Economics of Insurance - Block - 2

PGEC S4 02
Exam Code: ECOI
Economics of Insurance
SEMESTER-IV
ECONOMICS
BLOCK- 2
KRISHNA KANTA HANDIQUI STATE OPEN UNIVERSITY

Subject Experts
1. Professor Madhurjya Prasad Bezbaruah,
Dept. of Economics, Gauhati University
2. Professor Nissar Ahmed Barua, Dept. of Economics, Gauhati University
3. Dr. Gautam Mazumdar, Dept. of Economics, Cotton University
Course Coordinator : Parag Dutta, KKHSOU
SLM Preparation Team

UNITS CONTRIBUTORS
8,9 Dr. Ajoy Mitra, Assistant Professor, Dispur College.
10 Mr. Harjyoti Kalita, Assistant Professor, K C Das Commerce College.
11 Dr. Ajay Kumar Deka, Assistant Professor, Dispur College.
12 Aparajita Neog, Reserach Scholar, Gauhati University.
Dr. Tilak Ch Das, Assistant Professor, Gauhati University.
13 Dr. Jyotish Goswami, Assistant Professor, Dispur College.
14 Dr. Mathur Barman, Assistant Professor, Dispur College.
Editorial Team
Content : Dr. Tilak Chandra Das, Assistant Professor, Gauhati University
(Unit 8,9,11,14)
Dr. Devajit Goswami, KKHSOU (Unit 10,13)
Dr. Parag Dutta, KKHSOU (Unit 12)
Language : Mrs. Dola Borkataki, KKHSOU (Unit 12)
Dr. Parag Dutta, KKHSOU (Unit 7,8,9,10,11),12 & 14 )
Structure, Format & Graphics : Dr. Parag Dutta, KKHSOU
August 2021
ISBN: 978-93-91026-55-4
This Self Learning Material (SLM) of the Krishna Kanta Handiqui State Open University
is made available under a Creative Commons Attribution-Non Commercial-Share Alike 4.0 License
(international): http://creativecommons.org/licenses/by-nc-sa/4.0/
Printed and published by Registrar on behalf of the Krishna Kanta Handiqui State Open
University
Headquarter : Patgaon, Rani Gate, Guwahati - 781017
City Office : Resham Nagar, Khanapara, Guwahati-781022; Website: www.kkhsou.in
The University acknowledges with thanks the financial support provided by the
Distance Education Bureau, UGC for the preparation of this study material.
CONTENTS
Pages
UNIT 8: Essentials of Life Insurance - II 129–145

Provisions of policies; Selection and classification of risks; Basics of premium
construction
UNIT 9: Essentials of Health Insurance - I 146–169

Individual health insurance; A Model Health Insurance Format and Explanation
of the Items
UNIT 10: Essentials of Health Insurance - II 170–189

Uses, Types of evaluation; Principles of underwriting of life and health
insurance; Group insurance
UNIT 11: Essentials of General Insurance- I 190–212

Definition of general insurance; Types of general insurance; Importance of
general insurance; Importance of general insurance in a country’s economic
development; Concept of short-term risk; Fundamentals of the following
concepts — Common law, Equity, Proposal/Accedence, Indemnity, Insurable
interest, Contribution subrogation, Representation; Utmost good faith, Material
fact, Physical hazard, Moral hazard
UNIT 12: Essentials of General Insurance-II 213–236

Policy endorsements conditions/warranties; Selection of risks; Inspection of
risks; Rating and calculation of premiums; Tariffs and non-tariffs; Marketing of
general insurance; Technology development and general insurance
UNIT 13: Planning for Wealth Accumulation and Retirement Needs 237–259
Wealth accumulation planning; Life cycle planning; Planning for accumulation,
objectives; Purchase of insurance and accumulation planning; Investments-
Tax-advantaged and tax non-advantaged; Essentials of individual retirement
planning; Analysis of retirement; Income needs; Retirement planning strategies;
Investing for retirement, Pension plans; Basic principles of pension plans.
260–278
UNIT 14: The Insurance Market in Indian Context
Insurance institutions in Indian capital market; Regulations governing
investments of insurance institutions in India; Purpose of government
intervention in markets; Relevant IRDA rules.
COURSE INTRODUCTION
Economics of Insuranceis is one of the fourth semester MA course in Economics. This course deals with
issues related to insurance such as essentials of life insurance, essentials of health insurance, essential
of general insurance and planning for wealth accumulation etc. This course basically covers the relevance
of these issues of insurance for a student doing post graduation in Economics and enables the learners
with various new knowledge and ideas of Economics of Insurance. This course comprises of 14 units and
has been divided into two blocks. Both first and second block comprises seven units each.
BLOCK INTRODUCTION
This is the second block of the course and comprises of seven units. The 8th unit of this course discusses
selection and classification of risk and basics of premium construction. A model health insurance
format of indivitual health insurance and explanation of the basic items are given in unit 9. Unit 10 of the
course analyses uses and types of evaluation of health insurance.Principles of underwriting of life and
health insurance and group insurance are discussed here. Unit 11 of the chapter includes defination,
types and importance of general insurance in a country’s economic development. Concept of short-term
risk is also discussed in this chapter.Policy endorsements conditions and warranties; selection of risks;
inspection of risks; rating and calculation of premiums; tariffs and non-tariffs; marketing of general insurance;
technology development and general insurance are discussed in unit 12. Wealth accumulation and life
cycle planning are discussed in unit 13.Insurance institutions in Indian capital market; regulations governing
investments of insurance institutions in India; purpose of government intervention in markets; relevant
IRDA rules are discussed in unit 14.
While going through a unit, you will notice some along-side boxes, which have been included to help you
to know some of the difficult, unseen terms. Again, we have included some relevant concepts in “LET
US KNOW” along with the text. At the end of some sections, you will get “CHECK YOUR PROGRESS”
questions. These have been designed to self-check your progress of study. It will be better if you solve
the problems put in these boxes immediately after you go through the sections of the units and then
match your answers with “ANSWERS TO CHECK YOUR PROGRESS” given at the end of each unit.
128
UNIT 8 : ESSENTIALS OF LIFE INSURANCE-II
UNIT STRUCTURE
8.1 Learning Objectives

8.2 Introduction
8.3 Essentials of Life Insurance
8.3.1 Essential Defination of Life Insurance
8.3.2 The Special Treatment of Life Insurance
8.4 Provision of Policies
8.5 Selection and Classification of Risk
8.6 Basis of Premium Construction
8.7 Let Us Sum Up
8.8 Further Readings
8.9 Answers to Check Your Progress
8.10 Model Questions
8.1 LEARNING OBJECTIVES
After going through this unit, you will be able to-

 know the essential of life insurance
 describe the various provisions of life policy
 discuss the selection and classification of risk associated with
the life policies
 illustrate the basis of premium construction
8.2 INTRODUCTION
Life Insurance can be defined as a contract between the insurance

company and the policy holder, where the life insurance company pays
a specific sum to the insured individual's family upon his death. The life
insurance sum is paid in exchange for a specific amount of premium. Life
is uncertain, but it is beautiful and we all want enjoy our life. Whatever we
do, however smart and hard we work, we are never sure what life has
in store for us.
Economics of Insurance, Block-2 129
Unit 8 Essentials of Life Insurance-II
It is therefore important that we do not leave anything to chance,

especially regarding 'life insurance'. So, we should cover our life with insure
well in advance as death is the only certain thing in life, apart from taxes.
The dictionary definition of "life insurance" is a financial product
that pays you or your dependants a sum of money either after a set
period or upon your death as the case may be.
However, if you were to understand the term clearly and also
appreciate its importance in your life, consider "life insurance" as always,
our back-up plan for life. In simple terms Life insurance means being
prepared financially, come what may be in future. It also ensures that your
family and you receive financial support in case you are not able to bring
in the much-needed income yourself (maybe due to an accident, retirement,
or untimely demise).
From legal point of view, life insurance is a contract between an
insurance policy holder (insured) and an insurance company (insurer).
Under this contract, the insurer promises to pay a pre-calculated sum of
money (also known as "Sum Assured" or "Cover Amount") upon the
death of the insured person or after a certain period of time.
8.3 ESSENTIALS OF LIFE INSURANCE
Life insurance is a contract between an insurer and insurance

policy holder, where the insurer promises to pay a definite sum of money
in exchange for a premium, upon or up to death of an insured person. Life
policies are always a legal contract.
There are many long-term tax saving investment options available, life
insurance is one of the most fundamental instruments that one need to
invest in. Here are some reasons why life insurance essential:
(i) To replace loss of income: A life insurance policy pays out death benefits
in the event of the policyholder's death. This is generally a lump sum
amount that can help the insured's family deal with the loss of their
primary source of income.
(ii) To repay pending debts: Debts taken in the name of the insured
130 Economics of Insurance, Block-2

Essentials of Life Insurance-II Unit 8
continue to remain a financial responsibility even after demise of the

policy holder. However, without an alternate source of income, the
legal heirs of the deceased may be incapable of repaying any pending
debts.
(iii) To meet educational expenses: If you invest in a life insurance policy
when you are in your early 20s, its most likely that the policy will
mature just around the time your child attains college going age.
The benefits received as a part of the maturity benefits can help you
meet the steep costs.
(iv) To diversify investments: Life insurance is one of the few investment
options that come with very low risks as per market condition.
(v) To save for retirement: It is also a retirement benefit option in case
you don't have retirement plan, investing in life insurance can help
get started. So, for a nominal monthly, quarterly, or annual payment
can help investment plan in place and contributing to retirement
fund.
(vi) To receive tax benefit: Life insurance is also among the many tax
saving investment options available to investors. The premiums can
be deducted from total taxable income as per the provisions of
section 80c, up to Rs1.5 lakhs.
(vii) To achieve long term goal: These types of funds can help achieve
long term goals one may have planned for life.
(viii) To leave behind an inheritance: A life insurance policy can also
ensure that you leave behind a sizeable amount for your inheritance.
8.3.1 Essential Defination of Life Insurance
 Policy owner: The person who buys and controls the

insurance policy. The policy owner may or may not be the one
whose life is insured. For example, a wife could own a policy
on her husband. The policy owner is the only one who can
change the beneficiary and get policy details from the insurer.
 Premium: The amount of money you pay for insurance,
generally quoted per month or per year.
 Beneficiary: The person who receives the life insurance

payout. You can name more than one beneficiary, and you
can designate a specific percentage for each beneficiary. For
example: 70% to Ram and 30% to Rahim.
 Death benefit: The life insurance money that is paid to the
beneficiary.
 Insured person: The person whose life is being insured.
 Term life insurance: This type of policy lasts for a specific
number of years. You select the term, such as 5, 10, 20 or
30 years.
 Permanent life insurance: This type of policy lasts for your
entire life and also has a cash value component. There are
multiple varieties of permanent life, including whole life,
universal life, variable life and variable universal life. If you
decide to buy permanent life insurance, work with a financial
advisor and be sure you understand the difference between
term vs. whole life insurance before you buy.
 Cash value: If you buy permanent life insurance, part of your
payment goes into a "cash value" account that grows in value
over time. You can take a loan against the cash value and
use the money for anything you like.
 Accelerated death benefit: This policy feature allows you
to receive some of the life insurance payout early if you are
terminally ill. Some insurers now call this a "living benefit." It's
usually a free feature, so make sure your policy has it.
 Rider: An add-on that provides an additional feature or
coverage at extra cost. For example, with a "waiver of premium"
rider you don't have to pay for your life insurance if you
become totally disabled and can't work.
"Imagine a life insurance policy is like buying a car, and a
rider like all the accessories the dealer offers you. Do you
need it? It's up to you to decide," says Chris de Lorimier of
O'Connor Wealth Management in Pasadena, California.
 Underwriting: This is the process by which insurance

companies evaluate the risk of insuring you and determine
your life insurance quote. It often includes accessing your
medical records, driving record and prescription drug history.
8.3.2 The Special Treatment of Life Insurance
The most unique part of Life insurance is it provides a sum

of money when you die; it receives special treatment by the various
tax code and regulatory agencies. This has provided opportunities
for insurance companies to provide a variety of options. These
diverse options confuse many consumers.
 Tax Code: Life insurance has historically been an "insurance"
product. Meaning it existed for safety and security. Therefore,
the insurance industry has always been successful at
maintaining favourable tax status, meaning they could lobby
for continued favourable tax treatment.
 Life Insurance's favourable tax status includes a tax-free death
benefit, tax-deferred cash value accumulation, and tax-free
borrowing of cash value (as long as the policy is not a
modified endowment contract that remains in force until death).
 Regulatory Agencies: The insurance and securities
regulatory agencies provide life insurance companies an
advantage over providers of other investments. Insurance
companies can provide sales literature with futuristic computer
illustrations of cash values.
CHECK YOUR PROGRESS

Q 1: Define legal terms of life insurance. (Answer
in about 20 words)
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Q 2: Why life insurance is a must for everyone? (Answer in about
30 words)
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Q 3: What are the Special treatments of Life Insurance? (Answer
in about 40 words)
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8.4 PROVISION OF POLICIES
Policy provisions are clauses in an insurance contract that lay out

the exact conditions for which coverage is provided and for what amounts,
along with exclusions and other restrictions.
Policy provisions in an insurance contract can include such details
as coverage periods, exclusions, riders, start dates, and other important
information. As it determines whether coverage applies and for what
amount, it is important for policyholders to carefully read the details of
their policy and understand them. Otherwise, they risk not taking advantage
of the protection their policy provides or potential unexpected financial
hardships due to losses that are not covered but assumed to have been.
1. Standard Policy Provisions: The standard insurance contract
provision is a provision of an insurance policy that allows an insurer or
any insurance company to cancel a property or a health insurance at
a specific time or expiration date. The standard insurance contract
provision is a legal clause or condition that requires parties to perform
a certain requirement or prevent from doing something in a stipulated
period of time.
2. Key Provisions to Life Insurance Policies: Some of the important
provisions to life insurance policies are stated below, among all
provisions some are for the advantage of the insured and beneficiary,
while others protect the insurance company.

(i) Naming A Beneficiary: While buying a life insurance in India,

you must name a beneficiary who can legally claim the sum
assured in your absence. You might think that naming a
beneficiary will be an easy process. Though the selection of life
insurance beneficiary is simple, you need to take care of various
financial, legal and tax obligations to make it work for you. If
you don't add a beneficiary properly for your life insurance, it
can cost you and your family a lot. Two types of life insurance
beneficiaries:
Primary Life Insurance Beneficiary: This is the person
whom you can name in your policy as a beneficiary who
will be entitled to receive the proceeds of sum assured
in case of death of the insured person. But if the primary
beneficiary dies before the insured person, then no amount
can be claimed in his name.
Secondary or Contingent Life Insurance Beneficiary:
This is the person you can add to your life insurance
policy who can claim the sum assured in case of death
of the primary beneficiary. The catch in this rule is that
a contingent beneficiary will only be entitled to receive
the sum, if the primary beneficiary dies before the insured
person. Then after the death of the insured person, the
secondary beneficiary can claim the money.
(ii) Grace Period: There are several options exist when paying for
a life insurance policy, with the most common being annually,
quarterly or monthly. If the premiums aren't paid, the policy will
lapse, meaning no coverage will exist. If the insured dies during
the lapsed period, the beneficiary will not receive the death
benefits. However, depending on the insurance policy, the grace
period can be as little as 24 hours or as long as 30 days. The
amount of time granted in an insurance grace period is indicated
in the insurance policy contract. Paying after the due date may
attract a financial penalty from the insurance company.
(iii) Policy Reinstatement: If the policy lapses, the insurance

company may also have a policy reinstatement period in which
the insured can pay past due premiums and resume the same
policy without applying for a new one. The insured should pay
close attention to the reinstatement period as it can vary by
insurance company. If the insured doesn't pay during the
reinstatement period the policy remains terminated and the
insured must reapply. Reapplication could result in a higher
premium or denial since the process is based on several
different factors, such as health, occupation and the age of the
insured.
(iv) Misstatement of Age Provision: The age is important factor in
life insurance so any misstatement of age provision may harm
both the parties in future. As age is major factor in calculating life
insurance premiums, insurance companies utilize actuarial
tables that calculate the probability of death and their is direct
correlation between age and premiums. Essentially, the older
you are, the greater risk of death and the higher your premium. If
you lie about your age, the misstatement of age provision allows
insurance companies to adjust the premium based on your true
age or to cancel the policy.
(v) Policy Loan Provision: There are two main types of life
insurance policies: term and whole. A term policy provides
coverage for a specific period of time, while a whole policy
lasts until the death of the insured. An additional benefit to
whole policies is they build cash value (called reserves) when
the insurance company invests the premiums.
Mr. A purchased a whole life policy for 100,000, and after
10 years, the invested premiums create a cash value of 10,000.
The insured can borrow up to 10,000, hence the policy loan
provision. Typically, the insured must pay back the 10,000; if
they do not, the beneficiary will simply receive the stated amount
of 100,000 (rather than 110,000) after the insured dies.
CHECK YOUR PROGRESS

Q 4: State about standard policy provisions.
(Answer in about 20 words)
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Q 5: Mention key policy provisions of life insurance? (Answer in
about 30 words)
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8.5 SELECTION AND CLASSIFICATION OF RISK
Every life insurance company is liable to assess the risk. It wishes

to accept and on that basis fix a fair and equitable premium payable by
the applicant. This is possible only if company carefully selects and classified
risks it assumes. The process through which a life insurer decides whether
an application received by it can be accepted at standard rates of premium
or on different terms or be rejected is called underwriting.
Underwriting is otherwise called selection and classification of risk.
While selection represents the 1st part and the 2nd part viz the terms on
which the proposal can be accepted is called classification.
According to - Mehr and Cammack "underwriting is the process of
accepting or rejecting risk."
The purpose of selecting of risk or underwriting and the selection
of risk is aimed at finding out those lives:
 Who can be offered life assurance;
 Who are uninsurable and are to be declined?
All companies generally gather underwriting information through
traditional underwriting sources including; an application, medical exam, a
MIB check, a motor vehicle report, and your prescription drug records.
We should also keep in mind, that many agents give quotations

based on the best insurance rate class without asking you enough questions
in order to win your business. However, the insurance rate class that you
get at the end of the application process is what really matters!
Here are the common names that are associated with the rate
classes available in the life insurance industry.
Table 8.1: Classification of Risk in Insurance
Sl No Preferred plus Table A= 25% above standard rate
Preferred Table B = 50% and above standard rate
Standard Plus Table B = 75% and above standard rate
Standard Table B = 100% and above standard rate
*Life insurance tables of A, B, C, and D
We have also provided you with some helpful descriptions of each
of the underwriting risk classifications.
Hopefully, these general life insurance underwriting risk
classifications will help clarify where you might fit into the life insurance
health classes.
 Preferred Plus/Super Preferred Risk Life Insurance Rate
 The preferred plus risk classification used by underwriters
means that you fit into the best class and have excellent overall
health
 You are free of any type of tobacco for 3-5 years
 You do not engage in a risky occupation or hobby's like scuba
diving or aviation
 You have no history of drug or alcohol abuse
 You must also have no history of heart disease (sometimes
cancer) among your parents or siblings prior to their age 60
 Preferred Risk Life Insurance Rate Class
 The preferred risk classification used by underwriters generally
applies to those who are in excellent overall health and do not
participate in dangerous activities
 A few medications are allowed like blood pressure, cholesterol,
and family history guidelines are slightly more lenient with the
preferred risk category

 Standard Plus Life Insurance Rate Class

 The standard plus insurance risk class is associated with
optimum health, but you may have a few minor health issues
 You may be slightly over the life insurance height and weight
chart, but you also have no family history of diseases
 Standard Risk Insurance Rate Class
 The standard risk insurance rate class generally apply to those
who are in average overall health
 You are taking multiple medications
 You do not fit within the published life insurance height and
weight chart
 You also have a family history of cancer or other diseases
 Substandard Risk Category
 The substandard risk classification is also called impaired risk
or table rated life insurance
 The substandard risk class refers to people who have significant
health impairments
 These individuals may have to pay an extra fee or "table rating"
depending on the risks they pose to the issuing life insurance
company.
These insurance risk classes are general guidelines and many
insurance companies have different rules to qualify for each rate class.
If you participate in a hazardous occupation or risky hobby like sky diving
or scuba diving, it is important to disclose it to your agent.
Many agent may forget to ask you or do not realize that these
endeavors can also bump you into a substandard risk class.
This is why it is important to work with an experienced agent that
is familiar with life insurance underwriting risk classifications of many
carriers. This will allow you to be matched with a company specializing in
your type of risk at the best possible price.

CHECK YOUR PROGRESS

Q 6: What is the purpose of selection of risk?
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Q 7: What is the various classification of Risk in life insurance?
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Q 8: Mention some of preferred plus/super preferred risk life
insurance rate?
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8.6 BASIS OF PREMIUM CONSTRUCTION
A life insurance policy is a contract between an insurer and a

policyholder. To make the contract valid, a premium amount is paid by the
policyholder at the time of buying the policy and later at agreed intervals
of time, depending on the frequency and mode of payment.
Life insurance is a way to provide your family (the nominees)
financial support in case of the insured's untimely demise. Generally, in
the case of death the policyholder during the policy term, a pre-agreed
amount (sum assured) is paid to the nominee.
Keeping the above view in mind, you must understand the following
three important factors that are key determinants in the life insurance
premium calculation for every insurer. The premium amount differs among
insurers due to these factors when you compare their policies for the
same coverage/sum insured. The premium rate for a life insurance policy
is based on two underlying concepts: mortality and interest. A third variable
is the expense factor which is the amount the company adds to the cost
of the policy to cover operating costs of selling insurance, investing the
premiums, and paying claims.
 Mortality: Life insurance is based on the sharing of the risk of death

by a large group of people. The amount at risk must be known to
predict the cost to each member of the group. Mortality tables are
used to give the company a basic estimate of how much money it will
need to pay for death claims each year. By using a mortality table a
life insurer can determine the average life expectancy for each age
group.
 Interest: The second factor used in calculating the premium is
interest earnings. Companies invest your premiums in bonds, stocks,
mortgages, real estate, etc., and assume they will earn a certain
rate of interest on these invested funds.
 Expense: The third consideration is the expenses of operating the
company. The company estimates such expenses as salaries,
agents' compensation, rent, legal fees, postage, etc. The amount
charged to cover each policy's share of expenses of operation is
called the expense loading. This is a cost area that can vary from
company to company based on its operations and efficiency.
The premium that you have to pay for a life insurance policy
depends on various factors like age, total coverage (sum assured), your
medical history, gender, lifestyle, and job. However, the premium for the
same life insurance coverage amount will vary from insurer to insurer.
 Types of insurance premium:
 Premium paid:
 Fixed premium: it is also known as level premium. These
premiums remain unchanged till the policy maturity.
 Flexible premium: this premium allows the policy holder
to make changes vis-à-vis the policy.
 Insurance purchased:
 Life Insurance: life insurance premiums are calculated
based on age, occupation, income, health, asset owned
and so on.
 Health Insurance: these premiums are calculated based
on age. Older you are, greater the chances of falling

sick. Higher the age, higher is the premium.

