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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
losses are customarily paid by business under fire insurance policies.Example of such losses can be – Damage to property caused by water used to extinguish fire Damage to property caused by fire brigade in execution of their duty Damage to property during its removal from a burning building to a safeplace**Test Yourself 1**Mr. Pinto contracted pneumonia as a result of lying on wet ground after a horse
riding accident. The pneumonia resulted in death of Mr. Pinto. What is the
proximate cause of the death?I. PneumoniaII. HorseIII. Horse riding accidentIV. Bad luck37**D.** **Indemnity**The Principle of Indemnity is applicable to Non-life insurance policies. **It means**
**that the policyholder, who suffers a loss, is compensated so as to put him or**
**her in the same financial position as he or she was before the occurrence of**
**the loss event** . The insurance contract guarantees that the insured would be
indemnified or compensated up to the amount of loss and no more.The philosophy is that one should not make a profit through insuring one’s assets
and recovering more than the loss. The insurer would assess the economic value
of the loss suffered and compensate accordingly.**Example**Ram has insured his house, worth Rs. 10 lakhs, for the full amount. He suffers loss
on account of fire estimated at Rs. 70,000. The insurance company would pay him
an amount of Rs. 70,000. The insured can claim no further amount.The indemnity to be paid would depend on the type of insurance one
takes.Indemnity might take one or more of the following modes of settlement: Cash payment
Repair of a damaged item
Replacement of the lost or damaged item
Reinstatement (Restoration). E.g. Rebuilding a house destroyed by fire**Diagram 2:** **Indemnity****a)** **Agreed Value:** However, there is some subject matter whose value cannot beeasily estimated or ascertained at the time of loss. For instance, it may be
difficult to put a price in the case of family heirlooms or rare artefacts.
Similarly in marine insurance policies it may be difficult to estimate the
extent of loss suffered in a ship accident half way around the world.In such instances, a principle known as the ‘Agreed Value’ is adopted. The
insurer and insured agree on the value of the property to be insured, at the38beginning of the insurance contract. In the event of total loss, the insurer
agrees to pay the agreed amount of the policy. This type of policy is known
as “ **Agreed Value Policy** ”.**b)** **Underinsurance:** Consider a situation now where the property has not been
insured for its full value. One would then be entitled to indemnity for loss
only in the same proportion as one’s insurance.Suppose the house, worth Rs. 10 lakhs has only been insured for a sum of Rs.
5 lakhs. If the loss on account of fire is Rs. 60,000, one cannot claim this
entire amount. It is deemed that the house owner has insured only to the
tune of half its value and he is thus entitled to claim just 50% [Rs. 30,000] ofthe amount of loss. This is known as underinsurance.In most types of non-life insurance policies, which deal with insurance of
property and liability, the insured is compensated to the extent of actual
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insurer and insured agree on the value of the property to be insured, at the38beginning of the insurance contract. In the event of total loss, the insurer
agrees to pay the agreed amount of the policy. This type of policy is known
as “ **Agreed Value Policy** ”.**b)** **Underinsurance:** Consider a situation now where the property has not been
insured for its full value. One would then be entitled to indemnity for loss
only in the same proportion as one’s insurance.Suppose the house, worth Rs. 10 lakhs has only been insured for a sum of Rs.
5 lakhs. If the loss on account of fire is Rs. 60,000, one cannot claim this
entire amount. It is deemed that the house owner has insured only to the
tune of half its value and he is thus entitled to claim just 50% [Rs. 30,000] ofthe amount of loss. This is known as underinsurance.In most types of non-life insurance policies, which deal with insurance of
property and liability, the insured is compensated to the extent of actual
amount of loss i.e. the amount of money needed to replace lost or damaged
property at current market prices less depreciation.**E.** **Subrogation**Subrogation means the transfer of all rights and remedies with respect to the
subject matter of insurance, from the insured to the insurer. Subrogation follows
from the principle of Indemnity. Hence, it is often called a ‘corollary’ of
Indemnity.In other words, if an insured suffers a loss and the loss has been indemnified by
the insurer, the insured’s right to get compensated by any third party for that
loss, would get shifted to the insurer. Note that the amount of damage that can
be collected by the insurance company is only to the extent of the amount paid
by the insurance company.**Important****Subrogation:** It is the process an insurance company uses to recover claim
amounts paid to a policy holder from a negligent third party.Subrogation can also be defined as surrender of rights by the insured to an
insurance company that has paid a claim against the third party.**Example**Mr. Kishore’s household goods were being carried in Sylvain Transport service.
They got damaged due to driver’s negligence, to the extent of Rs. 45,000 and the
insurer paid an amount of Rs. 30,000 to Mr. Kishore. The insurer stands subrogated
to the extent of only Rs. 30,000 and collect that amount from Sylvain Transports.39In case the matter went into litigation and the Court directed Sylvain Transports
to pay Rs.35,000 as compensation to Mr. Kishore, he is liable to pay the insurer
the claim amount of Rs 30,000 under the subrogation clause, and to keep the
balance amount of Rs 5,000 with himself.The Subrogation Clause prevents the insured from collecting more than the loss from the insurance company and from any third party. Subrogation arises only in
case of contracts of indemnity and not against benefit policies like Life Insurance
Policy or Personal Accident Policy.**Example**Mr. Suresh dies in an air crash. His family is entitled to collect the full Sum Assured
of Rs 50 lakhs from the insurer who has issued a Personal Accident Policy plus the
compensation paid by the airline, say, Rs 15 lakhs.**F.** **Contribution:**Like Subrogation, ‘Contribution’ also follows from the Principle of Indemnity.
Hence, it is also called a ‘corollary’ of Indemnity. Contribution is a principle that
arises in general insurance contracts. It tells us how the liability is to be metwhen the insured has taken insurance from more than one insurer. Contributionimplies that if the same property is insured with more than one insurance
company, the compensation paid by all the insurers together cannot exceed the
actual loss suffered. The policy holder can claim from each of the insurers only a
portion of the loss in proportion to the amount insured with each.Example: If Mr Srinivas has taken a fire policy on his house with two insurance
companies, with both of whom, he insured for the full value of Rs.12 lakhs.
Suppose a fire breaks out and he suffers a loss of Rs 3 lakhs as a result, he canclaim an amount of Rs 1.5 lakhs from each of the insurers.The Principle of Contribution applies only to indemnity policies. It does not arise
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compensation paid by the airline, say, Rs 15 lakhs.**F.** **Contribution:**Like Subrogation, ‘Contribution’ also follows from the Principle of Indemnity.
Hence, it is also called a ‘corollary’ of Indemnity. Contribution is a principle that
arises in general insurance contracts. It tells us how the liability is to be metwhen the insured has taken insurance from more than one insurer. Contributionimplies that if the same property is insured with more than one insurance
company, the compensation paid by all the insurers together cannot exceed the
actual loss suffered. The policy holder can claim from each of the insurers only a
portion of the loss in proportion to the amount insured with each.Example: If Mr Srinivas has taken a fire policy on his house with two insurance
companies, with both of whom, he insured for the full value of Rs.12 lakhs.
Suppose a fire breaks out and he suffers a loss of Rs 3 lakhs as a result, he canclaim an amount of Rs 1.5 lakhs from each of the insurers.The Principle of Contribution applies only to indemnity policies. It does not arise
in the case of Life Insurance, because there is no upper limit that can be placedon the losses suffered when there is a loss of life.**Test Yourself 2**Which among the following is an example of coercion?I. Ramesh signs a contract without having knowledge of the fine print
II. Ramesh threatens to kill Mahesh if he does not sign the contract
III. Ramesh uses his professional standing to get Mahesh to sign a contract
IV. Ramesh provides false information to get Mahesh to sign a contract40**Test Yourself 3**Which among the following options cannot be insured by Ramesh?I. Ramesh’s houseII. Ramesh’s spouseIII. Ramesh’s friendIV. Ramesh’s parents**Test Yourself 4**What is the significance of the principle of contribution?I. It ensures that the insured also contributes a certain portion of the claimalong with the insurer
II. It ensures that all the insured who are a part of the pool, contribute to theclaim made by a participant of the pool, in the proportion of the premium
paid by them
III. It ensures that multiple insurers covering the same subject matter; cometogether and contribute the claim amount in proportion to their exposure to
the subject matter
IV. It ensures that the premium is contributed by the insured in equal instalmentsover the year.**Summary**The special features of insurance policies include:i. Uberrima fides,
ii. Insurable interest,
iii. Proximate cause,
iv. Indemnity
v. Subrogationvi. Contribution**Key Terms**1. Non-Disclosure2. Misrepresentation3. Material facts4. Agreed Value5. Under Insurance41**Answers to Test Yourself****Answer 1** - The correct option is III
**Answer 2** - The correct option is II
**Answer 3** - The correct option is III
**Answer 4** - The correct option is III42## CHAPTER C-04 **FEATURES OF INSURANCE CONTRACTS****Chapter Introduction**In this chapter, we discuss the elements that govern the working and specialfeatures of an insurance contract.43**A.** **Insurance contracts – Legal aspects and special features.**The chapter also deals with the legal aspects and special features of an insurancecontract.**1.** **The Insurance Contract**Insurance involves a contractual agreement in which the insurer agrees to
provide financial protection against certain specified risks for a price or
consideration known as the premium. The contractual agreement takes the
form of an insurance policy.**2.** **Legal aspects of an insurance contract**This section looks at some features of an insurance contract and considers thelegal principles that govern insurance contracts in general.**Important**A contract is an agreement between parties, enforceable at law. The provisions
of the Indian Contract Act, 1872 govern all contracts in India, including insurancecontracts.An insurance policy is a contract entered into between two parties, viz., the
company, called the **insurer**, and the policy holder, called the **insured** and fulfils
the requirements enshrined in the Indian Contract Act, 1872.**Diagram 1:** **Insurance contract**44**B.** **Elements of a valid contract****Diagram 2:** **Elements of a valid contract**The elements of a valid contract are:**1.** **Offer and acceptance**When one person signifies to another his willingness to do or to abstain from doing
anything with a view to obtaining the assent of the other to such act, he is said
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provide financial protection against certain specified risks for a price or
consideration known as the premium. The contractual agreement takes the
form of an insurance policy.**2.** **Legal aspects of an insurance contract**This section looks at some features of an insurance contract and considers thelegal principles that govern insurance contracts in general.**Important**A contract is an agreement between parties, enforceable at law. The provisions
of the Indian Contract Act, 1872 govern all contracts in India, including insurancecontracts.An insurance policy is a contract entered into between two parties, viz., the
company, called the **insurer**, and the policy holder, called the **insured** and fulfils
the requirements enshrined in the Indian Contract Act, 1872.**Diagram 1:** **Insurance contract**44**B.** **Elements of a valid contract****Diagram 2:** **Elements of a valid contract**The elements of a valid contract are:**1.** **Offer and acceptance**When one person signifies to another his willingness to do or to abstain from doing
anything with a view to obtaining the assent of the other to such act, he is said
to make an offer or proposal. Usually, the offer is made by the proposer, and
acceptance made by the insurer.When a person to whom the offer is made signifies his assent thereto, this is
deemed to be an acceptance. Hence, when a proposal is accepted, it becomes a
promise. The acceptance needs to be communicated to the proposer whichresults in the formation of a contract.When a proposer accepts the terms of the insurance plan and signifies his/ her
assent by paying the deposit amount, which, on acceptance of the proposal, gets
converted to the first premium, the proposal becomes a policy. If any condition
is put, it becomes a counter offer. The policy bond becomes the evidence of thecontract.**2.** **Consideration**This means that the contract must contain some mutual benefit for the parties.
The premium is the consideration from the insured, and the promise to indemnify,is the consideration from the insurers.45**3.** **Agreement between the parties (Consensus Ad-Idem)**Both the parties, the insurer and the policyholder, should agree to the same thing
in the same sense. In other words, there should be “ **consensus ad-idem** ” between
both parties.**4.** **Free consent**There should be free consent while entering into a contract. Consent is said
to be free when it is not caused by Coercion/ By Force
Undue influence Fraud Misrepresentation
MistakeWhen consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is voidable.**5.** **Capacity of the parties**Both the parties to the contract must be legally competent to enter into the
contract. The policyholder must be legally an adult at the time of signing the
proposal and should be of sound mind and not disqualified under law. For
example, minors cannot enter into insurance contracts.**6.** **Legality**The object of the contract must be legal, for example, no insurance can be
had for illegal acts. Every agreement of which the object or consideration is
unlawful is void. The object of an insurance contract is a lawful object.Also one’s entering into an insurance contract should be done out of one’s
free will, without any kind of force, fear or mistake.**C.** **Paying Premium in Advance**As per Indian laws, Insurers are not allowed to assume risk unless they receive
the premium in advance. In other words, insurance protection cannot be sold oncredit basis in India.Section 64 VB of the Insurance Act 1938 states, “No risk to be assumed unless
premium is received in advance”. No insurer shall assume any risk unless and until
the premium is received in advance or is guaranteed to be paid or a deposit is
made in advance in the prescribed manner. This is an important feature of the
insurance industry in India.46The Insurance Rules, 1939, provide certain exceptions to this condition of
advance payment of premium, in respect of particular categories of insurances.
Section 59 of the Insurance Rules allows accepting premiums in instalments in
respect of Sickness Insurance, Group Personal Accident Insurance Medical
Benefits Insurance and Hospitalisation Insurance Schemes, subject to certain
conditions. Section 59 of the Insurance Rules allows relaxations for policies issued
to Government and semi-Government bodies, Fidelity Guarantee Insurance
policies covering Government and semi-Government employees, Workmen's
Compensation policies, Cash in Transit policies, and some other categories of
insurances subject to certain conditions.**Solicitation**Insurance has always been regarded as something to be purchased after a
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the premium in advance. In other words, insurance protection cannot be sold oncredit basis in India.Section 64 VB of the Insurance Act 1938 states, “No risk to be assumed unless
premium is received in advance”. No insurer shall assume any risk unless and until
the premium is received in advance or is guaranteed to be paid or a deposit is
made in advance in the prescribed manner. This is an important feature of the
insurance industry in India.46The Insurance Rules, 1939, provide certain exceptions to this condition of
advance payment of premium, in respect of particular categories of insurances.
Section 59 of the Insurance Rules allows accepting premiums in instalments in
respect of Sickness Insurance, Group Personal Accident Insurance Medical
Benefits Insurance and Hospitalisation Insurance Schemes, subject to certain
conditions. Section 59 of the Insurance Rules allows relaxations for policies issued
to Government and semi-Government bodies, Fidelity Guarantee Insurance
policies covering Government and semi-Government employees, Workmen's
Compensation policies, Cash in Transit policies, and some other categories of
insurances subject to certain conditions.**Solicitation**Insurance has always been regarded as something to be purchased after a
proper understanding the product and not just bought/ sold. Hence, insurance
is to be ‘solicited’ or asked for by the customer. Traditionally, insurers declare
that “Insurance is the subject matter of solicitation”. To elucidate, insurance
is not a ready-made product like a packet of biscuits or a bar of chocolate to
be bought/ sold outright. Customers have to discuss their insurance needs
with a person qualified for the same and based on professional advice, the
right insurance product is to be purchased. The Insurance product has to be
understood and the offering most suited to the specific needs and
requirements of the customer in terms of the policy coverage, exclusions,
terms and conditions, is to be considered.‘Solicitation’ is usually initiated when an insurer or an authorised
intermediary approaches a prospect with a view to understand his/ her
insurance needs and provides professional advice in selecting appropriate
insurance products. The prospect solicits the proper solution and provides all
requisite details to the advisor. As per regulations of IRDAI, **Insurance Agents**
are appointed by an insurer for the purpose of engaging in the solicitation
process and procuring insurance business, including business relating to the
continuance, renewal or revival of policies of insurance. Only authorised
employees of insurance companies, and specified persons of licensed
intermediaries, who are trained and authorised for the purpose can be part of
the process of solicitation and sales of insurance.**D.** **Enabling Provisions****1.** **Grace Period**Grace period is the specified period of time immediately following the
premium due date during which a payment can be made to renew or continue47a policy in force without loss of continuity benefits such as waiting periods
and coverage of pre-existing diseases. Coverage is not available for the period
for which no premium is received. The days of grace are computed from the
next day after the due date fixed for payment of the premium.For **Life insurance**, if there is no grace period, a single delay in payment can
lead to a policy lapse. This would be detrimental for the policyholder, the
insurer and the insurance industry in general. IRDAI Regulations allow a grace
period of 15 days is applicable in case of Monthly mode of Premium collection and
30 days in other modes.In respect of **Health insurance** also, certain number of days as grace period is
allowed for renewal of individual health policies. This period depends on the
policy of the company and the product offered. All continuity benefits are
maintained if the policy is renewed within the grace period. However Claims, if
any, during the break period will not be considered. As per IRDAI Regulations, the
grace period is 15 days in case of Monthly mode of Premium collection and 30
days in other modes.**Motor Policies** are usually valid for a period of one year and have to be
renewed before the due date. Grace period for paying the premium do not
apply. In case a comprehensive policy lapses for more than 90 days, the
accrued No Claim Bonus (NCB) benefit would also be lost.In the interest of smooth operation of affairs during the Covid-19 pandemic,
IRDAI permitted the following relaxations:i. In case of Life insurance policies, Insurers were asked to enhance thegrace period by additional 30 days if desired by the policyholders.ii. In case of Health insurance policies, Insurers were told to condonedelays in renewal up to 30 days without deeming such condonation as
a break in policy. Insurers were requested to contact the policyholders
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policy of the company and the product offered. All continuity benefits are
maintained if the policy is renewed within the grace period. However Claims, if
any, during the break period will not be considered. As per IRDAI Regulations, the
grace period is 15 days in case of Monthly mode of Premium collection and 30
days in other modes.**Motor Policies** are usually valid for a period of one year and have to be
renewed before the due date. Grace period for paying the premium do not
apply. In case a comprehensive policy lapses for more than 90 days, the
accrued No Claim Bonus (NCB) benefit would also be lost.In the interest of smooth operation of affairs during the Covid-19 pandemic,
IRDAI permitted the following relaxations:i. In case of Life insurance policies, Insurers were asked to enhance thegrace period by additional 30 days if desired by the policyholders.ii. In case of Health insurance policies, Insurers were told to condonedelays in renewal up to 30 days without deeming such condonation as
a break in policy. Insurers were requested to contact the policyholders
well in advance to avoid discontinuance in coverage.iii. As regards Motor Vehicle Third Party Insurance policies that fell duefor renewal and premiums could not be paid due to the Covid-19
situation, IRDAI allowed a grace period till 15th May, 2020.**2.** **Free-Look Period introduced by “IRDAI”**Insurance contracts are drafted by the insurer, and the other party has to adhere
to it if he/ she wants the insurance. Such contracts where someone has to accept
the contract as it is and cannot make any change to it are legally called Contracts
of Adhesion. Because of this one-sided situation, the Courts always make insurers48liable for any ambiguity or confusion that may arise in interpreting these termsand conditions.To reduce this one-sidedness and make insurance transactions more customerfriendly, IRDAI has built into its regulations a consumer-friendly provision called
‘Free-Look Period’ whereby, if the customer is not satisfied with any term and
conditions of the policy, he/ she can return it and get a refund. This provision
whereby policyholders are given the option of cancelling the policy within 15 days
(30 days, in case of electronic policies and policies sourced through distance
mode) after receiving the policy document, in case they are not satisfied with
the policy, has been introduced for Life Insurance and Health Insurance policies
(having a tenure of at least one year). The company has to be intimated in writing
and the premium is refunded less, proportionate risk premium for the period of
cover, expenses and charges.**Cancellation of Policies:** When policies are cancelled by the insurer, the
proportion of the premium corresponding to the expired period of insurance is
charged/ retained by the insurer and the proportion corresponding to the
unexpired period of insurance is returned to the insured, provided no claim has
been paid under the policy. Such proportionate calculation of premium is called
Pro-rata premium.When annual policies are cancelled by the insured, insurers usually charge/ retain
premiums at a higher rate and refund premiums at higher rates, instead of
calculating pro-rata premiums. This would prevent anti-selection against the
insurers and take care of the initial expenses of the insurer. Such rates are
disclosed as part of the terms and conditions of the insurance contract and
referred to as Short period scales.**Important****i.** **Coercion** - Involves pressure applied through criminal means.**ii.** **Undue influence** – using one’s position to dominate the will of anotherperson, to obtain an undue advantage over that person.**iii.** **Fraud** – inducing another to act on a false belief that is caused by arepresentation one does not believe to be true. It can arise either from
deliberate concealment of facts or through misrepresenting them.**iv.** **Mistake** - Error in one’s knowledge or belief or interpretation of a thing orevent. This can lead to an error in understanding and agreement about the
subject matter of the contract.49**Test Yourself 1**Which among the following cannot be an element in a valid insurance contract?I. Offer and AcceptanceII. CoercionIII. ConsiderationIV. Legality**Summary**i. Insurance involves a contractual agreement in which the insurer agrees toprovide financial protection against specified risks for a price or consideration
known as the premium.
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disclosed as part of the terms and conditions of the insurance contract and
referred to as Short period scales.**Important****i.** **Coercion** - Involves pressure applied through criminal means.**ii.** **Undue influence** – using one’s position to dominate the will of anotherperson, to obtain an undue advantage over that person.**iii.** **Fraud** – inducing another to act on a false belief that is caused by arepresentation one does not believe to be true. It can arise either from
deliberate concealment of facts or through misrepresenting them.**iv.** **Mistake** - Error in one’s knowledge or belief or interpretation of a thing orevent. This can lead to an error in understanding and agreement about the
subject matter of the contract.49**Test Yourself 1**Which among the following cannot be an element in a valid insurance contract?I. Offer and AcceptanceII. CoercionIII. ConsiderationIV. Legality**Summary**i. Insurance involves a contractual agreement in which the insurer agrees toprovide financial protection against specified risks for a price or consideration
known as the premium.
ii. A contract is an agreement between parties, enforceable at law.iii. The elements of a valid contract include:Offer and acceptanceConsideration,Consensus ad-idem,- Free consentCapacity of the parties andLegality of the object**Key Terms**1. Offer and Acceptance2. Lawful consideration3. Consensus ad idem**Test Yourself 2**During the Free-look period, if the policyholder, who has bought a policy through
an Agent, disagrees to any of its terms and conditions, he/ she can return it and
get a refund subject to the following conditions:I. He/ she can exercise this option within 15 days of receiving the policydocumentII. He/ she has to communicate to the company in writing
III. The premium refund will be adjusted for proportionate risk premium for theperiod on cover, expenses incurred by the insurer on medical examination and
stamp duty chargesIV. All the above50**Test Yourself 3**If the policyholder has bought a policy and does not want it, he/ she can return
it during the _________ period, and get a refund.I. Free evaluationII. Free-lookIII. CancellationIV. Free trial**Answers to Test Yourself****Answer 1** - The correct option is II.
**Answer 2** - The correct option is IV.
**Answer 3** - The correct option is II.51## CHAPTER C-05## UNDERWRITING AND RATING**Chapter Introduction**In this chapter you will learn the basics of underwriting and rating. You will learn
about the different methods of dealing with hazards in the process of rating of
risks. You will be able to appreciate the common aspects of underwriting, product
approval and rating.**Learning Outcomes**After studying this chapter, you should be able to:1. Define the basics of underwriting2. Understand the basics of product approvals in India3. Appreciate rating factors and the importance of ratemaking52**A.** **Basics of Underwriting**In the previous chapters, we have seen that the concept of insurance involves
managing risk through pooling. Insurers create a pool consisting of premiums that
are made by several individuals/ commercial/ industrial firms/ organizations.This process of understanding risks, classifying risks, identifying which category
they fall into, **deciding whether to accept the risk or not** and if so, how much
premium the insurer would require to accept the risk and whether any extra
conditions are to be imposed on the risk - all these are part of **underwriting** .It is also important to know what rate is to be charged and how the rates aremade.**Definition**Underwriting is the process of determining whether a risk offered for insurance
is acceptable, and if so, at what rates, terms and conditions.Underwriting comprises the following steps:i. Assessment and evaluation of hazard and risk in terms of frequency andseverity of lossii. Formulation of policy coverage and terms and conditionsiii. Fixing of rates of premiumThe underwriter decides on whether or not to accept the riskThe next step would be to decide the **rates, terms and conditions** under which
the risk is to be accepted.Underwriting skills are acquired through a continuous learning process involving
adequate training, field exposure and deep insights. To be a fire insurance
underwriter one needs to have a good knowledge of the likely causes of fire,
impact of fire on various physical goods and property, the process involved in an
industry, geography, climatic conditions etc.Similarly a marine insurance underwriter must be aware about port/ road
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Important
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Final IC 38 -IMF_Composite -English_025
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premium the insurer would require to accept the risk and whether any extra
conditions are to be imposed on the risk - all these are part of **underwriting** .It is also important to know what rate is to be charged and how the rates aremade.**Definition**Underwriting is the process of determining whether a risk offered for insurance
is acceptable, and if so, at what rates, terms and conditions.Underwriting comprises the following steps:i. Assessment and evaluation of hazard and risk in terms of frequency andseverity of lossii. Formulation of policy coverage and terms and conditionsiii. Fixing of rates of premiumThe underwriter decides on whether or not to accept the riskThe next step would be to decide the **rates, terms and conditions** under which
the risk is to be accepted.Underwriting skills are acquired through a continuous learning process involving
adequate training, field exposure and deep insights. To be a fire insurance
underwriter one needs to have a good knowledge of the likely causes of fire,
impact of fire on various physical goods and property, the process involved in an
industry, geography, climatic conditions etc.Similarly a marine insurance underwriter must be aware about port/ road
conditions, problems encountered by cargo/ goods in transit or storage, ships andtheir seaworthiness and so on.A health underwriter needs to understand the risk profile of the insured, age,
medical aspects, fitness levels and family history and measure the effect of each
factor affecting the risk.53**Sources of information for underwriting**The first stage in any numerical (or statistical) analysis is the collection of data.
When pricing a risk, an underwriter should gather as much information as possibleto aid accurate assessment.**Sources of information are:**i. **Proposal form or underwriting presentation**ii. **Risk surveys**iii. **Historic claims experience data:** For some classes of business, such aspersonal and motor lines, underwriters often utilise historic claims
experience data to provide an indication of the likely future claims
experience, and to arrive at a suitable premium **.****Underwriting, equity and business sustainability**The need for careful underwriting and risk classification in insurance arises from
the simple fact that **all risks are not equal** . Each risk thus needs to be
appropriately assessed and priced in accordance with the likelihood of loss
occurrence and severity.Since all risks are not equal, it would not be proper to ask all those who are to be
insured, to pay equal premium. **The purpose of underwriting is to classify risks**
**so that, depending on their characteristics and degree of risk posed, an**
**appropriate rate of premium may be charged.** It is important for the
underwriter to ensure that the risk evaluation is done properly and the premium
charged is neither too low to cover the risk nor too high to make it noncompetitive.The main features of underwriting are as followsi. To **identify risk** based upon the characteristicsii. To **determine the level** of risk presented by the proposerThe objectives of underwriting are achieved, in short, by deciding the level of
acceptability, adequacy of premium and other terms.**B.** **Product Filing with IRDAI**Every Insurance product needs to be filed with IRDAI for approval before it is
offered for sale. IRDAI allots a Unique Identification number (UIN) for every
insurance product. Once products are introduced in the market, there are
guidelines to be followed for withdrawing the product as well.**1.** The Regulator asks for a clear commitment by the Board of the insurer that itis willing to accept the risks in the policy and agrees to pay the claims. It also54asks the insurer to commit that the policy wordings are fair to the customer
and that the prices are decided on a scientific basis.**2.** The insurer should plan for the possibility of withdrawal of the products in thefuture and the options that would be available to the policyholder on such
withdrawal of the product.**3.** The withdrawn product shall not be offered to the prospective customers.**C.** **Basics of Ratemaking**Insurance is based on transfer of risk to the insurer. By purchasing an insurance
policy, the insured is able to reduce the impact of financial losses arising from
the peril against which the property is insured. The Insurer needs to adopt a
process of calculating a price to cover the future cost of insurance claims and
expenses, including a margin for profit. This is known as **ratemaking.****A rate is the price of a given unit of insurance.** For example, a rate may be
expressed as Rs.1.00 per mile (per thousand) sum assured for earthquake
coverage. Each rate is established after looking at past trends and changes in the
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Definition
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Final IC 38 -IMF_Composite -English_026
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and that the prices are decided on a scientific basis.**2.** The insurer should plan for the possibility of withdrawal of the products in thefuture and the options that would be available to the policyholder on such
withdrawal of the product.**3.** The withdrawn product shall not be offered to the prospective customers.**C.** **Basics of Ratemaking**Insurance is based on transfer of risk to the insurer. By purchasing an insurance
policy, the insured is able to reduce the impact of financial losses arising from
the peril against which the property is insured. The Insurer needs to adopt a
process of calculating a price to cover the future cost of insurance claims and
expenses, including a margin for profit. This is known as **ratemaking.****A rate is the price of a given unit of insurance.** For example, a rate may be
expressed as Rs.1.00 per mile (per thousand) sum assured for earthquake
coverage. Each rate is established after looking at past trends and changes in the
current environment that may affect potential losses in the future.**Note that rates are not the same as premiums.****Premium = (Sum Insured) x (rate)****Example**Taking an example of health insurance, numerical or percentage assessments are
made on each component of the risk. Factors like age, race, occupation, habits
etc. are examined and scored numerically based on predetermined criteria.The amount of premium to be paid by each depends on a rate, which is
determined by two factors; The probability of loss due to a loss event (caused by an insured peril) and The estimated amount of loss that may arise due to the loss event**Example**Assume the average amount of a house being destroyed by fire is Rs 1,00,000.The probability of the loss of a house being destroyed by fire 1 out of 100 [or
0.01]. That is, the experience is that out of a 100 insured houses, one house gets
destroyed by fire.The expected average loss would be Rs.1,00,000 x 0.01 = Rs. 1000.So, Insurers would need to charge a minimum of Rs.1000 to insure a house of
Rs.1,00,000 value.55How can the insurer ensure that the pool is sufficient to compensate for the losses
that are actually incurred?As seen earlier, the whole mechanism of insurance involves pooling of many
similar risks so that the probability of the number of losses (frequency) as well as
the extent of loss (severity) becomes predictable. This principle, referred to as
‘the law of large numbers’ states that as the sample size grows, the results come
closer to the expected value. Insurance companies need to sell more policies to
more and more people to make their expectations/ predictions work.An example is that if a coin is tossed, the chances of getting ‘heads’ or ‘tails’ is
50:50. However, if the coin is tossed only once, the result can be 100% heads and
0% ‘tails’ or 0% ‘heads’ and or 100% tails. However, if one tosses a coin many
times, the chance of the average count of ‘heads’ and ‘tails’ being 100% and 0%
reduces and will get closer to 50:50.**Example**In the field of property insurance, the chances of a wooden structure catching
fire are more than stone structures; hence, a higher premium is required to insurethe wooden structure.The same concept applies to Life and Health Insurance also. An individual
suffering from high blood pressure or diabetes has higher chances of suffering aheart attack.**Test Yourself 1**Identify the two factors that affect insurance ratemaking.I. Probability and severity of riskII. Source and nature of riskIII. Source and timing of risk
IV. Nature and impact of risk**1.** **Determining the rate of premium**The pure rate of premium is arrived at on the basis of past loss experience.
Therefore, statistical data regarding past losses is most essential for purposes of
calculating rates. To fix the rates, it is necessary to give a ‘mathematical value’to the risks.**Example**If loss experience of a large number of motor cycles is collected for a period of
say 10 years, we will get the sum total of the losses resulting from damage to the
vehicles. By expressing this amount of loss as percentage of the total value of56motor cycles we can fix the ‘mathematical value’ of the risk. This may be
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C.
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Final IC 38 -IMF_Composite -English_027
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fire are more than stone structures; hence, a higher premium is required to insurethe wooden structure.The same concept applies to Life and Health Insurance also. An individual
suffering from high blood pressure or diabetes has higher chances of suffering aheart attack.**Test Yourself 1**Identify the two factors that affect insurance ratemaking.I. Probability and severity of riskII. Source and nature of riskIII. Source and timing of risk
IV. Nature and impact of risk**1.** **Determining the rate of premium**The pure rate of premium is arrived at on the basis of past loss experience.
Therefore, statistical data regarding past losses is most essential for purposes of
calculating rates. To fix the rates, it is necessary to give a ‘mathematical value’to the risks.**Example**If loss experience of a large number of motor cycles is collected for a period of
say 10 years, we will get the sum total of the losses resulting from damage to the
vehicles. By expressing this amount of loss as percentage of the total value of56motor cycles we can fix the ‘mathematical value’ of the risk. This may be
expressed in the formula given below:Let us suppose that: The Value of a motor cycle: Rs. 50,000/ Loss experience: Out of 1000 motor cycles, 50 motor cycles get stolen over10 years
On an average, 5 motor cycles become total losses due to theft every yearApplying the formula, the result will be:Losses per year (Rs. 50,000 X 5) = Rs. 2,50,000**Total Values of 1000 motor vehicles (Rs.** 50,000 X 1000) **= Rs. 5,00,00,000**This means that average loss percentage per vehicle (L/ V) x 100= [2,50,000/
5,00,00,000] x 100 = 0.5%Therefore the rate of premium that a motor cycle owner pays is half a percent of
Rs. 50,000/ - i.e. Rs. 250/ - per year. This is called the **‘Pure’ premium,** also
known as ‘Burning Cost’.At the rate of Rs. 250 per motor cycle, Rs. 2.5 lakhs is collected which is paid outin claims on total losses of 5 vehicles.If the pure premium, which is arrived above, is collected it would constitute a
fund which will be sufficient only to pay for losses.In the example above we can see that there is no surplus. But insurance
operations also involve costs of administration (expenses of management) and
costs of procurement of business (agency commission). It is also necessary to
provide a margin for unexpected heavy losses.Finally, since insurance is transacted on a commercial basis, like any other
business, it is necessary to provide for a margin of profit which is a return on the
capital invested in the business.**Therefore, the ‘pure premium’ is suitably loaded or increased by adding**
**percentages to provide for expenses, reserves and profits.****The final rate of premium will consist of the following components:** Loss payments
Loss expenses (e.g. survey fees)
Agency commission
Expenses of management57 Margin for reserves for unexpected heavy losses e.g. 7 total losses against5 expected
Margin for profitsBy taking all the relevant rating factors into consideration, one can ensure the
rates are adequate, excessive or unfairly discriminatory as between risks of
similar type and quality.**Test Yourself 2**What is pure premium?I. Premium sufficiently big enough to pay for losses only
II. Premium applicable to marginal members of the society
III. Premium after loading for administrative costs
IV. Premium derived from the most recent loss experience period**2.** **Deductible**‘Deductible’ or ‘excess’ is a cost-sharing provision between an insurer and
insured. Deductibles provide that only the claims in excess of a particular
threshold are payable by the insurer. In other words, the insurer will not be liable
for claims below a specified level. The level or the threshold would be set as a
fixed amount, or a percentage or even as a specified period of time (when it is
called time-excess.) In case of health policies, there could be a condition that
claims would be payable only if the hospitalization is beyond a specified number
of days/ hours. Deductibles are not used in life policies.In products such as property, motor and home insurances, deductibles are
predetermined amounts that the insured must bear towards an indemnity claim.
Deductibles can be compulsory for some policies or voluntary. Insurers generally
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Test Yourself 1
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Final IC 38 -IMF_Composite -English_028
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similar type and quality.**Test Yourself 2**What is pure premium?I. Premium sufficiently big enough to pay for losses only
II. Premium applicable to marginal members of the society
III. Premium after loading for administrative costs
IV. Premium derived from the most recent loss experience period**2.** **Deductible**‘Deductible’ or ‘excess’ is a cost-sharing provision between an insurer and
insured. Deductibles provide that only the claims in excess of a particular
threshold are payable by the insurer. In other words, the insurer will not be liable
for claims below a specified level. The level or the threshold would be set as a
fixed amount, or a percentage or even as a specified period of time (when it is
called time-excess.) In case of health policies, there could be a condition that
claims would be payable only if the hospitalization is beyond a specified number
of days/ hours. Deductibles are not used in life policies.In products such as property, motor and home insurances, deductibles are
predetermined amounts that the insured must bear towards an indemnity claim.
Deductibles can be compulsory for some policies or voluntary. Insurers generally
charge lower premiums when the insured voluntarily opt for higher deductibles.
An agent must examine how specific deductibles work and inform the insured
whether the deductible is applicable on a ‘per year’ or ‘per event’ basis.There are various reasons for having deductibles. Corporate customers covering
factories, multiple cargo consignments, large groups of employee, public liability
exposures etc. and having huge amounts of Sum Insured, may prefer to bear small
claims themselves and avoid the documentation to prove claims. For example, a
large factory owner paying lakhs or rupees as premium may not be bothered about
a minor repair cost of a machine amounting to around Rs.2,000.Some type of policies may need the insured also to bear some part of the loss to
ensure that he/ she takes due care. For instance, health insurers may insist on a
deductible so that insured would not overspend on costly hospital rooms just
because insurance is there. Some Insurers also may not prefer spending time on58processing small claims. Also, in certain situations, insurers may not want to get
exposed to the financial stress caused by accumulation of a large number of small
losses at one location. For example, a small flood in an industrial estate area can
cause many low value claims from all the warehouses in the area.**Franchise:** Franchise refers to a threshold set, usually as a percentage of the sum
insured, below which no claim is admissible, as in the case of deductibles.
