basics of life insurance

7/30/2019 Basics of Life Insurance

1/146

BASICS OF LIFE INSURANCE


2/146

State the business of Insurance

Principles of Life Insurance

Different types of Life Insurance products

Calculation of premiums & concept of Bonus

Policy Conditions

Underwriting

Types of Claims

Role of an insurance agent

PROGRAM OBJECTIVES:-


3/146

Protection of economic value of assets

Mechanism to reduce impact of adverse events on value generating

assets

What is insurance ?

Chapter 1


4/146

Every one has some assets .like House, Car etc.

Income Generating

Assets are

For Comfort /Convenience

Example: Factory Example: Car


5/146

Assets have a specified Lifetime

But, It can

Be destroyed Become Non-Functional

Which will cause loss to the Owner

Insurance is a mechanism that helps to reduce the

effect of such adverse situations


6/146

PERIL Perils are uncertainties

RISK Damage to asset due to this peril

Insurance is a function of UNCERTAINTY

If there is no uncertainty , it cannot be insured

Purpose & Need ?


7/146

Assets may get damaged due to

Accidental Occurrences Called Perils

However

The damage due to the perils is the Risk the assetis exposed to


8/146

Peril

Asset

Damage/Financial loss

Risk can be insured

against

Cannot be prevented

Risk only means that there is a possibility of

loss or damage


9/146

Insurance Compensates only the financial losses

But does not protect the asset against the Peril

Insurance cannot

protect the house

against the fire

It will however compensate the

monetary loss because of the peril

If the loss is not financial, insurance is not

possible


10/146

How Insurance Works

The manner in which the loss is shared can be determined before hand

FundContribution Compensation

Basis of contribution ishow many and not who

will suffer

Fortunate ManyUnfortunate Few

Insurance is a risk sharing mechanism


11/146

Human Life is a income generating asset which can be

lost due to premature death OR become non-functional

due to an accident or sickness

Life Insurance

Death is certain timing is uncertain


12/146

Life insurance does not PROTECT LIFE

it tries to minimize the impact of an untimely death on those dependent

on that income

Occurrence has to be random

Occurrence has to be Accidental

Not the Deliberate creation of the InsuredPerson


13/146

Risk for Human beings

Dying too Early Living too Long

EconomicLoss


14/146

In a village there are 400 houses, each valued at Rs

20,000.

Every year on an average, 4 houses get burnt,

resulting into a total loss of Rs 80,000.

How much should each family contributeto cover its risk?


15/146

400 owners cometogether

and contributed Rs 200each

Fund Size

= 400 200

= Rs 80,000

Fund


16/146

Insurance companies, called insurers, bring together people withcommon interests sharing of same risk

Collect a contribution premium

Pay compensation claims

The insurance company is the trustee managing the commonfund

Underwritingensures that all insured share the same risk &prevents entry of those who do not

Insurance The business

Life Insurance is complementary to the states

efforts in social managementits a social security tool


17/146

Classification of Insurance business- India

Insurance Business

Life Insurance Non- Life Insurance

Fire Marine Miscellaneous

Covers

Fire

Related

Risks

Covers

transport

related risks

and ships

Covers liability,

fidelity, motor,

crop, personal

accident, etc.

Covers deathand disability


18/146

Premium is based on expectations of losses

These expectations are based on studies of occurrences inthe past and use of statistical principles called Law of LargeNumbers

Law of Large Numbers

Law of large numbers When you toss a coin, the

chances of a head / tail coming up is half; the

probability of getting heads will be closer to million if you toss the coin atleast a million times.

The larger the numbers included in the pool, the

better the chances of assumptions regarding the

probability of the risk occurring


19/146

Advantages of Life Insurance

Life insurance has no competition from any other business

It offers quick settlement of claims in the event of death

It encourages financial discipline, as premiums are required to be

paid regularly

Creditors cannot claim life insurance money. The money can be

protected against attachment by courts

Marketability and liquidity are better. A life insurance policy is

property and can be transferred or mortgaged. Loan can be taken

against it.


20/146

The Life Insurance Contract

On happening of insured

event or survival to a

specified term

The Insurer

promises to

pay the

claim

The Insured

pays the

premium

Agreement

As per the mode chosen

and the premium as per

the age and the plan


21/146

Offer & acceptance

Consideration

Capacity to contract

Consensus ad idem (genuine meeting of minds)

Legality of object or purpose

Capability of performance

Intention to create legal relationship

A simple contract must have the following components


22/146

Is Life Insurance a Legal Contract?

Intention is legal

Proposer offers-insurer accepts

Premium is consideration

Insured must be major with sound mind-capacity to contract

Insured and Insurer are in agreement of same mind and free

consent

Yes, since all essentials of valid contract are present


23/146

Special Characteristics of Insurance Contracts

Principle of Utmost Good Faith. Uberrimae Fidei

Principle of Insurable Interest


24/146

Principles of Life InsuranceIn Life Insurance.

