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Insurance. PGDBM - INSURANCE The term risk broadly refers to situations where outcomes are uncertain. Risk often refers specifically to variability in.

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Presentation on theme: "Insurance. PGDBM - INSURANCE The term risk broadly refers to situations where outcomes are uncertain. Risk often refers specifically to variability in."— Presentation transcript:

1 Insurance

2 PGDBM - INSURANCE The term risk broadly refers to situations where outcomes are uncertain. Risk often refers specifically to variability in outcomes around the expected value. The term risk broadly refers to situations where outcomes are uncertain. Risk often refers specifically to variability in outcomes around the expected value. Major types of business risk that produce fluctuations in business value include price risk, credit risk, and pure risk. Major types of business risk that produce fluctuations in business value include price risk, credit risk, and pure risk. Pure risk is loss form damage to and theft or expropriation of business assets, legal liability for injuries to customers and others, work place injuries to employees and obligations under employee benefit plans. Pure risk is loss form damage to and theft or expropriation of business assets, legal liability for injuries to customers and others, work place injuries to employees and obligations under employee benefit plans. Major risk management methods include loss control, loss financing and internal risk reduction. Major risk management methods include loss control, loss financing and internal risk reduction. Pooling arrangements reduce risks for each participant, provided losses are not perfectly positively correlated. Pooling arrangements reduce risks for each participant, provided losses are not perfectly positively correlated. The amount or risk that can be reduced through pooling arrangements increases as the number of participants increases, all other factors being held constant The amount or risk that can be reduced through pooling arrangements increases as the number of participants increases, all other factors being held constant Loss financing methods include retention (self insurance),insurance, hedging and other contractual risk transfers. Loss financing methods include retention (self insurance),insurance, hedging and other contractual risk transfers.

3 PGDBM - INSURANCE Individuals face the following risks: Risk of an early death Risk of an early death Risk of out-living ones income Risk of out-living ones income Risk of illness and health problems to oneself & the family Risk of illness and health problems to oneself & the family Risk of accident causing loss of life or impairment Risk of accident causing loss of life or impairment Risk of loss and damage of property Risk of loss and damage of property Risk from professional liability Risk from professional liability Insurance is a contract by which the one party, in consideration of a price paid to him adequate to the risk, becomes security to the other that he shall not suffer loss, damage or prejudice by the happening of the perils specified to certain things which may be exposed to them- Laurenace, J Insurance is a contract by which the one party, in consideration of a price paid to him adequate to the risk, becomes security to the other that he shall not suffer loss, damage or prejudice by the happening of the perils specified to certain things which may be exposed to them- Laurenace, J Insurance is a method of spreading over large number of persons, a possible financial loss too serious to be conveniently born by an individual. – Maclean J B Insurance is a method of spreading over large number of persons, a possible financial loss too serious to be conveniently born by an individual. – Maclean J B 3

4 PGDBM - INSURANCE Following are the general characteristics of insurance: Following are the general characteristics of insurance: insurance aids business insurance aids business Co operative device under which large number of persons agree to share the financial loss due to a particular risk. Co operative device under which large number of persons agree to share the financial loss due to a particular risk. Payment is made at certain contingency – except for life insurance. Payment is made at certain contingency – except for life insurance. Insurance is not gambling Insurance is not gambling Insurance is not charity. It is against premium paid. Insurance is not charity. It is against premium paid. It is a service. It is a service. It is a species of general contract. All requisites of a valid contract are required. It is a species of general contract. All requisites of a valid contract are required. 4

5 PGDBM - INSURANCE Primary functions: Provide protection against future risk – economic loss Provide protection against future risk – economic loss Collective bearing of risk. Collective bearing of risk. Assessment of risk Assessment of risk Provide Certainty- Provide Certainty- Secondary functions: Prevention of Losses - safety instructions Prevention of Losses - safety instructions Small capital to cover larger risks Small capital to cover larger risks Contributes towards the development of larger industries Contributes towards the development of larger industries Other functions: Means of savings and investment Means of savings and investment Source of earning foreign exchange Source of earning foreign exchange Risk Free trade Risk Free trade 5

