Fundamentals Of Insurance(2)


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Fundamentals Of Insurance(2)

  1. 1. Fundamentals of INSURANCE<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  2. 2. objectives<br />At the end of this session it is expected that the participants have understood the following-<br /><ul><li>The Fundamentals of Insurance.
  3. 3. The basic concepts relating to the business of insurance.
  4. 4. The types of Risks and their classifications.
  5. 5. Acturial and Underwriting responsibilities and functions.
  6. 6. Terms and Terminologies used in the industry.
  7. 7. Types of Contracts and their classification.
  8. 8. Techniques used to Manage Risks.
  9. 9. Importance of Utmost Good Faith and insurance.
  10. 10. Claims and their Settlement.
  11. 11. Agent responsibilities and functions.</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  13. 13. WHY SHOULD ONE BUY AN INSURANCE ?<br />It is the utterly vital that one buy’s an insurance to ensure safety against any significant financial losses he/she may face in future. <br />Insurance also helps financial planning and provides tax benefits to the insured.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  14. 14. How is the premium decided by the insurer?<br />In a contract for Insurance the Insurer promises to pay to the Insured a specific amount of money in case of facing a risk or a peril. The policy holder will pay a certain amount of consideration for the same. This is termed as the premium. The insurer will typically decide the premium based on the value of the insured item or the risk involved. The Actuary does this complex job of premium calculation. For general understanding the same can be explained as below.<br />Net premium = Investment Income + Rate of Mortality<br />Base Premium = Net Premium + Loading Expenses. <br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  15. 15. What is Bonus and how is it paid ?<br />Bonus is basically that amount of money that is surplus to the valuation and is distributed amongst the policy holders. Only policy holders who have opted for a participating option are paid the bonus.<br />The calculation of Bonus is done in two ways namely –<br /><ul><li>Simple Reversionary Bonus – This is the most common way of calculating the bonus. For instance the SA under the policy is Rs. 100000 and the bonus declared is Rs 75 per Rs. 1000 or 7.5 % of the SA under the policy would be Rs. 107500</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  16. 16. Bonus contd…<br />Compound Reversionary bonus – In this system the bonus is simply added to the existing SA including the vested bonus. Hence the SA would now become Rs. 108062<br />The mode of payment of the bonus is however the discretion of the Insurer as he may offer many options to the policy holder.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  17. 17. What is a risk?<br />Risks are basically the consequential losses or damages to assets making them non-functional before their expected life time or entire destruction of the assets. The risk actually only means that there is a possibility of a loss or damage. It may or may not happen. Insurance covers such risks if they do happen. Although the word possibility implies uncertainty , it has a great relevance to Insurance which applies only in such cases where there is an amount of uncertainty and predictability.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  18. 18. What are the types of risks that an insurer would cover?<br />Insurance covers only the significant financial losses occurring due to any critical or catastrophic risks that are pure and speculative.<br />Perils that arise out of fire, natural disasters, breakdowns, accidents, illnesses and that are static in nature are some which are covered by the insurer.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  19. 19. Types of risks continued……<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  20. 20. Classification of risks<br />Risks are classified into speculative and pure risks.<br />Speculative risks are never insurable.<br />Pure risks are further classified into fundamental and particular risks.<br />Pure risks are always insurable as they are specific and static.<br />Fundamental risks can affect many people at a time and may be caused due to natural calamities, wars, epidemics etc and hence are not always insurable<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  21. 21. What is risk management ?<br />The identification and assessment of a financial risk is known as Risk Management.<br />The risk can be managed in four simple ways<br /><ul><li>Avoid the risk to a possible extent.
  22. 22. Control the risk within limits.
  23. 23. Accept the risk if any peril occurs.