However, when the claim amount is beyond the franchise limit, the entire claim
is admissible by the insurer. In other words, franchise determines the minimum
threshold of the insurance companies' financial responsibility. Franchise will
apply to the policy in the same way and for the same reasons as a deductible in
case of claims below the threshold, but in the event of a claim exceeding the
franchise, the full amount of the loss will be paid.**D.** **Rating factors**The relevant elements that are used to add up the rates and make the rating plan
are referred to as **rating factors** . Insurers use ‘rating factors’ to determine the
risk and to decide the price they will charge. The Insurer uses his assessments to establish a base rate. The Insurer then adjusts this rate with discounts applied for positivefeatures such as superior fire protection on property risk and loadings
applied for adverse features such as presence of inflammable materials in
the premises. In Life Insurance the usual practice is to apply loading for adverse health,habits, heredity or occupational factors.**Key Terms**- Deductibles- Franchise**Answers to Test Yourself****Answer 1** - The correct option is I.**Answer 2** - The correct option is I.59## CHAPTER C-06## CLAIMS PROCESSING**Chapter Introduction**The insured get to taste the benefit of insurance only when they are affected by
losses. The entire insurance industry is sensitive to the losses faced by insured
and try to settle the claims that arise as amicably as possible and as fast as
possible.After studying this chapter, you should be able to understand:1. Claims settlement2. Importance of claim procedures60**A.** **Loss Assessment and Claim settlement**Claims Assessment (Loss Assessment) is the process of determining whether the
loss suffered by the insured is covered by the insurance policy, i.e. the loss does
not fall under any exclusion and there is no breach of warranty.Settlement of claims has to be based on considerations of fairness. For anInsurance company, expeditious settlement of claim is the benchmark of
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Test Yourself 2
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Final IC 38 -IMF_Composite -English_029
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the premises. In Life Insurance the usual practice is to apply loading for adverse health,habits, heredity or occupational factors.**Key Terms**- Deductibles- Franchise**Answers to Test Yourself****Answer 1** - The correct option is I.**Answer 2** - The correct option is I.59## CHAPTER C-06## CLAIMS PROCESSING**Chapter Introduction**The insured get to taste the benefit of insurance only when they are affected by
losses. The entire insurance industry is sensitive to the losses faced by insured
and try to settle the claims that arise as amicably as possible and as fast as
possible.After studying this chapter, you should be able to understand:1. Claims settlement2. Importance of claim procedures60**A.** **Loss Assessment and Claim settlement**Claims Assessment (Loss Assessment) is the process of determining whether the
loss suffered by the insured is covered by the insurance policy, i.e. the loss does
not fall under any exclusion and there is no breach of warranty.Settlement of claims has to be based on considerations of fairness. For anInsurance company, expeditious settlement of claim is the benchmark of
efficiency for its services. Each company has internal guidelines about time taken
in claims processing, which its employees follow.This is generally known by the term “Turnaround time” (TAT). Some insurers have
also put in place, facility for the insured to check claim status online from time
to time. Some insurance companies have also set up claims hub for speedy
processing of claims.**Important aspects in an insurance claim**Although most companies are bound by their TAT it is important for an agent to
know the aspects that are looked into for settling a claim. Six of the most
important aspects for Non-life claims are given below.i. Whether the loss causing event is within the scope of the policyii. Whether the insured has complied with his part of the policy conditionsiii. Compliance with warranties. The survey report would indicate whether or notwarranties have been complied with.iv. Observance of utmost good faith by the proposer, during the currency of thepolicy.v. On the occurrence of a loss, the insured is expected to act as if he isuninsured. In other words, he has a duty to take measures to minimise theloss.vi. Determination of the amount payable. The amount of loss payable is subjectto the sum insured. However, the amount payable will also depend upon the
following: The extent of the insured’s insurable interest in the property affected
The value of salvage
Application of underinsurance
Application of contribution and subrogation conditionsIn the matter of claims relating to life insurance, the insurer checks whether1) Conditions of policy have not been breached
2) Utmost good faith has been followed and613) No material facts have been concealed fraudulently.**B.** **Categories of claim**Insurance Claims fall into the following categories:**i.** **Standard claims**These are claims which are clearly within the terms and conditions of the policy.
The assessment of claim is done keeping in view scope and the sum insured opted
for and other methods of indemnity laid down for various classes of insurance.**ii.** **Condition of average or average clause**This is a condition in some policies which penalises the insured for insuring his
property at a sum insured less than its actual value known as underinsurance. In
the event of a claim the insured gets an amount that is proportionately reducedfrom his actual loss in accordance to the amount underinsured. Such situationsoccur more in the case of non-life insurance.**iii.** **Act of God perils - Catastrophic losses**Natural perils like storm, cyclone, flood, inundation, and earthquake are termed
as “Act of God” perils. These perils may result in losses to many policies of insurer
in the affected region. Surveyors are appointed for assessment of certain
categories of non-life insurance claims.In such major and catastrophic losses, the surveyor is asked to proceed to the loss
site immediately for an early assessment and loss minimisation efforts.
Simultaneously, insurers’ officials also visit the scene of loss particularly when
the amount involved is large. The purpose of the visit is to obtain an immediate,
on the spot idea of the nature and extent of loss.Preliminary reports are also submitted if the surveyors face some problems in
regards to the assessment and may desire guidance and instructions from insurers
who are thus given an opportunity to discuss the issues with the insured, ifnecessary.**iv.** **On account payment**In Non-life insurance claims, apart from preliminary reports, interim reports may
be submitted from time to time where repairs and/ or replacements are made
over a long period. Interim reports also give the insurer an idea of the
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Key Terms
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Final IC 38 -IMF_Composite -English_030
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as “Act of God” perils. These perils may result in losses to many policies of insurer
in the affected region. Surveyors are appointed for assessment of certain
categories of non-life insurance claims.In such major and catastrophic losses, the surveyor is asked to proceed to the loss
site immediately for an early assessment and loss minimisation efforts.
Simultaneously, insurers’ officials also visit the scene of loss particularly when
the amount involved is large. The purpose of the visit is to obtain an immediate,
on the spot idea of the nature and extent of loss.Preliminary reports are also submitted if the surveyors face some problems in
regards to the assessment and may desire guidance and instructions from insurers
who are thus given an opportunity to discuss the issues with the insured, ifnecessary.**iv.** **On account payment**In Non-life insurance claims, apart from preliminary reports, interim reports may
be submitted from time to time where repairs and/ or replacements are made
over a long period. Interim reports also give the insurer an idea of the
development of assessment of loss. It also helps in recommendation of "On
account payment" of the claim if desired by the insured. This usually happens if
the loss is large and the completion of assessment may take some time.If the claim is found to be in order, payment is made to the claimant and entries
made in the company records. Appropriate recoveries are made from the co62insurers and reinsurers, if any. In some cases, the insured may not be the person
to whom the money is to be paid.**v.** **Discharge vouchers**Settlement of the claim is made only after obtaining a discharge under the policy.
A sample of discharge receipt for claims (under personal accident insurance) for
injuries is worded along the following lines: (may vary from company to company)Name of the InsuredClaim No. Policy No.Received from the Company Ltd.The sum of Rs. ___________ in full and final settlement of compensation due
to me/ us on account of injuries sustained by me/ us due to accident which
occurred on or about the___________ I/ we give this discharge receipt to the
Company in full and final settlement of all my/ our claim present or future
arising directly or indirectly in respect of the said claim.Date (Signature)vi. **Post settlement action**The action taken after settlement of the non-life claim in relation to underwritingvaries from one class of business to another.**Example**Sum insured under a fire policy stands reduced to the extent of the amount of
claim paid. However, it can be reinstated on payment of pro-rata premium,
which is deducted from the amount of claim paid.On payment of the capital sum insured under a personal accident policy, the
policy stands cancelled.Similarly, payment of a claim under individual fidelity guarantee policy
automatically terminates the policy.**vii.** **Salvage**Salvage generally refers to damaged property. On payment of loss, the salvage
belongs to insurers.**Example**When motor claims are settled on total loss basis, the damaged vehicle is taken
over by insurers. Salvage can also arise in other non-life insurances like fire
claims, marine cargo claims etc.63Salvage is disposed of according to the procedure laid down by the companies for
the purpose. Surveyors, who have assessed the loss, will also recommend methods
of disposal.**viii.** **Recoveries**After settlement of claims, the insurers under subrogation rights applicable to
insurance contracts, are entitled to the rights and remedies of the insured and to
recover the loss paid from a third party who may be responsible for the loss under
respective laws applicable. Thus, insurers can recover the loss from shipping
companies, railways, road carriers, airlines, port trust authorities etc.**Example**In the case of non-delivery of consignment, the carriers are responsible for the
loss. Similarly, the port trust is liable for goods which are safely landed but
subsequently missing. For this purpose, a letter of subrogation duly stamped isobtained from the insured before the settlement of the claim.**ix.** **Disputes related to claims**Despite best efforts, there could be delay in payment, non-payment (repudiation)
of the claim, or the claim being admitted for a lesser amount, which might lead
to dissatisfaction and dispute between Insurer and the insured.Apart from these, the most common reasons, to name a few are: Non-disclosure of material facts Lack of coverage Loss caused by excluded perils Lack of adequate sum insured Breach of warranty Issues regarding quantum due to underinsurance, depreciation, etc.All this could cause considerable grief to the insured at a time when he is already
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On account payment
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Final IC 38 -IMF_Composite -English_031
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respective laws applicable. Thus, insurers can recover the loss from shipping
companies, railways, road carriers, airlines, port trust authorities etc.**Example**In the case of non-delivery of consignment, the carriers are responsible for the
loss. Similarly, the port trust is liable for goods which are safely landed but
subsequently missing. For this purpose, a letter of subrogation duly stamped isobtained from the insured before the settlement of the claim.**ix.** **Disputes related to claims**Despite best efforts, there could be delay in payment, non-payment (repudiation)
of the claim, or the claim being admitted for a lesser amount, which might lead
to dissatisfaction and dispute between Insurer and the insured.Apart from these, the most common reasons, to name a few are: Non-disclosure of material facts Lack of coverage Loss caused by excluded perils Lack of adequate sum insured Breach of warranty Issues regarding quantum due to underinsurance, depreciation, etc.All this could cause considerable grief to the insured at a time when he is already
suffering from financial constraints arising due to losses. In order to reduce his
sufferings, grievance redressal and dispute handling procedures are well laid out
in the policy itself. Policies of fire or property have the condition of “Arbitration”
in the policy itself.**C.** **Arbitration**Arbitration is a method of settling disputes arising out of contracts. Arbitration is
done in accordance with the provisions of the Arbitration and Conciliation Act,
1996. The normal method of enforcing a contract or settling a dispute there under
would be to go to a court of law. Such litigation, however, involves considerable
delay and expense. The Arbitration Act allows the parties to submit disputes64under a contract to the more informal, less costly and private process ofarbitration.Arbitration may be done by a single arbitrator or by more than one, chosen by
the parties to the dispute themselves. In the event of a single arbitrator, the
parties have to agree about that person. Many commercial insurance policies
contain an **arbitration clause** stating that disputes will be subject to arbitration.
Fire and most miscellaneous policies also contain an arbitration clause which
provides that if the liability under the policy is admitted by the company, and
there is a difference concerning the quantum to be paid, such a difference must
be referred to arbitration. Normally the arbitrator’s decision is considered final
and binding on both the parties.The wording of the condition varies from policy to policy. Generally, it providesas follows:i. The dispute is submitted to the decision of a single arbitrator to be appointedby the parties, or in the event of any disagreement between them upon
appointment of a single arbitrator, to the decision of two arbitrators each
appointed by the parties.ii. These two arbitrators shall appoint an Umpire, who presides at the meetings.The procedure during these meetings resembles that of a court of law. Each
party states his case, if necessary, with the help of a counsel and witnessesare examined.iii. If the two arbitrators do not agree on a decision, the matter is submittedbefore the Umpire, who makes his award.iv. Costs are awarded at the discretion of the arbitrator/ arbitrators or Umpiremaking the award.Disputes relating to question of liability are to be settled through litigation.**Example**If the insurers contend that the loss is not payable because it is not covered under
the policy, the matter has to be decided by a Court of Law. Again, if the insurers
refuse to pay the claim on the ground that the policy is void because it was
obtained through fraudulent non-disclosure of material facts (breach of the legal
duty of ‘utmost good faith’), the issue has to be resolved through litigation.**D.** **Other dispute resolution mechanisms**As per IRDAI regulations, all policies have to mention about the grievanceredressal mechanism available to the insured in the event the insured isdissatisfied with the service of the insurer for any reason.65In case of claims under personal lines of business, a dissatisfied insured can
approach Insurance Ombudsman. The procedure is discussed in detail in Chapter
9. The Office details of Insurance Ombudsman are given in the policy. Decision of
Ombudsman is binding on Insurer but not on insured.Matters like the financial authority and the limitations of Ombudsmen are also
discussed in detail in Chapter 9.**Test Yourself 1**Which of the following activities would not be categorised under professionalsettlement of claims?I. Seeking information relating to the cause of the loss
II. Approaching the claim with a prejudice
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refuse to pay the claim on the ground that the policy is void because it was
obtained through fraudulent non-disclosure of material facts (breach of the legal
duty of ‘utmost good faith’), the issue has to be resolved through litigation.**D.** **Other dispute resolution mechanisms**As per IRDAI regulations, all policies have to mention about the grievanceredressal mechanism available to the insured in the event the insured isdissatisfied with the service of the insurer for any reason.65In case of claims under personal lines of business, a dissatisfied insured can
approach Insurance Ombudsman. The procedure is discussed in detail in Chapter
9. The Office details of Insurance Ombudsman are given in the policy. Decision of
Ombudsman is binding on Insurer but not on insured.Matters like the financial authority and the limitations of Ombudsmen are also
discussed in detail in Chapter 9.**Test Yourself 1**Which of the following activities would not be categorised under professionalsettlement of claims?I. Seeking information relating to the cause of the loss
II. Approaching the claim with a prejudice
III. Ascertaining whether the loss was a result of an insured peril
IV. Quantifying the amount payable under the claim**Answers to Test Yourself****Answer 1** - The correct option is II.**Key Terms**Turn Around TimeSalvageRecoveriesClaims Assessment66## CHAPTER C-07## DOCUMENTATION**Chapter Introduction**In the insurance industry we deal with a large number of forms and documents.
These are required for the purpose of bringing clarity in the relationship between
the insured and the insurer. In this chapter, we shall deal with the various
documents that are involved at the proposal stage and their significance.**After learning this Chapter you will be able to:**Understand proposal stage documentation and its importanceFamiliarize with the purposes of the ProspectusUnderstand the importance of the Proposal formAppreciate Anti-Money Laundering (AML), Know Your Customer (KYC) norms
and the important documents, commonly applicable for practically all
policiesImportance of Age Proof and acceptable documents.67**A.** **Prospectus**Prospectus is a proposal stage document. The prospectus is a formal legal
document used by insurance companies that provides details about the product.
It can mean a document issued by the insurer in physical, electronic or any other
format to sell or promote insurance products. For this purpose, Insurance
products would also include the add-on covers/ riders offered, if any. The
prospectus is like an introductory document which helps the prospective
policyholder to get familiar with the company’s products.As per IRDAI’s (Protection of Policyholders’ Interests) Regulations, 2017 the
prospectus should contain all facts that are necessary for a prospective
policyholder to make an informed decision regarding purchase of a policy. It
should contain the following for each plan of insurance:The Unique Identification Number (UIN) allotted by the Authority for the
concerned insurance product- The extent of insurance coverThe Scope of benefits/ entitlements – guaranteed and non-guaranteedWarranties, exclusions/ exceptions of the insurance cover with
explanations- The terms and conditions of the insurance coverDescription of the contingency or contingencies to be covered byinsuranceThe class or classes of lives or property eligible for insurance under the
terms of such prospectusWhether the plan is participative or non-participativeThe allowable Add-on covers (also called Riders in Life insurance) on the productand their benefits are also stated.Other important information which a Prospectus includes:1. Any differences in covers and premium. E.g. for different age groups or fordifferent entry ages
2. Renewal terms of the policy
3. Terms of cancellation of policy under certain circumstances
4. The details of any discounts or loading applicable under differentcircumstances5. The possibility of any revision or modification of the terms of the policyincluding the premium686. Any incentives to reward policyholders for early entry, continued renewals,favourable claims experience etc. with the same insurer.
7. Prospectus shall necessarily contain the product UIN allotted by IRDAI
8. IRDAI Regulations mandate that Prospectus shall contain a copy of Section41. This section prohibits any direct or indirect inducement to any person
for buying a new insurance, continuing or renewing any kind of insurance
relating to lives or property in India, including any rebate of the whole or
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terms of such prospectusWhether the plan is participative or non-participativeThe allowable Add-on covers (also called Riders in Life insurance) on the productand their benefits are also stated.Other important information which a Prospectus includes:1. Any differences in covers and premium. E.g. for different age groups or fordifferent entry ages
2. Renewal terms of the policy
3. Terms of cancellation of policy under certain circumstances
4. The details of any discounts or loading applicable under differentcircumstances5. The possibility of any revision or modification of the terms of the policyincluding the premium686. Any incentives to reward policyholders for early entry, continued renewals,favourable claims experience etc. with the same insurer.
7. Prospectus shall necessarily contain the product UIN allotted by IRDAI
8. IRDAI Regulations mandate that Prospectus shall contain a copy of Section41. This section prohibits any direct or indirect inducement to any person
for buying a new insurance, continuing or renewing any kind of insurance
relating to lives or property in India, including any rebate of the whole or
part of the commission payable on the policy.In particular the prospectus informs the proposer about the availability of facilityfor nomination.**Test Yourself 1**Which of the following it not usually part of the insurance prospectus?I. Name of OmbudsmanII. Date of Scope of benefitsIII. The EntitlementsIV. The Exceptions**B.** **Proposal Form**The insurance policy is a legal contract between the insurer and the policyholder.
As required for any contract, it has a proposal and its acceptance.The “Proposal form” is the application document that is used for making a
proposal. It is a form to be filled in by the proposer in written or electronic or
any other format approved by the Authority. It contains all information required
by the insurer to decide whether to accept or reject to cover the risk. In case the
risk is accepted, the insurer can on the basis of this information, decide the rates,
terms and conditions of the cover to be granted.The Principle of Utmost Good Faith and the Duty of Disclosure of material
information begin with the Proposal Form for insurance. The proposer must
provide all information correctly and completely as this document becomes the
basis of granting insurance and any wrong or concealed information could resultin denial of claim.This duty to disclose continues beyond the proposal stage even after finalizing
the insurance contract. That is, any material change that happens anytime during
the period of insurance needs to be disclosed in non-life policies.Information collected from the Proposal Form during the course of solicitation of
an insurance policy or issuance of an insurance policy are confidential and should69not be shared with any third party. Where a proposal deposit is refundable to a
prospect for any reason, the same shall be refunded within 15 days from the date
of underwriting decision on the proposal.As per IRDAI guidelines, it is the duty of the insurer to furnish to the insured, free
of charge, within 30 days of the acceptance of a proposal, a copy of the proposal
submitted by the Insured. The agent is expected to keep track of these timelines,
follow up internally and communicate with the prospect/ insured as and when
required by way of customer service.**a)** **Proposal Form - Details**The proposal form is first stage of documentation through which the insuredinforms the insurer: Who he/ she is What kind of insurance he/ she needs Details of what he/ she wants to insure and For what period of time Details of the risk (E.g., for Life and Health insurances – details of healthor any ailments suffered are to be given) Details would include the monetary value proposed on the subject matterof insurance and all **material facts** connected with the proposedinsurance.In other words, the Proposal form collects details on the proposer’s identity such
as name, father’s name, address and other identifying inputs. To determine the
true identity of their customers, documents like address proof, PAN card,
photographs etc. are collected with the proposal.In respect of Life and Health insurances, details of the proposers’ family members
(including parents) indicating their longevity, status of health and ailments
suffered by any of them are collected. Depending on the product, the medical
details of the life proposed for insurance, personal characteristics and his/ her
personal history of disease may also be asked for.Details of the monetary value proposed on the subject matter of insurance and
the material facts connected with the proposed insurance would be collected for
many lines of insurance.The insurance advisor’s recommendations including the reasons for such
recommendation may also be part of the proposal form. There would be a
declaration that the recommended policy’s details have been fully explained to
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as name, father’s name, address and other identifying inputs. To determine the
true identity of their customers, documents like address proof, PAN card,
photographs etc. are collected with the proposal.In respect of Life and Health insurances, details of the proposers’ family members
(including parents) indicating their longevity, status of health and ailments
suffered by any of them are collected. Depending on the product, the medical
details of the life proposed for insurance, personal characteristics and his/ her
personal history of disease may also be asked for.Details of the monetary value proposed on the subject matter of insurance and
the material facts connected with the proposed insurance would be collected for
many lines of insurance.The insurance advisor’s recommendations including the reasons for such
recommendation may also be part of the proposal form. There would be a
declaration that the recommended policy’s details have been fully explained to
the proposer and the latter has acknowledged the same.70A Proposal form may have the following Sections starting with details of the
Insurer, the Agent, the details of the product, the Sum Assured, the mode of
payment of premiums etc. The form would also contain the signature of the
proposer, as proof of the fact that he/ she has filled up the form and has
submitted the proposal.Other details asked for are the Proposer’s name, date of birth, contact details,
marital status, nationality, names of parents and spouse, educational
qualifications, habits and ID Proof, family particulars, employment details, bank
details, name of nominee/ appointee; details of existing insurance and reasons
for opting for the policy.Depending on the Product, medical details of the life proposed for insurance,
personal characteristics and his/ her personal history of disease may be askedfor.Aspects related to the personal financial planning of the life being proposed
including his/ her work span, projected income and expenses, as well as needs
for savings and investment, health, retirement and insurance may also be
enquired about.The Agents recommendations including the reasons for such recommendation may
also be part of the proposal form. In compliance to the IRDAI regulations
mentioned above, the Agent would make a declaration that the recommended
policy’s details have been fully explained to the proposer and the latter has
acknowledged the same.Proposal forms are printed by insurers usually with the insurance company’s
name, logo, address and the class/ type of insurance/ product that it is used for.
It is customary for insurance companies to add a printed note in the proposal
form, though there is no standard format or practice in this regard.**b)** **Declaration in the Proposal Form**Insurance companies usually add a declaration at the end of the proposal form to
be signed by the proposer. This ensures that the insured takes the pain to fill up
the form accurately and has understood the facts given therein, so that at the
time of a claim there is no scope for disagreements on account of
misrepresentation of facts. Such declaration converts the common law principle
of utmost good faith to a contractual duty of utmost good faith.**Example**Examples of such declarations are:71‘I/ We hereby declare and warrant that the above statements are true and
complete in all respects and that there is no other information which is relevant
to the application for insurance that has not been disclosed to you.’‘I/ We agree that this proposal and the declarations shall be the basis of the
contract between me/ us and (insurer’s name).’**Test Yourself 2**Which of the following is not relevant in respect of a Proposal form?I. Utmost Good-faith
II. Amount expected to be claimed
III. Duty to Disclose material facts
IV. Confidentiality of details given**Some examples of such notes are:**‘Non-disclosure of facts material to the assessment of the risk, providing
misleading information, fraud or non-co-operation by the insured will nullify the
cover under the policy issued’.‘The company will not be on risk until the proposal has been accepted by the
Company and full premium paid’.**C.** **Know Your Customer (KYC) Norms****Anti-Money Laundering and KYC Norms**Money Laundering is the process by which criminals transfer funds to conceal the
true origin and ownership of the proceeds of criminal activities. Money laundering
processes are used by criminals to make funds obtained through illegal activities
appear legal money. In the process, they try to cover up the criminal origin of the
money and make it appear valid.Criminals attempt to use financial services, including banks and insurance, to
launder their money. They make transactions using false identities, for example,
by purchasing some form of insurance and then managing to withdraw that money
and then disappearing once their purpose is served. Governments across the
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II. Amount expected to be claimed
III. Duty to Disclose material facts
IV. Confidentiality of details given**Some examples of such notes are:**‘Non-disclosure of facts material to the assessment of the risk, providing
misleading information, fraud or non-co-operation by the insured will nullify the
cover under the policy issued’.‘The company will not be on risk until the proposal has been accepted by the
Company and full premium paid’.**C.** **Know Your Customer (KYC) Norms****Anti-Money Laundering and KYC Norms**Money Laundering is the process by which criminals transfer funds to conceal the
true origin and ownership of the proceeds of criminal activities. Money laundering
processes are used by criminals to make funds obtained through illegal activities
appear legal money. In the process, they try to cover up the criminal origin of the
money and make it appear valid.Criminals attempt to use financial services, including banks and insurance, to
launder their money. They make transactions using false identities, for example,
by purchasing some form of insurance and then managing to withdraw that money
and then disappearing once their purpose is served. Governments across the
world, including India constantly try to prevent such money laundering attempts.72**Definition**Money laundering is the process of bringing illegal money into an economy by
hiding its illegal origin so that it appears to be legally acquired. The Government
of India launched the PMLA, 2002 to rein in money-laundering activities.The Prevention of Money Laundering Act (PMLA), 2002 came into effect from 2005
to control money laundering activities and to provide for confiscation of property
derived from money-laundering.The Anti-Money Laundering guidelines issued by IRDAI soon after have indicated
suitable measures to determine the true identity of customers requesting for
insurance services, reporting of suspicious transactions and proper record keeping
of cases involving or suspected of involving money laundering. It is necessary to
be vigilant and ensure, right at the beginning of the contract that it is not
intended to be a tool for money laundering of any sort.The Prevention of Money Laundering Act, 2002 (PMLA) was been brought into
force by the Government of India with effect from 1st July 2005. As per the Act,
every banking company, financial institution (which includes Insurance
companies) and intermediary shall have to maintain a record of all the
transactions prescribed under the PMLA. Accordingly, IRDAI issued the Guidelines
on Anti-Money laundering/ Counter Financing of Terrorism (AML/ CFT) 31st March2006.Know your customer is the process used by a business to verify the identity of
their clients. Banks and insurers are increasingly demanding their customers
provide detailed information to prevent identity theft, financial fraud and money
laundering. The objective of KYC guidelines is to prevent financial institutions
from being used by criminal elements for money laundering activities.Insurers, hence, need to determine the true identity of their customers. Agents
should ensure that proposers submit the proposal form along with the following
as part of the KYC procedure:i. Proof of identity – driving license, passport, voter ID card, PAN card,Photographs etc.ii. Proof of address – driving license, passport, telephone bill, electricity bill,bank passbook etc. Different documentation are prescribed for
individuals, corporates, partnership firms, trusts and foundationsiii. Income proof documents and financial status, esp. in case of high-valuetransactionsiv. Purpose of insurance contract73**a)** **Age Proof – for Personal Lines**While dealing with person related insurances like Life, Health, Personal Accident,
etc. Insurance companies use age as an important factor to determine the risk
profile of the insured. In life business, as age assumes great importance, life
insurers used to follow more detailed norms of age related documentation.[However, the Government, the Reserve Bank of India and the IRDAI are becoming
stricter on following KYC norms.]An important part of the underwriting process is
admission of age, after verifying the proof of age.**i.** **Standard Age Proofs**There are two types of age proofs that insurers come across as evidence
of age. Valid age proofs may be standard or non-standard. Standard **age proofs** are normally issued by a public authority, like birthcertificate issued by a municipality or other government body, school
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individuals, corporates, partnership firms, trusts and foundationsiii. Income proof documents and financial status, esp. in case of high-valuetransactionsiv. Purpose of insurance contract73**a)** **Age Proof – for Personal Lines**While dealing with person related insurances like Life, Health, Personal Accident,
etc. Insurance companies use age as an important factor to determine the risk
profile of the insured. In life business, as age assumes great importance, life
insurers used to follow more detailed norms of age related documentation.[However, the Government, the Reserve Bank of India and the IRDAI are becoming
stricter on following KYC norms.]An important part of the underwriting process is
admission of age, after verifying the proof of age.**i.** **Standard Age Proofs**There are two types of age proofs that insurers come across as evidence
of age. Valid age proofs may be standard or non-standard. Standard **age proofs** are normally issued by a public authority, like birthcertificate issued by a municipality or other government body, school
leaving certificate, passport etc. Non-standard, when a standard age proof is not available (not to beaccepted readily)Some documents considered as standard age proofs are:i. School or college certificateii. Birth certificate extracted from municipal recordsiii. Passportiv. PAN cardv. Service registervi. Identity card in case of defence personnelvii. Marriage certificate issued by appropriate authority**ii.** **Non-standard age proofs**When standard age proofs like the above are not available, the life insurer
may allow submission of a non-standard age proof. Some documents
considered as non-standard age proofs are:i. Horoscopeii. Ration cardiii. An affidavit by way of self-declarationiv. Certificate from village panchayat74**Test Yourself 3**Which of the following is not acceptable as valid Age Proof?I. Birth certificate extracted from municipal recordsII. Birth Certificate issued by Member of Legislative AssemblyIII. PassportIV. PAN Card**Answers to Test Yourself****Answer 1** -The correct option is I.
**Answer 2** - The correct option is II.
**Answer 3** – The correct option is II.**Summary**Prospectus is a formal legal document used by insurance companies that
provides details about the product.The application document used for making the proposal is commonly known
as the ‘proposal form’.Some documents considered as standard age proofs include school or college
certificate, birth certificate extracted from municipal records etc.Insurers need to determine the true identity of their customers. KYC
documents like address proof, PAN card and photographs etc. need to be
collected as a part of the KYC procedure.**Key Terms**1. Prospectus
2. Proposal form
3. Moral hazard
4. Know your Customer (KYC)
5. Age Proof
6. Standard and non-standard age proofs
7. Free-look period75#### CHAPTER C-08## CUSTOMER SERVICE**Chapter Introduction**In this chapter you will learn the importance of customer service. You will learn
the role of agents in providing service to customers. You will also learn how tocommunicate and relate with customers.After studying this chapter, you should be able to:Understand the importance of customer service1. Describe quality of service2. Examine the importance of service in the insurance industry3. Discuss the role of an insurance agent in providing good service4. Explain the process of communication5. Demonstrate the importance of non-verbal communication6. Recommend ethical behaviour76**A.** **Customer Service – General concepts****1.** **Why Customer Service?**Customers are the most important part of any industry and no enterprise can
afford to treat them indifferently. The role of customer service and relationships
is important in the service sector and more so for insurance.Every enterprise has a goal to delight its customers. This can be explained by
examining how buying insurance differs from buying a car.A car can be seen, touched, test driven and experienced, whereas the Insurance
of the car is just a promise to pay if there is loss or damage to the car due to an
accident. This promise is intangible – it cannot be seen, touched or experienced.While the customer of the car will be able to understand and experience the car
easily, the customer of insurance can evaluate and experience the insurance
protection that he buys only when a loss happens and the insurance company
settles the claim. All customers do not get the chance to experience this. In
insurance, when such a situation arises, if the service exceeds expectations, the
customer would be delighted.**2.** **Quality of service**It is necessary for insurance companies and their personnel, which includes their
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afford to treat them indifferently. The role of customer service and relationships
is important in the service sector and more so for insurance.Every enterprise has a goal to delight its customers. This can be explained by
examining how buying insurance differs from buying a car.A car can be seen, touched, test driven and experienced, whereas the Insurance
of the car is just a promise to pay if there is loss or damage to the car due to an
accident. This promise is intangible – it cannot be seen, touched or experienced.While the customer of the car will be able to understand and experience the car
easily, the customer of insurance can evaluate and experience the insurance
protection that he buys only when a loss happens and the insurance company
settles the claim. All customers do not get the chance to experience this. In
insurance, when such a situation arises, if the service exceeds expectations, the
customer would be delighted.**2.** **Quality of service**It is necessary for insurance companies and their personnel, which includes their
agents, to render high quality service and delight the customer.**But what is high quality service? What are its attributes?**The well-known SERVQUAL approach to service quality of Zeithaml, Parasuraman
and Berry highlights 5 major indicators of service quality:**a)** **Reliability** : The ability to perform the promised service dependably andaccurately is considered the most important indicator of good service. Itis the foundation on which trust is built.**b)** **Responsiveness** : Refers to the willingness and ability of service personnelto help customers and provide prompt response to the customer’s needs.
It may be measured by indicators like speed, accuracy, and attitude while
giving the service.**c)** **Assurance** : Refers to the knowledge, competence and courtesy displayedby an employee or agent in understanding and meeting the needs of a
customer, thus conveying trust and confidence.**d)** **Empathy** : Empathy is described as the human touch. It is reflected in thecaring attitude and individualised attention provided to customers.77**e)** **Tangibles** : Represent physical environmental factors like location, layoutand cleanliness as also the sense of professionalism that a customer feels
when contacting a service provider. First impressions last long.**3.** **Customer service and insurance**Leading sales producers in the insurance industry state that the secret of reaching
the top and staying there is in getting the patronage and support of a large
number of existing clients with whose help the business gets built. These clients
are a source of commissions from renewal of existing contracts. These can be a
valuable source for acquiring new customers.One great mantra of success in insurance selling is to be able to convert one’s
customers into one’s clients. Customers are those who buy a product. Clients, on
the other hand are people with whom an agent relates for life, who continue to
buy from him/ her as also help and possibly, support him/ her in reaching out to
and selling to other customers.Clients are built by working with deep commitment to serving one’s customers.
To understand how keeping a customer happy benefits the agent and the
company, one should understand the concept of Customer’s Lifetime Value.**Customer Lifetime Value** may be defined as the sum of economic benefits that
can be derived from building a sound relationship with a customer over a long
period of time.**Diagram 1:** **Customer Lifetime Value**An agent who renders service and builds close relationships with her customers,
builds goodwill and brand value, which helps in expanding the business.**Test Yourself 1**What is meant by customer lifetime value?I. Sum of costs incurred while servicing the customer over his lifetime78II. Rank given to customer based on business generated
III. Sum of economic benefits that can be achieved by building a long termrelationship with the customerIV. Maximum insurance that can be attributed to the customer**4.** **Customer Relationships and Service**While customer service is a key element in creating satisfied and loyal customers,
it is also necessary to build a strong relationship with them. A Customer’s views
about an insurer depends on the service and relationships experience the insureroffers.What goes to make a healthy relationship? At its heart, of course, there is trust.
At the same time, there are other elements, which reinforce and promote thattrust. Let us illustrate some of the elements.**Diagram 2:** **Elements for Trust**i. Every relationship begins with **attraction** : Attraction means being liked andbeing able to build a rapport with the customer, starting with creating a great
first impression. Attraction is regarded the key to unlocking every heart.
Without it a relationship is hardly possible. A sales person cannot make much
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builds goodwill and brand value, which helps in expanding the business.**Test Yourself 1**What is meant by customer lifetime value?I. Sum of costs incurred while servicing the customer over his lifetime78II. Rank given to customer based on business generated
III. Sum of economic benefits that can be achieved by building a long termrelationship with the customerIV. Maximum insurance that can be attributed to the customer**4.** **Customer Relationships and Service**While customer service is a key element in creating satisfied and loyal customers,
it is also necessary to build a strong relationship with them. A Customer’s views
about an insurer depends on the service and relationships experience the insureroffers.What goes to make a healthy relationship? At its heart, of course, there is trust.
At the same time, there are other elements, which reinforce and promote thattrust. Let us illustrate some of the elements.**Diagram 2:** **Elements for Trust**i. Every relationship begins with **attraction** : Attraction means being liked andbeing able to build a rapport with the customer, starting with creating a great
first impression. Attraction is regarded the key to unlocking every heart.
Without it a relationship is hardly possible. A sales person cannot make much
headway if he/ she is not liked by the customer.ii. The second element of a relationship is one’s presence, being there whenneedediii. **Communication:** Even if one is not fully present and unable to do full justiceto all the expectations of one’s customers, one can still **maintain a strong**
**relationship by communicating in a manner that is assuring, full of empathy**
**and conveying a sense of responsibility.**The above dimensions of communication call for discipline and skills. They
ultimately reflect how one thinks and sees.Companies emphasise on customer relationship management, as the cost of
retaining a customer is far lower than acquiring a new customer. A customer79relation opportunity arises at various touch points e.g. while understanding
customers insurance needs, explaining coverage’s, handing over forms etc.**B.** **Insurance agent’s role in providing customer service.**Let us now consider how an agent can render great service to the customer. It is
important to realise that from the moment a customer gets contacted by a sales
person to the final point of settlement of a claim, the customer goes on a journey
of experience that we shall call the ‘ **Customer Journey’** . The agent needs to
partner with the customer through the entire duration of the contract, hand
holding him/ her in each step of the journey to create memorable experiences atevery step.Let us look at some milestones in the journey and the role played at each step.**1.** **The Sale**It is said that selling is both an art and a science. It is a science because it calls
for a set process which, if consistently and properly followed, is likely to lead to
success. It is also an art in the sense that each sales person brings his or her
distinctive beliefs, style and personality into the process and the results depend
on what each person puts into the process.- **Prospecting:** The Sales Process begins with **Prospecting**, which literally
means ‘searching’ for a prospective customer. Searching is important as ‘ _**One**_
_**cannot find till one searches’,**_ it is the most important step in the process.
An agent typically begins with his or her natural market, made up of known
and easily approachable people. The challenge lies in getting across to more
networks of people who are outside one’s immediate circle – getting to know
them and be known by them.All the people one knows and approaches may not be proper candidates for
insurance or they may not be interested in buying. It is thus necessary to
**qualify** them so that one targets only those who are likely to buy insurance.
The prospecting process becomes successful only when an agent is able to
build strong relationships with the prospect. The first task of any sales person
is thus to **sell trust and build confidence.**_**Invite for an Interview:**_ While personal relationships are the foundation on
which insurance business is built, it is necessary to convert the goodwill one
earns into a sale. This begins when the sales person sets up a formal
appointment for a detailed sales interview. This step is critical for establishing
one’s professional credentials and also to separate business from casualdiscussions.80- _**Determining the needs and recommending the Solution:**_ The heart of the
Sales Interview is the steps wherein the sales agent determines and makes
the prospective customer aware about the exact needs for which insurance is
a solution. A master sales person is distinguished by his/ her skill in guiding a
prospect, through asking gentle questions, to understand the gaps in
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them and be known by them.All the people one knows and approaches may not be proper candidates for
insurance or they may not be interested in buying. It is thus necessary to
**qualify** them so that one targets only those who are likely to buy insurance.
The prospecting process becomes successful only when an agent is able to
build strong relationships with the prospect. The first task of any sales person
is thus to **sell trust and build confidence.**_**Invite for an Interview:**_ While personal relationships are the foundation on
which insurance business is built, it is necessary to convert the goodwill one
earns into a sale. This begins when the sales person sets up a formal
appointment for a detailed sales interview. This step is critical for establishing
one’s professional credentials and also to separate business from casualdiscussions.80- _**Determining the needs and recommending the Solution:**_ The heart of the
Sales Interview is the steps wherein the sales agent determines and makes
the prospective customer aware about the exact needs for which insurance is
a solution. A master sales person is distinguished by his/ her skill in guiding a
prospect, through asking gentle questions, to understand the gaps in
protection that give rise to the needs for insurance.The Agent has the responsibility to provide _Best Advice_ to the Prospect about the
right kind of insurance solutions to meet his/ her needs. Firstly one must
determine and make the prospective customer aware about the exact needs for
which insurance is a solution. This also includes giving proper advice on the
amount of insurance to be purchased. For example the amount of life insurance
to be purchased by an individual needs to be linked to his/ her income and paying
capacity.It is also important to keep a basic percept in mind, especially when buying nonlife insurance: Do not recommend insuring where the risk can be managedotherwise.Whether insurance is needed or not, depends on the circumstances. If the
premium payments are high compared to the loss involved, it may be advisable
to just bear the risk. On the other hand, if the loss consequences of a risk are
likely to be severe, it is wise to insure against it.**Example**To a homeowner living in a flood prone area, purchasing an add-on cover against
floods would prove to be helpful. On the other hand, if the home owner owns a
home at a place where the risk of floods is negligible it may not be necessary toobtain such cover.Many customers may not be much concerned about getting maximum insurance
per rupee spent, but would be interested in **reducing the cost of handling risk** .
