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1 L&T General Insurance

TABLE OF CONTENTS

SR.NO PARTICULARS PAGE.NO

1 Introduction 3

2 Fundamentals & Principles of Insurance 4

3 Insurance Documents 7

4 Insurance Legislations 8

5 Marine Insurance 13

6 Fire Insurance 16

7 Engineering Insurance 19

8 CAR Insurance 19

9 EAR Insurance 22

10 Miscellaneous 25


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SR.NO. PARTICULARS PAGE NO.

11 Introduction to Underwriting 23

12 Underwriting Policy 30

13 Filing of Products 32

14 Underwriting Practice 38

15 Underwriting of Physical Hazard 42

16 Underwriting of Moral Hazard 45

17

Reinsurance

49

18 Risk Management 53

19 Customer service 59

20 IRDA regulations 2002 (protection of policy holders interests) 63


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INTRODUCTION

What is General Insurance?

Insurance other than Life Insurance falls under the category of General Insurance. GeneralInsurance comprises of insurance of property against fire, burglary etc, personal insurance suchas Accident and Health Insurance, and liability insurance which covers legal liabilities. There are

also other covers such as Errors and Omissions insurance for professionals, credit insurance etc.

Non-life insurance companies have products that cover property against Fire and allied perils,flood storm and inundation, earthquake and so on. There are products that cover property against

burglary, theft etc. The non-life companies also offer policies covering machinery againstbreakdown, there are policies that cover the hull of ships and so on. A Marine Cargo policy

covers goods in transit including by sea, air and road. Further, insurance of motor vehiclesagainst damages and theft forms a major chunk of non-life insurance business.

In respect of insurance of property, it is important that the cover is taken for the actual value of

the property to avoid being imposed a penalty should there be a claim. Where a property isundervalued for the purposes of insurance, the insured will have to bear a ratable proportion of

the loss. For instance if the value of a property is Rs.100 and it is insured for Rs.50/-, in the eventof a loss to the extent of say Rs.50/-, the maximum claim amount payable would be Rs.25/- (50%

of the loss being borne by the insured for underinsuring the property by 50%). This concept isquite often not understood by most insured.

Personal insurance covers include policies for Accident, Health etc. Products offering Personal

Accident cover are benefit policies. Health insurance covers offered by non-life insurers aremainly hospitalization covers either on reimbursement or cashless basis. The cashless service is

offered through Third Party Administrators who have arrangements with various serviceproviders, i.e., hospitals. The Third Party Administrators also provide service for reimbursement

claims. Sometimes the insurers themselves process reimbursement claims.

Accident and health insurance policies are available for individuals as well as groups. A groupcould be a group of employees of an organization or holders of credit cards or deposit holders in

a bank etc. Normally when a group is covered, insurers offer group discounts.

Liability insurance covers such as Motor Third Party Liability Insurance, WorkmensCompensation Policy etc offer cover against legal liabilities that may arise under the respective

statutes Motor Vehicles Act, The Workmens Compensation Act etc. Some of the covers suchas the foregoing (Motor Third Party and Workmens Compensation policy ) are compulsory by

statute. Liability Insurance not compulsory by statute is also gaining popularity these days. Manyindustries insure against Public liability. There are liability covers available for Products as well.

There are general insurance products that are in the nature of package policies offering a

combination of the covers mentioned above. For instance, there are package policies available


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for householders, shop keepers and also for professionals such as doctors, chartered accountantsetc. Apart from offering standard covers, insurers also offer customized or tailor-made ones.

Suitable general Insurance covers are necessary for every family. It is important to protect ones

property, which one might have acquired from ones hard earned income. A loss or damage to

ones property can leave one shattered. Losses created by catastrophes such as the tsunami,earthquakes, cyclones etc have left many homeless and penniless. Such losses can be devastatingbut insurance could help mitigate them. Property can be covered, so also the people against

Personal Accident. A Health Insurance policy can provide financial relief to a person undergoingmedical treatment whether due to a disease or an injury.

Industries also need to protect themselves by obtaining insurance covers to protect their building,

machinery, stocks etc. They need to cover their liabilities as well. Financiers insist on insurance.So, most industries or businesses that are financed by banks and other institutions do obtain

covers. But are they obtaining the right covers? And are they insuring adequately are questionsthat need to be given some thought. Also organizations or industries that are self-financed should

ensure that they are protected by insurance.

Most general insurance covers are annual contracts. However, there are few products that arelong-term.

It is important for proposers to read and understand the terms and conditions of a policy before

they enter into an insurance contract. The proposal form needs to be filled in completely andcorrectly by a proposer to ensure that the cover is adequate and the right one.

FUNDAMENTALS/ PRINC

IPLES OF GENERAL

INSURANCE

Contract of insurance

1. When the insured pays the premium and the insurer accepts the risk, the contract of

insurance is contract is concluded. The policy issued by the insurer is the evidence of the

contract.

2. Like any other contracts of insurance is completed when one party accepts the offer made

by the other party. The offer usually comes from the proposer and the offer is known as

the proposal. Insurers indicate acceptance by the issue of a cover note or a policy.

3. No contract is valid unless there is due consideration. In the case of insurance contracts

premium is the consideration from the insured and the promise to indemnify is the

consideration from the insurer.

4. Both the parties should be of the same mind with a common intention. For example, if the

proposer desired fire insurance, and the insurers issue a burglary policy, there is no

consent arising out of common intention


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5. The persons to the contract should be competent to contact. Minors and persons of

unsound mind cannot enter into insurance contracts.

6. The object of the contract must be legal and not against public policy. For example/

stolen goods cannot be insured.

7. Insurance contracts are subject to certain special principles evolved under common law in

the U.K. which are generally followed by Indian courts. The five principles are known as

fundamentals or basic principles of law of insurance.

Insurable interest

The owner of property has a right under law to effect insurance on the property if he is

likely to suffer financially when the property is lost or damaged. This legal right to insure

is called insurable interest. Without insurable interest, the contract of insurance will be

void. Because of legal requirements of insurable interest, insurance contracts are not

gambling transactions.

Examples of insurable interest

Ownership of property

A bank as insurable interest in the property on the mortgage of which loans have

been given. The interest is limited to the amount of the loan. Usually, under such

circumstances, the policies are issued in the joint names of the insured and the bank.

A ship owner has insurable interest in the ship owned by him. Cargo owners, both sellers

and buyers, have insurable interest in the goods owned by them.

Time when insurable interest should be present

In fire and miscellaneous insurances, insurable interest must be both at the time of taking

the policy and at the time of loss. For example, if the property insured under a fire

insurance policy is sold and there is a loss after the sale, the insured cannot recover the loss

as he has no insurable interest at the time of loss.

In marine cargo insurance, insurable interest is required at the time of loss. It may not be

present at the time of effecting insurance. An importer of goods may insure the goods

under a marine policy, although at that time, he may not be the owner of the goods.

Ownership of the goods passes from the exporter to the importer when the payment is

made. If goods arrive damaged at destination, and if the importer had paid for the goods,

he can recover the loss and has a policy. In marine hull insurance, insurable interest must

be present both at the time of taking the policy and the time of loss.


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Indemnity

The object of the principle of the indemnity is to place the insured after a loss in the same

financial position, as far as possible, as he occupied immediately before the loss. The

effect of this principle is to prevent the insured from making a profit out of his loss.

Subrogation

Subrogation may be defined as the transfer of rights and remedies of the insured to the insurer

who has indemnified the insured in the respect of loss. If the insured has any rights of action to

recover loss from third party, who is primary responsible for the loss, the insurer, having paid the

loss, is entitled to avoid him self of these rights to recover the loss from the third party. The

effect is that the insured does not receive more than the actual amount of his loss and any

recovery from the third party goes to benefit of the insurer to reduce the amount of his loss. The

principal of subrogation arises from principle of indemnity.