 Car Insurance: these premiums are calculated based on
the type of car insurance plan. 3rd party liability insurance
or comprehensive insurance, riders opted, car model, daily
commute, the age of the driver, and so on.
CHECK YOUR PROGRESS

Q 9: State three variables which effect life
insurance premium construction. (Answer in about
20 words)
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Q 10: State types of life insurance premium and its factors? (Answer
in about 60 words)
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8.7 LET US SUM UP
 Evaluate Life Insurance Needs: Only purchase additional life

insurance if you have a need for it. First examine the amount of life
insurance that you need to provide for those financially dependent
on you.
 Purchase Life Insurance for Protection: The first priority for
purchasing insurance should be for protection. It is most important
that people, who need insurance purchase it and start their coverage
without delay. At the very least, procure term life insurance with an
appropriate death benefit, and term period, at a competitive premium.
Term insurance provides the most economical decision for most
middle-income people today. Most financial experts and commentators

recommend term insurance for most people since it provides the
most amount of protection at the lowest cost, enabling you to save
and invest.
 Purchasing Cash Value Life Insurance: The decision to purchase
cash value life insurance should be made in tandem with the outcome
of your financial plan. Most people's first priorities are the proper
funding of their retirement and other plans. After people have
implemented the proper action steps in their financial plan, they may
want to consider cash value life insurance for longer term needs.
Seek advice from a trusted financial professional to help evaluate
the appropriate options. A close examination of a contract should
include not only attractive illustrations and sales literature, but a
thorough analysis of their prospectuses and fully disclosed
information. Insurance agents should provide best, good and worst
case illustrations. Remember insurance agents are paid vastly more
commission for permanent cash value insurance, so some may feel
pressure to sell this.
 Life Insurance as an Estate Planning Vehicle: People with large
net worth may want to consider life insurance as a viable legacy
planning tool to aid in liquidity and estate and tax planning. They
should consult their estate planning attorneys and financial planners
for direction.
8.8 FURTHER READINGS
1) Mishra, M. N. & Mishra, S. B. (2016). Insurance: Principles & Practice,

22/e, New Delhi: S .Chand and Company Ltd.
2) Mishra, Kaninika, (2016), Fundamentals of Life Insurance Theories
and Applications, PHI Learning Private Limited

8.9 ANSWERS TO CHECK YOUR

PROGRESS
Ans to Q No 1: In legal terms, life insurance is a contract between an

insurance policy holder (insured) and an insurance company
(insurer).
Ans to Q No 2: Life insurance is a must - to replace loss of income, to
repay pending debts, to meet educational expenses, to diversify
investments, to save for retirement and to receive tax benefit.
Ans to Q No 3: Life insurance is not only unique because it provides a
sum of money when you die; it receives special treatment by the
tax code and regulatory agencies. This has provided opportunities
for insurance companies to provide a wide array of options.
Ans to Q No 4: It is a legal clause or condition that requires parties to
perform a certain requirement.
Ans to Q No 5: Key Provisions to Life Insurance Policies - Naming A
Beneficiary, Grace Period and Policy Reinstatement, Misstatement
of Age Provision and Policy Loan Provision
Ans to Q No 6: Two Purposes - who can be offered life assurance and
who are uninsurable and are to be declined.
Ans to Q No 7: Preferred Plus = 25% above standard rates
Preferred = 50% above standard rates
Standard Plus = 75% above standard rates
Standard = 100% above standard rates
Ans to Q No 8: It means that you fit into the best class and have excellent
overall health - You are free of any type of tobacco for 3-5 years;
You do not engage in a risky occupation or hobby's like scuba
diving or aviation; You have no history of drug or alcohol abuse
Ans to Q No 9: Three variables are - Mortality, Interest and Expense.
Ans to Q No 10: Types of insurance premium: 1) Premium paid- a) Fixed
premium: it is also known as level premium. b) Flexible premium.
2) Insurance purchased- a) Life insurance: Life insurance premiums

are calculated based on age, occupation, income, health, asset

owned and so on. b) Health insurance: these premiums are
calculated based on age. c) Car insurance: these premiums are
calculated based on the type of car insurance plan.
8.10 MODEL QUESTIONS
Short Questions (Answer each question in about 150 words)

Q 1: What do you mean by the terms a) Life Insurance and b) Life
Insurance Product?
Q 2: What are the essentials of life insurance contract?
Q 3: Write short notes on a) Standard Policy Provisions b) Grace Period
and c) Policy Reinstatement.
Long Questions (Answer each question in about 300-500 words)

Q 1: What is Provision of Policies? Discuss about the key provisions
of life insurance policy.
Q 2: Critically discuss the various issues related with Selection and
Classification of Risk.
Q 3: Discuss in details about basis and types of premium construction.
*** ***** ***

UNIT 9 : ESSENTIALS OF HEALTH INSURANCE-I
UNIT STRUCTURE

9.2 Introduction
9.3 Essentials of Health Insurance
9.4 Individual health insurance
9.4.1 Top Insurers Providing Individual Health Insurance
9.4.2 Understanding Individual Health Insurance
9.4.3 Exclusions in Individual Health Insurance
9.5 A Model Health Insurance Format and Explanation of the Items.
9.6 Let Us Sum Up
9.9 Model Questions

 know the essentials of health insurance product
 idea about various individual health insurance product
 discuss about a model health insurance format
 explain various items included in a health insurance
9.2 INTRODUCTION
Health insurance (sometimes called health coverage) generally

pays for some or all of the cost of the health services you receive, like
doctors’ visits, hospital stays, and visits to the emergency room. It also
helps to keep your health care costs predictable and affordable. Several
different amounts for health insurance you may likely to pay:
1. Pay a premium, a monthly fixed payment to the insurance company.
2. Pay a deductible as this is the fixed amount that you pay out of pocket
before your health insurance begins to pay for your health services.
Essentials of Health Insurance-I Unit 9
3. After paying the deductible, you and your insurance company typically
share the cost of covered health services. Your insurance pays
most of the cost first, and then you pay the remaining cost. The
amount that you pay is either a copayment (a fixed amount) or a
coinsurance (a percentage of the cost of the service).
Health insurance, is a system for the financing medical expenses
by means of contributions or taxes paid into a common fund to pay for
all or part of health services specified in an insurance policy or the law.
The key elements generally common to all of the health insurance plans
are advance payment of premiums or taxes, pooling of funds, and eligibility
for benefits on the basis of contributions or employment.
A health insurance system is generally organized and administered
by an insurance company or other private agency, with all the provisions
specified in a contract and is known as private, or voluntary, health
insurance. Private health insurance is usually financed on a group basis,
but most health plans also provide for individual policies. Private group
plans are usually financed by groups of employees whose payments may
be subsidized by their employer, with the money going into a special fund.
Insurance of hospital costs is the most prevalent form of private health
insurance coverage; another type is major medical expense protection,
which provides protection against large medical costs but avoids the
financial and administrative burdens involved in insuring small costs.
9.3 ESSENTIALS OF HEALTH INSURANCE
All over the world Health insurance is a necessity today as it gives

mental peace to all the individuals. Given the increasing medical costs
day by day, this insurance policy and the coverage it offers can provide
several benefits to the insured, some of the most important are-
1. Protect savings: opting for health insurance policy protects savings
from getting washed-out for medical treatment. If you have insurance
policy, a majority of cost can be covered.
2. Provide Coverage: an insurance policy mainly provides coverage

Unit 9 Essentials of Health Insurance-I
against hospitalization expenses along with it covers other medical

costs that may be incurred before, after and during the course of
treatment.
3. Quality treatment: generally, most of the insurance policies have
a cashless treatment, where the insurance company directly settles
bills with the hospitals.
4. Provides coverage for the family: buying individual health
insurance policies always much expensive. So, most insurance
companies provide family floater plans where policies and their
benefits are clubbed together and premium also affordable.
5. Lifestyle changes: during recent decades there is enormous change
in the present lifestyle. With the increase in the number of sitting
workers, there is higher chances for lifestyle related diseases such
as diabetes, cardiac problems etc. to protect the family from such
shocks, it is best to buy a health insurance policy.
There are numerous reasons to buy health insurance, a few of
them are listed below:
 To pay the various medical treatment expenses in case of
hospitalization due to any disease or accident.
 Health coverage can help the insured to limit their extra costs,
protects their assets and safeguard their present and future earnings.
 Insured need not have to worry about arranging money for medical
treatment at the last hour, which gives peace of mind.
 Nonattendance of any risk protection measures by the government
to bear the cost of expenses related to health.
 The cost of medical expenses is rising and it is expected that in
future the cost will rise further due to high rate of inflation and
increasing cost of medicines and other expenses.
 With cashless hospitalization treatment, one just need to show the
identity card (health card) and rest of the thing is taken care by the
hospital staff.
 Insured can get best treatment in the listed hospitals of the insurance
company which was otherwise not affordable by the common man.
 Insurance companies offer 24 hours helpline, that always helpful to

arrange for ambulances, get information about nearest hospitals,
best doctors and so on.
 Human life is very unpredictable, even if someone is healthy and
exercise regularly, may suffer unexpected illness or injury.
 Our food habits, lifestyle, stress levels, use of electronic gadgets are
changing which increases the chance of getting caught by diseases
and health problems.
 In case of critical illness, the cost of treatment generally very high
and it is not always possible to meet the expenses from own sources.
CHECK YOUR PROGRESS

Q 1: Mention some key elements of health
insurance. (Answer in about 20 words)
..............................................................................
................................................................................................................
Q 2: What are the benefits of health insurance? (Answer in about
30 words)
................................................................................................................
................................................................................................................
................................................................................................................
Q 3: Mention some of the reasons to buy health insurance? (Answer
in about 40 words)
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
9.4 INDIVIDUAL HEALTH INSURANCE
Health insurance mainly an agreement between an insurance

provider and an individual, by which the former guarantees to take care
of certain medical costs of the latter based on the investment made. There
are different plans, some offer health insurance for individuals while others
offer health insurance for family and group.

The Individual Health Insurance plan covers only one individual,
the policyholder, who will gain the benefits of the health insurance for his
investment.
 Key Features:
 This type of health insurance for individuals mainly covers only
for the insured individual
 The insurance provider covers certain declared medical costs
of the insured based on the premium paid by the individual
 Hospitalization- The policy covers hospitalization charges
 Lifetime renewal
 Tax deductions under section 80D of the Income Tax act
 Covers surgery costs, room rent, physician’s fee and laboratory
tests but depends on choice of individual policy
 The insured must pay a predetermined amount for certain
health care services. This is called co-payment.
 Pre and post hospitalization expenses are covered under this
plan.
 Provides coverage for critical illness.
 Advantages of Individual Health Insurance Plan:
 In individual health insurance plan, the insured alone earns all
the benefits under the plan.
 The individual will earn the benefit of individual sum assured
rather than floating sum assured.
 Policy best suited for people with higher health risks.
 Parents and immediate family members can be added to the
plan with additional premium
 No restrictions on the maximum age for the members for the
renewal of the policy.
 There is no need to worry about making more than one claim
in a year since the plan caters only to a single person.
 Who should buy this plan?
 The plan is best suited for individuals with higher health risks.

 Single individuals with family members who are already insured.

 An individual who wants to earn the benefit of the sum assured
rather than floating sum assured.
 Individuals who want to renew the policy without having to
worry about any age restrictions.
 An individual who wants higher protection than what is offered
under a family floater plan.
 Cashless facility for claim settlement can be availed in this
plan.
9.4.1 Top Insurers Providing Individual Health Insurance
There are a lot of insurance providers who offer individual

health insurance. Listed below are some of the individual health
insurance providers.
 National Mediclaim Policy (Individual Plan) of National In-
surance Company Limited. The key features of the policy
are:
 Sum Insured range– Rs.1,00,000/- to Rs.10, 00,000/-
Entry Age– 18 to 65 years
 Who can be covered – Self, Spouse, Dependent natural
or legally adopted children, Parents, Parent-in-laws,
Brother up to 25 years, if a bona-fide student and not
employed, Sister if not employed, till marriage, new born
from 3 months age.
 Lines of treatment covered – Allopathy, Ayurveda and
Homeopathy (Up to 100% of SI)
 Room Rent/ICU charges, Medical practitioners, surgeon,
anaesthetist, consultants, specialist’s fees and other
charges as per limits mentioned in the policy.
 Ambulance Charges and Organ Donor’s expenses
covered up to sublimit mentioned.
 Pre and Post Hospitalization up to 45 days and 60

days respectively for same disease/illness/injury for which

Hospitalization occurred.
 12 Modern treatments like Robotic surgery, oral
chemotherapies, immunotherapies and etc., are now
covered in the policy.
 Mental illness, HIV/AIDS, Genetic disorders are now
covered.
 Cashless Facility available at Network Hospitals Only
through TPA.
 Pre Negotiated Package rates for specific surgeries/
procedure in network hospitals.
 Life Long Renewability.
 Portability (migration) allowed from/to similar products
as per IRDAI guidelines.
 ICICI Lombard - Personal Protect Insurance Policy: The
key features of the ICICI Personal Protect Insurance
Policy are:
 You can choose the coverage against Death or
Permanent Total Disablement (PTD) due to an accident
anywhere between Rs. 3 lakhs - Rs. 25 lakhs as a sum
assured.
 The ICICI Personal Protect Insurance Policy will even
provide insurance cover to individuals who can claim
after being in an act of violence from acts of terrorism.
 There will no requirement for the individual to go through
a health check in order to take up this policy.
 The policy has an easy claim process with the need of
documentation to be minimal, the coverage for this policy
will be worldwide.
 For the ICICI Personal Protect Insurance Policy an
individual between the ages of 18 - 60 years, is eligible
for a policy term of 1-5 years.
 Bajaj Allianz - Individual Health Guard: The key features
of the Bajaj Allianz Individual Health Guard are:

 With this policy you will receive hospitalization charges
and you will also receive 10% discount for family
members. You can also get cashless hospitalization in
the partner hospitals which are more than 3700 hospitals
in the country.
 The policy will cover pre and post hospitalization
expenses that are of relevance, which would have
occurred 60 days prior to hospitalization or 90 days
after hospitalization. This will also costs of the
ambulance if there’s a case of emergency. The
ambulance costs will be covered up to Rs. 1000/- .
 The sum assured will be in a range of Rs. 1.5 lakhs- Rs.
10 lakhs for an individual aged between 3 months- 55 years.
And for an individual aged between 56 years- 65 years the
sum assured will be from Rs. 1.5 lakhs- Rs. 5 lakhs.
 There are 130 day care procedures that will be covered
under this policy.
 For the Bajaj Allianz Individual Health Guard an individual
between the ages of 18 - 65 years, is eligible for a
policy. For Spouse and parents as well. The proposer
can also take up this policy for his/her children they will
need to be between the ages of 3 months - 25 years.
 Oriental Health Insurance - Individual Mediclaim: The
key features of the Individual Mediclaim Health Insurance are:
 This policy will offer cashless hospitalization and
reimbursement hospitalization in the partner hospitals
in the country.
 The policy will cover pre and post hospitalization
expenses that are of relevance, which would have
occurred 30 days prior to hospitalization or 60 days
after hospitalization.
 The hospital charges for nursing expenses, room,
boarding, etc for Rs. 5,000/- or 1% of the sum assured

whichever is less.
 For family members covered under this policy, they will
receive a 10% discount.
 Any special fees for surgeons, ambulance, consultation
etc will be covered under the policy.
 If the individual is in Intensive Care the cost of the
Intensive Care Unit will be borne for up to 2% of the
sum assured of Rs. 5,000/- whichever is less.
 The sum assured will range from Rs. 50,000- Rs.
50,000.
 Star Health Insurance-Medi Classic Insurance: The key
features of the Medi Classic Insurance are:
 The insured individual will get protection under in patient
hospitalization for a minimum of 24 hours.
 Surgeon, Medical Practitioner, Anaesthetist, Specialist,
Consultants Fees.
 In case of emergencies, charges for transporting the
covered patient to a hospital in an ambulance are
covered up to Rs. 750 per hospitalisation (maximum
Rs. 1500 per policy period).
 Blood, Anesthesia, Oxygen, charges for Operation
theatre, Pacemaker cost etc.
 Room charges, nursing expenses, boarding as provided
by the Nursing Home or Hospital at also covered at 2%
of the Sum Insured (maximum Rs.5,000 per day).
 Non-Allopathic treatments are also covered by this policy
up to 25% of the sum insured (maximum Rs.25,000
per policy period).
 The policy term is one year but special discount of 5%
is offered when premium is paid for two years in
advance.

9.4.2 Understanding Individual Health Insurance
 Who does the individual health insurance plan cover?

The Individual Health Insurance plan covers only the poli-
cyholder.
 What is the difference between Individual Health
Insurance and Family Floater Health Insurance?
In individual health insurance plans, each individual of a family
is entitled to a health cover of a certain sum; whereas in the
family floater health insurance plan, the health cover of the same
amount is shared by all the family members included in the plan.
 What does individual health insurance plan cover?
The charges covered by individual health insurance are
listed below.
 Medical examinations
 Hospitalization
 Emergency services
 Laboratory services
 Maternity and new born care
 Room, boarding expenses
 Physician fee
 Is there an age limit to avail an individual health
insurance?
No. Anyone can avail an individual health insurance.
 Does the policy offer tax deductions?
Individual health insurance plan offers tax deductions under
section 80D of the Income Tax Act.
 Will there be additional costs other than regular
premiums?
There are a few additional costs other than regular
premiums that one has to pay
 Medical
 Deductibles

 Co-payment
 Co-insurance
 Can my family members be included in the plan?
The main aim of individual health insurance is to provide
complete protection just to the insured but the plan can be
extended to parents and in-laws in certain cases.
9.4.3 Exclusions In Individual Health Insurance
Though individual health insurance covers most of the medical

expenses, there are some exceptions:
 Individual health insurance covers pre-existing diseases sub-
ject to a waiting period of 2 to 4 years which can prove to be
a disadvantage to some.
 Cost of prescription glasses, lenses and hearing aids aren’t
covered by this plan.
 Dental treatment.
 Naturopathy treatment.
 Certain ailments like cataract, hernia, sinusitis, etc. won’t be
covered under first year of policy. For instance, Mr. Deka and
Ms. Kalita who were traveling in a car meet with an accident.
After the treatment, the hospital bill comes up to Rs.1.8 lakh
for each person. Mr. Deka has a family floater health insurance
which offers coverage of Rs.3 lakh for his family of three. Ms.
Kalita has an individual health insurance plan that offers
coverage of Rs.2 lakh. Ms. Kalita manages to use her
insurance to pay for the hospital bills. Unfortunately, Mr. Deka’s
family member had already made a claim of Rs.2.5 lakh the
same year for a surgery. Hence, Mr. Deka had to pay up
Rs.1.3 lakh from his own pocket for the medical bills. Since
he did not have an individual insurance plan he had to pay
from his own pocket. This instance shows why exactly
individual health insurance is a better option.

CHECK YOUR PROGRESS

Q 4: What do you understand by individual health
insurance? (Answer in about 20 words)
..............................................................................
................................................................................................................
Q 5: What are the advantages of health insurance? (Answer in
about 30 words)
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................................................................................................................
Q 6: Mention some of the key features of Individual Health Insurance
Plan? (Answer in about 40 words)
................................................................................................................
................................................................................................................
................................................................................................................
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Q 7: What are the charges covered under individual health
insurance plan? (Answer in about 30 words)
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Q 8: Mention those expenses which are not covered by Individual
Health Insurance Plan? (Answer in about 30 words)
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9.5 A MODEL HEALTH INSURANCE FORMAT AND

EXPLANATION OF THE ITEMS

 Explanation of the Items used in Health Insurance Policies: There

are some standard definitions of terminology generally used in Health
Insurance Policies. It has become increasingly necessary to ensure
that certain basic terminology being used in Health Insurance policies

are given standard definitions so that prospects and insured are able
to understand them without doubt. All insurers generally follow the
following standard definitions for the terminology listed hereunder,
Where a particular terminology is not applicable to one or more types
of policies, it is indicated against it in brackets.
 Accident: An accident means sudden, unforeseen and
involuntary event caused by external, visible and violent means.
 Any one illness: (not applicable for Travel and Personal
Accident Insurance) Any one illness means continuous period
of illness and includes relapse within 45 days from the date of
last consultation with the Hospital/Nursing Home where
treatment was taken.
 Cashless facility: Cashless facility means a facility extended
by the insurer to the insured where the payments, of the costs
of treatment undergone by the insured in accordance with the
policy terms and conditions, are directly made to the network
provider by the insurer to the extent of pre-authorization is
approved.
 Condition Precedent: Condition Precedent means a policy
term or condition upon which the Insurer’s liability under the
policy is conditional upon.
 Congenital Anomaly: Congenital Anomaly means a condition
which is present since birth, and which is abnormal with
reference to form, structure or position.
 Co-Payment: Co-payment means a cost sharing requirement
under a health insurance policy that provides that the policyholder/
insured will bear a specified percentage of the admissible claims
amount. A co-payment does not reduce the Sum Insured.
 Cumulative Bonus: Cumulative Bonus means any increase
or addition in the Sum Insured granted by the insurer without
an associated increase in premium.
 Day Care Centre: A day care centre means any institution

established for day care treatment of illness and/or injuries or

a medical setup with a hospital and which has been registered
with the local authorities, wherever applicable, and is under
supervision of a registered and qualified medical practitioner
and must comply with all minimum criterion as under – i) has
qualified nursing staff under its employment; ii) has qualified
medical practitioner/s in charge; iii) has fully equipped operation
theatre of its own where surgical procedures are carried out;
iv) maintains daily records of patients and will make these
accessible to the insurance company’s authorized personnel.
 Deductible: Deductible means a cost sharing requirement
under a health insurance policy that provides that the insurer
will not be liable for a specified rupee amount in case of
indemnity policies and for a specified number of days/hours in
case of hospital cash policies which will apply before any
benefits are payable by the insurer. A deductible does not reduce
the Sum Insured. (Insurers to define whether the deductible is
applicable per year, per life or per event and the manner of
applicability of the specific deductible)
 Disclosure to information norm: The policy shall be void
and all premium paid thereon shall be forfeited to the Company
in the event of misrepresentation, mis-description or non-
disclosure of any material fact.
 Domiciliary Hospitalization: Domiciliary hospitalization means
medical treatment for an illness/disease/injury which in the
normal course would require care and treatment at a hospital
but is actually taken while confined at home under any of the
following circumstances: i) the condition of the patient is such
that he/she is not in a condition to be removed to a hospital,
or ii) the patient takes treatment at home on account of non-
availability of room in a hospital.
 Emergency Care: Emergency care means management for
an illness or injury which results in symptoms which occur
suddenly and unexpectedly, and requires immediate care by a

medical practitioner to prevent death or serious long-term
impairment of the insured person’s health.
 Grace Period: Grace period means the specified period of
time immediately following the premium due date during which
a payment can be made to renew or continue a policy in force
without loss of continuity benefits such as waiting periods and
coverage of pre-existing diseases. Coverage is not available
for the period for which no premium is received.
 Illness: Illness means a sickness or a disease or pathological
condition leading to the impairment of normal physiological
function and requires medical treatment.
 Acute condition: Acute condition is a disease, illness or
injury that is likely to respond quickly to treatment which
aims to return the person to his or her state of health
immediately before suffering the disease/ illness/ injury
which leads to full recovery
 Chronic condition: A chronic condition is defined as a
disease, illness, or injury that has one or more of the following
characteristics: (i) it needs ongoing or long-term monitoring
through consultations, examinations, check-ups, and /or
tests (ii). it needs ongoing or long-term control or relief of
symptoms (iii). it requires rehabilitation for the patient or for
the patient to be specially trained to cope with it (iv). it
continues indefinitely (v). it recurs or is likely to recur.
 Injury: Injury means accidental physical bodily harm excluding
illness or disease solely and directly caused by external, violent,
visible and evident means which is verified and certified by a
Medical Practitioner.
 Inpatient Care (not applicable for Overseas Travel
Insurance): Inpatient care means treatment for which the
insured person has to stay in a hospital for more than 24
hours for a covered event.
 Intensive Care Unit: Intensive care unit means an identified

section, ward or wing of a hospital which is under the constant
supervision of a dedicated medical practitioner(s), and which
is specially equipped for the continuous monitoring and
treatment of patients who are in a critical condition, or require
life support facilities and where the level of care and supervision
is considerably more sophisticated and intensive than in the
ordinary and other wards.
 ICU Charges: ICU (Intensive Care Unit) charges means the
amount charged by a Hospital towards ICU expenses which
shall include the expenses for ICU bed, general medical support
services provided to any ICU patient including monitoring
devices, critical care nursing and intensivist charges.
 Medical Advice: Medical Advice means any consultation or
advice from a Medical Practitioner including the issuance of
any prescription or follow-up prescription.
 Medical Expenses: Medical Expenses means those expenses
that an Insured Person has necessarily and actually incurred
for medical treatment on account of Illness or Accident on the
advice of a Medical Practitioner, as long as these are no more
than would have been payable if the Insured Person had not
been insured and no more than other hospitals or doctors in
the same locality would have charged for the same medical
treatment.
 Pre-Existing Disease (not applicable for Overseas Travel
Insurance): Pre-Existing Disease means any condition, ailment
or injury or related condition(s) for which there were signs or
symptoms, and / or were diagnosed, and / or for which medical
advice / treatment was received within 48 months prior to the
first policy issued by the insurer and renewed continuously
thereafter. (Life Insurers may define norms for applicability of
PED at reinstatement).
 Pre-hospitalization Medical Expenses: Pre-hospitalization
Medical Expenses means medical expenses incurred during

predefined number of days preceding the hospitalization of the
Insured Person, provided that: i. Such Medical Expenses are
incurred for the same condition for which the Insured Person’s
Hospitalization was required, and ii. The In-patient
Hospitalization claim for such Hospitalization is admissible by
the Insurance Company.
 Post-hospitalization Medical Expenses: Post-hospitalization
Medical Expenses means medical expenses incurred during
predefined number of days immediately after the insured person
is discharged from the hospital provided that: (i) Such Medical
Expenses are for the same condition for which the insured
person’s hospitalization was required, and (ii) The inpatient
hospitalization claim for such hospitalization is admissible by
the insurance company.
 Room Rent: Room Rent means the amount charged by a
Hospital towards Room and Boarding expenses and shall include
the associated medical expenses.
 Surgery or Surgical Procedure: Surgery or Surgical Procedure
means manual and / or operative procedure (s) required for
treatment of an illness or injury, correction of deformities and
defects, diagnosis and cure of diseases, relief from suffering
and prolongation of life, performed in a hospital or day care
centre by a medical practitioner.
CHECK YOUR PROGRESS

Q 9: Explain about cashless facilities under health
insurance plan. (Answer in about 40 words)
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................................................................................................................
................................................................................................................
................................................................................................................
Q 10: What is the meaning of pre and post hospitalisation expenses?