The concern would be thus on identifying those risks which a customer cannotretain and hence must be insured.The agent becomes successful when he/ she renders best advice. The agent needs
to constantly ask himself/ herself about his/ her role vis-à-vis the customer. He/
she should go to the customer not just to get a sale but to relate to the customer
as a coach and partner who can help him/ her to manage his/ her risks more
effectively?_**Handling Objections and Closing the Sale:**_ It may not be enough to give best
advice and recommendations to a customer about the right products to buy.
One also needs to persuade him/ her to take the decision to buy. Quite often
the customer may have a number of questions and may raise objections that81need to be addressed before he/ she decides to commit to the purchase.
Whilst handling these objections, it is vitally important to understand that the
objections being voiced may reflect underlying concerns that need to beidentified and resolved.In sum, the role of an insurance agent is more than that of a mere sales person.
He/ she also **needs to be a risk assessor, underwriter, risk management**
**counsellor, designer of customised solutions and a relationship builder** (who
thrives on building trust and long-term relationships), all rolled into one.**2.** **The Proposal stage**The agent has to support the customer in filling out the proposal for insurance.
The insured is required to take responsibility for the statements made therein.
The salient aspects of a proposal form have been discussed in a later chapter.The agent should explain and clarify to the proposer the details to be filled as
answers to each of the questions in the proposal form. A failure to give proper
and complete information can jeopardise the customer’s claim.Sometimes, if additional information is required to complete the policy, the
company may inform the customer directly or through the agent/ advisor. The
agent should help the customer in completing such formalities, explaining why
they are necessary.IRDAI (Issuance of e-Insurance Policies) Regulations, 2016, provide for e – Proposal
forms that are similar to the physical proposal form and having a provision to the
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He/ she also **needs to be a risk assessor, underwriter, risk management**
**counsellor, designer of customised solutions and a relationship builder** (who
thrives on building trust and long-term relationships), all rolled into one.**2.** **The Proposal stage**The agent has to support the customer in filling out the proposal for insurance.
The insured is required to take responsibility for the statements made therein.
The salient aspects of a proposal form have been discussed in a later chapter.The agent should explain and clarify to the proposer the details to be filled as
answers to each of the questions in the proposal form. A failure to give proper
and complete information can jeopardise the customer’s claim.Sometimes, if additional information is required to complete the policy, the
company may inform the customer directly or through the agent/ advisor. The
agent should help the customer in completing such formalities, explaining why
they are necessary.IRDAI (Issuance of e-Insurance Policies) Regulations, 2016, provide for e – Proposal
forms that are similar to the physical proposal form and having a provision to the
Prospect to give his consent to the proposal, which can be validated by one time
password (mobile phone OTP).**3.** **Acceptance stage****a)** **Cover notes/ Certificates of Insurance**After underwriting is completed it may take some time before the policy is issued.
Pending the preparation of the policy or when the negotiations for insurance are
in progress and it is necessary to provide cover on a provisional basis or when
the premises are being inspected for determining the actual rate applicable,
a cover note is issued to confirm protection under the policy.As Cover notes and Certificates of Insurance are used predominantly in marine
and motor classes of business, cover note is discussed in detail under theGeneral Insurance Section.It is the agent’s responsibility to ensure that the cover note is issued by the
company, where applicable, to the insured. Promptness in this regardcommunicates to the client that his/ her interests are safe in the hands of theagent and the company.82**b)** **Policy Document**The policy is a formal document which provides an evidence of the contract
of insurance. This document has to be stamped in accordance with the
provisions of the Indian Stamp Act, 1899. The insurer is duty bound to give
the policy document to the insured.**4.** **Premium Payment****Premium** is the consideration or amount paid by the insured to the insurer for
insuring the subject matter of insurance, under a contract of insurance.A good agent takes active interest in ensuring that the insured pays the
premium for taking or continuing or renewing his policy and the customer is
made aware of various options available for payment of premium.**5.** **Method of payment of premium**The premium to be paid by any person proposing to take an insurance policy or
by the policyholder to an insurer may be made in any one or more of the followingmethods:a) Cashb) Any recognised banking negotiable instrument such as cheques, demanddrafts, pay order, banker’s cheques drawn on any schedule bank in India;c) Postal money order;d) Credit or debit cards;e) Bank guarantee or cash deposit;f) Internet;g) E-transferh) Direct credits via standing instruction of proposer or the policyholder orthe life insured through bank transfers;i) Any other method or payment as may be approved by the Authority fromtime to time;As per IRDA Regulations, in case the proposer/ policyholder opts for premium
payment through net banking or credit/ debit card, the payment must be
made only through net banking account or credit/ debit card issued on the
name of such proposer/ policyholder.83**6.** **Service after issuance of Policy Document and Receipt for Premium**Once the premium is paid by the customer, the insurer is bound to issue a
receipt. A receipt is also to be issued even in case the premium is paid inadvance.The agent may approach the insured and enquire whether the Policy
Document has been received from the insurance company. It presents a great
opportunity for the agent to connect with the customer. The agent will be
able to clear any doubts and also explain the various policy provisions and
policy holders’ rights and privileges. This demonstrates commitment to the
customer and provides an opportunity to pledge continued support and
service. One should also inform the customer about the free-look period
provision, during which period, the policy can be returned and refund of
premium obtained.If the policy being purchased is an Electronic insurance policy, the agent can
help the Customer to open an e-Insurance Account (e-I-A), through the
Registered Insurance Repository.This also paves the way for the next step which is to ask the customer for the
names and particulars of other individuals he/ she knows, who can possibly
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name of such proposer/ policyholder.83**6.** **Service after issuance of Policy Document and Receipt for Premium**Once the premium is paid by the customer, the insurer is bound to issue a
receipt. A receipt is also to be issued even in case the premium is paid inadvance.The agent may approach the insured and enquire whether the Policy
Document has been received from the insurance company. It presents a great
opportunity for the agent to connect with the customer. The agent will be
able to clear any doubts and also explain the various policy provisions and
policy holders’ rights and privileges. This demonstrates commitment to the
customer and provides an opportunity to pledge continued support and
service. One should also inform the customer about the free-look period
provision, during which period, the policy can be returned and refund of
premium obtained.If the policy being purchased is an Electronic insurance policy, the agent can
help the Customer to open an e-Insurance Account (e-I-A), through the
Registered Insurance Repository.This also paves the way for the next step which is to ask the customer for the
names and particulars of other individuals he/ she knows, who can possibly
benefit from the agent’s services. It would be even better if the client itself
contacted these people and introduced the agent to them.**7.** **Policy Renewal**Most general Insurance policies have to be renewed each year. For general
insurance policies, at the time of each renewal, the customer has a choice to
continue insuring with the same company or switch to another company. In
case of Life Insurance, a policy would continue to be in force when the
customer pays the premium at regular intervals based on premium payment
term. This does not apply to one-time payments.General Insurers usually send a Renewal Notice, well in advance of the date
of expiry of the premium paying period, inviting renewal of the policy.The customer’s choice to renew or continue with the policy may often depend
on the trust and goodwill created by the agent and company and the agent
needs to be in touch to remind the customer about the renewal or continuity
of policy well before the due date.High producer agents constantly keep in touch with their clients, and win their
trust and loyalty through various acts of service and relationships – like
greeting their clients on various occasions like festivals or family events and
being with them to share their joys and sorrows.84**8.** **The claim stage**The crucial test comes at the time of claim settlement. The agent must ensure
that the incident giving rise to the claim is immediately informed to the
insurer and that the customer carefully follows all the formalities. The agent
may also assist in all the investigations that may need to be done to assess
the loss. A good agent assists the customers or his representatives in fulfilling
the claim lodgement formalities quickly, correctly and completely.**Test Yourself 2**Identify the scenario where a debate on the need for insurance is not required.I. Property insurance
II. Business liability insurance
III. Motor insurance for third party liabilityIV. Fire insurance85**C.** **Communication skills in customer service**An agent needs to possess soft skills for effective performance in the work place.S **oft skills relate to one’s ability to interact effectively with others, both at**
**work and outside. Communication skills are the most important of these soft**
**skills.****1.** **Process of communication**What is communication?All communications require a sender, who sends a message, and a person who
received that message. The process is complete once the receiver has understood
the message of the sender.**Diagram 3:** **Forms of communication**Communication may be face to face, over the phone, or by mail or internet. It
may be formal or informal. Whatever the content or form of the message or the
media used, the effectiveness of communication depends on whether or not the
recipient has understood what was sought to be communicated.Since an insurance policy is essentially a promise, it is important that what is
promised by the insurer is clearly understood by the insured. The agent as an
intermediary has to not only provide complete, accurate and unambiguous
account of the terms of the insurance to the customer, but also seek and clarify
doubts or queries that a customer may have.**2.** **Barriers to effective communication**Different kinds of barriers to effective communication can arise at each step in
the above process, due to which communication can get distorted. The challenge
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**work and outside. Communication skills are the most important of these soft**
**skills.****1.** **Process of communication**What is communication?All communications require a sender, who sends a message, and a person who
received that message. The process is complete once the receiver has understood
the message of the sender.**Diagram 3:** **Forms of communication**Communication may be face to face, over the phone, or by mail or internet. It
may be formal or informal. Whatever the content or form of the message or the
media used, the effectiveness of communication depends on whether or not the
recipient has understood what was sought to be communicated.Since an insurance policy is essentially a promise, it is important that what is
promised by the insurer is clearly understood by the insured. The agent as an
intermediary has to not only provide complete, accurate and unambiguous
account of the terms of the insurance to the customer, but also seek and clarify
doubts or queries that a customer may have.**2.** **Barriers to effective communication**Different kinds of barriers to effective communication can arise at each step in
the above process, due to which communication can get distorted. The challenge
is to visualize, understand and remove the barriers.**Test Yourself 3**What does not go on to make a healthy relationship?I. AttractionII. TrustIII. CommunicationIV. Dislike86**D.** **Non-verbal Communication**Let us now look at some concepts that the agent needs to understand.**Important****1.** **Making a great first impression**The prospect judges an agent based on his appearance, body language,
mannerisms, dress and speech. As attraction is the first pillar of a relationship
and first impressions last long, some tips for making a good first impression are
given below:**i.** **Be on time always** . Plan to arrive a few minutes early, allowing flexibilityfor all kinds of possible delays.**ii.** **Present yourself appropriately** . The appearance should to create the right first impression
The dress must be appropriate for the meeting or occasion
The look must be clean and tidy – with good haircut and shave, clean andtidy clothes, neat and tidy make up**iii.** **A warm, confident and winning smile** puts a person and his/ heraudience immediately at ease with one another.**iv.** **Being open, confident and positive** body language must project confidence and self-assurance stand tall, smile, make eye contact, greet with a firm handshake remain positive even in the face of some criticism or when the meetingis not going as well as expected**v.** **Interest in the other person** - The most important thing is about beinggenuinely interested in the other person. Take some time to find out about the customer as a person Be caring and attentive to what he or she says Be totally present and available to your customer Not engaging in one’s mobile phone during the interview?**2.** **Body language**Body language refers to movements, gestures, facial expressions. The way we
talk, walk, sit and stand, all says something about us, and what is happeninginside us.87It is often said that people listen to only a small percentage of what is actually
said. What we don’t say may speak a lot more about us in a louder way. Obviously,
one needs to be very careful about one’s body language.**a)** **Confidence**Here are a few tips about how to appear confident and self-assured, giving
the impression of someone to be seriously listened to: Posture – standing tall with shoulders held back. Solid eye contact - with a "smiling" face Purposeful and deliberate gestures**b)** **Trust** Quite often, a sales person’s words fall on deaf ears because the audiencedoes not trust him/ her – his/ her body language does not give the
assurance that he/ she is sincere about what he/ she says**3.** **Listening skills**The third set of communication skills that one needs to be aware about andcultivate are listening skills. These follow from a well-known principle of personal
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talk, walk, sit and stand, all says something about us, and what is happeninginside us.87It is often said that people listen to only a small percentage of what is actually
said. What we don’t say may speak a lot more about us in a louder way. Obviously,
one needs to be very careful about one’s body language.**a)** **Confidence**Here are a few tips about how to appear confident and self-assured, giving
the impression of someone to be seriously listened to: Posture – standing tall with shoulders held back. Solid eye contact - with a "smiling" face Purposeful and deliberate gestures**b)** **Trust** Quite often, a sales person’s words fall on deaf ears because the audiencedoes not trust him/ her – his/ her body language does not give the
assurance that he/ she is sincere about what he/ she says**3.** **Listening skills**The third set of communication skills that one needs to be aware about andcultivate are listening skills. These follow from a well-known principle of personal
effectiveness – ‘first try to understand before being understood’.Active listening calls for: Allowing the speaker to finish each point before asking questions Not interrupting the speaker with any counter arguments This may require that we reflect on the message and ask questions toclarify what was said Another way to provide feedback is to summarize the speaker’s words andrepeat it back to him or her periodically or at the end of the conversation.**Let us look at the skills required for active listening:****a)** **Demonstrating that one is listening:** For instance one may: Give an occasional nod and smile Adopt a posture that is open and draws out the other to speak freely Have small verbal comments like "I understand", "I see", "yes" and "uh".88**b)** **Paying attention**One needs to give the speaker one’s undivided attention, and acknowledge
him. Some aspects of paying attention are as follows:Look at the speaker directly Put aside distracting thoughts Don't mentally prepare a rebuttal Avoid all external distractions [for instance, keep your mobile on silentmode] "Listen" to the speaker's body language**c)** **Removing filters:**A lot of what we hear may get distorted by one’s personal filters, like the
assumptions, judgments, and beliefs one carries.**Not being judgemental: If the listener is judgemental,** even if he hears what
the speaker is saying, he will understand only according to his biased
interpretation.**d)** **Empathetic listening:****Empathy implies hearing and listening patiently, and with full attention,**
**to what the other person has to say, even when one does not agree with**
**it. It is important to show the speaker acceptance, not necessarily****agreement.****e)** **Responding appropriately:**Active listening implies much more than just hearing what a speaker says. The
communication can be completed only when the listener responds in some
way, through word or action. Certain rules need to be followed for ensuring
that the speaker is not put down but treated with respect.These include: Being candid, open, and honest in your response Asserting one’s opinions respectfully Treating another person in a way, one would like oneself to be treated**Example****Asking for clarity** – “I realize that we have not been able to clear about the
benefits of some of our health plans. Could you help us by asking us your doubts?”89**Paraphrasing the speaker’s exact words** – “So, you are saying that ‘our health
plans are not attractive enough’ – Have I understood you correctly?”**Test Yourself 4**Which among the following is not an element of active listening?I. Paying good attention
II. Being extremely judgemental
III. Empathetic listening
IV. Responding appropriately**E.** **Ethical Behavior**In recent years, there are many reports of improper conduct, and serious concerns
have been raised about ethical behaviour in business causing betrayal of trust.This has led to discussions about concepts like accountability, corporate
governance, and treating customers fairly in insurance, which form part of“Ethics” in business.It is not wrong to look after one’s interests. But it is wrong to do so at the cost ofthe interests of others. Unethical behaviour arises when there is no concern forothers and there is high concern for oneself.**Insurance is a business of trust** . Breach of trust amounts to cheating. When
wrong information is given to prospects tempting them to buy insurance, or if the
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Confidence
|
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|
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benefits of some of our health plans. Could you help us by asking us your doubts?”89**Paraphrasing the speaker’s exact words** – “So, you are saying that ‘our health
plans are not attractive enough’ – Have I understood you correctly?”**Test Yourself 4**Which among the following is not an element of active listening?I. Paying good attention
II. Being extremely judgemental
III. Empathetic listening
IV. Responding appropriately**E.** **Ethical Behavior**In recent years, there are many reports of improper conduct, and serious concerns
have been raised about ethical behaviour in business causing betrayal of trust.This has led to discussions about concepts like accountability, corporate
governance, and treating customers fairly in insurance, which form part of“Ethics” in business.It is not wrong to look after one’s interests. But it is wrong to do so at the cost ofthe interests of others. Unethical behaviour arises when there is no concern forothers and there is high concern for oneself.**Insurance is a business of trust** . Breach of trust amounts to cheating. When
wrong information is given to prospects tempting them to buy insurance, or if the
insurance given does not cater to the specific needs of the prospect, things gowrong.The Code of Ethics spelt out by the IRDAI in various regulations are directed
towards ethical behaviour. It is not enough just to know the code. What is more
important for the insurers and their representatives is to always keep the
interests of the prospect/ policy holder as primary.**Characteristics:** Some characteristics of ethical behaviour are:a) Placing the best interests of the client above one’s own direct or indirectbenefitsb) Holding in strictest confidence and considering as privileged, all business andpersonal information pertaining to client’s affairsc) Making full and adequate disclosure of all facts to enable clients makeinformed decisionsThere could be a likelihood of ethics being compromised in the followingsituations:90a) Having to choose between two plans, one giving much less premium orcommission than the otherb) Temptation to recommend discontinuance of an existing policy and taking outa new onec) Being aware of circumstances that, if known to the insurer, could adverselyaffect the interests of the client or the beneficiaries of the claim.**Test Yourself 5**Which among the following is not a characteristic of ethical behaviour?
I. Making adequate disclosures to enable the clients to make an informeddecision
II. Maintaining confidentiality of client’s business and personal information
III. Placing self-interest ahead of client’s interests
IV. Placing client’s interest ahead of self interest**Summary**a) The role of customer service and relationships is far more critical in the caseof insurance than in other products.b) Five major indicators of service quality include reliability, responsiveness,assurance, empathy and tangibles.c) Customer lifetime value may be defined as the sum of economic benefits thatcan be derived from building a sound relationship with a customer over a long
period of time.d) The role of an insurance agent in the area of customer service is absolutelycritical.e) Active listening involves paying attention, providing feedback and respondingappropriately.f) Ethical behaviour involves placing the customer’s interest before one’s own.**Key terms**a) Quality of serviceb) Empathyc) Body languaged) Active listening91e) Ethical behavior**Answers to Test Yourself****Answer 1** -The correct option is III.
**Answer 2** - The correct option is III.
**Answer 3** - The correct option is IV.
**Answer 4** - The correct option is II.
**Answer 5** - The correct option is III.92## CHAPTER C-09## GRIEVANCE REDRESSAL MECHANISM**Chapter Introduction**Insurance industry is essentially a service industry where customer expectations
are constantly rising. There is dissatisfaction with the standard of services.
Despite continuous product innovation and significant improvement in the level
of customer service, aided by use of modern technology, the industry suffers
badly in terms of customer dissatisfaction and poor image. The Government and
the regulator have taken a number of initiatives to improve the situation.IRDAI Regulations on Protection of Policyholders’ Interests 2017 mandate that
every Insurer shall have their own board approved policy for protection of
policyholders’ interests which shall includei. Service parameters including turnaround times for various servicesrendered.
ii. Procedure for speedy resolution of complaints.**Learning Outcomes**93**A.** **Grievance Redressal**The time for high priority action is when the customer has a complaint. Remember
that in the case of a complaint, the customer is angry due to a failure of service.
This is only a part of the story.Many times, Customers get upset because they understand the situation wrongly.
|
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|
Paraphrasing the speaker’s exact words
|
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|
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**Answer 5** - The correct option is III.92## CHAPTER C-09## GRIEVANCE REDRESSAL MECHANISM**Chapter Introduction**Insurance industry is essentially a service industry where customer expectations
are constantly rising. There is dissatisfaction with the standard of services.
Despite continuous product innovation and significant improvement in the level
of customer service, aided by use of modern technology, the industry suffers
badly in terms of customer dissatisfaction and poor image. The Government and
the regulator have taken a number of initiatives to improve the situation.IRDAI Regulations on Protection of Policyholders’ Interests 2017 mandate that
every Insurer shall have their own board approved policy for protection of
policyholders’ interests which shall includei. Service parameters including turnaround times for various servicesrendered.
ii. Procedure for speedy resolution of complaints.**Learning Outcomes**93**A.** **Grievance Redressal**The time for high priority action is when the customer has a complaint. Remember
that in the case of a complaint, the customer is angry due to a failure of service.
This is only a part of the story.Many times, Customers get upset because they understand the situation wrongly.
All service failures causes two types of feelings:1. A feeling that the insurer was unfair (a feeling of being cheated)2. A feeling of hurt ego (being made to look and feel small)The customers want to feel valued and human touch is critical in this situation.As a professional insurance advisor first of all, the agent would not allow such a
complaint situation to happen. He would take up the matter with the appropriate
officer of the company.A complaint is a crucial “ **moment of truth** ” in the customer relationship. If the
agent/ company can use the situation to clarify the position, the situation can
actually improve customer loyalty.**Remember, no one else in the company has ownership of the client’s problems**
**as much as an agent does** .Complaints/ grievances give us the chance to show how much we care for the
customer’s interests. They are in fact the pillars on which an insurance agent
builds goodwill and business. **Word of mouth publicity (Good/ Bad) plays a**
**significant role in selling and servicing** .The procedure for grievance redressal is detailed at the end of every policy
document. This should be bought to the notice of customers. As per the
regulations, any grievance of a policy holder should be first referred to the
Insurer’s Grievance Cell. If it is not satisfactorily resolved, the complainant may
approach the Regulator through the Integrated Grievance Management System.**B.** **Integrated Grievance Management System (IGMS)**Each Insurer has its own grievance redressal mechanism. All operating/
controlling/ corporate offices of Insurance companies have Grievance Redressal
Officers. A policyholder can approach them directly for any grievance.IRDAI has launched an Integrated Grievance Management System (IGMS) which
acts as an online consumer complaints registration system. Insurers have to
register all grievances that they receive in the system which is integrated with
IGMS of IRDAI. IGMS helps IRDAI in monitoring grievance redress in the industry
and also acts as a central repository of insurance grievance data.94Policyholders can approach the respective insurer first for any grievance. If he
does not receive any response from the insurer or if the response/ resolution
received is not to his satisfaction, he can approach the Regulator under the IGMS.
The complaint registration process involves two steps – (i) Registering oneself by
entering one’s policy details and (ii) Registering one’s complaints and viewing the
status of the complaints. Complaints are then forwarded to the respective
insurance companies and IRDAI facilitates disposal of Grievances.IGMS tracks complaints and the time taken for their redressal. The complaints
can be registered at the following URL:
http://www.policyholder.gov.in/Integrated_ Grievance_Management.aspx**C.** **Consumer Protection****The Consumer Protection Act, 2019:** This original Act of 1986 was passed _“to_
_provide for better protection of the interest of consumers and to make provision_
_for the establishment of consumer councils and other authorities for the_
_settlement of consumer’s disputes”_ . The Act was amended by the Consumer
Protection (Amendment) Act, 2002 and later on 2019.Some definitions provided
in the Act are as follows:“ **Service** ” means service of any description which is made available to potential
users and includes the provision of facilities in connection with banking,
financing, **insurance**, transport, processing, supply of electrical or other energy,
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Answer 5
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The complaint registration process involves two steps – (i) Registering oneself by
entering one’s policy details and (ii) Registering one’s complaints and viewing the
status of the complaints. Complaints are then forwarded to the respective
insurance companies and IRDAI facilitates disposal of Grievances.IGMS tracks complaints and the time taken for their redressal. The complaints
can be registered at the following URL:
http://www.policyholder.gov.in/Integrated_ Grievance_Management.aspx**C.** **Consumer Protection****The Consumer Protection Act, 2019:** This original Act of 1986 was passed _“to_
_provide for better protection of the interest of consumers and to make provision_
_for the establishment of consumer councils and other authorities for the_
_settlement of consumer’s disputes”_ . The Act was amended by the Consumer
Protection (Amendment) Act, 2002 and later on 2019.Some definitions provided
in the Act are as follows:“ **Service** ” means service of any description which is made available to potential
users and includes the provision of facilities in connection with banking,
financing, **insurance**, transport, processing, supply of electrical or other energy,
board or lodging or both, housing construction, entertainment, etc. **Insurance is**
**included as a service.** However, “Service” does not include the rendering of any
service free of charge or under a contract of personal service.“ **Consumer** ” means any person who Buys goods for a consideration. It includes any user of such goods. (It does notinclude a person who obtains such goods for resale or for any commercial
purpose) or
Hires or avails of any services for a consideration. It includes the beneficiaryof such services. (It does not include any person who avails of such service for
any commercial purpose.)“ **Defect** ” means any fault, imperfection, shortcoming, inadequacy in the quality,
nature and manner of performance which is required to be maintained by or under
any law or has been undertaken to be performed by a person in pursuance of a
contract or otherwise in relation to any service.**“Complaint”** means any allegation in writing made by a complainant that: an unfair trade practice or restrictive trade practice has been adopted
the goods bought by him suffer from one or more defects
the services hired or availed of by him suffer from deficiency in any respect
price charged is in excess of that fixed by law or displayed on package
goods which will be hazardous to life and safety when used are being offeredfor sale to the public in contravention of the provisions of any law requiring95trader to display information in regard to the contents, manner and effect of
use of such goods.“ **Consumer dispute** ” means a dispute where the person against whom a
complaint has been made, denies and disputes the allegations contained in the
complaint.**D.** **Consumer** **disputes redressal agencies**Consumer disputes redressal agencies are established at district, state and
national levels.**i.** **District Consumer Disputes Redressal Commission** The District Consumer Disputes Redressal Commission (District
Commission), has jurisdiction to entertain complaints, where value of the
goods or services does not exceed Rs. 1 crore. The District Commission has
the powers of a civil court.**ii.** **State Consumer Disputes Redressal Commission** The State Consumer Disputes Redressal Commission (State Commission) hasoriginal jurisdiction to entertain complaints where the value of goods/
service and compensation, if any claimed exceeds Rs. 1 crore but does not
exceed Rs.10 crores.
It also has appellate and supervisory jurisdiction to entertain appeals fromthe District Commission.
Other powers and authority are similar to those of the District Commission.**iii.** **National Consumer Disputes Redressal Commission** The National Consumer Disputes Redressal Commission (NationalCommission) is the final authority established under the Act.
It has original jurisdiction to entertain disputes, where goods/ services andthe compensation claimed exceeds Rs.10 crores.
It has appellate as well as supervisory jurisdiction to hear the appeals fromthe orders passed by the State Commission.
Every order made by a District Commission, State Commission or the National
Commission shall be enforced by it in the same manner as if it were a decree
made by a Court in a suit before it. Appeals against the orders of the National
Commission have to be made only at the Supreme Court.96**Channels for Consumer Disputes Redressal**|Judicial Channels|Col2|
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service and compensation, if any claimed exceeds Rs. 1 crore but does not
exceed Rs.10 crores.
It also has appellate and supervisory jurisdiction to entertain appeals fromthe District Commission.
Other powers and authority are similar to those of the District Commission.**iii.** **National Consumer Disputes Redressal Commission** The National Consumer Disputes Redressal Commission (NationalCommission) is the final authority established under the Act.
It has original jurisdiction to entertain disputes, where goods/ services andthe compensation claimed exceeds Rs.10 crores.
It has appellate as well as supervisory jurisdiction to hear the appeals fromthe orders passed by the State Commission.
Every order made by a District Commission, State Commission or the National
Commission shall be enforced by it in the same manner as if it were a decree
made by a Court in a suit before it. Appeals against the orders of the National
Commission have to be made only at the Supreme Court.96**Channels for Consumer Disputes Redressal**|Judicial Channels|Col2|
|---|---|
|<br> <br> <br> <br> <br>**National Consumer**<br>**Disputes Redressal**<br>**Commission** <br> <br>**State Consumer**<br>**Disputes Redressal**<br>**Commission** <br> <br>**District Consumer**<br>**Disputes Redressal**<br>**Commission** <br> <br> <br> <br> <br> <br>**Established by the**<br>**Central Government**<br> <br>**Established by the State**<br>**Government**<br> <br>**Established by the**<br>**State Government**|<br> <br> <br> <br> <br>**National Consumer**<br>**Disputes Redressal**<br>**Commission** <br> <br>**State Consumer**<br>**Disputes Redressal**<br>**Commission** <br> <br>**District Consumer**<br>**Disputes Redressal**<br>**Commission** <br> <br> <br> <br> <br> <br>**Established by the**<br>**Central Government**<br> <br>**Established by the State**<br>**Government**<br> <br>**Established by the**<br>**State Government**|
|**Established by the**<br>**Central Government**|**Established by the**<br>**State Government**|**a)** **Procedure for filing a complaint**The procedure for filing a complaint is very simple in all the above three
agencies. There is no fee for filing a complaint or filing an appeal whether
before the State Commission or National Commission. The complaint can be
filed by the complainant himself or by his authorised agent. It can be filed
personally or can even be sent by post. It may be noted that no advocate is
necessary for the purpose of filing a complaint.**b)** **Consumer Commission Orders**If the Commission is satisfied (a) that the goods in question have the defects
specified in the complaint or (b) that the allegations about the services are
proven; the Commission can issue orders directing the opposite party to do
any of the following:
i. To **return** to the complainant the **price** (or premium in case of insurance)and/ or charges paid by the complainant
ii. To award such amount as **compensation** to the consumers for any loss orinjury suffered by the consumer due to negligence of the opposite party
iii. To remove the defects or **deficiencies** in the services in question.
iv. To **discontinue the unfair trade practice** or the restrictive trade practiceor not to repeat them
v. To provide for **adequate costs** to the complainants.**c)** **Nature of complaints**97The **majority of consumer disputes** with the three Commissions relating to
insurance business fall in the following main categories:i. Delay in settlement of claims
ii. Non-settlement of claims
iii. Repudiation of claims
iv. Amount or Quantum of loss
v. Policy terms, conditions etc.**E.** **The Insurance Ombudsman**The Central Government under the powers of the Insurance Regulatory &
Development Authority Act, 1999 made **Insurance Ombudsman Rules 2017** by a
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any of the following:
i. To **return** to the complainant the **price** (or premium in case of insurance)and/ or charges paid by the complainant
ii. To award such amount as **compensation** to the consumers for any loss orinjury suffered by the consumer due to negligence of the opposite party
iii. To remove the defects or **deficiencies** in the services in question.
iv. To **discontinue the unfair trade practice** or the restrictive trade practiceor not to repeat them
v. To provide for **adequate costs** to the complainants.**c)** **Nature of complaints**97The **majority of consumer disputes** with the three Commissions relating to
insurance business fall in the following main categories:i. Delay in settlement of claims
ii. Non-settlement of claims
iii. Repudiation of claims
iv. Amount or Quantum of loss
v. Policy terms, conditions etc.**E.** **The Insurance Ombudsman**The Central Government under the powers of the Insurance Regulatory &
Development Authority Act, 1999 made **Insurance Ombudsman Rules 2017** by a
notification published in the official gazette on 25 [th] April 2017.Rules regarding Insurance Ombudsmen apply to all insurers and their agents and
intermediaries in respect of complaints on all personal lines of insurance, group
insurance policies, policies issued to sole proprietorship and micro enterprises.[‘Personal lines’ here means insurances taken in an individual capacity, in
contrast to insurances sold to corporate entities.] Complaints relating to (a) delay
in settlement of claims beyond the time specified by IRDAI, (b) partial or total
repudiation of claims by the insurer, (c) disputes about premium paid or payable
in terms of insurance policy, (d) misrepresentation of policy terms and conditions
at any time in the policy document or policy contract, (e) legal construction of
insurance policies that affect the claim; and (f) policy servicing and related
grievances against insurers and their agents and intermediaries.a) Issuance of life insurance policy, general insurance policy including healthinsurance policy which is not in conformity with the proposal form submitted
by the proposer.
b) Non issuance of insurance policy after receipt of premium in life insuranceand general insurance including health insurance and
c) Any other matter resulting from the violation of provisions of the InsuranceAct, 1938 or the regulations, circulars, guidelines or instructions issued by
the IRDAI from time to time or the terms and conditions of the policy
contract, in so far as they relate to issues mentioned at clauses (a) to (f)
The objective of these rules is to resolve all types of complaints mentioned above,
in a cost effective, and impartial manner.**The Ombudsman, by mutual agreement of the insured and the insurer can act**
**as a mediator and counsellor within the terms of reference.****The decision of the Ombudsman, whether to accept or reject the complaint,**
**is final.****a)** **Complaint to the Ombudsman**Any complaint made to the Ombudsman should be in writing, and must be
signed by the insured or his legal heirs, nominee or assignee, and addressed
to an Ombudsman within whose jurisdiction, the insurer has a branch/ office.98It should contain the facts giving rise to the complaint, supported by
documents, the nature and extent of the loss caused to the complainant and
the relief sought.**Complaints can be made to the Ombudsman if:**i. The complainant had made a previous written representation to theinsurance company and:
the insurance company had rejected the complaint or
the complainant had not received any reply within one month afterreceipt of the complaint by the insurer.
ii. The complainant is not satisfied with the reply given by the insurer
iii. The complaint is made within one year from the date of rejection by theinsurance company
iv. The complaint is not pending in any court or consumer Commission or inarbitration
v. The value of the claim including expenses claimed is not above Rs 30 lakhs.**b)** **Recommendations by the Ombudsman**The Ombudsman will send copies of complaints to both the complainant and
the insurance company. The Ombudsman will make his recommendations
within one month of the receipt of the complaint.**c)** **Award**The dispute can be settled by intermediation. If this is not possible, the
Ombudsman will pass an award to the insured which he thinks is fair within a
period of 3 months from the date of receipt of all requirements from the
complainant and sending a copy of the award to the complainant and the
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the insurance company had rejected the complaint or
the complainant had not received any reply within one month afterreceipt of the complaint by the insurer.
ii. The complainant is not satisfied with the reply given by the insurer
iii. The complaint is made within one year from the date of rejection by theinsurance company
iv. The complaint is not pending in any court or consumer Commission or inarbitration
v. The value of the claim including expenses claimed is not above Rs 30 lakhs.**b)** **Recommendations by the Ombudsman**The Ombudsman will send copies of complaints to both the complainant and
the insurance company. The Ombudsman will make his recommendations
within one month of the receipt of the complaint.**c)** **Award**The dispute can be settled by intermediation. If this is not possible, the
Ombudsman will pass an award to the insured which he thinks is fair within a
period of 3 months from the date of receipt of all requirements from the
complainant and sending a copy of the award to the complainant and the
insurer.The insurer shall comply with the award within 30 days of the receipt of the
award and intimate compliance of the same to the Ombudsman. The award
of the Ombudsman shall be binding on the insurer.**F.** **Right to Information**In addition to the rules and regulations that are specific for grievance redressal
in insurance, there are certain general laws common to everyone in the country.
