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b) Explain the concept of healthcare and the types and levels of healthcare.
c) Appreciate the factors affecting healthcare in India and the progress madesince independence.
d) Discuss the evolution of health insurance in India.
e) Know the health insurance market in India.205**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.206**Test Yourself 1**Which of the following diseases is not attributed to Lifestyle factors (i.e. not in
the control of the individual)?I. CancerII. AidsIII. 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 peopleComprehensiveAdequateEasily 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 bereadily 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 affordabilityBased 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.207**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
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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 bereadily 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 affordabilityBased 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.207**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. FeverII. Cancer
III. Organ Transplant
IV. High risk pregnancy208**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
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|
C.
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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.209Considerable variations in covers, exclusions and newer add-on covers have
been introduced which will be discussed in later chapters.**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. 1948II. 1954III. 1986IV. 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 insurance210brokers, 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:
a. Servicing of claims under health insurance policies by way of pre authorizationof 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 AccidentPolicy and domestic travel policy.
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|
Central Government Health Scheme
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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 insurance210brokers, 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:
a. Servicing of claims under health insurance policies by way of pre authorizationof 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 AccidentPolicy and domestic travel policy.
c. Facilitating carrying out of pre-insurance medical examinations in connectionwith underwriting of the health insurance policies.**Summary**a) Insurance in some form or other existed many centuries ago but its modernform 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 increating a suitable healthcare system.c) Level of healthcare provided depends on many factors relating to a country’spopulation.d) The three type of healthcare are primary, secondary and tertiary dependingon 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 andurbanization which require proper healthcare.f) The public sector insurance companies were the first to come up with schemesfor health insurance followed later by commercial insurance by private
insurance companies.g) The health insurance market is made up of many players some providing theinfrastructure, 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.211**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 Administrator212## 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**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.213**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 insuredperson. 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 ofthe specified diseases in the form.
5. Further, the details of any other illness or disease suffered or accident sustainedare called for as follows:
a. Nature of illness/ injury and treatment
b. Date of first treatment
c. Name and address of attending Doctor
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Intermediaries:
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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 insuredperson. 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 ofthe specified diseases in the form.
5. Further, the details of any other illness or disease suffered or accident sustainedare 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 insurersand 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 andadditional present insurance with any other insurer.
8. The special features of the declaration to be signed by the proposer must benoted.
9. The insured person agrees and authorises the insurer to seek medical informationfrom 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 theform and is willing to accept the terms and conditions.
11. The declaration includes the usual warranty regarding the truth of thestatements 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.214These 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.**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 tobe 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 theinsurance 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 inthe 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 fromany 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 proposalincluding 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,
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|
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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 proposalincluding 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.215**Example 1** A delivery man of a fast-food restaurant, who has to frequently travel on motorbikes 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 dustparticles leading to lung ailments.**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 thecase.**Example 3** In case of health insurance, it could be the cost of hospital treatment, whilefor 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 required216 Details of the physical features both positive and negative
Previous history of insurance and claim experienceIn 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.**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
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|
Nature of questions in a proposal form
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Previous history of insurance and claim experienceIn 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.**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 havinginsurable 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 personinvolved 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 hasbeen continuously obtaining health insurance cover in India from any of
the insurers without break217g) The sub-limits, Proportionate Deductions and the existence of Packagerates 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 andexclusions
l) Premium payable and where the premium is provisional subject toadjustment, 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 likelyto give rise to a claim under the policy
o) The obligations of the insured in relation to the subject-matter ofinsurance 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
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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.2182. **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
III. A warranty is always communicated to the insured separately and cannot bepart 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 thepolicy 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 travelpolicy
f) Cancellation of insurance
g) Change in name or address etc.219**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. EndorsementIII. Alteration
IV. Modifications are not possible**Answers to Test Yourself****Answer 1** -The correct option is II.
**Answer 2** - The correct option is II.220## 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**After studying this chapter, you should be able to:a) Explain the various classes of health insurance
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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 travelpolicy
f) Cancellation of insurance
g) Change in name or address etc.219**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. EndorsementIII. Alteration
IV. Modifications are not possible**Answers to Test Yourself****Answer 1** -The correct option is II.
**Answer 2** - The correct option is II.220## 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**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 markettoday
d) Explain Personal Accident insurance
e) Discuss overseas travel insurance
f) Understand key terms and clauses in health policies221**A.** **Classification of health insurance products****1.** **Introduction to health insurance products**“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 anyillness. **Preserving the savings of an individual** which may otherwise be wiped outdue 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 members222b) **Group cover** offered to corporate clients, covering employees and groups,covering their membersc) **Mass policies** for government schemes like/ Pradhan Mantri Jan ArogyaYojana/ 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 thepremium 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 individualhealth 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
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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 thepremium 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 individualhealth 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 formedwith 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 GroupPersonal 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 thanone 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.223**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 exclusions10. 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
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8. standard File and Use format for getting IRDAI for new policies
9. Standardisation of exclusions10. 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 to224the plan coverage and Raghu had to pay the remaining amount of Rs. 25,000 from
his own pocketThe 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/ nursinghome. This includes nursing care, RMO charges, IV fluids/ blood
transfusion/ injection administration charges and similar expensesii. Intensive Care Unit (ICU) expensesiii. Surgeon, anaesthetist, medical practitioner, consultants, specialists feesiv. Anaesthetic, blood, oxygen, operation theatre charges, surgicalappliances,v. Medicines and drugs,vi. Dialysis, chemotherapy, radiotherapyvii. Cost of prosthetic devices implanted during surgical procedure likepacemaker, orthopaedic implants, infra cardiac valve replacements,
vascular stentsviii.Relevant laboratory/ diagnostic tests and other medical expenses relatedto the treatmentix. Hospitalization expenses (excluding cost of organ) incurred on donor inrespect 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 cover225treatment as outpatient and also related health care expenses associated with
doctor visits, regular medical tests, dental and pharmacy costs.**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
anda) Such Medical Expenses are incurred for the same condition for which theInsured Person’s Hospitalization was required, and
b) The In-patient Hospitalization claim for such Hospitalization is admissibleby 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
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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
anda) Such Medical Expenses are incurred for the same condition for which theInsured Person’s Hospitalization was required, and
b) The In-patient Hospitalization claim for such Hospitalization is admissibleby 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’sHospitalization was required, and
b) The In-patient Hospitalization claim for such Hospitalization is admissibleby 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** .226Pre 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 needshospitalisation but avail treatment at home either for accommodation in
hospitals or in a position that they cannot be moved to a hospital.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 familymembers 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 familyconsisting 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 insurance227The 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
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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 familyconsisting 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 insurance227The 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 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.228**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.
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
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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.
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.229**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: **Maternity cover:** Maternity was not offered earlier under retail policies but isnow offered by most insurers, with varying waiting periods.
**Critical illness cover:** Available as an option under the high end versionproducts 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 f** ewpolicies 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
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Deductible/ Excess
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of the insurers. Some of them are: **Maternity cover:** Maternity was not offered earlier under retail policies but isnow offered by most insurers, with varying waiting periods.
**Critical illness cover:** Available as an option under the high end versionproducts 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 f** ewpolicies 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 ofhospitalization 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 inhospital due to sickness and/ or accident is not less than 10 days.230 **Donor’s expenses:** The policy provides for reimbursement of expenses towardsdonor in case of major organ transplant as per the terms and condition defined
in the policy. **Reimbursement of ambulance:** Expenses incurred towards ambulance byInsured/ 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 expensesincurred 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 healthproducts. Earlier, primary insured, spouse, dependent children were granted
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 preexisting diseases. Such cases are now being offered cover by excluding such
diseases.**Standard Health Product** **– Arogya Sanjeevani** : In the background of the Covid19 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 ArogyaSanjeevani policy.**Family Floater Plan** : Multiple family members of the policyholder canbecome 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.231**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
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d19
|
Maternity cover:
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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 ArogyaSanjeevani policy.**Family Floater Plan** : Multiple family members of the policyholder canbecome 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.231**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.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.232Example: 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.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
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Individual Plan
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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.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.233**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.**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 largeexpenses.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.234The 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
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F.
|
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|
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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 largeexpenses.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.234The 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._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 Positivediagnosis of Covid-19 in a government authorized diagnostic centre covering235the following: (Expenses on Hospitalization for a minimum period of 24 hours
are admissible.)a. Room, Boarding, Nursing Expenses as provided by the Hospital / NursingHome.
b. Surgeon, Anaesthetist, Medical Practitioner, Consultants, Specialist Fees
c. Anaesthesia, blood, oxygen, operation theatre charges, surgicalappliances, 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 tomaximum 14 days per incident subject to the conditions (not exhaustive)
mentioned below:
a. The Medical practitioner advices the Insured person to undergo treatmentat home.
