IC - 38

CORPORATE AGENTS
COMPOSITE

ACKNOWLEDGEMENT

This course is based on revised syllabus prescribed by Insurance Regulatory and

Development Authority of India (IRDAI) and prepared by Insurance Institute of
India, Mumbai.

AUTHORS/ REVIEWERS (in Alphabetical order)

Dr. R. K. Duggal
Dr. Shashidharan K. Kutty
CA P. Koteswara Rao
Dr. Pradip Sarkar
Prof. Madhuri Sharma
Dr. George E. Thomas
Prof. Archana Vaze

G – Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.

i
 CORPORATE AGENTS
COMPOSITE

IC - 38

Year of Edition: 2023

ALL RIGHTS RESERVED

This course material is the copyright of Insurance Institute of India (III). This course
is designed for providing academic inputs for students appearing for the
examinations of Insurance Institute of India. This course material may not be
reproduced for commercial purpose, in part or whole, without prior express written
permission of the Institute.

The contents are based on prevailing best practices and not intended to give
interpretations or solutions in case of disputes, legal or otherwise.

This is only an indicative study material. Please note that the questions in the
examination shall not be confined to this study material only.

Published by: Secretary General, Insurance Institute of India, G- Block, Plot C-46,
Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and Printed at

Any communication regarding this study material may be addressed to ctd@iii.org.in

mentioning the subject title and unique publication number mentioned on the cover
page

ii
 PREFACE

Insurance Institute of India, (the Institute) has developed this course material for
Corporate Agents based on the syllabus prescribed by Insurance Regulatory and
Development Authority of India (IRDAI). Industry experts were involved in preparing
the course material.
The course provides basic knowledge of Life, General and Health insurance to
enable agents in the respective line of business to understand and appreciate their
professional career in the right perspective.
The course is structured as four sections. (1) Overview - a Common section that
covers Insurance Principles, Legal Principles and Regulatory matters that Insurance
agents need to know. Separate sections are provided for those aspiring to become
(2) Life Insurance Agents, (3) General Insurance Agents and (4) Health Insurance
Agents.
A set of model questions are included in the course to give students an idea of the
examination format and the types of objective questions that may be asked. The
model questions will also help them in revising what they have learnt.
Insurance operates in a dynamic environment. Agents need to be up to date about
changes in the market. They should actively pursue knowledge through personal
study and participation in the in-house training programmes arranged by the
respective insurers.
The Institute thanks IRDAI for entrusting this work to the Institute. The Institute
wishes all interested in studying the material a successful career in insurance
marketing.

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 CONTENTS

Chapter no. Title Page no.

SECTION COMMON CHAPTERS
C-01 Introduction to Insurance 2
C-02 Core Elements of Insurance 18
C-03 Principles of Insurance 27
C-04 Features of Insurance Contracts 40
C-05 Underwriting and Rating 48
C-06 Claims Processing 56
C-07 Documentation 63
C-08 Customer Service 72
C-09 Grievance Redressal Mechanism 87
C-10 Regulatory Aspects for Corporate Agents 95
SECTION LIFE INSURANCE
L-01 What Life Insurance Involves 113
L-02 Financial Planning 119
L-03 Life Insurance Products: Traditional 132
L-04 Life insurance products: Non-Traditional 142
L-05 Applications of Life Insurance 148
L-06 Pricing and Valuation in Life Insurance 153
L-07 Life Insurance Documentation 162
L-08 Life Insurance Underwriting 175
L-09 Life Insurance Claims 188
SECTION HEALTH INSURANCE
H-01 Introduction to Health Insurance 196
H-02 Health Insurance Documentation 203
H-03 Health Insurance Products 210
H-04 Health Insurance Underwriting 236
H-05 Health Insurance Claims 251
SECTION GENERAL INSURANCE
G-01 General Insurance Documentation 267
G-02 Underwriting and Rate Making 282
G-03 Personal and Retail Insurance 291
G-04 Commercial Insurance 301
G-05 General Insurance Claims 324
SECTION ANNEXURES
Annexures – Specimen Proposal forms and Claims Forms
A-1 333
for filling up

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 SECTION

AN OVERVIEW

1
 CHAPTER C-01
INTRODUCTION TO INSURANCE
Chapter Introduction

This chapter aims to introduce the basics of insurance, trace its evolution and how
it works. It intends to teach how insurance provides protection against economic
losses arising as a result of unforeseen events and serves as an instrument of risk
transfer.

Learning Outcomes
A. Insurance – History and evolution
B. The Principle of Risk Pooling
C. Risk management techniques
D. Insurance as a tool for managing risk
E. Considerations before opting for Insurance
F. Insurance Market Players
G. Role of Insurance in the Society

2
A. Insurance – History and Evolution

We live in a world of uncertainty. We hear about:

 Trains colliding
 Floods destroying entire communities
 Earthquakes destroying buildings
 Young people dying unexpectedly
Diagram 1: Events happening around us

Why do these events make people anxious and afraid?

The reason is simple.
i. Firstly these events are unpredictable. If one can anticipate and predict an
event, one can prepare for it.
ii. Secondly, such unpredictable and untoward events are often a cause of
economic loss and grief.
The people around can come to the aid of individuals who are affected by such
events, by having a system of sharing and mutual support. The idea of insurance is
thousands of years old. Yet, the present form of insurance, is only two or three
centuries old.
1. History of insurance
Insurance has existed in some form or other since 3000 BC. Many civilisations, have
practiced the concept of pooling and sharing among themselves, all the losses
suffered by some members of the community. Let us take a look at some of the
ways in which this concept was applied.

3
2. Insurance through the ages – Some instances
Bottomry Loans Traders of Babylon paid extra money to their lenders to write off
their loans if shipment was lost or stolen.
Traders of Bharuch and Surat also had similar practices.

Benevolent Greeks of 7th Cy. AD, used to pay in advance to take care of the
Societies/ family of members who died and also the funeral expenses of the
Friendly member.
Societies
Similar practices were followed in England as well.

Rhodes Traders of Rhodes who were sending goods by sea, were sharing
losses if any of them lost their goods due to jettison1.

Chinese Traders Chinese traders in ancient days used to send their goods in
different ships, so that even if some boats sank, their loss would be
partial.

3. Modern concepts of insurance

In India the principle of life insurance was reflected in the joint-family system.
Losses arising from the demise of a member were shared by various family
members so that each member of the family continued to feel secure.
The break-up of the joint family system and emergence of the nuclear family in
the modern era, coupled with the stress of daily life has made it necessary to
evolve alternative systems for security. This highlights the importance of life
insurance to an individual.
i. Lloyds: The origins of modern commercial insurance started at Lloyd’s
Coffee House in London, where traders agreed to share losses they suffered
due to various perils at sea.
ii. Amicable Society for a Perpetual Assurance founded in 1706 in London is
considered to be the first life insurance company in the world.
4. History of insurance in India
a) India: Modern insurance in India began in early 1800 or thereabouts, with
agencies of foreign insurers starting marine insurance business.

The Oriental Life The first life insurance company to be set up in India
Insurance Co. Ltd was an English company

Triton Insurance Co. Ltd. The first non-life insurer to be established in India

Bombay Mutual The first Indian insurance company. It was formed

Assurance Society Ltd. in 1870 in Mumbai

1
Jettison/ Jettisoning’ refers to throwing away some of the cargo to reduce the weight of the ship while at sea.
4
 National Insurance The oldest insurance company in India. It was
Company Ltd. founded in 1906

Many other Indian companies were set up subsequently as a result of the Swadeshi
movement at the turn of the century.

Important

a) The Insurance Act 1938 was the first legislation to regulate the conduct of
insurance companies in India. This Act, as amended from time to time continues
to be in force.
b) Life insurance business was nationalised on 1st September 1956 and the Life
Insurance Corporation of India (LIC) was formed. From 1956 to 1999, the LIC
held exclusive rights to do life insurance business in India.
c) In 1972, the non-life insurance business was also nationalised and the General
Insurance Corporation of India (GIC) and its four subsidiaries were set up.
d) The Malhotra Committee, in its report submitted in 1994, recommended
opening of the market for competition
e) The Insurance market was liberalised in 2000, with the passing of the Insurance
Regulatory & Development Act, 1999 (IRDAI), which also established the
Insurance Regulatory and Development Authority of India (IRDAI) in April 2000 as
a statutory regulatory body for the insurance industry.
f) An amendment of the Insurance Act in 2021, has allowed Foreign investors, to
hold up to 74% of the paid up equity capital in an Indian Insurance company.
Foreign insurers can now establish branches in India to do reinsurance.
a. Insurance industry today (As on 30th September 2021)
a) There are 24 Life insurance companies operating in India. Of these, Life
Insurance Corporation (LIC) of India is a public sector company (PSU) and the
remaining 23 life insurance companies are in the private sector.
b) There are 34 General Insurance companies of which 4 - National Insurance
Co. Ltd, The New India Assurance Co. Ltd., The Oriental Insurance Co. Ltd
and United India Insurance Co. Ltd. are PSU Companies dealing with all lines
of general insurance. 26 Private Companies also deal with all lines of general
insurance. 6General Insurers deal only in Health insurance. 2 are specialised
insurers - Agricultural Insurance Company [AIC] and Export Credit and
Guarantees Corporation [ECGC], both set up as Public sector entities.
c) There is one Reinsurance Company – The General Insurance Corporation of
India [GIC Re] and 11 foreign Reinsurers that operate through branch offices.

5
 d) The Department of Posts (called as India Post) of the Government of India,
also transacts life insurance known as Postal Life Insurance. India post is
exempt from the purview of the Insurance Regulator.

Test Yourself 1
Which among the following is the regulatory body for the insurance industry in India?
I. Insurance Authority of India
II. Insurance Regulatory and Development Authority of India
III. Life Insurance Corporation of India
IV. General Insurance Corporation of India
How insurance works

Modern commerce was founded on the principle of ownership of property. When an

asset loses value (by loss or destruction), the owner of the asset suffers an economic
loss. This loss can be compensated from a common fund made up of small
contributions from many similar asset owners. This process of transferring the
chance and consequence of a loss making event is insurance.
This mechanism of pooling risks works differently in the case of death and disability
as there is no loss/ destruction of a commercial asset.

Definition

Insurance may thus be considered as a process by which the losses of a few are
shared amongst many of those exposed to similar uncertain events/ situations.
Diagram 2: How insurance works

There are however some questions that need to be answered.

i. Would people agree to part with their hard earned money, to create such a
common fund?
ii. How could they trust that their contributions are actually being used for the
desired purpose?
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 iii. How would they know if they are paying too much or too little?
iv. Who would take the responsibility of managing these funds and paying those
who suffer the loss?
The need for an Insurer comes as an answer to all these questions. The Insurer
assesses the risk, decides and collects the individual contributions (called premium),
pools the risks and premiums, and arranges to pay to those who suffer the loss. The
insurer must also win the trust of the individuals and the community.
1. Insurance is about value
a) Firstly, there must be an asset which has an economic value. The Asset may be:
i. Physical (like a car or a building) or
ii. Non-physical (like reputation, goodwill, liability to pay to someone) or
iii. Personal (like one’s eyes, limbs, body and physical capabilities).
b) The asset may lose its value if a certain event happens. This chance of loss is
called as risk. The cause of the risk event is known as peril.
c) There is a principle known as pooling. This consists of collecting numerous
individual contributions (known as premiums) from various persons. These
persons have similar assets which are exposed to similar risks. Their assets are
also referred to as ‘risks’ in many contexts.
d) This pool of funds is used to compensate the few who might suffer the losses
caused by a peril.
e) This process of pooling funds and compensating the unfortunate few is carried
out through an institution known as the insurer (Insurance Company).
f) The insurer enters into an insurance contract with each person who seeks to
participate in this mechanism of pooling. The persons who participate are known
as insured.
2. Insurance reduces Risk Burden
The burden of risk refers to the costs, losses and disabilities one has to bear as a
result of being exposed to a given loss situation/ event.
Diagram 3: Risk burdens that one carries

There are two types of risk burdens that one carries – primary and secondary.

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 a) Primary burden of risk
The primary burden of risk consists of losses that are actually suffered by
households (and business units), as a result of pure risk events. These losses are
often direct and measurable; and can be easily compensated for by insurance.

Example

When a factory gets destroyed by fire, the actual value of goods damaged or
destroyed can be estimated and the compensation can be paid to the owner of
the factory who has suffered the loss.
Similarly, if an individual undergoes a heart surgery, the medical cost of the
same is known and compensated. In addition there may be some indirect losses.

Example

A fire may interrupt business operations and lead to loss of profits which also
can be estimated and the compensation can be paid to the one who suffers such
a loss.
Someone whose scooter hits a pedestrian is liable to pay the victim the
compensation that the Court decides.
b) Secondary burden of risk
Even when no such event occurs and there is no loss, the people who are exposed
to the peril carry some burden. That is, apart from the primary burden, one also
carries a secondary burden of risk.
The secondary burden of risk consists of costs and strains that one has to bear,
even if the said event does not occur, from the mere fact that one is exposed
to a loss situation.
Let us understand some of these burdens:
i. Firstly there is physical and mental strain caused by fear and anxiety. This
can cause stress and affect a person’s wellbeing.
ii. Secondly when one is uncertain about whether a loss would occur or not,
it would be prudent to keep a reserve fund to meet such an eventuality.
Such funds may be held in liquid form and yield low returns.
By transferring the risk to an insurer, it becomes possible to enjoy peace of mind
and also invest one’s funds more effectively. It is precisely for these reasons that
insurance is needed.
In India, one must purchase third party insurance if he/ she owns a vehicle because
it is mandatory if one wants to drive on a public road. At the same time it would be
prudent to cover the possibility of loss of own damage to the car though it is not

8
mandatory. It is also compulsory to have a Personal Accident cover for the Owner-
Driver.

Test Yourself 2
Which among the following is a secondary burden of risk?
I. Business interruption cost
II. Goods damaged cost
III. Setting aside reserves as a provision for meeting potential losses in the future
IV. Hospitalisation costs as a result of heart attack

B. The Principle of Risk Pooling

Insurance companies enter into contracts with different entities – policyholders,

who can be individuals or corporates. The benefits they pay to policyholders are
contractual obligations. Insurance contracts are meaningful only if the Insurers are
financially capable of taking over the risks and compensating for the losses, if and
when they occur. The structure arises from application of the mutuality or the
pooling principle.
Mutuality and Diversification are two important ways to reduce risk in financial
markets. They are fundamentally different.

Diversification Mutuality

Here the funds are spread out among Under mutuality or pooling, the funds of
various assets (eggs are placed in different various individuals are combined (all eggs
baskets). are placed in one basket).

Funds flow from one source to many Funds flow from many sources to one.
destinations.

Diagram 4: Mutuality - Mutuality (Funds flow from many sources to one)

The Principle of Mutuality is what gives insurance contracts their power and
uniqueness. By paying a small contribution (the premium), an insured immediately
creates a large quantity of funds ( corpus)that is available to him/ her in the event
of a loss arising due to the insured risk. This potential corpus of money is what
makes insurance unique and without any substitutes among all financial products.

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C. Risk Management Techniques

One may also ask whether insurance is the right solution to all kinds of risk
situations. The answer is ‘No’.
Insurance is only one of the methods by which individuals may seek to manage their
risks. Here they transfer the risks they face to an insurance company. However there
are other methods of dealing with risks, which are explained below:
1. Risk avoidance
Reducing risk by avoiding a loss situation is known as risk avoidance. Thus one may
try to avoid activities or situations, or avoid dealing with property or persons due
to which there can be an exposure.

Example

i. One may avoid certain manufacturing risks by contracting out the manufacturing
to someone else.
ii. One may not venture outside the house for fear of meeting with an accident or
may not travel at all for fear of falling ill when abroad.
Risk avoidance is considered a negative way to handle risk. Individuals and societies
need to take some risks for doing activities for their progress. Avoiding such risk
taking activities would lead to losing the benefits from such activity.
2. Risk retention
One tries to manage the impact of risk and decides to bear the risk and its effects
by oneself. This is known as self-insurance.

Example

A business house may decide, based on experience about its capacity to bear small
losses upto a certain limit, to retain the risk with itself.
3. Risk reduction and control
This is a more practical and relevant approach than risk avoidance. It means taking
steps to lower the chance of occurrence of a loss and/ or to reduce severity of its
impact if such loss should occur.

Important

Measures to reduce the chance of occurrence of loss causing events are known as
‘Loss Prevention’. The measures to reduce the degree of loss, in case a loss
happens, are called ‘Loss Reduction’/ Loss Minimisation.
Risk reduction involves reducing the frequency and/ or sizes of losses through:

10
 a) Education and training of various types of employees in proper risk
practices – e.g. (i) participating in ‘fire drills’; (ii)wearing of seatbelts
helmets on cars.
b) Making Environmental changes – like improving physical conditions - e.g. (i)
installing fire alarms; (ii) spraying chemicals to kill mosquitoes to reduce
spread of Malaria.
c) Changes made in dangerous or hazardous operations, while using
machinery and equipment or in the performance of other task - e.g. (i)
wearing helmets inside construction sites; (ii) wearing gloves and face shields
while handling chemicals.
d) Leading a healthy lifestyle- helps in reduce the incidence of falling ill - e.g.
(i) undergoing regular medical check-ups; (ii) practicing yoga regularly.
e) Separation, or spreading out various items of property into varied locations
rather than concentrating them, to reduce impact of mishap in any one
location - e.g. (i) storing large quantities of flammable substances at separate
locations; (ii) fixing fire proof doors in hazardous areas of factories.
4. Risk financing
This refers to the provision of funds to meet losses that may occur.
a) Risk retention through self-financing involves bearing losses oneself as they
occur. The firm assumes and finances its own risk, either through its own or
borrowed funds, this is known as self-insurance.
b) Risk retention within a bigger group: If the risk is part of a bigger group,
like a parent company, the risk can be retained within the larger group which
would finance the losses. This can be a group formed by mutual consent as
well.
c) Risk transfer is an alternative to risk retention. It involves transferring the
responsibility for losses to another party.
Insurance is one of the major forms of risk transfer. Instead of facing the
uncertainty of many of the other forms, people prefer Insurance as it
provides certainty and peace of mind.
5. Insurance vs Assurance
Insurance is used for most General insurance contracts which provide protection
against an event that may or may not happen, and where the loss amount can
be assessed only after the event.
Assurance refers to financial coverage for extended periods or until death. In
the case of life, the happening of death (the loss making event), is certain. Only
the timing is uncertain. Further, it is not possible to estimate the amount of
economic loss suffered when a person dies. The loss amount that is to be paid,
11
 must be fixed in advance. This is why people use the term ‘Assurance’ in case
of Life insurance.
Though there are such subtle technical differences, the terms ‘Insurance’
and ‘Assurance’ are used interchangeably in most markets, including India.
[One of the biggest general insurers in India carries the name – New India
Assurance Company Ltd. and no life company in India is using the word
‘Assurance’ in its name!]
Diagram 5: How insurance indemnifies the insured

Test Yourself 3
Which among the following is a method of risk transfer?
I. Bank Fixed Deposit
II. Insurance
III. Equity shares
IV. Real Estate

D. Insurance as a tool for managing risk

The term ‘Risk’ refers not to a loss that has actually been suffered but a loss that is
likely to occur. It is thus an expected loss. The cost of this expected loss is the
product of two factors:
i. The probability that the peril being insured against may happen, leading to
the loss
ii. The severity (impact) or the amount of loss that may be suffered as a result.
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The cost of risk would increase in direct proportion with both the probability and
the severity (amount of loss). This works in different ways – (a) If the amount of
loss is very high, and the probability of its occurrence is small, the cost of the risk
would be low as such instances may be very few. (b) Even if the amount of loss is
small, if the probability of its occurrence is very high, the cost of the risk would be
high, as there would be many such occurrences. Insurance can be seen as a powerful
tool for managing one’s risk. It protects one from the financial impact of losing
one’s assets/ wealth due to an insured loss.
Diagram 6: Considerations before opting for insurance

E. Considerations before opting for Insurance

When deciding whether to insure or not, one needs to evaluate the cost of
transferring the risk [the insurance premium] against the cost of bearing it oneself.
Insurance would be most required where the loss impact could be very high, but the
probability (and hence the premium), is very low. E.g. (i) the chance of an
earthquake; (ii) the chance of a ship sinking.
a) Do not risk a lot for a little: A reasonable relationship must be there between
the cost of transferring the risk and the value derived.
Would it make sense to insure an ordinary ball pen?
b) Do not risk more than one can afford to lose: If the loss that can arise as a
result of an event is large enough to cause bankruptcy, retention of the risk
would not be appropriate.
If a large oil refinery gets destroyed, the owners cannot afford to bear the loss.
c) Consider the likely outcomes of the risk carefully: It is best to insure those
assets for which the probability of occurrence (frequency) of a loss is low but
the possible impact (severity), is high.
The loss of a space satellite can be so costly that it has to be insured.

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Test Yourself 4
Which among the following scenarios needs insurance?
I. The sole bread winner of a family might die untimely
II. A person may lose his wallet
III. Stock prices may fall drastically
IV. A house may lose value due to natural wear and tear

F. Insurance Market Players

The Insurance Companies (Insurers) are the major players in the insurance industry.
In addition to insurers, there are multiple parties who are part of the Insurance
value chain. There is the Insurance Regulator, which regulates the entire market.
Intermediaries like Agents, Brokers, Banks (through Bancassurance) Insurance
Marketing Firms and Point of Sales Persons are in the field of interacting with the
prospects/ insured finding out their needs, giving them information about the
policies available for covering their needs.
Surveyors and Loss Assessors/ Adjusters go into assessing claims and ancillary work.
Third Party Administrators deal with Health and Travel Insurance Claims.
Regulations provides that all intermediaries have a responsibility towards the
customer.
Agents, being intermediaries between the insurance company and the insured have
the responsibility to ensure all material information about the risk is provided by
the insured to insurer.

Important
Duty of an Insurance Agent/ Intermediary towards the Prospect (Customer)
IRDAI regulations provides that intermediaries have certain responsibilities towards
the prospect. The intermediary has a responsibility towards the insurer as well.
The regulation states that where the prospect depends upon the advice of the
insurer or his agent or an insurance intermediary, such a person must advise the
prospect in a fair manner. It also says that “An insurer or its agent or other
intermediary shall provide all material information in respect of a proposed cover
to the prospect to enable the prospect to decide on the best cover that would be in
his or her interest”.
If the proposal and other connected papers are not filled by the customer, a
certificate may be incorporated at the end of proposal form from the customer that
the contents of the form and documents have been fully explained to him and that
he has fully understood the importance of the proposed contract.
When the customer pays the insurer towards premium, the insurer is bound to issue
a receipt. That is, even if the premium is paid in advance.
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G. Role of Insurance in the Society

Insurance companies play an important role in a country’s economic development.

They ensure that the wealth of the country is protected and preserved. Some of
their contributions are given below.
a) Insurance is founded on the principle of Mutuality, in which the collective
power of the community is brought together to support its unfortunate few
members who suffer an economic loss. There are no substitutes for
insurance.
b) Insurance companies collect small amounts of premium and pool them
together as huge funds. These funds are held and invested for the interests
of policyholders and the benefit of the community. They are not unduly
invested in speculative ventures.
c) Insurance provides the benefit of protection to numerous insured - both
individuals and enterprises –against losses caused by accidents or fortuitous
events. It preserves capital and releases it for development of business and
industry, which helps the country’s growth.
d) Insurance enables investment of capital leading to commercial and industrial
development. It also helps in removing the fear, worry and anxiety
associated with entrepreneurship.
e) Many Banks and Financial institutions do not advance loans on property
unless it is insured against loss or damage. Many of them insist on assigning
the policy as collateral security.
f) Before accepting large complicated risks, general insurers arrange for
inspection of the property by qualified engineers/ other experts. They assess
the risk and suggest risk management measures to reduce the risk and help
in rating.
g) Insurance earns foreign exchange for the country like trade, shipping and
banking services.
h) Insurers are associated with institutions engaged in fire loss prevention,
cargo loss prevention, industrial safety and road safety.
i) Entrepreneurs get the confidence to invest in new or relatively unknown
fields with the protection offered by Insurance.

Information

Insurance and Social Security

a) Social security is an obligation of the State. Social security schemes of the
State involve the use of compulsory or voluntary insurance, as a tool of social
security. The Employees State Insurance Act, 1948 provides for Employees
State Insurance Corporation to pay for the expenses of sickness,

15
 disablement, maternity and death for industrial employees and their families,
who are covered.
b) Insurers play an important role in social security schemes sponsored by the
Government such as
1. PMJJBY –Pradhan Mantri Jeevan Jyoti Bima Yojana
2. PMSBY – Pradhan Mantri Suraksha Bima Yojana
3. PMFBY- Pradhan Mantri Fasal Bima Yojana
4. PMJAY – Pradhan Mantri Jan Arogya Yojana (Ayushmaan Bharat)
5. PMVVY - Pradhan Mantri Vaya Vandana Yojana – a Pension plan
6. APY - Atal Pension Yojana
These, and other Government schemes have been benefiting the Indian
society/ community.
c) In addition to supporting Government schemes, the insurance industry offers
insurance covers on a commercial basis which have the ultimate objective of
providing social security. The rural insurance schemes, operated on a
commercial basis, are designed to provide social security to the rural families.

Test Yourself 5
Which of the following insurance schemes are sponsored by the Government of
India?
I. PM Jan Arogya Yojana - Ayushmaan Bharat
II. PM Fasal Bima Yojana
III. PM Suraksha Bima Yojana
IV. All of the above
Summary

 Insurance is risk transfer through risk pooling.

 Commercial insurance business as practiced today started at the Lloyd’s Coffee
House in London.
 An insurance arrangement involves the following:
 Asset,
 Risk,
 Peril,
 Contract,
 Insurer and
 Insured
 When persons having similar assets, exposed to similar risks, contribute into a
common pool of funds it is known as pooling.
 Apart from insurance, other risk management techniques include:
 Risk avoidance,

16
  Risk control,
 Risk retention,
 Risk financing and
 Risk transfer
 The thumb rules of insurance are:
 Do not risk more than one can afford to lose,
 Consider the likely outcomes of the risk carefully and
 Do not risk a lot for a little

Key Terms

1. Risk
2. Pooling
3. Asset
4. Burden of risk
5. Risk avoidance
6. Risk control
7. Risk retention
8. Risk financing
9. Risk transfer

Answers to Test Yourself

Answer 1 - The correct option is II.

Answer 2 - The correct option is III.
Answer 3 - The correct option is II.
Answer 4 - The correct option is I.
Answer 5 - The correct option is IV.

17
 CHAPTER C-02
CORE ELEMENTS OF INSURANCE
Chapter Introduction

In this chapter, we shall learn about the various key elements and principles of
insurance that govern the working of insurance.

Learning Outcomes

A. Elements of Insurance
Assets and Risk
Hazard and Peril
Risk Pooling
After studying this chapter, one should be able to:
1. Understand Assets are
2. Understand Risk, Hazards and Perils
3. Appreciate Risk Management
4. Understand Risk Pooling in insurance

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A. Elements of insurance
We have seen that the process of insurance has four elements
 Asset
 Risk
 Risk pooling
Let us now look at the various elements of the insurance process in some detail.
1. Asset

Definition

An asset may be defined as ‘anything that confers some benefits and has an
economic value to its owner’.

An asset must have the following features:

 Economic value: An asset must have economic value. Value can arise in two
ways.
a) Income generation: Asset may be productive and generate income.

Example
A machine used to manufacture biscuits, or a cow that yields milk, both generate
income for their owner. A healthy worker is an asset to an organization.

b) Serving needs: An asset could also add value by satisfying one or a group of
needs.

Example
A refrigerator cools and preserves food while a car provides comfort and
convenience in transportation, similarly a body free of illness adds value to oneself
and family also.

 Scarcity and Ownership

What about air and sunlight? Are they not assets? - The answer is ‘No’.
Few things are as valuable as air and sunlight. We cannot live without them. Yet
they are not considered as assets in the economic sense of the term.
There are two reasons for this:
 Their supply is abundant and not scarce.
 They are not owned by any one individual but are freely available to all.
This implies that an asset must satisfy two more conditions to qualify as such - its
scarcity and its ownership or possession by someone.

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 Insurance of assets
Insurance provides protection only against financial losses arising from unexpected
events and not natural wear and tear, of assets due to usage over time.
We must note that insurance cannot protect an asset from loss or damage. An
earthquake will destroy a house whether it is insured or not. The insurer can only
pay a sum of money, which would reduce the economic impact of the loss.
Losses can arise in the event of breach of an agreement.

Example

An exporter would lose a great deal if the importer on the other side refused to
accept the goods or defaulted on payments.

 Life insurance
What about our lives? There is indeed nothing as valuable to us as our own lives and
those of our loved ones. Our lives can be seriously affected when subjected to an
accident or an illness.
This can impact in two ways:
 Firstly there are costs of treatment of a particular disease.
 Secondly there may be loss of economic earnings, both due to death or disability.
These kinds of losses are covered by insurances of the person or personal lines of
insurance. Insurance is possible for anyone who has assets that have value [i.e.
which generate income or meet some needs]; the loss of which [due to fortuitous
or accidental events] cause financial loss that can be [measured in terms of money].
Thus these assets are commonly referred to as subject matter of insurance in
insurance parlance.
2. Risk
The second element in the process of insurance is the concept of risk. Risk can be
defined as the chance of a loss. Risk thus refers to the likely loss or damage that
can arise on account of happening of an event. [Risk is sometimes used to refer the
subject matter of insurance, as well.] One do not usually expect one’s house to burn
or one’s car to have an accident. Yet it can happen.
Examples of risks are the possibility of economic loss arising from the burning of a
house or a burglary or an accident which results in the loss of a limb.
This has two implications.
i. Firstly, it means that that the loss may or may not happen.
ii. Secondly, the event, the occurrence of which actually leads to the loss, is
known as a peril. It is the cause of the loss.

20
Example

Examples of perils are fire, earthquakes, floods, lightning, burglary, heart attack
etc.

Natural wear and tear

It is true that nothing lasts forever. Every asset has a finite lifetime during which it
is functional and yields benefits. This is a natural process and one discards or
changes one’s mobiles, washing machines and clothes when they are worn out.
Therefore losses arising out of normal wear and tear are not covered in insurance.
Exposure to risk: Occurrence of a peril need not necessarily lead to a loss. A person
staying in Mumbai does not suffer any loss due to a flood in coastal Andhra. For loss
to happen the asset must be exposed to the peril. Exposure to risk alone is not
enough ground for insurance compensation.

Example

A fire may break out in factory premises without causing actual damage. Insurance
comes into play only if there is an actual economic (financial) loss as a result of a
peril.

Degree of Risk Exposure:

Two assets may be exposed to the same peril but the likelihood of loss or the amount
of loss may vary greatly. A vehicle carrying explosives can yield far greater loss from
fire than tanker carrying water.
3. Risk Management
 Extent of damage likely to be suffered
This is given by the degree of loss and its impact on an individual or business.
On this basis one may identify three types of risk events or situations:
 Critical
Where losses are of such a magnitude; that may result in total loss or
bankruptcy. Losses can be critical when the accident results in significant and
severe impact, disability, damage to equipment and the environment, which
may be reversible to some extent. Critical losses would include those resulting
in serious financial losses, compelling a firm to borrow to continue operations.

Example: Critical

 A fire in the plant of a large multinational company at Gurgaon destroys

inventory worth Rs 1 crore. The loss is heavy but not so high as to lead to
bankruptcy.

21
 A torpedo from a pirate ship sinks an entire passenger ship but most passengers
are saved.
 A major accident resulting in a kidney damage necessitating a kidney transplant
operation entailing prohibitive costs
.

 Catastrophic
Catastrophic losses signify death or total disability for a large number of people,
widespread loss of assets, having significant environmental impact which are
practically irreversible. Catastrophic losses usually signify disasters that are
sudden, widespread and unstoppable.

Example: Catastrophic

 An earthquake or flood that completely destroys a few villages

 A major fire that completely destroys a multi crore installation over a large
territory
 The terrorist attack of 9/ 11 on World Trade Centre which caused injuries to a
large number of people
 A pandemic like Covid – 19 causing disease to people across the globe
.

 Marginal/ Insignificant
Where the possible losses are insignificant and can be easily met from an
individual or a firm’s existing assets or current income without imposing any
undue financial strain.

Example
 A minor car accident results in the side being slightly grazed due to which some
of the paint is damaged and a fender is slightly bent.
 An individual suffering from common cold and cough.
.

4. Hazards and Perils

The condition or conditions which increase the probability of a loss or its severity,
and thus impact(s) the risk is known as hazard. When insurers make an assessment
of the risk, it is generally with reference to the hazards to which the asset is subject.
The term hazard in insurance language refers to those conditions or features or
characteristics which create or increase the chance of loss arising from a given peril.
A thorough knowledge of various hazards to which a risk is exposed to is most
essential for underwriting. Examples of the link between assets, peril and hazards
are given below.

22
 Asset Peril Hazard

Life Cancer Excessive Smoking

Factory Fire Explosive material left Unattended
Car Car Accident Careless driving by driver
Water seeping in cargo and spoiling; Cargo not packaged in
Cargo Storm
waterproof containers

Important
 Types of hazards
a) Physical hazard is a physical condition that increases the chance of loss.

Example

i. Defective wiring in a building

ii. Indulging in water sports
iii. Leading a sedentary lifestyle

b) Moral hazard refers to dishonesty or character defects in an individual that

influence the frequency or severity of the loss. A dishonest individual may
attempt to commit fraud and make money by misusing the facility of insurance.

Example

If one deliberately sets a fire to one’s property and collects claims against losses
under the policy, such claims are clearly fraudulent and could be justifiably rejected
A classic instance of moral hazard is purchasing insurance for a factory and then
burning it down to collect the insurance amount or buying health insurance after
onset of a major ailment.

c) Legal hazard is more prevalent in cases involving a liability to pay for damages.
It arises when certain features of the legal system or regulatory environment
can increase the incidence or severity of losses.

Example

The enactment of law governing workmen’s compensation in the case of accidents

can raise the amount of liability payable considerably.

A major concern in insurance is the relationship between risks and associated

hazards. Assets are classified into various risk categories on this basis and the price
[premiums] charged for insurance coverage would increase if the susceptibility to
loss, arising as a result of the presence of associated hazards, is high.

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5. Mathematical Principle of Insurance (Risk pooling)
The third element in insurance is a mathematical principle that makes insurance
possible. It is known as the principle of risk pooling.

Example

Suppose there are 100000 RCC houses exposed to the risk of fire that can cause an
average loss of Rs. 50000. If the chance of a house catching fire is 2 in 1000 [or 2/
1000 = 0.002] it would mean that the total amount of loss suffered would be Rs
10000000 [= 50000x 0.002 x 100000].
If an insurer were to get the owners of each of the 100000 houses to contribute Rs
100 and if these contributions (100000 x 100 = Rs.10000000) were to be pooled into
a single fund, it would be enough to pay for the loss of the unfortunate few who
suffered from the fire.
To ensure that there is equity [fairness] among all those being insured, it is
necessary that the houses should all be similarly exposed to the risk. In the above
example risk exposure to mud houses will be different.
a) How exactly does the principle work in insurance?
It is by pooling number of risks of all the insured similarly placed and exposed
to possibility of loss due to a peril that the insurer is able to assume that risk
and its financial impact.

Large Paying Premium Paying Claims to a

number Premium few who suffered
of people loss
Many Small These small amounts are pooled Big amounts are
people amounts of together as a Common Pool, big paid to those who
pay money as enough to pay a statistically suffer a loss
Premiums estimated number of claims

b) Risk pooling and the law of large numbers

The probability of damage [derived as 2 out of 1000 or 0.002 in the example
above] forms the basis on which the premium is determined. The insurer would
face no risk of loss if the actual experience was as expected. In such a situation
the premiums of the numerous insured would be sufficient to completely
compensate for the losses of those who have been affected by the peril. The
insurer would however face a risk if the actual experience was more adverse
than expected and the premiums collected were not sufficient to pay the claims.
How can the insurer be sure about its predictions? This becomes possible because
of a principle known as the “Law of large numbers”. It states that the larger the
size of the pool of risks, the actual average of losses would be closer to the
estimated or expected average loss.
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 c) Insurance Companies to remain Solvent:
If the pools of risks and the premium pools created are not sufficient to meet
the liabilities towards paying claims (in case they occur), the system of risk
pooling and insurance may fail. Insurers need to have sufficient money with
them to honour their promises to all the members of the pool. If they have the
sufficient money, they are considered solvent and if they do not have money to
meet their obligations, they become insolvent.
In other words, Insurers need to keep with them some surplus money (or solvency
margin) to meet unforeseen deviations between expected and actual claims
situations. Solvency Ratio assesses the extent to which assets are available to
cover the insurers’ commitments towards future payments. Different countries
use different measures to assess Solvency Ratio. In India, IRDAI has mandated
that insurers are required to maintain a minimum solvency ratio of 1.5.

Example

To give a simple illustration, the probability of getting heads on a toss of the coin
is 1 out of 2. But one cannot be sure to actually get 2 heads if a coin is tossed four
times.
Only when the number of tosses gets very large and closer to infinity, the chance of
getting heads once for every two tosses will become closer to one.

It follows that insurers can be sure of their ground only when they have been able
to insure a large number of insured. An insurer who has insured only a few hundred
houses, likely would be worse affected than one who has insured several thousand
houses.

Important

Conditions for insuring a risk

When does it make sense to insure a risk from the insurer’s point of view?
Six broad requirements for a risk to be considered insurable are given below.
i. A sufficiently large number of homogenously [similar] exposed units to make
the losses reasonably predictable. This follows from the law of large numbers.
Without this it would be difficult to make predictions.
ii. Loss produced by the risk must be definite and measurable. It is difficult to
decide the compensation if one cannot say for sure that a loss has occurred and
how much it is.
iii. Loss must be fortuitous or accidental. It must be the result of an event that
may or may not happen. The event must be beyond the control of insured. No
insurer would cover a loss that is intentionally caused by the insured.

25
iv. Sharing of losses of the few by many can work only if a small percentage of the
insured group suffers loss at any given period of time.
v. Economic feasibility: The cost of insurance must not be high in relation to the
possible loss; otherwise the insurance would be economically unviable.
vi. Public policy: Finally the contract should not be contrary to public policy and
morality.

Test Yourself 1
Which one of the following does not represent an insurable risk?
I. Fire
II. Stolen goods
III. Burglary
IV. Loss of goods due to ship capsizing

Summary

a) The process of insurance has four elements (asset, risk, risk pooling and an
insurance contract).
b) An asset may be anything that confers some benefit and is of economic value to
its owner.
c) A chance of loss represents risk.
d) Condition or conditions that increase the probability or severity of the loss are
referred to as hazards.
e) The mathematical principle, that makes insurance possible is known as principle
of risk pooling.

Key terms

a) Asset
b) Risk
c) Hazard
d) Risk pooling
e) Offer and acceptance
f) Lawful consideration

Answers to Test Yourself

Answer 1 - The correct option is II.

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 CHAPTER C-03
PRINCIPLES OF INSURANCE
Chapter Introduction

In this chapter, we discuss the principles, based on which the mechanism of

insurance works.
a) Utmost Good Faith or "Uberrima fides" is defined as involving “a positive duty
to voluntarily disclose, accurately and fully, all facts material to the risk being
proposed, whether requested or not". All insurance contracts are based on the
principle of Uberrima Fides
b) The existence of ‘Insurable Interest’ is an essential ingredient of every
insurance contract and is considered as the legal pre-requisite for insurance.
c) Indemnity ensures that the insured is compensated to the extent of his loss on
the occurrence of the contingent event.
d) Subrogation means the transfer of all rights and remedies, with respect to the
subject matter of insurance, from the insured to the insurer.
e) The principle of contribution implies that if the same property is insured with
more than one insurance company, the compensation paid by all the insurers
together cannot exceed the actual loss suffered.
f) Proximate cause is a key principle of insurance and is concerned with how the
loss or damage actually occurred and whether it is indeed as a result of an
insured peril.

Learning Outcomes
A. Uberrima fides
B. Insurable Interest
C. Proximate Cause
D. Indemnity
E. Subrogation
F. Contribution

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A. Uberrima Fides

Insurance contracts have various special features that are discussed below:
1. Utmost Good Faith or ‘Uberrima Fides’
Utmost Good Faith or "Uberrima fides", one of the fundamental principles of an
insurance contract, is defined as “a positive duty to voluntarily disclose, accurately
and fully, all facts material to the risk being proposed, whether requested or not".
All commercial contracts are based on Good Faith in so much as there shall be no
fraud or deceit when giving information or doing the transaction. The rule observed
here is that of “Caveat Emptor” which means Buyer Beware. The parties to the
contract are expected to examine the subject matter of the contract and so long as
one party does not mislead the other and the answers are given truthfully, there is
no question of the other party avoiding the contract.
Insurance contracts stand on a different footing as the subject matter of the
contract is intangible and cannot be easily known to the insurer. Again, there are
many facts, which may be known only to the proposer. The insurer has to rely
entirely on the proposer for information. Hence the proposer has a legal duty to
disclose all material information about the subject matter of insurance to the
insurers. That is, the insured should not make any misrepresentation regarding any
fact that is material for the insurance contract. This higher obligation of full
representation and full disclosure in respect of Insurance contracts makes them
contracts of Utmost Good Faith.
If Utmost Good Faith is not observed by either party, the contract may be
avoided by the other. This follows from the logic that no one should be allowed to
take advantage of his own wrong especially while entering into a contract of
insurance.
a) Material fact has been defined as a fact that would affect the judgment of an
insurance underwriter in deciding whether to accept the risk and if so, the rate
of premium and the terms and conditions. The insured has an obligation to fully
and accurately disclose all facts that are material to an insurance contract.
Whether an undisclosed fact was material or not would depend on the
circumstances of the individual case and could be decided ultimately only in a
court of law. The insured has to disclose facts that affect the risk.
Material facts denote the information which enables the insurers to decide:
 Whether they will accept the risk?
 If so, at what rate of premium and subject to what terms and conditions?
This legal duty of utmost good faith arises under common law. The duty applies
not only to material facts which the proposer knows, but also extends to material

28
 facts which he ought to know. There is a corresponding duty of the insurer not to
withhold any information about the policy to the insured.

Example
The following are some examples of material information that the proposer should
disclose while making a proposal:
i. Life Insurance: One’s own medical history, family history of hereditary
illnesses, habits like smoking and drinking, absence from work, age, hobbies,
financial information like income details of proposer, pre-existing life
insurance policies, occupation etc.
ii. Fire Insurance: Construction, location/ situation of risk and usage of
building, age of the building, nature of goods in premises etc.
iii. Marine Insurance: Description of goods, method of packing and mode of
transit etc.
iv. Motor Insurance: Description of vehicle, date of purchase and Regional
Registration authority etc.
v. Health Insurance: Pre-existing disease, age etc.
b) When a Fact becomes ‘Material’: Some types of material facts that one needs
to disclose are those indicating that the particular risk represents a greater
exposure than can be normally expected.

Example

Hazardous nature of cargo being sent by a ship, past history of illness, past history
burglary of a house.
i. Existence of policies taken from all insurers and their present status
ii. All questions in the proposal form or application for insurance are considered
to be material, as these relate to various aspects of the subject matter of
insurance and its exposure to risk. They need to be answered truthfully and
be full in all respects.
The following are some scenarios wherein material facts need not be disclosed.

Information

a. Material Facts that need not be disclosed: Unless there is a specific enquiry by
underwriters, the proposer has no obligation to disclose facts like:
i. Measures implemented to reduce the risk. E.g.: The presence of a fire
extinguisher
ii. Facts which the insured does not know or is unaware of. E.g.: An
individual, who had high blood pressure but was not aware about the same

29
 at the time of taking the policy, cannot be charged with non-disclosure of
this fact.
iii. Which could be discovered, by reasonable diligence. It is not necessary to
disclose every minute material fact. The underwriters must be conscious
enough to ask for the same if they require further information. E.g.: When
insuring a textile shop one does not need to specifically say that some of the
synthetic clothes in the shop are highly combustible.
iv. Matters of law: Everybody is supposed to know the law of the land. E.g.:
Municipal laws about storing of explosives
v. About which insurer appears to be indifferent (or has waived the need
for further information)
In such cases, the insurer cannot later disclaim responsibility on grounds that the
answers were incomplete.

b. Duty to Disclose: In the case of insurance contracts, the duty to disclose is

present throughout the entire period of negotiation until the proposal is accepted
and a Life Insurance policy is issued.
Once the Life Insurance policy is accepted, there is no further need to disclose any
material facts that may come up during the term of the policy.

Example

Mr. Rajan has taken a Life insurance policy for a term of fifteen years. Six years
after taking the policy, Mr. Rajan has some heart problems and has to undergo some
surgery. Mr. Rajan does not need to disclose this fact to the insurer.

[However, if the policy is in a lapsed condition because of failure to pay the

premiums when due and the policy holder seeks to revive the policy contract and
bring it back in force, he may, at the time of such revival, have the duty to disclose
all facts that are material and relevant, as though it is a new policy.]
In the case he has Health Insurance, at the time of renewing the policy, Mr. Rajan
has to inform the insurer about this health issue.
Similarly, in the case of General Insurance, at the time of renewing the Fire policy
for an enterprise/ factory, the insured has to inform the insurer if a change was
made in the occupancy of the building.
At the time of renewing the Hull policy for a ship, the insured has to inform the
insurer if the ship was modified to carry a different type cargo; say, hazardous
chemicals instead of pulses.
c. Situations of Non-Disclosure may arise when the insured is silent about material
facts because the insurer has not raised any specific enquiry. Such situations may
also arise through evasive answers to queries raised by the insurer.
30
 Often non-disclosure may be inadvertent (meaning that it may be made without
one’s knowledge or intention) or because the proposer thought that a fact was
not material. In such a case it is innocent.
When a fact is intentionally suppressed it is treated as concealment. Here, there
is the intent to deceive.
d. Misrepresentation: Any statement made during negotiation of a contract of
insurance is called representation. A representation may be a definite statement
of fact or a statement of belief, intention or expectation. It is expected that the
statement must be substantially correct. Representations that concern matters
of belief or expectation must be made in good faith. Misrepresentation is of two
kinds:-
i. Innocent Misrepresentation relates to inaccurate statements, which are
made without any fraudulent intention.
ii. Fraudulent Misrepresentation on the other hand refers to false statements
that are made with deliberate intent to deceive the insurer or are made
recklessly without due regard for truth.
An insurance contract generally becomes void when there is a clear case of
concealment with intent to deceive, or when there is fraudulent
misrepresentation.
Amendments (March, 2015) to Insurance Act, 1938 have provided certain
guidelines about the conditions under which a policy can be called into question
for fraud. The new provisions are as follows
e. Fraud: The term “Fraud” has been specified under Section 45 (2) of the
Insurance Act (amended in 2015). Accordingly, a Life Insurance policy can be
called in question on the ground of Fraud by the insurer only within a time period
and not later. However, Insurers can do so only within three years from (a) the
date of issuance of the policy (b) the date of commencement of risk, (c) the date
of revival of the policy or (d) the date of the rider to the policy, whichever is
later.
The insurer needs to communicate the reasons on which the policy is questioned
in writing to the insured or his/ her legal representatives, nominees or assignees.
The expression "fraud" means any act committed by the insured, with the intent
to deceive the insurer or to induce the insurer to issue an insurance policy. It is
also provided that in case the policyholder is not alive, the onus of disproving
fraud, lies upon the beneficiaries.

B. Insurable interest

The existence of ‘insurable interest’ is an essential ingredient of every insurance

contract and is considered as the legal pre-requisite for insurance.

31
Three essential elements of insurable interest:
i. There must be property, right, interest, life or potential liability capable of
being insured.
ii. Such property, right, interest, life or potential liability must be the subject
matter of insurance.
iii. The insured must bear a legal relationship to the subject matter such that he
stands to benefit by the safety of the property, right, interest, life or freedom
of liability. By the same token, he must stand to lose financially by any loss,
damage, injury or creation of liability.
Let us see how insurance differs from a gambling or wager agreement.
a) Gambling and insurance: Unlike a card game, where one could win or lose, a
fire can have only one consequence – loss to the owner of the house.
The owner takes insurance to ensure that the loss suffered is compensated for
in some way.
In other words, Insurable Interest is the interest the insured has in the subject
matter of insurance. Insurable interest makes an insurance contract valid and
enforceable under the law.

Example

If Mr. Patel has brought a house with a mortgage loan of Rs 15 lakhs from a bank
and he has repaid 12 lakhs of this amount, the bank’s interest would be only to the
tune of the balance three lakhs which is outstanding.
Thus the bank also has an insurable interest financially in the house for the balance
amount of loan that is unpaid and would ensure that it is made a co insured in the
policy
Mr. Patel owns a house for which he has taken a mortgage loan of Rs. 15 lakhs from
a bank. Ponder over the questions below:
 Does he have an insurable interest in the house?
 Does the bank have an insurable interest in the house?
 What about his neighbour?
Mr. Dass has a family consisting of spouse, two kids and old parents. Ponder over
the below questions:
 Does he have an insurable interest in their well-being?
 Does he stand to financially lose if any of them are hospitalised?
 What about his neighbour’s kids? Would he have an insurable interest in them?

32
It would be relevant here to make a distinction between the subject matter of
insurance and the subject matter of an insurance contract.
The subject matter of insurance relates to property being insured against, which
has an intrinsic value of its own.
The subject matter of an insurance contract on the other hand is the insured’s
financial interest in that property. It is only when the insured has such an interest
in the property that he/ she has the legal right to insure. The insurance policy in
the strictest sense covers not the property per se, but the insured’s financial
interest in the property.
Diagram 1: Insurable interest according to common law

b) Time when insurable interest should be present: In life insurance, insurable

interest should be present at the time of taking the policy. In general insurance,
insurable interest should be present both at the time of taking the policy and at
the time of claim with some exceptions like marine policies in which case it
must exist at the time of claim.
In case of fire and accident insurance, insurable interest should be present both
at the time of taking the policy and at the time of loss.
In case of health and personal accident insurance apart from self, family can
also be insured by the proposer since he/ she stands to incur financial losses if
the family meets with an accident or undergoes hospitalisation. However, in
marine cargo insurance, insurable interest is required only at the time of loss as
the ownership of the goods would change hands when the cost is paid, which
can happen during the period of transit.

C. Proximate Cause
Proximate cause is a key principle of insurance and is concerned with how the loss
or damage actually occurred and whether it is as a result of an insured peril. If the
loss has been caused by the insured peril, the insurer is liable. If the immediate
cause is an insured peril, the insurer is bound to make good the loss, otherwise he
is not. This application of principle is practically more in respect of non-life
insurance claims.

33
When a loss occurs, there can often be a series of events leading up to the incident
and so it is sometimes difficult to determine the nearest or proximate cause. Under
this rule, the insurer looks for the predominant cause which sets into motion the
chain of events producing the loss. This may not necessarily be the last event that
immediately preceded the loss i.e. it is not necessarily an event which is closest to,
or immediately responsible for causing the loss. For example, a fire might cause a
water pipe to burst. Despite the resultant loss being water damage, the fire would
still be considered the proximate cause of the incident. Other causes may be
classified as remote causes, which are separate from proximate causes. Remote
causes may be present but are not effectual in causing an event.

Definition

Proximate cause is defined as the active and efficient cause that sets in motion a
chain of events which brings about a result, without the intervention of any force
started and working actively from a new and independent source.
How does the principle of proximate cause apply to insurance contracts? Since
insurance provides for payment of a death benefit, regardless of the cause of death,
the principle of proximate cause would not usually apply. However many insurance
contracts may also have an accident benefit add-on wherein an additional sum
assured is payable in the event of accidental death. In such a situation, it becomes
necessary to ascertain the cause - whether the death occurred as a result of an
accident. The principle of proximate cause would become applicable in such
instances.
To understand the principle of proximate cause, consider the following situation:

Example
Scenario 1: Mr. Ajay had parked his car in the garage and gone on a long vacation.
Six months later, when he came back and started the car, he noticed that the air-
conditioning of the car was not working. Mr. Ajay filed a claim with the insurance
company for the cost of repairing the air-conditioning and the insurance company
rejected the claim. The reason given by the insurance company was that the damage
was due to the ‘normal wear and tear’ of the car and the air-conditioning system,
which was an excluded peril in the insurance policy. Mr Ajay approached the Court
and after examining the survey report which said that the car was 12 years old and
neither the car nor the air-conditioning had been serviced/ repaired during the
previous 6 years, the damage was due to the ‘normal wear and tear’ and the
insurance company was not liable to pay the claim.
Scenario 2: Mr. Pinto, while riding a horse, fell on the ground and had his leg
broken, he was lying on the wet ground for a long time before he was taken to
hospital. Because of lying on the wet ground, he had fever that developed into
pneumonia, finally dying of this cause. Though pneumonia might seem to be the

34
immediate cause, in fact it was the accidental fall that emerged as the proximate
cause and the claim was paid under personal accident insurance.
There are certain losses which are suffered by the insured as a result of fire but
which cannot be said to be proximately caused by fire. In practice, some of these
losses are customarily paid by business under fire insurance policies.

Example of such losses can be –

 Damage to property caused by water used to extinguish fire
 Damage to property caused by fire brigade in execution of their duty
 Damage to property during its removal from a burning building to a safe place

Test Yourself 1
Mr. Pinto contracted pneumonia as a result of lying on wet ground after a horse
riding accident. The pneumonia resulted in death of Mr. Pinto. What is the
proximate cause of the death?
I. Pneumonia
II. Horse
III. Horse riding accident
IV. Bad luck

D. Indemnity

The Principle of Indemnity is applicable to Non-life insurance policies. It means that

the policyholder, who suffers a loss, is compensated so as to put him or her in
the same financial position as he or she was before the occurrence of the loss
event. The insurance contract guarantees that the insured would be indemnified or
compensated up to the amount of loss and no more.
The philosophy is that one should not make a profit through insuring one’s assets
and recovering more than the loss. The insurer would assess the economic value of
the loss suffered and compensate accordingly.

Example

Ram has insured his house, worth Rs. 10 lakhs, for the full amount. He suffers loss
on account of fire estimated at Rs. 70,000. The insurance company would pay him
an amount of Rs. 70,000. The insured can claim no further amount.
The indemnity to be paid would depend on the type of insurance one
takes.Indemnity might take one or more of the following modes of settlement:
 Cash payment
 Repair of a damaged item
 Replacement of the lost or damaged item
 Reinstatement (Restoration). E.g. Rebuilding a house destroyed by fire
35
 Diagram 2: Indemnity

a) Agreed Value: However, there is some subject matter whose value cannot be
easily estimated or ascertained at the time of loss. For instance, it may be
difficult to put a price in the case of family heirlooms or rare artefacts. Similarly
in marine insurance policies it may be difficult to estimate the extent of loss
suffered in a ship accident half way around the world.
In such instances, a principle known as the ‘Agreed Value’ is adopted. The
insurer and insured agree on the value of the property to be insured, at the
beginning of the insurance contract. In the event of total loss, the insurer agrees
to pay the agreed amount of the policy. This type of policy is known as “Agreed
Value Policy”.
b) Underinsurance: Consider a situation now where the property has not been
insured for its full value. One would then be entitled to indemnity for loss only
in the same proportion as one’s insurance.
Suppose the house, worth Rs. 10 lakhs has only been insured for a sum of Rs. 5
lakhs. If the loss on account of fire is Rs. 60,000, one cannot claim this entire
amount. It is deemed that the house owner has insured only to the tune of half
its value and he is thus entitled to claim just 50% [Rs. 30,000] of the amount of
loss. This is known as underinsurance.
In most types of non-life insurance policies, which deal with insurance of
property and liability, the insured is compensated to the extent of actual
amount of loss i.e. the amount of money needed to replace lost or damaged
property at current market prices less depreciation.

E. Subrogation

Subrogation means the transfer of all rights and remedies with respect to the
subject matter of insurance, from the insured to the insurer. Subrogation follows
from the principle of Indemnity. Hence, it is often called a ‘corollary’ of Indemnity.
In other words, if an insured suffers a loss and the loss has been indemnified by the
insurer, the insured’s right to get compensated by any third party for that loss,
36
would get shifted to the insurer. Note that the amount of damage that can be
collected by the insurance company is only to the extent of the amount paid by the
insurance company.

Important

Subrogation: It is the process an insurance company uses to recover claim amounts

paid to a policy holder from a negligent third party.
Subrogation can also be defined as surrender of rights by the insured to an insurance
company that has paid a claim against the third party.

Example

Mr. Kishore’s household goods were being carried in Sylvain Transport service. They
got damaged due to driver’s negligence, to the extent of Rs. 45,000 and the insurer
paid an amount of Rs. 30,000 to Mr. Kishore. The insurer stands subrogated to the
extent of only Rs. 30,000 and collect that amount from Sylvain Transports.
In case the matter went into litigation and the Court directed Sylvain Transports to
pay Rs.35,000 as compensation to Mr. Kishore, he is liable to pay the insurer the
claim amount of Rs 30,000 under the subrogation clause, and to keep the balance
amount of Rs 5,000 with himself.
The Subrogation Clause prevents the insured from collecting more than the loss -
from the insurance company and from any third party. Subrogation arises only in
case of contracts of indemnity and not against benefit policies like Life Insurance
Policy or Personal Accident Policy.

Example

Mr. Suresh dies in an air crash. His family is entitled to collect the full Sum Assured
of Rs 50 lakhs from the insurer who has issued a Personal Accident Policy plus the
compensation paid by the airline, say, Rs 15 lakhs.

F. Contribution:

Like Subrogation, ‘Contribution’ also follows from the Principle of Indemnity.

Hence, it is also called a ‘corollary’ of Indemnity. Contribution is a principle that
arises in general insurance contracts. It tells us how the liability is to be met when
the insured has taken insurance from more than one insurer. Contribution implies
that if the same property is insured with more than one insurance company, the
compensation paid by all the insurers together cannot exceed the actual loss
suffered. The policy holder can claim from each of the insurers only a portion of the
loss in proportion to the amount insured with each.
Example: If Mr Srinivas has taken a fire policy on his house with two insurance
companies, with both of whom, he insured for the full value of Rs.12 lakhs. Suppose

37
a fire breaks out and he suffers a loss of Rs 3 lakhs as a result, he can claim an
amount of Rs 1.5 lakhs from each of the insurers.
The Principle of Contribution applies only to indemnity policies. It does not arise in
the case of Life Insurance, because there is no upper limit that can be placed on
the losses suffered when there is a loss of life.

Test Yourself 2
Which among the following is an example of coercion?
I. Ramesh signs a contract without having knowledge of the fine print
II. Ramesh threatens to kill Mahesh if he does not sign the contract
III. Ramesh uses his professional standing to get Mahesh to sign a contract
IV. Ramesh provides false information to get Mahesh to sign a contract

Test Yourself 3
Which among the following options cannot be insured by Ramesh?
I. Ramesh’s house
II. Ramesh’s spouse
III. Ramesh’s friend
IV. Ramesh’s parents

Test Yourself 4
What is the significance of the principle of contribution?
I. It ensures that the insured also contributes a certain portion of the claim along
with the insurer
II. It ensures that all the insured who are a part of the pool, contribute to the claim
made by a participant of the pool, in the proportion of the premium paid by
them
III. It ensures that multiple insurers covering the same subject matter; come
together and contribute the claim amount in proportion to their exposure to the
subject matter
IV. It ensures that the premium is contributed by the insured in equal instalments
over the year.

Summary

 The special features of insurance policies include:

i. Uberrima fides,
ii. Insurable interest,
iii. Proximate cause,
iv. Indemnity
v. Subrogation

38
 vi. Contribution

Key Terms

1. Non-Disclosure
2. Misrepresentation
3. Material facts
4. Agreed Value
5. Under Insurance

Answers to Test Yourself

Answer 1 - The correct option is III

Answer 2 - The correct option is II
Answer 3 - The correct option is III
Answer 4 - The correct option is III

39
 CHAPTER C-04
FEATURES OF INSURANCE CONTRACTS
Chapter Introduction

In this chapter, we discuss the elements that govern the working and special
features of an insurance contract.

Learning Outcomes
A. Legal Aspects of Insurance Contracts
B. Elements of a valid contract
C. Premium payment in advance
D. Solicitation
E. Enabling Provisions like Grace Period and Free-look

40
A. Insurance contracts – Legal aspects and special features.

The chapter also deals with the legal aspects and special features of an insurance
contract.
1. The Insurance Contract
Insurance involves a contractual agreement in which the insurer agrees to
provide financial protection against certain specified risks for a price or
consideration known as the premium. The contractual agreement takes the form
of an insurance policy.
2. Legal aspects of an insurance contract
This section looks at some features of an insurance contract and considers the
legal principles that govern insurance contracts in general.

Important

A contract is an agreement between parties, enforceable at law. The provisions of

the Indian Contract Act, 1872 govern all contracts in India, including insurance
contracts.

An insurance policy is a contract entered into between two parties, viz., the
company, called the insurer, and the policy holder, called the insured and fulfils
the requirements enshrined in the Indian Contract Act, 1872.

Diagram 1: Insurance contract

41
B. Elements of a valid contract

Diagram 2: Elements of a valid contract

The elements of a valid contract are:

1. Offer and acceptance
When one person signifies to another his willingness to do or to abstain from doing
anything with a view to obtaining the assent of the other to such act, he is said to
make an offer or proposal. Usually, the offer is made by the proposer, and
acceptance made by the insurer.
When a person to whom the offer is made signifies his assent thereto, this is deemed
to be an acceptance. Hence, when a proposal is accepted, it becomes a promise.
The acceptance needs to be communicated to the proposer which results in the
formation of a contract.
When a proposer accepts the terms of the insurance plan and signifies his/ her
assent by paying the deposit amount, which, on acceptance of the proposal, gets
converted to the first premium, the proposal becomes a policy. If any condition is
put, it becomes a counter offer. The policy bond becomes the evidence of the
contract.
2. Consideration
This means that the contract must contain some mutual benefit for the parties. The
premium is the consideration from the insured, and the promise to indemnify, is the
consideration from the insurers.
3. Agreement between the parties (Consensus Ad-Idem)
Both the parties, the insurer and the policyholder, should agree to the same thing
in the same sense. In other words, there should be “consensus ad-idem” between
both parties.

42
4. Free consent
There should be free consent while entering into a contract. Consent is said to
be free when it is not caused by
 Coercion/ By Force
 Undue influence
 Fraud
 Misrepresentation
 Mistake
When consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is voidable.
5. Capacity of the parties
Both the parties to the contract must be legally competent to enter into the
contract. The policyholder must be legally an adult at the time of signing the
proposal and should be of sound mind and not disqualified under law. For
example, minors cannot enter into insurance contracts.
6. Legality
The object of the contract must be legal, for example, no insurance can be had
for illegal acts. Every agreement of which the object or consideration is unlawful
is void. The object of an insurance contract is a lawful object.
Also one’s entering into an insurance contract should be done out of one’s free
will, without any kind of force, fear or mistake.

