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1.1 HISTORY OF INSURANCE
In some sense we can say that insurance appears simultaneously with the appearance of human
society. We know of two types of economies in human societies: natural or non-monetary
economies (using barter and trade with no centralized nor standardized set of financial
instruments) and more modern monetary economies (with markets, currency, financial
instruments and so on). The former is more primitive and the insurance in such economies
entails agreements of mutual aid. If one family's house is destroyed the neighbors are committed
to help rebuild. Granaries housed another primitive form of insurance to indemnify against
famines. Often informal or formally intrinsic to local religious customs, this type of insurance
has survived to the present day in some countries where a modern money economy with its
financial instruments is not widespread.
Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in
which insurance is part of the financial sphere), early methods of transferring or distributing risk
were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC,
respectively. Chinese merchants travelling treacherous river rapids would redistribute their
wares across many vessels to limit the loss due to any single vessel's capsizing. The
Babylonians developed a system which was recorded in the famous Code of Hammurabi, c.
1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan
to fund his shipment, he would pay the lender an additional sum in exchange for the lender's
guarantee to cancel the loan should the shipment be stolen or lost at sea.
Achaemenian monarchs of Ancient Persia were the first to insure their people and made it
official by registering the insuring process in governmental notary offices. The insurance
tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of
different ethnic groups as well as others willing to take part, presented gifts to the monarch. The
most important gift was presented during a special ceremony. When a gift was worth more than
10,000 Derik (Achaemenian gold coin) the issue was registered in a special office. This was
advantageous to those who presented such special gifts. For others, the presents were fairly
assessed by the confidants of the court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift registered by
the court was in trouble, the monarch and the court would help him. Jahez, a historian and
writer, writes in one of his books on ancient Iran: "Whenever the owner of the present is in
trouble or wants to construct a building, set up a feast, have his children married, etc. the one in
charge of this in the court would check the registration. If the registered amount exceeded
10,000 Derik, he or she would receive an amount of twice as much”.
A thousand years later, the inhabitants of Rhodes invented the concept of the general
average. Merchants whose goods were being shipped together would pay a proportionally
divided premium which would be used to reimburse any merchant whose goods were
deliberately jettisoned in order to lighten the ship and save it from total loss.
The ancient Athenian "maritime loan" advanced money for voyages with repayment being
cancelled if the ship was lost. In the 4th century BC, rates for the loans differed according to
safe or dangerous times of year, implying an intuitive pricing of risk with an effect similar to
insurance. The Greeks and Romans introduced the origins of health and life insurance c. 600
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BCE when they created guilds called "benevolent societies" which cared for the families of
deceased members, as well as paying funeral expenses of members. Guilds in the Middle
Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before
insurance was established in the late 17th century, "friendly societies" existed in England, in
which people donated amounts of money to a general sum that could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of
contracts) were invented in Genoa in the 14th century, as were insurance pools backed by
pledges of landed estates. These new insurance contracts allowed insurance to be separated
from investment, a separation of roles that first proved useful in marine insurance. Insurance
became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.
Some forms of insurance had developed in London by the early decades of the 17th century.
For example, the will of the English colonist Robert Hayman mentions two "policies of
insurance" taken out with the diocesan Chancellor of London, Arthur Duck. Of the value of
£100 each, one relates to the safe arrival of Hayman's ship in Guyana and the other is in regard
to "one hundred pounds assured by the said Doctor Arthur Duck on my life". Hayman's will was
signed and sealed on 17 November 1628 but not proved until 1633. Toward the end of the
seventeenth century, London's growing importance as a centre for trade increased demand for
marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that became a popular
haunt of ship owners, merchants, and ships' captains, and thereby a reliable source of the latest
shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and
those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market
(note that it is an insurance market rather than a company) for marine and other specialist types
of insurance, but it operates rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London, which in 1666
devoured more than 13,000 houses. The devastating effects of the fire converted the
development of insurance "from a matter of convenience into one of urgency, a change of
opinion reflected in Sir Christopher Wren's inclusion of a site for 'the Insurance Office' in his
new plan for London in 1667". A number of attempted fire insurance schemes came to nothing,
but in 1681 Nicholas Barbon, and eleven associates, established England's first fire insurance
company, the "Insurance Office for Houses", at the back of the Royal Exchange. Initially, 5,000
homes were insured by Barbon's Insurance Office.
The first insurance company in the United States underwrote fire insurance and was formed
in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped
to popularize and make standard the practice of insurance, particularly against fire in the form
of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance
of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire
prevention. Not only did his company warn against certain fire hazards, it refused to insure
certain buildings where the risk of fire was too great, such as all wooden houses.
In the United States, regulation of the insurance industry primary resides with
individual state insurance departments. The current state insurance regulatory framework has its
roots in the 19th century, when New Hampshire appointed the first insurance commissioner in
1851. Congress adopted the McCarran-Ferguson Act in 1945, which declared that states should
regulate the business of insurance and to affirm that the continued regulation of the insurance
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industry by the states is in the public's best interest. The Financial Modernization Act of 1999,
commonly referred to as "Gramm-Leach-Bliley", established a comprehensive framework to
authorize affiliations between banks, securities firms, and insurers, and once again
acknowledged that states should regulate insurance.
Whereas insurance markets have become centralized nationally and internationally, state
insurance commissioners operate individually, though at times in concert through the National
Association of Insurance Commissioners. In recent years, some have called for a dual state and
federal regulatory system (commonly referred to as the Optional federal charter (OFC)) for
insurance similar to the banking industry.
In 2010, the federal Dodd-Frank Wall Street Reform and Consumer Protection
Act established the Federal Insurance Office ("FIO"). FIO is part of the U.S. Department of the
Treasury and it monitors all aspects of the insurance industry, including identifying issues or
gaps in the regulation of insurers that may contribute to a systemic crisis in the insurance
industry or in the U.S. financial system. FIO coordinates and develops federal policy on
prudential aspects of international insurance matters, including representing the U.S. in
the International Association of Insurance Supervisors. FIO also assists the U.S. Secretary of
Treasury with negotiating (with the U.S. Trade Representative) certain international agreements.
Moreover, FIO monitors access to affordable insurance by traditionally underserved
communities and consumers, minorities, and low- and moderate-income persons. The Office
also assists the U.S. Secretary of the Treasury with administering the Terrorism Risk Insurance
Program. However, FIO is not a regulator or supervisor. The regulation of insurance continues
to reside with the states.
1.2 EVOLUTION OF INSURANCE INDUSTRY IN INDIA –IMPORTANT
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk
in terms of pooling of resources that could be re-distributed in times of calamities such as fire,
floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient
Indian history has preserved the earliest traces of insurance in the form of marine trade loans
and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other
countries, England in particular.
1818 The advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta.
1834 Oriental Life Insurance Failure
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1850 The advent of General Insurance in India with the establishment of Triton
Insurance Company Ltd in Calcutta
1870 The enactment of the British Insurance Act
1907 The Indian Mercantile Insurance Ltd was set up
1912 The Indian Life Assurance Companies Act, 1912 was the first statutory
measure to regulate life business.
1928 The Indian Insurance Companies Act was enacted.
1956 Nationalization of Life Insurance Sector and Life Insurance Corporation .The
LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident
1971 The General Insurance Corporation of India was incorporated as a company
1973 General insurance business was nationalized with effect from 1st January
107 insurers were amalgamated and grouped into four companies namely:
1) National Insurance Company Ltd.,
2) The New India Assurance Company Ltd.,
3) The Oriental Insurance Company Ltd
4) The United India Insurance Company Ltd.
1993 The Government set up a committee under the chairmanship of RN Malhotra
former Governor of RBI to propose recommendations for reforms in the
2000 The IRDA was incorporated as a statutory body in April 2000.
Foreign companies were allowed ownership of up to 26%.
2000-01 Insurance Industry had 16 new entrants, 10 in Life and 6 in General Insurance
2001-03 Insurance Industry had 5 new entrants, 2 in Life and 3 in General
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2003-04 Insurance Industry had 1new entrant, Sahara India Insurance Company Ltd.
In Life Insurance category
2004-05 Insurance Industry had 1new entrant, Shri Ram Insurance company Ltd. In
Life Insurance category
2005-06 Bharti Axa Life insurance company was granted Certification of Registration
2006 Bharti Axa Life insurance company commenced its operations the newest
player in the insurance sector.
1.3 EVOLUTION OF NON-LIFE INSURANCE IN INDIA
The boycott of British goods and British institutions, which occurred because of the nationalist
movement, encouraged formation of Indian-owned commercial and business houses. By 1907,
the Indian mercantile the first of the long lasting general insurance companies to be established
with Indian capital, had started functioning five offices, the New India, Vulcan, Jupiter, British
India General and the Universal, were established in 1919 almost simultaneously for transacting
general insurance business.
