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Examination Planning

Risk Management and Insurance Planning

Module

Exam Style

Duration = 2 hrsTotal Marks = 140Passing Marks = 50% = 70Negative marking = 20% of the assigned marks to questionResults = graded (A = 75%+, B = 60 to 75%, C = 50 to 60%)Examination = Objective / multiple choice

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Paper PatternTotal = 140 marksSections = 3

Section 1 = 40 questions x 1 mark = 40 marksSection 2 = 20 questions x 2 marks = 40 marksSection 3 = 15 questions x 4 marks = 60 marks

Avg. time for each question = 120 / 75 = 1.6 min

Planning

How to attempt the paper – which Section to start withNegative marking – treading carefully Double check – specially for numerical questionsElimination – arrive at right choice by eliminating the wrong onesTime ManagementUsing calculator or excel

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Learning Objectives - For Module 2

Understand the role of the financial planner in the personal risk management process.Implement insurance into a comprehensive, integrated financial plan. Identify and explain features of private and public insurance available to meet each identified need. Integrate the tax implications into insurance decisions. Evaluate client insurance and risk management needs.

Weightage

Risk Management – 15%Insurance Concepts – 15%Insurance Policies & Strategies – 50%Environment of an Insurance Advisor – 20%

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ChaptersFundamental Concepts in Risk ManagementInsurance Fundamentals: Risk Exposures, Needs Analysis & Premium PricingLegal Principles in insuranceRole of Insurance in Financial PlanningFactors affecting Insurance needsGeneral Insurance Policy AnalysisLife Insurance Policy AnalysisComparing Life Insurance productsAnnuity Policy AnalysisHealth Insurance Policy AnalysisLegislation Affecting Insurance BusinessEvaluating Life Insurance Cos.Consumer Protection & Life Insurance Code of Practice

Time ManagementAvailable Time – 21 hrs over 7 sessions

All sessions to be taken by Jagdish Bhat

Time ManagementSession 1 – Ch 1 to 3Session 2 – Ch 4 to 6Session 3 – Ch 7 to 9Session 4 – Ch 10 to 13Session 5 – Revision & ques. solvingSession 6 – Revision & ques. SolvingSession 7 – Revision & ques. Solving

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Efforts

DeterminationAttendanceInvolvement / ParticipationInteractionSelf-Help

Basic Meaning / Nature of Risk‘In this world nothing can be said to be certain, except death & taxes’ – Benjamin FranklinUncertainty can lead to positive or negative outcomeRisk - that in a given situation, there is uncertainty about the outcome and that the outcome will be unfavorable.Uncertainty – ignorance of what may or may not happen in futureThe examination process represents the uncertainty for u.There is risk of failing the exam. On failure there is a loss.Risk is defined differently for different professionals –economists, statisticians, insurance theoreticians, etc.Definition from risk management – Uncertainty about financial loss from an exposure.Loss is the end effect of risk

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Some termsPeril – defined as cause of loss• Car with drunk driver meets with accident – peril is car,

driver or alcohol ?Hazard – is condition that creates or increases probability of loss3 main types• Physical – condition that increases chance of loss

• oil spilled road increases chances of accident• Moral – Dishonesty or character defects of individual

that increases occurrence or grievousness of loss• Faking sickness for mediclaim

• Morale – slackness or indifference to a loss because of insurance cover• leaving the house unlocked due to burglary insurance

Risk & Chance

Difference between risk & chanceRisk• Possibility of loss• Risk of accident

Chance• outcome is favourable• chance of winning bet

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Types of Risks –Fundamental & Particular

Fundamental risk• affects the entire economy/society or large nos. / groups

within society – economic, political, natural like -hyperinflation, war, earthquakes, floods

• Usually uninsurable – act of war, risk of unemployment• Where insurance is considered, govt assistance is

needed – terrorism, third party poolParticular risk• affects only individuals / corporates• e.g. Fires, robbery, thefts• Risks are insurable

Dynamic & Static Dynamic risk• result from changes in economy like changes in price

levels, consumer tastes, technology, etc.• May cause financial loss to members but benefit society

in longer run• Result of adjustment to misallocation of resources• e.g. effects of IT, modernization, globalization (WTO and

the effect on Americans/Europeans)• for some losses, for some gains• Affect large no. of individuals and less predictable than

static risks, since they don’t occur with any regularity

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Dynamic & StaticStatic risk• losses that would occur even if no changes in economy• Losses arise from causes other than changes in

economy• People end up with losses even when times are good or

bad. • e.g. EQ, floods, dishonesty.• Unlike dynamic risks, static risks cause only losses –

either devastation of wealth or transfer of assets from victim to dishonest party

• Tend to occur with a degree of regularity resulting in their predictability, becos of which they are more suited to treatment by insurance than dynamic risks

Pure & SpeculativePure risk• where only possibilities are loss or no loss

Speculative• chance of either loss or gain

Insurance deals mainly with pure riskThough speculative risks are uninsurable, pure risk consequences of speculative risk are insurable.Loss due to Marketing of product is uninsurable, but loss due to property damage is insurable.

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Types of Pure riskPersonal risks- related to individual - 4 dominant• Premature death• Old Age / Retirement• Deterioration of Health• Unemployment

Property risk – Damage / loss to property• Direct loss – is financial loss from physical

damage, theft etc.• Indirect or consequential loss – financial loss

resulting from direct lossLiability risk• These are class of pure risks gaining prominence• Liability arising from Property Damage or Bodily

injury / death

Diff in human attitude towards risk

Perceived v/s objective risk• Risk has objective and subjective (perceived)

dimensions• Pure risk has 2 parts – amount that could be lost, 2nd

is chance of loss happening• Risk is accepted or rejected after obj or sub evaluation• Motor car may be insured for comprehensive loss

depending on owner’s perception

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Behaviour towards risk

Risk seeking –• aggressive persons who perceive risk as opportunity

rather than danger• preference for uncertainty over certainty• Entrepreneur

Risk averting –• conservative persons• preference for certainty over uncertainty

Risk indifferent –• persons are neutral• neither attracted nor repelled by risk

Risk Management

Systematic approach to the problem of handling pure risks faced by individuals or businessSix-step processStep 1 - Establish risk mgmt objective• pre loss objective• post loss objective

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Risk Management

Step 2- Gather info for risk identification & evaluationallow loss exposure identification3 classes of losses –• property• liability and • Personal / personnel

Risk Management Step 3- Analyse information to identify, measure & evaluate riskidentify thru discussion, physical observation, fact-finding sheet, current covermeasuring loss grievousness and chance of event occurringmeasuring personal risk, property risk (thru actual cash value = replacement cost-depreciation)measuring liability risk3rd is evaluate the risk – worst case possible (total) loss and worst case probable (likely) loss

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Risk Management

Step 4 - Develop risk management plan• Risk avoidance• Risk (loss) control• Risk retention (is a loss financing technique)• Risk transfer (is a loss financing technique)

Risk Management

Step 5 - Implement risk mgmt planRisk avoidance by • elimination (re-deployment of accident prone

employee)• substitution (harmful food preservative with a

safer version)• separation (separating potential dangerous

activities) and • rational planning (have more than one source

of supply)

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Risk ManagementStep 5 (contd.)Risk (loss) control by • loss prevention (do not use a mobile during driving)• loss reduction (install sprinkler, hydrant system)

Risk Retention• also called self-insurance• set aside a contingency fund

Risk Transfer by • non-insurance transfer (outsource hazardous activity to

specialists, through contract conditions like indemnity, hold harmless clauses)

• Insurance

Risk Management

Step 6 - Monitor & revise risk management plancontinuous monitoringperiodic reviews

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What is InsuranceInsurance is • pooling of fortuitous (unintentional) losses by transfer

of such risk to • insurers, who agree to indemnify insured for such

losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.