Hari comes to Ram to sell life insurance

Ram agrees to buy insurance from him. Does Hari know about:

Whether Ram is already suffering from a disease?

What are Rams habits smoking / drinking etc?


25/146

Principles of Life InsuranceThe insurance company and Hari will not be able to know

everything about Ram until and unless Ram discloses it

Hence in Life Insurance there is no question of verification of

correctness and is based on trust. This is called Principle of

utmost good faith


26/146

Principle of Utmost Good Faith. Uberrimae Fidei

Duty of the proposed insured to make full disclosure to the

underwriter

It is implied in all insurance contracts that each party discloses

every material fact known to him

Every circumstance known to the proposed insured thatwould have a bearing on the judgement of aprudentunderwriter in fixing the premium or decision to accept theproposal, is a material fact


27/146

Why. Uberrimae Fidei

Other commercial contracts are subject to the principle ofcaveat

emptor, i.e. let the buyer beware..an assumption that each

party can examine the item or service before getting into the

contract

In Life insurance, this doesnt happen. Most of the facts relating to

health, medical history, habits etc are known only to the proposer,which puts the insurer at a disadvantage to assess the risk

accurately

Therefore, to avoid adverse selection, Uberrimae Fidei


28/146

Facts that an Insurer doesnt need

Facts of common knowledge

Facts of law

Facts which a survey would have revealed

Facts which reduce the risk


29/146

Declaration

Proposal Form is the Basis Of Contract

If any statement/declaration by the proposer is found

untrue

The Contract can be made Null and Void and

Premiums paid are Forfeited

The Effect of declaration is to turn Representations in the

proposal form into warranties


30/146

When does a breach occur to Uberrimae Fides

Misrepresentation

/Non-Disclosure

Substantially false / known to proposer as false

Calculated to induce the other party to enter into a contract on its

own terms


31/146

Section 45 of the Insurance Act,1938

PolicyStart Date 2 years

If Material Factsdiscovered within2 years of the policythen the insurercan declare the policy

null and void

The policy cannot be called inquestion after 2 years, on thegrounds of inaccurate or falsestatement unless it is proved to bematerial and fraudulent.

Indisputability of the

policy


32/146

Principle of Insurable Interest

Proposer must have a stake in the continuance of the subject

insured; he should benefit from its safety & well being

It is the presence of insurable interest that distinguishes an

insurance contract from a wagering contract

In life insurance, presence of insurable interest is required at the

inception of the policy; not at the time of the claim

Insurance Act, 1938 does not define Insurable Interest


33/146

Wagering Contract Insurance Contract

Loss or No LossLoss Or Gain

Presence of

Insurable Interest
http://creative.gettyimages.com/source/Search/44','44','1','


