Mmm-Ii: Controlled Document Insurance - White Paper

Project name: FM - Insurance
CONTROLLED Sector
DOCUMENT Prepared by: Group 2, Roll no
– 8-15
Insurance – White Checked by: Prof. Suyash
Paper Bhatt
Issue: 1.0
MMM-II
Prof-Suyash Bhatt
Chirag Bhuva - 09
Sachin Chavan - 11
Vishal Chavan - 12
Chetan Shape - 13
Christine Glenn -15
File name: FM - Insurance
CONTROLLED Sector
8-15
Paper Bhatt
Issue: 1.0
Table of contents:
1. Introduction to Insurance
2. Concept - Life Insurance
3. Insurance Operations
4. Regulatory Authority
5. Market Players – Local & International
6. Current Market Scenario
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OVERVIEW OF INSURANCE SECTOR IN INDIA
INTRODUCTION: -
The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972,
Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related
Acts. With such a large population and the untapped market area of this population
Insurance happens to be a very big opportunity in India. Today it stands as a
business growing at the rate of 15-20 per cent annually. Together with banking
services, it adds about 7 per cent to the country’s GDP .In spite of all this growth the
statistics of the penetration of the insurance in the country is very poor. Nearly 80%
of Indian populations are without Life insurance cover and the Health insurance. This
is an indicator that growth potential for the insurance sector is immense in India. It
was due to this immense growth that the regulations were introduced in the
insurance sector and in continuation “Malhotra Committee” was constituted by the
government in 1993 to examine the various aspects of the industry. The key element
of the reform process was Participation of overseas insurance companies with 26%
capital. Creating a more efficient and competitive financial system suitable for the
requirements of the economy was the main idea behind this reform.
Since then the insurance industry has gone through many sea changes .The
competition LIC started facing from these companies were threatening to the
existence of LIC .since the liberalization of the industry the insurance industry has
never looked back and today stand as the one of the most competitive and exploring
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industry in India. The entry of the private players and the increased use of the new
distribution are in the limelight today. The use of new distribution techniques and the
IT tools has increased the scope of the industry in the longer run.
Introduction To Insurance
HISTORY OF INSURANCE SECTOR: -
The business of life insurance in India in its existing form started in India in the year
1818 with the establishment of the Oriental Life Insurance Company in Calcutta.
Some of the important milestones in the life insurance business in India are given in
the table 1.
Table 1: milestone’s in the life insurance business in India
Year Milestones in the life insurance business in India
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 245 Indian and foreign insurers and provident societies taken over by
the central government and nationalised. LIC formed by an Act of
Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore
from the Government of India.
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The General insurance business in India, on the other hand, can trace its roots to the
Triton Insurance Company Ltd., the first general insurance company established in
the year 1850 in Calcutta by the British. Some of the important milestones in the
general insurance business in India are given in the table 2.
1. Introduction to insurance sector
 What is insurance - Insurance is related to the protection of the

economic value of assets.
 What is asset - As asset is something that provides benefits to

the owner and has an monetary value.
Definition - “Insurance is a mechanism that helps reduce the

effects of adverse situations and promises to pay to the owner
or beneficiary of the asset, a certain sum if the loss occurs.”
Asset can be of multiple types as represented under
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Assets have a specific lifespan, but it is possible that during the

lifespan, the asset may:
- Be destroyed
- Become non functional
 Any destruction or no-functionality of an asset cause economic or

monetary loss to the owner.
 Insurance is a mechanism that helps reduce the impact

and effect of such adverse situation.
What is Perils & Risks?
Perils
 Assets are insured because they are likely to be destroyed or
made non-functional before expected life time, through
accidental occurrence.
 Such possible occurrences are called “PERILS”.
 For example: Fire, floods, lightening, breakdowns etc.
Risks
 Risks are consequential losses or damages.
 Risks only indicate that there is a possibility of loss or damage,
however, the damage may or may not happen.
 For example: Earthquake may occur, but building may not
be damaged.
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Examples of Perils
Purpose & Need of Insurance
The damage that are caused due to these perils is the “Risk” that the
asset is exposed to
 The economic/financial loss due to the damage can be

compensated by taking proper insurance
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 Non-economic losses, such as emotional loss, are not covered

under insurance
 Insurance is necessary:
 As it compensates, to some extent, the monetary losses
caused by external causes
 As it helps reduce the consequences of adverse situations
Insurance as a Risk Sharing device
 People exposed to the same risk come together and agree that if
any one ‘member’ suffers a loss; the same will be shared by
others, who will make good to the person who lost.
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Insurance as a Business of Sharing
 1000 workers working in a textile mill traveled to work on

bicycles
 It was noted that every month 2 bicycles on an average were
stolen from the company premises.
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 Whoever lost their bicycle was compensated from the common

fund.
 Thus, one person’s loss was shared by many, saving him from
financial burden.
The law of large numbers
 Insurance is based on law of large numbers.

 The premiums payable by an individual for insurance is based on
expectations of the losses.
 These expectations are based on studies of occurrences in the
past, and the use of statistical principles.
 In statistics there is a “Law of Large Numbers”.
 If a coin is tossed, the chance of it coming down as a head
or tail is half.
 If the same coin is tossed 10 times, we cannot say for sure
that heads will come 5 times.
 If the coin is tossed 1 million times, the number of heads will be
closer to half a million. The variation will also be less as a
percentage.
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How does insurance work?
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 Insurance is based on occurrence of perils and protection

of risks.
 Insurance works on the following criteria:
 The occurrence of the peril has to be random
 The occurrence of peril has to Accidental
 The peril should not be a deliberate creation of the
Insured person
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We just saw why we need insurance to protect physical assets… and

how insurance works on a risk sharing mechanism.
Now let’s take a look at Human Being’s as Assets!
 Human life is an income generating asset.

 A Human being is an economic asset as well.
 This asset is perishable as it can be lost or affected by death or
sickness or accidents leading to disability.
 Accidents may or may not happen, but death is certain.
 Only the time of death is not certain.
 Humans as assets face the following risks:

 Early death
 Living too long
 Disabilities
 Sickness
 Unemployed
 Life Insurance takes care of:

 Living too long
 Dying too early
We just saw that human beings are income generating assets and
hence need insurance.
Now let’s take a look at business side of insurance and see

how it actually works.
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 Insurance companies are called the insurers.

