Most important summery points exam point of view IC -38 Insurance exam

Most important summery points   exam point of view IC -38 Insurance exam 

The idea of insurance took birth thousands of years ago. Yet, the business of

insurance, as we know it today, goes back to just two or three centuries.

1. History of insurance

Insurance has been known to exist in some form or other since 3000 BC. Various

civilisations, over the years, have practiced the concept of pooling and sharing

among themselves, all the losses suffered by some members of the community.

Let us take a look at some of the ways in which this concept was applied.

2. Insurance through the ages

Babylonian Traders The Babylonian traders had agreements where they

would pay additional sums to lenders, as a price for

writing off of their loans, in case a shipment was lost or

stolen. These were called ‘bottomry loans’. Under these

agreements, the loan taken against the security of the

ship or its goods had to be repaid only if and when the

ship arrived safely, after the voyage, at its destination.

Traders

Bharuch and Surat

from Practices similar to Babylonian traders were prevalent

among traders from Bharuch and Surat, sailing in Indian

ships to Sri Lanka, Egypt and Greece._

Greeks The Greeks had started benevolent societies in the late

7th century AD, to take care of the funeral - and families

- of members who died. The Friendly Societies of

England were similarly constituted._

Inhabitants

Rhodes

of The inhabitants of Rhodes adopted a practice whereby,

if some goods were lost due to jettisoning1 during

distress, the owners of goods (even those who lost

nothing) would bear the losses in some proportion._

Chinese Traders Chinese traders in ancient days would keep their goods

in different boats or ships sailing over the treacherous

rivers. They assumed that even if any of the boats

suffered such a fate, the loss of goods would be only

partial and not total. The loss could be distributed and

thereby reduced._

3. Modern concepts of insurance

In India the principle of life insurance was reflected in the institution of the

joint-family system in India, which was one of the best forms of life insurance

down the ages. Sorrows and losses were shared by various family members in

the event of the unfortunate demise of a member, as a result of which each

member of the family continued to feel secure.

The break-up of the joint family system and emergence of the nuclear

family in the modern era, coupled with the stress of daily life has made it

Jettisoning means throwing away some of the cargo to reduce weight of the ship and restore balance

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necessary to evolve alternative systems for security. This highlights the

importance of life insurance to an individual.

i. Lloyds: The origins of modern commercial insurance business as

practiced today can be traced to Lloyd’s Coffee House in London.

Traders, who used to gather there, would agree to share the losses, to

their goods being carried by ships, due to perils of the sea. Such losses

used to occur because of maritime perils, such as pirates robbing on the

high seas, or bad sea weather spoiling the goods or sinking of the ship

due to perils of the sea.

ii. Amicable Society for a Perpetual Assurance founded in 1706 in London

is considered to be the first life insurance company in the world.

4. History of insurance in India

a) India: Modern insurance in India began in early 1800 or thereabouts, with

agencies of foreign insurers starting marine insurance business.

The Oriental

Insurance Co. Ltd

Life The first life insurance company to be set up

in India was an English company_

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

India

Bombay Mutual Assurance

Society Ltd.

The first Indian insurance company. It was

formed in 1870 in Mumbai

National

Company Ltd.

The oldest insurance company in India. It was

founded in 1906 and it is still in business.

Insurance

Many other Indian companies were set up subsequently as a result of the

Swadeshi movement at the turn of the century.

Important

In 1912, the Life Insurance Companies Act and the Provident Fund Act were

passed to regulate the insurance business. The Life Insurance Companies Act,

1912 made it compulsory that premium-rate tables and periodical valuation of

companies be certified by an actuary. However, the disparity and discrimination

between Indian and foreign companies continued.

The Insurance Act 1938 was the first legislation enacted to regulate the

conduct of insurance companies in India. This Act, as amended from time

to time continues to be in force. The Controller of Insurance was

appointed by the Government under the provisions of the Insurance Act.

b) Nationalisation of life insurance: Life insurance business was nationalised

on 1st September 1956 and the Life Insurance Corporation of India (LIC)

was formed. There were 170 companies and 75 provident fund societies

doing life insurance business in India at that time. From 1956 to 1999, the

LIC held exclusive rights to do life insurance business in India.

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Summary

• Insurance is risk transfer through risk pooling.

• The origin of commercial insurance business as practiced today is traced to

the Lloyd’s Coffee House in London.

• An insurance arrangement involves the following entities like:

S Asset,

S Risk,

s Peril,

s Contract,

S Insurer and

s Insured

• When persons having similar assets exposed to similar risks contribute into a

common pool of funds it is known as pooling.

• Apart from insurance, other risk management techniques include:

s Risk avoidance,

s Risk control,

s Risk retention,

Risk financing and

S Risk transfer

• The thumb rules of insurance are:

•/ Don’t risk more than you can afford to lose,

s Consider the likely outcomes of the risk carefully and

S Don’t risk a lot for a little

Key Terms

1. Risk

2. Pooling

3. Asset

4. Burden of risk

5. Risk avoidance

6. Risk control

7. Risk retention

8. Risk financing

9. Risk transfer

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Summary

a) The role of customer service and relationships is far more critical in the case

of insurance than in other products.

b) Five major indicators of service quality include reliability, assurance,

responsiveness, empathy and tangibles.

c) Customer lifetime value may be defined as the sum of economic benefits

that can be derived from building a sound relationship with a customer over

a long period of time.

d) The role of an insurance agent in the area of customer service is absolutely

critical.

e) IRDA has launched an Integrated Grievance Management System (IGMS)

which acts as a central repository of insurance grievance data and as a tool

for monitoring grievance redress in the industry.

f) The Ombudsman, by mutual agreement of the insured and the insurer can

act as a mediator and counsellor within the terms of reference.

g) Active listening involves paying attention, providing feedback and

responding appropriately.

h) Ethical behaviour involves placing the customer’s interest before self.

