1. Alok has completed his MBA and has joined the insurance industry.

He was recruited
for non-life insurance. He wanted to prepare himself with various types of non-life
insurance policies offered in the industry, so he approached his brother who was also
working in insurance industry to brief him. If you are his brother elaborate on various
types of policies offered in non-life insurance category.

Answer: Non-life Insurance policies

The Indian non-life insurance sector has substantial growth potential becausemarket
penetration remained low, thus leaving significant room for furthergrowth.India’s insurance
industry has emerged as one of the fastest developingmarkets of the global insurance
industry. However, its non-life sector, whichincludes property/casualty and health insurance,
has one of the lowestpenetration rates in Asia.Private insurers tookadvantage of the
opportunities and steadily improved their market shareand emerged as serious rivals to the
public insurers. Also, during the pastdecade, the non-life sector maintained—on absolute
levels—an impressivegrowth momentum.

Motor Insurance
Today motor insurance is the largest branch of general insurance in terms of premium income
in India. Motor Vehicles Act forms the basis of motor insurance in the country.The liability
of the insurance company, i.e., the financial compensation to be paid by the company, is not
capped to a fixed amount in case of physical injury/death. However, it is limited in case of
property damage. Since it is a benefit policy to the victim under a liability insurance policy,
the principle of indemnity does not strictly apply in case of motor third-party insurance
policy. However, the insurer is entitled to repudiate a third-party claim on the ground that
there has been a breach of a specified condition of the policy.

Advantages of motor insurance may be given to promote the product

Protection from Financial Liability: If you are involved in an accident and damage
someone’s property, then you will want insurance to help take care of any expenses that are
involved in the repair or replacement.
Pay Medical Costs: Hopefully you will not ever be in an accident that will be major enough
to need medical care or for someone else to need it, but if it does happen, you want to be sure
that medical costs are covered.
Repair or Replace: Depending upon the severity of the accident, you will need to either
repair or replace your car.

Health insurance
Health insurance has been accepted as an instrument for the health of the economy. If the
people of the country are healthy, they can contribute significantly in the overall economic
development. The health insurance industry would provide protection to social development.
The insurance industry should come forward to provide health to the masses like life
insurance and property insurance. The Government provisions for health have not succeeded
for want of initiative on the part of government officers and beneficiaries. It is hoped that
commercial bases of health insurance will be more suitable for betterment of people’s health.
There is a need of products, designs, structural facilities and sustainability of insurance
products. Adequate environment is to be developed for the introduction and development of
health insurance.

Benefits of health insurance

One of the benefits of health insurance through the Marketplace is that all health insurance
plans cover the same set of essential health benefits, even for a pre-existing health condition.
In addition to coverage for doctor visits, lab tests, hospitalization, surgery, and
emergency care, here are a few more:
Pregnancy, maternity, and newborn care before and after your baby is born. You get this
coverage even if you were pregnant before your coverage starts. Most plans also provide
breastfeeding benefits.
Preventive services for adults, children, and women. Women’s preventive services include
well-woman visits and contraceptive care.
Mental health and substance abuse services, including behavioral health treatment like
counselling and psychotherapy

Home and Property Insurance

The protection against possible financial loss is referred to as insurance. Home insurance
protects you from financial losses resulting from damages such as injury to a visitor when
he/she is on your property, damage to the contents belonging to your home, and personal
property loss due to theft or vandalism. Property insurance offers protection against most
risks related to property, such as fire, theft and some weather damages.

Insurance therefore offers protection against potential damage that is the outcome of certain
risks, peril or hazards. Risk can be classified as an uncertainty or lack of predictability. Peril
can be the reason of a potential loss. Examples of perils are fire, windstorms, explosions,
robbery, accidents and premature death. Hazards are the potential disasters or loss through
certain perilous action. For example, a defective house wiring is a hazard which increases the
likelihood of the peril of fire.

Travel Insurance
Travel insurance is designed to provide financial protection for unexpected events that impact
a traveller’s trip. Popular benefits on a travel insurance policy include coverage for trip
expenses, medical emergencies, and luggage. There are three different types of travel
insurance policies: single trip, annual, and group.Single trip travel insurance covers travellers
for one trip, starting when they leave home and ending when they return. A single trip policy
can cover up to 10 travellers on international or domestic trips.Annual policies are designed
to cover travellers taking multiple short trips throughout a year. Travelers select a specific
start date for an annual policy, which should be the departure date for their first trip. An
annual policy will last one year from that date.While a single trip policy can cover up to 10
travellers, group travel insurance allows parties of 10 or more travellers to purchase one
policy for their trip. Group policies offer benefits similar to single trip policies, including
coverage for cancellations, medical emergencies, travel delays, and luggage.Purchasing a
group travel insurance policy can be a more convenient option for organized groups traveling
together. Because group policy premiums are not based on age, they can be less expensive
per traveller.