 They bring together persons with common interests
(sharing the same risks)
 Collect the share of contribution (called premium)
 Pay out compensation (called claims)
 The insurer acts as a trustee and manages the entire fund
 The Trustee ensures that:

 The premium claim paid is genuine and no suspicious
claims are paid
 The premium charged is fair and reasonable
 The life fund is safe and secured
 The life fund earns the maximum interest and provides
good returns
Reinsurance
 The insurance companies are taking risks

 They have to pay claims as and when they occur
 They cannot be sure when the claim will occur and how big the
claim may be
 Insurers are normally financially sound
 However, a claim like Tsunami, or earthquake can bring in claims
worth crores
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 Insurers protect themselves from such situations by reinsuring

risks with other insurers.
 When on insurer insurers his risks with another insurer it is called
reinsurance.
 There are certain companies that are exclusively in business of
reinsurance
Indian Insurance business
 When a breadwinner of the family dies, the income of the family

dies as well.
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 The economic condition of the family is thus affected.

 The family may be pushed into the lower strata of society, which
creates a cost for the society.
 Insurance prevents this by stepping in and providing the family
with the sum assured.
 Insurance is one of the a social security tool that benefits the
society, the individual and the business.
Advantages of Life Insurance
 Life insurance has no competition from any other business.

 It offers quick settlement of claims in the event of death.
 It encourages financial discipline, as premiums are required to be
paid regularly.
 Creditors cannot claim life insurance money. The money can be
protected against attachment by courts.
Marketability and liquidity are better. A life insurance policy is
property and can be transferred or mortgaged. Loan can be taken
against it
Life Insurance Contract
 A life insurance contract is a contract between the insured and

the insurer, which promises that the insurer will pay the insured
a certain sum of money in case the person dies or any other
specified contingency happens.
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 Insurance contract is subject to two principles in addition to the

essentials of contract that we have seen.
 Insurance is a special type of contract.
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 The two principles are:

 These principles apply to all insurances – life and non-life
Insurance Contracts
 Most of the facts related to health, habits, personal history,

family history etc., which form the basis of insurance contract,
are known only to the proposer.
 The insurer cannot know them unless the proposer chooses to
disclose them.
 For example: History of past sickness that can affect life
expectancy and increase risk for the insurer.
 Non-disclosure of such facts would put the insurer as well as
community of policyholders at a disadvantage.
 When a proposer, knowingly puts an insurer at a disadvantage,
the contract becomes unfair and gives rise to ‘adverse selection’.
 To avoid adverse selections and bring a disadvantage to the
entire community of policyholders… the law imposes a greater
duty on the parties to an insurance contract information.
 This duty is the one of utmost good faith or ‘Uberrimae Fides’.
 In case the insured fails to disclose all important facts the
contract can be held void ab initio (null & void).
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 There are two types of facts:

 Material Facts
 Non-material facts
 Certain important material facts are:

 Facts of higher Risk or external Factors that make the risk
higher – risky job, hobby
 Any refusal/special terms imposed on previous proposals
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Existence of other policies

Normal facts like age, height, etc. and other health related
facts
 The proposer cannot defend non-disclosure by contending that
he did not think that the fact was material
Non Material Facts
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Declaration
 The proposal form is the basis of an insurance contract

The proposer makes a declaration to the effect that all statements in
the proposal form are true, and that the insurer can treat the contract
as null and void, if any statement is found to be untrue
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Material Fact Dispute

 The insurer’s right to cancel the contract, is limited by the
provisions of Section 45 of the Insurance Act, 1938.
Principle of Insurable Interest
Wagering Contract & Insurance Contract

 All risks are not insurable
 Speculative risks are not insurable
 Insurance is thus, not a wagering contract or betting.
 A wagering contract is speculative in nature and is illegal in
terms of Section 30 of Indian Contract Act.
 What distinguishes an insurance contract from a wagering
contract is that the insured person must have an insurable
interest in the subject of insurance.
What is Insurable Interest??
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• Insurable Interest is the monetary interest.

• In life insurance business insurable interest is required only at
the time of entering an insurance contract.
Who have Insurable Interest?
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When do these principles apply in life Insurance?
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Principle of Indemnity
 Insurance is meant to compensate the losses; hence, the

mechanism of Insurance cannot be used to make profits. This
broadly is the Principle of Indemnity.
 Amount of claim cannot exceed the amount of loss incurred
 Insurance makes good the loss
 In Life Insurance, insurable interest on own life is unlimited,
hence, Principle of Indemnity does not apply. However, it does
apply in General Insurance.
Risks
 Life insurance business deals with risks relating to life of human

beings.
 The circumstances (perils) that create the loss or damage (risks)
are mainly old age and death.
 Insurance does not prevent the risks but mitigates the
consequences in those circumstances.

Needs
 Risks arise because there are needs to be fulfilled

 The risk attached to early death arises because of the need to
maintain the family that is left behind.
 If there were no needs, there would be no risks.

 Insurance is therefore, related to the needs of individuals
 Needs of the people are not the same, they vary.
 Needs depend on personal values, demands of the society,
family, age, occupation, habits etc.
 It is necessary to be sensitive to needs.
Classification of Needs
Broadly, needs of individuals can be classified as:

 Protection of standard of living, which is at risk on early death.
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 Future expenses, on account of children’s education, marriage,

starting a business and so on.
 Continuance of business, when financers as for life insurance
policies as collateral security.
 Substitute income when earning capacity ceases due to old age
or disabilities.
What is Premium?
 In an insurance contract, the insurer promises to pay to the

policyholder a specified sum of money, in an event of a specified
happening.
 The policyholder has to pay a specified amount to the insurer, in
consideration of this promise.
 ‘Premium’ is the name given to this consideration that the
policyholder has to pay in order to secure the benefits offered by
the insurance contract.
 Premium can be looked upon as the price of the insurance policy,
often paid regularly over a period of time.
 A default in premium can endanger the continuance of the
policy.
Risk Premium
 Risk Premium refers to the amount of premium that is used to
cover the risk of death during a given year for a given age.
 This is based on probabilities of death at various ages.
 This information is provided in mortality tables.
Net Premium
 The balance amount of premium after providing for the risk can
be invested to earn interest.
 The overall premium can be reduced to the extent of the
interest that is likely to be earned on it.
 The amount of premium worked out after taking into account the
interest is called the pure or net premium.
Office Premium
 Office premium is the premium arrived at after loading the pure
or net premiums.
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Loadings
 The insurance company’s administration expenditure has to be

met out of the premiums paid to them by policyholders.
 To this extent, the premium collected from the policyholders will
be higher.
 Such additions to the pure premium are called ‘loadings’.
 Loadings can also be due to other reasons like unexpected
contingencies and fluctuations- such as earthquakes or
epidemics which may cause more deaths than normal.
 Due to this, the risk premium based on mortality tables would be
inadequate to meet catastrophic claims.
 Insurers would, therefore, provide for such contingencies by
suitably loading the premium.
Concept of Level Premiums