34/146

Insurable interest is deemed to exist

Insurable Interest arises as a result of financial involvement

Any person in himself Husband and wife in eachother

Partners in business

Employer EmployeeLender- Borrower


35/146

Chapter 5

Life Insurance products

Life insurance products are called plans of insurance

There are 2 basic elements; Death Cover & Survival benefit


36/146

Term Plan

Term = Duration

BENEFIT PAID OUT

No death, no benefit paid at the end


37/146

Pure Endowment Plan

Term = Duration

BENEFIT PAID OUT

Benefit paid out only on survival till the end of the term


38/146

Classification of plans

By benefits payable

Death Benefit

Survival Benefit

Maturity Benefit

By premium

payment

Single Premium

Limited Premium

Continuous Premium

By participationin profits

With profits

Without profits


39/146

All Insurance Plans today

Term Plan + Pure EndowmentTerm InsuranceEndowment

Money Back or interest sensitive or anticipated endowment

Whole LifeUnit Linked

Annuities

&

Riders


40/146

Term Insurance

Provides only death benefit

No savings element

The most economical form of life insurance

Excellent protection cover for any kind of liabilities /

loans, especially housing loans

A variation to the term insurance plan is the TROP, term

with a return of premium

Belongs to the traditional class of insurance plans


41/146

Endowment Plans

Provides death benefit + maturity benefit

Savings element present, hence have gained popularity

Usually participating in nature

Excellent tool for long term financial planning



42/146

Money Back / Anticipated Endowment Plans

A variation of endowment family of plans

Provides death benefit + survival + maturity benefit

Death benefit does not reduce on payment of survival payouts

Are interest sensitive by nature

Survival benefit payouts can meet certain anticipated needs of

a family



43/146

Whole Life Plans

A continuation an endowment plan

Provides a death benefit + maturity benefit at a specified age,

which could differ from company to company

May also provide a survival benefit

Can be continuous / limited premium paying



44/146

Unit Linked Insurance Plans

A combination of term + investment

Provides death benefit + maturity benefit

Are highly liquid in nature, compared to other traditional

counterparts

Returns are dependent on the performance of the market

Highly flexible in nature, compared to other traditional

counterparts


45/146

Annuities

Opposite or Reverse of life insurance policies, as the risk

covered through them is of living too long

Provide regular periodical payments on retirement

Practically very little underwriting is done in annuities

Can be an Immediate annuity or Deferred

Has many variants in terms of joint life, payment terms etc


46/146

Riders

Are a clause or condition that is added on to a basic insurance

planadd on benefits

Hence are supplementary contracts

Very economical way of enhancing risk cover

Are non-participating in nature

Can be attached only as long as the PPT of the policy

Can offer a variety of risk cover options


47/146

Other important information

Plans & Annuities can also be joint life

SSS Salary Saving Scheme, is a method of premium payment

where the insurer arranges with the employer to deduct the

premium from the salary of the employee on a monthly basis

Life Insurance can be for an individual as well as for a group of

people


48/146

Chapter 4

Premiums & Bonuses


49/146

Premium

Is the consideration that the policyholder has to pay in order to

secure the benefits offered under the policy

It may be a 1-time payment, or will need to be paid periodically,

as decided at the policy inception

Is calculated as per the age of the proposed insured

Non-payment would render a policy as Lapsed


50/146

Premium

Mortality /Cost ofInsurance /

RiskPremium

Investment Expenses


51/146

Premium

Mortality / Cost ofInsurance / RiskPremium

Investment AdministrativeExpenses

Savings/Participating Plan


52/146

Which component of premium is missing from a Term

insurance product?

Why?


53/146

Premium

Mortality / Cost ofInsurance / RiskPremium

Investment AdministrativeExpenses

Term/Non- Participating

Plan


54/146

Risk premium is the cost to meet the risk of death for 1 year at a

particular age

It is based on the probabilities of death at various ages

Usually represented as per Rs.1000/- rates in a tabular form,

called tabular premium

Level Premium is equal premium being charged, irrespective of age,year on year

Premium collected in the earlier years is more than

necessary for the risk


55/146

Loading

Any extra premium charged on account of a sub-standard life

Loading is done on the published tabular premium

Any extra premium charged on account of a mode of payment


56/146

Calculation of Age

When do you think we should know the exact age of

the proposed insured? Is it:-

Before the policy has been issued?

After the policy has been issued?

Why?


57/146

When do you think we should know the exact age ofthe proposed insured? Is it:-

Before the policy has been issued?

After the policy has been issued?

Determining correct age at the commencement of the

policy is known as

Admittance of Age


58/146

Age can be as of

Age next Birthday

Age nearer birthday

Age last birthday

Age within 5 months & 29 days will be age last birthday orthe lower age


59/146

Lets see how

Ex 1:- DOC of contract 12 Aug 2007

DOB of proposed insured 16 July 1975

Age within 5 months & 29 days will be age last birthday orthe lower age


60/146

Age next Birthday - 33

Age nearer birthday - 32

Age last birthday - 32

12. 08. 2007

- 16. 07. 1975

Days Mth Yr

26. 0. 32


61/146

Calculate all ages 3 for the following example

Ex 1:- DOC of contract 1 Jan 2000

DOB of proposed insured 2 Feb 1975


62/146

Age next Birthday - 25

Age nearer birthday - 25

Age last birthday - 24


63/146

Step 1 : Determine tabular premium depending on the Table-Term (Consider Age)

Step 2 : Allow for modal rebate

Step 3 : Allow for adjustment for Large Sum Assured

Step 4 : Multiply be number of Units

Step 5 : Add if any

Accident extra

Health extra

Occupational extra

Other extras

Step 6 : Get Annual Premium

Step 7 : Divide by 2-Semiannual, 4-Quarterly, 12 - Annual

Calculation of Premium


64/146

- 3 % for yearly mode

- 1.5 % for half yearly mode

0 % for quarterly mode

+ 5 % for monthly mode

SSS- No mode extra charged

Modal Rebate

All Modal Rebates are on the Tabular Premium (TP)


65/146

Sum Assured Rebate

All Sum Assured Rebates are on the Tabular Premium (TP)