Key terms

a) Quality of service

b) Empathy

c) Integrated Grievance Management System (IGMS)

d) Customer Protection Act, 1986

e) District Consumer Forum

f) Insurance Ombudsman

g) Body language

h) Active listening

i) Ethical behaviour

Answers to Test Yourself

Answer 1

The correct option is III.

Sum of economic benefits that can be achieved by building a long term

relationship with the customer is referred to as customer lifetime value.

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Summary

• Insurance involves a contractual agreement in which the insurer agrees to

provide financial protection against specified risks for a price or

consideration known as the premium.

• A contract is an agreement between parties, enforceable at law.

• The elements of a valid contract include:

i. Offer and acceptance

ii. Consideration,

iii. Consensus ad-idem,

iv. Free consent

v. Capacity of the parties and

vi. Legality of the object

• The special features of insurance contracts include:

i. Uberrima fides,

ii. Insurable interest,

iii. Proximate cause

Key Terms

1. Offer and acceptance

2. Lawful consideration

3. Consensus ad idem

4. Uberrima fides

5. Material facts

6. Insurable interest

7. Proximate cause

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Summary

a) Insurance in some form or other existed many centuries ago but its modern

form is only a few centuries old. Insurance in India has passed through many

stages with government regulation.

b) Health of its citizens being very important, governments play a major role in

creating a suitable healthcare system.

c) Level of healthcare provided depends on many factors relating to a

country’s population.

d) The three type of healthcare are primary, secondary and tertiary depending

on the level of medical attention required. Cost of healthcare rises with

each level with tertiary care being the costliest.

e) India has its own peculiar challenges such as population growth and

urbanization which require proper healthcare.

f) The government was also the first to come up with schemes for health

insurance followed later by commercial insurance by private insurance

companies.

g) The health insurance market is made up of many players some providing the

infrastructure, with others providing insurance services, intermediaries such

as brokers, agents and third party administrators servicing health insurance

business and also other regulatory, educational as well as legal entities

playing their role.

Key terms

a) Healthcare

b) Commercial insurance

c) Nationalization

d) Primary, Secondary and Tertiary Healthcare

e) Mediclaim

f) Broker

g) Agent

h) Third Party Administrator

i) IRDAI

j) Ombudsman

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Summary

a) The first stage of documentation is the proposal form through which the

insured informs about herself and what insurance she needs

b) The duty of disclosure of material information arises prior to the inception

of the policy, and continues throughout the policy period

c) Insurance companies usually add a declaration at the end of the Proposal

form to be signed by the proposer.

d) Elements of a proposal form usually include:

i. Proposer’s name in full

ii. Proposer’s address and contact details

iii. Bank details in case of health policies

iv. Proposer’s profession, occupation or business

v. Details and identity of the subject matter of insurance

vi. Sum insured

vii. Previous and present insurance

viii.Loss experience

ix. Declaration by the insured

e) An agent, who acts as the intermediary, has the responsibility to ensure all

material information about the risk is provided by the insured to insurer.

f) The process of scrutinising the proposal and deciding about acceptance is

known as underwriting.

g) In health policies, a Prospectus is also provided to the insured and he has to

declare in the proposal that he has read and understood it

h) 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.

i) Payment of premium can be made by cash, any recognised banking

negotiable instrument, postal money order, credit or debit card, internet, etransfer,

direct credit or any other method approved by authority from time

to time.

j) A certificate of insurance provides proof of insurance in cases where it may

be required

k) The policy is a formal document which provides an evidence of the contract

of insurance.

1) A warranty is a condition expressly stated in the policy which has to be

literally complied with for validity of the contract.

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m) 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 / changes through a

document called endorsement.

n) 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.

o) Money Laundering means converting money obtained through criminal means

to legal money and laws to fight this have been introduced worldwide and in

India

p) An agent has a responsibility to follow the Know Your Customer guidelines

and obtain documents as required by these guidelines.

Key Terms

a) Policy form

b) Advance payment of premium

c) Certificate of Insurance

d) Renewal notice

e) Warranty

f) Condition

---

g) Endorsement

h) Money Laundering

i) Know Your Customer

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Summary

a) A health insurance policy provides financial protection to the insured person

in the event of an unforeseen and sudden accident / illness leading to

hospitalization.

b) Health insurance products can be classified on the basis of number of people

covered under the policy: individual policy, family floater policy, group

policy.

c) A hospitalization expenses policy or Mediclaim reimburses the cost of

hospitalization expenses incurred on account of illness / accident.

d) Pre hospitalization expenses would be relevant medical expenses incurred

during period up to the defined number of days (generally 30 days) prior to

hospitalization and will be considered as part of claim.

e) Post hospitalization expenses would be relevant medical expenses incurred

during period up to the defined number of days (generally 60 days) after

hospitalization and will be considered as part of claim.

f) In a family floater policy, the family consisting of spouse, dependent

children and dependent parents are offered a single sum insured which

floats over the entire family.

g) A hospital daily cash policy provides a fixed sum to the insured person for

each day of hospitalization.

h) Critical illness policy is a benefit policy with a provision to pay a lump sum

amount on diagnosis of certain named critical illness.

i) High Deductible or Top-up Covers offer cover for higher sum insured over

and above a specified chosen amount (called threshold or deductible).

j) The fixed benefits cover provides adequate cover to the insured person and

also helps the insurer to effectively price his policy

k) A Personal Accident (PA) Cover provides compensation in the form of death

and disability benefits due to unforeseen accidents.

1) Out-patient covers provide for medical expenses like dental treatments,

vision care expenses, routine medical examinations and tests etc. that do

not require hospitalization.

m) 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.

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n) Corporate Floater or Buffer Cover amount helps meet excess expenses over

and above the family sum insured.

o) Overseas Mediclaim / Travel Policies provide cover to an individual against

exposure to the risk of accident, injury and sickness during his stay

overseas.

p) Corporate Frequent Travelers’ Plan is an annual policy whereby a corporate

takes individual policies for its executives who frequently make trips outside

India.

q) Many terms used in health insurance have been standardized by IRDA by

regulation to avoid confusion especially for the insureds.

