A brief history of InsuranceInsurance is a form of risk management, primarily used to hedge against the risk of acontingent loss. In essence, insurance is simply the equitable transfer of a risk of a loss, fromone entity to another, in exchange for a premium.Early methods of transferring or distributing risk were practiced by Chinese traders as earlyas the 3rd millennia BC. These merchants travelling treacherous river rapids would cleverlydistribute their wares across many vessels to spread the loss due to any single vesselscapsizing.Modern profit insurance manifested in Babylon almost 2000 years B.C., in a contract of loanof trading capital to travelling merchants. The contract contained a clause that the risk ofloss due to robbery in transit was borne by the party providing the loan. In consideration forbearing this risk, the lender calculated interest on the loan at an exceptionally high rate.
Separate insurance contracts (i.e. insurance policies not bundled with loans or other kindsof contracts) were invented in Genoa in the 14th century, as were insurance pools backed bypledges of landed estates. These new insurance contracts allowed insurance to be separatedfrom investment, a separation of roles that first proved useful in marine insurance.Insurance became far more sophisticated in post-Renaissance Europe, and specializedvarieties developed.On 3 December 1591, one hundred Hamburg house-owners concluded the so-called“Hamburg fire contracts”, which are generally regarded as some of the first examples of truemutual insurance contracts that we have today.Insurance - as we know it today - can be traced to the Great Fire of London of 1666that ravaged London from Sunday, 2 to Wednesday, 5 September.To make a long story short, insurance (today) is being conducted over a vast array of "linesof business" that encompass personal, commercial, marine, aviation, agriculture, life, health,financial and engineering insurance. Virtually anything - from the mundane to the bizarre -can be insured, as Lloyd’s is famous for insuring the life, health, legs or even noses of actors,actresses and / or sports figures.
What do expect at the end of this session?The Fundamentals of Insurance.The basic concepts relating to the business of insurance.The types of Risks and their classifications.Acturial and Underwriting responsibilities and functions.Terms and Terminologies used in the industry.Types of Contracts and their classification.Techniques used to Manage Risks.Importance of Utmost Good Faith and insurance.Claims and their Settlement.Agent responsibilities and functions.
WHAT IS INSURANCE ? INSURANCE IS A PROMISE MADE BY THE INSURER TO THE INSURED TO COMPENSATEAGAINST ANY SIGNIFICANT POTENTIAL LOSSES WHICH ARE FINANCIAL IN NATURE, IN EXCHANGE OF A PERIODIC PAYMENT THE INSURED MAKES TO THE INSURER.
WHY SHOULD ONE BUY AN INSURANCE ? It is the utterly vital that one buy’s an insurance toensure safety against any significant financial losses he/she may face in future.Insurance also helps financial planning and provides tax benefits to the insured
How is the premium decided by the insurer? In a contract for Insurance the Insurer promises to pay to theInsured a specific amount of money in case of facing a risk or a peril. The policy holder will pay a certain amount ofconsideration for the same. This is termed as the premium. Theinsurer will typically decide the premium based on the value of the insured item or the risk involved. The Actuary does thiscomplex job of premium calculation. For general understanding the same can be explained as below. Net premium = Investment Income + Rate of Mortality Base Premium = Net Premium + Loading Expenses
What is Bonus and how is it paid ? Bonus is basically that amount of money that is surplus to the valuation and is distributed amongst the policy holders. Only policy holders who haveopted for a participating option are paid the bonus.The calculation of Bonus is done in two ways namely – Simple Reversionary Bonus – This is the most common way of calculating the bonus. For instancethe 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
Compound Reversionary bonus – In this system the bonus is simply added to the existing SAincluding the vested bonus. Hence the SA would now become Rs. 108062The mode of payment of the bonus is however the discretion of the Insurer as he may offer many options to the policy holder
What is a risk? Risks are basically the consequential losses or damages toassets making them non-functional before their expected lifetime or entire destruction of the assets. The risk actually onlymeans that there is a possibility of a loss or damage. It may or may not happen. Insurance covers such risks if they dohappen. Although the word possibility implies uncertainty , ithas a great relevance to Insurance which applies only in such cases where there is an amount of uncertainty and predictability
What are the types of risks that an insurer would cover? Insurance covers only the significant financial losses occurring due to any critical orcatastrophic risks that are pure and speculative. 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
Types of Risks Personal Risk to Third Party Risk Property Risk Outliving Losses due toDeath Poor Health Financial manmade and Resources natural disasters
Classification of risks Risks are classified into speculative and pure risks. Speculative risks are never insurable. Pure risks are further classified into fundamental and particular risks. Pure risks are always insurable as they are specific and static. 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
What is risk management ?The identification and assessment of a financial riskis known as Risk Management.The risk can be managed in four simple waysAvoid the risk to a possible extent.Control the risk within limits.Accept the risk if any peril occurs.Transfer the risk to decrease the burden.