................................................................................................................
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................................................................................................................
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9.6 LET US SUM UP
 The Insurance Regulatory and Development Authority of India (IRDAI),

on January 2, 2020 issued a circular mandating health and general
insurance companies to offer a standardised product that will take care
of the basic requirements of policyholders.
 According to IRDAI, the policy will be named as Arogya Sanjeevani
Policy, succeeded by the name of the insurance company. The
regulator said, no other name is allowed in any of the documents.
Insurers will have to start offering the policy from April 1, 2020.
 According to IRDAI’s guidelines, issued on January 2, these are the
key features of the Arogya Sanjeevani Policy.
 Health insurance policy to take care of basic health needs of
insuring public
 To have a standard product with common policy wordings
across the industry
 To facilitate seamless portability among insurers
 Some important things we should know about the health insurance
plan, as per IRDAI:
 Minimum and maximum sum insured: The minimum sum
insured under the health insurance plan will be Rs 1 lakh and
the maximum sum insured limit should be Rs 5 lakh (in multiples
of 50,000).
 Eligibility: Minimum entry age is 18 years and the maximum
age at entry is 65. However, there is no exit age. The policy is
subject to lifelong renewability.The policy can be availed for
self and the following family members:-

 Legally wedded spouse
 Parents and parents-in-laws
 Dependent children (i.e., natural or legally adopted)
between the age of 3 months and 25 years.
 Policy period: The health insurance plan should be offered
with a policy term of one year.
 Modes of premium payment: All the premium payment modes
are available, that is, you can pay the insurance premium
either annually, half-yearly, quarterly or in monthly mode. There
will be uniformity in premium pricing. Also, the premium under
this health insurance plan will be pan India basis. No geographic
location/ zone-based pricing is allowed.
 Grace period for premium payments: For yearly premium
payment mode, a fixed period of 30 days is to be allowed as
Grace Period. However, for all other modes of payment, a
fixed period of 15 days grace period will be allowed.
1) Gupta, P. K. (2016). Essentials of Insurance and Risk Management,

Himalaya Publishing House
2) Patukale, Kshitij (2020), Mediclaim and Health Insurance, Prabhat
Prakashan

PROGRESS
Ans to Q No 1: Key elements are - advance payment of premiums or

taxes, pooling of funds, and eligibility for benefits on the basis of
contributions or employment.
Ans to Q No 2: Benefits are- Protect savings; Coverage against
hospitalization; Quality treatment; Provides coverage for the family
and protection against lifestyle related diseases such as diabetes,

cardiac problems etc.
Ans to Q No 3: To pay the medical treatment expenses in case of
hospitalization due to any disease or accident and to get 24 hours
helpline with cashless hospitalization. To enjoy best treatment in
the network hospitals and protects their assets and safeguard
their future earnings.
Ans to Q No 4: The Individual Health Insurance plan covers only one
individual, the policyholder, who will gain the benefits of the health
insurance for his investment.
Ans to Q No 5:
 The insured alone earns all the benefits under the plan.
 Best suited for people with higher health risks
 Parents and immediate family members can be added to the
plan.
Ans to Q No 6:
 Pre and post hospitalization expenses are covered under
this plan.
 Lifetime renewal.
 Tax deductions under section 80D of the Income Tax act.
 Covers surgery costs, room rent, physician’s fee and
laboratory tests.
 Provides coverage for critical illness.
Ans to Q No 7: The charges covered by individual health insurance are
listed below.
 Medical examinations
 Hospitalization
 Emergency services
 Laboratory services
 Maternity and new born care
 Room, boarding expenses
 Physician fee
Ans to Q No 8: Though individual health insurance covers most of the
medical expenses, there are some exceptions:

 Pre-existing diseases subject to a waiting period of 2 to 4
years
 Cost of prescription glasses, lenses and hearing aids aren’t
covered by this plan.
 Dental treatment.
 Naturopathy treatment.
 Certain ailments like cataract, hernia, sinusitis, etc. won’t be
covered under first year of policy.
Ans to Q No 9: Cashless facility means a facility extended by the insurer
to the insured where the payments, of the costs of treatment
undergone by the insured in accordance with the policy terms and
conditions, are directly made to the network provider by the insurer
to the extent pre-authorization is approved.
Ans to Q No 10:
 Pre-hospitalization Medical Expenses means medical
expenses incurred during predefined number of days
preceding the hospitalization of the Insured Person provided
that:
 Such Medical Expenses are incurred for the same
condition for which the Insured Person’s Hospitalization
was required, and
 The In-patient Hospitalization claim for such
Hospitalization is admissible by the Insurance Company.
 Post-hospitalization Medical Expenses means medical
expenses incurred during predefined number of days
immediately after the insured person is discharged from the
hospital provided that:
 Such Medical Expenses are for the same condition for
which the insured person’s hospitalization was required,
and
 The inpatient hospitalization claim for such hospitalization
is admissible by the insurance company.
9.9 MODEL QUESTIONS

Q 1: Write notes on health insurance system?
Q 2: What are the essentials of health insurance contract?
Q 3: Mention some of the key features of health insurance policy
provided by top insurer.

Q 1: What are the advantages and disadvantages of individual health
insurance plan?
Q 2: Critically discuss understanding and exclusion under health
insurance plan.
Q 3: Discuss about model health insurance format and explain some
of the important items included in health insurance policy.
*** ***** ***

UNIT 10 : ESSENTIALS OF HEALTH INSURANCE-II
UNIT STRUCTURE

10.2 Concept of Insurance
10.3 Historical Perspective of Insurance
10.4 Reforms in Insurance Sector in India
10.5 Principles of Under-Writing of Life Insurance and Health
Insurance
10.6 Classification of Risks
10.7 Group Insurance
10.8 Let Us Sum Up
10.10 Answer to Check Your Progress
After going through the unit, you will able to-

 explain the principles of underwriting of insurance
 discuss about life and health Insurance
 discuss about group insurance
10.2 CONCEPT OF INSURANCE
Insurance is a means of protection from financial loss. It is a form

of risk management, primarily used to hedge against the risk of a contingent
or uncertain loss.
An entity which provides insurance is known as an insurer/
insurance company. A person or entity who buys insurance is known as
an insured or as a policyholder. The insurance transaction involves the
insured assuming a guaranteed and known, relatively small loss in the
form of payment to the insurer in exchange for the insurer's promise to
compensate the insured in the event of a covered loss. The loss may or
Essentials of Health Insurance-II Unit 10
may not be financial, but it must be reducible to financial terms, and

usually involves something in which the insured has an insurable interest
established by ownership, possession, or pre-existing relationship.
The insured receives a contract, called the insurance policy, which
details the conditions and circumstances under which the insurer will
compensate the insured. The amount of money charged by the insurer
to the policyholder for the coverage set forth in the insurance policy is
called the premium. If the insured experiences a loss which is potentially
covered by the insurance policy, the insured submits a claim to the insurer
for processing by a claims adjuster. The insurer may hedge its own risk
by taking out reinsurance, whereby another insurance company agrees to
carry some of the risk, especially if the primary insurer deems the risk too
large for it to carry.
The basic principle of insurance is that an entity will choose to
spend small periodic amounts of money against a possibility of a huge
unexpected loss. Basically, all the policyholder pools their risks together.
Any loss that they suffer will be paid out of their premiums which they pay.
10.3 HISTORICAL PERSPECTIVE OF INSURANCE
Insurance is a system of spreading the risk of one onto the

shoulders of many. Insurance is a method or process which distributes
the burden of the loss on a number of persons within the group formed
for this particular purpose.
Although not in the present-day form of insurance, the concept of
such a philosophy of grouping together or risk sharing developed in very
ancient times. 4th century witnessed the practice of Bottomry Bonds and
Respondentia Bonds in maritime trade. If at a time of distress in mid-
ocean, the master of a vessel was in urgent need of fund/money for the
completion of the journey, and he could not manage the same at an
intermediary port either on his own account or on the account of the
owner of the vessel, he (master) was authorised to gather such fund by
mortgaging the vessel. This system was known as Bottomry Bond as the
loan was to be given by signing a bond.
Unit 10 Essentials of Health Insurance-II
The term of the agreement was that the loan was required to be
reimbursed only if the ship reached destination unscathed. In case of total
loss or destruction of the ship, nothing was required to be repaid.
Therefore, it was quite obvious, that the creditors used to charge
a premium, in addition to interest to protect themselves against the possibility
of total losses when they lose the principal amount. Similar loans could
also be gathered on the mortgage of a cargo and this was used to be done
on RESPONDENTIA BONDS. The terms of repayment were exactly the
same. The practice has been abolished since 19th century due to the
immense development in a communication system.
Until the 18th century, there is a system of sharing risks with each
other amongst the merchant community. They used to form a group where
in one of the merchants, in a particular voyage, used to accept the risk
against a premium from others whilst the others used to trade. On a
different occasion, another from the group used to accept the risk whilst
the rest used to trade, and so on.
History of Insurance in India started from the prehistoric period as
Insurance in its primitive form has been known to exist from as back as
3000 BC. Various civilizations were known for practicing the basic concept
of insurance - pooling and sharing in an unorganized manner.
Modern Insurance in India began around 1800 AD with agencies
of foreign insurance starting a marine Insurance business.
CHECK YOUR PROGRESS

Q 1. Name two bonds signed during the 4th
Century in relation to evaluation of insurance
contract.
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Q 2. What is insurance contract?
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................................................................................................................
10.4 REFORMS IN INSURANCE SECTOR IN INDIA
The formation of the Malhotra Committee in 1993 initiated reforms

in the Indian insurance sector and is considered as one of the milestones
in the history of Insurance in India. The aim of the Malhotra Committee
was to assess the functionality of the Indian insurance sector. This
committee was also in charge of recommending the future path of insurance
in India. The Malhotra Committee attempted to improve various aspects
of the insurance sector, making them more appropriate and effective for
the Indian market.
The Insurance Regulatory and Development Authority Act of 1999
brought about several crucial policy changes in the insurance sector of
India. It led to the formation of the Insurance Regulatory and Development
Authority (IRDA) in 2000.
A Brief about insurance history
 1818: Oriental Life Insurance Company, the first life insurance company
on Indian soil started functioning.
 1870: Bombay Mutual Life Assurance Society, the first Indian life
insurance company started its business.
 1912: The Indian Life Assurance Companies Act enacted as the first
statute to regulate the life insurance business.
 1928: The Indian Insurance Companies Act enacted to enable the
government to collect statistical information about both life and non-
life insurance businesses.
 1938: Earlier legislation consolidated and amended to by the
Insurance Act with the objective of protecting the interests of the
insuring public.
 1956: Nationalization of life insurance: Life insurance business was
nationalized on 1st September 1956 and the Life Insurance
Corporation of India (LICI) was formed through the LIC Act, 1956. A
capital contribution of Rs. 5 crores from the Government of India
was also made. There were 170 companies and 75 provident fund
societies doing life insurance business in India at that time. From

1956 to 1999, the LIC held exclusive rights to do the life insurance
business in India.
 1972: Nationalization of non-life insurance: With the enactment of
General Insurance Business Nationalization Act (GIBNA) in 1972,
the non-life insurance business was also nationalized and the General
Insurance Corporation of India (GIC) and its four subsidiaries were
set up. At that point of time, 106 insurers in India doing non-life
insurance business were amalgamated with the formation of four
subsidiaries of the GIC of India.
10.5 PRINCIPLES OF UNDER-WRITING OF LIFE

INSURANCE AND HEALTH INSURANCE
Life Insurance Underwriting is the process of accepting the

proposal of the customer based on the guidelines formulated by the
insurance company. The insurance companies codify a set of procedures
which must be followed before accepting any new business. When a new
proposal comes to the insurance company, its underwriting department
scrutinizes the proposal whether or not it fulfils the criteria laid down by
the company. If they find any gaps, they ask the agent to get it corrected.
It is not that one can get whatever cover one wants. The issue of policy
depends on income of the insured and whether he has the capacity to
pay the premium over the years. Once the underwriters are satisfied that
all the conditions have been fulfilled, they go ahead to accept the premium
and issue the policy.
Commonly insurance is known as a social device in which a
group of individuals (i.e. insured) transfer risk to another party (i.e. insurers)
in order to combine loss experience, which permits statistical prediction
of losses and provides for payment of losses from funds contributed (i.e.
premiums) by all members who transferred the risk. The insurers resort
to underwriting which is the process of classifying the potential insured
into the appropriate risk classification in order to charge the appropriate
rate. Insurance involves-

 A large group of people or organizations who are exposed to similar

risks;
 Each person or the organization that becomes an insured to transfer
risk to the whole group (i.e. pooling of risk), as evidenced by an
insurance contract issued by an insurer;
 The systematic accumulation of funds through the statistical
prediction of losses and calculation of premiums;
 Payment of losses in accordance with the terms of insurance as a
legal contract.
Two Procedure of Underwriting of Insurance are
 Group Insurance
 Individual Insurance
 Group underwriting: the group characteristics, demographics, and
past losses are judged. Because individual insurability is not
examined, even very sick people such as CORONA patients can
obtain health insurance through a group policy in India and even in
international parlance.
Whereas for individual underwriting, the insured has to provide
evidence of insurability in areas of health insurance or specific details
about the property and automobiles in for property/casualty lines of
business. An individual applicant for the health insurance must be
approved by the health insurance company underwriter, a process
that is specific to recognize the hazards associated with a person.
Even for a person entering in health insurance after attaining the
age of 50 years (& above) pre-acceptance Medical check-up (at
their own cost) for blood/urine sugar, blood pressure, echo-
cardiograph and eye-check including retinoscopy - all has now
become mandatory.
 The underwriting manual: Every carrier has its own underwriting
manual. This defines the guidelines that an individual carrier will use
to determine your final premium rates.
An underwriting manual will state things like what service a
carrier's underwriters should use for ordering an attending physician
statement online, when they require a prescription history report,

how height and weight correlate to health classifications, and more.
Since each carrier has their own guidelines, the underwriting
process may include - conducting physical test etc. Everything that
is followed is a standard set of tools and tasks for an underwriter,
but the specification of what is used, when, and how may not be the
same across insurance companies.
 Step 1: Application quality check: Before the process of life
insurance underwriting begins, the carrier will go through the
application to make sure that all information is correct. It's not
uncommon for applications to be accidentally incomplete. The
carrier is looking to make sure that all the information is accurate
and completely filled out. Unless the missing information is
related to medical history, most changes that need to be made
to an application will not slow down the underwriting process.
Depending on the carrier, you may need to do a phone
interview as well. You'll usually need to do this if you only gave
the most basic information on your application, like your date
of birth, address, and coverage needs, and the carrier needs
to dig a little deeper into things like your hobbies.
After that, you'll go into the official underwriting process.
Each of the following checks can add some time to your
application, but it's important in getting you the premium price
you will need to pay over the life of your policy.
 Step 2: Paramedical exam: The Paramedical exam is like a
checkup with your doctor, except it is free to you. You will have
to go to a lab where a medical technician will perform the
exam.
After the paramedical exam, the results will be sent to the
underwriter. The information an underwriter uses falls into three
main categories:
 Basic measurements. Height, weight, blood pressure -
Your height-to-weight ratio plays a big role in how you'll
be classified and, ultimately, what you'll pay for your life

insurance policy. High blood pressure, which becomes a
particular concern as you get older, is also required for
setting your rates.
 Blood test. You can get a lot of information on potentially
risky health concerns with a simple blood test. Heart
disease, stroke, diabetes, blood-borne illnesses, and more
can all be found out with a few vials of blood.
 Drug test. A urine test for a full drug panel will alert the
carrier to the use of drugs like amphetamines, cocaine,
barbiturates, and more. Generally speaking, drug use
makes you riskier to insure and raises your premiums
(unless it's marijuana, which is in a legal, social, and
insurance grey area at the moment).
You can reuse the results of your paramedical exam to
apply for other types of insurance, like disability insurance, or
even for life insurance from another carrier. You are under no
obligation to go with a particular life insurance company just
because they paid for your medical examination.
 Step 3: Attending physician statement(APS): If there are
red flags coming out of your paramedical exam, the underwriter
will order an attending physician statement to answer some
remaining questions.
It provides the status of each condition your doctor is
treating and information about the condition such as how long
you've been treating it, how long symptoms have been present,
and your prognosis.
Say you're showing signs of high blood pressure. An APS
can let an underwriter know that the high blood pressure is a
temporary side effect of medication you're taking and not
necessarily indicative of a larger problem. In that way, it
complements the paramedical exam by getting down into the
finer details of your health.
This step can skew the timeline for the life insurance
underwriting process, adding anywhere from a few days to a
few months depending on how long it takes for a doctor's
office to comply with the request.
 Step 4: Medical Information Bureau check: The Medical
Information Bureau (MIB) is a trade group that helps insurers
share medical data, which helps a carrier fend off fraud by
seeing where and when you've previously applied for life
insurance in a general window of six months.
It's not a bad thing if you've applied for life insurance with
different carriers in the past, but the MIB will let carriers see
what sort of information you've been disclosing on some
applications that you may have accidentally left off others.
Tested positive for drug use on a previous test but failed to
disclose it on your current application? They'll find out.
 Step 5: Prescription check: The underwriter will check all
the medication prescribed to you over the past five to seven
years. As with the paramedical exam and APS, the prescription
check will confirm the information in your application: the
prescriptions you say you're on or if you've omitted any
medication up to this point.
Whether your underwriter requires this step depends on
what he or she finds in other areas of investigation. Life
insurance policies with higher coverage amounts may also
require a prescription check.
 Step 6: Motor vehicle report: The underwriter will receive a
motor vehicle report, or MVR, detailing your driving history.
Just like your health history, your driving history plays a role in
your life insurance rates because it helps determine how risky
you are to insure.
An MVR notes driving violations like traffic citations (think
speeding or reckless driving tickets), vehicular crimes, accident
reports, driving record points, and DUI convictions. It can look
as far back as five to seven years.

If you have a tendency to speed, drink and drive, or engage
in other dangerous driving habits, you're riskier, and your rates
will be higher than someone who's not.
You can request to see your MVR from your state. It's also
used when determining your auto insurance rates, so a copy
of your MVR can be nice to have.
 Step 7: Actuarial tables: Underwriters use a number of
different actuarial tables to determine what risk you pose to
the insurer and how much the insurer needs to charge to
offset that risk.
 Mortality table: This table shows the mortality probability
for a given population, usually based on age and gender
and assuming all other things being equal. Think of it as
a baseline for when, statistically speaking, you're most
likely to die.
 Build table: This table takes your body mass index (BMI)
based on your height and weight and translates it into
information that's relevant to setting your insurance
classification. A poor build can automatically set your
classification to Standard, meaning you'll pay more for
your life insurance policy than someone with a Preferred
classification.
 Step 8: Credit system: After the underwriter has gone through
all of the tests, tool, and checks needed to set your insurance
classification, the last thing he or she may do is use a credit
system to give you a little bump to help you get better rates.
If a chronic illness you have results in a Standard (or worse)
classification, the underwriter's credit system can make your
premium more affordable if you're actively taking steps to
improve your health and undergoing preventative care.
The APS and prescription check will let an underwriter
know what you are doing to keep health problems from getting
worse, which can be a boost to both your health and your

wallet.
 Step 9: Your final rating: Once underwriting is complete, you
are now the proud owner of a life insurance policy. The whole
process can take anywhere from three to eight weeks, and
relying on outside sources - like a doctor's office for an APS
- can add time. All that's left is to confirm the premium rate, sign
the policy to put it in force, and your family is protected.
If that was a lot to digest, you could consider getting
simplified-issue life insurance, which skips the paramedical
exam and the attending physician statement. But simplified-
issue offers lower coverage amounts and isn't available to
people with certain health profiles.
Understanding Risk Selection:
The underwriter does not approve all applications. In some
cases, the underwriter determines that the risk associated
with the application is too high. It is the underwriter's
responsibility to ensure that the insurance company is not
taking on too much risk, which could lead to a loss for the
company.
In order to determine which applicants, represent a
reasonable risk to the company, the underwriter uses the
following information in addition to the application:
 Medical history and examinations
 Inspection reports, and
 The information from the Medical Information Bureau (MIB)
Not every applicant will require a detailed medical
examination. Insurance companies have criteria regarding the
type of information that they must gather for the face amount,
or the amount of insurance coverage for which the applicant
is applying. The larger the face amount, the more information
the applicant will have to submit. For example, if Mr. A applies
for a $5 million policy, the insurance company would want her
doctor to conduct a medical examination, and she may be

required to complete additional testing.
Sometimes, underwriters request an inspection report, or
independent information on the applicant's financial situation
and lifestyle. For example, Mr. A may have disclosed that he
has only participated in skydiving once, but the insurance
company may want to verify this information before making a
decision on hisr policy. If he regularly participates in skydiving,
he would have a greater risk of dying than someone who does
not participate in this activity.
The Medical Insurance Bureau, or MIB, maintains the
applicant's medical information that the underwriter uses to
make a decision about the application. The underwriter
compares information obtained from the MIB to the application
to identify any inconsistencies.
The MIB also provides the underwriter with information
about the number of times in the past two years that another
company had requested this information. The underwriter uses
this information to identify whether the applicant is in the habit
of cancelling his/her insurance coverage in the first two years
of the policy, as this is the time when the insurance company
incurs the majority of the policy's costs.
10.6 CLASSIFICATION OF RISKS
Risk can be classified into 3 categories

1. Financial and Non-Financial Risks.
2. Pure and Speculative Risks.
3. Fundamental and Particular Risks
1. Financial and Non-Financial Risks: Financial risks are the risks
where the outcome of an event (i.e. event giving birth to a loss) can
be measured in monetary terms.
The losses can be assessed and a proper money value can be
given to those losses. The common examples are:
 Material damage to property arising out of an event. We may

consider the damage to a ship due to a cyclone or even sinking
of a ship due to the cyclone. Damage to the motor car due to
a road accident which may be of partial or total nature. Damage
to stock or machinery etc.
 Theft of a property which may be a motorcycle, motor car,
machinery, items of household use or even cash.
 Loss of profit of a business due to fire damage the material
property.
 Personal injuries due to the industrial, road or other accidents
resulting in medical costs, Court awards, etc.
 Death of a breadwinner in a family leading to corresponding
financial hardship.
All such losses, i.e. the outcome of unforeseen untoward
events can be measured in monetary terms.
The losses can be replaced, reinstated or repaired or even
a corresponding reasonable financial support (in case of death)
can be thought about.
We would call all such financial risks as insurable risks
and these are indeed the main subjects of insurance.
Non-Financial risks are the risks the outcome of which
cannot be measured in monetary terms.
There may be a wrong choice or a wrong decision giving
rise to possible discomfort or disliking or embarrassment but
not being capable of valuation in money terms.
 Examples can be:
 Choice of a car, its brand, color, etc.
 Selection of a restaurant menu,
 Career selection, whether to be a doctor or engineer etc.
 Choice of bride/bridegroom,
 Choice of publicity etc.
Since the outcome cannot be valued in terms of money,
we shall call these non-financial risks as uninsurable.
2. Pure and Speculative Risks: Pure risks are those risks where the
outcome shall result in loss only or at best a break-even situation. We
cannot think about a gain-gain situation.
The result is always unfavorable, or maybe the same situation
(as existed before the event) has remained without giving birth to a
profit (or loss).
As opposed to this, speculative risks are those risks where
there is the possibility of gain or profit. At least the intent is to make
a profit and no loss (although loss might ensue).
Investing in shares may be a good example. Pricing, marketing,
forecasting, credit sale, etc. are yet examples falling within the domain
of speculation.
Consider another example where we can have the existence of
both pure risks and speculative risks. A garment factory may be in
our minds. Here we have:
 Cyclone damage possibility to the factory building,
 Fire damage possibility to stock,
 Machinery breakdown possibility to Machinery,
 Theft possibility to removable items,
 Personal accident possibility of factory workers etc.
3. Fundamental Risk and Particular Risks: Now coming to the last
stage of classification of risk we may consider the subject from the
viewpoint of the cause of risk and its effect. We call such
classifications as fundamental risks and particular risks.
Fundamental risks are the risks mostly emanating from nature.
These are the risks that arise from causes that are beyond the
control of an individual or group of individuals.
The losses arising out of such causes may be catastrophic in
dimension and felt by a huge number of populations, the society or
by the state although an individual may be a part of that catastrophe.
The common examples are:
 Flood & Cyclone, Subsidence & landslip,
 Earthquake & volcanic eruption, Tsunami,
 The convulsion of nature and other natural disasters,

 Famine, Draught
We may also add in the list perils like war, terrorism, riots &
other political activities which are neither created by nature nor by
an individual but resulting in colossal losses.
But one thing is certain which are this that all such perils are
impersonal not being caused or contributed by an individual or even
a group of individuals.
Normally fundamental risks were not supposed to be insurable
because of the magnitude and these were considered to be the
responsibility of State. Now because of demand and insurers'
strength, these risks are easily insurable.
Particular risks are; as opposed to what has been narrated
hereinbefore, there are risks which usually arise from actions of
individuals or even group of individuals.
These may be identified as causes arising from personal (or
group) behavior and effects (losses) not being of that magnitude.
These are mostly men created because of their negligence,
error in judgment, carelessness, and disregard for law or respect.
We may call these as risks of personal nature. The common
examples are:
 Fire, Explosion,
 Burglary, housebreaking, larceny, and theft,
 Stranding, Sinking, Capsizing, Collision in case of a ship,
including cargo loss,
 Machinery breakdown and deterioration of stock due to
machinery breakdown,
 Motor accidents including death and bodily injuries, industrial
accidents,
 The collapse of bridges, derailments.
Particular risks are insurable risks and most of the insurances
relate to these risks.
However, the students should appreciate that risk is a dynamic
concept and may be modified because of the ever-changing situation.
CHECK IN PROGRESS
Q 3. Mention the important steps under insurance
underwriting.
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10.7 GROUP INSURANCE
Group insurance is an insurance that covers a group of people, for

example the members of a society or professional association, or the
employees of a particular employer for the purpose of taking insurance.
Group coverage can help reduce the problem of adverse selection by
creating a pool of people eligible to purchase insurance who belong to the
group for reasons other than the wish to buy insurance, which might be
because they are a worse than average risk. Grouping individuals together
allows insurance companies to give lower rates to companies, "Providing
large volume of business to insurance companies gives us greater
bargaining power for clients, resulting in cheaper group rates"
Salient features of a group plan which makes it unique are
discussed below-
 Relevance: A group health insurance plan is available only for
recognised groups. Groups like employer-employees, trade unions,
clubs, associations, etc. can buy a group health insurance plan for
their members. The plan can be bought by groups who are already in
existence and not by those who are formed for the purpose of buying
insurance.
 Nature: In a group health insurance policy, different policies are not
issued for different members. A single policy is issued which is
called a master policy. All the members who are covered are named
in the policy with their respective coverage levels.
 Ownership: The group health insurance plan is issued in the name

of the group. The group, therefore, acts as the policyholder while the
covered members are called beneficiaries. So, if a company, say
ABC Private Limited, buys a group health insurance plan for its
employees, the policyholder would be ABC Private Limited while the
insured members would be the employees.
 Sum insured: The sum insured for each member is determined by
the insurance company. The members or the group cannot decide
the sum insured which it wants.
 Premiums: Premiums of group health insurance plans are relatively
low and hence affordable. They can be paid by the group itself, by
its members, or partially by the group and partially by the members.
The insurance company, however, collects the lump sum premium
from the group which is the policyholder.
 Pre-entrance medical check-ups: Group health insurance plans
have simplified underwriting guidelines. Irrespective of the age of the
insured members, no pre-entrance medical check-ups are required.
 Waiting period: Group Mediclaim plans have minimal or no waiting
periods. Pre-existing illnesses are covered from the first day of the
plan itself.
 Cashless treatments: If the insured member takes treatments at
a network hospital, group health insurance plans allow cashless
settlement of claims.
 Policy tenure: A group health insurance plan is offered for one year.
After the coverage period is over, the policy can be renewed. Upon
renewal, fresh underwriting is done before the coverage is allowed
to continue. The sum insured and the premium can change during
renewal
 Coverage for dependents: Under many group health insurance
plans, coverage can be taken not only for the group members but
for their dependents too. Dependents could include the member's
spouse, dependent children and dependent parents.
 No co-payment clause - In individual health insurance plans, if the
insured is aged 60 years and above, a co-payment clause is applicable.
Under that clause, a part of the claim is borne by the policyholder.