Answers to Test Yourself

Answer 1

The correct option is II.

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

thirty days pre-hospitalization.

Answer 2

The correct option is I.

As per IRDA guidelines, a 30 days grace period is allowed for renewal of

individual health policies.

Self-Examination Questions

Question 1

Which of the below statement is correct with regards to a hospitalization

expenses policy?

I. Only hospitalization expenses are covered

II. Hospitalization as well as pre and post hospitalization expenses are covered

III. Hospitalization as well as pre and post hospitalization expenses are covered

and a lumpsum amount is paid to the family members in the event of

insured’s death

IV. Hospitalization expenses are covered from the first year and pre and post

hospitalization expenses are covered from the second year if the first year is

claim free.

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Summary

a) Health insurance is based on the concept of morbidity which is defined as

the risk of a person falling ill or sick.

b) Underwriting is the process of risk selection and risk pricing.

c) Underwriting is required to strike a proper balance between risk and

business thereby maintaining the competitiveness and yet profitability for

the organisation.

d) Some of the factors which affect a person’s morbidity are age, gender,

habits, occupation, build, family history, past illness or surgery, current

health status and place of residence.

e) The purpose of underwriting to prevent adverse selection against the insurer

and also ensure proper classification and equity among risks.

f) The agent is the first level underwriter as he is in the best position to know

the prospective client to be insured.

g) The core principles of insurance are: utmost good faith, insurable interest,

indemnity, contribution, subrogation and proximate cause.

h) The key tools for underwriting are: proposal form, age proof, financial

documents, medical reports and sales reports.

i) Medical underwriting is a process which is used by the insurance companies

to determine the health status of an individual applying for health insurance

policy.

j) Non-medical underwriting is a process where the proposer is not required to

undergo any medical examination.

k) Numerical rating method is a process adopted in underwriting, wherein

numerical or percentage assessments are made on each aspect of the risk.

1) The underwriting process is completed when the received information is

carefully assessed and classified into appropriate risk categories.

m) Group insurance is mainly underwritten based on the law of averages,

implying that when all members of a standard group are covered under a

group health insurance policy, the individuals constituting the group cannot

anti-select against the insurer.

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The above list is only indicative. Additional information/documents may be

required depending on specific case details or depending upon claim

settlement policy/procedure followed by particular insurer.

Test Yourself 5

are paid upfront by Assistance Company and later claimed

from insurance company.

I. Bail bond cases

II. Personal accident claims

III. Overseas travel insurance claims

IV. Untenable claims

Summary

a) Insurance is a ‘promise’ and the policy is a ‘witness’ to that promise. The

occurrence of insured event leading to a claim under the policy is the true

test of that promise.

b) One of the key rating parameter in insurance is the claims paying ability of

the insurance company.

c) Customers, who buys insurance is the primary stakeholder as well as the

receiver of the claim.

d) In Cashless claim a network hospital provides the medical services based on

a pre-approval from the insurer / TPA and later submits the documents for

settlement of the claim.

e) In reimbursement claim, the customer pays the hospital from his own

resources and then files claim with Insurer / TPA for payment.

f) Claim intimation is the first instance of contact between the customer and

the claims team.

g) If a fraud is suspected by insurance company in case of insurance claim, it is

sent for investigation. Investigation of a claim could be done in-house by an

insurer/TPA or be entrusted to a professional investigation agency.

h) Reserving refers to the amount of provision made for all claims in the books

of the insurer based on the status of the claims.

i) In case of a denial, the customer has the option, apart from the

representation to the insurer, to approach the Insurance Ombudsman or the

consumer forums or even the legal authorities.

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j) Frauds occur mostly in hospitalization indemnity policies but Personal

accident policies also are used to make fraud claims.

k) The TPA provides many important services to the insurer and gets

remunerated in the form of fees.

Self-Examination Questions

Question 1

Who among the following is considered as primary stakeholder in insurance

claim process?

I. Customers

II. Owners

III. Underwriters

IV. Insurance agents/brokers

Question 2

Girish Saxena’s insurance claim was denied by insurance company. In case of a

denial, what is the option available to Girish Saxena, apart from the

representation to the insurer?

I. To approach Government

II. To approach legal authorities

III. To approach insurance agent

IV. Nothing could be done in case of case denial

Question 3

During investigation, of a health insurance claim presented by Rajiv Mehto,

insurance company finds that instead of Rajiv Mehto, his brother Rajesh Mehto

had been admitted to hospital for treatment. The policy of Rajiv Mehto is not a

family floater plan. This is an example of fraud.

I. Impersonation

II. Fabrication of documents

III. Exaggeration of expenses

IV. Outpatient treatment converted to in-patient / hospitalization

Question 4

Under which of the following condition, is domiciliary hospitalization is covered

in a health insurance policy?

The condition of the patient is such that he/she can be removed to the

Hospital/Nursing Home , but prefer not to

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I.

S The nature of goods stored/manufactured, i.e., non-hazardous,

hazardous, extra-hazardous etc.

ii. Marine Insurance

S Method of packing i.e., whether in single gunny bags or double gunny

bags, whether in new drums or second hand drums; etc.

S The nature of goods (e.g. whether the machinery is new or second hand)

iii. Motor Insurance

S Cubic capacity of engine (private car)

The year of manufacture

S Carrying capacity of a truck (tonnage)

•S The purpose for which the vehicle is used

S The geographical area in which it is used

iv. Personal Accident Insurance

S The exact nature of occupation

S Age

•S Height and weight

S Physical disabilities etc.

v. Health Insurance

S Any operations undergone

S If suffering from Diabetes or Hypertension

vi. Common features

S The fact that previous insurers had rejected the proposal or charged

extra premium, or cancelled, or refused to renew the policy

S Previous losses suffered by the proposer

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Summary

a) The process of insurance has four elements (asset, risk, risk pooling and an

insurance contract).

b) An asset may be anything that confers some benefit and is of economic

value to its owner.

c) A chance of loss represents risk.

d) Condition or conditions that increase the probability or severity of the loss

are referred to as hazards.

e) The mathematical principle, that makes insurance possible is known as

principle of risk pooling.

f) The elements of a valid contract include offer and acceptance,

consideration, legality, capacity of the parties and the agreement between

parties.

g) Indemnity ensures that the insured is compensated to the extent of his loss

on the occurrence of the contingent event.

h) Subrogation means the transfer of all rights and remedies, with respect to

the subject matter of insurance, from the insured to the insurer.

i) The principle of contribution implies that if the same property is insured

with more than one insurance company, the compensation paid by all the

insurers together cannot exceed the actual loss suffered.

j) All insurance contracts are based on the principle of Uberrima Fides.