Contribution

An insured may have several insurances on the same subject matter. If he recovers his loss under

all these insurances, he will obviously make a profit out of the loss. Common law has, there fore,

evolved the principle of contribution which may be defined as the right of insurers who have

paid a loss under a policy to recover appropriate amount from other insurers who are liable for

the same loss.

Proximate cause

The object of insurance is to provide indemnity for such loses as or caused by insured perils. If

stocks are burnt, then the cause of loss is fire which is covered under a fire policy enhance the

claim is payable. If stocks are stolen, the loss is not payable under the fire policy, as burglary is

not a peril cover. Stocks are covered by bomb dropped by enemy country then the loss is caused

by war which is an excluded peril and not payable under the fire policy. Thus, it is important to

determine the cause of loss to decide whether the loss is payable or not.


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INSURANCE DOCUMENTS

Proposal forms

The proposal form contains questions designed to elect all material information about the

particular risk proposed insurance. The number and nature of questions vary according to the

particular class of insurance concerned.

In marine cargo insurance, it is not the practice to use a proposal form, although sometimes it is

usual to obtain a questionnaire duly completed. Proposal forms are required to be used in all

classes as per IRDA regulations. Proposals are used in marine hull insurance.

Questionnaire on the following items may be considered as common to all proposal forms:

a) Proposers name in full:b) Proposers address:

c) Proposers occupation, profession or business:

d) Sum insured:

e) Previous and present insurances and full details of all losses suffered by him whether or

not they were insured.

f) Other sections common to all proposal forms relate to signature, date and in some cases

agents recommendations.

In addition to these general questions which are common to all proposal forms, there are specialquestions depending upon the class of insurance concerned. For example, in motor insurance the

special questions relate to the vehicle.

The purposes of the proposal form are to provide all material information to the insurers.

Secondly, the form includes a declaration by the insured that the answers are true and accurate

and that he agrees that the form shall be the basis of the insurance contract. Any wrong answer

will give the right to insurers to avoid the contract.


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a) A balance sheet

b) A profit and loss account

c) A revenue account for each class of insurance

i. These accounts are required to be audited annually by an auditor and printed and four

copies have to be furnished as returns to the authority within six months from the close of

the financial year. Every insurer is required to furnish to the authority a certified copy of

the minutes of the proceedings of every general meeting, within 30 days from the holding

of the meeting

ii. The insurance rules framed under the act provide that the following items of information

shall be maintained in respect of each class of business.

iii. A record of cover notes specifying the identification number, name of party, dates of

commencement and expiry, type of cover granted, the amount of premium and cross-

reference to the policy.

iv. A record of policies, which should be serially numbered, listing all policies issued,entered in chronological order, stating the number of the policy, dates of commencement

and expiry of risk, name of the insured, premium received, cross reference to the relevant

bank guarantee or deposit and the nature of risk granted, cross reference to any cover note

issued prior to the issue of the policy and cross reference to any endorsement passed

subsequent to the issue of the policy.

v. A record of premium showing, according to chronological order of receipt, the amount

and name of party from whom received and with cross reference to policy number.

vi. A record of endorsements mentioning the policy number to which it is attached, dates of

commencement and expiry of the endorsement, the type of endorsement and the

additional premium charged or refund due and cross reference to the premium register.vii. A record of bank guarantees and deposits giving particulars of the party , amount and

conditions of guarantee or deposit and cross reference to the relevant policy or policies.

viii. A record of claims intimated mentioning name of claimant, giving reference to policy

number, date of intimation of claim, interest covered, nature and cause of the loss or

damage, provisional estimate of loss, amount at which settled, date of settlement of claim

recoveries from salvage or otherwise and whether surveyed. Two separate records, one

relating to claims intimated and the other relating to claims paid, may be maintained if

there is adequate cross referencing of information between them and if the information

required under this clause is readily available from them taken together.

The rules framed under the insurance act 1938 also provide that the following items of

information shall be maintained for the business of the insurer as a whole.


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i. A register of agents

ii. A record of business procured by each agent and the amount of commission paid

thereon.

iii. Record of employees including field workers

iv. Cash book and disbursement book

v. A record of investments and assets

vi. Record of insurance companies with which reinsurance treaties are entered into and

facultative arrangements made.

vii. Record of facultative reinsurance ceded and accepted.

Further, the rules provide that receipts for payments received shall be maintained in a systematic

manner and documents used for assuming risk are serially numbered and filed accordingly.

The documents relating to claims settled, including copies of any survey or loss assessment

reports, shall be maintained as follows in respect of every loss and damage.

a) On which claim of less than rs.5000/- has been made, for a period of three years.

b) On which a claim of rs.5000/- or more but less than rs.20000/- has been made, for a

period of seven years.

c) On which a claim of rupees one lakh or more has been made for a period of twelve years;

such period being counted from the date on which the claim is settled.

Investments

Every insurer is required to invest his assets only in those investments approved under the

provisions of the acts(from time to time guidelines are issued prescribing the approved

investments).

Returns in the prescribed form are to be submitted showing position as at 31st march of the

preceding year, for the investments made out of assets..

Limitation on expenses of management

The act prescribes maximum limits of expenses of management including commission that may

be incurred by an insurer. The percentages are prescribed in relation to the total gross direct

business written by the insurer in India.

Prohibition of Rebates

No persons shall allow or offer to allow as an inducement to any persons to take out insurance,

any rebate of the whole or part of commission payable or any rebate of the premium shown in

the policy. Any person making default in complying with these provisions shall be punishable

with fine which may extend to five hundred rupees.


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Powers ofInvestigation

The central government may at any time, by order in writing, direct authority to investigate the

affairs of any insurer and report to the central government.

Other Provisions

The other important provisions of the act relate to licensing of agents, brokers and surveyors and

advance payment of premium. These are dealt with in the appropriate chapters.

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA)

After the nationalization of the insurance industry, the responsibilities of supervision had

reduced considerably. With the opening up the industry, following the policy of liberalization

and globalization and private companies being permitted to transact insurance business in India,

it became necessary to establish an authority to regulate insurance operations.

In the anticipation of formal decisions to this effect, the government constituted the IRA.(

insurance regulatory act), on an interim basis, with a chairman and two members representing the

life and general insurance businesses.

Subsequently, the insurance regulatory and development authority act, 1999(IRDA) was enacted

with effect from 19/04/2000.

The preamble of IRDA act states as follows:

An act to provide for the establishment of an authority to protect the interest of holders of

insurance policies, to regulate, promote and ensure orderly growth of the insurance industry andfor matters connected therewith or incidental there to and further to amend the insurance act,

1938, the life insurance corporation act, 1956 and the general insurance business

(Nationalisation) act, 1972.

The IRDA consists of a chairperson, not more than five whole time members and not more than

four part time members. The whole time members shall hold office for 5 years or until the age of

62 (65 in case of the chairperson) whichever is earlier. Part time members will hold office for not

more than 5 years.

The powers and functions of the authority are stated in the act as follows;

To regulate, promote and ensure orderly growth of the insurance and reinsurance

business.

Issue a certificate of registration, renew, modify, withdraw, suspend or cancel such

registration to the applicant i.e., insurance company.


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Prepare a code of conduct for the agents, surveyors and loss assessors or the

intermediaries who take part in the development of insurance business and in the

settlement of the claims.

To exercise all powers and perform all functions of the controller of insurance under the

insurance act 1938 and other related acts as mentioned above.

To protect the interest of the policy holders in matters concerning inter alia assigning of

policy. Settlement of insurance claims, terms and conditions of contract of insurance etc

To promote efficiency in the conduct of insurance business.

To promote and regulate professional organizations connected with the insurance

business.