C. Paying Premium in Advance

As per Indian laws, Insurers are not allowed to assume risk unless they receive the
premium in advance. In other words, insurance protection cannot be sold on credit
basis in India.
Section 64 VB of the Insurance Act 1938 states, “No risk to be assumed unless
premium is received in advance”. No insurer shall assume any risk unless and until
the premium is received in advance or is guaranteed to be paid or a deposit is made
in advance in the prescribed manner. This is an important feature of the insurance
industry in India.
The Insurance Rules, 1939, provide certain exceptions to this condition of advance
payment of premium, in respect of particular categories of insurances. Section 59
of the Insurance Rules allows accepting premiums in instalments in respect of
Sickness Insurance, Group Personal Accident Insurance Medical Benefits Insurance
and Hospitalisation Insurance Schemes, subject to certain conditions. Section 59 of
the Insurance Rules allows relaxations for policies issued to Government and semi-
Government bodies, Fidelity Guarantee Insurance policies covering Government and

43
semi-Government employees, Workmen's Compensation policies, Cash in Transit
policies, and some other categories of insurances subject to certain conditions.
Solicitation
Insurance has always been regarded as something to be purchased after a proper
understanding the product and not just bought/ sold. Hence, insurance is to be
‘solicited’ or asked for by the customer. Traditionally, insurers declare that
“Insurance is the subject matter of solicitation”. To elucidate, insurance is not
a ready-made product like a packet of biscuits or a bar of chocolate to be
bought/ sold outright. Customers have to discuss their insurance needs with a
person qualified for the same and based on professional advice, the right
insurance product is to be purchased. The Insurance product has to be
understood and the offering most suited to the specific needs and requirements
of the customer in terms of the policy coverage, exclusions, terms and
conditions, is to be considered.
‘Solicitation’ is usually initiated when an insurer or an authorised intermediary
approaches a prospect with a view to understand his/ her insurance needs and
provides professional advice in selecting appropriate insurance products. The
prospect solicits the proper solution and provides all requisite details to the
advisor. As per regulations of IRDAI, Insurance Agents are appointed by an
insurer for the purpose of engaging in the solicitation process and procuring
insurance business, including business relating to the continuance, renewal or
revival of policies of insurance. Only authorised employees of insurance
companies, and specified persons of licensed intermediaries, who are trained
and authorised for the purpose can be part of the process of solicitation and
sales of insurance.
D. Enabling Provisions

1. Grace Period
Grace period is the specified period of time immediately following the premium
due date during which a payment can be made to renew or continue a policy in
force without loss of continuity benefits such as waiting periods and coverage of
pre-existing diseases. Coverage is not available for the period for which no
premium is received. The days of grace are computed from the next day after the
due date fixed for payment of the premium.
For Life insurance, if there is no grace period, a single delay in payment can
lead to a policy lapse. This would be detrimental for the policyholder, the
insurer and the insurance industry in general. IRDAI Regulations allow a grace
period of 15 days is applicable in case of Monthly mode of Premium collection and
30 days in other modes.

44
In respect of Health insurance also, certain number of days as grace period is
allowed for renewal of individual health policies. This period depends on the policy
of the company and the product offered. All continuity benefits are maintained if
the policy is renewed within the grace period. However Claims, if any, during the
break period will not be considered. As per IRDAI Regulations, the grace period is
15 days in case of Monthly mode of Premium collection and 30 days in other modes.
Motor Policies are usually valid for a period of one year and have to be renewed
before the due date. Grace period for paying the premium do not apply. In case
a comprehensive policy lapses for more than 90 days, the accrued No Claim
Bonus (NCB) benefit would also be lost.
In the interest of smooth operation of affairs during the Covid-19 pandemic,
IRDAI permitted the following relaxations:
i. In case of Life insurance policies, Insurers were asked to enhance the
grace period by additional 30 days if desired by the policyholders.
ii. In case of Health insurance policies, Insurers were told to condone delays
in renewal up to 30 days without deeming such condonation as a break in
policy. Insurers were requested to contact the policyholders well in
advance to avoid discontinuance in coverage.
iii. As regards Motor Vehicle Third Party Insurance policies that fell due for
renewal and premiums could not be paid due to the Covid-19 situation,
IRDAI allowed a grace period till 15th May, 2020.
2. Free-Look Period introduced by “IRDAI”
Insurance contracts are drafted by the insurer, and the other party has to adhere to
it if he/ she wants the insurance. Such contracts where someone has to accept the
contract as it is and cannot make any change to it are legally called Contracts of
Adhesion. Because of this one-sided situation, the Courts always make insurers
liable for any ambiguity or confusion that may arise in interpreting these terms and
conditions.
To reduce this one-sidedness and make insurance transactions more customer
friendly, IRDAI has built into its regulations a consumer-friendly provision called
‘Free-Look Period’ whereby, if the customer is not satisfied with any term and
conditions of the policy, he/ she can return it and get a refund. This provision
whereby policyholders are given the option of cancelling the policy within 15 days
(30 days, in case of electronic policies and policies sourced through distance mode)
after receiving the policy document, in case they are not satisfied with the policy,
has been introduced for Life Insurance and Health Insurance policies (having a
tenure of at least one year). The company has to be intimated in writing and the
premium is refunded less, proportionate risk premium for the period of cover,
expenses and charges.
45
Cancellation of Policies: When policies are cancelled by the insurer, the proportion
of the premium corresponding to the expired period of insurance is charged/
retained by the insurer and the proportion corresponding to the unexpired period
of insurance is returned to the insured, provided no claim has been paid under the
policy. Such proportionate calculation of premium is called Pro-rata premium.
When annual policies are cancelled by the insured, insurers usually charge/ retain
premiums at a higher rate and refund premiums at higher rates, instead of
calculating pro-rata premiums. This would prevent anti-selection against the
insurers and take care of the initial expenses of the insurer. Such rates are disclosed
as part of the terms and conditions of the insurance contract and referred to as
Short period scales.

Important

i. Coercion - Involves pressure applied through criminal means.

ii. Undue influence – using one’s position to dominate the will of another person,
to obtain an undue advantage over that person.
iii. Fraud – inducing another to act on a false belief that is caused by a
representation one does not believe to be true. It can arise either from
deliberate concealment of facts or through misrepresenting them.
iv. Mistake - Error in one’s knowledge or belief or interpretation of a thing or event.
This can lead to an error in understanding and agreement about the subject
matter of the contract.

Test Yourself 1
Which among the following cannot be an element in a valid insurance contract?
I. Offer and Acceptance
II. Coercion
III. Consideration
IV. Legality
Summary

i. Insurance involves a contractual agreement in which the insurer agrees to

provide financial protection against specified risks for a price or consideration
known as the premium.
ii. A contract is an agreement between parties, enforceable at law.
iii. The elements of a valid contract include:
 Offer and acceptance
 Consideration,
 Consensus ad-idem,
 Free consent
 Capacity of the parties and
46
  Legality of the object

Key Terms

1. Offer and Acceptance

2. Lawful consideration
3. Consensus ad idem
Test Yourself 2
During the Free-look period, if the policyholder, who has bought a policy through
an Agent, disagrees to any of its terms and conditions, he/ she can return it and get
a refund subject to the following conditions:
I. He/ she can exercise this option within 15 days of receiving the policy document
II. He/ she has to communicate to the company in writing
III. The premium refund will be adjusted for proportionate risk premium for the
period on cover, expenses incurred by the insurer on medical examination and
stamp duty charges
IV. All the above

Test Yourself 3
If the policyholder has bought a policy and does not want it, he/ she can return it
during the _________ period, and get a refund.
I. Free evaluation
II. Free-look
III. Cancellation
IV. Free trial
Answers to Test Yourself
Answer 1 - The correct option is II.
Answer 2 - The correct option is IV.
Answer 3 - The correct option is II.

47
 CHAPTER C-05
UNDERWRITING AND RATING
Chapter Introduction

In this chapter you will learn the basics of underwriting and rating. You will learn
about the different methods of dealing with hazards in the process of rating of risks.
You will be able to appreciate the common aspects of underwriting, product
approval and rating.

Learning Outcomes

A. Basics of Underwriting
B. Product Filing with IRDAI
C. Basics of Ratemaking
D. Rating factors

After studying this chapter, you should be able to:

1. Define the basics of underwriting
2. Understand the basics of product approvals in India
3. Appreciate rating factors and the importance of ratemaking

48
A. Basics of Underwriting

In the previous chapters, we have seen that the concept of insurance involves
managing risk through pooling. Insurers create a pool consisting of premiums that
are made by several individuals/ commercial/ industrial firms/ organizations.
This process of understanding risks, classifying risks, identifying which category they
fall into, deciding whether to accept the risk or not and if so, how much premium
the insurer would require to accept the risk and whether any extra conditions are
to be imposed on the risk - all these are part of underwriting.
It is also important to know what rate is to be charged and how the rates are made.

Definition

Underwriting is the process of determining whether a risk offered for insurance is

acceptable, and if so, at what rates, terms and conditions.

Underwriting comprises the following steps:

i. Assessment and evaluation of hazard and risk in terms of frequency and
severity of loss
ii. Formulation of policy coverage and terms and conditions
iii. Fixing of rates of premium
The underwriter decides on whether or not to accept the risk
The next step would be to decide the rates, terms and conditions under which the
risk is to be accepted.
Underwriting skills are acquired through a continuous learning process involving
adequate training, field exposure and deep insights. To be a fire insurance
underwriter one needs to have a good knowledge of the likely causes of fire, impact
of fire on various physical goods and property, the process involved in an industry,
geography, climatic conditions etc.
Similarly a marine insurance underwriter must be aware about port/ road
conditions, problems encountered by cargo/ goods in transit or storage, ships and
their seaworthiness and so on.
A health underwriter needs to understand the risk profile of the insured, age,
medical aspects, fitness levels and family history and measure the effect of each
factor affecting the risk.
Sources of information for underwriting
The first stage in any numerical (or statistical) analysis is the collection of data.
When pricing a risk, an underwriter should gather as much information as possible
to aid accurate assessment.

49
Sources of information are:
i. Proposal form or underwriting presentation
ii. Risk surveys
iii. Historic claims experience data: For some classes of business, such as
personal and motor lines, underwriters often utilise historic claims
experience data to provide an indication of the likely future claims
experience, and to arrive at a suitable premium.

Underwriting, equity and business sustainability

The need for careful underwriting and risk classification in insurance arises from the
simple fact that all risks are not equal. Each risk thus needs to be appropriately
assessed and priced in accordance with the likelihood of loss occurrence and
severity.
Since all risks are not equal, it would not be proper to ask all those who are to be
insured, to pay equal premium. The purpose of underwriting is to classify risks so
that, depending on their characteristics and degree of risk posed, an appropriate
rate of premium may be charged. It is important for the underwriter to ensure
that the risk evaluation is done properly and the premium charged is neither too
low to cover the risk nor too high to make it non-competitive.
The main features of underwriting are as follows
i. To identify risk based upon the characteristics
ii. To determine the level of risk presented by the proposer
The objectives of underwriting are achieved, in short, by deciding the level of
acceptability, adequacy of premium and other terms.

B. Product Filing with IRDAI

Every Insurance product needs to be filed with IRDAI for approval before it is offered
for sale. IRDAI allots a Unique Identification number (UIN) for every insurance
product. Once products are introduced in the market, there are guidelines to be
followed for withdrawing the product as well.
1. The Regulator asks for a clear commitment by the Board of the insurer that it is
willing to accept the risks in the policy and agrees to pay the claims. It also asks
the insurer to commit that the policy wordings are fair to the customer and that
the prices are decided on a scientific basis.
2. The insurer should plan for the possibility of withdrawal of the products in the
future and the options that would be available to the policyholder on such
withdrawal of the product.
3. The withdrawn product shall not be offered to the prospective customers.

50
C. Basics of Ratemaking

Insurance is based on transfer of risk to the insurer. By purchasing an insurance

policy, the insured is able to reduce the impact of financial losses arising from the
peril against which the property is insured. The Insurer needs to adopt a process of
calculating a price to cover the future cost of insurance claims and expenses,
including a margin for profit. This is known as ratemaking.
A rate is the price of a given unit of insurance. For example, a rate may be
expressed as Rs.1.00 per mile (per thousand) sum assured for earthquake coverage.
Each rate is established after looking at past trends and changes in the current
environment that may affect potential losses in the future.
Note that rates are not the same as premiums.
Premium = (Sum Insured) x (rate)

Example
Taking an example of health insurance, numerical or percentage assessments are
made on each component of the risk. Factors like age, race, occupation, habits etc.
are examined and scored numerically based on predetermined criteria.
The amount of premium to be paid by each depends on a rate, which is determined
by two factors;
 The probability of loss due to a loss event (caused by an insured peril) and
 The estimated amount of loss that may arise due to the loss event

Example
Assume the average amount of a house being destroyed by fire is Rs 1,00,000.
The probability of the loss of a house being destroyed by fire 1 out of 100 [or 0.01].
That is, the experience is that out of a 100 insured houses, one house gets destroyed
by fire.
The expected average loss would be Rs.1,00,000 x 0.01 = Rs. 1000.
So, Insurers would need to charge a minimum of Rs.1000 to insure a house of
Rs.1,00,000 value.

How can the insurer ensure that the pool is sufficient to compensate for the losses
that are actually incurred?
As seen earlier, the whole mechanism of insurance involves pooling of many similar
risks so that the probability of the number of losses (frequency) as well as the extent
of loss (severity) becomes predictable. This principle, referred to as ‘the law of
large numbers’ states that as the sample size grows, the results come closer to the
expected value. Insurance companies need to sell more policies to more and more
people to make their expectations/ predictions work.
51
An example is that if a coin is tossed, the chances of getting ‘heads’ or ‘tails’ is
50:50. However, if the coin is tossed only once, the result can be 100% heads and
0% ‘tails’ or 0% ‘heads’ and or 100% tails. However, if one tosses a coin many times,
the chance of the average count of ‘heads’ and ‘tails’ being 100% and 0% reduces
and will get closer to 50:50.

Example

In the field of property insurance, the chances of a wooden structure catching fire
are more than stone structures; hence, a higher premium is required to insure the
wooden structure.
The same concept applies to Life and Health Insurance also. An individual suffering
from high blood pressure or diabetes has higher chances of suffering a heart attack.

Test Yourself 1
Identify the two factors that affect insurance ratemaking.
I. Probability and severity of risk
II. Source and nature of risk
III. Source and timing of risk
IV. Nature and impact of risk

1. Determining the rate of premium

The pure rate of premium is arrived at on the basis of past loss experience.
Therefore, statistical data regarding past losses is most essential for purposes of
calculating rates. To fix the rates, it is necessary to give a ‘mathematical value’ to
the risks.

Example

If loss experience of a large number of motor cycles is collected for a period of say
10 years, we will get the sum total of the losses resulting from damage to the
vehicles. By expressing this amount of loss as percentage of the total value of motor
cycles we can fix the ‘mathematical value’ of the risk. This may be expressed in the
formula given below:

M = L X 100 L refers to the sum total of the losses and V to the total values of all
V the motor cycles and M to average loss percentage.

Let us suppose that:

 The Value of a motor cycle: Rs. 50,000/ -
 Loss experience: Out of 1000 motor cycles, 50 motor cycles get stolen over
10 years
 On an average, 5 motor cycles become total losses due to theft every year
Applying the formula, the result will be:
52
Losses per year (Rs. 50,000 X 5) = Rs. 2,50,000
Total Values of 1000 motor vehicles (Rs. 50,000 X 1000) = Rs. 5,00,00,000
This means that average loss percentage per vehicle (L/ V) x 100= [2,50,000/
5,00,00,000] x 100 = 0.5%
Therefore the rate of premium that a motor cycle owner pays is half a percent of
Rs. 50,000/ - i.e. Rs. 250/ - per year. This is called the ‘Pure’ premium, also known
as ‘Burning Cost’.
At the rate of Rs. 250 per motor cycle, Rs. 2.5 lakhs is collected which is paid out
in claims on total losses of 5 vehicles.
If the pure premium, which is arrived above, is collected it would constitute a fund
which will be sufficient only to pay for losses.

In the example above we can see that there is no surplus. But insurance operations
also involve costs of administration (expenses of management) and costs of
procurement of business (agency commission). It is also necessary to provide a
margin for unexpected heavy losses.
Finally, since insurance is transacted on a commercial basis, like any other business,
it is necessary to provide for a margin of profit which is a return on the capital
invested in the business.
Therefore, the ‘pure premium’ is suitably loaded or increased by adding
percentages to provide for expenses, reserves and profits.
The final rate of premium will consist of the following components:
 Loss payments
 Loss expenses (e.g. survey fees)
 Agency commission
 Expenses of management
 Margin for reserves for unexpected heavy losses e.g. 7 total losses against 5
expected
 Margin for profits
By taking all the relevant rating factors into consideration, one can ensure the rates
are adequate, excessive or unfairly discriminatory as between risks of similar type
and quality.

Test Yourself 2
What is pure premium?
I. Premium sufficiently big enough to pay for losses only
II. Premium applicable to marginal members of the society
III. Premium after loading for administrative costs
IV. Premium derived from the most recent loss experience period
53
2. Deductible
‘Deductible’ or ‘excess’ is a cost-sharing provision between an insurer and insured.
Deductibles provide that only the claims in excess of a particular threshold are
payable by the insurer. In other words, the insurer will not be liable for claims below
a specified level. The level or the threshold would be set as a fixed amount, or a
percentage or even as a specified period of time (when it is called time-excess.) In
case of health policies, there could be a condition that claims would be payable
only if the hospitalization is beyond a specified number of days/ hours. Deductibles
are not used in life policies.
In products such as property, motor and home insurances, deductibles are
predetermined amounts that the insured must bear towards an indemnity claim.
Deductibles can be compulsory for some policies or voluntary. Insurers generally
charge lower premiums when the insured voluntarily opt for higher deductibles. An
agent must examine how specific deductibles work and inform the insured whether
the deductible is applicable on a ‘per year’ or ‘per event’ basis.
There are various reasons for having deductibles. Corporate customers covering
factories, multiple cargo consignments, large groups of employee, public liability
exposures etc. and having huge amounts of Sum Insured, may prefer to bear small
claims themselves and avoid the documentation to prove claims. For example, a
large factory owner paying lakhs or rupees as premium may not be bothered about
a minor repair cost of a machine amounting to around Rs.2,000.
Some type of policies may need the insured also to bear some part of the loss to
ensure that he/ she takes due care. For instance, health insurers may insist on a
deductible so that insured would not overspend on costly hospital rooms just
because insurance is there. Some Insurers also may not prefer spending time on
processing small claims. Also, in certain situations, insurers may not want to get
exposed to the financial stress caused by accumulation of a large number of small
losses at one location. For example, a small flood in an industrial estate area can
cause many low value claims from all the warehouses in the area.
Franchise: Franchise refers to a threshold set, usually as a percentage of the sum
insured, below which no claim is admissible, as in the case of deductibles. However,
when the claim amount is beyond the franchise limit, the entire claim is admissible
by the insurer. In other words, franchise determines the minimum threshold of the
insurance companies' financial responsibility. Franchise will apply to the policy in
the same way and for the same reasons as a deductible in case of claims below the
threshold, but in the event of a claim exceeding the franchise, the full amount of
the loss will be paid.

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D. Rating factors

The relevant elements that are used to add up the rates and make the rating plan
are referred to as rating factors. Insurers use ‘rating factors’ to determine the risk
and to decide the price they will charge.
 The Insurer uses his assessments to establish a base rate.
 The Insurer then adjusts this rate with discounts applied for positive features
such as superior fire protection on property risk and loadings applied for
adverse features such as presence of inflammable materials in the premises.
 In Life Insurance the usual practice is to apply loading for adverse health,
habits, heredity or occupational factors.

Key Terms

 Deductibles
 Franchise

Answers to Test Yourself

Answer 1 - The correct option is I.

Answer 2 - The correct option is I.

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 CHAPTER C-06
CLAIMS PROCESSING
Chapter Introduction

The insured get to taste the benefit of insurance only when they are affected by
losses. The entire insurance industry is sensitive to the losses faced by insured and
try to settle the claims that arise as amicably as possible and as fast as possible.

Learning Outcomes
A. Loss Assessment and Claim settlement
B. Categories of claim
C. Arbitration
D. Other dispute resolution mechanisms

After studying this chapter, you should be able to understand:

1. Claims settlement
2. Importance of claim procedures

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A. Loss Assessment and Claim settlement

Claims Assessment (Loss Assessment) is the process of determining whether the loss
suffered by the insured is covered by the insurance policy, i.e. the loss does not fall
under any exclusion and there is no breach of warranty.
Settlement of claims has to be based on considerations of fairness. For an Insurance
company, expeditious settlement of claim is the benchmark of efficiency for its
services. Each company has internal guidelines about time taken in claims
processing, which its employees follow.
This is generally known by the term “Turnaround time” (TAT). Some insurers have
also put in place, facility for the insured to check claim status online from time to
time. Some insurance companies have also set up claims hub for speedy processing
of claims.
Important aspects in an insurance claim
Although most companies are bound by their TAT it is important for an agent to
know the aspects that are looked into for settling a claim. Six of the most important
aspects for Non-life claims are given below.
i. Whether the loss causing event is within the scope of the policy
ii. Whether the insured has complied with his part of the policy conditions
iii. Compliance with warranties. The survey report would indicate whether or not
warranties have been complied with.
iv. Observance of utmost good faith by the proposer, during the currency of the
policy.
v. On the occurrence of a loss, the insured is expected to act as if he is uninsured.
In other words, he has a duty to take measures to minimise the loss.
vi. Determination of the amount payable. The amount of loss payable is subject to
the sum insured. However, the amount payable will also depend upon the
following:
 The extent of the insured’s insurable interest in the property affected
 The value of salvage
 Application of underinsurance
 Application of contribution and subrogation conditions
In the matter of claims relating to life insurance, the insurer checks whether
1) Conditions of policy have not been breached
2) Utmost good faith has been followed and
3) No material facts have been concealed fraudulently.

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B. Categories of claim

Insurance Claims fall into the following categories:

i. Standard claims
These are claims which are clearly within the terms and conditions of the policy.
The assessment of claim is done keeping in view scope and the sum insured opted
for and other methods of indemnity laid down for various classes of insurance.
ii. Condition of average or average clause
This is a condition in some policies which penalises the insured for insuring his
property at a sum insured less than its actual value known as underinsurance. In the
event of a claim the insured gets an amount that is proportionately reduced from
his actual loss in accordance to the amount underinsured. Such situations occur
more in the case of non-life insurance.
iii. Act of God perils - Catastrophic losses
Natural perils like storm, cyclone, flood, inundation, and earthquake are termed as
“Act of God” perils. These perils may result in losses to many policies of insurer in
the affected region. Surveyors are appointed for assessment of certain categories
of non-life insurance claims.
In such major and catastrophic losses, the surveyor is asked to proceed to the loss
site immediately for an early assessment and loss minimisation efforts.
Simultaneously, insurers’ officials also visit the scene of loss particularly when the
amount involved is large. The purpose of the visit is to obtain an immediate, on the
spot idea of the nature and extent of loss.
Preliminary reports are also submitted if the surveyors face some problems in
regards to the assessment and may desire guidance and instructions from insurers
who are thus given an opportunity to discuss the issues with the insured, if
necessary.
iv. On account payment
In Non-life insurance claims, apart from preliminary reports, interim reports may be
submitted from time to time where repairs and/ or replacements are made over a
long period. Interim reports also give the insurer an idea of the development of
assessment of loss. It also helps in recommendation of "On account payment" of the
claim if desired by the insured. This usually happens if the loss is large and the
completion of assessment may take some time.
If the claim is found to be in order, payment is made to the claimant and entries
made in the company records. Appropriate recoveries are made from the co-insurers
and reinsurers, if any. In some cases, the insured may not be the person to whom
the money is to be paid.

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v. Discharge vouchers
Settlement of the claim is made only after obtaining a discharge under the policy.
A sample of discharge receipt for claims (under personal accident insurance) for
injuries is worded along the following lines: (may vary from company to company)

Name of the Insured

Claim No. Policy No.
Received from the Company Ltd.
The sum of Rs. ___________ in full and final settlement of compensation due
to me/ us on account of injuries sustained by me/ us due to accident which
occurred on or about the___________ I/ we give this discharge receipt to the
Company in full and final settlement of all my/ our claim present or future
arising directly or indirectly in respect of the said claim.
Date (Signature)

vi. Post settlement action

The action taken after settlement of the non-life claim in relation to underwriting
varies from one class of business to another.

Example

Sum insured under a fire policy stands reduced to the extent of the amount of
claim paid. However, it can be reinstated on payment of pro-rata premium, which
is deducted from the amount of claim paid.
On payment of the capital sum insured under a personal accident policy, the policy
stands cancelled.
Similarly, payment of a claim under individual fidelity guarantee policy
automatically terminates the policy.
vii. Salvage
Salvage generally refers to damaged property. On payment of loss, the salvage
belongs to insurers.
Example
When motor claims are settled on total loss basis, the damaged vehicle is taken over
by insurers. Salvage can also arise in other non-life insurances like fire claims,
marine cargo claims etc.
Salvage is disposed of according to the procedure laid down by the companies for
the purpose. Surveyors, who have assessed the loss, will also recommend methods
of disposal.
viii. Recoveries
After settlement of claims, the insurers under subrogation rights applicable to
insurance contracts, are entitled to the rights and remedies of the insured and to
59
recover the loss paid from a third party who may be responsible for the loss under
respective laws applicable. Thus, insurers can recover the loss from shipping
companies, railways, road carriers, airlines, port trust authorities etc.
Example

In the case of non-delivery of consignment, the carriers are responsible for the loss.
Similarly, the port trust is liable for goods which are safely landed but subsequently
missing. For this purpose, a letter of subrogation duly stamped is obtained from the
insured before the settlement of the claim.

ix. Disputes related to claims

Despite best efforts, there could be delay in payment, non-payment (repudiation)
of the claim, or the claim being admitted for a lesser amount, which might lead to
dissatisfaction and dispute between Insurer and the insured.
Apart from these, the most common reasons, to name a few are:
 Non-disclosure of material facts
 Lack of coverage
 Loss caused by excluded perils
 Lack of adequate sum insured
 Breach of warranty
 Issues regarding quantum due to underinsurance, depreciation, etc.
All this could cause considerable grief to the insured at a time when he is already
suffering from financial constraints arising due to losses. In order to reduce his
sufferings, grievance redressal and dispute handling procedures are well laid out in
the policy itself. Policies of fire or property have the condition of “Arbitration” in
the policy itself.
C. Arbitration

Arbitration is a method of settling disputes arising out of contracts. Arbitration is

done in accordance with the provisions of the Arbitration and Conciliation Act, 1996.
The normal method of enforcing a contract or settling a dispute there under would
be to go to a court of law. Such litigation, however, involves considerable delay and
expense. The Arbitration Act allows the parties to submit disputes under a contract
to the more informal, less costly and private process of arbitration.
Arbitration may be done by a single arbitrator or by more than one, chosen by the
parties to the dispute themselves. In the event of a single arbitrator, the parties
have to agree about that person. Many commercial insurance policies contain an
arbitration clause stating that disputes will be subject to arbitration. Fire and most
miscellaneous policies also contain an arbitration clause which provides that if the
liability under the policy is admitted by the company, and there is a difference
concerning the quantum to be paid, such a difference must be referred to
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arbitration. Normally the arbitrator’s decision is considered final and binding on
both the parties.
The wording of the condition varies from policy to policy. Generally, it provides as
follows:
i. The dispute is submitted to the decision of a single arbitrator to be appointed
by the parties, or in the event of any disagreement between them upon
appointment of a single arbitrator, to the decision of two arbitrators each
appointed by the parties.
ii. These two arbitrators shall appoint an Umpire, who presides at the meetings.
The procedure during these meetings resembles that of a court of law. Each
party states his case, if necessary, with the help of a counsel and witnesses are
examined.
iii. If the two arbitrators do not agree on a decision, the matter is submitted before
the Umpire, who makes his award.
iv. Costs are awarded at the discretion of the arbitrator/ arbitrators or Umpire
making the award.
Disputes relating to question of liability are to be settled through litigation.

Example

If the insurers contend that the loss is not payable because it is not covered under
the policy, the matter has to be decided by a Court of Law. Again, if the insurers
refuse to pay the claim on the ground that the policy is void because it was obtained
through fraudulent non-disclosure of material facts (breach of the legal duty of
‘utmost good faith’), the issue has to be resolved through litigation.

D. Other dispute resolution mechanisms

As per IRDAI regulations, all policies have to mention about the grievance redressal
mechanism available to the insured in the event the insured is dissatisfied with the
service of the insurer for any reason.
In case of claims under personal lines of business, a dissatisfied insured can
approach Insurance Ombudsman. The procedure is discussed in detail in Chapter 9.
The Office details of Insurance Ombudsman are given in the policy. Decision of
Ombudsman is binding on Insurer but not on insured.
Matters like the financial authority and the limitations of Ombudsmen are also
discussed in detail in Chapter 9.

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Test Yourself 1
Which of the following activities would not be categorised under professional
settlement of claims?
I. Seeking information relating to the cause of the loss
II. Approaching the claim with a prejudice
III. Ascertaining whether the loss was a result of an insured peril
IV. Quantifying the amount payable under the claim

Answers to Test Yourself

Answer 1 - The correct option is II.

Key Terms
Turn Around Time
Salvage
Recoveries
Claims Assessment

62
 CHAPTER C-07
DOCUMENTATION
Chapter Introduction

In the insurance industry we deal with a large number of forms and documents.
These are required for the purpose of bringing clarity in the relationship between
the insured and the insurer. In this chapter, we shall deal with the various
documents that are involved at the proposal stage and their significance.

Learning Outcomes

Understand the Importance of:

A. Prospectus
B. Proposal form
C. Know Your Customer (KYC) documents

After learning this Chapter you will be able to:

 Understand proposal stage documentation and its importance

 Familiarize with the purposes of the Prospectus

 Understand the importance of the Proposal form

 Appreciate Anti-Money Laundering (AML), Know Your Customer (KYC) norms

and the important documents, commonly applicable for practically all
policies

 Importance of Age Proof and acceptable documents.

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A. Prospectus

Prospectus is a proposal stage document. The prospectus is a formal legal document

used by insurance companies that provides details about the product. It can mean
a document issued by the insurer in physical, electronic or any other format to sell
or promote insurance products. For this purpose, Insurance products would also
include the add-on covers/ riders offered, if any. The prospectus is like an
introductory document which helps the prospective policyholder to get familiar with
the company’s products.
As per IRDAI’s (Protection of Policyholders’ Interests) Regulations, 2017 the
prospectus should contain all facts that are necessary for a prospective policyholder
to make an informed decision regarding purchase of a policy. It should contain the
following for each plan of insurance:
 The Unique Identification Number (UIN) allotted by the Authority for the
concerned insurance product
 The extent of insurance cover
 The Scope of benefits/ entitlements – guaranteed and non-guaranteed
 Warranties, exclusions/ exceptions of the insurance cover with explanations
 The terms and conditions of the insurance cover
 Description of the contingency or contingencies to be covered by insurance
 The class or classes of lives or property eligible for insurance under the terms
of such prospectus
 Whether the plan is participative or non-participative
The allowable Add-on covers (also called Riders in Life insurance) on the product
and their benefits are also stated.
Other important information which a Prospectus includes:
1. Any differences in covers and premium. E.g. for different age groups or for
different entry ages
2. Renewal terms of the policy
3. Terms of cancellation of policy under certain circumstances
4. The details of any discounts or loading applicable under different
circumstances
5. The possibility of any revision or modification of the terms of the policy
including the premium
6. Any incentives to reward policyholders for early entry, continued renewals,
favourable claims experience etc. with the same insurer.
7. Prospectus shall necessarily contain the product UIN allotted by IRDAI

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 8. IRDAI Regulations mandate that Prospectus shall contain a copy of Section 41.
This section prohibits any direct or indirect inducement to any person for
buying a new insurance, continuing or renewing any kind of insurance relating
to lives or property in India, including any rebate of the whole or part of the
commission payable on the policy.
In particular the prospectus informs the proposer about the availability of facility
for nomination.

Test Yourself 1
Which of the following it not usually part of the insurance prospectus?
I. Name of Ombudsman
II. Date of Scope of benefits
III. The Entitlements
IV. The Exceptions

B. Proposal Form

The insurance policy is a legal contract between the insurer and the policyholder.
As required for any contract, it has a proposal and its acceptance.
The “Proposal form” is the application document that is used for making a proposal.
It is a form to be filled in by the proposer in written or electronic or any other
format approved by the Authority. It contains all information required by the insurer
to decide whether to accept or reject to cover the risk. In case the risk is accepted,
the insurer can on the basis of this information, decide the rates, terms and
conditions of the cover to be granted.
The Principle of Utmost Good Faith and the Duty of Disclosure of material
information begin with the Proposal Form for insurance. The proposer must provide
all information correctly and completely as this document becomes the basis of
granting insurance and any wrong or concealed information could result in denial of
claim.
This duty to disclose continues beyond the proposal stage even after finalizing the
insurance contract. That is, any material change that happens anytime during the
period of insurance needs to be disclosed in non-life policies.
Information collected from the Proposal Form during the course of solicitation of an
insurance policy or issuance of an insurance policy are confidential and should not
be shared with any third party. Where a proposal deposit is refundable to a prospect
for any reason, the same shall be refunded within 15 days from the date of
underwriting decision on the proposal.

65
As per IRDAI guidelines, it is the duty of the insurer to furnish to the insured, free
of charge, within 30 days of the acceptance of a proposal, a copy of the proposal
submitted by the Insured. The agent is expected to keep track of these timelines,
follow up internally and communicate with the prospect/ insured as and when
required by way of customer service.
a) Proposal Form - Details
The proposal form is first stage of documentation through which the insured informs
the insurer:
 Who he/ she is
 What kind of insurance he/ she needs
 Details of what he/ she wants to insure and
 For what period of time
 Details of the risk (E.g., for Life and Health insurances – details of health or
any ailments suffered are to be given)
 Details would include the monetary value proposed on the subject matter of
insurance and all material facts connected with the proposed insurance.
In other words, the Proposal form collects details on the proposer’s identity such as
name, father’s name, address and other identifying inputs. To determine the true
identity of their customers, documents like address proof, PAN card, photographs
etc. are collected with the proposal.
In respect of Life and Health insurances, details of the proposers’ family members
(including parents) indicating their longevity, status of health and ailments suffered
by any of them are collected. Depending on the product, the medical details of the
life proposed for insurance, personal characteristics and his/ her personal history
of disease may also be asked for.
Details of the monetary value proposed on the subject matter of insurance and the
material facts connected with the proposed insurance would be collected for many
lines of insurance.
The insurance advisor’s recommendations including the reasons for such
recommendation may also be part of the proposal form. There would be a
declaration that the recommended policy’s details have been fully explained to the
proposer and the latter has acknowledged the same.
A Proposal form may have the following Sections starting with details of the Insurer,
the Agent, the details of the product, the Sum Assured, the mode of payment of
premiums etc. The form would also contain the signature of the proposer, as proof
of the fact that he/ she has filled up the form and has submitted the proposal.

66
Other details asked for are the Proposer’s name, date of birth, contact details,
marital status, nationality, names of parents and spouse, educational qualifications,
habits and ID Proof, family particulars, employment details, bank details, name of
nominee/ appointee; details of existing insurance and reasons for opting for the
policy.
Depending on the Product, medical details of the life proposed for insurance,
personal characteristics and his/ her personal history of disease may be asked for.
Aspects related to the personal financial planning of the life being proposed
including his/ her work span, projected income and expenses, as well as needs for
savings and investment, health, retirement and insurance may also be enquired
about.
The Agents recommendations including the reasons for such recommendation may
also be part of the proposal form. In compliance to the IRDAI regulations mentioned
above, the Agent would make a declaration that the recommended policy’s details
have been fully explained to the proposer and the latter has acknowledged the
same.
Proposal forms are printed by insurers usually with the insurance company’s name,
logo, address and the class/ type of insurance/ product that it is used for. It is
customary for insurance companies to add a printed note in the proposal form,
though there is no standard format or practice in this regard.
b) Declaration in the Proposal Form
Insurance companies usually add a declaration at the end of the proposal form to
be signed by the proposer. This ensures that the insured takes the pain to fill up the
form accurately and has understood the facts given therein, so that at the time of
a claim there is no scope for disagreements on account of misrepresentation of
facts. Such declaration converts the common law principle of utmost good faith to
a contractual duty of utmost good faith.

Example

Examples of such declarations are:

‘I/ We hereby declare and warrant that the above statements are true and complete
in all respects and that there is no other information which is relevant to the
application for insurance that has not been disclosed to you.’
‘I/ We agree that this proposal and the declarations shall be the basis of the contract
between me/ us and (insurer’s name).’

67
Test Yourself 2
Which of the following is not relevant in respect of a Proposal form?

I. Utmost Good-faith
II. Amount expected to be claimed
III. Duty to Disclose material facts
IV. Confidentiality of details given

Some examples of such notes are:

‘Non-disclosure of facts material to the assessment of the risk, providing misleading
information, fraud or non-co-operation by the insured will nullify the cover under
the policy issued’.
‘The company will not be on risk until the proposal has been accepted by the
Company and full premium paid’.

C. Know Your Customer (KYC) Norms

Anti-Money Laundering and KYC Norms

Money Laundering is the process by which criminals transfer funds to conceal the
true origin and ownership of the proceeds of criminal activities. Money laundering
processes are used by criminals to make funds obtained through illegal activities
appear legal money. In the process, they try to cover up the criminal origin of the
money and make it appear valid.
Criminals attempt to use financial services, including banks and insurance, to
launder their money. They make transactions using false identities, for example, by
purchasing some form of insurance and then managing to withdraw that money and
then disappearing once their purpose is served. Governments across the world,
including India constantly try to prevent such money laundering attempts.

Definition
Money laundering is the process of bringing illegal money into an economy by hiding
its illegal origin so that it appears to be legally acquired. The Government of India
launched the PMLA, 2002 to rein in money-laundering activities.

The Prevention of Money Laundering Act (PMLA), 2002 came into effect from 2005
to control money laundering activities and to provide for confiscation of property
derived from money-laundering.
The Anti-Money Laundering guidelines issued by IRDAI soon after have indicated
suitable measures to determine the true identity of customers requesting for
insurance services, reporting of suspicious transactions and proper record keeping
of cases involving or suspected of involving money laundering. It is necessary to be
68
vigilant and ensure, right at the beginning of the contract that it is not intended to
be a tool for money laundering of any sort.
The Prevention of Money Laundering Act, 2002 (PMLA) was been brought into force
by the Government of India with effect from 1st July 2005. As per the Act, every
banking company, financial institution (which includes Insurance companies) and
intermediary shall have to maintain a record of all the transactions prescribed under
the PMLA. Accordingly, IRDAI issued the Guidelines on Anti-Money laundering/
Counter Financing of Terrorism (AML/ CFT) 31st March 2006.
Know your customer is the process used by a business to verify the identity of their
clients. Banks and insurers are increasingly demanding their customers provide
detailed information to prevent identity theft, financial fraud and money
laundering. The objective of KYC guidelines is to prevent financial institutions from
being used by criminal elements for money laundering activities.
Insurers, hence, need to determine the true identity of their customers. Agents
should ensure that proposers submit the proposal form along with the following as
part of the KYC procedure:
i. Proof of identity – driving license, passport, voter ID card, PAN card,
Photographs etc.
ii. Proof of address – driving license, passport, telephone bill, electricity bill,
bank passbook etc. Different documentation are prescribed for individuals,
corporates, partnership firms, trusts and foundations
iii. Income proof documents and financial status, esp. in case of high-value
transactions
iv. Purpose of insurance contract
a) Age Proof – for Personal Lines
While dealing with person related insurances like Life, Health, Personal Accident,
etc. Insurance companies use age as an important factor to determine the risk
profile of the insured. In life business, as age assumes great importance, life insurers
used to follow more detailed norms of age related documentation. [However, the
Government, the Reserve Bank of India and the IRDAI are becoming stricter on
following KYC norms.]An important part of the underwriting process is admission of
age, after verifying the proof of age.
i. Standard Age Proofs
There are two types of age proofs that insurers come across as evidence of
age. Valid age proofs may be standard or non-standard.
 Standard age proofs are normally issued by a public authority, like birth
certificate issued by a municipality or other government body, school
leaving certificate, passport etc.
69
  Non-standard, when a standard age proof is not available (not to be
accepted readily)
Some documents considered as standard age proofs are:
i. School or college certificate
ii. Birth certificate extracted from municipal records
iii. Passport
iv. PAN card
v. Service register
vi. Identity card in case of defence personnel
vii. Marriage certificate issued by appropriate authority
ii. Non-standard age proofs
When standard age proofs like the above are not available, the life insurer
may allow submission of a non-standard age proof. Some documents
considered as non-standard age proofs are:
i. Horoscope
ii. Ration card
iii. An affidavit by way of self-declaration
iv. Certificate from village panchayat
Test Yourself 3
Which of the following is not acceptable as valid Age Proof?
I. Birth certificate extracted from municipal records
II. Birth Certificate issued by Member of Legislative Assembly
III. Passport
IV. PAN Card
Answers to Test Yourself

Answer 1 -The correct option is I.

Answer 2 - The correct option is II.
Answer 3 – The correct option is II.

Summary

 Prospectus is a formal legal document used by insurance companies that

provides details about the product.
 The application document used for making the proposal is commonly known as
the ‘proposal form’.

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 Some documents considered as standard age proofs include school or college
certificate, birth certificate extracted from municipal records etc.
 Insurers need to determine the true identity of their customers. KYC documents
like address proof, PAN card and photographs etc. need to be collected as a part
of the KYC procedure.

Key Terms

1. Prospectus
2. Proposal form
3. Moral hazard
4. Know your Customer (KYC)
5. Age Proof
6. Standard and non-standard age proofs
7. Free-look period

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 CHAPTER C-08
CUSTOMER SERVICE
Chapter Introduction

In this chapter you will learn the importance of customer service. You will learn the
role of agents in providing service to customers. You will also learn how to
communicate and relate with customers.

Learning Outcomes
A. Customer service – General concepts
B. Insurance Agent’s role in providing customer service
C. Communication skills in customer service
D. Non-verbal communication
E. Ethical behavior

After studying this chapter, you should be able to:

Understand the importance of customer service
1. Describe quality of service
2. Examine the importance of service in the insurance industry
3. Discuss the role of an insurance agent in providing good service
4. Explain the process of communication
5. Demonstrate the importance of non-verbal communication
6. Recommend ethical behaviour

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A. Customer Service – General concepts

1. Why Customer Service?

Customers are the most important part of any industry and no enterprise can afford
to treat them indifferently. The role of customer service and relationships is
important in the service sector and more so for insurance.
Every enterprise has a goal to delight its customers. This can be explained by
examining how buying insurance differs from buying a car.
A car can be seen, touched, test driven and experienced, whereas the Insurance of
the car is just a promise to pay if there is loss or damage to the car due to an
accident. This promise is intangible – it cannot be seen, touched or experienced.
While the customer of the car will be able to understand and experience the car
easily, the customer of insurance can evaluate and experience the insurance
protection that he buys only when a loss happens and the insurance company settles
the claim. All customers do not get the chance to experience this. In insurance,
when such a situation arises, if the service exceeds expectations, the customer
would be delighted.
2. Quality of service
It is necessary for insurance companies and their personnel, which includes their
agents, to render high quality service and delight the customer.
But what is high quality service? What are its attributes?
The well-known SERVQUAL approach to service quality of Zeithaml, Parasuraman
and Berry highlights 5 major indicators of service quality:
a) Reliability: The ability to perform the promised service dependably and
accurately is considered the most important indicator of good service. It is
the foundation on which trust is built.
b) Responsiveness: Refers to the willingness and ability of service personnel to
help customers and provide prompt response to the customer’s needs. It may
be measured by indicators like speed, accuracy, and attitude while giving
the service.
c) Assurance: Refers to the knowledge, competence and courtesy displayed by
an employee or agent in understanding and meeting the needs of a customer,
thus conveying trust and confidence.
d) Empathy: Empathy is described as the human touch. It is reflected in the
caring attitude and individualised attention provided to customers.
e) Tangibles: Represent physical environmental factors like location, layout
and cleanliness as also the sense of professionalism that a customer feels
when contacting a service provider. First impressions last long.
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3. Customer service and insurance
Leading sales producers in the insurance industry state that the secret of reaching
the top and staying there is in getting the patronage and support of a large number
of existing clients with whose help the business gets built. These clients are a source
of commissions from renewal of existing contracts. These can be a valuable source
for acquiring new customers.
One great mantra of success in insurance selling is to be able to convert one’s
customers into one’s clients. Customers are those who buy a product. Clients, on
the other hand are people with whom an agent relates for life, who continue to buy
from him/ her as also help and possibly, support him/ her in reaching out to and
selling to other customers.
Clients are built by working with deep commitment to serving one’s customers. To
understand how keeping a customer happy benefits the agent and the company, one
should understand the concept of Customer’s Lifetime Value.
Customer Lifetime Value may be defined as the sum of economic benefits that can
be derived from building a sound relationship with a customer over a long period of
time.
Diagram 1: Customer Lifetime Value

An agent who renders service and builds close relationships with her customers,
builds goodwill and brand value, which helps in expanding the business.

Test Yourself 1
What is meant by customer lifetime value?
I. Sum of costs incurred while servicing the customer over his lifetime
II. Rank given to customer based on business generated
III. Sum of economic benefits that can be achieved by building a long term
relationship with the customer
IV. Maximum insurance that can be attributed to the customer

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4. Customer Relationships and Service
While customer service is a key element in creating satisfied and loyal customers,
it is also necessary to build a strong relationship with them. A Customer’s views
about an insurer depends on the service and relationships experience the insurer
offers.
What goes to make a healthy relationship? At its heart, of course, there is trust. At
the same time, there are other elements, which reinforce and promote that trust.
Let us illustrate some of the elements.
Diagram 2: Elements for Trust

i. Every relationship begins with attraction: Attraction means being liked and being
able to build a rapport with the customer, starting with creating a great first
impression. Attraction is regarded the key to unlocking every heart. Without it a
relationship is hardly possible. A sales person cannot make much headway if he/
she is not liked by the customer.
ii. The second element of a relationship is one’s presence, being there when needed
iii.Communication: Even if one is not fully present and unable to do full justice to
all the expectations of one’s customers, one can still maintain a strong
relationship by communicating in a manner that is assuring, full of empathy
and conveying a sense of responsibility.
The above dimensions of communication call for discipline and skills. They
ultimately reflect how one thinks and sees.
Companies emphasise on customer relationship management, as the cost of
retaining a customer is far lower than acquiring a new customer. A customer relation
opportunity arises at various touch points e.g. while understanding customers
insurance needs, explaining coverage’s, handing over forms etc.

B. Insurance agent’s role in providing customer service.

Let us now consider how an agent can render great service to the customer. It is
important to realise that from the moment a customer gets contacted by a sales
person to the final point of settlement of a claim, the customer goes on a journey
of experience that we shall call the ‘Customer Journey’. The agent needs to
partner with the customer through the entire duration of the contract, hand holding

75
him/ her in each step of the journey to create memorable experiences at every
step.
Let us look at some milestones in the journey and the role played at each step.
1. The Sale
It is said that selling is both an art and a science. It is a science because it calls for
a set process which, if consistently and properly followed, is likely to lead to
success. It is also an art in the sense that each sales person brings his or her
distinctive beliefs, style and personality into the process and the results depend on
what each person puts into the process.
 Prospecting: The Sales Process begins with Prospecting, which literally means
‘searching’ for a prospective customer. Searching is important as ‘One cannot
find till one searches’, it is the most important step in the process. An agent
typically begins with his or her natural market, made up of known and easily
approachable people. The challenge lies in getting across to more networks of
people who are outside one’s immediate circle – getting to know them and be
known by them.
All the people one knows and approaches may not be proper candidates for
insurance or they may not be interested in buying. It is thus necessary to qualify
them so that one targets only those who are likely to buy insurance. The
prospecting process becomes successful only when an agent is able to build
strong relationships with the prospect. The first task of any sales person is thus
to sell trust and build confidence.
 Invite for an Interview: While personal relationships are the foundation on
which insurance business is built, it is necessary to convert the goodwill one
earns into a sale. This begins when the sales person sets up a formal appointment
for a detailed sales interview. This step is critical for establishing one’s
professional credentials and also to separate business from casual discussions.
 Determining the needs and recommending the Solution: The heart of the Sales
Interview is the steps wherein the sales agent determines and makes the
prospective customer aware about the exact needs for which insurance is a
solution. A master sales person is distinguished by his/ her skill in guiding a
prospect, through asking gentle questions, to understand the gaps in protection
that give rise to the needs for insurance.
The Agent has the responsibility to provide Best Advice to the Prospect about the
right kind of insurance solutions to meet his/ her needs. Firstly one must determine
and make the prospective customer aware about the exact needs for which
insurance is a solution. This also includes giving proper advice on the amount of
insurance to be purchased. For example the amount of life insurance to be

76
purchased by an individual needs to be linked to his/ her income and paying
capacity.
It is also important to keep a basic percept in mind, especially when buying non-life
insurance: Do not recommend insuring where the risk can be managed otherwise.
Whether insurance is needed or not, depends on the circumstances. If the premium
payments are high compared to the loss involved, it may be advisable to just bear
the risk. On the other hand, if the loss consequences of a risk are likely to be severe,
it is wise to insure against it.

Example

To a homeowner living in a flood prone area, purchasing an add-on cover against

floods would prove to be helpful. On the other hand, if the home owner owns a
home at a place where the risk of floods is negligible it may not be necessary to
obtain such cover.

Many customers may not be much concerned about getting maximum insurance per
rupee spent, but would be interested in reducing the cost of handling risk. The
concern would be thus on identifying those risks which a customer cannot retain
and hence must be insured.
The agent becomes successful when he/ she renders best advice. The agent needs
to constantly ask himself/ herself about his/ her role vis-à-vis the customer. He/
she should go to the customer not just to get a sale but to relate to the customer
as a coach and partner who can help him/ her to manage his/ her risks more
effectively?
 Handling Objections and Closing the Sale: It may not be enough to give best
advice and recommendations to a customer about the right products to buy. One
also needs to persuade him/ her to take the decision to buy. Quite often the
customer may have a number of questions and may raise objections that need
to be addressed before he/ she decides to commit to the purchase. Whilst
handling these objections, it is vitally important to understand that the
objections being voiced may reflect underlying concerns that need to be
identified and resolved.
In sum, the role of an insurance agent is more than that of a mere sales person. He/
she also needs to be a risk assessor, underwriter, risk management counsellor,
designer of customised solutions and a relationship builder (who thrives on
building trust and long-term relationships), all rolled into one.
2. The Proposal stage
The agent has to support the customer in filling out the proposal for insurance. The
insured is required to take responsibility for the statements made therein. The
salient aspects of a proposal form have been discussed in a later chapter.

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The agent should explain and clarify to the proposer the details to be filled as
answers to each of the questions in the proposal form. A failure to give proper and
complete information can jeopardise the customer’s claim.
Sometimes, if additional information is required to complete the policy, the
company may inform the customer directly or through the agent/ advisor. The agent
should help the customer in completing such formalities, explaining why they are
necessary.
IRDAI (Issuance of e-Insurance Policies) Regulations, 2016, provide for e – Proposal
forms that are similar to the physical proposal form and having a provision to the
Prospect to give his consent to the proposal, which can be validated by one time
password (mobile phone OTP).
3. Acceptance stage
a) Cover notes/ Certificates of Insurance
After underwriting is completed it may take some time before the policy is issued.
Pending the preparation of the policy or when the negotiations for insurance are
in progress and it is necessary to provide cover on a provisional basis or when the
premises are being inspected for determining the actual rate applicable, a cover
note is issued to confirm protection under the policy.
As Cover notes and Certificates of Insurance are used predominantly in marine
and motor classes of business, cover note is discussed in detail under the General
Insurance Section.
It is the agent’s responsibility to ensure that the cover note is issued by the
company, where applicable, to the insured. Promptness in this regard
communicates to the client that his/ her interests are safe in the hands of the
agent and the company.
b) Policy Document
The policy is a formal document which provides an evidence of the contract of
insurance. This document has to be stamped in accordance with the provisions
of the Indian Stamp Act, 1899. The insurer is duty bound to give the policy
document to the insured.
4. Premium Payment
Premium is the consideration or amount paid by the insured to the insurer for
insuring the subject matter of insurance, under a contract of insurance.
A good agent takes active interest in ensuring that the insured pays the premium
for taking or continuing or renewing his policy and the customer is made aware
of various options available for payment of premium.

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5. Method of payment of premium
The premium to be paid by any person proposing to take an insurance policy or by
the policyholder to an insurer may be made in any one or more of the following
methods:
a) Cash
b) Any recognised banking negotiable instrument such as cheques, demand
drafts, pay order, banker’s cheques drawn on any schedule bank in India;
c) Postal money order;
d) Credit or debit cards;
e) Bank guarantee or cash deposit;
f) Internet;
g) E-transfer
h) Direct credits via standing instruction of proposer or the policyholder or the
life insured through bank transfers;
i) Any other method or payment as may be approved by the Authority from
time to time;
As per IRDA Regulations, in case the proposer/ policyholder opts for premium
payment through net banking or credit/ debit card, the payment must be made
only through net banking account or credit/ debit card issued on the name of
such proposer/ policyholder.
6. Service after issuance of Policy Document and Receipt for Premium
Once the premium is paid by the customer, the insurer is bound to issue a
receipt. A receipt is also to be issued even in case the premium is paid in
advance.
The agent may approach the insured and enquire whether the Policy Document
has been received from the insurance company. It presents a great opportunity
for the agent to connect with the customer. The agent will be able to clear any
doubts and also explain the various policy provisions and policy holders’ rights
and privileges. This demonstrates commitment to the customer and provides an
opportunity to pledge continued support and service. One should also inform the
customer about the free-look period provision, during which period, the policy
can be returned and refund of premium obtained.
If the policy being purchased is an Electronic insurance policy, the agent can
help the Customer to open an e-Insurance Account (e-I-A), through the
Registered Insurance Repository.

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 This also paves the way for the next step which is to ask the customer for the
names and particulars of other individuals he/ she knows, who can possibly
benefit from the agent’s services. It would be even better if the client itself
contacted these people and introduced the agent to them.
7. Policy Renewal
Most general Insurance policies have to be renewed each year. For general
insurance policies, at the time of each renewal, the customer has a choice to
continue insuring with the same company or switch to another company. In case
of Life Insurance, a policy would continue to be in force when the customer pays
the premium at regular intervals based on premium payment term. This does
not apply to one-time payments.
General Insurers usually send a Renewal Notice, well in advance of the date of
expiry of the premium paying period, inviting renewal of the policy.
The customer’s choice to renew or continue with the policy may often depend
on the trust and goodwill created by the agent and company and the agent needs
to be in touch to remind the customer about the renewal or continuity of policy
well before the due date.
High producer agents constantly keep in touch with their clients, and win their
trust and loyalty through various acts of service and relationships – like greeting
their clients on various occasions like festivals or family events and being with
them to share their joys and sorrows.
8. The claim stage
The crucial test comes at the time of claim settlement. The agent must ensure
that the incident giving rise to the claim is immediately informed to the insurer
and that the customer carefully follows all the formalities. The agent may also
assist in all the investigations that may need to be done to assess the loss. A
good agent assists the customers or his representatives in fulfilling the claim
lodgement formalities quickly, correctly and completely.

Test Yourself 2
Identify the scenario where a debate on the need for insurance is not required.
I. Property insurance
II. Business liability insurance
III. Motor insurance for third party liability
IV. Fire insurance

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 C. Communication skills in customer service

An agent needs to possess soft skills for effective performance in the work place.
Soft skills relate to one’s ability to interact effectively with others, both at work
and outside. Communication skills are the most important of these soft skills.
1. Process of communication
What is communication?
All communications require a sender, who sends a message, and a person who
received that message. The process is complete once the receiver has understood
the message of the sender.
Diagram 3: Forms of communication

Communication may be face to face, over the phone, or by mail or internet. It may
be formal or informal. Whatever the content or form of the message or the media
used, the effectiveness of communication depends on whether or not the recipient
has understood what was sought to be communicated.
Since an insurance policy is essentially a promise, it is important that what is
promised by the insurer is clearly understood by the insured. The agent as an
intermediary has to not only provide complete, accurate and unambiguous account
of the terms of the insurance to the customer, but also seek and clarify doubts or
queries that a customer may have.
2. Barriers to effective communication
Different kinds of barriers to effective communication can arise at each step in the
above process, due to which communication can get distorted. The challenge is to
visualize, understand and remove the barriers.

Test Yourself 3
What does not go on to make a healthy relationship?
I. Attraction
II. Trust
III. Communication
IV. Dislike

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D. Non-verbal Communication

Let us now look at some concepts that the agent needs to understand.

Important
1. Making a great first impression
The prospect judges an agent based on his appearance, body language, mannerisms,
dress and speech. As attraction is the first pillar of a relationship and first
impressions last long, some tips for making a good first impression are given below:
i. Be on time always. Plan to arrive a few minutes early, allowing flexibility
for all kinds of possible delays.
ii. Present yourself appropriately.
 The appearance should to create the right first impression
 The dress must be appropriate for the meeting or occasion
 The look must be clean and tidy – with good haircut and shave, clean and
tidy clothes, neat and tidy make up
iii. A warm, confident and winning smile puts a person and his/ her audience
immediately at ease with one another.
iv. Being open, confident and positive
 body language must project confidence and self-assurance
 stand tall, smile, make eye contact, greet with a firm handshake
 remain positive even in the face of some criticism or when the meeting is
not going as well as expected
v. Interest in the other person - The most important thing is about being
genuinely interested in the other person.
 Take some time to find out about the customer as a person
 Be caring and attentive to what he or she says
 Be totally present and available to your customer
 Not engaging in one’s mobile phone during the interview?

2. Body language
Body language refers to movements, gestures, facial expressions. The way we talk,
walk, sit and stand, all says something about us, and what is happening inside us.
It is often said that people listen to only a small percentage of what is actually said.
What we don’t say may speak a lot more about us in a louder way. Obviously, one
needs to be very careful about one’s body language.

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 a) Confidence
Here are a few tips about how to appear confident and self-assured, giving the
impression of someone to be seriously listened to:
 Posture – standing tall with shoulders held back.
 Solid eye contact - with a "smiling" face
 Purposeful and deliberate gestures
b) Trust
 Quite often, a sales person’s words fall on deaf ears because the audience
does not trust him/ her – his/ her body language does not give the assurance
that he/ she is sincere about what he/ she says
3. Listening skills
The third set of communication skills that one needs to be aware about and cultivate
are listening skills. These follow from a well-known principle of personal
effectiveness – ‘first try to understand before being understood’.
Active listening calls for:
 Allowing the speaker to finish each point before asking questions
 Not interrupting the speaker with any counter arguments
 This may require that we reflect on the message and ask questions to clarify
what was said
 Another way to provide feedback is to summarize the speaker’s words and
repeat it back to him or her periodically or at the end of the conversation.
Let us look at the skills required for active listening:
a) Demonstrating that one is listening:
 For instance one may:
 Give an occasional nod and smile
 Adopt a posture that is open and draws out the other to speak freely
 Have small verbal comments like "I understand", "I see", "yes" and "uh".
b) Paying attention
One needs to give the speaker one’s undivided attention, and acknowledge him.
Some aspects of paying attention are as follows:
Look at the speaker directly
 Put aside distracting thoughts
 Don't mentally prepare a rebuttal
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  Avoid all external distractions [for instance, keep your mobile on silent
mode]
 "Listen" to the speaker's body language
c) Removing filters:
A lot of what we hear may get distorted by one’s personal filters, like the
assumptions, judgments, and beliefs one carries.
Not being judgemental: If the listener is judgemental, even if he hears what
the speaker is saying, he will understand only according to his biased
interpretation.
d) Empathetic listening:
Empathy implies hearing and listening patiently, and with full attention, to
what the other person has to say, even when one does not agree with it. It
is important to show the speaker acceptance, not necessarily agreement.
e) Responding appropriately:
Active listening implies much more than just hearing what a speaker says. The
communication can be completed only when the listener responds in some way,
through word or action. Certain rules need to be followed for ensuring that the
speaker is not put down but treated with respect.
These include:
 Being candid, open, and honest in your response
 Asserting one’s opinions respectfully
 Treating another person in a way, one would like oneself to be treated

Example

Asking for clarity – “I realize that we have not been able to clear about the benefits
of some of our health plans. Could you help us by asking us your doubts?”
Paraphrasing the speaker’s exact words – “So, you are saying that ‘our health plans
are not attractive enough’ – Have I understood you correctly?”

Test Yourself 4
Which among the following is not an element of active listening?
I. Paying good attention
II. Being extremely judgemental
III. Empathetic listening
IV. Responding appropriately

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E. Ethical Behavior

In recent years, there are many reports of improper conduct, and serious concerns
have been raised about ethical behaviour in business causing betrayal of trust.
This has led to discussions about concepts like accountability, corporate
governance, and treating customers fairly in insurance, which form part of “Ethics”
in business.
It is not wrong to look after one’s interests. But it is wrong to do so at the cost of
the interests of others. Unethical behaviour arises when there is no concern for
others and there is high concern for oneself.
Insurance is a business of trust. Breach of trust amounts to cheating. When wrong
information is given to prospects tempting them to buy insurance, or if the insurance
given does not cater to the specific needs of the prospect, things go wrong.
The Code of Ethics spelt out by the IRDAI in various regulations are directed towards
ethical behaviour. It is not enough just to know the code. What is more important
for the insurers and their representatives is to always keep the interests of the
prospect/ policy holder as primary.
Characteristics: Some characteristics of ethical behaviour are:
a) Placing the best interests of the client above one’s own direct or indirect
benefits
b) Holding in strictest confidence and considering as privileged, all business and
personal information pertaining to client’s affairs
c) Making full and adequate disclosure of all facts to enable clients make informed
decisions
There could be a likelihood of ethics being compromised in the following situations:
a) Having to choose between two plans, one giving much less premium or
commission than the other
b) Temptation to recommend discontinuance of an existing policy and taking out a
new one
c) Being aware of circumstances that, if known to the insurer, could adversely
affect the interests of the client or the beneficiaries of the claim.

Test Yourself 5
Which among the following is not a characteristic of ethical behaviour?
I. Making adequate disclosures to enable the clients to make an informed decision
II. Maintaining confidentiality of client’s business and personal information
III. Placing self-interest ahead of client’s interests
IV. Placing client’s interest ahead of self interest

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Summary

a) The role of customer service and relationships is far more critical in the case of
insurance than in other products.
b) Five major indicators of service quality include reliability, responsiveness,
assurance, empathy and tangibles.
c) Customer lifetime value may be defined as the sum of economic benefits that
can be derived from building a sound relationship with a customer over a long
period of time.
d) The role of an insurance agent in the area of customer service is absolutely
critical.
e) Active listening involves paying attention, providing feedback and responding
appropriately.
f) Ethical behaviour involves placing the customer’s interest before one’s own.

Key terms

a) Quality of service
b) Empathy
c) Body language
d) Active listening
e) Ethical behavior

Answers to Test Yourself

Answer 1 -The correct option is III.
Answer 2 - The correct option is III.
Answer 3 - The correct option is IV.
Answer 4 - The correct option is II.
Answer 5 - The correct option is III.

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 CHAPTER C-09
GRIEVANCE REDRESSAL MECHANISM
Chapter Introduction

Insurance industry is essentially a service industry where customer expectations are

constantly rising. There is dissatisfaction with the standard of services. Despite
continuous product innovation and significant improvement in the level of customer
service, aided by use of modern technology, the industry suffers badly in terms of
customer dissatisfaction and poor image. The Government and the regulator have
taken a number of initiatives to improve the situation.

IRDAI Regulations on Protection of Policyholders’ Interests 2017 mandate that every

Insurer shall have their own board approved policy for protection of policyholders’
interests which shall include
i. Service parameters including turnaround times for various services rendered.
ii. Procedure for speedy resolution of complaints.

Learning Outcomes

A. Grievance Redressal Mechanism

B. Integrated Grievance Management System (IGMS)
C. Consumer Courts
D. Consumer disputes redressal agencies
E. The Insurance Ombudsman
F. Right to Information

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A. Grievance Redressal

The time for high priority action is when the customer has a complaint. Remember
that in the case of a complaint, the customer is angry due to a failure of service.
This is only a part of the story.
Many times, Customers get upset because they understand the situation wrongly.
All service failures causes two types of feelings:
1. A feeling that the insurer was unfair (a feeling of being cheated)
2. A feeling of hurt ego (being made to look and feel small)
The customers want to feel valued and human touch is critical in this situation. As
a professional insurance advisor first of all, the agent would not allow such a
complaint situation to happen. He would take up the matter with the appropriate
officer of the company.
A complaint is a crucial “moment of truth” in the customer relationship. If the
agent/ company can use the situation to clarify the position, the situation can
actually improve customer loyalty.
Remember, no one else in the company has ownership of the client’s problems
as much as an agent does.
Complaints/ grievances give us the chance to show how much we care for the
customer’s interests. They are in fact the pillars on which an insurance agent builds
goodwill and business. Word of mouth publicity (Good/ Bad) plays a significant
role in selling and servicing.
The procedure for grievance redressal is detailed at the end of every policy
document. This should be bought to the notice of customers. As per the regulations,
any grievance of a policy holder should be first referred to the Insurer’s Grievance
Cell. If it is not satisfactorily resolved, the complainant may approach the Regulator
through the Integrated Grievance Management System.