However, group health insurance plans have no co-payment clause.
The policyholder is not required to bear a portion of the claim as the
insurer settles the claims in full.
CHECK IN PROGRESS
Q 4. What is Group Insurance?
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10.8 LET US SUM UP
 Insurance is a means of protection from financial loss. It is a form of

risk management, primarily used to hedge against the risk of a
contingent or uncertain loss.
 4th century stands as witnessed the practice of BOTTOMRY BONDS
and RESPONDENTIA BONDS in maritime trade as evolution of
insurance
 History of Insurance in India started from the prehistoric period as
Insurance in its primitive form has been known to exist from as back
as 3000 BC.
 Underwriting is the process of accepting the proposal of the customer
based on the guidelines formulated by the insurance company. The
insurance companies codify a set of procedures which must be
followed before accepting any new business.
 Two Procedure of Underwriting of Insurance are
 Group Insurance
 Individual Insurance
 The factors that affect risk on the life of an individual is known as
hazard. The hazard may be classified as
 Physical
 Occupational
 Moral
 Group Insurance is a form of Business "Providing large volume of

business to insurance companies gives us greater bargaining power
for clients, resulting in cheaper group rates"
1) GUPTA, L. P. (2014) India Insurance Guide Paperback- 1

2) K S N Murthy & K V S Sarma. Modern Law of Insurance in India
10.10 ANSWER TO CHECK YOUR

PROGRESS
Ans to No 1: Bottomry Bonds and Respondentia Bonds

Ans to Q No 2: Insurance contract is the conditions and circumstances
under which the insurer will compensate the insured.
Ans to Q No 3:
Step 1: Application quality check
Step 2: Paramedical Exam
Step 3: Attending Physician Statement (APS)
Step 4: Medical Information Bureau Check
Step 5: Prescription Check
Step 6: Motor Vechicle Report
Step 7: Acturial Tables
Step 8: Credit System
Step 9: Your Final Rating
Ans to Q No 4: Group insurance is an insurance that covers a group of
people, for example the members of a society or professional
association, or the employees of a particular employer for the
purpose of taking insurance. Group coverage can help reduce the
problem of adverse selection by creating a pool of people eligible
to purchase insurance.

Q 1: What is insurance?
Q 2: What do you mean by Insurance Underwriting?
Q 3: Discuss the historical perspective of insurance.
Q 4: Discuss about the importance of Group Insurance.
*** ***** ***

UNIT 11 : ESSENTIALS OF GENERAL INSURANCE
UNIT STRUCTURE

11.2 Introduction
11.3 Definition of General Insurance
11.3.1 Types of General Insurance
11.4. Importance of general insurance
11.4.1 Importance of general insurance in a country's
economic development
11.5. Concept of Short Term Risk
11.6. Fundamental of the following concepts
11.6.1 Common Law
11.6.2 Insurable interest
11.6.3 Proposal accidence
11.6.4 Indemnity
11.6.5 Contribution suborgation
11.6.6 Representation
11.6.7 Utmost good faith
11.6.8 Material fact
11.6.9 Physical Hazard
11.6.10 Moral Hazard
11.7 Let Us Sum UP

 Know the definition and types of general insurance
 Describe the importance of general insurance in country’s economic
development

Essentials of General Insurance Unit 11
 Concept of short term risk

 Knows some of basic concept such as common law, proposal
accidence, indemnity, insurable interest etc
11.2 INTRODUCTION
Insurance is a legal agreement between two parties i.e, the insurance

company (insurer) and the individual (insured). In this, the insurance company
promises to return the losses of the insured on happening of the insured
contingency. The contingency is the event, which causes a loss. It can be
the death of the policyholder or destruction of the property. It is called a
contingency because there is an uncertainty regarding happening of the
event. The insured pays a premium in return for the promise made by the
insurer.
General insurance is insurance, which is not a life insurance. It
includes property insurance, liability insurance and other form of insurance.
In general insurance, payments made by insurance companies are based
on the loss incurred, rather than being a fixed sum as in life insurance.
11.3 DEFINITION OF GENERAL INSURANCE
As already discussed, Insurance may be defined as a consisting

one party (the insurer) agrees to pay to the other party (the insured) or his
beneficiary, a certain sum upon a given contingency (the risk) against which
insurance is sought.
According to British English Dictionary, general insurance means an
“insurance (such as house insurance and car insurance) that does
not insure someone’s life”. General insurance is typically defined as any
insurance that is not determined to be life insurance
CHECK IN PROGRESS
Q 1: What is an insurance business?
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Unit 11 Essentials of General Insurance
Q 2: What is general insurance?

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11.3 TYPES OF GENERAL INSURANCE:
Insurance can be widely segregated in three categories–life, health

and general. General insurance is insurance for valuables other than our
life. General insurance covers the insurer against damage, loss and theft
of your valuables. The premium and cover of general insurance depends
upon the type and extent of insurance. A general insurance policy typically
has a period of a few years. In India, general insurance policies are of the
following types:
 Motor Insurance: Insurance for the damage or theft of your motor
vehicle, two-wheeler, three-wheeler or four-wheeler, is covered under
this type of insurance. The damage caused to the vehicle can be
caused natural or man-made circumstances, the extent of which
would change from policy to policy. Under the Motors Vehicle Act,
motor insurance is mandatory in India. New motor vehicles come
with third-party insurance right from the showroom itself.
 Home Insurance: Home and household insurance protects your
home and the items inside it. A home insurance policy would also
cover natural and man-made circumstances. The contents that are
covered under a home insurance policy would depend on the type of
policy you buy.
 Travel Insurance: Another popular type of general insurance is travel
insurance, which covers your trips abroad. Travel insurance can be
taken to cover loss or theft of your valuables as well as documents.
Some travel insurance policies also cover flight delays and medical
emergencies. Travel insurance can be taken for personal as well as
business trips
 Health Insurance: Common types of health insurance includes:
individual health insurance, family floater health insurance,
comprehensive health insurance and critical illness insurance.

 Marine Insurance: Marine cargo insurance covers goods, freight,
cargo, and other interests against loss or damage during transit by
rail, road, sea and/or air.
 Commercial Insurance: Commercial insurance encompasses
solutions for all sectors of the industry arising out of business
operations.
 Accident Insurance: Accidents of different types are possible at any
time, at any place and in case of any person or object. Persons and
vehicles are more prone to accidents causing injuries and damages.
 Fire Insurance: In order to get the asset, stock or machines insured
against fire, a proposal form is to be filled in and submitted to the
insurance company. The Insurance company examines the proposal
with due regards to various factors and the periodical amount of
premium is fixed. An insurance policy is then issued in favour of the
applicant
 Education Insurance: Education Insurance can be used to pay for
your child’s higher education expenses. Under this insurance, the child
is the life assured or the recipient of the funds, while the parent/legal
guardian is the owner of the policy. You can estimate the amount of
money that will go into funding your children’s higher education
using Education Planning calculator.
 Theft Insurance: Theft insurance generally covers all acts of stealing
against loss or damage caused by the unlawful taking of property.
There are three major types of insurance contracts for burglary,
robbery, and other theft. Burglary is defined to mean the unlawful taking
of property within premises that have been closed and in which visible
marks are evidencing forcible entry. Robbery is defined as that type
of unlawful taking of property in which another person is threatened
by either force or violence. In the robbery peril, therefore, the element
of personal contact is necessary.
 Property Insurance: The property insurance is the insurance that
protects the physical goods and the equipment of the business or

home against any loss from theft, fire, and any other perils. Generally,
the property insurance covers the risks of all the damages caused by
fire, theft, wind, smoke, snow, lightning, etc.
 Aviation Insurance: Aviation insurance normally covers physical
damage to the aircraft and legal liability arising out of its ownership
and operation. Specific policies are also available to cover the legal
liability of airport owners arising out of the operation of hangars or
from the sale of various aviation products.
 Livestock insurance: The Livestock Insurance Scheme has been
formulated with the twin objective of providing protection mechanism
to the farmers and cattle. Farmers can protect themselves against the
loss of valuable animals by purchasing livestock insurance.
This insurance is typically used to cover domesticated animals such
as cattle, sheep, pigs, and horses. There are several types of livestock
insurance.
 Crop Insurance: Crop insurance is purchased by agricultural
producers, and subsidized by the federal government, to protect against
either the loss of their crops due to natural disasters, such as hail,
drought, and floods, or the loss of revenue due to declines in the
prices of agricultural commodities.
 Rural insurance: Rural insurance is insurance that has been created
for the rural public to insure their businesses such as poultry, cattle,
farming, etc. An area with a low population density and in which at
least 75% of the male population is involved in agriculture comes under
the rural sector.
CHECK IN PROGRESS
Q 3: What are the different types of general
insurance?
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11.4 IMPORTANCE OF GENERAL INSURANCE

While life insurance remains a priority for most people, general
insurance policies are not far behind. Owing to the risks posed by natural
calamities, diseases, medical emergencies, and accidents, general
insurance covers is something that can provide a blanket of financial
protection from them. Accidents and misfortunes cannot be predicted, but
it is in our hands to make sure that we are prepared. That is why investing
in the right general insurance covers is something that should be on the top
of your to-do list.
General insurance helps us protect ourselves and the things we
value, such as our homes, our cars and our valuables, from the financial
impact of risks, big and small–from fire, flood, storm and earthquake, theft,
car accidents, and travel mishaps – and even from the costs of legal action
against us. And we can choose the types of risks we wish to cover by
choosing the right kind of policy with the features we need.
In addition, it also covers a special type of insurance such as
professional indemnity. Getting any of the general insurance will leave your
mind at peace. Obviously, the reasons has increased why getting general
insurance is considered to be important because it almost covers everything.
It covers even your car, home, and health. Below are numerous reasons
why we should have a general insurance.
 It Pays to stay insured: Whether we want to open a garage or a
restaurant, own a home or buy an automobile, having the right general
insurance policy at hand saves a lot of hassle in times of exigencies
where finances may get affected.
General insurance policies are basically contracts on those assets
which are vulnerable to damages and whose economic value needs
to be taken care of. On the individual front, these include vehicle, house,
health, and travel insurance, while for entities, it entails the likes of trade
of micro and rural insurance, to name a few.
 Not having to worry about healthcare expenses: A medical
emergency can affect us at any point in time, and happen to any of

your loved ones. Therefore, getting yourself and your family insured
under a health insurance plan can save you a lot of hassle when it
comes to bearing healthcare expenses. Be it a medical check-up or
an emergency surgery; your bills are taken care of when you have the
right health insurance policy at hand.
 Drive with Peace of Mind: Most of us own a motor vehicle that
enables our everyday commute to the workplace, social gatherings,
and even road trips. But no matter how safe you drive, there is always
the risk of being involved in an accident, even if it no fault of your own.
That is why vehicle insurance is essential. There’s a reason it is
mandatory and now come with 3 years (four-wheelers) and 5 years
(two-wheelers) of third party insurance at the time of purchasing a
new vehicle.
 Never Suffer a Property Loss: When our property faces a calamity,
be it natural or human-made, your home insurance comes to your
aid, providing you the financial backup to repair the damages suffered
by the property. It is a safeguard you must have to secure one of your
most valuable assets i.e. your home.
 It is Beneficial for Business: If we have a business of our own, we
have to keep in mind that risks associated with our business can
sprout up at any moment. It, therefore, becomes important that we
get business insurance. If we happen to be plying a trade or have a
business based in the rural region, we can opt for trade insurance
and micro & rural insurance, respectively.
With the operational costs, payment obligations and other liabilities
that we have in our business, we can ill afford to not be insured.
Each and every insurance type which comes under the spectrum
of general insurance has a singular objective – provide coverage for
an aspect it has been designed for. Research about the different
insurance types, identify the ones you need and invest in them as
soon as you can. The best way to be prepared for exigencies is by
being properly insured.

 It will Give You Peace of Mind: The principal reason why an

individual should get insurance is to have a peace of mind. it is the
only weapon that you could have opposed to any risk or misfortune.
 Loss of property will not give you a burden: In case of loss of
personal property due to natural calamities or man- made, you will
not be worrying too much since general insurance almost covers
everything. As long as you had insured your properties, you will receive
enough amount of money depending on the agreement and policy
that you had agreed upon.
 You will be ready for any type of mishap: If you are insured, it
seems that you are just saving or depositing money through the
premium that you are paying. Each amount will be useful in times
misfortunes or accidents. The insurance company will give it back to
you with additional interest depending on the insurance policy that
you buy.
 Greater Profits for Businessman: Because insurance almost
covers everything, your insurer will handle any future risk. Goods as
well as services transportation are all covered by general insurance
that is why any type of loss or misfortune will not anymore be a problem.
 Emergencies can be handled
You cannot foretell what might happen next, and getting yourself
insured is the most practical alternative you can have. If you had
encountered an accident such as road accident, your insurer will
shoulder the hospital bill. Moreover, if you are diagnosed having a
serious type of disease, you will not hesitate to undergo any type of
urgent operation as long as you had yourself a health or medical
insurance.
 Expenses your car repair can be covered also: If you had your
car insured, all expenses will be partially shouldered by the insurance
company in case of road accidents and you need a car repair.
 You can use it during any unexpected liability: Liability is taken
care and the same amount will be paid by the parties for an insurance
policy between two or three.

General insurance is the best option you can have if you want to
have risk- free life. The premium that you will pay will be all worth it
especially in times of mishap. Being secured and guaranty with your
life is probably the perfect way to enjoy life.
11.4.1 Importance Of General Insurance in a Country's

Economic Development
The world we live in is full of uncertainties and risks.

Individuals, families, businesses, properties and assets are exposed
to different types and levels of risks. These include risk of losses of
life, health, assets, property, etc. While it is not always possible to
prevent unwanted events from occurring, financial world has
developed products that protect individuals and businesses against
such losses by compensating them with financial resources.
Insurance is a financial product that reduces or eliminates the cost of
loss or effect of loss caused by different types of risks.
Apart from protecting individuals and businesses from many
kinds of potential risks, the Insurance sector contributes significantly
to the general economic growth of the nation by providing stability
to the functioning of businesses and generating long-term financial
resources for the industrial projects. Among other things, Insurance
sector also encourages the virtue of savings among individuals and
generates employments for millions, especially in a country like India,
where savings and employment are important.
Let’s understand in detail how and why insurance as a sector
is key to development of any economy:
 Provides Safety and Security to Individuals and
Businesses : Insurance provides financial support and
reduces uncertainties that individuals and businesses face
at every step of their lifecycles. It provides an ideal risk
mitigation mechanism against events that can potentially
cause financial distress to individuals and businesses. For
instance, with medical inflation growing at approximately 15%

per annum, even simple medical procedures cost enough to

disturb a family’s well-calculated budget, but a Health
Insurance would ensure financial security for the family. In
case of business insurance, financial compensation is
provided against financial loss due to fire, theft, mishaps
related to marine activities, other accidents etc.
 Generates Long-term Financial Resources: The Insurance
sector generates funds by way of premiums from millions of
policyholders. Due to the long-term nature of these funds, these
are invested in building long-term infrastructure assets (such
as roads, ports, power plants, dams, etc.) that are significant
to nation-building. Employment opportunities are increased by
big investments leading to capital formation in the economy.
 Promotes Economic Growth: The Insurance sector makes
a significant impact on the overall economy by mobilizing
domestic savings. Insurance turn accumulated capital into
productive investments. Insurance also enables mitigation of
losses, financial stability and promotes trade and commerce
activities those results into sustainable economic growth and
development. Thus, insurance plays a crucial role in the
sustainable growth of an economy.
 Provides Support to Families during Medical
Emergencies: Well-being of family is important for all and
health of family members is the biggest concern for most.
From elderly parents to newborn children, medication and
hospitalization play important role while ensuring well-being of
families. Rising medical treatment costs and soaring medicine
prices are enough to drain your savings if not well prepared.
Anyone can fall victim to critical illnesses (such as heart attack,
stroke, cancer etc.) unexpectedly. And rising medical expense
is of great concern. Medical Insurance is a policy that protects
individuals financially against different type of health risks. With
a Health Insurance policy, an insured gets financial support in

case of medical emergency.

 Spreads Risk: Insurance facilitates moving of risk of loss
from the insured to the insurer. The basic principle of insurance
is to spread risk among a large number of people. A large
population gets insurance policies and pay premium to the
insurer. Whenever a loss occurs, it is compensated out of
corpus of funds collected from the millions of policyholders.
CHECK IN PROGRESS
Q 4: Discuss the importance of general
insurance.
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Q 5: Discuss the importance of general insurance in a country’s
economic development.
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11.5 CONCEPT OF SHORT TERM RISKS
Risk is the potential for uncontrolled loss of something of value.

Risk can also be defined as the intentional interaction with uncertainty.
Uncertainty is a potential, unpredictable, and uncontrollable outcome; risk is
an aspect of action taken in spite of uncertainty. Specifically, in the short-
term insurance industry, when we talk about risk we mean the potential to
make a financial loss from an unexpected event (such as a burglary or
accident). The financial loss can be for anything; indeed, there
is insurance available for almost any loss you may suffer that you can
imagine.
Short term risk in insurance is a financial contract that you take
with an insurer to protect your movable assets in the case of damage or
loss. The contract stipulates that the company will pay you a set amount of
money, or will replace or repair your movable asset in the event of the
damage or loss. Basically, the short-term option provides consumers with
the opportunity to cover any financial risks to their material possessions.

These are things such as your vehicle, your property, the things you own
inside your house or even yourself
CHECK IN PROGRESS
Q 6. What do you mean by short term risks?
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11.6 FUNDAMENTALS OF THE FOLLOWING

CONCEPTS
11.6.1 Common Law
Common law is the body of law derived from judicial decisions

of courts and similar tribunals. The defining characteristic of “common
law” is that it arises as precedent. In cases where the parties disagree
on what the law is, a common law court looks to past precedential
decisions of relevant courts and synthesizes the principles of those
past cases as applicable to the current facts. If a similar dispute has
been resolved in the past, the court is usually bound to follow the
reasoning used in the prior decision. If, however, the court finds that
the current dispute is fundamentally distinct from all previous cases
and legislative statutes are either silent or ambiguous on the question,
judges have the authority and duty to resolve the issue (one party or
the other has to win, and on disagreements of law, judges make that
decision). The court states an opinion that gives reasons for the
decision, and those reasons agglomerate with past decisions as
precedent to bind future judges and litigants. Common law, as the
body of law made by judges, stands in contrast to and on equal
footing with statutes which are adopted through the legislative
process,

11.6.2 Insurable Interest
A person or entity has an insurable interest in an item, event

or action when the damage or loss of the object would cause a
financial loss or other hardships. To have an insurable interest a
person or entity would take out an insurance policy protecting the
person, item or event in question. The insurance policy mitigates
the risk of loss should something beset the asset. Insurable interest
is an essential requirement for issuing an insurance policy that makes
the entity or event legal, valid and protected against intentionally
harmful acts. People not subject to financial loss do not have an
insurable interest. Therefore a person or entity cannot purchase an
insurance policy to cover themselves in the event of a loss.Insurable
interest is a type of investment that protects anything subject to a
financial loss. It specifically applies to people or entities where there
is a reasonable assumption of longevity or sustainability, barring
any unforeseen adverse events. Insurable interest insures against
the prospect of a loss to this person or entity
11.6.3 Proposal Accidence
It is an offer for consideration and accidence or acceptance

means to give consent, approval, or adherence; agree; assent; to
accede to a request; to accede to the terms of a contract. An offer
or proposal is intimation to another of one’s intention to do or to
abstain from doing anything with a view to obtaining the assent of
that other person to such an act or abstinence. When the person to
whom the proposal is made signifies his assent to it, the offer is said
to be acceptance. The proposal for general insurance must be in
writing. The proposer gives the necessary description of the property
or other valuables to the insured. In practice the printed proposal
form is used for the purpose. Introduction, type of properties,
construction, occupation, etc., are the various information which are
required by the insurer. The answers to these questions must be

completely correct. The assured must disclosed all the material facts
and should observe utmost good faith. The description of the subject
matter of insurance is the basis of the contract for assessing the risk
and fixing the premium.
On receipt of the proposal form, the insurer will assess the
risk. Sometimes, when the contents and subject-matters are not of
very high amount, the insurer may accept on the basis of proposal
form only. When the subject-matter is of larger magnitude and when
the hazard involved is of a variable or unknown nature, the insurer
may send his surveyor to survey the property. The surveyors being
expert in the field of insurance evaluation will consider the proposal
in the light of this report. The unknown proposers are required to
submit an evidence of responsibility. The insured will required to
submit a certificate from some known and responsible person about
honesty and integrity. As soon as the proposal is accepted, the
assured is informing about the decision.
11.6.4 Indemnity
Indemnity means making compensation payments to one

party by the other for the loss. Indemnity is considered a contractual
agreement between two parties whereby one party agrees to pay
for potential losses or damages caused by another party.
With indemnity, the insurer indemnifies the policyholder—that is,
promises to make whole the individual or business for any covered
loss.
It is based on a mutual contract between two parties (one
insured and the other insurer) where one promises the other to
compensate for the loss against payment of premiums.
The principle of indemnity asserts that on the happening of
a loss the insured shall be put back into the same financial position
as he used to occupy immediately before the loss. In other words,
the insured shall get neither more nor less than the actual amount of
loss sustained.
This, of course, is always subject to the limit of the sum insured

and also subject to certain terms and conditions of the policy.
Therefore, to put it in a much better way, on the
happening of a loss, the insurers will try to put back the insured into
the same financial position as the insured used to occupy immediately
before the happening of the loss, only if the insurance is properly
arranged on full value insurance.
11.6.5 Contribution Subrogation
Contribution is a term used in both marine and non-marine

insurance to describe the right of an insurer, when he has
discharged their liability to the assured, to call on another insurer
to bear his share of the loss and pay his proportion of the amount
already paid under the first policy. Insurer’s ‘rights of contribution’
are completely different – this is the insurer’s own legal right, under
the Insurance Contracts Act. It doesn’t depend on the insured’s rights.
It exists where two (or more) insurance policies cover the same loss.
The insurer who pays the claim can require the other insurer(s) to
contribute. That’s why insurers will not usually waive their right of
contribution or treat their policy as “primary” to another policy.
Subrogation means an organization that is controlled by
and subordinate to another organization. It is seldom possible to
reform a suborganization for the benefit of the parent organization
without encountering resistance.
The aim of subrogation is that the insured should not get
more than the actual loss or damage. After payment of the loss, the
insurer gets the right to receive compensation or any sum from the
third party from whom the assured is legally liable to get the amount
of compensation. The main characteristics of subrogation are as
follows; - The insurer subrogates all the remedies, rights and liabilities
of the insured after payment of the compensation. The insurer has
right to pay the amount of loss after reducing the sum received by
the insured from the third party. But in marine insurance the right of
subrogation arises only after payment has been made, and it is not
customary as in fire and accident insurance, to after this by, means
of a condition to provide for the exercise of subrogation rights before
payment of a claim. At the same time the right of subrogation must
be distinguished from abandonment. If property is abandonment to
a marine insurer, he is entitled to whatever remains to the property
irrespective of value of subrogation.
After indemnification, the insurer gets all the rights of the
insured on the third parties, but insurer cannot file suit in his own
name. Therefore, the insured must assist the insurer for receiving
money can receive the amount of compensation from the insured.
11.6.6 Representation
A representation is a statement made by the proposer to the

insurer relating to a proposed risk. Such a representation may pertain
to both material and immaterial facts. It refers to the act of disclosing
important information either in written form or orally that will help the
one being disclosed to form the proper course of action. In insurance,
this information is crucial to the crafting of the policy by the insurer.
Failure to disclose important information might nullify the insurance
contract. When a person applies for insurance, he or she tells the
representative of the insurance company facts about himself or
herself or the property that he or she wants insured that will affect
the price and the coverage of the policy.
For examples, a person with diabetes must inform the insurer
so that the latter is informed of this health risk and can properly
determine the proper policy for the potential insured. Another
examples, a person who is insuring their car must tell pertinent facts
like whether or not they’ve ever been arrested for drunken driving or
that the car is sometimes used for racing.
In those cases, the insurance company can later deny
coverage if those important information were undisclosed. Failure to
represent the facts properly can nullify or void a policy.
11.6.7 Utmost Good Faith
The parties to an insurance contract must be honest with

each other and must not hide any information relevant to the contract
from each other. This is known as the principle of Utmost Good Faith.
It is important to the insurer that they have a full and accurate picture
of the risk that is proposed to them.
The principle of Utmost Good Faith is also known as
Uberrimae Fides. It means that both the policyholder and the insurer
need to disclose all material and relevant information to each other
before commencement of the contract.
Under Section 45 of Insurance Act 1938 states that if within
2 years of commencement or revival of the insurance policy, the
insurer get to know that there has been a non-disclosure or
misrepresentation of material facts, then the insurer can call the
policy null and void.
It simply means that if within 2 years the Insurance Company
finds out that the policy holder has not stated the complete truth or
has lied while filling up the proposal form, then it can cancel the
policy and decline the claim. It is not necessary that they will definitely
repudiate the claim, but it is also a possibility. The insurer may ask
for the difference in premium or change the terms and conditions
after the fact has been disclosed.
Thus, if an alcoholic person had mentioned that he is non-
alcoholic and he dies in a heart attack within 2 years of the policy
commencement, then also the Insurance Company may repudiate
or decline the claim on grounds of “non-disclosure” or
“misrepresentation” of “material facts”, i.e. for not stating the
complete truth or misstating information which is relevant for
underwriting and risk assessment. His policy could have been over-
rated or loaded with additional premium if the underwriters were
aware of the fact.
Thus, it is the duty of the proposer to make full disclosure. In