To levy fees and other charges for carrying out the purposes of the proposed act

To call for information from, undertake inspection and conduct enquires and

investigations including audit of the insurers, insurance intermediaries and other

organizations connected with the insurance business.

To connect and regulate the rates, advantages terms and conditions that may be offeredby insurers in respect of general insurance business not so controlled by the tariff

advisory committee under section 64 UC of the insurance act 1938.

To prescribe the form and the manner in which books of accounts will be maintained and

statement of accounts will be rendered by insurers and other insurance intermediaries.

To regulate investment of funds by insurance companies.

To regulate maintenance of margin of solvency.

To adjudicate disputes between insurers and intermediaries.

To exercise such other powers as may be prescribed by the central government.

The authority has the power, under section 25 of the act, to appoint a committee toprovide guidance to the authority and the committee is called as insurance advisory

committee. This committee is established by a notification by the authority and the

committee contains not more than 25 members excluding ex-officio members to represent the

interest of commerce, industry transport, agriculture, consumer for a, surveyors, agents,

intermediaries, organizations engaged in safety and loss prevention, research bodies and

employees associations in the insurance sector. The chairperson and the members of the

authority are the ex-officio members of the insurance advisory committee.

The objects of the insurance advisory committee, inter alia, shall be the authority on matters

relating to the making of the regulations consistent with the act and rules to carry out thepurposes of the act.


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MARINE INSURANCE

Definition

Marine insurance is a type of insurance that covers boats and ships, as well as their cargo and in

some instances the places where the boat or ship is docked. It has a colorful history, beginning

informally in England during the 17th century. In 1906, the Marine Insurance Act was passed

under British law, creating a standard operating procedure for policies that dictates the world's

policies to this day. The standards set forth by the act are considered reasonable, but due to

changes in technology and social standards, the act is generally seen as obsolete and is being

replaced by more modern legislature.

Types of marine insurance:-

Hull Insurance:- covers the insurance of the vessel and its equipment i.e. furniture and

fittings, machinery, tools, fuel, etc. It is effected generally by the owner of the ship. Cargo Insurance:- includes the cargo or goods contained in the ship and the personal

belongings of the crew and passengers.

In a contract of marine insurance, the insured must have insurable interest in the subject matterinsured at the time of the loss. Insurable interest is not required to be present at the time of taking

the policy. Under marine insurance, the following persons are deemed to have insurable interest:-

The owner of the ship has an insurable interest in the ship. The owner of the cargo has insurable interest in the cargo. A creditor who has advanced money on the security of the ship or cargo has insurable

interest to the extent of his loan.

The master and crew of the ship have insurable interest in respect of their wages. If the subject matter of insurance is mortgaged, the mortgagor has insurable interest in the

full value thereof, and the mortgagee has insurable interest in respect of any sum due to

him. A trustee holding any property in trust has insurable interest in such property.

In case of advance freight the person advancing the freight has an insurable interest in sofar as such freight is repayable in case of loss.


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Types of Marine Insurance Policies:-

Major types of marine insurance policies are

1. Time policy

A time policy is taken for definite period of time, usually not exceeding 12 months say

from January 1, 1981 to December 31, 1981. This policy is most suitable for hull

insurance.

2. Voyage policy

Where the subject matter is insured for a specific voyage, say from Karachi to Port Saeed

it is named as voyage policy.

3. Mixed policy

This policy is the combination of time and voyage policy. It, therefore, covers the risks

for both particular voyage and for a stated period of time.

4. Floating policy

Floating policy is taken for a relatively large sum by the regular suppliers of goods. It

covers several shipments which are declared afterwards along with other particulars. This

policy is most situated to exporter in order to avoid trouble of taking out a separate policy

for every shipment.

5. Valued policy

Under its terms the agreed value of the subject matter of insurance is mentioned in the

policy itself. In case of cargo this value means the cost of goods plus freight and shipping

charges plus 10% to 15% margin for anticipated profit. The said value may be more than

the actual value of goods.

6. Unvalued policy (Open Policy)

Where the value of the subject matter of insurance is not declared but left to be

ascertained and proved later it is called unvalued policy.

7. Builder's risk policy

This policy is issued for more than one year. This covers the risk of damage to vessels

from the time its construction commences until its trail is completed.


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8. Blanket policy

Under the condition of the blanket policy the maximum limit of the required amount of

protection is estimated which is purchased in lump sum. The amount of premium is

usually paid in advance. This policy describes the nature of goods insured, specific route,

ports and places of the voyages and covers all the risk accordingly.

9. Port risk policy

This policy covers all the risk of a vessel while it is standing at a port for particular period

of time.

11. Special hazards policy

This policy covers special risks incident to piracy and war. It provides protection to

insured under agreement against seizure, capture, detention and other war risks.

12. Composite policy

This type of policy is purchased from more than one under writers. If there is no any

motive of fraud then insured will be indemnified by each under writer separately in case

of loss.

13. Block policy

This policy is particularly purchased to gold diggers. It covers all the risks of damage to

gold from the time of its recovery to its distinction. This types of policy has been

introduced in Africa and is very popular in the mine fields of gold.


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Breakage of goods in the process of their removal from the building where fire is raging

e.g. damage caused by throwing furniture out of window.

Wages paid to persons employed for extinguishing fire.

The types of losses not covered by a fire insurance policy are:-

Loss due to fire caused by earthquake, invasion, act of foreign enemy, hostilities or war,civil strife, riots, mutiny, martial law, military rising or rebellion or insurrection.

Loss caused by subterranean (underground) fire.

Loss caused by burning of property by order of any public authority.

Loss by theft during or after the occurrence of fire.

Loss or damage to property caused by its own fermentation or spontaneous combustion

e.g. exploding of a bomb due to an inherent defect in it.

Loss or damage by lightening or explosion is not covered unless these cause actualignition which spread into fire.

A claim for loss by fire must satisfy the following conditions:-

The loss must be caused by actual fire or ignition and not just by high temperature.

The proximate cause of loss should be fire.

The loss or damage must relate to subject matter of policy.

The ignition must be either of the goods or of the premises where goods are kept.

The fire must be accidental, not intentional. If the fire is caused through a malicious ordeliberate act of the insured or his agents, the insurer will not be liable for the loss.

Types of Fire Insurance Policies:-

Specific policy:- is a policy which covers the loss up to a specific amount which is lessthan the real value of the property. The actual value of the property is not taken into

consideration while determining the amount of indemnity. Such a policy is not subject to'average clause'. 'Average clause' is a clause by which the insured is called upon to bear a

portion of the loss himself. The main object of the clause is to check under-insurance, toencourage full insurance and to impress upon the property owners to get their property

accurately valued before insurance. If the insurer has inserted an average clause, thepolicy is known as "Average Policy".


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Comprehensive policy:- is also known as 'all in one' policy and covers risks like fire,

theft, burglary, third party risks, etc. It may also cover loss of profits during the period thebusiness remains closed due to fire.

Valued policy:- is a departure from the contract of indemnity. Under it the insured canrecover a fixed amount agreed to at the time the policy is taken. In the event of loss, only

the fixed amount is payable, irrespective of the actual amount of loss.

Floating policy:- is a policy which covers loss by fire caused to property belonging to the

same person but located at different places under a single sum and for one premium. Sucha policy might cover goods lying in two warehouses at two different locations. This

policy is always subject to 'average clause'.

Replacement or Re-instatement policy:- is a policy in which the insurer inserts a re-

instatement clause, whereby he undertakes to pay the cost of replacement of the property

damaged or destroyed by fire. Thus, he may re-instate or replace the property instead of payingcash. In such a policy, the insurer has to select one of the two alternatives, i.e. either to pay cash

or to replace the property, and afterwards he cannot change to the other option


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ENGINEERING INSURANCE

Contractors All Risk Policy

y Highlights

y Scope

y Add on covers

y Who can take the policy

y How to select the sum insured

y How to claim

y Period of Insurance

This policy is specially designed to give financial protection to the Civil Engineering Contractors

in the event of an accident to the civil engineering works under construction.