6 PGDBM - INSURANCE Writings of Manu, Yagnavalkya and Kautiilya refer to pooling of resources that could be re- distributed in times of calamities such as fire, floods, epidemics and famine. Writings of Manu, Yagnavalkya and Kautiilya refer to pooling of resources that could be re- distributed in times of calamities such as fire, floods, epidemics and famine. The first Insurance Company was started in India in The first Insurance Company was started in India in LIC of India formed in 1956 – 245 private Co s nationalised. LIC of India formed in 1956 – 245 private Co s nationalised. In 1972, four General Insurance Cos were formed by nationalising 107 General Insurance companies -(1) National insurance Co Lltd (2) New India Assurance Co Ltd (3) Oriental Insurance Co Ltd and (4) United India insurance Co Ltd. In 1972, four General Insurance Cos were formed by nationalising 107 General Insurance companies -(1) National insurance Co Lltd (2) New India Assurance Co Ltd (3) Oriental Insurance Co Ltd and (4) United India insurance Co Ltd. Following Malhotra Committee Report,IRDA was constituted in Following Malhotra Committee Report,IRDA was constituted in This opened up insurance sector for Private players. This opened up insurance sector for Private players. 16 new entrants during and number increasing each year. 16 new entrants during and number increasing each year. Banks entering the market - joint ventures with foreign finance majors Banks entering the market - joint ventures with foreign finance majors During , 3 new entrants in Life Insurance (including Canara HSBC OBC Life Insurance Company Ltd.) and one in General Insurance. During , 3 new entrants in Life Insurance (including Canara HSBC OBC Life Insurance Company Ltd.) and one in General Insurance. Latest - India First Life Insurance Co Ltd, registered on Latest - India First Life Insurance Co Ltd, registered on Life and 19 Non life Insurance Companies are registered with IRDA, apart form ECGC and Agricultural Insurance Company of India Ltd. 21 Life and 19 Non life Insurance Companies are registered with IRDA, apart form ECGC and Agricultural Insurance Company of India Ltd. 6

7 PGDBM - INSURANCE 7 DENSITY - RATIO OF PREMIUM ($) TO POPULATION Country U K France U S A H K Japan Australia Singapore Germany Taiwan S Korea S Africa Malaysia Russia Brazil Thailand China India Pakistan WORLD

8 PGDBM - INSURANCE 8 PENETRATION - RATIO OF PREMIUM ($) TO GDP ($) Country U K Taiwan S Africa S Korea H K France Japan USA Singapore Australia Germany India Malaysia Thailand Brazil China Russia Pakistan World

9 PGDBM - INSURANCE 9 GROSS DIRECT PREMIUM OF NON-LIFE INSURANCE (Rs. Crore) Pub. Sec Growth %) (3.07)(8.18)(6.87)(4.65)(5.65)(13.45)(13.59) Pvt. Sec Growth% (27.12)(61.24)(52.89)(55.35)(67.27)(188.64) Total Growth% (11.09)(21.51)(15.62)(11.57)(11.25)(20.06) (17.97) FIRST YEAR PREMIUM (INCL. SINGLE PREMIUM) LIFE INSURANCE (Rs. Crore) LIC Growth % (6.71)(97.17)(38.07)(19.05)(8.58)(-18.44)(101.93) Pvt. Sec Growth% (73.56)(88.84)(84.55)(127.99)(152.74)(259.65) Total Growth% (23.88)(94.96)(47.94)(32.49)(16.80)(-14.68)

10 PGDBM - INSURANCE As per the provisional figures provided by the Life Insurance Council, the life insurance penetration in year was 4.30 percent. As per the provisional figures provided by the Life Insurance Council, the life insurance penetration in year was 4.30 percent. Gross direct premium during was Rs Crores. Gross direct premium during was Rs Crores. As per press reports, first half of the current year shows a jump of 10.8 per cent in gross first year premium. As per press reports, first half of the current year shows a jump of 10.8 per cent in gross first year premium. According to the Investment Commission of India, the Indian insurance market is expected to be around US$ 52 billion by The CAGR is expected to be over 30 per cent per annum. According to the Investment Commission of India, the Indian insurance market is expected to be around US$ 52 billion by The CAGR is expected to be over 30 per cent per annum. The total investment opportunity is estimated to be US$ billion. The total investment opportunity is estimated to be US$ billion. In October, the cabinet approved the proposal for raising the foreign investment limit to 49% from the present 26%. In October, the cabinet approved the proposal for raising the foreign investment limit to 49% from the present 26%. Largely untapped market with 17% of the worlds population Largely untapped market with 17% of the worlds population Nearly 80% of the population is without insurance Nearly 80% of the population is without insurance Strong economic growth with increase in affluence and rising risk awareness leading to rapid growth in the insurance sector Strong economic growth with increase in affluence and rising risk awareness leading to rapid growth in the insurance sector Innovative products such as ULIPs are likely to drive industry growth Innovative products such as ULIPs are likely to drive industry growth Investment opportunities exist in both life and non-life segments. Investment opportunities exist in both life and non-life segments. 10

11 PGDBM - INSURANCE Life Insurers transact life insurance business; General Insurers transact the rest. No composites are permitted as per law. Life Insurers transact life insurance business; General Insurers transact the rest. No composites are permitted as per law. The following legislations deals with insuracne: The following legislations deals with insuracne: The Insurance Act, 1938 The Insurance Act, 1938 The Life Insurance Corporation Act, 1956 The Life Insurance Corporation Act, 1956 The Marine Insurance Act, 1963 The Marine Insurance Act, 1963 The General Insurance Business (Nationalisation) Act, 1972 The General Insurance Business (Nationalisation) Act, 1972 Insurance Regulatory & Development Authority Act, Insurance Regulatory & Development Authority Act, Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is empowered to redress customer grievances in respect of insurance contracts on personal lines where the insured amount is less than Rs. 20 lakhs, in accordance with the Ombudsman Scheme. Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is empowered to redress customer grievances in respect of insurance contracts on personal lines where the insured amount is less than Rs. 20 lakhs, in accordance with the Ombudsman Scheme. 11