the event of failure to disclose material facts, the contract can be

held null and void. The duty of disclosure in life insurance operates
till the risk commences.
11.6.8 Material Fact
Material fact is information that is vital to interpreting a subject

matter and is relevant to a legal document. In insurance, it is
information that can determine the coverage and the cost of the
premium. Withholding it might cause the policy to be null and void.
An insurance transaction works under the principle of utmost
good faith. When someone wants to get a health insurance policy,
for instance, they must reveal their health history so that the insurer
can properly determine the coverage and the premium. If the person
smokes tobacco, they must reveal that habit to the insurer or the
representative of the insurance company to aid in the proper crafting
of the policy. The smoking habit is a material fact because it exposes
the insured to a number of health risks that the insurer will likely
cover in the future.
11.6.9 Physical Hazard
Physical hazard is a physical condition that increases the

possibility of a loss. Thus, smoking is a physical hazard that increases
the likelihood of a house fire and illness. Moral hazards are losses
that results from dishonesty. Thus, insurance companies suffer losses
because of fraudulent or inflated claims.
Physical hazards in insurance, indicates those dangers of
the subject matter of insurance which can be ascertained or identified
by mere inspection of the risk. The hazards are apparent in the
subject- matter itself.
Some of the examples of physical hazard are
(a) Marine Insurance: The nature of the cargo, whether these
are more susceptible to damage, e.g., fragile nature of the cargo like
fish, egg etc. or glass items which are more prone to breakage.
Quality of packing of the goods. Bad quality packing creates more

losses.
The voyage itself may be hazardous particularly during the monsoon
period in our country.
Nature, construction, age, classification, and condition of a vessel.
For example, an over-aged vessel or a vessel in a bad shape or a
vessel in an unseaworthy condition presents higher risks and is more
affiliated with accidents.
(b) Fire Insurance: Nature and construction of the building.
Materials used in the construction and whether such materials
are of combustible or non-combustible nature.
The system of lighting and heating of the premises. Whether the
electrical wirings are in good shape or worn-out.
Whether the premises are kept clear. Rubbishes scattered here and
there help the fire to spread.
Indiscriminate smoking throughout the premises, particularly if it is a
factory where inflammable materials are required to be kept, is in
itself an example of physical hazard.
Whether the risk is situated near the fire brigade, and whether internal
firefighting facilities are there on the premises.
Nature of occupation of the premises, e.g., if it is a petroleum or
kerosene or chemical trade the hazard will be more.
Nature, construction, the occupation of the adjoining premises
because fire may travel from the adjoining premises to the insured
premises.
11.6.10 Moral Hazard
Moral hazard indicates those dangers which relate to

character, integrity and mental attitude of the insured. These are not
visible and cannot be identified or ascertained by mere inspection of
the risk or the subject-matter of insurance. These, in fact, refer to
the behavior and attitude of the insured or their employees towards
the subject-matter of insurance from the viewpoint of encouraging
or discouraging the causation of the insured event. In every risk, an

element of moral hazard may be in varying degree, is always present.
There may be an example of first-class moral hazard where
the insured gives maximum cooperation to the insurers by
materializing their suggestions aimed at risk improvement, or where
the insured himself is very strict and particular in maintaining the
property or premises with such care that the possibility of the
happening of the insured event is reduced.
Examples of bad moral hazards are also there where the
insured fraudulently and intentionally brings about an insured event
with the sole motive of making money out of insurance at the cost of
insurers.
(a) Carelessness: It is an implied condition of all insurance
contracts that the insured must take all reasonable precaution
in averting or minimizing a loss. Carelessness is the cause of
most of the accidents and when the insured behaves carelessly,
an unsatisfactory moral hazard is created.
(b) Difficult Insured: An insured may be always uncompromising
and litigation-minded. He may refuse to accept the amount
offered by insurers and press for an unreasonable amount.
(c) Fraud: A very unsatisfactory moral hazard exists when a
person wants to take out a policy with the intent to make a
profit.
(d) Over insurance: Excessive over insurance is apparently an
instance of bad moral hazard.
(e) Maintenance: Bad administration and resultant shabby
maintenance of the property premises is an example of bad
moral hazard.
It is also an example of a physical hazard since bad maintenance
reflects in the untidy atmosphere around which can be physically
seen.

CHECK IN PROGRESS
Q 7. Define Common law.
................................................................................................................
................................................................................................................
11.7 LET US SUM UP
 According to British English Dictionary, general insurance means an

“insurance (such as house insurance and car insurance) that does
not insure someone’s life.
 General insurance is an insurance which is not a life insurance. It
includes property insurance, liability insurance and other form of
insurance. In general insurance, payments made by insurance
companies are based on the loss incurred, rather than being a fixed
sum as in life insurance.
 Insurance can be widely segregated in three categories–life, health
and general. General insurance is insurance for valuables other than
our life. General insurance covers the insurer against damage, loss
and theft of your valuables. The premium and cover of general
insurance depends upon the type and extent of insurance. A general
insurance policy typically has a period of a few years.
 Short term risk in insurance is a financial contract that you take with
an insurer to protect your movable assets in the case of damage or
loss.
 Insurance for the damage or theft of your motor vehicle, two-wheeler,
three-wheeler or four-wheeler, is covered under the motor insurance.
 Subrogation is referred as the process of seeking re-imbursement from
the responsible party for a claim that they had already paid.
 Insurance generates significant impact on the economic development
of a country by mobilizing domestic savings. Insurance sectors provide
capital into productive investments. Insurance enables to mitigate loss,
financial stability and promotes trade and commerce activities those
result into economic growth and development.
 Physical hazards in insurance mean any physical condition that

increases the possibility of a loss. It includes any material, structural,
or operational features of the business.
1) Mishra, M N (January-1, 2016). Insurance Principle and Practice. S

Chand Publishing, India.
2) Gupta, L.P (January-!, 2016). Handbook of General Insurance policies
and Claim. Dr. L. Gupta, India
3) Dayal Hargovind, (January-1, 2017 ). Fundamentals Of Insurance.
Notion Press, 1st Edition, India
4) Gupta, L. P. (1 January, 2014). India Insurance Guide Paperback. Dr.
L. P. GUPTA (Author, Contributor) , India.
5) Murthy, K S N & Sarma, K V S. Modern Law of Insurance in India.

PROGRESS
Ans to Q 1 No: A financial institution that provides a range of insurance

policies to protect individuals and business against in the risk of
financial losses return of regular premiums
Ans to Q 2 No: General insurance that do not come under the scope of life
insurance are called general insurance.
Ans to Q 3 No: Home insurance, motor insurance, travel Insurance, health
insurance Marine insurance is the General insurance.
Ans to Q 4 No: A general insurance policy is essentially a policy that protects
your financial well-being. it is a special type of policy that helps
secure your many properties-whether it is your priced vehicles or
the most important thing of all.
Ans to Q 5 No: Insurance generates significant impact on the economic
development of a country by mobilizing domestic savings. Insurance

sectors provide capital into productive investments. Insurance

enables to mitigate loss, financial stability and promotes trade and
commerce activities those result into economic growth and
development.
Ans to Q 6: Short-term risk in finance involves providing loans with a term
of a few months or less, but no longer than a year. car insurance,
home insurance, cell phone insurance are examples of short-term
risk insurance.
Answer to Q.7:
Common law is the body of law derived from judicial decisions of
courts and similar tribunals. It is unwritten law derived from court
case decisions based on custom and precedent.

Q 1: Write a note on General Insurance.
Q 2: What does travel insurance cover?
Q 3: What are the eligibility criteria for purchasing General Insurance?
Q 4: What do you mean by term ‘Insurer’ and ‘Insured’?
Q 5: Write notes on subrogation.
Q 6: What do you mean by education insurance?
Long Questions: (Answer each question in about 300 to 500 words)

Q 1: What is General Insurance and what are the different kinds of
General Insurance?
Q 2: Why we should have a general insurance?
Q 3: Discuss the role of general insurance in the economic
development of a country.
Q 4: Explain the meaning of the following terms-
Utmost good faith, insurable interest, indemnity, material facts
and physical hazard.
*** ***** ***

UNIT 12 : ESSENTIALS OF GENERAL INSURANCE-
II
UNIT STRUCTURE

12.2 Policy Endorsements
12.3 Selection and Inspection of Risks
12.4 Rating and Calculation of Premiums
12.5 Marketing of General Insurance
12.6 Let Us Sum Up

 explain the meaning of policy endorsement
 understand the concept of risk selection and inspection
 describe the different methods of rating or pricing of general
insurance products
 discuss the major distribution systems for marketing of general
insurance products
12.2 POLICY ENDORSEMENTS
General Insurance is a type of non-life insurance contract entered

into by two parties, namely, the insurer or the insurance company and the
insured or the client. It covers insurance of assets, including financial assets.
In this type of contract, the insurer agrees to compensate the insured,
against any loss suffered by the property insured on the happing of a
particular financial event, in exchange of a payment of a specific sum of
money called premium. In other words, the premium is paid by the insured,
who has a financial interest in the asset covered, and in return, the insurer

Unit 12 Essentials of General Insurance-II
protects the insured from the financial liability in case of loss. One of the
notable features of an insurance contract is that the policyholder has the
provision to make further amendments or modifications to the original terms
and condition of the insurance policy. This modification in the original policy
contract is usually performed by the insurance company on the behest of
the policyholder by setting out the desired alterations in a memorandum
called as endorsement. In simple words, any form of change introduced in a
pre-existing insurance policy is known as endorsement. An endorsement is
generally issued subsequent to the issue of an insurance policy, whenever
the policyholder feels the requirement of the same. It may be issued when
the insurance the company initially hands over the insurance policy to the
insured at the time of purchase, or issued anytime during the term of the
policy, or issued when the policy is due for renewal. Endorsement allows the
policyholder to change the terms and scope of an existing insurance contract
by adding, removing, excluding, restricting and extending the insurance
coverage. A policyholder can, by submitting a letter in writing, request the
insurer to permit transfers of interest in property, to transfer coverage from
one place to another, or to increase or decrease limits of coverage, to list
additional conditions, to provide for assignment of policies or changes in
beneficiary designations, to provide for changes in settlement options elected,
or to permit any amendments to the original contract in a legal manner. The
insurance company on receiving the client’s request shall make the required
changes and record them in the policy after they are satisfied with the validity
and accuracy of the alterations as requested. When an endorsement is
attached to an original policy, it is imperative that the policy must be read
and understood in line with the add-on provisions. The reason being, too
many endorsements might result in an alteration of the essential features of
the insured risk itself, thus resulting in determination of a new premium amount
different than the premium amount initially fixed, as warranted in many cases.
An endorsement attached to a policy generally takes precedence over any
conflicting provision mentioned in the policy. Also, many policies have
endorsements that amend the policy to conform to a given State’s law. There

Essentials of General Insurance-II Unit 12
are basically 3 types of endorsements: Extra, Nil & Refund.

 Extra endorsement: Involves charging of an additional premium,
 Nil endorsement: Involves no change in the amount of premium but
correction of some original data such as address etc.
 Refund endorsement: Involve estimation of policy contract or refund
of premium amount in part or in full
Generally endorsements are issued in respect of the following
amendments:
 Change in insurable interest
 Cancellation of insurance
 Change in the value at risk
 Change in the location or situation of risk
 Reduction or addition to the risk
 Change of the insured as and when a transfer of interest or assignment
of interest is made. Sometimes an endorsement is also issued to
correct a typographical error in the policy already issued.
12.3 SELECTION AND INSPECTION OF RISKS
The process of selection and classification of risks is called

underwriting. It is the process of evaluating information crucial to the
acceptance or rejection of exposures. In other words, it is a function of
assessing and classifying the degree of risk an applicant or a group of
applicants represents and then determining the coverage of that risk. The
first part of the underwriting process i.e. selection of risks includes the
decision regarding acceptance of a proposal. The second part of the process
i.e. classification of risks refer to the terms of agreement on the basis of
which the proposal is to be accepted by the underwriter. The underwriter is
the person responsible for evaluation of risks and computation of premium.
Risk selection is a technique of screening incoming insurance
applicants with the aim of grouping them into different risks classes or
categories so as to determine the appropriate amount of premium to be
charged to a proposed insured. Risk selection in case of general insurance
is a complex activity because this line of insurance deals with a vast range
of properties with varying degree of risks. Before accepting or declining a

risk proposal, the underwriter is burdened with the task of inspecting the
hazards risk associated with it. In general insurance, the commercial properties
involved are of high value, because of which the details of the risk and
exposures cannot be compiled in a single proposal form alone. The insurance
companies for evaluating and inspecting the associated risks take the help
of various parties as mentioned below:
 Application form: The application form, which varies for each line of
insurance, containing the details of the properties as mentioned by the
proposed client is the primary source of information required by the
underwriter to assess and make selection of risks.
 Information from the Broker or Agent: Sometimes, the broker
prepares the case for the underwriter. The broker inspects the site or
the location of the property and lays down the plans and reports on the
relevant aspects of the risk. These documentations are then forwarded
to the underwriter to facilitate negotiation on the terms of the contract.
In some line of general insurance, the agent may also exercise his
right to act as an underwriter. He agrees to exercise his authority to
gain incentives out of an insurance contract by making profit for the
company.
 Inspection: Inspection reports prepared by experts or specialists or
company professionals after conducting field surveys to verify the
information as provided in the proposal form are also helpful in selection
of applications by the underwriter
CHECK IN PROGRESS
Q 1: Mention the three types of policy
endorsements
..............................................................................
................................................................................................................
Q 2: Name the major amendment areas in respect of which
endorsements can be issued
................................................................................................................
................................................................................................................
Q 3: What is meant by the term “risk selection”?
................................................................................................................
................................................................................................................
Q 4: Who is responsible for evaluation of risk proposals and
calculation of premiums?
................................................................................................................
................................................................................................................
12.4 RATING AND CALCULATION OF PREMIUMS
Insurance is a business of buying risks which is why careful pricing

of insurance products becomes an essential element in building business
for the insurance company. Rating also known as Pricing of Insurance
Products is quite inexplicable to most of the people. The reason being
insurance as an intangible service follows a different approach to pricing.
Unlike tangible products, one is unable to determine the cost of direct inputs
in services. When goods are sold, the company generally knows in advance
the costs of producing the same and hence, prices can be fixed in a way
that it covers all costs and yields profit simultaneously. Also, in case of
other services, the cost of total offer can be estimated with some degree of
judgment. But, since insurance offers protection against risks, people
consider price in terms of the amount they pay for buying a risk. When an
insurer sells a policy, it has no way of knowing what will be the realized cost
of the policy because it is contingent upon a future event i.e. whether or not
the policy buyer face losses and, if he or she does, how many and how
large the amount of losses would turns out to be. The actual cost of providing
insurance remains unknown until the policy period has lapsed. Therefore,
insurance rates are mainly based on predictions rather than actual costs.
Most rates are determined by statistical analysis of past loss data based on
specific variables of the insured. Variables that produce the best forecast
results serve as criteria for fixing premium amounts. The insurance company
cannot tell with precision what its actual costs are going to be. The total

premiums charged for a given line of insurance services may be inadequate

for covering all claims and expenses during the policy period. Of course,
the insurer hopes that the premium calculated and the investment income
will be adequate to pay all claims and expenses and yield a return. But, the
actual amount of losses and expenses can only be determined after the
expiry of the protection period. This is the primary reason why different prices
are charged to different people, by the insurance companies, for policies
providing the same kinds and amounts of insurance coverage.
The process of pricing of insurance and the calculation of insurance
premiums is known as rate making. Rate making plays an important role
in determining the overall profitability of the insurance business as it ensures
that the premium is charged in a manner that covers all the expected losses
and at the same time remains competitive with the premiums charged by
other policymakers. The premium amount liable for payment by the insured
party, on purchase of an insurance cover, is arrived at by fixing a rate
determined by the actuaries. This rate is then multiplied by the number of
exposure units and is further adjusted by various rating plans (a process
called rating). In other words, insurance prices are called as premiums.
Premiums are based on rates and rates are based on per unit of exposure.
The term rate is synonymous with premium in the insurance business. It is
the price per unit of insurance for each exposure unit. An exposure unit is
the quantitative unit of measurement used in insurance pricing, which varies
by line of insurance. It is a unit of liability or property with similar
characteristics. The person who undertakes the responsibility to determine
the rates and premiums is known as an actuary. An actuary is an individual
possessing high mathematical and statistical skills that he applies in all
stages of insurance company operations, including research, planning, and
pricing of insurance products.
In General Insurance, actuaries determine the rates for different lines
of insurance. Rates are usually calculated by taking into consideration the
company’s past data or loss experiences along with industry statistics.
Statistical Data on natural calamities and events like earthquake, hurricanes,
floods, cyclone, fires, marine-related perils, crime rates, traffic accidents,
and the cost of living are carefully analyzed. Many insurance companies
valuates and perform analysis on their own records of past loss data in the
process of establishing their policy rates; whereas some companies obtain
loss data from authorized advisory organizations. These organizations
render services like calculation of costs based on historical or prospective
losses that individual companies can further make use of in calculating
their own policy rates. Actuaries then conduct analysis of the data in order
to estimate the expected loss levels and expected deviations from such
levels. However, determining or fixing rates by taking historical analysis as
the base may not always provide adequate statistical justification for the
same, such as in case of earthquake insurance where one cannot predict
the magnitude and likely damage of an earthquake based on past data. In
such cases, catastrophe modeling is helpful in calculation of rates, but with
less success. Actuaries decide on the insurance rate through extensive
study on specific variables, and finally underwriters makes decision as to
which variables shall be relevant for an insurance applicant.
Since, the survival of the insurance industry is based on the game
of probability and statistics, only the insurer who can make correct
estimations and predictions will be able to attract clients. The Insurance
actuaries have to constantly deal with a tradeoff while deciding on the
premium amount to be charged for insurance coverage. The premium must
be high enough to sufficiently cover expected losses and expenses, but not
too high to dissuade potential clients. On the other hand, the rate should be
low enough to compete with premiums charged by other insurance firms
and at the same time equitable for similar exposures. Rating or Pricing of
insurance products is a challenging task for the actuaries as the sales price
(i.e. the insurance premium)of such insurance offers is collected from the
policyholders before the stipulated services, i.e. claim payments, are duly
made available to them. Hence, the insurance companies in order to reduce
the adverse effects of insurance risks opt for pooling method. They make a
pool of applicants from a huge group of customers and then by applying the
law of large numbers attempt to mitigate the risks of future losses.
A significant part of ratemaking relies on the process of identification
of characteristics and variables that can make reliable predictions on future

losses so as to ensure that low risk customer groups are charged with lower
amount of premiums and high risk customer groups are charged with higher
amount of premiums. In this way, an insurance company achieves a
competitive advantage over the other competing firms. By pricing the premiums
lower in case of low risk customer groups, the insurance company is able to
meet their needs through the insurance services they are offering, thus,
lowering their own chances of making probable losses and expenses out of
the contract. This move on their part increases the odds against the remaining
insurance companies in the market to suffer from higher losses and expenses
since they will be left to cater to the needs of the comparatively high risks
profile of customers. Hence, insurance companies are always willing to invest
on actuary studies in an effort to identify every characteristic that can forecast
future losses with high precision.
The pure premium, which is an important component of insurance
premium, is determined with the help of actuarial calculations. It represents
that part of the premium which is necessary to cover for the losses and
loss adjustment expenses. Loading is another component of the premium
necessary to pay for other expenses, particularly sales expenses, and to
allow for a profit margin. In other words, it refers to the amount that is added
to the pure premium to cover expenses. The gross rate is the pure premium
amount and the loading per exposure unit and the gross premium amount
is the gross rate multiplied by the number of exposure units to be insured.
The ratio of the loading charge over the gross rate is called the expense
ratio.
Pure Premium = Losses / Exposure Units
Example: An average loss of Rs. 100,00,000 per year per 1000
automobiles yields the following pure premium:
Pure Premium = Rs. 100,00,000 / 1000 = Rs.10,000 per Automobile per
Year
The loading charge consists of the following ancillary insurance costs:
 commissions and other acquisition expenses
 premium taxes
 general administrative expenses

 contingency allowances
 profit margin
Gross Rate = Pure Premium + Load
Loading charges are directly proportionate to the premiums as these
charges increase proportionately with the increase in premium amount,
especially commissions and premium taxes. Hence, the loading charge is
also called an expense ratio. Therefore, the gross rate is expressed as a
percentage increase over the pure premium:
Pure Premium
Gross Rate =
1 – Expense Ratio
Example: If the pure premium is Rs.6000 and the expense ratio is
40%, then:
Gross Rate = Rs. 6000/(1 – 0.4) = Rs. 6000/0.6 = Rs. 10,000
Gross Premium = Gross Rate × Number of Exposure Units
Expense Ratio = Load / Gross Rate
It is essential that pricing of premiums should be done in the light of
the insurance company’s objectives as well as requirements mandated by
regulations in the insurance sector. Responsiveness of the premium rates
to changing business situations is one of the primary business objectives
to meet.In addition to that, secondary objectives like simplicity, flexibility and
consistency in the rating structure facilitate easy understanding for
policyholders. On the other hand, regulations in the insurance sector
regarding premium pricing are primarily made to protect customer’s
interests. Such regulations demand fairness and non-discrimination in rating
which means that same rates should be applicable to all the members of
an underwriting class drawing a similar risk profile. It also mandates that
the premium rates be reasonable and adequate in its amount in order to
maintain insurer’s solvency.
 Types of Rating: Insurance rating evaluates the cost of the insurance
product. Rates for most of the insurance offers usually are determined
either by individual rating or class rating. Individual rates depend on

the individual whereas class rates depend on the underwriting class of

the insured. It is highly probable that all insurance rates fixed could be
class rates, where the insurance company simply makes adjustments
in the premium amount to accommodate the losses of the entire class.
However, some insurance companies initially identify lower risk
customer groups within the class, and then offer them lower premiums
to capture market share. Hence, depending upon the rating approach
followed by an insurance company,the price to the buyer may be-
(a)entirely different from the one charged to another buyer, (b) same
as the payment made by other buyers or (c) similar to that paid by
others, but may not be equal to the exact amount for one reason or
another. These rate-making methods applied in general insurance
business are as follows:
 Class Rating: Class rates are the most common rate used
both in life as well as general insurance business. Under class
rating, insured risks are classified into different classes on the
basis of one or several important factors. For instance, some
of the major factors in health insurance are age, health, gender
etc. The policyholders belonging to a particular class are subject
to same rate per unit of exposure. The class is defined through
statistical studies as a group with specific characteristics that
reliably predict the insured losses of that group. These rates
are most commonly used when the factors causing losses
can be easily quantified. This type of rating is also termed as
manual rating because the various classifications and the
respective rates are printed and published in the form of
manuals.
There are two methods to determine a class rated premium
or to adjust it.
In the pure premium method, the pure premium is arrived
at by adding the losses and loss-adjusted expenses over a given
period, and then dividing it by the number of exposure units. The
final step includes the loading charge being added to the pure
premium to determine the gross premium, which is ultimately

charged to the customer.
Actual Losses + Loss-Adjusted Expenses

Pure Premium =
Number of Exposure Units
Gross Premium = Pure Premium + Load

In the loss ratio method–a comparison is made between
the ratio of incurred losses along with loss-adjustment expenses
to the earned premiums and the loss ratio that was expected. If
the actual loss ratio differs from the expected loss ratio, then the
premium is adjusted accordingly. The loss ratio that is expected
is the percentage of the premiums that are expected to be used
to pay for the losses. The actual loss ratio is the sum of losses
and loss-adjusted expenses over the premiums charged.
If the actual loss ratio differs from the expected loss ratio,
then the premium is adjusted according to the following formula:
Actual Loss Ratio – Expected Loss Ratio