Risk Transfer mechanism in Insurance Policy Holder Insurance Contract Insurer Re-Insurance Contract Re-Insurer Contract of Retrocessionaire Retrocessionaire
What are the characteristics of an insurance risk ? The risk must happen by chance. Losses occurring should have a significant value. The loss must be definite in terms of time and amount. Risk must have a predictable loss rate. The loss must not be catastrophic to the insurance company.
Terms and terminologies in life insuranceInsurer - The Insurance Company is the insurer andwill take instructions only from the policy holder.Policy holder – the person who enters into acontract with the insurance company to coversomeones life is known as the policy holder or thepolicy owner.Insured – The person whose life is covered under anInsurance policy is known as the insured.
Sum insured/assured – The amount of covermentioned on the policy is known as the suminsured/assured.Premium – The amount paid to the Insurer in orderto keep the policy active is known as premiums.Proposal form – The application for insurance to befilled by the policy holder for buying an insurance.Initial premium – The first payment/premium that issent to the Insurer along with the proposal form iscalled the initial premium.Cooling off period – The time allowed to theapplicant to decide whether or not to accept thepolicy.
What are actuaries and underwriters ? Actuaries Underwriters• These are basically • They identify, assess mathematicians or and evaluate the risk statisticians who involved in an individual identify, assess and proposal. evaluate the risk • They decide the final involved in a group. premium that is to be charged to the insured.• They also decide the base premium. • They decide whether or not to accept a proposal• They design policies and also modify the for the Insurance terms and conditions. Company.
WHAT IS THE PREMIUM BLOCK ? (% AGES MENTIONED ARE AN EXAMPLE)•Government bonds, •Expenses required to share markets, meet salary expenses, infrastructure, infrastructural banks, real estate, maintenance, gold etc. stationery etc. Investment Operating Income Expenses (10%) (15%) Policy Cash Reserves Reserves (10%) (60%)•The amount required to settle claims as and •The Insurer would at when they occur times declare bonus to the insured to attract more business.
Investment Income – This is a part of the premiums which is invested insecured and unsecured markets. The profit from such investments is used bythe insurance company for it’s own benefit.Operating Expenses – These are the funds that are kept aside to meet theoperating expenses to run the business of the company like payment ofsalaries, infrastructure maintenance, stationery etc.Cash Reserves – Cash reserves are a part of the premiums which are investedin secured and unsecured markets. The profit from such investments is usedby the Insurance Company to be distributed amongst the policyholders/beneficiaries in the form of Bonus.Policy Reserves – Policy reserves are a part of the premiums which are keptaside in order to pay up claims whenever they arise. This portion determinesthe standing of an Insurance Company in the market. Money once kept asidein the policy reserves is not spent unless there is a claim.
Types of policies and their details Heading Term Policy Whole of life Endowment Policy• Duration • Min- 5 years Max • Till death max – • Min- 5 years Max• Bonus – 20 years 99 years – 20 years• Premiums • No Bonus • Yes • Yes• Claims paid from • Lowest Premiums • Moderate • Highest premiums• Maturity/Survival • Policy reserves premiums • Sum assured- benefit • NA • Sum assured- policy reserves,• Purpose • Risk Protection policy reserves, Bonus – Cash for a certain Bonus – Cash reserves period reserves • Yes thro’ cash • NA reserves(Entire • Investment and maturity value) protection • Investment
What is a linked policy ? 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 thatcombine the benefits of Life Insurance while giving the prospect an option of participating in the growth of the capital market. Such plans are called Linked Life Insurance Plans They are also termed as Unit Linked Insurance Plans. (ULIP)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.
What are the fund options that one can select ?There are a variety of options that the policyholder can select in terms of funds.Equity Funds – Also christened as Growth Fund the Insurer would makemore investments in the share and stock marketsDebt Fund – Also christened as the Bond fund the investments would be inmajority done in Government and Government guaranteed securities.Money Market Funds – Also Christened as Liquid Fund the investment ofsuch funds may be more in short term money market investments as treasurybills, commercial papers etc.Balanced Funds – In this type the Insurer will invest in both the equity aswell as the debt funds.
What is NAV (Nett Assets Value) ? 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 exitsfrom the fund. The NAV used at the time of entry is termed as the Offer Price and that while exiting istermed 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.