 In case of any insurance policy, normally, the risk premium would
be lower in the initial stages if the age is lesser.
 As the age increases, the risk premium will also be increased
proportionately.
 In later years, the risk premium may become too heavy to pay
and may lead to policy lapses.
 Therefore the insurance companies spread the risk premium on a
uniform basis over the term of the policy, to offset the problem.
 This is called “Level Premium”.
 Level premiums are charged for the following reason.
 It is possible that healthier people may drop out in the later
years, as they would find the premium too burdensome to pay.
 This would mean an adverse selection against the insurer.
 The remaining policyholders would not be the same kind of
population as the mortality tables would assume and the
calculations would go awry.
Extra Premiums
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 Extra premiums will be charged, if any additional benefit, life

accident benefits or premium waiver benefit have been opted
for.
 These are known as “Riders”, which provide supplementary
benefits.
 Extra premiums may be charged due to underwriting decisions
as well.
 If the underwriting reveals a greater risk or if the risk of life is
assessed to be more due to the nature of job or health,
underwriters may charge extra premiums.
 These are usually stated as “Rs. 2” per thousand and will be
added to the premium otherwise chargeable.
Calculation of Age
 The premium charged differs with age.

 If the age is found to be different from the age stated in the
proposal, after the policy is issued, the premium mentioned in
the policy shall be changed from inception.
 Either the shortfall will be collected or the excess will be
refunded.
 The age has to be determined as on the date of commencement
of the policy.
 This could be the age last birthday, age next birthday or the age
nearest birthday.
How to calculate Age?
 Age can be calculated in the following manner:

 Age = Date of Commencement of the Policy – Date of Birth
 Let’s take an example:
 Date of Commencement (DOC): 24/10/2008
 Date of Birth (DOB): 10/3/1982
 Age = 24/10/2008 – 10/03/1982 = 26 years, 7 months and
14 days
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Premium Calculations
Bonus
 The surplus amount, determined after the valuation, is
distributed amongst the policyholders by declaration of bonus.
 Bonuses are payable only to those policyholders, who have
participating or with profit policies.
 There are different types of Bonuses.
 Simple Reversionary Bonus
 Compounded Reversionary Bonus
 Terminal Bonus
 Interim Bonus
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Life Insurance Products
 Life insurance products are referred to as ‘Plans’ of insurance

 The life insurance plans have two basic elements
Term Insurance Plan
 Plans of insurance that provide only death cover are called

“Term Assurance” Plans
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 The nominee of the insured gets the specified amount, if

the insured dies within the policy term.
 If the insured does not die within the specified period, no
payment is made under a term assurance plan.
 For example: Mr. A has purchased a term assurance plan
for a 20 year term. If he dies within the 20 years, his
nominee gets the entire Sum Assured. However, if he does
not die in the 20 year term, no payment is made to him at
all.
Endowment Plans
 Plans of insurance that provide only survival benefit are called

“Pure Endowment” Plans
 The insured get the specified amount if he lives or survives
the policy period.
 If the insured dies within the specified period, no payment
is paid under pure endowment plan.
 For example: Mr. B has purchased a pure endowment plan
for a 20 year term. If he dies within the 20 years, he does
not get any payment. However, if he does not die in the 20
year term, he gets the entire sum assured.
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Some Popular Products
 All insurers do not offer all the plans.

 Further, the same plan can be called by different names by
different insurers.
Term Assurance
 Term assurance plan is the cheapest and most common

insurance plan.
 In this plan, the sum assured is paid to the nominee on death
during the chosen term.
 However, if death does not occur during the term, no payment is
made to the insured.
 Term Assurance Plans by themselves are no very popular as
there is no saving element in the plan.
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 They are useful only when death cover is required and other
arrangements are available for survival benefits.
Endowment Plans
 The Sum Assured becomes payable on survival to the end of the

term or on earlier death.
 The premiums are usually payable till the end of the term of the
plan.
 The amount payable on death may not be the same.
 Survival benefits can be more than death benefits and vice
versa.
 Survival benefits can also be paid at intervals during the term,
without affecting the sum assured on death.
Whole Life Plans
 The Sum Assured is paid on death or on maturity of the policy

(i.e. attaining a certain age.)
 The premiums are normally payable till a claim arises.
 Some plans offer shorter premium payment terms as well.
Marriage Endowment Plans
 The plan stipulates the date on which the Sum Assured will be
payable, even if the life insured dies early.
 The date can be chosen to coincide with the age of a son or
daughter, for whose marriage the sum assured may come in
handy.
 The policy can be taken to meet any other financial goal… as the
plan has nothing to do with contingency of marriage.
Education Annuity Plans
 It is not really an annuity plan, but an ordinary endowment plan

which states that the sum assured will be paid in installments,
commencing from a date.
 The date may be chosen as a likely date when the child will be
old enough for higher education.
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Convertible Plans
 Convertible plans are those plans which can be converted into

another plan after or within a certain period of time after
commencement.
 The advantage of such plans is that when the right to conversion
is exercised, there is no further underwriting decision to be
made.
 There would be no medical examination - so the right to the
policy cannot be denied to him even if he has an adverse
medical condition.
Such policies are usually taken by people in the early stages of their
careers, who expect their financial conditions to improve soon, but do
not want to delay the benefits of insurance till then
Without Profit and with Profit Policies
 Without profit or Non Participating policies are not entitled to

bonuses, which are declared after actuarial valuations.
 With profit or participating policies require slightly higher
premium for the right to participate in the progress of the
insurer.
 With profit policies are popular because the bonuses are
expected to be more than the extra premium paid.
 With ‘profit’ policies, where the premium is payable for limited
period, will continue to participate even after the premiums have
ceased.
Joint Life Policies
 Two or more lives can be covered under one policy.

 Such policies usually cover married couples or business partners.
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 The Sum Assured is paid on death of any of the insured persons

during the term or at the end of the term.
 Some plans continue the payment of the Sum Assured on death
of one life and policy is continued to cover the second life till
maturity, without further premium payment.
 In case of joint life insurances:
 A joint life declaration is necessary for creating a joint
interest in the policy.
 In case of partnership, the partnership deed will be
examined to ascertain the nature of financial interest of
each partner.
 Each life will be underwritten separately and the bonuses
will accrue on the single basic sum assured only
Child Insurance Plans
 Insurance can be taken on life of children who are minors.