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|
Disease Specific Products
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June 2020:1. Hospitalization Expenses incurred for the treatment of Covid-19 on Positivediagnosis of Covid-19 in a government authorized diagnostic centre covering235the following: (Expenses on Hospitalization for a minimum period of 24 hours
are admissible.)a. Room, Boarding, Nursing Expenses as provided by the Hospital / NursingHome.
b. Surgeon, Anaesthetist, Medical Practitioner, Consultants, Specialist Fees
c. Anaesthesia, blood, oxygen, operation theatre charges, surgicalappliances, 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 tomaximum 14 days per incident subject to the conditions (not exhaustive)
mentioned below:
a. The Medical practitioner advices the Insured person to undergo treatmentat home.
b. There is a continuous monitoring of the health status by a medicalpractitioner for each day, including records of treatment administered.3. Other Expenses covered if prescribed by the treating medical practitioner andrelated 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 NebulizerAdditional 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 Insuredshall 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-azar236e) Chikungunya
f) Japanese Encephalitis
g) Zika Virus2. **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 ofcovers.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.**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, 2005.237Such 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
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|
Standard Vector Borne Disease Health Policy:
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cover benefits with indemnity policies and even life insurance policies and
hospital daily cash benefits with indemnity policies.**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, 2005.237Such 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.**Enrolment Modality/ Period** : The cover shall be for the one year period from 1 [st]
June to 31 [st] 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 31 [st]
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:238|Table of Benefits|Sum Insured|
|---|---|
|~~Death~~<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of both eyes or loss of use of both~~<br>hands or feet or loss of sight of one eye and loss of use of hand<br>or foot<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of sight of one eye or loss of use of~~<br>one hand or foot|~~Rs. 1 Lakh~~|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
|
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Travel Insurance:
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savings bank account on the prescribed forms will be required to be given by 31 [st]
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:238|Table of Benefits|Sum Insured|
|---|---|
|~~Death~~<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of both eyes or loss of use of both~~<br>hands or feet or loss of sight of one eye and loss of use of hand<br>or foot<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of sight of one eye or loss of use of~~<br>one hand or foot|~~Rs. 1 Lakh~~|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) or2. Closure of account with the Bank or insufficiency of balance to keep theinsurance in force orIf 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 disabilityc) 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 forlifetime 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,**ii.** **Permanent partial disability (PPD):** means becoming partially disabledfor lifetime viz. loss of fingers, toes, phalanges etc.**iii.** **Temporary total disability (TTD):** means becoming totally disabled for atemporary period of time. This section of cover is intended to cover the
loss of income during the disability period.239The 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
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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.**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 of240medical 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 World-wide including USA/ Canada241Some 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
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where premium has to be paid in dollars. The plans are usually of two types: World-wide excluding USA/ Canada World-wide including USA/ Canada241Some 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.242**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.**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 checkup 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
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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 checkup 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.243**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 daysII. Thirty daysIII. Forty Five daysIV. Sixty daysKey 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 hisinsurance policy and can be used for admission into a hospitalii. Providing a cashless service at network hospitalsiii. Processing of claimsTPAs 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 hospitals244or health service providers and ensure that any person who undergoes treatment
in the network hospitals is given a cashless service. They are the intermediaries
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
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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 hisinsurance policy and can be used for admission into a hospitalii. Providing a cashless service at network hospitalsiii. Processing of claimsTPAs 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 hospitals244or health service providers and ensure that any person who undergoes treatment
in the network hospitals is given a cashless service. They are the intermediaries
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 lessthan 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 surgicalprocedures are carried out;e) Maintains daily records of patients and will make these accessible to theInsurance 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.245**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.**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
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|
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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.246**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.**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 daysII. Thirty daysIII. Forty Five daysIV. Sixty days**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.247## 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**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 underwritten248**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
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|
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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**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 underwritten248**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.249**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 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
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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 childbearing 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.250**c)** **Habits:** Consumption of tobacco, alcohol or narcotics in any form has adirect 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.
**e)** **Family history:** This has greater relevance, as genetic factors influencediseases 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 incertain groups.
**g)** **Past illness or surgery:** It has to be ascertained whether the past illnesshas 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 importantto 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 morbidityrates.**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 risks251**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.**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,
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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 risks251**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.**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) isaverage.**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.252[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 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
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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.253**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.**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 andabove 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 ofoccupation, 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 forearly 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 is254under 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 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
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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 is254under 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 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,255occupation, 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.**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 coveragesought, 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.256**Test Yourself 2**The principle of utmost good faith in underwriting is required to be followed by___________.
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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 coveragesought, 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.256**Test Yourself 2**The principle of utmost good faith in underwriting is required to be followed by___________.
I. The insurerII. The insuredIII. Both the insurer and the insuredIV. 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
III. Each insurer’s share of loss when more than one company covers the samelossIV. 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 risk257profile 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 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 predetermined 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 practicedin 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 policyIf any illness is permanently excluded, it is endorsed on the policy certificate.
This becomes an additional exclusion apart from the standard policy exclusion
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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 predetermined 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 practicedin 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 policyIf 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.258**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.**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 forhealth insurance.
III. Proposers have to undergo medical and pathological investigations to assesstheir 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 membersto opt out259f) 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 locationsspread in different geographical locations
i) Preference of the group holder for administration of the group insuranceby 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 thecases.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
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h) Difference in healthcare costs across regions in case of multiple locationsspread in different geographical locations
i) Preference of the group holder for administration of the group insuranceby 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 thecases.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-onbenefit
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:2601. Premium rate would depend on the age of the proposer and the durationof foreign travel.
2. As medical treatment is costly overseas, the premium rates are normallymuch higher compared to domestic health insurance policies.
3. Even among the foreign countries, USA and Canada premium is thehighest.
4. Care should be taken to rule out the possibility of a Proposer using thepolicy 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.**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 1870.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.261**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
employeeMembers of a registered co-operative societyMembers of registered service clubs- Holders of credit card of banks/ Diners/ Master/ VisaIn case of proposals relating to any further category different from the above
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respectively.**Age Limits**General age limits for the working population (employer employee) is 1870.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.261**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
employeeMembers of a registered co-operative societyMembers of registered service clubs- Holders of credit card of banks/ Diners/ Master/ VisaIn 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.**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)262Adverse experience is penalised by loading of renewal premium (malus),
according to a scaleNormal 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 couldanti-select against the insurer.
2) Group health insurance provides coverage only to employer-employee groups.
I. Statement 1 is true and statement 2 is falseII. Statement 2 is true and statement 1 is falseIII. Statement 1 and statement 2 are trueIV. 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.263## 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**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 insuranceclaims
d) Explain how reserves for claims are provided for by insurers.
e) Discuss personal accident claims
f) Understand the concept and role of TPAs264**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**|Customer|The person who buys insurance is the first stakeholder and<br>‘receiver of the claim’.|
|---|---|
|**Owners**|Owners of the insurance company have a big stake as the<br>‘payers of the claims’. Even if the claims are met from the<br>policy holders’ funds, in most cases, it is they who are liable<br>to keep the promise.|
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e) Discuss personal accident claims
f) Understand the concept and role of TPAs264**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**|Customer|The person who buys insurance is the first stakeholder and<br>‘receiver of the claim’.|
|---|---|
|**Owners**|Owners of the insurance company have a big stake as the<br>‘payers of the claims’. Even if the claims are met from the<br>policy holders’ funds, in most cases, it is they who are liable<br>to keep the promise.|
|**Underwriters**|Underwriters within an insurance company and across all<br>insurers have the responsibility to understand the claims and<br>design the products, decide policy terms, conditions and<br>pricing etc.|265|Regulator|The regulator (Insurance Regulatory and Development<br>Authority of India) is a key stakeholder in its objective to:<br> Maintain order in the insurance environment<br> Protect policy holders’ interest<br> Ensure long term financial health of insurers.|
|---|---|
|**Third Party**<br>**Administrators**|Service intermediaries known as Third Party Administrators,<br>who process health insurance claims.|
|**Insurance**<br>**agents/**<br>**brokers**|Insurance agents/ brokers not only sell policies but are also<br>expected to service the customers in the event of a claim.<br>|
|**Providers/**<br>**Hospitals**|~~They ensure that the customer gets a smooth claim~~<br>experience, especially when the hospital is on the panel of<br>the TPA the 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 insurancecompany.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 welldefined steps, each having its own relevance.266The 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.**Diagram 2:** **Claim process broadly comprises following steps** (may not be in the
same order)267**a)** **Intimation**Claim intimation is the first instance of contact between the customer andthe 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.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
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(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.**Diagram 2:** **Claim process broadly comprises following steps** (may not be in the
same order)267**a)** **Intimation**Claim intimation is the first instance of contact between the customer andthe 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.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 arescrutinized 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, doublecharging 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.268This 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 policyb) Balance sum insured available under the policy for the member aftertaking into account any claim made already:c) Sub-Limitsd) Check for any limits specific to illnesse) Check whether entitled or not to cumulative bonusf) 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 StandardizationGuidelines.**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
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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 StandardizationGuidelines.**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 denial269letter 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:i. Impersonation, the person insured is different from person treated.
