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has been submitted but before communication of the risk acceptance by thecompany.4. I/ We declare and consent to the company seeking medical information from anydoctor 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 healthinsurance experience etc. along with the proposer’s profession, occupation or
business which important as they could have a material bearing on the risk.**Example 1** A delivery man of a fast-food restaurant, who has to frequently travel on 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.11**Example 2** For the purpose of overseas travel insurance, the proposer is required to state(who is travelling, when, to which country, for what purpose) or For the purpose of health insurance, the proposer is asked about his/ her health
(with person’s name, address and identification) etc. depending on the case.**Example 3** In case of health insurance, it could be the cost of hospital treatment, while forpersonal accident insurance this could be a fixed amount for loss of life, loss of
a limb, or loss of sight due to an accident.**a)** **Previous and Present insurance**The proposer is required to inform the details about his previous insurances to the
insurer. This is to understand his insurance history. In some markets there are
systems by which insurers confidentially share data about the insured.The proposer is also required to state whether any insurer had declined his proposal,
imposed special conditions, required an increased premium at renewal or refused
to renew or cancelled the policy. Details of current insurance with any other insurer
including the names of the insurers are also required to be disclosed. Further, in
personal accident insurance an insurer would like to restrict the amount of coverage
(sum insured) depending on the sum insured under other PA policies taken by the
same insured.**b)** **Claim Experience**The proposer is asked to declare full details of all losses suffered by him/ her,
whether or not they were insured. This will give the insurer information about the
subject matter of insurance and how the insured has managed the risk in the past.
It means the insurance company has a duty to record all the information received
even orally, which the agent has to keep in mind by way of follow up.**B.** **Acceptance of the proposal (underwriting)**A completed proposal form broadly gives the following information: Details of the insured
Details of the subject matter
Type of cover required
Details of the physical features both positive and negative
Previous history of insurance and claim 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.12**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 | IC 38 -IA- Eng-Health.md | null | Nature of questions in a proposal form | IC 38 -IA- Eng-Health_006 | {
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Details of the subject matter
Type of cover required
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.12**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 break
g) The sub-limits, Proportionate Deductions and the existence of Package ratesif 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 likely togive rise to a claim under the policy13o) The obligations of the insured in relation to the subject-matter of insuranceupon 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 | IC 38 -IA- Eng-Health.md | D-19 | C. | IC 38 -IA- Eng-Health_007 | {
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insurer in the circumstances
p) Any special conditions
q) Provision for cancellation of the policy on grounds of misrepresentation,fraud, non-disclosure of material facts or non-cooperation of the insured
r) The details of the Add-on covers, if any
s) Details of Grievance Redressal mechanism and address of Ombudsman
t) Details of Grievance Redressal mechanism of Insurer;
u) Free-look period facility and portability conditions;
v) Policy migration facility and conditions where applicable.**E.** **Conditions and Warranties**Here, it is important to explain two important terms used in policy wordings. These
are called Conditions and Warranties.1. **Conditions:** A condition is a provision in an insurance contract which forms the
basis of the agreement.**EXAMPLES:****a.** **One of the standard conditions in most insurance policies states:**If the claim be in any respect fraudulent, or if any false declaration be made or
used in support thereof or if any fraudulent means or devices are used by the
Insured or any one acting on his behalf to obtain any benefit under the policy or
if the loss or damage be occasioned by the wilful act, or with the connivance of
the Insured, all benefits under this policy shall be forfeited.**b.** **The Claim Intimation condition in a Health policy may state:**Claim must be filed within certain days from date of discharge from the Hospital.
However, waiver of this Condition may be considered in extreme cases of
hardship.A breach of condition makes the policy voidable at the option of the insurer.2. **Warranties:** A warranty is an agreement between insurer and insured that must
be carried out fully. It forms a part of the policy document. For example, the Insurer
may be covering the risk of a particular disease on the condition that the insured
shall do a quarterly consultations with a specialist. In the above example, failure of
the insured to fulfil his part of the agreement shall either negate or reduce the
liability in respect of that particular section/ warranty.Warranties must be observed and complied with strictly and literally, whether it is
material to the risk or not.**Test Yourself 1**Which of the below statement is correct with regards to a warranty?I. A warranty is a condition which is implied without being stated in the policy
II. A warranty forms part of a policy document14III. A warranty is always communicated to the insured separately and cannot be partof 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.**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.15## 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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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.**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.15## 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 market today
d) Explain Personal Accident insurance
e) Discuss overseas travel insurance
f) Understand key terms and clauses in health policies16**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 out dueto 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 membersb) **Group cover** offered to corporate clients, covering employees and groups,covering their members17c) **Mass policies** for government schemes like/ Pradhan Mantri Jan Arogya Yojana/various State health insurance schemes covering very poor sections of the
population.The benefit structures, pricing, underwriting and marketing for each segment are
quite distinct.**Regulations for Health Insurance** : Some important changes have been brought in
Health Regulations, 2016 regarding Health Products, some of which have been given
below:1. Life Insurance Companies can offer long term health products but 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-Insurersand 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 | IC 38 -IA- Eng-Health.md | H-03 | Test Yourself 2 | IC 38 -IA- Eng-Health_009 | {
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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-Insurersand 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.18**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 bill | IC 38 -IA- Eng-Health.md | s10 | Regulations for Health Insurance | IC 38 -IA- Eng-Health_010 | {
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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 to the
plan coverage and Raghu had to pay the remaining amount of Rs. 25,000 from his
own pocket19The 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, surgical appliances,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 related tothe 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 cover treatment
as outpatient and also related health care expenses associated with doctor visits,
regular medical tests, dental and pharmacy costs.20**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 hospitalisationexpenses**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 admissible bythe 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
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regular medical tests, dental and pharmacy costs.20**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 hospitalisationexpenses**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 admissible bythe 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 admissible bythe Insurance Company.
Post hospitalization expenses would be relevant medical expenses incurred
during period up to the defined number of days after hospitalization and will be
considered as part of claim.
Post hospitalization expenses could be in the form of medicines, drugs, review
by doctors etc. after discharge from hospital. Such expenses have to be related
to the treatment taken in hospital and are covered under the health policies.Though the duration of cover for pre and post hospitalization expenses would
vary from insurer to insurer and is defined in the policy, the most common cover
is for **thirty days pre and sixty days post hospitalization** .Pre and post-hospitalization expenses form part of the overall sum insured for
which cover is granted under the policy.**iii.** **Domiciliary Hospitalization**
**iv.** There is also a benefit available for patients whose illness otherwise needshospitalisation but avail treatment at home either for accommodation in
hospitals or in a position that they cannot be moved to a hospital.21To 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 insuranceThe covers and exclusions under both these policies would be the same. Family
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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 insuranceThe 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 of22some others. It goes against the principle of creating risk pools covering similarly
placed risks. So, it is very important to collect details of the existing ailments/
injuries of each insured person before issuing a health policy. This will enable the
insurer to decide on accepting the proposal for insurance, charging proper premiums
and/ or providing additional conditions for those who are more likely to make
claims.**What is a pre-existing disease?**
Diseases suffered by an insured person within 48 months prior to commencement of
the policy are regarded as pre-existing diseases. Based on the same logic, insurers
are not allowed to exclude pre-existing diseases after a person is covered for
insurance continuously for 48 months.**Renewability:** Although Healthcare policies have a contract life of one year, and a
fresh policy is to be issued every year, Lifelong renewability has been made
compulsory by IRDAI for all policies.**SPECIAL FEATURES**In order to provide new features in the product as also to maintain the pricing,
insurance companies have come out innovative modifications in the products. For
example, the Mediclaim Policy, which was the most popular policy before 2000, has
undergone many changes and new special features have been added to the
coverage. Some features have been added to the basic indemnity cover. These
features may vary from insurer to insurer and product to product and may not be
available uniformly for all products.**i.** **Sub limits and Disease specific capping**Some of the products have disease specific capping e.g. cataract. A few also have
sub limits on room rent linked to sum insured e.g. per day room rent restricted to
1% of sum insured and ICU charges to 2% of sum insured. As expenses under other
heads such as ICU charges, OT charges and even surgeon’s fees are linked to the
type of room opted for, room rent capping helps in restricting expenses under other
heads also and hence the overall hospitalization expenses.**ii.** **Co-payment (popularly called Co-pay)**Co-payment is defined by IRDAI as a cost sharing requirement under a health
insurance policy that provides that the policyholder/ insured will bear a specified
percentage of the admissible claims amount. A co-payment does not reduce the Sum
Insured.
Co-payment is the concept of the insured bearing a portion of each and every claim
under a health policy. These could be compulsory or voluntary depending on the
product. Co-payment brings in a certain discipline among the insured to avoid
unnecessary hospitalizations. This ensures that the insured exercises caution in
selecting his healthcare options and avoids luxurious ones.23When 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 | IC 38 -IA- Eng-Health.md | f22 | Family floater: | IC 38 -IA- Eng-Health_013 | {
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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.23When an insured event occurs, many health policies require the insured to share a
part of the insured loss. E.g. If the insured loss is INR 20000 and the co-pay amount
is 10% in the policy, then insured pays INR 2000.**iii.** **Deductible/ Excess**As explained in Chapter 5, ‘Deductible’, also called ‘Excess’ is a cost-sharing
provision. Under a health insurance policy, it provides that the insurer will not be
liable for a specified rupee amount in case of indemnity policies and for a specified
number of days/ hours in case of hospital cash policies which will apply before any
benefits are payable by the insurer. In Health policies, it is the fixed amount of
money the insured is required to pay initially before the claim is paid by insurer, for
e.g. if the deductible in a policy is Rs. 10,000, the insured pays first Rs. 10,000 in
each insured loss claimed for. To illustrate, if the claim is for Rs. 80,000, the insured
bears the first Rs. 10,000 and the insurer pays Rs. 70,000. A deductible does not
reduce the Sum Insured.Deductible may also be a specified number of days/ hours in case of hospital cash
policies which will apply before any benefits are payable by the insurer.An agent must examine and inform the insured whether the deductible is applicable
per year, per life or per event and the specific deductible to be applied.**iv.** **Waiting Period**A waiting period of 30 days from inception of policy is normally applicable in most
policies for making any claim. This however will not be applied for hospitalization
due to an accident.**v.** **Waiting periods for specific diseases**This is applicable for diseases for which treatment can be delayed and planned.
Depending on the product waiting periods of one/ two/ four years are imposed by
the insurance companies and claims are paid for these ailments only after expiry of
this period. Some of the diseases are Cataract, Benign Prostatic Hypertrophy,
Hysterectomy for Menorrhagia or Fibromyoma, Hernia, Hydrocele, Congenital
internal disease, Fistula in anus, piles, Sinusitis and related disorders etc.**vi.** **Coverage for Day care procedure**Advancement of medical science has seen inclusion of large number of procedures
under day care category as already discussed earlier**vii.** **Cost of pre policy check up**Cost of medical examination was earlier borne by prospective clients. Now insurer
reimburses the cost, provided the proposal is accepted for underwriting, the
reimbursement varying from 50% to 100%.Now this has also been mandated by IRDAI
that insurer would bear at least 50% of health check-up expenses.**viii.** **Add on covers**Various new additional covers called Add-on covers have been introduced by some
of the insurers. Some of them are:24 **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 version productsfor certain ailments which are life threatening and entail expensive treatment.
**Reinstatement of sum insured:** After payment of claim, the sum insured (whichgets 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
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of the insurers. Some of them are:24 **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 version productsfor certain ailments which are life threatening and entail expensive treatment.
**Reinstatement of sum insured:** After payment of claim, the sum insured (whichgets 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 outpatient 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 in hospitaldue to sickness and/ or accident is not less than 10 days. **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 granted25cover. Now there are policies where parents and in-laws can also be granted
cover under the same policy.**x.** **Failure to seek or follow medical advice or failure to follow treatment**Initially the health insurance cover was denied to persons suffering from pre-existing
diseases. Such cases are now being offered cover by excluding such diseases.**Standard Health Product** **– Arogya Sanjeevani** : In the background of the Covid-19
pandemic, IRDAI asked all Insurance Companies to come out with a standard health
product called Arogya Sanjeevani with no variations in terms and conditions to make
it easy to understand. The premium may however vary according to the pricing
policy of each company. This is to ensure better penetration of Health Insurance in
market. All Insurers are required to offer this product called Arogya Sanjeevani.[The context for this move was that there were different Health Insurances available
in the market and customers were not able to compare them, causing confusion.]The following two types of plans are available under Arogya Sanjeevani Insurance
Policy:- **Individual Plan** : A single policyholder will be the beneficiary of ArogyaSanjeevani policy.**Family Floater Plan** : Multiple family members of the policyholder can becomethe beneficiaries of Arogya Sanjeevani plan.This product comes with a capping on room rent and ICU charges but it also covers
modern day treatment and stem cell therapy with 50% capping.**D.** **Top-up covers or high deductible insurance plans**A top-up cover is also known as a high deductible policy. Top-Up policies by insurers,
provide cover for high sums insured over and above a specified amount (called
threshold).This policy works along with a basic health cover having a low sum
insured and comes at a comparatively reasonable premium. For example, Individuals
covered by their employers can also opt for a top-up cover for additional protection
(keeping the sum insured of the first policy as the threshold).To be eligible to receive a claim under the top-up policy, the medical costs must be | IC 38 -IA- Eng-Health.md | d25 | Maternity cover: | IC 38 -IA- Eng-Health_015 | {
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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 can becomethe beneficiaries of Arogya Sanjeevani plan.This product comes with a capping on room rent and ICU charges but it also covers
modern day treatment and stem cell therapy with 50% capping.**D.** **Top-up covers or high deductible insurance plans**A top-up cover is also known as a high deductible policy. Top-Up policies by insurers,
provide cover for high sums insured over and above a specified amount (called
threshold).This policy works along with a basic health cover having a low sum
insured and comes at a comparatively reasonable premium. For example, Individuals
covered by their employers can also opt for a top-up cover for additional protection
(keeping the sum insured of the first policy as the threshold).To be eligible to receive a claim under the top-up policy, the medical costs must be
greater than the deductible (or threshold) level chosen under the plan and the
reimbursement under the high deductible plan would be the amount of expense
incurred i.e. greater than the deductible.**Example**An individual is covered for a sum insured of Rs. 3 lacs by his employer. He could
opt for a top-up policy of Rs. 10 lacs in excess of Rs. Three lacs. If the cost of a
single hospitalization is Rs. 5 lacs, the basic policy would cover up to Rs. Three lacs
only. With the top-up cover, the balance sum of Rs. Two lacs would be paid out by
the top-up policy.26Top-up policies come cheap and the cost of a single Rs. 10 lacs policy would be far
higher than the top-up policy of Rs. 10 lacs in excess of Rs. Three lacs.These covers are available on individual basis and family basis the top-up plan
requires the deductible amount to be crossed at every single event of
hospitalization. However some top-up plans that allow the deductible to be crossed
post a series of hospitalizations during the policy period are known as Aggregate
based high deductible plans or Super top-up cover as known in the Indian market. A
super top-up plan covers the total of all hospitalisation bills (up to the super top-up
plan limit) above the deductible amount, that is, the deductible is applied to the
total claims in one year. Hence, once the deductible is paid, the plan becomes
active for subsequent claims.**E.** **Senior Citizen Policy**These plans are designed to offer cover to elderly people who often were denied
coverage after certain age (e.g. people over 60 years of age). The structure of the
coverage and exclusions are much like a hospitalization policy.Special attention is paid to diseases of the elderly in setting coverage and waiting
period. Entry age is mostly after 60 years and renewable lifelong. Sum insured range
from Rs. 50,000 to Rs. 5,00,000. There is variation of waiting period applicable to
certain ailments.Example: Cataract may have 1 year waiting for one insurer and 2 year waiting period
for some other insurer.Example: Sinusitis does not fall in waiting period clause of some insurers but few
others include it in their waiting period clause.Some policies have waiting periods or capping in respect of Pre-existing diseases.
Pre-post hospital expenses are either paid as a percentage of hospital claims or a
sub limit whichever is higher. In some policies they follow the typical indemnity
plans such as expenses falling within specified period of 30/ 60 days or 60/ 90 days.IRDAI has mandated that all health insurers and TPAs shall establish a separate
channel to address the health insurance related claims and grievances of senior
citizens.**F.** **Fixed benefit covers – Hospital Cash, Critical Illness**Under this cover, the insured gets a fixed sum as claim amount irrespective of the
amount spent by him for the named treatment. In this product, commonly occurring
treatments are listed under segments such as ENT, Ophthalmology, Obstetrics and
Gynaecology, etc. and the maximum pay out for each of these is spelt out in the
policy.27These 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
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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.27These policies are simple as only proof of hospitalization and coverage of ailment
under the policy are sufficient to process the claim. Some products package a daily
cash benefit along with the fixed benefit cover.A provision is made to pay a fixed sum for surgeries/ treatment which do not find a
place in the list named in the policy. Multiple claims for different treatments are
possible during the policy period. However the claims are finally limited by the sum
insured chosen under the policy.Some of the fixed benefit insurance plans are: Hospital daily cash insurance plans
Critical illness insurance plans**1.** **HOSPITAL DAILY CASH POLICY****a)** **Per day amount limit**
Hospital cash coverage provides a fixed sum to the insured person for each day
of hospitalization. Per day cash coverage could vary from (for example) Rs. 1,500
per day to Rs. 5,000 or even more per day. An upper limit is provided on the
daily cash pay-out per illness as well as for the duration of the policy, which is
usually an annual policy.**b)** **Number of payment days**
In some of the variants of this policy, the number of days of daily cash allowed
is linked to the disease for which treatment is being taken. A detailed list of
treatments and duration of stay for each is stipulated which limits the daily cash
benefit allowed for each type of procedure/ illness.**c)** **Standalone cover or add-on cover**
The hospital daily cash policy is available as a standalone policy as offered by
some insurers while, in other cases, it is an add-on cover to a regular indemnity
policy. These policies help the insured to cover incidental expenses as the payout is a fixed sum and not related to the actual cost of treatment. This also
allows the pay out under the policy to be provided in addition to any cover
received under an indemnity based health insurance plan.**d)** **Supplementary cover**
These policies could supplement a regular hospital expenses policy as it is cost
effective and provides compensation for incidental expenses and also expenses
not payable under the indemnity policy such as exclusions, co-pay etc.**e)** **Other advantages of the cover**From the insurer’s point of view, this plan has several advantages as it is easy
to explain to a customer and hence can be sold more easily. It beats medical
inflation as a fixed sum per day is paid for the duration of hospitalization
whatever may be the actual expense. Also, acceptance of such insurance covers
and claims settlements are really simplified.28**2.** **CRITICAL ILLNESS POLICY**With advancement in medical science, people are surviving some of the major
diseases like cancer, strokes and heart attack etc., which in earlier times would
have resulted in death. However surviving a major illness entails huge expense for
treatment as well as for living expenses post treatment. Onset of critical illness
threatens the financial security of a person. A basic health insurance policy may not
be sufficient to cover all medical costs in such cases.Critical illness policy has a provision to pay a lump sum amount on diagnosis of
certain named critical illness. The sum insured is high to take care of large expenses.In India, Critical Illness (CI) benefits are most commonly sold by life insurers as
riders to life policies and two forms of cover are offered by them – accelerated CI
benefit plan and standalone CI benefit plan. To avoid confusion, the definitions of
22 most common critical illnesses have been standardized under IRDA Health
Insurance Standardization guidelines.The critical illnesses covered vary across insurers and products. Generally 100% of
the sum insured is paid on diagnosis of a critical illness. In some cases compensation
could vary from 25% to 100% of sum insured depending on the policy terms and
conditions and severity of illness.There is a waiting period of 90 days from inception of policy for any benefit to
become payable under the policy and the survival clause of 30 days after diagnosis | IC 38 -IA- Eng-Health.md | null | F. | IC 38 -IA- Eng-Health_017 | {
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treatment as well as for living expenses post treatment. Onset of critical illness
threatens the financial security of a person. A basic health insurance policy may not
be sufficient to cover all medical costs in such cases.Critical illness policy has a provision to pay a lump sum amount on diagnosis of
certain named critical illness. The sum insured is high to take care of large expenses.In India, Critical Illness (CI) benefits are most commonly sold by life insurers as
riders to life policies and two forms of cover are offered by them – accelerated CI
benefit plan and standalone CI benefit plan. To avoid confusion, the definitions of
22 most common critical illnesses have been standardized under IRDA Health
Insurance Standardization guidelines.The critical illnesses covered vary across insurers and products. Generally 100% of
the sum insured is paid on diagnosis of a critical illness. In some cases compensation
could vary from 25% to 100% of sum insured depending on the policy terms and
conditions and severity of illness.There is a waiting period of 90 days from inception of policy for any benefit to
become payable under the policy and the survival clause of 30 days after diagnosis
of the illness. Rigorous medical examinations are to be undergone for persons
especially over 45 years of age.The policy terminates, once compensation is paid under the policy in respect of any
of the insured person. This policy is also offered to groups especially corporates who
take policies for their employees.**Disease Specific Products** - **Corona Kavach**In June 2020, when the country was facing many cases of Corona Virus infection
(Covid-19), the market saw the introduction of many benefit based products
providing lump sum payment on the diagnosis of Covid-19 positive. Later some
companies introduced indemnity based products too. However, there were many
consumables like PPE kits, Oximeter etc. and quarantine expenses that were not
taken care of in these products.IRDAI came up with two standard Health Insurance Policies called _Corona Kavach_
and _Corona Rakshak (discussed separately under Life insurance section)_ . While it is
mandatory for general and health insurers to provide _Corona Kavach_ as an
indemnity-based standard COVID-19 product, _Corona Rakshak,_ offering the benefitbased product, is optional for all insurers. Both products have a waiting period of
15 days.29_Corona Rakshak_ is a standard benefit based health insurance designed for providing
lump sum benefit to insured individuals affected by COVID-19 and require
hospitalisation for a minimum continuous period of 72 hours. The plan offers
coverage on individual basis for people between the age of 18 years and 65 years,
with different policy terms of 3.5months, 6.5 months and 9.5 months as a one-time
benefit policy and terminates upon the payment of benefit. _Corona Rakshak_ offers
sum insured options ranging from Rs. 50,000 to Rs. 2.5 lakh, in multiples of
50,000.The policy provides (i) complete sum insured benefit, (ii) economical
premium, (iii) lump-sum amount of claim, (iv) a short waiting period of 15 days and
(v) tax benefits.**Corona Kavach** offers the following coverage vide Guidelines issued by IRDAI in June
2020:1. Hospitalization Expenses incurred for the treatment of Covid-19 on Positivediagnosis of Covid-19 in a government authorized diagnostic centre covering the
following: (Expenses on Hospitalization for a minimum period of 24 hours are
admissible.)a. Room, Boarding, Nursing Expenses as provided by the Hospital / NursingHome.
b. Surgeon, Anaesthetist, Medical Practitioner, Consultants, Specialist Fees
c. Anaesthesia, blood, oxygen, operation theatre charges, surgical appliances,ventilator charges, medicines and drugs, costs towards diagnostics,
diagnostic imaging modalities, PPE Kit, gloves, mask and such other similarexpenses
d. Intensive Care Unit (ICU) / Intensive Cardiac Care Unit (ICCU) expenses.
e. Expenses incurred on road Ambulance subject to a maximum of Rs.2000/
per hospitalization.2. Home Care Treatment Expenses for availing treatment at home up to maximum14 days per incident subject to the conditions (not exhaustive) mentioned
below:
a. The Medical practitioner advices the Insured person to undergo treatment athome.
b. There is a continuous monitoring of the health status by a medicalpractitioner for each day, including records of treatment administered.3. Other Expenses covered if prescribed by the treating medical practitioner andrelated to treatment of COVID,
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admissible.)a. Room, Boarding, Nursing Expenses as provided by the Hospital / NursingHome.
b. Surgeon, Anaesthetist, Medical Practitioner, Consultants, Specialist Fees
c. Anaesthesia, blood, oxygen, operation theatre charges, surgical appliances,ventilator charges, medicines and drugs, costs towards diagnostics,
diagnostic imaging modalities, PPE Kit, gloves, mask and such other similarexpenses
d. Intensive Care Unit (ICU) / Intensive Cardiac Care Unit (ICCU) expenses.
e. Expenses incurred on road Ambulance subject to a maximum of Rs.2000/
per hospitalization.2. Home Care Treatment Expenses for availing treatment at home up to maximum14 days per incident subject to the conditions (not exhaustive) mentioned
below:
a. The Medical practitioner advices the Insured person to undergo treatment athome.
b. There is a continuous monitoring of the health status by a medicalpractitioner for each day, including records of treatment administered.3. Other Expenses covered if prescribed by the treating medical practitioner andrelated to treatment of COVID,
a. Diagnostic tests undergone at home or at diagnostics centre
b. Medicines prescribed in writing
c. Consultation charges of the medical practitioner
d. Nursing charges related to medical staff
e. Medical procedures limited to parenteral administration of medicines
f. Cost of Pulse oximeter, Oxygen cylinder and Nebulizer30Additional Cover - Hospital Daily Cash: The Insurer will pay 0.5% of sum insured per
day for each 24 hours of continuous hospitalization for treatment of Covid following
an admissible hospitalization claim under this policy.**Standard Vector Borne Disease Health Policy:**IRDAI vide its Guidelines dated 3 February 2021 decided that Standard Products for
vector borne diseases shall offer the following coverage:
1. **Hospitalization Benefit:** Lump sum benefit equal to 100% of the Sum Insuredshall be payable on positive diagnosis of any of the following vector borne
disease (s) requiring hospitalization for a minimum continuous period of 72
hours.