Per thousand Sum Assured

Rs 25,000 - Rs 49,999 - Rs 1

Rs 50,000 Rs 99, 999 - Rs 1.5

Rs 1,00,000 & above - Rs 2


66/146

Calculate Premium for the following - Ex 1:-

Plan Term = 14-30

SA = Rs. 25000

Age = 35

Mode = Hly

Riders = DAB + EPDB

TP = Rs. 36.55 Add Re.1/1000 for both the riders

Rs. 450/-


67/146

Calculate Premium for the following - Ex 2:-

Plan Term = 5-35

SA = Rs. 50,000

Age = 30

Mode = Qtrly

Extra = Health extra Rs. 3/1000

Rs. 373.75/-

TP = Rs. 28.40


68/146

Actuarial Valuations

The process of checking the validity of assumptions in terms of

mortality, interest received on investments & expenses

Insurance Act requires that acturial valuations are conducted every

year

Solvencyis one of the results of an acturial valuation exercise


69/146

The insurer is required to maintain 2 separate funds in respect of non-

participating policies and participating policies

Separate valuations are done for both of these

If the fund has more money than the estimated liabilities, the insurer

is said to have a surplus, which may be distributed

Some part may be kept back as reserves

The law stipulates that 90% of the surplus can be distributed to the

policyholders as bonus

Actuarial Valuations


70/146

Bonus

The surplus amount, determined after the valuation, is

distributed amongst the policyholders by declaration of bonus

Bonuses are payable only to those policyholders, who have with

profit policies


71/146

Simple Reversionary Bonuses- The bonus as a percentage of sumassured is added to the policy. Subsequent bonuses are calculatedon the sum assured only

Compounded Reversionary Bonuses- The bonuses are added tothe existing SA including bonuses attached earlier

Terminal Bonus- This is a one time bonus that is declared on

policies that have been in force for a period of 15 years / or asper policy design

Interim Bonus- It is bonus that is payable on policies whichbecome claims between two valuations

Types of Bonuses
http://creative.gettyimages.com/source/Search/11','11','1','http://creative.gettyimages.com/source/Search/11','11','1','http://creative.gettyimages.com/source/Search/11','11','1','


72/146

Chapter 8

Policy Conditions

Days of grace

Lapsation

Surrender value

Paid up value

Loans

Revival

Assignments & Nominations

The present state of the policy in the insurer's records / variousrights that can be exercised by a policy holder


73/146

Days of Grace

Premium due date

15 days 30 days

Insurers allow a grace period for the payment of premium

Payment within grace period is considered payment on time

It is one month but not less than 30 days for yearly ,half yearly and

quarterly modes of premium

It is 15 days for

monthly mode

No grace period forSalary Savings Scheme

The policy lapses if the premium is not paid within the grace period

In case of death during the grace period, the full claim will be admitted

after deducting the premium for the current year from the claim amount


74/146

Premium isconsidered asreceived when it

reaches the insurersoffice

Insurers officeInsured

The cheque or DD need to be cleared and

proceeds credited into insureds account

In practice RPR maybe issued before the clearance of cheque subjectto clearance

Sometimes especially in case of death claims the insurer mayconsider the premium is paid if there is proof that policyholder has

sent the money


75/146

Lapsation

The obligation of insurer to pay S.A is subject to premium

being paid on due dates

The payment within days of grace is deemed to be payment

on due date

If the payment is not received by the insurer within days of

grace the policy terminates this is called a lapse

No claim arises on a policy after it lapses and all premiums

are forfeited


76/146

Non-ForfeitureIn practice insurers don't forfeit all the premiums

The insurance act does not allow such a forfeiture as it is not fair

Every policy acquires a reserve

Premiums are more in the earlier yearsThere is savings element in the policy

The policy conditions provide various safe guards incase of a

premium default

These provisions are called Non Forfeiture options

Surrender

Value

Paid up

Keeping policy in force through premiums

advanced from surrender value

Providing term cover

from Surrender Value

Various Non-forfeiture options available


77/146

Surrender Value

RESERVES

The Insurance Act (Section 113)requires that every policy shall

have a guaranteed surrender value if at least three years

premiums have been paid.The first year most of the premium

goes in expenses and very little is left for accumulation

The amount which represents the reserve in a policy can be returned

to the policy holder. This is called the Surrender Value or the CashValue

This minimum has to be stated in the policy conditions


78/146

Paid up Value

No. of Premiums Paid

No.of premiums payable

xSum Assured

In this option the sum Assured is reduced to a sum which bears the

same ratio to sum assured as the number of premiums actually paid

bears to the total no. of premiums actually payable

Only the S.A is reduced proportionately; the vested bonus remains

unaffected

This policy now becomes a non participating policy


79/146

Keeping Policy in Force

The policy is terminated when surrender value is not

sufficient to pay the premium and left over surrender value is

paid to the customer

It helps by safeguarding the cover. The policyholder can

resume paying the premium at any time. With profit policy

will also be entitled to bonus

In case the policyholder fails to pay the arrears premiums,

the surrender value is exhausted and very little is benefit is

available


80/146

RevivalA lapsed policy does not benefit anybody-the insured, the insureror the agent

The insured loses the risk cover and hence beats the very purposeof buying insurance

It reflects badly on the agent as it means that the insured was notsufficiently convinced

The insurer follows a level premium system where the except fordeath claims the policies are expected to run full term

Also the initial expenses for the insurer on any policy are high andinsurer can recover them only if policy remains in force


81/146

People with bad health are the ones to continue while the people

with good health do not value continuance. This leads to selection

against the insurer.