12 PGDBM - INSURANCE 12 PERSONAL INSURANCE Life Insurance Personal accident Insurance Health Insurance PROPERTY INSURANCE Marine Insurance Fire Insurance Automobile Cattle Insurance Crop Insurance Machinery Insurance Theft Insurance FIDELITY INSURANCE Fiduciary Insurance Credit accident Insurance Privilege Insurance LIABILITY INSURANCE Third Party Insurance Employees Insurance Motor Insurance Reinsurance

13 PGDBM - INSURANCE 13 InsuranceWager 1. Contract of indemnity ( except life, personal accident etc.), for loss on happening on an event. Not a contract of indemnity. Voluntary acceptance of risk. 2. Event occurrence a contingencyThe event is bound to happen. 3. Effected to cover an existing riskNo risk until the bet is made. 4. To protect against the loss.To earn speculative gain. 5. Event is not desired by any partyEvent is desired 6. It is known who bears the riskKnown only after the event 7. Presence of insurable interest.Pecuniary interest created. 8. No concealment of facts.No such utmost good faith exist. 6. Legally valid contractA contract void ab initio 7. Adequate consideration calculated scientifically. No such consideration. 8. Varying degree of loss.Either win or lose.

14 PGDBM - INSURANCE Utmost Good Faith Utmost Good Faith Insurable Interest Insurable Interest Indemnity Indemnity Double Insurance Double Insurance Reinsurance Reinsurance Subrogation Subrogation Attachment of risk. Attachment of risk. Contribution Contribution Proximate Cause Proximate Cause

15 PGDBM - INSURANCE A contract of insurance is of utmost good faith. It is the duty of the proposer to disclose all material facts. A contract of insurance is of utmost good faith. It is the duty of the proposer to disclose all material facts. Material Fact: affect the judgment or decision of both parties to the contract – whether to offer/ accept and on what terms. Material Fact: affect the judgment or decision of both parties to the contract – whether to offer/ accept and on what terms. Full and True disclosure: Disclosed in that form in which they really exist. No concealment, misrepresentation, mistake or fraud. Duty extends to material facts which the insured ought to know. Full and True disclosure: Disclosed in that form in which they really exist. No concealment, misrepresentation, mistake or fraud. Duty extends to material facts which the insured ought to know. Duty on both parties: rule holds good for both. Duty on both parties: rule holds good for both. Facts need not be disclosed: Facts need not be disclosed: which diminishes the risk which diminishes the risk comes to the knowledge of the insured after the contract comes to the knowledge of the insured after the contract known to the insured or which cab be inferred from the facts. known to the insured or which cab be inferred from the facts. Waived by the policy. Waived by the policy. 15

16 PGDBM - INSURANCE The legal right enjoyed by the owner of a property to insure is called Insurable Interest. The legal right enjoyed by the owner of a property to insure is called Insurable Interest. The insured derives pecuniary benefit from the existence of the property and will suffer loss from its destruction. The insured derives pecuniary benefit from the existence of the property and will suffer loss from its destruction. The insurance will become null and void, without the insurable interest. An insurable interest must be: The insurance will become null and void, without the insurable interest. An insurable interest must be: Definite. Definite. Capable of valuation. Capable of valuation. Valid and subsisting. Valid and subsisting. Should involve legal liability. Should involve legal liability. Time of insurable interest Time of insurable interest Insurable interest arises by Insurable interest arises by ownership ownership Law Law Contract Contract Legal liability Legal liability Interest of a Person in Life Interest of a Person in Life 16

17 PGDBM - INSURANCE Life Insurancee Life Insurancee Own life Own life Close ties of blood or marriage Close ties of blood or marriage When pecuniary interest is involved When pecuniary interest is involved creditor in the life of debtor, partnership firm - partners, an insurer- assured, an employee - employer, an employer - key employee. creditor in the life of debtor, partnership firm - partners, an insurer- assured, an employee - employer, an employer - key employee. Property Insurance Property Insurance Part or Joint Ventures Part or Joint Ventures Mortgagees and Mortgagors Mortgagees and Mortgagors Executors and Trustees Executors and Trustees Bailees, Agents Bailees, Agents Husband and Wife Husband and Wife Liability Insurance Liability Insurance to the extent of any potential liability may be incurred by way of damages or other costs. to the extent of any potential liability may be incurred by way of damages or other costs. Insurable Interest of Insurer - reinsurance Insurable Interest of Insurer - reinsurance 17

18 PGDBM - INSURANCE 18 Marine insurance:at the time of loss Life insurance:at the inception of the policy; continuing insurable interest is not necessary Other Insurances:at the time of loss and also at inception