The Right to Information (RTI) Act, 2005 enacted by the Govt. of India is an
important law that gives citizens of India access to the information available with
public authorities which promotes transparency and accountability in these
organisations. The Act provides for appointment of a Chief Public Information
Officer (CPIO) to deal with requests for information. IRDAI is obliged to provide
information to members of public in accordance with the provisions of the said
Act. Agents should be aware that as per the RTI Act, IRDAI and Insurance
Companies may have to reveal certain information to customers and others; as
also allow them to inspect the work, document, records, extracts or certified
copies of documents/ records and also information stored in electronic form.99However, there are certain categories of information that are exempt from
disclosure.**Test Yourself 1**The ______________ has jurisdiction to entertain complaints, where value of the
goods or services and the compensation claimed is up to Rs.20 lakhs.I. District CommissionII. State CommissionIII. Zilla ParishadIV. National Commission**Summary**IRDAI has launched an Integrated Grievance Management System (IGMS) which
acts as a central repository of insurance grievance data and as a tool for
monitoring grievance redress in the industry.Consumer disputes redressal agencies are established in each district and
state and at national level.As far as insurance business is concerned, the majority of consumer disputes
fall in categories such as delay in settlement of claims, non-settlement of
claims, repudiation of claims, quantum of loss and policy terms, conditions
etc.The Ombudsman, by mutual agreement of the insured and the insurer can act
as a mediator and counsellor within the terms of reference.- If the dispute is not settled by intermediation, the Ombudsman will pass
award to the insured which he thinks is fair, and is not more than what is
necessary to cover the loss of the insured.**Key Terms**1. Integrated Grievance Management System (IGMS)
2. The Consumer Protection Act, 2019
3. District Commission4. State Commission5. National Commission6. Insurance Ombudsman**Answers to Test Yourself****Answer 1** -The correct answer is I.100## CHAPTER C-10## REGULATORY ASPECTS FOR INSURANCE MARKETING **FIRM****Chapter Introduction**In this chapter, we discuss Regulatory aspects of Insurance marketing firm**Learning Outcomes**A. Regulations of Insurance marketing firm101Registration of Insurance Marketing Firm regulations came into effect from 21 [st]
January 2015.The following definitions are relevant.**1.** **Definitions:****i)** "Act" means the Insurance Act, 1938 (4 of 1938), as amended from time totime.
ii) “Applicant” meansa. A company formed under the Companies Act, 2013 (18 of 2013) or anyenactment thereof or under any previous company law which was in
force; or
b. A limited liability partnership formed and registered under the LimitedLiability Partnership Act, 2008; or
c. Co-operative Societies registered under Co-operative Societies Act,1912 or under any law for registration of Co-operative Societies; or
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3. District Commission4. State Commission5. National Commission6. Insurance Ombudsman**Answers to Test Yourself****Answer 1** -The correct answer is I.100## CHAPTER C-10## REGULATORY ASPECTS FOR INSURANCE MARKETING **FIRM****Chapter Introduction**In this chapter, we discuss Regulatory aspects of Insurance marketing firm**Learning Outcomes**A. Regulations of Insurance marketing firm101Registration of Insurance Marketing Firm regulations came into effect from 21 [st]
January 2015.The following definitions are relevant.**1.** **Definitions:****i)** "Act" means the Insurance Act, 1938 (4 of 1938), as amended from time totime.
ii) “Applicant” meansa. A company formed under the Companies Act, 2013 (18 of 2013) or anyenactment thereof or under any previous company law which was in
force; or
b. A limited liability partnership formed and registered under the LimitedLiability Partnership Act, 2008; or
c. Co-operative Societies registered under Co-operative Societies Act,1912 or under any law for registration of Co-operative Societies; or
d. Any other person as may be recognized by the Authority to act as anInsurance Marketing Firm.
iii) “Approved Institution” means an institution engaged in education and/ortraining particularly in the area of insurance sales, service and marketing,
approved and notified by the Authority from time to time.
iii-a) Aspirational District” means a district designated as such by the NITI
Aayog, Government of India or any other economically backward district, as
may be recognized by the Authority.
iv) "Authority" means the Insurance Regulatory and Development Authority ofIndia established under the provisions of Section 3 of the Insurance
Regulatory and Development Authority Act, 1999 (41 of 1999).
v) “Examination Body” for the purpose of these Regulations is theexamination body approved by the Authority for conducting certificationexams.
vi) “Financial Service Executive” (FSE) is an individual employed by InsuranceMarketing Firm and holding a valid licence issued by respective financial
regulators, other than the Authority, to market products specified by the
regulator.
vii) “Fit and Proper” is the criteria for determining the suitability for licensingan Applicant including his principal officer, directors or partners to act as
Insurance Marketing Firm.
viii) “Insurance Marketing Firm” is an entity registered by the Authority tosolicit or procure insurance products as specified by the regulator, to
undertake insurance service activities as specified by the regulator and
to distribute other financial products as specified by the regulator by
employing individuals licensed to market, distribute and service such
other financial products.
ix) "Insurance Sales Person" (ISP) is an individual employed by InsuranceMarketing Firm to solicit or procure insurance products.102x) “Insurance Servicing Activity” means the activities specified in theregulation below.
xi) "Principal Officer” of Insurance Marketing Firm means a director or apartner or any officer or employee so designated by it, and approved by
the Authority, to exclusively supervise the activities of Insurance
Marketing Firm and who possesses the requisite qualifications and
practical training and who has passed examination as required under these
Regulations.
xii) “Regulations” means Insurance Regulatory and Development Authority ofIndia (Registration of Insurance Marketing Firm) Regulations, 2015.**2.** **Scope and applicability of these Regulations:**
These regulations shall covera. (i) Tie-ups with insurers:The Insurance Marketing Firms (IMF) shall engage Insurance Sales Persons (ISP)
for the purpose of soliciting and procuring insurance products of maximum of two
Life insurers, two General insurers and two Health insurers at any point of time,
under intimation to the Authority.Provided that in addition to two General insurers, Insurance Marketing Firm shall
have option to engage with Agriculture Insurance Company of India Ltd. (AIC) and
Export Credit Guarantee Corporation Ltd.(ECGC).Provided further that any change in the engagement with the insurers shall be
governed by the terms of the agreement entered into between the Insurance
Marketing Firm and the insurer, with suitable arrangements for servicing existing
policyholders by the concerned insurer, in case of cancellation / termination /
discontinuity of agreement.The Insurance Marketing Firm shall intimate the Authority of any such change in
the engagement with insurers in the format specified by the Authority in this
behalf.(ii) Products allowed for Insurance Marketing Firms:The Insurance Marketing Firm shall be allowed to solicit or procure:
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These regulations shall covera. (i) Tie-ups with insurers:The Insurance Marketing Firms (IMF) shall engage Insurance Sales Persons (ISP)
for the purpose of soliciting and procuring insurance products of maximum of two
Life insurers, two General insurers and two Health insurers at any point of time,
under intimation to the Authority.Provided that in addition to two General insurers, Insurance Marketing Firm shall
have option to engage with Agriculture Insurance Company of India Ltd. (AIC) and
Export Credit Guarantee Corporation Ltd.(ECGC).Provided further that any change in the engagement with the insurers shall be
governed by the terms of the agreement entered into between the Insurance
Marketing Firm and the insurer, with suitable arrangements for servicing existing
policyholders by the concerned insurer, in case of cancellation / termination /
discontinuity of agreement.The Insurance Marketing Firm shall intimate the Authority of any such change in
the engagement with insurers in the format specified by the Authority in this
behalf.(ii) Products allowed for Insurance Marketing Firms:The Insurance Marketing Firm shall be allowed to solicit or procure:
1. all kinds of products sold on individual and / or retail basis, including cropinsurance for non-loanee farmers and combi products.2. property, group personal accident, group health, GSLI and term insurancepolicies for Micro, Small and Medium Enterprises (MSME). The IMF shall
not be allowed to solicit and procure commercial lines of business for any
segment except for MSMEs.103_Explanation: For the purpose of these Regulations,_
_a._ _“Combi products” mean any combination of products of life, general and__health insurance as approved by the Authority._
_b._ _“Micro, Small and Medium Enterprises” shall have the meaning as defined__in ‘The Micro, Small and Medium Enterprises Development Act, 2006’, as_
_amended from time to time_ .]b. Insurance Servicing Activities of the Insurance Marketing Firm by: InsuranceServicing Activities of the Insurance Marketing Firm by:i. undertaking such activities of insurers as allowed in the Insurance
Regulatory and Development Authority of India (Outsourcing of Activities
by Indian Insurers) Regulations, 2017, as amended from time to time;
ii. becoming approved person of Insurance Repositories;
iii. any other insurance related activity permitted by the Authority from time
to time._Explanation: For the purpose of these Regulations, the Insurance_
_Marketing Firm shall undertake the insurance servicing activities in_
_respect of only those insurance companies with whom they have an_
_agreement for soliciting or procuring insurance products;_c. Marketing of other financial products through the FSE engaged by theInsurance Marketing Firm namely:
i) Mutual funds of mutual fund companies regulated by SEBI;
ii) Pension products regulated by PFRDA;
iii) Other financial products distributed by SEBI licensed Investment Advisors;
iv) Banking/ financial products of banks/ NBFC regulated by RBI;
v) Non-insurance products offered by Department of Posts, Government ofIndia;
Any other financial product or activity permitted by the Authority from time
to time.d. An IMF shall abide by the guidelines /regulations/circulars issued by theAuthority from time to time on Distance Marketing of Insurance Products
subject to the following:Distance Marketing shall bei) undertaken by the IMF without engaging tele-marketer(s).
ii) undertaken after obtaining prior approval from the Authority.
iii) carried out only through ISPs.
iv) on behalf of those Insurer(s) with whom agreements are entered by IMFfor carrying out insurance business activity as specified.104**REGISTRATION OF INSURANCE MARKETING FIRM****3.** **Application for grant of Registration to Insurance Marketing Firm** :An Applicant desiring to obtain a Registration to act as an Insurance Marketing
Firm shall follow the following procedure:**a.** Submit an application to the Authority (Form A).
**b.** Remit the non-refundable application fees of five thousand rupees alongwith the application for grant of a registration.
**c.** Submit all the necessary documents as mentioned in detail in theapplication Form - A along with declaration of principal officer / directors
/ managing partners satisfying the fit & proper criteria in the prescribed
form or as may be additionally prescribed by the Authority.
**d.** Submit copy of the Insurance Marketing Firm Exam pass Certificate of thePrincipal Officer and the ISPs proposed to be engaged by the Insurance
Marketing Firm.
**e.** Submit copy of the approved person certificate of the InsuranceRepository of the Insurance Marketing Firm.
**f.** Submit copy of the licenses or authorization or registration obtained bythe FSE proposed to be employed by the Insurance Marketing Firm issued
by SEBI, RBI, PFRDA, Post Office for the line of activity proposed to be
undertaken.
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REGISTRATION OF INSURANCE MARKETING FIRM
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Firm shall follow the following procedure:**a.** Submit an application to the Authority (Form A).
**b.** Remit the non-refundable application fees of five thousand rupees alongwith the application for grant of a registration.
**c.** Submit all the necessary documents as mentioned in detail in theapplication Form - A along with declaration of principal officer / directors
/ managing partners satisfying the fit & proper criteria in the prescribed
form or as may be additionally prescribed by the Authority.
**d.** Submit copy of the Insurance Marketing Firm Exam pass Certificate of thePrincipal Officer and the ISPs proposed to be engaged by the Insurance
Marketing Firm.
**e.** Submit copy of the approved person certificate of the InsuranceRepository of the Insurance Marketing Firm.
**f.** Submit copy of the licenses or authorization or registration obtained bythe FSE proposed to be employed by the Insurance Marketing Firm issued
by SEBI, RBI, PFRDA, Post Office for the line of activity proposed to be
undertaken.
**g.** Submit an undertaking stating that a tele marketer(s) shall not be engagedfor solicitation/lead generation of insurance business.**4.** **Consideration of application and eligibility criteria for Insurance Marketing****Firm:**
**a.** The Authority while considering an application for grant of a registrationshall take into account, all matters relevant to carrying out of the
functions by the Insurance Marketing Firm.
**b.** Without prejudice to the above, the Authority in particular, shall take intoaccount the following, namely:i) Whether any of the Directors, Partners, Principal Officer or one ormore of its officers or other employees so designated by it and in the
case of any other person, the chief executive by whatever name
called, or one or more of his employees designated by him of the
Applicant is suffering from any of the disqualifications specified under
sub-section (5) of section 42 D of the Insurance Act, 1938, as amended
from time to time;
ii) Whether any person, directly or indirectly connected with theApplicant, has been refused in the past the grant of any license or
registration by the Authority.
iii) Whether the Applicant fulfils the capital adequacy requirements asspecified below.
iv) Whether the ‘Principal Officer, and ISP meet the criteria as laid downby the Authority.105v) Whether the Applicant has the necessary infrastructure like adequateoffice space earmarked for its Insurance Marketing Firm activities,
equipment and trained manpower to effectively discharge its
activities.
vi) Whether the Applicant has in its name the word “Insurance MarketingFirm” or “IMF”.
vii) Whether the Applicant which is also engaged in activities other thaninsurance activities, has necessary approvals/ authorizations from
respective authorities;
viii) Whether the Authority is of the opinion that the grant of registrationwill be in the interest of policyholders and other clients.**5.** **Capital Requirements of Insurance Marketing Firm** :a. The applicant shall have a net worth of:i) Not less than five lakh rupees, if the applicant is opting for only onedistrict, which is an aspirational district.
Provided that increase in net worth arising out of change of status of
aspirational district is mandatory at the time of renewal of
registration
ii) Not less than ten lakh rupees for all other cases.
_Explanation: For the purposes of these Regulations, “net worth” shall have_
_the meaning assigned to it in the Companies Act, 2013 and as amended from_
_time to time._
b. The Applicant shall ensure that the net worth is maintained at all timesand Insurance Marketing Firm shall submit a certificate duly certified by a
chartered accountant to this effect annually within three months from the
close of the financial year.
c. The aggregate holdings of equity shares or contribution of the InsuranceMarketing Firm by a foreign investors, including portfolio investors, shall
not exceed such per cent of limits as prescribed by the Central
Government from time to time, under Indian Insurance Companies
(Foreign Investment) Rules, 2015.For the purposes of these regulations,
the calculations of foreign investment shall be made in the same manner
as specified in the Insurance Regulatory and Development Authority
(Registration of Indian Insurance Companies) Regulations, 2000 for an
insurer, as amended from time to time.**6. Period of validity of registration of the Insurance Marketing Firm:**a) The registration of an Insurance Marketing firm shall be valid for a periodof three years from the date of its issue, unless it is suspended or
cancelled by the Authority [or surrendered by the Insurance Marketing
Firm]. The Registration can be renewed by the authority on receipt of
such application, documents and fee as are prescribed.
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|
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_time to time._
b. The Applicant shall ensure that the net worth is maintained at all timesand Insurance Marketing Firm shall submit a certificate duly certified by a
chartered accountant to this effect annually within three months from the
close of the financial year.
c. The aggregate holdings of equity shares or contribution of the InsuranceMarketing Firm by a foreign investors, including portfolio investors, shall
not exceed such per cent of limits as prescribed by the Central
Government from time to time, under Indian Insurance Companies
(Foreign Investment) Rules, 2015.For the purposes of these regulations,
the calculations of foreign investment shall be made in the same manner
as specified in the Insurance Regulatory and Development Authority
(Registration of Indian Insurance Companies) Regulations, 2000 for an
insurer, as amended from time to time.**6. Period of validity of registration of the Insurance Marketing Firm:**a) The registration of an Insurance Marketing firm shall be valid for a periodof three years from the date of its issue, unless it is suspended or
cancelled by the Authority [or surrendered by the Insurance Marketing
Firm]. The Registration can be renewed by the authority on receipt of
such application, documents and fee as are prescribed.
b) No Insurance Marketing Firm is allowed to function as such after theexpiry of registration unless it is renewed by the Authority. They shall not
engage any person without a valid registration for the purposes of carrying
out the functions of Insurance Marketing Firm.106**7.** **Principal Officer of the Insurance Marketing Firm:**a. The Insurance Marketing Firm shall designate a Principal Officer who shallbe the overall in charge and shall be responsible for regulatory
compliance to the Authority.
b. On resignation or termination or death of the Principal Officer, theInsurance Marketing Firm shall endeavour to appoint a new Principal
Officer at the earliest, and seek approval, within a period not exceeding
60 days, from the Authority.
Provided that in the absence of a Principal Officer, a whole time director
or managing partner or any other senior designated official of the
Insurance Marketing Firm may, under intimation to the Authority, be
authorized to act and perform the duties of the Principal Officer to meet
regulatory compliance requirements only; and shall not solicit insurance
business unless they have also undergone the training and passed the
examination, and meet all the eligibility criteria of a Principal Officer.**8.** **Principal Officer of the Insurance Marketing Firm – Eligibility Criteria**The Principal Officer of the Insurance Marketing Firm, shall fulfil any of the
eligibility conditions as given below:
(a) Associate/Fellow of the Insurance Institute of India, Mumbai; or
(b) Associate/Fellow of the Institute of Actuaries of India; or
(c) Associate/Fellow of Chartered Insurance Institute, London; or
(d) Post graduate qualification of the Institute of Insurance and RiskManagement, Hyderabad; or
(e) Graduate with Insurance experience of two years preceding the year inwhich the application is made; or
(f) Graduate with 5 years of experience in financial services sector precedingthe year in which the application is made.
(g) Master’s in Business Administration or its equivalent from any institution/ university recognized by UGC / AICTE / any State Government or the
Govt. of India; or
(h) Associate / Fellow of the Institute of Chartered Accountants of India, NewDelhi; or
(i) Associate / Fellow of the Institute of Cost Accountants of India, Kolkata;or
(j) Executive/Professional of the Institute of Company Secretaries of India,New Delhi; or
(k) Any other qualification specified by the Authority from time to time.**9.** **Training, Examination and Certification of Principal Officer**The Principal Officer of the Insurance Marketing Firm shall fulfil the
requirements for training, examination and certification as mentioned below:
**a.** The Principal Officer shall undergo Fifty Hours of Insurance Marketing Firmtraining from an institution recognised by the Authority, and should pass
an examination, at the end of the period of training, conducted by the
Examination Body recognised by the Authority.107**b.** In case the Principal Officer of the Insurance Marketing Firm possesses anyone of the following qualifications, then he/she shall undergo Twenty Five
Hours of training and pass the examination:
(i) Associate/ Fellow of the Insurance Institute of India, Mumbai; or
(ii) Associate/ Fellow of the Institute of Actuaries of India; or
(iii) Associate/Fellow of Chartered Insurance Institute, London; or
(iv) Post graduate qualification of the Institute of Insurance and Risk
Management, Hyderabad.
**c.** If the proposed Principal Officer has undergone training and passedexamination as required for the Principal Officer of an insurance broking
company / Corporate Agent / Web Aggregator, then he / she shall be
exempted from training and examination requirement to become the
Principal Officer of the Insurance Marketing Firm.
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requirements for training, examination and certification as mentioned below:
**a.** The Principal Officer shall undergo Fifty Hours of Insurance Marketing Firmtraining from an institution recognised by the Authority, and should pass
an examination, at the end of the period of training, conducted by the
Examination Body recognised by the Authority.107**b.** In case the Principal Officer of the Insurance Marketing Firm possesses anyone of the following qualifications, then he/she shall undergo Twenty Five
Hours of training and pass the examination:
(i) Associate/ Fellow of the Insurance Institute of India, Mumbai; or
(ii) Associate/ Fellow of the Institute of Actuaries of India; or
(iii) Associate/Fellow of Chartered Insurance Institute, London; or
(iv) Post graduate qualification of the Institute of Insurance and Risk
Management, Hyderabad.
**c.** If the proposed Principal Officer has undergone training and passedexamination as required for the Principal Officer of an insurance broking
company / Corporate Agent / Web Aggregator, then he / she shall be
exempted from training and examination requirement to become the
Principal Officer of the Insurance Marketing Firm.
Provided that the training and examination was undertaken within a period
of five years preceding the date of application as Principal Officer of the
IMF.**10.Fit & Proper Criteria for Principal Officer of the Insurance Marketing Firm**The Principal Officer of the Insurance Marketing Firm seeking registration
shall be considered as a ‘fit and proper person’, if he fulfils the conditions,
including, but not limited to the following criteria –i. Financial integrity;
ii. Absence of convictions or civil liabilities;
iii. Competence;iv. Good reputation and character;v. Efficiency and honesty; and
vi. Absence of any disqualification to act as an intermediary as stipulatedin the Act, as amended from time to time.**11.Certification requirements for ISP & FSE****a.** The Insurance Marketing Firm can engage individuals to market Insuranceand/or Financial Products as specified before.
**b.** Insurance Marketing Firm is not permitted to engage in marketing anyother financial products other than the financial products specified above.
**c.** ISPs engaged by the Insurance Marketing Firm are allowed to solicit andprocure insurance products of those insurers with whom the IMF has
entered into tie-up / agreement.
**d.** FSEs engaged by the Insurance Marketing Firm to market financialproducts, should have valid license or certificate issued by the respective
regulator as specified in these Regulations.
**e.** FSEs shall be governed by the regulations of the respective regulators andshall be responsible for any act of omission and commission and subject
to any disciplinary action initiated by the respective regulatory/ statutory
authorities.108**12.Qualifications and Eligibility criteria for ISP:**The ISP shall possess the minimum qualification of:
**a.** Pass in 12th Class or equivalent examination from a recognizedBoard/Institution.
**b.** Should have undergone the Insurance Marketing Firm Training prescribedby the Authority and qualified in the Insurance Marketing Firm
Examination from an institution recognized by the Authority as stated
below.
**c.** Should be resident in the area of Registration of IMF.**13.Training, Examination and Certification of ISP**The ISP of an Insurance Marketing Firm shall meet the same requirements of
training, examination and certification as those prescribed for the Principal
Officer of the Insurance Marketing Firm.**14.Engagement of FSE****a.** FSEs engaged by the Insurance Marketing Firm for marketing otherfinancial products as specified by the regulation shall possess valid
license/ certificate/authorization issued by respective authorities
empowered to issue such license/certificate/authorization.
**b.** FSE deployed in the Insurance Marketing Firm shall meet the necessarytraining, qualifications, experience and other requirements as may be
specified by the other regulatory/ statutory authorities for the line of
activity undertaken on an on-going basis in order to be fully in compliance
with applicable law, regulations, rules, guidelines, circulars, etc.
**15.Remuneration payable to the Insurance Marketing Firm**i. The Insurer shall make all remuneration for soliciting and procuring
insurance policies undertaken by an Insurance Marketing Firm, to the
concerned Insurance Marketing Firm only, and not to any other person or
entity.
The payment of remuneration and/ or reward to an Insurance Marketing
Firm by an insurer shall be as per Insurance Regulatory and Development
Authority of India (Payment of commission or remuneration or reward to
insurance agents and insurance intermediaries) Regulations, 2016 (as
amended from time to time).In addition, the Insurance Marketing Firm may receive reimbursement of
expenses from Life insurers towards recruitment, training and mentoring
of their ISPs. This reimbursement shall not exceed 50% of first year
commission and 10% of renewal commission received by the IMF in case of
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**b.** FSE deployed in the Insurance Marketing Firm shall meet the necessarytraining, qualifications, experience and other requirements as may be
specified by the other regulatory/ statutory authorities for the line of
activity undertaken on an on-going basis in order to be fully in compliance
with applicable law, regulations, rules, guidelines, circulars, etc.
**15.Remuneration payable to the Insurance Marketing Firm**i. The Insurer shall make all remuneration for soliciting and procuring
insurance policies undertaken by an Insurance Marketing Firm, to the
concerned Insurance Marketing Firm only, and not to any other person or
entity.
The payment of remuneration and/ or reward to an Insurance Marketing
Firm by an insurer shall be as per Insurance Regulatory and Development
Authority of India (Payment of commission or remuneration or reward to
insurance agents and insurance intermediaries) Regulations, 2016 (as
amended from time to time).In addition, the Insurance Marketing Firm may receive reimbursement of
expenses from Life insurers towards recruitment, training and mentoring
of their ISPs. This reimbursement shall not exceed 50% of first year
commission and 10% of renewal commission received by the IMF in case of
Life insurers.ii. The Insurance Marketing Firm shall also be entitled to receive the fees for
undertaking insurance service activities as may be mutually agreed
between the Insurance Marketing Firm and the Insurance Company which
shall be reasonable depending upon the time and effort and should be109evidenced by an agreement entered at the outset with basis of fees being
clearly addressed.
iii. The Insurance Marketing Firm will also be entitled to collect the
‘Applicable Service Charges’ from the financial entities for the services
rendered by the FSE employed by the Insurance Marketing Firm.
iv. The settlement of accounts by insurers in respect of remuneration of
Insurance Marketing Firm shall be done on a monthly basis.**16. Remuneration of ISPs and FSEs and migration of ISPs****1.** Minimum fixed salary of ISP and FSE:(i) Every ISP employed by the Insurance Marketing Firm shall be paid afixed minimum monthly salary as per the applicable laws. Variable pay
over and above the fixed monthly salary may also be payable
depending on the arrangement between the IMF and the ISP.
(ii) The FSE shall be paid remuneration by the financial entities as per theapplicable guidelines of respective regulators.
(iii)An Insurance Marketing Firm found violating the condition set out inclause (i) above would be liable for cancellation of registration with
notice.
**2.** Migration of insurance agents to Insurance Marketing Firm:(i) An individual agent cannot migrate or join Insurance Marketing Firmas PO / ISP / Managing Partner / Director unless he has resigned from
his existing agency appointment and meets the eligibility criteria as
specified in these Regulations.(ii) Provided that the continuation of agency benefits of an agentmigrating to or joining an Insurance Marketing Firm shall be governed
by the Board approved policy of the respective insurers.
(iii)An Individual employed as an ISP in an Insurance Marketing Firm shallnot be allowed to migrate to any insurance company, insurance
marketing firm or insurance broking firm unless he has obtained a No
Objection Certificate (NOC) from the existing Insurance Marketing
Firm.**17. Area of operation of the Insurance Marketing Firm****1.** The Insurance Marketing Firm shall employ ISPs who are resident in thearea for which the request for registration is made in the application and
approved by Authority. However, the IMF shall be free to solicit or procure
the insurance business from all over the country;
**2.** The “Area” is defined as the district for which the registration of theInsurance Marketing Firm is valid. Maximum of three districts within a
State are allowed for registration/renewal.
**3.** The Area selected by the Insurance Marketing Firm shall be clearlymentioned in the application Form A and renewal application Form AA
while submitting the application to the Authority.
Provided that if an applicant is opting for more than one district, then at
least one of the districts shall be aspirational.110**4.** Provided further that any addition of office or change in registeredaddress by the Insurance Marketing Firm shall be done only with prior
approval from the Authority. Request for addition of office or change in
registered address shall be made to the Authority in the format as may be
specified in this behalf;
**5.** The Authority shall incorporate the Area in the registration made in FormB to the Insurance Marketing Firm.
**6.** The Insurance Marketing Firm may apply for more Areas subject tomaximum of three districts while filing the application for renewal of
registration.
**7.** The Insurance Marketing Firm shall specify the details of the offices to beset up in the Area opted; including manpower deployment in the
application form for fresh registration and renewal. The additional areas
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State are allowed for registration/renewal.
**3.** The Area selected by the Insurance Marketing Firm shall be clearlymentioned in the application Form A and renewal application Form AA
while submitting the application to the Authority.
Provided that if an applicant is opting for more than one district, then at
least one of the districts shall be aspirational.110**4.** Provided further that any addition of office or change in registeredaddress by the Insurance Marketing Firm shall be done only with prior
approval from the Authority. Request for addition of office or change in
registered address shall be made to the Authority in the format as may be
specified in this behalf;
**5.** The Authority shall incorporate the Area in the registration made in FormB to the Insurance Marketing Firm.
**6.** The Insurance Marketing Firm may apply for more Areas subject tomaximum of three districts while filing the application for renewal of
registration.
**7.** The Insurance Marketing Firm shall specify the details of the offices to beset up in the Area opted; including manpower deployment in the
application form for fresh registration and renewal. The additional areas
opted at the time of renewal shall be considered on merits.
Provided that if the Insurance Marketing Firm has more than one office,it will ensure that each office shall have at least one ISP.**8.** If additional Areas are not opted by the Insurance Marketing Firm in therenewal Application, renewal will be considered for the original
jurisdiction for which the registration was made.
**9.** The Insurance Marketing Firm may opt for a change in the Area whileapplying for renewal of registration. The Authority may consider the
request subject to the Insurance Marketing Firm submitting details of the
offices to be set up in the newly opted areas; including manpower
deployment etc. in the Renewal Application form.**18. Duties and Obligations of Insurance Marketing Firm towards ISP****1.** Insurance Marketing Firm, on obtaining the registration from theAuthority, may enter into agreement with Insurance companies for
carrying out Insurance Business activity.
**2.** Insurance Marketing Firm shall engage licensed ISP and FSE on salary andincentive basis.
**3.** Insurance Marketing Firm shall include the relevant conditions and clausesin the agreement with the ISP engaged by the firm on matters relating to—
a. Engagement with the Insurance Marketing Firm
b. Prescribed code of conduct,
c. Sales processes/rules etc.
d. Remuneration
i. The remuneration payable to ISP by the Insurance Marketing Firm, forsolicitation and procurement of policies by the ISPs shall be on salary
and incentive basis.
ii. In addition to the minimum amount specified above, the InsuranceMarketing Firm, depending upon ISPs performance can pay him
additional incentives, which are declared upfront and form part of
the employment agreement between him and the Insurance
Marketing Firm.111e. The Insurance marketing Firm under no circumstances can dismiss theISP from employment during the period of the registration, except as
allowed under Reg. 27 (2) (b).
f. Any change of employer by the ISP shall be at the time of renewal ofthe registration of the Insurance Marketing Firm or by way of
resignation submitted to the Insurance Marketing Firm subject to
fulfilment of conditions as laid down in regulation 27(2)(b) of these
regulations.
**4.** Insurance Marketing Firm shall assist the individuals intending to becomeISPs to undergo the prescribed training and certification.
**5.** Insurance Marketing Firm shall ensure continuous monitoring of theactivities of the ISP and be responsible for the compliance of these
Regulations and the code of conduct by ISPs.**19. Duties and Obligations of Insurance Marketing Firm towards Authority**The Insurance Marketing Firm shall
**a.** Undertake to immediately notify the Authority in writing within 30 daysof:
i) Any change in the status of registration with regard to scope ofactivities of the Insurance Marketing Firm issued by the Authority;
ii) any change in the engagement with the insurers;
iii) any addition or deletion of ISPs;
iv) Any change in its constitution (including shareholding change),ownership, directors / partners;
v) Any disciplinary proceedings or investigation by any other regulatory /statutory Authority.
**b.** Ensure that ISPs responsible for solicitation of insurance business shall becompetent, qualified, have undergone the required training and passed
the examination as specified by the Authority;
**c.** Not divulge any confidential information about its client, which has cometo its knowledge, without taking prior permission of its clients, except
where such disclosures are required to be made in compliance with any
law for the time being in force.
**d.** Adhere to the IRDA (Advertisement & Disclosure) Regulation, 2000, asapplicable to intermediaries as amended from time to time and take
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**a.** Undertake to immediately notify the Authority in writing within 30 daysof:
i) Any change in the status of registration with regard to scope ofactivities of the Insurance Marketing Firm issued by the Authority;
ii) any change in the engagement with the insurers;
iii) any addition or deletion of ISPs;
iv) Any change in its constitution (including shareholding change),ownership, directors / partners;
v) Any disciplinary proceedings or investigation by any other regulatory /statutory Authority.
**b.** Ensure that ISPs responsible for solicitation of insurance business shall becompetent, qualified, have undergone the required training and passed
the examination as specified by the Authority;
**c.** Not divulge any confidential information about its client, which has cometo its knowledge, without taking prior permission of its clients, except
where such disclosures are required to be made in compliance with any
law for the time being in force.
**d.** Adhere to the IRDA (Advertisement & Disclosure) Regulation, 2000, asapplicable to intermediaries as amended from time to time and take
measures to enhance the awareness of insurance.
**e.** Display at their place of work/office, details of their registration issuedby the Authority such as, date of issue of registration and it validity, and
list of permitted business activities, grievance handling process, list of
ombudsman and such other relevant information as may be required under
other applicable statute.
**f.** Comply with all applicable provisions under the Act, as amended fromtime to time, including rules, regulations, circulars and guidelines issued
by Authority from time to time.
**g.** Perform its duties, functions in accordance with terms of the registrationin a manner that they do not work as fronting arrangements or a franchise
institution and shall act in the public interest and in fiduciary capacity be112accountable for the omissions and commissions of their own
employees/persons engaged by them, in case of violations committed by
such employees/persons;
**h.** maintain a Professional Indemnity Insurance Cover as required underRegulations;**20. Duties and Obligations of Insurance Marketing Firm towards Insurance****Companies**
Insurance Marketing Firm, on obtaining the registration from the Authority
under Sec. 42D of the Act, as amended from time to time, to act as an
insurance intermediary, may enter into agreements with Insurance companies
for carrying out Insurance Business activity. The Agreement shall include
conditions relating to.
(a) Engagement with the Insurance Marketing Firm
(b) Prescribed code of conduct,
(c) Sales processes/rules etc.
(d) Remuneration basis
(e) Minimum term
(f) Sharing of records
(g) Product training
(h)Collection of premiums through Reserve Bank of India (RBI) recognizedmode of payments and as mutually agreed between the IMF and the insurer
in the agreement.**21. Cancellation of Registration of the Insurance Marketing Firm with Notice**The Authority may suspend or cancel the registration of an Insurance
Marketing Firm for any one or more of the following reasons:
i) Suffers at any time during the period of the registration from any of thedisqualifications specified under subsection (5) of section 42D of the Act,
as amended from time to time;
ii) Violates the provisions of the Act, as amended from time to time, IRDAAct 1999 and Rules, Regulations, Guidelines, Notices, Circulars made there
under, such as:
a. Fails to furnish any information relating to its activities as an InsuranceMarketing Firm as required by the Authority;
b. Furnishes wrong or false information; or conceals or fails to disclosematerial facts in the application submitted for obtaining a
registration;
c. Indulges in rebates or inducements in cash or kind to a client or any ofthe client's Directors or other employees or any person acting as an
introducer;
d. Fails to carry out its obligations as specified in these Regulations;
e. Fails to comply with any of the conditions subject to which theregistration has been granted;
f. Fails to comply with duties and obligations of Insurance Marketing Firmtowards ISP;113g. Fails to comply with duties and obligations of Insurance Marketing Firmtowards Authority;
h. Fails to comply with duties and obligations of Insurance Marketing Firmtowards Insurance Companies;
iii) Resort to spurious calls or mis-selling;
iv) Acts in a manner against the interest of the policyholders or against publicinterest.**22. Code of Conduct of ISP and FSE**Every ISP holding a valid certificate shall adhere to the code of conduct
specified below:
**(i) Every ISP shall:**a. Identify himself and the Insurance Marketing Firm of whom he is anISP;
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b. Furnishes wrong or false information; or conceals or fails to disclosematerial facts in the application submitted for obtaining a
registration;
c. Indulges in rebates or inducements in cash or kind to a client or any ofthe client's Directors or other employees or any person acting as an
introducer;
d. Fails to carry out its obligations as specified in these Regulations;
e. Fails to comply with any of the conditions subject to which theregistration has been granted;
f. Fails to comply with duties and obligations of Insurance Marketing Firmtowards ISP;113g. Fails to comply with duties and obligations of Insurance Marketing Firmtowards Authority;
h. Fails to comply with duties and obligations of Insurance Marketing Firmtowards Insurance Companies;
iii) Resort to spurious calls or mis-selling;
iv) Acts in a manner against the interest of the policyholders or against publicinterest.**22. Code of Conduct of ISP and FSE**Every ISP holding a valid certificate shall adhere to the code of conduct
specified below:
**(i) Every ISP shall:**a. Identify himself and the Insurance Marketing Firm of whom he is anISP;
b. Disclose his certificate particulars to the prospect on demand;
c. Disseminate the requisite information in respect of insurance productsoffered; and take into account the needs of the prospect while
recommending an insurance product;
d. Undertake needs analysis for clients;
e. Compare products of insurers with which they have arrangement;
f. Recommend the product based on clients’ needs;
g. Indicate the premium to be charged by the insurer for the insuranceproduct offered;
h. Disclose the scales of remuneration in respect of the insurance productoffered, if asked by the prospect;
i. Explain to the prospect the nature of information required in theproposal form by the insurer, and also the importance of disclosure of
material information in the purchase of an insurance contract;
j. bring to the notice of the insurer any adverse habits or incomeinconsistency of the prospect, in the form of a report (called
“Insurance Confidential Report”) along with every proposal submitted
to the insurer, and any material fact that may adversely affect the
underwriting decision of the insurer as regards acceptance of the
proposal, by making all reasonable enquiries about the prospect;
k. Inform promptly the prospect about the acceptance or rejection of theproposal by the insurer;
l. Obtain the requisite documents at the time of filing the proposal formwith the insurer and other documents subsequently asked for by the
insurer for completion of the proposal;
m. Render necessary assistance to the policyholders or claimants orbeneficiaries in complying with the requirements for settlement of
claims by the insurer;
n. Advise every individual policyholder to effect nomination orassignment or change of address or exercise of options, as the case
may be, and offer necessary assistance in this behalf, wherevernecessary;
o. Forward any information received from the client regarding a claim oran incident that may give rise to a claim without delay;114p. Advise the client without delay of the insurer's decision or otherwiseof a claim;
q. Ensure that statements made regarding the policies to the customerare not misleading or exaggerated;
r. Ensure the compliance of Section 64-VB(4) of the Act, as amendedfrom time to time;
s. Draw the attention of the client to Section 41 of the Act, as amendedfrom time to time, which prohibits rebating and sharing of commission
/ remuneration;
t. Ensure the compliance of AML and KYC guidelines in force.
u. Act in a fiduciary capacity towards its clients and shall disclose allconflicts of interests as and when they arise;
v. Follow recognized standards of professional conduct and discharge hisfunctions in the interest of the policyholders. Comply with provisions
of the Act, as amended from time to time, IRDA Act, 1999, IRDA
(Protection of Policyholders’ Interests) Regulations, 2002 and any
other regulations, guidelines, circulars, directions issued by the
Authority from time to time.
**(ii) No ISP shall--****a.** Solicit or procure insurance business without holding a validcertificate,
**b.** Induce the prospect to omit any material information in the proposalform;
**c.** Induce the prospect to submit wrong information in the proposal formor documents submitted to the insurer for acceptance of the proposal;
**d.** Behave in a discourteous manner with the prospect;
**e.** Interfere with any proposal introduced by any other insuranceintermediary;
**f.** Offer different rates, advantages, terms and conditions other thanthose offered by his insurer;
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Final IC 38 -IMF_Composite -English_059
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u. Act in a fiduciary capacity towards its clients and shall disclose allconflicts of interests as and when they arise;
v. Follow recognized standards of professional conduct and discharge hisfunctions in the interest of the policyholders. Comply with provisions
of the Act, as amended from time to time, IRDA Act, 1999, IRDA
(Protection of Policyholders’ Interests) Regulations, 2002 and any
other regulations, guidelines, circulars, directions issued by the
Authority from time to time.
**(ii) No ISP shall--****a.** Solicit or procure insurance business without holding a validcertificate,
**b.** Induce the prospect to omit any material information in the proposalform;
**c.** Induce the prospect to submit wrong information in the proposal formor documents submitted to the insurer for acceptance of the proposal;
**d.** Behave in a discourteous manner with the prospect;
**e.** Interfere with any proposal introduced by any other insuranceintermediary;
**f.** Offer different rates, advantages, terms and conditions other thanthose offered by his insurer;
**g.** Demand or receive a share of proceeds from the beneficiary under aninsurance contract;
**h.** Force a policyholder to terminate the existing policy and to effect anew proposal through him within three years from the date of such
termination;
iii) Every ISP shall, with a view to conserve the insurance business alreadyprocured through him, make every attempt to ensure remittance of the
premiums by the policyholders within the stipulated time, by giving notice
to the policyholder orally and in writing;
iv) FSE: Every FSE shall abide by the code of conduct prescribed by therespective regulatory/statutory authority which oversees that particular
activity.
v) **Violation of Code of Conduct by the ISP** : The Code of Conduct specifiedabove has to be adhered to by the ISP. The Authority shall initiate
disciplinary action against the ISP and the IMF they are representing for
any non-compliance.115## SECTION## LIFE INSURANCE116## CHAPTER L-01## WHAT LIFE INSURANCE INVOLVES**Chapter Introduction**We have seen some aspects related to Insurance in the common chapters.
However, when it comes to Life insurance, we need to look at them more deeply. An asset
The risk insured against
The principle of pooling
The contractLet us now examine the features of life insurance. This chapter will take a brief
look at the various components of life insurance mentioned above.**Learning Outcomes**117**A.** **Life insurance business – Components, human life value, mutuality****a)** **The Asset – Human Life Value (HLV)**We have already seen that an asset is a kind of property that yields value or a
return. For most kinds of property both the value and loss of value amounts can
be measured in precise monetary terms.**Example**If the estimated damage of a car meeting an accident is Rs 50000, the insurer will
compensate the owner for this loss.How do we estimate the amount of loss when a person dies?Is he worth Rs. 50,000 or Rs. 5,00,000?An Agent must be able to answer the above question when meeting a customer.