ii. Fabrication of documents to make a claim where there is nohospitalization.
iii. Inflation of expenses, either with the help of the hospital or by additionof external bills fraudulently created.
iv. Outpatient treatment converted to in-patient/ hospitalization to covercost 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**270|Step 2| The hospital compiles the necessary information such as:<br>i. Diagnosis of illness<br>ii. Treatment,<br>iii. Name of treating doctor,<br>iv. Number of days of proposed hospitalization and<br>v. The estimated cost<br> This is presented in a format, called the cashless authorization form.|
|---|---|
|**Step 3**|~~~~ The TPA studies the information provided in the_cashless authorization_<br>_form_ and takes a decision on whether the cashless authorization could<br>be provided and if so, for how much amount it should be authorized<br>and it is communicated to the hospital without delay.|
|**Step 4**| The patient is treated by the hospital, keeping the amount authorized<br>by the TPA as credit in the patient’s account. The member may be<br>called on to make a deposit payment to cover the non-treatment<br>expenses and any co-pay required under the policy.<br>|
|**Step 5**|~~~~ When the patient is ready for discharge, the hospital checks the<br>amount of credit in the account of the patient approved by the TPA<br>against the actual treatment charges covered by insurance.<br> If the credit is less, the hospital requests for additional approval of<br>credit for the cashless treatment.<br> TPA analyses the same and approves the additional amount.<br>|
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|---|---|
|**Step 3**|~~~~ The TPA studies the information provided in the_cashless authorization_<br>_form_ and takes a decision on whether the cashless authorization could<br>be provided and if so, for how much amount it should be authorized<br>and it is communicated to the hospital without delay.|
|**Step 4**| The patient is treated by the hospital, keeping the amount authorized<br>by the TPA as credit in the patient’s account. The member may be<br>called on to make a deposit payment to cover the non-treatment<br>expenses and any co-pay required under the policy.<br>|
|**Step 5**|~~~~ When the patient is ready for discharge, the hospital checks the<br>amount of credit in the account of the patient approved by the TPA<br>against the actual treatment charges covered by insurance.<br> If the credit is less, the hospital requests for additional approval of<br>credit for the cashless treatment.<br> TPA analyses the same and approves the additional amount.<br>|
|**Step 6**|~~~~ Patient pays the non-admissible charges and gets discharged. He will<br>be asked to sign the claim form and the bill, to complete the<br>documentation.<br>|
|**Step 7**|~~~~ Hospital consolidates all the documents and presents to the TPA the<br>documents for processing of the bill<br>|
|**Step 8**|~~~~ TPA will process the claim and recommend for payment to the hospital<br>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 consultingdoctor 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 thepre-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 thelimits such as room rent or caps on specified treatments such as cataract.iv. The customer must inform the TPA in advance of the discharge andrequest the hospital to send to the TPA any additional approval that may271be 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
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
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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
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.272Besides information on disease, treatment etc., the declaration the insured
person makes in the claim form is the most important document in the legalsense.**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 thehospital 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 definitionof 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 reportII. Discharge summaryIII. Case paperIV. Hospital registration certificate**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. Investing273**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 coveragecommences.
b) If a TPA is to be used for servicing the policy, the insurer passes on theinformation about the customer and the policy to the TPA.
c) The TPA enrols the members (while the proposer is the person taking thepolicy, 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 wellas 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 serviceswithin the time agreed with the insurer.
f) The insured persons must carry an Identity Card that relates them to thepolicy and the TPA.
g) TPA issues a pre-authorization or a Letter of Guarantee to the hospitalbased on the information provided for requesting the cashless facility.
h) Where the information is not clear or not available, the TPA may rejectthe 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
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c) The TPA enrols the members (while the proposer is the person taking thepolicy, 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 wellas 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 serviceswithin the time agreed with the insurer.
f) The insured persons must carry an Identity Card that relates them to thepolicy and the TPA.
g) TPA issues a pre-authorization or a Letter of Guarantee to the hospitalbased on the information provided for requesting the cashless facility.
h) Where the information is not clear or not available, the TPA may rejectthe 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
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 thecustomer informed of the development of the claim.274**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 andtime
ii. Was the insured a pedestrian, traveling as passenger/ pillion rider ordriving 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 reasonsconverted 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 dulysigned by all legal heirs and notarized
g) Permanent disability certificate from a civil surgeon or any equivalentcompetent doctors certifying the disability of the insured.
h) Medical certificate from treating doctor mentioning the type of disabilityand 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.**Test Yourself 4**Which of the following documents are not required to be submitted for Permanent
Total Disability claim?275I. 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 equivalentcompetent doctors certifying the disability of the insured.
IV. Fitness certificate from the treating doctor certifying that the insured is fitto 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;
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h) Medical certificate from treating doctor mentioning the type of disabilityand 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.**Test Yourself 4**Which of the following documents are not required to be submitted for Permanent
Total Disability claim?275I. 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 equivalentcompetent doctors certifying the disability of the insured.
IV. Fitness certificate from the treating doctor certifying that the insured is fitto 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
f) Interpreter Referral
g) Legal Referral276h) Appointment with lawyer
**a)** **Hospitalization Procedures**i. Most hospitals accept Guarantee of Payments from all internationalinsurance 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 theinsurance 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 tothe insured on the toll free numbers provided by the assistance companies.iv. In event of the necessity of a hospitalization the insured needs to intimatethe 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 callcentre numbers to check the validity of the policy and verify coverages.vi. Once the policy is accepted by the hospital the insured would undergotreatment in the hospital on a cashless basis.vii. Some basic information required by the insurer/ assistance provider todetermine admissibility are:1. Details of ailment2. In case of any previous history,details of hospital, local medical officerin India: Past history, current treatment and further planned course inhospital 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 foreigncurrency.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
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valid travel insurance policy.v. Hospitals usually contact the assistance companies/ insurers on the callcentre numbers to check the validity of the policy and verify coverages.vi. Once the policy is accepted by the hospital the insured would undergotreatment in the hospital on a cashless basis.vii. Some basic information required by the insurer/ assistance provider todetermine admissibility are:1. Details of ailment2. In case of any previous history,details of hospital, local medical officerin India: Past history, current treatment and further planned course inhospital 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 foreigncurrency.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 formii. Doctor’s reportiii. Original Admission/ discharge card277iv. Original Bills/ Receipts/ Prescriptionv. Original X-ray reports/ Pathological/ Investigative reportsvi. Copy of passport/ Visa with Entry and exit stampThe 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 RakshakIII. Overseas TravelIV. 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. Theoccurrence 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 ofthe insurance company.c) Customers, who buys insurance is the primary stakeholder as well as thereceiver of the claim.d) In Cashless claim a network hospital provides the medical services based on apre-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 ownresources and then files claim with Insurer/ TPA for payment.f) Claim intimation is the first instance of contact between the customer andthe claims team.g) If a fraud is suspected by insurance company in case of insurance claim, it issent for investigation. Investigation of a claim could be done in-house by an
insurer/ TPA or be entrusted to a professional investigation agency.278h) Reserving refers to the amount of provision made for all claims in the booksof the insurer based on the status of the claims.i) In case of a denial, the customer has the option, apart from therepresentation 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 Personalaccident policies also are used to make fraud claims.k) The TPA provides many important services to the insurer and getsremunerated in the form of fees.279## SECTION **GENERAL INSURANCE**280## 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**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.281**A.** **Proposal forms**The Proposal form contains information which are useful for the insurance
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Reimbursement of medical expenses and other non-medical claims:
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consumer Commissions or even the legal authorities.j) Frauds occur mostly in hospitalization indemnity policies but Personalaccident policies also are used to make fraud claims.k) The TPA provides many important services to the insurer and getsremunerated in the form of fees.279## SECTION **GENERAL INSURANCE**280## 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**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.281**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 proposalform 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 classof insurance concerned.**i.** **Fire insurance** proposal forms are usually used for relatively simple/ standardrisks 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 specificinformation.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, proposalforms 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.282**iv.** **In other miscellaneous insurances,** proposal forms are compulsory and theyincorporate a declaration which extends the common law duty of good faith.**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 addressand 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 proposedfor 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 andhas to be indicated in all proposal forms.**vi.** **Previous and present insurance** : As seen in the common chapters, theproposer is required to inform the details about his previous insurances to
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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 proposedfor 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 andhas to be indicated in all proposal forms.**vi.** **Previous and present insurance** : As seen in the common chapters, theproposer 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 of283contribution 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.**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 followinginformation: Details of the insured Details of the subject matter Type of cover required Details of the physical features both positive and negative - including typeand quality of construction, age, presence of fire-fighting equipment, the
type of security etc., Previous history of insurance and lossIn 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 natureand value of the risk. Insurers take their decision based on the informationavailable 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.284**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.**Test Yourself 1**As per Protection of Policyholders’ Interests) Regulations, 2017, an insurance
company has to process an insurance proposal within __________.I. 7 daysII. 15 daysIII. 30 daysIV. 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 assumeany risk unless and until the premium is received in advance or is guaranteed
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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.**Test Yourself 1**As per Protection of Policyholders’ Interests) Regulations, 2017, an insurance
company has to process an insurance proposal within __________.I. 7 daysII. 15 daysIII. 30 daysIV. 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 assumeany 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 onbehalf 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 whichthe premium has been paid in cash or by cheque.d) Where the premium is tendered by postal or money order or cheque sent bypost, 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 ofthe 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 proper285receipt 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.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 insuredb) Sum insuredc) Period of insuranced) Risk coverede) Rate and premium: if rate is not known, the provisional premiumf) **Description of the risk covered** : for example a fire cover note wouldindicate identification particulars of the building, its construction andoccupancy.g) Serial number of the cover noteh) Date of issuei) **Validity of cover note** is usually for a period of a fortnight and rarely upto 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
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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:286i. Marine Cover Note Numberii. Date of issueiii. Name of the insurediv. 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 perInstitute Clauses, but subject to 7 days’ notice of cancellation.**b)** **Conditions:** Details of shipment to be supplied on receipt of shipping documentsfor 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