The business of transferring pure risks by means of a 2 party contract.

Law of large nos. – greater the no. of exposures, more closely will the actual results approach the probable results expected from an infinite no. of (homogeneous) exposures.

Principles of InsuranceUtmost Good Faith

Flows from requirement of contractual arrangementContract defined as agreement between 2 or more parties to do or to abstain from doing an act.Agreement designed to have legal consequences.Simple contract should have following elements in order to be enforceable:• intention to create legal relations• offer & acceptance• consideration• capacity to contract• certainty of terms• consensus ad idem (genuine meeting of minds)• legality of purpose• possibility of performance

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Utmost Good Faith…

Caveat Emptor – Let the Buyer Bewaremost contracts allow subject matter (whether item or service) to be examined by each partyso far as there is no misleading or answers are answered truthfully, neither party can avoid the contractEqually, there is no need to disclose information, which is not asked for

Utmost Good Faith…

Insurance contractsNature is intangible (promise)Circumstances surrounding the subject matter are known by proposer onlyEven if survey / examination is done before u/w, all facts cannot get disclosed.

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Utmost Good Faith…Uberrima Fides – Utmost Good Faith

Law imposes greater duty on parties to insurance contract than commercial contractsAs underwriter knows nothing & proposer knows everything, it is duty of insured to make full disclosure without being asked of all material circumstances.Duty of full disclosure rests on both partiesDefinition – A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not

Utmost Good Faith…Material factEvery circumstance is material which would influence the judgement of a prudent insurer in fixing the premium or determining whether he will take the risk.

Facts which must be disclosedMaterial facts• Fact which was immaterial during u/w, but becomes

material later need not be disclosed• Exception when policy condition requires continuous

disclosure (most GI policies)

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Utmost Good Faith…

Categories• facts showing greater exposure of particular risk due

to nature or class (PA)• external factors making risk greater (private vehicle

used commercially)• previous losses & claims• Special terms / declines by other insurers• Existence of benefit or non-indemnity policies (Life /

PA)• Full facts of subject matter (goods description for

marine cover)

Utmost Good Faith…Examples • Fire – construction, occupancy, fire detection

equipment, etc.• Theft – nature of contents & storage, security

arrangements, etc.• Motor – make, cc, geograhical region, driver’s age,

color, etc.• Marine – terms of sale, mode, packing, FCL / LCL• PA – age, physical deformities, occupation• Life – age, medical history, occupation, family history,

other policies (free cover limit)

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Utmost Good Faith…Facts which need not be disclosed• Facts of Law• Facts of common knowledge – strife in some location,

normal processes of trade• Facts which lessen the risk – existence of guards, alarm

system• Facts which could reasonably be discovered – from

facts given in proposal form or from previous records with insurer (like claims history)

• Facts which a survey should reveal • Facts covered by policy conditions – burglar alarms or

extinguishers are maintained properly

Insurable InterestAll risks are not insurableCertain characteristics for being insurable• financial measurement• sufficient no. of similar risks for rating• pure and particular risk (certain fundamental also

qualify)• occurrence of insured event should not be against

public policy• premium has to be reasonable• insurable interest should be present (fundamental &

important principle)

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Insurable Interest

While the subject matter can be property or financial liability, the pecuniary interest of the insured in the subject matter which is important.It is the interest of the insured in the subject matter which is insured.Definition -• The legal right to insure arising out of a financial

relationship recognized under law, between the insured and the subject matter of insurance.

Insurable Interest

Features• There must be some property or potential liability

capable of being insured• This property or liability must be the subject matter• Insured should have relationship with subject matter

whereby he benefits from its safety and prejudiced by its loss

• Relationship between insured and subject matter must be recognized by law

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Insurable Interest

When insurable interest must exist• Life – Must at inception, no requirement at

time of claim• Marine – No need at inception, Must at time of

loss• Others – Must during both inception as well

as loss

IndemnityDefinition• Protection or security against damage or loss or security

against legal responsibility• Mechanism by which insurers provide financial

compensation to place the insured in the same pecuniary position after the loss as enjoyed immediately before it.

• Since the subject matter that is insured is the insured’ interest, the indemnity cannot exceed the extent of his interest.

• All policies are strictly on the principle of indemnity• The insured cannot make a profit out of his loss or gain

any benefit / advantage • The measure of indemnity for loss of or damage to

property is generally the intrinsic market value of the property at the place and time of loss

• Exceptions are life, accident, agreed value policies (marine, art, etc.)

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Corollaries of IndemnitySubrogation

may be defined as the transfer of rights and remedies of the insured to the insurer who has indemnified the insured in respect of the loss.It is implied in all contracts of indemnity Arises only after payment of lossFire & some miscellaneous policies (motor) contain express condition that insurer can exercise right even before claim payment to ensure there are no delays.

Corollaries of IndemnityContribution

right of insurers who have paid a loss under a policy to recover proportionate amount from other insurers who are liable for same losscommon law principle allows the insured to recover his full loss within SI from any insurer he likeshowever, in some policies like fire, accident (for medical, weekly expenses) contain condition that the insurer is liable only for proportionate loss

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Proximate cause

Nature of perilsCan be classified under 3 headings• Insured perils (fire, lightening, storm theft, etc.)• Excepted or excluded perils - either as cause of

insured peril e.g. riot, EQ, war or a result of insured peril e.g. certain types of explosion

• Uninsured or other perils – not mentioned in policy. Smoke & water damage may neither be excluded nor mentioned as insured in fire policy

Proximate causeNeed for Doctrine• If loss is due to 2 or more causes, operating

simultaneously or one after the other,• Necessary to ascertain the proximate cause which

brought about the loss• e.g. During war, an army officer visiting sentries

posted along the railway line was killed by a passing train. Policy excluded death / injury ‘directly or indirectly caused by war, etc.’

• Proximate cause – Passing of train, Indirect cause -War

• Claim – Payable / Unpayable

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Proximate causeMeaning of Proximate cause• Based on the principle of cause & effect –• states that having proved the effect and traced the

cause, it is not necessary to go further.• To be proximate, a cause should be immediate• ‘Immediate’ does not mean cause nearest to loss in

point of time• It is in terms of effectiveness or efficiency or the cause

effectual in producing that result• Proximate cause means direct, most dominant & most

effective cause of which loss is natural consequence.