Based on this the agent can determine how much insurance to recommend to the
customer. It is in fact the first lesson a life insurance agent must learn.Luckily we have a measure, developed almost seventy years ago by Prof. Hubener.
It is known as **Human Life Value (HLV)** and is used worldwide.The HLV concept considers human life as a kind of property or asset that earns
an income. It thus measures the value of human life based on an individual’s
expected net future earnings. Net earnings means the income a person expects
to earn each year in the future, less the amount he would spend on himself. It
thus indicates the economic loss a family would suffer if the wage earner were to
die prematurely. These earnings are capitalised, using an appropriate interest
rate to discount them.Although there are multiple parameters used to calculate HLV including taking
into account inflation, wage rise, future earning capacity etc., a simple thumb
rule to calculate HLV is to determine the amount that would generate the annual
income the family would be needing by way of interest. In other words HLV is the
annual contribution for the family by the breadwinner divided by the prevailing
rate of interest.**Example**Mr. Rajan earns Rs. 1,20,000 a year and spends Rs. 24,000 on himself. The net
earnings his family would lose, were he to die prematurely, would be Rs. 96,000
|
Final IC 38 -IMF_Composite -English.md
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E116
|
Violation of Code of Conduct by the ISP
|
Final IC 38 -IMF_Composite -English_060
|
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It is known as **Human Life Value (HLV)** and is used worldwide.The HLV concept considers human life as a kind of property or asset that earns
an income. It thus measures the value of human life based on an individual’s
expected net future earnings. Net earnings means the income a person expects
to earn each year in the future, less the amount he would spend on himself. It
thus indicates the economic loss a family would suffer if the wage earner were to
die prematurely. These earnings are capitalised, using an appropriate interest
rate to discount them.Although there are multiple parameters used to calculate HLV including taking
into account inflation, wage rise, future earning capacity etc., a simple thumb
rule to calculate HLV is to determine the amount that would generate the annual
income the family would be needing by way of interest. In other words HLV is the
annual contribution for the family by the breadwinner divided by the prevailing
rate of interest.**Example**Mr. Rajan earns Rs. 1,20,000 a year and spends Rs. 24,000 on himself. The net
earnings his family would lose, were he to die prematurely, would be Rs. 96,000
per year. Suppose the rate of interest is 8% (expressed as 0.08).**Human-Life-Value (HLV) = Annual Contribution for Dependents ÷ Rate of****Interest**HLV = 96000/ 0.08 = Rs. 12,00,000118HLV helps to determine how much insurance one should have for full protection.
It also tells us the upper limit beyond which providing life insurance may not be
reasonable.In general, the amount of insurance should be around 10 to 15 times one’s annual
income. Thus one should grow suspicious if Mr. Rajan was to ask insurance of Rs.
2 crores, while earning only Rs. 1.2 lakhs a year. The actual amount of insurance
purchased would depend on factors like how much insurance one can afford and
would like to buy.**B.** **Risk and Life Insurance**As we have seen above, life insurance provides protection against those risk
events that can destroy or reduce the value of human life as an asset. There are
three kinds of situations where such loss can occur. They are typical concerns
which ordinary people face.**Diagram 1:** Typical concerns faced by ordinary peopleGeneral insurance on the other hand typically deals with risks that affect property
– like fire, loss of cargo while at sea, theft and burglary and motor accidents.
They also cover events leading to loss of name and goodwill. These are covered
by liability insurance.Finally there are risks that can affect the person. Termed as personal risks, these
may also be covered by general insurance.**Example**Accident insurance which protects against losses suffered due to an accident.**a)** **How exactly does life insurance differ from general insurance?**|General Insurance|Life Insurance|
|---|---|
| Indemnity: General insurance policies,<br>with the exception of Personal Accident<br>Insurance, are usually contracts of<br>indemnity i.e. after an event like fire,<br>the insurer assesses the exact amount of<br>loss that has occurred and compensates<br>only that amount of loss – no more, no<br>less.| **Assurance:** Life insurance policies<br>are contracts of assurance.<br> The amount of benefit to be paid in<br>the event of death is fixed at the<br>beginning of the contract.<br> An assured sum is paid to the<br>nominees or beneficiaries of the<br>insured when he dies.|119| Duration: The contract is generally short<br>period or for one year renewable basis| The contract is generally long term<br>though some one year renewable<br>contracts are also prevalent|
|---|---|
| Uncertainty: In general insurance<br>contracts, the concerned risk event is<br>uncertain. No one can be certain about<br>whether a house would catch fire or a<br>car meet an accident.| There is no such question Death is<br>certain once a person is born. What<br>is uncertain is the time of death.<br>Life insurance offers protection<br>against the risk of premature death.|
| Increase in probability: In case of<br>General insurance perils like fire or<br>earthquake, the probability of happening<br>of the event does not increase with<br>time.| In life insurance the probability of<br>death increases with age.|**b)** **Nature of life insurance risk**Since probability of death increases with age, lower premiums are charged for
those who are young and higher premiums for older people. One result was that
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|
Final IC 38 -IMF_Composite -English_061
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|---|---|
| Uncertainty: In general insurance<br>contracts, the concerned risk event is<br>uncertain. No one can be certain about<br>whether a house would catch fire or a<br>car meet an accident.| There is no such question Death is<br>certain once a person is born. What<br>is uncertain is the time of death.<br>Life insurance offers protection<br>against the risk of premature death.|
| Increase in probability: In case of<br>General insurance perils like fire or<br>earthquake, the probability of happening<br>of the event does not increase with<br>time.| In life insurance the probability of<br>death increases with age.|**b)** **Nature of life insurance risk**Since probability of death increases with age, lower premiums are charged for
those who are young and higher premiums for older people. One result was that
old individuals who were in good health, tended to withdraw while unhealthy
members remained in the scheme. Insurance companies faced serious problems
as a result. Their attempts to develop life insurance policies that people could
afford led to the development of level premiums.**c)** **Level premiums**The level premium is fixed such that it does not increase with age but remains
constant throughout the contract period. This means premiums collected in early
years is more than the amount needed to cover death claims of those dying when
young, while premiums collected in later years are less than what is needed to
meet claims of those dying at higher ages. The level premium is an average of
both. The excess premiums of earlier ages compensate for the deficit of
premiums in later ages. The level premium feature is illustrated below.**Diagram 2:** **Level Premium**120Level premiums are required because life insurance contracts are long term
insurance contracts that run for 10, 20 or many more years. The concept of level
premiums, do not arise for general insurance policies, which are typically short
term and expire annually.**Example**The level premium rate is arrived at by the insurers based on the mortality
(probability of death) during the term of the policy as the age of the insured
would increase every year. The rate once decided shall be constant for the entire
term of the policy.**d)** **The Principle of Risk Pooling and Life Insurance**We have already discussed the Principle of Pooling and Mutuality earlier. The
pooling principle plays two specific roles in life insurance.i. It **provides protection against the economic loss arising as a result of one’s****untimely death** . This is done by creating a fund that pools the contributions
of many who have purchased a life insurance contract.**e)** **The Life Insurance Contract**The Policy document is the **evidence of the insurance contract** which a details
all the terms and conditions of the **insurance** .The contract states the sum assured of the life insurance policy. Life insurance is
regarded a **financial security** as the sum Insured is guaranteed by the contract.
The guarantee implies that life insurance is managed efficiently and
conservatively; strongly regulated and strictly supervised.Since Life insurance contracts involve both risk cover and savings, they are often
compared with financial products. They are also seen as a way of holding wealth
than as protection. Indeed, many life insurance products have a large cash value
or savings component which can form a significant part of an individual’s savings.
Some do argue that it may be better to buy only Term Insurance from an insurance
company and invest the balance premiums in instruments that yield higher
returns.Let us consider the arguments for and against traditional cash value insurance
contracts.**a)** **Advantages**i. Insurance has historically been proven as a **safe and secure investment**
**offering** a minimum guaranteed rate of return, which may increase with
contract duration.ii. Regularity of premium payments requires compulsory planning of one’s
savings and results in savings **discipline** .iii. The Insurer takes care of professional investment management and **frees**the **individual** of this responsibility121iv. Insurance **provides liquidity** . The insured can take a loan on or surrenderthe policy and convert it into cash.v. Both cash value type life insurance and annuities may enjoy some **income**
**tax advantages.**vi. Insurance may be **safe from creditors’ claims**, generally in the event ofthe insured’s bankruptcy or death.**b)** **Disadvantages**i. As insurance gives relatively fixed and stable returns, it can be seriously
affected by inflation.ii. High marketing and other initial costs reduces the amount of cash value
|
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y121
|
Nature of life insurance risk
|
Final IC 38 -IMF_Composite -English_062
|
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Some do argue that it may be better to buy only Term Insurance from an insurance
company and invest the balance premiums in instruments that yield higher
returns.Let us consider the arguments for and against traditional cash value insurance
contracts.**a)** **Advantages**i. Insurance has historically been proven as a **safe and secure investment**
**offering** a minimum guaranteed rate of return, which may increase with
contract duration.ii. Regularity of premium payments requires compulsory planning of one’s
savings and results in savings **discipline** .iii. The Insurer takes care of professional investment management and **frees**the **individual** of this responsibility121iv. Insurance **provides liquidity** . The insured can take a loan on or surrenderthe policy and convert it into cash.v. Both cash value type life insurance and annuities may enjoy some **income**
**tax advantages.**vi. Insurance may be **safe from creditors’ claims**, generally in the event ofthe insured’s bankruptcy or death.**b)** **Disadvantages**i. As insurance gives relatively fixed and stable returns, it can be seriously
affected by inflation.ii. High marketing and other initial costs reduces the amount of cash value
accumulated in earlier years of life insurance policies.iii. The guaranteed yield may be below that of other financial instruments**Test Yourself 1**How does diversification reduce risks in financial markets?I. Collecting funds from multiple sources and investing them in one placeII. Investing funds across various asset classesIII. Maintaining time difference between investmentsIV. Investing in safe assets**Summary**a) Asset is a kind of property that yields value or a return.b) The HLV concept considers human life as a kind of property or asset that earnsan income. It thus measures the value of human life based on an individual’s
expected net future earnings.c) The level premium is a premium fixed such that it does not increase with agebut remains constant throughout the contract period.d) Mutuality is one of the important ways to reduce risk in financial markets, theother being diversification.e) The element of guarantee in a life insurance contract implies that lifeinsurance is subject to stringent regulation and strict supervision.**Key Terms**1. Asset2. Human Life Value1223. Level premium4. Mutuality5. Diversification**Answers to Test Yourself****Answer 1** - The correct answer is II.123## CHAPTER L-02## FINANCIAL PLANNING**Chapter Introduction**In previous chapters we discussed life insurance and its role in providing financial
protection. Security is only one of the concerns of individuals who seek to allocate
their income and wealth to meet various needs of the present and the future.
Life insurance must be understood in the wider context of “Personal Financial
Planning”. The purpose of this chapter is to introduce the subject of financial
planning.**Learning Outcomes**124**A.** **Financial planning and the individual life cycle****1.** **What is financial planning?**Most of us spend a major part of our lives working to make money. Financial
planning is a smart way to make money work for us.**Definition**Financial planning is a process of identifying one’s life’s goals, translating these
goals into financial goals and managing one’s finances to achieve those goals.Financial planning involves preparing a roadmap to meet both current and future
needs, which may be unforeseen. It plays a crucial role in building a life with less
worry. Careful planning can help to set one’s priorities and work to achieve your
various goals.**Diagram 1:** **Types of Goals**i. Goals may be **short term** : Buying an LCD TV set or a family vacationii. They could be **medium term** : Buying a house or a vacation abroadiii. The **long term** goals may include: Education or marriage of one’s child orpost retirement provision**2.** **Individual’s life cycle**From the day a person is born till the day of his/ her death, he/ she goes through
various stages in life, during which he/ she is expected to play a series of roles
These stages are illustrated in the diagram given below.**Diagram 2:** **The Economic Life Cycle**125**Life Stages and Priorities****a)** **Learner (till say age 20 -25)** :The stage when one is preparing for hisfuture byimproving his or her knowledge and skills. Funds are
required for financing one’s education. For instance, meeting the
high cost of fees for Medical or Management Education.**b)** **Earner (from 25 onwards)** :When one has found employment andperhaps earns enough to meet his or her needs and has some surplus
to spare.There are family responsibilities and one may also save and
invest in order to have money to meet the needs that may arise in
|
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|
Advantages
|
Final IC 38 -IMF_Composite -English_063
|
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various stages in life, during which he/ she is expected to play a series of roles
These stages are illustrated in the diagram given below.**Diagram 2:** **The Economic Life Cycle**125**Life Stages and Priorities****a)** **Learner (till say age 20 -25)** :The stage when one is preparing for hisfuture byimproving his or her knowledge and skills. Funds are
required for financing one’s education. For instance, meeting the
high cost of fees for Medical or Management Education.**b)** **Earner (from 25 onwards)** :When one has found employment andperhaps earns enough to meet his or her needs and has some surplus
to spare.There are family responsibilities and one may also save and
invest in order to have money to meet the needs that may arise in
the immediate future.For instance, a young man takes a housing loan
and invests in a house.**c)** **Partner(on getting marriage at say 28 - 30)** : The stage when one ismarried and has a family of one’s own.This creates new needs like
having a house of one’s own, perhaps a car, consumer durables,
planning for children’s future etc.**d)** **Parent(say 28 to 35)** : The years when one becomes the parent ofone or more children.One now has to worry about their health and
education - getting them into good schools etc.**e)** **Provider(say age 35 to 55)** : The stage when children have grown intoteenagers, and includes their high school and college years. One is
concerned about the high cost of education to make the child
qualified to face the challenges of life.For instance, consider the
amount that needs to be set up to finance a medical course that runs
for five years.In many Indian homes, making provision for marriage
and settlement of girl children is a critical area of concern.Indeed,
marriage and education of children is a prime motive for savings for
most Indian families today.**f)** **Empty Nester(age 55 to 65):** The term ‘empty nester’ implies thatthe offspring have flown away leaving the nest [the household]
empty.This is the period when children have married and sometimes
have migrated to other places for work, leaving the
parents.Hopefully by this stage, one has liquidated one’sliabilities[like housing loan and other mortgages] and has built up a fund for126reirement.It is also the period when ailments like BP and Diabetes
begin to manifest and plague one’s life.Health care,financial
independence and security of income become very important at this
stage.**g)** **Retirement – the twilight years (age 60 and beyond):** The age whenone has retired from active work and spends one’s savings to meet
the needs of life.The living needs of the husband and wife as long as
both are alive is the focus.One is concerned abouthealth
issues,adequateincome and loneliness.This is also the period when
one would seek to enhance the quality of life and enjoy many of the
things that one had dreamt of but could not achieve – like pursuing a
hobby or going on a vacation or a pilgrimage.Whether one ages
gracefully or in poverty would depend on how much one has provided
for these years.As we can see above, the economic life cycle has three phases: a student or Pre
– job phase; the working phase that begins between ages 18 to 25 and lasts for 35
to 40 years; and the retirement years that begin after one has stopped working.**3.** **Why does one need to save and purchase various financial assets?**The reason is that during each stage in an individual’s life, when one performs a
particular role, a number of needs come up for which funds have to be provided.**Example**When a person gets married and starts a family of his own, he may need to have
his own house. As children grow older, funds are needed for their higher
education. As an individual goes well past middle age, the concern is for having
money to meet health costs and post retirement savings so that one does not
need to depend on one’s children and become a burden. Living with independence
and dignity becomes important.The Savings – Investment process may be considered as being made of two
decisions.**i.** **Postponement of consumption:** an allocation of resources between presentand future consumption.**ii.** **Parting with liquidity** (or ready purchasing power) in exchange for less liquidassets. For instance, purchase of a life insurance policy would mean
exchanging money for a contract which is less liquid.Financial planning includes both kinds of decisions. One needs to plan in order to
save for the future and also must invest wisely in appropriate assets to meet the
|
Final IC 38 -IMF_Composite -English.md
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r126
|
Diagram 2:
|
Final IC 38 -IMF_Composite -English_064
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particular role, a number of needs come up for which funds have to be provided.**Example**When a person gets married and starts a family of his own, he may need to have
his own house. As children grow older, funds are needed for their higher
education. As an individual goes well past middle age, the concern is for having
money to meet health costs and post retirement savings so that one does not
need to depend on one’s children and become a burden. Living with independence
and dignity becomes important.The Savings – Investment process may be considered as being made of two
decisions.**i.** **Postponement of consumption:** an allocation of resources between presentand future consumption.**ii.** **Parting with liquidity** (or ready purchasing power) in exchange for less liquidassets. For instance, purchase of a life insurance policy would mean
exchanging money for a contract which is less liquid.Financial planning includes both kinds of decisions. One needs to plan in order to
save for the future and also must invest wisely in appropriate assets to meet the
various needs that will arise in future.**4.** **Individual needs**If we look at the stages of the life cycle that has been discussed above, we would
see that three types of needs can arise. These give rise to three types of financial
products.127a) **Enabling future transactions**The first set of needs arise from funds for meeting a range of anticipated
expenditures that are expected to arise at different stages of the life cycle.
There are two types of such needs:**i.** **Specific transaction needs** : that are linked to specific life events whichrequire a commitment of resources. For instance making a provision for
higher education/ marriage of dependents; or purchase of a house or
consumer durables**ii.** **General transaction needs:** Amounts set aside from current consumptionwithout being earmarked for any specific purposes – these are popularly
termed as ‘future provisions’**b)** **Meeting contingencies**Contingencies are unforeseen life events that may call for large funds. These
cannot met from current income and need to be pre-funded. Some of these
events, like death and disability or unemployment, lead to a loss of income.
Others, like a fire, may result in a loss of wealth.Such needs may be addressed through insurance, if the probability of their
occurrence is low but cost impact is high. One may alternatively meet them
by setting aside a large amount of liquid assets as a reserve.**c)** **Wealth accumulation**The accumulation motive refers to an individual’s desire to invest for
accumulating wealth, taking advantage of favourable market opportunities.
Some individuals may take a cautious approach while investing, while some
may be willing to take more risks, with a view to earn a higher return. Higher
return is desired because it helps to increase one’s wealth or net worth more
rapidly. Wealth is linked with independence, enterprise, power and influence.**5.** **Financial products**Corresponding to the above sets of needs there are three types of products in the
financial market:|Transactional<br>products|Bank deposits and other savings instruments that enable<br>one to have adequate purchasing power (liquidity) at the<br>right time and quantum.|
|---|---|
|**Contingency**<br>**products like**<br>**insurance**|These provide protection against large losses that may be<br>suffered in the event of sudden unforeseen events.|
|**Wealth**<br>**accumulation**<br>**products**|Shares and high yielding bonds or real estate are examples<br>of such products. Here the investment is made with a view<br>to committing money for making more money.|128An individual would typically have a mix of all of the above needs and thus may
need to have all three types of products. In a nutshell one may say there is:i. A need to save – For cash requirementsii. A need to insure – Against uncertaintiesiii. A need to invest – For wealth creation**6.** **Risk profile and investments**As an individual moves through various stages in the life cycle, from young earner
towards middle ages and then towards the final years of one’s work life, the risk
profile, or approach towards taking risks also changes.When one is young, one may be quite aggressive and willing to take risks in order
to accumulate as much wealth as possible. As the years pass however, one may
become more prudent and careful about investing. One is now concerned to
secure and consolidate one’s investments.Finally, as one nears retirement one may be more conservative. The focus is now
to have a corpus from which one can spend in the post retirement years. One may
|
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Example
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need to have all three types of products. In a nutshell one may say there is:i. A need to save – For cash requirementsii. A need to insure – Against uncertaintiesiii. A need to invest – For wealth creation**6.** **Risk profile and investments**As an individual moves through various stages in the life cycle, from young earner
towards middle ages and then towards the final years of one’s work life, the risk
profile, or approach towards taking risks also changes.When one is young, one may be quite aggressive and willing to take risks in order
to accumulate as much wealth as possible. As the years pass however, one may
become more prudent and careful about investing. One is now concerned to
secure and consolidate one’s investments.Finally, as one nears retirement one may be more conservative. The focus is now
to have a corpus from which one can spend in the post retirement years. One may
also think about making donations for one’s children, for gifting to charity etc.**One’s investment style also changes to keep pace with the risk profile.** This is
indicated below:**Diagram 3:** **Risk Profile and Investment Style****Risk Profile** **Investment Style****Test Yourself 1**Which among the following gives specific protection against unforeseen events?I. InsuranceII. Transactional products like bank Fixed DepositsIII. SharesIV. Debentures129**B.** **Role of financial planning****1.** **Financial planning**Financial planning is the process of carefully evaluating a ~~c~~ lient’s current and
future needs along with his or her risk profile and income, to chart out a road
map for meeting various anticipated/ unforeseen needs through recommending
appropriate financial products.Elements of financial planning include: Investing - allocating assets based on one’s risk taking appetite, Risk management, Retirement planning, Tax and estate planning, and Financing one’s needsTo put it in a nutshell financial planning involves 360 degrees planning.**Diagram 4:** **Elements of Financial Planning****2.** **Role of Financial planning**Financial planning is not a new discipline. It was practiced in simple form by our
fore fathers. There were limited investment options then. A few decades ago
many considered equity investment as akin to gambling. Savings were largely
channelled in bank deposits, postal savings schemes and other fixed income
instruments. The challenges facing our society and our customers are far different
today. Some of them are:**i.** **Disintegration of the joint family**The joint family has given way to the nuclear family, consisting of father,
mother and children. The typical head and earning member of this family has
to bear the responsibility for taking care of oneself and one’s immediate
family. This may call for a lot of proper planning and advice from a
professional financial planner.130**ii.** **Multiple investment choices**A large number of investment instruments are available today for wealth
creation, each offering varying degrees of risk and return. To achieve financial
goals, one has to choose wisely and make the right investment decisions based
on one’s risk taking appetite. Financial planning can help with one’s asset
allocation.**iii.** **Changing lifestyles**Instant pleasure seems to be the order of the day. Individuals want to have
the latest mobile phones, cars, large homes, memberships of prestigious
clubs, etc. To satisfy these desires, people often borrow heavily and spend a
good part of their income to pay off loans, leaving little scope to save.
Financial planning helps to plan and one’s expenditure so that one can cut
down unnecessary expenses so as to maintain one’s present standard of living
while upgrading it over time.**iv.** **Inflation**Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. This leads to a fall in the value of money. As
a result, the purchasing power of money gets reduced. Inflation can play
havoc post retirement. Financial planning can help to ensure that one is
equipped to deal with inflation, especially in later years.**v.** **Other contingencies and needs**Financial planning also enables individuals to meet a number of other needs
and challenges like medical emergencies and tax liabilities. Individuals also
need to ensure that their estate consisting of their wealth and properties,
smoothly pass on to their loved ones after their death. There are other needs
like the need to do charity or meet certain social and religious obligations
during one’s lifetime and even thereafter. Financial planning is the means to
achieve all this.3. **When is the right time to start financial planning?****Financial planning** is not meant only for the wealthy. Indeed, Planning should
ideally start one earns one’s first salary. There is no trigger point to tell when
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while upgrading it over time.**iv.** **Inflation**Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. This leads to a fall in the value of money. As
a result, the purchasing power of money gets reduced. Inflation can play
havoc post retirement. Financial planning can help to ensure that one is
equipped to deal with inflation, especially in later years.**v.** **Other contingencies and needs**Financial planning also enables individuals to meet a number of other needs
and challenges like medical emergencies and tax liabilities. Individuals also
need to ensure that their estate consisting of their wealth and properties,
smoothly pass on to their loved ones after their death. There are other needs
like the need to do charity or meet certain social and religious obligations
during one’s lifetime and even thereafter. Financial planning is the means to
achieve all this.3. **When is the right time to start financial planning?****Financial planning** is not meant only for the wealthy. Indeed, Planning should
ideally start one earns one’s first salary. There is no trigger point to tell when
one should begin to plan.**There is however an important principle that should guide us – the longer the**
**time period of our investments, the more they will multiply.**Hence one should start early. One’s investments would then get the maximum
benefit of time. Again, planning is not only for wealthy individuals. It is for
everyone. To achieve one’s financial goals, one must follow a disciplined
approach. An unplanned, impulsive approach to financial planning is one of the
prime causes of financial distress of individuals.131**Test Yourself 2**When is the best time to start financial planning?I. Post retirement
II. As soon as one gets his first salary
III. After marriage
IV. Only after one gets rich**C.** **Financial planning - Types**Let us now look at the various types of financial planning exercises that an
individual may need to do.**Diagram 5:** **Financial Planning Advisory Services**Consider the various advisory services that may be provided. There are six such
areas that are taken up Cash planning Investment planning Insurance planning Retirement planning Estate planning Tax planning**1.** **Cash planning**Managing cash flows has two purposes.i. To manage income and expenditures flow including establishing andmaintaining a reserve of liquid assets to meet unanticipated needs.ii. To systematically create and maintain a surplus of cash for capitalinvestment.Cash Planning involves a number of steps. One must prepare a budget and analyse
one’s income and expenditure flows to check on what regular and lump sum costs132have been incurred. While fixed expenses cannot be controlled easily, one can
reduce, postpone and manage expenses that are variable. The next step is to
**predict future monthly income and expenses over the whole year and** design
a plan for managing these cash flows.Another part of the cash planning process is to design strategies for maximizing
discretionary income.**Example**One can restructure one’s outstanding debts.One can meet outstanding credit card debts through consolidating them and
paying them off through a bank loan with lower interest.One may reallocate one’s investments to make them earn more income.**2.** **Insurance planning**There are certain risks to which individuals are exposed that can keep them from
attaining their personal financial goals. Insurance planning involves constructing
a plan of action to provide adequate insurance against such risks.The task here is to estimate how much insurance is needed and determining what
type of policy is best suited.**i.** **Life insurance** may be decided by estimating the income and expenserequirements of the dependents in the event of premature death of the
bread winner.**ii.** **Health insurance** requirements may be assessed in terms of thehospitalisation expenses that are likely to be incurred in any family
medical emergency.a. Finally **insurance for one’s assets** may be considered in terms ofthe type and quantum of cover required to protect one’s home/
vehicle/ factory etc. from the risk of loss.**3.** **Investment planning**There is no one right way to invest. What is appropriate would vary from
individual to individual. Investment planning is a process of determining the most
suitable investment and asset allocation strategies based on an individual’s risk
taking appetite, financial goals and the time horizon to meet those goals.**a)** **Investment parameters****Diagram 6:** **Investment Parameters**133The first step here is to define certain investment parameters. These include:**i.** **Returns** : Returns on Investment is often the most important parameterthat people look for when they invest their money. The rate of return
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type of policy is best suited.**i.** **Life insurance** may be decided by estimating the income and expenserequirements of the dependents in the event of premature death of the
bread winner.**ii.** **Health insurance** requirements may be assessed in terms of thehospitalisation expenses that are likely to be incurred in any family
medical emergency.a. Finally **insurance for one’s assets** may be considered in terms ofthe type and quantum of cover required to protect one’s home/
vehicle/ factory etc. from the risk of loss.**3.** **Investment planning**There is no one right way to invest. What is appropriate would vary from
individual to individual. Investment planning is a process of determining the most
suitable investment and asset allocation strategies based on an individual’s risk
taking appetite, financial goals and the time horizon to meet those goals.**a)** **Investment parameters****Diagram 6:** **Investment Parameters**133The first step here is to define certain investment parameters. These include:**i.** **Returns** : Returns on Investment is often the most important parameterthat people look for when they invest their money. The rate of return
determines how fast one’s wealth from investments would grow over time.
The role of returns can be appreciated when one considers the ‘Power of
compounding’. For instance, if an amount of Rs 1000 is invested today at
8% rate of interest, at the end of five years, it would accumulate to Rs
1469 and at the end of 10 years it would more than double to reach Rs
2159. This expectation of returns which helps to accumulate wealth is one
of the prime motives of investment. At the same time, one must note that
higher rates of return may be typically accompanied with higher levels of
risk. One has to make a trade-off between return and risk. This depends
on an individual’s risk tolerance.**ii.** **Risk tolerance** : A measure of how much risk someone is willing to take inpurchasing an investment.**iii.** **Time horizon** : This is the amount of time available to attain a financialobjective. The longer the time horizon, the less concern is there about
short term liability. One can invest in longer term, in less liquid assets
that earn a higher return.**iv.** **Liquidity** : Individuals with limited investment capacity, or uncertainincome and expenditure flows, or who are investing for meeting a
particular personal or business expenditure, would be concerned with
liquidity [This refers to the ability to convert investment into cash without
loss of value.]**v.** **Marketability** : The ease with which an asset can be bought or sold.**vi.** **Diversification** : The extent to which one seeks to diversify or spread theinvestments to reduce the risks.134**vii.** **Taxes** : Many investments confer certain income tax benefits and one maylike to consider the post-tax returns of various investments.**b)** **Selection of appropriate investment vehicles**The next step is selection of appropriate investment vehicles based on the above
parameters. The actual selection would depend on the individual’s expectations
about return and risk.In India there are a variety of products that may be considered for the purpose
of investments. These include: Fixed deposits of banks/ corporates, Small savings schemes of post office, Public issues of shares, Debentures or other securities, Mutual funds Unit linked policies that are issued by life insurance companies etc.**4.** **Retirement planning**It is the process of determining the amount of money that an individual needs to
meet his needs post retirement and deciding on various retirement options for
meeting these needs. Retirement planning involves three phases**a)** **Accumulation:** Accumulation of funds is done through various kinds ofstrategies to set aside money for investment with this purpose.**b)** **Conservation:** Conservation refers to the efforts made to ensure that one’sinvestments are put to hard work and that the principal gets maximised
during the individual’s working years.**c)** **Distribution:** Distribution refers to the optimal method of converting thecorpus or principal into withdrawals/ annuity payments for meeting income
needs after retirement.**5.** **Estate planning**It is a plan for the devolution and transfer of one’s estate after one’s demise.
There are various processes like nomination and assignment or preparation of a
will. The basic idea is to ensure that one’s property and assets are smoothly
distributed and or utilised according to one’s wishes after one is no more.**6.** **Tax planning**Tax planning is done to determine how to gain maximum tax benefit from existing
tax laws and also for planning of income, expenses and investments taking full
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meet his needs post retirement and deciding on various retirement options for
meeting these needs. Retirement planning involves three phases**a)** **Accumulation:** Accumulation of funds is done through various kinds ofstrategies to set aside money for investment with this purpose.**b)** **Conservation:** Conservation refers to the efforts made to ensure that one’sinvestments are put to hard work and that the principal gets maximised
during the individual’s working years.**c)** **Distribution:** Distribution refers to the optimal method of converting thecorpus or principal into withdrawals/ annuity payments for meeting income
needs after retirement.**5.** **Estate planning**It is a plan for the devolution and transfer of one’s estate after one’s demise.
There are various processes like nomination and assignment or preparation of a
will. The basic idea is to ensure that one’s property and assets are smoothly
distributed and or utilised according to one’s wishes after one is no more.**6.** **Tax planning**Tax planning is done to determine how to gain maximum tax benefit from existing
tax laws and also for planning of income, expenses and investments taking full
advantage of the tax breaks. As per the tax laws in India, life insurance premium
paid by an individual on a life insurance policy on his/ her own life, on the life of
his/ her spouse and children is eligible for deduction under Section 80C of the
Income Tax Act for calculating the taxable income. Currently, this deduction is
allowed up to Rs.1,50,000 subject to conditions. The maturity proceeds (sum135assured plus bonus) of such policies are also exempted under Section 10 (10D).
Similarly, Death Claim amounts are exempt from Income Tax at the hands of the
recipient. One must note that the purpose here is to minimise and not evade
taxes.Life insurance agents may be often required by their clients and prospective
customers to advise them not only about meeting their insurance needs but also
for support in meeting their other financial needs as well. A sound knowledge of
financial planning would be of great value to any insurance agent.**Test Yourself 3**Which among the following is not an objective of tax planning?I. Maximum tax benefitII. Reduced tax burden as a result of prudent investmentsIII. Tax evasionIV. Full advantage of tax breaks**Summary**Financial planning is a process of: Identifying one’s life’s goals, Translating these identified goals into financial goals and Managing one’s finances in ways that will help one to achieve those goalsBased on the individual life cycle three types of financial products are needed.
These help in: Enabling future transactions, Meeting contingencies and Wealth accumulationThe need for financial planning is further increased by the changing societal
dynamics like disintegration of the joint family, multiple investment choices
that are available today and changing lifestyles etc.The best time to start financial planning is right after one receives the first
salary.Financial planning advisory services include: Cash planning,
Investment planning,
Insurance planning,
Retirement planning,
Estate planning and
Tax planning136**Key Terms**1. Financial planning
2. Life stages
3. Risk profile
4. Cash planning
5. Investment planning
6. Insurance planning
7. Retirement planning
8. Estate planning
9. Suitability information
10. Tax planning**Answers to Test Yourself****Answer 1** - The correct option is I.
**Answer 2** - The correct option is II.
**Answer 3** - The correct option is III.137## CHAPTER L-03## LIFE INSURANCE PRODUCTS: TRADITIONAL**Chapter Introduction**The chapter introduces you to the world of life insurance products. It begins by
talking about products in general and then proceeds to discussing the need for
life insurance products and the role they play in achieving various life goals.
Finally we look at some traditional life insurance products.**Learning Outcomes**138**A.** **Overview of life insurance products****1.** **What is a product?**To begin with, let us understand what is meant by a ‘product’. In popular terms
a product is normally just considered as a commodity or good that is brought and
sold in the market.It is necessary to understand that every Product is a bundle of features or
attributes that confer certain benefits.All Companies try to differentiate their products by making them more attractive
to customers and offering different kinds of features and benefits. A life insurance
agent’s role is to understand and pitch on these features and benefits to make
the products of their companies unique and attractive compared to others.**Example**Colgate, Close up and Promise are all different brands of toothpastes. But the
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**Answer 3** - The correct option is III.137## CHAPTER L-03## LIFE INSURANCE PRODUCTS: TRADITIONAL**Chapter Introduction**The chapter introduces you to the world of life insurance products. It begins by
talking about products in general and then proceeds to discussing the need for
life insurance products and the role they play in achieving various life goals.
Finally we look at some traditional life insurance products.**Learning Outcomes**138**A.** **Overview of life insurance products****1.** **What is a product?**To begin with, let us understand what is meant by a ‘product’. In popular terms
a product is normally just considered as a commodity or good that is brought and
sold in the market.It is necessary to understand that every Product is a bundle of features or
attributes that confer certain benefits.All Companies try to differentiate their products by making them more attractive
to customers and offering different kinds of features and benefits. A life insurance
agent’s role is to understand and pitch on these features and benefits to make
the products of their companies unique and attractive compared to others.**Example**Colgate, Close up and Promise are all different brands of toothpastes. But the
features of each brand is different from the other.Products may be:**i.** **Tangible** : refers to physical objects that can be directly seen or felt by touch
(for instance a car or a television set)**ii.** **Intangible:** refers to products that can only be perceived indirectly.Life insurance is a product that is intangible.**2.** **Purpose of Life Insurance products.**Human beings possess **an immensely valuable asset** - **human capital – which is**
**the source of our productive earning capacity.** However, there is an uncertainty
about life and human well-being. Events like death and disease can destroy our
Earning capabilities and life savings. Insurance provides protection for such
situations.Life insurance products offer protection against the loss of economic value of an
individual’s productive abilities, as a result of death or disability. The moment
an individual takes a life insurance policy and pays the first premium, **an**
**immediate estate is created** in his/ her name and its proceeds are available to
his/ her dependents or loved ones.Life insurance provides peace of mind and protection to the near and dear ones
of an individual, in case of one’ unfortunate death. Beyond providing such
protection, life insurance fulfils other needs of the market, such as savings,
wealth accumulation, safety and security of investment and certain rates of
return, which are not discussed in this course.Life insurance industry has seen enormous innovations in product offerings over
the last two centuries. The journey began with death benefit products but over139the period, multiple living benefits like endowment, disability benefits, dreaded
disease covers and so on were added.One of the major innovations of recent years was the creation of market linked
policies where the insured was invited to participate in choosing and managing
his investment assets. Another major innovation was the evolution of flexible
unbundled products, in which different benefits as well as cost components could
be varied by the policy holder as per changing needs, affordability and life-stages.**3.** **Suitability Information**In order to make insurance intermediaries including agents and brokers more
accountable and reduce instances of mis-selling, IRDAI has created a concept of
‘product suitability’. ‘Suitability information’ is the information of a prospect on
age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, etc. That is, before selling an
insurance policy to a client, an Agents should be able to justify the suitability of
the product for the client’s needs.In other words, the Agent takes into account the particular prospect’s risk profile- age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, insurance needs etc. and decides
whether the product is suitable for that prospect. The nature of product, the
amount of premium, the mode of premium payment and tenure of the policy as
well as the manner of premium payment are also part of the parameters of
‘Suitability’.IRDAI mandates that the suitability information collected should be signed by the
prospect and the agent; and preserved by the Insurer as part of the policy records
and made available for inspection by the Authority.**4.** **Riders in Life Insurance Products**A rider is a provision typically added through an endorsement, which becomes
part of the contract. Riders are commonly used to provide supplementary benefits
like increasing the amount of death benefit provided by a policy, say, because of
accidents. Life insurance companies offer a number of riders through which the
value of their offerings get enhanced Riders help to customise different
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insurance policy to a client, an Agents should be able to justify the suitability of
the product for the client’s needs.In other words, the Agent takes into account the particular prospect’s risk profile- age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, insurance needs etc. and decides
whether the product is suitable for that prospect. The nature of product, the
amount of premium, the mode of premium payment and tenure of the policy as
well as the manner of premium payment are also part of the parameters of
‘Suitability’.IRDAI mandates that the suitability information collected should be signed by the
prospect and the agent; and preserved by the Insurer as part of the policy records
and made available for inspection by the Authority.**4.** **Riders in Life Insurance Products**A rider is a provision typically added through an endorsement, which becomes
part of the contract. Riders are commonly used to provide supplementary benefits
like increasing the amount of death benefit provided by a policy, say, because of
accidents. Life insurance companies offer a number of riders through which the
value of their offerings get enhanced Riders help to customise different
requirements of a person into a single plan.Riders provide a means to provide benefits like Disability cover, accident cover
and Critical Illness cover as additional benefits in a standard life insurance
contract. Policy holders can avail of them by paying an extra premium.**Test Yourself 1**Which among the following is an intangible product?