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

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

1) Proximate cause is a key principle of insurance and is concerned with how

the loss or damage actually occurred and whether it is indeed as a result of

an insured peril.

Key terms

a) Asset

b) Risk

c) Hazard

d) Risk pooling

e) Offer and acceptance

f) Lawful consideration

g) Consensus ad idem

h) Uberrima fides

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Summary

a) The first stage of documentation is essentially the proposal forms through

which the insured informs about herself

b) The duty of disclosure of material information arises prior to the inception

of the policy, and continues even after the conclusion of the contract

c) Insurance companies usually add a declaration at the end of the Proposal

form to be signed by the insurer

d) Elements of a proposal form include:

i. Proposer’s name in full

ii. Proposer’s address and contact details

iii. Proposer’s profession, occupation or business

iv. Details and identity of the subject matter of insurance

v. Sum insured

vi. Previous and present insurance

vii. Loss experience

viii.Declaration by the insured

e) An agent, who acts as the intermediary, has the responsibility to ensure all

material information about the risk is provided by the insured to insurer.

f) The process of scrutinising the proposal and deciding about acceptance is

known as underwriting.

g) Premium is the consideration or amount paid by the insured to the insurer

for insuring the subject matter of insurance, under a contract of insurance.

h) Payment of premium can be made by cash, any recognised banking

negotiable instrument, postal money order, credit or debit card, internet, etransfer,

direct credit or any other method approved by authority from time

to time.

i) A cover note is issued when preparation of policy is pending or when

negotiations for insurance are in progress and it is necessary to provide

insurance cover on provisional basis.

j) Cover notes are used predominantly in marine and motor classes of business.

k) A certificate of insurance provides existence of insurance in cases where

proof may be required

l) The policy is a formal document which provides an evidence of the contract

of insurance.

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m) A warranty is a condition expressly stated in the policy which has to be

literally complied with for validity of the contract.

n) If certain terms and conditions of the policy need to be modified at the time

of issuance, it is done by setting out the amendments / changes through a

document called endorsement.

o) The most important rule of construction is that the intention of the parties

must prevail and this intention is to be looked for in the policy itself.

Key Terms

a) Policy form

b) Advance payment of premium

c) Cover note

d) Certificate of Insurance

e) Renewal notice

f) Warranty

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By loading the premium the higher probability of claims or occurrence of

large claims is taken into consideration.

Example

i. Normal rate of premium is charged for cargo shipped by liners or other

vessels, which comply with the prescribed standards. However, if an over¬

aged or under-tonnage vessel ships the cargo then extra premium is

charged.

ii. 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.

iii. In health insurance if there are adverse features at the time of

underwriting, it can also lead to loading of premium.

Sometimes loading of premium is also done for adverse claims ratio, as in case

of motor insurance or health insurance policies.

As per the recent regulation of IRDAI Individual claim based loading cannot be

applied. Loading can only be applied to the overall portfolio, based on objective

criteria.

b) Imposition of warranties

Insurers incorporate appropriate warranties to reduce the physical hazard.

Some examples are provided below.

Example

i. Marine cargo

A warranty is inserted to the effect that goods (e.g. Tea) are packed in tin lined

cases.

ii. Burglary

It is warranted that the property is guarded by a watchman for twenty four

hours.

iii. Fire

In fire insurance, it is warranted the premises would not be used beyond normal

working hours.

iv. Motor

It is warranted that the vehicle will not be used for speed testing or racing.

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D. 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, for that is the maximum amount that would be reimbursed at the

time of claim.

The sum insured is always fixed by the insured and is the limit of liability under

the policy. 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.

1. Deciding the sum insured

Under each class of business the insured should be advised of the following

points which have to be borne in mind while deciding the sum insured:

a) Personal accident insurance: The sum insured offered by a company

can be a fixed amount or it can also be based on the insured’s income.

Some insurance companies may give a benefit equal to 60 times or 100

times of the insured’s monthly income for a particular disability. There

could be an upper limit or ‘cap’ on the maximum amount.

Compensations can vary from company to company. In group personal

accident policies the sum insured may be fixed separately for each

insured person or may be linked to emoluments payable to the insured

person.

b) Health insurance: The sum insured is available within a certain range. It

depends on the age bracket too. Let us say for age group of 25 -40 years

the insurer may offer a sum insured of 10 lakhs or higher and for age

group of 3 months to 5 years it could be 2 lakhs or so.

c) Motor insurance: In case of motor insurance the sum insured is the

insured's declared value [IDV]. It is the value of the vehicle, which is

arrived at by adjusting the current manufacture's listed selling price of

the vehicle with depreciation percentage as prescribed in the IRDA

regulations. Manufacturer's listed selling price will include local duties /

taxes excluding registration and insurance.

IDV = (Manufacturer’s listed selling price - depreciation) + (Accessories that

are not included in listed selling price-depreciation) and excludes

registration and insurance costs.

The IDV of vehicles that are obsolete or aged over 5 years is calculated by

mutual agreement between insurer and the insured. Instead of depreciation,

IDV of old cars is arrived at by assessment of vehicle’s condition done by

surveyors, car dealers etc.