19 PGDBM - INSURANCE A contract of indemnity is one in which the promiser promises to make good the loss that occurs to the promisee on the happening of an event. A contract of indemnity is one in which the promiser promises to make good the loss that occurs to the promisee on the happening of an event. Indemnity Contract – Fire or Marine Insurance Indemnity Contract – Fire or Marine Insurance Non-indemnity Contract – Life Insurance Non-indemnity Contract – Life Insurance The principle of Indemnity states that under the policy of insurance, the insured has to be placed after the loss in the same financial position in which he was immediately before the loss. The principle of Indemnity states that under the policy of insurance, the insured has to be placed after the loss in the same financial position in which he was immediately before the loss. Applicability: Applicability: – When the losses suffered by the insured can be measured in terms of money – It is practicable to place the insured in the same financial position which he occupied before the loss In Marine Cargo where valued polices are issued, there is only commercial indemnity- the value declared for insurance is accepted at the time of loss. In Marine Cargo where valued polices are issued, there is only commercial indemnity- the value declared for insurance is accepted at the time of loss. If the sum insured is less than the indemnity, only the sum insured is payable. If the sum insured is less than the indemnity, only the sum insured is payable. Property insurances- Condition of average- If there is under insurance only proportionate value is payable. Property insurances- Condition of average- If there is under insurance only proportionate value is payable. Exceptions for Indemnity: Life, Personal Accident Exceptions for Indemnity: Life, Personal Accident

20 PGDBM - INSURANCE Premium once paid cannot be refunded, except: Premium once paid cannot be refunded, except: Non attachment of risk - when risk is not run. Non attachment of risk - when risk is not run. Agreement in policy Agreement in policy Undeclared balance in the open policy Undeclared balance in the open policy 20

21 PGDBM - INSURANCE The active efficient cause that sets in motion a train of events which brings about a result without intervention of any force started and working actively from a new independent source. The active efficient cause that sets in motion a train of events which brings about a result without intervention of any force started and working actively from a new independent source. Insurer is liable to indemnify only against the insured peril Insurer is liable to indemnify only against the insured peril Proximate cause literally means the nearest cause or the direct cause. Proximate cause literally means the nearest cause or the direct cause. The insurer is only liable for loss, if the risk insured against is the proximate to the last cause of loss The insurer is only liable for loss, if the risk insured against is the proximate to the last cause of loss The insurer is responsible only if the nearest cause comes within the meaning of the risk insured. The insurer is responsible only if the nearest cause comes within the meaning of the risk insured. A man fell from a horse and sustained injuries that prevented him from moving. As a result he contracted pneumonia due to lying in the wet and died. The proximate cause of his death was the fall and not pneumonia. A man fell from a horse and sustained injuries that prevented him from moving. As a result he contracted pneumonia due to lying in the wet and died. The proximate cause of his death was the fall and not pneumonia.

22 PGDBM - INSURANCE There are three types of perils related to a claim under an Insurance policy There are three types of perils related to a claim under an Insurance policy Insured Perils Insured Perils Excepted Perils Excepted Perils Uninsured Perils Uninsured Perils Insurers are liable to pay claims arising out of losses caused by Insured Perils only. Insurers are liable to pay claims arising out of losses caused by Insured Perils only. Losses can occur in the following manners Losses can occur in the following manners Loss due to a single cause. Loss due to a single cause. A series or chain of events one following and resulting from the other causing the loss – Event starting the chain should be insured peril. A series or chain of events one following and resulting from the other causing the loss – Event starting the chain should be insured peril. A series or chain of events, which is broken by a new event independently from a different source causing the loss – Broken sequence. The event interrupting and causing the loss should be insured peril. A series or chain of events, which is broken by a new event independently from a different source causing the loss – Broken sequence. The event interrupting and causing the loss should be insured peril. Two or more events occurring simultaneously and resulting in loss – All events should be insured perils. Two or more events occurring simultaneously and resulting in loss – All events should be insured perils. 22

23 PGDBM - INSURANCE Subrogation means the restitution of the rights of an assured in favour of the insurer against the third party for any damages caused by him in place of the assured after the insurer has indemnified him for the loss. Subrogation means the restitution of the rights of an assured in favour of the insurer against the third party for any damages caused by him in place of the assured after the insurer has indemnified him for the loss. The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurances. The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurances. all rights and remedies which the insured has against third person will pass on to the insurer all rights and remedies which the insured has against third person will pass on to the insurer when an insurer has paid the loss as per contract of insurance. when an insurer has paid the loss as per contract of insurance. The right cannot be exercised for his benefit until the insurer recoups the amount he has paid under the policy. The right cannot be exercised for his benefit until the insurer recoups the amount he has paid under the policy. This right extends only to the rights and remedies available to the insured in respect of the thing to which the contract of insurance relates. This right extends only to the rights and remedies available to the insured in respect of the thing to which the contract of insurance relates.

24 PGDBM - INSURANCE The right of insurers who have paid a loss under a policy to recover a proportionate amount from other insurers, who are liable for the same loss. The right of insurers who have paid a loss under a policy to recover a proportionate amount from other insurers, who are liable for the same loss. Where there are two or more insurances on same risks, the loss will be shared proportionately among the insurers according to the ratable proportion of the loss. Where there are two or more insurances on same risks, the loss will be shared proportionately among the insurers according to the ratable proportion of the loss. 1) the insured asset must be common to all the policies 2) the risk insured against must be common to all the policies 3) the insured owner of the asset must be the same person 4) All policies must be in force during the occurrence of loss.