Proximate cause

Practical Application of DoctrineSingle CauseConcurrent Causes • where no excepted peril involved – liability under

policy• when an insured & excepted peril operate together –

claim outside policy scope• if operation of insured peril can be separated from

effects of excluded peril, there is liability

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Proximate causeDirect Chain of events – Unbroken sequence (successive causes)If excepted peril precedes insured peril claim unpayableIf insured peril is followed by excepted peril, part of the claim is payableCertain consequential loss payable.• Damage to property by water used to extinguish fire• Damage caused by fire brigade while fire fighting• Damage to property during removal to a safe place

Proximate causeSome examples• An incendiary bomb dropped by enemy aircraft set fire

to a warehouse. The loss was caused by fire, but the proximate cause was enemy action. (Held - War is excluded peril).

• Thieves took advantage of a blackout during air raid (Held – War was not proximate cause)

• Captain lost course and took ship inshore to pick out a lighthouse. Due to hostilities, light was out & ship ran aground. (Held – Hostilities was too remote, proximate cause – bad seamanship)

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Proximate cause

Classic• Insured fell from horse, suffered some injuries forcing

him to lie in cold, contracted pneumonia and eventually died.(Illness – excluded peril, remote cause, Accident –insured peril, proximate cause)

• Insured suffered from accidental injuries taken to hospital. Contracted infectious disease while undergoing operation, causing death.(Held – disease proximate cause, accident – remote cause)

Business of insurance

is to bring together persons of common interest (sharing the same risks)collecting the share or contribution from all of them (called premium)and paying out compensation to those to suffer (called claims)Insurer is a Trustee

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Essential characteristics of Insurance

Principle of Risk TransferPrinciple of IndemnityPrinciple of Pooling (spreading) Losses (law of large nos.)Principle of Payment of Fortuitous (unintentional) Losses

Concepts of Insurable RisksFinancial value should be present & determinableLoss should not exceed catastrophic sizeLoss should be fortuitousPossibility, magnitude and wavering of future losses must be mathematically predictablePremium charged should make economic senseInsurable interestShould not be against public policy

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Common Mistakes

to avoid while buying insuranceBuying too littleBuying too muchMissing out on essential covers

Risk Exposures of individual

The needs analysis of an individual for insurance is based for 3 broad categories of risks –

Personal Risk exposuresProperty Risk exposuresLiability Risk exposures

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Need Analysis - IPersonal Risk Exposures

Identifying the risks : Expenses & Income loss of dependents / selfMeasuring the Personal Risks

• Human Life Value method(earning ability of person, amount that would be lost in case ofpremature death)

• Need Analysis method(cash & income needs of dependents after deducting available assets of deceased at time of death)

Human Life Value method

based on income earning abilityis the PV of income lost by the dependents as a result of deathCons• income keeps changing over the years• assumptions of interest rates can be

erroneous • if deprivation of income does not effect, there

is no need for insurance

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Needs Analysis Method

based on the needs of dependents when breadwinner diesFirst part is to determine the cash & income needs of dependants2nd part to identify resources that the proposermay posses3rd is compute the deficiency – diff between needs and available resources

Some common Risks

risks associated with superannuationrisks associated with disabilityrisks associated with medical ailments

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Need Analysis-IIProperty Risks Exposure

2 types of losses associated with property –• direct & • indirect (consequential)

Measuring the Risks – For Real Estate• Owner’s residence• Other Property ownership (identical)• Consequence of under-insurance

Measuring the Risks – For Motor vehicles• Type of cover• Sum Insured• Rating (de-tariffed w.e.f. 01-01-07)

Need Analysis-IIILiability Risks Exposure

covers negligence & legal liabilityconcerned with Tort (violation of another’s rights) and Tort Feasor(wrongdoer)

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Insurance ContractsRequirements of insurance contracts• Offer & Acceptance• Consideration• Legal Capacity to contract• Legality of purpose• Consensus Ad idem (Meeting of minds)

Modification of Utmost Good faith principle – Sec. 45 (indisputability after 2 yrs)Agent filling form – Proposer is responsible for non-disclosure of information by agentVoid & voidable contract

Authority of Agentby express authority or stipulated authority is that which is specifically granted to the agent either orally or in writingimplied authority is incidental to make express authority meaningfulApparent authority or ostensible authority is a perceived authority and based on the principle of estoppel. Arises when a third party believes that the agent is vested with some authority because of circumstances created by the principal. Action of agent is binding on the principal.

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Principle of Estoppelis a doctrine which protects a party who would suffer detrimentally if the other party has done or said something to induce an expectation and if the sufferer has relied (reasonably) on the expectation and would suffer loss if that expectation were false.e.g. a landlord might inform a tenant that rent has been reduced, for example, if there is construction or a lapse in utility services. If the tenant relies on this advice, the landlord could be estopped from collecting rent retroactively.If insurer provides a person with some vestiges of authority like signboards, receipt books, etc. that will lead a third-party to conclude that the agency relationship exits, the insurer will be estopeed from denying that the person is not its agent.

Crime & Tort

A person can commit 2 classes of wrongs, one is public wrong, the other is private wrongPublic wrong is a crime where the government will make prosecutionPrivate wrong (tort) is the violation of the rights of another person and may cause action against the wrongdoer (tort feasor) for damages.Action taken against tort is called civil action.

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Crime & Tort…

Insurance does not deal with criminal behavior or intentional torts because it is against public policy to provide such protection.Unintentional torts dealt by insurance are those actions that are result of negligence or carelessness.e.g. resident of a flat accidentally dropping a flowerpot from his eight floor and damaging a car parked below.

NegligenceContributory negligence• based on the idea that every person has a duty to look

after his own safety and hence cannot blame others for the damages resulting from his or her personal negligence.

Professional negligence• law imposes an implied duty of care on a professional

because his public claim to have a special skill is a representation to everyone that they can rely on that ability and skill to get a certain job done satisfactorily and within reason.