IDV is the amount of compensation given in case a vehicle is stolen or suffers

total loss. It is highly recommended to get IDV which is near the market

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value of the car. Insurers provide a range of 5% to 10% to decrease IDV to

the insured. Less IDV would mean lesser premium.

d) Fire insurance

In fire insurance the sum insured may be fixed on the basis of market value

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.

e) Stocks insurance

In case of stocks, sum insured is their market value. The insured will be

reimbursed at the cost at which these stocks can be purchased in the market

to replace the damaged raw material, after the loss.

f) Marine cargo insurance

It is an agreed valued policy and the sum insured is as per the agreement

between insurer and insured at the time of contract. Normally it would

consist of the sum of cost of the commodity plus Insurance + freight i.e. CIF

value.

g) 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.

h) Liability insurance

In case of liability policies, the sum insured is the liability exposure of the

industrial units based on the degree of exposure, geographical spread.

Additional legal costs and expenses may also form part of claim

compensation. The sum insured is decided by the insured based on the

above parameters.

Test Yourself 4

Suggest an insurance scheme for a doctor to protect him from any claims of

negligence against him.

I. Personal accident insurance

II. Liability insurance

III. Marine hull insurance

IV. Health insurance

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Summary

a) Process of classifying risks and deciding into which category they fall is

important for rate making.

b) Underwriting is the process of determining whether a risk offered for

insurance is acceptable, and if so, at what rate, terms and conditions the

insurance cover will be accepted.

c) A rate is the price of a given unit of insurance.

d) The basic objective of rate making is to ensure that price of insurance

should be adequate and reasonable.

e) ‘Pure premium’ is suitably loaded or increased by adding percentages to

provide for expenses, reserves and profits.

f) The term hazard in insurance language refers to those conditions or features

or characteristics which create or increase the chance of loss arising from a

given peril.

g) The objective of imposing deductible / excess clauses is to eliminate small

claims.

h) No claim bonus is a powerful strategy to improve underwriting experience

and forms an integral part of rating systems.

i) Sum insured is the maximum amount that an insurance company will

indemnify as per policy condition.

Key terms

a) Underwriting

b) Rate making

c) Physical hazards

d) Moral hazards

e) Indemnity

f) Benefit

g) Loading of premium

h) Warranties

i) Deductibles

j) Excess

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Summary

a) A householder’s insurance policy only provides coverage on losses incurred

to an insured property from hazards or events named in the policy. The

perils covered will be clearly spelt out.

b) Householder’s insurance covers the structure and its contents against fire,

riots, bursting of pipes, earthquakes etc. Apart from the structure, it covers

the contents against burglary, housebreaking, larceny and theft.

c) Package or umbrella covers give, under a single document, a combination of

covers.

d) For a householder’s insurance policy generally there are two methods of

fixing the sum insured: Market Value (MV) and Reinstatement Value (RIV).

e) Shopkeeper’s insurance usually covers damage to the shop structure and

contents due to fire, earthquake, flooding or malicious damage; and

burglary. Shop insurance can also include business interruption protection.

f) Motor insurance covers the loss of vehicles and the damages to them due to

accidents and some other reasons. Motor insurance also covers the legal

liability of vehicle owners to compensate the victims of the accidents

caused by their vehicles.

Key terms

a) Householder’s insurance

b) Shopkeeper’s insurance

c) Motor insurance

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G. Jewelers’ Block Policy

In recent years India has emerged as a leading center in world trade for

jewelry, especially diamonds. Imported raw diamonds are cut, polished and

exported. It takes care of all risks of a jeweler whose business involves sale of

articles of high value in small bulk like jewelry gold & silver articles, diamonds

and precious stones, wrist watches etc. The trade involves stocking these

expensive items in large quantity and moving them between different premises.

1. Coverage of Jeweler’s Block Policy

Jewelers block policy covers such risks. It is divided into four sections.

Coverage under Section 1 is compulsory. The insured can avail of other sections

at her option. It’s a package policy.

a) Section I: Covers loss of or damage to property whilst in the premises

insured, as a result of fire, explosion, lightning burglary, house-breaking,

theft, hold-up, robbery, riot, strikes and malicious damage and

terrorism.

b) Section II: Covers loss or damage whilst the property insured is in the

custody of the insured and other specified persons.

c) Section III: Covers loss or damage whilst such property is in transit by

registered insured parcel post, air freight etc.

d) Section IV: Provides cover for trade and office furniture and fittings in

the premises against the perils specified in Section I.

Each section is separately rated for calculating premium.

2. Important exclusions are:

a) Dishonesty of agents, cutters, goldsmiths,

b) Property kept during public exhibition

c) Lost whilst being worn / carried for personal purpose

d) Property not kept in safe outside business hours

e) Property kept in display windows at night

f) Loss due to infidelity of employees or members of the insured family is

not covered.

Fidelity guarantee cover should also be taken by the insured for full

protection.

3. Premium

Risks are rated on merits of each case. Different premium rates are applied for

each section with discounts for exclusive round the clock watchman, close

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Summary

a) Fire insurance policy is suitable for commercial establishments as well as for

the owner of property, and for individuals / financial institutions who have

financial interest in the property.

b) Variants of fire policy include:

v' Market value basis policy

Rreinstatement value policies

S Declaration policy

s Floater policy

c) Consequential Loss (CL) Policy or Business Interruption (Bl) policy provides

indemnity for loss of what is termed as gross profit - which includes Net

Profit plus Standing Charges along with the increased cost of working

incurred by the insured to get the business back to normalcy, as soon as

possible to reduce the final loss.

d) Burglary policy is meant for business premises like factories, shops, offices,

warehouses and go-downs which may contain stocks, goods, furniture

fixtures and cash in a locked safe which can be stolen.

e) Money insurance policy is designed to cover the losses that may occur while

cash cheques/postal orders/postal stamps are being handled.

f) Money insurance policy provides cover under two sections: transit section

and premises section.

g) Fidelity guarantee insurance indemnifies employers against the financial loss

suffered by them due to fraud or dishonesty of their employees by forgery,

embezzlement, larceny, misappropriation and default.

h) Types of fidelity guarantee policy include: individual policy, collective

floating policy, positions policy and blanket policy.

i) Bankers indemnity policy is a comprehensive cover, drafted for the banks,

NBFC's and other institutions who deal with operations involving money,

considering the special risks faced by them regarding money and securities.

j) The major policies that fall under engineering insurance include:

S Contractors All Risks Policy

S Contractors Plant & Machinery Policy

Erection All Risks Policy

Machinery Breakdown Policy

v' Boiler and Pressure Plant Policy

s Machinery Loss of Profits Policy

S Deterioration of Stock Policy

Electronic Equipment Policy

S Advance Loss of Profit Cover

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k) The Industrial All Risks Policy was designed to cover, industrial properties -

both manufacturing and storage facilities, anywhere in India under one

policy.