I. CarII. HouseIII. Life insurance
IV. Soap140**B.** **Traditional life insurance products**We shall now learn about some of the traditional types of life insurance products.**Diagram 1:** **Traditional Life Insurance Products****1.** **Term insurance plans**Term insurance is a contract that is valid only during a certain time period. This
may range from the short time required to complete an airplane trip to multiple
years. Protection may extend up to age 65 or 70. One-year term policies are quite
similar to property and casualty insurance contracts. There is no savings or cash
value element in this policy.In October 2020, IRDAI has introduced a Standard Individual Term Life Insurance
Product called, “Saral Jeevan Bima” (the Insurer’s name shall be prefixed to the
product name), a non-linked non-participating individual pure risk premium life
insurance plan, which provides for payment of Sum Assured in lump sum to the
nominee in case of the Life Assured’s unfortunate death during the policy term.Apart from certain benefits and riders specified by the Regulator, no other riders/
benefits/ options/ variants are allowed to be offered. Also, there shall be no
exclusions under the product other than the suicide exclusion. Saral Jeevan Bima
is to be offered to individuals without restrictions on gender, place of residence,
travel, occupation or educational qualifications.**a)** **Purpose**A Term Life insurance plan fulfils the main and basic idea behind life
insurance, which is to provide an assured sum of money to the dependents of
the insured on his/ her death.**The policy works as an income replacement plan also.** Here the payment of
a lump-sum amount is replaced by a series of monthly, quarterly or similar
periodical payments to the dependent beneficiaries.141**b)** **Disability**
Normally a Term insurance policy covers only death. However, it is possible
to buy a Disability Protection Rider on the main policy. In such a case, if the
insured suffers from a specified disability during the term of the contract, a
disability benefit would be paid to the beneficiaries/ insured person. The
benefits will continue till the death of the insured person.**Diagram 2:** **Disability****c)** **Term insurance as a rider**Protection under Term Life is usually provided as a stand-alone policy but it
could also be provided through a rider in a policy.**Example**A rider to a pension plan provides for a death benefit to be payable if one dies
before the date when pension is to start.**d)** **Convertibility**Convertible term insurance policies allow a policyholder to change or convert
a term insurance policy into a permanent plan like “Whole Life” without
providing fresh evidence of insurability. This privilege helps those who wish
to have permanent cash value insurance but are unable to afford its high
premiums. When the term policy is converted into permanent insurance the
new premium rate would be higher.**e)** **Unique Selling Proposition** ( **USP)**The unique selling proposition (USP) of term assurance is its low price,
enabling one to buy relatively large amounts of life insurance on a limited
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insured suffers from a specified disability during the term of the contract, a
disability benefit would be paid to the beneficiaries/ insured person. The
benefits will continue till the death of the insured person.**Diagram 2:** **Disability****c)** **Term insurance as a rider**Protection under Term Life is usually provided as a stand-alone policy but it
could also be provided through a rider in a policy.**Example**A rider to a pension plan provides for a death benefit to be payable if one dies
before the date when pension is to start.**d)** **Convertibility**Convertible term insurance policies allow a policyholder to change or convert
a term insurance policy into a permanent plan like “Whole Life” without
providing fresh evidence of insurability. This privilege helps those who wish
to have permanent cash value insurance but are unable to afford its high
premiums. When the term policy is converted into permanent insurance the
new premium rate would be higher.**e)** **Unique Selling Proposition** ( **USP)**The unique selling proposition (USP) of term assurance is its low price,
enabling one to buy relatively large amounts of life insurance on a limited
budget.**f)** **Variants**A number of variants of term assurance are possible.**Diagram 3:** **Variants of Term Assurance**142**i.** **Decreasing Term Assurance**
These plans typically consist of decreasing term insurance which provides an
amount of death benefit that is equal to the balance that is due on a loan, if
the borrower dies before the loan is paid. These are often marketed as
Mortgage Redemption (discussed in Chapter 15) or Credit Life Insurance. The
plans are usually sold to lending institutions as group insurance to cover the
lives of their borrowers. Purchase of mortgage redemption insurance is often
a condition of the mortgage loan. Such plans may also be available for
automobile or other personal loans.**ii.** **Increasing term assurance**
As the name suggests, the plan provides a death benefit, which increases
along with the term of the policy. Premium generally increases as the amount
of coverage increases.**iii.** **Term insurance with return of premiums**
Another type of policy (quite popular in India) is term assurance with return
of premiums. Though the premium paid would be much higher than for a
similar term insurance plan without return of premiums, some customers may
need such policies.**g)** **Relevant scenarios**Term insurance may have relevance in the following situations:
i. Where the need for insurance protection is purely temporary, as in caseof mortgage redemption
ii. As an additional supplement to a savings plan.
iii. As part of a “buy term and invest the rest” philosophy, where one seeksonly cheap term insurance protection from the insurance company and
wants to invest the difference of premiums in other attractive
investments.**Important****Limitations of term plans:** Term Insurance plans are available only for specific
periods and one may not be able to continue the coverage beyond a certain
age, say 65 or 70.**2.** **Whole life insurance**Whole life insurance is an example of a permanent life insurance policy. Here,
the life insurer offers to pay the agreed death benefit when the insured dies, no
matter when the death might occur. The premiums can be paid throughout one’s
life or for a limited time as specified.Whole life premiums are much higher than term premiums as whole life policies
are designed to remain in force until the death of the insured, and pay the death
benefit anytime. The Plan also provides for a cash value in the policy holder’s
account. He/ she can withdraw cash in the form of a policy loan from this cash
value or even redeem it by surrendering the policy for its cash value.143In case of outstanding loans, the amount of loan and interest get deducted from
the pay-out to the beneficiaries upon death.**A whole life policy is a good plan for the main earner of the family who wishes**
**to protect his/ her loved ones in the event of premature death and preserve**
**his/ her capital against erosion from various events like terminal illness.** One
can also use the cash value of the whole life insurance policy for retirement
needs, if required. Whole life insurance thus plays an important role in household
saving and creating wealth to be passed on to the next generation.**3.** **Endowment Assurance**It is a contract in which the sum assured is payable to the nominees of the insured
in case of the death of the insured during the term of the policy. If the insured
survives the term the sum assured is paid to the insured.**The product has both death and survival benefit components.** Endowment
Assurance links one’s insurance and savings programmes by offering a safe and
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account. He/ she can withdraw cash in the form of a policy loan from this cash
value or even redeem it by surrendering the policy for its cash value.143In case of outstanding loans, the amount of loan and interest get deducted from
the pay-out to the beneficiaries upon death.**A whole life policy is a good plan for the main earner of the family who wishes**
**to protect his/ her loved ones in the event of premature death and preserve**
**his/ her capital against erosion from various events like terminal illness.** One
can also use the cash value of the whole life insurance policy for retirement
needs, if required. Whole life insurance thus plays an important role in household
saving and creating wealth to be passed on to the next generation.**3.** **Endowment Assurance**It is a contract in which the sum assured is payable to the nominees of the insured
in case of the death of the insured during the term of the policy. If the insured
survives the term the sum assured is paid to the insured.**The product has both death and survival benefit components.** Endowment
Assurance links one’s insurance and savings programmes by offering a safe and
compulsory method of savings accumulation.People buy endowment plans as a sure method of providing against old age or for
meeting specific purposes like having a fund for (a) educational purposes, (b)
meeting children’s marriage expenses or(c) paying a mortgage (housing) loan.**Government usually offers tax benefits on the premiums paid, which make it**
**attractive.** Many endowment policies mature at ages 55 to 65, when the insured
is planning for his/ her retirement. In such cases such policies can supplement
retirement savings.**Variants:** Endowment assurance has certain variants - discussed below.**4.** **Money Back Policy**
The Money Back policy is a popular endowment plan in India. It has a provision
for returning some part of the sum assured in instalments during the term and
the balance sum assured at the end of the term.**Example**A Money Back policy for 20 years may provide for paying survival benefits of 20%
of the sum assured each at the end of the 5 [th], 10 [th] and 15 [th] years and the balance
40% at the end of the full term of 20 years. If the life assured dies at the end of,
say 18 years, the full sum assured and bonuses (explained in the next section)
accrued are paid as death benefit, even though the insured would have been paid
a benefit of 60% of the face value already, as money back.Money Back plans have been popular because of their liquidity (cash back)
element, which make them attractive for meeting short and medium term needs.
Such plans provide full death protection also, if the individual dies at any point
during the term of the policy.144**5.** **Participating (Par) and Non-Participating (Non-Par)Plans**The Life Insurance products can also be classified as Participating (Par) and Nonparticipating (Non-Par) products. The term “Par” implies policies which are
participating in the profits of the life insurer. “Non–Par”, on the other hand,
represents policies which do not participate in the profits. Both kinds are present
in traditional life insurance. Under all traditional plans, the pooled life funds,
which are derived from policyholders’ premiums, are invested as per regulatory
norms. Policy holders who opt for ‘par products’ are eligible to receive, in
addition to a guaranteed sum assured, a share in the surpluses( bonuses) that are
generated by the insurer. These are known as ‘With Profit’ plans.**6.** **Non-participating products**The Policy holders who buy non-linked without profit [non par] plans are paid a
benefit that is fixed and guaranteed at the beginning of the contract and nothing
more. Non-participating products may be offered either under a ‘linked platform’
or a ‘non-linked platform’. These are known as ‘Without Profits’ plans.**Example**One may have an endowment policy of twenty years providing a guaranteed
addition of 2% of sum assured for each year of term, so that the maturity benefit
is sum assured plus a total addition of 40% of the sum assured.Under the IRDAI’s guidelines on traditional non-par policies, the benefits to be
paid on the happening of a specified event, have to be explicitly stated at the
outset and not linked to an index or benchmark. The same applies to additional
benefits that are accrued at regular intervals. This means that the return on these
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addition to a guaranteed sum assured, a share in the surpluses( bonuses) that are
generated by the insurer. These are known as ‘With Profit’ plans.**6.** **Non-participating products**The Policy holders who buy non-linked without profit [non par] plans are paid a
benefit that is fixed and guaranteed at the beginning of the contract and nothing
more. Non-participating products may be offered either under a ‘linked platform’
or a ‘non-linked platform’. These are known as ‘Without Profits’ plans.**Example**One may have an endowment policy of twenty years providing a guaranteed
addition of 2% of sum assured for each year of term, so that the maturity benefit
is sum assured plus a total addition of 40% of the sum assured.Under the IRDAI’s guidelines on traditional non-par policies, the benefits to be
paid on the happening of a specified event, have to be explicitly stated at the
outset and not linked to an index or benchmark. The same applies to additional
benefits that are accrued at regular intervals. This means that the return on these
policies must be disclosed at the time of taking the policy.**Important**Death benefits are subject to regulations of IRDAI issued from time to time. At
present, as per the new Regulation 9 of IRDAI (Non-linked) Products Regulation,
2019 pertaining to traditional products, the minimum death cover is as follows:For all non-linked individual life insurance products, the minimum Sum Assured
on death during the entire term of the policy shall not be less than 7 times the
annualized premium, for limited or regular premium products, and 1.25 times the
single premium for single premium products.For participating products, in addition to the sum assured on death, the bonus
and additional benefits as stated in the policy and accrued till the date of death
shall become payable on death as part of the death benefit, if not paid earlier.
In essence, there are **two variants**, participating and non-participating plans.i. For **participating polices** the bonus is linked to the investmentperformance of the fund and is not declared or guaranteed before. The
**bonus, once it is announced, becomes a guarantee** . It is usually paid in145case of death of the policyholder or maturity benefit. This bonus is also
called **reversionary bonus** .
ii. In case of **non-participating policies**, the return on the policy is disclosedin the beginning of the policy itself.**7.** **Pension Plans and Annuities**A pension plan is typically a fund into which money is paid during a person’s
employment years and from which money is drawn to support the person after
[his retirement from work in the form of periodic payments.](https://en.wikipedia.org/wiki/Retirement)Pension plans are designed on group (usually employer driven) or individual basis.
A group pension may be a "defined benefit plan", where a fixed sum is paid
regularly to a person, or a "defined contribution plan", under which a fixed sum
is invested which becomes available at retirement age. Pensions are essentially
[guaranteed life annuities, thus insuring against the risk of longevity. A pension](https://en.wikipedia.org/wiki/Life_annuity)
created by an employer for the benefit of an employee is commonly referred to
as an occupational or employer pension.On retirement, the money in the member's account is used to provide retirement
benefits, typically by purchasing an annuity which then provides a regular
income. An annuity is a long-term investment issued by an insurance company
designed to help protect one from the risk of outliving one’s income. Through
annuitization, one’s contributions are converted into periodic payments that can
last for life.Individuals can avail of pension benefits by purchasing pension plans from
insurance companies. Pension plans can be **on accumulation or deferred** **basis**
which allows a person to contribute in two ways, (i) in lump sum, or (ii) over a
period of time; so that he/ she can get a pension from the desired age/ date
(called as the ‘vesting’ date). One can opt to receive pensions/ annuities on
monthly, quarterly, half-yearly or annual modes. Pension plans are available on
an **immediate basis** also, from the very next month of purchase, on payment of
a lump sum amount, called as immediate annuity.The Indian insurance industry has several deferred and immediate annuity
products marketed by Life Insurers. Each product has its own features, terms,
conditions and annuity options.**Saral Pension:** To provide uniformity across Insurers, to reduce confusion in the
market about annuity schemes, and to make available a product that will broadly
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designed to help protect one from the risk of outliving one’s income. Through
annuitization, one’s contributions are converted into periodic payments that can
last for life.Individuals can avail of pension benefits by purchasing pension plans from
insurance companies. Pension plans can be **on accumulation or deferred** **basis**
which allows a person to contribute in two ways, (i) in lump sum, or (ii) over a
period of time; so that he/ she can get a pension from the desired age/ date
(called as the ‘vesting’ date). One can opt to receive pensions/ annuities on
monthly, quarterly, half-yearly or annual modes. Pension plans are available on
an **immediate basis** also, from the very next month of purchase, on payment of
a lump sum amount, called as immediate annuity.The Indian insurance industry has several deferred and immediate annuity
products marketed by Life Insurers. Each product has its own features, terms,
conditions and annuity options.**Saral Pension:** To provide uniformity across Insurers, to reduce confusion in the
market about annuity schemes, and to make available a product that will broadly
meet the needs of an average customer, in January 2021, IRDAI mandated all Life
Insurers to introduce a standard, immediate annuity product, with simple
features and standard terms and conditions on an individual (not group) basis.
Such a standard product will make it easier for the customers to make an
informed choice, enhance the trust between the Insurers and the insured, and
reduce mis-selling as well as potential disputes.The standard individual immediate annuity product is called, “Saral Pension”,
prefixed by the Insurer’s name. The product offer two (and only two) annuity
options as follows:146a) Life annuity with 100% Return of Purchase Price; andb) Joint Life annuity with a provision of 100% annuity to the secondary
annuitant on death of the primary annuitant and return of 100% Purchase Price
on death of last survivor.Mode of Annuity payment would be Monthly, Quarterly, Half-Yearly and Yearly.
Details are available on IRDAI’s website at the following link
=
[https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page](https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo4353&flag=1) PageNo
[4353&flag=1](https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo4353&flag=1)**Test Yourself 2**The premium paid for whole life insurance is _____________ than the premium
paid for term assurance.I. Higher
II. Lower
III. Equal
IV. Substantially higher**Summary**Life insurance products offer protection against the loss of economic value of
an individual’s productive abilities, which is available to his/ her dependents
or to the self.A life insurance policy, at its core, provides peace of mind and protection to
the near and dear ones of the individual in case something unfortunate
happens to him or her.Term insurance provides valid cover only during a certain time period that has
been specified in the contract.The unique selling proposition (USP) of term assurance is its low price,
enabling one to buy relatively large amounts of life insurance on a limited
budget.While term assurance policies are examples of temporary assurance, where
protection is available for a temporary period of time, whole life insurance is- an example of a permanent life insurance policy.**Key Terms**1. Term insurance2. Whole life insurance3. Endowment assurance
4. Money back policy
5. Par and non-par schemes
6. Reversionary bonus147**Answers to Test Yourself****Answer 1** -The correct option is III.
**Answer 2** - The correct option is I.148## CHAPTER L-04## LIFE INSURANCE PRODUCTS: NON-TRADITIONAL**Chapter Introduction**The chapter introduces you to the world of non-traditional life insurance
products. We start by examining the limitations of traditional life insurance
products and then have a look at the appeal of non-traditional life insurance
products. Finally we look at some of the different types of non-traditional life
insurance products available in the market.**Learning Outcomes**149**A.** **Overview of non-traditional life insurance products****1.** **Non-traditional life insurance products – Purpose and need**In the previous chapters we have considered some of the traditional life insurance
products which have insurance as well as a savings element in them.People have been questioning the ability of traditional life insurance policies to
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4. Money back policy
5. Par and non-par schemes
6. Reversionary bonus147**Answers to Test Yourself****Answer 1** -The correct option is III.
**Answer 2** - The correct option is I.148## CHAPTER L-04## LIFE INSURANCE PRODUCTS: NON-TRADITIONAL**Chapter Introduction**The chapter introduces you to the world of non-traditional life insurance
products. We start by examining the limitations of traditional life insurance
products and then have a look at the appeal of non-traditional life insurance
products. Finally we look at some of the different types of non-traditional life
insurance products available in the market.**Learning Outcomes**149**A.** **Overview of non-traditional life insurance products****1.** **Non-traditional life insurance products – Purpose and need**In the previous chapters we have considered some of the traditional life insurance
products which have insurance as well as a savings element in them.People have been questioning the ability of traditional life insurance policies to
provide a rate of return comparable to other assets in the financial market. Issues
have also been raised about the way they are structured into a single package of
benefits and premiums.**2.** **Limitations of traditional products**a) A critical examination would reveal the following areas of concern:b) **Cash value component:** The savings or cash value component in traditional
policies is not well defined. This makes it less transparent about mortality,
interest rates, expenses and other parameters that are made.c) **Rate of return:** It is not easy to ascertain the rate of return on traditional policies
because the value of the benefits under “With Profit policies” can be known only
when the contract ends. This makes it difficult to compare these policies with
other financial instruments.d)e)f) **Surrender value:** The method of arriving at the cash and surrender values (at any
point of time), are set by the life insurer and not transparent.**Yield:** The yield on these policies are much lower than those from other
investments.**3.** **Features of Non-Traditional Policies:** Life insurance companies starteddesigning policies with certain innovative features, some of which are given
below:a) **Direct linkage with investment gains:** Policies with direct linkage withthe capital market were designed in an attempt to make investment gains.
b) **Policies that can beat inflation:** Policies were designed to give returnscloser to the inflation rates. The change was that insurers started thinking
that life policies need to match if not beat inflation.
c) **Policies with Flexibility:** Policies which allowed customers to decide(within certain limits) the amount of premium they wanted to pay; and
the amount of death benefits and cash values they wanted, got designed.
d) **Surrender value:** Policies that gave better surrender values availableunder traditional policies were also designed by insurers.These policies became very popular and even began to replace traditional
products in many countries, including India.150**Test Yourself 1**Which among the following is a non-traditional life insurance product?I. Term assuranceII. Universal life insuranceIII. Endowment insuranceIV. Whole life insurance**B.** **Non-traditional life insurance products****Some non-traditional products**We shall discuss some of the non-traditional products which have emerged in the
Indian market and elsewhere.**1.** **Universal Life and Variable Life**Universal Life policy was introduced in the United States in 1979 and quickly
became very popular. Its features are **flexible premiums, flexible face amount**
**and death benefit amounts.** Unlike traditional policies, where fixed premiums
have to be paid periodically to keep the contract in force, universal life policies
allow the policyholder (within limits) to decide the amount of premiums he or
she wants to pay for the coverage.Variable Life was introduced in the United States in 1977.It is a typeof “Whole
Life” policy where the death benefit and cash value of the policy fluctuates
according to the investment performance of a special investment account into
which premiums are credited.The design and sale of the above two kinds of products, both of which were called
Variable Insurance Products, have been discontinued and are not allowed in India
since2019,further to the issue of IRDAI (ULIP) Regulations, 2019.**2.** **Unit linked insurance**Unit Linked Plans, also known as ULIPs were first introduced in UK during the
1960s.They have today emerged as one of the most popular and significant
products, displacing traditional plans in many markets.Unit linked policies help to overcome the limitations of traditional products.
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became very popular. Its features are **flexible premiums, flexible face amount**
**and death benefit amounts.** Unlike traditional policies, where fixed premiums
have to be paid periodically to keep the contract in force, universal life policies
allow the policyholder (within limits) to decide the amount of premiums he or
she wants to pay for the coverage.Variable Life was introduced in the United States in 1977.It is a typeof “Whole
Life” policy where the death benefit and cash value of the policy fluctuates
according to the investment performance of a special investment account into
which premiums are credited.The design and sale of the above two kinds of products, both of which were called
Variable Insurance Products, have been discontinued and are not allowed in India
since2019,further to the issue of IRDAI (ULIP) Regulations, 2019.**2.** **Unit linked insurance**Unit Linked Plans, also known as ULIPs were first introduced in UK during the
1960s.They have today emerged as one of the most popular and significant
products, displacing traditional plans in many markets.Unit linked policies help to overcome the limitations of traditional products.
The premium paid by the policyholder gets divided into two major portionsthe first portion which is utilised for providing insurance cover, andthe second portion that gets invested into the fund opted by the insured.151The benefits under such contracts are wholly or partially determined by the value
of units credited to the policyholder’s account at the date when payment is due.In many markets these policies were positioned and sold as investment vehicles
with an attached insurance component.Unlike traditional savings policies that are bundled, Unit linked contracts are
unbundled. Their structure is transparent with the charges to pay for the
insurance and expenses component being clearly specified.**Diagram 1:** **Premium break-up**After deducting the charges from the premium, the balance of the account and
income are invested in **units** .**The Value of Units**The value of units is defined by a rule or formula, which is outlined in advance.
Typically the value of the units is given by the Net Asset Value (NAV), which
reflects the market value of the assets in which the fund is invested. Different
persons could arrive at the same benefits payable by following the formula.The Formula is as follows:Net Asset Value [NAV] = Market Value of Assets of the fund/ Number of units of
the fundsThus, Policyholder benefits do not depend on the assumptions of the life
insurance company.Unit linked policies allow policy holders to choose between different kinds of
funds. Each fund would have a different portfolio mix. The investor gets to choose
between a broad option of debt, balanced and equity funds, defined below. Even
within these broad categories there may be other types of options.|Equity Fund|Debt Fund|Balanced Fund|Money Market Fund|
|---|---|---|---|
|~~This fund invests~~<br>the major portion of<br>the money in equity|~~This fund invests~~<br>major portion of the<br>money in Govt.|~~This fund~~<br>invests in a mix<br>of equity and|~~This fund invests~~<br>money mainly in<br>instruments such as|152There is also provision to switch from one kind of fund to another if performance
of one or more funds is not found to be up to the mark.Some of the specific features of ULIP Policies are given below:**i.** **Unitising**Benefits under ULIP policies are determined by the value of units credited to the
policyholder’s account at the date when the claim payment is due to be made. A
unit is created by dividing an investment fund into a number of equal parts.**ii.** **Transparent structure**The charges for insurance cover and expenses in ULIPs are clearly specified. Once
these charges are deducted from the premium, the balance of the account and
income from it are invested in units.**iii.** **Pricing**Under ULIPs, the insured decides the amount of premium that he/ she can
contribute at regular intervals.In all Life Insurance policies, the initial costs are very high. Under traditional
policies, the premium charges for meeting these costs are spread throughout the
policy term.In the case of ULIPs, they are deducted from the initial premiums itself. This
significantly reduces the amount allocated for investment. This is why the value
of the benefits, vis-à-vis the premiums paid, would be very low and even less than
the premiums paid in the early years of the contract.**iv.** **Death Benefit**Unlike in traditional policies, the amount of death benefit in ULIP policies is a
multiple of the premiums paid. In case of death during the term of the policy,
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policyholder’s account at the date when the claim payment is due to be made. A
unit is created by dividing an investment fund into a number of equal parts.**ii.** **Transparent structure**The charges for insurance cover and expenses in ULIPs are clearly specified. Once
these charges are deducted from the premium, the balance of the account and
income from it are invested in units.**iii.** **Pricing**Under ULIPs, the insured decides the amount of premium that he/ she can
contribute at regular intervals.In all Life Insurance policies, the initial costs are very high. Under traditional
policies, the premium charges for meeting these costs are spread throughout the
policy term.In the case of ULIPs, they are deducted from the initial premiums itself. This
significantly reduces the amount allocated for investment. This is why the value
of the benefits, vis-à-vis the premiums paid, would be very low and even less than
the premiums paid in the early years of the contract.**iv.** **Death Benefit**Unlike in traditional policies, the amount of death benefit in ULIP policies is a
multiple of the premiums paid. In case of death during the term of the policy,
the beneficiary would be paid the higher of the Sum Assured [which is a multiple
of the premium] or the Fund Value (unit price multiplied by the number of units)
standing to his or her account.**v.** **The bearing of investment risk**The value of the units depends on the value of the life insurer’s investments,
which are not guaranteed.153The life insurer, though expected to manage the portfolio efficiently, does not
give any guarantee about unit values. Hence, the investment risk is borne by the
policyholder/ unit holder.**Test Yourself 2**Which of the following statements is/ are incorrect?I. Variable life insurance is a temporary life insurance policy
II. Variable life insurance is a permanent life insurance policy
III. The policy has a cash value account
IV. The policy provides a minimum death benefit guarantee**Summary**A critical concern with respect to life insurance policies was giving a
competitive rate of return comparable to other assets in the financial
marketplace.Some of the trends that led to the increase in non-traditional life products
include unbundling, investment linkage and transparency.Universal life insurance is a form of permanent life insurance characterised
by its flexible premiums, flexible face amount and death benefit amounts,
and the unbundling of its pricing factors.ULIPs became one of the most popular and significant products, replacing
traditional plans in many markets.ULIPs provide the means for directly and immediately cashing on the benefits
of a Life Insurer’s investment performance.**Key Terms**1. Universal life insurance2. Variable life insurance3. Unit linked insurance4. Net asset value**Answers to Test Yourself****Answer 1** -The correct option is II.**Answer 2** - The correct option is I.154## CHAPTER L-05## APPLICATIONS OF LIFE INSURANCE**Chapter Introduction**Life insurance does not merely seek to protect individuals from premature death.
It has other applications as well. It can be applied to the creation of trusts with
resultant insurance benefits; it can be applied for creating a policy covering key
personnel of industries and also for redeeming mortgages. We shall briefly
describe these various applications of life insurance.**Learning Outcomes**155N’s
**A.** **Applications of Life insurance****1.** **Married Women’s Property Act**Section 6 of the Married Women’s Property Act, 1874 tries to ensure that the
benefits under a life insurance policy will pass on in a secure manner to the wife
and children through creation of a trust for the purpose.**Diagram 1:** **Beneficiaries under MWP Act**The section provides that when a married man takes a policy on his own life and
clearly expresses on the face of such policy that it is for the benefit of his wife
or his wife and children, and to be held in a trust for their benefit only, the
proceeds of such a policy shall not, so long as the objects of the trust remains,
be subject to the control of the husband or to his creditors or form part of his
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It has other applications as well. It can be applied to the creation of trusts with
resultant insurance benefits; it can be applied for creating a policy covering key
personnel of industries and also for redeeming mortgages. We shall briefly
describe these various applications of life insurance.**Learning Outcomes**155N’s
**A.** **Applications of Life insurance****1.** **Married Women’s Property Act**Section 6 of the Married Women’s Property Act, 1874 tries to ensure that the
benefits under a life insurance policy will pass on in a secure manner to the wife
and children through creation of a trust for the purpose.**Diagram 1:** **Beneficiaries under MWP Act**The section provides that when a married man takes a policy on his own life and
clearly expresses on the face of such policy that it is for the benefit of his wife
or his wife and children, and to be held in a trust for their benefit only, the
proceeds of such a policy shall not, so long as the objects of the trust remains,
be subject to the control of the husband or to his creditors or form part of his
estate.**Features of a policy under the MWP Act**i. Each policy will remain a separate Trust. Either the wife or child (over 18years of age) can be a trustee.ii. The policy shall be beyond the control of court attachments, creditors andeven the life assured.iii. The claim money shall be paid to the trustees.iv. The policy cannot be surrendered and neither nomination nor assignmentis allowed.v. If the policyholder does not appoint a special trustee to receive andadminister the benefits under the policy, the sum secured under the policy156becomes payable to the Official Trustee of the State in which the office
at which the insurance was effected is situated.**Benefits**The Trust is set up under a deed that cannot be revoked or amended. It can
contain one or more insurance policies. It is important to appoint a trustee who
would be responsible for administering the trust property, including investing the
insurance proceeds, on behalf of the beneficiaries. These benefits are secured
from passing to future creditors**2.** **Key-man Insurance**Keyman insurance is an important form of business insurance.**Definition**Key-man Insurance can be described as an insurance policy taken out by a business
to compensate that business for financial losses that would arise from the death
or extended incapacity of an important member of the business.Many businesses have key persons responsible for a major part of its profits or has
knowledge and skills that are vital to the organisation and difficult to replace.
Key man insurance is taken by employers on the life of such key persons to
facilitate business continuity and offset the costs and losses which are likely to
be suffered in the event of the loss of a key person. Keyman insurance does not
indemnify the actual losses incurred but compensates with a fixed monetary sum
as specified on the insurance policy.Keyman insurance is allowed as a term insurance policy where the sum assured is
linked to the profitability of the company rather than the key person’s own
income. The premium is paid by the company. In case the key person dies, the
benefit is paid to the company. The proceeds of Keyman insurance is taxable at
the hands of the company.**a)** **Who can be a key-man?**A key person can be anyone directly associated with the business whose loss
can cause financial strain to the business. For example, the person could be
a director of the company, a partner, a key sales person, key project
manager, or someone with specific skills or knowledge which is especially
valuable to the company.**b)** **Insurable losses**The following are the losses for which key person insurance can provide
compensation:157i. Losses related to the extended period when a key person is unable towork, to provide temporary personnel and, if necessary to finance the
recruitment and training of a replacementii. Insurance to protect profits. For example, offsetting lost income from lostsales, losses resulting from the delay or cancellation of any business
project that the key person was involved in, loss of opportunity to expand,
loss of specialised skills or knowledge**3.** **Mortgage Redemption Insurance (MRI)**A person taking a loan to buy a property, may be required to pay for mortgage
redemption insurance by the bank, as part of the loan arrangement. “Mortgage
Redemption Insurance” is popularly referred to “Credit Life Insurance policy”.**a)** **What is MRI?**It is an insurance policy that provides financial protection for home loan
borrowers. It is basically a decreasing term life insurance policy taken by
mortgagor to repay the balance on a mortgage loan if he/ she dies before its
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Learning Outcomes
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Final IC 38 -IMF_Composite -English_079
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manager, or someone with specific skills or knowledge which is especially
valuable to the company.**b)** **Insurable losses**The following are the losses for which key person insurance can provide
compensation:157i. Losses related to the extended period when a key person is unable towork, to provide temporary personnel and, if necessary to finance the
recruitment and training of a replacementii. Insurance to protect profits. For example, offsetting lost income from lostsales, losses resulting from the delay or cancellation of any business
project that the key person was involved in, loss of opportunity to expand,
loss of specialised skills or knowledge**3.** **Mortgage Redemption Insurance (MRI)**A person taking a loan to buy a property, may be required to pay for mortgage
redemption insurance by the bank, as part of the loan arrangement. “Mortgage
Redemption Insurance” is popularly referred to “Credit Life Insurance policy”.**a)** **What is MRI?**It is an insurance policy that provides financial protection for home loan
borrowers. It is basically a decreasing term life insurance policy taken by
mortgagor to repay the balance on a mortgage loan if he/ she dies before its
full repayment. It can be called a loan protector policy. This plan is suitable
for people whose dependents may need assistance in clearing their debts in
case of the unexpected demise of the policyholder.**b)** **Features**The insurance cover under this policy decreases each year unlike a term
insurance policy where insurance cover is constant during the policy period.**Test Yourself 1**What is the objective behind Mortgage Redemption Insurance?I. Facilitate cheaper mortgage rates
II. Provide financial protection for home loan borrowers
III. Protect value of the mortgaged property
IV. Evade eviction in case of default**Summary**Section 6 of the Married Women’s Property Act, 1874 provides for security of
benefits under a life insurance policy to the wife and children.The policy effected under MWP Act shall be beyond the control of court
attachments, creditors and even the life assured.158Keyman insurance is an important form of business insurance. It can be
described as an insurance policy taken out by a business to compensate at for
financial losses that would arise from the death or extended capacity of an
important member of the business.Mortgage redemption insurance is basically a decreasing term life insurance
policy taken by a mortgagor to repay the balance on a mortgage loan if he/
she dies before its full repayment.**Key Terms**1. Married Women’s Property Act
2. Keyman insurance
3. Mortgage Redemption Insurance**Answers to Test Yourself****Answer 1** - The correct option is II.159## CHAPTER L-06## PRICING AND VALUATION IN LIFE INSURANCE**Chapter Introduction**The objective of this chapter is to introduce to the learner the basic elements
that are involved in the pricing and benefits of life insurance contracts. We shall
first discuss the elements that constitute the premium and then discuss the
concept of surplus and bonus.**Learning Outcomes**160**A.** **Insurance pricing – Basic elements****1.** **Premium**In ordinary language, the term premium denotes the price that is paid by an
insured for purchasing an insurance policy. It is normally expressed as a rate of
premium per thousand rupees of sum assured. The premium rates depend on the
age of the prospect and the plan.These premium rates are available in the form of tables of rates that are available
with insurance companies.**Diagram 1:** PremiumThe rates printed in these tables are known as “Office Premiums”. They are in
most cases the same throughout the term and are expressed as an annual rate.**Example**If the premium for a twenty year endowment policy for a given age is Rs. 4,800,
it means that Rs. 4,800 has to be paid each year for twenty years.However it is possible to have some policies in which the premiums are payable
only in the first few years. Companies also have single premium contracts in which
only one premium is payable at the beginning of the contract. These policies are
usually investment oriented.**2.** **Rebates**Life insurance companies may also offer certain types of rebates on the premium
that is payable. Two such rebates are: For sum assured161 For mode of premum**Rebate for sum assured**The rebate **for sum assured** is offered to those who buy policies with higher
amounts of sum assured. It is offered as a way of passing on to the customer,
the gains that the insurer may make when servicing higher value policies. The
logic is that the effort and cost required to process a policy of Rs 50,000 or
5,00,000 remains the same. But higher sum assured policies yield more
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L-06
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Insurable losses
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Final IC 38 -IMF_Composite -English_080
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most cases the same throughout the term and are expressed as an annual rate.**Example**If the premium for a twenty year endowment policy for a given age is Rs. 4,800,
it means that Rs. 4,800 has to be paid each year for twenty years.However it is possible to have some policies in which the premiums are payable
only in the first few years. Companies also have single premium contracts in which
only one premium is payable at the beginning of the contract. These policies are
usually investment oriented.**2.** **Rebates**Life insurance companies may also offer certain types of rebates on the premium
that is payable. Two such rebates are: For sum assured161 For mode of premum**Rebate for sum assured**The rebate **for sum assured** is offered to those who buy policies with higher
amounts of sum assured. It is offered as a way of passing on to the customer,
the gains that the insurer may make when servicing higher value policies. The
logic is that the effort and cost required to process a policy of Rs 50,000 or
5,00,000 remains the same. But higher sum assured policies yield more
premium and so more profits.**Rebate for mode of premium**Similarly a rebate may be offered **for the mode of premium** . Life insurance
companies may allow premiums to be paid on annual, half yearly, quarterly
or monthly basis. More frequent the mode, more the administrative costs for
collecting and accounting the premium. Again, in the yearly mode, the insurer
can utilise this amount during the entire year and earn interest on it. Insurers
would hence encourage payment via yearly and half yearly modes by allowing
a rebate on these. They may also charge a little extra for monthly mode of
payments, to cover additional administrative expenses involved.**3.** **Extra charges**The tabular premium is charged for those individuals who are not subject to
any significant factors that would pose an extra risk. They are known as
**standard lives** and the rates charged are known as ordinary rates.If a person proposing for insurance suffers from certain health problems like
heart ailments or diabetes that can pose a hazard to his life, he or she is
considered to be sub-standard. The insurer may decide to impose an extra
premium by way of a health extra. Similarly an occupational extra may be
imposed on those engaged in a hazardous occupation, like a circus acrobat.
These extras would result in the premium being more than the tabular
premium.Again, an insurer may offer certain extra benefits under a policy, which are
available on payment of an extra premium.**Example**A life insurer may offer a Double Accident Benefit or DAB (where double the
sum assured is payable as a claim if death is a result of accident). For this it
may charge an extra premium of one rupee per thousand sum assured.162Similarly a benefit known as Permanent Disability Benefit (PDB) may be
availed by paying an extra per thousand sum assured.**4.** **Determining the premium**Let us now examine how life insurers arrive at the rates that are presented in
the premium tables. This task is performed by an actuary. The process of
setting the premium in case of traditional life insurance policies like term
insurance, whole life and endowment considers following elements: Mortality
Interest
Expenses of management
Reserves
Bonus loading**Diagram 2:** **Components of Premium**The first two elements give us the Net premium. By adding [also called
‘loading’] the other elements to the net premium we get the gross or office
premium**a)** **Mortality and Interest**Mortality is the first element in premiums. It is the chance or likelihood that
a person of a certain age would die during a given year. To find out the
expected Mortality of a person, “Mortality Tables” are used.**Example**If the mortality rate for age 35 is 0.0035 it implies that out of every 1000
people who are alive as on age 35, 3.5 (or 35 out of 10,000) are expected to
die between age 35 and 36.163The table may be used to calculate mortality cost for different ages. For
example the rate of 0.0035 for age 35 implies a cost of insurance of 0.0035 x
1000 (sum assured) = Rs. 3.50 per thousand sum assured.The above cost may be also called the “Risk Premium”. For higher ages the
risk premium would be higher.**Example**If we need to have Rs. 5 per thousand to meet the cost of insurance after five
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d161
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Example
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Final IC 38 -IMF_Composite -English_081
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‘loading’] the other elements to the net premium we get the gross or office
premium**a)** **Mortality and Interest**Mortality is the first element in premiums. It is the chance or likelihood that
a person of a certain age would die during a given year. To find out the
expected Mortality of a person, “Mortality Tables” are used.**Example**If the mortality rate for age 35 is 0.0035 it implies that out of every 1000
people who are alive as on age 35, 3.5 (or 35 out of 10,000) are expected to
die between age 35 and 36.163The table may be used to calculate mortality cost for different ages. For
example the rate of 0.0035 for age 35 implies a cost of insurance of 0.0035 x
1000 (sum assured) = Rs. 3.50 per thousand sum assured.The above cost may be also called the “Risk Premium”. For higher ages the
risk premium would be higher.**Example**If we need to have Rs. 5 per thousand to meet the cost of insurance after five
years and if we assume a rate of interest of 6%, the present value of Rs. 5
payable after five years would be 5 x 1/ (1.06) [5 ] = 3.74.If instead of 6% we were to assume 10%, the present value would be only 3.10.