In 1928, prominent insurance men of Bombay met and formed the Indian insurance companies
association to protect the interest of Indian insurers. Leaders of the insurance industry began to
organize conferences, educate public on the benefit of insurance, focus attention on the annual
remove of national wealth through invisible export’s, and arise public interest in favour of Indian
In 1950, the planning commission was set up to formulate plans for successive five years. This
five year plan brought about large scale economic development and increased insurance
consciousness among the people. As insurance business increased the number of claims for
compensation against losses also naturally increased. Settlement of too many large claims meant
a severe demand on the funds of insurance companies. So to prevent this situation the practice of
‘Reinsurance’ was adopted according to which insurers themselves reinsured portions of the
insurances they had undertaken. So Indian insurance companies with their expanding business
wanted to reinsure for which they had to seek foreign reinsurance markets.
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Since the need for conserving foreign exchange was felt in India all the insurers in India as well
as foreigners operating in India formed the India Reinsurance Corporation in 1956. This
corporation provided reinsurance facilities. It was compulsory for insurers in India to reinsure a
fixed percentage of their insurances with the corporation.
The Insurance Amendment Act 1950 imposed certain limitations on expenses of management.
The general insurance council constituted what was called the tariff committee to control and
regulate terms and conditions of business.
In 1972, the General Insurance Business (Nationalization) Act 1972 was passed under the
provisions of this act. The general insurance corporation of India was established for the purpose
of directing, controlling and caring on the general insurance business and all the 106 insurers
were merged and grouped into four subsidiaries of the general insurance corporation of India
National Insurance Company Ltd., with its head office at Calcutta.
The New India Assurance Company Ltd., with its head office at Bombay.
The Oriental Insurance company Ltd., with its head office at Delhi.
The United India Insurance Company Ltd., with its head office at Madras.
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Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange
for payment. It is a form of risk management primarily used to hedge against the risk of a
contingent, uncertain loss.
An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder,
is the person or entity buying the insurance policy. The amount of money to be charged for a
certain amount of insurance coverage is called the premium. Risk management, the practice
of appraising and controlling risk, has evolved as a discrete field of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in
the form of payment to the insurer in exchange for the insurer's promise to compensate
(indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract,
called the insurance policy, which details the conditions and circumstances under which the
insured will be financially compensated.
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the
losses that some may incur. The insured entities are therefore protected from risk for a fee, with
the fee being dependent upon the frequency and severity of the event occurring. In order to be
an insurable risk, the risk insured against must meet certain characteristics. Insurance as a
financial intermediary is a commercial enterprise and a major part of the financial services
industry, but individual entities can also self-insure through saving money for possible future
Risk which can be insured by private companies typically shares seven common characteristics:
1. Large number of similar exposure units: Since insurance operates through pooling
resources, the majority of insurance policies are provided for individual members of
large classes, allowing insurers to benefit from the law of large numbers in which
predicted losses are similar to the actual losses. Exceptions include Lloyd's of London,
which is famous for insuring the life or health of actors, sports figures, and other famous
individuals. However, all exposures will have particular differences, which may lead to
different premium rates.
2. Definite loss: The loss takes place at a known time, in a known place, and from a known
cause. The classic example is death of an insured person on a life insurance
policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion.
Other types of losses may only be definite in theory. Occupational disease, for instance,
may involve prolonged exposure to injurious conditions where no specific time, place, or
cause is identifiable. Ideally, the time, place, and cause of a loss should be clear enough
that a reasonable person, with sufficient information, could objectively verify all three
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3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or
at least outside the control of the beneficiary of the insurance. The loss should be pure, in
the sense that it results from an event for which there is only the opportunity for cost.
Events that contain speculative elements, such as ordinary business risks or even
purchasing a lottery ticket, are generally not considered insurable.
4. Large loss: The size of the loss must be meaningful from the perspective of the insured.
Insurance premiums need to cover both the expected cost of losses, plus the cost of
issuing and administering the policy, adjusting losses, and supplying the capital needed
to reasonably assure that the insurer will be able to pay claims. For small losses, these
latter costs may be several times the size of the expected cost of losses. There is hardly
any point in paying such costs unless the protection offered has real value to a buyer.
5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the
event so large, that the resulting premium is large relative to the amount of protection
offered, then it is not likely that the insurance will be purchased, even if on offer.
Furthermore, as the accounting profession formally recognizes in financial accounting
standards, the premium cannot be so large that there is not a reasonable chance of a
significant loss to the insurer. If there is no such chance of loss, then the transaction may
have the form of insurance, but not the substance. (See the US Financial Accounting
Standards Board standard number 113)
6. Calculable loss: There are two elements that must be at least estimable, if not formally
calculable: the probability of loss, and the attendant cost. Probability of loss is generally
an empirical exercise, while cost has more to do with the ability of a reasonable person in
possession of a copy of the insurance policy and a proof of loss associated with a claim
presented under that policy to make a reasonably definite and objective evaluation of the
amount of the loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses: Insurable losses are
ideally independent and non-catastrophic, meaning that the losses do not happen all at
once and individual losses are not severe enough to bankrupt the insurer; insurers may
prefer to limit their exposure to a loss from a single event to some small portion of their
capital base. Capital constrains insurers' ability to sell earthquake insurance as well as
wind insurance in hurricane zones. In the US, flood risk is insured by the federal
government. In commercial fire insurance, it is possible to find single properties whose
total exposed value is well in excess of any individual insurer's capital constraint. Such
properties are generally shared among several insurers, or are insured by a single insurer
who syndicates the risk into the reinsurance market.
When a company insures an individual entity, there are basic legal requirements. Several
commonly cited legal principles of insurance include:
1. Indemnity – the insurance company indemnifies, or compensates, the insured in the case
of certain losses only up to the insured's interest.
2. Insurable interest – the insured typically must directly suffer from the loss. Insurable
interest must exist whether property insurance or insurance on a person is involved. The
concept requires that the insured have a "stake" in the loss or damage to the life or
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property insured. What that "stake" is will be determined by the kind of insurance
involved and the nature of the property ownership or relationship between the persons.
The requirement of an insurable interest is what distinguishes insurance from gambling.
3. Utmost good faith – (Uberrima fides) the insured and the insurer are bound by a good
faith bond of honesty and fairness. Material facts must be disclosed.
4. Contribution – insurers which have similar obligations to the insured contribute in the
indemnification, according to some method.
5. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf
of the insured; for example, the insurer may sue those liable for the insured's loss.
6. Causa proxima, or proximate cause – the cause of loss (the peril) must be covered under
the insuring agreement of the policy, and the dominant cause must not be excluded
7. Mitigation – In case of any loss or casualty, the asset owner must attempt to keep loss to
a minimum, as if the asset was not insured.
To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to
the extent possible, prior to the happening of a specified event or peril. Accordingly, insurances
generally not considered to be indemnity insurance, but rather "contingent" insurance (i.e., a
claim arises on the occurrence of a specified event). There are generally three types of insurance
contracts that seek to indemnify an insured:
1. a "reimbursement" policy, and
2. a "pay on behalf" or "on behalf of" policy, and
3. an "indemnification" policy.
From an insured's standpoint, the result is usually the same: the insurer pays the loss and claims
If the Insured has a "reimbursement" policy, the insured can be required to pay for a loss and
then be "reimbursed" by the insurance carrier for the loss and out of pocket costs including, with
the permission of the insurer, claim expenses
Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim on behalf of
the insured who would not be out of pocket for anything. Most modern liability insurance is
written on the basis of "pay on behalf" language which enables the insurance carrier to manage
and control the claim.
Under an "indemnification" policy, the insurance carrier can generally either "reimburse" or "pay
on behalf of", whichever is more beneficial to it and the insured in the claim handling process.
An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.)
becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a
contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the
following elements: identification of participating parties (the insurer, the insured, the
beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount
of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and
exclusions (events not covered). An insured is thus said to be "indemnified" against the loss
covered in the policy.
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When insured parties experience a loss for a specified peril, the coverage entitles the
policyholder to make a claim against the insurer for the covered amount of loss as specified by
the policy. The fee paid by the insured to the insurer for assuming the risk is called the premium.
Insurance premiums from many insured’s are used to fund accounts reserved for later payment of
claims – in theory for a relatively few claimants – and for overhead costs. So long as an insurer
maintains adequate funds set aside for anticipated losses (called reserves), the remaining margin
is an insurer's profit.