Lapsation may not always be intended by the insured. It could

happen due to neglect or temporary financial difficulties.

Revival Requirements

Arrears with outstanding premium with Interest

Proof of Continued Good Health

Revival allowed if policy remains lapsed for not more than 5

years

Revival


82/146

Revival-Types of Revival

SpecialRevivalScheme

InstallmentRevivalscheme

Loan cumRevival


83/146

Assignment

A life insurance policy is a property, it represents rights and as

per transfer of property act 1982, it is an actionable claim.

An assignment transfers the rights title and interest of the

assignor to assignee.

Legal provisions for assignment are available in section 38 of

Insurance Act 1938

The assignment can be done by an endorsement on policy or by a

separate deed

No stamp duty is required for endorsement

Separate Deed has to be stamped

It must be signed by the transfer or his duly authorized agent


84/146

Assignment Section 38

The signature must be attested by a witness

The assignment is effective as soon as it is executed

It must be sent to the insurer along with a notice

An assignor

Must have Title

Must be major

Must be competent to contract

An assignment once made cannot be cancelled or altered by the

assignor unless assignee reassigns the policy


85/146

Types of Assignment

The Title cannot be

reverted back to the

assignor unless the

assignee reassigns thepolicy through a deed

The Title automatically

reverts to the assignor

on fulfilling of the

specified condition

Absolute Assignment Conditional Assignment


86/146

Nomination

As per section 39 of insurance act 1938, the holder of a policy on

his own life may nominate the person or persons to whom the

money secured by policy shall be paid in the event of his death

It can be made at the time of proposal or at any time during thecurrency of the policy

A person having policy on the life of another cannot effect a

nomination

A nomination can be changed by the policy holder by making

endorsement on the policy

If space is not available on the policy document, nomination can

be done on a separate piece of paper and pasted onto the policy

with the signature of life assured on the edges, where the slip is

attached to the policy


87/146

When nominees are more than one, the policy moneys are payable

to them jointly or to the survivor

No specific share of each nominee can be made

However, nomination in succession, like payable to A failing him

B , failing him C is valid

An assignment automatically cancels a nomination, except anassignment made in favour of the insurer in consideration for a loan

granted against the security of the policy

Nominations made after the commencement of the policy have to

be intimated to the insurer, otherwise they are not effective

Nomination


88/146

Surrenders and LoansA surrender is a voluntary termination of the contract by thepolicyholder.The amount payable on surrender is called surrender

or cash value.

A policyholder can surrender the policy anytime before it becomes

a claim.The surrender value is usually a percentage of the paid up value,

the percentage increases with the term.

The percentage decreases as the original term of the policy

increases.Loans may be repaid in full or in part during

the currency of the policy or may remain as

debts on the policy monies until the claim

arises

If the premiums are paid on the time the

surrender value will go on increasing and will

be more than the outstanding loan and interest

In Life Insurance loan up to 80

to 90% of the Surrender Value

is given

Interest is also charged on the

Loan


89/146

Policies without

surrender value

Temporary life Insurance

Annuity Policies

Money Back Policy

Are not eligible for the loan facility

No loan is granted on the Childrens Deferred Assurance policies

Surrenders and Loans


90/146

ForeclosureForeclosure means writing off or closure of the policy before itsactual maturity

When a loan is granted in a policy the customer can either pay theinterest or allow it to accumulate to be adjusted against the claim

This is possible in case the premiums are paid regularly and policyremains in force

In case of paid up policy the the

surrender value will not grow as

fast as the accumulated interest

The principal loan and accumulated

interest will become more than the

surrender value at some time-

Foreclosure becomes necessary


91/146


92/146

Alterations

Some changes are allowed in the policy after it is issued

Simple changes like

change in address, change of mode in payment, change in nomination

participating policy to non-participating

break one policy to two or more-affects premiums but not the risk

principle followed is alteration allowed if risk does not increase


93/146

Chapter 6

Underwriting


94/146

Underwriting of a proposal

When the insurer receives a proposal for insurance, it does not

immediately agree to grant the cover

It has to ensure that every new entrant into the pool of

policyholder is subject to the same exposures as the others

The process of verifying the risk is called Selection or

Underwriting

A lower premium would affect solvency and the additional risk

would have to be borne by the rest of the policyholders in thesame group.

Therefore if the insurer feels that there are adverse features that

increase the risk, the premium charged would be different.

In some cases, the insurer may decline the cover.


95/146

Hazards Factors that affect the risk on the life of an individual are calledhazards

Hazards may be

Physical

Occupational and

Moral

Physical Hazards are as follows:

As age increases, so does the probability of death. Theseprobabilities are built into the premium rates.