B. Integrated Grievance Management System (IGMS)

Each Insurer has its own grievance redressal mechanism. All operating/ controlling/
corporate offices of Insurance companies have Grievance Redressal Officers. A
policyholder can approach them directly for any grievance.

IRDAI has launched an Integrated Grievance Management System (IGMS) which acts
as an online consumer complaints registration system. Insurers have to register all
grievances that they receive in the system which is integrated with IGMS of IRDAI.
IGMS helps IRDAI in monitoring grievance redress in the industry and also acts as a
central repository of insurance grievance data.

Policyholders can approach the respective insurer first for any grievance. If he does
not receive any response from the insurer or if the response/ resolution received is

88
not to his satisfaction, he can approach the Regulator under the IGMS. The
complaint registration process involves two steps – (i) Registering oneself by
entering one’s policy details and (ii) Registering one’s complaints and viewing the
status of the complaints. Complaints are then forwarded to the respective insurance
companies and IRDAI facilitates disposal of Grievances.

IGMS tracks complaints and the time taken for their redressal. The complaints can
be registered at the following URL: http://www.policyholder.gov.in/Integrated_
Grievance_Management.aspx
C. Consumer Protection

The Consumer Protection Act, 2019: This original Act of 1986 was passed “to
provide for better protection of the interest of consumers and to make provision
for the establishment of consumer councils and other authorities for the
settlement of consumer’s disputes”. The Act was amended by the Consumer
Protection (Amendment) Act, 2002 and later on 2019.Some definitions provided in
the Act are as follows:
“Service” means service of any description which is made available to potential
users and includes the provision of facilities in connection with banking, financing,
insurance, transport, processing, supply of electrical or other energy, board or
lodging or both, housing construction, entertainment, etc. Insurance is included as
a service. However, “Service” does not include the rendering of any service free of
charge or under a contract of personal service.
“Consumer” means any person who
 Buys goods for a consideration. It includes any user of such goods. (It does not
include a person who obtains such goods for resale or for any commercial
purpose) or
 Hires or avails of any services for a consideration. It includes the beneficiary of
such services. (It does not include any person who avails of such service for any
commercial purpose.)
“Defect” means any fault, imperfection, shortcoming, inadequacy in the quality,
nature and manner of performance which is required to be maintained by or under
any law or has been undertaken to be performed by a person in pursuance of a
contract or otherwise in relation to any service.
“Complaint” means any allegation in writing made by a complainant that:
 an unfair trade practice or restrictive trade practice has been adopted
 the goods bought by him suffer from one or more defects
 the services hired or availed of by him suffer from deficiency in any respect
 price charged is in excess of that fixed by law or displayed on package
 goods which will be hazardous to life and safety when used are being offered
for sale to the public in contravention of the provisions of any law requiring
trader to display information in regard to the contents, manner and effect of
use of such goods.
“Consumer dispute” means a dispute where the person against whom a complaint
has been made, denies and disputes the allegations contained in the complaint.

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D. Consumer disputes redressal agencies

Consumer disputes redressal agencies are established at district, state and national
levels.
i. District Consumer Disputes Redressal Commission
 The District Consumer Disputes Redressal Commission (District Commission),
has jurisdiction to entertain complaints, where value of the goods or services
does not exceed Rs. 1 crore. The District Commission has the powers of a civil
court.
ii. State Consumer Disputes Redressal Commission
 The State Consumer Disputes Redressal Commission (State Commission) has
original jurisdiction to entertain complaints where the value of goods/ service
and compensation, if any claimed exceeds Rs. 1 crore but does not exceed
Rs.10 crores.
 It also has appellate and supervisory jurisdiction to entertain appeals from
the District Commission.
 Other powers and authority are similar to those of the District Commission.

iii. National Consumer Disputes Redressal Commission

 The National Consumer Disputes Redressal Commission (National Commission)
is the final authority established under the Act.
 It has original jurisdiction to entertain disputes, where goods/ services and
the compensation claimed exceeds Rs.10 crores.
 It has appellate as well as supervisory jurisdiction to hear the appeals from
the orders passed by the State Commission.
Every order made by a District Commission, State Commission or the National
Commission shall be enforced by it in the same manner as if it were a decree
made by a Court in a suit before it. Appeals against the orders of the National
Commission have to be made only at the Supreme Court.

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Channels for Consumer Disputes Redressal

Judicial Channels
National Consumer State Consumer District Consumer
Disputes Redressal Disputes Redressal Disputes Redressal
Commission Commission Commission

Established by the Established by the State Established by the

Central Government Government State Government
Has jurisdiction to Has jurisdiction to Has jurisdiction to
entertain complaints, entertain complaints, entertain complaints,
where value of the where value of the where value of the
goods or services goods or services is goods or services does
exceeds Rs.10 crore between Rs. 1 crore not exceed Rs. 1 crore
and Rs.10 crore
Accepts appeals Accepts appeals against
against the orders of the orders of the
the State Commission District Commission

a) Procedure for filing a complaint

The procedure for filing a complaint is very simple in all the above three
agencies. There is no fee for filing a complaint or filing an appeal whether before
the State Commission or National Commission. The complaint can be filed by
the complainant himself or by his authorised agent. It can be filed personally or
can even be sent by post. It may be noted that no advocate is necessary for the
purpose of filing a complaint.
b) Consumer Commission Orders
If the Commission is satisfied (a) that the goods in question have the defects
specified in the complaint or (b) that the allegations about the services are
proven; the Commission can issue orders directing the opposite party to do any
of the following:
i. To return to the complainant the price (or premium in case of insurance)
and/ or charges paid by the complainant
ii. To award such amount as compensation to the consumers for any loss or
injury suffered by the consumer due to negligence of the opposite party
iii. To remove the defects or deficiencies in the services in question.
iv. To discontinue the unfair trade practice or the restrictive trade practice
or not to repeat them
v. To provide for adequate costs to the complainants.
c) Nature of complaints
The majority of consumer disputes with the three Commissions relating to
insurance business fall in the following main categories:
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 i. Delay in settlement of claims
ii. Non-settlement of claims
iii. Repudiation of claims
iv. Amount or Quantum of loss
v. Policy terms, conditions etc.
E. The Insurance Ombudsman

The Central Government under the powers of the Insurance Regulatory &
Development Authority Act, 1999 made Insurance Ombudsman Rules 2017 by a
notification published in the official gazette on 25th April 2017.

Rules regarding Insurance Ombudsmen apply to all insurers and their agents and
intermediaries in respect of complaints on all personal lines of insurance, group
insurance policies, policies issued to sole proprietorship and micro enterprises.
[‘Personal lines’ here means insurances taken in an individual capacity, in contrast
to insurances sold to corporate entities.] Complaints relating to (a) delay in
settlement of claims beyond the time specified by IRDAI, (b) partial or total
repudiation of claims by the insurer, (c) disputes about premium paid or payable in
terms of insurance policy, (d) misrepresentation of policy terms and conditions at
any time in the policy document or policy contract, (e) legal construction of
insurance policies that affect the claim; and (f) policy servicing and related
grievances against insurers and their agents and intermediaries.
a) Issuance of life insurance policy, general insurance policy including health
insurance policy which is not in conformity with the proposal form submitted
by the proposer.
b) Non issuance of insurance policy after receipt of premium in life insurance and
general insurance including health insurance and
c) Any other matter resulting from the violation of provisions of the Insurance
Act, 1938 or the regulations, circulars, guidelines or instructions issued by the
IRDAI from time to time or the terms and conditions of the policy contract, in
so far as they relate to issues mentioned at clauses (a) to (f)
The objective of these rules is to resolve all types of complaints mentioned above,
in a cost effective, and impartial manner.

The Ombudsman, by mutual agreement of the insured and the insurer can act as
a mediator and counsellor within the terms of reference.

The decision of the Ombudsman, whether to accept or reject the complaint, is

final.
a) Complaint to the Ombudsman
Any complaint made to the Ombudsman should be in writing, and must be signed
by the insured or his legal heirs, nominee or assignee, and addressed to an
Ombudsman within whose jurisdiction, the insurer has a branch/ office. It should
contain the facts giving rise to the complaint, supported by documents, the
nature and extent of the loss caused to the complainant and the relief sought.

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 Complaints can be made to the Ombudsman if:
i. The complainant had made a previous written representation to the
insurance company and:
 the insurance company had rejected the complaint or
 the complainant had not received any reply within one month after
receipt of the complaint by the insurer.
ii. The complainant is not satisfied with the reply given by the insurer
iii. The complaint is made within one year from the date of rejection by the
insurance company
iv. The complaint is not pending in any court or consumer Commission or in
arbitration
v. The value of the claim including expenses claimed is not above Rs 30 lakhs.
b) Recommendations by the Ombudsman
The Ombudsman will send copies of complaints to both the complainant and the
insurance company. The Ombudsman will make his recommendations within one
month of the receipt of the complaint.
c) Award
The dispute can be settled by intermediation. If this is not possible, the
Ombudsman will pass an award to the insured which he thinks is fair within a
period of 3 months from the date of receipt of all requirements from the
complainant and sending a copy of the award to the complainant and the
insurer.

The insurer shall comply with the award within 30 days of the receipt of the
award and intimate compliance of the same to the Ombudsman. The award of
the Ombudsman shall be binding on the insurer.
F. Right to Information

In addition to the rules and regulations that are specific for grievance redressal in
insurance, there are certain general laws common to everyone in the country. The
Right to Information (RTI) Act, 2005 enacted by the Govt. of India is an important
law that gives citizens of India access to the information available with public
authorities which promotes transparency and accountability in these organisations.
The Act provides for appointment of a Chief Public Information Officer (CPIO) to
deal with requests for information. IRDAI is obliged to provide information to
members of public in accordance with the provisions of the said Act. Agents should
be aware that as per the RTI Act, IRDAI and Insurance Companies may have to reveal
certain information to customers and others; as also allow them to inspect the work,
document, records, extracts or certified copies of documents/ records and also
information stored in electronic form. However, there are certain categories of
information that are exempt from disclosure.

93
Test Yourself 1
The ______________ has jurisdiction to entertain complaints, where value of the
goods or services and the compensation claimed is up to Rs.20 lakhs.
I. District Commission
II. State Commission
III. Zilla Parishad
IV. National Commission
Summary
 IRDAI has launched an Integrated Grievance Management System (IGMS) which
acts as a central repository of insurance grievance data and as a tool for
monitoring grievance redress in the industry.
 Consumer disputes redressal agencies are established in each district and state
and at national level.
 As far as insurance business is concerned, the majority of consumer disputes fall
in categories such as delay in settlement of claims, non-settlement of claims,
repudiation of claims, quantum of loss and policy terms, conditions etc.
 The Ombudsman, by mutual agreement of the insured and the insurer can act
as a mediator and counsellor within the terms of reference.
 If the dispute is not settled by intermediation, the Ombudsman will pass award
to the insured which he thinks is fair, and is not more than what is necessary
to cover the loss of the insured.
Key Terms
1. Integrated Grievance Management System (IGMS)
2. The Consumer Protection Act, 2019
3. District Commission
4. State Commission
5. National Commission
6. Insurance Ombudsman

Answers to Test Yourself

Answer 1 -The correct answer is I.

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 CHAPTER C-10

REGULATORY ASPECTS FOR CORPORATE AGENTS

Chapter Introduction

In this chapter, we discuss Regulatory aspects of corporate agents.

Learning Outcomes

Regulations of Corporate Agents

The IRDAI ( Registration of Corporate Agent ) regulations,2015 has come into effect
from 1st April, 2016.
Before this the IRDAI (Licensing of Corporate Agents) regulations,2002 was dealing
with Corporate Agency licencing, etc.,

95
Corporate Agents

The IRDAI (Registration of Corporate Agent) regulations, 2015. These regulations

deal with matters relating to who can Corporate Agent, Scope and applicability of
the regulations, Registration, Arrangement with Insurers for distributions products,
remuneration, code of conduct, etc..

The following definitions are relevant.

1. Definitions:

(a) "Act" means the Insurance Act, 1938 (4 of 1938), as amended from time to time

(b) "Applicant" means -

(i) A company formed under the Companies Act, 2013 (18 of 2013) or any
enactment thereof or under any previous company law which was in force;
or
(ii) A limited liability partnership formed and registered under the Limited
Liability Partnership Act, 2008; or
(iii) A Co-operative Society registered under Co-operative Societies Act, l9l2 or
under any law for registration of co-operative societies, or
(iv) a banking company as defined in clause (4A) of section 2 of the Act; or
(v) a corresponding new bank as defined under clause (da) of sub-section (1)
of section 5 of the Banking Companies Act, 1949 (10 of 1949); or
(vi) a regional rural bank established under section 3 of the Regional Rural
Banks Act, 1976 (21 of 1976): or
(vii) a Non-Governmental organisation or a micro lending finance organization
covered under the Co-operative Societies Act, 1912 or a Non-Banking
Financial Company registered with the Reserve Bank of India; or
(viii) Any other person as may be recognized by the Authority to act as a
corporate agent.
(c) “Approved Institution" means any institution engaged in education and/or
training particularly in the area of insurance sales, service and marketing,
approved and notified by the Authority from time to time, and includes
Insurance Institute of India, Mumbai.
(d) "Authorized Verifier" means a person employed by a Telemarketer for the
purpose of solicitation or sale over telephonic mode and shall fulfill the
requirements as specified under regulation 7(3) of these regulations for a
specified person;
(e) "Authority" means the Insurance Regulatory and Development Authority of India
established under the provisions of Section 3 of the Insurance Regulatory and
Development Authority Act, 1999 (41 of 1999).
(f) "Corporate Agent" means any applicant specified in clause (b) above holds a valid
certificate of registration issued by the Authority under these regulations for
solicitation and servicing of insurance business for any of the specified category
of life, general and health.

96
(g) “Corporate Agent (Life)" means a corporate agent who holds a valid certificate
of registration to act as such, for solicitation and servicing of insurance business
for life insurers as specified in these regulations;
(h) "Corporate Agent (General)" means a corporate agent who holds a valid
certificate of registration to act as such, for solicitation and servicing of
insurance business for general insurers as specified in these regulations;
(i) "Corporate Agent (Health)" means a corporate agent who holds a valid certificate
of registration to act as such, for solicitation and servicing of insurance business
for health insurers as specified in these regulations;
(j) "Corporate Agent (Composite)" means a corporate agent who holds a valid
certificate of registration to act as such, for solicitation and procurement of
insurance business for life insurers, general insurers and health insurers or
combination of any two or all three as specified in clauses (f) above:
(k) “Examination Body” for the purpose of these Regulations is Insurance Institute
of India, Mumbai or any other body approved and notified by the Authority for
conducting certification examination for principal officer and specified persons
of the corporate agents.
(l) Fit and Proper" is the criteria for determining the suitability for registering an
Applicant including his principal officer, directors or partners or any other
employees to act as Corporate Agent.
(m) “Principal Officer" of a Corporate Agent means a director or a partner or any
officer or employee so designated by it, and approved by the Authority,
exclusively appointed to supervise the activities of Corporate Agent and who
possesses the requisite qualifications and practical training and has passed
examination as required under these Regulations.
(n) "Registration" means a certificate of registration to act as a corporate agent
issued under these regulations.
(o) "Regulations" means Insurance Regulatory and Development Authority of India
(Registration of Corporate Agent) Regulations, 2015.
(p) "Specified Person" means an employee of a Corporate Agent who is responsible
for soliciting and procuring insurance business on behalf of a corporate agent
and shall have fulfilled the requirements of qualification, training and passing
of examination as specified in these regulations;
(q) "Telemarketer' means an entity registered with Telecom Regulatory Authority of
India under Chapter III of the Telecom Commercial Communications Customer
Preference Regulations, 2010 to conduct the business of sending commercial
communications and holding a certificate issued by the Authority;
(r) Words and expressions used and not defined in these Regulations but defined in
the Act, as amended from time to time, the Insurance Regulatory and
Development Authority Act, 1999 or in any of the Regulations / Guidelines made
there under shall have the meanings respectively assigned to them in those Acts
/ Regulations / Guidelines.

2. Scope and applicability of these Regulations:

(1) These regulations shall cover Registration of Corporate Agents for the purpose
of soliciting, procuring and servicing of Insurance business of life insurers,
general insurers and health insurers during the validity of certificate of
registration as follows.

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 (a) A Corporate Agent (Life), may have arrangements with a maximum of
three life insurers to solicit, procure and service their insurance
Products.
(b) A Corporate Agent (General), may have arrangements with a maximum
of three general insurers to solicit, procure and service their insurance
products. Further, the Corporate Agent (General) shall solicit, procure
and service retail lines of general insurance products and commercial
lines of such insurers having a total sum insured not exceeding rupees
five crores per risk for all insurances combined.
(c) A Corporate Agent (Health), may have arrangements with a maximum of
three health insurers to solicit, procure and service their insurance
products.
(d) In the case of Corporate Agent (Composite), the conditions as specified
in clauses (a) to (c) shall apply.
(e) any change in the arrangement with the insurance companies shall be
done only with the prior approval of the Authority and with suitable
arrangements for servicing existing policyholders.

3. Consideration of application –

(1) The Authority while considering an application for grant of registration shall take
into account, all matters relevant for carrying out the activities of a corporate
agent.

(2) Without prejudice to the above, the Authority in particular, shall take into
account the following, namely:-
(a) whether the applicant is not suffering from any of the disqualifications
specified under sub-section (5) of section 42 D of the Act;
(b) whether the applicant has the necessary infrastructure, such as, adequate
office space, equipment and trained manpower on their rolls to effectively
discharge its activities;
(c) whether any person, directly or indirectly connected with the applicant, has
been refused in the past the grant of license/registration by the Authority.

(d) Whether the principal officer of the applicant is a graduate and has received
at least fifty hours of theoretical and practical training from an approved
institution according to a syllabus approved by the Authority, and has passed
an examination, at the end of the period of training mentioned above,
conducted by the examination body.
In case where the principal officer of the applicant is an Associate/ Fellow
of the Insurance Institute of India, Mumbai; or Associate/Fellow of the CII,
London; or Associate/Fellow of the institute of Actuaries of India; or holds
any post graduate qualification of the Institute of Insurance and Risk
Management, Hyderabad, the theoretical and practical training shall be
twenty five hours.
(e) whether the principal officer' directors and other employees of the applicant
have not violated the code of conduct as specified in Schedule III to these
regulations during the last three years;

98
 (f) Whether the applicant, in case the principal business of the applicant is
other than insurance' maintain an arms-length relationship in financial
matters between its activities as Corporate Agent and other activities.
(g) Whether the Principal Officer/Director(s)/Partner(s)/Specified Persons
is/are Fit and Proper based on the statement in Annexure I of these
regulation; and
(h) the Authority is of the opinion that the grant of registration will be in the
interest of policyholders.

(3) The specified persons of the applicant shall fulfill the following requirements –
a. Having passed minimum of l2th Class or equivalent examination from a
recognized Board/Institution:

b. (i) The specified person shall have undergone at least fifty hours of training' for
the specified category of life, general, health for' which registration is sought
for, from an approved institution and shall have passed the examination
conducted by the examination body;
(ii) The specified person of corporate agent (composite) shall have undergone
at seventy five hours of training from an approved institute and shall have pass
the examination conducted by the examination body;

c. the specified persons engaged by the corporate agent to solicit and procure
insurance business shall have valid certificate issued by the Authority as,
specified in these Regulations.
The certificate shall be valid for a period of three years from the date of issued
subject to the valid registration of the corporate agent;
The specified person shall apply through the principal officer of the corporate
agent to the Authority in the format specified in Annexure 3 of these regulations
for issuance of certificate.

d. A specified person of a corporate agent wishes to switch over to any other

corporate agent, shall do so by applying to the Authority through the new
corporate agent along with a no objection certificate issued by the present
corporate agent. In case, the present corporate agent does not issue a no
objection certificate within 30 days, it shall be deemed that the said corporate
agent has no objection to his switching over. The Authority after receipt of
request from the corporate agent, issue a revised certificate changing the name
of the corporate agent indicating the switching over.

4. Renewal of registration –
(1) As per this regulation a corporate agent may, within thirty days before the
expiry of the registration, make an application in Form A along with requisite
fee to the Authority for renewal of registration.

Provided however that if the application reaches the Authority later than that
period but before the actual expiry of the current registration, an additional fee
of rupees one hundred, plus applicable taxes, shall be payable to the Authority.

99
 Provided further that the Authority may for sufficient reasons offered in writing
by the applicant for a delay not covered by the previous proviso, accept an
application for renewal after the date of the expiry of the registration on
payment of an additional fee of seven hundred and fifty rupees, plus applicable
taxes, by the applicant.

Note: A corporate agent is permitted to submit the application for renewal of

registration ninety days prior to the expiry of the registration.

(2) Principal Officer and specified persons before seeking a renewal of

registration shall have completed, at least twenty five hours of therefore local
and practical raining, imparted by an approved institution.

(3) The Authority, on being satisfied that the applicant fulfills all the conditions
specified for a renewal of the registration, shall renew the registration in Form
C for a period of three years and send intimation to the applicant.

5. Procedure where a registration is not granted -

(1) Where an application for grant of a registration under regulation 4 or renewal

thereof under regulation 11, does not satisfy the conditions set out in regulation
7, the Authority may refuse to grant or renew the Certificate of Registration.

Before the application is rejected the applicant has to be given a reasonable

opportunity of being heard.

(2) The refusal to grant or renew a Certificate of Registration shall be

communicated by the Authority within thirty days of such refusal to the
applicant stating therein the grounds on which the application has been
rejected.

(3) Any applicant aggrieved by the decision of the Authority may make an appeal
to Securities Appellate Tribunal, within a period of forty-five days from the date
on which a copy of the order made by the Authority under sub-regulation (2)
above is received by it.

6. Effect of refusal to grant registration- An applicant, whose application for grant

of registration under regulation 4 or of a renewal thereof under regulation 11
has been refused or rejected by the Authority, shall, on and from the date of
the receipt of the communication under regulation 12(2) cease to act as a
corporate agent.
He, however, shall continue to be liable to provide services in respect of
contracts already entered into through him.
Such a service shall continue upto the period of expiry of those existing
contracts, which have already been closed, or for a period of six months,
whichever is earlier within which time they shall make suitable arrangements
with the concerned insurer.

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7. Conditions of grant of registration to Corporate Agent:

The registration granted under regulation 9 or the renewal granted under

regulation 11 shall be subject to the following conditions:-

(i) The corporate agent registered under these regulations shall be permitted
to solicit and service insurance business as specified in regulation (3) above
only;
(ii) The corporate agent shall comply with the provisions of the Act, Insurance
Regulatory and Development Authority Act, 1999 and the Regulations,
Circulars, Guidelines and any other instructions issued there under from
time to time by the Authority;
(iii) The corporate agent shall take adequate steps for redressal of grievances
of its clients within 14 days of receipt of such complaint and keep the
Authority informed about the number, nature and other particulars of the
complaints received from such clients in format and manner as may be
specified by the Authority;
(iv) The corporate agent shall solicit and procure reasonable number of
insurance policies commensurate with their resources and the number of
specified persons they employ.
(v) The corporate agent shall maintain records in the format specified by the
Authority which shall capture policy-wise and specified person-wise details
wherein each policy solicited by the corporate agent is tagged to the
specified person, except for those products which are simple, sold over
the counter and specifically approved by the Authority. The corporate
agent shall put in place systems which allow regular access to such records
and details by the Authority.
(vi) The corporate agent under no circumstance shall undertake multi-level
marketing for solicitation of insurance products;
(vii) The Corporate Agent shall ensure compliance of Code of Conduct
applicable to its directors, principal officer and specified persons;
(viii) The corporate agent shall maintain separate books of accounts for their
corporate agency business as specified in regulation 31;

8. Payment of fees and the consequences of failure to pay fees –

(1) Every corporate agent shall at the time of application of registration and
renewal thereof pay non refundable application fee of Rs.10,000/-, plus
applicable taxes. No application shall be processed without the application fee.

(2) Upon receipt of communication for grant of registration from the Authority,
the applicant shall pay a fee of Rs.25,000/-, plus applicable taxes, within 15
days of receipt of such communication. On receipt of the fee and on satisfactory
compliance of terms and conditions for grant of registration, the Authority shall
grant the registration to act as a corporate agent under the category for which
an application is made.

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 (3) A corporate agent desirous of applying for renewal shall make an application
for renewal in the prescribed format along with a fee of Rs.25, 000/-, plus
applicable taxes.

9. Remuneration-

The payment of remuneration to or receipt of remuneration by a corporate

agent shall be governed by the regulations notified in this behalf by the
Authority from time to time.

10. Conflict of interest –

While soliciting and procuring the insurance business, the corporate agent shall
comply with the following:

(i) The corporate agent having tie-ups with more than one insurer in a particular
line of business, disclose to the prospective customer the list of insurers, with
whom they have arrangements to distribute the products and provide them with
the details such products. Further, disclose the scale of commission in respect
of the insurance product offered, if asked by the prospect;

(ii) Where the insurance is sold as an ancillary product along with a principal
business product, the corporate agent or its shareholder or its associates shall
not compel the buyer of the principal business product to necessarily buy the
insurance product through it.
The Principal Officer and CFO (or its equivalent) of the corporate agent shall file
with the Authority a certificate in the format given in the Schedule VIII on half-
yearly basis, certifying that there is no forced selling of an insurance product to
any prospect.

11. Disclosures to the Authority-

(1) An applicant desires to become a corporate agent shall disclose to the

Authority at the time of filing application all material facts relevant for
consideration of application, on its own. In case of any change in the
information provided for consideration of their application, subsequent to
filing of application or during the processing of application, such change shall
be disclosed to the Authority, voluntary by the applicant, for consideration
of the Authority.

(2) Similarly, a corporate agent disclose, to the Authority voluntarily, any

change in material facts, based on which a registration was made to them,
within a reasonable time but not later than 30 days from the happening of
such change.
(3) A corporate shall disclose to the Authority proceedings initiated against them
by other regulatory or Government bodies within a reasonable time but not
later than 30 days from the initiation of such proceedings. Any action or
direction issued by such other bodies shall also be disclosed to the Authority
within the time limits prescribed above

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 (4) The corporate agent shall disclose to the Authority the details of its offices
in which they propose to distribute insurance products and details of
Specified Persons along with their certificate number issued by the
Authority. Further, any opening or closure of an office by a corporate agent
shall be informed to the Authority.
(5) Failure to adhere to the conditions set out above shall attract regulatory
actions such as suspension or cancelation of registration, imposition of
monetary penalty or any other action.

12. Arrangements with insurers for distribution of products

a) Corporate agents registered under these regulations shall have to enter into
arrangements with insurers for distribution of products. These arrangements
shall have to be disclosed to the Authority within 30 days of entering into
such arrangements. The minimum period of such arrangement shall be for
one year;
(b) while entering into such arrangements, no corporate agent shall promise nor
shall any insurer compel the corporate agent to distribute the products of a
Particular insurer;
(c) Arrangements shall have provisions to include duties and responsibilities of
corporate agents towards the policyholders, duties and responsibilities of
insurers and corporate agents, terms and conditions for termination of
arrangements;
(d) No arrangements shall be made against the interests of Policyholders;
(e) In case a corporate agent wishes to terminate arrangement with any insurer,
they may do so after informing the insurer and the Authority, the reasons or
termination of arrangement. In such cases, they shall ensure that the policies
solicited and placed with the insurer are serviced till the expiry of policies,
or for a Period of six months, whichever is earlier with in which time they
shall make suitable arrangements with the concerned insurer;
(f) In case an insurer wishes to terminate the arrangement with any corporate
agent, they may do so after informing the corporate agent and the Authority,
the reasons for termination of arrangement.
In such cases, the concerned insurer shall take the responsibility of servicing
the policies Procured by the corporate agent. In all such cases, the insurer
shall inform the policyholder concerned of the changes made in servicing
arrangements;
(g) No insurer shall directly pay incentives (cash or non-cash) to the principal
officer, specified persons and other employees of the corporate agents;

13. Servicing of policyholders-

(1) A corporate agent registered under these regulations shall have the duty to
service its policyholders during the entire period of contract. Servicing
includes assisting in payment of premium required under section 64VB of the
Act, providing necessary assistance and guidance in the event of a claim.

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14. Sale of Insurance by tele-marketing mode and distance marketing activities
of a corporate agent –

(1) A corporate agent who intends to engage the services of a telemarketer or

engage in distance marketing activities for the purpose of distribution of
insurance products shall follow the instructions as laid down in Schedule VII.

(2) A corporate agent shall have to comply with the following additional
conditions for engaging the services of a telemarketer:

a. The telemarketer engaged by the corporate agent shall comply with various
circulars and/or guidelines or any other direction issued by Telecom
Regulatory Authority of India in the matter;

b. A corporate agent intends to undertake telemarketing activities for

insurance intermediation shall seek prior approval of the Authority in the
form specified by the Authority at Annexure 4 of these regulations. The
Authority on verification of the same issue a certificate to the telemarketer;
c. Further, the corporate agent shall file with the Authority the names of
Authorised verifiers engaged/proposed to be engaged by the telemarketer
in the form specified at Annexure 5 of these regulations,.
d. The Authority on verification of the same issue a certificate to the
Authorised verifier.
e. In case an Authorised Verifier intends to switch to another telemarketer who
is also dealing with insurance intermediation, they shall obtain a No
Objection Certificate from the erstwhile telemarketer and submit the same
to the Authority for issuing a fresh certificate. In case, the present
telemarketer does not issue a no objection certificate within 30 days from
the date of application for the same, it shall be deemed that the
telemarketer has no objection to his switching over;
f. Application for removal or addition of Authorised Verifiers shall be made by
the Corporate Agent concerned through the Principal Officer;
g. In case the corporate agent registers as telemarketer with TRAI, the
corporate agent shall act as telemarketer for only those insurers with whom
he has arrangements;
h. No corporate agent or its telemarketer shall make outbound calls to any
person unless he or she has shown interest in buying an insurance policy by
making enquiries to that effect. They shall maintain the database of such
persons and the enquiry made for verification and checking by the Authority
or any person authorized by it.
i. The telemarketer shall disclose to the prospective customer the following
information
(a) The name of the corporate agent they represent;
(b) The registration number of the corporate agent;
(c) Contact number of the telemarketer and-/or corporate agent in case the
customer desires to call back or verify the telesales information;

104
 (d) Name and identification number of the person (Authorised Verifier)
making the tele-call.
j. A corporate agent engaging a telemarketer shall enter into an agreement
with the telemarketer and the agreement shall provide the details such as
source of the database, duties and responsibilities, payment details, period
of agreement, actions to be taken in case of violation of Act, regulations,
guidelines, circulars, directions issued by the Authority, Code of Conduct of
Authorised Verifiers. The agreements shall be made available to the
Authority or any person authorized by the Authority for verification as and
when required;
k. Every telemarketer and the authorized Verifier shall abide by the Code of
Conduct applicable to corporate agents as specified in Schedule III of these
regulations.
l. The Authority shall have the power to inspect the premises of the
telemarketer or any other premises, which the Authority feels necessary for
the verification of records / documents, and seek any document/record,
record statements of any employee of the telemarketer or make copies of
any documents/records at its discretion:
m. The telemarketer shall have to comply with any other terms and conditions
as may be prescribed by the Authority from time to time in the matter.

(3) A telemarketer shall not be engaged with more than three insurers or
insurance related entities

15. Code of conduct for Corporate Agents-

(1) Every Corporate Agent shall abide by the Code of Conduct as specified in
Schedule III of these regulations,

(2) The corporate agent shall be responsible for all (the acts and omissions of its
principal officer, specified persons and other employees including violation of
code of conduct specified under these regulations and liable to a penalty which
may extend to one crore rupees under the provisions of Sec.102 of the Act.

16. Maintenance of Records

A Corporate Agent shall maintain the following records including in electronic

form and shall be made available as and when required by the Aurhority –

(i) Know Your Client (KYC) records of the client, as required under the
relevant Authority’s guidelines and provisions of Prevention of Money
Laundering Act;
(ii) Copy of the proposal form duly signed by the client and submitted to the
insurer with ACR signed by the specified person of corporate agent;
(iii) A register containing list of clients, details of policy such as type of policy,
premium amount, date of issue of the policy, charges or fees received;

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 (iv) A register containing details of complaints received which include name of
the complainant, nature of complaint, details of policy issued/solicited
and action taken thereon;
(v) A register which shall contain the name, address, telephone no,
photograph, date of commencement of employment, date of leaving the
service, if any, monthly remuneration paid to the specified person;
(vi) Copies of the correspondence exchanged with the Authority;
(vii) Any other record as may be specified by the Authority from time to time.

17. Maintenance of books of account, records, etc. –

(1) A corporate agent, which is incorporated exclusively for the purposes of

insurance intermediation, shall prepare the following books of accounts for
every financial year -

(i) a balance sheet or a statement of affairs as at the end of each accounting

period;
(ii) a profit and loss account for that period;
(iii) a statement of cash/fund flow:
(iv) Additional statements as may be required by the Authority from time to
rime.

Note.1: For purposes of this regulation, the financial year shall be a period of 12
months (or less where a business is started after 1st April) commencing on the first
day of the April of an year and ending on the 31st day of March of the year following
and the accounts shall be maintained on accrual basis.

Note.2: There shall be a schedule to their financial statements or providing the

details of all the incomes received from insurers and insurer's group companies,
insurer-wise, by the corporate agent, and also the details of payments received by
the group companies and/or associates of the corporate agent from any insurer and
the details thereof.

(a) A copy of the audited financial statements as stated in sub-regulation (1) along
with the auditor's report thereon shall be submitted to the Authority before
30th September every year along with the remarks or observations of the
auditors, if any, on the conduct of the business, state of accounts, etc., and a
suitable explanation on such observations shall be appended to such accounts
filed with the Authority.

(b) Within ninety days from the date of the Auditor's report necessary steps to
rectify any deficiencies, made out in the auditor's report, be made and
informed to the Authority.

(c) All the books of account, statements, document, etc., shall be maintained at
the head office of the corporate agent or such other branch office as may be
designated and notified to the Authority, and shall be available on all working
days to such officers of the Authority, and authorised in this behalf for
inspection.

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(d) All the books, documents, statements, contract notes etc., referred to in this
regulation and maintained by the corporate agent shall be retained for a
minimum period of ten years from the end of the year to which they relate.
However, the documents pertaining to the cases where claims are reported and
the settlement is pending for a decision from courts, the documents are
required to be maintained till the disposal of the cases by the court.

(2) In the case of corporate agents whose principal business is other than insurance
intermediation, they shall maintain segment wise reporting capturing the
revenues received for insurance intermediation and other income from
insurers.

(3) Every insurer who is engaging the services of a corporate agent shall file with
the Authority a certificate, separately for all such corporate agents, in the
format given in the Schedule VIA to be signed by the CEO and CFO. A similar
certificate from the Principal Officer and CFO (or its equivalent) of the
corporate agent specifying the commission/ remuneration received from the
insurer shall be filed with the Authority as given in Schedule VlB.

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 Code of Conduct
I. General Code of Conduct
1. Every corporate agent shall follow recognised standards of professional conduct
and discharge their duties in the interest of the policyholders. While doing so-

a) conduct its dealings with clients with utmost good faith and integrity at all
times;
b) act with care and diligence;
c) ensure that the client understands his relationship with the corporate agent
and on whose behalf the corporate agent is acting;
d) treat all information supplied by the prospective clients as completely
confidential to themselves and to the insurer(s) to which the business is
being offered;
e) take appropriate steps to maintain the security of confidential documents in
their possession;
f) No director of a company or a partner of a firm or the chief executive or a
principal officer or a specified person shall hold similar position with another
corporate agent;

2. Every Corporate Agent shall

a) be responsible for all acts of omission and commission of its principal officer
and every specified person;
b) ensure that the principal officer and all specified persons are properly
trained, skilled and knowledgeable in the insurance products they market;
c) ensure that the principal officer and the specified person do not make to the
prospect any misrepresentation on policy benefits and returns available
under policy;
d) ensure that no prospect is forced to buy an insurance product;
e) give adequate pre-sale and post-sale advice to the insured in respect of the
insurance product;
f) Extend all possible help and cooperation to an insured in completion of all
formalities and documentation in the event of a claim;
g) give due publicity to the fact that the corporate agent does not underwrite
the risk or act as an insurer;
h) enter into agreements with the insurers in which the duties and
responsibilities of both are defined

II. Pre-sale Code of Conduct

3. Every corporate agent or principal officer or a specified person shall also follow
the code of conduct specified below:

i) Every corporate agent/principal officer/ specified person shall,-

a) identify himself and disclose his registration/ certificate to the prospect on

demand;
b) disseminate the requisite information in respect of insurance products
offered for sale by the insurers with whom they have arrangement and take
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 into account the needs of the prospects while recommending a specific
insurance plan;
c) disclose the scales of commission in respect of the insurance product offered
for sale, if asked by the prospect;
d) indicate the premium to be charged by the insurer for the insurance product
offered for sale;
e) explain to the prospect the nature of information required in the proposal
form by the insurer, and also the importance of disclosure of material
information in the purchase of an insurance contract;
f) bring to the notice of the insurer any adverse habits or income inconsistency
of the prospect, in the form of a Confidential Report along with every
proposal submitted to the insurer, and any material fact that may adversely
affect the underwriting decision of the insurer as regards acceptance of the
proposal, by making all reasonable enquiries about the prospect;
g) inform promptly the prospect about the acceptance or rejection of the
proposal by the insurer;
h) obtain the requisite documents at the time of filing the proposal form with
the insurer, and other documents subsequently asked for by the insurer for
completion of the proposal;

ii) No corporate agent/ principal officer/ specified person shall,-----

a) solicit or procure insurance business without holding a valid

registration/certificate;
b) induce the prospect to omit any material information in the proposal form;
c) induce the prospect to submit wrong information in the proposal form or
documents submitted to the insurer for acceptance of the proposal;
d) behave in a discourteous manner with the prospect;
e) interfere with any proposal introduced by any other specified person or any
insurance intermediary;
f) offer different rates, advantages, terms and conditions other than those
offered by the insurer;
g) force a policyholder to terminate the existing policy and to effect a new
proposal from him within three years from the date of such termination;
h) No corporate agent shall have a portfolio of insurance business from one
person or one organization or one group of organizations under which the
premium is in excess of fifty percent of total premium procured in any year
;
i) become or remain a director of any insurance company, except with the
prior approval of the Authority,
j) indulge in any sort of money laundering activities;
k) indulge in sourcing of business by themselves or through call centers by
way of misleading calls or spurious calls;
l) undertake multi-level marketing for soliciting and procuring of insurance
products;
m) engage untrained and unauthorised persons to bring in business;
n) provide insurance consultancy or claims consultancy or any other insurance
related services except soliciting and servicing of insurance products as per
the certificate of registration.

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 o) Engage, encourage, enter into a contract with or have any sort of
arrangement with any person other than
a specified person, to refer, solicit, generate lead, advise, introduce, find
or provide contact details of prospective policyholders in furtherance of the
distribution of the insurance product;
p) Pay or allow the payment of any fee, commission, incentive by any other
name whatsoever for the purpose of sale, introduction, lead generation,
referring or finding to any person or entity

III. Post-Sale Code of Conduct

4. Every Corporate Agent shall -

a) advise every individual policyholder to effect nomination or assignment or
change of address or exercise of options, as the case may be, and offer
necessary assistance in this behalf, wherever necessary;
b) with a view to conserve the insurance business already procured through
him, make every attempt to ensure remittance of the premiums by the
policyholders within the stipulated time, by giving notice to the policyholder
orally and in writing.
c) ensure that its client is aware of the expiry date of the insurance even if it
chooses not to offer further cover to the client:
d) ensure that renewal notices contain a warning about the duty of disclosure
including the necessity to advise changes affecting the policy, which have
occurred since the policy inception or the last renewal date;
e) ensure that renewal notices contain a requirement for keeping a record
(including copies of letters) of all information supplied to the insurer for the
purpose of renewal of the contract;
f) ensure that the client receives the insurer’s renewal invitation well in time
before the expiry date.
g) render necessary assistance to the policyholders or claimants or
beneficiaries in complying with the requirements for settlement of claims by
the insurer;
h) explain to its clients their obligation to notify claims promptly and to disclose
all material facts and advise subsequent developments as soon as possible;
i) advise the client to make true, fair and complete disclosure where it believes
that the client has not done so. lf further disclosure is nor forthcoming it
shall consider declining to act further for the client;
j) give prompt advice to the client of any requirements concerning the claim;
k) forward any information received from the client regarding a claim or an
incident that may give rise to a claim without delay, and in any event within
three working days;
l) advise the client without delay of the insurer's decision or otherwise of a
claim; and give all reasonable assistance to the client in pursuing his claim.
m) shall not demand or receive a share of proceeds from the beneficiary under
an insurance contract;
n) ensure that letters of instructor, policies and renewal documents contain
details of complaints handling procedures:
o) accept complaints either by phone or in writing:

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p) acknowledge a complaint within fourteen days from the receipt of
correspondence, advise the member of staff who will be dealing with the
complaint and the timetable for dealing with it;
q) ensure that response letters are sent and inform the complainant of what he
may do if he is unhappy with the response;
r) ensure that complaints are dealt with at a suitably senior level;
s) Have in place a system for recording and monitoring complaints.

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 SECTION

LIFE INSURANCE

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 CHAPTER L-01

WHAT LIFE INSURANCE INVOLVES

Chapter Introduction

We have seen some aspects related to Insurance in the common chapters. However,
when it comes to Life insurance, we need to look at them more deeply.

 An asset
 The risk insured against
 The principle of pooling
 The contract

Let us now examine the features of life insurance. This chapter will take a brief
look at the various components of life insurance mentioned above.

Learning Outcomes

A. Life insurance business –Components, human life value, mutuality

B. Risks and Life Insurance

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A. Life insurance business – Components, human life value, mutuality
a) The Asset – Human Life Value (HLV)
We have already seen that an asset is a kind of property that yields value or a return.
For most kinds of property both the value and loss of value amounts can be measured
in precise monetary terms.
Example

If the estimated damage of a car meeting an accident is Rs 50000, the insurer will
compensate the owner for this loss.
How do we estimate the amount of loss when a person dies?
Is he worth Rs. 50,000 or Rs. 5,00,000?
An Agent must be able to answer the above question when meeting a customer.
Based on this the agent can determine how much insurance to recommend to the
customer. It is in fact the first lesson a life insurance agent must learn.
Luckily we have a measure, developed almost seventy years ago by Prof. Hubener.
It is known as Human Life Value (HLV) and is used worldwide.
The HLV concept considers human life as a kind of property or asset that earns an
income. It thus measures the value of human life based on an individual’s expected
net future earnings. Net earnings means the income a person expects to earn each
year in the future, less the amount he would spend on himself. It thus indicates the
economic loss a family would suffer if the wage earner were to die prematurely.
These earnings are capitalised, using an appropriate interest rate to discount them.
Although there are multiple parameters used to calculate HLV including taking into
account inflation, wage rise, future earning capacity etc., a simple thumb rule to
calculate HLV is to determine the amount that would generate the annual income
the family would be needing by way of interest. In other words HLV is the annual
contribution for the family by the breadwinner divided by the prevailing rate of
interest.
Example
Mr. Rajan earns Rs. 1,20,000 a year and spends Rs. 24,000 on himself. The net
earnings his family would lose, were he to die prematurely, would be Rs. 96,000 per
year. Suppose the rate of interest is 8% (expressed as 0.08).
Human-Life-Value (HLV) = Annual Contribution for Dependents ÷ Rate of
Interest
HLV = 96000/ 0.08 = Rs. 12,00,000

HLV helps to determine how much insurance one should have for full protection. It
also tells us the upper limit beyond which providing life insurance may not be
reasonable.

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In general, the amount of insurance should be around 10 to 15 times one’s annual
income. Thus one should grow suspicious if Mr. Rajan was to ask insurance of Rs. 2
crores, while earning only Rs. 1.2 lakhs a year. The actual amount of insurance
purchased would depend on factors like how much insurance one can afford and
would like to buy.
B. Risk and Life Insurance
As we have seen above, life insurance provides protection against those risk events
that can destroy or reduce the value of human life as an asset. There are three kinds
of situations where such loss can occur. They are typical concerns which ordinary
people face.
Diagram 1: Typical concerns faced by ordinary people

General insurance on the other hand typically deals with risks that affect property
– like fire, loss of cargo while at sea, theft and burglary and motor accidents. They
also cover events leading to loss of name and goodwill. These are covered by liability
insurance.
Finally there are risks that can affect the person. Termed as personal risks, these
may also be covered by general insurance.
Example
Accident insurance which protects against losses suffered due to an accident.
a) How exactly does life insurance differ from general insurance?

General Insurance Life Insurance

 Indemnity: General insurance policies,  Assurance: Life insurance policies are

with the exception of Personal Accident contracts of assurance.
Insurance, are usually contracts of
indemnity i.e. after an event like fire, the  The amount of benefit to be paid in
insurer assesses the exact amount of loss the event of death is fixed at the
that has occurred and compensates only beginning of the contract.
that amount of loss – no more, no less.  An assured sum is paid to the
nominees or beneficiaries of the
insured when he dies.

 Duration: The contract is generally short  The contract is generally long term
period or for one year renewable basis though some one year renewable
contracts are also prevalent

 Uncertainty: In general insurance  There is no such question Death is

contracts, the concerned risk event is certain once a person is born. What is

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 uncertain. No one can be certain about uncertain is the time of death. Life
whether a house would catch fire or a car insurance offers protection against
meet an accident. the risk of premature death.

 Increase in probability: In case of General  In life insurance the probability of

insurance perils like fire or earthquake, death increases with age.
the probability of happening of the event
does not increase with time.

b) Nature of life insurance risk

Since probability of death increases with age, lower premiums are charged for those
who are young and higher premiums for older people. One result was that old
individuals who were in good health, tended to withdraw while unhealthy members
remained in the scheme. Insurance companies faced serious problems as a result.
Their attempts to develop life insurance policies that people could afford led to the
development of level premiums.
c) Level premiums
The level premium is fixed such that it does not increase with age but remains
constant throughout the contract period. This means premiums collected in early
years is more than the amount needed to cover death claims of those dying when
young, while premiums collected in later years are less than what is needed to meet
claims of those dying at higher ages. The level premium is an average of both. The
excess premiums of earlier ages compensate for the deficit of premiums in later
ages. The level premium feature is illustrated below.
Diagram 2: Level Premium

Level premiums are required because life insurance contracts are long term
insurance contracts that run for 10, 20 or many more years. The concept of level
premiums, do not arise for general insurance policies, which are typically short term
and expire annually.

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Example
The level premium rate is arrived at by the insurers based on the mortality
(probability of death) during the term of the policy as the age of the insured would
increase every year. The rate once decided shall be constant for the entire term of
the policy.
d) The Principle of Risk Pooling and Life Insurance
We have already discussed the Principle of Pooling and Mutuality earlier. The
pooling principle plays two specific roles in life insurance.
i. It provides protection against the economic loss arising as a result of one’s
untimely death. This is done by creating a fund that pools the contributions of
many who have purchased a life insurance contract.
e) The Life Insurance Contract
The Policy document is the evidence of the insurance contract which a details all
the terms and conditions of the insurance.
The contract states the sum assured of the life insurance policy. Life insurance is
regarded a financial security as the sum Insured is guaranteed by the contract. The
guarantee implies that life insurance is managed efficiently and conservatively;
strongly regulated and strictly supervised.
Since Life insurance contracts involve both risk cover and savings, they are often
compared with financial products. They are also seen as a way of holding wealth
than as protection. Indeed, many life insurance products have a large cash value or
savings component which can form a significant part of an individual’s savings. Some
do argue that it may be better to buy only Term Insurance from an insurance
company and invest the balance premiums in instruments that yield higher returns.
Let us consider the arguments for and against traditional cash value insurance
contracts.
a) Advantages
i. Insurance has historically been proven as a safe and secure investment
offering a minimum guaranteed rate of return, which may increase with
contract duration.
ii. Regularity of premium payments requires compulsory planning of one’s
savings and results in savings discipline.
iii. The Insurer takes care of professional investment management and frees the
individual of this responsibility
iv. Insurance provides liquidity. The insured can take a loan on or surrender
the policy and convert it into cash.
v. Both cash value type life insurance and annuities may enjoy some income
tax advantages.
vi. Insurance may be safe from creditors’ claims, generally in the event of the
insured’s bankruptcy or death.

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b) Disadvantages
i. As insurance gives relatively fixed and stable returns, it can be seriously
affected by inflation.
ii. High marketing and other initial costs reduces the amount of cash value
accumulated in earlier years of life insurance policies.
iii. The guaranteed yield may be below that of other financial instruments

Test Yourself 1
How does diversification reduce risks in financial markets?
I. Collecting funds from multiple sources and investing them in one place
II. Investing funds across various asset classes
III. Maintaining time difference between investments
IV. Investing in safe assets

Summary
a) Asset is a kind of property that yields value or a return.
b) The HLV concept considers human life as a kind of property or asset that earns
an income. It thus measures the value of human life based on an individual’s
expected net future earnings.
c) The level premium is a premium fixed such that it does not increase with age
but remains constant throughout the contract period.
d) Mutuality is one of the important ways to reduce risk in financial markets, the
other being diversification.
e) The element of guarantee in a life insurance contract implies that life insurance
is subject to stringent regulation and strict supervision.

Key Terms
1. Asset
2. Human Life Value
3. Level premium
4. Mutuality
5. Diversification

Answers to Test Yourself

Answer 1 - The correct answer is II.

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 CHAPTER L-02
FINANCIAL PLANNING

Chapter Introduction

In previous chapters we discussed life insurance and its role in providing financial
protection. Security is only one of the concerns of individuals who seek to allocate
their income and wealth to meet various needs of the present and the future. Life
insurance must be understood in the wider context of “Personal Financial Planning”.
The purpose of this chapter is to introduce the subject of financial planning.

Learning Outcomes

A. Financial planning and the individual life cycle

B. Role of financial planning
C. Financial planning - Types

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A. Financial planning and the individual life cycle
1. What is financial planning?
Most of us spend a major part of our lives working to make money. Financial planning
is a smart way to make money work for us.
Definition
Financial planning is a process of identifying one’s life’s goals, translating these
goals into financial goals and managing one’s finances to achieve those goals.
Financial planning involves preparing a roadmap to meet both current and future
needs, which may be unforeseen. It plays a crucial role in building a life with less
worry. Careful planning can help to set one’s priorities and work to achieve your
various goals.
Diagram 1: Types of Goals

i. Goals may be short term: Buying an LCD TV set or a family vacation

ii. They could be medium term: Buying a house or a vacation abroad
iii. The long term goals may include: Education or marriage of one’s child or
post retirement provision
2. Individual’s life cycle
From the day a person is born till the day of his/ her death, he/ she goes through
various stages in life, during which he/ she is expected to play a series of roles
These stages are illustrated in the diagram given below.
Diagram 2: The Economic Life Cycle

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 Life Stages and Priorities
a) Learner (till say age 20 -25):The stage when one is preparing for his
future byimproving his or her knowledge and skills. Funds are required
for financing one’s education. For instance, meeting the high cost of
fees for Medical or Management Education.
b) Earner (from 25 onwards):When one has found employment and
perhaps earns enough to meet his or her needs and has some surplus to
spare.There are family responsibilities and one may also save and invest
in order to have money to meet the needs that may arise in the
immediate future.For instance, a young man takes a housing loan and
invests in a house.
c) Partner(on getting marriage at say 28 - 30): The stage when one is
married and has a family of one’s own.This creates new needs like
having a house of one’s own, perhaps a car, consumer durables,
planning for children’s future etc.
d) Parent(say 28 to 35): The years when one becomes the parent of one
or more children.One now has to worry about their health and
education - getting them into good schools etc.
e) Provider(say age 35 to 55): The stage when children have grown into
teenagers, and includes their high school and college years. One is
concerned about the high cost of education to make the child qualified
to face the challenges of life.For instance, consider the amount that
needs to be set up to finance a medical course that runs for five years.In
many Indian homes, making provision for marriage and settlement of
girl children is a critical area of concern.Indeed, marriage and
education of children is a prime motive for savings for most Indian
families today.
f) Empty Nester(age 55 to 65):The term ‘empty nester’ implies that the
offspring have flown away leaving the nest [the household] empty.This
is the period when children have married and sometimes have migrated
to other places for work, leaving the parents.Hopefully by this stage,
one has liquidated one’sliabilities [like housing loan and other
mortgages] and has built up a fund for reirement.It is also the period
when ailments like BP and Diabetes begin to manifest and plague one’s
life.Health care,financial independence and security of income become
very important at this stage.
g) Retirement – the twilight years (age 60 and beyond):The age when
one has retired from active work and spends one’s savings to meet the
needs of life.The living needs of the husband and wife as long as both
are alive is the focus.One is concerned abouthealth
issues,adequateincome and loneliness.This is also the period when one
would seek to enhance the quality of life and enjoy many of the things
that one had dreamt of but could not achieve – like pursuing a hobby or
going on a vacation or a pilgrimage.Whether one ages gracefully or in
poverty would depend on how much one has provided for these years.

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As we can see above, the economic life cycle has three phases: a student or Pre –
job phase; the working phase that begins between ages 18 to 25 and lasts for 35 to
40 years; and the retirement years that begin after one has stopped working.
3. Why does one need to save and purchase various financial assets?
The reason is that during each stage in an individual’s life, when one performs a
particular role, a number of needs come up for which funds have to be provided.
Example
When a person gets married and starts a family of his own, he may need to have his
own house. As children grow older, funds are needed for their higher education. As
an individual goes well past middle age, the concern is for having money to meet
health costs and post retirement savings so that one does not need to depend on
one’s children and become a burden. Living with independence and dignity becomes
important.
The Savings – Investment process may be considered as being made of two decisions.
i. Postponement of consumption: an allocation of resources between present and
future consumption.
ii. Parting with liquidity (or ready purchasing power) in exchange for less liquid
assets. For instance, purchase of a life insurance policy would mean exchanging
money for a contract which is less liquid.
Financial planning includes both kinds of decisions. One needs to plan in order to
save for the future and also must invest wisely in appropriate assets to meet the
various needs that will arise in future.
4. Individual needs
If we look at the stages of the life cycle that has been discussed above, we would
see that three types of needs can arise. These give rise to three types of financial
products.
a) Enabling future transactions
The first set of needs arise from funds for meeting a range of anticipated
expenditures that are expected to arise at different stages of the life cycle.
There are two types of such needs:
i. Specific transaction needs: that are linked to specific life events which
require a commitment of resources. For instance making a provision for
higher education/ marriage of dependents; or purchase of a house or
consumer durables
ii. General transaction needs: Amounts set aside from current consumption
without being earmarked for any specific purposes – these are popularly
termed as ‘future provisions’
b) Meeting contingencies
Contingencies are unforeseen life events that may call for large funds. These
cannot met from current income and need to be pre-funded. Some of these

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 events, like death and disability or unemployment, lead to a loss of income.
Others, like a fire, may result in a loss of wealth.
Such needs may be addressed through insurance, if the probability of their
occurrence is low but cost impact is high. One may alternatively meet them by
setting aside a large amount of liquid assets as a reserve.
c) Wealth accumulation
The accumulation motive refers to an individual’s desire to invest for
accumulating wealth, taking advantage of favourable market opportunities.
Some individuals may take a cautious approach while investing, while some may
be willing to take more risks, with a view to earn a higher return. Higher return
is desired because it helps to increase one’s wealth or net worth more rapidly.
Wealth is linked with independence, enterprise, power and influence.
5. Financial products
Corresponding to the above sets of needs there are three types of products in the
financial market:

Transactional Bank deposits and other savings instruments that enable one
products to have adequate purchasing power (liquidity) at the right
time and quantum.

Contingency These provide protection against large losses that may be

products like suffered in the event of sudden unforeseen events.
insurance

Wealth Shares and high yielding bonds or real estate are examples of
accumulation such products. Here the investment is made with a view to
products committing money for making more money.

An individual would typically have a mix of all of the above needs and thus may
need to have all three types of products. In a nutshell one may say there is:
i. A need to save – For cash requirements
ii. A need to insure – Against uncertainties
iii. A need to invest – For wealth creation
6. Risk profile and investments
As an individual moves through various stages in the life cycle, from young earner
towards middle ages and then towards the final years of one’s work life, the risk
profile, or approach towards taking risks also changes.
When one is young, one may be quite aggressive and willing to take risks in order to
accumulate as much wealth as possible. As the years pass however, one may become
more prudent and careful about investing. One is now concerned to secure and
consolidate one’s investments.
Finally, as one nears retirement one may be more conservative. The focus is now to
have a corpus from which one can spend in the post retirement years. One may also
think about making donations for one’s children, for gifting to charity etc.
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One’s investment style also changes to keep pace with the risk profile. This is
indicated below:
Diagram 3: Risk Profile and Investment Style
Risk Profile Investment Style

Test Yourself 1
Which among the following gives specific protection against unforeseen events?
I. Insurance
II. Transactional products like bank Fixed Deposits
III. Shares
IV. Debentures
B. Role of financial planning
1. Financial planning
Financial planning is the process of carefully evaluating a client’s current and future
needs along with his or her risk profile and income, to chart out a road map for
meeting various anticipated/ unforeseen needs through recommending appropriate
financial products.
Elements of financial planning include:
 Investing - allocating assets based on one’s risk taking appetite,
 Risk management,
 Retirement planning,
 Tax and estate planning, and
 Financing one’s needs
To put it in a nutshell financial planning involves 360 degrees planning.

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Diagram 4: Elements of Financial Planning

2. Role of Financial planning

Financial planning is not a new discipline. It was practiced in simple form by our
fore fathers. There were limited investment options then. A few decades ago many
considered equity investment as akin to gambling. Savings were largely channelled
in bank deposits, postal savings schemes and other fixed income instruments. The
challenges facing our society and our customers are far different today. Some of
them are:
i. Disintegration of the joint family
The joint family has given way to the nuclear family, consisting of father,
mother and children. The typical head and earning member of this family has to
bear the responsibility for taking care of oneself and one’s immediate family.
This may call for a lot of proper planning and advice from a professional financial
planner.
ii. Multiple investment choices
A large number of investment instruments are available today for wealth
creation, each offering varying degrees of risk and return. To achieve financial
goals, one has to choose wisely and make the right investment decisions based
on one’s risk taking appetite. Financial planning can help with one’s asset
allocation.
iii. Changing lifestyles
Instant pleasure seems to be the order of the day. Individuals want to have the
latest mobile phones, cars, large homes, memberships of prestigious clubs, etc.
To satisfy these desires, people often borrow heavily and spend a good part of
their income to pay off loans, leaving little scope to save. Financial planning
helps to plan and one’s expenditure so that one can cut down unnecessary
expenses so as to maintain one’s present standard of living while upgrading it
over time.
iv. Inflation
Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. This leads to a fall in the value of money. As a
result, the purchasing power of money gets reduced. Inflation can play havoc
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 post retirement. Financial planning can help to ensure that one is equipped to
deal with inflation, especially in later years.
v. Other contingencies and needs
Financial planning also enables individuals to meet a number of other needs and
challenges like medical emergencies and tax liabilities. Individuals also need to
ensure that their estate consisting of their wealth and properties, smoothly pass
on to their loved ones after their death. There are other needs like the need to
do charity or meet certain social and religious obligations during one’s lifetime
and even thereafter. Financial planning is the means to achieve all this.
3. When is the right time to start financial planning?
Financial planning is not meant only for the wealthy. Indeed, Planning should
ideally start one earns one’s first salary. There is no trigger point to tell when one
should begin to plan.
There is however an important principle that should guide us – the longer the
time period of our investments, the more they will multiply.
Hence one should start early. One’s investments would then get the maximum
benefit of time. Again, planning is not only for wealthy individuals. It is for
everyone. To achieve one’s financial goals, one must follow a disciplined approach.
An unplanned, impulsive approach to financial planning is one of the prime causes
of financial distress of individuals.
Test Yourself 2
When is the best time to start financial planning?
I. Post retirement
II. As soon as one gets his first salary
III. After marriage
IV. Only after one gets rich
C. Financial planning - Types
Let us now look at the various types of financial planning exercises that an individual
may need to do.
Diagram 5: Financial Planning Advisory Services

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Consider the various advisory services that may be provided. There are six such
areas that are taken up
 Cash planning
 Investment planning
 Insurance planning
 Retirement planning
 Estate planning
 Tax planning
1. Cash planning
Managing cash flows has two purposes.
i. To manage income and expenditures flow including establishing and
maintaining a reserve of liquid assets to meet unanticipated needs.
ii. To systematically create and maintain a surplus of cash for capital
investment.
Cash Planning involves a number of steps. One must prepare a budget and analyse
one’s income and expenditure flows to check on what regular and lump sum costs
have been incurred. While fixed expenses cannot be controlled easily, one can
reduce, postpone and manage expenses that are variable. The next step is to
predict future monthly income and expenses over the whole year and design a
plan for managing these cash flows.
Another part of the cash planning process is to design strategies for maximizing
discretionary income.
Example
One can restructure one’s outstanding debts.
One can meet outstanding credit card debts through consolidating them and paying
them off through a bank loan with lower interest.
One may reallocate one’s investments to make them earn more income.
2. Insurance planning
There are certain risks to which individuals are exposed that can keep them from
attaining their personal financial goals. Insurance planning involves constructing a
plan of action to provide adequate insurance against such risks.
The task here is to estimate how much insurance is needed and determining what
type of policy is best suited.
i. Life insurance may be decided by estimating the income and expense
requirements of the dependents in the event of premature death of the
bread winner.
ii. Health insurance requirements may be assessed in terms of the
hospitalisation expenses that are likely to be incurred in any family medical
emergency.
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 a. Finally insurance for one’s assets may be considered in terms of the
type and quantum of cover required to protect one’s home/ vehicle/
factory etc. from the risk of loss.
3. Investment planning
There is no one right way to invest. What is appropriate would vary from individual
to individual. Investment planning is a process of determining the most suitable
investment and asset allocation strategies based on an individual’s risk taking
appetite, financial goals and the time horizon to meet those goals.

a) Investment parameters
Diagram 6: Investment Parameters

Retuns

Tax Risk tolerance

considerations

Investment Time horizon

parameters
Diversification

Liquidity
Marketability

The first step here is to define certain investment parameters. These include:
i. Returns: Returns on Investment is often the most important parameter that
people look for when they invest their money. The rate of return determines
how fast one’s wealth from investments would grow over time. The role of
returns can be appreciated when one considers the ‘Power of compounding’.
For instance, if an amount of Rs 1000 is invested today at 8% rate of interest,
at the end of five years, it would accumulate to Rs 1469 and at the end of
10 years it would more than double to reach Rs 2159. This expectation of
returns which helps to accumulate wealth is one of the prime motives of
investment. At the same time, one must note that higher rates of return may
be typically accompanied with higher levels of risk. One has to make a trade-
off between return and risk. This depends on an individual’s risk tolerance.
ii. Risk tolerance: A measure of how much risk someone is willing to take in
purchasing an investment.
iii. Time horizon: This is the amount of time available to attain a financial
objective. The longer the time horizon, the less concern is there about short

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 term liability. One can invest in longer term, in less liquid assets that earn
a higher return.
iv. Liquidity: Individuals with limited investment capacity, or uncertain income
and expenditure flows, or who are investing for meeting a particular
personal or business expenditure, would be concerned with liquidity [This
refers to the ability to convert investment into cash without loss of value.]
v. Marketability: The ease with which an asset can be bought or sold.
vi. Diversification: The extent to which one seeks to diversify or spread the
investments to reduce the risks.
vii. Taxes: Many investments confer certain income tax benefits and one may
like to consider the post-tax returns of various investments.
b) Selection of appropriate investment vehicles
The next step is selection of appropriate investment vehicles based on the above
parameters. The actual selection would depend on the individual’s expectations
about return and risk.
In India there are a variety of products that may be considered for the purpose of
investments. These include:
 Fixed deposits of banks/ corporates,
 Small savings schemes of post office,
 Public issues of shares,
 Debentures or other securities,
 Mutual funds
 Unit linked policies that are issued by life insurance companies etc.
4. Retirement planning
It is the process of determining the amount of money that an individual needs to
meet his needs post retirement and deciding on various retirement options for
meeting these needs. Retirement planning involves three phases
a) Accumulation: Accumulation of funds is done through various kinds of
strategies to set aside money for investment with this purpose.
b) Conservation: Conservation refers to the efforts made to ensure that one’s
investments are put to hard work and that the principal gets maximised during
the individual’s working years.
c) Distribution: Distribution refers to the optimal method of converting the corpus
or principal into withdrawals/ annuity payments for meeting income needs
after retirement.
5. Estate planning
It is a plan for the devolution and transfer of one’s estate after one’s demise. There
are various processes like nomination and assignment or preparation of a will. The
basic idea is to ensure that one’s property and assets are smoothly distributed and
or utilised according to one’s wishes after one is no more.
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6. Tax planning
Tax planning is done to determine how to gain maximum tax benefit from existing
tax laws and also for planning of income, expenses and investments taking full
advantage of the tax breaks. As per the tax laws in India, life insurance premium
paid by an individual on a life insurance policy on his/ her own life, on the life of
his/ her spouse and children is eligible for deduction under Section 80C of the
Income Tax Act for calculating the taxable income. Currently, this deduction is
allowed up to Rs.1,50,000 subject to conditions. The maturity proceeds (sum
assured plus bonus) of such policies are also exempted under Section 10 (10D).
Similarly, Death Claim amounts are exempt from Income Tax at the hands of the
recipient. One must note that the purpose here is to minimise and not evade taxes.
Life insurance agents may be often required by their clients and prospective
customers to advise them not only about meeting their insurance needs but also for
support in meeting their other financial needs as well. A sound knowledge of
financial planning would be of great value to any insurance agent.
Test Yourself 3
Which among the following is not an objective of tax planning?
I. Maximum tax benefit
II. Reduced tax burden as a result of prudent investments
III. Tax evasion
IV. Full advantage of tax breaks
Summary
 Financial planning is a process of:
 Identifying one’s life’s goals,
 Translating these identified goals into financial goals and
 Managing one’s finances in ways that will help one to achieve those goals
 Based on the individual life cycle three types of financial products are needed.
These help in:
 Enabling future transactions,
 Meeting contingencies and
 Wealth accumulation
 The need for financial planning is further increased by the changing societal
dynamics like disintegration of the joint family, multiple investment choices
that are available today and changing lifestyles etc.
 The best time to start financial planning is right after one receives the first
salary.
 Financial planning advisory services include:
 Cash planning,

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  Investment planning,
 Insurance planning,
 Retirement planning,
 Estate planning and
 Tax planning

Key Terms

1. Financial planning
2. Life stages
3. Risk profile
4. Cash planning
5. Investment planning
6. Insurance planning
7. Retirement planning
8. Estate planning
9. Suitability information
10. Tax planning

Answers to Test Yourself

Answer 1 - The correct option is I.

