee, particularly in this

competitive Globalised marketing Environment.Today’s company’s expansion diversification, and

setting up policy depends upon its Far sighted Vision, decision, technical know-how of the Key

Director and Key Employee and that’s required to be secured by purchasing Key-man Insurance formaking funds available for promoting, recruiting in the absence of Key-man includes key-woman. This

policy is specially purchased by the company (both Pvt. and Pub Ltd. Co.) for the life of its single

most important Key person.

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Sum Assured

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This depends upon the nature, size and business of the Company and the importance of key person

in execution of job/business with the help of his qualification/experience to make the company,profitable. Maximum allowable S.A. will be lower of the following:

1. 5 times of average net profit after making provisions for depreciation and Income Tax

2. Two to three times of the G.P .(Net profit + Depreciation + Income Tax).

Taxation

• The premium paid by the company for an insurance policy taken on the life of Key-man is a

permissible business expenditure U/S 37 (1)

• Since the insurance is taken for the benefits of the business and is Allowed as business Expenses, the

premium paid is not treated as perks in the hands of the Key Man. The death proceeds will not be

taxable.

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QUESTIONS

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1. What is the name of the insurance company?

2. Which policy lapse that Walter went to renew?

3. What was the grace period of the policy as per insurance company?

4. What is the commission of the insurance sales man?

5. What was the sum assured of the accident policy?

6. What was the premium?

7. What is the double indemnity clause?

8. What analogy does Keyes give of examining the claim forms?

9. What policy clause does insurance company try to invoke to avoid paying claim?

10.What inaction about the accident policy by Mr Dietrichson gave rise to Keyes suspicion?

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EXERCISE

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1. Present about the working of the insurance company as youunderstand from this movie

2. Describe any one character in the movie vis-a-vis insuranceindustry:

1. Mrs Dietrichson - customer

2. Walter - Insurance sales man

3. Keyes - Insurance company back office

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161

MARINE INSURANCE

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Insurance connected with risk of transportation of goods, is oneof the oldest and most important forms of insurance. It isbelieved to be originated in England owing to the frequentmovement of ships over high seas for commerce and trade.

The value of goods shipped by the business firms each year costbillions of rupees. These goods are exposed to damage or lossfrom numerous perils associated with the transportation.Marine insurance helps protect these goods from such risk.

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BIGGEST PASSENGER SHIP"ALLURE OF THE SEAS"

+6000 PASSENGER CAPACITY

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BIGGEST CONTAINER SHIP"MAERSK EMMA"

11000CONTAINERS164

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BIGGEST PASSENGER PLANE

"AIRBUS A380"525 PASSENGERS

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BIGGEST CARGO PLANE

"ANTONOV AN-225 MRIYA"PAYLOAD : 250,000 KG

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BIGGEST FREIGHT TRUCK

"NATIONAL HEAVY HAULAGE" (SOUTH AFRICA)85 TONNES

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BIGGEST PASSENGER BUS

"YOUNGMAN JPG 6250G" (CHINA)300 PASSENGER CAPACITY

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LONGEST PASSENGER TRAIN

"GHENT-OOSTENDE" (BELGIUM)70 COACHES

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LONGEST CARGO TRAIN

OWNED BY UNION PACIFIC (UNITED STATES)295 WAGONS

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MARINE INSURANCE MARKET

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Llyods, a corporate establishment in London, is the biggest centre for marineinsurance in the world.

British ocean liner 'Titanic' which sank in 1912 during maiden voyage was insuredby Llyods who paid insurance claim of one million USD.

This market has evolved over time and now it is required to protect the interestof:

1. owner of the ship

2. owner of the cargo

3. person interested in freight

4. liabilities and fines imposed

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CLASSIFICATION

Marine insurance can be classified into 4 categories:

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Hull insurance

Cargo insurance

Freight insurance

Liabilities insurance

Cargo refers to the goods and commodities carried during transit by rail, road, sea or air from one

place to another.