25 PGDBM - INSURANCE Insurance Regulatory and Development Authority Act constituted by an act of parliament Insurance Regulatory and Development Authority Act constituted by an act of parliament The Authority is a ten member team consisting of (a) a Chairman; (b) five whole-time members; (c) four part-time members, The Authority is a ten member team consisting of (a) a Chairman; (b) five whole-time members; (c) four part-time members, All the members are appointed by the Central Government from persons of ability, integrity and standing who have knowledge or experience in Life Insurance, General Insurance, Actuarial Science, Finance, Economic, Law, Accountancy, Administration or any other discipline which the Govt. feels may be useful to the Authority All the members are appointed by the Central Government from persons of ability, integrity and standing who have knowledge or experience in Life Insurance, General Insurance, Actuarial Science, Finance, Economic, Law, Accountancy, Administration or any other discipline which the Govt. feels may be useful to the Authority The Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re- insurance business. The Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re- insurance business. 25

26 PGDBM - INSURANCE Registration of Insurers, Intermediaries and Agents Registration of Insurers, Intermediaries and Agents Regulating returns and conditions of contract of Insurance. Regulating returns and conditions of contract of Insurance. Promoting and regulating professional organisations connected with Insurance and Reinsurance business Promoting and regulating professional organisations connected with Insurance and Reinsurance business Monitoring investment of funds and solvency margin of Insurance Company. Monitoring investment of funds and solvency margin of Insurance Company. Regulation for advertisements whether issued by insurance company or an insurance intermediary including an agent. Regulation for advertisements whether issued by insurance company or an insurance intermediary including an agent. Authority to be advised by Insurance Advisory Committee (IAC), which shall consist of not more than 25 members Authority to be advised by Insurance Advisory Committee (IAC), which shall consist of not more than 25 members 26

27 PGDBM - INSURANCE Paid-up capital of company - not less than 100 crores for life or general Insurance and 200 crores in the case of reinsurance business. Paid-up capital of company - not less than 100 crores for life or general Insurance and 200 crores in the case of reinsurance business. Company to appoint an actuary to be approved by the IRDA whose duty will be to Company to appoint an actuary to be approved by the IRDA whose duty will be to Valuate assets in appropriate manner Valuate assets in appropriate manner Valuate liability as required Valuate liability as required Ensure maintenance of prescribed solvency margin. Ensure maintenance of prescribed solvency margin. Assets of insurer should be invested as … Assets of insurer should be invested as … 25% in Government securities(including deposit in RBI), 25% in Government securities(including deposit in RBI), At least 25% in Government/other approved securities; At least 25% in Government/other approved securities; Up to 15% of the controlled fund of the insurers can be invested in other insurance; Up to 15% of the controlled fund of the insurers can be invested in other insurance; Up to 25% of the assets of GIC can be invested in other investment; Up to 25% of the assets of GIC can be invested in other investment; No fund of policy holder can be invested outside India. No fund of policy holder can be invested outside India. 27

28 PGDBM - INSURANCE For all new life insurer:-( percentage of total insurance) First year-7% First year-7% Second year-9% Second year-9% Third year-12% Third year-12% Fourth year-14% Fourth year-14% Fifth year-16% Fifth year-16% Sixth year-18% Sixth year-18% For Genral Insurance For Genral Insurance First year-2% First year-2% Second year- 3% Second year- 3% Third year-5% Third year-5% Fourth year-5% so on… Fourth year-5% so on… All insurers are obliged to issue 5,7,10,15,20,and 25 thousand lives in first six years respectively. All insurers are obliged to issue 5,7,10,15,20,and 25 thousand lives in first six years respectively. 28

29 PGDBM - INSURANCE Business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life. Business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life. Popular Products: Endowment Assurance (Participating), and Money Back (Participating). More than 80% of the life insurance business is from these products. Popular Products: Endowment Assurance (Participating), and Money Back (Participating). More than 80% of the life insurance business is from these products. New products have been launched by life insurers. These include linked-products New products have been launched by life insurers. These include linked-products 29

30 PGDBM - INSURANCE Nomination – claim amount is paid to the nominee in case of death of the assured. Nomination – claim amount is paid to the nominee in case of death of the assured. can be made by insured – own life policies only. can be made by insured – own life policies only. At the time of proposal At the time of proposal later only by endorsement in the policy with notice to insurer. later only by endorsement in the policy with notice to insurer. Can be changed. Can be changed. Assignment transfers the right on the policy to the assignee. Assignment transfers the right on the policy to the assignee. Made by an endorsement on the policy Made by an endorsement on the policy Can also be by a separate deed. If deed, stamp duty is payable. Can also be by a separate deed. If deed, stamp duty is payable. Notice of Assignment to the insurer Notice of Assignment to the insurer In absolute assignment, all rights are transferred to the assignee. In absolute assignment, all rights are transferred to the assignee. In conditional assignment, right till death of the assignee. In conditional assignment, right till death of the assignee. Cannot be revoked by the assignor Cannot be revoked by the assignor Only life policies can be assigned. Only life policies can be assigned. Reassignment by the assignee similar manner. Reassignment by the assignee similar manner. Assignment cancels nomination. Assignment cancels nomination. 30