2.3 SOCIAL EFFECTS
Insurance can have various effects on society through the way that it changes who bears the cost
of losses and damage. On one hand it can increase fraud; on the other it can help societies and
individuals prepare for catastrophes and mitigate the effects of catastrophes on both households
Insurance can influence the probability of losses through moral hazard, insurance fraud, and
preventive steps by the insurance company. Insurance scholars have typically used morale
hazard to refer to the increased loss due to unintentional carelessness and moral hazard to refer to
increased risk due to intentional carelessness or indifference. Insurers attempt to address
carelessness through inspections, policy provisions requiring certain types of maintenance, and
possible discounts for loss mitigation efforts. While in theory insurers could encourage
investment in loss reduction, some commentators have argued that in practice insurers had
historically not aggressively pursued loss control measures – particularly to prevent disaster
losses such as hurricanes—because of concerns over rate reductions and legal battles. However,
since about 1996 insurers have begun to take a more active role in loss mitigation, such as
through building codes.
2.4 INSURER’S BUSINESS MODEL
Underwriting and investing
The business model is to collect more in premium and investment income than is paid out in
losses, and to also offer a competitive price which consumers will accept. Profit can be reduced
to a simple equation:
Profit = earned premium + investment income - incurred loss - underwriting expenses.
Insurers make money in two ways:
Through underwriting, the process by which insurers select the risks to insure and decide
how much in premiums to charge for accepting those risks
By investing the premiums they collect from insured parties
The most complicated aspect of the insurance business is the actuarial science of ratemaking
(price-setting) of policies, which uses statistics and probability to approximate the rate of future
claims based on a given risk. After producing rates, the insurer will use discretion to reject or
accept risks through the underwriting process.
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At the most basic level, initial ratemaking involves looking at the frequency and severity of
insured perils and the expected average payout resulting from these perils. Thereafter an
insurance company will collect historical loss data, bring the loss data to present value, and
compare these prior losses to the premium collected in order to assess rate adequacy. Loss
ratios and expense loads are also used. Rating for different risk characteristics involves at the
most basic level comparing the losses with "loss relativities"—a policy with twice as many
losses would therefore be charged twice as much. More complex multivariate analyses are
sometimes used when multiple characteristics are involved and a univariate analysis could
produce confounded results. Other statistical methods may be used in assessing the probability of
Upon termination of a given policy, the amount of premium collected minus the amount paid out
in claims is the insurer's underwriting profit on that policy. Underwriting performance is
measured by something called the "combined ratio" which is the ratio of expenses/losses to
premiums. A combined ratio of less than 100 percent indicates an underwriting profit, while
anything over 100 indicates an underwriting loss. A company with a combined ratio over 100%
may nevertheless remain profitable due to investment earnings.
Insurance companies earn investment profits on "float". Float, or available reserve, is the amount
of money on hand at any given moment that an insurer has collected in insurance premiums but
has not paid out in claims. Insurers start investing insurance premiums as soon as they are
collected and continue to earn interest or other income on them until claims are paid out. The
Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance
services) has almost 20% of the investments in the London Stock Exchange.
In the United States, the underwriting loss of property and casualty insurance companies was
$142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4
billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do
not believe that it is forever possible to sustain a profit from float without an underwriting profit
as well, but this opinion is not universally held.
Naturally, the float method is difficult to carry out in an economically depressed period. Bear
markets do cause insurers to shift away from investments and to toughen up their underwriting
standards, so a poor economy generally means high insurance premiums. This tendency to swing
between profitable and unprofitable periods over time is commonly known as the underwriting,
or insurance, cycle.
Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid
for. Claims may be filed by insured’s directly with the insurer or through brokers or agents. The
insurer may require that the claim be filed on its own proprietary forms, or may accept claims on
a standard industry form, such as those produced by ACORD.
Insurance company claims departments employ a large number of claims adjusters supported by
a staff of records management and data entry clerks. Incoming claims are classified based on
severity and are assigned to adjusters whose settlement authority varies with their knowledge and
experience. The adjuster undertakes an investigation of each claim, usually in close cooperation
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with the insured, determines if coverage is available under the terms of the insurance contract,
and if so, the reasonable monetary value of the claim, and authorizes payment.
The policyholder may hire their own public adjuster to negotiate the settlement with the
insurance company on their behalf. For policies that are complicated, where claims may be
complex, the insured may take out a separate insurance policy add on, called loss recovery
insurance, which covers the cost of a public adjuster in the case of a claim.
Adjusting liability insurance claims is particularly difficult because there is a third party
involved, the plaintiff, who is under no contractual obligation to cooperate with the insurer and
may in fact regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the
insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may
take years to complete, and appear in person or over the telephone with settlement authority at a
mandatory settlement conference when requested by the judge.
If a claims adjuster suspects under-insurance, the condition of average may come into play to
limit the insurance company's exposure.
In managing the claims handling function, insurers seek to balance the elements of customer
satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this
balancing act, fraudulent insurance practices are a major business risk that must be managed and
overcome. Disputes between insurers and insureds over the validity of claims or claims handling
practices occasionally escalate into litigation (see insurance bad faith).
Insurers will often use insurance agents to initially market or underwrite their customers. Agents
can be captive, meaning they write only for one company, or independent, meaning that they can
issue policies from several companies. The existence and success of companies using insurance
agents is likely due to improved and personalized service.
2.5 TYPES OF INSURANCE
Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give
rise to claims are known as perils. An insurance policy will set out in detail which perils are
covered by the policy and which are not. Below are non-exhaustive lists of the many different
types of insurance that exist. A single policy may cover risks in one or more of the categories set
out below. For example, vehicle insurance would typically cover both the property risk (theft or
damage to the vehicle) and the liability risk (legal claims arising from an accident). A home
insurance policy in the US typically includes coverage for damage to the home and the owner's
belongings, certain legal claims against the owner, and even a small amount of coverage for
medical expenses of guests who are injured on the owner's property.
Business insurance can take a number of different forms, such as the various kinds of
professional liability insurance, also called professional indemnity (PI), which are discussed
below under that name; and the business owner's policy (BOP), which packages into one policy
many of the kinds of coverage that a business owner needs, in a way analogous to how
homeowners' insurance packages the coverage’s that a homeowner needs.
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Auto insurance protects the policyholder against financial loss in the event of an incident
involving a vehicle they own, such as in a traffic collision.
Coverage typically includes:
Property coverage, for damage to or theft of the car
Liability coverage, for the legal responsibility to others for bodily injury or property
Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost
wages and funeral expenses
Most countries, such as the United Kingdom, require drivers to buy some, but not all, of these
coverage’s. When a car is used as collateral for a loan the lender usually requires specific
Gap insurance covers the excess amount on your auto loan in an instance where your insurance
company does not cover the entire loan. Depending on the companies specific policies it might
or might not cover the deductible as well. This coverage is marketed for those who put low down
payments, have high interest rates on their loans, and those with 60 month or longer terms. Gap
insurance is typically offered by your finance company when you first purchase your vehicle.
Most auto insurance companies offer this coverage to consumers as well. If you are unsure if
GAP coverage had been purchased, you should check your vehicle lease or purchase
Health insurance policies cover the cost of medical treatments. Dental insurance, like medical
insurance protects policyholders for dental costs. In the US and Canada, dental insurance is often
part of an employer's benefits package, along with health insurance.
Accident, sickness, and unemployment insurance
Disability insurance policies provide financial support in the event of the policyholder
becoming unable to work because of disabling illness or injury. It provides monthly
support to help pay such obligations as mortgage loans and credit cards. Short-term and
long-term disability policies are available to individuals, but considering the expense,
long-term policies are generally obtained only by those with at least six-figure incomes,
such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period
typically up to six months, paying a stipend each month to cover medical bills and other
Long-term disability insurance covers an individual's expenses for the long term, up until
such time as they are considered permanently disabled and thereafter. Insurance
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companies will often try to encourage the person back into employment in preference to
and before declaring them unable to work at all and therefore totally disabled.
Disability overhead insurance allows business owners to cover the overhead expenses of
their business while they are unable to work.
Total permanent disability insurance provides benefits when a person is permanently
disabled and can no longer work in their profession, often taken as an adjunct to life
Workers' compensation insurance replaces all or part of a worker's wages lost and
accompanying medical expenses incurred because of a job-related injury.
Casualty insurance insures against accidents, not necessarily tied to any specific property. It is a
broad spectrum of insurance that a number of other types of insurance could be classified, such
as auto, workers compensation, and some liability insurances.
Crime insurance is a form of casualty insurance that covers the policyholder against
losses arising from the criminal acts of third parties. For example, a company can obtain
crime insurance to cover losses arising from theft or embezzlement.
Political risk insurance is a form of casualty insurance that can be taken out by businesses
with operations in countries in which there is a risk that revolution or
other political conditions could result in a loss.
Life insurance provides a monetary benefit to a decedent's family or other designated
beneficiary, and may specifically provide for income to an insured person's family, burial,
funeral and other final expenses. Life insurance policies often allow the option of having the
proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states,
a person cannot purchase a policy on another person without their knowledge.