a) Dengue fever
b) Malaria
c) Filaria (Lymphatic Filariasis)
d) Kala-azar
e) Chikungunya
f) Japanese Encephalitis
g) Zika Virus2. **Diagnosis Cover:** 2% of the sum insured shall be payable on positive diagnosis(through laboratory examination and confirmed by the medical practitioner) of
every covered vector borne disease on the first diagnosis during the Cover
Period, subject to policy terms and conditions. The Policyholder is entitled for
payments under “diagnosis cover” payment for each disease only once in the
policy year.**G.** **Combo-products****Health plus Life Combo Products** offer the combination of a life insurance cover of
a Life Insurance Company and a health insurance cover offered by Non-Life and/ or
Standalone Health Insurance Company.The product may be offered both as individual insurance policy and on group
insurance basis. However in respect of health insurance floater policies, the pure
term life insurance coverage is allowed on the life of one of the earning members
of the family who is also the proposer on health insurance policy subject to insurable
interest and other applicable underwriting norms of respective insurers.**Package policies**Package or umbrella covers give, under a single document, a combination of covers.Examples of package policy in health insurance include combining Critical illness
cover benefits with indemnity policies and even life insurance policies and hospital
daily cash benefits with indemnity policies.31**Travel Insurance:**Travel insurance policy is also offered as a package policy covering not only health
insurance but also accidental death/ disability benefits along with Medical expenses
due to illness/ accident and the coverages like Loss of or delay in arrival of checked
in baggage, Loss of passport and documents, Third party liability for property/
personal damages, Cancellation of trips and even Hijack cover traditionally provided
under travel policies. (Details of Travel Insurance are provided later.)**H.** **Micro insurance and health insurance for poorer sections**Micro-insurance products are specifically designed to aim for the protection of low
income people from rural and informal sectors. It is a low value product, with an
affordable premium and benefit package. Micro insurance is governed by the IRDA
Micro Insurance Regulations, 2005.Such covers are mostly taken on a group basis by various community organizations
or non-governmental organizations (NGOs) for their members.Two policies particularly created by PSUs to cater to the poorer sections of society
are Jan Arogya Bima Policy and Universal Health Scheme. The private sector
insurance companies have also come out with many innovative micro insurance
health products to cater to this target segment like Bima Kavach Yojana, Grameena | IC 38 -IA- Eng-Health.md | m14 | Standard Vector Borne Disease Health Policy: | IC 38 -IA- Eng-Health_019 | {
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insurance but also accidental death/ disability benefits along with Medical expenses
due to illness/ accident and the coverages like Loss of or delay in arrival of checked
in baggage, Loss of passport and documents, Third party liability for property/
personal damages, Cancellation of trips and even Hijack cover traditionally provided
under travel policies. (Details of Travel Insurance are provided later.)**H.** **Micro insurance and health insurance for poorer sections**Micro-insurance products are specifically designed to aim for the protection of low
income people from rural and informal sectors. It is a low value product, with an
affordable premium and benefit package. Micro insurance is governed by the IRDA
Micro Insurance Regulations, 2005.Such covers are mostly taken on a group basis by various community organizations
or non-governmental organizations (NGOs) for their members.Two policies particularly created by PSUs to cater to the poorer sections of society
are Jan Arogya Bima Policy and Universal Health Scheme. The private sector
insurance companies have also come out with many innovative micro insurance
health products to cater to this target segment like Bima Kavach Yojana, Grameena
Jeevan Raksha Plan, Bhaghya Laxmi - the entire list can be found on IRDAI website.**I.** **Rashtriya Swasthya Bima Yojana**The government has also launched various health schemes, some of them applicable
to particular states. It had implemented the Rashtriya Swasthya Bima Yojana (RSBY)
in association with insurance companies to provide health insurance coverage for
the below poverty line (BPL) families. However RSBY provided a Sum Insured of only
Rs 30,000 which was not considered enough to cover major surgeries/
hospitalisation expenses.**J.** **Pradhan Mantri Jan Arogya Yojana**To address the shortcomings of RSBY, as recommended by the National Health Policy
2017, the Government of India launched ‘Ayushman Bharat Scheme’ in 2017, a
flagship scheme of to achieve the vision of Universal Health Coverage (UHC). Also
known as Pradhan Mantri Jan Arogya Yojana (PMJAY) Ayushman Bharat came with a
Sum Insured of Rs. 5,00,000.It subsumed the then existing Rashtriya Swasthya Bima Yojana (RSBY). PM-JAY is
fully funded by the Government and cost of implementation is shared between the
Central and State Governments.**K.** **Pradhan Mantri Suraksha Bima Yojana**Features of the recently announced PMSBY covering personal accident death and
disability cover are as follows:
**Scope of coverage:** All savings bank account holders in the age 18 to 70 years in
participating banks are entitled to join through one savings bank account only and
if he enrols in more than one bank, he gets no extra benefit and the extra premium
paid will stand forfeited. Aadhaar would be the primary KYC for the bank account.32**Enrolment Modality/ Period** : The cover shall be for the one year period from 1 [st]
June to 31 [st] May for which option to join/ pay by auto-debit from the designated
savings bank account on the prescribed forms will be required to be given by 31 [st]
May of every year,Joining subsequently on payment of full annual premium may be possible on
specified terms. Individuals who exit the scheme at any point may re-join the
scheme in future years through the above modality.Benefits under the insurance are as follows:|Table of Benefits|Sum Insured|
|---|---|
|~~Death~~<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of both eyes or loss of use of both~~<br>hands or feet or loss of sight of one eye and loss of use of hand<br>or foot<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of sight of one eye or loss of use of~~<br>one hand or foot|~~Rs. 1 Lakh~~|Joining and Nomination facility is available by SMS, email or personal visit.**Premium** : Rs.12/- per annum per member. The premium will be deducted from the | IC 38 -IA- Eng-Health.md | null | H. | IC 38 -IA- Eng-Health_020 | {
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savings bank account on the prescribed forms will be required to be given by 31 [st]
May of every year,Joining subsequently on payment of full annual premium may be possible on
specified terms. Individuals who exit the scheme at any point may re-join the
scheme in future years through the above modality.Benefits under the insurance are as follows:|Table of Benefits|Sum Insured|
|---|---|
|~~Death~~<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of both eyes or loss of use of both~~<br>hands or feet or loss of sight of one eye and loss of use of hand<br>or foot<br>|~~Rs. 2 Lakh~~<br>|
|~~Total and irrecoverable loss of sight of one eye or loss of use of~~<br>one hand or foot|~~Rs. 1 Lakh~~|Joining and Nomination facility is available by SMS, email or personal visit.**Premium** : Rs.12/- per annum per member. The premium will be deducted from the
account holder’s savings bank account through ‘auto debit’ facility**Termination of cover** : The accident cover for the member shall terminate:1. On member attaining the age of 70 years (age nearest birth day) or2. Closure of account with the Bank or insufficiency of balance to keep theinsurance in force orIf the insurance cover is ceased due to any technical reasons such as insufficient
balance on due date or due to any administrative issues, the same can be reinstated
on receipt of full annual premium, subject to conditions that may be laid down.**L.** **Personal Accident and Disability cover**A **Personal Accident (PA) Cover** provides compensation due to death and disability
in the event of unforeseen accident.In a PA policy,a) The death benefit is payment of 100% of the sum insured,b) In the event of disability, compensation varies from a fixed percentage of the
sum insured in the case of permanent disabilityc) Weekly compensation for temporary disablement.Weekly compensation means payment of a fixed sum per week of disablement
subject to a maximum limit in terms of number of weeks for which the compensation
would be payable.**1.** **Types of disability covered**Types of disability which are normally covered under the policy are:**i.** **Permanent total disability (PTD):** means becoming totally disabled forlifetime viz. paralysis of all four limbs, comatose condition, loss of both
eyes/ both hands/ both limbs or one hand and one eye or one eye and one
leg or one hand and one leg,33**ii.** **Permanent partial disability (PPD):** means becoming partially disabled forlifetime viz. loss of fingers, toes, phalanges etc.**iii.** **Temporary total disability (TTD):** means becoming totally disabled for atemporary period of time. This section of cover is intended to cover the loss
of income during the disability period.The client has choice to select only death cover or death plus permanent
disablement of Or Death plus permanent disablement and also temporary total
disablement.**2.** **Sum insured**Sums insured for PA policies are usually decided on the basis of gross monthly
income. Typically, it is 60 times of the gross monthly income. However, some
insurers also offer on fixed plan basis without considering the income level. In such
policies sum insured for each section of cover varies as per the plan opted.**3.** **Personal Accident Insurance – a Benefit plan**Being a benefit plan, PA policies are not subject to the principle of ‘contribution’
at the time of claim. Thus, if a person has more than one policy with different
insurers, claims would be paid under all the policies.**4.** **Scope of cover**These policies are often extended to cover medical expenses, i.e. reimbursement
of hospitalization/ medical costs incurred following the accident.**5.** **Value added benefits**Along with personal accident, many insurers also offer value added benefits like
hospital cash on account of hospitalization due to accident, cost of transportation
of mortal remains, education benefit for a fixed sum and ambulance charges on the
basis of actual or fixed limit whichever is lower.**6.** **Exclusions:**Common exclusions under Personal Accident insurance are accidents arising out of
disability existing prior to the inception of policy, death or disability due to mental
disorders or any sickness, injury due to war, invasion, culpable homicide or murder,
intentional self-injury, suicide, intake of drugs/ alcohol, injury while engaging in
defined extra hazardous activity like aviation or ballooning . This is an indicative | IC 38 -IA- Eng-Health.md | r2 | Premium | IC 38 -IA- Eng-Health_021 | {
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at the time of claim. Thus, if a person has more than one policy with different
insurers, claims would be paid under all the policies.**4.** **Scope of cover**These policies are often extended to cover medical expenses, i.e. reimbursement
of hospitalization/ medical costs incurred following the accident.**5.** **Value added benefits**Along with personal accident, many insurers also offer value added benefits like
hospital cash on account of hospitalization due to accident, cost of transportation
of mortal remains, education benefit for a fixed sum and ambulance charges on the
basis of actual or fixed limit whichever is lower.**6.** **Exclusions:**Common exclusions under Personal Accident insurance are accidents arising out of
disability existing prior to the inception of policy, death or disability due to mental
disorders or any sickness, injury due to war, invasion, culpable homicide or murder,
intentional self-injury, suicide, intake of drugs/ alcohol, injury while engaging in
defined extra hazardous activity like aviation or ballooning . This is an indicative
list and can vary from company to company.PA policies are offered to individuals, family and also to groups.**Group Personal Accident Policies**Group Personal Accident Policies are usually annual policies with renewals being
allowed on the anniversary. However, non-life and standalone health insurers may
offer group personal accident products with term less than one year also to provide
coverage to specific events.**Broken bone policy and compensation for loss of daily activities**This is a specialised PA policy. This policy is designed to provide cover against listed
fractures. Fixed benefit or percentage of sum insured mentioned against each
fracture is paid at the time of claim. Quantum of benefit depends on the type of
bone covered and nature of fracture sustained.34**M.** **Overseas Travel insurance****Need for the policy:** To cover expenses of accidental injury or hospitalisation whilst
travelling outside India for business, holidays or studies., The cost of medical care,
especially in countries such as USA and Canada, is very high and could cause major
financial problems.**Scope of coverage**Such policies are primarily meant for accident and sickness benefits, but most
products available in the market package a range of covers within one product.The usual covers offered are:**a) Medical and sickness section:**i. Accidental death/ disability
ii. Medical expenses due to illness/ accident
**b) Repatriation and evacuation**
**c) Personal accident cover**
**d) Personal liability**
**e) Other non-medical covers:**i. Trip Cancellation
ii. Trip Delay
iii. Trip interruption
iv. Missed Connection
v. Delay of Checked Baggage
vi. Loss of Checked Baggage
vii. Loss of Passport
viii. Emergency Cash Advance
ix. Hijack Allowance
x. Bail Bond insurance
xi. Hijack cover
xii. Sponsor Protection
xiii. Compassionate Visit
xiv. Study Interruption
xv. Home burglary**1.** **Types of plans**The popular policies are the Business and Holiday Plans, the Study Plans and the
Employment Plans.**2.** **Who can take the policy**An Indian citizen travelling abroad on business, holiday or for studies can avail this
policy. Employees of Indian employers sent on contracts abroad can also be covered.**3.** **Sum insured and premiums**The cover is granted in US Dollars and generally varies from USD 100,000 to USD
500,000 for the section covering medical expenses, evacuation and repatriation. For
other sections the Sum Insured is lower, except for the liability cover. Premiums
can be paid in Indian rupees except in the case of the employment plan where
premium has to be paid in dollars. The plans are usually of two types: World-wide excluding USA/ Canada35 World-wide including USA/ CanadaSome products provide cover for a group of countries. Examples are travel to Asian
countries only, European countries only or travel to a particular country only.**Corporate Frequent Flyer plans**This is an annual policy whereby a corporate/ employer takes individual policies for
its executives who frequently make trips outside India. This cover can also be taken
by individuals who fly overseas many times during a year. An advance premium is
paid based on the estimated man days of travel in a year by a company’s employees.
The above policies are granted only for business and holiday travels. Pre-existing
diseases are usually excluded for Overseas Medical/ Travel Insurances.**N.** **Group Health cover****1.** **GROUP POLICIES**As explained earlier in the chapter a group policy is taken by a group owner who
could be an employer, an association, a bank’s credit card division, where a single
policy covers the entire group of individuals. These policies are usually, one year | IC 38 -IA- Eng-Health.md | a35 | Scope of cover | IC 38 -IA- Eng-Health_022 | {
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can be paid in Indian rupees except in the case of the employment plan where
premium has to be paid in dollars. The plans are usually of two types: World-wide excluding USA/ Canada35 World-wide including USA/ CanadaSome products provide cover for a group of countries. Examples are travel to Asian
countries only, European countries only or travel to a particular country only.**Corporate Frequent Flyer plans**This is an annual policy whereby a corporate/ employer takes individual policies for
its executives who frequently make trips outside India. This cover can also be taken
by individuals who fly overseas many times during a year. An advance premium is
paid based on the estimated man days of travel in a year by a company’s employees.
The above policies are granted only for business and holiday travels. Pre-existing
diseases are usually excluded for Overseas Medical/ Travel Insurances.**N.** **Group Health cover****1.** **GROUP POLICIES**As explained earlier in the chapter a group policy is taken by a group owner who
could be an employer, an association, a bank’s credit card division, where a single
policy covers the entire group of individuals. These policies are usually, one year
renewable contracts.**Features of group policies - Hospitalisation benefit covers.****1.** **Scope of coverage**The most common form of group health insurance is the policy taken by
employers covering employees and their families including dependent spouse,
children and parents/ parents in law.**2.** **Tailor-made cover**Group policies are often tailor-made covers to suit the requirements of the
group. Thus, in group policies, one will find several standard exclusions of the
individual policy being covered under the group policy.**3.** **Maternity cover**One of the most common extensions in a group policy is the maternity cover.
Maternity cover would provide for the expenses incurred in hospitalization for
delivery of child and includes C- section delivery. This cover is generally
restricted to a certain amount within the overall sum insured of the family.**4.** **Child cover**Coverage is given to babies from day one, sometimes restricted to the
maternity cover limit and sometimes extended to include the full sum insured
of the family.**5.** **Pre-existing diseases covered, waiting period waived off**Several of the usual exclusions, such as the pre-existing disease exclusion,
thirty days waiting period, two years waiting period, congenital diseases may
be waived off, in tailor-made group policies.**6.** **Premium calculation**The premium charged for a group policy is based on the age profile of the
group members, the size of the group and most importantly the claims
experience of the group.36**7.** **Non-employer employee groups**In India, regulatory provisions strictly prohibit formation of groups primarily
for the purpose of taking out a group insurance cover. When group policies
are given to other than employers, it is important to determine the relation
of the group owner to its members.**Example**A bank taking a policy for its saving bank account holders or credit card
holders constitutes a homogenous group, whereby a large group is able to
benefit by a tailor-made policy designed to suit their requirements.**8.** **Pricing**In group policies, there is provision for discount on premium based on size of
the group as also the claims experience of the group**2.** **CORPORATE BUFFER OR FLOATER COVER**In most group policies, each family is covered for a defined sum insured, varying
from Rs. One lac to five lacs and sometimes more. There arise situations where the
sum insured of the family is exhausted, especially in the case of major illness of a
family member. In such situations, if the buffer cover is opted for it brings relief,
whereby the excess expenses over and above the family sum insured are met from
this buffer amount.Amounts are drawn from the buffer, once a family’s sum insured is exhausted.
However this utilization is usually restricted to major illness/ critical illness
expenses where a single hospitalization exhausts the sum insured.**O.** **Special Products****1.** **Disease covers**In recent years, disease specific covers for cancer, diabetes, Covid-19 have been
introduced in the Indian market. The cover is either short term or long term – 5
years to 20 years and a wellness benefit is also included – a regular health check-up
paid for by the insurer. There is incentive for better control of factors like blood
glucose, blood pressure etc. in the form of reduced premiums from second year of
policy onwards. On the other hand, a higher premium would be chargeable for poor
control.**2.** **Product designed to cover diabetic persons**This policy can be taken by persons between 26 and 65 years and is renewable up | IC 38 -IA- Eng-Health.md | a35 | Corporate Frequent Flyer plans | IC 38 -IA- Eng-Health_023 | {
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family member. In such situations, if the buffer cover is opted for it brings relief,
whereby the excess expenses over and above the family sum insured are met from
this buffer amount.Amounts are drawn from the buffer, once a family’s sum insured is exhausted.
However this utilization is usually restricted to major illness/ critical illness
expenses where a single hospitalization exhausts the sum insured.**O.** **Special Products****1.** **Disease covers**In recent years, disease specific covers for cancer, diabetes, Covid-19 have been
introduced in the Indian market. The cover is either short term or long term – 5
years to 20 years and a wellness benefit is also included – a regular health check-up
paid for by the insurer. There is incentive for better control of factors like blood
glucose, blood pressure etc. in the form of reduced premiums from second year of
policy onwards. On the other hand, a higher premium would be chargeable for poor
control.**2.** **Product designed to cover diabetic persons**This policy can be taken by persons between 26 and 65 years and is renewable up
to 70 years. Sum Insured ranges from Rs. 50,000 to Rs. 5,00,000. Capping on Room
rent is applicable. Product is aimed to cover hospitalization complications of
diabetes like diabetic retinopathy (eye), kidney, diabetic foot, kidney transplant
including donor expenses.37**Test Yourself 1**Though the duration of cover for pre-hospitalization expenses would vary from
insurer to insurer and is defined in the policy, the most common cover is for
________ pre-hospitalization.I. Fifteen daysII. Thirty daysIII. Forty Five daysIV. Sixty daysKey terms in health policies **(All the terms are as defined in IRDAI Master**
**Circular on Standardization of Health Insurance Products dated 22.07.2020)****1.** **Network Provider**Network provider refers to a hospital/ nursing home/ day care centre which is under
tie-up with an insurer/ TPA for providing cashless treatment to insured patients.
Patients are free to go to out-of-network providers but there they are generally
charged much higher fees.**2.** **Preferred provider network (PPN)**An insurer has the option to create a preferred network of hospitals to ensure quality
treatment and at best rates. When this group is limited to only a select few by the
insurer based on experience, utilization and cost of providing care, preferred
provider networks get formed.**3.** **Cashless service**A cashless service enables the insured to avail of the treatment up to the limit of
cover without any payment to the hospitals. All that the insured has to do is
approach a network hospital and present his medical card as proof of insurance. The
insurer facilitates a cashless access to the health service and directly makes
payment to the network provider for the admissible amount. However, the insured
has to make payment for amounts beyond the policy limits and for expenses not
payable as per policy conditions.**4.** **Third Party Administrator (TPA)**A major development in the field of health insurance is the introduction of the third
party administrator or TPA. Several insurers across the world utilize the services of
independent organizations for managing health insurance claims. These agencies
are known as the TPAs. In India, a TPA is engaged by an insurer for provision of
health services which includes among other things:i. Providing an identity card to the policyholder which is proof of his insurancepolicy and can be used for admission into a hospitalii. Providing a cashless service at network hospitalsiii. Processing of claimsTPAs service health policyholders starting from issuance of unique identity cards for
hospital admissions up to settlement of claims either on cashless basis or
reimbursement basis. Third party administrators enter into an MOU with hospitals
or health service providers and ensure that any person who undergoes treatment in
the network hospitals is given a cashless service. They are the intermediaries38between the insurer(s) and the insured(s), who co-ordinate with the hospitals and
finalize health claims.**5.** **Hospital**A hospital means any institution established for in-patient care and day care
treatment of sickness and/ or injuries and which has been registered as a hospital
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independent organizations for managing health insurance claims. These agencies
are known as the TPAs. In India, a TPA is engaged by an insurer for provision of
health services which includes among other things:i. Providing an identity card to the policyholder which is proof of his insurancepolicy and can be used for admission into a hospitalii. Providing a cashless service at network hospitalsiii. Processing of claimsTPAs service health policyholders starting from issuance of unique identity cards for
hospital admissions up to settlement of claims either on cashless basis or
reimbursement basis. Third party administrators enter into an MOU with hospitals
or health service providers and ensure that any person who undergoes treatment in
the network hospitals is given a cashless service. They are the intermediaries38between the insurer(s) and the insured(s), who co-ordinate with the hospitals and
finalize health claims.**5.** **Hospital**A hospital means any institution established for in-patient care and day care
treatment of sickness and/ or injuries and which has been registered as a hospital
with the local authorities, wherever applicable, and is under the supervision of a
registered and qualified medical practitioner AND must comply with all minimum
criteria as under:a) Has at least 10 inpatient beds in those towns having a population of less than10,00,000 and 15 inpatient beds in all other places;b) Has qualified nursing staff under its employment round the clock;c) Has qualified medical practitioner(s) in charge round the clock;d) Has a fully equipped operation theatre of its own where surgical proceduresare carried out;e) Maintains daily records of patients and will make these accessible to theInsurance Company’s authorized personnel.**6.** **Medical practitioner**A Medical practitioner is a person who holds a valid registration from the medical
council of any state of India or for homeopathy and is thereby entitled to practice
medicine within its jurisdiction; and is acting within the scope and jurisdiction of
his license. However, insurance companies are free to make a restriction that the
registered practitioner should not be the insured or any close family member. This
is to ensure fraudulent claims are not lodged by taking treatment from relatives or
by self or by hospitals owned by either.**Qualified nurse:** Qualified nurse means a person who holds a valid registration from
the Nursing Council of India or the Nursing Council of any state in India.**7.** **Reasonable and necessary expenses**A health insurance policy always contains this clause as the policy provides for
compensation of expenses that would be deemed to be reasonable for treatment of
a particular ailment and in a particular geographical area.**8.** **Notice of claim**Every insurance policy provides for immediate intimation of claim and specified
time limits for document submission. In health insurance policies, wherever cashless
facility is desired by the customer, intimations are given well before the
hospitalization. However in cases of reimbursement claims the time limit for
submission of claim documents is normally fixed at 15 days from the date of
discharge.**9.** **Free health check**In individual health policies, a provision is generally available to give some form of
incentive to a claim free policyholder. Many policies provide for reimbursement of
the cost of health check-up at the end of four continuous, claim free policy periods.39**10.** **Cumulative bonus**A cumulative bonus is given on the sum insured for every claim free year. This means
that the sum insured gets increased on renewal by a fixed percentage say 5%
annually and is allowed up to a maximum of 50% for ten claim-free renewals.
Moreover, if a claim is made in any particular year, the cumulative bonus accrued
can only be reduced at the same rate at which it is accrued.**Example**A person takes a policy for Rs. 3 lacs at a premium of Rs. 5,000. In the second year,
in case of no claims in the first year, he gets a sum insured of Rs. 3.15 lacs (5% more
than the previous year) at the same premium of Rs. 5,000. This could go up to Rs.
4.5 lacs over a ten year claim free renewal.**11.** **Malus/ Bonus**Just as there is an incentive to keep the health policy free of claims, the opposite
is called a malus. Here, if the claims under a policy are very high, a malus or loading
of premium is collected at renewal. However, in case of group policies, the malus
is charged by way of loading the overall premium suitably to keep the claim ratio
within reasonable limits.**12.** **No claim discount**Some products provide for a discount on premium for every claim free year instead | IC 38 -IA- Eng-Health.md | s38 | Hospital | IC 38 -IA- Eng-Health_025 | {
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Moreover, if a claim is made in any particular year, the cumulative bonus accrued
can only be reduced at the same rate at which it is accrued.**Example**A person takes a policy for Rs. 3 lacs at a premium of Rs. 5,000. In the second year,
in case of no claims in the first year, he gets a sum insured of Rs. 3.15 lacs (5% more
than the previous year) at the same premium of Rs. 5,000. This could go up to Rs.
4.5 lacs over a ten year claim free renewal.**11.** **Malus/ Bonus**Just as there is an incentive to keep the health policy free of claims, the opposite
is called a malus. Here, if the claims under a policy are very high, a malus or loading
of premium is collected at renewal. However, in case of group policies, the malus
is charged by way of loading the overall premium suitably to keep the claim ratio
within reasonable limits.**12.** **No claim discount**Some products provide for a discount on premium for every claim free year instead
of a bonus on sum insured.**13.** **Room rent restrictions**Some health plans place a restriction on the category of room that an insured
chooses by linking it to the sum insured. Hence a person with a sum insured of one
lac would be entitled to a room of Rs 1,000 per day if the policy has a room rent
restriction of 1% of sum insured per day.**14.** **Renewability clause**The IRDAI guidelines on renewability of health insurance policies makes lifetime
guaranteed renewal of the health policies compulsory, except on grounds of fraud
and misrepresentation. In accordance to the provisions of IRDAI Health Insurance
Regulation 2016, once a proposal is accepted in respect of a health insurance policy
(except Personal Accident and Travel Policies) and a policy is issued which is
thereafter renewed periodically without any break, further renewal shall not be
denied on the grounds of age of the Insured. Thus, health insurance policies are
renewable lifelong.**15.** **Cancellation clause**An insurance company may at any time cancel the policy only on grounds of
misrepresentation, fraud, and non-disclosure of material fact or non-cooperation by
the insured.When policies are cancelled by the insurer, a proportion of the premium
corresponding to the unexpired period of insurance, is returned to the insured
provided no claim has been paid under the policy. This is usually on pro-rata basis.When annual policies are cancelled by the insured, insurers usually charge premiums
at Short period scales, instead of pro-rata premiums. This would prevent antiselection against the insurers and take care of the initial expenses of the insurer.40**16.** **Grace period for renewal**As mentioned in Chapter 4, the Grace Period provision enables a policy that would
otherwise have lapsed for non-payment of premium, to continue in force during the
grace period.Most of above key clauses, definitions, exclusions relating to grace period have been
standardized under Health Regulations and Health Insurance Standardization
Guidelines issued by IRDAI and updated from time to time.**Test Yourself 2**As per IRDA guidelines, a ________ grace period is allowed for renewal of individual
health policies.I. Fifteen daysII. Thirty daysIII. Forty Five daysIV. Sixty days**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.41## CHAPTER H-04## HEALTH INSURANCE UNDERWRITING**Chapter Introduction**This chapter aims to provide you detailed knowledge about underwriting in health
insurance. Underwriting is a very important aspect of any type of insurance and
plays a vital role in issuance of an insurance policy. In this chapter, you will get an
understanding about basic principles, tools, methods and process of underwriting.
It will also provide you the knowledge about group health insurance underwriting.**Learning Outcomes**After studying this chapter, you should be able to:a) Explain what is meant by underwriting
b) Describe the basic concepts of underwriting
c) Explain the principles and the various tools followed by underwriters
d) Appreciate the complete process of underwriting individual health policies
e) Discuss how group health policies are underwritten42**Look at this Scenario**Manish aged 48 years, working as a software engineer, decided to take a health
insurance policy for himself. He went to an insurance company, where they gave
him a proposal form in which he was required to answer a number of questions
related to his physical build and health, mental health, pre-existing illnesses, his | IC 38 -IA- Eng-Health.md | H-04 | Example | IC 38 -IA- Eng-Health_026 | {
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insurance. Underwriting is a very important aspect of any type of insurance and
plays a vital role in issuance of an insurance policy. In this chapter, you will get an
understanding about basic principles, tools, methods and process of underwriting.
It will also provide you the knowledge about group health insurance underwriting.**Learning Outcomes**After studying this chapter, you should be able to:a) Explain what is meant by underwriting
b) Describe the basic concepts of underwriting
c) Explain the principles and the various tools followed by underwriters
d) Appreciate the complete process of underwriting individual health policies
e) Discuss how group health policies are underwritten42**Look at this Scenario**Manish aged 48 years, working as a software engineer, decided to take a health
insurance policy for himself. He went to an insurance company, where they gave
him a proposal form in which he was required to answer a number of questions
related to his physical build and health, mental health, pre-existing illnesses, his
family health history, habits and so on.On receipt of his proposal form, he was also required to submit many documents
such as identity and age proof, proof of address and previous medical records. Then
they told him to undergo a health check-up and some medical tests which frustrated
him.Manish, who considered himself a healthy person and with a good income level,
started wondering why such a lengthy process was being followed by the insurance
company in his case. Even after going through all this, the insurance company told
him that high cholesterol and high BP had been diagnosed in his medical tests, which
increased the chances of heart diseases later. Though they offered him a policy, the
premium was much higher than what his friend had paid and so he refused to take
the policy.Here, the insurance company was following all these steps as part of their
underwriting process. While providing risk coverage, an insurer needs to evaluate
risks properly and also to make reasonable profit. If the risk is not assessed properly
and there is a claim, it will result in a loss. Moreover, insurers collect premiums on
behalf of all insuring persons and have to handle these moneys like a trust.**A.** **What is underwriting?****1.** **Underwriting**
Insurance companies try to insure people who are expected to pay adequate
premium in proportion to the risk they bring to the insurance pool. This process of
collecting and analysing information from a proposer is known as underwriting. On
the basis of information collected through this process, they decide whether they
want to insure a proposer. If they decide to do so, then at what premium, terms
and conditions so as to make a reasonable profit from taking such risk.**Definition****Underwriting** is the process of assessing the risk appropriately and deciding the
terms on which the insurance cover is to be granted. Thus, it is a process of risk
assessment and risk pricing.**2.** **Need for Underwriting**Underwriting is the backbone of an insurance company as acceptance of the risk
carelessly or for insufficient premiums will lead to insurer’s insolvency. On the other
hand, being too selective or careful will prevent the insurance company from43creating a big pool so as to spread the risk uniformly. It is therefore critical to strike
the correct balance between risk and business, thereby being competitive and yet
profitable for the organization.This process of balancing is done by the underwriter, in accordance with the
philosophy, policies and risk hunger of the insurance company concerned. Although
age affects the chance of sickness as well as death, it must be remembered that
sickness usually comes much before death and could be frequent. Hence, it is quite
logical that the underwriting norms and guidelines are much tighter for health
coverage than death coverage.**3.** **Underwriting – Risk Assessment**In health insurance, there is a higher focus on medical or health findings than
financial or income based underwriting. However, the latter cannot be ignored as
there has to be an insurable interest and financial underwriting is important to rule
out any adverse selection and ensure continuity in health insurance.**Example**An individual who is diabetic has a far higher chance of developing a cardiac or
kidney complication requiring hospitalization than of death, and also health
episodes can happen multiple times during the course of insurance coverage. A life
insurance underwriting guideline might rate this individual as an average risk.
However, for medical underwriting, he would be rated as a higher risk.**4.** **Factors which affect chance of illness**The factors which affect morbidity (risk of falling ill) should be considered carefully
while assessing risk are as follows:**a)** **Age:** Premiums are charged corresponding with age and the degree of risk.For e.g. the premiums for infants and children are higher than young adults | IC 38 -IA- Eng-Health.md | n42 | Learning Outcomes | IC 38 -IA- Eng-Health_027 | {
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sickness usually comes much before death and could be frequent. Hence, it is quite
logical that the underwriting norms and guidelines are much tighter for health
coverage than death coverage.**3.** **Underwriting – Risk Assessment**In health insurance, there is a higher focus on medical or health findings than
financial or income based underwriting. However, the latter cannot be ignored as
there has to be an insurable interest and financial underwriting is important to rule
out any adverse selection and ensure continuity in health insurance.**Example**An individual who is diabetic has a far higher chance of developing a cardiac or
kidney complication requiring hospitalization than of death, and also health
episodes can happen multiple times during the course of insurance coverage. A life
insurance underwriting guideline might rate this individual as an average risk.
However, for medical underwriting, he would be rated as a higher risk.**4.** **Factors which affect chance of illness**The factors which affect morbidity (risk of falling ill) should be considered carefully
while assessing risk are as follows:**a)** **Age:** Premiums are charged corresponding with age and the degree of risk.For e.g. the premiums for infants and children are higher than young adults
due to increased risk of infections and accidents. Similarly, for adults beyond
the age of 45 years, the premiums are higher, as the probability of an
individual suffering from a chronic ailment like diabetes, a sudden heart
ailment or other such morbidity is much higher.
**b)** **Gender:** Women are exposed to additional risk of illness during child bearingperiod. However, men are more likely to get affected by heart attacks than
women or suffer job related accidents than women as they may be more
involved in hazardous employment.
**c)** **Habits:** Consumption of tobacco, alcohol or narcotics in any form has a directbearing on the morbidity risk.
**d)** **Occupation:** Extra risk to accidents is possible in certain occupations, e.g.driver, blaster, aviator etc. Likewise, certain occupations may have higher
health risks, like an X-Ray machine operator, asbestos industry workers,
miners etc.44**e)** **Family history:** This has greater relevance, as genetic factors influencediseases like asthma, diabetes and certain cancers. This does impact the
morbidity and should be taken into consideration while accepting risk.
**f)** **Build:** Stout, thin or average build may also be linked to morbidity in certaingroups.
**g)** **Past illness or surgery:** It has to be ascertained whether the past illness hasany possibility of causing increased physical weakness or even recur and
accordingly the policy terms should be decided. For e.g. kidney stones are
known to recur and similarly, cataract in one eye increases possibility of
cataract in the other eye.
**h)** **Current health status and other factors or complaints:** This is important toascertain the degree of risk and insurability and can be established by proper
disclosure and medical examination.
**i)** **Environment and residence:** These also have a bearing on morbidity rates.**Understanding Moral Hazard in Health Insurance**While factors like age, gender, habits etc. refer to the physical hazard of a health
risk, there is something else that needs to be closely watched. This is the moral
hazard of the client which can prove very costly to the insurance company.An extreme example of bad moral hazard is that of an insured taking health
insurance knowing that he will undergo a surgical operation within a short time but
not disclosing this to the insurer. There is thus a deliberate intention of taking
insurance just to collect a claim.**Test Yourself 1**Underwriting is the process of ___________.
I. Marketing insurance products
II. Collecting premiums from customers
III. Risk assessment and risk pricing
IV. Selling various insurance products**B.** **Underwriting – Basic concepts****1.** **Purposes of Underwriting**
There are two main purposes for Underwriting.i. To prevent anti-selection, that is selection against the insurer
ii. To classify risks and ensure equity among risks**Definition**The term **assessment of risks** refers to the process of evaluating each proposal for
health insurance in terms of the degree of risk it represents and then deciding
whether or not to grant insurance and on what terms.45**Anti-selection** (or **adverse selection** ) is the tendency of people, who suspect or
know that their chance of experiencing a loss is high, to seek out insurance eagerly
and to gain in the process.**Example**If insurers were not selective about whom and how they offered insurance, there is
a chance that people with serious ailments like diabetes, high BP, heart problems
or cancer, who knew that they would soon require hospitalization, would seek to | IC 38 -IA- Eng-Health.md | null | Underwriting – Risk Assessment | IC 38 -IA- Eng-Health_028 | {
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insurance just to collect a claim.**Test Yourself 1**Underwriting is the process of ___________.
I. Marketing insurance products
II. Collecting premiums from customers
III. Risk assessment and risk pricing
IV. Selling various insurance products**B.** **Underwriting – Basic concepts****1.** **Purposes of Underwriting**
There are two main purposes for Underwriting.i. To prevent anti-selection, that is selection against the insurer
ii. To classify risks and ensure equity among risks**Definition**The term **assessment of risks** refers to the process of evaluating each proposal for
health insurance in terms of the degree of risk it represents and then deciding
whether or not to grant insurance and on what terms.45**Anti-selection** (or **adverse selection** ) is the tendency of people, who suspect or
know that their chance of experiencing a loss is high, to seek out insurance eagerly
and to gain in the process.**Example**If insurers were not selective about whom and how they offered insurance, there is
a chance that people with serious ailments like diabetes, high BP, heart problems
or cancer, who knew that they would soon require hospitalization, would seek to
buy health insurance, create losses for the insurer. In other words, if an insurer does
not assess risk properly, it would be selected against and suffer losses in the process.**2.** **Equity among risks**
Let us now consider equity among risks. “Equity” means that applicants who are
exposed to similar types and degrees of risk be placed in the same premium class.
Insurers would like to have some type of standardization to determine the premiums
to be charged. The proposals that come to the underwriter are classified into
following risk types:**i.** **Standard risks**
These are the people whose expected morbidity (chance of falling ill) is average.**ii.** **Preferred risks**
In some cases, the expected morbidity is significantly lower than average and
hence are preferred risks. These could be charged a lower premium.**iii.** **Substandard risks**
In some other cases, the expected morbidity may be higher than the average.