  24. 24. Transfer the risk to decrease the burden.</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  25. 25. Risk Transfer mechanism in Insurance<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  26. 26. What are the characteristics of an insurance risk ?<br />The risk must happen by chance.<br />Losses occurring should have a significant value.<br />The loss must be definite in terms of time and amount.<br />Risk must have a predictable loss rate.<br />The loss must not be catastrophic to the insurance company.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  27. 27. Terms and terminologies in life insurance.<br />Insurer - The Insurance Company is the insurer and will take instructions only from the policy holder.<br />Policy holder – the person who enters into a contract with the insurance company to cover someone's life is known as the policy holder or the policy owner.<br />Insured – The person whose life is covered under an Insurance policy is known as the insured.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  28. 28. Terms and terminologies in life insurance contd….<br />Sum insured/assured – The amount of cover mentioned on the policy is known as the sum insured/assured.<br />Premium – The amount paid to the Insurer in order to keep the policy active is known as premiums.<br />Proposal form – The application for insurance to be filled by the policy holder for buying an insurance.<br />Initial premium – The first payment/premium that is sent to the Insurer along with the proposal form is called the initial premium.<br />Cooling off period – The time allowed to the applicant to decide whether or not to accept the policy.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  29. 29. What are actuaries and underwriters ?<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />These are basically mathematicians or statisticians who identify, assess and evaluate the risk involved in a group.<br />They also decide the base premium.<br />They design policies for the Insurance Company.<br />They identify, assess and evaluate the risk involved in an individual proposal.<br />They decide the final premium that is to be charged to the insured.<br />They decide whether or not to accept a proposal and also modify the terms and conditions.<br />Actuaries <br />Underwriters<br />
  30. 30. 1/28/2010<br />Designed and Developed by Ajit Peshave<br />What is the Premium Block ?<br />(% ages mentioned are an example)<br />
  31. 31. Premium Block contd…..<br />Investment Income – This is a part of the premiums which is invested in secured and unsecured markets. The profit from such investments is used by the insurance company for it’s own benefit.<br />Operating Expenses – These are the funds that are kept aside to meet the operating expenses to run the business of the company like payment of salaries, infrastructure maintenance, stationery etc.<br />Cash Reserves – Cash reserves are a part of the premiums which are invested in secured and unsecured markets. The profit from such investments is used by the Insurance Company to be distributed amongst the policy holders/beneficiaries in the form of Bonus.<br />Policy Reserves – Policy reserves are a part of the premiums which are kept aside in order to pay up claims whenever they arise. This portion determines the standing of an Insurance Company in the market. Money once kept aside in the policy reserves is not spent unless there is a claim.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  32. 32. Types of policies and their details<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  33. 33. What is a linked policy ?<br />The urge of the Investor to participate in the Capital Market to reap benefits of the Market BOOM diverted a lot of funds to this arena. The Insurance Companies developed plans that combine the benefits of Life Insurance while giving the prospect an option of participating in the growth of the capital market. <br />Such plans are called Linked Life Insurance Plans They are also termed as Unit Linked Insurance Plans. (ULIP) <br />The terms for such plans are usually fixed (not less than 5 years or age 70 for whole life plans) and the premium is in multiples of say Rs 500 or Rs. 1000. the Prospect has an option to pay in monthly, quarterly, half yearly or yearly payment modes. The Policy holder can also top-up his investments in such plans to a maximum of 25% of the regular premiums paid till date.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  34. 34. What are the fund options that one can select ?<br />There are a variety of options that the policy holder can select in terms of funds.<br /><ul><li>Equity Funds – Also christened as Growth Fund the Insurer would make more investments in the share and stock markets
  35. 35. Debt Fund – Also christened as the Bond fund the investments would be in majority done in Government and Government guaranteed securities.
  36. 36. Money Market Funds – Also Christened as Liquid Fund the investment of such funds may be more in short term money market investments as treasury bills, commercial papers etc.
  37. 37. Balanced Funds – In this type the Insurer will invest in both the equity as well as the debt funds.</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  38. 38. What is NAV (Nett Assets Value) ?<br />As the word itself suggests NAV represents the net value of the fund on a particular date and also reflects the total value of the assets of that fund, after some adjustments for expenses. The NAV keeps fluctuating as per the market value of the shares. NAV is basis for new entrants and for exits from the fund. The NAV used at the time of entry is termed as the Offer Price and that while exiting is termed as the Bid Price. This difference is termed as the Bid-offer Spread and is normally around 5 %. There is a minimum of 3 years lock-in period for such funds per the IRDA guidelines.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  39. 39. What are the Insurable/Non insurable interests?<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />Beneficiary is the Bank or the institution and the policy amount is limited to the Loan amount<br />Grand children cannot insure their Grand parents<br />In this case the beneficiary is the court and not the legal guardian<br />**Insurable interest reduces the possibility that one person will benefit<br />From the death of the other. The concept was introduced in 1774 under the <br />Life Assurance Act Prior to which Life Assurance was governed under the Gambling Act**<br />
  40. 40. What does the Insurance tree look like?<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />Assurance – The claim is based on the amount mentioned in the Policy Cover. There can be only one claim<br />Insurance – The claim is based on the actual loss incurred by the claimant. There can be any number of claims on insurance<br />
  41. 41. Definition and types of a contract<br /><ul><li>A contract is a legally enforceable agreement between two or more parties.
  42. 42. Types of contracts –
  43. 43. Contract of Indemnity – Under such contracts the benefit is based on the actual financial losses incurred. eg. health, property, liability etc.