Annuities provide a stream of payments and are generally classified as insurance because they
are issued by insurance companies, are regulated as insurance, and require the same kinds of
actuarial and investment management expertise that life insurance requires. Annuities
and pensions that pay a benefit for life are sometimes regarded as insurance against the
possibility that a retiree will outlive his or her financial resources. In that sense, they are the
complement of life insurance and, from an underwriting perspective, are the mirror image of life
Certain life insurance contracts accumulate cash values, which may be taken by the insured if the
policy is surrendered or which may be borrowed against. Some policies, such as annuities and
endowment policies, are financial instruments to accumulate or liquidate wealth when it is
In many countries, such as the United States and the UK, the tax law provides that the interest on
this cash value is not taxable under certain circumstances. This leads to widespread use of life
insurance as a tax-efficient method of saving as well as protection in the event of early death.
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In the United States, the tax on interest income on life insurance policies and annuities is
generally deferred. However, in some cases the benefit derived from tax deferral may be offset
by a low return. This depends upon the insuring company, the type of policy and other variables
(mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k)
plans, Roth IRAs) may be better alternatives for value accumulation.
Burial insurance is a very old type of life insurance which is paid out upon death to cover final
expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance
c. 600 CE when they organized guilds called "benevolent societies" which cared for the
surviving families and paid funeral expenses of members upon death. Guilds in the Middle
Ages served a similar purpose, as did friendly societies during Victorian times.
Property insurance provides protection against risks to property, such
as fire, theft or weather damage. This may include specialized forms of insurance such as fire
insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance
or boiler insurance. The term property insurance may, like casualty insurance, be used as a broad
category of various subtypes of insurance, some of which are listed below:
Aviation insurance protects aircraft hulls and spares, and associated liability risks, such as
passenger and third-party liability. Airports may also appear under this subcategory,
including air traffic control and refueling operations for international airports through to
smaller domestic exposures.
Boiler insurance (also known as boiler and machinery insurance, or equipment
breakdown insurance) insures against accidental physical damage to boilers, equipment
Builder's risk insurance insures against the risk of physical loss or damage to property
during construction. Builder's risk insurance is typically written on an "all risk" basis
covering damage arising from any cause (including the negligence of the insured) not
otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's
or organization's insurable interest in materials, fixtures and/or equipment being used in
the construction or renovation of a building or structure should those items sustain
physical loss or damage from an insured peril.
Crop insurance may be purchased by farmers to reduce or manage various risks
associated with growing crops. Such risks include crop loss or damage caused by
weather, hail, drought, frost damage, insects, or disease.
Earthquake insurance is a form of property insurance that pays the policyholder in the
event of an earthquake that causes damage to the property. Most ordinary home
insurance policies do not cover earthquake damage. Earthquake insurance policies
generally feature a high deductible. Rates depend on location and hence the likelihood of
an earthquake, as well as the construction of the home.
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Fidelity bond is a form of casualty insurance that covers policyholders for losses incurred
as a result of fraudulent acts by specified individuals. It usually insures a business for
losses caused by the dishonest acts of its employees.
Flood insurance protects against property loss due to flooding. Many insurers in the US
do not provide flood insurance in some parts of the country. In response to this, the
federal government created the National Flood Insurance Program which serves as the
insurer of last resort.
Home insurance, also commonly called hazard insurance or homeowners insurance (often
abbreviated in the real estate industry as HOI), provides coverage for damage or
destruction of the policyholder's home. In some geographical areas, the policy may
exclude certain types of risks, such as flood or earthquake, that require additional
coverage. Maintenance-related issues are typically the homeowner's responsibility. The
policy may include inventory, or this can be bought as a separate policy, especially for
people who rent housing. In some countries, insurers offer a package which may include
liability and legal responsibility for injuries and property damage caused by members of
the household, including pets.
Landlord insurance covers residential and commercial properties which are rented to
others. Most homeowners' insurance covers only owner-occupied homes.
Marine insurance and marine cargo insurance cover the loss or damage of vessels at sea
or on inland waterways, and of cargo in transit, regardless of the method of transit. When
the owner of the cargo and the carrier are separate corporations, marine cargo insurance
typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc.,
but excludes losses that can be recovered from the carrier or the carrier's insurance.
Many marine insurance underwriters will include "time element" coverage in such
policies, which extends the indemnity to cover loss of profit and other business expenses
attributable to the delay caused by a covered loss.
Supplemental natural disaster insurance covers specified expenses after a natural disaster
renders the policyholder's home uninhabitable. Periodic payments are made directly to
the insured until the home is rebuilt or a specified time period has elapsed.
Surety bond insurance is a three-party insurance guaranteeing the performance of the
Terrorism insurance provides protection against any loss or damage caused
by terrorist activities. In the United States in the wake of 9/11, the Terrorism Risk
Insurance Act 2002 (TRIA) set up a federal Program providing a transparent system of
shared public and private compensation for insured losses resulting from acts of
terrorism. The program was extended until the end of 2014 by the Terrorism Risk
Insurance Program Reauthorization Act 2007 (TRIPRA).
Volcano insurance is a specialized insurance protecting against damage arising
specifically from volcanic eruptions.
Windstorm insurance is an insurance covering the damage that can be caused by wind
events such as hurricanes.
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Liability insurance is a very broad superset that covers legal claims against the insured. Many
types of insurance include an aspect of liability coverage. For example, a homeowner's insurance
policy will normally include liability coverage which protects the insured in the event of a claim
brought by someone who slips and falls on the property; automobile insurance also includes an
aspect of liability insurance that indemnifies against the harm that a crashing car can cause to
others' lives, health, or property. The protection offered by a liability insurance policy is twofold:
a legal defense in the event of a lawsuit commenced against the policyholder and indemnification
(payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies
typically cover only the negligence of the insured, and will not apply to results of willful or
intentional acts by the insured.
Public liability insurance covers a business or organization against claims should its
operations injure a member of the public or damage their property in some way.
Directors and officers liability insurance (D&O) protects an organization (usually a
corporation) from costs associated with litigation resulting from errors made by directors
and officers for which they are liable.
Environmental liability insurance protects the insured from bodily injury, property
damage and cleanup costs as a result of the dispersal, release or escape of pollutants.
Errors and omissions insurance (E&O) is business liability insurance for professionals
such as insurance agents, real estate agents and brokers, architects, third-party
administrators (TPAs) and other business professionals.
Prize indemnity insurance protects the insured from giving away a large prize at a
specific event. Examples would include offering prizes to contestants who can make a
half-court shot at a basketball game, or a hole-in-one at a golf tournament.
Professional liability insurance, also called professional indemnity insurance (PI),
protects insured professionals such as architectural corporations and medical
practitioners against potential negligence claims made by their patients/clients.
Professional liability insurance may take on different names depending on the
profession. For example, professional liability insurance in reference to the medical
profession may be called medical malpractice insurance.
Credit insurance repays some or all of a loan when certain circumstances arise to the borrower
such as unemployment, disability, or death.
Mortgage insurance insures the lender against default by the borrower. Mortgage
insurance is a form of credit insurance, although the name "credit insurance" more often
is used to refer to policies that cover other kinds of debt.
Many credit cards offer payment protection plans which are a form of credit insurance.
Trade credit insurance is business insurance over the accounts receivable of the insured.
The policy pays the policy holder for covered accounts receivable if the debtor defaults
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All-risk insurance is an insurance that covers a wide range of incidents and perils, except those
noted in the policy. All-risk insurance is different from peril-specific insurance that cover losses
from only those perils listed in the policy. In car insurance, all-risk policy includes also the
damages caused by the own driver.
Bloodstock insurance covers individual horses or a number of horses under common
ownership. Coverage is typically for mortality as a result of accident, illness or disease
but may extend to include infertility, in-transit loss, veterinary fees, and prospective foal.
Business interruption insurance covers the loss of income, and the expenses incurred,
after a covered peril interrupts normal business operations.
Collateral protection insurance (CPI) insures property (primarily vehicles) held as
collateral for loans made by lending institutions.
Defense Base Act (DBA) insurance provides coverage for civilian workers hired by the
government to perform contracts outside the US and Canada. DBA is required for all US
citizens, US residents, US Green Card holders, and all employees or subcontractors hired
on overseas government contracts. Depending on the country, foreign nationals must also
be covered under DBA. This coverage typically includes expenses related to medical
treatment and loss of wages, as well as disability and death benefits.
Expatriate insurance provides individuals and organizations operating outside of their
home country with protection for automobiles, property, health, liability and business
Kidnap and ransom insurance is designed to protect individuals and corporations
operating in high-risk areas around the world against the perils of kidnap, extortion,
wrongful detention and hijacking.
Legal expenses insurance covers policyholders for the potential costs of legal action
against an institution or an individual. When something happens which triggers the need
for legal action, it is known as "the event". There are two main types of legal expenses
insurance: before the event insurance and after the event insurance.
Livestock insurance is a specialist policy provided to, for example, commercial or hobby
farms, aquariums, fish farms or any other animal holding. Cover is available for
mortality or economic slaughter as a result of accident, illness or disease but can extend
to include destruction by government order.