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Legal characteristics of insurance contracts

Aleatory contract (value exchanged is not equal). Different from commutative contract (value exchanged is equal) Unilateral contract (one party – insurer - makes promise). Different from commercial contract (bilateral) contractConditional contract (insurer’s obligation to pay depends on conditions fulfilled by insured)Personal contract (even if property is insured, it is actually the insured’s interest which is protected)Contract of adhesion (no negotiation between the parties, insured has to accept the contract in toto from the insurer)

Premium PricingFor Life Insurance, 3 components• Expenses / costs• Mortality• Interest / Benefits / Investment

Mortality - the proportion of deaths to populationMortality Table - an actuarial table based on mortality statistics over a number of yearsMorbidity - the relative incidence of diseaseActuary - a person who calculates insurance and annuity premiums, reserves, and dividends

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Premium Pricing

Rate Making – process of valuing the benefits contained in policySingle Premium – PV of future benefits to be paid to insuredLevel Premium – actuarial equivalent of single premium spread over periodic payments during the policy term

Life insurance products

TermEndowmentPensionMarket Linked / Traditional (Non-linked)

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Non-Life insurance

Premium pricing takes into a/c• Expenses• Risk exposure• Reserves

Rate Making depends on • Degree of hazard (wooden v/s concrete building)• Classification of hazards (4 wheelers, 2 wheelers)• Past loss experience

Non-Life products

Tariff / Non-TariffTAC – Tariff Advisory CommitteeChairman (IRDA chairman), Vice-Chairman (Sr. IRDA member), 10 Indian & 4 Non-Indian insurer representativeswww.tac.org.in

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IRDA (Insurance Brokers) Regulations, 2002

Meaning within the regulationsInsurance broker can be a direct broker, a reinsurance broker ora composite brokerDirect Broker – for a remuneration, carries out the functions either in life insurance or general insurance or both on behalf of his clientsReinsurance Broker- for a remuneration, arranges reinsurance for direct insurers with insurance & reinsurance companies. Composite Broker - for a remuneration, carries out the functions of both a Direct Broker as well as a reinsurance brokerPrincipal Officer - means Proprietor or a Partner or a Director or CEO Persons who can become an insurance broker – Individual, Firm, Company, a Co-operative Society or any other person recognized by the Authority to act as an insurance broker;An insurance broker cannot do any other business than what is stated as its main object.

IRDA Brokers RegulationsFunctions of a direct broker - shall include any one or more of the following-obtaining detailed information of the client's business and risk management philosophy;familiarising himself with the client's business and underwriting informationso that this can be explained to an insurer and others;rendering advice on appropriate insurance cover and terms;maintaining detailed knowledge of available insurance markets, as may be applicable;submitting quotation received from insurer/s for consideration of a client;providing requisite underwriting information as required by an insurer in assessing the risk to decide pricing terms and conditions for cover;acting promptly on instructions from a client and providing him written acknowledgements and progress reports;assisting clients in paying premium under section 64VB of Insurance Act, 1938 (4 of 1938);providing services related to insurance consultancy and risk management;assisting in the negotiation of the claims; andmaintaining proper records of claims;

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IRDA Brokers RegulationsFunctions of a re-insurance broker - shall include any one or more of the following-familiarising himself with the client’s business and risk retention philosophy;maintaining clear records of the insurer's business to assist the reinsurer(s) or others;rendering advice based on technical data on the reinsurance covers available in the international insurance and the reinsurance markets; maintaining a database of available reinsurance markets, including solvency ratings of individual reinsurers;rendering consultancy and risk management services for reinsurance;selecting and recommending a reinsurer or a group of reinsurers;negotiating with a reinsurer on the client’s behalf;assisting in case of commutation of reinsurance contracts placed with them;acting promptly on instructions from a client and providing it written acknowledgements and progress reports;collecting and remitting premiums and claims within such time as agreed upon;assisting in the negotiation and settlement of claims;maintaining proper records of claims; andexercising due care and diligence at the time of selection of reinsurers and international insurance brokers having regard to their respective security rating and establishing respective responsibilities at the time of engaging their services.

IRDA Brokers Regulations

Functions of composite broker - shall carry out any one or more of the functions mentioned in regulations covering functions of Direct and Re-insurance broker.

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IRDA Brokers RegulationsApplication for grant of licence – can be made by a person for any of the 3 categories alongwith the requisite licence feesThe applicant or its principal officer shall, if so required, appear before the Authority for a personal representation in connectionwith an application.Principal Officer should possess certain minimum qualifications and passed the IRDA exam conducted by NIA, PuneBroker should have at least 2 persons who have passed the exam Any employee responsible for soliciting and procuring insurance business on behalf on an insurance broker shall also have to pass the examApplication for change from one category to another can be made only after 1 yearLicence will be valid for 3 years, after which it can be renewed for further period of 3 years.For renewal the broker has to undergo at least 25 hours of theoretical and practical training. No exams.

IRDA Brokers Regulations

Minimum capital requirement-Direct Broker – Rs.50 lacsReinsurance Broker – Rs.200 lacsComposite Broker – Rs.250 lacsNon-Indian interest can hold only upto26%.Deposit requirement – 20% of initial capital as fixed deposit

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IRDA Brokers RegulationsLicence feesDirect Broker – Rs.25,000Reinsurance Broker – Rs.75,000Composite Broker – Rs.1,25,000Brokerage Non-Life – 6¼% to 17.5%Life – Individual - upto 30% for fresh, 5% for renewal Group Life – 0.5% to 7½% Ceiling on business from single client• 1st year – 50%• 2nd year – 40%• 3rd year onwards – 30%

Captive Broker

IRDA Brokers RegulationsProfessional Indemnity insurance limits• Direct Broker – min. of 3 times annual

remuneration or Rs.50 lacs• Reinsurance Broker - min. of 3 times annual

remuneration or Rs.250 lacs• Composite Broker - min. of 3 times annual

remuneration or Rs.500 lacsSubmission of Results –• Audited Annual Report – within 90 days• ½ yearly unaudited results – before 31st Oct & 30

Apr each yearAll books of accounts should be preserved for 10 yrsRead Code of Conduct – to be mailed separately

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Policy ComponentsHeading – insurer’s detailsPreamble – recites parties to contract, reference to proposal formSignature – validates policy documentOperative/Insuring Clause – essence of contract, specifies insuring perilsExceptions or Exclusions – circumstance in which insurer is not liablePolicy Schedule – information/details of the risk coveredDefinitionsConditions• Express & Implied Conditions • Conditions Precedent to the Contract• Conditions Subsequent to the Contract• Conditions Precedent to Liability

Cover NotesCertificatesRenewals – No legal obligation on insurer to adviseNon-Payment of Premiums - Grace PeriodLong-Term AgreementsDeclarations

Some TermsCover Note – issued in advance of policy – not stampedCertificate of Insurance – issued in addition to policy – Motor, MarineEndorsements – sets out modifications in terms & conditions of policy which is issued in standard formRenewal Notice – no legal obligation on part of insurers to advise.Claim Form – to elicit full information about the lossSurvey Report – information / details about claim submitted by surveyors / loss assessorsPolicy cancellation – Short period / Pro-rata

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Terms…All Risks / Named PerilsSalvageExcess / DeductibleBonus (CB, NCB) - DiscountMalus – LoadingBuilt-in covers / Add-on covers (Rider)Longevity - long duration of individual life or length of lifeCorollary - something that naturally followsCongenital - existing at or dating from birthPro-rata, Short PeriodMACT – Motor Accident Claims Tribunal

Terms…Co-insurance -• In India, it is sharing of a risk by agreeing to share the premium and

also partake in the loss at a fixed proportion. Lead insurer is appointed.

• abroad – sharing agreement between insured & insurer whereby both share covered costs after deductible in a pre-determined percentage.