Answer 2 - The correct option is II.
Answer 3 - The correct option is III.

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 CHAPTER L-03

LIFE INSURANCE PRODUCTS: TRADITIONAL

Chapter Introduction

The chapter introduces you to the world of life insurance products. It begins by
talking about products in general and then proceeds to discussing the need for life
insurance products and the role they play in achieving various life goals. Finally we
look at some traditional life insurance products.

Learning Outcomes

A. Overview of life insurance products

B. Traditional life insurance products

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A. Overview of life insurance products

1. What is a product?
To begin with, let us understand what is meant by a ‘product’. In popular terms a
product is normally just considered as a commodity or good that is brought and sold
in the market.
It is necessary to understand that every Product is a bundle of features or attributes
that confer certain benefits.
All Companies try to differentiate their products by making them more attractive
to customers and offering different kinds of features and benefits. A life insurance
agent’s role is to understand and pitch on these features and benefits to make the
products of their companies unique and attractive compared to others.
Example
Colgate, Close up and Promise are all different brands of toothpastes. But the
features of each brand is different from the other.
Products may be:
i. Tangible: refers to physical objects that can be directly seen or felt by touch
(for instance a car or a television set)
ii. Intangible: refers to products that can only be perceived indirectly.
Life insurance is a product that is intangible.
2. Purpose of Life Insurance products.
Human beings possess an immensely valuable asset - human capital – which is the
source of our productive earning capacity. However, there is an uncertainty about
life and human well-being. Events like death and disease can destroy our Earning
capabilities and life savings. Insurance provides protection for such situations.
Life insurance products offer protection against the loss of economic value of an
individual’s productive abilities, as a result of death or disability. The moment an
individual takes a life insurance policy and pays the first premium, an immediate
estate is created in his/ her name and its proceeds are available to his/ her
dependents or loved ones.
Life insurance provides peace of mind and protection to the near and dear ones of
an individual, in case of one’ unfortunate death. Beyond providing such protection,
life insurance fulfils other needs of the market, such as savings, wealth
accumulation, safety and security of investment and certain rates of return, which
are not discussed in this course.
Life insurance industry has seen enormous innovations in product offerings over the
last two centuries. The journey began with death benefit products but over the
period, multiple living benefits like endowment, disability benefits, dreaded disease
covers and so on were added.

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One of the major innovations of recent years was the creation of market linked
policies where the insured was invited to participate in choosing and managing his
investment assets. Another major innovation was the evolution of flexible
unbundled products, in which different benefits as well as cost components could
be varied by the policy holder as per changing needs, affordability and life-stages.
3. Suitability Information
In order to make insurance intermediaries including agents and brokers more
accountable and reduce instances of mis-selling, IRDAI has created a concept of
‘product suitability’. ‘Suitability information’ is the information of a prospect on
age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, etc. That is, before selling an insurance
policy to a client, an Agents should be able to justify the suitability of the product
for the client’s needs.
In other words, the Agent takes into account the particular prospect’s risk profile -
age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, insurance needs etc. and decides
whether the product is suitable for that prospect. The nature of product, the
amount of premium, the mode of premium payment and tenure of the policy as well
as the manner of premium payment are also part of the parameters of ‘Suitability’.
IRDAI mandates that the suitability information collected should be signed by the
prospect and the agent; and preserved by the Insurer as part of the policy records
and made available for inspection by the Authority.
4. Riders in Life Insurance Products
A rider is a provision typically added through an endorsement, which becomes part
of the contract. Riders are commonly used to provide supplementary benefits like
increasing the amount of death benefit provided by a policy, say, because of
accidents. Life insurance companies offer a number of riders through which the
value of their offerings get enhanced Riders help to customise different
requirements of a person into a single plan.
Riders provide a means to provide benefits like Disability cover, accident cover and
Critical Illness cover as additional benefits in a standard life insurance contract.
Policy holders can avail of them by paying an extra premium.
Test Yourself 1
Which among the following is an intangible product?
I. Car
II. House
III. Life insurance
IV. Soap

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B. Traditional life insurance products

We shall now learn about some of the traditional types of life insurance products.

Diagram 1: Traditional Life Insurance Products

1. Term insurance plans

Term insurance is a contract that is valid only during a certain time period. This
may range from the short time required to complete an airplane trip to multiple
years. Protection may extend up to age 65 or 70. One-year term policies are quite
similar to property and casualty insurance contracts. There is no savings or cash
value element in this policy.

In October 2020, IRDAI has introduced a Standard Individual Term Life Insurance
Product called, “Saral Jeevan Bima” (the Insurer’s name shall be prefixed to the
product name), a non-linked non-participating individual pure risk premium life
insurance plan, which provides for payment of Sum Assured in lump sum to the
nominee in case of the Life Assured’s unfortunate death during the policy term.

Apart from certain benefits and riders specified by the Regulator, no other riders/
benefits/ options/ variants are allowed to be offered. Also, there shall be no
exclusions under the product other than the suicide exclusion. Saral Jeevan Bima is
to be offered to individuals without restrictions on gender, place of residence,
travel, occupation or educational qualifications.
a) Purpose
A Term Life insurance plan fulfils the main and basic idea behind life insurance,
which is to provide an assured sum of money to the dependents of the insured
on his/ her death.
The policy works as an income replacement plan also. Here the payment of a
lump-sum amount is replaced by a series of monthly, quarterly or similar
periodical payments to the dependent beneficiaries.

b) Disability
Normally a Term insurance policy covers only death. However, it is possible to
buy a Disability Protection Rider on the main policy. In such a case, if the insured
suffers from a specified disability during the term of the contract, a disability
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benefit would be paid to the beneficiaries/ insured person. The benefits will
continue till the death of the insured person.

Diagram 2: Disability

c) Term insurance as a rider

Protection under Term Life is usually provided as a stand-alone policy but it
could also be provided through a rider in a policy.

Example
A rider to a pension plan provides for a death benefit to be payable if one dies
before the date when pension is to start.
d) Convertibility
Convertible term insurance policies allow a policyholder to change or convert a
term insurance policy into a permanent plan like “Whole Life” without providing
fresh evidence of insurability. This privilege helps those who wish to have
permanent cash value insurance but are unable to afford its high premiums.
When the term policy is converted into permanent insurance the new premium
rate would be higher.
e) Unique Selling Proposition (USP)
The unique selling proposition (USP) of term assurance is its low price, enabling
one to buy relatively large amounts of life insurance on a limited budget.
f) Variants
A number of variants of term assurance are possible.

Diagram 3: Variants of Term Assurance

i. Decreasing Term Assurance

These plans typically consist of decreasing term insurance which provides an
amount of death benefit that is equal to the balance that is due on a loan, if the
borrower dies before the loan is paid. These are often marketed as Mortgage
Redemption (discussed in Chapter 15) or Credit Life Insurance. The plans are

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 usually sold to lending institutions as group insurance to cover the lives of their
borrowers. Purchase of mortgage redemption insurance is often a condition of
the mortgage loan. Such plans may also be available for automobile or other
personal loans.

ii. Increasing term assurance

As the name suggests, the plan provides a death benefit, which increases along
with the term of the policy. Premium generally increases as the amount of
coverage increases.

iii. Term insurance with return of premiums

Another type of policy (quite popular in India) is term assurance with return of
premiums. Though the premium paid would be much higher than for a similar
term insurance plan without return of premiums, some customers may need such
policies.

g) Relevant scenarios
Term insurance may have relevance in the following situations:
i. Where the need for insurance protection is purely temporary, as in case of
mortgage redemption
ii. As an additional supplement to a savings plan.
iii. As part of a “buy term and invest the rest” philosophy, where one seeks only
cheap term insurance protection from the insurance company and wants to
invest the difference of premiums in other attractive investments.

Important
Limitations of term plans: Term Insurance plans are available only for specific
periods and one may not be able to continue the coverage beyond a certain age,
say 65 or 70.
2. Whole life insurance
Whole life insurance is an example of a permanent life insurance policy. Here, the
life insurer offers to pay the agreed death benefit when the insured dies, no matter
when the death might occur. The premiums can be paid throughout one’s life or for
a limited time as specified.
Whole life premiums are much higher than term premiums as whole life policies are
designed to remain in force until the death of the insured, and pay the death benefit
anytime. The Plan also provides for a cash value in the policy holder’s account. He/
she can withdraw cash in the form of a policy loan from this cash value or even
redeem it by surrendering the policy for its cash value.
In case of outstanding loans, the amount of loan and interest get deducted from the
pay-out to the beneficiaries upon death.
A whole life policy is a good plan for the main earner of the family who wishes
to protect his/ her loved ones in the event of premature death and preserve his/
her capital against erosion from various events like terminal illness. One can also
use the cash value of the whole life insurance policy for retirement needs, if

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required. Whole life insurance thus plays an important role in household saving and
creating wealth to be passed on to the next generation.
3. Endowment Assurance
It is a contract in which the sum assured is payable to the nominees of the insured
in case of the death of the insured during the term of the policy. If the insured
survives the term the sum assured is paid to the insured.
The product has both death and survival benefit components. Endowment
Assurance links one’s insurance and savings programmes by offering a safe and
compulsory method of savings accumulation.
People buy endowment plans as a sure method of providing against old age or for
meeting specific purposes like having a fund for (a) educational purposes, (b)
meeting children’s marriage expenses or(c) paying a mortgage (housing) loan.
Government usually offers tax benefits on the premiums paid, which make it
attractive. Many endowment policies mature at ages 55 to 65, when the insured is
planning for his/ her retirement. In such cases such policies can supplement
retirement savings.
Variants: Endowment assurance has certain variants - discussed below.

4. Money Back Policy

The Money Back policy is a popular endowment plan in India. It has a provision for
returning some part of the sum assured in instalments during the term and the
balance sum assured at the end of the term.

Example

A Money Back policy for 20 years may provide for paying survival benefits of 20% of
the sum assured each at the end of the 5th, 10th and 15th years and the balance 40%
at the end of the full term of 20 years. If the life assured dies at the end of, say 18
years, the full sum assured and bonuses (explained in the next section) accrued are
paid as death benefit, even though the insured would have been paid a benefit of
60% of the face value already, as money back.

Money Back plans have been popular because of their liquidity (cash back) element,
which make them attractive for meeting short and medium term needs. Such plans
provide full death protection also, if the individual dies at any point during the term
of the policy.
5. Participating (Par) and Non-Participating (Non-Par)Plans
The Life Insurance products can also be classified as Participating (Par) and Non-
participating (Non-Par) products. The term “Par” implies policies which are
participating in the profits of the life insurer. “Non–Par”, on the other hand,
represents policies which do not participate in the profits. Both kinds are present
in traditional life insurance. Under all traditional plans, the pooled life funds, which
are derived from policyholders’ premiums, are invested as per regulatory norms.
Policy holders who opt for ‘par products’ are eligible to receive, in addition to a

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guaranteed sum assured, a share in the surpluses( bonuses) that are generated by
the insurer. These are known as ‘With Profit’ plans.

6. Non-participating products
The Policy holders who buy non-linked without profit [non par] plans are paid a
benefit that is fixed and guaranteed at the beginning of the contract and nothing
more. Non-participating products may be offered either under a ‘linked platform’
or a ‘non-linked platform’. These are known as ‘Without Profits’ plans.

Example
One may have an endowment policy of twenty years providing a guaranteed addition
of 2% of sum assured for each year of term, so that the maturity benefit is sum
assured plus a total addition of 40% of the sum assured.

Under the IRDAI’s guidelines on traditional non-par policies, the benefits to be paid
on the happening of a specified event, have to be explicitly stated at the outset and
not linked to an index or benchmark. The same applies to additional benefits that
are accrued at regular intervals. This means that the return on these policies must
be disclosed at the time of taking the policy.

Important
Death benefits are subject to regulations of IRDAI issued from time to time. At
present, as per the new Regulation 9 of IRDAI (Non-linked) Products Regulation,
2019 pertaining to traditional products, the minimum death cover is as follows:
For all non-linked individual life insurance products, the minimum Sum Assured on
death during the entire term of the policy shall not be less than 7 times the
annualized premium, for limited or regular premium products, and 1.25 times the
single premium for single premium products.
For participating products, in addition to the sum assured on death, the bonus and
additional benefits as stated in the policy and accrued till the date of death shall
become payable on death as part of the death benefit, if not paid earlier. In
essence, there are two variants, participating and non-participating plans.
i. For participating polices the bonus is linked to the investment performance
of the fund and is not declared or guaranteed before. The bonus, once it is
announced, becomes a guarantee. It is usually paid in case of death of the
policyholder or maturity benefit. This bonus is also called reversionary
bonus.
ii. In case of non-participating policies, the return on the policy is disclosed in
the beginning of the policy itself.

7. Pension Plans and Annuities

A pension plan is typically a fund into which money is paid during a person’s
employment years and from which money is drawn to support the person after his
retirement from work in the form of periodic payments.

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Pension plans are designed on group (usually employer driven) or individual basis. A
group pension may be a "defined benefit plan", where a fixed sum is paid regularly
to a person, or a "defined contribution plan", under which a fixed sum is invested
which becomes available at retirement age. Pensions are essentially guaranteed life
annuities, thus insuring against the risk of longevity. A pension created by an
employer for the benefit of an employee is commonly referred to as an occupational
or employer pension.
On retirement, the money in the member's account is used to provide retirement
benefits, typically by purchasing an annuity which then provides a regular income.
An annuity is a long-term investment issued by an insurance company designed to
help protect one from the risk of outliving one’s income. Through annuitization,
one’s contributions are converted into periodic payments that can last for life.
Individuals can avail of pension benefits by purchasing pension plans from insurance
companies. Pension plans can be on accumulation or deferred basis which allows
a person to contribute in two ways, (i) in lump sum, or (ii) over a period of time; so
that he/ she can get a pension from the desired age/ date (called as the ‘vesting’
date). One can opt to receive pensions/ annuities on monthly, quarterly, half-yearly
or annual modes. Pension plans are available on an immediate basis also, from the
very next month of purchase, on payment of a lump sum amount, called as
immediate annuity.
The Indian insurance industry has several deferred and immediate annuity products
marketed by Life Insurers. Each product has its own features, terms, conditions and
annuity options.
Saral Pension: To provide uniformity across Insurers, to reduce confusion in the
market about annuity schemes, and to make available a product that will broadly
meet the needs of an average customer, in January 2021, IRDAI mandated all Life
Insurers to introduce a standard, immediate annuity product, with simple features
and standard terms and conditions on an individual (not group) basis. Such a
standard product will make it easier for the customers to make an informed choice,
enhance the trust between the Insurers and the insured, and reduce mis-selling as
well as potential disputes.
The standard individual immediate annuity product is called, “Saral Pension”,
prefixed by the Insurer’s name. The product offer two (and only two) annuity
options as follows:
a) Life annuity with 100% Return of Purchase Price; and
b) Joint Life annuity with a provision of 100% annuity to the secondary annuitant
on death of the primary annuitant and return of 100% Purchase Price on death
of last survivor.
Mode of Annuity payment would be Monthly, Quarterly, Half-Yearly and Yearly.
Details are available on IRDAI’s website at the following link -
https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo43
53&flag=1

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Test Yourself 2

The premium paid for whole life insurance is _____________ than the premium paid
for term assurance.
I. Higher
II. Lower
III. Equal
IV. Substantially higher
Summary

 Life insurance products offer protection against the loss of economic value of
an individual’s productive abilities, which is available to his/ her dependents or
to the self.
 A life insurance policy, at its core, provides peace of mind and protection to the
near and dear ones of the individual in case something unfortunate happens to
him or her.
 Term insurance provides valid cover only during a certain time period that has
been specified in the contract.
 The unique selling proposition (USP) of term assurance is its low price, enabling
one to buy relatively large amounts of life insurance on a limited budget.
 While term assurance policies are examples of temporary assurance, where
protection is available for a temporary period of time, whole life insurance is an

example of a permanent life insurance policy.
Key Terms

1. Term insurance
2. Whole life insurance
3. Endowment assurance
4. Money back policy
5. Par and non-par schemes
6. Reversionary bonus

Answers to Test Yourself

Answer 1 -The correct option is III.
Answer 2 - The correct option is I.

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 CHAPTER L-04

LIFE INSURANCE PRODUCTS: NON-TRADITIONAL

Chapter Introduction

The chapter introduces you to the world of non-traditional life insurance products.
We start by examining the limitations of traditional life insurance products and then
have a look at the appeal of non-traditional life insurance products. Finally we look
at some of the different types of non-traditional life insurance products available
in the market.

Learning Outcomes

A. Overview of non-traditional life insurance products

B. Non-traditional life insurance products

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 A. Overview of non-traditional life insurance products

1. Non-traditional life insurance products – Purpose and need

In the previous chapters we have considered some of the traditional life insurance
products which have insurance as well as a savings element in them.

People have been questioning the ability of traditional life insurance policies to
provide a rate of return comparable to other assets in the financial market. Issues
have also been raised about the way they are structured into a single package of
benefits and premiums.

2. Limitations of traditional products

a)
A critical examination would reveal the following areas of concern:
b) Cash value component: The savings or cash value component in traditional policies
is not well defined. This makes it less transparent about mortality, interest rates,
expenses and other parameters that are made.
c) Rate of return: It is not easy to ascertain the rate of return on traditional policies
because the value of the benefits under “With Profit policies” can be known only
when the contract ends. This makes it difficult to compare these policies with other
d)
financial instruments.
e)

f)

Surrender value: The method of arriving at the cash and surrender values (at any
point of time), are set by the life insurer and not transparent.

Yield: The yield on these policies are much lower than those from other
investments.

3. Features of Non-Traditional Policies: Life insurance companies started

designing policies with certain innovative features, some of which are given
below:

a) Direct linkage with investment gains: Policies with direct linkage with the
capital market were designed in an attempt to make investment gains.
b) Policies that can beat inflation: Policies were designed to give returns
closer to the inflation rates. The change was that insurers started thinking
that life policies need to match if not beat inflation.
c) Policies with Flexibility: Policies which allowed customers to decide (within
certain limits) the amount of premium they wanted to pay; and the amount
of death benefits and cash values they wanted, got designed.
d) Surrender value: Policies that gave better surrender values available under
traditional policies were also designed by insurers.

These policies became very popular and even began to replace traditional products
in many countries, including India.

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Test Yourself 1

Which among the following is a non-traditional life insurance product?

I. Term assurance
II. Universal life insurance
III. Endowment insurance
IV. Whole life insurance

B. Non-traditional life insurance products

Some non-traditional products

We shall discuss some of the non-traditional products which have emerged in the
Indian market and elsewhere.

1. Universal Life and Variable Life

Universal Life policy was introduced in the United States in 1979 and quickly became
very popular. Its features are flexible premiums, flexible face amount and death
benefit amounts. Unlike traditional policies, where fixed premiums have to be paid
periodically to keep the contract in force, universal life policies allow the
policyholder (within limits) to decide the amount of premiums he or she wants to
pay for the coverage.

Variable Life was introduced in the United States in 1977.It is a typeof “Whole Life”
policy where the death benefit and cash value of the policy fluctuates according to
the investment performance of a special investment account into which premiums
are credited.

The design and sale of the above two kinds of products, both of which were called
Variable Insurance Products, have been discontinued and are not allowed in India
since2019,further to the issue of IRDAI (ULIP) Regulations, 2019.

2. Unit linked insurance

Unit Linked Plans, also known as ULIPs were first introduced in UK during the
1960s.They have today emerged as one of the most popular and significant products,
displacing traditional plans in many markets.

Unit linked policies help to overcome the limitations of traditional products.

The premium paid by the policyholder gets divided into two major portions
 the first portion which is utilised for providing insurance cover, and
 the second portion that gets invested into the fund opted by the insured.

The benefits under such contracts are wholly or partially determined by the value
of units credited to the policyholder’s account at the date when payment is due.

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In many markets these policies were positioned and sold as investment vehicles with
an attached insurance component.

Unlike traditional savings policies that are bundled, Unit linked contracts are
unbundled. Their structure is transparent with the charges to pay for the insurance
and expenses component being clearly specified.

Diagram 1: Premium break-up

After deducting the charges from the premium, the balance of the account and
income are invested in units.

The Value of Units

The value of units is defined by a rule or formula, which is outlined in advance.

Typically the value of the units is given by the Net Asset Value (NAV), which reflects
the market value of the assets in which the fund is invested. Different persons could
arrive at the same benefits payable by following the formula.

The Formula is as follows:

Net Asset Value [NAV] = Market Value of Assets of the fund/ Number of units of the
funds

Thus, Policyholder benefits do not depend on the assumptions of the life insurance
company.

Unit linked policies allow policy holders to choose between different kinds of funds.
Each fund would have a different portfolio mix. The investor gets to choose between
a broad option of debt, balanced and equity funds, defined below. Even within these
broad categories there may be other types of options.

Equity Fund Debt Fund Balanced Fund Money Market Fund

This fund invests This fund invests This fund This fund invests
the major portion of major portion of the invests in a mix money mainly in
the money in equity money in Govt. of equity and instruments such as
and equity related Bonds, Corporate debt Treasury Bills,
instruments. Bonds, Fixed instruments Certificates of Deposit,
Deposits etc. Commercial Paper etc.
There is also provision to switch from one kind of fund to another if performance of
one or more funds is not found to be up to the mark.
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Some of the specific features of ULIP Policies are given below:

i. Unitising

Benefits under ULIP policies are determined by the value of units credited to the
policyholder’s account at the date when the claim payment is due to be made. A
unit is created by dividing an investment fund into a number of equal parts.

ii. Transparent structure

The charges for insurance cover and expenses in ULIPs are clearly specified. Once
these charges are deducted from the premium, the balance of the account and
income from it are invested in units.

iii. Pricing
Under ULIPs, the insured decides the amount of premium that he/ she can
contribute at regular intervals.

In all Life Insurance policies, the initial costs are very high. Under traditional
policies, the premium charges for meeting these costs are spread throughout the
policy term.

In the case of ULIPs, they are deducted from the initial premiums itself. This
significantly reduces the amount allocated for investment. This is why the value of
the benefits, vis-à-vis the premiums paid, would be very low and even less than the
premiums paid in the early years of the contract.

iv. Death Benefit

Unlike in traditional policies, the amount of death benefit in ULIP policies is a

multiple of the premiums paid. In case of death during the term of the policy, the
beneficiary would be paid the higher of the Sum Assured [which is a multiple of the
premium] or the Fund Value (unit price multiplied by the number of units) standing
to his or her account.

v. The bearing of investment risk

The value of the units depends on the value of the life insurer’s investments, which
are not guaranteed.

The life insurer, though expected to manage the portfolio efficiently, does not give
any guarantee about unit values. Hence, the investment risk is borne by the
policyholder/ unit holder.

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Test Yourself 2

Which of the following statements is/ are incorrect?

I. Variable life insurance is a temporary life insurance policy
II. Variable life insurance is a permanent life insurance policy
III. The policy has a cash value account
IV. The policy provides a minimum death benefit guarantee

Summary

 A critical concern with respect to life insurance policies was giving a competitive
rate of return comparable to other assets in the financial marketplace.

 Some of the trends that led to the increase in non-traditional life products
include unbundling, investment linkage and transparency.

 Universal life insurance is a form of permanent life insurance characterised by

its flexible premiums, flexible face amount and death benefit amounts, and the
unbundling of its pricing factors.

 ULIPs became one of the most popular and significant products, replacing
traditional plans in many markets.

 ULIPs provide the means for directly and immediately cashing on the benefits of
a Life Insurer’s investment performance.

Key Terms
1. Universal life insurance
2. Variable life insurance
3. Unit linked insurance
4. Net asset value

Answers to Test Yourself

Answer 1 -The correct option is II.

Answer 2 - The correct option is I.

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 CHAPTER L-05

APPLICATIONS OF LIFE INSURANCE

Chapter Introduction

Life insurance does not merely seek to protect individuals from premature death. It
has other applications as well. It can be applied to the creation of trusts with
resultant insurance benefits; it can be applied for creating a policy covering key
personnel of industries and also for redeeming mortgages. We shall briefly describe
these various applications of life insurance.

Learning Outcomes

A. Married Women’s Property Act, 1874

B. Keyman Insurance
C. Mortgage Redemption Insurance

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N’s

A. Applications of Life insurance

1. Married Women’s Property Act

Section 6 of the Married Women’s Property Act, 1874 tries to ensure that the
benefits under a life insurance policy will pass on in a secure manner to the wife
and children through creation of a trust for the purpose.

Diagram 1: Beneficiaries under MWP Act

The section provides that when a married man takes a policy on his own life and
clearly expresses on the face of such policy that it is for the benefit of his wife or
his wife and children, and to be held in a trust for their benefit only, the proceeds
of such a policy shall not, so long as the objects of the trust remains, be subject to
the control of the husband or to his creditors or form part of his estate.

Features of a policy under the MWP Act

i. Each policy will remain a separate Trust. Either the wife or child (over 18
years of age) can be a trustee.

ii. The policy shall be beyond the control of court attachments, creditors and
even the life assured.

iii. The claim money shall be paid to the trustees.

iv. The policy cannot be surrendered and neither nomination nor assignment is
allowed.

v. If the policyholder does not appoint a special trustee to receive and

administer the benefits under the policy, the sum secured under the policy
becomes payable to the Official Trustee of the State in which the office at
which the insurance was effected is situated.

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Benefits

The Trust is set up under a deed that cannot be revoked or amended. It can contain
one or more insurance policies. It is important to appoint a trustee who would be
responsible for administering the trust property, including investing the insurance
proceeds, on behalf of the beneficiaries. These benefits are secured from passing
to future creditors

2. Key-man Insurance

Keyman insurance is an important form of business insurance.

Definition

Key-man Insurance can be described as an insurance policy taken out by a business

to compensate that business for financial losses that would arise from the death or
extended incapacity of an important member of the business.

Many businesses have key persons responsible for a major part of its profits or has
knowledge and skills that are vital to the organisation and difficult to replace. Key
man insurance is taken by employers on the life of such key persons to facilitate
business continuity and offset the costs and losses which are likely to be suffered in
the event of the loss of a key person. Keyman insurance does not indemnify the
actual losses incurred but compensates with a fixed monetary sum as specified on
the insurance policy.

Keyman insurance is allowed as a term insurance policy where the sum assured is
linked to the profitability of the company rather than the key person’s own income.
The premium is paid by the company. In case the key person dies, the benefit is
paid to the company. The proceeds of Keyman insurance is taxable at the hands of
the company.

a) Who can be a key-man?

A key person can be anyone directly associated with the business whose loss can
cause financial strain to the business. For example, the person could be a
director of the company, a partner, a key sales person, key project manager, or
someone with specific skills or knowledge which is especially valuable to the
company.

b) Insurable losses

The following are the losses for which key person insurance can provide
compensation:

i. Losses related to the extended period when a key person is unable to work,
to provide temporary personnel and, if necessary to finance the recruitment
and training of a replacement

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 ii. Insurance to protect profits. For example, offsetting lost income from lost
sales, losses resulting from the delay or cancellation of any business project
that the key person was involved in, loss of opportunity to expand, loss of
specialised skills or knowledge

3. Mortgage Redemption Insurance (MRI)

A person taking a loan to buy a property, may be required to pay for mortgage
redemption insurance by the bank, as part of the loan arrangement. “Mortgage
Redemption Insurance” is popularly referred to “Credit Life Insurance policy”.

a) What is MRI?

It is an insurance policy that provides financial protection for home loan

borrowers. It is basically a decreasing term life insurance policy taken by
mortgagor to repay the balance on a mortgage loan if he/ she dies before its full
repayment. It can be called a loan protector policy. This plan is suitable for
people whose dependents may need assistance in clearing their debts in case of
the unexpected demise of the policyholder.

b) Features

The insurance cover under this policy decreases each year unlike a term
insurance policy where insurance cover is constant during the policy period.

Test Yourself 1

What is the objective behind Mortgage Redemption Insurance?

I. Facilitate cheaper mortgage rates

II. Provide financial protection for home loan borrowers
III. Protect value of the mortgaged property
IV. Evade eviction in case of default

Summary

 Section 6 of the Married Women’s Property Act, 1874 provides for security of
benefits under a life insurance policy to the wife and children.

 The policy effected under MWP Act shall be beyond the control of court
attachments, creditors and even the life assured.

 Keyman insurance is an important form of business insurance. It can be

described as an insurance policy taken out by a business to compensate at for
financial losses that would arise from the death or extended capacity of an
important member of the business.

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 Mortgage redemption insurance is basically a decreasing term life insurance
policy taken by a mortgagor to repay the balance on a mortgage loan if he/ she
dies before its full repayment.

Key Terms

1. Married Women’s Property Act

2. Keyman insurance
3. Mortgage Redemption Insurance

Answers to Test Yourself

Answer 1 - The correct option is II.

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 CHAPTER L-06

PRICING AND VALUATION IN LIFE INSURANCE

Chapter Introduction

The objective of this chapter is to introduce to the learner the basic elements that
are involved in the pricing and benefits of life insurance contracts. We shall first
discuss the elements that constitute the premium and then discuss the concept of
surplus and bonus.

Learning Outcomes

A. Insurance pricing – basic elements

B. Surplus and bonus

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A. Insurance pricing – Basic elements

1. Premium

In ordinary language, the term premium denotes the price that is paid by an insured
for purchasing an insurance policy. It is normally expressed as a rate of premium
per thousand rupees of sum assured. The premium rates depend on the age of the
prospect and the plan.

These premium rates are available in the form of tables of rates that are available
with insurance companies.

Diagram 1: Premium

The rates printed in these tables are known as “Office Premiums”. They are in most
cases the same throughout the term and are expressed as an annual rate.

Example

If the premium for a twenty year endowment policy for a given age is Rs. 4,800, it
means that Rs. 4,800 has to be paid each year for twenty years.

However it is possible to have some policies in which the premiums are payable only
in the first few years. Companies also have single premium contracts in which only
one premium is payable at the beginning of the contract. These policies are usually
investment oriented.

2. Rebates

Life insurance companies may also offer certain types of rebates on the premium
that is payable. Two such rebates are:

 For sum assured

 For mode of premum

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 Rebate for sum assured

The rebate for sum assured is offered to those who buy policies with higher
amounts of sum assured. It is offered as a way of passing on to the customer,
the gains that the insurer may make when servicing higher value policies. The
logic is that the effort and cost required to process a policy of Rs 50,000 or
5,00,000 remains the same. But higher sum assured policies yield more premium
and so more profits.

Rebate for mode of premium

Similarly a rebate may be offered for the mode of premium. Life insurance
companies may allow premiums to be paid on annual, half yearly, quarterly or
monthly basis. More frequent the mode, more the administrative costs for
collecting and accounting the premium. Again, in the yearly mode, the insurer
can utilise this amount during the entire year and earn interest on it. Insurers
would hence encourage payment via yearly and half yearly modes by allowing a
rebate on these. They may also charge a little extra for monthly mode of
payments, to cover additional administrative expenses involved.

3. Extra charges

The tabular premium is charged for those individuals who are not subject to any
significant factors that would pose an extra risk. They are known as standard
lives and the rates charged are known as ordinary rates.

If a person proposing for insurance suffers from certain health problems like
heart ailments or diabetes that can pose a hazard to his life, he or she is
considered to be sub-standard. The insurer may decide to impose an extra
premium by way of a health extra. Similarly an occupational extra may be
imposed on those engaged in a hazardous occupation, like a circus acrobat.
These extras would result in the premium being more than the tabular premium.

Again, an insurer may offer certain extra benefits under a policy, which are
available on payment of an extra premium.

Example

A life insurer may offer a Double Accident Benefit or DAB (where double the sum
assured is payable as a claim if death is a result of accident). For this it may
charge an extra premium of one rupee per thousand sum assured.

Similarly a benefit known as Permanent Disability Benefit (PDB) may be availed

by paying an extra per thousand sum assured.

4. Determining the premium

Let us now examine how life insurers arrive at the rates that are presented in
the premium tables. This task is performed by an actuary. The process of setting

155
 the premium in case of traditional life insurance policies like term insurance,
whole life and endowment considers following elements:

 Mortality
 Interest
 Expenses of management
 Reserves
 Bonus loading

Diagram 2: Components of Premium

The first two elements give us the Net premium. By adding [also called ‘loading’]
the other elements to the net premium we get the gross or office premium

a) Mortality and Interest

Mortality is the first element in premiums. It is the chance or likelihood that a

person of a certain age would die during a given year. To find out the expected
Mortality of a person, “Mortality Tables” are used.

Example

If the mortality rate for age 35 is 0.0035 it implies that out of every 1000 people
who are alive as on age 35, 3.5 (or 35 out of 10,000) are expected to die between
age 35 and 36.

The table may be used to calculate mortality cost for different ages. For
example the rate of 0.0035 for age 35 implies a cost of insurance of 0.0035 x
1000 (sum assured) = Rs. 3.50 per thousand sum assured.

The above cost may be also called the “Risk Premium”. For higher ages the risk
premium would be higher.

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Example

If we need to have Rs. 5 per thousand to meet the cost of insurance after five
years and if we assume a rate of interest of 6%, the present value of Rs. 5 payable
after five years would be 5 x 1/ (1.06)5 = 3.74.

If instead of 6% we were to assume 10%, the present value would be only 3.10.
In other words the higher the rate of interest assumed, the lower the present
value.

From our study of mortality and interest there are two major conclusions we can
derive

 Higher the mortality rate in the mortality table, higher the premiums
would be
 Higher the interest rate assumed, lower the premium

Net premium
The estimates of mortality and interest give the “Net Premium”

Gross premium
Gross premium is the net premium plus an amount called loading. There are
three considerations or guiding principles that needs to be borne in mind when
determining the amount of loading:

b) Expenses and reserves

Life insurers have to incur various types of operating expenses including:

 Agents training and recruitment,

 Commissions of agents,
 Staff salaries,
 Office accommodation,
 Office stationery,
 Electricity charges,
 Other miscellaneous etc.

All these have to be paid from premiums that are collected by insurers.
These expenses are suitably loaded to the net premium.

c) Lapses and contingencies

In addition to expenses, there are other factors that can make the calculations
of life insurers go wrong.

One source of risk is that of lapses and withdrawals. A lapse means that the
policyholder discontinues payment of premiums. In case of withdrawals, the
policyholder surrenders the policy and receives an amount from the policy’s
acquired cash value.
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 Lapses usually happen within the first three years, especially in the first year of
the contract.

d) With Profit (participating) policies and Bonus loading

The concept of ‘With Profit’ policies originated when Life insurers started the
practice of charging a high loading in advance to create a buffer to keep them
solvent even in adverse situations. If subsequent experience proved to be more
favourable, the life insurer would share some of the profits it made as a result
with policy holders by way of bonus.

In sum we can say that:

Gross premium = Net premium + Loading for expenses + Loading for

contingencies + Bonus loading

Test Yourself 1

What does a policy lapse mean?

I. Policyholder completes premium payment for a policy
II. Policyholder discontinues premium payment for a policy
III. Policy attains maturity
IV. Policy is withdrawn from the market

B. Surplus and bonus

1. Determination of surplus and bonus

Every life insurance company is expected to undertake a periodic valuation of its

assets and liabilities. Such a valuation has two purposes:

i. To assess the financial state of the life insurer and determine if it is solvent
or insolvent
ii. To determine the surplus available for distribution among policyholders/
share holders

Definition

Surplus is the excess of value of assets over value of liabilities. If it is negative, it is

known as a strain.

Let us now see how the concept of surplus in life insurance is different from that of
profit of a firm.

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Firms in general look at profits in two ways. Firstly, profit is the excess of income
over outgo for a given accounting period, as it appears in the profit and loss
account. Profit also forms part of the balance sheet of a firm - it may be defined as
the excess of assets over liabilities. In both instances, profits are determined at
the end of the accounting period.

Surplus = Assets - Liabilities

Let us understand what liabilities mean in life insurance. For a given block of life
insurance policies, the life insurer has to make provision for meeting future claims,
expenses and other expected pay-outs that may arise. The insurer also expects to
receive premiums in future for these policies.

Liabilities are thus the present value of all payments that have to be made less the
present value of premiums expected to be received on these policies. The present
value is arrived at by applying a suitable rate of discount [the interest rate]
Surplus arises as a result of the life insurer’s actual experience being better than
what it had assumed. Life insurers are obliged to share the benefits arising as a
result with holders of it’s with profit policies.

Example

The profits of XYZ firm as on 31stMarch 2013, is given as its income less expenses or
its assets less liabilities as on that date.

In both instances, the profit is clearly defined and is known.

2. Bonus

Insurers have to declare and distribute its divisible surplus among the policy holders
and shareholders of the company [if any] in the form of a bonus. In India, the United
Kingdom and many other countries, distribution of surplus is popular.

Bonus is paid as an addition to the basic benefit payable under a contract. Typically
it may appear as an addition to basic sum assured or basic pension per annum. It is
expressed, for example, as Rs. 60 per thousand sum assured

The most common form of bonus is the reversionary bonus. Once declared these
bonus additions, made each year, get attached to the policy and cannot be taken
away. They are called ‘Reversionary’ bonuses because they are received only at the
time of a claim by death or maturity. Bonuses may also be payable on surrender
provided the contract is eligible through having run for a minimum term [say 5 years]

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Types of reversionary bonuses

Diagram 3: Types of Reversionary Bonuses

i. Simple Reversionary Bonus

This is a bonus expressed as a percentage of the basic cash benefit under the
contract. In India for example, it is declared as amount per thousand sum
assured.

ii. Compound Bonus

Here the company expresses a bonus as a percentage of basic benefit and

already attached bonuses. It is thus a bonus on a bonus. A way to express it may
be as @ 8% of basic sum assured plus attached bonus.

iii. Terminal Bonus

As the name suggests, this bonus attaches to the contract only at the time of its
termination [by death or maturity]. It is applicable only for the claims arising in
the ensuing year. Thus terminal bonus declared for 2013 would only apply to
claims that have arisen during 2013-14 and not for subsequent years. Terminal
bonuses depend on the time duration of the contract and increase with it. A
contract that has run for 25 years would have higher terminal bonus than one
which has run for 15 years.

3. The Contribution Method

Another method of distribution of surplus adopted in North America is the

“Contribution” method. Here, the surplus, i.e. the difference between what was
expected to happen and what actually happened over the year with respect to
mortality, interest and expenses is declared and distributed as dividends.

The dividends can be paid in cash, by way of adjustments/ reductions in future

premiums, by allowing purchase of non-forfeitable paid up additions to the policy
or as accumulations to the credit of the policy.
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4. Unit Linked Policies

The Principles of Pricing and other features of ULIP Policies have already been
covered in an earlier chapter.

Summary

 In ordinary language, the term premium denotes the price that is paid by an
insured for purchasing an insurance policy.
 The process of setting the premium for life insurance policies involves
consideration of mortality, interests, expense management and reserves.
 Gross premium is the net premium plus an amount called loading.
 A lapse means that the policyholder discontinues payment of premiums. In case
of withdrawals, the policyholder surrenders the policy and receives an amount
from the policy’s acquired cash value.
 Surplus arises as a result of the life insurer’s actual experience being better than
what it had assumed.
 Surplus allocation could be towards maintaining solvency requirements,
increasing free assets etc.
 The most common form of bonus is the reversionary bonus.

Key Terms

1. Premium
2. Rebate
3. Bonus
4. Surplus
5. Reserve
6. Loading
7. Reversionary bonus
Answers to Test Yourself

Answer 1 - The correct option is II.

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 CHAPTER L-07

LIFE INSURANCE DOCUMENTATION

Chapter Introduction

We have seen that the insurance industry deals with a large number of forms and
documents in Chapter 7. There are some documents specific to life insurance, which
are discussed in this chapter. Here, we are also discussing the main provisions
incorporated in a policy document. Provisions related to grace period, policy lapse
and non-forfeiture and certain other privileges are also discussed.

Learning Outcomes

A. Proposal stage documentation

B. Policy stage documentation
C. Policy conditions and privileges

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A. Proposal stage documentation

Further to the common points discussed about the Prospectus and the Proposal Form
in Chapter 7, there are some additional points that Life Insurers need to understand.

Prospectus: In insurance, ‘Prospectus’ means a document in physical, electronic or

any other format issued by the insurer to sell or promote the insurance product.
The prospectus of an insurance product shall clearly state
(a) the Unique Identification Number (UIN) allotted by the Authority for the
concerned insurance product:
(b) the scope of benefits;
(c) the extent of insurance cover;
(d) the warranties, exclusions/exceptions and conditions of the insurance cover
along with explanations.
The prospectus should also provide:
(a) a description of the contingency or contingencies to be covered by insurance;
(b) the class or classes of lives or property eligible for insurance under the terms
of such prospectus.
In Life insurance, the prospectus should also mention about the Riders (also called
Add-on covers in Health and General Insurance) allowable on the product and their
benefits.

Proposal Form: In respect of Life insurance, the details of the proposers’ family
members (including parents) indicating their longevity, status of health and
ailments suffered by any of them, are collected through the Proposal form.
Depending on the product, the medical details of the life proposed for insurance,
his/ her personal history of disease and personal characteristics may also be asked
for. The Proposal Form is the document by which insurers get all the information
that they need from the prospect.

Section 45 of the Insurance Act, provides that the Policy shall not be called in
question on the ground of mis-statement after three years. Agents have an
important role in guiding the prospect to give answers to all the questions in the
Proposal Form/ Medical Forms etc. truthfully and advising them of the implications
of not doing so in terms of Section 45.

Proposal Forms for Life Insurance should state the requirements of Section 45 of the
Act. While answering the questions in the Proposal Form for obtaining life insurance
cover, the prospect is to be guided by the provisions of Section 45 of the Act.

Similarly, Section 39 of the Act is about the provision of nomination. Wherever the
facility of Nomination is available to the proposer, the Agent shall inform him/ her
of the provisions of Section 39 of the Act and encourage the proposer to avail the
facility.

Aspects related to the personal financial planning of the life proposed including his/
her work span, projected income and expenses, as well as needs for savings and
investment, health, retirement and insurance may also be asked in the Life
Insurance Proposal Form.

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Age Proof: Age being an important factor for assessing the risk profile of the life to
be insured, Life insurers collect documentary evidence to verify correct age. Valid
age proofs may be standard or non-standard, as discussed in Chapter 7.
Life insurers look into the following documents as well.
a) Agent’s Confidential Report
The agent is the primary underwriter. All material facts and particulars about the
policyholder, relevant to risk assessment, need to be revealed by the agent in his/
her report. This means that matters of health, habits, occupation, income and
family details need to be mentioned in the report.
b) Medical Examiner’s report
In many cases, the life to be insured has to be medically examined by a doctor who
is empanelled by the insurance company. Details of physical features like height,
weight, blood pressure, cardiac status etc. are recorded and mentioned by the
doctor in his report called the medical examiner’s report. The underwriter of the
insurance company thereby gets an account of the current health position of the
life to be insured.
Many proposals are underwritten and accepted for insurance without calling for a
medical examination. They are known as non–medical cases. The medical
examiner’s report is required typically when the proposal cannot be considered
under non-medical underwriting because the sum proposed or the age of the
proposed life is high or there are certain characteristics which are revealed in the
proposal, which call for examination and report by a medical examiner.
c) Moral Hazard report
Moral Hazard is the likelihood that a client's behaviour might change as a result of
purchasing a life insurance policy and such a change would increase the chance of
a loss. This is one factor that Life insurance underwriters take into account seriously
when assessing the risk.
Life insurance companies seek to guard against the possibility of individuals seeking
to make a profit from the purchase of life insurance through actions like ending
one’s own life or the life of another. Life insurance underwriters would thus look
for any factors which might suggest such hazard. For this purpose, the company may
require that a Moral Hazard Report has to be submitted by an official of the
insurance company.
Example
Vikas recently purchased a life insurance policy. He then decided to go on a skiing
expedition at a site which was touted to be one of the most dangerous skiing places
on earth. In the past he had refused to undertake such expeditions.

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B. Policy Stage Documentation
1. First Premium Receipt
An insurance contract commences when the life insurance company issues a first
premium receipt (FPR).
The FPR is the evidence that the policy contract has begun. The first premium
receipt contains the following information:
i. Name and address of the life assured
ii. Policy number
iii. Premium amount paid
iv. Method and frequency of premium payment
v. Next due date of premium payment
vi. Date of commencement of the risk
vii. Date of final maturity of the policy
viii. Date of payment of the last premium
ix. Sum assured

After the issue of the FPR, the insurance company will issue subsequent premium
receipts when it receives further premiums from the proposer. These receipts are
known as renewal premium receipts (RPR). The RPRs act as proof of payment in the
event of any disputes related to premium payment.

2. Policy Document

The policy document is the most important document associated with insurance. It
is evidence of the contract between the assured and the insurance company. It
is not the contract itself. If the policy document is lost by the policy holder, it does
not affect the insurance contract. The insurance company will issue a duplicate
policy without making any changes to the contract. The policy document has to be
signed by a competent authority and should be stamped according to the Indian
Stamp Act. Life insurers are very careful while designing the policy document
because they bear onus of responsibility for any ambiguity or confusion that may
arise in the interpretation of its wordings.

The standard policy document typically has three parts:

a) Policy Schedule

The policy schedule forms the first part. It is usually found on the face page of
the policy. The schedules of life insurance contracts would be generally similar.
They would normally contain the following information:

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Diagram 1: Policy document components

i. Name of the insurance company

ii. Some common details of a policy are:

 Policy owner’s name and address

 Date of birth and age last birthday
 Plan and term of policy contract
 Sum assured
 Amount of premium
 Premium paying term
 Date of commencement, date of maturity and due date of last premium
 Whether policy is with or without profits
 Name of nominee
 Mode of premium payment – yearly; half yearly; quarterly; monthly; via
deduction from salary
 The policy number – which is the unique identity number of the policy
contract
iii. The insurer’s promise to pay. The events on the happening of which and the
amounts that are promised to be paid. This forms the heart of the insurance
contract
iv. The signature of the authorised signatory and policy stamp
v. The address of the local Insurance Ombudsman.
b) Standard Provisions

The second component of the policy document is made up of standard policy

provisions, such as relating to proof of age, premium payment grace period etc.
which are normally present in all life insurance contracts. Some of these
provisions may not be applicable in the case of certain kinds of contracts, like
term, single premium or non-participating (with profits) policies. These standard
provisions define the rights and privileges and other conditions, which are
applicable under the contract.

c) Specific Policy Provisions

The third part of the policy document consists of specific policy provisions that
are specific to the individual policy contract. These may be printed on the face
of the document or inserted separately in the form of an attachment.

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 While standard policy provisions, like days of grace or non-forfeiture in case of
lapse, are often statutorily provided under the contract, specific provisions are
generally linked to the particular contract between the insurer and the insured.

Example

A clause precluding death due to pregnancy for a lady who is expecting at the time
of writing the contract.

Test Yourself 1
What does a first premium receipt (FPR) signify? Choose the most appropriate
option.
I. Free-look period has ended
II. It is evidence that the policy contract has begun
III. Policy cannot be cancelled now
IV. Policy has acquired a certain cash value.
C. Policy conditions and privileges
Grace Period
As mentioned in Chapter 4, the Grace Period provision enables a policy that would
otherwise have lapsed for non-payment of premium, to continue in force during the
grace period. Every life insurance contract undertakes to pay the death benefit on
the condition that the premiums have been paid up to date and the policy is in
force. The “Grace Period” clause grants the policyholder an additional period of
time to pay the premium after it has become due.
The premium however remains due and if the policyholder dies during this period,
the insurer deducts the premium from the death benefit. If premiums remain unpaid
even after the grace period is over, the policy would then be considered lapsed and
the company is not under obligation to pay the death benefit. The only amount
payable would be whatever is applicable under the non-forfeiture provisions.
Important
Lapse and Reinstatement/ Revival
We have already seen that a policy may be said to be in lapse condition if premium
has not been paid even during the days of grace. The good news is that most lapsed
life insurance policies can be reinstated [revived]. As per IRDAI Product Regulations,
a Non-Linked Policy can be revived within 5 years from the date of unpaid premium,
whereas a Linked Policy can be revived within 3 years.
Definition
Reinstatement is the process by which a life insurance company puts back into force
a policy that has either been terminated because of non-payment of premiums or
has been continued under one of the non-forfeiture provisions.

A revival of the policy cannot however be an unconditional right of the insured. It

can be accomplished only under certain conditions:

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 i. Revival application within specific time period: The policy owner must
complete the revival application within the time frame stated in the
provision for such reinstatement, say five years from the date of lapsation.
ii. Satisfactory evidence of continued insurability: The insured must present
to the insurance company satisfactory evidence of continued insurability of
the insured. Not only must her health be satisfactory but other factors such
as financial income and morals must not have deteriorated substantially.
iii. Payment of overdue premiums with interest: The policy owner is required
to make payment of all overdue premiums with interest from due date of
each premium.
iv. After having evaluated the evidence of continued insurability the insurer
may decide to revive the policy as per existing terms and premium or even
offer revival with increase in premium or reduced risk cover or both.
Perhaps the most significant of the above conditions is that which requires
evidence of insurability at revival. The type of evidence called for would depend
on the circumstances of each individual policy. If the policy has been in a lapsed
state for a very short period of time, the insurer may reinstate the policy without
any evidence of insurability or may only require a simple statement from the insured
certifying that he is in good health.
The company may however require a medical examination or other evidence of
insurability under certain circumstances:
i. If the grace period has expired since long and the policy is in a lapsed
condition for say, nearly a year.
ii. If the insurer has reason to suspect that a health or other problem may be
present. Fresh medical examination may also be required if the sum assured
or face amount of the policy is large.
Important
Revival of lapsed policies is an important service function that life insurers seek to
actively encourage since policies in lapsed state may do little good to either insurer
or policyholder.
Non-forfeiture provisions
The Insurance Act, 1938 (Section 113) protects policies (which have acquired
surrender value), from lapsation, by keeping them alive to the extent of paid-up
sum assured even without payment of further premiums. This is because the
policyholder has a claim to the cash value accumulated under the policy.
a) Surrender values
Surrender value is the amount you stand to get when you decide to make a
premature exit from the plan, i.e. when you have decided to completely withdraw
or terminate the policy before its maturity.
Life insurers normally have a chart that lists the surrender values at various times
and also the method that will be used for calculating the surrender values. The

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formula takes into account the type and plan of insurance, age of the policy and
the length of the policy premium-paying period.
The actual amount of cash one gets in hand on surrender may be different from the
surrender value amount prescribed in the policy. The actual amount may differ on
account of any accrued bonuses, recoveries etc.
Guaranteed Surrender Value [GSV]: The law in India as per IRDAI Guidelines
(revised in 2019) provides for a Guaranteed Surrender Value [GSV] to be payable if
all premiums have been paid for at least two consecutive years. This Value arrived
as a percentage (say 30%) of premiums paid is called Guaranteed Surrender Value.
The value depends on the duration of premium paid. The GSV is required to be
mentioned in the policy document.
b) Policy loans
Life insurance policies that accumulate a cash value also have a provision to grant
the policyholder the right to borrow money from the insurer by using the cash value
of the policy as a security for the loan. The policy loan is usually limited to a
percentage of the policy’s surrender value (say 90%). Note that the policyholder
borrows from his own account. He or she would have been eligible to get the amount
if the policy had been surrendered. In that case the insurance would have been
terminated.
Insurers charge interest on policy loans, which are payable semi-annually or
annually. Although loan and interest are repayable periodically, If the loan has not
been repaid, the insurer deducts the amount of outstanding (unpaid) loan and
interest from the policy benefit that is payable. A loan provides relief to
policyholder in case of financial emergencies while keeping the insurance alive.
Since the loan is granted on the policy being kept as security, the policy has to be
assigned (explained in later para) in favour of the insurer. Where the policyholder
has nominated (explained in later para) someone to receive the money in the event
of death of the insured, this nomination shall not be cancelled but the nominee’s
right will be affected to the extent of the insurer’s interest in the policy.
Example
Arjun bought a life insurance policy wherein the total death claim payable under
the policy was Rs. 2.5 lakhs. Arjun’s total outstanding loan and interest under the
policy amounts to Rs. 1.5 lakhs. Hence in the event of Arjun’s death, the nominee
will be eligible to get the balance of Rs. 1 lakh.
Special policy provisions and endorsements
a) Nomination
i. Under Section 39 of the Insurance Act 1938, the holder of a policy on his/
her own life may nominate the person or persons to whom the money secured
by the policy shall be paid in the event of his/her death.
ii. The life assured can nominate one or more than one person as nominees.
iii. Nominees are entitled for valid discharge and have to hold the money as a
trustee on behalf of those entitled to it.
iv. Nomination can be done either at the time the policy is bought or later at
any time before the maturity of the Policy.
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v. Nomination may be incorporated in the text of the Policy itself or by an
endorsement on the Policy. Nominations need be communicated to the
insurer and registered by the insurer in the records relating to the Policy.
vi. Nomination can be cancelled or changed at any time before Policy matures,
by an endorsement or a further endorsement or a will as the case may be.
Important
Nomination only gives the nominee the right to receive the policy monies from
the insurer in the event of the death of the life assured. However, the money
would be belonging to the legal heir only. A nominee does not have any right
to the whole (or part) of the claim. However vide Section 39(7) of Insurance
Act,1938, in respect of all policies maturing for payment after 26th December,
2014, nomination in favour of parents, spouse, children or spouse and children
by the owner of the policy on his/ own life makes the nominees beneficially
entitled to the amount payable by the insurance company.

Where the nominee is a minor, the policy holder needs to appoint an appointee.
The appointee needs to sign the policy document to show his or her consent to
acting as an appointee. The appointees lose their status when the nominee
reaches majority age. The policy holder can change the appointee at any time.
If no appointee is given, and the nominee is a minor, then on the death of the
life assured, the death claim is paid to the legal heirs of the policyholder.
Where more than one nominee is appointed, the death claim will be payable to
them jointly, or to the survivor or survivors. Nominations made after the
commencement of the policy have to be intimated to the insurers to be
effective.
Section 39(11) of the Insurance Act says that where a policyholder dies after the
maturity of the policy but the proceeds and benefit of his policy has not been
made to him because of his death, his nominee shall be entitled to the proceeds
and benefit of his policy.
Diagram 2: Provisions related to nomination

b) Assignment
Since life insurance policy carries a promise or a debt that the insurance
company owes the insured, it is considered a security for money or property.
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We have seen that loan is advanced against by the insurers against the surrender
value of the policy. Similarly, many financial institutions including banks
advance loan against the security of the insurance policy by having it assigned
it in their favour.
The term assignment ordinarily refers to transfer of property by writing in favour
of another person.
The assignment of a life insurance policy implies the act of transferring the
rights, title and interest in the policy (as property) from one person to another.
The person who transfers the rights is called assignor and the person to whom
property is transferred is called assignee. On assignment, the ownership of the
policy changes and hence nomination is cancelled, except when assignment is
made to the insurance company for a policy loan.
There are two types of assignments.
Diagram 3: Types of Assignment

Conditional Assignment Absolute Assignment

Conditional assignment  Absolute assignment provides that all rights, title and
provides that the policy interest which the assignor has in the policy are
shall revert back to the transferred to the assignee without reversion to the
life assured on his or former or his/ her estate in any event.
her surviving the date of
maturity or on death of  The policy thus vests absolutely with the assignee. The
the assignee. latter can deal with the policy in whatever manner he or
she likes without the consent of the assignor.

Absolute assignment is more commonly seen in many commercial situations

where the policy is typically mortgaged against a debt assumed by the
policyholder, like a housing loan.
Conditions for valid assignment
Let us now look at the conditions that are necessary for a valid assignment.
i. The assignor must have absolute right and title or assignable interest to
the policy being assigned.
ii. The assignment should not be opposed to any law in force.
iii. Assignee can do another assignment, but cannot do nomination because
assignee is not the life assured.
Important:
 A life insurance policy can be assigned wholly or partially
 The assignment must be signed by the transferor or assignor or duly
authorized agent and attested by at least one witness.
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  The transfer of title has to be specifically set forth in the form of an
endorsement on the policy or a separate instrument.
 The policyholder must give notice of the assignment to the insurer,
without which the assignment will not be valid.
 Section 38(2) specifies that an insurer may accept the assignment, or
decline the same, if it has sufficient reason to believe that such
assignment is not bona fide or is not in the interest of the policyholder
or in public interest or is for the purpose of trading of insurance policy.
 However, the insurer shall, before refusing to act upon the endorsement,
record in writing the reasons for such refusal and communicate the same
to the policyholder not later than thirty days from the date of the
policyholder giving notice of such transfer or assignment.
Diagram 4: Provisions related to assignment of insurance policies

Commonly extended privileges to policyholders

a) Duplicate Policy:
A life insurance policy document is only an evidence of a promise. Loss or
destruction of the policy document does not in any way absolve the company of
its liability under the contract. Life insurance companies generally have
standard procedures to be followed in case of loss of the policy document.
Normally the office would examine the case to see if there is any reason to doubt
the alleged loss. Satisfactory proof may need to be produced that the policy has
been lost and not dealt with in any manner. Generally the claim may be settled
on the claimant furnishing an indemnity bond with or without surety.
If payment is shortly due and the amount to be paid is high, the office may also
insist that an advertisement be placed in a national paper with wide circulation,
reporting the loss. A duplicate policy may be issued on being sure that there is
no objection from anyone else.
b) Alteration
Policyholders may seek to effect alterations in policy terms and conditions.
There is provision to make such changes subject to consent of both the insurer
and assured. Normally alterations may not be permitted during the first year of

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 the policy, except for change in the mode of premium or alterations which are
of a compulsory nature – like
 change in name or/ address;
 readmission of age in case it is proved higher or lower;
 request for grant of double accident benefit or permanent disability
benefit etc.
Alterations may be permitted in subsequent years. Some of these alterations
may be affected by placing a suitable endorsement on the policy or on a separate
paper. Other alterations, which require a material change in policy conditions,
may require the cancellation of existing policies and issue of new policies.
Some of the main types of alterations that are permitted are
i. Change in certain classes of insurance or term [where risk is not increased]
ii. Reduction in the sum assured
iii. Change in the mode of payment of premium
iv. Change in the date of commencement of the policy
v. Splitting up of the policy into two or more policies
vi. Removal of an extra premium or restrictive clause
vii. Change from without profits to with profits plan
viii. Correction in name
ix. Settlement option for payment of claim and grant of double accident benefit
These alterations generally do not involve an increase in the risk. There are
other alterations in policies that are not allowed. These may be alterations that
have the effect of lowering the premium. Examples are extension of the
premium paying term; change from with profit to without profit plans; change
from one class of insurance to another, where it increases the risk: and increase
in the sum assured.
Test Yourself 2
Under what circumstances would the policyholder need to appoint an appointee?
I. Insured is minor
II. Nominee is a minor
III. Policyholder is not of sound mind
IV. Policyholder is not married
Summary
 Matters of health, habits and occupation, income and family details need to be
mentioned by the agent in the agent’s report.
 Details pertaining to physical features like height, weight, blood pressure,
cardiac status etc. are recorded and mentioned by the doctor in his/ her report
called the medical examiner’s report.
 Moral hazard is the likelihood that a client's behaviour might change as a result
of purchasing a life insurance policy and such a change would increase the
chance of a loss.
 An insurance contract commences when the life insurance company issues a first
premium receipt (FPR). The FPR is the evidence that the policy contract has
begun.
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 The policy document is the most important document associated with insurance.
It is the evidence of the contract between the assured and the insurance
company.
 The standard policy document typically has three parts which are the policy
schedule, standard provisions and the policy’s specific provisions.
 The grace period clause grants the policyholder an additional period of time to
pay the premium after it has become due.
 Reinstatement is the process by which a life insurance company puts back into
force a policy that has either been terminated because of non-payment of
premiums or has been continued under one of the non-forfeiture provisions.
 A policy loan is different from an ordinary commercial loan in two respects,
firstly the policy owner is not legally obligated to repay the loan and the insurer
need not perform a credit check on the insured.
 Nomination is where the life assured proposes the name of the person(s) to
which the sum assured should be paid by the insurance company after their
death.
 The assignment of a life insurance policy implies the act of transferring the
rights right, title and interest in the policy (as property) from one person to
another. The person who transfers the rights is called assignor and the person
to whom property is transferred is called assignee.
 Alteration is subject to consent of both the insurer and assured. Normally
alterations may not be permitted during the first year of the policy, except for
some simple ones.

Key Terms

1. Agents Confidential Report

2. Medical Examiner’s Report
3. Moral Hazard Report
4. First Premium Receipt (FPR)
5. Policy document
6. Policy schedule
7. Standard provisions
8. Special Provisions
9. Grace period
10. Policy lapse
11. Policy revival
12. Surrender value
13. Nomination
14. Assignment
Answers to Test Yourself
Answer 1 - The correct option is II.
Answer 2 - The correct option is II.

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 CHAPTER L-08

LIFE INSURANCE UNDERWRITING

Chapter Introduction

A life insurance agent’s work does not stop once a proposal is secured from a
prospective customer. The proposal must also be accepted by the insurance
company and result in a policy.

Every life insurance proposal has to pass through a gateway where the life insurer
decides whether to accept the proposal and if so, on what terms. In this chapter we
shall know more about the process of underwriting and the elements involved in the
process.

Learning Outcomes

A. Underwriting – Basic concepts

B. Non-medical underwriting
C. Medical underwriting

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A. Underwriting – Basic concepts
1. Underwriting purpose

Underwriting has two purposes

i. To assess the risk, classify the risk and decide the terms of acceptance or to
decline the risk.
ii. To prevent anti-selection against the insurer

Definition
The term underwriting refers to the process of evaluating each proposal for life
insurance in terms of the degree of risk it represents and then deciding whether or
not to grant insurance and on what terms.

Anti-selection is the tendency of people, who suspect or know that their chance of
experiencing a loss is high, to seek out insurance with a view to gain in the process.

Example

If life insurers were to be not selective about whom they offered insurance, there
is a chance that people with serious ailments like heart problems or cancer, who
did not expect to live long, would seek to buy insurance.