Marine cargo insurance covers the following:

• Export and import of shipments by ocean

• Trans-shipments

• Consignments sent by rail, road and air

• articles sent by post

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Inclusions

• Breakage

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Breakage

• Accident

• Fire, explosion

• Derailment of conveyance

• Theft

• Pilferage

• Non delivery

• Jettison

• Collision

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• Burning and sinking

• Mutiny, piracy

• Spoilage of cargo

• Wilful destruction of the ship

and cargo by master or crew

Exclusions

• Ordinary leakage ordinary loss in volume or weights or ordinary

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• Ordinary leakage, ordinary loss in volume or weights or ordinary

wear and tear of the subject matter insured

• Loss or damage caused by insufficiency or unsuitability of packing

• Inherent vice

• Wilful misconduct of the assured

• Loss or damage arising out of insolvency or financial default of the

owners or operators of the vessel

• Loss, damage or expense arising out from the use of any weapon of

war like atomic or nuclear fission or radio active reaction

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POLICY CLAUSES

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Policy clauses are framed by Institute of London Underwriters.Most countries of the world including India are using theseclauses. The coverage and the exclusions are explained by wayof institute's cargo clauses.

For import and export - the institute cargo clauses (ITC A, B orC) are used

For transport within the country - inland transit clauses (ITC A,B or C) are used

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MOVEMENT OF CARGO &UNDERWRITING

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Shipment of goods usually is managed by third party operators.

Marine policies are generally known as Warehouse to Warehouse. Therefore each and every stageof transit is important for proper underwriting:

• condition of the ports

• distance involved

• direct or broken

• loading, unloading and other facilities;

• past experiences

• weather conditions

• cargo stored on deck / under deck

• current world events like political tensions, civil war, labor disturbances etc

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TYPES OF POLICIES

• Specific voyage policy

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Specific voyage policy

• Floater policy (12 month period)

• Open policy - rates are fixed in advance. The assured has to only declare the nature of each shipment

• Duty insurance

• Increased value insurance - market value at the destination is insured. Theinsurer usually pays 75% and assured pays 25% of the claim

• Special declaration policy - used by large turnover and those with annual

despatches or at-least 2cr

• Special storage risk policy - storage at railway yard, carrier premises etc

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INSURANCE COMPANY OPERATIONS

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RATE MAKING

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Rate making refers to the pricing of insurance. Insurance pricing differs

considerably from the pricing of other products. Unlike in case of otherproducts, Insurance company does not know in advance its actual costs.The premium charged for the insurance may be inadequate for all claimsand expenses. It is only after the period of protection has expired that theinsurer can determine its actual losses and expenses.

The person who determines rates and premiums is known as Actuary. AnActuary is a highly skilled mathematician who is involved in all phases ofinsurance company operations.

Rates are based on the company's past loss experience and industry

statistics. Some companies use their own loss data and others obtain itfrom external agencies, in establishing the rates.

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UNDERWRITING

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Underwriting refers to the process of selecting and classifyingapplicants for insurance. The underwriter is the person who decides to accept or reject an application. The fundamental objective ofunderwriting is to produce a profitable book of business. Theunderwriter constantly strives to select certain types of applicants and to reject others so as to obtain a profitable portfolio of insurable

risks.

Underwriting star ts with a clear statement of underwriting policy. Aninsurer establishes an under writing policy that is consistent withcompany objectives. The objective may be large volume of business

with low profits or smaller volume with large profits. Classes ofbusiness that is acceptable, borderline or prohibited are clearly stated.

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The goal of underwriting is to produce a profitable

volume of business. To achieve this goal certain

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underwriting principles are followed, as follows:

• selection of insured according to the company's

underwriting standards

• proper balance within each rate classification

• equity among policy owners

Insurance agent is considered to be the first underwriterand often called field underwriter.

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Underwriting information - underwriting requires certain type of information in

deciding whether to accept or reject an application for insurance. The information can be

obtained from variety of sources:

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y

• application

• agent's report

• inspection report

• physical inspection

• physical examination and physician's report

After the underwriter evaluates the information, an underwriting decision is made either to

• accept the application

• accept the application subject to certain restrictions

• reject the application

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PRODUCTION

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The term production refers to the sales and marketing activities of insurers.

Agents who sell insurance are often also referred to as producers. This word isused because, nothing in insurance company is produced until a policy is sold.Key to the insurers' success is an effective sales force.