Co-pay - insured pays a specified amount while the remaining is borne by insurerRetroactive date - A date stipulated in a claims-made liability policy as the first date from which incidents covered by the policy. Isdesigned to provide coverage for claims resulting from incidents that take place prior to the current but continuous policy term. Renewal claims-made policies usually have the retroactive date of the first policy issued to the insured. When this is not done, there is a gap in coverage.Claims-made policy - provides coverage for a claim if first reported or filed during the policy period. Occurrence based policy – liability policy for claims arising out of incidents that occur during the policy period, regardless of whether the policy is still in effect at the time the claim is made. Losses to be reported during ‘discovery period’.

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TermsUnder Evidence Act, person who has disappeared is pronounced dead only if he has not been heard of for 7 yrs. Decree of presumption of death needed from court of law.Claim is time barred if intimation of claim is received after 3 yrs from date of death.Agency maxim – Qui facit per alium, facit per se • one who acts through other, acts through himself.• Contracts entered into by an agent will have same

legal consequences on the principal.

Life TermsMortality Table or Actuarial TableMorbidity TableLife Expectancy - statistical measure of the average length of survival of a living thingLongevity - is the length of a person's life (Life Expectancy)Premium Construction (mortality, interest, expense)Net Premium (age, gender, benefits, mortality, interest rate)Gross Premium (add expenses – which change with premium rate, amount of insurance and constant for all contracts)For GI premium, net is without commission, gross is with commission

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Life Table factors

probability of surviving between age x and age x+1px

life expectancy at exact age xex

total number of person-years lived at and after age xTx

number of person-years lived between ages x and x+1Lx

probability of dying between age x and age x+1qx

number of persons dying between age x and age x+1dx

number of persons alive at exact age xnote: the value for age 0 is called the radix

lx

exact age of person in yearsage x

DescriptionFunction

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Life TermsDOP – Date of ProposalDOB – Date of BirthIP – Installment PremiumSA – Sum AssuredTP – Tabular PremiumDAB – Accidental Death Benefit Rider (can also be Disability Benefit Rider)SSS – Salary Savings SchemeLBD – Last Birth DateNBD – Near Birth Date or Next Birth DateDOC – Date of CommencementLUP – Last Unpaid PremiumDOM – Date of MaturityPV – Paid-up ValueSV – Surrender ValueLPP – Last Paid PremiumDOS – Date of SurrenderVB – Variable Bonus

Reinsurance TermsRe-insurance – transfer of risk from insurer to re-insurerRe-insurer – risk assuming insurer Cedent – ceding insurerCession – insurance coverage transferred to re-insurer by cedentRetrocession – transfer of re-insurance to another re-insurerRetention – amount of risk kept of cedent’s own accountMethods of Reinsurance – Facultative (transfer of individual risks), Treaty (transfer of all risks in a class of business)

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Reinsurance TermsTreaties basically Proportional & Non-ProportionalProportional • Quota Share - Premium & losses shared in equal

proportion• Surplus – shared in excess of retention and arranged in

linesNon-Proportional• Excess of Loss (layered)

• Risk basis• Occurrence basis (Catastrophic)

• Stop Loss (a/c based)Lloyds Market

Types of Insurance

EngineeringProperty & CasualtyAccident & HealthLiabilitySpecialisedIndividual & Group

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Fire InsuranceStandard Fire & Special Perils Policy1. Fire2. Lightning3. Explosion / Implosion4. Aircraft Damage5. Impact Damage from vehicle or animal6. Riot, Strike, Malicious Damage (RSMD)7. Storm, Tempest, Floods, Inundation (STFI)8. Subsidence and Landslide including Rock slide9. Bursting and / or overflowing of Water Tanks, Apparatus

& Pipes10.Missile Testing operations11.Leakage from Automatic Sprinkler installations12.Bush Fire (xcludes Forest Fire)

Fire InsuranceFire Peril excludes damage caused by own fermentation, heating process, burning of property by public authorityAdd-ons – EQ, TerrorismCondition of Average-

Property Value – Rs.2,00,000Sum Insured – Rs.1,50,000Under insurance – Rs.50,000 (SI-Value)

= UI / Value = 25%IAR – for risks with SI (MD) > 100 crores in 1 or more locationsMega Risk – PML > 1054 cr or SI > 10,000 cr at one location

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Loss of Profit (LOP) insurancealso called Consequential Loss (Fire) or Business Interruption insurancecovers loss of profit following losses to physical assets from perils covered under fire policycompensation may include• Loss of Gross Profit (Net Profit + Standing Charges) from

reduction in turnover• Increase in cost of working

Variable charges are not payablepayment of loss under LOP policy is made only if there is liability under material damage insurance (fire policy)Insured has to choose indemnity period (time taken for reinstatement and start of business)

Marine InsuranceOldest branch – covers hull & cargoInsurable interest – only at time of lossICC – Institute Cargo Clauses by ILUICC ‘C’ – jettison, general avg sacrifice, port of distress discharge, collision / sinking of vessel, fire or explosionICC ‘B’ – ICC ‘C’ + EQ, LOB / WOB, entry of water, while loading / unloadingICC ‘A’ – All Risks (War, SRCC at extra)ICC (Air) – All RisksInland Transit (Rail/Road) Clause ‘C’, ‘B’, ‘A’Open Policy / Open Cover

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Marine InsuranceILU – Institute of London Underwriters FOB – Free on BoardFOR – Free on RailC & F – Cost & FreightCIF – Cost, Insurance & FreightEx-works or WW – Warehouse to WarehouseB / L – Bill of LadingL / R, R / R – Lorry Receipt, Rail ReceiptCTL – Constructive Total LossDWT – Dead Weight TonnageWar risk is covered only at sea & not on landParticular Average – Partial LossesGeneral Average – shared proportionately

Motor InsuranceLoss or damage to your vehicle: The policy covers you against any loss or damage caused to the vehicle or it’s accessories due to the following natural and man made calamities.• Natural Calamities – Fire, explosion, self-ignition or lightning, earthquake,

flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost, landslide, rockslide.

• Man made Calamities – Burglary, theft, riot, strike, malicious act, accident by external means, terrorist activity, any damage in transit by road, rail, inland waterway, lift, elevator or air.