Media liability insurance is designed to cover professionals that engage in film and
television production and print, against risks such as defamation.
Nuclear incident insurance covers damages resulting from an incident involving
radioactive materials and is generally arranged at the national level. (See the nuclear
exclusion clause and for the US the Price-Anderson Nuclear Industries Indemnity Act.)
Pet insurance insures pets against accidents and illnesses; some companies cover
routine/wellness care and burial, as well.
Pollution insurance usually takes the form of first-party coverage for contamination of
insured property either by external or on-site sources. Coverage is also afforded for
liability to third parties arising from contamination of air, water, or land due to the
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sudden and accidental release of hazardous materials from the insured site. The policy
usually covers the costs of cleanup and may include coverage for releases from
underground storage tanks. Intentional acts are specifically excluded.
Purchase insurance is aimed at providing protection on the products people purchase.
Purchase insurance can cover individual purchase protection, warranties, guarantees,
care plans and even mobile phone insurance. Such insurance is normally very limited in
the scope of problems that are covered by the policy.
Title insurance provides a guarantee that title to real property is vested in the purchaser
and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in
conjunction with a search of the public records performed at the time of a real
Travel insurance is an insurance cover taken by those who travel abroad, which covers
certain losses such as medical expenses, loss of personal belongings, travel delay, and
Tuition insurance insures students against involuntary withdrawal from cost-intensive
Interest rate insurance protects the holder from adverse changes in interest rates, for
instance for those with a variable rate loan or mortgage
Divorce insurance is a form of contractual liability insurance that pays the insured a cash
benefit if their marriage ends in divorce.
Insurance financing vehicles
Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other
social organizations. No-fault insurance is a type of insurance policy (typically automobile
insurance) where insured’s are indemnified by their own insurer regardless of fault in the
Protected self-insurance is an alternative risk financing mechanism in which an
organization retains the mathematically calculated cost of risk within the organization
and transfers the catastrophic risk with specific and aggregate limits to an insurer so the
maximum total cost of the program is known. A properly designed and underwritten
Protected Self-Insurance Program reduces and stabilizes the cost of insurance and
provides valuable risk management information.
Retrospectively rated insurance is a method of establishing a premium on large
commercial accounts. The final premium is based on the insured's actual loss experience
during the policy term, sometimes subject to a minimum and maximum premium, with
the final premium determined by a formula. Under this plan, the current year's premium
is based partially (or wholly) on the current year's losses, although the premium
adjustments may take months or years beyond the current year's expiration date. The
rating formula is guaranteed in the insurance contract.
Formula: retrospective premium = converted loss + basic premium × tax multiplier.
Numerous variations of this formula have been developed and are in use.
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Formal self-insurance is the deliberate decision to pay for otherwise insurable losses out
of one's own money. This can be done on a formal basis by establishing a separate fund
into which funds are deposited on a periodic basis, or by simply forgoing the purchase of
available insurance and paying out-of-pocket. Self-insurance is usually used to pay for
high-frequency, low-severity losses. Such losses, if covered by conventional insurance,
mean having to pay a premium that includes loadings for the company's general
expenses, cost of putting the policy on the books, acquisition expenses, premium taxes,
and contingencies. While this is true for all insurance, for small, frequent losses the
transaction costs may exceed the benefit of volatility reduction that insurance otherwise
Reinsurance is a type of insurance purchased by insurance companies or self-insured
employers to protect against unexpected losses. Financial reinsurance is a form of
reinsurance that is primarily used for capital management rather than to transfer
Social insurance can be many things to many people in many countries. But a summary
of its essence is that it is a collection of insurance coverage’s (including components of
life insurance, disability income insurance, unemployment insurance, health insurance,
and others), plus retirement savings, that requires participation by all citizens. By forcing
everyone in society to be a policyholder and pay premiums, it ensures that everyone can
become a claimant when or if he/she needs to. Along the way this inevitably becomes
related to other concepts such as the justice system and the welfare state. This is a large,
complicated topic that engenders tremendous debate, which can be further studied in the
following articles (and others):
Social safety net
Social Security debate (United States)
Social Security (United States)
Social welfare provision
Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is
purchased by organizations who do not want to assume 100% of the liability for losses
arising from the plans. Under a stop-loss policy, the insurance company becomes liable
for losses that exceed certain limits called deductibles.
Closed community self-insurance
Some communities prefer to create virtual insurance amongst themselves by other means than
contractual risk transfer, which assigns explicit numerical values to risk. A number of religious
groups, including the Amish and some Muslim groups, depend on support provided by
their communities when disasters strike. The risk presented by any given person is assumed
collectively by the community who all bear the cost of rebuilding lost property and supporting
people whose needs are suddenly greater after a loss of some kind. In supportive communities
where others can be trusted to follow community leaders, this tacit form of insurance can work.
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In this manner the community can even out the extreme differences in insurability that exist
among its members. Some further justification is also provided by invoking the moral hazard of
explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant the civil service) did
not insure property such as government buildings. If a government building was damaged, the
cost of repair would be met from public funds because, in the long run, this was cheaper than
paying insurance premiums. Since many UK government buildings have been sold to property
companies, and rented back, this arrangement is now less common and may have disappeared
2.6 INSURANCE COMPANIES
Insurance companies may be classified into two groups:
Life insurance companies, which sell life insurance, annuities and pensions products.
Non-life, general, or property/casualty insurance companies, which sell other types of
General insurance companies can be further divided into these sub categories.
In most countries, life and non-life insurers are subject to different regulatory regimes and
different tax and accounting rules. The main reason for the distinction between the two types of
company is that life, annuity, and pension business is very long-term in nature – coverage for life
assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover
usually covers a shorter period, such as one year.
In the United States, standard line insurance companies are insurers that have received a license
or authorization from a state for the purpose of writing specific kinds of insurance in that state,
such as automobile insurance or homeowners' insurance. They are typically referred to as
"admitted" insurers. Generally, such an insurance company must submit its rates and policy
forms to the state's insurance regulator to receive his or her prior approval, although whether an
insurance company must receive prior approval depends upon the kind of insurance being
written. Standard line insurance companies usually charge lower premiums than excess line
insurers and may sell directly to individual insured’s. They are regulated by state laws, which
include restrictions on rates and forms, and which aim to protect consumers and the public from
unfair or abusive practices. These insurers also are required to contribute to state guarantee
funds, which are used to pay for losses if an insurer becomes insolvent.
Excess line insurance companies (also known as Excess and Surplus) typically insure risks not
covered by the standard lines insurance market, due to a variety of reasons (e.g., new entity or an
entity that does not have an adequate loss history, an entity with unique risk characteristics, or an
entity that has a loss history that does not fit the underwriting requirements of the standard lines
insurance market). They are typically referred to as non-admitted or unlicensed insurers. Non-
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admitted insurers are generally not licensed or authorized in the states in which they write
business, although they must be licensed or authorized in the state in which they are domiciled.
These companies have more flexibility and can react faster than standard line insurance
companies because they are not required to file rates and forms. However, they still have
substantial regulatory requirements placed upon them.
Most states require that excess line insurers submit financial information, articles of
incorporation, a list of officers, and other general information. They also may not write insurance
that is typically available in the admitted market, do not participate in state guarantee funds (and
therefore policyholders do not have any recourse through these funds if an insurer becomes
insolvent and cannot pay claims), may pay higher taxes, only may write coverage for a risk if it
has been rejected by three different admitted insurers, and only when the insurance producer
placing the business has a surplus lines license. Generally, when an excess line insurer writes a
policy, it must, pursuant to state laws, provide disclosure to the policyholder that the
policyholder's policy is being written by an excess line insurer.
On July 21, 2010, President Barack Obama signed into law the Non admitted and Reinsurance
Reform Act of 2010 ("NRRA"), which took effect on July 21, 2011 and was part of the Dodd-
Frank Wall Street Reform and Consumer Protection Act. The NRRA changed the regulatory
paradigm for excess line insurance. Generally, under the NRRA, only the insured's home state
may regulate and tax the excess line transaction.
Insurance companies are generally classified as either mutual or proprietary companies. Mutual
companies are owned by the policyholders, while shareholders (who may or may not own
policies) own proprietary insurance companies.
Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid
known as a mutual holding company, became common in some countries, such as the United
States, in the late 20th century. However, not all states permit mutual holding companies.
Other possible forms for an insurance company include reciprocals, in which policyholders
reciprocate in sharing risks, and Lloyd's organizations.