  44. 44. Valued Contract - Under such contracts the benefit is actually mentioned in the contract . eg. Life, One off (Lata’s voice)
  45. 45. Bilateral Contract - Under such contracts both the parties involved make legally enforceable promises eg. marriages
  46. 46. Unilateral Contracts - Under such contracts only one of the parties involved makes legally enforceable promises eg. The Insurance Companies.</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  47. 47. Definition and types of a contract contd…<br />Commutative Contracts - Under such contracts both the parties involved specify in advance the values of exchange. Eg. Sales agreement<br />Bargaining Contract - Under such contracts both the parties involved specify in advance the terms and conditions of the contract and reserve the right to accept or reject the same. Eg. Insurance Companies.<br />Adhesion - Under such contracts one of the parties involved dictates the terms and conditions.<br />Aleatory Contract - Under such contracts one of the parties involved provides something of value in exchange of a conditional promise. Eg. Insurance.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  48. 48. Legal status and requirements of a valid contract<br />Valid – A contract is held to be a valid contract only if it is enforceable by law.<br />Void – A void contract is that contract which was never deemed to be valid under the law.<br />Voidable – A voidable contract can be terminated by either of the parties involved.<br />A contract is valid only if it meets the following criteria –<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  49. 49. What is utmost good faith ?<br />It is the primary duty of the applicant to voluntarily and fully disclose all facts which are material to the risk being proposed. It is also the duty of the Insurance Company to disclose all benefits, risks and material facts to the applicant. Any misrepresentation whether material or fraudulent between the contracting parties will affect or influence the decision making process. Hence it is expected that no party involved makes any misrepresentation of the material facts to each other. The entire process of insurance revolves around this faith.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  50. 50. What is a claim ?<br />A claim is the demand that the Insurer should redeem the promise made in the Insurance Contract. This is the time when the Insurer has to play his part of the contract and settle the claim after he is satisfied that all the terms and conditions in the original contract have been complied with. He should check that –<br /><ul><li>The Insured event has in fact taken place.
  51. 51. The obligations to pay per the contract are complied with.
  52. 52. The persons asking for performance are eligible to do so. Nominees, Income tax Officials, Prohibitory orders, assignees are some of the relevant eligible's.</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  53. 53. Type of claims<br />Maturity Claims – The survival amount in the endowment type of policies is to be paid when the term of the policy expires (Maturity Date). Such claims are settled by the Insurer after he confirms that there are no assignments , the identity of the insured is clear, the age stands admitted, the premiums are fully paid up, the original policy is handed over to the insurer and the discharge voucher is duly completed and signed by the insured.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  54. 54. Type of claims contd…<br />Survival Benefit Payments – In this case the benefit on a Money Back Policy is paid during the existence of the policy before the date of maturity and the procedure is the same as in the case of a Maturity Claim except for the fact that the payments are made by post dated cheques placed with the insured in advance.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  55. 55. Type of claims contd…<br />Death Claim – Settlement of a death claim is rather complex as it involves too many factors –<br /><ul><li>The facts relating to the death and the identity of the deceased has to be established beyond any doubt.
  56. 56. Has the death occurred within 3 years from the commencement of the policy or the date of revival.
  57. 57. Whether the death was natural or unnatural due to reasons like accident, suicide etc.
  58. 58. Documents like the Policy, Deeds of assignments, proof of age, certificate of death, legal evidence of the title, form of discharge are referred to while settling such claims.</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  59. 59. Type of claims contd…<br />Accidents and Disability Benefits – There are certain parameters that govern such claims. Such claims should not arise out of intentional self injury, attempted suicide, insanity, immorality or intoxication. Claims arising out of accidents caused due to aeronautics, riots, civil commotion are excluded in such cases.<br />Settlement of such claims will depend on the FIR, Panchnama, police report, post mortem report, chemical analysis of the viscera, hospital reports etc.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  60. 60. Type of claims contd…<br />Critical Illness Claims – Such claims are settled after satisfactory evidence is placed before the insurer along with all the reports. It is necessary under such payments that the conditions of criticality, waiting period and the illness are met.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  61. 61. Insurance agency as a profession !!!<br />Once licensed and appointed as an Agent under section 42 of the Insurance Act 1938, it is expected that the agent represents the Insurer and for all purposes works for soliciting or procuring new business, continuance, renewal or revival of policies for the Insurer and is paid a commission.<br />The licensing is controlled by the IRDA (licensing of Insurance agents) Regulations 2000.<br />Insurance agency need not necessarily be a full time engagement. Rather it acts as a supplemental income source which further can also become the primary one. <br />The agent is an individual professional and is the master of his own time.<br />A genuine Agent will typically work in the interest of the prospect and will provide him with the right alternative after understanding the prospects needs. A successful agent is the one who is admired for his knowledge about insurance and the intelligent solutions that he provides to the prospect. Ethical behavior is what is expected out of a good agent.<br />1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  62. 62. Vital functions of an agent<br />The agents primary functional area is to solicit and procure life insurance business for the Insurer, who has appointed him for the purpose. Incidentally he is also trusted by the prospect to provide suitable advise keeping in mind the circumstances and needs. The agent has a unique role to play between the prospect and the insurer. He would be required to –<br /><ul><li>Understand the prospects needs and persuade him to buy a plan that suits him the best.
  63. 63. Help the prospect complete all the paper work expeditiously.
  64. 64. Assist the prospect to clear his claims if they occur.
  65. 65. To be ethical and honest to both the prospect and the insurer.</li></ul>1/28/2010<br />Designed and Developed by Ajit Peshave<br />
  66. 66. 1/28/2010<br />Designed and Developed by Ajit Peshave<br />