 The proposal will have to be made by a parent of a guardian.
 In these plans, risk on the life of the insured child will begin only
when child attains specified age.
 The time gap between commencement of the policy and
commencement of the risk is called ‘Deferment Period’.
 For example, if the child is 6 years old when the policy is
taken, and the insurance cover starts when the child is 15
years old, the deferment period will be 9 years.
 The date on which risk will commence at the end of the
deferment period is called ‘Deferred Date’.
 The Deferred Date will be the policy anniversary.
 There is no cover during the Deferment Period.
 In case of death during this period, the premiums are returned.
 Risk commences automatically on Deferred Date without any
medical examination.
 The main advantage of this plan is that premiums are relatively
low and cover will be obtained irrespective of the state of the
child’s health.
 The title will automatically be passed on to the insured child, on
his attaining majority.
 This process is called ‘Vesting’, which cannot be before age of 18
year.
 The deferred date ca be fixed without any such limitations.
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 After vesting, the policy becomes a contract between insured

and insurer.
Variable Insurance Plans
 A very common objection to life insurance is that the returns are

not good.
 Although life insurance is not an investment and criteria on
returns is inappropriate, the concern is real, particularly in
context of inflation.
 The sum assured considered adequate today may have much
lower value on maturity, after 20 to 25 years.
 The Unit Trust of India started the Unit Linked Insurance Plan in
1971.
 In this plan a small par of the contribution was utilized for
providing life cover and the balance was invested in units. We
will learn more about Unit Linked plans in another chapter.
Industrial Assurance Plans
 These are designed for workers with low incomes.

 The policies are issued with low sum assured and weekly
premiums are payable.
 The agents visit the house or place of work of the workers every
week to collect the premium.
 The administrative costs are higher and the remuneration
structure is different because of this reason.
 Both mortality and lapsation rates tend to be higher too.
 These policies have not become popular in India.
Riders
 A rider is a clause or condition that is added on to a basic policy

to provide an additional benefit, at the proposer’s choice.
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 For example, a rider can be “A provision that in the event of

death by accident, the sum assured would be double” which can
be added on to a policy under any plan.
 Riders can be with regard to additional payments on disability or
sickness, or waiver of future premiums, partly or fully, under
certain conditions.
 Riders add variety and attractiveness to the policy plan.
 Insurers often find it convenient to have a small number of basic
plans, with riders being offered as options, so that the prospect
has number of options to choose from.
 In fact, 5 basic plans and 7 riders, effectively provide 300 or
more options.
 Riders provide the policyholder with options to customize his
plan.
IRDA Regulations on Riders
 As per the regulations made by the IRDA in April 2002 and

amended in October 2002,
 The premium on all the riders relating to health or critical
illnesses, in the case of term or group products shall not
exceed more than 100% of the premiums paid on main
policy.
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 The premium on all the other riders put together should

not exceed 30% of the basic premium.
 The benefits arising under each of the riders shall not
exceed the sum assured under the basic product.
 This virtually puts a limit on the number of riders that can be
offered with any policy.
Annuities
 Annuities are practically the same as pensions.
 Pensions provide regular periodical payments to employees, who
have retired.
 They are paid as long as the recipient is alive.
 Sometimes a pension is also paid to the dependants after the
pensioner’s death.
 Annuities are also periodical payments, not necessarily monthly,
and are not related to employment.
Annuities are called the ‘reverse’ of life insurance.
In Insurance, the insured makes a series of payments to the

insurer in return for a lump sum on his/ her death.
In annuities, the insured pays a lump sum amount to the
insurer in return for a series of periodic payments to him/ her
as long as he/ she live.
 The annuity payments are paid by the insurer in monthly,
quarterly, half-yearly or annual installments, as per the
policyholder’s choice.
 An annuity can be made payable:
Plans Covering Handicapped people
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 Physically handicapped persons can also be insured.

 Some extra premium may be charged in some cases like
 Loss of both arms
 Deaf in both ears
 Blind in both eyes etc.
 Partially handicapped persons are mostly accepted without any
extra premium, except in case of certain plans.
Group Insurance
 Group insurance is a plan of insurance that provides cover to a

large number of individuals under a single policy called the
“Master Policy”.
 The individuals covered under the master policy are not parties
to the contract.
 The contract is between the insurer and the body that represents
the group of individuals covered.
 The individuals are beneficiaries and play no role in the
negotiation of the contract.
 Thus, the policyholder may be the employer, association of
individuals, trade of professional association, etc.
 It can also be a bank or financer who wants to protect his
interests against defaults occurring because of death of the
debtors.
 The policyholder pays the premiums.
 He may or may not recover the premium amount from the
individual beneficiaries.
 However, if individuals do contribute to the premiums, it is
usually deducted from their salaries… or loan interests etc.
 The ownership of the policy is with the policyholder.
 The extent of cover, terms and conditions are determined by the
policyholder.
Broadly, there are 4 different types of group insurance

schemes:
 One year renewable Group Term Insurance Scheme (OYRGTIS)

 Group Savings-Linked Insurance Schemes (GSLIS)
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 Group Gratuity Schemes

 Group Superannuation Schemes
OYRGTIS - One Year Renewable Group Term Insurance Scheme

GSLIS - Group Savings-Linked Insurance Scheme
Group Gratuity Schemes
 Group gratuity schemes are also offered to employees and are

related to the gratuity of employees.
 Gratuity is paid to employees who retire or die after long years of
service.
 Since 1972, payment of gratuity has been made compulsory by
the Payment of Gratuity Act.
 The amount of gratuity is linked to the number of years of
service and the salary drawn during the last few years.
 The Scheme provides 2 advantages:
 It can guarantee a certain amount of gratuity which would
be more than what the rule provides, particularly for those
who die young and with relatively less services.
 It makes it easier to fund the gratuity liability of the
employer.
Group Superannuation Schemes
 These Schemes are offered to Employers and are related to

payment of pensions to employees as pension as it is fast
becoming a preferred retirement benefit.
 Lump sum benefits like provident fund and gratuity may be
inadequate to last longer life span.
 Group superannuation schemes offered by insurers are intended
to help employers administer the pension funds.
 Employers may fix the contribution they would make annually,
generally as a percentage of salary.
 The benefit available to the employees would be equal to what
this contribution can buy on the date of his retirement.
 Alternatively, the benefit to be given to the employees may be
fixed and the appropriate contribution made annually by the
employer, all by himself or partly by the employee also.
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Special Schemes
 Employee Deposit Linked Insurance (EDLI) scheme is applicable

to all organizations contributing Provident Fund under
Employee’s Provident Fund And Miscellaneous Provisions
Act,1952
 The scheme provides for an insurance cover to a maximum of
Rs. 60,000.
 The Act empowers the Central provident Fund Commission to
exempt an employer from EDLI, if he opts for group insurance
scheme of L.I.C. which is more beneficial for employees.
 The cover ranges from Rs. 5,000 to Rs. 20,000, depending on
length of the service and current salary.
 The scheme has the advantage of low premium in many cases
and the easy settlement of claims, compared to the provident
fund.
Underwriting
 When the insurer receives a proposal for insurance:

 It does not immediately agree to grant the cover.
 It has to ensure that every new entrant into the pool of
policyholder is subject to similar exposures as the others.
 The process of verifying the risk is called “Selection” or
“Underwriting”
 If the risk is wrongly assessed, the premium charged would be
inappropriate.
 A lower premium would affect solvency and the additional
risk would have to be borne by the rest of the members in
the same group.
 Therefore, if the insurer feels that there are adverse features
that increase the risk, the premium charged would be different.
 In some cases, the insurer may decline the cover.
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Financial Underwriting
 One of the indicators of moral hazard is the size of the insurance

proposed compared to income.
 Financial underwriting is checking the financial situation of the
proposer:
 The premium for the insurance policy is paid from the
current income, so the source of these premiums needs to
be checked.
 If someone else is paying the premium, the source of the
premium needs to be checked, as there could be issues of
Insurable Interest.
 The underwriter needs to be satisfied that the need for
insurance is related to the current situation and not a
desirable situation in the future.
 In case of large sum assured the underwriter may:

 Ask for additional medical reports
 Consult senior officials (for moral hazard) as a matter of
routine.
 Officials are also expected to make enquiries about the proposed
insured, family, occupation/business, income, lifestyles, etc.
 Proofs may be sought to substantiate the reports on these
aspects of the proposed Insured.
 A report from the insurance agent is a must in all the cases
 In some cases, the report of the agent may be sufficient, if the
agent is experienced enough.
Assessing the risk
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 The underwriter decides on the level of risk in a particular case

after examination and interpretation of the data available.
 For this purpose, the underwriter would avail of the assistance of
doctors associated with Life Insurance companies and having
specialized knowledge about the effect of medical conditions on
mortality.
 These doctors are called medical referees who are on the panels
of insurers.
 In case of very high Sum Assured, the insurer may even refer the
case to the specialists in the panel of reinsurers.
Non-Medical Underwriting
 Insurers have found that more than 90% proposals are accepted
as O.R. (Ordinary Rate) after medicals.
 To overcome the problems associated with medical
examinations, LIC had been underwriting proposals without any
medical examination, relying entirely on personal statements
and declarations made by the proposer.
 Non-medical underwriting is limited to younger ages, less than
45 years old.
 There are limits on sum assured as well. The limits are higher for
those in employment in reputed organisations, with leave
records, medical check at entry and so on.
 These limits are not sacrosanct. The conditions for non-medical
insurance are decided by insurers from time to time, depending
on experience.
Underwriting Female Lives
 Insurers were cautious when insuring female lives because of:

 High pregnancy related deaths, particularly in remote
areas.
 History of frauds.
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 These practices are have changed over the last 50 years.

Working women and men are now treated at par.
 Some women who do not have any earned income are also
considered, provided their husbands are adequately insured.
 Women in purdah are considered.
These are not rigid rules or principles and every insurer will have their
own experiences and practices. Some insurers allow lower premium
rates for working women.
Role of an Agent underwriter
 The agent is the first level underwriter.

 He/she has to inform the insurer about the factors that affect the
risk of the subject matter of the insurance.
 This is done by submitting an unambiguous report and also by
ensuring that the proposal papers do not conceal any
information.
 The agents report is an important source of data for the
underwriter in the office.
 For the agent, this is an important obligation to the insurer as
well as the insured.
 Otherwise, in the event of an early claim, the insurer may allege
that certain important factors were concealed and deny the
claim. The claimant may allege that the fault was that of the
agent.
Proposal Form
 The proposal form is the basis of the Insurance contract.

 Usually a standardized application form is used for all insurance
contracts.
 It has to be filled up in own handwriting.
 Must be signed in presence of a witness.
 The proposal form contains a declaration at the end stating that
all the statements mentioned in the form are true
 If any statement is found untrue then the insurer can
declare the contract null and void.
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Declaration
 If the proposal form is filled in by another person on his/her

behalf, then the person filling in the form requires to give a
declaration to that effect.
What does proposal Form Contain?
 Name and address of proposer

 Name of the person to be insured (if different)
 Details of the person to be insured like occupation date of birth
etc.
 Plan, term, Sum Assured
 Riders to be added
 Details about earlier proposals of insurance
According to the Regulations issued by the IRDA in April 2002, a copy

of the proposal is to be given to the policyholder within 30 days of
completion of contract.
Personal statement
 The personal statement is to be completed along with the
proposal.
 It includes the following particulars about the insured:
 State of health of the person
 His family history, his personal habits medical
consultations
 His absence of work due to medical reasons
 In case a medical examination is done for underwriting purposes,
the report becomes part of the documentation
 In case of Female Lives, some additional questions are asked.
 The following are the other reports that are considered
confidential.
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First Premium Receipt
 If the underwriter has accepted the risk at OR, the policy can be
commenced immediately after the full premium has been paid,
after which the FPR will be issued.
 If the risk has been accepted at modified terms, the proposer has
to agree to these terms and pay the balance premium if any.
After this the FPR will be issued.
 The FPR is evidence that the proposal has been accepted and
premium received.
The IRDA Regulations require that the decision on the proposal should
be made by the insurer within 15 days
Free Look Period
Free look period is the option given to the Policy owner to withdraw
from the policy contract within 15 days of the issue of the policy.
In case of withdrawal, the policy owner is refunded the premium paid,

less cost of risk for the short period and expenses towards medical
examination and Stamp Duty.
The Insurer is not legally bound to remind the policyholder about

premium due dates.
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Bonus notices are not sent to individual policyholders, but bonus

declarations are made in news items and advertisements, etc.
Policy Document
 Policy document is an evidence of contract between the insurer

and the insured
 It is prepared to reflect the terms and conditions of the contract.
 The clauses and liens are typed and pasted separately on the
policy document.
 Usually standardized policy documents are used.
 The policy document has to be signed by competent authority
and stamped according to the Indian Stamp Act.
Endorsements
 The standard policy conditions and privileges are printed in a