2. Neha was accompanying her manager in selling life insurance. Her manager wanted
her to understand the different factors that affects the cost of life insurance. He asked
her to make asmall report covering the factors. Help Neha to prepare the report.

Answer: Life insurance is one of the most important and expensive purchases you may ever
make. When persons purchase a life-insurance policy, they enter into a contract with the life
insurance company. Under the terms of the policy, the insurance company promises to pay a
sum of money in the event of the policyholder’s death to the beneficiaries of the policy holder
or to the policy holders themselves at the end of the policy period. The insurance company
makes this promise in return for the insured’s agreement to pay it a sum of money i.e., the
premium periodically.

Most of the people buy life insurance to protect their dependants from financial losses caused
by their death. Their dependants could be their nonworking spouse, children, an aging parent,
a business partner or a corporation.

Life insurance proceeds may be used for the following purposes:

 Repaying a home mortgage or other debts in the event of death of the policy holder.
 Providing lump-sum payments through an endowment to children when they reach a
specified age.
 Providing education for children.
 Making charitable bequests after death.
 Ensuring an income after retirement.
 Accumulating savings.
 Establishing a regular income for survivors.
 Setting up an estate plan.
 Making estate and death tax payments.

Life insurance is one of the ways to provide liquidity to the dependants of the policy holder in
the event of death of the policy holder. You should consider a number of factors before you
buy life insurance. These factors include your present and future sources of income, other
savings, group life insurance, group annuities and net worth.An insurance company can
change the provisions of a policy by attaching a rider to it. A rider is any document attached
to the policy that modifies its coverage by adding exclusive specified conditions or altering
its benefits.

A whole life insurance policy may include a loss of premium disability benefit, an accidental
death benefit, or both.The suicide clause states that the insurance company will not give the
money if the insured attempts or commits suicide within an indicated period from the starting
of the coverage. If the insured's loss is a result of suicide, an insurer will only return formerly
paid premiums to the family.An important provision in every life insurance policy is the right
to name your beneficiary. A beneficiary is a person who is designated to receive something,
such as life insurance proceeds, from the insured. In your policy, you can name one or more
persons as contingent beneficiaries who will receive your policy proceeds if the primary
beneficiary dies before you do.

The factors that affect your premium towards Life Insurance are:
 Age: This is an obvious and not surprising factor that affects your Life Insurance
premium, the age of the policyholder. If you’re young the rates will be lower in
comparison to someone older. The possibility of a young individual contracting a life
threatening disease or to pass away in their youth is very unlikely. The insurance
companies believe that you’ll make many premium payments before they have to
write a cheque for your family.
 Gender: Insurance companies aren’t against gender equality, but they believe there is
a different life expectancy for different genders. As per the studies and statistical
 findings, women are believed to live 5 years more than men at the minimum.
Therefore affecting the premium they pay, making them pay the premium for a larger
period of time but at lower rate which is a plus point for the women.
 Smoking: Smoking puts the policyholders at higher risk of all ailments, so if you’re a
smoker that that’s as good as raising a red flag to the insurance companies. Most
smokers pay a premium twice as much as non - smoker does, thus affecting the
premium to a huge extent.
 Medical history: There’s isn’t much one can do with the gene pool they come from.
If a policyholder has a medical history of serious illnesses like cancer, heart diseases,
or any other, then that makes them susceptible to get these from a hereditary
perspective. Which increases the individual’s premium by a larger margin than if their
gene pool wasn’t.
 Health records: You as the policyholder will also need to provide your own health
records. These records will ensure that you don’t have any chronic diseases or
potential health issues and keep your premium also in check instead of making a
difference to it.
 Drinking: Drinking of alcohol is injurious to health in more ways than one. If you as
the policyholder are a heavy consumer of alcohol this can affect your premium at
higher insurance rates. Insurance companies ensure to ask the applicant if they are
smokers or drinkers.
 The Policy: The policy itself also affects the premium you pay, the longer the tenure
of the policy the larger the amount of the benefit at the time of death, since you’re
paying it for that period of time. Short term policies are more expensive that long
term.
 Profession: Your profession also plays an important role in the premium you end up
paying, any policyholder working in the mining industry, oil and gas, fisheries or any
other dangerous profession increases the premium amounts you pay for the policy you
decide to take.
 Lifestyles choices: Many insurers have a higher premium for people who love to
takes risks for the thrill of it. Like speeding cars, climbing treacherous mountains or
other high risk activities. Thereby increasing your premium to substantially more than
other.
 Obesity: Obesity is another factor that affects your premium as a policyholder, being
obese can lead to a number of health problems like Osteoarthritis, High Blood
Pressure, Cancer, Stroke, Coronary Heart Disease, causing overall health problems in
the future and also increases your rates.