What are the Insurable/Non insurable interests? Grand children cannot Beneficiary is the Bank insure their Grand or the institution and parents the policy amount is limited to the Loan Immediate Financial amount Family Relations Relation – Banks, – Spouse, Children, Financial Siblings, Institutions etc. Grandparents Legal Relations - Business Partners i.e. Employer-employee, Adopted children/parents, Legal guardians, trust and trustees In this case the **Insurable interest reduces the beneficiary is the possibility that one person will benefit court and not the From the death of the other. The legal guardian concept was introduced in 1774 under the Life Assurance Act Prior to which Life Assurance was governed under the Gambling Act**
What does the Insurance tree look like? Insurance tree Life General Assurance Insurance Death Disability Health Non-Life Property Casualty Assurance – The claim is based on the amount mentioned in the Policy Cover. There can be only one claim Insurance – The claim is based on the actual loss incurred by the claimant. There can be any number of claims on insurance
Definition and types of a contractA contract is a legally enforceable agreement between two or more parties.Types of contracts –Contract of Indemnity – Under such contracts the benefit is based on theactual financial losses incurred. eg. health, property, liability etc.Valued Contract - Under such contracts the benefit is actually mentioned inthe contract . eg. Life, One off (Lata’s voice)Bilateral Contract - Under such contracts both the parties involved makelegally enforceable promises eg. marriagesUnilateral Contracts - Under such contracts only one of the parties involvedmakes legally enforceable promises eg. The Insurance Companies.
Commutative Contracts - Under such contracts both the parties involvedspecify in advance the values of exchange. Eg. Sales agreementBargaining Contract - Under such contracts both the parties involvedspecify in advance the terms and conditions of the contract and reservethe right to accept or reject the same. Eg. Insurance Companies.Adhesion - Under such contracts one of the parties involved dictates theterms and conditions.Aleatory Contract - Under such contracts one of the parties involvedprovides something of value in exchange of a conditional promise. Eg.Insurance.
Legal status and requirements of a valid contractValid – A contract is held to be a valid contract only if it is enforceable by law.Void – A void contract is that contract which was never deemed to be validunder the law.Voidable – A voidable contract can be terminated by either of the partiesinvolved.A contract is valid only if it meets the following criteria – Contractual Adequate Mutual Assent Lawful Purpose Capacity Consideration • Policy holder • Policy holder is a • Policy holder pays • Policy holder has applies for a policy Major and of the initial insurable interest • Insurance sound health premium Company Accepts • Insurance • Insurance • Insurance the application Company is Company promises Company is registered to pay claims registered
What is utmost good faith ? 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 theInsurance 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.
What is a claim ?A claim is the demand that the Insurer should redeem thepromise made in the Insurance Contract. This is the time whenthe Insurer has to play his part of the contract and settle theclaim after he is satisfied that all the terms and conditions in theoriginal contract have been complied with. He should check that :The Insured event has in fact taken place.The obligations to pay per the contract are complied with. The persons asking for performance are eligible to do so. Nominees, Income tax Officials, Prohibitory orders, assignees are some of the relevant eligibles.
Type of claimsMaturity Claims – The survival amount in theendowment type of policies is to be paid when the termof the policy expires (Maturity Date). Such claims aresettled by the Insurer after he confirms that there are noassignments , the identity of the insured is clear, the agestands admitted, the premiums are fully paid up, theoriginal policy is handed over to the insurer and thedischarge voucher is duly completed and signed by theinsured.
Survival Benefit Payments – In this case thebenefit on a Money Back Policy is paid duringthe existence of the policy before the date ofmaturity and the procedure is the same as in thecase of a Maturity Claim except for the fact thatthe payments are made by post dated chequesplaced with the insured in advance.
Death Claim – Settlement of a death claim is rathercomplex as it involves too many factors –The facts relating to the death and the identity ofthe deceased has to be established beyond anydoubt.Has the death occurred within 3 years from thecommencement of the policy or the date of revival.Whether the death was natural or unnatural dueto reasons like accident, suicide etc.Documents like the Policy, Deeds of assignments,proof of age, certificate of death, legal evidence ofthe title, form of discharge are referred to whilesettling such claims.
Accidents and Disability Benefits – There are certainparameters that govern such claims. Such claimsshould not arise out of intentional self injury,attempted suicide, insanity, immorality orintoxication. Claims arising out of accidents causeddue to aeronautics, riots, civil commotion areexcluded in such cases.Settlement of such claims will depend on the FIR,Panchnama, police report, post mortem report,chemical analysis of the viscera, hospital reports etc.
Critical Illness Claims – Such claims are settledafter satisfactory evidence is placed before theinsurer along with all the reports. It is necessaryunder such payments that the conditions ofcriticality, waiting period and the illness are met.
Vital functions of an Broker/AdvisorThe Broker’s/Advisor’s primary functional area is to solicit and procurelife insurance business for the Insurer, who has appointed him for thepurpose. Incidentally he is also trusted by the prospect to providesuitable advise keeping in mind the circumstances and needs. The agenthas a unique role to play between the prospect and the insurer. Hewould be required to –Understand the prospects needs and persuade him to buy a plan that suits him the best.Help the prospect complete all the paper work expeditiously.Assist the prospect to clear his claims if they occur.To be ethical and honest to both the prospect and the insurer.
Thank you for your attention and wish you all the best