In other words the higher the rate of interest assumed, the lower the present
value.From our study of mortality and interest there are two major conclusions we
can derive Higher the mortality rate in the mortality table, higher the premiumswould be
Higher the interest rate assumed, lower the premium**Net premium**
The estimates of mortality and interest give the “Net Premium”**Gross premium**
Gross premium is the net premium plus an amount called loading. There are
three considerations or guiding principles that needs to be borne in mind when
determining the amount of loading:**b)** **Expenses and reserves**Life insurers have to incur various types of operating expenses including: Agents training and recruitment,
Commissions of agents,
Staff salaries,
Office accommodation,
Office stationery,
Electricity charges,
Other miscellaneous etc.All these have to be paid from premiums that are collected by insurers.
These expenses are suitably loaded to the net premium.164**c)** **Lapses and contingencies**In addition to expenses, there are other factors that can make the calculations
of life insurers go wrong.One source of risk is that of lapses and withdrawals. A lapse means that the
policyholder discontinues payment of premiums. In case of withdrawals, the
policyholder surrenders the policy and receives an amount from the policy’s
acquired cash value.Lapses usually happen within the first three years, especially in the first year
of the contract.**d)** **With Profit (participating) policies and Bonus loading**The concept of ‘With Profit’ policies originated when Life insurers started the
practice of charging a high loading in advance to create a buffer to keep them
solvent even in adverse situations. If subsequent experience proved to be
more favourable, the life insurer would share some of the profits it made as
a result with policy holders by way of bonus.In sum we can say that:**Gross premium = Net premium + Loading for expenses + Loading for**
**contingencies + Bonus loading****Test Yourself 1**What does a policy lapse mean?I. Policyholder completes premium payment for a policy
II. Policyholder discontinues premium payment for a policy
III. Policy attains maturity
IV. Policy is withdrawn from the market**B.** **Surplus and bonus****1.** **Determination of surplus and bonus**Every life insurance company is expected to undertake a periodic valuation of its
assets and liabilities. Such a valuation has two purposes:i. To assess the financial state of the life insurer and determine if it issolvent or insolvent
ii. To determine the surplus available for distribution among policyholders/share holders165**Definition**Surplus is the excess of value of assets over value of liabilities. If it is negative,
it is known as a strain.Let us now see how the concept of surplus in life insurance is different from that
of profit of a firm.Firms in general look at profits in two ways. Firstly, profit is the **excess of income**
**over outgo** for a given accounting period, as it appears in the profit and loss
account. Profit also forms part of the balance sheet of a firm - it may be defined
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s165
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Mortality and Interest
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**contingencies + Bonus loading****Test Yourself 1**What does a policy lapse mean?I. Policyholder completes premium payment for a policy
II. Policyholder discontinues premium payment for a policy
III. Policy attains maturity
IV. Policy is withdrawn from the market**B.** **Surplus and bonus****1.** **Determination of surplus and bonus**Every life insurance company is expected to undertake a periodic valuation of its
assets and liabilities. Such a valuation has two purposes:i. To assess the financial state of the life insurer and determine if it issolvent or insolvent
ii. To determine the surplus available for distribution among policyholders/share holders165**Definition**Surplus is the excess of value of assets over value of liabilities. If it is negative,
it is known as a strain.Let us now see how the concept of surplus in life insurance is different from that
of profit of a firm.Firms in general look at profits in two ways. Firstly, profit is the **excess of income**
**over outgo** for a given accounting period, as it appears in the profit and loss
account. Profit also forms part of the balance sheet of a firm - it may be defined
as the **excess of assets over liabilities** . In both instances, profits are determined
at the end of the accounting period.**Surplus = Assets - Liabilities**Let us understand what liabilities mean in life insurance. For a given block of life
insurance policies, the life insurer has to make provision for meeting future
claims, expenses and other expected pay-outs that may arise. The insurer also
expects to receive premiums in future for these policies.Liabilities are thus the present value of all payments that have to be made less
the present value of premiums expected to be received on these policies. The
present value is arrived at by applying a suitable rate of discount [the interest
rate]
Surplus arises as a result of the life insurer’s actual experience being better than
what it had assumed. Life insurers are obliged to share the benefits arising as a
result with holders of it’s with profit policies.**Example**The profits of XYZ firm as on 31 [st] March 2013, is given as its income less expenses
or its assets less liabilities as on that date.In both instances, the profit is clearly defined and is known.**2.** **Bonus**Insurers have to declare and distribute its divisible surplus among the policy
holders and shareholders of the company [if any] in the form of a bonus. In India,
the United Kingdom and many other countries, distribution of surplus is popular.Bonus is paid as an addition to the basic benefit payable under a contract.
Typically it may appear as an addition to basic sum assured or basic pension per
annum. It is expressed, for example, as Rs. 60 per thousand sum assured166The most common form of bonus is the **reversionary bonus** . Once declared these
bonus additions, made each year, get attached to the policy and cannot be taken
away. They are called ‘Reversionary’ bonuses because they are received only at
the time of a claim by death or maturity. Bonuses may also be payable on
surrender provided the contract is eligible through having run for a minimum term[say 5 years]**Types of reversionary bonuses****Diagram 3:** **Types of Reversionary Bonuses****i.** **Simple Reversionary Bonus**This is a bonus expressed as a percentage of the basic cash benefit under the
contract. In India for example, it is declared as amount per thousand sum
assured.**ii.** **Compound Bonus**Here the company expresses a bonus as a percentage of basic benefit and
already attached bonuses. It is thus a bonus on a bonus. A way to express it
may be as @ 8% of basic sum assured plus attached bonus.**iii.** **Terminal Bonus**As the name suggests, this bonus attaches to the contract only at the time of
its termination [by death or maturity]. It is applicable only for the claims
arising in the ensuing year. Thus terminal bonus declared for 2013 would only
apply to claims that have arisen during 2013-14 and not for subsequent years.
Terminal bonuses depend on the time duration of the contract and increase
with it. A contract that has run for 25 years would have higher terminal bonus
than one which has run for 15 years.167**3.** **The Contribution Method**Another method of distribution of surplus adopted in North America is the
“Contribution” method. Here, the surplus, i.e. the difference between what was
expected to happen and what actually happened over the year with respect to
mortality, interest and expenses is declared and distributed as dividends.The dividends can be paid in cash, by way of adjustments/ reductions in future
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s165
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Test Yourself 1
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already attached bonuses. It is thus a bonus on a bonus. A way to express it
may be as @ 8% of basic sum assured plus attached bonus.**iii.** **Terminal Bonus**As the name suggests, this bonus attaches to the contract only at the time of
its termination [by death or maturity]. It is applicable only for the claims
arising in the ensuing year. Thus terminal bonus declared for 2013 would only
apply to claims that have arisen during 2013-14 and not for subsequent years.
Terminal bonuses depend on the time duration of the contract and increase
with it. A contract that has run for 25 years would have higher terminal bonus
than one which has run for 15 years.167**3.** **The Contribution Method**Another method of distribution of surplus adopted in North America is the
“Contribution” method. Here, the surplus, i.e. the difference between what was
expected to happen and what actually happened over the year with respect to
mortality, interest and expenses is declared and distributed as dividends.The dividends can be paid in cash, by way of adjustments/ reductions in future
premiums, by allowing purchase of non-forfeitable paid up additions to the policy
or as accumulations to the credit of the policy.**4.** **Unit Linked Policies**The Principles of Pricing and other features of ULIP Policies have already been
covered in an earlier chapter.**Summary**In ordinary language, the term premium denotes the price that is paid by an
insured for purchasing an insurance policy.The process of setting the premium for life insurance policies involves
consideration of mortality, interests, expense management and reserves.Gross premium is the net premium plus an amount called loading.A lapse means that the policyholder discontinues payment of premiums. In
case of withdrawals, the policyholder surrenders the policy and receives an
amount from the policy’s acquired cash value.Surplus arises as a result of the life insurer’s actual experience being better
than what it had assumed.Surplus allocation could be towards maintaining solvency requirements,
increasing free assets etc.The most common form of bonus is the reversionary bonus.**Key Terms**1. Premium2. Rebate3. Bonus
4. Surplus
5. Reserve
6. Loading
7. Reversionary bonus**Answers to Test Yourself****Answer 1** - The correct option is II.168## CHAPTER L-07## LIFE INSURANCE DOCUMENTATION**Chapter Introduction**We have seen that the insurance industry deals with a large number of forms and
documents in Chapter 7. There are some documents specific to life insurance,
which are discussed in this chapter. Here, we are also discussing the main
provisions incorporated in a policy document. Provisions related to grace period,
policy lapse and non-forfeiture and certain other privileges are also discussed.**Learning Outcomes**169**A. Proposal stage documentation**Further to the common points discussed about the Prospectus and the Proposal
Form in Chapter 7, there are some additional points that Life Insurers need to
understand.**Prospectus:** In insurance, ‘Prospectus’ means a document in physical, electronic
or any other format issued by the insurer to sell or promote the insurance product.
The prospectus of an insurance product shall clearly state(a) the Unique Identification Number (UIN) allotted by the Authority for theconcerned insurance product:
(b) the scope of benefits;
(c) the extent of insurance cover;
(d) the warranties, exclusions/exceptions and conditions of the insurancecover along with explanations.
The prospectus should also provide:(a) a description of the contingency or contingencies to be covered by
insurance;
(b) the class or classes of lives or property eligible for insurance under theterms of such prospectus.
In Life insurance, the prospectus should also mention about the Riders (also called
Add-on covers in Health and General Insurance) allowable on the product and
their benefits.**Proposal Form:** In respect of Life insurance, the details of the proposers’ family
members (including parents) indicating their longevity, status of health and
ailments suffered by any of them, are collected through the Proposal form.
Depending on the product, the medical details of the life proposed for insurance,
his/ her personal history of disease and personal characteristics may also be asked
for. The Proposal Form is the document by which insurers get all the information
that they need from the prospect.Section 45 of the Insurance Act, provides that the Policy shall not be called in
question on the ground of mis-statement after three years. Agents have an
important role in guiding the prospect to give answers to all the questions in the
Proposal Form/ Medical Forms etc. truthfully and advising them of the
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m2
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Terminal Bonus
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Final IC 38 -IMF_Composite -English_084
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The prospectus should also provide:(a) a description of the contingency or contingencies to be covered by
insurance;
(b) the class or classes of lives or property eligible for insurance under theterms of such prospectus.
In Life insurance, the prospectus should also mention about the Riders (also called
Add-on covers in Health and General Insurance) allowable on the product and
their benefits.**Proposal Form:** In respect of Life insurance, the details of the proposers’ family
members (including parents) indicating their longevity, status of health and
ailments suffered by any of them, are collected through the Proposal form.
Depending on the product, the medical details of the life proposed for insurance,
his/ her personal history of disease and personal characteristics may also be asked
for. The Proposal Form is the document by which insurers get all the information
that they need from the prospect.Section 45 of the Insurance Act, provides that the Policy shall not be called in
question on the ground of mis-statement after three years. Agents have an
important role in guiding the prospect to give answers to all the questions in the
Proposal Form/ Medical Forms etc. truthfully and advising them of the
implications of not doing so in terms of Section 45.Proposal Forms for Life Insurance should state the requirements of Section 45 of
the Act. While answering the questions in the Proposal Form for obtaining life
insurance cover, the prospect is to be guided by the provisions of Section 45 of
the Act.Similarly, Section 39 of the Act is about the provision of nomination. Wherever
the facility of Nomination is available to the proposer, the Agent shall inform
him/ her of the provisions of Section 39 of the Act and encourage the proposer to
avail the facility.170Aspects related to the personal financial planning of the life proposed including
his/ her work span, projected income and expenses, as well as needs for savings
and investment, health, retirement and insurance may also be asked in the Life
Insurance Proposal Form.**Age Proof:** Age being an important factor for assessing the risk profile of the life
to be insured, Life insurers collect documentary evidence to verify correct age.
Valid age proofs may be standard or non-standard, as discussed in Chapter 7.Life insurers look into the following documents as well.**a)** **Agent’s Confidential Report**The agent is the primary underwriter. All material facts and particulars about the
policyholder, relevant to risk assessment, need to be revealed by the agent in
his/ her report. This means that matters of health, habits, occupation, income
and family details need to be mentioned in the report.**b)** **Medical Examiner’s report**In many cases, the life to be insured has to be medically examined by a doctor
who is empanelled by the insurance company. Details of physical features like
height, weight, blood pressure, cardiac status etc. are recorded and mentioned
by the doctor in his report called the medical examiner’s report. The underwriter
of the insurance company thereby gets an account of the current health position
of the life to be insured.Many proposals are underwritten and accepted for insurance without calling for
a medical examination. They are known as non–medical cases. The medical
examiner’s report is required typically when the proposal cannot be considered
under non-medical underwriting because the sum proposed or the age of the
proposed life is high or there are certain characteristics which are revealed in the
proposal, which call for examination and report by a medical examiner.**c)** **Moral Hazard report**Moral Hazard is the likelihood that a client's behaviour might change as a result
of purchasing a life insurance policy and such a change would increase the chance
of a loss. This is one factor that Life insurance underwriters take into account
seriously when assessing the risk.Life insurance companies seek to guard against the possibility of individuals
seeking to make a profit from the purchase of life insurance through actions like
ending one’s own life or the life of another. Life insurance underwriters would
thus look for any factors which might suggest such hazard. For this purpose, the
company may require that a Moral Hazard Report has to be submitted by an
official of the insurance company.**Example**Vikas recently purchased a life insurance policy. He then decided to go on a skiing
expedition at a site which was touted to be one of the most dangerous skiing
places on earth. In the past he had refused to undertake such expeditions.171**B. Policy Stage Documentation****1.** **First Premium Receipt**An insurance contract commences when the life insurance company issues a first
premium receipt (FPR).
**The FPR is the evidence that the policy contract has begun.** The first premium
receipt contains the following information:i. Name and address of the life assured
ii. Policy number
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Proposal Form:
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of purchasing a life insurance policy and such a change would increase the chance
of a loss. This is one factor that Life insurance underwriters take into account
seriously when assessing the risk.Life insurance companies seek to guard against the possibility of individuals
seeking to make a profit from the purchase of life insurance through actions like
ending one’s own life or the life of another. Life insurance underwriters would
thus look for any factors which might suggest such hazard. For this purpose, the
company may require that a Moral Hazard Report has to be submitted by an
official of the insurance company.**Example**Vikas recently purchased a life insurance policy. He then decided to go on a skiing
expedition at a site which was touted to be one of the most dangerous skiing
places on earth. In the past he had refused to undertake such expeditions.171**B. Policy Stage Documentation****1.** **First Premium Receipt**An insurance contract commences when the life insurance company issues a first
premium receipt (FPR).
**The FPR is the evidence that the policy contract has begun.** The first premium
receipt contains the following information:i. Name and address of the life assured
ii. Policy number
iii. Premium amount paid
iv. Method and frequency of premium payment
v. Next due date of premium payment
vi. Date of commencement of the risk
vii. Date of final maturity of the policy
viii.Date of payment of the last premium
ix. Sum assuredAfter the issue of the FPR, the insurance company will issue subsequent premium
receipts when it receives further premiums from the proposer. These receipts are
known as renewal premium receipts (RPR). The RPRs act as proof of payment in
the event of any disputes related to premium payment.**2.** **Policy Document**The policy document is the most important document associated with insurance.
**It is evidence of the contract between the assured and the insurance**
**company.** It is not the contract itself. If the policy document is lost by the policy
holder, it does not affect the insurance contract. The insurance company will
issue a duplicate policy without making any changes to the contract. The policy
document has to be signed by a competent authority and should be stamped
according to the Indian Stamp Act. Life insurers are very careful while designing
the policy document because they bear onus of responsibility for any ambiguity
or confusion that may arise in the interpretation of its wordings.The standard policy document typically has three parts:**a)** **Policy Schedule**The policy schedule forms the first part. It is usually found on the face page
of the policy. The schedules of life insurance contracts would be generally
similar. They would normally contain the following information:172**Diagram 1:** **Policy document components**i. Name of the insurance companyii. Some common details of a policy are: Policy owner’s name and address
Date of birth and age last birthday
Plan and term of policy contract
Sum assured
Amount of premium
Premium paying term
Date of commencement, date of maturity and due date of lastpremium
Whether policy is with or without profits
Name of nominee
Mode of premium payment – yearly; half yearly; quarterly; monthly;via deduction from salary
The policy number – which is the unique identity number of the policycontractiii. The insurer’s promise to pay. The events on the happening of which andthe amounts that are promised to be paid. This forms the heart of the
insurance contractiv. The signature of the authorised signatory and policy stampv. The address of the local Insurance Ombudsman.**b)** **Standard Provisions**The second component of the policy document is made up of standard policy
provisions, such as relating to proof of age, premium payment grace period
etc. which are normally present in all life insurance contracts. Some of these
provisions may not be applicable in the case of certain kinds of contracts, like
term, single premium or non-participating (with profits) policies. These
standard provisions define the rights and privileges and other conditions,
which are applicable under the contract.173**c)** **Specific Policy Provisions**The third part of the policy document consists of specific policy provisions
that are specific to the individual policy contract. These may be printed on
the face of the document or inserted separately in the form of an attachment.While standard policy provisions, like days of grace or non-forfeiture in case
of lapse, are often statutorily provided under the contract, specific provisions
are generally linked to the particular contract between the insurer and the
insured.**Example**A clause precluding death due to pregnancy for a lady who is expecting at the
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insurance contractiv. The signature of the authorised signatory and policy stampv. The address of the local Insurance Ombudsman.**b)** **Standard Provisions**The second component of the policy document is made up of standard policy
provisions, such as relating to proof of age, premium payment grace period
etc. which are normally present in all life insurance contracts. Some of these
provisions may not be applicable in the case of certain kinds of contracts, like
term, single premium or non-participating (with profits) policies. These
standard provisions define the rights and privileges and other conditions,
which are applicable under the contract.173**c)** **Specific Policy Provisions**The third part of the policy document consists of specific policy provisions
that are specific to the individual policy contract. These may be printed on
the face of the document or inserted separately in the form of an attachment.While standard policy provisions, like days of grace or non-forfeiture in case
of lapse, are often statutorily provided under the contract, specific provisions
are generally linked to the particular contract between the insurer and the
insured.**Example**A clause precluding death due to pregnancy for a lady who is expecting at the
time of writing the contract.**Test Yourself 1**What does a first premium receipt (FPR) signify? Choose the most appropriate
option.I. Free-look period has ended
II. It is evidence that the policy contract has begun
III. Policy cannot be cancelled now
IV. Policy has acquired a certain cash value.**C. Policy conditions and privileges****Grace Period**As mentioned in Chapter 4, the Grace Period provision enables a policy that would
otherwise have lapsed for non-payment of premium, to continue in force during
the grace period. Every life insurance contract undertakes to pay the death
benefit on the condition that the premiums have been paid up to date and the
policy is in force. The “Grace Period” clause grants the policyholder an additional
period of time to pay the premium after it has become due.The premium however remains due and if the policyholder dies during this period,
the insurer deducts the premium from the death benefit. If premiums remain
unpaid even after the grace period is over, the policy would then be considered
lapsed and the company is not under obligation to pay the death benefit. The
only amount payable would be whatever is applicable under the non-forfeiture
provisions.**Important****Lapse and Reinstatement/ Revival**We have already seen that a policy may be said to be in lapse condition if premium
has not been paid even during the days of grace. The good news is that most
lapsed life insurance policies can be reinstated [revived]. As per IRDAI Product
Regulations, a Non-Linked Policy can be revived within 5 years from the date of
unpaid premium, whereas a Linked Policy can be revived within 3 years.174**Definition**Reinstatement is the process by which a life insurance company puts back into
force a policy that has either been terminated because of non-payment of
premiums or has been continued under one of the non-forfeiture provisions.A revival of the policy cannot however be an unconditional right of the insured.
It can be accomplished only under certain conditions:**i.** **Revival application within specific time period:** The policy owner must
complete the revival application within the time frame stated in the
provision for such reinstatement, say five years from the date of lapsation.**ii.** **Satisfactory evidence of continued insurability:** The insured mustpresent to the insurance company satisfactory evidence of continued
insurability of the insured. Not only must her health be satisfactory but
other factors such as financial income and morals must not have
deteriorated substantially.**iii.** **Payment of overdue premiums with interest:** The policy owner isrequired to make payment of all overdue premiums with interest from due
date of each premium.**iv.** After having evaluated the evidence of continued insurability the insurermay decide to revive the policy as per existing terms and premium or even
offer revival with increase in premium or reduced risk cover or both.**Perhaps the most significant of the above conditions is that which requires**
**evidence of insurability at revival.** The type of evidence called for would depend
on the circumstances of each individual policy. If the policy has been in a lapsed
state for a very short period of time, the insurer may reinstate the policy without
any evidence of insurability or may only require a simple statement from the
insured certifying that he is in good health.The company may however require a medical examination or other evidence of
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insurability of the insured. Not only must her health be satisfactory but
other factors such as financial income and morals must not have
deteriorated substantially.**iii.** **Payment of overdue premiums with interest:** The policy owner isrequired to make payment of all overdue premiums with interest from due
date of each premium.**iv.** After having evaluated the evidence of continued insurability the insurermay decide to revive the policy as per existing terms and premium or even
offer revival with increase in premium or reduced risk cover or both.**Perhaps the most significant of the above conditions is that which requires**
**evidence of insurability at revival.** The type of evidence called for would depend
on the circumstances of each individual policy. If the policy has been in a lapsed
state for a very short period of time, the insurer may reinstate the policy without
any evidence of insurability or may only require a simple statement from the
insured certifying that he is in good health.The company may however require a medical examination or other evidence of
insurability under certain circumstances:i. If the grace period has expired since long and the policy is in a lapsedcondition for say, nearly a year.ii. If the insurer has reason to suspect that a health or other problem may bepresent. Fresh medical examination may also be required if the sum
assured or face amount of the policy is large.**Important**Revival of lapsed policies is an important service function that life insurers seek
to actively encourage since policies in lapsed state may do little good to either
insurer or policyholder.175**Non-forfeiture provisions**The Insurance Act, 1938 (Section 113) protects policies (which have acquired
surrender value), from lapsation, by keeping them alive to the extent of paid-up
sum assured even without payment of further premiums. This is because the
policyholder has a claim to the cash value accumulated under the policy.**a)** **Surrender values**Surrender value is the amount you stand to get when you decide to make a
premature exit from the plan, i.e. when you have decided to completely
withdraw or terminate the policy before its maturity.Life insurers normally have a chart that lists the surrender values at various times
and also the method that will be used for calculating the surrender values. The
formula takes into account the type and plan of insurance, age of the policy and
the length of the policy premium-paying period.The actual amount of cash one gets in hand on surrender may be different from
the surrender value amount prescribed in the policy. The actual amount may
differ on account of any accrued bonuses, recoveries etc.**Guaranteed Surrender Value [GSV]:** The law in India as per IRDAI Guidelines
(revised in 2019) provides for a Guaranteed Surrender Value [GSV] to be payable
if all premiums have been paid for at least two consecutive years. This Value
arrived as a percentage (say 30%) of premiums paid is called Guaranteed
Surrender Value. The value depends on the duration of premium paid. The GSV is
required to be mentioned in the policy document.**b)** **Policy loans**Life insurance policies that accumulate a cash value also have a provision to grant
the policyholder the right to borrow money from the insurer by using the cash
value of the policy as a security for the loan. The policy loan is usually limited to
a percentage of the policy’s surrender value (say 90%). Note that the policyholder
borrows from his own account. He or she would have been eligible to get the
amount if the policy had been surrendered. In that case the insurance would have
been terminated.Insurers charge interest on policy loans, which are payable semi-annually or
annually. Although loan and interest are repayable periodically, If the loan has
not been repaid, the insurer deducts the amount of outstanding (unpaid) loan and
interest from the policy benefit that is payable. A loan provides relief to
policyholder in case of financial emergencies while keeping the insurance alive.Since the loan is granted on the policy being kept as security, the policy has to
be assigned (explained in later para) in favour of the insurer. Where the
policyholder has nominated (explained in later para) someone to receive the
money in the event of death of the insured, this nomination shall not be cancelled
but the nominee’s right will be affected to the extent of the insurer’s interest in
the policy.176**Example**Arjun bought a life insurance policy wherein the total death claim payable under
the policy was Rs. 2.5 lakhs. Arjun’s total outstanding loan and interest under the
policy amounts to Rs. 1.5 lakhs. Hence in the event of Arjun’s death, the nominee
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amount if the policy had been surrendered. In that case the insurance would have
been terminated.Insurers charge interest on policy loans, which are payable semi-annually or
annually. Although loan and interest are repayable periodically, If the loan has
not been repaid, the insurer deducts the amount of outstanding (unpaid) loan and
interest from the policy benefit that is payable. A loan provides relief to
policyholder in case of financial emergencies while keeping the insurance alive.Since the loan is granted on the policy being kept as security, the policy has to
be assigned (explained in later para) in favour of the insurer. Where the
policyholder has nominated (explained in later para) someone to receive the
money in the event of death of the insured, this nomination shall not be cancelled
but the nominee’s right will be affected to the extent of the insurer’s interest in
the policy.176**Example**Arjun bought a life insurance policy wherein the total death claim payable under
the policy was Rs. 2.5 lakhs. Arjun’s total outstanding loan and interest under the
policy amounts to Rs. 1.5 lakhs. Hence in the event of Arjun’s death, the nominee
will be eligible to get the balance of Rs. 1 lakh.**Special policy provisions and endorsements****a)** **Nomination**i. Under Section 39 of the Insurance Act 1938, the holder of a policy on his/her own life may nominate the person or persons to whom the money
secured by the policy shall be paid in the event of his/her death.
ii. The life assured can **nominate one or more than one person** as nominees.
iii. Nominees are entitled for **valid discharge** and have to **hold the money as****a trustee** on behalf of those entitled to it.
iv. Nomination can be done either **at the time the policy is bought or later**at any time before the maturity of the Policy.
v. Nomination may be incorporated in the text of the Policy itself or by anendorsement on the Policy. Nominations need be communicated to the
insurer and registered by the insurer in the records relating to the Policy.
vi. Nomination can be cancelled or changed at any time before Policymatures, by an endorsement or a further endorsement or a will as the case
may be.**Important**Nomination only gives the nominee the right to receive the policy monies from
the insurer in the event of the death of the life assured. However, the money
would be belonging to the legal heir only. **A nominee does not have any right**
**to the whole (or part) of the claim.** However vide Section 39(7) of Insurance
Act,1938, in respect of all policies maturing for payment after 26 [th] December,
2014, nomination in favour of parents, spouse, children or spouse and children
by the owner of the policy on his/ own life makes the nominees beneficially
entitled to the amount payable by the insurance company.Where the nominee is a minor, the policy holder needs to appoint an
appointee. The appointee needs to sign the policy document to show his or
her consent to acting as an appointee. The appointees lose their status when
the nominee reaches majority age. The policy holder can change the
appointee at any time. If no appointee is given, and the nominee is a minor,
then on the death of the life assured, the death claim is paid to the legal heirs
of the policyholder.Where more than one nominee is appointed, the death claim will be payable
to them jointly, or to the survivor or survivors. Nominations made after the
commencement of the policy have to be intimated to the insurers to be
effective.177Section 39(11) of the Insurance Act says that where a policyholder dies after
the maturity of the policy but the proceeds and benefit of his policy has not
been made to him because of his death, his nominee shall be entitled to the
proceeds and benefit of his policy.**Diagram 2:** **Provisions related to nomination****b)** **Assignment**Since life insurance policy carries a promise or a debt that the insurance
company owes the insured, it is considered a security for money or property.
We have seen that loan is advanced against by the insurers against the
surrender value of the policy. Similarly, many financial institutions including
banks advance loan against the security of the insurance policy by having it
assigned it in their favour.The term assignment ordinarily refers to transfer of property by writing in
favour of another person.The assignment of a life insurance policy implies the act of transferring the
rights, title and interest in the policy (as property) from one person to
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to them jointly, or to the survivor or survivors. Nominations made after the
commencement of the policy have to be intimated to the insurers to be
effective.177Section 39(11) of the Insurance Act says that where a policyholder dies after
the maturity of the policy but the proceeds and benefit of his policy has not
been made to him because of his death, his nominee shall be entitled to the
proceeds and benefit of his policy.**Diagram 2:** **Provisions related to nomination****b)** **Assignment**Since life insurance policy carries a promise or a debt that the insurance
company owes the insured, it is considered a security for money or property.
We have seen that loan is advanced against by the insurers against the
surrender value of the policy. Similarly, many financial institutions including
banks advance loan against the security of the insurance policy by having it
assigned it in their favour.The term assignment ordinarily refers to transfer of property by writing in
favour of another person.The assignment of a life insurance policy implies the act of transferring the
rights, title and interest in the policy (as property) from one person to
another. The person who transfers the rights is called **assignor** and the person
to whom property is transferred is called **assignee** . On assignment, the
ownership of the policy changes and hence nomination is cancelled, except
when assignment is made to the insurance company for a policy loan.There are two types of assignments.**Diagram 3:** **Types of Assignment**178Absolute assignment is more commonly seen in many commercial situations
where the policy is typically mortgaged against a debt assumed by the
policyholder, like a housing loan.**Conditions for valid assignment**Let us now look at the conditions that are necessary for a valid assignment.i. The assignor must have **absolute right and title or assignable interest** tothe policy being assigned.ii. The assignment should **not be opposed to any law in force** .iii. Assignee can do another assignment, but cannot do nomination becauseassignee is not the life assured.**Important** : A life insurance policy can be assigned wholly or partially The assignment must be signed by the transferor or assignor or dulyauthorized agent and attested by at least one witness. The transfer of title has to be specifically set forth in the form of anendorsement on the policy or a separate instrument.
The policyholder must give notice of the assignment to the insurer,without which the assignment will not be valid. Section 38(2) specifies that an insurer may accept the assignment, ordecline the same, if it has sufficient reason to believe that such
assignment is not bona fide or is not in the interest of the policyholder
or in public interest or is for the purpose of trading of insurance policy. However, the insurer shall, before refusing to act upon theendorsement, record in writing the reasons for such refusal and
communicate the same to the policyholder not later than thirty days
from the date of the policyholder giving notice of such transfer or
assignment.179**Diagram 4:** **Provisions related to assignment of insurance policies****Commonly extended privileges to policyholders**a) **Duplicate Policy:**A life insurance policy document is only an evidence of a promise. Loss or
destruction of the policy document does not in any way absolve the company
of its liability under the contract. Life insurance companies generally have
standard procedures to be followed in case of loss of the policy document.Normally the office would examine the case to see if there is any reason to
doubt the alleged loss. Satisfactory proof may need to be produced that the
policy has been lost and not dealt with in any manner. Generally the claim
may be settled on the claimant furnishing an indemnity bond with or without
surety.If payment is shortly due and the amount to be paid is high, the office may
also insist that an advertisement be placed in a national paper with wide
circulation, reporting the loss. A duplicate policy may be issued on being sure
that there is no objection from anyone else.b) **Alteration**Policyholders may seek to effect alterations in policy terms and conditions.
There is provision to make such changes subject to consent of both the insurer
and assured. Normally alterations may not be permitted during the first year
of the policy, except for change in the mode of premium or alterations which
are of a compulsory nature – like change in name or/ address;
readmission of age in case it is proved higher or lower;
request for grant of double accident benefit or permanent disabilitybenefit etc.Alterations may be permitted in subsequent years. Some of these alterations
may be affected by placing a suitable endorsement on the policy or on a
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doubt the alleged loss. Satisfactory proof may need to be produced that the
policy has been lost and not dealt with in any manner. Generally the claim
may be settled on the claimant furnishing an indemnity bond with or without
surety.If payment is shortly due and the amount to be paid is high, the office may
also insist that an advertisement be placed in a national paper with wide
circulation, reporting the loss. A duplicate policy may be issued on being sure
that there is no objection from anyone else.b) **Alteration**Policyholders may seek to effect alterations in policy terms and conditions.