3. In the insurance sector, underwriters or actuaries use various methods to determine

the rates of premium. As an insurance company is a profit business, the rate of
premium charged for insurance must be sufficient enough to provide for losses and
expenses while at the same time earn profit for the company. Alok works as an actuary
in an insurance company. Suggest which method of premium calculation would be used
in the following cases:
a) Same rate of premium is charged from individuals under the same situation
b) Method frequently used by commercial fire insurance companies

Answer: a) Following are various methods to calculate the premium to be charged from
individuals in different situations:
  Yearly renewable term life insurance: This plan provides coverage for one year
only but guarantees renewal irrespective of the insurability of the policy owner.
Premium depends on the rate of mortality. As age increases, premium rate increases.
Therefore, there is a possibility that those in good health discontinue the policies
because of burdensome premium.
 Single premium term life plan: In this system, premium will not increase year after
year. Only one single lumpsum is collected at the inception to cover risk for the
selected period of insurance. The single premium will be equal to the present value of
total death claims anticipated to be paid by the insurer over the period of insurance is
calculated at a chosen rate of interest plus an allowance for expenses.
 Level premium plan: In this system, premium payable throughout the period of
insurance is level or uniform. In this system, reserve builds up under each policy
because the premium charged in the initial years of the policy is more than what is
required to cover the death risk. The difference between the face value of a policy and
the reserve under the policy is called the ‘net amount at risk’.
 Flexible premium plan: Flexibility of deciding the amount of premium to be paid is
allowed by many insurers to policy owners, e.g., universal life policies. Out of the
amount paid, mortality charges and expenses are deducted and balance accumulates
and the insurer gives interest credit to the insured.
Pricing objectives
 Rate adequacy: To avoid financial problems and insolvency, insurance company
rates must be adequate in the light of benefits promised under the company’s
insurance products. Rate adequacy means that for a given block of policies,total
payments collected now and in the future by the insurer plus the investment earnings
attributable to any net retained funds are sufficient to fund the current and future
benefits promised plus cover-related expenses.
 Rate equity: Equity means charging premiums commensurate with the expected
losses and other costs that insured bring to the insurance pool. The pursuit of equity is
one of the goals of underwriting (classification and selection of insured).
 Rates not excessive: Rates should not be excessive in relation to the benefits
provided. This objective is achieved by establishing a ceiling on the rates.
Competition discourages excessive pricing.

From the above given methods it can be concluded that Single premium term life plan is a
plan where premium will not increase year after year also Same rate of premium is charged
from individuals under the same situation.

b) Fire insurance contract may be defined as ‘an agreement whereby one party inreturn for a
consideration undertakes to indemnify the other party against financialloss which the latter
may sustain by reason of certain defined subject-matterbeing damaged or destroyed by fire or
other defined perils up to an agreedamount’.

Rate fixation in fire insurance

1. Classification: Properties to be insured are of various natures and risks. Since the premium
isfixed in relation to the class of risk, the properties are generally classified intothree main
classes: (a) common or ordinary, (b) hazardous (c) doublyhazardous. Different premium rates
are fixed for each class.
2. Discrimination: The differentiation of the rates for individual risks in a particular class is
knownas discrimination. Each additional feature of risk is charged extra premium.Lesser
premium is charged where fire extinguishing appliances or fire-resistingconstruction are
present. The tariff system is based on the law of average andgraded schedule is formulated
where different rates are ascertained for thedifferent types of risks.
3. Schedule rating: It is a plan by which hazards with respect to any particular risk are
measured.Schedule rating takes into consideration the various items influencing the perilof
fire.
The average fire rate is calculated as follows: L/V×100
Where L represents the losses and V represents the values of insuredamount.The rate arrived
at, called ‘normal rate’, will be net premium which is justsufficient to meet all the losses in
that particular risk. This basic or net premiumis loaded with expenses of management,
commission, rents and a margin forprofit to arrive at the gross premium or office premium.

Principles of Rate Fixation

1. Person judgement rating: Under this method, the rates so made indicatethe opinion or
judgement of the rate makers. The judgement is the resultof the experience and observation
of many years. The rates made wereequitable. All the good features and all the defective
features were puttogether and the rate was calculated by differentiating from the
averagepremium
2. Experience rating: In this method, the combined judgement of a largenumber of
individuals is taken into account. Being based on the experienceof several years and of
several persons, it reflects a reasonably accuratetreatment of the various elements to measure
the fire hazard. Under thismethod, the risks are classified according to their loss experiences.
3. Schedule rating: Under this method, fire hazard is separated into variouselements and
each element is assigned a particular value. The scheduledescribes a property as ‘Standard’.
For each standard risk, a standardpremium is assigned. The advantages of schedule rating
system are thatit provides more equitable treatment of all insured as the premium ratescome
approximately the same. The second advantage is that it reducesfriction between the
company and the insured because the insured isable to understand how this rate is made in
every case. The third advantageis that it secures more thorough inspection and rating.