pre-printed policy form.
 Any modification to the original terms and conditions are
attached as endorsements to the policy.
 If a condition in the pre-printed policy is not applicable, the same
will be cancelled by rubber stamping the clause.
 If individual policies are printed on the computer, such
endorsements and deletions can be avoided.
 During the policy term, alterations can be made in age, plan or
term, Sum Assured, mode of payment, nominee etc. by placing
separate endorsements that are attached to the policy
document.
Regulatory Authority - Duties, Powers and Functions of IRDA
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Section 14 of IRDA Act, 1999 lays down the duties, powers and
functions of IRDA.
.(1) Subject to the provisions of this Act and any other law for the
time being in force, the Authority shall have the duty to regulate,
promote and ensure orderly growth of the insurance business and re-
insurance business.
(2) Without prejudice to the generality of the provisions contained in
sub-section (1), the powers and functions of the Authority shall include,
-
(a) issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration;
(b) protection of the interests of the policy holders in matters
concerning assigning of policy, nomination by policy holders, insurable
interest, settlement of insurance claim, surrender value of policy and
other terms and conditions of contracts of insurance;
(c) specifying requisite qualifications, code of conduct and practical
training for intermediary or insurance intermediaries and agents;
(d) specifying the code of conduct for surveyors and loss assessors;
(e) promoting efficiency in the conduct of insurance business;
(f) promoting and regulating professional organizations connected
with the insurance and re-insurance business;
(g) levying fees and other charges for carrying out the purposes of
this Act;
(h) calling for information from, undertaking inspection of,
conducting enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organizations
connected with the insurance business;
(i) control and regulation of the rates, advantages, terms and
conditions that may be offered by insurers in respect of general
insurance business not so controlled and regulated by the Tariff
Advisory Committee under section 64U of the Insurance Act, 1938 (4 of
1938);
(j) specifying the form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by insurers
and other insurance intermediaries;
(k) regulating investment of funds by insurance companies;
(l) regulating maintenance of margin of solvency;
(m) adjudication of disputes between insurers and intermediaries or
insurance intermediaries;
(n) supervising the functioning of the Tariff Advisory Committee;
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(o) specifying the percentage of premium income of the insurer to

finance schemes for promoting and regulating professional
organisations referred to in clause (f);
(p) specifying the percentage of life insurance business and general
insurance business to be undertaken by the insurer in the rural or
social sector; and
(q) exercising such other powers as may be prescribed
Current Market Scenario
LIC (Life Insurance Corporation of India) still remains the largest life insurance company
accounting for 64% market share. Its share, however, has dropped from 74% a year
before, mainly owing to entry of private players with innovative products and better sales
force.
ICICI Prudential Life Insurance Co Ltd is the biggest private life insurance company in
India. It experienced growth of 58% in new business premium, accounting for increase in
market share to 8.93% in 2007-08 from 6.97% in 2006-07.
Bajaj Allianz Life Insurance Co Ltd has reported a growth of 52% and its market share
went up to 6.98% in 2007-08 form 5.66% in 2006-07. The company ranked second (after
LIC) in number of policies sold in 2007-08, with total market share of 7.36%.
SBI Life Insurance Co Ltd in terms of new number of policies sold, the company ranked
6th in 2007-08. New premium collection for the company was Rs 4,792.66 crore in 2007-
08, an increase of 87% over last year.
Reliance Life Insurance Co Ltd Total collected was Rs 2,792.76 crore and its market
share went up to 2.96% from 1.23% a year back. It now ranks 5th in new business
premium and 4th in number of new policies sold in 2007-08.
HDFC Standard Life Insurance Co Ltd with an income of Rs 2,680 crore in FY2007-08,
registering a year-on-year growth of 64%. Its market share is 2.88% and it ranks 6 th
among the insurance companies and 5th amongst the private players.
Birla Sun Life Insurance Co Ltd market share of the company increased from 1.22% to
2.11% in 2007-08. The company moved to the 7th position in 2007-08 from 8the a year
before, pushing down Max New York Life insurance company.
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Max New York Life Insurance Co Ltd has reported growth of 73% in 2007-08. Total new
business generated was Rs 641.83 crores as against Rs 387.51 crores. The company was
pushed down to the 8th position from 7th in 2007-08.
Kotak Mahindra Old Mutual Life Insurance Ltd the fiscal 2007-08, the company reported
growth of 80%, moving from the 11th position to 9th. It captured a market share of
1.19% in 2007-08. Last year the company doubled its branch network to 150 from 74.
Aviva Life Insurance Company India Ltd ranking dropped to 10th in 2007-08 from 9th
last year. It has presence in more than 3,000 locations across India via 221 branches and
close to 40 banc assurance partnerships. Aviva Life Insurance plans to increase its capital
base by Rs 344 crores. With the fresh investment, total paid-up capital of the insurer
would go up to Rs 1,348.8 crores.
MARKET SHARE OF INDIAN INSURANCE INDUSTRY
The introduction of private players in the industry has added value to the industry.
The initiatives taken by the private players are very competitive and have given
immense competition to the on time monopoly of the market LIC. Since the advent
of the private players in the market the industry has seen new and innovative steps
taken by the players in this sector. The new players have improved the service
quality of the insurance. As a result LIC down the years have seen the declining
phase in its career. The market share was distributed among the private players.
Though LIC still holds the 75% of the insurance sector but the upcoming natures of
these private players are enough to give more competition to LIC in the near future.
LIC market share has decreased from 95% (2002-03) to 81 %( 2004-05).The
following companies has the rest of the market share of the insurance industry.
Table 3 shows the mane of the player in the market.
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TABLE NO: 3 NAME OF THE INSURANCE COMPANY AND THE SHARE

HOLDING PATTEN
Name of the Insurance Company Shareholding
Agricultural Insurance Co Bank and Public Ins Co
Bajaj Allianz General Insurance Co. Ltd. Privately Held
Cholamandalam MS General Insurance Co. Ltd. Privately Held
Export Credit Guarantee Company Public Sector
HDFC Chubb General Insurance Co. Ltd. Privately Held
ICICI Lombard General Insurance Co. Ltd. Privately Held
IFFCO-Tokio General Insurance Co. Ltd. Privately Held
National Insurance Co. Ltd. Public Sector
New India Assurance Co. Ltd. Public Sector
Oriental Insurance Co. Ltd. Public Sector
Reliance General Insurance Co. Ltd. Privately Held
Royal Sundaram Alliance General Insurance Co.