Age also has a relationship with other factors. Being overweightfor children is a positive factor, but it is not so in case of adults.

Age

Sex

Mortality on female lives are seen to be more than that of malelives at younger ages.

This may be due to the lack of adequate care in maternity cases.

The underwriting considerations are also different in these cases


96/146

Physical Hazards

Build

Height, Weight, Chest and Abdomen measurements maysuggest tendencies towards ailments.

Variations from standard weights are dealt with care.

Physical Condition Medical examination of reflexes, blood pressure, pulse rates,

urine etc, provides data with regard to the condition ofimportant systems in the body.

Blindness, deafness, and other conditions which are notillnesses, are hazards affecting the probability of death.Physical

Impairments

Personal History

Family History

This is important as a pointer to the health and lifestyle ofthe person.

Hereditary factors which may make a person more prone to aparticular disease are important factors.

A history of early deaths, cardiac illnesses or diabetes


97/146

Occupational Hazards

Hazards that arise from ones job/occupation

The nature and place of job effects the worker

Contact with or inhalation of fumes, excessive temperatures are

some examples

People working in chemical factories are likely to be afflicted with

various respiratory disorders

Studies have identified occupations with various hazards and have

also tried to quantify the excess hazard, so the underwriters can

determine the appropriate extra premiums


98/146

Moral Hazard Moral Hazard refers to the intentions of the proposer

If proposal is made for a genuine insurance need, there is no moralhazard

It is said to be a moral hazard if one seeks some undue advantagedue such as getting a lower premium, or to make monetary gains,through insurance, there is a moral hazard

This has to be judged on the basis of circumstantial evidence likelifestyles, income as compared to premium payable, reputation forintegrity, and so on

Moral Hazard is not measurable. It is a matter of opinion

If moral hazard is suspected, no amount of extra

premium will be appropriate


99/146

Moral hazards

Moral hazards can be suspected in the following

circumstances:

The proposal is for

a larger amount

than the income of

the proposer would

justify.

A large amount of

insurance is proposed

on the life of a family

member while thebreadwinner is not

insured or insured for a

relatively lower

amount

The proposer is old,

has not been insured so

far and now wants

insurance for a large

amount


100/146


101/146

Data for underwriting

The statements made in the

proposal form (principal of

utmost good faith)

Report of the

medical

examination

Report of the

agent or other

officials.

The underwriting decision is based on the following parameters:

The statements made in the proposal form (principal of utmost goodfaith)

Report of the medical examination

Report of the agent or other officials.

In case of large sum assureds the underwriter may also ask foradditional medical reports or from senior officials (for moralhazard) as a matter of routine.

The underwriting decision is based on


102/146

Data for underwriting

In case of large sum assureds the underwriter may also ask for

additional medical reports or from senior officials (for moral

hazard) as a matter of routine

Officials are also expected to make enquiries about the proposed

insured, family, occupation/business, income, lifestyles, etc.

Proofs may be sought to substantiate the reports on these aspects

of the proposed Insured

A report from the insurance agent is a must in all the cases

In some cases, the report of the agent may be sufficient, if the

agent is experienced enough


103/146

Assessing the risk

The underwriter decides on the level of risk in a particular caseafter examination and interpretation of the data available

For this purpose, the underwriter would avail of the assistance ofdoctors associated with Life Insurance companies and havingspecialized knowledge about the effect of medical conditions onmortality

These doctors are called medical referees who are on the panels ofinsurers

In case of very high Sum Assured, the insurer may even refer thecase to the specialists in the panel of re-insurers


104/146

Assessing the riskSome insurers have developed parameters to identify andinterpret data which is significant to risk:

Numerical Rating System

Standards are laid down for each factor such as weight, height fordifferent ages

Variations are given values, based on the level of significance

The values are then grouped and tabulated showing extramortality (em) and therefore extra premium

A variation of 20% may be considered normal, between 20% and35% may be considered Class I and so on

The few cases which would not clearly fall into these classeswould be referred to experts


105/146

Assessment of RisksThe decision of the underwriter may be one of thefollowing:

*The risk is not standard but the risk is expected to wear off and does not justify

increase in premium. Instead, the SA would be reduced to the extent of the Lien

Accept as OR (Ordinary

Life- standard for which thetabular rates can be offered)

Accept with Extra

(amount to be specified) per1000 of SA

Accept with lien of(Thelien condition)*

Accept with Modified

Terms (Other than the originalplan applied for)

Accept with (Specified)

Clause [excluding specificrisks]

Postpone for specific

period

Decline

The regulations of IRDA require that the decision should be conveyedto the proposer within 15 days.


106/146

Non- Medical Underwriting

Usually medical underwriting starts from a particular level of riskthat the insurer is willing to take (the SA)any SA case below thisthreshold is within non-medical underwriting

Non-medical underwriting is limited to younger ages, less than 45years old

The SA limits are higher for those in employment in reputed

organisations, with leave records, medical check at entry and soon.