1) Marine insurance is classified into: marine cargo and marine hull.

m) Cargo policies are essentially voyage policies, i.e. they cover the subject

matter from one place to another.

n) Different types of marine policies include:

s Specific policy

•S Open policy

S Open cover

•S Duty and increased value insurance

•S Delay in start up

o) Marine hull covers are essentially of two types: covering a particular voyage

and covering a period of time.

p) A public liability policy covers liability arising out of fault / negligence of

the insured causing third party personal injury or property destruction.

q) Product liability policies cover liability of the insured related to defect in

the product causing death, bodily injury or illness or even damage to the

property of third parties.

r) Professional indemnities are designed to provide insurance protection to

professional people against their legal liability to pay damages arising out of

negligence in the performance of their professional duties.

Key Terms

a) Fire insurance of Property

b) Burglary insurance

c) Money insurance

d) Fidelity guarantee insurance

e) Bankers’ indemnity insurance

f) Jewelers block policy

g) Engineering insurance

h) Industrial All risk insurance

i) Marine insurance

j) Hull insurance

k) Liability policy

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Summary

a) Settling claims professionally is regarded as the biggest advertisement for an

insurance company.

b) Policy conditions provide that the loss be intimated to the insurer

immediately.

c) If the claim amount is small, the investigation to determine the cause and

extent of loss is done by an officer of the insurer. But for other claims it is

entrusted to independent licensed professional surveyors who are specialists

in loss assessment.

d) In general the claim form is designed to get full information regarding the

circumstances of the loss, such as date of loss, time, cause of loss, extent of

loss, etc.

e) Claims assessment is the process of determining whether the loss suffered

by the insured is caused by the insured peril that there is no breach of

warranty, the quantum of loss suffered by the insured and the insurers

liability under the policy.

f) Settlement of the claim is made only after obtaining a discharge under the

policy.

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

Key terms

a) Intimation of loss

b) Investigation and Assessment

c) Surveyors and Loss Assessors

d) Claim forms

e) Adjustment and Settlement

f) Disputes in claim settlement

g) Arbitration

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J. 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. The low income people

form a sizable part of our population and usually don’t have any health security

cover. Therefore, this low value product, with an affordable premium and

benefit package, is initiated to help these people to cope with and recover from

common risks. Micro insurance is governed by the IRDA Micro Insurance

Regulations, 2005.

These products come with a small premium and typically, the sum insured is

below Rs.30,000, as required vide 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. The

IRDA’s rural and social sector obligations also require that insurers should sell a

defined proportion of their policies as micro-insurance products, to enable

wider reach of insurance.

Two policies particularly created by PSUs to cater to the poorer sections of

society are described below:

1. Jan Arogya Bima Policy

Following are the features of Jan Arogya Bima Policy:

a. This policy is designed to provide cheap medical insurance to poorer

sections of the society.

b. The coverage is along the lines of the individual Mediclaim policy.

Cumulative bonus and medical check-up benefits are not included.

c. The policy is available to individuals and family members.

d. The age limit is five to 70 years.

e. Children between the age of three months and five years can be covered

provided one or both parents are covered concurrently.

f. The sum insured per insured person is restricted to Rs.5,000 and the

premium payable as per the following table.

Table 2.1

Age of the person insured Up to 46

years

46-55 56-65 66-70

Head of the family 70 100 120 140

Spouse 70 100 120 140

Dependent child up to 25 years 50 50 50 50

For family of 2+1 dependent child 190 250 290 330

For family of 2+2 dependent 240 300 340 380

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children

• Premium qualifies for tax benefit under Section 80D of the Income Tax Act.

• Service tax is not applicable to the policy.

2. Universal Health Insurance Scheme (UHIS)

This policy is available to groups of 100 or more families. In recent times even

individual UHIS Policies were made available to the public.

Benefits

Following is the list of benefits of universal health insurance scheme:

•Medical reimbursement

The policy provides reimbursement of hospitalization expenses up to

Rs.30,000 to an individual / family subject to the following sub limits.

Table 2.2

Particulars Limit

Room, boarding expenses Up to Rs.150/- per day

If admitted in ICU Up to Rs.300/- per day

Surgeon, Anaesthetist, Consultant, Specialists

fees, Nursing expenses_

Up to Rs.4,500/- per illness/

injury

Anaesthesia, Blood, Oxygen, OT charges,

Medicines, Diagnostic material and X-Ray,

Dialysis, Radiotherapy,

Chemotherapy, Cost of pacemaker, Artificial

limb, etc.

Up to Rs.4,500/- per illness/

injury

Total expenses incurred for any one illness Up to Rs. 15,000/-

•Personal accident cover

Coverage for death of the earning head of the family (as named in the

schedule) due to accident: Rs.25,000/-.

•Disability cover

If the earning head of the family is hospitalised due to an accident / illness

compensation of Rs. 50/- per day will be paid per day of hospitalisation up to

a maximum of 15 days after a waiting period of three days.