Highlights

This policy is specially designed to give financial protection to the Civil Engineering Contractors

in the event of an accident to the civil engineering works under construction.

In case the policy period exceeds 12 months, the premium can be paid in quarterly installments

with the first installment being more by 5% and the last installment being paid 6 months before

expiry of the policy.

Scope

The policy comprises of 2 Sections:

y Section I-Material Damage-covering physical loss, damage or destruction of the property

insured by any cause, other than those specifically excluded in the policy.

y Section II-Third Party Liability-covering the legal liability falling on the insured

contractor as a result of bodily injury or property damage belongingto a third party.


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The main exclusions under Section I for which no claim is payable, are loss or damage due

to:

y faulty design

y rectification of aesthetic defects of structure not relating to any physical loss or damage to

the structure due to any accident, or of material defector of workmanship defect.y The exclusion of defective material / workmanship is limited to the parts of the structure

immediately affected and does not apply to any consequential loss to correctly executed

items, arising out of the accident due to defective material or workmanship.

y loss or damage due to gradual deterioration, atmospheric condition, rusting etc.

y loss discovered only at the time of taking inventory.

y loss arising out of penalty for delay, non-fulfillment of terms of contract.

Add on covers

a) The policy can be extended to cover the following items :-

b) construction equipment like scaffolding, shuttering materials

c) construction equipment like scaffolding, shuttering materials

d) damage to surrounding property not forming part of the contract work.

e) maintenance visit / extended maintenance cover to cover accidental loss or damage whilst

carrying out any rectification during maintenance period and / or any amount incurred for

rectification of such original defects or faults during construction.

Who can take the policy

The policy can be taken by the principal, contractor or sub contractor, jointly or separately.

How to select the sum insured

The sum insured selected under section I should represent total contract value including the

estimated cost of labour charges and cost of materials but excluding profit. The cost of materials

supplied by the principal is to be declared separately.

In case of long term contracts, there is bound to be escalation in prices. The basic policy will pay

only as per the original cost and prices. However escalation clause can be opted for, under which

escalation upto 50%, can be selected to take care of such increase in prices.

The sum insured under section II should represent the per accident limit (the maximum legal

liability that may fall on the insured as a result of an accident in the insured's site). The limit per


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policy period should be fixed taking into account the maximum number of such accidents which

can reasonably be expected to occur.

How to claim

In the event of any loss or damage giving rise to a claim under the policy, the following steps

should be taken:-

y Take necessary steps to minimize the loss.

y Inform insurance company immediately.

y Extend full cooperation to the surveyor deputed by the company.

y Submit duly filled in claim form along with necessary documents to substantiate the

financial loss suffered as a result of the accident.

Period ofInsurance

Unlike other policies where the period of insurance is one year, in this policy the period of

insurance should be equivalent to the period of contract, commencing from the date of unloading

of the first batch of material at the site of construction and expiring on the date of handing over

of the contract work to the principal.

Although it is possible to extend the policy period in case of delay in completion of contract, it is

always advisable to choose a slightly longer period of insurance initially, to avoid paying the

higher extension premium.


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ERECTION ALL RISK POLICY

This policy is suitable for the principal or contractors of a project being erected. This is vital as

the project is exposed to various external risks such as earthquakes or floods during theconstruction / erection period. Moreover, damage to plant and machinery and the supporting

structures due to accidents, causes financial loss apart from delay in implementation of the

project.

Loss, damage or destruction of property insured by any cause, other than those specifically

excluded here under.

Plan coverage

This policy is typical all risk insurance for storage, assembly/erection, testing and

commissioning of the following types of activities. Unless specifically excluded, it provides

comprehensive cover for:

Setting up a new project/individual machines

Expansion of an existing project

Dismantling and re-erection of an existing facility

The interests of suppliers, manufacturers, contractors as well as subcontractors can be

included in the policy.

Cover begins from the time of unloading of the first consignment at the project site and

terminates on completion of testing or handing over of the project to the principal, or the

period chosen, whichever is earlier.

Extension

The policy can be extended on payment of an additional premium to cover:

Earthquake

Act of terrorism

Escalation

Limited maintenance cover

Extended maintenance cover

Clearance and removal of debris

Damage to owners surrounding property

Third party liability

Cross liability

Additional customs duty


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Express freight, holiday and overtime rates of wages

Contractors plant and machinery

Sum insured

The Sum Insured is the completely erected value of the plant and machinery, inclusive of freight,

customs duty and cost of erection.

Premium

The premium under this policy depends on the type of activity, Sum Insured, duration of the

project, period of testing and voluntary excess opted for by the Insured. The premium can be

paid in installments, when the policy period is more than 12 months.

Excess

The policy has the following types of excess:

Excess due to normal perils

Excess during testing activity

Excess for Act of God perils like earthquake, flood, storm, etc.

Excess due to fire and explosion perils

Excess due for terrorist acts, if terrorism cover is opted for

Exclusions

Loss or damage due to faulty design, defective material or casting, and/or bad

workmanship

Manufacturing defects

Loss or damage due to willful act or willful negligence of the insured or of his

representative

Consequential loss

War and allied perils

Nuclear perils Normal wear and tear, gradual deterioration due to atmospheric condition, rust,

scratching of polished surfaces, breakage of glass


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y Industrial Insurance

y Business Insurance Services

y Industrial All Risks Policy

y Wide and comprehensive cover for the large sized business where the assets at all locations of

the insured exceeds Rs.100 Crores.It is an All Risks Policy covering a wide range of perils such as fire and allied perils, burglary,

accidental damage, breakdown as well as business interruption.It also has an optional Machinery Breakdown Loss of Profits Cover.

y Standard Cover

y Section I: Material Damage - It covers accidental physical loss or damage (including machinery

breakdown) to the property insured due to any cause other than those excluded.

Section II: Business Interruption- It covers loss due to business interruption following a Physical

loss or damage to the property covered and the same is admissible, under material damagesection of the policy Loss of Profits arising out of machinery breakdown is optional.

y Salient features

y - Quick and expert risk inspections where required.- Expert Risk Control Programmed by our Risk Engineers on all aspects of safety and

Loss Prevention/ Minimization- Availability of various optional covers

- Rating based on individual risk features including claims experience and fire protectionsystems availability

- Superior claim service


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MISCELLANEOUS INSURANCE

Miscellaneous Insurance exists to help people gain a good understanding of the various

kinds of insurance coverage's that are available to people today. Insurance has become a veryimportant part of many people's lives as they realize the need to provide protection for different

areas of their everyday life. There is a wide variety of types of insurance coverage available

today.

The dictionary defines insurance as "coverage by contract whereby one party undertakes to

indemnify or guarantee another against loss by a specified contingency or peril". This means that

an individual enters into an agreement with an insurance company that will pay a set amount of

money in case of a loss in a specified area. There are a number of inclusions and exclusions

involved in each insurance policy with all kinds of variables that must be taken into

consideration before purchasing the policy.

One of the most important things to remember is that an insurance policy is a contract between

the insurance company and their customer. The insurance company agrees to pay certain

amounts of money in case of loss and the customer agrees to pay the insurance premiums that are

required to keep the policy in place. If the customer fails to pay the premiums due, the insurance

may be revoked, leaving the customer vulnerable.

The contract specifically makes the insurance company liable to pay for any loss that is

specifically stated in the insurance policy. Most policies will accurately describe the types of

losses covered and the amount of money that the company will pay for those losses.