In other words, if an insurer did not exercise underwriting discretion, it would be

selected against and may suffer losses in the process.
2. Equity among risks
The term “Equity” means that applicants who are exposed to similar degrees of risk
must be placed in the same premium class. The Mortality table, used to determine
premiums, represents the mortality experience of standard lives or average risks.
They include the vast majority of individuals who propose to take life insurance.
a) Risk classification
To usher equity, the underwriter engages in a process known as risk classification
i.e. individual lives are categorised and assigned to different risk classes depending
on the degree of risks they pose. There are four such risk classes.
Diagram 1: Risk classification

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 i. Standard lives
These consist of those whose anticipated mortality corresponds to the standard
lives represented by the mortality table.

ii. Preferred risks

These are the ones whose anticipated mortality is significantly lower than
standard lives and hence could be charged a lower premium.

iii. Substandard lives

These are the ones whose anticipated mortality is higher than the average or
standard lives, but are still considered to be insurable. They may be accepted
for insurance with higher (or extra) premiums or subjected to certain
restrictions.

iv. Declined lives

These are the ones whose impairments and anticipated extra mortality are so
great that they could not be provided insurance coverage at an affordable cost.
Sometimes an individual’s proposal may also be temporarily declined if he or
she has been exposed to a recent medical event, like an operation.

3. Underwriting process

Underwriting process takes place at two levels:

 At Field level
 At Underwriting department level

a) Field or Primary level

Field level underwriting is also known as primary underwriting. It includes
information gathering by an agent or company representative to decide whether
an applicant is suitable for granting insurance coverage. The agent plays a
critical role as primary underwriter. He is in the best position to know the life
to be insured.
Many insurance companies may require that agents complete a statement or a
confidential report, asking for specific information, opinion and
recommendations to be provided by the agent with respect to the proposed life.
Fraud monitoring and role of agent as primary underwriter
Much of the decision with regard to acceptance of a risk depends on the facts
that have been disclosed by the proposer in the proposal form. It may be difficult
for an underwriter who is sitting in the underwriting department to know
whether these facts are untrue and have been fraudulently misrepresented with
deliberate intent to deceive.
The agent plays a significant role here. He or she is in the best position to ensure
that the facts that have been represented are true, due to his/ her direct and
personal contact with the proposed life.

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 b) Underwriting at the Department level
The main level of Underwriting is at the Department or Office level. It involves
specialists and persons who consider all the relevant data on the case to decide
whether to accept a proposal for Life insurance and on what terms.
4. Methods of underwriting
Diagram 2: Methods of Underwriting

Underwriters may use two types of methods for the purpose:

Judgment Method Numerical Method

Under this method Under this method underwriters assign positive
subjective judgment is used, rating points for all negative or adverse factors
especially when deciding on (negative points for any positive or favourable
a case that is complex. factors).
Example: Deciding whether Example: A person with history of cardiac
life insurance can be given to ailments and/ or early deaths in the family may
a person staying in a be assigned positive points. The total number of
disturbed country/ area. points so assigned will help an underwriter in
deciding the extent of risk involved.
In such situations, the The sum total of these positive/negative points,
department may get the and/or is referred to as Extra Mortality Rating
expert opinion of a medical (EMR). Higher EMR indicates that the life is
doctor who is also called a substandard. If the EMR is very high,
medical referee. underwriters may decline insurance.
Underwriting Decisions
Let us now consider the various kinds of decisions that underwriters may take with
regard to a life proposed for underwriting.

a) Acceptance at ordinary rates (OR) is the most common decision. This rating
indicates that the risk is accepted at the same rate of premium as would
apply to an ordinary or standard life.

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 Diagram 3: Underwriting decisions

b) Acceptance with an extra: This is the most common way of dealing with the
large majority of sub-standard risks. It involves charging an extra over the
tabular rate of premium.
c) Acceptance with a lien on the sum assured: A lien is a kind of hold which
the life insurance company can exercise (in part or whole) on the amount of
benefit it has to pay in the event of a claim.
Example: Consider the case of an insured who has suffered and recovered
from a certain disease like TB. Imposition of Lien would imply that if this
person were to die from a relapse of the TB, within a given period, only a
decreased amount of death benefit may be payable.
d) Acceptance with a restrictive clause: For certain kinds of hazards a
restrictive clause may be applied which limits death benefit in the event of
death under certain circumstances.
Example is a pregnancy clause imposed on pregnant ladies that limits
insurance payable in the event of pregnancy related deaths occurring within
say three months of delivery.
e) Decline or postpone: Finally, a life insurance underwriter may decide to
decline or reject a proposal for insurance. This would happen when there
are certain health/ other features which are so adverse that they
considerably increase the risk.
Example: An individual who suffers from cancer and has little chance of
remission, would be a candidate for rejection,
Similarly in some cases it may be prudent to postpone acceptance of the risk
until such time as the situation has improved and become more favourable.

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Example

A lady who has just had a hysterectomy operation may be asked to wait for a few
months before insurance on her life is allowed, to allow any post operation
complications that may have arisen to disappear.

Test Yourself 1

Which of the following cases is likely to be declined or postponed by a life insurer?

I. A healthy 18 year old

II. A sports person
III. A person suffering from AIDS
IV. A housewife with no income of her own

B. Non-medical underwriting
1. Non-medical underwriting
A large number of life insurance proposals may typically get selected for insurance
without conducting a medical examination to check the insurability of a life to be
insured. Such cases are termed as non-medical proposals.
In view of multiple reasons including the costs involved, in some types of policies,
Life insurers grant insurance without insisting on a medical examination
2. Conditions for non-medical underwriting
However non-medical underwriting calls for conditions like applicability to certain
class of lives, certain plans of insurance, certain upper limits of sum insured, entry
age limits, maximum term of insurance etc.to be followed.
3. Rating factors in underwriting
Rating factors refer to various aspects related to financial situation, life style,
habits, family history, personal history of health and other personal circumstances
in the prospective insured’s life that may pose a hazard and increase the risk.
Underwriting involves identifying these hazards and their likely impact and
classifying the risk accordingly.
Rating factors may be broadly divided into two – those which contribute to moral
hazard and those which contribute to physical [medical] hazards. Life insurance
companies often divide their underwriting into categories accordingly. Factors like
income, occupation, lifestyle and habits, which contribute to moral hazard, are
assessed as part of financial underwriting, while medical aspects of health fall
under medical underwriting.
a) Female insurance
Women generally have greater longevity than men. However they may face some
problems with respect to moral hazard. This is because many women in Indian
society are victims of male domination and social exploitation. Evils like dowry
deaths exist even today. Longevity of women can also be affected from problems
connected with pregnancy.

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Insurability of women is governed by need for insurance and capacity to pay
premiums. Insurance companies may thus decide to grant full insurance only to
those who have earned income of their own and may impose limits on other
categories of women. Similarly some conditions may be levied on pregnant
women.
b) Minors
Minors have no contracting power of their own. Hence a proposal on the life of
a minor has to be submitted by another person who is related to the minor in
the capacity of a parent or legal guardian. It would also be necessary to ascertain
the need for insurance, since minors usually have no earned income of their
own. Three conditions would generally be sought when considering insurance for
minors:
i. Whether they have a properly developed physique
Poor physique can be a result of malnutrition or other health problems posing
grave risks.
ii. Proper family history and personal history
If there are adverse indicators here, it may pose risks.
iii. Whether the family is adequately insured
It is necessary to check if the family has a culture of insurance. One must be
on guard if no other member of the minor’s family has been insured. Amount
of insurance is generally linked to that of parents.
c) Large sums assured
An underwriter needs to be wary when the amount of insurance is very large
relative to annual income of the proposed insured. Generally sum assured may
be assumed to be around ten to twelve times one’s annual income. If the ratio
is much higher than this, it raises the possibility of selection against the insurer.
Example
If an individual has an annual income of Rs. 5 lakhs and proposes for a life
insurance cover of Rs. 3 crores, it raises a cause for concern.
Typically concerns can arise in such instances because of the possibility that
such a large amount of insurance is being proposed in anticipation of suicide or
as a result of expected deterioration in health. A third reason for such large
sums could be excessive misselling by the sales person.
Large sums assured would also mean premiums increasing in proportion and raise
the question of whether the payment of such premiums would be continued. In
general, the premium payable should be within one third of an individual’s
annual income
d) Age
Mortality risk is closely related to age. The underwriter needs to be careful when
considering insurance for people of advanced ages.
Example
If the insurance is being proposed for the first time after age 50, there is a need
to suspect moral hazard and enquire about why such insurance was not taken
earlier.
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We must also note that chances of occurrence of degenerative diseases like
diseases of the heart and kidney failure increase with age and become higher at
older ages. Life insurers may also seek for some special reports when proposals
are submitted for high sums assured/ advanced ages or a combination of both.
Example
Examples of such reports are ECG; EEG; X-Ray of the chest and Blood Sugar test.
These tests may reveal deeper insights about the health of the proposed life
than the answers given in the proposal or an ordinary medical examination can
provide.
Examples
When a proposal is submitted at a branch located far away from the place of
residence of the proposed insured
A medical examination is done elsewhere even when a qualified medical
examiner is available near one’s place of residence.
A third case is when a proposal is made on the life of another without having
clear insurable interest, or when the nominee is not the near dependent of the
life proposed.
In each such case an enquiry may be made. Finally, when the agent is related
to the life assured a moral hazard report may be called from a branch official
like the agency manager/ development officer.
e) Occupation
Occupational hazards can arise from three sources:
 Accident
 Health hazard
 Moral hazard
Diagram 4: Sources of Occupational Hazards

i. Accidental hazards arise because certain kinds of jobs expose one to the
risk of accident. There is any number of jobs in this category – like circus
artistes, scaffolding workers, demolition experts and film stunt artistes.
ii. Health hazards arise when the nature of the job is such as to give rise to
possibility of medical impairment. There are various kinds of health hazards.

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  Some jobs like that of rickshaw pullers involve a lot of physical strain and
impact the respiratory system.
 Situations where one may be exposed to toxic substances like mining dust
or carcinogenic substances (that cause cancer) like chemicals and nuclear
radiation.
 Working in high pressure environments like underground tunnels or deep
sea, can cause acute decompression sickness.
 Finally, overexposure to certain job situations (like sitting cramped
before a computer or working in a high noise setting) can impair
functioning of certain body parts in the longer run.
iii. Moral hazard can arise when a job involves proximity or can cause
predisposition towards criminal elements or to drugs and alcohol. An example
is that of a dancer in a nightclub or an enforcer in a liquor bar or the
‘bodyguard’ of a businessman with suspected criminal links. Again the job
profiles of certain individuals like superstar entertainers may lead them to
intoxicating lifestyles, which sometimes come to tragic ends.
When an occupation falls under any such hazardous category, the applicant for
insurance may need to complete an occupational questionnaire that asks for
specific details of the job, duties involved and risks exposed to. A rating may
also be imposed for occupation in the form of a flat extra (for example Rupees
two per thousand sums assured.) Such extra may be reduced or removed when
the insured’s occupation changes.
f) Lifestyle and habits
Lifestyle and habits are terms, covering a wide range of individual lifestyle
characteristics, which may be brought out in the agent’s confidential reports
and moral hazard reports, suggesting an exposure to risk. In particular three
features are important:
Smoking and tobacco use: Use of tobacco is not only a risk in itself but also
contributes to increasing other medical risks. Companies charge differential
rates today for smokers and non-smokers and users of other forms of tobacco
usage like gutkha and paan masala.
Alcohol: Drinking alcohol occasionally or in modest quantities is not considered
a hazard. However, long term heavy drinking can impair liver functioning, affect
the digestive system and lead to mental disorders. Alcoholism is also linked with
accidents, violence, family abuse, depression and suicides.
Substance abuse: Substance abuse refers to the use of various kinds of
substances like drugs or narcotics, sedatives and other similar stimulants. Some
of these are even illegal and their use indicates criminal disposition and moral
hazard.

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Test Yourself 2
Which of the following is an example of moral hazard?
I. Stunt artist dies while performing a stunt
II. A person drinking copious amounts of alcohol because he is insured
III. Insured defaulting on premium payments
IV. Proposer misplacing policy document

C. Medical underwriting
1. Medical underwriting
Let us now consider some of the medical factors that would influence an
underwriter’s decision. These are generally assessed through medical underwriting.
They may often call for a medical examiner’s report. Let us look at some of the
factors that are checked.
Diagram 5: Medical Factors that influence an Underwriter’s Decision

a) Family history
The impact of family history on mortality risk has been studied from three
angles.
i. Heredity: Certain diseases can be transmitted from one generation to
another, say from parents to children.
ii. Average longevity of the family: When the parents have died early on
account of certain diseases like heart trouble or cancer, it may be a pointer
that the offspring may also not live long.
iii. Family environment: Thirdly, the environment in which the family lives can
cause exposure to infection and other risks.
Life insurers have thus to be careful when entertaining cases of individuals with
adverse family history. They may call for other reports and may impose an extra
mortality rating in such cases.

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b) Personal history

Personal history refers to past impairments of various systems of the human body
which the life to be insured has suffered from. The proposal form for life
insurance typically contains a set of questions which enquire whether the life to
be insured has been under treatment for any of these.
The major kinds of ailments that are considered by the underwriters include
Cardiovascular diseases, diseases of the respiratory system, malignant tumours/
cancer, ailments of the renal system, impairments of the endocrine system,
diseases of the digestive system like gastric ulcers and cirrhosis of the liver and
diseases of the nervous system.
c) Personal characteristics
These can also be significant indicators of the tendency to disease.
i. Build
A person’s build consists of his height, weight, chest and girth of the abdomen.
For given age and height, there is a standard weight that has been defined and
if the weight is too high or low in relation to this standard weight, we can say
that the person is overweight or underweight.
Similarly, it is expected that the chest should be expanded at least by four
centimetres in a normal person and that the abdominal girth should not be more
than one’s expanded chest.
ii. Blood pressure
Another indicator is a person’s blood pressure. There are two measures of this
 Systolic
 Diastolic
When the actual readings are much higher than the normal values, we say that
the person has high blood pressure or hypertension. When it is too low, it is
termed as hypotension. The former can have serious consequences.
iii. Urine – Specific gravity
Finally, a reading of the specific gravity of one’s urine can indicate the balance
among various salts in the urinary system. It can indicate any malfunctioning of
the system.
d) Backdating:
Backdating means changing the start date of the policy to an earlier one. For
example, you bought a Life insurance policy on 1st June, 2013 but later you
think that the policy would have generated better returns if you had bought it
in April 2013. You and your insurance company agree to change the policy to
officially start it from April, 2013. In this case, you have backdated the policy.
Usually, no interest is charged if the policy is backdated by less than a month.
Backdating is done for the following purposes:

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 (i) Getting a lower premium based on age: While issuing the policy, insurers
consider the nearest age of the policyholder. It means if you are 32 years
and 7 months old, the insurer will consider your age as 33 years. This nearest
age may put you in a higher premium slab. However, if you backdate the
policy by 2 months, the insurer will consider your age as 32 years and 5
months only. Now you will be paying lower premiums based on a plan for a
32-year old.
(ii) Set the timing of payment: There are specific professions where the
income flow is not steady. In such a scenario if an individual accidently buys
a life insurance policy in its off-season then the policy can be backdated to
the period of maximum earnings. For instance, a farmer may have a
seasonal income. He would prefer to make insurance payments only after
he has received his crop proceedings. In this case, a farmer could backdate
the policy to start it in the harvest season.
(iii) To coincide with special dates: You can backdate the policy to coincide
with your important dates, such as birthday and anniversary. It keeps easy
for you to remember your premium due date.
(iv) Early maturity claims: Backdating reduces the tenure of a policy and
facilitates early maturity. For instance, if a 30-year life insurance cover
bought on March 2000 is backdated to April 1999, the policy would mature
on April, 2029 instead of March 2030. In case of endowment policies, this
could be beneficial as maturity benefits accrue earlier.
Test Yourself 3

Why is heredity history of importance in medical underwriting?

I. Rich parents have healthy kids

II. Certain diseases can be passed on from parents to children
III. Poor parents have malnourished kids
IV. Family environment is a critical factor

Summary

 To bring equity, the underwriter engages in risk classification where individual

lives are categorised and assigned to different risk classes depending on the
degree of risks they pose.
 Underwriting process may be said to take place at two levels:
 At field level and
 At underwriting department level
 Underwriting decisions made by underwriters include acceptance of standard
risk at standard rates or charging extra for sub-standard risks. Sometimes there
is acceptance with lien on sum assured or acceptance is based on restrictive
clauses. Where the risk is large the proposal is declined or postponed.

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 A large number of life insurance proposals may typically get selected for
insurance without conducting a medical examination. Such cases are termed as
non-medical proposals.
 Some of the rating factors for non-medical underwriting include
 Age
 Large sum assured
 Moral hazard etc.
 Some of the factors considered in medical underwriting include
 Family history,
 Heredity and personal history etc.

Key Terms

1. Underwriting
2. Standard life
3. Non-medical underwriting
4. Rating factor
5. Medical underwriting
6. Anti-selection

Answers to Test Yourself

Answer 1 - The correct option is III.

Answer 2 - The correct option is II.

Answer 3 - The correct option is II.

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 CHAPTER L-09
LIFE INSURANCE CLAIMS
Chapter Introduction

This chapter explains the concept of claim and how claims are ascertained. The
chapter then explains the types of claims. In the end you will learn about the forms
to be submitted for a death claim and the safeguards in place to protect a
beneficiary from claim rejection by the insurer, provided no material information
has been suppressed by the insured.

Learning Outcomes

A. Types of claims and claims procedure

B. Ascertaining whether a claim situation has occurred
C. Claims Procedure for Life Insurance Policies

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A. Types of claims and claims procedure

Concept of claims
The real test of an insurance company and an insurance policy comes when a policy
results into a claim. The true value of life insurance is judged by the way a claim is
settled and benefits are paid.
IRDAI’s Protection of Policyholders’ Interests Regulations, 2017 prescribes that life
insurers, shall process death claims without delay and call for all requirements
together, within 15 days of the receipt of the death intimation.
A death claim shall be paid, rejected or repudiated giving all the relevant reasons,
within 30 days from the date of receipt of all relevant papers/ clarifications.
If, in the opinion of the insurer, the claim warrants investigation, it shall complete
the same expeditiously, within 90 days from the date of intimation and settle the
claim within 30 days thereafter.
IRDAI specifies that in respect of Maturity clams, Survival Benefit claims and
Annuities, the Life Insurer shall initiate the claim process by sending advance
intimation, by sending post-dated cheque or by giving direct credit to the bank
account of the claimant through any electronic mode approved by RBI, so as to pay
the claim on or before the due date.
Definition
A claim is a demand that the insurer should make good the promise specified in the
contract.
A claim under a life insurance contract is triggered by the happening of one or more
of the events covered under the insurance contract. While in some claims, the
contract continues, in others, the contract is terminated.
Claims can be of two types:
i. survival claims payable when the life assured is alive and
ii. death claim
Diagram 1: Types of claims

While a death claim arises only upon the death of the life assured, survival claims
are payable on happening of events specified in the policy.

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Important

In all claims situations, the insurer has to ensure that the identity of the claimant
is proven and well documented as per KYC norms.
Example

Such specified events where the claims are paid to the insured.

i. The insured reaching the maturity period of the policy;

ii. The insured reaching the pre-decided duration(s) under a money-back
policy, when instalment(s) become payable; or under annuity plans.
iii. Occurrences of Critical illnesses covered under the policy (as a rider benefit
or otherwise);
iv. Surrender of the policy either by the policyholder or assignee;

B. Ascertaining whether a claim situation has occurred

i. Survival claim is payable to the insured on reaching the period of maturity

or fulfilling conditions stipulated in the policy.

ii. Maturity claims and money-back instalment claims are easily established
as they are based on dates which are determined at the beginning of the
contract itself. For instance, the date of maturity and the dates when the
instalments of survival benefits may be paid under a money back policy are
clearly laid out at the time of preparing the contract.

iii. Surrender value payments are different from other claim payments. Here,
unlike other claims, the event is triggered by the decision of the policy
holder or assignee to cancel the contract and withdraw what is due to him
or her under the contract. There is typically a penalty for premature
withdrawal. The amount paid would be less than what would be due under
a full claim and hence would be less than what would have been due if the
full claim were to be paid.

iv. Critical illness claims are ascertained based on the medical and other
records provided by the policyholder in support of his claim.

v. Annuities: In case of annuity payments (pension plans), insured need to

provide life certificates periodically.
The purpose of a critical illness benefit is to enable a policy holder to defray his/
her expenses in the event of a critical illness. If this policy were to be assigned, all
the benefits would be payable to the assignee and it would not meet the intended
purpose of the critical illness benefit. To avoid this situation, policy holders need
to be educated about the extent of benefits they may assign by way of a conditional
assignment.
A maturity or death claim or a surrender leads to termination of the insurance
cover under the contract and no further insurance cover is available.
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Types of claims: The following payments may occur during the policy term:
a) Survival Benefit Payments
Periodical payments are made by the insurer to the insured at specified times
during the term of the policy.
I. Surrender of Policy
Surrender value reflects the value of investments and depends on various factors
such as sum assured, bonuses, policy term and premiums paid. Premature closing
of a life insurance policy is a voluntary termination of the policy contract. A
policy can be surrendered only if it has acquired paid-up value. The amount
payable to the insured is the surrender value which is usually a percentage of
the premiums paid. The actual surrender value paid to the insured is more than
the Guaranteed Surrender Value (GSV).
II. Rider Benefit
A payment under a rider is made by an insurance company on the occurrence of
a specified event according to the terms and conditions.
Under a critical illness rider, in the event of diagnosis of a critical illness, a
specified amount is paid as per terms. The illness should have been covered in
the list of critical illnesses specified by the insurance company.
Under hospital care rider, the insurer pays the treatment costs in the event of
hospitalisation of the insured, subject to terms and conditions.
The policy contract continues even after the rider payments are made.
The following claim payments are made at the end of the policy term specified
in the insurance contract.
III. Maturity Claim
In such claims, the insurer promises to pay the insured a specified amount at
the end of the term, if the insured survives the plan’s entire term. This is known
as a maturity claim.
i. Participating Plan: The maturity claim amount payable under a participating
plan is the sum assured plus accumulated bonuses less dues such as
outstanding premium and policy loans and interests thereon.
ii. Return of Premium (ROP) Plan: In some cases premiums paid over the term
period are returned when the policy matures.
iii. Unit Linked Insurance Plan (ULIP): In case of ULIPs, the insurer pays the
fund value as the maturity claim.
iv. Money-back Plan: In case of money-back policy, the insurer pays the
maturity claim minus the survival benefits already paid during the term of
the policy.
The insurance contact terminates after the claim is paid.
b) Death Claim
If the insured expires during the term of his/ her policy, accidentally or
otherwise, the insurer pays the sum assured plus accumulated bonuses, if
participating, less dues to be recovered by the insurer [like outstanding policy
loan and interest or premiums plus interest]. This is the death claim, which is

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paid to the nominee or assignee or legal heir whatever the situation may be. A
death claim generally marks the end of the contract as a result of death.
A death claim may be:

 Early (less than three years policy duration) or

 Non-early (more than three years)
The nominee or assignee or legal heir has to intimate the insurer of the cause,
date and place of death.

i. Forms to be submitted for death claim

Usually, the following forms are to be submitted by the beneficiary to the insurer
to facilitate processing of the claim:

 Claim form by nominee

 Certificate of burial or cremation
 Treating physician’s certificate
 Hospital’s certificate
 Employer’s certificate
 Death certificate issued by municipal authorities etc., as proof of death
 Certified court copies of police reports like First Information Report
(FIR), Inquest Report, Post-Mortem Report, and Final Report - these
reports are required in case of death by accident.

Diagram 2: Forms to be submitted for Death Claim

ii. Repudiation of death claim

The death claim may be paid or repudiated. If, while processing the claim, the
insurer detects that the proposer had made any incorrect statements or had
suppressed material facts relevant to the policy, the contract would be declared
as void. All benefits under the policy are forfeited.

iii. Section 45: Indisputability Clause

However this penalty is subject to Section 45 of the Insurance Act, 1938.

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Important

Section 45 states:

“No policy of life insurance shall be called in question on any ground whatsoever
after the expiry of three years from the date of the policy, i.e. from the date of
issuance of the policy or the date of commencement of risk or the date of revival
of the policy or the date of the rider to the policy, whichever is later”.

C. Claim Procedure for Life Insurance Policy

Although there is no laid down standard claims procedure for all insurers,
the IRDAI has laid down guidelines for insurers in the matter of claim
settlement.
Regulation 8: Claims procedure in respect of a life insurance policy
i. A life insurance policy shall state the primary documents which are normally
required to be submitted by a claimant in support of a claim.
ii. A life insurance company, upon receiving a claim, shall process the claim
without delay. Any queries or requirement of additional documents, to the
extent possible, shall be raised all at once and not in a piece-meal manner,
within a period of 15 days of the receipt of the claim.
iii. As per the IRDAI (Protection of Policyholders’ Interests) Regulations, 2017, a
death claim under a life insurance policy shall be paid, rejected or
repudiated giving all the relevant reasons, within 30 days from the date of
receipt of all relevant papers and required clarifications. However, if the
insurer needs the claim to be investigated, it shall initiate and complete the
investigation at the earliest, in any case not later than 90 days from the date
of receipt of claim intimation. The claim should be settled within 30 days of
completing the investigation.
iv. Where a claim is ready for payment but the payment cannot be made due to
any reasons of proper identification of the payee, the life insurer shall hold
the amount for the benefit of the payee and it shall earn interest at the rate
applicable to a savings bank account with a scheduled bank (effective from
30 days following the submission of all papers and information).
v. Where there is a delay on the part of the insurer in processing a claim for a
reason other than the one covered by sub-regulation (iv), the life insurance
company shall pay interest on the claim amount at a rate which is 2%
above the bank rate prevalent at the beginning of the financial year in
which the claim is reviewed by it.
Role of an agent
An agent shall render all possible service to the nominee/ legal heir or the
beneficiary in filling up of claim forms accurately and assisting in submission of
these at the insurer’s office.

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Apart from discharging obligations, goodwill is generated from such a situation
whereby there exists ample opportunity for the agent to procure business or
referrals in future from the family of the deceased.

Test Yourself 1

Which of the below statement best describes the concept of claim? Choose the most
appropriate option.

I. A claim is a request that the insurer should make good the promise specified in
the contract
II. A claim is a demand that the insurer should make good the promise specified in
the contract
III. A claim is a demand that the insured should make good the commitment
specified in the agreement
IV. A claim is a request that the insured should make good the promise specified in
the agreement

Summary

 A claim is a demand that the insurer should make good the promise specified in
the contract.
 A claim can be survival claim or death claim. While a death claim arises only
upon the death of the life assured, survival claims can be caused by one or more
events
 For payment of a survival claim, the insurer has to ascertain that the event has
occurred as per the conditions stipulated in the policy.
 The following payments may occur during the policy term:
 Survival Benefit Payments
 Surrender of Policy
 Rider Benefit
 Maturity Claim
 Death Claim
 Section 45 (Indisputability Clause) of the Insurance Act offers protection against
rejection of claim by the insurer on flimsy grounds provided and sets a time limit
of 3 years for the Insurer for calling a policy into question.
 Under the IRDAI (Protection of Policyholders Interests) Regulations, 2017, the
IRDAI has laid down regulations to safeguard/ protect the insured or beneficiary
in case of claims.

Answers to Test Yourself

Answer 1 The correct option is II.

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 SECTION

HEALTH SECTION

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 CHAPTER H-01
INTRODUCTION TO HEALTH INSURANCE
Chapter Introduction

This chapter will tell you about how insurance evolved over time. It will also explain
what healthcare is, levels of healthcare and types of healthcare. You will also learn
about the healthcare system in India and factors affecting it. Finally, it will explain
how health insurance evolved in India and also the various players in the health
insurance market in India.

Learning Outcomes

A. Understanding Healthcare
B. Levels of Healthcare
C. Types of Healthcare
D. Evolution of Health Insurance in India
E. Health Insurance Market

After studying this chapter, you should be able to:

a) Understand how insurance evolved.

b) Explain the concept of healthcare and the types and levels of healthcare.
c) Appreciate the factors affecting healthcare in India and the progress made
since independence.
d) Discuss the evolution of health insurance in India.
e) Know the health insurance market in India.

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A. Understanding Healthcare
The word ‘Health’ was derived from the word ‘hoelth’, which means ‘soundness of
the body’.
In olden days, health was considered to be a ‘Divine Gift’ and illness was believed
to have been caused due to the sins committed by the concerned person. It was
Hippocrates (460 to 370 BC) who came up with the reasons behind illness. According
to him, illness is caused due to various factors relating to environment, sanitation,
personal hygiene and diets. Vedic texts of ancient India speak about ‘Arogyame
Mahabhagyam’ meaning ‘Health is great luck’ or in other words, ‘Health is Wealth’.
Many treatises of ancient India like Atharva Veda, Charaka Samhita, Sushruta
Samhita, Ashtangahrdayam, Ashtangasamgraha, Bhela Samhita, and Kashyapa
Samhita discuss healing traditions practiced in India in olden times.
Definition
A widely accepted definition of health was given by World Health Organization
(WHO) –‘Health is a state of complete physical, mental and social wellbeing and
not merely the absence of disease or infirmity.’
Determinants of health
It is generally believed that the following factors determine the health of any
individual:
a) Lifestyle factors
Lifestyle factors are those which are mostly in the control of the individual
concerned e.g. exercising and eating within limits, avoiding worry and the like
leading to good health; leading to diseases such as cancer, aids, hypertension
and diabetes, to name a few.
b) Environmental factors
Communicable diseases like Influenza and Chickenpox etc. are spread due to
bad hygiene, diseases like Malaria and Dengue are spread due to bad
environmental sanitation, while certain diseases are also caused due to
environmental factors.
c) Genetic factors
Diseases may be passed on from parents to children through genes. Such genetic
factors result in differing health trends amongst the population spread across
the globe based on race, geographical location and even communities.
It is quite obvious that a country’s social and economic progress depends on the
health of its people. This poses a question as to whether different types of
healthcare are required for different situations.

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Test Yourself 1
Which of the following diseases is not attributed to Lifestyle factors (i.e. not in the
control of the individual)?
I. Cancer
II. Aids
III. Malaria
IV. Hypertension

B. Levels of Healthcare
Healthcare is nothing but a set of services provided by various agencies and
providers including the government, to promote, maintain, monitor or restore
health of people. Health care to be effective must be:
 Appropriate to the needs of the people
 Comprehensive
 Adequate
 Easily available
 Affordable
The health care facilities should be based upon the probability of the incidence of
disease for the population. For example, a person may get fever, cold, cough, skin
allergies etc. many times a year, but the probability of him/ her suffering from
Hepatitis B is less as compared to cold and cough.

Hence, the need to set up the healthcare facilities in any area whether a village or
a district or a state will be based upon the various healthcare factors called
indicators of that area such as:

 Size of population
 Death rate
 Sickness rate
 Disability rate
 Social and mental health of the people
 General nutritional status of the people
 Environmental factors such as if it is a mining area or an industrial area
 The possible health care provider system e.g. heart doctors may not be
readily available in a village but may be in a district town
 How much of the health care system is likely to be used
 Socio-economic factors such as affordability

Based on the above factors, the government decides upon setting up of centres for
primary, secondary and tertiary health care and takes other measures to make
appropriate healthcare affordable and accessible to the population.

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C. Types of Healthcare
Healthcare is broadly categorized as follows:
1. Primary healthcare
Primary health care refers to the services offered by the doctors, nurses and other
small clinics which are contacted first by the patient for any sickness, that is to say
that primary healthcare provider is the first point of contact for all patients within
a health system.
For example, if a person visits a doctor for fever and the first diagnosis is indicative
of Dengue fever, the primary health care provider will prescribe some medicines
but also direct the patient to get admitted in a hospital for specialized treatment.
At a country level, Primary Health care centres are set up both by Government and
private players. Government primary health care centres are established depending
upon the population size and are present right up to the village level in some form
or the other.
2. Secondary healthcare
Secondary health care refers to the healthcare services provided by medical
specialists and other health professionals who generally do not have first contact
with patient. It includes acute care requiring treatment for a short period for a
serious illness, often (but not necessarily) as an in-patient, including Intensive Care
services, ambulance facilities, pathology, diagnostic and other relevant medical
services.
3. Tertiary healthcare
Tertiary Health care is specialized consultative healthcare, usually for inpatients
and on referral from primary/ secondary care providers.
Examples of Tertiary Health care providers are those who have advanced medical
facilities and medical professionals, beyond the scope of secondary health care
providers e.g. Oncology (cancer treatment), Organ Transplant facilities, High risk
pregnancy specialists etc.
It is to be noted that as the level of care increases, the expenses associated with
the care also increase. The infrastructure for different levels of care also varies
from country to country, rural-urban areas, while socio-economic factors also
influence the same.
Test Yourself 2
Which of the following are part of primary healthcare?
I. Fever
II. Cancer
III. Organ Transplant
IV. High risk pregnancy

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D. Evolution of Health Insurance in India
While the government had been busy with its policy decisions on healthcare, it also
put in place health insurance schemes. Insurance companies came with their health
insurance policies only later. Here is how health insurance developed in India:
1. Employees’ State Insurance Scheme
Health Insurance in India formally began with the beginning of the Employees’
State Insurance Scheme, introduced vide the ESI Act, 1948, shortly after the
country’s independence in 1947. This scheme was introduced for blue-collar
workers employed in the formal private sector and provides comprehensive
health services through a network of its own dispensaries and hospitals.
ESIC (Employees State Insurance Corporation) is the implementing agency which
runs its own hospitals and dispensaries and also contracts public/ private
providers wherever its own facilities are inadequate.
2. Central Government Health Scheme
The ESIS was soon followed by the Central Government Health Scheme (CGHS),
which was introduced in 1954 for the central government employees including
pensioners and their family members working in civilian jobs. It aims to provide
comprehensive medical care to employees and their families and is partly
funded by the employees and largely by the employer (central government).
3. Commercial Health insurance
Commercial health insurance was offered by some of the non-life insurers before
as well as after nationalisation of insurance industry.
In 1986, the first standardised health insurance product for individuals and their
families was launched in the Indian market by all the four nationalized non-life
insurance companies (these were then the subsidiaries of the General Insurance
Corporation of India). This product, Mediclaim was introduced to provide
coverage for the hospitalisation expenses up to a certain annual limit of
indemnity with certain exclusions such as maternity, pre-existing diseases etc.
The hospitalization indemnity-based annual contract continues to be the most
popular form of private health insurance in India today. With private players
coming into the insurance sector in 2001, health insurance has grown
tremendously. However, there is a large untapped market even today.

The Government has encouraged individuals to purchase Health Insurance

policies. Premiums paid by the individuals towards Health Insurance of self,
spouse and family members are allowed to be deducted from taxable income
under Section 80 D of the Income Tax Act. The Section allows higher limits for
paying premiums of parents/ parents in law above 60 years of age.

Considerable variations in covers, exclusions and newer add-on covers have been
introduced which will be discussed in later chapters.

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Test Yourself 3
The first standardised health insurance product for individuals and their families
was launched in the Indian market by all the four nationalized non-life insurance
companies in the year _____.
I. 1948
II. 1954
III. 1986
IV. 2001

E. Health Insurance Market

The health insurance market today consists of a number of players some providing
the health care facilities called providers, others the insurance services and also
various intermediaries. Some form the basic infrastructure while others provide
support facilities. Some are in the government sector while others are in the private
sector.

1. Private sector Health Care providers

India has a very large private health sector providing all three types of healthcare
services - primary, secondary as well as tertiary. These range from voluntary, not-
for-profit organisations and individuals to for-profit corporate, trusts, solo
practitioners, stand-alone specialist services, diagnostic laboratories, pharmacy
shops, and also the unqualified providers (quacks).

India also has the largest number of qualified practitioners in other systems of
Medicine (Ayurveda/ Siddha/ Unani/ Homeopathy) which is over 7 lakh
practitioners. These are located in the public as well as the private sector. Apart
from the for-profit private providers of health care, the NGOs and the voluntary
sector have also been engaged in providing health care services to the community.

Insurance Companies in the general insurance sector provide the bulk of the health
insurance services. Stand Alone Health Insurance (SAHI) Companies are allowed to
transact all types of Health Insurances, while Life Insurance Companies are also
permitted to transact certain types of Health Insurances.

2. Intermediaries:

A number of people and organizations providing services as part of the insurance

industry also form part of the health insurance market. Insurance Intermediaries
are defined under Section 2 of the IRDA Act, 1999. These include insurance brokers,
reinsurance brokers, insurance consultants, surveyors and loss assessors as well as
Third Party Administrators.

A Third Party Administrator (TPA) is a company registered with IRDAI and engaged
by an insurer, for a fee, for providing health services. A TPA may render the
following services to an insurer under an agreement in connection with health
insurance business:
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a. Servicing of claims under health insurance policies by way of pre authorization
of cashless treatment or settlement of claims other than cashless claims or both,
as per the underlying terms and conditions of the respective policy and within
the framework of the guidelines issued by the insurers for settlement of claims.
b. Servicing of claims for Hospitalization cover, if any, under Personal Accident
Policy and domestic travel policy.
c. Facilitating carrying out of pre-insurance medical examinations in connection
with underwriting of the health insurance policies.

Summary

a) Insurance in some form or other existed many centuries ago but its modern form
is only a few centuries old. Insurance in India has passed through many stages
with government regulation.

b) Health of its citizens being very important, governments play a major role in
creating a suitable healthcare system.
c) Level of healthcare provided depends on many factors relating to a country’s
population.
d) The three type of healthcare are primary, secondary and tertiary depending on
the level of medical attention required. Cost of healthcare rises with each level
with tertiary care being the costliest.
e) India has its own peculiar challenges such as population growth and urbanization
which require proper healthcare.

f) The public sector insurance companies were the first to come up with schemes
for health insurance followed later by commercial insurance by private
insurance companies.

g) The health insurance market is made up of many players some providing the
infrastructure, with others providing insurance services, intermediaries such as
brokers, agents and third party administrators servicing health insurance
business and also other regulatory, educational as well as legal entities playing
their role.

Answers to Test Yourself

Answer 1 The correct option is III.

Answer 2 The correct option is I.
Answer 3 The correct option is III.

Key terms
a) Healthcare
b) Commercial insurance
c) Nationalization
d) Primary, Secondary and Tertiary Healthcare
e) Third Party Administrator
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 CHAPTER H-02

HEALTH INSURANCE DOCUMENTATION

Chapter Introduction

In the insurance industry, we deal with a large number of forms, documents etc.
This chapter takes us through the documents and their importance in a health
insurance contract.

Learning Outcomes

A. Proposal forms
B. Acceptance of the proposal (underwriting)
C. Prospectus
D. Policy Document
E. Conditions and Warranties

After studying this chapter, you should be able to:

a) Explain the contents of proposal form.

b) Describe the importance of Prospectus
c) Explain terms and wordings in insurance policy document.
d) Discuss policy conditions and warranties.
e) Appreciate why endorsements are issued.
f) Understand the premium receipt.
g) Appreciate why renewal notices are issued.

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A. Proposal forms
1. Health Insurance Proposal forms
As discussed in the common chapters, the Proposal Form contains information which
is useful for the insurance company to accept the risk offered for insurance. Given
below are some of the details of the proposal form for a health insurance policy:
1. The proposal form incorporates a prospectus which gives details of the cover, such
as coverage, exclusions, provisions etc. The prospectus forms part of the proposal
form and the proposer has to sign it as having noted its contents.
2. The proposal form collects information relating to the name, address, occupation,
date of birth, sex, and relationship of each insured person with the proposer,
average monthly income and income tax PAN No., name and address of the Medical
Practitioner, his qualifications and registration number. Bank details of the insured
are also now a days collected to make payment of claim money directly through
bank transfer.
3. In addition, there are questions relating to the medical condition of the insured
person. These detailed questions in the form are based on past claims experience
and are to achieve proper underwriting of the risk.
4. The insured person is required to state full details if he has suffered from any of
the specified diseases in the form.
5. Further, the details of any other illness or disease suffered or accident sustained
are called for as follows:
a. Nature of illness/ injury and treatment
b. Date of first treatment
c. Name and address of attending Doctor
d. Whether fully recovered
6. The proposer as to state any additional facts which should be disclosed to insurers
and if he has any knowledge of any positive existence or presence of any illness or
injury which may require medical attention.
7. The form also includes questions relating to past insurance and claims history and
additional present insurance with any other insurer.
8. The special features of the declaration to be signed by the proposer must be noted.
9. The insured person agrees and authorises the insurer to seek medical information
from any hospital/ medical practitioner who has at any time attended or may
attend concerning any illness which affects his physical or mental health.
10. The insured person confirms that he has read the prospectus forming part of the
form and is willing to accept the terms and conditions.
11. The declaration includes the usual warranty regarding the truth of the statements
and the proposal form as the basis of the contract.
2. Medical Questionnaire
In case of adverse medical history in the proposal form, the insured person has to
complete a detailed questionnaire relating to diseases such as Diabetes, Hypertension,
Chest pain or Coronary Insufficiency or Myocardial Infarction.
These have to be supported by a form completed by a consulting physician. This form
is scrutinised by company’s panel doctor, based on whose opinion, acceptance,
exclusion, etc. are decided.

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Standard form of Declaration
The IRDAI has specified the format of the standard declaration in the health
insurance proposal as under:
1. I/ We hereby declare, on my behalf and on behalf of all persons proposed to be
insured, that the above statements, answers and/ or particulars given by me are
true and complete in all respects to the best of my knowledge and that I/ We
am/ are authorized to propose on behalf of these other persons.
2. I understand that the information provided by me will form the basis of the
insurance policy, is subject to the Board approved underwriting policy of the
insurance company and that the policy will come into force only after full receipt
of the premium chargeable.
3. I/ We further declare that I/ we will notify in writing any change occurring in the
occupation or general health of the life to be insured/ proposer after the proposal
has been submitted but before communication of the risk acceptance by the
company.
4. I/ We declare and consent to the company seeking medical information from any
doctor or from a hospital who at any time has attended on the life to be insured/
proposer or from any past or present employer concerning anything which affects
the physical or mental health of the life to be assured/ proposer and seeking
information from any insurance company to which an application for insurance
on the life to be assured/ proposer has been made for the purpose of underwriting
the proposal and/ or claim settlement.
5. I/ We authorize the company to share information pertaining to my proposal
including the medical records for the sole purpose of proposal underwriting and/
or claims settlement and with any Governmental and/ or Regulatory Authority.
3. Nature of questions in a proposal form
The number and nature of questions in a proposal form vary according to the type
of insurance concerned. Sum insured indicates the limit of liability of the insurer
under the policy and has to be indicated in all proposal forms.
In personal lines like health, personal accident and travel insurance, proposal forms
are designed to get information about the proposer’s health, way of life and habits,
pre-existing health conditions, medical history, hereditary traits, past health-
insurance experience etc. along with the proposer’s profession, occupation or
business which important as they could have a material bearing on the risk.
Example 1
 A delivery man of a fast-food restaurant, who has to frequently travel on motor
bikes at a high speed to deliver food to his customers, may be more exposed to
accidents than the accountant of the same restaurant.
 A person working in a coal mine or a cement plant may be exposed to dust
particles leading to lung ailments.

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 Example 2
 For the purpose of overseas travel insurance, the proposer is required to state
(who is travelling, when, to which country, for what purpose) or
 For the purpose of health insurance, the proposer is asked about his/ her health
(with person’s name, address and identification) etc. depending on the case.

Example 3
 In case of health insurance, it could be the cost of hospital treatment, while for
personal accident insurance this could be a fixed amount for loss of life, loss of
a limb, or loss of sight due to an accident.
a) Previous and Present insurance
The proposer is required to inform the details about his previous insurances to the
insurer. This is to understand his insurance history. In some markets there are
systems by which insurers confidentially share data about the insured.
The proposer is also required to state whether any insurer had declined his proposal,
imposed special conditions, required an increased premium at renewal or refused
to renew or cancelled the policy. Details of current insurance with any other insurer
including the names of the insurers are also required to be disclosed. Further, in
personal accident insurance an insurer would like to restrict the amount of coverage
(sum insured) depending on the sum insured under other PA policies taken by the
same insured.
b) Claim Experience
The proposer is asked to declare full details of all losses suffered by him/ her,
whether or not they were insured. This will give the insurer information about the
subject matter of insurance and how the insured has managed the risk in the past.
It means the insurance company has a duty to record all the information received
even orally, which the agent has to keep in mind by way of follow up.

B. Acceptance of the proposal (underwriting)

A completed proposal form broadly gives the following information:
 Details of the insured
 Details of the subject matter
 Type of cover required
 Details of the physical features both positive and negative
 Previous history of insurance and claim experience
In the case of a health insurance proposal, the insurer may also refer the prospective
customer e.g. above 45 years of age to a doctor and/ or for medical check-up. Based
on the information available in the proposal and, where medical check-up has been
advised, based on the medical report and the recommendation of the doctor, the
insurer takes the decision. Sometimes, where the medical history is not satisfactory,
an additional questionnaire to get more information is also required to be obtained
from the prospective client. The insurer then decides about the rate to be applied
to the risk factor and calculates the premium based on various factors, which is
then conveyed to the insured.
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C. Prospectus
A Prospectus is a document issued by the insurer or on its behalf to the prospective
buyers of insurance. It is usually in the form of a brochure or leaflet or it can be in
electronic form also and serves the purpose of introducing a product to such
prospective buyers. Issue of prospectus is governed by the Insurance Act, 1938 as
well as by Protection of Policyholders’ Interest Regulations 2017 and the Health
Insurance Regulations 2016 of the IRDAI. Insurers of Health policies usually publish
Prospectuses about their Health insurance products. The proposal form in such cases
would contain a declaration that the customer has read the Prospectus and agrees
to it.
As discussed in Chapter 4, Section 64 VB of the Insurance Act 1938 stipulates that
Premiums have to be collected in advance. However, considering the need for
easing the payment of health insurance premiums in view of conditions owing to
COVID-19 outbreak, IRDAI allowed insurers to collect premiums of individual health
insurance products in instalments. It was also mandated that Insurance companies
would announce the availability of the facility of payment of premiums in
instalments, and the conditions thereof, on their websites. This facility would be
offered to all policyholders without any discrimination.

D. Policy Document
IRDAI Regulations for protecting policy holder’s interest act 2017 specified that a Health
Insurance Policy document should contain:
a) The name(s) and address(es) of the insured and any other person having
insurable interest in the subject matter
b) Full description of the persons or interest insured
c) The sum insured under the policy person and/ or peril wise
d) UIN of the product, name, code number, contact details of the person
involved in sales process;
e) Date of birth of the insured and corresponding age in completed years;
f) The period of insurance and the date from which the policyholder has been
continuously obtaining health insurance cover in India from any of the
insurers without break
g) The sub-limits, Proportionate Deductions and the existence of Package rates
if any, with cross reference to the concerned policy section;
h) Co-pay limits if any;
i) The pre-existing disease (PED) waiting period, if applicable;
j) Specific waiting periods as applicable;
k) Deductible as applicable – general and specific, if any Perils covered and
exclusions
l) Premium payable and where the premium is provisional subject to
adjustment, the basis of adjustment of premium along with periodicity of
instalments if any
m) Policy terms, conditions and warranties
n) Action to be taken by the insured upon occurrence of a contingency likely to
give rise to a claim under the policy

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 o) The obligations of the insured in relation to the subject-matter of insurance
upon occurrence of an event giving rise to a claim and the rights of the
insurer in the circumstances
p) Any special conditions
q) Provision for cancellation of the policy on grounds of misrepresentation,
fraud, non-disclosure of material facts or non-cooperation of the insured
r) The details of the Add-on covers, if any
s) Details of Grievance Redressal mechanism and address of Ombudsman
t) Details of Grievance Redressal mechanism of Insurer;
u) Free-look period facility and portability conditions;
v) Policy migration facility and conditions where applicable.

E. Conditions and Warranties

Here, it is important to explain two important terms used in policy wordings. These
are called Conditions and Warranties.
1. Conditions: A condition is a provision in an insurance contract which forms the
basis of the agreement.
EXAMPLES:
a. One of the standard conditions in most insurance policies states:
If the claim be in any respect fraudulent, or if any false declaration be made or
used in support thereof or if any fraudulent means or devices are used by the
Insured or any one acting on his behalf to obtain any benefit under the policy or
if the loss or damage be occasioned by the wilful act, or with the connivance of
the Insured, all benefits under this policy shall be forfeited.
b. The Claim Intimation condition in a Health policy may state:
Claim must be filed within certain days from date of discharge from the Hospital.
However, waiver of this Condition may be considered in extreme cases of
hardship.
A breach of condition makes the policy voidable at the option of the insurer.
2. Warranties: A warranty is an agreement between insurer and insured that must
be carried out fully. It forms a part of the policy document. For example, the Insurer
may be covering the risk of a particular disease on the condition that the insured
shall do a quarterly consultations with a specialist. In the above example, failure of
the insured to fulfil his part of the agreement shall either negate or reduce the
liability in respect of that particular section/ warranty.
Warranties must be observed and complied with strictly and literally, whether it is
material to the risk or not.
Test Yourself 1
Which of the below statement is correct with regards to a warranty?
I. A warranty is a condition which is implied without being stated in the policy
II. A warranty forms part of a policy document

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III. A warranty is always communicated to the insured separately and cannot be part
of the policy document
IV. Claims will be payable even if a warranty is breached.

Endorsements in Health Insurance

It is the practice of insurers to issue policies in a standard form; covering certain perils
and excluding certain others.
Definition
If certain terms and conditions of the policy need to be changed at the time of issuance,
it is done by setting out the amendments/ changes through a document called
endorsement.
It is attached to the policy and forms part of it. The policy and the endorsement together
make up the contract. Endorsements may also be issued during the currency of the policy
to record changes/ amendments.
Whenever material information changes, the insured has to advice the insurance
company who will take note of this and incorporate the same as part of the
insurance contract through the endorsement.
Endorsements normally required under a policy relate to:
a) Variations/ changes in sum insured
b) Addition and deletion of insured family members
c) Change of insurable interest by way of taking of a loan and mortgaging the
policy to a bank.
d) Extension of insurance to cover additional perils/ extension of policy period
e) Change in risk, e.g. change of destinations in the case of an overseas travel
policy
f) Cancellation of insurance
g) Change in name or address etc.
Test Yourself 2
If certain terms and conditions of the policy need to be modified at the time of issuance,
it is done by setting out the amendments through __________.
I. Warranty
II. Endorsement
III. Alteration
IV. Modifications are not possible

Answers to Test Yourself

Answer 1 -The correct option is II.

Answer 2 - The correct option is II.

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 CHAPTER H-03

HEALTH INSURANCE PRODUCTS

Chapter Introduction

This chapter will give you an overall insight into the various health insurance
products offered by insurance companies in India. From just one product – Mediclaim
to hundreds of products of different kinds, the customer has a wide range to choose
appropriate cover. The chapter explains the features of various health products that
can cover individuals, family and group.

Learning Outcomes

A. Classification of health insurance products

B. IRDA Guidelines on Standardization in health insurance
C. Hospitalization indemnity product
D. Top-up covers or high deductible insurance plans
E. Senior citizen policy
F. Fixed benefit covers – Hospital cash, critical illness
G. Combo-products
H. Micro insurance and health insurance for poorer sections
I. Rashtriya Swasthya Bima Yojana
J. Pradhan Mantri Jan Arogya Yojna
K. Pradhan Mantri Suraksha Bima Yojana
L. Personal accident and disability cover
M. Overseas travel insurance
N. Group health cover
O. Special products
P. Key terms in health policies

After studying this chapter, you should be able to:

a) Explain the various classes of health insurance

b) Describe the IRDAI guidelines on standardization in health insurance
c) Discuss the various types of health products available in the Indian market today
d) Explain Personal Accident insurance
e) Discuss overseas travel insurance
f) Understand key terms and clauses in health policies

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A. Classification of health insurance products
1. Introduction to health insurance products

Definition
“Health insurance business” is defined under Section 2(6C) of the Insurance Act,
1938 as “the effecting of contracts which provide for sickness benefits or medical,
surgical or hospital expense benefits, whether in-patient or out-patient travel
cover and personal accident cover.” IRDAI follows this definition of Health insurance
business.
Health insurance products available in the Indian market are mostly in the nature
of hospitalization products. These products cover the expenses incurred by an
individual during hospitalization.
Therefore, health insurance is important mainly for two reasons:
 Providing financial assistance to pay for medical facilities in case of any
illness.
 Preserving the savings of an individual which may otherwise be wiped out due
to illness.
Today, the health insurance segment has developed to a large extent, with hundreds
of products offered by almost all general Insurance companies, standalone health
insurers and life insurers. However, the basic benefit structure of the Mediclaim
policy i.e. cover against hospitalization expenses still remains the most popular form
of insurance.
2. Broad classification of health insurance products
Whatever be the product design, health insurance products can be broadly classified
into two categories:
a) Indemnity covers
These products constitute the bulk of the health insurance market and pay for
actual medical expenses incurred due to hospitalization.
b) Fixed benefit covers
Also called as ‘hospital cash’, these products pay for a fixed sum per day for the
period of hospitalization. Some products also provide for a pre-decided amount
for different surgeries.
3. Classification based on customer segment
Products can also be classified on the basis of the target customer segment.
Products classified based on customer segments are:
a) Individual cover offered to retail customers and their family members
b) Group cover offered to corporate clients, covering employees and groups,
covering their members

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c) Mass policies for government schemes like/ Pradhan Mantri Jan Arogya Yojana/
various State health insurance schemes covering very poor sections of the
population.
The benefit structures, pricing, underwriting and marketing for each segment are
quite distinct.
Regulations for Health Insurance: Some important changes have been brought in
Health Regulations, 2016 regarding Health Products, some of which have been given
below:
1. Life Insurance Companies can offer long term health products but the
premium for such products shall remain unchanged for at least a period of
every block of three years, thereafter the premium may be reviewed and
modified as necessary.
2. Non-Life and Standalone Health insurance companies can offer individual
health products with a minimum tenure of one year and a maximum tenure
of three years, provided that the premium will remain unchanged for the
tenure.
3. Insurance companies may offer innovative ‘Pilot-Products’. General-Insurers
and Health-Insurers, can offer these products for policy tenure of 1 Year, but
not exceeding 5 Years. Group Health Policies can be offered by any insurer
for a term of one year except credit linked products where the term can be
extended up to the loan period not exceeding five years.
4. No Group Health Insurance Policy shall be issued where a Group is formed
with the main purpose of availing itself of insurance. The Group shall have a
size as determined by the Insurer which shall be applicable for all its group
policies, subject to a minimum of 7.
5. General Insurers and Health Insurers may also offer Credit Linked Group
Personal Accident policies for a term extended up to the loan period not
exceeding five years.
6. Multiple policies –In case insured has taken health policies from more than
one insurance company which provide fixed benefits, each insurer shall make
the claim payment, on occurrence of an insured event, independent of
payments received from other similar policies in accordance with the terms
and conditions of the policies.
If two or more policies are taken by an insured during a period from one or
more insurers to indemnify treatment costs, the policyholder shall have the
right to ask for a settlement of his/ her claim in terms of any of his/ her
policies. The insurer on whom the claim is made shall make the claim
payment and balance claim or claims disallowed under the earlier chosen
policy/ policies may be made from the other policy/ policies even if the sum
insured is not exhausted in the earlier chosen policy/ policies.

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B. IRDA Guidelines on Standardization in health insurance
With so many insurers providing numerous varied products and with different
definitions of various terms and exclusions, confusion arose in the market. It became
difficult for the customer to compare products and take a considered decision.
Moreover, in critical illness policies, there is no clear understanding as to what is
meant by critical illness and what is not.
To remove the confusion among insurers, service providers, TPAs and hospitals and
the grievances of the insuring public, the regulator tried to provide some kind of
standardization in health insurance. Based on a common understanding, IRDA issued
Guidelines on standardization in health insurance in 2016 which was further
amended in 2020. These are applicable to all General and Health Insurers offering
indemnity based Health insurance (excluding PA and Domestic/ Overseas Travel)
products (both Individual and Group)
The guidelines now provide for standardization of:
1. definitions of commonly used insurance terms
2. definitions of critical illnesses
3. list of optional items of expenses in hospitalization indemnity policies
4. claim forms and pre-authorization forms
5. billing formats
6. discharge summary of hospitals
7. standard contracts between TPAs, insurers and hospitals
8. standard File and Use format for getting IRDAI for new policies
9. Standardisation of exclusions
10. Exclusions not allowed

C. Hospitalization indemnity product

Hospitalization indemnity products protect individuals from the expenditure they
may need to incur in the event of hospitalisation. In most of the cases, they also
cover a specific number of days before and after hospitalisation, but exclude any
expenses not involving hospitalisation.
Hospitalization indemnity policy popularly called Mediclaim operates on an
‘indemnity’ basis. It indemnifies the policyholder by covering the expenses
during hospitalisation. Some expenses that are not covered are specified in the
policy document.
Example
Raghu has a small family consisting of his wife and a 14 year old son. He has taken
a Mediclaim policy, covering each member of his family, from a health insurance
company, for an individual cover of Rs. 1 lakh each. Each of them could get recovery
of medical expenses up to Rs. 1 lakh in case of hospitalization.
Raghu was hospitalized due to heart attack and required surgery. The medical bill
raised was Rs. 1.25 lakhs. The insurance company paid Rs 1 lakh according to the
plan coverage and Raghu had to pay the remaining amount of Rs. 25,000 from his
own pocket

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The main features of the indemnity based Mediclaim policy are detailed below,
though variations in limits of cover, additional exclusions or benefits or some
add-ons may apply to products marketed by each insurer.
1. Inpatient hospitalization expenses
The policy pays the insured the cost of hospitalization expenses incurred on
account of illness/ accident. The policy has a minimum prescribed period of
hospitalization (generally 24 hours) after which the policy provisions come into
force. However once this period is reached then the expenses for the entire
period become payable.
Most of the expenses related with the treatment are paid, yet certain expenses that
includes items of personal comfort, cosmetic surgeries are not. It is therefore
important for the customer to be made aware of the excluded items of expenses
that are not covered under the policy.
i. Room, boarding and nursing expenses as provided by the hospital/ nursing
home. This includes nursing care, RMO charges, IV fluids/ blood transfusion/
injection administration charges and similar expenses
ii. Intensive Care Unit (ICU) expenses
iii. Surgeon, anaesthetist, medical practitioner, consultants, specialists fees
iv. Anaesthetic, blood, oxygen, operation theatre charges, surgical appliances,
v. Medicines and drugs,
vi. Dialysis, chemotherapy, radiotherapy
vii. Cost of prosthetic devices implanted during surgical procedure like
pacemaker, orthopaedic implants, infra cardiac valve replacements,
vascular stents
viii. Relevant laboratory/ diagnostic tests and other medical expenses related to
the treatment
ix. Hospitalization expenses (excluding cost of organ) incurred on donor in
respect of organ transplant to the insured.
2. Day Care Procedures
There are many surgeries that do not require can be conducted at specialized
hospitals. Treatments such as eye surgeries, chemotherapy; dialysis etc. can be
classified under day-care surgeries and the list is ever growing. These are also
covered under the policy.
3. OPD cover
Coverage of outpatient expenses is still very limited in India, with few such products
offering OPD covers. However there are some plans that provide cover treatment
as outpatient and also related health care expenses associated with doctor visits,
regular medical tests, dental and pharmacy costs.

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4. Pre and post hospitalization expenses
i. Pre hospitalization expenses
Hospitalization could be either emergency hospitalization or planned. If a
patient goes in for a planned surgery, there would be expenses incurred by him
prior to the hospitalization. Such expenses are known as Pre hospitalisation
expenses
Definition
It means medical expenses incurred during a predefined number of days
preceding the hospitalization of the Insured Person, provided that these
expenses are incurred immediately before the insured person is hospitalized and

a) Such Medical Expenses are incurred for the same condition for which the
Insured Person’s Hospitalization was required, and
b) The In-patient Hospitalization claim for such Hospitalization is admissible by
the Insurance Company.
Pre hospitalization expenses could be in the form of tests, medicines,
doctors’ fees etc. Such expenses relevant and pertaining to the
hospitalization are covered under the health policies.

ii. Post hospitalization expenses

After stay in the hospital, in most cases there would be expenses related to
recovery and follow-up immediately after the insured is discharged from
hospital.

Both these two types of expenses are admissible if

a) They are incurred for the same condition for which the Insured Person’s
Hospitalization was required, and
b) The In-patient Hospitalization claim for such Hospitalization is admissible by
the Insurance Company.
Post hospitalization expenses would be relevant medical expenses incurred
during period up to the defined number of days after hospitalization and will be
considered as part of claim.
Post hospitalization expenses could be in the form of medicines, drugs, review
by doctors etc. after discharge from hospital. Such expenses have to be related
to the treatment taken in hospital and are covered under the health policies.

Though the duration of cover for pre and post hospitalization expenses would
vary from insurer to insurer and is defined in the policy, the most common cover
is for thirty days pre and sixty days post hospitalization.

Pre and post-hospitalization expenses form part of the overall sum insured for
which cover is granted under the policy.
iii. Domiciliary Hospitalization
iv. There is also a benefit available for patients whose illness otherwise needs
hospitalisation but avail treatment at home either for accommodation in
hospitals or in a position that they cannot be moved to a hospital.
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 To prevent misuse of the provision, this cover usually carries an excess clause
of three to five days meaning that treatment costs for the first three to five
days have to be borne by the insured. The cover excludes domiciliary treatments
for certain chronic or common ailments such as Asthma, Bronchitis, Diabetes
Mellitus, Hypertension, Influenza Cough, Cold, and fevers etc.

Example

Mira had taken a health insurance policy for coverage of expenses in the event of
hospitalisation. The policy had a clause for initial waiting period of 30 days.
Unfortunately, 20 days after she took the policy, Mira contracted malaria and was
hospitalised for 5 days. She had to pay heavy hospital bills.

When she asked for reimbursement from the insurance company, they denied
payment of the claim because the event of hospitalization occurred within the
waiting period of 30 days from taking the policy.

a) COVERAGE OPTIONS AVAILABLE

i. Individual coverage: An individual insured can cover himself along with family
members such as spouse, dependent children, dependent parents, dependent
parents in law, dependent siblings etc. Some insurers do not have a restriction
on the dependents who can be covered. It is possible to cover each of such
dependent insured’s under a single policy with a separate sum insured chosen
for each insured person. In such covers, each person insured under the policy
can claim up to the maximum amount of his sum insured during the currency of
the policy. Premium will be charged for each individual insured according to his
age and sum insured chosen and any other rating factor.

ii. Family floater: In the variant known as a family floater policy, the family
consisting of spouse, dependent children and dependent parents are offered a
single sum insured which floats over the entire family.
Example
If a floater policy of Rs. 5 lacs is taken for a family of four, it means that during the
policy period, it will pay for claims related to more than one family member or
multiple claims of a single member of the family. All these together cannot exceed
the total coverage of Rs. 5 lacs. Premium will normally be charged based on the age
of the oldest member of the family proposed for insurance
The covers and exclusions under both these policies would be the same. Family
floater policies are getting popular in the market as the entire family gets coverage
for an overall sum insured which can be chosen at a higher level at a reasonable
premium.
Pre-Existing diseases
Insurance is designed to cover accidents/ diseases etc. that happen unexpectedly.
Covering the costs of treating existing medical conditions is not part of insurance,
as it is unfair to healthy people who would have to pay for the existing illnesses of

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some others. It goes against the principle of creating risk pools covering similarly
placed risks. So, it is very important to collect details of the existing ailments/
injuries of each insured person before issuing a health policy. This will enable the
insurer to decide on accepting the proposal for insurance, charging proper premiums
and/ or providing additional conditions for those who are more likely to make
claims.

What is a pre-existing disease?

Diseases suffered by an insured person within 48 months prior to commencement of
the policy are regarded as pre-existing diseases. Based on the same logic, insurers
are not allowed to exclude pre-existing diseases after a person is covered for
insurance continuously for 48 months.

Renewability: Although Healthcare policies have a contract life of one year, and a
fresh policy is to be issued every year, Lifelong renewability has been made
compulsory by IRDAI for all policies.