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/ cubiccapacity/ 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 ofthe 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 any287The 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 insurerUse 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 provides evidence of insurance to the Police and Registration**
**Authorities.** A specimen certificate for private cars is reproduced below, showing
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d) Date of expiry of insurance
e) Persons or classes of persons entitled to drive
f) Limitations as to use
g) Additional risks, if any287The 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 insurerUse 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 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 permissionProvided 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:288(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
Indian Stamp Act, 1899.A general insurance policy usually contains:a) The name(s) and address(es) of the insured and any other person havinginsurable 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 andwhere 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 toadjustment, 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 likelyto give rise to a claim under the policy;
k) The obligations of the insured in relation to the subject-matter ofinsurance 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 thepolicy should be sent;
o) The details of Add–on covers and/ or Endorsements if any;
p) Details of Grievance Redressal mechanism and address of Ombudsman289**Test Yourself 2**Which of the following statements is true with regards to cover notes?I. Cover notes are predominantly used in life insurance
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e) Sums insured;
f) Perils covered and exclusions ;
g) Any excess/ deductible applicable;
h) Premium payable and where the premium is provisional subject toadjustment, 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 likelyto give rise to a claim under the policy;
k) The obligations of the insured in relation to the subject-matter ofinsurance 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 thepolicy should be sent;
o) The details of Add–on covers and/ or Endorsements if any;
p) Details of Grievance Redressal mechanism and address of Ombudsman289**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 generalinsurance**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.**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 30 [0] C are used/ stored in the premises**2.** In **Marine Insurance, a warranty** is defined as follows: “a promissorywarranty, 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 awatchman for twenty four hours. The rates, terms and conditions of the policy290continue 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 bepart of the policy document
IV. Claims will be payable even if a warranty is breached.**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
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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 bepart of the policy document
IV. Claims will be payable even if a warranty is breached.**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 infire 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:291**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.**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. EndorsementIII. 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**292**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 isinconsistency in doing so.
b) In the event of a contradiction in terms between the standard printedpolicy 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 printedwords.c) If an endorsement contradicts other parts of the contract the meaning ofthe endorsement will prevail as it is the later document.
d) Clauses in italics over-ride the ordinary printed wording where they areinconsistent.e) Clauses printed or typed in the margin of the policy are to be given moreimportance than the wording within the body of the policy.
f) Clauses attached or pasted to the policy override both marginal clausesand the clauses in the body of the policy.
g) Printed wording is over-ridden by typewritten wording or wordingimpressed 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 thereis 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.293**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**
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f) Clauses attached or pasted to the policy override both marginal clausesand the clauses in the body of the policy.
g) Printed wording is over-ridden by typewritten wording or wordingimpressed 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 thereis 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.293**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 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 renewalnotice to insured, 30 days before the expiry of the policy
II. As per regulations there is a legal obligation on insurers to send a renewalnotice to insured, 15 days before the expiry of the policy
III. As per regulations there is a legal obligation on insurers to send a renewalnotice to insured, 7 days before the expiry of the policy
IV. As per regulations there is no legal obligation on insurers to send a renewalnotice to insured before the expiry of the policy294**Summary**a) The first stage of documentation is essentially the proposal forms throughwhich the insured informs about himself/ herself
b) The duty of disclosure of material information arises prior to the inception ofthe policy, and continues even after the conclusion of the contract
c) Insurance companies usually add a declaration at the end of the Proposal formto 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 allmaterial information about the risk is provided by the insured to insurer.
f) The process of scrutinising the proposal and deciding about acceptance isknown as underwriting.
g) Premium is the consideration or amount paid by the insured to the insurer forinsuring the subject matter of insurance, under a contract of insurance.
h) Payment of premium can be made by cash, any recognised banking negotiableinstrument, postal money order, credit or debit card, internet, e-transfer,
direct credit or any other method approved by IRDAI from time to time.
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c) Insurance companies usually add a declaration at the end of the Proposal formto 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 allmaterial information about the risk is provided by the insured to insurer.
f) The process of scrutinising the proposal and deciding about acceptance isknown as underwriting.
g) Premium is the consideration or amount paid by the insured to the insurer forinsuring the subject matter of insurance, under a contract of insurance.
h) Payment of premium can be made by cash, any recognised banking negotiableinstrument, 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 whennegotiations 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 proofmay be required
l) The policy is a formal document which provides an evidence of the contractof insurance.
m) A warranty is a condition expressly stated in the policy which has to beliterally complied with for validity of the contract.
n) If certain terms and conditions of the policy need to be modified at the timeof 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 partiesmust prevail and this intention is to be looked for in the policy itself.295**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.296## 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**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.297**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 wallsand roof. A concrete building is superior to a timber building.**ii.** **The height:** Greater the number of storey’s, the greater the hazard becauseof 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 floorscollapse 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 isused. Various types of hazards arise from occupancy.**v.** **Ignition hazard:** Buildings in which chemicals are produced or used in largequantity 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
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are some examples of physical hazard in various classes of insurance.**a)** **Fire****i.** **Construction:** Construction refers to the building materials used in wallsand roof. A concrete building is superior to a timber building.**ii.** **The height:** Greater the number of storey’s, the greater the hazard becauseof 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 floorscollapse 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 isused. Various types of hazards arise from occupancy.**v.** **Ignition hazard:** Buildings in which chemicals are produced or used in largequantity 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 hazardis 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 tohazardous 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.**298**c)** **Motor****i.** **The age and condition of the vehicle:** Older vehicles are more prone toaccidents.**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: privatedwellings situated in isolated areas are hazardous.**iii.** **Constructional hazard** : Too many doors and windows constitute badphysical hazard.**e)** **Personal accident****i.** **The age of the person:** Very old persons are accident prone; besides theywill take longer to recover in the event of an accident.**ii.** **Nature of occupation:** Jockeys, mining engineers, manual workers areexamples of bad physical hazard.**iii.** **Health and physical condition:** A person suffering from Diabetes may notrespond 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 undertonnage vessel ships the cargo then extra premium is charged.299In personal accident insurance if the insured is engaged in hazardous pursuits like
mountaineering, racing on wheels, big game hunting etc. extra premium is
charged.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
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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 undertonnage vessel ships the cargo then extra premium is charged.299In personal accident insurance if the insured is engaged in hazardous pursuits like
mountaineering, racing on wheels, big game hunting etc. extra premium is
charged.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) arepacked in tin lined cases.**ii.** **Burglary:** It is warranted that the property is guarded by a watchman fortwenty four hours.**iii.** **Fire:** In fire insurance, it is warranted the premises would not be used beyondnormal working hours.**iv.** **Motor:** It is warranted that the vehicle will not be used for speed testing orracing.**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 oncomprehensive terms but insurers will offer a restricted cover i.e. against
third party risks only.300**ii.** **Personal accident** : A personal accident proposer who has crossed themaximum acceptance age limit may be covered for death risk only instead
of on comprehensive terms i.e. including disablement benefits.**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 premisesii. Installation of hydrant system in the compoundiii. Installation of hand appliances consisting of buckets, portableextinguishers and manual fire pumpsiv. 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 freeyears.**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.301**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,
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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 freeyears.**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.301**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.**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 thepolicy whether for a 12 months period or a shorter period, are almost thesame.302b) Further, an annual policy requires renewal procedure only once during a yearwhereas 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 greaterduring 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.**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 beforeII. Report the same to the insurerIII. Ask for a share in the claimsIV. 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 ofclaim.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
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In that case refund is made keeping the premium on short period scale for the
period Insurer was in risk.**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 beforeII. Report the same to the insurerIII. Ask for a share in the claimsIV. 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 ofclaim.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 afixed 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 to303company. 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'sdeclared 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 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 ofindemnity 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. Theinsured 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 isas 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 liabilityexposure 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.304**Test Yourself 2**Suggest an insurance scheme for a doctor to protect himself from any claims of
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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 isas 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 liabilityexposure 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.304**Test Yourself 2**Suggest an insurance scheme for a doctor to protect himself from any claims of
negligence against him.I. Personal accident insuranceII. Professional Liability insuranceIII. Marine hull insuranceIV. Health insurance**Summary**a) Process of classifying risks and deciding into which category they fall isimportant for rate making.b) Underwriting is the process of determining whether a risk offered forinsurance 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 shouldbe adequate and reasonable.e) ‘Pure premium’ is suitably loaded or increased by adding percentages toprovide for expenses, reserves and profits.f) The term hazard in insurance language refers to those conditions or featuresor 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 smallclaims.h) No claim bonus is a powerful strategy to improve underwriting experience andforms an integral part of rating systems.i) Sum insured is the maximum amount that an insurance company willindemnify as per policy condition.**Key terms**a) Underwritingb) Rate makingc) Physical hazardsd) Moral hazardse) Indemnity305f) Loading of premiumg) Warrantiesh) Deductiblesi) Excess**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.306## 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**After studying this chapter, you should be able to:1. Explain householder’s insurance
2. Prepare shop insurance cover
3. Discuss motor insurance307**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 policiesi. "All risks" typically means that any risk that the insurance contract does notspecifically exclude is covered, subject to terms and conditions.ii. All-risks insurance is the most comprehensive type of coverage available. It istherefore 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 listedand 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’sPolicy, 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.