•Premium

Table 2.3

Entity Premium

For an individual Rs.365/- per annum

For a family up to five

(including the first three children)

Rs.548/- per annum

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For a family up to seven

(including the first three children and

dependent parents)_

Rs.730/- per annum

Premium subsidy for BPL families For families below the poverty line

the Government will provide a

premium subsidy._

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K. Rashtriya Swasthya Bima Yojana

The government has also launched various health schemes, some of them

applicable to particular states. To extend the reach of health benefits to the

masses, it has implemented the Rashtriya Swasthya Bima Yojana in association

with insurance companies. RSBY has been launched by the Ministry of Labour

and Employment, Government of India, to provide health insurance coverage for

the below poverty line (BPL) families.

Following are the features of Rashtriya Swasthya Bima Yojana:

a. Total sum insured of Rs. 30,000 per BPL family on a family floater basis.

b. Pre-existing diseases to be covered.

c. Coverage of health services related to hospitalization and services of

surgical nature which can be provided on a day-care basis.

d. Cashless coverage of all eligible health services.

e. Provision of smart card.

f. Provision of pre and post hospitalization expenses.

g. Transport allowance of Rs.100/- per visit.

h. The Central and State Government pays the premium to the insurer.

i. Insurers are selected by the State Government on the basis of a competitive

bidding.

j. Choice to the beneficiary between public and private hospitals.

k. Premium to be borne by the Central and State governments in the

proportion of 3:1. Central Government to contribute a maximum amount of

Rs. 565/- per family.

1. Contribution by the State Governments: 25 percent of the annual premium

and any additional premium beyond Rs 750.

m. Beneficiary to pay Rs. 30/- per annum as registration fee/ renewal fee.

n. Administrative cost to be borne by the State Government.

o. Cost of smart card additional amount of Rs. 60/- per beneficiary would be

available for this purpose.

p. The scheme shall commence operation from the first of the month after the

next month from the date of issue of smart card. Thus, if the initial smart

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cards are issued anytime during the month of February in a particular

district, the scheme will commence from 1st of April.

q. The scheme will last for one year till 31st March of next year. This would be

the terminal date of the scheme in that particular district. Thus, cards

issued during the intervening period will also have the terminal date as 31st

March of the following year.

Claim settlement to be done through TPA’s mentioned in the schedule or by

the insurance company. The settlement is to be made cashless as far as

possible through listed hospitals.

Any one illness will be deemed to mean continuous period of illness and it

includes relapse within 60 days from the date of last consultation with the

hospital.

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L. Pradhan Mantri Suraksha Bima Yojana

The recently announced PMSBY covering personal accident death and

disability cover insurance has attracted lot of interest and the scheme

details are as under:

Scope of coverage: All savings bank account holders in the age 18 to 70

years in participating banks are entitled to join. Participating banks must tie

up with any approved non-life insurer who will offer a Master Policy to such

bank for the cover. Any person would be eligible to join the scheme 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.

Aadhar would be the primary KYC for the bank account.

Enrollment Modality / Period: The cover shall be for the one year period

from 1st June to 31st May for which option to join / pay by auto-debit from

the designated savings bank account on the prescribed forms will be

required to be given by 31st May of every year, extendable up to 31st August

2015 in the initial year. Initially on launch, the period for joining may be

extended by Govt, of India for another three months, i.e. up to 30th of

November, 2015.

Joining subsequently on payment of full annual premium may be possible on

specified terms. Applicants may give an indefinite / longer option for

enrolment / auto-debit, subject to continuation of the scheme with terms as

may be revised on the basis of past experience. Individuals who exit the

scheme at any point may re-join the scheme in future years through the

above modality. New entrants into the eligible category from year to year or

currently eligible individuals who did not join earlier shall be able to join in

future years while the scheme is continuing.

Benefits under the insurance are as follows:

Table of Benefits Sum Insured

Death Rs. 2 Lakh

Total and irrecoverable loss of both

eyes or loss of use of both hands or

feet or loss of sight of one eye and

loss of use of hand or foot

Rs. 2 Lakh

Total and irrecoverable loss of sight of

one eye or loss of use of 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

in one instalment on or before 1st June of each annual coverage period.

However, in cases where auto debit takes place after 1st June, the cover

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shall commence from the first day of the month following the auto debit.

Participating banks will deduct the premium amount in the same month

when the auto debit option is given, preferably in May of every year, and

remit the amount due to the Insurance Company in that month itself.

The premium would be reviewed based on annual claims experience but

efforts would be made to ensure that there is no upward revision of

premium in the first three years.

Termination of cover: The accident cover for the member shall terminate:

1. On member attaining the age of 70 years (age nearest birth day) or

2. Closure of account with the Bank or insufficiency of balance to keep the

insurance in force or

3. In case a member is covered through more than one account, insurance

cover will be restricted to one only and the other cover will terminate

while the premium shall be forfeited.

If the insurance cover is ceased due to any technical reasons such as

insufficient balance on due date or due to any administrative issues, the

same can be reinstated on receipt of full annual premium, subject to

conditions that may be laid down. During this period, the risk cover will be

suspended and reinstatement of risk cover will be at the sole discretion of

Insurance Company.

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M. Pradhan Mantri Jan Dhan Yojana

This financial inclusion campaign for Indian citizens in Banking Savings St Deposit

Accounts, Remittance, Credit, Insurance and Pension in an affordable manner

was launched by the Prime Minister of India, Narendra Modi on 28 August 2014

as announced on his first Independence Day speech on 15 August 2014. This

scheme has set a world record in bank account opening during any one week.

Aimed at including maximum number of people in the banking mainstream

An account can be opened in any bank branch or Business Correspondent (Bank

Mitra) outlet. PMJDY accounts are being opened with Zero balance. However, if

the account-holder wishes to get cheque book, he/she will have to fulfill

minimum balance criteria.

Special Benefits under PMJDY Scheme

1. Interest on deposit.

2. Accidental insurance cover of Rs.1.00 lac

3. No minimum balance required.

4. Life insurance cover of Rs.30,000/-

5. Easy Transfer of money across India

6. Beneficiaries of Government Schemes will get Direct Benefit Transfer in

these accounts.