Insurance companies are rated by various agencies such as A. M. Best. The ratings include the
company's financial strength, which measures its ability to pay claims. It also rates financial
instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies,
allowing them to reduce their risks and protect themselves from very large losses. The
reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer
may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies
established with the specific objective of financing risks emanating from their parent group or
groups. This definition can sometimes be extended to include some of the risks of the parent
company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the
form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a
"mutual" captive (which insures the collective risks of members of an industry); and of an
"association" captive (which self-insures individual risks of the members of a professional,
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commercial or industrial association). Captives represent commercial, economic and tax
advantages to their sponsors because of the reductions in costs they help create and for the ease
of insurance risk management and the flexibility for cash flows they generate. Additionally, they
may provide coverage of risks which is neither available nor offered in the traditional insurance
market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public
and product liability, professional indemnity, employee benefits, employers' liability, motor and
medical aid expenses. The captive's exposure to such risks may be limited by the use of
Captives are becoming an increasingly important component of the risk management and risk
financing strategy of their parent. This can be understood against the following background:
Heavy and increasing premium costs in almost every line of coverage
Difficulties in insuring certain types of fortuitous risk
Differential coverage standards in various parts of the world
Rating structures which reflect market trends rather than individual loss experience
Insufficient credit for deductibles and/or loss control efforts
There are also companies known as "insurance consultants". Like a mortgage broker, these
companies are paid a fee by the customer to shop around for the best insurance policy amongst
many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for
the best insurance policy amongst many companies. However, with insurance brokers, the fee is
usually paid in the form of commission from the insurer that is selected rather than directly from
Neither insurance consultants nor insurance brokers are insurance companies and no risks are
transferred to them in insurance transactions. Third party administrators are companies that
perform underwriting and sometimes claims handling services for insurance companies. These
companies often have special expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration
when buying an insurance contract. An insurance premium paid currently provides coverage for
losses that might arise many years in the future. For that reason, the viability of the insurance
carrier is very important. In recent years, a number of insurance companies have become
insolvent, leaving their policyholders with no coverage (or coverage only from a government-
backed insurance pool or other arrangement with less attractive payouts for losses). A number of
independent rating agencies provide information and rate the financial viability of insurance
2.7 ACROSS THE WORLD
Global insurance premiums grew by 2.7% in inflation-adjusted terms in 2010 to $4.3 trillion,
climbing above pre-crisis levels. The return to growth and record premiums generated during the
year followed two years of decline in real terms. Life insurance premiums increased by 3.2% in
2010 and non-life premiums by 2.1%. While industrialized countries saw an increase in
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premiums of around 1.4%, insurance markets in emerging economies saw rapid expansion with
11% growth in premium income. The global insurance industry was sufficiently capitalised to
withstand the financial crisis of 2008 and 2009 and most insurance companies restored their
capital to pre-crisis levels by the end of 2010. With the continuation of the gradual recovery of
the global economy, it is likely the insurance industry will continue to see growth in premium
income both in industrialized countries and emerging markets in 2011.
Advanced economies account for the bulk of global insurance. With premium income of
$1,620bn, Europe was the most important region in 2010, followed by North America $1,409bn
and Asia $1,161bn. Europe has however seen a decline in premium income during the year in
contrast to the growth seen in North America and Asia. The top four countries generated more
than a half of premiums. The United States and Japan alone accounted for 40% of world
insurance, much higher than their 7% share of the global population. Emerging economies
accounted for over 85% of the world’s population but only around 15% of premiums. Their
markets are however growing at a quicker pace. The country expected to have the biggest
impact on the insurance share distribution across the world is China. According to Sam
Radwan of Enhance International, low premium penetration (insurance premium as a % of
GDP), an ageing population and the largest car market in terms of new sales, premium growth
has averaged 15–20% in the past five years, and China is expected to be the largest insurance
market in the next decade or two.
2.8 REGULATORY DIFFERENCES (INSURANCE LAW)
In the United States, insurance is regulated by the states under the McCarran-Ferguson Act, with
"periodic proposals for federal intervention", and a nonprofit coalition of state insurance agencies
called the National Association of Insurance Commissioners works to harmonize the country's
different laws and regulations. The National Conference of Insurance Legislators (NCOIL) also
works to harmonize the different state laws.
In the European Union, the Third Non-Life Directive and the Third Life Directive, both passed
in 1992 and effective 1994, created a single insurance market in Europe and allowed insurance
companies to offer insurance anywhere in the EU (subject to permission from authority in the
head office) and allowed insurance consumers to purchase insurance from any insurer in the
EU.As far as insurance in the United Kingdom, the Financial Services Authority took over
insurance regulation from the General Insurance Standards Council in 2005; laws passed include
the Insurance Companies Act 1973 and another in 1982, and reforms to warranty and other
aspects under discussion as of 2012.
The insurance industry in China was nationalized in 1949 and thereafter offered by only a single
state-owned company, the People's Insurance Company of China, which was eventually
suspended as demand declined in a communist environment. In 1978, market reforms led to an
increase in the market and by 1995 a comprehensive Insurance Law of the People's Republic of
China was passed, followed in 1998 by the formation of China Insurance Regulatory
Commission (CIRC), which has broad regulatory authority over the insurance market of China.
In India IRDA is insurance regulatory authority. As per the section 4 of IRDA Act 1999,
Insurance Regulatory and Development Authority (IRDA), which was constituted by an act of
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parliament. National Insurance Academy, Pune is apex insurance capacity builder institute
promoted with support from Ministry of Finance and by LIC, Life & General Insurance
2.9 INSURANCE CYCLE
The tendency to swing between profitable and unprofitable periods over time is commonly
known as the underwriting or insurance cycle.
The underwriting cycle is the tendency of property and casualty insurance premiums, profits, and
availability of coverage to rise and fall with some regularity over time. A cycle begins when
insurers tighten their underwriting standards and sharply raise premiums after a period of severe
underwriting losses or negative stocks to capital (e.g., investment losses). Stricter standards and
higher premium rates lead to an increase in profits and accumulation of capital. The increase in
underwriting capacity increases competition, which in turn drives premium rates down and
relaxes underwriting standards, thereby causing underwriting losses and setting the stage for the
cycle to begin again. For example, Lloyd's Franchise Performance Director Rolf Tolle stated in
2007 that “mitigating the insurance cycle was the “biggest challenge” facing managing agents in
the next few years”. The Insurance Cycle affects all areas of insurance except life insurance,
where there is enough data and a large base of similar risks (i.e. people) to accurately predict
claims, and therefore minimize the risk that the cycle poses to business.
For the sake of argument let's start from a 'soft' period in the cycle, that is a period in which
premiums are low, capital base is high and competition is high. Premiums continue to fall as
naive insurers offer cover at unrealistic rates, and established businesses are forced to compete or
risk losing business in the long term.
The next stage is precipitated by a catastrophe or similar significant loss, for example Hurricane
Andrew or the attacks on the World Trade Center. The graph below shows the effect that these
two events had on insurance premiums.
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After a major claims burst, less stable companies are driven out of the market which decreases
competition. In addition to this, large claims have left even larger companies with less capital.
Therefore, premiums rise rapidly. The market hardens, and underwriters are less likely to take on
In turn, this lack of competition and high rates looks suddenly very profitable, and more
companies join the market whilst existing business begin to lower rates to compete. This causes
a market saturation and Insurance Cycle begins again.
2.9.1 Dealing with insurance cycle
While many underwriters believe that the cycle is out of their hands, Lloyd’s is trying to push for
more proactive management of the ups and downs of the industry. In 2006 they published their
‘Seven Steps’ to managing the insurance cycle:
1. Don’t follow the herd. Insurers need to be prepared to walk away from markets when prices
fall below a prudent, risk-based premium.
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2. Invest in the latest risk management tools. Insurers must push for continuous improvement
of these tools based on the latest science around issues such as climate change, and make full use
of them to communicate their pricing and coverage decisions.
3. Don’t let surplus capital dictate your underwriting. An excess of capital available for
underwriting can easily push an insurer to deploy the capital in unsustainable ways, rather than
having that capital migrate to other uses such as hedge funds and equities, or returning it to
4. Don’t be dazzled by higher investment returns. Don’t let higher investment returns replace
disciplined underwriting as base rates creep up on both sides of the Atlantic. Notionally, splitting
the business into insurance and asset management operations, and monitoring each separately, is
one way to achieve this.
5. Don’t rely on “the big one” to push prices upwards. The spectacular insured loss should not
be used as an excuse to raise prices in unrelated lines of business. Regulators, rating agencies,
and analysts – not to mention insurance buyers – are increasingly resisting such behavior.
6. Redeploy capital from lines where margins are unsustainable. There is little that individual
insurers can do to alter overall supply-and-demand conditions. But insurers can set up internal
monitoring systems to ensure that they scale back in lines in which margins have become
unsustainable and migrate to other lines.
7. Get smarter with underwriter and manager incentives. Incentives for key staff should be
structured to reward efficient deployment of capital, linking such rewards to target shareholder
returns rather than volume growth. The Lloyd’s Managing Cycle report has several problems. It
focuses on the industry as a whole being able to work together to reduce the effect of market
fluctuations. However, this is somewhat unrealistic, as if underwriters do not write business in a
soft market (i.e. at cheap prices for the customer), it will be hard to win this business back in a
hard market due to loyalty issues.