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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 policiesi. "All risks" typically means that any risk that the insurance contract does notspecifically exclude is covered, subject to terms and conditions.ii. All-risks insurance is the most comprehensive type of coverage available. It istherefore 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 listedand 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’sPolicy, 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 asalso 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.308**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/ mechanicalappliances
**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 anaccident 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 officialpurposes
**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 bydishonest acts of employees
**ix.** **Legal Liability:** Compensation for accidents arising out of and in the course ofemployment
Provides cover for legal liability to third parties309Fire/ 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.**E.** **Householder’s Insurance**The coverages under a Householder’s Insurance Policy can be quite wide. It is
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A till (box/ drawer/ counter) at the business premises
**v.** **Baggage** : Compensates for loss of baggage while on travel for officialpurposes
**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 bydishonest acts of employees
**ix.** **Legal Liability:** Compensation for accidents arising out of and in the course ofemployment
Provides cover for legal liability to third parties309Fire/ 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.**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.310The 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.**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
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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.**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 replacementsubject 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.311**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 notavailable.V.
**Definition****Some important definitions****a)** **Burglary** means the unforeseen and unauthorised entry to or exit from theinsured 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 beencommitted by entering it for the purpose of committing an offence.**c)** **Robbery** means the theft of contents at the insured’s premises usingaggressive and violent means against the Insured and/ or insured’s employees.**d)** **Safe** means a strong cabinet within the insured’s premises designed for thesafe 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 andfraudulently 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 hitting312it, 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?
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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 hitting312it, 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?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 liability313of 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)**‘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 insuredThird 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 damageLiability 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
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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 insuredThird 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 damageLiability 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.314**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.**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 RegionalTransport Authority
II. If the person who will be driving the vehicle is different from the owner, thenin 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 vehicleowner, subject to approval from the Regional Transport Authority
IV. If the vehicle will be driven by anyone other than the owner, then primarypolicy should be in the name of the vehicle owner and additional policies315should 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 toan 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 fixingthe sum insured: Market Value (MV) and Reinstatement Value (RIV).
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from Regional Transport Authority
III. In the name of any family member of the vehicle owner, including the vehicleowner, subject to approval from the Regional Transport Authority
IV. If the vehicle will be driven by anyone other than the owner, then primarypolicy should be in the name of the vehicle owner and additional policies315should 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 toan 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 fixingthe sum insured: Market Value (MV) and Reinstatement Value (RIV).
e) Shopkeeper’s insurance usually covers damage to the shop structure andcontents 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 toaccidents 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. 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.316## 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**After studying this chapter, you should be able to understand the importance and
basic purposes of the 11 types of insurances discussed.317**A.** **Property/ Fire Insurance**Commercial enterprises are broadly divided into two types: Small and Medium Enterprises [SMEs]Bharat Sookshma PolicyBharat 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 andinundation
Subsidence and landslide including rock slide
Bursting and overflowing of water tanks, apparatus and pipes
Missile testing operations
Leakages from automatic sprinkler installation318 Bush fireThere are two important features which differentiate commercial insurance from
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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 andinundation
Subsidence and landslide including rock slide
Bursting and overflowing of water tanks, apparatus and pipes
Missile testing operations
Leakages from automatic sprinkler installation318 Bush fireThere 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 thatof 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 ormade 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 MSMEsThis 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 of31915% is waived. Bharat Sookshma Udyam Policies allow increase in Sum Insurer
during the policy tenure by endorsement.**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 MSMEsThis 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 inbuilt 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
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industries, storage risks and so on. The policy underinsurance to the extent of31915% is waived. Bharat Sookshma Udyam Policies allow increase in Sum Insurer
during the policy tenure by endorsement.**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 MSMEsThis 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 inbuilt 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 radiationiv. Pollution and contamination losses**Perils that are covered by other policies in General Insurance**i. Machinery Breakdown,
ii. Business Interruptioniv. **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.320a. **Market Value and Reinstatement Value Policies:** In the event of a loss, theinsurer 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.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 inwarehouse, 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 arestored 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 ratedepending on the product(s) made.
c) Facilities outside industrial complexes will be rated depending on thenature 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 protectionfacilities provided at the premises.
g) One can also opt out of riot, strike, malicious damage covers and floodgroup 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 fire321**B.** **Business Interruption Insurance**Business Interruption insurance is also known as Consequential Loss Insurance or
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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 ratedepending on the product(s) made.
c) Facilities outside industrial complexes will be rated depending on thenature 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 protectionfacilities provided at the premises.
g) One can also opt out of riot, strike, malicious damage covers and floodgroup 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 fire321**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 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 premisesor loss followed by actual, forcible and violent exit from the premises or holdup.322b) Damage to insured property or premises by burglars. Property insured iscovered 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 iscovered 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 placeother than the safe. The liability of the insurer is limited to the amount
actually shown by such records.**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
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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 iscovered 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 placeother than the safe. The liability of the insurer is limited to the amount
actually shown by such records.**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 property323II. 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**a)** **Transit section:** It covers loss of money as a result of robbery or theft or otherfortuitous 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 berequired to pay in respect of each loss.**ii.** **Estimated amount in transit during the policy period:** It represents theamount 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 personandc) 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 risks324c) Disbursement risk, which is the loss suffered during payment of wages toemployees**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
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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 personandc) 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 risks324c) Disbursement risk, which is the loss suffered during payment of wages toemployees**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**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 goodsb) 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 deathretirement resignation or dismissal of the employee, whichever is earlierd) 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 tobe 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 ofthose 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 theindividuals to be covered are inserted in a schedule, but instead of
individual amounts of guarantee, a specified amount of guarantee is325“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 differencethat 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 namesor 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.**Test Yourself 5**Fidelity Guarantee Insurance indemnifies ________________.I. Employers against the financial loss suffered by them due to fraud ordishonesty of their employees
II. Employees against the financial loss suffered by them due to fraud ordishonesty of their employer
III. Third parties against the financial loss suffered by them due to fraud ordishonesty of the corporate
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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 namesor 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.**Test Yourself 5**Fidelity Guarantee Insurance indemnifies ________________.I. Employers against the financial loss suffered by them due to fraud ordishonesty of their employees
II. Employees against the financial loss suffered by them due to fraud ordishonesty of their employer
III. Third parties against the financial loss suffered by them due to fraud ordishonesty of the corporate
IV. Shareholders against the financial loss suffered by them due to fraud ordishonesty 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 theemployees, when the property is carried outside the premises in the hands
of authorized employees.326c) Forgery or alteration of cheques, drafts, fixed deposit receipts etc.d) Dishonesty of employees with reference to money/ securities or in respectof 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**3.** **Scope**
The policy comprises of 7 sections viz.:1. On Premises2. 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 insured327c) 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.**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,
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Blanket policy:
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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.**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. Compensatory328**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 PolicyThere 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 andb) 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 industrywhich 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 reassemblythereafter.