Though these risks also may be insurable, insurers may charge higher premiums
and/or accept them subject to certain conditions and restrictions.**iv.** **Declined risks**There are some persons who have certain medical or other conditions, which
make them highly prone to sicknesses and making claims. It is highly probable
that such persons fall sick and cause a disproportionate degree of liability on
the common pool. In other words, while others in the pool have a more or less
average chance of falling sick, these persons have a very high chance of falling
sick making it difficult to insure them even at higher rates of premium.[Sometimes, such persons may be posing a Moral Hazard when they do not reveal
their high probability of falling sick and try to get insured like other normal
people.] Most insurers decline such risks and create a database of such people
for future use.Being a ‘Declined Risk’ means only that a particular insurer does not wish to
insure a person for that type of insurance product, at that particular point in
time. However, it is possible that another insurer might insure him/ her at a
different premium and/or with different conditions. The same insurer might also46consider him/ her for another type of policy or even for the same policy at a
later date, when the conditions change.**3.** **Underwriting process**The underwriting process takes place at two levels: At the primary or field level or
At the underwriting department level**a)** **Primary Underwriting**Primary underwriting (or Field level underwriting) includes information gathering
by an agent or company representative to decide whether an applicant is suitable
for granting insurance coverage. The agent plays this critical role of **primary**
**underwriting** . He is in the best position to know whether prospective client is
insurable.Some insurance companies require the agents to provide a statement or a
confidential report, with specific information, opinion and recommendations
with respect to the proposer.A similar kind of report, which has been called as **Moral Hazard report**, may also
be sought from an official of the insurance company. These reports typically
cover the occupation, income and financial standing and reputation of the person
proposed for health insurance.**4.** **Fraud monitoring role of Agent**Decisions regarding selecting a risk for insurance depends on the facts disclosed
by the proposer in the Proposal Form. It would be difficult for an underwriter
sitting in the office to know whether these facts are true or have been
fraudulently misrepresented with an intention to cheat the insurer.The agent, **as primary underwriter** plays a significant role here. Since the agent | IC 38 -IA- Eng-Health.md | o46 | Test Yourself 1 | IC 38 -IA- Eng-Health_029 | {
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by an agent or company representative to decide whether an applicant is suitable
for granting insurance coverage. The agent plays this critical role of **primary**
**underwriting** . He is in the best position to know whether prospective client is
insurable.Some insurance companies require the agents to provide a statement or a
confidential report, with specific information, opinion and recommendations
with respect to the proposer.A similar kind of report, which has been called as **Moral Hazard report**, may also
be sought from an official of the insurance company. These reports typically
cover the occupation, income and financial standing and reputation of the person
proposed for health insurance.**4.** **Fraud monitoring role of Agent**Decisions regarding selecting a risk for insurance depends on the facts disclosed
by the proposer in the Proposal Form. It would be difficult for an underwriter
sitting in the office to know whether these facts are true or have been
fraudulently misrepresented with an intention to cheat the insurer.The agent, **as primary underwriter** plays a significant role here. Since the agent
has direct personal contact with the proposer, he or she is in the best position to
find out whether the information submitted is true and whether any wilful nondisclosure or misrepresentation has been made.**a)** **Role of the Underwriting department**The Underwriting department in the insurer’s office does the major part of the
underwriting. Here, specialists who are proficient in such work, consider and
analyse all the relevant data on the particular risk and even some demographical
data. They finally decide whether to accept the proposal for insurance, decide
the terms, and charge the appropriate premiums.47**C.** **Other Health Insurance regulations of IRDAI**
The regulator has also brought in some changes for benefit of the Insured as given
below.a. The insured is to be informed of any underwriting loading charged over andabove the premium and the specific consent of the policyholder for such loadings
shall be obtained before issuance of a policy.
b. If an insurance company requires any further information, such as change ofoccupation, at any subsequent stage of a policy or at the time of its renewal, it
has prescribed standard forms to be filled up by the insured which forms part of
the policy document.
c. Insurers have come out with various mechanisms to reward policyholders forearly entry, continued renewals, favourable claims experience etc. with the
same insurer and disclose upfront such mechanism or incentives in the
prospectus and the policy document.**D.** **Portability of Health Insurance**Portability is defined by IRDAI as **the right** accorded to individual health insurance
policyholders (including all members under family cover), **to transfer** the credit
gained for pre-existing conditions and time bound exclusions, **from one insurer to**
**another insurer or from one plan to another plan of the same insurer**, provided
the previous policy has been maintained without any break.Portability is the provision by which an Insured can move from one insurer to another
carrying with him/ her all the benefits earned over a period of time. Students may
please read IRDAI’s Consolidated Guidelines on Product filing in Health Insurance
Business dated 22 July 2020 lays down norms for standardising many of the practices
including Portability.IRDAI mandates that Portability shall be allowed under all individual indemnity
health insurance policies issued by General Insurers and Health Insurers including
family floater policies.However, porting can be done only at the time of renewal. Apart from the waiting
period credit, other terms of the new policy including the premium would be
decided by the new insurance company. Procedurally, the request for porting should
be made by the insured to the old insurer at least 45 days before the renewal,
specifying the company to which the policy has to be ported. The policy has to be
renewed without a break (there is a 30 day grace period if porting is under process).
IRDA has created a web-based facility that maintains data about all health insurance
policies issued by insurance companies to individuals, to enable the new insurer to
access and obtain data on the porting policyholder’s health insurance history in a
smooth manner.**E.** **Migration of Health Insurance**Migration is defined by IRDAI as the right accorded to health insurance policyholders
(including all members under family cover and members of group health insurance48policy), **to transfer** the credit gained for pre-existing conditions and time bound
exclusions, **with the same insurer** .IRDAI’s Consolidated Guidelines on Product filing in Health Insurance Business dated
22 July 2020 revised the guidelines on Migration of health insurance policies. It
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decided by the new insurance company. Procedurally, the request for porting should
be made by the insured to the old insurer at least 45 days before the renewal,
specifying the company to which the policy has to be ported. The policy has to be
renewed without a break (there is a 30 day grace period if porting is under process).
IRDA has created a web-based facility that maintains data about all health insurance
policies issued by insurance companies to individuals, to enable the new insurer to
access and obtain data on the porting policyholder’s health insurance history in a
smooth manner.**E.** **Migration of Health Insurance**Migration is defined by IRDAI as the right accorded to health insurance policyholders
(including all members under family cover and members of group health insurance48policy), **to transfer** the credit gained for pre-existing conditions and time bound
exclusions, **with the same insurer** .IRDAI’s Consolidated Guidelines on Product filing in Health Insurance Business dated
22 July 2020 revised the guidelines on Migration of health insurance policies. It
provides that every individual policyholder (including members under family floater
policy) covered under an indemnity based individual health insurance policy shall
be provided an option of migration at the explicit option exercised by the
policyholder. Migration from group policies to individual policy will be subject to
underwriting.A policyholder desirous of migrating his/ her policy shall be allowed to apply to the
insurance company to migrate the policy along with all members of the family, if
any, at least 30 days before the premium renewal date of his/her existing policy.
However, if the insurer is willing to consider even less than 30 days period, then the
insurer may do so. Insurers shall not levy any charges exclusively for migration.**F.** **Basic principles of insurance and tools for underwriting****1.** **Basic principles relevant to underwriting**In any form of insurance, whether it is life insurance or general insurance, there are
certain legal principles which operate along with acceptance of risks. Health
insurance is equally governed by these principles and any violation of the principles
may result in the insurer deciding to avoid the liability. (These principles have been
discussed in the common chapters.)**2.** **Tools for underwriting**These are the sources of information for the underwriter and the basis on which the
risk classification is done and premiums finally decided. The following are the key
tools for underwriting:**a)** **Proposal form**This document is the base of the contract where all the critical information
pertaining to the health and personal details of the proposer (i.e. age,
occupation, build, habits, health status, income, premium payment details etc.)
are collected. Any breach or concealment of information by the insured shall
render the policy void. (This has been discussed in the common chapters.)**b)** **Age proof**Premiums are determined on the basis of the age of the insured. Hence it is
imperative that the age disclosed at the time of enrolment is verified through
submission of an age proof.49**Example**
In India, there are many documents which can be considered as age proof but all of
them are not legally acceptable. Mostly valid documents are divided into two broad
categories. They are as follows:a) Standard age proof: Some of these include school certificate, passport,domicile certificate, PAN card etc.
b) Non-standard age proof: Some of these include ration card, voter ID, elder’sdeclaration, gram panchayat certificate etc.**Financial documents**
Knowing the financial status of the proposer is particularly relevant for benefit
products and to reduce the moral hazard. However, normally the financial
documents are only asked for in cases of:a) Personal accident covers or
b) High sum assured coverage or
c) When the stated income and occupation as compared to the coveragesought, show a mismatch.**c)** **Medical reports**Requirement of medical reports is based on the norms of the insurer, and usually
depends upon the age of the insured and sometimes on the amount of cover
opted. Some replies in the proposal form may also contain some information
that leads to medical reports being asked for.**d)** **Reports of sales personnel**Sales personnel can also be seen as grassroots level underwriters for the
company and the information given by them in their report could form an
important consideration. However, as the sales personnel have an incentive to
generate more business, there is a conflict of interest which has to be watched
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Knowing the financial status of the proposer is particularly relevant for benefit
products and to reduce the moral hazard. However, normally the financial
documents are only asked for in cases of:a) Personal accident covers or
b) High sum assured coverage or
c) When the stated income and occupation as compared to the coveragesought, show a mismatch.**c)** **Medical reports**Requirement of medical reports is based on the norms of the insurer, and usually
depends upon the age of the insured and sometimes on the amount of cover
opted. Some replies in the proposal form may also contain some information
that leads to medical reports being asked for.**d)** **Reports of sales personnel**Sales personnel can also be seen as grassroots level underwriters for the
company and the information given by them in their report could form an
important consideration. However, as the sales personnel have an incentive to
generate more business, there is a conflict of interest which has to be watched
out for.**Test Yourself 2**The principle of utmost good faith in underwriting is required to be followed by___________.
I. The insurerII. The insuredIII. Both the insurer and the insuredIV. The medical examiners**Test Yourself 3**Insurable interest refers to ____________.
I. Financial interest of the person in the asset to be insured
II. The asset which is already insured50III. Each insurer’s share of loss when more than one company covers the same loss
IV. The amount of the loss that can be recovered from the insurer**G.** **Underwriting** **process**Once the required information is received, the underwriter decides the terms of the
policy. The common forms used for underwriting health insurance business are as
below:**1.** **Medical underwriting**Medical underwriting is a process in which medical reports are called for from the
proposer to determine the health status of an individual applying for health
insurance policy. The health information collected is then evaluated by the insurers
to determine whether to offer coverage, up to what limit and on what conditions
and exclusions. Thus medical underwriting can determine the acceptance or
declining of a risk and also the terms of cover.**Example**Medical conditions like hypertension, overweight/ obesity and raised sugar levels
have a high probability of future hospitalization for diseases of the heart, kidney
and the nervous system. So, these conditions should be carefully considered while
assessing the risk for medical underwriting.Medical underwriting guidelines may also require a signed declaration of the
proposer’s health status by his/ her family physician.Persons above the age of 45-50 years, enrolling for the first time are normally
required to undergo specified pathological investigations to assess health risk profile
and to obtain information on their current health status. Such investigations also
provide an indication of prevalence of any pre-existing medical conditions or
diseases.**2.** **Non-medical underwriting**Most of the proposers which apply for health insurance do not need medical
examination.Even, if the proposer were to disclose all material facts completely and truthfully
and the same were checked by agent carefully, then also the need for medical
examination could be much less.**Example**
If an individual has to take health insurance coverage quickly without going through
a long process of medical examinations, waiting periods and processing delays, then
he can opt for a non-medical underwriting policy. In a non-medical underwriting51policy, premium rates and sum assured are usually decided on the basis of answers
to a few health questions mostly based on age, gender, smoking class, build etc.
The process is speedy but the premiums may be relatively higher.**3.** **Numerical rating method**This is a process adopted in underwriting, wherein numerical or percentage
assessments are made on each component of the risk.
Factors like age, sex, race, occupation, residence, environment, build, habits,
family and personal history are examined and scored numerically based on predetermined criteria.**4.** **Underwriting decisions**The underwriting process is completed when the received information is carefully
assessed and classified into appropriate risk categories. Based on the above tools
and his judgment, the underwriter classifies the risk into the following categories:a) Accept risk at standard rates
b) Accept risk at an extra premium (loading), though it may not be practiced inall companies
c) Postpone the cover for a stipulated period/ term
d) Decline the cover
e) Counter offer (either restrict or deny part of the cover)
f) Impose a higher deductible or Co-pay
g) Levy permanent exclusion(s)under the policyIf any illness is permanently excluded, it is endorsed on the policy certificate. This
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The process is speedy but the premiums may be relatively higher.**3.** **Numerical rating method**This is a process adopted in underwriting, wherein numerical or percentage
assessments are made on each component of the risk.
Factors like age, sex, race, occupation, residence, environment, build, habits,
family and personal history are examined and scored numerically based on predetermined criteria.**4.** **Underwriting decisions**The underwriting process is completed when the received information is carefully
assessed and classified into appropriate risk categories. Based on the above tools
and his judgment, the underwriter classifies the risk into the following categories:a) Accept risk at standard rates
b) Accept risk at an extra premium (loading), though it may not be practiced inall companies
c) Postpone the cover for a stipulated period/ term
d) Decline the cover
e) Counter offer (either restrict or deny part of the cover)
f) Impose a higher deductible or Co-pay
g) Levy permanent exclusion(s)under the policyIf any illness is permanently excluded, it is endorsed on the policy certificate. This
becomes an additional exclusion apart from the standard policy exclusion and shall
form the part of the contract.**5.** **Use of general or standard exclusions**The majority of policies impose exclusions that apply to all their members. These
are known as standard exclusions or sometimes referred to as general exclusions.
Insurers limit their exposure by the implementation of standard exclusions. These
have been discussed in an earlier chapter.**6.** **Zone wise premium**Normally, the premium would depend on the age of the insured person and the sum
insured selected. Premium differential has been introduced in certain zones with
higher claims cost e.g. Delhi and Mumbai form part of highest premium zone for
certain products by some insurers. For e.g. Individual Policy for age group of 55-65
years would be rated higher in Metros and ‘A Class’ cities than a similar policy for
the same age bracket in a city like Indore or Jammu.52**Test Yourself 4**Which of the following statements about medical underwriting is incorrect?I. It involves high cost in collecting and assessing medical reports.
II. Current health status and age are the key factors in medical underwriting forhealth insurance.
III. Proposers have to undergo medical and pathological investigations to assesstheir health risk profile.
IV. Percentage assessment is made on each component of the risk.**H.** **Health Insurance at Group Level**While accepting a group for health insurance, the insurers take into consideration
the possibility of existence of a few members in the group who may have severe and
frequent health problems.**1.** **Group Health Insurance**Underwriting of group health insurance requires analysing the characteristics of the
group to evaluate whether it falls within the insurance company’s underwriting
guidelines as well as the guidelines laid down for group insurance by the insurance
regulators.Standard underwriting process for group health insurance requires evaluating the
proposed group on the following factors:a) Type of group
b) Group size
c) Type of industry
d) Eligible persons for coverage
e) Whether entire group is being covered or there is an option for members toopt out
f) Level of coverage – whether uniform for all or differently
g) Composition of the group in terms of sex, age, single or multiple locations,income levels of group members, employee turnover rate, whether premium
paid entirely by the group holder or members are required to participate in
premium payment
h) Difference in healthcare costs across regions in case of multiple locationsspread in different geographical locations
i) Preference of the group holder for administration of the group insurance bya third party administrator (of his choice or one selected by the insurer) or
by the insurer itself
j) Past claims experience of the proposed group**Example**A group of members working in mines or factories is at higher health risk than a
group of members working in air-conditioned offices. Also the nature of diseases
(thereby claims) are also likely to be quite different for both groups. Therefore, the
insurer will price the group health insurance policy accordingly in both the cases.53Similarly to avoid adverse selection in case of groups with high turnover such as IT
companies, insurers can introduce precautionary criteria requiring employees to
serve their probationary period before becoming eligible for insurance.**2.** **Underwriting other than employer- employee groups**Employer-employee groups are traditionally the most common groups offered group
health insurance, the character of the group composition is one of the important
consideration while underwriting the group.Health insurance can also be offered to Non Employer employee groups. The IRDAI
has issued group insurance guidelines with a view to regulate the approach to be | IC 38 -IA- Eng-Health.md | null | Numerical rating method | IC 38 -IA- Eng-Health_033 | {
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i) Preference of the group holder for administration of the group insurance bya third party administrator (of his choice or one selected by the insurer) or
by the insurer itself
j) Past claims experience of the proposed group**Example**A group of members working in mines or factories is at higher health risk than a
group of members working in air-conditioned offices. Also the nature of diseases
(thereby claims) are also likely to be quite different for both groups. Therefore, the
insurer will price the group health insurance policy accordingly in both the cases.53Similarly to avoid adverse selection in case of groups with high turnover such as IT
companies, insurers can introduce precautionary criteria requiring employees to
serve their probationary period before becoming eligible for insurance.**2.** **Underwriting other than employer- employee groups**Employer-employee groups are traditionally the most common groups offered group
health insurance, the character of the group composition is one of the important
consideration while underwriting the group.Health insurance can also be offered to Non Employer employee groups. The IRDAI
has issued group insurance guidelines with a view to regulate the approach to be
adopted by insurers in dealing with various groups. Such non-employer groups
include:a) Employer welfare associations
b) Holders of credit cards issued by a specific company
c) Customers of a particular business where insurance is offered as an add-onbenefit
d) Borrowers of a bank and professional associations or societies**I.** **Underwriting of Overseas Travel Insurance**Since the main cover under Overseas Travel Insurance policies is the health cover,
the underwriting would follow the pattern for health insurance in general.The premium rating and acceptance would as per individual company guidelines but
a few important considerations are given below:1. Premium rate would depend on the age of the proposer and the duration offoreign travel.
2. As medical treatment is costly overseas, the premium rates are normallymuch higher compared to domestic health insurance policies.
3. Even among the foreign countries, USA and Canada premium is the highest.
4. Care should be taken to rule out the possibility of a Proposer using the policyto take medical treatment abroad and hence the existence of any preexisting disease must be carefully considered at the proposal stage.**J.** **Underwriting of Personal Accident Insurance**The underwriting considerations for Personal Accident Policies are discussed below:**Rating**In personal accident insurance, the main factor considered is the occupation of the
insured. The risks associated with profession or occupation varies in accordance
with the nature of work performed. For example, an office manager is less exposed
to risk at work than a civil engineer working at a site where a building is being
constructed. To fix a rate, occupations are classified into groups, each group
reflecting, more or less, similar risk exposure.54**Classification of Risk**On the basis of occupation, the risks associated with the insured person may be
classified into three groups:**Risk group I**
Accountants, Doctors, Lawyers, Architects and persons engaged in
administration functions, persons primarily engaged in occupations of similar
hazards.**Risk group II**
Builders, Contractors and Engineers engaged in superintending functions and
persons engaged in occupation of similar hazards. All persons engaged in manual
labour (except those falling under Group III),**Risk group III**
Persons working in underground mines or engaged in activities like racing on
wheels and persons engaged in occupations/ activities of similar hazard.
Risk groups are also known in the form of ‘Normal’, ‘Medium’ and ‘High’
respectively.**Age Limits**General age limits for the working population (employer employee) is 1870.However for students Minimum age could be 5 years too.
The minimum and maximum age for being covered and renewed varies from
company to company.**Family Package Cover**The Personal accident policy also has a family package cover wherein Children and
Non-earning spouse are covered for to death and permanent disablement (total or
partial) only.**Premium Discount in Group Policies**A group discount is allowed off the premium, if the number of insured person
exceeds a certain number say 100. Group policy however may be issued when
number is smaller, say 25 but without any discount.**Group discount criteria**Group policies should be issued only in respect of the named groups. For the purpose
of availing of group discount and other benefits, the proposed “Group” should fall
clearly under one of the following categories, given below:Employer – employee relationship including dependents of the employeeMembers of a registered co-operative societyMembers of registered service clubs- Holders of credit card of banks/ Diners/ Master/ VisaIn case of proposals relating to any further category different from the above
categories, they may be deliberated and decided upon by the technical department | IC 38 -IA- Eng-Health.md | null | Example | IC 38 -IA- Eng-Health_034 | {
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The minimum and maximum age for being covered and renewed varies from
company to company.**Family Package Cover**The Personal accident policy also has a family package cover wherein Children and
Non-earning spouse are covered for to death and permanent disablement (total or
partial) only.**Premium Discount in Group Policies**A group discount is allowed off the premium, if the number of insured person
exceeds a certain number say 100. Group policy however may be issued when
number is smaller, say 25 but without any discount.**Group discount criteria**Group policies should be issued only in respect of the named groups. For the purpose
of availing of group discount and other benefits, the proposed “Group” should fall
clearly under one of the following categories, given below:Employer – employee relationship including dependents of the employeeMembers of a registered co-operative societyMembers of registered service clubs- Holders of credit card of banks/ Diners/ Master/ VisaIn case of proposals relating to any further category different from the above
categories, they may be deliberated and decided upon by the technical department
of the respective insurers.55**Premium**Varying rates of premium are applicable to named employees as per the
classification of risks and the benefits selected.**On-duty cover**PA policies may have a cover for both on-duty and off-duty period or for either
separately. The premium is dependent on the Sum Assured, the number of hours of
duty etc. Some employers may like to restrict themselves to cover the duty period
only.**Exclusion of death cover**It is possible to issue group P.A. policies excluding the death benefit, subject to
individual company guidelines.**Group discount and Bonus/ Malus**Rating under renewal of group policies is determined with reference to the claims
experience.Favourable experience is rewarded with a discount in the renewal premium
(bonus)Adverse experience is penalised by loading of renewal premium (malus),
according to a scaleNormal rates will apply for renewal if the claims experience is, say, 70 percent**Test Yourself 5**1) In a group health insurance, any of the individual constituting the group couldanti-select against the insurer.
2) Group health insurance provides coverage only to employer-employee groups.
I. Statement 1 is true and statement 2 is falseII. Statement 2 is true and statement 1 is falseIII. Statement 1 and statement 2 are trueIV. Statement 1 and statement 2 are false**Answers to Test Yourself****Answer 1** **-** The correct option is III.
**Answer 2** **-** The correct option is III.
**Answer 3** **-** The correct option is I.
**Answer 4** **-** The correct option is IV.
**Answer 5** **-** The correct option is IV.56## CHAPTER H-05## HEALTH INSURANCE CLAIMS**Chapter Introduction**In this chapter we will discuss about claim management process in Health Insurance,
claims related procedures and documentation. Apart from this, we will also look
into claims management under Personal Accident Insurance and understand the role
of TPAs.**Learning Outcomes**After studying this chapter, you should be able to:a) Explain the various stakeholders in insurance claims
b) Describe how health insurance claims are managed
c) Discuss the various documents required for settlement of health insuranceclaims
d) Explain how reserves for claims are provided for by insurers.
e) Discuss personal accident claims
f) Understand the concept and role of TPAs57**A.** **Claims Management in Insurance**It is very well understood that insurance is a ‘ **promise’** and the policy is a ‘ **witness’**
to that promise. The occurrence of an insured event leading to a claim under the
policy is the true test of that promise. How well an insurer performs is evaluated by
how well it keeps its claims promises. One of the key rating factors in insurance is
the claims paying ability of the insurance company.**1.** **Stakeholders in claim process**One needs to understand the parties interested in the claims process before looking
at how claims are managed.**Diagram 1:** **Stakeholders in claim process**|Customer|The person who buys insurance is the first stakeholder and<br>‘receiver of the claim’.|
|---|---|
|**Owners**|Owners of the insurance company have a big stake as the ‘payers<br>of the claims’. Even if the claims are met from the policy<br>holders’ funds, in most cases, it is they who are liable to keep<br>the promise.|
|**Underwriters**|Underwriters within an insurance company and across all<br>insurers have the responsibility to understand the claims and<br>design the products, decide policy terms, conditions and pricing<br>etc.| | IC 38 -IA- Eng-Health.md | H-05 | Family Package Cover | IC 38 -IA- Eng-Health_035 | {
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to that promise. The occurrence of an insured event leading to a claim under the
policy is the true test of that promise. How well an insurer performs is evaluated by
how well it keeps its claims promises. One of the key rating factors in insurance is
the claims paying ability of the insurance company.**1.** **Stakeholders in claim process**One needs to understand the parties interested in the claims process before looking
at how claims are managed.**Diagram 1:** **Stakeholders in claim process**|Customer|The person who buys insurance is the first stakeholder and<br>‘receiver of the claim’.|
|---|---|
|**Owners**|Owners of the insurance company have a big stake as the ‘payers<br>of the claims’. Even if the claims are met from the policy<br>holders’ funds, in most cases, it is they who are liable to keep<br>the promise.|
|**Underwriters**|Underwriters within an insurance company and across all<br>insurers have the responsibility to understand the claims and<br>design the products, decide policy terms, conditions and pricing<br>etc.|
|**Regulator**|The regulator (Insurance Regulatory and Development Authority<br>of India) is a key stakeholder in its objective to:<br> Maintain order in the insurance environment<br> Protect policy holders’ interest<br> Ensure long term financial health of insurers.|58|Third Party<br>Administrators|Service intermediaries known as Third Party Administrators,<br>who process health insurance claims.|
|---|---|
|**Insurance**<br>**agents/**<br>**brokers**|Insurance agents/ brokers not only sell policies but are also<br>expected to service the customers in the event of a claim.<br>|
|**Providers/**<br>**Hospitals**|~~They ensure that the customer gets a smooth claim experience,~~<br>especially when the hospital is on the panel of the TPA the<br>Insurer to provide cashless hospitalization.|Thus managing claims well means managing the objectives of the each of these
stakeholders related to the claims. Of course, it may happen that some of these
objectives can conflict with each other.**Reserving:** In many cases, insurance companies may not be able to settle claims
instantly and may have to wait for information or the results of disputes, litigation
etc. So, they have to hold the claim amounts in reserve till the payments are due.
Reserves are usually are actuarial estimates of the amounts that will be paid on
outstanding claims.Reserving refers to the amount of provision made for all claims in the books of the
insurer based on the status of the claims.**Test Yourself 1**Who among the following is not a stakeholder in Health insurance claim process?I. Customers
II. Police Department
III. Regulator
IV. TPA**B.** **Management of Health Insurance Claims****1.** **Claim process in health insurance**A claim may be serviced either by the insurance company itself or through the
services of a Third Party Administrator (TPA) authorized by the insurance company.From the time a claim is made known to the insurer/ TPA to the time the payment
is made as per the policy terms, the health claim passes through a set of welldefined steps, each having its own relevance.The processes detailed below are in specific reference to health insurance
(hospitalization) indemnity products which form the major part of health insurance
business.
The general process and supporting documents for a claim under fixed benefit
product or critical illness or daily cash product etc. would be quite similar, except
for the fact that such products may not come with cashless facility.In both cases of indemnity as well as reimbursement type of claim, the basic steps
remain the same.59**Diagram 2:** **Claim process broadly comprises following steps** (may not be in the
same order)**a)** **Intimation**Claim intimation is the first instance of contact between the customer and theclaims team. The customer could inform the company that he is planning to avail
a hospitalization or the intimation would be made after the hospitalization has
taken place, especially in case of emergency admission to a hospital.60Till recently, the act of intimation of a claim event was a formality. However,
recently insurers have started insisting on the intimation of claim as soon as
practicable. Typically it is required before hospitalization in case of planned
admission, and within 24 hours of hospitalization in case of an emergency.
Intimation is now possible through Mobile Apps/ call centres run by insurers/ | IC 38 -IA- Eng-Health.md | null | Stakeholders in claim process | IC 38 -IA- Eng-Health_036 | {
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business.
The general process and supporting documents for a claim under fixed benefit
product or critical illness or daily cash product etc. would be quite similar, except
for the fact that such products may not come with cashless facility.In both cases of indemnity as well as reimbursement type of claim, the basic steps
remain the same.59**Diagram 2:** **Claim process broadly comprises following steps** (may not be in the
same order)**a)** **Intimation**Claim intimation is the first instance of contact between the customer and theclaims team. The customer could inform the company that he is planning to avail
a hospitalization or the intimation would be made after the hospitalization has
taken place, especially in case of emergency admission to a hospital.60Till recently, the act of intimation of a claim event was a formality. However,
recently insurers have started insisting on the intimation of claim as soon as
practicable. Typically it is required before hospitalization in case of planned
admission, and within 24 hours of hospitalization in case of an emergency.
Intimation is now possible through Mobile Apps/ call centres run by insurers/
TPAs open 24 hours as well as through the internet and e-mail.**b)** **Registration**Once the intimation is received by the company directly or through the TPA, the
details thereof are matched for accuracy and a reference number or claim
control number generated and intimated to the claimant. The documents are
then scrutinized for prima facie coverage and pre-authorisation of likely
expenditure is given to the Hospital in case the intimation is of a planned surgery
under the Cash-less scheme (detailed in subsequent section).The claims that come for the final settlement on the reimbursement basis arescrutinized in detail about admissibility, sum assured, deductibles, sub-limits
etc. In case of deficiency in documents the same has to be communicated
together, not in piecemeal. It is worth knowing that the claim processing
involves not only ensuring that the terms of the contract have to be fulfilled,
but also in ensuring that the Hospitals do not indulge in overcharging, doublecharging etc.**Example**Hospitalization is typically associated with Allopathic method of treatment.