7. After satisfactory operation of the account for 6 months, an overdraft

facility will be permitted

8. Access to Pension, insurance products.

9. Accidental Insurance Cover

10. RuPay Debit Card which must be used at least once in 45 days.

11. Overdraft facility upto Rs.5000/- is available in only one account per

household, preferably lady of the household.

As on 13th May 2015, a record 15.59 Crore accounts have been opened with a

balance in account of Rs. 16,918.91 Crores. Of these, 8.50 Crore accounts

have been opened with zero balance.

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N. Personal Accident and disability cover

A Personal Accident (PA) Cover provides compensation due to death and

disability in the event of unforeseen accident. Often these policies provide

some form of medical cover along with the accident benefit.

In a PA policy, while the death benefit is payment of 100% of the sum insured,

in the event of disability, compensation varies from a fixed percentage of the

sum insured in the case of permanent disability to weekly compensation for

temporary disablement.

Weekly compensation means payment of a fixed sum per week of disablement

subject to a maximum limit in terms of number of weeks for which the

compensation would be payable.

1. Types of disability covered

Types of disability which are normally covered under the policy are:

i. Permanent total disability (PTD): means becoming totally disabled for

lifetime viz. paralysis of all four limbs, comatose condition, loss of both

eyes/ both hands/ both limbs or one hand and one eye or one eye and

one leg or one hand and one leg,

ii. Permanent partial disability (PPD): means becoming partially disabled

for lifetime viz. loss of fingers, toes, phalanges etc.

iii. Temporary total disability (TTD): means becoming totally disabled for a

temporary period of time. This section of cover is intended to cover the

loss of income during the disability period.

The client has choice to select only death cover or death plus permanent

disablement of Or Death plus permanent disablement and also temporary

total disablement.

2. Sum insured

Sums insured for PA policies are usually decided on the basis of gross monthly

income. Typically, it is 60 times of the gross monthly income. However, some

insurers also offer on fixed plan basis without considering the income level. In

such policies sum insured for each section of cover varies as per the plan opted.

3. Benefit plan

Being a benefit plan, PA policies do not attract contribution. Thus, if a person

has more than one policy with different insurers, in the event of accidental

death, PTD or PPD, claims would be paid under all the policies.

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4. Scope of cover

These policies are often extended to cover medical expenses, which reimburses

the hospitalization and other medical costs incurred following the accident.

Today we have health policies which are issued to cover medical/

hospitalization expenses incurred consequent to an accident. Such policies do

not cover diseases and their treatment and instead cover only accident related

medical costs.

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 cover are:

i. Any existing disability prior to the inception of policy

ii. Death or disability due to mental disorders or any sickness

iii. Directly or indirectly caused by venereal disease, sexually transmitted

diseases, AIDS or insanity.

iv. Death or disability caused by radiation, infection, poisoning except

where these arise from an accident.

v. Any injury arising or resulting from the Insured or any of his family

members committing any breach of law with criminal intent.

vi. Death or disability or Injury due to accidental injury arising out of or

directly or indirectly connected with or traceable to war, invasion, act

of foreign enemy, hostilities (whether war be declared or not), civil war,

rebellion, revolution, insurrection, mutiny, military or usurped power,

seizure, capture, arrests, restraints and detainments.

vii. In the event the insured person is a victim of culpable homicide, i.e.

murder. However, in most policies, in case of murder where the insured

is not himself involved in criminal activity, it is treated as an accident

and covered under the policy.

viii.Death/Disablement/Hospitalization resulting, directly or indirectly,

caused by, contributed to or aggravated or prolonged by child birth or

from pregnancy or in consequence thereof.

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ix. While the Insured/Insured Person is participating or training for any sport

as a professional, serving in any branch of the Military or Armed Forces

of any country, whether in peace or war.

x. Intentional self-injury, suicide or attempted suicide (whether sane or

insane)

xi. abuse of intoxicants or drugs and alcohol

xii. whilst engaging in aviation or ballooning, whilst mounting into,

dismounting from or travelling in any aircraft or balloon other than as a

passenger (fare paying or otherwise) in any duly licensed standard type

of aircraft anywhere in the world

Certain policies also exclude loss arising out of driving any vehicle without a

valid driving license.

PA policies are offered to individuals, family and also to groups.

Family Package Cover

Family package cover may be granted on the following pattern:

• Earning member (Persons Insured) and Spouse, if earning:

Independent capital sum insured for each, as desired, within usual

limitations as in individual.

• Spouse (if not earning member): usually 50 percent of the capital sum

insured of the earning member. This may be limited to a specified upper

limit e.g. Rs.1,00,000 or Rs. 3,00,000.

• Children (between the age of 5 years and 25 years): usually 25 percent

of the capital sum insured of the earning parent subject to a specified

upper limit e.g. Rs. 50,000 per child.

Group Personal Accident Policies

Group Personal Accident Policies are usually annual policies only renewal being

allowed on 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 any specific events.

Following are different types of group policies:

• Employer and Employee relationship

These policies are granted to firms, association etc. to cover:

• Named employees

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• Unnamed employees

• Non Employer-Employee relationship

These policies are granted to associations, societies, clubs, etc. to

cover:

• Named members

• Members not identified by name

(Note: Employees may be covered separately)

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.

i. Fixed benefit or percentage of sum insured mentioned against each

fracture is paid at the time of claim.

ii. Quantum of benefit depends on the type of bone covered and nature of

fracture sustained.

iii. To illustrate further, compound fracture would have higher percentage

of benefit than simple fracture. Again, percentage of benefit for femur

bone (thigh bone) would have higher percentage over benefit of finger

bone.

iv. The policy also covers fixed benefit defined in the policy for loss of daily

activities viz. eating, toileting, dressing, continence (ability to hold

urine or stools) or immobility so that insured can take care of cost

associated to maintain his/her life.

v. It also covers hospital cash benefit and accidental death cover.

Different plans are available with varying sums insured and benefit

payout.