With the increase in public awareness and the consequent thrust of the Insurance Industry in the

areas of Health Insurance, Liability Insurance and other personal lines of insurances, the

miscellaneous portfolio of Insurance is poised to be a sunrise portfolio of General Insurance.

Glass Insurance Personal Accident Insurance

Money Insurance Golfer Insurance

Burglary Insurance General Public Legal Liability Insurance

Electronic Equipment Insurance Contract Works Insurance

Workmen Compensation Insurance Fidelity Guarantee Insurance

Machinery Insurance Aviation Insurance

Travel Accident Insurance All Risks Insurance

Boat Insurance


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General insurance : QUESTIONS and ANSWERS

What is insurance?

We face a lot of risks in our daily lives. Some of these lead to financial losses. Insurance is a wayof protecting against these financial losses. For a payment (premium), an insurance company will

take the responsibility of compensating your financial losses.

What is general insurance?

Insuring anything other than human life is called general insurance. Examples are insuringproperty like house and belongings against fire and theft or vehicles against accidental damage or

theft. Injury due to accident or hospitalization for illness and surgery can also be insured. Yourliabilities to others arising out of the law can also be insured and is compulsory in some cases

like motor third party insurance.

Why should one insure?

One of the main reasons one should insure is to protect ones belongings and assets against

financial loss. When one has earned and accumulated property, protecting it is prudent. The lawalso requires us to be insured against some liabilities. That is, in case we should cause a loss toanother person, that person is entitled to compensation. To ensure that we can afford to pay that

compensation, the law requires us to buy liability insurance so that the responsibility of payingthe compensation is transferred to an insurance company.

Who should buy general insurance?

Anyone who owns an asset can buy insurance to protect it against losses due to fire or theft and

so on. Each one of us can insure our and our dependents health and well being throughhospitalization and personal accident policies. To buy a policy the person should be the one who

will bear financial losses if they occur. This is called insurable interest.

What kinds of policies are there?

Most general insurance policies are annual that is, they last for one year. Some policies aregiven for longer periods like fire insurance for residences and some for shorter periods like

insurance for goods transportation or for emergency medical treatment during foreign travel.


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How much should I insure for?

The amount you insure for is called the sum assured. Normally a policy should cover the value ofthe asset either the market value while insuring, or the cost of replacing the asset should it be

lost or destroyed. The premium will depend on the sum assured.

Can I take two policies and get claims under both of them?

In case of an indemnity cover (one that seeks to compensate the actual loss )--for instance, apolicy that covers property, if there are two policies in vogue, the loss shall be shared by both

the policies. In no case can an insured get more than the actual pecuniary loss he or she hasincurred. On the other hand, in respect of benefit policies like the Personal Accident policy,

where a fixed compensation is paid, no matter what the actual loss is , one may obtain more thanone policy.

On what basis is claim paid?

In indemnity policies, the upper limit of a claim is the sum assured and this usually applies for

the period of the policy. Certain policies, however, allow for reinstatement of the Sum Insured bypayment of proportionate premium for the remaining period of the policy. The actual claim will

be the actual extent of financial loss as validated by documents like bills. If the property isunderinsured, the insured shall bear a ratable proportion of the loss. There can be more than one

claim in the policy period but the sum assured is usually the limit for the policy period unlessreinstated.

Nowadays health insurance policies which cover hospitalization costs have also a cashless

settlement of claims. That is, you dont have to pay for the treatment at the hospital and thenmake a claim for reimbursement of the expenses. The insurance company has a service provider

called the third party administrator (TPA) health services, who liaises with the hospitals anddirectly makes the payment for your treatment as per the terms of your policy and coverage.

What is the periodicity of premium payments?

Most general insurance policies are annual and the premium payment is in advance. No risk

commences unless you have paid the premium. In some long term policies companies have thefacility of collecting premiums periodically.

Why do different people have different premiums?

The premium is calculated on the extent and nature of the cover you want. A higher sum insured

means a higher rate of premium. Similarly a higher risk will be charged a higher premium. Anexample of this is that an older person will have to pay a higher premium for health insurance for

the same sum insured. Sometimes the risk is higher depending on the location of risks forexample in motor insurance in areas where accidents are higher. So the premium will vary

according to the nature and severity of the risk.


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If I buy a policy and dont make a claim, it is a loss. So, why should I buy insurance?General insurance is not meant to be for savings or investment returns. It is meant for protection.

What you pay for is the protection against a risk. To approach it as something from which returnsshould be obtained is not the correct approach as there is a price to pay for protecting a property

worth lakhs for a few hundred rupees.

If there are problems with claims what can I do?

First you should write to the company and give them sufficient time to respond suitably. If theydont respond, or it is not a response satisfactory to you, then you can approach the appropriate

judicial channel. For complaints relating to personal insurance covers upto a value of Rs.20 lakh,you may approach the Insurance Ombudsman in your area.


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1. Introduction to Underwriting

Underwriting, in board sense, means transaction of insurance. Hence, insurers are commonly

referred to as underwriters. However, underwriting, in a technical sense, comprises the following

Assessment of hazard and evaluation of risk. Formulation of policy coverages and terms and conditions.

Fixing of rates of premium.

Determination of limits of retention for insurers own account and arranging reinsurance

for the balance amount.ing

The ultimate objectives of underwriting are to earn a reasonable profit on insurance operations.

This is sought to be achieved through a large volume of premium, spread over different classes

of insurance e.g., fire, marine, miscellaneous etc. and different geographical areas. In insurance

languages this is called balanced portfolio .This facilities the application of the law of average or

the theory of large numbers.

Profit is also ensured through proper selection of business through risk assessment including risk

inspection, wherever necessary. This traditional approach to underwriting has acquired new

dimensions through IRDA intervention. These dimensions are reflected in the file and useguidelines for insurance products issued under section 14(2) (i) of IRDA Act, 1999.No general

insurance product may be sold to any person unless the requirements of the guidelines are

complied with respect of that product.


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2. Underwriting Policy

Filing of products will be accepted by IRDA only after the insurer has filed the underwritingpolicy as approved by the Board of Directors of the insurer.

The underwriting policy placed before the board shall cover important aspects such as:

A) The underwriting approach of the company in the matter of expectation of

underwriting profit.

B) The margins that will be built into the rates of premium to cover acquisition costs,

promotional expenses, expenses of management, catastrophe reserve and profit

margin and the credit that will be taken for investment income in the design of rates,terms and conditions of cover, and how they will be modified based on the actual

operating ratios of the insurer.

C) The list of products that will fall into each of the sub-categories, as provided in the

guidelines.

For this purpose, the Products are classified into two broad classifications, namely

class rated products and individually rated products. These are further classified into

the following 5 sub categories.

A) Class Rated Products

i. Internal Tariff Rated Products: These are standard products that can be sold by any of the

officers of the insurer with the rates, terms and conditions of cover, including choice of

deductible where applicable, as set out in an internal guide tariff of the insurers.

Examples are: Fire insurance with certain sum insured or category of risk limitations,

motor insurance (other than fleets), Personal Accident Insurance (other than groups),

health insurance (other than groups), burglary insurance, fidelity insurance and so on.

ii. Packaged or Customized Products: these are products specially designed for an individual

client or class of clients, in terms of scope of cover, basis of insurance, deductibles, rates

and terms

and conditions of cover etc.


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B. Individually rated products

iii. Individual experience rated products: These are products where the rates, terms and

conditions of cover are determined by reference to the requirements of and the actualclaims experience of the insured concerned. These will typically be insurances with a

high frequency but low intensity of loss occurrence.

Examples are: Cargo insurance, Group P.A or health, Motor fleets, Hull insurance and so

on.

iv. Exposure rated products: These are products where the rates, terms and conditions of

cover are determined by an evaluation of the exposure to loss in respect of the risk

concerned, independent of the actual claims experience of that risk.