However, the patient could undergo other modes of treatment such as: Unani
Siddha
Homeopathy
Ayurveda
Naturopathy etc.Most policies now include these treatments, however there could be sub-limits.**Telemedicine:** IRDAI has asked insurers to allow telemedicine wherever regular
medical consultation is allowed, in the terms and conditions of medical insurance
policies.This will help policy holders who may prefer to consult medical practitioners online
or telephonically to avoid going out of their homes or if they are in quarantine
themselves due to the coronavirus infection.**Arriving at the final claim payable:** The factors that decide the claim amount
payable are:a) Sum insured available for the member under the policyb) Balance sum insured available under the policy for the member after takinginto account any claim made already:61c) Sub-Limitsd) Check for any limits specific to illnesse) Check whether entitled or not to cumulative bonusf) Other expenses covered with limitation:What are finally paid are the Reasonable and Customary Charges meaning the
charges for services or supplies, which are the standard charges for the specific
provider and consistent with the prevailing charges in the geographical area for
identical or similar services, taking into account the nature of the illness/ injury
involved.Earlier every TPA/ insurer had its own list of non-payable items, now the same
has been standardized under IRDAI Health Insurance Standardization Guidelines.**c)** **Payment of claim**Once the payable claim amount is arrived at, payment is done to the customer
or the hospital as the case may be. The payment may be made either by cheque
or by transferring the claim money to the customer’s bank account.**d)** **Denial of claims**The experience in health claims show that 10% to 15% of the claims submitted
do not fall within the terms of the policy. This could be because of a variety of
reasons some of which are:i. Date of admission is not within the period of insurance.ii. The Member for whom the claim is made is not covered.iii. Due to Pre-existing illness (where the policy excludes such condition).
iv. Undue delay in submission without valid reason.
v. No active treatment; admission is only for investigation purpose.
vi. Illness treated is excluded under the policy.
vii. The cause of illness is abuse of alcohol or drugs | IC 38 -IA- Eng-Health.md | null | Diagram 2: | IC 38 -IA- Eng-Health_037 | {
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involved.Earlier every TPA/ insurer had its own list of non-payable items, now the same
has been standardized under IRDAI Health Insurance Standardization Guidelines.**c)** **Payment of claim**Once the payable claim amount is arrived at, payment is done to the customer
or the hospital as the case may be. The payment may be made either by cheque
or by transferring the claim money to the customer’s bank account.**d)** **Denial of claims**The experience in health claims show that 10% to 15% of the claims submitted
do not fall within the terms of the policy. This could be because of a variety of
reasons some of which are:i. Date of admission is not within the period of insurance.ii. The Member for whom the claim is made is not covered.iii. Due to Pre-existing illness (where the policy excludes such condition).
iv. Undue delay in submission without valid reason.
v. No active treatment; admission is only for investigation purpose.
vi. Illness treated is excluded under the policy.
vii. The cause of illness is abuse of alcohol or drugs
viii. Hospitalization is less than 24 hours.Denial or repudiation of a claim (due to whatever reason) has to be informed to
the customer in writing by the insurance company. Usually, such denial letter
clearly states the reason for denial, narrating the policy term/ condition on which
the claim was denied.Apart from the representation to the insurer, the customer has the option to
approach the following in case of denial of claim: Insurance Ombudsman or The Consumer Commissions or IRDAI or Law courts.**e)** **Suspect claims require more detailed investigation by the companies/****TPAs**
Wherever the insurance company suspects foul-play it can get claims
investigated. A few examples of frauds committed in health insurance are:62i. Impersonation, the person insured is different from person treated.
ii. Fabrication of documents to make a claim where there is no hospitalization.
iii. Inflation of expenses, either with the help of the hospital or by addition ofexternal bills fraudulently created.
iv. Outpatient treatment converted to in-patient/ hospitalization to cover costof diagnosis, which could be high in some conditions.It is to be noted that in respect of claims that need to be investigated,
investigations shall be initiated and completed at the earliest, in any case not
later than 90 days from the date of receipt of claim intimation. The claim should
be settled within 30 days of completing the investigation. (Pl refer to IRDAI
(Protection of policyholder’s), 2017 Regulations and updated accordingly)**f)** **Cashless settlement process by TPA**How does the cashless facility work? At the heart of this is an agreement that
the TPA insurer enters into, with the hospital. There are agreements possible
with other medical service providers as well. The process used for providing
cashless facility are discussed in this section:|ble 3.1|Col2|
|---|---|
|**Step 1**| A customer covered under health insurance suffers from an illness or<br>sustains an injury and so is advised admission into a hospital. He/ she (or<br>someone on his/ her behalf) approaches the hospital’s insurance desk<br>with the insurance details such as:<br>i. TPA name,<br>ii. Customer’s membership number,<br>iii. Insurer’s name, etc.|
|**Step 2**| The hospital compiles the necessary information such as:<br>i. Diagnosis of illness<br>ii. Treatment,<br>iii. Name of treating doctor,<br>iv. Number of days of proposed hospitalization and<br>v. The estimated cost<br> This is presented in a format, called the cashless authorization form.<br>|
|**Step 3**|~~~~ The TPA studies the information provided in the_cashless authorization_<br>_form_ and takes a decision on whether the cashless authorization could be<br>provided and if so, for how much amount it should be authorized and it<br>is communicated to the hospital without delay.|
|**Step 4**| The patient is treated by the hospital, keeping the amount authorized by<br>the TPA as credit in the patient’s account. The member may be called on<br>to make a deposit payment to cover the non-treatment expenses and any<br>co-pay required under the policy.<br>| | IC 38 -IA- Eng-Health.md | l2 | Payment of claim | IC 38 -IA- Eng-Health_038 | {
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|**Step 2**| The hospital compiles the necessary information such as:<br>i. Diagnosis of illness<br>ii. Treatment,<br>iii. Name of treating doctor,<br>iv. Number of days of proposed hospitalization and<br>v. The estimated cost<br> This is presented in a format, called the cashless authorization form.<br>|
|**Step 3**|~~~~ The TPA studies the information provided in the_cashless authorization_<br>_form_ and takes a decision on whether the cashless authorization could be<br>provided and if so, for how much amount it should be authorized and it<br>is communicated to the hospital without delay.|
|**Step 4**| The patient is treated by the hospital, keeping the amount authorized by<br>the TPA as credit in the patient’s account. The member may be called on<br>to make a deposit payment to cover the non-treatment expenses and any<br>co-pay required under the policy.<br>|
|**Step 5**|~~~~ When the patient is ready for discharge, the hospital checks the amount<br>of credit in the account of the patient approved by the TPA against the<br>actual treatment charges covered by insurance.<br> If the credit is less, the hospital requests for additional approval of credit<br>for the cashless treatment.<br> TPA analyses the same and approves the additional amount.<br>|
|**Step 6**|~~~~ Patient pays the non-admissible charges and gets discharged. He will be<br>asked to sign the claim form and the bill, to complete the documentation.|63|Step 7| Hospital consolidates all the documents and presents to the TPA the<br>documents for processing of the bill|
|---|---|
|**Step 8**|~~~~ TPA will process the claim and recommend for payment to the hospital<br>after verifying details.|**g)** **Customer must make sure that he/ she has his/ her insurance details with****him/ her.**This includes his TPA card, Policy copy, Terms and conditions of cover etc.When these are not available, he can contact the TPA (through a 24 hour
helpline) and seek the details.i. Customer must check if the hospital suggested by his/ her consulting doctoris in the network of the TPA. If not, he needs to check with the TPA the
options available where cashless facility for such treatment is available.ii. He/ she needs to make sure that the correct details are entered into thepre-authorization form. This form has been standardized by IRDAI as per
Guidelines on Standardization in Health Insurance issued in 2013. If the case
is not clear, the TPA could deny the cashless facility or raise query.iii. He/ she needs to ensure that the hospital charges are consistent with thelimits such as room rent or caps on specified treatments such as cataract.iv. The customer must inform the TPA in advance of the discharge and requestthe hospital to send to the TPA any additional approval that may be required
before discharge. This will ensure the patient does not wait unnecessarily at
the hospital.It is also possible that the customer requests and takes an approval for cashless
treatment at a hospital but decides to admit the patient elsewhere. In such
cases, the customer must inform and ask the hospital to communicate to the
TPA that the cashless approval is not being used.If this is not done, the amount approved could get blocked in the customer’s
policy and could prejudice the approval of the subsequent request.**C.** **Documentation in Health Insurance Claims**This section explains the need for and content of each of the documents required
to be submitted by the customers:**1.** **Discharge summary**Discharge summary can be termed as the most important document that is required
to process a health insurance claim. It details the complete information about the
condition of the patient and the line of treatment and helps the claim processing
person immensely to understand the illness/ injury and the line of treatment. Where
the patient unfortunately does not survive, the discharge summary is termed **Death**
**Summary** in many hospitals. The discharge summary is always sought in original.**2.** **Investigation reports**Investigation reports assist in comparing the diagnosis and the treatment, thereby
providing the necessary information to understand the exact condition that64prompted the treatment and the progress made during the hospitalization for e.g.
Blood test reports, X-ray reports and Biopsy reports. The insurer may return the Xray and other films to the customer on specific request.**3.** **Consolidated and detailed bills:**This is the document that decides what needs to be paid under the insurance policy. | IC 38 -IA- Eng-Health.md | t64 | Step 2 | IC 38 -IA- Eng-Health_039 | {
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policy and could prejudice the approval of the subsequent request.**C.** **Documentation in Health Insurance Claims**This section explains the need for and content of each of the documents required
to be submitted by the customers:**1.** **Discharge summary**Discharge summary can be termed as the most important document that is required
to process a health insurance claim. It details the complete information about the
condition of the patient and the line of treatment and helps the claim processing
person immensely to understand the illness/ injury and the line of treatment. Where
the patient unfortunately does not survive, the discharge summary is termed **Death**
**Summary** in many hospitals. The discharge summary is always sought in original.**2.** **Investigation reports**Investigation reports assist in comparing the diagnosis and the treatment, thereby
providing the necessary information to understand the exact condition that64prompted the treatment and the progress made during the hospitalization for e.g.
Blood test reports, X-ray reports and Biopsy reports. The insurer may return the Xray and other films to the customer on specific request.**3.** **Consolidated and detailed bills:**This is the document that decides what needs to be paid under the insurance policy.
While the consolidated bill presents the overall picture, the detailed bill will provide
the break up, with reference codes. The bills have to be received in original.**4.** **Receipt for payment**The reimbursement of a health insurance claim will also require the formal receipt
from the hospital of the amount paid which must correspond to the total of the bill.The receipt should be numbered and or stamped and be presented in original.**5.** **Claim form**Claim form is the formal and legal request for processing the claim and is submitted
in original signed by the customer. The claim form has now been standardized by
IRDAI.Besides information on disease, treatment etc., the declaration the insured person
makes in the claim form is the most important document in the legal sense.**6.** **Identity proof**With the increasing use of identity proof across various activities in our life, the
general Proof of identity helps in verifying whether the person covered and the
person treated are one and the same. Usually identification document which is
sought could be voters’ identity card, driving license, PAN card, Aadhaar card etc.**7.** **Documents contingent to specific claims**There are certain types of claims that require additional documents apart from what
has been stated above. These are:a) Accident claims, where FIR or Medico-legal certificate issued by the hospitalto the registered police station, may be required.b) Case indoor papers in case of complicated or high value claims.c) Dialysis/ Chemotherapy/ Physiotherapy charts where applicable.d) Hospital registration certificate, where the compliance with the definitionof hospital needs to be checked**Test Yourself 2**Which of the following document is maintained at the hospital detailing all
treatment done to an in-patient?I. Investigation reportII. Discharge summaryIII. Case paperIV. Hospital registration certificate65**Test Yourself 3**The amount of provision made for all claims in the books of the insurer based on
the status of the claims is known as ________.I. Pooling
II. Accounting
III. Reserving
IV. Investing**D.** **Role of Third Party Administrators (TPA)**The Role of TPA has been discussed in earlier chapters too. It is important to know
the services offered by TPA so that the customer can be provided suitable services
by the salesperson.The scope of TPA services starts after the sale and issue of the insurance policy. In
case of insurers not using TPAs, the services are performed by in-house team.**1.** **Post sale service of health insurance**a) Once the proposal (and the premium) is accepted, the coverage commences.
b) If a TPA is to be used for servicing the policy, the insurer passes on theinformation about the customer and the policy to the TPA.
c) The TPA enrols the members (while the proposer is the person taking thepolicy, members are those covered under the policy) and may issue a
membership identification in the form of a card, either physical or
electronic.
d) The membership with the TPA is used for availing cashless facility as well asprocessing of claims when the member requires the support of the policy for
a hospitalization or treatment that is covered.
e) TPA processes the claim or cashless request and provides the services withinthe time agreed with the insurer.
f) The insured persons must carry an Identity Card that relates them to thepolicy and the TPA.
g) TPA issues a pre-authorization or a Letter of Guarantee to the hospital basedon the information provided for requesting the cashless facility. | IC 38 -IA- Eng-Health.md | t64 | C. | IC 38 -IA- Eng-Health_040 | {
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case of insurers not using TPAs, the services are performed by in-house team.**1.** **Post sale service of health insurance**a) Once the proposal (and the premium) is accepted, the coverage commences.
b) If a TPA is to be used for servicing the policy, the insurer passes on theinformation about the customer and the policy to the TPA.
c) The TPA enrols the members (while the proposer is the person taking thepolicy, members are those covered under the policy) and may issue a
membership identification in the form of a card, either physical or
electronic.
d) The membership with the TPA is used for availing cashless facility as well asprocessing of claims when the member requires the support of the policy for
a hospitalization or treatment that is covered.
e) TPA processes the claim or cashless request and provides the services withinthe time agreed with the insurer.
f) The insured persons must carry an Identity Card that relates them to thepolicy and the TPA.
g) TPA issues a pre-authorization or a Letter of Guarantee to the hospital basedon the information provided for requesting the cashless facility.
h) Where the information is not clear or not available, the TPA may reject thecashless request. In such cases the claim could be examined on
reimbursement basis.**2.** **Customer relationship and contact management**Since TPAs are involved in claims servicing, they usually have a grievance redressal
mechanism themselves.**E.** **Claims Management – Personal Accident**On receipt of the notification of the claim the following aspects should be looked
into:a) Person in respect of whom the claim is made is covered under the policy
b) Policy is valid as on date of accident and premium has been received
c) Loss is within the policy period66d) Loss has arisen out of “Accident” and not sickness
e) Check for any fraud triggers and assign investigation if need be
f) Register the claim and create reserve for the same
g) Maintain the turnaround time (claim servicing time) and keep the customerinformed of the development of the claim.**1.** **Claims Investigation**Claims Investigation is about determining the validity of the claim and finding out
the real cause and extent of the loss. On receipt of the claim documents, if a claim
appears suspicious, the claim may be assigned to an internal/ professional
investigator for verification.**Example**Example of case guideline:
**Road traffic accident**i. When did the incident take place – exact time and date place? Date and time
ii. Was the insured a pedestrian, traveling as passenger/ pillion rider or drivingthe vehicle involved in accident?**Some examples of possible fraud and leakage in personal accident claims:**i. Exaggeration in TTD period.
ii. Illness presented as accident e.g. backache due to pathological reasonsconverted into a PA claim after reported ‘fall/ slip’ at home
Discharge voucher is an important document for settlement of personal accident
claim, especially those involving death claims. It is also important to obtain nominee
details at the time of proposal and the same should form part of policy document.
**2.** **Claim documentation- Each company gives a list**a) Duly completed Personal Accident claim form signed by the claimant’s
nominee/ family member
b) Original or Attested copy of First Information Report.
c) Original or Attested copy of Death certificate.
d) Attested copy of Post Mortem Report if conducted.
e) Attested copy of AML documents (Anti-money laundering) - for name
verification (passport/ PAN card/ Voter's ID/ Driving license) for address
verification (Telephone bill/ Bank account statement, Electricity bill/ Ration
card).
f) Legal heir certificate containing affidavit and indemnity bond both dulysigned by all legal heirs and notarized
g) Permanent disability certificate from a civil surgeon or any equivalentcompetent doctors certifying the disability of the insured.
h) Medical certificate from treating doctor mentioning the type of disabilityand disability period. Leave certificate from employer giving details of exact
leave period, duly signed and sealed by the employer.
The above list is only indicative, further documents (including photographs of scar
marks, site of accident etc.) may be required depending on particular facts of the
case, especially the cases with suspected fraud angle to be investigated.67**Test Yourself 4**Which of the following documents are not required to be submitted for Permanent
Total Disability claim?
I. Duly completed Personal Accident claim form signed by the claimant.
II. Copy of Insurance Policy.
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verification (passport/ PAN card/ Voter's ID/ Driving license) for address
verification (Telephone bill/ Bank account statement, Electricity bill/ Ration
card).
f) Legal heir certificate containing affidavit and indemnity bond both dulysigned by all legal heirs and notarized
g) Permanent disability certificate from a civil surgeon or any equivalentcompetent doctors certifying the disability of the insured.
h) Medical certificate from treating doctor mentioning the type of disabilityand disability period. Leave certificate from employer giving details of exact
leave period, duly signed and sealed by the employer.
The above list is only indicative, further documents (including photographs of scar
marks, site of accident etc.) may be required depending on particular facts of the
case, especially the cases with suspected fraud angle to be investigated.67**Test Yourself 4**Which of the following documents are not required to be submitted for Permanent
Total Disability claim?
I. Duly completed Personal Accident claim form signed by the claimant.
II. Copy of Insurance Policy.
III. Permanent disability certificate from a civil surgeon or any equivalentcompetent doctors certifying the disability of the insured.
IV. Fitness certificate from the treating doctor certifying that the insured is fit toperform his normal duties.**F.** **Claims Management- Overseas Travel Insurance**The coverage under this policy has already been discussed under the product
chapter. This section tries to explain how the claims arising during overseas travel
are handled.
**Claims services essentially include:**a) Taking down the claim notification 24*7 basis;
b) Sending the claim form and procedure;
c) Guiding customer on what to do immediately after loss;
d) Extending cashless services for medical and sickness claims;
e) Arranging for repatriation and evacuation, emergency cash advance.
**Assistance companies – Role in overseas claims**
Assistance companies have their own offices and tie up arrangements with other
similar service providers world over. These companies offer assistance to the
customers of insurance companies in case of contingencies covered under the
policy.
These companies operate a 24*7 call centre including international toll free numbers
for claim registration and information. They also offer the following services and
charges for the services vary depending on agreement with the particular insurance
company, benefits covered etc.a) Medical assistance services:
i. Medical service provider referrals
ii. Arrangement of hospital admission
iii. Arrangement of Emergency Medical Evacuation
iv. Arrangement of Emergency Medical Repatriation
v. Mortal remains repatriation
vi. Compassionate visit arrangements
vii. Minor children assistance/ escort
b) Monitoring of Medical Condition during and after hospitalisation
c) Delivery of Essential Medicines
d) Guarantee of Medical Expenses Incurred during hospitalization subject to
terms and condition of the policy and approval of insurance company.
e) Pre-trip information services and other services:
i. Visas and inoculation requirements
ii. Embassy referral services
iii. Lost passport and lost luggage assistance services
iv. Emergency message transmission services
v. Bail bond arrangement
vi. Financial Emergency Assistance68f) Interpreter Referral
g) Legal Referral
h) Appointment with lawyer
**a)** **Hospitalization Procedures**i. Most hospitals accept Guarantee of Payments from all international insurancecompanies once the insured provides them with a valid health or overseas
travel insurance policy.ii. Hospitals start the treatment immediately. If there is insurance cover theinsurance policy pays or the patient person has to pay. The hospitals tend to
inflate charges since payments are delayed.iii. Information regarding network hospitals and the procedures is available tothe insured on the toll free numbers provided by the assistance companies.iv. In event of the necessity of a hospitalization the insured needs to intimatethe same at the call centre and proceed to a specified hospital with the valid
travel insurance policy.v. Hospitals usually contact the assistance companies/ insurers on the callcentre numbers to check the validity of the policy and verify coverages.vi. Once the policy is accepted by the hospital the insured would undergotreatment in the hospital on a cashless basis.vii. Some basic information required by the insurer/ assistance provider todetermine admissibility are:1. Details of ailment2. In case of any previous history,details of hospital, local medical officer inIndia: Past history, current treatment and further planned course in hospitaland request for immediate sending of
Claim form along with attending physicians statement
Passport copy
Release of medical information form**b)** **Reimbursement of medical expenses and other non-medical claims:**Reimbursement claims are normally filed by insured after they return to
India. Upon receipt of the claim papers, claim is processed as per usual
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travel insurance policy.v. Hospitals usually contact the assistance companies/ insurers on the callcentre numbers to check the validity of the policy and verify coverages.vi. Once the policy is accepted by the hospital the insured would undergotreatment in the hospital on a cashless basis.vii. Some basic information required by the insurer/ assistance provider todetermine admissibility are:1. Details of ailment2. In case of any previous history,details of hospital, local medical officer inIndia: Past history, current treatment and further planned course in hospitaland request for immediate sending of
Claim form along with attending physicians statement
Passport copy
Release of medical information form**b)** **Reimbursement of medical expenses and other non-medical claims:**Reimbursement claims are normally filed by insured after they return to
India. Upon receipt of the claim papers, claim is processed as per usual
process. Payments for all admissible claims are made in Indian Rupee (INR),
unlike in cashless claims where payment is made in foreign currency.While processing the reimbursement claims, currency conversion rate is
applied as on date of loss to arrive at quantum of liability in INR. Then the
payment is made though cheque or electronic transfer.**c)** **Claim documentation for Medical Accident and Sickness Expenses**i. Claim formii. Doctor’s reportiii. Original Admission/ discharge card69iv. Original Bills/ Receipts/ Prescriptionv. Original X-ray reports/ Pathological/ Investigative reportsvi. Copy of passport/ Visa with Entry and exit stampThe above list is only indicative. Additional information/ documents may be
required depending on specific case details or depending upon claim settlement
policy/ procedure followed by particular insurer.**Test Yourself 5**Most hospitals accept Guarantee of Payments from all international insurance
companies once the insured provides them with a valid __________ Insurance policy.I. Legal Liability
II. Corona RakshakIII. Overseas TravelIV. Endowment**Answers to Test Yourself****Answer 1** - The correct option is II.
**Answer 2** - The correct option is II.
**Answer 3** - The correct option is III.
**Answer 4** - The correct option is IV.
**Answer 5** - The correct option is III.**Summary**a) Insurance is a ‘promise’ and the policy is a ‘witness’ to that promise. Theoccurrence of insured event leading to a claim under the policy is the true test
of that promise.b) One of the key rating parameter in insurance is the claims paying ability of theinsurance company.c) Customers, who buys insurance is the primary stakeholder as well as the receiverof the claim.d) In Cashless claim a network hospital provides the medical services based on apre-approval from the insurer/ TPA and later submits the documents for
settlement of the claim.e) In reimbursement claim, the customer pays the hospital from his own resourcesand then files claim with Insurer/ TPA for payment.f) Claim intimation is the first instance of contact between the customer and theclaims team.g) If a fraud is suspected by insurance company in case of insurance claim, it issent for investigation. Investigation of a claim could be done in-house by an
insurer/ TPA or be entrusted to a professional investigation agency.h) Reserving refers to the amount of provision made for all claims in the books ofthe insurer based on the status of the claims.70i) In case of a denial, the customer has the option, apart from the representationto the insurer, to approach the Insurance Ombudsman or the consumer
Commissions or even the legal authorities.j) Frauds occur mostly in hospitalization indemnity policies but Personal accidentpolicies also are used to make fraud claims.k) The TPA provides many important services to the insurer and gets remuneratedin the form of fees.71 | IC 38 -IA- Eng-Health.md | t2 | Reimbursement of medical expenses and other non-medical claims: | IC 38 -IA- Eng-Health_043 | {
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## IC - 38 **INSURANCE AGENTS** **LIFE****ACKNOWLEDGEMENT****This course is based on revised syllabus prescribed by Insurance Regulatory and**
**Development Authority of India (IRDAI) and prepared by Insurance Institute of**
**India, Mumbai.****AUTHORS/ REVIEWERS (in Alphabetical order)**Dr. R. K. Duggal
Dr. Shashidharan K. Kutty
CA P. Koteswara Rao
Dr. Pradip Sarkar
Prof. Madhuri Sharma
Dr. George E. Thomas
Prof. Archana VazeG – Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.i## INSURANCE AGENTS **LIFE** **IC - 38****Year of Edition: 2023****ALL RIGHTS RESERVED**This course material is the copyright of Insurance Institute of India (III). This course
is designed for providing academic inputs for students appearing for the
examinations of Insurance Institute of India. This course material may not be
reproduced for commercial purpose, in part or whole, without prior express written
permission of the Institute.The contents are based on prevailing best practices and not intended to give
interpretations or solutions in case of disputes, legal or otherwise.This is only an indicative study material. Please note that the questions in the
examination shall not be confined to this study material only.Published by: Secretary General, Insurance Institute of India, G- Block, Plot C-46,
Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and Printed atAny communication regarding this study material may be addressed to ctd@iii.org.in
mentioning the subject title and unique publication number mentioned on the coverpageii## PREFACEInsurance Institute of India, (the Institute) has developed this course material for
Insurance Agents based on the syllabus prescribed by Insurance Regulatory and
Development Authority of India (IRDAI). Industry experts were involved in preparingthe course material.The course provides basic knowledge of Life, General and Health insurance to
enable agents in the respective line of business to understand and appreciate their
professional career in the right perspective.The course is structured as four sections. (1) Overview - a Common section that
covers Insurance Principles, Legal Principles and Regulatory matters that Insurance
agents need to know. Separate sections are provided for those aspiring to become
(2) Life Insurance Agents, (3) General Insurance Agents and (4) Health Insurance
Agents.A set of model questions are included in the course to give students an idea of the
examination format and the types of objective questions that may be asked. The
model questions will also help them in revising what they have learnt.Insurance operates in a dynamic environment. Agents need to be up to date about
changes in the market. They should actively pursue knowledge through personal
study and participation in the in-house training programmes arranged by the
respective insurers.The Institute thanks IRDAI for entrusting this work to the Institute. The Institute
wishes all interested in studying the material a successful career in insurance
marketing.iii## CONTENTS|Chapter no.|Title|Page no.|
|---|---|---|
|**SECTION**|**LIFE INSURANCE **|**LIFE INSURANCE **|
|L-01|What Life Insurance Involves|2|
|L-02|Financial Planning|8|
|L-03|Life Insurance Products: Traditional|22|
|L-04|Life insurance products: Non-Traditional|32|
|L-05|Applications of Life Insurance|38|
|L-06|Pricing and Valuation in Life Insurance|43|
|L-07|Life Insurance Documentation|52|
|L-08|Life Insurance Underwriting|65|
|L-09|Life Insurance Claims <br>|78|iv## SECTION## LIFE INSURANCE1## 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**2**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 | IC 38 -IA-Eng-Life.md | C-46 | INSURANCE AGENTS | IC 38 -IA-Eng-Life_000 | {
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|L-05|Applications of Life Insurance|38|
|L-06|Pricing and Valuation in Life Insurance|43|
|L-07|Life Insurance Documentation|52|
|L-08|Life Insurance Underwriting|65|
|L-09|Life Insurance Claims <br>|78|iv## SECTION## LIFE INSURANCE1## 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**2**A.** **Life insurance business – Components, human life value, mutuality****a)** **The Asset – Human Life Value (HLV)**We have already seen that an asset is a kind of property that yields value or a return.
For most kinds of property both the value and loss of value amounts can be measured
in precise monetary terms.**Example**If the estimated damage of a car meeting an accident is Rs 50000, the insurer will
compensate the owner for this loss.How do we estimate the amount of loss when a person dies?Is he worth Rs. 50,000 or Rs. 5,00,000?An Agent must be able to answer the above question when meeting a customer.
Based on this the agent can determine how much insurance to recommend to the
customer. It is in fact the first lesson a life insurance agent must learn.Luckily we have a measure, developed almost seventy years ago by Prof. Hubener.
It is known as **Human Life Value (HLV)** and is used worldwide.The HLV concept considers human life as a kind of property or asset that earns an
income. It thus measures the value of human life based on an individual’s expected
net future earnings. Net earnings means the income a person expects to earn each
year in the future, less the amount he would spend on himself. It thus indicates the
economic loss a family would suffer if the wage earner were to die prematurely.
These earnings are capitalised, using an appropriate interest rate to discount them.Although there are multiple parameters used to calculate HLV including taking into
account inflation, wage rise, future earning capacity etc., a simple thumb rule to
calculate HLV is to determine the amount that would generate the annual income
the family would be needing by way of interest. In other words HLV is the annual
contribution for the family by the breadwinner divided by the prevailing rate of
interest.**Example**Mr. Rajan earns Rs. 1,20,000 a year and spends Rs. 24,000 on himself. The net
earnings his family would lose, were he to die prematurely, would be Rs. 96,000 per
year. Suppose the rate of interest is 8% (expressed as 0.08).**Human-Life-Value (HLV) = Annual Contribution for Dependents ÷ Rate of****Interest**HLV = 96000/ 0.08 = Rs. 12,00,000HLV 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.3In 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| | IC 38 -IA-Eng-Life.md | L-05 | Chapter Introduction | IC 38 -IA-Eng-Life_001 | {
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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, the<br>insurer assesses the exact amount of loss<br>that has occurred and compensates only<br>that amount of loss – no more, no less.| **Assurance:** Life insurance policies are<br>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.|
| 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| There is no such question Death is<br>certain once a person is born. What is|4|uncertain. No one can be certain about<br>whether a house would catch fire or a car<br>meet an accident.|uncertain is the time of death. Life<br>insurance offers protection against<br>the risk of premature death.|
|---|---|
| Increase in probability: In case of General<br>insurance perils like fire or earthquake,<br>the probability of happening of the event<br>does not increase with 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**Level premiums are required because life insurance contracts are long term
insurance contracts that run for 10, 20 or many more years. The concept of level
premiums, do not arise for general insurance policies, which are typically short term
and expire annually.5**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 | IC 38 -IA-Eng-Life.md | null | B. | IC 38 -IA-Eng-Life_002 | {
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claims of those dying at higher ages. The level premium is an average of both. The
excess premiums of earlier ages compensate for the deficit of premiums in later
ages. The level premium feature is illustrated below.**Diagram 2:** **Level Premium**Level premiums are required because life insurance contracts are long term
insurance contracts that run for 10, 20 or many more years. The concept of level
premiums, do not arise for general insurance policies, which are typically short term
and expire annually.5**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 responsibilityiv. 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 of theinsured’s bankruptcy or death.6**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 life insuranceis subject to stringent regulation and strict supervision.**Key Terms**1. Asset2. Human Life Value3. Level premium4. Mutuality5. Diversification**Answers to Test Yourself****Answer 1** - The correct answer is II.7## 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
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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 life insuranceis subject to stringent regulation and strict supervision.**Key Terms**1. Asset2. Human Life Value3. Level premium4. Mutuality5. Diversification**Answers to Test Yourself****Answer 1** - The correct answer is II.7## 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**8**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**9**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 of oneor 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 that theoffspring have flown away leaving the nest [the household] empty.This
is the period when children have married and sometimes have migrated
to other places for work, leaving the parents.Hopefully by this stage,
one has liquidated one’sliabilities [like housing loan and other
mortgages] and has built up a fund for reirement.It is also the period
when ailments like BP and Diabetes begin to manifest and plague one’s
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concerned about the high cost of education to make the child qualified
to face the challenges of life.For instance, consider the amount that
needs to be set up to finance a medical course that runs for five years.In
many Indian homes, making provision for marriage and settlement of
girl children is a critical area of concern.Indeed, marriage and
education of children is a prime motive for savings for most Indian
families today.**f)** **Empty Nester(age 55 to 65):** The term ‘empty nester’ implies that theoffspring have flown away leaving the nest [the household] empty.This
is the period when children have married and sometimes have migrated
to other places for work, leaving the parents.Hopefully by this stage,
one has liquidated one’sliabilities [like housing loan and other
mortgages] and has built up a fund for reirement.It is also the period
when ailments like BP and Diabetes begin to manifest and plague one’s
life.Health care,financial independence and security of income become
very important at this stage.**g)** **Retirement – the twilight years (age 60 and beyond):** The age 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.10As we can see above, the economic life cycle has three phases: a student or Pre –
job phase; the working phase that begins between ages 18 to 25 and lasts for 35 to
40 years; and the retirement years that begin after one has stopped working.**3.** **Why does one need to save and purchase various financial assets?**The reason is that during each stage in an individual’s life, when one performs a
particular role, a number of needs come up for which funds have to be provided.**Example**When a person gets married and starts a family of his own, he may need to have his
own house. As children grow older, funds are needed for their higher education. As
an individual goes well past middle age, the concern is for having money to meet
health costs and post retirement savings so that one does not need to depend on
one’s children and become a burden. Living with independence and dignity becomes
important.The Savings – Investment process may be considered as being made of two decisions.**i.** **Postponement of consumption:** an allocation of resources between present andfuture 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.a) **Enabling future transactions**The first set of needs arise from funds for meeting a range of anticipated
expenditures that are expected to arise at different stages of the life cycle.
There are two types of such needs:**i.** **Specific transaction needs** : that are linked to specific life events 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 these11events, 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
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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 these11events, 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 one<br>to have adequate purchasing power (liquidity) at the right<br>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 of<br>such products. Here the investment is made with a view to<br>committing money for making more money.|An individual would typically have a mix of all of the above needs and thus may
need to have all three types of products. In a nutshell one may say there is:i. A need to save – For cash 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.12**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. Debentures**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.13**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 | IC 38 -IA-Eng-Life.md | e11 | Specific transaction needs | IC 38 -IA-Eng-Life_006 | {
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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.13**Diagram 4:** **Elements of Financial Planning****2.** **Role of Financial planning**Financial planning is not a new discipline. It was practiced in simple form by our
fore fathers. There were limited investment options then. A few decades ago many
considered equity investment as akin to gambling. Savings were largely channelled
in bank deposits, postal savings schemes and other fixed income instruments. The
challenges facing our society and our customers are far different today. Some of
them are:**i.** **Disintegration of the joint family**The joint family has given way to the nuclear family, consisting of father,
mother and children. The typical head and earning member of this family has to
bear the responsibility for taking care of oneself and one’s immediate family.