There is provision to make such changes subject to consent of both the insurer
and assured. Normally alterations may not be permitted during the first year
of the policy, except for change in the mode of premium or alterations which
are of a compulsory nature – like change in name or/ address;
readmission of age in case it is proved higher or lower;
request for grant of double accident benefit or permanent disabilitybenefit etc.Alterations may be permitted in subsequent years. Some of these alterations
may be affected by placing a suitable endorsement on the policy or on a
separate paper. Other alterations, which require a material change in policy180conditions, may require the cancellation of existing policies and issue of new
policies.Some of the main types of alterations that are permitted arei. Change in certain classes of insurance or term [where risk is not increased]
ii. Reduction in the sum assured
iii. Change in the mode of payment of premium
iv. Change in the date of commencement of the policy
v. Splitting up of the policy into two or more policies
vi. Removal of an extra premium or restrictive clause
vii. Change from without profits to with profits plan
viii. Correction in name
ix. Settlement option for payment of claim and grant of double accidentbenefitThese alterations generally do not involve an increase in the risk. There are
other alterations in policies that are not allowed. These may be alterations
that have the effect of lowering the premium. Examples are extension of the
premium paying term; change from with profit to without profit plans; change
from one class of insurance to another, where it increases the risk: and
increase in the sum assured.**Test Yourself 2**Under what circumstances would the policyholder need to appoint an appointee?I. Insured is minorII. Nominee is a minor
III. Policyholder is not of sound mind
IV. Policyholder is not married**Summary**Matters of health, habits and occupation, income and family details need to
be mentioned by the agent in the agent’s report.Details pertaining to physical features like height, weight, blood pressure,
cardiac status etc. are recorded and mentioned by the doctor in his/ her
report called the medical examiner’s report.Moral hazard is the likelihood that a client's behaviour might change as a result
of purchasing a life insurance policy and such a change would increase the
chance of a loss.An insurance contract commences when the life insurance company issues a
first premium receipt (FPR). The FPR is the evidence that the policy contract
has begun.The policy document is the most important document associated with
insurance. It is the evidence of the contract between the assured and the
insurance company.The standard policy document typically has three parts which are the policy
schedule, standard provisions and the policy’s specific provisions.181The grace period clause grants the policyholder an additional period of time
to pay the premium after it has become due.Reinstatement is the process by which a life insurance company puts back into
force a policy that has either been terminated because of non-payment of
premiums or has been continued under one of the non-forfeiture provisions.A policy loan is different from an ordinary commercial loan in two respects,
firstly the policy owner is not legally obligated to repay the loan and the
insurer need not perform a credit check on the insured.Nomination is where the life assured proposes the name of the person(s) to
which the sum assured should be paid by the insurance company after their
death.The assignment of a life insurance policy implies the act of transferring the
rights right, title and interest in the policy (as property) from one person to
another. The person who transfers the rights is called assignor and the person
to whom property is transferred is called assignee.Alteration is subject to consent of both the insurer and assured. Normally
alterations may not be permitted during the first year of the policy, except
for some simple ones.**Key Terms**1. Agents Confidential Report
2. Medical Examiner’s Report
3. Moral Hazard Report
4. First Premium Receipt (FPR)
5. Policy document
6. Policy schedule
7. Standard provisions
8. Special Provisions
9. Grace period
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force a policy that has either been terminated because of non-payment of
premiums or has been continued under one of the non-forfeiture provisions.A policy loan is different from an ordinary commercial loan in two respects,
firstly the policy owner is not legally obligated to repay the loan and the
insurer need not perform a credit check on the insured.Nomination is where the life assured proposes the name of the person(s) to
which the sum assured should be paid by the insurance company after their
death.The assignment of a life insurance policy implies the act of transferring the
rights right, title and interest in the policy (as property) from one person to
another. The person who transfers the rights is called assignor and the person
to whom property is transferred is called assignee.Alteration is subject to consent of both the insurer and assured. Normally
alterations may not be permitted during the first year of the policy, except
for some simple ones.**Key Terms**1. Agents Confidential Report
2. Medical Examiner’s Report
3. Moral Hazard Report
4. First Premium Receipt (FPR)
5. Policy document
6. Policy schedule
7. Standard provisions
8. Special Provisions
9. Grace period
10. Policy lapse
11. Policy revival
12. Surrender value13. Nomination
14. Assignment**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.182## CHAPTER L-08## LIFE INSURANCE UNDERWRITING**Chapter Introduction**A life insurance agent’s work does not stop once a proposal is secured from a
prospective customer. The proposal must also be accepted by the insurance
company and result in a policy.Every life insurance proposal has to pass through a gateway where the life insurer
decides whether to accept the proposal and if so, on what terms. In this chapter
we shall know more about the process of underwriting and the elements involved
in the process.**Learning Outcomes**183**A.** **Underwriting – Basic concepts****1.** **Underwriting purpose**Underwriting has two purposesi. To assess the risk, classify the risk and decide the terms of acceptance orto decline the risk.
ii. To prevent anti-selection against the insurer**Definition**The term **underwriting** refers to the process of evaluating each proposal for life
insurance in terms of the degree of risk it represents and then deciding whether
or not to grant insurance and on what terms.**Anti-selection** is the tendency of people, who suspect or know that their chance
of experiencing a loss is high, to seek out insurance with a view to gain in theprocess.**Example**If life insurers were to be not selective about whom they offered insurance, there
is a chance that people with serious ailments like heart problems or cancer, who
did not expect to live long, would seek to buy insurance.In other words, if an insurer did not exercise underwriting discretion, it would be
selected against and may suffer losses in the process.**2.** **Equity among risks**The term “Equity” means that applicants who are exposed to similar degrees of
risk must be placed in the same premium class. The Mortality table, used to
determine premiums, represents the mortality experience of standard lives or
average risks. They include the vast majority of individuals who propose to take
life insurance.**a)** **Risk classification**To usher equity, the underwriter engages in a process known as **risk classification**
i.e. individual lives are categorised and assigned to different risk classes
depending on the degree of risks they pose. There are four such risk classes.**Diagram 1:** **Risk classification**184**i.** **Standard lives**
These consist of those whose anticipated mortality corresponds to the
standard lives represented by the mortality table.**ii.** **Preferred risks**
These are the ones whose anticipated mortality is significantly lower than
standard lives and hence could be charged a lower premium.**iii.** **Substandard lives**
These are the ones whose anticipated mortality is higher than the average or
standard lives, but are still considered to be insurable. They may be accepted
for insurance with higher (or extra) premiums or subjected to certain
restrictions.**iv.** **Declined lives**
These are the ones whose impairments and anticipated extra mortality are so
great that they could not be provided insurance coverage at an affordable
cost. Sometimes an individual’s proposal may also be temporarily declined if
he or she has been exposed to a recent medical event, like an operation.**3.** **Underwriting process**Underwriting process takes place at two levels: At Field level
At Underwriting department level**a)** **Field or Primary level**Field level underwriting is also known as **primary underwriting** . It includes
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These consist of those whose anticipated mortality corresponds to the
standard lives represented by the mortality table.**ii.** **Preferred risks**
These are the ones whose anticipated mortality is significantly lower than
standard lives and hence could be charged a lower premium.**iii.** **Substandard lives**
These are the ones whose anticipated mortality is higher than the average or
standard lives, but are still considered to be insurable. They may be accepted
for insurance with higher (or extra) premiums or subjected to certain
restrictions.**iv.** **Declined lives**
These are the ones whose impairments and anticipated extra mortality are so
great that they could not be provided insurance coverage at an affordable
cost. Sometimes an individual’s proposal may also be temporarily declined if
he or she has been exposed to a recent medical event, like an operation.**3.** **Underwriting process**Underwriting process takes place at two levels: At Field level
At Underwriting department level**a)** **Field or Primary level**Field level underwriting is also known as **primary underwriting** . It includes
information gathering by an agent or company representative to decide
whether an applicant is suitable for granting insurance coverage. The agent
plays a critical role as primary underwriter. He is in the best position to know
the life to be insured.Many insurance companies may require that agents complete a statement or
a confidential report, asking for specific information, opinion and
recommendations to be provided by the agent with respect to the proposed
life.185**Fraud monitoring and role of agent as primary underwriter**Much of the decision with regard to acceptance of a risk depends on the facts
that have been disclosed by the proposer in the proposal form. It may be
difficult for an underwriter who is sitting in the underwriting department to
know whether these facts are untrue and have been fraudulently
misrepresented with deliberate intent to deceive.The agent plays a significant role here. He or she is in the best position to
ensure that the facts that have been represented are true, due to his/ her
direct and personal contact with the proposed life.**b)** **Underwriting at the Department level**The main level of Underwriting is at the Department or Office level. It involves
specialists and persons who consider all the relevant data on the case to
decide whether to accept a proposal for Life insurance and on what terms.**4.** **Methods of underwriting****Diagram 2:** **Methods of Underwriting**Underwriters may use two types of methods for the purpose:|Judgment Method|Numerical Method|
|---|---|
|~~Under~~<br>~~this~~<br>~~method~~<br>subjective<br>judgment<br>is<br>used,<br>especially<br>when<br>deciding on a case that is<br>complex.<br>|~~Under this method underwriters assign positive~~<br>rating points for all negative or adverse factors<br>(negative points for any positive or favourable<br>factors).<br>|
|~~**Example:**Deciding whether~~<br>life insurance can be given<br>to a person staying in a<br>disturbed country/ area.<br>|~~**Example:** A person with history of cardiac~~<br>ailments and/ or early deaths in the family may<br>be assigned positive points. The total number<br>of points so assigned will help an underwriter<br>in deciding the extent of risk involved.<br>|
|~~In such situations, the~~<br>department may get the<br>expert opinion of a medical<br>doctor who is also called a<br>medical referee.|~~The sum total of these positive/negative~~<br>points, and/or is referred to as Extra Mortality<br>Rating (EMR). Higher EMR indicates that the<br>life is substandard. If the EMR is very high,<br>underwriters may decline insurance.|186**Underwriting Decisions**Let us now consider the various kinds of decisions that underwriters may take
with regard to a life proposed for underwriting.**a)** **Acceptance at ordinary rates (OR)** is the most common decision. Thisrating indicates that the risk is accepted at the same rate of premium as
would apply to an ordinary or standard life.**Diagram 3:** **Underwriting decisions****b)** **Acceptance with an extra:** This is the most common way of dealing withthe large majority of sub-standard risks. It involves charging an extra over
the tabular rate of premium.**c)** **Acceptance with a lien on the sum assured:** A lien is a kind of hold whichthe life insurance company can exercise (in part or whole) on the amount
of benefit it has to pay in the event of a claim.
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Preferred risks
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with regard to a life proposed for underwriting.**a)** **Acceptance at ordinary rates (OR)** is the most common decision. Thisrating indicates that the risk is accepted at the same rate of premium as
would apply to an ordinary or standard life.**Diagram 3:** **Underwriting decisions****b)** **Acceptance with an extra:** This is the most common way of dealing withthe large majority of sub-standard risks. It involves charging an extra over
the tabular rate of premium.**c)** **Acceptance with a lien on the sum assured:** A lien is a kind of hold whichthe life insurance company can exercise (in part or whole) on the amount
of benefit it has to pay in the event of a claim.
**Example: Consider the case of an insured who** has suffered and
recovered from a certain disease like TB. Imposition of Lien would imply
that if this person were to die from a relapse of the TB, within a given
period, only a decreased amount of death benefit may be payable.
**d)** **Acceptance with a restrictive clause:** For certain kinds of hazards arestrictive clause may be applied which limits death benefit in the event
of death under certain circumstances.**Example** is a pregnancy clause imposed on pregnant ladies that limits
insurance payable in the event of pregnancy related deaths occurring
within say three months of delivery.187**e)** **Decline or postpone:** Finally, a life insurance underwriter may decide todecline or reject a proposal for insurance. This would happen when there
are certain health/ other features which are so adverse that they
considerably increase the risk.**Example:** An individual who suffers from cancer and has little chance of
remission, would be a candidate for rejection,Similarly in some cases it may be prudent to postpone acceptance of the risk
until such time as the situation has improved and become more favourable.**Example**A lady who has just had a hysterectomy operation may be asked to wait for a few
months before insurance on her life is allowed, to allow any post operation
complications that may have arisen to disappear.**Test Yourself 1**Which of the following cases is likely to be declined or postponed by a life insurer?I. A healthy 18 year old
II. A sports person
III. A person suffering from AIDS
IV. A housewife with no income of her own**B.** **Non-medical underwriting****1.** **Non-medical underwriting**A large number of life insurance proposals may typically get selected for
insurance without conducting a medical examination to check the insurability of
a life to be insured. Such cases are termed as **non-medical proposals** .In view of multiple reasons including the costs involved, in some types of policies,
Life insurers grant insurance without insisting on a medical examination
**2.** **Conditions for non-medical underwriting**However non-medical underwriting calls for conditions like applicability to
certain class of lives, certain plans of insurance, certain upper limits of sum
insured, entry age limits, maximum term of insurance etc.to be followed.
**3.** **Rating factors in underwriting**Rating factors refer to various aspects related to financial situation, life style,
habits, family history, personal history of health and other personal
circumstances in the prospective insured’s life that may pose a hazard and
increase the risk. Underwriting involves identifying these hazards and their likely
impact and classifying the risk accordingly.Rating factors may be broadly divided into two – those which contribute to moral
hazard and those which contribute to physical [medical] hazards. Life insurance
companies often divide their underwriting into categories accordingly. Factors188like income, occupation, lifestyle and habits, which contribute to moral hazard,
are assessed as part of **financial underwriting**, while medical aspects of health
fall under **medical underwriting** .**a)** **Female insurance**Women generally have greater longevity than men. However they may face
some problems with respect to moral hazard. This is because many women in
Indian society are victims of male domination and social exploitation. Evils
like dowry deaths exist even today. Longevity of women can also be affected
from problems connected with pregnancy.Insurability of women is governed by need for insurance and capacity to pay
premiums. Insurance companies may thus decide to grant full insurance only
to those who have earned income of their own and may impose limits on other
categories of women. Similarly some conditions may be levied on pregnantwomen.**b)** **Minors**Minors have no contracting power of their own. Hence a proposal on the life
of a minor has to be submitted by another person who is related to the minor
in the capacity of a parent or legal guardian. It would also be necessary to
ascertain the need for insurance, since minors usually have no earned income
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Acceptance at ordinary rates (OR)
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are assessed as part of **financial underwriting**, while medical aspects of health
fall under **medical underwriting** .**a)** **Female insurance**Women generally have greater longevity than men. However they may face
some problems with respect to moral hazard. This is because many women in
Indian society are victims of male domination and social exploitation. Evils
like dowry deaths exist even today. Longevity of women can also be affected
from problems connected with pregnancy.Insurability of women is governed by need for insurance and capacity to pay
premiums. Insurance companies may thus decide to grant full insurance only
to those who have earned income of their own and may impose limits on other
categories of women. Similarly some conditions may be levied on pregnantwomen.**b)** **Minors**Minors have no contracting power of their own. Hence a proposal on the life
of a minor has to be submitted by another person who is related to the minor
in the capacity of a parent or legal guardian. It would also be necessary to
ascertain the need for insurance, since minors usually have no earned income
of their own. Three conditions would generally be sought when considering
insurance for minors:**i.** **Whether they have a properly developed physique**Poor physique can be a result of malnutrition or other health problems
posing grave risks.**ii.** **Proper family history and personal history**If there are adverse indicators here, it may pose risks.**iii.** **Whether the family is adequately insured**It is necessary to check if the family has a culture of insurance. One must
be on guard if no other member of the minor’s family has been insured.
Amount of insurance is generally linked to that of parents.
**c)** **Large sums assured**An underwriter needs to be wary when the amount of insurance is very large
relative to annual income of the proposed insured. Generally sum assured may
be assumed to be around ten to twelve times one’s annual income. If the ratio
is much higher than this, it raises the possibility of selection against the
insurer.**Example**
If an individual has an annual income of Rs. 5 lakhs and proposes for a life
insurance cover of Rs. 3 crores, it raises a cause for concern.Typically concerns can arise in such instances because of the possibility that
such a large amount of insurance is being proposed in anticipation of suicide189or as a result of expected deterioration in health. A third reason for such large
sums could be excessive misselling by the sales person.Large sums assured would also mean premiums increasing in proportion and
raise the question of whether the payment of such premiums would be
continued. In general, the premium payable should be within one third of an
individual’s annual income**d)** **Age**
Mortality risk is closely related to age. The underwriter needs to be careful
when considering insurance for people of advanced ages.**Example**
If the insurance is being proposed for the first time after age 50, there is a
need to suspect moral hazard and enquire about why such insurance was not
taken earlier.We must also note that chances of occurrence of degenerative diseases like
diseases of the heart and kidney failure increase with age and become higher
at older ages. Life insurers may also seek for some special reports when
proposals are submitted for high sums assured/ advanced ages or a
combination of both.**Example**
Examples of such reports are ECG; EEG; X-Ray of the chest and Blood Sugar
test. These tests may reveal deeper insights about the health of the proposed
life than the answers given in the proposal or an ordinary medical examination
can provide.**Examples**
When a proposal is submitted at a branch located far away from the place of
residence of the proposed insuredA medical examination is done elsewhere even when a qualified medical
examiner is available near one’s place of residence.A third case is when a proposal is made on the life of another without having
clear insurable interest, or when the nominee is not the near dependent of
the life proposed.In each such case an enquiry may be made. Finally, when the agent is related
to the life assured a moral hazard report may be called from a branch official
like the agency manager/ development officer.**e)** **Occupation**Occupational hazards can arise from three sources: Accident
Health hazard
Moral hazard190**Diagram 4:** **Sources of Occupational Hazards****i.** **Accidental hazards** arise because certain kinds of jobs expose one to the
risk of accident. There is any number of jobs in this category – like circus
artistes, scaffolding workers, demolition experts and film stunt artistes.**ii.** **Health hazards** arise when the nature of the job is such as to give rise to
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Female insurance
|
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can provide.**Examples**
When a proposal is submitted at a branch located far away from the place of
residence of the proposed insuredA medical examination is done elsewhere even when a qualified medical
examiner is available near one’s place of residence.A third case is when a proposal is made on the life of another without having
clear insurable interest, or when the nominee is not the near dependent of
the life proposed.In each such case an enquiry may be made. Finally, when the agent is related
to the life assured a moral hazard report may be called from a branch official
like the agency manager/ development officer.**e)** **Occupation**Occupational hazards can arise from three sources: Accident
Health hazard
Moral hazard190**Diagram 4:** **Sources of Occupational Hazards****i.** **Accidental hazards** arise because certain kinds of jobs expose one to the
risk of accident. There is any number of jobs in this category – like circus
artistes, scaffolding workers, demolition experts and film stunt artistes.**ii.** **Health hazards** arise when the nature of the job is such as to give rise to
possibility of medical impairment. There are various kinds of health hazards. Some jobs like that of **rickshaw pullers** involve a lot of physical strainand impact the respiratory system. Situations where one may be exposed to **toxic substances** like miningdust or carcinogenic substances (that cause cancer) like chemicals and
nuclear radiation. Working in **high pressure environments** like underground tunnels ordeep sea, can cause acute decompression sickness. Finally, **overexposure** to certain job situations (like sitting crampedbefore a computer or working in a high noise setting) can impair
functioning of certain body parts in the longer run.**iii.** **Moral hazard** can arise when a job involves proximity or can cause
predisposition towards criminal elements or to drugs and alcohol. An
example is that of a dancer in a nightclub or an enforcer in a liquor bar or
the ‘bodyguard’ of a businessman with suspected criminal links. Again the
job profiles of certain individuals like superstar entertainers may lead them
to intoxicating lifestyles, which sometimes come to tragic ends.When an occupation falls under any such hazardous category, the applicant
for insurance may need to complete an occupational questionnaire that asks
for specific details of the job, duties involved and risks exposed to. A rating
may also be imposed for occupation in the form of a flat extra (for example
Rupees two per thousand sums assured.) Such extra may be reduced or
removed when the insured’s occupation changes.**f)** **Lifestyle and habits**Lifestyle and habits are terms, covering a wide range of individual lifestyle
characteristics, which may be brought out in the agent’s confidential reports191and moral hazard reports, suggesting an exposure to risk. In particular three
features are important:**Smoking and tobacco use** : Use of tobacco is not only a risk in itself but also
contributes to increasing other medical risks. Companies charge differential
rates today for smokers and non-smokers and users of other forms of tobacco
usage like _gutkha_ and _paan masala_ .**Alcohol:** Drinking alcohol occasionally or in modest quantities is not
considered a hazard. However, long term heavy drinking can impair liver
functioning, affect the digestive system and lead to mental disorders.
Alcoholism is also linked with accidents, violence, family abuse, depression
and suicides.**Substance abuse** : Substance abuse refers to the use of various kinds of
substances like drugs or narcotics, sedatives and other similar stimulants.
Some of these are even illegal and their use indicates criminal disposition and
moral hazard.**Test Yourself 2**Which of the following is an example of moral hazard?I. Stunt artist dies while performing a stunt
II. A person drinking copious amounts of alcohol because he is insured
III. Insured defaulting on premium payments
IV. Proposer misplacing policy document**C.** **Medical underwriting****1.** **Medical underwriting**Let us now consider some of the medical factors that would influence an
underwriter’s decision. These are generally assessed through medical
underwriting. They may often call for a medical examiner’s report. Let us look at
some of the factors that are checked.**Diagram 5:** **Medical Factors that influence an Underwriter’s Decision**192**a)** **Family history**The impact of family history on mortality risk has been studied from three
angles.**i.** **Heredity** : Certain diseases can be transmitted from one generation to
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|
Examples
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and suicides.**Substance abuse** : Substance abuse refers to the use of various kinds of
substances like drugs or narcotics, sedatives and other similar stimulants.
Some of these are even illegal and their use indicates criminal disposition and
moral hazard.**Test Yourself 2**Which of the following is an example of moral hazard?I. Stunt artist dies while performing a stunt
II. A person drinking copious amounts of alcohol because he is insured
III. Insured defaulting on premium payments
IV. Proposer misplacing policy document**C.** **Medical underwriting****1.** **Medical underwriting**Let us now consider some of the medical factors that would influence an
underwriter’s decision. These are generally assessed through medical
underwriting. They may often call for a medical examiner’s report. Let us look at
some of the factors that are checked.**Diagram 5:** **Medical Factors that influence an Underwriter’s Decision**192**a)** **Family history**The impact of family history on mortality risk has been studied from three
angles.**i.** **Heredity** : Certain diseases can be transmitted from one generation to
another, say from parents to children.**ii.** **Average longevity of the family** : When the parents have died early onaccount of certain diseases like heart trouble or cancer, it may be a
pointer that the offspring may also not live long.**iii.** **Family environment** : Thirdly, the environment in which the family livescan cause exposure to infection and other risks.Life insurers have thus to be careful when entertaining cases of individuals
with adverse family history. They may call for other reports and may impose
an extra mortality rating in such cases.**b)** **Personal history**Personal history refers to past impairments of various systems of the human
body which the life to be insured has suffered from. The proposal form for
life insurance typically contains a set of questions which enquire whether the
life to be insured has been under treatment for any of these.The major kinds of ailments that are considered by the underwriters include
Cardiovascular diseases, diseases of the respiratory system, malignant
tumours/ cancer, ailments of the renal system, impairments of the endocrine
system, diseases of the digestive system like gastric ulcers and cirrhosis of the
liver and diseases of the nervous system.**c)** **Personal characteristics**These can also be significant indicators of the tendency to disease.**i.** **Build**A person’s build consists of his height, weight, chest and girth of the
abdomen. For given age and height, there is a standard weight that has been
defined and if the weight is too high or low in relation to this standard weight,
we can say that the person is overweight or underweight.Similarly, it is expected that the chest should be expanded at least by four
centimetres in a normal person and that the abdominal girth should not be
more than one’s expanded chest.**ii.** **Blood pressure**Another indicator is a person’s blood pressure. There are two measures of this Systolic Diastolic193When the actual readings are much higher than the normal values, we say
that the person has high blood pressure or hypertension. When it is too low,
it is termed as hypotension. The former can have serious consequences.**iii.** **Urine – Specific gravity**Finally, a reading of the specific gravity of one’s urine can indicate the
balance among various salts in the urinary system. It can indicate any
malfunctioning of the system.**d)** **Backdating:**Backdating means changing the start date of the policy to an earlier one. For
example, you bought a Life insurance policy on 1st June, 2013 but later you
think that the policy would have generated better returns if you had bought
it in April 2013. You and your insurance company agree to change the policy
to officially start it from April, 2013. In this case, you have backdated the
policy. Usually, no interest is charged if the policy is backdated by less than
a month.Backdating is done for the following purposes:(i) **Getting a lower premium based on age:** While issuing the policy,insurers consider the nearest age of the policyholder. It means if you are
32 years and 7 months old, the insurer will consider your age as 33 years.
This nearest age may put you in a higher premium slab. However, if you
backdate the policy by 2 months, the insurer will consider your age as 32
years and 5 months only. Now you will be paying lower premiums based
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Substance abuse
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balance among various salts in the urinary system. It can indicate any
malfunctioning of the system.**d)** **Backdating:**Backdating means changing the start date of the policy to an earlier one. For
example, you bought a Life insurance policy on 1st June, 2013 but later you
think that the policy would have generated better returns if you had bought
it in April 2013. You and your insurance company agree to change the policy
to officially start it from April, 2013. In this case, you have backdated the
policy. Usually, no interest is charged if the policy is backdated by less than
a month.Backdating is done for the following purposes:(i) **Getting a lower premium based on age:** While issuing the policy,insurers consider the nearest age of the policyholder. It means if you are
32 years and 7 months old, the insurer will consider your age as 33 years.
This nearest age may put you in a higher premium slab. However, if you
backdate the policy by 2 months, the insurer will consider your age as 32
years and 5 months only. Now you will be paying lower premiums based
on a plan for a 32-year old.(ii) **Set the timing of payment:** There are specific professions where theincome flow is not steady. In such a scenario if an individual accidently
buys a life insurance policy in its off-season then the policy can be
backdated to the period of maximum earnings. For instance, a farmer
may have a seasonal income. He would prefer to make insurance
payments only after he has received his crop proceedings. In this case, a
farmer could backdate the policy to start it in the harvest season.(iii) **To coincide with special dates:** You can backdate the policy to coincidewith your important dates, such as birthday and anniversary. It keeps
easy for you to remember your premium due date.(iv) **Early maturity claims** : Backdating reduces the tenure of a policy andfacilitates early maturity. For instance, if a 30-year life insurance cover
bought on March 2000 is backdated to April 1999, the policy would mature
on April, 2029 instead of March 2030. In case of endowment policies, this
could be beneficial as maturity benefits accrue earlier.194**Test Yourself 3**Why is heredity history of importance in medical underwriting?I. Rich parents have healthy kids
II. Certain diseases can be passed on from parents to children
III. Poor parents have malnourished kids
IV. Family environment is a critical factor**Summary**To bring equity, the underwriter engages in risk classification where individual
lives are categorised and assigned to different risk classes depending on the
degree of risks they pose.Underwriting process may be said to take place at two levels: At field level and At underwriting department levelUnderwriting decisions made by underwriters include acceptance of standard
risk at standard rates or charging extra for sub-standard risks. Sometimes
there is acceptance with lien on sum assured or acceptance is based on
restrictive clauses. Where the risk is large the proposal is declined or
postponed.A large number of life insurance proposals may typically get selected for
insurance without conducting a medical examination. Such cases are termed
as non-medical proposals.Some of the rating factors for non-medical underwriting include Age Large sum assured Moral hazard etc.Some of the factors considered in medical underwriting include Family history, Heredity and personal history etc.**Key Terms**1. Underwriting
2. Standard life
3. Non-medical underwriting
4. Rating factor1955. Medical underwriting
6. Anti-selection**Answers to Test Yourself****Answer 1** - The correct option is III.**Answer 2** - The correct option is II.**Answer 3** - The correct option is II.196## CHAPTER L-09## LIFE INSURANCE CLAIMS**Chapter Introduction**This chapter explains the concept of claim and how claims are ascertained. The
chapter then explains the types of claims. In the end you will learn about the
forms to be submitted for a death claim and the safeguards in place to protect a
beneficiary from claim rejection by the insurer, provided no material information
has been suppressed by the insured.**Learning Outcomes**197**A.** **Types of claims and claims procedure****Concept of claims**The real test of an insurance company and an insurance policy comes when a
policy results into a claim. The true value of life insurance is judged by the way
a claim is settled and benefits are paid.IRDAI’s Protection of Policyholders’ Interests Regulations, 2017 prescribes that
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Backdating:
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2. Standard life
3. Non-medical underwriting
4. Rating factor1955. Medical underwriting
6. Anti-selection**Answers to Test Yourself****Answer 1** - The correct option is III.**Answer 2** - The correct option is II.**Answer 3** - The correct option is II.196## CHAPTER L-09## LIFE INSURANCE CLAIMS**Chapter Introduction**This chapter explains the concept of claim and how claims are ascertained. The
chapter then explains the types of claims. In the end you will learn about the
forms to be submitted for a death claim and the safeguards in place to protect a
beneficiary from claim rejection by the insurer, provided no material information
has been suppressed by the insured.**Learning Outcomes**197**A.** **Types of claims and claims procedure****Concept of claims**The real test of an insurance company and an insurance policy comes when a
policy results into a claim. The true value of life insurance is judged by the way
a claim is settled and benefits are paid.IRDAI’s Protection of Policyholders’ Interests Regulations, 2017 prescribes that
life insurers, shall process death claims without delay and call for all
requirements together, within 15 days of the receipt of the death intimation.A death claim shall be paid, rejected or repudiated giving all the relevant
reasons, within 30 days from the date of receipt of all relevant papers/
clarifications.If, in the opinion of the insurer, the claim warrants investigation, it shall
complete the same expeditiously, within 90 days from the date of intimation and
settle the claim within 30 days thereafter.IRDAI specifies that in respect of Maturity clams, Survival Benefit claims and
Annuities, the Life Insurer shall initiate the claim process by sending advance
intimation, by sending post-dated cheque or by giving direct credit to the bank
account of the claimant through any electronic mode approved by RBI, so as to
pay the claim on or before the due date.**Definition**A claim is a demand that the insurer should make good the promise specified in
the contract.A claim under a life insurance contract is triggered by the happening of one or
more of the events covered under the insurance contract. While in some claims,
the contract continues, in others, the contract is terminated.Claims can be of two types:**i.** survival claims payable when the life assured is alive and**ii.** death claim**Diagram 1:** **Types of claims**While a **death claim** arises only upon the death of the life assured, **survival claims**
are payable on happening of events specified in the policy.198**Important**In all claims situations, the insurer has to ensure that the identity of the claimant
is proven and well documented as per KYC norms.**Example**Such specified events where the claims are paid to the insured.i. The insured reaching the maturity period of the policy;
ii. The insured reaching the pre-decided duration(s) under a money-backpolicy, when instalment(s) become payable; or under annuity plans.
iii. Occurrences of Critical illnesses covered under the policy (as a riderbenefit or otherwise);
iv. Surrender of the policy either by the policyholder or assignee;**B.** **Ascertaining whether a claim situation has occurred****i.** **Survival claim** is payable to the insured on reaching the period of maturityor fulfilling conditions stipulated in the policy.**ii.** **Maturity claims and money-back instalment claims** are easily establishedas they are based on dates which are determined at the beginning of the
contract itself. For instance, the date of maturity and the dates when the
instalments of survival benefits may be paid under a money back policy
are clearly laid out at the time of preparing the contract.**iii.** **Surrender value payments** are different from other claim payments.Here, unlike other claims, the event is triggered by the decision of the
policy holder or assignee to cancel the contract and withdraw what is due
to him or her under the contract. There is typically a penalty for
premature withdrawal. The amount paid would be less than what would
be due under a full claim and hence would be less than what would have
been due if the full claim were to be paid.**iv.** **Critical illness** claims are ascertained based on the medical and otherrecords provided by the policyholder in support of his claim.**v.** **Annuities:** In case of annuity payments (pension plans), insured need toprovide life certificates periodically.The purpose of a critical illness benefit is to enable a policy holder to defray his/
her expenses in the event of a critical illness. If this policy were to be assigned,
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contract itself. For instance, the date of maturity and the dates when the
instalments of survival benefits may be paid under a money back policy
are clearly laid out at the time of preparing the contract.**iii.** **Surrender value payments** are different from other claim payments.Here, unlike other claims, the event is triggered by the decision of the
policy holder or assignee to cancel the contract and withdraw what is due
to him or her under the contract. There is typically a penalty for
premature withdrawal. The amount paid would be less than what would
be due under a full claim and hence would be less than what would have
been due if the full claim were to be paid.**iv.** **Critical illness** claims are ascertained based on the medical and otherrecords provided by the policyholder in support of his claim.**v.** **Annuities:** In case of annuity payments (pension plans), insured need toprovide life certificates periodically.The purpose of a critical illness benefit is to enable a policy holder to defray his/
her expenses in the event of a critical illness. If this policy were to be assigned,
all the benefits would be payable to the assignee and it would not meet the
intended purpose of the critical illness benefit. To avoid this situation, policy
holders need to be educated about the extent of benefits they may assign by way
of a conditional assignment.199A **maturity or death claim** or a surrender leads to termination of the insurance
cover under the contract and no further insurance cover is available.**Types of claims:** The following payments may occur during the policy term:
**a)** **Survival Benefit Payments**Periodical payments are made by the insurer to the insured at specified times
during the term of the policy.**I.** **Surrender of Policy**Surrender value reflects the value of investments and depends on various
factors such as sum assured, bonuses, policy term and premiums paid.
Premature closing of a life insurance policy is a voluntary termination of the
policy contract. A policy can be surrendered only if it has acquired paid-up
value. The amount payable to the insured is the **surrender value** which is
usually a percentage of the premiums paid. The actual surrender value paid
to the insured is more than the Guaranteed Surrender Value (GSV).**II.** **Rider Benefit**A payment under a rider is made by an insurance company on the occurrence
of a specified event according to the terms and conditions.Under a **critical illness rider**, in the event of diagnosis of a critical illness, a
specified amount is paid as per terms. The illness should have been covered
in the list of critical illnesses specified by the insurance company.Under **hospital care rider**, the insurer pays the treatment costs in the event
of hospitalisation of the insured, subject to terms and conditions.The policy contract continues even after the rider payments are made.The following claim payments are made at the end of the policy term specified
in the insurance contract.**III.** **Maturity Claim**In such claims, the insurer promises to pay the insured a specified amount at
the end of the term, if the insured survives the plan’s entire term. This is
known as a **maturity claim.****i.** **Participating Plan:** The maturity claim amount payable under aparticipating plan is the sum assured plus accumulated bonuses less dues
such as outstanding premium and policy loans and interests thereon.
**ii.** **Return of Premium (ROP) Plan:** In some cases premiums paid over theterm period are returned when the policy matures.
**iii.** **Unit Linked Insurance Plan (ULIP):** In case of ULIPs, the insurer pays thefund value as the maturity claim.**iv.** **Money-back Plan:** In case of money-back policy, the insurer pays thematurity claim minus the survival benefits already paid during the term of
the policy.The insurance contact terminates after the claim is paid.200**b)** **Death Claim**If the insured expires during the term of his/ her policy, accidentally or
otherwise, the insurer pays the sum assured plus accumulated bonuses, if
participating, less dues to be recovered by the insurer [like outstanding policy
loan and interest or premiums plus interest]. This is the **death claim**, which
is paid to the nominee or assignee or legal heir whatever the situation may
be. A death claim generally marks the end of the contract as a result of death.A death claim may be: Early (less than three years policy duration) or
Non-early (more than three years)The nominee or assignee or legal heir has to intimate the insurer of the cause,
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**iii.** **Unit Linked Insurance Plan (ULIP):** In case of ULIPs, the insurer pays thefund value as the maturity claim.**iv.** **Money-back Plan:** In case of money-back policy, the insurer pays thematurity claim minus the survival benefits already paid during the term of
the policy.The insurance contact terminates after the claim is paid.200**b)** **Death Claim**If the insured expires during the term of his/ her policy, accidentally or
otherwise, the insurer pays the sum assured plus accumulated bonuses, if
participating, less dues to be recovered by the insurer [like outstanding policy
loan and interest or premiums plus interest]. This is the **death claim**, which
is paid to the nominee or assignee or legal heir whatever the situation may
be. A death claim generally marks the end of the contract as a result of death.A death claim may be: Early (less than three years policy duration) or
Non-early (more than three years)The nominee or assignee or legal heir has to intimate the insurer of the cause,
date and place of death.**i.** **Forms to be submitted for death claim**Usually, the following forms are to be submitted by the beneficiary to the
insurer to facilitate processing of the claim: Claim form by nominee
Certificate of burial or cremation
Treating physician’s certificate
Hospital’s certificate
Employer’s certificate
Death certificate issued by municipal authorities etc., as proof ofdeath
Certified court copies of police reports like First Information Report(FIR), Inquest Report, Post-Mortem Report, and Final Report - these
reports are required in case of death by accident.**Diagram 2:** **Forms to be submitted for Death Claim**201**ii.** **Repudiation of death claim**The death claim may be paid or repudiated. If, while processing the claim,
the insurer detects that the proposer had made any incorrect statements or
had suppressed material facts relevant to the policy, the contract would be
declared as void. All benefits under the policy are forfeited.**iii.** **Section 45: Indisputability Clause**However this penalty is subject to **Section 45** of the Insurance Act, 1938.**Important****Section 45 states:**“No policy of life insurance shall be called in question on any ground
whatsoever after the expiry of three years from the date of the policy, i.e.
from the date of issuance of the policy or the date of commencement of risk
or the date of revival of the policy or the date of the rider to the policy,
whichever is later”.**C.** **Claim Procedure for Life Insurance Policy****Although there is no laid down standard claims procedure for all insurers,**
**the IRDAI has laid down guidelines for insurers in the matter of claim**
**settlement.****Regulation 8: Claims procedure in respect of a life insurance policy**i. A life insurance policy shall state the **primary documents** which arenormally required to be submitted by a claimant in support of a claim.ii. A life insurance company, upon receiving a claim, shall process the claimwithout delay. Any queries or requirement of additional documents, to the
extent possible, shall be raised all at once and not in a piece-meal manner,
within a period of 15 days of the receipt of the claim.iii. As per the IRDAI (Protection of Policyholders’ Interests) Regulations, 2017,a death claim under a life insurance policy shall be paid, rejected or
repudiated giving all the relevant reasons, within 30 days from the date
of receipt of all relevant papers and required clarifications. However, if
the insurer needs the claim to be investigated, it shall initiate and
complete the investigation at the earliest, in any case not later than 90
days from the date of receipt of claim intimation. The claim should be
settled within 30 days of completing the investigation.iv. Where a claim is ready for payment but the payment cannot be made dueto any reasons of proper identification of the payee, the life insurer shall
hold the amount for the benefit of the payee and it shall earn interest at
the rate applicable to a savings bank account with a scheduled bank202(effective from 30 days following the submission of all papers and
information).v. Where there is a delay on the part of the insurer in processing a claim fora reason other than the one covered by sub-regulation (iv), the life
insurance company shall pay **interest on the claim amount at a rate**
**which is 2% above the bank rate** prevalent at the beginning of the
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|
Unit Linked Insurance Plan (ULIP):
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repudiated giving all the relevant reasons, within 30 days from the date
of receipt of all relevant papers and required clarifications. However, if
the insurer needs the claim to be investigated, it shall initiate and
complete the investigation at the earliest, in any case not later than 90
days from the date of receipt of claim intimation. The claim should be
settled within 30 days of completing the investigation.iv. Where a claim is ready for payment but the payment cannot be made dueto any reasons of proper identification of the payee, the life insurer shall
hold the amount for the benefit of the payee and it shall earn interest at
the rate applicable to a savings bank account with a scheduled bank202(effective from 30 days following the submission of all papers and
information).v. Where there is a delay on the part of the insurer in processing a claim fora reason other than the one covered by sub-regulation (iv), the life
insurance company shall pay **interest on the claim amount at a rate**
**which is 2% above the bank rate** prevalent at the beginning of the
financial year in which the claim is reviewed by it.**Role of an agent**An agent shall render all possible service to the nominee/ legal heir or the
beneficiary in filling up of claim forms accurately and assisting in submission of
these at the insurer’s office.Apart from discharging obligations, goodwill is generated from such a situation
whereby there exists ample opportunity for the agent to procure business or
referrals in future from the family of the deceased.**Test Yourself 1**Which of the below statement best describes the concept of claim? Choose the
most appropriate option.I. A claim is a request that the insurer should make good the promise specifiedin the contract
II. A claim is a demand that the insurer should make good the promise specifiedin the contract
III. A claim is a demand that the insured should make good the commitmentspecified in the agreement
IV. A claim is a request that the insured should make good the promise specifiedin the agreement**Summary**A claim is a demand that the insurer should make good the promise specified
in the contract.A claim can be survival claim or death claim. While a death claim arises only
upon the death of the life assured, survival claims can be caused by one or
more eventsFor payment of a survival claim, the insurer has to ascertain that the event
has occurred as per the conditions stipulated in the policy.The following payments may occur during the policy term:
Survival Benefit Payments
Surrender of Policy
Rider Benefit
Maturity Claim
Death Claim203Section 45 (Indisputability Clause) of the Insurance Act offers protection
against rejection of claim by the insurer on flimsy grounds provided and sets
a time limit of 3 years for the Insurer for calling a policy into question.Under the IRDAI (Protection of Policyholders Interests) Regulations, 2017, the
IRDAI has laid down regulations to safeguard/ protect the insured or
beneficiary in case of claims.**Answers to Test Yourself****Answer 1** The correct option is II.204## SECTION## HEALTH SECTION205## CHAPTER H-01## INTRODUCTION TO HEALTH INSURANCE**Chapter Introduction**This chapter will tell you about how insurance evolved over time. It will also
explain what healthcare is, levels of healthcare and types of healthcare. You will
also learn about the healthcare system in India and factors affecting it. Finally,
it will explain how health insurance evolved in India and also the various players
in the health insurance market in India.**Learning Outcomes**After studying this chapter, you should be able to:a) Understand how insurance evolved.
b) Explain the concept of healthcare and the types and levels of healthcare.
c) Appreciate the factors affecting healthcare in India and the progress madesince independence.
d) Discuss the evolution of health insurance in India.
e) Know the health insurance market in India.206**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_
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|
Role of an agent
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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.206**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.207**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.208**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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A.
|
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|
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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.208**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 pregnancy209**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.210Considerable 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 insurance211brokers, 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 insurance211brokers, 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.**Answers to Test Yourself**212**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 Administrator213## 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.214**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
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e211
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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.215These 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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Medical Questionnaire
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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.216**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 required217 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 has beencontinuously obtaining health insurance cover in India from any of the
insurers without break218g) 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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D-19
|
C.
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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.2192. **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.220**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.221## 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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H-03
|
E.
|
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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.220**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.221## 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 policies222**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 members223b) **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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Test Yourself 2
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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.224**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 to225the 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 cover226treatment 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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C.
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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** .227Pre 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 insurance228The 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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Definition
|
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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 insurance228The 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.229**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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Family floater:
|
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|
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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.230**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.231 **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.232**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
|
Final IC 38 -IMF_Composite -English.md
|
d19
|
Maternity cover:
|
Final IC 38 -IMF_Composite -English_117
|
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"Hospital cash:",
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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.232**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.233Example: 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
|
Final IC 38 -IMF_Composite -English_118
|
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