Agency Department

This department is responsible for recruiting and training new agents and for the supervision of agents and branch office managers. In addition to thedevelopment of an effective sales force, an insurance company engages in widevariety of marketing activities. This involves development of a marketingphilosophy and the company's perception of its role in the market place,

identification of short term or long term production goals, marketing research,development of new products to meet changing needs of customers,development of marketing strategies and advertising of insurance products.

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CLAIMS SETTLEMENT

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Basic objectives in claim settlement

1. Verification of covered loss - this step involves determining whether a specificperson or property is covered under the policy, and the extent of the coverage.

2. Fair and prompt payment of claims - if the valid claim is denied, the fundamentalpurpose of protecting the insured is defeated. Also, the insurer's reputation may

be harmed, and the sale of new policies may be adversely affected. Fair paymentmeans that the insurer should avoid excessive claim settlement and should resist

the payment of fraudulent claims, because they will ultimately result in higherpremiums.

3. Personal assistance to the insured - apart from the contractual obligations, the

insurer should also provide personal assistance after a loss occurs.

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Steps in settlement of a claim

• Notice of loss - the first step is to notify the insurer of a loss. The provision concerning

notice of loss is stated in the policy and typically requires the insured to give immediate

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notice of loss is stated in the policy and typically requires the insured to give immediate

notice

• Investigation of the claim - the next step is to investigate the claim. A series of questions

must be asked before the claim is approved, the most important ones are :

• Did the loss occur while the policy was in force?

• Does the policy cover the risk that caused the loss?

• Does policy cover the property or person?

• Is the claimant entitled to recover?

• Did the loss occur at an insured location?

• Is the type of loss covered?

• Is the claim fraudulent?

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• Filing a proof of loss - a proof of loss may be required

before the claim is paid. For example, under homeinsurance policy, the insured may be required to file aproof of loss that indicates the time and cause of the lossetc.

• Decision concerning payment - There are 3 possibledecisions. The claim can be paid, the claim can be deniedor there could be a dispute. In case of a dispute, the policyprovisions specify on how the dispute will be resolved.

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REINSURANCE

R i i hifti f t ll f th i i i ll

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Reinsurance is shifting of part or all of the insurance originally

written by one insurer to another insurer. The insurer that initiallywrites the business is called ceding company . The insurer thataccepts the insurance from the ceding company is called the

reinsurer.

The amount of insurance retained by the ceding company for itsown account is called the retention limit or net retention. The

amount of insurance ceded to the reinsurer is known as cession.

The reinsurer in turn may reinsure part or all of the risk with

another insurer. This is known as a retrocession. In this case, the

second reinsurer is called a retrocessionaire.

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Reasons for re-insurance

• Increase underwriting capacity - without reinsurance, the agent will

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have to place large amounts of insurance with several companies or not

accept the risk. Reinsurance permits the primary company to issue a singlepolicy in excess of its retention limit for the full amount of insurance.

• Stabilise profits - an insurer may wish to avoid large fluctuations in

annual financial results. Reinsurance can be used to level out the effects of

poor loss experience.

• Provide protection against catastrophic loss - reinsurance can

provide considerable protection to the ceding company that experiences a

catastrophic loss. The reinsurer pays for losses that exceed the ceding

company's retention limit. Sep 11 terrorist attack in US clearly shows the

importance of reinsurance. Of the total insured loss of $40 billion, more

than $20 billion were paid by reinsurers.

188

TYPES OF REINSURANCE

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• Facultative Reinsurance - it is an optional, case by casemethod that is used when the ceding company receives anapplication for insurance that exceeds its retention limit. Before the policy is issued, the primary insurer shops around forreinsurance.

• Treaty Reinsurance - means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business. All business that falls within the scope of the agreement is automatically reinsured according to the terms

of the treaty.

189

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LEGAL PRINCIPLES190

BASIC PRINCIPLES OF INSURANCE

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• Principle of indemnity

• Principle of contribution

• Principle of subrogation

• Principle of insurable interest

• Principle of loss minimization

• Principle of proximity cause

191

PRINCIPLE OF INDEMNITY

Indemnity means security, protection and compensation given against damage, loss

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or injury.