This may call for a lot of proper planning and advice from a professional financial
planner.**ii.** **Multiple investment choices**A large number of investment instruments are available today for wealth
creation, each offering varying degrees of risk and return. To achieve financial
goals, one has to choose wisely and make the right investment decisions based
on one’s risk taking appetite. Financial planning can help with one’s asset
allocation.**iii.** **Changing lifestyles**Instant pleasure seems to be the order of the day. Individuals want to have the
latest mobile phones, cars, large homes, memberships of prestigious clubs, etc.
To satisfy these desires, people often borrow heavily and spend a good part of
their income to pay off loans, leaving little scope to save. Financial planning
helps to plan and one’s expenditure so that one can cut down unnecessary
expenses so as to maintain one’s present standard of living while upgrading it
over time.**iv.** **Inflation**Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. This leads to a fall in the value of money. As a
result, the purchasing power of money gets reduced. Inflation can play havoc14post retirement. Financial planning can help to ensure that one is equipped to
deal with inflation, especially in later years.**v.** **Other contingencies and needs**Financial planning also enables individuals to meet a number of other needs and
challenges like medical emergencies and tax liabilities. Individuals also need to
ensure that their estate consisting of their wealth and properties, smoothly pass
on to their loved ones after their death. There are other needs like the need to
do charity or meet certain social and religious obligations during one’s lifetime
and even thereafter. Financial planning is the means to achieve all this.3. **When is the right time to start financial planning?****Financial planning** is not meant only for the wealthy. Indeed, Planning should
ideally start one earns one’s first salary. There is no trigger point to tell when one
should begin to plan.**There is however an important principle that should guide us – the longer the**
**time period of our investments, the more they will multiply.**Hence one should start early. One’s investments would then get the maximum
benefit of time. Again, planning is not only for wealthy individuals. It is for
everyone. To achieve one’s financial goals, one must follow a disciplined approach.
An unplanned, impulsive approach to financial planning is one of the prime causes
of financial distress of individuals.**Test Yourself 2**When is the best time to start financial planning?I. Post retirement
II. As soon as one gets his first salary
III. After marriage
IV. Only after one gets rich**C.** **Financial planning - Types**Let us now look at the various types of financial planning exercises that an individual
may need to do.15**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
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An unplanned, impulsive approach to financial planning is one of the prime causes
of financial distress of individuals.**Test Yourself 2**When is the best time to start financial planning?I. Post retirement
II. As soon as one gets his first salary
III. After marriage
IV. Only after one gets rich**C.** **Financial planning - Types**Let us now look at the various types of financial planning exercises that an individual
may need to do.15**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 costs
have been incurred. While fixed expenses cannot be controlled easily, one can
reduce, postpone and manage expenses that are variable. The next step is to
**predict future monthly income and expenses over the whole year and** design a
plan for managing these cash flows.Another part of the cash planning process is to design strategies for maximizing
discretionary income.**Example**One can restructure one’s outstanding debts.One can meet outstanding credit card debts through consolidating them and paying
them off through a bank loan with lower interest.16One 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 medicalemergency.a. Finally **insurance for one’s assets** may be considered in terms of thetype 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**The first step here is to define certain investment parameters. These include:17**i.** **Returns** : Returns on Investment is often the most important parameter thatpeople 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 tradeoff 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 uncertain incomeand expenditure flows, or who are investing for meeting a particular
personal or business expenditure, would be concerned with liquidity [This | IC 38 -IA-Eng-Life.md | null | Test Yourself 2 | IC 38 -IA-Eng-Life_008 | {
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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 tradeoff 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 uncertain incomeand 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.**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.18**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 the corpusor 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 (sum
assured plus bonus) of such policies are also exempted under Section 10 (10D).
Similarly, Death Claim amounts are exempt from Income Tax at the hands of the
recipient. One must note that the purpose here is to minimise and not evade taxes.Life insurance agents may be often required by their clients and prospective
customers to advise them not only about meeting their insurance needs but also for
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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 (sum
assured plus bonus) of such policies are also exempted under Section 10 (10D).
Similarly, Death Claim amounts are exempt from Income Tax at the hands of the
recipient. One must note that the purpose here is to minimise and not evade taxes.Life insurance agents may be often required by their clients and prospective
customers to advise them not only about meeting their insurance needs but also for
support in meeting their other financial needs as well. A sound knowledge of
financial planning would be of great value to any insurance agent.**Test Yourself 3**Which among the following is not an objective of tax planning?I. Maximum tax benefitII. Reduced tax burden as a result of prudent investmentsIII. Tax evasionIV. Full advantage of tax breaks19**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 planning**Key Terms**1. Financial planning
2. Life stages
3. Risk profile
4. Cash planning
5. Investment planning
6. Insurance planning
7. Retirement planning
8. Estate planning
9. Suitability information
10. Tax planning20**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.21## 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**22**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** | IC 38 -IA-Eng-Life.md | s19 | Tax planning | IC 38 -IA-Eng-Life_010 | {
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agent’s role is to understand and pitch on these features and benefits to make the
products of their companies unique and attractive compared to others.**Example**Colgate, Close up and Promise are all different brands of toothpastes. But the
features of each brand is different from the other.Products may be:**i.** **Tangible** : refers to physical objects that can be directly seen or felt by touch
(for instance a car or a television set)**ii.** **Intangible:** refers to products that can only be perceived indirectly.Life insurance is a product that is intangible.**2.** **Purpose of Life Insurance products.**Human beings possess **an immensely valuable asset** - **human capital – which is the**
**source of our productive earning capacity.** However, there is an uncertainty about
life and human well-being. Events like death and disease can destroy our Earning
capabilities and life savings. Insurance provides protection for such situations.Life insurance products offer protection against the loss of economic value of an
individual’s productive abilities, as a result of death or disability. The moment an
individual takes a life insurance policy and pays the first premium, **an immediate**
**estate is created** in his/ her name and its proceeds are available to his/ her
dependents or loved ones.Life insurance provides peace of mind and protection to the near and dear ones of
an individual, in case of one’ unfortunate death. Beyond providing such protection,
life insurance fulfils other needs of the market, such as savings, wealth
accumulation, safety and security of investment and certain rates of return, which
are not discussed in this course.Life insurance industry has seen enormous innovations in product offerings over the
last two centuries. The journey began with death benefit products but over the
period, multiple living benefits like endowment, disability benefits, dreaded disease
covers and so on were added.23One of the major innovations of recent years was the creation of market linked
policies where the insured was invited to participate in choosing and managing his
investment assets. Another major innovation was the evolution of flexible
unbundled products, in which different benefits as well as cost components could
be varied by the policy holder as per changing needs, affordability and life-stages.**3.** **Suitability Information**In order to make insurance intermediaries including agents and brokers more
accountable and reduce instances of mis-selling, IRDAI has created a concept of
‘product suitability’. ‘Suitability information’ is the information of a prospect on
age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, etc. That is, before selling an insurance
policy to a client, an Agents should be able to justify the suitability of the product
for the client’s needs.In other words, the Agent takes into account the particular prospect’s risk profile age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, insurance needs etc. and decides
whether the product is suitable for that prospect. The nature of product, the
amount of premium, the mode of premium payment and tenure of the policy as well
as the manner of premium payment are also part of the parameters of ‘Suitability’.IRDAI mandates that the suitability information collected should be signed by the
prospect and the agent; and preserved by the Insurer as part of the policy records
and made available for inspection by the Authority.**4.** **Riders in Life Insurance Products**A rider is a provision typically added through an endorsement, which becomes part
of the contract. Riders are commonly used to provide supplementary benefits like
increasing the amount of death benefit provided by a policy, say, because of
accidents. Life insurance companies offer a number of riders through which the
value of their offerings get enhanced Riders help to customise different
requirements of a person into a single plan.Riders provide a means to provide benefits like Disability cover, accident cover and
Critical Illness cover as additional benefits in a standard life insurance contract.
Policy holders can avail of them by paying an extra premium.**Test Yourself 1**Which among the following is an intangible product?
I. CarII. HouseIII. Life insurance
IV. Soap24**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 | IC 38 -IA-Eng-Life.md | p24 | Example | IC 38 -IA-Eng-Life_011 | {
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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. Soap24**B.** **Traditional life insurance products**We shall now learn about some of the traditional types of life insurance products.**Diagram 1:** **Traditional Life Insurance Products****1.** **Term insurance plans**Term insurance is a contract that is valid only during a certain time period. This
may range from the short time required to complete an airplane trip to multiple
years. Protection may extend up to age 65 or 70. One-year term policies are quite
similar to property and casualty insurance contracts. There is no savings or cash
value element in this policy.In October 2020, IRDAI has introduced a Standard Individual Term Life Insurance
Product called, “Saral Jeevan Bima” (the Insurer’s name shall be prefixed to the
product name), a non-linked non-participating individual pure risk premium life
insurance plan, which provides for payment of Sum Assured in lump sum to the
nominee in case of the Life Assured’s unfortunate death during the policy term.Apart from certain benefits and riders specified by the Regulator, no other riders/
benefits/ options/ variants are allowed to be offered. Also, there shall be no
exclusions under the product other than the suicide exclusion. Saral Jeevan Bima is
to be offered to individuals without restrictions on gender, place of residence,
travel, occupation or educational qualifications.**a)** **Purpose**A Term Life insurance plan fulfils the main and basic idea behind life insurance,
which is to provide an assured sum of money to the dependents of the insured
on his/ her death.**The policy works as an income replacement plan also.** Here the payment of a
lump-sum amount is replaced by a series of monthly, quarterly or similar
periodical payments to the dependent beneficiaries.**b)** **Disability**
Normally a Term insurance policy covers only death. However, it is possible to
buy a Disability Protection Rider on the main policy. In such a case, if the insured
suffers from a specified disability during the term of the contract, a disability25benefit would be paid to the beneficiaries/ insured person. The benefits will
continue till the death of the insured person.**Diagram 2:** **Disability****c)** **Term insurance as a rider**Protection under Term Life is usually provided as a stand-alone policy but it
could also be provided through a rider in a policy.**Example**A rider to a pension plan provides for a death benefit to be payable if one dies
before the date when pension is to start.**d)** **Convertibility**Convertible term insurance policies allow a policyholder to change or convert a
term insurance policy into a permanent plan like “Whole Life” without providing
fresh evidence of insurability. This privilege helps those who wish to have
permanent cash value insurance but are unable to afford its high premiums.
When the term policy is converted into permanent insurance the new premium
rate would be higher.**e)** **Unique Selling Proposition** ( **USP)**The unique selling proposition (USP) of term assurance is its low price, enabling
one to buy relatively large amounts of life insurance on a limited budget.**f)** **Variants**A number of variants of term assurance are possible.**Diagram 3:** **Variants of Term Assurance****i.** **Decreasing Term Assurance**
These plans typically consist of decreasing term insurance which provides an
amount of death benefit that is equal to the balance that is due on a loan, if the
borrower dies before the loan is paid. These are often marketed as Mortgage
Redemption (discussed in Chapter 15) or Credit Life Insurance. The plans are26usually 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** | IC 38 -IA-Eng-Life.md | p24 | Test Yourself 1 | IC 38 -IA-Eng-Life_012 | {
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one to buy relatively large amounts of life insurance on a limited budget.**f)** **Variants**A number of variants of term assurance are possible.**Diagram 3:** **Variants of Term Assurance****i.** **Decreasing Term Assurance**
These plans typically consist of decreasing term insurance which provides an
amount of death benefit that is equal to the balance that is due on a loan, if the
borrower dies before the loan is paid. These are often marketed as Mortgage
Redemption (discussed in Chapter 15) or Credit Life Insurance. The plans are26usually sold to lending institutions as group insurance to cover the lives of their
borrowers. Purchase of mortgage redemption insurance is often a condition of
the mortgage loan. Such plans may also be available for automobile or other
personal loans.**ii.** **Increasing term assurance**
As the name suggests, the plan provides a death benefit, which increases along
with the term of the policy. Premium generally increases as the amount of
coverage increases.**iii.** **Term insurance with return of premiums**
Another type of policy (quite popular in India) is term assurance with return of
premiums. Though the premium paid would be much higher than for a similar
term insurance plan without return of premiums, some customers may need such
policies.**g)** **Relevant scenarios**Term insurance may have relevance in the following situations:
i. Where the need for insurance protection is purely temporary, as in case ofmortgage redemption
ii. As an additional supplement to a savings plan.
iii. As part of a “buy term and invest the rest” philosophy, where one seeks onlycheap term insurance protection from the insurance company and wants to
invest the difference of premiums in other attractive investments.**Important****Limitations of term plans:** Term Insurance plans are available only for specific
periods and one may not be able to continue the coverage beyond a certain age,
say 65 or 70.**2.** **Whole life insurance**Whole life insurance is an example of a permanent life insurance policy. Here, the
life insurer offers to pay the agreed death benefit when the insured dies, no matter
when the death might occur. The premiums can be paid throughout one’s life or for
a limited time as specified.Whole life premiums are much higher than term premiums as whole life policies are
designed to remain in force until the death of the insured, and pay the death benefit
anytime. The Plan also provides for a cash value in the policy holder’s account. He/
she can withdraw cash in the form of a policy loan from this cash value or even
redeem it by surrendering the policy for its cash value.In case of outstanding loans, the amount of loan and interest get deducted from the
pay-out to the beneficiaries upon death.**A whole life policy is a good plan for the main earner of the family who wishes**
**to protect his/ her loved ones in the event of premature death and preserve his/**
**her capital against erosion from various events like terminal illness.** One can also
use the cash value of the whole life insurance policy for retirement needs, if27required. 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% | IC 38 -IA-Eng-Life.md | e26 | Variants | IC 38 -IA-Eng-Life_013 | {
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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.**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 a28guaranteed sum assured, a share in the surpluses( bonuses) that are generated by
the insurer. These are known as ‘With Profit’ plans.**6.** **Non-participating products**The Policy holders who buy non-linked without profit [non par] plans are paid a
benefit that is fixed and guaranteed at the beginning of the contract and nothing
more. Non-participating products may be offered either under a ‘linked platform’
or a ‘non-linked platform’. These are known as ‘Without Profits’ plans.**Example**One may have an endowment policy of twenty years providing a guaranteed addition
of 2% of sum assured for each year of term, so that the maturity benefit is sum
assured plus a total addition of 40% of the sum assured.Under the IRDAI’s guidelines on traditional non-par policies, the benefits to be paid
on the happening of a specified event, have to be explicitly stated at the outset and
not linked to an index or benchmark. The same applies to additional benefits that
are accrued at regular intervals. This means that the return on these policies must
be disclosed at the time of taking the policy.**Important**Death benefits are subject to regulations of IRDAI issued from time to time. At
present, as per the new Regulation 9 of IRDAI (Non-linked) Products Regulation,
2019 pertaining to traditional products, the minimum death cover is as follows:For all non-linked individual life insurance products, the minimum Sum Assured on
death during the entire term of the policy shall not be less than 7 times the
annualized premium, for limited or regular premium products, and 1.25 times the
single premium for single premium products.For participating products, in addition to the sum assured on death, the bonus and
additional benefits as stated in the policy and accrued till the date of death shall
become payable on death as part of the death benefit, if not paid earlier. In
essence, there are **two variants**, participating and non-participating plans.i. For **participating polices** the bonus is linked to the investment performanceof the fund and is not declared or guaranteed before. The **bonus, once it is**
**announced, becomes a guarantee** . It is usually paid in case of death of the | IC 38 -IA-Eng-Life.md | a28 | Government usually offers tax benefits on the premiums paid, which make it | IC 38 -IA-Eng-Life_014 | {
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be disclosed at the time of taking the policy.**Important**Death benefits are subject to regulations of IRDAI issued from time to time. At
present, as per the new Regulation 9 of IRDAI (Non-linked) Products Regulation,
2019 pertaining to traditional products, the minimum death cover is as follows:For all non-linked individual life insurance products, the minimum Sum Assured on
death during the entire term of the policy shall not be less than 7 times the
annualized premium, for limited or regular premium products, and 1.25 times the
single premium for single premium products.For participating products, in addition to the sum assured on death, the bonus and
additional benefits as stated in the policy and accrued till the date of death shall
become payable on death as part of the death benefit, if not paid earlier. In
essence, there are **two variants**, participating and non-participating plans.i. For **participating polices** the bonus is linked to the investment performanceof the fund and is not declared or guaranteed before. The **bonus, once it is**
**announced, becomes a guarantee** . It is usually paid in case of death of the
policyholder or maturity benefit. This bonus is also called **reversionary**
**bonus** .
ii. In case of **non-participating policies**, the return on the policy is disclosed inthe 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)29Pension 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](https://en.wikipedia.org/wiki/Life_annuity)
[annuities, thus insuring against the risk of longevity. A pension created by an](https://en.wikipedia.org/wiki/Life_annuity)
employer for the benefit of an employee is commonly referred to as an occupational
or employer pension.On retirement, the money in the member's account is used to provide retirement
benefits, typically by purchasing an annuity which then provides a regular income.
An annuity is a long-term investment issued by an insurance company designed to
help protect one from the risk of outliving one’s income. Through annuitization,
one’s contributions are converted into periodic payments that can last for life.Individuals can avail of pension benefits by purchasing pension plans from insurance
companies. Pension plans can be **on accumulation or deferred** **basis** which allows
a person to contribute in two ways, (i) in lump sum, or (ii) over a period of time; so
that he/ she can get a pension from the desired age/ date (called as the ‘vesting’
date). One can opt to receive pensions/ annuities on monthly, quarterly, half-yearly
or annual modes. Pension plans are available on an **immediate basis** also, from the
very next month of purchase, on payment of a lump sum amount, called as
immediate annuity.The Indian insurance industry has several deferred and immediate annuity products
marketed by Life Insurers. Each product has its own features, terms, conditions and
annuity options.**Saral Pension:** To provide uniformity across Insurers, to reduce confusion in the
market about annuity schemes, and to make available a product that will broadly
meet the needs of an average customer, in January 2021, IRDAI mandated all Life
Insurers to introduce a standard, immediate annuity product, with simple features
and standard terms and conditions on an individual (not group) basis. Such a
standard product will make it easier for the customers to make an informed choice,
enhance the trust between the Insurers and the insured, and reduce mis-selling as
well as potential disputes.The standard individual immediate annuity product is called, “Saral Pension”,
prefixed by the Insurer’s name. The product offer two (and only two) annuity
options as follows:a) Life annuity with 100% Return of Purchase Price; 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
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annuity options.**Saral Pension:** To provide uniformity across Insurers, to reduce confusion in the
market about annuity schemes, and to make available a product that will broadly
meet the needs of an average customer, in January 2021, IRDAI mandated all Life
Insurers to introduce a standard, immediate annuity product, with simple features
and standard terms and conditions on an individual (not group) basis. Such a
standard product will make it easier for the customers to make an informed choice,
enhance the trust between the Insurers and the insured, and reduce mis-selling as
well as potential disputes.The standard individual immediate annuity product is called, “Saral Pension”,
prefixed by the Insurer’s name. The product offer two (and only two) annuity
options as follows:a) Life annuity with 100% Return of Purchase Price; 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) PageNo43
[53&flag=1](https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo4353&flag=1)30**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 bonus**Answers to Test Yourself****Answer 1** -The correct option is III.
**Answer 2** - The correct option is I.31## 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**32**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 | IC 38 -IA-Eng-Life.md | o4353 | Saral Pension: | IC 38 -IA-Eng-Life_016 | {
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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 with thecapital 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 (withincertain limits) the amount of premium they wanted to pay; and the amount
of death benefits and cash values they wanted, got designed.
d) **Surrender value:** Policies that gave better surrender values available undertraditional policies were also designed by insurers.These policies became very popular and even began to replace traditional products
in many countries, including India.33**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.
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.The benefits under such contracts are wholly or partially determined by the value
of units credited to the policyholder’s account at the date when payment is due.34In 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
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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.The benefits under such contracts are wholly or partially determined by the value
of units credited to the policyholder’s account at the date when payment is due.34In 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 insurancecompany.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<br>and equity related<br>instruments.<br>|~~This fund invests~~<br>major portion of the<br>money in Govt.<br>Bonds, Corporate<br>Bonds, Fixed<br>Deposits etc.<br>|~~This fund~~<br>invests in a mix<br>of equity and<br>debt<br>instruments<br>|~~This fund invests~~<br>money mainly in<br>instruments such as<br>Treasury Bills,<br>Certificates of Deposit,<br>Commercial Paper etc.<br>|There is also provision to switch from one kind of fund to another if performance of
one or more funds is not found to be up to the mark.35Some of the specific features of ULIP Policies are given below:**i.** **Unitising**Benefits under ULIP policies are determined by the value of units credited to the
policyholder’s account at the date when the claim payment is due to be made. A
unit is created by dividing an investment fund into a number of equal parts.**ii.** **Transparent structure**The charges for insurance cover and expenses in ULIPs are clearly specified. Once
these charges are deducted from the premium, the balance of the account and
income from it are invested in units.**iii.** **Pricing**Under ULIPs, the insured decides the amount of premium that he/ she can
contribute at regular intervals.In all Life Insurance policies, the initial costs are very high. Under traditional
policies, the premium charges for meeting these costs are spread throughout the
policy term.In the case of ULIPs, they are deducted from the initial premiums itself. This
significantly reduces the amount allocated for investment. This is why the value of
the benefits, vis-à-vis the premiums paid, would be very low and even less than the
premiums paid in the early years of the contract.**iv.** **Death Benefit**Unlike in traditional policies, the amount of death benefit in ULIP policies is a
multiple of the premiums paid. In case of death during the term of the policy, the
beneficiary would be paid the higher of the Sum Assured [which is a multiple of the
premium] or the Fund Value (unit price multiplied by the number of units) standing
to his or her account.**v.** **The bearing of investment risk**The value of the units depends on the value of the life insurer’s investments, which
are not guaranteed.The life insurer, though expected to manage the portfolio efficiently, does not give
any guarantee about unit values. Hence, the investment risk is borne by the
policyholder/ unit holder.36**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
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the benefits, vis-à-vis the premiums paid, would be very low and even less than the
premiums paid in the early years of the contract.**iv.** **Death Benefit**Unlike in traditional policies, the amount of death benefit in ULIP policies is a
multiple of the premiums paid. In case of death during the term of the policy, the
beneficiary would be paid the higher of the Sum Assured [which is a multiple of the
premium] or the Fund Value (unit price multiplied by the number of units) standing
to his or her account.**v.** **The bearing of investment risk**The value of the units depends on the value of the life insurer’s investments, which
are not guaranteed.The life insurer, though expected to manage the portfolio efficiently, does not give
any guarantee about unit values. Hence, the investment risk is borne by the
policyholder/ unit holder.36**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.37## 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**38N’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 assignment isallowed.v. If the policyholder does not appoint a special trustee to receive andadminister the benefits under the policy, the sum secured under the policy
becomes payable to the Official Trustee of the State in which the office at
which the insurance was effected is situated.39**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
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becomes payable to the Official Trustee of the State in which the office at
which the insurance was effected is situated.39**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 thecompany.**b)** **Insurable losses**The following are the losses for which key person insurance can provide
compensation:i. Losses related to the extended period when a key person is unable to work,to provide temporary personnel and, if necessary to finance the recruitment
and training of a replacement40ii. 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.Keyman insurance is an important form of business insurance. It can be
described as an insurance policy taken out by a business to compensate at for
financial losses that would arise from the death or extended capacity of an
important member of the business.41Mortgage 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.42## 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
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IV. Evade eviction in case of default**Summary**Section 6 of the Married Women’s Property Act, 1874 provides for security of
benefits under a life insurance policy to the wife and children.The policy effected under MWP Act shall be beyond the control of court
attachments, creditors and even the life assured.Keyman insurance is an important form of business insurance. It can be
described as an insurance policy taken out by a business to compensate at for
financial losses that would arise from the death or extended capacity of an
important member of the business.41Mortgage 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.42## 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**43**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 assured
For mode of premum44**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
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would hence encourage payment via yearly and half yearly modes by allowing a
rebate on these. They may also charge a little extra for monthly mode of
payments, to cover additional administrative expenses involved.**3.** **Extra charges**The tabular premium is charged for those individuals who are not subject to any
significant factors that would pose an extra risk. They are known as **standard**
**lives** and the rates charged are known as ordinary rates.If a person proposing for insurance suffers from certain health problems like
heart ailments or diabetes that can pose a hazard to his life, he or she is
considered to be sub-standard. The insurer may decide to impose an extra
premium by way of a health extra. Similarly an occupational extra may be
imposed on those engaged in a hazardous occupation, like a circus acrobat.
These extras would result in the premium being more than the tabular premium.Again, an insurer may offer certain extra benefits under a policy, which are
available on payment of an extra premium.**Example**A life insurer may offer a Double Accident Benefit or DAB (where double the sum
assured is payable as a claim if death is a result of accident). For this it may
charge an extra premium of one rupee per thousand sum assured.Similarly a benefit known as Permanent Disability Benefit (PDB) may be availed
by paying an extra per thousand sum assured.**4.** **Determining the premium**Let us now examine how life insurers arrive at the rates that are presented in
the premium tables. This task is performed by an actuary. The process of setting45the premium in case of traditional life insurance policies like term insurance,
whole life and endowment considers following elements: Mortality
Interest
Expenses of management
Reserves
Bonus loading**Diagram 2:** **Components of Premium**The first two elements give us the Net premium. By adding [also called ‘loading’]
the other elements to the net premium we get the gross or office premium**a)** **Mortality and Interest**Mortality is the first element in premiums. It is the chance or likelihood that a
person of a certain age would die during a given year. To find out the expected
Mortality of a person, “Mortality Tables” are used.**Example**If the mortality rate for age 35 is 0.0035 it implies that out of every 1000 people
who are alive as on age 35, 3.5 (or 35 out of 10,000) are expected to die between
age 35 and 36.The table may be used to calculate mortality cost for different ages. For
example the rate of 0.0035 for age 35 implies a cost of insurance of 0.0035 x
1000 (sum assured) = Rs. 3.50 per thousand sum assured.The above cost may be also called the “Risk Premium”. For higher ages the risk
premium would be higher.46**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.**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 | IC 38 -IA-Eng-Life.md | g45 | Extra charges | IC 38 -IA-Eng-Life_022 | {
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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.**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.47Lapses usually happen within the first three years, especially in the first year of
the contract.**d)** **With Profit (participating) policies and Bonus loading**The concept of ‘With Profit’ policies originated when Life insurers started the
practice of charging a high loading in advance to create a buffer to keep them
solvent even in adverse situations. If subsequent experience proved to be more
favourable, the life insurer would share some of the profits it made as a result
with policy holders by way of bonus.In sum we can say that:**Gross premium = Net premium + Loading for expenses + Loading for**
**contingencies + Bonus loading****Test Yourself 1**What does a policy lapse mean?I. Policyholder completes premium payment for a policy
II. Policyholder discontinues premium payment for a policy
III. Policy attains maturity
IV. Policy is withdrawn from the market**B.** **Surplus and bonus****1.** **Determination of surplus and bonus**Every life insurance company is expected to undertake a periodic valuation of its
assets and liabilities. Such a valuation has two purposes:i. To assess the financial state of the life insurer and determine if it is solventor insolvent
ii. To determine the surplus available for distribution among policyholders/share holders**Definition**Surplus is the excess of value of assets over value of liabilities. If it is negative, it is
known as a strain.Let us now see how the concept of surplus in life insurance is different from that of
profit of a firm.48Firms 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
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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 assuredThe 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]49**Types of reversionary bonuses****Diagram 3:** **Types of Reversionary Bonuses****i.** **Simple Reversionary Bonus**This is a bonus expressed as a percentage of the basic cash benefit under the
contract. In India for example, it is declared as amount per thousand sum
assured.**ii.** **Compound Bonus**Here the company expresses a bonus as a percentage of basic benefit and
already attached bonuses. It is thus a bonus on a bonus. A way to express it may
be as @ 8% of basic sum assured plus attached bonus.**iii.** **Terminal Bonus**As the name suggests, this bonus attaches to the contract only at the time of its
termination [by death or maturity]. It is applicable only for the claims arising in
the ensuing year. Thus terminal bonus declared for 2013 would only apply to
claims that have arisen during 2013-14 and not for subsequent years. Terminal
bonuses depend on the time duration of the contract and increase with it. A
contract that has run for 25 years would have higher terminal bonus than one
which has run for 15 years.**3.** **The Contribution Method**Another method of distribution of surplus adopted in North America is the
“Contribution” method. Here, the surplus, i.e. the difference between what was
expected to happen and what actually happened over the year with respect to
mortality, interest and expenses is declared and distributed as dividends.The dividends can be paid in cash, by way of adjustments/ reductions in future
premiums, by allowing purchase of non-forfeitable paid up additions to the policy
or as accumulations to the credit of the policy.50**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.51## 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
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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.51## 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**52**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 insurance coveralong with explanations.
The prospectus should also provide:(a) a description of the contingency or contingencies to be covered by insurance;
(b) the class or classes of lives or property eligible for insurance under the termsof such prospectus.
In Life insurance, the prospectus should also mention about the Riders (also called
Add-on covers in Health and General Insurance) allowable on the product and their
benefits.**Proposal Form:** In respect of Life insurance, the details of the proposers’ family
members (including parents) indicating their longevity, status of health and
ailments suffered by any of them, are collected through the Proposal form.
Depending on the product, the medical details of the life proposed for insurance,
his/ her personal history of disease and personal characteristics may also be asked
for. The Proposal Form is the document by which insurers get all the information
that they need from the prospect.Section 45 of the Insurance Act, provides that the Policy shall not be called in
question on the ground of mis-statement after three years. Agents have an
important role in guiding the prospect to give answers to all the questions in the
Proposal Form/ Medical Forms etc. truthfully and advising them of the implications
of not doing so in terms of Section 45.Proposal Forms for Life Insurance should state the requirements of Section 45 of the
Act. While answering the questions in the Proposal Form for obtaining life insurance
cover, the prospect is to be guided by the provisions of Section 45 of the Act.Similarly, Section 39 of the Act is about the provision of nomination. Wherever the
facility of Nomination is available to the proposer, the Agent shall inform him/ her
of the provisions of Section 39 of the Act and encourage the proposer to avail the
facility.Aspects related to the personal financial planning of the life proposed including his/
her work span, projected income and expenses, as well as needs for savings and
investment, health, retirement and insurance may also be asked in the Life
Insurance Proposal Form.53**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 | IC 38 -IA-Eng-Life.md | m2 | Key Terms | IC 38 -IA-Eng-Life_025 | {
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facility of Nomination is available to the proposer, the Agent shall inform him/ her
of the provisions of Section 39 of the Act and encourage the proposer to avail the
facility.Aspects related to the personal financial planning of the life proposed including his/
her work span, projected income and expenses, as well as needs for savings and
investment, health, retirement and insurance may also be asked in the Life
Insurance Proposal Form.53**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.54**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. | IC 38 -IA-Eng-Life.md | null | Age Proof: | IC 38 -IA-Eng-Life_026 | {
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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:55**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 last premium
Whether policy is with or without profits
Name of nominee
Mode of premium payment – yearly; half yearly; quarterly; monthly; viadeduction 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 and theamounts 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.**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.56While 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
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otherwise have lapsed for non-payment of premium, to continue in force during the
grace period. Every life insurance contract undertakes to pay the death benefit on
the condition that the premiums have been paid up to date and the policy is in
force. The “Grace Period” clause grants the policyholder an additional period of
time to pay the premium after it has become due.The premium however remains due and if the policyholder dies during this period,
the insurer deducts the premium from the death benefit. If premiums remain unpaid
even after the grace period is over, the policy would then be considered lapsed and
the company is not under obligation to pay the death benefit. The only amount
payable would be whatever is applicable under the non-forfeiture provisions.**Important****Lapse and Reinstatement/ Revival**We have already seen that a policy may be said to be in lapse condition if premium
has not been paid even during the days of grace. The good news is that most lapsed
life insurance policies can be reinstated [revived]. As per IRDAI Product Regulations,
a Non-Linked Policy can be revived within 5 years from the date of unpaid premium,
whereas a Linked Policy can be revived within 3 years.**Definition**Reinstatement is the process by which a life insurance company puts back into force
a policy that has either been terminated because of non-payment of premiums or
has been continued under one of the non-forfeiture provisions.A revival of the policy cannot however be an unconditional right of the insured. It
can be accomplished only under certain conditions:57**i.** **Revival application within specific time period:** The policy owner must
complete the revival application within the time frame stated in the
provision for such reinstatement, say five years from the date of lapsation.**ii.** **Satisfactory evidence of continued insurability:** The insured must presentto the insurance company satisfactory evidence of continued insurability of
the insured. Not only must her health be satisfactory but other factors such
as financial income and morals must not have deteriorated substantially.**iii.** **Payment of overdue premiums with interest:** The policy owner is requiredto 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.**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. The58formula 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
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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. The58formula takes into account the type and plan of insurance, age of the policy and
the length of the policy premium-paying period.The actual amount of cash one gets in hand on surrender may be different from the
surrender value amount prescribed in the policy. The actual amount may differ on
account of any accrued bonuses, recoveries etc.**Guaranteed Surrender Value [GSV]:** The law in India as per IRDAI Guidelines
(revised in 2019) provides for a Guaranteed Surrender Value [GSV] to be payable if
all premiums have been paid for at least two consecutive years. This Value arrived
as a percentage (say 30%) of premiums paid is called Guaranteed Surrender Value.