Rate Change =
Expected Loss Ratio
 Individual Ratings: Contrary to class rating, Individual ratings

use several factors to forecast future losses and these factors
vary considerably from one individual to another. Additionally,
individuals can also exercise their right to loss control measures
that will reduce the amount of losses and allow them to pay a
lower premium. Individual ratings are of two types – (a) judgment
rating and (b) merit rating. Merit rating can be further classified
as schedule rating, experience rating, and retrospective rating.
 Judgment Rating: As the name suggests, judgment rating is
based on the judgment of the actuary or underwriter calculating
the rate. This type of rate is applied when the risk proposed to

be bought is so unusual that little or no statistical information

about similar risk is available. In situations when the factors that
predict potential future losses are so diverse and difficult to be
quantified, the underwriter is left with no option but to evaluate
each exposure individually, and use a combination of his
judgment and his intuition based on past experience. Because
of the complexity of these factors, class rating is rendered
useless, as there are no statistics that can reliably assess the
probability and quantity of future losses. When judgment rating
is used, each premium is unique and is based on the opinion of
the person making it. It is widely used in ocean marine insurance
and in some lines of inland marine insurance.
 Merit Rating: Merit rating is a modified version of class rating.
Since this rating plan is based on the concept of class rating,
the premium amount charged is adjusted according to individual
customers, contingent upon the actual losses of a customer. In
other words, it modifies or makes adjustments in the class rate
either upward or downward depending on individual loss
experience. The underlying principle of this rating method is that
the loss experience varies substantially from one insured party
to another. Hence, it reflects the extent to which a specific risk
differs from the others within the same class. The three types of
merit-rating plans are: schedule rating, experience rating and
retrospective rating.
 Schedule rating: Under this rating method, each exposure is
individually rated. In calculation of schedule rates, examining the
risk (the person or object insured) is of significance in order to
identify the features that are likely to cause losses or to prevent
them. The risk is then compared with the average or standard
risk of its type, usually class rates are used as the standard
base rate. Finally, deductions and additions are made from the
standard rate corresponding to the risk’s desirable features and
its undesirable features. After making modifications in the rate
by debits and credits, the resultant rate is tailored to reflect the

characteristics of risk for which it is used. The various additions
to and deductions from the basic rate are based upon
judgments. For example, schedule rating is used to determine
premiums for commercial property insurance, where factors
such as the physical features of the building, its size and location,
protective devices installed in the building, its occupancy in the
building, usage of the building, maintenance and protection of
the building are taken into consideration while analyzing the
associated risks.
 Experience rating: In this rating method, the class rate is
modified depending on the claim experience of a particular
exposure. In other words, the class rate is adjusted upward or
downward on the basis of loss experience in previous years,
which is taken as a base to estimate the premium for the next
policy period. Usually, the actual amount of losses suffered by
the insured during previous policy periods, typically of the prior
two or three years is compared to the average risks in the same
class. The premium rate is reduced if the risk and losses have
a better record than the average. On the other hand, the premium
rate is increased if the record losses are higher than the average.
Experience rating is used specially for large risks viz. large
enough to have many losses each year thus, reflecting a trend.
Hence, this type of rating is found to be adopted by larger firms
that generate a sufficiently high volume of premiums and have
more credible experience.
The premium under experience rating is calculated by
following the loss ratio method. But the actual adjustment to the
rate is determined by multiplying it by a credibility factor. The
credibility factor is a measure of reliability that the actual loss
experience is predictive of future losses. In statistics, reliability
is directly proportional to the increase in sample size. The larger
the sample size, the more reliable is the statistics. Hence, the
size of the business is a determinant of the credibility factor—

the larger the business, the higher is the credibility factor. Since
the credibility factor for small businesses is low, their eligibility
criteria to use experience rating is not met.
Loss Ratio Method for Adjusting Premiums for an Experience
Rating
Actual Loss Ratio – Expected Loss Ratio

× Credibility Factor
Rate Change =
Expected Loss Ratio
 Retrospective ratingP: Contrary to experience rating,
retrospective rating makes use of the insured’s loss experience
in the current policy period in order to determine the actual
premium to be paid. In other words, this rating plan considers
actual loss experience for a period to calculate the premium for
the same time period. A provision is allowed for, in the contract,
which determines a range of maximum and minimum amount
that can be charged. When losses are small, a minimum
premium is charged to the insured otherwise when losses are
huge, maximum premium is payable by the insured. Part of the
premium is paid at the beginning, and the final part which is
determined after the expiration of the policy is usually paid at the
end of the period. In most cases, the premium lies between
maximum and minimum premium.
Retrospective Premium= [BP+(RL×LCF)]×PTM
BP = Basic Premium
RL = Ratable Losses
LCF = Loss Conversion Factor
PTM = Premium Tax Multiplier
The loss conversion factor is expressed as a percentage
of the ratable losses. This percentage is added to 1, and then
multiplied by the amount of losses incurred during the retrospective
period. Likewise, the premium tax multiplier is a percentage of
the premiums charged, so the premium tax percentage is added

to 1 before multiplying it by the total premium. So if loss adjustment

expenses equals 20% of the total losses, then the loss conversion
factor = 1 + 20% = 1.2. If the premium tax is 8% of the premiums
charged, then the premium tax multiplier = 1 + 8% = 1.08.
CHECK IN PROGRESS
Q 5: Who is an actuary?
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Q 6: What do you mean by an exposure unit?
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Q 7: What do you mean by pure premium?
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................................................................................................................
Q 8: What is loading charge?
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Q 9: Mention the formula for calculating retrospective premium.
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12.5 MARKETING OF GENERAL INSURANCE
Organizations offering general insurance protection for its customers

are basically commercial establishments with risk sharing and profit earning
as their primary motives. Being a part of the business community, general
insurance companies like any other company attempts to yield a reasonable
amount of profit for its long term survival and sustainable growth. The premium
amount that the company collects from its policyholders is utilized primarily
to cover up the costs and expenses incurred in performing a variety of
operations, viz, underwriting, resolving claims, advertising and marketing of
their products, rate making and information processing. Out of all the functions,

marketing and distribution is considered to be the most essential of all. The

reason being proper marketing of insurance products to potential customers
will eventually lead to expansion of customer base and turn in more funds
and profits for the company.Hence, integrated marketing and distribution
system is one of the keys to success for an insurance company.
After the advent of LPG policy in India, Insurance sector has
undergone a sea change with the entry of private players. New and advanced
form of distribution and marketing channels were set up by private entities
mainly to enhance penetration and expansion of insurance services in the
market. They believed that developing integrated marketing channels will
expand insurance knowledge, improve its accessibility, and widen the reach
of the insurance business, thus, attracting potential customers for the
service.
Insurance Marketing System refers to the various marketing
strategies adopted for identifying potential customers, and making the
insurance products available to them as and when needed. These different
methods of selling insurance products through various insurance
intermediaries like agencies, institutions and organizations comprise the
distribution system. Market Intermediaries play a very crucial role of
‘matchmaking’ or ‘market making’. Their major responsibility is to match
the requirements of the clients with the suitable insurance services available
in the market which turns out to be a complex multidimensional process.
The primary function of the intermediaries is to observe and monitor the
market to look for prospective buyers. Once they identify the buyers, they
analyze their risk requirements. subsequently, they search for insurers
having the necessary risk appetite and financial strength to underwrite the
required risk. Next, they help their client select from the list of competing
offers. Insurers engage actuaries, claims adjusters, underwriters, and other
home office personnel to distribute their products, but unless insurance
policies are sold at a margin, the insurer’s financial survival will be at stake.
Thus, a well-designed and an efficient marketing system are necessary for
insurer’s survival. The major marketing intermediaries at play for distribution
of general insurance products are as follows:
 Insurance Agents: An insurance agent is a person who has been

granted license by approved authority to procure and carry on
insurance business activities including continuance, renewal or revival
of insurance contracts. An agent could be an individual agent or a
corporate agent. In other words, an insurance agent is a person who
works for an insurance company and sells its insurance products on
behalf of the company as its sole representative through authorized
license. An individual agent, as the name suggests, is an individual
who represents an insurance company, whereas a corporate agent
is an intermediary other than an individual, representing an insurance
company. As per business ethics, an agent can only deal with the
insurance products of one company only, and thus is typically not
allowed to promote and compare prices and features of other products
on the market. Since agents are representatives of insurance
companies, they usually operate under the terms of an agency
agreement with the insurer. In India, agents can have license with only
one non-life insurance company as per Insurance Regulatory and
Development Authority of India (IRDAI) regulations.
 Insurance brokers: Insurance brokers are registered professionals
under IRDAI who represent and cater to the interests of insurance
buyers. They enter into insurance contracts with insurance companies
on behalf of their clients. Insurance brokers usually work for
policyholders and act independently in relation to insurers. Brokers
act as a connecting link between insurers and potential clients seeking
for insurance coverage against specified risks. They mainly assist
clients in the selection of suitable insurance policies by presenting
them with alternatives in terms of insurers and products. Acting as an
‘agent’ for the buyer, brokers unlike agents has the freedom to work
for and represent multiple companies at the same time to place
coverage for their clients’ risks. Brokers provide their guidance to their
clients with regard to the selection of an adequate policy that matches
their risk appetite after obtaining quotes from various insurance
companies. As a result, brokers end up working with multiple insurers,
a variety of clients and, in many cases, in a wide geographical area.

 Bancassurance: Bancassurance refers to sale of insurance products
and services through groups such as business houses, professional
associations or banks. Under this form of marketing, banks or
professional associations enter into a partnership agreement with an
insurance company that permits the insurance company to sell its
products to the former’s client base. This arrangement creates an
additional source of revenue for the organizations through sale of
insurance products and at the same time enables the insurance
companies to expand their customer base without having to expand
their sales force or having to pay additional commissions to insurance
agents and brokers. Hence, the bargain turns out to be profitable for
both the parties. These affinity groups and banks along with Non-
Banking Financial Companies act as a corporate agent i.e. sole
representative of the insurance company. Bancassurance is said to
be in its infant stage in India but has a huge potential to become one of
the leading marketing intermediaries in the insurance business.
 Worksite marketing: Worksite marketing is a form of marketing where
insurance companies deploy a team to a target group in order to
demonstrate them, the features of various general insurance products.
The team visits a target group, who can either be an individual or a
crowd, at their workplace. The target group may be employees of a
particular company, of an educational institution or any kind of
organization. The advantage of worksite marketing is that the entire
catchment area is available on site in a particular location of a
prospective client, which also gives the opportunity to up-sell and
cross-sell related insurance products. Premium is generally charged
either in the form of payroll deduction or other regular means. This is
an emerging medium of marketing with high potential to attract clients
initially and then securing them via other marketing channels such as
telephone, internet, direct marketing or even through company sales
force.
 Telemarketing: Telemarketing is another popular method of marketing
general insurance products. It also supplements other aids of

distribution channels. Insurance companies approach their potential
buyers by giving them a call and explaining to them their offers. The
insurance companies, after obtaining data of prospective customers,
contact them over the telephone, and when a deal is finalized through
the call, the papers and payment instruments are collected physically
with the assistance of a runner boy or a courier agency. Companies
are extensively using the telephone medium to advertise their products
and expand their business.
 Internet and digital marketing: Internet marketing or online marketing
is one of the most sought after digital marketing channel by the
insurance companies because of its worldwide reach and access.
Insurance companies take the advantage of internet and place their
insurance products in it. In other words, they promote and advertise
their insurance services on the World Wide Web or via email to drive
direct sales or sales over an electronic site. Various avenues like email,
websites, social media, social networking sites, mobile apps are
adopted by the insurers to get to customers quickly. The internet gives
quick and personal access to customers for review and final selection
of various general insurance policies.
 Web-aggregators: Web-aggregators utilize the online space to reach
out to their potential clients. They offer customers ease of access
and comparison of various insurance companies advertising and
dealing with the same or similar product offers. This action allows the
customer to analyze and evaluate the best option out of the multiple
choices available infront of them before making the final purchase.
IRDAI has issued guidelines for web-aggregators in 2011, 2013 and
2015 for regulating their operations. Factors like website security,
website design, customer services, reliability and product portfolio are
important considerations that influence the choice of product and the
choice of web-aggregator by the customers of general insurance
products.
 Post offices: Post offices are also authorized to distribute insurance
products, with IRDAI allowing each circle of the Department of Post to

act as a corporate agent of insurance companies. Each circle of India
post is identified as a separate unit and is issued an independent
corporate agent license to help increase insurance penetration in rural
India.
 Referrals: Referral refers to an agreement between a referral company
and an insurance company. This agreement grants the insurance
company the access to the database of the customers of the referral
company but does not permit sale, either directly or indirectly through
an agent, corporate agent or an insurance intermediary including a
micro-insurance agent of an insurance product.
 Shop-assurance: Shop-assurance is the technique of promoting and
selling insurance services through retail and departmental stores such
as Big Bazaar. The retailer may make an attempt of selling burglary
and fire policy on purchase of a product from the store. Also referred to
as mall-assurance, this method of marketing is more common outside
India, where one can get the consumer durable, which one has
purchased, insured by applying for the insurance coverage along with
it right at the store. These are known as point of purchase policies.
12.6 LET US SUM UP
 General insurance is a type of non-life insurance. It also covers the

insurance of assets, including financial assets. It is a contract between
the policyholder and insured, which is considered only after the
realization of the premium from the insured.
 Policy endorsements refer to the amendments or modifications that
are introduced to the original terms and condition of the insurance
policy. This modification is usually performed by the insurance company
on the behest of the policyholder by setting out the desired alterations
in a memorandum called as endorsement. An endorsement is generally
issued subsequent to the issue of an insurance policy, whenever the

policyholder feels the requirement of the same.

 Underwriting is the process of evaluating information crucial to the
acceptance or rejection of exposures. It is a task of assessing and
classifying the degree of risk an applicant or a group of applicants
represents and then determining the coverage of that risk. The first
part of the underwriting process is called selection of risks and the
second part of the process is called classification of risk.
 The process of pricing of insurance and the calculation of insurance
premiums is known as ratemaking. Ratemaking plays an important
role in determining the overall profitability of the insurance business
as it ensures that the premium is charged in a manner that covers all
the expected losses and at the same time remains competitive with
the premiums charged by other policymakers.
 Pricing of premiums should be done in the light of the objectives set
by the insurance company as well as regulations in the insurance
sector. Responsiveness, simplicity, flexibility and consistency are
some of the primary objectives to be fulfilled.
 There are mainly two types of rating plans – class rating and individual
rating. Class rating is based on the risks levels of the class to which
the insured belongs and Individual rating is based on the risk levels of
the individual insured. Individual rating plan is further divided into two
kinds – judgment rating and merit rating. Again, merit rating is classified
into three types – schedule rating, experience rating and retrospective
rating.
 Insurance Marketing System refers to the various marketing strategies
adopted for identifying potential customers, and making the insurance
products available to them as per their risk appetite. Market
Intermediaries play a very crucial role of ‘matchmaking’ or ‘market
making’. The major marketing intermediaries are – insurance agents,
insurance brokers, bancassurance, web aggregators, referrals, shop-
assurance, postal office, digital marketing, worksite marketing,
telemarketing, direct marketing etc.

1) Govender, V. & L. 1) Gupta, P. K. (2004). Fundamentals of

Insurance. Penguin Random House.
2) Parodi, P. (2014). Pricing in General Insurance (1st ed.). Chapman
and Hall/CRC.
3) Rejda, G. E., & McNamara, M. J. (2014). Principles of Risk
Management and Insurance. Pearson.
4) The Institute of Chartered Accountants of India. (2008). Principles and
Practice of General Insurance (4th ed.). The Publication Department
on behalf of Dr. T. Paramasivan, Secretary of the Committee on
Insurance and Pension of the Institute of Chartered Accountants of
India, ‘ICAI Bhawan’, Indraprastha Marg, New Delhi - 110 002.

PROGRESS
Ans to Q No 1: The 3 types of endorsements are - Extra, Nil & Refund.

Extra endorsement – Involves charging of an additional premium,
Nil endorsement – Involves no change in the amount of premium but
correction of some original data such as address etc.
Refund endorsement – Involves termination of policy contract or
refund of premium amount in part or in full
Ans to Q No. 2: The major amendment areas in respect of which
endorsements can be issued are
 Change in insurable interest
 Cancellation of insurance
 Change in the value at risk
 Change in the location or situation of risk
 Reduction or addition to the risk
 Change of the insured as and when a transfer of interest or

assignment of interest is made.

 Rectification of a typographical error.
Ans to Q No 3: Risk selection refers to the process of screening incoming
insurance applicants with the aim of grouping them into different
risks classes or categories so as to determine the appropriate
amount of premium to be charged to a proposed insured individual
or a group.
Ans to Q No 4: The underwriter is responsible for evaluation of risk proposals
and calculation of premiums
Ans to Q No 5: An actuary is a person who undertakes the responsibility of
determining the rates and premiumsof different non-life insurance
products. An actuary is an individual possessing high mathematical
and statistical skills that he applies in all stages of insurance
company operations, including research, planning, and pricing of
insurance products.
Ans to Q No 6: An exposure unit is the quantitative unit of measurement
used in insurance pricing, which varies by line of insurance. It is a
unit of liability or property with similar characteristics
Ans to Q No 7: The pure premium represents that part of the premium
which is necessary to cover for the losses and loss adjustment
expenses.
Ans to Q No 8: Loading is a component of the premium which is necessary
to pay for other expenses, particularly sales expenses, and to allow
for a profit margin. In other words, it refers to the amount that is
added to the pure premium to cover additional expenses. The loading
charge consists of the following ancillary insurance costs:
commissions and other acquisition expenses, premium taxes, general
administrative expenses, contingency allowances and profit margin.
Ans to Q No. 9: The formula for retrospective premium is
Retrospective Premium = [ BP + (RL x LCF)] x PTM
Where, BP = Basic Premium; RL = Ratable Losses; LCF = Loss
Conversion Factor; PTM = Premium Tax Multiplier


Q 1: Write short notes on (a) Policy endorsements (b) Ratemaking (c)
Premium (d) Judgment rating (e) Class rating
Q 2: What do you mean by underwriting? Discuss the main sources of
information relevant to the process of underwriting.
Q 3: Discuss the different types of merit rating plan of premium pricing.
Q 4: Explain the two methods of determining class rates for general
insurance products.
Q 5: Why is marketing of general insurance products important?
Q 6: Why is rating considered to be a complex activity in the field of
general insurance business?

Q 1: Discuss the different types of rate-making methods applicable in
general insurance industry.
Q 2: Discuss the role of major distribution channels in marketing of non-
life insurance products in India.
*** ***** ***

UNIT 13 : PLANNING FOR WEALTH
ACCUMULATION AND RETIREMENT
NEEDS
UNIT STRUCTURE

13.2 Introduction
13.3 Wealth Accumulation Planning
13.4 Life Cycle Planning
13.5 Planning for accumulation
13.6 Purchase of insurance and accumulation planning
13.7 Investment- Tax advantaged and non-advantaged
13.8 Essentials of individual retirement planning: Analysis of
retirement/ Income needs
13.8.1 Decide When to Retire
13.9 Retirement Planning Strategies
13.10 Investment for retirement
13.11 Pension Plans
13.11.1.1 Basic principles of pension plans
13.12 Let Us Sum Up

After going through this unit, you will be able to:
 discuss the meaning of wealth accumulation planning and life cycle
planning.
 discuss the objectives of wealth accumulation planning.
 explain the purchase of insurance and accumulation planning.
 discuss the different types of investments.
 explain the essentials of individual retirement planning.

Unit 13 Planning For Wealth Accumulation and Retirement Needs
 analyse the retirement and income need.

 discuss about retirement planning strategies.
 discuss the meaning of pension plans and its principles.
13.2 INTRODUCTION
A wealth accumulation strategy is a broad financial approach to
increasing the value of a portfolio. By doing so, the investor builds up a greater
and larger stake in the mutual fund as the fund’s portfolio grows in value.
Wealth accumulation planning refers to the act of preparing with patience
and making sound financial decisions. Based on investment scenarios
and maintenance methods, lifecycle planning predicts the future
performance of an asset, or a collection of assets. From construction to
disposal, lifecycle planning refers to the approach to asset main
tenance. The objectives of wealth accumulation, insurance buying,
accumulation planning, and investment are all included in the accumulation
plan.
13.3 WEALTH ACCUMULATION PLANNING

Wealth accumulation is a process of planning with patience and
make right decision about one’s own money. It is a plan of investment with
short term and long term set goals. Building wealth doesn’t require large
amount of money but one need to be disciplined enough to invest on a
consistent basis while making sure that the investment will give adequate
gains. Diversification is important to keep risk relatively low and minimum
but on the other hand it also gives more gain and alternative platform to
make more profits and build more wealth.
As an individual accumulates wealth, he/ she must keep in mind the
retirement timing and approach the wealth accumulation process
systematically by keeping an eye at the retirement timing. When working
with and advising clients with a goal of retirement and financial
independence, financial planning focuses on:

Planning For Wealth Accumulation and Retirement Needs Unit 13
 Creating Confidence in Plan – As wealth accumulation increases

and long-term goal of retirement nears, this is the perfect time to
analyze and evaluate key financial inputs under various scenarios.
This includes projecting how retirement may proceed under different
investment rates of return, higher or lower spending levels, and other
variables such as the purchase of a second home. This exercise
instills a higher level of confidence that retirement is not only
achievable, but also allows to proactively evaluate critical financial
decisions such as retirement age, spending levels after retirement,
and other inputs associated with upcoming retirement.
 Retirement Cash Flow – During working years, people typically focus
on income levels but as theretirement time approaches, the focus is
on how and from where to fund retirement cash flow. How much and
at what age should distribute cash flow from a taxable account versus
an individual retirement account? What is the plan for claiming social
security benefits? Do people have access to other sources of
retirement cash flow such as pension income, deferred compensation
plan, real estate income, etc.? What is the most tax efficient way to
fund the retirement cash flow needs?
 Healthcare Insurance Planning –According to industry analysis of
different insurance company in India and according to IRDA data,
Health insurance also plays one of a major role for wealth creation in
India. Health Insurance is one of the investment plans for wealth
creation. Investment plans with life insurance are sure shot way to
accumulate wealth over a period. As an investor one can choose
suits the best depending on the risk, returns and disposal amount to
buy a plan. In future, when investors would required funds for child’s
education, child’s marriage, retirement, pension, etc. So, health
insurance plan will financially aid investors wealth,
 Wealth accumulation planning
An accumulation plan is a general financial strategy in which an investor
attempts to build the value of his or her portfolio. In the context of
mutual funds, an accumulation plan is a formal arrangement in which

an investor contributes a specified amount of money to the fund on a

periodic basis. By doing so, the investor accumulates a larger and
larger investment in the fund through his or her contributions and the
increase in value of the fund’s portfolio. A prudent accumulation plan
is key to building a financial nest egg for retirement. Many investors
accumulate investment funds with regular contributions and the
reinvestment of dividends and capital gains. Generally, the goals are
to keep funds invested, reinvest income and capital gains, and have
these compounds for as long as possible. An accumulation plan can
also be useful for investors who wish to build their positions in a mutual
fund over time. It also provides the benefits of dollar-cost averaging. A
voluntary accumulation plan is an investment method in which a retail
investor periodically invests relatively small amounts of money into a
mutual fund, building a large position over an extended period. By
spreading the contributions over a period of time, investors reap the
benefits of dollar-cost averaging because the fixed contributions will
buy more shares of a mutual fund when its price is low than when it is
high. This can be an excellent solution for anyone who wishes to
build an investment portfolio but is not in a position to invest a large
sum of money at one time. Along with the advantage of being able to
build up an investment over an extended period, the voluntary
accumulation plan has the benefit of being an investment option with
mutual funds that are considered to be relatively low risky.
13.4 LIFE CYCLE PLANNING
The strategy to sustaining an asset from construction to disposal

is known as lifecycle planning. It entails predicting the future performance
of a single asset or a group of assets using investment scenarios and
maintenance methods. Lifecycle plans can be used to show how financing
and/or performance criteria are met through suitable maintenance
techniques, with the goal of reducing costs while maintaining the needed
level of performance over a given time period. All road infrastructure
assets may benefit from lifecycle planning, which can take a variety of
ways based on the maturity of the individual, the financial organisation,

and the talents and risk-taking capacity of its employees. Its
implementation, on the other hand, may be more advantageous to assets
with the greatest value, which require significant finance, are high risk,
and/or are considered vital assets. Complex methodologies may be used
in some instances, necessitating the use of higher-quality data and
predictive modeling tools. When just limited information is available, a
more basic or risk-based strategy may be used.
An asset’s life span includes the following stages:
 Construction of a new road: This might be a single asset, such as
a new bridge, light column, or sign post, or a succession of new
assets.
 Routine maintenance: This is a reactive and cyclic activity that is
done on a regular basis to keep the asset in good working order.
Pothole repairs, safety fence tensioning, and drainage and sign
cleaning are all examples. It should be highlighted that normal
maintenance techniques might have an impact on the asset’s long-
term performance. Routine maintenance should be considered during
the lifecycle planning phase. Routine maintenance can help extend
the life of an item.
 Renewal or replacement: This is the process of restoring an asset’s
performance after it has degraded. Unless it’s a minor component in
the road inventory, in which case it may be replaced as part of normal
maintenance, this usually necessitates a capital investment.
 Decommissioning: The vast majority of road infrastructure assets
are never decommissioned. However, certain assets may be
withdrawn from service. Bridges may be closed, and street lighting,
signs, and barricades may be removed.
13.5 PLANNING FOR ACCUMULATION
The plan for accumulation involves the objectives of wealth

accumulation, purchase of insurance and accumulation planning and
investment. These are discussed below.
Objectives
Wealth accumulation helps to build wealth and financial knowledge.
Successful design of wealth accumulation results into reach specific goals
of financial solutions. Successful financial plan helps to design, whether a
person saving for a down payment on a home, considering cost of children’s
education or working to reduce credit card debt etc. A successful wealth
accumulation helps to reach financial goals without impacting on lifestyle.
13.6 PURCHASE OF INSURANCE AND