According to the principle of indemnity, an insurance contract is signed only forgetting protection against unpredicted financial losses arising due to futureuncertainties. Insurance contract is not made for making profit else its sole purposeis to give compensation in case of any damage or loss.

In an insurance contract, the amount of compensations paid is in proportion to theincurred losses. The amount of compensations is limited to the amount assured or the actual losses, whichever is less. The compensation must not be less or more than the actual damage. Compensation is not paid if the specified loss does nothappen due to a particular reason during a specific time period. Thus, insurance isonly for giving protection against losses and not for making profit.

However, in case of life insurance, the principle of indemnity does not applybecause the value of human life cannot be measured in terms of money.

192

PRINCIPLE OF CONTRIBUTION

Principle of Contribution is a corollary of the principle of indemnity. It applies

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p y p p y pp to all contracts of indemnity, if the insured has taken out more than one policy

on the same subject matter. According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers orfrom any one insurer. If one insurer pays full compensation then that insurercan claim proportionate claim from the other insurers.

For example :- Mr. Ravi insures his property worth Rs 100,000 with twoinsurers "Tata AIA Ltd." for Rs 90,000 and "ICICI Lombard Ltd." for Rs 60,000.Ravi's actual property destroyed is worth Rs 60,000, then Mr. Ravi can claim

the full loss of Rs 60,000 either from Tata AIA Ltd. or ICICI Lombard Ltd., orhe can claim Rs 36,000 from Tata AIA Ltd. and Rs 24,000 from ICICI LombardLtd.

So, if the insured claims full amount of compensation from one insurer then hecannot claim the same compensation from other insurer and make a profit.

193

PRINCIPLE OF SUBROGATION

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Subrogation means substituting one creditor for another.

Principle of Subrogation is an extension and another corollary of the principle of indemnity. It alsoapplies to all contracts of indemnity.

According to the principle of subrogation, when the insured is compensated for the losses due todamage to his insured property, then the ownership right of such property shifts to the insurer.

This principle is applicable only when the damaged property has any value after the event causing the damage. The insurer can benefit out of subrogation rights only to the extent of the amounthe has paid to the insured as compensation.

For example :- Mr. John insures his house for $ 1 million. The house is totally destroyed by thenegligence of his neighbour Mr.Tom. The insurance company shall settle the claim of Mr. John for $1 million. At the same time, it can file a law suit against Mr.Tom for $ 1.2 million, the market value

of the house. If insurance company wins the case and collects $ 1.2 million from Mr. Tom, then theinsurance company will retain $ 1 million (which it has already paid to Mr. John) plus otherexpenses such as court fees. The balance amount, if any will be given to Mr. John, the insured.

194

PRINCIPLE OF UTMOST GOOD FAITH

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Principle of Uberrimae fidei (a Latin phrase), or in simple english words,

the Principle of Utmost Good Faith, is a very basic and first primaryprinciple of insurance. According to this principle, the insurance contractmust be signed by both parties (i.e insurer and insured) in an absolutegood faith or belief or trust.

The person getting insured must willingly disclose and surrender to theinsurer his complete true information regarding the subject matter ofinsurance. The insurer's liability gets void (i.e legally revoked or cancelled) ifany facts, about the subject matter of insurance are either omitted, hidden,falsified or presented in a wrong manner by the insured.

The principle of Uberrimae fidei applies to all types of insurance contracts.

195

PRINCIPLE OF INSURABLE INTEREST

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The principle of insurable interest states that the person getting insured must

have insurable interest in the object of insurance. A person has an insurableinterest when the physical existence of the insured object gives him somegain but its non-existence will give him a loss. In simple words, the insuredperson must suffer some financial loss by the damage of the insured object.

For example :- The owner of a taxicab has insurable interest in the taxicabbecause he is getting income from it. But, if he sells it, he will not have aninsurable interest left in that taxicab.

From above example, we can conclude that, ownership plays a very crucialrole in evaluating insurable interest. Every person has an insurable interest in

his own life. A merchant has insurable interest in his business of trading.Similarly, a creditor has insurable interest in his debtor.