Privately Held
Ltd.
Tata AIG General Insurance Co. Ltd. Privately Held
United India Insurance Co. Ltd. Public Sector
There are a total of 13 life insurance companies operating in India, of which one is a
Public Sector Undertaking and the balance 12 are Private Sector Enterprises.
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List of Companies are indicated below:-
TABLE NO: 4 NAME OF THE LIFE INSURANCE COMPANY AND THE SHARE
HOLDING PATTEN
Name of the company Nature of Holding
Allianz Bajaj Life Insurance Co Private
Aviva Life Insurance Private
Birla Sun Life Insurance Co Private
HDFC Standard Life Insurance Co Private
ICICI Prudential Life Insurance Co Private
ING Vysya Life Insurance Co. Private
Life Insurance Corporation of India Public
Max New York Life Insurance Co. Private
MetLife Insurance Co. Private
Om Kotak Mahindra Life Insurance Private
Reliance insurance Private
SBI Life Insurance Co Private
TATA- AIG Life Insurance Company Private
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TABLE 5. NAME OF THE PLAYER MARKET SHARE (%)
Name of the Player Market share (%)
LIFE INSURANCE CORPORATION OF INDIA 82.3
ICICI PRUDENTIAL 5.63
BIRLA SUN LIFE 2.56
BAJAJ ALLIANZ 2.03
SBI LIFE INSURANCE 1.80
HDFC STANDARD 1.36
TATA AIG 1.29
MAX NEW YARK 0.90
AVIVA 0.79
OM KOTAK MAHINDRA 0.51
ING VYSYA 0.37
MET LIFE 0.21
Global Standards: -
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While the world is eyeing India for growth and expansion, Indian companies are
becoming increasingly world class. Take the case of LIC, which has set its sight on
becoming a major global player following a Rs280-crore investment from the Indian
government. The company now operates in Mauritius, Fiji, the UK, Sri Lanka, Nepal
and will soon start operations in Saudi Arabia. It also plans to venture into the
African and Asia-Pacific regions in 2006.
The year 2005 was a testing phase for the general insurance industry with a series of
catastrophes hitting the Indian sub-continent.
However, with robust reinsurance programmes in place, insurers have successfully

managed to tide over the crisis without any adverse impact on their balance sheets.
With life insurance premiums being just 2.5% of GDP and general insurance
premiums being 0.65% of GDP, the opportunities in the Indian market place is
immense. The next five years will be challenging but those that can build scale and
market share will survive and prosper.
Top Ten Global Insurance Companies by Market Value - 2009
Since the recent financial meltdown which began in September 2008, a reshuffling of
the market value of the world's largest insurance companies has occured. Below is a
list of the top ten insurance companies:
Market
Value
Rank Company Country
($
Billions)
American Intl
1 $172.24 United States
Group
2 AXA Group $66.12 France
Allianz
3 $65.55 Germany
Worldwide
Manulife
4 $50.52 Japan
Financial
Generali
5 $45.45 Italy
Group
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Prudential
6 $39.70 United States
Financial
7 MetLife $37.94 United States
United
8 Aviva $33.10
Kingdom
Munich Re
9 $30.99 Germany
Group
10 Aegon $26.40 Netherlands
(1) Based on an analysis of companies in the Forbes Global 2000.
(2) Based on market value in billions. Rankings based on sales, profits, or

assets will be different.
List of insurance companies over the world:
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Company Name Country
21 ST CENTURY INSURANCE USA
ACE Bermuda
Aegon Netherlands
Aflac United States
Aioi Insurance Japan
Allianz Worldwide Germany
Allmerica Financial United States
Allstate United States
Ambac Financial Group United States
American Finl Group United States
American Intl Group United States
American Natl Ins United States
AmerUs Group United States
AMP Australia
Aon United States
Arch Capital Group Bermuda
Assurant United States
Aviva United Kingdom
AXA Group France
Axis Capital Holdings Bermuda
Bbloise Group Switzerland
Berkshire Hathaway United States
Britannic Group United Kingdom
Cathay Financial Taiwan
Cattolica Assicurazioni Italy
China Life Insurance China
Chubb United States
Cincinnati Financial United States
CNP Assurances France
Conseco United States
Converium Holding Switzerland
Corporation Mapfre Spain
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EXAMPLES-1
In a village, there are 400 houses, each valued at Rs.20,000. Every yr, on the
average. =, 4 houses get burnt, resulting into a total loss of Rs. 80,000. If all the
400 owners come Together and contribute Rs.200 each, the common fund would be
Rs.80,000. This is Enough to pay Rs.20,000 to each of the 4 owners whose houses
got burnt. Thus, the risk Of 4 owners is spread over 400 houses owners of the
village.
EXAMPLE-2
There are 100 person who are all aged 50 and are heakthy. It is expected that of
these,
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10 persons may die during the year. If the economic value of the loss suffered by the
Family of each dyinig persoon is taken to be Rs.20,000 the total loss would work out
to
Rs.2,00,000.If each person in the group contributed Rs.200 a year, the common
fund would be Rs.2,00,000. This would be enough who die. Thus, the risks in the
cash of the Ten persons who die. Thus, the risks in the case of 10 person, are shared
by 1000 persons
APPLICATION OF INFORMATION TECHNOLOGY IN INSURANCE SECTOR
There is a evolutionary change in the technology that has revolutionized the entire
insurance sector. Insurance industry is a data-rich industry, and thus, there is a need
to use the data for trend analysis and personalization.
With increased competition among insurers, service has become a key issue.
Moreover, customers are getting increasingly sophisticated and tech-savvy. People
today don’t want to accept the current value propositions, they want personalized
interactions and they look for more and more features and add ones and better
service
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The insurance companies today must meet the need of the hour for more and more
personalized approach for handling the customer. Today managing the customer
intelligently is very critical for the insurer especially in the very competitive
environment. Companies need to apply different set of rules and treatment
strategies to different customer segments. However, to personalize interactions,
insurers are required to capture customer information in an integrated system.
With the explosion of Website and greater access to direct product or policy
information, there is a need to developing better techniques to give customers a
truly personalized experience. Personalization helps organizations to reach their
customers with more impact and to generate new revenue through cross selling and
up selling activities. To ensure that the customers are receiving personalized
information, many organizations are incorporating knowledge database-repositories
of content that typically include a search engine and lets the customers locate the all
document and information related to their queries of request for services. Customers
can hereby use the knowledge database to mange their products or the company
information and invoices, claim records, and histories of the service inquiry. These
products also may be able to learn from the customer’s previous knowledge
database and to use their information when determining the relevance to the
customers search request.
The Insurance Industry- World

The global insurance industry is one of the largest sectors of finance. It ranges from
consumer to corporate and industrial insurance, and even reinsurance, or insurance
of insurance.
The major insurance markets of the world are obviously the US, Europe, Japan, and
South Korea. Emerging markets are found throughout Asia, specifically in India and
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China, and are also in Latin America.