Examples are: Earthquake risk, public liability insurance for high hazard occupancies and

so on.

v. Insurance of large risks: For the purpose of these guidelines, large risks are:

y Insurances for total sum insured of Rs.2500 crores or more at one location for

property insurance, material damage and business interruption combined;

y RS 100 Crores or more per event for liability insurances.

These are typically insurances that are designed for individual large clients and where the

rates, terms, terms and conditions of cover may be determined by reference to the

international markets

The delegation of authority to various levels of management for quoting rates and terms and for

underwriting. In particular, the board should appoint the Appointed Actuary or Financial Adviser

or the Chief Financial Officer or any other top management executive who does not have any

responsibility for business development to act as the moderator of rates and terms that are quoted

on individually rated risk.

The role and extent of involvement of the appointed actuary in review of statistics to determine

rates, terms and conditions of cover in respect of internal tariff rated risks and products designed

for a class of clients. The internal audit machinery that will be put in place for ensuring quality in

underwriting and compliance with the corporate underwriting policy. The procedure for

reporting to the board on the performance of the management in underwriting the business

including the forms and frequency of such report


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3. Filing of productsIRDAs file and use guidelines stipulate the following requirements for filing productsfor approval.

a. Design and rating of products must always be on sound and prudent underwriting

basis. The e contingencies insured under the product should clear and provide

transparent cover which is of value to the insured.

b. All literature relating to the product should be in simple language and easily

understandable to the public at large. As far as possible, a similar sequence of

presentation may be followed .all technical terms should be clarified in simple

language for the benefit of insured.

c. The insurance product should comply with all the requirements of the protection

of policy holders; interests regulations, 2002.

d. The pricing of products should be based on data and with technical justification

(e.g. adequate statistical information on the claims experience).

e. The terms and conditions of cover shall be fair between the insurer and the

insured .for example, the conditions and warrantees should be reasonable and

capable of compliance. exclusions should not limit cover to an extent that the

value of insurance is lost. The cover provided should be of value to the policy

holder and should offer needed protection. The policy holder should e does not be

forced to buy covers that he does not need as a pre condition of being granted

cover that he needs.

f. The time allowed for reporting of claims should be reasonable. The policy bearer

should not be required to do things that are onerous after a claim to maintain hiseligibility for protection nor should the policy hold be prevented from resuming

his business expeditiously by the claims process

Role of Actuary:


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The appointed actuary, in consultation with the underwriters of the insurer, shall determine the

requirements for compilation and analysis of data of sums insured premiums and claims at the

stage of product design itself and ensures that such data is captured at the stage of effecting

insurance, on claims intimation and on all claims payments.

Analysis of data referred to in previous Para above should enable reviews of rates, loadings and

discounts for every rating factor used in the determination of premium rates. While filing the

product a certificate by the Approval Actuary should accompany every product stating the rating

factors for which data will be captured and that adequate capacities and capabilities have been

put in place for collection and analysis of such data.

Documents to Be Filed

The documents to be filed in respect of every nee product or revision of an existing product

in respect of products classified as class rated products above shall be among others

1. Statement filing particulars of the product in form A;

2. Copies of prospectus and other sales literature relating to the product;

3. Copy of proposal form;

4. Copy of policy form and copies of the standard endorsements to be used with the

policy; one should look for simple easy to understand language. The conditions

applicable to the policy holder should be clearly set out and he should be told of the

claims registration and qualification procedures. There should also be information onthe disputes resolution procedures. And

5. Copy of the underwriters manual in respect of the product along with the list of

declined risks, if any.

Particulars in form A relate to, among other things, the following

Full details of the product

Coverage, exclusions, special features, if any

Delegated authority for underwriting and claims

Rates and terms basis of rating, etc.

Certificate by principal officer or designated officer

Certificate by appointed actuary

Certificate by Lawyer


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Certificate by Principal Officer or Designated Officer

This is to confirm that;

1. The rates terms and conditions of the above mentioned product filed with this certificate

have been determined in compliance with the IRDA Act, 1999. Insurance Act, 1938, and

the regulations and guidelines issued there under, including the file and use guidelines.

2. The prospectus, sales literature, policy and endorsement documents, and the rates, terms

and conditions of the product have been prepared on a technically sound basis and on

terms that are fair between the insurer and the client and are set out in language that is

clear and unambiguous.

3. These documents are also fully in compliance with the underwriting and rating policy

approved by the board of directors of the insurer.

4. The statement made in the filing form A are true and correct.

5. The requirements of the revised file and use guidelines have been fully complied with in

respect of this product.

Date:

Place:

Signature of Principal Officer or Designated

Officer:

Name and Designation:


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Certificate by Appointed Actuary

This is to confirm that:

1. I have carefully studied the requirements of the file and use guidelines in relation to the

design and rating of insurance products.

2. The rates, terms and conditions of the above mentioned product are determined on a

technically sound basis and are sustainable on the basis of information and claims

experience available in the records of the insurer.

3. An adequate system has been put in place for collection of data on premiums and claimsbased on every rating factor that will enable review of the rates and terms of cover from

time to time. It is planned o review the rates, terms and conditions of cover based on

emerging experience (enter periodicity of review).

4. The requirement of the revised file and use guidelines have been fully complied with in

respect of this product.

Date:

Place:

Signature of Appointed Actuary:

Name and Designation:


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Certificate by the Lawyer of the Insurer

This is to confirm that:

(a) I have carefully studied the prospectus, sales literature, policy wordings and endorsement

wordings relating to the above mentioned product in the light of the IRDA (protection of

policyholders interests) Regulations 2002, and the file and use guidelines.

(b)The above mentioned documents are written in clear unambiguous language, and

properly explain the nature and scope of cover, the expectations and limitations, the

duties and obligations of the insured and the effect of non-disclosure of material facts.

(c)These documents are in compliance with the policy holders protection Regulations and

Insurance Advertisements and disclosure Regulations.

Date:

Place:

Signature of Lawyer:

Name and address:

Every insurer shall constitute a technical audit department that will be charged with the responsibility to

ensure that all underwriting is done in compliance with these guidelines. Such audit should be done at

least once every quarter during the year 2007. The reports of the technical Audit shall be placed before

the board of directors.


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Compliance Officer

Each insurer shall appoint a senior official as compliance officer to ensure compliance with the

requirements of the guidelines by the insurer. The compliance officer shall not be an officer who is also

holding responsibility for underwriting.

The compliance officer shall be responsible, inter alia, to monitor the business activities of the

insurer and ensure that all products being sold by insurer are in compliance with the underwriting

policy as approved by the board and also with these guidelines;

Where a risk is co-insured, the primary responsibility to comply with these guidelines will rest

with the leading co-insurer. However, all other co-insurers will remain responsible to satisfy

themselves by enquiry that the guidelines have been complied with.


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4. Underwriting practiceAt the operating level, underwriting process involves assessment of physical and moral hazards.

The term hazard in insurance language refers to those conditions or features or characteristicswhich create or increase the chance off loss arising from a given peril. A thorough knowledge of

various hazards to which property and persons are exposed is most essential for successfulunderwriting.

Hazards can be classified into physical and moral .physical hazards refers to the risk arising

from material features of the subject matter of insurance, whereas moral hazard may arise from

human weakness ( e.g. Dishonesty, carelessness, etc.) or from general economic and social

conditions .

Physical Hazard

Physical hazard can be assessed from their information given in a proposal form. It can be better

ascertained by a survey or inspection of the risk. The following are some examples of physical hazard in

various classes of insurance.

Fire

Construction: Construction refers to the building materials used in walls and roof. A concrete

building is superior to a timber building.

The height: The greater the number of storeys,

Nature of flooring: wooden floors add fuel to fire. Besides, wooden floors collapse easily in the

event of fire, causing damage to property on lower floors through falling machinery of goods

from upper floors.