31 PGDBM - INSURANCE Provides death cover only. Provides death cover only. Benefit comes to the nominee only in case of death of the holder Benefit comes to the nominee only in case of death of the holder The premiums are very low The premiums are very low This is an expense similar to motor insurance This is an expense similar to motor insurance Options Available Term Insurance policy convertible to whole life or endowment plan Term Insurance policy convertible to whole life or endowment plan Term Insurance with increasing sum assured Term Insurance with increasing sum assured Term Insurance with decreasing sum assured – for mortgage loans protection Term Insurance with decreasing sum assured – for mortgage loans protection

32 PGDBM - INSURANCE Covers the risk of death of insured, whenever it may happen, i.e. for the whole life Covers the risk of death of insured, whenever it may happen, i.e. for the whole life The Term Insurance for the longest term The Term Insurance for the longest term Premium rates low but higher than Term Insurance Premium rates low but higher than Term Insurance Options available Options available Pure Whole Life Insurance – premiums payable continuously throughout the life Pure Whole Life Insurance – premiums payable continuously throughout the life Limited Payment Whole Life Insurance – premiums payable for a limited and shorter period Limited Payment Whole Life Insurance – premiums payable for a limited and shorter period

33 PGDBM - INSURANCE Provides death cover to the insured during the policy period; and survival benefits at the end of the policy period Provides death cover to the insured during the policy period; and survival benefits at the end of the policy period Premium rates are high Premium rates are high Options Available Options Available Money Back Plan Money Back Plan Endowment Plan for marriage/education Endowment Plan for marriage/education Endowment Plan with/without profit Endowment Plan with/without profit Endowment Plan with double/triple risk cover Endowment Plan with double/triple risk cover Unit Linked Endowment Plan Unit Linked Endowment Plan

34 PGDBM - INSURANCE The savings (investment) component of the policy premium is invested into the financial market instruments to avail a greater rate of return than from traditional insurance policies. The savings (investment) component of the policy premium is invested into the financial market instruments to avail a greater rate of return than from traditional insurance policies. Return on investment linked to the financial market Return on investment linked to the financial market Options Available Options Available Investments can be made into equity (asset appreciation), debt (regular income), or money market instruments, etc. Investments can be made into equity (asset appreciation), debt (regular income), or money market instruments, etc.

35 PGDBM - INSURANCE Provides for a lump sum amount and annuity benefit payments at the stipulated retirement age. Provides for a lump sum amount and annuity benefit payments at the stipulated retirement age. An effective way of contributing to ones own retirement benefits An effective way of contributing to ones own retirement benefits Helps in achieving financial independence for ones Golden Years Helps in achieving financial independence for ones Golden Years An built-in life insurance cover, as an option An built-in life insurance cover, as an option Unit liked pension plans also available Unit liked pension plans also available

36 PGDBM - INSURANCE Children Policies: To provide for expenses (lumpsum/recurring) related to education, etc. of children or for the benefit of disabled children, in the event of death of the parent. Children Policies: To provide for expenses (lumpsum/recurring) related to education, etc. of children or for the benefit of disabled children, in the event of death of the parent. Joint Life Policies: Provides risk cover on either or survivor basis. During policy period, on death of one life, sum assured paid to the second life, and subsequent premiums waived, but the risk cover on second life continues. Joint Life Policies: Provides risk cover on either or survivor basis. During policy period, on death of one life, sum assured paid to the second life, and subsequent premiums waived, but the risk cover on second life continues.

37 PGDBM - INSURANCE A person aged 30 has Annual salary 2lacs A person aged 30 has Annual salary 2lacs His personal expenses annually is 1lac His personal expenses annually is 1lac He give for the family 1lac He give for the family 1lac His earning span is 30 years, so the family requires 30lacs(this is over a period of 30years) His earning span is 30 years, so the family requires 30lacs(this is over a period of 30years) Human Life value= *1-(1/(1+i)^30)/i Human Life value= *1-(1/(1+i)^30)/i I=present bank rate of interest so at 8% it will be 1lac* = I=present bank rate of interest so at 8% it will be 1lac* =

38 PGDBM - INSURANCE the monetary value of the risk contingent upon the duration of human life and accepted by the insurer the monetary value of the risk contingent upon the duration of human life and accepted by the insurer Premium is a consideration paid by the policyholder, to the insurance co for Insurance Contract in order to get benefits offered by an Insurance policy. Premium is a consideration paid by the policyholder, to the insurance co for Insurance Contract in order to get benefits offered by an Insurance policy. A default in premium payment will result into discontinuance of contract. The Policy will be treated as lapsed and expected benefits will not be available A default in premium payment will result into discontinuance of contract. The Policy will be treated as lapsed and expected benefits will not be available 38