Rolf Tolle asserts that “There is nothing complex about the cycle. It is about having the courage
of your convictions to act with strength.”. Swiss Re argue that instead of ‘beating’ the cycle,
insurers should learn to anticipate its fluctuations. “Cycle management is essentially proper
timing. Monitoring the market, predicting market trends and accurately assessing prices play an
Swiss Re give several examples of potential business strategies. One is to write risks at a roughly
fixed rate. This is clearly not practicable as it does not allow for the cyclical nature of the market.
Another is to fail to react fast enough to changes in the market, which leaves a company even
more exposed. The recommended strategy is one that relies on prediction of the business cycle
and setting premiums based on models and experience.
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3.1 BASIS OF CLAIMS MANAGEMENT
Claims management comprises of all the managerial decisions, and the processes involved
regarding the settlement and payment of claim with regard to the terms in the insurance contract.
The main emphasis here is on monitoring and lowering the costs related in carrying out the claim
process. The elements or the basis of claims management are claims preparation, claims
philosophy, claims processing and claims settlement.
Claims preparation - Claims preparation includes reporting the damages occurred to
property, or injuries to people along with documentary proof of the assessment of loss and details
of the loss.
Claims philosophy - Claims philosophy deals with the claims handling methods and
procedures. It also contains the guidelines required to prepare the receipt of claims from the
insurers, analysis of the claim, the decision to be taken on the issue or dispute, evaluation of the
claim cost and expenses, supervise the claim payment, and enhance the efficiency of claims
Claims processing - The claim process deals with the claims procedures and handling of
claims. Handling of claims is keeping track of the events which causes the loss to the insured and
gives a cause to the insured to file a claim. The claims process has two procedures for the insurer
and insured to be pursued. Considering from the view of the insured, it includes the loss or
damage by understanding the cause for the loss, giving notice of the loss to the insurer, make
available the required proof of the loss to the insurer or the loss assessor and surveyors. From the
point of the insurer on receiving the receipt of the claim from the insured, the immediate steps
such as verification of the claim, reviewing the claim application, responding to the insured and
carrying out claims investigation, claims negotiation and claim settlement.
Claims settlement - Settling a claim is a process of negotiation between the insured person
and insurance provider. Insurance companies receive claims relating to accidents and medical
procedures. If there is evidence to support claims, the claims settlement claims is very easy. The
insurer may try to compare the claim with similar ones in the past and try to lower the settlement.
Thus good negotiation skills are essential for an insured to get a good claims settlement.
3.2 CLAIMS SETTLEMENT
An insurance company to the insured to settle an insurance claim according the guidelines
stipulated in the insurance policy defines claims settlement as the payment of proceeds.
The information furnished in the proposal form of an insurance contract is proved correct only at
the time of claim. If after inspection of the property, the claim appears to be misinterpreting or
false, then the insurance company can decline the claim or avoid the policy or in certain
instances the reduced amount of the claim is paid. The points to be covered in case of a claim
settlement procedure are:
possible. On intimation, the insurance company is to forward a claim form.
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port the loss.
an insured peril.
3.2.1 General guidelines for claims’ settlement
There are some guidelines that must be followed while settling the claims. These guidelines are
general in nature, and are not compiled to be the same always. Therefore, the claim settling
authority uses discretion and records reasons.
Appointment of surveyor
The Insurance Act states that surveyor should survey claims above Rs. 20,000. The surveyor’s
appointment should be based on the following points:
the type of loss and nature of the claims.
expertise assists the surveyor.
Appointment of investigator
Depending on circumstances, it is necessary to appoint an investigator for verifying the claim
version of loss. The appointing letter of the investigator o mentions all the reference terms to
3.3 GUIDELINES FOR SETTLEMENT OF CLAIMS BY IRDA
3.3.1 Proposal for insurance
The proposals for insurance are:
written document). But a written proposal form is not required for marine insurance markets.
be made available in the languages recognised by the constitution of India.
under the guidance of the provisions of section 45
of the Insurance Act.
a proposal form is not used, the insurer has to record the information obtained, orally or in
writing, and confirmation is to be done by the insurer within 15 days. If any information is not
recorded, the burden of the missing information lies on the insurer, in case he claims that the
insured is suppressing information or is providing misleading information.
nominee or any facility based on the terms of act or conditions of policy.
confirmations should not exceed 15 days from the receipt of proposal by the insurer.
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3.3.2 Matters to be stated in life insurance policy
A life insurance policy should clearly state the following:
benefits are payable.
um, the grace period to pay premium.
-up policy, surrender value, non-
forfeiture and to revive lapsed policy.
e provision for loan keeping the policy as the security and the rate of interest on the loan
amount is to be mentioned at the time of taking the loan.
im under a policy.
the letter forwarded has a time span of 15 days from the date of receipt, to review the terms and
conditions of the policy. If, in case, the insured do not agree, they can return the policy stating
the reasons for objection. The insured is entitled to refund the premium which is subjected to a
deduction with respect to a proportionate risk premium.
With respect to the policy coverage, if the premium charge depends on age, the insurer should
verify the age before issuing the policy document. If the premium charge does not depend on
age, the insurer is to obtain the proof of age as soon as possible.
3.3.3 Claims procedure of life insurance policy
The claims procedures with respect to life insurance policy are:
1. A life insurance policy should state all the documents to be submitted by a claimant, to
support a claim.
2. A life insurance company on receiving a claim, has to process the claim. Any additional
document, if needed, is to be raised within a period of 15 days of the receipt claim.
3. A claim under a life policy has to be paid or disputed, by giving relevant reasons, and
clarifying within 30 days from the date of receipt. All investigations, that is, initiations and
completions of investigations, must be done not later than 6 months.
4. If a claim is ready for payment, but the payment is not made because of reasons related to
proper identification of the payee, the insurer has to hold the amount for the benefit of the payee,
and earn interest at the rate applicable to a savings bank account.
5. If there is a delay in payment from the part of the insurer, in processing a claim, then the
insurance company has to pay the claim amount at a rate two percent above the bank rate,
according to the rate at the beginning of the financial year, in which the claim is reviewed.
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3.4 TYPES OF CLAIMS
The basic process of filing a claim is similar for different types of insurance policies. But there are
certain differences according to the nature of the policies which the insured must be aware of in
order to file the claims.
3.4.1 Life insurance claims
A life insurance policy claim is filed in the following situations:
on the date of death is acquired.
The various types of claims covered under life insurance claims are:
Death claim - This claim is paid, when the person insured dies. Following are the conditions
to be fulfilled for a death claim to be paid:
o The policy document, original death certificate, burial permit copy of the ID of the deceased
must be provided to the insurance company.
o A report from the doctor who treated the deceased.
o Filled in claim form.
o A police abstract report is required if death occurs in an accident.
Maturity claim - A maturity claim is paid on endowments and education insurance policies
whose duration has expired. Payment in a maturity claim is straightforward, where the customer
returns the original policy document and signs a discharge form. The claim cheque is cleared in a
period of about two weeks, once all the required conditions are fulfilled.
Partial maturity claim - Many endowments and education policies provide a provision for
payment of partial maturities after a given duration. The partial maturity is paid according to the
set dates in the policy document. For example, an education policy of 10 years has an option for
payment of 20% of the sum insured after four years and every year after that until the expiry of
the policy. Partial maturity cheques are prepared in an automated manner, and there is no need
Surrender value claim - This claim is raised when a customer is unable to continue with the
payment of premiums due to unforeseen events. He/she has the option of encashing the policy to
receive the surrender value if the policy has been in force for more than 3 years. The procedure
for lodging this claim is simple, and the procedures are similar to the maturity claim where the
customer returns the policy document and signs a discharge form. The claim cheque is paid to
the customer within two weeks.
Disability claim - This claim is seen in life insurance policies where the customer procures
the personal accident policy as an additional benefit. Disability claims are payable, when
subjected to sufficient medical evidence being provided as proof of disablement.
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3.4.2 Marine insurance claims
Marine insurance claims are made due to many causes which depend on weather conditions,
collisions, loss of cargo and so on. But Marine insurance policy does not cover loss or damage
due to willful misconduct, ordinary leakage, improper packing, delay, war, strike, riot and civil
Marine insurance claim procedure:
e carrier within the
time limit to protect recovery rights.
the nature, cause and extent of loss/damage is must.
he value of loss incurred.
Depending on the nature of operations, deployment and the hazards that can occur, the marine
hulls are divided into vessels under tariff advisory committee, vessels insured under policies. The
types of claims which are covered under marine insurance claims are total loss, particular or
partial charges, salvage and salvage charges, general expenses, collision liability and accident
The procedure to claim with respect to hulls is:
the vessel is available for inspection a licensed surveyor is appointed.
constructing total loss claims as
a notice. The insurer refuses the acceptance of the abandonment of the wreck till the probable
liabilities attached to the wreck are estimated.