Occupancy:

The occupancy of a building is the purpose for which it is used. Three types of hazards arise

from occupancy. Buildings in which chemicals are produced or used in large quantity involve a


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considerable ignition hazard .A timber yard presents a high combustibility hazard because once

a fire starts, timber burns quickly .The contents may be highly susceptible to damage in the event

of fire. For , example, paper, clothing etc. are the event of fire. For, example, paper, clothing etc.

are susceptible not only to fire damage but also to damage by water, heat etc.

The process of manufacture:

The process of manufacture involving the use of electricity increase in the risk of fire. If work is

carried during the night; the hazard is increased due to the use of artificial lights, continuous use

of machinery leading to friction and the likely carelessness of workers due to fatigue.

Situation:

The location in a congested area, exposure to more hazardous adjacent premises, and distance

from the fire brigade is examples of location physical hazard.

Marine

a) The age and condition of vessel: Older vessels are inferior risks

b) The voyage to be undertaken,i.e.the route of the voyage, loading and unloading

conditions and warehousing facilities at the ports are factors affecting physical hazard

c) The nature of the stocks. Articles of high value are exposed to theft: machinery is liable

to breakage in transit.

d) The method of packing. Cargo packed in bales is considered to be better than cargo in

bags.

e) Again, double bags are safer than single bags. Liquid cargo in secondhand drumsconstitute bad physical hazard.

Miscellaneous

a) Motor

i) The age and condition of the vehicle: Older vehicles are more prone to accidents

ii) The type of vehicle: sports cars involve greater physical hazard etc.

b) Burglary

i) The nature of the stocks: Articles of high value in small bulk(e.g.Jewellery )andeasily disposable are considered to be bad risks.

ii) Situation: Ground floor risks are inferior to upper floor risks: private dwellings

situated in isolated areas are hazardous.

iii) Constructional Hazard: Too many doors and windows constitute bad physical hazard.

c) Personal Accident


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i) The age of the person: Very old persons are accident prone; besides they will take

longer to recover in the event of an accident.

ii) Nature of occupation: Jockeys, mining engineers, manual workers are examples of bad

physical hazard.

iii) Health and physical condition: A person suffering from diabetes may not respond to

surgical treatment in the event of accidental bodily injury,

c) Fidelity Guarantee

i) Accounting and control systems

ii)

iii) The methods of check and supervision

The above examples indicate the variety of physical hazards involved in insurance

underwriting as well as that each class of business has its own special hazards.

Moral Hazard

Moral Hazard arises from individual moral weakness or from general social and economic

conditions. It is intangible unlike physical hazard and therefore, more difficult to ascertain.

Neverthless, insurers Endeavour, on the basis of their experience, to estimate moral hazard from

the details given in the proposal form, inspection report or other enquiries made by them from

their general knowledge of the prevailing conditions.

Moral hazard could arise in the following ways:

a) Dishonesty: An extreme example of bad moral hazard is that arising from an insured taking

insurance with the deliberate intention of creating or making a loss to collect a claim. Even, an

honest insured may be tempted to stage a loss, if he happens to be in financial difficulties.

b) Carelessness: Indifference towards loss is an example. Because of the existence of insurance,

the insured may tend to adopt a careless attitude towards the insured property. If the insured does

not tame the same care of the property as a prudent and reasonable man would if he were

uninsured the moral hazard is unsatisfactory.

c) Poor maintenance of motor vehicles: Poor housekeeping in manufacturing risks, laxity in

control and supervision in fidelity risks are examples of bad moral hazard.


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d) Difficult Insured: This kind of moral hazard arises when claims occur. An insured may boot

deliberately bring about a loss but once a loss occurs, he would attempt to demand unreasonable

high amount of compensation, in total disregard of the principle of indemnity. Examples of such

moral hazard arise in personal accident insurance, where the claimant would tent to prolong his

period of disablement in order to obtain more benefits of insurance than is justified by the nature

of injury.

e) In motor claims: such a hazard would arise when the insured unreasonably insists on

replacement of new parts whereas the damage could be satisfactorily repaired or attempts to

carry out certain repairs or replacements which not related to accidental damage.

f) Industrial relations: Employer-employee relationship may an element of bad moral hazard.

Labor unrest, which leads to carelessness, malicious damage and even to acts of arson and

sabotage.

g) Generic economic conditions: During times of economic depression, insured owners of

property would be tempted to cause deliberate losses in order to realize the cash value of their

property. Conditions of unemployment would result in an increase of burglaries. Similarly,

during times of war , scarcity of certain types of goods would lead to increased number of thefts.

.


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5. Underwriting of physical hazard

A proposal involving bad physical hazard is dealt with in a Varity of ways. There are degrees

and types of physical hazard and the existence of bad physical hazard does not render the risk

uninsurable.

Insurers recommend measures to improve the risk i.e. to reduce the possibility of loss or damage

occurring or liability arising from the hazard. In fire insurance, installation of sprinklers and fire

measures suggested include segregation of hazardous processes and construction of perfect party

walls to provide effective fire breaks. In burglary insurance, improvements are affected by the

fitting of additional locks and bolts. In fidelity guarantee insurance, insurers would suggest a

better method of supervision of accounts or a system of audit which would render defalcations

more difficult.

Imposition ofWarranties

Insurers incorporate appropriate warranties to reduce the physical hazard. In marine cargo

insurance a warranty is inserted to the effect that goods are packed in tin-lined cases. In burglary

insurance, it is warranted that the property is guarded by a watchman for twenty four hours.

Incorporation of Clauses

Machinery is especially susceptible to breakage. Even a small breakage may lead the insured to

claim a constructive total loss on the grounds that the machine is useless. Therefore, marinecargo policies on machinery are issued with the Replacement Clause. This clause limits

underwriters liability only to the cost of replacing, forwarding and refitting any broken part.

Marine policies on cast pipes, hardboard etc. are subject to the clause, attainting that the

damaged portion should be cut off and the balance utilized and on tinned and bottled goods have


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the clause which excludes damage to labels unless the goods are themselves damaged at the

same time.

Many a time marine insurance for inland transit is demanded on goods imported from abroad. Itis quite possible that loss or damage on such goods may have already occurred during the ocean

voyage but may not be apparent on external examination. In such cases, risk is accepted subject

to an inspection of the goods.

Loading of Premium

Normal rate of premium is charged if the cargo is shipped by liners other vessels which comply

with the prescribed standards. If the cargo is shipped by an over sagged or under-tonnage vessel

then extra premium is charged. In personal accident insurance if the insured is engaged in

hazardous pursuits like mountaineering, racing on wheels, big game hunting etc. extra premium

is charged.

Restriction of Cover

A proposal for an old motor vehicle may be accepted on comprehensive terms but insurers may

offer a restricted cover e.e.against third party risks. A personal accident proposer who has

crossed the maximum acceptable age limit may be covered for death risk only instead of on

comprehensive terms i/e/including disablement benefits.

Imposition of Excess /Franchise Limits

The meaning of and difference between excess (or deductible) and franchise limits may be

illustrated as follows:-

Excess limit Rs.500 Franchise limit Rs.500

Amount of loss Rs.490 Claim payable Nil Nil

Amount of loss of Rs.550 Claim payable Rs.50 Rs.550


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When the loss amount exceeds the limit, the full amount is paid under franchise clause and

only the balance is paid under excess clause. Loss below the limit is not payable in either case.

In practice, franchise is rarely used.

The object of these clauses is to eliminate small claims. As the insured is made to pay part of a

loss, he is encouraged to exercise more care and to practice loss prevention, Proposals for

imported motor vehicles are accepted subject to an excess. If goods in the open are covered

under a burglary policy then an excess is imposed to eliminate small unexplained losses.