With the internet and other forms of high-speed communication, companies and
individuals are now able to purchase insurance and related financial products from
almost anywhere in the world. Increasing affluence, especially in developing
countries, and a rising understanding of the need to protect wealth and human
capital has led to significant growth in the insurance industry.
Given the evolving and growing socio-economic conditions worldwide, insurance
companies are increasingly reaching out across borders and are offering more
competitive and customized products than ever before.
Over the past ten years, global insurance premiums have risen by more than 50%,
with annual growth rates ranging between 2 and 10%.In 2004, global insurance
premiums amounted to $3.3 trillion.
The majority of insurance comes from developed nations such as most of Europe, the
US, and Japan. In 2004, premiums in North American amounted to $1,217 billion,
while the European Union generated $1,198 billion, and Japan produced $492 billion.
The UK amounted to $295 billion.
The four biggest generators of insurance premiums comprised almost two-thirds of

premiums for 2004, the US and Japan amount to half, while they only make up 7%
of the world’s population.
In contrast, the emerging markets that make up 85% of the world’s population
produced only 10% of the premiums.
Insurance in the World
Insurance Types US State Insurance Country Insurance

 Auto Insurance  Alabama Insurance
 Dental Insurance  Arizona Insurance
 Australia Insurance
 Home Insurance  Arkansas Insurance
 Brazil Insurance
 Travel Insurance  California Insurance
 Canada Insurance
 Medical Insurance  Colorado Insurance
 China Insurance
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 General Insurance  Florida Insurance  Egypt Insurance

 Renters Insurance  Georgia Insurance  France Insurance
 Life Insurance  Idaho Insurance  Germany Insurance
 Disability Insurance  Iowa Insurance  Malaysia Insurance
 Term Insurance  Indiana Insurance  India Insurance
 Insurance Marketing  Kansas Insurance  Indonesia Insurance
 Framer Insurance  Maine Insurance  Philippines Insurance
 Insurance Agent  Minnesota Insurance  Russia Insurance
US Insurance  Maryland Insurance  Hong Kong Insurance
 USA Insurance Industry  Massachusetts Insurance  Italy Insurance
 USA Insurance Companies  Nebraska Insurance  Japan Insurance
 NAIC  New York Insurance  Singapore Insurance
 New Mexico Insurance  United Kingdom Insurance
 Ohio Insurance  South-Africa Insurance
 South Carolina Insurance  Spain Insurance
 Texas Insurance  Mexico Insurance
 Utah Insurance  Kuwait Insurance
 Wyoming Insurance
Unit Linked Insurance Plans
Unit linked insurance plan (ULIP) is life insurance solution that provides for the
benefits of risk protection and flexibility in investment. The investment is denoted as
units and is represented by the value that it has attained called as Net Asset Value
(NAV). The policy value at any time varies according to the value of the underlying
assets at the time.
In a ULIP, the invested amount of the premiums after deducting for all the charges
and premium for risk cover under all policies in a particular fund as chosen by the
policy holders are pooled together to form a Unit fund. A Unit is the component of
the Fund in a Unit Linked Insurance Policy.
The returns in a ULIP depend upon the performance of the fund in the capital
market. ULIP investors have the option of investing across various schemes, i.e,
diversified equity funds, balanced funds, debt funds etc. It is important to remember
that in a ULIP, the investment risk is generally borne by the investor.
In a ULIP, investors have the choice of investing in a lump sum (single premium) or
making premium payments on an annual, half-yearly, quarterly or monthly basis.
Investors also have the flexibility to alter the premium amounts during the policy's
tenure. For example, if an individual has surplus funds, he can enhance the
contribution in ULIP. Conversely an individual faced with a liquidity crunch has the
option of paying a lower amount (the difference being adjusted in the accumulated
value of his ULIP). ULIP investors can shift their investments across various
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plans/asset classes (diversified equity funds, balanced funds, debt funds) either at a
nominal or no cost.
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OVERVIEW OF INSURANCE SECTOR IN INDIA

HISTORY OF INSURANCE SECTOR: -

Table 1: milestone’s in the life insurance business in India

Year Milestones in the life insurance business in India

1. Introduction to insurance sector

 What is insurance - Insurance is related to the protection of the

 What is asset - As asset is something that provides benefits to

Definition - “Insurance is a mechanism that helps reduce the

Asset can be of multiple types as represented under

Assets have a specific lifespan, but it is possible that during the

 Any destruction or no-functionality of an asset cause economic or

 Insurance is a mechanism that helps reduce the impact

What is Perils & Risks?

Purpose & Need of Insurance

 The economic/financial loss due to the damage can be

 Non-economic losses, such as emotional loss, are not covered

Insurance as a Risk Sharing device

Insurance as a Business of Sharing

 1000 workers working in a textile mill traveled to work on

 Whoever lost their bicycle was compensated from the common

The law of large numbers

 Insurance is based on law of large numbers.

How does insurance work?

 Insurance is based on occurrence of perils and protection

We just saw why we need insurance to protect physical assets… and

Now let’s take a look at Human Being’s as Assets!

 Human life is an income generating asset.

 Humans as assets face the following risks:

 Life Insurance takes care of:

Now let’s take a look at business side of insurance and see

 Insurance companies are called the insurers.

 The insurer acts as a trustee and manages the entire fund

 The Trustee ensures that:

 The insurance companies are taking risks

 Insurers protect themselves from such situations by reinsuring

Indian Insurance business

 When a breadwinner of the family dies, the income of the family

 The economic condition of the family is thus affected.

Advantages of Life Insurance

 Life insurance has no competition from any other business.

Life Insurance Contract

 A life insurance contract is a contract between the insured and

 Insurance contract is subject to two principles in addition to the

 The two principles are:

 Most of the facts related to health, habits, personal history,

 There are two types of facts:

 Certain important material facts are:

Existence of other policies

Non Material Facts

 The proposal form is the basis of an insurance contract

Material Fact Dispute

Principle of Insurable Interest

Wagering Contract & Insurance Contract

What is Insurable Interest??

• Insurable Interest is the monetary interest.

Who have Insurable Interest?

When do these principles apply in life Insurance?