ACCUMULATION PLANNING
The easiest method to accumulate money over time is via an
investment strategy. A variety of investing plans are available from life
insurance providers. These are the goods that will generate money in the
future when it is needed. It requires forethought and knowledge of the
many alternatives accessible.
Benefits in wealth Investment Plans:
 Money Creation: Investing in life insurance policies is a sure-fire
method to build wealth over time. As an investor, you may choose the
plan that best fits your needs based on risk, returns, and the amount
of money you have available to invest. Life insurance investment plans
will financially assist you in the future when you need money for your
child’s education, marriage, retirement, pension, and other expenses.
 Financial Security: A life insurance policy offers life coverage as well
as investment possibilities, ensuring that the family is financially secure.
At the end of the policy’s term, the policyholder gets the proceeds with
a profit. This manner, the family’s financial stability may be ensured in
the long run. The insurance company will pay the nominee the amount
guaranteed if the policyholder dies before the maturity term. As a result,
the policyholder’s family is financially protected.
 Death Risk Insurance-Not all investing channels provide death risk
insurance.Life insurance policies, on the other hand, have investment
strategies. Death risk coverage is included in these policies. Even if
you are not present, your family’s financial requirements will be met.
In the case of the policyholder’s death, the amount guaranteed is

paid to his or her nominee.
 Retirement Savings: These investment plans may be purchased at
any point in a person’s life. As a result, you’ll be able to start building
your retirement fund. One can buy and save money for later use.As a
result, the investor will be financially self-sufficient even after he or
she retires.
 Flexibility: It refers to the amount of money that can be invested as
well as the length of time that it can be invested for. Depending on the
requirements and plans, a viable option may be selected.
 Investment Plan: Investment plans aren’t only for risk management
or building wealth; they may also help you save money on your taxes.
Sections 80C and 10(10D) of the Indian Income Tax Act exempt
premiums and payouts from taxation.Savings, wealth development,
financial security, and tax advantages all in one package.
 Loan Facilitator: Life insurance investment plans may also be used
to facilitate loans. However, it is contingent on the kind of insurance
purchased, premiums paid, and loan amount qualifying.
The following are some examples of different investing plans:
 Unit Linked Insurance Plan (ULIP): A Unit Linked Insurance
Plan (ULIP) is a kind of insurance that also serves as an
investment vehicle. In a ULIP, a portion of the premium is
deducted for insurance and the remainder is invested in the
stock market. Depending on the investor, money may be invested
in bonds, stocks, debt, market funds, or hybrids. It provides
transparency in terms of fund investments, which can be
evaluated and tracked using Net Asset Value (NAV). Both
coverage and investment possibilities are available via ULIPs.
One receives the Maturity amount as a Survival Benefit, which
is based on the current unit pricing. The nominee will be paid
the amount guaranteed as a Death Benefit.
 Endowment Plan: An endowment plan is a conventional
insurance policy that also offers the option of investing. It’s a

mix of coverage and financial investment. The market is not

tied to the funds. There are two components to the premium
paid throughout the course of the period:
A portion of the premium is put into a savings account.
A portion of the premiums is retained as a risk cover on maturity,
with profit assured, although small. The nominee gets the amount
guaranteed if the investor dies before the maturity date.
 Money Back Plan: A Money Back Plan is a kind of investment
plan offered by life insurance companies that incorporates both
investing and insurance. It covers mortality risks and pays out at
regular intervals as a proportion of the amount guaranteed. Pay
premiums for a certain number of years and get payments each
year after the premium payment term has ended. Money is paid
out to the policyholder on a regular basis. The remainder of the
amount guaranteed is repaid at the end of the term. Terminal
bonuses are included in the survival benefit. The coverage is paid
to the nominee if the investor dies during the period of the contract.
 Fixed Deposit (FD): A fixed deposit, also known as a term
deposit, is an investment in which the interest rate is fixed for
the duration of the term. As a result, the investor knows exactly
how much money he or she will make when the FD matures.
For risk-averse investors, this is a good investing strategy to
use. Banks and financial organisations that provide FD plans
have different interest rates.
 Public Provident Fund (PPF): This is one of the most widely
used savings and investment vehicles, particularly for tax
savings and long-term investment. It needs a minimum yearly
investment of Rs. 500 and a maximum investment of Rs.
1,50,000, and offers a 7.6% annual interest rate that is
compounded annually. Public Provident Funds allow you to pay
for your investment in a single sum or over the course of a
financial year in up to 12 simple payments. Depending on the
investor’s financial goals, the maturity term may vary from a

minimum of 15 years to a maximum of 5 years. From the third

financial year forward, the invested money may be transferred
from one bank to another in India, and it can be used as security
and collateral when applying for a loan. Section 80C of the
Income Tax Act of 1961 allows investors to deduct their
expenses. The interest that has accrued is likewise tax-free.
 National Saving Certificate:A National Savings Certificate is a
tax-saving investment guaranteed by the government. Any Indian
citizen may buy it from a local post office. They come in 100, 500,
1,000, 5,000, and 10,000 rupee denominations. It’s a good option
for individuals who don’t want to take on too much risk or who
want to diversify their portfolio by investing in a fixed-income
product. NSC is now available for 5-year subscriptions with a
minimum investment of Rs. 100. This investing strategy has no
maximum restriction. Interest is compounded yearly and varies
according to Ministry of Finance rules. It is, however, only paid
out once the maturity period has ended, and no TDS is deducted.
According to Section 80C of the Income Tax Act of 1961, the
concept is entitled to tax advantages up to Rs. 1.5 lakh per year.
 The National Pension Scheme (NPS): The National Pension
Scheme (NPS) is a government-sponsored pension plan
intended specifically for government workers. From 2009
forward, non-government workers are now eligible to participate
in this investment programme. It may be used to achieve a
variety of financial goals. An investor may opt to contribute to
this pension plan at his or her leisure, or withdraw a portion of
the corpus in a lump payment and invest the remainder in
annuities to create a strong corpus for post-retirement years.
 Mutual Funds: A mutual fund is an investment plan managed
by a professional Asset Management Company (AMC) that pools
the money from all of its clients and invests it in stocks, bonds,
and other assets. These investments are made in accordance
with each investor’s individual investing goals and risk tolerance.

To build a strong portfolio of bonds, securities, and equities, the

units are bought and sold according to the current NAV (Net
Asset Value).
 Tax-Advantaged Mutual Funds: The sole mutual fund option
that provides tax advantages is the Equity-Linked Savings
Scheme (ELSS). It’s a long-term equity mutual fund with a three-
year lock-in period and a Rs. 500 minimum investment amount.
Despite market volatility, an ELSS mutual fund can provide long-
term financial gain to investors.
 Bonds: Bonds are debt investment plans that allow investors to
lend money to a borrower, such as a company or the government,
for a certain length of time and at a set interest rate.
13.7 INVESTMENTS: TAX ADVANTAGED AND TAX

NONADVANTAGED
The word “tax-advantaged” refers to any form of investment, bank

account, or savings plan that is either tax-free, tax-deferred, or gives
additional tax advantages. Municipal bonds, partnerships, UITs, and
annuities are examples of tax-advantaged investments. IRAs (Individual
Retirement Accounts) and eligible retirement plans are examples of tax-
advantaged programmes. A wide range of investors and workers in varied
financial conditions use tax-advantaged investments and accounts.
Employees save for retirement through IRAs and employer-sponsored
retirement plans, while high-income taxpayers pursue tax-free municipal-
bond income. Tax-deferred and tax-exempt status are the two most
frequent ways for people to reduce their tax obligations. Tax-deferred
accounts provide for immediate tax deductions on the whole amount
contributed, but withdrawals from the account will be taxed at ordinary
income rates in the future. Traditional IRAs and 401(k) plans are the most
prevalent tax-deferred retirement funds in the United States. The most
prevalent in Canada is a Registered Retirement Savings Plan (RRSP)
(RRSP). Tax-exempt accounts, on the other hand, give future tax benefits
since retirement withdrawals are not taxed. There is no immediate tax benefit
because contributions to the account are made using after-tax money.
Tax-advantaged investments protect a portion or all of an investor’s
income from taxes, allowing him or her to reduce their tax liability. Investors
in municipal bonds, for example, get interest on their bonds over the life
of the bond. Municipal governments utilise the profits from the sale of
these bonds to support capital projects in their communities. The interest
income earned by investors is not taxed at the federal level, which
encourages additional investors to acquire these bonds. If the bondholder
lives in the same state where the bonds were issued, his or her interest
income is often tax-free.
13.8 ESSENTIALS OF INDIVIDUAL RETIREMENT

PLANNING
Individuals and corporations who invest in real estate can also

benefit from depreciation. Depreciation is a tax deduction that allows a
taxpayer to reclaim the cost basis of certain assets. The cost of acquiring
land or a structure in the United States is amortised over a certain number
of usable years by yearly depreciation deductions.
Thinking about retirement objectives and how long it will take to
achieve them is the first step in retirement planning. Then one must
consider the many sorts of retirement accounts that might assist in
raising funds for the future. As one saves money, he or she must invest
it in order for it to expand. Before investing any money, it’s also important
to think about the tax implications of each investment option. The following
points should be considered while making retirement plans:
1. Determining time horizons, predicting costs, calculating necessary
after-tax returns, measuring risk tolerance, and completing estate
planning are all important aspects of retirement planning.
2. Start saving for retirement as soon as possible to take advantage of
compounding interest.
3. Younger investors can afford to take greater risks with their assets,
but those nearing retirement should be more cautious.
4. As retirement plans change over time, portfolios should be rebalanced

and estate plans should be revised as appropriate.
5. Analysis for retirement: Retirement analysis is crucial because,
according to experts, a person who is about to retire will require at
least 75% of his pre-retirement income to maintain the same lifestyle
after he retires. The wage replacement ratio is the term for this
proportion (WRR). The basis of one’s retirement requirements is
provided by Social Security payments, but most people discover
that they require far more than their Social Security checks. If a
person’s retirement funds are insufficient, he may have to consider
delaying retirement or working part-time after retirement. It is critical
to plan on paying off as many debts and mortgages as possible
between now and the time of retirement. Debt reduction or
elimination is an essential element of retirement planning. Older
retirees are less likely to spend money than younger retirees. They
usually don’t have a mortgage and don’t have any costs related to
travel or other hobbies they liked when they were younger. Older
individuals are less active and spend less money as a result.
6. Money requirements: The first stage in planning a person’s retirement
is to determine how much income he will require to support his retirement.
Retirement planning isn’t an exact science, so it’s not as simple as it
seems. The precise requirements are determined by the objectives and
a variety of other variables. As a starting point, it is preferable to use
current income. It’s typical to talk about desired yearly retirement income
in terms of a proportion of current earnings. Depending on who you ask,
that figure could range from 60% to 90% or even higher. The appeal of
this approach is its simplicity, as well as the fact that it is based on a fairly
common-sense analysis: current income supports a current lifestyle, so
taking that income and reducing it by a certain percentage to reflect the
fact that certain expenses will no longer be liable for (e.g., payroll taxes),
will theoretically allow one to maintain the lifestyle. The difficulty with this
strategy is that it fails to account for unique circumstances. For example,
if a retiree plans to travel extensively in retirement, he may require 100

percent (or more) of his current salary to make ends meet. It’s OK to use
a percentage of current income as a baseline, but it’s also good to go
through all of your current costs in detail and consider how they’ll change
as you approach retirement.
7. Projected retirement expenditures: During retirement, your yearly
income should be sufficient (or more than sufficient) to cover your
expenses. Estimating such costs is an important part of retirement
planning. However, recognizing all the costs and predicting how
much would be spent in each area may be difficult, especially if
retirement is still a long way off. Here are some common retirement
expenditures to get you started:
 Food and clothing.
 Housing: Rent or mortgage payments, property taxes,
homeowners insurance, property upkeep and repairs.
 Utilities: Gas, electric, water, telephone, cable TV.
 Transportation: Car payments, auto insurance, gas,
maintenance and repairs, public transportation.
 Insurance: Medical, dental, life, disability, long-termcare.
 Health-care costs not covered by insurance: Deductibles, co-
payments, prescription drugs.
 Taxes: Federal and state income tax, capital gainstax.
 Debts: Personal loans, business loans, credit card payments.
 Education: Children’s or grandchildren’s college expenses.
 Gifts: Charitable and personal.
 Savings and investments: Contributions to IRAs, annuities, and
other investment accounts.
 Recreation: Travel, dining out, hobbies, leisureactivities.
 Care for self, parents, or others: Costs for a nursing home, home
health aide, or other type of assisted living.
 Miscellaneous: Personal grooming, pets, club memberships.
13.8.1 Decide when to retire
To determine the total retirement needs, one can’t just

estimate how much annual income need. One has to estimate

how long will be retired. Why? The longer the retirement, the
more years of income need to fund it. The length of retirement will
depend partly on when one plan to retire. This important decision
typically revolves around personal goals and financial situation.
Estimation of life expectancy
The age at which one retire isn’t the only factor that
determines how long will be retired. The other important factor is
lifespan. People hope to live to an old age, but a longer life means
that one has even more years of retirement to fund. One may even
run the risk of outliving savings and other income sources. To guard
against that risk, it will need to estimate the life expectancy. One
can use government statistics, life insurance tables, or a life
expectancy calculator to get a reasonable estimate of how long
one will live. Experts base these estimates on age, gender, race,
health, lifestyle, occupation, and family history. But these are just
estimates. There’s no way to predict how long one will actually live,
but with life expectancies on the rise, it’s probably best to assume
one will live longer than the expectation.
Identify the sources of retirement income
Once one has an idea of retirement income needs, next step
is to assess how prepared are to meet those needs. In other words,
what sources of retirement income will be available for one? The
employer may offer a traditional pension that will pay monthly benefits.
In addition, one can likely count on Social Security to provide a portion
of retirement income. Additional sources of retirement income may
include other retirement plan, annuities, and other investments. The
amount of income one receives from those sources will depend on
the amount the investment, the rate of investment return, and other
factors. Finally, if one plans to work during retirement, the amount of
job earnings will be another source of income.
Make up of income shortfall
A financial professional can help to figure out the best ways

when the expected income sources will be shorter than enough to

fund retirement. The following are few suggestions:
 Try to cut current expenses so to have more money to save
for retirement.
 Shift assets to investments that have the potential to
substantially outpace inflation. (but keep in mind that
investments that offer higher potential returns may involve
greater risk of loss)
 Lower expectations for retirement so that won’t need as much
money.
 Work part-time during retirement for extra income.
 Consider delaying the retirement for a few years (or longer).
13.9 RETIREMENT PLANNING STRATEGIES
1) Save more: Financial professionals recommend saving 15 percent

or more of annual income throughout the career for retirement. If it
hasn’t done so and time is running short, one should try drastically by
increasing savings rate. Reduce current expenses wherever possible
and funnel the savings into retirement accounts.
2) Take more risk: consider taking more risk by investing in investment
portfolio
3) Delay in retirement: working longer also gives additional time to add
to retirement fund and build savings.
4) Be Frugal: Most people want to live a lifestyle in retirement at least
equal to the one they enjoyed during their working career. However, if
savings are inadequate, one may have to cut expenses to increase
savings.
5) Taking combo approach: From delaying retirement to moving to a
cheaper place for moderating life style can produce substantial savings
in retirement. Along with that, more and more retirees are choosing
part-time employment, which not only supplements retirement
savings, but provides an opportunity to stay mentally and physically
active and engaged in the community.
13.10 INVESTMENT FOR RETIREMENT:
Retirement Making the greatest possible use of one’s retirement

funds in order to reduce tax obligations and provide a steady source of
income is critical for a retiree. Many seniors face a difficult time putting
up a retirement portfolio that includes both fixed income and market-
linked investments. Retirees can invest in the following options:
1) Senior Citizen Savings Scheme (SCSS): The Senior Citizen
Savings Scheme (SCSS) is a government-run programme that
encourages senior citizens to save money. SCSS (Senior Citizens
Savings Scheme) is a government-sponsored savings programme
for Indian citizens over the age of 60. The deposit matures after 5
years from the date of the account’s opening, although it can be
extended for another 3 years once. The interest rate on the SCSS
has been fixed at 7.4 percent for the months of April to June 2020.
Among India’s numerous modest savings plans, this offers the highest
interest rate. SCSS may be obtained through public and private banks
as well as India Post Offices. The SCSS has the same terms and
conditions regardless of whatever bank or post office you invest
through because it is a government-backed savings vehicle.
2) POMIS Account (Post Office Monthly Income Scheme): It is one of
the highest-earning plans, with an interest rate of 7.6%, among others
such as Post Office Savings Account, Post Office Recurring Deposit,
and Post Office Time Deposit. This scheme’s interest is paid out
monthly, as the name implies. The Ministry of Finance recognises and
validates this programme, as it does all other post office programmes.
3) Bank Fixed Deposits: A bank or NBFC fixed deposit is a financial
product that pays a greater rate of interest to investors than a standard
savings account until the maturity date. A separate account may or
may not be required. In Canada, Australia, New Zealand, India, and the
United States, it is known as a term deposit or time deposit, and in the
United Kingdom, it is known as a bond. The difference between a
recurring deposit or a demand deposit and a fixed deposit is that the

money cannot be withdrawn from the FD before maturity. Some banks

may provide FD holders with extra services, such as competitively
priced loans secured by FD certificates. It’s worth noting that in uncertain
economic times, banks may offer lower interest rates. The interest
rate ranges from 4% to 7.5%.
4) Mutual funds: It provide access to professionally managed
portfolios of stocks, bonds, and other assets for small and individual
investors. As a result, each stakeholder shares in the fund’s gains
and losses in a proportional manner. Mutual funds invest in a diverse
range of assets, and their success is often measured by the change
in the fund’s total market capitalization, which is calculated by
combining the performance of the underlying investments.
5) Tax-free Bonds: A government enterprise issues tax-free bonds to
raise cash for a specific purpose. Municipal bonds are an example of
this type of bond. They have a fixed rate of interest, making them a
low-risk investment option. The absolute tax exemption under Section
10 of the Income Tax Act of India, 1961, is its most appealing feature,
as the name indicates. Bonds that are tax-free have a ten-year or
longer maturity. The money raised from these bonds is used to fund
infrastructure and housing projects in the United States. These are a
great option for investors looking for a steady stream of income, such
as retirees. Because government entities normally issue these bonds
for a longer period of time, the danger of default is lower, and you are
guaranteed a fixed income for a longer period of time, usually 10 years
or more. The money raised from the sale of these bonds is invested
in infrastructure and housing projects by government businesses.
6) Immediate Annuities: An immediate annuity is a way to ensure a
steady income stream. It’s most commonly utilised to ensure retirees
have a steady income. However, whether it is a suitable fit for your
requirements is contingent on your own circumstances. A contractual
financial product is an annuity. It takes and develops cash from
individuals in most situations before paying out an agreed-upon sum
each year. Annuities are sometimes funded over years before they

begin to pay out. An instant payout annuity, on the other hand, is bought
with a single lump-sum payment and immediately begins paying out.
13.11 PENSION PLANS
A pension plan is an arrangement to provide income to participants

in the plan when they retire. Pension plans are generally sponsored by
private employers, government as an employer, and labour unions. The
PPs may be funded or may be unfunded. Funded PPs are those where the
benefits promised by the PP are secured by assets specifically dedicated
for that purpose. Unfunded PPs are those, where fulfillment of the promised
benefits by the sponsor depends on the general credit and not by any specific
contribution to be made year afteryear.
Some pension plans are said to be insured where, the sponsor
pays premiums to a life insurance company in exchange for a group annuity
that would pay retirement benefits to the participants.
Pension plans may also be classified into the following categories:
 Public sectors banks pension plan.
 Central civil services pension plan.
 Pay-as-you-go Pension Plan (PAYGPP): Under this the current
employees pay a percentage of their income to provide for the old,
and, this, along with the contribution of the state, goes as a pension
that sustains the older generation. This plan is popular in European
countries including France and Germany.
13.11.1 Basic Principles of Pension Plans
The following are the principles of a pension plan-

 In terms of coverage, adequacy, security, efficiency, and
sustainability, pension systems should have clear and well-
defined objectives. The achievement of these goals should
be tracked on a regular basis. To achieve these goals, an
effective legal framework, a strong institutional and financial
market infrastructure, and a good regulatory and supervisory
system for pensions should be in place.
 Policy objectives for pension plans’ coverage, adequacy,

security, efficiency, and sustainability, as well as their role in
overall retirement income support, should be clear and well-
defined. These goals should be enshrined in law, and their
attainment should be monitored on a regular basis as part of
the policy and regulatory process.
 The regulatory and supervisory system, institutional and financial
market structure, and the behaviour of the various actors should
all be in sync, so that they support and complement each other
in attaining the system’s ultimate goals. The regulatory
framework should take into account the extent to which pension
plans are integrated with other retirement income provision
systems, particularly public systems.
 Legal provisions should enhance the safety of pension plan
participants and beneficiaries, as well as the financial stability
of pension plans and funds.
 Legal measures should make it easier to run and develop
pension plans by encouraging good governance and prudent
management, providing proper and clear regulatory handling
of various types of operators, and encouraging the supply of
cost-effective pension arrangements.
 To facilitate the development of new financial instruments and
markets to support pension provision, the development of well-
functioning and transparent capital markets and financial
institutions should be encouraged (e.g., inflation-indexed
instruments and retirement annuity markets).
 The legal system should make it possible to enforce pension
contracts. There should be a body of ethical, professional,
and trained lawyers and judges, as well as an enforced judicial
system. In circumstances where other dispute mechanisms
exist, comparable criteria should be applied.
 Accounting, auditing, and actuarial standards for pension funds
and pension corporations should be thorough documented,

transparent, and consistent with international standards,

where applicable.
Through proper reporting and disclosure methods, legal
provisions should enhance the availability of data. The availability of
this data, which includes economic and demographic data, will allow
regulators and stakeholders to assess the design and operation of
the pension system in relation to its objectives, ensuring that private
pension plans are consistent with the goals set for them and their
role in overall retirement provision. Data should be stored and
supplied in a way that respects its potentially sensitive nature.
CHECK IN PROGRESS
Q 1: What are the main four steps to generate
wealth?
..............................................................................
...........................................................................................................
Q 2: What are the four categories of wealth?
............................................................................................................
...........................................................................................................
Q 3: What are the 5 stages of investing?
............................................................................................................
...........................................................................................................
Q 4: How do you build wealth from nothing?
............................................................................................................
...........................................................................................................
Q 5: What is an accumulation plan?
............................................................................................................
...........................................................................................................
13.12 LET US SUM UP
 A wealth accumulation strategy is a broad financial approach to

increasing the value of a portfolio. By doing so, the investor builds up a
greater and larger stake in the mutual fund as the fund’s portfolio
grows in value.
Wealth accumulation planning refers to the act of preparing
with patience and making sound financial decisions.
 An accumulation plan is a general financial strategy in which an investor
attempts to build the value of his or her portfolio.
 The strategy to sustaining an asset from construction to disposal is
known as lifecycle planning. It entails predicting the future performance
of a single asset or a group of assets using investment scenarios
and maintenance methods.
 The plan for accumulation involves the objectives of wealth accumulation,
purchase of insurance and accumulation planning and investment.
 The easiest method to accumulate money over time is via an
investment strategy. A variety of investing plans are available from
life insurance providers. These are the goods that will generate
money in the future when it is needed.
 The word “tax-advantaged” refers to any form of investment, bank
account, or savings plan that is either tax-free, tax-deferred, or gives
additional tax advantages. Municipal bonds, partnerships, UITs, and
annuities are examples of tax-advantaged investments.
 Individuals and corporations who invest in real estate can also benefit
from depreciation. Depreciation is a tax deduction that allows a
taxpayer to reclaim the cost basis of certain assets.
 Making the greatest possible use of one’s retirement funds in order to
reduce tax obligations and provide a steady source of income is critical
for a retiree.
 A pension plan is an arrangement to provide income to participants in
the plan when they retire.
1) Sankaran, Sundar (2012), Wealth Engine: Indian Financial Planning

and Wealth Management Handbook, Vision Books Publisher.
2) Dun & Bradstreet (2017). Wealth management, TATA McGraw Hill

Publishing Company Limited.
3) Sen, Joydeep (2018). Wealth Management: A Guide for Affluent
and Middle Income Classes, Shroff Publishers & Distributers
Pvt.Ltd.
4) Sen, Joydeep (2020): Financial Planning & Wealth Management:
Concepts and Practice, Shroff Publishers & Distributers Pvt.Ltd.
5) Sen, Kaushik (2020). 7 Smart Steps of Wealth Management.