SPECIAL FEATURES

In order to provide new features in the product as also to maintain the pricing,
insurance companies have come out innovative modifications in the products. For
example, the Mediclaim Policy, which was the most popular policy before 2000, has
undergone many changes and new special features have been added to the
coverage. Some features have been added to the basic indemnity cover. These
features may vary from insurer to insurer and product to product and may not be
available uniformly for all products.

i. Sub limits and Disease specific capping

Some of the products have disease specific capping e.g. cataract. A few also have
sub limits on room rent linked to sum insured e.g. per day room rent restricted to
1% of sum insured and ICU charges to 2% of sum insured. As expenses under other
heads such as ICU charges, OT charges and even surgeon’s fees are linked to the
type of room opted for, room rent capping helps in restricting expenses under other
heads also and hence the overall hospitalization expenses.

ii. Co-payment (popularly called Co-pay)

Co-payment is defined by IRDAI as a cost sharing requirement under a health

insurance policy that provides that the policyholder/ insured will bear a specified
percentage of the admissible claims amount. A co-payment does not reduce the Sum
Insured.
Co-payment is the concept of the insured bearing a portion of each and every claim
under a health policy. These could be compulsory or voluntary depending on the
product. Co-payment brings in a certain discipline among the insured to avoid
unnecessary hospitalizations. This ensures that the insured exercises caution in
selecting his healthcare options and avoids luxurious ones.

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When an insured event occurs, many health policies require the insured to share a
part of the insured loss. E.g. If the insured loss is INR 20000 and the co-pay amount
is 10% in the policy, then insured pays INR 2000.

iii. Deductible/ Excess

As explained in Chapter 5, ‘Deductible’, also called ‘Excess’ is a cost-sharing
provision. Under a health insurance policy, it provides that the insurer will not be
liable for a specified rupee amount in case of indemnity policies and for a specified
number of days/ hours in case of hospital cash policies which will apply before any
benefits are payable by the insurer. In Health policies, it is the fixed amount of
money the insured is required to pay initially before the claim is paid by insurer, for
e.g. if the deductible in a policy is Rs. 10,000, the insured pays first Rs. 10,000 in
each insured loss claimed for. To illustrate, if the claim is for Rs. 80,000, the insured
bears the first Rs. 10,000 and the insurer pays Rs. 70,000. A deductible does not
reduce the Sum Insured.
Deductible may also be a specified number of days/ hours in case of hospital cash
policies which will apply before any benefits are payable by the insurer.
An agent must examine and inform the insured whether the deductible is applicable
per year, per life or per event and the specific deductible to be applied.

iv. Waiting Period

A waiting period of 30 days from inception of policy is normally applicable in most
policies for making any claim. This however will not be applied for hospitalization
due to an accident.

v. Waiting periods for specific diseases

This is applicable for diseases for which treatment can be delayed and planned.
Depending on the product waiting periods of one/ two/ four years are imposed by
the insurance companies and claims are paid for these ailments only after expiry of
this period. Some of the diseases are Cataract, Benign Prostatic Hypertrophy,
Hysterectomy for Menorrhagia or Fibromyoma, Hernia, Hydrocele, Congenital
internal disease, Fistula in anus, piles, Sinusitis and related disorders etc.

vi. Coverage for Day care procedure

Advancement of medical science has seen inclusion of large number of procedures
under day care category as already discussed earlier

vii. Cost of pre policy check up

Cost of medical examination was earlier borne by prospective clients. Now insurer
reimburses the cost, provided the proposal is accepted for underwriting, the
reimbursement varying from 50% to 100%.Now this has also been mandated by IRDAI
that insurer would bear at least 50% of health check-up expenses.

viii. Add on covers

Various new additional covers called Add-on covers have been introduced by some
of the insurers. Some of them are:
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 Maternity cover: Maternity was not offered earlier under retail policies but is
now offered by most insurers, with varying waiting periods.
 Critical illness cover: Available as an option under the high end version products
for certain ailments which are life threatening and entail expensive treatment.
 Reinstatement of sum insured: After payment of claim, the sum insured (which
gets reduced on payment of a claim) can be restored to the original limit by
paying extra premium.
 Coverage for AYUSH – Ayurveda – Yoga – Unani – Siddha – Homeopath: A few
policies cover expenses towards AYUSH treatment up to a certain percentage of
the hospitalization expenses.

ix. Value added covers

Few indemnity products include value added covers as listed below. The benefits
are payable up to the limit of sum insured specified against each cover in the
schedule of the policy, not exceeding the overall sum insured.

 Outpatient cover: Health insurance products in India mostly cover only in-
patient hospitalization expenses. Few companies now offer limited cover for out-
patient expenses under some of the high-end plans.

 Hospital cash: This provides for fixed lump sum payment for each day of
hospitalization for a specified period. Normally the period is granted for 7 days
excluding the policies deductible of 2/ 3 days. Thus, the benefit would trigger
only if hospitalization period is beyond the deductible period. This is in addition
to the hospitalization claim but within the overall sum insured of the policy or
may be with a separate sub-limit.

 Recovery benefit: Lump sum benefit is paid if the total period of stay in hospital
due to sickness and/ or accident is not less than 10 days.

 Donor’s expenses: The policy provides for reimbursement of expenses towards

donor in case of major organ transplant as per the terms and condition defined
in the policy.

 Reimbursement of ambulance: Expenses incurred towards ambulance by

Insured/ insured person are reimbursed up to a certain limit specified in the
schedule of the policy.

 Expenses for accompanying person: This is intended to cover the expenses

incurred by accompanying person towards food, transportation whilst attending
to insured patient during the period of hospitalization. Lump sum payment or
reimbursement payment as per the policy terms is paid, up to the limit specified
in the schedule of the policy.

 Family definition: Definition of family has undergone changes in few health

products. Earlier, primary insured, spouse, dependent children were granted

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 cover. Now there are policies where parents and in-laws can also be granted
cover under the same policy.

x. Failure to seek or follow medical advice or failure to follow treatment

Initially the health insurance cover was denied to persons suffering from pre-existing
diseases. Such cases are now being offered cover by excluding such diseases.

Standard Health Product – Arogya Sanjeevani: In the background of the Covid-19

pandemic, IRDAI asked all Insurance Companies to come out with a standard health
product called Arogya Sanjeevani with no variations in terms and conditions to make
it easy to understand. The premium may however vary according to the pricing
policy of each company. This is to ensure better penetration of Health Insurance in
market. All Insurers are required to offer this product called Arogya Sanjeevani.
[The context for this move was that there were different Health Insurances available
in the market and customers were not able to compare them, causing confusion.]

The following two types of plans are available under Arogya Sanjeevani Insurance
Policy:

 Individual Plan: A single policyholder will be the beneficiary of Arogya

Sanjeevani policy.
 Family Floater Plan: Multiple family members of the policyholder can become
the beneficiaries of Arogya Sanjeevani plan.

This product comes with a capping on room rent and ICU charges but it also covers
modern day treatment and stem cell therapy with 50% capping.

D. Top-up covers or high deductible insurance plans

A top-up cover is also known as a high deductible policy. Top-Up policies by insurers,
provide cover for high sums insured over and above a specified amount (called
threshold).This policy works along with a basic health cover having a low sum
insured and comes at a comparatively reasonable premium. For example, Individuals
covered by their employers can also opt for a top-up cover for additional protection
(keeping the sum insured of the first policy as the threshold).

To be eligible to receive a claim under the top-up policy, the medical costs must be
greater than the deductible (or threshold) level chosen under the plan and the
reimbursement under the high deductible plan would be the amount of expense
incurred i.e. greater than the deductible.
Example

An individual is covered for a sum insured of Rs. 3 lacs by his employer. He could
opt for a top-up policy of Rs. 10 lacs in excess of Rs. Three lacs. If the cost of a
single hospitalization is Rs. 5 lacs, the basic policy would cover up to Rs. Three lacs
only. With the top-up cover, the balance sum of Rs. Two lacs would be paid out by
the top-up policy.
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Top-up policies come cheap and the cost of a single Rs. 10 lacs policy would be far
higher than the top-up policy of Rs. 10 lacs in excess of Rs. Three lacs.

These covers are available on individual basis and family basis the top-up plan
requires the deductible amount to be crossed at every single event of
hospitalization. However some top-up plans that allow the deductible to be crossed
post a series of hospitalizations during the policy period are known as Aggregate
based high deductible plans or Super top-up cover as known in the Indian market. A
super top-up plan covers the total of all hospitalisation bills (up to the super top-up
plan limit) above the deductible amount, that is, the deductible is applied to the
total claims in one year. Hence, once the deductible is paid, the plan becomes
active for subsequent claims.

E. Senior Citizen Policy

These plans are designed to offer cover to elderly people who often were denied
coverage after certain age (e.g. people over 60 years of age). The structure of the
coverage and exclusions are much like a hospitalization policy.

Special attention is paid to diseases of the elderly in setting coverage and waiting
period. Entry age is mostly after 60 years and renewable lifelong. Sum insured range
from Rs. 50,000 to Rs. 5,00,000. There is variation of waiting period applicable to
certain ailments.

Example: Cataract may have 1 year waiting for one insurer and 2 year waiting period
for some other insurer.

Example: Sinusitis does not fall in waiting period clause of some insurers but few
others include it in their waiting period clause.

Some policies have waiting periods or capping in respect of Pre-existing diseases.

Pre-post hospital expenses are either paid as a percentage of hospital claims or a
sub limit whichever is higher. In some policies they follow the typical indemnity
plans such as expenses falling within specified period of 30/ 60 days or 60/ 90 days.

IRDAI has mandated that all health insurers and TPAs shall establish a separate
channel to address the health insurance related claims and grievances of senior
citizens.

F. Fixed benefit covers – Hospital Cash, Critical Illness

Under this cover, the insured gets a fixed sum as claim amount irrespective of the
amount spent by him for the named treatment. In this product, commonly occurring
treatments are listed under segments such as ENT, Ophthalmology, Obstetrics and
Gynaecology, etc. and the maximum pay out for each of these is spelt out in the
policy.

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These policies are simple as only proof of hospitalization and coverage of ailment
under the policy are sufficient to process the claim. Some products package a daily
cash benefit along with the fixed benefit cover.

A provision is made to pay a fixed sum for surgeries/ treatment which do not find a
place in the list named in the policy. Multiple claims for different treatments are
possible during the policy period. However the claims are finally limited by the sum
insured chosen under the policy.

Some of the fixed benefit insurance plans are:

 Hospital daily cash insurance plans

 Critical illness insurance plans

1. HOSPITAL DAILY CASH POLICY

a) Per day amount limit

Hospital cash coverage provides a fixed sum to the insured person for each day
of hospitalization. Per day cash coverage could vary from (for example) Rs. 1,500
per day to Rs. 5,000 or even more per day. An upper limit is provided on the
daily cash pay-out per illness as well as for the duration of the policy, which is
usually an annual policy.
b) Number of payment days
In some of the variants of this policy, the number of days of daily cash allowed
is linked to the disease for which treatment is being taken. A detailed list of
treatments and duration of stay for each is stipulated which limits the daily cash
benefit allowed for each type of procedure/ illness.

c) Standalone cover or add-on cover

The hospital daily cash policy is available as a standalone policy as offered by
some insurers while, in other cases, it is an add-on cover to a regular indemnity
policy. These policies help the insured to cover incidental expenses as the pay-
out is a fixed sum and not related to the actual cost of treatment. This also
allows the pay out under the policy to be provided in addition to any cover
received under an indemnity based health insurance plan.
d) Supplementary cover
These policies could supplement a regular hospital expenses policy as it is cost
effective and provides compensation for incidental expenses and also expenses
not payable under the indemnity policy such as exclusions, co-pay etc.

e) Other advantages of the cover

From the insurer’s point of view, this plan has several advantages as it is easy
to explain to a customer and hence can be sold more easily. It beats medical
inflation as a fixed sum per day is paid for the duration of hospitalization
whatever may be the actual expense. Also, acceptance of such insurance covers
and claims settlements are really simplified.

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2. CRITICAL ILLNESS POLICY

With advancement in medical science, people are surviving some of the major
diseases like cancer, strokes and heart attack etc., which in earlier times would
have resulted in death. However surviving a major illness entails huge expense for
treatment as well as for living expenses post treatment. Onset of critical illness
threatens the financial security of a person. A basic health insurance policy may not
be sufficient to cover all medical costs in such cases.

Critical illness policy has a provision to pay a lump sum amount on diagnosis of
certain named critical illness. The sum insured is high to take care of large expenses.

In India, Critical Illness (CI) benefits are most commonly sold by life insurers as
riders to life policies and two forms of cover are offered by them – accelerated CI
benefit plan and standalone CI benefit plan. To avoid confusion, the definitions of
22 most common critical illnesses have been standardized under IRDA Health
Insurance Standardization guidelines.

The critical illnesses covered vary across insurers and products. Generally 100% of
the sum insured is paid on diagnosis of a critical illness. In some cases compensation
could vary from 25% to 100% of sum insured depending on the policy terms and
conditions and severity of illness.

There is a waiting period of 90 days from inception of policy for any benefit to
become payable under the policy and the survival clause of 30 days after diagnosis
of the illness. Rigorous medical examinations are to be undergone for persons
especially over 45 years of age.

The policy terminates, once compensation is paid under the policy in respect of any
of the insured person. This policy is also offered to groups especially corporates who
take policies for their employees.

Disease Specific Products- Corona Kavach

In June 2020, when the country was facing many cases of Corona Virus infection
(Covid-19), the market saw the introduction of many benefit based products
providing lump sum payment on the diagnosis of Covid-19 positive. Later some
companies introduced indemnity based products too. However, there were many
consumables like PPE kits, Oximeter etc. and quarantine expenses that were not
taken care of in these products.

IRDAI came up with two standard Health Insurance Policies called Corona Kavach
and Corona Rakshak (discussed separately under Life insurance section). While it is
mandatory for general and health insurers to provide Corona Kavach as an
indemnity-based standard COVID-19 product, Corona Rakshak, offering the benefit-
based product, is optional for all insurers. Both products have a waiting period of
15 days.

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Corona Rakshak is a standard benefit based health insurance designed for providing
lump sum benefit to insured individuals affected by COVID-19 and require
hospitalisation for a minimum continuous period of 72 hours. The plan offers
coverage on individual basis for people between the age of 18 years and 65 years,
with different policy terms of 3.5months, 6.5 months and 9.5 months as a one-time
benefit policy and terminates upon the payment of benefit. Corona Rakshak offers
sum insured options ranging from Rs. 50,000 to Rs. 2.5 lakh, in multiples of
50,000.The policy provides (i) complete sum insured benefit, (ii) economical
premium, (iii) lump-sum amount of claim, (iv) a short waiting period of 15 days and
(v) tax benefits.

Corona Kavach offers the following coverage vide Guidelines issued by IRDAI in June
2020:

1. Hospitalization Expenses incurred for the treatment of Covid-19 on Positive

diagnosis of Covid-19 in a government authorized diagnostic centre covering the
following: (Expenses on Hospitalization for a minimum period of 24 hours are
admissible.)

a. Room, Boarding, Nursing Expenses as provided by the Hospital / Nursing

Home.
b. Surgeon, Anaesthetist, Medical Practitioner, Consultants, Specialist Fees
c. Anaesthesia, blood, oxygen, operation theatre charges, surgical appliances,
ventilator charges, medicines and drugs, costs towards diagnostics,
diagnostic imaging modalities, PPE Kit, gloves, mask and such other similar
expenses
d. Intensive Care Unit (ICU) / Intensive Cardiac Care Unit (ICCU) expenses.
e. Expenses incurred on road Ambulance subject to a maximum of Rs.2000/-
per hospitalization.

2. Home Care Treatment Expenses for availing treatment at home up to maximum

14 days per incident subject to the conditions (not exhaustive) mentioned
below:
a. The Medical practitioner advices the Insured person to undergo treatment at
home.
b. There is a continuous monitoring of the health status by a medical
practitioner for each day, including records of treatment administered.

3. Other Expenses covered if prescribed by the treating medical practitioner and

related to treatment of COVID,
a. Diagnostic tests undergone at home or at diagnostics centre
b. Medicines prescribed in writing
c. Consultation charges of the medical practitioner
d. Nursing charges related to medical staff
e. Medical procedures limited to parenteral administration of medicines
f. Cost of Pulse oximeter, Oxygen cylinder and Nebulizer

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Additional Cover - Hospital Daily Cash: The Insurer will pay 0.5% of sum insured per
day for each 24 hours of continuous hospitalization for treatment of Covid following
an admissible hospitalization claim under this policy.

Standard Vector Borne Disease Health Policy:

IRDAI vide its Guidelines dated 3 February 2021 decided that Standard Products for
vector borne diseases shall offer the following coverage:
1. Hospitalization Benefit: Lump sum benefit equal to 100% of the Sum Insured
shall be payable on positive diagnosis of any of the following vector borne
disease (s) requiring hospitalization for a minimum continuous period of 72
hours.
a) Dengue fever
b) Malaria
c) Filaria (Lymphatic Filariasis)
d) Kala-azar
e) Chikungunya
f) Japanese Encephalitis
g) Zika Virus

2. Diagnosis Cover: 2% of the sum insured shall be payable on positive diagnosis

(through laboratory examination and confirmed by the medical practitioner) of
every covered vector borne disease on the first diagnosis during the Cover
Period, subject to policy terms and conditions. The Policyholder is entitled for
payments under “diagnosis cover” payment for each disease only once in the
policy year.

G. Combo-products

Health plus Life Combo Products offer the combination of a life insurance cover of
a Life Insurance Company and a health insurance cover offered by Non-Life and/ or
Standalone Health Insurance Company.

The product may be offered both as individual insurance policy and on group
insurance basis. However in respect of health insurance floater policies, the pure
term life insurance coverage is allowed on the life of one of the earning members
of the family who is also the proposer on health insurance policy subject to insurable
interest and other applicable underwriting norms of respective insurers.

Package policies

Package or umbrella covers give, under a single document, a combination of covers.

Examples of package policy in health insurance include combining Critical illness

cover benefits with indemnity policies and even life insurance policies and hospital
daily cash benefits with indemnity policies.

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Travel Insurance:
Travel insurance policy is also offered as a package policy covering not only health
insurance but also accidental death/ disability benefits along with Medical expenses
due to illness/ accident and the coverages like Loss of or delay in arrival of checked
in baggage, Loss of passport and documents, Third party liability for property/
personal damages, Cancellation of trips and even Hijack cover traditionally provided
under travel policies. (Details of Travel Insurance are provided later.)
H. Micro insurance and health insurance for poorer sections
Micro-insurance products are specifically designed to aim for the protection of low
income people from rural and informal sectors. It is a low value product, with an
affordable premium and benefit package. Micro insurance is governed by the IRDA
Micro Insurance Regulations, 2005.
Such covers are mostly taken on a group basis by various community organizations
or non-governmental organizations (NGOs) for their members.
Two policies particularly created by PSUs to cater to the poorer sections of society
are Jan Arogya Bima Policy and Universal Health Scheme. The private sector
insurance companies have also come out with many innovative micro insurance
health products to cater to this target segment like Bima Kavach Yojana, Grameena
Jeevan Raksha Plan, Bhaghya Laxmi - the entire list can be found on IRDAI website.
I. Rashtriya Swasthya Bima Yojana
The government has also launched various health schemes, some of them applicable
to particular states. It had implemented the Rashtriya Swasthya Bima Yojana (RSBY)
in association with insurance companies to provide health insurance coverage for
the below poverty line (BPL) families. However RSBY provided a Sum Insured of only
Rs 30,000 which was not considered enough to cover major surgeries/
hospitalisation expenses.
J. Pradhan Mantri Jan Arogya Yojana
To address the shortcomings of RSBY, as recommended by the National Health Policy
2017, the Government of India launched ‘Ayushman Bharat Scheme’ in 2017, a
flagship scheme of to achieve the vision of Universal Health Coverage (UHC). Also
known as Pradhan Mantri Jan Arogya Yojana (PMJAY) Ayushman Bharat came with a
Sum Insured of Rs. 5,00,000.
It subsumed the then existing Rashtriya Swasthya Bima Yojana (RSBY). PM-JAY is
fully funded by the Government and cost of implementation is shared between the
Central and State Governments.

K. Pradhan Mantri Suraksha Bima Yojana

Features of the recently announced PMSBY covering personal accident death and
disability cover are as follows:
Scope of coverage: All savings bank account holders in the age 18 to 70 years in
participating banks are entitled to join through one savings bank account only and
if he enrols in more than one bank, he gets no extra benefit and the extra premium
paid will stand forfeited. Aadhaar would be the primary KYC for the bank account.

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Enrolment Modality/ Period: The cover shall be for the one year period from 1st
June to 31st May for which option to join/ pay by auto-debit from the designated
savings bank account on the prescribed forms will be required to be given by 31st
May of every year,
Joining subsequently on payment of full annual premium may be possible on
specified terms. Individuals who exit the scheme at any point may re-join the
scheme in future years through the above modality.
Benefits under the insurance are as follows:
Table of Benefits Sum Insured
Death Rs. 2 Lakh
Total and irrecoverable loss of both eyes or loss of use of both Rs. 2 Lakh
hands or feet or loss of sight of one eye and loss of use of hand
or foot
Total and irrecoverable loss of sight of one eye or loss of use of Rs. 1 Lakh
one hand or foot
Joining and Nomination facility is available by SMS, email or personal visit.
Premium: Rs.12/- per annum per member. The premium will be deducted from the
account holder’s savings bank account through ‘auto debit’ facility
Termination of cover: The accident cover for the member shall terminate:
1. On member attaining the age of 70 years (age nearest birth day) or
2. Closure of account with the Bank or insufficiency of balance to keep the
insurance in force or
If the insurance cover is ceased due to any technical reasons such as insufficient
balance on due date or due to any administrative issues, the same can be reinstated
on receipt of full annual premium, subject to conditions that may be laid down.

L. Personal Accident and Disability cover

A Personal Accident (PA) Cover provides compensation due to death and disability
in the event of unforeseen accident.
In a PA policy,
a) The death benefit is payment of 100% of the sum insured,
b) In the event of disability, compensation varies from a fixed percentage of the
sum insured in the case of permanent disability
c) Weekly compensation for temporary disablement.
Weekly compensation means payment of a fixed sum per week of disablement
subject to a maximum limit in terms of number of weeks for which the compensation
would be payable.
1. Types of disability covered
Types of disability which are normally covered under the policy are:
i. Permanent total disability (PTD): means becoming totally disabled for
lifetime viz. paralysis of all four limbs, comatose condition, loss of both
eyes/ both hands/ both limbs or one hand and one eye or one eye and one
leg or one hand and one leg,
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 ii. Permanent partial disability (PPD): means becoming partially disabled for
lifetime viz. loss of fingers, toes, phalanges etc.
iii. Temporary total disability (TTD): means becoming totally disabled for a
temporary period of time. This section of cover is intended to cover the loss
of income during the disability period.
The client has choice to select only death cover or death plus permanent
disablement of Or Death plus permanent disablement and also temporary total
disablement.
2. Sum insured
Sums insured for PA policies are usually decided on the basis of gross monthly
income. Typically, it is 60 times of the gross monthly income. However, some
insurers also offer on fixed plan basis without considering the income level. In such
policies sum insured for each section of cover varies as per the plan opted.
3. Personal Accident Insurance – a Benefit plan
Being a benefit plan, PA policies are not subject to the principle of ‘contribution’
at the time of claim. Thus, if a person has more than one policy with different
insurers, claims would be paid under all the policies.
4. Scope of cover
These policies are often extended to cover medical expenses, i.e. reimbursement
of hospitalization/ medical costs incurred following the accident.
5. Value added benefits
Along with personal accident, many insurers also offer value added benefits like
hospital cash on account of hospitalization due to accident, cost of transportation
of mortal remains, education benefit for a fixed sum and ambulance charges on the
basis of actual or fixed limit whichever is lower.
6. Exclusions:
Common exclusions under Personal Accident insurance are accidents arising out of
disability existing prior to the inception of policy, death or disability due to mental
disorders or any sickness, injury due to war, invasion, culpable homicide or murder,
intentional self-injury, suicide, intake of drugs/ alcohol, injury while engaging in
defined extra hazardous activity like aviation or ballooning . This is an indicative
list and can vary from company to company.
PA policies are offered to individuals, family and also to groups.
Group Personal Accident Policies
Group Personal Accident Policies are usually annual policies with renewals being
allowed on the anniversary. However, non-life and standalone health insurers may
offer group personal accident products with term less than one year also to provide
coverage to specific events.
Broken bone policy and compensation for loss of daily activities
This is a specialised PA policy. This policy is designed to provide cover against listed
fractures. Fixed benefit or percentage of sum insured mentioned against each
fracture is paid at the time of claim. Quantum of benefit depends on the type of
bone covered and nature of fracture sustained.

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M. Overseas Travel insurance
Need for the policy: To cover expenses of accidental injury or hospitalisation whilst
travelling outside India for business, holidays or studies. , The cost of medical care,
especially in countries such as USA and Canada, is very high and could cause major
financial problems.
Scope of coverage
Such policies are primarily meant for accident and sickness benefits, but most
products available in the market package a range of covers within one product.
The usual covers offered are:
a) Medical and sickness section:
i. Accidental death/ disability
ii. Medical expenses due to illness/ accident
b) Repatriation and evacuation
c) Personal accident cover
d) Personal liability
e) Other non-medical covers:
i. Trip Cancellation
ii. Trip Delay
iii. Trip interruption
iv. Missed Connection
v. Delay of Checked Baggage
vi. Loss of Checked Baggage
vii. Loss of Passport
viii. Emergency Cash Advance
ix. Hijack Allowance
x. Bail Bond insurance
xi. Hijack cover
xii. Sponsor Protection
xiii. Compassionate Visit
xiv. Study Interruption
xv. Home burglary

1. Types of plans
The popular policies are the Business and Holiday Plans, the Study Plans and the
Employment Plans.
2. Who can take the policy
An Indian citizen travelling abroad on business, holiday or for studies can avail this
policy. Employees of Indian employers sent on contracts abroad can also be covered.
3. Sum insured and premiums
The cover is granted in US Dollars and generally varies from USD 100,000 to USD
500,000 for the section covering medical expenses, evacuation and repatriation. For
other sections the Sum Insured is lower, except for the liability cover. Premiums
can be paid in Indian rupees except in the case of the employment plan where
premium has to be paid in dollars. The plans are usually of two types:
 World-wide excluding USA/ Canada
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  World-wide including USA/ Canada
Some products provide cover for a group of countries. Examples are travel to Asian
countries only, European countries only or travel to a particular country only.
Corporate Frequent Flyer plans
This is an annual policy whereby a corporate/ employer takes individual policies for
its executives who frequently make trips outside India. This cover can also be taken
by individuals who fly overseas many times during a year. An advance premium is
paid based on the estimated man days of travel in a year by a company’s employees.
The above policies are granted only for business and holiday travels. Pre-existing
diseases are usually excluded for Overseas Medical/ Travel Insurances.

N. Group Health cover

1. GROUP POLICIES
As explained earlier in the chapter a group policy is taken by a group owner who
could be an employer, an association, a bank’s credit card division, where a single
policy covers the entire group of individuals. These policies are usually, one year
renewable contracts.
Features of group policies - Hospitalisation benefit covers.
1. Scope of coverage
The most common form of group health insurance is the policy taken by
employers covering employees and their families including dependent spouse,
children and parents/ parents in law.
2. Tailor-made cover
Group policies are often tailor-made covers to suit the requirements of the
group. Thus, in group policies, one will find several standard exclusions of the
individual policy being covered under the group policy.
3. Maternity cover
One of the most common extensions in a group policy is the maternity cover.
Maternity cover would provide for the expenses incurred in hospitalization for
delivery of child and includes C- section delivery. This cover is generally
restricted to a certain amount within the overall sum insured of the family.
4. Child cover
Coverage is given to babies from day one, sometimes restricted to the
maternity cover limit and sometimes extended to include the full sum insured
of the family.
5. Pre-existing diseases covered, waiting period waived off
Several of the usual exclusions, such as the pre-existing disease exclusion,
thirty days waiting period, two years waiting period, congenital diseases may
be waived off, in tailor-made group policies.
6. Premium calculation
The premium charged for a group policy is based on the age profile of the
group members, the size of the group and most importantly the claims
experience of the group.

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 7. Non-employer employee groups
In India, regulatory provisions strictly prohibit formation of groups primarily
for the purpose of taking out a group insurance cover. When group policies
are given to other than employers, it is important to determine the relation
of the group owner to its members.
Example
A bank taking a policy for its saving bank account holders or credit card
holders constitutes a homogenous group, whereby a large group is able to
benefit by a tailor-made policy designed to suit their requirements.

8. Pricing
In group policies, there is provision for discount on premium based on size of
the group as also the claims experience of the group
2. CORPORATE BUFFER OR FLOATER COVER
In most group policies, each family is covered for a defined sum insured, varying
from Rs. One lac to five lacs and sometimes more. There arise situations where the
sum insured of the family is exhausted, especially in the case of major illness of a
family member. In such situations, if the buffer cover is opted for it brings relief,
whereby the excess expenses over and above the family sum insured are met from
this buffer amount.
Amounts are drawn from the buffer, once a family’s sum insured is exhausted.
However this utilization is usually restricted to major illness/ critical illness
expenses where a single hospitalization exhausts the sum insured.
O. Special Products
1. Disease covers
In recent years, disease specific covers for cancer, diabetes, Covid-19 have been
introduced in the Indian market. The cover is either short term or long term – 5
years to 20 years and a wellness benefit is also included – a regular health check-up
paid for by the insurer. There is incentive for better control of factors like blood
glucose, blood pressure etc. in the form of reduced premiums from second year of
policy onwards. On the other hand, a higher premium would be chargeable for poor
control.
2. Product designed to cover diabetic persons
This policy can be taken by persons between 26 and 65 years and is renewable up
to 70 years. Sum Insured ranges from Rs. 50,000 to Rs. 5,00,000. Capping on Room
rent is applicable. Product is aimed to cover hospitalization complications of
diabetes like diabetic retinopathy (eye), kidney, diabetic foot, kidney transplant
including donor expenses.

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Test Yourself 1
Though the duration of cover for pre-hospitalization expenses would vary from
insurer to insurer and is defined in the policy, the most common cover is for
________ pre-hospitalization.
I. Fifteen days
II. Thirty days
III. Forty Five days
IV. Sixty days

Key terms in health policies (All the terms are as defined in IRDAI Master
Circular on Standardization of Health Insurance Products dated 22.07.2020)
1. Network Provider
Network provider refers to a hospital/ nursing home/ day care centre which is under
tie-up with an insurer/ TPA for providing cashless treatment to insured patients.
Patients are free to go to out-of-network providers but there they are generally
charged much higher fees.
2. Preferred provider network (PPN)
An insurer has the option to create a preferred network of hospitals to ensure quality
treatment and at best rates. When this group is limited to only a select few by the
insurer based on experience, utilization and cost of providing care, preferred
provider networks get formed.
3. Cashless service
A cashless service enables the insured to avail of the treatment up to the limit of
cover without any payment to the hospitals. All that the insured has to do is
approach a network hospital and present his medical card as proof of insurance. The
insurer facilitates a cashless access to the health service and directly makes
payment to the network provider for the admissible amount. However, the insured
has to make payment for amounts beyond the policy limits and for expenses not
payable as per policy conditions.
4. Third Party Administrator (TPA)
A major development in the field of health insurance is the introduction of the third
party administrator or TPA. Several insurers across the world utilize the services of
independent organizations for managing health insurance claims. These agencies
are known as the TPAs. In India, a TPA is engaged by an insurer for provision of
health services which includes among other things:
i. Providing an identity card to the policyholder which is proof of his insurance
policy and can be used for admission into a hospital
ii. Providing a cashless service at network hospitals
iii. Processing of claims
TPAs service health policyholders starting from issuance of unique identity cards for
hospital admissions up to settlement of claims either on cashless basis or
reimbursement basis. Third party administrators enter into an MOU with hospitals
or health service providers and ensure that any person who undergoes treatment in
the network hospitals is given a cashless service. They are the intermediaries
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between the insurer(s) and the insured(s), who co-ordinate with the hospitals and
finalize health claims.
5. Hospital
A hospital means any institution established for in-patient care and day care
treatment of sickness and/ or injuries and which has been registered as a hospital
with the local authorities, wherever applicable, and is under the supervision of a
registered and qualified medical practitioner AND must comply with all minimum
criteria as under:
a) Has at least 10 inpatient beds in those towns having a population of less than
10,00,000 and 15 inpatient beds in all other places;
b) Has qualified nursing staff under its employment round the clock;
c) Has qualified medical practitioner(s) in charge round the clock;
d) Has a fully equipped operation theatre of its own where surgical procedures
are carried out;
e) Maintains daily records of patients and will make these accessible to the
Insurance Company’s authorized personnel.
6. Medical practitioner
A Medical practitioner is a person who holds a valid registration from the medical
council of any state of India or for homeopathy and is thereby entitled to practice
medicine within its jurisdiction; and is acting within the scope and jurisdiction of
his license. However, insurance companies are free to make a restriction that the
registered practitioner should not be the insured or any close family member. This
is to ensure fraudulent claims are not lodged by taking treatment from relatives or
by self or by hospitals owned by either.
Qualified nurse: Qualified nurse means a person who holds a valid registration from
the Nursing Council of India or the Nursing Council of any state in India.
7. Reasonable and necessary expenses
A health insurance policy always contains this clause as the policy provides for
compensation of expenses that would be deemed to be reasonable for treatment of
a particular ailment and in a particular geographical area.
8. Notice of claim
Every insurance policy provides for immediate intimation of claim and specified
time limits for document submission. In health insurance policies, wherever cashless
facility is desired by the customer, intimations are given well before the
hospitalization. However in cases of reimbursement claims the time limit for
submission of claim documents is normally fixed at 15 days from the date of
discharge.
9. Free health check
In individual health policies, a provision is generally available to give some form of
incentive to a claim free policyholder. Many policies provide for reimbursement of
the cost of health check-up at the end of four continuous, claim free policy periods.

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10. Cumulative bonus
A cumulative bonus is given on the sum insured for every claim free year. This means
that the sum insured gets increased on renewal by a fixed percentage say 5%
annually and is allowed up to a maximum of 50% for ten claim-free renewals.
Moreover, if a claim is made in any particular year, the cumulative bonus accrued
can only be reduced at the same rate at which it is accrued.
Example
A person takes a policy for Rs. 3 lacs at a premium of Rs. 5,000. In the second year,
in case of no claims in the first year, he gets a sum insured of Rs. 3.15 lacs (5% more
than the previous year) at the same premium of Rs. 5,000. This could go up to Rs.
4.5 lacs over a ten year claim free renewal.
11. Malus/ Bonus
Just as there is an incentive to keep the health policy free of claims, the opposite
is called a malus. Here, if the claims under a policy are very high, a malus or loading
of premium is collected at renewal. However, in case of group policies, the malus
is charged by way of loading the overall premium suitably to keep the claim ratio
within reasonable limits.
12. No claim discount
Some products provide for a discount on premium for every claim free year instead
of a bonus on sum insured.
13. Room rent restrictions
Some health plans place a restriction on the category of room that an insured
chooses by linking it to the sum insured. Hence a person with a sum insured of one
lac would be entitled to a room of Rs 1,000 per day if the policy has a room rent
restriction of 1% of sum insured per day.
14. Renewability clause
The IRDAI guidelines on renewability of health insurance policies makes lifetime
guaranteed renewal of the health policies compulsory, except on grounds of fraud
and misrepresentation. In accordance to the provisions of IRDAI Health Insurance
Regulation 2016, once a proposal is accepted in respect of a health insurance policy
(except Personal Accident and Travel Policies) and a policy is issued which is
thereafter renewed periodically without any break, further renewal shall not be
denied on the grounds of age of the Insured. Thus, health insurance policies are
renewable lifelong.
15. Cancellation clause
An insurance company may at any time cancel the policy only on grounds of
misrepresentation, fraud, and non-disclosure of material fact or non-cooperation by
the insured.
When policies are cancelled by the insurer, a proportion of the premium
corresponding to the unexpired period of insurance, is returned to the insured
provided no claim has been paid under the policy. This is usually on pro-rata basis.
When annual policies are cancelled by the insured, insurers usually charge premiums
at Short period scales, instead of pro-rata premiums. This would prevent anti-
selection against the insurers and take care of the initial expenses of the insurer.

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16. Grace period for renewal
As mentioned in Chapter 4, the Grace Period provision enables a policy that would
otherwise have lapsed for non-payment of premium, to continue in force during the
grace period.
Most of above key clauses, definitions, exclusions relating to grace period have been
standardized under Health Regulations and Health Insurance Standardization
Guidelines issued by IRDAI and updated from time to time.
Test Yourself 2
As per IRDA guidelines, a ________ grace period is allowed for renewal of individual
health policies.
I. Fifteen days
II. Thirty days
III. Forty Five days
IV. Sixty days

Answers to Test Yourself

Answer 1 - The correct option is II.
Answer 2 - The correct option is II.

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 CHAPTER H-04

HEALTH INSURANCE UNDERWRITING

Chapter Introduction

This chapter aims to provide you detailed knowledge about underwriting in health
insurance. Underwriting is a very important aspect of any type of insurance and
plays a vital role in issuance of an insurance policy. In this chapter, you will get an
understanding about basic principles, tools, methods and process of underwriting.
It will also provide you the knowledge about group health insurance underwriting.

Learning Outcomes

A. What is underwriting?
B. Underwriting – Basic concepts
C. Other health insurance regulations of IRDAI
D. Portability of Health Insurance
E. Basic principles and tools for underwriting
F. Underwriting process
G. Health Insurance at Group Level
H. Underwriting of Overseas Travel Insurance
I. Underwriting of Personal Accident Insurance
After studying this chapter, you should be able to:

a) Explain what is meant by underwriting

b) Describe the basic concepts of underwriting
c) Explain the principles and the various tools followed by underwriters
d) Appreciate the complete process of underwriting individual health policies
e) Discuss how group health policies are underwritten

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Look at this Scenario
Manish aged 48 years, working as a software engineer, decided to take a health
insurance policy for himself. He went to an insurance company, where they gave
him a proposal form in which he was required to answer a number of questions
related to his physical build and health, mental health, pre-existing illnesses, his
family health history, habits and so on.

On receipt of his proposal form, he was also required to submit many documents
such as identity and age proof, proof of address and previous medical records. Then
they told him to undergo a health check-up and some medical tests which frustrated
him.

Manish, who considered himself a healthy person and with a good income level,
started wondering why such a lengthy process was being followed by the insurance
company in his case. Even after going through all this, the insurance company told
him that high cholesterol and high BP had been diagnosed in his medical tests, which
increased the chances of heart diseases later. Though they offered him a policy, the
premium was much higher than what his friend had paid and so he refused to take
the policy.

Here, the insurance company was following all these steps as part of their
underwriting process. While providing risk coverage, an insurer needs to evaluate
risks properly and also to make reasonable profit. If the risk is not assessed properly
and there is a claim, it will result in a loss. Moreover, insurers collect premiums on
behalf of all insuring persons and have to handle these moneys like a trust.

A. What is underwriting?

1. Underwriting
Insurance companies try to insure people who are expected to pay adequate
premium in proportion to the risk they bring to the insurance pool. This process of
collecting and analysing information from a proposer is known as underwriting. On
the basis of information collected through this process, they decide whether they
want to insure a proposer. If they decide to do so, then at what premium, terms
and conditions so as to make a reasonable profit from taking such risk.

Definition

Underwriting is the process of assessing the risk appropriately and deciding the
terms on which the insurance cover is to be granted. Thus, it is a process of risk
assessment and risk pricing.

2. Need for Underwriting

Underwriting is the backbone of an insurance company as acceptance of the risk

carelessly or for insufficient premiums will lead to insurer’s insolvency. On the other
hand, being too selective or careful will prevent the insurance company from

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creating a big pool so as to spread the risk uniformly. It is therefore critical to strike
the correct balance between risk and business, thereby being competitive and yet
profitable for the organization.

This process of balancing is done by the underwriter, in accordance with the

philosophy, policies and risk hunger of the insurance company concerned. Although
age affects the chance of sickness as well as death, it must be remembered that
sickness usually comes much before death and could be frequent. Hence, it is quite
logical that the underwriting norms and guidelines are much tighter for health
coverage than death coverage.

3. Underwriting – Risk Assessment

In health insurance, there is a higher focus on medical or health findings than

financial or income based underwriting. However, the latter cannot be ignored as
there has to be an insurable interest and financial underwriting is important to rule
out any adverse selection and ensure continuity in health insurance.

Example

An individual who is diabetic has a far higher chance of developing a cardiac or

kidney complication requiring hospitalization than of death, and also health
episodes can happen multiple times during the course of insurance coverage. A life
insurance underwriting guideline might rate this individual as an average risk.
However, for medical underwriting, he would be rated as a higher risk.

4. Factors which affect chance of illness

The factors which affect morbidity (risk of falling ill) should be considered carefully
while assessing risk are as follows:

a) Age: Premiums are charged corresponding with age and the degree of risk.
For e.g. the premiums for infants and children are higher than young adults
due to increased risk of infections and accidents. Similarly, for adults beyond
the age of 45 years, the premiums are higher, as the probability of an
individual suffering from a chronic ailment like diabetes, a sudden heart
ailment or other such morbidity is much higher.
b) Gender: Women are exposed to additional risk of illness during child bearing
period. However, men are more likely to get affected by heart attacks than
women or suffer job related accidents than women as they may be more
involved in hazardous employment.
c) Habits: Consumption of tobacco, alcohol or narcotics in any form has a direct
bearing on the morbidity risk.
d) Occupation: Extra risk to accidents is possible in certain occupations, e.g.
driver, blaster, aviator etc. Likewise, certain occupations may have higher
health risks, like an X-Ray machine operator, asbestos industry workers,
miners etc.

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 e) Family history: This has greater relevance, as genetic factors influence
diseases like asthma, diabetes and certain cancers. This does impact the
morbidity and should be taken into consideration while accepting risk.
f) Build: Stout, thin or average build may also be linked to morbidity in certain
groups.
g) Past illness or surgery: It has to be ascertained whether the past illness has
any possibility of causing increased physical weakness or even recur and
accordingly the policy terms should be decided. For e.g. kidney stones are
known to recur and similarly, cataract in one eye increases possibility of
cataract in the other eye.
h) Current health status and other factors or complaints: This is important to
ascertain the degree of risk and insurability and can be established by proper
disclosure and medical examination.
i) Environment and residence: These also have a bearing on morbidity rates.

Understanding Moral Hazard in Health Insurance

While factors like age, gender, habits etc. refer to the physical hazard of a health
risk, there is something else that needs to be closely watched. This is the moral
hazard of the client which can prove very costly to the insurance company.

An extreme example of bad moral hazard is that of an insured taking health

insurance knowing that he will undergo a surgical operation within a short time but
not disclosing this to the insurer. There is thus a deliberate intention of taking
insurance just to collect a claim.

Test Yourself 1

Underwriting is the process of ___________.

I. Marketing insurance products
II. Collecting premiums from customers
III. Risk assessment and risk pricing
IV. Selling various insurance products
B. Underwriting – Basic concepts

1. Purposes of Underwriting
There are two main purposes for Underwriting.
i. To prevent anti-selection, that is selection against the insurer
ii. To classify risks and ensure equity among risks

Definition

The term assessment of risks refers to the process of evaluating each proposal for
health insurance in terms of the degree of risk it represents and then deciding
whether or not to grant insurance and on what terms.

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Anti-selection (or adverse selection) is the tendency of people, who suspect or
know that their chance of experiencing a loss is high, to seek out insurance eagerly
and to gain in the process.

Example

If insurers were not selective about whom and how they offered insurance, there is
a chance that people with serious ailments like diabetes, high BP, heart problems
or cancer, who knew that they would soon require hospitalization, would seek to
buy health insurance, create losses for the insurer. In other words, if an insurer does
not assess risk properly, it would be selected against and suffer losses in the process.

2. Equity among risks

Let us now consider equity among risks. “Equity” means that applicants who are
exposed to similar types and degrees of risk be placed in the same premium class.
Insurers would like to have some type of standardization to determine the premiums
to be charged. The proposals that come to the underwriter are classified into
following risk types:

i. Standard risks
These are the people whose expected morbidity (chance of falling ill) is average.

ii. Preferred risks

In some cases, the expected morbidity is significantly lower than average and
hence are preferred risks. These could be charged a lower premium.

iii. Substandard risks

In some other cases, the expected morbidity may be higher than the average.
Though these risks also may be insurable, insurers may charge higher premiums
and/or accept them subject to certain conditions and restrictions.

iv. Declined risks

There are some persons who have certain medical or other conditions, which
make them highly prone to sicknesses and making claims. It is highly probable
that such persons fall sick and cause a disproportionate degree of liability on
the common pool. In other words, while others in the pool have a more or less
average chance of falling sick, these persons have a very high chance of falling
sick making it difficult to insure them even at higher rates of premium.
[Sometimes, such persons may be posing a Moral Hazard when they do not reveal
their high probability of falling sick and try to get insured like other normal
people.] Most insurers decline such risks and create a database of such people
for future use.
Being a ‘Declined Risk’ means only that a particular insurer does not wish to
insure a person for that type of insurance product, at that particular point in
time. However, it is possible that another insurer might insure him/ her at a
different premium and/or with different conditions. The same insurer might also

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 consider him/ her for another type of policy or even for the same policy at a
later date, when the conditions change.
3. Underwriting process

The underwriting process takes place at two levels:

 At the primary or field level or
 At the underwriting department level

a) Primary Underwriting

Primary underwriting (or Field level underwriting) includes information gathering

by an agent or company representative to decide whether an applicant is suitable
for granting insurance coverage. The agent plays this critical role of primary
underwriting. He is in the best position to know whether prospective client is
insurable.

Some insurance companies require the agents to provide a statement or a

confidential report, with specific information, opinion and recommendations
with respect to the proposer.

A similar kind of report, which has been called as Moral Hazard report, may also
be sought from an official of the insurance company. These reports typically
cover the occupation, income and financial standing and reputation of the person
proposed for health insurance.

4. Fraud monitoring role of Agent

Decisions regarding selecting a risk for insurance depends on the facts disclosed
by the proposer in the Proposal Form. It would be difficult for an underwriter
sitting in the office to know whether these facts are true or have been
fraudulently misrepresented with an intention to cheat the insurer.

The agent, as primary underwriter plays a significant role here. Since the agent
has direct personal contact with the proposer, he or she is in the best position to
find out whether the information submitted is true and whether any wilful non-
disclosure or misrepresentation has been made.

a) Role of the Underwriting department

The Underwriting department in the insurer’s office does the major part of the
underwriting. Here, specialists who are proficient in such work, consider and
analyse all the relevant data on the particular risk and even some demographical
data. They finally decide whether to accept the proposal for insurance, decide
the terms, and charge the appropriate premiums.

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C. Other Health Insurance regulations of IRDAI
The regulator has also brought in some changes for benefit of the Insured as given
below.
a. The insured is to be informed of any underwriting loading charged over and
above the premium and the specific consent of the policyholder for such loadings
shall be obtained before issuance of a policy.
b. If an insurance company requires any further information, such as change of
occupation, at any subsequent stage of a policy or at the time of its renewal, it
has prescribed standard forms to be filled up by the insured which forms part of
the policy document.
c. Insurers have come out with various mechanisms to reward policyholders for
early entry, continued renewals, favourable claims experience etc. with the
same insurer and disclose upfront such mechanism or incentives in the
prospectus and the policy document.

D. Portability of Health Insurance

Portability is defined by IRDAI as the right accorded to individual health insurance

policyholders (including all members under family cover), to transfer the credit
gained for pre-existing conditions and time bound exclusions, from one insurer to
another insurer or from one plan to another plan of the same insurer, provided
the previous policy has been maintained without any break.

Portability is the provision by which an Insured can move from one insurer to another
carrying with him/ her all the benefits earned over a period of time. Students may
please read IRDAI’s Consolidated Guidelines on Product filing in Health Insurance
Business dated 22 July 2020 lays down norms for standardising many of the practices
including Portability.

IRDAI mandates that Portability shall be allowed under all individual indemnity
health insurance policies issued by General Insurers and Health Insurers including
family floater policies.

However, porting can be done only at the time of renewal. Apart from the waiting
period credit, other terms of the new policy including the premium would be
decided by the new insurance company. Procedurally, the request for porting should
be made by the insured to the old insurer at least 45 days before the renewal,
specifying the company to which the policy has to be ported. The policy has to be
renewed without a break (there is a 30 day grace period if porting is under process).
IRDA has created a web-based facility that maintains data about all health insurance
policies issued by insurance companies to individuals, to enable the new insurer to
access and obtain data on the porting policyholder’s health insurance history in a
smooth manner.

E. Migration of Health Insurance

Migration is defined by IRDAI as the right accorded to health insurance policyholders

(including all members under family cover and members of group health insurance

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policy), to transfer the credit gained for pre-existing conditions and time bound
exclusions, with the same insurer.

IRDAI’s Consolidated Guidelines on Product filing in Health Insurance Business dated

22 July 2020 revised the guidelines on Migration of health insurance policies. It
provides that every individual policyholder (including members under family floater
policy) covered under an indemnity based individual health insurance policy shall
be provided an option of migration at the explicit option exercised by the
policyholder. Migration from group policies to individual policy will be subject to
underwriting.

A policyholder desirous of migrating his/ her policy shall be allowed to apply to the
insurance company to migrate the policy along with all members of the family, if
any, at least 30 days before the premium renewal date of his/her existing policy.
However, if the insurer is willing to consider even less than 30 days period, then the
insurer may do so. Insurers shall not levy any charges exclusively for migration.

F. Basic principles of insurance and tools for underwriting

1. Basic principles relevant to underwriting

In any form of insurance, whether it is life insurance or general insurance, there are
certain legal principles which operate along with acceptance of risks. Health
insurance is equally governed by these principles and any violation of the principles
may result in the insurer deciding to avoid the liability. (These principles have been
discussed in the common chapters.)

2. Tools for underwriting

These are the sources of information for the underwriter and the basis on which the
risk classification is done and premiums finally decided. The following are the key
tools for underwriting:

a) Proposal form

This document is the base of the contract where all the critical information
pertaining to the health and personal details of the proposer (i.e. age,
occupation, build, habits, health status, income, premium payment details etc.)
are collected. Any breach or concealment of information by the insured shall
render the policy void. (This has been discussed in the common chapters.)

b) Age proof

Premiums are determined on the basis of the age of the insured. Hence it is
imperative that the age disclosed at the time of enrolment is verified through
submission of an age proof.

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Example
In India, there are many documents which can be considered as age proof but all of
them are not legally acceptable. Mostly valid documents are divided into two broad
categories. They are as follows:

a) Standard age proof: Some of these include school certificate, passport,

domicile certificate, PAN card etc.
b) Non-standard age proof: Some of these include ration card, voter ID, elder’s
declaration, gram panchayat certificate etc.

Financial documents
Knowing the financial status of the proposer is particularly relevant for benefit
products and to reduce the moral hazard. However, normally the financial
documents are only asked for in cases of:
a) Personal accident covers or
b) High sum assured coverage or
c) When the stated income and occupation as compared to the coverage
sought, show a mismatch.

c) Medical reports

Requirement of medical reports is based on the norms of the insurer, and usually
depends upon the age of the insured and sometimes on the amount of cover
opted. Some replies in the proposal form may also contain some information
that leads to medical reports being asked for.

d) Reports of sales personnel

Sales personnel can also be seen as grassroots level underwriters for the
company and the information given by them in their report could form an
important consideration. However, as the sales personnel have an incentive to
generate more business, there is a conflict of interest which has to be watched
out for.

Test Yourself 2

The principle of utmost good faith in underwriting is required to be followed by

___________.
I. The insurer
II. The insured
III. Both the insurer and the insured
IV. The medical examiners

Test Yourself 3

Insurable interest refers to ____________.

I. Financial interest of the person in the asset to be insured
II. The asset which is already insured
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III. Each insurer’s share of loss when more than one company covers the same loss
IV. The amount of the loss that can be recovered from the insurer

G. Underwriting process

Once the required information is received, the underwriter decides the terms of the
policy. The common forms used for underwriting health insurance business are as
below:

1. Medical underwriting

Medical underwriting is a process in which medical reports are called for from the
proposer to determine the health status of an individual applying for health
insurance policy. The health information collected is then evaluated by the insurers
to determine whether to offer coverage, up to what limit and on what conditions
and exclusions. Thus medical underwriting can determine the acceptance or
declining of a risk and also the terms of cover.

Example

Medical conditions like hypertension, overweight/ obesity and raised sugar levels
have a high probability of future hospitalization for diseases of the heart, kidney
and the nervous system. So, these conditions should be carefully considered while
assessing the risk for medical underwriting.

Medical underwriting guidelines may also require a signed declaration of the

proposer’s health status by his/ her family physician.

Persons above the age of 45-50 years, enrolling for the first time are normally
required to undergo specified pathological investigations to assess health risk profile
and to obtain information on their current health status. Such investigations also
provide an indication of prevalence of any pre-existing medical conditions or
diseases.

2. Non-medical underwriting

Most of the proposers which apply for health insurance do not need medical
examination.

Even, if the proposer were to disclose all material facts completely and truthfully
and the same were checked by agent carefully, then also the need for medical
examination could be much less.

Example
If an individual has to take health insurance coverage quickly without going through
a long process of medical examinations, waiting periods and processing delays, then
he can opt for a non-medical underwriting policy. In a non-medical underwriting

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policy, premium rates and sum assured are usually decided on the basis of answers
to a few health questions mostly based on age, gender, smoking class, build etc.
The process is speedy but the premiums may be relatively higher.

3. Numerical rating method

This is a process adopted in underwriting, wherein numerical or percentage

assessments are made on each component of the risk.
Factors like age, sex, race, occupation, residence, environment, build, habits,
family and personal history are examined and scored numerically based on pre-
determined criteria.

4. Underwriting decisions

The underwriting process is completed when the received information is carefully

assessed and classified into appropriate risk categories. Based on the above tools
and his judgment, the underwriter classifies the risk into the following categories:

a) Accept risk at standard rates

b) Accept risk at an extra premium (loading), though it may not be practiced in
all companies
c) Postpone the cover for a stipulated period/ term
d) Decline the cover
e) Counter offer (either restrict or deny part of the cover)
f) Impose a higher deductible or Co-pay
g) Levy permanent exclusion(s)under the policy

If any illness is permanently excluded, it is endorsed on the policy certificate. This

becomes an additional exclusion apart from the standard policy exclusion and shall
form the part of the contract.

5. Use of general or standard exclusions

The majority of policies impose exclusions that apply to all their members. These
are known as standard exclusions or sometimes referred to as general exclusions.
Insurers limit their exposure by the implementation of standard exclusions. These
have been discussed in an earlier chapter.

6. Zone wise premium

Normally, the premium would depend on the age of the insured person and the sum
insured selected. Premium differential has been introduced in certain zones with
higher claims cost e.g. Delhi and Mumbai form part of highest premium zone for
certain products by some insurers. For e.g. Individual Policy for age group of 55-65
years would be rated higher in Metros and ‘A Class’ cities than a similar policy for
the same age bracket in a city like Indore or Jammu.

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Test Yourself 4

Which of the following statements about medical underwriting is incorrect?

I. It involves high cost in collecting and assessing medical reports.

II. Current health status and age are the key factors in medical underwriting for
health insurance.
III. Proposers have to undergo medical and pathological investigations to assess
their health risk profile.
IV. Percentage assessment is made on each component of the risk.

H. Health Insurance at Group Level

While accepting a group for health insurance, the insurers take into consideration
the possibility of existence of a few members in the group who may have severe and
frequent health problems.
1. Group Health Insurance
Underwriting of group health insurance requires analysing the characteristics of the
group to evaluate whether it falls within the insurance company’s underwriting
guidelines as well as the guidelines laid down for group insurance by the insurance
regulators.
Standard underwriting process for group health insurance requires evaluating the
proposed group on the following factors:
a) Type of group
b) Group size
c) Type of industry
d) Eligible persons for coverage
e) Whether entire group is being covered or there is an option for members to
opt out
f) Level of coverage – whether uniform for all or differently
g) Composition of the group in terms of sex, age, single or multiple locations,
income levels of group members, employee turnover rate, whether premium
paid entirely by the group holder or members are required to participate in
premium payment
h) Difference in healthcare costs across regions in case of multiple locations
spread in different geographical locations
i) Preference of the group holder for administration of the group insurance by
a third party administrator (of his choice or one selected by the insurer) or
by the insurer itself
j) Past claims experience of the proposed group

Example
A group of members working in mines or factories is at higher health risk than a
group of members working in air-conditioned offices. Also the nature of diseases
(thereby claims) are also likely to be quite different for both groups. Therefore, the
insurer will price the group health insurance policy accordingly in both the cases.

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Similarly to avoid adverse selection in case of groups with high turnover such as IT
companies, insurers can introduce precautionary criteria requiring employees to
serve their probationary period before becoming eligible for insurance.
2. Underwriting other than employer- employee groups

Employer-employee groups are traditionally the most common groups offered group
health insurance, the character of the group composition is one of the important
consideration while underwriting the group.

Health insurance can also be offered to Non Employer employee groups. The IRDAI
has issued group insurance guidelines with a view to regulate the approach to be
adopted by insurers in dealing with various groups. Such non-employer groups
include:
a) Employer welfare associations
b) Holders of credit cards issued by a specific company
c) Customers of a particular business where insurance is offered as an add-on
benefit
d) Borrowers of a bank and professional associations or societies

I. Underwriting of Overseas Travel Insurance

Since the main cover under Overseas Travel Insurance policies is the health cover,
the underwriting would follow the pattern for health insurance in general.
The premium rating and acceptance would as per individual company guidelines but
a few important considerations are given below:

1. Premium rate would depend on the age of the proposer and the duration of
foreign travel.
2. As medical treatment is costly overseas, the premium rates are normally
much higher compared to domestic health insurance policies.
3. Even among the foreign countries, USA and Canada premium is the highest.
4. Care should be taken to rule out the possibility of a Proposer using the policy
to take medical treatment abroad and hence the existence of any pre-
existing disease must be carefully considered at the proposal stage.

J. Underwriting of Personal Accident Insurance

The underwriting considerations for Personal Accident Policies are discussed below:

Rating
In personal accident insurance, the main factor considered is the occupation of the
insured. The risks associated with profession or occupation varies in accordance
with the nature of work performed. For example, an office manager is less exposed
to risk at work than a civil engineer working at a site where a building is being
constructed. To fix a rate, occupations are classified into groups, each group
reflecting, more or less, similar risk exposure.

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Classification of Risk
On the basis of occupation, the risks associated with the insured person may be
classified into three groups:
 Risk group I
Accountants, Doctors, Lawyers, Architects and persons engaged in
administration functions, persons primarily engaged in occupations of similar
hazards.
 Risk group II
Builders, Contractors and Engineers engaged in superintending functions and
persons engaged in occupation of similar hazards. All persons engaged in manual
labour (except those falling under Group III),
 Risk group III
Persons working in underground mines or engaged in activities like racing on
wheels and persons engaged in occupations/ activities of similar hazard.
Risk groups are also known in the form of ‘Normal’, ‘Medium’ and ‘High’
respectively.

Age Limits
General age limits for the working population (employer employee) is 18-
70.However for students Minimum age could be 5 years too.
The minimum and maximum age for being covered and renewed varies from
company to company.

Family Package Cover

The Personal accident policy also has a family package cover wherein Children and
Non-earning spouse are covered for to death and permanent disablement (total or
partial) only.

Premium Discount in Group Policies

A group discount is allowed off the premium, if the number of insured person
exceeds a certain number say 100. Group policy however may be issued when
number is smaller, say 25 but without any discount.

Group discount criteria

Group policies should be issued only in respect of the named groups. For the purpose
of availing of group discount and other benefits, the proposed “Group” should fall
clearly under one of the following categories, given below:
 Employer – employee relationship including dependents of the employee
 Members of a registered co-operative society
 Members of registered service clubs
 Holders of credit card of banks/ Diners/ Master/ Visa

In case of proposals relating to any further category different from the above
categories, they may be deliberated and decided upon by the technical department
of the respective insurers.

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Premium
Varying rates of premium are applicable to named employees as per the
classification of risks and the benefits selected.

On-duty cover
PA policies may have a cover for both on-duty and off-duty period or for either
separately. The premium is dependent on the Sum Assured, the number of hours of
duty etc. Some employers may like to restrict themselves to cover the duty period
only.

Exclusion of death cover

It is possible to issue group P.A. policies excluding the death benefit, subject to
individual company guidelines.

Group discount and Bonus/ Malus

Rating under renewal of group policies is determined with reference to the claims
experience.
 Favourable experience is rewarded with a discount in the renewal premium
(bonus)
 Adverse experience is penalised by loading of renewal premium (malus),
according to a scale
 Normal rates will apply for renewal if the claims experience is, say, 70 percent

Test Yourself 5

1) In a group health insurance, any of the individual constituting the group could
anti-select against the insurer.
2) Group health insurance provides coverage only to employer-employee groups.
I. Statement 1 is true and statement 2 is false
II. Statement 2 is true and statement 1 is false
III. Statement 1 and statement 2 are true
IV. Statement 1 and statement 2 are false

Answers to Test Yourself

Answer 1 - The correct option is III.
Answer 2 - The correct option is III.
Answer 3 - The correct option is I.
Answer 4 - The correct option is IV.
Answer 5 - The correct option is IV.

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 CHAPTER H-05

HEALTH INSURANCE CLAIMS

Chapter Introduction

In this chapter we will discuss about claim management process in Health Insurance,
claims related procedures and documentation. Apart from this, we will also look
into claims management under Personal Accident Insurance and understand the role
of TPAs.

Learning Outcomes

A. Claims Management in insurance

B. Management of Health Insurance claims
C. Documentation in Health Insurance claims
D. Role of Third Party Administrators (TPA)
E. Claims Management – Personal Accident
F. Claims Management- Overseas Travel Insurance
After studying this chapter, you should be able to:

a) Explain the various stakeholders in insurance claims

b) Describe how health insurance claims are managed
c) Discuss the various documents required for settlement of health insurance
claims
d) Explain how reserves for claims are provided for by insurers.
e) Discuss personal accident claims
f) Understand the concept and role of TPAs

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A. Claims Management in Insurance

It is very well understood that insurance is a ‘promise’ and the policy is a ‘witness’
to that promise. The occurrence of an insured event leading to a claim under the
policy is the true test of that promise. How well an insurer performs is evaluated by
how well it keeps its claims promises. One of the key rating factors in insurance is
the claims paying ability of the insurance company.

1. Stakeholders in claim process

One needs to understand the parties interested in the claims process before looking
at how claims are managed.

Diagram 1: Stakeholders in claim process

The person who buys insurance is the first stakeholder and

Customer
‘receiver of the claim’.
Owners of the insurance company have a big stake as the ‘payers
of the claims’. Even if the claims are met from the policy
Owners
holders’ funds, in most cases, it is they who are liable to keep
the promise.
Underwriters within an insurance company and across all
insurers have the responsibility to understand the claims and
Underwriters
design the products, decide policy terms, conditions and pricing
etc.
The regulator (Insurance Regulatory and Development Authority
of India) is a key stakeholder in its objective to:
Regulator  Maintain order in the insurance environment
 Protect policy holders’ interest
 Ensure long term financial health of insurers.
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 Third Party Service intermediaries known as Third Party Administrators,
Administrators who process health insurance claims.
Insurance
Insurance agents/ brokers not only sell policies but are also
agents/
expected to service the customers in the event of a claim.
brokers
They ensure that the customer gets a smooth claim experience,
Providers/
especially when the hospital is on the panel of the TPA the
Hospitals
Insurer to provide cashless hospitalization.
Thus managing claims well means managing the objectives of the each of these
stakeholders related to the claims. Of course, it may happen that some of these
objectives can conflict with each other.
Reserving: In many cases, insurance companies may not be able to settle claims
instantly and may have to wait for information or the results of disputes, litigation
etc. So, they have to hold the claim amounts in reserve till the payments are due.
Reserves are usually are actuarial estimates of the amounts that will be paid on
outstanding claims.
Reserving refers to the amount of provision made for all claims in the books of the
insurer based on the status of the claims.
Test Yourself 1
Who among the following is not a stakeholder in Health insurance claim process?
I. Customers
II. Police Department
III. Regulator
IV. TPA

B. Management of Health Insurance Claims

1. Claim process in health insurance

A claim may be serviced either by the insurance company itself or through the
services of a Third Party Administrator (TPA) authorized by the insurance company.