IDV – Insured’s Declared Value. The rates of the vehicle and its parts are subject to depreciation as per the schedule provided by the Indian Motor Tariff.Personal accident cover: The motor insurance provides compulsory personal accident cover for individual owners of the vehicle while driving. You can also opt for a personal accident cover for passengers.Third party legal liability: This protects you against legal liability arising due to accidental damages• Any permanent injury/ death of a person (Unlimited)• Any damage caused to the property (Rs.7.5lacs-4 wheeler, Rs.1lac-2 wheeler)

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Motor InsuranceNo Claim Bonus: If you do not make a claim during the policy period, a No Claim Bonus (NCB) is offered on renewals (only on Own Damage Section). This discount can go as high as 50%. (NCB will only be allowed provided the policy is renewed within 90 days of the expiry date of the previous policy.)Transfer your NCB: You can transfer full benefits of No Claim Bonus when you shift your motor insurance policy to another company.Voluntary Excess discount: A further discount on the premium is available if you opt for a Voluntary Excess in addition to the Compulsory Excess. (Compulsory Excess is the amount of loss which the insured has to bear in each and every claim.)Additional discounts: You can also avail of additional discounts if you are a member of a recognized Automobile Association in India.ARAI (Automotive Research Association of India) devices: In case you have installed ARAI approved anti theft device in your vehicle, you get a discount of 2.5 % on the OD Premium to a maximum of Rs. 500.CTL – Constructive Total Loss – when aggregate cost of repairs exceeds 75% of IDVHomologation – approve or confirm officially

Motor InsuranceSum InsuredThe vehicles are insured at a fixed value called the Insured’s Declared Value (IDV). IDV is calculated on the basis of the manufacturer’s listed selling price of the vehicle (plus the listed price of any accessories) after deducting the depreciation for every year as per the schedule provided by the Indian Motor Tariff.If the price of any electrical and / or electronic item installed in the vehicle is not included in the manufacturer’s listed selling price, then the actual value (after depreciation) of this item can be added to the sum insured over and above the IDV.Policy Exclusions - Under this policy, you are not covered against -Normal wear, tear and general aging of the vehicleDepreciation or any consequential lossMechanical/ electrical breakdownWear and tear of consumables like tyres and tubesVehicle being used otherwise than in accordance with limitations as to useDamage to/ by a person driving the vehicle without a valid licenseDamage to/ by a person driving the vehicle under the influence of drugs or liquorLoss/ damage due to war, mutiny or nuclear riskSolatium Scheme – scheme for compensation to ‘hit & run’ motor accident victims. RS.25,000 for death and Rs.12,500 for grievous hurt

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ClaimsOnus of proof that loss is within scope of policy is on insuredIf loss is caused by excepted peril, onus of proof is on insurerStandard Claim – within terms & conditions of policyNon-Standard Claim – insured has committed breach of condition / warrantyEx-gratia payments – losses outside scope of cover hence un-payable. However, consideration shown for genuine oversightSurvey Report – right of insured to get copyAverage Adjusters – for general average lossesIn-house Surveyor – limit upto Rs.20,000

Condition of averageComes into effect in case of claims settlement when there is under-insuranceInsured has to bear portion of loss (to the extent of under-insurance) on his own a/cIn case of Total Loss, claim amount payable is SI or RV / MV whichever is lessFormula:• Sum Insured / Value x loss

Claims Settlement if Indemnity is on Reinstatement Value basisproperty value = Rs.2 lacssum insured = Rs.1.50 lacs• Loss = 50,000, claim payable = 37,500• Loss = 1 lac, claim payable = 75,000• Loss = 1.50 lac, claim payable = 1,12,500• Loss = 1.75 lac, claim payable = 1,31,250• Loss = 2.00 lac, claim payable = 1,50,000

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Condition of averageIf indemnity is on Market Value basis, claim settlement is as follows-sum insured = Rs.1.50 lacsproperty value = Rs.2 lacsdepreciation = 10%after depreciation property value = Rs.1.80 lacs• Loss = 50,000, claim payable = 37,500• Loss = 1 lac, claim payable = 75,000• Loss = 1.50 lac, claim payable = 1,12,500• Loss = 1.75 lac, claim payable = 1,31,250• Loss = 2.00 lac, claim payable = 1,50,000

Rural InsuranceLALGI - Landless Agricultural Labourers Group Insurance Scheme• Premium borne by GOI. • SA – Rs.2,000 for both ND & AD

IRDP – Integrated Rural Development Programme• Premium borne by GOI• SA – Rs.5,000 (ND), Rs.10,000 (AD)

Jan Shree Bima Yojana• Premium paid thru Nodal Agency (State Govt. Dept.) & Social Security Fund of LIC• Minimum group size - 25• SA – Rs.20,000 (ND), Rs.50,000 (AD)

Krishi Shramik Samajik Suraksha Yojana• Object of scheme is to provide life insurance protection, periodical lump sum survival

benefit and pension to the agricultural workers• Premium paid thru Nodal Agency (Gram Panchayat) & Social Security Fund of LIC• Minimum group size - 20• SA – Rs.20,000 (ND), Rs.50,000 (AD)

PASS – Personal Accident Social Security Scheme• RS.3,000 paid on earning member’s accidental death

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Group SchemesMinimum members – 25 personsShould be an already existing groupTypes of SchemesGroup Term Life Insurance (GTLI) Scheme• Covers only death (pure risk cover) and there is no maturity value

at the end of the termEmployee’s Deposit Linked Insurance (EDLI) Scheme, 1976• Insurance benefit is equal to the average balance to the credit of

the deceased employee in EPF a/c during last 12 months, provided that where such balance exceeds Rs.35,000, insurance cover would be equal to Rs.35,000 plus 25% of the amount in excess of Rs.35,000 subject to a maximum of Rs.60,000.

• Insurance schemes offered by Life Cos. in lieu of the EDLI scheme offer higher benefits which is excepted by the CPFC.

Group SchemesGroup Gratuity Scheme• Under the Payment of Gratuity Act, 1972, it is employer’s statutory

liability to pay 15 days salary (15/26 of a month's wages) for every completed year’s service to each of his employees on their exit, for any reason after five years of continuous service, subject to maximum limit of 3.5 lacs.

• Higher benefits can be paid if the employer so desires.• Employers can fund this liability through a scheme managed by Life

Cos.Group Superannuation Scheme• Can also be called a Pension scheme and seeks to provide pension

benefits to employees (not obligatory on the part of employer toprovide for pension).

• Mostly the employer contributes, but both employer and employeescan also contribute, in which case the scheme is called a Contributory Pension Fund Scheme.

• The maximum annual contribution that an employer can make to thePension Fund and Provident Fund is restricted by the Income Tax Provisions to 27% of the annual salary (basic plus D.A.)

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Group SchemesGroup Savings Linked Insurance Scheme• Similar to Endowment product for a Group.• Premium comprises of risk premium + savings component

(which is accumulated in member’s a/c)Group Leave Encashment Scheme• Funding of Leave Encashment benefit (including Medical

Leave Encashment) liability of the corporate.• The amount depends upon the leave to the credit of the

employee and his / her salary at the time of exit.Group Mortgage Redemption Assurance Scheme• for borrowers of Housing/Vehicle Loans from Financial

Institutions where Loan is recovered under EMI.• Insurance cover every year will be almost equal to the loan

outstanding at the anniversary date of each borrower.