d) When being shifted within the premise.329Premium 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 plantand to surrounding property of the insured; and
b) Legal liability of the insured on account of bodily injury to the person, ordamage 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**
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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 reassemblythereafter.
d) When being shifted within the premise.329Premium 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 plantand to surrounding property of the insured; and
b) Legal liability of the insured on account of bodily injury to the person, ordamage 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 electronicequipment, 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 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 externalhard disks
**c)** **Section 3:** Increased cost of working - to ensure continued data processingon substitute equipment up to 12, 26, 40 or 52 weeks.**4.** **Contractors Plant & Machinery (CPM) Policy:** Suitable for contractorsinvolved 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, Tempest330b) Fire and lightning, external explosion, earthquake and other Acts of Godperils
c) Accidental damage while at work due to faulty manhandling, dropping orfalling, 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 coldstorage (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 whohas 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
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 andInundation, Wave action of water
7. Subsidence and Landslide (Including Rockslide) damage
8. Earthquake Fire and Shock (Including flood due to earthquake), Tsunami
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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 whohas 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
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 andInundation, 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 interestsof 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 and331unforeseen 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 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 anticipated332net 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 coverIII. 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
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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 anticipated332net 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 coverIII. 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 byindividual operational policies.
Premium rates for the policy depend on the cover opted, claimsexperience, and deductibles opted, risk assessment report for MLOP etc.**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 equipment333**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.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 transit334ii. Institute Cargo Clause (ICC) A, B, or C for voyage by sea
iii. Institute Cargo (Air) Clause – A for transport by airInstitute 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
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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.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 transit334ii. Institute Cargo Clause (ICC) A, B, or C for voyage by sea
iii. Institute Cargo (Air) Clause – A for transport by airInstitute 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 perilsThese 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.**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.335**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 tradeOpen 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
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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 tradeOpen 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**
**c)** War risks are governed by special regulations and the premiums collectedwill 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)336v. Jetties and Wharvesvi. 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 aboveIV. 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**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 2010337Insurance 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
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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**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 2010337Insurance 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|Col2|
|---|---|
|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 liabilityb) Pollution liabilityc) Transportation andd) 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,
electrical appliances, mechanical equipment, chemicals etc.) that are today
manufactured and sold to the public. If a defect in the product causes death,338bodily 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
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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 underthe 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, 1855and 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 ofemployee injuries, up to specific amounts339ii. Liability for occupational diseases listed in the Actiii. 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.340## 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.After studying this chapter, you should be able to:1. Argue the importance of claim settlement functions2. Describe the procedures for intimation of loss3. Appraise claim investigation and assessment4. Explain the importance of surveyors and loss assessors5. Illustrate the contents of claim forms6. Define claims adjustment and settlement341**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 businessof 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
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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 businessof 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 insurancecompany.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.342The 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,
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 ofthe 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 ofdisablement.343Under 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
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|
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investigation to determine the cause and extent of loss is done, by an officer ofthe 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 ofdisablement.343Under 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.**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 ordamage2. The loss or damage is caused by an insured peril3. The property (subject matter of insurance) affected by the loss is the sameas insured under the policy4. 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 theclaimant.Claims involving third party property damage are assessed on the basis of a surveyreport. 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.344They 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 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
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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 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 addressii. Date, time, cause and circumstances of the fireiii. Details of damaged propertyiv. Sound value of the property at the time of fire. Where the insurance consistsof 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 valuevi. Situation and occupancy of the premises in which the fire occurredvii. Capacity in which the insured claims, whether as owner, mortgage or the likeviii. If any other person is interested in the property damagedix. If any other insurance is in force upon such property if so, details thereof345This 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’.**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 calledforiii. In burglary claims, a report from the Police may be necessary.iv. For fatal accident claims, reports may be necessary from the Coroner and thePolice.v. For motor claims, the insurer may like to examine driving license, registrationbook, police report etc.vi. In marine cargo claims, the nature of documents varies according to the typeof 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 settlementof claims?I. Seeking information relating to the cause of the lossII. Approaching the claim with a prejudiceIII. Ascertaining whether the loss was a result of an insured perilIV. 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 todo?I. Notify the insurer of the loss as soon as reasonably possibleII. Notify the insurer at the time of insurance renewalIII. Damage the car further so as to receive a bigger compensationIV. Ignore the damage346**Test Yourself 3**Which of the following statements about claims investigation and claimsassessment is correct?I. Claims Investigation and Claims Assessment are the sameII. Claims Investigation is to determine the validity of the claim whereasassessment is whether the loss was caused by an insured peril and whether
there was any breach of warrantyIII. Claims Assessment tries to determine the validity of the claim whereasinvestigation is more concerned with the cause and extent of the lossIV. Claims Investigation is done before the claim is paid and Claims Assessment isdone after the claim is paid**Test Yourself 4**Who is the licensing authority for surveyors?I. Surveyor Association of IndiaII. Surveyor Regulatory and Development AuthorityIII. Insurance Regulatory and Development Authority of IndiaIV. Government of India**Test Yourself 5**Which among the following documents is most likely to be requested while
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comprehensive policy. Which among the following is most appropriate for Raj todo?I. Notify the insurer of the loss as soon as reasonably possibleII. Notify the insurer at the time of insurance renewalIII. Damage the car further so as to receive a bigger compensationIV. Ignore the damage346**Test Yourself 3**Which of the following statements about claims investigation and claimsassessment is correct?I. Claims Investigation and Claims Assessment are the sameII. Claims Investigation is to determine the validity of the claim whereasassessment is whether the loss was caused by an insured peril and whether
there was any breach of warrantyIII. Claims Assessment tries to determine the validity of the claim whereasinvestigation is more concerned with the cause and extent of the lossIV. Claims Investigation is done before the claim is paid and Claims Assessment isdone after the claim is paid**Test Yourself 4**Who is the licensing authority for surveyors?I. Surveyor Association of IndiaII. Surveyor Regulatory and Development AuthorityIII. Insurance Regulatory and Development Authority of IndiaIV. 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 reportII. Report from Fire BrigadeIII. Police reportIV. 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. ContributionII. DischargeIII. SubrogationIV. Indemnity347**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 finalII. UmpireIII. ArbitratorIV. Court of Law**Summary**a) Settling claims professionally is regarded as the biggest advertisement for aninsurance company.b) Policy conditions provide that the loss be intimated to the insurerimmediately.c) If the claim amount is small, the investigation to determine the cause andextent of loss is done by an officer of the insurer. But for other claims it is
entrusted to independent licensed professional surveyors who are specialistsin loss assessment.d) In general the claim form is designed to get full information regarding thecircumstances 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 losssuffered 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 paymentof the claim.f) Settlement of the claim is made only after obtaining a discharge under thepolicy.**Key terms**a) Intimation of lossb) Investigation and Assessmentc) Surveyors and Loss Assessorsd) Claim formse) Adjustment and Settlement348**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.349## SECTION## ANNEXURES350## CHAPTER A-01## ANNEXURESThese annexures are provided so that the students get a better idea of proposal
forms used in general insurance.351352**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/Ann
exure-I-BharatGrihaRaksha.pdf353
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ANNEXURESThese annexures are provided so that the students get a better idea of proposal
|
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## IC - 38 **INSURANCE MARKETING FIRM** **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 VazeG – Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.i## INSURANCE MARKETING FIRM **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 atAny 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 pageii## PREFACEInsurance 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.iii## CONTENTS|Chapter no.|Title|Page no.|
|---|---|---|
|**SECTION **|**COMMON CHAPTERS **|**COMMON CHAPTERS **|
|C-01|Introduction to Insurance|2|
|C-02|Core Elements of Insurance|19|
|C-03|Principles of Insurance|29|
|C-04|Features of Insurance Contracts|43|
|C-05|Underwriting and Rating|52|
|C-06|Claims Processing|60|
|C-07|Documentation|67|
|C-08|Customer Service|76|
|C-09|Grievance Redressal Mechanism|93|
|C-10|Regulatory Aspects for Insurance Marketing Firm|101|
|**SECTION **|**LIFE INSURANCE **|**LIFE INSURANCE **|
|L-01|What Life Insurance Involves|118|
|L-02|Financial Planning|125|
|L-03|Life Insurance Products: Traditional|139|
|L-04|Life insurance products: Non-Traditional|150|
|L-05|Applications of Life Insurance|156|
|L-06|Pricing and Valuation in Life Insurance|161|
