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Insurance business
- 1. Insurance Business CO2: To examinethe nature of insurance contract and types of policies
- 2. You will learnthese Concept of insurance, Need for insurance, Legal aspects of insurance contracts Objectives of insurance contract Structure of insurance industry Property & liability coverage Classification of Policies- Annuity- Pension Fund- ULIP Institutions for insurance & reinsurance
- 3. What is Insurance •Insurance is defined as a contract, which is called a policy, in which an individual or organisation receives financial protection and reimbursement of damages from the insurer or the insurance company. • “It is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for: specified loss, damage, illness, or death in return for payment of a specified premium”
- 4. Features of Insurance 1.A large number of insured persons To reduce the burden of premium, large number of insured will be there 2. A contract Insurance is a contract between insurer & insured 3. Sharing Risk Insurance is an event that is a person to share a risk e.g. Death of a person, Fire breakout 4. Payment on contingency Most of the insurance policy will be payable only on contingency E.g. Medical insurance 5. Non- catastrophic loss Not all units in the homogenous group suffer adverse event 6. Payment of Premium Insured will pay a premium to transfer the risk to the insured
- 5. Need for Insurance 1.To minimize risk Prone to various risk It leads to its reduction E.g. Life insurance, fire insurance, Health insurance etc. 2. To maintain the stability of assets Taking insurance can maintain the value of assets/ life 3. Protection To protect family (individual), Stakeholders (Company) 4. Confidence
- 6. Objectives of Insurance 1.To minimize risk 2. To develop the economy a) To mobilize scattered resources: They are pooled from the insured and invested in projects b) Creation of Liquidity: Money behalf of insurance premium is invested in private as well as public projects creates liquidity c) Economies of scale: The bulk funds reduce overall finance cost which leads to economic development 3. To make good the loss To provide money for the loss 4. To ensure well being of the stakeholders Life Insurance: The bereaved family members Corporate Insurance: Owners and other stake holders
- 7. Objectives of Insurance 5.To reimburse losses 6. To reduce tension and fear 7. To act as an investment avenue (ULIP) 8. To reduce the cost of business operations
- 8. Only Pure Riskscan be insured Large number of exposure units Calculable Risk Random lossPremium should be economically feasible • Large number of insured should be present • Homogenous exposure to risk • E.g. Life insurance • Losses should be fairly predictable • Measured in monetary terms • E.g. Motor Vehicle insurance • Premium should be justifiable • Good for both parties (Insurer & Insured) • Adverse event may or may not happen in future Non- Catastrophic Loss • Not all units in the group gets affected by the loss
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- 10. Legal aspects ofInsurance PRINCIPLES OF INSURANCE 1. Uberrimae fidei - Utmost Good Faith Insurer, Insured are bound to disclose all material facts relating to the risk covered It applies to all types of insurance contract E.g. Life: Details of heart disease 2. Insurable Interest Legal right to insure arising out of financial relationship between insured and subject matter The insured must be benefitted from its safety E.g. A has a car insured and sold to B. If insurance not transferred > Cease 3. Principle of indemnity On happening of an event, insurer will put insured in the same monetary position Insured shall get neither more nor less than the actual amount of loss sustained 4. Contribution The insured cannot claim same loss from more than 1 insurer Each policy pays only ratable portion Three conditions (Cover same peril, Cover same subject, Behalf of same insured)
- 11. Legal aspects ofInsurance PRINCIPLES OF INSURANCE 5. Principle of Subrogation Stepping in the shoes of others After paying claims, insurer will have the rights against third parties 6. Mitigation of loss Even though insured has an insurance contract; He should give in efforts to reduce the loss E.g. During a fire outbreak, don’t sit and watch it as it is insured… 7. Causa Proxima The causes for the adverse event would be a chain of events The dominant cause would be the proximate cause If the proximate cause is insured, insurer > insured and vice verse E.g. You have insured your stock against fire, it was kept outside and rained. The stock was damaged. Will u be able to claim insurance?