(Note: Some polices may have a compulsory excess. Voluntary excess is also provided under

different policies. A discount in the premium is granted)

If the physical hazard involved is considerably bad, the risk becomes uninsurable and is declined.

Based on their past loss experience, knowledge of hazards and overall underwriting policy,

insurers have formulated a list of risks to be declined in each class of insurance. After all, the

insurance business has to be conducted along business principles and insurers cannot accept

risks where the loss potential is predominantly high.

Nevertheless, the number of risks actually declined is very small. Insurers Endeavour to accept

these risks by treating the proposals in any of the ways described above either singly or in

combination. Such acceptances are called accommodation acceptances.


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6. Underwriting of Moral Hazard

Moral Hazard cannot be assessed in the same way as physical hazard and the underwriting

techniques described above cannot really take care of moral hazard. Usually nothing can be done

to improve a bad moral hazard and the risk simply becomes insurable. However, moral hazard

arising out of carelessness can be dealt with, for example, by imposition of excess (motor

insurance), restrictive warranties (

watchman for burglary risks), etc.

Acceptance of Risks Subject to Underwriting Safeguards

Certain risks are allowed to be accepted by the operating offices provided certain underwriting

measures are taken. The underwriting instructions specify the types of risks which may be

accepted by the operating offices if they are satisfied about the moral of the proposer, previous

loss experience etc.

In motor insurance, acceptance of comprehensive risks is subject to the specified year of

manufacture of the vehicle. This specification varies s from once class of vehicle to another.

Older vehicles may be accepted subject to inspection of the vehicle and imposition of excess.

Certain types of vehicles may be covered under liability only policy. If a burglary proposal

involves large sum insured, the acceptance is subject to a satisfactory survey report.

. In marine insurance, certain acceptances are subject to imposition of exclusions.

Examples are:

- Asbestos cement pipes and sheets (breakage is excluded).

- Refrigerators and air conditions (risk of denting and scratching are excluded).

-

Cargo in papers bags(tearing and bursting of bags is excluded).- Glass (breakage, scratching and chipping and denting is excluded).

- Machinery (second hand)(breakage is excluded).

- Oil in second hand drums (leakage and contamination is excluded).

- Motor spare parts, ball bearing (theft, pilferage and non-delivery is excluded).

- Watches (TPND and breakage is excluded).


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In marine insurance, the cargo carrying vessel is an important underwriting factor. Whereas normal rates

are charged for cargo carried on vessels which conform to prescribed standards(e.g. liner vessels not over

certain years old), extra rates are charged if the vessel is over certain years of age (overage) or the tonnage

is below the prescribed limit (under-tonnage).

Declined Risks

Certain risks are regarded as extra-hazardous and are normally, to be declined. Hence, it is

common to refer to these risks as Declined Risks. Nevertheless, some of these risks are accepted

subject to fixing of appropriate rate of premium and imposing restrictive conditions, clauses and

warranties in the policies. Acceptance of such risk is called accommodation. (insurers practice

varies)

Some examples of such risks in different classes of business are:

Fire:

- Camphor boiling works

- Explosive factories

- Fire wood/bamboos in the open

- Fireworks factories

- Match factories and matches in transit

Marine

- Bullion , Gold currency notes over specified limits

- Salt, Bulk cargo on terms wider than I.C.C(C).

- Second hand machinery against breakage

- Oil in second hand drums against leakage and contamination

Miscellaneous

i) Burglary-jeweler, dealers in precious stones, curios and antique, gold and silver

smithsii) Cash in-transit-proposals involving large carrying of cash without adequate escort

arrangement

RISK INSPECTION


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Although the proposal form and other related correspondence is sufficient for acceptance is

sufficient for acceptance and rating of risk in a majority of cases, pre acceptance risk inspection

is considered necessary for various underwriting purposes. Risk inspection is common in fire,

burglary, public and products liability, engineering and sometimes in marine insurance also.

Risk inspection is conducted where the sum insured is large or complicated features of physical

hazard are involved. Risk inspection is conducted by engineers or of the companies depending

upon circumstances.

Risk Inspection provides:

A complete picture of the risk of deciding the rates of premium for drafting the policy and

incorporating warranties. It is also useful for fixing retentions for reinsurances purposes and for

suggesting measures for risk improvement so that premium rates may be reduced and loss

prevention promoted.

Some examples of risk inspection are mentioned below:

-Inspection of fire extinguishing appliances systems and electrical installation in Industrial risks

for approval of discounts in premium.

- Industrial risk where sum insured is large

-Petrochemical risk.

-Risks eligible for Industrial All Risks Policy.

Engineering Insurance

-Projects insurance; erection all risks, marine cum erection and contractors all risks

-Machinery breakdown and contractors plant and equipment insurance.

-Electronic equipment insurances.

(Note: Inspection is not always a onetime exercise. It is also conducted periodically during the

course of the project (e.g. marine) sum erection policy) or at renewal).


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Public and Products Liability

A) Public liability insurance for industrial and storage risks where limits of indemnity

exceed the prescribed figure.

B) Products liability insurance for

a) Exports to U.S.A. and Canada irrespective o f limit of indemnityb) Exports to other countries where the limit of indemnity exceeds a prescribed figure.

c) Domestic sales where the limit of indemnity exceeds a prescribed figure.

Burglary Insurance (Business Premises)

- Inspection of extra hazardous risks such as Jewelers premises, god owns storing high

value property e.g. copper etc.

Marine Cargo Insurance

Where inland transit insurance is required on cargo which is insured by the supplier up to the

port in India, this inspection is required to determine whether the cargo has already suffered

damage during the Ocean Voyage.


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7. Re-Insurance

Fixing retention of risk for own account and arranging reinsurance for the balance of risk is an

integral part of underwriting process.

Reinsurance is insurance of insured risk. The original insurance company, known as the ceding

company or the reinsured, retains a portion of the risk and cedes balance to re-insurers.

Reinsurance (i) creates a better spread of the risk,(ii)increases the capacity of the insurance

company to write the business and (iii)protects the insurance company from the impact of a very

heavy loss.

Re-Insurer could be a company which is involved exclusively in reinsurance business only or it

could be the insurance companies who do direct business also. In India G.I.C. (General Insurance

Corporation) is the entity involved only in reinsurance. Whereas the insurance companies which

operate in India either in public sector or private sector, conduct bother direct business as well as

reinsurance. Reinsurance placements are generally through the reinsurance brokers, especially

when the placement is abroad.

There are two main methods of reinsurance placement; facultative and treaty.

a) Facultative

Under this method the risk, a portion thereof is offered to the prospective re insurers, on case to

case basis. The re insurers use their faculties to decide about the acceptance or otherwise. There

is no obligation on the part of the either side, to offer or to accept.

The Insurer may have to approach various re insurers to off-load the load. Some may accept and

some may not. The acceptance could sometimes be with modified terms being introduced. Like

increase in premium rate, higher deductible, exclusion of cover, say, terrorism. Thus the whole

process of placement becomes time consuming, laborious, cumbersome and also expensive.

b) Treaty

This is a standing arrangement/agreement valid generally for one year, to be renewed with or

without modifications. Here, usually there is an obligation to cede and accept those risks which

come under the treaty provisions. These are often called as blind treaties, because there is no


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need to give details of ach risk that is reinsured. The settlement is usually done on quarterly basis

through the accounting settlement.

Treaties can be classified into following types

a) Proportional treaty

i) Quota Share

ii) Surplus

iii) Pool

b) Non proportional treaty

i) Excess of loss(X/L treaty)

ii) Stop loss.

Proportional Treaty: Under this type claims are shared in proportion to the share of premium.

Quota Share

In this case a specific predetermined percentage of each risk is placed in treaty, irrespective of

l & t project rep

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