From the time a claim is made known to the insurer/ TPA to the time the payment
is made as per the policy terms, the health claim passes through a set of well-
defined steps, each having its own relevance.

The processes detailed below are in specific reference to health insurance

(hospitalization) indemnity products which form the major part of health insurance
business.
The general process and supporting documents for a claim under fixed benefit
product or critical illness or daily cash product etc. would be quite similar, except
for the fact that such products may not come with cashless facility.

In both cases of indemnity as well as reimbursement type of claim, the basic steps
remain the same.
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Diagram 2: Claim process broadly comprises following steps (may not be in the
same order)

a) Intimation
Claim intimation is the first instance of contact between the customer and the
claims team. The customer could inform the company that he is planning to avail
a hospitalization or the intimation would be made after the hospitalization has
taken place, especially in case of emergency admission to a hospital.

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 Till recently, the act of intimation of a claim event was a formality. However,
recently insurers have started insisting on the intimation of claim as soon as
practicable. Typically it is required before hospitalization in case of planned
admission, and within 24 hours of hospitalization in case of an emergency.
Intimation is now possible through Mobile Apps/ call centres run by insurers/
TPAs open 24 hours as well as through the internet and e-mail.
b) Registration
Once the intimation is received by the company directly or through the TPA, the
details thereof are matched for accuracy and a reference number or claim
control number generated and intimated to the claimant. The documents are
then scrutinized for prima facie coverage and pre-authorisation of likely
expenditure is given to the Hospital in case the intimation is of a planned surgery
under the Cash-less scheme (detailed in subsequent section).
The claims that come for the final settlement on the reimbursement basis are
scrutinized in detail about admissibility, sum assured, deductibles, sub-limits
etc. In case of deficiency in documents the same has to be communicated
together, not in piecemeal. It is worth knowing that the claim processing
involves not only ensuring that the terms of the contract have to be fulfilled,
but also in ensuring that the Hospitals do not indulge in overcharging, double-
charging etc.

Example
Hospitalization is typically associated with Allopathic method of treatment.
However, the patient could undergo other modes of treatment such as:
 Unani
 Siddha
 Homeopathy
 Ayurveda
 Naturopathy etc.

Most policies now include these treatments, however there could be sub-limits.
Telemedicine: IRDAI has asked insurers to allow telemedicine wherever regular
medical consultation is allowed, in the terms and conditions of medical insurance
policies.
This will help policy holders who may prefer to consult medical practitioners online
or telephonically to avoid going out of their homes or if they are in quarantine
themselves due to the coronavirus infection.
Arriving at the final claim payable: The factors that decide the claim amount
payable are:
a) Sum insured available for the member under the policy
b) Balance sum insured available under the policy for the member after taking
into account any claim made already:

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c) Sub-Limits
d) Check for any limits specific to illness
e) Check whether entitled or not to cumulative bonus
f) Other expenses covered with limitation:
What are finally paid are the Reasonable and Customary Charges meaning the
charges for services or supplies, which are the standard charges for the specific
provider and consistent with the prevailing charges in the geographical area for
identical or similar services, taking into account the nature of the illness/ injury
involved.
Earlier every TPA/ insurer had its own list of non-payable items, now the same
has been standardized under IRDAI Health Insurance Standardization Guidelines.
c) Payment of claim
Once the payable claim amount is arrived at, payment is done to the customer
or the hospital as the case may be. The payment may be made either by cheque
or by transferring the claim money to the customer’s bank account.
d) Denial of claims
The experience in health claims show that 10% to 15% of the claims submitted
do not fall within the terms of the policy. This could be because of a variety of
reasons some of which are:
i. Date of admission is not within the period of insurance.
ii. The Member for whom the claim is made is not covered.
iii. Due to Pre-existing illness (where the policy excludes such condition).
iv. Undue delay in submission without valid reason.
v. No active treatment; admission is only for investigation purpose.
vi. Illness treated is excluded under the policy.
vii. The cause of illness is abuse of alcohol or drugs
viii. Hospitalization is less than 24 hours.

Denial or repudiation of a claim (due to whatever reason) has to be informed to

the customer in writing by the insurance company. Usually, such denial letter
clearly states the reason for denial, narrating the policy term/ condition on which
the claim was denied.
Apart from the representation to the insurer, the customer has the option to
approach the following in case of denial of claim:
 Insurance Ombudsman or
 The Consumer Commissions or
 IRDAI or
 Law courts.
e) Suspect claims require more detailed investigation by the companies/
TPAs
Wherever the insurance company suspects foul-play it can get claims
investigated. A few examples of frauds committed in health insurance are:

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 i. Impersonation, the person insured is different from person treated.
ii. Fabrication of documents to make a claim where there is no hospitalization.
iii. Inflation of expenses, either with the help of the hospital or by addition of
external bills fraudulently created.
iv. Outpatient treatment converted to in-patient/ hospitalization to cover cost
of diagnosis, which could be high in some conditions.
It is to be noted that in respect of claims that need to be investigated,
investigations shall be initiated and completed at the earliest, in any case not
later than 90 days from the date of receipt of claim intimation. The claim should
be settled within 30 days of completing the investigation. (Pl refer to IRDAI
(Protection of policyholder’s), 2017 Regulations and updated accordingly)
f) Cashless settlement process by TPA
How does the cashless facility work? At the heart of this is an agreement that
the TPA insurer enters into, with the hospital. There are agreements possible
with other medical service providers as well. The process used for providing
cashless facility are discussed in this section:
Table 3.1
 A customer covered under health insurance suffers from an illness or
sustains an injury and so is advised admission into a hospital. He/ she (or
someone on his/ her behalf) approaches the hospital’s insurance desk
Step 1 with the insurance details such as:
i. TPA name,
ii. Customer’s membership number,
iii. Insurer’s name, etc.
 The hospital compiles the necessary information such as:
i. Diagnosis of illness
ii. Treatment,
Step 2 iii. Name of treating doctor,
iv. Number of days of proposed hospitalization and
v. The estimated cost
 This is presented in a format, called the cashless authorization form.
 The TPA studies the information provided in the cashless authorization
form and takes a decision on whether the cashless authorization could be
Step 3
provided and if so, for how much amount it should be authorized and it
is communicated to the hospital without delay.
 The patient is treated by the hospital, keeping the amount authorized by
the TPA as credit in the patient’s account. The member may be called on
Step 4
to make a deposit payment to cover the non-treatment expenses and any
co-pay required under the policy.
 When the patient is ready for discharge, the hospital checks the amount
of credit in the account of the patient approved by the TPA against the
actual treatment charges covered by insurance.
Step 5
 If the credit is less, the hospital requests for additional approval of credit
for the cashless treatment.
 TPA analyses the same and approves the additional amount.
 Patient pays the non-admissible charges and gets discharged. He will be
Step 6
asked to sign the claim form and the bill, to complete the documentation.

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  Hospital consolidates all the documents and presents to the TPA the
Step 7
documents for processing of the bill
 TPA will process the claim and recommend for payment to the hospital
Step 8
after verifying details.
g) Customer must make sure that he/ she has his/ her insurance details with
him/ her.
This includes his TPA card, Policy copy, Terms and conditions of cover etc.
When these are not available, he can contact the TPA (through a 24 hour
helpline) and seek the details.
i. Customer must check if the hospital suggested by his/ her consulting doctor
is in the network of the TPA. If not, he needs to check with the TPA the
options available where cashless facility for such treatment is available.
ii. He/ she needs to make sure that the correct details are entered into the
pre-authorization form. This form has been standardized by IRDAI as per
Guidelines on Standardization in Health Insurance issued in 2013. If the case
is not clear, the TPA could deny the cashless facility or raise query.
iii. He/ she needs to ensure that the hospital charges are consistent with the
limits such as room rent or caps on specified treatments such as cataract.
iv. The customer must inform the TPA in advance of the discharge and request
the hospital to send to the TPA any additional approval that may be required
before discharge. This will ensure the patient does not wait unnecessarily at
the hospital.
It is also possible that the customer requests and takes an approval for cashless
treatment at a hospital but decides to admit the patient elsewhere. In such
cases, the customer must inform and ask the hospital to communicate to the
TPA that the cashless approval is not being used.

If this is not done, the amount approved could get blocked in the customer’s
policy and could prejudice the approval of the subsequent request.

C. Documentation in Health Insurance Claims

This section explains the need for and content of each of the documents required
to be submitted by the customers:
1. Discharge summary
Discharge summary can be termed as the most important document that is required
to process a health insurance claim. It details the complete information about the
condition of the patient and the line of treatment and helps the claim processing
person immensely to understand the illness/ injury and the line of treatment. Where
the patient unfortunately does not survive, the discharge summary is termed Death
Summary in many hospitals. The discharge summary is always sought in original.
2. Investigation reports
Investigation reports assist in comparing the diagnosis and the treatment, thereby
providing the necessary information to understand the exact condition that
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prompted the treatment and the progress made during the hospitalization for e.g.
Blood test reports, X-ray reports and Biopsy reports. The insurer may return the X-
ray and other films to the customer on specific request.
3. Consolidated and detailed bills:
This is the document that decides what needs to be paid under the insurance policy.
While the consolidated bill presents the overall picture, the detailed bill will provide
the break up, with reference codes. The bills have to be received in original.
4. Receipt for payment
The reimbursement of a health insurance claim will also require the formal receipt
from the hospital of the amount paid which must correspond to the total of the bill.
The receipt should be numbered and or stamped and be presented in original.
5. Claim form
Claim form is the formal and legal request for processing the claim and is submitted
in original signed by the customer. The claim form has now been standardized by
IRDAI.
Besides information on disease, treatment etc., the declaration the insured person
makes in the claim form is the most important document in the legal sense.
6. Identity proof
With the increasing use of identity proof across various activities in our life, the
general Proof of identity helps in verifying whether the person covered and the
person treated are one and the same. Usually identification document which is
sought could be voters’ identity card, driving license, PAN card, Aadhaar card etc.
7. Documents contingent to specific claims
There are certain types of claims that require additional documents apart from what
has been stated above. These are:
a) Accident claims, where FIR or Medico-legal certificate issued by the hospital
to the registered police station, may be required.
b) Case indoor papers in case of complicated or high value claims.
c) Dialysis/ Chemotherapy/ Physiotherapy charts where applicable.
d) Hospital registration certificate, where the compliance with the definition
of hospital needs to be checked
Test Yourself 2
Which of the following document is maintained at the hospital detailing all
treatment done to an in-patient?
I. Investigation report
II. Discharge summary
III. Case paper
IV. Hospital registration certificate

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Test Yourself 3
The amount of provision made for all claims in the books of the insurer based on
the status of the claims is known as ________.
I. Pooling
II. Accounting
III. Reserving
IV. Investing

D. Role of Third Party Administrators (TPA)

The Role of TPA has been discussed in earlier chapters too. It is important to know
the services offered by TPA so that the customer can be provided suitable services
by the salesperson.
The scope of TPA services starts after the sale and issue of the insurance policy. In
case of insurers not using TPAs, the services are performed by in-house team.
1. Post sale service of health insurance
a) Once the proposal (and the premium) is accepted, the coverage commences.
b) If a TPA is to be used for servicing the policy, the insurer passes on the
information about the customer and the policy to the TPA.
c) The TPA enrols the members (while the proposer is the person taking the
policy, members are those covered under the policy) and may issue a
membership identification in the form of a card, either physical or
electronic.
d) The membership with the TPA is used for availing cashless facility as well as
processing of claims when the member requires the support of the policy for
a hospitalization or treatment that is covered.
e) TPA processes the claim or cashless request and provides the services within
the time agreed with the insurer.
f) The insured persons must carry an Identity Card that relates them to the
policy and the TPA.
g) TPA issues a pre-authorization or a Letter of Guarantee to the hospital based
on the information provided for requesting the cashless facility.
h) Where the information is not clear or not available, the TPA may reject the
cashless request. In such cases the claim could be examined on
reimbursement basis.
2. Customer relationship and contact management
Since TPAs are involved in claims servicing, they usually have a grievance redressal
mechanism themselves.

E. Claims Management – Personal Accident

On receipt of the notification of the claim the following aspects should be looked
into:
a) Person in respect of whom the claim is made is covered under the policy
b) Policy is valid as on date of accident and premium has been received
c) Loss is within the policy period
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 d) Loss has arisen out of “Accident” and not sickness
e) Check for any fraud triggers and assign investigation if need be
f) Register the claim and create reserve for the same
g) Maintain the turnaround time (claim servicing time) and keep the customer
informed of the development of the claim.

1. Claims Investigation

Claims Investigation is about determining the validity of the claim and finding out
the real cause and extent of the loss. On receipt of the claim documents, if a claim
appears suspicious, the claim may be assigned to an internal/ professional
investigator for verification.
Example
Example of case guideline:
Road traffic accident
i. When did the incident take place – exact time and date place? Date and time
ii. Was the insured a pedestrian, traveling as passenger/ pillion rider or driving
the vehicle involved in accident?

Some examples of possible fraud and leakage in personal accident claims:

i. Exaggeration in TTD period.
ii. Illness presented as accident e.g. backache due to pathological reasons
converted into a PA claim after reported ‘fall/ slip’ at home
Discharge voucher is an important document for settlement of personal accident
claim, especially those involving death claims. It is also important to obtain nominee
details at the time of proposal and the same should form part of policy document.
2. Claim documentation- Each company gives a list
a) Duly completed Personal Accident claim form signed by the claimant’s
nominee/ family member
b) Original or Attested copy of First Information Report.
c) Original or Attested copy of Death certificate.
d) Attested copy of Post Mortem Report if conducted.
e) Attested copy of AML documents (Anti-money laundering) - for name
verification (passport/ PAN card/ Voter's ID/ Driving license) for address
verification (Telephone bill/ Bank account statement, Electricity bill/ Ration
card).
f) Legal heir certificate containing affidavit and indemnity bond both duly
signed by all legal heirs and notarized
g) Permanent disability certificate from a civil surgeon or any equivalent
competent doctors certifying the disability of the insured.
h) Medical certificate from treating doctor mentioning the type of disability
and disability period. Leave certificate from employer giving details of exact
leave period, duly signed and sealed by the employer.
The above list is only indicative, further documents (including photographs of scar
marks, site of accident etc.) may be required depending on particular facts of the
case, especially the cases with suspected fraud angle to be investigated.

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Test Yourself 4
Which of the following documents are not required to be submitted for Permanent
Total Disability claim?
I. Duly completed Personal Accident claim form signed by the claimant.
II. Copy of Insurance Policy.
III. Permanent disability certificate from a civil surgeon or any equivalent
competent doctors certifying the disability of the insured.
IV. Fitness certificate from the treating doctor certifying that the insured is fit to
perform his normal duties.
F. Claims Management- Overseas Travel Insurance
The coverage under this policy has already been discussed under the product
chapter. This section tries to explain how the claims arising during overseas travel
are handled.
Claims services essentially include:
a) Taking down the claim notification 24*7 basis;
b) Sending the claim form and procedure;
c) Guiding customer on what to do immediately after loss;
d) Extending cashless services for medical and sickness claims;
e) Arranging for repatriation and evacuation, emergency cash advance.
Assistance companies – Role in overseas claims
Assistance companies have their own offices and tie up arrangements with other
similar service providers world over. These companies offer assistance to the
customers of insurance companies in case of contingencies covered under the
policy.
These companies operate a 24*7 call centre including international toll free numbers
for claim registration and information. They also offer the following services and
charges for the services vary depending on agreement with the particular insurance
company, benefits covered etc.
a) Medical assistance services:
i. Medical service provider referrals
ii. Arrangement of hospital admission
iii. Arrangement of Emergency Medical Evacuation
iv. Arrangement of Emergency Medical Repatriation
v. Mortal remains repatriation
vi. Compassionate visit arrangements
vii. Minor children assistance/ escort
b) Monitoring of Medical Condition during and after hospitalisation
c) Delivery of Essential Medicines
d) Guarantee of Medical Expenses Incurred during hospitalization subject to
terms and condition of the policy and approval of insurance company.
e) Pre-trip information services and other services:
i. Visas and inoculation requirements
ii. Embassy referral services
iii. Lost passport and lost luggage assistance services
iv. Emergency message transmission services
v. Bail bond arrangement
vi. Financial Emergency Assistance

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 f) Interpreter Referral
g) Legal Referral
h) Appointment with lawyer
a) Hospitalization Procedures
i. Most hospitals accept Guarantee of Payments from all international insurance
companies once the insured provides them with a valid health or overseas
travel insurance policy.
ii. Hospitals start the treatment immediately. If there is insurance cover the
insurance policy pays or the patient person has to pay. The hospitals tend to
inflate charges since payments are delayed.
iii. Information regarding network hospitals and the procedures is available to
the insured on the toll free numbers provided by the assistance companies.
iv. In event of the necessity of a hospitalization the insured needs to intimate
the same at the call centre and proceed to a specified hospital with the valid
travel insurance policy.
v. Hospitals usually contact the assistance companies/ insurers on the call
centre numbers to check the validity of the policy and verify coverages.
vi. Once the policy is accepted by the hospital the insured would undergo
treatment in the hospital on a cashless basis.
vii. Some basic information required by the insurer/ assistance provider to
determine admissibility are:
1. Details of ailment
2. In case of any previous history ,details of hospital, local medical officer in
India:
 Past history, current treatment and further planned course in hospital
and request for immediate sending of
 Claim form along with attending physicians statement
 Passport copy
 Release of medical information form
b) Reimbursement of medical expenses and other non-medical claims:
Reimbursement claims are normally filed by insured after they return to
India. Upon receipt of the claim papers, claim is processed as per usual
process. Payments for all admissible claims are made in Indian Rupee (INR),
unlike in cashless claims where payment is made in foreign currency.
While processing the reimbursement claims, currency conversion rate is
applied as on date of loss to arrive at quantum of liability in INR. Then the
payment is made though cheque or electronic transfer.
c) Claim documentation for Medical Accident and Sickness Expenses
i. Claim form
ii. Doctor’s report
iii. Original Admission/ discharge card

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 iv. Original Bills/ Receipts/ Prescription
v. Original X-ray reports/ Pathological/ Investigative reports
vi. Copy of passport/ Visa with Entry and exit stamp
The above list is only indicative. Additional information/ documents may be
required depending on specific case details or depending upon claim settlement
policy/ procedure followed by particular insurer.
Test Yourself 5
Most hospitals accept Guarantee of Payments from all international insurance
companies once the insured provides them with a valid __________ Insurance policy.
I. Legal Liability
II. Corona Rakshak
III. Overseas Travel
IV. Endowment
Answers to Test Yourself

Answer 1 - The correct option is II.

Answer 2 - The correct option is II.
Answer 3 - The correct option is III.
Answer 4 - The correct option is IV.
Answer 5 - The correct option is III.

Summary
a) Insurance is a ‘promise’ and the policy is a ‘witness’ to that promise. The
occurrence of insured event leading to a claim under the policy is the true test
of that promise.
b) One of the key rating parameter in insurance is the claims paying ability of the
insurance company.
c) Customers, who buys insurance is the primary stakeholder as well as the receiver
of the claim.
d) In Cashless claim a network hospital provides the medical services based on a
pre-approval from the insurer/ TPA and later submits the documents for
settlement of the claim.
e) In reimbursement claim, the customer pays the hospital from his own resources
and then files claim with Insurer/ TPA for payment.
f) Claim intimation is the first instance of contact between the customer and the
claims team.
g) If a fraud is suspected by insurance company in case of insurance claim, it is
sent for investigation. Investigation of a claim could be done in-house by an
insurer/ TPA or be entrusted to a professional investigation agency.
h) Reserving refers to the amount of provision made for all claims in the books of
the insurer based on the status of the claims.

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i) In case of a denial, the customer has the option, apart from the representation
to the insurer, to approach the Insurance Ombudsman or the consumer
Commissions or even the legal authorities.
j) Frauds occur mostly in hospitalization indemnity policies but Personal accident
policies also are used to make fraud claims.
k) The TPA provides many important services to the insurer and gets remunerated
in the form of fees.

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 SECTION

GENERAL INSURANCE

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 CHAPTER G-01
GENERAL INSURANCE DOCUMENTATION

Chapter Introduction

As discussed in Chapter 7, the Proposal form contains information which are useful for
the insurance company to accept the risk offered for insurance.

We have seen that in different branches of insurance, the documentation needs are
different based on the subject matter insured, type of insurance coverage and the
types of claims that can arise.

Learning Outcomes

A. Proposal forms
B. Acceptance of a proposal (underwriting)
C. Premium Receipt
D. Cover Notes/ Certificate of Insurance/ Policy Document
E. Warranties
F. Endorsements
G. Interpretation of Policies
H. Renewal Notice

After studying this chapter, you should be able to:

a) Explain the contents of a Proposal form.

b) Describe the importance of Prospectus
c) Understand the premium receipt.
d) Explain terms and wordings in insurance policy document.
e) Discuss policy conditions and warranties.
f) Appreciate why endorsements are issued.
g) Appreciate why renewal notices are issued.

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A. Proposal forms
The Proposal form contains information which are useful for the insurance company
to accept the risk offered for insurance. The principle of utmost good faith and the
duty of disclosure of material information begin with the proposal form for
insurance.

Example
If the insured was required to maintain an alarm or had stated that he has an
automatic alarm system in his gold jewellery showroom, then not only is he
required to disclose it, he has to ensure the same remains in a working condition
throughout the policy period. The existence of the alarm is a material fact for the
insurer who will be accepting the proposal based on these facts and pricing the risk
accordingly.
1. Nature of questions in a proposal form
The number and nature of questions in a proposal form vary according to the class
of insurance concerned.
i. Fire insurance proposal forms are usually used for relatively simple/ standard
risks like houses, shops etc. For large industrial risks, inspection of the risk is
arranged by insurer before acceptance of the risk. Special questionnaire are
sometimes used in addition to the proposal form to gather specific information.
Fire insurance proposal form seeks, among other things, the description of the
property which would include the following information:
 Construction of external walls and roof, number of story
 Occupation of each portion of the building
 Presence of hazardous goods
 Process of manufacture including raw material and finished goods
 The sums proposed for insurance
 The period of insurance, etc.
ii. For motor insurance, questions are asked about the vehicle, its operations,
make and carrying capacity, how it is managed by the owner and related
insurance history.
iii. In personal lines like health, personal accident and travel insurance, proposal
forms are designed to get information about the proposer’s health, way of life
and habits, pre-existing health conditions, medical history, hereditary traits,
past insurance experience etc.
iv. In other miscellaneous insurances, proposal forms are compulsory and they
incorporate a declaration which extends the common law duty of good faith.

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2. Elements of a proposal
i. Proposer’s name in full
The proposer should be able to identify himself/ herself unambiguously. It is
important for the insurer to know with whom the contract has been entered, so
that the benefits under the policy would be received only by the insured.
ii. Proposer’s address and contact details
The reasons stated above are applicable for collecting the proposer’s address and
contact details as well.
iii. Proposer’s profession, occupation or business
In some cases like health and personal accident insurance, the proposer’s
profession, occupation or business are of importance as they could have a
material bearing on the risk.
iv. Details and identity of the subject matter of insurance
The proposer is required to clearly state the subject matter that is proposed for
insurance.

Example
The proposer is required to state if it is:
i. A private car [with its identification like engine number, chassis number,
registration number] or
ii. A residential house [with its full address and identification numbers] or
iii. An overseas travel [by whom, when, to which country, for what purpose] or
iv. A person’s health [with person’s name, address and identification] etc.
depending on the case
v. Sum insured indicates limit of liability of the insurer under the policy and
has to be indicated in all proposal forms.
vi. Previous and present insurance: As seen in the common chapters, the
proposer is required to inform the details about his previous insurances to the
insurer.
In property insurance, there is a chance that insured may take policies from
different insurers and when a loss happens, claim from more than one insurer.
This information is required to ensure that the principle of contribution is
applied so that the insured is indemnified and does not gain/ profit due to
multiple insurance policies for the same risk.
Further, in personal accident insurance an insurer would like to restrict the
amount of coverage (sum insured) depending on the sum insured under other
PA policies taken by the same insured.

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 vii. Loss experience
The proposer is asked to declare full details of all losses suffered by him/ her,
whether or not they were insured. This will give the insurer information about
the subject matter of insurance and how the insured has managed the risk in the
past. Underwriters can understand the risk better from such answers and decide
on conducting risk inspections or collecting further details.
viii. Declaration by insured
As the purpose of the proposal form is to provide all material information to the
insurers, the form includes a declaration by the insured that the answers are
true and accurate and he agrees that the form shall be the basis of the
insurance contract. Any wrong answer will give the right to insurers to avoid the
contract. Other sections common to all proposal forms relate to signature, date
and in some cases agent’s recommendation.

B. Acceptance of the Proposal (underwriting)

As seen earlier, a completed proposal form broadly gives the following information:
 Details of the insured
 Details of the subject matter
 Type of cover required
 Details of the physical features both positive and negative - including type
and quality of construction, age, presence of fire-fighting equipment, the
type of security etc.,
 Previous history of insurance and loss
In the case of property, motor or cargo insurance, the insurer may also arrange for
pre-inspection survey of the risk before acceptance, depending on the nature and
value of the risk. Insurers take their decision based on the information available in
the proposal, the risk inspection report, answers to the additional questionnaire and
other documents (as may be called for by the insurer). The insurer then decides
about the rate to be applied to the risk factor and calculates the premium based on
various parameters, which is then conveyed to the insured. Proposals are processed
by the insurer with speed and efficiency and all decisions thereof are communicated by it
in writing within a reasonable period.

Definition
Underwriting: As per Protection of Policyholders’ Interests) Regulations, 2017, the
company has to process the proposal within 15 days’ time. The agent is expected to
keep track of these timelines, follow up internally and communicate with the
prospect/ insured as and when required by way of customer service. This entire
process of scrutinizing the proposal and deciding about acceptance is known as
underwriting.

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Test Yourself 1
As per Protection of Policyholders’ Interests) Regulations, 2017, an insurance
company has to process an insurance proposal within __________.
I. 7 days
II. 15 days
III. 30 days
IV. 45 days
C. Premium Receipt
Premium is the consideration or amount paid by the insured to the insurer for
insuring the subject matter of insurance, under a contract of insurance. As discussed
in Chapter 4, the Agent should be always mindful that the premium is to be paid
in advance, before the inception date of the insurance contract as per Section
64 VB of the Insurance Act.
Important
a) Section 64 VB of the Insurance Act-1938 provides that no insurer shall assume
any risk unless and until the premium is received in advance or is guaranteed to
be paid or a deposit is made in advance in the prescribed manner. Insurance
Rules 58 and 59 provide certain exceptions to this condition of advance payment
of premium in some situations.
b) Where an insurance agent collects a premium on a policy of insurance on behalf
of an insurer, he shall deposit with or dispatch by post to the insurer the
premium so collected in full without deduction of his commission within twenty-
four hours of the collection excluding bank and postal holidays.
c) It is also provided that the risk may be assumed only from the date on which the
premium has been paid in cash or by cheque.
d) Where the premium is tendered by postal or money order or cheque sent by
post, the risk may be assumed on the date on which the money order is booked
or the cheque is posted as the case may be.
e) Any refund of premium which may become due to an insured on account of the
cancellation of policy or alteration in its terms and conditions or otherwise, shall
be paid by the insurer directly to the insured by a crossed or order cheque or by
postal/ money order or by Electronic Mode and a proper receipt shall be
obtained by the insurer from the insured, and such refund shall in no case be
credited to the account of the agent.
D. Cover Notes/ Certificate of Insurance/ Policy Document
After underwriting is completed it may take some time before the policy is issued. Pending
the preparation of the policy or when the negotiations for insurance are in
progress and it is necessary to provide cover on a provisional basis or when the
premises are being inspected for determining the actual rate applicable, a cover
note is issued to confirm protection under the policy. It gives description of cover.
Sometimes, insurers issue a letter confirming the provisional insurance cover instead of a
cover note.
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Although the cover note is not stamped, the wording of the cover note makes it clear
that it is subject to the usual terms and conditions of the insurers' policy for the class of
insurance concerned. If the risk is governed by any warranties, then the cover note would
state that the insurance is subject to such warranties. The cover note is also made subject
to special clauses, if applicable e.g. Agreed Bank Clause, Declaration Clause etc.
A cover note would incorporate the following:
a) Name and address of insured
b) Sum insured
c) Period of insurance
d) Risk covered
e) Rate and premium: if rate is not known, the provisional premium
f) Description of the risk covered: for example a fire cover note would
indicate identification particulars of the building, its construction and
occupancy.
g) Serial number of the cover note
h) Date of issue
i) Validity of cover note is usually for a period of a fortnight and rarely up to
60 days
Cover notes are used predominantly in marine and motor classes of business.
1. Marine Cover Notes
These are normally issued when details required for the issue of policy such as name
of the steamer, number of packages, or exact value etc. are not known. Even in
respect of exports, a cover note may be issued e.g. a certain quantity of cargo
meant for shipment is sent by the exporter to the docks. It may happen that, owing
to difficulty of securing adequate shipping space, shipment of the cargo by the
intended vessel does not take place. The quantity therefore, that may be sent by a
particular vessel cannot be known. In the circumstances, a cover note may be
required which is to be followed subsequently by the issue of regular policy when
full details are available and made known to the insurance company.
Marine cover note may be worded along the following lines:
i. Marine Cover Note Number
ii. Date of issue
iii. Name of the insured
iv. Valid up to
“As requested, you are hereby held covered subject to usual conditions of the
company's policy to the extent of Rs. _____________.”

a) Clauses: Institute Cargo Clauses A, B or C including War SRCC risks as per Institute
Clauses, but subject to 7 days’ notice of cancellation.
b) Conditions: Details of shipment to be supplied on receipt of shipping documents
for issue of policy. In the event of loss or damage prior to declaration and/ or
shipment on board the steamer, it is hereby agreed that the basis of valuation

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 shall be prime cost of the goods plus charges actually incurred and for which the
assured is liable.
With regard to inland transit normally all relevant data required for issue of policy
are available and therefore a cover note is rarely required. There may however, be
some occasions when cover notes are issued and substituted later on by policies
containing full description of the cargo, transit etc.
2. Motor Cover Notes
These are to be issued in the form prescribed by the respective companies the
operative clause of a motor cover note may read as follows:
“The insured described in the form, referred to below, having proposed for
insurance in respect of the Motor Vehicle(s) described therein and having paid the
sum of Rs….as premium the risk is hereby held covered under the terms of the
company’s usual form of……Policy applicable thereto (subject to any Special
Conditions mentioned below) unless the cover be terminated by the Company by
notice in writing in which case the insurance will thereupon cease and a
proportionate part of the premium otherwise payable for such insurance will be
charged for the time the company had been on risk.”
The Motor Cover Note generally contains the following particulars:
a) Registration mark and number, or description of the vehicles insured/ cubic
capacity/ carrying capacity/ make/ year of manufacture, engine number,
chassis number
b) Name and address of the insured
c) Effective date and time of commencement of insurance for the purpose of the
Act. Time……, Date……
d) Date of expiry of insurance
e) Persons or classes of persons entitled to drive
f) Limitations as to use
g) Additional risks, if any
The Motor Cover Note incorporates a certificate to the effect that it is issued in
accordance with the provisions of Chapters X and XI of the Motor Vehicles Act, 1988.
Important
The validity of the Cover Note may be extended for a further period of 15 days at a
time, but in, but in no case the total period of validity of a Cover Note shall exceed
sixty days.
Note: The wordings of the cover note may vary from insurer to insurer
Use of cover notes is being discouraged by most companies. Present day technology
facilitates issuance of policy document immediately.
3. Certificate of Insurance – Motor Insurance
A certificate of insurance provides existence of insurance in cases where proof may
be required. For instance in motor insurance, in addition to the policy, a certificate
of insurance is issued as required by the Motor Vehicles Act. This certificate

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provides evidence of insurance to the Police and Registration Authorities. A
specimen certificate for private cars is reproduced below, showing salient features.
MOTOR VEHICLES ACT, 1988
CERTIFICATE OF INSURANCE
Certificate No. Policy No.
1. Registration mark and Number, Place of registration, Engine No./Chassis No./ Make/
Year of manufacture.
2. Type of Body/ C.C/ Seating capacity/ Net Premium/ Name of Registration Authority,
3. Geographical area – India. `
4. Insured declared value (IDV)
5. Name and address of the Insured, Business or profession.
6. Effective date of commencement of Insurance for the purpose of the Act. From………. 'O'
clock on ………
7. Date of expiry of insurance: midnight on ……………
8. Persons or classes of persons entitled to drive.
Any of the following:
(a) The insured:
(b) Any other person who is driving on the insured's order or with his permission
Provided that the person driving holds an effective driving license at the time of the accident
and is not disqualified from holding or obtaining such a license. Provided also that the person
holding an effective learner's license may also drive the vehicle and such a person satisfies
the requirement of Rule 3 of Central Motor Vehicles Rules 1989.
LIMITATIONS AS TO USE
The policy covers use for any purpose other than:
(a) Hire or reward;
(b) Carriage of goods (other than personal luggage)
(c) Organised racing,
(d) Race making,
(e) Speed testing
(f) Reliability Trials
(g) Any purpose in connection with Motor Trade.
I/ we hereby certify that the Policy to which this Certificate relates as well as this Certificate of
Insurance are issued in accordance with the provisions of Chapter X and Chapter XI of the Motor
Vehicles Act, 1988.
Examined .........
(Authorized Insurer)

Motor certificate of Insurance is required to be carried in the vehicle at all times for
the scrutiny of the relevant authorities.
4. Policy Document
The policy is a formal document which provides an evidence of the contract of
insurance. This document has to be stamped in accordance with the provisions of the

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Indian Stamp Act, 1899.

A general insurance policy usually contains:

a) The name(s) and address(es) of the insured and any other person having
insurable interest in the subject matter;
b) Full description of the property or interest insured;
c) The location/ s of the property or interest insured under the policy and
where appropriate, with respective insured values;
d) Period of insurance;
e) Sums insured;
f) Perils covered and exclusions ;
g) Any excess/ deductible applicable;
h) Premium payable and where the premium is provisional subject to
adjustment, the basis of adjustment of premium ;
i) Policy terms, conditions and warranties;
j) Action to be taken by the insured upon occurrence of a contingency likely to
give rise to a claim under the policy;
k) The obligations of the insured in relation to the subject-matter of insurance
upon occurrence of an event giving rise to a claim and the rights of the
insurer in the circumstances;
l) Any special conditions ;
m) Provision for cancellation of the policy on grounds of misrepresentation,
fraud, non-disclosure of material facts or non-cooperation of the insured;
n) The address of the insurer to which all communications in respect of the
policy should be sent;
o) The details of Add–on covers and/ or Endorsements if any;
p) Details of Grievance Redressal mechanism and address of Ombudsman

Test Yourself 2
Which of the following statements is true with regards to cover notes?
I. Cover notes are predominantly used in life insurance
II. Cover notes are predominantly used in all classes of general insurance
III. Cover notes are predominantly used in health insurance
IV. Cover notes are predominantly used in marine and motor classes of general
insurance
E. Warranties
A warranty is a condition expressly stated in the policy which has to be literally
complied with for validity of the contract. Warranty is not a separate document.
It is part of both cover notes and policy document. It is a condition precedent to
the contract. It must be observed and complied with strictly and literally,
irrespective of the fact whether it is material to the risk or not. If a warranty is
breached, the policy becomes voidable at the option of the insurers even when it is
clearly established that the breach has not caused or contributed to a particular
loss. However, in practice, if the breach of warranty is of a purely technical nature
and does not, in any way, contribute to or aggravate the loss, insurers at their
discretion may process the claims according to norms and guidelines as per company
policy.
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1. Fire Insurances warranties (some examples) are as given below

Warranted, that no hazards goods shall be stored in the insured premises during the
currency of policy.

Silent Risk: Warranted that no manufacturing activity is carried out in the insured
premises for consecutive period of 30 days or more.

Cigarette Filter Manufacturing: Warranted that no solvents having flash point

below 300C are used/ stored in the premises

2. In Marine Insurance, a warranty is defined as follows: “a promissory warranty,

that is to say, a warranty by which the assured undertake that some particular
thing shall or shall not be done, or that some condition will be fulfilled, or
whereby he affirms or negates the existence of a particular state of facts”

In Marine Cargo Insurance, a warranty is inserted to the effect that goods (e.g.
tea) are packed in tin-lined cases. In Marine Hull insurance by inserting a warranty
that the insured vessel will not navigate in a certain area, gives an idea to the
insurer about the extent of risk he has agreed to provide cover for. If the warranty
is breached, the risk agreed to initially is altered and the insurer is allowed to
discharge himself from further liability from the date of breach

3. In Burglary Insurance, it is warranted that the property is guarded by a

watchman for twenty four hours. The rates, terms and conditions of the policy
continue to be the same only if the warranties attached to the policy are
complied with.

Test Yourself 3

Which of the following statements is correct with regards to a warranty?

I. A warranty is a condition which is never stated in the policy
II. A warranty forms part of a policy document
III. A warranty is always communicated to the insured separately and cannot be part
of the policy document
IV. Claims will be payable even if a warranty is breached.

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F. Endorsements
It is the practice of insurers to issue policies in a standard form; covering certain perils
and excluding certain others.
Definition
If certain terms and conditions of the policy need to be modified at the time of issuance,
or during the policy tenure, it is done by setting out the amendments/ changes through a
document called endorsement.
It is attached to the policy and forms part of it. The policy and the endorsement together
constitute the evidence of the contract. Endorsements may also be issued during the
currency of the policy to record changes/ amendments.
Whenever material information changes, the insured has to advice the insurance
company who will take note of this and incorporate the same as part of the
insurance contract through the endorsement.
Endorsements normally required under a policy related to:
a) Variations/ changes in sum insured
b) Change of insurable interest by way of sale, mortgage, etc.
c) Extension of insurance to cover additional perils/ extension of policy period
d) Change in risk, e.g. change of construction, or occupancy of the building in fire
insurance
e) Transfer of property to another location
f) Cancellation of insurance
g) Change in name or address etc.

Specimen

For the purpose of illustration, specimen wordings of some endorsements are

reproduced below:

Cancellation

At the request of the insured the insurance by this Policy is hereby declared to be
cancelled as from ………. The insurance having been in force for a period over ………….
Months, no refund is due to the Insured.

Increase in Stock Value Cover:

"The Insured having advised that the stock covered by this policy has been increased
it is hereby agreed that the sum insured is accordingly altered to Rs..... discussed
as follows:

On (Describe) Rs.
On (Describe) Rs.

In consideration whereof an additional premium is hereby charged.

Further annual premium Rs……….
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The total insurance now stands at Rs …….

Subject otherwise to the terms, provisions and conditions of this policy.

Extension of cover to include extraneous peril in a Marine Policy

At the request of the insured, it is hereby agreed to include the risks of breakage under
the above policy.

In consideration, thereof an additional premium as under is charged to the insured on Rs.

Test Yourself 4

If certain terms and conditions of the policy need to be modified at the time of issuance, or
during the policy tenure it is done by setting out the amendments through __________.

I. Warranty
II. Endorsement
III. Alteration
IV. Modifications are not possible

G. Interpretation of policies

Contracts of insurance are expressed in writing and the insurance policy wordings
are drafted by insurers. These policies have to be interpreted according to certain
well-defined rules of construction or interpretation which have been established by
various courts. The most important rule of construction is that the intention of
the parties must prevail and this intention is to be looked for in the policy itself.
If the policy is issued in an ambiguous manner, it will be interpreted by the courts
in favour of the insured and against the insurer on the general principle that the
policy was drafted by the latter.

Policy wordings are understood and interpreted as per the following rules:

a) An express condition overrides an implied condition except where there is

inconsistency in doing so.
b) In the event of a contradiction in terms between the standard printed policy
form and the typed or handwritten parts, the typed or handwritten part is
deemed to express the intention of the parties in the particular contract,
and their meaning will overrule those of the original printed words.
c) If an endorsement contradicts other parts of the contract the meaning of the
endorsement will prevail as it is the later document.
d) Clauses in italics over-ride the ordinary printed wording where they are
inconsistent.

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 e) Clauses printed or typed in the margin of the policy are to be given more
importance than the wording within the body of the policy.
f) Clauses attached or pasted to the policy override both marginal clauses and
the clauses in the body of the policy.
g) Printed wording is over-ridden by typewritten wording or wording impressed
by an inked rubber stamp.
h) Handwriting takes precedence over typed or impressed wording.
i) Finally, the ordinary rules of grammar and punctuation are applied if there
is any ambiguity or lack of clarity.

Important

1. Construction of policies

An insurance policy is evidence of a commercial contract and the general rules of

construction and interpretation adopted by courts apply to insurance contracts as
in the case of other contracts.

The principal rule of construction is that the intention of the parties of the contract
must prevail, that intention must be gathered from the policy document itself and
the proposal form, clauses, endorsements, warranties etc. attached to it and
forming a part of the contract.

2. Meaning of wordings
The words used are to be construed in their ordinary and popular sense. The
meaning to be used for words is the meaning that the ordinary man in the street
would construe. Thus, “fire” means flame or actual burning.

On the other hand, words which have a common business or trade meaning will
be construed with that meaning unless the context of the sentence indicates
otherwise. Where words are defined by statute, the meaning of that definition will
be used, such as “theft” as in the Indian Penal Code.

Many words used in insurance policies have been the subject of previous legal
decisions and those decisions of a higher court will be binding on a lower court
decision. Technical terms must always be given their technical meaning, unless
there is an indication to the contrary.

H. Renewal Notice

Most of the non-life insurance policies are insured on annual basis.

Although there is no legal obligation on the part of insurers to advise the insured
that his policy is due to expire on a particular date, yet as a matter of courtesy and
healthy business practice, insurers issue a renewal notice in advance of the date of
expiry, inviting renewal of the policy. The notice incorporates all the relevant
particulars of the policy such as sum insured, the annual premium, etc. It is also the
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practice to include a note advising the insured that he should intimate any material
alterations in the risk.

In motor renewal notice, for example, the insured’s attention is to be drawn to

revise the sum insured (i.e. the Insured’s Declared Value of the vehicle) in the
light of current requirements.

The insured’s attention is also to be invited to the statutory provision that no risk
can be assumed unless the premium is paid in advance.

Test Yourself 5

Which of the following statements is correct with regards to renewal notice?

I. As per regulations there is a legal obligation on insurers to send a renewal notice

to insured, 30 days before the expiry of the policy
II. As per regulations there is a legal obligation on insurers to send a renewal notice
to insured, 15 days before the expiry of the policy
III. As per regulations there is a legal obligation on insurers to send a renewal notice
to insured, 7 days before the expiry of the policy
IV. As per regulations there is no legal obligation on insurers to send a renewal
notice to insured before the expiry of the policy

Summary

a) The first stage of documentation is essentially the proposal forms through which
the insured informs about himself/ herself
b) The duty of disclosure of material information arises prior to the inception of
the policy, and continues even after the conclusion of the contract
c) Insurance companies usually add a declaration at the end of the Proposal form
to be signed by the insurer
d) Elements of a proposal form include:
i. Proposer’s name in full
ii. Proposer’s address and contact details
iii. Proposer’s profession, occupation or business
iv. Details and identity of the subject matter of insurance
v. Sum insured
vi. Previous and present insurance
vii. Loss experience
viii. Declaration by the insured
e) An agent, who acts as the intermediary, has the responsibility to ensure all
material information about the risk is provided by the insured to insurer.
f) The process of scrutinising the proposal and deciding about acceptance is known
as underwriting.
g) Premium is the consideration or amount paid by the insured to the insurer for
insuring the subject matter of insurance, under a contract of insurance.

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h) Payment of premium can be made by cash, any recognised banking negotiable
instrument, postal money order, credit or debit card, internet, e-transfer, direct
credit or any other method approved by IRDAI from time to time.
i) A cover note is issued when preparation of policy is pending or when negotiations
for insurance are in progress and it is necessary to provide insurance cover on
provisional basis.
j) Cover notes are used predominantly in marine and motor classes of business.
k) A certificate of insurance provides existence of insurance in cases where proof
may be required
l) The policy is a formal document which provides an evidence of the contract of
insurance.
m) A warranty is a condition expressly stated in the policy which has to be literally
complied with for validity of the contract.
n) If certain terms and conditions of the policy need to be modified at the time of
issuance or during the policy tenure, it is done by setting out the amendments/
changes through a document called endorsement.
o) The most important rule of construction is that the intention of the parties must
prevail and this intention is to be looked for in the policy itself.

Key Terms

a) Policy form
b) Advance payment of premium
c) Cover note
d) Certificate of Insurance
e) Renewal notice
f) Warranty

Answers to Test Yourself

Answer 1 - The correct option is II.

Answer 2 - The correct option is IV.
Answer 3 - The correct option is II.
Answer 4 - The correct option is II.
Answer 5 - The correct option is IV.

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 CHAPTER G-02
UNDERWRITING AND RATE MAKING
Chapter Introduction

We have learnt various concepts and principles related to general insurance.

Underwriting is the process by which the Insurer decides whether to accept a risk
or not. For this, the underwriters analyse the risk. They understand how risky the
risk is. Also, how much of money should be collected as premium. Again, sometimes
the risks can be accepted only subject to conditions to improve the risk. All these
angles are discussed in this chapter.

Learning Outcomes

A. Physical Hazards
B. Physical Hazards –Importance of Risk Management, Clauses and Rating
C. Deciding on Excess/ Deductibles and Restricting the Cover
D. Moral Hazard
E. Fixing the Sum Insured

After studying this chapter, you should be able to:

1. Understand Physical hazards

2. Appreciate Underwriting as a function
3. Methods used by underwriters to reduce the risk
4. Understand how the Sum Insured is fixed.

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A. Physical Hazards
A thorough knowledge of various hazards to which property and persons are exposed
is most essential for underwriting.
Physical hazard can be ascertained from the information given in a proposal form.
It can be better ascertained by a survey or inspection of the risk. The following are
some examples of physical hazard in various classes of insurance.
a) Fire
i. Construction: Construction refers to the building materials used in walls and
roof. A concrete building is superior to a timber building.
ii. The height: Greater the number of storey’s, the greater the hazard because
of difficulties of extinguishing fire. Besides, a greater number of floors involve
risk of collapse of the upper floors causing heavy impact damage.
iii. Nature of flooring: Wooden floors add fuel to fire. Besides, wooden floors
collapse easily in the event of fire, causing damage to property on lower floors
through falling machinery or goods from upper floors.
iv. Occupancy: The occupancy of a building, and the purpose for which it is used.
Various types of hazards arise from occupancy.
v. Ignition hazard: Buildings in which chemicals are produced or used in large
quantity involve a considerable ignition hazard. A timber yard presents a high
combustibility hazard because once a fire starts, timber burns quickly. The
contents may be highly susceptible to damage in the event of fire.
For example, paper, clothing etc. are susceptible not only to fire damage but
also to damage by water, heat etc.
vi. The process of manufacture: If work is carried during the night, the hazard
is increased due to the use of artificial lights, continuous use of machinery
leading to friction and the likely carelessness of workers due to fatigue.
vii. Situation/ location of risk: Location in a congested area, exposure to
hazardous adjacent premises and distance from the fire brigade is an example
of physical hazard.
b) Marine
i. The age and condition of vessel: Older vessels are inferior risks.
ii. The voyage to be undertaken: The route of the voyage, loading and
unloading conditions and warehousing facilities at the ports are factors.
iii. The nature of the stocks: Articles of high value are exposed to theft;
machinery is liable to breakage in transit.
iv. The method of packing: Cargo packed in bales is considered to be better
than cargo in bags. Again, double bags are safer than single bags. Liquid
cargo in second-hand drums constitute bad physical hazard.

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c) Motor
i. The age and condition of the vehicle: Older vehicles are more prone to
accidents.
ii. The type of vehicle: Sports cars involve greater physical hazard etc.
d) Burglary
i. The nature of the stocks: Articles of high value in small bulk (e.g. Jewellery)
and easily disposable are considered to be bad risks.
ii. Situation: Ground floor risks are inferior to upper floor risks: private
dwellings situated in isolated areas are hazardous.
iii. Constructional hazard: Too many doors and windows constitute bad physical
hazard.
e) Personal accident
i. The age of the person: Very old persons are accident prone; besides they
will take longer to recover in the event of an accident.
ii. Nature of occupation: Jockeys, mining engineers, manual workers are
examples of bad physical hazard.
iii. Health and physical condition: A person suffering from Diabetes may not
respond to surgical treatment in the event of accidental bodily injury.
B. Physical Hazards – Importance of Risk Management, Clauses and Rating
Underwriters use the following methods to deal with physical hazards:
 Loading of premium
 Applying warranties on the policy
 Applying certain clauses
 Imposition of excess/ deductibles
 Restricting the cover granted
 Declinature of cover
a) Loading of premium
There may be some adverse features in a risk exposure for which the underwriters
may decide to charge an extra premium before acceptance of the same. By loading
the premium the higher probability of claims or occurrence of large claims is taken
into consideration.
Example
Normal rate of premium is charged for cargo shipped by liners or other vessels,
which comply with the prescribed standards. However, if an over-aged or under-
tonnage vessel ships the cargo then extra premium is charged.
In personal accident insurance if the insured is engaged in hazardous pursuits like
mountaineering, racing on wheels, big game hunting etc. extra premium is charged.

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Sometimes loading of premium is also done for adverse claims ratio, as in case of
motor insurance or health insurance policies.
b) Imposition of warranties
Insurers incorporate appropriate warranties to reduce the physical hazard. Some
examples are provided below.
Example
i. Marine cargo: A warranty is inserted to the effect that goods (e.g. Tea) are
packed in tin lined cases.
ii. Burglary: It is warranted that the property is guarded by a watchman for twenty
four hours.
iii. Fire: In fire insurance, it is warranted the premises would not be used beyond
normal working hours.
iv. Motor: It is warranted that the vehicle will not be used for speed testing or
racing.

Example
Marine cargo: Small damage to parts may cause costly machinery to be a
constructive total loss. Such machinery are subject to the Replacement Clause,
which limits underwriter’s liability only to the cost of replacing, forwarding and
refitting any broken part.
Cast pipes, hard board sometimes get damaged only at the edges. Marine policies
on cast pipes, hardboard etc., are subject to the cutting clause warranting that the
damaged portion should be cut off and the balance utilised.

c) Deciding on Excess/ Deductibles and Restricting the Cover

When the loss amount exceeds the deductible/ excess mentioned the balance is
paid under 'excess' clause. Loss below the limit is not payable.
The object of these clauses is to eliminate small claims. As the insured is made to
pay part of a loss, he is encouraged to exercise more care and to practice loss
prevention.
Example
i. Motor: A proposal for an old motor vehicle will not be accepted on
comprehensive terms but insurers will offer a restricted cover i.e. against third
party risks only.
ii. Personal accident: A personal accident proposer who has crossed the
maximum acceptance age limit may be covered for death risk only instead of
on comprehensive terms i.e. including disablement benefits.

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d) Discounts
Lower rates are charged or a discount is given in the normal premium if the risk is
favourable. The following features are considered to contribute to improvement of
risk in fire insurance.
i. Installation of sprinkler system within the premises
ii. Installation of hydrant system in the compound
iii. Installation of hand appliances consisting of buckets, portable extinguishers
and manual fire pumps
iv. Installation of automatic fire alarm
Example
Under motor insurance a discount in the premium is provided if the motor cycle is
always used with a side-car attached, as this feature contributes to improved risk
because of the greater stability of the vehicle.
In marine insurance, the insurer may consider giving discounts on premium for “Full
Load” container as this reduces the incidence of theft and shortage.
Under a group personal accident cover, discounts would be given for coverage of a
large group, which reduces the administrative work and expenses of the insurer.
e) No claim bonus (NCB)
A certain percentage is given as bonus for every claim free renewal year with a limit
to the maximum bonus that can be availed. It is allowed by way of deduction on the
total premium at renewal only, depending upon the incurred claim ratio for the
entire group or to Motor vehicle Own damage policy holders for claim free years.
No claim bonus is a powerful strategy to improve underwriting experience and
forms an integral part of rating systems. This bonus recognises the factor of moral
hazard in the insured. It rewards the insured for not lodging claims either by
adopting better driving skills as in motor insurance or taking better care of his health
in Health policies.
f) Declinature
If the physical hazard involved is considerably bad, the risk becomes uninsurable
and is declined. Based on their past loss experience, knowledge of hazards and
overall underwriting policy, insurers have formulated a list of risks to be declined
in each class of insurance.
C. Moral hazard
Moral hazard could arise in the following ways:
a) Dishonesty
An extreme example of bad moral hazard is that an insured taking insurance
with deliberate intention of creating or making a loss to collect a claim. Even,
an honest insured may be tempted to stage a loss, if he happens to be in financial
difficulties.

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 b) Carelessness
Indifference towards loss is an example of carelessness. Because of the
existence of insurance, the insured may tend to adopt a careless attitude
towards the insured property.
If the insured does not take the same care of the property as a prudent and
reasonable man would if he were uninsured the moral hazard is unsatisfactory.
c) Industrial relations
Employer-employee relationship may involve an element of bad moral hazard.
d) Wrong claims
This kind of moral hazard arises when claims occur. An insured may not
deliberately bring about a loss but once a loss occurs, he would attempt to
demand unreasonably high amount of compensation, in total disregard of the
principle of indemnity.
Information
Sub-limits: The insurer may impose a limit on the total pay-out separately each for
room expenses, surgical procedures or doctor fees to check the inflated bills.

Where the moral hazard of the insured is suspected, the agent should not
entertain or bring such proposals to the insurance company. S/ he should also
bring such issues before the insurance company officials.
1. Short period scales
Normally, premium rates are quoted for a period of twelve months. If a policy is
taken for a shorter period, the premium is charged according to a special scale,
known as short period scale. The premium chargeable for short period insurance is
not on proportionate basis.
Need for short period scales
a) These rates are applied because the expenses involved in the issue of the policy
whether for a 12 months period or a shorter period, are almost the same.
b) Further, an annual policy requires renewal procedure only once during a year
whereas short period insurances involve more frequent renewals. If a
proportionate premium is allowed, there would be a tendency on the part of the
insured to go on taking short period policies and thereby, in effect, pay
premiums in instalments.
c) Besides, some insurance are seasonal in character and the risk is greater during
that season. Insurances are sometimes taken during such period when the risk is
greatest and thereby selection takes place against the insurers. Short period
scales are evolved to prevent such selection against the insurers. They are also
applicable when annual insurance is cancelled by the insured. In that case
refund is made keeping the premium on short period scale for the period Insurer
was in risk.

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Minimum premium
It is the practice to charge minimum premium under each policy so that
administrative expenses of issuing the policy are covered.
Test Yourself 1
What is expected of an agent when she detects a moral hazard?
I. Continue with the insurance as before
II. Report the same to the insurer
III. Ask for a share in the claims
IV. Turn a blind eye

D. Fixing the Sum Insured

It’s the maximum amount that an insurance company will indemnify as per policy
condition. An insured has to be very careful in choosing the limit of indemnity,
because that is the maximum amount that would be reimbursed at the time of
claim.
The sum insured is always fixed by the insured. It is an amount on which rate is
applied to arrive at the premium under the policy.
It should be representative of the actual value of the property. If there is over
insurance, no benefit accrues to the insured and in case of under insurance, the
claim gets proportionately reduced.
Deciding the sum insured
Under each class of business the insured should be advised of the following points
which have to be borne in mind while deciding the sum insured:
a) Personal accident insurance: The sum insured offered by a company can be a
fixed amount or it can also be based on the insured’s income. Some insurance
companies may give a benefit equal to 60 times or 100 times of the insured’s
monthly income for a particular disability. There could be an upper limit or ‘cap’
on the maximum amount. Compensations can vary from company to company. In
group personal accident policies the sum insured may be fixed separately for
each insured person or may be linked to emoluments payable to the insured
person.
b) Motor insurance: In case of motor insurance the sum insured is the insured's
declared value [IDV]. It is the value of the vehicle, which is arrived at by adjusting
the current manufacture's listed selling price of the vehicle with depreciation
percentage as prescribed in the erstwhile India Motor Tariff. Manufacturer's listed
selling price will include local duties/ taxes excluding registration and insurance.
IDV = (Manufacturer’s listed selling price – depreciation) + (Accessories that are
not included in listed selling price-depreciation) and excludes registration and
insurance costs.
The IDV of vehicles that are obsolete or aged over 5 years is calculated by mutual
agreement between insurer and the insured. Instead of depreciation, IDV of old
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 cars is arrived at by assessment of vehicle’s condition done by surveyors, car
dealers etc.
IDV is the amount of compensation given in case a vehicle is stolen or suffers
total loss. It is highly recommended to get IDV which is near the market value of
the car. Insurers provide a range of 5% to 10% to decrease IDV to the insured.
Less IDV would mean lesser premium.
c) Fire insurance: In fire insurance the sum insured may be fixed on the basis of
indemnity or reinstatement value for buildings/ plant and machinery and
fixtures. Contents are covered on the basis of their market value which is cost of
the item less depreciation. (Reinstatement value is explained in detail in Chapter
28 - Commercial Insurance)
d) Stocks insurance: In case of stocks, sum insured is their market value. The
insured will be reimbursed at the cost at which these stocks can be purchased in
the market to replace the damaged raw material, after the loss.
e) Marine cargo insurance: It is an agreed valued policy and the sum insured is as
per the agreement between insurer and insured at the time of contract. Normally
it would consist of the sum of cost of the commodity plus Insurance + freight i.e.
CIF value.
f) Marine hull insurance: In marine hull insurance, the sum insured is the value,
agreed between the insured and the insurer at the beginning of the contract.
This value would be arrived at by a certified valuer after an inspection of the
hull/ ship.

g) Liability insurance: In case of liability policies, the sum insured is the liability
exposure of the industrial units based on the degree of exposure, geographical
spread. Additional legal costs and expenses may also form part of claim
compensation. The sum insured is decided by the insured based on the above
parameters.
Test Yourself 2
Suggest an insurance scheme for a doctor to protect himself from any claims of
negligence against him.
I. Personal accident insurance
II. Professional Liability insurance
III. Marine hull insurance
IV. Health insurance

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Summary
a) Process of classifying risks and deciding into which category they fall is
important for rate making.
b) Underwriting is the process of determining whether a risk offered for insurance
is acceptable, and if so, at what rate, terms and conditions the insurance cover
will be accepted.
c) A rate is the price of a given unit of insurance.
d) The basic objective of rate making is to ensure that price of insurance should be
adequate and reasonable.
e) ‘Pure premium’ is suitably loaded or increased by adding percentages to provide
for expenses, reserves and profits.
f) The term hazard in insurance language refers to those conditions or features or
characteristics which create or increase the chance of loss arising from a given
peril.
g) The objective of imposing deductible/ excess clauses is to eliminate small
claims.
h) No claim bonus is a powerful strategy to improve underwriting experience and
forms an integral part of rating systems.
i) Sum insured is the maximum amount that an insurance company will indemnify
as per policy condition.

Key terms
a) Underwriting
b) Rate making
c) Physical hazards
d) Moral hazards
e) Indemnity
f) Loading of premium
g) Warranties
h) Deductibles
i) Excess

Answers to Test Yourself

Answer 1 - The correct option is II.
Answer 2 - The correct option is II.

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 CHAPTER G-03
PERSONAL AND RETAIL INSURANCE

Chapter Introduction

In the previous chapters we have learnt various concepts and principles related to
general insurance. General insurance products are classified differently in different
markets. Some classify them as property, casualty and liability. Elsewhere, they are
grouped as fire, marine, motor and miscellaneous. In this chapter, common products
such as personal accident, travel, home and shop keepers and motor insurance that
are bought by such retail customers are discussed.

Learning Outcomes

A. Retail Insurance Products

B. 'All Risks' and ‘Named Perils’ Insurance Policy
C. Package policies
D. Shopkeeper’s Insurance
E. Householder’s Insurance
F. Sum Insured and Premium
G. Motor Insurance

After studying this chapter, you should be able to:

1. Explain householder’s insurance

2. Prepare shop insurance cover
3. Discuss motor insurance

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A. Retail Insurance Products

There are some insurance products that are purchased for individuals for covering
certain interests. Though small commercial or business interests could be there for
such insurances, these are generally sold to individuals. In some markets these are
called ‘small ticket’ policies or ‘retail policies’ or ‘retail products’. Insurances of
the home, motor cars, two-wheelers, small businesses like shops etc. fall under this
category. These products are usually sold by the same agents/ distribution channels
that deal with personal lines of insurance as the buyers also are essentially from the
same consumer segment.

B. 'All Risks' and ‘Named Perils’ Insurance Policy

Non-life insurance policies can be broadly classified into two categories:

 Named peril policies

 All risk policies

i. "All risks" typically means that any risk that the insurance contract does not
specifically exclude is covered, subject to terms and conditions.

ii. All-risks insurance is the most comprehensive type of coverage available. It is

therefore priced proportionately higher than other types of policies, and the
cost of this type of insurance is measured against the probability of a claim.

iii. Named peril policies are those where the perils covered are specifically listed
and defined.

C. Package policies

i. Package covers give, under a single document, a combination of covers.

ii. For instance there are covers such as Householder’s Policy, Shopkeeper’s Policy,
Office Package Policy etc. that, under one policy, seek to cover various physical
assets including buildings, contents etc.
iii. Such policies may also include certain personal lines or liability covers.
iv. Package covers could have common terms and conditions for all sections as also
specific terms for specific sections of the policy.
I.

D. Shopkeeper’s Insurance
A shop owner is not a corporate house that has large reserves of money to restart
business. A single mishap may lead to closure of her/ his shop and could probably
ruin her/ his family. There may be bank loans also to repay. There is always the
possibility that a member of the public suffers a personal injury or damage to her/
his property, caused by the shop owner’s operations and a court holds the shop
owner liable to pay the damages. Such situations can also ruin a shopkeeper.
Therefore, it's very essential to secure this means of livelihood.

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Shopkeeper’s Insurance policies are devised to cover many of such aspects of
commercial shop/ retail business. There are policies that are customised to cover
specific interests of many types of shops such as antique shop, barbershop, beauty
parlour, bookstore, department store, dry cleaners, gift shop, pharmacy, stationery
shop, toy shop, apparel store etc.

1. What does shopkeeper’s insurance cover?

The policy can be tailored to provide cover to protect the specific areas of retail
business. It usually covers damage to the shop structure and contents due to fire,
earthquake, flooding or malicious damage; and burglary. Shop insurance can also
include business interruption protection. This will cover any loss of income or
additional expenditure in the event of operation of unexpected peril causing
interruption of business operation. The coverage can be selected by the insured
depending on her/ his range of activities.
The additional covers the insured can opt may vary from insurer to insurer and can
be verified from the respective websites of the non-life insurance companies. These
could be:
i. Burglary and Housebreaking: Cover for housebreaking, theft, and larceny of
office content
ii. Machinery Breakdown: Cover for breakdown of electrical/ mechanical
appliances
iii. Electronic Equipment and Appliances:
 Provides all-risk cover for electronic appliances
 Cover for loss of electronic installations
iv. Money Insurance: Provides coverage against loss of money due to an accident
while it is in:
 Transit from the business premises to bank and vice versa
 A safe at the business premises
 A till (box/ drawer/ counter) at the business premises
v. Baggage: Compensates for loss of baggage while on travel for official purposes
vi. Fixed Plate Glass and Sanitary Fittings covers accidental loss of damage to:
 Fixed plate glass
 Sanitary fittings
 Neon Sign/ Glow Sign/ Hoarding
vii. Personal Accident
viii. Infidelity/ Dishonesty of employees: Covers loss or damage caused by
dishonest acts of employees
ix. Legal Liability:
 Compensation for accidents arising out of and in the course of employment
 Provides cover for legal liability to third parties
Fire/ Burglary/ Baggage/ Plate Glass/ Fidelity Guarantee/ Workmen
Compensation and Public Liability Polices (dealt with next chapter) can be taken
separately also.
Terrorism cover may also be extended. The exclusions are generally the same
as in householder’s insurance.

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E. Householder’s Insurance

The coverages under a Householder’s Insurance Policy can be quite wide. It is usually
a package of all the needs of a Householder.

Losses normally covered include fire, lightning, explosion and aircraft fall/ impact
damage (commonly known as FLEXA); storm, tempest, flood and inundation
(commonly known as STFI); and burglary. Coverage differs from company to
company and from policy to policy.