PROGRESS
Ans to Q No 1: 4 step to generate wealth are

Step 1: Save Smartly. Saving is the first step towards wealth creation.
Step 2: Turn your monthly saving into investment through SIPs.
Saving is not enough; based on your financial needs channelize
your monthly savings into investments.
Step 3: Increase your investment periodically.
Step 4: Invest lumpsum when possible.
Ans to Q No 2: There are 4 types of wealth:
1. Financial wealth (Money)
2. Social wealth (Status)
3. Time wealth (Freedom)
4. Physical wealth (Health)
Ans to Q No 3: There are five (5) main stage of investments, They are:
 Step One: Put-and-Take Account. This is the first savings you
should establish when you begin making money.
 Step Two: Beginning to Invest.
 Step Three: Systematic Investing.
 Step Four: Strategic Investing.
 Step Five: Speculative Investing.
Ans to Q no 4: Steps to change your fortunes from zero to riches, they
are:

1. Educate yourself about money.

2. Get a regular income source.
3. Create a budget.
4. Have enough insurance (but don’t over-insure)
5. Practice extreme savings from your income.
6. Build an emergency fund.
7. Improve your skill set.
8. Explore passive income ideas.
Ans to Q no 5: An accumulation plan is a general financial strategy in which
an investor attempts to build the value of a portfolio. In the context
of mutual funds, an accumulation plan is a formal arrangement in
which an investor contributes a specified amount of money to the
fund on a periodic basis.
Short Questions: (Answers each question in about 150 wards)

Q 1: What is wealth accumulation plans?
Q 2: What do you mean by Life cycle planning in wealth accumulation?
Q 3: Mention the five advantage of Investment.
Q 4: What is Pensions Plans?
Q 5: What are the processes of purchase of insurance in India?
Long Questions: (Answers each question in about 300 to 500 wards)

Q 1: Write the basics principle of pensions plans.
Q 2: Explain the types of retirement investment plans.
Q 3: What are the essentials elements of individual retirement planning?
Q 4: Explains the advantage and disadvantage of investment.
Q 5: What are the difference between purchase of insurance and
accumulation planning?
*** ***** ***

UNIT 14: THE INSURANCE MARKET IN INDIAN
CONTEXT
UNIT STRUCTURE

14.2 Introduction
14.3 Insurance Institutes in Indian capital Market
14.3.1 Meaning of Capital Market
14.3.2 Importance of capital market
14.3.3 Role of Insurance Company in Indian capital market
14.4. Regulation Governing Investment of Insurance in India
14.4.1 Insurance Regulation
14.4.2 Objective of insurance regulation
14.4.3 Principle of insurance Investment
14.5. Purpose of government intervention in market
14.6. Relevant IRDA rules
14.6.1 Purpose of IRDA
14.6.2 Important Functions of IRDA
14.6.3 Duties and powers of IRDA
14.6.4 Effect of Insurance Regulatory and Development
Authority (IRDA)
14.7 Let Us Sum UP
14.8 Further Reading

 understand the meaning of capital market
 know the importance of capital market
 elaborate the role of insurance institute in capital market
 explain the need and purpose of Insurance regulation in India

The Insurance Market in Indian Context Unit 14
 understand the purpose of Government intervention in insurance

market
 explain the relevant IRDA rules.
14.2 INTRODUCTION
The insurance companies are important participants in the financial

market, especially in the capital market. They have a very important role
as they contribute to the strengthening of competition in the financial
market. Like all other financial institution, insurance is an activity that
needs to be regulated as health of the insurance sector reflects a country’s
economy. This sector not only generates long terms funds for
infrastructural development but also increase risk taking capacity. The
basic rational to regulate this sector is to maintain the confidence of the
financial system and to provide appropriate degree of consumer protection.
Moreover, the smooth functioning of the insurance business depends on
the trust and confidence reposed in the solvency of the financial institutions.
A proper regulatory mechanism is therefore the sine qua non of success
and growth of insurance industry as it inspires the confidence of all
stockholders.
This unit will familiarize you with the meaning and importance of
capital market, role of insurance company in capital market, regulation
governing investment in insurance in India, purpose of government
intervention and also the relevant rules of IRDA.
14.3 INSURANCE INSTITUTE IN INDIAN CAPITAL

MARKET
14.3.1 Meaning of capital market
There are broadly two types of financial market in an

economy- capital market and money market. Money market deals
short term securities and capital market deals in financial
instruments and commodities that are long-term securities .They

Unit 14 The Insurance Market in Indian Context
have a maturity of at least more than one year. Capital markets

performed the same function as the money market. It provides a link
between the investors and the wealth creators. The funds will be
used for productive purpose and create wealth in the economy in the
long term. The three main components of capital market in India are-
 Primary markets which are involved in the buying and selling of
new issues of stocks and Securities
 Secondary markets which are involved in the trade of existing
securities and stocks
 Financial Institutions (e.g UTI, LIC ,GIC etc.)
14.3.2 Importance of Capital Market
The capital market plays an important role in mobilizing

savings and channels it in the productive investment for the
development of commerce and industry. Capital market helps in
capital formation and economic growth of the country.
The capital market acts as an important link between savers
and investors .The savers are lenders of fund while investors are
borrowers of funds. The saver who do not spend all their income
are called ‘’surplus unit’’ and the borrowers are known as ‘ deficit
units’’ the capital market is the transmission mechanism between
surplus unit and deficit unit .This market provide excellent investment
opportunities to the members of the public. The Capital market play
very important role in Indian financial system such as-
 To mobilize long-term savings to finance long terms investment
 To inspire broader ownership of productive assets
 To improve the efficiency of capital allocation through a
competitive pricing mechanism
 To provide liquidity with mechanism enabling the investor to
see financial assets
 To make lower the costs of transaction and information
 To make bridge between investors and companies
 To make quick valuation of financial instruments both equity
and debt
 To provide operational efficiency
 To direct the flow of funds into efficient channels through
investment, disinvestment and reinvestment.
 To make integration between financial sector and non-financial
sectors, long term fund and short term fund.
Thus a Capital market serves as an important link between
those save and those who aspire to invest their savings.
14.3.3 Role of insurance company in the capital market
In any economy, a well functioning capital market helps

channel savings to the productive sectors of the economy in an
efficient and transparent manner. An efficient capital market provides
appropriate returns on the savings while the productive sectors get
capital at market determined rates.
Among the Institutional framework for channeling the savings
of the economy, banks have been the pre-dominant channel for
garnering and deploying the savings. Insurance companies have
largely played a second fiddle to the banking channel in respect of
garnering savings. The traditional channel of financial savings like
banks have been slowly and steadily yielding ground to the mutual
funds and insurance industry as distributor reach continues to
expand and the awareness among the general public about the
available alternative, increases.
While the Insurance space was dominated by a single large
public sector firm, the opening up of the space in the year 2000
bought in many private sector players.
Over the last two decades the private insurance has been
in operation, this space has grown at a respectable rate of growth
of insurance sector.

CHECK IN PROGRESS
Q. 1: State whether the following statements
are True or False.
(a) Capital market deals with the short term
securities.(True/False)
..........................................................................................................
(b) Capital provides a link between the savings /investors and the
wealth creators. (True/False)
.............................................................................................................
(c) Financial institution is one of the main components of capital
market in India. (True/False)
...........................................................................................................
Q. 2: State the meaning of Capital Market.
...........................................................................................................
............................................................................................................
Q. 3: Mention the five important role played the capital market in
Indian Financial system.
...........................................................................................................
...........................................................................................................
14.4 REGULATION GOVERNING INVESTMENTS OF

INSURANCE INSTITUTIONS IN INDIA
14.4.1 Insurance Regulation
Regulation defines the requirements of an insurer, provide

consumer protection through the supervision of insurers to safeguard
their solvency and thus shield the customer from buying insurance
from an unsuitable company. The main regulations that regulate the
insurance business in India are the Insurance Act, 1938, the Life
Insurance Act, 1956, the general insurance business (Nationalization)
Act ,1971, The Marine Insurance Act , 1963, and the Motor vehicles
Act,1988. The Indian Contract Act,1872 and companies law governs

most of the aspects of insurance contract. Additionally, the Foreign

Exchange and Indian Succession Act also govern some aspects
involved in insurance.
The purpose of regulation of insurance investments is clearly
to assure the solvency of insurer. Regulation of insurance industry is
necessary due to the externalities from insolvency of insurance
companies and the presence of asymmetric information between
insurance companies and consumers. Investment regulation save
insurers from risky and fraudulent investment, fuelling the priority sectors
and thus recline public faith and interest in the insurance Industry.
14.4.2 The Objective of Insurance Regulation
The basic objectives of insurance regulations are as under

 To protect customers from misleading sellers (by regulating
the delivery channel, e.g. through standards for agents/
licensing agents and brokers)and unfair claims practices; for
example by requiring disclosure and by regulating complaints;
or by regulating rate setting/pricing (some jurisdictions have
limits for rate or require prior approval);and by regulating
policies (forms/contracts and exclusions)
 To protect the financial viability of insurer, e.g. by requiring
standards for qualification, solvency, performance, risk
limitation, disclosure, reserve, reporting (periodicity, accounting
and information system), auditors, investment restrictions.
 To define general features of insurance: e.g. the provision of
insurance, the types of products and the different types of
insurance e.g. ( short and long term ; national or cross border
operation ;life insurance and general insurance)
 To define duties and responsibilities, e.g. the person permitted
to engage in insurance activities, ownership (management
domicile, holdings, and foreign investors); the regulatory agency
responsibilities for insurance regulations and compliance,
sanctions

and penalties for non compliance or omission.

 To define the conditions for the entry and exit of players in the
market.
14.4.3 Principles of Investment in Insurance Companies
Investment management assumes great in the case of

insurance companies where huge funds are collected by means of
premium. Since these funds are not immediately required to meet
the liabilities, insurance companies are able to invest a major portion
in funds in investable assets and earn optimum rate of return from
these investment. Investment operation of insurance companies can
reduce the cost of insurance and increase the profitability of business.
While making investment the insurance company generally follows
the following principle-
 Principle of safety and security: Security of capital must be
the prime consideration for insurance companies in making their
investment decision because they are entrusted with the
responsibility to pay claim as and when arises. The initial focus
on insurance companies is not to earn maximum return on their
investment but to ensure security of funds. Therefore, speculative
investments involving potential of abnormal profit/loss are not
acceptable for insurance funds .To ensure safety of policyholder’s
funds; the investment must be in safe and risk free securities.
The policy holder money should be remained secure and their
right to get sum assured on time must be granted.
 The Principle of Profitability: The ability of insurance
companies to run its business on a solvent basis depend to a
large extent on how they are invested their fund. The obligation
of insurers is not merely the security of fund, but earning a
rate of return not less than that on which premium are based.
In addition to adequate amount of return, regularity and stability
of return are also essential. The investment of insurance fund
therefore calls for a rate of return adequate to honors insurer’s

liability arising from the claims of insured, establishment

expenditure of insurer’s besides leaving insurer with a normal
surplus necessary to continue insurance business. Therefore,
investment of insurance fund it is required to establish a proper
balance between safety and profitability.
 The Principle of Liquidity: Liquidity represents convertibility
of investments into cash without undue loss of capital. The
principle is crucial because of pressing requirement of money
for payment of claims. The investment of insurance company
should be made according to the requirement of insurers i.e.
investment are so made the maturity of investment should
match maturity of obligation. Insurers are not required to keep
maximum amount in form of cash or readily convertible
securities because they have substantial inflow of money by
way of premium, return on investment and sale of securities.
Liquidity of funds is not a very big concern for the established
and financially strong insurers. Moreover, insurers can add a
clause of delay in payment of claim for a specified period.
 Principle of Diversification: Diversification of
investment simply means spreading investment over
different channels. It can be viewed as a sound policy of
not relying unnecessarily on a single class of investment.
Insurance investment assets should be broaden in
different directions, viz -a)according to different
geographical distribution (b) according to economic
enterprises of the country, political changes and time
and(c)according to number of investment in a security,
maturity of security and duration of security.
14.5 PURPOSE OF GOVERNMENT INTERVENTION

IN MARKET
Government intervention into insurance markets takes many forms,

some direct and some indirect. Its stated purposes are always noble: to
protect consumers, to raise revenue to support worthwhile social

objectives, or to ensure orderly, well functioning markets. However, in
reality, regulation does not always serve noble purposes.
Various factors influence regulatory policies and behavior. These factors
include market problems that regulators are seeking to rectify, ideology, special
interests, and regulatory resources. The goal of regulation should be to protect
consumers and to promote the public interest. This objective is achieved by
appropriate government measures designed to address significant market
difficulties which, in turn, aids market efficiency Regulation unduly influenced
the special interests which is characterized by-
 Restrictions on entry of new national and especially foreign insurers
 Suppression of price and product competition
 Control of inter-industry competition from those selling similar or
complementary products.
Insurance regulation that exhibits these characteristics is subject
to “capture” by the local industry, with the result that both individual and
commercial insured are penalized through high prices, lack of product
innovation, and poor product choice.
All markets have imperfections, but they are generally not significant
enough to warrant government intervention. However, in instances where
market imperfections are significant, government intervention might be
needed to protect consumers and promote workable competition. In
insurance, the justification for regulatory intervention stems primarily from
the existence of information problems and principal agent conflicts, and
occasionally from excessive market power. Sometimes insurance market
problems are not inherent to the industry, but are caused by government
policies. The efficiency of government intervention to address a particular
market imperfection must be evaluated from a cost benefit standpoint.
Private insurance cannot flourish without public confidence that it will function
as promised. Government’s duty is to ensure that this confidence is neither
misplaced nor undermined. Consequently, every country has insurance
laws and regulations to determine who may sell and underwrite insurance
and the circumstances under which they may continue to do so. Countries

usually establish minimum reserve, asset quality and quantity, and capital
requirements. In many countries, regulators also control prices and policy
provisions.
It is possible to distinguish three fundamental types of government
intervention in insurance. One approach emphasizes competitive markets
and minimal intrusion with respect to market forces and insurers ‘decisions.
Chile, and to a lesser extent the U.S., are examples of this approach. The
second approach relies on more restrictive regulation of market forces and
the partial or complete sheltering of private insurers from competition.
Historically, Japan, Korea, some European countries, and developing
countries fell into this category. Countries that delegate the provision of
insurance to the government fall into the third category. Most such countries
(for example, China and India) are moving toward a role for private insurance
providers, although other countries have yet to make meaningful progress.
CHECK IN PROGRESS
Q 4: State whether the following statements
are True or False.
(a) The purpose of regulation of insurance
investments is clearly to assure the solvency of insurer. (True/
False)
..........................................................................................................
(b) Protection of the financial viability of insurer is one of the
objective of insurance regulation. (True/False)
..........................................................................................................
(c) Restrictions on entry of new national and especially foreign
insurers is one of the purpose of government intervention in
insurance market. (True/False)
..........................................................................................................
Q 5: Write four principle of investment in insurance industry.
..........................................................................................................
..........................................................................................................

Q 6: Write three objective of insurance regulation.

..........................................................................................................
..........................................................................................................
..........................................................................................................
Q 7: Mention three purpose of Government intervention in Insurance
Mark.
..........................................................................................................
..........................................................................................................
14.6 INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY ACT (IRDA)
After the Liberalization of the financial sector in the year 1991, the
Government of India constituted the ‘Malhotra Committee’ for suggesting
reform in the insurance sector. This committee recommended the opening
up of the insurance sector and suggested setting up of a statutory body
called Insurance Regulatory Authority. In 1996, Interim IRA was formed
and in 1999, the IRDA bill was passed IRA was renamed as Insurance
Regulatory and Development Authority (IRDA) to reflect on the development
of the insurance sector.
IRDA Act provides for the establishment of an Authority to protect
the interests of holders of insurance policies, to regulate, to promote and
ensure orderly growth of the insurance industry and for matters connected
or incidental thereto. The insurance Regulatory and Development Authority
called IRDA has been established under this Act.
14.6.1 Purpose of IRDA
The enacting the act and setting up of the IRDA has following purpose:
 To protect the interests of and secure fair treatment of policy
holders.
 To bring about speedy and orderly growth of insurance industry
(including annuities and superannuation) for the benefit of the
common man and to provide long term funds for growth of the
economy.
 To set, promote, monitor and enforce high standards of

integrity, financial soundness, fair dealing and competence of
those it regulates.
 To ensure that insurance customers receive precise, clear
and correct information about products and services and make
them
aware of rights and responsibilities in this regard.
 To ensure speedy settlement of genuine claims to prevent
insurance frauds and other malpractices and put in place
effective grievance redressed machinery.
 To promote fairness, transparency andorderly conduct in
financial markets dealing with insurance and build a reliable
management information system to enforce high standards
of financial soundness among market players.
 To take action where such standards are inadequate or
ineffectively enforced
 To bring about optimal amount of self regulation in a day to
day working of industry consistent with standards of prudential
regulation.
14.6.2 Important Functions of IRDA
 To exercise all powers and functions of the controller under

insurance Act, 1938.
 To Protection of the interests of policyholders.
 To issue, renew, modify, withdraw or suspend certificate of
registration.
 To specify requisite qualification and training for insurance
intermediaries and agents and to specify code of conduct,
practical training of international surveyors and loss assessors.
 To promote and regulate professional organizations connected
with insurance.
 To conduct inspection, investigation etc.
 To prescribe the method of insurance Accounting.
 To regulate investment of funds and margin of solvency.

 To adjudicate upon disputes.
 To call for information and to conduct inspection and audit of
insurance intermediaries and other organizations concerned
with insurance.
 Specify percentage of life insurance and general insurance
business in rural and social sector.
14.6.3 Duties and powers of IRDA
For smooth running of insurance business, the regulatory

authority has been vested with adequate power and duties.
The duties and powers of the IRDA are:
 To regulate, promote and ensure orderly growth of the
insurance business.
 To exercise all powers and functions of the controller of
insurance.
 To protect the interest of the policy holders in settlement of
claims and terms and conditions of policies.
 To promote and regulate professional organizations connected
with insurance business.
 To call for information from, undertake inspection and conduct
investigations including audit of the insurer, intermediaries and
other connected organisations and persons.
 6.To control and regulate the rates and terms and conditions
that may offered by the insurers in respect of general insurance
matters, not so controlled by the Tariff Advisory Committee
under section 64(u)of the insurance Act.
 To prescribe the manner and form in which accounts will be
maintained and submitted by insurers and intermediaries.
 To regulate investment of funds.
 To regulate margins of solvency.
 To adjudicate disputes between insurers and intermediaries.

14.6.4 Effect of Insurance Regulatory and Development

Authority (IRDA)
 Effect on Regulation of Insurance Industry: Insurance

Regulatory and Development Authority regulates the Insurance
sector. It aims to protect the interest of the insurance policy
holders. It also encourages and ensure the systematic growth
of the insurance industry.Effect over protection of
policyholders: IRDA has great impact over the protection of
policyholders. The Authority aims to
provide fair treatment to all the policyholders.
 Effect over Awareness about Insurance: IRDA is taking steps
to increase awareness amongst the masses about the benefits
of insurance. There is a separate Consumer education
website of IRDA to educate people about insurance.
 Effect over Insurance Market: There is a drastic effect of
Insurance Regulatory and Development Authority over
insurance market. IRDA regulates the insurance market and
ensure the systematic and speedy growth of the insurance
market
 Effect over Development of Insurance Product: All the
insurance companies must take approval from Insurance
Regulatory and Development Authority before launching any
new product or before making any changes in the existing
product or withdrawing a product. The insurers who wishes
to launch a new product or make changes to the existing
product or withdrawing a product shall submit an application
to the Authority in the prescribed form along with the necessary
details and reasons for the change reasons. The authority may
ask for additional information if required. If no information is
asked for then the insurer can start selling the product.
 Effect on Competition between Private and Public sector: As
there is more demand from the customer for new, beneficial

and improved insurance products, there is a healthy

competition amongst the insurers. This acts as a boon to the
customer. Improved products along with attractive schemes
have been designed by the public sector to give tough
competition to the private sector.
Effect over Banks and Post Offices: With the
increasing awareness amongst people about the benefits of
insurance, the flow of funds have shifted to the insurance industry
from Banks and Post Offices. Insurance has become a medium
for not only covering losses and risks but has also become a popular
way to save tax.
CHECK IN PROGRESS
Q. 8: Write three purpose of IRDA.
.........................................................................................
.........................................................................................
Q. 9: Mention three duties and powers of IRDA.
................................................................................................................
................................................................................................................
Q. 10: Write the effect of IRDA on Development of Insurance
product.
................................................................................................................
................................................................................................................
14.7 LET US SUM UP
 We have discussed above the meaning of capital market, the Market

which deals in financial instruments and commodities that are long –
term securities .They have a maturity of at least more than one year.
 The three main components of capital market in India are-a)Primary
markets which are involved in the buying and selling of new issues of
stocks and Securities(b) Secondary markets which are involved in
the trade of existing securities and stocks ’c) Financial Institutions
(e.g UTI, LIC ,GIC etc.).

 Capital market serves as an important link between those save and
those who aspire to invest their savings
 An efficient capital market provides appropriate returns on the savings
while the productive sectors get capital at market determined rates.
 Among the Institutional framework for channeling the savings of the
economy, banks have been the pre-dominant channel for garnering
and deploying the savings. Insurance company have largely played a
second fiddle to the banking channel in respect of garnering savings.
 The purpose of regulation of insurance investments is clearly to assure
the solvency of insurer. This is the primary concern of regulation
because insurance is a business affected with the public as insurance
consumer and policy holders.
 The main purpose of Government intervention in insurance market
are (a) Restrictions on entry of new national and especially foreign
insurers; (b) Suppression of price and product competition; and (c)
Control of inter-industry competition from those selling similar
complementary products.
 IRDA Act provides for the establishment of an Authority to protect the
interests of holders of insurance policies, to regulate, to promote and
ensure orderly growth of the insurance industry and for matters
connected or incidental thereto.
1) Rajesh Chakrabarti (2020): Capital Markets in India, Indian School of

Business, Hyderabad, SAGE Publications.
2) Sharma B. S (2011): Basic Law of Insurance, Ankit Publishing House.
3) Panda G, & Mahajan. M (2018), Principle and Practice of Insurance,
Kalyani Publishers.
4) Mishra & Mishra (2018), Insurance Principal & Practice, New Delhi.
5) Gupta P.K (2016), Insurance and Risk Management, Himalaya
Publishing House.

PROGRESS
Ans to Q No 1: False
Ans. to Q No 2: True
Ans to Q No 3: Capital market deals in financial instruments and
commodities that are long–term securities. They have a maturity of
at least more than one year. Capital markets performed the same
function as the money market .It provides a link between the savings
/investors and the wealth creators.
Ans to Q No 4: The five roles played by capital market are:
 To mobilize long-term savings to finance long terms
investment.
 To inspiration broader ownership of productive assets.
 To improve the efficiency of capital allocation through a
competitive pricing mechanism.
 To provide liquidity with mechanism enabling the investor to
see financial assets.
 To make lower the costs of transaction and information.
Ans to Q No 5: Principle of safety and security , Principle of Liquidity,
Principle of Profitability, Principle of Diversification.
Ans to Q No 6:
investment.
investment.To protect customers from misleading sellers (by
regulating the delivery channel,e.g. through standards for
agents/licensing agents and brokers)and unfair claims
practices; for example by requiring disclosure and by regulating
complaints; or by regulating rate setting/pricing (some
jurisdictions have limits for rate or require prior approval);and
by regulating policies (forms/contracts and exclusions)

 To protect the financial viability of insurer, e.g by requiring

standards for qualification, solvency, performance, risk
limitation, disclosure, reserve, reporting (periodicity, accounting
and information system), auditors, investment restrictions.
 To define general features of insurance: e.g. the provision of
insurance, the types of products and the different types of
insurance e.g. ( short and long term; national or cross border
operation; life insurance and general insurance)
Ans to Q No 7:
 Restrictions on entry of new national and especially foreign
insurers;
 Suppression of price and product competition; and
 Control of inter-industry competition from those selling similar
or complementary products
Ans to Q No 8:
 To protect the interests of and secure fair treatment of policy
holders.
 To bring about speedy and orderly growth of insurance industry
(including annuities and superannuation) for the benefit of the
common man and to provide long term funds for growth of the
economy.
 To set, promote, monitor and enforce high standards of
integrity, financial soundness, fair dealing and competence of
those it regulates.
Ans to Q No 9:
 To regulate, promote and ensure orderly growth of the
insurance business.
 To exercise all powers and functions of the controller of
insurance.
 To protect the interest of the policy holders in settlement of
claims and terms and conditions of policies.
Ans to Q No 10 : IRDA affect the development of Insurance Product because
all the insurance companies must take approval from Insurance

Regulatory and Development Authority before launching any new

product or before making any changes in the existing product or
withdrawing a product. The insurers who wishes to launch a new
product or make changes to the existing product or withdrawing a
product shall submit an application to the Authority in the prescribed
form along with the necessary details and reasons for the change
reasons. The authority may ask for additional information if required. If
no information is asked for then the insurer can start selling the product.
Very Short Questions (Answer each question in about 75 words)

Q 1: Write the meaning of capital market:
Q 2: Write short notes on insurance regulation.
Short Questions (Answer each question in about 100-150 words)

Q 1: Write the notes on Important of capital Market in Indian financial
system.
Q 2: Write the Objective of Insurance Regulation for development of
insurance market.
Q 3: Discuss the effect of Insurance Regulatory and Development

Authority (IRDA)
Essay Type Questions Answer (each question in about 300-500 words)
Q 1: Discuss the role of insurance company in the capital market.
Q 2: Discuss the Purpose of government intervention in insurance market.
Q 3: Write a brief notes on IRDA.
*** ***** ***

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PGEC S4 02

Exam Code: ECOI

KRISHNA KANTA HANDIQUI STATE OPEN UNIVERSITY

Course Coordinator : Parag Dutta, KKHSOU

SLM Preparation Team

UNIT 8: Essentials of Life Insurance - II 129–145

UNIT 9: Essentials of Health Insurance - I 146–169

UNIT 10: Essentials of Health Insurance - II 170–189

UNIT 11: Essentials of General Insurance- I 190–212

UNIT 12: Essentials of General Insurance-II 213–236

8.1 Learning Objectives

8.1 LEARNING OBJECTIVES

After going through this unit, you will be able to-

Life Insurance can be defined as a contract between the insurance

It is therefore important that we do not leave anything to chance,

8.3 ESSENTIALS OF LIFE INSURANCE

Life insurance is a contract between an insurer and insurance

130 Economics of Insurance, Block-2

continue to remain a financial responsibility even after demise of the

8.3.1 Essential Defination of Life Insurance

 Policy owner: The person who buys and controls the

 Beneficiary: The person who receives the life insurance

 Underwriting: This is the process by which insurance

8.3.2 The Special Treatment of Life Insurance

The most unique part of Life insurance is it provides a sum

CHECK YOUR PROGRESS

8.4 PROVISION OF POLICIES

Policy provisions are clauses in an insurance contract that lay out

134 Economics of Insurance, Block-2

(i) Naming A Beneficiary: While buying a life insurance in India,

(iii) Policy Reinstatement: If the policy lapses, the insurance

CHECK YOUR PROGRESS

8.5 SELECTION AND CLASSIFICATION OF RISK

Every life insurance company is liable to assess the risk. It wishes

Economics of Insurance, Block-2 137

138 Economics of Insurance, Block-2

 Standard Plus Life Insurance Rate Class

Economics of Insurance, Block-2 139

CHECK YOUR PROGRESS

8.6 BASIS OF PREMIUM CONSTRUCTION

A life insurance policy is a contract between an insurer and a

 Mortality: Life insurance is based on the sharing of the risk of death

Economics of Insurance, Block-2 141

sick. Higher the age, higher is the premium.

CHECK YOUR PROGRESS

8.7 LET US SUM UP

 Evaluate Life Insurance Needs: Only purchase additional life

middle-income people today. Most financial experts and commentators

8.8 FURTHER READINGS

1) Mishra, M. N. & Mishra, S. B. (2016). Insurance: Principles & Practice,

Economics of Insurance, Block-2 143

8.9 ANSWERS TO CHECK YOUR

Ans to Q No 1: In legal terms, life insurance is a contract between an

144 Economics of Insurance, Block-2

are calculated based on age, occupation, income, health, asset

8.10 MODEL QUESTIONS

Short Questions (Answer each question in about 150 words)

Long Questions (Answer each question in about 300-500 words)

* * *

* * *