These limits are not sacrosanct. The conditions for non-medicalinsurance are decided by insurers from time to time, depending

on experience


107/146


108/146

Agent as underwriter The agent is the first level underwriter

He/ she has to inform the insurer about the factors that affect the

risk of the subject matter of the insurance

This is done by submitting an unambiguous report and also by

ensuring that the proposal papers do not conceal any information

The agents report is a source of data for the underwriter in the

office


109/146

Recent Trends The underwriting standards are dynamic and are studied by

institutes and re-insurers all over the world

Advances in medical sciences have lead to better insights into

diseases, so people who would not have been insurable 40 yearsago can avail of the benefits of insurance now

Insurers have also begun to take note of habits that affect health-

smoking and drinking

Some insurers charge additional premium from those who smoke ordrink

Proposers may be tempted to understate such habits, but run the

risk of being guilty of Suppression of material facts and facing

the consequences


110/146

Chapter 9

Claims


111/146

A claim is a demand for performance of the promise made by theinsurer at the time of making the contract

The insurer should find out:

Policy holder has performed his part

Insured event has taken place

Who are the persons entitled to demand performance.Nomination/

Assignment/Income Tax Notice/ Prohibitory Orders /Official Assignees

Notice

Payment of Claims depends upon the type of contract!!


112/146

Maturity Claims

Sum

Assured

Bonuses

if any

Loan and Interest orOutstandingPremiums

The Date on which the term of the policy is complete is the date of maturity

Settlement of sum assured on that date is called Maturity Claim

Insurer usually sends advance intimations regarding the maturity of the policy

Maturity Claim


113/146

Maturity Claims- The insurer has to satisfy that

There are no Assignments on the policy

The identity of the Policyholder is proved

The Age stands admitted by the insurer

The original policy has to be submitted

The discharge voucher is duly completed


114/146

Maturity Claims

The insurer is expected to make payments on the maturity date

Post dated cheques are sent in advance after the duly signed dischargevoucher is received


115/146

Difficulties encountered in settling the claim

The policy proceeds

will be paid to thetrustee or to the

beneficiaries if they

are competent tocontract

The payment willbe made to theassignee. In case ofconditional

assignment if the titlehas reverted to the lifeassured he can alsoreceivethe payment directly

The originalpolicy is reported

lost

The policy iscovered under

MWP ACT

The policy is under

AbsoluteAssignment

The claim canbesettled bytaking anindemnity bondand a copy ofadvertisementin thenewspaper


116/146

Survival Benefit Payments

Survival Benefits are paid during the currency of the policy before thedate of maturity

Action is initiated by the insurer and the post dated cheques are sent

to the customer

If the policy is lost an indemnity bond will not suffice as the policy still

exists. Instead a duly endorsed duplicate policy is issued

If the life assured dies after the survival benefitdue date but before it issettled instead of the survival benefit the death benefit will be paid to the

nominee


117/146

Death ClaimSettling death claim is more complicated than Maturity claims

The death claim action begins with the intimation being received in the

insurers office

The intimation may be sent by nominee, assignee, a relative of life

assured ,the employer ,agent ,or development officer

The office need not wait for the intimation of the claim. Obituarycolumns and newspaper reports in case of accidents or air crashes may

give the required information


118/146

Documents required to settle a death claim

Policy DocumentAssignment or

Reassignment Deed

Proof of Age ,if

already notadmitted

Certificate of Death

Legal Evidence ofTitle ,if no

assignment ornomination

Form of Discharge

executed andwitnessed


119/146

Documentation for Early ClaimIf the death claim occurs within 3 years from the Date of

commencement or revival the following additional Documents are

required

Statement from the last medical attendant giving details of last illness andtreatment

Statement from the hospital, if the deceased had been admitted to hospital

Statement from the person who had attended lastrites and had seen thedead body

Statement from the employer, if the deceasedwas employed showing details

of leave


120/146

Unnatural Death

Accident, suicide,or unknown causes the

following documents would be required

Police Inquest Report

Panchnama/ FIR

Chemical Analyzers Report

Postmortem ReportCoroners Report/ Investigators reports


121/146

Early Claims

Claims arising within 3 years are looked at with suspicion

There could be suppression of material facts which if found true would

result in repudiation of claim

When the policy is revived on the basis of evidence of good health during

underwriters scrutiny, an early claim in this scenario would raise the

same issues as above


122/146

DisputesIn case of repudiation of claim the customer may go to the court

The court is more sympathetic to the policyholder and the insurer may be

asked to prove the suppression of facts

Insurer may fail to submit enough evidence and may still end up paying

the claim

The Insurer despite these inconveniences still prefers to do the enquiry

because it prevents anybody from taking undue advantage of the insurer

Also it helps improve the underwriting standards and also helps point out

agent and regions more prone to claims


123/146

Proof of Title

In case of no valid nomination or assignment the claimant would have to

prove his title

Title is proved through legal procedures like probate of will, succession

certificates, court orders, etc.