Apart from the structure, it covers the contents of the house against burglary,
housebreaking, larceny and theft. Jewellery whilst being worn or kept in locked safe
can also be insured under Householder’s Insurance. Cover is also given for electrical
and mechanical failure of domestic and electronic appliances.

Similarly, Householder’s insurance Package also provides coverage for loss of

personal baggage, lost during travel, or liabilities to neighbours/ visitors may also
be part of Householders’ insurance package. Some insurers also provide coverage
for pedal cycle, personal accident and workmen’s compensation.

IRDAI has introduced a standard product with effect from 1st April, 2021 – Bharat
Griha Raksha policy with a tenure of upto 10 years, which shall be mandatorily
offered by all general insurers carrying on Fire and allied perils insurance business.

Bharat Griha Raksha (meant for Home Building and Home Contents) policy offers
cover against a wide range of perils, namely Fire, Natural Catastrophe, Forest,
Jungle and Bush fires, Impact Damage of any kind, Riot, Strike, Malicious Damages,
Acts of terrorism, Bursting and overflowing of water tanks, apparatus and pipes,
Leakage from automatic sprinkler installations and Theft within 7 days from the
occurrence of any of the aforesaid events. This policy can be for a period of 1 to 10
years.

In addition to the Home Building, the policy covers General Home Contents
automatically (without any need for declaration of details) for 20% of the Sum
Insured of the Building subject to a maximum of Rs.10 lakhs. One can also opt for a
higher Sum Insured for general contents by declaring the details.

The policy offers two optional covers, namely (i) Insurance for Valuable Contents
like jewellery and curios; and (ii) Personal Accident of the insured and spouse due
to an insured peril under the policy.

The policy gives complete waiver of underinsurance. That is, if the Sum Insured
declared by a policyholder is less than what ought to have been declared for the
property in question, the policyholder’s claim will not be settled proportionately
but upto the Sum Insured that is declared.

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F. Sum Insured and Premium

Industrial units or offices will maintain books of accounts showing therein value of
assets, therefore, it may not be difficult to arrive at the sum insured. In the case of
shop and house this may not be always possible.

As already stated under householder’s insurance, generally, there are two methods
of fixing the sum insured, viz. market value and reinstatement/ replacement value.

For additional coverage like money, baggage, personal accident the premium would
depend on the sum insured and the covers opted for.

How does one fix the Sum Insured?

i. Generally, for fire insurance, there are two methods of fixing the Sum Insured.
One is Market Value (MV) and the other is Reinstatement Value (RIV). In the case
of M.V., in the event of a loss, depreciation is levied on the asset depending on
its age. Under this method, the insured is not paid amount sufficient to replace
the property.

ii. In the RIV method, the insurance company will pay the cost of replacement
subject to ceiling of sum insured. Under this method, no depreciation is levied.
One condition is that the damaged asset should be repaired/ replaced in order
to get the claim. It may be noted that RIV method is allowed only for fixed assets
and not for other assets like stocks and stocks in process.

Most policies insure the structure of the home for its reconstruction, which is called
‘reinstatement value’ (and not on ‘market value’). Reinstatement value is the cost
incurred to reconstruct the home if it is damaged. On the other hand, market value
depends on factors like age of the property, depreciation, etc.

Sum insured is generally calculated by multiplying the built up area of insured's

home with the construction rate per square foot. The contents of the home -
furniture, durables, clothes, utensils, etc. - are valued on market value basis i.e.
the current market value of similar items after depreciation.

Premium would depend on the value insured and the coverage taken.

Test Yourself 1

Which of the below statements is correct with regards to a package policy?

I. Package Policy provide a combination of covers under a single document

II. Package Policy can cover only physical assets like buildings
III. A named peril policy or package policy comes at the same price.
IV. Only named peril policies can be bought and package policies are not available.
V.

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Definition
Some important definitions
a) Burglary means the unforeseen and unauthorised entry to or exit from the
insured premises by aggressive and detectable means with the intent to steal
contents there from.
b) Housebreaking is said to have taken place when a house trespass has been
committed by entering it for the purpose of committing an offence.

c) Robbery means the theft of contents at the insured’s premises using aggressive
and violent means against the Insured and/ or insured’s employees.
d) Safe means a strong cabinet within the insured’s premises designed for the safe
and secure storage of valuable items, and access to which is restricted.
e) Theft is a generic term for all crimes in which a person intentionally and
fraudulently takes the property of another without permission or consent and
with the intent to convert it to the taker’s use or potential sale. Theft is
synonymous with ‘larceny’.

Test Yourself 2

Under the shopkeeper package policy, the insured may opt for an additional ‘Fixed plate
glass and sanitary fittings’ cover. This will cover accidental loss of damage to which of the
following?

I. Fixed plate glass

II. Sanitary fittings
III. Neon signs
IV. All of the above

G. Motor Insurance

Think of this situation: Revathi has bought a new car using all her savings and taken
it for a drive. Out of nowhere, a dog comes in the way and to avoid hitting it, Revathi
swerves sharply, breaks and goes over the divider, hits another car and injures a
person walking on the road. The outcome of a single incident has resulted in damage
to Revathi’s own car, public property, another car and also caused injury to another
person.

In this scenario, if Revathi does not have a car insurance, she may end up paying far
more than what it cost her to purchase the car.

 Will Revathi or similar people have that much money to pay?

 Should the other party’s insurance pay for Revathi’s actions?
 What if they don't have insurance?

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That is why the laws of the land make it mandatory to have third-party liability
insurance. While motor insurance does not prevent these things from happening, it
provides a financial security blanket for the owner.

Apart from an accident, the car can also be stolen, damaged by an accident or
destroyed by fire and the owner would suffer financially.

Motor insurance must be taken by a vehicle owner (i.e. the person in whose name
the vehicle is registered with the Regional Transport Authority in India.)

Important

Mandatory Third Party Insurance

As per the Motor Vehicles Act, 1988, it is mandatory for every owner of a vehicle
plying on public roads, to take an insurance policy, to cover the amount, which the
owner becomes legally liable to pay as damages to third parties as a result of
accidental death, bodily injury or damage to property. A Certificate of Insurance
must be carried in the vehicle as a proof of such insurance.

1. Motor insurance coverage

The country has a large vehicle population. A number of new vehicles keep coming
on to the road every day. Many of them are very costly as well. People say that in
India, vehicles do not get junked, but only keep changing hands. This means that
old vehicles continue to be on the road and new vehicles get added. The area of the
roads (the space for driving) is not growing correspondingly with the number of
vehicles. The number of people walking on the road is also increasing. Police and
hospital statistics say that the number of road accidents in the country is increasing.
The amount of compensations awarded to accident victims by Courts of Law are
increasing. Even vehicle repair costs are going up. All these show the importance
of motor insurance in the country.

Motor insurance covers the loss of vehicles and the damages to them due to
accidents and some other reasons. Motor insurance also covers the legal liability of
vehicle owners to compensate the victims of the accidents caused by their vehicles.

Despite, the government mandate, all the vehicles in the country are not insured.

Motor Insurance covers all types of vehicles plying on public roads such as:

 Two wheelers
 Private cars
 All types of commercial vehicles: Goods carrying and passenger carrying
 Miscellaneous type of vehicles e.g. cranes,
 Motor Trade (Vehicles in Showrooms and Garages)

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‘Third-Party Insurance’

An insurance policy purchased for protection against the legal actions of another
party. Third-party insurance is purchased by the insured (first party) from an
insurance company (second party) for protection against another party's claims
(third party) for liability arising out of the action of the insured

Third party insurance is called ‘Liability Insurance’ as well.

Two important types of covers that are popular in the market are discussed
below:
Act [Liability] Only Policy: As per Motor Vehicles Act it is mandatory for any vehicle
plying in public place to insure liabilities towards third parties.
The policy only covers the vehicle owner's legal liability to pay compensation for:

 Third party bodily injury or death

 Third party property damage
Liability is covered for an unlimited amount in respect of death or injury and
damage.
The claims for compensation to third party victims in case of death or injury caused
by a motor accident are to be filed by the complainant in Motor Accident Claim
Tribunal (MACT).
‘Compulsory Personal Accident (CPA) Insurance’

IRDAI permitted the issuance of a stand-alone Compulsory Personal Accident cover

for Owner-Driver effective 1st January, 2019. The Cover is provided to the Owner-
Driver whilst driving the vehicle including mounting into/ dismounting from or
traveling in the insured vehicle as a co-driver. However, the policyholder can choose
to opt for the CPA cover as part of the Liability Only policy or the Package policy.
In the event the policyholder chooses to take a stand-alone CPA policy, the CPA
cover offered as part of Liability only or Package policy shall be deleted.

Package/ Comprehensive Policy: (Own Damage + Third Party Liability)

In addition to the above, the loss or damage to the vehicle insured by specified
perils (known as own damage to motor vehicles) is also covered subject to the value
declared (called IDV – discussed above) other terms and conditions in the policy.
Some of these perils are fire, theft, riot and strike, earthquake, flood, accident etc.
Some insurers may also pay for towing charges from the place of accident to the
workshop. A restricted cover is also available covering the risk of fire and/ or theft
only, in addition to the compulsory cover granted under Act (Liability) Only Policy.
The policy can also cover loss or damage to accessories fitted in the vehicle,
personal accident cover under private car policies for passengers, paid driver; legal
liability to employees and non-fare paying passengers in commercial vehicles.
Insurers also provide free emergency services or use of alternative car in case of
breakdown.
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2. Exclusions
Some of the important exclusions under the policies are wear and tear, breakdowns,
consequential loss, and loss due to driving with invalid driving license or under the
influence of alcohol. Use of vehicle not in accordance with `limitations as to use '
(e.g. private car being used as a taxi) is not covered.

3. Sum Insured and Premium

The sum insured of a vehicle in a Motor Policy is referred to as Insured's Declared
Value (IDV).

In case of theft of vehicle or total damage beyond repairs in an accident, the claim
amount will be determined on the basis of the IDV.

Rating/ premium calculation depends on factors like the Insured's Declared Value,
cubic capacity, geographical zone, age of the vehicle etc.

Test Yourself 3
Motor insurance should be taken in whose name?
I. In the name of the vehicle owner whose name is registered with Regional
Transport Authority
II. If the person who will be driving the vehicle is different from the owner, then
in the name of the person who will be driving the vehicle, subject to approval
from Regional Transport Authority
III. In the name of any family member of the vehicle owner, including the vehicle
owner, subject to approval from the Regional Transport Authority
IV. If the vehicle will be driven by anyone other than the owner, then primary policy
should be in the name of the vehicle owner and additional policies should be
purchased in the names of all the people who will be driving the vehicle.

Summary

a) A householder’s insurance policy only provides coverage on losses incurred to an

insured property from hazards or events named in the policy. The perils covered
will be clearly spelt out.
b) Householder’s insurance covers the structure and its contents against fire, riots,
bursting of pipes, earthquakes etc. Apart from the structure, it covers the
contents against burglary, housebreaking, larceny and theft.
c) Package covers give, under a single document, a combination of covers.
d) For a householder’s insurance policy generally there are two methods of fixing
the sum insured: Market Value (MV) and Reinstatement Value (RIV).
e) Shopkeeper’s insurance usually covers damage to the shop structure and
contents due to fire, earthquake, flooding or malicious damage; and burglary.
Shop insurance can also include business interruption protection.
f) Motor insurance covers the loss of vehicles and the damages to them due to
accidents and some other reasons. Motor insurance also covers the legal liability
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 of vehicle owners to compensate the victims of the accidents caused by their
vehicles. Compulsory Personal Accident cover for Owner-Driver is provided to
whilst driving the vehicle including mounting into/ dismounting from or traveling
in the insured vehicle as a co-driver.

Key terms

a) Householder’s insurance
b) Shopkeeper’s insurance
c) Motor insurance

Answers to Test Yourself

Answer 1 - The correct option is I.
Answer 2 - The correct option is IV.
Answer 3 - The correct option is I.

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 CHAPTER G-04
COMMERCIAL INSURANCE

Chapter Introduction

In the previous chapter we considered various kinds of insurance products that cover
the risks faced by individuals and households. There is another set of customers who
have other needs for protection. These are the commercial or business enterprises
or firms, who are engaged in or deal with of various kinds of goods and services. In
this chapter we shall consider the insurance products available to cover the risks
faced by this segment.

Learning Outcomes

Understand the basics of the following lines of insurance:

A. Property/ Fire Insurance
B. Business Interruption Insurance
C. Burglary Insurance
D. Money Insurance
E. Fidelity Guarantee Insurance
F. Bankers Indemnity Insurance
G. Jewelers’ Block Policy
H. Engineering Insurance
I. Industrial All Risks Insurance
J. Marine Insurance
K. Liability Insurance policies

After studying this chapter, you should be able to understand the importance and
basic purposes of the 11 types of insurances discussed.

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A. Property/ Fire Insurance
Commercial enterprises are broadly divided into two types:
 Small and Medium Enterprises [SMEs]
- Bharat Sookshma Policy
- Bharat Laghu Policy
 Large Business Enterprises
-Standard fire and Special Perils Policy (SFSP), IAR etc.
Historically, general insurance sector has largely developed by catering to the needs
of these customers.
Selling general insurance products to commercial enterprises calls for a careful
matching of insurance products with their needs. Agents must have a proper
understanding of the products available. Let us briefly consider some of these
general insurance products.
1. Standard Fire and Special Perils Policy (SFSP)
Fire insurance policy is suitable for commercial establishments as well as for the
owner of property, one who holds property in trust or in commission and for,
individuals/ financial institutions who have financial interest in the property.
All immovable and movable property located at a particular premises such as
buildings, plant and machinery, furniture, fixtures, fittings and other contents,
stocks and stock in process, including stocks at suppliers/ customer's premises,
Stocks held in trust, if specifically declared, machinery temporarily removed from
the premises for repairs can be insured. Monetary relief is essential to rebuild and
renew the property damaged to bring back the business to its normal course. It is
here that fire insurance plays its role.
2.1. What does the Standard Fire policy cover?
Some of the perils traditionally covered by the Fire policy (as per the erstwhile All
India Fire Tariff) are discussed below.
The fire policy for commercial risks covers the perils of:
 Fire
 Lightning
 Explosion/ implosion
 Riot strike and malicious damage
 Impact damage
 Aircraft damage
 Storm, tempest, cyclone, typhoon, hurricane, tornado, flood and inundation
 Subsidence and landslide including rock slide
 Bursting and overflowing of water tanks, apparatus and pipes
 Missile testing operations
 Leakages from automatic sprinkler installation
 Bush fire

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There are two important features which differentiate commercial insurance from
individual and retail lines.

a) The insurance needs of firms or business enterprises are much larger than that
of individuals. The reason is that the value of the assets of a commercial
enterprise is much larger than that of an individual’s assets. Their loss or damage
could adversely impact the very survival and future of the company.

b) The demand for insurance of commercial enterprise is often mandated or made

necessary by legal or other requirements. For instance, when plants and assets
are set up through a bank loan, their insurance may be a condition of the loan.
Many corporate enterprises in India are professionally run companies and a
number of them are multinationals.

They are required to maintain global quality standards, including the adoption
of appropriate risk management strategies and insurance for protecting their
assets.

Any loss arising out of the above perils is covered by the policy subject to some
exclusion.

2.2. Revised Standard Fire and Special Perils (SFSP) Policies:

IRDAI has issued guidelines with effect from 1st April, 2021 whereby the Standard
Fire and Special Perils (SFSP) Policy will be replaced by the following two standard
products for the risks given below that shall be mandatorily offered by all general
insurers carrying on Fire and allied perils insurance business.

i. Bharat Sookshma Udyam Suraksha (meant for enterprises where the total
value at risk is upto Rs. 5 Crore)- designed for financial protection of MSMEs

This policy provides cover for the Building/ Structures, Plant and Machinery, Stock
and other assets of enterprises where the total value at risk across all insurable
asset classes at one location is up to Rs. 5 Crore. This policy also offers cover against
a wide range of perils, quite similar to the policy meant for Dwellings.

The policy has many in-built covers in addition to the basic coverage — Cover for
alterations, additions or extensions, Cover for stocks on a floater basis, Cover for
temporary removal of stocks, Cover for Specific Contents, Cover for start-up
expenses (following a loss), Cover for payment of professional fees for Architects,
Surveyors and Consulting Engineers, Cost for removal of debris and Costs compelled
by Municipal Regulations.

The policy can be taken by micro level enterprises such as offices, hotels, industries,
storage risks and so on. The policy underinsurance to the extent of 15% is waived.
Bharat Sookshma Udyam Policies allow increase in Sum Insurer during the policy
tenure by endorsement.

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ii. Bharat Laghu Udyam Suraksha(meant for enterprises where the total value
at risk is more than Rs. 5 Crore and upto Rs. 50 crore) designed for financial
protection of MSMEs

This policy provides cover for the Buildings/ Structures, Plant and Machinery, Stock
and other assets of enterprises where the total value of risk across all insurable
asset classes at one location exceeds Rs.5 Crore but does not exceed Rs. 50 Crore
at the policy commencement date. This policy also has all the in-built covers offered
by the policy for micro level enterprises mentioned above. The perils against which
insurance is offered are also similar to the policy meant for micro level enterprises.

The policy, again, can be taken for all types of risks such as offices, hotels,
industries, storage risks and so on. Bharat Laghu Udyam Policies allow increase in
Sum Insurer during the policy tenure by endorsement.

iii. Exclusions under Fire Policies

Insurers traditionally exclude the following from the scope of Fire policies.

Losses due to excepted perils like

i. War and war like activities.
ii. Nuclear perils
iii. Ionisation and radiation
iv. Pollution and contamination losses

Perils that are covered by other policies in General Insurance

i. Machinery Breakdown,
ii. Business Interruption

iv. Add-on Covers

However some perils can be covered by payment of additional premium like earth
quake, fire and shock; deterioration of stock in the cold storages following power
failure as a result of insured peril, additional expenditure involved in removal of
debris, architect, consulting engineers’ fee over and above the amount covered by
the policy, forest fire, spontaneous combustion and impact damage due to own
vehicles; terrorism.

v. Variants of Fire policy

Fire policies are generally issued for a period of 12 months. Only for dwellings,
insurance companies offer long term policies, i.e. for a period over 12 months. In
some cases short period policies are also issued, to which the short period scales
are applicable.

a. Market Value and Reinstatement Value Policies: In the event of a loss, the
insurer would normally pay the market value [which is the depreciated value].
Under Reinstatement Value Policy, however, the insurers would pay cost of
replacement of the damaged property, by new property of the same kind.

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 Reinstatement value policies are issued for covering buildings, plant,
machinery and furniture, fixture, fittings. Reinstatement value policies are not
issued to cover stocks, which are usually covered on market value basis.

b. Declaration Policy: To take care of frequent fluctuations in stocks values in

warehouse, Declaration Policy is granted subject to certain conditions. The sum
insured should be the highest value that is expected to be stored in the godown
during the period of policy. On this value a provisional premium is charged. The
insured has to declare the value of his stocks at agreed intervals, during the
currency of policy. This is adjustable along with the premium at the end of the
policy period.

c. Floater Policies: Floater policies may be issued for stocks of goods which are
stored at various specified locations under one sum insured. Unspecified
locations are not covered. The premium rate is the highest rate applicable to
insured’s stocks at any one location with a loading of 10%. These are also called
fire floater policies as the sum insured ‘floats’ over multiple locations.

vi. Premium rating depends on:

a) The type of occupancy, whether industrial or otherwise.

b) All property located in an industrial complex will be charged one rate
depending on the product(s) made.
c) Facilities outside industrial complexes will be rated depending on the nature
of occupancy at individual location.
d) Storage areas will be rated based on the hazardous nature of goods held.
e) Additional premium is charged to include "Add on" covers.
f) Discount in premium is given based on past claims history & fire protection
facilities provided at the premises.
g) One can also opt out of riot, strike, malicious damage covers and flood group
perils for reduction in premium.
The rating pattern may again vary from insurer to insurer.
Test Yourself 1

A fire policy for commercial risks covers the peril of ________

I. Vehicle burning on highway

II. Fire on ship
III. Explosion in factory
IV. Hospitalization due to fire

B. Business Interruption Insurance

Business Interruption insurance is also known as Consequential Loss Insurance or
Loss of Profit Insurance.
Fire insurance provides indemnity against material or property damage or loss
suffered to building, plant, machinery fixtures, fittings, merchandise goods, etc. by

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insured perils. This may result in total or partial interruption of the insured’s
business, resulting in various economic losses, during the period of interruption.
Coverage under Business Interruption Policy
Consequential Loss (CL) Policy [Business Interruption (BI)] provides indemnity for
loss of what is termed as gross profit – which includes Net Profit plus Standing
Charges along with the increased cost of working incurred by the insured to get the
business back to normalcy, as soon as possible to reduce the final loss. The perils
covered and conditions are the same as those covered under the fire policy.
Example
If a Fire results in damage to the car manufacturer's plant, the production loss will
result in loss of income to the manufacturer. This loss of income along with extra
expenses incurred can be insured provided it has resulted from a peril insured.

This policy can be taken only in conjunction with standard fire and special perils
policy as claims under this policy are admissible only if there is a claim under
standard fire and special perils policy.
Test Yourself 2
A business interruption insurance policy can be taken only in conjunction with
____________.
I. Standard fire and special perils insurance policy
II. Standard marine insurance policy
III. Standard motor insurance policy
IV. Standard health insurance policy
C. Burglary Insurance
The policy is meant for business premises like factories, shops, offices, warehouses
and godowns which may contain stocks, goods, furniture fixtures and cash in a
locked safe which can be stolen. The scope of cover is clearly expressed in the
policy.
Risks covered under burglary insurance
a) Loss of property following actual forcible and violent entry into the premises or
loss followed by actual, forcible and violent exit from the premises or hold up.
b) Damage to insured property or premises by burglars. Property insured is covered
only when it is lost from the insured premises and not from any other premises.
Cash cover: An important part of burglary cover is cash cover. It operates only when
the cash is secured in a safe, which is burglar proof and is of an approved make and
design. The common conditions applicable for granting cash cover are given below:
a) Cash lost from the safe following the use of the original key to open, it is covered
only where such key has been obtained by violence or threats of violence or
through means of force. This is generally known as “key clause”.
b) A complete list of the amounts of cash in safe is kept secure in some place other
than the safe. The liability of the insurer is limited to the amount actually shown
by such records.

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1. First Loss Insurance
In the cases, which are of low value in high bulk, (such as cotton in bales, grain,
sugar etc.) the risk of losing the entire stock on a single occasion is considered
remote. The value that can be burgled is ascertained as probable maximum loss
(PML) and the full premium is charged for this maximum probable loss and
certain percentage of full premium is charged on rest amount of stock as PML
floats over the entire stock. It is assumed that a second burglary may not follow
immediately or the insured may take additional security measures from its
recurrence.
2. Declaration cover and floater cover is also possible in respect of stocks,
similar to fire insurance.
3. Exclusions
The policy does not cover theft by employees, family members or other persons
who are lawfully on the premises, nor does it cover larceny or ordinary theft. It
also excludes losses that are covered by a fire or plate glass policy.
4. Extensions
The policy can be extended to cover riot, strikes and terrorism risks at extra
premium.
5. Premium
Rates of premium for burglary policy depend upon the nature of insured
property, the moral hazard of the insured himself, construction and location of
premises, safety measures (e.g. watchmen, burglar alarm), previous claims
experience etc.
In addition to details given in the proposal form, a pre-acceptance inspection is
done by insurers where high values are involved.
Test Yourself 3
The premium for burglary policy depends on ______________.
I. Nature of insured property
II. Moral hazard of the insured himself
III. Construction and location of the premises
IV. All of the above

D. Money Insurance
Handling of cash is an integral part of any business. The Money Insurance policy is
intended to protect banks and industrial business establishments against loss of
money. Money is at risk in the premises as well as outside. It can be unlawfully taken
away while withdrawing, depositing, making payments or collections.
1. Coverage of Money Insurance
Money insurance policy is designed to cover the losses that may occur while cash,
cheques/ postal orders/ postal stamps are being handled. The policy normally
provides cover under two sections

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a) Transit section: It covers loss of money as a result of robbery or theft or other
fortuitous cause whilst it is carried outside by the insured or her authorised
employees.
The transit section specifies two amounts:
i. Limit per carrying: This is the maximum amount that insurers may be
required to pay in respect of each loss.
ii. Estimated amount in transit during the policy period: It represents the
amount to which the rate of premium is to be applied to arrive at the amount
of premium.
Policies can be issued on “declaration basis”, similar to the practice in fire
insurance. Insurers thus charge a provisional premium on the estimated amount
in transit and adjust this premium at the time of expiry of the policy, based on
actual amount in transit during the policy period, as declared by the insured.
b) Premises section: This section covers loss of cash from one’s premises/ locked
safe due to burglary, housebreaking, hold up etc. Other features of the policy
are normally the same as of burglary insurance (of business premises) that this
was discussed under Learning Outcome C above.
2. Important exclusions
These include:
a) Shortage due to error or omission,
b) Loss of money that has been entrusted to other than authorized person and
c) Riot, strike and terrorism
3. Extensions
On payment of additional premium the policy may be extended to cover:
a) Dishonesty of persons carrying cash,
b) Riot, strike and terrorism risks
c) Disbursement risk, which is the loss suffered during payment of wages to
employees
4. Premium
Premium rate is fixed depending on the insured, cash carrying liability of the
company at any one time, the mode of conveyance, distance involved, safety
measures taken etc. Premium is adjustable according to actual cash carried
throughout the year based on declaration made within 30 days of expiry of the
policy.
Test Yourself 4
Which of the below is covered under a money insurance policy?

I. Shortage due to error or omission

II. Loss of cash from one’s premises due to burglary
III. Loss of money that has been entrusted to other than authorized person
IV. Riot, strike and terrorism

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E. Fidelity Guarantee Insurance
Companies suffer financial loss due to what are termed as white collar crimes like
fraud or dishonesty of their employees. Fidelity guarantee insurance indemnifies
employers against the financial loss suffered by them due to fraud or dishonesty of
their employees by forgery, embezzlement, larceny, misappropriation and default.
1. Coverage under Fidelity Guarantee Insurance
Cover is granted against a direct pecuniary loss and does not include consequential
losses.
a) The loss should be in respect of moneys, securities or goods
b) The act should be committed in the course of the duties specified;
c) The loss has be discovered within 12 months of expiry of the policy or death
retirement resignation or dismissal of the employee, whichever is earlier
d) No cover is provided in respect of a dishonest employee who has been re-
employed
2. Types of Fidelity Guarantee Policy
There are various types of fidelity guarantee policies, as discussed below:
a) Individual policy: This type of policy is used where only one individual is to
be guaranteed. Name, designation of the employee and amount of guarantee
has to be specified.
b) Collective policy: This policy comprises a schedule listing out the names of
those employees to whom the guarantee applies, along with a note on the
duties of each employee and separate individual sums insured.
c) Floating policy or floater: In this policy, the names and duties of the
individuals to be covered are inserted in a schedule, but instead of individual
amounts of guarantee, a specified amount of guarantee is “floated” over the
whole group. A claim in respect of any one employee will, therefore, reduce
the floated guarantee, unless the original sum is reinstated by payment of an
extra premium.
d) Positions policy: This is similar to a collective policy with the difference that
only the schedule lists out "positions’ (say, Cashier, Account Officer Etc.) that
are to be guaranteed for a specified amount and the name are not mentioned.
e) Blanket policy: This policy covers the entire staff without showing names or
positions. No enquiries about the employees are made by the insurers. Such
policies are only suitable for an employer with a large staff and the
organization makes adequate enquiries into the antecedents of employees.
The references that the employer obtains must be available to the insurers in
the event of a claim. The policy is granted only to large firms of repute.
3. Premium

The rate of premium depends upon the type of business occupation, status of the
employee, the system of check and supervision.

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Test Yourself 5
Fidelity Guarantee Insurance indemnifies ________________.

I. Employers against the financial loss suffered by them due to fraud or dishonesty
of their employees
II. Employees against the financial loss suffered by them due to fraud or dishonesty
of their employer
III. Third parties against the financial loss suffered by them due to fraud or
dishonesty of the corporate
IV. Shareholders against the financial loss suffered by them due to fraud or
dishonesty of the company management
F. Bankers Indemnity Insurance

This comprehensive cover was drafted for the banks, NBFC's and other institutions
who deal with operations involving money, considering the special risks faced by
them regarding money and securities.

1. Coverage under Bankers Indemnity Insurance

There are different variations to this policy based on the requirement of banker.

a) Money securities lost or damaged whilst within the premises due to fire,
burglary, riot and strike.
b) Loss suffered due to any cause whatsoever including negligence of the
employees, when the property is carried outside the premises in the hands
of authorized employees.
c) Forgery or alteration of cheques, drafts, fixed deposit receipts etc.
d) Dishonesty of employees with reference to money/ securities or in respect
of goods pledged.
e) Dispatches by registered post parcels.
f) Dishonesty of appraisers.
g) Money lost while in the hands of agents of the bank like ‘Janata Agents’,
‘Chhoti Bachat Yojana Agents’.
The cover is issued on discovery basis, this means the policy will respond to a period
during which a loss is discovered and not necessarily the period when it occurred.
But a cover should have been in existence when the loss actually occurred.

Conventionally losses within a period of 2 years prior to date of discovery only are
payable, subject to the cover having been continuous, from a date earlier than that
when the loss has occurred.

2. Important exclusions
Major exclusions are Trading losses, Negligence, Software crimes and dishonesty of
the partners/ directors

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3. Scope
The policy comprises of 7 sections viz.:
1. On Premises
2. In Transit
3. Forgery or Alteration
4. Dishonesty
5. Hypothecated Goods
6. Registered Postal Service
7. Appraisers
8. Janata Agents

4. Sum insured

The bank has to fix the sum insured which would usually float over the first 5
sections. This is termed as ‘basic sum insured’. Additional sum insured can be
purchased for section (1) and (2) if the basic sum insured is not sufficient. The policy
also allows one compulsory and automatic reinstatement of sum insured by payment
of an extra premium

5. Rating

The premium calculation is based on:

a) Basic sum insured
b) Additional sum insured
c) Number of staff
d) Number of branches.

Test Yourself 6

Which of the below can be covered under a bankers indemnity insurance policy?

I. Money securities lost or damaged whilst within the premises due to fire
II. Forgery or alteration of cheques
III. Dishonesty of employees with reference to money
IV. All of the above

G. Jewelers’ Block Policy

In recent years India has emerged as a leading centre in world trade for jewellery,
especially diamonds. Imported raw diamonds are cut, polished and exported. It
takes care of all risks of a jeweller whose business involves sale of articles of high
value in small bulk like jewellery gold &silver articles, diamonds and precious
stones, wrist watches etc. The trade involves stocking these expensive items in large
quantity and moving them between different premises.

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1. Coverage of Jeweller’s Block Policy

Jewellers block policy is a package policy, traditionally divided into 4 sections.

Coverage under Section 1 is usually made compulsory while the insured are allowed
to avail of other sections at their option. It is also the market practice to include
some more sections to cover other assets like Electronic equipment, Plate glass,
Signage etc. and liabilities like Employees Compensation, Infidelity of employees.

Fidelity guarantee cover should also be taken by the insured for full protection if
there is no separate section for this cover.

Risks are rated on merits of each case. Different premium rates are applied for each
section with discounts for exclusive round the clock watchman, close circuit TV/
alarm system, exclusive strong room and for any other safety expedient etc.

Test Yourself 7
In case of a Jeweller’s Block Policy, there are traditionally multiple sections, of
which one is usually compulsory while the remaining sections are ____________.

I. Mandatory
II. Retrospective
III. Optional
IV. Compensatory

H. Engineering Insurance

Engineering insurance is a branch of general insurance that developed parallel with

the growth of fire insurance. Its origins can be traced to the development of
industrialization, which highlighted the need for a separate cover for plant and
machinery. Concept of All Risks cover was also developed with regard to
engineering projects - covering damage due to any cause except those specifically
excluded. The products covered various stages – from construction to testing till the
plant became operational. The customers for this insurance are both large and small
industrial units. This also includes units having electronic equipment and
contractors doing big projects. There are two types of engineering insurance
policies:

1) Annual Policies-Generally of one year duration-

a. Machinery Breakdown Policy
b. Boiler Pressure Plant policy
c. Electronic Equipment Policy
d. Contractor’s Plant & Machinery Policy
e. Deterioration of Stock Policy
f. Civil Engineering Completed Risk
2) Project Policies with variable duration based on project period-
a) Contractors All Risk Policy
b) Erection All Risk Policy

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There are two “Consequential Loss” policies associated with Engineering Policies:
a) Machinery Breakdown Loss of Profit Policy (MBLOP) taken with Machinery
Breakdown Policy or with Boiler and Pressure Plant policy and
b) Advance loss of Profit (ALOP) or Delay in Startup (DSU) Policy taken with
project policy.
Let us briefly consider the policies:
A. Annual Policies

1. Machinery Breakdown Policy (MB): This policy is suitable for every industry
which operates on machines and for whom breakdown of plant and machinery is
of serious consequence. This policy covers machines like generators,
transformer and other electrical, mechanical and lifting equipment.

The policy covers unforeseen and sudden physical damage by mechanical or

electrical breakdown by any cause (subject to excepted risks) to the insured
property:
a) While it is at work or at rest.
b) While being dismantled for cleaning or overhauling
c) During cleaning or overhauling operations and during reassembly thereafter.
d) When being shifted within the premise.

Premium is charged on the reinstatement/ replacement value of individual

machinery. The machine as a whole should be insured. Rates depend on the type of
machine; the industry in which it is used and its value. Discounts are offered based
on factors such as stand-by facilities, spares available and claims experience.

2. Boiler and Pressure Plant Policy: This covers boilers and pressure vessels,
against:

a) Damage, other than by fire, to the boilers and/ or other pressure plant and
to surrounding property of the insured; and
b) Legal liability of the insured on account of bodily injury to the person, or
damage to the property, of third parties, caused by explosion or collapse
due to internal pressures of such boiler and/ or pressure plant.

Since fire policy and boiler insurance policy are mutually exclusive, for adequate
cover, both the policies need to be taken. Sum insured under all Engineering
Policies should be the current replacement value.

3. Electronic Equipment Policy: This covers various kinds of electronic equipment,

which includes the entire computer system consisting of CPU, keyboards,
monitors, printers, UPS, system software etc. Auxiliary equipment such as air-
conditioning, heating and power conversion, etc. are also covered.

This policy is a combination of fire policy, machinery insurance policy and burglary
policy. The policy covers the contingencies such as defective design (not covered
under a warranty), effects of natural phenomena; defective functioning due to

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voltage fluctuations, impact shock etc., burglary, housebreaking & theft are also
covered.

The policy is available to the owner, lessor or hirer, depending upon the
responsibility or liability in each case. It has usually three sections that cover various
types of losses:

a) Section 1: Loss and damage to equipment

b) Section 2: Loss and damage to external data media like computer external
hard disks
c) Section 3: Increased cost of working - to ensure continued data processing
on substitute equipment up to 12, 26, 40 or 52 weeks.

4. Contractors Plant & Machinery (CPM) Policy: Suitable for contractors involved
in construction business for covering all kinds of machinery like cranes,
excavators from unforeseen and sudden physical loss or damage from any cause
including:

a) Burglary, Theft, Riot, Storm, Malicious Damage, Tempest

b) Fire and lightning, external explosion, earthquake and other Acts of God
perils
c) Accidental damage while at work due to faulty manhandling, dropping or
falling, collapse, collision and impact; can be extended for third party
damage.

The Premium to be charged depends on the type of equipment and the location
at which it operates.

The cover is operative whilst the equipment is at work or at rest or being

dismantled for cleaning or overhauling or re-assembling thereafter. The
cover also applies while the same are lying at contractors own premises.
However floater policy covering the equipment “Anywhere in India basis” is
also available by charging 10% extra premium and with certain conditions.

5. Deterioration of Stock Policy: This policy is suitable for the owner of the cold
storage (individual or a cooperative society) or those who take the cold storage
on lease or hire for storage of perishable commodities. The cover is against the
risk of deterioration and contamination following breakdown of the refrigeration
plant and machinery and also due to rise in temperature and sudden and
unforeseen escape of refrigerants into the cold storage rooms.

6. Civil Engineering Completed Risk: It is generally taken by contractors who has

to maintain the civil projects after completion. The civil projects like – Bridges,
Dry docks, Harbours, Jetties Railway lines, Rock Filled dams, Concrete dams,
Earthen dams, Canals , Irrigation system are considered under this policy. Risks
covered are –
1. Fire
2. Lightning
3. Explosion/ Implosion
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 4. Riot, Strike, Malicious Damage
5. Impact by any Rail/ Road or water borne vehicle or animal
6. Storm Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and
Inundation, Wave action of water
7. Subsidence and Landslide (Including Rockslide) damage
8. Earthquake Fire and Shock (Including flood due to earthquake), Tsunami
9. Frost, avalanche, ice.

B. Project Policies

These policies are typically issued for the period of the project and may not be on
an annual basis.
1. Contractors All Risks (C.A.R.) Policy: This is designed to protect the interests
of contractors and principals engaged in civil engineering projects from small
buildings to massive dams, buildings, bridges, tunnels, etc. The policy provides
an “All Risk” cover – thus providing indemnity against any sudden and unforeseen
loss or damage that occurs to property insured at the construction site. This can
be extended to cover third party liability and other exposures. Premium
chargeable depends on the nature of the project, the project cost, the project
period, geographic location and the period of testing.

2. Erection All Risks (EAR) Policy: This policy is also known as Storage-cum-
Erection (SCE) policy. It is suitable for the principal or contractors of a project
whereas plant and machinery is being erected as it is exposed to various external
risks. This is a comprehensive insurance policy that covers any sort of
contingency right from the moment the materials are unloaded at the project
site and continues during the entire project period until the project is tested,
commissioned and handed over.

Premium chargeable depends on the nature of the project, the cost, the project
period, geographic location, and the period of testing.

If required a marine cover can be issued along with the erection policy for
providing coverage to the equipment and materials during the transit phase
till delivered at the project site.

C. Consequential Loss Policies

These type of policies are issued to cover losses consequential to other losses. These
are also called ‘Business Interruption’ policies or ‘Loss of Profits’ policies.
3. Machinery Loss of Profits (MLOP) Policy

This policy is suitable for industries where interruptions or delays as a result of

machinery breakdown or boiler explosion result in huge consequential losses.

Where the time lag between the breakdown or loss and the restoration is large, this
policy compensates for the loss of profits during the intervening period due to
reduction in turnover and increase in cost of working. The terms and conditions and

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coverage of business interruption policy is the same as the business interruption
policy following a fire policy loss, which has been discussed earlier in this chapter.

4. Advance Loss of Profit Cover (ALOP) or Delay in Start-up Policy (D.S.U.)

This covers financial consequences of a project being delayed because of accidental

damages during the project. It is suitable for the insured who is deprived of the
anticipated earning and for the financial institutions to the extent of their interest
in the project. It is issued as an extension to the MCE/ EAR/ CAR Policy before the
actual commencement of project.

The policy also covers financial losses in the form of continuing expenses such as
interest on term loan, debentures, wages and salaries etc. and on the anticipated
net profit which the business could have earned if it had commenced on the
scheduled date.

Premium rating depends on various critical factors and on re-insurance support

available. The anticipated gross profit or turnover and the indemnity period are also
critical factors in deciding the premium payable.

Test Yourself 8

Delay in start-up policy is also known as ______________.

I. Machinery Loss of Profits cover

II. Advance Loss of Profits cover
III. Contractors All Risk cover
IV. Contractors Plant & Machinery cover

I. Industrial All Risks Insurance

The Industrial All Risks Policy was designed to cover, industrial properties – both
manufacturing and storage facilities, anywhere in India under one policy. It provides
indemnification against material damage and business interruption.
Usually, the policy provides cover for the following:

i. Fire and specified perils as per fire insurance practice,

ii. Burglary (except larceny)
iii. Machinery breakdown/ boiler explosion/ electronic equipment
iv. Business interruption following operation of perils mentioned above

(Note: Business interruption following perils under (iii) above is usually not included
in the package cover but available as optional cover)

 The policy offers widest range of cover compared to that provided by

individual operational policies.
 Premium rates for the policy depend on the cover opted, claims experience,
and deductibles opted, risk assessment report for MLOP etc.

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Test Yourself 9

Which of the following is not covered under Industrial All Risks insurance?

I. Fire and special perils as per fire insurance practice

II. Larceny
III. Machinery breakdown
IV. Electronic equipment
J. Marine Insurance

Marine insurance is classified into two types: marine cargo and marine hull

1. Marine Cargo Insurance

Though the term ‘marine’ may indicate only losses due to sea (marine)
misadventures, marine cargo insurance covers much more. It provides indemnity
in respect of loss of or damage to goods during transit by rail, road, sea, air or
registered post, within the country as well as abroad. Type of goods may range from
diamonds to household goods, bulk items like cement, grains, over dimensional
cargoes for projects etc.

Cargo insurance plays an important role in domestic trade as well as in international

trade. Most contracts of sale require that the goods must be covered, either by the
seller or the buyer, against loss or damage.

Who effects the insurance: The seller or the buyer of the goods [consignment] may
insure the cargo depending upon the contract of sale.

Marine insurance contract needs to have provisions that apply internationally. This
is because it covers goods that are in transit beyond any country’s borders. The
covers are accordingly governed by international conventions and certain clauses
attached to the policy.

While the basic policy document contains general conditions, the scope of cover and
exceptions and special exclusions are attached by separate clauses known as
Institute cargo Clauses (ICC). These are drafted by the Institute of London
Underwriters.

a) Coverage under Marine Cargo Insurance

Cargo policies are essentially voyage policies, i.e. they cover the subject matter
whilst in transit from one place to another. However, the insured is required to
always act with reasonable care in all circumstances within his control. The main
feature of this policy is that it's an Agreed Value Policy. The valuation is agreed
between the insurer and insured and is not subject to revaluation later unless fraud
is suspected. The convention for the Sum Insured is CIF + 10% (Cost Insurance &
Freight + 10%). Another unique feature is that the policy is freely assignable.

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The cover normally commences from the time the goods leave the warehouse at the
place named in the policy and terminates at the destination named in the policy,
depending on the terms of the contract of sale.

The terms and conditions applicable are governed by either;

i. Inland Transit Clause (ITC) A, B or C for inland transit

ii. Institute Cargo Clause (ICC) A, B, or C for voyage by sea
iii. Institute Cargo (Air) Clause – A for transport by air

Institute Cargo Clause C grants the minimum cover, which is loss or damage due to
accident to the vehicle or vessel carrying the cargo due to:

i. Fire or explosion
ii. Derailment or overturning of the vehicle
iii. Stranding, grounding or sinking of the vessel (in case of ship)
iv. Collision with an external object
v. Discharge of cargo at a port of distress
vi. General average sacrifice
vii. Jettison.

Institute Cargo Clause B is wider than C. Apart from the perils covered in C it also
covers loss or damage due to:
i. Act of God (AOG) perils like earthquake, volcanic eruption and lightning
ii. Collapse of bridges in Inland transit
iii. Washing overboard and sling loss in case of ocean transit
iv. Entry of water into the vessel.

Institute Cargo Clause A is the widest cover as it covers all perils of B and C and loss
or damage due to any other risk except some exclusion specified such as:

i. Loss or damage due to wilful conduct of the insured

ii. Ordinary leakage, breakage, wear and tear or ordinary loss in weight/
volume
iii. Insufficiency in packing
iv. Inherent vice
v. Delays
vi. Loss due to insolvency of owners
vii. Nuclear perils

These exclusions are common to all clauses of inland, air and sea. There are
separate clauses also for trading of specific commodities like coal, bulk oil and tea
etc. Marine cover can be extended by paying additional premium to cover War,
Strikes, Riots, Civil Commotion and Terrorism. Marine and Aviation policies are the
only branches of insurance that offer cover against War perils.

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Important
Risks covered under a marine policy, under the standard policy form and under the
various clauses attached to the policy broadly fall into three categories:

i. Marine perils,
ii. Extraneous perils and
iii. War, strike riot, civil commotion and terrorism risks.

b) Different types of marine policies

i. Specific Policy
This policy covers a single shipment. It is valid for the particular voyage or
transit. Merchants who are engaged in regular import and export trade or
who are sending consignments regularly by inland transit would find it
convenient to arrange insurances under special arrangements like the open
policy.
ii. Open Policy
The carriage of goods within the country can be covered under an open
policy. The policy is valid for one year and all consignments during this period
have to be declared by the insured to the insurer as agreed between them
on a fortnightly, monthly or quarterly basis.
iii. Open Cover
The open cover is a contract for a year giving the Insured continuous
protection to cover a large number of shipments/ despatches. The premium
on the consignments would be adjusted from the respective cash deposit
account maintained by the Insured. Open covers are issued to large exporters
and importers who have continuous trade
Open covers set out the terms of cover and rates of premium for transactions
of marine dispatches for one-year. The open cover is not a policy and it is
not stamped. A certificate of insurance is issued for each declaration duly
stamped for appropriate value.
iv. Duty and increased value insurance
These policies provide extra insurance if the value of the cargo is increased
due to payment of customs duty or increase in the market value of the goods
at the destination on the date of the landing.
2. Marine Hull insurance
The term ‘Hull’ refers to the body of a ship or other water transport vessel.
Marine hull insurance is done as per international clauses applicable across different
countries. Marine hull covers are essentially of two types:
a) Covering a particular Voyage: The set of clauses used here are called
Institute Voyage Clauses
b) Covering a period of time: Usually one year. The set of clauses used here
are called Institute (Time) Clauses

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 c) War risks are governed by special regulations and the premiums collected will
be credited to the Central Government.
Information
Hull insurance also includes the following insurances:
i. Inland vessels such as barges, launches, passenger vessels etc.
ii. Dredgers (Mechanized or non-mechanized)
iii. Fishing Vessels (Mechanized or non-mechanized)
iv. Sailing Vessels (Mechanized or non-mechanized)
v. Jetties and Wharves
vi. Vessels in the course of construction

The ship owner has insurable interest not only in the ship, but also in the freight
to be earned during the period of insurance. In addition to freight the ship owner
has insurable interest in the amount spent by him in fitting out the vessel, including
provisions and stores. These expenses are termed disbursements and are insured
concurrently with the hull policy for a period of time.
Important
Aviation insurance: A comprehensive policy is also available for aircraft which
covers loss or damage to the aircraft as also the legal liability to third parties and
to passengers arising out of the operation of the aircraft.

Test Yourself 10
Which branch of insurance offers cover against war perils?
I. Marine policies
II. Aviation policies
III. Both of the above
IV. None of the above
K. Liability Policies
Accidents cannot be avoided altogether, however careful a person is. This could
result in injury to oneself and damage to one’s property and also may simultaneously
cause injury to third parties and damage to their property. The persons thus
affected would claim compensation for such loss.
A liability could also arise from a defect in a product manufactured and sold, say
chocolates or medicines, causing harm to the consumer. Similarly, liability could
arise from wrong diagnosis/ treatment of a patient or from a case improperly
handled by a lawyer for his client.
In all such cases, where a third party, consumer or the patient would demand
compensation for the alleged wrong doing, it would raise a need for payment of
compensation or meeting expenses involved in defending the suits filed by the
claimants. In other words there is a financial loss arising from a liability to pay. The
existence of such a liability and the amount of compensation to be paid would be
decided by a civil court which would go into the aspect of alleged negligence/ fraud.
Liability insurance policies provide coverage of such liabilities. Let us look at some
of the liability policies.
Statutory liability
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There are certain laws or statutes which provide for the payment of compensation.
The laws are:
 Public Liability Insurance Act, 1991 and
 Employees Compensation Act 1923 amended in 2010
Insurance policies are available for protection in respect of such liabilities. Let us
look at some of them.
1. Compulsory Public Liability Policy
The Public Liability Insurance Act, 1991 imposes liability on no fault basis on those
who handle hazardous substances if a third party is injured or his property is
damaged during the course of such handling. The names of hazardous substances
and the quantity of each, is listed in the 'Act’. The amount of compensation payable
per person is fixed as shown below.
Compensation payable
Fatal Accident Rs. 25,000
Permanent Total Disability Rs. 25,000
Permanent Partial Disability % of Rs. 25,000 based on % of disability
Temporary Partial Disablement Rs. 1000 per month, maximum 3 months
Actual Medical Expenses Up to a maximum of Rs. 12,500
Actual damage to property up to Rs. 6,000
The premium is based on the AOA (Any One Accident) limit and the turnover of the
client. A special feature of this policy is that the insured has to pay compulsorily an
amount equal to the premium as contribution to Environment Relief Fund. If large
numbers of third parties are affected and the total amount of relief payable exceeds
A.O.A. limit, the balance amount will be paid by the fund.
2. Public Liability Policy (Industrial/ Non-industrial Risks)
This type of policy covers liability arising out of fault/ negligence of the insured
causing third party personal injury or property destruction [TPPI OR TPPD].
There are separate policies covering industrial risks as well as non-industrial risks
like those affecting hotels, cinema halls, auditoriums, residential premises, offices,
stadiums, godowns and shops. It covers the legal liability to pay compensation
including claimant’s costs, fees and expense according to Indian Law, in respect of
TPPI/ TPPD.
The policy does not cover:
a) Products liability
b) Pollution liability
c) Transportation and
d) Injuries to workmen/ employees
3. Products Liability Policy
The demand for products liability insurance has arisen because of the wide variety
of products (e.g. canned food stuff, aerated waters, medicines and injections,
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electrical appliances, mechanical equipment, chemicals etc.) that are today
manufactured and sold to the public. If a defect in the product causes death, bodily
injury or illness or even damage to the property of third parties, it could cause a
claim to arise. Product liability policies cover this liability of the insured.
Cover is available for exports as well as domestic sales.
4. Lift (Third Party) Liability Insurance
The policy provides indemnity to owners of buildings in respect of liabilities arising
out of the use and operation of lifts. It covers legal liabilities for:
a) Death/ bodily injury of any person (excluding employees of the insured)
b) Damage to property (excluding insured’s own or employee’s property)
The premium rates depend upon the limit of indemnity, any one person, any one
accident and any one year.
5. Professional Liability
Professional indemnities are designed to provide insurance protection to
professional people against their legal liability to pay damages arising out of
negligence in the performance of their professional duties. Such covers are available
for doctors hospitals; engineers, architects; chartered accountants, financial
consultants, lawyers, insurance brokers.
6. Directors' and Officers' Liability Policy
Directors and Officers of a company hold positions of trust and responsibility. They
may become liable to pay damages to shareholders, employees, creditors and other
stakeholders of the company, for wrongful acts committed by them in the
supervision and management of the affairs of the company. A policy has been
devised to cover such liability and is issued to the company covering all their
directors.
7. Employee’s Compensation Insurance
This policy provides indemnity to the insured in respect of his legal liability to pay
compensation to his employees who sustain personal injury by accident or disease
arising out of and in the course of his employment. This is also called Workman’s
Compensation Insurance.
Two forms of insurance are prevalent in the market:
a) Table A: Indemnity against legal liability for accidents to employees under
the Employees Compensation Act, 1923, (Workman’s Compensation Act,
1923), Fatal Accident Act, 1855 & Common Law.

b) Table B: Indemnity against legal liability under Fatal Accidents Act, 1855
and Common law.
The premium rate is applied on the estimated wages of employees as declared in
the proposal form.
The policy may be extended to cover:

i. Medical and hospital expenses incurred by the insured for treatment of

employee injuries, up to specific amounts

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 ii. Liability for occupational diseases listed in the Act
iii. Liability towards employees of contractors

Test Yourself 11
Under the Public Liability Insurance Act, 1991, how much is the compensation
payable for actual medical expenses for non-fatal accidents?
I. Rs. 6,250
II. Rs, 12,500
III. Rs. 25,000
IV. Rs. 50,000

Answers to Test Yourself

Answer 1 - The correct option is III.

Answer 2 - The correct option is I.
Answer 3 - The correct option is IV.
Answer 4 - The correct option is II.
Answer 5 - The correct option is I.
Answer 6 - The correct option is IV.
Answer 7 - The correct option is III.
Answer 8 - The correct option is II.
Answer 9 - The correct option is II.
Answer 10 - The correct option is III.
Answer 11 - The correct option is II.

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 CHAPTER G-05
GENERAL INSURANCE CLAIMS
Chapter Introduction

At the core of any insurance contract is the promise made at the beginning i.e. to
indemnify the insured in the event of a loss. This chapter talks about the procedures
and documents involved, from the time loss takes place, making it easier to
comprehend the entire process of claims settlement. It also explains the method of
dealing with disputed claims either by insured or insurer.

Learning Outcomes
A. Claims Settlement Process
B. Role of Surveyors and Loss Assessors

After studying this chapter, you should be able to:

1. Argue the importance of claim settlement functions
2. Describe the procedures for intimation of loss
3. Appraise claim investigation and assessment
4. Explain the importance of surveyors and loss assessors
5. Illustrate the contents of claim forms
6. Define claims adjustment and settlement

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A. Claims settlement process

1. Importance of settling claims

The most important function of an insurance company is to settle claims of
policyholders on the happening of a loss event. Insurer fulfils this promise by
providing prompt, fair and equitable service in either paying the policyholder or
paying claims made against the insured by a third party.
One of the non-life insurance companies had the inscription “Pay if you can;
repudiate if you must” in its board room. That is the spirit of the noble business of
insurance.
Settling claims professionally is regarded the biggest advertisement for an
insurance company.
a) Promptness
Prompt settlement of claims, whether the insured is a corporate client or an
individual or whether the size of the loss is big or small is very important. It
must be understood that the insured needs insurance compensation as soon as
the possible after the loss.
If he gets the money promptly, it is of maximum use to him. It is insurance
company’s duty to pay the claim amount when insured needs it most – as early
as possible after the loss.
b) Professionalism
The insurance officials consider each and every claim on its merits and do not
apply prejudicial or pre-conceived notions to reject the claim without examining
all the documents that would answer the following questions.
i. Did the loss really happen?
ii. If so, did the loss making event really cause the damage?
iii. The extent of damage out of this event.
iv. What was the reason for the loss?
v. Was the loss covered under the policy?
vi. Is the claim payable as per the contract/ policy conditions?
vii. If so, how much is payable?
The answers to all these questions need to be found out by the insurance company.
Processing claims is an important activity. All claims forms, procedures and
processes have been carefully designed by the company to ensure that all claims
‘payable’ under the policy are promptly paid and those that are not payable are not
paid.
The agent, being the representative of the company known to the insured, has to
ensure that all the relevant forms are properly filled up with correct information,

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all documents evidencing the loss are attached and all prescribed procedures are
followed in a timely manner and duly submitted to the company. The role of the
agent at the time of loss has already been discussed earlier.
2. Intimation or Notice of Loss
Policy conditions provide that the loss be intimated to the insurer immediately. The
purpose of an immediate notice is to allow the insurer to investigate a loss at its
early stages. Delays may result in loss of valuable information relating to the loss.
It would also enable the insurer to suggest measures to minimise the loss and to
take steps to protect salvage. The notice of loss is to be given as soon as reasonably
possible.
After this initial check/ scrutiny, the claim is allotted a number and entered in the
claims register, with details like policy number, name of insured, estimate of
amount of loss, date of loss, the claim is now ready to be processed.
Under certain types of policies (e.g. Burglary) notice is also to be given to police
authorities. Under cargo rail transit policies, notice has to be served on the
Railways.
3. Investigation and assessment
a) Overview
On receipt of the claim form, from the insured, the insurers decide about
investigation and assessment of the loss. If the claim amount is small, the
investigation to determine the cause and extent of loss is done, by an officer of the
insurers.
The investigation of other claims is entrusted to independent licensed professional
surveyors who are specialists in loss assessment. The assessment of loss by
independent surveyors is based on the principle that since both the insurers and
insured are interested parties, the unbiased opinion of an independent professional
person should be acceptable to both the parties as well as to a court of law in the
event of any dispute.
b) Claims assessment
In case of fire, claim is assessed on the basis of survey report along with supporting
documents. Where necessary Police report/ fire Brigade report, Investigator’s
report are also obtained. For personal accident claims, the insured is required to
submit a report from the attending doctor specifying the cause of accident or the
nature of illness as the case may be, and the duration of disablement.
Under policy conditions, the insurers reserve the right to arrange an independent
medical examination. Medical evidence is also required in support of “Workmen’s
Compensation” claims. Livestock and cattle claims are assessed on the basis of the
report of a veterinary doctor.

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Information
On receipt of intimation of loss or damage insurers check whether:
1. The insurance policy is in force on the date of occurrence of the loss or damage
2. The loss or damage is caused by an insured peril
3. The property (subject matter of insurance) affected by the loss is the same as
insured under the policy
4. Notice of loss has been received without delay.
Motor third party claims involving death and personal injuries are assessed on the
basis of doctor’s report. These claims are dealt by Motor Accident Claims Tribunal
and the amount to be paid is decided by factors like the age and income of the
claimant.
Claims involving third party property damage are assessed on the basis of a survey
report.
 Motor own damage claim is assessed on the basis of surveyors report.
 It may require police report if third party damage is involved.
Information
Investigation is different from the assessment of loss. Investigation is done to ensure
that a valid claim has been made and verify the important details and doubts like
absence of insurable interest, suppression or misrepresentation of material facts,
deliberately creating the loss, etc. are ruled out.
Insurance surveyors undertake the work of investigation also. It helps if a surveyor
gets on to the job as early as possible. Therefore, the practice is to appoint the
surveyor, as soon as possible after the intimation of the claim is received.
B. Role of Surveyors and Loss Assessors
a) Surveyors
Surveyors are professionals licensed by IRDAI. They are experts in inspecting and
evaluating losses in specific areas. Surveyors are generally paid fees by the
insurance company, engaging them. Surveyors and loss assessors are hired by
general insurance companies normally, at the time of a claim. They inspect the
property in question, examine and verify the causes and circumstances of the loss.
They also estimate the quantum of the loss and submit reports to the insurance
company.
They also advise insurers, regarding appropriate measures to prevent further
losses. Surveyors are governed by provisions of the Insurance Act, 1938, Insurance
Rules 1939 and specific regulations issued by IRDAI.
Claims made outside the country in case of ‘Travel Policy’ or ‘Marine Open Cover’
for exports, are assessed by the claims settling agents abroad named in the policy.
These agents may assess the loss and make payment, which is reimbursed by the
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 insurers along with their settling fees. Alternatively, all the claims papers are
collected by the insurance claim settling agents and submitted to the insurers,
along with their assessment.
Important
Section 64 UM of Insurance Act
For the claim more than Rupees fifty thousand for Motor Own Damage and Rupees
One lakh for other property damage, Insurers need to appoint surveyors for
assessment of such claims. For other claims Insurers may employ other persons (not
being a person disqualified for the time being for being employed as a surveyor or
loss assessor) for assessment.
5. Claim forms
The contents of the claim form vary with each class of insurance. In general the
claim form is designed to get full information regarding the circumstances of the
loss, such as date of loss, time, cause of loss, extent of loss, etc. The other questions
vary from one class of insurance to another.
Example
An example of information sought in a fire claim form is given here under:
i. Name of the insured, policy number and address
ii. Date, time, cause and circumstances of the fire
iii. Details of damaged property
iv. Sound value of the property at the time of fire. Where the insurance consists of
several items under which the claim is made. [The claim must be based on actual
value of property at the place and time of occurrence after allowance for
depreciation, wear and tear (unless the policy in respect of building, plant and
machinery is on “reinstatement value” basis). It shall not include profit]
v. Amount claimed after deduction of salvage value
vi. Situation and occupancy of the premises in which the fire occurred
vii. Capacity in which the insured claims, whether as owner, mortgage or the like
viii. If any other person is interested in the property damaged
ix. If any other insurance is in force upon such property if so, details thereof

This is followed by the declaration as to the truth and accuracy of the statement of
in the form and signature of the insured and the date.
The issuance of claim form by the insurance company does not imply or mean that
liability for the claim is admitted by insurers. Claim forms are issued with the
remark ‘without prejudice’.

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Supporting documents
In addition to the claim form, certain documents are required to be submitted by
the claimant or secured by the insurers to substantiate the claim.
i. For fire claims, a report from the Fire Brigade would be necessary.
ii. For cyclone damage, a report from the Meteorological office may be called for
iii. In burglary claims, a report from the Police may be necessary.
iv. For fatal accident claims, reports may be necessary from the Coroner and the
Police.
v. For motor claims, the insurer may like to examine driving license, registration
book, police report etc.
vi. In marine cargo claims, the nature of documents varies according to the type of
loss i.e. total loss, particular average, inland or overseas transit claims etc.
Test Yourself 1
Which of the following activities is not considered as professional in settlement of
claims?
I. Seeking information relating to the cause of the loss
II. Approaching the claim with a prejudice
III. Ascertaining whether the loss was a result of an insured peril
IV. Quantifying the amount payable under the claim
Test Yourself 2
Raj is involved in a car accident. His car is insured under a motor insurance
comprehensive policy. Which among the following is most appropriate for Raj to do?
I. Notify the insurer of the loss as soon as reasonably possible
II. Notify the insurer at the time of insurance renewal
III. Damage the car further so as to receive a bigger compensation
IV. Ignore the damage
Test Yourself 3
Which of the following statements about claims investigation and claims assessment
is correct?
I. Claims Investigation and Claims Assessment are the same
II. Claims Investigation is to determine the validity of the claim whereas
assessment is whether the loss was caused by an insured peril and whether there
was any breach of warranty
III. Claims Assessment tries to determine the validity of the claim whereas
investigation is more concerned with the cause and extent of the loss

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IV. Claims Investigation is done before the claim is paid and Claims Assessment is
done after the claim is paid
Test Yourself 4
Who is the licensing authority for surveyors?
I. Surveyor Association of India
II. Surveyor Regulatory and Development Authority
III. Insurance Regulatory and Development Authority of India
IV. Government of India
Test Yourself 5
Which among the following documents is most likely to be requested while
examining a cyclone damage claim?
I. Coroner’s report
II. Report from Fire Brigade
III. Police report
IV. Report from Meteorological Department
Test Yourself 6
Under which principle can the insurer assume the rights of the insured in order to
recover from a third party the loss paid under a policy?
I. Contribution
II. Discharge
III. Subrogation
IV. Indemnity
Test Yourself 7
If the insurer decides that a certain loss is not payable because it is not covered
under the policy then who decides on such matters?
I. Insurer’s decision is final
II. Umpire
III. Arbitrator
IV. Court of Law
Summary
a) Settling claims professionally is regarded as the biggest advertisement for an
insurance company.
b) Policy conditions provide that the loss be intimated to the insurer immediately.

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c) If the claim amount is small, the investigation to determine the cause and extent
of loss is done by an officer of the insurer. But for other claims it is entrusted
to independent licensed professional surveyors who are specialists in loss
assessment.
d) In general the claim form is designed to get full information regarding the
circumstances of the loss, such as date of loss, time, cause of loss, extent of
loss, etc.
e) Claims assessment is the process of determining whether the cause of the loss
suffered by the insured was caused by an insured peril and whether there was
any breach of warranty. The quantum of loss suffered by the insured and the
insurer’s liability under the policy are assessed. This is done before payment of
the claim.
f) Settlement of the claim is made only after obtaining a discharge under the
policy.
Key terms
a) Intimation of loss
b) Investigation and Assessment
c) Surveyors and Loss Assessors
d) Claim forms
e) Adjustment and Settlement
Answers to Test Yourself
Answer 1 - The correct option is II.
Answer 2 - The correct option is I.
Answer 3 - The correct option is II.
Answer 4 - The correct option is III.
Answer 5 - The correct option is IV.
Answer 6 - The correct option is III.
Answer 7 - The correct option is IV.

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 SECTION

ANNEXURES

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 CHAPTER A-01
ANNEXURES
These annexures are provided so that the students get a better idea of proposal
forms used in general insurance.

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1. Compulsory PA is Rs.15lakh

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Proposal Forms of Bharat Griha Raksha, Bharat Sookshma & Bharat Laghu Udyam
For a better understanding of standard products and their respective proposal
forms, i.e. Bharat Griha Raksha, Bharat Sookshma and Bharat Laghu Udyam, please
check the following link to the IRDAI website.
https://www.irdai.gov.in/ADMINCMS/cms/Uploadedfiles/StandardProducts/Annex
ure-I-BharatGrihaRaksha.pdf

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