39 PGDBM - INSURANCE Mortality Mortality a measure of the number of deaths in some population, scaled to the size of that population, per unit time. Mortality rate is typically expressed in units of deaths per 1000 individuals per year. Thus, a mortality rate of 9.5 in a population of 100,000 means 950 deaths per year in that entire population. a measure of the number of deaths in some population, scaled to the size of that population, per unit time. Mortality rate is typically expressed in units of deaths per 1000 individuals per year. Thus, a mortality rate of 9.5 in a population of 100,000 means 950 deaths per year in that entire population. Expenses Expenses Some margin are added to cover the companys future expense levels to be experienced in administering the policy. Some margin are added to cover the companys future expense levels to be experienced in administering the policy. Investments Investments Premiums received are invested from which bonuses are given Premiums received are invested from which bonuses are given Contingency Contingency A major catastrophe like an earthquake, riots, or epidemic can raise the number of deaths to higher levels than indicated by the mortality tables. Insurers therefore as a matter of safety provide for such contingencies and fluctuations by loading the premium suitably A major catastrophe like an earthquake, riots, or epidemic can raise the number of deaths to higher levels than indicated by the mortality tables. Insurers therefore as a matter of safety provide for such contingencies and fluctuations by loading the premium suitably 39

40 PGDBM - INSURANCE Two methods 1. Value of Service: premium determined according to the utility of insurance to each proponent. This is impracticable. premium determined according to the utility of insurance to each proponent. This is impracticable. 2. Cost of Service includes all expenses of the business plus small profit margin. At least premium should cover cost of claim. includes all expenses of the business plus small profit margin. At least premium should cover cost of claim. Net premium: Net premium: The premium charged to meet the amount of claim The premium charged to meet the amount of claim Cost of administration Cost of administration Fixed cost- spread over the policy life Fixed cost- spread over the policy life recurring cost. recurring cost. Method of distribution of expenses is called loading. Method of distribution of expenses is called loading. Interest Factor: Interest Factor: Benefit of interest on premium collected to be given to policy holders. Benefit of interest on premium collected to be given to policy holders. 40

41 PGDBM - INSURANCE Mortality: Forecasting of death of single individual is not possible, but expectation of number of deaths from a group of persons of same age can be forecasted on the basis of Theory of probability and Law of large numbers Forecasting of death of single individual is not possible, but expectation of number of deaths from a group of persons of same age can be forecasted on the basis of Theory of probability and Law of large numbers Mortality is a measure of the number of deaths in some population, scaled to the size of that population, per unit time. Mortality rate is typically expressed in units of deaths per 1000 individuals per year. Thus, a mortality rate of 9.5 in a population of 100,000 means 950 deaths per year in that entire population. Mortality is a measure of the number of deaths in some population, scaled to the size of that population, per unit time. Mortality rate is typically expressed in units of deaths per 1000 individuals per year. Thus, a mortality rate of 9.5 in a population of 100,000 means 950 deaths per year in that entire population. Expenses- Contingency A major catastrophe like an earthquake, riots, or epidemic can increase the risk of the insurer. Insurers therefore as a matter of safety provide for such contingencies and fluctuations. A major catastrophe like an earthquake, riots, or epidemic can increase the risk of the insurer. Insurers therefore as a matter of safety provide for such contingencies and fluctuations. 41

42 PGDBM - INSURANCE Days Of Grace: The premium paid after due date but within certain period fixed. 30 days for yearly, half yearly and quarterly mode & 15 days for monthly mode. The premium paid after due date but within certain period fixed. 30 days for yearly, half yearly and quarterly mode & 15 days for monthly mode.Lapse: If the premium is not paid within the grace period, it calls for termination of policy contract. If the premium is not paid within the grace period, it calls for termination of policy contract.Non-Forfeiture: If premium is paid for minimum 3 years, policy can not be forfeited. If premium is paid for minimum 3 years, policy can not be forfeited.Paid-Up-Value: When premiums are paid for minimum three years but not for entire term of the policy, the S.A. is reduced by calculating paid up value and policy continues for certain duration with out paying further premium. When premiums are paid for minimum three years but not for entire term of the policy, the S.A. is reduced by calculating paid up value and policy continues for certain duration with out paying further premium. 42 Paid up Value = Paid up Value = Sum Assured * No. of years Premium Paid Total Premium Payable

43 PGDBM - INSURANCE Surrender Value : Surrender Value : amount refunded on total discharge of the contract, in case the assured wishes to surrender this policy. amount refunded on total discharge of the contract, in case the assured wishes to surrender this policy. Surrender Value = (Paid up Value + vested bonus)*S V factor % Surrender Value = (Paid up Value + vested bonus)*S V factor % Sub standard risks : Sub standard risks : Increasing extra risk, decreasing extra risk, constant extra risks Increasing extra risk, decreasing extra risk, constant extra risks Increase in premium, decrease in death benefits, change in class and period of insurance, postponement of risk are the methods used Increase in premium, decrease in death benefits, change in class and period of insurance, postponement of risk are the methods used Rider premium: Rider premium: For extra benefits, like double accident benefit etc. extra premium charged. For extra benefits, like double accident benefit etc. extra premium charged. 43