The value depends on the duration of premium paid. The GSV is required to be
mentioned in the policy document.**b)** **Policy loans**Life insurance policies that accumulate a cash value also have a provision to grant
the policyholder the right to borrow money from the insurer by using the cash value
of the policy as a security for the loan. The policy loan is usually limited to a
percentage of the policy’s surrender value (say 90%). Note that the policyholder
borrows from his own account. He or she would have been eligible to get the amount
if the policy had been surrendered. In that case the insurance would have been
terminated.Insurers charge interest on policy loans, which are payable semi-annually or
annually. Although loan and interest are repayable periodically, If the loan has not
been repaid, the insurer deducts the amount of outstanding (unpaid) loan and
interest from the policy benefit that is payable. A loan provides relief to
policyholder in case of financial emergencies while keeping the insurance alive.Since the loan is granted on the policy being kept as security, the policy has to be
assigned (explained in later para) in favour of the insurer. Where the policyholder
has nominated (explained in later para) someone to receive the money in the event
of death of the insured, this nomination shall not be cancelled but the nominee’s
right will be affected to the extent of the insurer’s interest in the policy.**Example**Arjun bought a life insurance policy wherein the total death claim payable under
the policy was Rs. 2.5 lakhs. Arjun’s total outstanding loan and interest under the
policy amounts to Rs. 1.5 lakhs. Hence in the event of Arjun’s death, the nominee
will be eligible to get the balance of Rs. 1 lakh.**Special policy provisions and endorsements****a)** **Nomination**i. Under Section 39 of the Insurance Act 1938, the holder of a policy on his/her own life may nominate the person or persons to whom the money secured
by the policy shall be paid in the event of his/her death.
ii. The life assured can **nominate one or more than one person** as nominees.
iii. Nominees are entitled for **valid discharge** and have to **hold the money as a****trustee** on behalf of those entitled to it.
iv. Nomination can be done either **at the time the policy is bought or later** atany time before the maturity of the Policy.59v. 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 Policy matures,by an endorsement or a further endorsement or a will as the case may be.**Important**Nomination only gives the nominee the right to receive the policy monies from
the insurer in the event of the death of the life assured. However, the money
would be belonging to the legal heir only. **A nominee does not have any right**
**to the whole (or part) of the claim.** However vide Section 39(7) of Insurance
Act,1938, in respect of all policies maturing for payment after 26 [th] December,
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iv. Nomination can be done either **at the time the policy is bought or later** atany time before the maturity of the Policy.59v. 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 Policy matures,by an endorsement or a further endorsement or a will as the case may be.**Important**Nomination only gives the nominee the right to receive the policy monies from
the insurer in the event of the death of the life assured. However, the money
would be belonging to the legal heir only. **A nominee does not have any right**
**to the whole (or part) of the claim.** However vide Section 39(7) of Insurance
Act,1938, in respect of all policies maturing for payment after 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.Section 39(11) of the Insurance Act says that where a policyholder dies after the
maturity of the policy but the proceeds and benefit of his policy has not been
made to him because of his death, his nominee shall be entitled to the proceeds
and benefit of his policy.**Diagram 2:** **Provisions related to nomination****b)** **Assignment**Since life insurance policy carries a promise or a debt that the insurance
company owes the insured, it is considered a security for money or property.60We have seen that loan is advanced against by the insurers against the surrender
value of the policy. Similarly, many financial institutions including banks
advance loan against the security of the insurance policy by having it assigned
it in their favour.The term assignment ordinarily refers to transfer of property by writing in favour
of another person.The assignment of a life insurance policy implies the act of transferring the
rights, title and interest in the policy (as property) from one person to another.
The person who transfers the rights is called **assignor** and the person to whom
property is transferred is called **assignee** . On assignment, the ownership of the
policy changes and hence nomination is cancelled, except when assignment is
made to the insurance company for a policy loan.There are two types of assignments.**Diagram 3:** **Types of Assignment**|Conditional Assignment|Absolute Assignment|
|---|---|
|Conditional assignment<br>provides that the policy<br>shall revert back to the<br>life assured on his or<br>her surviving the date of<br>maturity or on death of<br>the assignee.| Absolute assignment provides that all rights, title and<br>interest which the assignor has in the policy are<br>transferred to the assignee without reversion to the<br>former or his/ her estate in any event.<br> The policy thus vests absolutely with the assignee. The<br>latter can deal with the policy in whatever manner he or<br>she likes without the consent of the assignor.|Absolute assignment is more commonly seen in many commercial situations
where the policy is typically mortgaged against a debt assumed by the | IC 38 -IA-Eng-Life.md | null | Important | IC 38 -IA-Eng-Life_030 | {
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The person who transfers the rights is called **assignor** and the person to whom
property is transferred is called **assignee** . On assignment, the ownership of the
policy changes and hence nomination is cancelled, except when assignment is
made to the insurance company for a policy loan.There are two types of assignments.**Diagram 3:** **Types of Assignment**|Conditional Assignment|Absolute Assignment|
|---|---|
|Conditional assignment<br>provides that the policy<br>shall revert back to the<br>life assured on his or<br>her surviving the date of<br>maturity or on death of<br>the assignee.| Absolute assignment provides that all rights, title and<br>interest which the assignor has in the policy are<br>transferred to the assignee without reversion to the<br>former or his/ her estate in any event.<br> The policy thus vests absolutely with the assignee. The<br>latter can deal with the policy in whatever manner he or<br>she likes without the consent of the assignor.|Absolute assignment is more commonly seen in many commercial situations
where the policy is typically mortgaged against a debt assumed by the
policyholder, like a housing loan.**Conditions for valid assignment**Let us now look at the conditions that are necessary for a valid assignment.i. The assignor must have **absolute right and title or assignable interest** 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.61 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 the endorsement,record in writing the reasons for such refusal and communicate the same
to the policyholder not later than thirty days from the date of the
policyholder giving notice of such transfer or assignment.**Diagram 4:** **Provisions related to assignment of insurance policies****Commonly extended privileges to policyholders**a) **Duplicate Policy:**A life insurance policy document is only an evidence of a promise. Loss or
destruction of the policy document does not in any way absolve the company of
its liability under the contract. Life insurance companies generally have
standard procedures to be followed in case of loss of the policy document.Normally the office would examine the case to see if there is any reason to doubt
the alleged loss. Satisfactory proof may need to be produced that the policy has
been lost and not dealt with in any manner. Generally the claim may be settled
on the claimant furnishing an indemnity bond with or without surety.If payment is shortly due and the amount to be paid is high, the office may also
insist that an advertisement be placed in a national paper with wide circulation,
reporting the loss. A duplicate policy may be issued on being sure that there is
no objection from anyone else.b) **Alteration**Policyholders may seek to effect alterations in policy terms and conditions.
There is provision to make such changes subject to consent of both the insurer
and assured. Normally alterations may not be permitted during the first year of62the 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 policy conditions,
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
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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 of62the 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 policy conditions,
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 accident benefitThese 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.63The policy document is the most important document associated with insurance.
It is the evidence of the contract between the assured and the insurancecompany.The standard policy document typically has three parts which are the policy
schedule, standard provisions and the policy’s specific provisions.The grace period clause grants the policyholder an additional period of time to
pay the premium after it has become due.Reinstatement is the process by which a life insurance company puts back into
force a policy that has either been terminated because of non-payment of
premiums or has been continued under one of the non-forfeiture provisions.A policy loan is different from an ordinary commercial loan in two respects,
firstly the policy owner is not legally obligated to repay the loan and the insurer
need not perform a credit check on the insured.Nomination is where the life assured proposes the name of the person(s) to
which the sum assured should be paid by the insurance company after their
death.The assignment of a life insurance policy implies the act of transferring the
rights right, title and interest in the policy (as property) from one person to
another. The person who transfers the rights is called assignor and the person
to whom property is transferred is called assignee.Alteration is subject to consent of both the insurer and assured. Normally
alterations may not be permitted during the first year of the policy, except for
some simple ones.**Key Terms**1. Agents Confidential Report
2. Medical Examiner’s Report
3. Moral Hazard Report
4. First Premium Receipt (FPR)
5. Policy document
6. Policy schedule
7. Standard provisions
8. Special Provisions
9. Grace period
10. Policy lapse
11. Policy revival
12. Surrender value13. Nomination
14. Assignment**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.64## 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 | IC 38 -IA-Eng-Life.md | f62 | Alteration | IC 38 -IA-Eng-Life_032 | {
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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.64## 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 theprocess.**Learning Outcomes**65**A.** **Underwriting – Basic concepts****1.** **Underwriting purpose**Underwriting has two purposesi. To assess the risk, classify the risk and decide the terms of acceptance or todecline the risk.
ii. To prevent anti-selection against the insurer**Definition**The term **underwriting** refers to the process of evaluating each proposal for life
insurance in terms of the degree of risk it represents and then deciding whether or
not to grant insurance and on what terms.**Anti-selection** is the tendency of people, who suspect or know that their chance of
experiencing a loss is high, to seek out insurance with a view to gain in the process.**Example**If life insurers were to be not selective about whom they offered insurance, there
is a chance that people with serious ailments like heart problems or cancer, who
did not expect to live long, would seek to buy insurance.In other words, if an insurer did not exercise underwriting discretion, it would be
selected against and may suffer losses in the process.**2.** **Equity among risks**The term “Equity” means that applicants who are exposed to similar degrees of risk
must be placed in the same premium class. The Mortality table, used to determine
premiums, represents the mortality experience of standard lives or average risks.
They include the vast majority of individuals who propose to take life insurance.**a)** **Risk classification**To usher equity, the underwriter engages in a process known as **risk classification**
i.e. individual lives are categorised and assigned to different risk classes depending
on the degree of risks they pose. There are four such risk classes.**Diagram 1:** **Risk classification**66**i.** **Standard lives**
These consist of those whose anticipated mortality corresponds to the standard
lives represented by the mortality table.**ii.** **Preferred risks**
These are the ones whose anticipated mortality is significantly lower than
standard lives and hence could be charged a lower premium.**iii.** **Substandard lives**
These are the ones whose anticipated mortality is higher than the average or
standard lives, but are still considered to be insurable. They may be accepted
for insurance with higher (or extra) premiums or subjected to certain
restrictions.**iv.** **Declined lives**
These are the ones whose impairments and anticipated extra mortality are so
great that they could not be provided insurance coverage at an affordable cost.
Sometimes an individual’s proposal may also be temporarily declined if he or
she has been exposed to a recent medical event, like an operation.**3.** **Underwriting process**Underwriting process takes place at two levels: At Field level
At Underwriting department level**a)** **Field or Primary level**Field level underwriting is also known as **primary underwriting** . It includes
information gathering by an agent or company representative to decide whether
an applicant is suitable for granting insurance coverage. The agent plays a
critical role as primary underwriter. He is in the best position to know the life
to be insured.Many insurance companies may require that agents complete a statement or a
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These are the ones whose anticipated mortality is higher than the average or
standard lives, but are still considered to be insurable. They may be accepted
for insurance with higher (or extra) premiums or subjected to certain
restrictions.**iv.** **Declined lives**
These are the ones whose impairments and anticipated extra mortality are so
great that they could not be provided insurance coverage at an affordable cost.
Sometimes an individual’s proposal may also be temporarily declined if he or
she has been exposed to a recent medical event, like an operation.**3.** **Underwriting process**Underwriting process takes place at two levels: At Field level
At Underwriting department level**a)** **Field or Primary level**Field level underwriting is also known as **primary underwriting** . It includes
information gathering by an agent or company representative to decide whether
an applicant is suitable for granting insurance coverage. The agent plays a
critical role as primary underwriter. He is in the best position to know the life
to be insured.Many insurance companies may require that agents complete a statement or a
confidential report, asking for specific information, opinion and
recommendations to be provided by the agent with respect to the proposed life.**Fraud monitoring and role of agent as primary underwriter**Much of the decision with regard to acceptance of a risk depends on the facts
that have been disclosed by the proposer in the proposal form. It may be difficult
for an underwriter who is sitting in the underwriting department to know
whether these facts are untrue and have been fraudulently misrepresented with
deliberate intent to deceive.The agent plays a significant role here. He or she is in the best position to ensure
that the facts that have been represented are true, due to his/ her direct and
personal contact with the proposed life.67**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 judgment is used,<br>especially when deciding on<br>a case that is 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 to<br>a <br>person<br>staying<br>in<br>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 of<br>points so assigned will help an underwriter in<br>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 points,~~<br>and/or is referred to as Extra Mortality Rating<br>(EMR). Higher EMR indicates that the life is<br>substandard.<br>If<br>the<br>EMR<br>is<br>very<br>high,<br>underwriters may decline insurance.|**Underwriting Decisions**Let us now consider the various kinds of decisions that underwriters may take with
regard to a life proposed for underwriting.**a)** **Acceptance at ordinary rates (OR)** is the most common decision. This ratingindicates that the risk is accepted at the same rate of premium as would
apply to an ordinary or standard life.68**Diagram 3:** **Underwriting decisions****b)** **Acceptance with an extra:** This is the most common way of dealing with thelarge 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 | IC 38 -IA-Eng-Life.md | null | Declined lives | IC 38 -IA-Eng-Life_034 | {
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regard to a life proposed for underwriting.**a)** **Acceptance at ordinary rates (OR)** is the most common decision. This ratingindicates that the risk is accepted at the same rate of premium as would
apply to an ordinary or standard life.68**Diagram 3:** **Underwriting decisions****b)** **Acceptance with an extra:** This is the most common way of dealing with thelarge 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.
**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.69**Example**A lady who has just had a hysterectomy operation may be asked to wait for a few
months before insurance on her life is allowed, to allow any post operation
complications that may have arisen to disappear.**Test Yourself 1**Which of the following cases is likely to be declined or postponed by a life insurer?I. A healthy 18 year old
II. A sports person
III. A person suffering from AIDS
IV. A housewife with no income of her own**B.** **Non-medical underwriting****1.** **Non-medical underwriting**A large number of life insurance proposals may typically get selected for insurance
without conducting a medical examination to check the insurability of a life to be
insured. Such cases are termed as **non-medical proposals** .In view of multiple reasons including the costs involved, in some types of policies,
Life insurers grant insurance without insisting on a medical examination**2.** **Conditions for non-medical underwriting**However non-medical underwriting calls for conditions like applicability to certain
class of lives, certain plans of insurance, certain upper limits of sum insured, entry
age limits, maximum term of insurance etc.to be followed.
**3.** **Rating factors in underwriting**Rating factors refer to various aspects related to financial situation, life style,
habits, family history, personal history of health and other personal circumstances
in the prospective insured’s life that may pose a hazard and increase the risk.
Underwriting involves identifying these hazards and their likely impact and
classifying the risk accordingly.Rating factors may be broadly divided into two – those which contribute to moral
hazard and those which contribute to physical [medical] hazards. Life insurance
companies often divide their underwriting into categories accordingly. Factors like
income, occupation, lifestyle and habits, which contribute to moral hazard, are
assessed as part of **financial underwriting**, while medical aspects of health fall
under **medical underwriting** .**a)** **Female insurance**Women generally have greater longevity than men. However they may face some
problems with respect to moral hazard. This is because many women in Indian
society are victims of male domination and social exploitation. Evils like dowry
deaths exist even today. Longevity of women can also be affected from problems
connected with pregnancy.70Insurability 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
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companies often divide their underwriting into categories accordingly. Factors like
income, occupation, lifestyle and habits, which contribute to moral hazard, are
assessed as part of **financial underwriting**, while medical aspects of health fall
under **medical underwriting** .**a)** **Female insurance**Women generally have greater longevity than men. However they may face some
problems with respect to moral hazard. This is because many women in Indian
society are victims of male domination and social exploitation. Evils like dowry
deaths exist even today. Longevity of women can also be affected from problems
connected with pregnancy.70Insurability 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 suicide or
as a result of expected deterioration in health. A third reason for such large
sums could be excessive misselling by the sales person.Large sums assured would also mean premiums increasing in proportion and raise
the question of whether the payment of such premiums would be continued. In
general, the premium payable should be within one third of an individual’s
annual income**d)** **Age**
Mortality risk is closely related to age. The underwriter needs to be careful when
considering insurance for people of advanced ages.**Example**
If the insurance is being proposed for the first time after age 50, there is a need
to suspect moral hazard and enquire about why such insurance was not taken
earlier.71We 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 hazard**Diagram 4:** **Sources of Occupational Hazards****i.** **Accidental hazards** arise because certain kinds of jobs expose one to the
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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 hazard**Diagram 4:** **Sources of Occupational Hazards****i.** **Accidental hazards** arise because certain kinds of jobs expose one to the
risk of accident. There is any number of jobs in this category – like circus
artistes, scaffolding workers, demolition experts and film stunt artistes.**ii.** **Health hazards** arise when the nature of the job is such as to give rise to
possibility of medical impairment. There are various kinds of health hazards.72 Some jobs like that of **rickshaw pullers** involve a lot of physical strain andimpact the respiratory system. Situations where one may be exposed to **toxic substances** like mining dustor carcinogenic substances (that cause cancer) like chemicals and nuclear
radiation. Working in **high pressure environments** like underground tunnels or deepsea, 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 reports
and moral hazard reports, suggesting an exposure to risk. In particular three
features are important:**Smoking and tobacco use** : Use of tobacco is not only a risk in itself but also
contributes to increasing other medical risks. Companies charge differential
rates today for smokers and non-smokers and users of other forms of tobacco
usage like _gutkha_ and _paan masala_ .**Alcohol:** Drinking alcohol occasionally or in modest quantities is not considered
a hazard. However, long term heavy drinking can impair liver functioning, affect
the digestive system and lead to mental disorders. Alcoholism is also linked with
accidents, violence, family abuse, depression and suicides.**Substance abuse** : Substance abuse refers to the use of various kinds of
substances like drugs or narcotics, sedatives and other similar stimulants. Some
of these are even illegal and their use indicates criminal disposition and moral
hazard.73**Test Yourself 2**Which of the following is an example of moral hazard?I. Stunt artist dies while performing a stunt
II. A person drinking copious amounts of alcohol because he is insured
III. Insured defaulting on premium payments
IV. Proposer misplacing policy document**C.** **Medical underwriting****1.** **Medical underwriting**Let us now consider some of the medical factors that would influence an
underwriter’s decision. These are generally assessed through medical underwriting.
They may often call for a medical examiner’s report. Let us look at some of the
factors that are checked.**Diagram 5:** **Medical Factors that influence an Underwriter’s Decision****a)** **Family history**The impact of family history on mortality risk has been studied from three
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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.73**Test Yourself 2**Which of the following is an example of moral hazard?I. Stunt artist dies while performing a stunt
II. A person drinking copious amounts of alcohol because he is insured
III. Insured defaulting on premium payments
IV. Proposer misplacing policy document**C.** **Medical underwriting****1.** **Medical underwriting**Let us now consider some of the medical factors that would influence an
underwriter’s decision. These are generally assessed through medical underwriting.
They may often call for a medical examiner’s report. Let us look at some of the
factors that are checked.**Diagram 5:** **Medical Factors that influence an Underwriter’s Decision****a)** **Family history**The impact of family history on mortality risk has been studied from three
angles.**i.** **Heredity** : Certain diseases can be transmitted from one generation to
another, say from parents to children.**ii.** **Average longevity of the family** : When the parents have died early 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 lives cancause 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.74**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 DiastolicWhen 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:75(i) **Getting a lower premium based on age:** While issuing the policy, insurersconsider 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
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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:75(i) **Getting a lower premium based on age:** While issuing the policy, insurersconsider 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.**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.76A large number of life insurance proposals may typically get selected for
insurance without conducting a medical examination. Such cases are termed as
non-medical proposals.Some of the rating factors for non-medical underwriting include Age Large sum assured Moral hazard etc.Some of the factors considered in medical underwriting include Family history, Heredity and personal history etc.**Key Terms**1. Underwriting
2. Standard life
3. Non-medical underwriting
4. Rating factor
5. Medical underwriting
6. Anti-selection**Answers to Test Yourself****Answer 1** - The correct option is III.**Answer 2** - The correct option is II.**Answer 3** - The correct option is II.77## 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**78**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
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3. Non-medical underwriting
4. Rating factor
5. Medical underwriting
6. Anti-selection**Answers to Test Yourself****Answer 1** - The correct option is III.**Answer 2** - The correct option is II.**Answer 3** - The correct option is II.77## 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**78**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.79**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 rider benefitor 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/
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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.A **maturity or death claim** or a surrender leads to termination of the insurance
cover under the contract and no further insurance cover is available.80**Types of claims:** The following payments may occur during the policy term:
**a)** **Survival Benefit Payments**Periodical payments are made by the insurer to the insured at specified times
during the term of the policy.**I.** **Surrender of Policy**Surrender value reflects the value of investments and depends on various factors
such as sum assured, bonuses, policy term and premiums paid. Premature closing
of a life insurance policy is a voluntary termination of the policy contract. A
policy can be surrendered only if it has acquired paid-up value. The amount
payable to the insured is the **surrender value** which is usually a percentage of
the premiums paid. The actual surrender value paid to the insured is more than
the Guaranteed Surrender Value (GSV).**II.** **Rider Benefit**A payment under a rider is made by an insurance company on the occurrence of
a specified event according to the terms and conditions.
Under a **critical illness rider**, in the event of diagnosis of a critical illness, a
specified amount is paid as per terms. The illness should have been covered in
the list of critical illnesses specified by the insurance company.Under **hospital care rider**, the insurer pays the treatment costs in the event of
hospitalisation of the insured, subject to terms and conditions.The policy contract continues even after the rider payments are made.The following claim payments are made at the end of the policy term specified
in the insurance contract.**III.** **Maturity Claim**In such claims, the insurer promises to pay the insured a specified amount at
the end of the term, if the insured survives the plan’s entire term. This is known
as a **maturity claim.****i.** **Participating Plan:** The maturity claim amount payable under a participatingplan is the sum assured plus accumulated bonuses less dues such as
outstanding premium and policy loans and interests thereon.
**ii.** **Return of Premium (ROP) Plan:** In some cases premiums paid over the termperiod 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.**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 is81paid 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
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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.**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 is81paid to the nominee or assignee or legal heir whatever the situation may be. A
death claim generally marks the end of the contract as a result of death.A death claim may be: Early (less than three years policy duration) or
Non-early (more than three years)The nominee or assignee or legal heir has to intimate the insurer of the cause,
date and place of death.**i.** **Forms to be submitted for death claim**Usually, the following forms are to be submitted by the beneficiary to the insurer
to facilitate processing of the claim: Claim form by nominee
Certificate of burial or cremation
Treating physician’s certificate
Hospital’s certificate
Employer’s certificate
Death certificate issued by municipal authorities etc., as proof of death
Certified court copies of police reports like First Information Report(FIR), Inquest Report, Post-Mortem Report, and Final Report - these
reports are required in case of death by accident.**Diagram 2:** **Forms to be submitted for Death Claim****ii.** **Repudiation of death claim**The death claim may be paid or repudiated. If, while processing the claim, the
insurer detects that the proposer had made any incorrect statements or had
suppressed material facts relevant to the policy, the contract would be declared
as void. All benefits under the policy are forfeited.**iii.** **Section 45: Indisputability Clause**However this penalty is subject to **Section 45** of the Insurance Act, 1938.82**Important****Section 45 states:**“No policy of life insurance shall be called in question on any ground whatsoever
after the expiry of three years from the date of the policy, i.e. from the date of
issuance of the policy or the date of commencement of risk or the date of revival
of the policy or the date of the rider to the policy, whichever is later”.**C.** **Claim Procedure for Life Insurance Policy****Although there is no laid down standard claims procedure for all insurers,**
**the IRDAI has laid down guidelines for insurers in the matter of claim**
**settlement.****Regulation 8: Claims procedure in respect of a life insurance policy**i. A life insurance policy shall state the **primary documents** which are normallyrequired 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, adeath claim under a life insurance policy shall be paid, rejected or
repudiated giving all the relevant reasons, within 30 days from the date of
receipt of all relevant papers and required clarifications. However, if the
insurer needs the claim to be investigated, it shall initiate and complete the
investigation at the earliest, in any case not later than 90 days from the date
of receipt of claim intimation. The claim should be settled within 30 days of
completing the investigation.iv. Where a claim is ready for payment but the payment cannot be made due toany reasons of proper identification of the payee, the life insurer shall hold
the amount for the benefit of the payee and it shall earn interest at the rate
applicable to a savings bank account with a scheduled bank (effective from
30 days following the submission of all papers and information).v. Where there is a delay on the part of the insurer in processing a claim for areason 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%**
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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 due toany reasons of proper identification of the payee, the life insurer shall hold
the amount for the benefit of the payee and it shall earn interest at the rate
applicable to a savings bank account with a scheduled bank (effective from
30 days following the submission of all papers and information).v. Where there is a delay on the part of the insurer in processing a claim for areason 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.83Apart from discharging obligations, goodwill is generated from such a situation
whereby there exists ample opportunity for the agent to procure business or
referrals in future from the family of the deceased.**Test Yourself 1**Which of the below statement best describes the concept of claim? Choose the most
appropriate option.I. A claim is a request that the insurer should make good the promise specified inthe contract
II. A claim is a demand that the insurer should make good the promise specified inthe 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 specified inthe 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 ClaimSection 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.84 | IC 38 -IA-Eng-Life.md | null | Role of an agent | IC 38 -IA-Eng-Life_043 | {
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## IC - 38 **INSURANCE AGENTS** **SECTION-GENERAL****ACKNOWLEDGEMENT****This course is based on revised syllabus prescribed by Insurance Regulatory and**
**Development Authority of India (IRDAI) and prepared by Insurance Institute of**
**India, Mumbai.****AUTHORS/ REVIEWERS (in Alphabetical order)**Dr. R. K. Duggal
Dr. Shashidharan K. Kutty
CA P. Koteswara Rao
Dr. Pradip Sarkar
Prof. Madhuri Sharma
Dr. George E. Thomas
Prof. Archana VazeG – Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.i## INSURANCE AGENTS **SECTION-GENERAL** **IC - 38****Year of Edition: 2023****ALL RIGHTS RESERVED**This course material is the copyright of Insurance Institute of India (III). This course
is designed for providing academic inputs for students appearing for the
examinations of Insurance Institute of India. This course material may not be
reproduced for commercial purpose, in part or whole, without prior express written
permission of the Institute.The contents are based on prevailing best practices and not intended to give
interpretations or solutions in case of disputes, legal or otherwise.This is only an indicative study material. Please note that the questions in the
examination shall not be confined to this study material only.Published by: Secretary General, Insurance Institute of India, G- Block, Plot C-46,
Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and Printed atAny communication regarding this study material may be addressed to ctd@iii.org.in
mentioning the subject title and unique publication number mentioned on the coverpageii## PREFACEInsurance Institute of India, (the Institute) has developed this course material for
Insurance Agents based on the syllabus prescribed by Insurance Regulatory and
Development Authority of India (IRDAI). Industry experts were involved in preparingthe course material.The course provides basic knowledge of Life, General and Health insurance to
enable agents in the respective line of business to understand and appreciate their
professional career in the right perspective.The course is structured as four sections. (1) Overview - a Common section that
covers Insurance Principles, Legal Principles and Regulatory matters that Insurance
agents need to know. Separate sections are provided for those aspiring to become
(2) Life Insurance Agents, (3) General Insurance Agents and (4) Health Insurance
Agents.A set of model questions are included in the course to give students an idea of the
examination format and the types of objective questions that may be asked. The
model questions will also help them in revising what they have learnt.Insurance operates in a dynamic environment. Agents need to be up to date about
changes in the market. They should actively pursue knowledge through personal
study and participation in the in-house training programmes arranged by the
respective insurers.The Institute thanks IRDAI for entrusting this work to the Institute. The Institute
wishes all interested in studying the material a successful career in insurance
marketing.iii## CONTENTS|Chapter no.|Title|Page no.|
|---|---|---|
|**SECTION **|**GENERAL INSURANCE **|**GENERAL INSURANCE **|
|G-01|General Insurance Documentation|2|
|G-02|Underwriting and Rate Making|17|
|G-03|Personal and Retail Insurance|26|
|G-04|Commercial Insurance|36|
|G-05|General Insurance Claims|59|
|**SECTION **|**ANNEXURES**|**ANNEXURES**|
|A-1|Annexures – Specimen Proposal forms and Claims Forms for filling up<br>|68|iv## SECTION **GENERAL INSURANCE**1## CHAPTER G-01## GENERAL INSURANCE DOCUMENTATION**Chapter Introduction**As discussed in Chapter 7, the Proposal form contains information which are useful for
the insurance company to accept the risk offered for insurance.We have seen that in different branches of insurance, the documentation needs are
different based on the subject matter insured, type of insurance coverage and the
types of claims that can arise.**Learning Outcomes**After studying this chapter, you should be able to:a) Explain the contents of a Proposal form.
b) Describe the importance of Prospectus
c) Understand the premium receipt.
d) Explain terms and wordings in insurance policy document.
e) Discuss policy conditions and warranties.
f) Appreciate why endorsements are issued.
g) Appreciate why renewal notices are issued.2**A.** **Proposal forms**The Proposal form contains information which are useful for the insurance company
to accept the risk offered for insurance. The principle of utmost good faith and the | IC 38 -IA-Eng-Non-Life.md | C-46 | INSURANCE AGENTS | IC 38 -IA-Eng-Non-Life_000 | {
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|**SECTION **|**ANNEXURES**|**ANNEXURES**|
|A-1|Annexures – Specimen Proposal forms and Claims Forms for filling up<br>|68|iv## SECTION **GENERAL INSURANCE**1## CHAPTER G-01## GENERAL INSURANCE DOCUMENTATION**Chapter Introduction**As discussed in Chapter 7, the Proposal form contains information which are useful for
the insurance company to accept the risk offered for insurance.We have seen that in different branches of insurance, the documentation needs are
different based on the subject matter insured, type of insurance coverage and the
types of claims that can arise.**Learning Outcomes**After studying this chapter, you should be able to:a) Explain the contents of a Proposal form.
b) Describe the importance of Prospectus
c) Understand the premium receipt.
d) Explain terms and wordings in insurance policy document.
e) Discuss policy conditions and warranties.
f) Appreciate why endorsements are issued.
g) Appreciate why renewal notices are issued.2**A.** **Proposal forms**The Proposal form contains information which are useful for the insurance company
to accept the risk offered for insurance. The principle of utmost good faith and the
duty of disclosure of material information begin with the proposal form forinsurance.**Example**If the insured was required to maintain an alarm or had stated that he has an
automatic alarm system in his gold jewellery showroom, then not only is he
required to disclose it, he has to ensure the same remains in a working condition
throughout the policy period. The existence of the alarm is a material fact for the
insurer who will be accepting the proposal based on these facts and pricing the risk
accordingly.**1.** **Nature of questions in a proposal form**The number and nature of questions in a proposal form vary according to the classof insurance concerned.**i.** **Fire insurance** proposal forms are usually used for relatively simple/ standardrisks like houses, shops etc. For large industrial risks, inspection of the risk is
arranged by insurer before acceptance of the risk. Special questionnaire are
sometimes used in addition to the proposal form to gather specific information.Fire insurance proposal form seeks, among other things, the description of the
property which would include the following information: Construction of external walls and roof, number of story
Occupation of each portion of the building
Presence of hazardous goods
Process of manufacture including raw material and finished goods
The sums proposed for insurance
The period of insurance, etc.**ii.** **For motor insurance,** questions are asked about the vehicle, its operations,make and carrying capacity, how it is managed by the owner and related
insurance history.**iii.** **In personal lines** like health, personal accident and travel insurance, proposalforms are designed to get information about the proposer’s health, way of life
and habits, pre-existing health conditions, medical history, hereditary traits,
past insurance experience etc.**iv.** **In other miscellaneous insurances,** proposal forms are compulsory and theyincorporate a declaration which extends the common law duty of good faith.3**2.** **Elements of a proposal****i.** **Proposer’s name in full**The proposer should be able to identify himself/ herself unambiguously. It is
important for the insurer to know with whom the contract has been entered, so
that the benefits under the policy would be received only by the insured.**ii.** **Proposer’s address and contact details**The reasons stated above are applicable for collecting the proposer’s address andcontact details as well.**iii.** **Proposer’s profession, occupation or business**In some cases like health and personal accident insurance, the proposer’s
profession, occupation or business are of importance as they could have a
material bearing on the risk.**iv.** **Details and identity of the subject matter of insurance**The proposer is required to clearly state the subject matter that is proposed forinsurance.**Example**The proposer is required to state if it is:**i.** A private car [with its identification like engine number, chassis number,registration number] or**ii.** A residential house [with its full address and identification numbers] or**iii.** An overseas travel [by whom, when, to which country, for what purpose] or**iv.** A person’s health [with person’s name, address and identification] etc.depending on the case**v.** **Sum insured** indicates limit of liability of the insurer under the policy andhas to be indicated in all proposal forms.**vi.** **Previous and present insurance** : As seen in the common chapters, theproposer is required to inform the details about his previous insurances to the | IC 38 -IA-Eng-Non-Life.md | A-1 | SECTION | IC 38 -IA-Eng-Non-Life_001 | {
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profession, occupation or business are of importance as they could have a
material bearing on the risk.**iv.** **Details and identity of the subject matter of insurance**The proposer is required to clearly state the subject matter that is proposed forinsurance.**Example**The proposer is required to state if it is:**i.** A private car [with its identification like engine number, chassis number,registration number] or**ii.** A residential house [with its full address and identification numbers] or**iii.** An overseas travel [by whom, when, to which country, for what purpose] or**iv.** A person’s health [with person’s name, address and identification] etc.depending on the case**v.** **Sum insured** indicates limit of liability of the insurer under the policy andhas to be indicated in all proposal forms.**vi.** **Previous and present insurance** : As seen in the common chapters, theproposer is required to inform the details about his previous insurances to the
insurer.In property insurance, there is a chance that insured may take policies from
different insurers and when a loss happens, claim from more than one insurer.