Personal Accident Ins.Features Policy offers compensation in case of death or bodily injury to the insured

person, directly and solely as a result of an accident, by external, visible and violent means. The policy operates worldwide and is a 24 hours cover

Scope of Cover Available in following combinations- AD cover only (Table A) AD + PTD (Table B) AD + PTD + PPD (Table C) AD + PTD + PPD + TTD (Table D)

(AD=Accidental Death, PTD=Permanent Total Disablement, PPD=Permanent Partial Disablement, TTD=Temporary Total Disablement; details of definitions as per insurers)

Add-ons Medical Extension On payment of additional premium, this benefit provides for reimbursement of actual medical expenses incurred following an accident limited to 20% of the Sum Insured or 40% of valid claim under main PA policy whichever is earlier.

Min / Max Age 5 to 100 yrs. However, premium is loaded above certain age (70 yrs) Cover Extensions Following extensions are built-in with the main policy

Education Grant In case of AD or PTD, a specified percentage of SI subject to a maximum limit is paid as education allowance to dependent children. Carriage of Body Payment for transportation of dead body in case of unfortunate AD, is paid as a percentage of SI subject to maximum limit.

Exclusions Some common exclusions- Compensation under more than one clause for same period of disability Any payment after admission of claim for 50% / 100% of Capital Sum

Insured Any claim in the same period of insurance exceeding the Capital Sum

Insured Suicide, attempted suicide, self injuries, VD, breach of law, influence of

liquor/drugs Pregnancy related claim War and nuclear perils

Sum Insured The maximum sum insured is limited to around 60 to 75 times of the monthly earnings / salary of proposer.

Bonus The sum payable is increased by 5% for each claim free year up to a maximum of 50%.

Discount / Loading

Family discount of 10% is available

Premium Depends on the risk class (I to III) of the proposer. Indicative premium per Rs.1 lac Sum Insured for risk class I is – Rs.45, Rs.70, Rs.100, Rs.150 for Table A to D resp. (serv.tax extra)

Group Policy Attractive discounts on premium are available for group policies. Some features of group policies will differ from individual policies.

Who can take Individuals, families, groups / corporates

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Domestic MediclaimFeatures Policy provides for Financial Assistance against Hospitalisation Expenses

towards disease / illness / injury in India requiring at least 24 hours of hospitalisation. Includes Domiciliary Hospitalisation and Day Care treatment (certain types only) expenses.

Scope of Cover Cashless services through TPA (Third Party Administrator). Hospitalisation expenses like Room/Boarding, Nursing,

Doctor’s/Anesthetist/others fees, Investigation, Medical Consumables, etc. in any registered nursing home/hospital in India.

Pre & Post hospitalization expenses – upto 30 days and 90 days resp. Pre & post hospitalization expenses includes Doctor’s Fees,

Prescription Medicines, Diagnostic tests-Lab, ultrasound, MRI, CT Scan etc. as prescribed by Doctor.

Add-ons Available only with Group policies on paying extra premium 30 day exclusion waiver Pre-existing illness / diseases cover Maternity Benefit cover Family Floater cover (available with some individual policies) Corporate Float

Min / Max Age 30 days to 80 yrs. However, restrictions on entry age vary across insurers Exclusions Some common exclusions-

Any claim during first 30 days (exception accident claims) Waiting period of 1 / 2 year for certain diseases like Cataract, Hernia,

Piles, Sinusitis, etc. Pre-existing diseases / Congenital diseases Cosmetic / aesthetic treatment or plastic surgery, other than

necessitated due to an accident or as a part of any illness. Naturopathy Medical treatment for intentional self-injury, suicide attempt,

alcohol/drug abuse. Sexually transmitted diseases, AIDS Diagnosis and treatment of infertility / sub fertility Rest cure i.e. treatment for convalescence, general debility etc. Dental treatment or surgery of any kind unless requiring hospitalisation. Treatment arising from childbirth including caesarean section Voluntary medical termination of pregnancy during the first 12 weeks

from the date of conception. Charges incurred at Hospital primarily for diagnostic studies not

consistent with the positive existence or presence of any ailment, sickness or injury for which confinement is required at a Hospital

Sum Insured Rs.50,000 to Rs.10 lacs (from one Co.) For multiple policies ‘contribution clause’ will apply

Bonus The sum payable is increased by 5% for each claim free year up to a maximum of 50%. Inversely, 10% gets reduced from the Bonus amount for claim(s) made year. However, basic sum insured remains intact if bonus is unavailable.

Discount / Loading

For Individuals - Family discount of 10% is available For Groups – various like group discount

Premium Depends on the age and sum insured opted Who can take Individuals, families, groups / corporates

Overseas TravelFeatures Policy covers persons undertaking overseas travel and provides for

emergency medical expenses, compensation for personal accident, repatriation / evacuation, travel related losses like checked baggage loss, loss of passport, personal liabilities, etc.

For individuals, policies typically cover per trip duration or multi trips during annual period (with restriction on no. of days per trip & per year)

For corporates, group policies can cover group travel or frequent travelers for actual no. of days traveled.

Scope of Cover Some available sections- Medical Expenses Dental Treatment Loss of Passport Total / Partial loss of checked in Baggage Personal Accident Personal Liability Daily Allowance in case of Hospitalization Financial Emergency Assistance Hijack Distress Allowance Trip Delay Trip Cancellation & Interruption Missed Connections Compassionate Visit Home Burglary Insurance

Min / Max Age 0.5 to 70 yrs. Beyond 70yrs on case-to-case basis with medicals. Cover Extensions Cover extension for treatment upon return to India on service provider’s

advice is built-in. Cover extension for specified period on account of uncontrollable

reasons of insured is built-in. Policies extensions beyond normal period can be made on paying extra

premium & Co. permission. Exclusions Pre-existing health conditions.

Other sectional exclusions / deductible / excess will be in terms of amount or time.

Sum Insured Only Standard SI available – typically USD50,000; USD1,00,000; USD2,50,000; USD5,00,000

Bonus The sum payable is increased by 5% for each claim free year up to a maximum of 50%.

Discount / Loading

Discounts available for Groups, Corporate policies-depending on no. of travel dates.

Premium Depends on - - Age - No. of travel days - Geographical region (like Asia, World excluding & including North

America) - Sum Insured / package opted

Group Policy Can be taken for Groups, Corporates with frequent fliers. Also individuals with frequent overseas travel can take an Annual policy covering multiple trips instead of per trip cover.