44 PGDBM - INSURANCE Reserves in Life Insurance is not on an accumulation of profit. Reserves in Life Insurance is not on an accumulation of profit. Reserve is that fund, which together with future premiums and interest will be sufficient to pay the future claims. Reserve is that fund, which together with future premiums and interest will be sufficient to pay the future claims. It is also considered as accumulation of the difference between the net premiums revived in the past and the claims paid out. It is also considered as accumulation of the difference between the net premiums revived in the past and the claims paid out. Life insurance fund is the surplus of revenue over expenditure. Life insurance fund is the surplus of revenue over expenditure. Net liability is excess of present value of future claims over the present value of the future premiums. – Valuation is required. Net liability is excess of present value of future claims over the present value of the future premiums. – Valuation is required. Life Insurance fund should be sufficient to cover net liability. Life Insurance fund should be sufficient to cover net liability. Deficiency call for drastic actions by the Management. Deficiency call for drastic actions by the Management. Surplus is to provide for General contingency fund, divided equalisation fund, bonus equalisation fund and taxation fund. Surplus is to provide for General contingency fund, divided equalisation fund, bonus equalisation fund and taxation fund. Balance available is profits – can be divided among the share holders and policy holders. Balance available is profits – can be divided among the share holders and policy holders. 44

45 PGDBM - INSURANCE Uniform bonus plan: Uniform bonus rate is given to all policy holders of particular type. The bonus rate is based on the policy amount. Uniform bonus plan: Uniform bonus rate is given to all policy holders of particular type. The bonus rate is based on the policy amount. Contribution Method: Divisible surplus allotted to the polices in proportion to the individual contribution of each policy to the surplus. Contribution Method: Divisible surplus allotted to the polices in proportion to the individual contribution of each policy to the surplus. Bonus options: Cash bonus: Cash bonus: immediate payment with option for conversion. immediate payment with option for conversion. Reversionary Bonus: Reversionary Bonus: uniform percentage addition to sum assured or to the sum assured plus accumulated bonus. Former is called simple and later compound. Simple reversionary bonus is paid in India. uniform percentage addition to sum assured or to the sum assured plus accumulated bonus. Former is called simple and later compound. Simple reversionary bonus is paid in India. Reduction in premium : Reduction in premium : permanent reduction in future premiums. permanent reduction in future premiums. Accumulation at interest Bonus: Accumulation at interest Bonus: Insurer pays interest on bonus. Insurer pays interest on bonus. Endowment option: Endowment option: Bonus is accumulated with interest. When accumulated value of the policy becomes equal to the policy amount, the policy amount is paid in full before maturity. Bonus is accumulated with interest. When accumulated value of the policy becomes equal to the policy amount, the policy amount is paid in full before maturity. 45

46 PGDBM - INSURANCE Revival: Bringing lapse policy in to force is called revival. This is subject to underwriting. Bringing lapse policy in to force is called revival. This is subject to underwriting.Surrenders: It is a voluntary termination of the contract by policy holder before it becomes a claim. This is allowed after minimum three years and value paid is called surrender or cash value. It is a voluntary termination of the contract by policy holder before it becomes a claim. This is allowed after minimum three years and value paid is called surrender or cash value.Loans: Policy holder can receive money from policy by assigning policy to insurer. Policy holder can receive money from policy by assigning policy to insurer. The interest is payable to insurer. The interest is payable to insurer.Foreclosure: The closure of policy before its maturity due to unpaid interest of loan is called foreclosure. The closure of policy before its maturity due to unpaid interest of loan is called foreclosure. 46

47 PGDBM - INSURANCE Maturity Claim: Maturity claim is paid when the term of the policy is over. Maturity Claim: Maturity claim is paid when the term of the policy is over. Survival Benefit Payments: This is paid during the currency of the policy and before the date of maturity. e.g. money back benefit. Survival Benefit Payments: This is paid during the currency of the policy and before the date of maturity. e.g. money back benefit. Death Claim: This claim is received by insurer on death of insured during the policy term. Death Claim: This claim is received by insurer on death of insured during the policy term. Claim Concession: Policy is lapsed, yet the insurer pays the death claim. Claim Concession: Policy is lapsed, yet the insurer pays the death claim. After three policy years, within six months from the date of lapse. After three policy years, within six months from the date of lapse. After five or more policy years, within twelve months from the date of lapse. After five or more policy years, within twelve months from the date of lapse. 47

48 PGDBM - INSURANCE The insurer should ask for all requirements in the case of a claim at one time and not piecemeal The insurer should ask for all requirements in the case of a claim at one time and not piecemeal The decision to admit or to repudiate should be made 30 days of receipt of papers The decision to admit or to repudiate should be made 30 days of receipt of papers If an investigation is necessary,it should be completed within 6 months If an investigation is necessary,it should be completed within 6 months Interest at 2% over the bank rate will be payable for the delays in settling the death claims Interest at 2% over the bank rate will be payable for the delays in settling the death claims Interest at the savings Bank rate will be paid if the insurer is ready to pay but the claimants are not ready to collect Interest at the savings Bank rate will be paid if the insurer is ready to pay but the claimants are not ready to collect 48

49 Insurance


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