|L-07|Life Insurance Documentation|170|
|L-08|Life Insurance Underwriting|184|
|L-09|Life Insurance Claims|198|
|**SECTION **|**HEALTH INSURANCE **|**HEALTH INSURANCE **|
|H-01|Introduction to Health Insurance|207|
|
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|
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|C-06|Claims Processing|60|
|C-07|Documentation|67|
|C-08|Customer Service|76|
|C-09|Grievance Redressal Mechanism|93|
|C-10|Regulatory Aspects for Insurance Marketing Firm|101|
|**SECTION **|**LIFE INSURANCE **|**LIFE INSURANCE **|
|L-01|What Life Insurance Involves|118|
|L-02|Financial Planning|125|
|L-03|Life Insurance Products: Traditional|139|
|L-04|Life insurance products: Non-Traditional|150|
|L-05|Applications of Life Insurance|156|
|L-06|Pricing and Valuation in Life Insurance|161|
|L-07|Life Insurance Documentation|170|
|L-08|Life Insurance Underwriting|184|
|L-09|Life Insurance Claims|198|
|**SECTION **|**HEALTH INSURANCE **|**HEALTH INSURANCE **|
|H-01|Introduction to Health Insurance|207|
|H-02|Health Insurance Documentation|215|
|H-03|Health Insurance Products|223|
|H-04|Health Insurance Underwriting|250|
|H-05|Health Insurance Claims|266|
|**SECTION **|**GENERAL INSURANCE **|**GENERAL INSURANCE **|
|G-01|General Insurance Documentation|283|
|G-02|Underwriting and Rate Making|299|
|G-03|Personal and Retail Insurance|309|
|G-04|Commercial Insurance|319|
|G-05|General Insurance Claims|343|
|**SECTION **|**ANNEXURES **<br>|**ANNEXURES **<br>|
|A-01|~~Annexures – Specimen Proposal forms and Claims Forms~~<br>for filling up|353|iv## 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 aninstrument of risk transfer.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 predictan 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 threecenturies 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<br>off their loans if shipment was lost or stolen.<br>Traders of Bharuch and Surat also had similar practices.|
|---|---|
|**Benevolent**<br>**Societies/**<br>**Friendly**<br>**Societies**|Greeks of 7th Cy. AD, used to pay in advance to take care of the<br>family of members who died and also the funeral expenses of the<br>member.<br>Similar practices were followed in England as well.|
|**Rhodes**|Traders of Rhodes who were sending goods by sea, were sharing<br>losses if any of them lost their goods due to jettison1.|
|**Chinese Traders**|**Chinese traders**in ancient days used to send their goods in<br>different ships, so that even if some boats sank, their loss would<br>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
|
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|---|---|
|**Benevolent**<br>**Societies/**<br>**Friendly**<br>**Societies**|Greeks of 7th Cy. AD, used to pay in advance to take care of the<br>family of members who died and also the funeral expenses of the<br>member.<br>Similar practices were followed in England as well.|
|**Rhodes**|Traders of Rhodes who were sending goods by sea, were sharing<br>losses if any of them lost their goods due to jettison1.|
|**Chinese Traders**|**Chinese traders**in ancient days used to send their goods in<br>different ships, so that even if some boats sank, their loss would<br>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 oflife insurance to an individual.**i.** **Lloyds** : The origins of modern commercial insurance started at Lloyd’sCoffee 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 Londonis 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<br>Insurance Co. Ltd|The first life insurance company to be set up in India<br>was an English company|
|---|---|
|**Triton Insurance Co. Ltd.**|The first non-life insurer to be established in India|1 Jettison/ Jettisoning’ refers to throwing away some of the cargo to reduce the weight of the ship while at sea.4|Bombay Mutual<br>Assurance Society Ltd.|The first Indian insurance company. It was formed<br>in 1870 in Mumbai|
|---|---|
|**National Insurance**<br>**Company Ltd.**|The oldest insurance company in India. It was<br>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 ofinsurance companies in India. This Act, as amended from time to timecontinues 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 competitione) The Insurance market was liberalised in 2000, with the passing of the InsuranceRegulatory & 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, tohold 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 30** **[th]** **September 2021)**a) There are 24 Life insurance companies operating in India. Of these, LifeInsurance 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 InsuranceCo. 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
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|
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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, tohold 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 30** **[th]** **September 2021)**a) There are 24 Life insurance companies operating in India. Of these, LifeInsurance 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 InsuranceCo. 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 sectorentities.5c) There is one Reinsurance Company – The General Insurance Corporation ofIndia [GIC Re] and 11 foreign Reinsurers that operate through branchoffices.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 IndiaII. Insurance Regulatory and Development Authority of IndiaIII. Life Insurance Corporation of IndiaIV. 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**6There are however some questions that need to be answered.i. Would people agree to part with their hard earned money, to create sucha common fund?ii. How could they trust that their contributions are actually being used forthe desired purpose?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 payingthose 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** maybe:i. P **hysical** (like a car or a building) orii. N **on-physical** (like reputation, goodwill, liability to pay to someone)oriii. P **ersonal** (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 iscalled as **risk** . The cause of the risk event is known as **peril** .c) There is a principle known as **pooling** . This consists of collecting numerousindividual 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 lossescaused by a **peril** .e) This process of pooling funds and compensating the unfortunate few is carriedout through an institution known as the **insurer** (Insurance Company).f) The insurer enters into an insurance **contract** with each person who seeks toparticipate 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
|
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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 lossescaused by a **peril** .e) This process of pooling funds and compensating the unfortunate few is carriedout through an institution known as the **insurer** (Insurance Company).f) The insurer enters into an insurance **contract** with each person who seeks toparticipate 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**7There are two types of risk burdens that one carries – **primary and secondary** .**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 byinsurance.**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 indirectlosses.**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 sufferssuch 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:8i. 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 thatinsurance 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 mandatory. It is also compulsory to have a Personal Accident coverfor 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<br>various assets (eggs are placed in different<br>baskets).|Under mutuality or pooling, the funds of<br>various individuals are combined (all eggs<br>are placed in one basket).|
|Funds flow from one source to many<br>destinations.|Funds flow from many sources to one.|9**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/
|
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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<br>various assets (eggs are placed in different<br>baskets).|Under mutuality or pooling, the funds of<br>various individuals are combined (all eggs<br>are placed in one basket).|
|Funds flow from one source to many<br>destinations.|Funds flow from many sources to one.|9**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.**C.** **Risk Management Techniques**One may also ask whether insurance is the right solution to all kinds of risksituations. 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 explainedbelow:**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 accidentor 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.10**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:**a)** **Education and training of various types of employees in proper risk****practices – e.g.** (i) participating in ‘fire drills’; (ii)wearing of seatbeltshelmets 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 usingmachinery 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 locationsrather 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 offactories.**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 asthey occur. The firm assumes and finances its own risk, either through its
|
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spread of Malaria.**c)** **Changes made in dangerous or hazardous operations,** while usingmachinery 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 locationsrather 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 offactories.**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 asthey occur. The firm assumes and finances its own risk, either through its
own or borrowed funds, this is known as **self-insurance** .11**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 mutualconsent as well.**c)** **Risk transfer** is an alternative to risk retention. It involves transferringthe 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, 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**12**Test Yourself 3**Which among the following is a method of risk transfer?
I. Bank Fixed DepositII. InsuranceIII. Equity sharesIV. 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, leadingto the lossii. The **severity (impact)** or the amount of loss that may be suffered as aresult.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 seen13as 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
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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 seen13as 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 therebetween 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 aresult 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 theloss.**c)** **Consider the likely outcomes of the risk carefully:** It is best to insure thoseassets 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.**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 tear14**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 theentire 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 thecustomer.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 insureras 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 bein 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.15**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 collectivepower of the community is brought together to support its unfortunatefew members who suffer an economic loss. There are no substitutes forinsurance.b) Insurance companies collect small amounts of premium and pool themtogether as huge funds. These funds are held and invested for the interests
of policyholders and the benefit of the community. They are not unduly
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to the prospect to enable the prospect to decide on the best cover that would bein 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.15**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 collectivepower of the community is brought together to support its unfortunatefew members who suffer an economic loss. There are no substitutes forinsurance.b) Insurance companies collect small amounts of premium and pool themtogether 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 - bothindividuals 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 andindustrial 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 propertyunless 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 forinspection 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 andbanking 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 unknownfields with the protection offered by Insurance.**Information****Insurance and Social Security**a) Social security is an obligation of the State. Social security schemes of theState involve the use of compulsory or voluntary insurance, as a tool of
social security. The Employees State Insurance Act, 1948 provides for16**Employees State Insurance Corporation** to pay for the expenses of
sickness, 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 theGovernment such as1. 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 YojanaThese, and other Government schemes have been benefiting the Indian
society/ community.c) In addition to supporting Government schemes, the insurance industryoffers insurance covers on a commercial basis which have the ultimateobjective of providing social security. The **rural insurance schemes**,
operated on a commercial basis, are designed to provide social security tothe 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’sCoffee House in London.An insurance arrangement involves the following: Asset,
Risk,
Peril,
Contract,
Insurer and
Insured17When 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,
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
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G.