Who can take Individuals, families, groups / corporates

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Householders PackageFeatures Package policy of various sections which covers household / domestic

property of the Insured against various perils. Scope of Cover Commonly available covers

Section I: Fire and Allied Perils Section II: Burglary and Housebreaking Section III: All Risk (for valuables) Section IV: Electrical and Mechanical Appliances Breakdown Section V: Electronic Equipments Section VI: Fixed Plate Glass Section VII: Baggage Section VIII: Pedal Cycle Section IX: Personal Accident Section X: Legal Liability

Add-ons Regular add-ons which are available with stand-alone policies Min Sections 1 to 2 Exclusions Regular exclusions as per the Sections Sum Insured Different as per Sections Bonus Only for PA Section, as per stand-alone policy terms. Discount / Loading

Sectional Discount (only on non-tariff sections) Renewal Discount Favourable Claims Ratio discount High Claim Ratio loading

Premium Depends on the Section and sum insured opted Who can take Individuals

Shopkeepers PackageFeatures Package policy of various sections which covers property / contents /

liability of the Shop-owner against various perils. Scope of Cover Commonly available covers

Section I: Fire and Allied Perils Section II: Burglary and Housebreaking Section III: Electrical and Mechanical Appliances Breakdown Section IV: Electronic Equipments Section V: Money Insurance Section VI: Fixed Plate Glass / Sanitary fittings Section VII: Baggage Section VIII: Signboard Section IX: Personal Accident Section X: Fidelity insurance Section XI: Legal Liability

Add-ons Regular add-ons which are available with stand-alone policies Min Sections 2 to 4 Exclusions Regular exclusions as per the Sections Sum Insured Different as per Sections Bonus Only for PA Section, as per stand-alone policy terms. Discount / Loading

Sectional Discount (only on non-tariff sections) Renewal Discount Special Discount Favourable Claims Ratio discount High Claim Ratio loading

Premium Depends on the Section and sum insured opted Who can take Shop-owners

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Postal Life InsuranceStarted in 1884 – 122 yrs oldIs open for employees of all Central and State Government Departments, Nationalized Banks, Public Sector Undertakings, Financial Institutions, Local Bodies like Municipalities and Zila Parishads, Educational Institutions aided by the Government etc.On 24th March, 1995, the benefits of Postal Life Insurance were extended to rural populace of the country under the banner of Rural Postal Life Insurance.

Insurance Ombudsmancreated w.e.f. 11-11-1998 Purpose - quick disposal / mitigation of grievances of the insuredAppointed by governing body of insurance council - on recommendations of the committee comprising of IRDA Chairman, LIC Chairman, GIC Chairman and Central Govt. representative. Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services. Appointed for a term of three years or till the incumbent attains the age of sixty five years, whichever is earlier. Reappointment is not permitted.Territorial jurisdiction – 12 Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction.

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Insurance OmbudsmanPower – 2 types of functions to performConciliation and Award making. Is empowered to receive and consider complaints in respect of personal lines of insurance from any person who has any grievance against an insurer. Complaint may relate to any grievance against the insurer i.e. • any partial or total repudiation of claims by the insurance companies, • dispute with regard to premium paid or payable in terms of the policy, • dispute on the legal construction of the policy wordings in case such dispute

relates to claims; • delay in settlement of claims and • non-issuance of any insurance document to customers after receipt of premium.

Ombudsman's powers are restricted to insurance contracts of value not exceeding Rs. 20 lakhs. The insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months.

Insurance OmbudsmanManner of lodging complaintThe complaint by an aggrieved person has to be in writing, and addressed to the insurance Ombudsman of the jurisdiction under which the office of the insurer falls. The complaint can also belodged by the legal heirs of the insured. Before lodging a complaint:• i) the complainant should have made a representation to

the insurer named in the complaint and the insurer either should have rejected the complaint or the complainant have not received any reply within a period of one month after the concerned insurer has received his complaint or he is not satisfied with the reply of the insurer.

• ii) The complaint is not made later than one year after the insurer had replied.

• iii) The same complaint on the subject should not be pending with before any court, consumer forum or arbitrator.

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Insurance OmbudsmanRecommendations of the Ombudsman• When a complaint is settled through the mediation of the Ombudsman, he

shall make the recommendations which he thinks fair in the circumstances of the case.

• Such a recommendation shall be made not later than one month and copies of the same sent to complainant and the insurance company concerned.

• If the complainant accepts recommendations, he will send a communication in writing within 15 days of the date of receipt accepting the settlement.

Award• The ombudsman shall pass an award within a period of three months from

the receipt of the complaint. • The awards are binding upon the insurance companies. • If the policy holder is not satisfied with the award of the Ombudsman he can

approach other venues like Consumer Forums and Courts of law forredressal of his grievances.

At a GlanceRisk Situation in which outcome is uncertain and unfavourable. Peril defined as cause of loss Hazard condition that creates or increases probability of loss.

3 types – Physical, Moral, Morale Principles of Insurance

1. Utmost Good Faith 2. Insurable Interest 3. Indemnity Subrogation (Corollary) Contribution (Corollary) 4. Proximate Cause

Principle of Estoppel

Protects a party from suffering detrimentally if the other party does or says something to induce an expectation. e.g. insurer providing receipt books is liable for agent’s actions.

Crime Public wrong – State is Prosecutor Tort Private wrong – Civil action taken by aggrieved party Aleatory contract Value exchanged is not equal. Premium v/s Sum Assured Contract of adhesion

No negotiation between the parties - insured has to accept the contract in toto from the insurer

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Fundamental Risks Particular Risks affects the entire economy or large nos. / groups within economy

affects only individuals / corporates

Usually uninsurable insurable Hyperinflation, war Fire, theft

Dynamic Risks Static Risks result from changes in economy causing financial loss to people

losses that would occur even if no changes in economy

for some losses, for some gains

Cause only losses

Less predictable so uninsurable More predictable so insurable Effects of IT, modernization Dishonesty, cheating Pure Risks Speculative Risks where only possibilities are loss or no loss

chance of either loss or gain

Insurable Uninsurable (consequence of speculative risk is insurable)

Personal Risks – Death, Old Age, Health Property Risks – Home, Car Liability Risks – claim from TP

Business Loss Default Risk (insurable)

Thumb Rules

Income Rule – 6 to 8 times of gross annual incomeIncome plus expenses – 5 times gross income + total expenses (like loans, debt, etc.)Premium as % of income –Premium = 6 % of breadwinner’s gross annual income + additional 1% for each dependentMultiples of SalaryIf 1 breadwinner, family can live adequately on 75% of breadwinners salary

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Needs ApproachStep 1 - Asses Cash Needs (funds required for major expenses) and Net Income Needs (funds required for living expenses)Net Income needsReadjustment Period – 1 to 2 years after insured’s deathDependency Period – years needed to support children till their majorityBlackout Period – children grow up but surviving spouse hasn’t retiredRetirement Period – surviving spouse’s retirement yearsStep 2 - Subtract available assets

Life Insurance = Cash needs + PV of Net Income needs – Expected available assets

Capital Retention MethodCapital Liquidation Method

Human Life ValueStep 1 - Determine the insured person’s after tax earningsStep 2 - Deduct the personal expenses of the insuredStep 3 - Consider no. of years for which income stream is requiredStep 4 - Consider anticipated salary growth and inflationStep 5 - Determine the total anticipated future income for supporting the familyStep 6 - Determine a discount rate for the insurance proceeds and calculate PVStep 7 - Determine the PV of expected income stream, using the discount rateStep 8 - Making adjustments to HLVStep 9 - Add in large lump-sum expensesStep 10 - Considering differences in income replacement needs during different future periods