- 12. Legal aspects ofInsurance TORTS & CRIME 1. Torts: It is a private wrong. It occurs when a someone acts in a way that an individual’s peace of mind and rights are jeopardized. 1. E.g. : Negligence, Slander (Talking), Libel (Written) 2. Crimes: They are public wrong. It include the following: 1. Rebating – Passing commissions by agent to prospective insured to purchase insurance. 2. Twisting – Inducing clients to terminate existing insurance policy to buy new 3. Unfair Discrimination – Charging different rates by the same insurance company to similar risk class 4. Filing of false claims – To collect money from insurance even no loss or less loss by false estimates 5. Asson – Felonious burning of property of another to defraud an insurance company
- 13. Legal aspects ofInsurance INDIAN CONTRACT ACT 1872 All Provisions of ICA 1872 are applicable for an Insurance Contract Offer & Acceptance Legal Object Capacity to Contract Consideration Free Consent •Offer comes from insured or insurer •Binding of contract upon payment of 1st premium •Should comply Indian Stamp Act •Not forbidden by law •Not immoral •Not against public policy •Not a Minor •Sound of Mind •Not disqualified •Payment of consideration is must •PREMIUM •Contract without premium is void •The consent should be free from: Coercion, Fraud, Misrepresentation or mistake
- 14. Legal aspects ofInsurance INDIAN CONTRACT ACT 1872 DISCHARGE OF CONTRACT Performance Release Discharge Void Contract Breach of Contract •All terms have been carried out •Payment of Premium, Payment of claims •Denial of claim by insured •The cases include: •Destruction of subject matter •Death/ incapacity of the promisor •Change in legislation •Agreement is discovered to be void •If insured has committed a breach •Insurer can terminate the contract
- 15. Legal aspects ofInsurance LAWS RELATING TO INSURANCE 1. Insurance Act 1938 2. IRDA Act 1999 3. LIC Act 1956 4. General Insurance Business Act 1972 5. Motor Vehicles Act 1988 6. Marine Insurance Act 1963
- 16. Structure of InsuranceIndustry Ministry of Finance (Govt. Of India) IRDA Life Insurance Non - Life Insurance Public Companies Private Companies Public Companies Private Companies • Motor Vehicle Insurance • Fire Insurance • Health Insurance • Marine Insurance
- 17. Property and LiabilityCoverage • What is Coverage Limit? • The amount of money that the insurance company pays for each kind of loss. PROPERTY COVERAGE LIABILITY COVERAGE • Coverage for your STUFF if a loss happens to it • E.g. CAR, HOME, DINING TABLE, JEWELLERY etc. • Coverage for other people for loss because of you • E.g. Your car hits other one, Your dog bites the neighbor etc. • Paying an injured person his medical bills • Most common liability claim - Damage done to other person’s car
- 18. Property and LiabilityCoverage • Property insurance protects business from the loss of assets due to fires, vandalism, theft, and equipment breakdown. • The insurance pays to replace or rebuild property destroyed by a covered loss • Liability insurance, is a critical coverage every business needs to purchase to protect their finances, public image, and well- being in these instances Medical payments when a third-party is injured as a result of your negligence. Property replacement costs to replace damaged property that doesn’t belong to you. Settlement expenses if you are found guilty of libel, slander, or advertising theft PropertyLiability
- 19. Classification of Policies-Annuity- Pension Fund- ULIP • What is an Insurance Policy? • It is a document that contains the agreement that an insurance company and a person have made. • In insurance, the insurance policy is a contract between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay
- 20. Classification of Policies Policies WholeLife Policy Endowment Policy Term Insurance Policy Annuity Policy Pension Plan Policy ULIP
- 21. Classification of Policies 1.Whole Life Policy A person is insured for whole life. The insurance company cannot pay any money to the insured until he is alive. The premium for such policy is very low. Money is payable only after the death of the insured person to his legal heir or his nominee. This policy is more beneficial for the family of the deceased, as it provides financial assistance to the family after the death of the insured person 2. Endowment Policy Insurance is taken for a specific time in such policies. Sum assured along with the bonus is given on his death to the dependent of the family or on the expiry of the particular time, the insured get the specific sum along with bonus. It protects the family of the dead person or provides old-age pension to the insured
- 22. Classification of Policies 3.Term Insurance Policy The period of such policies is specific. The premium of this policy is the lowest among all the insurance schemes. Throughout the term of the policy, the premium is fix, and it does not change In the term life insurance agreement, dependents will receive the specified benefited amount in case of untimely death of the person If insured survives, nothing is received
- 23. Classification of Policies 4.Annuity Policy The insured has to pay the premium of the policy in installments or in the lump sum for a specific period of time. The insured will receive back a specific sum periodically from a mentioned date onwards, either for life or for the fixed number of years. It helps people who have some extra money and want to use the same after their retirement (Provides 10 to 12.5 % returns) Annuities are of the following types: Immediate • Payment begin within 1 year of purchase • Income will be for lifetime or specified no. of years • Invest lump sum premium Deferred • Payment begin after deferment period • Single purchase or several purchase • Invest regularly • Amt. accumulated Fixed • Assures minimum rate of return • E.g. Jeevan Dhara Variable • Variable returns based on performance of portfolio