This information is required to ensure that the principle of contribution is
applied so that the insured is indemnified and does not gain/ profit due to
multiple insurance policies for the same risk.Further, in personal accident insurance an insurer would like to restrict the
amount of coverage (sum insured) depending on the sum insured under other
PA policies taken by the same insured.4**vii.** **Loss experience**The proposer is asked to declare full details of all losses suffered by him/ her,
whether or not they were insured. This will give the insurer information about
the subject matter of insurance and how the insured has managed the risk in the
past. Underwriters can understand the risk better from such answers and decide
on conducting risk inspections or collecting further details.**viii.** **Declaration by insured**As the purpose of the proposal form is to provide all material information to the
insurers, the form **includes a declaration by the insured that the answers are**
**true and accurate and he agrees that the form shall be the basis of the**
**insurance contract.** Any wrong answer will give the right to insurers to avoid the
contract. Other sections common to all proposal forms relate to **signature, date**
**and in some cases agent’s recommendation.****B.** **Acceptance of the Proposal (underwriting)**As seen earlier, a completed proposal form broadly gives the following information: Details of the insured Details of the subject matter Type of cover required Details of the physical features both positive and negative - including typeand quality of construction, age, presence of fire-fighting equipment, the
type of security etc., Previous history of insurance and lossIn the case of property, motor or cargo insurance, the insurer may also arrange for
pre-inspection survey of the risk before acceptance, depending on the nature andvalue of the risk. Insurers take their decision based on the information available inthe proposal, the risk inspection report, answers to the additional questionnaire and
other documents (as may be called for by the insurer). The insurer then decides
about the rate to be applied to the risk factor and calculates the premium based on
various parameters, which is then conveyed to the insured. Proposals are processed
by the insurer with speed and efficiency and all decisions thereof are communicated by it
in writing within a reasonable period.**Definition****Underwriting:** As per Protection of Policyholders’ Interests) Regulations, 2017, the
company has to process the proposal within 15 days’ time. The agent is expected to
keep track of these timelines, follow up internally and communicate with the
prospect/ insured as and when required by way of customer service. This entire
process of scrutinizing the proposal and deciding about acceptance is known as
underwriting.5**Test Yourself 1**As per Protection of Policyholders’ Interests) Regulations, 2017, an insurance
company has to process an insurance proposal within __________.I. 7 daysII. 15 daysIII. 30 daysIV. 45 days**C.** **Premium Receipt****Premium** is the consideration or amount paid by the insured to the insurer for
insuring the subject matter of insurance, under a contract of insurance. As discussed
in Chapter 4, the Agent should be always mindful that the **premium is to be paid**
**in advance, before the inception date of the insurance contract** as per Section
64 VB of the Insurance Act **.****Important**a) Section 64 VB of the Insurance Act-1938 provides that no insurer shall assumeany risk unless and until the premium is received in advance or is guaranteed to | IC 38 -IA-Eng-Non-Life.md | t-1938 | Details and identity of the subject matter of insurance | IC 38 -IA-Eng-Non-Life_002 | {
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company has to process the proposal within 15 days’ time. The agent is expected to
keep track of these timelines, follow up internally and communicate with the
prospect/ insured as and when required by way of customer service. This entire
process of scrutinizing the proposal and deciding about acceptance is known as
underwriting.5**Test Yourself 1**As per Protection of Policyholders’ Interests) Regulations, 2017, an insurance
company has to process an insurance proposal within __________.I. 7 daysII. 15 daysIII. 30 daysIV. 45 days**C.** **Premium Receipt****Premium** is the consideration or amount paid by the insured to the insurer for
insuring the subject matter of insurance, under a contract of insurance. As discussed
in Chapter 4, the Agent should be always mindful that the **premium is to be paid**
**in advance, before the inception date of the insurance contract** as per Section
64 VB of the Insurance Act **.****Important**a) Section 64 VB of the Insurance Act-1938 provides that no insurer shall assumeany risk unless and until the premium is received in advance or is guaranteed to
be paid or a deposit is made in advance in the prescribed manner. Insurance
Rules 58 and 59 provide certain exceptions to this condition of advance payment
of premium in some situations.b) Where an insurance agent collects a premium on a policy of insurance on behalfof an insurer, he shall deposit with or dispatch by post to the insurer the
premium so collected in full without deduction of his commission within twentyfour hours of the collection excluding bank and postal holidays.c) It is also provided that the risk may be assumed only from the date on which thepremium has been paid in cash or by cheque.d) Where the premium is tendered by postal or money order or cheque sent bypost, the risk may be assumed on the date on which the money order is booked
or the cheque is posted as the case may be.e) Any refund of premium which may become due to an insured on account of thecancellation of policy or alteration in its terms and conditions or otherwise, shall
be paid by the insurer directly to the insured by a crossed or order cheque or by
postal/ money order or by Electronic Mode and a proper receipt shall be
obtained by the insurer from the insured, and such refund shall in no case be
credited to the account of the agent.**D.** **Cover Notes/ Certificate of Insurance/ Policy Document**After underwriting is completed it may take some time before the policy is issued. **Pending**
**the preparation of the policy or when the negotiations for insurance are in**
**progress and it is necessary to provide cover on a provisional basis or when the**
**premises are being inspected for determining the actual rate applicable,** a cover
note is issued to confirm protection under the policy. It gives description of cover.
Sometimes, insurers issue a letter confirming the provisional insurance cover instead of a
cover note.6Although the cover note is not stamped, the wording of the cover note makes it clear
that it is subject to the usual terms and conditions of the insurers' policy for the class of
insurance concerned. If the risk is governed by any warranties, then the cover note would
state that the insurance is subject to such warranties. The cover note is also made subject
to special clauses, if applicable e.g. Agreed Bank Clause, Declaration Clause etc.**A cover note would incorporate the following:**a) Name and address of insuredb) Sum insuredc) Period of insuranced) Risk coverede) Rate and premium: if rate is not known, the provisional premiumf) **Description of the risk covered** : for example a fire cover note wouldindicate identification particulars of the building, its construction andoccupancy.g) Serial number of the cover noteh) Date of issuei) **Validity of cover note** is usually for a period of a fortnight and rarely up to60 days**Cover notes are used predominantly in marine and motor classes of business.****1.** **Marine Cover Notes**These are normally issued when details required for the issue of policy such as name
of the steamer, number of packages, or exact value etc. are not known. Even in
respect of exports, a cover note may be issued e.g. a certain quantity of cargo
meant for shipment is sent by the exporter to the docks. It may happen that, owing
to difficulty of securing adequate shipping space, shipment of the cargo by the
intended vessel does not take place. The quantity therefore, that may be sent by a
particular vessel cannot be known. In the circumstances, a cover note may be
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of the steamer, number of packages, or exact value etc. are not known. Even in
respect of exports, a cover note may be issued e.g. a certain quantity of cargo
meant for shipment is sent by the exporter to the docks. It may happen that, owing
to difficulty of securing adequate shipping space, shipment of the cargo by the
intended vessel does not take place. The quantity therefore, that may be sent by a
particular vessel cannot be known. In the circumstances, a cover note may be
required which is to be followed subsequently by the issue of regular policy when
full details are available and made known to the insurance company.Marine cover note may be worded along the following lines:i. Marine Cover Note Numberii. Date of issueiii. Name of the insurediv. Valid up to“As requested, you are hereby held covered subject to usual conditions of the
company's policy to the extent of Rs. _____________.”**a)** **Clauses:** Institute Cargo Clauses A, B or C including War SRCC risks as per InstituteClauses, but subject to 7 days’ notice of cancellation.**b)** **Conditions:** Details of shipment to be supplied on receipt of shipping documentsfor issue of policy. In the event of loss or damage prior to declaration and/ or
shipment on board the steamer, it is hereby agreed that the basis of valuation7shall be prime cost of the goods plus charges actually incurred and for which the
assured is liable.With regard to inland transit normally all relevant data required for issue of policy
are available and therefore a cover note is rarely required. There may however, be
some occasions when cover notes are issued and substituted later on by policies
containing full description of the cargo, transit etc.**2.** **Motor Cover Notes**These are to be issued in the form prescribed by the respective companies the
operative clause of a motor cover note may read as follows:“The insured described in the form, referred to below, having proposed for
insurance in respect of the Motor Vehicle(s) described therein and having paid the
sum of Rs….as premium the risk is hereby held covered under the terms of the
company’s usual form of……Policy applicable thereto (subject to any Special
Conditions mentioned below) unless the cover be terminated by the Company by
notice in writing in which case the insurance will thereupon cease and a
proportionate part of the premium otherwise payable for such insurance will be
charged for the time the company had been on risk.”**The Motor Cover Note generally contains the following particulars:**a) Registration mark and number, or description of the vehicles insured/ cubiccapacity/ carrying capacity/ make/ year of manufacture, engine number,
chassis number
b) Name and address of the insured
c) Effective date and time of commencement of insurance for the purpose of theAct. Time……, Date……
d) Date of expiry of insurance
e) Persons or classes of persons entitled to drive
f) Limitations as to use
g) Additional risks, if anyThe Motor Cover Note incorporates a certificate to the effect that it is issued in
accordance with the provisions of Chapters X and XI of the Motor Vehicles Act, 1988.**Important**The validity of the Cover Note may be extended for a further period of 15 days at a
time, but in, but in no case the total period of validity of a Cover Note shall exceed
sixty days.**Note:** The wordings of the cover note may vary from insurer to insurerUse of cover notes is being discouraged by most companies. Present day technology
facilitates issuance of policy document immediately.**3.** **Certificate of Insurance – Motor Insurance**A certificate of insurance provides existence of insurance in cases where proof may
be required. For instance in motor insurance, in addition to the policy, a certificate
of insurance is issued as required by the Motor Vehicles Act. **This certificate**8**provides evidence of insurance to the Police and Registration Authorities.** A | IC 38 -IA-Eng-Non-Life.md | n7 | Clauses: | IC 38 -IA-Eng-Non-Life_004 | {
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d) Date of expiry of insurance
e) Persons or classes of persons entitled to drive
f) Limitations as to use
g) Additional risks, if anyThe Motor Cover Note incorporates a certificate to the effect that it is issued in
accordance with the provisions of Chapters X and XI of the Motor Vehicles Act, 1988.**Important**The validity of the Cover Note may be extended for a further period of 15 days at a
time, but in, but in no case the total period of validity of a Cover Note shall exceed
sixty days.**Note:** The wordings of the cover note may vary from insurer to insurerUse of cover notes is being discouraged by most companies. Present day technology
facilitates issuance of policy document immediately.**3.** **Certificate of Insurance – Motor Insurance**A certificate of insurance provides existence of insurance in cases where proof may
be required. For instance in motor insurance, in addition to the policy, a certificate
of insurance is issued as required by the Motor Vehicles Act. **This certificate**8**provides evidence of insurance to the Police and Registration Authorities.** A
specimen certificate for private cars is reproduced below, showing salient features.**MOTOR VEHICLES ACT, 1988****CERTIFICATE OF INSURANCE**Certificate No. Policy No.1. Registration mark and Number, Place of registration, Engine No./Chassis No./ Make/Year of manufacture.2. Type of Body/ C.C/ Seating capacity/ Net Premium/ Name of Registration Authority,3. Geographical area – India. `4. Insured declared value (IDV)5. Name and address of the Insured, Business or profession.6. Effective date of commencement of Insurance for the purpose of the Act. From………. 'O'clock on ………7. Date of expiry of insurance: midnight on ……………8. Persons or classes of persons entitled to drive.Any of the following:(a) The insured:(b) Any other person who is driving on the insured's order or with his permissionProvided that the person driving holds an effective driving license at the time of the accident
and is not disqualified from holding or obtaining such a license. Provided also that the person
holding an effective learner's license may also drive the vehicle and such a person satisfies
the requirement of Rule 3 of Central Motor Vehicles Rules 1989.**LIMITATIONS AS TO USE**The policy covers use for any purpose other than:(a) Hire or reward;(b) Carriage of goods (other than personal luggage)(c) Organised racing,(d) Race making,(e) Speed testing(f) Reliability Trials(g) Any purpose in connection with Motor Trade.I/ we hereby certify that the Policy to which this Certificate relates as well as this Certificate of
Insurance are issued in accordance with the provisions of Chapter X and Chapter XI of the Motor
Vehicles Act, 1988.Examined .........(Authorized Insurer)**Motor certificate of Insurance is required to be carried in the vehicle at all times for**
**the scrutiny of the relevant authorities.****4.** **Policy Document****The policy is a formal document which provides an evidence of the contract of**
**insurance.** This document has to be stamped in accordance with the provisions of the9Indian Stamp Act, 1899.A general insurance policy usually contains:a) The name(s) and address(es) of the insured and any other person havinginsurable interest in the subject matter;
b) Full description of the property or interest insured;
c) The location/ s of the property or interest insured under the policy andwhere appropriate, with respective insured values;
d) Period of insurance;
e) Sums insured;
f) Perils covered and exclusions ;
g) Any excess/ deductible applicable;
h) Premium payable and where the premium is provisional subject toadjustment, the basis of adjustment of premium ;
i) Policy terms, conditions and warranties;
j) Action to be taken by the insured upon occurrence of a contingency likely togive rise to a claim under the policy;
k) The obligations of the insured in relation to the subject-matter of insuranceupon occurrence of an event giving rise to a claim and the rights of the
insurer in the circumstances;
l) Any special conditions ;
m) Provision for cancellation of the policy on grounds of misrepresentation,fraud, non-disclosure of material facts or non-cooperation of the insured;
n) The address of the insurer to which all communications in respect of thepolicy should be sent;
o) The details of Add–on covers and/ or Endorsements if any;
p) Details of Grievance Redressal mechanism and address of Ombudsman**Test Yourself 1**Which of the following statements is true with regards to cover notes?I. Cover notes are predominantly used in life insurance | IC 38 -IA-Eng-Non-Life.md | e9 | Important | IC 38 -IA-Eng-Non-Life_005 | {
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e) Sums insured;
f) Perils covered and exclusions ;
g) Any excess/ deductible applicable;
h) Premium payable and where the premium is provisional subject toadjustment, the basis of adjustment of premium ;
i) Policy terms, conditions and warranties;
j) Action to be taken by the insured upon occurrence of a contingency likely togive rise to a claim under the policy;
k) The obligations of the insured in relation to the subject-matter of insuranceupon occurrence of an event giving rise to a claim and the rights of the
insurer in the circumstances;
l) Any special conditions ;
m) Provision for cancellation of the policy on grounds of misrepresentation,fraud, non-disclosure of material facts or non-cooperation of the insured;
n) The address of the insurer to which all communications in respect of thepolicy should be sent;
o) The details of Add–on covers and/ or Endorsements if any;
p) Details of Grievance Redressal mechanism and address of Ombudsman**Test Yourself 1**Which of the following statements is true with regards to cover notes?I. Cover notes are predominantly used in life insurance
II. Cover notes are predominantly used in all classes of general insurance
III. Cover notes are predominantly used in health insurance
IV. Cover notes are predominantly used in marine and motor classes of generalinsurance**E.** **Warranties****A warranty is a condition expressly stated in the policy which has to be literally**
**complied with for validity of the contract. Warranty is not a separate document.**
**It is part of both cover notes and policy document.** It is a condition precedent to
the contract. It must be observed and complied with strictly and literally,
irrespective of the fact whether it is material to the risk or not. If a warranty is
breached, the policy becomes voidable at the option of the insurers even when it is
clearly established that the breach has not caused or contributed to a particular
loss. However, in practice, if the breach of warranty is of a purely technical nature
and does not, in any way, contribute to or aggravate the loss, insurers at their
discretion may process the claims according to norms and guidelines as per company
policy.10**1.** **Fire Insurances warranties (some examples) are as given below**Warranted, that no hazards goods shall be stored in the insured premises during the
currency of policy.**Silent Risk:** Warranted that no manufacturing activity is carried out in the insured
premises for consecutive period of 30 days or more.**Cigarette Filter Manufacturing:** Warranted that no solvents having flash point
below 30 [0] C are used/ stored in the premises**2.** In **Marine Insurance, a warranty** is defined as follows: “a promissory warranty,that is to say, a warranty by which the assured undertake that some particular
thing shall or shall not be done, or that some condition will be fulfilled, or
whereby he affirms or negates the existence of a particular state of facts”In **Marine Cargo Insurance, a warranty** is inserted to the effect that goods (e.g.
tea) are packed in tin-lined cases. In **Marine Hull insurance by inserting a warranty**
that the insured vessel will not navigate in a certain area, gives an idea to the
insurer about the extent of risk he has agreed to provide cover for. If the warranty
is breached, the risk agreed to initially is altered and the insurer is allowed to
discharge himself from further liability from the date of breach**3.** In **Burglary Insurance**, it is warranted that the property is guarded by awatchman for twenty four hours. The rates, terms and conditions of the policy
continue to be the same only if the warranties attached to the policy are
complied with.**Test Yourself 2**Which of the following statements is correct with regards to a warranty?I. A warranty is a condition which is never stated in the policy
II. A warranty forms part of a policy document
III. A warranty is always communicated to the insured separately and cannot be partof the policy document
IV. Claims will be payable even if a warranty is breached.11**F.** **Endorsements**It is the practice of insurers to issue policies in a standard form; covering certain perils
and excluding certain others.**Definition**If certain terms and conditions of the policy need to be modified at the time of issuance,
or during the policy tenure, it is done by setting out the amendments/ changes through a
document called endorsement.It is attached to the policy and forms part of it. The policy and the endorsement together
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continue to be the same only if the warranties attached to the policy are
complied with.**Test Yourself 2**Which of the following statements is correct with regards to a warranty?I. A warranty is a condition which is never stated in the policy
II. A warranty forms part of a policy document
III. A warranty is always communicated to the insured separately and cannot be partof the policy document
IV. Claims will be payable even if a warranty is breached.11**F.** **Endorsements**It is the practice of insurers to issue policies in a standard form; covering certain perils
and excluding certain others.**Definition**If certain terms and conditions of the policy need to be modified at the time of issuance,
or during the policy tenure, it is done by setting out the amendments/ changes through a
document called endorsement.It is attached to the policy and forms part of it. The policy and the endorsement together
constitute the evidence of the contract. Endorsements may also be issued during the
currency of the policy to record changes/ amendments.Whenever material information changes, the insured has to advice the insurance
company who will take note of this and incorporate the same as part of the
insurance contract through the endorsement.Endorsements normally required under a policy related to:a) Variations/ changes in sum insured
b) Change of insurable interest by way of sale, mortgage, etc.
c) Extension of insurance to cover additional perils/ extension of policy period
d) Change in risk, e.g. change of construction, or occupancy of the building in fireinsurance
e) Transfer of property to another location
f) Cancellation of insurance
g) Change in name or address etc.**Specimen**For the purpose of illustration, specimen wordings of some endorsements are
reproduced below:**Cancellation**At the request of the insured the insurance by this Policy is hereby declared to be
cancelled as from ………. The insurance having been in force for a period over ………….
Months, no refund is due to the Insured.12The total insurance now stands at Rs …….Subject otherwise to the terms, provisions and conditions of this policy.**Test Yourself 3**If certain terms and conditions of the policy need to be modified at the time of issuance, or
during the policy tenure it is done by setting out the amendments through __________.I. Warranty
II. EndorsementIII. Alteration
IV. Modifications are not possible**G.** **Interpretation of policies**Contracts of insurance are expressed in writing and the insurance policy wordings
are drafted by insurers. These policies have to be interpreted according to certain
well-defined rules of construction or interpretation which have been established by
various courts. **The most important rule of construction is that the intention of**
**the parties must prevail and this intention is to be looked for in the policy itself.**
If the policy is issued in an ambiguous manner, it will be interpreted by the courts
in favour of the insured and against the insurer on the general principle that the
policy was drafted by the latter.**Policy wordings** are understood and interpreted as per the following rules:a) An express condition overrides an implied condition except where there isinconsistency in doing so.
b) In the event of a contradiction in terms between the standard printed policyform and the typed or handwritten parts, the typed or handwritten part is
deemed to express the intention of the parties in the particular contract,
and their meaning will overrule those of the original printed words.
c) If an endorsement contradicts other parts of the contract the meaning of theendorsement will prevail as it is the later document.
d) Clauses in italics over-ride the ordinary printed wording where they areinconsistent.13e) Clauses printed or typed in the margin of the policy are to be given moreimportance than the wording within the body of the policy.
f) Clauses attached or pasted to the policy override both marginal clauses andthe clauses in the body of the policy.
g) Printed wording is over-ridden by typewritten wording or wording impressedby an inked rubber stamp.
h) Handwriting takes precedence over typed or impressed wording.
i) Finally, the ordinary rules of grammar and punctuation are applied if thereis any ambiguity or lack of clarity.**Important****1.** **Construction of policies**An insurance policy is evidence of a commercial contract and the general rules of
construction and interpretation adopted by courts apply to insurance contracts as
in the case of other contracts.The principal rule of construction is that the intention of the parties of the contract
must prevail, that intention must be gathered from the policy document itself and
the proposal form, clauses, endorsements, warranties etc. attached to it and
forming a part of the contract.**2.** **Meaning of wordings** | IC 38 -IA-Eng-Non-Life.md | null | Test Yourself 2 | IC 38 -IA-Eng-Non-Life_007 | {
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d) Clauses in italics over-ride the ordinary printed wording where they areinconsistent.13e) Clauses printed or typed in the margin of the policy are to be given moreimportance than the wording within the body of the policy.
f) Clauses attached or pasted to the policy override both marginal clauses andthe clauses in the body of the policy.
g) Printed wording is over-ridden by typewritten wording or wording impressedby an inked rubber stamp.
h) Handwriting takes precedence over typed or impressed wording.
i) Finally, the ordinary rules of grammar and punctuation are applied if thereis any ambiguity or lack of clarity.**Important****1.** **Construction of policies**An insurance policy is evidence of a commercial contract and the general rules of
construction and interpretation adopted by courts apply to insurance contracts as
in the case of other contracts.The principal rule of construction is that the intention of the parties of the contract
must prevail, that intention must be gathered from the policy document itself and
the proposal form, clauses, endorsements, warranties etc. attached to it and
forming a part of the contract.**2.** **Meaning of wordings**
The words used are to be construed in their ordinary and popular sense. **The**
**meaning to be used for words is the meaning that the ordinary man in the street**
**would construe. Thus, “fire” means flame or actual burning.**On the other hand, **words which have a common business or trade meaning will**
**be construed with that meaning unless the context of the sentence indicates**
**otherwise** . Where words are defined by statute, the meaning of that definition will
be used, such as “theft” as in the Indian Penal Code.Many words used in insurance policies have been the subject of previous legal
decisions and those decisions of a higher court will be binding on a lower court
decision. Technical terms must always be given their technical meaning, unless
there is an indication to the contrary.**H.** **Renewal Notice****Most of the non-life insurance policies are insured on annual basis.**Although there is no legal obligation on the part of insurers to advise the insured
that his policy is due to expire on a particular date, yet as a matter of courtesy and
healthy business practice, insurers issue a renewal notice in advance of the date of
expiry, inviting renewal of the policy. The notice incorporates all the relevant
particulars of the policy such as sum insured, the annual premium, etc. It is also the14practice to include a note advising the insured that he should intimate any material
alterations in the risk.**In motor renewal notice, for example, the insured’s attention is to be drawn to**
**revise the sum insured (i.e. the Insured’s Declared Value of the vehicle) in the**
**light of current requirements.**The insured’s attention is also to be invited to the statutory provision that no risk
can be assumed unless the premium is paid in advance.**Test Yourself 4**Which of the following statements is correct with regards to renewal notice?I. As per regulations there is a legal obligation on insurers to send a renewal noticeto insured, 30 days before the expiry of the policy
II. As per regulations there is a legal obligation on insurers to send a renewal noticeto insured, 15 days before the expiry of the policy
III. As per regulations there is a legal obligation on insurers to send a renewal noticeto insured, 7 days before the expiry of the policy
IV. As per regulations there is no legal obligation on insurers to send a renewalnotice to insured before the expiry of the policy**Summary**a) The first stage of documentation is essentially the proposal forms through whichthe insured informs about himself/ herself
b) The duty of disclosure of material information arises prior to the inception ofthe policy, and continues even after the conclusion of the contract
c) Insurance companies usually add a declaration at the end of the Proposal formto be signed by the insurer
d) Elements of a proposal form include:i. Proposer’s name in full
ii. Proposer’s address and contact details
iii. Proposer’s profession, occupation or business
iv. Details and identity of the subject matter of insurance
v. Sum insured
vi. Previous and present insurance
vii. Loss experience
viii.Declaration by the insured
e) An agent, who acts as the intermediary, has the responsibility to ensure allmaterial information about the risk is provided by the insured to insurer.
f) The process of scrutinising the proposal and deciding about acceptance is knownas underwriting. | IC 38 -IA-Eng-Non-Life.md | e14 | Important | IC 38 -IA-Eng-Non-Life_008 | {
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IV. As per regulations there is no legal obligation on insurers to send a renewalnotice to insured before the expiry of the policy**Summary**a) The first stage of documentation is essentially the proposal forms through whichthe insured informs about himself/ herself
b) The duty of disclosure of material information arises prior to the inception ofthe policy, and continues even after the conclusion of the contract
c) Insurance companies usually add a declaration at the end of the Proposal formto be signed by the insurer
d) Elements of a proposal form include:i. Proposer’s name in full
ii. Proposer’s address and contact details
iii. Proposer’s profession, occupation or business
iv. Details and identity of the subject matter of insurance
v. Sum insured
vi. Previous and present insurance
vii. Loss experience
viii.Declaration by the insured
e) An agent, who acts as the intermediary, has the responsibility to ensure allmaterial information about the risk is provided by the insured to insurer.
f) The process of scrutinising the proposal and deciding about acceptance is knownas underwriting.
g) Premium is the consideration or amount paid by the insured to the insurer forinsuring the subject matter of insurance, under a contract of insurance.15h) Payment of premium can be made by cash, any recognised banking negotiableinstrument, postal money order, credit or debit card, internet, e-transfer, direct
credit or any other method approved by IRDAI from time to time.
i) A cover note is issued when preparation of policy is pending or when negotiationsfor insurance are in progress and it is necessary to provide insurance cover on
provisional basis.
j) Cover notes are used predominantly in marine and motor classes of business.
k) A certificate of insurance provides existence of insurance in cases where proofmay be required
l) The policy is a formal document which provides an evidence of the contract ofinsurance.
m) A warranty is a condition expressly stated in the policy which has to be literallycomplied with for validity of the contract.
n) If certain terms and conditions of the policy need to be modified at the time ofissuance or during the policy tenure, it is done by setting out the amendments/
changes through a document called endorsement.
o) The most important rule of construction is that the intention of the parties mustprevail and this intention is to be looked for in the policy itself.**Key Terms**a) Policy form
b) Advance payment of premium
c) Cover note
d) Certificate of Insurance
e) Renewal notice
f) Warranty**Answers to Test Yourself****Answer 1** - The correct option is II.
**Answer 2** - The correct option is IV.
**Answer 3** - The correct option is II.
**Answer 4** - The correct option is II.
**Answer 5** - The correct option is IV.16## CHAPTER G-02## UNDERWRITING AND RATE MAKING**Chapter Introduction**We have learnt various concepts and principles related to general insurance.
Underwriting is the process by which the Insurer decides whether to accept a risk
or not. For this, the underwriters analyse the risk. They understand how risky the
risk is. Also, how much of money should be collected as premium. Again, sometimes
the risks can be accepted only subject to conditions to improve the risk. All these
angles are discussed in this chapter.**Learning Outcomes**After studying this chapter, you should be able to:1. Understand Physical hazards
2. Appreciate Underwriting as a function
3. Methods used by underwriters to reduce the risk
4. Understand how the Sum Insured is fixed.17**A.** **Physical Hazards**A thorough knowledge of various hazards to which property and persons are exposed
is most essential for underwriting.Physical hazard can be ascertained from the information given in a proposal form.