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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’sCoffee House in London.An insurance arrangement involves the following: Asset,
Risk,
Peril,
Contract,
Insurer and
Insured17When 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,
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. Risk2. Pooling3. Asset4. Burden of risk5. Risk avoidance6. Risk control7. Risk retention8. Risk financing9. 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.18#### CHAPTER C- 0 2## 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**After studying this chapter, one should be able to:1. Understand Assets are2. Understand Risk, Hazards and Perils3. Appreciate Risk Management4. Understand Risk Pooling in insurance19**A.** **Elements of insurance**We have seen that the process of insurance has four elements Asset Risk Risk poolingLet 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 aneconomic value to its owner’.An asset must have the following features: **Economic value:** An asset must have economic value. Value can arise in twoways.**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 ofneeds.**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.20This implies that an asset must satisfy two more conditions to qualify as such - its
scarcity and its ownership or possession by someone. **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 overtime.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 subjectedto 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 ordisability.These kinds of losses are covered by insurances of the person or personal lines of
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scarcity and its ownership or possession by someone. **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 overtime.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 subjectedto 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 ordisability.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.21Examples 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.**Example**Examples of perils are fire, earthquakes, floods, lightning, burglary, heart attacketc.**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.ExampleA 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 and22severe 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 destroysinventory worth Rs 1 crore. The loss is heavy but not so high as to lead to
bankruptcy.
A torpedo from a pirate ship sinks an entire passenger ship but mostpassengers are saved.
A major accident resulting in a kidney damage necessitating a kidneytransplant 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
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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 and22severe 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 destroysinventory worth Rs 1 crore. The loss is heavy but not so high as to lead to
bankruptcy.
A torpedo from a pirate ship sinks an entire passenger ship but mostpassengers are saved.
A major accident resulting in a kidney damage necessitating a kidneytransplant 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 largeterritory
The terrorist attack of 9/ 11 on World Trade Centre which caused injuries toa 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 anyundue financial strain.**Example** A minor car accident results in the side being slightly grazed due to whichsome 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 assessment23of 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.|Asset|Peril|Hazard|
|---|---|---|
|**Life**|Cancer|Excessive Smoking|
|**Factory**|Fire|Explosive material left Unattended|
|**Car**|Car<br>Accident|Careless driving by driver|
|**Cargo**|Storm|Water seeping in cargo and spoiling; Cargo not packaged in<br>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 thatinfluence the frequency or severity of the loss. A dishonest individual may
attempt to commit fraud and make money by misusing the facility ofinsurance.**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
rejectedA 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.24**c)** **Legal hazard** is more prevalent in cases involving a liability to pay fordamages. 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.**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
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under the policy, such claims are clearly fraudulent and could be justifiably
rejectedA 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.24**c)** **Legal hazard** is more prevalent in cases involving a liability to pay fordamages. 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.**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 fewwho 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.25|Large<br>number<br>of people|Paying<br>Premium|Premium|Paying Claims to a<br>few who suffered<br>loss|
|---|---|---|---|
|**Many**<br>**people**<br>**pay**|**Small**<br>**amounts of**<br>**money as**<br>**Premiums**|**These small amounts are pooled**<br>**together as a Common Pool, big**<br>**enough to pay a statistically**<br>**estimated number of claims**|**Big amounts are**<br>**paid to those who**<br>**suffer a loss**|**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 paythe 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.**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
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|
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.**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 1.5.26**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 tossedfour 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 severalthousand 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** tomake 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 difficultto decide the compensation if one cannot say for sure that a loss has occurredand how much it is.**iii.** **Loss must be fortuitous or accidental** . It must be the result of an event thatmay 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.**iv.** **Sharing of losses of the few by many** can work only if a small percentage ofthe insured group suffers loss at any given period of time.**v.** **Economic feasibility:** The cost of insurance must not be high in relation tothe possible loss; otherwise the insurance would be economically unviable.**vi.** **Public policy:** Finally the contract should not be contrary to public policy andmorality.**Test Yourself 1**Which one of the following does not represent an insurable risk?I. FireII. Stolen goods
III. Burglary27IV. Loss of goods due to ship capsizing**Summary**a) The process of insurance has four elements (asset, risk, risk pooling and aninsurance contract).b) An asset may be anything that confers some benefit and is of economic valueto its owner.c) A chance of loss represents risk.d) Condition or conditions that increase the probability or severity of the lossare referred to as hazards.e) The mathematical principle, that makes insurance possible is known asprinciple 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.28#### CHAPTER C-0 3## PRINCIPLES OF INSURANCE**Chapter Introduction**In this chapter, we discuss the principles, based on which the mechanism ofinsurance 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 Fidesb) 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
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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.28#### CHAPTER C-0 3## PRINCIPLES OF INSURANCE**Chapter Introduction**In this chapter, we discuss the principles, based on which the mechanism ofinsurance 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 Fidesb) 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.29**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 nofraud 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 themcontracts 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 ofinsurance.**a)** **Material fact** has been defined as a fact that would affect the judgment of aninsurance 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 insurancecontract.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?30This 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 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 hereditaryillnesses, habits like smoking and drinking, absence from work, age,
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of premium and the terms and conditions. The insured has an obligation to
fully and accurately disclose all facts that are material to an insurancecontract.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?30This 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 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 hereditaryillnesses, habits like smoking and drinking, absence from work, age,
hobbies, financial information like income details of proposer, preexisting life insurance policies, occupation etc.**ii.** **Fire Insurance:** Construction, location/ situation of risk and usage ofbuilding, age of the building, nature of goods in premises etc.**iii.** **Marine Insurance:** Description of goods, method of packing and mode oftransit etc.**iv.** **Motor Insurance:** Description of vehicle, date of purchase and RegionalRegistration 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 statusii. All questions in the proposal form or application for insurance areconsidered 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 enquiryby underwriters, the proposer has no obligation to disclose facts like:31**i.** **Measures implemented to reduce the risk. E.g.:** The presence of a fireextinguisher**ii.** **Facts which the insured does not know or is unaware of. E.g.:** Anindividual, who had high blood pressure but was not aware about the same
at the time of taking the policy, cannot be charged with non-disclosure ofthis fact.**iii.** **Which could be discovered, by reasonable diligence.** It is not necessaryto 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 ispresent 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_
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answers were incomplete.**b.** **Duty to Disclose:** In the case of insurance contracts, the duty to disclose ispresent 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. Rajanhas 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.32At 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 aboutmaterial facts because the insurer has not raised any specific enquiry. Such
situations may also arise through evasive answers to queries raised by theinsurer.Often non-disclosure may be inadvertent (meaning that it may be made
without one’s knowledge or intention) or because the proposer thought that afact 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 ofinsurance 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 aremade without any fraudulent intention.**ii.** **Fraudulent Misrepresentation** on the other hand refers to false statementsthat are made with deliberate intent to deceive the insurer or are maderecklessly 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 followse. **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.33The 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 theintent to deceive the insurer or to induce the insurer to issue an insurancepolicy. 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.**Three essential elements of insurable interest:**i. There must be property, right, interest, life or potential liability capable ofbeing insured.ii. Such property, right, interest, life or potential liability must be the subjectmatter of insurance.iii. The insured must bear a legal relationship to the subject matter such that hestands to benefit by the safety of the property, right, interest, life or freedom
|
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(c) the date of revival of the policy or (d) the date of the rider to the policy,whichever is later.33The 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 theintent to deceive the insurer or to induce the insurer to issue an insurancepolicy. 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.**Three essential elements of insurable interest:**i. There must be property, right, interest, life or potential liability capable ofbeing insured.ii. Such property, right, interest, life or potential liability must be the subjectmatter of insurance.iii. The insured must bear a legal relationship to the subject matter such that hestands 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, afire 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 subjectmatter of insurance. Insurable interest makes an insurance contract valid andenforceable 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 policy34Mr. 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 inthem?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, whichhas 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, insurableinterest 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 inwhich case it must exist at the time of claim.35In 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
|
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|
B.
|
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|
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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 inwhich case it must exist at the time of claim.35In 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 ofnon-life insurance claims.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 motiona 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.36To 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 airconditioning 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 theclaim.**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
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
|
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C.
|
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|
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