196

PRINCIPLE OF LOSS MINIMIZATION

A di t th P i i l f L Mi i i ti i d t l t hi

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According to the Principle of Loss Minimization, insured must always try his

level best to minimize the loss of his insured property, in case of uncertainevents like a fire outbreak or blast, etc. The insured must take all possiblemeasures and necessary steps to control and reduce the losses in such ascenario. The insured must not neglect and behave irresponsibly during suchevents just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses.

For example :- Assume, Mr. John's house is set on fire due to an electricshort-circuit. In this tragic scenario, Mr. John must try his level best to stopfire by all possible means, like first calling nearest fire department office,asking neighbours for emergency fire extinguishers, etc. He must not

remain inactive and watch his house burning hoping, "Why should I worry?I've insured my house."

197

PRINCIPLE OF PROXIMATE CAUSE

Principle of Causa Proxima (a Latin phrase) or in simple english words the Principle of

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Principle of Causa Proxima (a Latin phrase), or in simple english words, the Principle ofProximate (i.e Nearest) Cause, means when a loss is caused by more than one causes, theproximate or the nearest or the closest cause should be taken into consideration todecide the liability of the insurer.

The principle states that to find out whether the insurer is liable for the loss or not, theproximate (closest) and not the remote (farest) must be looked into.

For example :- A cargo ship's base was punctured due to rats and so sea water enteredand cargo was damaged. Here there are two causes for the damage of the cargo ship - (i)The cargo ship getting punctured because of rats, and (ii) The sea water entering ship through puncture. The risk of sea water is insured but the first cause is not. The nearestcause of damage is sea water which is insured and therefore the insurer must pay thecompensation.

However, in case of life insurance, the principle of Causa Proxima does not apply. Whatever may be the reason of death (whether a natural death or an unnatural death) the insurer is liable to pay the amount of insurance.

198

LEGAL ASPECTS OF INSURANCE CONTRACT

Th I di C A 1972 d fi h "A

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The Indian Contract Act, 1972 defines the term contract as "Any agreement

enforceable by law is a contract". Such an agreement must be entered into by two ormore parties, with the intention of creating a legally binding relationship.

Essentials of a valid insurance contract are:

• offer and acceptance

• consideration

• consensus 'ad idem'

• legality of purpose

• possibility of performance

• intention to create legal relationship

199

The insurance contract being a commercial contract resembles

the fundamental principles of contract. The contracts in India are

governed byThe Indian Contract Act 1972 The only difference

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governed by The Indian Contract Act, 1972. The only difference

between an insurance contract and the other contract is that, aninsurance contract is made for a specific but an uncertain

happening in which the insurer ensurers the protection of the

insured against an occurrence of loss or damage which is also

uncertain. This element of uncer tainty is usually not found inother contracts.

An insurance contract must be for a pure risk upon which the

contract is entered into. The contract should be unilateral in

nature, which binds only the insurer to compensate the insured

against the loss of the subject matter of the policy..

200

IMPORTANT CLAUSES OF THE INSURANCE ACT,1938

Incontestable Clause (section 45)

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Incontestable Clause (section 45)

The incontestable clause typically is stated as "We will not contest the validity of the policy, except for non payment of premiums, afterit has been in force during the insured's lifetime for two years from

the policy date"

exceptions to incontestable clause:

• impersonation

• lack of insurable interest

• procurement of policy with intent to murder

201

Nomination (section 39)

Nomination is a process to ensure that the policy payments are

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p p y p y

made available to the person named by the insured in case ofdeath. Nominations can be changed by policy holder any

number of times by an endorsement on the policy.

Assignment (section 38)

A transfer or assignment of a policy of life insurance, may be

made only by an endorsement upon the policy, signed by the

transferor and attested by atleast one witness, specifically setting

forth the fact of transfer or assignment. Assignment may beconditional or absolute.

202

Nomination Assignment

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203

Can be done anytime, at thebeginning or during the policyeriod

Can only be done during thepolicy period

Is done by the holder of thepolicy

Can be done by the absoluteor conditional assignee

No interest is created in favorof the nominee

Assignee acquires interest

In case of a minor, appointment

of an appointee is required

In case assignee is a minor,

guardian is to be appointed

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