If the amount of claim is not large insurers may waive the proof of title

and settle the claims on the basis of declaration, affidavits and Indemnity

Bonds


124/146

Presumption of DeathProof of Death is an important document

A death certificate issued by the municipal office or similar local body is

the acceptable proof of death

A certificate from burial cremation is also acceptable

Statements from witnesses of the last rites can be used as the supporting

evidence

In case the body is not found the statement from competent authorities

with relevant information is acceptable. FIR/ Panchnama is required

In case of defense personnel ,the statement from the commanding officer

may be obtained

As per Indian Evidence Act a presumption of death can be made if a

person is not heard of for a period ofseven years

If the nominee or claimant of such a person claim him to be missing and

ask him to be presumed as dead then the insurer asks for a decree from

court of presumption of death


125/146

Time Barred

If the intimation of death is received 3 years after the

death

Investigation needs to be carried out in case of early claims as the Insurer

would have grounds of suspicion and there might be a possibility of Fraud,

non-disclosure of complete facts.


126/146


127/146

Conditions are:-

The accident must be caused by outward, violent means not self inflicted

The death must be result of injuries caused by that accident

The death must occur within 120 days or such other period as may bespecified


128/146


129/146


130/146


131/146

Chapter 14

Role of an Insurance Agent


132/146

Introduction

License

According to the Insurance Act

An agent requires

A license to be able tofunction as an agent

He is remunerated byway of commissions

on the premium paidunder policies procuredthrough his efforts

The Agent is the main component of the distribution channel for the lifeinsurance business


133/146

Life Insurance AgentA life Insurance agent is required to solicit and procure

new business keeping in mind the interest of the

policyholders and of the insurance Company

Interest of InsurerInterest of

Policyholder


134/146

Procuring new Business

Agentprocures

new Businessby

Contacting prospects, studying their

needs and persuading them to buy

Completing all the formalities,including proposal form and other

documentation

Arranging Medical Examination

Other information required byUnderwriter


135/146

Continuation of the policyAfter the sale, the agent has to ensure that the policy

continues without a lapse till it becomes a claim

This is in Interest of all the three parties- The insurer,policyholder and the agent

For the continuation of the policy the agent has to:

Keep in touch with the policyholder to make sure that renewal

premiums are paid in time

Ensure that nominations are made or changed according to changing

circumstances

Assist in settlement of the claim by helping the claimants tocomplete the formalities and requirements


136/146

Customer Service

Another way in which an agent can be of assistance to the

policyholder in case he needs the loan under the policy or

wants to make an assignment

These services strengthen the relationship between the

agent and the policyholder


137/146

Benefits under

Various plans

Of insurance

Offered by his

insurer

The Agent needs to be familiar with

The office

procedures includingvarious forms and

documents

Insurance agent is an agent of the prospect as wellHe should be knowledgeable enough so that the customer can trust him

Besides having knowledge of his own products he also must know about

the benefits and advantages of other financial instruments suitable for

savings and investment.


138/146

Prerequisites for success

Since it is difficult for a person to know everything ,an agent

can promise the customer that he will get back after

checking the details

Rather than using guesswork or saying on basis of

hearsay


139/146

Selling InsuranceAn Agent must have continually expanding list of prospects, persons, who

can be approached for insurance

These names of people within reach obtained obtained from

acquaintances,newspapers reports, directories, contacts at parties,

meetings, seminars etc.

These names have to be qualified after some preliminary work which will

indicate whether it is worth approaching them

Those in the qualified list have to be metA sale results when the sales man takes the prospect through well defined

steps


140/146

Selling Insurance

Pre approach

Approach

Interview

Objections

Close


141/146


142/146

Ethical BehaviorThe insurance agent is in a position of trust, the policyholders entrust

their small savings in an insurer,trusting the company to look after these

funds and look after these funds and look after their dependents.

The code of Ethics spelt out by the IRDA in the Agents Regulations is

directed towards Ethical Behavior

If the agent keeps the interest of the customer in mind the compliance to

these is not difficult


143/146


144/146

Examples of compromise in EthicsBecoming aware of such circumstances whose knowledge to insurer would

adversely affect the interests of the client.

Temptation to recommend discontinuance of an existing policy and taking

out a new one

Having to choose between two plans one giving more commission than

other


145/146

Ethical Behaviour

Some agents might feel that they are helping the client by not revealing

some of his information to the underwriter,but in case of early claim the

client and his family will be the loser

Although such an action might not directly reflect on the commission of

the agent but he loses his credibility and his action affects not only the

insurer but also the entire Life Insurance Industry


146/146