A survey report consisting the following is required for processing and documentation for the
settlement of hull claims:
ements, salvage and labour as applicable.
3.4.3 Fire insurance claims
Fire insurance covers damages due to fire for buildings, equipments and stocks. Hence, it is
essential that the insurance company officials visit the site of losses to assess the damage caused
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by fire. If the loss incurred is within Rs. 20,000, and loss of profits claim is not involved, then the
officer has the discretion to do an independent survey and settle the claim on the basis of the
The documents generally required for processing fire insurance claims are:
assessment of loss,
confirmation of policy terms.
Salvage from fire and allied peril losses deteriorate. Hence disposal of the salvage is undertaken
on priority basis without waiting for the liability to be established. In circumstances where the
records required are destroyed in fire or through perils like flood, then settlement is negotiated by
the surveyor who asses such losses on a realistic and reasonable basis.
3.4.4 Motor insurance claims
Motor insurance claim, facilitates the repair of the vehicles in any of the cashless garage
network. Nevertheless, if the vehicle is serviced in a garage outside the network, then an insured
person can reimburse the claim.
The documents that are required for settling motor claims are:
loss incurred to the parked vehicles.
, to verify the load carried was within the permissible limits.
claim, the detailed explanation of the
happening and the list of the replacement of parts.
The insurance company appoints a surveyor on intimation of loss. In case of major accidents, the
insured arranges the photographs of the vehicle at the spot of the accident, depicting the external
damages and the number plate of the vehicle. If for any reason the driving license cannot be
produced, the claim is considered on non-standard basis.
3.4.5 Mediclaim insurance
Medical insurance is also known as Mediclaim policy or Mediclaim insurance in India. It is a
tool to deal with health related crisis. It offers financial assurance during medical emergencies.
Mediclaim insurance covers medical and hospitalization expenses.
Mediclaim insurance plays a significant role in individual’s financial planning. It offers many
benefits by lessening the burden on financial aspects and assisting in solving medical problems.
Mediclaim insurance is a non-life insurance. The documents to be submitted, to avail mediclaim
are hospitalization claim form consisting duly completed claim form, bills receipts, discharge
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card, cash memos, bills from chemists with the prescription, test reports and surgeon’s bill and
receipt consisting of the nature of operation.
The cases which are to be given special care in Mediclaim are:
are asked for verification.
malpractice in the cash memos and bills.
3.4.6 Miscellaneous insurance claims
Miscellaneous insurance claims cover claims based on the nature of package policies. These
policies are made user friendly, and they require a high degree of skill and tact as they deal with
emotions and sentiments of individuals. The different types of miscellaneous insurance claims
Workmen’s compensation insurance claims - Worker's compensation claims are raise by an
employee who has been hurt on the job to obtain reimbursement for medical treatment and salary
lost. To receive this compensation, the injured employee or the nominee must file a claim within
a specified time period. In some cases, the employee may need to undergo a check-up by a
physician who is authorized by the Worker's Compensation Board. For permanent disablement
claims, the agreement letter is to be submitted to the workmen’s compensation commissioner
while demanding compensation as per the Workmen Compensation Act.
In addition to the claims form, the following documents must also be submitted:
o Medical certificate.
o Wages statement.
o Age proof as given in the company.
Personal accident insurance claims - Personal accident insurance claims can be raised when
some accidents occur that results in either death or disablement of the policy holder. Following
documents are to be submitted to process this personal accident insurance claim:
o Filled in claim form.
o Doctor’s report.
o Investigation reports, like lab tests, x-rays and reports to confirm the injury.
o Age proof, in case the claim is for a dependent child.
o Medical bills, if there is provision to claim for medical expenses.
In case of fatal claims, the claim payment is made to the assignee. If there is no assignee, then
the legal representative receives the payment. In case of group policy, the payment is made to the
individual beneficiary, but payment to the employer is also made with respect to the employee.
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3.5 FACTORS AFFECTING THE CLAIM MANAGEMENT
3.5.1 General factors affecting claims
The factors that affect claim settlement are:
cause of event is directly related to the loss, a remote cause cannot be placed in the
conditions and warranties are not fulfilled according to the cover of the policy, the cover of
insurance does not come into effect even though premium is paid.
of the insurable interest for the property insured at the time of loss, the
benefit or compensation cannot be availed.
nature as it makes good the loss suffered.
The insured has the following alternatives for settling the claims:
-versed in insurance, and come to an
agreement, if it is a disputed claim
ar asset can be made.
Repaired assets should continue to provide service as before.
3.5.2 Time element in the claims payment
The time value is very important in the settlement of a claim. Insurer should submit the claim
details within the specific period mentioned in the policy document. In few cases, either the
policyholder or the claimant or the claimant representative, has to intimate the death of a person
or the accident of vehicle, either orally or in person, immediately.
The reasons for the importance of time element in the claims payment are as:
unfavorable opinion about the insurer.
the due insurance amount, or
insurers may have to pay the case costs to the assured, as per the direction of the court, which
increases the costs.
he insurer due to the unproductive use of manpower to
defend, expenses incurred and waste of time on legal actions.
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rease the number of cases with consumer protection councils.
Thus, the delay in the claims payment influences the present and future insurance business along
with the cost burden. Therefore, it is necessary to settle the claim payments faster.
The reasons for the delay in claims settlement may include:
Late submission of claim form: The reasons for the late submission of claim form may be:
o The ignorance or lack of knowledge of the existence of the insurance policies against the lives
of the persons, who face the event.
o Non-availability of the information to the beneficiary.
o The policy may not have any nominee details.
Innocence and illiteracy of the claimant: The claimant or assured may not have the
knowledge, and may fail to:
o File the claim papers.
o File the insurance claims within a specified period.
o Follow the claims procedure.
Incompletely filled claims forms: If the insured do not properly fill the claim forms, then the
o Fail to provide the necessary information to settle the claims.
o Delay the claim settlement asking for the desired information.
Insufficient proof: If the assured fails to submit the sufficient proof or the supporting
documents along with the claim form, which assists the claim evaluator to know the event date
or cause, then it may lead the claim evaluator to delay the settlement of claims. The reasons
Reasons from insured’s or claimant’s side:
-operation with the insurer to settle the claim or attain some compromise.
estimation of the loss payable under the claim.
oviding the information about the changes in the constitution of the organisation or the
changed address or any other information necessary to settle the claim.
Reasons from insurer’s side:
organizations or imperfect supervision or
Insurers can avoid the delay in submitting the claims or settlements, by providing the awareness
of the facts and importance of the insurance and the claims procedure, to the claimant or the
assured. They can take the help of agent or the local staff to attain certain compromises with the
claimants in the complex cases. They must design the organisation in such a way, that it avoids
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holding of papers. They should have well-trained and motivated staff. They can also use the
latest technologies, to assess the losses and recruit suitable staff for using the same.
3.6 TERMS IN CLAIMS
The general terms used in claims, on the basis of variety of claims, are maturity and death
claims. These claims are life insurance claims based on the type of life policies.
3.6.1 Maturity claims
Maturity claims are availed in general endowment policies, which include money back policies.
The insurance company makes the payment on the maturity date or post-dated cheques should be
sent to policy holders in advance. The policyholder or the nominee to of the policy makes the
claims on maturity. If the life assured dies before the maturity date, the claim is considered as
Those who can claim these policies are:
e benefit schedule of the policy as a party interested.
The amount paid on the maturity of the policy is the sum assured, plus profits and bonus that
increases with the policy. The profits are paid on pro-rata basis, i.e., in the proportion of the
premium paid and declared bonuses. The payment of profits is a clause in the policy. Hence it is
compulsory for the insurer to pay the bonus.
Dispute in payment of maturity claims
The general dispute that arises in payment of maturity claims, is regarding the proof of age. If the
age is not correctly checked at the time of issuing the policy document, then malpractice can take
place. Another dispute is regarding the good title of the claimant on the policy. In case the
insurer delays the payment of bonus to the insured upon maturity, and if the payment of bonus is
not as per the contract, the policy holder can move to the court to claim such payment.
3.6.2 Death claims
Death claim policy is a request made by the beneficiary of a life insurance policy on the death of
the insured to the insurance company to make the payment according to the terms of the policy.
Death claim is claimed, if the insured dies before the expiry term of the policy. The occurrence
of death must be intimated to the insurance company in writing. The intimation must be from a
concerned person, and must beyond doubt establish the identity of the deceased person. The
claimants paid on the happening of the event are:
The claim amount which is paid in a life insurance policy includes:
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share of profits in case of participation policy.
-payment of the premium or if the assured
surrenders the policy, the insurance company may pay a percentage of the premium paid,
according to the ordinances of the company.
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LIFE INSURANCE CORPORATION