- 24. Payout Options inAnnuity Single Life Annuity • Annuitant receives income payment for the rest of his life Single life with period certain • Annuitant receives income payment for the rest of his life • If annuitant dies, beneficiary receives till the remainder period Joint & Survivor • Annuitant and joint annuitant receives income payment for the rest of their life • If annuitant dies, joint annuitant receives till he dies Joint and survivor with period certain • Annuitant and joint annuitant receives income payment for the rest of their life • If annuitant dies, joint annuitant receives till he dies • If JA dies, beneficiary gets till the remainder period
- 25. Benefits of AnnuityPlan Accumulate long term savings Maximize income in retirement Life time source of income Tax benefits Benefits the beneficiary on the death on annuitant
- 26. Classification of Policies 5.Pension Plan Policy This policy is different from all other forms of life insurance policies. As it does not provide any kind of life cover, but it offers a guaranteed income after certain period of time or life time. These insurance policies are taken to provide some financial support after retirement. 6. ULIP - Unit Linked insurance policy The private companies introduced ULIPs to merge the profits of life insurance policies with mutual funds. Specific amount of premium is invested in listed companies or bonds, funds and remaining amount is used in fund management expense and life insurance to provide balance. Its benefits include: Long term wealth creation A concept of insurance + Investment Tax benefits
- 27. BASIS Whole Life Policy Endowment Policy Term Insurance Annuity Policy Pension Fund ULIP Duration Entirelife Specific Specific Specific Specific Specific Coverage Family Family/ Insured Family Family/ Insured No Family/ Insured Beneficiary Yes Yes Yes Yes Yes Yes Premium Less Higher Very Less Single/ Multiple (high) Single/ Multiple (high) High (Charges also high) Payout Only if death occurs Sum assured + Bonus Only if death occurs Annual, Month, Qtr. Annual, Month, Qtr. Death/ Duration lapse Investment/ Savings Nil Savings Nil Savings Savings Investment
- 28. Concept of Reinsurance •We’ll be learning: Reinsuran ce Meaning ObjectivesTechniques
- 29. Reinsurance “Reinsurance is atransaction in which: One insurer agrees, for a premium to indemnify another insurer against all or part of the loss that insurer may sustain under its policy or policies of insurance” Purchaser = CEDING INSURER Seller = ASSUMING INSURER Basically means: INSURANCE OF INSURANCE COMPANIES Basic Objective: Spread the risk to reduce financial burden
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- 31. Reinsurance - Objectives •To limit liability on specific risks: Helps to stabilize losses on individual risks as well as on accumulated losses under many policies in a specific period E.g. Flood Affected vehicles, Huge fire etc. • Stabilization: Helps to reduce swings in profit and loss for the ceding company E.g. Risks cannot be calculated on an accurate basis • Catastrophe Protection: Disruptive effects of such risks can be avoided which depends upon the type and size of the company purchasing reinsurance E.g. Loss from a single event, Single event affecting many • Increased Capacity: Reinsurance can induce more risk taking by the ceding company due to protection
- 32. Reinsurance - Techniques Techniquesof Reinsurance Reinsurance Treaties Facultative Reinsurance
- 33. 1. Reinsurance Treaties •Comprehensive coverage bought directly/ Indirectly • It is to protect all or a part of their portfolio for a given class of business • The reinsurer cannot decline a risk coming under the treaty • Both parties are obliged to perform their duties NON PROPORTIONAL TREATY PROPORTIONAL TREATY • Reinsurance cover begins once the amount of claim exceeds the predetermined amount • E.g. NPT REIN for Rs. 400 crores in excess of Rs. 100 crores (400 Cr. will be paid by the reinsurer • Premium and losses are shared by both proportionally • E.g. PT REIN for 40% of its portfolio has a claim amount of Rs. 100 crores, the reinsurer is liable to pay Rs. 40 crores (100-60)
- 34. 1. Facultative Reinsurance •A case by case method (Individual policy) • The ceding company insures risks for amount in excess of its capacity • The reinsurer assess each risk individually after consulting the ceding company and makes the terms of policy • It covers major industrial and civil engineering risks • The reinsurer can accept or reject the business offered by the ceding company • To provide the coverage, the primary insurer submits to the risk to the reinsurer to facilitate (allow) the coverage. If the reinsurer agrees, coverage is written and a facultative reinsurance contract is created • E.g. : One commercial fire policy, One location of a huge plant etc.
- 35. Treaty V/S Facultative BasisTreaty Facultative Coverage Protects a large block of Business Covers individual risks Offer and Acceptance The reinsurer does not have a right to reject claim The reinsurer may or may not accept the claim Document Basically a treaty/ contract Duly signed certificate Conditions Pre - Agreed Based on the certificate Applicability XYZ reinsures its automobile policy claims of 40% ABC reinsures one of its Fire policy according to their terms and conditions
- 36. Who Provides Reinsurance? •Professional Reinsurers General Re (Berkshire Hathaway) • Reinsurance department of primary insurers Travelers, CIGNA
- 37. Who Provides Reinsurancein India? General Insurance Corporation of India As a sole reinsurer in the domestic reinsurance market, GIC Re provides reinsurance to the direct general insurance companies in the Indian market.
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