It can be better ascertained by a survey or inspection of the risk. The following are
some examples of physical hazard in various classes of insurance.**a)** **Fire****i.** **Construction:** Construction refers to the building materials used in walls androof. A concrete building is superior to a timber building.**ii.** **The height:** Greater the number of storey’s, the greater the hazard becauseof difficulties of extinguishing fire. Besides, a greater number of floors involve
risk of collapse of the upper floors causing heavy impact damage.**iii.** **Nature of flooring:** Wooden floors add fuel to fire. Besides, wooden floorscollapse easily in the event of fire, causing damage to property on lower floors | IC 38 -IA-Eng-Non-Life.md | G-02 | Summary | IC 38 -IA-Eng-Non-Life_009 | {
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2. Appreciate Underwriting as a function
3. Methods used by underwriters to reduce the risk
4. Understand how the Sum Insured is fixed.17**A.** **Physical Hazards**A thorough knowledge of various hazards to which property and persons are exposed
is most essential for underwriting.Physical hazard can be ascertained from the information given in a proposal form.
It can be better ascertained by a survey or inspection of the risk. The following are
some examples of physical hazard in various classes of insurance.**a)** **Fire****i.** **Construction:** Construction refers to the building materials used in walls androof. A concrete building is superior to a timber building.**ii.** **The height:** Greater the number of storey’s, the greater the hazard becauseof difficulties of extinguishing fire. Besides, a greater number of floors involve
risk of collapse of the upper floors causing heavy impact damage.**iii.** **Nature of flooring:** Wooden floors add fuel to fire. Besides, wooden floorscollapse easily in the event of fire, causing damage to property on lower floors
through falling machinery or goods from upper floors.**iv.** **Occupancy:** The occupancy of a building, and the purpose for which it is used.Various types of hazards arise from occupancy.**v.** **Ignition hazard:** Buildings in which chemicals are produced or used in largequantity involve a considerable **ignition hazard** . A timber yard presents a **high**
**combustibility hazard** because once a fire starts, timber burns quickly. The
contents may be highly susceptible to damage in the event of fire.For example, paper, clothing etc. are susceptible not only to fire damage but
also to damage by water, heat etc.**vi.** **The process of manufacture:** If work is carried during the night, the hazardis increased due to the use of artificial lights, continuous use of machinery
leading to friction and the likely carelessness of workers due to fatigue.**vii.** **Situation/ location of risk:** Location in a congested area, exposure tohazardous adjacent premises and distance from the fire brigade is an example
of physical hazard.**b)** **Marine****i.** **The age and condition of vessel: Older vessels are inferior risks.****ii.** **The voyage to be undertaken: The route of the voyage, loading and****unloading conditions and warehousing facilities at the ports are factors.****iii.** **The nature of the stocks: Articles of high value are exposed to theft;****machinery is liable to breakage in transit.****iv.** **The method of packing: Cargo packed in bales is considered to be better****than cargo in bags. Again, double bags are safer than single bags. Liquid**
**cargo in second-hand drums constitute bad physical hazard.**18**c)** **Motor****i.** **The age and condition of the vehicle:** Older vehicles are more prone toaccidents.**ii.** **The type of vehicle:** Sports cars involve greater physical hazard etc.**d)** **Burglary****i.** **The nature of the stocks:** Articles of high value in small bulk (e.g. Jewellery)and easily disposable are considered to be bad risks.**ii.** **Situation:** Ground floor risks are inferior to upper floor risks: privatedwellings situated in isolated areas are hazardous.**iii.** **Constructional hazard** : Too many doors and windows constitute bad physicalhazard.**e)** **Personal accident****i.** **The age of the person:** Very old persons are accident prone; besides theywill take longer to recover in the event of an accident.**ii.** **Nature of occupation:** Jockeys, mining engineers, manual workers areexamples of bad physical hazard.**iii.** **Health and physical condition:** A person suffering from Diabetes may notrespond to surgical treatment in the event of accidental bodily injury.**B.** **Physical Hazards – Importance of Risk Management, Clauses and Rating**Underwriters use the following methods to deal with physical hazards: Loading of premium Applying warranties on the policy Applying certain clauses Imposition of excess/ deductibles Restricting the cover granted Declinature of cover**a)** **Loading of premium**There may be some adverse features in a risk exposure for which the underwriters
may decide to charge an extra premium before acceptance of the same. By loading
the premium the higher probability of claims or occurrence of large claims is taken
into consideration.**Example**Normal rate of premium is charged for cargo shipped by liners or other vessels,
which comply with the prescribed standards. However, if an over-aged or undertonnage vessel ships the cargo then extra premium is charged.In personal accident insurance if the insured is engaged in hazardous pursuits like | IC 38 -IA-Eng-Non-Life.md | null | A. | IC 38 -IA-Eng-Non-Life_010 | {
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may decide to charge an extra premium before acceptance of the same. By loading
the premium the higher probability of claims or occurrence of large claims is taken
into consideration.**Example**Normal rate of premium is charged for cargo shipped by liners or other vessels,
which comply with the prescribed standards. However, if an over-aged or undertonnage vessel ships the cargo then extra premium is charged.In personal accident insurance if the insured is engaged in hazardous pursuits like
mountaineering, racing on wheels, big game hunting etc. extra premium is charged.19Sometimes loading of premium is also done for adverse claims ratio, as in case of
motor insurance or health insurance policies.**b)** **Imposition of warranties**Insurers incorporate appropriate warranties to reduce the physical hazard. Some
examples are provided below.**Example****i.** **Marine cargo:** A warranty is inserted to the effect that goods (e.g. Tea) arepacked in tin lined cases.**ii.** **Burglary:** It is warranted that the property is guarded by a watchman for twentyfour hours.**iii.** **Fire:** In fire insurance, it is warranted the premises would not be used beyondnormal working hours.**iv.** **Motor:** It is warranted that the vehicle will not be used for speed testing orracing.**Example****Marine cargo:** Small damage to parts may cause costly machinery to be a
constructive total loss. Such machinery are subject to the Replacement Clause,
which limits underwriter’s liability only to the cost of replacing, forwarding and
refitting any broken part.Cast pipes, hard board sometimes get damaged only at the edges. Marine policies
on cast pipes, hardboard etc., are subject to the cutting clause warranting that the
damaged portion should be cut off and the balance utilised.**c)** **Deciding on Excess/ Deductibles and Restricting the Cover**When the loss amount exceeds the deductible/ excess mentioned the balance is
paid under 'excess' clause. Loss below the limit is not payable.The object of these clauses is to eliminate small claims. As the insured is made to
pay part of a loss, he is encouraged to exercise more care and to practice loss
prevention.**Example****i.** **Motor** : A proposal for an old motor vehicle will not be accepted oncomprehensive terms but insurers will offer a restricted cover i.e. against third
party risks only.**ii.** **Personal accident** : A personal accident proposer who has crossed themaximum acceptance age limit may be covered for death risk only instead of
on comprehensive terms i.e. including disablement benefits.20**d)** **Discounts**Lower rates are charged or a discount is given in the normal premium if the risk is
favourable. The following features are considered to contribute to improvement of
risk in fire insurance.i. Installation of sprinkler system within the premisesii. Installation of hydrant system in the compoundiii. Installation of hand appliances consisting of buckets, portable extinguishersand manual fire pumpsiv. Installation of automatic fire alarm**Example**Under **motor insurance** a discount in the premium is provided if the motor cycle is
always used with a side-car attached, as this feature contributes to improved risk
because of the greater stability of the vehicle.In **marine insurance**, the insurer may consider giving discounts on premium for “Full
Load” container as this reduces the incidence of theft and shortage.Under a **group personal accident** cover, discounts would be given for coverage of a
large group, which reduces the administrative work and expenses of the insurer.**e)** **No claim bonus (NCB)**A certain percentage is given as bonus for every claim free renewal year with a limit
to the maximum bonus that can be availed. It is allowed by way of deduction on the
total premium at renewal only, depending upon the incurred claim ratio for the
entire group or to Motor vehicle Own damage policy holders for claim free years.**No claim bonus is a powerful strategy to improve underwriting experience and**
**forms an integral part of rating systems** . This bonus recognises the factor of moral
hazard in the insured. It rewards the insured for not lodging claims either by
adopting better driving skills as in motor insurance or taking better care of his health
in Health policies.**f)** **Declinature**If the physical hazard involved is considerably bad, the risk becomes uninsurable
and is declined. Based on their past loss experience, knowledge of hazards and
overall underwriting policy, insurers have formulated a list of risks to be declined
in each class of insurance.**C.** **Moral hazard**Moral hazard could arise in the following ways:**a)** **Dishonesty**An extreme example of bad moral hazard is that an insured taking insurance
with deliberate intention of creating or making a loss to collect a claim. Even, | IC 38 -IA-Eng-Non-Life.md | null | Example | IC 38 -IA-Eng-Non-Life_011 | {
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to the maximum bonus that can be availed. It is allowed by way of deduction on the
total premium at renewal only, depending upon the incurred claim ratio for the
entire group or to Motor vehicle Own damage policy holders for claim free years.**No claim bonus is a powerful strategy to improve underwriting experience and**
**forms an integral part of rating systems** . This bonus recognises the factor of moral
hazard in the insured. It rewards the insured for not lodging claims either by
adopting better driving skills as in motor insurance or taking better care of his health
in Health policies.**f)** **Declinature**If the physical hazard involved is considerably bad, the risk becomes uninsurable
and is declined. Based on their past loss experience, knowledge of hazards and
overall underwriting policy, insurers have formulated a list of risks to be declined
in each class of insurance.**C.** **Moral hazard**Moral hazard could arise in the following ways:**a)** **Dishonesty**An extreme example of bad moral hazard is that an insured taking insurance
with deliberate intention of creating or making a loss to collect a claim. Even,
an honest insured may be tempted to stage a loss, if he happens to be in financial
difficulties.21**b)** **Carelessness**Indifference towards loss is an example of carelessness. Because of the
existence of insurance, the insured may tend to adopt a careless attitude
towards the insured property.If the insured does not take the same care of the property as a prudent and
reasonable man would if he were uninsured the moral hazard is unsatisfactory.**c)** **Industrial relations**Employer-employee relationship may involve an element of bad moral hazard.**d)** **Wrong claims**This kind of moral hazard arises when claims occur. An insured may not
deliberately bring about a loss but once a loss occurs, he would attempt to
demand unreasonably high amount of compensation, in total disregard of the
principle of indemnity.**Information****Sub-limits:** The insurer may impose a limit on the total pay-out separately each for
room expenses, surgical procedures or doctor fees to check the inflated bills.**Where the moral hazard of the insured is suspected, the agent should not**
**entertain or bring such proposals to the insurance company. S/ he should also**
**bring such issues before the insurance company officials.****1.** **Short period scales**Normally, premium rates are quoted for a period of twelve months. If a policy is
taken for a shorter period, the premium is charged according to a special scale,
known as short period scale. The premium chargeable for short period insurance is
not on proportionate basis.**Need for short period scales**a) These rates are applied because the expenses involved in the issue of the policywhether for a 12 months period or a shorter period, are almost the same.b) Further, an annual policy requires renewal procedure only once during a yearwhereas short period insurances involve more frequent renewals. If a
proportionate premium is allowed, there would be a tendency on the part of the
insured to go on taking short period policies and thereby, in effect, pay
premiums in instalments.c) Besides, some insurance are seasonal in character and the risk is greater duringthat season. Insurances are sometimes taken during such period when the risk is
greatest and thereby selection takes place against the insurers. Short period
scales are evolved to prevent such selection against the insurers. They are also
applicable when annual insurance is cancelled by the insured. In that case
refund is made keeping the premium on short period scale for the period Insurer
was in risk.22**Minimum premium**It is the practice to charge minimum premium under each policy so that
administrative expenses of issuing the policy are covered.**Test Yourself 1**What is expected of an agent when she detects a moral hazard?I. Continue with the insurance as beforeII. Report the same to the insurerIII. Ask for a share in the claimsIV. Turn a blind eye**D.** **Fixing the Sum Insured**It’s the maximum amount that an insurance company will indemnify as per policy
condition. An insured has to be very careful in choosing the limit of indemnity,
because that is the maximum amount that would be reimbursed at the time ofclaim.The sum insured is always fixed by the insured. It is an amount on which rate is
applied to arrive at the premium under the policy.It should be representative of the actual value of the property. If there is over
insurance, no benefit accrues to the insured and in case of under insurance, the
claim gets proportionately reduced.**Deciding the sum insured**Under each class of business the insured should be advised of the following points | IC 38 -IA-Eng-Non-Life.md | null | No claim bonus is a powerful strategy to improve underwriting experience and | IC 38 -IA-Eng-Non-Life_012 | {
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refund is made keeping the premium on short period scale for the period Insurer
was in risk.22**Minimum premium**It is the practice to charge minimum premium under each policy so that
administrative expenses of issuing the policy are covered.**Test Yourself 1**What is expected of an agent when she detects a moral hazard?I. Continue with the insurance as beforeII. Report the same to the insurerIII. Ask for a share in the claimsIV. Turn a blind eye**D.** **Fixing the Sum Insured**It’s the maximum amount that an insurance company will indemnify as per policy
condition. An insured has to be very careful in choosing the limit of indemnity,
because that is the maximum amount that would be reimbursed at the time ofclaim.The sum insured is always fixed by the insured. It is an amount on which rate is
applied to arrive at the premium under the policy.It should be representative of the actual value of the property. If there is over
insurance, no benefit accrues to the insured and in case of under insurance, the
claim gets proportionately reduced.**Deciding the sum insured**Under each class of business the insured should be advised of the following points
which have to be borne in mind while deciding the sum insured:**a)** **Personal accident insurance** : The sum insured offered by a company can be afixed amount or it can also be based on the insured’s income. Some insurance
companies may give a benefit equal to 60 times or 100 times of the insured’s
monthly income for a particular disability. There could be an upper limit or ‘cap’
on the maximum amount. Compensations can vary from company to company. In
group personal accident policies the sum insured may be fixed separately for
each insured person or may be linked to emoluments payable to the insuredperson.**b)** **Motor insurance** : In case of motor insurance the sum insured is the insured'sdeclared value [IDV]. It is the value of the vehicle, which is arrived at by adjusting
the current manufacture's listed selling price of the vehicle with depreciation
percentage as prescribed in the erstwhile India Motor Tariff. Manufacturer's listed
selling price will include local duties/ taxes excluding registration and insurance.IDV = (Manufacturer’s listed selling price – depreciation) + (Accessories that are
not included in listed selling price-depreciation) and excludes registration and
insurance costs.The IDV of vehicles that are obsolete or aged over 5 years is calculated by mutual
agreement between insurer and the insured. Instead of depreciation, IDV of old23cars is arrived at by assessment of vehicle’s condition done by surveyors, car
dealers etc.IDV is the amount of compensation given in case a vehicle is stolen or suffers
total loss. It is highly recommended to get IDV which is near the market value of
the car. Insurers provide a range of 5% to 10% to decrease IDV to the insured.
Less IDV would mean lesser premium.**c)** **Fire insurance:** In fire insurance the sum insured may be fixed on the basis ofindemnity or reinstatement value for buildings/ plant and machinery and
fixtures. Contents are covered on the basis of their market value which is cost of
the item less depreciation. (Reinstatement value is explained in detail in Chapter
28 - Commercial Insurance)**d)** **Stocks insurance:** In case of stocks, sum insured is their market value. Theinsured will be reimbursed at the cost at which these stocks can be purchased in
the market to replace the damaged raw material, after the loss.**e)** **Marine cargo insurance:** It is an agreed valued policy and the sum insured is asper the agreement between insurer and insured at the time of contract. Normally
it would consist of the sum of cost of the commodity plus Insurance + freight i.e.
CIF value.**f)** **Marine hull insurance:** In marine hull insurance, the sum insured is the value,agreed between the insured and the insurer at the beginning of the contract.
This value would be arrived at by a certified valuer after an inspection of the
hull/ ship.**g)** **Liability insurance:** In case of liability policies, the sum insured is the liabilityexposure of the industrial units based on the degree of exposure, geographical
spread. Additional legal costs and expenses may also form part of claim
compensation. The sum insured is decided by the insured based on the above
parameters.**Test Yourself 2**Suggest an insurance scheme for a doctor to protect himself from any claims of | IC 38 -IA-Eng-Non-Life.md | d23 | Minimum premium | IC 38 -IA-Eng-Non-Life_013 | {
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the market to replace the damaged raw material, after the loss.**e)** **Marine cargo insurance:** It is an agreed valued policy and the sum insured is asper the agreement between insurer and insured at the time of contract. Normally
it would consist of the sum of cost of the commodity plus Insurance + freight i.e.
CIF value.**f)** **Marine hull insurance:** In marine hull insurance, the sum insured is the value,agreed between the insured and the insurer at the beginning of the contract.
This value would be arrived at by a certified valuer after an inspection of the
hull/ ship.**g)** **Liability insurance:** In case of liability policies, the sum insured is the liabilityexposure of the industrial units based on the degree of exposure, geographical
spread. Additional legal costs and expenses may also form part of claim
compensation. The sum insured is decided by the insured based on the above
parameters.**Test Yourself 2**Suggest an insurance scheme for a doctor to protect himself from any claims of
negligence against him.I. Personal accident insuranceII. Professional Liability insuranceIII. Marine hull insuranceIV. Health insurance24**Summary**a) Process of classifying risks and deciding into which category they fall isimportant for rate making.b) Underwriting is the process of determining whether a risk offered for insuranceis acceptable, and if so, at what rate, terms and conditions the insurance cover
will be accepted.c) A rate is the price of a given unit of insurance.d) The basic objective of rate making is to ensure that price of insurance should beadequate and reasonable.e) ‘Pure premium’ is suitably loaded or increased by adding percentages to providefor expenses, reserves and profits.f) The term hazard in insurance language refers to those conditions or features orcharacteristics which create or increase the chance of loss arising from a given
peril.g) The objective of imposing deductible/ excess clauses is to eliminate smallclaims.h) No claim bonus is a powerful strategy to improve underwriting experience andforms an integral part of rating systems.i) Sum insured is the maximum amount that an insurance company will indemnifyas per policy condition.**Key terms**a) Underwritingb) Rate makingc) Physical hazardsd) Moral hazardse) Indemnityf) Loading of premiumg) Warrantiesh) Deductiblesi) Excess**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.25## CHAPTER G-03## PERSONAL AND RETAIL INSURANCE**Chapter Introduction**In the previous chapters we have learnt various concepts and principles related to
general insurance. General insurance products are classified differently in different
markets. Some classify them as property, casualty and liability. Elsewhere, they are
grouped as fire, marine, motor and miscellaneous. In this chapter, common products
such as personal accident, travel, home and shop keepers and motor insurance that
are bought by such retail customers are discussed.**Learning Outcomes**After studying this chapter, you should be able to:1. Explain householder’s insurance
2. Prepare shop insurance cover
3. Discuss motor insurance26**A.** **Retail Insurance Products**There are some insurance products that are purchased for individuals for covering
certain interests. Though small commercial or business interests could be there for
such insurances, these are generally sold to individuals. In some markets these are
called ‘small ticket’ policies or ‘retail policies’ or ‘retail products’. Insurances of
the home, motor cars, two-wheelers, small businesses like shops etc. fall under this
category. These products are usually sold by the same agents/ distribution channels
that deal with personal lines of insurance as the buyers also are essentially from the
same consumer segment.**B.** **'All Risks' and ‘Named Perils’ Insurance Policy**Non-life insurance policies can be broadly classified into two categories: Named peril policies
All risk policiesi. "All risks" typically means that any risk that the insurance contract does notspecifically exclude is covered, subject to terms and conditions.ii. All-risks insurance is the most comprehensive type of coverage available. It istherefore priced proportionately higher than other types of policies, and the
cost of this type of insurance is measured against the probability of a claim.iii. Named peril policies are those where the perils covered are specifically listedand defined.**C.** **Package policies**i. Package covers give, under a single document, a combination of covers.
ii. For instance there are covers such as Householder’s Policy, Shopkeeper’s Policy,Office Package Policy etc. that, under one policy, seek to cover various physical
assets including buildings, contents etc.
iii. Such policies may also include certain personal lines or liability covers. | IC 38 -IA-Eng-Non-Life.md | e24 | Marine cargo insurance: | IC 38 -IA-Eng-Non-Life_014 | {
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that deal with personal lines of insurance as the buyers also are essentially from the
same consumer segment.**B.** **'All Risks' and ‘Named Perils’ Insurance Policy**Non-life insurance policies can be broadly classified into two categories: Named peril policies
All risk policiesi. "All risks" typically means that any risk that the insurance contract does notspecifically exclude is covered, subject to terms and conditions.ii. All-risks insurance is the most comprehensive type of coverage available. It istherefore priced proportionately higher than other types of policies, and the
cost of this type of insurance is measured against the probability of a claim.iii. Named peril policies are those where the perils covered are specifically listedand defined.**C.** **Package policies**i. Package covers give, under a single document, a combination of covers.
ii. For instance there are covers such as Householder’s Policy, Shopkeeper’s Policy,Office Package Policy etc. that, under one policy, seek to cover various physical
assets including buildings, contents etc.
iii. Such policies may also include certain personal lines or liability covers.
iv. Package covers could have common terms and conditions for all sections as alsospecific terms for specific sections of the policy.I.**D.** **Shopkeeper’s Insurance**A shop owner is not a corporate house that has large reserves of money to restart
business. A single mishap may lead to closure of her/ his shop and could probably
ruin her/ his family. There may be bank loans also to repay. There is always the
possibility that a member of the public suffers a personal injury or damage to her/
his property, caused by the shop owner’s operations and a court holds the shop
owner liable to pay the damages. Such situations can also ruin a shopkeeper.
Therefore, it's very essential to secure this means of livelihood.27**Shopkeeper’s Insurance policies are devised to cover many of such aspects of**
**commercial shop/ retail business.** There are policies that are customised to cover
specific interests of many types of shops such as antique shop, barbershop, beauty
parlour, bookstore, department store, dry cleaners, gift shop, pharmacy, stationery
shop, toy shop, apparel store etc.**1.** **What does shopkeeper’s insurance cover?**The policy can be tailored to provide cover to protect the specific areas of retail
business. It usually covers damage to the shop structure and contents due to fire,
earthquake, flooding or malicious damage; and burglary. Shop insurance can also
include business interruption protection. This will cover any loss of income or
additional expenditure in the event of operation of unexpected peril causing
interruption of business operation. The coverage can be selected by the insured
depending on her/ his range of activities.The additional covers the insured can opt may vary from insurer to insurer and can
be verified from the respective websites of the non-life insurance companies. These
could be:**i.** **Burglary and Housebreaking:** Cover for housebreaking, theft, and larceny of
office content
**ii.** **Machinery Breakdown:** Cover for breakdown of electrical/ mechanicalappliances
**iii.** **Electronic Equipment and Appliances:** Provides all-risk cover for electronic appliances
Cover for loss of electronic installations
**iv.** **Money Insurance** : Provides coverage against loss of money due to an accidentwhile it is in: Transit from the business premises to bank and vice versa
A safe at the business premises
A till (box/ drawer/ counter) at the business premises
**v.** **Baggage** : Compensates for loss of baggage while on travel for official purposes
**vi.** **Fixed Plate Glass and Sanitary Fittings covers accidental loss of damage to:** Fixed plate glass
Sanitary fittings
Neon Sign/ Glow Sign/ Hoarding
**vii.** **Personal Accident**
**viii.** **Infidelity/ Dishonesty of employees** : Covers loss or damage caused bydishonest acts of employees
**ix.** **Legal Liability:** Compensation for accidents arising out of and in the course of employment
Provides cover for legal liability to third parties
Fire/ Burglary/ Baggage/ Plate Glass/ Fidelity Guarantee/ Workmen
Compensation and Public Liability Polices (dealt with next chapter) can be taken
separately also.
Terrorism cover may also be extended. The exclusions are generally the same
as in householder’s insurance.28**E.** **Householder’s Insurance**The coverages under a Householder’s Insurance Policy can be quite wide. It is usually | IC 38 -IA-Eng-Non-Life.md | null | B. | IC 38 -IA-Eng-Non-Life_015 | {
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**v.** **Baggage** : Compensates for loss of baggage while on travel for official purposes
**vi.** **Fixed Plate Glass and Sanitary Fittings covers accidental loss of damage to:** Fixed plate glass
Sanitary fittings
Neon Sign/ Glow Sign/ Hoarding
**vii.** **Personal Accident**
**viii.** **Infidelity/ Dishonesty of employees** : Covers loss or damage caused bydishonest acts of employees
**ix.** **Legal Liability:** Compensation for accidents arising out of and in the course of employment
Provides cover for legal liability to third parties
Fire/ Burglary/ Baggage/ Plate Glass/ Fidelity Guarantee/ Workmen
Compensation and Public Liability Polices (dealt with next chapter) can be taken
separately also.
Terrorism cover may also be extended. The exclusions are generally the same
as in householder’s insurance.28**E.** **Householder’s Insurance**The coverages under a Householder’s Insurance Policy can be quite wide. It is usually
a package of all the needs of a Householder.Losses normally covered include fire, lightning, explosion and aircraft fall/ impact
damage (commonly known as FLEXA); storm, tempest, flood and inundation
(commonly known as STFI); and burglary. Coverage differs from company to
company and from policy to policy.Apart from the structure, it covers the contents of the house against burglary,
housebreaking, larceny and theft. Jewellery whilst being worn or kept in locked safe
can also be insured under Householder’s Insurance. Cover is also given for electrical
and mechanical failure of domestic and electronic appliances.Similarly, Householder’s insurance Package also provides coverage for loss of
personal baggage, lost during travel, or liabilities to neighbours/ visitors may also
be part of Householders’ insurance package. Some insurers also provide coverage
for pedal cycle, personal accident and workmen’s compensation.IRDAI has introduced a standard product with effect from 1st April, 2021 – Bharat
Griha Raksha policy with a tenure of upto 10 years, which shall be mandatorily
offered by all general insurers carrying on Fire and allied perils insurance business.**Bharat Griha Raksha (meant for Home Building and Home Contents) policy** offers
cover against a wide range of perils, namely Fire, Natural Catastrophe, Forest,
Jungle and Bush fires, Impact Damage of any kind, Riot, Strike, Malicious Damages,
Acts of terrorism, Bursting and overflowing of water tanks, apparatus and pipes,
Leakage from automatic sprinkler installations and Theft within 7 days from the
occurrence of any of the aforesaid events. This policy can be for a period of 1 to 10years.In addition to the Home Building, the policy covers General Home Contents
automatically (without any need for declaration of details) for 20% of the Sum
Insured of the Building subject to a maximum of Rs.10 lakhs. One can also opt for a
higher Sum Insured for general contents by declaring the details.The policy offers two optional covers, namely (i) Insurance for Valuable Contents
like jewellery and curios; and (ii) Personal Accident of the insured and spouse due
to an insured peril under the policy.The policy gives complete waiver of underinsurance. That is, if the Sum Insured
declared by a policyholder is less than what ought to have been declared for the
property in question, the policyholder’s claim will not be settled proportionately
but upto the Sum Insured that is declared.29**F.** **Sum Insured and Premium**Industrial units or offices will maintain books of accounts showing therein value of
assets, therefore, it may not be difficult to arrive at the sum insured. In the case of
shop and house this may not be always possible.As already stated under householder’s insurance, generally, there are two methods
of fixing the sum insured, viz. market value and reinstatement/ replacement value.For additional coverage like money, baggage, personal accident the premium would
depend on the sum insured and the covers opted for.**How does one fix the Sum Insured?**i. Generally, for fire insurance, there are two methods of fixing the Sum Insured.One is Market Value (MV) and the other is Reinstatement Value (RIV). In the case
of M.V., in the event of a loss, depreciation is levied on the asset depending on
its age. Under this method, the insured is not paid amount sufficient to replace | IC 38 -IA-Eng-Non-Life.md | null | Baggage | IC 38 -IA-Eng-Non-Life_016 | {
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declared by a policyholder is less than what ought to have been declared for the
property in question, the policyholder’s claim will not be settled proportionately
but upto the Sum Insured that is declared.29**F.** **Sum Insured and Premium**Industrial units or offices will maintain books of accounts showing therein value of
assets, therefore, it may not be difficult to arrive at the sum insured. In the case of
shop and house this may not be always possible.As already stated under householder’s insurance, generally, there are two methods
of fixing the sum insured, viz. market value and reinstatement/ replacement value.For additional coverage like money, baggage, personal accident the premium would
depend on the sum insured and the covers opted for.**How does one fix the Sum Insured?**i. Generally, for fire insurance, there are two methods of fixing the Sum Insured.One is Market Value (MV) and the other is Reinstatement Value (RIV). In the case
of M.V., in the event of a loss, depreciation is levied on the asset depending on
its age. Under this method, the insured is not paid amount sufficient to replace
the property.ii. In the RIV method, the insurance company will pay the cost of replacementsubject to ceiling of sum insured. Under this method, no depreciation is levied.
One condition is that the damaged asset should be repaired/ replaced in order
to get the claim. It may be noted that RIV method is allowed only for fixed assets
and not for other assets like stocks and stocks in process.Most policies insure the structure of the home for its reconstruction, which is called
‘reinstatement value’ (and not on ‘market value’). Reinstatement value is the cost
incurred to reconstruct the home if it is damaged. On the other hand, market value
depends on factors like age of the property, depreciation, etc.Sum insured is generally calculated by multiplying the built up area of insured's
home with the construction rate per square foot. The contents of the home furniture, durables, clothes, utensils, etc. - are valued on market value basis i.e.
the current market value of similar items after depreciation.Premium would depend on the value insured and the coverage taken.**Test Yourself 1**Which of the below statements is correct with regards to a package policy?I. Package Policy provide a combination of covers under a single document
II. Package Policy can cover only physical assets like buildings
III. A named peril policy or package policy comes at the same price.
IV. Only named peril policies can be bought and package policies are not available.V.30**Definition****Some important definitions****a)** **Burglary** means the unforeseen and unauthorised entry to or exit from theinsured premises by aggressive and detectable means with the intent to steal
contents there from.**b)** **Housebreaking** is said to have taken place when a house trespass has beencommitted by entering it for the purpose of committing an offence.**c)** **Robbery** means the theft of contents at the insured’s premises using aggressiveand violent means against the Insured and/ or insured’s employees.**d)** **Safe** means a strong cabinet within the insured’s premises designed for the safeand secure storage of valuable items, and access to which is restricted.**e)** **Theft** is a generic term for all crimes in which a person intentionally andfraudulently takes the property of another without permission or consent and
with the intent to convert it to the taker’s use or potential sale. Theft is
synonymous with ‘larceny’.**Test Yourself 2**Under the shopkeeper package policy, the insured may opt for an additional ‘Fixed plate
glass and sanitary fittings’ cover. This will cover accidental loss of damage to which of the
following?I. Fixed plate glass
II. Sanitary fittings
III. Neon signs
IV. All of the above**G.** **Motor Insurance**Think of this situation: Revathi has bought a new car using all her savings and taken
it for a drive. Out of nowhere, a dog comes in the way and to avoid hitting it, Revathi
swerves sharply, breaks and goes over the divider, hits another car and injures a
person walking on the road. The outcome of a single incident has resulted in damage
to Revathi’s own car, public property, another car and also caused injury to anotherperson.In this scenario, if Revathi does not have a car insurance, she may end up paying far
more than what it cost her to purchase the car. Will Revathi or similar people have that much money to pay?
Should the other party’s insurance pay for Revathi’s actions? | IC 38 -IA-Eng-Non-Life.md | null | F. | IC 38 -IA-Eng-Non-Life_017 | {
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